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 (Zip Code)
Offices)
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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 Trust Preferred Securities issued by IFC
Capital Trust III 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the Corporation was $277,671,410 as of March 11, 2002. As of March 11, 2002, there were outstanding 27,534,021 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 of Part III Shareholders to be held April 25, 2002 |
EXPLANATORY NOTE:
This Form 10-K/A is being filed to correct an inadvertent error in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2001. On page 66, the Report of Independent Accountants incorrectly referred to Note 23 in the date of the audit opinion. The correct reference should have been to Note 24. There are no other changes to Item 8 or to the Annual Report on Form 10-K for the year ended December 31, 2001.
ITEM 8. FINANCIAL STATEMENTS
Management Report on Responsibility for Financial Reporting
The management of Irwin Financial Corporation and its subsidiaries has the responsibility of preparing the accompanying financial statements and for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles and are not misstated due to material fraud or error. The financial statements include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the financial statements.
Our financial statements have been audited by PricewaterhouseCoopers LLP, independent certified public accountants. Management has made available to PricewaterhouseCoopers all of Irwin Financial's financial records and related data, as well as the minutes of stockholders' and directors' meetings. Furthermore, management believes that all representations made to PricewaterhouseCoopers during its audit were valid and appropriate.
Management of Irwin Financial has established and maintains a system of internal control that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. Assessments of the system of internal control are based on criteria for effective internal control over financial reporting described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management continually monitors the system of internal control for compliance. Irwin Financial maintains a strong internal auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements. In addition, as part of its audit of our financial statements, PricewaterhouseCoopers completed an assessment of selected internal accounting controls to establish a basis for reliance on these controls in determining the nature, timing, and extent of audit-tests to be applied. Management has considered the internal auditor's and PricewaterhouseCoopers' recommendations concerning our system of internal control and has taken actions to respond appropriately to these recommendations that we believe are cost effective in the circumstances. Management believes that our system of internal control is adequate to accomplish the objectives discussed herein.
Management also recognized its responsibility for fostering a strong ethical climate so that our affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in our Guiding Philosophy, which is publicized throughout Irwin Financial Corporation. This responsibility is also reflected in the individual Codes of Conduct of each major operating subsidiary. These Codes of Conduct address, among other things, the necessity of ensuring open communication within Irwin Financial; potential conflicts of interests; compliance with all domestic and foreign laws, including those related to financial disclosures; and a confidentiality of proprietary information. Irwin Financial maintains a systematic program to assess compliance with these policies.
/s/ John A. Nash /s/ Gregory F. Ehlinger |
To the Shareholders and Board of Directors
Irwin Financial Corporation
Columbus, Indiana
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Irwin Financial Corporation and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP Chicago, Illinois January 22, 2002, except as to Note 24, which is as of February 25, 2002. |
DECEMBER 31, DECEMBER 31,
2001 2000
-------------- --------------
(IN THOUSANDS, EXCEPT FOR SHARES)
ASSETS:
Cash and cash equivalents................................... $ 158,291 $ 83,493
Interest-bearing deposits with financial institutions....... 14,247 36,400
Trading assets -- Note 3.................................... 216,684 154,921
Investment securities -- Note 4............................. 38,796 37,095
Loans held for sale......................................... 503,757 579,788
Loans and leases, net of unearned income -- Note 5.......... 2,137,747 1,234,922
Less: Allowance for loan and lease losses -- Note 6......... (22,283) (13,129)
---------- ----------
2,115,464 1,221,793
Servicing assets -- Note 7................................ 228,624 130,522
Accounts receivable......................................... 41,996 69,224
Accrued interest receivable................................. 14,063 12,979
Premises and equipment -- Note 8............................ 34,988 29,409
Other assets................................................ 72,885 66,805
---------- ----------
Total assets...................................... $3,439,795 $2,422,429
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Noninterest-bearing....................................... $ 533,983 $ 263,159
Interest-bearing.......................................... 889,448 517,127
Certificates of deposit over $100,000..................... 885,587 663,044
---------- ----------
2,309,018 1,443,330
Short-term borrowings -- Note 10............................ 487,963 475,502
Long-term debt -- Note 11................................... 29,654 29,608
Other liabilities........................................... 189,889 136,897
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust -- Note 12................. 190,948 147,167
---------- ----------
Total liabilities................................. 3,207,472 2,232,504
---------- ----------
Commitments and contingencies -- Note 13
Shareholders' equity
Preferred stock, no par value -- authorized 4,000,000
shares; issued 96,336 shares as of December 31, 2001
and December 31, 2000.................................. 1,386 1,386
Common stock, no par value -- authorized 40,000,000
shares; issued 23,402,080 shares as of December 31,
2001 and December 31, 2000; including 2,096,947 and
2,376,119 shares in treasury as of December 31, 2001
and December 31, 2000, respectively.................... 29,965 29,965
Additional paid-in capital................................ 4,426 4,331
Minority interest......................................... 658 1,055
Deferred compensation..................................... (449) (503)
Accumulated other comprehensive loss, net of deferred
income tax benefit of $130 and $305 in 2001 and 2000,
respectively........................................... (325) (459)
Retained earnings......................................... 241,725 201,729
---------- ----------
277,386 237,504
Less treasury stock, at cost...................... (45,063) (47,579)
---------- ----------
Total shareholders' equity........................ 232,323 189,925
---------- ----------
Total liabilities and shareholders' equity........ $3,439,795 $2,422,429
========== ==========
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The accompanying notes are an integral part of the consolidated financial
statements.
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE)
INTEREST INCOME:
Loans and leases............................................ $128,157 $ 93,251 $ 48,978
Loans held for sale......................................... 102,679 71,141 66,682
Trading account............................................. 31,980 15,584 6,275
Investment securities:
Taxable................................................... 4,913 4,161 3,755
Tax-exempt................................................ 247 250 271
Federal funds sold.......................................... 257 143 652
-------- -------- --------
Total interest income............................... 268,233 184,530 126,613
-------- -------- --------
INTEREST EXPENSE:
Deposits.................................................... 73,340 52,815 25,220
Short-term borrowings....................................... 29,656 32,610 28,425
Long-term debt.............................................. 2,320 2,348 1,149
Preferred securities distribution........................... 15,768 5,761 4,697
-------- -------- --------
Total interest expense.............................. 121,084 93,534 59,491
-------- -------- --------
Net interest income......................................... 147,149 90,996 67,122
Provision for loan and lease losses......................... 17,505 5,403 4,443
-------- -------- --------
Net interest income after provision for loan and lease
losses.................................................... 129,644 85,593 62,679
-------- -------- --------
OTHER INCOME:
Loan origination fees....................................... 64,303 52,696 41,024
Gain from sales of loans.................................... 207,538 77,047 74,834
Loan servicing fees......................................... 67,362 58,939 60,581
Amortization and impairment of servicing assets............. (50,134) (39,529) (15,702)
-------- -------- --------
Net loan administration income............................ 17,228 19,410 44,879
-------- -------- --------
Gain on sale of mortgage servicing assets................... 8,394 27,528 37,801
Trading gains/(losses)...................................... (32,412) 14,399 (8,296)
Other....................................................... 6,340 20,631 13,827
-------- -------- --------
271,391 211,711 204,069
-------- -------- --------
OTHER EXPENSE:
Salaries.................................................... 184,427 124,639 114,303
Pension and other employee benefits......................... 26,616 20,359 18,402
Office expense.............................................. 16,862 13,783 13,181
Premises and equipment...................................... 30,702 26,812 24,052
Marketing and development................................... 4,202 13,071 8,962
Professional Fees........................................... 11,192 7,013 4,684
Other....................................................... 53,419 32,285 30,527
-------- -------- --------
327,420 237,962 214,111
-------- -------- --------
Income before income taxes.................................. 73,615 59,342 52,637
Provision for income taxes.................................. 28,624 23,676 19,481
-------- -------- --------
Income before minority interest............................. 44,991 35,666 33,156
Minority interest in losses of subsidiaries................. (350) -- --
-------- -------- --------
Income before cumulative effect of change in accounting
principle................................................. 45,341 35,666 33,156
Cumulative effect of change in accounting principle, net of
tax....................................................... 175 -- --
-------- -------- --------
Net income.................................................. $ 45,516 $ 35,666 $ 33,156
======== ======== ========
Earnings per share before cumulative effect of change in
accounting principle:
Basic -- Note 18.......................................... $ 2.14 $ 1.70 $ 1.54
======== ======== ========
Diluted -- Note 18........................................ $ 1.99 $ 1.67 $ 1.51
======== ======== ========
Earnings per share:
Basic -- Note 18.......................................... $ 2.15 $ 1.70 $ 1.54
======== ======== ========
Diluted -- Note 18........................................ $ 2.00 $ 1.67 $ 1.51
======== ======== ========
Dividends per share......................................... $ 0.26 $ 0.24 $ 0.20
======== ======== ========
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The accompanying notes are an integral part of the consolidated financial
statements.
