UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                      .
Commission File Number: 0-6835
IRWIN FINANCIAL CORPORATION
(Exact Name of Corporation as Specified in its Charter)
     
Indiana   35-1286807
     
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
     
500 Washington Street Columbus, Indiana   47201
     
(Address of Principal Executive Offices)   (Zip Code)
     
(812) 376-1909   www.irwinfinancial.com
     
(Corporation’s Telephone Number, Including Area Code)   (Web Site)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
As of April 24, 2007, there were outstanding 29,539,804 common shares, no par value, of the Registrant.

 

FORM 10-Q
TABLE OF CONTENTS
                 
            PAGE  
            NO.  
PART I  
FINANCIAL INFORMATION
  3  
Item 1  
Financial Statements
  3  
Item 2  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  17  
Item 3  
Quantitative and Qualitative Disclosures About Market Risk
  47  
Item 4  
Controls and Procedures
  47  
PART II  
OTHER INFORMATION
  48  
Item 2  
Unregistered Sales of Equity Securities and Use of Proceeds
  48  
Item 6  
Exhibits
  49  
       
Signatures
  52  
  Certification by CEO
  Certification by CFO
  Section 906 Certification of the CEO
  Section 906 Certification of the CFO
 

2

PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
                 
    March 31,   December 31,
    2007   2006
    (Dollars in thousands)
Assets:
               
Cash and cash equivalents
  $ 61,821     $ 145,765  
Interest-bearing deposits with financial institutions
    43,393       53,106  
Residual interests
    9,619       10,320  
Investment securities- held-to-maturity (Fair value: $17,766 at March 31, 2007 and $17,893 at December 31, 2006)
    18,038       18,066  
Investment securities- available-for-sale
    116,659       110,364  
Loans held for sale
    44,906       237,510  
Loans and leases, net of unearned income — Note 3
    5,414,778       5,238,193  
Less: Allowance for loan and lease losses — Note 4
    (84,876 )     (74,468 )
     
 
    5,329,902       5,163,725  
Servicing assets — Note 5
    30,105       31,949  
Accounts receivable
    70,591       208,585  
Accrued interest receivable
    24,567       26,470  
Premises and equipment
    38,671       36,211  
Other assets
    188,008       139,314  
Assets held for sale — Note 2
    41,456       56,573  
     
Total assets
  $ 6,017,736     $ 6,237,958  
     
 
               
Liabilities and Shareholders’ Equity:
               
Deposits
               
Noninterest-bearing
  $ 336,298     $ 687,626  
Interest-bearing
    1,748,012       1,756,109  
Certificates of deposit over $100,000
    1,363,087       1,107,781  
     
 
    3,447,397       3,551,516  
Short-term borrowings — Note 6
    619,304       602,443  
Collateralized debt — Note 7
    1,102,025       1,173,012  
Other long-term debt
    233,885       233,889  
Other liabilities
    102,256       146,596  
     
Total liabilities
    5,504,867       5,707,456  
     
Commitments and contingencies — Note 11
               
Shareholders’ equity
               
Preferred stock, no par value — authorized 4,000,000 shares; none issued
    —       —  
Noncumulative perpetual preferred stock - 15,000 authorized and issued
    14,446       14,518  
Common stock, no par value — authorized 40,000,000 shares; issued 29,890,917 shares and 29,879,773 shares as of March 31, 2007 and December 31, 2006; 430,316 shares 143,543 shares in treasury as of March 31, 2007 and December 31, 2006
    116,246       116,192  
Additional paid-in capital
    1,688       1,583  
Accumulated other comprehensive loss, net of deferred income tax benefit of $4,003 and $4,813 as of March 31, 2007 and December 31, 2006
    (3,785 )     (4,364 )
Retained earnings
    393,564       405,835  
     
 
    522,159       533,764  
Less treasury stock, at cost
    (9,290 )     (3,262 )
     
Total shareholders’ equity
    512,869       530,502  
     
Total liabilities and shareholders’ equity
  $ 6,017,736     $ 6,237,958  
     
The accompanying notes are an integral part of the consolidated financial statements.

