e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 0-6835
IRWIN FINANCIAL CORPORATION
(Exact Name of Corporation as Specified in its Charter)
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Indiana
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35-1286807 |
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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500 Washington Street Columbus, Indiana
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47201 |
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(Address of Principal Executive
Offices) |
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(Zip Code) |
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(812) 376-1909
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www.irwinfinancial.com |
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(Corporations Telephone Number, Including Area Code)
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(Web Site) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act (Check one):
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Large accelerated filer o Accelerated filer þ Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
oYes þ No
As of July 27, 2007, there were outstanding 29,330,993 common shares, no par value, of the
Registrant.
FORM 10-Q
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
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June 30, |
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December 31, |
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2007 |
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2006 |
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(Dollars in thousands) |
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Assets: |
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|
|
|
|
|
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Cash and cash equivalents |
|
$ |
80,234 |
|
|
$ |
145,765 |
|
Interest-bearing deposits with financial institutions |
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|
40,922 |
|
|
|
53,106 |
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Residual interests |
|
|
10,414 |
|
|
|
10,320 |
|
Investment securities- held-to-maturity (Fair value: $17,335 at June 30, 2007
and $17,893 at December 31, 2006) |
|
|
17,431 |
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|
18,066 |
|
Investment securities- available-for-sale |
|
|
124,882 |
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|
|
110,364 |
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Loans held for sale |
|
|
26,886 |
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|
|
237,510 |
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Loans and leases, net of unearned income Note 3 |
|
|
5,511,756 |
|
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|
5,238,193 |
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Less: Allowance for loan and lease losses Note 4 |
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(92,140 |
) |
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|
(74,468 |
) |
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|
|
|
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5,419,616 |
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|
|
5,163,725 |
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Servicing assets Note 5 |
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27,920 |
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31,949 |
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Accounts receivable |
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70,898 |
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208,585 |
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Accrued interest receivable |
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|
25,143 |
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26,470 |
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Premises and equipment |
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|
41,990 |
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|
36,211 |
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Other assets |
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184,324 |
|
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139,314 |
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Assets held for sale Note 2 |
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27,262 |
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|
|
56,573 |
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Total assets |
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$ |
6,097,922 |
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$ |
6,237,958 |
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Liabilities and Shareholders Equity: |
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Deposits |
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Noninterest-bearing |
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$ |
336,801 |
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$ |
687,626 |
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Interest-bearing |
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1,799,748 |
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1,756,109 |
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Certificates of deposit over $100,000 |
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1,181,234 |
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1,107,781 |
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3,317,783 |
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3,551,516 |
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Short-term borrowings Note 6 |
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613,200 |
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602,443 |
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Collateralized debt Note 7 |
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1,327,897 |
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1,173,012 |
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Other long-term debt |
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233,881 |
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233,889 |
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Other liabilities |
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97,516 |
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146,596 |
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Total liabilities |
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5,590,277 |
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5,707,456 |
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Commitments and contingencies Note 11 |
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Shareholders equity |
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Preferred stock, no par value authorized 4,000,000 shares; none issued |
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Noncumulative perpetual preferred stock 15,000 shares authorized and issued |
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14,441 |
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14,518 |
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Common stock, no par value authorized 40,000,000 shares; issued 29,895,483
shares and 29,879,773 shares as of June 30, 2007 and December 31, 2006; 715,599
shares 143,543 shares in treasury as of June 30, 2007 and December 31, 2006 |
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116,246 |
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116,192 |
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Additional paid-in capital |
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|
2,401 |
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|
1,583 |
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Accumulated other comprehensive loss, net of deferred income tax benefit of
$4,785 and $4,813 as of June 30, 2007 and December 31, 2006 |
|
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(932 |
) |
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(4,364 |
) |
Retained earnings |
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|
389,349 |
|
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|
405,835 |
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|
|
|
|
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|
521,505 |
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|
533,764 |
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Less treasury stock, at cost |
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(13,860 |
) |
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(3,262 |
) |
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Total shareholders equity |
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507,645 |
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|
530,502 |
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Total liabilities and shareholders equity |
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$ |
6,097,922 |
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|
$ |
6,237,958 |
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|
The accompanying notes are an integral part of the consolidated financial statements.
3
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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For the Three Months Ended June 30, |
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2007 |
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2006 |
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(Dollars in thousands, except per share) |
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Interest income: |
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|
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|
|
|
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Loans and leases |
|
$ |
124,198 |
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$ |
105,096 |
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Loans held for sale |
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|
1,136 |
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|
9,804 |
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Residual interests |
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|
280 |
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|
467 |
|
Investment securities |
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|
2,562 |
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|
2,221 |
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Federal funds sold |
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|
787 |
|
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|
21 |
|
|
|
|
|
|
|
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Total interest income |
|
|
128,963 |
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|
117,609 |
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Interest expense: |
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|
|
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|
|
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Deposits |
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|
34,980 |
|
|
|
34,618 |
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Short-term borrowings |
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|
7,096 |
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|
3,393 |
|
Collateralized debt |
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|
17,113 |
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|
11,596 |
|
Other long-term debt |
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|
3,930 |
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4,130 |
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Total interest expense |
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|
63,119 |
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|
|
53,737 |
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|
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Net interest income |
|
|
65,844 |
|
|
|
63,872 |
|
Provision for loan and lease losses Note 4 |
|
|
19,454 |
|
|
|
6,826 |
|
|
|
|
|
|
|
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Net interest income after provision for loan and lease losses |
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|
46,390 |
|
|
|
57,046 |
|
Other income: |
|
|
|
|
|
|
|
|
Loan servicing fees |
|
|
5,116 |
|
|
|
10,849 |
|
Amortization and impairment of servicing assets |
|
|
(2,288 |
) |
|
|
(5,643 |
) |
Gain (loss) from sales of loans and loans held for sale |
|
|
3,268 |
|
|
|
(3,591 |
) |
Trading gains |
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|
256 |
|
|
|
1 |
|
Derivative (losses) gains, net |
|
|
(3,252 |
) |
|
|
672 |
|
Other |
|
|
6,481 |
|
|
|
6,758 |
|
|
|
|
|
|
|
|
|
|
|
9,581 |
|
|
|
9,046 |
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|
|
|
|
|
|
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Other expense: |
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|
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Salaries |
|
|
23,538 |
|
|
|
26,479 |
|
Pension and other employee benefits |
|
|
6,696 |
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|
|
7,627 |
|
Office expense |
|
|
2,539 |
|
|
|
2,190 |
|
Premises and equipment |
|
|
5,288 |
|
|
|
5,438 |
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Marketing and development |
|
|
1,368 |
|
|
|
722 |
|
Professional fees |
|
|
2,681 |
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|
|
2,469 |
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Other |
|
|
4,954 |
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|
|
6,370 |
|
|
|
|
|
|
|
|
|
|
|
47,064 |
|
|
|
51,295 |
|
|
|
|
|
|
|
|
Income before income taxes from continuing operations |
|
|
8,907 |
|
|
|
14,797 |
|
Provision for income taxes |
|
|
3,436 |
|
|
|
5,828 |
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
5,471 |
|
|
|
8,969 |
|
Loss from discontinued operations, net of $3,968 and $4,054 income tax
benefit, respectively Note 2 |
|
|
(5,860 |
) |
|
|
(6,098 |
) |
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(389 |
) |
|
$ |
2,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations: Note 9 |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.18 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.17 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: Note 9 |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.02 |
) |
|
$ |
0.10 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.03 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.12 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
4
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands, except per share) |
|
Interest income: |
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
243,547 |
|
|
$ |
202,981 |
|
Loans held for sale |
|
|
6,078 |
|
|
|
21,210 |
|
Residual interests |
|
|
549 |
|
|
|
1,130 |
|
Investment securities |
|
|
5,019 |
|
|
|
3,706 |
|
Federal funds sold |
|
|
807 |
|
|
|
48 |
|
|
|
|
|
|
|
|
Total interest income |
|
|
256,000 |
|
|
|
229,075 |
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
Deposits |
|
|
68,431 |
|
|
|
64,299 |
|
Short-term borrowings |
|
|
14,902 |
|
|
|
7,499 |
|
Collateralized debt |
|
|
32,928 |
|
|
|
22,707 |
|
Other long-term debt |
|
|
7,768 |
|
|
|
9,121 |
|
|
|
|
|
|
|
|
Total interest expense |
|
|
124,029 |
|
|
|
103,626 |
|
|
|
|
|
|
|
|
Net interest income |
|
|
131,971 |
|
|
|
125,449 |
|
Provision for loan and lease losses Note 4 |
|
|
42,662 |
|
|
|
16,019 |
|
|
|
|
|
|
|
|
Net interest income after provision for loan and lease losses |
|
|
89,309 |
|
|
|
109,430 |
|
Other income: |
|
|
|
|
|
|
|
|
Loan servicing fees |
|
|
11,028 |
|
|
|
18,957 |
|
Amortization and impairment of servicing assets |
|
|
(7,237 |
) |
|
|
(11,545 |
) |
Loss from sales of loans and loans held for sale |
|
|
(2,639 |
) |
|
|
(823 |
) |
Trading losses |
|
|
(8 |
) |
|
|
(217 |
) |
Derivative (losses) gains, net |
|
|
(4,341 |
) |
|
|
3,439 |
|
Other |
|
|
11,964 |
|
|
|
13,231 |
|
|
|
|
|
|
|
|
|
|
|
8,767 |
|
|
|
23,042 |
|
|
|
|
|
|
|
|
|
|
Other expense: |
|
|
|
|
|
|
|
|
Salaries |
|
|
49,273 |
|
|
|
50,143 |
|
Pension and other employee benefits |
|
|
14,434 |
|
|
|
15,400 |
|
Office expense |
|
|
4,876 |
|
|
|
4,284 |
|
Premises and equipment |
|
|
10,915 |
|
|
|
10,473 |
|
Marketing and development |
|
|
2,577 |
|
|
|
1,390 |
|
Professional fees |
|
|
4,767 |
|
|
|
4,867 |
|
Other |
|
|
12,507 |
|
|
|
17,551 |
|
|
|
|
|
|
|
|
|
|
|
99,349 |
|
|
|
104,108 |
|
|
|
|
|
|
|
|
(Loss) income before income taxes from continuing operations |
|
|
(1,273 |
) |
|
|
28,364 |
|
(Benefit) provision for income taxes |
|
|
(650 |
) |
|
|
10,705 |
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations |
|
|
(623 |
) |
|
|
17,659 |
|
Loss from discontinued operations, net of $6,710 and $11,080 income tax
benefit, respectively Note 2 |
|
|
(9,895 |
) |
|
|
(16,646 |
) |
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(10,518 |
) |
|
$ |
1,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations: Note 9 |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.04 |
) |
|
$ |
0.60 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.06 |
) |
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: Note 9 |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.38 |
) |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.39 |
) |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.24 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
5
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
For the Six Months Ended June 30, 2007, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined |
|
Additional |
|
|
|
|
|
|
|
|
|
Perpetual |
|
|
|
|
|
|
Retained |
|
Foreign |
|
Unrealized Gain/Loss |
|
Benefit |
|
Paid in |
|
Common |
|
Treasury |
|
Preferred |
|
|
Total |
|
Earnings |
|
Currency |
|
Securities |
|
Derivatives |
|
Plans |
|
Capital |
|
Stock |
|
Stock |
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007 |
|
$ |
530,502 |
|
|
$ |
405,835 |
|
|
$ |
2,884 |
|
|
$ |
(344 |
) |
|
$ |
(30 |
) |
|
$ |
(6,874 |
) |
|
$ |
1,583 |
|
|
$ |
116,192 |
|
|
$ |
(3,262 |
) |
|
$ |
14,518 |
|
Net loss |
|
|
(10,518 |
) |
|
|
(10,518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investment
securities net of $307 tax benefit |
|
|
(461 |
) |
|
|
|
|
|
|
|
|
|
|
(461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on derivatives
net of $355 tax liability |
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency adjustment |
|
|
3,360 |
|
|
|
|
|
|
|
3,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
3,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
(7,086 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends common stock |
|
|
(7,033 |
) |
|
|
(7,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends preferred stock |
|
|
(678 |
) |
|
|
(678 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS 156 adoption |
|
|
1,743 |
|
|
|
1,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit on stock option exercises |
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense |
|
|
986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issuance costs |
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77 |
) |
Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of 668,308 shares |
|
|
(12,753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,753 |
) |
|
|
|
|
Sales of 97,376 shares |
|
|
1,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(282 |
) |
|
|
54 |
|
|
|
2,155 |
|
|
|
|
|
|
|
|
Balance at June 30, 2007 |
|
$ |
507,645 |
|
|
$ |
389,349 |
|
|
$ |
6,244 |
|
|
$ |
(805 |
) |
|
$ |
503 |
|
|
$ |
(6,874 |
) |
|
$ |
2,401 |
|
|
$ |
116,246 |
|
|
$ |
(13,860 |
) |
|
$ |
14,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2006 |
|
$ |
512,334 |
|
|
$ |
418,784 |
|
|
$ |
3,341 |
|
|
$ |
(373 |
) |
|
$ |
754 |
|
|
$ |
(274 |
) |
|
$ |
50 |
|
|
$ |
112,000 |
|
|
$ |
(21,948 |
) |
|
$ |
|
|
Net income |
|
|
1,013 |
|
|
|
1,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investment
securities net of $249 tax benefit |
|
|
(374 |
) |
|
|
|
|
|
|
|
|
|
|
(374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivative
net of $38 tax benefit |
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency adjustment |
|
|
1,020 |
|
|
|
|
|
|
|
1,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
1,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends |
|
|
(6,541 |
) |
|
|
(6,541 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit on stock option exercises |
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense |
|
|
1,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of trust preferred shares
to 1,013,938 shares of common stock |
|
|
19,513 |
|
|
|
(1,058 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,070 |
|
|
|
19,501 |
|
|
|
|
|
Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of 48,433 shares |
|
|
(952 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(952 |
) |
|
|
|
|
Sales of 147,636 shares |
|
|
2,199 |
|
|
|
(508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(406 |
) |
|
|
603 |
|
|
|
2,510 |
|
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
$ |
529,581 |
|
|
$ |
411,690 |
|
|
$ |
4,361 |
|
|
$ |
(747 |
) |
|
$ |
697 |
|
|
$ |
(274 |
) |
|
$ |
1,070 |
|
|
$ |
113,673 |
|
|
$ |
(889 |
) |
|
$ |
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
6
IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Six Months ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
(Loss) Income from continuing operations |
|
$ |
(623 |
) |
|
$ |
17,659 |
|
Loss from discontinued operations |
|
|
(9,895 |
) |
|
|
(16,646 |
) |
|
|
|
|
|
|
|
Net (loss) income |
|
|
(10,518 |
) |
|
|
1,013 |
|
Adjustments to reconcile net (loss) income to cash provided
by operating activities: |
|
|
|
|
|
|
|
|
Depreciation, amortization, and accretion, net |
|
|
4,834 |
|
|
|
3,229 |
|
Amortization and impairment of servicing assets |
|
|
7,487 |
|
|
|
30,663 |
|
Provision for loan and lease losses |
|
|
42,662 |
|
|
|
16,048 |
|
Loss (gain) from sales of loans held for sale |
|
|
10,071 |
|
|
|
(32,333 |
) |
Originations and purchases of loans held for sale |
|
|
(368,697 |
) |
|
|
(5,063,058 |
) |
Proceeds from sales and repayments of loans held for sale |
|
|
419,859 |
|
|
|
5,573,814 |
|
Net decrease in residuals |
|
|
456 |
|
|
|
8,210 |
|
Net decrease in accounts receivable |
|
|
137,687 |
|
|
|
50,136 |
|
Other, net |
|
|
(90,289 |
) |
|
|
(39,893 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
153,552 |
|
|
|
547,829 |
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Proceeds from maturities/calls of investment securities: |
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
2,114 |
|
|
|
895 |
|
Available-for-sale |
|
|
1,962 |
|
|
|
1,810 |
|
Purchase of investment securities: |
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
(1,482 |
) |
|
|
(1,426 |
) |
Available-for-sale |
|
|
(17,278 |
) |
|
|
(13,184 |
) |
Net decrease in interest-bearing deposits |
|
|
12,184 |
|
|
|
855 |
|
Net increase in loans, excluding sales |
|
|
(156,541 |
) |
|
|
(463,668 |
) |
Proceeds from sale of loans |
|
|
34,385 |
|
|
|
26,062 |
|
Other, net |
|
|
(9,213 |
) |
|
|
(5,938 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(133,869 |
) |
|
|
(454,594 |
) |
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Net decrease in deposits |
|
|
(233,733 |
) |
|
|
(30,640 |
) |
Net increase (decrease) in short-term borrowings |
|
|
10,757 |
|
|
|
(243,564 |
) |
Proceeds from issuance of collateralized debt |
|
|
331,781 |
|
|
|
351,325 |
|
Repayments of collateralized debt |
|
|
(176,924 |
) |
|
|
(166,109 |
) |
Proceeds from the issuance of trust preferred securities |
|
|
|
|
|
|
31,500 |
|
Repayments of long term debt |
|
|
(7 |
) |
|
|
(32,116 |
) |
Purchase of treasury stock for employee benefit plans |
|
|
(12,753 |
) |
|
|
(952 |
) |
Proceeds from sale of stock for employee benefit plans |
|
|
2,091 |
|
|
|
2,518 |
|
Dividends paid |
|
|
(7,711 |
) |
|
|
(6,541 |
) |
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(86,499 |
) |
|
|
(94,579 |
) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
1,285 |
|
|
|
538 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(65,531 |
) |
|
|
(806 |
) |
Cash and cash equivalents at beginning of period |
|
|
145,765 |
|
|
|
155,486 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
80,234 |
|
|
$ |
154,680 |
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash flow during the period: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
122,412 |
|
|
$ |
115,450 |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
11,491 |
|
|
$ |
21,231 |
|
|
|
|
|
|
|
|
Noncash transactions: |
|
|
|
|
|
|
|
|
Adoption of FAS 156 |
|
$ |
2,905 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Loans transferred from held-for-sale to held-for-investment |
|
$ |
166,773 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
$ |
7,703 |
|
|
$ |
4,437 |
|
|
|
|
|
|
|
|
Conversion of trust preferred stock to common stock |
|
$ |
|
|
|
$ |
19,513 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Accounting Policies, Management Judgments and Accounting Estimates
Consolidation: Irwin Financial Corporation and its subsidiaries (the Corporation) provide
financial services throughout the United States (U.S.) and Canada. We are engaged in commercial
banking, commercial finance and home equity lending. We are in the process of exiting the mortgage
banking segment. Our direct and indirect subsidiaries include, Irwin Union Bank and Trust Company,
Irwin Union Bank, F.S.B., Irwin Commercial Finance Corporation, Irwin Home Equity Corporation and
Irwin Mortgage Corporation (IMC). Intercompany balances and transactions have been eliminated in
consolidation. In the opinion of management, the financial statements reflect all material
adjustments necessary for a fair presentation. The Corporation does not meet the criteria as
primary beneficiary for our wholly-owned trusts holding our company-obligated mandatorily
redeemable preferred securities established by Financial Accounting Standards Board (FASB)
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. As a result, these
trusts are not consolidated.
Because we are in the process of exiting the mortgage banking line of business, the financial
statements and footnotes within this report conform to the presentation required in Statement of
Financial Accounting Standard (SFAS) 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Certain of the balance sheet assets related to this line of business are being reported as
assets held for sale. See Note 2 for additional information.
Use of Estimates: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents Defined: For purposes of the statement of cash flows, we consider
cash and due from banks to be cash equivalents.
Allowance for Loan and Lease Losses: The allowance for loan and lease losses is an estimate
based on managements judgment applying the principles of SFAS 5, Accounting for Contingencies,
SFAS 114, Accounting by Creditors for Impairment of a Loan, and SFAS 118, Accounting by
Creditors for Impairment of a Loan Income Recognition and Disclosures. The allowance is
maintained at a level we believe is adequate to absorb probable losses inherent in the loan and
lease portfolio. We perform an assessment of the adequacy of the allowance on a quarterly basis.
Within the allowance, there are specific and expected loss components. The specific loss
component is assessed for loans we believe to be impaired in accordance with SFAS 114. We have
defined impairment as nonaccrual loans. For loans determined to be impaired, we measure the level
of impairment by comparing the loans carrying value to fair value using one of the following fair
value measurement techniques: present value of expected future cash flows, observable market price,
or fair value of the associated collateral. An allowance is established when the fair value implies
a value that is lower than the carrying value of that loan. In addition to establishing allowance
levels for specifically identified impaired loans, management determines an allowance for all other
loans in the portfolio for which historical experience indicates that certain losses exist. These
loans are segregated by major product type, and in some instances, by aging, with an estimated loss
ratio applied against each product type and aging category. The loss ratio is generally based upon
historic loss experience for each loan type as adjusted for certain environmental factors
management believes to be relevant.
It is our policy to promptly charge off any commercial loan, or portion thereof, which is
deemed to be uncollectible. This includes, but is not limited to, any loan rated Loss by the
regulatory authorities. Impaired commercial credits are considered on a case-by-case basis. The
amount charged off includes any accrued interest. Unless there is a significant reason to the
contrary, consumer loans are charged off when deemed uncollectible, but generally no later than
when a loan is past due 180 days.
Servicing Assets: When we securitize or sell loans, we periodically retain the right to
service the underlying loans sold. A portion of the cost basis of loans sold is allocated to this
servicing asset based on its fair value relative to the loans sold and the servicing asset
combined. Prior to the January 1, 2007, all servicing rights were carried at lower of cost or fair
market value. We use a combination of observed pricing on similar, market-traded servicing rights
and internal valuation models that calculate the present value of future cash flows to determine
the fair value of the servicing assets. These models are supplemented and calibrated to market
prices using inputs from independent servicing brokers, industry surveys and valuation experts. In
using this valuation method, we incorporate assumptions that we believe market participants would
use in estimating future net servicing income, which include estimates of the
8
cost of servicing per loan, the discount rate, float value, an inflation rate, ancillary income per
loan, prepayment speeds, and default rates. Prior to January 1, 2007, all servicing assets were
amortized over the period of and in proportion to estimated net servicing income.
For servicing assets associated with second mortgages and high loan-to-value first mortgages,
the fair value measurement method of reporting these servicing rights was elected beginning January
1, 2007, in accordance with SFAS 156, Accounting for Servicing of Financial Assets. Under the
fair value method, we measure servicing assets at fair value at each reporting date and report
changes in fair value in earnings in the period in which the changes occur. All remaining servicing
rights follow the amortization method for subsequent measurement whereby these servicing rights are
amortized in proportion to and over the period of estimated net servicing income.
Incentive Servicing Fees: For whole loan sales of certain home equity loans, in addition to
our normal servicing fee, we have the right to an incentive servicing fee (ISF) that will provide
cash payments to us if a pre-established return for the certificate holders and certain
structure-specific loan credit and servicing performance metrics are met. Generally the
structure-specific metrics involved both a delinquency and a loss test. The delinquency test is
satisfied if, as of the last business day of the preceding month, delinquencies on the current pool
of mortgage loans are less than or equal to a given percentage. The loss test is satisfied if, on
the last business day of the preceding month, the percentage of cumulative losses on the original
pool of mortgage loans is less than or equal to the applicable percentage as outlined in the
specific deal documents. We receive ISF payments monthly, once the pre-established return has been
paid to the certificate holder, if the delinquency and loss percentages are within guidelines. If
we are terminated or replaced for cause as servicer under the securitization, the cash flow stream
under the ISF contract terminates.
We account for ISFs similar to management contracts under Emerging Issues Task Force Topic No.
D-96, Accounting for Management Fees Based on a Formula. Accordingly, we recognize revenue on a
cash basis as the pre-established performance metrics are met and cash is due.
Income Taxes: A consolidated tax return is filed for all eligible entities. In accordance with
SFAS 109, deferred income taxes are computed using the liability method, which establishes a
deferred tax asset or liability based on temporary differences between the tax basis of an asset or
liability and the basis recorded in the financial statements.
Recent Accounting Developments: In March 2006, the FASB issued SFAS 156, Accounting for
Servicing of Financial Assets, an amendment of FASB Statement No. 140. This statement requires
that all separately recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable. The statement permits, but does not require, the subsequent measurement
of classes of servicing assets and servicing liabilities at fair value, to better align with the
use of derivatives used to mitigate the inherent risks of these assets and liabilities. Offsetting
changes in fair value are recognized through income. This statement is effective as of January 1,
2007. We elected the fair value treatment for servicing rights associated with second mortgage and
high loan to value first mortgage loans at our home equity lending line of business. Implementation
of the fair value treatment under SFAS 156 resulted in a one-time increase to retained earnings of
$1.7 million. This represents the after-tax effect of the $2.9 million fair value adjustment to the
mortgage servicing asset as of January 1, 2007.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. This statement defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. We are currently evaluating this new statement and have not yet
determined the ultimate impact it will have on our financial statements.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities. This statement permits entities to choose to measure certain financial
instruments at fair value. This statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007. Early adoption is permitted as of January 1, 2007. We
elected not to early adopt this statement. We are currently evaluating this new statement and have
not yet determined the ultimate impact it will have on our financial statements once it becomes
effective in 2008.
Effective January 1, 2007, we adopted FASB Interpretation Number 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (FIN No. 48), which
prescribes a single, comprehensive model for how a company should recognize, measure, present and
disclose in its financial statements uncertain tax positions that the company has taken or expects
to take on its tax returns. Upon adoption of FIN No. 48, we did not recognize any material
adjustment in our liability for unrecognized tax benefits. As of January 1, 2007, our unrecognized
tax benefits were $10.7 million, $0.7 million of which would, if
9
recognized, favorably affect the effective tax rate in future periods. As of June 30, 2007, our
unrecognized tax benefits were $15.9 million, $0.7 million of which would, if recognized, favorably
affect the effective tax rate in future periods.