ACCUMULATED
OTHER ADDITIONAL
RETAINED COMPREHENSIVE DEFERRED MINORITY PAID IN COMMON PREFERRED
TOTAL EARNINGS INCOME (LOSS) COMPENSATION INTEREST CAPITAL STOCK STOCK
-------- -------- ------------- ------------ -------- ---------- ------- ---------
Balance at January 1,
1999...................... $145,233 $142,232 $ 85 -- $ -- $2,595 $29,965 $ --
Net income................ 33,156 33,156
Unrealized gain on
investment securities
net of $104 tax
benefit................. (155) (155)
--------
Total comprehensive
income............ 33,001
--------
Cash dividends.............. (4,287) (4,287)
Tax benefit on stock option
exercises................. 1,055 1,055
Treasury stock:
Purchase of 800,052
shares.................. (18,314)
Sales of 232,073 shares... 2,608 600
-------- -------- ----- ----- ------ ------ ------- ------
Balance December 31, 1999... $159,296 $171,101 $ (70) -- $ -- $4,250 $29,965 $ --
======== ======== ===== ===== ====== ====== ======= ======
Net income................ 35,666 35,666
Unrealized gain on
investment securities
net of $43 tax
liability............... 64 64
Foreign currency adjustment
net of $43 tax benefit.... (66) (66)
Minimum pension liability
net of $257 tax benefit... (387) (387)
--------
Total comprehensive
income............ 35,277
Deferred compensation....... (503) (503)
Cash dividends.............. (5,038) (5,038)
Tax benefit on stock option
exercises................. 136 136
Treasury stock:
Purchase of 220,948
shares.................. (3,414)
Sales of 142,132 shares... 1,730 (55)
Issuance of 96,336 shares of
preferred stock........... 1,386 1,386
Minority Interest........... 1,055 1,055
-------- -------- ----- ----- ------ ------ ------- ------
Balance December 31, 2000... $189,925 $201,729 $(459) $(503) $1,055 $4,331 $29,965 $1,386
======== ======== ===== ===== ====== ====== ======= ======
Net income................ 45,516 45,516
Unrealized gain on
investment securities
net of $53 tax
liability............... 80 80
Foreign currency
adjustment net of $221
tax benefit............. (333) (333)
Minimum pension liability
net of $257 tax
liability............... 387 387
--------
Total comprehensive
income............ 45,650
Deferred compensation....... 54 54
Cash dividends.............. (5,520) (5,520)
Tax benefit on stock option
exercises................. 2,451 2,451
Treasury stock:
Purchase of 136,089
shares.................. (3,223)
Sales of 415,261 shares... 3,383 (2,356)
Minority Interest........... (397) (397)
-------- -------- ----- ----- ------ ------ ------- ------
Balance December 31, 2001... $232,323 $241,725 $(325) $(449) $ 658 $4,426 $29,965 $1,386
======== ======== ===== ===== ====== ====== ======= ======
TREASURY
STOCK
--------
Balance at January 1,
1999...................... $(29,644)
Net income................
Unrealized gain on
investment securities
net of $104 tax
benefit.................
Total comprehensive
income............
Cash dividends..............
Tax benefit on stock option
exercises.................
Treasury stock:
Purchase of 800,052
shares.................. (18,314)
Sales of 232,073 shares... 2,008
--------
Balance December 31, 1999... $(45,950)
========
Net income................
Unrealized gain on
investment securities
net of $43 tax
liability...............
Foreign currency adjustment
net of $43 tax benefit....
Minimum pension liability
net of $257 tax benefit...
Total comprehensive
income............
Deferred compensation.......
Cash dividends..............
Tax benefit on stock option
exercises.................
Treasury stock:
Purchase of 220,948
shares.................. (3,414)
Sales of 142,132 shares... 1,785
Issuance of 96,336 shares of
preferred stock...........
Minority Interest...........
--------
Balance December 31, 2000... $(47,579)
========
Net income................
Unrealized gain on
investment securities
net of $53 tax
liability...............
Foreign currency
adjustment net of $221
tax benefit.............
Minimum pension liability
net of $257 tax
liability...............
Total comprehensive
income............
Deferred compensation.......
Cash dividends..............
Tax benefit on stock option
exercises.................
Treasury stock:
Purchase of 136,089
shares.................. (3,223)
Sales of 415,261 shares... 5,739
Minority Interest...........
--------
Balance December 31, 2001... $(45,063)
========
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The accompanying notes are an integral part of the consolidated financial
statements.
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
------------ ----------- -----------
(IN THOUSANDS)
NET INCOME.................................................. $ 45,516 $ 35,666 $ 33,156
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED (USED)
BY OPERATING ACTIVITIES:
Depreciation, amortization, and accretion, net.............. 9,097 9,114 8,535
Amortization and impairment of servicing assets............. 50,134 39,529 15,702
Provision for loan and lease losses......................... 17,505 5,403 4,443
Deferred income tax......................................... 26,245 21,702 15,543
Gain on sale of mortgage servicing assets................... (8,394) (27,528) (37,801)
Gain from sale of loans..................................... (207,538) (77,047) (74,834)
Originated and purchased mortgage servicing assets.......... (151,821) (57,165) (84,653)
Originations of loans held for sale......................... (10,375,401) (5,317,528) (6,316,257)
Proceeds from sale of mortgage servicing assets............. 11,979 53,142 85,380
Proceeds from the sale of loans held for sale............... 10,331,270 5,323,784 6,818,882
Net increase in trading assets.............................. (61,763) (95,896) (26,877)
Decrease (increase) in accounts receivable.................. 27,228 (49,415) 21,672
Other, net.................................................. 14,160 23,160 (1,828)
------------ ----------- -----------
Net cash provided (used) by operating activities.......... (271,783) (113,079) 461,063
------------ ----------- -----------
LENDING AND INVESTING ACTIVITIES:
Proceeds from maturities/calls of investment securities:
Held-to-maturity.......................................... 4,114 1,286 12,058
Available-for-sale........................................ 2,441 26 159
Proceeds from sales of investment securities:
Available-for-sale........................................ -- -- 3,118
Purchase of investment securities:
Held-to-maturity.......................................... (437) (781) (34)
Available-for-sale........................................ (7,692) -- (5,899)
Net increase (decrease) in interest-bearing deposits with
financial institutions.................................... 22,153 (9,615) (8,344)
Net increase in loans, excluding sales...................... (733,433) (533,848) (205,137)
Sale of mortgage loans by commercial bank................... 149,957 31,521 22,928
Acquisition of Onset Capital Corporation, net of cash
acquired.................................................. -- (837) --
Other, net.................................................. (10,760) (11,922) (6,520)
------------ ----------- -----------
Net cash used by lending and investing activities......... (573,657) (524,170) (187,671)
------------ ----------- -----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits......................... 865,688 573,012 (138,893)
Net increase (decrease) in short-term borrowings............ 12,461 2,399 (171,758)
Proceeds from issuance long-term debt....................... -- -- 30,000
Repayments of long-term debt................................ -- (176) (3,055)
Proceeds from the issuance of trust preferred securities.... 45,000 103,500
Proceeds from issuance of preferred stock................... -- 1,386 --
Purchase of treasury stock for employee benefit plans....... (3,223) (3,414) (18,314)
Proceeds from sale of stock for employee benefit plans...... 5,834 1,866 2,608
Dividends paid.............................................. (5,520) (5,038) (4,287)
------------ ----------- -----------
Net cash provided (used) by financing activities.......... 920,240 673,535 (303,699)
------------ ----------- -----------
Effect of exchange rate changes on cash..................... (2) (8) --
------------ ----------- -----------
Net increase in cash and cash equivalents................... 74,798 36,278 (30,307)
Cash and cash equivalents at beginning of period............ 83,493 47,215 77,522
------------ ----------- -----------
Cash and cash equivalents at end of period.................. $ 158,291 $ 83,493 $ 47,215
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest.................................................. $ 123,058 $ 81,989 $ 52,456
============ =========== ===========
Income taxes.............................................. $ 7,357 $ 13,864 $ 14,328
============ =========== ===========
Non cash Transactions:
Mortgage loans held for sale transferred to loans and
leases.................................................. $ 327,700 $ -- $ --
============ =========== ===========
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The accompanying notes are an integral part of the consolidated financial
statements.
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: Irwin Financial Corporation and its subsidiaries provide financial services throughout the United States and Canada. We are engaged in the mortgage banking, home equity lending, commercial banking, equipment leasing, and venture capital lines of business. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency: Assets and liabilities denominated in Canadian dollars are translated into U.S. dollars at rates prevailing on the balance sheet date; income and expenses are translated at average rates of exchange for the year. Unrealized foreign currency translation gains and losses (net of hedging activities and related income taxes) are recorded in accumulated other comprehensive income in shareholders' equity.
Securities: Those securities that we have the positive intent and ability to hold until maturity are classified as "held-to-maturity" and are stated at cost adjusted for amortization of premium and accretion of discount. Securities that might be sold prior to maturity are classified as "available-for-sale" and are stated at fair value. Unrealized gains and losses on available for sale investments, net of the future tax impact, are reported as a separate component of shareholders' equity until realized. Investment gains and losses are based on the adjusted cost of the specific security.
Trading Assets: Trading assets are stated at fair value. Unrealized gains and losses are included in earnings. Included in trading assets are residual interests. When we sell receivables in securitizations of home equity loans and lines of credit, we retain residual interests, a servicing asset, one or more subordinated tranches, and in some cases a cash reserve account, all of which are retained interests in the securitized receivables. Gain or loss on the sale of the receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer.
To obtain fair value of residual interests, quoted market prices are used if available. However, quotes are generally not available for residual interests, so we generally estimate fair value based on the present value of expected cash flows estimated using management's best estimates of the key assumptions -- prepayment speeds, credit losses, forward yield curves, and discount rates commensurate with the risks involved. Adjustments to carrying values are recorded as trading gains or losses.
Loans Held For Sale: Loans held for sale are carried at the lower of cost or market, determined on an aggregate basis for both performing and nonperforming loans. Market value is determined by outstanding commitments or by current investor yield requirements.
Loans: Loans are carried at cost. Loan origination fees and costs are deferred and the net amounts are amortized as an adjustment to yield. When loans are sold, deferred fees and costs are included with outstanding principal balances to determine gains or losses. Interest income on loans is computed daily based on the principal amount of loans outstanding. The accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest.
Direct Financing Leases: Interest and service charges, net of initial direct costs, are deferred and reported as income in decreasing amounts over the life of the lease, which averages three to four years, so as to provide an approximate constant yield on the outstanding principal balance.
Allowance for Loan and Lease Losses: The allowance for loan and lease losses is maintained at a level considered adequate to provide for loan and lease losses and is based on management's evaluation of inherent losses in the portfolio. Loans are considered impaired if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral.
Servicing Assets: When we securitize or sell loans, we generally retain the right to service the underlying loans sold. A portion of the cost basis is allocated to this servicing asset based on its fair value relative to the loan as a whole. We use the market prices under comparable servicing sale contracts, when available, or alternatively use a valuation model that calculates the present value of future cash flows to determine the fair value of the servicing assets. In using this valuation method, we incorporate assumptions that we believe market participants would use in estimating future net servicing income, which include estimates of the cost of servicing per loan, the discount rate, float value, an inflation rate, ancillary income per loan, prepayment speeds, and default rates. Servicing assets are amortized over the estimated lives of the related loans, which are grouped based on loan characteristics, in proportion to estimated net servicing income.
In determining servicing value impairment, the servicing portfolio was stratified into its predominant risk characteristics, principally by interest rate. These segments of the portfolio are valued, using market prices under comparable servicing sale contracts, when available, or alternatively, using the same model as was used to originally determine the fair value at origination, using current market assumptions. The calculated value is then compared with the book value of each stratum to determine the required reserve for impairment. The impairment reserve fluctuates as interest rates change and, therefore, no reasonable estimate can be made as to future increases or declines in reserve levels.
Derivative Instruments: Effective January 1, 2001, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. Under the provisions of this standard, all derivative instruments have been recorded at fair value as assets or liabilities in the December 31, 2001 consolidated balance sheet. Unrealized holding gains and losses from all derivative instruments classified as fair value hedges or freestanding derivative instruments have been recorded in the consolidated statement of income. The adoption of SFAS 133 resulted in a cumulative change in accounting principle, increasing net income by $175 thousand in 2001.
We utilize certain derivative instruments that do not qualify for hedge accounting treatment under SFAS No. 133. These derivatives are accounted for as trading securities and marked to market on the income statement. While we do not seek GAAP hedge accounting treatment for most of these instruments, their economic purpose is to hedge existing exposures to either interest rate risk or foreign currency risk.
We enter into forward contracts to protect against interest rate fluctuations from the date of mortgage loan commitment until the loans are sold. At December 31, 2001, we designated the portion of these transactions hedging the closed mortgage loans as hedges that qualify for hedge accounting treatment under SFAS 133. The basis of the hedged closed loans is adjusted for changes in value associated with the risk being hedged. The effect of these hedging activities, which do not have a material impact on our net income, was recorded through earnings as gain from sale of loans. Hedge ineffectiveness recorded in gains from sale of loans related to these hedging activities was immaterial.
Additionally, we enter into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on loans intended to be sold are currently considered to be derivatives. At the time of interest rate lock commitment, no gain or loss is recognized. Any subsequent changes in fair value are recorded in earnings. These derivatives are recorded on the balance sheet at fair value at period end.
Premises and Equipment: Premises and equipment are recorded at cost. Depreciation is determined by the straight-line method.
Venture Capital Investments: Venture capital investments held by Irwin Ventures, LLC are carried at fair value with changes in fair value recognized in other income. The investment committee of Irwin Ventures determines the value of these nonpublicly traded investments at the end of each reporting period based upon review of the investee's financial results, condition, and prospects. Changes in estimated fair values can also be made when an event such as a new round of funding from other private equity investors would cause a change in estimated market value. In the future, should the company have investments in publicly-traded securities, it would look to the traded market value of the investments as the basis of its mark-to-market.
Other Assets: Included in other assets at December 31, 2001 and 2000 are $4.4 million and $2.8 million of real estate properties acquired as a result of foreclosure. Other real estate owned is carried at the lower of the recorded investment in the related loan or fair value of the property less estimated costs to sell.
Income Taxes: A consolidated tax return is filed for all eligible entities. Deferred income taxes are computed using the liability method, which establishes a deferred tax asset or liability based on temporary differences between the tax basis of an asset or liability and the basis recorded in the financial statements.
Cash and Cash Equivalents Defined: For purposes of the statement of cash flows, we consider cash and due from banks to be cash equivalents.
Recent Accounting Developments: In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No 140, which replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," provides accounting and reporting standards for securitizations and other transfers of assets. The Standard is based on the application of a financial components approach that focuses on control, and provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Standard requires disclosure of information about securitized assets, including principal outstanding of securitized and other managed assets, accounting policies, key assumptions related to the determination of the fair value of residual interests, delinquencies and credit losses. The accounting requirements of this Standard were effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Adoption of this statement did not have a material impact on our financial position or results of operations.
On June 29, 2001 the FASB approved SFAS No. 141, "Business Combinations," and No. 142 "Goodwill and Other Intangible Assets." SFAS 141 eliminates the pooling-of-interests method of accounting -- requiring that purchase accounting, with its recognition of intangible assets separately from goodwill, be applied to all business combinations initiated after June 30, 2001.
Under the provisions of SFAS 142, goodwill will no longer be amortized against earnings. Instead, goodwill and intangible assets deemed to have an indefinite life will be reviewed for impairment at least annually. The amortization period of intangible assets with finite lives will no longer be limited to forty years. This standard became effective January 1, 2002. We discontinued the amortization of goodwill with a net carrying value of $1.8 million on the date of adoption and annual amortization of $0.2 million that resulted from business combinations prior to the adoption of SFAS 141. In addition, we will record an after tax benefit of $0.5 million, as a cumulative effect of a change in accounting principle, representing the write-off of negative goodwill at January 1, 2002 arising from a prior business combination.
The FASB has also issued SFAS No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 143 addresses accounting for the retirement of tangible long-lived assets and the associated asset retirement costs. The effective date is for fiscal years beginning after June 15, 2002. SFAS 144, effective for fiscal years beginning after December 15, 2001, supersedes FASB No. 121 "Accounting for the Impairment of long-Lived Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. Management does not believe the implementation of SFAS 143 or SFAS 144 will have a material effect on our earnings or financial condition.
Reclassifications: Certain amounts in the 2000 and 1999 consolidated financial statements have been reclassified to conform to the 2001 presentation. These changes had no impact on previously reported net income or shareholders' equity.
Irwin Union Bank and Trust Company and Irwin Union Bank, F.S.B. are required to maintain reserve balances with the Federal Reserve Bank. The amount of the reserve balance at December 31, 2001 was $7.5 million. Additionally, we are required to maintain reserve funds in connection with our loan securitization activities. Included in accounts receivable at December 31, 2001 is $0.5 million of these reserve funds.
