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 September 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 October 26, 2007, there were outstanding 29,349,108 common shares, no par value, of the Registrant.
 
 

 

 

FORM 10-Q
TABLE OF CONTENTS
             
        PAGE
        NO.
  FINANCIAL INFORMATION     3  
  Financial Statements     3  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     20  
  Quantitative and Qualitative Disclosures About Market Risk     56  
  Controls and Procedures     56  
  OTHER INFORMATION     57  
  Legal Proceedings     57  
  Unregistered Sales of Equity Securities and Use of Proceeds     57  
 
            
  Exhibits     58  
 
   Signatures     61  
  Certification
  Certification
  Certification
  Certification

2

Table of Contents

PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
                 
    September 30,   December 31,
    2007   2006
    (Dollars in thousands)
Assets:
                
Cash and cash equivalents
   $ 85,673     $ 145,765  
Interest-bearing deposits with financial institutions
     32,841       53,106  
Residual interests
     11,005       10,320  
Investment securities- held-to-maturity (Fair value: $17,724 at September 30, 2007 and $17,893 at December 31, 2006)
     17,721       18,066  
Investment securities- available-for-sale
     124,069       110,364  
Loans held for sale
     3,253       237,510  
Loans and leases, net of unearned income — Note 3
     5,676,690       5,238,193  
Less: Allowance for loan and lease losses — Note 4
     (104,443 )     (74,468 )
     
 
     5,572,247       5,163,725  
Servicing assets — Note 5
     25,324       31,949  
Accounts receivable
     45,091       208,585  
Accrued interest receivable
     26,295       26,470  
Premises and equipment
     38,604       36,211  
Other assets
     171,361       139,314  
Assets held for sale — Note 2
     8,364       56,573  
     
Total assets
   $ 6,161,848     $ 6,237,958  
     
Liabilities and Shareholders’ Equity:
                
Deposits
                
Noninterest-bearing
   $ 383,142     $ 687,626  
Interest-bearing
     2,348,819       1,756,109  
Certificates of deposit over $100,000
     771,109       1,107,781  
     
 
     3,503,070       3,551,516  
Short-term borrowings — Note 6
     539,273       602,443  
Collateralized debt — Note 7
     1,288,119       1,173,012  
Other long-term debt
     233,877       233,889  
Other liabilities
     108,713       146,596  
     
Total liabilities
     5,673,052       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 29,900,305 shares and 29,879,773 shares as of September 30, 2007 and December 31, 2006; 701,751 shares 143,543 shares in treasury as of September 30, 2007 and December 31, 2006
     116,292       116,192  
Additional paid-in capital
     2,772       1,583  
Accumulated other comprehensive income (loss), net of deferred income tax benefit of $5,113 and $4,813 as of September 30, 2007 and December 31, 2006
     1,332       (4,364 )
Retained earnings
     367,483       405,835  
     
 
     502,320       533,764  
Less treasury stock, at cost
     (13,524 )     (3,262 )
     
Total shareholders’ equity
     488,796       530,502  
     
Total liabilities and shareholders’ equity
   $ 6,161,848     $ 6,237,958  
     
The accompanying notes are an integral part of the consolidated financial statements.

3

Table of Contents

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
                 
    For the Three Months Ended September 30,  
    2007     2006  
    (Dollars in thousands, except per share)  
Interest income:
                
Loans and leases
   $ 126,180     $ 113,923  
Loans held for sale
     585       7,075  
Residual interests
     268       279  
Investment securities
     2,738       2,422  
Federal funds sold
     79       89  
 
            
Total interest income
     129,850       123,788  
 
            
Interest expense:
                
Deposits
     34,747       34,322  
Short-term borrowings
     7,436       4,344  
Collateralized debt
     18,563       14,305  
Other long-term debt
     3,958       5,520  
 
            
Total interest expense
     64,704       58,491  
 
            
Net interest income
     65,146       65,297  
Provision for loan and lease losses — Note 4
     28,493       9,135  
 
            
Net interest income after provision for loan and lease losses
     36,653       56,162  
Other income:
                
Loan servicing fees
     4,415       6,207  
Amortization and impairment of servicing assets
     (2,686 )     (5,343 )
Gain from sales of loans and loans held for sale
     3,329       1,640  
Trading gains
     876       968  
Derivative losses, net
     (5,673 )     (2,301 )
Other
     6,771       6,176  
 
            
 
     7,032       7,347  
 
                
Other expense:
                
Salaries
     24,043       23,815  
Pension and other employee benefits
     6,478       6,586  
Office expense
     2,126       2,413  
Premises and equipment
     5,500       5,040  
Marketing and development
     1,354       614  
Professional fees
     2,086       2,479  
Other
     4,758       9,917  
 
