INDIANA 35-1286807
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
500 WASHINGTON STREET COLUMBUS, INDIANA 47201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(812) 376-1909
(CORPORATION'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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TITLE OF CLASS: COMMON STOCK*
TITLE OF CLASS: 9.25% CUMULATIVE TRUST PREFERRED SECURITIES ISSUED BY IFC
CAPITAL TRUST I AND THE GUARANTEE WITH RESPECT THERETO.
TITLE OF CLASS: 10.50% CUMULATIVE TRUST PREFERRED SECURITIES ISSUED BY IFC
CAPITAL TRUST II AND THE GUARANTEE WITH RESPECT THERETO.
TITLE OF CLASS: 8.75% CUMULATIVE 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. [X]
The aggregate market value of the voting stock held by non-affiliates of the Corporation was $243,512,425 as of March 9, 2001. As of March 9, 2001, there were outstanding 21,160,823 common shares of the Corporation.
* Includes associated rights.
SELECTED PORTIONS OF THE FOLLOWING DOCUMENTS PART OF FORM 10-K INTO WHICH INCORPORATED
-------------------------------------------- -----------------------------------------
DEFINITIVE PROXY STATEMENT FOR ANNUAL MEETING PART III
OF SHAREHOLDERS TO BE HELD APRIL 26, 2001
EXHIBIT INDEX ON PAGES 75 THROUGH 76
TOTAL PAGES IN THIS FILING: 163
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Part I
Item 1 -- Business.................................................... 2
Item 2 -- Properties.................................................. 7
Item 3 -- Legal Proceedings........................................... 8
Item 4 -- Submission of Matters to a Vote of Security Holders......... 9
Part II
Item 5 -- Market for Corporation's Common Equity and Related Security
Holder Matters............................................ 9
Item 6 -- Selected Financial Data..................................... 11
Item 7 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 8 -- Financial Statements and Supplementary Data................. 45
Item 9 -- Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 73
Part III
Item -- Directors and Executive Officers of the Corporation......... 74
10
Item -- Executive Compensation...................................... 74
11
Item -- Security Ownership of Certain Beneficial Owners and
12 Management................................................ 74
Item -- Certain Relationships and Related Transactions.............. 74
13
Part IV
Item -- Exhibits, Financial Statement Schedules and Reports on Form
14 8-K....................................................... 75
Signatures................................................................. 77
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ITEM 1. BUSINESS
GENERAL
Irwin Financial Corporation (the "Corporation") is a diversified financial services company organized as an Indiana bank holding company in May, 1972. The Corporation's principal subsidiaries are Irwin Mortgage Corporation ("Irwin Mortgage"), a mortgage banking company; Irwin Union Bank and Trust Company ("Irwin Union Bank"), a commercial bank; Irwin Union Bank, F.S.B., ("Irwin F.S.B."), a federal savings bank; Irwin Home Equity Corporation ("Home Equity"), a consumer lending company; Irwin Business Finance ("Business Finance"), an equipment leasing company; Irwin Ventures LLC ("Irwin Ventures"), a venture capital company; and Irwin Union Credit Insurance Corporation, a credit insurance company. The Corporation is also the sole equity shareholder of IFC Capital Trust I, IFC Capital Trust II and IFC Capital Trust III, special purpose trusts.
BUSINESS OF SUBSIDIARIES
Irwin Mortgage, acquired in 1981, originates, purchases and services conventional or government agency backed (i.e., FHA and VA) residential mortgage loans. Most mortgages are either insured by an agency of the federal government, or in the case of a conventional mortgage, meet requirements for resale to the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. This market is composed of borrowers who do not qualify under the underwriting guidelines established by the government-sponsored secondary market agencies for conforming first mortgages.
Irwin Mortgage sells mortgage loans to institutional and private investors but may retain servicing rights to mortgage loans that it originates or purchases from correspondents. Irwin Mortgage collects and accounts for the monthly payments on each loan serviced and pays the real estate taxes and insurance necessary to protect the integrity of the mortgage lien, for which it receives a servicing fee. Irwin Mortgage operates 89 production and satellite offices in 28 states. During 2000, Irwin Mortgage established offices in Glendale and Phoenix, Arizona; Arroyo Grande, Bakersfield North, Carson, Citrus Heights, Huntington Park, Stockton, and Walnut South, California; Apopka, Florida; Chicago, Illinois; Roscommon, Michigan; Medford Township, New Jersey; Columbus (2) and Reynoldsburg, Ohio; Clackamas, Oregon; Houston, Texas (2 Popular Cash Express locations); Mechanicsburg, Pennsylvania; and Morgantown, West Virginia. During 2000, Irwin Mortgage closed offices in Phoenix Central and Tucson, Arizona; Irvine, California; Woodland Park, Colorado; Kailua and Maui, Hawaii; Lafayette, Indiana; Ashland, Kentucky; Columbia, Maryland; Park Hills, Sunset Hills and Union, Missouri; Las Vegas, Nevada (Wholesale); Brick, New Jersey; Cary, Charlotte and Greensboro, North Carolina; Weatherford, Oklahoma; Lancaster, Pennsylvania; Austin and San Antonio, Texas; and Chesapeake, Fredericksburg, Richmond, Springfield and Virginia Beach, Virginia.
Irwin Union Bank, organized in 1871, is a full service commercial bank offering a wide variety of services to individual, business, institutional, and governmental customers. Irwin Union Bank's services include personal and commercial checking accounts, savings and time deposit accounts, personal and business loans, credit card services, money transfer, financial counseling, property and casualty insurance agency services, trust services, securities brokerage, and safe deposit facilities. Irwin Union Bank holds the largest market share of the eleven financial institutions operating in Bartholomew County, Indiana, with eight locations throughout the county. Irwin Union Bank also has branch facilities in Greensburg (Decatur County), Carmel (Hamilton County), Avon (Hendricks County), Seymour (Jackson County-2), Franklin and Greenwood (Johnson County-2), Indianapolis (Marion County), Bloomington (Monroe County-3) and Shelbyville (Shelby County), Indiana. Irwin Union Bank also has four branches outside Indiana: three branches in Michigan-located in Kalamazoo, Grandville (Grand Rapids), and Traverse City; and one branch in Carson City, Nevada. The Traverse City branch was established in May 2000. In December, 2000, Irwin Union Bank converted its loan production offices in Louisville, Kentucky; Brentwood (St. Louis), Missouri; Phoenix, Arizona; Las Vegas, Nevada; and Salt Lake City, Utah to offices of Irwin F.S.B. In March, 2001, Irwin Union Bank opened a loan production office in Lansing, Michigan.
Home Equity was formed in 1994 and is located in San Ramon, California and Carson City, Nevada. In conjunction with its affiliate, Irwin Union Bank, Home Equity originates, securitizes and services home equity loans and lines of credit. The products are marketed through retail, wholesale and Internet channels nationally. Home Equity regularly develops and tests new product offerings, which if successful, are introduced on a systematic basis. To provide for efficient use of capital, the loans are periodically packaged and sold to bond investors, with a small interest being retained. In each of the past two years, the business sold portions of its retained residual interests. Current product offerings, in addition to traditional home equity products, include streamlined lower balance, high loan-to-value home equity loans, as well as first mortgage refinance programs. Home Equity's core competencies are credit risk management and analysis, risk assessment, profit-based planning and specialized home loan servicing, with particular expertise in product development, test management and database analysis.
Business Finance, headquartered in Bellevue, Washington, and Onset Capital Corporation, its Canadian affiliate, originate and service small to medium-sized equipment leases and loans. Business Finance was organized in the second quarter of 1999 and commenced operations in January, 2000. In conjunction with its affiliate, Irwin Union Bank, Business Finance originates transactions from an established North American network of brokers and vendors through an e-commerce system that provides automated credit scoring, documentation, and portfolio management services.
Irwin Ventures, located in Columbus, Indiana, is a venture capital subsidiary formed in the third quarter of 1999 for the purpose of making investments in early stage companies in the financial services industry and related fields. In August, 1999, Irwin Ventures established a subsidiary, Irwin Ventures SBIC, which obtained a Small Business Investment Company license in April, 2000. In December, 2000, Irwin Ventures and Irwin Ventures SBIC became Delaware limited liability companies.
Irwin Union Credit Insurance Corporation has its home office in Columbus, Indiana and provides credit life insurance to consumer loan customers of Irwin Union Bank.
To create greater efficiencies within the home equity and equipment leasing lines of business, the Corporation is pursuing a plan to position Irwin Home Equity and Irwin Business Finance as subsidiaries of Irwin Union Bank in 2001.
IFC Capital Trust I ("Capital Trust I") is a statutory business trust created under the laws of Delaware. The Corporation owns all of the Common Securities of Capital Trust I. Capital Trust I exists for the purpose of issuing the Preferred Securities and investing the proceeds thereof in an equivalent amount of 9.25% Subordinated Debentures of the Corporation. The Subordinated Debentures will mature on March 31, 2027, which date may be (i) shortened to a date not earlier than March 31, 2002, or (ii) extended to a date not later than March 31, 2046, in each case if certain conditions are met (including, in the case of shortening the Stated Maturity, the Corporation having received prior approval of the Board of Governors of the Federal Reserve System ("Federal Reserve") to do so if then required under applicable capital guidelines or policies of the Federal Reserve). The Preferred Securities will have a preference under certain circumstances with respect to cash distributions and amounts payable on liquidation, redemption or otherwise over the Common Securities. Holders of Preferred Securities are entitled to receive preferential cumulative cash distributions, at the annual rate of 9.25% of the liquidation amount of $25 per Preferred Security accruing from the date of original issuance and payable quarterly in arrears on the last day of March, June, September and December of each year, commencing March 31, 1997.
IFC Capital Trust II ("Capital Trust II") is a statutory business trust created under the laws of Delaware. The Corporation owns all of the Common Securities of Capital Trust II. Capital Trust II exists for the purpose of issuing Preferred Securities and investing the proceeds thereof in an equivalent amount of 10.50% Subordinated Debentures of the Corporation. The Subordinated Debentures will mature on September 30, 2030, which date may be shortened to a date not earlier than September 30, 2005, if certain conditions are met (including, in the case of shortening the Stated Maturity, the Corporation having received prior approval of the Board of Governors of the Federal Reserve System ("Federal Reserve") to do so if then required under applicable capital guidelines or policies of the Federal Reserve). The Preferred Securities will have a preference under certain circumstances with respect to cash distributions and amounts payable on liquidation, redemption or otherwise over the Common Securities. Holders of Preferred Securities are entitled to receive preferential cumulative cash distributions, at the annual rate of 10.50% of the liquidation amount of $25 per Preferred Security accruing from the date of original issuance and payable quarterly in arrears on the last day of March, June, September and December of each year, commencing December 29, 2000.
IFC Capital Trust III ("Capital Trust III") is a statutory business trust created under the laws of Delaware. The Corporation owns all of the Common Securities of Capital Trust III. Capital Trust III exists for the purpose of issuing Preferred Securities and investing the proceeds thereof in an equivalent amount of 8.75% Subordinated Debentures of the Corporation. The Subordinated Debentures will mature on September 30, 2030, which date may be shortened to a date not earlier than September 30, 2003, if certain conditions are met (including, in the case of shortening the Stated Maturity, the Corporation having received prior approval of the Board of Governors of the Federal Reserve System ("Federal Reserve") to do so if then required under applicable capital guidelines or policies of the Federal Reserve and certain price parameters for the Common Security having been met). The Preferred Securities will have a preference under certain circumstances with respect to cash distributions and amounts payable on liquidation, redemption or otherwise over the Common Securities. Holders of Preferred Securities are entitled to receive preferential cumulative cash distributions, at the annual rate of 8.75% of the liquidation amount of $25 per Preferred Security accruing from the date of original issuance and payable quarterly in arrears on the last day of March, June, September and December of each year, commencing December 29, 2000. Holders of Capital Trust III Preferred Securities are entitled to convert Preferred Securities into Common Securities at any time at an exchange ratio of 0.7930 Preferred Securities for each 1.0 Common Security.
The Corporation continues to hold certain small-ticket equipment leases in its subsidiary, Irwin Leasing Corporation (the former Affiliated Capital Corp.). The leases were not part of the 1998 sale of substantially all of the assets of Affiliated Capital to DVI Financial Services, Inc. Irwin Leasing and its parent, Irwin Equipment Finance Corporation, are inactive except for the leases.
No single part of the business of the Corporation is dependent upon a single customer or upon a very few customers and the loss of any one customer would not have a materially adverse effect upon the business of the Corporation.
COMPETITION
Irwin Mortgage originates and services residential first and second mortgage loans from 89 production and satellite offices in Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, Michigan, Minnesota, Missouri, Nevada, New Jersey, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin. In each of these locations, competition for mortgage loans comes from other national, regional, local, and web-enabled mortgage banking companies, as well as commercial banks, savings banks, and savings and loan associations. Irwin Mortgage purchases mortgage loans from correspondents in these and other states as well.
In the commercial banking business, Irwin Union Bank competes with commercial banks, savings banks, savings and loan associations and credit unions for deposits and loans in Bartholomew, Decatur, Hamilton, Hendricks, Jackson, Johnson, Marion, Monroe and Shelby County, Indiana. Irwin Union Bank also competes for the provision of banking services with banks located in counties surrounding its branch offices, primarily in south central Indiana, and with a number of nonbank companies located throughout the United States, including insurance companies, retailers, brokerage firms, companies offering money market accounts, and national credit card companies. As of December 31, 2000, Irwin Union Bank ranked first in Bartholomew County among commercial banking and savings bank institutions on the basis of Bartholomew County deposits. In addition to the above mentioned counties, Irwin Union Bank derives its business from several other counties in south central Indiana. Irwin Union Bank's branch offices in Grandville, Kalamazoo and Traverse City, Michigan, and Carson City, Nevada experience competition from existing institutions in those areas.
As a new entity, Irwin F.S.B. faces competition from established local and regional banks and savings and loan institutions. The offices of Irwin F.S.B. have been strategically located in markets in Kentucky, Arizona, Missouri, Nevada and Utah, where considerable financial merger and acquisition activity has occurred and where the savings bank has succeeded in attracting experienced personnel. Irwin F.S.B. frequently generates business through the individual reputations of its personnel and draws from the surrounding counties of its branch locations.
Home Equity's primary competitors for home equity loans and lines of credit include banks, credit unions, and other home equity lenders with operations that are either national, regional, local or web-enabled in scope. Such competitors may be headquartered anywhere in the country.
The primary competitors of Business Finance include other funding sources that are independent or affiliated with banks or large equipment leasing companies that operate on a North American or regional basis.
The primary competitors of Irwin Ventures are other venture capital firms and individuals who invest in start-up companies. Such companies and individuals may be located anywhere in the country.
SUPERVISION AND REGULATION
The Corporation is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered with, regulated and examined by the Board of Governors of the Federal Reserve System (the "Board of Governors").
Subject to certain exceptions, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company that is not a bank and from engaging directly or indirectly in activities unrelated to banking or managing or controlling banks. One exception to this prohibition permits activities by a bank holding company or its subsidiary that the Board of Governors determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Board of Governors has adopted regulations prescribing those activities it presently regards as permissible, which include the activities engaged in by the Corporation and its subsidiaries.
The Bank Holding Company Act, the Federal Reserve Act, and the Federal Deposit Insurance Act also subject bank holding companies and their subsidiaries to certain restrictions on extensions of credit by subsidiary banks to the bank holding company or any of its subsidiaries, or investments in the securities thereof, and on the taking of such securities as collateral for loans to any borrower. Further, the Bank Holding Company Act and the regulations of the Board of Governors thereunder, prohibit a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of any property or furnishing of services.
In addition to the regulation of the Corporation, Irwin Union Bank is subject to extensive regulation and periodic examination, principally by the Indiana Department of Financial Institutions and the Federal Reserve Bank of Chicago. Irwin F.S.B. is regulated and periodically examined by the Office of Thrift Supervision. The Corporation's depository institutions are also subject to federal "cross-guarantee" provisions that allow the Federal Deposit Insurance Corporation ("FDIC") to assess a commonly-controlled depository institution for losses suffered by the FDIC if another commonly controlled depository institution fails or requires FDIC assistance. The federal banking agencies possess broad powers to take corrective action as deemed appropriate for an insured depository institution and its holding company.
Irwin Mortgage is subject to audit and examination oversight by the U.S. Department of Housing and Urban Development, as well as the Government National Mortgage Association, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation. The insurance subsidiary of the Corporation and the insurance subsidiary of Irwin Union Bank are dependent upon state licenses and upon franchise agreements with private corporations for their continued existence. The reinsurance subsidiary of Irwin Union Bank is subject to examination by the state of Vermont. The home equity and equipment leasing lines of business of the Corporation are also dependent upon state licenses for their ability to engage in origination and servicing activities in certain states. Onset Capital Corporation, the Canadian equipment leasing subsidiary, must obtain local licenses and register with each province in which it does business in Canada. The securities brokerage activities of Irwin Union Bank's registered broker/dealer are regulated and examined by the Securities and Exchange Commission, the Indiana Securities Division, the securities divisions of the various states in which Irwin Union Securities, Inc. operates, and the National Association of Securities Dealers. The activities of Irwin Union Bank's investment advisory subsidiary are regulated and examined by the Indiana Securities Division and the securities divisions of the states in which Irwin Union Advisory Services, Inc. operates. Irwin Ventures SBIC LLC, the small business investment subsidiary of Irwin Ventures, is regulated by the Small Business Administration.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 2000, the Corporation and its subsidiaries had a total of 2,412 employees, including full-time and part-time employees. The Corporation continues a commitment of equal employment opportunity for all job applicants and staff members, and management regards its relations with its employees as satisfactory.
EXECUTIVE OFFICERS OF THE CORPORATION
The Executive Officers of the Corporation are elected annually by the Board of Directors and serve for a term of one year or until their successors are elected and qualified. There are no arrangements or understandings between any Executive Officer and any other person pursuant to which the Officer was or is to be selected as an Officer.
Claude E. Davis (40) is President of Irwin Union Bank since January, 1996. He has been an officer since 1988.
Elena Delgado (45) is President of Irwin Home Equity Corporation since September, 1994.
Gregory F. Ehlinger (38) is Senior Vice President and Chief Financial Officer of the Corporation. He has been an officer since August of 1992.
Jose M. Gonzalez (42) is Vice President and Director of Internal Audit of the Corporation since October of 1995.
Robert H. Griffith (43) became President of Irwin Mortgage on January 2, 2001. He has been an officer of Irwin Mortgage since 1993.
Theresa L. Hall (48) is Vice President - Human Resources of the Corporation since 1988. She has been an officer since 1980.
Bradley J. Kime (40) is President of Irwin F.S.B. since December, 2000, and is also Chief Operating Officer and Executive Vice President of Irwin Union Bank. He has been an officer of Irwin Union Bank since 1987, and was an officer of the Corporation in 1986.
Jody A. Littrell (33) is Vice President and Controller of the Corporation since March, 2000. He was employed with Arthur Andersen LLP from September, 1990 to March, 2000.
David S. Meyercord (34) is Senior Vice President of Irwin Ventures LLC and Irwin Ventures SBIC LLC since 1999. He has been an officer of the Corporation since 1997.
William I. Miller (44) is Chairman of the Board since 1990, and has been a Director of the Corporation since 1985.
John A. Nash (63) is Chairman of the Executive Committee since 1990, and President since 1985, of the Corporation. He has been an officer and Director of the Corporation since 1972.
Matthew F. Souza (44) is Senior Vice President, Ethics and Secretary of the Corporation. He has been an officer since 1985.
Michael E. Taft (60) is President of Irwin Business Finance Corporation since April, 1999. From August, 1998 to April, 1999, he was Executive Vice President of General Electric Capital Business Asset Funding Corp., a subsidiary of General Electric Capital Corporation. From September, 1984 to August, 1998, he was Executive Vice President of MetLife Capital Corp., a subsidiary of Metropolitan Life Insurance Company. (General Electric Capital Corporation acquired MetLife Capital in August, 1998.)
Thomas D. Washburn (54) is Executive Vice President of the Corporation. He has been an officer since 1976.
Brett R. Vanderkolk (35) is Vice President - Treasurer of the Corporation since September, 2000. From August, 1996, to August, 2000, he served as Manager, Capital Markets for Arvin Industries, Inc., and from 1988 to 1996 he was Second Vice President at The Northern Trust Company.
ITEM 2. PROPERTIES
The location and general character of the materially important physical properties of the Corporation and its subsidiaries are as follows: The main office of Irwin Mortgage, where administrative and servicing activities are centered, is located at 9265 Counselor's Row, Indianapolis, Indiana, and a servicing facility is located at 11800 Exit Five Parkway, Indianapolis, Indiana. Irwin Mortgage also has loan production and satellite offices located in Glendale, Mesa, Phoenix, and Scottsdale, Arizona; Arroyo Grande, Bakersfield, Bakersfield North, Carson, Citrus Heights, Concord, Covina, Huntington Park, Richmond, Sacramento, Salinas, San Diego, Stockton, Temecula, Ventura, Visalia, Walnut Creek, Walnut South, Yreka and Yuba City, California; Castle Rock, Colorado Springs, Denver, and Englewood, Colorado; Rocky Hill, Connecticut; Newark, Delaware; Apopka, Boca Raton, Clearwater and Orlando, Florida; Atlanta, Georgia; Honolulu, Hawaii; Chicago, Decatur, Oak Forest and Springfield, Illinois; Indianapolis (5), Carmel, Fishers, Ft. Wayne, Greenwood, Kokomo, Schererville, and South Bend, Indiana; Baton Rouge, Louisiana; Kalamazoo, Lansing and Roscommon, Michigan; Arden Hills, Burnsville and Minneapolis, Minnesota; Desloge and St. Louis, Missouri; Reno, Nevada; Medford Township, New Jersey; Greensboro, Raleigh and Wilmington, North Carolina; Columbus (2), Dayton and Reynoldsburg, Ohio; Tulsa, Oklahoma; Beaverton, Clackamas, and Portland, Oregon; Mechanicsburg, Pennsylvania; Brentwood, Tennessee; Corpus Christi, El Paso, Houston (4) and Irving, Texas; Salt Lake City, Utah; Glen Allen and Newport News, Virginia; Battle Ground, Everett and Mount Lake Terrace, Washington; and Madison, Wisconsin. All offices occupied by Irwin Mortgage are leased.
The main office of Irwin Union Bank is located in four connected buildings at 500 and 520 Washington Street, Columbus, Indiana. These buildings are owned in fee by Irwin Union Realty Corporation, a wholly-owned subsidiary of Irwin Union Bank, and are leased by Irwin Union Bank. The following Irwin Union Bank branch properties are owned in fee by either Irwin Union Bank or Irwin Union Realty: State Street and Eastbrook in Columbus, Indiana; Hope, Taylorsville, and Franklin, Indiana (the Franklin building and a portion of the land are owned; the remaining land is leased). The other branch offices are leased: Avon, Bloomington (3), Carmel, Columbus (3), Greensburg, Greenwood, Indianapolis, Seymour (2) and Shelbyville, Indiana; Grandville (Grand Rapids), Kalamazoo, and Traverse City, Michigan; and Carson City, Nevada. The loan production office in Lansing, Michigan is leased. None of the properties owned by Irwin Union Bank or Irwin Union Realty are subject to any major encumbrances.
The main office of Irwin Home Equity is located at 12677 Alcosta Boulevard, Suite 500, San Ramon, California. Home Equity occupies three other offices in San Ramon, California and an office at 1717 East College Parkway, Suite 101, Carson City, Nevada. All offices occupied by Home Equity are leased.
The main office of Irwin Business Finance is located at 330 120th Avenue NE, Suite 110, Bellevue, Washington. The office location is leased. The main office of Onset Capital Corporation is located at 1100 Melville Street, Suite 300, Vancouver, British Columbia, Canada. Branches are located in Canada in Calgary and Edmonton, Alberta; East St. Paul (Winnipeg), Manitoba; Toronto (2), Ontario; and St. Laurent (Montreal) and Quebec City, Quebec. All of the Onset locations are leased.
The main offices of the Corporation, Irwin Ventures LLC, Irwin Ventures SBIC LLC, and Irwin Union Credit Insurance Corporation are located at 500 Washington Street, Columbus, Indiana, in space leased from Irwin Union Bank.
ITEM 3. LEGAL PROCEEDINGS
As a part of the ordinary course of business, the Corporation and its subsidiary companies are parties to litigation involving claims to the ownership of funds in particular accounts, the collection of delinquent accounts, challenges to security interests in collateral, and foreclosure interests, that is incidental to their regular business activities. In addition to such claims, the Corporation is involved in the following actions:
Culpepper, et. al v. Inland Mortgage Corporation continues on appeal before the United States Court of Appeals for the 11th Circuit. This lawsuit was filed against Irwin Mortgage Corporation ("IMC") (formerly Inland Mortgage Corporation) in April, 1996, in the United States District Court, Northern District of Alabama. The suit alleges that IMC violated the Real Estate Settlement Procedures Act (RESPA) in connection with certain payments IMC made to mortgage brokers, and the plaintiffs sought to have the claims certified as a class action. In June, 1999, the trial court certified a limited class of borrowers, and in December, 1999, IMC appealed the trial court's grant of class certification. On January 23, 2001, the court of appeals heard oral argument by Irwin Mortgage. It is uncertain when a ruling will be issued. If the class certification is upheld, the case would proceed to an adjudication on the merits of the alleged RESPA violations. Because the case is in the early stages of litigation, the Corporation is unable at this time to form a reasonable estimate of the amount of potential loss, if any, that the Corporation could suffer. The Corporation intends to continue to vigorously defend this lawsuit.
In January, 2001, Irwin Leasing Corporation (formerly Affiliated Capital Corp.), Irwin Equipment Finance Corporation and Irwin Financial Corporation (collectively, "the Irwin Companies") were served as defendants in United States ex rel. Paranich v. Sorgnard et. al, 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 (Matrix Biokinetics, Inc., and others) made misrepresentations to health care professionals and to government officials to improperly obtain Medicare reimbursement for treatments using the devices, and that the Irwin Companies, through Affiliated Capital's financing activities, aided in making the alleged misrepresentations. The Irwin Companies filed a motion to dismiss on February 12, 2001. Because the case is in the early stages of litigation, the Corporation is unable at this time to form a reasonable estimate of the amount of potential loss, if any, that the Corporation could suffer. The Corporation intends to vigorously defend this lawsuit.
Except as described above, there is no material pending litigation in which the Corporation or any of its subsidiaries is involved or of which any of their property is the subject. Furthermore, there is no pending legal proceeding that is adverse to the Corporation in which any director, officer or affiliate of the Corporation, or any associate of any such director or officer, is a party, or has a material interest.
During the fourth quarter of 2000, no matters were submitted to a vote of security holders of the Corporation, through the solicitation of proxies or otherwise.
ITEM 5. MARKET FOR CORPORATION'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of Irwin Financial Corporation is quoted on the National Association of Securities Dealers Automated Quotation System/National Market System (NASDAQ/NMS-trading symbol IRWN). The following table sets forth certain information regarding trading in, and cash dividends paid with respect to, the shares of the Corporation's common stock in each quarter of the three most recent calendar years. The approximate number of shareholders of record on March 9, 2001, was 1,668.
STOCK PRICES AND DIVIDENDS:
TOTAL
QUARTER CASH DIVIDENDS
HIGH* LOW* END* DIVIDENDS* FOR YEAR*
----- ---- ------- ---------- ---------
1998
First Quarter................................. 28 1/4 19 1/2 28 1/8 $0.04
Second Quarter................................ 30 25 1/8 29 1/16 $0.04
Third Quarter................................. 37 20 1/2 24 5/8 $0.04
Fourth Quarter................................ 31 20 1/8 27 3/16 $0.04 $0.16
1999
First Quarter................................. 28 7/8 20 20 1/16 $0.05
Second Quarter................................ 25 1/2 17 1/2 19 1/2 $0.05
Third Quarter................................. 24 15/16 19 5/16 20 1/16 $0.05
Fourth Quarter................................ 22 7/8 17 17 13/16 $0.05 $0.20
2000
First Quarter................................. 18 5/16 13 9/16 15 $0.06
Second Quarter................................ 18 1/2 14 3/8 14 7/16 $0.06
Third Quarter................................. 17 13 7/16 16 3/8 $0.06
Fourth Quarter................................ 22 13 1/4 21 3/16 $0.06 $0.24
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* Adjusted for the May 27, 1998 two-for-one stock split
The Corporation expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements, and financial condition. On March 1, 2001, the Corporation's Board of Directors approved an increase in the first quarter dividend to $.065 per share, payable in March, 2001. Dividends paid by Irwin Union Bank and Irwin F.S.B. to the Corporation are restricted by banking law.
SALES OF UNREGISTERED SECURITIES:
In 2000, the Corporation awarded a total of 21,136 shares of common stock in restricted stock grants to four newly hired executives at the Corporation's subsidiary, Irwin Union Bank and Trust Company:
NUMBER
DATE ISSUED OF SHARES
----------- ---------
July 1, 2000............................................... 13,822
October 1, 2000............................................ 7,314
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In 2000, the Corporation issued 8,678 shares of common stock pursuant to elections made by nine outside directors of the Corporation to receive board compensation under the 1999 Outside Director Restricted Stock Compensation Plan in lieu of cash fees:
NUMBER
DATE ISSUED OF SHARES
----------- ---------
January 3, 2000............................................ 4,147
February 24, 2000.......................................... 2,133
April 1, 2000.............................................. 965
July 1, 2000............................................... 794
October 1, 2000............................................ 639
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All of these shares were issued in reliance on the private placement exemption from registration provided in Section 4(2) of the Securities Act.
2000 1999 1998 1997 1996
---------- ----------- ----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE INFO)
FOR THE YEAR:
Net Revenues............................ $ 297,304 $ 266,748 $ 272,063 $ 200,996 $ 181,117
Other Operating Expense................. 237,962 214,111 221,206 158,818 143,829
Net Income.............................. 35,666 33,156 30,503 24,444 22,428
Return on Average Equity................ 20.83% 21.51% 22.84% 19.80% 20.58%
Return on Average Assets................ 1.76 2.01 1.85 1.94 1.95
Dividend Payout Ratio................... 14.13 12.93 11.39 12.74 12.15
PER SHARE:*
Net Income -- Basic..................... $ 1.70 $ 1.54 $ 1.40 $ 1.10 $ 0.99
Net Income -- Diluted................... 1.67 1.51 1.38 1.08 0.98
Cash Dividends.......................... 0.24 0.20 0.16 0.14 0.12
Book Value.............................. 8.97 7.55 6.70 5.82 5.23
Market Value at December 31,............ 21.19 17.81 27.20 20.94 12.38
AT YEAR END:
Assets.................................. $2,422,429 $ 1,680,847 $ 1,946,179 $ 1,496,794 $ 1,300,122
Deposits................................ 1,443,330 870,318 1,009,211 719,596 640,153
Mortgage Loans Held for Sale............ 579,788 508,997 936,788 528,739 446,898
Loans and Leases, Net................... 1,221,793 724,869 547,103 602,281 526,175
Long-Term Debt.......................... 29,608 29,784 2,839 7,096 17,659
Company-Obligated Manditorily Redeemable
Preferred Securities of Subsidiary
Trusts............................... 147,167 48,071 47,999 47,927 --
Shareholders' Equity.................... 189,925 159,296 145,233 127,983 118,903
Owned First Mortgage Servicing
Portfolio............................ 9,196,513 10,488,112 11,242,470 10,713,549 10,810,988
Managed Home Equity Portfolio........... 1,822,856 842,403 581,241 358,166 230,450
Equity to Assets Ratio.................. 7.84% 9.48% 7.46% 8.55% 9.15%
Risk-based Capital Ratio................ 13.60 13.50 12.25 14.85 12.88
Leverage Ratio (Tier one)............... 12.44 12.77 10.51 12.06 9.84
AVERAGES:
Assets.................................. $2,022,980 $ 1,651,010 $ 1,650,384 $ 1,262,714 $ 1,151,535
Equity.................................. 171,196 154,143 133,563 123,483 108,970
Shares Outstanding* -- Basic............ 20,973 21,530 21,732 22,326 22,716
Shares Outstanding* -- Diluted.......... 21,593 21,886 22,139 22,722 23,030
RATIO OF EARNINGS TO FIXED CHARGES:
Including Deposit Interest.............. 1.63x 1.88x 1.79x 1.86x 1.90x
Excluding Deposit Interest.............. 2.46 2.54 2.25 2.45 2.56
|
* Adjusted for stock splits
Management's discussion and analysis should be read in conjunction with the accompanying consolidated financial statements, footnotes, and tables. This discussion and other sections of this report contain forward-looking statements that are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "intends," "are likely," "estimates," "outlook," "assumption," and similar expressions are intended to identify forward-looking statements, which include but are not limited to projections of business strategies and future activities. These statements are not guarantees of future performance and involve uncertainties that are difficult to predict. Actual future results may differ materially from what is projected due to a variety of factors, including, but not limited to, unexpected changes in interest rates or in the economies served by the Corporation, competition from other financial service providers, unanticipated difficulties in expanding the Corporation's businesses, such as higher than expected entry costs in new markets, availability of appropriate investment opportunities, fluctuations in the valuation of the Corporation's portfolios, legislative or regulatory changes, or governmental changes in monetary or fiscal policy.
CONSOLIDATED OVERVIEW
Irwin Financial Corporation's net income increased in 2000 to $35.7 million or $1.67 per share. The Corporation's mortgage banking line of business was negatively impacted in 2000 by an interest rate environment which saw rising rates throughout the majority of the year followed by a sharp decline in rates late in the fourth quarter. The Corporation's home equity lending business experienced a significant improvement in earnings as it continued to grow its managed portfolio and expand in its niche of prime credit quality, high loan-to-value second mortgage loans. Results at the Corporation's commercial bank were driven by strong commercial loan portfolio growth in 2000 reflecting the company's continued geographic expansion into new markets in Midwestern and Western states. The Corporation's new leasing line of business incurred losses throughout 2000 which were in line with management's expectations given the start-up status of the company. Lastly, the Corporation's venture capital line of business contributed favorably to the consolidated results as a result of net valuation increases in its portfolio investments.
Results in 1999 and 1998 include one-time after-tax gains of $1.1 million and $3.1 million from a change in statutory tax rates and the sale of the majority of assets of the medical equipment leasing business, respectively.