NOTE 3 -- SALES OF RECEIVABLES
During 2001 and 2000, we sold home equity loans and lines of credit in securitization transactions resulting in the creation of residual interests and a servicing asset. Residual interests totaling $199.1 million and $152.6 million, respectively, are included in trading assets at December 31, 2001 and 2000, respectively. We receive annual servicing fees of approximately 0.75% to 1.0% of the outstanding balance and rights to future cash flows arising after the investors in the securitization trust have received the return for which they contracted. The investors and the securitization trusts have no recourse to our other assets for failure of debtors to pay when due. Our residual interests are subordinate to investors' interests. The value of the residual interests are subject to prepayment, credit, and interest rate risks in the transferred financial assets.
We recognized pretax gains of $91.6 million, $47.0 million, and $23.7 million on the securitization of home equity loans and lines of credit at our home equity line of business during 2001, 2000, and 1999, respectively.
Key economic assumptions used in measuring the fair value of residual interests at the date of securitization resulting from securitizations completed during the year 2001 (weighted based on principal amounts securitized) were as follows:
Prepayment speed (annual rate)................ 18.78%
Weighted-average life (in years).............. 3.57
Expected credit losses (annual rate).......... 2.27%
Residual cash flows discounted at............. 16.85
Interest rates on adjustable notes............ LIBOR plus contractual spread ranging from 18
to 200 basis points
|
The table shown above aggregates each of the securitization transactions by the line of business completed in 2001 into a single set of assumptions. In accounting for the residual assets, we analyze interests on a security by security basis and perform analysis at the loan level.
At December 31, 2001, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 25 percent adverse changes in those assumptions are as follows:
HOME EQUITY LOANS AND LINES OF CREDIT
-------------------------------------
(DOLLARS IN THOUSANDS)
Balance sheet carrying value of residual interests -- fair
value..................................................... $199,071
Weighted-average life (in years)............................ 2.72
Prepayment speed assumptions (annual rate).................. 24.84%
Impact on fair value of 10% adverse change (27.32%)......... $ (3,395)
Impact on fair value of 25% adverse change (31.05%)......... (7,919)
Expected credit losses (annual rate)........................ 2.83%
Impact on fair value of 10% adverse change (3.11%).......... $ (8,731)
Impact on fair value of 25% adverse change (3.54%).......... (21,135)
Residual cash flows discount rate (annual).................. 18.54%
Impact on fair value of 10% adverse change (20.39%)......... $ (8,124)
Impact on fair value of 25% adverse change (23.18%)......... (19,243)
|
These sensitivities are hypothetical and should be considered with caution. As the figures indicate, changes in fair value based on a 10 percent and 25 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.
Static pool credit losses are calculated by summing the actual and projected future credit losses and dividing them by the original balance of each pool of assets. The amount shown here for each year is calculated based on all securitizations occurring in that year.
Actual and projected credit losses (%) as of:
HOME EQUITY LOANS AND LINES OF CREDIT SECURITIZED IN
---------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001
------- -------- -------- -------- -------- -------- ----------
DECEMBER 31, 2001 (DOLLARS IN THOUSANDS)
Actual to date........... 2.29% 1.04% 1.12% 0.90% 2.19% 2.11% 0.14%
Projected remaining...... -- -- 0.08 0.48 1.4 4.13 8.62
------- -------- -------- -------- -------- -------- ----------
Total losses............. 2.29 1.04 1.20 1.38 3.59 6.24 8.76
Original balance
securitized............ $51,584 $139,996 $229,994 $160,470 $433,606 $781,914 $1,042,462
|
The table below summarizes the cash flows received from (paid to) securitization trusts during the year ended December 31, 2001 ($ in thousands):
Proceeds from new securitizations........................... $1,072,177 Collections used by the trust to purchase new home equity loan balances............................................. 6,501 Servicing fees received..................................... 10,741 Cash flows received on residual interests*.................. 45,645 Cash received upon release from reserve accounts............ 135 Purchases of delinquent or foreclosed assets................ (701) Servicing advances.......................................... (42,483) Reimbursements of servicing advances........................ 43,319 |
* Cash flows received on residual interests are net of $31.9 million used to over-collateralize the trusts. During 2001, $6.0 million was paid to over-collateralize the trusts at the time of securitization.
DELINQUENT
TOTAL PRINCIPAL PRINCIPAL
AMOUNT OF OVER 60 DAYS***
LOANS AT -----------------
DECEMBER 31, YEAR ENDED
2001 DECEMBER 31, 2001
--------------- -----------------
Home equity loans and lines of credit....................... $2,317,975 $121,666
Comprised of:
Loans owned*:
Loans....................................................... $ 350,433 $ 15,198
Loans securitized, servicing and residual retained**........ 1,714,109 89,422
---------- --------
Total owned portfolio....................................... 2,064,542 104,620
---------- --------
Loans managed but not owned:
Loans securitized, servicing retained, residual sold**...... $ 216,512 $ 17,046
Loans and residual sold, servicing retained................. 36,921 --
Total managed but not owned................................. 253,433 17,046
---------- --------
Total managed loans......................................... $2,317,975 $121,666
========== ========
|
* Loans owned are loans held for investment or loans in which we retain a subordinate interest and retain a risk of loss
** Represents the principal amount of the loan. Residual interests held for securitized assets are excluded from this table because they are recognized separately.
*** Includes bankruptcies, foreclosures and other real estate owned.
Actual credit losses, net of recoveries, on the managed portfolios during the year ended December 31, 2001 were $35.4 million related to loans securitized and loans held for investment. Of this amount, $10.0 million relates to unsold loans while $25.4 million relates to securitized loans.
NOTE 4 -- INVESTMENT SECURITIES
The amortized cost, fair value, and carrying value of investments held at December 31, 2001 are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- ------- --------
(IN THOUSANDS)
Held-to-maturity:
Obligations of states and political
subdivisions................................. $ 4,425 $113 $ -- $ 4,538 $ 4,425
Mortgage-backed securities..................... 1,507 28 -- 1,535 1,507
Other.......................................... 133 -- -- 133 133
------- ---- ----- ------- -------
Total held-to-maturity....................... 6,065 141 -- 6,206 6,065
------- ---- ----- ------- -------
Available-for-sale:
U.S. Treasury and government obligations....... 29,251 78 -- 29,329 29,329
Mortgage-backed securities..................... 2,671 46 -- 2,717 2,717
Other.......................................... 685 -- -- 685 685
------- ---- ----- ------- -------
Total available-for-sale..................... 32,607 124 -- 32,731 32,731
------- ---- ----- ------- -------
Total investments............................ $38,672 $265 $ -- $38,937 $38,796
======= ==== ===== ======= =======
|
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- ------- --------
(IN THOUSANDS)
Held-to-maturity:
U.S. Treasury and government obligations....... $21,006 $-- $ (1) $21,005 $21,006
Obligations of states and political
subdivisions................................. 4,586 71 (1) 4,656 4,586
Mortgage-backed securities..................... 2,059 (1) -- 2,058 2,059
------- --- ---- ------- -------
Total held-to-maturity....................... 27,651 70 (2) 27,719 27,651
------- --- ---- ------- -------
Available-for-sale:
U.S. Treasury and government obligations....... 4,992 -- 1 4,993 4,993
Mortgage-backed securities..................... 3,103 -- (10) 3,093 3,093
Other.......................................... 1,358 -- -- 1,358 1,358
------- --- ---- ------- -------
Total available-for-sale..................... 9,453 -- (9) 9,444 9,444
------- --- ---- ------- -------
Total investments............................ $37,104 $70 $(11) $37,163 $37,095
======= === ==== ======= =======
|
The amortized cost and estimated value of debt securities at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED FAIR
COST VALUE
--------- -------
(IN THOUSANDS)
Held-to-maturity:
Due in one year or less................................... $ 268 $ 268
Due after one year through five years..................... 1,095 1,095
Due after five years through ten years.................... 1,215 1,258
Due after ten years....................................... 1,980 2,050
------- -------
4,558 4,671
Mortgage-backed securities.................................. 1,507 1,535
------- -------
6,065 6,206
------- -------
Available-for-sale:
Due in one year or less................................... $ 3,682 $ 3,760
Due after ten years....................................... 26,254 26,254
------- -------
29,936 30,014
Mortgage-backed securities.................................. 2,671 2,717
------- -------
32,607 32,731
------- -------
Total investments...................................... $38,672 $38,937
======= =======
|
Investment securities amounting to $12.8 million were pledged as collateral for borrowings and for other purposes on December 31, 2001. During 2001 and 2000 there were no sales of "available for sale" investments. During 1999, sales of "available for sale" investments with proceeds of $3.1 million resulted in a gross loss of $1.2 thousand. Additionally in 2001, 2000, and 1999, "held-to-maturity" investments totaling $0.3 million, $2.9 million and $1.8 million, respectively, were called. Calls in 2001 and 2000 resulted in gross losses of $0.4 thousand and $23.1 thousand, respectively. Calls in 1999 were at par.
Loans and leases are summarized as follows:
DECEMBER 31,
------------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Commercial, financial and agricultural...................... $1,055,307 $ 677,066
Real estate-construction.................................... 287,228 220,485
Real estate-mortgage........................................ 490,111 122,301
Consumer.................................................... 38,489 56,785
Direct financing leases
Domestic.................................................. 232,527 116,867
Foreign................................................... 91,816 72,864
Unearned income
Domestic.................................................. (44,183) (21,570)
Foreign................................................... (13,548) (9,876)
---------- ----------
Total............................................. $2,137,747 $1,234,922
========== ==========
|
In 2001, $327.7 million of loans held for sale at the home equity lending line of business were reclassified to loans and leases. These loans are included in the real estate-mortgage category above.
Commercial loans are extended primarily to local regional businesses in the market areas of Irwin Union Bank. We also provide consumer loans to the customers in those markets. Real estate loans and direct financing leases are extended throughout the United States and Canada.
Irwin Union Bank and Trust, in the normal course of business, makes loans to directors, officers, and organizations and individuals with which they are associated at market rates. Such loans amounted to $1.9 million and $2.4 million at December 31, 2001 and 2000, respectively. During 2001, $0.9 million of new loans were made and repayments totaled $1.0 million.
NOTE 6 -- ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses are summarized below:
DECEMBER 31,
------------------------------
2001 2000 1999
-------- ------- -------
(IN THOUSANDS)
Balance at beginning of year................................ $ 13,129 $ 8,555 $ 9,888
Acquisition of Onset Capital................................ -- 1,908 --
Provision for loan and lease losses......................... 17,505 5,403 4,443
Reduction due to sale of loans and leases................... (6) -- (3,126)
Reduction due to reclassification of loans.................. -- (16) (922)
Foreign currency adjustment................................. (140) (19) --
Recoveries.................................................. 2,236 466 503
Charge-offs................................................. (10,441) (3,168) (2,231)
-------- ------- -------
Balance at end of year...................................... $ 22,283 $13,129 $ 8,555
======== ======= =======
|
At December 31, 2001, 2000, and 1999, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 and SFAS No. 118 totaled $33.1 million, $7.4 million, and $0.9 million, respectively. These loans had a corresponding valuation allowance of $4.2 million, $820 thousand, and $204 thousand, respectively, based on the fair value of the loans' collateral. We recognized $2.3 million, $521 thousand, and $38 thousand of interest income on these loans in 2001, 2000, and 1999, respectively.
Included on the consolidated balance sheet at December 31, 2001 and 2000 are $228.6 million and $130.5 million, respectively, of capitalized servicing assets. These amounts relate to the principal balances of loans serviced by us for investors. Although they are not generally held for purposes of sale, there is an active secondary market for servicing assets.
MORTGAGE SERVICING ASSET:
DECEMBER 31,
--------------------
2001 2000
-------- --------
(IN THOUSANDS)
Beginning Balance........................................... $130,522 $138,500
Additions................................................... 151,821 57,165
Amortization and impairment................................. (50,134) (39,529)
Reduction for servicing sales............................... (3,585) (25,614)
-------- --------
$228,624 $130,522
======== ========
|
We have established a valuation allowance to record servicing assets at their fair market value. Changes in the allowance are summarized below:
DECEMBER 31,
-------------------------------
2001 2000 1999
-------- ------- --------
(IN THOUSANDS)
Balance at beginning of year................................ $ 14,204 $ 401 $ 11,720
Provision for impairment.................................... 11,321 13,803 (11,319)
Permanent impairment*....................................... (12,030) -- --
-------- ------- --------
Balance at end of year...................................... $ 13,495 $14,204 $ 401
======== ======= ========
|
* Permanent impairment was recorded in conjunction with a portfolio restratification change made when we updated predominant risk characteristics inherent in the portfolio of servicing rights during 2001.
At December 31 2001, key economic assumptions and the sensitivity of the current carrying value of mortgage servicing rights to immediate 10% and 20% adverse changes in those assumptions are as follows ($ in thousands):
Carrying amount of mortgage servicing rights................ $228,624 Constant prepayment speeds.................................. 13.86% Impact on fair value of 10% adverse change (15.2%).......... (9,723) Impact on fair value of 20% adverse change (16.6%).......... (18,238) Discount Rate............................................... 10.47% Impact on fair value of 10% adverse change (11.51%)......... (6,474) Impact on fair value of 20% adverse change (12.55%)......... (12,332) |
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in value based on a 10% and 20% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the value of the residual interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.
Included in the servicing assets are $211.2 million and $121.6 million of servicing assets related to the mortgage bank at December 31, 2001 and 2000, respectively. The servicing assets at the mortgage bank had a fair value of $239.7 million and $165.1 million at December 31, 2001 and 2000, respectively. Below is a rollforward of the mortgage bank's servicing portfolio balance:
SERVICING PORTFOLIO:
DECEMBER 31,
-----------------------
2001 2000 1999
----- ----- -----
(IN BILLIONS)
Beginning Portfolio......................................... $ 9.2 $10.5 $11.2
Add:
Originations of servicing rights.......................... 9.2 3.7 5.9
Deduct:
Sale of servicing rights.................................. (2.3) (4.1) (4.7)
Run-off................................................... (3.2) (0.9) (1.9)
----- ----- -----
Ending Portfolio............................................ $12.9 $ 9.2 $10.5
===== ===== =====
|
Key economic assumptions used in measuring the carrying value of mortgage servicing rights at the mortgage bank at the date of securitization resulting from deliveries completed during the year 2001 (weighted based on principal amount of deliveries) were as follows:
Weighted average prepayment rate (annual rate).............. 13.86% Weighted average life (in years)............................ 8.24 Weighted average discount rate.............................. 9.89% |
NOTE 8 -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31,
----------------------------------
USEFUL
2001 2000 LIVES
-------- -------- ----------
(IN THOUSANDS)
Land...................................................... $ 2,263 $ 1,737 n/a
Building and leasehold improvements....................... 19,742 17,410 7-40 years
Furniture and equipment................................... 49,001 40,660 3-10 years
-------- --------
71,006 59,807
Less accumulated depreciation............................. (36,018) (30,398)
-------- --------
Total........................................... $ 34,988 $ 29,409
======== ========
|
Amounts charged to non-interest expense for depreciation amounted to $5.2 million, $5.9 million, and $4.5 million in 2001, 2000, and 1999, respectively.
NOTE 9 -- LEASE OBLIGATIONS
At December 31, 2001, we leased certain branch locations and office equipment used in our operations.
Operating lease rental expense was $19.8 million in 2001, $17.8 million in 2000, and $16.5 million in 1999.
YEAR ENDED DECEMBER 31: (IN THOUSANDS)
2002...................................................... $17,076
2003...................................................... 11,206
2004...................................................... 9,481
2005...................................................... 7,427
2006...................................................... 5,526
Thereafter................................................ 2,031
-------
Total minimum rental payments..................... $52,747
=======
|
NOTE 10 -- SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
DECEMBER 31,
--------------------
2001 2000
-------- --------
(IN THOUSANDS)
Repurchase agreements & drafts payable related to mortgage
loan closings............................................. $154,157 $ 64,557
Commercial paper............................................ 11,123 11,346
Federal Home Loan Bank borrowings........................... 212,000 153,000
Federal funds............................................... 35,200 20,000
Lines of credit and other borrowings........................ 75,483 226,599
-------- --------
$487,963 $475,502
======== ========
Weighted average interest rate.............................. 4.64% 6.79%
|
Repurchase agreements at December 31, 2001 and 2000, include $0.1 million and $0.1 million in mortgages sold under agreements to repurchase that are used to fund mortgages prior to sale in the secondary market. These repurchase agreements are collateralized by mortgage loans held for sale.
Drafts payable related to mortgage loan closings totaled $154.0 million and $64.5 million at December 31, 2001 and 2000. These borrowings are related to mortgage closings at the end of December which have not been presented to the banks for payment. When presented for payment, these borrowings will be funded internally or by borrowing from the lines of credit.
Commercial paper includes $11.1 million and $5.7 million at December 31, 2001 and 2000, respectively, payable to a company controlled by a significant shareholder and director of Irwin Financial.
Federal funds and Federal Home Loan Bank borrowings are collateralized by mortgage loans held for sale.
We also have lines of credit available of $813.3 million to fund loan originations and operations. Interest on the lines of credit is payable monthly or quarterly with rates ranging from 1.9% to 7.4%.
