IRWIN FINANCIAL CORPORATION - 10-Q Quarterly Report

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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	$ &nbs