1,800,000 1,800,000
Preferred Securities Convertible Preferred Securities
IFC CAPITAL TRUST II IFC CAPITAL TRUST III
10.50% Cumulative Trust Preferred 8.75% Cumulative Convertible Trust
Securities Preferred Securities
(Liquidation Amount $25 (Liquidation Amount $25
Per Preferred Security) Per Convertible Preferred Security)
Fully, irrevocably and unconditionally Fully, irrevocably and unconditionally
guaranteed on a subordinated basis, guaranteed on a subordinated basis,
as described in this prospectus, by as described in this prospectus, by
|
IFC Capital Trust II is offering 1,800,000 preferred securities at $25 per security and IFC Capital Trust III is offering 1,800,000 convertible preferred securities at $25 per security. The preferred securities and the convertible preferred securities are being offered and sold separately and not as units.
The preferred securities represent an indirect interest in our 10.50% junior subordinated debentures. The debentures have the same payment terms as the preferred securities and will be purchased by IFC Capital Trust II using the proceeds from its offering of preferred securities. The preferred securities are not convertible into shares of our common stock.
The convertible preferred securities represent an indirect interest in our 8.75% convertible junior subordinated debentures. The convertible debentures have the same payment terms as the convertible preferred securities and will be purchased by IFC Capital Trust III using the proceeds from its offering of the convertible preferred securities. The convertible preferred securities are convertible into shares of our common stock as described in this prospectus.
Our common stock trades on the Nasdaq National Market under the symbol "IRWN." The closing price as reported on Nasdaq on November 16, 2000, was $15.25. The preferred securities and convertible preferred securities have been approved for inclusion on the Nasdaq National Market under the symbols "IRWNO" and "IRWNN", respectively. Trading is expected to commence on or before delivery of the securities.
Investing in the securities involves risks. See "Risk Factors" beginning on page 16.
The securities offered by this prospectus are not savings accounts, deposits or obligations of any bank and are not insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation or any other governmental agency.
Per Convertible
Per Preferred Preferred
Security Total Security Total
------------- ----------- --------------- -----------
Public offering price..... $25.00 $45,000,000 $25.00 $45,000,000
Proceeds to the trust..... $25.00 $45,000,000 $25.00 $45,000,000
|
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
Stifel, Nicolaus & Company Incorporated
McDonald Investments Inc.
November 16, 2000
. Founded in . 1981 . 1994 Start- . 1999 Start- . 1999 Start-
1871 Acquisition up up up
. Focuses on . Originates, . Originates . Funding . Investor in
commercial sells and and source for early stage
and private services services leasing companies
banking conforming prime- companies, in
needs of first quality, brokers and financial
small mortgage high loan- vendors services or
businesses loans to-value financial
and home equity services-
business loans related
owners technology
. Locations . National . National . North . National
in Indiana, scope, scope, American focus
Michigan, emphasis on emphasis on focus
Missouri, borrowers debt
Nevada, with consoli-
Utah and special dation
Kentucky needs products
. Acquired
78%
ownership
interest in
Onset
Capital
Corporation,
a Canadian
equipment
leasing
company, in
July 2000
. $3.0 . $601
billion in million in
originations originations
in the and
first nine acquisitions
months of in the
2000 first nine
months of
2000
. Loan . $10.0 . $1.3 . Lease . Three
portfolio billion billion portfolio portfolio
of $1.0 servicing managed of $128.2 investments
billion as portfolio portfolio million as as of
of as of as of of September
September September September September 30, 2000
30, 2000 30, 2000 30, 2000 30, 2000
. Headquarters . Headquarters . Headquarters . Headquarters . Headquarters
in in in San in in
Columbus, Indianapolis, Ramon, CA Bellevue, Columbus,
IN IN WA IN
|
This summary highlights information contained in, or incorporated by reference into, this prospectus. Because this is a summary, it may not contain all of the information that is important to you. Therefore, you should also read the more detailed information set forth in this prospectus, our financial statements and the other information that is incorporated by reference into this prospectus. Unless otherwise indicated, the information in this prospectus assumes that the underwriters will not exercise their option to purchase additional preferred securities and convertible preferred securities to cover over-allotments.
Irwin Financial Corporation, headquartered in Columbus, Indiana, is a diversified financial services company organized as an Indiana bank holding company in May of 1972. Our major subsidiaries are Irwin Union Bank and Trust Company, a commercial bank; Irwin Mortgage Corporation, a mortgage banking company; Irwin Home Equity Corporation, a consumer home equity lending company; Irwin Business Finance Corporation, an equipment leasing subsidiary; and Irwin Ventures Incorporated, a venture capital company. Our strategy encourages a diverse revenue stream and we focus on niches in financial services where we believe we can optimize the productivity of our capital and where our experience can provide a competitive advantage.
At September 30, 2000, Irwin had total assets of $2.2 billion and shareholders' equity of $181 million. While continuing to grow our franchise, over the five- and ten-year periods ending December 31, 1999, respectively:
. our return on average equity has averaged 21.47% and 21.31%;
. our earnings per share has compounded at an average annual growth rate of 14.45% and 24.48%;
. our book value per share has compounded at an average annual growth rate of 14.58% and 18.55%;
. our annual net charge offs to average loans and leases averaged 0.40% and
0.44%; and
. our ratio of year-end allowance for loan and lease losses to total average loans and leases averaged 1.46% and 1.44%.
We attribute the strong profitability reflected in these results primarily to the following:
. We pursue complementary consumer and commercial finance niches through our bank holding company structure;
. Our significant insider ownership, approximately 58% as of September 30, 2000, aligns management's interests with those of both creditors and shareholders. While this concentrated ownership enables management to control the outcome of all shareholder votes, we believe it also heightens management's emphasis on creditworthy, profitable growth;
. Our management teams, both at the parent company and in each line of business, have substantial tenure with Irwin and within the financial services industry. Our financial performance over the past 10 years reflects the success of strategies pursued by this core management team; and
. Our product and geographic market diversification has allowed us to be opportunistic in new ventures and has resulted in a relatively stable revenue and earnings stream throughout various economic environments and cycles.
At or For
Nine Months Ended At or For
September 30, Year Ended December 31,
---------------------- ----------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands except per share data)
Net income.............. $ 26,114 $ 25,296 $ 33,156 $ 30,503 $ 24,444 $ 22,428 $ 20,083
Earnings per share
(diluted).............. 1.23 1.15 1.51 1.38 1.08 0.98 0.88
Total assets............ 2,150,122 1,662,531 1,680,847 1,946,179 1,496,794 1,300,122 1,037,541
Total deposits.......... 1,320,164 875,933 870,318 1,009,211 719,596 640,153 563,999
Loans held for sale..... 490,690 511,007 508,997 936,788 528,739 446,898 378,658
Loans and leases, net... 1,105,117 660,572 724,869 547,103 602,281 526,175 407,904
Total shareholders'
equity................. 181,065 158,755 159,296 145,233 127,983 118,903 99,216
Return on average
assets................. 1.82% 2.04% 2.01% 1.85% 1.94% 1.95% 2.28%
Return on average
equity................. 20.88% 22.15% 21.51% 22.84% 19.80% 20.58% 22.60%
Net interest margin..... 5.33% 5.62% 5.36% 4.41% 4.95% 5.12% 4.93%
|
Business Strategy
Our business strategy is to operate as an interrelated group of specialized financial services companies which focus on selected markets where competitive advantages are perceived and optimize the productivity of our capital base.
. Interrelated Group of Specialized Financial Services Companies. We are organized into five principal lines of business: commercial banking, mortgage banking, home equity lending, equipment leasing, and venture capital. Each line of business has a separate management team who operate their niche as a separate business unit responsible for performance goals specific to that particular line of business. Our structure allows the senior management team of each line of business to focus their efforts on understanding their customers and meeting the needs of the markets they serve. This structure also promotes accountability among managers of each enterprise. At the same time, Irwin at the parent level works actively to add value to our lines of business through interaction with the management teams, capitalizing on interrelationships and providing centralized services, and overall organizational decisions. In addition, diversification among business lines makes our consolidated earnings less susceptible to economic and interest rate fluctuations than more traditional commercial banks. The following table shows our net income by line of business for the past five years and the first nine months of 2000.