3

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
                 
    For the Three Months Ended March 31,  
    2007     2006  
    (Dollars in thousands, except per share)  
Interest income:
               
Loans and leases
  $ 119,349     $ 97,886  
Loans held for sale
    4,942       11,406  
Residual interests
    270       664  
Investment securities
    2,457       1,485  
Federal funds sold
    20       26  
 
           
Total interest income
    127,038       111,467  
 
           
Interest expense:
               
Deposits
    33,451       29,682  
Short-term borrowings
    7,806       4,106  
Collateralized debt
    15,815       11,111  
Other long-term debt
    3,838       4,990  
 
           
Total interest expense
    60,910       49,889  
 
           
Net interest income
    66,128       61,578  
Provision for loan and lease losses — Note 4
    23,208       9,193  
 
           
Net interest income after provision for loan and lease losses
    42,920       52,385  
Other income:
               
Loan servicing fees
    5,912       8,108  
Amortization and impairment of servicing assets
    (4,950 )     (5,902 )
(Loss) gain from sales of loans and loans held for sale
    (5,907 )     2,768  
Trading losses
    (264 )     (219 )
Derivative (losses) gains, net
    (1,089 )     2,768  
Other
    5,484       6,473  
 
           
 
    (814 )     13,996  
 
               
Other expense:
               
Salaries
    25,735       25,303  
Pension and other employee benefits
    7,738       7,773  
Office expense
    2,337       2,094  
Premises and equipment
    5,628       5,035  
Marketing and development
    1,209       668  
Professional fees
    2,086       2,398  
Other
    7,552       9,543  
 
           
 
    52,285       52,814  
 
           
(Loss) income before income taxes from continuing operations
    (10,179 )     13,567  
Provision for income taxes
    (4,085 )     4,877  
 
           
Net (loss) income from continuing operations
    (6,094 )     8,690  
Loss from discontinued operations, net of $2,742 and $7,026 income tax benefit, respectively — Note 2
    (4,035 )     (10,548 )
 
           
Net loss
  $ (10,129 )   $ (1,858 )
 
           
 
               
Earnings per share from continuing operations: — Note 9
               
Basic
  $ (0.22 )   $ 0.30  
 
           
Diluted
  $ (0.22 )   $ 0.30  
 
           
 
               
Earnings per share: — Note 9
               
Basic
  $ (0.35 )   $ (0.06 )
 
           
Diluted
  $ (0.36 )   $ (0.07 )
 
           
Dividends per share
  $ 0.12     $ 0.11  
 
           
The accompanying notes are an integral part of the consolidated financial statements.

4

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the Three Months Ended March 31, 2007, and 2006
                                                                                 
                    Accumulated Other Comprehensive Income                              
                                            Defined     Additional                     Perpetual  
            Retained     Foreign     Unrealized Gain/Loss     Benefit     Paid in     Common     Treasury     Preferred  
    Total     Earnings     Currency     Securities     Derivatives     Plans     Capital     Stock     Stock     Stock  
    (Dollars in thousands)  
Balance at January 1, 2007
  $ 530,502     $ 405,835     $ 2,884     $ (344 )   $ (30 )   $ (6,874 )   $ 1,583     $ 116,192     $ (3,262 )   $ 14,518  
Net loss
    (10,129 )     (10,129 )                                                                
Unrealized gain on investment securities net of $21 tax liability
    31                       31                                                  
Unrealized gain on derivatives net of $121 tax liability
    183                               183                                          
Foreign currency adjustment
    365               365                                                          
 
                                                                             
Other comprehensive income
    579                                                                          
 
                                                                             
Total comprehensive income
    (9,550 )                                                                        
Cash dividends — common stock
    (3,533 )     (3,533 )                                                                
Cash dividends — preferred stock
    (352 )     (352 )                                                                
FAS 156 adoption
    1,743       1,743                                                                  
Tax benefit on stock option exercises
    116                                               116                          
Stock option expense
    363                                               363                          
Stock issuance costs
    (72 )                                                                     (72 )
Stock:
                                                                               
Purchase of 359,848 shares
    (7,668 )                                                             (7,668 )        
Sales of 74,199 shares
    1,320                                               (374 )     54       1,640          
     
Balance at March 31, 2007
  $ 512,869     $ 393,564     $ 3,249     $ (313 )   $ 153     $ (6,874 )   $ 1,688     $ 116,246     $ (9,290 )   $ 14,446  
     
 
                                                                               
Balance at January 1, 2006
  $ 512,334     $ 418,784     $ 3,341     $ (373 )   $ 754     $ (274 )   $ 50     $ 112,000     $ (21,948 )   $ —  
Net loss
    (1,858 )     (1,858 )                                                                
Unrealized loss on investment securities net of $79 tax benefit
    (119 )                     (119 )                                                
Unrealized loss on derivative net of $4 tax benefit
    (6 )                             (6 )                                        
Foreign currency adjustment
    (153 )             (153 )                                                        
 