Our continuing practice is to recognize interest and penalties related to unrecognized tax
benefits in income tax expense. As of January 1, 2007, we had approximately $0.8 million accrued
for interest and no accrual for penalties related to unrecognized tax benefits. As of June 30,
2007, we have approximately $1.2 million accrued for interest related to unrecognized tax benefits.
Tax years 2003-2006 remain open to examination by major taxing jurisdictions. Certain state
tax returns remain open to examination for tax years 2002-2006.
Reclassifications: Certain amounts in the 2006 consolidated financial statements have been
reclassified to conform to the 2007 presentation. These changes had no impact on previously
reported net income or shareholders equity.
Note 2 Discontinued Operations
In 2006, we sold the mortgage banking line of business origination operation, including the
majority of this segments loans held for sale, as well as the majority of this segments
capitalized mortgage servicing rights to five separate buyers. In January 2007, we transferred a
nominal amount of assets associated with this segments servicing platform (but not mortgage
servicing rights) to a sixth buyer. The majority of the cash proceeds from the sales have been
collected. We have staff continuing to work at IMC through the wind-down of our remaining assets,
such as construction loans and repurchased loans.
In accordance with the provisions of SFAS 144, the results of operations of the mortgage
banking line of business for the current and prior periods have been reported as discontinued
operations. In addition, certain of the remaining assets for this segment have been reclassified as
held for sale in the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Net revenues |
|
$ |
(3,955 |
) |
|
$ |
21,153 |
|
|
$ |
(8,676 |
) |
|
$ |
29,514 |
|
Other expense |
|
|
(5,873 |
) |
|
|
(31,305 |
) |
|
|
(7,929 |
) |
|
|
(57,240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(9,828 |
) |
|
|
(10,152 |
) |
|
|
(16,605 |
) |
|
|
(27,726 |
) |
Income taxes |
|
|
3,968 |
|
|
|
4,054 |
|
|
|
6,710 |
|
|
|
11,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations |
|
$ |
(5,860 |
) |
|
$ |
(6,098 |
) |
|
$ |
(9,895 |
) |
|
$ |
(16,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Loans, net of allowance, and Loans held for sale |
|
$ |
21,248 |
|
|
$ |
48,555 |
|
Net servicing asset |
|
|
35 |
|
|
|
385 |
|
Other assets |
|
|
5,979 |
|
|
|
7,633 |
|
|
|
|
|
|
|
|
Assets held for sale |
|
$ |
27,262 |
|
|
$ |
56,573 |
|
|
|
|
|
|
|
|
10
Note 3 Loans and Leases
Loans and leases are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Commercial, financial and agricultural |
|
$ |
2,291,303 |
|
|
$ |
2,249,988 |
|
Residential real estate-construction |
|
|
337,156 |
|
|
|
377,601 |
|
Residential real estate-mortgage |
|
|
1,698,084 |
|
|
|
1,522,616 |
|
Consumer |
|
|
25,274 |
|
|
|
31,581 |
|
Commercial financing |
|
|
|
|
|
|
|
|
Franchise financing |
|
|
783,102 |
|
|
|
699,969 |
|
Domestic leasing |
|
|
303,102 |
|
|
|
296,056 |
|
Canadian leasing |
|
|
417,460 |
|
|
|
358,783 |
|
Unearned income |
|
|
|
|
|
|
|
|
Franchise financing |
|
|
(248,889 |
) |
|
|
(211,480 |
) |
Domestic leasing |
|
|
(42,873 |
) |
|
|
(42,782 |
) |
Canadian leasing |
|
|
(51,963 |
) |
|
|
(44,139 |
) |
|
|
|
Total |
|
$ |
5,511,756 |
|
|
$ |
5,238,193 |
|
|
|
|
Note 4 Allowance for Loan and Lease Losses
Changes in the allowance for loan and lease losses are summarized below:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
December 31, 2006 |
|
|
And the Six Months |
|
And the Year |
|
|
Then Ended |
|
Then Ended |
|
|
(Dollars in thousands) |
Balance at beginning of year |
|
$ |
74,468 |
|
|
$ |
59,223 |
|
Provision for loan and lease losses |
|
|
42,662 |
|
|
|
35,101 |
|
Charge-offs |
|
|
(29,837 |
) |
|
|
(30,810 |
) |
Recoveries |
|
|
5,326 |
|
|
|
11,208 |
|
Reduction due to reclassification or sale of loans |
|
|
(796 |
) |
|
|
(246 |
) |
Foreign currency adjustment |
|
|
317 |
|
|
|
(8 |
) |
|
|
|
Balance at end of period |
|
$ |
92,140 |
|
|
$ |
74,468 |
|
|
|
|
Note 5 Servicing Assets
We adopted the fair value treatment for servicing assets associated with our second mortgage
and high loan-to-value first mortgage portfolios as of January 1, 2007. The effect of remeasuring
the selected servicing assets at fair value was reported as a cumulative-effect adjustment to
retained earnings, increasing retained earnings $1.7 million, net of tax. Changes in fair value
subsequent to adoption were recorded through amortization and impairment of servicing assets. All
other first mortgage loans continue to be accounted for using the amortization method with
impairment recognized. These mortgage servicing assets are recorded at lower of their allocated
cost basis or fair value and a valuation allowance is recorded for any stratum that is impaired.
We estimate the fair value of the servicing assets 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. The primary assumptions we use for valuing our mortgage servicing assets
include prepayment speeds, default rates, cost to service and discount rates. We review these
assumptions on a regular basis to ensure that they remain consistent with current market
conditions. Additionally, we periodically receive third party estimates of the portfolio value from
independent valuation firms. Inaccurate assumptions in valuing mortgage servicing rights could
adversely affect our results of operations. For servicing rights accounted for under the
amortization method, we also review these mortgage servicing assets for other-than-temporary
impairment each quarter and recognize a direct write-down when the recoverability of a recorded
valuation allowance is determined to be remote. Unlike a valuation allowance, a direct write-down
permanently reduces the unamortized cost of the mortgage servicing rights asset and the
valuation allowance, precluding subsequent reversals.
11
Changes in our fair value servicing assets are shown below:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
December 31, 2006 |
|
|
|
And the Six Months |
|
|
And the Year |
|
|
|
Then Ended |
|
|
Then Ended |
|
|
|
(Dollars in thousands) |
|
Beginning balance |
|
$ |
27,725 |
|
|
NA |
Gain from initial adoption of SFAS 156 |
|
|
2,905 |
|
|
NA |
Changes in fair value |
|
|
(6,554 |
) |
|
NA |
|
|
|
|
|
|
|
Mortgage servicing asset from continuing operations |
|
$ |
24,076 |
|
|
NA |
|
|
|
|
|
|
|
Changes in our amortizing servicing assets are shown below:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
December 31, 2006 |
|
|
|
And the Six Months |
|
|
And the Year |
|
|
|
Then Ended |
|
|
Then Ended |
|
|
|
(Dollars in thousands) |
|
Beginning balance |
|
$ |
31,949 |
|
|
$ |
34,445 |
|
Initial adoption of SFAS 156 |
|
|
(27,725 |
) |
|
|
|
|
Additions |
|
|
303 |
|
|
|
17,884 |
|
Amortization |
|
|
(637 |
) |
|
|
(21,027 |
) |
(Impairment) recovery |
|
|
(46 |
) |
|
|
647 |
|
|
|
|
|
|
|
|
Mortgage servicing asset from continuing operations |
|
$ |
3,844 |
|
|
$ |
31,949 |
|
|
|
|
|
|
|
|
We have established a valuation allowance to record amortizing servicing assets at their
lower of cost or market value. Changes in the allowance are summarized below:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
December 31, 2006 |
|
|
|
And the Six Months |
|
|
And the Year |
|
|
|
Then Ended |
|
|
Then Ended |
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
483 |
|
|
$ |
1,152 |
|
Transfer of assets from amortizing to fair value |
|
|
(332 |
) |
|
|
|
|
Impairment (recovery) |
|
|
46 |
|
|
|
(647 |
) |
Reclass for sales of servicing and clean up calls |
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
Valuation allowance from continuing operations |
|
$ |
197 |
|
|
$ |
483 |
|
|
|
|
|
|
|
|
Note 6 Short-Term Borrowings
Short-term borrowings are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Federal Home Loan Bank borrowings |
|
$ |
490,173 |
|
|
$ |
371,693 |
|
Federal funds |
|
|
123,000 |
|
|
|
230,500 |
|
Other |
|
|
27 |
|
|
|
250 |
|
|
|
|
|
|
|
|
Total |
|
$ |
613,200 |
|
|
$ |
602,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate |
|
|
4.77 |
% |
|
|
4.49 |
% |
Federal Home Loan Bank borrowings are collateralized by loans and loans held for sale.
12
We also have lines of credit available to fund loan originations and operations with variable
rates ranging from 5.6% to 5.8% at June 30, 2007.
Note 7 Collateralized Debt
We pledge or sell loans structured as secured financings at our home equity and commercial
finance lines of business. Sale treatment is precluded on these transactions because we fail the
true-sale requirements of SFAS 140 as we maintain effective control over the loans and leases
securitized. This type of structure results in cash being received, debt being recorded, and the
establishment of an allowance for credit losses. The notes associated with these transactions are
collateralized by $1.5 billion in home equity loans, home equity lines of credit, and leases. The
principal and interest on these debt securities are paid using the cash flows from the underlying
loans and leases. Accordingly, the timing of the principal payments on these debt securities is
dependent on the payments received on the underlying collateral. The interest rates on the bonds
are both fixed and floating.
Collateralized debt is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Interest Rate at |
|
|
|
|
|
|
Contractual |
|
June 30, |
|
June 30, |
|
December 31, |
|
|
Maturity |
|
2007 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
Commercial finance line of business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic asset backed note |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
5,797 |
|
Canadian asset backed notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 1 |
|
|
revolving |
|
|
|
5.5 |
|
|
|
39,727 |
|
|
|
30,611 |
|
Note 2 |
|
|
6/2012 |
|
|
|
4.4 |
|
|
|
206,013 |
|
|
|
179,508 |
|
Note 3 |
|
|
10/2009 |
|
|
|
4.5 |
|
|
|
5,919 |
|
|
|
8,157 |
|
Home equity line of business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004-1 asset backed notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate senior note |
|
|
12/2024-12/2034 |
|
|
|
5.7 |
|
|
|
36,692 |
|
|
|
50,072 |
|
Variable rate subordinate note |
|
|
12/2034 |
|
|
|
6.5 |
|
|
|
24,775 |
|
|
|
24,775 |
|
2005-1 asset backed notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate senior note |
|
|
6/2025-6/2035 |
|
|
|
5.5 |
|
|
|
27,156 |
|
|
|
40,972 |
|
Fixed rate senior note |
|
|
6/2035 |
|
|
|
5.1 |
|
|
|
78,169 |
|
|
|
94,129 |
|
Variable rate subordinate note |
|
|
6/2035 |
|
|
|
7.1 |
|
|
|
10,785 |
|
|
|
10,785 |
|
Fixed rate subordinate note |
|
|
6/2035 |
|
|
|
5.6 |
|
|
|
52,127 |
|
|
|
52,127 |
|
Unamortized premium/discount |
|
|
|
|
|
|
|
|
|
|
(74 |
) |
|
|
(90 |
) |
2006-1 asset backed notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate senior note |
|
|
9/2035 |
|
|
|
5.5 |
|
|
|
67,871 |
|
|
|
102,252 |
|
Fixed rate senior note |
|
|
9/2035 |
|
|
|
5.5 |
|
|
|
96,561 |
|
|
|
96,561 |
|
Fixed rate lockout senior note |
|
|
9/2035 |
|
|
|
5.6 |
|
|
|
24,264 |
|
|
|
24,264 |
|
Unamortized premium/discount |
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
(19 |
) |
2006-2 asset backed notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate senior note |
|
|
2/2036 |
|
|
|
5.4 |
|
|
|
104,476 |
|
|
|
136,386 |
|
Fixed rate senior note |
|
|
2/2036 |
|
|
|
6.3 |
|
|
|
80,033 |
|
|
|
80,033 |
|
Fixed rate lockout senior note |
|
|
2/2036 |
|
|
|
6.2 |
|
|
|
21,348 |
|
|
|
21,348 |
|
Unamortized premium/discount |
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
(21 |
) |
2006-3 asset backed notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate senior note |
|
|
1/2037-9/2037 |
|
|
|
5.5 |
|
|
|
101,645 |
|
|
|
130,326 |
|
Fixed rate senior note |
|
|
9/2037 |
|
|
|
5.9 |
|
|
|
67,050 |
|
|
|
67,050 |
|
Fixed rate lockout senior note |
|
|
9/2037 |
|
|
|
5.9 |
|
|
|
18,000 |
|
|
|
18,000 |
|
Unamortized premium/discount |
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
(11 |
) |
2007-1 asset backed notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate senior note |
|
|
8/2037 |
|
|
|
5.5 |
|
|
|
152,074 |
|
|
|
|
|
Fixed rate senior note |
|
|
8/2037 |
|
|
|
6.0 |
|
|
|
91,346 |
|
|
|
|
|
Fixed rate lockout senior note |
|
|
8/2037 |
|
|
|
5.9 |
|
|
|
22,000 |
|
|
|
|
|
Unamortized premium/discount |
|
|
|
|
|
|
|
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
1,327,897 |
|
|
$ |
1,173,012 |
|
|
|
|
|
|
|
|
|
|
|
|
13
Note 8 Employee Retirement Plans
Components of net periodic cost of pension benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Service cost |
|
$ |
1,016 |
|
|
$ |
926 |
|
|
$ |
2,145 |
|
|
$ |
1,979 |
|
Interest cost |
|
|
728 |
|
|
|
645 |
|
|
|
1,414 |
|
|
|
1,226 |
|
Expected return on plan assets |
|
|
(616 |
) |
|
|
(523 |
) |
|
|
(1,254 |
) |
|
|
(1,126 |
) |
Amortization of transition obligation |
|
|
3 |
|
|
|
3 |
|
|
|
5 |
|
|
|
5 |
|
Amortization of prior service cost |
|
|
9 |
|
|
|
9 |
|
|
|
19 |
|
|
|
20 |
|
Amortization of actuarial loss |
|
|
136 |
|
|
|
200 |
|
|
|
312 |
|
|
|
484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1,276 |
|
|
$ |
1,260 |
|
|
$ |
2,641 |
|
|
$ |
2,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007, we have not made any contributions to our pension plan in the
current year and currently do not need to contribute to this plan in 2007 to maintain its funding
status.
Note 9 Earnings Per Share
Earnings per share calculations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
Diluted |
|
|
Net |
|
Preferred |
|
Earnings |
|
Effect of |
|
Earnings |
|
|
Income (Loss) |
|
Dividends |
|
Per Share |
|
Stock Options |
|
Per Share |
|
|
(Dollars in thousands, except per share amounts) |
Net income (loss) available to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Continuing Operations |
|
$ |
5,471 |
|
|
$ |
(326 |
) |
|
$ |
5,145 |
|
|
$ |
(215 |
) |
|
$ |
4,930 |
|
From Discontinued Operations |
|
|
(5,860 |
) |
|
|
|
|
|
|
(5,860 |
) |
|
|
|
|
|
|
(5,860 |
) |
|
|
|
Total Net Loss for All Operations |
|
$ |
(389 |
) |
|
$ |
(326 |
) |
|
|
(715 |
) |
|
|
(215 |
) |
|
|
(930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
29,361 |
|
|
|
14 |
|
|
|
29,375 |
|
|
|
|
|
|
|
|
|
|
|
|
Per-share from Continuing Operations |
|
|
|
|
|
|
|
|
|
$ |
0.18 |
|
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
Per-share amount for All Operations |
|
|
|
|
|
|
|
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
Diluted |
|
|
Net |
|
Preferred |
|
Earnings |
|
Effect of |
|
Earnings |
|
|
Income (Loss) |
|
Dividends |
|
Per Share |
|
Stock Options |
|
Per Share |
|
|
(Dollars in thousands, except per share amounts) |
Net income (loss) available to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Continuing Operations |
|
$ |
8,969 |
|
|
$ |
|
|
|
$ |
8,969 |
|
|
$ |
(71 |
) |
|
$ |
8,898 |
|
From Discontinued Operations |
|
|
(6,098 |
) |
|
|
|
|
|
|
(6,098 |
) |
|
|
|
|
|
|
(6,098 |
) |
|
|
|
Total Net Income for All Operations |
|
$ |
2,871 |
|
|
$ |
|
|
|
|
2,871 |
|
|
|
(71 |
) |
|
|
2,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
29,694 |
|
|
|
168 |
|
|
|
29,862 |
|
|
|
|
|
|
|
|
|
|
|
|
Per-share from Continuing Operations |
|
|
|
|
|
|
|
|
|
$ |
0.30 |
|
|
$ |
|
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
Per-share amount for All Operations |
|
|
|
|
|
|
|
|
|
$ |
0.10 |
|
|
$ |
(0.01 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
Diluted |
|
|
Net |
|
Preferred |
|
Earnings |
|
Effect of |
|
Earnings |
|
|
Loss |
|
Dividends |
|
Per Share |
|
Stock Options |
|
Per Share |
|
|
(Dollars in thousands, except per share amounts) |
Net loss available to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Continuing Operations |
|
$ |
(623 |
) |
|
$ |
(678 |
) |
|
$ |
(1,301 |
) |
|
$ |
(404 |
) |
|
$ |
(1,705 |
) |
From Discontinued Operations |
|
|
(9,895 |
) |
|
|
|
|
|
|
(9,895 |
) |
|
|
|
|
|
|
(9,895 |
) |
|
|
|
Total Net Loss for All Operations |
|
$ |
(10,518 |
) |
|
$ |
(678 |
) |
|
|
(11,196 |
) |
|
|
(404 |
) |
|
|
(11,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
29,491 |
|
|
|
75 |
|
|
|
29,566 |
|
|
|
|
|
|
|
|
|
|
|
|
Per-share from Continuing Operations |
|
|
|
|
|
|
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
Per-share amount for All Operations |
|
|
|
|
|
|
|
|
|
$ |
(0.38 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
Diluted |
|
|
Net |
|
Preferred |
|
Earnings |
|
Effect of |
|
Earnings |
|
|
Income (Loss) |
|
Dividends |
|
Per Share |
|
Stock Options |
|
Per Share |
|
|
(Dollars in thousands, except per share amounts) |
Net income (loss) available to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Continuing Operations |
|
$ |
17,659 |
|
|
$ |
|
|
|
$ |
17,659 |
|
|
$ |
(140 |
) |
|
$ |
17,519 |
|
From Discontinued Operations |
|
|
(16,646 |
) |
|
|
|
|
|
|
(16,646 |
) |
|
|
|
|
|
|
(16,646 |
) |
|
|
|
Total Net Income for All Operations |
|
$ |
1,013 |
|
|
$ |
|
|
|
|
1,013 |
|
|
|
(140 |
) |
|
|
873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
29,318 |
|
|
|
190 |
|
|
|
29,508 |
|
|
|
|
|
|
|
|
|
|
|
|
Per-share from Continuing Operations |
|
|
|
|
|
|
|
|
|
$ |
0.60 |
|
|
$ |
(0.01 |
) |
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
Per-share amount for All Operations |
|
|
|
|
|
|
|
|
|
$ |
0.03 |
|
|
$ |
|
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2007 and 2006, 2,015,094 and 1,830,737 shares, respectively, related to stock
options that were not included in the dilutive earnings per share calculation because they had
exercise prices above the stock price as of the respective dates.
Note 10 Industry Segment Information
We have three principal business segments that provide a broad range of financial services.
The commercial banking line of business provides commercial banking services. The commercial
finance line of business originates leases and loans against commercial equipment and real estate.
The home equity lending line of business provides consumer mortgage products and services.
As described in Note 2, we have recently exited the conforming, conventional mortgage banking
line of business. This segment is shown in the table below as Discontinued Operations. Our other
segment primarily includes the parent company, our private equity portfolio and eliminations and a
small amount of unsold items of our mortgage banking business.
The accounting policies of each segment are the same as those described in Note 1
Accounting Policies, Management Judgments and Accounting Estimates.
15
Following is a summary of each segments revenues, net income, and assets for the years
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
Commercial |
|
Commercial |
|
Home Equity |
|
|
|
|
|
Continuing |
|
Discontinued |
|
|
|
|
Banking |
|
Finance |
|
Lending |
|
Other |
|
Operations |
|
Operations |
|
Consolidated |
|
|
(Dollars in thousands) |
For the Three Months Ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
28,278 |
|
|
$ |
19,306 |
|
|
$ |
14,549 |
|
|
$ |
(15,743 |
) |
|
$ |
46,390 |
|
|
$ |
(876 |
) |
|
$ |
45,514 |
|
Intersegment interest |
|
|
814 |
|
|
|
(9,436 |
) |
|
|
(5,677 |
) |
|
|
14,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues |
|
|
4,188 |
|
|
|
2,947 |
|
|
|
3,679 |
|
|
|
(1,233 |
) |
|
|
9,581 |
|
|
|
(3,079 |
) |
|
|
6,502 |
|
Intersegment revenues |
|
|
|
|
|
|
|
|
|
|
1,084 |
|
|
|
(1,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
33,280 |
|
|
|
12,817 |
|
|
|
13,635 |
|
|
|
(3,761 |
) |
|
|
55,971 |
|
|
|
(3,955 |
) |
|
|
52,016 |
|
Other expense |
|
|
22,006 |
|
|
|
7,477 |
|
|
|
16,198 |
|
|
|
1,383 |
|
|
|
47,064 |
|
|
|
5,873 |
|
|
|
52,937 |
|
Intersegment expenses |
|
|
917 |
|
|
|
457 |
|
|
|
670 |
|
|
|
(2,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
10,357 |
|
|
|
4,883 |
|
|
|
(3,233 |
) |
|
|
(3,100 |
) |
|
|
8,907 |
|
|
|
(9,828 |
) |
|
|
(921 |
) |
Income taxes |
|
|
4,015 |
|
|
|
1,947 |
|
|
|
(1,283 |
) |
|
|
(1,243 |
) |
|
|
3,436 |
|
|
|
(3,968 |
) |
|
|
(532 |
) |
|
|
|
Net income (loss) |
|
$ |
6,342 |
|
|
$ |
2,936 |
|
|
$ |
(1,950 |
) |
|
$ |
(1,857 |
) |
|
$ |
5,471 |
|
|
$ |
(5,860 |
) |
|
$ |
(389 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
26,753 |
|
|
$ |
15,262 |
|
|
$ |
29,817 |
|
|
$ |
(14,786 |
) |
|
$ |
57,046 |
|
|
$ |
7,443 |
|
|
$ |
64,489 |
|
Intersegment interest |
|
|
3,321 |
|
|
|
(6,940 |
) |
|
|
(10,597 |
) |
|
|
14,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue |
|
|
4,593 |
|
|
|
1,999 |
|
|
|
3,580 |
|
|
|
(1,126 |
) |
|
|
9,046 |
|
|
|
13,710 |
|
|
|
22,756 |
|
|
|
|
Total net revenues |
|
|
34,667 |
|
|
|
10,321 |
|
|
|
22,800 |
|
|
|
(1,696 |
) |
|
|
66,092 |
|
|
|
21,153 |
|
|
|
87,245 |
|
Other expense |
|
|
20,898 |
|
|
|
5,421 |
|
|
|
22,628 |
|
|
|
2,348 |
|
|
|
51,295 |
|
|
|
31,305 |
|
|
|
82,600 |
|
Intersegment expenses |
|
|
687 |
|
|
|
289 |
|
|
|
791 |
|
|
|
(1,767 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
13,082 |
|
|
|
4,611 |
|
|
|
(619 |
) |
|
|
(2,277 |
) |
|
|
14,797 |
|
|
|
(10,152 |
) |
|
|
4,645 |
|
Income taxes |
|
|
5,230 |
|
|
|
1,679 |
|
|
|
(238 |
) |
|
|
(843 |
) |
|
|
5,828 |
|
|
|
(4,054 |
) |
|
|
1,774 |
|
|
|
|
Net income (loss) |
|
$ |
7,852 |
|
|
$ |
2,932 |
|
|
$ |
(381 |
) |
|
$ |
(1,434 |
) |
|
$ |
8,969 |
|
|
$ |
(6,098 |
) |
|
$ |
2,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
Commercial |
|
Commercial |
|
Home Equity |
|
|
|
|
|
Continuing |
|
Discontinued |
|
|
|
|
Banking |
|
Finance |
|
Lending |
|
Other |
|
Operations |
|
Operations |
|
Consolidated |
|
|
(Dollars in thousands) |
For the Six Months Ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
54,192 |
|
|
$ |
36,876 |
|
|
$ |
31,751 |
|
|
$ |
(33,510 |
) |
|
$ |
89,309 |
|
|
$ |
(1,215 |
) |
|
$ |
88,094 |
|
Intersegment interest |
|
|
(155 |
) |
|
|
(18,477 |
) |
|
|
(13,403 |
) |
|
|
32,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue |
|
|
8,135 |
|
|
|
5,738 |
|
|
|
(3,051 |
) |
|
|
(2,055 |
) |
|
|
8,767 |
|
|
|
(7,461 |
) |
|
|
1,306 |
|
Intersegment revenues |
|
|
|
|
|
|
|
|
|
|
1,017 |
|
|
|
(1,017 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
62,172 |
|
|
|
24,137 |
|
|
|
16,314 |
|
|
|
(4,547 |
) |
|
|
98,076 |
|
|
|
(8,676 |
) |
|
|
89,400 |
|
Other expense |
|
|
45,446 |
|
|
|
14,259 |
|
|
|
35,153 |
|
|
|
4,491 |
|
|
|
99,349 |
|
|
|
7,929 |
|
|
|
107,278 |
|
Intersegment expenses |
|
|
1,768 |
|
|
|
809 |
|
|
|
1,296 |
|
|
|
(3,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
14,958 |
|
|
|
9,069 |
|
|
|
(20,135 |
) |
|
|
(5,165 |
) |
|
|
(1,273 |
) |
|
|
(16,605 |
) |
|
|
(17,878 |
) |
Income taxes |
|
|
5,453 |
|
|
|
3,542 |
|
|
|
(8,035 |
) |
|
|
(1,610 |
) |
|
|
(650 |
) |
|
|
(6,710 |
) |
|
|
(7,360 |
) |
|
|
|
Net income (loss) |
|
$ |
9,505 |
|
|
$ |
5,527 |
|
|
$ |
(12,100 |
) |
|
$ |
(3,555 |
) |
|
$ |
(623 |
) |
|
$ |
(9,895 |
) |
|
$ |
(10,518 |
) |
|
|
|
Assets at June 30, 2007 |
|
$ |
3,099,206 |
|
|
$ |
1,175,325 |
|
|
$ |
1,577,785 |
|
|
$ |
245,606 |
|
|
|
|
|
|
|
|
|
|
$ |
6,097,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
53,264 |
|
|
$ |
29,781 |
|
|
$ |
56,653 |
|
|
$ |
(30,268 |
) |
|
$ |
109,430 |
|
|
$ |
14,380 |
|
|
$ |
123,810 |
|
Intersegment interest |
|
|
5,196 |
|
|
|
(12,931 |
) |
|
|
(20,318 |
) |
|
|
28,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue |
|
|
8,862 |
|
|
|
4,149 |
|
|
|
10,968 |
|
|
|
(937 |
) |
|
|
23,042 |
|
|
|
15,134 |
|
|
|
38,176 |
|
|
|
|
Total net revenues |
|
|
67,322 |
|
|
|
20,999 |
|
|
|
47,303 |
|
|
|
(3,152 |
) |
|
|
132,472 |
|
|
|
29,514 |
|
|
|
161,986 |
|
Other expense |
|
|
41,685 |
|
|
|
11,094 |
|
|
|
44,483 |
|
|
|
6,846 |
|
|
|
104,108 |
|
|
|
57,240 |
|
|
|
161,348 |
|
Intersegment expenses |
|
|
1,371 |
|
|
|
554 |
|
|
|
1,707 |
|
|
|
(3,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
24,266 |
|
|
|
9,351 |
|
|
|
1,113 |
|
|
|
(6,366 |
) |
|
|
28,364 |
|
|
|
(27,726 |
) |
|
|
638 |
|
Income taxes |
|
|
9,652 |
|
|
|
3,528 |
|
|
|
460 |
|
|
|
(2,935 |
) |
|
|
10,705 |
|
|
|
(11,080 |
) |
|
|
(375 |
) |
|
|
|
Net income (loss) |
|
$ |
14,614 |
|
|
$ |
5,823 |
|
|
$ |
653 |
|
|
$ |
(3,431 |
) |
|
$ |
17,659 |
|
|
$ |
(16,646 |
) |
|
$ |
1,013 |
|
|
|
|
Assets at June 30, 2006 |
|
$ |
3,004,403 |
|
|
$ |
969,876 |
|
|
$ |
1,398,377 |
|
|
$ |
1,143,335 |
|
|
|
|
|
|
|
|
|
|
$ |
6,515,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Note 11 Commitments and Contingencies
Culpepper v. Inland Mortgage Corporation
On July 2, 2007, the Court of Appeals for the 11th Circuit affirmed the decision of
the United States District Court for the Northern District of Alabama granting summary judgment in
favor of our indirect subsidiary, Irwin Mortgage Corporation (formerly Inland Mortgage
Corporation), and decertifying the plaintiffs class. On July 13, 2007, plaintiffs filed a petition
for a rehearing en banc. This lawsuit was originally filed in April 1996 alleging that Irwin
Mortgages payment of broker fees to mortgage brokers violated the federal Real Estate Settlement
Procedures Act. In its July 2, 2007, decision, and based on the test set forth in the Department
of Housing and Urban Developments 2001 policy statement on lender payments to mortgage brokers,
the court of appeals affirmed summary judgment for Irwin Mortgage because the plaintiffs failed to
show that the total compensation Irwin Mortgage paid to the mortgage brokers was unreasonable in
light of the services provided. The court of appeals also held that the district court did not
abuse its discretion in decertifying the plaintiffs class because the individualized assessment
required in this type of action made class certification inappropriate. We await a decision of the
court of appeals on the plaintiffs petition. We have not
established any reserves for this case.
