UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] 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 registrant as specified in its charter) INDIANA (State or other jurisdiction of Incorporation or organization) 35-1286807 (IRS Employer Identification No.) 500 Washington Street, Columbus, IN 47201 (Address or principal executive offices) (Zip Code) 812-376-1909 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year if changed since last report) 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. Yes __X __ No _____ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes _____ No _____ As of July 31, 2000 there were outstanding 20,979,683 common shares, no par value, of the Registrant. Part I Item 1 IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited) (In thousands, except for shares) June 30, December 31, Assets: 2000 1999 Cash and due from banks $51,999 $47,215 Federal funds sold 10,000 0 Cash and cash equivalents 61,999 47,215 Interest-bearing deposits with financial institutions 34,595 26,785 Trading assets 96,094 59,025 Investment securities (Market value: $36,400 in 2000 36,754 37,508 and $37,464 in 1999) - Note 2 Loans held for sale - Note 3 543,673 508,997 Loans and leases, net of unearned income - Note 4 939,025 733,424 Less: Allowance for loan and lease losses - Note 5 (10,054) (8,555) 928,971 724,869 Servicing assets - Note 6 139,876 138,500 Accounts receivable 54,016 49,415 Accrued interest receivable 12,488 8,430 Premises and equipment 27,540 23,368 Other assets 57,005 56,735 $1,993,011 $1,680,847 Liabilities and Shareholders' Equity: Deposits Noninterest-bearing $263,661 $218,402 Interest-bearing 487,017 411,400 Certificates of deposit over $100,000 479,821 240,516 1,230,499 870,318 Short-term borrowings- Note 7 410,971 473,103 Long-term debt- Note 8 29,585 29,784 Other liabilities 101,032 100,275 Total liabilities 1,772,087 1,473,480 Company-obligated mandatorily redeemable preferred securities of subsidiary trust- Note 9 +----------+---------- 48,107 48,071 Shareholders' equity Preferred stock, no par value - authorized 4,000,000 shares; issued 96,336 shares as of June 30, 2000 and none as of December 31, 1999 +----------+---------- +----------+---------- 1,386 0 Common stock; no par value - authorized 40,000,000 shares; issued 23,402,080 shares as of June 30, 2000 and December 31, 1999; including 2,430,488 and 2,297,303 shares in treasury as of June 30, +----------+---------- 2000 and December 31, 1999 respectively +----------+---------- +----------+---------- 29,965 29,965 Additional paid-in capital 4,334 4,250 Unrealized losses on investment securities (105) (70) Retained earnings 185,570 171,101 221,150 205,246 Less treasury stock, at cost (48,333) (45,950) Total shareholders' equity 172,817 159,296 $1,993,011 $1,680,847 The accompanying notes are an integral part of the consolidated financial statements. IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (Unaudited) Three Months Ended June 30, (In thousands, except for per share) 2000 1999 Interest income: Loans and leases $19,322 $12,450 Investment securities: Taxable 999 981 Tax-exempt 64 69 Loans held for sale 19,610 14,972 Trading Account 2,682 1,589 Federal funds sold 47 274 Total interest income 42,724 30,335 Interest expense: Deposits 11,550 5,755 Short-term borrowings 9,050 5,612 Long-term debt 580 1,186 Total interest expense 21,180 12,553 Net interest income 21,544 17,782 Provision for loan and lease losses - Note 5 1,119 2,330 Net interest income after provision for loan and lease losses 20,425 15,452 Other income: Loan origination fees 9,052 12,613 Gain from sales of loans 21,718 25,834 Loan servicing fees 14,802 15,943 Amortization and impairment of servicing assets 6,708 4,573 Net loan administration income 8,094 11,370 Gain on sale of mortgage servicing 5,471 478 Trading gains (losses) 4,902 (639) Brokerage fees and commissions 497 411 Trust fees 683 544 Service charges on deposit accounts 472 445 Insurance commissions, fees and premiums 1,363 976 Other 627 1,444 52,879 53,476 Other expense: Salaries 29,527 28,808 Pension and other employee benefits 5,256 4,511 Office expense 3,244 3,058 Premises and equipment 7,048 5,804 Marketing and development 3,934 2,337 Other 9,026 10,263 58,035 54,781 Income before income taxes 15,269 14,147 Provision for income taxes 5,590 5,360 9,679 8,787 Distribution on company-obligated mandatorily redeemable preferred securities of subsidiary trust 1,174 1,174 Net income available to common shareholders $8,505 $7,613 Earnings per share of common stock available to shareholders: Basic - Note 10 $0.41 $0.35 Diluted - Note 10 $0.40 $0.35 Dividends per share of common stock $0.06 $0.05 The accompanying notes are an integral part of the consolidated financial statements. IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (Unaudited) Six Months Ended June 30, (In thousands, except for per share) 2000 1999 Interest income: Loans and leases $39,532 $24,230 Investment securities: Taxable 1,928 1,987 Tax-exempt 127 141 Loans held for sale 31,648 32,413 Trading Account 5,166 2,875 Federal funds sold 93 417 Total interest income 78,494 62,063 Interest expense: Deposits 20,010 11,420 Short-term borrowings 15,498 12,457 Long-term debt 1,163 2,478 Total interest expense 36,671 26,355 Net interest income 41,823 35,708 Provision for loan and lease losses - Note 5 2,254 3,531 Net interest income after provision for loan and lease losses 39,569 32,177 Other income: Loan origination fees 16,566 26,028 Gain from sales of loans 40,320 57,416 Loan servicing fees 29,923 31,375 Amortization and impairment of servicing assets 12,809 5,902 Net loan administration income 17,114 25,473 Gain on sale of mortgage servicing 5,723 2,829 Trading gains (losses) 8,291 (10,386) Brokerage fees and commissions 1,032 763 Trust fees 1,165 1,120 Service charges on deposit accounts 912 847 Insurance commissions, fees and premiums 2,555 1,402 Other 9,339 2,569 103,017 108,061 Other expense: Salaries 55,482 57,407 Pension and other employee benefits 10,924 9,984 Office expense 6,513 6,415 Premises and equipment 13,105 11,472 Marketing and development 8,712 5,138 Other 17,236 19,413 111,972 109,829 Income before income taxes 30,614 30,409 Provision for income taxes 11,279 11,476 19,335 18,933 Distribution on company-obligated mandatorily redeemable preferred securities of subsidiary trust 2,348 2,348 Net income available to common shareholders $16,987 $16,585 Earnings per share of common stock available to shareholders: Basic - Note 10 $0.81 $0.77 Diluted - Note 10 $0.80 $0.76 Dividends per share of common stock $0.12 $0.10 The accompanying notes are an integral part of the consolidated financial statements. IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 (Unaudited) Unrealized Gains/Losses on Additional Retained Investment Common Paid in Treasury Preferred Total Earnings Securities Stock Capital Stock Stock (In thousands) Balance at April 1, 2000 $165,256 $178,324 ($112) $29,965 $4,387 ($48,695) $1,387 Comprehensive Income: Note 1 Net Income 8,505 Other Comprehensive Income 7 Total 8,512 Cash dividends (1,259) (1,259) Purchase of treasury stock (332) (332) Sales of treasury stock 641 (53) 694 Preferred stock issued (1) (1) Balance June 30, 2000 $172,817 $185,570 ($105) $29,965 $4,334 ($48,333) $1,386 Balance at April 1, 1999 $153,566 $150,119 $44 $29,965 $2,881 ($29,443) $0 Comprehensive Income: Note 1 Net Income 7,613 Other Comprehensive Income (53) Total 7,560 Cash dividends (1,077) (1,077) Purchase of treasury stock (7,119) (7,119) Sales of treasury stock (180) (1,362) 1,182 Balance June 30, 1999 $152,750 $156,655 ($9) $29,965 $1,519 ($35,380) $0 The accompanying notes are an integral part of the consolidated financial statements. FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (Unaudited) Unrealized Gains/Losses on Additional Retained Investment Common Paid in Treasury Preferred Total Earnings Securities Stock Capital Stock Stock (In thousands) Balance at January 1, 2000 $159,296 $171,101 ($70) $29,965 $4,250 ($45,950) $0 Comprehensive Income: Note 1 Net Income 16,987 Other Comprehensive Income (35) Total 16,952 Cash dividends (2,518) (2,518) Purchase of treasury stock (3,384) (3,384) Sales of treasury stock 1,085 84 1,001 Preferred stock issued 1,386 1,386 Balance June 30, 2000 $172,817 $185,570 ($105) $29,965 $4,334 ($48,333) $1,386 Balance at January 1, 1999 $145,233 $142,232 $85 $29,965 $2,595 ($29,644) $0 Comprehensive Income: Note 1 Net Income 16,585 Other Comprehensive Income (94) Total 16,491 Cash dividends (2,162) (2,162) Purchase of treasury stock (7,119) (7,119) Sales of treasury stock 307 (1,076) 1,383 Balance June 30, 1999 $152,750 $156,655 ($9) $29,965 $1,519 ($35,380) $0 The accompanying notes are an integral part of the consolidated financial statements. IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For the six months ended June 30, 2000 1999 (In thousands) Net income $16,987 $16,585 Adjustments to reconcile net income to cash provided (used) by operating activities Depreciation and amortization 4,103 1,260 Amortization and impairment of servicing assets 12,809 1,298 Provision for loan and lease losses 2,254 3,531 Amortization of premiums, less accretion of discounts (72) 1,082 (Increase) decrease in loans held for sale (34,676) 361,641 Gain on sale of mortgage servicing (5,723) (22,340) Net increase in trading assets (37,069) (15,441) Other, net (9,419) 17,192 Net cash provided (used) by operating activities (50,806) 364,808 Lending and investing activities: Proceeds from maturities/calls of investment securities: Held-to-Maturity 802 5,222 Available-for-Sale 17 190 Purchase of investment securities: Held-to-Maturity (51) 0 Available-for-Sale 0 (2,940) Net increase in interest-bearing deposits with financial institutions (7,810) (10,003) Net increase in loans, excluding sales (213,609) (82,631) Sale of loans 7,253 22,928 Additions to mortgage servicing assets (27,655) (69,884) Proceeds from sale of mortgage servicing assets 19,193 75,726 Other, net (6,969) (2,448) Net cash used by lending and investing activities (228,829) (63,840) Financing activities: Net increase (decrease) in deposits 360,181 (101,108) Net increase (decrease) in short-term borrowings (62,132) (209,192) Repayments of long-term debt (199) (356) Issuance of preferred stock 1,386 0 Purchase of treasury stock (3,384) (7,119) Proceeds from sale of stock for employee benefit plans 1,085 307 Dividends paid (2,518) (2,162) Net cash provided (used) by financing activities 294,419 (319,630) Net increase (decrease) in cash and cash equivalents 14,784 (18,662) Cash and cash equivalents at beginning of period 47,215 77,522 Cash and cash equivalents at end of period $61,999 $58,860 Supplemental disclosures of cash flow information: Cash paid during the period: Interest $34,208 $26,227 Income taxes $4,239 $8,219 The accompanying notes are an integral part of the consolidated financial statements. NOTES TO THE FINANCIAL STATEMENTS (Unaudited) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The unaudited financial statements included herein have been prepared by the Corporation pursuant to the rules and regulations of the Securities and Exchange Commission but do not include all information and footnotes required by generally accepted accounting principles. In the opinion of management, the financial statements reflect all material adjustments necessary for a fair presentation. The accompanying financial statements should be read in conjunction with the financial statements and related notes included with the Corporation's Annual Report on Form 10-K for the year ended December 31, 1999. Reclassifications: Certain amounts in the 1999 consolidated financial statements have been reclassified to conform to the 2000 presentation. Derivatives: 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" (FAS 133). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the market value of derivatives would 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 will adopt SFAS 133 on January 1, 2001. The Corporation has not quantified the impact of this statement on its financial position or results of operations. Derivative instruments on the Corporation's balance sheet are currently classified as trading assets and carried at market value. Changes in market value are recorded as trading gains or losses on the income statement. 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. Market values for interest-only strips are determined using assumptions about the duration and performance of the securitized loans and are calculated on the basis of the expected timing of cash receipts by the company. Included in these 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. Adjustments to carrying values are recorded as trading gains or losses. NOTE 2 - INVESTMENT SECURITIES The carrying amounts of investment securities, including net unrealized losses of $175 thousand and $117 thousand on available-for-sale securities at June 30, 2000 and December 31, 1999, respectively, are summarized as follows: June 30, December 31, (In thousands) 2000 1999 Held-to-Maturity US Treasury and Government obligations $21,001 $21,238 Obligations of states and political subdivisions 4,606 4,706 Mortgage-backed securities 2,522 2,981 Corporate Obligations 50 -- Total Held-to-Maturity 28,179 28,925 Available-for-Sale US Treasury and Government obligations 4,898 4,934 Mortgage-backed securities 3,025 3,070 Other 652 579 Total Available-for-Sale 8,575 8,583 Total Investments $36,754 $37,508 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 on available-for-sale securities, net of the future tax impact, are reported as a separate component of shareholders' equity until realized. NOTE 3 - LOANS HELD FOR SALE Loans held for sale are stated at the lower of cost or market as of the balance sheet date. NOTE 4 - LOANS AND LEASES Loans and leases are summarized as follows: June 