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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


(Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________.

Commission File Number: 0-6835


IRWIN FINANCIAL CORPORATION

(Exact Name of Corporation as Specified in its Charter)

Indiana

35-1286807

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

   
   

500 Washington Street Columbus, Indiana

47201

(Address of Principal Executive Offices)

(Zip Code)

   

(812) 376-1909

www.irwinfinancial.com

(Corporation's Telephone Number, Including Area Code)

(Web Site)

   

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[ X ] Yes                          [  ] No
 
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act

[ X ] Yes                          [  ] No

As of August 8, 2003, there were outstanding 27,970,459 common shares, no par value, of the Registrant.


FORM 10-Q
TABLE OF CONTENTS

   

PAGE NO.

PART I

FINANCIAL INFORMATION

 
     

Item 1

Financial Statements

3

     

Item 2

Management's Discussion and Analysis of Financial Condition and Results of Operations

18

     

Item 3

Quantitative and Qualitative Disclosures About Market Risk

48

     

Item 4

Controls and Procedures

48

     

PART II

OTHER INFORMATION

 
     

Item 1

Legal Proceedings

49

     

Item 2

Changes in Securities and Use of Proceeds

50

     

Item 4

Submission of Matters to a Vote of Security Holders

50

     

Item 6

Exhibits and Reports on Form 8-K

51

     
 

Signatures

54

     
     
     
     
     

PART 1. FINANCIAL INFORMATION.

Item 1. Financial Statements.

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)

June 30, 

December 31, 

2003 

2002 


 

(In thousands except for shares)

Assets:

   

Cash and cash equivalents

$    179,041 

$    157,771 

Interest-bearing deposits with financial institutions

56,250 

34,951 

Trading assets

93,602 

157,514 

Investment securities - held-to-maturity (Market value:

   

$5,038 in 2003 and $5,644 in 2002)

4,902 

5,349 

Investment securities - available-for-sale

74,847 

62,599 

Loans held for sale

1,665,983 

1,314,849 

Loans and leases, net of unearned income - Note 2

3,049,405 

2,815,276 

Less: Allowance for loan and lease losses - Note 3

      (57,935)

      (50,936)

 

2,991,471 

2,764,340 

Servicing assets - Note 4

224,626 

174,935 

Accounts receivable

48,236 

55,928 

Accrued interest receivable

16,724 

15,264 

Premises and equipment, net

32,301 

32,398 

Other assets

     142,171 

     135,028 

     Total assets

$5,530,153 

$  4,910,926 

Liabilities and Shareholders' Equity:

   

Deposits

  Noninterest-bearing


$   1,268,620 


$    821,814 

  Interest-bearing

 1,320,695 

1,170,660 

  Certificates of deposit over $100,000

         759,762 

     701,870 

 

 3,349,077 

2,694,344 

Short-term borrowings - Note 5

707,363 

993,124 

Long-term debt

 30,065 

30,070 

Collateralized debt - Note 6

 648,708 

391,425 

Company-obligated mandatorily redeemable preferred
  securities of subsidiary trusts


 181,207 


181,250 

  Convertible securities of subsidiary trusts

 51,750 

51,750 

Other liabilities

      175,760 

    207,552 

     Total liabilities

    5,143,930 

   4,549,515 

Commitments and contingencies - Note 9

   

Minority interest

 1,388 

856 

Shareholders' equity
  Preferred stock, no par value - authorized 4,000,000 shares;
     none issued as of June 30, 2003 and December 31, 2002



- -- 



- -- 

  Common stock, no par value - authorized 40,000,000 shares; issued
     29,612,080 shares as of June 30, 2003 and December 31, 2002,
     respectively; including 1,653,724 and 1,840,623 shares in treasury
     as of June 30, 2003 and December 31, 2002, respectively    




 112,000 




112,000 

  Additional paid-in capital

 2,422 

3,606 

  Deferred compensation

(489)

(240)

  Accumulated other comprehensive loss, net of deferred income tax
     benefit of $38 and $336 as of June 30, 2003 and December 31,
     2002, respectively



(58)



(1,142)

  Retained earnings

    308,760 

     287,662 

 

 422,635 

401,886 

     Less treasury stock, at cost

     (37,800)

     (41,331)

     Total shareholders' equity

    384,835 

    360,555 

     Total liabilities and shareholders' equity

$ 5,530,153 

$  4,910,926 


The accompanying notes are an integral part of the consolidated financial statements.


IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

For the Three Months
Ended June 30,

2003

2002


 

(In thousands, except per share)

Interest income:

   

Loans and leases

$     61,708 

$      52,307 

Loans held for sale

29,926 

9,159 

Trading account

6,006 

8,789 

Investment securities

1,148 

753 

Federal funds sold

            62 

              11 

     Total interest income

     98,850 

       71,019 

Interest expense:

   

Deposits

11,557 

13,894 

Short-term borrowings

4,603 

3,796 

Long-term debt

662 

573 

Collateralized debt

4,540 

221 

Preferred securities distribution

        5,527 

          4,818 

     Total interest expense

      26,889 

        23,302 

Net interest income

 71,961 

47,717 

Provision for loan and lease losses

      13,634 

         9,500 

Net interest income after provision for loan and lease losses

      58,327 

        38,217 

Other income:

   

Loan servicing fees

24,817 

17,809 

Amortization of servicing assets - Note 4

(37,239)

        (14,125)

Impairment of servicing assets - Note 4

     (40,577)

        (48,132)

  Net loan administration loss

     (52,999)

        (44,448)

Gain from sales of loans

124,000 

37,270 

Gain (loss) on sale of mortgage servicing assets

(4)

9,809 

Trading losses

(33,131)

(5,757)

Derivative gains, net

29,364 

45,381 

Other

      7,039 

         4,808 

 

    74,269 

       47,063 

Other expense:

   

Salaries

58,208 

35,989 

Pension and other employee benefits

11,183 

8,166 

Office expense

5,679 

4,401 

Premises and equipment

8,916 

8,649 

Marketing and development

4,063 

3,180 

Professional fees

2,878 

2,110 

Other

     20,303 

          9,724 

 

   111,230 

        72,219 

Income before income taxes

21,366 

13,061 

Provision for income taxes

       8,139 

          5,075 

Net income

$    13,227 

$        7,986 

Earnings per share: - Note 7
  Basic


$        0.47 


$          0.29 

  Diluted

$        0.45 

$          0.28 

Dividends per share

$    0.0700 

$      0.0675 

The accompanying notes are an integral part of the consolidated financial statements.


IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

For the Six Months
Ended June 30,

2003

2002


 

(In thousands, except per share)

Interest income:

   

Loans and leases

$    119,832 

$      99,854 

Loans held for sale

52,822 

19,096 

Trading account

12,969 

18,068 

Investment securities

2,010 

1,508 

Federal funds sold

             99 

             30  

     Total interest income

    187,732 

    138,556  

Interest expense:

   

Deposits

22,806 

28,028 

Short-term borrowings

8,670 

7,395  

Long-term debt

1,324 

1,142 

Collateralized debt

7,525 

221 

Preferred securities distribution

     11,055 

         9,638 

     Total interest expense

     51,380 

       46,424  

Net interest income

136,352 

92,132 

Provision for loan and lease losses

     22,877 

      19,832 

Net interest income after provision for loan and lease losses

   113,475 

      72,300 

Other income:

   

Loan servicing fees

46,708 

36,466 

Amortization of servicing assets - Note 4

(68,048)

(27,724)

Impairment of servicing assets - Note 4

    (43,632)

      (37,826)

  Net loan administration loss

    (64,972)

      (29,084)

Gain from sales of loans

219,511 

84,759 

Gain on sale of mortgage servicing assets

9,716 

Trading losses

(50,919)

(13,059)

Derivative gains, net

29,678 

37,227 

Other

     10,570 

        8,856 

 

    143,868 

      98,415 

Other expense:

   

Salaries

114,631 

70,208 

Pension and other employee benefits

22,107 

17,176 

Office expense

10,870 

8,579 

Premises and equipment

19,218 

17,143 

Marketing and development

7,757 

5,901 

Professional fees

5,684 

5,170 

Other

     36,563 

       18,004 

 

   216,830 

     142,181 

Income before income taxes

40,513 

28,534 

Provision for income taxes

     15,510 

       11,097 

Income before cumulative effect of change in accounting principle

25,003 

17,437 

Cumulative effect of change in accounting principle, net of tax

              -- 

            495 

Net income

$     25,003

$     17,932 

Earnings per share before cumulative effect of change in accounting principle: -
  Note 7
  Basic



$       0.90 



$         0.67 

  Diluted

$       0.86 

$         0.65 

Earnings per share: - Note 7
  Basic


$       0.90 


$         0.69 

  Diluted

$       0.86 

$         0.67 

Dividends per share

$   0.1400 

$     0.1350 

The accompanying notes are an integral part of the consolidated financial statements.


IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)

For the Three Months Ended June 30, 2003, and 2002









Total




Retained
Earnings

Accumulated
Other
Comprehensive
Income
(Loss)




Deferred
Compensation



Additional
Paid in
Capital




Common
Stock




Preferred
Stock




Treasury
Stock

 

(In thousands, except shares)

Balance April 1, 2003

$  371,480 

$  297,490 

$          (524)

$           (558)

$    3,225 

$ 112,000 

$          -- 

$  (40,153)

  Net income

13,227 

13,227 

  Unrealized loss on investment
     securities net of $7 tax
     benefit



 (10)



(10)

  Unrealized loss on interest rate
     cap net of $28 tax benefit


(42)


(42)

  Foreign currency adjustment net
     of $346 tax liability


          518 


518 

          Total comprehensive
            income


13,693 

Deferred compensation

69 

69 

Cash dividends

(1,957)

(1,957)

Tax benefit on stock option
  exercises


927 


927 

Conversion of 1,700 trust
  preferred shares to 2,142   common shares



43 



(1)



44

Treasury stock:

  Purchase of 109,001 shares

(2,674)

(2,674)

  Sales of 242,689 shares

         3,254 

                  

                        

                      

        (1,729)

                 

               

      4,983 

Balance June 30, 2003

$  384,835 

$  308,760 

$             (58)

$           (489)

$  2,422 

$ 112,000 

$          -- 

$  (37,800)

Balance April 1, 2002

$  322,505 

$  249,812 

$             (360)

$           (419)

$    4,444 

$  112,336 

$   1,386 

$  (44,694)

  Net income

7,986 

7,986 

  Unrealized loss on investment
     securities net of $13 tax
     benefit



(19)



(19)

  Foreign currency adjustment net
     of $170 tax liability


           254 


254 

          Total comprehensive
             income


8,221 

Deferred compensation

60 

60 

Cash dividends

(1,866)

(1,866)

Additional costs for equity   offering


(177)

(177)

Conversion of preferred stocks
  to 120,441 common shares


- --


(1,386)


1,386 

Tax benefit on stock option
  exercises


504 


504 

Treasury stock:

  Purchase of 54,732 shares

(1,101)

(1,101)

  Sales of 152,193 shares

         1,129 

                  

                        

                      

            (1,154)

                 

               

         2,283 

Balance June 30, 2002

$  329,275 

$  255,932 

$             (125)

$           (359)

$    3,794 

$ 112,159 

$         -- 

$  (42,126)

The accompanying notes are an integral part of the consolidated financial statements.


 

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)

For the Six Months Ended June 30, 2003, and 2002

 





Total




Retained
Earnings

Accumulated
Other
Comprehensive
Income
(Loss)




Deferred
Compensation



Additional
Paid in
Capital




Common
Stock




Preferred
Stock




Treasury
Stock

 

(In thousands, except shares)

Balance January 1, 2003

$  360,555 

$  287,662 

$        (1,142)

$           (240)

$    3,606 

$ 112,000 

$          -- 

$  (41,331)

  Net income

25,003 

25,003 

           

  Unrealized gain on investment
     securities net of $8 tax
     liability



 12 

 



12 

         

  Unrealized loss on interest rate
     cap net of $48 tax benefit


(72)

 


(72)

         

  Foreign currency adjustment net
     of $593 tax liability


889 

 


 889 

         

  Minimum SERP liability net
     of $170 tax liability


           255 

 


 255 

         

          Total comprehensive
            income


26,087 

             

Deferred compensation

(249)

   

(249)

       

Cash dividends

(3,905)

(3,905)

           

Tax benefit on stock option
  exercises


1,009 

     


1,009 

     

Conversion of 1,700 trust
  preferred shares to 2,142
  common shares



43 

     



(1)

   



44 

Treasury stock:

               

  Purchase of 186,899 shares

(2,789)

           

(2,789)

  Sales of 305,900 shares

        4,084 

                  

                     

                     

     (2,192)

                 

               

      6,276 

Balance June 30, 2003

$  384,835 

$  308,760 

$             (58)

$           (489)

$    2,422 

$ 112,000 

$          -- 

$  (37,800)

                 
                 

Balance January 1, 2002

$  231,665 

$  241,725 

$           (325)

$           (449)

$    4,426 

$   29,965 

$   1,386 

$  (45,063)

  Net income

17,932 

17,932 

           

  Unrealized loss on investment
     securities net of $32 tax
     benefit



(48)

 



(48)

         

  Foreign currency adjustment net
     of $166 tax liability


         248 

 


248 

         

          Total comprehensive
             income


18,132 

             

Deferred compensation

90 

   

90 

       

Cash dividends

(3,725)

(3,725)

           

Sales of 6,210,000 shares of
  common stock


82,194 

       


82,194 

   

Conversion of preferred stock to
  120,441 common shares


- --

         


(1,386)


1,386 

Tax benefit on stock option
  exercises


516 

     


516 

     

Treasury stock:

               

  Purchase of 55,345 shares

(1,111)

           

(1,111)

  Sales of 152,193 shares

       1,514 

                  

                     

                      

             (1,148)

                 

               

       2,662 

Balance June 30, 2002

$  329,275 

$  255,932 

$           (125)

$           (359)

$            3,794 

$ 112,159 

$         -- 

$  (42,126)

The accompanying notes are an integral part of the consolidated financial statements.


IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

For the Six Months Ended June 30,

 

2003

2002


 

(In thousands)

Net income

$            25,003 

$             17,932 

Adjustments to reconcile net income to cash

   

  (used) provided by operating activities:

   

Depreciation, amortization, and accretion, net

5,569 

6,243 

Amortization and impairment of servicing assets

111,680 

65,550 

Provision for loan and lease losses

22,877 

19,832 

Gain on sale of mortgage servicing assets

-- 

(9,716)

Gain from sale of loans

(219,511)

(84,759)

Originations of loans held for sale

(13,456,103)

(3,846,556)

Proceeds from the sale of mortgage servicing assets

-- 

25,275 

Proceeds from sales and repayments of loans held for sale

13,161,261 

3,989,040 

Net decrease in trading assets

63,912 

15,532 

Net decrease (increase) in accounts receivable

7,692 

(12)

Other, net

             (40,627)

             (59,933)

  Net cash (used) provided by operating activities

           (318,247)

            138,428 

Lending and investing activities:

   

Proceeds from maturities/calls of investment securities:

   

  Held-to-maturity

451 

476 

  Available-for-sale

28,486 

1,862 

Purchase of investment securities:

  Held-to-maturity

(14)

-- 

  Available-for-sale

(40,689)

(77)

Net increase in interest-bearing deposits with financial institutions

(21,299)

(5,280)

Net increase in loans, excluding sales

(278,299)

(813,211)

Sales of loans

30,140 

277,428 

Other, net

                (3,767)

                (2,337)

  Net cash used by lending and investing activities

            (284,991)

            (541,139)

Financing activities:

   

Net increase (decrease) in deposits

654,733 

(51,712)

Net decrease in short-term borrowings

(285,761)

(107,351)

Repayments of long-term debt

(5)

-- 

Proceeds from issuance of collateralized borrowings

358,251 

440,471 

Repayments of collateralized borrowings

(100,968)

(5,503)

Proceeds from sale of stock for equity offering

-- 

82,194 

Purchase of treasury stock for employee benefit plans

(2,789)

(1,111)

Proceeds from sale of stock for employee benefit plans

5,093 

2,030 

Dividends paid

                (3,905)

               (3,725)

  Net cash provided by financing activities

             624,649 

            355,293 

Effect of exchange rate changes on cash

                   (141)

                      (8)

Net increase (decrease) in cash and cash equivalents

21,270 

(47,426)

Cash and cash equivalents at beginning of period

             157,771 

            158,291 

Cash and cash equivalents at end of period

$ 179,041 

$          110,865 

Supplemental disclosures of cash flow information:

   

Cash paid during the period:

   

  Interest

$             51,993 

$            45,284 

  Income taxes

$             42,917 

$              6,414 

Noncash transactions:

   

  Conversion of trust preferred stock to common stock

$                    43 

$                    -- 

  Conversion of preferred stock to common stock

$                     -- 

$              1,386 

The accompanying notes are an integral part of the consolidated financial statements.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

     Consolidation:
Irwin Financial Corporation and its subsidiaries provide financial services throughout the United States and Canada. We are engaged in the mortgage banking, commercial banking, home equity lending, commercial finance, and venture capital lines of business. Intercompany balances and transactions have been eliminated in consolidation.

     Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of 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.

     Trading Assets: Trading assets are stated at fair value. Unrealized gains and losses are included in earnings. Included in trading assets are residual interests. In the past, when we sold receivables in securitizations of home equity loans and lines of credit, we retained residual interests, a servicing asset, one or more subordinated tranches, and in some cases a cash reserve account, all of which are retained interests in the securitized receivables. Gain or loss on the sale of the receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer.

     To obtain fair value of residual interests, quoted market prices are used if available. However, quotes are generally not available for residual interests, so we generally estimate fair value based on the present value of expected cash flows using estimates of the key assumptions -- prepayment speeds, credit losses, and discount rates commensurate with the risks involved -- that management believes market participants would use to value similar assets. Adjustments to carrying values are recorded as trading gains or losses. An adjustment of $50.9 million was recorded in the first half of 2003 to write down the residual interests due to increased prepayment speeds and expected credit losses.

