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   June 30, 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 July 27, 2007, there were outstanding 29,330,993 common shares, no par value, of the Registrant.
 
 

 

 

FORM 10-Q
             
        PAGE  
        NO.  
  FINANCIAL INFORMATION     3  
  Financial Statements     3  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     19  
  Quantitative and Qualitative Disclosures About Market Risk     50  
  Controls and Procedures     51  
  OTHER INFORMATION     51  
  Legal Proceedings     51  
  Unregistered Sales of Equity Securities and Use of Proceeds     52  
  Submission of Matters to a Vote of Security Holders     53  
  Exhibits     54  
 
  Signatures     57  
  First Amendment to IFC Amended and Restated Short Term Incentive Plan
  First Amendment to ICF Amended and Restated Short Term Incentive Plan
  First Amendment to IHE Amended and Restated Short Term Incentive Plan
  First Amendment to IUBT Amended and Restated Short Term Incentive Plan
  Amended and Restated Shareholder Agreement
  302 Certification of Chief Executive Officer
  302 Certification of Chief Financial Officer
  906 Certification of Chief Executive Officer
  906 Certification of Chief Financial Officer

2

PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
                 
    June 30,     December 31,  
    2007     2006  
    (Dollars in thousands)  
Assets:
               
Cash and cash equivalents
  $ 80,234     $ 145,765  
Interest-bearing deposits with financial institutions
    40,922       53,106  
Residual interests
    10,414       10,320  
Investment securities- held-to-maturity (Fair value: $17,335 at June 30, 2007 and $17,893 at December 31, 2006)
    17,431       18,066  
Investment securities- available-for-sale
    124,882       110,364  
Loans held for sale
    26,886       237,510  
Loans and leases, net of unearned income — Note 3
    5,511,756       5,238,193  
Less: Allowance for loan and lease losses — Note 4
    (92,140 )     (74,468 )
     
 
    5,419,616       5,163,725  
Servicing assets — Note 5
    27,920       31,949  
Accounts receivable
    70,898       208,585  
Accrued interest receivable
    25,143       26,470  
Premises and equipment
    41,990       36,211  
Other assets
    184,324       139,314  
Assets held for sale — Note 2
    27,262       56,573  
     
Total assets
  $ 6,097,922     $ 6,237,958  
     
Liabilities and Shareholders’ Equity:
               
Deposits
               
Noninterest-bearing
  $ 336,801     $ 687,626  
Interest-bearing
    1,799,748       1,756,109  
Certificates of deposit over $100,000
    1,181,234       1,107,781  
     
 
    3,317,783       3,551,516  
Short-term borrowings — Note 6
    613,200       602,443  
Collateralized debt — Note 7
    1,327,897       1,173,012  
Other long-term debt
    233,881       233,889  
Other liabilities
    97,516       146,596  
     
Total liabilities
    5,590,277       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 shares authorized and issued
    14,441       14,518  
Common stock, no par value — authorized 40,000,000 shares; issued 29,895,483 shares and 29,879,773 shares as of June 30, 2007 and December 31, 2006; 715,599 shares 143,543 shares in treasury as of June 30, 2007 and December 31, 2006
    116,246       116,192  
Additional paid-in capital
    2,401       1,583  
Accumulated other comprehensive loss, net of deferred income tax benefit of $4,785 and $4,813 as of June 30, 2007 and December 31, 2006
    (932 )     (4,364 )
Retained earnings
    389,349       405,835  
     
 
    521,505       533,764  
Less treasury stock, at cost
    (13,860 )     (3,262 )
     
Total shareholders’ equity
    507,645       530,502  
     
Total liabilities and shareholders’ equity
  $ 6,097,922     $ 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 June 30,  
    2007     2006  
    (Dollars in thousands, except per share)  
Interest income:
               
Loans and leases
  $ 124,198     $ 105,096  
Loans held for sale
    1,136       9,804  
Residual interests
    280       467  
Investment securities
    2,562       2,221  
Federal funds sold
    787       21  
 
           
Total interest income
    128,963       117,609  
 
           
Interest expense:
               
