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, 2008
     
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
 
(State or Other Jurisdiction of Incorporation or Organization) 		  35-1286807
 
(I.R.S. Employer Identification No.)
     
500 Washington Street Columbus, Indiana
 
(Address of Principal Executive Offices) 		  47201
 
(Zip Code)
     
(812) 376-1909
 
(Corporation’s Telephone Number, Including Area Code) 		  www.irwinfinancial.com
 
(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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer  o   Accelerated filer  þ   Non-accelerated filer  o   Smaller reporting company  o
    (Do not check if a smaller reporting company)
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 30, 2008, there were outstanding 29,644,557 common shares, no par value, of the Registrant.
 
 

 

 

FORM 10-Q
TABLE OF CONTENTS
             
        PAGE
        NO.
  FINANCIAL INFORMATION     3  
    Item 1
  Financial Statements     3  
    Item 2
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     20  
    Item 3
  Quantitative and Qualitative Disclosures About Market Risk     54  
    Item 4
  Controls and Procedures     54  
  OTHER INFORMATION     54  
    Item 1
  Legal Proceedings     54  
    Item 2
  Unregistered Sales of Equity Securities and Use of Proceeds     54  
    Item 6
  Exhibits     55  
 
  Signatures     59  
  302 Certification of Chief Executive Officer
  302 Certification of Chief Financial Officer
  906 Certification of Chief Executive Officer
  906 Certification of Chief Financial Officer

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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
                 
    March 31,     December 31,  
    2008     2007  
    (Dollars in thousands)  
Assets:
               
Cash and cash equivalents — Note 1
  $ 103,029     $ 78,212  
Interest-bearing deposits with financial institutions
    39,685       31,841  
Residual interests
    10,974       12,047  
Investment securities- held-to-maturity (Fair value: $16,419 March 31, 2008 and $18,134 at December 31, 2007) — Note 2
    17,603       18,123  
Investment securities- available-for-sale — Note 2
    45,941       59,684  
Investment securities- other — Note 2
    62,588       62,588  
Loans held for sale
    2,747       6,134  
Loans and leases, net of unearned income — Note 3
    5,583,538       5,696,230  
Less: Allowance for loan and lease losses — Note 4
    (158,598 )     (144,855 )
     
 
    5,424,940       5,551,375  
Servicing assets — Note 5
    19,343       23,234  
Accounts receivable
    33,329       38,710  
Accrued interest receivable
    23,450       26,291  
Premises and equipment
    38,282       38,178  
Other assets
    235,156       215,874  
Assets held for sale
    —       3,814  
     
Total assets
  $ 6,057,067     $ 6,166,105  
     
Liabilities and Shareholders’ Equity:
               
Deposits
               
Noninterest-bearing
  $ 324,135     $ 306,820  
Interest-bearing
    2,299,933       2,357,050  
Certificates of deposit over $100,000
    774,924       661,618  
     
 
    3,398,992       3,325,488  
Other borrowings — Note 6
    674,258       802,424  
Collateralized debt — Note 7
    1,186,123       1,213,139  
Other long-term debt
    233,871       233,873  
Other liabilities
    127,817       131,881  
     
Total liabilities
    5,621,061       5,706,805  
     
Commitments and contingencies — Note 12
               
Shareholders’ equity
               
Preferred stock, no par value — authorized 4,000,000 shares;
    —       —  
Noncumulative perpetual preferred stock - 15,000 authorized and issued;
    14,441       14,441  
Common stock, no par value — authorized 40,000,000 shares; issued 29,896,464 as of March 31, 2008 and December 31, 2007; 636,616 and 670,169 shares in treasury as of March 31, 2008 and December 31, 2007, respectively
    116,542       116,542  
Additional paid-in capital
    3,227       2,557  
Accumulated other comprehensive (loss) income, net of deferred income tax benefit of $6,131 and $4,367 as of March 31, 2008 and December 31, 2007
    (1,472 )     1,032  
Retained earnings
    315,358       337,524  
     
 
    448,096       472,096  
Less treasury stock, at cost
    (12,090 )     (12,796 )
     
Total shareholders’ equity
    436,006       459,300  
     
Total liabilities and shareholders’ equity
  $ 6,057,067     $ 6,166,105  
     
The accompanying notes are an integral part of the consolidated financial statements.