     Servicing Assets: In determining servicing value impairment we stratify the servicing portfolio into its predominant risk characteristics, principally by interest rate and product type. Effective as of June 30, 2003 we lowered our lowest interest rate stratum from 7% to 5% and split our interest strata by government and conventional loans. We believe these changes in interest rate and product type stratums are responsive to significant changes in economic facts and circumstances that have caused a change in predominant risk characteristics. Because our strata changes were prompted by changes in economic facts and circumstances, they will be accounted for prospectively as a change in estimate.

     Cash and Cash Equivalents Defined: For purposes of the consolidated statement of cash flows, we consider cash and due from banks to be cash equivalents.

     Stock-Based Employee Compensation: At June 30, 2003, we had two stock-based employee compensation plans. We use the intrinsic value method to account for our plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost is reflected in net income for any of the periods presented, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The Board of Directors has not chosen to expense stock options. The Board wishes to analyze new guidance from the FASB, SEC or other relevant authority regarding the standardization of valuation methods, should such guidance be forthcoming. In the absence of a uniform valuation method for public companies, we will continue to disclose in this footnote the impact of expensing stock options, using our valuation met hod, which is based on a Black-Scholes model using several assumptions management believes to be reasonable. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," using our valuation method to stock-based employee compensation:

 

For the three months ended June 30,

For the six months ended
 June 30,

 

2003

2002

2003

2002


 

(In thousands)

Net income as reported

$     13,227 

$      7,986 

$ 25,003 

$     17,932 

Deduct: Total stock-based employee compensation expense
  determined under fair value based method for all awards,
  net of related tax effects



            (841
)



      (692)



   (1,488
)



       (1,315)

Pro forma net income

$      12,386 

$      7,294 

$ 23,515 

$     16,617 

Basic earnings per share
  As reported


$          0.47 


$         0.29 


$     0.90 


$         0.69 

  Pro forma

$          0.44 

$         0.26 

$     0.84 

$         0.64 

Diluted earnings per share
  As reported


$          0.45 


$         0.28 


$     0.86 


$         0.67 

  Pro forma

$          0.42 

$         0.26 

$     0.81 

$         0.63 

     Recent Accounting Developments

     
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" which requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. The primary beneficiary is the party that absorbs a majority of expected losses, receives a majority of expected residual returns, or both, as a result of holding variable interests, which are the ownership, contractual, or other beneficiary interests in the entity. The primary beneficiary is required to disclose the (a) nature, purpose, size, and activities of the variable interest entity, (b) the carrying amount and classification of assets that are collateral, and (c) any lack of recourse by creditors to the primary beneficiary. If a primary interest is not held, but a significant variable interest is held, disclosure requirements include (1) the nature, purpose, size and activities of the variable interest entity, (2) exposure to loss, (3) the date and nature of involvement with the entity. This interpretation applies immediately to variable interests created or obtained after January 31, 2003 for interim periods beginning after June 15, 2003. Prior to 2002, we used securitization structures involving qualified special purpose entities (QSPEs) which are exempt from the requirements of this interpretation. As a result, management does not believe the implementation of Interpretation No. 46 will have a material effect on our earnings or financial position.

     Reclassifications: Certain amounts in the 2002 consolidated financial statements have been reclassified to conform to the 2003 presentation. These changes had no impact on previously reported net income or shareholders' equity.


Note 2 - Loans and Leases

     
Loans and leases are summarized as follows:

 

June 30,

December 31,

 

2003

2002


 

(In thousands)

Commercial, financial and agricultural

$     1,431,280 

$        1,347,962 

Real estate-construction

322,910 

314,851 

Real estate-mortgage

871,118 

777,865 

Consumer

24,132 

27,857 

Direct financing leases
     Domestic


311,034 


291,711 

     Foreign

179,358 

133,784 

Unearned income
     Domestic


(64,477)


(59,287)

     Foreign

            (25,950)

             (19,467)

  Total

$      3,049,405 

$        2,815,276 

Note 3 - Allowance for Loan and Lease Losses

     
Changes in the allowance for loan and lease losses are summarized below:

 

As of and for the
six months ended

As of and for the
year ended

 

June 30,
2003

December 31,
2002


 

(In thousands)

Balance at beginning of period

$              50,936 

$              22,283 

Provision for loan and lease losses

22,877 

43,996 

Other adjustments

(55)

17 

Recoveries

1,415 

2,870 

Charge-offs

            (17,238)

              (18,230)

Balance at end of period

$             57,935 

$              50,936 


Note 4 - Servicing Assets

     
Included in the consolidated balance sheet at June 30, 2003 and December 31, 2002 are $224.6 million and $174.9 million, respectively, of capitalized servicing assets. These amounts relate primarily to the principal balances of mortgage and home equity loans serviced by us for investors. Changes in our capitalized servicing assets, net of valuation allowance, are shown below:

 

As of and for the
six months ended

As of and for the
year ended

 

June 30,
2003

December 31,
2002


 

(In thousands)

Beginning balance

$            174,935 

$            228,624 

Additions

161,371 

180,627 

Amortization

(68,048)

(62,191)

Impairment

(43,632)

(146,370)

Reduction for servicing sales

                        -- 

              (25,755)

 

$            224,626 

$            174,935 

     We have established a valuation allowance to record servicing assets at their fair value. Changes in the allowance are summarized below:

 

June 30,

December 31,

 

2003

2002


 

(In thousands)

Balance at beginning of period

$   159,865 

$             13,495 

Provision for impairment

      43,632 

             146,370 

Balance at end of period

$   203,497 

$           159,865 

Note 5 - Short-term Borrowings

     
Short-term borrowings are summarized as follows:

June 30,

December 31,

2003

2002


 

(In thousands)

Drafts payable related to mortgage loan closings

$     508,512 

$     200,701 

Commercial paper

15,302 

14,121 

Federal Home Loan Bank borrowings

123,000 

527,000 

Federal funds

26,400 

30,000 

Lines of credit and other borrowings

         34,149 

       221,302 

 

$     707,363 

$     993,124 


     Drafts payable relate to mortgage loan closings that have not been presented to the banks for payment. When presented for payment, these borrowings will be funded internally or by borrowing from the lines of credit.

     The majority of our commercial paper is payable to a company controlled by a significant shareholder and director of the Corporation.

     Federal Home Loan Bank borrowings are collateralized by loans and loans held for sale.

     We also have lines of credit available to fund loan originations and operations. Interest on the lines of credit is payable monthly or quarterly with variable rates ranging from 1.13% to 2.60% at June 30, 2003.

Note 6 - Collateralized Debt

     
Beginning in the second quarter of 2002, we began securitizing loans using secured financing structures at our home equity lending line of business. In 2003, we also began securitizing leases at our commercial finance line of business using secured financing structures. Sale treatment was precluded on these transactions as we maintained effective control over the loans and leases securitized. This type of securitization 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 $0.7 billion in leases and home equity loans and home equity lines of credit classified on the balance sheet as loans and leases held for investment (Note 2). 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 th e payments received on the underlying collateral. The interest rates on the bonds are at a floating rate. We have an interest only senior note on both securitizations at the home lending line of business which as of June 30, 2003 had a combined notional balance of $61.7 million. These senior notes pay interest at 10%, and mature on December 25, 2004 and September 25, 2005.

     Collateralized debt is summarized as follows:

 





Contractual
Maturity

Weighted
Average
Interest Rate
at
June 30,
2003





June 30,
2003





December 31,
2002


 

(In thousands)

Commercial finance line of business

       

2003 asset backed note

7/4/2010

2.15 

$ 50,844 

$                 -- 

         

Home equity lending line of business

       

2003-1 asset backed notes:

       

  Combined variable rate senior note

2/28/2028

  1.86 

215,506 

-- 

  Combined variable rate subordinate note

2/28/2028

3.38 

61,763 

-- 

  Unamortized premium

   

5,482 

-- 

         

2002-1 asset backed notes:

       


  Combined variable rate senior note

7/25/2023-
6/25/2029


1.60 


237,459 


312,997 

  Combined variable rate subordinate note

2/25/2029

2.89 

72,551 

72,551 

  Unamortized premium

   

     5,103 

            5,877 

Total

   

$648,708 

$      391,425 


Note 7 - Earnings per Share

     
Earnings per share calculations are summarized as follow:

 

Basic
Earnings
Per Share

Effect of
Stock
Options

Effect of
Preferred
Shares

Effect of
Convertible
Shares

Diluted
Earnings
Per Share


 

(In thousands, except per share amounts)

Three Months Ended June 30, 2003
  
Net income


$      13,227 


$            -- 


$            -- 


$            679 


$     13,906 

  Shares

        27,888 

           321 

              -- 

          2,610 

      30,819 

  Per-Share Amount

$          0.47 

$            -- 

$            -- 

$          (0.02)

$        0.45 

           

Three Months Ended June 30, 2002
  
Net income before cumulative effect of
    change in accounting principle



$        7,986 



$            -- 



$            -- 



$             700 



$       8,686 

  Shares

        27,553 

           218 

           119 

            2,610 

       30,500 

  Per-Share Amount

$          0.29 

$            -- 

$            -- 

$          (0.01)

$         0.28 

 

Basic
Earnings
Per Share

Effect of
Stock
Options

Effect of
Preferred
Shares

Effect of
Convertible
Shares

Diluted
Earnings
Per Share


 

(In thousands, except per share amounts)

Six Months Ended June 30, 2003
  
Net income


$        25,003 


$            -- 


$               -- 


$         1,358 


$     26,361 

  Shares

          27,839 

           262 

                 -- 

            2,610 

       30,711 

  Per-Share Amount

$            0.90 

$            -- 

$               -- 

$          (0.04)

$         0.86 

           

Six Months Ended June 30, 2002
  
Net income before cumulative effect of
    change in accounting principle



$       17,437 



$            -- 



$                 -- 



$          1,400 



$     18,837 

  Shares

         25,880 

           177 

             113 

            2,610 

       28,780 

  Per-Share Amount

$           0.67 

$            -- 

$            (0.01)

$          (0.01)

$         0.65 

  Cumulative effect of change in
    accounting principle


              495 





            495 

  Per-Share Amount

$           0.02 

     

$         0.02 

  Net income

         17,932 

     

       19,332 

  Per-Share Amount

$           0.69 

     

$         0.67 


     At June 30, 2003 and 2002, 882,791 and 741,056 shares, respectively, related to stock options, were not included in the dilutive earnings per share calculation because the options' exercise price was greater than the market price of the common stock.

Note 8 - Industry Segment Information

     
We have five principal segments that provide a broad range of financial services. The mortgage banking line of business originates, sells, and services residential first mortgage loans throughout the United States. The commercial banking line of business provides commercial banking services in seven Midwestern and Rocky Mountain states. The home equity lending line of business originates and services home equity loans and lines of credit throughout the United States. The commercial finance line of business originates leases and loans against commercial equipment and real estate throughout the United States (U.S.) and Canada. The venture capital line of business invests in early-stage U.S. technology companies focusing on financial services. Our other segment primarily includes the parent company and eliminations.

     The accounting policies of each segment are the same as those described in the "Summary of Significant Accounting Policies." Below is a summary of each segment's revenues, net income, and assets for the three months and six months ended June 30, 2003, and 2002:

 

Mortgage
Banking

Commercial
Banking

Home Equity
Lending

Commercial
Finance

Venture
Capital


Other


Consolidated


 

(In thousands)

For the Three Months Ended June 30, 2003
Net interest income


$        20,904 


$        20,155 


$        28,222 


$        5,398 


$           2 


$  (2,720)


$          71,961 

Intersegment interest

-- 

(717)

-- 

-- 

-- 

717 

-- 

Provision for loan and lease losses

(83)

(1,333)

(7,970)

(4,069)

(215) 

36 

(13,634)

Other revenue

88,824 

5,645 

(22,492)

2,663 

(165)

(206)

74,269 

Intersegment revenues

                   -- 

                   -- 

                    -- 

                  -- 

         150 

     (150)

                    -- 

  Total net revenues

109,645 

23,750 

(2,240)

3,992 

(228)

(2,323)

132,596 

Other expense

71,183 

13,515 

21,404 

3,943 

1,181 

111,230 

Intersegment expenses

               690 

              451 

                406 

             111 

             -- 

   (1,658)

                   -- 

  Net income (loss) before taxes

37,772 

9,784 

(24,050)

(62)

(232)

(1,846)

21,366 

Income taxes

          14,530 

           3,904 

           (9,620)

             (63)

          (96)

      (516)

             8,139 

Net income (loss)

$       23,242 

$         5,880 

$       (14,430)

$               1 

$      (136)

$ (1,330)

$        13,227 


 

Mortgage
Banking

Commercial
Banking

Home Equity
Lending

Commercial
Finance

Venture
Capital


Other


Consolidated


 

(In thousands)

For the Three Months Ended June 30, 2002
Net interest income


$      7,659 


$       15,690 


$        20,457 


$         3,726 


$           12 


$        173 


$        47,717 

Intersegment interest

-- 

1,593 

-- 

-- 

-- 

      (1,593)

-- 

Provision for loan and lease losses

(52)

(2,340)

(5,883)

(1,281)

-- 

56 

(9,500)

Other revenue

45,362 

4,221 

(3,348)

842 

(8)

(6)

47,063 

Intersegment revenues

              -- 

               (87)

                  --

                  -- 

           125 

         (38)

                  -- 

  Total net revenues

52,969 

19,077 

11,226 

3,287 

129 

(1,408)

85,280 

Other expense

37,379 

12,098 

18,181 

3,035 

135 

1,391 

72,219 

Intersegment expenses

          527 

               344 

              597 

                  -- 

              -- 

    (1,468)

                  -- 

  Net income (loss) before taxes

15,063 

6,635 

(7,552)

252

(6)

(1,331)

13,061 

Income taxes

       5,879 

            2,576 

          (3,021)

               124 

            (2)

       (481)

            5,075 

Net income (loss)

$      9,184 

$          4,059 

$        (4,531)

$             128 

$          (4)

$      (850)

$          7,986 

 

 

Mortgage
Banking

Commercial
Banking

Home Equity
Lending

Commercial
Finance

Venture
Capital


Other


Consolidated


 

(In thousands)

For the Six Months Ended June 30, 2003
Net interest income


$       36,969 


$       39,912 


$       54,634 


$       10,205 


$       9 


$          (5,377)


$     136,352 

Intersegment interest

-- 

(1,447)

-- 

-- 

-- 

1,447 

-- 

Provision for loan and lease losses

(30)

(2,913)

(12,850)

(6,933)

(215)

64 

(22,877)

Other revenue

169,808 

10,774 

(37,474)

3,497 

(2,427)

(310)

143,868 

Intersegment revenues

               -- 

                   -- 

                   -- 

                  -- 

         300 

              (300)

                 -- 

  Total net revenues

206,747 

46,326 

4,310 

6,769 

(2,333)

(4,476)

257,343 

Other expense

135,705 

26,969 

42,819 

7,160 

111 

4,066 

216,830 

Intersegment expenses

          1,381 

                902 

            1,372 

              221 

             -- 

           (3,876)

                 -- 

  Net income (loss) before taxes

69,661 

18,455 

(39,881)

(612)

(2,444)

(4,666)

40,513 

Income taxes

        26,780 

             7,364 

         (15,952)

            (353)

        (980)

           (1,349)

          15,510 

Net income (loss)

$       42,881 

$         11,091 

$       (23,929)

$           (259)

$   (1,464)

$          (3,317)

$        25,003 

Assets at June 30, 2003

2,009,155 

$    2,139,403 

$    1,025,284 

$      403,466 

$     7,767 

$        (54,922)

$   5,530,153 

 

Mortgage
Banking

Commercial
Banking

Home Equity
Lending

Commercial
Finance

Venture
Capital


Other


Consolidated


 

(In thousands)

For the Six Months Ended June 30, 2002

Net interest income


$    15,833 


$       31,925 


$        38,590 


$         7,120 


$           22 


$     (1,358)


$        92,132 

Intersegment interest

-- 

1,449 

-- 

(2)

-- 

(1,447)

-- 

Provision for loan and lease losses

(202)

(4,510)

(12,460)

(2,715)

-- 

55 

(19,832)

Other revenue

90,830 

8,390 

(803)

1,629 

(1,482)

(149) 

98,415 

Intersegment revenues

              -- 

               109 

                   -- 

                  -- 

            326 

          (435)

                 -- 

  Total net revenues

106,461 

37,363 

25,327 

6,032 

(1,134)

(3,334)

170,715 

Other expense

73,257 

23,937 

36,543 

5,888 

298 

2,258 

142,181 

Intersegment expenses

        1,061 

               538 

             1,186 

                  -- 

               -- 

       (2,785)

                 -- 

  Net income (loss) before taxes

32,143 

12,888 

(12,402)

144 

(1,432)

(2,807)

28,534 

Income taxes

      12,621 

           5,000 

            (4,961)

               131 

          (573)

       (1,121)

         11,097 

  Income (loss) before cumulative effect of
     change in accounting principle


19,522 


7,888 


(7,441)


13 


(859)


(1,686)


17,437 

Cumulative effect of change in accounting principle


              -- 


                  -- 


                   -- 


               495 


               -- 


               -- 


             495 

Net income (loss)

$    19,522 

$          7,888 

$          (7,441)

$             508 

$        (859)

$     (1,686)

         17,932 

Assets at June 30, 2002

$  799,221 

$   1,813,463 

$       894,122 

$      300,269 

$       6,548 

$    16,810 

$  3,830,433 

Note 9 - Contingencies

     
Our indirect subsidiary, Irwin Mortgage Corporation, is a defendant in a class action lawsuit in the United States District Court for the Northern District of Alabama alleging that Irwin Mortgage violated the federal Real Estate Settlement Procedures Act (RESPA) relating to Irwin Mortgage's payment of broker fees to mortgage brokers. In June 2001, the Court of Appeals for the 11th Circuit upheld the district court's certification of a plaintiff class and the case was remanded for further proceedings in the federal district court. In September 2001, a second suit sought class status and consolidation with this suit.