30, December 31, (In thousands) 2000 1999 Commercial, financial and agricultural $597,643 $443,985 Real estate-construction 121,167 121,803 Real estate-mortgage 126,496 115,265 Consumer 43,976 48,936 Direct financing leases 61,180 3,890 Unearned income (11,437) (455) $939,025 $733,424 NOTE 5 - ALLOWANCE FOR LOAN AND LEASE LOSSES Changes in the allowance for loan and lease losses are summarized as follows: June 30, December 31, (In thousands) 2000 1999 Balance at beginning of year $8,555 $9,888 Provision for loan and lease losses 2,254 4,443 Reduction due to sale of loans 0 (3,126) Reduction due to reclassification of loans to held for sale 0 (922) Recoveries 186 503 Charge-offs (941) (2,231) Balance at end of period $10,054 $8,555 NOTE 6- SERVICING ASSETS Included on the consolidated balance sheet at June 30, 2000 and December 31, 1999 are $139.9 million and $138.5 million, respectively, of servicing assets. These amounts relate to the principal balances of loans serviced by the Corporation for investors. Although they are not generally held for sale, there is an active secondary market for servicing assets. The Corporation has periodically sold servicing assets. Mortgage Servicing Asset: June 30, December 31, 2000 1999 Beginning Balance $138,500 $117,129 Additions 27,655 84,653 Amortization and impairment (12,809) (15,702) Reduction for servicing sales (13,470) (47,580) $139,876 $138,500 NOTE 7- SHORT-TERM BORROWINGS Short-term borrowings are summarized as follows: June 30, December 31, (In thousands) 2000 1999 Federal funds and Federal Home Loan Bank borrowings $142,000 $173,000 Lines of Credit 166,347 231,413 Repurchase agreements and drafts payable related to mortgage loan closings 76,517 46,796 Commercial paper 26,107 21,894 Total $410,971 $473,103 Repurchase agreements at December 31, 1999, include $0.7 million in mortgage loans sold under agreements to repurchase which are used to fund mortgage loans sold 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 $76.5 million and $46.1 million at June 30, 2000 and December 31, 1999, respectively. These borrowings are related to mortgage closings at the end of the period which have not been presented to banks for payment. When presented for payment these borrowings will be funded internally or by borrowing from the lines of credit. The Corporation has lines of credit available to fund mortgage loans held for sale. Interest on the lines of credit is payable monthly at variable rates ranging from 7.61% to the lender's prime rate at June 30, 2000. NOTE 8 -- LONG-TERM DEBT Long-term debt at June 30, 2000 consists of a note payable of $29.6 million with an interest rate of 7.58% that will mature on July 7, 2014. The note is shown on the balance sheet net of capitalized issuance costs. NOTE 9 -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST In January 1997, the Corporation issued $50 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 from issuance, 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 $51.1 million, an interest rate of 9.25% and an initial maturity of 30 years with a 19-year extension option. NOTE 10 -- EARNINGS PER SHARE Earnings per share calculations are summarized as follows: Effects of Stock Options Basic and Diluted Earnings Preferred Earnings Per Share Shares Per Share Three months ended June 30, 2000 Net income available to common shareholders $8,505 $0 $8,505 Shares 20,958 337 21,295 Per-Share Amount available to common shareholders $0.41 ($0.01) $0.40 Six months ended June 30, 2000 Net income available to common shareholders $16,987 $0 $16,987 Shares 21,008 300 21,308 Per-Share Amount available to common shareholders $0.81 ($0.01) $0.80 Basic Earnings Effects Diluted Earnings of Per Share Stock Options Per Share Three months ended June 30, 1999 Net income available to common shareholders $7,613 $0 $7,613 Shares 21,547 339 21,886 Per-Share Amount available to common shareholders $0.35 $0.00 $0.35 Six months ended June 30, 1999 Net income available to common shareholders $16,585 $0 $16,585 Shares 21,547 348 21,895 Per-Share Amount available to common shareholders $0.77 ($0.01) $0.76 NOTE 11 -- 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. As of June 30, 2000, Irwin Mortgage Corporation (IMC) was a defendant in class action lawsuits relating to IMC's administration of mortgage escrow accounts and IMC's right to pay broker fees to mortgage brokers. In the lawsuit involving escrow accounts, the court approved a settlement on June 13, 2000, and the matter is now concluded. The settlement provides a discount of one hundred eighty dollars towards refinancing or obtaining a new first mortgage loan from Irwin. In the lawsuit involving broker fees, it is not presently possible for the Corporation to predict the likelihood of an unfavorable outcome or to establish the possible extent or amount of liability or potential exposure with respect to the litigation. NOTE 12 -- Industry Segment Information The Corporation has five principal segments that provide a broad range of financial services throughout the United States. 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 financial services-oriented technology companies. Other consists primarily of the parent company including eliminations. The accounting policies of each segment are the same as those described in the "Summary of Significant Accounting Policies". Below is a summary of each segment's revenues, net income, and assets for 2000 and 1999: Home Mortgage Equity Commercial Equipment Venture (In thousands) Banking Lending Banking Leasing Capital Other Consolidated For the three months ended June 30, 2000 Net interest income, net of provision $4,567 $9,415 $6,336 $132 ($89) $64 $20,425 Intersegment interest (2,175) (1,207) 2,121 (27) 0 1,288 0 Other revenue 20,613 16,192 3,007 9 (15) 13,073 52,879 Intersegment revenues 13,330 0 (63) 0 100 (13,367) 0 Total net revenues 36,335 24,400 11,401 114 (4) 1,058 73,304 Other expense 29,358 17,257 (5,289) 980 100 15,629 58,035 Intersegment expenses 585 688 13,968 18 0 (15,259) 0 Net income before taxes 6,392 6,455 2,722 (884) (104) 688 15,269 Income taxes 2,626 2,520 1,075 0 (50) (581) 5,590 Net income 3,766 3,935 1,647 (884) (54) 1,269 9,679 Distribution on Preferred Securities 0 0 0 0 0 1,174 1,174 Net income available to shareholders $3,766 $3,935 $1,647 ($884) ($54) $95 $8,505 Assets at June 30, 2000 $559,543 $458,395 $950,887 $51,170 $15,622 ($42,606) $1,993,011 For the three months ended June 30, 1999 Net interest income, net of provision $5,205 $4,716 $6,249 $0 $0 ($718) $15,452 Intersegment interest (1,430) (339) 806 0 0 963 0 Other revenue 44,468 6,849 2,948 0 0 (789) 53,476 Intersegment revenues 0 607 42 0 0 (649) 0 Total net revenues 48,243 11,833 10,045 0 0 (1,193) 68,928 Other expense 38,060 8,067 6,169 0 0 2,485 54,781 Intersegment expenses 685 466 906 0 0 (2,057) 0 Net income before taxes 9,498 3,300 2,970 0 0 (1,621) 14,147 Income taxes 3,876 0 1,119 0 0 365 5,360 Net income 