2000 % CHANGE 1999 % CHANGE 1998
----- -------- ----- -------- -----
Net Income ($ Millions)....................... $35.7 7.5% $33.2 8.7% $30.5
Basic Earnings per Share...................... 1.70 10.4 1.54 10.0 1.40
Diluted Earnings per Share.................... 1.67 10.6 1.51 9.4 1.38
Return on Average Equity...................... 20.83% -- 21.51% -- 22.84%
Return on Average Assets...................... 1.76% -- 2.01% -- 1.85%
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EARNINGS BY LINE OF BUSINESS
Irwin Financial Corporation is composed of five principal lines of business:
- Mortgage banking
- Home equity lending
- Commercial banking
- Equipment leasing
- Venture capital
EARNINGS:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Mortgage Banking............................................ $13,006 $23,063 $28,853
Home Equity Lending......................................... 18,494 12,608 (6,668)
Commercial Banking.......................................... 7,090 7,345 6,509
Equipment Leasing........................................... (2,563) (843) --
Venture Capital............................................. 2,724 656 --
Other (including consolidating entries)..................... (3,085) (9,673) 1,809
------- ------- -------
$35,666 $33,156 $30,503
======= ======= =======
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SUMMARY OF QUARTERLY FINANCIAL INFORMATION:
2000
----------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS)
SUMMARY INCOME INFORMATION
Interest income................................... $57,446 $48,034 $43,015 $36,035
Interest expense.................................. 27,755 26,760 22,354 16,665
Provision for loan and lease losses............... 1,793 1,356 1,119 1,135
Non-interest income............................... 51,174 58,075 52,589 49,873
Non-interest expense.............................. 63,242 62,748 58,036 53,936
Income taxes...................................... 6,279 6,117 5,591 5,689
------- ------- ------- -------
Net income........................................ $ 9,551 $ 9,128 $ 8,504 $ 8,483
======= ======= ======= =======
Earnings per share of common stock:
Basic -- Note 1................................ $ 0.46 $ 0.43 $ 0.41 $ 0.40
Diluted -- Note 1.............................. $ 0.44 $ 0.43 $ 0.40 $ 0.40
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1999
----------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS)
SUMMARY INCOME INFORMATION
Interest income................................... $32,900 $31,644 $30,323 $31,746
Interest expense.................................. 16,510 14,277 13,715 14,989
Provision for loan and lease losses............... 548 364 2,330 1,201
Non-interest income............................... 47,281 48,627 53,518 54,643
Non-interest expense.............................. 52,991 51,186 54,823 55,111
Income taxes...................................... 2,272 5,733 5,360 6,116
------- ------- ------- -------
Net income........................................ $ 7,860 $ 8,711 $ 7,613 $ 8,972
======= ======= ======= =======
Earnings per share of common stock:
Basic -- Note 1................................ $ 0.37 $ 0.41 $ 0.35 $ 0.41
Diluted -- Note 1.............................. $ 0.36 $ 0.40 $ 0.35 $ 0.41
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1998
----------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
SUMMARY INCOME INFORMATION
Interest income................................... $30,183 $33,649 $31,946 $27,409
Interest expense.................................. 14,268 19,430 16,609 13,679
Provision for loan and lease losses............... 1,350 1,951 1,056 1,638
Non-interest income............................... 60,472 59,258 50,089 49,038
Non-interest expense.............................. 64,575 54,749 52,697 49,185
Income taxes...................................... 4,162 6,684 4,627 4,881
------- ------- ------- -------
Net income........................................ $ 6,300 $10,093 $ 7,046 $ 7,064
======= ======= ======= =======
Earnings per share of common stock:
Basic -- Note 1................................ $ 0.29 $ 0.47 $ 0.32 $ 0.32
Diluted -- Note 1.............................. $ 0.29 $ 0.46 $ 0.32 $ 0.31
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Earning per share reflect 2-for-1 stock split on May 27, 1998.
Included in the fourth quarter 2000 results are $2.5 million of pretax net adjustments for accrued interest on loans sold, revisions to modeling assumptions for the Company's securitization activities, revisions to compensation estimates and revisions to other various accruals to appropriately reflect reserve levels at year end.
Mortgage Banking
BUSINESS PROFILE: MORTGAGE BANKING
2000 1999 1998 1997 1996
---------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
SELECTED INCOME STATEMENT DATA:
Net interest income............ $ 15,401 $ 21,745 $ 26,244 $ 17,577 $ 17,178
Provision for loan losses...... 357 (1,998) (1,721) (1,383) (455)
Loan origination fees.......... 34,688 46,311 59,328 41,045 43,463
Gain on sale of loans.......... 45,601 72,395 97,724 53,332 41,333
Loan servicing fees............ 50,309 54,247 52,217 50,194 45,573
Amortization and impairment of
servicing assets, net of
hedging..................... (37,490) (24,566) (29,805) (15,843) (13,897)
Gain on sale of servicing...... 27,528 9,005 829 1,512 1,224
Other income................... 4,538 3,628 2,422 1,223 891
---------- ----------- ----------- ----------- -----------
Total net revenue........... 140,932 180,767 207,238 147,657 135,310
Operating expense................ 119,387 144,915 159,192 111,367 101,215
---------- ----------- ----------- ----------- -----------
Income before tax................ 21,545 35,852 48,046 36,290 34,095
Tax.............................. 8,539 12,789 19,193 14,990 13,673
---------- ----------- ----------- ----------- -----------
Net income....................... $ 13,006 $ 23,063 $ 28,853 $ 21,300 $ 20,422
========== =========== =========== =========== ===========
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2000 1999 1998 1997 1996
---------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
SELECTED BALANCE SHEET DATA AT
END OF PERIOD:
Mortgage loans held for sale... $ 249,580 $ 277,614 $ 697,542 $ 528,739 $ 446,897
Mortgage servicing assets...... 121,555 132,648 113,131 81,610 71,715
Total assets................... 523,920 549,966 1,020,249 792,007 629,528
Short-term debt................ 215,826 217,691 430,859 429,451 339,688
Long-term debt................. 3,951 223 2,839 54 4,914
Shareholders' equity........... $ 47,828 $ 98,556 $ 104,696 $ 81,058 $ 66,182
SELECTED OPERATING DATA:
Mortgage loan originations..... $4,091,573 $ 5,876,750 $ 8,944,615 $ 5,397,338 $ 5,085,625
Servicing portfolio:
Balance at December 31...... 9,196,513 10,448,112 11,242,470 10,713,549 10,810,988
Weighted average coupon
rate...................... 7.76% 7.51% 7.56% 7.85% 7.83%
Servicing fee.................. 0.43 0.44 0.43 0.40 0.38
Servicing sold as a % of
production.................. 99.4 79.9 54.6 71.8 60.9
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OVERVIEW & STRATEGY:
Irwin Mortgage Corporation, in combination with Irwin Union Bank (together, the mortgage banking line of business), originates, purchases, sells, and services conventional and government agency backed (i.e., FHA and VA) residential mortgage loans throughout the U.S. The company utilizes a niche strategy, focusing on first-time homeowners. The majority of its mortgage originations are either government-insured through the Veterans' Administration (VA) or Federal Housing Administration (FHA) or conventional loans which conform to the underwriting guidelines of the two principal government-sponsored agencies which support the secondary mortgage markets, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).
Mortgage loans are purchased from correspondents or originated through branches (retail), third party sources (wholesale), and to a limited degree, the Internet. Potential borrowers are identified principally through relationships maintained with housing intermediaries, including realtors, home builders, and brokers.
The mortgage banking line of business sells mortgage loans to institutional and private investors but may retain servicing rights to the loans that it originates or purchases from correspondents. This balance between mortgage loan originations and mortgage loan servicing provides an economic hedge against interest rate changes and the impact of rate changes on each part of the business. In rising interest rate environments, originations typically decline, while the value of the business' mortgage servicing portfolio generally increases as prepayment expectations decline. In declining interest rate environments, servicing values typically decrease as prepayment expectations increase, while the value of the business' mortgage production franchise generally increases. Servicing rights are periodically sold for a variety of reasons, including income recognition, cash flow, and servicing portfolio management.
Loans are funded on a short-term basis through credit facilities provided by commercial banks, including Irwin Union Bank. Repurchase agreements with investment banks are also used. Individual loans are pooled, securitized, and sold into the secondary mortgage market.
Net income from mortgage banking was $13.0 million in 2000, a decrease of 43.7% from 1999 results of $23.1 million and a decrease of 55.0% from 1998 results of $28.9 million. Return on average equity was 20.2% in 2000 compared to 22.6% in 1999 and 31.5% in 1998. Both the 2000 and 1999 declines were the result of a rising interest rate environment which slowed production activity throughout the mortgage banking industry.
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
Total originations:.................................... $4,091,573 $5,876,750 $8,944,615
Percent retail loans................................... 35.7% 37.4% 35.9%
Percent wholesale loans................................ 55.7 57.1 59.7
Percent brokered....................................... 8.6 5.5 4.4
Percent refinances..................................... 16.4 28.6 49.5
|
As a result of rising interest rates throughout the majority of 2000, the mortgage banking line of business experienced a decline in 2000 loan originations as compared to 1999 and 1998 when a record number of originations were made in a low interest rate environment. Loan originations in 2000 of $4.1 billion were down 30.4% from 1999 and down 41.5% from 1998. Income from mortgage loan originations totaled $34.7 million which was 25.1% lower than 1999 and 21.9% less than 1998. Refinances accounted for 16.4% of 2000 originations as compared to 28.6% in 1999 and 49.5% in 1998. Because certain fees are not collected for loan refinancings, loan origination fees did not decrease at the same rate as loan production in 2000 and 1999.
Gains from the sale of mortgage loans totaled $45.6 million in 2000, compared to $72.4 million in 1999 and $97.7 million in 1998. Lower loan production levels accounted for the 2000 decline.
MORTGAGE SERVICING:
SERVICING PORTFOLIO:
2000 1999 1998
-------- -------- --------
(PORTFOLIO IN BILLIONS)
Beginning Portfolio........................................ $ 10.5 $ 11.2 $ 10.7
Add:
Mortgage Loan Closings................................... 4.1 5.9 8.9
Deduct:
Sale of Servicing Rights................................. (4.1) (4.7) (4.9)
Run-off*................................................. (1.3) (1.9) (3.5)
-------- -------- --------
Ending Portfolio........................................... $ 9.2 $ 10.5 $ 11.2
======== ======== ========
Number of Loans............................................ 103,069 133,990 135,833
Average Loan Size.......................................... $ 89,200 $ 84,500 $ 82,900
Percent GNMA............................................... 75% 70% 65%
Percent FHLMC.............................................. 6 4 5
Percent FNMA............................................... 11 8 13
Delinquency ratio.......................................... 9.3 6.8 5.0
Capitalized servicing as a percentage of servicing
portfolio................................................ 1.3 1.3 1.0
|
* Run-off is the reduction in principal balance of the servicing portfolio due
to regular principal payments made by mortgagees and early repayment of an
entire loan.
The mortgage servicing portfolio was $9.2 billion at December 31, 2000, down 12.4% from the same date in 1999 and 17.9% from 1998. The mortgage bank has followed a strategy to manage the interest rate risk associated with the servicing portfolio by selling servicing rights on those loans that are most likely to refinance should the interest rates decline. During 2000, the line of business sold servicing rights to help manage its investment in the portfolio and to monetize existing gains in its servicing portfolio. The business recognized revenues of $27.5 million in 2000 from these sales, up 205.7% from 1999 and up 3220.6% compared to 1998. The rising delinquency rate of the portfolio, reflective of deterioration in the national economy, is consistent with that of other lenders which are heavily weighted toward GNMA servicing. While the business does not retain credit risk on the majority of the loans it services, rising delinquencies do modestly increase its servicing costs and increases the probability it will have repurchase obligations resulting from errors made at the time of original loan production and sale to the secondary market.
The following table sets forth certain information regarding the interest rates of loans in the servicing portfolio at December 31:
SERVICING PORTFOLIO BY INTEREST RATE:
2000 1999 1998
---- ---- ----
Less than 7%................................................ 9.6% 14.9% 15.1%
7.00 - 7.99%................................................ 47.3 53.3 52.7
8.00 - 8.99%................................................ 35.7 29.9 27.6
9% or greater............................................... 7.4 1.9 4.6
---- ---- ----
Total............................................. 100% 100% 100%
==== ==== ====
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Mortgage servicing assets are recorded at the lower of their cost or market value, and a valuation allowance is recorded for any impairment. At December 31, 2000, the market value of these assets was estimated to be $165.1 million or $43.6 million greater than the carrying value on the balance sheet.
LOAN ADMINISTRATION INCOME:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Servicing fees.............................................. $50,309 $54,247 $52,217
Amortization and impairment of servicing assets............. 37,514 13,758 34,123
------- ------- -------
Net loan administration income.............................. $12,795 $40,489 $18,094
======= ======= =======
|
Servicing fee income is recognized by collecting fees which normally range between 25 and 44 basis points annually on the principal amount of the underlying mortgages. Servicing fee income decreased 7.3% from 1999 and 3.7% from 1998, reflecting the decrease in the average size of the servicing portfolio throughout the last two years.
The value of mortgage servicing assets must be amortized over their estimated life and adjusted for impairment which could result from interest rate changes. The amortization and impairment of servicing assets increased 172.7% from 1999 and 9.9% from 1998. The increase is the result of the actual and anticipated reductions in mortgage interest rates near the end of 2000. Declining rates result in increased prepayments in underlying loans and increased impairment levels in mortgage servicing assets. The 1999 improvement in mortgage servicing asset amortization and impairment was substantially offset by corresponding losses on hedging activities. In 1999, the mortgage bank used options on treasury futures to offset the interest rate risk associated with its mortgage servicing assets. By December 31, 1999, options on the mortgage bank's balance sheet had expired. In 1999, the mortgage bank recorded a $10.8 million market loss on options held during the year. This compares with a market gain of $4.3 million recorded in 1998. There were nominal hedging gains recorded in 2000. At year end 2000, the mortgage bank had Treasury future contracts on a notional value of $200 million. The current activities of the mortgage bank do not satisfy the criteria for "hedge accounting." As a result, options were accounted for as trading assets, and changes in fair value were adjusted through earnings as trading gains or losses.
The mortgage banking business maintains the flexibility to either sell servicing for current cash flow or retain servicing for future cash flow. The decision to sell or retain servicing is based on current market conditions balanced with the interest rate risk tolerance of the business.
Servicing totaling $4.1 billion was sold in 2000. This figure includes $2.5 billion in bulk sales generating a $27.5 million pre-tax gain on those sales. This compares to servicing sales of $4.7 billion in 1999, which included $1.2 billion in bulk sales that produced a $9.0 million pre-tax gain. Servicing sales in 2000 represented 99.4% of 2000 originations versus 1999 sales which were 79.9% of that year's originations and 1998 sales which were 54.6% of originations. The increases in both 1999 and 2000 relate to increased bulk sales during each of those respective years.
NET INTEREST INCOME:
Net interest income is generated from the interest earned on mortgage loans before they are sold to investors, less the interest expense incurred on borrowings to fund the loans. Net interest income totaled $15.4 million in 2000, compared to $21.7 million in 1999 and $26.2 million in 1998. The 2000 decline resulted from the decreased loan production during the year which was driven by rising interest rates throughout the majority of the year.
OPERATING EXPENSES:
2000 1999 1998
-------- -------- --------
($ IN THOUSANDS)
Salaries and employee benefits............................. $ 72,818 $ 88,473 $101,477
Other expenses............................................. 46,569 56,442 57,715
-------- -------- --------
Total operating expenses......................... $119,387 $144,915 $159,192
======== ======== ========
Number of employees at December 31......................... 1,226 1,492 1,752
|
Total operating expenses decreased 17.6% from 1999 and 25.0% from 1998. Salaries and employee benefits were down 17.7% from 1999 and 28.2% from 1998. The decrease reflects the decreased production activities throughout 1999 and 2000.
2001 OUTLOOK:
The mortgage bank anticipates an increase in loan production throughout the mortgage industry in 2001. Interest rates declined near the end of 2000 and are expected to decline further during 2001, reflecting slowing of the national economy. Declining rates have historically caused refinance activity to increase.
The mortgage bank's strategy for competing in this changing environment is comprised of three components. The first is to grow its loan production activities through the expansion of existing channels. These include expansion to new geographic markets, demographic groups that support our first time home buyer strategy, and channels (such as credit unions) that are thought to be underserved by the mortgage industry and that value the mortgage bank's service-oriented approach to lending. The second component is to improve profit margins as a result of an important process improvement initiative undertaken throughout 1999 and 2000 for loan production activities. This initiative uses process re-design to increase efficiency by allowing the mortgage bank to process, underwrite, and close loans in a highly automated environment. The company believes it can significantly reduce the fixed costs associated with processing mortgage loans through its efforts in this initiative. The final component is to continue a strategy that attempts to minimize the interest rate risk associated with managing its servicing portfolio.
BUSINESS PROFILE: HOME EQUITY LENDING
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(IN THOUSANDS)
SELECTED INCOME STATEMENT DATA:
Net interest income................ $ 35,593 $ 18,852 $ 5,495 $ 7,129 $ 7,755
Provision for loan losses.......... (461) -- (513) (1,404) (983)
Gain on sale of loans.............. 30,340 17,742 18,610 15,908 7,798
Loan origination fees.............. 17,581 6,256 -- -- --
Loan servicing fees................ 7,559 4,907 3,323 2,145 710
Amortization and impairment of
servicing assets................. (1,583) (1,445) (842) (334) --
Trading gains (losses)............. 14,399 2,512 (2,952) (1,961) --
Other income....................... 19 1,742 820 294 140
---------- -------- -------- -------- --------
Total net revenues....... 103,447 50,566 23,941 21,777 15,420
Operating expenses................. 72,623 35,557 30,609 20,067 16,236
Income before taxes................ 30,824 15,009 (6,668) 1,710 (816)
Income taxes..................... 12,330 2,403 -- -- --
---------- -------- -------- -------- --------
Net income......................... $ 18,494 $ 12,606 $ (6,668) $ 1,710 $ (816)
========== ======== ======== ======== ========
SELECTED BALANCE SHEET DATA AT END
OF PERIOD:
Home equity loans, net of loan
loss reserve.................. $ 4,010 $ 1,904 $ 7,832 $111,216 $117,588
Home equity loans held for
sale.......................... 330,208 231,382 242,702 -- --
Interest-only strips............. 152,614 57,833 32,321 22,134 12,661
Total assets..................... 550,526 339,640 311,974 165,242 145,113
Short-term debt.................. 163,595 260,184 226,998 146,219 129,627
Shareholders' equity............. 99,586 58,733 40,272 10,936 13,221
SELECTED OPERATING DATA:
Loan volume:
Lines of credit.................. $ 629,906 $ 93,185 $ 98,855 $115,274 $ 80,724
Loans............................ 596,049 346,322 290,818 99,244 88,396
Total managed portfolio balance at
December 31,..................... 1,822,856 842,403 581,241 358,166 230,450
Weighted average coupon rate:
Lines of credit.................. 14.04% 12.72% 11.89% 12.96% 12.80%
Loans............................ 13.09% 12.33% 11.86% 13.97% 14.08%
|
OVERVIEW & STRATEGY:
Irwin Home Equity operates from offices located in San Ramon, California and Carson City, Nevada, and was incorporated in late 1994. The company, in combination with Irwin Union Bank (together, the home equity line of business), originates and services home equity loans and lines of credit nationwide through direct mail and telemarketing, broker and correspondent channels, acquisition channels, and Internet-based solicitations. In addition, in 1999 and continuing into 2000, the home equity line of business acquired, through carefully selected bulk purchases, loans originated by third parties which have elected for various reasons to withdraw from the home equity business. Through the use of extensive data mining and credit analysis, the company principally targets homeowners who are creditworthy, active users of debt and prices the loans for risks and profitability. The loan and line of credit products allows customers to refinance their debts into lower cost, lower payment, home equity loans.
The business has the option to either hold its loans in portfolio or sell them through securitization transactions and continue to service them. If the loans are held in portfolio, many non-production costs incurred during the period to produce the loans are expensed immediately, whereas the revenue from the loans accrues over the lives of the loans. Alternatively, if the loans are securitized and sold on the secondary market to investors, a portion of the present value of the future net revenues from the loans will be recognized in the current period, helping to offset the expenses incurred in producing the loans. Regardless of whether the loans are funded on balance sheet or through securitizations, the business retains some credit and interest rate risk on the loans.
2000 REVIEW:
The home equity lending business recorded net income of $30.8 million pre-tax ($18.5 million after-tax) in 2000, compared with a pre-tax profit of $15.0 million ($12.6 million after-tax) in 1999 and a pre-tax loss of $6.7 million in 1998. Results in 1999 are net of $2.4 million of income taxes. It was not until late in 1999 that the net operating losses carried forward by the business were fully used and the business began recording income tax expense. Until that point, income taxes for this business were recorded at the parent company.
The improvement in 2000 earnings was the result of the growth of the business' managed loan portfolio, improved credit and prepayment performance of the loans relative to the assumptions used to value the interest-only strips, and improved competitive conditions.
LOAN ORIGINATIONS AND SECURITIZATIONS:
During 2000, the home equity lending business originated and acquired $1.2 billion of home equity loans, up 178.9% from 1999 volume of $439.5 million and 214.6% from 1998 volume of $389.7 million. Included in the 2000 total is a fourth quarter acquisition of the residual interest, servicing rights and related whole loans of an approximately $400 million pool of previously securitized home equity lines of credit. The collateral supporting the pool is comprised of seasoned lines of credit predominantly up to 100% combined loan-to-value and similar in credit quality and yield to lines of credit originated by the business. The home equity lending business had $334.7 million of loans and loans held for sale at December 31, 2000. This compares to $233.3 million at the end of 1999 and $250.5 million at the end of 1998.
The business securitized $774.6 million of loans in 2000 which generated a pre-tax gain of $30.3 million. This compares to a $17.7 million gain recognized in 1999 on the sale of $430.7 million of loans, and an $18.6 million gain recognized in 1998 on the sale of $294.3 million of loans.
SERVICING PORTFOLIO:
2000 1999 1998
---------- -------- --------
(IN THOUSANDS)
Balance at December 31.................................... $1,822,856 $842,403 $581,243
Delinquency ratio......................................... 4.27% 2.7% 1.3%
|
The home equity lending business continues to service loans it has securitized. The servicing portfolio, which includes loans held on the balance sheet as well as securitized loans, increased 116.4% from 1999 and 213.6% from 1998. The business earns a servicing fee equal to approximately one percent of the outstanding principal balance of the securitized loans. Servicing fee income increased to $7.6 million in 2000 from $4.9 million in 1999 and $3.3 million in 1998.
The home equity lending business recognizes on its balance sheet a servicing asset equal to the discounted cash flows of estimated future servicing income and cost. At December 31, 2000, net servicing assets totaled $7.7 million, compared with $4.5 million at the end of 1999 and $3.1 million at the end of 1998. Servicing asset amortization and impairment expense totaled $1.6 million in 2000, up from $1.4 million in 1999 and $0.8 million in 1998.
The securitization of loans into the secondary market results in the creation of a residual asset which we refer to as an interest-only strip. This recorded interest-only strip is equal to the discounted future cash flows of the interest paid by borrowers less servicing fees, expected losses, third party fees and interest paid to investors. Interest-only strips are carried on the balance sheet as a trading asset and recorded at their market values determined using assumptions about the duration and performance of the securitized loans. Interest-only strips had a balance of $152.6 million at December 31, 2000, compared with $57.8 million at the same date in 1999 and $32.3 million in 1998. Included in the market valuation assumptions are estimates of the lives of the loans, expected losses, and appropriate discount rates. Management continually evaluates these assumptions to determine the proper carrying values of these items on the balance sheet. Credit aspects have been favorable with respect to the portfolio. Adjustments to carrying values are recorded as trading gains or losses. During 2000, the home equity lending business recorded a trading gain of $14.4 million. This compares with a trading gain of $2.5 million recorded in 1999 and a trading loss of $3.0 million recorded in 1998. The 2000 improvement was the result of an increase in securitization volume, a higher interest rate environment and reduced competition. The 1999 improvement over 1998 relates to efforts made to shift a substantial portion of the home equity loan portfolio into product with less prepayment sensitivity.
At the end of 2000 the home equity line of business owned interest-only strips in 12 securitizations. In addition, the company has sold partial interests in three of its interest-only strips to an independent third party, with retained risk equal to that sold to the third party at prices equal to or greater than the carrying value at the time of sale. Assumptions used in the calculation of carrying value for these interest-only strips at December 31, 2000, were as follows:
UNPAID
PRINCIPAL PREPAY CARRYING REM AVG ANNUAL
SALE PRODUCT BALANCE PENALTY SPEED LIFE LOSSES
---- ------- -------------- ------- -------- ------- ------
(IN THOUSANDS) (CPR) (YRS)
Originated interest-only strips:
1995-2 Home equity lines of credit.......... $ 6,264 no 30% 0.59 2.85%
1996-1 Home equity lines of credit.......... 11,803 no 34 1.58 0.65
Home equity loans.................... 6,147 no 32 0.89 0.65
1997-1 Home equity lines of credit.......... 10,078 no 29 2.84 0.65
Home equity loans.................... 7,439 no 30 1.98 0.65
1997-2 Home equity lines of credit.......... 17,972 no 30 2.70 0.65
Home equity loans.................... 15,115 no 26 2.23 0.65
1998-1 First mortgage loans................. 312 no 0 3.19 0.50
First mortgage loans................. 6,556 yes 3 3.19 0.50
Home equity loans.................... 12,001 no 24 3.19 0.50
Home equity loans.................... 18,034 yes 25 3.19 0.50
125 LTV home equity loans............ 42 yes 25 3.19 0.50
125 LTV home equity loans............ 26,024 no 34 3.19 0.50
125 LTV home equity lines of
credit............................. 38,602 yes 31 3.19 0.50
125 LTV home equity lines of
credit............................. 2,000 no 28 3.19 2.00
Low balance home equity loans........ 1,569 yes 35 3.19 2.00
Low balance home equity lines of
credit............................. 248 no 31 3.19 0.50
1999-1 First mortgage loans................. 41,001 yes 4 6.30 0.25
First mortgage loans................. 10,052 no 10 6.30 0.25
Home equity loans.................... 37,170 yes 26 6.30 0.50
Home equity loans.................... 12,598 no 33 6.30 0.50
1999-2 First mortgage loans................. 2,035 no 0 3.40 0.25
First mortgage loans................. 10,114 yes 12 3.40 0.25
Home equity loans.................... 6,271 no 28 3.40 0.50
Home equity loans.................... 24,327 yes 24 3.40 0.50
125 LTV home equity loans............ 26,745 no 21 3.40 2.00
125 LTV home equity loans............ 65,983 yes 15 3.40 2.00
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UNPAID
PRINCIPAL PREPAY CARRYING REM AVG ANNUAL
SALE PRODUCT BALANCE PENALTY SPEED LIFE LOSSES
---- ------- -------------- ------- -------- ------- ------
(IN THOUSANDS) (CPR) (YRS)
1999-3 First mortgage loans................. 5,700 no 14 3.91 0.25
First mortgage loans 17,825 yes 4 3.91 0.25
Home equity loans.................... 14,570 no 32 3.91 0.50
Home equity loans.................... 75,286 yes 19 3.91 0.50
125 LTV home equity loans............ 14,360 no 20 3.91 2.00
125 LTV home equity loans............ 47,388 yes 12 3.91 2.00
125 LTV home equity lines of
credit............................. 10,315 no 20 3.91 2.00
125 LTV home equity lines of
credit............................. 22,492 yes 15 3.91 2.00
Low balance home equity loans........ 331 no 31 3.91 4.00
Low balance home equity lines of
credit............................. 9,202 no 26 3.91 4.00
2000 A-1 125 LTV home equity loans............ 111,158 mixed 17 3.56 2.00
2000 LB-1 125 LTV home equity lines of
credit............................. 27,130 yes 14 2.92 2.00
125 LTV home equity lines of
credit............................. 1,731 no 23 2.92 2.00
Low balance home equity lines of
credit............................. 61,692 no 27 2.92 4.00
2000-1 Home equity loans -- group 1......... 99,263 mixed 20 3.60 0.64
Home equity loans -- group 2......... 20,063 mixed 20 3.60 0.66
125 LTV home equity loans -- group
2.................................. 114,934 mixed 15 3.60 2.58
125 LTV home equity loans -- group
3.................................. 49,002 mixed 15 3.60 2.66
Home equity lines of credit.......... 62,797 mixed 22 3.60 0.55
PURCHASED INTEREST-ONLY STRIPS:
1999 PNB-1 Home equity lines of credit........ 363,871 no 35 2.31 2-3.5
|
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
------- -------- -------- -------- -------- --------
December 31, 2000
Actual to date................... 2.24% 0.95% 0.97% 0.65% 1.02% 0.40%
Projected........................ 0.18 0.11 0.35 0.87 2.74 6.22
Total............................ 2.42 1.06 1.32 1.52 3.76 6.62
Original balance securitized
($ in thousands): $51,584 $139,996 $229,994 $160,470 $433,606 $781,914
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NET INTEREST INCOME:
Net interest income was $35.1 million in 2000, compared to $18.9 million in 1999 and $5.5 million in 1998. The business earns interest income on its loans held on balance sheet and the accretion of the discount applied to its interest-only strips, net of amortization expense. This amounted to $15.9 million in 2000, compared to $6.5 million in 1999 and $0.4 million in 1998.
OPERATING EXPENSES:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Salaries and employee benefits.............................. $39,180 $21,383 $15,480
Marketing and development................................... 7,630 3,410 5,314
Other....................................................... 25,813 10,764 9,815
------- ------- -------
Total operating expenses.......................... $72,623 $35,557 $30,609
======= ======= =======
Number of employees at December 31.......................... 614 372 266
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Operating expenses increased 104.2% from 1999 and 137.3% from 1998, reflecting the growth in the managed portfolio and growth in production.
The competitive environment for high loan-to-value home equity lending became more favorable during 1999 and remained so in 2000 with the exit of many home equity lenders who did not survive the competitive pressures and significant refinance activity of 1998. Management anticipates that the competitive environment will remain favorable, and consumer demand for home equity products is expected to remain high in 2001; and management believes these factors, coupled with recent expansion of its broker, correspondent and acquisition channels will assist the home equity business to increase its originations. The timing of loan acquisitions is more difficult to predict; however, the company intends to opportunistically continue its growth in this channel as appropriate.
As noted above, the home equity business retains credit risk on loans it originates whether funded on- or off-balance sheet. Delinquency rates and losses on its managed portfolio result from a variety of factors, including loan seasoning, portfolio mix, and general economic conditions. The 30-day and greater delinquency ratio totaled 4.27% as of December 31, 2000, compared with 2.70% a year earlier. Given continual product testing and seasoning of the company's portfolio, as well as anticipated declines in general economic conditions, management anticipates that delinquencies and losses are likely to increase in 2001, but still remain within the loss reserves and valuation parameters used in valuing the loans and interest-only strips on the balance sheet.
Home equity products are highly regulated and recent regulatory initiatives have focused on the high loan-to-value home equity market and capital levels required to support investments in interest-only strips. Certain state and federal regulatory proposals could cause the business to limit certain of its product offerings and/or cause it to hold additional capital. Management believes the business' loan products and capital levels are appropriate, even under the proposals currently under review; however, future regulatory changes are difficult to predict.
Commercial Banking
BUSINESS PROFILE: COMMERCIAL BANK
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(IN THOUSANDS)
SELECTED INCOME STATEMENT DATA:
Interest income.................. $ 82,680 $ 54,452 $ 46,056 $ 41,115 $ 35,645
Interest expense................. 44,268 23,525 20,957 19,120 15,908
Provision for loan and lease
losses........................ 2,933 1,813 1,820 2,201 2,284
---------- -------- -------- -------- --------
Net interest income after
provision for loan and lease
losses........................ 35,479 29,114 23,279 19,794 17,453
Non-interest income.............. 11,974 11,797 11,712 9,256 9,298
---------- -------- -------- -------- --------
Total net revenues....... 47,453 40,911 34,991 29,050 26,751
Operating expense................ 35,773 29,080 24,515 20,194 20,225
---------- -------- -------- -------- --------
Income before taxes.............. 11,680 11,831 10,476 8,856 6,526
Income taxes..................... 4,590 4,486 3,967 3,269 2,272
---------- -------- -------- -------- --------
Net income....................... $ 7,090 $ 7,345 $ 6,509 $ 5,587 $ 4,254
========== ======== ======== ======== ========
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2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(IN THOUSANDS)
SELECTED BALANCE SHEET DATA AT
END OF PERIOD:
Loans............................ $1,067,980 $720,493 $514,950 $410,272 $336,580
Allowance for loan losses........ 9,228 7,375 6,680 5,525 4,790
Total assets..................... 1,167,559 789,560 607,992 539,233 503,507
Deposits......................... 998,892 710,899 567,526 486,481 453,879
Shareholders' equity............. 68,539 63,678 46,990 38,390 33,967
DAILY AVERAGES:
Assets........................... $ 956,744 $682,632 $567,116 $515,666 $459,893
Deposits......................... 851,386 619,308 514,694 463,851 413,935
Loans............................ 879,875 600,877 462,319 370,313 329,658
Allowance for loan losses........ 8,133 7,317 6,308 5,332 4,367
Shareholders' equity............. 57,214 52,867 42,026 36,232 31,863
Shareholders' equity to assets... 5.98% 7.74% 7.41% 7.03% 6.93%
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OVERVIEW & STRATEGY:
Commercial banking is conducted by Irwin Union Bank and Trust Company and Irwin Union Bank, F.S.B. (together, "the commercial bank"). The federal savings bank, which began operations in December 2000, will enable the commercial bank to expand into markets beyond where Irwin Union Bank is currently permitted to branch. The commercial bank offers a wide variety of services to individuals, businesses, and institutional and governmental customers in selected markets. The commercial bank's primary focus is on credit and credit-related products for small businesses and business owners. In recent years, the commercial bank has implemented a growth plan that calls for expansion into new markets outside of its traditional markets in south-central Indiana using offices staffed by senior commercial loan officers who have experience with other commercial banks. The commercial bank's strategy in these and other possible new markets is to position itself with local management and staff who can provide highly personalized, flexible service to commercial customers who have been negatively affected by bank consolidation.
The conditions that led the commercial bank to execute its strategy have come about due to what management believes are poorly executed mergers and acquisitions of other banking institutions. This activity has caused disenchantment with the delivery of services to the small business community among both the owners of those small businesses and the senior banking officers who had been calling upon them. The commercial bank's expansion strategy has three criteria -- each of which need to be present prior to entering a new market: i) the market must be a metropolitan area with attractive business demographics displaying evidence of sustainable growth, ii) there must have been recent banking merger and acquisition activity in the market where the new participant is viewed as an outsider and/or not responsive to local small business needs, and iii) the commercial bank must be able to attract experienced, senior banking staff to manage the new market. Depending on a variety of factors including continued merger and acquisition activity, earnings, capital, and operational capacity, the commercial bank plans to continue its expansion efforts into new markets throughout the United States.
The commercial bank anticipates that the low-cost entry into these markets, coupled with relatively rapid asset growth resulting from conversion of customer relationships to Irwin Union by the seasoned lending officers who are native to the new markets, will enable it to break even and achieve target levels of return on capital in these markets in 18 months and 5 years, respectively, in an average market. Some markets will experience growth and profitability at greater or lesser rates than the average due to a variety of factors including execution of the strategy, accuracy in accessing market potential, and success in recruiting senior lenders and other staff to the commercial bank. Over time, the commercial bank may choose to exit certain markets should these factors limit profitability.