NOTE 11 -- LONG-TERM DEBT
Long-term debt consists of a note payable for $30.0 million with an interest rate of 7.58%. This debt is carried on the balance sheet net of capitalized fees of $0.3 million and $0.4 million as of December 31, 2001, and 2000, respectively. The entire principle of this note will mature on July 7, 2014.
NOTE 12 -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS
In January 1997, we issued $50.0 million of trust preferred securities through IFC Capital Trust I, our wholly-owned statutory business trust subsidiary created under the laws of Delaware. The securities were issued at $25 per share with a cumulative dividend rate of 9.25%, payable quarterly. In connection with the issuance of the securities, we sold an equivalent amount of subordinated debentures to the trust. The securities have an initial maturity of 30 years with a 19-year extension option. The securities are callable at par after five years. The securities are shown on the balance sheet at December 31, 2001 net of $1.8 million of capitalized issuance costs. The sole assets of IFC Capital Trust I are our subordinated debentures with a principal balance of $51.5 million, an interest rate of 9.25%, and an initial maturity of 30 years with a 19-year extension option. These funds are considered Tier 1 qualifying capital.
In November 2000, we issued $51.75 million of trust preferred securities through IFC Capital Trust II and $51.75 million of convertible trust preferred securities through IFC Capital Trust III, wholly-owned statutory business trust subsidiaries created under the laws of Delaware. The securities were issued at $25 per share with cumulative dividend rates of 10.5% and 8.75%, respectively, payable quarterly. They have an initial maturity of 30 years. The trust preferred securities are not convertible into our common shares. The convertible trust preferred securities have an initial conversion ratio of 1.261 shares of common stock for each convertible preferred security (equivalent to an initial conversion price of $19.825 per share of common stock). The securities are shown on the balance sheet at December 31, 2001, net of $4.4 million of capitalized issuance costs. The sole assets of IFC Capital Trust II and III are our subordinated debentures with principal balances of $53.35 million each, interest rates of 10.5% and 8.75%, respectively, and an initial maturity of 30 years. The subordinated debentures of IFC Capital Trust II are callable at par after five years. Both issues are Tier 1 qualifying capital elements.
In July 2001, we issued $15 million of trust preferred securities in a private placement transaction through IFC Capital Trust IV, our wholly-owned statutory business trust subsidiary created under the laws of Delaware. In connection with the issuance of the trust preferred securities, we sold an equivalent amount of subordinated debentures to the trust. These subordinated debentures will mature on July 25, 2031, which date may be shortened to a date not before July 25, 2006, if certain conditions are met. The securities are shown on the balance sheet at December 31, 2001, net of $0.5 million of capitalized issuance costs. The cumulative dividend rate payable on the trust preferred securities and the subordinated debentures is 10.25%, payable semiannually on January 25 and July 25 of each year. These funds are considered Tier 1 qualifying capital.
In November 2001, we issued $30 million of trust preferred securities in a private placement transaction through IFC Capital Trust V, a wholly-owned statutory business trust subsidiary created under the laws of Delaware. In connection with the issuance of the trust preferred securities, we sold an equivalent amount of subordinated debentures to the trust. These subordinated debentures will mature in 2031, with an option to call them at par after five years. The securities are held on the balance sheet at December 31, 2001, net of $0.9 million of capitalized issuance costs. The cumulative dividend rate payable on the trust preferred securities and the subordinated debentures is 9.95%, payable semiannually on June 8 and December 8 of each year. These funds are considered Tier 1 qualifying capital.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
Our subsidiary, Irwin Mortgage Corporation is a defendant in a class action lawsuit in the United States District Court for the northern District of Alabama alleging that Irwin Mortgage violated the federal Real Estate Settlement Procedures Act (RESPA) relating to Irwin Mortgage's payment of broker fees to mortgage brokers. A second suit was filed September, 2001 seeking consolidation with this case. In July, 2001, the plaintiffs filed a motion for partial summary judgment asking the court to find Irwin Mortgage summarily liable for violating RESPA. Irwin Mortgage filed a motion in opposition and these motions are now pending before the district court.
In November, 2001, by order of the district court, the parties filed supplemental briefs analyzing the impact of a new HUD policy statement that explicitly disagrees with the judicial interpretation of RESPA by the Court of Appeals for the 11th Circuit in its ruling upholding class certification in this case. Irwin Mortgage filed a petition for certiorari with the United States Supreme Court seeking review of the 11th Circuit's class certification ruling and also filed a motion in the district court seeking a stay of further proceedings until the 11th Circuit renders decisions in the other three RESPA cases pending before it. The Supreme Court denied Irwin Mortgage's petition. On March 8, 2002, the district court granted Irwin Mortgage's motion to stay proceedings in this case.
At this stage of the litigation we are unable to determine the outcome or a reasonable estimate of potential loss. However, we expect that an adverse outcome in this lawsuit could result in substantial monetary damages that could be material to our financial position. We have not established any reserves for this case or for the second suit that seeks consolidation with this one. The second case, which seeks class action status and contains allegations similar to those in the first case, has been stayed until the 11th Circuit renders decisions in the other three RESPA cases pending before it. An adverse outcome in the second case could cause the company to suffer material losses.
In January, 2001, we and two subsidiaries, Irwin Leasing Corporation (formerly Affiliated Capital Corp.) and Irwin Equipment Finance Corporation, our indirect and direct subsidiaries, respectively (for purposes of this paragraph, the Irwin companies), were served as defendants in an action filed in the U.S. District Court for the Middle District of Pennsylvania. The suit alleges that a manufacturer/importer of certain medical devices made misrepresentations to health care professionals and to government officials to improperly obtain Medicare reimbursement for treatment 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 our motion in part by dismissing us 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, we are unable at this time to form a reasonable estimate of the amount of potential loss, if any, that we could suffer.
In May, 2001, Irwin Union Bank and Trust and Irwin Home Equity, our direct and indirect subsidiaries, respectively (for purposes of this paragraph, Irwin), received notice that they were named as defendants in a lawsuit filed in the U.S. District Court for the District of Rhode Island. The suit alleges that Irwin's disclosures and closing procedure for certain home equity loans did not comply with certain provisions of the Truth in Lending Act. The suit also requests that the court certify a plaintiff class in this action. On June 18, 2001, Irwin filed a motion with the court to compel arbitration pursuant to the provisions in the home equity loan agreement. On October 20, 2001, the Court entered judgment in favor of Irwin compelling arbitration and dismissing the plaintiffs' complaint. The plaintiffs have appealed. We have not established any reserves for this case. If arbitration is ultimately upheld, we do not expect to suffer material loss in this case.
In an amended complaint, our subsidiary Irwin Union Bank and Trust was named in place of our indirect subsidiary, Irwin Home Equity, as a defendant in a suit originally filed in July, 2001 in the U.S. District Court for the District of Massachusetts. The suit relates to a loan purchased by Irwin Union Bank and Trust and serviced by Irwin Home Equity. The plaintiff alleges that the loan documents did not comply with certain provisions of the Truth in Lending Act relating to high rate loans. The suit also requests that the court certify a plaintiff class in this action. Irwin Union Bank and Trust filed an answer to the amended complaint denying plaintiff's allegations. Because the case is in the early stages of litigation, we are unable at this time to form a reasonable estimate of the amount of potential loss, if any, that we could suffer. We have not established any reserves for this case.
On January 25, 2002, a jury awarded the plaintiffs damages of $1.434 million jointly and severally against defendants, including our subsidiary Irwin Mortgage, in a case filed in August 1998 in the Baltimore, Maryland, City Circuit Court. The nine plaintiffs alleged that a home rehabilitation company defrauded them by selling them defective homes at inflated prices and that Irwin Mortgage, which provided the plaintiff borrowers mortgage loans on the home purchases, participated in the fraud. Prior to the outcome of the jury trial, we had no reserves for this case. On February 6, 2002, plaintiffs filed a petition for attorney's fees. On the same date, Irwin Mortgage filed post-trial motions for judgment notwithstanding the verdict, new trial and/or remittitur, which is a request for the court to reduce the amount of damages awarded by the jury. If the court denies Irwin's post-trial motion, Irwin plans to appeal and will continue to defend this case vigorously.
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, results of operations, or cash flows, except as described above. Reserves have been established for these various matters of litigation, when appropriate, based upon the advice of legal counsel.
NOTE 14 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business we are party to certain financial instruments with off-balance sheet risk to meet the financial needs of our customers. These financial instruments include loan commitments and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the consolidated balance sheet.