            
 
     46,345       50,864  
 
            
(Loss) income before income taxes from continuing operations
     (2,660 )     12,645  
(Benefit) provision for income taxes
     (1,857 )     3,550  
 
            
Net (loss) income from continuing operations
     (803 )     9,095  
Loss from discontinued operations, net of $11,540 and $8,884 income tax benefit, respectively — Note 2
     (17,227 )     (13,302 )
 
            
Net loss
   $ (18,030 )   $ (4,207 )
 
            
 
                
Earnings per share from continuing operations: — Note 9
                
Basic
   $ (0.04 )   $ 0.31  
 
            
Diluted
   $ (0.05 )   $ 0.30  
 
            
 
                
Earnings per share: — Note 9
                
Basic
   $ (0.63 )   $ (0.14 )
 
            
Diluted
   $ (0.64 )   $ (0.14 )
 
            
Dividends per share
   $ 0.12     $ 0.11  
 
            
The accompanying notes are an integral part of the consolidated financial statements.

4

Table of Contents

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
                 
    For the Nine Months Ended September 30,  
    2007     2006  
    (Dollars in thousands, except per share)  
Interest income:
                
Loans and leases
   $ 369,727     $ 316,904  
Loans held for sale
     6,663       28,285  
Residual interests
     817       1,409  
Investment securities
     7,757       6,128  
Federal funds sold
     602       138  
 
            
Total interest income
     385,566       352,864  
 
            
Interest expense:
                
Deposits
     103,178       98,621  
Short-term borrowings
     22,054       11,843  
Collateralized debt
     51,491       37,013  
Other long-term debt
     11,726       14,641  
 
            
Total interest expense
     188,449       162,118  
 
            
Net interest income
     197,117       190,746  
Provision for loan and lease losses — Note 4
     71,155       25,154  
 
            
Net interest income after provision for loan and lease losses
     125,962       165,592  
Other income:
                
Loan servicing fees
     15,443       25,164  
Amortization and impairment of servicing assets
     (9,924 )     (16,888 )
Gain from sales of loans and loans held for sale
     690       816  
Trading gains
     868       751  
Derivative (losses) gains, net
     (10,014 )     1,138  
Other
     18,736       19,408  
 
            
 
     15,799       30,389  
 
                
Other expense:
                
Salaries
     73,688       73,958  
Pension and other employee benefits
     20,912       21,985  
Office expense
     7,002       6,698  
Premises and equipment
     16,468       15,513  
Marketing and development
     3,931       2,004  
Professional fees
     6,853       7,346  
Other
     16,839       27,468  
 
            
 
     145,693       154,972  
 
            
(Loss) income before income taxes from continuing operations
     (3,932 )     41,009  
(Benefit) provision for income taxes
     (2,507 )     14,255  
 
            
Net (loss) income from continuing operations
     (1,425 )     26,754  
Loss from discontinued operations, net of $18,250 and $19,964 income tax benefit, respectively — Note 2
     (27,123 )     (29,948 )
 
            
Net loss
   $ (28,548 )   $ (3,194 )
 
            
 
                
Earnings per share from continuing operations: — Note 9
                
Basic
   $ (0.08 )   $ 0.91  
 
            
Diluted
   $ (0.11 )   $ 0.90  
 
            
 
                
Earnings per share: — Note 9
                
Basic
   $ (1.01 )   $ (0.11 )
 
            
Diluted
   $ (1.03 )   $ (0.12 )
 
            
Dividends per share
   $ 0.36     $ 0.33  
 
            
The accompanying notes are an integral part of the consolidated financial statements.

5

Table of Contents

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the Nine Months Ended September 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
     (28,548 )     (28,548 )                                                                
Unrealized loss on investment securities net of $300 tax benefit
     (450 )                     (450 )                                                
Unrealized loss on derivatives net of $318 tax benefit
     (477 )                             (477 )                                        
Foreign currency adjustment
     6,623               6,623                                                          
 
                                                                                
Other comprehensive income
     5,696                                                                          
 
                                                                                
Total comprehensive income
     (22,852 )                                                                        
Cash dividends — common stock
     (10,543 )     (10,543 )                                                                
Cash dividends — preferred stock
     (1,004 )     (1,004 )                                                                
FAS 156 adoption
     1,743       1,743                                                                  
Tax benefit on stock option exercises
     91                                               91                          
Stock compensation expense
     1,296                                               1,296                          
Stock issuance costs
     (77 )                                                                     (77 )
Stock:
                                                                                