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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
                 
    For the Three Months Ended March 31,  
    2008     2007  
    (Dollars in thousands, except per share)  
Interest income:
               
Loans and leases
  $ 117,322     $ 119,349  
Loans held for sale
    166       4,942  
Residual interests
    275       270  
Investment securities
    2,289       2,457  
Federal funds sold
    38       20  
 
           
Total interest income
    120,090       127,038  
 
           
Interest expense:
               
Deposits
    28,938       33,451  
Other borrowings
    7,236       7,806  
Collateralized debt
    15,170       15,815  
Other long-term debt
    4,311       3,838  
 
           
Total interest expense
    55,655       60,910  
 
           
Net interest income
    64,435       66,128  
Provision for loan and lease losses — Note 4
    44,520       23,208  
 
           
Net interest income after provision for loan and lease losses
    19,915       42,920  
 
               
Other income:
               
Loan servicing fees
    2,458       5,912  
Amortization and impairment of servicing assets — Note 9
    (4,219 )     (4,950 )
Gain (loss) from sales of loans held for sale
    6,831       (5,907 )
Trading losses — Note 9
    (1,057 )     (264 )
Derivative losses, net
    (957 )     (1,089 )
Other than temporary impairment — Note 2
    (13,157 )     —  
Other
    5,645       5,484  
 
           
 
    (4,456 )     (814 )
 
               
Other expense:
               
Salaries
    22,629       25,735  
Pension and other employee benefits
    7,708       7,738  
Office expense
    2,212       2,337  
Premises and equipment
    5,766       5,628  
Marketing and development
    1,132       1,209  
Professional fees
    2,098       2,086  
Other
    10,409       7,552  
 
           
 
    51,954       52,285  
 
           
Loss before income taxes from continuing operations
    (36,495 )     (10,179 )
Provision for income taxes
    (14,329 )     (4,085 )
 
           
Net loss from continuing operations
    (22,166 )     (6,094 )
Loss from discontinued operations, net of $2,742 income tax benefit March 31, 2007
    —       (4,035 )
 
           
Net loss
  $ (22,166 )   $ (10,129 )
 
           
 
               
Earnings per share from continuing operations: — Note 10
               
Basic
  $ (0.76 )   $ (0.22 )
 
           
Diluted
  $ (0.77 )   $ (0.22 )
 
           
 
               
Earnings per share: — Note 10
               
Basic
  $ (0.76 )   $ (0.35 )
 
           
Diluted
  $ (0.77 )   $ (0.36 )
 
           
Dividends per share
  $ —     $ 0.12  
 
           
The accompanying notes are an integral part of the consolidated financial statements.

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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the Three Months Ended March 31, 2008, and 2007
                                                                                 
                    Accumulated Other Comprehensive loss                              
                                            Defined     Additional             Perpetual        
            Retained     Foreign     Unrealized Gain/Loss     Benefit     Paid in     Common     Preferred     Treasury  
    Total     Earnings     Currency     Securities     Derivatives     Plans     Capital     Stock     Stock     Stock  
    (Dollars in thousands)  
Balance at January 1, 2008
  $ 459,300     $ 337,524     $ 9,158     $ (1,445 )   $ (1,576 )   $ (5,105 )   $ 2,557     $ 116,542     $ 14,441     $ (12,796 )
Net loss
    (22,166 )     (22,166 )                                                                
Unrealized gain on investment securities net of $29 tax liability
    44                       44                                                  
Unrealized loss on derivatives net of $743 tax benefit
    (1,114 )                             (1,114 )                                        
Foreign currency adjustment
    (1,434 )             (1,434 )                                                        
 
                                                                             
Other comprehensive loss
    (2,504 )                                                                        
 
                                                                             
Total comprehensive loss
    (24,670 )                                                                        
Stock compensation expense
    1,147                                               1,147                          
Stock:
                                                                               
Purchase of 835 shares
    (6 )                                                                     (6 )
Sales of 34,388 shares
    235                                               (477 )     —               712  
     
Balance at March 31, 2008
  $ 436,006     $ 315,358     $ 7,724     $ (1,401 )   $ (2,690 )   $ (5,105 )   $ 3,227     $ 116,542     $ 14,441     $ (12,090 )
     
 
                                                                               
Balance at January 1, 2007
  $ 530,502     $ 405,835     $ 2,884     $ (344 )   $ (30 )   $ (6,874 )   $ 1,583     $ 116,192     $ 14,518     $ (3,262 )
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 loss
    (9,550 )                                                                        
Cash dividends — common stock
    (3,533 )     (3,533 )                                                                
Cash dividends — preferred stock
    (352 )     (352 )                                                                
FAS 156 adoption, net of tax
    1,743       1,743                                                                  
Tax benefit on stock option exercises
    116                                               116                          
Stock compensation expense
    363                                               363                          
Stock issuance costs
    (72 )                                                             (72 )        
Stock:
                                                                               
Purchase of 359,848 shares
    (7,668 )                                                                     (7,668 )
Sales of 74,199 shares
    (1320 )                                             (374 )     54               1,640  
     
Balance at March 31, 2007
  $ 512,869     $ 393,564     $ 3,249     $ (313 )   $ 153     $ (6,874 )   $ 1,688     $ 116,246     $ 14,446     $ (9,290 )
     
The accompanying notes are an integral part of the consolidated financial statements.