     In November 2001, by order of the district court, the parties filed supplemental briefs analyzing the impact of a new policy statement from the Department of Housing and Urban Development (HUD) that explicitly disagrees with the judicial interpretation of RESPA by the Court of Appeals for the 11th Circuit in its ruling upholding class certification in this case. In response to a motion from Irwin Mortgage, in March 2002, the district court granted Irwin Mortgage's motion to stay proceedings in this case until the 11th Circuit decided the three other RESPA cases originally argued before it with this case. The second suit seeking consolidation with this one was similarly stayed.

     The 11th Circuit has now decided all of the RESPA cases pending in that court. In one of those cases, the 11th Circuit concluded that the trial court had abused its discretion in certifying a class action under RESPA. Further, in that decision, the 11th Circuit expressly recognized it was, in effect, overruling its previous decision upholding class certification in this case. In March 2003, Irwin Mortgage filed a motion to decertify the class and the plaintiffs filed a renewed motion for summary judgment.

     If the class is not decertified and the district court finds that Irwin Mortgage violated RESPA, Irwin Mortgage could be liable for damages equal to three times the amount of that portion of payments made to the mortgage brokers that is ruled unlawful. Based on notices sent by the plaintiffs to date to potential class members and additional notices that might be sent in this case, we believe the class is not likely to exceed 32,000 borrowers who meet the class specifications.

     In addition to this case and the case seeking consolidation with it, three other lawsuits were filed against Irwin Mortgage in 2002 in the Circuit Court of Calhoun County, Alabama seeking class action status and allege claims based on payments similar to those at issue in this case.  In April, 2003, Irwin Mortgage and the plaintiffs reached an agreement to settle the three cases in Calhoun County, Alabama, for a nonmaterial amount.  Another case filed in 2002 in the United States District Court for the Northern District of Alabama was permitted to intervene in the case seeking consolidation with this case.  The intervening case alleged RESPA violations both similar to and different from those in this case in connection with payments made to mortgage brokers.  In July, 2003, the parties agreed in principle to settle the suit seeking consolidation with this one, along with the intervening case, for a nonmaterial amount.

     Irwin Mortgage intends to defend this and the related lawsuits vigorously and believes it has numerous defenses to the alleged RESPA and similar violations. Irwin Mortgage further believes that the 11th Circuit's recent RESPA decisions provide grounds for reversal of the class certification in this case. We have no assurance, however, that Irwin Mortgage will be successful in defeating class certification in this case or will ultimately prevail on the merits in this or the other cases. However, we expect that an adverse outcome in this or the related cases could result in substantial monetary damages that could be material to our financial position. We have not established any reserves for this or the related cases and are unable at this stage of the litigation to form a reasonable estimate of potential loss that we could suffer.

     In January 2001, we and Irwin Leasing Corporation (formerly Affiliated Capital Corp.), our indirect subsidiary, and Irwin Equipment Finance Corporation, our direct subsidiary (together, the Irwin companies), were served as defendants in an action filed in the United States District Court for the Middle District of Pennsylvania. The suit alleges that a manufacturer/importer of certain medical devices made misrepresentations to health care professionals and to government officials to improperly obtain Medicare reimbursement for treatments using the devices, and that the Irwin companies, through Affiliated Capital's financing activities, aided in making the alleged misrepresentations. The Irwin companies filed a motion to dismiss on February 12, 2001. On August 10, 2001, the court granted our motion in part by dismissing Irwin Financial and Irwin Equipment Finance as defendants in the suit. In June, 2003, Irwin Leasing filed a motion for summary judgment. We have not established any reserves for this case. At this stage of the litigation, we are unable to form a reasonable estimate of the amount of potential loss, if any, that Irwin Leasing could suffer.

     Our subsidiary, Irwin Union Bank and Trust Company, is a defendant in a purported class action lawsuit, filed in the U.S. District Court in Massachusetts in July 2001. The case involves loans purchased by Irwin Union Bank and Trust from an unaffiliated third-party originator. The plaintiffs allege that the loan documents did not comply with certain provisions of the Truth in Lending Act relating to high rate loans. The complaint seeks rescission of the loans and other damages. On September 30, 2002, the court granted plaintiffs' motion for certification of a class, subject to certain limitations. We filed a motion for reconsideration with the district court and a petition for permission to appeal the class certification decision with the Court of Appeals for the 1st Circuit. Discovery has not yet commenced. In May, 2003, the district court denied our motion for summary judgment and denied in part our motion for reconsideration of class decertification. However, the court further restricted membership in the class. If the class is ultimately upheld, the actual number of plaintiff borrowers will be determined only after a review of loan files. We believe that out of approximately 200 loans acquired directly from the third-party originator and approximately 7,800 loans acquired from others through bulk acquisitions, only a portion of these loans will qualify for inclusion in the class. Because this case is in the early stages of litigation, we are unable to form a reasonable estimate of potential loss, if any, and have not established any reserves related to this case.

     Our indirect subsidiary, Irwin Mortgage Corporation, is a defendant in a case filed in August, 1998 in the Baltimore, Maryland, City Circuit Court. On January 25, 2002, a jury in this case awarded the plaintiffs damages of $1.434 million jointly and severally against defendants, including Irwin Mortgage. The nine plaintiff borrowers alleged that a home rehabilitation company defrauded the plaintiffs by selling them defective homes at inflated prices and that Irwin Mortgage, which provided the plaintiff borrowers mortgage loans on the home purchases, participated in the fraud. Irwin Mortgage filed an appeal with the Maryland Court of Special Appeals. Oral argument was held on January 7, 2003. We have reserved for this case based upon advice of our legal counsel. Although we believe Irwin Mortgage has justifiable grounds for appeal, we cannot predict at this time whether the appeal will ultimately be successful.

     In April, 2003, our indirect subsidiary, Irwin Mortgage Corporation, was named as a defendant in an action filed in the Marion County, Indiana, Circuit Court. The complaint alleges 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. The plaintiff is seeking to certify a class consisting of Indiana borrowers who were charged the fee during the six-year period prior to the filing of the lawsuit. Because the case is in the early stages of litigation, we are unable at this time to form a reasonable estimate of the amount of potential loss, if any, that Irwin Mortgage could suffer. We have not established any reserves for this case.

     In April, 2003, our indirect subsidiary, Irwin Mortgage Corporation, was named as a defendant in an action filed in the District Court of Nueces County, Texas. The complaint alleges that Irwin Mortgage improperly charged borrowers fees for the services of third-party vendors in excess of Irwin Mortgage's costs, and charged certain fees to which plaintiffs did not agree. The plaintiffs are seeking to certify a class consisting of similarly situated borrowers. Because the case is in the early stages of litigation, we are unable at this time to form a reasonable estimate of the amount of potential loss, if any, that Irwin Mortgage could suffer. We have not established any reserves for this case.

     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 have been established for these vario us matters of litigation, when appropriate, based upon the advice of legal counsel.

Item 2. Management's 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, and are including this statement for purposes of invoking these safe harbor provisions. Words such as "anticipated," "assume," "assumptions," "attempt," "believe," "continues," "could," "estimate," "estimated," "expect," "expectations," "expected," "forecasts," "forward," "future," "judgment," "likely," &qu ot;may," "objectives," "possible," "projected," "projections," "strategy," "unlikely," "will," "would," and similar expressions are intended to identify forward-looking statements, which may include, among other things:

     Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from our expectations of future results, performance or achievements expressed or implied by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. Actual future results may differ materially from what is projected due to a variety of factors, including, but not limited to, potential changes in interest rates, which may affect consumer demand for our products and the valuation of our servicing portfolio; staffing fluctuations in response to product demand; the relative profitability of our lending operations, including our correspondent mortgage loan originations; management of our servicing portfolios, including short-term swings in valuation of such portfolios due to quarter-end secondary market interest rates, which are inherently volatile; borrowers' refinancing opportunities, which may affect the prepayment assumptions used in our valuation estimates; unanticipated deterioration in the credit quality of our assets; difficulties in delivering products to the secondary market as planned or in securitizing our products as planned; difficulties in expanding our businesses or raising capital and other funding sources as needed; competition from other financial service providers for experienced managers as well as for customers; changes in the value of 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; legislative or regulatory changes, including changes in the interpretation of regulatory capital rules, disclosure or consumer lending rules or rules affecting corporate governance; changes in applicable accounting policies or principles or their application t o our business; or governmental changes in monetary or fiscal policies. Further, geopolitical uncertainty may negatively impact the financial services industry or cause changes in or exaggerate the effects of the factors described above. We undertake no obligation to update publicly any of these statements in light of future events, except as required in subsequent periodic reports we file with the Securities and Exchange Commission (SEC).

Consolidated Overview

 

Three Months Ended June 30,

Six Months Ended June 30,

2003

2002

2003

2002


Net income (millions)

$    13.2    

$    8.0    

$    25.0    

$    17.9    

Basic earnings per share (1)

0.47    

0.29    

0.90    

0.69    

Diluted earnings per share (1)

0.45    

0.28    

0.86    

0.67    

Return on average equity

14.22 %

9.76 %

13.68 %

11.98 %

Return on average assets

1.00    

0.88    

1.01    

1.00    

_________
(1) Earnings per share of common stock before cumulative effect of change in accounting principle related to SFAS 142, "Goodwill and Other Intangible Assets," for the six months ended June 30, 2002 was $0.67 basic and $0.65 diluted.

Consolidated Income Statement Analysis

Net Income

     
We recorded net income of $13.2 million for the three months ended June 30, 2003, up 66% from net income of $8.0 million for the three months ended June 30, 2002. Net income per share (diluted) was $0.45 during the three-month period ended June 30, 2003, up 61% from $0.28 per share during the same period a year earlier. Return on equity for the second quarter of 2003 was 14.22% compared with 9.76% during the same period in 2002.

     For the year to date, we recorded net income of $25.0 million or $0.86 per diluted share. This represents increases of 39% and 28%, respectively, compared to the same period in 2002. Return on equity for the six-month period ended June 30, 2003 was 13.68% compared with 11.98% during the same period a year earlier.

     Net interest income for the six months ended June 30, 2003 totaled $136.4 million, up 48% from 2002 net interest income of $92.1 million for the same period. Net interest margin for the six months ended June 30, 2003 was 5.98% compared to 5.94% for the same period in 2002. The improvement in margin from 2002 to 2003 was primarily due to lower rate funding sources. The following tables show our daily average consolidated balance sheet, interest rates and interest differential at the dates indicated:

Six Months Ended June 30,

2003

2002

Average Balance


Interest

Yield/
Rate

Average
Balance


Interest

Yield/
Rate


 

(Dollars in thousands)

Assets

           

Interest-earning assets

           

  Interest-bearing deposits with banks

$       53,642 

$       254 

0.95 %

$      20,450 

$         158 

1.56 %

  Federal funds sold

15,430 

99 

1.28    

2,691 

30 

2.17    

  Trading assets

 132,584 

12,969 

19.73    

204,936 

18,068 

17.78    

  Investment securities

 62,500 

1,756 

5.67    

37,772 

1,350 

7.21    

  Loans held for sale

 1,256,211 

52,822 

8.48    

498,117 

19,096 

7.73    

  Loans and leases, net of unearned income (1)

     3,080,541 

    19,832 

   7.84    

    2,365,034 

       99,854 

    8.51    

        Total interest earning assets

$   4,600,908 

$ 187,732 

8.23 %

$  3,129,000 

$   138,556 

8.95 %

Noninterest-earning assets

           

  Cash and due from banks

$        99,345 

   

$       98,224 

   

  Premises and equipment, net

32,443 

   

34,733 

   

  Other assets

356,323 

   

375,191 

   

  Less allowance for loan and lease losses

        (54,127

   

       (28,658)

   

         Total assets

$   5,034,892 

   

$  3,608,490 

   

Liabilities and Shareholders' Equity

           

Interest-bearing liabilities

           

  Money market checking

$      158,524 

$        399 

0.51 %

$     134,318 

$          353 

0.53 %

  Money market savings

 816,350 

5,660 

1.40    

567,517 

4,349 

1.55    

  Regular savings

63,905 

689 

2.17    

55,196 

790 

2.89    

  Time deposits

1,020,243 

16,058 

3.17    

1,077,817 

22,536 

4.22    

  Short-term borrowings

682,465 

8,670 

2.86    

592,284 

7,395 

2.52    

  Long-term

30,068 

1,325 

8.89    

30,000 

1,142 

7.68    

  Collateralized debt

568,269 

7,524 

2.67    

4,655 

221 

9.57    

  Trust preferred securities

       232,994 

     11,055 

   9.57    

      198,500 

        9,638 

    9.79    

        Total interest-bearing liabilities

$   3,572,818 

$   51,380 

2.90 %

$ 2,660,287 

$    46,424 

3.52 %

Noninterest-bearing liabilities

           

  Demand deposits

$      928,679 

   

$    457,834 

   

  Other liabilities

165,163 

   

189,314 

   

Shareholders' equity

        368,232 

   

      301,055 

   

        Total liabilities and shareholders' equity

$   5,034,892 

   

$ 3,608,490 

   

  Net interest income

 

$ 136,352 

   

$    92,132 

 

  Net interest income to average interest-
     earning assets

   


   5.98 %

   


    5.94  %

__________
(1) For purposes of these computations, nonaccrual loans are included in daily average loan amounts outstanding.


Provision for Loan and Lease Losses

     
The consolidated provision for loan and lease losses for the three months ended June 30, 2003 was $13.6 million, compared to $9.5 million for the same period in 2002. Year to date, the provision for 2003 was $22.9 million, compared to $19.8 million in 2002. More information on this subject is contained in the section on credit risk.

Noninterest Income

     
Noninterest income during the three months ended June 30, 2003 totaled $74.3 million, compared to $47.1 million for the same period in 2002. Non-interest income of $143.9 million was recorded for the six months ended June 30, 2003 and $98.4 million for the same period in 2002. The increase in 2003 versus 2002 year-to-date noninterest income was primarily a result of a 159% increase in gain from sale of loans at the mortgage banking line of business as a result of market conditions and increased production resulting in increased secondary market deliveries. Partially offsetting these increases were higher amortization and impairment expense related to mortgage servicing rights as a result of declining interest rates and higher trading losses related to our residual assets due to higher expected credit losses.

Noninterest Expense

     
Noninterest expenses for the three and six months ended June 30, 2003 totaled $111.2 million and $216.8 million, respectively, compared to $72.2 million and $142.2 million for the same periods in 2002. The increase in consolidated noninterest expense in 2003 is primarily related to higher personnel costs associated with our increased production at the mortgage banking line of business.

Consolidated Balance Sheet Analysis

     
Total assets at June 30, 2003 were $5.5 billion, up 13% from December 31, 2002. However, we believe that changes in the average balance sheet are a more accurate reflection of the actual changes in the level of activity on the balance sheet. Average assets for the first half of 2003 were $5.0 billion, up 26% from the average assets at December 31, 2002. The growth in the consolidated balance sheet reflects significant growth in loans held for sale at the mortgage banking line of business during the first half of 2003. Also, there were increases in portfolio loans and leases at the commercial banking, home equity lending and commercial finance lines of business.

Loans and Leases

     
Our commercial loans and leases are originated throughout the United States and Canada. At June 30, 2003, 5% of our loan and lease portfolio was with our Canadian operation. We also extend credit to consumers in the United States through mortgages, installment loans and revolving credit arrangements. The majority of the remaining portfolio consists of residential mortgage loans (1-4 family dwellings) and mortgage loans on commercial property. Loans by major category for the periods presented were as follows:

 

June 30,

December 31,

 

2003

2002


 

(In thousands)

Commercial, financial and agricultural

$  1,431,280 

$         1,347,962 

Real estate construction

322,910 

314,851 

Real estate mortgage

871,118 

777,865 

Consumer

24,132 

27,857 

Direct lease financing:

   

  Domestic

311,034 

291,711 

  Canadian

179,358 

133,784 

Unearned income:

   

  Domestic

(64,477)

(59,287)

  Canadian

        (25,950)

             (19,467)

        Total

$   3,049,405 

$         2,815,276 


Investment Securities

     
The following table shows the composition of our investment securities at the dates indicated:

 

June 30,

December 31,

 

2003

2002


 

(In thousands)

U.S. Treasury and government obligations

$   72,178 

$    60,868 

Obligations of states and political subdivisions

3,950 

4,210 

Mortgage-backed securities

  2,430 

1,738 

Other

      1,191 

        1,132 

  Total

$   79,749 

$    67,948 


     At June 30, 2003, 86% of our investment in U.S. Treasury and government obligations were investments in the stock of the Federal Reserve Bank and the Federal Home Loan Bank of Indianapolis . The amount of our investment is determined by formula and relates to the size or amount of activities undertaken by us with those organizations.

Deposits

     
Total deposits as of June 30, 2003 averaged $3.0 billion compared to deposits for the year 2002 that averaged $2.4 billion. Demand deposits at June 30, 2003 averaged $928.7 million, a 61% increase over the average balance for the year 2002. A significant portion of demand deposits is related to deposits at Irwin Union Bank and Trust, which are associated with escrow accounts held on loans in the servicing portfolio at the mortgage banking line of business. During the first half of 2003, these escrow accounts averaged $723.7 million compared to an average of $409.4 million for the year 2002.

     Irwin Union Bank and Trust utilizes institutional broker-sourced deposits as funding from time to time to supplement deposits solicited through branches and other wholesale funding sources. At June 30, 2003, institutional broker-sourced deposits totaled $406.6 million compared to a balance of $337.4 million at December 31, 2002. The increase in brokered deposits in 2003 relates to the increased funding needed to support the balance sheet growth in loans and loans held for sale, coupled with a desire to maintain a laddering of the maturities of longer term wholesale funding.

Short-Term Borrowings

     
Short-term borrowings during the first half of 2003 averaged $682.5 million compared to an average of $600.8 million for the year 2002. The increase in 2003 was a result of strong growth in loans and loans held for sale.