Silke v. Irwin Mortgage Corporation
In April 2003, our indirect subsidiary, Irwin Mortgage Corporation, was named as a defendant
in a class action lawsuit filed in the Marion County, Indiana, Superior Court. The complaint
alleged that Irwin Mortgage charged a document preparation fee in violation of Indiana law for
services performed by clerical personnel in completing legal documents related to mortgage loans.
On June 18, 2004, the court certified a plaintiff class and held oral argument on cross-motions for
summary judgment on April 30, 2007. On May 2, 2007, the Indiana Supreme Court issued an opinion in
another case, Charter One Mortgage Corporation v. Condra, which held that the preparation of
mortgage documents by non-attorneys does not necessarily constitute the practice of law and that a
lenders charging a fee for the preparation does not convert it into the unauthorized practice of
law. In light of the Charter One decision, the plaintiffs in Silke delivered to the trial court
their proposed Order on Parties Cross-Motions for Summary
Judgment and Entry of Final Judgment in favor of Irwin Mortgage.
We therefore expect the court to dismiss the Silke litigation. We have not
established any reserves for this case.
Cohens v. Inland Mortgage Corporation
In October 2003, our indirect subsidiary, Irwin Mortgage Corporation (formerly Inland Mortgage
Corporation), was named as a defendant, along with others, in an action filed in the Supreme Court
of New York, County of Kings. The plaintiffs, a mother and two children, allege they were injured
from lead contamination while living in premises allegedly owned by the defendants. The suit seeks
approximately $41 million in damages and alleges negligence, breach of implied warranty of
habitability and fitness for intended use, loss of services and the cost of medical treatment. On
September 15, 2005, Irwin Mortgage filed an answer and cross-claims seeking dismissal of the
complaint. On October 13, 2006, Irwin Mortgage filed a motion for summary judgment. In May 2007,
the court disposed of this case due to lack of prosecution by the plaintiffs. We expect the action
to be restored, however, based on a motion by plaintiffs on
June 28, 2007. We filed an
affirmation in support of our motion for summary judgment on July 10, 2007. We have not established
any reserves for this case.
Litigation in Connection with Loans Purchased from Community Bank of Northern Virginia
Our subsidiary, Irwin Union Bank and Trust Company, is a defendant in several actions in
connection with loans Irwin Union Bank purchased from Community Bank of Northern Virginia
(Community).
Hobson v. Irwin Union Bank and Trust Company was filed on July 30, 2004 in the United States
District Court for the Northern District of Alabama. As amended on August 30, 2004, the Hobson
complaint, seeks certification of both a plaintiffs and a defendants class, the plaintiffs class
to consist of all persons who obtained loans from Community and whose loans were purchased by Irwin
Union Bank. Hobson alleges that defendants violated the Truth-in-Lending Act (TILA), the Home
Ownership and Equity Protection Act (HOEPA), the Real Estate Settlement Procedures Act (RESPA) and
the Racketeer Influenced and Corrupt Organizations Act (RICO). On October 12, 2004, Irwin filed a
motion to dismiss the Hobson claims as untimely filed and substantively defective.
Kossler v. Community Bank of Northern Virginia was originally filed in July 2002 in the United
States District Court for the Western District of Pennsylvania. Irwin Union Bank and Trust was
added as a defendant in December 2004. The Kossler complaint seeks certification of a plaintiffs
class and seeks to void the mortgage loans as illegal contracts. Plaintiffs also seek recovery
against Irwin for alleged RESPA violations and for conversion. On September 9, 2005, the Kossler
plaintiffs filed a Third Amended Class Action Complaint. On October 21, 2005, Irwin filed a renewed
motion seeking to dismiss the Kossler action.
17
The plaintiffs in Hobson and Kossler claim that Community was allegedly engaged in a lending
arrangement involving the use of its charter by certain third parties who charged high fees that
were not representative of the services rendered and not properly disclosed as to the amount or
recipient of the fees. The loans in question are allegedly high cost/high interest loans under
Section 32 of HOEPA. Plaintiffs also allege illegal kickbacks and fee splitting. In Hobson, the
plaintiffs allege that Irwin was aware of Communitys alleged arrangement when Irwin purchased the
loans and that Irwin participated in a RICO enterprise and conspiracy related to the loans. Because
Irwin bought the loans from Community, the Hobson plaintiffs are alleging that Irwin has assignee
liability under HOEPA.
If the Hobson and Kossler plaintiffs are successful in establishing a class and prevailing at
trial, possible RESPA remedies could include treble damages for each service for which there was an
unearned fee, kickback or overvalued service. Other possible damages in Hobson could include TILA
remedies, such as rescission, actual damages, statutory damages not to exceed the lesser of
$500,000 or 1% of the net worth of the creditor, and attorneys fees and costs; possible HOEPA
remedies could include the refunding of all closing costs, finance charges and fees paid by the
borrower; RICO remedies could include treble plaintiffs actually proved damages. In addition, the
Hobson plaintiffs are seeking unspecified punitive damages. Under TILA, HOEPA, RESPA and RICO,
statutory remedies include recovery of attorneys fees and costs. Other possible damages in Kossler
could include the refunding of all origination fees paid by the plaintiffs.
Irwin Union Bank and Trust Company is also a defendant, along with Community, in two
individual actions (Chatfield v. Irwin Union Bank and Trust Company, et al. and Ransom v. Irwin
Union Bank and Trust Company, et al.) filed on September 9, 2004 in the Circuit Court of Frederick
County, Maryland, involving mortgage loans Irwin Union Bank purchased from Community. On July 16,
2004, both of these lawsuits were removed to the United States District Court for the District of
Maryland. The complaints allege that the plaintiffs did not receive disclosures required under
HOEPA and TILA. The lawsuits also allege violations of Maryland law because the plaintiffs were
allegedly charged or contracted for a prepayment penalty fee. Irwin believes the plaintiffs
received the required disclosures and that Community, a Virginia-chartered bank, was permitted to
charge prepayment fees to Maryland borrowers.
Under the loan purchase agreements between Irwin and Community, Irwin has the right to demand
repurchase of the mortgage loans and to seek indemnification from Community for the claims in these
lawsuits. On September 17, 2004, Irwin made a demand for indemnification and a defense to Hobson,
Chatfield and Ransom. Community denied this request as premature.
In response to a motion by Irwin, the Judicial Panel On Multidistrict Litigation consolidated
Hobson, Chatfield and Ransom with Kossler in the Western District of Pennsylvania for all pretrial
proceedings. The Pennsylvania District Court had been handling another case seeking class action
status, Kessler v. RFC, et al., also involving Community and with facts similar to those alleged in
the Irwin consolidated cases. The Kessler case had been settled, but the settlement was appealed
and set aside on procedural grounds. Subsequently, the parties in Kessler filed a motion for
approval of a modified settlement, which would provide additional relief to the settlement class.
Irwin is not a party to the Kessler action, but the resolution of issues in Kessler may have an
impact on the Irwin cases. The Pennsylvania District Court has effectively stayed action on the
Irwin cases until issues in the Kessler case are resolved. On
July 5, 2007, the Amicus Curiae
(Friend of the Court) appointed by the Pennsylvania District Court to evaluate the fairness of
the modified Kessler settlement issued his Advisory Opinion, which found the proposed modified
Kessler settlement to be fair and reasonable. We have established a reserve for the Community
litigation based upon SFAS 5 guidance and the advice of legal counsel.
Putkowski v. Irwin Home Equity Corporation and Irwin Union Bank and Trust Company
On August 12, 2005, our indirect subsidiary, Irwin Home Equity Corporation, and our direct
subsidiary, Irwin Union Bank and Trust Company (collectively, Irwin), were named as defendants in
litigation seeking class action status in the United States District Court for the Northern
District of California for alleged violations of the Fair Credit Reporting Act. In response to
Irwins motion to dismiss filed on October 18, 2005, the court dismissed the plaintiffs complaint
with prejudice on March 23, 2006. Plaintiffs filed an appeal in the U.S. Court of Appeals for the
9th Circuit on April 13, 2006. We have not established any reserves for this case.
White v. Irwin Union Bank and Trust Company and Irwin Home Equity Corporation
On January 5, 2006, our direct subsidiary, Irwin Union Bank and Trust Company, and our
indirect subsidiary, Irwin Home Equity Corporation, (collectively, Irwin) were named as
defendants in litigation in the Circuit Court for Baltimore City, Maryland. The plaintiffs alleged
that Irwin charged or caused plaintiffs to pay certain fees, costs and other charges that were
excessive or illegal under Maryland law in connection with loans made to plaintiffs by Irwin. The
plaintiffs sought certification of a class consisting of Maryland residents who received mortgage
loans from Irwin secured by real property in the State of Maryland and who claimed injury due to
Irwins lending practices. On April 24, 2006, the plaintiffs initiated an arbitration with the
American Arbitration Association (White v. Irwin Union Bank & Trust, et al.)
18
on behalf of the same
proposed class of persons. On August 11, 2006, the court dismissed the lawsuit and compelled
arbitration of the claims asserted on behalf of the class. On October 13, 2006, the parties
tentatively agreed to settle this matter solely on behalf of the individual plaintiffs for a
nonmaterial amount. The settlement agreement was approved by the arbitrator, and the American
Arbitration Association arbitration was dismissed with prejudice, effective June 6, 2007, thus
concluding this matter.
We and our subsidiaries are from time to time engaged in various matters of litigation,
including the matters described above, other assertions of improper or fraudulent loan practices or
lending violations, and other matters, and we have a number of unresolved claims pending. In
addition, as part of the ordinary course of business, we and our subsidiaries are parties to
litigation involving claims to the ownership of funds in particular accounts, the collection of
delinquent accounts, challenges to security interests in collateral, and foreclosure interests,
that is incidental to our regular business activities. While the ultimate liability with respect to
these other litigation matters and claims cannot be determined at this time, we believe that
damages, if any, and other amounts relating to pending matters are not likely to be material to our
consolidated financial position or results of operations, except as described above. Reserves are
established for these various matters of litigation, when appropriate under SFAS 5, based in part
upon the advice of legal counsel.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
About Forward-looking Statements
You should read the following discussion in conjunction with our consolidated financial
statements, footnotes, and tables. This discussion and other sections of this report contain
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. We are including this statement for purposes of invoking
these safe harbor provisions.
Forward-looking statements are based on managements expectations, estimates, projections, and
assumptions. These statements involve inherent risks and uncertainties that are difficult to
predict and are not guarantees of future performance. In addition, our past results of operations
do not necessarily indicate our future results. Words that convey our beliefs, views, expectations,
assumptions, estimates, forecasts, outlook and projections or similar language, or that indicate
events we believe could, would, should, may or will occur (or might not occur) or are likely (or
unlikely) to occur, and similar expressions, are intended to identify forward-looking statements.
These may include, among other things, statements and assumptions about:
|
|
|
our projected revenues, earnings or earnings per share, as well as managements
short-term and long-term performance goals; |
|
|
|
|
projected trends or potential changes in our asset quality, loan delinquencies,
charge-offs, reserves, asset valuations, capital ratios or financial performance measures; |
|
|
|
|
our plans and strategies, including the expected results or costs and impact of
implementing or changing such plans and strategies; |
|
|
|
|
potential litigation developments and the anticipated impact of potential outcomes of pending legal matters; |
|
|
|
|
the anticipated effects on results of operations or financial condition from recent developments or events; and |
|
|
|
|
any other projections or expressions that are not historical facts. |
We qualify any forward-looking statements entirely by these cautionary factors.
Actual future results may differ materially from what is projected due to a variety of factors,
including, but not limited to:
|
|
|
potential changes in direction, volatility and relative movement (basis risk) of interest
rates, which may affect consumer demand for our products and the management and success of
our interest rate risk management strategies; |
|
|
|
|
competition from other financial service providers for experienced managers as well as
for customers; |
19
|
|
|
staffing fluctuations in response to product demand or the implementation of corporate
strategies that affect our work force; |
|
|
|
|
the relative profitability of our lending operations; |
|
|
|
|
the valuation and management of our portfolios, including the use of external and
internal modeling assumptions we embed in the valuation of those portfolios and short-term
swings in the valuation of such portfolios; |
|
|
|
|
borrowers refinancing opportunities, which may affect the prepayment assumptions used in
our valuation estimates and which may affect loan demand; |
|
|
|
|
unanticipated deterioration in the credit quality or collectibility of our loan and lease
assets, including deterioration resulting from the effects of natural disasters; |
|
|
|
|
unanticipated deterioration or changes in estimates of the carrying value of our other assets, including securities; |
|
|
|
|
difficulties in delivering products to the secondary market as planned; |
|
|
|
|
difficulties in expanding our businesses and obtaining funding sources as needed; |
|
|
|
|
changes in the value of our lines of business, subsidiaries, or companies in which we invest; |
|
|
|
|
changes in variable compensation plans related to the performance and valuation of lines
of business where we tie compensation systems to line-of-business performance; |
|
|
|
|
unanticipated outcomes in litigation; |
|
|
|
|
legislative or regulatory changes, including changes in laws, rules or regulations that
affect tax, consumer or commercial lending, corporate governance and disclosure
requirements, and other laws, rules or regulations affecting the rights and responsibilities
of our Corporation, bank or thrift; |
|
|
|
|
regulatory actions that impact our Corporation, bank or thrift, including the memorandum
of understanding entered into as of March 1, 2007 between Irwin Union Bank and Trust and the
Federal Reserve Bank of Chicago; |
|
|
|
|
changes in the interpretation of regulatory capital or other rules; |
|
|
|
|
the availability of resources to address changes in laws, rules or regulations or to respond to regulatory actions; |
|
|
|
|
changes in applicable accounting policies or principles or their application to our
business or final audit adjustments, including additional guidance and interpretation on
accounting issues and details of the implementation of new accounting methods; |
|
|
|
|
the final disposition of our remaining assets and obligations of our discontinued mortgage banking segment; or |
|
|
|
|
governmental changes in monetary or fiscal policies. |
We undertake no obligation to update publicly any of these statements in light of future
events, except as required in subsequent reports we file with the Securities and Exchange
Commission (SEC).
Strategy
Our strategy is to create competitive advantage within the banking industry by serving niche
markets of small businesses and consumers. Our strategic objective is to create value through
well-controlled, profitable growth by: i) focusing on meeting customer needs rather than simply
offering banking products or services, ii) being cost-efficient in our delivery, and iii) having
strong risk management systems. We believe we must continually balance these three factors in order
to deliver long-term value to all of our stakeholders.
20
We have developed several tactics to meet these goals:
1. Identify market niches. We focus on product or market niches in banking where our
understanding of customer needs and ability to meet them creates added value that permits us not
to have to compete primarily on price. We do not believe it is necessary to be the largest or
leading market share company in any of our product lines to earn an adequate risk-adjusted
return, but we do believe it is important that we are viewed as a preferred provider in niche
segments of those product offerings.
2. Attract, develop and retain exceptional management with niche expertise. We participate
in lines of business only when we have attracted senior managers who have proven track records in
the niche for which they are responsible. Our structure allows managers to focus their efforts on
understanding their customers, meeting the needs of the markets they serve cost effectively, and
identifying and controlling the risks inherent in their activities. This structure also promotes
accountability among managers of each segment. We attempt to create a mix of short-term and
long-term rewards that provide these managers with the incentive to achieve well-controlled,
profitable growth over the long term.
3. Diversify capital and earnings risk. We diversify our revenues, credit risk, and
application of capital across complementary lines of business and across different regions as a
key part of our risk management. For example, the customers of our commercial bank have different
growth and risk profiles in the Midwest and West. These markets perform differently due to
differences in local economies, affecting both demand and credit quality of our products. Our
home equity segment lends to consumers on a national basis, building a diversified portfolio
where demand and credit quality fluctuate depending, in part, on local market conditions. Our
customers credit needs are cyclical, but when combined in an appropriate mix, we believe they
provide sources of diversification and opportunities for growth in a variety of economic
conditions.
4. Focus on organic growth. We primarily focus on growth through organic expansion of
existing lines of business as we believe this approach often provides a better risk/return
profile. Over the past ten years, we have made only a few acquisitions. Those have typically not
been in competitive bidding situations.
5. Identify opportunities for coordination and efficiencies across the Bank. We have
recently increased our attention to the identification of areas in which we can better coordinate
and consolidate non-customer facing operations within our segments. Our objective is to improve
risk management and operating efficiency without diminishing our ability to provide a high level
of service to our customers. Our efforts to date have focused on the centralization of certain
risk management functions, as well as improvements in information technologies and procurement
through shared services.
6. Create and maintain risk management systems appropriate to our size, scale and scope.
Increasingly, banks of all sizes have seen the need to enhance their risk management systems.
These systems are an integral part of a well-managed banking organization and are as important to
our future success as hiring good people and offering products and services in attractive niches.
We are engaged in a multiyear process of enhancing our management depth and systems for assuring
that we operate our businesses within the risk appetite established by our board of directors.
The system we are creating provides centralized guidance and support from staff with demonstrated
risk management expertise, who provide an independent perspective assessing and assisting the
risk management processes and systems that are an integral part of each of our managers
responsibilities.
We believe long-term growth and profitability will result from our endeavors to serve
attractive niches within commercial and consumer banking, our experienced management, our diverse
products and geographic markets, and our focus on risk management systems.
Critical Accounting Policies
Accounting estimates are an integral part of our financial statements and are based upon our
current judgments. Certain accounting estimates are particularly sensitive because of their
significance to the financial statements and because of the possibility that future events
affecting them may differ from our current judgments or that our use of different assumptions could
result in materially different estimates. Our Annual Report on Form 10-K for the year ended 2006 provides a
description of the critical accounting policies we apply to material financial statement items, all
of which require the use of accounting estimates and/or judgment.
21
Consolidated Overview
As discussed below, the financial statements, footnotes, schedules and discussion within this
report have been reformatted to conform to the presentation required for discontinued operations
pursuant to our sale of our mortgage banking line of business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
For the Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
Net income (loss) from continuing operations (in thousands) |
|
$ |
5,471 |
|
|
$ |
8,969 |
|
|
|
(39.0 |
%) |
|
$ |
(623 |
) |
|
$ |
17,659 |
|
|
NM |
Net (loss) income including discontinued operations (in thousands) |
|
|
(389 |
) |
|
|
2,871 |
|
|
NM |
|
|
(10,518 |
) |
|
|
1,013 |
|
|
NM |
Basic earnings per share from continuing operations |
|
|
0.18 |
|
|
|
0.30 |
|
|
|
(40.0 |
%) |
|
|
(0.04 |
) |
|
|
0.60 |
|
|
NM |
Basic earnings per share including discontinued operations |
|
|
(0.02 |
) |
|
|
0.10 |
|
|
NM |
|
|
(0.38 |
) |
|
|
0.03 |
|
|
NM |
Diluted earnings per share from continuing operations |
|
|
0.17 |
|
|
|
0.30 |
|
|
|
(43.3 |
%) |
|
|
(0.06 |
) |
|
|
0.59 |
|
|
NM |
Diluted earnings per share including discontinued operations |
|
|
(0.03 |
) |
|
|
0.09 |
|
|
NM |
|
|
(0.39 |
) |
|
|
0.03 |
|
|
NM |
Return on average equity from continuing operations |
|
|
4.3 |
% |
|
|
6.7 |
% |
|
|
|
|
|
|
(0.2 |
)% |
|
|
4.5 |
% |
|
|
|
|
Return on average assets from continuing operations |
|
|
0.4 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
0.4 |
% |
|
|
|
|
Consolidated Income Statement Analysis
Net Income from Continuing Operations
We recorded net income from continuing operations of $5.5 million for the three months ended
June 30, 2007, down from net income from continuing operations of $9.0 million for the three months
ended June 30, 2006. Net income per share (diluted) was $0.17 for the quarter ended June 30, 2007,
down from $0.30 per share for the second quarter of 2006. Return on equity was 4.3% for the three
months ended June 30, 2007 and 6.7% for the same period in 2006. For the year to date, we recorded
a net loss from continuing operations of $0.6 million or $(0.06) per diluted share compared to net
income of $17.7 million or $0.59 per share in 2006. Return on equity for continuing operations for
the six-month period ended June 30, 2007 was (0.2)% compared with 4.5% during the same period a
year earlier.
Our consolidated performance in the first half of 2007 was negatively affected primarily by
three factors: i) a loss in the home equity segment principally as a result of a disruption in the
secondary markets, ii) an impaired commercial credit during the first quarter, and iii) slow loan
and deposit growth in commercial banking. The disruption in the consumer mortgage market has been
more significant than most observers had predicted and there are now fewer buyers for
non-conforming mortgage products. Secondly, we determined that a large loan in Michigan was
impaired due to apparent misrepresentations about collateral by the borrower discovered during the
first quarter of 2007. This appears to have been an isolated event The slowing of growth in the
commercial banking segment is attributable to a combination of decreased demand and some turn-over
in our local market leadership of established branches, primarily in the Midwest.