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CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                 
    For the Three Months ended March 31,  
    2008     2007  
    (Dollars in thousands)  
Loss from continuing operations
  $ (22,166 )   $ (6,094 )
Loss from discontinued operations
    —       (4,035 )
 
           
Net Loss
    (22,166 )     (10,129 )
Adjustments to reconcile net loss to cash provided by operating activities:
               
Depreciation, amortization, and accretion, net
    2,604       2,356  
Other than temporary impairment
    13,157       —  
Amortization and impairment of servicing assets
    4,219       5,199  
Provision for loan and lease losses
    44,520       23,208  
(Gain) loss from sales of loans held for sale
    (6,831 )     10,155  
Originations and purchases of loans held for sale
    (64,436 )     (208,830 )
Proceeds from sales and repayments of loans held for sale
    130,272       261,224  
Net decrease in residuals
    1,348       971  
Net decrease in accounts receivable
    5,381       137,994  
Other, net
    (19,999 )     (92,243 )
 
           
Net cash provided by operating activities
    88,069       129,905  
 
           
Investing activities:
               
Proceeds from maturities/calls of investment securities:
               
Held-to-maturity
    1,132       127  
Available-for-sale
    685       974  
Purchase of investment securities:
               
Held-to-maturity
    (451 )     (100 )
Available-for-sale
    (187 )     (7,240 )
Net (increase) decrease in interest-bearing deposits
    (7,844 )     9,713  
Net decrease (increase) in loans, excluding sales
    27,251       (44,957 )
Other, net
    (1,869 )     (4,120 )
 
           
Net cash provided (used) by investing activities
    18,717       (45,603 )
 
           
Financing activities:
               
Net increase (decrease) in deposits
    73,505       (104,118 )
Net (decrease) increase in other borrowings
    (128,166 )     16,861  
Proceeds from issuance of collateralized debt
    96,415       27,206  
Repayments of collateralized debt
    (123,444 )     (98,208 )
Payments on long term debt
    (3 )     (4 )
Purchase of treasury stock for employee benefit plans
    (6 )     (7,668 )
Proceeds from sale of stock for employee benefit plans
    235       1,436  
Dividends paid
    —       (3,885 )
 
           
Net cash used by financing activities
    (81,464 )     (168,380 )
 
           
Effect of exchange rate changes on cash
    (505 )     134  
 
           
Net increase (decrease) in cash and cash equivalents
    24,817       (83,944 )
Cash and cash equivalents at beginning of period
    78,212       145,765  
 
           
Cash and cash equivalents at end of period
  $ 103,029     $ 61,821  
 
           
Supplemental disclosures of cash flow information:
               
Cash flow during the period:
               
Interest paid
  $ 50,740     $ 59,659  
 
           
Income taxes paid
  $ 2,216     $ 6,152  
 
           
Noncash transactions:
               
Adoption of FAS 156
  $ —     $ 1,743  
 
           
Other real estate owned
  $ 1,225     $ 2,664  
 
           
The accompanying notes are an integral part of the consolidated financial statements.

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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 have exited the mortgage banking segment, maintaining a limited staff to manage our residual liabilities and responsibilities from past activities. 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. 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.
     For the mortgage banking line of business that we have exited, the financial statement and notes 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” for “discontinued operations.”
      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 periods. 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 dates; income and expenses are translated at average rates of exchange for the reporting period. Unrealized foreign currency translation gains and losses are recorded in accumulated other comprehensive income in shareholders’ equity.
      Cash and Cash Equivalents: For purposes of the consolidated balance sheets, we consider cash and due from banks to be cash equivalents.
      Investment Securities: Those investment securities that we have the positive intent and ability to hold until maturity are classified as “held-to-maturity” and are stated at cost adjusted for amortization of premiums and accretion of discounts (adjusted cost). All other investment securities are classified as “available-for-sale” and are stated at fair value. Unrealized gains and losses on available-for-sale investment securities, net of the future tax impact, are reported as a separate component of shareholders’ equity until realized. Investment securities gains and losses are based on the amortized cost of the specific investment security determined on a specific identification basis. Fair values are determined based upon dealer quotes and discounted cash flow modeling. A decline in value lasting an extended period of time or of significant magnitude is evaluated for impairment that may be deemed “other-than-temporary”.
      Residual Interests: Residual interests are stated at fair value. Unrealized gains and losses are included in earnings. To obtain fair value of residual interests, quoted market prices would be used if available. However, quotes are generally not available for residual interests, so we estimate fair value based on the present value of expected cash flows using estimates of the key assumptions — prepayment speeds, credit losses, forward yield curves, and discount rates commensurate with the risks involved — that management believes market participants would use to value similar assets. 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. Cost basis includes deferred origination fees and costs. Fair value is determined based on the contract price at which the mortgage loans will be sold. At the time of origination, loans which management believes will be sold prior to maturity are classified as loans held for sale.
      Loans: Loans are carried at amortized cost. Loan origination fees and costs are deferred and the net amounts are amortized as an adjustment to yield using the interest method. 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.

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The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest or earlier should credit analysis prior to 90 days suggest collection of such amounts is unlikely to occur . Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest and the loan is in the process of collection.
      Direct Financing Leases: At lease inception, we record an asset representing the aggregate future minimum lease payments and deferred incremental direct costs less unearned income. Income is recognized over the life of the lease, which generally averages three to four years, in order 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 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 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. 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 may retain the righ