Long-Term and Collateralized Debt

     
Long-term debt totaled $30.1 million at June 30, 2003, relatively unchanged from December 31, 2002. Collateralized debt totaled $648.7 million at June 30, 2003, compared to $391.4 million at December 31, 2002. The increased debt relates to secured financing transactions in the first quarter at our home equity lending and commercial finance lines of business. These securitization structures result in loans remaining as assets and debt borrowings being recorded as liabilities on the balance sheet. The securitization debt represents match-term funding for these loans and leases.

Capital

     
Shareholders' equity averaged $368.2 million during the first half of 2003, up 15% compared to the average for the year 2002. Shareholders' equity balance of $384.8 million at June 30, 2003 represented $13.76 per common share, compared to $12.98 per common share at December 31, 2002. We paid $2.0 million in dividends in the second quarter of 2003, and $3.9 million year to date.

     The following table sets forth our capital and capital ratios at the dates indicated:

 

June 30,

December 31,

 

2003

2002


 

(In thousands)

Tier 1 capital

$        495,090 

$        462,064 

Tier 2 capital

          193,615 

          196,092 

     Total risk-based capital

$        688,705 

$        658,156 

Risk-weighted assets

$     4,989,023 

$     4,996,891 

Risk-based ratios:

   

  Tier 1 capital

 9.9 % 

9.2 % 

  Total capital

13.8     

13.2     

  Tier 1 leverage ratio

9.3     

9.7     

Ending shareholders' equity to assets

7.0     

7.4     

Average shareholders' equity to assets

7.3     

8.0     

     At June 30, 2003, our total risk-adjusted capital ratio was 13.8% compared to the 10.0% required to be considered "well-capitalized" by banking regulation and our internal minimum target of 11.0%. At December 31, 2002, our total risk-adjusted capital ratio was 13.2%. Our ending equity to assets ratio at June 30, 2003 was 7.0% compared to 7.4% at December 31, 2002. Our Tier 1 capital totaled $495.1 million as of June 30, 2003, or 9.9% of risk-weighted assets.

     In connection with an analysis of the capital needed to support certain of our home equity lending activities in accordance with regulatory guidance set forth in SR 01-4 and in consultation with our banking regulators, we will make a risk-weighting adjustment in our regulatory Consolidated Report of Condition and Income, beginning with the third quarter of 2003. This adjustment will reflect a risk-weighting of 200 percent for certain assets that are described in the guidance as "subprime." We estimate that these assets totaled approximately $250 million as of June 30, 2003. We have curtailed the origination of loan and line products that require this risk capital treatment and intend to sell all new originations of these products on a whole loan basis. Therefore, we expect the portfolio balance to decline over time. Assuming normal attrition of such loans, we anticipate the new risk weighting would have the initial effect of lowering our Total Risk-based Capital R atio by approximately 0.60 to 0.80 percent, declining in effect over time as the assets are removed from our balance sheet.

Cash Flows Analysis

     
Our cash and cash equivalents increased $21.3 million during the first half of 2003 compared to a decrease of $47.4 million during the same period in 2002. Cash flows from operating activities resulted in a use of $318.2 million in cash and cash equivalents in the first six months of 2003 compared to the first six months of 2002 when our operations provided $138.4 million in cash and cash equivalents. Changes in loans held for sale impact cash flows from operations. In the first six months of 2003, our loans held for sale increased $351.1 million, thus increasing the cash used by operating activities. During the same period in 2002, loans held for sale decreased $64.9 million.

Earnings Outlook

     Due to our recent mortgage origination activity, the potential for reversal in mortgage servicing asset impairment should interest rates increase meaningfully as compared to the end of June 2003, and our assumption that we will be successful in the execution of the other elements of our diversified revenue strategy, we expect at the time of this filing that we will have consolidated earnings per share (diluted) in 2003 of at least $2.25 per share. This estimate is based on various factors and current assumptions management believes are reasonable, including current industry forecasts of a variety of economic and competitive factors. However, projections are inherently uncertain, and our actual earnings may differ significantly from this estimate due to uncertainties and risks related to our business. Our transition off securitization gain-on-sale accounting in our home equity line of business will have had a two-year history at the end of 2003. We believe that this transitio n, coupled with the continued growth of our other lines of business, will enable us over time to produce earnings growth and return on equity aligned with our long-term targets of 12% or better growth in earnings per share and 15% or better return on equity on an annualized basis over economic cycles.

     A meaningful amount of our earnings comes from activities and mark-to-market accounting requirements tied directly or indirectly to market activities, particularly movements in the bond market (e.g., the valuation of our mortgage servicing portfolio). We attempt to manage the impact of short-term movements in interest rates on the valuation of our mortgage servicing rights through a combination of financial derivatives and the changes in income from production of new mortgages likely to be driven by those same movements in interest rates. However, the correlation within short periods of time (such as a single quarter) between interest rate movements that impact the reported value of our mortgage servicing rights at quarter end and the production effects of those interest rate movements -- which may not be reflected until the following quarter -- can be low. It is possible, therefore, that our balanced revenue strategy may be successful as measured over several quarters or yea rs, but may have market-driven variances if measured over short periods. We also have a large amount of income that is subject to assumptions and pricing for credit risks. We use a variety of methods for estimating the effects of and accounting for credit losses, but ultimately, we need to make estimates based on imperfect knowledge of future events. For example, if the pace of economic recovery in the U.S. is slower during the second half of 2003 than currently anticipated by consensus estimates, our credit related costs may increase beyond our current estimates. Conversely, should the economic environment be stronger than estimated at June 30, certain credit costs may be lower than we had previously estimated and, if economic conditions create higher long-term interest rates, we may need to reverse amounts of our previously recognized mortgage servicing impairment.

Earnings by Line of Business

     
Irwin Financial Corporation is composed of five principal lines of business:


     The following table summarizes our net income (loss) by line of business for the periods indicated:

Three Months Ended June 30,

Six Months Ended June 30,

2003

2002

2003

2002


(In thousands)

Net income (loss):

  Mortgage Banking

$      23,242 

$     9,184 

$      42,881 

$      19,522 

  Commercial Banking

5,880 

4,059 

 11,091 

7,888 

  Home Equity Lending

(14,430)

(4,531)

(23,929)

(7,441)

  Commercial Finance

128 

(259)

508 

  Venture Capital

(136)

(4)

(1,464)

(859)

  Other (including consolidating entries)

        (1,330)

       (850)

        (3,317)

         (1,686)

$      13,227 

$    7,986 

$      25,003 

$      17,932 


Mortgage Banking

     
The following table shows selected financial information for our mortgage banking line of business:

 

Three Months Ended June 30,

Six Months Ended June 30,

 

2003

2002

2003

2002


 

(In thousands)

Selected Income Statement Data:

       

  Net interest income

$    20,904   

$             7,659   

$         36,969   

$           15,833    

  Provision for loan losses

(83)  

(52)  

(30)  

(202)   

  Gain on sales of loans

111,511   

35,406   

202,739   

73,853    

  Loan servicing fees

19,157   

13,893   

35,913   

28,627    

  Amortization of servicing assets

(33,233)  

(12,491)  

(60,468)  

(24,610)   

  Impairment of servicing assets

(40,663)  

(47,973)   

(42,618)  

(37,240)   

  Gain on derivatives

28,927    

45,430   

29,248   

37,302    

  Gain on sales of mortgage servicing assets

(4)   

9,809   

--   

9,716    

  Other income

        3,129    

               1,288    

             4,994   

              3,182    

     Total net revenue

109,645    

52,969    

206,747   

106,461    

Operating expense

    (71,873)   

           (37,906)   

       (137,086)  

          (74,318)   

Income before taxes

37,772    

15,063    

69,661   

32,143    

Income taxes

    (14,530)   

             (5,879)   

         (26,780)  

          (12,621)   

Net income

$    23,242    

$             9,184    

$         42,881   

$          19,522    

Selected Operating Data:

       

  Mortgage loan originations

7,237,670    

$      1,897,162    

$  12,714,962   

$     3,846,556    

  Servicing sold as a % of originations

4.5 %

96.6 %

4.5 %

53.1 %

         

Selected Balance Sheet Data at End of

June 30,

December 31,

  Period:

2003

2002


  Total assets

$       2,009,155    

$      1,631,406    

  Mortgage loans held for sale

1,542,863    

1,239,309    

  Mortgage servicing assets

194,288    

146,398    

  Shareholder's equity

132,732    

100,069    

Selected Operating Data:

  Servicing portfolio:

  Balance at end of period

24,700,125    

16,792,669    

     Weighted average coupon rate

6.08 %

6.59 %

     Weighted average servicing fee

0.34    

0.37    

Overview

     
In our mortgage banking line of business, we originate, purchase, sell and service primarily conventional and government agency-backed residential mortgage loans throughout the United States. We also engage in the business of mortgage reinsurance. Because most of our mortgage originations either are insured by an agency of the federal government, such as the Federal Housing Administration (FHA) or the Veterans Administration (VA), or, in the case of conventional mortgages, meet requirements for sale to Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC), we are able to remove substantially all of the credit risk of these loans from our balance sheet. We securitize and sell mortgage loans to institutional and private investors but may retain the servicing rights. Loan origination demand and servicing values react in opposite directions to interest rate change as explained below. We believe this balance between mortgage loan originations and mortgage loan servicing assists in managing the risk from interest rate changes, which has helped stabilize our revenue stream.

     Our mortgage banking line of business is currently our largest contributor to revenue, comprising 83% and 80%, respectively, of our total revenues for the second quarter and year to date in 2003, compared to 62% for both the second quarter and year to date in 2002. Our mortgage banking line of business contributed 176% and 115% of our net income for the three months ended June 30, 2003 and 2002, respectively, and 172% and 109% for the six months ended June 30, 2003 and 2002, respectively.

     Our channels for originating loans consist primarily of retail, wholesale, and correspondent lending. We also use the Internet to facilitate customer interaction in these channels. The retail channel originates loans through branches and identifies potential borrowers mainly through relationships maintained with housing intermediaries, such as realtors, homebuilders and brokers. Our wholesale and correspondent divisions purchase loans from third party sources. The wholesale division purchases primarily from mortgage loan brokers and issues loan proceeds directly to the borrower. During the fourth quarter of 2002 we launched our correspondent lending division. This division purchases closed mortgage loans primarily from small mortgage banks and retail banks. In the first half of 2003, this channel originated $3.2 billion of mortgage loans or 25% of our total production for the year to date. We fund our mortgage loan originations using internal funding sources and through cr edit facilities provided by third parties. Generally within a 30-day period after funding, we sell our mortgage loan originations into the secondary mortgage market by either direct loan sales or by securitization. Our secondary market sources include government-sponsored mortgage entities, nationally-sponsored mortgage conduits, and institutional and private investors. Our mortgage banking line of business may retain servicing rights to the loans that it sells or securitizes.

     As mentioned, we believe there is a balance between mortgage loan originations and mortgage loan servicing that assists in managing the risk from interest rate changes and the impact of rate changes on each part of the business. In rising interest rate environments, originations typically decline, while the unrealized value of our mortgage servicing portfolio generally increases as prepayment expectations decline. In declining interest rate environments, servicing values typically decrease as prepayment expectations increase, while the value of our mortgage production franchise generally increases. However, the offsetting impact of changes in production income and servicing values may not always be recognized in the same quarter under generally accepted accounting principles, causing greater volatility in short-term results than is apparent in longer-term measurements such as annual income. We sell servicing rights periodically for many reasons, including income recognition, cash flow, and servicing portfolio management. Servicing rights sales occur at the time the underlying loans are sold to an investor (in flow sales) or in pools from our seasoned servicing portfolio (in bulk sales).

Net Income

     
Net income from mortgage banking for the three months ended June 30, 2003 was $23.2 million, compared to $9.2 million for the same period in 2002, an increase of 153%. This net income increase in 2003 primarily relates to increased production as a result of a declining interest rate environment.

     The following table shows the composition of our originations by loan categories for the periods indicated:

 

Three Months Ended June 30,

Six Months Ended June 30,

 

2003

2002

2003

2002


 

(Dollars in thousands)

Total originations

$       7,237,670     

$       1,897,162    

$       12,714,962    

$       3,846,556    

Percent retail loans

26.8 %

34.0 %

26.9 %

34.8 %

Percent wholesale loans

42.5     

59.0     

45.5     

58.5     

Percent correspondent

28.1     

--     

24.9     

--      

Percent brokered (1)

2.6     

7.0     

2.7     

6.7     

Percent refinances

75.1     

39.2     

73.0     

46.3     

__________
(1) Brokered loans are loans we originate for which we receive loan origination fees, but which are funded, closed and owned by unrelated third parties.


     Mortgage loan originations for the three months ended June 30, 2003 totaled $7.2 billion, up 282% from the same period in 2002. For the year, originations totaled $12.7 billion, up 231% from 2002. Refinanced loans accounted for 75% of loan production for the second quarter of 2003 and 73% year to date compared to 39% and 46% for the same periods in 2002. The increased originations and refinances are as a percent of production in 2003 are a result of the favorable interest rate conditions as well as distribution channel expansions.

Net Revenue

     
Net revenue for the three and six months ended June 30, 2003 totaled $109.6 million and $206.7 million, compared to $53.0 million and $106.5 million for the three and six months ended June 30, 2002.

     Net interest income is generated from the interest earned on mortgage loans before they are sold to investors, less the interest expense incurred on borrowings to fund the loans. Net interest income for the second quarter in 2003 totaled $20.9 million compared to $7.7 million for the second quarter in 2002. Net interest income year to date increased 133% to $37 million. The increase in net interest income in 2003 is a result of increased production related to the favorable interest rate environment as well as an increase in spread between short-term warehouse interest rates we pay and longer-term interest rates paid to us by our borrowers while the mortgage loans are on our balance sheet. Another contributor to the increase is the development of our correspondent channel where the bulk of net revenues come from the warehousing process and where production fees are of lesser importance to profitability as compared to the retail and wholesale channels.

     Gain on sale of loans includes the valuation of newly created mortgage servicing rights and net loan origination fees and is recognized when loans are pooled and sold into the secondary mortgage market. Also included in gain on sale of loans are fair value adjustments to forward contracts and interest rate lock commitments. Gain on sale of loans during the second quarter increased 215% compared to the same period in 2002. Gain on sale of loans for the six months ended June 30, 2003 totaled $202.7 million, compared to $73.9 million for the same period in 2002, an increase of 175%. This increase is attributable to increased production, market conditions and secondary market activity as a result of the favorable interest rate environment.

     Servicing fee income is recognized by collecting fees, which normally range between 25 and 44 basis points annually on the principal amount of the underlying mortgages. Servicing fee income totaled $19.2 million and $35.9 million for the three and six months ended June 30, 2003, an increase of 38% and 25% from the same periods in 2002, primarily reflecting the growth in the servicing portfolio.

     Amortization expense relates to mortgage servicing rights and is based on the proportion of current net servicing income to the total expected for the estimated lives of the underlying loans. Amortization expense totaled $33.2 million for the three months ended June 30, 2003, compared to $12.5 million during the second quarter of 2002. Year-to-date amortization expense totaled $60.5 million and $24.6 million for 2003 and 2002, respectively. This increase relates to the increase in the underlying servicing portfolio, the shortening of estimated lives due to decreases in interest rates, and an enhancement we made to our mortgage asset amortization methodology commencing at the beginning of 2003. The methodology enhancement better aligns the amortization with current prepayment speeds. This change will likely result in a commensurate offset (positive or negative depending on the then current interest rate environment) to our quarterly servicing asset impairment.

     Impairment expense is recorded when the book value of the mortgage servicing rights exceeds the fair value on a strata by strata basis. Impairment expense totaled $40.7 million during the second quarter and $42.6 million for first half of 2003, compared to $48.0 million and $37.2 million during the same periods of 2002. The impairment expense recorded in 2003 was somewhat offset by derivative gains of $28.9 million during the second quarter and $29.2 million for the first half of 2003. Derivative gains of $45.4 million and $37.3 million were recorded during the second quarter and year to date in 2002, respectively. As a result, impairment expense net of derivative gains totaled $11.7 million in the second quarter of 2003 compared to an impairment expense net of derivative gains of $2.5 million during the same period in 2002. At June 30, 2003, the mortgage line of business held $8.0 billion net notional amount in interest rate swaptions to manage the risk of our servicing as sets. Notional amounts do not represent the amount at risk. The swaptions we owned on June 30, 2003, had expiration dates of July 1, 2003, and were replaced on that date by new swaption contracts and Eurodollar futures. The current risk management activities of the mortgage bank related to servicing assets do not satisfy the criteria for "hedge accounting" under SFAS 133. As a result, these derivatives are accounted for as "other assets" and "other liabilities," and changes in fair value are adjusted through earnings as "derivative gains," while the underlying servicing asset is accounted for on a strata-by-strata basis at the lower of cost or market.

     Our mortgage banking business maintains the flexibility either to sell servicing for current cash flow through bulk sales or to retain servicing for future cash flow through the retention of ongoing servicing fees. Total servicing sales represented 4.5% of loan originations for both the three and six months ended June 30, 2003, compared to 96.6% and 51.4% for the same periods of 2002. The decision to sell or retain servicing is based on current market conditions for servicing assets, loan origination levels and production expenses, servicing portfolio management considerations, and the general level of risk tolerance of the mortgage banking line of business and the Corporation.

     Over the past few years, we have built our servicing portfolio in anticipation of rising interest rates that would result in lower mortgage loan production. During the last weeks of June and during the month of July 2003, mortgage interest rates increased over 100 basis points (1.0 percent) and, as expected, we have seen a decline in our mortgage loan applications in recent weeks. However, we have also recorded an increase in the value of our mortgage servicing asset (MSA) through the reversal of previously booked impairment. While we have incurred losses in our derivatives used to hedge this MSA, in total, the financial result has been commensurate with our balanced revenue strategy and expectation that the servicing portfolio does provide an economic offset to declines in production revenues that are driven by interest rate increases.