Purchase of 671,186 shares
     (12,781 )                                                             (12,781 )        
Sales of 117,715 shares
     2,421                                               (198 )     100       2,519          
     
Balance at September 30, 2007
   $ 488,796     $ 367,483     $ 9,507     $ (794 )   $ (507 )   $ (6,874 )   $ 2,772     $ 116,292     $ (13,524 )   $ 14,441  
     
 
                                                                                
Balance at January 1, 2006
   $ 512,334     $ 418,784     $ 3,341     $ (373 )   $ 754     $ (274 )   $ 50     $ 112,000     $ (21,948 )   $ —  
Net loss
     (3,194 )     (3,194 )                                                                
Unrealized loss on investment securities net of $50 tax benefit
     (75 )                     (75 )                                                
Unrealized loss on derivative net of $250 tax benefit
     (375 )                             (375 )                                        
Foreign currency adjustment
     972               972                                                          
 
                                                                                
Other comprehensive income
     522                                                                          
 
                                                                                
Total comprehensive income
     (2,672 )                                                                        
Cash dividends
     (9,818 )     (9,818 )                                                                
Tax benefit on stock option exercises
     349                                               349                          
Stock compensation expense
     1,419                                               1,419                          
Conversion of trust preferred shares to 1,013,938 shares of common stock
     19,513       (1,058 )                                             1,070       19,501          
Stock:
                                                                                
Purchase of 52,230 shares
     (1,027 )                                                             (1,027 )        
Sales of 187,301 shares
     2,957       (508 )                                     (476 )     1,153       2,788          
     
Balance at September 30, 2006
   $ 523,055     $ 404,206     $ 4,313     $ (448 )   $ 379     $ (274 )   $ 1,342     $ 114,223     $ (686 )   $ —  
     
The accompanying notes are an integral part of the consolidated financial statements.

6

Table of Contents

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                 
    For the Nine Months ended September 30,  
    2007     2006  
    (Dollars in thousands)  
(Loss) Income from continuing operations
   $ (1,425 )   $ 26,754  
Loss from discontinued operations
     (27,123 )     (29,948 )
 
            
Net loss
     (28,548 )     (3,194 )
Adjustments to reconcile net loss to cash provided by operating activities:
                
Depreciation, amortization, and accretion, net
     7,742       6,071  
Amortization and impairment of servicing assets
     10,174       57,878  
Provision for loan and lease losses
     71,155       25,183  
Loss on sale of mortgage servicing assets
     —       15,829  
Loss (gain) from sales of loans held for sale
     11,279       (44,237 )
Originations and purchases of loans held for sale
     (497,707 )     (6,969,021 )
Proceeds from sales and repayments of loans held for sale
     555,820       8,014,813  
Proceeds from the sale of mortgage servicing assets
     137       79,395  
Net decrease in residuals
     132       13,181  
Net decrease in accounts receivable
     163,494       65,540  
Other, net
     (65,082 )     (139,727 )
 
            
Net cash provided by operating activities
     228,596       1,121,711  
 
            
Investing activities:
                
Proceeds from maturities/calls of investment securities:
                
Held-to-maturity
     2,438       1,055  
Available-for-sale
     2,818       9,015  
Purchase of investment securities:
                
Held-to-maturity
     (2,167 )     (2,648 )
Available-for-sale
     (17,316 )     (23,006 )
Net decrease in interest-bearing deposits
     20,265       396  
Net increase in loans, excluding sales
     (337,626 )     (677,505 )
Proceeds from sale of loans
     66,748       46,728  
Other, net
     (7,739 )     (9,663 )
 
            
Net cash used by investing activities
     (272,579 )     (655,628 )
 
            
Financing activities:
                
Net decrease in deposits
     (48,445 )     (108,793 )
Net decrease in short-term borrowings
     (63,170 )     (733,205 )
Proceeds from issuance of collateralized debt
     364,579       650,808  
Repayments of collateralized debt
     (249,514 )     (276,832 )
Proceeds from the issuance of trust preferred securities
     —       31,500  
Repayments of long term debt
     (11 )     (47,583 )
Purchase of treasury stock for employee benefit plans
     (12,781 )     (1,027 )
Proceeds from sale of stock for employee benefit plans
     2,512       4,053  
Dividends paid
     (11,547 )     (9,818 )
 
            
Net cash used by financing activities
     (18,377 )     (490,897 )
 
            
Effect of exchange rate changes on cash
     2,268       505  
 
            
Net decrease in cash and cash equivalents
     (60,092 )     (24,309 )
Cash and cash equivalents at beginning of period
     145,765       155,486  
 
            
Cash and cash equivalents at end of period
   $ 85,673