Net Interest Income from Continuing Operations
Net interest income from continuing operations for the six months ended June 30, 2007 totaled
$132 million, up 5% from the first half of 2006 net interest income of $125 million. Net interest
margin for the six months ended June 30, 2007 was 4.58%, down slightly compared to 4.61% for the
same period in 2006.
22
The following table shows our daily average consolidated balance sheet, interest rates and yield at
the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Annualized |
|
|
|
|
|
|
|
|
|
|
Annualized |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with financial institutions |
|
$ |
54,887 |
|
|
$ |
1,374 |
|
|
|
5.05 |
% |
|
$ |
79,889 |
|
|
$ |
1,311 |
|
|
|
3.31 |
% |
Federal funds sold |
|
|
30,678 |
|
|
|
807 |
|
|
|
5.30 |
% |
|
|
2,244 |
|
|
|
48 |
|
|
|
4.31 |
% |
Residual interests |
|
|
10,108 |
|
|
|
549 |
|
|
|
10.95 |
% |
|
|
16,207 |
|
|
|
1,130 |
|
|
|
14.06 |
% |
Investment securities |
|
|
135,968 |
|
|
|
3,645 |
|
|
|
5.41 |
% |
|
|
106,282 |
|
|
|
2,395 |
|
|
|
4.54 |
% |
Loans held for sale |
|
|
167,480 |
|
|
|
6,091 |
|
|
|
7.33 |
% |
|
|
1,236,293 |
|
|
|
50,180 |
|
|
|
8.19 |
% |
Loans and leases, net of unearned income (1) |
|
|
5,351,985 |
|
|
|
244,910 |
|
|
|
9.23 |
% |
|
|
4,681,482 |
|
|
|
203,526 |
|
|
|
8.77 |
% |
|
|
|
Total interest earning assets |
|
|
5,751,106 |
|
|
$ |
257,376 |
|
|
|
9.02 |
% |
|
|
6,122,397 |
|
|
$ |
258,590 |
|
|
|
8.52 |
% |
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
72,036 |
|
|
|
|
|
|
|
|
|
|
|
111,564 |
|
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
38,604 |
|
|
|
|
|
|
|
|
|
|
|
32,312 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
305,064 |
|
|
|
|
|
|
|
|
|
|
|
528,918 |
|
|
|
|
|
|
|
|
|
Less allowance for loan and lease losses |
|
|
(82,825 |
) |
|
|
|
|
|
|
|
|
|
|
(64,106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
6,083,985 |
|
|
|
|
|
|
|
|
|
|
$ |
6,731,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market checking |
|
$ |
290,790 |
|
|
$ |
3,406 |
|
|
|
2.36 |
% |
|
$ |
410,471 |
|
|
$ |
4,923 |
|
|
|
2.42 |
% |
Money market savings |
|
|
1,152,525 |
|
|
|
25,726 |
|
|
|
4.50 |
% |
|
|
1,199,666 |
|
|
|
23,849 |
|
|
|
4.01 |
% |
Regular savings |
|
|
125,220 |
|
|
|
1,375 |
|
|
|
2.21 |
% |
|
|
135,916 |
|
|
|
1,154 |
|
|
|
1.71 |
% |
Time deposits |
|
|
1,500,068 |
|
|
|
37,924 |
|
|
|
5.10 |
% |
|
|
1,574,336 |
|
|
|
34,373 |
|
|
|
4.40 |
% |
Short-term borrowings |
|
|
633,603 |
|
|
|
16,581 |
|
|
|
5.28 |
% |
|
|
686,757 |
|
|
|
20,818 |
|
|
|
6.11 |
% |
Collateralized debt |
|
|
1,181,911 |
|
|
|
32,928 |
|
|
|
5.62 |
% |
|
|
893,536 |
|
|
|
22,707 |
|
|
|
5.12 |
% |
Other long-term debt |
|
|
233,955 |
|
|
|
8,680 |
|
|
|
7.48 |
% |
|
|
260,414 |
|
|
|
10,908 |
|
|
|
8.45 |
% |
|
|
|
Total interest-bearing liabilities |
|
$ |
5,118,072 |
|
|
$ |
126,620 |
|
|
|
4.99 |
% |
|
$ |
5,161,096 |
|
|
$ |
118,732 |
|
|
|
4.64 |
% |
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
343,183 |
|
|
|
|
|
|
|
|
|
|
|
768,056 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
102,784 |
|
|
|
|
|
|
|
|
|
|
|
277,920 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
519,946 |
|
|
|
|
|
|
|
|
|
|
|
524,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
6,083,985 |
|
|
|
|
|
|
|
|
|
|
$ |
6,731,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
130,756 |
|
|
|
|
|
|
|
|
|
|
$ |
139,858 |
|
|
|
|
|
Net interest income to average
interest earning assets |
|
|
|
|
|
|
|
|
|
|
4.58 |
% |
|
|
|
|
|
|
|
|
|
|
4.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net interest income from discontinued operations |
|
|
|
|
|
|
(1,215 |
) |
|
|
|
|
|
|
|
|
|
|
14,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income from continuing operations |
|
|
|
|
|
$ |
131,971 |
|
|
|
|
|
|
|
|
|
|
$ |
125,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For purposes of these computations, nonaccrual loans are included in daily average loan
amounts outstanding. |
23
Provision for Loan and Lease Losses from Continuing Operations
The consolidated provision for loan and lease losses for the three months ended June 30, 2007
was $19 million, compared to $7 million for the same period in 2006. Year to date, the provision
for 2007 was $43 million, compared to $16 million for the same period in 2006. More information on
this subject is contained in the section on credit risk.
Noninterest Income from Continuing Operations
Noninterest income during the three months ended June 30, 2007 totaled $10 million, compared
to $9 million for the same period of 2006. Noninterest income of $9 million was recorded for the
six months ended June 30, 2007 and $23 million for the same period in 2006. The decrease in 2007
versus 2006 related primarily to the home equity line of business where there were higher valuation
adjustments on loans held for sale, lower servicing revenues, and lower derivative gains. Details
related to these fluctuations are discussed later in the home equity lending section of this
document.
Noninterest Expense from Continuing Operations
Noninterest expenses for the three and six months ended June 30, 2007 totaled $47 million and
$99 million, respectively, compared to $51 million and $104 million for the same periods in 2006.
The decrease in consolidated noninterest expense in 2007 is primarily due to decreases in the home
equity line of business variable compensation costs. Details related to these fluctuations are
discussed later in the home equity lending section of this document.
Income Tax Provision from Continuing Operations
Income
tax provision for the three months ended June 30, 2007 totaled $3.4 million and income tax
benefit totaled $0.6 million, for the six months ended June 30, 2007, compared to tax provision of
$5.8 million and $10.7 million during the same periods in 2006.
Consolidated Balance Sheet Analysis
Total assets at June 30, 2007 were $6.1 billion, down 2% from December 31, 2006. Average
assets for the first six months of 2007 were $6.1 billion, down 7% from the average assets for the
year ended December 31, 2006. The decline in the consolidated average balance sheet reflects the
sale of the majority of the mortgage banking line of business assets. At June 30, 2007, $27
million of assets from our mortgage banking segment were classified as assets held for sale on our
balance sheet pending the planned sale of these assets.
Investment Securities
The following table shows the composition of our investment securities at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
U.S. Treasury and government obligations |
|
$ |
13,245 |
|
|
$ |
13,730 |
|
Obligations of states and political subdivisions |
|
|
3,436 |
|
|
|
3,545 |
|
Mortgage-backed securities |
|
|
48,189 |
|
|
|
45,187 |
|
Other |
|
|
77,443 |
|
|
|
65,968 |
|
|
|
|
|
|
|
|
Total |
|
$ |
142,313 |
|
|
$ |
128,430 |
|
|
|
|
|
|
|
|
Loans Held For Sale
Loans held for sale totaled $27 million at June 30, 2007, a decrease from a balance of $238
million at December 31, 2006. The reduction occurred primarily at our home equity line of business
where we reclassified $167 million of mortgage loans held for sale to held for investment during
the first quarter reflecting our decision not to sell into weak secondary market conditions.
Details related to this reclassification are discussed later in the home equity lending section
of this document.
24
Loans and Leases
Our commercial loans and leases are originated throughout the United States and Canada. At
June 30, 2007, 93% of our loan and lease portfolio was associated with our U.S. operations. We also
extend credit to consumers throughout the United States through mortgages, installment loans and
revolving credit arrangements. Loans by major category for the periods presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Commercial, financial and agricultural |
|
$ |
2,291,303 |
|
|
$ |
2,249,988 |
|
Residential real estate-construction |
|
|
337,156 |
|
|
|
377,601 |
|
Residential real estate-mortgage |
|
|
1,698,084 |
|
|
|
1,522,616 |
|
Consumer |
|
|
25,274 |
|
|
|
31,581 |
|
Commercial financing |
|
|
|
|
|
|
|
|
Franchise financing |
|
|
783,102 |
|
|
|
699,969 |
|
Domestic leasing |
|
|
303,102 |
|
|
|
296,056 |
|
Canadian leasing |
|
|
417,460 |
|
|
|
358,783 |
|
Unearned income |
|
|
|
|
|
|
|
|
Franchise financing |
|
|
(248,889 |
) |
|
|
(211,480 |
) |
Domestic leasing |
|
|
(42,873 |
) |
|
|
(42,782 |
) |
Canadian leasing |
|
|
(51,963 |
) |
|
|
(44,139 |
) |
|
|
|
Total |
|
$ |
5,511,756 |
|
|
$ |
5,238,193 |
|
|
|
|
Allowance for Loans and Lease Losses
Changes in the allowance for loan and lease losses are summarized below:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
December 31, 2006 |
|
|
And the Six Months |
|
And the Year |
|
|
Then Ended |
|
Then Ended |
|
|
(Dollars in thousands) |
Balance at beginning of year |
|
$ |
74,468 |
|
|
$ |
59,223 |
|
Provision for loan and lease losses |
|
|
42,662 |
|
|
|
35,101 |
|
Charge-offs |
|
|
(29,837 |
) |
|
|
(30,810 |
) |
Recoveries |
|
|
5,326 |
|
|
|
11,208 |
|
Reduction due to reclassification or sale of loans |
|
|
(796 |
) |
|
|
(246 |
) |
Foreign currency adjustment |
|
|
317 |
|
|
|
(8 |
) |
|
|
|
Balance at end of period |
|
$ |
92,140 |
|
|
$ |
74,468 |
|
|
|
|
Deposits
Total deposits for the first half of 2007 averaged $3.4 billion compared to deposits for the
year 2006 that averaged $4.0 billion. Demand deposits for the first half of 2007 averaged $0.3
billion, a 55% decrease over the average balance for the year 2006. Demand deposits totaling $0.4
billion in 2006 related to deposits at Irwin Union Bank and Trust Company (IUBT) which were
associated with escrow accounts held on loans in the servicing portfolio at the discontinued
mortgage banking line of business. These escrow accounts were transferred out of IUBT in early 2007
in connection with the transfer of mortgage servicing rights at the mortgage banking line of
business.
Irwin Union Bank and Trust utilizes institutional broker-sourced deposits as funding to
supplement deposits solicited through branches and other wholesale funding sources. At June 30,
2007, institutional broker-sourced deposits totaled $0.5 billion, unchanged from December 31, 2006.
Short-Term Borrowings
Short-term borrowings during the first half of 2007 averaged $634 million compared to an
average of $544 million for the year 2006. Short-term borrowings totaled $613 million at June 30,
2007, compared to $602 million at December 31, 2006. The increase in
25
average short-term borrowings during the first half of 2007 compared to 2006 reflects declining deposit balances during the first
half of 2007. Proceeds from this financing were used to pay down short-term borrowings.
Federal Home Loan Bank borrowings averaged $483 million for the six months ended June 30,
2007, with an average rate of 5.11%. At June 30, 2007 the balance was $490 million at an interest
rate of 5.14%. The maximum outstanding during any month end during the first six months of 2007 was
$565 million. Federal Home Loan Bank borrowings averaged $322 million for the year ended December
31, 2006, with an average rate of 4.9%. The balance at December 31, 2006 was $372 million at an
interest rate of 5.02%. The maximum outstanding during any month end during 2006 was $609 million.
Collateralized and Other Long-Term Debt
Collateralized debt totaled $1.3 billion at June 30, 2007, compared to $1.2 billion at
December 31, 2006. The bulk of these borrowings resulted from securitization of portfolio loans at
the home equity lending line of business that results in loans remaining as assets and debt being
recorded on the balance sheet. The securitization debt represents match-term funding for these
loans.
Other long-term debt totaled $234 million at June 30, 2007 and December 31, 2006. We have
obligations represented by subordinated debentures totaling $204 million with our wholly-owned
trusts that were created for the purpose of issuing these securities. The subordinated debentures
were the sole assets of the trusts at June 30, 2007. In accordance with FASB Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities (revised December 2004), we deconsolidate
the wholly-owned trusts that issued the trust preferred securities. As a result, these securities
are no longer consolidated on our balance sheet. Instead, the subordinated debentures held by the
trusts are disclosed on the balance sheet as other long-term debt.
Capital
Shareholders equity averaged $520 million during the first six months of 2007, down 1%
compared to the average for the year 2006. Shareholders equity balance of $508 million at June 30,
2007 represented $16.90 per common share, compared to $17.30 per common share at December 31, 2006.
We paid $3.5 million and $7.0 million in dividends for the three and six months ended June 30,
2007, respectively, reflecting an increase of $0.01 and $0.02 per share, respectively, compared to
a year ago. We also paid $0.3 million and $0.7 million for the three and six months ended June 30,
2007, respectively, in preferred dividends on our noncumulative perpetual preferred stock.
The following table sets forth our capital and regulatory capital ratios at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Tier 1 capital |
|
$ |
680,781 |
|
|
$ |
712,403 |
|
Tier 2 capital |
|
|
134,184 |
|
|
|
125,351 |
|
|
|
|
|
|
|
|
Total risk-based capital |
|
$ |
814,965 |
|
|
$ |
837,754 |
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
$ |
6,113,756 |
|
|
$ |
6,258,927 |
|
Risk-based ratios: |
|
|
|
|
|
|
|
|
Tier 1 capital |
|
|
11.1 |
% |
|
|
11.4 |
% |
Total capital |
|
|
13.3 |
|
|
|
13.4 |
|
Tier 1 leverage ratio |
|
|
11.1 |
|
|
|
11.5 |
|
Ending shareholders equity to assets |
|
|
8.3 |
|
|
|
8.5 |
|
Average shareholders equity to assets |
|
|
8.5 |
|
|
|
8.1 |
|
At June 30, 2007, our total risk-adjusted capital ratio was 13.3% exceeding our Policy
internal minimum of 11.0% (we manage to a higher Policy minimum, 12.0%, at our principal
subsidiary, Irwin Union Bank and Trust.). At December 31, 2006, our total risk-adjusted capital
ratio was also 13.4%. Our ending equity to assets ratio at June 30, 2007 was 8.3% compared to 8.5%
at December 31, 2006. Our Tier 1 capital totaled $681 million as of June 30, 2007, or 11.1% of
risk-weighted assets.
Retained earnings increased by $1.7 million during 2007 reflecting the impact of our adoption
of FAS 156 related to accounting for mortgage servicing rights. In accordance with this
pronouncement, we recorded as an increase to retained earnings a $1.7 million one time
(tax-affected) cumulative adjustment on January 1, 2007.
26
Cash Flow Analysis
Our cash and cash equivalents decreased $66 million during the first six months of 2007,
compared to a decrease of $0.8 million during the same period in 2006. Cash flows from operating
activities provided $154 million in cash and cash equivalents in the six months ended June 30, 2007
compared to the same period in 2006 when our operations provided $548 million in cash and cash
equivalents. In the first half of 2007, accounts receivable decreased $138 million which increased
cash provided by operating activities during that period.
Earnings Outlook
We do not provide specific earnings guidance. Our strategy is to seek opportunities for
well-controlled, profitable growth by serving niche markets while attempting to mitigate the impact
of changes in interest rates and economic conditions on our credit retained portfolios. Although at
present we are not meeting our targets, we believe this strategy can, over time, provide above
market growth rates in earnings per share and return on equity. Prior to 2005, a meaningful amount
of our earnings, in many years, came from our conforming conventional first mortgage segment. We
decided to exit this line of business in 2006. Opportunities in our remaining three segments
continue to grow across the U.S. and, in our commercial finance segment, also in Canada. We believe
this growth will contribute in a meaningful way to the Corporations future success.
Home equity is currently performing at an unacceptable level. The segment provides credit and
geographic diversification for commercial portfolios. If we are able
to return it to acceptable financial performance, we believe in the
long run it can generate
excess capital to grow the commercial segments. Achieving this
strategic intent is proving quite difficult in the short term
as we are in the midst of making significant structural changes in
this segment in the face of an external market environment undergoing extensive disruption resulting from increased losses in
the subprime mortgage industry. This disruption in the subprime industry has spilled over into the
broader mortgage market in which we participate. If our initiatives
are successful and the
external market environment normalizes, we believe that this segment can achieve both our financial
goals of double digit earnings growth and a return in excess of the cost of capital.
Our consolidated performance in the first half of 2007 was negatively affected by three
factors: a loss in the home equity segment as a result of a disruption in the secondary markets and
increased loan losses, an impaired commercial credit, and slow loan and deposit growth in
commercial banking. The disruption in the consumer mortgage market has been more significant than
most observers had predicted and there are now fewer buyers for non-conforming mortgage products.
We believe, however, that over time liquidity will be restored for non-conforming mortgages with
prime or near-prime credit risk. Secondly, in the first quarter, we determined that a large loan in
Michigan was impaired due to apparent misrepresentations about collateral by the borrower
discovered during the first quarter of 2007. This appears to have been an isolated event. We have
taken steps to retrain on best practices in collateral review procedures and have embarked on an
extensive review of all material commercial credits in Michigan by our credit risk management
staff. We intend to push our improved practices throughout our origination systems. Finally, we
believe the slowing of growth in the commercial banking segment is attributable to a combination of
decreased demand and some turn-over in our local market leadership of established branches
primarily in the Midwest. We have continued to experience good growth in our newer markets in the
West and we have put in place new processes which we believe will enhance growth in coming
quarters.
As discussed in Note 2 to the Financial Statements, we are reporting the results of our mortgage
banking business as discontinued operations. Weak secondary market conditions have prolonged the
wind-down and increased disposition costs of the discontinued mortgage operations more than
originally anticipated. We have suffered discontinued operations losses in each quarter since
selling the segment. The majority of our current losses relate to credit costs for alleged
breaches of representations and warranties made when loans were sold to the secondary market, prior
to the sale of the segment in 2006. Management expects to report modest losses from Discontinued
Operations in each of the remaining quarters of 2007. The amount of the loss is most likely to be
affected by future economic deterioration, repurchase demands and results of disposition in the
secondary market, which are hard to predict. We believe the bulk of the remaining disposition
activities other than those associated with repurchase demands will be completed by year-end.
Earnings by Line of Business
Irwin Financial Corporation is composed of three principal lines of business:
27
|
|
|
Commercial Finance |
|
|
|
|
Home Equity Lending |
The following table summarizes our net income (loss) by line of business for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
(Dollars in thousands) |
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
|
$ |
6,342 |
|
|
$ |
7,852 |
|
|
$ |
9,505 |
|
|
$ |
14,614 |
|
Commercial Finance |
|
|
2,936 |
|
|
|
2,932 |
|
|
|
5,527 |
|
|
|
5,823 |
|
Home Equity Lending |
|
|
(1,950 |
) |
|
|
(381 |
) |
|
|
(12,100 |
) |
|
|
653 |
|
Other (including consolidating entries) |
|
|
(1,857 |
) |
|
|
(1,434 |
) |
|
|
(3,555 |
) |
|
|
(3,431 |
) |
|
|
|
|
|
Net income (loss) from continuing
operations |
|
|
5,471 |
|
|
|
8,969 |
|
|
|
(623 |
) |
|
|
17,659 |
|
Discontinued operations |
|
|
(5,860 |
) |
|
|
(6,098 |
) |
|
|
(9,895 |
) |
|
|
(16,646 |
) |
|
|
|
|
|
Net (loss) income |
|
$ |
(389 |
) |
|
$ |
2,871 |
|
|
$ |
(10,518 |
) |
|
$ |
1,013 |
|
|
|
|
|
|
Commercial Banking
The following table shows selected financial information for our commercial banking line of
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Selected Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
59,782 |
|
|
$ |
58,583 |
|
|
$ |
117,255 |
|
|
$ |
112,068 |
|
Interest expense |
|
|
(29,890 |
) |
|
|
(27,172 |
) |
|
|
(57,777 |
) |
|
|
(50,795 |
) |
|
|
|
|
|
Net interest income |
|
|
29,892 |
|
|
|
31,411 |
|
|
|
59,478 |
|
|
|
61,273 |
|
Provision for loan and lease losses |
|
|
(800 |
) |
|
|
(1,337 |
) |
|
|
(5,441 |
) |
|
|
(2,813 |
) |
Noninterest income |
|
|
4,188 |
|
|
|
4,593 |
|
|
|
8,135 |
|
|
|
8,862 |
|
|
|
|
|
|
Total net revenue |
|
|
33,280 |
|
|
|
34,667 |
|
|
|
62,172 |
|
|
|
67,322 |
|
Operating expense |
|
|
(22,923 |
) |
|
|
(21,585 |
) |
|
|
(47,214 |
) |
|
|
(43,056 |
) |
|
|
|
|
|
Income before taxes |
|
|
10,357 |
|
|
|
13,082 |
|
|
|
14,958 |
|
|
|
24,266 |
|
Income taxes |
|
|
(4,015 |
) |
|
|
(5,230 |
) |
|
|
(5,453 |
) |
|
|
(9,652 |
) |
|
|
|
|
|
Net income |
|
$ |
6,342 |
|
|
$ |
7,852 |
|
|
$ |
9,505 |
|
|
$ |
14,614 |
|
|
|
|
|
|
|
Performance Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Equity |
|
|
10.70 |
% |
|
|
14.46 |
% |
|
|
8.19 |
% |
|
|
14.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Selected Balance Sheet Data at End of Period: |
|
|
|
|
|
|
|
|
Assets |
|
$ |
3,099,206 |
|
|
$ |
3,103,547 |
|
Loans and leases |
|
|
2,881,748 |
|
|
|
2,901,029 |
|
Allowance for loan and lease losses |
|
|
(26,476 |
) |
|
|
(27,113 |
) |
Deposits |
|
|
2,736,451 |
|
|
|
2,635,380 |
|
Shareholders equity |
|
|
241,768 |
|
|
|
241,556 |
|
Daily Averages: |
|
|
|
|
|
|
|
|
Assets |
|
$ |
3,157,261 |
|
|
$ |
3,143,439 |
|
Loans and leases |
|
|
2,889,207 |
|
|
|
2,797,853 |
|
Allowance for loan and lease losses |
|
|
(27,091 |
) |
|
|
(26,175 |
) |
Deposits |
|
|
2,767,725 |
|
|
|
2,826,446 |
|
Shareholders equity |
|
|
234,129 |
|
|
|
218,076 |
|
Shareholders equity to assets |
|
|
7.42 |
% |
|
|
6.95 |
% |
28
Overview
Our commercial banking line of business focuses on providing credit, cash management and
personal banking products to small businesses and business owners. We offer commercial banking
services through our banking subsidiaries, Irwin Union Bank and Trust Company, an Indiana
state-chartered commercial bank, and Irwin Union Bank, F.S.B., a federal savings bank.
The following tables show the geographic composition of our commercial banking loans and our
core deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Loans |
|
Percent |
|
Average |
|
Loans |
|
Percent |
|
Average |
Markets |
|
Outstanding |
|
of Total |
|
Coupon |
|
Outstanding |
|
of Total |
|
Coupon |
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Indianapolis |
|
$ |
530,635 |
|
|
|
18.4 |
% |
|
|
7.5 |
% |
|
$ |
561,343 |
|
|
|
19.3 |
% |
|
|
7.6 |
% |
Western and Central Michigan |
|
|
477,259 |
|
|
|
16.6 |
% |
|
|
7.6 |
|
|
|
519,348 |
|
|
|
17.9 |
|
|
|
7.7 |
|
Southern Indiana |
|
|
464,283 |
|
|
|
16.1 |
% |
|
|
7.2 |
|
|
|
475,051 |
|
|
|
16.4 |
|
|
|
7.2 |
|
Phoenix |
|
|
468,767 |
|
|
|
16.3 |
% |
|
|
7.7 |
|
|
|
452,919 |
|
|
|
15.6 |
|
|
|
7.9 |
|
Las Vegas |
|
|
165,645 |
|
|
|
5.7 |
% |
|
|
8.2 |
|
|
|
154,218 |
|
|
|
5.3 |
|
|
|
8.1 |
|
Other |
|
|
775,159 |
|
|
|
26.9 |
% |
|
|
7.8 |
|
|
|
738,150 |
|
|
|
25.5 |
|
|
|
7.9 |
|
|
|
|
|
|
Total |
|
$ |
2,881,748 |
|
|
|
100.0 |
% |
|
|
7.6 |
% |
|
$ |
2,901,029 |
|
|
|
100.0 |
% |
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Core |
|
Percent |
|
Average |
|
Core |
|
Percent |
|
Average |
|
|
Deposits |
|
of Total |
|
Coupon |
|
Deposits |
|
of Total |
|
Coupon |
Indianapolis |
|
$ |
252,885 |
|
|
|
10.4 |
% |
|
|
3.1 |
% |
|
$ |
259,835 |
|
|
|
10.8 |
% |
|
|
2.4 |
% |
Western and Central Michigan |
|
|
222,222 |
|
|
|
9.1 |
% |
|
|
3.6 |
|
|
|
231,666 |
|
|
|
9.7 |
|
|
|
3.4 |
|
Southern Indiana |
|
|
795,973 |
|
|
|
32.7 |
% |
|
|
3.3 |
|
|
|
630,060 |
|
|
|
26.3 |
|
|
|
2.8 |
|
Phoenix |
|
|
202,945 |
|
|
|
8.3 |
% |
|
|
4.0 |
|
|
|
179,502 |
|
|
|
7.5 |
|
|
|
3.4 |
|
Las Vegas |
|
|
455,414 |
|
|
|
18.7 |
% |
|
|
4.5 |
|
|
|
467,708 |
|
|
|
19.5 |
|
|
|
4.1 |
|
Other |
|
|
507,983 |
|
|
|
20.8 |
% |
|
|
3.7 |
|
|
|
631,268 |
|
|
|
26.2 |
|
|
|
3.5 |
|
|
|
|
|
|
Total |
|
$ |
2,437,422 |
|
|
|
100.0 |
% |
|
|
3.7 |
% |
|
$ |
2,400,039 |
|
|
|
100.0 |
% |
|
|
3.3 |
% |
|
|
|
|
|
Net Income
Commercial banking net income totaled $6.3 million during the second quarter of 2007 compared
to $7.9 million for the same period in 2006. Year-to-date net income totaled $9.5 million in 2007
compared to net income of $14.6 million in 2006.