Our exposure to credit loss, in the form of nonperformance by the counterparty on commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments. Collateral pledged for standby letters of credit and commitments varies but may include accounts receivable; inventory; property, plant, and equipment; and residential real estate. Total outstanding commitments to extend credit at December 31, 2001, were $157.6 million. These loan commitments include $120.8 million of floating rate loan commitments and $36.8 million of fixed rate loan commitments related to commercial banking activities. We had approximately $26.1 million and $14.6 million in irrevocable standby letters of credit outstanding at December 31, 2001 and 2000, respectively.
NOTE 15 -- DERIVATIVE FINANCIAL INSTRUMENTS
Financial derivatives are used as part of the overall asset/liability management process. These instruments are used to manage risk-related to changes in interest and foreign currency fluctuations. Our portfolio of derivative financial instruments generally consist of forward contracts and interest rate lock commitments relating to mortgage banking activities, financial futures contracts, interest rate caps, forward foreign exchange contracts, and interest rate swaps.
We enter into forward contracts to protect against interest rate fluctuations from the date of mortgage loan commitment until the loans are sold. At December 31, 2001, we designated the portion of these transactions hedging the closed mortgage loans as hedges that qualify for hedge accounting treatment under SFAS 133. The notional amount of these contracts (which does not represent the amount at risk) totaled $646.7 million and $308.2 million at December 31, 2001 and 2000, respectively. The basis of the hedged closed loans is adjusted for changes in value associated with the risk being hedged. We value these contracts at period end based upon the current secondary market value of securities with similar characteristics. The carrying amount and fair value of these derivatives at December 31, 2001 was $0.7 million. Hedge ineffectiveness recorded in gains from sales of loans related to these hedging activities was immaterial. The effect of these hedging activities was recorded through earnings as gain from sale of loans.
We enter into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on loans intended to be sold are considered to be derivatives and are recorded at fair value. We value these commitments at period end based upon the current secondary market value of securities with similar characteristics. At December 31, 2001, we had a notional amount of rate lock commitments outstanding totaling $326.5 million with a fair value of $0.9 million. Changes in fair value of these derivatives are recorded in earnings.
Financial futures contracts or interest rate floors are used periodically to hedge the value of servicing assets against declining interest rates which increase prepayment activity and decrease the value of the servicing asset. To the extent that interest rates increase, the value of servicing assets increases while the value of these derivative instruments declines. As of December 31, 2001, our servicing asset derivative instruments had a positive fair value of $17.5 million on a notional amount of $17.4 billion.
We enter into foreign currency contracts to protect the value of intercompany loans made to Onset, our Canadian leasing company, against changes in the exchange rate. We had a notional amount of $38.1 million in forward contracts outstanding as of December 31, 2001.
The Canadian leasing company uses interest rate swaps to neutralize repricing risk associated with its funding source. At December 31, 2001, we had two interest rate swaps with a notional value of $16.0 million and $14.3 million. The interest rate swaps amortize on a schedule that is designed to match the principal pay down of the loan portfolio and have a final maturity of May 25, 2004. We can reduce the notional value of the swaps by up to 10% if prepayments on the loans are greater than originally anticipated.
NOTE 16 -- REGULATORY MATTERS
Irwin Financial and our bank subsidiaries, Irwin Union Bank and Trust and Irwin Union Bank, F.S.B. are subject to various regulatory capital requirements administered by the federal and state banking agencies. Under capital adequacy guidelines, Irwin Financial, Irwin Union Bank and Trust, and Irwin Union Bank, F.S.B., must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital to average assets (as defined). We believe, as of December 31, 2001, that we have met all capital adequacy requirements to which we are subject.
As of December 31, 2001, we were categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Irwin Financial, Irwin Union Bank and Trust, and Irwin Union Bank, F.S.B., must exceed minimum total risk-based, Tier 1 risk-based, and Tier 1 capital to average assets ratios. There have been no conditions or events subsequent to December 31, 2001 that we believe have changed our being well capitalized.
ADEQUATELY WELL
ACTUAL CAPITALIZED CAPITALIZED
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(IN THOUSANDS)
AS OF DECEMBER 31, 2001:
Total Capital (to Risk-Weighted
Assets):
Irwin Financial Corporation....... $468,337 10.8% $346,408 8.0% $433,010 10.0%
Irwin Union Bank and Trust........ 363,735 10.8 268,663 8.0 335,829 10.0
Irwin Union Bank, F.S.B........... 17,135 34.8 3,939 8.0 4,923 10.0
Tier 1 Capital (to Risk-Weighted
Assets):
Irwin Financial Corporation....... 295,021 6.8 173,204 4.0 259,806 6.0
Irwin Union Bank and Trust........ 342,153 10.2 134,332 4.0 201,497 6.0
Irwin Union Bank, F.S.B........... 17,074 34.7 N/A 2,954 6.0
Tier 1 Capital (to Average Assets):
Irwin Financial Corporation....... 295,021 9.4 126,091 4.0 157,613 5.0
Irwin Union Bank and Trust........ 342,153 10.9 125,344 4.0 156,680 5.0
Core Capital (to Adjusted Tangible
Assets)
Irwin Union Bank, F.S.B........... 17,074 9.4 7,293 4.0 9,117 5.0
Tangible Capital (to Tangible
Assets)
Irwin Union Bank, F.S.B........... 17,074 9.4 2,735 1.5 N/A
AS OF DECEMBER 31, 2000:
Total Capital (to Risk-Weighted
Assets):
Irwin Financial Corporation....... $384,144 12.9% $226,153 8.0% $282,691 10.0%
Irwin Union Bank and Trust........ 283,611 10.3 220,180 8.0 275,225 10.0
Irwin Union Bank, F.S.B........... 6,636 105.9 501 8.0 627 10.0
Tier 1 Capital (to Risk-Weighted
Assets):
Irwin Financial Corporation....... 250,825 8.4 113,076 4.0 169,614 6.0
Irwin Union Bank and Trust........ 271,037 9.9 110,090 4.0 165,135 6.0
Irwin Union Bank, F.S.B........... 6,636 105.9 N/A 376 6.0
Tier 1 Capital (to Average Assets):
Irwin Financial Corporation....... 250,825 12.4 80,823 4.0 101,028 5.0
Irwin Union Bank and Trust........ 271,037 12.7 85,600 4.0 106,999 5.0
Core Capital (to Adjusted Tangible
Assets)
Irwin Union Bank, F.S.B........... 12,738 51.9 510 4.0 637 5.0
Tangible Capital (to Tangible
Assets)
Irwin Union Bank, F.S.B........... 12,738 51.9 191 1.5 N/A
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ADEQUATELY WELL
ACTUAL CAPITALIZED CAPITALIZED
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(IN THOUSANDS)
AS OF DECEMBER 31, 1999:
Total Capital (to Risk-Weighted
Assets):
Irwin Financial Corporation....... $246,183 13.5% 145,891 8.0% 182,363 10.0%
Irwin Union Bank and Trust........ 144,305 10.0 115,295 8.0 144,119 10.0
Tier 1 Capital (to Risk-Weighted
Assets):
Irwin Financial Corporation....... 207,627 11.4 72,945 4.0 109,418 6.0
Irwin Union Bank and Trust........ 136,864 9.5 57,647 4.0 86,471 6.0
Tier 1 Capital (to Average Assets):
Irwin Financial Corporation....... 207,627 12.8 65,046 4.0 81,307 5.0
Irwin Union Bank and Trust........ 136,864 11.0 50,349 4.0 62,936 5.0
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NOTE 17 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for our financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values.
Interest-bearing deposits with financial institutions, Loans, Loans held for sale, Deposit liabilities, Short-term borrowings, Long-term debt, and Company-obligated mandatorily redeemable preferred securities of subsidiary trust: The fair values were estimated using discounted cash flow analyses, using interest rates currently being offered for like assets with similar terms, to borrowers with similar credit quality, and for the same remaining maturities.
Trading assets: The carrying amounts reported in the balance sheet for trading assets approximate those assets' fair values.
Investment securities: Fair values for investment securities were based on quoted market prices when available. For securities that had no quoted market prices, fair values were estimated by discounting future cash flows using current rates on similar securities.
Forward contract commitments: The unrealized gains and losses of forward contract commitments is based on the difference between the settlement values of those commitments and the quoted market values of the underlying securities.
Derivative instruments: The carrying amounts reported in the balance sheet for derivative instruments approximate those assets' fair values. The estimated fair values of derivative instruments are determined using methodologies discussed in Note 15.
Loan commitments -- commercial bank: No value is assigned for unfunded commitments as these primarily represent commitments to land at market rates tied to short term indices.