Deposits
    34,980       34,618  
Short-term borrowings
    7,096       3,393  
Collateralized debt
    17,113       11,596  
Other long-term debt
    3,930       4,130  
 
           
Total interest expense
    63,119       53,737  
 
           
Net interest income
    65,844       63,872  
Provision for loan and lease losses — Note 4
    19,454       6,826  
 
           
Net interest income after provision for loan and lease losses
    46,390       57,046  
Other income:
               
Loan servicing fees
    5,116       10,849  
Amortization and impairment of servicing assets
    (2,288 )     (5,643 )
Gain (loss) from sales of loans and loans held for sale
    3,268       (3,591 )
Trading gains
    256       1  
Derivative (losses) gains, net
    (3,252 )     672  
Other
    6,481       6,758  
 
           
 
    9,581       9,046  
 
               
Other expense:
               
Salaries
    23,538       26,479  
Pension and other employee benefits
    6,696       7,627  
Office expense
    2,539       2,190  
Premises and equipment
    5,288       5,438  
Marketing and development
    1,368       722  
Professional fees
    2,681       2,469  
Other
    4,954       6,370  
 
           
 
    47,064       51,295  
 
           
Income before income taxes from continuing operations
    8,907       14,797  
Provision for income taxes
    3,436       5,828  
 
           
Net income from continuing operations
    5,471       8,969  
Loss from discontinued operations, net of $3,968 and $4,054 income tax benefit, respectively — Note 2
    (5,860 )     (6,098 )
 
           
Net (loss) income
  $ (389 )   $ 2,871  
 
           
 
               
Earnings per share from continuing operations: — Note 9
               
Basic
  $ 0.18     $ 0.30  
 
           
Diluted
  $ 0.17     $ 0.30  
 
           
 
               
Earnings per share: — Note 9
               
Basic
  $ (0.02 )   $ 0.10  
 
           
Diluted
  $ (0.03 )   $ 0.09  
 
           
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 INCOME (Unaudited)
                 
    For the Six Months Ended June 30,  
    2007     2006  
    (Dollars in thousands, except per share)  
Interest income:
               
Loans and leases
  $ 243,547     $ 202,981  
Loans held for sale
    6,078       21,210  
Residual interests
    549       1,130  
Investment securities
    5,019       3,706  
Federal funds sold
    807       48  
 
           
Total interest income
    256,000       229,075  
 
           
Interest expense:
               
Deposits
    68,431       64,299  
Short-term borrowings
    14,902       7,499  
Collateralized debt
    32,928       22,707  
Other long-term debt
    7,768       9,121  
 
           
Total interest expense
    124,029       103,626  
 
           
Net interest income
    131,971       125,449  
Provision for loan and lease losses — Note 4
    42,662       16,019  
 
           
Net interest income after provision for loan and lease losses
    89,309       109,430  
Other income:
               
Loan servicing fees
    11,028       18,957  
Amortization and impairment of servicing assets
    (7,237 )     (11,545 )
Loss from sales of loans and loans held for sale
    (2,639 )     (823 )
Trading losses
    (8 )     (217 )
Derivative (losses) gains, net
    (4,341 )     3,439  
Other
    11,964       13,231  
 
           
 
    8,767       23,042  
 
               
Other expense:
               
Salaries
    49,273       50,143  
Pension and other employee benefits
    14,434       15,400  
Office expense
    4,876       4,284  
Premises and equipment
    10,915       10,473  
Marketing and development
    2,577       1,390  
Professional fees
    4,767       4,867  
Other
    12,507       17,551  
 
           
 
    99,349       104,108  
 
           
(Loss) income before income taxes from continuing operations
    (1,273 )     28,364  
(Benefit) provision for income taxes
    (650 )     10,705  
 
           
Net (loss) income from continuing operations
    (623 )     17,659  
Loss from discontinued operations, net of $6,710 and $11,080 income tax benefit, respectively — Note 2
    (9,895 )     (16,646 )
 
           
Net (loss) income
  $ (10,518 )   $ 1,013  
 
           
 
               
Earnings per share from continuing operations: — Note 9
               
Basic
  $ (0.04 )   $ 0.60  
 
           
Diluted
  $ (0.06 )   $ 0.59  
 
           
 
               
Earnings per share: — Note 9
               
Basic
  $ (0.38 )   $ 0.03  
 
           
Diluted
  $ (0.39 )   $ 0.03  
 
           
Dividends per share
  $ 0.24     $ 0.22  
 
           
The accompanying notes are an integral part of the consolidated financial statements.