Commercial banking net income in 2000 totaled $7.1 million, down 3.5% from 1999 net income of $7.3 million and up 8.9% from 1998 net income of $6.5 million. The return on average equity was 12.31% in 2000 as compared to 13.89% in 1999 and 15.49% in 1998. Results in 2000 and 1999 reflect the continued growth and expansion efforts of the commercial bank into new markets.
NET INTEREST REVENUE:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Net interest revenue on a taxable equivalent basis*........ $ 38,620 $ 31,151 $ 25,367
Average interest earning assets............................ 908,739 645,809 534,439
Net interest margin........................................ 4.25% 4.82% 4.75%
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* Reflects what net interest revenue would be if all interest income were
subject to federal and state income taxes.
Net interest revenue on a taxable equivalent basis increased 24.0% from 1999 and 52.2% from 1998 to a total of $38.6 million. Net interest revenue is the product of net interest margin and average earning assets. The 2000 improvement in net interest revenue resulted from an increase in the commercial bank's loan portfolio as a result of its expansion efforts.
Net interest margin was down for the year, coming in at 4.25% for 2000 compared to 4.82% in 1999 and 4.75% in 1998. The reduction in net interest margin is due to a combination of two factors. First, the expansion activities at the commercial bank have resulted in an increased use of wholesale deposit sources required to fund the growth in the loan portfolio. Secondly, during 2000 the parent company began allocating interest-bearing capital to the commercial bank. Prior to this intercompany allocation, which has no consolidated impact, the net interest margin for the year declined 34 basis points compared to 1999 and is down 27 basis points compared to 1998.
NONINTEREST INCOME:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Trust fees.................................................. $ 2,285 $ 2,257 $ 2,136
Service charges on deposit accounts......................... 2,156 2,021 2,076
Insurance commissions, fees and premiums.................... 1,877 1,635 1,265
Gain from sale of loans..................................... 259 901 1,346
Loan servicing fees......................................... 1,006 1,458 1,745
Brokerage fees.............................................. 1,991 1,546 1,050
Other....................................................... 2,400 1,979 2,094
------- ------- -------
Total noninterest income.......................... $11,974 $11,797 $11,712
======= ======= =======
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Reflective of the growth at the commercial bank from expansion into new markets, noninterest income was up 1.5% from 1999 and 2.2% from 1998.
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Salaries and employee benefits.............................. $21,507 $16,881 $14,142
Other expenses.............................................. 14,266 12,199 10,373
------- ------- -------
Total operating expenses.......................... $35,773 $29,080 $24,515
======= ======= =======
Number of employees at December 31,......................... 432 395 353
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Operating expenses increased 23.0% from 1999 and 45.9% from 1998. Costs associated with expanding new products and markets contributed to the increase.
BALANCE SHEET:
Total assets averaged $956.7 million in 2000, compared to $682.6 million in 1999 and $567.1 million in 1998. Average earning assets for the year were $908.7 million, up $262.9 million or 40.7% from 1999 and up $374.3 million or 70.0% from 1998. The most significant component of the 2000 increase was loans which were up $279.0 million on average in 2000 as a result of the commercial bank's expansion efforts into new markets. Average deposits were $851.4 million in 2000, 37.5% higher than 1999 and 65.4% higher than 1998.
Growth at the commercial bank has occurred both in established markets and in the newer markets opened in connection with recent expansion as indicated in the table below:
2000 1999 1998
---------------------- ---------------------- ----------------------
LOANS PERCENT LOANS PERCENT LOANS PERCENT
OUTSTANDING OF TOTAL OUTSTANDING OF TOTAL OUTSTANDING OF TOTAL
----------- -------- ----------- -------- ----------- --------
MARKETS OPENED PRIOR TO 1999:
Bartholomew County, Indiana........ $ 233,609 21.9% $214,525 29.8% $184,133 35.8%
Shelby County, Indiana............. 69,327 6.5 66,463 9.2 52,393 10.2
Seymour, Indiana................... 50,638 4.7 48,427 6.7 48,017 9.3
Greensburg, Indiana................ 42,340 4.0 31,872 4.4 26,984 5.2
Bloomington, Indiana............... 123,949 11.6 108,704 15.1 87,178 16.9
Hendricks County, Indiana.......... 40,258 3.8 26,865 3.7 5,971 1.2
Carmel, Indiana.................... 84,196 7.9 60,049 8.3 28,302 5.5
Johnson County, Indiana............ 56,080 5.3 91,995 12.8 81,972 15.9
---------- ---- -------- ---- -------- -----
700,397 65.6 648,900 90.1 514,950 100.0
MARKETS OPENED IN 1999 OR LATER:
Indianapolis, Indiana.............. 82,513 7.7 16,490 2.3 -- --
St. Louis, Missouri................ 27,855 2.6 13,903 1.9 -- --
Kalamazoo, Michigan................ 61,234 5.7 27,167 3.8 -- --
Grand Rapids, Michigan............. 104,897 9.8 14,033 1.9 -- --
Carson City, Nevada................ 14,002 1.3 -- -- -- --
Traverse City, Michigan............ 54,426 5.1 -- -- -- --
Louisville, Kentucky............... 3,306 0.3 -- -- -- --
Salt Lake City, Utah............... 18,221 1.7 -- -- -- --
Phoenix, Arizona................... 998 0.1 -- -- -- --
Las Vegas, Nevada.................. 131 -- -- -- -- --
---------- ---- -------- ---- -------- -----
367,583 34.4 71,593 9.9 -- --
---------- ---- -------- ---- -------- -----
Total...................... $1,067,980 100% $720,493 100% $514,950 100%
========== ==== ======== ==== ======== =====
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The commercial bank's risk-based assets ratio was 10.3% at December 31, 2000 compared to 10.0% at the end of 1999 and 10.1% at the end of 1998. Banks having a ratio of at least 10% are considered to be well capitalized by bank regulatory authorities.
In 1999, Irwin Financial Corporation commenced offerings under its Preferred Share Program targeted to investors in new commercial banking markets who can assist with deposit growth. There were 96,336 shares under this plan issued in the first quarter of 2000. More information on this subject is contained in the section on Capital.
CREDIT QUALITY:
2000 1999 1998
------ ------ ------
(IN THOUSANDS)
AT DECEMBER 31,
Nonperforming loans....................................... $2,469 $1,168 $1,858
Other real estate owned................................... 230 -- 48
------ ------ ------
Total nonperforming assets................................ $2,699 $1,168 $1,906
====== ====== ======
Nonperforming assets as a percentage of total assets...... 0.23% 0.15% 0.31%
====== ====== ======
Allowance for loan losses................................. $9,228 $7,375 $6,680
====== ====== ======
Allowance for loan losses as a percentage of loans........ 0.86% 1.02% 1.30%
====== ====== ======
FOR THE YEAR ENDED DECEMBER 31,
Provision for loan losses................................. $2,933 $1,813 $1,820
====== ====== ======
Net charge-offs........................................... $1,080 $ 963 $ 592
====== ====== ======
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2001 OUTLOOK:
The commercial bank expects consolidation to continue in the banking and financial services industry. The commercial bank plans to capitalize on the opportunities brought about by consolidation by continuing its growth strategy for small business lending in new markets throughout the United States. The focus will be to provide personalized lending services to small businesses in cities affected by consolidation, using experienced lenders with a strong presence in those cities.
As the national economy has slowed in recent months, the commercial bank has been more selective in its extension of credit. However, its expansion strategy through the establishment of new offices should allow for continued loan growth, notwithstanding the slowing of the national economy.
In addition to its lending expansion, the commercial bank looks to develop further its insurance and investment operations in order to provide a full range of financial services to its customers.
BUSINESS PROFILE: EQUIPMENT LEASING
2000 1999
-------- -----
(IN THOUSANDS)
SELECTED INCOME STATEMENT DATA:
Net interest income....................................... $ 3,196 $ (18)
Provision for loan and lease losses....................... (1,513) --
Non-interest income....................................... 799 --
-------- -----
Total net revenues................................ 2,482 (18)
Salaries, pension, and other employee expense
Other expense............................................. 5,045 825
-------- -----
Income before taxes....................................... $ (2,563) $(843)
======== =====
SELECTED BALANCE SHEET DATA AT END OF PERIOD:
Leases.................................................... $154,934 $ --
Allowance for lease losses................................ (2,441) --
Total assets.............................................. 159,773 543
Shareholders' equity...................................... 20,291 386
Net charge-offs........................................... 961 n/a
Net interest margin....................................... 4.50% n/a
Total fundings of loans and leases (includes Onset since
7/14/2000)............................................. 113,323 n/a
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OVERVIEW AND STRATEGY:
In mid-1999, the Corporation formed a new leasing subsidiary, Irwin Business Finance, which is located in Bellevue, Washington. On July 14, 2000, the line of business completed an acquisition of a 78% ownership position in Onset Capital Corporation, a Canadian small-ticket equipment leasing company headquartered in Vancouver. The remaining 22% was and remains in the ownership of principals of Onset. The Onset acquisition added approximately $60 million in leases to the line of business portfolio. Together, these companies, in conjunction with Irwin Union Bank, form the equipment leasing line of business.
The equipment leasing line of business sources equipment leasing transactions from an established network of brokers and vendors. The majority of the leases originated are full payout, small-ticket $(5,000-$300,000) assets. The business finances a variety of commercial and office equipment types and attempts to limit its industry or geographic concentrations in any one area. In addition to traditional direct solicitation of brokers and vendors, the business uses a web-based e-commerce system that provides for automated credit scoring, documentation and portfolio management services.
2000 REVIEW:
The equipment leasing line of business incurred a pre-tax loss of $2.6 million in 2000 versus pre-tax losses of $0.8 million a year earlier. These losses reflect expenses related to staffing, systems development and portfolio growth initiatives in excess of portfolio revenues. The domestic business, which began funding leases in January 2000, reached break even on a monthly basis by the end of the fourth quarter of 2000. Management anticipates that the company will fluctuate around break even in subsequent months, until such time as its portfolio is more mature. The line of business originated $113.3 million in leases in 2000 and had a portfolio at year end of $154.9 million.
2001 OUTLOOK:
The leasing industry experienced strong growth in new business volume in 1999 and through the first three quarters of 2000, with an overall softening in the fourth quarter reflecting the general decline in the U.S. economy during that period. Margins increased in the latter half of 2000 and continuing into the first quarter of 2001 as lessors in the small-ticket market were able to hold rates despite a general decline in cost of funds.
For the year 2001, Irwin Business Finance is anticipating that new U.S. volume generation will continue to suffer during the first and second quarters but begin to rebound as the market responds to rate cuts by the Federal Reserve Bank and a general tightening of credit by banks. In addition to its current broker relationships, the company is beginning new initiatives directed toward direct vendor business and franchise financing. Onset Capital also expects to expand its current vendor network by developing new relationships throughout Canada as it regains momentum following a slow growth period prior to its acquisition by Irwin in mid-year 2000. The economic outlook predictions for Canada in 2001 indicate slightly slower growth than 2000, although commercial and consumer confidence remains relatively steady.
VENTURE CAPITAL
BUSINESS PROFILE: VENTURE CAPITAL
2000 1999
------- ------
(IN THOUSANDS)
SELECTED INCOME STATEMENT DATA:
Net interest income....................................... $ (598) $ (109)
Mark-to-market adjustment on investments.................. 5,202 1,306
Non-interest income....................................... 364 --
------- ------
Total net revenues................................ 4,968 1,197
Operating expense......................................... 430 78
------- ------
Income before taxes....................................... 4,538 1,119
Income taxes.............................................. 1,814 463
------- ------
Net income................................................ $ 2,724 $ 656
======= ======
SELECTED BALANCE SHEET DATA AT END OF PERIOD:
Investment in portfolio companies (cost).................. $ 5,206 $1,759
Mark-to-market adjustment................................. 6,508 1,306
------- ------
Carrying value of portfolio companies..................... $11,714 $3,065
======= ======
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OVERVIEW AND STRATEGY:
During 1999, the Corporation formed Irwin Ventures, a venture capital company that makes minority investments in early-stage financial services-related businesses. Its primary focus is on financial services- oriented businesses that plan to use technology as a key component of their competitive strategy. The company seeks to make investments in opportunities where the financial services experience and expertise of Irwin Ventures' management team can add superior value to innovative companies. The Corporation's Board of Directors has approved an allocation of up to 10% of the Corporation's capital base to support this subsidiary.
Venture capital investments held by Irwin Ventures are carried at market value with changes in market value recognized in other income. The investment committee of Irwin Ventures determines the value of the investments at the end of each reporting period and the values are adjusted based upon review of the investee's financial results, condition, and prospects. Changes in estimated market values can also be made when an event such as a new funding round 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.
2000 REVIEW:
During 2000, the venture capital line of business recorded net income of $2.7 million. This compares to $0.7 million of net income in 1999. These results from 2000 and 1999 are primarily due to valuation adjustments to reflect the company's portfolio investments at market value. The company invested in three new portfolio companies in 2000, bringing the total of portfolio companies to four at year end.
At December 31, 2000, the business had investments in the following companies:
COMPANY PUBLIC/PRIVATE INVESTMENT AT COST CARRYING VALUE
------- -------------- ------------------ --------------
LiveCapital.com................................ Private $1.94million $ 8.69million
Bremer Associates.............................. Private $1.60million $ 1.60million
DocuTouch...................................... Private $1.00million $ 0.75million
Zoologic....................................... Private $0.67million $ 0.67million
------------ -------------
Total................................ $5.21million $11.71million
============ =============
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2001 OUTLOOK:
Numerous opportunities have arisen in the past few years for technology-focused private equity investment in the financial services industry. Despite the sharp reduction in values of technology segment companies, Irwin Ventures continues to see opportunities in emerging technologies applied to this industry. Irwin Ventures believes this will continue in 2001 as improvements in technology and entreprenuerial innovation continue to change the manner in which financial services are delivered to businesses and consumers.
Irwin Ventures anticipates that it will be able to identify and fund attractive opportunities in 2001 and beyond. In early 2001, Irwin Ventures increased its investment in Bremer Associates and DocuTouch by $0.4 million and $0.3 million, respectively. In addition, during the first quarter, the company made a $1.0 million investment in PayCycle. PayCycle is an Internet-based provider of fully guided, self-service payroll management services for small businesses and their accountants.
Results at the Corporation's other businesses totaled a net loss of $3.1 million in 2000, compared with a net loss of $9.7 million in 1999 and a net loss of $1.8 million in 1998. The components of these other results are as follows:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Parent Company operating results............................ $(4,375) $(6,269) $(3,722)
Income tax benefit (expense) generated at home equity line
of business............................................... -- (3,601) 2,667
Income tax benefit generated at leasing line of business.... 1,025 335 NA
------- ------- -------
Total parent company.............................. (3,350) (9,535) (1,055)
Medical equipment leasing line of business.................. 21 (257) 2,898
Other, net.................................................. 245 121 (34)
------- ------- -------
$(3,084) $(9,671) $ 1,809
======= ======= =======
|
Parent company operating losses were lower in 2000 versus 1999 as a result of allocations to its subsidiaries of $5.4 million in interest expense related to interest-bearing capital obligations of the parent company. Prior to 2000, these expenses were not allocated by the parent to the subsidiaries. Partly offsetting this improvement to parent earnings was a $2.7 million compensation expense recorded during 2000 to reflect the increase in minority ownership interests at the home equity line of business. This minority interest expense will continue to grow as the book value of certain of the Corporation's subsidiaries increase, reflecting the ownership positions of senior subsidiary management in their lines of business. There are currently minority interests in the home equity, venture capital, and leasing lines of business and similar long-term incentive plans are contemplated for other lines of business as necessary to attract and retain key executives.
Each subsidiary pays taxes to the parent company at the statutory rate. Subsidiaries also pay fees to the parent company to cover direct and indirect services. In addition, services are provided from one subsidiary to another. Intercompany income and expenses are calculated on an arm's-length, external market basis and are eliminated in consolidation.
CONSOLIDATED INCOME STATEMENT ANALYSIS
Pre-tax income for 2000 totaled $59.3 million, up 12.7% from 1999 and 16.7% from 1998. The effective income tax rate was 40% in 2000, 37% in 1999, and 40.0% in 1998. The lower rate in 1999 was the result of a change in the Indiana Financial Institutions Tax which took effect in 1999. The change in tax law resulted in a reduction in the Corporation's deferred Indiana income tax liability.
Net interest revenue for 2000 totaled $85.6 million, up 36.6% from 1999 and 60.9% from 1998. The net interest margin was 5.36% in 2000 compared to 5.01% in 1999 and 4.09% in 1998. These improvements in margin were primarily due to a shift in composition of mortgage loans held for sale from a concentration in first mortgage loans to a greater share of higher-yielding second mortgage loans.
The following table sets forth, for the periods indicated, a summary of the changes in interest earned and interest paid resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities on fully taxable equivalent basis:
2000 OVER 1999 1999 OVER 1998
--------------------------- ----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- -------- ------- -------
(IN THOUSANDS)
INTEREST INCOME
Loans and leases........................ $24,327 $19,952 $44,279 $ 5,144 $(8,524) $(3,380)
Mortgage loans held for sale............ 367 4,092 4,459 (15,723) 17,250 1,527
Taxable investment securities........... (543) 153 (390) (321) (350) (671)
Tax-exempt securities................... 5 (37) (32) (32) (11) (43)
Trading assets.......................... 6,283 3,026 9,309 120 5,844 5,964
Interest-bearing deposits with financial
institutions.......................... 322 474 796 314 (250) 64
Federal funds sold...................... (531) 22 (509) (56) (23) (79)
------- ------- ------- -------- ------- -------
Total......................... 30,230 27,682 57,912 (10,554) 13,936 3,382
------- ------- ------- -------- ------- -------
INTEREST EXPENSE
Money market checking................... (118) 22 (96) 320 (735) (415)
Money market savings.................... (9) 45 36 (13) (19) (32)
Regular savings......................... 2,772 2,710 5,482 2,971 712 3,683
Time deposits........................... 15,706 6,468 22,174 (863) (522) (1,385)
Short-term borrowings................... 4,115 68 4,183 (10,013) 3,332 (6,681)
Long-term debt.......................... 1,349 (65) 1,284 269 66 335
Preferred securities distribution....... 1,647 (667) 980 7 (7) --
------- ------- ------- -------- ------- -------
Total......................... 25,462 8,581 34,043 (7,322) 2,827 (4,495)
------- ------- ------- -------- ------- -------
Net Interest Revenue............... $ 4,768 $19,101 $23,869 $ (3,232) $11,109 $ 7,877
======= ======= ======= ======== ======= =======
|
DECEMBER 31,
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(IN THOUSANDS)
ASSETS
Interest-earning assets:
Interest bearing deposits
with banks................. $ 31,654 $ 1,567 4.95% $ 22,334 $ 771 3.45% $ 15,462 $ 707 4.57%
Federal funds sold........... 2,265 143 6.31 12,293 652 5.30 13,317 731 5.49
Trading assets............... 91,334 15,584 17.06 45,637 6,275 13.75 32,920 311 0.94
Taxable investment
securities................. 32,068 2,594 8.09 39,208 2,984 7.61 42,988 3,655 8.50
Tax-exempt investment
securities(1).............. 4,974 378 7.60 4,916 410 8.34 5,291 453 8.56
Loans held for sale.......... 578,758 71,141 12.29 575,592 66,682 11.58 758,640 65,155 8.59
Loans and leases, net of
unearned income(1)(2)...... 960,848 93,342 9.71 642,435 49,063 7.64 585,025 52,443 8.96
---------- -------- ----- ---------- -------- ------ ---------- -------- ----
Total interest-earning
assets............... 1,701,901 184,749 10.86% 1,342,415 126,837 9.45% 1,453,643 123,455 8.49%
========== ======== ===== ========== ======== ====== ========== ======== ====
|
DECEMBER 31,
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(IN THOUSANDS)
Noninterest-earning assets:
Cash and due from banks...... 47,752 44,775 50,754
Premises and equipment,
net........................ 27,412 22,077 18,944
Other assets................. 256,807 251,251 135,693
Less allowance for possible
loan and lease losses...... (10,892) (9,508) (8,650)
---------- ---------- ----------
Total assets........... $2,022,980 $1,651,010 $1,650,384
========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Money market checking........ $ 96,028 1,334 1.39% $ 104,641 $ 1,430 1.37% $ 89,158 $ 1,845 2.07%
Money market savings......... 6,428 201 3.13 6,801 165 2.43 7,281 197 2.70
Regular savings.............. 207,823 10,665 5.13 135,438 5,183 3.83 45,414 1,500 3.30
Time deposits................ 629,179 40,616 6.46 339,934 18,442 5.43 355,431 19,827 5.57
Short-term borrowings........ 465,353 32,608 7.01 406,488 28,425 6.99 568,772 35,106 6.17
Long-term debt............... 29,629 2,433 8.21 13,631 1,149 8.43 10,245 814 7.94
Preferred securities
distribution............... 64,885 5,677 8.75 48,044 4,697 9.78 47,972 4,697 9.79
---------- -------- ----- ---------- -------- ------ ---------- -------- ----
Total interest-bearing
liabilities.......... 1,499,325 93,534 6.24% 1,054,977 59,491 5.64% 1,124,273 63,986 5.69%
========== ======== ===== ========== ======== ====== ========== ======== ====
Noninterest-bearing
liabilities:
Demand deposits.............. 260,348 357,771 381,343
Other liabilities............ 92,111 132,163 59,177
Shareholders' equity........... 171,196 154,143 133,563
---------- ---------- ----------
Total liabilities and
shareholders'
equity............... $2,022,980 $1,699,054 $1,698,356
========== ========== ==========
Net interest income.......... $ 91,215 $ 67,346 $ 59,469
======== ======== ========
Net interest income to
average interest-earning
assets..................... 5.36% 5.01% 4.09%
===== ====== ====
|
Notes:
(1) Interest is reported on a fully taxable equivalent basis. The prevailing federal income tax rate was 35% for the last three years.
(2) For purposes of these computations, nonaccrual loans are included in daily average loan amounts outstanding.
The consolidated provision for loan and lease losses for 2000 was $5.4 million, up 21.6% from 1999 and down 9.9% from 1998. More information on this subject is contained in the section on credit risk.
Other income increased 3.7% in 2000 to $211.7 million. This compares to $204.1 million in 1999 and $218.9 million in 1998. Improvements at the home equity line of business were offset by declines at the mortgage bank.
Other expenses in 2000 totaled $238.0 million, up 11.1% from 1999 and up 7.6% from 1998. The 2000 increase in consolidated other expense of $23.9 million was mostly due to higher operating expenses associated with increased commercial and home equity loan production offset partly by lower loan production costs at the mortgage bank.
CONSOLIDATED BALANCE SHEET ANALYSIS
Total assets at year-end 2000 were $2.42 billion, up 44.1% from 1999 and up 24.5% from 1998. However, changes in the average balance sheet are a more accurate reflection of the actual changes in the level of activity on the balance sheet. Average assets were $2.02 billion in 2000, up 22.5% compared to 1999 and 22.6% compared to 1998. The growth in the consolidated balance sheet reflects increases in portfolio loans and leases at the commercial banking and equipment leasing lines of business. In addition, there was significant growth in loans held for sale at the home equity lending line of business related to both internal growth and portfolio acquisitions.
The Corporation's commercial loans are extended primarily to Midwest regional businesses. The Corporation also extends credit to consumers nationally through mortgages, installment loans and revolving credit arrangements. The majority of the remaining portfolio consists of residential mortgage loans (1-4 family dwellings) and mortgage loans on commercial property. Loans by major category at the end of the last five years were as follows:
AT DECEMBER 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(IN THOUSANDS)
Commercial, financial and
agricultural..................... $ 677,066 $443,985 $278,834 $212,095 $179,650
Real estate construction........... 220,485 121,803 97,253 73,279 48,991
Real estate mortgage............... 122,301 115,265 123,980 222,818 214,696
Consumer........................... 56,785 48,936 51,730 39,985 38,371
Direct lease financing
Domestic......................... 116,867 3,890 6,375 78,079 62,372
Canadian......................... 72,864 -- -- -- --
Unearned income
Domestic......................... (21,570) (455) (1,181) (15,163) (11,030)
Canadian......................... (9,876) -- -- -- --
---------- -------- -------- -------- --------
Total.................... $1,234,922 $733,424 $556,991 $611,093 $533,050
========== ======== ======== ======== ========
|
AT DECEMBER 31, 2000
--------------------------------------------------
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial, financial and agricultural........ $188,018 $242,964 $246,084 $ 677,066
Real estate construction...................... 114,075 66,121 40,289 $ 220,485
Real estate mortgage.......................... 12,975 32,176 77,150 $ 122,301
Consumer loans................................ 5,061 27,073 24,651 $ 56,785
Direct lease financing
Domestic.................................... 1,603 83,810 9,884 95,297
Canadian.................................... 9,425 48,397 5,166 62,988
----------
Total............................... $1,234,922
==========
Loans due after one year with:
Fixed interest rates........................ $ 451,886
Variable interest rates..................... 451,879
----------
Total............................... $ 903,765
==========
|
AT DECEMBER 31, 2000
-------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
-------- ---------- ---------- ---------
(IN THOUSANDS)
U.S. Treasury and government obligations........ $2,498 $4,993 $ -- $18,508
Obligations of states and political
subdivisions.................................. 120 1,091 1,130 2,245
Mortgage-backed securities...................... 17 127 3,294 1,714
Other........................................... 1,358 -- -- --
------ ------ ------ -------
Total................................. $3,993 $6,211 $4,424 $22,467
====== ====== ====== =======
Weighted Average Yield
Held-to-maturity.............................. 7.00% 6.81% 7.35% 8.59%
Available-for-sale............................ 7.59% 6.33% n/a n/a
|
Average yield represents the weighted average yield to maturity computed based on average historical cost balances. The yield information on available-for-sale securities does not give effect to changes in fair value that are reflected as a component of shareholders' equity. The yield on state and municipal obligations has been calculated on a fully taxable equivalent basis, assuming a 35% tax rate. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Deposits averaged $1,199.8 million during 2000, compared to $944.6 million during 1999, and $878.6 million in 1998. Demand deposits were down 27.2% on average, or $97.4 million from 1999. A significant portion of demand deposits is related to deposits at Irwin Union Bank, which are associated with escrow accounts held on loans in the servicing portfolio of Irwin Mortgage. These escrow accounts averaged $175.8 million in 2000 and $283.9 million in 1999.
Maturities of certificates of deposit of $100,000 or more are set forth in the following table:
AT DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Under 3 months............................................. $133,804 $ 92,965 $ 81,850
3 to 6 months.............................................. 164,904 28,387 17,107
6 to 12 months............................................. 120,476 40,292 17,807
after 12 months............................................ 243,860 78,872 25,207
-------- -------- --------
Total............................................ $663,044 $240,516 $141,971
======== ======== ========
|
SHORT-TERM BORROWINGS
Short-term borrowings averaged $465.4 million in 2000, compared to $406.5 million in 1999 and $568.8 million in 1998. The increase in 2000 relates to the growth in 2000 at the home equity lending business and the commercial bank while the decrease in 1999 was due to the decrease in mortgage loan closings in 1999 compared to 1998.
The following table shows the distribution of the Corporation's short-term borrowings and the weighted average rates at the end of each of the last three years. Also provided are the maximum amount of borrowings and the average amounts of borrowings as well as weighted average interest rates for the last three years.
REPURCHASE
AGREEMENTS &
DRAFTS PAYABLE FEDERAL HOME
RELATED TO LOAN BANK LINES OF
MORTGAGE COMMERCIAL BORROWINGS & CREDIT AND
LOAN CLOSINGS PAPER FEDERAL FUNDS OTHER
-------------- ---------- ------------- ----------
(IN THOUSANDS)
Year ended December 31:
2000.................................... $ 64,557 $11,346 $173,000 $226,599
1999.................................... 46,796 21,894 173,000 231,413
1998.................................... 172,126 26,617 266,000 180,118
Weighted average interest rates at year
end:
2000.................................... 7.35% 6.85% 6.32% 7.19%
1999.................................... 5.35 6.00 5.46 6.02
1998.................................... 5.43 5.78 4.93 6.01
Maximum amount outstanding at any
month's end:
2000.................................... $ 95,094 $31,774 $250,000 $293,100
1999.................................... 162,251 28,215 249,500 308,422
1998.................................... 301,849 29,691 316,200 249,519
Average amount outstanding during the
year:
2000.................................... $ 68,028 $20,786 $148,975 $227,564
1999.................................... 105,591 24,810 108,422 167,665
1998.................................... 218,342 26,166 115,479 208,785
Weighted average interest rate during the
year:
2000.................................... 6.86% 6.60% 6.54% 6.95%
1999.................................... 5.40 5.82 5.40 5.45
1998.................................... 5.84 6.05 5.63 6.20
|
CAPITAL
Shareholders' equity averaged $171.2 million in 2000, up 11.1% from 1999 and 28.2% from 1998. Year-end shareholders' equity of $189.9 million represented $8.97 per common share, compared to $7.55 and $6.70 at December 31, 1999 and 1998, respectively. The Corporation paid an aggregate of $5.0 million in dividends on the Corporation's common stock in 2000, compared to $4.3 million in 1999 and $3.5 million in 1998.
Prior to the adoption of a new mortgage banking accounting standard in the second quarter of 1995, mortgage banking accounting did not allow the full value of mortgage servicing rights to be reflected on the balance sheet. Since a portion of the Corporation's mortgage servicing portfolio was generated prior to the adoption of the new accounting standard, it represents economic value which is not recorded on the balance sheet. Management estimated this value to be approximately $15.4 million after-tax or $0.73 per share at December 31, 2000. This estimate was based on the market value of servicing assets related to loans with similar interest rates and servicing fees. With the implementation of the new accounting standard in 1995, this off-balance sheet value will decline over future years and eventually be reduced to zero as the servicing rights are sold, the underlying loans pay off, servicing fees are collected, and the income from servicing the loans is fully accreted into earnings.
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
Tier 1 capital......................................... $ 250,825 $ 207,627 $ 191,806
Tier 2 capital......................................... 133,319 38,556 11,505
---------- ---------- ----------
Total risk-based capital..................... 384,144 246,183 203,311
Risk weighted assets................................... 2,826,908 1,823,633 1,649,227
Risk-based ratios:
Tier 1 capital....................................... 8.87% 11.39% 11.63%
Total capital................................ 13.59 13.50 12.25
Tier 1 leverage ratio.................................. 12.41 12.77 10.51
Ending shareholders' equity to assets.................. 7.84 9.48 7.46
Average shareholders' equity to assets................. 8.46 9.33 8.09
|
Capital is a major focus of regulatory attention, with both book and risk-based capital standards used as capital adequacy measures. Unless an institution has adequate capital in the opinion of the regulators, they may withhold approval for new activities or force additions to capital. Therefore, the Corporation considers both the regulators' viewpoint and its own analysis of the capital structure and leverage amounts that are consistent with underlying business risks.
At year-end 2000, the Corporation's total risk-adjusted capital ratio was
13.60% compared to 10.0% which is required to be considered well capitalized by
the regulators. The Corporation's ending equity to assets ratio for 2000 was
7.84%. However, as previously discussed, temporary conditions that existed at
year end make the average balance sheet ratio a more accurate measure of
capital. The Corporation's average equity to assets for 2000 was 8.46%.
In November 2000, the Corporation 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, trusts created and controlled by the Corporation. 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 of Capital Trust II are not convertible into common stock of the Corporation. The convertible trust preferred securities of Capital Trust III 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 net of capitalized issuance costs. The sole assets of IFC Capital Trust II and III are subordinated debentures of the Corporation with principal balances of $53.35 million each, interest rates of 10.5% and 8.75%, respectively, and an initial maturity of 30 years. Both new issues are Tier-1 qualifying capital elements.
In July 1999, the Corporation raised $30 million of 7.58%, 15-year subordinated debt which is callable in 10 years at par, to strengthen and add flexibility in the management of its capital base. The debt was privately placed. These funds qualify as Tier 2 capital. The securities are not convertible into common stock of the Corporation.
To assist Irwin Union Bank in generating deposits in new markets, Irwin Financial Corporation initiated a program in 1999 to issue Irwin Financial non-coupon, convertible preferred shares to certain qualified investors thought to be in a position to support deposit growth. Under the program, each preferred share is issued for cash at approximately the market price of one common share. A preferred share automatically converts into one common share at a determined future date. If a banking branch reaches a specified level of deposits prior to the conversion date, the number of common shares into which a preferred share converts is increased by as much as 25%, depending upon the date on which the deposit level was attained. A maximum of approximately 400,000 shares of preferred stock are issuable under the program. Approximately $1.4 million in non-coupon bearing convertible preferred shares of the Corporation's stock have been issued under this program. These funds are Tier-1 qualifying capital.
In 2000, the Corporation repurchased approximately 220,000 common shares. Over the past three years, repurchases of $34 million of common stock were made in an effort to restructure capital to reach a more optimal mix between common equity and less expensive, hybrid forms of capital.
RISK MANAGEMENT
As a financial intermediary, Irwin Financial Corporation is engaged in businesses which involve the assumption of financial risks including:
- Credit risk
- Liquidity risk
- Interest rate risk
Each line of business that assumes financial risk uses a formal process to manage this risk. In all cases, the objectives are to ensure that risk is contained within prudent levels and that we are adequately compensated for the level of risk assumed. The Chairman, the President, and the Chief Financial Officer of the parent company participate in each subsidiary's risk management process.
CREDIT RISK
The assumption of credit risk is a key source of earnings for the home equity lending, commercial banking and equipment leasing lines of business. In addition, the mortgage banking business assumes some credit risk despite the fact that its mortgages are typically insured.
The credit risk in the loan portfolios of the home equity lending business and commercial bank have the most potential to have a significant effect on consolidated financial performance. These lines of business manage credit risk through the use of lending policies, credit analysis and approval procedures, periodic loan reviews, and personal contact with borrowers. Loans over a certain size are reviewed by a loan committee prior to approval.
An allowance for loan losses is established as an estimate of the probable credit losses on the loans held by the Corporation. A specific allowance is determined by evaluating those loans which are either substandard or have the potential to become substandard. In general, commercial loans, mortgage loans, and leases are evaluated individually to determine the appropriate allowance. Consumer loans, including home equity loans, are generally evaluated as a group. For interest-only strips, a loss estimate is embedded in the residual value of the asset. A specific allowance is set at a level which management considers sufficient to cover probable losses on these loans. An additional allowance is determined by analyzing historical loss experience by loan type and then adjusting these loss factors for current conditions not reflected in prior experience. The allowance for loan losses is an estimate which is based on management's judgement combined with a quantitative process of evaluation and analysis.
Loans and leases that are determined by management to be uncollectible are charged against the allowance. The allowance is increased by provisions against income and recoveries of loans and leases previously charged off. The table on page 38 analyzes the consolidated allowance for loan and lease losses over the past five years.
Net charge-offs in 2000 were $2.7 million, up 56.4% from 1999, and up 39.1% from 1998. Net charge-offs to average loans and leases was 0.28% in 2000 compared to 0.27% in 1999 and 0.33% in 1998. At year end, the allowance for loan and lease losses was 1.06% of outstanding loans and leases, compared to 1.17% in 1999 and 1.78% in 1998.