Operating Expenses

     
The following table sets forth operating expenses for our mortgage banking line of business for the periods indicated:

 

 

Three Months Ended June 30,

Six Months Ended June 30,

 

2003

2002

2003

2002


 

(Dollars in thousands)

Salaries and employee benefits

$      20,883 

$     14,268 

$      38,980 

$     28,466 

Incentive and commission pay

24,074 

8,853 

47,088 

16,123 

Other expenses

       26,916 

      14,785 

       51,018 

      29,729 

Total operating expenses

$     71,873 

$    37,906 

$    137,086 

$    74,318 

Number of employees(1)

 

 

2,307 

1,589 

__________
(1)
On a full-time equivalent basis.


     Operating expenses for the three and six months ended June 30, 2003 totaled $71.9 million and $137.1 million, a 90% and 84% increase over the same periods in 2002. Salaries and employee benefits including incentive and commission pay increased 94% during the second quarter of 2003 compared to the same period in 2002. These fluctuations reflect significant increases in production activities in 2003.

Mortgage Servicing

     
The following table shows information about our managed mortgage servicing portfolio, including mortgage loans held for sale, for the periods indicated:

Six Months Ended
June 30,

Year Ended
December 31,

2003

2002


 

(Portfolio in billions)

Beginning servicing portfolio

$           16.8 

$           12.9

  Mortgage loan closings

12.4 

10.8

  Sales of servicing rights

(0.2)

(2.9)

  Run-off(1)

            (4.3)

            (4.0)

Ending servicing portfolio

$          24.7 

$           16.8

Number of loans (end of period)

193,418 

137,738

Average loan size

$    127,703 

$     121,917

Percent Government National Mortgage Association
  (GNMA) and state housing programs


28 % 


37 %

Percent conventional and other

63     

55    

Percent warehouse

9     

8    

Delinquency ratio

4.3     

5.3    

Mortgage servicing assets to related servicing portfolio(2)

0.8     

0.9    

__________
(1) Run-off is the reduction in principal balance of the servicing portfolio due to regular principal payments made by mortgagees and early repayments of entire loans.
(2) Excludes loans held for sale (warehouse) and any deferred service release premium on warehouse.

     Our mortgage servicing portfolio, including mortgage loans held for sale, totaled $24.7 billion at June 30, 2003, a 47% increase from the December 31, 2002 balance of $16.8 billion. The increase in 2003 reflects the strong mortgage production we have experienced along with greater retention of servicing on loans sold over the past year. We believe that the relative growth of the conventional portion of the portfolio is the result of heavy refinance activity in 2003 where conventional loans made up a higher than normal portion of our originations.

     We record originated mortgage servicing assets at allocated cost basis when the loans are sold and record purchased servicing assets at fair value. Thereafter servicing rights are accounted for at the lower of their cost or fair value. We record a valuation allowance for any impairment on a strata-by-strata basis. We determine fair value on a monthly basis based on a discounted cash flow analysis. These cash flows are projected over the life of the servicing using prepayment, default, discount rate and cost to service assumptions that we believe market participants would use to value similar assets. At June 30, 2003, we estimated the fair value of these assets to be $194.5 million in the aggregate, or $0.2 million greater than the carrying value on the balance sheet. At December 31, 2002, we estimated the fair value of these assets to be $150.8 million in the aggregate, or $4.4 million greater than the carrying value on the balance sheet. Fair value declined during the fi rst six months of 2003 relative to carrying value as a result of the higher prepayment trends from declining interest rates and decreasing cushion in a number of valuation strata.

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,

 

2003

2002

2003

2002


 

(Dollars in thousands)

Selected Income Statement Data:

       

Interest income

$      28,156 

$        27,491 

$      55,786 

$         53,463 

Interest expense

       (8,718)

        (10,208)

      (17,321)

         (20,089)

Net interest income

19,438 

17,283 

38,465 

33,374 

Provision for loan and lease losses

(1,333)

(2,340)

(2,913)

(4,510)

Noninterest income

5,645 

4,134 

10,774 

8,499 

Operating expense

      (13,966)

        (12,442)

      (27,871)

        (24,475)

Income before taxes

9,784 

6,635 

18,455 

12,888 

Income taxes

        (3,904)

          (2,576)

        (7,364)

          (5,000)

Net income

$        5,880 

$         4,059 

$     11,091 

$         7,888 

         

 

June 30,

December 31,

Selected Balance Sheet Data at End of Period

2003

2002


Total assets

$          2,139,403    

$          1,969,957    

Loans

1,900,975    

1,823,304    

Allowance for loan and lease losses

21,525    

20,725    

Deposits

1,928,976    

1,733,864    

Shareholder's equity

144,000    

154,423    

     
 

June 30,

December 31,

Daily Averages Year to Date:

2003

2002


Assets

$        2,032,305    

$         1,802,896    

Loans

1,864,936   

1,693,426    

Allowance for loan and lease losses

21,735    

17,823    

Deposits

1,825,673    

1,583,926    

Shareholder's equity

139,625    

140,249    

Shareholder's equity to assets

6.87 %

7.78 %

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, an Indiana state-chartered commercial bank, and Irwin Union Bank, F.S.B., a federal savings bank.

Net Income

     
Commercial banking net income increased to $5.9 million during the second quarter of 2003, compared to $4.1 million for the same period in 2002. Year-to-date net income totaled $11.1 million in 2003 compared to net income of $7.9 million in 2002. Results during 2003 reflect growth in net interest income, noninterest income and a reduction in provisions for loan and lease losses compared to the same periods of 2002.

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,

 

2003

2002

2003

2002


 

(Dollars in thousands)

Net interest income

$       19,438    

$       17,283    

$      38,465    

$      33,374    

Average interest earning assets

2,015,028    

1,705,795    

1,965,905    

1,651,211    

Net interest margin

3.87 %

4.06 %

3.95 %

4.08 %

     Net interest income was $19.4 million for the first quarter of 2003, an increase of 12% over first quarter of 2002. Net interest income for the first half of 2003 improved 15% over the same period in 2002. The 2003 improvement in net interest income resulted primarily from an increase in our commercial banking loan portfolio as a result of growth and expansion efforts. 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, 2003 was 3.87%, compared to 4.06% for the same period in 2002. Year-to-date net interest margin for 2003 was 3.95% compared to 4.08% for 2002. The line of business increased its core deposits to $1.7 billion, an increase of 12% since year end, reflecting success in deposit gathering initiatives.

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,

 

2003

2002

2003

2002


 

(Dollars in thousands)

Trust fees

$           409    

$            499     

$           886    

$       1,063    

Service charges on deposit accounts

1,289    

1,178     

2,506    

2,354    

Insurance commissions, fees and premiums

535    

449     

1,143    

880    

Gain from sales of loans

2,361    

1,030     

4,673    

2,290    

Loan servicing fees

298    

230    

582    

440    

Amortization of servicing assets

(685)   

(209)   

(1,376)   

(459)   

Impairment of servicing assets

151    

--    

68    

--    

Brokerage fees

286    

361    

547    

719    

Other

          1,001    

             596     

         1,745    

        1,212    

Total noninterest income

$         5,645    

$        4,134    

$     10,774    

$      8,499    

Total noninterest income to total net revenues

23.8 %

21.7 %

23.3 %

22.7 %


     Noninterest income during the first half of 2003 increased 27% over 2002. This increase was due primarily to higher gains from sales of loans related to increased mortgage production. These increases were partially offset by increased impairment and amortization charges recorded against mortgage servicing assets in this line of business. The commercial banking line of business has a first mortgage servicing portfolio totaling $419 million, principally a result of mortgage loan production in its south-central Indiana markets. Those servicing rights are carried on the balance sheet at the lower of cost or market, estimated at June 30, 2003 to be $2.8 million.

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,

2003

2002

2003

2002


 

(Dollars in thousands)

Salaries and employee benefits

$      8,716 

$       7,572 

$      17,641 

$      14,672 

Other expenses

       5,250 

         4,870 

       10,230 

         9,803 

Total operating expenses

$    13,966 

$     12,442 

$     27,871 

$     24,475 

Number of employees at period end(1)

 

 

474 

442 

__________
(1) On a full-time equivalent basis.


     Operating expenses for the six months ended June 30, 2003 totaled $27.9 million, an increase of 14% over the same period in 2002. While operating expenses increased 14% net revenues increased 24% in the first half of 2003 compared to 2002, indicative of improved operating efficiency.

Balance Sheet

     
Year-to-date total assets as of June 30, 2003 averaged $2.0 billion compared to $1.8 billion for the year ended December 31, 2002. Year-to-date average earning assets as of June 30, 2003 averaged $2.0 billion compared to $1.6 billion for the year 2002. The most significant component of the increase in 2003 was an increase in commercial loans as a result of the commercial bank's continued growth and expansion efforts into new markets. Average core deposits for the second quarter of 2003 totaled $1.6 billion, an increase of 8% over average core deposits in the fourth quarter 2002.

Credit Quality

     
As of June 30, nonperforming loans and the allowance for loan losses have increased in 2003 over 2002 reflecting general economic conditions and portfolio growth. Nonperforming loans are not significantly concentrated in any industry category. The following table shows information about our nonperforming assets in this line of business and our allowance for loan losses:

 

June 30,

December 31,

 

2003

2002


 

(Dollars in thousands)

Nonperforming loans

$     18,778    

$        14,970    

Other real estate owned

            994    

                 96    

Total nonperforming assets

$     19,772    

$        15,066    

Nonperforming assets to total assets

0.92 %

0.76 %

Allowance for loan losses

$     21,525    

$        20,725    

Allowance for loan losses to total loans

1.13 %

1.14 %

 

Three Months Ended June 30,

Six Months Ended June 30,

 

2003

2002

2003

2002


Provision for loan losses

$         1,333    

$         2,340    

$       2,913    

$          4,510    

Net charge-offs

$         1,167    

$            603    

$       2,113    

$          1,318    

Annualized net charge-offs to average loans

0.25 %

0.15 %

0.23 %

0.17 %

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,

 

2003

2002

2003

2002


 

(Dollars in thousands)

Selected Income Statement Data

       

Net interest income

$      28,222    

$      20,457    

$      54,634    

$      38,590    

Provision for loan losses

(7,970)   

(5,883)   

(12,850)   

(12,460)   

Gain on sales of loans

8,280    

363    

10,250    

8,084    

Loan servicing fees

5,158    

3,482    

9,831    

7,010    

Amortization of servicing assets

(3,321)   

(1,425)   

(6,204)   

(2,655)   

Impairment of servicing assets

(65)   

(159)   

(1,083)   

(586)   

Trading losses

(33,131)   

(5,757)   

(50,919)   

(13,059)   

Other income

            587    

            148    

            651    

            403    

     Total net revenues

(2,240)   

11,226    

4,310    

25,327    

Operating expenses

     (21,810)   

      (18,778)   

     (44,191)   

      (37,729)   

Income before taxes

(24,050)   

(7,552)   

(39,881)   

(12,402)   

  Income tax benefit

       9,620    

         3,021    

      15,952    

         4,961    

Net loss

$    (14,430)   

$      (4,531)   

$   (23,929)   

$      (7,441)   

Selected Operating Data:

       

Loan volume

       

  Lines of credit

$ 90,419    

$104,233    

$163,878    

$205,426    

  Loans

 208,536    

163,491    

413,627    

309,036    

Gain on sale of loans to whole
     loans sold


3.4 %


N/A    


3.1 %


2.6 %

         

Selected Balance Sheet Data:

June 30,
2003

December 31,
2002


Home equity loans and lines of credit (1)

$       727,064    

$      626,355    

Allowance for loan losses

(25,084)   

(21,689)   

Home equity loans held for sale

118,659    

75,540    

Residual assets -- trading (2)

92,847    

157,065    

Short-term debt

171,283    

201,328    

Collateralized borrowings

597,864    

391,425    

Shareholders' equity

119,708    

155,831    

Selected Operating Data:

   

Total managed portfolio balance at end of period (3)

1,698,876    

1,830,339    

Delinquency ratio (30+ days)

5.7 %

6.0 %

Total managed portfolio including credit risk sold(4) balance at end of period

$2,578,911    

$2,502,685    

Weighted average coupon rate:

   

  Lines of credit

10.20 %

10.79 %

  Loans

12.69    

13.50    

__________
(1) Includes $608.8 million and $392.4 million of collateralized loans at June 30, 2003 and December 31, 2002, respectively, as part of securitized financings.
(2) Includes $19.0 million and $82.5 million of residual assets at June 30, 2003 and December 31, 2002, respectively, that would be considered credit-enhancing interest-only strips (CEIOS) under federal banking regulations.
(3) "Managed portfolio" includes all loans we manage (on-balance sheet and off-balance sheet) for which we retain credit risk. See Securitization section below for further discussion of off-balance sheet structures.
(4) "Managed portfolio including credit risk sold" includes the managed portfolio as well as whole loans sold with servicing retained and off-balance sheet loans with the credit risk (residual) sold to third parties. See Securitization section below for further discussion of off-balance sheet structures.

Overview

     
Our home equity lending line of business originates, purchases, securitizes, sells and services a variety of home equity lines of credit and fixed-rate home equity loan products nationwide. We market our home equity products through a combination of direct mail, Internet, and wholesale channels. We target creditworthy homeowners who are active credit users. Customers are underwritten using proprietary models based on several criteria, including the customers' previous use of credit.

     We offer home equity loans with combined loan-to-value (CLTV) ratios of up to 125% of their collateral value. Home equity loans are priced taking into account, among other factors, the relative loan-to-value (LTV) ratio of the loan at origination. For example, everything being equal, those loans with loan-to-value ratios greater than 100% (high LTV or HLTVs) are priced with higher coupons than home equity loans with loan-to-value ratios less than 100% to compensate for increased expected losses through default. Year to date through June 30, 2003, HLTV home equity loans made up 52% of our loan originations and 62% of our managed portfolio. In an effort to manage portfolio concentration risk and to comply with existing banking regulations, we have in place policies governing the size of our investment in loans secured by real estate where the LTV is greater than 90%. As discussed earlier in the Capital section, in accordance with regulatory guidance set forth in SR 01-4 and in consultation with our banking regulators, we will make a risk-weighting adjustment in our regulatory Consolidated Report of Condition and Income, beginning with the third quarter of 2003. This adjustment will reflect a risk-weighting of 200 percent for certain assets that are described in the guidance as "subprime."

     For most of our home equity product offerings, we offer customers the choice to accept an early repayment fee in exchange for a lower interest rate. A typical early repayment option provides for a fee equal to up to six months' interest that is payable if the borrower chooses to repay the loan during the first three to five years of its term. Approximately 81%, or $1.4 billion, of our home equity managed portfolio at June 30, 2003 has early repayment provisions.

     Generally we either sell loans through whole loan sales or we securitize them as financings. We normally retain the servicing rights for the loans we sell. To address new capital rules, in 2002 we began using securitizations accounted for as on-balance sheet financing and whole loan sales, while eliminating our use of securitization structures requiring gain-on-sale accounting and the creation of residual interests.

     As we discussed in our 2002 annual report on Form 10-K, we responded to economic weakness and rising consumer delinquencies and defaults by implementing a new origination and underwriting strategy in late 2002. Our objective was to increase focus on customers whose credit history would suggest lower risk of default on loans we extended. It is our expectation that over time, our loss rates on this new production will be lower than that for our production up to that point and our overall risk-adjusted profitability will improve. While our originations during the first half of 2003 still reflect a transition from previous to revised underwriting guidelines and, as such, current originations may not reflect the impact of these changes, the table below is illustrative of the changes we see in customer profile.

 

For the Three Months Ended

 

June 30,
2003

December 31,
2002


Total Originations (in thousands)

$     298,955    

$     261,997    

Weighted Average Coupon

9.68 %

11.26 %

  • Loans up to 100% CLTV

9.58     

10.21    

  • Lines of credit up to 100% CLTV

7.23    

8.52    

  • Loans up to 125% CLTV

11.31    

13.26    

  • Lines of credit up to 125% CLTV

11.02    

12.90    

  • First mortgage loans to 100% LTV

7.14    

7.86    

Weighted Average FICO score

683    

670    

  • Loans up to 100% CLTV

676    

662    

  • Lines of credit up to 100% CLTV

678    

665    

  • Loans up to 125% CLTV

683    

675    

  • Lines of credit up to 125% CLTV

692    

670    

  • First mortgage loans to 100% LTV

690    

675    

Weighted Average Disposable Income (in dollars) (1)

$       5,047    

$       4,414    

  • Loans up to 100% CLTV

4,864    

4,365    

  • Lines of credit up to 100% CLTV

6,679    

5,794    

  • Loans up to 125% CLTV

4,416    

3,733    

  • Lines of credit up to 125% CLTV

4,523    

3,976    

  • First mortgage loans up to 100% LTV

5,103    

4,921    

_____________
(1) We define Disposable Income as gross monthly income (from all sources) minus all monthly debt payments.