Net Interest Income
The following table shows information about net interest income for our commercial banking
line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Net interest income |
|
$ |
29,892 |
|
|
$ |
31,411 |
|
|
$ |
59,478 |
|
|
$ |
61,273 |
|
Average interest earning assets |
|
|
3,104,600 |
|
|
|
3,164,181 |
|
|
|
3,055,570 |
|
|
|
3,102,229 |
|
Net interest margin |
|
|
3.86 |
% |
|
|
3.98 |
% |
|
|
3.93 |
% |
|
|
3.98 |
% |
Net interest income was $30 million for the second quarter of 2007, a decrease of 5% over
second quarter of 2006. Net interest income year to date in 2007 also decreased 3% over the same
period in 2006. The 2007 decline in net interest income resulted primarily from a decrease in our
commercial banking interest earning assets. Net interest margin is computed by dividing net
interest income by average interest earning assets. Net interest margin for the three months ended
June 30, 2007 was 3.86%, compared to 3.98% for the same period in 2006. Year-to-date net interest
margin for 2007 was 3.93%, compared to 3.98% for 2006. The decrease in 2007 margin reflects
competitive conditions and unfavorable repricing of loans and deposits.
29
Provision for Loan and Lease Losses
Provision for loan and lease losses increased to $5.4 million during the first half of 2007,
compared to a provision of $2.8 million during the same period in 2006. The increased provision
relates primarily to a loss identified in the first quarter related to a commercial credit in
Michigan. With respect to this credit, we believe the borrower will be unable to repay the majority
of the loan as we discovered what we believe were misrepresentations about collateral offered for
the loan. As such, we took a charge-off of $4.1 million related specifically to this loan during
the first quarter. With the exception of this loan, credit quality at the commercial banking line
of business declined modestly during the first half of the year, but is still consistent with our
historic experiences. The provision in the second quarter of 2007 was $0.8 million compared to $1.3
million a year earlier See further discussion in the Credit Quality section below.
Noninterest Income
The following table shows the components of noninterest income for our commercial banking line
of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Trust fees |
|
$ |
540 |
|
|
$ |
478 |
|
|
$ |
1,114 |
|
|
$ |
979 |
|
Service charges on deposit accounts |
|
|
926 |
|
|
|
1,102 |
|
|
|
1,794 |
|
|
|
2,061 |
|
Insurance commissions, fees and
premiums |
|
|
436 |
|
|
|
509 |
|
|
|
1,021 |
|
|
|
1,158 |
|
Gain from sales of loans |
|
|
560 |
|
|
|
582 |
|
|
|
1,016 |
|
|
|
1,011 |
|
Loan servicing fees |
|
|
366 |
|
|
|
377 |
|
|
|
750 |
|
|
|
763 |
|
Amortization of servicing assets |
|
|
(290 |
) |
|
|
(293 |
) |
|
|
(569 |
) |
|
|
(534 |
) |
Brokerage fees |
|
|
398 |
|
|
|
362 |
|
|
|
750 |
|
|
|
660 |
|
Other |
|
|
1,252 |
|
|
|
1,476 |
|
|
|
2,259 |
|
|
|
2,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
4,188 |
|
|
$ |
4,593 |
|
|
$ |
8,135 |
|
|
$ |
8,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income during the three and six months ended June 30, 2007 decreased 9% and
8%, respectively, over the same periods in 2006. This decline relates primarily to lower service
charges on deposit accounts and to a loss on sale of other real estate owned (OREO) during the
first half of 2007.
Operating Expenses
The following table shows the components of operating expenses for our commercial banking line
of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Salaries and employee benefits |
|
$ |
12,917 |
|
|
$ |
13,280 |
|
|
$ |
27,269 |
|
|
$ |
26,767 |
|
Other expenses |
|
|
10,006 |
|
|
|
8,305 |
|
|
|
19,945 |
|
|
|
16,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
22,923 |
|
|
$ |
21,585 |
|
|
$ |
47,214 |
|
|
$ |
43,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio |
|
|
67.3 |
% |
|
|
60.0 |
% |
|
|
69.8 |
% |
|
|
61.4 |
% |
Number of employees at period end(1) |
|
|
|
|
|
|
|
|
|
|
588 |
|
|
|
585 |
|
|
|
|
(1) |
|
On a full time equivalent basis. |
Operating expenses for the three and six months ended June 30, 2007 totaled $23 million and
$47 million, respectively, an increase of 6% and 10% over the same periods in 2006. The increase in
operating expenses is primarily due to increased premises and equipment costs due to our recent
office expansions and support staff.
Balance Sheet
Total assets at June 30, 2007 were $3.1 billion, unchanged from December 31, 2006. Earning
assets for the six months ended June 30, 2007 averaged $3.1 billion, unchanged from the same period
in 2006. Average core deposits for the second quarter of 2007 totaled $2.4 billion, an increase of
3% over average core deposits in the first quarter 2007.
30
Credit Quality
The allowance for loan losses to total loans is 0.92% at June 30, 2007, down slightly from
0.93% at December 31, 2006. Total nonperforming assets were $17 million at June 30, 2007, a
decrease of $1.9 million versus year end 2006. Other real estate owned was $5.7 million at June 30,
an increase of $1.3 million compared to the year-end 2006 balance. Nonperforming loans are not
significantly concentrated in any industry category, although a greater than average amount of our
nonperforming loans are located in our Michigan markets. The increase in year-to-date charge-offs
and increase in year-to-date provision for loan losses relate primarily to a single commercial
credit in the Michigan market that was charged off in the first quarter of 2007. The following
table shows information about our nonperforming assets in this line of business and our allowance
for loan losses.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Nonperforming loans |
|
$ |
11,323 |
|
|
$ |
14,455 |
|
Other real estate owned |
|
|
5,683 |
|
|
|
4,423 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
17,006 |
|
|
$ |
18,878 |
|
|
|
|
|
|
|
|
Nonperforming assets to total
assets |
|
|
0.55 |
% |
|
|
0.61 |
% |
Allowance for loan losses |
|
$ |
26,476 |
|
|
$ |
27,113 |
|
Allowance for loan losses to
total loans |
|
|
0.92 |
% |
|
|
0.93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Provision for loan losses |
|
$ |
800 |
|
|
$ |
1,337 |
|
|
$ |
5,441 |
|
|
$ |
2,813 |
|
Net charge-offs |
|
|
1,252 |
|
|
|
715 |
|
|
|
6,079 |
|
|
|
1,307 |
|
Net charge-offs to average loans |
|
|
0.14 |
% |
|
|
0.10 |
% |
|
|
0.42 |
% |
|
|
0.10 |
% |
The following table shows the ratio of nonperforming assets to total loans by market for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
Markets |
|
2007 |
|
2006 |
Indianapolis |
|
|
0.27 |
% |
|
|
0.24 |
% |
Western and Central Michigan |
|
|
2.42 |
% |
|
|
2.72 |
% |
Southern Indiana |
|
|
0.18 |
% |
|
|
0.14 |
% |
Phoenix |
|
|
0.36 |
% |
|
|
0.52 |
% |
Las Vegas |
|
|
0.00 |
% |
|
|
0.00 |
% |
Other |
|
|
0.19 |
% |
|
|
0.06 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
0.59 |
% |
|
|
0.65 |
% |
|
|
|
|
|
|
|
|
|
31
Commercial Finance
The following table shows selected financial information for our commercial finance line of
business for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
(Dollars in thousands) |
|
Selected Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
12,923 |
|
|
$ |
10,107 |
|
|
$ |
24,931 |
|
|
$ |
19,799 |
|
Provision for loan and lease losses |
|
|
(3,053 |
) |
|
|
(1,785 |
) |
|
|
(6,532 |
) |
|
|
(2,949 |
) |
Noninterest income |
|
|
2,947 |
|
|
|
1,999 |
|
|
|
5,738 |
|
|
|
4,149 |
|
|
|
|
|
|
|
|
Total net revenue |
|
|
12,817 |
|
|
|
10,321 |
|
|
|
24,137 |
|
|
|
20,999 |
|
Operating expense |
|
|
(7,934 |
) |
|
|
(5,710 |
) |
|
|
(15,068 |
) |
|
|
(11,648 |
) |
|
|
|
|
|
|
|
Income before taxes |
|
|
4,883 |
|
|
|
4,611 |
|
|
|
9,069 |
|
|
|
9,351 |
|
Income taxes |
|
|
(1,947 |
) |
|
|
(1,679 |
) |
|
|
(3,542 |
) |
|
|
(3,528 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
2,936 |
|
|
$ |
2,932 |
|
|
$ |
5,527 |
|
|
$ |
5,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
2,089 |
|
|
$ |
868 |
|
|
$ |
4,035 |
|
|
$ |
1,615 |
|
Net interest margin |
|
|
4.69 |
% |
|
|
4.50 |
% |
|
|
4.67 |
% |
|
|
4.58 |
% |
Total funding of loans and leases |
|
$ |
174,742 |
|
|
$ |
164,399 |
|
|
$ |
303,353 |
|
|
$ |
284,481 |
|
Return on average equity |
|
|
10.81 |
% |
|
|
16.88 |
% |
|
|
11.26 |
% |
|
|
17.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Selected Balance Sheet Data at End of Period: |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,175,325 |
|
|
$ |
1,073,552 |
|
Loans and leases |
|
|
1,159,939 |
|
|
|
1,056,406 |
|
Allowance for loan and lease losses |
|
|
(15,544 |
) |
|
|
(13,525 |
) |
Shareholders equity |
|
|
105,306 |
|
|
|
88,587 |
|
Overview
We established this line of business in 1999. We offer commercial finance products and
services through a direct subsidiary of our banking subsidiary, Irwin Union Bank and Trust, an
Indiana state-chartered commercial bank and its direct and indirect subsidiaries. In this segment,
we provide small ticket, primarily full payout lease financing on a variety of small business
equipment in the United States and Canada as well as equipment and leasehold improvement financing
for franchisees (mainly in the quick service restaurant sector) in the United States. In 2006, we
expanded our product line to include professional practice financing and information technology
leasing to middle and upper middle market companies throughout the United States and Canada.
We provide cost-competitive, service-oriented financing alternatives to small businesses
generally and to franchisees. We utilize direct and indirect sales forces to distribute our
products. In the small ticket lease channel, with an average lease size of approximately $30
thousand in our portfolio, our sales efforts focus on providing lease solutions for vendors and
manufacturers. The majority of our leases are full payout (no residual), small-ticket assets
secured by commercial equipment. We finance a variety of commercial, light industrial and office
equipment types and limit the concentrations in our loan and lease portfolios. Within the franchise
channel, the financing of equipment and real estate is structured as loans and the loan amounts
average approximately $500 thousand.
32
Portfolio Characteristics
The following tables show the geographic composition of our commercial finance loans and
leases:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
United States |
|
|
|
|
|
|
|
|
California |
|
|
11.9 |
% |
|
|
12.4 |
% |
Texas |
|
|
7.1 |
|
|
|
5.9 |
|
New York |
|
|
4.3 |
|
|
|
5.0 |
|
Florida |
|
|
3.8 |
|
|
|
4.0 |
|
All other states |
|
|
41.4 |
|
|
|
42.8 |
|
|
|
|
|
|
|
|
Total United States |
|
|
68.5 |
% |
|
|
70.1 |
% |
|
|
|
|
|
|
|
Canada |
|
|
|
|
|
|
|
|
Ontario |
|
|
7.6 |
% |
|
|
7.3 |
% |
Quebec |
|
|
7.4 |
|
|
|
7.1 |
|
British Columbia |
|
|
7.3 |
|
|
|
7.0 |
|
Alberta |
|
|
6.3 |
|
|
|
5.8 |
|
All other provinces |
|
|
2.9 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
Total Canada |
|
|
31.5 |
% |
|
|
29.9 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
Total Portfolio |
|
$ |
1,159,939 |
|
|
$ |
1,056,406 |
|
The following table provides certain information about the loan and lease portfolio of
our commercial finance line of business at the dates shown:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Domestic franchise loans |
|
$ |
534,213 |
|
|
$ |
488,489 |
|
Weighted average coupon |
|
|
|
% |
|
|
8.79 |
% |
Delinquency ratio |
|
|
0.36 |
|
|
|
0.16 |
|
Domestic leases |
|
$ |
260,229 |
|
|
$ |
253,274 |
|
Weighted average coupon |
|
|
10.80 |
% |
|
|
10.32 |
% |
Delinquency ratio |
|
|
2.41 |
|
|
|
1.72 |
|
Canadian leases (1) |
|
$ |
365,497 |
|
|
$ |
314,644 |
|
Weighted average coupon |
|
|
9.17 |
% |
|
|
9.13 |
|
Delinquency ratio |
|
|
0.36 |
|
|
|
0.36 |
|
Net Income
During the three months ended June 30, 2007, the commercial finance line of business recorded
net income of $2.9 million, relatively unchanged from the same period in the prior year. Year to
date, the commercial finance line of business earned $5.5 million compared to $5.8 million for the
same period in the prior year. The 2007 year-to-date decline in earnings is attributable primarily
to higher loan loss provision related to our domestic small ticket leasing business as well as
higher compensation and related expenses.
33
Net Interest Income
The following table shows information about net interest income for our commercial finance
line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months June 30, |
|
Six Months June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Net interest income |
|
$ |
12,923 |
|
|
$ |
10,107 |
|
|
$ |
24,931 |
|
|
$ |
19,799 |
|
Average interest earning assets |
|
|
1,104,098 |
|
|
|
900,148 |
|
|
|
1,077,182 |
|
|
|
870,866 |
|
Net interest margin |
|
|
4.69 |
% |
|
|
4.50 |
% |
|
|
4.67 |
% |
|
|
4.58 |
% |
Net interest income was $13 million for the quarter ended June 30, 2007, an increase of
28% over 2006. Year to date net interest income was $25 million, compared to $20 million in 2006.
The improvement in net interest income resulted primarily from an increase in our portfolio. The
total loan and lease portfolio has increased to $1.2 billion at June 30, 2007, an increase of 10%
over year-end 2006 and an increase of 22% over June 30, 2006. This line of business originated $175
million and $303 million in loans and leases during the second quarter and year-to-date 2007,
respectively, compared to $164 million and $284 million during the same periods of 2006.
Net interest margin is computed by dividing net interest income by average interest earning
assets. Net interest margin for the second quarter of 2007 was 4.69% compared to 4.50% in 2006 for
the same period. Year-to-date margins improved to 4.67% in 2007 compared to 4.58% during the same
period in 2006. The increase in 2007 margin is due primarily to higher loan fees.
Provision for Loan and Lease Losses
The provision for loan and lease losses increased to $6.5 million during the first six months
in 2007 compared to $2.9 million for the same period in 2006. The increased provisioning levels
relate primarily to losses identified in the domestic small ticket leasing component of the
commercial finance portfolio.
Noninterest Income
The following table shows the components of noninterest income for our commercial finance line
of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Gain from sales of loans |
|
$ |
1,466 |
|
|
$ |
498 |
|
|
$ |
3,037 |
|
|
$ |
1,252 |
|
Derivative losses, net |
|
|
(258 |
) |
|
|
(165 |
) |
|
|
(274 |
) |
|
|
(218 |
) |
Other |
|
|
1,739 |
|
|
|
1,666 |
|
|
|
2,975 |
|
|
|
3,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
2,947 |
|
|
$ |
1,999 |
|
|
$ |
5,738 |
|
|
$ |
4,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income during the three months ended June 30, 2007 increased 47% over the
same period in 2006. Year to date, noninterest income was $5.7 million, compared to $4.1 million in
the same period of 2006. Included in noninterest income were gains that totaled $0.3 million and
$1.8 million for the three and six months ended June 30, from sales of $6 million and $33 million
in loans, respectively, compared to gains of $0.5 million and $1.3 million during the same periods
in 2006. In addition to whole loan sales, we also sold $39 million in participations of our
franchise loan portfolio during the first half of 2007 resulting in a gain of $1.2 million.
34
Operating Expenses
The following table shows the components of operating expenses for our commercial finance line
of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Salaries and employee benefits |
|
$ |
4,529 |
|
|
$ |
3,055 |
|
|
$ |
9,111 |
|
|
$ |
6,581 |
|
Other |
|
|
3,405 |
|
|
|
2,655 |
|
|
|
5,958 |
|
|
|
5,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
7,934 |
|
|
$ |
5,710 |
|
|
$ |
15,069 |
|
|
$ |
11,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio |
|
|
50.00 |
% |
|
|
47.20 |
% |
|
|
49.10 |
% |
|
|
48.65 |
% |
Number of employees at period end (1) |
|
|
|
|
|
|
|
|
|
|
217 |
|
|
|
195 |
|
|
|
|
(1) |
|
On a full time equivalent basis. |
Operating expenses during the second quarter and first half of 2007 totaled $7.9 million and
$15.1 million, respectively, an increase of 39% and 29% over the same periods in 2006. The
increased salaries and benefits expense relates to the continued growth in this business, including
compensation costs related to higher production levels, infrastructure and staffing development, as
well as incentive compensation costs related to profitability.
Credit Quality
The commercial finance line of business had nonperforming loans and leases at June 30, 2007 of
$5.8 million, compared to $5.4 million as of December 31, 2006. Net charge-offs recorded by this
line of business totaled $2.1 million for the second quarter of 2007, compared to $0.9 million for
the second quarter of 2006. Net charge-offs year to date were $4.0 million, up from the $1.6
million net charge-offs recorded in the first half of 2006. Our allowance for loan and lease losses
at June 30, 2007 totaled $15.5 million, representing 1.34% of loans and leases, compared to a
balance at December 31, 2006 of $13.5 million, or 1.28% of loans and leases.
The following table shows information about our nonperforming loans and leases in this line of
business and our allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Nonperforming loans |
|
$ |
5,773 |
|
|
$ |
5,374 |
|
Allowance for loan losses |
|
|
15,544 |
|
|
|
13,525 |
|
Allowance for loan losses to total loans |
|
|
1.34 |
% |
|
|
1.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Provision for loan losses |
|
$ |
3,053 |
|
|
$ |
1,785 |
|
|
$ |
6,532 |
|
|
$ |
2,949 |
|
Net charge-offs |
|
|
2,089 |
|
|
|
868 |
|
|
|
4,035 |
|
|
|
1,615 |
|
Annualized net charge-offs to average
loans |
|
|
0.76 |
% |
|
|
0.39 |
% |
|
|
0.76 |
% |
|
|
0.38 |
% |
35
Home Equity Lending
The following table shows selected financial information for the home equity lending line of
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Selected Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
24,473 |
|
|
$ |
22,924 |
|
|
$ |
49,037 |
|
|
$ |
46,593 |
|
Provision for loan and lease losses |
|
|
(15,601 |
) |
|
|
(3,704 |
) |
|
|
(30,689 |
) |
|
|
(10,258 |
) |
Noninterest income |
|
|
4,763 |
|
|
|
3,580 |
|
|
|
(2,034 |
) |
|
|
10,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
13,635 |
|
|
|
22,800 |
|
|
|
16,314 |
|
|
|
47,303 |
|
Operating expenses |
|
|
(16,868 |
) |
|
|
(23,419 |
) |
|
|
(36,449 |
) |
|
|
(46,190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
(3,233 |
) |
|
|
(619 |
) |
|
|
(20,135 |
) |
|
|
1,113 |
|
Income taxes |
|
|
1,283 |
|
|
|
238 |
|
|
|
8,035 |
|
|
|
(460 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1,950 |
) |
|
$ |
(381 |
) |
|
$ |
(12,100 |
) |
|
$ |
653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan volume: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit |
|
$ |
7,745 |
|
|
$ |
31,617 |
|
|
$ |
20,356 |
|
|
$ |
94,919 |
|
Loans |
|
|
115,393 |
|
|
|
179,717 |
|
|
|
292,002 |
|
|
|
400,789 |
|
Net home equity charge-offs to average
managed portfolio |
|
|
2.18 |
% |
|
|
0.58 |
% |
|
|
2.61 |
% |
|
|
0.80 |
% |
Gain on sale of loans to loans sold |
|
|
1.42 |
% |
|
|
0.78 |
% |
|
|
0.46 |
% |
|
|
1.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Selected Balance Sheet Data: |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,577,785 |
|
|
$ |
1,617,219 |
|
Home equity loans and lines of credit(1) |
|
|
1,469,814 |
|
|
|
1,280,497 |
|
Allowance for loan losses |
|
|
(49,905 |
) |
|
|
(33,614 |
) |
Home equity loans held for sale |
|
|
26,923 |
|
|
|
236,636 |
|
Residual interests |
|
|
2,730 |
|
|
|
2,760 |
|
Mortgage servicing assets |
|
|
24,465 |
|
|
|
28,231 |
|
Short-term borrowings |
|
|
223,429 |
|
|
|
446,163 |
|
Collateralized debt |
|
|
1,076,239 |
|
|
|
948,939 |
|
Shareholders equity |
|
|
190,157 |
|
|
|
155,791 |
|
Selected Operating Data: |
|
|
|
|
|
|
|
|
Total managed portfolio balance |
|
|
1,656,141 |
|
|
|
1,708,975 |
|
Delinquency ratio (2) |
|
|
3.6 |
% |
|
|
3.2 |
% |
Weighted average coupon rate: |
|
|
|
|
|
|
|
|
Lines of credit |
|
|
11.12 |
% |
|
|
11.13 |
% |
Loans |
|
|
10.94 |
|
|
|
10.75 |
|
|
|
|
(1) |
|
Includes $1.2 billion and $1.1 billion of collateralized loans at June 30, 2007 and December
31, 2006, respectively, pledged as part of securitized financings. |
|
(2) |
|
Nonaccrual loans are included in the delinquency ratio. |
Overview
Our home equity lending line of business originates, purchases, sells, and services a variety
of mortgage loans nationwide. We offer mortgage products through our banking subsidiary, Irwin
Union Bank and Trust, an Indiana state-chartered commercial bank and its direct subsidiary. We
market our mortgage loans (generally using second mortgage liens, but also including first mortgage
liens) principally through brokers and correspondents, but also through the Internet. We seek to
serve creditworthy homeowners who are active credit users.
We offer mortgage loans with combined loan-to-value (CLTV) ratios of up to 125% of their
collateral value to borrowers we believe have prime credit-quality. Mortgage loans are priced using
a proprietary model, taking into account, among other factors, the credit history of our customer
and the relative loan-to-value (LTV) ratio of the loan at origination. For most of our home equity
36
product offerings, we offer customers the choice to accept an early repayment fee in exchange for a
lower interest rate. Generally we either sell loans through whole loan sales or we fund these loans
on balance sheet through warehouse lines or secured, term financings. In an effort to manage
portfolio concentration risk and to comply with existing banking regulations, we have policies in
place governing the size of our investment in loans secured by real estate where the LTV is greater
than 90%.
Production and Portfolio Characteristics
The following table shows the geographic composition of our home equity managed portfolio:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
State |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
California |
|
|
9.8 |
% |
|
|
10.2 |
% |
Michigan |
|
|
8.0 |
|
|
|
7.8 |
|
Colorado |
|
|
7.5 |
|
|
|
7.0 |
|
Florida |
|
|
6.8 |
|
|
|
7.8 |
|
Ohio |
|
|
6.6 |
|
|
|
6.2 |
|
All other states |
|
|
61.3 |
|
|
|
61.0 |
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total managed portfolio in thousands |
|
$ |
1,656,141 |
|
|
$ |
1,708,975 |
|
For the quarter ended June 30, 2007, loans with loan-to-value ratios greater than 100%,
but less than 125% (high LTVs, or HLTVs) constituted 51% of our loan originations and 53% of our
managed portfolio for this line of business. HLTVs constituted 47% of our managed portfolio at
December 31, 2006. Approximately 68%, or $1.1 billion, of our home equity managed portfolio at June
30, 2007 was originated with early repayment provisions.