Other real estate owned totaled $2.8 million at December 31, 2000, down from $3.8 million at December 31, 1999, and from $3.5 million in 1998. Total nonperforming assets were $10.1 million, or 0.42% of total assets at December 31, 2000, as compared to $8.1 million, or 0.48%, at year-end 1999 and $15.5 million, or 0.78% at the end of 1998.
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(IN THOUSANDS)
Loans and leases outstanding at end
of period, net of unearned
income........................... $1,234,922 $733,425 $556,991 $611,093 $533,050
========== ======== ======== ======== ========
Average loans and leases for the
period, net of unearned income... $ 960,848 $642,435 $585,025 $569,325 $496,729
========== ======== ======== ======== ========
ALLOWANCE FOR POSSIBLE LOAN AND
LEASE LOSSES:
Balance beginning of period........ $ 8,555 $ 9,888 $ 8,812 $ 6,875 $ 5,033
CHARGE-OFFS:
Commercial, financial and
agricultural loans............ 1,210 646 246 800 495
Real estate mortgage loans....... -- -- 232 356 37
Consumer loans................... 818 813 761 734 959
Lease financing:
Domestic...................... 363 772 1,263 1,255 883
Canadian...................... 777 -- -- -- --
---------- -------- -------- -------- --------
Total charge-offs........ 3,168 2,231 2,502 3,145 2,374
---------- -------- -------- -------- --------
RECOVERIES:
Commercial, financial and
agricultural loans............ 76 32 14 32 133
Real estate mortgage loans....... -- -- -- 1 --
Consumer loans................... 221 307 362 246 214
Lease financing:
Domestic...................... 84 164 183 259 246
Canadian...................... 85 -- -- -- --
---------- -------- -------- -------- --------
Total recoveries......... 466 503 559 538 593
---------- -------- -------- -------- --------
Net charge-offs.................... (2,702) (1,728) (1,943) (2,607) (1,781)
Acquisition of Onset Capital....... 1,908 -- -- -- --
Reduction due to sale of loans..... -- (3,126) (2,976) (1,694) (930)
Reduction due to reclassification
of loans......................... (16) (922) -- -- --
Foreign currency adjustment........ (19) -- -- -- --
Provision charged to expense....... 5,403 4,443 5,995 6,238 4,553
---------- -------- -------- -------- --------
Balance end of period.............. $ 13,129 $ 8,555 $ 9,888 $ 8,812 $ 6,875
========== ======== ======== ======== ========
|
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(IN THOUSANDS)
ALLOWANCE FOR POSSIBLE LOAN AND
LEASE LOSSES:
By category of loans and leases
Commercial, financial and
agricultural loans............ $ 4,370 $ 5,634 $ 4,240 $ 5,118 $ 3,676
Real estate mortgage loans....... 2,462 1,194 3,299 2,170 281
Consumer loans................... 2,226 1,270 1,747 446 1,974
Lease financing:
Domestic...................... 2,325 457 602 1,078 944
Canadian...................... 1,746 -- -- -- --
---------- -------- -------- -------- --------
Totals................... $ 13,129 $ 8,555 $ 9,888 $ 8,812 $ 6,875
========== ======== ======== ======== ========
RATIOS:
Net charge-offs to average loans
and leases....................... 0.28% 0.27% 0.33% 0.46% 0.36%
Allowance for possible loan losses
to average loans and leases...... 1.37% 1.33% 1.69% 1.55% 1.38%
Allowance for possible loan losses
to loans and leases
outstanding...................... 1.06% 1.17% 1.78% 1.44% 1.29%
|
2000 1999 1998 1997 1996
------- ------ ------- ------ ------
(IN THOUSANDS)
ACCRUING LOANS PAST DUE 90 DAYS OR MORE:
Commercial, financial and agricultural
loans.................................. $ 324 $ 58 $ 252 $ 382 $ 256
Real estate mortgages..................... -- -- 291 534 234
Consumer loans............................ 510 89 89 86 205
Lease financing domestic.................. 627 -- -- -- --
------- ------ ------- ------ ------
1,461 147 632 1,002 695
------- ------ ------- ------ ------
NONACCRUAL LOANS AND LEASES:
Commercial, financial and agricultural
loans.................................. 752 748 1,052 777 2,739
Real estate mortgages..................... 1,922 3,049 9,710 5,333 2,481
Consumer loans............................ 918 273 174 63 --
Lease financing:
Domestic............................... 960 88 426 506 1,261
Canadian............................... 1,209 -- -- -- --
------- ------ ------- ------ ------
5,761 4,158 11,362 6,679 6,481
------- ------ ------- ------ ------
Total nonperforming loans and
leases.......................... 7,222 4,305 11,994 7,681 7,176
------- ------ ------- ------ ------
OTHER REAL ESTATE OWNED:
Other real estate owned................... 2,833 3,752 3,506 1,828 2,239
------- ------ ------- ------ ------
Total nonperforming assets........ $10,055 $8,057 $15,500 $9,509 $9,415
======= ====== ======= ====== ======
Nonperforming loans and leases to total
loans and
leases.................................... 0.58% 0.59% 2.15% 1.26% 1.35%
======= ====== ======= ====== ======
Nonperforming assets to total assets........ 0.42% 0.48% 0.78% 0.64% 0.72%
======= ====== ======= ====== ======
|
Loans which are past due 90 days or more are placed on nonaccrual status unless, in management's opinion, there is sufficient collateral value to offset both principal and interest.
2000 1999 1998
---- ---- ----
(IN THOUSANDS)
Interest which would have been recorded under original terms
Renegotiated.............................................. $ -- $-- $ --
Nonaccrual................................................ 318 80 323
---- --- ----
318 80 323
---- --- ----
Interest income actually recorded
Renegotiated.............................................. -- -- --
Nonaccrual................................................ 60 33 47
---- --- ----
60 33 47
---- --- ----
Reduction in interest income................................ $258 $47 $276
==== === ====
|
No loan concentrations existed of more than 10% of total loans to borrowers engaged in similar activities that would be similarly affected by economic or other conditions.
Generally, the accrual of income is discontinued when the full collection of principal or interest is in doubt, or when the payment of principal or interest has become contractually 90 days past due unless the obligation is both well secured and in the process of collection.
LIQUIDITY
Liquidity is the availability of funds to meet the daily requirements of the Corporation's business. For financial institutions, demand for funds results principally from extensions of credit and withdrawal of deposits. Liquidity is provided by asset maturities or sales and through deposits and short-term borrowings.
The objectives of liquidity management are to ensure that funds will be available to meet current and future demands and that funds are available at a reasonable cost. Liquidity is managed by the parent company via daily interaction with the lines of business and periodic liquidity planning sessions.
Since loans are less marketable than securities, the ratio of total loans to total deposits is a traditional measure of liquidity for banks and bank holding companies. At December 31, 2000, the ratio of loans and loans held for sale to total deposits was 124.8%. The Corporation is comfortable with this relatively high level due to its position in mortgage loans held for sale. These loans carry an interest rate at or near current market rates for first and second lien mortgage loans. Since the Corporation securitizes and sells nearly all these mortgage loans within a 90-day period, our liquidity is significantly higher than the ratio would suggest by traditional standards. Excluding mortgage loans held for sale, the loan-to-deposit ratio is 84.7% at December 31, 2000
INTEREST RATE RISK
Because assets are not perfectly match funded with like-term liabilities, the Corporation's earnings are affected by interest rate changes. Interest rate risk is measured by the sensitivity of both net interest income and fair market value of net interest sensitive assets to changes in interest rates.
An asset/liability management committee at each of the Corporation's lines of business monitors the repricing structure of assets, liabilities and off-balance sheet items and uses a financial simulation model to measure interest rate risk over multiple interest rate scenarios. The Corporate Asset/Liability Management Committee oversees the rate risk profile of the Corporation as a whole; similar committees exist at each line of business, represented by the Corporate office and the business segment. Numerous factors are incorporated into the financial model including prepayment speeds, net interest margin, fee income and a comprehensive mark-to-market valuation process. Risk measures and assumptions are regularly reevaluated and modeling tools are enhanced as needed.
The commercial banking, home equity, and leasing lines of business assume interest rate risk in the pricing of their loans and leases, and manage this risk by adjusting the duration of their interest sensitive liabilities and through the use of off-balance sheet hedging.
The mortgage banking business assumes interest rate risk by entering into commitments to extend loans to borrowers at a fixed rate for a limited period of time. Closed loans are held only temporarily until a pool is formed. To mitigate the risk that interest rates will rise between loan origination and securitization, the mortgage bank buys commitments to deliver loans at a fixed price.
The mortgage and home equity lines of business are also exposed to the risk that rates will decline, increasing prepayment speeds on loans and decreasing the value of servicing assets and interest-only strips. As discussed in the line of business analysis section of this report, some offsets to these exposures exist in the form of a strong production operation, selective sales of servicing rights, match funded asset-backed securities sales and the use of financial instruments to hedge the economic performance of the assets.
The following tables reflect management's estimate of the present value of interest sensitive assets, liabilities, and off-balance sheet items at December 31, 2000. In addition to showing the estimated fair market value at current rates, they also provide estimates of the fair market values of interest sensitive items based upon a hypothetical move both up and down 100 and 200 basis points in the entire yield curve.
The first table is an economic analysis showing the present value impact of changes in interest rates, assuming a comprehensive mark-to-market environment. The second table is an accounting analysis showing the same net present value impact, adjusted for expected GAAP treatment. Neither analysis takes into account the book values of the non-interest sensitive assets and liabilities (such as cash, accounts receivable, and fixed assets), the values of which are not directly determined by interest rates.
The analyses are based on discounted cash flows over the remaining estimated lives of the financial instruments. The interest rate sensitivities apply to December 31, 2000 booked transactions only. The net asset value sensitivities do not necessarily represent the changes in the lines of business' net asset value that would actually occur under the given interest rate scenarios, as sensitivities do not reflect changes in value of the companies as a going concern nor consider potential rebalancing or other hedging actions that might be taken in the future under asset/liability management.
PRESENT VALUE
AT DECEMBER 31, 2000
INSTANTANEOUS CHANGE IN INTEREST RATES OF:
-----------------------------------------------------------------------
-2% -1% CURRENT +1% +2%
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
INTEREST SENSITIVE
ASSETS
Loans and Other
Assets................ $ 1,415,887 $ 1,390,869 $ 1,366,583 $ 1,342,990 $ 1,320,689
Loans Held for Sale..... 580,992 576,053 570,841 565,260 559,493
Mortgage Servicing
Rights................ 66,814 95,893 139,520 168,911 177,494
Interest-Only Strips.... 141,524 147,431 154,547 162,406 169,974
----------- ----------- ----------- ----------- -----------
Total Interest Sensitive
Assets................ 2,205,217 2,210,246 2,231,491 2,239,567 2,227,650
----------- ----------- ----------- ----------- -----------
INTEREST SENSITIVE
LIABILITIES
Deposits................ (954,577) (949,485) (944,492) (939,590) (934,784)
Short-Term Borrowings... (765,977) (763,233) (760,531) (757,874) (755,263)
Long-Term Debt.......... (206,054) (197,539) (188,277) (177,805) (165,955)
----------- ----------- ----------- ----------- -----------
Total Interest Sensitive
Liabilities........... (1,926,608) (1,910,257) (1,893,300) (1,875,269) (1,856,002)
----------- ----------- ----------- ----------- -----------
Interest Sensitive Off-
Balance Sheet Items... 24,834 12,288 704 (11,028) (23,142)
----------- ----------- ----------- ----------- -----------
Net Market Value as of
December 31, 2000..... $ 303,443 $ 312,277 $ 338,895 $ 353,270 $ 348,506
=========== =========== =========== =========== ===========
Potential Change........ $ (35,452) $ (26,618) $ -- $ 14,375 $ 9,611
=========== =========== =========== =========== ===========
Net Market Value as of
December 31, 1999..... $ 271,837 $ 315,927 $ 334,983 $ 333,872 $ 327,353
=========== =========== =========== =========== ===========
Potential Change........ $ (63,146) $ (19,056) $ -- $ (1,111) $ (7,630)
=========== =========== =========== =========== ===========
|
PRESENT VALUE
AT DECEMBER 31, 2000
INSTANTANEOUS CHANGE IN INTEREST RATES OF:
--------------------------------------------------------
-2% -1% CURRENT +1% +2%
-------- -------- -------- -------- --------
(IN THOUSANDS)
INTEREST SENSITIVE ASSETS
Loans and Other Assets(1)........... $ -- $ -- $ -- $ -- $ --
Loans Held for Sale................. 570,841 570,841 570,841 565,260 559,493
Mortgage Servicing Rights........... 80,384 106,453 130,746 144,119 144,948
Interest-Only Strips................ 141,524 147,431 154,547 162,406 169,974
-------- -------- -------- -------- --------
Total Interest Sensitive Assets..... 792,749 824,725 856,134 871,785 874,415
-------- -------- -------- -------- --------
|
PRESENT VALUE
AT DECEMBER 31, 2000
INSTANTANEOUS CHANGE IN INTEREST RATES OF:
--------------------------------------------------------
-2% -1% CURRENT +1% +2%
-------- -------- -------- -------- --------
(IN THOUSANDS)
INTEREST SENSITIVE LIABILITIES
Deposits(1)......................... -- -- -- -- --
Short-Term Borrowings(1)............ -- -- -- -- --
Long-Term Debt(1)................... -- -- -- -- --
-------- -------- -------- -------- --------
Total Interest Sensitive
Liabilities(1).................... -- -- -- -- --
-------- -------- -------- -------- --------
Interest Sensitive Off-Balance Sheet
Items............................. 25,573 12,447 298 (11,984) (24,632)
-------- -------- -------- -------- --------
Net Market Value as of December 31,
2000.............................. $818,322 $837,172 $856,432 $859,801 $849,783
======== ======== ======== ======== ========
Potential Change.................... $(38,110) $(19,260) $ -- $ 3,369 $ (6,649)
======== ======== ======== ======== ========
Net Market Value as of December 31,
1999.............................. $490,111 $509,774 $518,647 $521,421 $524,034
======== ======== ======== ======== ========
Potential Change.................... $(28,536) $ (8,873) $ -- $ 2,774 $ 5,387
======== ======== ======== ======== ========
|
(1) Value does not change in GAAP presentation.
DERIVATIVE FINANCIAL INSTRUMENTS
Certain of the Corporation's interest-only strips are hedged using interest rate caps which had a fair value of $0.2 million and a notional amount of $22.7 million at December 31, 2000.
The Corporation also engaged in hedging its mortgage servicing rights through the use of futures contracts on U.S. Treasury securities. As of year-end 2000, the futures contracts had a positive fair value of less than $0.1 million on a notional value of $200 million. Options on Treasury futures and interest rate caps are classified as trading securities on the balance sheet and carried at their market values. Adjustments to market values are recorded as trading gains or losses on the income statement. In 2000, the Corporation recorded a $0.3 million loss related to these derivative products. This compares to a loss of $8.2 million in 1999.
Onset Capital Corporation, a Canadian leasing company acquired in the second quarter of 2000, uses interest rate swaps and swaptions to neutralize repricing risk associated with its Sound Trust funding source. At December 31, 2000, Onset had two interest rate swaps and five swaptions outstanding to hedge the $32.8 million of fixed rate lease assets which are funded with a variable rate source. The notional value of the interest rate swaps amortizes on a schedule that is designed to match the principal pay down of the loan portfolio with a final maturity date of May 25, 2004. Onset can reduce the notional value of the swaps by up to 10% if prepayments on the loans are greater than originally anticipated. The swaptions exist to allow Onset the flexibility to switch its interest rate swaps from receiving a floating rate of interest to receiving a fixed rate of interest. Onset would exercise this option if it chose to switch the underlying funding source from a floating rate source to a fixed rate source.
Since the July 2000 acquisition of Onset Corporation, the Corporation has begun entering into foreign currency contracts to protect the value of intercompany loans made to Onset against changes in the exchange rate. The Corporation had a notional amount of $15.0 million in forward contracts outstanding as of December 31, 2000. Gains and losses associated with these contracts are included in other expense on the income statement.
The Corporation did not experience any significant Year 2000 related computer disruptions.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are reported in the Interest Rate Risk section to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations found on pages 31 through 33.
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.
The Corporation's financial statements have been audited by PricewaterhouseCoopers LLP, independent certified public accountants elected by the shareholders. Management has made available to PricewaterhouseCoopers all the Corporation's financial records and related data, as well as the minutes of stockholders' and directors' meetings. Furthermore, management believes that all representations made to PricewaterhouseCoopers during its audit were valid and appropriate.
Management of the Corporation has established and maintains a system of internal control that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. Assessments of the system of internal control are based on criteria for effective internal control over financial reporting described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management continually monitors the system of internal control for compliance. The Corporation maintains a strong internal auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. In addition, as part of its audit of the Corporation's financial statements, PricewaterhouseCoopers completed an assessment of selected internal accounting controls to establish a basis for reliance thereon in determining the nature, timing, and extent of audit tests to be applied. Management has considered the internal auditor's and PricewaterhouseCoopers' recommendations concerning the Corporation's system of internal control and has taken actions to respond appropriately to these recommendations that we believe are cost effective in the circumstances. Management believes that the Corporation's system of internal control is adequate to accomplish the objectives discussed herein.
Management also recognized its responsibility for fostering a strong ethical climate so that the Corporation's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Corporation's Guiding Philosophy, which is publicized throughout the 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 the Corporation; potential conflicts of interests; compliance with all domestic and foreign laws, including those related to financial disclosures; and a confidentiality of proprietary information. The Corporation maintains a systematic program to assess compliance with these policies.
/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 sheet and the related consolidated statement 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, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, 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 the opinion expressed above.
/s/ PricewaterhouseCoopers LLP Cincinnati, Ohio January 23, 2001 |
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
(IN THOUSANDS, EXCEPT FOR SHARES)
ASSETS:
Cash and cash equivalents................................... $ 83,493 $ 47,215
Interest-bearing deposits with financial institutions....... 36,400 26,785
Trading assets -- Note 3.................................... 152,805 59,025
Investment securities (Market value: $37,163 in 2000 and
$37,464 in 1999) -- Note 4................................ 37,095 37,508
Loans held for sale......................................... 579,788 508,997
Loans and leases, net of unearned income -- Note 5.......... 1,234,922 733,424
Less: Allowance for loan and lease losses -- Note 6......... (13,129) (8,555)
---------- ----------
1,221,793 724,869
---------- ----------
Servicing assets -- Note 7.................................. 132,638 138,500
Accounts receivable......................................... 69,224 49,415
Accrued interest receivable................................. 12,979 8,430
Premises and equipment -- Note 8............................ 29,409 23,368
Other assets................................................ 66,805 56,735
---------- ----------
$2,422,429 $1,680,847
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Noninterest-bearing....................................... $ 263,159 $ 218,402
Interest-bearing.......................................... 517,127 411,400
Certificates of deposit over $100,000..................... 663,044 240,516
---------- ----------
1,443,330 870,318
Short-term borrowings -- Note 10............................ 475,502 473,103
Long-term debt -- Note 11................................... 29,608 29,784
Other liabilities........................................... 136,897 100,275
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust -- Note 12................. 147,167 48,071
---------- ----------
Total liabilities................................. 2,232,504 1,521,551
---------- ----------
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, 2000
and none as of December 31, 1999....................... 1,386 --
Common stock; no par value -- authorized 40,000,000
shares; issued 23,402,080 shares as of December 31,
2000 and December 31, 1999; including 2,376,119 and
2,297,303 shares in treasury as of December 31, 2000
and December 31, 1999, respectively.................... 29,965 29,965
Additional paid-in capital................................ 4,331 4,250
Minority interest......................................... 1,055 --
Accumulated other comprehensive losses net of deferred
income tax asset of ($305) and ($47) in 2000 and 1999,
respectively........................................... (962) (70)
Retained earnings......................................... 201,729 171,101
---------- ----------
237,504 205,246
Less treasury stock, at cost...................... (47,579) (45,950)
---------- ----------
Total shareholders' equity........................ 189,925 159,296
---------- ----------
$2,422,429 $1,680,847
========== ==========
|
The accompanying notes are an integral part of the consolidated financial statements.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE)
INTEREST INCOME:
Loans held for sale......................................... $71,141 $66,682 $65,155
Loans and leases............................................ 93,251 48,978 52,329
Trading account............................................. 15,584 6,275 311
Investment securities:
Taxable................................................... 4,161 3,755 4,362
Tax-exempt................................................ 250 271 299
Federal funds sold.......................................... 143 652 731
------- ------- -------
Total interest income............................. 184,530 126,613 123,187
------- ------- -------
INTEREST EXPENSE:
Deposits.................................................... 52,815 25,220 23,369
Short-term borrowings....................................... 32,610 28,425 35,106
Long-term debt.............................................. 2,348 1,149 814
Distribution on company-obligated mandatorily redeemable
preferred securities of subsidiary trust.................. 5,761 4,697 4,697
------- ------- -------
Total interest expense............................ 93,534 59,491 63,986
------- ------- -------
Net interest income......................................... 90,996 67,122 59,201
Provision for loan and lease losses -- Note 6............... 5,403 4,443 5,995
------- ------- -------
Net interest income after provision for loan and lease
losses.................................................... 85,593 62,679 53,206
------- ------- -------
OTHER INCOME:
Loan origination fees....................................... 52,696 47,007 60,013
Gain from sale of loans..................................... 77,047 68,851 75,201
Loan servicing fees......................................... 58,939 60,581 57,284
Amortization and impairment of servicing assets............. (39,529) (15,702) (35,388)
------- ------- -------
Net loan administration income............................ 19,410 44,879 21,896
------- ------- -------
Gain on sale of mortgage servicing assets................... 27,528 37,801 43,308
Trading gains (losses)...................................... 14,399 (8,296) 1,366
Gain from sale of leasing assets............................ -- -- 5,241
Other....................................................... 20,631 13,827 11,832
------- ------- -------
211,711 204,069 218,857
------- ------- -------
OTHER EXPENSE:
Salaries.................................................... 124,639 114,303 120,338
Pension and other employee benefits......................... 20,359 18,402 16,757
Office expense.............................................. 13,783 13,181 12,865
Premises and equipment...................................... 26,812 24,052 20,214
Marketing and development................................... 13,071 8,962 11,735
Other....................................................... 39,298 35,211 39,297
------- ------- -------
237,962 214,111 221,206
------- ------- -------
Income before income taxes.................................. 59,342 52,637 50,857
Provision for income taxes.................................. 23,676 19,481 20,354
------- ------- -------
Net income available to common shareholders................. $35,666 $33,156 $30,503
======= ======= =======
Earnings per share of common stock available to
shareholders:
Basic -- Note 18.......................................... $ 1.70 $ 1.54 $ 1.40
======= ======= =======
Diluted -- Note 18........................................ $ 1.67 $ 1.51 $ 1.38
======= ======= =======
Dividends per share of common stock......................... $ 0.24 $ 0.20 $ 0.16
======= ======= =======
|
The accompanying notes are an integral part of the consolidated financial statements.
ACCUMULATED
OTHER ADDITIONAL
RETAINED COMPREHENSIVE PREFERRED COMMON PAID IN TREASURY MINORITY
TOTAL EARNINGS INCOME STOCK STOCK CAPITAL STOCK INTEREST
-------- -------- ------------- --------- ------- ---------- -------- --------
Balance at January 1, 1998........ $127,983 $115,414 $ 55 $ -- $29,965 $ 780 $(18,231) $ --
Net income...................... 30,503 30,503
Unrealized gain on investment
securities net of $26 tax
liability..................... 30 30
--------
Total Comprehensive
income................. 30,533
--------
Cash dividends.................... (3,473) (3,473)
Tax benefit on stock option
exercises....................... 1,027 1,027
Treasury stock:
Purchase of 496,455 shares...... (12,593) (12,593)
Sales of 164,411 shares......... 1,756 (212) 788 1,180
-------- -------- ----- ------ ------- ------ -------- ------
Balance December 31, 1998......... $145,233 $142,232 $ 85 $ -- $29,965 $2,595 $(29,644) $ --
======== ======== ===== ====== ======= ====== ======== ======
Net income...................... 33,156 33,156
Unrealized loss on investment
securities net of $104 tax
credit........................ (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) (18,314)
Sales of 232,073 shares......... 2,608 600 2,008
-------- -------- ----- ------ ------- ------ -------- ------
Balance December 31, 1999......... $159,296 $171,101 $ (70) $ -- $29,965 $4,250 $(45,950) $ --
======== ======== ===== ====== ======= ====== ======== ======
Net income...................... 35,666 35,666
Unrealized gain on investment
securities net of $43 tax
liability..................... 64 64
Minimum pension liability net of
$257 tax credit............... (387) (387)
Foreign currency adjustment net
of $43 tax credit............. (66) (66)
Deferred Compensation........... (503) (503)
--------
Total Comprehensive
income................. 34,774
--------
Cash dividends.................... (5,038) (5,038)
Tax benefit on stock option
exercises....................... 136 136
Treasury stock:
Purchase of 220,948 shares...... (3,414) (3,414)
Sales of 142,132 shares......... 1,730 (55) 1,785
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 $(962) $1,386 $29,965 $4,331 $(47,579) $1,055
======== ======== ===== ====== ======= ====== ======== ======
|
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
NET INCOME.................................................. $ 35,666 $ 33,156 $ 30,503
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization............................... 9,125 7,390 5,802
Amortization and impairment of servicing assets............. 39,529 15,702 35,388
Provision for loan and lease losses......................... 5,403 4,443 5,995
Amortization of premiums, less accretion of discounts....... (11) 1,145 3,210
Decrease (increase) in loans held for sale.................. (70,791) 427,791 (408,049)
Gain on sale of mortgage servicing assets................... (27,528) (37,801) (43,308)
Net increase in trading assets.............................. (93,780) (26,877) (10,015)
Other, net.................................................. (65) 35,387 (23,663)
--------- --------- ---------
Net cash provided (used) by operating activities... (102,452) 460,336 (404,137)
--------- --------- ---------
LENDING AND INVESTING ACTIVITIES:
Proceeds from maturities/calls of investment securities:
Held-to-maturity.......................................... 1,286 12,058 10,645
Available-for-sale........................................ 26 159 280
Proceeds from sales of investment securities:
Available-for-sale........................................ -- 3,118 6,000
Purchase of investment securities:
Held-to-maturity.......................................... (781) (34) (8,932)
Available-for-sale........................................ -- (5,899) (4,051)
Net increase in interest-bearing deposits with financial
institutions.............................................. (9,615) (8,344) (201)
Net increase in loans, excluding sales...................... (533,848) (205,137) (131,632)
Sale of loans............................................... 31,521 22,928 175,574
Sale of leasing assets...................................... -- -- 5,241
Additions to mortgage servicing assets...................... (59,281) (84,653) (165,910)
Proceeds from sale of mortgage servicing assets............. 53,142 85,380 138,635
Acquisition of Onset Capital Corporation, net of cash
acquired.................................................. (837) -- --
Net additions to premises and equipment..................... (11,922) (6,520) (4,148)
--------- --------- ---------
Net cash provided (used) by lending and investing
activities....................................... (530,309) (186,944) 21,501
--------- --------- ---------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits......................... 573,012 (138,893) 289,615
Net increase (decrease) in short-term borrowings............ 2,399 (171,758) 132,586
Proceeds from long-term debt................................ -- 30,000 7,614
Repayments of long-term debt................................ (176) (3,055) (11,871)
Proceeds from the issuance of trust preferred securities.... 99,012 -- --
Issuance of preferred stock................................. 1,386 -- --
Purchase of treasury stock.................................. (3,414) (18,314) (12,593)
Proceeds from sale of treasury stock for employee benefit
plans..................................................... 1,866 2,608 1,756
Dividends paid.............................................. (5,038) (4,287) (3,473)
--------- --------- ---------
Net cash provided (used) by financing activities... 669,047 (303,699) 403,634
--------- --------- ---------
Effect of exchange rate changes on cash..................... (8) -- --
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 36,278 (30,307) 20,998
Cash and cash equivalents at beginning of period............ 47,215 77,522 56,524
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 83,493 $ 47,215 $ 77,522
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest.................................................. $ 81,989 $ 52,456 $ 58,689
========= ========= =========
Income taxes.............................................. $ 13,864 $ 14,328 $ 18,947
========= ========= =========
|
The accompanying notes are an integral part of the consolidated financial statements.
Consolidation: Irwin Financial Corporation and its subsidiaries (the Corporation), provide financial services throughout the United States. The Corporation is 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 the Corporation to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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 period since purchase of the Canadian firm. 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, which the Corporation has the positive intent and ability to hold until maturity are classified as "held-to-maturity" and are stated at cost adjusted for amortization of premium and accretion of discount. Securities that might be sold prior to maturity are classified as "available-for-sale" and are stated at fair value. Unrealized gains and losses, net of the future tax impact, are reported as a separate component of shareholders' equity until realized. Investment gains and losses are based on the adjusted cost of the specific security.
Trading Assets: Trading assets are stated at fair value. Unrealized gains and losses are included in earnings. Included in trading assets are interest-only strips. When the Corporation sells receivables in securitizations of residential mortgage loans, it retains interest-only strips, one or more subordinated tranches, servicing rights, 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, quoted market prices are used if available. However, quotes are generally not available for retained interests, so the Corporation generally estimates 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: 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 and amortization of deferred loan origination fees and costs is discontinued when a loan becomes 90 days past due as to principal or interest. Management may elect to continue the accrual of interest and fees 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 expected losses in the portfolio. Loans are considered impaired if it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral.
Servicing Assets: When the Corporation securitizes loans, it retains servicing assets and interest-only strips. A portion of the cost of originating a loan is allocated to the servicing asset and interest-only strip based on their fair values relative to the loan as a whole. The Corporation uses the market prices under comparable servicing sale contracts, when available, or alternatively uses a valuation model that calculates the present value of future cash flows to determine the fair value of the servicing assets. In using this valuation method, the Corporation incorporates assumptions that it is believed market participants would use in estimating future net servicing income which include estimates of the cost of servicing per loan, the discount rate, float value, an inflation rate, ancillary income per loan, prepayment speeds, and default rates. Servicing assets are amortized over the estimated lives of the related loans, which are grouped based on loan characteristics, in proportion to estimated net servicing income.
In determining servicing value impairment at the end of the year, the servicing portfolio was disaggregated into its predominant risk characteristics, including loan type and interest rate. These segments of the portfolio were valued, using market prices under comparable servicing sale contracts, when available, or alternatively, using the same model as was used to originally determine the fair value at origination, using current market assumptions. The calculated value was then compared with the book value of each segment to determine the required reserve for impairment. It is reasonably possible that a change in the impairment reserve will occur in the near term. No reasonable estimate can be made of the range of amounts of loss or gain.
Derivative Instruments: The Corporation uses derivative instruments to offset changes in the value of servicing assets and interest-only strips. Derivative instruments on the Corporation's balance sheet are classified as trading assets and carried at market value. Changes in market value are recorded as trading gains or losses on the income statement. The Corporation uses forward contracts to reduce its interest rate exposure on mortgage loans held for sale and on the pipeline of loan applications in process. Gains and losses associated with these contracts are deferred and included in the determination of gain or loss on ultimate sale of the loans, or expensed when it becomes evident the loan sale will not occur. The Corporation also uses foreign currency contracts to protect against changes in exchange rates. Gains and losses associated with these contracts are included in other expense on the income statement.
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," deferring its effective date to fiscal years beginning after June 15, 2000. The Corporation adopted SFAS 133 on January 1, 2001. Adoption of this pronouncement would result in a transition adjustment of approximately $0.3 million, which will be recorded as a cumulative effect of a change in accounting principle. The FASB is currently reviewing certain implementation guidance which may affect the transition adjustment amounts for commitments to purchase and originate loans.
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 market value and are included in other assets with changes in market value recognized in other income. The investment committee of Irvin Ventures determines the value of the investments at the end of each reporting period and the values are adjusted based upon review of the investee's financial results, condition, and prospects. Changes in estimated market values can also be made when an event such as a new funding round 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.
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. Rehabilitation tax credits and low-income housing tax credits are recorded as a reduction to the provision for federal income taxes in the year the eligible buildings are placed in service.
Cash and Cash Equivalents Defined: For purposes of the statement of cash flows, the Corporation considers cash and due from banks to be cash equivalents.
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 retained interests, delinquencies and credit losses. The accounting requirements of the Standard are effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and must be applied prospectively. The disclosures related to securitization transactions are required for fiscal years ending after December 15, 2000, and comparative disclosures for prior periods are not required. The Corporation has provided the required disclosures as of December 31, 2000 in Note 3 and Note 7, and does not expect the impact of the accounting requirements of the Standard to be material to its financial position or results of operations in future periods.
Reclassifications: Certain amounts in the 1999 and 1998 consolidated financial statements have been reclassified to conform to the 2000 presentation.
NOTE 2 -- RESTRICTIONS ON CASH AND INTEREST-BEARING DEPOSITS WITH FINANCIAL INSTITUTIONS
Irwin Union Bank and Trust Company is required to maintain a reserve balance with the Federal Reserve Bank. The amount of the reserve balance at December 31, 2000 was $1.4 million. Additionally, the Corporation is required to maintain reserve funds in connection with its loan securitization activities. Included in accounts receivable at December 31, 2000 is $672 thousand of these reserve funds.
NOTE 3 -- SALES OF RECEIVABLES
During 2000 and 1999, the Corporation sold residential mortgage loans and lines of credit in securitization transactions resulting in the creation of residual interests which we refer to as interest-only strips and a servicing asset. Interest-only strips totaling $152.6 million and $57.8 million, respectively, are included in trading assets. The Corporation receives annual servicing fees of between 0.5% and 2.0% 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 the Corporation's other assets for failure of debtors to pay when due. The Corporation's retained interests are subordinate to investor's interests. Their value is subject to prepayment, credit, and interest rate risks in the transferred financial assets.
The Corporation recognized pre-tax gains of $ 30.3 million and $ 17.7 million on the securitization of residential mortgage loans and lines of credit during 2000 and 1999, respectively.
HOME EQUITY LOANS AND LINES OF CREDIT
------------------------------------------
Prepayment speed (annual rate)............ 18.69%
Weighted-average life (in years).......... 3.78
Expected credit losses.................... .5% to 4%
Residual cash flows discounted at......... 15%
Interest rates on adjustable notes........ LIBOR plus contractual spread ranging from
12 to 325 basis points
|
The table shown above aggregates each of the secondary market sales the Corporation performed in 2000 into a single set of assumptions. In accounting for the residual assets, the Corporation analyzes its interests on a tranche by tranche basis and performs analysis at the loan level.
At December 31, 2000, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10% and 25% adverse changes in those assumptions are as follows:
HOME EQUITY LOANS AND LINES OF CREDIT
-------------------------------------
($ IN THOUSANDS)
Balance sheet carrying value of retained interests -- fair
value..................................................... $152,614
Weighted-average life (in years)............................ 3.55
Prepayment speed assumptions (annual rate).................. 20.91%
Impact on fair value of 10% adverse change.................. $3,289
Impact on fair value of 25% adverse change.................. 7,369
Expected credit losses (annual rate)........................ 1.82%
Impact on fair value of 10% adverse change.................. $5,818
Impact on fair value of 25% adverse change.................. 13,779
Residual cash flows discount rate (annual).................. 18.90%
Impact on fair value of 10% adverse change.................. $6,831
Impact on fair value of 25% adverse change.................. 16,133
|
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.