Portfolio Mix

     
Our home equity lending line of business blends aspects of the credit card and mortgage banking industries. The home equity products are designed to appeal to homeowners who have high levels of unsecured (credit card) debt, who through the use of a debt consolidating mortgage loan can meaningfully reduce their after-tax monthly cash outflows. We underwrite our loans as if the credit is unsecured, but we believe that the mortgage lien associated with the loan has a meaningful, positive influence on the payment priority of our customers. We lend nationally in our home equity lending line of business. The following table shows the geographic composition of our home equity lending managed portfolio on a percentage basis as of June 30, 2003 and December 31, 2002:

State

June 30,2003

December 31, 2002


California

18.1 %

20.1 %

Florida

7.6    

7.4     

Maryland

5.6    

5.2     

Arizona

5.5    

4.9     

Virginia

5.5    

5.5     

All other states

        57.7    

       56.9     

  Total

      100.0 %

     100.0  %

Total managed (in thousands)

$   1,698,876    

$  1,830,339     

     

     The following table provides a breakdown of our home equity lending managed portfolio by product type, outstanding principal balance and weighted average coupon as of June 30, 2003:

 



Amount



% of Total

Weighted
Average
Coupon


 

(In thousands)

Home equity loans < = 100% CLTV

$   212,511 

12.51 %

11.23 %

Home equity lines of credit < = 100% CLTV

$   370,106 

   21.79 %

    9.02 %

Total <= 100% CLTV

$   582,617 

34.30 %

9.82 %

Home equity loans > 100% CLTV

$   662,606 

39.00 %

14.12 %

Home equity lines of credit > 100% CLTV

$   384,143 

   22.61 %

   11.82 %

Total > 100% CLTV

$1,046,749 

61.61 %

13.28 %

First mortgages

$     29,185 

1.72 %

8.04 %

Other

$ 40,325 

    2.37 %

   13.94 %

  Total

$1,698,876 

 100.00 %

   12.02 %


     At June 30, 2003, key economic assumptions and the sensitivity of the current fair value of residuals based on projected cash flows to immediate 10% and 25% increases in those assumptions are as follows:

 

June 30,
2003

December 31,
2002


 

(dollars in thousands)

Balance sheet carrying value of residual interests - fair value

$      92,847    

$      157,065    

Weighted-average life (in years)

1.56    

1.91    

     

Prepayment speed assumptions (annual rate)

36.87 %

32.37 %

Impact on fair value of 10% increase (40.56%)

$            58    

 

Impact on fair value of 25% increase (46.09%)

(5,971)   

 
     

Expected credit losses (annual rate)

7.38 %

3.57 %

Impact on fair value of 10% increase (8.12%)

($7,527)   

 

Impact on fair value of 25% increase (9.23%)

(18,439)   

 
     

Residual cash flows discount rate (average annual rate)

18.50 %

18.69 %

Impact on fair value of 10% increase (20.35%)

($2,325)   

 

Impact on fair value of 25% increase (23.13%)

(5,620)   


     These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value of residuals based on a variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also in the above table, the effect of a variation in a particular assumption on the fair value of the residual interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments but increased credit losses), which might magnify or counteract the sensitivities.

Securitizations

     
Under our past securitization program, home equity loans were sold to limited purpose, bankruptcy-remote fully owned subsidiaries. In turn, these subsidiaries established separate trusts to which they transferred the home equity loans in exchange for the proceeds from the sale of asset-backed securities issued by the trust. The trusts' activities are generally limited to acquiring the home equity loans, issuing asset-backed securities and making payments on the securities. Due to the nature of the assets held by the trusts and the limited nature of each trust's activities, they are classified as Qualified Special Purpose Entities (QSPEs) under SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."

     The securitization structures we used prior to 2002 qualified as sales of the loans, transferring them off of our balance sheet, and have been accounted for using gain-on-sale treatment in accordance with SFAS 140 or its predecessor SFAS 125. Although we recognized gains on the sale of loans in the period in which such loans were sold, we expect to receive cash (representing the excess spread, overcollateralization if applicable, and servicing fees) over the lives of the loans. Concurrent with recognizing such gains on sale, we recorded the future expected receipt of discounted cash flow as a residual interest, which is currently included on our consolidated balance sheet as part of "trading assets." We recognized gains on the sale of loans in an amount equal to the difference between proceeds and allocated cost basis of the loans sold. Residual interests are recorded at fair value with the subsequent changes in fair value recorded as unrealized gain or loss in our results of operations in the period of the change. We determine fair value on a monthly basis based on a discounted cash flow analysis. These cash flows are projected over the lives of the residuals using prepayment, default, and discount rate assumptions that we believe market participants would use for similar financial instruments.

     Based on changes to our funding practices to adjust to new regulatory capital rules discussed later in this section, in 2002 we began using securitization structures that do not qualify as loan sales and therefore are not accounted for using gain-on-sale treatment under generally accepted accounting principles, but rather as secured borrowings. For these assets funded on-balance sheet, we are now recording interest income over the life of the loan as it is earned, net of interest expense over the life of the bonds and a provision for credit losses inherent in the portfolio. We do not expect this different accounting treatment to affect cash flows related to the loans, nor do we expect that the ultimate total receipt of revenues and profitability derived from our home equity loans will change materially by these different financing structures.

     Our secured financing and securitization deals have triggers that, when exceeded, provide trustees and/or bond insurers with the ability, but not the obligation, of removing us as servicer of the deals whose triggers have been exceeded. Trigger levels are typically in the form of cumulative or periodic losses and/or delinquencies for a pool of loans over a stated period of time. At June 30, 2003, we had $110.1 million in loans that we serviced and for which certain triggers had been exceeded. The mortgage servicing rights related to the loans for which a trigger had been exceeded totaled $0.5 million at June 30, 2003. Based on our evaluation of industry practice by trustees and bond insurers and in our estimation of the steps which would be in the best interests of the trusts, we believe it is unlikely given current performance of the company that the trustee will remove servicing from us and, therefore, we have not provided for an allowance for this contingency.

Home Equity Servicing

     
Our home equity lending business continues to service the majority of the loans it has securitized and sold. We earn annually a servicing fee of approximately 50 to 100 basis points of the outstanding principal balance of the loans we service treated as sales under generally accepted accounting principles. For loans treated as secured financings, the servicing fee is implicit in the yield of the underlying loans and therefore has not historically been capitalized. For whole loans sold with servicing retained, we capitalize servicing fees including rights to future early repayment fees. These loans are included below in managed portfolio including credit risk sold. In addition, where applicable, we have the opportunity to earn additional future servicing incentive fees, although we are not currently recognizing any revenue or balance sheet asset to reflect this potential given the uncertainty surrounding our ability to earn and estimate such incentive fees.

     Our managed portfolio is separated into $0.8 billion of loans and lines of credit originated, securitized, and treated as sold loans under SFAS 140 and $0.8 billion of loans originated, generally since 2002, and held on balance sheet either as loans held for investment or loans held for sale. Generally, loans originated prior to 2002 and treated as sold under SFAS 140 have a reserve methodology embedded in the associated residual valuations that reflects life of account loss expectations, whereas our policy for on-balance sheet loans requires that we hold, at a minimum at least twelve months coverage in sufficient reserves for potential losses inherent in the portfolio at the balance sheet date. The following table sets forth certain information for each of these portfolios.

Managed Portfolio Including Credit Risk Sold

June 30,
2003

December 31,
2002


Total Loans

$   2,578,911     

$     2,502,685    

30 days past due

4.60 %

5.12 %

90 days past due

2.07     

2.40     

Annualized QTD Net Chargeoff Rate

3.51     

2.42     

Loan Loss Reserve

$        25,084    

$         21,689     

Managed Portfolio

Total Loans

$   1,698,876    

$    1,830,339    

30 days past due

5.68 %

6.01 %

90 days past due

2.58     

2.80     

Annualized QTD Net Chargeoff Rate

4.38     

2.78     

Loan Loss Reserve

$        25,084    

$        21,689     

Residual Undiscounted Losses

101,498    

79,746     

    Unsold Loans

    Total Loans (1)

$      849,502    

$      706,899    

    30 days past due

2.70 %

3.01 %

    90 days past due

1.21     

1.38    

    Annualized QTD Net Chargeoff Rate

2.58     

1.34    

    Loan Loss Reserve

$        25,084     

$        21,689    

    Owned Residual

    Total Loans

$     849,374    

$   1,123,440    

    30 days past due

8.66 %

7.89 %

    90 days past due

3.95     

3.69     

    Annualized QTD Net Chargeoff Rate

6.14     

3.70     

    Residual Undiscounted Losses

$      101,498     

$        79,746    

Credit Risk Sold

Total Loans

$      880,035    

$      672,346    

30 days past due

2.53 %

2.71 %

90 days past due

1.07     

1.32     

    Whole Loan Sales

   

    Total Loans

$      791,410    

$      552,660    

    30 days past due

1.50 %

0.89 %

    90 days past due

0.48 %

0.31     

    Sold Residuals

    Total Loans

$       88,625    

$      119,686    

    30 days past due

11.64 %

11.12 %

    90 days past due

6.40     

5.97     

____________
(1) Excludes deferred fees and costs.

     In our home equity lending business, we generally retain credit risk on loans we originate, whether funded on- or off-balance sheet. The managed portfolio amounts listed above include 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. The 30-day and greater delinquency ratio on our managed portfolio was 5.7% at June 30, 2003, and 6.0% at December 31, 2002. Current economic conditions have caused us to increase near-term expectations for increases in losses and make it difficult for us to predict with accuracy what long-term losses are expected to be.

Net Income

     
Our home equity lending business recorded a net loss of $14.4 million during the three months ended June 30, 2003, compared to a net loss for the same period in 2002 of $4.5 million. Year to date a loss of $23.9 million was recorded through June 30, 2003 compared to a net loss of $7.4 million during the same period a year earlier. The increased losses in 2003 relate primarily to unrealized trading losses recorded during the first half of the year to write down our residual assets to fair value.

Net Revenue

     
Net revenue for the three and six months ended June 30, 2003 totaled negative $2.2 million and $4.3 million, respectively, compared to net revenue for the same periods in 2002 of $11.2 million and $25.3 million. The reduction in revenues is primarily a result of increased trading losses related to marking the residual assets to fair value to reflect our view that the effects of the economic weakness in 2001 and 2002 on our home equity portfolios will continue throughout 2003 and 2004. Trading losses during the three and six months ended June 30, 2003 totaled $33.1 million and $50.9 million, respectively, compared to losses of $5.8 million and $13.1 million during the same periods in 2002. Partially offsetting the increased trading losses was increased net interest income resulting from a buildup in our on-balance sheet loan portfolio.

     During the second quarter of 2003, our home equity lending business produced $299.0 million of home equity loans, compared to $267.7 million during the same period in 2002. Our home equity lending business had $820.6 million of net loans and loans held for sale at June 30, 2003, compared to $680.2 million at December 31, 2002. The increase in 2003 relates to the buildup of the on-balance sheet loan portfolio as part of the transition away from gain-on-sale securitizations. Included in the loan balance at June 30, 2003 were $608.8 million 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,

 

2003

2002

2003

2002


 

(Dollars in thousands)

Net interest income

$      28,222 

$        20,457 

$      54,634 

$     38,590 

Provision for loan losses

(7,970)

(5,883)

(12,850)

(12,460)

Gain on sales of loans

8,280 

363 

 10,250 

8,084 

Loan servicing fees

5,158 

3,482 

 9,831 

7,010 

Amortization of servicing assets

(3,321) 

(1,425)

(6,204)

(2,655)

Impairment of servicing assets

(65) 

(159)

(1,083)

(586)

Trading losses

(33,131)

(5,757)

(50,919)

(13,059)

Other income

            587 

              148 

          651 

           403 

Total net revenue

$      (2,240)

$       11,226 

$     4,310 

$     25,327 


     Net interest income increased to $28.2 million for the three months ended June 30, 2003, compared to $20.5 million for the same period in 2002. Year-to-date net interest income for 2003 was $54.6 million compared to $38.6 million for 2002. This line of business earns interest income on loans held on the balance sheet and the accretion of the discount applied to its residual interests, which accretion totaled $6.0 million and $13.0 million during the three and six months of 2003, respectively, versus $8.8 million and $18.1 million in 2002 for the same periods. As previously mentioned, the increase in 2003 net interest income is a result of the buildup of our on-balance sheet loan portfolio.

     Gains on sales of loans for the three months ended June 30, 2003 totaled $8.3 million, compared to $0.4 million during the same period in 2002. Gains on sales of loans for the six months ended June 30, 2003 totaled $10.3 million, compared to $8.1 million during the same period in 2002. The significant increase in gains in the second quarter of 2003 compared to the same period in 2002 relates to the sale of whole loans, which totaled $242 million during the second quarter of 2003 versus none during the same period in 2002. We do not record a residual interest as a result of these whole loan sales. These are cash sales for which we receive a premium, record a servicing asset, and monetize any points and fees at the time of sale. We do, however, retain the rights to an "incentive servicing fee" which will provide cash payments to us in the event certain loan credit performance metrics are met. We have not received any such payments to date. On a quarterly basis, we evaluate the likelihood of receiving such payments and at that time evaluate whether an associated potential asset is likely to accrue to us.

     Amortization and impairment of servicing assets includes amortization expenses and valuation adjustments relating to the carrying value of servicing assets. Our home equity lending business determines fair value of its 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. At June 30, 2003, net servicing assets totaled $27.5 million, compared to a balance of $26.4 million at December 31, 2002. Servicing asset amortization and impairment expense totaled $7.3 million during the first half of 2003, compared to $3.2 million for the six months ended June 30, 2002.

     Trading losses represent unrealized losses as a result of adjustments to the carrying values of our residual interests. Trading losses totaled $33.1 million in the second quarter of 2003 compared to $5.8 million for the same period in 2002. Year-to-date trading losses totaled $50.9 million for 2003 compared to $13.1 million for the same period in 2002. Residual interests had a balance of $92.8 million at June 30, 2003 and $157.1 million at December 31, 2002. Included in the valuation are assumptions for estimated prepayments, expected losses, and discount rates that we believe market participants would use to value similar assets. Management continually evaluates these assumptions to determine the proper carrying values of these items on the balance sheet. To the extent our expectations of future loss rates, prepayment speeds and other factors change as we gather additional data over time, these residual valuations may be subject to additional adjustments in the future, up or down. These adjustments could have a material effect on our earnings. The increased unrealized trading losses in the first half of 2003 principally reflect higher expected loss rates. These higher expected loss rates are reflective of the continued weakness in the economy and a slower rate of recovery in the delinquency of the portfolio than we had anticipated. Our forward loss assumptions are reevaluated monthly and, as such, our residual asset valuations will be adjusted continuously to reflect changes in actual and expected loss rates in our portfolio.

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,

 

2003

2002

2003

2002


 

(Dollars in thousands)

Salaries and employee benefits

$   12,664

$     10,700 

$     25,726

$      22,628 

Other

       9,146

         8,078 

      18,465

       15,101 

     Total operating expenses

$   21,810

$     18,778 

$    44,191

$     37,729 

Number of employees at period end

 

 

686 

713 


     Operating expenses were $21.8 million and $44.2 million for the three and six months ended June 30, 2003, respectively, compared to $18.8 million and $37.7 million for the same periods in 2002. Salaries expense during the first half of 2002 included the reversal of approximately $4.0 million due to the decline in the value of the minority ownership interest during that period. During the same period in 2003, there was a $0.3 million similar reversal included in salaries expense.

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,

 

2003

2002

2003

2002


 

(Dollars in thousands)

Selected Income Statement Data:

       

Net interest income

$        5,398    

$         3,726    

$      10,205    

$         7,119    

Provision for loan and lease losses

(4,069)   

(1,281)   

(6,933)   

(2,715)   

Noninterest income

          2,663    

             842    

          3,497    

           1,629    

  Total net revenues

3,992    

3,287    

6,769    

6,033    

Salaries, pension, and other employee expense

(2,852)   

(2,107)   

(5,458)   

(4,292)   

Other expense

        (1,202)   

           (928)   

         (1,923)   

         (1,598)   

Income (loss) before taxes and cumulative effect of change in accounting principle


(62)   


252    


(612)   


143    

Income tax benefit (expense)

               63    

           (124)   

             353    

           (130)   

Income (loss) before cumulative effect of change in
    accounting principle


1    


128    


(259)   


13    

Cumulative effect of change in accounting principle

                --    

                --    

                 --    

             495    

Net income (loss)

$               1    

$           128    

$         (259)   

$           508    

Selected Operating Data:

       

Net charge-offs

$        2,659    

$        1,251    

$        4,471    

$        2,129    

Net interest margin

5.45 %

5.23 %

5.73 %

5.16 %

Total fundings of loans and leases

$      66,300    

$      46,184    

$    123,909    

$      85,863    

         


Selected Balance Sheet Data at End of Period:

June 30,
2003

December 31,
2002


Total assets

$     403,466 

$     343,384 

Loans and leases

399,358 

345,844 

Allowance for loan and lease losses

(10,325)

(7,657)

Shareholders' equity

37,561 

29,236 


Overview

     
In our commercial finance line of business, we originate transactions through established U.S. and Canadian relationships with vendors and manufacturers, some select independent leasing companies, and direct relationships with franchisees. The majority of our loans and leases are full payout, small-ticket loans and leases secured by commercial equipment. Within the franchise channel, the majority of our contracts are loans, and our leases are full payout with higher transaction sizes than in our small-ticket channel. The franchise channel also finances real estate for select franchise systems. We finance a variety of commercial and office equipment and try to limit the industry, franchise concept and geographic concentrations in our loan and lease portfolio.

     During the three and six months ended June 30, 2003, respectively, the commercial finance line of business broke even and incurred a loss of $0.3 million, compared to net income of $0.1 million and $0.5 million for the three and six months ending June 30, 2002. The decline in net income largely reflected additional credit reserves for our U.S.-based broker-sourced portfolio and costs related to our decision to exit that distribution channel. In addition, the 2002 year to date results include a $0.5 million benefit from a cumulative effect of an accounting change related to the reversal of unamortized negative goodwill related to the acquisition of Onset. This line of business originated $66.3 million in loans and leases during the second quarter of 2003, compared to $46.2 million during the same period in 2002. The line of business portfolio at June 30, 2003 was $399.4 million compared to $345.8 million at December 31, 2002.

     We had nonperforming loans and leases at June 30, 2003 totaling $4.3 million, compared to non-performing loans and leases at December 31, 2002 totaling $4.9 million. Allowance for loan and lease losses at June 30, 2003 was $10.3 million, representing 2.59% of total loans and leases, compared to a balance at December 31, 2002 of $7.7 million, representing 2.21% of total leases. Net charge-offs recorded by this line of business totaled $4.5 million during the first half of 2003 compared to $2.1 million for the first half of 2002. The increased allowance and charge-offs were principally the result of continued deterioration in the credit quality of the broker-based, small ticket portion of our domestic portfolio. During the second quarter of 2003 we made a decision to exit this distribution channel. We will continue to manage the broker based portfolio as if runs off while focusing our efforts in originating vendor-sourced small ticket leases in the U.S. In the future, we ex pect our concentration in vendor-based small ticket products (both domestically and Canadian) and franchise finance to grow as a proportion of the line of business' portfolio.