The following table provides a breakdown of our home equity lending managed portfolio by
product type, outstanding principal balance and weighted average coupon for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Amount |
|
|
% of Total |
|
|
Coupon |
|
|
Amount |
|
|
% of Total |
|
|
Coupon |
|
|
|
(Dollars in thousands) |
|
Loans £ 100% CLTV |
|
$ |
459,331 |
|
|
|
27.73 |
% |
|
|
9.03 |
% |
|
$ |
536,387 |
|
|
|
31.39 |
% |
|
|
9.10 |
% |
Lines of credit £ 100% CLTV |
|
|
275,217 |
|
|
|
16.62 |
|
|
|
9.92 |
|
|
|
319,415 |
|
|
|
18.69 |
|
|
|
9.96 |
|
First mortgages £ 100% CLTV |
|
|
49,472 |
|
|
|
2.99 |
|
|
|
7.56 |
|
|
|
44,727 |
|
|
|
2.62 |
|
|
|
7.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total £ 100% CLTV |
|
|
784,020 |
|
|
|
47.34 |
|
|
|
9.25 |
|
|
|
900,529 |
|
|
|
52.70 |
|
|
|
9.32 |
|
Loans > 100% CLTV |
|
|
752,572 |
|
|
|
45.44 |
|
|
|
12.41 |
|
|
|
677,119 |
|
|
|
39.62 |
|
|
|
12.36 |
|
Lines of credit > 100% CLTV |
|
|
89,652 |
|
|
|
5.41 |
|
|
|
14.54 |
|
|
|
101,683 |
|
|
|
5.95 |
|
|
|
14.55 |
|
First mortgages > 100% CLTV |
|
|
24,166 |
|
|
|
1.46 |
|
|
|
8.49 |
|
|
|
22,916 |
|
|
|
1.34 |
|
|
|
8.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total > 100% CLTV |
|
|
866,390 |
|
|
|
52.31 |
|
|
|
12.52 |
|
|
|
801,718 |
|
|
|
46.91 |
|
|
|
12.53 |
|
Other (including discontinued
products) |
|
|
5,731 |
|
|
|
0.35 |
|
|
|
14.96 |
|
|
|
6,728 |
|
|
|
0.39 |
|
|
|
15.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total managed portfolio(1) |
|
$ |
1,656,141 |
|
|
|
100.00 |
% |
|
|
10.98 |
% |
|
$ |
1,708,975 |
|
|
|
100.00 |
% |
|
|
10.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We define our Managed portfolio as the portfolio ($1.7 billion) that we service and on
which we carry credit risk. At June 30, 2007, we also serviced another $0.9 billion of loans
for which the credit risk is held by others. |
37
The following table shows the composition of our loan volume by categories for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
Product |
|
2007 |
|
2006 |
|
|
(Funding amount in thousands) |
First mortgage loans |
|
|
|
|
|
|
|
|
Funding Amount |
|
|
18,653 |
|
|
|
8,952 |
|
Weighted Average Disposable Income |
|
|
6,311 |
|
|
|
4,988 |
|
Weighted Average FICO score |
|
|
696 |
|
|
|
689 |
|
Weighted Average Coupon |
|
|
8.20 |
% |
|
|
8.10 |
% |
|
|
|
|
|
|
|
|
|
First mortgage loans up to 110% |
|
|
|
|
|
|
|
|
Funding Amount |
|
|
588 |
|
|
|
943 |
|
Weighted Average Disposable Income |
|
|
5,115 |
|
|
|
4,000 |
|
Weighted Average FICO score |
|
|
741 |
|
|
|
688 |
|
Weighted Average Coupon |
|
|
8.49 |
% |
|
|
8.77 |
% |
|
|
|
|
|
|
|
|
|
Home equity loans up to 100% CLTV |
|
|
|
|
|
|
|
|
Funding Amount |
|
|
24,488 |
|
|
|
103,434 |
|
Weighted Average Disposable Income |
|
|
5,466 |
|
|
|
6,629 |
|
Weighted Average FICO score |
|
|
695 |
|
|
|
700 |
|
Weighted Average Coupon |
|
|
10.27 |
% |
|
|
11.08 |
% |
|
|
|
|
|
|
|
|
|
Home equity loans up to 125% CLTV |
|
|
|
|
|
|
|
|
Funding Amount |
|
|
71,664 |
|
|
|
66,388 |
|
Weighted Average Disposable Income |
|
|
4,910 |
|
|
|
4,306 |
|
Weighted Average FICO score |
|
|
696 |
|
|
|
698 |
|
Weighted Average Coupon |
|
|
13.10 |
% |
|
|
12.69 |
% |
|
|
|
|
|
|
|
|
|
Home equity lines of credit up to 100% CLTV |
|
|
|
|
|
|
|
|
Funding Amount |
|
|
3,834 |
|
|
|
28,556 |
|
Weighted Average Disposable Income |
|
|
6,607 |
|
|
|
5,765 |
|
Weighted Average FICO score |
|
|
699 |
|
|
|
694 |
|
Weighted Average Coupon |
|
|
11.14 |
% |
|
|
9.65 |
% |
|
|
|
|
|
|
|
|
|
Home equity lines of credit up to 125% CLTV |
|
|
|
|
|
|
|
|
Funding Amount |
|
|
3,911 |
|
|
|
3,061 |
|
Weighted Average Disposable Income |
|
|
5,442 |
|
|
|
4,393 |
|
Weighted Average FICO score |
|
|
684 |
|
|
|
693 |
|
Weighted Average Coupon |
|
|
14.56 |
% |
|
|
14.93 |
% |
|
|
|
|
|
|
|
|
|
All Products |
|
|
|
|
|
|
|
|
Funding Amount |
|
|
123,138 |
|
|
|
211,334 |
|
Weighted Average Disposable Income |
|
|
5,304 |
|
|
|
5,557 |
|
Weighted Average FICO score |
|
|
696 |
|
|
|
698 |
|
Weighted Average Coupon |
|
|
11.76 |
% |
|
|
11.31 |
% |
Net Income
Our home equity lending business recorded a net loss of $2.0 million during the three months
ended June 30, 2007, compared to a net loss for the same period in 2006 of $0.4 million. A
year-to-date loss of $12.1 million was recorded through June 30, 2007, compared to net income of
$0.7 million during the same period a year earlier.
38
Net Revenue
Net revenue for the three and six months ended June 30, 2007 totaled $14 million and $16
million, respectively, compared to net revenue for the same periods in 2006 of $23 million and $47
million. The decrease in revenues is primarily a result of higher loan loss provision and lower
gains from loan sales.
During the second quarter of 2007, our home equity lending business produced $123 million of
home equity loans, compared to $211 million during the same period in 2006. The decrease in volume
principally reflects a decline in acquisitions in the retail channel and reflects disruptions in
the secondary markets during the first half of 2007. The table below shows our originations by
channel for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, |
|
For the Six Months Ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Total originations |
|
$ |
123,138 |
|
|
$ |
211,334 |
|
|
$ |
312,358 |
|
|
$ |
495,708 |
|
Percent broker |
|
|
50 |
% |
|
|
29 |
% |
|
|
50 |
% |
|
|
27 |
% |
Percent correspondent |
|
|
39 |
|
|
|
26 |
|
|
|
39 |
|
|
|
29 |
|
Percent retail loans |
|
|
11 |
|
|
|
14 |
|
|
|
8 |
|
|
|
20 |
|
Percent other |
|
|
|
|
|
|
31 |
|
|
|
3 |
|
|
|
24 |
|
Our home equity lending business had $1.5 billion of net loans and loans held for sale at
June 30, 2007 unchanged from December 31, 2006. Included in the loan balance at June 30, 2007 were
$1.2 billion of collateralized loans as part of secured financings.
The following table sets forth certain information regarding net revenue for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Net interest income |
|
$ |
24,473 |
|
|
$ |
22,924 |
|
|
$ |
49,037 |
|
|
$ |
46,593 |
|
Provision for loan losses |
|
|
(15,601 |
) |
|
|
(3,704 |
) |
|
|
(30,689 |
) |
|
|
(10,258 |
) |
Gain on sales of whole loans |
|
|
1,588 |
|
|
|
618 |
|
|
|
1,841 |
|
|
|
3,004 |
|
Valuation adjustment on loans held for sale |
|
|
(166 |
) |
|
|
(5,088 |
) |
|
|
(8,141 |
) |
|
|
(5,541 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sales of loans |
|
|
1,422 |
|
|
|
(4,470 |
) |
|
|
(6,300 |
) |
|
|
(2,537 |
) |
Loan servicing fees |
|
|
4,751 |
|
|
|
10,472 |
|
|
|
10,278 |
|
|
|
18,194 |
|
Amortization of servicing assets |
|
|
(32 |
) |
|
|
(5,760 |
) |
|
|
(68 |
) |
|
|
(11,994 |
) |
(Impairment) recovery of servicing assets |
|
|
(1,966 |
) |
|
|
409 |
|
|
|
(6,600 |
) |
|
|
983 |
|
Derivative gains (losses) |
|
|
12 |
|
|
|
2,934 |
|
|
|
(282 |
) |
|
|
5,841 |
|
Other |
|
|
576 |
|
|
|
(5 |
) |
|
|
938 |
|
|
|
481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
13,635 |
|
|
$ |
22,800 |
|
|
$ |
16,314 |
|
|
$ |
47,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income increased to $24 million for the three months ended June 30, 2007,
compared to $23 million for the same period in 2006. Year-to-date net interest income for 2007 was
$49 million, compared to $47 million for 2006. The increase in net interest income is primarily due
to higher rates and average loan balances in 2007 compared to 2006.
Provision for loan losses increased to $16 million in the second quarter of 2007, compared to
$4 million during the same period in 2006. Year-to-date provision for loan losses was $31 million
in 2007 compared to $10 million in 2006. The increased provision in 2007 relates primarily to the
reclassification of $167 million of mortgage loans held for sale to held for investment during the
first quarter reflecting our decision not to sell into weak secondary market conditions. The loans
and lines that were moved were originated with the intent to sell into the secondary market,
however, conditions in that market deteriorated rapidly during the first quarter. It is
managements expectation that conditions will improve, but only gradually and, as a result,
determined that it was more appropriate to move these loans into held for investment. These
transferred loans resulted in an increase of $6 million to the provision for loan losses during the
first quarter. During the second quarter, the actual and expected performance of portfolio loans
deteriorated, leading to the need to provide additional reserves for potential future loan losses.
We expect weaknesses in this portfolio to continue as long as challenging conditions in the
mortgage market persist.
39
We completed whole loan sales during the second quarter of 2007 of $35 million resulting in a
gain on sale of loans of $0.5 million, compared to $0.8 million in gain on the sale of $336 million
of loans during the same period in 2006. In addition, net charge offs in our loans held for sale
classification reduced the gain on sale during the quarter. As mentioned above, $167 million of
loans were reclassified to held for investment during the first quarter. We charged off $7 million
in the first quarter related to this pool of loans to mark them to market prior to the
reclassification.
Loan servicing fees totaled $5 million during the second quarter of 2007 compared to $10
million during the same period in 2006. Year to date, loan servicing fees totaled $10 million,
compared to $18 million during the same period in 2006. The servicing portfolio underlying the
mortgage servicing asset totaled $1.1 billion at June 30, 2007 compared to $1.7 billion at June 30,
2006. Included in loan servicing fees are incentive servicing fees (ISFs). As part of certain
whole loan sales, we have the right to an incentive servicing fee that will provide cash payments
to us once a pre-established return for the certificate holders and certain structure-specific loan
credit and servicing performance metrics are met. At June 30, 2007, we were receiving incentive
fees for six transactions that met these performance metrics. During the second quarter of 2007,
we earned $1.7 million in ISF fees, compared to $4.3 million during the same period in
2006. For the first half of 2007, we earned $3.6 million in ISF fees, compared to $5.7 million
during the same period in 2006. The following table summarizes ISF revenue recognized by quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
First Quarter |
|
$ |
471 |
|
|
$ |
325 |
|
|
$ |
1,387 |
|
|
$ |
1,933 |
|
Second Quarter |
|
|
234 |
|
|
|
681 |
|
|
|
4,278 |
|
|
|
1,708 |
|
Third Quarter |
|
|
244 |
|
|
|
851 |
|
|
|
659 |
|
|
NA |
|
Fourth Quarter |
|
|
|
|
|
|
481 |
|
|
|
2,757 |
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to date |
|
$ |
949 |
|
|
$ |
2,338 |
|
|
$ |
9,081 |
|
|
$ |
3,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and impairment of servicing assets includes amortization expenses and
valuation adjustments relating to the carrying value of servicing assets. We determine fair value
of the home equity lending servicing asset using discounted cash flows and assumptions as to
estimated future servicing income and cost that we believe market participants would use to value
similar assets. In addition, we periodically assess these modeled assumptions for reasonableness
through independent third-party valuations. Servicing asset amortization and impairment expense
totaled $7 million during the first half of 2007, compared to $11 million for the six months ended
June 30, 2006. This decrease reflects a smaller portfolio and reduced prepayment speeds. During the
first quarter of 2007, the home equity lending line of business adopted the fair value method of
accounting for mortgage servicing rights in accordance with SFAS 156. As a result, we are no longer
amortizing servicing rights underlying high loan-to-value first mortgages and second mortgages.
Rather, we are adjusting the fair value each quarter and recognizing a fair value adjustment
through impairment on the income statement.
We originate fixed rate loans that are susceptible to decreases in value in a period of
increasing interest rates. To protect against such decreases, we enter into derivative contracts.
Derivative gains were $12 thousand for the second quarter of 2007 and we had derivative losses of
$0.3 million year to date. This compares with gains of $2.9 million and $5.8 million for the same
periods in 2006. The decrease in derivative gains in 2007 versus 2006 is due to fewer derivative
contracts outstanding.
Operating Expenses
The following table shows operating expenses for our home equity lending line of business for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Salaries and employee benefits |
|
$ |
10,391 |
|
|
$ |
15,127 |
|
|
$ |
22,553 |
|
|
$ |
28,727 |
|
Other |
|
|
6,477 |
|
|
|
8,292 |
|
|
|
13,896 |
|
|
|
17,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
16,868 |
|
|
$ |
23,419 |
|
|
$ |
36,449 |
|
|
$ |
46,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at period end (1) |
|
|
|
|
|
|
|
|
|
|
458 |
|
|
|
472 |
|
|
|
|
(1) |
|
On a full time equivalent basis. |
40
Operating expenses were $17 million and $36 million for the three and six months ended June
30, 2007, compared to $23 million and $46 million for the same periods in 2006. Operating expenses
declined in 2007 primarily due to a restructuring and downsizing of the retail channel which took
place in the second quarter of 2006 and other cost cutting initiatives.
Home Equity Servicing
Our home equity lending business continues to service certain of the loans it has securitized
and sold. We earn a servicing fee of approximately 50 to 100 basis points of the outstanding
principal balance of the loans securitized. The total servicing portfolio was $2.6 billion at June
30, 2007, compared to $2.9 billion at December 31, 2006. For whole loans sold with servicing
retained totaling $0.6 billion at June 30, 2007 and $0.7 billion at December 31, 2006, we
capitalize servicing fees including rights to future early repayment fees. During the first quarter
of 2007, we adopted the fair value method under FAS 156. Adoption of this new standard resulted in
a $2.9 million increase in our servicing asset to adjust its value to fair market value. We
recorded a one time (tax-affected) cumulative adjustment to retained earnings of $1.7 million to
reflect the adoption of this new standard. The servicing asset at June 30, 2007 was $24 million,
down from $28 million at December 31, 2006 reflecting the decrease in fair value as a result of
recognizing the asset at fair value under FAS 156.
Our managed portfolio, representing that portion of the servicing portfolio on which we have
retained credit risk, is separated into two categories: $1.5 billion of loans originated and held
on balance sheet either as loans held for investment or loans held for sale, and $0.2 billion of
loans and lines of credit securitized for which we retained a residual interest. In both cases, we
retain credit and interest rate risk.
Included below in the category Credit Risk Sold, Potential Incentive Servicing Fee Retained
Portfolio are $0.5 billion of loans at June 30, 2007 and $0.6 billion of loans at December 31,
2006 for which we have the opportunity to earn an incentive servicing fee. While the credit
performance of these loans we have sold is one factor that can affect the value of the incentive
servicing fee, we do not have direct credit risk in these pools.
The following table sets forth certain information for these portfolios. The managed portfolio
includes those loans we service with credit risk retained. Delinquency rates and losses on our
managed portfolio result from a variety of factors, including loan seasoning, portfolio mix, and
general economic conditions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2006 |
Managed Portfolio |
|
(Dollars in thousands) |
|
|
|
|
Total Loans |
|
$ |
1,656,141 |
|
|
$ |
1,708,975 |
|
|
$ |
1,600,288 |
|
30 days past due |
|
|
3.64 |
% |
|
|
3.16 |
% |
|
|
2.67 |
% |
90 days past due |
|
|
1.52 |
|
|
|
1.19 |
|
|
|
1.01 |
|
Annualized QTD Net Chargeoff Rate |
|
|
2.18 |
|
|
|
1.50 |
|
|
|
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsold Loans |
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans (1) |
|
$ |
1,490,752 |
|
|
$ |
1,515,881 |
|
|
$ |
1,301,618 |
|
30 days past due |
|
|
3.97 |
% |
|
|
3.54 |
% |
|
|
2.61 |
% |
90 days past due |
|
|
1.67 |
|
|
|
1.32 |
|
|
|
1.04 |
|
Annualized QTD Net Chargeoff Rate |
|
|
2.43 |
|
|
|
1.71 |
|
|
|
0.68 |
|
Loan Loss Reserve |
|
$ |
49,905 |
|
|
$ |
33,614 |
|
|
$ |
28,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned Residual |
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
$ |
165,389 |
|
|
$ |
193,094 |
|
|
$ |
298,670 |
|
30 days past due |
|
|
0.73 |
% |
|
|
0.20 |
% |
|
|
2.94 |
% |
90 days past due |
|
|
0.17 |
|
|
|
0.18 |
|
|
|
0.88 |
|
Annualized QTD Net Chargeoff Rate |
|
|
|
|
|
|
|
|
|
|
(0.53 |
) |
Residual Undiscounted Losses |
|
$ |
610 |
|
|
$ |
430 |
|
|
$ |
470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Sold, Potential Incentive
Servicing Fee Retained Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
$ |
528,846 |
|
|
$ |
627,838 |
|
|
$ |
772,066 |
|
30 days past due |
|
|
5.43 |
% |
|
|
5.40 |
% |
|
|
3.83 |
% |
90 days past due |
|
|
2.00 |
|
|
|
2.30 |
|
|
|
1.38 |
|
|
|
|
(1) |
|
Excludes deferred fees and costs. |
41
Discontinued OperationsMortgage Banking
In 2006, we sold the mortgage banking line of business origination operation, including the
majority of this segments loans held for sale, as well as the majority of this segments
capitalized mortgage servicing rights to five separate purchasers. In January 2007, we transferred
certain assets associated with this segments servicing platform and placed the bulk of our
remaining staff with a sixth buyer. We have some staff continuing to work at IMC through the
wind-down of our remaining assets managing repurchased loans and collecting outstanding documents
required for the completion of servicing transfers.
In accordance with the provisions of SFAS 144, the results of operations of the mortgage
banking line of business for the current and prior periods have been reported as discontinued
operations. In addition, certain of the remaining assets for this segment have been reclassified as
held for sale in the consolidated balance sheet.
Weak secondary market conditions negatively affected the continuation of the wind-down and
disposition costs of the discontinued mortgage operations. During the second quarter, the
discontinued segment lost $5.9 million, compared to $4.0 million during the first quarter. The
majority of our current losses relate to credit costs for alleged breaches of representations and
warranties made when loans were sold to the secondary market, prior to the sale of the segment in
2006. In addition, the loss in the second quarter includes mark-to-market adjustments on the
remaining assets that we are currently marketing for sale. The amount of any future loss is most
likely to be affected by future repurchase demands and results of disposition in the secondary
market, which are difficult to predict. We believe the bulk of the remaining disposition
activities other than those associated with repurchase demands will be completed by year-end.
Parent and Other
Results at the parent company and other businesses totaled a net loss of $1.9 million and $3.6
million for the three and six months ended June 30, 2007, compared to a loss of $1.4 million and
$3.4 million during the same periods in 2006. These losses at the parent company primarily relate
to operating and interest expenses in excess of management fees charged to the lines of business
and interest income earned on intracompany loans. Parent company operating results also include
allocations to our subsidiaries of interest expense related to our interest-bearing capital
obligations. During the six month period ended June 30, 2007, we allocated $8.7 million of these
expenses to our subsidiaries, compared to $6.5 million during the first half of 2006.
Each subsidiary pays taxes to us at the statutory rate. Subsidiaries also pay fees to us to
cover direct and indirect services. In addition, certain services are provided from one subsidiary
to another. Intercompany income and expenses are calculated on an arms-length, external market
basis and are eliminated in consolidation.
Risk Management
We are engaged in businesses that involve the assumption of risks including:
|
|
|
Credit risk |
|
|
|
|
Liquidity risk |
|
|
|
|
Market risk (including interest rate and foreign exchange risk) |
|
|
|
|
Operational risk |
|
|
|
|
Compliance risk |
The Board of Directors has primary responsibility for establishing the Corporations risk
appetite and overseeing its risk management system. Primary responsibility for management of risks
within the risk appetite set by the Board of Directors rests with the managers of our business
units, who are responsible for establishing and maintaining internal control systems and procedures
that are appropriate for their operations. To provide an independent assessment of line
managements risk mitigation procedures, we have established a centralized enterprise-wide risk
management function. To maintain independence, this function is staffed with managers with
substantial expertise and experience in various aspects of risk management who are not part of line
management. They report to the Chief Risk Officer (CRO), who in turn reports to the Risk Management
Committee of our Board of Directors. Our Internal Audit
42
function independently audits both risk management activities in the lines of business and the
work of the centralized enterprise-wide risk management function and reports directly to the Audit
Committee of our Board of Directors.
Given the on-going growth in the scope of the Corporation, our efforts to date to improve our
risk management systems, and heightened industry and regulatory focus around credit, market,
liquidity, operational and compliance risks, the Board, having reviewed and evaluated results of
reports from Internal Audit, Risk Management, and regulatory exams, embarked in 2006 on a
comprehensive review of our risk management systems. These assessments were conducted at the
Boards direction by a third-party to ensure independence and access to best-in-class practices. As
a result of these assessments, management has developed a program of risk management improvement
steps that it has begun implementing on an enterprise-wide basis. The costs of these resources are
reflected in current period earnings.
Each line of business that assumes risk uses a formal process to manage this risk. In all
cases, the objectives are to ensure that risk is contained within the risk appetite established by
our Board of Directors and expressed through policy guidelines and limits. In addition, we attempt
to take risks only when we are adequately compensated for the level of risk assumed.
Our CEO, Executive Vice President, CFO, Senior Vice President, and Chief Risk Officer meet on
a regularly-scheduled basis (or more frequently as appropriate) as an Enterprise-wide Risk
Management Committee (ERMC), reporting to the Board of Directors Risk Management Committee. Our
Chief Risk Officer, who reports directly to the Risk Management Committee, chairs the ERMC. In
2006, the ERMC reported to the Audit and Risk Management Committee of the Board of Directors. On
January 1, 2007, the Board formed two committees, an Audit Committee and a separate Risk Management
Committee in order to focus more independent oversight at the board level on the governance of the
Corporations risk management system. To ensure coordination between the two committees, the Chair
of each committee is a member of the other committee. Beginning in 2007, the ERMC reports to the
newly-formed Risk Management Committee of the Board of Directors.
Each of our principal risks is managed directly at the line of business level, with oversight
and, when appropriate, standardization provided by the ERMC and its subcommittees. The ERMC and its
subcommittees oversee all aspects of our credit, market, operational and compliance risks. The ERMC
provides senior-level review and enhancement of line manager risk processes and oversight of our
risk reporting, surveillance and model parameter changes.
Credit Risk
The assumption of credit risk is a key source of our earnings. However, the credit risk in our
loan portfolios has the most potential for a significant effect on our consolidated financial
performance. Each of our segments has a Chief Credit Officer with expertise specific to the product
line and manages credit risk through various combinations of the use of lending policies, credit
analysis and approval procedures, periodic loan reviews, servicing activities, and/or personal
contact with borrowers. Commercial loans over a certain size, depending on the loan type and
structure, are reviewed by a loan committee prior to approval. We perform independent loan review
across the Corporation through a centralized function that reports directly to the head of Credit
Risk Management who in turn reports to the Chief Risk Officer.
The allowance for loan and lease losses is an estimate based on our judgment applying the
principles of SFAS 5, Accounting for Contingencies, SFAS 114, Accounting by Creditors for
Impairment of a Loan, and SFAS 118, Accounting by Creditors for Impairment of a Loan Income
Recognition and Disclosures. The allowance is maintained at a level we believe is adequate to
absorb probable losses inherent in the loan and lease portfolio. We perform an assessment of the
adequacy of the allowance at the segment level no less frequently than on a quarterly basis and
through review by a subcommittee of the ERMC.
Within the allowance, there are specific and expected loss components. The specific loss
component is based on a regular analysis of all loans over a fixed-dollar amount where the internal
credit rating is at or below a predetermined classification. From this analysis we determine the
loans that we believe to be impaired in accordance with SFAS 114. Management has defined impaired
as nonaccrual loans. For loans determined to be impaired, we measure the level of impairment by
comparing the loans carrying value using one of the following fair value measurement techniques:
present value of expected future cash flows, observable market price, or fair value of the
associated collateral. An allowance is established when the collateral value of the loan implies a
value that is lower than carrying value. In addition to establishing allowance levels for
specifically identified higher risk graded or high delinquency loans, management determines an
allowance for all other loans in the portfolio for which historical or projected experience
indicates that certain losses will occur. These loans are segregated by major product type, and in
some instances, by aging, with an estimated loss ratio or migration pattern applied against each
product type and aging category. For portfolios that are too new to have adequate historical
experience on which to base a loss estimate, we use estimates derived from industry experience and
managements
43
judgment. The loss ratio or migration patterns are generally based upon historic loss
experience or historic rate migration behaviors, respectively, for each loan type adjusted for
certain environmental factors management believes to be relevant.