Static pool credit losses are calculated by summing the actual and projected future credit losses and dividing them by the original balance of each pool of assets. The amount shown on the next page for each year is calculated based on all securitizations occurring in that year.
HOME EQUITY LOANS AND LINES OF CREDIT SECURITIZED IN
-------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
------- -------- -------- -------- -------- --------
December 31, 2000
Actual to date.............. 2.24% 0.95% 0.97% 0.65% 1.02% 0.40%
Projected................... 0.18 0.11 0.35 0.87 2.74 6.22
Total............... 2.42 1.06 1.32 1.52 3.76 6.62
Original balance securitized
($ in thousands):........... $51,584 $139,996 $229,994 $160,470 $433,606 $781,914
December 31, 1999
Actual to date.............. 2.06% 0.82% 0.69% 0.22% 0.19%
Projected................... 0.31 0.17 0.43 1.38 3.21
Total............... 2.37 0.99 1.12 1.60 3.40
|
The table below summarizes the cash flows received from (paid to) securitization trusts during the year ended December 31, 2000 ($ in thousands):
Proceeds from new securitizations........................... $776,000 Collections used by the trust to purchase new Home Equity Loan Balances............................................. 15,462 Servicing fees received..................................... 6,632 Cash flows received on interest-only strips*................ 12,112 Cash received upon release from reserve accounts............ 400 Purchases of delinquent or foreclosed assets................ (711) Servicing Advances.......................................... (21,359) Reimbursements of servicing advances........................ 18,190 Prepayment interest shortfalls paid out as compensating interest.................................................. (434) |
* Cash flows received on interest-only strips are net of $22.7 million used to
over-collateralize the trusts. During the year 2000, $12.2 million was paid to
over-collateralize the trusts at the time of securitization.
YEAR
ENDED
DECEMBER
31, 2000
AT DECEMBER 31, 2000 -----------
--------------------------------- CREDIT
TOTAL PRINCIPAL DELINQUENT LOSSES
AMOUNT OF PRINCIPAL OVER (NET OF
LOANS 30 DAYS*** RECOVERIES)
--------------- -------------- -----------
Home Equity Loans and Lines of Credit................... $1,822,856 $77,831 $10,326
COMPRISED OF:
Loans owned*:
Loans held for investment............................. $ 4,510 $ 1,809
Loans held for sale or securitization................. 332,739 9,409
Loans securitized, servicing and residual
retained**......................................... 1,285,500 57,805
---------- -------
Total owned portfolio......................... 1,622,749 60,024
---------- -------
Loans managed but not owned:
Loans securitized, servicing retained, residual
sold**............................................. $ 195,865 $ 8,808
Loans and residual sold, servicing retained........... 4,242 --
---------- -------
Total managed but not owned................... 200,107 8,808
---------- -------
Total managed loans........................... $1,822,856 $77,831
========== =======
|
* Loans owned are home equity loans in which the transferor retains a
subordinate interest or retains any risk of loss.
** Represents the principal amount of the loan. Interest-only strips or other retained interests held for securitized assets are excluded from this table because they are recognized separately.
*** Includes bankruptcies, foreclosures and real estate owned.
NOTE 4 -- INVESTMENT SECURITIES
The amortized cost, fair value, and carrying value of investments held at December 31, 2000 are as follows:
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, fair value, and carrying value of investments held at December 31, 1999 are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- ------- --------
(IN THOUSANDS)
HELD-TO-MATURITY:
U.S. Treasury and Government Obligations........ $21,238 $ 2 $ -- $21,240 $21,238
Obligations of states and political
subdivisions.................................. 4,706 7 (74) 4,639 4,706
Mortgage-backed securities...................... 2,981 21 -- 3,002 2,981
------- --- ----- ------- -------
Total held-to-maturity................ 28,925 30 (74) 28,881 28,925
------- --- ----- ------- -------
AVAILABLE-FOR-SALE:
U.S. Treasury and Government Obligations........ 4,988 -- (54) 4,934 4,934
Mortgage-backed securities...................... 3,133 -- (63) 3,070 3,070
Other........................................... 579 -- -- 579 579
------- --- ----- ------- -------
Total available-for-sale.............. 8,700 -- (117) 8,583 8,583
------- --- ----- ------- -------
Total investments..................... $37,625 $30 $(191) $37,464 $37,508
======= === ===== ======= =======
|
The amortized cost and estimated value of debt securities at December 31, 2000, 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................................... $ 2,618 $ 2,617
Due after one year through five years..................... 1,091 1,098
Due after five years through ten years.................... 1,130 1,143
Due after ten years....................................... 20,753 20,803
------- -------
25,592 25,661
Mortgage-backed securities.................................. 2,059 2,058
------- -------
27,651 27,719
------- -------
AVAILABLE-FOR-SALE:
Due in one year or less................................... $ 1,358 $ 1,358
Due after one year through five years..................... 4,992 4,993
------- -------
6,350 6,351
Mortgage-backed securities.................................. 3,103 3,093
------- -------
9,453 9,444
------- -------
Total investments................................. $37,104 $37,163
======= =======
|
Investment securities amounting to $11.7 million were pledged as collateral for borrowings and for other purposes on December 31, 2000. During 2000, there were no sales of "available for sale" investments. During 1999 and 1998, sales of "available for sale" investments with proceeds $3.1 million, and $6.0 million resulted in a gross loss of $1.2 thousand, and a gross gain of $58.9 thousand, respectively. Additionally in 2000, 1999, and 1998, "held-to-maturity" investments totaling $2.9 million, $1.8 million and $2.8 million, respectively, were called. Calls in 2000 and 1998 resulted in a gross loss of $23.1 thousand and a gross gain of $54.3 thousand, respectively. Calls in 1999 were at par.
Loans and leases are summarized as follows:
DECEMBER 31,
----------------------
2000 1999
---------- --------
(IN THOUSANDS)
Commercial, financial and agricultural...................... $ 677,066 $443,985
Real estate-construction.................................... 220,485 121,803
Real estate-mortgage........................................ 122,301 115,265
Consumer.................................................... 56,785 48,936
Direct financing leases
Domestic.................................................. 116,867 3,890
Canadian.................................................. 72,864 --
Unearned income
Domestic.................................................. (21,570) (455)
Canadian.................................................. (9,876) --
---------- --------
Total............................................. $1,234,922 $733,424
========== ========
|
Commercial loans are extended primarily to local regional businesses in the market areas of Irwin Union Bank. The Corporation also provides consumer loans to the customers in those markets. Real estate loans and direct financing leases are extended throughout North America.
Irwin Union Bank, in the normal course of business, makes loans to directors, officers, and organizations and individuals with which they are associated. Such loans amounted to approximately $2.4 million and $2.2 million at December 31, 2000 and 1999, respectively. During 2000, $2.0 million of new loans were made and repayments totaled $1.3 million.
Included in loans and leases and loans held for sale are $1.2 million and $4.0 million at December 31, 2000 and 1999, respectively, of unamortized deferred costs. These costs will be amortized over the life of the loans.
NOTE 6 -- ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses are summarized below:
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Balance at beginning of year................................ $ 8,555 $ 9,888 $ 8,812
Acquisition of Onset Capital................................ $ 1,908 -- --
Provision for loan and lease losses......................... 5,403 4,443 5,995
Reduction due to sale of loans and leases................... -- (3,126) (2,976)
Reduction due to reclassification of loans.................. (16) (922) --
Foreign currency adjustment................................. (19) -- --
Recoveries.................................................. 466 503 559
Charge-offs................................................. (3,168) (2,231) (2,502)
------- ------- -------
Balance at end of year...................................... $13,129 $ 8,555 $ 9,888
======= ======= =======
|
At December 31, 2000, 1999, and 1998, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 and SFAS No. 118 totaled $7.4 million, $0.9 million, and $1.6 million, respectively. These loans had a corresponding valuation allowance of $820 thousand, $204 thousand, and $493 thousand, respectively, based on the fair value of the loans' collateral. The Corporation recognized $521 thousand, $38 thousand, and $103 thousand of interest income on these loans in 2000, 1999, and 1998, respectively.
Included on the consolidated balance sheet at December 31, 2000 and 1999 are $132.6 million and $138.5 million, respectively, of capitalized servicing assets. These amounts relate to the principal balances of loans serviced by the Corporation for investors. There is an active secondary market for servicing assets.
MORTGAGE SERVICING ASSETS:
DECEMBER 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
Beginning Balance........................................... $138,500 $117,129
Additions................................................... 59,281 84,653
Amortization and impairment................................. (39,529) (15,702)
Reduction for servicing sales............................... (25,614) (47,580)
-------- --------
$132,638 $138,500
======== ========
|
The Corporation has established a valuation allowance to record servicing assets at their fair market value. Changes in the allowance are summarized below:
DECEMBER 31,
------------------------------
2000 1999 1998
------- -------- -------
(IN THOUSANDS)
Balance at beginning of year................................ $ 401 $ 11,720 $ 600
Provision................................................... 13,803 (11,319) 11,120
------- -------- -------
Balance at end of year...................................... $14,204 $ 401 $11,720
======= ======== =======
|
At December 31, 2000, key economic assumptions and the sensitivity of the current fair value of mortgage servicing rights to immediate 10 and 20% adverse changes in those assumptions are as follows ($ in millions):
Carrying amount of mortgage servicing rights................ $132.6 Constant prepayment speeds.................................. 10.4% Impact on fair value of 10% adverse change.................. $ 7.4 Impact on fair value of 20% adverse change.................. $ 14.1 Discount Rate............................................... 11.2% Impact on fair value of 10% adverse change.................. $ 5.9 Impact on fair value of 20% adverse change.................. $ 11.5 |
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% 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, interests 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 $121.6 million and $132.6 million of servicing assets related to the mortgage bank at December 31, 2000 and 1999, respectively. The servicing assets at the mortgage bank had a fair value of $165.1 million and $180.5 million at December 31, 2000 and 1999, respectively. The mortgage bank's servicing portfolio balance and interest rate stratification are as follows:
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(IN BILLIONS)
Beginning Portfolio......................................... $10.5 $11.2 $10.7
Add:
Mortgage loan closings.................................... 4.1 5.9 8.9
Deduct:
Sale of servicing rights.................................. (4.1) (4.7) (4.9)
Run-off................................................... (1.3) (1.9) (3.5)
----- ----- -----
Ending Portfolio............................................ $ 9.2 $10.5 $11.2
===== ===== =====
|
NOTE 8 -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31,
-------------------- USEFUL
2000 1999 LIVES
-------- -------- ----------
(IN THOUSANDS)
Land........................................................ $ 1,737 $ 1,734 n/a
Building and leasehold improvements......................... 17,410 15,063 7-40 years
Furniture and equipment..................................... 40,660 33,297 3-10 years
-------- --------
59,807 50,094
Less accumulated depreciation............................... (30,398) (26,726)
-------- --------
Total............................................. $ 29,409 $ 23,368
======== ========
|
NOTE 9 -- LEASE OBLIGATIONS
At December 31, 2000, the Corporation and its subsidiaries leased certain branch locations and office equipment used in its operations.
Operating lease rental expense was $17.8 million in 2000, $16.5 million in 1999, and $13.7 million in 1998.
The future minimum rental payments required under noncancellable operating leases with initial or remaining terms of one year or more are summarized as follows:
YEAR ENDED DECEMBER 31: (IN THOUSANDS)
2001...................................................... $13,279
2002...................................................... $ 8,102
2003...................................................... $ 3,988
2004...................................................... $ 2,935
2005...................................................... $ 1,428
Thereafter................................................ $ 98
-------
Total minimum rental payments..................... $29,830
=======
|
NOTE 10 -- SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
DECEMBER 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
Repurchase agreements & drafts payable related to mortgage
loan closings............................................. $ 64,557 $ 46,796
Commercial paper............................................ 11,346 21,894
Federal funds and Federal Home Loan Bank borrowings......... 173,000 173,000
Lines of credit and other borrowings........................ 226,599 231,413
-------- --------
$475,502 $473,103
======== ========
Weighted average interest rate.............................. 6.79% 5.45%
|
Repurchase agreements at December 31, 2000 and 1999, include $0.1 million and $0.7 million in mortgages sold under agreements to repurchase which are used to fund mortgages prior to sale in the secondary market. These repurchase agreements are collateralized by mortgage loans held for sale.
Drafts payable related to mortgage loan closings totaled $64.5 million and $46.1 million at December 31, 2000 and 1999. 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 $5.7 million and $15.6 million at December 31, 2000 and 1999, respectively, payable to a company owned by a significant shareholder and director of the Corporation.
Federal funds and Federal Home Loan Bank borrowings are collateralized by $153 million and $163 million of mortgage loans held for sale at December 31, 2000 and 1999, respectively.
The Corporation also has lines of credit available of $222 million to fund loan originations and operations. Interest on the lines of credit is payable monthly or quarterly with rates ranging from 6.2% to 7.7%.
NOTE 11 -- LONG-TERM DEBT
Long-term debt at December 31, 2000 consists of a note payable for $29.6 million, net of capitalized fees, with an interest rate of 7.58%. The entire principal of this note will mature on July 7, 2014.
Long-term debt at December 31, 1999 consisted of two notes payable. The first note, scheduled to mature in 2000, allowed the Corporation to borrow up to $10 million with a variable interest rate tied to LIBOR. The second note was for $29.6 million with an interest rate of 7.58% that will mature on July 7, 2014.
NOTE 12 -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST
In January 1997, the Corporation issued $50.0 million of trust preferred
securities through IFC Capital Trust I, a trust created and controlled by the
Corporation. The securities were issued at $25 per share with a cumulative
dividend rate of 9.25%, payable quarterly. They have an initial maturity of 30
years with a 19-year extension option. The securities are callable at par after
five years, or immediately, in the event of an adverse tax development affecting
the Corporation's classification of the securities for federal income tax
purposes. They are not convertible into common stock of the Corporation. The
securities are shown on the balance sheet net of capitalized issuance costs. The
sole assets of IFC Capital Trust I are subordinated debentures of the
Corporation with a principal balance of $51.5 million, an interest rate of
9.25%, and an initial maturity of 30 years with a 19-year extension option.
In November 2000, the Corporation 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, trusts created and controlled by the Corporation. 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 of Capital Trust II are not convertible into common stock of the Corporation. The convertible trust preferred securities of Capital Trust III 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 net of capitalized issuance costs. The sole assets of IFC Capital Trust II and III are subordinated debentures of the Corporation with principal balances of $53.35 million each, interest rates of 10.5% and 8.75%, respectively, and an initial maturity of 30 years.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, Irwin Financial Corporation and its subsidiaries are subject to various claims and other pending and possible legal actions.
Irwin Mortgage Corporation (IMC) is a defendant in a class action lawsuit relating to IMC's payment of broker fees to mortgage brokers. The litigation is pending on appeal before the U.S. Court of Appeals for the 11th Circuit for review of the class certification. Because the case is in the early stages of litigation, the Corporation is unable at this time to form a reasonable estimate of the amount of potential loss, if any, that the Corporation could suffer.
Irwin Leasing Corporation (formerly Affiliated Capital Corp.), Irwin Equipment Finance Corporation and Irwin Financial Corporation (collectively, "the Irwin Companies") are defendants in an action relating to alleged misrepresentations made to obtain Medicare reimbursement for treatments performed with medical equipment financed by the Irwin Companies. The Irwin Companies filed a motion to dismiss on February 12, 2001 in the U.S. District Court for the Middle District of Pennsylvania. Because the case is in the early stages of litigation, the Corporation is unable at this time to form a reasonable estimate of the amount of potential loss, if any, that the Corporation could suffer.
NOTE 14 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business the Corporation is party to certain financial instruments with off-balance sheet risk to meet the financial needs of its customers or to reduce its own exposure to fluctuations in market rates. These financial instruments include loan commitments, standby letters of credit, forward commitments relating to mortgage banking activities, financial futures contracts, forward foreign exchange contracts, and interest rate swaps. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the consolidated balance sheet.
The Corporation's 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, 2000, were $706.7 million. These loan commitments include $551.7 million of floating rate loan commitments and $155.0 million of fixed rate loan commitments related to commercial and mortgage banking activities. The Corporation had approximately $14.6 million and $13.6 million in irrevocable standby letters of credit outstanding at December 31, 2000 and 1999, respectively.
Forward commitments are used in mortgage banking activities to offset the interest rate risk associated with mortgage loan commitments and loans held for sale. The contractual amount of forward contracts does not represent exposure to credit loss. Forward commitments related to mortgage banking activities were $308.2 million and $255.3 million at December 31, 2000 and 1999, respectively.
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, 2000, the Corporations's servicing asset derivative instruments had a positive fair value of less than $.1 million on a notional amount of $200.0 million.
Derivative instruments are also used to protect the value of interest-only strips. Interest rate caps are used when interest on securitized loans is received at a fixed rate paid to mortgage-backed security holders at a variable rate of interest. As interest rates change, the value of the interest-only strips and interest rate caps move in opposite directions. At December 31, 2000, the carrying value of the interest rate caps was $.19 million and the notional amount was $22.7 million.
Since the July 2000 acquisition of Onset Capital Corporation, a Canadian leasing company, the Corporation has begun entering into foreign currency contracts to protect the value of intercompany loans made to Onset against changes in the exchange rate. The Corporation had a notional amount of $15.0 million in forward contracts outstanding as of December 31, 2000.
The Canadian leasing company uses interest rate swaps and swaptions to neutralize repricing risk associated with its funding source. At December 31, 2000, the company had two interest rate swaps and five swaptions outstanding to hedge the $32.8 million of fixed rate lease assets which are funded with a variable rate source. The notional value of the interest rate swaps amortizes on a schedule that is designed to match the principal pay down of the loan portfolio. Onset can reduce the notional value of the swaps by up to 10% if prepayments on the loans are greater than originally anticipated. The swaptions exist to allow the company the flexibility to switch its interest rate swaps from receiving a floating rate of interest to receiving a fixed rate of interest. Onset would exercise this option if it chose to switch the underlying funding source from a floating rate source to a fixed rate source.
NOTE 15 -- REGULATORY MATTERS
The Corporation and its bank subsidiaries, Irwin Union Bank (IUB) and Irwin Union Bank FSB (IUBFSB), are subject to various regulatory capital requirements administered by the federal and state banking agencies. Under capital adequacy guidelines, the Corporation, IUB, and IUBFSB must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's, IUB's, and IUBFSB's 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 the Corporation, IUB, and IUBFSB to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital to average assets (as defined). Management believes, as of December 31, 2000, that the Corporation, IUB, and IUBFSB met all capital adequacy requirements to which they are subject.
As of December 31, 2000, the Corporation, IUB, and IUBFSB were categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Corporation, IUB, and IUBFSB must significantly exceed minimum total risk-based, Tier I risk-based, and Tier I capital to average assets ratios. There have been no conditions or events that management believes have changed this category.
ADEQUATELY WELL
ACTUAL CAPITALIZED CAPITALIZED
---------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(IN THOUSANDS)
AS OF DECEMBER 31, 2000:
Total Capital (to Risk-Weighted Assets):
Irwin Financial Corporation................ $384,144 13.6% $226,153 8.0% $282,691 10.0%
Irwin Union Bank........................... 283,611 10.3 220,180 8.0 275,225 10.0
Irwin Union Bank FSB....................... 6,636 105.9 501 8.0 627 10.0
Tier I Capital (to Risk-Weighted Assets):
Irwin Financial Corporation................ 250,825 8.9 113,076 4.0 169,614 6.0
Irwin Union Bank........................... 271,037 9.9 110,090 4.0 165,135 6.0
Irwin Union Bank FSB....................... 6,636 105.9 N/A 376 6.0
Tier I Capital (to Average Assets):
Irwin Financial Corporation................ 250,825 12.4 80,823 4.0 101,028 5.0
Irwin Union Bank........................... 271,037 12.7 85,600 4.0 106,999 5.0
Core Capital (to Adjusted Tangible Assets)
Irwin Union Bank FSB....................... 12,738 51.9 510 4.0 637 5.0
Tangible Capital (to Tangible Assets)
Irwin Union Bank FSB....................... 12,738 51.9 191 1.5 N/A
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........................... 144,305 10.0 115,295 8.0 144,119 10.0
Tier I Capital (to Risk-Weighted Assets):
Irwin Financial Corporation................ 207,627 11.4 72,945 4.0 109,418 6.0
Irwin Union Bank........................... 136,864 9.5 57,647 4.0 86,471 6.0
Tier I Capital (to Average Assets):
Irwin Financial Corporation................ 207,627 12.8 65,046 4.0 81,307 5.0
Irwin Union Bank........................... 136,864 11.0 50,349 4.0 62,936 5.0
AS OF DECEMBER 31, 1998:
Total Capital (to Risk-Weighted Assets):
Irwin Financial Corporation................ $203,311 12.3% $132,742 8.0% $165,927 10.0%
Irwin Union Bank........................... 111,935 10.1 88,712 8.0 110,890 10.0
Tier I Capital (to Risk-Weighted Assets):
Irwin Financial Corporation................ 191,806 11.6 66,371 4.0 99,556 6.0
Irwin Union Bank........................... 105,215 9.5 44,356 4.0 66,534 6.0
Tier I Capital (to Average Assets)
Irwin Financial Corporation................ 191,806 10.5 73,032 4.0 91,290 5.0
Irwin Union Bank........................... 105,215 7.9 53,162 4.0 66,452 5.0
|
NOTE 16 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for the Corporation's financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values.
Interest-bearing deposits with financial institutions, 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 which 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.
The estimated fair values of the Corporation's financial instruments at December 31, are as follows:
2000 1999
---------------------------- --------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
AMOUNT VALUE AMOUNT VALUE
---------- -------------- -------- --------------
(IN THOUSANDS)
FINANCIAL ASSETS:
Cash and cash equivalents.................... $ 83,493 $ 83,493 $ 47,215 $ 47,215
Interest-bearing deposits with financial
institutions............................... 36,400 36,442 26,785 26,764
Trading assets............................... 152,805 152,805 59,025 59,025
Investment securities........................ 37,095 37,163 37,508 37,464
Loans held for sale.......................... 579,788 579,788 508,997 522,033
Loans, net of unearned discount.............. 1,078,604 1,145,129 729,534 771,948
FINANCIAL LIABILITIES:
Deposits..................................... 1,443,330 1,452,024 870,318 710,762
Short-term borrowings........................ 475,502 478,342 473,103 473,785
Long-term debt............................... 29,608 30,597 29,784 28,112
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust... 147,167 157,681 50,000 48,389
Forward contract commitments................. $ -- $ 704 $ -- $ 860
|
The fair value estimates consider relevant market information when available. Because no market exists for a significant portion of the Corporation's financial instruments, fair value estimates are determined 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 the Corporation's long-term relationships with depositors and the benefit that results from the low cost funding provided by deposit liabilities. In addition, significant assets which were not considered financial instruments and were therefore not a part of the fair value estimates include lease receivables, and premises and equipment.
NOTE 17 -- SHAREHOLDERS' EQUITY
The Board of Directors of the Corporation approved a two-for-one stock split May 27, 1998. Previously reported shares and per share data have been changed to reflect these splits.
In 2000, the Corporation awarded 21,136 shares of common stock in restricted stock grants at a weighted average fair value of $15.14.
The Corporation has a stock plan to compensate Directors of the Corporation with the Corporation's common stock, if so elected, in lieu of cash for their annual retainer and meeting fees. The number of shares issued under the plan is based on the current market value of the Corporation's common stock. In 2000 and 1999, respectively, the Corporation granted 8,678 and 23,153 shares under the 1999 plan at a weighted average fair value of $19.63. The Corporation also has an employee stock purchase plan for all qualified employees. The plan provides for employees to purchase common stock through payroll deduction at approximately 85% of the current market value.
The Corporation has three stock option plans (established in 1997, 1992, and 1986) which provide for the issuance of 4,280,000 shares of non-qualified and incentive stock options. The exercise price of each option, which has a ten-year life and a vesting period of four years beginning the year granted, is equal to the market price of the Corporation's stock on the grant date. Vested outstanding stock options have been considered as common stock equivalents in the computation of diluted earnings per share.
Activity in the above stock option plans for 2000, 1999, and 1998 is summarized as follows (adjusted for the two-for-one stock split on May 27, 1998):
2000 1999 1998
-------------------------- -------------------------- --------------------------
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...................... 1,328,090 $12.50 1,257,050 $ 9.68 1,231,220 $ 7.39
Granted....................... 351,934 16.67 216,155 24.02 133,710 27.23
Exercised..................... (32,400) 5.56 (137,600) 4.19 (103,880) 4.74
Canceled...................... (30,384) 21.56 (7,515) 24.59 (4,000) 19.42
--------- --------- ---------
Outstanding at the end of the
year.......................... 1,617,240 13.38 1,328,090 12.50 1,257,050 9.68
========= ========= =========
Exercisable at the end of the
year.......................... 1,210,356 $11.30 1,045,659 $ 9.64 1,014,420 $ 7.47
========= ========= =========
Available for future grants..... 1,051,284 1,380,634 1,560,878
========= ========= =========
|
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AS OF 12/31/2000 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/2000 EXERCISE PRICE
----------------------------------- ---------------- ---------------- -------------- ---------------- --------------
$ 1.33 - $ 5.53.................... 213,200 1.85 $ 4.31 213,200 $ 4.31
$ 5.69 - $ 5.69.................... 207,800 3.27 $ 5.69 207,800 $ 5.69
$ 7.84 - $ 7.84.................... 177,400 4.32 $ 7.84 177,400 $ 7.84
$10.66 - $10.66.................... 180,200 5.30 $10.66 180,200 $10.66
$13.69 - $13.69.................... 171,620 6.33 $13.69 171,620 $13.69
$14.13 - $16.50.................... 56,600 9.48 $15.19 14,226 $15.19
$16.97 - $16.97.................... 287,519 9.32 $16.97 72,008 $16.97
$17.03 - $23.88.................... 31,682 7.67 $22.31 3,550 $19.71
$24.09 - $24.09.................... 170,978 8.33 $24.09 86,006 $24.09
$24.50 - $28.56.................... 120,241 7.50 $27.49 84,346 $27.49
--------- ---- ------ --------- ------
$ 1.33 - $28.56.................... 1,617,240 5.98 $13.38 1,210,356 $11.30
|
The Corporation has not recognized compensation cost for the three non-qualified and incentive stock option plans or the Employee Stock Purchase Plan. Had compensation cost been determined based on the fair value at the grant dates, the Corporation's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Net income
As reported............................................... $35,666 $33,156 $30,503
Pro forma................................................. 34,365 32,176 29,746
Basic earnings per share
As reported............................................... 1.70 1.54 1.40
Pro forma................................................. 1.64 1.49 1.37
Diluted earnings per share
As reported............................................... 1.67 1.51 1.38
Pro forma................................................. 1.61 1.49 1.34
|
The fair value of each option was estimated to be $9.32, $10.97, and $12.25 on the date of the grant using the binomial option-pricing model with the following assumptions for 2000, 1999, and 1998, respectively: risk free interest rates of 6.13%, 5.20%, and 5.85%; dividend yield of 1.00% for 2000, 0.83% for 1999, and 1.00% for 1998; volatility of .400 for 2000, .287 for 1999, and .250 for 1998, and a weighted average expected life of nine years for all three years.
NOTE 18 -- EARNINGS PER SHARE
Earnings per share calculations are summarized as follows:
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)
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
======= ====== =======
1998
Net income................................. $30,503 $ -- $30,503
Shares..................................... 21,732 407 N/A N/A 22,139
------- ------ -------
Per-Share Amount........................... $ 1.40 $(0.02) $ 1.38
======= ====== =======
|
In 2000, 535,474 shares of stock options were not included in the dilutive earnings per share calculation because they were antidilutive.
Income tax expense is summarized as follows:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
CURRENT:
Federal................................................... $ 1,374 $ 3,251 $ 6,963
State..................................................... 600 687 2,048
------- ------- -------
1,974 3,938 9,011
------- ------- -------
DEFERRED:
Federal................................................... 18,000 14,580 9,256
State..................................................... 3,702 963 2,087
------- ------- -------
21,702 15,543 11,343
------- ------- -------
INCOME TAX EXPENSE:
Federal................................................... 19,374 17,831 16,219
State..................................................... 4,302 1,650 4,135
------- ------- -------
$23,676 $19,481 $20,354
======= ======= =======
|
The Corporation's net deferred tax liability, which is included in other liabilities on the consolidated balance sheet, consisted of the following:
DECEMBER 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
Mortgage servicing.......................................... $(48,912) $(52,464)
Deferred securitization income.............................. (34,438) (9,992)
Loan and lease loss reserve................................. 4,958 6,555
Deferred origination fees and costs......................... 1,786 (1,731)
Deferred compensation....................................... 5,097 4,069
Retirement benefits......................................... 1,155 1,018
Fixed assets................................................ (1,919) (1,566)
Other, net.................................................. 179 (61)
-------- --------
Net deferred tax liability.................................. $(72,094) $(54,172)
======== ========
|
A reconciliation of income tax expense to the amount computed by applying the statutory income tax rate to income before income taxes is summarized as follows:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Income taxes computed at the statutory rate................. $20,770 $18,423 $17,800
Increase (decrease) resulting from:
Nontaxable interest from investment securities and
loans.................................................. (136) (410) (484)
State franchise tax, net of federal benefit............... 2,796 2,121 2,810
Change in deferred tax asset or liability resulting from
tax rate change........................................ -- (1,055) --
Other items -- net........................................ 246 402 228
------- ------- -------
$23,676 $19,481 $20,354
======= ======= =======
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NOTE 20 -- EMPLOYEE RETIREMENT PLANS
The Corporation has a contributory retirement and savings plan which covers all employees and meets the requirements of Section 401(k) of the Internal Revenue Code. Employees may contribute up to 14% of their compensation to the plan which is matched by 60% by the Corporation up to 5% of the employee's compensations.
The Corporation matching vests 20% after one year, 40% after two years, 60% after three years, 80% after four years, and 100% after 5 years. The Corporation's expense to match employee contributions for the years ended December 31, 2000, 1999 and 1998 was approximately $1.1 million, $1.0 million and $1.0 million, respectively.
The Corporation has a defined benefit plan covering eligible employees of adopting subsidiaries. The benefits are based on years of service and the employees' compensation during their employment. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
Plan assets are primarily invested in corporate and U.S. bonds, mutual funds and cash equivalents. The mutual funds are invested primarily in common stocks and bonds.
At December 31, 2000, the Corporation recognized a minimum pension liability equal to the excess of the accumulated benefit obligation over plan assets. A corresponding amount is recognized as either an intangible asset, to the extent of previously unrecognized prior service cost, or a reduction of shareholders' equity. The Corporation recorded additional liabilities of $800,000 as of December 31, 2000, an intangible asset of $156,000, and a shareholders' equity reduction of $644,000, net of income taxes of $257,000.
The following table sets forth amounts recognized in the Corporation's balance sheet:
DECEMBER 31,
------------------
2000 1999
------- -------
(IN THOUSANDS)
Funded status............................................... $(2,775) $ 1,071
Unrecognized prior service cost............................. 156 181
Unrecognized net actuarial loss............................. 2,578 (1,380)
Adjustment for minimum liability............................ (800) --
------- -------
Accrued pension cost........................................ $ (841) $ (128)
======= =======
Weighted average assumptions:
Discount rate............................................. 7.25% 7.75%
Return on plan assets..................................... 8.50 9.00
Rate of compensation increase............................. 3.83 4.50
|
A reconciliation of the change in projected benefit obligation and plan assets is presented below:
2000 1999
------- -------
(IN THOUSANDS)
Benefit obligation at January 1............................. $10,531 $10,183
Service cost................................................ 623 627
Interest cost............................................... 819 713
Amendments.................................................. -- 70
Actuarial loss/(gain)....................................... 1,811 (779)
Benefits paid............................................... (343) (283)
------- -------
Benefit obligation at December 31........................... $13,441 $10,531
======= =======
Fair value plan assets at January 1......................... $11,602 $10,214
Return on plan assets....................................... (1,135) 1,671
Benefits paid............................................... (343) (283)
Employer contributions...................................... 542 --
------- -------
Fair value plan assets at December 31....................... $10,666 $11,602
======= =======
|
The net pension cost for 2000, 1999 and 1998 included the following components:
2000 1999 1998
------- ----- -----
(IN THOUSANDS)
Service cost................................................ $ 650 $ 627 $ 568
Interest cost............................................... 819 713 622
Return on plan assets....................................... (1,040) (906) (863)
Amortization of prior service cost.......................... 25 25 20
------- ----- -----
Net pension cost............................................ $ 454 $ 459 $ 347
======= ===== =====
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NOTE 21 -- INDUSTRY SEGMENT INFORMATION
The Corporation has five principal segments that provide a broad range of financial services throughout North America. The Mortgage Banking line of business originates, sells, and services residential first mortgage loans. The Home Equity Lending line of business originates and services home equity loans. The Commercial Banking line of business provides commercial banking services. The Equipment Leasing line of business leases commercial equipment. The Venture Capital line of business invests in early-stage companies that could transform the way financial services are delivered. The Corporation's other segment primarily includes the parent company and eliminations.