5,622 3,300 1,851 0 0 (1,986) 8,787 Distribution on Preferred Securities 0 0 0 0 0 1,174 1,174 Net income available to shareholders $5,622 $3,300 $1,851 $0 $0 ($3,160) $7,613 Assets at June 30, 1999 $736,851 $283,455 $656,443 $0 $0 ($55,876) $1,620,873 Home Mortgage Equity Commercial Equipment Venture (In thousands) Banking Lending Banking Leasing Capital Other Consolidated For the six months ended June 30, 2000 Net interest income, net of provision $13,018 $14,213 $14,386 $17 ($359) ($1,706) $39,569 Intersegment interest (4,396) (864) 2,627 (34) (1) 2,668 0 Other revenue 43,931 30,157 5,795 11 7,420 15,703 103,017 Intersegment revenues 17,262 0 81 0 200 (17,543) 0 Total net revenues 69,815 43,506 22,889 (6) 7,260 (878) 142,586 Other expense 58,216 31,845 (1,508) 1,773 189 21,457 111,972 Intersegment expenses 1,123 840 18,562 20 0 (20,545) 0 Net income before taxes 10,476 10,821 5,835 (1,799) 7,071 (1,790) 30,614 Income taxes 4,227 4,267 2,282 0 2,828 (2,325) 11,279 Net income 6,249 6,554 3,553 (1,799) 4,243 535 19,335 Distribution on Preferred Securities 0 0 0 0 0 2,348 2,348 Net income available to shareholders $6,249 $6,554 $3,553 ($1,799) $4,243 ($1,813) $16,987 Assets at June 30, 2000 $559,543 $458,395 $950,887 $51,170 $15,622 ($42,606) $1,993,011 For the six months ended June 30, 1999 Net interest income, net of provision $12,416 $3,938 $11,487 $0 $0 $4,336 $32,177 Intersegment interest (3,402) 5,396 2,191 0 0 (4,185) 0 Other revenue 88,428 12,373 6,048 0 0 1,212 108,061 Intersegment revenues 0 1,171 84 0 0 (1,255) 0 Total net revenues 97,442 22,878 19,810 0 0 108 140,238 Other expense 76,594 15,943 12,421 0 0 4,871 109,829 Intersegment expenses 1,319 603 1,735 0 0 (3,657) 0 Net income before taxes 19,529 6,332 5,654 0 0 (1,106) 30,409 Income taxes 7,959 0  2,138 0 0 1,379 11,476 Net income 11,570 6,332 3,516 0 0 (2,485) 18,933 Distribution on Preferred Securities 0 0 0 0 0 2,348 2,348 Net income available to shareholders $11,570 $6,332 $3,516 $0 $0 ($4,833) $16,585 Assets at June 30, 1999 $736,851 $283,455 $656,443 $0 $0 ($55,876) $1,620,873 NOTE 13 -- Subsequent Event On July 14, 2000, the company completed its acquisition of a 78% ownership position in Onset Capital Corporation. The acquisition was a cash transaction. Onset is a small-ticket equipment leasing company located in Canada. Part I Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and footnotes. This discussion contains forward-looking statements that are based on management's expectations, estimates, projections and assumptions. Words such as "expected," "assumptions," "estimate," 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 legislative or regulatory changes, or governmental changes in monetary or fiscal policy. Overview Net income for the second quarter ended June 30, 2000, was $ 8.5 million, up 11.7% from the second quarter 1999 net income of $7.6 million. Net income per share (diluted) was $0.40 for the second quarter of 2000 as compared to $0.35 for the same period in 1999. Return on equity for the second quarter of 2000 was 20.38% compared to 19.90% in 1999. For the year to date, the Corporation recorded net income of $ 17.0 million, up 2.4% from 1999. Net income per share (diluted) was $0.80, up from $0.76 a year earlier. Return on equity for the year to date was 20.64% as compared to 22.06% for the same period in 1999. Lines of Business Irwin Financial Corporation has five principal lines of business: o Mortgage banking (includes Irwin Mortgage Corporation and the related activities of Irwin Union Bank) o Home equity lending (includes Irwin Home Equity Corporation and the related activities of Irwin Union Bank) o Commercial banking (Irwin Union Bank) o Equipment leasing (includes Irwin Business Finance and the related activities of Irwin Union Bank) o Venture capital (includes Irwin Ventures, Inc. and the related activities of Irwin Union Bank) Listed below are the earnings by line of business for the quarter and year to date, as compared to the same periods in 1999: Three Months Six Months +--------------+-------------- Ended June 30, Ended June 30, (In Thousands) 2000 1999 2000 1999 Mortgage banking $3,766 $5,622 $6,249 $11,570 Home equity lending 3,935 3,300 6,554 6,332 Commercial banking 1,647 1,851 3,553 3,516 Equipment leasing (884) - (1,799) - Venture capital (54) - 4,243 - Parent (includes 95 (3,160) (1,813) (4,833) consolidating entries) $8,505 $7,613 $16,987 $16,585 Mortgage Banking Selected Financial Data (shown in thousands): Three Months Six Months +--------------+-------------- Ended June 30, Ended June 30, Selected Income Statement Data 2000 1999 2000 1999 Loan origination fees $8,931 $12,441 $16,359 $25,655 Gain from sales of loans 11,677 21,097 22,508 45,881 Loan servicing fees 12,958 14,226 26,337 28,294 Amortization and impairment of (6,269) (4,780) (11,881) (15,700) servicing assets, net of hedging Net interest income 2,328 5,504 8,601 11,203 Provision for loan losses 64 (1,729) 21 (2,189) Gain on sale of servicing 5,470 478 5,723 2,829 Other income 1,176 1,006 2,147 1,469 Total net revenues 36,335 48,243 69,815 97,442 Salaries and employee benefits 18,057 23,236 35,929 47,256 Other operating expenses 11,886 15,509 23,410 30,657 Income before tax 6,392 9,498 10,476 19,529 Income tax 2,626 3,876 4,227 7,959 Net income $3,766 $5,622 $6,249 $11,570 Return on average equity 18.80% 20.60% 15.60% 21.10% Mortgage loan originations $1,080,673 $1,609,898 $1,942,990 $3,386,794 Selected Operating Data: June 30, December 31, 2000 1999 Servicing portfolio $10,261,375 $10,488,112 Mortgage loans held for sale 281,604 277,614 Mortgage servicing asset 133,010 132,648 Mortgage banking activities are conducted by Irwin Mortgage Corporation which originates, sells, and services residential mortgage loans throughout the United States. Net income from mortgage banking for the second quarter was $3.8 million, down 33.0% from the same period in 1999. Year to date, net income was $6.2 million compared to $11.6 million in 1999. Return on average equity was 18.8% for the second quarter of 2000, compared to 20.6% during the same period in 1999. These declines relate to a continued rising interest rate environment which slowed production activity throughout the mortgage banking industry. As a result of the rising interest rate environment, mortgage loan originations of $1.1 billion were 32.9% below the second quarter of 1999. For the year, originations totaled $1.9 billion, down 42.6% from 1999. Refinances accounted for 12.7% of loan production in the second quarter of 2000, and 13.3% year to date. This compares to 26.5% and 37.8%, respectively, in 1999. Lower production volume caused mortgage loan origination income to decrease 28.2% in the second quarter to $8.9 million. Year to date it was down 36.2% to $16.4 million. As a result of lower loan production in the second quarter of 2000, gains on the sale of loans decreased 44.7% to $11.7 million and net interest income declined 57.7% to $2.3 million. Year to date, gains on sale of loans decreased 50.9% to $22.5 million. Net interest income year to date declined 23.2% to $8.6 million. Included in first quarter 2000 interest income was $3.0 million related to interest earned pursuant to a refund of federal income taxes due the company relating to a prior period tax return. Absent this one time item, net interest income for the six month period ended June 30, 2000, declined 50.0% compared to the same period in 1999. Mortgage loan servicing fees totaled $13.0 million and $26.3 million for the second quarter and year to date 2000. This represents a decrease of 8.9% and 6.9%, respectively. The servicing portfolio totaled $10.3 billion at June 30, 2000, a 2.2% decrease from December 31, 1999. Mortgage servicing assets totaled $133.0 million at June 30, 2000, relatively unchanged from December 31, 1999. The amortization and impairment of servicing assets, net of hedging, of $6.3 million in the second quarter of 2000 represents an increase of 31.2% compared to the same period in 1999. Year to date amortization and impairment totaled $11.9 million, down 24.3% from 1999. The provision for loan losses was down $1.8 million and $2.2 million in the second quarter and year to date 2000 compared to the second quarter and year to date of 1999. The second quarter and year to date 2000 figures reflect a reclassification to reflect management's intent to sell non-performing residential mortgage loans on a flow basis, rather than managing them as part of a loan portfolio. Prior to the third quarter of 1999, all nonperforming loans held at the mortgage bank were included in the non-performing asset category. With the change, these non-performing loans are more appropriately classified as part of the portfolio of loans held for sale and carried at the lower of cost or market value. There is no economic difference in this accounting classification as marking the loans to market when valued at less than face value has the same effect as establishing a loan loss allowance. Gains from the sale of mortgage servicing were up $5 million from the second quarter of 1999 to $5.5 million. Year to date gains from the sale of servicing totaled $5.7 million, up $2.9 million from 1999. This increase was the result of the company's effort to realize a portion of the increase in value in its servicing portfolio and to assist in the continued expansion of production assets by selling approximately $700 million of servicing during the quarter. Salaries and employee benefits decreased 22.3% to $18.1 million for the second quarter of 2000. Year to date, salaries and employee benefits decreased 24.0% to $35.9 million. These declines reflect the company's efforts at cost reduction in light of reduced originations. The reduction was due to a decline in commissions as a result of lower loan production in 2000. The decline in loan production also impacted other operating expenses which decreased 23.4% in the second quarter of 2000 and 23.6% year to date. Home Equity Lending Selected Financial Data (shown in thousands): Three Months Six Months +--------------+-------------- Ended June 30, Ended June 30, Selected Income Statement Data 2000 1999 2000 1999 Net interest income-unsold loans $5,526 $2,788 $8,183 $6,459 and other I/O strip interest income 2,682 1,589 5,166 2,875 Gain from sale of loans 10,153 5,645 19,110 10,508 Loan servicing fees, net of 1,283 891 2,402 1,543 amortization and impairment of servicing assets Trading gains (losses) 4,902 152 8,291 387 Other revenue (146) 768 354 1,106 Total net revenues 24,400 11,833 43,506 22,878 Operating expenses 17,945 8,533 32,685 16,546 Income before tax 6,455 3,300 10,821 6,332 Income tax 2,520 0 4,267 0 Net income $3,935 $3,300 $6,554 $6,332 Other Selected Financial Data: June 30, December 31, 2000 1999 Home equity loans and loans held $267,906 $233,326 for sale Interest-only strip 95,439 57,833 Managed portfolio 1,154,009 842,403 The home equity lending business markets home equity and first mortgage loans through direct mail, telemarketing and the Internet to customers in 25 states. Net income for the home equity lending business was $3.9 million, $6.5 million pre-tax, during the second quarter of 2000, and $6.6 million, $10.8 million pre-tax, for the year to date 2000. These results are compared to 1999 second quarter and year to date pre-tax net income of $3.3 million and $6.3 million, respectively. Income tax expense for the quarter and six month period ended June 30, 1999 was recorded at the parent company as the home equity lending business had not fully utilized its net operating loss carryforwards until late in 1999. Net interest income increased for unsold loans and other, as well as on I/O strips for both the quarter and year to date versus 1999. The total increase in net interest income over 1999 was $3.8 million for the second quarter and $4.0 million year to date. These increases are a result of increased loan production during 2000 compared to 1999. During the second quarter of 2000, home equity loan and line of credit production (originated and purchased)totaled $211.5 million, compared with $99.2 million in 1999. Year to date, loan production totaled $408.1 million, compared to $194.2 million in 1999. Included in the second quarter and year to date 2000 increases were $52.6 million and $151.9 million, respectively, in home equity loans which were acquired from other prime credit, high loan-to-value lenders. Gains from the securitization of loans totaled $10.2 million in the second quarter 2000, up 79.9% from the second quarter 1999. Year to date gains from securitization of loans totaled $19.1 million versus $10.5 million in 1999. Gain on sale as a percentage of loans securitized was 5.4% and 5.0% for the six months ended June 30, 2000 and 1999, respectively. The company sold $224.6 million and $356.2 million, respectively, of product in the quarter and six month period ended June 30, 2000, versus $85.2 million and $212.2 million, respectively, during the quarter and six month period ended June 30, 1999. The home equity lending business services the loans it has securitized and collects an annual fee of up to 1% of the outstanding principal balance of the securitized loans. Net servicing fee income totaled $1.3 million in the second quarter of 2000, up 44.0% from the same period in 1999. Year to date, net servicing fee income totaled $2.4 million, a 55.7% increase over 1999. The increase is due to growth in the servicing portfolio combined with a decline in the prepayments of underlying loans and resulting impairment of servicing assets caused by the rising interest rate environment. Interest-only strips are carried at their market values determined using assumptions about the duration and performance of the securitized loans. At June 30, 2000, the assumed annual loss rates ranged from 0.25% to 3.00%, prepayment speeds ranged from 16% to 32% CPR (constant prepayment rate) per