Net charge-offs for the three months ended June 30, 2007 in our held for investment portfolio
were $12 million, or 0.9% of average loans, compared to $4 million, or 0.3% of average loans during
the same period in 2006. Year-to-date net charge-offs were $25 million, compared to $8 million
during the same period in 2006. The increase in charge-offs and allowance is due in part to a
single large commercial credit in Michigan that was charged off during the first quarter. We
believe the borrower will be unable to repay the majority of the loan as we recently discovered
what we believe were misrepresentations about collateral offered for the loan. In addition, a
reclassification of home equity loans from the held-for-sale category to the held-for-investment
category during the first quarter resulted in a $7 million charge off as these loans were marked to
market at the date of transfer. In addition, we incurred a $6 million increase to our loan loss
provision in connection with these same loans. At June 30, 2007, the allowance for loan and lease
losses was 1.7% of outstanding loans and leases, compared to 1.4% at year-end 2006.
Total nonperforming loans and leases at June 30, 2007, were $43 million compared to $38
million at December 31, 2006. Nonperforming loans and leases as a percent of total loans and leases
at June 30, 2007 were 0.8%, an increase from 0.7% at December 31, 2006. Other real estate we owned
totaled $17 million at June 30, 2007, up from $15 million at December 31, 2006. Total nonperforming
assets at June 30, 2007 were $61 million, or 1.0% of total assets compared to nonperforming assets
at December 31, 2006 of $58 million, or 0.9% of total assets.
The following table shows information about our nonperforming assets at the dates shown:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Accruing loans past due 90 days or more: |
|
|
|
|
|
|
|
|
Commercial, financial and
agricultural loans |
|
$ |
146 |
|
|
$ |
|
|
Consumer loans |
|
|
4 |
|
|
|
73 |
|
Commercial financing |
|
|
|
|
|
|
|
|
Domestic leasing |
|
|
45 |
|
|
|
83 |
|
Foreign leasing |
|
|
128 |
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
|
323 |
|
|
|
392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans and leases: |
|
|
|
|
|
|
|
|
Commercial, financial and
agricultural loans |
|
|
10,040 |
|
|
|
13,296 |
|
Real estate mortgages |
|
|
26,233 |
|
|
|
18,125 |
|
Consumer loans |
|
|
724 |
|
|
|
696 |
|
Commercial financing |
|
|
|
|
|
|
|
|
Franchise financing |
|
|
1,818 |
|
|
|
791 |
|
Domestic leasing |
|
|
2,366 |
|
|
|
2,495 |
|
Foreign leasing |
|
|
1,416 |
|
|
|
1,768 |
|
|
|
|
|
|
|
|
|
|
|
42,597 |
|
|
|
37,171 |
|
|
|
|
|
|
|
|
Total nonperforming
loans and leases |
|
|
42,920 |
|
|
|
37,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming Loans held for Sale not guaranteed |
|
|
993 |
|
|
|
5,564 |
|
Other real estate owned |
|
|
16,716 |
|
|
|
15,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
60,629 |
|
|
$ |
58,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans and leases to total
loans and leases |
|
|
0.8 |
% |
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets total
assets |
|
|
1.0 |
% |
|
|
0.9 |
% |
|
|
|
|
|
|
|
44
For the periods presented, the balances of any restructured loans are reflected in the
table above either in the amounts shown for accruing loans past due 90 days or more or in the
amounts shown for nonaccrual loans and leases.
The nonperforming assets at June 30, 2007 and December 31, 2006 were held at our lines of
business as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
|
|
|
(In millions) |
|
|
|
|
Commercial banking |
|
$ |
17 |
|
|
$ |
19 |
|
|
|
|
|
Commercial finance |
|
|
6 |
|
|
|
5 |
|
|
|
|
|
Home equity lending |
|
|
30 |
|
|
|
23 |
|
|
|
|
|
Mortgage banking |
|
|
8 |
|
|
|
11 |
|
Generally, the accrual of income is discontinued when the full collection of principal or
interest is in doubt, or when the payment of principal or interest has become contractually 90 days
past due unless the obligation is both well secured and in the process of collection. Loans are
charged-off upon evidence of expected loss or 180 days past due, whichever comes first.
Liquidity Risk
Liquidity is the availability of funds to meet the daily requirements of our business. For
financial institutions, demand for funds results principally from extensions of credit, withdrawal
of deposits, and maturity of other funding liabilities. Liquidity is provided through deposits and
short-term and long-term borrowings, by asset maturities or sales, and through equity capital.
The objectives of liquidity management are to ensure that funds will be available to meet
current and future demands and that funds are available at a reasonable cost. Since loan assets are
less marketable than securities and, therefore, need less volatile liability funding, the ratio of
total loans to total deposits is a traditional measure of liquidity for banks and bank holding
companies. At June 30, 2007, the ratio of loans (which excludes loans held for sale) to total
deposits was 166%. We permanently fund a significant portion of our loans with secured financings,
which effectively eliminates liquidity risk on these assets until we elected to exercise a clean up
call. The ratio of loans to total deposits after reducing loans for those funded with secured
financings was 120%.
Since 2002, home equity loan securitizations have generally been retained on-balance sheet. As
a result, both the securitized assets and the funding from these on balance sheet securitizations
are now reflected on the balance sheet. From a liquidity perspective, the securitizations provide
matched-term funding for the life of the loans making up the securitizations unless we choose to
utilize a clean-up call provision to terminate the securitization funding early. A clean-up
call typically is optional at the master servicers discretion. It can typically be made once
outstanding loan balances in the securitization fall below 10% of the original loan balance in the
securitization. Bond principal payments are dependent upon principal collections on the underlying
loans. Prepayment speeds can affect the timing and amount of loan principal payments.
Our deposits consist of two primary types: non-maturity transaction account deposits and
certificates of deposit (CDs). Core deposits exclude jumbo CDs, brokered CDs, and public fund CDs.
Core deposits totaled $2.5 billion at June 30, 2007, compared to $2.4 billion at December 31, 2006.
Non-maturity transaction account deposits are generated by our commercial banking line of
business and include deposits placed into checking, savings, money market and other types of
deposit accounts by our customers. These types of deposits have no contractual maturity date and
may be withdrawn at any time. While these balances fluctuate daily, a large percentage typically
remains for much longer. At June 30, 2007, these deposit types totaled $1.7 billion, unchanged from
December 31, 2006. We monitor overall deposit balances daily with particular attention given to
larger accounts that have the potential for larger daily fluctuations and which are at greater risk
to be withdrawn should there be an industry-wide or bank-specific event that might cause uninsured
depositors to be concerned about the safety of their deposits. On a monthly basis we model the
expected impact on liquidity from moderate and severe liquidity stress scenarios as one of our
tools to ensure that our liquidity is sufficient.
CDs differ from non-contractual maturity accounts in that they have contractual maturity
dates. We issue CDs both directly to customers and through brokers. As of June 30, 2007, CDs issued
directly to customers totaled $0.6 billion, an increase of $0.1 billion from December 31, 2006.
Brokered CDs are typically considered to have higher liquidity (renewal) risk than CDs issued
directly to customers, since brokered CDs are often done in large blocks and since a direct
relationship does not exist with the depositor. In recognition of this, we manage the size and
maturity structure of brokered CDs closely. For example, the maturities of brokered CDs
45
are laddered to mitigate liquidity risk. CDs issued through brokers totaled $0.5 billion at
June 30, 2007, and had an average remaining life of 17 months, unchanged from December 31, 2006.
Escrow account deposits are related to the servicing of our originated first mortgage loans.
At June 30, 2007, these escrow balances totaled $8 million, a $317 million decrease from December
31, 2006. We sold the majority of our mortgage servicing rights in the third quarter of 2006 and
transferred the servicing and related escrows in early January 2007. These deposits had been used
primarily to fund mortgage loans prior to the sale of our first mortgage business.
Short-term borrowings consist of borrowings from several sources. Our largest borrowing source
is the Federal Home Loan Bank of Indianapolis (FHLBI). We utilize their collateralized borrowing
programs to help fund qualifying first mortgage, home equity and commercial real estate loans. As
of June 30, 2007, FHLBI borrowings outstanding totaled $0.5 billion, a $0.1 billion increase from
December 31, 2006. We had sufficient collateral pledged to FHLBI at June 30, 2007 to borrow an
additional $0.2 billion, if needed.
In addition to borrowings from the FHLBI, we use other lines of credit as needed. We have
three lines of credit subject to compliance with certain financial covenants set forth in these
facilities including, but not limited to, net income, consolidated tangible net worth, return on
average assets, nonperforming loans, loan loss reserve, Tier 1 leverage ratio, and risk-based
capital ratio. We are in compliance with all applicable covenants as of June 30, 2007.
At June 30, 2007, the amount of short-term borrowings outstanding on our major credit lines
and the total amount of the borrowing lines were as follows:
|
|
|
Warehouse lines of credit to fund primarily home equity loans: none outstanding on a $300
million borrowing facility, of which $150 million is committed |
|
|
|
Lines of credit with correspondent banks, including fed funds lines: none outstanding out
of $175 million available but not committed |
|
|
|
Lines of credit with non-correspondent banks: $130 million outstanding |
|
|
|
Warehouse lines of credit and conduits to fund Canadian sourced small ticket leases: $252
million outstanding on $366 million of borrowing facilities |
In order to further diversify our funding sources, we have recently developed an internet
deposit platform. Element Financial (https://www.element-direct.com) offers CDs nationally in
denominations of $5 thousand and larger. This initiative was released late in the second quarter
of 2007 and, as a result, there has been a nominal amount of deposits raised through this channel
as of June 30.
Market Risk (including Interest Rate and Foreign Exchange Risk)
Because all of our assets are not perfectly match-funded with like-term liabilities, our
earnings are affected by interest rate changes. Interest rate risk is measured by the sensitivity
of both net interest income and fair market value of net interest sensitive assets to changes in
interest rates.
Our corporate-level asset-liability management committee (ALMC) oversees the interest rate
risk profile of all of our lines of business. It is supported by ALMCs at each of our lines of
business and monitors the repricing structure of assets, liabilities and off-balance sheet items.
It uses a financial simulation model to measure the potential change in market value of all
interest-sensitive assets and liabilities and also the potential change in earnings resulting from
changes in interest rates. We incorporate many factors into the financial models, including
prepayment speeds, prepayment fee income, deposit rate forecasts for non-maturity transaction
accounts, caps and floors that exist on some variable rate instruments, embedded optionality and a
comprehensive mark-to-market valuation process. We reevaluate risk measures and assumptions
regularly, enhance modeling tools as needed, and, on an approximately annual schedule, have the
model validated by internal audit or an out-sourced provider under internal audits direction.
Our lines of business assume interest rate risk in the form of repricing structure mismatches
between their loans and leases and funding sources. We manage this risk by adjusting the duration
of their interest sensitive liabilities and through the use of hedging via financial derivatives.
46
Our discontinued mortgage banking segment held a material amount of mortgage servicing rights
(MSRs) as part of its strategy and operations. Having sold the mortgage segment, we do not expect
ownership or the related hedging of remaining MSRs to be a material item. As of June 30, 2007, the
amount of interest rate risk at our discontinued mortgage banking segment is not material. Our
commercial banking and home equity lines of business assume interest rate risk by holding MSRs ($28
million at June 30, 2007). Among other items, a key determinant to the value of MSRs is the
prevailing level of interest rates. The primary exposure to interest rates is the risk that rates
will decline, possibly increasing prepayment speeds on loans and decreasing the value of MSRs. MSRs
have traditionally been recorded at the lower of cost or fair market value. We adopted SFAS 156,
Accounting for Servicing of Financial Assets on our high loan-to-value first lien and home equity
segment second lien mortgages during the first quarter of 2007. This adoption requires full
mark-to-market on the designated servicing assets, eliminating the lower-of-cost or market
treatment. Our decisions on the degree to which we manage servicing right interest risk with
derivative instruments to insulate against short-term price volatility depend on a variety of
factors.
The following tables reflect our estimate of the present value of interest sensitive assets,
liabilities, and off-balance sheet items at June 30, 2007. In addition to showing the estimated
fair market value at current rates, they also provide estimates of the fair market values of
interest sensitive items based upon a hypothetical instantaneous and permanent move both up and
down 100 and 200 basis points in the entire yield curve.
The first table is an economic analysis showing the present value impact of changes in
interest rates, assuming a comprehensive mark-to-market environment. The second table is an
accounting analysis showing the same net present value impact, adjusted for expected GAAP
treatment. Neither analysis takes into account the book values of the noninterest sensitive assets
and liabilities (such as cash, accounts receivable, and fixed assets), the values of which are not
directly determined by interest rates.
The analyses are based on discounted cash flows over the remaining estimated lives of the
financial instruments. The interest rate sensitivities apply only to transactions booked as of June
30, 2007, although certain accounts are normalized whereby the three- or six-month average balance
is included rather than the year-end balance in order to avoid having the analysis skewed by a
significant increase or decrease to an account balance at year end.
The tables that follow should be used with caution.
|
|
|
The net asset value sensitivities do not necessarily represent the changes in the lines
of business net asset value that would actually occur under the given interest rate
scenarios, as sensitivities do not reflect changes in value of the companies as a going
concern, nor consider potential rebalancing or other management actions that might be taken
in the future under asset/liability management as interest rates change. |
|
|
|
The tables below show modeled changes in interest rates for individual asset and
liability classes. Asset and liability classes in our portfolio have interest rate
sensitivity tied to different underlying indices or instruments. While the rate sensitivity
of individual classes presented below is our best estimate of changes in value due to
interest rate changes, the total potential change figures are subject to basis risk if all
yield curve do not move in parallel as the model assumes. |
|
|
|
Few of the asset classes shown react to interest rate changes in a linear fashion. That
is, the point estimates we have made at Current and +/-2% and +/-1% are appropriate
estimates at those amounts of rate change, but it may not be accurate to interpolate
linearly between those points. This is most evident in products that contain optionality in
payment timing or pricing such as mortgage servicing or nonmaturity transaction deposits. |
|
|
|
Finally, the tables show theoretical outcomes for dramatic changes in interest rates
which do not consider potential rebalancing or repositioning of hedges and balance sheet
mix. |
47
Economic Value Change Method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present Value at June 30, 2007 |
|
|
|
Change in Interest Rates of: |
|
|
|
-2% |
|
|
-1% |
|
|
Current |
|
|
+1% |
|
|
+2% |
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Interest Sensitive Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and other assets |
|
$ |
5,905,829 |
|
|
$ |
5,827,698 |
|
|
$ |
5,744,817 |
|
|
$ |
5,658,588 |
|
|
$ |
5,574,025 |
|
Loans held for sale |
|
|
28,323 |
|
|
|
28,077 |
|
|
|
27,540 |
|
|
|
26,752 |
|
|
|
25,880 |
|
Mortgage servicing rights |
|
|
21,408 |
|
|
|
25,408 |
|
|
|
29,381 |
|
|
|
33,466 |
|
|
|
35,070 |
|
Residual interests |
|
|
10,398 |
|
|
|
10,453 |
|
|
|
10,414 |
|
|
|
10,018 |
|
|
|
11,044 |
|
Interest sensitive financial derivatives |
|
|
(10,940 |
) |
|
|
(4,104 |
) |
|
|
2,399 |
|
|
|
9,292 |
|
|
|
16,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest sensitive assets |
|
|
5,955,018 |
|
|
|
5,887,532 |
|
|
|
5,814,551 |
|
|
|
5,738,116 |
|
|
|
5,662,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Sensitive Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
(3,241,268 |
) |
|
|
(3,220,022 |
) |
|
|
(3,197,661 |
) |
|
|
(3,169,421 |
) |
|
|
(3,139,199 |
) |
Short-term borrowings (1) |
|
|
(855,020 |
) |
|
|
(843,805 |
) |
|
|
(833,107 |
) |
|
|
(822,900 |
) |
|
|
(813,153 |
) |
Long-term debt |
|
|
(1,334,808 |
) |
|
|
(1,324,073 |
) |
|
|
(1,307,805 |
) |
|
|
(1,288,064 |
) |
|
|
(1,261,037 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest sensitive liabilities |
|
|
(5,431,096 |
) |
|
|
(5,387,900 |
) |
|
|
(5,338,573 |
) |
|
|
(5,280,385 |
) |
|
|
(5,213,389 |
) |
Net market value as of June 30, 2007 |
|
$ |
523,922 |
|
|
$ |
499,632 |
|
|
$ |
475,978 |
|
|
$ |
457,731 |
|
|
$ |
449,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from current |
|
$ |
47,944 |
|
|
$ |
23,654 |
|
|
$ |
|
|
|
$ |
(18,247 |
) |
|
$ |
(26,843 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net market value as of March 31, 2007 |
|
$ |
426,550 |
|
|
$ |
404,159 |
|
|
$ |
378,861 |
|
|
$ |
353,311 |
|
|
$ |
327,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential change |
|
$ |
47,689 |
|
|
$ |
25,298 |
|
|
$ |
|
|
|
$ |
(25,550 |
) |
|
$ |
(50,917 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes certain debt which is categorized as collateralized borrowings in other sections
of this document |
GAAP-Based Value Change Method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present Value at June 30, 2007 |
|
|
|
Change in Interest Rates of: |
|
|
|
-2% |
|
|
-1% |
|
|
Current |
|
|
+1% |
|
|
+2% |
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Interest Sensitive Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and other assets (1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Loans held for sale |
|
|
26,886 |
|
|
|
26,886 |
|
|
|
26,886 |
|
|
|
26,098 |
|
|
|
25,227 |
|
Mortgage servicing rights |
|
|
21,317 |
|
|
|
24,785 |
|
|
|
27,920 |
|
|
|
31,519 |
|
|
|
32,942 |
|
Residual interests |
|
|
10,398 |
|
|
|
10,453 |
|
|
|
10,414 |
|
|
|
10,018 |
|
|
|
11,044 |
|
Interest sensitive financial derivatives |
|
|
(10,940 |
) |
|
|
(4,104 |
) |
|
|
2,399 |
|
|
|
9,292 |
|
|
|
16,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest sensitive assets |
|
|
47,661 |
|
|
|
58,020 |
|
|
|
67,619 |
|
|
|
76,927 |
|
|
|
85,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Sensitive Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest sensitive liabilities (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net market value as of June 30, 2007 |
|
$ |
47,661 |
|
|
$ |
58,020 |
|
|
$ |
67,619 |
|
|
$ |
76,927 |
|
|
$ |
85,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential change |
|
$ |
(19,958 |
) |
|
$ |
(9,599 |
) |
|
$ |
|
|
|
$ |
9,308 |
|
|
$ |
18,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net market value as of March 31, 2007 |
|
$ |
71,214 |
|
|
$ |
78,188 |
|
|
$ |
85,512 |
|
|
$ |
92,069 |
|
|
$ |
97,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential change |
|
$ |
(14,298 |
) |
|
$ |
(7,324 |
) |
|
$ |
|
|
|
$ |
6,557 |
|
|
$ |
12,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Value does not change in GAAP presentation |
Off-Balance Sheet Instruments
In the normal course of our business as a provider of financial services, we are party to
certain financial instruments with off-balance sheet risk to meet the financial needs of our
customers. These financial instruments include loan commitments and standby
48
letters of credit.
Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized on the consolidated balance sheet. We follow the same credit policies in
making commitments and contractual obligations as we do for our on-balance sheet instruments.
Our exposure to credit loss, in the form of nonperformance by the counterparty on commitments
to extend credit and standby letters of credit, is represented by the contractual amount of those
instruments. Collateral pledged for standby letters of credit and commitments varies but may
include accounts receivable; inventory; property, plant, and equipment; and residential real
estate. Total outstanding commitments to extend credit at June 30, 2007 and December 31, 2006 were
$1.0 billion. We had $25 million in irrevocable standby letters of credit outstanding at both June
30, 2007 and December 31, 2006.
Derivative Financial Instruments
Financial derivatives are used as part of the overall asset/liability risk management process.
We use certain derivative instruments that qualify and certain derivative instruments that do not
qualify for hedge accounting treatment under SFAS 133. The derivatives that do not qualify for
hedge treatment are classified as other assets and other liabilities and are marked to market on
the income statement. While we do not seek Generally Accepted Accounting Principles (GAAP) hedge
accounting treatment for the assets and liabilities that these instruments are hedging, the
economic purpose of these instruments is to manage the risk inherent in existing exposures to
either interest rate risk or foreign currency risk.
We have interest rate swaps that have a notional amount of $25 million to economically hedge
fixed rate certificate of deposits. Notional amounts do not represent the amount of risk. We do not
receive SFAS 133 hedge accounting treatment for these transactions. We recognized an immaterial
gain in derivative gains (losses) and ($0.6) million loss for the six months ended June 30, 2007
and 2006, respectively, related to these swaps. Under the terms of these swap agreements, we
receive a fixed rate of interest and pay a floating rate of interest based upon either one-month or
three-month LIBOR.
We have interest rate swaps that have a notional amount of $75 million to hedge floating rate
deposits that qualify for SFAS 133 hedge accounting treatment. Under the terms of these swap
agreements, we pay a fixed rate of interest and receive a floating rate of interest based on the
Federal Funds rate. Ineffectiveness related to these cash flow hedges in 2007 was $6 thousand.
We have one additional interest rate swap that qualifies for hedge accounting treatment under
SFAS 133. It is a cash flow hedge in which we pay a fixed rate of interest and receive a floating
rate. The purpose of this swap is to manage interest rate risk exposure created by Capital Trust XI
which has variable rate interest payments. This hedge had a notional amount of $15 million at June
30, 2007. The amount of loss on this swap recorded to other comprehensive income at June 30, 2007
was immaterial. Ineffectiveness related to these cash flow hedges in 2007 was immaterial.
In
our home equity business we utilize interest rate caps to mitigate the interest rate exposure created
by the 2006-1, 2006-2, 2006-3 and 2007-1 securitizations in which floating rate notes are funding
fixed rate home equity loans. We have $287 million in amortizing interest rate caps relating to
these hedging activities. These contracts are marked-to-market with gains and losses included in
derivative gains (losses) on the consolidated income statements. We do not receive SFAS 133 hedge
accounting treatment for these transactions. The gain (loss) on these activities for the six months
ending June 30, 2007 and 2006, totaled a loss of ($0.1) million and $0.8 million gain,
respectively.
Also in our home equity business, we have a $10 million amortizing interest rate swap in which
we pay a fixed rate of interest and receive a floating rate. The purpose of the swap is to manage
interest rate risk exposure created by the 2005-1 securitization in which floating rate notes are
funding fixed rate home equity loans. This swap is accounted for as a cash flow hedge in
accordance with SFAS 133, with the changes in the fair value of the effective portion of the hedge
reported as a component of equity and $83 thousand and $326 thousand reduced interest expense
during the six months ended June 30, 2007 and 2006, respectively. Ineffectiveness related to this
cash flow hedge in 2007 was immaterial.
We enter into commitments to originate home equity loans whereby the interest rate on the loan
is determined prior to funding (rate lock commitments). Rate lock commitments on loans intended to
be sold are considered to be derivatives. We record changes in the fair value of these commitments
based upon the current secondary market value of securities with similar characteristics. For the
six months ended June 30, 2007, a gain of $0.1 million was recorded in Gain from sale of loans.
At June 30, 2007, we had rate lock commitments outstanding totaling $21 million.
49
We deliver Canadian dollar fixed rate leases into a commercial paper conduit. To lessen the
repricing mismatch between fixed rate CAD-denominated leases and floating rate CAD-denomiated
commercial paper, a series of amortizing CAD interest rate swaps have been executed. As of June 30,
2007, the commercial paper conduit was providing $206 million of variable rate funding. In total,
our interest rate swaps were effectively converting $202 million of this funding to a fixed
interest rate. The losses on these swaps for the six months ended June 30, 2007 and 2006 were $0.3
million and $0.3 million, respectively.
We own foreign currency forward contracts to protect the U.S. dollar value of intercompany
loans made to Irwin Commercial Finance Canada Corporation that are denominated in Canadian dollars.
We had a contractual amount of $70 million in forward contracts outstanding as of June 30, 2007.
For the six months ending June 30, 2007 and 2006, we recognized losses of $3.9 million and $1.5
million, respectively. These contracts are marked-to-market with gains and losses included in
derivative gains (losses) on the consolidated income statements. We do not receive SFAS 133 hedge
accounting treatment for this transaction. We recognized a foreign currency transaction gain on the
intercompany loans of $4.4 million and $2.0 million, respectively, for the six months ended June
30, 2007 and 2006.
Operational and Compliance Risk.
Operational risk is the risk of loss resulting from inadequate or failed internal processes,
people and systems or from external events. Irwin Financial, like other financial services
organizations, is exposed to a variety of operational risks. These risks include regulatory,
reputational and legal risks, as well as the potential for processing errors, internal or external
fraud, failure of computer systems, unauthorized access to information, and external events that
are beyond the control of the Corporation, such as natural disasters.
Compliance risk is the risk of loss resulting from failure to comply with laws and
regulations. While Irwin Financial is exposed to a variety of compliance risks, the two most
significant arise from our consumer lending activities and our status as a public company.
Our Board of Directors has ultimate accountability for the level of operational and compliance
risk we assume. The Board guides management by approving our business strategy and significant
policies. Our management and Board have also established (and continue to improve) a control
environment that encourages a high degree of awareness of the need to alert senior management and
the Board of potential control issues on a timely basis.