                                                                             
Other comprehensive income
    (278 )                                                                        
 
                                                                             
Total comprehensive income
    (2,136 )                                                                        
Cash dividends
    (3,268 )     (3,268 )                                                                
Tax benefit on stock option exercises
    319                                               319                          
Stock option expense
    253                                               253                          
Conversion of trust preferred shares to 1,013,938 shares of common stock
    19,513       (1,058 )                                             1,070       19,501          
Stock:
                                                                               
Purchase of 48,303 shares
    (950 )                                                             (950 )        
Sales of 124,386 shares
    1,628       (508 )                                     (300 )     179       2,257          
     
Balance at March 31, 2006
  $ 527,693     $ 412,092     $ 3,188     $ (492 )   $ 748     $ (274 )   $ 322     $ 113,249     $ (1,140 )   $ —  
     
The accompanying notes are an integral part of the consolidated financial statements.

5

CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                 
    For the Three Months ended March 31,  
    2007     2006  
    (Dollars in thousands)  
(Loss) Income from continuing operations
  $ (6,094 )   $ 8,690  
Loss from discontinued operations
    (4,035 )     (10,548 )
 
           
Net Loss
    (10,129 )     (1,858 )
Adjustments to reconcile net income to cash provided by operating activities:
               
Depreciation, amortization, and accretion, net
    2,356       1,486  
Amortization and impairment of servicing assets
    5,199       15,562  
Provision for loan and lease losses
    23,208       9,240  
Loss (gain) from sales of loans held for sale
    10,155       (18,117 )
Originations and purchases of loans held for sale
    (208,830 )     (2,565,909 )
Proceeds from sales and repayments of loans held for sale
    233,201       2,622,218  
Net decrease in residuals
    971       8,383  
Net decrease in accounts receivable
    137,994       30,036  
Other, net
    (92,243 )     (29,209 )
 
           
Net cash provided by operating activities
    101,882       71,832  
 
           
Investing activities:
               
Proceeds from maturities/calls of investment securities:
               
Held-to-maturity
    127       45  
Available-for-sale
    974       913  
Purchase of investment securities:
               
Held-to-maturity
    (100 )     —  
Available-for-sale
    (7,240 )     (692 )
Net decrease (increase) in interest-bearing deposits
    9,713       (14,035 )
Net increase in loans, excluding sales
    (44,957 )     (353,095 )
Proceeds from sale of loans
    28,023       122,635  
Other, net
    (4,120 )     (2,729 )
 
           
Net cash used by investing activities
    (17,580 )     (246,958 )
 
           
Financing activities:
               
Net (decrease) increase in deposits
    (104,118 )     175,507  
Net increase (decrease) in short-term borrowings
    16,861       (254,284 )
Proceeds from issuance of collateralized debt
    27,206       335,384  
Repayments of collateralized debt
    (98,208 )     (90,068 )
Proceeds from the issuance of trust preferred securities
    —       31,500  
Redemption of trust preferred securities and other long term debt
    (4 )     (32,112 )
Purchase of treasury stock for employee benefit plans
    (7,668 )     (950 )
Proceeds from sale of stock for employee benefit plans
    1,436       1,947  
Dividends paid
    (3,885 )     (3,268 )
 
           
Net cash (used) provided by financing activities
    (168,380 )     163,656  
 
           
Effect of exchange rate changes on cash
    134       (74 )
 
           
Net decrease in cash and cash equivalents
    (83,944 )     (11,544 )
Cash and cash equivalents at beginning of period
    145,765       155,486  
 
           
Cash and cash equivalents at end of period
  $ 61,821     $ 143,942  
 
           
Supplemental disclosures of cash flow information:
               
Cash flow during the period:
               
Interest paid
  $ 59,659     $ 54,685  
 
           
Income taxes paid
  $ 6,152     $ 4,103  
 
           
Noncash transactions:
               
Adoption of FAS 156
  $ 1,743     $ —  
 
           
Loans transferred from held-for-sale to held-for-investment
  $ 166,773     $ —  
 
           
Other real estate owned
  $ 2,664     $ 2,103  
 
           
Conversion of trust preferred stock to common stock
  $ —     $ 19,513  
 
           
The accompanying notes are an integral part of the consolidated financial statements.