year, and the discount rate was 15%. To mitigate the interest rate risk associated with certain interest-only strips, the home equity lending business uses an interest rate cap which is also carried at its market value, which was $0.7 million at June 30, 2000. Included in income during the second quarter of 2000 was an unrealized trading gain of $4.9 million recorded to adjust the carrying value of interest-only strips and the interest rate cap to their market values. This gain compares with a $0.2 million gain recorded in the second quarter of 1999. Year to date, trading gains totaled $8.3 million, compared with $0.4 million trading gain in 1999. The improvement in 2000 is due to increased volume of securitizations and a rising interest rate environment. Operating expenses were $17.9 million in the second quarter of 2000, up $9.4 million from 1999. Year to date operating expenses were $32.7 million compared to $16.5 million a year earlier. These increases are reflective of the growth in the company's managed portfolio and growth in production. Commercial Banking Selected Financial Data (shown in thousands): Three Months Six Months +--------------+-------------- Ended June 30, Ended June 30, Selected Income Statement Data 2000 1999 2000 1999 Net interest revenue $9,181 $7,605 $18,181 $14,680 Provision for loan losses (724) (550) (1,168) (1,002) Other income 2,944 2,990 5,876 6,132 Other operating expenses 8,679 7,075 17,054 14,156 Income before tax 2,722 2,970 5,835 5,654 Income tax 1,075 1,119 2,282 2,138 Net income $1,647 $1,851 $3,553 $3,516 Return on average equity 12.83% 14.50% 12.39% 14.27% Selected Balance Sheet Data: June 30, December 31, 2000 1999 Securities and short-term $22,065 $21,603 investments Loans and leases 873,339 720,493 Allowance for loan losses (8,028) (7,375) Deposits 825,408 710,899 Commercial banking activities are conducted by Irwin Union Bank (the Bank) which is headquartered in Columbus, Indiana. In recent years, the Bank has implemented a growth plan that calls for expansion into new markets outside of its traditional markets in south-central Indiana using de novo offices staffed by senior commercial loan officers who have experience with other commercial banks. As a result, the commercial bank currently operates in nine counties in Indiana as well as Kalamazoo, Grandville (Grand Rapids), and Traverse City, Michigan; Brentwood (St. Louis), Missouri; and Carson City, Nevada. Net income for the commercial bank decreased in the second quarter by $0.2 million to $1.6 compared to the second quarter of 1999. Year to date, net income was $3.6 million, an increase of 1.1% over 1999. Net interest income improved 20.7% to $9.2 million in the second quarter of 2000. Year to date net interest income improved 23.8% to $18.2 million. These increases relate primarily to the commercial bank's continued growth in new markets. The provision for loan losses increased 31.6% to $724 thousand in the second quarter compared with a provision of $550 thousand a year earlier. Year to date provision increased 16.6% to $1.2 million compared with a provision of $1.0 million a year earlier. Following is an analysis of net interest income and net interest margin computed on a tax equivalent basis: For the Three Months 2000 1999 Ended June 30, (In Thousands) Average Interest Yield/ Average Interest Yield/ Balance Rate Balance Rate Interest-earning $862,731 $19,497 9.08% $616,675 $13,005 8.46% assets Interest-bearing 779,758 10,264 5.29% 533,817 5,331 4.01% liabilities Net interest income $9,233 * $7,674 * Net interest margin * * 4.30% 4.99% For the Six Months 2000 1999 Ended June 30, (In Thousands) Average Interest Yield/ Average Interest Yield/ Balance Rate Balance Rate Interest-earning $822,970 $36,638 8.95% $597,625 $25,036 8.45% assets Interest-bearing 738,541 18,353 4.99% 512,041 10,228 4.03% liabilities Net interest income $18,285 * $14,808 * Net interest margin * * 4.46% 5.00% Interest margins during 2000 have declined as shown above compared to 1999 as a result of higher cost sources of funds and an allocation from the holding company of interest-bearing capital during the second quarter of 2000. Prior to this inter-company allocation, which has no consolidated impact, the net interest margin for the second quarter 2000 at the commercial bank declined 42 basis points compared to the same period in 1999. Total operating expenses, including salaries and benefits, increased 22.6% from the second quarter of 1999 to $8.7 million. Year to date, total operating expenses were $17.1 million, an increase of 20.5% compared to 1999. The continued expansion of operations in new markets led to the increased non-interest expense in 2000. Equipment Leasing During 1999, the Corporation formed a new leasing subsidiary, Irwin Business Finance. The company began organizing in the second quarter of 1999 and began lease originations in early 2000. During the second quarter of 2000, the leasing line of business incurred a pre-tax loss of $0.9 million. Year to date, the leasing line of business incurred a pre-tax loss of $1.8 million. These losses reflect expenses related to staffing, systems development and portfolio growth initiations in excess of portfolio revenue. Total loan and lease receivables originated during the three month and six month periods ended June 30, 2000 were $35.7 million and $51.5 million, respectively. The total loan and lease portfolio now totals $50.8 million. Venture Capital During 1999, the Corporation formed Irwin Ventures, Inc., a venture capital company which makes minority investments in early-stage financial services-related businesses. Its primary focus is on businesses which 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. During the second quarter of 2000 the venture capital line of business recorded a net loss of $54 thousand related to operating expenses. Year to date, the venture capital line of business recorded net income of $4.2 million which resulted principally from valuation increases in one of its portfolio investments. Venture capital investments held by Irwin Ventures, Inc. are carried at fair 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 prospectus. 