     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,

 

2003

2002


 

(Dollars in thousands)

Franchise loans

$     114,274    

$     95,753    

  Weighted average yield

8.62 %

9.01 %

  Delinquency ratio

0.23     

0.30     

Domestic leases

$     131,676    

$   135,775    

  Weighted average yield

10.09 %

10.37 %

  Delinquency ratio

1.03     

1.41     

Canadian leases (1)

$     153,408     

$   114,316    

  Weighted average yield

10.69 %

10.95 %

  Delinquency ratio

1.31     

1.03     

__________
(1) In U.S. dollars.


Venture Capital

     
The following table shows selected financial information for our venture capital line of business for the periods indicated:

 

Three Months Ended June 30,

Six Months Ended June 30,

 

2003

2002

2003

2002


 

(In thousands)

Selected Income Statement Data:

       

Net interest income

$           2 

$           12 

$             9 

$           22 

Mark-to-market adjustment on investments

(162)

-- 

(2,421)

(1,465)

Noninterest income

         (68)

          117 

             79 

           309 

  Total net revenues

(228)

129 

(2,333)

(1,134)

Operating expense

           (4)

        (135)

         (111)

         (298)

Loss before taxes

(232)

(6)

(2,444)

(1,432)

Income tax benefit

           96 

             2 

           980 

           573 

Net loss

$      (136)

$          (4)

$     (1,464)

$       (859)

         


Selected Balance Sheet Data at End of Period:

June 30,
2003

December 31,
2002


Investment in portfolio companies (cost)

$     14,571 

$     12,620 

Mark-to-market adjustment

     (10,543)

       (8,123)

Carrying value of portfolio companies

$       4,028 

$       4,497 


Overview

     
In our venture capital line of business, we make minority investments in early stage companies in the financial services industry and related fields that intend to use technology as a key component of their competitive strategy. We provide Irwin Ventures' portfolio companies the benefit of our management experience in the financial services industry. In addition, we expect that contacts made through venture activities may benefit management of our other lines of business through the sharing of technologies and market opportunities. Our venture capital line of business had investments in seven private companies as of June 30, 2003, with an aggregate investment cost of $14.6 million and a carrying value of $4.0 million.

     During the three and six months ended June 30, 2003, the venture capital line of business recorded a net loss of $0.1 million and $1.5 million, respectively, compared to breaking even and a net loss of $0.9 million for the same periods in 2002. The decline in net income is primarily due to valuation adjustments to reflect the company's portfolio investments at market value.

Parent and Other

     
Results at the parent company and other businesses totaled a net loss of $1.3 million and $3.3 million for the three and six months ended June 30, 2003, compared to net losses of $0.8 million and $1.7 million during the same periods in 2002. These losses at the parent company primarily relate to operating expenses in excess of management fees charged to the lines of business and interest income earned on intracompany loans. Included in the year to date loss at the parent was a $1.8 million benefit related to the reversal of a portion of a liability associated with key employee retention initiatives at the home equity lending line of business, compared with a $1.6 million benefit for the same period in 2002.

Risk Management

     
We are engaged in businesses that involve the assumption of financial risks including:


     Each line of business that assumes financial risk uses a formal process to manage this risk. In all cases, the objectives are to ensure that risk is contained within prudent levels and that we are adequately compensated for the level of risk assumed.

     Our Chairman, Executive Vice President, Senior Vice President, Chief Financial Officer, Vice President Financial Risk Management, and Vice President Operational Risk Management meet on a monthly basis (or more frequently as appropriate) as an Executive Risk Management Committee (ERMC), reporting to the Board of Directors' Audit and Risk Management Committee. The ERMC and its subcommittees oversee all aspects of our financial, credit, and operational risks, although these risks are typically managed at the line of business level. The ERMC provides independent review and enhancement of those lines of business' risk management processes and establishes independent oversight of our risk reporting, surveillance and model parameter changes.

     Credit Risk. The assumption of credit risk is a key source of earnings for the home equity lending, commercial banking and commercial finance lines of business. In addition, the mortgage banking line of business assumes some credit risk although its mortgages typically are insured.

     The credit risk in the loan portfolios of the home equity lending, commercial finance and commercial banking lines of business have the most potential to have a significant effect on our consolidated financial performance. These lines of business manage credit risk through various combinations of the use of lending policies, credit analysis and approval procedures, periodic loan reviews, servicing activities, and personal contact with borrowers. Loans over a certain size are reviewed by a loan committee prior to approval.

     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 compute the allowance based on an analysis that incorporates both a quantitative and qualitative component. The quantitative component of the allowance reflects expected losses resulting from analysis developed through specific credit allocations for individual loans and historical loss experience for each loan category. The specific credit allocations are 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. The histo rical loan loss component is applied to all loans that do not have a specific reserve allocated to them. 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.

     The qualitative component of the allowance reflects management's estimate of probable inherent but undetected losses within the portfolio. This assessment is performed via the evaluation of eight specific qualitative factors as outlined in regulatory guidance. We perform the quantitative and qualitative assessments on a quarterly basis. Loans and leases that are determined by management to be uncollectible are charged against the allowance. The allowance is increased by provisions against income and recoveries of loans and leases previously charged off.

     Net charge-offs for the three months ended June 30, 2003 were $9.7 million, or 1.19% of average loans, compared to $4.6 million, or 0.78% of average loans during the same period in 2002. Year-to-date net charge-offs were $15.8 million compared to $8.6 million during the same period in 2002. At June 30, 2003, the allowance for loan and lease losses was $57.9 million or 1.90% of outstanding loans and leases, compared to $50.9 million or 1.81% at year-end 2002. The increase in charge-offs and allowance is a result of loan growth, deteriorating credit quality, as well as the new balance sheet retention of home equity loans.

     Total nonperforming loans and leases at June 30, 2003, were $35.2 million, compared to $31.1 million at December 31, 2002. Nonperforming loans and leases as a percent of total loans and leases at June 30, 2003 were 1.15%, compared to 1.11% at December 31, 2002. The 2003 increase occurred primarily at the commercial banking line of business where nonperforming loans increased to $18.8 million at June 30, 2003, compared to $15.0 million at the end of 2002.

     Other real estate we owned totaled $5.2 million at June 30, 2003, down from $5.3 million at December 31, 2002. Total nonperforming assets at June 30, 2003 were $40.4 million, or 0.73% of total assets compared to nonperforming assets at December 31, 2002, of $36.4 million, or 0.75% of total assets.

     The following table shows information about our nonperforming assets at the dates shown:

 

June 30,

December 31,

 

2003

2002


 

(In thousands)

Accruing loans past due 90 days or more:

   

Commercial, financial and agricultural loans

$        337    

$           30    

Real estate mortgages

--    

--    

Consumer loans

263    

688    

Lease financing:

   

  Domestic

--    

220    

  Canadian

          142    

           143    

 

          742    

        1,081    

Nonaccrual loans and leases:

   

Commercial, financial and agricultural loans

16,576    

13,798    

Real estate mortgages

11,842    

11,308    

Consumer loans

1,819    

454    

Lease financing:

 

 

  Domestic

2,479    

3,415    

  Canadian

        1,708    

        1,077    

 

      34,424    

      30,052    

     Total nonperforming loans and leases

      35,166    

      31,133    

Other real estate owned:

   

Other real estate owned

        5,235    

        5,272    

     Total nonperforming assets

$     40,401    

$    36,405    

Nonperforming loans and leases to total loans and leases

      1.15 %

      1.11 %

Nonperforming assets to total assets

      0.73 %

      0.75 %


     Loans that are past due 90 days or more are placed on nonaccrual status unless, in management's opinion, there is sufficient collateral value to offset both principal and interest. The $40.4 million of nonperforming assets at June 30, 2003, were concentrated at our four largest lines of business as follows (in millions):

  • Mortgage banking

$3.2

  • Commercial banking

19.8

  • Home equity lending

12.9

  • Commercial finance

4.3


     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."

     No loan concentrations existed of more than 10% of total loans to borrowers engaged in similar activities that would be similarly affected by economic or other conditions.

     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.

     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 and withdrawal of deposits. 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. We manage liquidity via daily interaction with the lines of business and periodic liquidity planning sessions. Since loans are less marketable than securities, the ratio of total loans to total deposits is a traditional measure of liquidity for banks and bank holding companies. At June 30, 2003, the ratio of loans and loans held for sale to total deposits was 141%. We are comfortable with this relatively high level due to our position in first mortgage loans held for sale ($1.5 billion) and second mortgage loans and leases financed through matched-term secured financing ($0.7 billion). The first mortgage loans carry an interest rate at or near current market rates for first mortgage loans and are generally sold within a short period. Excluding these two items, our loans to deposit ratio at June 30, 2003 was 74%.

     The mortgage banking line of business sells virtually all of its mortgage loan originations within 30 days of funding, taking them off our balance sheet. Therefore, the on-balance sheet funding of first mortgage loans is for the brief period of time from origination to sale/securitization. In the first half of 2003, the home equity lending line of business produced $0.6 billion and the sum of funding home equity loan sales and secured financings totaled $0.6 billion.

     Deposits consist of three primary types: non-maturity transaction account deposits, certificates of deposit and escrow account deposits. Non-maturity transaction account deposits are generated by our commercial banking line of business and include deposits made 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 remain for much longer. At June 30, 2003, these deposit types totaled $1.0 billion, an increase of $0.1 billion from December 31, 2002.

     Certificates of deposit (CDs) differ from non-contractual maturity accounts in that they do have contractual maturity dates. We issue CDs both directly to customers and through brokers. As of June 30, 2003, CDs issued directly to customers totaled $0.5 billion, which was level with December 31, 2002. Brokered CDs are typically considered to have higher liquidity 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 are laddered to mitigate liquidity risk. CDs issued through brokers totaled $0.4 billion at June 30, 2003, and had an average remaining life of 20 months as compared to $0.3 billion outstanding with a 22 month average remaining life at December 31, 2002.

     Escrow account deposits are related to the servicing of our originated first mortgage loans. When a first mortgage borrower makes a monthly mortgage payment, consisting of interest and principal due on the loan and often a real estate tax portion, we hold the payment on a non-interest earning basis, except where otherwise required by law, until the payment is remitted to the current owner of the loan or the proper tax authority. At June 30, 2003, these balances totaled $1.0 billion, which was a $0.4 billion increase from December 31, 2002.

     Short-term borrowings consist of borrowings from several sources. Our largest borrowing source is the Federal Home Loan Bank of Indianapolis (FHLBI), of which we are an active member. We utilize their collateralized borrowing programs to help fund qualifying first mortgage, home equity and commercial real estate loans. As of June 30, 2003, FHLBI borrowings outstanding totaled $123 million, a $404 million decrease from December 31, 2002. We had sufficient collateral pledged to FHLBI at June 30, 2003 to borrow an additional $1.6 billion, if needed.

     In addition to borrowings from the FHLBI, we use other lines of credit as needed. At June 30, 2003, the amount of short-term borrowings outstanding on our major credit lines and the total amount of the borrowing lines were as follows:

     In addition to short term borrowings from the aforementioned credit lines, sale facilities are used to effect sale of GSE-conforming first mortgage loans before scheduled GSE settlement dates. The first two of these sale facilities listed below have specific dollar limits as noted. The size of the third facility is limited only by the amount of mortgage-backed securities we can package for purchase by the facility provider. At June 30, 2003, the amount unsettled by the GSE on these facilities and the total facility amount were as follows:

     Interest Rate 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.

     An asset/liability management committee (ALMC) at each of our lines of business monitors the repricing structure of assets, liabilities and off-balance sheet items and uses a financial simulation model to measure interest rate risk over multiple interest rate scenarios. Our parent company ALMC oversees the interest rate risk profile of all of our lines of business as a whole and is represented on each of the line of business ALMCs. We incorporate many factors into the financial model, including prepayment speeds, net interest margin, fee income and a comprehensive mark-to-market valuation process. We reevaluate risk measures and assumptions regularly and enhance modeling tools as needed.

     Our commercial banking, home equity lending, and commercial finance lines of business assume interest rate risk in the pricing structure of their loans and leases, and manage this risk by adjusting the duration of their interest sensitive liabilities and through the use of hedging.

     Our mortgage banking line of business assumes interest rate risk by entering into commitments to extend loans to borrowers at a fixed rate for a limited period of time. We hold closed loans only temporarily until a pool is formed and sold in a securitization or under a flow sale arrangement. To mitigate the risk that interest rates will rise between the time we lock a loan rate to the customer and the time we sell the loan, the mortgage bank enters into commitments to deliver loans at a fixed price. Since not all rate-locks result in loans, we only hedge the percentage of rate locks that we believe will result in loan originations. Our home equity business originates a much smaller volume of first mortgage loans than our mortgage banking line of business, but has begun to hedge its funded first mortgage originations from the time of origination until a price to sell the loan is locked-in.

     Our mortgage, commercial banking and home equity lending lines of business also are exposed to the risk that interest rates will decline, increasing prepayment speeds on loans and decreasing the value of servicing assets and residual interests. Some offsets to these exposures exist in the form of strong production operations, selective sales of servicing rights, match-funded asset-backed securities sales and the use of financial instruments to manage the economic performance of the assets. Since there are accounting timing differences between the recognition of gains or losses on financial derivatives and the realization of economic gains or losses on certain offsetting exposures (e.g., strong production operations), our decisions on the degree to which we manage risk with derivative instruments to insulate against short-term price volatility depends on a variety of factors, including:

     This strategy may, at times, result in variability in inter-quarter results that are not reflective of underlying trends for the Corporation.

     The following tables reflect our estimate of the present value of interest sensitive assets, liabilities, and off-balance sheet items at June 30, 2003. 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 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, 2003, although certain accounts such as "Official Checks and Due From" are normalized whereby the three- or six-month average balance is included rather than the quarter-end balance in order to avoid having the analysis skewed by a significant increase or decrease to an account balance at quarter-end.

     The net asset value sensitivities do not necessarily represent the changes in the lines of business' net asset value that would actually occur under the given interest rate scenarios, as sensitivities do not reflect changes in value of the companies as a going concern, nor consider potential rebalancing or other hedging actions that might be taken in the future under asset/liability management.

     Specifically, the volume of derivative contracts entered into to manage the risk of mortgage servicing rights (MSRs) fluctuates from quarter to quarter, depending upon market conditions, the size of our MSR portfolio and various additional factors. We monitor derivative positions frequently and rebalance them as needed. It is unlikely that the volume of derivative positions would remain constant over large fluctuations in interest rates, although the tables below assume they do. MSR risk management derivative contracts appear under the category "Interest Sensitive Financial Derivatives" in the tables below.

Economic Value Change Method

 

Present Value at June 30, 2003,
Change in Interest Rates of:

 

-2%

-1%

Current

+1%

+2%


 

(In thousands)

Interest Sensitive Assets

Loans and other assets

$    3,325,539 

$    3,296,631 

$    3,254,487 

$    3,212,058 

$    3,169,558 

Loans held for sale

1,682,432 

1,681,946 

1,678,756 

1,674,845 

1,670,712 

Mortgage servicing rights

133,774 

162,295 

224,937 

353,267 

457,203 

Residual interests

76,315 

84,521 

92,806 

101,691 

110,378 

Interest sensitive financial derivatives

          45,374 

          45,511 

          13,552 

         (11,360)

         (71,960)

Total interest sensitive assets

$   5,263,434 

$   5,270,904 

$   5,264,538 

$   5,330,501 

$   5,335,891 

Interest Sensitive Liabilities

Deposits

(3,384,410)

(3,378,499)

(3,365,528)

(3,352,211)

(3,339,377)

Short-term borrowings

(564,413)

(564,357)

(564,124)

(563,898)

(563,676)

Long-term debt

       (906,440)

       (898,047)

       (885,408)

       (871,431)

       (855,949)

Total interest sensitive liabilities

    (4,855,263)

    (4,840,903)

    (4,815,060)

    (4,787,540)

    (4,759,002)

Net market value as of June 30, 2003

$      408,171 

$       430,001 

$       449,478 

$      542,961 

$      576,889 

Change from current

$     (41,307) 

$        (19,477)

$                 -- 

$        93,483 

$      127,411 

Net market value as of December 31, 2002

$      449,493 

$       444,059 

$       456,510 

$      518,260 

$      534,107 

Potential change

$         (7,017)

$        (12,451)

$                 -- 

$        61,750 

$        77,597 



GAAP-Based Value Change Method

 

Present Value at June 30, 2003,
Change in Interest Rates of:

 

-2%

-1%

Current

+1%

+2%


 

(In thousands)

Interest Sensitive Assets

         

Loans and other assets (1)

$               -- 

$              -- 

$              -- 

$               -- 

$               -- 

Loans held for sale

1,665,983 

1,665,983

1,665,983 

1,662,072 

1,657,939 

Mortgage servicing rights

133,594 

162,105

224,626 

341,740 

372,571 

Residual interests

 77,110 

85,317

93,602 

102,487 

111,173 

Interest sensitive financial derivatives

        45,374 

         45,511

        13,552 

       (11,360)

       (71,960)

Total interest sensitive assets

    1,922,061 

    1,958,916

   1,997,763 

   2,094,939 

   2,069,723 

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, 2003

$  1,922,061 

$   1,958,916

$  1,997,763 

$  2,094,939 

$   2,069,723 

Potential change

$     (75,702)

$     (38,847)

$              -- 

$      97,176 

$       71,960 

Net market value as of December 31, 2002

$  1,618,460 

$ 1,629,506 

$  1,656,461 

$  1,722,027 

$   1,715,012 

Potential change

$     (38,001)

$     (26,955)

$               -- 

$      65,565 

$       58,551 

__________
(1) Value does not change in GAAP presentation.


     Operational 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, and external events that are beyond the control of the Corporation, such as natural disasters.