The Board has directed that primary responsibility for the management of operational and
compliance risk rests with the managers of our business units, who are responsible for establishing
and maintaining internal control procedures that are appropriate for their operations. Our
enterprise-wide risk management function provides an independent assessment of line managements
operational risk
mitigation procedures. This function, which is managed in conjunction with enterprise-wide
oversight of compliance, reports to the Chief Risk Officer (CRO), who in turn reports to the Risk
Management Committee of our Board of Directors. We have developed risk and control summaries for
our key business processes. Line of business and corporate-level managers use these summaries to
assist in identifying operational and other risks for the purpose of monitoring and strengthening
internal and disclosure controls. Our Chief Executive Officer, Chief Financial Officer and Board of
Directors, as well as the Boards of our subsidiaries, use the risk summaries to assist in
overseeing and assessing the adequacy of our internal and disclosure controls, including the
adequacy of our controls over financial reporting as required by section 404 of the Sarbanes Oxley
Act and Federal Deposit Insurance Corporation Improvement Act.
Given the ongoing growth of the scope of the Corporation, our efforts to date to improve our
risk management systems, and heightened industry and regulatory focus around risks, the Board,
having reviewed and evaluated results of reports from Internal Audit, Risk Management, and
regulatory exams, embarked in 2006 on a comprehensive review of our risk management systems,
including operational and compliance risk management processes. These assessments were conducted at
the Boards direction by a third-party to ensure independence and access to best-in-class
practices. As a result of these assessments, management has developed a program of risk management
improvement steps which it has begun implementing on an enterprise-wide basis. The costs of these
resources are reflected in current period earnings.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The quantitative and qualitative disclosures about market risk are reported in the Market Risk
(including Interest Rate and Foreign Exchange Risk) section of Item 2, Managements Discussion and
Analysis of Financial Condition and Results of Operations found on pages 46 through 48.
50
Item 4. Controls and Procedures.
Disclosure Controls and Procedures As of the end of the period covered by this report, the
Corporation carried out an evaluation as required by Rule 13a-15(b) or 15d-15(b) of the Securities
Exchange Act of 1934 (Exchange Act), under the supervision and with the participation of
management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO),
of the effectiveness of the Corporations disclosure controls and procedures as defined in Exchange
Act Rule 13a-15(e) or 15d-15(e). Based on this evaluation, the CEO and the CFO have concluded that
the Corporations disclosure controls and procedures were effective as of June 30, 2007.
Internal Control Over Financial Reporting In connection with the evaluation performed by
management with the participation of the CEO and the CFO as required by Exchange Act Rule 13a-15(d)
or 15d-15(d), there were no changes in the Corporations internal control over financial reporting
as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) that occurred during the quarter ended
June 30, 2007 that have materially affected, or are reasonably likely to materially affect, the
Corporations internal control over financial reporting. In March 2007, we discovered what we
believe were misrepresentations about the collateral offered for a commercial loan originated by a
branch of our subsidiary, Irwin Union Bank and Trust Company, which caused us to charge off $4
million. We have undertaken an investigation of the causes of the loss and have made certain
changes in staff and operating procedures in the branch in which we had the loss. We have further
ascertained that we believe the control procedures have been and continue to be in place and
effective in our other branches and lending locations.
PART II. Other Information.
Item 1. Legal Proceedings.
Since the time we filed our Report on Form 10-Q for the quarter ended March 31, 2007, we
experienced developments as noted in the litigation described below. For a full description of the
litigation, see Note 11, Commitments and Contingencies, in the Notes to Consolidated Financial
Statements, Part I, Item 1, of this Report.
Culpepper v. Inland Mortgage Corporation (suit filed in April 1996 in the United States
District Court for the Northern District of Alabama alleging our indirect subsidiary, Irwin
Mortgage Corporation (formerly Inland Mortgage Corporation), violated the federal Real Estate
Settlement Procedures Act relating to the payment by Irwin Mortgage of broker fees to mortgage
brokers).
Developments: On July, 2, 2007, the Court of Appeals for the 11th Circuit affirmed
the decision of the district court granting
summary judgment in favor of Irwin Mortgage and decertifying the plaintiffs class. On July
13, 2007, plaintiffs filed a petition for a rehearing en banc. We await a decision of the court of
appeals on the plaintiffs petition.
Silke v. Irwin Mortgage Corporation (suit filed in April 2003 in the Marion County, Indiana,
Superior Court seeking class action status and alleging our indirect subsidiary, Irwin Mortgage
Corporation, charged a document preparation fee in violation of Indiana law).
Developments: On May 2, 2007, the Indiana Supreme Court decided a case unrelated to Irwin
involving document preparation fees, and held that the preparation of mortgage documents by
non-attorneys does not necessarily constitute the practice of law and that a lenders charging a
fee for the preparation does not convert it into the unauthorized practice of law. In light of the
Indiana Supreme Courts decision in that case, the plaintiffs in Silke delivered to the trial court
a proposed Order on Parties Cross-Motions for Summary Judgment
and Entry of Final Judgment in favor of Irwin Mortgage on May
7, 2007. We therefore expect the trial court to dismiss the Silke litigation.
Cohens v. Inland Mortgage Corporation (suit filed in October 2003 in the Supreme Court of New
York, County of Kings, against our indirect subsidiary, Irwin Mortgage Corporation (formerly Inland
Mortgage Corporation) and others, alleging lead contamination from premises allegedly owned by
defendants).
Developments: In May 2007, the court disposed of this case due to lack of prosecution by the
plaintiffs. We expect the action to be restored, however, based on a motion by plaintiffs on June
28, 2007. We filed an affirmation in support of our motion for summary judgment on July 10,
2007.
51
Litigation in Connection with Loans Purchased from Community Bank of Northern Virginia
(several actions in which our subsidiary, Irwin Union Bank and Trust Company, is a defendant in
connection with loans Irwin Union Bank purchased from Community Bank of Northern Virginia,
consolidated for pretrial proceedings in the United States District Court for the Western District
of Pennsylvania).
Developments: The District Court for the Western District of Pennsylvania had sought the
opinion of an Amicus Curiae (Friend of the Court) to determine whether a proposed modified
settlement in a similar case (not involving Irwin) was fair and reasonable, during which time the
Irwin cases were effectively stayed. On July 5, 2007, the Amicus Curiae found the proposed
settlement in the other case to be fair and reasonable.
White v. Irwin Union Bank and Trust Company and Irwin Home Equity Corporation (suit filed on
January 5, 2006 in the Circuit Court for Baltimore City, Maryland, seeking class action status
against our direct subsidiary, Irwin Union Bank and Trust Company, and our indirect subsidiary,
Irwin Home Equity Corporation, alleging violations of the Maryland Mortgage Lending Laws and the
Maryland Consumer Protection Act; plaintiffs initiated arbitration on April 24, 2006; lawsuit was
dismissed on August 11, 2006; on October 13, 2006, the parties tentatively agreed to settle the
arbitration action solely on behalf of the individual plaintiffs for a nonmaterial amount.)
Developments: The settlement agreement was approved by the arbitrator, and the arbitration
action was dismissed with prejudice, effective June 6, 2007, thus concluding this matter.
We and our subsidiaries are from time to time engaged in various matters of litigation,
including the matters described above, other assertions of improper or fraudulent loan practices or
lending violations, and other matters, and we have a number of unresolved claims pending. In
addition, as part of the ordinary course of business, we and our subsidiaries are parties to
litigation involving claims to the ownership of funds in particular accounts, the collection of
delinquent accounts, challenges to security interests in collateral, and foreclosure interests,
that is incidental to our regular business activities. While the ultimate liability with respect to
these other litigation matters and claims cannot be determined at this time, we believe that
damages, if any, and other amounts relating to pending matters are not likely to be material to our
consolidated financial position or results of operations, except as described above. Reserves are
established for these various matters of litigation, when appropriate under SFAS 5, based in part
upon the advice of legal counsel.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) (Issuer Repurchases of Equity Securities). In 2006, the Board of Directors of the
Corporation approved the repurchase of up to two million shares or up to $50 million of common
stock of the Corporation. The repurchases will occur from time to time based on market conditions,
parent company cash flow, and the Corporations current and future projections of capital position.
From time to
time, we also repurchase shares in connection with our equity-based compensation plans. The
following table shows our repurchase activity for the past three months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Value of Shares |
|
|
Total Number of |
|
|
|
|
|
Part of Publicly |
|
that May Yet Be |
|
|
Shares Purchased |
|
Average Price Paid |
|
Announced Plan or |
|
Purchased under the |
Calendar Month |
|
(1) |
|
per Share |
|
Program |
|
Plan or Program |
|
April |
|
|
4,566 |
|
|
$ |
16.26 |
|
|
|
|
|
|
|
|
|
May |
|
|
233,500 |
|
|
$ |
16.61 |
|
|
|
233,500 |
|
|
|
36,107,236 |
|
June |
|
|
72,875 |
|
|
$ |
16.08 |
|
|
|
70,272 |
|
|
$ |
34,977,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
310,941 |
|
|
$ |
16.48 |
|
|
|
303,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes shares repurchased in connection with the Corporations equity-based compensation
plans. |
52
Item 4. Submission of Matters to a Vote of Security Holders.
|
a) |
|
We held our Annual Meeting of Shareholders on May 9, 2007. |
|
b) |
|
Proposal No. 1. The following Director Nominees were elected to serve on the Board until
the 2010 Annual Meeting, by the votes set forth below. |
|
|
|
|
|
|
|
|
|
Nominees |
|
Shares For |
|
Shares Withheld |
|
|
|
|
|
|
|
|
|
Sally A. Dean |
|
|
25,081,438 |
|
|
|
2,539,003 |
|
William H. Kling |
|
|
26,814,128 |
|
|
|
806,313 |
|
Lance R. Odden |
|
|
26,748,498 |
|
|
|
871,943 |
|
The following directors are currently serving terms that expire as set forth below:
|
|
|
|
|
David W. Goodrich |
|
|
2009 |
|
R. David Hoover |
|
|
2008 |
|
Brenda J. Lauderback |
|
|
2009 |
|
John C. McGinty, Jr. |
|
|
2009 |
|
William I. Miller |
|
|
2008 |
|
Dayton H. Molendorp |
|
|
2008 |
|
Marita Zuraitis |
|
|
2009 |
|
|
|
|
c) |
|
In addition to the election of directors, the shareholders voted on and approved the
following proposal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Matter |
|
Shares For |
|
Shares Against |
|
Shares Abstained |
Proposal No. 2. Approval of the Irwin Financial Corporation
2007 Performance Unit Plan and grants made under the Plan |
|
|
26,896,013 |
|
|
|
670,040 |
|
|
|
54,385 |
|
53
Item 6. Exhibits.
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
2.1
|
|
Asset Purchase Agreement by and among Irwin Financial Corporation, Irwin Mortgage Corporation and Freedom
Mortgage Corporation dated as of August 7, 2006. (Incorporated by reference to Exhibits 2.1 and 2.2 of Form 8-K
filed October 2, 2006, File No. 001-16691.) |
|
|
|
3.1
|
|
Restated Articles of Incorporation of Irwin Financial Corporation, as amended December 20, 2006. (Incorporated
by reference to Exhibit 3.1 of Form 10-K filed March 9, 2007, File No. 001-16691.) |
|
|
|
3.2
|
|
Code of By-laws of Irwin Financial Corporation, as amended, February 15, 2007. (Incorporated by reference to
Exhibit 3.2 of Form 10-K filed March 9, 2007, File No. 001-16691.) |
|
|
|
4.1
|
|
Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 of Form 10-K filed March 9, 2007,
File No. 001-16691.) |
|
|
|
4.2
|
|
Certain instruments defining the rights of the holders of long-term debt of Irwin Financial Corporation and
certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the
total assets of the Corporation and its subsidiaries on a consolidated basis, have not been filed as Exhibits.
The Corporation hereby agrees to furnish a copy of any of these agreements to the Commission upon request. |
|
|
|
4.3
|
|
Rights Agreement, dated as of March 1, 2001, between Irwin Financial Corporation and Irwin Union Bank and Trust.
(Incorporated by reference to Exhibit 4.1 to Form 8-A filed March 2, 2001, File No. 000-06835.) |
|
|
|
4.4
|
|
Appointment of Successor Rights Agent dated as of May 11, 2001 between Irwin Financial Corporation and National
City Bank. (Incorporated by reference to Exhibit 4.5 to Form S-8 filed on September 7, 2001, File No.
333-69156.) |
|
|
|
10.1
|
|
*Irwin Financial Corporation 1992 Stock Option Plan. (Incorporated by reference to Exhibit 10(h) to Form 10-K
Report for year ended December 31, 1992, File No. 000-06835.) |
|
|
|
10.2
|
|
*Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit 10 to Form 10-Q
Report for period ended June 30, 1997, File No. 000-06835.) |
|
|
|
10.3
|
|
*Amendment to Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit 10(i) to
Form 10-Q Report for period ended June 30, 1997, File No. 000-06835.) |
|
|
|
10.4
|
|
*Irwin Financial Corporation Amended and Restated 2001 Stock Plan, as amended and restated May 10, 2007.
(Incorporated by reference to Exhibit 99.1 of Form 8-K filed May 16, 2007, File No. 001-16691.) |
|
|
|
10.5
|
|
*Irwin Financial Corporation 2001 Stock Plan Form of Stock Option Agreement. (Incorporated by reference to
Exhibit 99.1 of the Corporations 8-K Current Report, dated May 9, 2005, File No. 001-16691.) |
|
|
|
10.6
|
|
*Irwin Financial Corporation 2001 Stock Plan Form of Restricted Stock Agreement (Incorporated by reference to
Exhibit 99.2 of the Corporations 8-K Current Report, dated May 9, 2005, File No. 001-16691.) |
|
|
|
10.7
|
|
*Irwin Financial Corporation 2001 Stock Plan Form of Stock Option Agreement (Canada) (Incorporated by reference
to Exhibit 10.8 of the Corporations 10-Q Report for period ended September 30, 2005, File No. 001-16691.) |
|
|
|
10.8
|
|
*Irwin Financial Corporation 2001 Stock Plan Form of Restricted Stock Agreement, with Performance Criteria, and
Notice. (Incorporated by reference to Exhibit 99.2 of Form 8-K filed May 16, 2007, File No. 001-16691). |
|
|
|
10.9
|
|
*Irwin Financial Corporation 1999 Outside Director Restricted Stock Compensation Plan. (Incorporated by
reference to Exhibit 2 to the Corporations proxy statement for its 2004 Annual Meeting, filed with the
Commission on March 18, 2004, File No. 001-16691.) |
|
|
|
10.10
|
|
*Employee Stock Purchase Plan III. (Incorporated by reference to Exhibit 10(a) to Form 10-Q Report for period
ended June 30, 1999, File No. 000-06835.) |
|
|
|
10.11
|
|
*Long-Term Management Performance Plan. (Incorporated by reference to Exhibit 10(a) to Form 10-K Report for year
ended December 31, 1986, File No. 000-06835.) |
|
|
|
10.12
|
|
*Long-Term Incentive Plan-Summary of Terms. (Incorporated by reference to Exhibit 10(a) to Form 10-K Report for
year ended December 31, 1986, File No. 000-06835.) |
|
|
|
10.13
|
|
*Inland Mortgage Corporation Long-Term Incentive Plan. (Incorporated by reference to Exhibit 10(j) to Form 10-K
Report for year ended December 31, 1995, File No. 000-06835.) |
|
|
|
54
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
10.14
|
|
*Amended and Restated Management
Bonus Plan. (Incorporated by reference to Exhibit 10(a) to Form 10-K Report for
year ended December 31, 1986, File No. 000-06835.) |
|
|
|
10.15
|
|
*Limited Liability Company Agreement of Irwin Ventures LLC. (Incorporated by reference to Exhibit 10(a) to Form
10-Q/A Report for period ended March 31, 2001, File No. 000-06835.) |
|
|
|
10.16
|
|
*Limited Liability Company Agreement of Irwin Ventures Co-Investment Fund LLC, effective as of April 20, 2001.
(Incorporated by reference to Exhibit 10.17 to Form S-1/A filed February 14, 2002, File No. 333-69586.) |
|
|
|
10.17
|
|
*Promissory Note dated January 30, 2002 from Elena Delgado to Irwin Financial Corporation. (Incorporated by
reference to Exhibit 10.19 to Form S-1/A filed February 14, 2002, File No. 333-69586.) |
|
|
|
10.18
|
|
*Consumer Pledge Agreement dated January 30, 2002 between Elena Delgado and Irwin Financial Corporation.
(Incorporated by reference to Exhibit 10.20 to Form S-1/A filed February 14, 2002, File No. 333-69586.) |
|
|
|
10.19
|
|
*Redemption and Loan Repayment Agreement dated December 22, 2004 between Irwin Financial Corporation, Irwin Home
Equity Corporation and Elena Delgado. (Incorporated by reference to Exhibit 10.15 of Form 10-K Report for year
ended December 31, 2004, File No. 001-16691.) |
|
|
|
10.20
|
|
*Irwin Home Equity Corporation Amendment and Restatement of Shareholder Agreement dated December 22, 2004
between Irwin Home Equity Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference
to Exhibit 10.16 of Form 10-K Report for year ended December 31, 2004, File No. 001-16691.) |
|
|
|
10.21
|
|
*Deferred Compensation Agreement dated December 22, 2004 between Irwin Home Equity Corporation, Irwin Financial
Corporation and Elena Delgado. (Incorporated by reference to Exhibit 10.17 of Form 10-K Report for year ended
December 31, 2004, File No. 001-16691.) |
|
|
|
10.22
|
|
*Tax Gross-up Agreement dated December 22, 2004 between Irwin Financial Corporation and Elena Delgado as
Shareholder. (Incorporated by reference to Exhibit 10.18 of Form 10-K Report for year ended December 31, 2004,
File No. 001-16691.) |
|
|
|
10.23
|
|
*Amendment No. 1 to Irwin Home Equity Corporation Amendment and Restatement of Shareholder Agreement dated April
7, 2005 between Irwin Home Equity Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by
reference to Exhibit 10.19 of Form 10-Q Report for the quarter ended March 31, 2005, File No. 001-16691.) |
|
|
|
10.24
|
|
*Amendment No. 1 to the Deferred Compensation Agreement dated April 7, 2005 between Irwin Home Equity
Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference to Exhibit 10.20 of Form
10-Q Report for the quarter ended March 31, 2005, File No. 001-16691.) |
|
|
|
10.25
|
|
*Amendment No. 2 to the Deferred Compensation Agreement dated November 15, 2005 between Irwin Home Equity
Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference to Exhibit 99.1 of Form
8-K Current Report dated November 18, 2005, File No. 001-16691.) |
|
|
|
10.26
|
|
*Election to Terminate the Deferred Compensation Agreement dated November 15, 2005 between Irwin Home Equity
Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference to Exhibit 99.2 of Form
8-K Current Report dated November 18, 2005, File No. 001-16691.) |
|
|
|
10.27
|
|
*Irwin Financial Corporation Amended and Restated Short Term Incentive Plan effective January 1, 2006.
(Incorporated by reference to Exhibit 10.27 of Form 10-Q Report for the quarter ended June 30 2006, File No.
001-16691.) |
|
|
|
10.28
|
|
*First Amendment to the Irwin Financial Corporation Amended and Restated Short Term Incentive Plan. |
|
|
|
10.29
|
|
*Irwin Commercial Finance Amended and Restated Short Term Incentive Plan effective January 1, 2006.
(Incorporated by reference to Exhibit 10.28 of Form 10-Q for the quarter ended June 30, 2006, File No.
001-16691.) |
|
|
|
10.30
|
|
*First Amendment to the Irwin
Commercial Finance Amended and Restated Short Term Incentive Plan. |
|
|
|
10.31
|
|
*Irwin Home Equity Amended and Restated Short Term Incentive Plan effective January 1, 2006. (Incorporated by
reference to Exhibit 10.29 of Form 10-Q for the quarter ended June 30, 2006, File No. 001-16691.) |
|
|
|
10.32
|
|
*First Amendment to the Irwin Home Equity Amended and Restated Short Term Incentive Plan. |
|
|
|
10.33
|
|
*Irwin Mortgage Corporation Amended and Restated Short Term Incentive Plan effective January 1, 2002.
(Incorporated by reference to Exhibit 6 of the Corporations proxy statement for its 2004 Annual Meeting, filed
with the Commission on March 18, 2004, File No. 001-16691.) |
|
|
|
10.34
|
|
*Irwin Union Bank and Trust Company Amended and Restated Short Term Incentive Plan effective January 1, 2006.
(Incorporated by reference to Exhibit 10.31 of Form 10-Q Report for the quarter ended June 30, 2006, File No.
001-16691.) |
|
|
|
10.35
|
|
*First Amendment to the Irwin Union Bank and Trust Company Amended and Restated Short Term Incentive Plan. |
|
|
|
10.36
|
|
*Onset Capital Corporation Employment Agreement. (Incorporated by reference to Exhibit 10.26 to Form 10-Q Report
for period ended June 30, 2002, File No. 000-06835.) |
|
|
|
10.37
|
|
*Irwin Financial Corporation Restated Supplemental Executive Retirement Plan for Named Executives. (Incorporated
by reference to Exhibit 10.27 to Form 10-Q Report for period ended June 30, 2002, File No. 000-06835.) |
55
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
10.38
|
|
*Irwin Financial Corporation Supplemental Executive Retirement Plan for Named Executives. (Incorporated by
reference to Exhibit 10.28 to Form 10-Q Report for period ended June 30, 2002, File No. 000-06835.) |
|
|
|
10.39
|
|
*Stock Purchase Agreement by and between Onset Holdings Inc. and Irwin International Corporation dated December
23, 2005. (Incorporated by reference to Exhibit 10.36 of Form 10-K Report for period ended December 31, 2005,
File No. 001-16691.). |
|
|
|
10.40
|
|
*Shareholder Agreement Termination Agreement by and between Irwin Commercial Finance Canada Corporation and
Irwin International Corporation dated December 23, 2005. (Incorporated by reference to Exhibit 10.37 of Form
10-K Report for period ended December 31, 2005, File No. 001-16691.) |
|
|
|
10.41
|
|
*Irwin Commercial Finance Corporation First Amended and Restated Shareholder Agreement dated May 15, 2007. |
|
|
|
10.42
|
|
*Irwin Commercial Finance Corporation 2005 Stock Option Agreement Grant of Option to Joseph LaLeggia dated
December 23, 2005. (Incorporated by reference to Exhibit 10.39 of Form 10-K Report for period ended December 31,
2005, File No. 001-16691.) |
|
|
|
10.43
|
|
*Irwin Commercial Finance Corporation 2005 Notice of Stock Option Grant to Joseph LaLeggia dated December 23,
2005. (Incorporated by reference to Exhibit 10.40 of Form 10-K Report for period ended December 31, 2005, File
No. 001-16691.) |
|
|
|
10.44
|
|
*Irwin Union Bank Amended and Restated Performance Unit Plan. (Incorporated by reference to Exhibit 10.41 of
Form 10-K Report for period ended December 31, 2005, File No. 001-16691.) |
|
|
|
10.45
|
|
*Irwin Commercial Finance Amended and Restated Performance Unit Plan. (Incorporated by reference to Exhibit
10.42 of Form 10-K Report for period ended December 31, 2005, File No. 001-16691.) |
|
|
|
10.46
|
|
*First Amendment to the Irwin Commercial Finance Amended and Restated Performance Unit Plan, dated October 31,
2006. (Incorporated by reference to Exhibit 10.41 of Form 10-K filed March 9, 2007, File No. 001-16691.) |
|
|
|
10.47
|
|
*Irwin Home Equity Corporation Performance Unit Plan. (Incorporated by reference to Exhibit 10.43 of Form 10-K
Report for period ended December 31, 2005, File No. 001-16691.) |
|
|
|
10.48
|
|
*First Amendment to Limited Liability Company Agreement of Irwin Ventures LLC. (Incorporated by reference to
Exhibit 10.44 of Form 10-K Report for period ended December 31, 2005, File No. 001-16691.) |
|
|
|
10.49
|
|
*Second Amendment to Limited Liability Company Agreement of Irwin Ventures Co-Investment Fund LLC. (Incorporated
by reference to Exhibit 10.45 of Form 10-K Report for period ended December 31, 2005, File No. 001-16691.) |
|
|
|
10.50
|
|
*Supplemental Performance Unit Grant-Jocelyn Martin-Leano, dated February 6, 2007. (Incorporated by reference to
Exhibit 10.45 of Form 10-K filed March 9, 2007, File No. 001-16691.) |
|
|
|
10.51
|
|
*Irwin Financial Corporation 2007 Performance Unit Plan. (Incorporated by reference to Appendix B of the
Corporations Proxy Statement for its 2007 Annual Meeting, filed April 16, 2007, File No. 001-16691.) |
|
|
|
11.1
|
|
Computation of Earnings Per Share is included in the footnotes to the financial statements. |
|
|
|
31.1
|
|
Certification pursuant to 18 U.S.C. Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer. |
|
|
|
31.2
|
|
Certification pursuant to 18 U.S.C. Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer. |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
* |
|
Indicates management contract or compensatory plan or arrangement. |
56
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
DATE: August 1, 2007 |
IRWIN FINANCIAL CORPORATION
|
|
|
By: |
/s/ Gregory F. Ehlinger
|
|
|
|
GREGORY F. EHLINGER |
|
|
|
CHIEF FINANCIAL OFFICER |
|
|
|
|
|
|
By: |
/s/ Jody A. Littrell
|
|
|
|
JODY A. LITTRELL |
|
|
|
CORPORATE CONTROLLER (Chief Accounting Officer) |
|
|
57