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. There were no valuation adjustments required during the quarter for the venture capital investments. At June 30, 2000 the business had investments in the following companies: Company Public/Private Investment At Cost Carrying Value LiveCapital.com Private $1.94 million $10.70 million Bremer Associates, Incorporated Private $1.17 million $1.17 million DocuTouch Private $0.50 million $0.50 million Parent Company (including consolidating entries) For the quarter ended June 30, 2000, the parent company recorded net income of $95 thousand compared with a net loss of $3.2 million a year earlier. Year to date, the parent company recorded a $1.8 million net loss compared to a $4.8 million net loss in 1999. The parent company recorded $0.4 million and $0.7 million of income tax benefit related to Irwin Business Finance for the three month and six month periods ended June 30, 2000. The parent company will continue to record tax benefits resulting from the operating losses of Irwin Business Finance until such time as Irwin Business Finance becomes profitable and utilizes all of its operating loss carryforwards. The improvement in 2000 over 1999 primarily relates to an intercompany allocation of interest-bearing capital from the parent company to each of the Corporation's four asset-generating lines of business. The parent began this allocation process on April 1, 2000. Consolidated Income Statement Analysis Net interest income for the second quarter of 2000 totaled $21.5 million, up 21.2% from the second quarter of 1999. For the year, net interest income totaled $41.8 million, a 17.1% increase over 1999. The increase was due primarily to increased loans outstanding at the community bank and home equity business which offset declines at the mortgage bank resulting from the rising interest rate environment. The loan and lease loss provision was $1.1 million for the second quarter of 2000, as compared with $2.3 million for the same period in 1999. For the year, the provision totaled $2.3 million versus $3.5 million in 1999. See the section on credit risk for additional information on the loan loss provision. Noninterest income was down 1.1% to $52.9 million in the second quarter of 2000. Year to date, noninterest income was down 4.7% to $103.0 million. The decline in 2000 versus 1999 was caused primarily by lower revenues at the Corporation's mortgage banking line of business as a result of the rising interest rate environment which slowed loan production activity. These reduced revenues were partially offset by increased revenues at the home equity line of business resulting from increased production and increased loan sales. Other expenses increased 5.9% in the second quarter of 2000 to $58.0 million. For the year, other expenses increased $2.1 million or 2.0% over 1999. The effective income tax rate for the Corporation was 39.7% during the second quarter of 2000 and 39.9% year to date. This compares with 41.3% in the second quarter of 1999 and 40.9% year to date 1999. Consolidated Balance Sheet Analysis Total assets of the Corporation at June 30, 2000, were $2.0 billion, up from December 31, 1999 total assets of $1.7 billion. The increase was due primarily to growth in loans at the commercial bank. The increase in assets was accompanied by a $0.3 billion increase in interest-bearing deposits primarily at the commercial bank. A portion of noninterest bearing deposits is associated with escrow accounts held on loans in the servicing portfolio of Irwin Mortgage. These escrow accounts totaled $169.3 million at June 30, 2000, up from $148.9 million at December 31, 1999. Shareholders' equity grew to $172.8 million as of June 30, 2000, an increase of 8.5% over year-end 1999 shareholders' equity of $159.3 million. Contributing to the growth in shareholders' equity was the issuance during the first quarter of 2000 of approximately $1.4 million in non-coupon, convertible preferred shares of the Corporation's stock. This stock was issued to certain qualified investors thought to be in a position to support deposit growth in certain of the expansion markets of the commercial banking line of business. Shareholders' equity as of June 30, 2000 was $8.17 per common share, an increase of 8.2% compared to December 31, 1999. The Corporation's equity to assets ratio ended the quarter at 8.67% compared to 9.48% at the end of 1999. Credit Risk The assumption of credit risk is a key source of earnings for the commercial banking, home equity lending and equipment leasing lines of business. In addition, the mortgage banking business assumes some credit risk despite the fact that the mortgages are typically insured. The credit risk in the loan portfolios of the commercial bank and the home equity lending business 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. A specific allowance is set at a level which management considers sufficient to cover probable losses on these loans. A general 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. As of June 30, 2000, the allowance for loan and lease losses as a percentage of total loans and leases was 1.07% compared to 1.17% at December 31, 1999. For the three month and six month period ended June 30, 2000, the provision for loans and lease losses totaled $1.1 million and $2.3 million, respectively. This represents a decline in the amounts recorded of 52.0% and 36.2% compared to the corresponding periods in 1999. The decline in the provisions for 2000 compared to 1999 relates to a reclassification which is discussed in further detail in the mortgage banking line of business section of this document. Nonperforming assets (loans 90 days past due, nonaccrual, and owned real estate) were $6.5 million or 0.33% of total assets at June 30, 2000, compared to $8.1 million or 0.48% at December 31, 1999. Nonperforming Assets June 30, December 31, December 31, (In Thousands) 2000 1999 1998 Accruing loans past due 90 days or more: Real Estate Mortgage $-- $-- $291 Commercial 718 58 252 Consumer 129 89 89 Subtotal 847 147 632 Nonaccrual loans: Real Estate Mortgage 1,933 3,049 9,449 Commercial 1,065 748 1,052 Leasing 64 88 426 Consumer 158 273 174 Subtotal 3,220 4,158 11,101 Total nonperforming loans 4,067 4,305 11,733 and leases Other real estate owned 2,473 3,752 3,506 Total nonperforming assets$6,540 $8,057 $15,239 Nonperforming assets to 0.33% 0.48% 0.78% total assets Liquidity Liquidity is the availability of funds to meet the daily requirements of the business. For financial institutions, demand for funds comes principally from extensions of credit and withdrawal of deposits. Liquidity is provided by asset maturities or sales through short-term borrowings. The objectives of liquidity management are to ensure that funds will be available to meet demands and that funds are available at a reasonable cost. Liquidity is managed by the parent company and liquidity management committees at each line of business. 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 June 30, 2000, the ratio of loans and loans held for sale was 120.5%. These loans carry an interest rate equal to the current market rate for first and second lien mortgage loans. Liquidity is significantly improved since nearly all mortgage loans held for sale are in the process of being securitized and sold. The holding period for an individual loan typically does not exceed 90 days. Interest Rate Risk The primary market risk associated with asset/liability management activities is interest rate risk. Because the assets are not perfectly matched with the liabilities funding those assets, sensitivity of earnings to interest rate changes exists. Interest rate exposure is the sensitivity of net interest income and the fair market value of net 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, over various time horizons and exposure to varying interest rate scenarios. Numerous factors are incorporated into the model including prepayment speeds, net interest margin, fee income, and the impact that a comprehensive mark-to-market valuation would have on equity. 