2001 2000
---------------------------- ----------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
AMOUNT VALUE AMOUNT VALUE
---------- -------------- ---------- --------------
(IN THOUSANDS)
FINANCIAL ASSETS:
Cash and cash equivalents.............. $ 158,291 $ 158,291 $ 83,493 $ 83,493
Interest-bearing deposits with
financial institutions............... 14,247 14,257 36,400 36,442
Trading assets......................... 216,684 216,684 154,921 154,921
Investment securities.................. 38,796 38,937 37,095 37,163
Loans held for sale.................... 503,757 505,076 579,788 579,788
Loans, net of unearned discount........ 1,871,135 1,919,336 1,078,604 1,145,129
Servicing asset........................ 257 257
FINANCIAL LIABILITIES:
Deposits............................... 2,309,018 2,296,929 1,443,330 1,452,024
Short-term borrowings.................. 487,963 488,361 475,502 478,342
Long-term debt......................... 29,654 30,334 29,608 30,597
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust..................... 190,948 208,102 147,167 157,681
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2001 2000
-------------------------- --------------------------
NOTIONAL ESTIMATED FAIR NOTIONAL ESTIMATED FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------------- -------- --------------
OFF BALANCE SHEET:
Loan commitments -- commercial bank...... $157,576 $ -- $ 36,521 $ --
Interest rate lock commitments(1)........ N/A N/A 643,289 --
Standby letters of credit................ 22,661 -- 14,649 --
Forward contract commitments(1).......... N/A N/A 308,208 704
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(1) Due to the adoption of SFAS 133, these commitments are considered derivatives and are included on balance sheet at December 31, 2001.
The fair value estimates consider relevant market information when available. Because no market exists for a significant portion of our financial instruments, fair value estimates are determined based on present value of estimated cash flows and consider various factors, including current economic conditions and risk characteristics of certain financial instruments. Changes in factors, or the weight assumed for the various factors, could significantly affect the estimated values.
The fair value estimates are presented for existing on- and off-balance sheet financial instruments without attempting to estimate the value of our long-term relationships with depositors and the benefit that results from the low cost funding provided by deposit liabilities. In addition, significant assets which were not considered financial instruments and were therefore not a part of the fair value estimates include lease receivables, and premises and equipment.
NOTE 18 -- SHAREHOLDERS' EQUITY
We have a stock plan that provides up to 300,000 shares to be used to compensate Business Development Board members of Irwin Union Bank and Trust and Irwin Union Bank, F.S.B. As of December 31, 2001 and 2000, 8,071 shares and 7,378 shares were issued at a weighted average price of $22.13 and $16.17, respectively.
We also have a stock plan to compensate our Directors with our common stock, if so elected, in lieu of cash for their annual retainer and meeting fees. The number of shares issued under the plan is based on the current market value of our common stock. In 2001 and 2000, respectively, we granted 5,466 and 8,678 shares under the 1999 plan at a weighted average fair value of $21.89 and $19.63. In addition, we have an employee stock purchase plan for all qualified employees. The plan provides for employees to purchase common stock through payroll deduction at approximately 85% of the current market value.
We have two stock option plans (established in 1997 and 1992) that provide for the issuance of 2,840,000 shares of non-qualified and incentive stock options. In addition, the 2001 stock plan provides for the issuance of 2,000,000 of non-qualified and incentive stock options, stock appreciation rights, restricted stock, and phantom stock units. An additional 2,000,000 of stock appreciation rights may be granted under this plan For all plans, the exercise price of each option, which has a ten-year life and a vesting period of four years beginning the year granted, is equal to the market price of our stock on the grant date. Vested outstanding stock options have been considered as common stock equivalents in the computation of diluted earnings per share. In 2001, we awarded 3,952 shares of common stock in restricted stock grants at a weighted average fair value of $25.30 through this plan.
Activity in the above plans for 2001, 2000, and 1999 is summarized as follows:
2001 2000 1999
-------------------------- -------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
Outstanding at the
beginning of the year.... 1,616,259 $13.37 1,328,090 $12.50 1,257,050 $ 9.68
Granted.................. 416,197 22.13 351,934 16.67 216,155 24.02
Exercised................ (329,053) 5.25 (32,400) 5.56 (137,600) 4.19
Canceled................. (19,095) 20.87 (31,365) 21.60 (7,515) 24.59
--------- --------- ---------
Outstanding at the of the
year..................... 1,684,308 17.04 1,616,259 13.37 1,328,090 12.50
========= ========= =========
Exercisable at the end of
the year................. 1,162,817 $15.46 1,210,356 $11.30 1,045,659 $ 9.64
========= ========= =========
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The table below shows options outstanding and exercisable by price range as of December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AS OF 12/31/2001 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/2001 EXERCISE PRICE
------------------------------ ---------------- ---------------- -------------- ---------------- --------------
$ 5.53 - $10.66............... 454,343 3.35 $ 8.27 454,343 $ 8.27
$13.69 - $16.50............... 220,111 6.07 $14.03 194,853 $13.89
$16.97 - $21.28............... 311,401 8.37 $17.26 153,731 $17.18
$21.38 - $23.97............... 357,388 9.15 $21.83 106,737 $22.13
$24.09 - $28.56............... 341,065 7.39 $25.44 253,153 $25.71
--------- ---- ------ --------- ------
$ 5.53 - $28.56............... 1,684,308 6.68 $17.04 1,162,817 $15.46
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The fair value of each option was estimated to be $11.43, $9.32, and $10.97 on the date of the grant using the binomial option-pricing model with the following assumptions for 2001, 2000, and 1999, respectively: risk free interest rates of 5.22%, 6.13%, and 5.20%; dividend yield of 1.00% for 2001 and 2000, and 0.83% for 1999; and volatility of 40% for 2001 and 2000, and 28.7% for 1999.
We have not recognized compensation cost for the three non-qualified and incentive stock option plans or the Employee Stock Purchase Plan. Had compensation cost been determined based on the fair value at the grant dates, our net income and earnings per share would have been reduced to the pro forma amounts indicated below:
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Net income
As reported............................................... $45,516 $35,666 $33,156
Pro forma................................................. 43,629 34,365 32,176
Basic earnings per share
As reported............................................... 2.15 1.70 1.54
Pro forma................................................. 2.06 1.64 1.49
Diluted earnings per share
As reported............................................... 2.00 1.67 1.51
Pro forma................................................. 1.90 1.61 1.49
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NOTE 19 -- EARNINGS PER SHARE
Earnings per share calculations are summarized as follow:
BASIC EFFECT OF EFFECT OF EFFECT OF DILUTED
EARNINGS STOCK PREFERRED CONVERTIBLE EARNINGS
PER SHARE OPTIONS SHARES SHARES PER SHARE
--------- --------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001
Net income before cumulative effect of change
in accounting principle.................... $45,341 $ -- $ -- $2,801 $48,142
Shares........................................ 21,175 292 96 2,610 24,173
------- ------ ------ ------ -------
Per-Share Amount.............................. 2.14 (0.03) (0.01) (0.11) 1.99
------- ====== ====== ====== -------
Cumulative effect of change in accounting
principle.................................. 175 175
------- -------
Per-Share Amount.............................. 0.01 0.01
------- -------
Net income.................................... 45,516 48,317
------- -------
Per-Share Amount.............................. $ 2.15 $ 2.00
======= =======
2000
Net income.................................... $35,666 $ -- $ -- $ 295 $35,961
Shares........................................ 20,973 281 78 261 21,593
------- ------ ------ ------ -------
Per-Share Amount.............................. $ 1.70 $(0.02) $(0.01) $ -- $ 1.67
======= ====== ====== ====== =======
1999
Net income.................................... $33,156 $ -- $33,156
Shares........................................ 21,530 356 N/A N/A 21,886
------- ------ -------
Per-Share Amount.............................. $ 1.54 $(0.03) $ 1.51
======= ====== =======
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In 2001, 562,764 shares related to stock options were not included in the dilutive earnings per share calculation because they were antidilutive.
Income tax expense is summarized as follows:
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
CURRENT:
Federal................................................... $ 2,578 $ 1,374 $ 3,251
State..................................................... (199) 600 687
------- ------- -------
2,379 1,974 3,938
======= ======= =======
DEFERRED:
Federal................................................... 22,876 18,000 14,580
State..................................................... 3,369 3,702 963
------- ------- -------
26,245 21,702 15,543
======= ======= =======
INCOME TAX EXPENSE:
Federal................................................... 25,454 19,374 17,831
State..................................................... 3,170 4,302 1,650
------- ------- -------
$28,624 $23,676 $19,481
======= ======= =======
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Our net deferred tax liability, which is included in other liabilities on the consolidated balance sheet, consisted of the following:
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Mortgage servicing.......................................... $(83,974) $(48,912)
Deferred securitization income.............................. (43,023) (34,438)
Loan and lease loss reserve................................. 13,499 4,958
Deferred origination fees and costs......................... 2,090 1,786
Deferred compensation....................................... 7,779 5,097
Retirement benefits......................................... 310 |