The accounting policies of each segment are the same as those described in the "Summary of Significant Accounting Policies." Prior to 2000, interest expense related to interest-bearing capital obligations of the Corporation was allocated to the Parent Company. Starting April 1, 2000, the Corporation began allocating these expenses to the subsidiaries. Below is a summary of each segment's revenues, net income, and assets for 2000, 1999, and 1998:
MORTGAGE HOME EQUITY COMMERCIAL EQUIPMENT VENTURE
BANKING LENDING BANKING LEASING CAPITAL OTHER CONSOLIDATED
---------- ----------- ---------- --------- ------- -------- ------------
(IN THOUSANDS)
2000
Net interest income.............. $ 18,477 $ 36,921 $ 35,774 $ 1,737 $ (597) $ (6,719) $ 85,593
Intersegment interest............ (2,719) (1,789) (295) (54) (1) 4,858 --
Other revenue.................... 125,174 68,315 11,808 799 5,146 469 211,711
Intersegment revenues............ -- -- 166 -- 420 (586) --
---------- -------- ---------- -------- ------- -------- ----------
Total net revenues........... 140,932 103,447 47,453 2,482 4,968 (1,978) 297,304
Other expense.................... 117,188 71,479 33,327 5,024 431 10,513 237,962
Intersegment expenses............ 2,199 1,144 2,446 21 -- (5,810) --
---------- -------- ---------- -------- ------- -------- ----------
Net income before taxes...... 21,545 30,824 11,680 (2,563) 4,537 (6,681) 59,342
Income taxes..................... 8,539 12,330 4,590 -- 1,814 (3,597) 23,676
---------- -------- ---------- -------- ------- -------- ----------
Net income................... 13,006 18,494 7,090 (2,563) 2,723 (3,084) 35,666
========== ======== ========== ======== ======= ======== ==========
Assets at December 31............ $ 523,920 $550,526 $1,167,559 $159,773 $15,198 $ 5,453 $2,422,429
========== ======== ========== ======== ======= ======== ==========
1999
Net interest income.............. $ 22,984 $ 20,276 $ 29,114 $ -- $ (109) $ (9,587) $ 62,678
Intersegment interest............ (3,237) (1,424) -- (18) -- 4,679 --
Other revenue.................... 161,020 31,714 11,622 -- 1,306 (1,592) 204,070
Intersegment revenues............ -- -- 175 -- -- (175) --
---------- -------- ---------- -------- ------- -------- ----------
Total net revenues........... 180,767 50,566 40,911 (18) 1,197 (6,675) 266,748
Other expense.................... 142,439 34,672 28,024 825 78 8,073 214,111
Intersegment expenses............ 2,476 885 1,056 -- -- (4,417) --
---------- -------- ---------- -------- ------- -------- ----------
Net income before taxes...... 35,852 15,009 11,831 (843) 1,119 (10,331) 52,637
Income taxes..................... 12,789 2,403 4,486 -- 463 (660) 19,481
---------- -------- ---------- -------- ------- -------- ----------
Net income................... 23,063 12,606 7,345 (843) 656 (9,671) 33,156
========== ======== ========== ======== ======= ======== ==========
Assets at December 31............ $ 549,966 $339,640 $ 789,560 $ 543 $ 8,096 $ (6,958) $1,680,847
========== ======== ========== ======== ======= ======== ==========
|
MORTGAGE HOME EQUITY COMMERCIAL EQUIPMENT VENTURE
BANKING LENDING BANKING LEASING CAPITAL OTHER CONSOLIDATED
---------- ----------- ---------- --------- ------- -------- ------------
(IN THOUSANDS)
1998
Net interest income.............. $ 27,245 $ 6,848 $ 23,279 $ (4,166) $ 53,206
Intersegment interest............ (2,722) (1,866) -- 4,588 --
Other revenue.................... 182,715 18,959 11,557 385 213,616
Gain on sale of leases........... -- -- -- 5,241 5,241
Intersegment revenues............ -- -- 155 (155) --
---------- -------- ---------- -------- ----------
Total net revenues........... 207,238 23,941 34,991 5,893 272,063
Other expense.................... 157,382 30,486 23,674 9,664 221,206
Intersegment expenses............ 1,810 123 841 (2,774) --
---------- -------- ---------- -------- ----------
Net income before taxes...... 48,046 (6,668) 10,476 (997) 50,857
Income taxes..................... 19,193 -- 3,967 (2,806) 20,354
---------- -------- ---------- -------- ----------
Net income................... 28,853 (6,668) 6,509 N/A N/A 1,809 30,503
========== ======== ========== ======== ======= ======== ==========
Assets at December 31............ $1,020,249 $311,974 $ 607,992 N/A N/A $148,309 $1,946,179
========== ======== ========== ======== ======= ======== ==========
|
NOTE 22 -- IRWIN FINANCIAL CORPORATION (PARENT ONLY) FINANCIAL INFORMATION
The condensed financial statements of the parent company as of December 31, 2000 and 1999, and for the three years ended December 31, 2000 are presented below:
DECEMBER 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
ASSETS:
Cash and short-term investments........................... $ 1,127 $ 643
Investment in bank subsidiary............................. 277,571 137,816
Investments in non-bank subsidiaries...................... 41,344 91,357
Loans to bank subsidiaries................................ 30,000 --
Loans to non-bank subsidiaries............................ 48,278 85,523
Other assets.............................................. 6,464 11,978
-------- --------
$404,784 $327,317
======== ========
LIABILITIES:
Short-term borrowings..................................... $ 34,346 $ 80,744
Long-term debt............................................ 181,522 79,179
Other liabilities......................................... (1,009) 8,098
-------- --------
214,859 168,021
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock........................................... 1,386 --
Common stock.............................................. 29,965 29,965
Other shareholders' equity................................ 158,574 129,331
-------- --------
189,925 159,296
-------- --------
$404,784 $327,317
======== ========
|
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
INCOME
Dividends from non-bank subsidiaries...................... $ 87,269 $ 15,500 $ 18,331
Dividends from bank subsidiary............................ 37,153 14,147 1,000
Interest income........................................... 4,949 4,800 5,348
Other..................................................... 6,635 3,200 3,002
-------- -------- --------
136,006 37,647 27,681
-------- -------- --------
EXPENSES
Interest expense.......................................... 12,643 9,891 7,897
Salaries and benefits..................................... 7,906 5,398 4,548
Other..................................................... 2,933 2,672 1,984
-------- -------- --------
23,482 17,961 14,429
-------- -------- --------
Income before income taxes and equity in undistributed
income of subsidiaries.................................... 112,524 19,686 13,252
Income taxes(credits), less amounts charged to
subsidiaries.............................................. (5,966) (10,482) (14,079)
-------- -------- --------
118,490 30,168 27,331
Equity in undistributed income of subsidiaries.............. (82,824) 2,988 3,172
-------- -------- --------
Net income........................................ $ 35,666 $ 33,156 $ 30,503
======== ======== ========
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FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- -------- --------
(IN THOUSANDS)
Net income.................................................. $ 35,666 $ 33,156 $ 30,503
Adjustments to reconcile net income to cash provided by
operating activities:
Equity in undistributed income of subsidiaries............ 82,824 (2,988) (3,172)
Depreciation and amortization............................. 505 408 209
Increase (decrease) in taxes payable...................... (1,102) 4,695 (17,244)
(Decrease) increase in interest receivable................ (122) (159) 217
Increase (decrease) in interest payable................... 986 763 (4)
Net change in other assets and other liabilities.......... (4,077) 4,322 1,529
--------- -------- --------
Net cash provided by operating activities......... 114,680 40,197 12,038
--------- -------- --------
Lending and investing activities:
Net decrease (increase) in loans to subsidiaries.......... 7,245 (25,302) 37,467
Investments in subsidiaries............................... (172,409) (39,122) (48,550)
Net sales (additions) to premises and equipment........... 314 286 (1,381)
--------- -------- --------
Net cash used by lending and investing
activities...................................... (164,850) (64,138) (12,464)
--------- -------- --------
Financing activities:
Net increase (decrease) in borrowings..................... (46,398) 13,778 14,791
Proceeds from long-term debt.............................. 102,260 30,000 --
Issuance of preferred stock............................... 1,386 -- --
Purchase of treasury stock................................ (3,414) (18,314) (12,593)
Proceeds from sale of stock for employee benefit plans.... 1,866 2,608 1,756
Dividends paid............................................ (5,038) (4,287) (3,473)
--------- -------- --------
Net cash provided by financing activities......... 50,662 23,785 481
--------- -------- --------
Net increase (decrease) in cash and cash equivalents...... 492 (156) 55
Effect of exchange rate changes on cash................... (8) -- --
Cash and cash equivalents at beginning of year............ 643 799 744
--------- -------- --------
Cash and cash equivalents at end of year.................. $ 1,127 $ 643 $ 799
========= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest............................................... $ 11,657 $ 9,056 $ 7,503
========= ======== ========
Income taxes........................................... $ 13,769 $ 14,328 $ 18,947
========= ======== ========
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In connection with the audits of the Corporation for the two most recent fiscal years ended December 31, 2000, the Corporation has not changed its independent certified public accountants nor have there been any disagreements (as defined in Instruction 4 to Item 304 of Regulation S-K) with such accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
The information contained in the proxy statement of the Corporation for the 2001 Annual Meeting of Shareholders under the caption "Election of Directors" on pages 4 through 7, inclusive, is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the proxy statement of the Corporation for the 2001 Annual Meeting of Shareholders under the captions "Election of Directors -- Outside Director Compensation," "Executive Compensation and Other Information" and "Board Compensation Committee Report on Executive Compensation" on pages 9 through 19, inclusive, is incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the proxy statement of the Corporation for the 2001 Annual Meeting of Shareholders under the captions "Voting Securities and Principal Holders" and "Security Ownership of Management" on pages 2 and 3, inclusive, is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the proxy statement of the Corporation for the 2001 Annual Meeting of Shareholders under the caption "Interest of Management in Certain Transactions" on pages 20 and 21, inclusive, is incorporated herein by reference in response to this item.
ITEM 14.
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3(a) Restated Articles of Incorporation of Irwin Financial
Corporation.
3(b) Articles of Amendment to Restated Articles of Incorporation
of Irwin Financial Corporation dated March 2, 2001.
3(c) Code of By-Laws of Irwin Financial Corporation as amended to
date.
4(a) Specimen stock certificate.(Incorporated by reference to
Exhibit 4(a) to Form 10-K Report for year ended December 31,
1994, File No. 0-06835.)
4(b) Certain instruments defining the rights of the holders of
long-term debt of the Corporation and certain of its
subsidiaries, none of which authorize a total amount of
indebtedness in excess of 10% of the total assets of the
Corporation and its subsidiaries on a consolidated basis,
have not been filed as Exhibits. The Corporation hereby
agrees to furnish a copy of any of these agreements to the
Commission upon request.
4(c) Rights Agreement dated as of March 1, 2001, between Irwin
Financial Corporation and Irwin Union Bank and Trust
Company. (Incorporated by reference to Exhibit 4.1 to Form
8-A filed March 2, 2001, File No. 0-06835.)
10(a) *Amended 1986 Stock Option Plan. (Incorporated by reference
to Exhibit 10(b) to Form 10-K Report for year ended December
31, 1991, File No. 0-06835.)
10(b) *Amended and Restated Management Bonus Plan. (Incorporated
by reference to Exhibit 19(a) to Form 10-K Report for year
ended December 31, 1986, File No. 0-06835.)
10(c) *Long-Term Management Performance Plan. (Incorporated by
reference to Exhibit 10(d) to Form 10-K Report for year
ended December 31, 1986, File No. 0-06835.)
10(d) *Long-Term Incentive Plan - Summary of Terms. (Incorporated
by reference to Exhibit 10(d) to Form 10-K Report for year
ended December 31, 1986, File No. 0-06835.)
10(e) *Irwin Financial Corporation Employees' Stock Purchase Plan.
(Incorporated by reference to Exhibit 10(d) to Form 10-K
Report for year ended December 31, 1991, File No. 0-06835.)
10(f) *Employee Stock Purchase Plan II. (Incorporated by reference
to Exhibit 10(f) to Form 10-K Report for year ended December
31, 1994, File No. 0-06835.)
10(g) *Amended Irwin Financial Corporation Outside Directors
Restricted Stock Compensation Plan. (Incorporated by
reference to Exhibit 10(g) to Form 10-K Report for year
ended December 31, 1991, File No. 0-06835.)
10(h) *Irwin Financial Corporation 1992 Stock Option Plan.
(Incorporated by reference to Exhibit 10(h) to Form 10-K
Report for year ended December 31, 1992, File No. 0-06835.)
10(i) *Amended Irwin Financial Corporation Outside Director
Restricted Stock Compensation Plan. (Incorporated by
reference to Exhibit 10(i) to Form 10-K Report for year
ended December 31, 1995, File No. 0-06835.)
|
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10(j) *Inland Mortgage Corporation Long-Term Incentive Plan.
(Incorporated by reference to Exhibit 10(j) to Form 10-K
Report for year ended December 31, 1996, File No. 0-06835.)
10(k) *Irwin Financial Corporation 1997 Stock Option Plan.
(Incorporated by reference to Exhibit 10 to Form 10-Q Report
for quarter ended June 30, 1997, File No. 0-06835.)
10(l) *Amendment to Irwin Financial Corporation 1997 Stock Option
Plan. (Incorporated by reference to Exhibit 10(i) to Form
10-Q Report for quarter ended June 30, 1997, File No.
0-06835.)
10(m) *Employee Stock Purchase Plan III. (Incorporated by
reference to Exhibit 10(a) to Form 10-Q Report for quarter
ended June 30, 1999, File No. 0-06835.)
10(n) *1999 Outside Director Restricted Stock Compensation Plan.
(Incorporated by reference to Exhibit 10(b) to Form 10-Q
Report for quarter ended June 30, 1999, File No. 0-06835.)
11(a) Computation of Earnings Per Share.
12(a) Computation of Ratio of Earnings to Fixed Charges.
21(a) Subsidiaries of the Corporation.
23(a) Consent of Independent Accountants.
|
* Indicates management contract or compensatory plan or arrangement.
A report on Form 8-K dated October 19, 2000, was filed with the Commission to announce third quarter earnings.
A report on Form 8-K dated October 26, 2000, was filed with the Commission to announce the promotion of Robert H. Griffith to Executive Vice President and Chief Operating Officer of Irwin Mortgage Corporation, with a transition to President in the first quarter of 2001.
A report on Form 8-K dated November 27, 2000, was filed with the Commission to announce the fourth quarter dividend.
A report on Form 8-K dated November 27, 2000, was filed with the Commission to announce the sale of trust preferred securities.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the Undersigned, thereunto duly authorized.
By: /s/ WILLIAM I. MILLER
---------------------------------------
William I. Miller,
Chairman of the Board
Date: March 22, 2001
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated.
CAPACITY WITH
SIGNATURE REGISTRANT DATE
--------- ------------- ----
/s/ SALLY A. DEAN Director March 22, 2001
-----------------------------------------------------
Sally A. Dean
/s/ DAVID W. GOODRICH Director March 22, 2001
-----------------------------------------------------
David W. Goodrich
/s/ JOHN T. HACKETT Director March 22, 2001
-----------------------------------------------------
John T. Hackett
/s/ WILLIAM H. KLING Director March 22, 2001
-----------------------------------------------------
William H. Kling
/s/ BRENDA J. LAUDERBACK Director March 22, 2001
-----------------------------------------------------
Brenda J. Lauderback
/s/ JOHN C. MCGINTY, JR. Director March 22, 2001
-----------------------------------------------------
John C. McGinty, Jr.
/s/ WILLIAM I. MILLER Director, Chairman of the Board March 22, 2001
----------------------------------------------------- (Principal Executive Officer)
William I. Miller
/s/ JOHN A. NASH Director, Chairman of the March 22, 2001
----------------------------------------------------- Executive Committee
John A. Nash
/s/ LANCE R. ODDEN Director March 22, 2001
-----------------------------------------------------
Lance R. Odden
/s/ THEODORE M. SOLSO Director March 22, 2001
-----------------------------------------------------
Theodore M. Solso
/s/ GREGORY F. EHLINGER Senior Vice President March 22, 2001
----------------------------------------------------- (Principal Financial Officer)
Gregory F. Ehlinger
/s/ JODY A. LITTRELL Vice President and Controller March 22, 2001
----------------------------------------------------- (Principal Accounting
Jody A. Littrell Officer)
|
EXHIBIT 3(a)
Irwin Financial Corporation, existing pursuant to the Indiana Business Corporation Law, desiring to give notice of corporate action effectuating the restatement of its Articles of Incorporation, sets forth the following:
Irwin Financial Corporation (the "Corporation") was incorporated on May 31, 1972 under the name Irwin Union Corporation. On August 21, 1990, the name was changed to Irwin Financial Corporation. The Articles of Incorporation be and the same are hereby restated and amended to read in its entirety as follows:
The purposes for which the Corporation is formed are: The transaction of any and all lawful business for which corporations may be incorporated under the Act, including by way of illustration and not of limitation, the following:
2.01 To Act as Holding Company. To purchase or otherwise acquire, own and hold the stock of other corporations and equity interests in other business entities and to direct the operations of other corporations through the ownership of stock therein and to direct the operations of other business entities through the ownership of equity interests therein.
2.02 Capacity to Act. To have the capacity to act possessed by natural persons, but to have authority to perform only such acts as are necessary, convenient or expedient to accomplish the purposes for which it is formed and such as are not repugnant to law.
2.03 To Deal in Securities. To acquire, by purchase, subscription or otherwise and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in and with any and all securities (as hereinafter defined) issued or created by any corporation, firm, organization, association or other entity, public or private, whether formed under the laws of the United States of America or any state or commonwealth thereof, or any foreign country, or by any agency, subdivision, territory, dependency, possession or municipality of any of the foregoing, and as owner thereof to possess and exercise all of the rights, powers and privileges of ownership, including the right to execute consents and vote thereon. The term "securities" as used herein shall mean any and all notes, stocks, treasury stocks, bonds, debentures, evidences of indebtedness, certificates of interest or participation in any profit-sharing agreement, collateral trust certificates, pre-organization certificates or subscriptions, transferable shares, investment contracts, voting trust certificates, certificates of deposit for a security, fractional undivided interests in oil, gas or other mineral rights or, in general, any interests or instruments commonly known as securities or any and all certificates of interest or participation in temporary or interim certificates for, receipts for, guarantees of, or warrants or rights to subscribe to or purchase any of the foregoing.
2.04 Investment Management. To make, establish and maintain investments in securities, funds or properties of any nature whatsoever and to manage such funds; to do any and all acts and things for the preservation, protection, improvement and enhancement of the value of such property or securities or designed to accomplish any such purposes. To make investigations as to the business affairs and property of corporations, partnerships and various forms of business enterprises and to make appraisals and valuations of all kinds and investigate and render opinions as to the advisability from a financial standpoint of creating, merging, combining or otherwise dealing in business enterprises.
2.05 Creation of Corporations and Other Entities. To cause to be organized under the laws of the United States of America or of any state, commonwealth, territory, dependency or possession thereof, or of any foreign country, or of any political subdivision, territory, dependency, possession or municipality thereof, one or more corporations, firms, organizations, associations or other entities, and to cause the same to be dissolved, wound up, liquidated, merged or consolidated.
2.06 To Deal in Good Will. To acquire by purchase or exchange, or by transfer, or by merger or consolidation with, the Corporation of any corporation, firm, organization, association or other entity owned or controlled, directly or indirectly, by the Corporation, or otherwise to acquire the whole or any part of the business, good will, rights or other assets of any corporation, firm, organization, association or other entity and to undertake or assume in connection therewith the whole or any part of the liabilities and obligations thereof and to effect any such acquisition in whole or in part by delivery of cash or other property, including securities issued by the Corporation or by any other lawful means.
2.07 To Engage in Lending. To make loans and give other forms of credit including, but not limited to, financing, factoring and leasing, with or without security, and to negotiate and make contracts and agreements in connection therewith and to sell and underwrite credit insurance and life, property and liability insurance, directly or through subsidiaries.
2.08 To Aid Subsidiaries. To aid by loans, subsidy, guaranty or in any other lawful manner any corporation, firm, organization, association or other entity of which any securities (as that term is defined in section C hereof) are in any manner, directly or indirectly, held by the Corporation or in which the Corporation or any such corporation, firm, organization, association or entity may be or become otherwise interested; to guarantee the payment of dividends on any stock issued by any such corporation, firm, organization, association or entity; to guarantee or, to assume, with or without recourse against any such corporation, firm, organization, association or entity, the payment of the principal of, and/or the interest and premium, if any, on any obligations issued or incurred by such corporation, firm, organization, association or entity; to do any and all other acts and things for the enhancement, protection or preservation of any securities which are in any manner, directly or indirectly, held, guaranteed or assumed by the Corporation, and to do any and all acts and things designed to accomplish any such purpose.
2.09 To Provide Services. To render service, assistance, counsel and advice to and act as representative or agent in any capacity (whether managing, operating, financial, purchasing, selling, advertising or otherwise) for any corporation, firm, organization, association or other entity and to gather, compile and disseminate information, data and advice in respect to matters of a commercial, financial, statistical and business nature and to act as consultants, counselors and advisors.
2.10 To Deal in Real Estate. To acquire by purchase, exchange, lease or otherwise, and to hold, own, improve, operate, manage, lease as lessee, let as lessor, sell, convey or mortgage, whether alone or in conjunction with others, real estate of every kind, character and description, and wherever situated, or any interest therein, including, without limiting the generality of the foregoing, the design, development, management, acquisition, and operation of commercial, mercantile and service structures and facilities of every character, recreational structures and facilities, residential properties and structures, and mobile home parks.
2.11 To Deal in Personal Property. To acquire (by purchase, exchange, lease, hire or otherwise), hold, mortgage, pledge, hypothecate, exchange, sell, deal in and dispose of, at wholesale or retail, alone or in syndicates or otherwise in conjunction with others, commodities or other personal property of every kind, character and description and wherever situated, and any interest therein.
2.12 To Deal in its Own Securities. To acquire (by purchase, exchange, lease, hire or otherwise), hold, sell, transfer, reissue, or cancel its own shares, or any securities or other obligations of the Corporation, in the manner and to the extent now or hereafter permitted by the laws of Indiana, except that the Corporation shall not use its funds or other assets for the purchase of its own shares if such use would cause any impairment of the capital of the Corporation, and except that its own shares beneficially owned by the Corporation shall not be voted directly or indirectly.
2.13 To Make Contracts. To enter into, make, perform and carry out, or cancel and rescind, contracts for any lawful purposes to its business.
2.14 To Enter into Partnerships. To enter into any lawful arrangement for sharing profits, union of interest, reciprocal association or cooperative association with any corporation, association, partnership, individual or other entity, for the carrying on of any business, transaction, or venture, which the Corporation is authorized to carry on or any business, transaction, or venture deemed necessary, convenient or incidental to carrying out of any of the purposes of the Corporation.
2.15 To Engage in Business Generally. To engage in any commercial, financial, mercantile, industrial, manufacturing, marine, exploration, mining, agricultural, research, licensing, servicing or agency business not prohibited by law and any, some or all of the foregoing.
2.16 To Borrow Money. To borrow money for any business object or purpose of the Corporation from time to time without limit as to amount, to issue any kind of indebtedness, whether or not in connection with borrowing money, including evidences of indebtedness convertible into stock of the Corporation, to secure the payment of any evidence of indebtedness by the creation of any interest in any of the property or rights of the Corporation, whether at that time owned or thereafter acquired.
2.17 To Execute Guarantees. To make any guarantee respecting stocks, dividends, securities, indebtedness, interest, contracts or other obligations.
2.18 Stated Capital; Consideration for Shares. To determine the amount of the stated capital and increase or reduce stated capital and determine the consideration to be received for shares issued from time to time.
2.19 Rights, Privileges and Powers. Subject to any limitations or restrictions imposed by law or by these Articles of Incorporation to have and exercise all the rights, privileges and powers specified in or permitted under the Indiana Business Corporation Law.
2.20 General Powers. To do everything necessary, proper, advisable or convenient for the accomplishment of any of the purposes or the attainment of any of the objects of the furtherance of any of the powers herein set forth and to do every other act and thing incidental thereto or connected therewith which is not forbidden by the laws of the State of Indiana or by the provisions of these Articles of Incorporation.
2.21 Construction. The foregoing sections shall be construed as purposes as well as powers and the matters expressed in each section shall, unless otherwise expressly provided, be in no way limited by reference to or inference from the terms of any other section, each of such sections being regarded as creating independent purposes and powers. The enumeration shall not be construed as limiting or restricting in any manner either the meaning or general terms used in any of the sections or the scope of the general powers of the Corporation created thereby. The enumeration herein of any specific purposes or powers shall not be held to limit or restrict in any manner the exercise by the Corporation of the general powers now or hereafter conferred by the laws of the state of Indiana nor shall the expression of one thing be deemed to exclude another not expressed, whether or not it be of like nature. The titles contained herein are solely for convenience and are not to be considered in construing the various sections.
2.22 Limiting Clause. Nothing in this article shall be construed to authorize the conduct by the Corporation, directly or indirectly, of a rural loan and savings association, credit union or a banking, railroad, insurance, surety, trust, safe deposit, mortgage guarantee or building and loan business or receiving deposits of money, bullion or foreign coins or of issuing bills, notes, or other evidences of debt or circulation as money; provided, however, that the Corporation may own, create or otherwise acquire all or part of the issued and outstanding stock of corporations lawfully engaged in any of such activities.
The period during which the Corporation shall continue is perpetual.
4.1 Resident Agent. The name and address of the Resident Agent in charge of the Corporation's principal office is John A. Nash, 500 Washington Street, Columbus, Indiana 47201.
4.2 Principal Office. The post office address of the principal office of the Corporation is 500 Washington Street, Columbus, Indiana 47201.
5.1 Number and Classes of Shares. The total number of shares, which the Corporation shall have the authority to issue, is 44,000,000 shares. The total authorized shares of the Corporation shall be divided into two classes: a class of up to 40,000,000 Common Shares without par value (the "Common Shares") and a class of up to 4,000,000 Preferred Shares without par value (the "Preferred Shares"). The Common Shares and the Preferred Shares are collectively referred to herein as the "Shares."
5.2 Terms.
5.21 Rights.
5.21.1 Common Shares. All Common Shares shall have the same rights and privileges. Common Shareholders shall have no preemptive rights.
5.21.2 Preferred Shares. The Board of Directors is expressly authorized at any time, and from time to time, by resolution, to determine and state the designations, relative rights, preferences, limitations and restrictions of any class or classes of Preferred Shares, or of any series of any class or classes thereof, and to authorize the issuance of such Preferred Shares upon compliance prior to the issuance of any such Preferred Shares with the applicable provisions of the Act.
5.22 Dividends. Dividends or distributions may be declared and paid upon outstanding Shares at the discretion of the Board of Directors from time to time out of earned surplus or capital surplus of the Corporation. Dividends payable on the Shares of any class of Shares or series thereof may be paid to the holders of Shares of that or any other class of Shares or series thereof.
5.23 Issuance of and Consideration for Shares. Shares may be issued for such consideration as may be fixed from time to time by the Board of Directors, which consideration may be equal to, less than or more than the par value thereof. The judgment of the Board of Directors as to (i) the value of any property or services received in full or partial payment for Shares, and (ii) as to the value of the corporate assets in the event of a Share dividend, shall be conclusive. When Shares are issued upon payment of the consideration fixed by the Board of Directors, such Shares shall be taken to be fully paid stock and shall be nonassessable.
5.24 Partial Distributions. The Board of Directors may make distributions to Shareholders out of capital surplus from time to time to the extent permitted by law.
5.25 Facsimile Signatures. Facsimile signatures may be used in lieu of the manual signature of an officer or director of the Corporation. In case any officer or director who has signed or whose facsimile signature has been placed upon any share certificate or other document issued by this Corporation shall have ceased to be such an officer or director before such certificate or other document is used, such certificate or other document may be issued by the Corporation with the same effect as if such person were an officer at the date of its issue.
5.26 Transfer of Shares. Transfer of Shares shall be governed by the By-Laws of the Corporation subject to applicable law.
5.27 Series A Convertible Preferred Shares. By Unanimous Written Consent effective as of October 8, 1999, the Board of Directors of Irwin Financial Corporation (the "Corporation"), has amended the terms of its Series A convertible Preferred Shares (the "Series A Preferred Shares"), to consist of 66,666 shares, and further as follows:
5.27.1 Definitions.
"Bank" means Irwin Union Bank and Trust Company, a commercial bank chartered under the laws of the State of Indiana and a wholly-owned subsidiary of the Corporation.
"Banking Office" means, collectively, the banking offices operated by the Bank in Monroe County, Indiana, including locations at 300 W. 6th St., Bloomington, IN 47404; 1175 College Mall Rd., Box A, Bloomington, IN 47401; and 528 S. College Ave., Box A, Bloomington, IN 47401.
"Board" means the Board of Directors of the Corporation.
"Common Shares" means the common shares of the Corporation.
"Corporation" means Irwin Financial Corporation, an Indiana corporation.
"Deposit Goal" means the goal that the average
deposits at the Bank on behalf of the Banking Office for any
calendar quarter equal or exceed $50,000,000, with the
calculations to be made as set forth in Section
5.27.4(b)(iii) herein.
"Person" means an individual, a partnership, a joint venture, a corporation, an association, a trust, or any other entity or organization.
"Purchase Price" means the price per share at which the Series A Preferred Shares have been offered and sold by the Corporation to qualified investors pursuant to a Confidential Private Placement Memorandum.
"Series A Preferred Shares" means the Series A Convertible Preferred Shares of the Corporation.
"Start Date" means the first day of the calendar quarter following the closing date of the offering. The Start Date is the date from which the Corporation will measure the amount of deposits at the Bank on behalf of the Banking Office for the purposes of determining conversion rights.
5.27.2 Dividends. The holders of outstanding Series A Preferred Shares shall not be entitled to receive any dividends on the Series A Preferred Shares.
5.27.3 Redemption.
(a) The outstanding Series A Preferred Shares are redeemable at the option of the Corporation, out of the assets of the Corporation legally available therefor, at any time or from time to time, in whole and not in part, at a redemption price per share of Series A Preferred Shares (the "Redemption Price") equal to the Purchase Price; provided, however, that for a period of not less than 30 days prior to the date fixed for redemption (the "Redemption Date"), the holders of the outstanding Series A Preferred Shares shall have an option to convert each Series A Preferred Share into 1.25 Common Shares.
(b) Notice of any redemption of Series A Preferred Shares, specifying the date fixed for redemption, the redemption price and the place at which shareholders may obtain payment of the Redemption Price upon surrender of their certificates, and the option of the shareholders to convert their Series A Preferred Shares into Common Shares, shall be mailed to each holder of record of the shares to be redeemed, at such holder's address of record, not less than 35, nor more than 90 days prior to the Redemption Date. Such notice shall set forth the manner in which shareholders may convert their Series A Preferred Shares into Common Shares, or to receive the Redemption Price, upon surrender of their certificates.
(c) Unless the Corporation defaults in the payment in full of the Redemption Price, (i) all rights of the holders of such Series A Preferred Shares as shareholders of the Corporation by reason of the ownership of such shares (including, without limitation, the right to convert the Series A Preferred Shares into Common Shares) shall cease on the Redemption Date except the right to receive the amount payable upon redemption of such shares upon presentation and surrender of the respective certificates evidencing such shares, and (ii) such shares shall be deemed not to be outstanding after the Redemption Date.
(d) Any Series A Preferred Shares that have been redeemed shall, after such redemption, not be reissued as Series A Preferred Shares, but shall become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled.
(e) Any notice required by the provisions of this Section 5.27.3 to be given to the holders of Series A Preferred Shares shall be deemed given if deposited in the United States mail postage prepaid, and addressed to each holder of record at his, her or its address appearing on the books of the Corporation.
5.27.4 Conversion Rights. The Series A Preferred Shares shall be convertible into Common Shares as follows:
(a) No Optional Conversion. Other than pursuant to a
redemption of the Series A Preferred Shares as set forth in
Section 5.27.3 above, the holders of Series A Preferred Shares
shall have no optional rights to convert such shares into Common
Shares.
(b) Automatic Conversion. Each Series A Preferred Share shall be automatically converted, without any further act of the Corporation or the holders of Series A Preferred Shares, into fully paid and nonassessable Common Shares in the manner and at the times specified below:
(i) Second Anniversary after Start Date. If the Deposit Goal is met prior to twenty-four (24) months from the Start Date, (A) the date of the automatic conversion into Common Shares shall be twenty-seven (27) months after the Start Date, and (B) each Series A Preferred Share shall automatically be converted into 1.25 Common Shares. If the Deposit Goal has not been met prior to twenty-four (24) months from the Start Date, the Series A Preferred Shares will not be converted into Common Shares until after the third anniversary of the Start Date.
(iii) Determination of Whether Deposit Goal Has Been Met. The Deposit Goal shall have been met prior to a specified date if the average deposits at the Bank on behalf of the Banking Office for any calendar quarter prior to such date equal or exceed $50,000,000. For the purposes of determining whether the Deposit Goal has been met, the Corporation will follow the following procedures:
Deposits: For the purpose of making the Deposit Goal calculations, "deposits" means the book balances of all accounts which are insurable by the Federal Deposit Insurance Corporation (such as demand, savings, time, money market and NOW accounts and certificates of deposit), including the balances in such accounts in excess of $100,000; provided, however, that certificates of deposit in amounts of $100,000 or more shall be included in the total amount of deposits only to the extent such certificates of deposit do not exceed 10% of total deposits.
Credit for Deposits: The specific banking office at which a deposit account is opened receives the credit for the account; provided, however, that if the Banking Office is not authorized to accept deposits or has not yet opened for business, a deposit account may be established at another banking office on behalf of the Banking Office if designated as such. The Bank's accounting system tracks and accounts for all depository accounts on a daily basis.
All determinations regarding whether the Deposit Goal has been met as of any date shall be made by the Corporation. Such determinations in this regard shall be final and conclusive for all purposes.
(c) Mechanics of Conversion. Upon the occurrence of the dates specified in Section 5.27.4(b) above, the outstanding Series A Preferred Shares shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue to any holder certificates evidencing the Common Shares issuable upon such conversion unless certificates evidencing the Series A Preferred Shares are delivered either to the Corporation or any transfer agent designated by the Corporation. Conversion shall be deemed to have been effected on the date of the occurrence of the dates specified in Section 5.27.4(b) above, as the case may be, and such date is referred to herein as the "Conversion Date." Subject to the provisions of Section 5.27.4(b) above, as promptly as practicable thereafter (and after surrender of the certificate or certificates representing the Series A Preferred Shares to the Corporation or any transfer agent designated by the Corporation), the Corporation shall issue and deliver to such holder a certificate or certificates for the number of full Common Shares to which such holder is entitled as provided in Section 5.27.4(b) hereof. Subject to the provisions of Section 5.27.4(b), the person in whose name the certificate or certificates for Common Shares are to be issued shall be deemed to have become a holder of record of such Common Shares on the applicable Conversion Date.
(d) Fractional Shares. No fractional Common Shares or scrip shall be issued upon conversion of Series A Preferred Shares. In lieu of any fractional Common Shares which would otherwise be issuable upon conversion of any Series A Preferred Shares, the number of full Common Shares issuable upon conversion thereof shall be increased to the next higher number of whole shares.
(e) Rights After Conversion Date. From and after Conversion Date (unless the Corporation defaults in issuing Common Shares in conversion for the outstanding Series A Preferred Shares on the Conversion Date), such Series A Preferred Shares shall be deemed not to be outstanding and all rights of the holders of such shares as Shareholders of the Corporation by reason of the ownership of such shares shall cease, except the right to receive Common Shares as provided in Section 5.27.4(b) herein on presentation and surrender of the respective certificates evidencing such Series A Preferred Shares. Upon presentation and surrender, on or after the Conversion Date, of any certificate evidencing Series A Preferred Shares (properly endorsed or assigned for transfer, if the Corporation shall so require), such shares shall be converted by the Corporation for Common Shares as provided in this Section 5.27.4.
(f) Authorized, But Unissued Shares. Any Series A Preferred Shares that shall at any time have been converted into Common Shares pursuant to this Section 5.27.4 shall, after such conversion become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled.
(g) Reservation of Shares. The Corporation shall reserve at all times so long as any Series A Preferred Shares remain outstanding, free from preemptive rights, out of its treasury shares or its authorized but unissued Common Shares, or both, solely for the purpose of effecting the conversion of the Series A Preferred Shares, sufficient Common Shares to provide for the conversion of all outstanding Series A Preferred Shares.