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 loan and lease products, and mitigate this risk by managing the duration of the liabilities raised to support their portfolios. 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 this risk, the mortgage bank buys commitments to deliver loans at a fixed price. The mortgage and home equity lines of business are also exposed to interest rate risk through their ownership of servicing assets and interest only strips. As discussed in the analysis of each line of business earlier in this report, offsets to these exposures include maintaining a strong production operation, selective sales of the servicing rights, match funded asset-backed securities sales, and the use of financial hedges. The following tables reflect management's estimate of the present value of interest sensitive assets, liabilities, and off-balance-sheet items as of June 30, 2000. In addition to showing the estimated fair market value at current rates, it also includes estimates of the fair market value of existing business based on a hypothetical up and down 100 and 200 basis point instantaneous shock in interest rates. 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 value of the non-interest sensitive assets and liabilities (such as cash, accounts receivable, and fixed assets), the value of which is 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 June 30, 2000 book of business 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. Economic Value Change Method Present Value At June 30, 2000 Instantaneous Change in Interest Rates of: (In Thousands) -2% -1% Current +1% +2% Interest Sensitive Assets Loans and Other Assets $1,021,616 $1,001,427 $982,275 $964,227 $947,070 Loans Held for Sale 492,892 487,071 481,397 475,754 469,928 Mortgage Servicing Rights 99,146 145,803 175,258 180,979 184,169 Interest-Only Strips 91,738 94,879 98,130 101,003 103,665 Total Interest Sensitive Assets 1,705,392 1,729,180 1,737,060 1,721,963 1,704,832 Interest Sensitive Liabilities Deposits -832,863 -829,154 -825,510 -821,936 -818,462 Short Term Borrowings -412,699 -410,997 -409,399 -407,820 -406,259 Long Term Debt -86,749 -83,337 -79,333 -74,827 -69,795 Total Interest Sensitive Liabilities -1,332,311 -1,323,488 -1,314,242 -1,304,583 -1,294,516 Interest Sensitive Off Balance Sheet Items 117 397 936 1,613 2,318 Net Sensitivity as of $373,198 $406,089 $423,754 $418,993 $412,634 June 30, 2000 Potential Change ($50,556) ($17,665) $- ($4,761) ($11,120) Net Sensitivity as of $271,838 $315,927 $334,983 $333,872 $327,352 December 31, 1999 Potential Change ($63,145) ($19,056) $- ($1,111) ($7,631) GAAP-Based Value Change Method Present Value At June 30, 2000 Instantaneous Change in Interest Rates of: (In Thousands) -2% -1% Current +1% +2% Interest Sensitive Assets Loans and Other Assets (1) $- $- $- $- $- Loans Held for Sale 481,397 481,397 481,397 475,754 469,928 Mortgage Servicing Rights 97,186 117,138 127,446 127,827 127,857 Interest-Only Strips 91,738 94,879 98,130 101,003 103,665 Total Interest Sensitive Assets 670,321 693,414 706,973 704,584 701,450 Interest Sensitive Liabilities Deposits (1) Short Term Borrowings (1) Long Term Debt (1) Total Interest Sensitive Liabilities (1) Interest Sensitive Off Balance Sheet Items 117 397 936 1,613 2,318 Net Sensitivity as of $670,438 $693,811 $707,909 $706,197 $703,768 June 30, 2000 Potential Change ($37,471) ($14,098) $- ($1,712) ($4,141) Net Sensitivity as of $271,838 $315,927 $334,983 $333,872 $327,352 December 31, 1999 Potential Change ($63,145) ($19,056) $- ($1,111) ($7,631) Value does not change in GAAP presentation. Derivative Financial Instruments The Corporation hedges its interest rate risk on mortgage loans held for sale using mandatory commitments to sell the loans at a future date. Prior to December 31, 1999, the value of mortgage servicing assets was periodically hedged using options in treasury futures. Certain of the Corporation's interest-only strips are hedged using interest rate caps which had a fair value of $0.7 million at June 30, 2000, and a notional amount of $26.1 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 the second quarter of 2000, the Corporation recorded virtually no gain or loss related to these derivative products. Year to date, the Corporation recorded a $0.1 million gain related to these products. This compares to losses of $0.3 million and $10.0 million in the second quarter and year to date 1999. Capital Adequacy The Corporation is subject to various regulatory capital requirements administered by federal banking agencies. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Equity and risk-based capital ratios for the Corporation are as follows: Ratio required to be considered well- June 30, December 31, December 31, capitalized 2000 1999 1998 Equity to Assets n/a 8.67% 9.48% 7.46% Risk-Based Capital 10.0% 11.24% 13.50% 12.25% Tier I Capital 6.0% 9.50% 11.39% 11.63% Tier I Leverage 5.0% 12.06% 12.77% 10.51% Year 2000 The Corporation did not experience any significant Year 2000 related computer disruptions during the second quarter of 2000. Part II Item 1. Legal Proceedings Kruta et al. v. Inland Mortgage Corporation. This class action lawsuit, initiated in October, 1995 and heard before a federal Multidistrict Litigation Panel in Chicago, Illinois, has been settled. Plaintiffs alleged they represented a nationwide class of persons who had mortgage escrow accounts allegedly improperly managed by Irwin Mortgage. On June 13, 2000, the Court issued a final order approving the settlement in which Irwin Mortgage will honor discount certificates for qualified class members of one hundred eighty dollars each to reduce closing costs associated with refinancing or obtaining a new first mortgage loan from Irwin Mortgage for a period of five years. Part II Item 6 Exhibits to Form 10-Q Number Assigned Sequential Numbering In Regulation S-K System Page Number Item 601 Description of Exhibit (2) No Exhibit (3) No Exhibit (4) No Exhibit (10) No Exhibit (11) Computation of earnings per share is included in the footnotes to the financial statements (15) No Exhibit (18) No Exhibit (19) No Exhibit (22) No Exhibit (23) No Exhibit (24) No Exhibit (27) Financial Data Schedule (99) No Exhibit (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements 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. IRWIN FINANCIAL CORPORATION /s/ Gregory F. Ehlinger By:____________________________________ Gregory F. Ehlinger Chief Financial Officer /s/ Jody A. Littrell By:_____________________________________ Jody A. Littrell Corporate Controller (Chief Accounting Officer)