Net Income by Line of Business
Nine Months
Ended
September 30, Year Ended December 31,
---------------- -------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- ------- -------
(in thousands)
Commercial banking...... $ 5,350 $ 5,392 $ 7,345 $ 6,509 $ 5,587 $ 4,254 $ 3,639
Mortgage banking........ 9,944 18,045 23,063 28,853 21,300 20,422 19,331
Home equity lending..... 10,515 8,886 12,606 (6,668) 1,710 (816) (3,220)
Equipment leasing....... (2,351) -- (843) -- -- -- --
Venture capital......... 4,077 724 656 -- -- -- --
Other (including parent,
medical equipment
leasing and
consolidating entries). (1,421) (7,751) (9,671) 1,809 (4,153) (1,432) 333
------- ------- ------- ------- ------- ------- -------
Total consolidated net
income................. $26,114 $25,296 $33,156 $30,503 $24,444 $22,428 $20,083
======= ======= ======= ======= ======= ======= =======
|
. Optimize the Productivity of Our Capital Base. We are highly regulated as to the amount of assets to equity we can have on a consolidated holding company basis and at Irwin Union Bank on a stand-alone basis. The amount of our regulatory capital affects the amount of assets that can be carried on our balance sheet. For this reason, our strategy is to balance growth between:
. businesses that require us to carry assets on our balance sheet (and are, therefore, capital-intensive such as Irwin Union Bank), and
. businesses that produce additional revenues and profits for us without adding proportionately to our asset size (less capital-intensive opportunities such as Irwin Mortgage).
We believe that, by optimizing the productivity of our capital, we can produce a larger stream of revenues and profits from our capital base than if we focused principally on asset growth.
The result of this strategy is that we derive a larger proportion of our revenue from fee income than from net interest income. For the nine months ended September 30, 2000, 72.82% of our total net revenues were derived from non-interest income compared to 75.47% for the first nine months of 1999, and 27.18% of our total net revenues were derived from net interest income during the first nine months of 2000 compared to 24.53% during the first nine months of 1999. Historically, we have also optimized our capital and enhanced our net interest margin by using Irwin Union Bank's ability to generate funding through deposits to provide a lower cost of funding than we could otherwise obtain through borrowings.
Major Lines of Business
Irwin Financial Corporation is a regulated bank holding company. We conduct our commercial and consumer finance businesses through separate operating subsidiaries. Under this ownership structure, our separate businesses hold and fund the majority of their assets through the bank. This provides additional liquidity and results in regulatory oversight of each of our lines of business.
. Commercial Banking. Irwin Union Bank is a full service commercial bank offering a wide variety of services to individuals, businesses, and institutional and governmental customers in selected markets. The bank focuses on credit and credit-related products for small businesses and business owners. In recent years, the bank has grown by selectively opening new offices in markets outside of the bank's historical markets in south-central Indiana. Irwin Union Bank currently has 20 banking facilities in Indiana, located throughout nine counties, primarily in the central and south-central portion of the state. The bank also has four banking branches outside Indiana: three branches in Michigan--located in Kalamazoo, established in June 1999; Grandville (near Grand Rapids), established in October 1999; and Traverse City, established in May 2000-- and one branch in Carson City, Nevada, established in December 1999. Irwin Union Bank also has loan production offices in Brentwood, Missouri (near St. Louis), established in 1999, and Louisville, Kentucky and Salt Lake City, Utah established in 2000. Offices in Las Vegas, Nevada and Phoenix, Arizona, are expected to open in the fourth quarter, 2000. Under its growth plan, Irwin Union Bank has targeted and expects to continue to target economically strong metropolitan markets where we believe customers have been negatively impacted by recent bank consolidation. In markets management identifies as attractive opportunities, the bank works to hire experienced bank officers who have strong local ties and who can focus on providing personalized
At or For
Nine Months Ended At or For
September 30, Year Ended December 31,
------------------ ------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------- ------- -------- -------- -------- -------- --------
(dollars in thousands)
Net income.............. $ 5,350 $ 5,392 $ 7,345 $ 6,509 $ 5,587 $ 4,254 $ 3,639
Total assets............ 1,061,796 737,567 789,560 607,992 539,233 503,507 440,035
Total loans............. 974,539 650,380 720,493 514,950 410,272 336,580 310,083
Total deposits.......... 924,272 677,854 710,899 567,526 486,481 453,879 400,149
Nonperforming assets as
a percentage of total
assets................. 0.20% 0.35% 0.15% 0.31% 0.60% 0.76% 0.45%
Net charge-offs as a
percentage of loans.... 0.06% 0.07% 0.13% 0.11% 0.31% 0.33% 0.52%
|
. Mortgage Banking. Irwin Mortgage originates, purchases and services conventional and government agency backed (i.e., FHA and VA) residential mortgage loans nationwide. Irwin Mortgage utilizes a niche strategy, focusing on first-time homeowners. The majority of its mortgage originations are either insured by an agency of the federal government or, in the case of conventional mortgages, meet requirements for resale to the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. This niche has provided Irwin Mortgage with an acceptable return on investment while focusing on loans with low credit risk attributes. Irwin Mortgage sells mortgage loans to institutional and private investors but may retain servicing rights to the loans that it originates or purchases from correspondents. This balance between mortgage loan originations and mortgage loan servicing provides an economic hedge against interest rate changes. In rising interest rate environments, the value of our mortgage servicing portfolio generally increases as prepayment expectations decline, and in declining interest rate environments, the value of our mortgage production franchise generally increases.
In addition to the mortgage servicing portfolio shown on the balance sheet, Irwin Mortgage has servicing assets valued at $69.7 million as of September 30, 2000. These assets are not recorded on the balance sheet because of provisions in generally accepted accounting principles in effect at the time the assets were originated which have since changed.
As a complement to its primary niche, Irwin Mortgage also originates, to a limited degree, non-prime first mortgage loans. This market is comprised of borrowers who do not qualify for first mortgages that conform to secondary market standards. These loans are sold on a non-recourse, service-released basis to private investors.
Irwin Mortgage utilizes retail, wholesale, direct, and Internet channels to originate and purchase mortgage loans. At September 30, 2000, Irwin Mortgage operated 95 production and satellite offices in 28 states. Irwin Mortgage is currently our largest contributor to revenue, comprising 48.23% of total revenues for the nine months ended September 30, 2000. The mortgage banking line of business accounted for 69.38% of total revenues for the same period in 1999. The following table shows selected financial data of our mortgage banking line of business.
At or For
Nine Months Ended At or For Year
September 30, Ended December 31,
---------------------- -----------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ----------- ----------- ----------- ----------- ----------- -----------
(dollars in thousands)
Net income.............. $ 9,944 $ 18,045 $ 23,063 $ 28,853 $ 21,300 $ 20,422 $ 19,331
Total mortgage
originations........... 2,986,445 4,769,740 5,876,750 8,944,615 5,397,338 5,085,625 3,559,310
Owned first mortgage
servicing portfolio.... 9,963,018 10,462,423 10,488,112 11,242,470 10,713,549 10,810,988 10,301,914
|
. Home Equity Lending. Irwin Home Equity, in conjunction with the bank, originates and services home equity loans and lines of credit nationwide. We either hold the loans in portfolio at the bank or sell them through securitization transactions, and Irwin Home Equity continues to service them. We generally recognize gain when we sell our loans through securitization. The loans are marketed through direct mail and telemarketing in 25 states and through Internet-based solicitations. We target creditworthy, homeowning consumers who are active unsecured credit card debt users. Target customers are pre-selected using proprietary models based on several criteria including the customer's previous use of credit. In 1997 and 1998, we significantly redesigned our product offerings to better position Irwin Home Equity in the future. We introduced new products with origination and prepayment fees and home equity loans with 125% loan-to-value ratios. Over 60% of our current home equity lending portfolio is protected with prepayment penalties. For the nine months ended September 30, 2000, home equity loans with loan-to- value ratios greater than 100% made up 58.1% of our loan originations (including 25.3% from an acquired pool). We plan to continue in the near term to originate a high level of loans in this line of business that have high loan-to-value ratios. We also expect to continue to expand our home equity lending line of business through the development of new products, the extension of existing products to newly eligible customers, and by the addition of brokers, correspondents and Internet sites.
The following table shows selected financial data of our home equity line of business.
At or For
Nine Months Ended At or For
September 30, Year Ended December 31,
-------------------- -----------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- -------- -------- -------- -------- -------- -------
(dollars in thousands)
Net interest income..... $ 21,318 $ 13,868 $ 18,852 $ 5,495 $ 7,129 $ 7,755 $ 1,828
Gain on sale of loans... 23,865 12,630 23,998 18,610 15,908 7,798 2,985
Fees.................... 5,081 3,530 4,907 3,323 2,145 710 13
Total net revenues...... 71,523 33,676 50,566 23,941 21,777 15,420 4,473
Total net income........ 10,515 8,886 12,606 (6,668) 1,710 (816) (3,220)
Loans and line of credit
volume................. 601,038 291,785 439,507 389,673 214,518 169,120 87,420
Total servicing
portfolio.............. 1,283,517 749,149 842,403 581,241 358,166 230,450 86,691
Weighted average yield
on lines of credit..... 14.23% 12.24% 12.72% 11.89% 12.96% 12.80% 13.61%
Weighted average yield
on loans............... 12.87% 12.05% 12.33% 11.86% 13.97% 14.08% -- %
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. Venture Capital. Irwin Ventures makes investments in early stage companies in the financial services industry and related fields. In August 1999, Irwin Ventures established Irwin Ventures Incorporated-- SBIC, which has received a Small Business Investment Company license. We expect to provide Irwin Ventures' portfolio companies the benefit of our management experience in the developing strategies and plans in the financial services marketplace. In addition, contacts made through venture activities are expected to benefit management of our other lines of business through the sharing of technologies and market opportunities.
Our principal executive offices are located at 500 Washington Street, P.O. Box 929, Columbus, Indiana 47202-0929. Our telephone number is (812) 376-1020.
Each trust is a newly formed financing subsidiary of Irwin. Upon issuance of the preferred securities and convertible preferred securities offered by this prospectus, the purchasers in this offering will own all of the issued and outstanding preferred securities of IFC Capital Trust II, and all of the issued and outstanding convertible preferred securities of IFC Capital Trust III. In exchange for our capital contribution to each of the trusts, we will own all of the common securities of each trust. Each trust exists exclusively for the following purposes:
. issuing the preferred securities or convertible preferred securities, as the case may be, to the public for cash;
. issuing the common securities to us;
. investing the proceeds from the sale of its preferred and common securities in an equivalent amount of junior subordinated debentures for IFC Capital Trust II and convertible junior subordinated debentures for IFC Capital Trust III, to be issued by us; and
. engaging in activities that are incidental to those listed above, such as receiving payments on the debentures and making distributions to security holders, furnishing notices and other administrative tasks.
Each trust's address is 500 Washington Street, P.O. Box 929, Columbus, Indiana 47202-0929, and the telephone number is (812) 376-1020.
|
Preferred Securities Convertible Preferred
(continued) Securities
(continued)
September 30, 2005 with the
payment of specific premium
amounts. We will not shorten
the maturity date unless we
have received the prior
approval of the Board of
Governors of the Federal
Reserve, if required.
Redemption
before
September
30, 2030 is
possible....
The trust must redeem
the convertible preferred
The trust must redeem the securities when the
preferred securities when the convertible debentures are
debentures are paid at paid at maturity, or upon any
maturity, or upon any earlier earlier redemption of the
redemption of the debentures convertible debentures to the
to the extent the debentures extent the debentures are
are redeemed. We may redeem redeemed. We may redeem all
all or part of the debentures or part of the convertible
at any time on or after debentures at any time on or
September 30, 2005. after September 30, 2005
without the payment of any
premium amounts.
In addition, we may redeem,
at any time, all of the
debentures if:
We may redeem all or part of
the convertible debentures
prior to September 30, 2005,
if we pay the following
redemption premium:
. there is a change in
existing laws or
regulations, or new
official administrative
or judicial
interpretation or
application of these
laws and regulations,
that causes the
interest we pay on the
debentures to no longer
be deductible by us for
federal income tax
purposes; or the trust
becomes subject to
federal income tax; or
the trust becomes or
will become subject to
other taxes or
governmental charges;
. on or after September
30, 2003 but before
September 30, 2004, we
pay a 15% premium over
the principal amount to
be redeemed; and
. on or after September
30, 2004 but before
September 30, 2005, we
pay a 10% premium over
the principal amount to
be redeemed.
However, we may only use
these early redemption rights
when the fair market value of
our common stock is at least
125% of the conversion price
of the convertible preferred
securities for a period of 20
consecutive trading days
ending within five business
days of the date of notice of
redemption.
. there is a change in
existing laws or
regulations that
requires the trust to
register as an
investment company; or
. there is a change in
the capital adequacy
guidelines of the
Federal Reserve that
results in the
preferred securities
not being counted as
Tier 1 capital.
8
|
Preferred Securities Convertible Preferred
(continued) Securities
(continued)
We may also redeem the
debentures at any time, and In addition, we may redeem
from time to time, in an all of the convertible
amount equal to the debentures, at any time,
liquidation amount of any without premium, if:
preferred securities we
purchase, plus a
proportionate amount of
common securities, but only
in exchange for a like amount
of the preferred securities
and common securities then
owned by us.
. there is a change in
existing laws or
regulations, or new
official administrative
or judicial
interpretation or
application of these
laws and regulations,
that causes the
interest we pay on the
convertible debentures
to no longer be
deductible by us for
federal income tax
purposes; or the trust
becomes subject to
federal income tax; or
the trust becomes or
will become subject to
certain other taxes or
governmental charges;
Redemption of the debentures
prior to maturity will be
subject to the prior approval
of the Federal Reserve, if
approval is then required. If
your preferred securities are
redeemed by the trust, you
will receive the liquidation
amount of $25 per preferred
security, plus any accrued
and unpaid distributions to
the date of redemption.
. there is a change in
existing laws or
regulations that
requires the trust to
register as an
investment company; or
. there is a change in
the capital adequacy
guidelines of the
Federal Reserve that
results in the
convertible preferred
securities not being
counted as Tier 1
capital.
We may also redeem the
convertible debentures at any
time, and from time to time,
without premium, in an amount
equal to the liquidation
amount of any convertible
preferred securities we
purchase, plus a
proportionate amount of
common securities, but only
in exchange for a like amount
of the convertible preferred
securities and common
securities then owned by us.
Redemption of the convertible
debentures prior to maturity
will be subject to the prior
approval of the Federal
Reserve, if approval is then
required. If your convertible
preferred securities are
redeemed by the trust, you
will receive the liquidation
9
|
Preferred Securities Convertible Preferred
(continued) Securities
(continued)
amount of $25 per convertible
preferred security, plus any
accrued and unpaid
distributions to the date of
redemption, plus the
applicable premium, if any.
We have the
option to
extend the
interest
payment
period......
The trust will rely solely on The trust will rely solely on
payments made by us under the payments made by us under the
debentures to pay convertible debentures to pay
distributions on the distributions on the
preferred securities. As long convertible preferred
as we are not in default securities. As long as we are
under the indenture relating not in default under the
to the debentures, we may, at indenture relating to the
one or more times, defer convertible debentures, we
interest payments on the may, at one or more times,
debentures for up to 20 defer interest payments on
consecutive quarters, but not the convertible debentures
beyond September 30, 2030. If for up to 20 consecutive
we defer interest payments on quarters, but not beyond
the debentures: September 30, 2030. If we
defer interest payments on
the convertible debentures:
. the trust will also
defer distributions on
the preferred
securities;
. the trust will also
defer distributions on
the convertible
preferred securities;
. the distributions you
are entitled to will
accumulate; and
. the distributions you
are entitled to will
accumulate; and
. these accumulated
distributions will earn
interest at an annual
rate of 10.50%,
compounded quarterly,
until paid.
. these accumulated
distributions will earn
interest at an annual
rate of 8.75%,
compounded quarterly,
until paid.
At the end of any deferral
period, we will pay to the
trust all accrued and unpaid
interest under the
debentures. The trust will
then pay all accumulated and
unpaid distributions to you.
At the end of any deferral
period, we will pay to the
trust all accrued and unpaid
interest under the
convertible debentures. The
trust will then pay all
accumulated and unpaid
distributions to you.
You will
still be
taxed if
distributions
are
deferred....
If a deferral of payment If a deferral of payment
occurs, you will still be occurs, you will still be
required to recognize the required to recognize the
deferred amounts as income deferred amounts as income
for federal income tax for federal income tax
purposes in advance of purposes in advance of
receiving these amounts, even receiving these amounts, even
if you are a cash basis if you are a cash basis
taxpayer. taxpayer.
10
|
Preferred Securities Convertible Preferred
(continued) Securities
(continued)
Our
guarantee
of payment.. Our obligations described in Our obligations described in
this prospectus, in the this prospectus, in the
aggregate, constitute a full, aggregate, constitute a full,
irrevocable and unconditional irrevocable and unconditional
guarantee on a subordinated guarantee on a subordinated
basis by us of the basis by us of the
obligations of the trust obligations of the trust
under the preferred under the convertible
securities. Under the preferred securities. Under
guarantee agreement, we the guarantee agreement, we
guarantee the trust will use guarantee the trust will use
its assets to pay the its assets to pay the
distributions on the distributions on the
preferred securities and the convertible preferred
liquidation amount upon securities and the
liquidation of the trust. liquidation amount upon
However, the guarantee does liquidation of the trust.
not apply when the trust does However, the guarantee does
not have sufficient funds to not apply when the trust does
make the payments. If we do not have sufficient funds to
not make payments on the make the payments. If we do
debentures, the trust will not make payments on the
not have sufficient funds to convertible debentures, the
make payments on the trust will not have
preferred securities. In this sufficient funds to make
event, your remedy is to payments on the convertible
institute a legal proceeding preferred securities. In this
directly against us for event, your remedy is to
enforcement of payments under institute a legal proceeding
the debentures. directly against us for
enforcement of payments under
the convertible debentures.
We may
distribute
the
debentures
directly to
you.........
We may, at any time, dissolve We may, at any time, dissolve the
the trust and distribute the trust and distribute the
debentures to you, subject to convertible debentures to you,
the prior approval of the subject to the prior approval of
Federal Reserve, if required. the Federal Reserve, if required.
If we distribute the If we distribute the convertible
debentures, we will use our debentures, we will use our best
best efforts to list them on efforts to list them on a
a national securities national securities exchange or
exchange or comparable comparable automated quotation
automated quotation system. system.
How the
securities
will rank
in right of
payment.....
Our obligations under the
Our obligations under the convertible preferred securities,
preferred securities, convertible debentures and
debentures and guarantee are guarantee are unsecured and will
unsecured and will rank as rank as follows with regard to
follows with regard to right right of payment:
of payment:
. the convertible preferred
. the preferred securities will rank
securities will rank equally with the common
equally with the common securities of the trust.
securities of the The trust will pay
trust. The trust will distributions on the
pay distributions on convertible preferred
the preferred securities and the common
securities and the securities pro rata.
common securities pro However, if we default with
rata. However, if we respect to the convertible
default with respect to debentures, then no
the debentures, then no distributions on the common
distributions on the
common securities of
the trust or our
11
|
Preferred Securities Convertible Preferred
(continued) Securities
(continued)
securities of the trust or
our common stock will be
paid until all accumulated
and unpaid distributions on
the convertible preferred
securities have been paid;
common stock will be
paid until all
accumulated and unpaid
distributions on the
preferred securities
have been paid;
. our obligations under the
convertible debentures and
the guarantee are unsecured
and generally will rank:
. our obligations under
the debentures and the
guarantee are unsecured
and generally will
rank:
. junior in priority to our
existing and future senior
and subordinated
indebtedness;
. junior in priority to
our existing and
future senior and
subordinated
indebtedness;
. junior in priority to our
subordinated debentures
associated with the $50
million of trust preferred
securities that an
affiliated trust of ours
currently has outstanding;
and
. equal to our
subordinated
debentures associated
with the $50 million
of trust preferred
securities that an
affiliated trust of
ours currently has
outstanding; and
. junior in priority to the
debentures that we will be
issuing to IFC Capital
Trust II; and
. senior to the
convertible debentures
that we will be
issuing to IFC Capital
Trust III; and
. because we are a holding
company, the convertible
debentures and the guarantee
will effectively be
subordinated to all
depositors' claims, as well
as existing and future
liabilities of our
subsidiaries.
. because we are a
holding company, the
debentures and the
guarantee will
effectively be
subordinated to all
depositors' claims, as
well as existing and
future liabilities of
our subsidiaries.
Voting
rights of
the
preferred
securities.. Except in limited Except in limited
circumstances, holders of the circumstances, holders of the
preferred securities will convertible preferred
have no voting rights. securities will have no
voting rights.
Nasdaq
National
Market
symbol...... IRWNO. IRWNN.
You will
not receive
certificates.
The preferred securities will The convertible preferred
be represented by a global securities will be
security that will be represented by a global
deposited with and registered security that will be
in the name of The Depository deposited with and registered
Trust Company, New York, New in the name of The Depository
York, or its nominee. This Trust Company, New York, New
means that you will not York, or its nominee. This
receive a certificate for the means that you will not
preferred securities, and receive a certificate for the
your ownership interests will convertible preferred
be recorded through the DTC securities, and your
book-entry system. ownership interests will be
recorded through the DTC
book-entry system.
12
|
Preferred Securities Convertible Preferred
(continued) Securities
(continued)
How the
proceeds of
this
offering
will be
used........
The trust will invest all of The trust will invest all of
the proceeds from the sale of the proceeds from the sale of
the preferred securities in the convertible preferred
the debentures. We estimate securities in the convertible
that the net proceeds to us debentures. We estimate that
from the sale of the the net proceeds to us from
debentures to the trust, the sale of the convertible
after deducting debentures to the
offering expenses and trust, after deducting
underwriting commissions, offering expenses and
will be approximately underwriting commissions,
$42,960,000. The purpose of will be approximately
the offering is to increase $42,960,000. The purpose of
our regulatory capital and the offering is to increase
support the growth and our regulatory capital and
operations of our support the growth and
subsidiaries. operations of our
subsidiaries.
Conversion
into common
stock....... The preferred securities are Each convertible preferred
not convertible into our security is convertible on or
common stock. after January 31, 2001, at
the option of the holder into
shares of our common stock,
at the initial conversion
ratio of 1.2610 shares of
common stock for each
convertible preferred
security (equivalent to an
initial conversion price of
$19.8250 per share of common
stock), subject to adjustment
under certain circumstances.
The last reported sales price
of our common stock on the
Nasdaq National Market on
November 16, 2000, was
$15.25. If you want to
convert a convertible
preferred security, the
conversion agent will
exchange your convertible
preferred security for the
appropriate principal amount
of convertible debentures
held by the trust and
immediately convert the
convertible debentures into
shares of our common stock.
You will receive cash in lieu
of fractional shares.
However, you will not receive
cash or additional shares of
our common stock to
compensate you for any
accrued but unpaid
distributions on the
convertible preferred
security through the time of
conversion. These accrued
amounts will be forfeited.
|
Before purchasing the preferred securities or the convertible preferred securities being offered, you should carefully consider the "Risk Factors" beginning on page 16.
The selected consolidated financial data presented below for, and as of the end of, each of the years in the five-year period ended December 31, 1999, are derived from our historical financial statements. Our consolidated financial statements for the five years ended December 31, 1999 have been audited by PricewaterhouseCoopers LLP, independent accountants. The summary data presented below for the nine-month periods ended September 30, 2000 and 1999, are derived from our unaudited financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of results as of or for the nine-month periods indicated have been included. This information should be read in conjunction with "Recent Developments" in this prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto incorporated by reference into this prospectus from our Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and from our Quarterly Report on Form 10-Q for the period ended September 30, 2000. Results for past periods are not necessarily indicative of results that may be expected for any future period, and results for the nine-month period ended September 30, 2000, are not necessarily indicative of results that may be expected for the entire year ending December 31, 2000.
Nine Months Ended
September 30, Year Ended December 31,
---------------------- ----------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share data)
Statements of Income
Data:
Net interest income.... $ 63,873 $ 54,254 $ 71,819 $ 63,898 $ 54,859 $ 50,020 $ 37,320
Provision for loan and
lease losses.......... (3,610) (3,895) (4,443) (5,995) (6,238) (4,553) (3,198)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan and lease
losses................ 60,263 50,359 67,376 57,903 48,621 45,467 34,122
---------- ---------- ---------- ---------- ---------- ---------- ----------
Non-interest income:
Loan origination
fees................ 37,250 41,670 47,007 60,013 41,370 43,779 32,133
Gain on sales of
loans............... 58,115 74,994 68,851 75,201 39,210 34,248 21,006
Loan servicing fees.. 44,781 45,885 60,581 57,284 53,257 46,877 36,156
Amortization and
impairment of
servicing assets.... (23,044) (12,512) (15,702) (35,388) (16,355) (14,331) (4,865)
Gain on sale of
servicing assets.... 14,432 6,386 37,801 43,308 32,631 16,378 15,271
Trading gains
(losses)............ 10,123 (11,130) (8,296) 1,366 (1,961) -- --
Gain from sale of
leasing assets...... -- -- -- 5,241 -- -- --
Other................ 19,834 9,701 13,827 11,832 8,696 8,699 9,551
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total non-interest
income.............. 161,491 154,994 204,069 218,857 156,848 135,650 109,252
Non-interest expense... 174,720 159,326 214,111 221,206 158,818 143,829 110,925
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes................. 47,034 46,027 57,334 55,554 46,651 37,288 32,449
Provision for income
taxes................. 17,397 17,208 19,481 20,354 17,734 14,860 12,366
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income before
distributions on
securities............ 29,637 28,819 37,853 35,200 28,917 22,428 20,083
Distribution on trust
preferred securities.. 3,523 3,523 4,697 4,697 4,473 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income available
to common
shareholders.......... $ 26,114 $ 25,296 $ 33,156 $ 30,503 $ 24,444 $ 22,428 $ 20,083
========== ========== ========== ========== ========== ========== ==========
Mortgage loan
originations.......... $2,986,445 $4,769,740 $5,876,750 $8,944,615 $5,397,338 $5,085,625 $3,559,310
Home equity loan
originations.......... 601,038 291,785 439,507 389,673 214,518 169,120 87,420
Common Share Data:
Net income per common
share:
Basic................ $ 1.24 $ 1.17 $ 1.54 $ 1.40 $ 1.10 $ 0.99 $ 0.89
Diluted.............. 1.23 1.15 1.51 1.38 1.08 0.98 0.88
Cash dividends per
common share.......... 0.18 0.15 0.20 0.16 0.14 0.12 0.11
Equity available to
common shareholders
(at end of period).... 8.55 7.42 7.55 6.70 5.82 5.23 4.38
Dividend payout ratio.. 14.46% 12.79% 12.93% 11.39% 12.74% 12.15% 12.36%
|
Nine Months Ended
September 30, Year Ended December 31,
----------------------- ---------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ----------- ----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share data)
Selected Consolidated
Financial Condition
Data (at end of
period):
Assets................ $2,150,122 $ 1,662,531 $ 1,680,847 $ 1,946,179 $ 1,496,794 $ 1,300,122 $ 1,037,541
Deposits.............. 1,320,164 875,933 870,318 1,009,211 719,596 640,153 563,999
Loans held for sale... 490,690 511,007 508,997 936,788 528,739 446,898 378,658
Loans and leases...... 1,117,746 669,375 733,424 556,991 611,093 533,050 412,524
Allowance for loan and
lease losses......... 12,629 8,803 8,555 9,888 8,812 6,875 5,033
Long-term debt........ 29,596 30,447 29,784 2,839 7,096 17,659 21,575
Redeemable preferred
securities........... 48,125 48,053 48,071 47,999 47,927 -- --
Shareholders' equity.. 181,065 158,755 159,296 145,233 127,983 118,903 99,216
Owned first mortgage
servicing portfolio.. 9,963,018 10,462,423 10,488,112 11,242,470 10,713,549 10,810,988 10,301,914
Managed home equity
portfolio............ 1,283,517 749,149 842,403 581,241 358,166 230,450 86,691
Selected Financial
Ratios:
Performance Ratios:
Net interest
margin(/1/)(/2/)(/3/). 5.33% 5.62% 5.36% 4.41% 4.95% 5.12% 4.93%
Non-interest income to
revenues(/4/)......... 71.66 74.07 73.97 77.40 74.09 73.06 74.54
Efficiency ratio(/5/).. 77.53 76.14 77.61 78.23 75.02 77.46 75.68
Return on average
assets(/1/)........... 1.82 2.04 2.01 1.85 1.94 1.95 2.28
Return on average
equity(/1/)........... 20.88 22.15 21.51 22.84 19.80 20.58 22.60
Average loan-to-average
deposit ratio......... 0.81 0.61 0.68 0.67 0.82 0.79 0.70
Average interest-
earning assets to
average interest-
bearing liabilities... 1.18 1.54 1.33 1.35 1.38 1.30 1.22
Asset Quality Ratios:
Non-performing loans
and leases to total
loans and leases...... 0.44% 0.81% 0.59% 2.13% 1.26% 1.35% 0.62%
Allowance for possible
loan and lease losses
to:
Total loans and leases. 1.13 1.32 1.17 1.78 1.45 1.29 1.22
Non-performing loans
and leases............ 252.88 162.03 198.72 84.28 114.72 95.81 197.14
Net charge-offs to
average loans and
leases(/1/)........... 0.21 0.22 0.27 0.33 0.46 0.36 0.57
Net home equity charge-
offs to managed home
equity portfolio(/1/). 0.62 0.39 0.36 0.37 0.29 0.02 --
Non-performing assets
to total assets (at
end of period)........ 0.37 0.53 0.48 0.78 0.64 0.72 0.27
Capital Ratios:
Average shareholders'
equity to average
assets................ 8.71% 9.23% 9.33% 8.09% 9.78% 9.46% 10.07%
Tier 1 capital ratio... 9.40 12.10 11.39 11.56 13.56 12.20 12.99
Tier 1 leverage ratio.. 12.01 12.60 12.77 10.51 12.06 9.84 10.57
Total risk-based
capital ratio......... 11.15 14.35 13.50 12.25 14.85 12.88 13.64
Ratio of earnings to
fixed charges(/6/):
Including deposit
interest.............. 1.66x 1.99x 1.88x 1.79x 1.86x 1.90x 2.14x
Excluding deposit
interest.............. 2.40 2.67 2.54 2.25 2.45 2.56 3.37
|
An investment in the preferred securities and the convertible preferred securities involves a number of risks. We urge you to read all of the information contained in this prospectus. In addition, we urge you to consider carefully the following factors in evaluating an investment in Irwin and the trusts before you purchase any of the preferred securities or the convertible preferred securities offered by this prospectus.
Because each trust will rely on the payments it receives on the debentures it owns to fund all payments on the preferred securities or the convertible preferred securities, and because each trust may distribute the debentures it owns in exchange for the preferred securities that it issues, you are making an investment decision that relates to the debentures being issued by us as well as the preferred securities or the convertible preferred securities. You should carefully review the information in this prospectus about the preferred securities, the convertible preferred securities, the debentures, the convertible debentures and the guarantees.
Because the convertible preferred securities are convertible into our common stock as described in this prospectus, prospective purchasers of convertible preferred securities are also making an investment decision with regard to our common stock. For this reason, you should also carefully review the information in this prospectus and in the documents incorporated by reference about our business and our common stock.
Our overall financial performance will likely depend more significantly on the results of our different specialized financial services businesses than on our commercial banking business.
We operate in diversified financial services businesses, and in recent years the performance of our mortgage banking and home equity lending businesses have had a larger effect on our consolidated results than our commercial banking line of business. Our future earnings will also be affected by the performance of our two newer businesses, Irwin Business Finance, which we started operating at the beginning of 2000 and recently expanded, and Irwin Ventures which we started in August 1999. We may reduce or exit current lines of business and pursue other lines of business if we believe other financial service niches offer us more attractive opportunities. We could be adversely affected by costs associated with implementing this strategy and uncertainties involved in new lines of business. There can be no assurance that we will be successful in evaluating the risk/reward attributes of the financial service or product niches we choose to pursue.
We may be adversely affected by interest rate changes.
We and our subsidiaries are subject to interest rate risk in all aspects of our finance business, although interest rate sensitivity impacts our various lines of business differently. Changes in interest rates will likely affect the pricing of loans and deposits and the value that we can recognize on the sale of mortgage and home equity loan originations or servicing portfolios. Interest rates tend to have opposite effects on the loan production aspect and the servicing aspect of these two lines of business. Changes in interest rates may also expose us to write-downs in the carrying value of servicing assets and to trading losses related to interest-only instruments that we often retain when selling or securitizing home equity loans.
Like other banks and financial institutions, Irwin Union Bank and Irwin Business Finance are principally dependent on earnings derived from net interest income. Net interest income is the difference between interest earned on loans and investments and the interest expense paid on other borrowings, including deposits in the case of the bank. Our interest income and interest expense are affected by general economic conditions and by the policies of regulatory authorities, including the monetary policies of the Federal Reserve.
Although we have taken measures intended to manage the risks of operating in a changing interest rate environment, we may not be able to effectively mitigate interest rate sensitivity. In addition, there are costs
Our operations may be adversely affected if we are unable to secure adequate funding; our reliance on wholesale funding sources exposes us to potential liquidity risk.
Due to balance sheet growth and increased competition for deposits in Irwin Union Bank's markets, we have in recent months increased our reliance on wholesale funding, including short-term credit facilities, Federal Home Loan Bank borrowings and brokered deposits. Wholesale funding sources have in the past proven to be somewhat volatile in our industry depending on the varying levels of confidence these investors have in commercial and consumer finance businesses. For this reason, the continued availability to us of these funding sources is uncertain, and we could be adversely impacted if our specialized financial services niches fall out of favor with wholesale lenders. Our financial flexibility will be severely constrained if we are unable to renew our wholesale funding or if adequate financing is not available in the future at acceptable rates of interest. We may not have sufficient liquidity to continue to fund new loan or lease originations, and we could need to liquidate loans or other assets unexpectedly in order to repay obligations as they mature. We regularly resell the majority of our mortgage loan originations into the secondary market, and Irwin Home Equity and Irwin Business Finance also seek to sell loans into the secondary market in the regular course of business as a source of liquidity. At times, some of our financial assets, such as nontraditional, nonprime mortgage and high loan-to-value home equity loans, may not be readily marketable, and we may not be able to sell assets when required at favorable prices. This could adversely affect our earnings and our ability to pay interest on the debentures.
We have credit risk inherent in the asset portfolios that we own as well as in certain assets that we have sold but continue to service.
Some borrowers may not repay loans that we make to them. This risk is inherent in our finance businesses. Like all financial institutions, we maintain an allowance for loan and lease losses to absorb the level of losses that we think is probable in the portfolios that we own, but our allowance for loan and lease losses may not be sufficient to cover the loan and lease losses that we may actually incur. While we maintain a reserve at a level management believes is adequate, our charge-offs could exceed these reserves. In particular, at September 30, 2000, approximately 49.22% of our total managed home equity portfolio consisted of high loan-to-value loans that are not fully collateralized by interests in real estate. If we experience defaults in these loans to a greater extent than we anticipated, this could adversely affect our earnings and our ability to pay interest on the debentures.
In our home equity lending line of business, some assets are reflected on our balance sheet at the net present value of the future revenue stream of the instruments measured at the time we sell the underlying portfolio of loans. These assets are interest-only instruments and generally represent residual interests in loans that we have sold or securitized. From time to time we may also purchase interest-only instruments that relate to portfolios of loans securitized by others. Payment defaults by borrowers on the related loans will cause deterioration in the value of these assets. If we do not collect the interest we expect, our future earnings will be adversely affected because we are required to record a trading loss equal to the amount the asset is impaired.
Our business may be adversely affected by the highly regulated environment in which we operate.
Irwin and our subsidiaries are subject to extensive federal and state regulation and supervision. Recently enacted, proposed and future legislation and regulations have had, will continue to have or may have significant impact on the financial services industry. Recent and proposed state legislative action to limit the use of fees, points, and interest rates on consumer loans may adversely affect the market for some of our residential
Pending litigation could subject us to material liability.
Numerous class action lawsuits have been filed against mortgage lenders, including Irwin Mortgage, alleging that certain payments to mortgage brokers by those lenders violate the federal Real Estate Settlement Procedures Act (RESPA). These lawsuits have generally been filed on behalf of a purported nationwide class of borrowers and allege that various forms of direct and indirect payments to mortgage brokers are referral fees or unearned fees which are prohibited under RESPA, or that consumers were not informed of the brokers' compensation, in violation of law.
Our subsidiary, Irwin Mortgage (formerly known as Inland Mortgage Corporation), is a defendant in litigation alleging that it violated RESPA in connection with mortgages originated by mortgage brokers. The name of this litigation is Culpepper v. Inland Mortgage Corporation. The initial action was filed in April 1996. In January 1997, the federal district court granted summary judgment in favor of Irwin Mortgage and denied the plaintiff's motion to certify the case as a class action. The plaintiff appealed, and in January 1998, the court of appeals reversed the district court's grant of summary judgment. The court of appeals sent the case back to the trial court to decide the merits of the case and the class certification issue. A second lawsuit was filed against Irwin Mortgage in August 1998 alleging similar RESPA violations and was consolidated with the first case. In June 1999, the trial court certified a limited class of borrowers. Irwin Mortgage appealed and the class certification issue was submitted to the court of appeals for review in December 1999. On October 31, 2000, the court of appeals granted Irwin Mortgage's request for oral argument, which is scheduled for the week of January 22, 2001.
The court of appeals could issue its order regarding class certification at any time. A decision regarding class certification, however decided, will not conclude the lawsuit or otherwise establish liability. A judicial determination in this case of whether Irwin Mortgage has liability under RESPA would be reached only by a trial or other adjudication addressing the merits of the allegations made by the plaintiffs in the lawsuit. However, if class certification is upheld, negative publicity regarding this litigation, and the possibility of additional RESPA litigation in the mortgage industry, could cause the trading price of our common stock, the preferred securities and the convertible preferred securities, to decline.
We intend to continue to vigorously defend this lawsuit. At this stage of litigation, we cannot predict the likelihood of an adverse outcome. We are also unable at this stage of litigation to reasonably predict the extent or amount of potential liability, if any, that we may incur. An adverse outcome in this litigation could have a material adverse effect on our financial condition and results of operations, and the trading price of our common the stock, the preferred securities and the convertible preferred securities, and could impact our ability to retire or make distributions on the preferred securities and the convertible preferred securities.
Ownership of our common stock is concentrated in persons affiliated with us.
Our chairman, William I. Miller, has voting control over more than 50% of our common stock. Together with Mr. Miller, directors and executive officers of Irwin beneficially own approximately 58% of our common stock. These persons have the ability to control the outcome of all shareholder votes and to direct our affairs and business. This voting power would enable them to cause actions to be taken that may prove to be inconsistent with the interests of non- affiliated shareholders.
We rely heavily on our management team, and the unexpected loss of key managers may adversely affect our operations.
Our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services. Our ability to retain executive officers and the current
Our future success is dependent on our ability to compete effectively in various highly competitive industries.
The financial services business, including commercial banking, mortgage banking, home equity lending and leasing, is highly competitive, and we and our operating subsidiaries encounter strong direct competition for deposits, loans and other financial services in all of our market areas in each of our lines of business. Our principal competitors include other commercial banks, savings banks, savings and loan associations, mutual funds, money market funds, finance companies, trust companies, insurers, leasing companies, credit unions, mortgage companies, private issuers of debt obligations, venture capital firms, and suppliers of other investment alternatives, such as securities firms. Many of our non-bank competitors are not subject to the same degree of regulation as that imposed on bank holding companies, federally insured Indiana chartered banks or federal savings banks. As a result, such non-bank competitors have advantages over us in providing certain services. Many of these financial institutions, lending and leasing companies and other businesses are significantly larger than Irwin and have greater access to capital and other resources. In addition, our ability to compete effectively in our lines of business is also dependent on our ability to adapt successfully to technological changes within the banking and financial services industries generally.
Risks Related to an Investment in the Preferred Securities and the Convertible Preferred Securities
If we do not make interest payments under the debentures or the convertible debentures, the related trust will be unable to pay distributions and liquidation amounts. The guarantee would not apply because the guarantee covers payments only if the trust has funds available.
Each trust will depend solely on our payments on the debentures or the convertible debentures to pay amounts due to you on the preferred securities or the convertible preferred securities, as the case may be. If we default on our obligation to pay the principal or interest on the debentures or the convertible debentures, the applicable trust will not have sufficient funds to pay distributions or the liquidation amount on the related preferred securities. In that case, you will not be able to rely on the applicable guarantee for payment of these amounts because the guarantee only applies if the applicable trust has sufficient funds to make distributions or to pay the liquidation amount. Instead, you or the applicable property trustee will have to institute a direct action against us to enforce the property trustee's rights under the indenture relating to the debentures or the convertible debentures, as the case may be.
Our ability to make interest payments on the debentures and convertible debentures to the trusts may be restricted.
We are a holding company and substantially all of our assets are held by our subsidiaries, principally at Irwin Union Bank. Our ability to make payments on the debentures and the convertible debentures when due will depend primarily on available cash resources at the bank holding company and dividends from our subsidiaries. Dividend payments or extensions of credit from the bank are subject to regulatory limitations, generally based on capital levels and current and retained earnings, imposed by the various regulatory agencies with authority over our banking subsidiary. The ability of our subsidiaries to pay dividends is also subject to their profitability, financial condition, capital expenditures and other cash flow requirements. Our subsidiaries may not be able to pay dividends in the future.
The debentures, the convertible debentures and the guarantees rank lower than most of our other indebtedness and our holding company structure effectively subordinates any claims against us to those of our subsidiaries' creditors.
Our obligations under the debentures, the convertible debentures and the guarantees are unsecured and will rank junior in priority of payment to our existing and future senior and subordinated indebtedness, which totaled $82.4 million of outstanding principal amount at September 30, 2000. The issuance of the debentures, the convertible debentures, the preferred securities and the convertible preferred securities does not limit our ability or the ability of our subsidiaries to incur additional indebtedness, guarantees or other liabilities.
Because we are a holding company, the creditors of our subsidiaries, including depositors, also will have priority over you in any distribution of our subsidiaries' assets in liquidation, reorganization or otherwise. Accordingly, the debentures, the convertible debentures and the guarantees will be effectively subordinated to all existing and future liabilities of our subsidiaries, and you should look only to our assets for payments on the preferred securities, the convertible preferred securities, the debentures and the convertible debentures. Please see the last risk factor on page 23 regarding the further subordination of the convertible debentures.
We have the option to defer interest payments on the debentures and the convertible debentures for substantial periods.
We may, at one or more times, defer interest payments on the debentures and the convertible debentures for up to 20 consecutive quarters. If we defer interest payments on the debentures or the convertible debentures, the applicable trust will defer distributions on the preferred securities or the convertible preferred securities, as the case may be, during any deferral period. During a deferral period, you will be required to recognize as income for federal income tax purposes the amount approximately equal to the interest that accrues on your proportionate share of the debentures or the convertible debentures, held by the applicable trust in the tax year in which that interest accrues, even though you will not receive these amounts until a later date.
You will also not receive the cash related to any accrued and unpaid interest from the applicable trust if you sell the preferred securities or the convertible preferred securities, as the case may be, before the end of any deferral period. During a deferral period, accrued but unpaid distributions will increase your tax basis in the preferred securities or the convertible preferred securities, as the case may be. If you sell the preferred securities or the convertible preferred securities during a deferral period, your increased tax basis will decrease the amount of any capital gain or increase the amount of any capital loss that you may have otherwise realized on the sale. A capital loss, except in certain limited circumstances, cannot be applied to offset ordinary income. As a result, deferral of distributions could result in ordinary income, and a related tax liability for the holder, and a capital loss that may only be used to offset a capital gain.
We do not currently intend to exercise our rights to defer interest payments on the debentures or the convertible debentures. However, if we do defer interest payments, the market price of the preferred securities or the convertible preferred securities, as the case may be, would likely be adversely affected. The preferred securities or the convertible preferred securities may trade at a price that does not fully reflect the value of accrued but unpaid interest on the debentures or the convertible debentures. If you sell the preferred securities or the convertible preferred securities during a deferral period, you may not receive the same return on
We have made only limited covenants in the indenture and the trust agreement.
The indentures governing the debentures and the convertible debentures and the trust agreements governing the trusts do not require us to maintain any financial ratios or specified levels of net worth, revenues, income, cash flow or liquidity. The instruments do not protect holders of the debentures, the convertible debentures, the preferred securities or the convertible preferred securities in the event we experience significant adverse changes in our financial condition or results of operations. In addition, neither the indentures nor the trust agreements limit our ability or the ability of any subsidiary to incur additional indebtedness. Therefore, you should not consider the provisions of these governing instruments as a significant factor in evaluating whether we will be able to comply with our obligations under the debentures, the convertible debentures, or the guarantees.
We may redeem the debentures and the convertible debentures before September 30, 2030.
Under the following circumstances, we may redeem the debentures or the convertible debentures or both before their stated maturity without payment of premium:
. We may redeem the debentures and the convertible debentures, in whole or in part, at any time on or after September 30, 2005.
. We may redeem the debentures and the convertible debentures in whole, but not in part, within 180 days after certain occurrences at any time during the life of the trust. These occurrences may include adverse tax, investment company or bank regulatory developments.
We have additional rights to redeem the convertible debentures early under certain conditions. See the discussion under "--Additional Risks Related to the Convertible Preferred Securities" on page 23.
You should assume that an early redemption may be attractive to us if we are able to obtain capital at a lower cost than we must pay on the debentures or the convertible debentures or if it is otherwise in our interest to redeem the debentures or the convertible debentures. If the debentures or the convertible debentures are redeemed, the applicable trust must redeem preferred securities or convertible preferred securities, as the case may be, having an aggregate liquidation amount equal to the aggregate principal amount of debentures or the convertible debentures redeemed, and you may be required to reinvest your principal at a time when you may not be able to earn a return that is as high as you were earning on the preferred securities or convertible preferred securities, as the case may be.
We can distribute the debentures and the convertible debentures to you, which may have adverse tax consequences for you; this right could also adversely affect the market price of the preferred securities and the convertible preferred securities.
Each trust may be dissolved at any time before maturity of the debentures or the convertible debentures, as the case may be. If this happens, the trustees may distribute the debentures or the convertible debentures, as the case may be, to you under the terms of the related trust agreement.
We cannot predict the market prices for the debentures or the convertible debentures that may be distributed in exchange for preferred securities or convertible preferred securities, as the case may be, upon liquidation of the applicable trust. The preferred securities and the convertible preferred securities, or the debentures and the convertible debentures that you may receive if the applicable trust is liquidated, may trade
Under current interpretations of federal income tax laws supporting classification of each of the trusts as a grantor trust for tax purposes, a distribution of the debentures or the convertible debentures to you upon the dissolution of the applicable trust would not be a taxable event to you. Nevertheless, if the applicable trust is classified for federal income tax purposes as an association taxable as a corporation at the time it is dissolved, the distribution of the debentures or the convertible debentures, as the case may be, would be a taxable event to you. In addition, if there is a change in law, a distribution of the debentures or the convertible debentures upon the dissolution of the applicable trust could be a taxable event to you.
There is no current public market for the preferred securities or the convertible preferred securities and their market prices may be subject to significant fluctuations.
There is currently no public market for the preferred securities or the convertible preferred securities. Although the preferred securities and the convertible preferred securities have been approved for inclusion on the Nasdaq National Market, there is no guarantee that an active or liquid trading market will develop for the preferred securities or the convertible preferred securities or that the quotation of the preferred securities or the convertible preferred securities will continue on the Nasdaq National Market. If an active trading market does not develop, the market price and liquidity of the preferred securities or the convertible preferred securities, as the case may be, will be adversely affected. Even if an active public market does develop, there is no guarantee that the market price for the preferred securities or the convertible preferred securities will equal or exceed the price you pay for the preferred securities or the convertible preferred securities.
Future trading prices of the preferred securities and the convertible preferred securities may be subject to significant fluctuations in response to prevailing interest rates, our future operating results and financial condition, the market for similar securities and general economic and market conditions. The initial public offering price of the preferred securities and the convertible preferred securities has been set at the applicable liquidation amount of the preferred securities or the convertible preferred securities, as the case may be, and may be greater than the market price of the applicable security following the offering.
The market price for the preferred securities or the convertible preferred securities and the debentures or the convertible debentures, as the case may be, that you may receive in a distribution, is also likely to decline during any period that we are deferring interest payments on the debentures or the convertible debentures, as the case may be.
You must rely on the applicable property trustee to enforce your rights if there is an event of default under either indenture.
You may not be able to directly enforce your rights against us if an event of default under the applicable indenture occurs. If an event of default under the applicable indenture occurs and is continuing, this event will also be an event of default under the applicable trust agreement. In that case, you must rely on the enforcement by the applicable property trustee of its rights as holder of the debentures or the convertible debentures, as the case may be, against us. The holders of a majority in liquidation amount of the preferred securities or convertible preferred securities, as the case may be, will have the right to direct the applicable property trustee to enforce its rights. If the property trustee does not enforce its rights following an event of default and a request by the record holders to do so, any record holder may, to the extent permitted by applicable law, take action directly against us to enforce the applicable property trustee's rights. If an event of default occurs under the applicable trust agreement that is attributable to our failure to pay interest or principal on the debentures or
As a holder of preferred securities or convertible preferred securities you have limited voting rights.
Holders of preferred securities and convertible preferred securities have limited voting rights. Your voting rights pertain primarily to amendments to the applicable trust agreement. In general, only we can replace or remove any of the trustees. However, if an event of default under the applicable trust agreement occurs and is continuing, the holders of at least a majority in aggregate liquidation amount of the preferred securities or convertible preferred securities, as the case may be, may replace the applicable property trustee and the applicable Delaware trustee.
We may redeem the convertible debentures earlier than September 30, 2005 in certain circumstances.
As long as the fair market value of our common stock has been at least 125% of the conversion price of the convertible preferred securities for a period of 20 consecutive trading days ending within five business days of the date of notice of redemption, we have the option to redeem any or all of the outstanding convertible debentures prior to maturity in the following circumstances:
. on or after September 30, 2003 but before September 30, 2004, upon payment of a redemption premium equal to 115% of the principal amount to be redeemed, plus any accrued and unpaid interest on the convertible debentures to the date of redemption; and
. on or after September 30, 2004 but before September 30, 2005, upon payment of a redemption premium equal to 110% of the principal amount to be redeemed, plus any accrued and unpaid interest on the convertible debentures to the date of redemption.
The convertible debentures are more deeply subordinated and will rank lower than debentures issued in connection with our other trust preferred financings.
The convertible debentures will be unsecured and will rank junior to all of our senior and subordinated debt, including indebtedness we may incur in the future, and will be further subordinated to any debt issued in connection with trust preferred securities intended to qualify for "Tier 1" capital treatment unless those debt securities are also convertible into our common stock. Therefore, the $50 million of subordinated debentures we issued to IFC Capital Trust I and the debentures that we will be issuing to IFC Capital Trust II will rank senior to the convertible debentures that we will be issuing to IFC Capital Trust III.
Certain statements contained in or incorporated by reference into this prospectus constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Irwin intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. You can identify these statements from our use of the words "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions. These forward-looking statements may include, among other things:
. statements relating to projected growth; anticipated improvements in earnings, earnings per share, and other financial performance measures; and management's long term performance goals;
. statements relating to the anticipated effects on results of operations or financial condition from expected developments or events;
. statements relating to our business and growth strategies, including potential acquisitions; and
. any other statements which are not historical facts.
Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from our expectations of future results, performance or achievements expressed or implied by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We discuss these and other uncertainties in the "Risk Factors" section of this prospectus beginning on page 16.
On October 19, 2000, we announced our third quarter earnings for the year. Our net income for the third quarter of 2000 was $9.1 million or $0.43 per share. This represents a 7.5% increase in earnings per share compared to net income of $8.7 million, or $0.40 per share, in the third quarter of 1999. For the nine months ended September 30, 2000, net income was $26.1 million, or $1.23 per share, which is an increase of 7.0% over the first nine months of 1999. Our total net revenues in the third quarter of 2000 were $79.2 million, compared to $65.1 million in the third quarter of 1999, an increase of 21.6%.
Return on average equity in the third quarter was 21.0% and our return on average assets was 1.67%. Our assets totaled $2.2 billion at September 30, 2000, a $0.5 billion increase from a year earlier. The increase in assets is primarily attributable to a 67.0% increase in the amount of commercial loans and leases in our portfolio.
Nonperforming assets (including other real estate owned of $3.0 million) were $7.9 million or 0.37% of total assets at September 30, 2000, down from $8.9 million or 0.53% of total assets a year earlier. Our allowance for loan losses totaled $12.6 million at September 30, 2000, compared with $8.8 million a year earlier. The ratio of allowance for loan losses to total loans at September 30, 2000, declined to 1.13%, compared to 1.32% at September 30, 1999. The ratio reflects the growth of our loan and lease portfolios. The ratio of allowance for loan losses to nonperforming loans was 257% at quarter-end.
We had $181.1 million in shareholders' equity as of September 30, 2000, an increase of 14.1% compared to September 30, 1999. Shareholders' equity as of September 30, 2000, was $8.55 per common share, a year-over-year increase of 15.2%. Our Tier 1 leverage ratio and total risk-based capital ratios were 12.0% and 11.1%, respectively, compared to 12.6% and 14.3% a year earlier.
In addition, we announced completion of three separate transactions which we feel are significant to the continued development of our home equity lending growth strategy.
. We completed our 11th asset-backed transaction in the home equity line of business with the sale of approximately $350 million of asset-backed AAA- rated bonds and a AAA-rated interest-only strip. The bonds are to be collateralized by a pool of home equity loans and lines of credit that include loans with 100% and 125% combined loan-to-value ratios. We delivered a portion of the collateral during the third quarter and expect to complete the sale of additional loans to the securitization vehicle over the next six months.
. We sold 38% of the residual interest that we had retained in home equity loans that we previously securitized in December 1999. The unpaid principal balance of loans relating to the residual interest sold was approximately $125 million. As we had achieved with two previous residual sales, we sold the residual interest for a price equal to the carrying value of the instrument reflected on our balance sheet. The transaction established a market value for the residual consistent with our valuation assumptions.
. Early in the fourth quarter, we acquired the residual interest, servicing rights and related whole loans of an approximately $400 million pool of home equity lines of credit previously securitized by another lender. The collateral supporting the pool is comprised of seasoned lines of credit that primarily have loan-to-value ratios of not more than 100% and which are similar in credit quality and yield to the lines of credit we originate in our home equity line of business. Based on our interpretation of recently proposed federal banking regulations, we believe the acquisition of the interest-only strip would qualify as a purchased residual interest for purposes of regulatory capital treatment.
In our mortgage banking line of business, net income for the third quarter was $3.7 million, a decrease of $2.8 million or 42.9% compared to third quarter 1999 earnings of $6.5 million. The decline principally reflected decreased loan origination fees, lower interest income due to reduced volume resulting from higher interest rates, and lower absorption of fixed costs.
Mortgage loan originations during the quarter totaled $1.0 billion, down $0.3 billion or 24.5% from the 1999 third quarter. Refinanced loans accounted for 13.2% of originations in the third quarter, compared to 15.9% a year earlier. Our owned mortgage servicing portfolio decreased 4.8% year-over-year to $10.0 billion at September 30, 2000, reflecting our decision to sell selected portions of the portfolio to take advantage of increasing values as interest rates have risen. The capitalized value of our servicing portfolio increased 4.2% to $133.3 million at September 30, 2000, compared to $127.9 million a year earlier, primarily reflecting positive valuation adjustments resulting from slower prepayment speeds. Based on recent market sales, the total economic value of our servicing portfolio at quarter end was $203.0 million, which was $69.7 million greater than the capitalized value.
Net income in our commercial banking line of business was $1.8 million in the third quarter, a decrease of $0.1 million or 4.3% from a year earlier. The decrease is primarily the result of increased expenses related to our expansion activities. During the third quarter, the bank successfully opened new markets in Louisville and
The commercial loan portfolio of $974.5 million increased $324.2 million, or 49.8% year-over-year. Our net interest margin in the commercial banking line of business was 4.40%, compared to 4.89% a year earlier, reflecting higher cost sources of funds. Net charge-offs were $103,000 during the third quarter, compared to $121,000 during the third quarter of 1999, and commercial loans past due 30 days or more comprised 0.29% of total loans at September 30, 2000, compared to 1.03% of total loans a year earlier.
In our leasing line of business, we incurred a pre-tax loss of $0.6 million during the third quarter. This loss was in line with management's expectations, reflecting the start-up phase of our leasing business. The leasing line of business originated $27.8 million in leases in the quarter and had a portfolio at September 30, 2000 of $128.2 million, including $60.8 million acquired as part of the Onset acquisition.
Irwin Ventures lost $0.2 million during the three months ended September 30, 2000, reflecting operating expenses. There were no valuation adjustments in the venture capital investment portfolio during the quarter. The venture investment portfolio currently has a $12.9 million carrying value and a $4.1 million cost basis.
The trusts will invest all of the proceeds from the sale of the preferred securities and the convertible preferred securities in the corresponding debentures and convertible debentures. We anticipate that the net proceeds to Irwin from the sale of the debentures and convertible debentures will be approximately $85,920,000 million after deduction of offering expenses, estimated to be $705,000, and deduction of underwriting commissions.
The purpose of the offering is to provide capital to fund continued growth at our subsidiaries and for general corporate purposes. We expect to contribute the majority of the net proceeds to Irwin Union Bank to fund loans, including commercial loans, home equity loans and leases from our various lines of business.
Our common stock is quoted on the Nasdaq National Market under the symbol "IRWN." The following table sets forth the high and low sales prices and cash dividends declared per share of common stock for the periods indicated. All information has been adjusted for stock splits.
Price Range
--------------- Dividends
High Low Declared
------- ------- --------- ---
Year Ended December 31, 1998
First quarter................................... $28.25 $19.50 $0.04
Second quarter.................................. 30.00 25.125 0.04
Third quarter................................... 37.00 20.50 |