(h) Fully Paid and Nonassessable Shares. All Common Shares or other securities which may be issued upon conversion of the Series A Preferred Shares will upon issuance by the Corporation be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof and the Corporation shall take no action which would cause a contrary result.
5.27.5 Conversion Ratio Adjustments. The number of Common Shares into which the Series A Preferred Shares shall be converted pursuant to Section 5.27.4 (the "Conversion Ratios") and the securities or other property deliverable upon conversion of the Series A Preferred Shares shall be subject to adjustment from time to time as follows:
(a) Share Subdivisions or Split-Ups. If the number of Common Shares outstanding at any time after the date of issuance of the Series A Preferred Shares is increased by a subdivision or split-up of Common Shares, then immediately after the record date fixed for the determination of holders of Common Shares entitled to receive such subdivision or split-up, as the case may be, the Conversion Ratios shall be appropriately increased so that the holder of any Series A Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series A Preferred Shares been converted immediately prior thereto.
(b) Combinations of Shares. If the number of Common Shares outstanding at any time after the date of issuance of the Series A Preferred Shares is decreased by a combination of the outstanding Common Shares, then, immediately after the effective date of such combination, the Conversion Ratios applicable thereto shall be appropriately decreased so that the holder of any Series A Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series A Preferred Shares been converted immediately prior thereto.
(c) Reorganization, Reclassification, Merger, Sale of All Assets, etc. In case of any capital reorganization of the Corporation, or of any reclassification of the Common Shares, or in case of the consolidation of the Corporation with or the merger of the Corporation with or into any other Person or of the sale, lease or other transfer of all or substantially all of the assets of the Corporation to any other Person, or in the case of any distribution of cash or other assets or of notes or other indebtedness of the Corporation or any other securities of the Corporation (except Common Shares) to the holders of its Common Shares, each Series A Preferred Share shall, after such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution, be convertible into the number of shares or other securities or property to which the Common Shares issuable (at the time of such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution) upon conversion of such Series A Preferred Shares would have been entitled upon such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution in place of (or in addition to, in the case of any such event after which Common Shares remain outstanding) the Common Shares into which such Series A Preferred Shares would otherwise have been convertible; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interest thereafter of the holders of Series A Preferred Shares shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares or other securities or property thereafter deliverable on the conversion of the Series A Preferred Shares.
(d) Rounding of Calculations; Minimum Adjustment. All calculations under this Section 5.27.5 shall be made to the nearest one hundredth (1/100th) of a Common Share, as the case may be. Any provision of this Section 5.27.5 to the contrary notwithstanding, no adjustment in the Conversion Ratios shall be made if the amount of such adjustment would be less than one hundredth of a Common Share, but any such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate one hundredth of a Common Share or more.
(e) Timing of Issuance of Additional Common Shares upon Certain Adjustments. In any case in which the provisions of this Section 5.27.5 shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event issuing to the holder of any Series A Preferred Shares converted after such record date and before the occurrence of such event the additional Common Shares or other property issuable or deliverable upon such conversion by reason of the adjustment required by such event over and above the Common Shares or other property issuable or deliverable upon such conversion before giving effect to such adjustment; provided, however, that the Corporation upon request shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares or other property, and such cash, upon the occurrence of the event requiring such adjustment.
(f) Statement Regarding Adjustments. Whenever the
Conversion Ratios shall be adjusted as provided in this
Section 5.27.5, the Corporation shall forthwith file, at the
office of any transfer agent for the Series A Preferred
Shares and at the principal office of the Corporation a
statement showing in detail the facts requiring such
adjustment and the Conversion Ratios that shall be in effect
after such adjustment, and the Corporation shall also cause
a copy of such statement to be mailed, first class postage
prepaid, to each holder of Series A Preferred Shares at its
address appearing on the Corporation's records.
(g) Cost. The Corporation shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of Common Shares of the Corporation or other securities or property upon conversion of any Series A Preferred Shares; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares or securities in the name other than that of the holder of Series A Preferred Shares in respect of which such shares are being issued.
5.27.6 Voting. The holders of Series A Preferred Shares shall have no right or power to vote on any matter except as required by law. In any matter on which the holders of Series A Preferred Shares shall, as a matter of law, be entitled to vote, the holders shall be entitled to one vote for each Series A Preferred Share held.
5.27.7 Liquidation Rights.
(a) Upon the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of Series A Preferred Shares then outstanding shall be entitled to receive out of the assets of the Corporation available for distribution to equity holders, an amount per share in cash equal to the Purchase Price before any payment or distribution shall be made on the Common Shares or on any other class of capital shares of the Corporation ranking junior to the Series A Preferred Shares upon liquidation. All outstanding shares of any other series of preferred shares shall rank at parity with the Series A Preferred Shares. The consolidation or merger of the Corporation, or a sale, exchange or transfer of all or substantially all of its assets as an entirety, shall not be regarded as a "dissolution, liquidation or winding up of the Corporation" within the meaning of this Section 5.27.7(a).
(b) After the payment to the holders of Series A Preferred Shares of the full preferential amounts fixed hereby for Series A Preferred Shares, the holders of Series A Preferred Shares as such shall have no right or claim to any of the remaining assets of the Corporation.
(c) If the assets of the Corporation available for distribution to the holders of Series A Preferred Shares upon dissolution, liquidation or winding up of the Corporation are insufficient to pay in full all amounts to which such holders are entitled pursuant to Section 5.27.7(a), no distribution shall be made on account of any shares of a class or series of capital shares of the Corporation ranking on a parity with the Series A Preferred Shares, if any, upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the Series A Preferred Shares, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up.
5.27.8 Reports to Holders of Series A Preferred Shares. For so long as there shall remain outstanding any Series A Preferred Shares, the Corporation shall furnish to each holder of record of Series A Preferred Shares (i) all reports or other correspondence sent by the Corporation to holders of record of the Common Shares of the Corporation, and (ii) a quarterly report setting forth the average monthly deposits on behalf of the Banking Office.
5.27.9 Certain Covenants. So long as any Series A Preferred Shares are outstanding, without the prior written consent of the holders of a majority of the outstanding Series A Preferred Shares, the Corporation shall not amend, alter or repeal any provisions of this Resolution Establishing Series A Convertible Preferred Shares, or otherwise amend, alter or repeal any provision of the Articles of Incorporation of the Corporation so as to affect adversely the preferences, rights, powers or privileges of the Series A Preferred Shares.
5.27.11 Exclusion of Other Rights. Unless otherwise required by law, the Series A Preferred Shares shall not have any voting powers, preferences or relative, participating, optional or other special rights other than those specifically set forth herein.
5.28 Series B Convertible Preferred Shares. By Unanimous Written Consent effective as of October 8, 1999, the Board of Directors of Irwin Financial Corporation (the "Corporation"), has amended the terms of its Series B Convertible Preferred Shares (the "Series B Preferred Shares"), to consist of 66,666 shares, and further as follows:
5.28.1 Definitions.
"Bank" means Irwin Union Bank and Trust Company, a commercial bank chartered under the laws of the State of Indiana and a wholly-owned subsidiary of the Corporation.
"Banking Office" means the banking office operated by the Bank at 555 W. Crosstown Parkway, Kalamazoo, Michigan 49008.
"Board" means the Board of Directors of the Corporation.
"Common Shares" means the common shares of the Corporation.
"Corporation" means Irwin Financial Corporation, an Indiana corporation.
"Deposit Goal" means the goal that the average deposits at the Bank on behalf of the Banking Office for any calendar quarter equal or exceed $25,000,000, with the calculations to be made as set forth in Section 4(b)(iii) herein.
"Person" means an individual, a partnership, a joint venture, a corporation, an association, a trust, or any other entity or organization.
"Series B Preferred Shares" means the Series B Convertible Preferred Shares of the Corporation.
"Start Date" means the first day of the calendar quarter following the closing date of the offering. The Start Date is the date from which the Corporation will measure the amount of deposits at the Bank on behalf of the Banking Office for the purposes of determining conversion rights.
5.28.2 Dividends. The holders of outstanding Series B Preferred Shares shall not be entitled to receive any dividends on the Series B Preferred Shares.
5.28.3 Redemption.
(a) The outstanding Series B Preferred Shares are
redeemable at the option of the Corporation, out of the
assets of the Corporation legally available therefor, at any
time or from time to time, in whole and not in part, at a
redemption price per share of Series B Preferred Shares (the
"Redemption Price") equal to the Purchase Price; provided,
however, that for a period of not less than 30 days prior to
the date fixed for redemption (the "Redemption Date"), the
holders of the outstanding Series B Preferred Shares shall
have an option to convert each Series B Preferred Share into
1.25 Common Shares.
(b) Notice of any redemption of Series B Preferred Shares, specifying the date fixed for redemption, the redemption price and the place at which shareholders may obtain payment of the Redemption Price upon surrender of their certificates, and the option of the shareholders to convert their Series B Preferred Shares into Common Shares, shall be mailed to each holder of record of the shares to be redeemed, at such holder's address of record, not less than 35, nor more than 90 days prior to the Redemption Date. Such notice shall set forth the manner in which shareholders may convert their Series B Preferred Shares into Common Shares, or to receive the Redemption Price, upon surrender of their certificates.
(d) Any Series B Preferred Shares that have been redeemed shall, after such redemption, not be reissued as Series B Preferred Shares, but shall become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled.
(e) Any notice required by the provisions of this Section 5.28.3 to be given to the holders of Series B Preferred Shares shall be deemed given if deposited in the United States mail postage prepaid, and addressed to each holder of record at his, her or its address appearing on the books of the Corporation.
5.28.4 Conversion Rights. The Series B Preferred Shares shall be convertible into Common Shares as follows:
(a) No Optional Conversion. Other than pursuant to a
redemption of the Series B Preferred Shares as set forth in
Section 5.28.3 above, the holders of Series B Preferred
Shares shall have no optional rights to convert such shares
into Common Shares.
(b) Automatic Conversion. Each Series B Preferred Share shall be automatically converted, without any further act of the Corporation or the holders of Series B Preferred Shares, into fully paid and nonassessable Common Shares in the manner and at the times specified below:
(i) Second Anniversary after Start Date. If the Deposit Goal is met prior to twenty-four (24) months from the Start Date, (A) the date of the automatic conversion into Common Shares shall be twenty-seven (27) months after the Start Date, and (B) each Series B Preferred Share shall automatically be converted into 1.25 Common Shares. If the Deposit Goal has not been met prior to twenty-four (24) months from the Start Date, the Series B Preferred Shares will not be converted into Common Shares until after the third anniversary of the Start Date.
(ii) Third Anniversary after Start Date. If the conversion of the Series B Preferred Shares into Common Shares has not previously taken place within thirty-six (36) months after the Start Date, then, thirty-nine (39) months after the Start Date, each outstanding Series B Preferred Share shall automatically be converted into (A) 1.10 Common Shares if the Deposit Goal has been met prior to the end of thirty-six (36) months after the Start Date, and (B) 1.02 Common Shares if the Deposit Goal has not been met prior to the end of thirty-six (36) months after the Start Date.
(iii) Determination of Whether Deposit Goal Has Been Met. The Deposit Goal shall have been met prior to a specified date if the average deposits at the Bank on behalf of the Banking Office for any calendar quarter prior to such date equal or exceed $25,000,000. For the purposes of determining whether the Deposit Goal has been met, the Corporation will follow the following procedures:
Deposits: For the purpose of making the Deposit Goal calculations, "deposits" means the book balances of all accounts which are insurable by the Federal Deposit Insurance Corporation (such as demand, savings, time, money market and NOW accounts and certificates of deposit), including the balances in such accounts in excess of $100,000; provided, however, that certificates of deposit in amounts of $100,000 or more shall be included in the total amount of deposits only to the extent such certificates of deposit do not exceed 10% of total deposits.
Credit for Deposits: The specific banking office at which a deposit account is opened receives the credit for the account; provided, however, that if the Banking Office is not authorized to accept deposits or has not yet opened for business, a deposit account may be established at another banking office on behalf of the Banking Office if designated as such. The Bank's accounting system tracks and accounts for all depository accounts on a daily basis.
Calendar Quarter Average: After a calendar quarter has expired, the Bank will calculate the calendar quarter average of deposits for accounts designated as gathered on behalf of the Banking Office by adding the sum of the daily general ledger balance for such deposits and then dividing this sum by the number of days in the calendar quarter.
All determinations regarding whether the Deposit Goal has been met as of any date shall be made by the Corporation. Such determinations in this regard shall be final and conclusive for all purposes.
(c) Mechanics of Conversion. Upon the occurrence of the dates specified in Section 5.28.4(b) above, the outstanding Series B Preferred Shares shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue to any holder certificates evidencing the Common Shares issuable upon such conversion unless certificates evidencing the Series B Preferred Shares are delivered either to the Corporation or any transfer agent designated by the Corporation. Conversion shall be deemed to have been effected on the date of the occurrence of the dates specified in Section 5.28.4(b) above, as the case may be, and such date is referred to herein as the "Conversion Date." Subject to the provisions of Section 5.28.4(b) above, as promptly as practicable thereafter (and after surrender of the certificate or certificates representing the Series B Preferred Shares to the Corporation or any transfer agent designated by the Corporation), the Corporation shall issue and deliver to such holder a certificate or certificates for the number of full Common Shares to which such holder is entitled as provided in Section 5.28.4(b) hereof. Subject to the provisions of Section 5.28.4(b), the person in whose name the certificate or certificates for Common Shares are to be issued shall be deemed to have become a holder of record of such Common Shares on the applicable Conversion Date.
(d) Fractional Shares. No fractional Common Shares or scrip shall be issued upon conversion of Series B Preferred Shares. In lieu of any fractional Common Shares which would otherwise be issuable upon conversion of any Series B Preferred Shares, the number of full Common Shares issuable upon conversion thereof shall be increased to the next higher number of whole shares.
(e) Rights After Conversion Date. From and after the Conversion Date (unless the Corporation defaults in issuing Common Shares in conversion for the outstanding Series B Preferred Shares on the Conversion Date), such Series B Preferred Shares shall be deemed not to be outstanding and all rights of the holders of such shares as Shareholders of the Corporation by reason of the ownership of such shares shall cease, except the right to receive Common Shares as provided in Section 5.28.4(b) herein on presentation and surrender of the respective certificates evidencing such Series B Preferred Shares. Upon presentation and surrender, on or after the Conversion Date, of any certificate evidencing Series B Preferred Shares (properly endorsed or assigned for transfer, if the Corporation shall so require), such shares shall be converted by the Corporation for Common Shares as provided in this Section 5.28.4.
(f) Authorized, But Unissued Shares. Any Series B Preferred Shares that shall at any time have been converted into Common Shares pursuant to this Section 5.28.4 shall, after such conversion become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled.
(g) Reservation of Shares. The Corporation shall reserve at all times so long as any Series B Preferred Shares remain outstanding, free from preemptive rights, out of its treasury shares or its authorized but unissued Common Shares, or both, solely for the purpose of effecting the conversion of the Series B Preferred Shares, sufficient Common Shares to provide for the conversion of all outstanding Series B Preferred Shares.
(h) Fully Paid and Nonassessable Shares. All Common Shares or other securities which may be issued upon conversion of the Series B Preferred Shares will upon issuance by the Corporation be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof and the Corporation shall take no action which would cause a contrary result.
5.28.5 Conversion Ratio Adjustments. The number of Common Shares into which the Series B Preferred Shares shall be converted pursuant to Section 5.28.4 (the "Conversion Ratios") and the securities or other property deliverable upon conversion of the Series B Preferred Shares shall be subject to adjustment from time to time as follows:
(a) Share Subdivisions or Split-Ups. If the number of Common Shares outstanding at any time after the date of issuance of the Series B Preferred Shares is increased by a subdivision or split-up of Common Shares, then immediately after the record date fixed for the determination of holders of Common Shares entitled to receive such subdivision or split-up, as the case may be, the Conversion Ratios shall be appropriately increased so that the holder of any Series B Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series B Preferred Shares been converted immediately prior thereto.
(b) Combinations of Shares. If the number of Common Shares outstanding at any time after the date of issuance of the Series B Preferred Shares is decreased by a combination of the outstanding Common Shares, then, immediately after the effective date of such combination, the Conversion Ratios applicable thereto shall be appropriately decreased so that the holder of any Series B Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series B Preferred Shares been converted immediately prior thereto.
(c) Reorganization, Reclassification, Merger, Sale of All Assets, etc. In case of any capital reorganization of the Corporation, or of any reclassification of the Common Shares, or in case of the consolidation of the Corporation with or the merger of the Corporation with or into any other Person or of the sale, lease or other transfer of all or substantially all of the assets of the Corporation to any other Person, or in the case of any distribution of cash or other assets or of notes or other indebtedness of the Corporation or any other securities of the Corporation (except Common Shares) to the holders of its Common Shares, each Series B Preferred Share shall, after such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution, be convertible into the number of shares or other securities or property to which the Common Shares issuable (at the time of such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution) upon conversion of such Series B Preferred Shares would have been entitled upon such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution in place of (or in addition to, in the case of any such event after which Common Shares remain outstanding) the Common Shares into which such Series B Preferred Shares would otherwise have been convertible; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interest thereafter of the holders of Series B Preferred Shares shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares or other securities or property thereafter deliverable on the conversion of the Series B Preferred Shares.
(d) Rounding of Calculations; Minimum Adjustment. All calculations under this Section 5.28.5 shall be made to the nearest one hundredth (1/100th) of a Common Share, as the case may be. Any provision of this Section 5.28.5 to the contrary notwithstanding, no adjustment in the Conversion Ratios shall be made if the amount of such adjustment would be less than one hundredth of a Common Share, but any such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate one hundredth of a Common Share or more.
(e) Timing of Issuance of Additional Common Shares upon Certain Adjustments. In any case in which the provisions of this Section 5.28.5 shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event issuing to the holder of any Series B Preferred Shares converted after such record date and before the occurrence of such event the additional Common Shares or other property issuable or deliverable upon such conversion by reason of the adjustment required by such event over and above the Common Shares or other property issuable or deliverable upon such conversion before giving effect to such adjustment; provided, however, that the Corporation upon request shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares or other property, and such cash, upon the occurrence of the event requiring such adjustment.
(f) Statement Regarding Adjustments. Whenever the
Conversion Ratios shall be adjusted as provided in this
Section 5.28.5, the Corporation shall forthwith file, at the
office of any transfer agent for the Series B Preferred
Shares and at the principal office of the Corporation a
statement showing in detail the facts requiring such
adjustment and the Conversion Ratios that shall be in effect
after such adjustment, and the Corporation shall also cause
a copy of such statement to be mailed, first class postage
prepaid, to each holder of Series B Preferred Shares at its
address appearing on the Corporation's records.
(g) Cost. The Corporation shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of Common Shares of the Corporation or other securities or property upon conversion of any Series B Preferred Shares; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares or securities in the name other than that of the holder of Series B Preferred Shares in respect of which such shares are being issued.
5.28.6 Voting. The holders of Series B Preferred Shares shall have no right or power to vote on any matter except as required by law. In any matter on which the holders of Series B Preferred Shares shall, as a matter of law, be entitled to vote, the holders shall be entitled to one vote for each Series B Preferred Share held.
5.28.7 Liquidation Rights.
(a) Upon the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of Series B Preferred Shares then outstanding shall be entitled to receive out of the assets of the Corporation available for distribution to equity holders, an amount per share in cash equal to the Purchase Price before any payment or distribution shall be made on the Common Shares or on any other class of capital shares of the Corporation ranking junior to the Series B Preferred Shares upon liquidation. All outstanding shares of any other series of preferred shares shall rank at parity with the Series B Preferred Shares. The consolidation or merger of the Corporation, or a sale, exchange or transfer of all or substantially all of its assets as an entirety, shall not be regarded as a "dissolution, liquidation or winding up of the Corporation" within the meaning of this Section 5.28.7(a).
(b) After the payment to the holders of Series B Preferred Shares of the full preferential amounts fixed hereby for Series B Preferred Shares, the holders of Series B Preferred Shares as such shall have no right or claim to any of the remaining assets of the Corporation.
(c) If the assets of the Corporation available for distribution to the holders of Series B Preferred Shares upon dissolution, liquidation or winding up of the Corporation are insufficient to pay in full all amounts to which such holders are entitled pursuant to Section 5.28.7(a), no distribution shall be made on account of any shares of a class or series of capital shares of the Corporation ranking on a parity with the Series B Preferred Shares, if any, upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the Series B Preferred Shares, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up.
5.28.8 Reports to Holders of Series B Preferred Shares. For so long as there shall remain outstanding any Series B Preferred Shares, the Corporation shall furnish to each holder of record of Series B Preferred Shares (i) all reports or other correspondence sent by the Corporation to holders of record of the Common Shares of the Corporation, and (ii) a quarterly report setting forth the average monthly deposits on behalf of the Banking Office.
5.28.9 Certain Covenants. So long as any Series B Preferred Shares are outstanding, without the prior written consent of the holders of a majority of the outstanding Series B Preferred Shares, the Corporation shall not amend, alter or repeal any provisions of this Resolution Establishing Series B Convertible Preferred Shares, or otherwise amend, alter or repeal any provision of the Articles of Incorporation of the Corporation so as to affect adversely the preferences, rights, powers or privileges of the Series B Preferred Shares.
5.28.10 Certain Events. If any event occurs of the type contemplated but not expressly provided for by the provisions of Section 5.28.4 or Section 5.28.5 herein, then the Corporation's Board of Directors will make an appropriate adjustment in the Conversion Ratios for the Series B Preferred Shares to protect the rights of the holders thereof.
5.28.11 Exclusion of Other Rights. Unless otherwise required by law, the Series B Preferred Shares shall not have any voting powers, preferences or relative, participating, optional or other special rights other than those specifically set forth herein.
5.29 Series C Convertible Preferred Shares. By Unanimous Written Consent effective as of October 8, 1999, the Board of Directors of Irwin Financial Corporation (the "Corporation"), has approved and adopted the terms of Series C Convertible Preferred Shares (the "Series C Preferred Shares"), to consist of 133,332 shares, as follows:
5.29.1 Definitions.
"Bank" means Irwin Union Bank and Trust Company, a commercial bank chartered under the laws of the State of Indiana and a wholly-owned subsidiary of the Corporation.
"Banking Office" means, collectively, the banking offices operated by the Bank in Hamilton County, Indiana, and Marion County, Indiana, including locations at 11611 N. Meridian St., Suite 100, Carmel, Indiana 46032 and 300 N. Meridian St., Suite 1200, Indianapolis, Indiana 46204.
"Board" means the Board of Directors of the Corporation.
"Common Shares" means the common shares of the Corporation.
"Corporation" means Irwin Financial Corporation, an Indiana corporation.
"Person" means an individual, a partnership, a joint venture, a corporation, an association, a trust, or any other entity or organization.
"Purchase Price" means the price per share at which the Series C Preferred Shares have been offered and sold by the Corporation to qualified investors pursuant to a Confidential Private Placement Memorandum.
"Series C Preferred Shares" means the Series C Convertible Preferred Shares of the Corporation.
"Start Date" means the first day of the calendar quarter following the closing date of the offering. The Start Date is the date from which the Corporation will measure the amount of deposits at the Bank on behalf of the Banking Office for the purposes of determining conversion rights.
5.29.2 Dividends. The holders of outstanding Series C Preferred Shares shall not be entitled to receive any dividends on the Series C Preferred Shares.
5.29.3 Redemption.
(a) The outstanding Series C Preferred Shares are
redeemable at the option of the Corporation, out of the
assets of the Corporation legally available therefor, at any
time or from time to time, in whole and not in part, at a
redemption price per share of Series C Preferred Shares (the
"Redemption Price") equal to the Purchase Price; provided,
however, that for a period of not less than 30 days prior to
the date fixed for redemption (the "Redemption Date"), the
holders of the outstanding Series C Preferred Shares shall
have an option to convert each Series C Preferred Share into
1.25 Common Shares.
(b) Notice of any redemption of Series C Preferred Shares, specifying the date fixed for redemption, the redemption price and the place at which shareholders may obtain payment of the Redemption Price upon surrender of their certificates, and the option of the shareholders to convert their Series C Preferred Shares into Common Shares, shall be mailed to each holder of record of the shares to be redeemed, at such holder's address of record, not less than 35, nor more than 90 days prior to the Redemption Date. Such notice shall set forth the manner in which shareholders may convert their Series C Preferred Shares into Common Shares, or to receive the Redemption Price, upon surrender of their certificates.
(c) Unless the Corporation defaults in the payment in full of the Redemption Price, (i) all rights of the holders of such Series C Preferred Shares as shareholders of the Corporation by reason of the ownership of such shares (including, without limitation, the right to convert the Series C Preferred Shares into Common Shares) shall cease on the Redemption Date except the right to receive the amount payable upon redemption of such shares upon presentation and surrender of the respective certificates evidencing such shares, and (ii) such shares shall be deemed not to be outstanding after the Redemption Date.
(d) Any Series C Preferred Shares that have been redeemed shall, after such redemption, not be reissued as Series C Preferred Shares, but shall become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled.
(e) Any notice required by the provisions of this Section 5.29.3 to be given to the holders of Series C Preferred Shares shall be deemed given if deposited in the United States mail postage prepaid, and addressed to each holder of record at his, her or its address appearing on the books of the Corporation.
5.29.4 Conversion Rights. The Series C Preferred Shares shall be convertible into Common Shares as follows:
(a) No Optional Conversion. Other than pursuant to a
redemption of the Series C Preferred Shares as set forth in
Section 5.29.3 above, the holders of Series C Preferred
Shares shall have no optional rights to convert such shares
into Common Shares.
(i) Second Anniversary after Start Date. If the Deposit Goal is met prior to twenty-four (24) months from the Start Date, (A) the date of the automatic conversion into Common Shares shall be twenty-seven (27) months after the Start Date, and (B) each Series C Preferred Share shall automatically be converted into 1.25 Common Shares. If the Deposit Goal has not been met prior to twenty-four (24) months from the Start Date, the Series C Preferred Shares will not be converted into Common Shares until after the third anniversary of the Start Date.
(ii) Third Anniversary after Start Date. If the conversion of the Series C Preferred Shares into Common Shares has not previously taken place within thirty-six (36) months after the Start Date, then, thirty-nine (39) months after the Start Date, each outstanding Series C Preferred Share shall automatically be converted into (A) 1.10 Common Shares if the Deposit Goal has been met prior to the end of thirty-six (36) months after the Start Date, and (B) 1.02 Common Shares if the Deposit Goal has not been met prior to the end of thirty-six (36) months after the Start Date.
(iii) Determination of Whether Deposit Goal Has Been Met. The Deposit Goal shall have been met prior to a specified date if the average deposits at the Bank on behalf of the Banking Office for any calendar quarter prior to such date equal or exceed $50,000,000. For the purposes of determining whether the Deposit Goal has been met, the Corporation will follow the following procedures:
Deposits: For the purpose of making the Deposit Goal calculations, "deposits" means the book balances of all accounts which are insurable by the Federal Deposit Insurance Corporation (such as demand, savings, time, money market and NOW accounts and certificates of deposit), including the balances in such accounts in excess of $100,000; provided, however, that certificates of deposit in amounts of $100,000 or more shall be included in the total amount of deposits only to the extent such certificates of deposit do not exceed 10% of total deposits.
Credit for Deposits: The specific banking office at which a deposit account is opened receives the credit for the account; provided, however, that if the Banking Office is not authorized to accept deposits or has not yet opened for business, a deposit account may be established at another banking office on behalf of the Banking Office if designated as such. The Bank's accounting system tracks and accounts for all depository accounts on a daily basis.
Calendar Quarter Average: After a calendar quarter has expired, the Bank will calculate the calendar quarter average of deposits for accounts designated as gathered on behalf of the Banking Office by adding the sum of the daily general ledger balance for such deposits and then dividing this sum by the number of days in the calendar quarter.
All determinations regarding whether the Deposit Goal has been met as of any date shall be made by the Corporation. Such determinations in this regard shall be final and conclusive for all purposes.
(c) Mechanics of Conversion. Upon the occurrence of the dates specified in Section 5.29.4(b) above, the outstanding Series C Preferred Shares shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue to any holder certificates evidencing the Common Shares issuable upon such conversion unless certificates evidencing the Series C Preferred Shares are delivered either to the Corporation or any transfer agent designated by the Corporation. Conversion shall be deemed to have been effected on the date of the occurrence of the dates specified in Section 5.29.4(b) above, as the case may be, and such date is referred to herein as the "Conversion Date." Subject to the provisions of Section 5.29.4(b) above, as promptly as practicable thereafter (and after surrender of the certificate or certificates representing the Series C Preferred Shares to the Corporation or any transfer agent designated by the Corporation), the Corporation shall issue and deliver to such holder a certificate or certificates for the number of full Common Shares to which such holder is entitled as provided in Section 5.29.4(b) hereof. Subject to the provisions of Section 5.29.4(b), the person in whose name the certificate or certificates for Common Shares are to be issued shall be deemed to have become a holder of record of such Common Shares on the applicable Conversion Date.
(d) Fractional Shares. No fractional Common Shares or scrip shall be issued upon conversion of Series C Preferred Shares. In lieu of any fractional Common Shares which would otherwise be issuable upon conversion of any Series C Preferred Shares, the number of full Common Shares issuable upon conversion thereof shall be increased to the next higher number of whole shares.
(e) Rights After Conversion Date. From and after the Conversion Date (unless the Corporation defaults in issuing Common Shares in conversion for the outstanding Series C Preferred Shares on the Conversion Date), such Series C Preferred Shares shall be deemed not to be outstanding and all rights of the holders of such shares as Shareholders of the Corporation by reason of the ownership of such shares shall cease, except the right to receive Common Shares as provided in Section 5.29.4(b) herein on presentation and surrender of the respective certificates evidencing such Series C Preferred Shares. Upon presentation and surrender, on or after the Conversion Date, of any certificate evidencing Series C Preferred Shares (properly endorsed or assigned for transfer, if the Corporation shall so require), such shares shall be converted by the Corporation for Common Shares as provided in this Section 5.29.4.
(f) Authorized, But Unissued Shares. Any Series C Preferred Shares that shall at any time have been converted into Common Shares pursuant to this Section 5.29.4 shall, after such conversion become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled.
(h) Fully Paid and Nonassessable Shares. All Common Shares or other securities which may be issued upon conversion of the Series C Preferred Shares will upon issuance by the Corporation be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof and the Corporation shall take no action which would cause a contrary result.
5.29.5 Conversion Ratio Adjustments. The number of Common Shares into which the Series C Preferred Shares shall be converted pursuant to Section 5.29.4 (the "Conversion Ratios") and the securities or other property deliverable upon conversion of the Series C Preferred Shares shall be subject to adjustment from time to time as follows:
(a) Share Subdivisions or Split-Ups. If the number of Common Shares outstanding at any time after the date of issuance of the Series C Preferred Shares is increased by a subdivision or split-up of Common Shares, then immediately after the record date fixed for the determination of holders of Common Shares entitled to receive such subdivision or split-up, as the case may be, the Conversion Ratios shall be appropriately increased so that the holder of any Series C Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series C Preferred Shares been converted immediately prior thereto.
(b) Combinations of Shares. If the number of Common Shares outstanding at any time after the date of issuance of the Series C Preferred Shares is decreased by a combination of the outstanding Common Shares, then, immediately after the effective date of such combination, the Conversion Ratios applicable thereto shall be appropriately decreased so that the holder of any Series C Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series C Preferred Shares been converted immediately prior thereto.
(c) Reorganization, Reclassification, Merger, Sale of All Assets, etc. In case of any capital reorganization of the Corporation, or of any reclassification of the Common Shares, or in case of the consolidation of the Corporation with or the merger of the Corporation with or into any other Person or of the sale, lease or other transfer of all or substantially all of the assets of the Corporation to any other Person, or in the case of any distribution of cash or other assets or of notes or other indebtedness of the Corporation or any other securities of the Corporation (except Common Shares) to the holders of its Common Shares, each Series C Preferred Share shall, after such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution, be convertible into the number of shares or other securities or property to which the Common Shares issuable (at the time of such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution) upon conversion of such Series C Preferred Shares would have been entitled upon such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution in place of (or in addition to, in the case of any such event after which Common Shares remain outstanding) the Common Shares into which such Series C Preferred Shares would otherwise have been convertible; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interest thereafter of the holders of Series C Preferred Shares shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares or other securities or property thereafter deliverable on the conversion of the Series C Preferred Shares.
(d) Rounding of Calculations; Minimum Adjustment. All calculations under this Section 5.29.5 shall be made to the nearest one hundredth (1/100th) of a Common Share, as the case may be. Any provision of this Section 5.29.5 to the contrary notwithstanding, no adjustment in the Conversion Ratios shall be made if the amount of such adjustment would be less than one hundredth of a Common Share, but any such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate one hundredth of a Common Share or more.
(e) Timing of Issuance of Additional Common Shares upon Certain Adjustments. In any case in which the provisions of this Section 5.29.5 shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event issuing to the holder of any Series C Preferred Shares converted after such record date and before the occurrence of such event the additional Common Shares or other property issuable or deliverable upon such conversion by reason of the adjustment required by such event over and above the Common Shares or other property issuable or deliverable upon such conversion before giving effect to such adjustment; provided, however, that the Corporation upon request shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares or other property, and such cash, upon the occurrence of the event requiring such adjustment.
(f) Statement Regarding Adjustments. Whenever the
Conversion Ratios shall be adjusted as provided in this
Section 5.29.5, the Corporation shall forthwith file, at the
office of any transfer agent for the Series C Preferred
Shares and at the principal office of the Corporation a
statement showing in detail the facts requiring such
adjustment and the Conversion Ratios that shall be in effect
after such adjustment, and the Corporation shall also cause
a copy of such statement to be mailed, first class postage
prepaid, to each holder of Series C Preferred Shares at its
address appearing on the Corporation's records.
(g) Cost. The Corporation shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of Common Shares of the Corporation or other securities or property upon conversion of any Series C Preferred Shares; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares or securities in the name other than that of the holder of Series C Preferred Shares in respect of which such shares are being issued.
5.29.7 Liquidation Rights.
(a) Upon the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of Series C Preferred Shares then outstanding shall be entitled to receive out of the assets of the Corporation available for distribution to equity holders, an amount per share in cash equal to the Purchase Price before any payment or distribution shall be made on the Common Shares or on any other class of capital shares of the Corporation ranking junior to the Series C Preferred Shares upon liquidation. All outstanding shares of any other series of preferred shares shall rank at parity with the Series C Preferred Shares. The consolidation or merger of the Corporation, or a sale, exchange or transfer of all or substantially all of its assets as an entirety, shall not be regarded as a "dissolution, liquidation or winding up of the Corporation" within the meaning of this Section 5.29.7(a).
(b) After the payment to the holders of Series C Preferred Shares of the full preferential amounts fixed hereby for Series C Preferred Shares, the holders of Series C Preferred Shares as such shall have no right or claim to any of the remaining assets of the Corporation.