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies
      Consolidation: Irwin Financial Corporation and its subsidiaries (the Corporation) provide financial services throughout the United States (U.S.) and Canada. We are engaged in commercial banking, commercial finance and home equity lending. We are in the process of exiting the mortgage banking segment. Our direct and indirect subsidiaries include, Irwin Union Bank and Trust Company, Irwin Union Bank, F.S.B., Irwin Commercial Finance Corporation, Irwin Home Equity Corporation and Irwin Mortgage Corporation (IMC). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the financial statements reflect all material adjustments necessary for a fair presentation. The Corporation does not meet the criteria as primary beneficiary for our wholly-owned trusts holding our company-obligated mandatorily redeemable preferred securities established by Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” As a result, these trusts are not consolidated.
     Because we are in the process of exiting the mortgage banking line of business, the financial statements and footnotes within this report conform to the presentation required in Statement of Financial Accounting Standard (SFAS) 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Certain of the balance sheet assets related to this line of business are being reported as assets held for sale. See Note 2 for additional information.
      Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent 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.
      Cash and Cash Equivalents Defined: For purposes of the statement of cash flows, we consider cash and due from banks to be cash equivalents.
      Allowance for Loan and Lease Losses: The allowance for loan and lease losses is an estimate based on management’s judgment applying the principles of SFAS 5, “Accounting for Contingencies,” SFAS 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.” The allowance is maintained at a level we believe is adequate to absorb probable losses inherent in the loan and lease portfolio. We perform an assessment of the adequacy of the allowance on a quarterly basis.
     Within the allowance, there are specific and expected loss components. The specific loss component is assessed for loans we believe to be impaired in accordance with SFAS 114. We have defined impairment as nonaccrual loans. For loans determined to be impaired, we measure the level of impairment by comparing the loan’s carrying value to fair value using one of the following fair value measurement techniques: present value of expected future cash flows, observable market price, or fair value of the associated collateral. An allowance is established when the fair value implies a value that is lower than the carrying value of that loan. In addition to establishing allowance levels for specifically identified impaired loans, management determines an allowance for all other loans in the portfolio for which historical experience indicates that certain losses exist. These loans are segregated by major product type, and in some instances, by aging, with an estimated loss ratio applied against each product type and aging category. The loss ratio is generally based upon historic loss experience for each loan type as adjusted for certain environmental factors management believes to be relevant.
     It is our policy to promptly charge off any commercial loan, or portion thereof, which is deemed to be uncollectible. This includes, but is not limited to, any loan rated “Loss” by the regulatory authorities. Impaired commercial credits are considered on a case-by-case basis. The amount charged off includes any accrued interest. Unless there is a significant reason to the contrary, consumer loans are charged off when deemed uncollectible, but generally no later than when a loan is past due 180 days.
      Servicing Assets: When we securitize or sell loans, we periodically retain the right to service the underlying loans sold. A portion of the cost basis of loans sold is allocated to this servicing asset based on its fair value relative to the loans sold and the servicing asset combined. Prior to the January 1, 2007, all servicing rights were carried at lower of cost or fair market value. We use a combination of observed pricing on similar, market-traded servicing rights and internal valuation models that calculate the present value of future cash flows to determine the fair value of the servicing assets. These models are supplemented and calibrated to market prices using inputs from independent servicing brokers, industry surveys and valuation experts. In using this valuation method, we incorporate assumptions that we believe market participants would use in estimating future net servicing income, which include estimates of the

7

cost of servicing per loan, the discount rate, float value, an inflation rate, ancillary income per loan, prepayment speeds, and default rates. Prior to January 1, 2007, all servicing assets were amortized over the period of and in proportion to estimated net servicing income.
     For servicing assets associated with second mortgages and high loan-to-value first mortgages, the fair value measurement method of reporting these servicing rights was elected beginning January 1, 2007, in accordance with SFAS 156, “Accounting for Servicing of Financial Assets.” Under the fair value method, we measure servicing assets at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. All remaining servicing rights follow the amortization method for subsequent measurement whereby these servicing rights are amortized in proportion to and over the period of estimated net servicing income.
      Incentive Servicing Fees: For whole loan sales of certain home equity loans, in addition to our normal servicing fee, we have the right to an incentive servicing fee (ISF) that will provide cash payments to us if a pre-established return for the certificate holders and certain structure-specific loan credit and servicing performance metrics are met. When ISF agreements are entered into