     Our Board of Directors has ultimate accountability for the level of operational risk assumed by us. 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 and proactivity in alerting senior management and the Board to potential control issues on a timely basis.

     The Board has directed that primary responsibility for the management of operational 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. In 2002, we started implementing a multi-year program to provide a more integrated firm-wide approach for the identification, measurement, monitoring and mitigation of operational risk. The new enterprise-wide operational risk oversight function reports to the Audit and Risk Management Committee of our Board of Directors and to our Executive Risk Management Committee, which is led by the Chairman of the Board of Directors.

     The financial services business is highly regulated. Failure to comply with these regulations could result in substantial monetary or other damages that could be material to our financial position. Statutes and regulations may change in the future, and we cannot predict what effect these changes, if made, will have on our operations. It should be noted that the supervision, regulation and examination of banks, thrifts and mortgage companies by regulatory agencies are intended primarily for the protection of depositors and other customers rather than shareholders of these institutions.

     We are registered as a bank holding company with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended, and the related regulations, referred to as the BHC act. We are subject to regulation, supervision and examination by the Federal Reserve, and as part of this process we must file reports and additional information with the Federal Reserve. The regulation, supervision and examinations occur at the local, state and federal levels and involve, but are not limited to minimum capital requirements, consumer protection, community reinvestment, and deposit insurance.

     As a result of the movement of residuals from Irwin Union Bank and Trust to the Corporation in 2001 and 2002, our subsidiary, Irwin Union Bank and Trust, has certain restrictions on paying dividends to us.

     Derivative Financial Instruments

     
Financial derivatives are used as part of the overall asset/liability risk management process. We use certain derivative instruments that do not qualify for hedge accounting treatment under SFAS No. 133. These derivatives are classified as other assets and other liabilities and marked to market on the income statement. While we do not seek GAAP hedge accounting treatment for the assets 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 entered into an interest rate swap to hedge a $25.0 million brokered certificate of deposit. This swap had a notional amount (which does not represent the amount at risk) of $25.0 million as of June 30, 2003. Under the terms of the swap agreement, we receive a fixed rate of interest and pay a floating rate of interest based upon one month LIBOR. This swap had a gain of $0.4 million during the second quarter.

     We enter into forward contracts to protect against interest rate fluctuations from the date of mortgage loan commitment until the loans are sold. The notional amount of these forward contracts (which does not represent the amount at risk) totaled $4.4 billion and $2.2 billion at June 30, 2003 and December 31, 2002, respectively. The closed mortgage loans hedged by forward contracts qualify for hedge accounting treatment under SFAS No. 133. The basis of the hedged closed loans is adjusted for change in value associated with the risk being hedged. We value closed loan contracts at period end based upon the current secondary market value of securities with similar characteristics. The unrealized gain on our forward contracts at June 30, 2003 was $14.2 million and the hedge ineffectiveness for the quarter then ended was a loss of $3.4 million. The effect of these hedging activities was recorded through earnings as gain from sale of loans.

     We enter into commitments to originate 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 and are recorded at fair value. We value these commitments at period end based upon the current secondary market value of securities with similar characteristics. At June 30, 2003, we had a notional amount of rate lock commitments outstanding totaling $4.2 billion with a fair value of $8.5 million. Notional amounts do not represent the amount at risk. A net decrease in fair value of these derivatives totaling $15.2 million for the year to date ended June 30, 2003 was recorded in gain from sale of loans.

    Our home equity line of business originated a relatively small amount of first mortgage loans in the second quarter and began a hedging process in the second quarter for a portion of these loans from the time they are originated until the time they are sold, which typically occurs once per month. During the second quarter, hedge losses related to this activity totaled $0.1 million.

     Certain of our fixed rate loans and leases are funded with floating rate liabilities. To hedge such mismatches, we own four interest rate caps, which had a fair value of $0.4 million and a notional amount of $105 million at June 30, 2003. Notional amounts do not represent the amount at risk. We classify interest rate caps as other assets on the balance sheet and carry them at their fair values. Two of the interest rate caps qualify for cash flow hedge accounting treatment under SFAS 133. As a result, adjustments to fair value for these derivatives are recorded through accumulated other comprehensive income. We record adjustments to fair value for the other two interest rate caps as other income on the income statement. For the six months ended June 30, 2003, we recorded an immaterial loss in other income and in accumulated other comprehensive income related to these derivative products.

     We manage the interest rate risk associated with our mortgage servicing rights through the use of Eurodollar futures contracts and interest rate options. The financial instrument underlying the Eurodollar futures contracts is the three-month LIBOR. For the six months ended June 30, 2003, we recorded gains of $29.2 million on these derivatives. Both the futures contracts and options were marked-to-market and included in other assets with changes in value recorded in the income statement as derivative gains. At June 30, 2003, we had no Eurodollar contracts outstanding. We also held open swaption positions with a net notional value totaling $8.0 billion at June 30, 2003, all of which had final maturities of July 1, 2003. The size and mix of these positions change during the quarter based upon many factors. Period-end positions may or may not be indicative of our net risk exposure throughout the quarter. Notional amounts do not represent the amount at risk.

     Onset Capital Corporation uses two interest rate swaps to reduce repricing risk associated with one of its funding sources. The interest rate risk is created due to a repricing mismatch between the fixed-rate payment stream from leasing assets and floating rate funding. The notional amounts of the swaps were $3 million and $1 million as of June 30, 2003. The notional values of both interest rate swaps amortize on a schedule designed to approximate the principal pay down of the lease portfolio, and have an average remaining maturity of approximately five months. Notional amounts do not represent the amount at risk. Fair value changes in the value of these swaps were immaterial.

     We own foreign currency forward contracts to protect the U.S. dollar value of intercompany loans made to Onset Capital Corporation that are denominated in Canadian dollars. We had a notional amount of $128 million in forward contracts outstanding as of June 30, 2003. Notional amounts do not represent the amount at risk. For the six months ended June 30, 2003, we recognized losses on these contracts of $17.5 million. These contracts are marked-to-market with gains and losses included in other expense on the income statement. The foreign currency transaction gain on the intercompany loans was also $17.2 million during the six months ended June 30, 2003.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

     The quantitative and qualitative disclosures about market risk are reported in the Interest Rate Risk section of Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations found on pages 44 through 46.

Item 4. Controls and Procedures.

    
 As of June 30, 2003, we performed an evaluation under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)). Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of June 30, 2003 to provide reasonable assurance that material information relating to the Corporation would be made known to them by others within the Corporation, particularly during the period in which the Form 10-Q was being prepared. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to our most recent evaluation of these controls, nor any significant deficiencies or material weaknesses in such controls requiring corrective actions. As a result, no correctiv e actions were required or taken.

PART II. Other Information.

Item 1. Legal Proceedings.

Culpepper and related cases.

     As described in our Annual Report on Form 10-K for the Year Ended 2002 and our Report on Form 10-Q for the Quarterly Period Ended March 31, 2003, our indirect subsidiary, Irwin Mortgage Corporation, is a defendant in Culpepper v. Inland Mortgage Corporation, a class action lawsuit in the United States District Court for the Northern District of Alabama. The suit alleges that Irwin Mortgage violated the federal Real Estate Settlement Procedures Act (RESPA) in connection with certain payments Irwin Mortgage made to mortgage brokers. We also reported that in September 2001, a second suit, Beggs v. Irwin Mortgage Corporation, sought class status and consolidation with Culpepper. Subsequently, the court permitted another suit, Gorman v. Irwin Mortgage, to intervene in the Beggs suit. In July, 2003, the parties agreed in principle to settle Beggs and Gorman for a nonmaterial amount.

McIntosh v. Irwin Home Equity Corporation

     Our subsidiary, Irwin Union Bank and Trust company, is a defendant in a purported class action lawsuit filed in the U.S. District Court in Massachusetts in July 2001. The case involves loans purchased by Irwin Union Bank from FirstPlus, an unaffiliated third-party lender, and alleges a failure to comply with certain truth in lending disclosure requirements in making second mortgage home equity loans to the plaintiff borrowers. The complaint seeks rescission of the loans and other damages.

     On September 30, 2002, the court granted plaintiffs' motion for certification of a class subject to certain limitations.  On October 15, 2002, we filed a motion for reconsideration with the district court and a petition for permission to appeal the class certification decision with the Court of Appeals for the 1st Circuit.  The court of appeals deferred taking action on the class certification issue until the district court ruled on the motion for reconsideration.  In May, 2003, the district court denied our motion for summary judgment and denied in part our motion for reconsideration of class decertification.  However, the court further limited membership in the plaintiff class.

     If the class is ultimately upheld, the actual number of plaintiff borrowers will be determined only after a review of loan files.  As originally specified, the plaintiff class was limited to those borrowers who obtained a mortgage loan originated with prepayment penalty provisions by FirstPlus during the three-year period prior to the filing of the suit.  As more recently defined by the court, the class has been further restricted to those borrowers who refinanced their loans and paid a prepayment penalty.  Only high-rate loans that are subject to the provisions of the Home Ownership and Equity Protection Act of 1994 would be included in the class.  Although discovery has not yet commenced, we believe that out of approximately 200 loans acquired directly from FirstPlus through our correspondent lending channel and approximately 7,800 loans acquired from other parties in certain bulk acquisitions that may include FirstPlus originations, only a portion of these loans will satisfy all of the criteria for inclusion in the class.

     We believe we have available numerous defenses to the allegations and intend to vigorously defend this lawsuit. Because this case is in the early stages of litigation, we are unable to form a reasonable estimate of potential loss, if any, and have not established any reserves related to this case.

Silke v. Irwin Mortgage Corporation

     In April, 2003, our indirect subsidiary, Irwin Mortgage Corporation, was named as a defendant in an action filed in the Marion County, Indiana, Circuit Court. The complaint alleges 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. The plaintiff is seeking to certify a class consisting of Indiana borrowers who were charged the fee during the six-year period prior to the filing of the lawsuit. Because the case is in the early stages of litigation, we are unable at this time to form a reasonable estimate of the amount of potential loss, if any, that Irwin Mortgage could suffer. We have not established any reserves for this case.

Gutierrez v. Irwin Mortgage Corporation

     In April, 2003, our indirect subsidiary, Irwin Mortgage Corporation, was named as a defendant in an action filed in the District Court of Nueces County, Texas. The complaint alleges that Irwin Mortgage improperly charged borrowers fees for the services of third-party vendors in excess of Irwin Mortgage's costs, and charged certain fees to which plaintiffs did not agree. The plaintiffs are seeking to certify a class consisting of similarly situated borrowers. Because the case is in the early stages of litigation, we are unable at this time to form a reasonable estimate of the amount of potential loss, if any, that Irwin Mortgage could suffer. We have not established any reserves for this case.

     We and our subsidiaries are from time to time engaged in various matters of litigation including the matters described above and those disclosed in our Annual Report on Form 10-K for the Year Ended 2002 and subsequent Reports on Form 10-Q, 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 financ ial position or results of operations, except as described above and in our Annual Report on Form 10-K and subsequent Reports on Form 10-Q. Reserves have been established for these various matters of litigation, when appropriate, based upon the advice of legal counsel.

Item 2. Changes in Securities and Use of Proceeds.

     (c)
The Corporation issued shares of common stock pursuant to elections made by four out of the eight of our outside directors to receive board compensation under the 1999 Outside Director Restricted Stock Compensation Plan in lieu of cash fees as indicated in the table below. All of these shares were issued in reliance on the private placement exemption from registration provided in Section 4(2) of the Securities Act.

Date Issued

Number of Shares

June 30, 2003

876

Item 4. Submission of Matters to a Vote of Security Holders.

     (a) The Annual Meeting of Shareholders of Registrant was held on April 24, 2003.

     (b)
The following directors were elected at the meeting to serve until 2006:

 

Affirmative Votes

Abstained

David W. Goodrich

24,414,818

237,337

John T. Hackett

24,324,975

327,180

Brenda J. Lauderback

24,297,782

354,373

John C. McGinty

24,280,025

372,130



       
  The following directors are currently serving terms that expire as indicated:

Sally A. Dean (2004)

William H. Kling (2004)

William I. Miller (2005)

Lance R. Odden (2004)

Theodore M. Solso (2005)


Item 6. Exhibits and Reports on Form 8-K.

     (a) Exhibits.

Exhibit
Number


Description of Exhibit

3.1

Restated Articles of Incorporation of Irwin Financial Corporation. (Incorporated by reference to Exhibit 3(a) to Form 10-K Report for year ended December 31, 2000, File No. 0-06835.)

   

3.2

Articles of Amendment to Restated Articles of Incorporation of Irwin Financial Corporation dated March 2, 2001. (Incorporated by reference to Exhibit 3(b) to Form 10-K Report for year ended December 31, 2000, File No. 0-06835.)

   

3.3

Code of By-laws of Irwin Financial Corporation. (Incorporated by reference to Exhibit 3 to Form 10-Q for period ended March 31, 2001, File No. 0-06835.)

   

4.1

Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4(a) to Form 10-K report for year ended December 31, 1994, File No. 0-06835.)

   

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. 0-06835.)

   

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

*Amended 1986 Stock Option Plan. (Incorporated by reference to Exhibit 10(b) to Form 10-K Report for year ended December 31, 1991, File No. 0-06835.)

   

10.2

*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. 0-06835.)

   

10.3

*Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit 10 to Form 10-Q Report for period ended June 30, 1994, File No. 0-06835.)

   

10.4

*Amendment to Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit 10(i) to Form10-Q Report for period ended June 30, 1997, File No. 0-06835.)

   

10.5

*Irwin Financial Corporation 2001 Stock Plan. (Incorporated by reference to Exhibit 10.18 to Form S-1/A filed February 14, 2002, File No. 333-69586.)

   

10.6

*Amended Irwin Financial Corporation Outside Directors Restricted Stock Compensation Plan. (Incorporated by reference to Exhibit 10(g) to Form 10-K Report for year ended December 31, 1991, File No. 0-06835.)

   

10.7

*Irwin Financial Corporation Outside Directors Restricted Stock Compensation Plan. (Incorporated by reference to Exhibit 10(i) to Form 10-K Report for year ended December31, 1995, File No. 0-06835.)


 

10.8

*1999 Outside Director Restricted Stock Compensation Plan. (Incorporated by reference to Exhibit 10(b) to Form 10-Q Report for period ended June 30, 1999, File No. 0-06835.)

   

10.9

*Irwin Financial Corporation Employees' Stock Purchase Plan. (Incorporated by reference to Exhibit 10(d) to Form 10-K Report for year ended December 31, 1991, File No. 0-06835.)

   

10.10

*Employee Stock Purchase Plan II. (Incorporated by reference to Exhibit 10(f) to Form 10-K Report for year ended December 31, 1994, File No. 0-06835.)

   

10.11

*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. 0-06835.)

   

10.12

*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. 0-06835.)

   

10.13

*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. 0-06835.)

   

10.14

*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. 0-06835.)

   

10.15

*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. 0-06835.)

   

10.16

*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. 0-06835.)

   

10.17

*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.)

   

10.18

*Irwin Home Equity Corporation Shareholder Agreement and Amendments. (Incorporated by reference to Exhibit 10(b) to Form 10-Q/A Report for period ended March 31, 2001, File No. 0-06835.)

   

10.19

*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.)

   

10.20

*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.)

   

10.21

*Irwin Financial Corporation Short Term Incentive Plan effective January 1, 2002. (Incorporated by reference to Exhibit 10.21 to Form 10-Q Report for period ended March 31, 2002, File No. 0-06835.)

   

10.22

*Irwin Union Bank Short Term Incentive Plan effective January 1, 2002. (Incorporated by reference to Exhibit 10.22 to Form 10-Q Report for period ended March 31, 2002, File No. 0-06835.)

   

10.23

*Irwin Home Equity Short Term Incentive Plan effective January 1, 2002. (Incorporated by reference to Exhibit 10.23 to Form 10-Q Report for period ended March 31, 2002, File No. 0-06835.)

   

10.24

*Irwin Mortgage Corporation Short Term Incentive Plan effective January 1, 2002. (Incorporated by reference to Exhibit 10.24 to Form 10-Q Report for period ended March 31, 2002, File No. 0-06835.)

   

10.25

*Irwin Capital Holdings Short Term Incentive Plan effective January 1, 2002. (Incorporated by reference to Exhibit 10.25 to Form 10-Q Report for period ended March 31, 2002, File No. 0-06835.)

   

10.26

*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. 0-06835.)

   

10.27

*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. 0-06835.)

   

10.28

*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. 0-06835.)

   

10.29

*Onset Capital Corporation Shareholders Agreement (Incorporated by reference to Exhibit 10.29 to Form 10-K Report for year ended December 31, 2002, File No. 0-06835.)

   

11.1

Computation of earnings per share is included in the footnotes to the financial statements.

   

31.1

Certification of the Chief Executive Officer under Section 302 of the Sarbanes - Oxley Act of 2002.

   

31.2

Certification of the Chief Financial Officer under Section 302 of the Sarbanes - Oxley Act of 2002.

   

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.

     (b) Reports on Form 8-K.

8-K

April 18, 2003

Attaching news release announcing first quarter earnings conference call.

8-K

April 24, 2003

Reg FD Disclosure announcing first quarter 2003 earnings.

8-K

April 24, 2003

Attaching news release announcing second quarter dividend.

8-K

June 10, 2003

Reg FD Disclosure on presentation made to McDonald Investments, Inc. KEYBANC Capital Markets 2003 Bank Conference 6-11-03.


SIGNATURES


     
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

IRWIN FINANCIAL CORPORATION

DATE: August 12, 2003

BY:              /s/ Gregory F. Ehlinger__________________
GREGORY F. EHLINGER                            
CHIEF FINANCIAL OFFICER                     

 


   
   
   
 

BY:             /s/ Jody A. Littrell______________________
JODY A. LITTRELL                                       
CORPORATE CONTROLLER                      
(Chief Accounting Officer)