(c) If the assets of the Corporation available for distribution to the holders of Series C Preferred Shares upon dissolution, liquidation or winding up of the Corporation are insufficient to pay in full all amounts to which such holders are entitled pursuant to Section 5.29.7(a), no distribution shall be made on account of any shares of a class or series of capital shares of the Corporation ranking on a parity with the Series C Preferred Shares, if any, upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the Series C Preferred Shares, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up.
5.29.9 Certain Covenants. So long as any Series C Preferred Shares are outstanding, without the prior written consent of the holders of a majority of the outstanding Series C Preferred Shares, the Corporation shall not amend, alter or repeal any provisions of this resolution establishing Series C Convertible Preferred Shares, or otherwise amend, alter or repeal any provision of the Articles of Incorporation of the Corporation so as to affect adversely the preferences, rights, powers or privileges of the Series C Preferred Shares.
5.29.10 Certain Events. If any event occurs of the type contemplated but not expressly provided for by the provisions of Section 5.29.4 or Section 5.29.5 herein, then the Corporation's Board of Directors will make an appropriate adjustment in the Conversion Ratios for the Series C Preferred Shares to protect the rights of the holders thereof.
5.29.11 Exclusion of Other Rights. Unless otherwise required by law, the Series C Preferred Shares shall not have any voting powers, preferences or relative, participating, optional or other special rights other than those specifically set forth herein.
5.30 Series D Convertible Preferred Shares. By Resolution effective as of December 16, 1999, the Board of Directors of Irwin Financial Corporation (the "Corporation"), has approved and adopted the terms of Series D Convertible Preferred Shares (the "Series D Preferred Shares"), to consist of 66,666 shares, as follows:
5.30.1 Definitions.
"Bank" means Irwin Union Bank and Trust Company, a commercial bank chartered under the laws of the State of Indiana and a wholly-owned subsidiary of the Corporation.
"Banking Office" means, collectively, the banking offices operated by the Bank at 0-185 44th Street, Grandville, Michigan 49418.
"Common Shares" means the common shares of the Corporation.
"Corporation" means Irwin Financial Corporation, an Indiana corporation.
"Deposit Goal" means the goal that the average deposits at the Bank on behalf of the Banking Office for any calendar quarter equal or exceed $25,000,000, with the calculations to be made as set forth in Section 5.30.4(b)(iii) herein.
"Person" means an individual, a partnership, a joint venture, a corporation, an association, a trust, or any other entity or organization.
"Purchase Price" means the price per share at which the Series D Preferred Shares have been offered and sold by the Corporation to qualified investors pursuant to a Confidential Private Placement Memorandum.
"Series D Preferred Shares" means the Series D Convertible Preferred Shares of the Corporation.
"Start Date" means the first day of the calendar quarter following the closing date of the offering. The Start Date is the date from which the Corporation will measure the amount of deposits at the Bank on behalf of the Banking Office for the purposes of determining conversion rights.
5.30.2 Dividends. The holders of outstanding Series D Preferred Shares shall not be entitled to receive any dividends on the Series D Preferred Shares.
5.30.3 Redemption.
(a) The outstanding Series D Preferred Shares are redeemable at the option of the Corporation, out of the assets of the Corporation legally available therefor, at any time or from time to time, in whole and not in part, at a redemption price per share of Series D Preferred Shares (the "Redemption Price") equal to the Purchase Price; provided, however, that for a period of not less than 30 days prior to the date fixed for redemption (the "Redemption Date"), the holders of the outstanding Series D Preferred Shares shall have an option to convert each Series D Preferred Share into 1.25 Common Shares.
(b) Notice of any redemption of Series D Preferred Shares, specifying the date fixed for redemption, the redemption price and the place at which shareholders may obtain payment of the Redemption Price upon surrender of their certificates, and the option of the shareholders to convert their Series D Preferred Shares into Common Shares, shall be mailed to each holder of record of the shares to be redeemed, at such holder's address of record, not less than 35, nor more than 90 days prior to the Redemption Date. Such notice shall set forth the manner in which shareholders may convert their Series D Preferred Shares into Common Shares, or to receive the Redemption Price, upon surrender of their certificates.
(c) Unless the Corporation defaults in the payment in full of the Redemption Price, (i) all rights of the holders of such Series D Preferred Shares as shareholders of the Corporation by reason of the ownership of such shares (including, without limitation, the right to convert the Series D Preferred Shares into Common Shares) shall cease on the Redemption Date except the right to receive the amount payable upon redemption of such shares upon presentation and surrender of the respective certificates evidencing such shares, and (ii) such shares shall be deemed not to be outstanding after the Redemption Date.
(d) Any Series D Preferred Shares that have been redeemed shall, after such redemption, not be reissued as Series D Preferred Shares, but shall become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled.
(e) Any notice required by the provisions of this Section 5.30.3 to be given to the holders of Series D Preferred Shares shall be deemed given if deposited in the United States mail postage prepaid, and addressed to each holder of record at his, her or its address appearing on the books of the Corporation.
5.30.4 Conversion Rights. The Series D Preferred Shares shall be convertible into Common Shares as follows:
(a) No Optional Conversion. Other than pursuant to a
redemption of the Series D Preferred Shares as set forth in
Section 3 above, the holders of Series D Preferred Shares
shall have no optional rights to convert such shares into
Common Shares.
(b) Automatic Conversion. Each Series D Preferred Share shall be automatically converted, without any further act of the Corporation or the holders of Series D Preferred Shares, into fully paid and nonassessable Common Shares in the manner and at the times specified below:
(i) Second Anniversary after Start Date. If the Deposit Goal is met prior to twenty-four (24) months from the Start Date, (A) the date of the automatic conversion into Common Shares shall be twenty-seven (27) months after the Start Date, and (B) each Series D Preferred Share shall automatically be converted into 1.25 Common Shares. If the Deposit Goal has not been met prior to twenty-four (24) months from the Start Date, the Series D Preferred Shares will not be converted into Common Shares until after the third anniversary of the Start Date.
(ii) Third Anniversary after Start Date. If the conversion of the Series D Preferred Shares into Common Shares has not previously taken place within thirty-six (36) months after the Start Date, then, thirty-nine (39) months after the Start Date, each outstanding Series D Preferred Share shall automatically be converted into (A) 1.10 Common Shares if the Deposit Goal has been met prior to the end of thirty-six (36) months after the Start Date, and (B) 1.02 Common Shares if the Deposit Goal has not been met prior to the end of thirty-six (36) months after the Start Date.
(iii) Determination of Whether Deposit Goal Has Been Met. The Deposit Goal shall have been met prior to a specified date if the average deposits at the Bank on behalf of the Banking Office for any calendar quarter prior to such date equal or exceed $25,000,000. For the purposes of determining whether the Deposit Goal has been met, the Corporation will follow the following procedures:
Credit for Deposits: The specific banking office at which a deposit account is opened receives the credit for the account; provided, however, that if the Banking Office is not authorized to accept deposits or has not yet opened for business, a deposit account may be established at another banking office on behalf of the Banking Office if designated as such. The Bank's accounting system tracks and accounts for all depository accounts on a daily basis.
Calendar Quarter Average: After a calendar quarter has expired, the Bank will calculate the calendar quarter average of deposits for accounts designated as gathered on behalf of the Banking Office by adding the sum of the daily general ledger balance for such deposits and then dividing this sum by the number of days in the calendar quarter.
All determinations regarding whether the Deposit Goal has been met as of any date shall be made by the Corporation. Such determinations in this regard shall be final and conclusive for all purposes.
(c) Mechanics of Conversion. Upon the occurrence of the dates specified in Section 5.30.4(b) above, the outstanding Series D Preferred Shares shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue to any holder certificates evidencing the Common Shares issuable upon such conversion unless certificates evidencing the Series D Preferred Shares are delivered either to the Corporation or any transfer agent designated by the Corporation. Conversion shall be deemed to have been effected on the date of the occurrence of the dates specified in Section 5.30.4(b) above, as the case may be, and such date is referred to herein as the "Conversion Date." Subject to the provisions of Section 5.30.4(b) above, as promptly as practicable thereafter (and after surrender of the certificate or certificates representing the Series D Preferred Shares to the Corporation or any transfer agent designated by the Corporation), the Corporation shall issue and deliver to such holder a certificate or certificates for the number of full Common Shares to which such holder is entitled as provided in Section 5.30.4(b) hereof. Subject to the provisions of Section 5.30.4(b), the person in whose name the certificate or certificates for Common Shares are to be issued shall be deemed to have become a holder of record of such Common Shares on the applicable Conversion Date.
(d) Fractional Shares. No fractional Common Shares or scrip shall be issued upon conversion of Series D Preferred Shares. In lieu of any fractional Common Shares which would otherwise be issuable upon conversion of any Series D Preferred Shares, the number of full Common Shares issuable upon conversion thereof shall be increased to the next higher number of whole shares.
(e) Rights After Conversion Date. From and after the Conversion Date (unless the Corporation defaults in issuing Common Shares in conversion for the outstanding Series D Preferred Shares on the Conversion Date), such Series D Preferred Shares shall be deemed not to be outstanding and all rights of the holders of such shares as Shareholders of the Corporation by reason of the ownership of such shares shall cease, except the right to receive Common Shares as provided in Section 5.30.4(b) herein on presentation and surrender of the respective certificates evidencing such Series D Preferred Shares. Upon presentation and surrender, on or after the Conversion Date, of any certificate evidencing Series D Preferred Shares (properly endorsed or assigned for transfer, if the Corporation shall so require), such shares shall be converted by the Corporation for Common Shares as provided in this Section 5.30.4.
(g) Reservation of Shares. The Corporation shall reserve at all times so long as any Series D Preferred Shares remain outstanding, free from preemptive rights, out of its treasury shares or its authorized but unissued Common Shares, or both, solely for the purpose of effecting the conversion of the Series D Preferred Shares, sufficient Common Shares to provide for the conversion of all outstanding Series D Preferred Shares.
(h) Fully Paid and Nonassessable Shares. All Common Shares or other securities which may be issued upon conversion of the Series D Preferred Shares will upon issuance by the Corporation be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof and the Corporation shall take no action which would cause a contrary result.
5.30.5 Conversion Ratio Adjustments. The number of Common Shares into which the Series D Preferred Shares shall be converted pursuant to Section 5.30.4 (the "Conversion Ratios") and the securities or other property deliverable upon conversion of the Series D Preferred Shares shall be subject to adjustment from time to time as follows:
(a) Share Subdivisions or Split-Ups. If the number of Common Shares outstanding at any time after the date of issuance of the Series D Preferred Shares is increased by a subdivision or split-up of Common Shares, then immediately after the record date fixed for the determination of holders of Common Shares entitled to receive such subdivision or split-up, as the case may be, the Conversion Ratios shall be appropriately increased so that the holder of any Series D Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series D Preferred Shares been converted immediately prior thereto.
(c) Reorganization, Reclassification, Merger, Sale of All Assets, etc. In case of any capital reorganization of the Corporation, or of any reclassification of the Common Shares, or in case of the consolidation of the Corporation with or the merger of the Corporation with or into any other Person or of the sale, lease or other transfer of all or substantially all of the assets of the Corporation to any other Person, or in the case of any distribution of cash or other assets or of notes or other indebtedness of the Corporation or any other securities of the Corporation (except Common Shares) to the holders of its Common Shares, each Series D Preferred Share shall, after such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution, be convertible into the number of shares or other securities or property to which the Common Shares issuable (at the time of such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution) upon conversion of such Series D Preferred Shares would have been entitled upon such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution in place of (or in addition to, in the case of any such event after which Common Shares remain outstanding) the Common Shares into which such Series D Preferred Shares would otherwise have been convertible; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interest thereafter of the holders of Series D Preferred Shares shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares or other securities or property thereafter deliverable on the conversion of the Series D Preferred Shares.
(e) Timing of Issuance of Additional Common Shares upon Certain Adjustments. In any case in which the provisions of this Section 5.30.5 shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event issuing to the holder of any Series D Preferred Shares converted after such record date and before the occurrence of such event the additional Common Shares or other property issuable or deliverable upon such conversion by reason of the adjustment required by such event over and above the Common Shares or other property issuable or deliverable upon such conversion before giving effect to such adjustment; provided, however, that the Corporation upon request shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares or other property, and such cash, upon the occurrence of the event requiring such adjustment.
(f) Statement Regarding Adjustments. Whenever the
Conversion Ratios shall be adjusted as provided in this
Section 5.30.5, the Corporation shall forthwith file, at the
office of any transfer agent for the Series D Preferred
Shares and at the principal office of the Corporation a
statement showing in detail the facts requiring such
adjustment and the Conversion Ratios that shall be in effect
after such adjustment, and the Corporation shall also cause
a copy of such statement to be mailed, first class postage
prepaid, to each holder of Series D Preferred Shares at its
address appearing on the Corporation's records.
(g) Cost. The Corporation shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of Common Shares of the Corporation or other securities or property upon conversion of any Series D Preferred Shares; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares or securities in the name other than that of the holder of Series D Preferred Shares in respect of which such shares are being issued.
5.30.6 Voting. The holders of Series D Preferred Shares shall have no right or power to vote on any matter except as required by law. In any matter on which the holders of Series D Preferred Shares shall, as a matter of law, be entitled to vote, the holders shall be entitled to one vote for each Series D Preferred Share held.
5.30.7 Liquidation Rights.
(a) Upon the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of Series D Preferred Shares then outstanding shall be entitled to receive out of the assets of the Corporation available for distribution to equity holders, an amount per share in cash equal to the Purchase Price before any payment or distribution shall be made on the Common Shares or on any other class of capital shares of the Corporation ranking junior to the Series D Preferred Shares upon liquidation. The Series D Preferred Shares shall rank at parity with all outstanding shares of any other series of preferred shares. The consolidation or merger of the Corporation, or a sale, exchange or transfer of all or substantially all of its assets as an entirety, shall not be regarded as a "dissolution, liquidation or winding up of the Corporation" within the meaning of this Section 5.30.7(a).
(b) After the payment to the holders of Series D Preferred Shares of the full preferential amounts fixed hereby for Series D Preferred Shares, the holders of Series D Preferred Shares as such shall have no right or claim to any of the remaining assets of the Corporation.
(c) If the assets of the Corporation available for distribution to the holders of Series D Preferred Shares upon dissolution, liquidation or winding up of the Corporation are insufficient to pay in full all amounts to which such holders are entitled pursuant to Section 5.30.7(a), no distribution shall be made on account of any shares of a class or series of capital shares of the Corporation ranking on a parity with the Series D Preferred Shares, if any, upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the Series D Preferred Shares, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up.
5.30.8 Reports to Holders of Series D Preferred Shares. For so long as there shall remain outstanding any Series D Preferred Shares, the Corporation shall furnish to each holder of record of Series D Preferred Shares (i) all reports or other correspondence sent by the Corporation to holders of record of the Common Shares of the Corporation, and (ii) a quarterly report setting forth the average monthly deposits on behalf of the Banking Office.
5.30.9 Certain Covenants. So long as any Series D Preferred Shares are outstanding, without the prior written consent of the holders of a majority of the outstanding Series D Preferred Shares, the Corporation shall not amend, alter or repeal any provisions of this resolution establishing Series D Convertible Preferred Shares, or otherwise amend, alter or repeal any provision of the Articles of Incorporation of the Corporation so as to affect adversely the preferences, rights, powers or privileges of the Series D Preferred Shares.
5.30.10 Certain Events. If any event occurs of the type
contemplated but not expressly provided for by the provisions of
Section 5.30.4 or Section 5.30.5 herein, then the Corporation's
Board of Directors will make an appropriate adjustment in the
Conversion Ratios for the Series D Preferred Shares to protect
the rights of the holders thereof.
5.30.11 Exclusion of Other Rights. Unless otherwise required by law, the Series D Preferred Shares shall not have any voting powers, preferences or relative, participating, optional or other special rights other than those specifically set forth herein.
5.4 Voting Rights.
5.41 Voting Rights.
5.41.1 Common Shares. Every holder of the Common Shares of the Corporation shall have the right at every Shareholders' meeting, to one vote for each Common Share standing in his or her name on the books of the Corporation.
5.42 No Greater Requirements. Nothing in these Articles shall be deemed to require any greater portion of the Shares to concur in any action taken by the Shareholders than is required by law.
5.43 Record Date. The By-Laws may provide for a record date for determining Shareholders entitled to receive payment of any dividend or for determining Shareholders for any other purpose.
5.44 Mergers and Consolidations. Any class of Shares of this Corporation shall be entitled to vote as a class if the agreement of merger or consolidation contains any provision which, if contained in a proposed amendment to the Articles of Incorporation of the Corporation, would entitle such class of Shares to vote as a class.
5.45 Voting on Special Corporate Transactions. In voting on adoption of any proposal for a special corporate transaction or for dissolution of the Corporation, all Shares shall vote as a single class and no Shares shall be entitled to vote as a separate class.
5.46 Mergers With Subsidiaries. Nothing herein contained shall limit the power of the Corporation or prescribe the procedures to be followed in any merger or consolidation of any subsidiary of this Corporation, ninety-five percent (95%) (or such lesser percentage as may hereafter be prescribed by law) or more of the outstanding Shares of which subsidiary are owned by this Corporation and any such merger or consolidation of any such subsidiary may be accomplished by the Board of Directors of this Corporation in the manner prescribed by law.
5.47 Class Voting. If the holders of any class of Shares are entitled to vote as a class, the proposal shall be adopted upon receiving the affirmative vote of the holders of at least a majority (or such greater proportion as these Articles of Incorporation may require) of the Shares of each class of Shares entitled to vote thereon as a class and of the total Shares entitled to vote thereon.
The stated capital of the Corporation is at least $1000.00.
7.01 Number of Directors. The Board of Directors is composed of sixteen (16) members. The number of directors may be from time to time fixed by the By-Laws of the Corporation at any number. In the absence of a By-Law fixing the number of directors, the number shall be sixteen.
7.02 Section Qualifications of Directors. No qualifications are prescribed by these Articles.
The name(s) and post office address(es) of the President and Executive Vice President, Secretary of the Corporation are:
Name Number and Street or Building City State Zip Code ---- ----------------------------- ---- ----- -------- Paul N. Dinkins 500 Washington Street Columbus Indiana 47201 (President) John A. Nash 500 Washington Street Columbus Indiana 47201 (Executive Vice President, Secretary) |
9.01 Code of By-Laws. The Board of Directors of the Corporation shall have power, without the assent of the Shareholders, to make, alter, amend or repeal the Code of By-Laws of the Corporation, but the affirmative vote of a majority of the members of the Board of Directors for the time being shall be necessary to make such Code or to effect any alteration, amendment or repeal thereof. All provisions for the regulation of business and management of the affairs of the Corporation shall be stated in the By-Laws.
9.02 Meetings of Shareholders. Meetings of the Shareholders of the Corporation shall be held at such place within or without the State of Indiana as may be specified in the respective notices or waivers of notice thereof or as specified in the By-Laws.
9.03 Meetings of Directors. Meetings of the Board of Directors and committees thereof of the Corporation shall be held at such place within or without the State of Indiana as may be specified in the respective notices or waivers of notice thereof or as specified in the By-Laws. The By-Laws shall prescribe the manner in which notice of such meetings may be given and the time before such meeting in which such notice shall be given, unless waived.
9.04 Interest of Directors in Contracts. Any contract or other transaction between the Corporation and any corporation in which this Corporation owns all or a part of the capital stock shall be valid and binding notwithstanding the fact that the officers and/or directors executing the contract on behalf of this Corporation are the same or a majority of them are the same or the participating directors or officers are the same. With the exception provided above, any contract or other transaction between the Corporation and any one or more of its directors or between the Corporation and any firm of which one or more of its directors are members or employees or in which they are interested or between the Corporation and any corporation or association in which one or more of its directors are stockholders, members, directors, officers or employees or in which they are interested, shall be valid for all purposes notwithstanding the presence of such director or directors at the meeting of the Board of Directors which acts upon or in reference to such contract or transaction and notwithstanding his or their participation in such action if the fact of such interest shall be disclosed or known to the Board of Directors and the Board of Directors shall authorize, approve and ratify such contract or transaction by a vote of the majority of the directors present, such interested director or directors to be counted in determining whether a quorum is present but not to be counted in calculating the majority of such quorum necessary to carry such vote. This section shall not be construed to invalidate any contract or other transaction which would otherwise be valid under the common and statutory law applicable thereto.
9.05 Indemnification of Directors, Officers and Employees.
9.05.1 "Liability;" "Expense;" As used in this Section 9.05 the terms "liability" and "expense" shall include but shall not be limited to attorneys' fees and disbursements and amounts of judgment, fines or penalties against and amounts paid in settlement by the directors, officers or employees.
9.05.2 "Claim." As used in this Section 9.05, the term "claim" shall include: (i) any claim, action, suit or proceeding, whether actual or threatened, brought by or in the right of this Corporation or another corporation or otherwise, civil, criminal or administrative or in connection with an investigation or appeal relating thereto, (ii) against a person who is or was a director, officer or employee of this Corporation or a person who was serving as a director, officer or employee of any other corporation at the request of this Corporation, and (iii) which is asserted against or threatened against him, as a party or otherwise, by reason of his having been a director, officer or employee of this Corporation or such other corporation or by reason of any past or future action taken or not taken in his capacity as such director, officer or employee, whether or not he continues to be such at the time the claim is asserted or threatened.
9.05.3 Indemnity. Any such director, officer or employee who has been wholly successful on the merits or otherwise with respect to any claim of the character described herein shall be entitled to indemnification as of right. Except as provided in the preceding sentence, any indemnification hereunder shall be made at the discretion of the Corporation but only if (i) the Board of Directors acting by a quorum consisting of directors who are not parties to or who have been wholly successful with respect to such claim, action, suit or proceeding shall find that the person to be indemnified acted in good faith in what he reasonably believed to be the best interests of this Corporation or such other corporation, as the case may be, and, in addition, in any criminal action or proceeding (which shall not be deemed to include civil, administrative or investigative actions or proceedings in which conduct which violates a criminal statute is alleged) he had no reasonable cause to believe that his conduct was unlawful, or (ii) independent legal counsel (who may be regular counsel of the Corporation) shall deliver to it its written opinion that the person to be indemnified so acted.
9.05.4 No Presumption. The termination of any claim by judgment, settlement (whether with or without court approval) or conviction or upon a plea of guilty or of nolo contendere or its equivalent shall not create a presumption that the person to be indemnified did not meet the standard of conduct set forth in Section 9.05.3.
9.05.5 Several Claims. If several claims, issues or matters of action are involved, any such person may be entitled to indemnification as to some matters even though he is not entitled as to other matters.
9.05.6 Advances. The Corporation may advance expenses to or, where appropriate, may at its expense undertake the defense of any such director, officer or employee upon receipt of an undertaking by or on behalf of such person to repay such expenses if it should ultimately be determined that he is not entitled to indemnification under this Section 9.05.
9.05.7 Applicability. The provisions of this Section 9.05 shall be applicable to claims, actions, suits or proceedings made or commenced after the adoption hereof, whether arising from acts or omissions to act during, before or after the adoption hereof.
9.05.9 Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation against any liability asserted against him and incurred by him in any capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Section 9.05 or otherwise.
9.06 Partnerships. The Board of Directors shall have the power to authorize the Corporation to enter into partnerships or any other lawful arrangement for the sharing of profits, union of interest, reciprocal association, cooperative association, partnership, joint venture or syndicate with any corporation, association, partnership, individual, firm or other legal entity for the purpose of carrying on any lawful business.
9.07 Committees. The By-Laws may provide for an executive committee and other committees, which shall have the fullest authority to act for the Board of Directors permitted under the laws of Indiana.
9.08 Removal of Directors. The Shareholders shall have no power to remove directors during their terms of office. Any director may be removed for specific cause found and determined by a vote of not less than two-thirds (2/3) of the entire Board of Directors at any time.
9.09 Term of Directors. When the Board of Directors consists of nine (9) or more directors, the By-Laws may specify that the directors shall be apportioned into two or more classes whose terms of office shall expire at different times, but no term shall continue longer than three (3) years.
9.10 Amendment of Articles of Incorporation. The Corporation reserves the right to alter, amend and repeal any provisions contained in these Articles of Incorporation in the manner now or hereafter prescribed by the provisions of the Act or any other pertinent enactment of the General Assembly of the State of Indiana and all rights and powers conferred hereby on Shareholders, directors and officers of the Corporation are subject to such reserved right.
EXHIBIT 3(b)
I, SUE ANNE GILROY, Secretary of State of Indiana, hereby certify that Articles of Amendment of the above For-Profit Domestic Corporation have been presented to me at my office, accompanied by the fees prescribed by law and that the documentation presented conforms to law as prescribed by the provisions of the Indiana Business Corporation Law.
NOW, THEREFORE, with this document I certify that said transaction will become effective Friday, March 02, 2001.
In Witness Whereof, I have caused to be affixed my signature and the seal of the State of Indiana, at the City of Indianapolis, March 2, 2001.
/s/ Sue Anne Gilroy SUE ANNE GILROY, SECRETARY OF STATE |
ARTICLES OF AMENDMENT OF THE
ARTICLES OF INCORPORATION OF:
Name of Corporation: Irwin Financial Corporation Date of Incorporation: May 31, 1972
The undersigned officers of the above referenced Corporation (hereinafter referred to as the "Corporation") existing pursuant to the provisions of: (indicate appropriate act)
[X] Indiana Business Corporation Law, as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating amendment of certain provisions of its Articles of Incorporation, certify the following facts:
The exact text of Article(s), Article V, Section 5.31 of the Articles, is amended to add a new Section 5.31, as set forth in Exhibit A attached hereto.
Date of each amendment's adoption: March 1, 2001
[X] SECTION 1 This amendment was adopted by the Board of Directors or incorporators and shareholder action was not required.
The manner of the adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal compliance with the provisions of the Act, the Articles of Incorporation, and the By-Laws of the Corporation.
I hereby verify, subject to the penalties of perjury, that the statements contained herein are true, this 1st day of March, 2001.
/s/ Matthew F. Souza MATTHEW F. SOUZA Secretary |
5.31 By resolution adopted on March 1, 2001, the Board of Directors of Irwin Financial Corporation (the "Corporation"), has established and designated a series of Preferred shares to be called the Junior Participating Series A Preferred Stock, to consist of 400,000 shares having the following terms:
5.31.1 Designation and Amount. There shall be a series of Preferred Stock of the Corporation which shall be designated as "Junior Participating Series A Preferred Stock" without par value (hereinafter called "Junior Preferred Stock"), and the number of shares constituting such series shall be 400,000. Such number of shares may be increased or decreased by resolution of the Board of Directors and by the filing of an amendment to the Restated Articles of Incorporation pursuant to the provisions of the Indiana Business Corporation Law stating that such increase or reduction has been so authorized; provided, however, that no decrease shall reduce the number of shares of Junior Preferred Stock to a number less than that of the shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation.
5.31.2 Dividends and Distributions.
(a) The holders of shares of Junior Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally available
for the purpose, quarterly dividends payable in cash to holders of record on
the first business day of March, June, September and December in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Junior Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b)
subject to the provision for adjustment hereinafter set forth, one hundred times
the aggregate per share amount of all cash dividends, and one hundred times
the aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions other than a dividend payable in shares of Common Stock
(hereinafter defined) or a subdivision of the outstanding shares of Common Stock
(by reclassification or otherwise), declared on the Common Stock, no par value
per share, of the Corporation (the "Common Stock") since the immediately
preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or fraction of
a share of Junior Preferred Stock. In the event the Corporation shall at any
time (i) declare any dividend on Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding Common Stock or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each such case the amount
to which holders of shares of Junior Preferred Stock were entitled immediately
prior to such event under clause (b) of the preceding sentence shall be adjusted
by multiplying each such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the Junior Preferred Stock as provided in paragraph (a) above at the time it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock).
(c) No dividend or distribution (other than a dividend payable in shares of Common Stock) shall be paid or payable to the holders of shares of Common Stock unless, at the same time as such payment is made with respect to the Common Stock or prior thereto, all accrued but unpaid dividends to the date of such dividend or distribution shall have been paid to the holders of shares of Junior Preferred Stock.
(d) Dividends shall begin to accrue and be cumulative on outstanding shares of Junior Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Junior Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Junior Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Junior Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Junior Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof.
5.31.3 Voting Rights. Each share of Junior Preferred Stock shall entitle the holder thereof to one hundred votes on all matters submitted to a vote of the shareholders of the Corporation. Except as otherwise provided herein or by law, the holders of shares of Junior Preferred Stock and the holders of Common Stock shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation.
(a) Whenever quarterly dividends or other dividends or distributions payable on the Junior Preferred Stock as provided in Section 5.31.2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Junior Preferred Stock outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Junior Preferred Stock, except dividends paid ratably on the Junior Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Junior Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Junior Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of Junior Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section, purchase or otherwise acquire such shares at such time and in such manner.
5.31.5 Liquidation, Dissolution or Winding Up.
(a) Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Preferred Stock unless, prior thereto, the holders of Junior Participating Series A Preferred Stock shall have received for each whole share the greater of (i) $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (ii) one hundred times the aggregate per share amount received by holders of Common Stock (the "Series A Liquidation Preference").
(b) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Junior Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences.
5.31.6 Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, share exchange, combination or other transaction in which the shares of Common Stock are exchanged for or converted into other stock or securities, cash and/or any other property, then in any such case the shares of Junior Preferred Stock shall at the same time be similarly exchanged or converted in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to one hundred times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is converted or exchanged. In the event the Corporation shall at any time (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or conversion of shares of Junior Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
5.31.7 Redemption. The shares of a Junior Preferred Stock shall not be redeemable by the Corporation. The preceding sentence shall not limit the ability of the Corporation to purchase or otherwise deal in such shares of stock to the extent permitted by law.
5.31.8 Fractional Shares. Junior Preferred Stock may be issued in fractions
of a share which shall entitle the holder, in proportion to such holder's fractional
shares, to exercise voting rights, receive dividends, participate in distributions
and to have the benefit of all other rights of holders of Junior Preferred Stock.
EXHIBIT 3(c)
1.01. Corporation. As used in this Code of By-Laws, the term "Corporation" means IRWIN FINANCIAL CORPORATION.
1.02. Act. As used in this Code of By-Laws, the term "Act" means The Indiana General Corporation Act.
1.03. Articles of Incorporation. As used in this Code of By-Laws, the term "Articles of Incorporation" means the Articles of Incorporation of the Corporation, as amended from time to time.
1.04. By-Laws. As used in this Code of By-Laws, the term "By-Laws" means the Code of By-Laws of the Corporation, as amended from time to time.
2.01. Name. The name of the Corporation is IRWIN FINANCIAL CORPORATION.
2.02. Principal Office and Resident Agent - Power to Change. The postoffice address of the principal office of the Corporation is 500 Washington Street, Columbus, Indiana 47201, and the postoffice address of its Resident Agent in charge of such office is John A. Nash, 500 Washington Street, Columbus, Indiana 47201. The location of its principal office, or the designation of its Resident Agent, or both, may be changed at any time or from time to time, when authorized by the Board of Directors, by filing with the Secretary of State of the State of Indiana, on or before the day any such change is to take effect, or within five (5) days after the death of the Resident Agent or other unforeseen termination of his agency, a certificate signed by the President or a Vice President, and the Secretary or an Assistant Secretary, of the Corporation, and verified under oath by one of such officers signing the same, stating the change to be made and reciting that such change is made pursuant to authorization by the Board of Directors.
2.03. Seal. The seal of the Corporation shall be circular in form and mounted upon a metal die, suitable for impressing the same upon paper. About the upper periphery of the seal shall appear the name of the Corporation, and about the lower periphery thereof the word "Indiana". In the center of the seal shall appear the words "Seal" or "Corporate Seal".
2.04. Fiscal Year. The fiscal year of the Corporation shall be the calendar year.
3.01. Consideration for Shares. The Board of Directors shall cause the Corporation to issue the Shares of the Corporation for such consideration as may be fixed by such Board pursuant to the provisions of the Articles of Incorporation.
3.02. Subscription for Shares. Subscriptions for Shares of the Corporation shall be paid to the Treasurer at such time or times, in such installments or calls, and upon such terms, as shall be determined, from time to time, by the Board of Directors. Any call made by the Board of Directors for payment on subscriptions shall be uniform as to all Shares of the same class or to all Shares of the same series, as the case may be.
3.03. Payment for Shares. Subject to the provisions of the Articles of Incorporation, the consideration for the issuance of Shares of the Corporation may be paid, in whole or in part, in money, in other property, tangible or intangible, or in labor actually performed for, or services actually rendered to, the Corporation; provided, however, that the part of the surplus of the Corporation which is transferred to stated capital upon the issuance of Shares as a Share dividend shall be deemed to be the consideration for the issuance of such Shares. When payment of the consideration for which a Share was authorized to be issued shall have been received by the Corporation, or when surplus shall have been transferred to stated capital upon the issuance of a Share dividend, such Share shall be declared and taken to be fully paid and not liable to any further call or assessment, and the holder thereof shall not be liable for any further payments thereon. In the absence of actual fraud in the transaction, the judgment of the Board of Directors as to the value of such property, labor, or services received as consideration, or the value placed by the Board of Directors upon the corporate assets in the event of a Share divided, shall be conclusive. Promissory notes, uncertified checks, or future services shall not be accepted in payment or part payment of any of the capital stock of the Corporation.
3.04. Certificates for Shares. Each Shareholder of the Corporation shall be entitled to a certificate, signed by the President or a Vice-President, and the Secretary or an Assistant Secretary of the Corporation stating the name of the registered holder, the number of Shares represented thereby and the kind and class thereof, the par value of each Share or a statement that such Shares have no par value, and whether such Shares have been fully paid and are nonassessable. If such certificate is countersigned by the written signature of a registrar other than the Corporation or its employee, the signatures of the transfer agent and the officers of the Corporation may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of its issue. Such certificates shall be in such form as the Board of Directors may, from time to time, by resolution approve.
3.05. Transfer of Shares. The Shares of the Corporation shall be transferable only on the books of the Corporation upon surrender of the certificate or certificates representing the same, provided:
3.051. Endorsement. The certificate is properly endorsed by the registered holder or his duly authorized attorney;
3.052. Witnessing. The endorsement or endorsements are witnessed by one witness unless this requirement is waived in writing upon the form of endorsement by the President, a Vice President, or the Secretary of the Corporation;
3.053. Adverse Claims. The Corporation has no notice of any adverse claims or has discharged any duty to inquire into any such claims; and
3.054. Collection of Taxes. Any applicable law relating to the collection of taxes has been complied with.
3.06. Lost, Stolen or Destroyed Certificates. The Corporation may issue a new certificate for Shares of the Corporation in the place of any certificate theretofore issued where the holder of record of the certificate:
3.061. Claim. Makes proof in affidavit form that it has been lost, destroyed, or wrongfully taken;
3.062. Timely Request. Requests the issue of a new certificate before the Corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of any adverse claim;
3.063. Bond. Gives a bond in such form, and with such surety or sureties, with fixed or open penalty, as the Corporation may direct, to indemnify the Corporation against any claim that may be made on account of the alleged loss, destruction, or theft of the certificates; and
3.064. Other Requirements. Satisfies any other reasonable requirements imposed by the Corporation.