5

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the Six Months Ended June 30, 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
    (10,518 )     (10,518 )                                                                
Unrealized loss on investment securities net of $307 tax benefit
    (461 )                     (461 )                                                
Unrealized gain on derivatives net of $355 tax liability
    533                               533                                          
Foreign currency adjustment
    3,360               3,360                                                          
 
                                                                               
Other comprehensive income
    3,432                                                                          
 
                                                                               
Total comprehensive income
    (7,086 )                                                                        
Cash dividends — common stock
    (7,033 )     (7,033 )                                                                
Cash dividends — preferred stock
    (678 )     (678 )                                                                
FAS 156 adoption
    1,743       1,743                                                                  
Tax benefit on stock option exercises
    114                                               114                          
Stock compensation expense
    986                                               986                          
Stock issuance costs
    (77 )                                                                     (77 )
Stock:
                                                                               
Purchase of 668,308 shares
    (12,753 )                                                             (12,753 )        
Sales of 97,376 shares
    1,927                                               (282 )     54       2,155          
     
Balance at June 30, 2007
  $ 507,645     $ 389,349     $ 6,244     $ (805 )   $ 503     $ (6,874 )   $ 2,401     $ 116,246     $ (13,860 )   $ 14,441  
     
 
                                                                               
Balance at January 1, 2006
  $ 512,334     $ 418,784     $ 3,341     $ (373 )   $ 754     $ (274 )   $ 50     $ 112,000     $ (21,948 )   $ —  
Net income
    1,013       1,013                                                                  
Unrealized loss on investment securities net of $249 tax benefit
    (374 )                     (374 )                                                
Unrealized loss on derivative net of $38 tax benefit
    (57 )                             (57 )                                        
Foreign currency adjustment
    1,020               1,020                                                          
 
                                                                               
Other comprehensive income
    589                                                                          
 
                                                                               
Total comprehensive income
    1,602                                                                          
Cash dividends
    (6,541 )     (6,541 )                                                                
Tax benefit on stock option exercises
    319                                               319                          
Stock option expense
    1,107                                               1,107                          
Conversion of trust preferred shares to 1,013,938 shares of common stock
    19,513       (1,058 )                                             1,070       19,501          
Stock:
                                                                               
Purchase of 48,433 shares
    (952 )                                                             (952 )        
Sales of 147,636 shares
    2,199       (508 )                                     (406 )     603       2,510          
     
Balance at June 30, 2006
  $ 529,581     $ 411,690     $ 4,361     $ (747 )   $ 697     $ (274 )   $ 1,070     $ 113,673     $ (889 )   $ —  
     
The accompanying notes are an integral part of the consolidated financial statements.

6

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                 
    For the Six Months ended June 30,  
    2007     2006  
    (Dollars in thousands)  
(Loss) Income from continuing operations
  $ (623 )   $ 17,659  
Loss from discontinued operations
    (9,895 )     (16,646 )
 
           
Net (loss) income
    (10,518 )     1,013  
Adjustments to reconcile net (loss) income to cash provided by operating activities:
               
Depreciation, amortization, and accretion, net
    4,834       3,229  
Amortization and impairment of servicing assets
    7,487       30,663  
Provision for loan and lease losses
    42,662       16,048  
Loss (gain) from sales of loans held for sale
    10,071       (32,333 )
Originations and purchases of loans held for sale
    (368,697 )     (5,063,058 )
Proceeds from sales and repayments of loans held for sale
    419,859       5,573,814  
Net decrease in residuals
    456       8,210  
Net decrease in accounts receivable
    137,687       50,136  
Other, net
    (90,289 )     (39,893 )
 
           
Net cash provided by operating activities
    153,552       547,829  
 
           
Investing activities: