8.70% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
IFC Capital Trust VI is offering 1,200,000 preferred securities at $25 per
security. The preferred securities represent an indirect interest in our
8.70% junior subordinated debentures. The debentures have the same payment terms
as the preferred securities and will be purchased by IFC Capital Trust VI using
the proceeds from its sale of the preferred securities.
The preferred securities have been approved for listing on the New York Stock Exchange under the symbol "IFC PrM." Trading is expected to commence within 30 days after the preferred securities are first issued.
THE PREFERRED SECURITIES ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK AND ARE NOT INSURED BY ANY BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
PER
PREFERRED
SECURITY TOTAL
--------- -----------
Public offering price...................$ 25.00 $30,000,000
Proceeds to the trust...................$ 25.00 $30,000,000
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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.
October 7, 2002
IRWIN FINANCIAL CORPORATION
COMMERCIAL MORTGAGE HOME EQUITY COMMERCIAL VENTURE CAPITAL
BANKING BANKING LENDING FINANCE
o Irwin Union Bank o Irwin Mortgage o Irwin Home o Irwin Commercial o Irwin Ventures
and Trust; Irwin Corporation Equity Finance LLC
Union Bank, Corporation Corporation
F.S.B.
o Founded in 1871 o 1981 acquisition o 1994 start-up o 1999 start-up o 1999 start-up
and 2000,
respectively
o 21% of o 64% of o 14% of o 3% of
consolidated net consolidated net consolidated net consolidated net
revenues first revenues first revenues first revenues first six
six months of six months of six months of months of 2002;
2002; 14% of 2002; 57% of 2002; 31% of 2001 1% of 2001
2001 2001 consolidated net consolidated net
consolidated net consolidated net revenues revenues
revenues revenues
o Focuses on o Originates, sells o Originates and o Funding source o Investor in early
commercial and and services services prime- for leasing stage companies
personal banking conforming first quality, high companies, in financial services
needs of small mortgage loans loan-to-value brokers and or financial services-
businesses and home equity vendors related technology
business owners loans
o Locations in o National scope, o National scope, o U.S. and o National scope
Indiana, emphasis on emphasis on debt Canadian focus
Michigan, first-time home consolidation
Arizona, buyers and small products
Missouri, brokers
Nevada, Utah and
Kentucky
o $3.8 billion in o $514 million in o Acquired 78%
originations in originations in ownership
the first six the first six interest in a
months of 2002 months of 2002 Canadian
equipment
leasing company
in July 2000
o Expects to o Began franchise
commence equipment
operations in business in
new August 2001
correspondent
lending division
in fourth
quarter 2002
o Loan portfolio o $13.5 billion o $2.1 billion o Portfolio of $301 o 6 portfolio
of $1.7 billion servicing portfolio as of million as of investments
as of June 30, portfolio as of June 30, 2002 June 30, 2002 totaling $6.2
2002 June 30, 2002 million as of
June 30, 2002
o Headquarters in o Headquarters in o Headquarters in o Headquarters in o Headquarters in
Columbus, IN; Indianapolis, IN San Ramon, CA Vancouver, B.C. Columbus, IN
Louisville, KY
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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 before you make an investment decision. Unless otherwise indicated, the information in this prospectus assumes that the underwriters will not exercise their option to purchase additional preferred securities to cover over-allotments.
We are a diversified financial services company headquartered in Columbus, Indiana with $3.8 billion in assets at June 30, 2002. We focus primarily on the extension of credit to consumers and small businesses as well as providing the ongoing servicing of those customer accounts. We currently operate five major lines of business through our subsidiaries. Our major lines of business are: commercial banking, mortgage banking, home equity lending, commercial finance and venture capital.
The majority of our activities are managed through our banking subsidiary, Irwin Union Bank and Trust Company, or its direct subsidiaries. Irwin Union Bank and Trust was organized in 1871, and we formed the holding company in 1972. Our subsidiaries include Irwin Union Bank and Trust, a commercial bank, which together with Irwin Union Bank, F.S.B., conducts our commercial banking activities; Irwin Mortgage Corporation, a mortgage banking company acquired in 1981; Irwin Home Equity Corporation, a consumer home equity lending company formed in 1994; Irwin Commercial Finance Corporation (formerly known as Irwin Capital Holdings Corporation), a commercial finance subsidiary; and Irwin Ventures LLC, a venture capital company. At June 30, 2002, we and our subsidiaries had a total of 2,880 employees, including full-time and part-time employees.
The following table summarizes our financial performance over the past five years and the first six months of 2002:
AT OR FOR THE SIX MONTHS
ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------- ---------------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income.......... $ 17,932 $ 21,979 $ 45,516 $ 35,666 $ 33,156 $ 30,503 $ 24,444
Earnings per common
share (diluted).. 0.67 0.97 2.00 1.67 1.51 1.38 1.08
Assets.............. 3,827,582 3,261,739 3,447,693 2,429,154 1,682,992 1,945,341 1,491,771
Loans held for sale. 437,147 1,016,792 502,086 579,788 508,997 936,788 528,739
Loans and leases,
net.............. 2,638,629 1,471,243 2,115,464 1,221,793 724,869 547,103 602,281
Deposits............ 2,257,306 1,928,968 2,309,018 1,443,330 870,318 1,009,211 719,596
Total shareholders'
equity........... 329,275 209,452 231,665 188,870 159,296 145,233 127,983
First mortgage
servicing
portfolio........ 13,466,335 10,474,246 12,875,532 9,196,513 10,488,112 11,242,470 10,713,549
Home equity
portfolio(1)..... 2,098,678 1,826,853 2,064,542 1,625,719 777,934 581,241 358,166
Return on average
assets(2)........ 1.00% 1.57% 1.45% 1.76% 2.01% 1.85% 1.94%
Return on average
equity(2)........ 12.01 22.51 21.82 20.83 21.51 22.77 19.80
Net interest
margin(2)........ 5.94 5.11 5.36 5.36 5.03 4.33 5.15
---------------------------
(1) Includes loans held in portfolio and loans we have securitized where we
retain credit risk. Does not include loans serviced for others.
(2) Annualized for interim periods.
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STRATEGY
Our strategy is to maintain a diverse revenue stream by focusing on niches in financial services where we believe we can optimize the productivity of our capital and where our experience and expertise can provide a competitive advantage. Our operational objectives are premised on simultaneously achieving three goals: creditworthiness, profitability and growth. We refer to this as creditworthy, profitable growth. We believe we must continually balance these goals in order to deliver long-term value to all of our stakeholders. We have developed a four-part business plan to meet these goals:
o We focus on product or market niches in financial services that we believe are underserved and where we believe customers are willing to pay a premium for value-added services.
o We enter niches only when we have attracted senior managers who have proven track records in the niche for which they are responsible.
o We diversify our revenues and allocate our capital across complementary lines of business as a key part of our risk management. Our lines of business are affected differently by interest rates and economic conditions and when combined in an appropriate mix, we believe they provide sources of diversification and opportunities for growth in a variety of economic conditions.
o We reinvest on an ongoing basis in the development of new and existing opportunities.
We believe our historical growth and profitability is the result of our endeavors to pursue complementary consumer and commercial lending niches through our bank holding company structure, our experienced management, our diverse product and geographic markets, and our willingness and ability to align the compensation structure of each of our lines of business with the interests of our stakeholders. Through various economic environments and cycles, we have had a relatively stable revenue and earnings stream on a consolidated basis generated primarily through internal growth rather than acquisitions. Over the five-year and ten-year periods ending December 31, 2001, respectively, our financial performance has been as follows:
o our return on average equity averaged 21.35% and 22.53%;
o our diluted earnings per common share compounded at an average annual growth rate of 16.65% and 15.18%;
o our net revenues(1) compounded at an average annual growth rate of 18.85% and 17.33%;
o our nonperforming assets to total assets averaged 0.60% and 0.57%;
o our annual net charge-offs to average loans and leases averaged 0.37% and 0.44%; and
o our book value per common share compounded at an average annual growth rate of 16.80% and 18.15%.
MAJOR LINES OF BUSINESS
We are a regulated bank holding company. At the parent level, we work actively to add value to our lines of business by interacting with the management teams, capitalizing on interrelationships, providing centralized services and coordinating overall organizational decisions. Under this organizational structure, our separate businesses currently hold and fund the majority of their assets through Irwin Union Bank and Trust. This provides additional liquidity and results in regulatory oversight of each of our lines of business.
The following table shows our net income (loss) by line of business:
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- ----------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS)
Commercial banking...................... $ 7,888 $ 3,142 $ 8,918 $ 7,090 $ 7,345 $ 6,509 $ 5,587
Mortgage banking........................ 19,522 14,488 38,100 13,006 23,063 28,853 21,300
Home equity lending..................... (7,441) 9,457 16,248 18,494 12,606 (6,668) 1,710
Commercial finance...................... 508 (761) (4,394) (2,563) (843) -- --
Venture capital......................... (859) (3,007) (6,549) 2,723 656 -- --
Other(1)................................ (1,686) (1,340) (6,807) (3,084) (9,671) 1,809 (4,153)
------- ------- ------- ------- ------- ------- -------
Total consolidated net income........... $17,932 $21,979 $45,516 $35,666 $33,156 $30,503 $24,444
======= ======= ======= ======= ======= ======= =======
---------------------------
(1) Includes parent, medical equipment leasing (which we discontinued in
1998) and consolidating entries.
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Our commercial banking line of business focuses on providing credit, cash management and personal banking products to small businesses and business owners. Services include a full line of consumer, mortgage and commercial loans, as well as personal and commercial checking accounts, savings and time deposit accounts, personal and business loans, credit card services, money transfer services, financial counseling, property, casualty, life and health insurance agency services, trust services, securities brokerage, and safe deposit facilities. Under the bank's commercial lending policies, at June 30, 2002, our lending limit is $10 million, and our average size commercial loan is $0.3 million.
We offer commercial banking services through our banking subsidiaries, Irwin Union Bank and Trust, an Indiana state-chartered commercial bank, and Irwin Union Bank, F.S.B., a federal savings bank. We have offices throughout nine counties in central and southern Indiana and in Kalamazoo, Grand Rapids, Traverse City and Lansing, Michigan; Carson City and Las Vegas, Nevada; St. Louis, Missouri; Louisville, Kentucky; Salt Lake City, Utah; and Phoenix, Arizona.
As a result of our expansion into new markets in the last few years, our earnings have been negatively impacted in this line of business during the last three years as we added new banking offices. While our newest office, opened in 2002, is not yet profitable, our other offices outside Indiana, which we opened in 1999 through 2001, are now operating profitably. In the near term, our strategy is to continue to grow our commercial banking line of business in the markets in which we are currently operating. We may also pursue opportunities to expand into one or two new markets. Our strategy is to target metropolitan markets with strong economies where we
The following table shows selected financial data for our commercial banking line of business:
AT OR FOR THE SIX MONTHS
ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------- ----------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---------- ---------- --------- ---------- -------- ----------- ----------
(DOLLARS IN THOUSANDS)
Commercial Banking:
Net income................... $ 7,888 $ 3,142 $ 8,918 $ 7,090 $ 7,345 $ 6,509 $ 5,587
Total assets................. 1,813,463 1,443,534 1,648,294 1,167,559 789,560 607,992 539,233
Total loans.................. 1,711,395 1,277,658 1,514,957 1,067,980 720,493 514,950 410,272
Allowance for loan and lease
losses.................... 17,836 11,000 14,643 9,228 7,375 6,680 5,525
Total deposits............... 1,599,119 1,305,352 1,456,376 998,892 710,899 567,526 486,481
Return on average assets..... 0.93% 0.50% 0.64% 0.74% 1.08% 1.15% 1.08%
Return on average equity..... 12.07 8.71 10.45 12.39 13.89 15.49 15.42
Net interest margin.......... 4.09 3.76 3.80 4.25 4.82 4.75 4.61
Efficiency ratio............. 58.43 73.38 65.91 71.00 68.06 66.60 64.62
Nonperforming assets to
total assets.............. 0.24 0.17 0.44 0.23 0.15 0.31 0.60
Allowance for loan losses to
total loans............... 1.04 0.86 0.97 0.86 1.02 1.30 1.35
Net charge-offs to average
loans(1).................. 0.17 0.13 0.19 0.12 0.16 0.13 0.34
---------------------------
(1) Annualized for interim periods.
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In our mortgage banking line of business we originate, purchase, sell and service conventional and government agency-backed residential mortgage loans throughout the United States. We established this line of business when we acquired our subsidiary, Irwin Mortgage Corporation, in 1981. We are realigning Irwin Mortgage within our organizational structure as a subsidiary of Irwin Union Bank and Trust. Most of our mortgage originations either are insured by an agency of the federal government, such as the Federal Housing Authority and the Veterans Administration 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 allows us to remove substantially all of the credit risk of these loans from our balance sheet. We sell mortgage loans to institutional and private investors but may retain servicing rights to the loans we originate or purchase from correspondents. We believe this balance between mortgage loan originations and mortgage loan servicing provides us a natural hedge against interest rate changes, which has helped stabilize our revenue stream.
We currently originate mortgage loans through retail offices, direct marketing, wholesale channels and our Internet website. At June 30, 2002, Irwin Mortgage operated 99 production and satellite offices in 26 states. Our mortgage banking line of business is currently our largest contributor to revenue, comprising 64% of our total revenues for the six months ended June 30, 2002, compared to 53% for the first six months of 2001. Our mortgage banking line of business contributed 109% of our net income for the first six months of 2002, compared to 66% for the same period in 2001.
We have recently developed a correspondent lending distribution channel in our mortgage banking business. We hired a key manager and team of experienced mortgage banking professionals previously affiliated with a national mortgage banking firm where the correspondent lending division was recently dissolved when that firm was acquired by a competitor. This group has established lending relationships with correspondent lenders located throughout the United States. Correspondent lending involves the purchase of loans underwritten and closed by third parties, usually smaller community banks and mortgage bankers. We expect our correspondent lending distribution channel to become operational in the fourth quarter of 2002.
AT OR FOR THE SIX MONTHS
ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------- --------------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Mortgage Banking:
Net income............ $ 19,522 $ 14,488 $ 38,100 $ 13,006 $ 23,063 $ 28,853 $ 21,300
Net interest income... 15,833 9,590 30,261 15,401 21,745 26,244 17,577
Provision for loan
losses............. (202) 76 31 357 (1,998) (1,721) (1,383)
Loan origination fees. 29,431 27,531 61,917 34,688 46,311 59,328 41,045
Gain on sale of loans. 52,971 44,436 113,140 45,601 72,395 97,724 53,332
Loan servicing fees... 28,627 24,798 52,837 50,309 54,247 55,217 50,194
Gain on sale of bulk
servicing.......... 9,716 5,781 8,394 27,528 9,005 829 1,512
Amortization and
impairment of
servicing assets,
net of hedging..... (24,547) (15,606) (42,135) (37,490) (24,566) (29,805) (15,843)
Total net revenue..... 115,036 99,146 229,461 140,932 180,767 207,092 147,657
Total mortgage
originations....... 3,846,556 4,359,940 9,225,991 4,091,573 5,876,750 8,944,615 5,397,338
Refinancings to total
originations....... 46.33% 52.88% 54.10% 16.39% 28.64% 49.54% 22.53%
Servicing sold to
originations....... 53.1 43.5 25.1 99.35 79.89 56.95 71.82
First mortgage
servicing portfolio $13,466,335 $10,474,246 $12,875,532 $9,196,513 $10,488,112 $11,242,470 $10,713,549
Bulk sales of
servicing.......... 1,643,209 610,610 1,030,744 2,526,006 1,216,718 99,929 536,971
Capitalized servicing. 195,455 170,723 211,201 121,555 132,648 113,131 81,610
Capitalized servicing
to servicing
portfolio.......... 1.5% 1.6% 1.6% 1.3% 1.3% 1.0% 0.8%
Weighted average
coupon............. 7.01 7.54 7.23 7.76 7.51 7.56 7.85
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In our home equity lending line of business, we originate, purchase, securitize and service home equity loans and lines of credit nationwide. We generally fund the loans through securitization transactions and whole loan sales. We continue to service the loans we securitize and sell. We target creditworthy, homeowning consumers who are active, unsecured credit card debt users. Target customers are underwritten using proprietary models based on several criteria, including the customers' previous use of credit. We market our home equity products through direct mail and telemarketing, mortgage brokers and correspondent lenders nationwide and through Internet-based solicitations.
We established this line of business when we formed Irwin Home Equity Corporation in 1994 as our subsidiary. Irwin Home Equity is headquartered in San Ramon, California and became a subsidiary of Irwin Union Bank and Trust in 2001. In 1997 and 1998, we largely redesigned our product offerings, introducing new products with origination fees and early repayment options. We also introduced home equity loans with loan-to-value ratios of up to 125% of their collateral value. Home equity loans with loan-to-value ratios greater than 100% are priced with higher coupons than home equity loans with loan-to-value ratios less than 100% to compensate for the increased risk. For the six months ended June 30, 2002, home equity loans with loan-to-value ratios greater than 100% made up 60.3% of our loan originations and 52.8% of our portfolio at June 30, 2002. We expect to continue to originate new loans in our home equity lending line of business through the development of new products, the extension of existing products to new customers, and continued sales through our indirect distribution channels.
For most of our home equity product offerings, we offer customers the choice to accept an early repayment fee in exchange for a lower interest rate. A typical early repayment option provides for a fee equal to up to six months' interest that is payable if the borrower chooses to repay the loan during the first three to five years of its term. Approximately 84.9%, or $1.3 billion, of our home equity loan servicing portfolio at June 30, 2002 has early repayment fees. This portfolio does not include our floating rate lines of credit.
As described more fully in this Summary under "Impact of Recent Change to Regulatory Capital Rules," we have eliminated our use of gain-on-sale accounting and have started using on-balance sheet financing to fund
The following table shows selected financial data for our home equity lending line of business:
AT OR FOR THE SIX MONTHS
ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
Home Equity Lending:
Net interest income.......... $ 38,590 $ 28,876 $ 61,754 $ 35,593 $ 18,852 $ 5,495 $ 7,129
Provision for loan losses.... (12,460) (300) (2,320) (461) -- (513) (1,404)
Gain on sale of loans........ 7,307 33,308 91,556 46,970 23,725 18,610 15,908
Loan origination fees........ 777 351 1,639 951 273 -- --
Loan servicing fees.......... 7,010 6,287 13,355 7,559 4,907 3,323 2,145
Amortization and impairment
of servicing assets....... (3,242) (1,167) (3,217) (1,583) (1,445) (842) (334)
Trading gains (losses)....... (13,059) (2,546) (38,420) 14,399 2,512 (2,952) (1,961)
Total net revenue............ 25,499 65,018 124,418 103,447 50,566 23,941 21,777
Operating expense............ 37,901 49,256 97,338 72,623 35,557 30,609 20,067
Net income (loss)............ (7,441) 9,457 16,248 18,494 12,606 (6,668) 1,710
Loan and line of credit
volume.................... 514,462 452,161 1,149,409 1,225,955 439,507 389,673 214,518
Secondary market delivery.... 180,780 401,975 1,080,328 774,610 430,743 294,261 210,057
Total portfolio.............. 2,098,678 1,826,853 2,064,542 1,625,719 777,934 581,241 358,166
Residual assets-trading(1)... 183,310 189,788 199,071 152,614 57,883 32,321 22,134
Weighted average yield on
loans..................... 13.57% 13.35% 13.38% 13.09% 12.33% 11.86% 13.97%
Weighted average yield on
lines of credit........... 10.85 12.25 11.11 14.04 12.72 11.89 12.96
Gain on sale to total loans
securitized............... 4.04 8.29 8.47 3.92 5.57 6.32 7.57
Net home equity charge-offs
to home equity
portfolio(2).............. 2.70 1.56 1.58 0.57 0.36 0.37 0.29
Delinquency ratio............ 4.6 4.5 5.1 4.4 2.1 1.3 1.5
---------------------------
(1) Included in trading assets on our consolidated balance sheets.
(2) Annualized for interim periods.
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In our commercial finance line of business, we originate transactions with brokers and vendors throughout the United States and Canada and through direct sales to franchisees involving small- to medium-sized equipment leases and loans. The majority of our loans and leases are full payout (i.e., no residual), small-ticket assets secured by commercial equipment. We finance a variety of commercial and office equipment types and try to limit the industry and geographic concentrations in our loan and lease portfolio. We established this line of business in 1999 and had a total loan and lease portfolio of $301.3 million as of June 30, 2002.
In our venture capital line of business, we make minority investments in early stage companies in the financial services industry and related fields that intend to use technology as a key component of their competitive strategy. We established this line of business when we formed Irwin Ventures in the third quarter of 1999, having made our first investment in 1997. We provide Irwin Ventures' portfolio companies the benefit of our management experience in the financial services marketplace. We had investments in six private companies as of June 30, 2002, with an aggregate investment cost of $11.6 million and a carrying value of $6.2 million.
The federal banking regulators, including the Federal Reserve, our principal regulator, have adopted revised regulatory capital standards regarding the treatment of certain recourse obligations, direct credit substitutes, residual interests in asset securitizations, and other securitized transactions. In general, the new rules require a banking institution that has certain residual interests, including assets commonly referred to as "credit-enhancing interest-only strips," in an amount that exceeds 25% of its Tier 1 capital, to deduct the after-tax excess amount of credit-enhancing interest-only strips from Tier 1 capital for purposes of computing risk-based capital ratios.
The new capital standards became effective on January 1, 2002, for new residual interests created after December 31, 2001. For transactions settled before January 1, 2002, application of the new capital treatment to the residuals created will be delayed until December 31, 2002.
These new rules apply to securitization transactions done by our home equity line of business prior to 2002. At June 30, 2002, the credit-enhancing interest-only strips included in our residual interests totaled $122 million, which comprised 28% of our consolidated Tier 1 capital. Due to anticipated earnings retention, subsequent accretion of our existing trust preferred securities into Tier 1 capital throughout the remainder of 2002, residual amortization throughout 2002, other normal balance sheet changes, and because we have ceased creating new residual interests, we expect that our credit-enhancing interest-only strips will have declined to less than 25% of Tier 1 capital by December 31, 2002. Accordingly, we anticipate that we will have little if any deduction of Tier 1 capital due to the concentration of credit-enhancing interest-only strips when the new rules become fully effective at the end of 2002.
Through 2001, we financed our significant growth in our home equity lending line of business using transaction structures that create residual assets through "gain-on-sale" accounting-sales transactions accounted for under SFAS 140. To address the new rules, beginning in the second quarter of 2002 we have eliminated our use of these securitization structures that require gain-on-sale accounting treatment. We believe using on-balance sheet financing or whole loan sale transactions rather than transactions accounted for as gain-on-sale under SFAS 140 will allow continued access to the capital markets for cost-effective, matched funding of our loan assets, while not meaningfully affecting or changing our cash flows, nor changing the longer term profitability of our home equity lending operation.
Changing our securitization practices has significantly affected the financial results of our home equity line of business in 2002. The key financial impacts have included:
o By using on-balance sheet financing to fund our home equity loan originations, we are required to change the timing of revenue recognition on these assets under generally accepted accounting principles. For assets funded on-balance sheet, we record interest income over the life of the loans, as it is earned, net of interest expense over the life of the bonds and a provision for credit losses inherent in the portfolio. For assets funded through securitization transactions accounted for as a sale under SFAS 140, we have recorded revenue as trading gains at the time of sale based on the difference between proceeds and allocated cost basis of the loans sold. We have also recognized residual interests based on the discounted present value of anticipated revenue streams over the expected lives of the loans. This different accounting treatment does not, however, affect cash flows related to the loans, and management expects that the ultimate total receipt of revenues and profitability derived from our home equity loans will be relatively unchanged by these different financing structures.
o Due to the extension of the period during which revenue is recognized under the new financing structures we are pursuing, we are reducing the rate of growth in production and related expenses in the home equity lending line of business to more closely align anticipated revenue recognition and expenses under this new model.
o After the initial transition period, as the portfolio of on-balance sheet home equity loans continues to grow, we should record increased levels of net interest income sufficient to cover ongoing expenses and credit losses. We would then expect to be in a position to resume profitable growth in this line of business. We may also continue to pursue selective opportunities to sell whole loans in cash sale transactions if attractive terms can be negotiated. We completed one sale during the first quarter of
The trust is a newly formed financing subsidiary of Irwin. Upon issuance of the preferred securities offered by this prospectus, the purchasers in this offering will own all of the issued and outstanding preferred securities of the trust. In exchange for our capital contribution to the trust, we will own all of the common securities of the trust. The trust exists exclusively for the following purposes:
o issuing the preferred securities to the public for cash;
o issuing the common securities to us;
o investing the proceeds from the sale of its preferred and common securities in an equivalent amount of junior subordinated debentures to be issued by us; and
o 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.
Our principal executive offices, as well as those of the trust, are located at 500 Washington Street, P.O. Box 929, Columbus, Indiana 47202-0929, and our telephone number is (812) 376-1909.
THE ISSUER................... IFC Capital Trust VI.
SECURITIES BEING OFFERED..... 1,200,000 preferred securities, which
represent preferred undivided interests in
the assets of the trust. Those assets will
consist solely of the debentures and
payments received on the debentures. The
trust will sell the preferred securities to
the public for cash. The trust will use that
cash to buy the debentures from us.
OFFERING PRICE............... $25 per preferred security.
WHEN DISTRIBUTIONS WILL BE
PAID TO YOU................ If you purchase the preferred securities,
you are entitled to receive cumulative cash
distributions at a 8.70% annual rate.
Distributions will accumulate from the date
the trust issues the preferred securities
and will be paid quarterly on March 31, June
30, September 30 and December 31 of each
year, beginning December 31, 2002. As long
as the preferred securities are represented
by a global security, the record date for
distributions on the preferred securities
will be the business day prior to the
distribution date. We may defer the payment
of cash distributions, as described below.
WHEN THE SECURITIES
MUST BE REDEEMED........... The debentures will mature and the preferred
securities must be redeemed on September 30,
2032. We have the option, however, to
shorten the maturity date to a date not
earlier than September 30, 2007. 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, 2032 IS POSSIBLE....... The trust must redeem the preferred
securities when the debentures are paid at
maturity, or upon any earlier redemption of
the debentures to the extent the debentures
are redeemed. We may redeem all or part of
the debentures at any time on or after
September 30, 2007.
In addition, we may redeem, at any time, all
of the debentures if:
o 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;
o there is a change in existing laws
or regulations that requires the
trust to register as an investment
company; or
o there is a change in the capital
adequacy guidelines of the Federal
Reserve that results in the
preferred securities not being
eligible as Tier 1 capital.
We may also redeem the debentures at any
time, and from time to time, in an amount
equal to the liquidation amount of any
preferred securities we purchase, plus a
proportionate amount
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WE HAVE THE OPTION TO EXTEND THE INTEREST
PAYMENT PERIOD............. The trust will rely solely on payments
made by us under the debentures to pay
distributions on the preferred securities.
As long as we are not in default under the
indenture relating to the debentures, we
may, at one or more times, defer interest
payments on the debentures for up to 20
consecutive quarters, but not beyond
September 30, 2032. If we defer interest
payments on the debentures:
o the trust will also defer
distributions on the preferred
securities;
o the distributions you are entitled
to will accumulate; and
o these accumulated distributions
will earn interest at an annual
rate of 8.70%, 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.
During an extension period, we are
restricted from making payments on debt that
ranks equally with or junior to the
debentures held by our other subsidiary
trusts, and from paying dividends or
distributions on our capital stock or
redeeming, purchasing or acquiring or making
liquidation payments with respect to our
capital stock, except for some exceptions.
YOU WILL STILL BE TAXED
IF DISTRIBUTIONS ARE
DEFERRED................... If a deferral of payment occurs, you will
still be required to recognize the deferred
amounts as income for federal income
tax purposes in advance of receiving these
amounts, even if you are a cash basis
taxpayer.
OUR GUARANTEE OF PAYMENT..... Our obligations described in this
prospectus, in the aggregate, constitute a
full, irrevocable and unconditional
guarantee on a subordinated basis by us of
the obligations of the trust under the
preferred securities. Under the guarantee
agreement, we guarantee the trust will use
its assets to pay the distributions on the
preferred securities and the liquidation
amount upon liquidation of the trust.
However, the guarantee does not apply when
the trust does not have sufficient funds to
make the payments. If we do not make
payments on the debentures, the trust will
not have sufficient funds to make payments
on the preferred securities. In this event,
your remedy is to institute a legal
proceeding directly against us for
enforcement of payments under the
debentures.
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TO YOU..................... We may, at any time, dissolve the trust and
distribute the debentures to you, subject to
the prior approval of the Federal Reserve,
if required. If we distribute the
debentures, we will use our best efforts to
list them on a national securities exchange
or comparable automated quotation system.
HOW THE SECURITIES WILL
RANK IN RIGHT
OF PAYMENT................. Our obligations under the preferred
securities, debentures and guarantee are
unsecured and will rank as follows with
regard to right of payment:
o the preferred securities will rank
equally with the common securities
of the trust. The trust will pay
distributions on the preferred
securities and the common
securities pro rata. However, if we
default with respect to the
debentures, then no distributions
on the common securities of the
trust or our common stock will be
paid until all accumulated and
unpaid distributions on the
preferred securities have been
paid;
o our obligations under the
debentures and the guarantee are
unsecured and generally will rank:
o junior in priority to our
existing and future senior
and subordinated
indebtedness;
o equal to our subordinated
debentures associated with
$146.7 million of trust
preferred securities that
affiliated trusts of ours
currently have outstanding;
o senior in priority to our
convertible subordinated
debentures associated with
$51.7 million of convertible
trust preferred securities
that an affiliated trust of
ours currently has
outstanding; and
o 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 circumstances, holders
of the preferred securities will have no
voting rights.
NEW YORK STOCK EXCHANGE
SYMBOL..................... IFC PrM.
YOU WILL NOT RECEIVE
CERTIFICATES............... The preferred securities will be represented
by a global security that will be deposited
with and registered in the name of The
Depository Trust Company, New York, New
York, or its nominee. This means that you
will not receive a certificate for the
preferred securities, and your ownership
interests will be recorded through the DTC
book-entry system.
HOW THE PROCEEDS OF THIS
OFFERING WILL BE USED........ The trust will invest all of the proceeds
from the sale of the preferred securities in
the debentures. We estimate that the net
proceeds to us from the sale of the
debentures to the trust, after
13
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deducting offering expenses and underwriting
commissions, will be approximately
$28,610,000. The purpose of the offering is
to increase our regulatory capital and
support the growth and operations of our
subsidiaries.
|
Before purchasing the preferred securities being offered, you should carefully consider the "Risk Factors" beginning on page 18.
The summary consolidated financial data presented below for, and as of the end of, each of the years in the five-year period ended December 31, 2001, are derived from our historical financial statements. Our consolidated financial statements for each of the five years ended December 31, 2001 have been audited by PricewaterhouseCoopers LLP, independent accountants. The summary data presented below for the six-month periods ended June 30, 2002 and 2001, 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 six-month periods indicated have been included. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 30, 2001 and our quarterly report on Form 10-Q for the quarter ended June 30, 2002, which are incorporated in this prospectus by reference. Results for past periods are not necessarily indicative of results that may be expected for any future period, and results for the six-month period ended June 30, 2002, are not necessarily indicative of results that may be expected for the entire year ending December 31, 2002.
AT OR FOR THE SIX
MONTHS ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------- -------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF INCOME DATA:
Net interest income........ $ 92,132 $ 62,953 $ 147,149 $ 90,996 $ 67,122 $ 59,201 $ 50,386
Provision for loan and
lease losses............ (19,832) (4,357) (17,505) (5,403) (4,443) (5,995) (6,238)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan and
lease losses............ 72,300 58,596 129,644 85,593 62,679 53,206 44,148
---------- ---------- ---------- ---------- ---------- ---------- ----------
Noninterest income:
Loan origination fees... 30,611 28,214 64,303 52,696 41,024 60,013 41,370
Gain on sale of loans... 62,698 81,061 207,538 77,047 74,834 75,201 39,210
Loan servicing fees..... 36,466 31,627 67,362 58,939 60,581 57,284 53,257
Amortization and
impairment of
servicing assets..... (65,550) (16,405) (50,134) (39,529) (15,702) (35,388) (16,355)
Gain on sale of
servicing assets..... 9,716 5,781 8,394 27,528 37,801 43,308 32,631
Trading gains (losses).. (13,059) (2,546) (32,412) 14,399 (8,296) 1,366 (1,961)
Gain from sale of
leasing assets....... -- -- -- -- -- 5,241 --
Other................... 46,125 2,494 6,340 20,631 13,827 11,832 8,696
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total noninterest income 107,007 130,226 271,391 211,711 204,069 218,857 156,848
Noninterest expense........ 150,829 152,975 327,420 237,962 214,111 221,206 158,818
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes. 28,478 35,847 73,615 59,342 52,637 50,857 42,178
Provision for income taxes. 11,075 14,254 28,624 23,676 19,481 20,354 17,734
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before minority
interest................ 17,403 21,593 44,991 35,666 33,156 30,503 24,444
Minority interest.......... (34) (211) (350) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative
effect of change in
accounting principle.... 17,437 21,804 45,341 35,666 33,156 30,503 24,444
Cumulative effect of
change in accounting
principle, net of tax... 495 175 175 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income available to
common shareholders..... $ 17,932 $ 21,979 $ 45,516 $ 35,666 $ 33,156 $ 30,503 $ 24,444
========== ========== ========== ========== ========== ========== ==========
Mortgage loan originations. $3,846,556 $4,359,940 $9,225,991 $4,091,573 $5,876,750 $8,944,615 $5,397,338
Home equity loan
originations............ 514,462 452,161 1,149,409 1,225,955 439,507 389,673 214,518
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AT OR FOR THE SIX
MONTHS ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------- -------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON SHARE DATA:
Earnings per share(1)(2):
Basic................... $ 0.69 $ 1.04 $ 2.15 $ 1.70 $ 1.54 $ 1.40 $ 1.10
Diluted................. 0.67 0.97 2.00 1.67 1.51 1.38 1.08
Cash dividends per share... 0.135 0.13 0.26 0.24 0.20 0.16 0.14
Book value per share....... 11.87 9.82 10.84 8.97 7.55 6.70 5.82
Dividend payout ratio...... 20.76% 12.53% 12.13% 14.13% 12.93% 11.39% 12.74%
Weighted average
shares--basic............ 25,880 21,109 21,175 20,973 21,530 21,732 22,326
Weighted average
shares--diluted.......... 28,780 24,121 24,173 21,593 21,886 22,139 22,722
Shares outstanding--end of
period.................. 27,732 21,192 21,305 21,026 21,105 21,673 22,001
BALANCE SHEET DATA:
Assets..................... $3,827,582 $3,261,739 $3,447,693 $2,429,154 $1,682,992 $1,945,341 $1,491,771
Trading assets............. 183,539 189,948 199,071 154,921 59,025 32,148 22,133
Loans held for sale........ 437,147 1,016,792 502,086 579,788 508,997 936,788 528,739
Loans and leases........... 2,675,915 1,486,461 2,137,747 1,234,922 733,424 556,991 611,093
Allowance for loan and
lease losses............ 37,286 15,218 22,283 13,129 8,555 9,888 8,812
Servicing assets........... 212,453 181,329 228,624 130,522 138,500 117,129 83,044
Deposits................... 2,257,306 1,928,968 2,309,018 1,443,330 870,318 1,009,211 719,596
Short-term borrowings...... 380,612 776,926 487,963 475,502 473,103 644,861 512,275
Long-term debt............. 464,968 30,000 30,000 30,000 30,000 2,839 7,096
Trust preferred securities. 198,500 153,500 198,500 153,500 50,000 50,000 50,000
Shareholders' equity....... 329,275 209,452 231,665 188,870 159,296 145,233 127,983
First mortgage servicing
portfolio............... 13,446,335 10,474,246 12,875,532 9,196,513 10,488,112 11,242,470 10,713,549
Home equity portfolio...... 2,098,678 1,826,853 2,064,542 1,625,719 777,934 581,241 358,166
SELECTED FINANCIAL RATIOS:
Performance Ratios:
Return on average assets(3) 1.00% 1.57% 1.45% 1.76% 2.01% 1.85% 1.94%
Return on average equity(3) 12.01 22.51 21.82 20.83 21.51 22.77 19.80
Net interest
margin(3)(4)(5)......... 5.94 5.11 5.36 5.36 5.03 4.33 5.15
Noninterest income to
revenues(6)............. 53.73 67.41 64.84 69.94 75.25 78.71 75.89
Efficiency ratio(7)........ 75.74 79.19 78.23 78.61 78.95 79.55 76.74
Loans and leases to
deposits(8)............. 118.54 77.06 92.58 85.56 84.27 55.19 84.92
Average interest-earning
assets to average
interest-bearing
liabilities............. 118.40 114.86 117.12 113.51 127.36 121.02 124.00
Asset Quality Ratios:
Allowance for loan and
lease losses to:
Total loans and leases.. 1.39% 1.02% 1.04% 1.06% 1.17% 1.78% 1.45%
Non-performing loans
and leases........... 216.00 154.00 116.34 181.79 189.86 84.28 115.02
Net charge-offs to average
loans and leases(3)..... 0.59 0.36 0.53 0.28 0.27 0.33 0.46
Net home equity
charge-offs to home
equity portfolio(3)..... 2.70 1.56 1.58 0.57 0.36 0.37 0.29
Non-performing assets to
total assets............ 0.57 0.49 0.68 0.42 0.48 0.78 0.64
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AT OR FOR THE SIX
MONTHS ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------- -------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Non-performing assets to
total loans and other
real estate owned........ 0.82% 1.07% 1.10% 0.81% 1.09% 2.77% 1.55%
Capital Ratios:
Average shareholders'
equity to average assets 8.34 6.91 6.65 8.46 9.35 8.09 9.32
Tier 1 capital ratio........ 9.08 7.81 6.81 8.42 11.41 11.63 13.56
Tier 1 leverage ratio....... 11.43 9.84 9.36 12.41 12.77 10.51 12.06
Total risk-based capital
ratio.................... 12.47 11.42 10.82 13.59 13.50 12.25 14.85
Ratios of Earnings to Fixed
Charges(9):
Including deposit interest.. 1.49x 1.54x 1.58x 1.60x 1.81x 1.74x 1.80x
Excluding deposit interest.. 2.10 2.28 2.35 2.27 2.32 2.13 2.28
---------------------------
(1) Earnings per share of common stock before cumulative effect of change
in accounting principle related to SFAS 142, "Goodwill and Other
Intangible Assets," for the six month period ended June 30, 2002 was
$0.67 basic and $0.65 diluted.
(2) Earnings per share of common stock before cumulative effect of change
in accounting principle related to SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," for the six months ended June
30, 2001 was $1.03 basic and $0.96 diluted, and for the year ended
December 31, 2001 was $2.14 basic and $1.99 diluted.
(3) Certain financial ratios for interim periods have been annualized.
(4) Net interest income divided by average interest-earning assets.
(5) Calculated on a tax-equivalent basis.
(6) Revenues consist of net interest income plus noninterest income.
(7) Noninterest expense divided by net interest income plus noninterest
income.
(8) Excludes loans held for sale.
(9) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes plus interest expense.
Fixed charges consist of interest expense plus distributions on
preferred securities.
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An investment in the 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 trust before you purchase any of the preferred securities offered by this prospectus.
Because the trust will rely on the payments it receives on the debentures it owns to fund all payments on the preferred securities and because the 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. You should carefully review the information in this prospectus about the preferred securities, the debentures and the guarantee.
RISKS RELATING TO AN INVESTMENT IN US.
WE HAVE BEEN AND MAY CONTINUE TO BE ADVERSELY AFFECTED BY THE GENERAL DETERIORATION IN ECONOMIC CONDITIONS.
The risks associated with our business become more acute in periods of a slowing economy or recession, like we have seen over the last year. Economic declines are typically accompanied by a decrease in demand for consumer and commercial credit and declining real estate and other asset values. We have experienced an increase in delinquencies, foreclosures and losses as generally occurs during economic slowdowns or recessions and we would expect this to continue if the economic deterioration persists. Our servicing costs and credit losses also tend to increase during periods of economic slowdown or recession.
In our home equity lending and commercial banking lines of business, a material decline in real estate values may reduce the ability of borrowers to use home equity and commercial real estate to support borrowings and increases the loan-to-value ratios of loans we have previously made, thereby weakening collateral coverage and increasing the possibility of a loss in the event of a default. Material declines in real estate values may also affect our residential mortgage lending since we sometimes hold mortgages in portfolio until we sell them.
WE MAY BE ADVERSELY AFFECTED BY INTEREST RATE CHANGES.
We and our subsidiaries are subject to interest rate risk in our consumer and commercial lending businesses, although interest rate sensitivity impacts our various lines of business differently. Changes in interest rates likely will 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 affect the valuations used in determining the market value of our mortgage servicing rights in our mortgage banking line of business and may cause us to experience additional impairment in the value of these assets.
In our mortgage banking line of business, we record mortgage servicing rights at the lower of their cost basis or market value, and a valuation allowance is recorded for any impairment. Reductions in interest rates expose us to write-downs in the carrying value of the mortgage servicing and other servicing assets we hold on our balance sheet. In addition to our practice of periodically selling servicing rights, we estimate the market value of the servicing assets each month using a cash flow model to project future expected cash flows based upon a set of valuation assumptions we believe market participants would use for similar assets. These valuations involve the judgment of management regarding a variety of factors, including assumptions regarding anticipated prepayment speeds of the underlying mortgages, and are not exact. We recently refined the models that we use to prepare these valuations to better reflect borrower tendencies given the current interest rate environment and we expect this to result in additional impairment in the third quarter of 2002.
Although impairment may be offset by increases in revenue due to higher loan volumes and origination fees during periods of declining interest rates, we also utilize interest rate instruments to counteract potential servicing asset impairment. However, if we improperly hedge or mismanage our servicing assets, our results of operations may be adversely affected during the period in which the impairment occurs. For example, during the
We may recognize additional trading losses with respect to our residual interests in our home equity line of business if interest rates continue to fall.
Reductions in interest rates also cause trading losses related to residual interests that we own from our prior securitizations. These assets are reflected on our balance sheet at their fair value with subsequent unrealized gain or loss recorded in our results of operations for any period in which the fair value changes. Fair value is based on a discounted cash flow analysis that takes into account, among other things, prepayment assumptions regarding the underlying loans. Decreasing interest rates often lead to an increase in actual and projected prepayments in the underlying loans. This could require that we recognize a trading loss with respect to our residual interests during the period in which the interest rates decrease. For example, during the second quarter of 2002, we recorded an unrecognized trading loss of $5.8 million, due in part to changes in the valuation assumptions based on prepayment speeds for residual assets in our home equity lending line of business.
The measures we take to manage interest rate risk in our commercial banking and commercial finance lines of business may not be sufficient to offset the effect of fluctuating interest rates on our net interest income.
Our commercial lending and commercial finance lines of business mainly depend 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 at our banks. 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 changing interest rate environments, we may not be able to mitigate interest rate sensitivity effectively. Our risk management techniques include modeling interest rate scenarios, using financial hedging instruments, match-funding certain loan assets, selling selected servicing rights and maintaining a strong loan production operation to offset interest rate risk. There are costs and risks associated with our risk management techniques, and these could be substantial.
The hedging techniques we use in an attempt to reduce our overall interest rate exposure may be costly and ineffective.
To reduce the effect interest rates have on our businesses, we invest in derivatives and other interest-sensitive instruments. While our intent in purchasing these instruments is to reduce our overall interest rate sensitivity, the performance of these instruments is, at times, unpredictable. When our hedges work as anticipated, they serve to reduce other losses. We experienced this in the second quarter of 2002 when hedging gains offset impairment to the value of our mortgage servicing assets. However, our investments in derivatives and other financial instruments we purchase with intent to hedge our interest rate risks may not always produce results in a highly correlated manner compared to the assets or liabilities being hedged. As a result, we may incur additional losses. For example, in the fourth quarter of 2001, hedging losses of $38.6 million exceeded a $31.2 million valuation increase in our mortgage servicing assets.
WE ARE THE DEFENDANT IN A CLASS ACTION LAWSUIT CALLED CULPEPPER V. INLAND MORTGAGE CORPORATION THAT COULD SUBJECT US TO MATERIAL LIABILITY.
We and our subsidiaries, especially in our consumer lending business, are from time to time engaged in various lawsuits, other assertions of improper or fraudulent loan practices or lending violations, and other matters, and we may have a number of unresolved claims pending. Numerous class action lawsuits have been, and continue to be, filed throughout the United States against mortgage lenders alleging violations of the federal Real Estate Settlement Procedures Act, commonly known as RESPA.
In June 2001, a federal circuit court of appeals upheld the lower court's grant of class action certification in favor of the plaintiffs in the Culpepper case. The case is now proceeding in the federal district court. In response to the court of appeals' decision unfavorable to us, the plaintiffs filed a motion for partial summary judgment in July 2001 asking the federal district court to find that our subsidiary is liable for violating RESPA. The court has not yet ruled on this motion. In November 2001, the parties filed supplemental briefs upon order of the district court. The briefs addressed the parties' views on the import of a new policy statement issued by the Department of Housing and Urban Development, or HUD, on October 18, 2001, after the appellate court's ruling in this case. HUD is the agency responsible for interpreting and implementing RESPA. The clarifying policy statement explicitly disagreed with the court of appeals' interpretation of RESPA in connection with the types of payments and alleged violation at issue in the Culpepper case. Irwin Mortgage also filed a motion in the district court seeking a stay of further proceedings. On March 8, 2002, the district court granted Irwin Mortgage's motion to stay the proceedings in this case until the appellate court renders decisions in three other RESPA cases pending in that court. On September 18, 2002, the appellate court reversed the grant of class certification in one of these cases, which is a result that is favorable to us. The court stated in that case that HUD's October 18, 2001 policy statement is contrary to and, in effect, overrules the appellate court's prior decision in the Culpepper case. We believe this provides grounds to decertify the class in Culpepper. However, the stay in the proceedings continues in effect in Culpepper and the district court has not yet taken action.
If the class is not decertified and the district court finds that Irwin Mortgage violated RESPA, Irwin Mortgage could be liable for damages equal to three times the amount of that portion of payments made to the mortgage brokers that is ruled unlawful. Based on notices sent by the Culpepper plaintiffs to date to potential class members and additional notices that might be sent, we believe the Culpepper class is not likely to exceed 32,000 borrowers who meet the class specifications. We also have other class action lawsuits filed against us alleging RESPA violations and other claims based on payments similar to those at issue in the Culpepper case, but in one case arguing different RESPA violations. These related lawsuits filed against us after Culpepper, some of which are subject to a similar stay of proceedings, seek class certification of additional borrowers on a different basis than that recently overruled by the court of appeals.
We intend to vigorously defend these lawsuits and believe we have available numerous defenses to the claims. At this stage of the litigation we are unable to reasonably estimate the amount of potential loss we could suffer, and we have not established any reserves related to these cases.
We expect that an adverse outcome in these litigation matters could subject us to significant monetary damages and this amount could be material to our financial position as well as affect the market price of the preferred securities and our ability to pay distributions on the preferred securities.
OUR BUSINESS MAY BE AFFECTED ADVERSELY BY THE HIGHLY REGULATED ENVIRONMENT IN WHICH WE OPERATE.
We and our subsidiaries are subject to extensive federal and state regulation and supervision. In addition, we are subject to class action lawsuits alleging violations of consumer lending laws, including truth in lending laws and regulations, which could, among other remedies, result in rights of rescission for borrowers and penalties. For example, on September 30, 2002, a federal district court in Massachusetts certified a plaintiff class in a lawsuit pending against our banking subsidiary in which the plaintiff borrowers claim that the originator of their home equity loans, which loans we later acquired, failed to make certain disclosures allegedly required with respect to prepayment penalty provisions.
Recently enacted, proposed and future legislation and regulations have had, will continue to have or may have significant impact on the financial services industry. Regulatory or legislative changes could cause us to change or limit some of our consumer loan products or the way we operate our different lines of business. Future changes could affect the profitability of some or all of our lines of business.
Because we originate home equity loans from our banking branch in Nevada, federal law permits us to conduct our home equity lending business in compliance with Nevada law regardless of where the borrowers may reside. Nonetheless, from time to time regulators from other states have questioned our ability to charge certain fees, such as prepayment penalties, to residents of their states. In some cases, we have chosen to deal with these issues by electing not to do business in certain states. A change in federal or state law or regulation may affect the rates and fees we charge on home equity loans made to borrowers outside Nevada.
These and other potential changes in government regulation or policies could increase our costs of doing business and could adversely affect our operations and the manner in which we conduct our business.
WE MAY FACE CHALLENGES IN MANAGING OUR OPERATIONAL RISKS AS WE GROW.
Like other financial services companies, we face a number of operational risks, including the potential for processing errors, internal or external fraud, failure of computer systems, and external events beyond our control such as natural disasters. Beginning in 2002, we commenced a multi-year program to provide a more integrated, firm-wide approach to identification, measurement, monitoring and mitigation of operational risks, but this effort is not yet complete. Our business is a complex organization, and our home equity and commercial lending businesses grew rapidly during 2000 and 2001. Our growth may strain our existing managerial resources and internal monitoring, accounting and reporting systems.
We have recently added correspondent lending as a new distribution channel to our mortgage banking line of business, and we expect continued significant growth in our lines of business as we implement our strategic plans. For this reason, the financial assets that we manage could increase significantly following this offering. If we are unable to expand the capabilities of our internal reporting and monitoring systems or to hire qualified personnel as needed to keep pace with our growth, our existing risk management may suffer and we could experience losses. Rapid growth may also adversely impact our profitability.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND ADEQUATE FINANCING MAY NOT BE AVAILABLE TO US ON ACCEPTABLE TERMS, OR AT ALL.
The capital from this offering and what we expect to generate internally may not be sufficient to maintain our regulatory capital levels at desired levels to support the level of growth contemplated under our current business plan. We may seek additional capital in the future to fund the growth of our operations and to maintain our regulatory capital above well-capitalized standards. We may not be able to obtain additional debt or equity financing, or, if available, it may not be in amounts and on terms acceptable to us. If we are unable to obtain the funding we need, we may be unable to develop our products and services, take advantage of future opportunities or respond to competitive pressures, which could have a material adverse effect on us.
We rely on wholesale funding, such as short-term credit facilities, Federal Home Loan Bank borrowings and brokered deposits, to significantly augment our core deposits to fund our financing businesses. Because wholesale funding sources are affected by general capital market conditions, the availability of funding from wholesale lenders may be dependent on the confidence these investors have in commercial and consumer finance businesses. The continued availability to us of these funding sources is uncertain, and we could be adversely impacted if our specialized financial services areas become disfavored by wholesale lenders. In addition, brokered deposits may be difficult for us to retain or replace at attractive rates as they mature. 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 loans or lease originations and we may need to liquidate loans or other assets unexpectedly in order to repay obligations as they mature.
We regularly sell the majority of our first and second mortgage loan originations into the secondary market through the use of securitizations. At times, some of our financial assets, such as nontraditional, high loan-to-value home equity loans or residuals, may not be readily marketable, and we may not be able to sell assets at favorable prices when necessary. This could adversely affect our liquidity and funding for future originations and purchases of loans. Additionally, adverse changes in the securitization market could impair our ability to originate, purchase and sell home equity loans or other assets on a favorable or timely basis. For these reasons, we may experience earnings volatility.
WE HAVE CREDIT RISK INHERENT IN OUR ASSET PORTFOLIOS AND IN CERTAIN ASSETS THAT WE HAVE SOLD BUT CONTINUE TO SERVICE.
In our businesses, some borrowers may not repay loans that we make to them. As all financial institutions do, we maintain an allowance for loan and lease losses to absorb the level of losses that we think is probable in our portfolios. In light of greater uncertainty in the national economy and as we moved away from gain-on-sale accounting in our home equity lending line of business, we significantly increased our loss reserve in this line of business during the third and fourth quarters of 2001 and the first half of 2002. We expect that we will continue to have sizeable additions to our allowance as a percentage of home equity loans in this line of business as we continue to build our on-balance sheet portfolio and as this portfolio continues to increase and mature. Our allowance for loan and lease losses is based on management's periodic estimates of probable losses and may not be sufficient to cover the loan and lease losses that we actually incur, and charge-offs could exceed the amounts reserved.
In the near term, our strategy in our commercial banking line of business is to continue to grow this line of business in the markets in which we are currently operating. We may also pursue opportunities to expand into one or two new markets outside our traditional markets in south-central Indiana by establishing offices staffed by senior commercial loan officers who come to us from other commercial banks in these new markets. As of June 30, 2002, $901.9 million of our total loans, representing 52.7% of our total loan portfolio, were to borrowers outside of our south-central Indiana markets from branch offices we opened since 1999. The majority of these loans are commercial loans and many of these borrowers may not have experienced a complete business or economic cycle since they have been loan customers of ours. We cannot be sure that our loan loss experience with these new borrowers in these newer markets will be consistent with our loan loss experience in our traditional south-central Indiana markets. Because we have only a limited lending history with these customers, our ability to assess whether our loan loss reserve is adequate is less certain. Our actual loan loss experience in these markets may cause us to increase our reserves.
In our home equity lending line of business, we carry some assets on our balance sheet at the net present value of the expected future revenue stream of the instruments, measured at the time we sold the underlying portfolio of loans. These assets are residual interests in loans we have sold or securitized. We are exposed to continuing credit risk on these assets. Payment defaults by borrowers could exceed the default assumptions we used. If we do not collect the expected amount of interest, the value of our residual interests in the loans will be impaired. Our future earnings will be affected adversely because we are required to record a trading loss equal to impairment of the residual. In addition, we project the expected cash flows over the life of the residual interest using certain assumptions that are subject to prepayment, credit and interest rate risks. If our actual experience as to
If we experience defaults by borrowers in any of our businesses to a greater extent than anticipated, our earnings could be negatively impacted.
WE RELY HEAVILY ON OUR MANAGEMENT TEAM AND KEY PERSONNEL, AND THE UNEXPECTED LOSS OF KEY MANAGERS AND PERSONNEL MAY AFFECT OUR OPERATIONS ADVERSELY.
Each line of our five lines of business has a separate management team that operates its niche as a separate business unit. Our overall financial performance depends heavily on the results of these different specialized financial services businesses. Our success to date has been influenced strongly by our ability to attract and to retain experienced senior management to run our lines of businesses as well as executive management experienced in banking and financial services to oversee our business units. Our ability to retain executive officers and the current management teams of each of our lines of business will continue to be important to implement our strategies successfully.
Our lending officers in our newer banking markets have primary contact with our new customers in these markets and maintain strong community ties and personal banking relationships with our customer base, which is a key aspect of our business strategy and in increasing our market presence. We are dependent on these new lending officers to maintain and increase our growth in these markets.
The unexpected loss of the services of any key management or personnel, or the inability to recruit and retain qualified management and key personnel in the future, could have an adverse effect on our business and financial results.
OWNERSHIP OF OUR COMMON STOCK IS CONCENTRATED IN PERSONS AFFILIATED WITH US.
Our Chairman, William I. Miller, currently has voting control over approximately 40% of our common shares and, as a result, substantially controls the vote of a significant portion of our common shares. Together with Mr. Miller, directors and executive officers of Irwin beneficially own approximately 44% of our common shares. These persons likely have the ability to significantly influence 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.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO COMPETE EFFECTIVELY IN THE HIGHLY COMPETITIVE FINANCIAL SERVICES INDUSTRY.
The financial services industry, including commercial banking, mortgage banking, home equity lending and commercial finance, is highly competitive, and we and our operating subsidiaries encounter strong 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 we and our subsidiaries are and have advantages over us in providing certain services. Many of our competitors are significantly larger than we are and have greater access to capital and other resources. Also, our ability to compete effectively in our lines of business is dependent on our ability to adapt successfully to technological changes within the banking and financial services industry generally.
IF WE DO NOT MAKE INTEREST PAYMENTS UNDER THE DEBENTURES, THE 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.
The trust will depend solely on our payments on the debentures to pay amounts due to you on the preferred securities. If we default on our obligation to pay the principal or interest on the debentures, the trust will not have sufficient funds to pay distributions or the liquidation amount on the preferred securities. In that case, you will not be able to rely on the guarantee for payment of these amounts because the guarantee only applies if the trust has sufficient funds to make distributions or to pay the liquidation amount. Instead, you or the 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.
OUR ABILITY TO MAKE INTEREST PAYMENTS ON THE DEBENTURES TO THE TRUST MAY BE RESTRICTED IF WE DO NOT RECEIVE DIVIDENDS FROM OUR SUBSIDIARIES.
We are a holding company and substantially all of our assets are held by our subsidiaries. Our ability to make payments on the debentures when due will depend primarily on available cash resources at the bank holding company and dividends from our subsidiaries. The ability of our subsidiaries to pay dividends is subject to their profitability, financial condition, capital expenditures and other cash flow requirements. Dividends from our banking subsidiaries are also subject to regulatory restrictions. Our subsidiaries may not be able to pay dividends in the future.
Our bank subsidiary, Irwin Union Bank and Trust, together with its subsidiaries, holds the majority of our assets. We currently conduct our commercial banking line of business as well as portions of our home equity lending line of business through the bank and its subsidiaries. When we complete our realignment of Irwin Mortgage Corporation as a subsidiary of the bank in the fourth quarter of 2002, all of our mortgage banking revenues will also flow through the bank. 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 the bank. As a state member bank, Irwin Union Bank and Trust may not, without the approval of the Federal Reserve, declare a dividend if the total of all dividends declared in a calendar year exceeds the total of its net income for that year, combined with its retained net income of the preceding two years, less any required transfers to the surplus account. Under Indiana law, certain dividends require notice to, or approval by, the Indiana Department of Financial Institutions, and Irwin Union Bank and Trust may not pay dividends in an amount greater than its net profits then available, after deducting losses and bad debts.
Due to these regulatory limitations and the sizeable dividend paid to the holding company in the fourth quarter of 2001, until at least late 2004, we must obtain prior approval from the Indiana Department of Financial Institutions and the Federal Reserve Bank of Chicago before Irwin Union Bank and Trust can pay additional dividends to us. There can be no assurance the regulators will approve additional dividends by the bank in excess of the regulatory limits. Consequently, revenues from our commercial lending line of business, portions of our home equity lending line of business and, after we complete the realignment in the fourth quarter of 2002, revenues from Irwin Mortgage Corporation will not be available to the holding company to service interest payments on the debentures if regulatory approval to pay bank dividends is not obtained. Subsidiaries not structured in our organization as subsidiaries of our banks, including the subsidiary that currently holds our residual interests, are not subject to these regulatory limitations on the amount of dividends they can pay to us.
In the fourth quarter of 2001 we adopted a policy to maintain total capital at the bank at a benchmark level equal to 12% of risk-weighted assets, which is above the regulatory minimum, and so long as our board maintains this policy we do not expect to pay dividends from the bank to the holding company if the bank would fall below this benchmark. In addition, if our banking regulators believe we are not managing our risks acceptably, they have the authority to impose supervisory directives that could require us to maintain capital at the bank at higher than minimum required levels and could restrict the bank's ability to pay dividends, which in turn could affect our ability to pay distributions on the preferred securities.
Since bank dividends are currently restricted, our holding company cash flows are now primarily from amounts collected on the $183.3 million of residual interests outstanding as of June 30, 2002 related to prior securitizations in our home equity lending line of business that the bank dividended to the holding company in the fourth quarter of 2001 and, to a lesser extent, certain management fees and direct cost allocations collected from our subsidiaries. We believe these cash flows will be sufficient to fund interest payments on our holding company debt, including the debentures offered by this prospectus, as well as debt related to $146.7 million of trust preferred securities we currently have outstanding that ranks equal to the debentures, until the bank's dividend restrictions lapse. However, if losses in the underlying loan portfolios exceed our current loss assumptions imbedded in the valuation of the residuals, the cash flows on the residuals will be less than anticipated which could affect our ability to make interest payments on the debentures. If we do not make the payments on the debentures, you will not receive distributions on your preferred securities.
OUR REGULATORS COULD IMPOSE RESTRICTIONS ON INTEREST PAYMENTS TO THE TRUST.
We could also be precluded from making interest payments on the debentures by our regulators if in the future they were to perceive deficiencies in liquidity or regulatory capital levels at our holding company. If this were to occur, we may be required to obtain the consent of our regulators prior to paying dividends on our common stock or interest on the debentures. If consent became required and our regulators were to withhold their consent, we would likely exercise our right to defer interest payments on the debentures, and the trust would not have funds available to make distributions on the preferred securities during such period.
THE DEBENTURES AND THE GUARANTEE 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 and the guarantee are unsecured and will rank junior in priority of payment to our existing and future senior and subordinated indebtedness. Holding company debt that ranks senior to the debentures totaled $45.2 million outstanding principal amount at June 30, 2002. The debentures also rank equal to the debt related to $146.7 million of our trust preferred securities currently outstanding, and the instruments governing the debentures and this indebtedness limit our ability to make interest payments on the debentures unless payments are also made on the debt ranking equal to the debentures. The issuance of the debentures and the 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 and the guarantee 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 and the debentures.
WE HAVE THE OPTION TO DEFER INTEREST PAYMENTS ON THE DEBENTURES FOR SUBSTANTIAL PERIODS.
We may, at one or more times, defer interest payments on the debentures for up to 20 consecutive quarters. If we defer interest payments on the debentures, the trust will defer distributions on the preferred securities 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 held by the 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 trust if you sell the preferred securities before the end of any deferral period. During a deferral period, accrued but unpaid distributions will increase your tax basis in the preferred securities. If you sell the 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 HAVE MADE ONLY LIMITED COVENANTS IN THE INDENTURE AND THE TRUST AGREEMENT.
The indenture governing the debentures and the trust agreement governing the trust 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 or the preferred securities in the event we experience significant adverse changes in our financial condition or results of operations. In addition, neither the indenture nor the trust agreement 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 or the guarantee.
WE MAY REDEEM THE DEBENTURES BEFORE SEPTEMBER 30, 2032.
Under the following circumstances, we may redeem the debentures before their stated maturity without payment of premium:
o We may redeem the debentures, in whole or in part, at any time on or after September 30, 2007.
o We may redeem the 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.
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 if it is otherwise in our interest to redeem the debentures. If the debentures are redeemed, the trust must redeem preferred securities having an aggregate liquidation amount equal to the aggregate principal amount of debentures, 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.
WE CAN DISTRIBUTE THE DEBENTURES TO YOU, WHICH MAY HAVE ADVERSE TAX CONSEQUENCES FOR YOU; THIS RIGHT COULD ALSO ADVERSELY AFFECT THE MARKET PRICE OF THE PREFERRED SECURITIES.
The trust may be dissolved at any time before maturity of the debentures. If this happens, the trustee may distribute the debentures to you under the terms of the trust agreement.
We cannot predict the market price for the debentures that may be distributed in exchange for preferred securities upon liquidation of the trust. The preferred securities or the debentures that you may receive if the trust is liquidated may trade at a discount to the price that you paid to purchase the preferred securities. Because you may receive debentures, your investment decision with regard to the preferred securities will also be an investment decision with regard to the debentures. You should carefully review all of the information contained in this prospectus regarding the debentures.
Under current interpretations of federal income tax laws supporting classification of the trust as a grantor trust for tax purposes, a distribution of the debentures to you upon the dissolution of the trust would not be a taxable event to you. Nevertheless, if the 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 would be a taxable event to you. In addition, if there is a change in law, a distribution of the debentures upon the dissolution of the trust could be a taxable event to you.
There is currently no public market for the preferred securities. Although the preferred securities have been approved for listing on the New York Stock Exchange, there is no guarantee that an active or liquid trading market will develop for the preferred securities or that the listing of the preferred securities will continue on the New York Stock Exchange. If an active trading market does not develop, the market price and liquidity of the preferred securities will be adversely affected. Even if an active public market does develop, there is no guarantee that the market price for the preferred securities will equal or exceed the price you pay for the preferred securities.
Future trading prices of the 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 has been set at the applicable liquidation amount of the preferred securities and may be greater than the market price of the security following the offering.
The market price for the preferred securities and the debentures that you may receive in a distribution is also likely to decline during any period that we are deferring interest payments on the debentures.
YOU MUST RELY ON THE PROPERTY TRUSTEE TO ENFORCE YOUR RIGHTS IF THERE IS AN EVENT OF DEFAULT UNDER THE INDENTURE.
You may not be able to directly enforce your rights against us if an event of default under the indenture occurs. If an event of default under the indenture occurs and is continuing, this event will also be an event of default under the trust agreement. In that case, you must rely on the enforcement by the property trustee of its rights as holder of the debentures against us. The holders of a majority in liquidation amount of the preferred securities will have the right to direct the 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 property trustee's rights. If an event of default occurs under the trust agreement that is attributable to our failure to pay interest or principal on the debentures, or if we default under the guarantee, you may proceed directly against us. You will not be able to exercise directly any other remedies available to the holders of the debentures unless the property trustee fails to do so.
AS A HOLDER OF PREFERRED SECURITIES YOU HAVE LIMITED VOTING RIGHTS.
Holders of preferred securities have limited voting rights. Your voting rights pertain primarily to amendments to the trust agreement. In general, only we can replace or remove any of the trustees. However, if an event of default under the trust agreement occurs and is continuing, the holders of at least a majority in aggregate liquidation amount of the preferred securities may replace the property trustee and the Delaware trustee.
Certain statements contained in 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. We intend 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 are including this statement for purposes of invoking these safe harbor provisions. You can identify these statements from our use of the words "plan," "forecast," "estimate," "project," "believe," "intend," "anticipate," "expect," "target," "is likely," "will," "may" and similar expressions. These forward-looking statements may include, among other things:
o statements and assumptions relating to projected growth, earnings, earnings per share, and other financial performance measures as well as management's short-term and long-term performance goals;
o statements relating to the anticipated effects on results of operations or financial condition from recent and expected developments or events, including the recently revised regulatory capital rules relating to residual interests;
o statements relating to our business and growth strategies, including potential acquisitions; and
o any other statements, projections or assumptions that 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 18 and elsewhere in this prospectus. We undertake no obligation to update publicly any of these statements in light of future events.
The trust will invest all of the proceeds from the sale of the preferred securities in the debentures. We anticipate that the net proceeds to us from the sale of the debentures will be approximately $28,610,000 after deduction of offering expenses, estimated to be $265,000, and deduction of underwriting commissions.
The purpose of the offering is to provide capital to fund continued growt