IRWIN FINANCIAL CORPORATION - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR

[ ] 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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) 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 (WEB SITE)
CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

TITLE OF CLASS: COMMON STOCK*
TITLE OF CLASS: 9.25% CUMULATIVE TRUST PREFERRED SECURITIES ISSUED BY IFC
CAPITAL TRUST I AND THE GUARANTEE WITH RESPECT THERETO.
TITLE OF CLASS: 10.50% CUMULATIVE TRUST PREFERRED SECURITIES ISSUED BY IFC
CAPITAL TRUST II AND THE GUARANTEE WITH RESPECT THERETO.
TITLE OF CLASS: 8.75% CUMULATIVE CONVERTIBLE TRUST PREFERRED SECURITIES
ISSUED BY IFC CAPITAL TRUST III AND THE GUARANTEE WITH
RESPECT THERETO.
TITLE OF CLASS 8.70% CUMULATIVE TRUST PREFERRED SECURITIES ISSUED BY IFC
CAPITAL TRUST VI AND THE GUARANTEE WITH RESPECT THERETO.

Indicate by check mark whether the Corporation: (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
Corporation was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Corporation's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

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

The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, based on the closing price for the
registrant's common stock on the New York Stock Exchange on June 30, 2002, was
approximately $332,375,690.

The aggregate market value of the voting stock held by non-affiliates of the
Corporation was $292,339,062 as of March 10, 2003. As of March 10, 2003, there
were outstanding 27,824,897 common shares of the Corporation.

* Includes associated rights.

DOCUMENTS INCORPORATED BY REFERENCE

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FORM 10-K

TABLE OF CONTENTS

Part I
Item 1 -- Business.................................................... 2
Item 2 -- Properties.................................................. 15
Item 3 -- Legal Proceedings........................................... 15
Item 4 -- Submission of Matters to a Vote of Security Holders......... 18

Part II
Item 5 -- Market for Corporation's Common Equity and Related
Stockholder Matters......................................... 19
Item 6 -- Selected Financial Data..................................... 20
Item 7 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Item 7A -- Quantitative and Qualitative Disclosures about Market
Risk........................................................ 70
Item 8 -- Financial Statements and Supplementary Data................. 70
Item 9 -- Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 105

Part III
Item 10 -- Directors and Executive Officers of the Corporation......... 106
Item 11 -- Executive Compensation...................................... 106
Item 12 -- Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 106
Item 13 -- Certain Relationships and Related Transactions.............. 107
Item 14 -- Controls and Procedures..................................... 107

Part IV
Item 15 -- Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 108

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PART I

ITEM 1. BUSINESS

GENERAL

We are a diversified financial services company headquartered in Columbus,
Indiana with $4.9 billion in assets at December 31, 2002. We focus primarily on
the extension of credit to consumers and small businesses as well as providing
the ongoing servicing of those customer accounts. We currently operate five
major lines of business through our direct and indirect subsidiaries. Our major
lines of business are: mortgage banking, commercial banking, home equity
lending, commercial finance and venture capital.

We are a regulated bank holding company and we conduct our consumer and
commercial lending businesses through various operating subsidiaries. Our
banking subsidiary, Irwin Union Bank and Trust Company, was organized in 1871
and we formed the holding company in 1972. Our direct and indirect major
subsidiaries include Irwin Union Bank and Trust, a commercial bank, which
together with Irwin Union Bank, F.S.B., a federal savings bank, conduct our
commercial banking activities; Irwin Mortgage Corporation, a mortgage banking
company; Irwin Home Equity Corporation, a consumer home equity lending company;
Irwin Commercial Finance Corporation, a commercial finance subsidiary; and Irwin
Ventures LLC, a venture capital company.

At the parent level, we work actively to add value to our lines of business
by interacting with the management teams, capitalizing on interrelationships,
providing centralized services and coordinating overall organizational
decisions. Under this organizational structure, our mortgage banking, home
equity and commercial finance lines of business operate as direct and indirect
subsidiaries of Irwin Union Bank and Trust. This structure provides additional
liquidity and results in regulatory oversight of our business.

Our Internet address is http://www.irwinfinancial.com.

We make available free of charge through our Internet website our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports as soon as reasonably practicable after we
electronically file the material with the Securities and Exchange Commission
(SEC). Our internet website and the information contained or incorporated in it
are not intended to be incorporated into this Annual Report on Form 10-K.

MAJOR LINES OF BUSINESS

Mortgage Banking

We established our mortgage banking line of business when we acquired our
subsidiary, Irwin Mortgage Corporation, formerly Inland Mortgage Corporation, in
1981. Irwin Mortgage became a subsidiary of Irwin Union Bank and Trust in
October, 2002. In this line of business, Irwin Mortgage originates, purchases,
sells, and services conventional and government agency-backed residential
mortgage loans throughout the United States. Most of our mortgage originations
either are insured or guaranteed by an agency of the federal government, such as
the Federal Housing Authority (FHA) or the Veterans Administration (VA) or, in
the case of conventional mortgages, meet requirements for resale to the Federal
National Mortgage Association (FNMA) or the Federal Home Loan Mortgage
Corporation (FHLMC). We originate mortgage loans through retail offices, direct
marketing and our Internet website. We also purchase mortgage loans through
mortgage brokers. Our relationships with realtors, homebuilders and brokers help
us identify potential borrowers. Irwin Mortgage also engages in the mortgage
reinsurance business through its subsidiary, Irwin Reinsurance Corporation, a
Vermont corporation. In October 2002, we began originating mortgage loans
through our new correspondent lending channel. We sell mortgage loans to
institutional and private investors but may retain servicing rights to the loans
we originate or purchase from correspondents. Irwin Mortgage collects and
accounts for the monthly payments on each loan serviced and pays the real estate
taxes and insurance necessary to protect the integrity of the mortgage lien, for
which it receives a servicing fee.

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At January 31, 2003, Irwin Mortgage operated 153 production and satellite
offices in 34 states. We discuss this line of business further in the Mortgage
Banking section of Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) of this report.

Commercial Banking

Our commercial banking line of business provides credit, cash management
and personal banking products primarily to small businesses and business owners.
We offer a full line of consumer, mortgage and commercial loans, as well as
personal and commercial checking accounts, savings and time deposit accounts,
personal and business loans, credit card services, money transfer services,
financial counseling, property, casualty, life and health insurance agency
services, trust services, securities brokerage and safe deposit facilities.

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.

- Irwin Union Bank and Trust Company -- headquartered in Columbus, Indiana
and organized in 1871, is a full service Indiana state-chartered
commercial bank with offices currently located throughout nine counties
in central and southern Indiana, as well as in Kalamazoo, Grandville
(near Grand Rapids), Traverse City and Lansing, Michigan, and Carson
City, Nevada; and

- Irwin Union Bank, F.S.B. -- headquartered in Louisville, Kentucky, is a
full-service federal savings bank that began operations in December 2000.
Currently we have offices located in Brentwood, Missouri (near St.
Louis); Louisville, Kentucky; Salt Lake City, Utah; Las Vegas, Nevada;
and Phoenix, Arizona. We anticipate pursuing the conversion of our Las
Vegas and Salt Lake City branches of Irwin Union Bank, F.S.B. to branches
of Irwin Union Bank and Trust Company.

We discuss this line of business further in the Commercial Banking section
of the MD&A of this report.

Home Equity Lending

We established this line of business when we formed Irwin Home Equity
Corporation as our subsidiary in 1994, headquartered in San Ramon, California.
Irwin Home Equity became a subsidiary of Irwin Union Bank and Trust in 2001. In
conjunction with Irwin Union Bank and Trust, Irwin Home Equity originates,
purchases, securitizes and services home equity loans and lines of credit and
first mortgages nationwide. Our target customers are principally credit worthy,
home owning consumers who are active, unsecured credit card debt users. We
market our home equity products (with loan to value ratios up to 125%) and first
mortgage refinance programs (with loan to value ratios up to 100%) through
direct mail, telemarketing, mortgage brokers and correspondent lenders
nationwide and through the Internet. Irwin Home Equity's core competencies are
credit risk management and analysis, risk assessment, and specialized home loan
servicing, with particular expertise in test management and database analysis.

We discuss this line of business further in the Home Equity Lending section
of the MD&A of this report.

Commercial Finance

Established in 1999, our commercial finance line of business (formerly
called our equipment leasing line of business) originates small-ticket equipment
leases through an established North American network of vendors and brokers and
provides finance for franchisees of selected quick service restaurant concepts
in the United States. The majority of our leases are full payout (no residual),
small-ticket assets secured by commercial equipment. We finance a variety of
commercial and office equipment types and try to limit the industry and
geographic concentrations in our lease portfolio. Loans and leases to
franchisees sometimes involve the financing of real estate as well as equipment.

In July 2000, the commercial finance line of business acquired an ownership
of approximately 78% in Onset Capital Corporation, a Canadian small-ticket
equipment leasing company headquartered in Vancouver, British Columbia. In
December 2001, Onset Capital established Onset Alberta Ltd. as a subsidiary to

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facilitate its leasing business. In October 2001, we formed Irwin Franchise
Capital Corporation to conduct our franchise leasing business. We established
Irwin Commercial Finance (formerly, Irwin Capital Holdings) in April 2001 as a
subsidiary of Irwin Union Bank and Trust to serve as the parent company for both
our United States and Canadian commercial finance companies.

We discuss this line of business further in the Commercial Finance section
of the MD&A of this report.

Venture Capital

We established this line of business when we formed Irwin Ventures
Incorporated in August 1999. 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.

In August 1999, Irwin Ventures established a subsidiary, Irwin Ventures
Incorporated-SBIC, which received a small business investment company license
from the Small Business Administration. In December 2000, Irwin Ventures and
Irwin Ventures-SBIC became Delaware limited liability companies. To date, the
primary geographic focus of this line of business and each of our investments
has been on the corridors of the east and west coasts between Washington, D.C.
and Boston, and Palo Alto and Seattle.

Other Subsidiaries

Irwin Union Credit Insurance Corporation has its home office in Columbus,
Indiana and provides credit life insurance to consumer loan customers of Irwin
Union Bank.

We established Irwin Residual Holdings Corporation and Irwin Residual
Holdings Corporation II in 2002 to hold residual interests that Irwin Union Bank
and Trust Company transferred to Irwin Financial Corporation. The residual
interests were created as a result of securitizations in our home equity line of
business.

We continue to hold certain small-ticket equipment leases in our
subsidiary, Irwin Leasing Corporation (the former Affiliated Capital Corp.). The
leases were not part of the 1998 sale of substantially all of the assets of
Affiliated Capital to DVI Financial Services, Inc. Irwin Leasing and its parent,
Irwin Equipment Finance Corporation, are inactive except for the leases.

No single part of our business is dependent upon a single customer or upon
a very few customers and the loss of any one customer would not have a
materially adverse effect upon our business.

COMPETITION

In our mortgage banking business we compete for mortgage loans with other
national, and regional mortgage banking companies, as well as commercial banks,
savings banks, credit unions and savings and loan associations.

In our commercial banking business, we compete with commercial banks,
savings banks, thrifts and credit unions for deposits and loans in and around
the counties surrounding our branch offices, and with a number of nonbank
companies located throughout the United States, including insurance companies,
retailers, securities firms, companies offering money market accounts, and
national credit card companies.

In our home equity lending business, our primary competitors for our home
equity loans and lines of credit include banks, mortgage banks, large securities
firms, credit unions, thrifts, credit card issuers, finance companies, and other
home equity and mortgage lenders with operations that are either national,
regional, local or web-enabled in scope. Competition can take many forms,
including convenience in obtaining loans, customer service, marketing and
distribution channels, terms provided and interest rates charged to borrowers.

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In our commercial finance business, our primary competitors include other
finance companies that are independent or affiliated with banks, large equipment
leasing or franchise financing companies that operate on a national or regional
basis.

In our venture capital line of business, we compete primarily with other
venture capital firms that invest in start-up companies.

Some of our competitors are not subject to the same degree of regulation as
that imposed on bank holding companies, state banking organizations and federal
saving banks. In addition, many larger banking organizations, mortgage
companies, mortgage banks, insurance companies and securities firms have
significantly greater resources than we do. As a result, some of our competitors
have advantages over us in name recognition and market penetration.

SUPERVISION AND REGULATION

GENERAL

The financial services business is highly regulated, primarily for the
protection of depositors and other customers. The following is a summary of
several applicable statutes and regulations that apply to us and to our
subsidiaries. These summaries are not complete, and you should refer to the
statutes and regulations for more information. Also, these statutes and
regulations may change in the future, and we cannot predict what effect these
changes, if made, will have on our operations.

BANK HOLDING COMPANY REGULATION

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.

Minimum Capital Requirements

The Federal Reserve has adopted risk-based capital guidelines for assessing
bank holding company capital adequacy. These standards define capital and
establish minimum capital ratios in relation to assets, both on an aggregate
basis and as adjusted for credit risks and off-balance sheet exposures. Under
the Federal Reserve's risk-based guidelines applicable to us, capital is
classified into two categories for bank holding companies:

Tier 1 capital, or core capital, consists of:

- common stockholder's equity;

- qualifying noncumulative perpetual preferred stock;

- qualifying cumulative perpetual preferred stock (subject to some
limitations, and including our Trust Preferred securities, of which $118
million qualified as Tier 1 capital as of December 31, 2002); and

- minority interests in the common equity accounts of consolidated
subsidiaries;

less

- goodwill;

- credit-enhancing interest-only strips (certain amounts only); and

- specified intangible assets.

Tier 2 capital, or supplementary capital, consists of:

- allowance for loan and lease losses;

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- perpetual preferred stock and related surplus;

- hybrid capital instruments;

- unrealized holding gains on equity securities;

- perpetual debt and mandatory convertible debt securities;

- term subordinated debt, including related surplus; and

- intermediate-term preferred stock, including related securities.

The Federal Reserve's capital adequacy guidelines require bank holding
companies to maintain a minimum ratio of qualifying total capital to
risk-weighted assets of 8 percent, at least 4 percent of which must be in the
form of Tier 1 capital. Risk-weighted assets include assets and credit
equivalent amounts of off-balance sheet items of bank holding companies that are
assigned to one of several risk categories, based on the obligor or the nature
of the collateral. The Federal Reserve has established a minimum ratio of Tier 1
capital (less any intangible capital items) to total assets (less any intangible
assets), or leverage ratio, of 3 percent for strong bank holding companies
(those rated a composite "1" under the Federal Reserve's rating system). For all
other bank holding companies, the minimum ratio of Tier 1 capital to total
assets is 4 percent. Also, the Federal Reserve continues to consider the Tier 1
leverage ratio in evaluating proposals for expansion or new activities.

In its capital adequacy guidelines, the Federal Reserve emphasizes that the
standards discussed above are minimums and that banking organizations generally
are expected to operate well above these minimum levels. These guidelines also
state that banking organizations experiencing growth, whether internally or
through acquisitions or other expansionary initiatives, are expected to maintain
strong capital positions substantially above the minimum levels.

As of December 31, 2002, we had regulatory capital in excess of all the
Federal Reserve's minimum levels and our internal minimum target of 11% for
risk-adjusted capital. Our ratio of total capital to risk weighted assets at
December 31, 2002 was 13.2% and our Tier 1 leverage ratio was 9.3%.

Residual Interests. On November 29, 2001, the four federal banking
agencies jointly adopted revised regulatory capital standards regarding the
treatment of certain recourse obligations, direct credit substitutes, residual
interests in assets securitizations, and other securitized transactions that
expose financial institutions primarily to credit risk. The agencies had
previously published guidelines on securitization activities in December, 1999
(the "Securitization Guidance") which dealt with the risk management and
regulatory oversight issues involved with asset securitizations and residual
interests.

Residual interests generally include any on-balance sheet asset created by
the sale of financial assets that results in the retention of any credit risks,
directly or indirectly, associated with the transfer of assets, where the
retained risk exceeds a pro rata share of the organization's claim on the
assets, whether through subordination provisions or other credit enhancement
techniques.

The revised rules (the "New Rules") became effective January 1, 2002 for
residual interests related to any transaction that settles on or after that
date. For transactions that settled prior to the effective date of the New
Rules, capital treatment prescribed by the application of the New Rules was
delayed until December 31, 2002.

Capital Treatment of Residual Interests. The New Rules imposed a
concentration limit on credit-enhancing interest-only strips (CEIOS), a subset
of residual interests, and a dollar-for-dollar capital requirement on residual
interests not deducted from Tier 1 capital.

CEIOS are, generally, assets created from the excess interest on assets
transferred (after reduction for administrative expenses, investor interest
payments, servicing fees, and credit losses on investors' interests in these
assets) that serve as credit enhancements for the investors. CEIOS are the
residual interests most often resulting from asset securitizations such as our
prior securitizations of home equity loans, in which the seller of loans
accounts for the transaction using gain-on-sale accounting treatment. Under the
New Rules, CEIOS are

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limited to 25% of Tier 1 capital, with the excess deducted from Tier 1 capital.
At December 31, 2002, our CEIOS represented 17% of Tier 1 capital.

The New Rules reflect the policy in the existing Securitization Guidance
that imposes more frequent supervisory review, limitations on residual interest
holdings, more stringent capital requirements, or other supervisory constraints
on banking organizations found by the regulatory agencies to be lacking
effective risk management programs or engaging in practices that present safety
and soundness concerns. The Securitization Guidance provides that a bank's
failure to understand the risks inherent in the securitization activities and to
incorporate them into risk management systems and internal capital allocations
may constitute an unsafe or unsound banking practice and may result in the
down-grading of an organization's regulatory ratings.

Expansion

The BHC Act requires prior Federal Reserve approval for certain activities,
such as the acquisition by a bank holding company of control of another bank or
bank holding company. Under the BHC Act, a bank holding company may engage in
activities that the Federal Reserve has determined to be so closely related to
banking or managing or controlling banks as to be a proper incident to those
banking activities, such as operating a mortgage bank or a savings association,
conducting leasing and venture capital investment activities, performing trust
company functions, or acting as an investment or financial advisor. See the
section on "Interstate Banking and Branching Legislation" below.

Dividends

The Federal Reserve has policies on the payment of cash dividends by bank
holding companies. The Federal Reserve believes that a bank holding company
experiencing earnings weaknesses should not pay cash dividends (1) exceeding its
net income or (2) which only could be funded in ways that would weaken a bank
holding company's financial health, such as by borrowing. Also, the Federal
Reserve possesses enforcement powers over bank holding companies and their
non-bank subsidiaries to prevent or remedy unsafe or unsound practices or
violations of applicable statutes and regulations. Among these powers is the
ability to prohibit or limit the payment of dividends by banks and bank holding
companies.

The Federal Reserve expects us to act as a source of financial strength to
our banking subsidiaries and to commit resources to support them. In
implementing this policy, the Federal Reserve could require us to provide
financial support when we otherwise would not consider ourselves able to do so.

In addition to the restrictions on fundamental corporate actions such as
acquisitions and dividends imposed by the Federal Reserve, Indiana law also
places limitations on our authority with respect to such activities.

BANK AND THRIFT REGULATION

Indiana law subjects Irwin Union Bank and Trust and its subsidiaries to
supervision and examination by the Indiana Department of Financial Institutions
(DFI). Irwin Union Bank and Trust is a member of the Federal Reserve System and,
along with its subsidiaries, is also subject to regulation, examination and
supervision by the Federal Reserve. These subsidiaries include Irwin Mortgage,
Irwin Home Equity and Irwin Commercial Finance. Irwin Union Bank, F.S.B. is a
federally chartered savings bank. Accordingly, it is governed by and subject to
regulation, examination and supervision by the Office of Thrift Supervision
(OTS), and is required to comply with the rules and regulations of the OTS under
the Home Owners' Loan Act (HOLA).

The Federal Reserve also supervises Irwin Union Bank and Trust's compliance
with federal law and regulations that restrict loans by member banks to their
directors, executive officers, and other controlling persons.

The deposits of Irwin Union Bank and Trust are insured by the Bank
Insurance Fund (BIF) and the deposits of Irwin Union Bank, F.S.B. are insured by
the Savings Association Insurance Fund (SAIF) under the provisions of the
Federal Deposit Insurance Act (FDIA). As a result, Irwin Union Bank and Trust
and

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Irwin Union Bank, F.S.B. also are subject to supervision and examination by the
Federal Deposit Insurance Corporation (FDIC). The regulatory scheme applicable
to Irwin Union Bank and Trust is comparable to that imposed on Irwin Union Bank,
F.S.B. by the OTS.

Mortgage Banking and Residential Lending Regulation

The residential lending activities of Irwin Union Bank and Trust, the
mortgage banking activities of Irwin Mortgage, and the home equity lending
business of Irwin Home Equity are regulated by the Federal Reserve. The Federal
Reserve has broad authority to oversee the banking activities of Irwin Union
Bank and Trust, as the primary federal regulator of the bank pursuant to the
FDIA, and the nonbanking subsidiaries of both Irwin Financial Corporation and
Irwin Union Bank and Trust, pursuant to the BHC Act. Federal Reserve
regulations, such as restrictions on affiliate transactions, asset quality and
earnings performance, apply to our residential lending activities. The DFI has
comparable supervisory and examination authority over Irwin Mortgage, Irwin Home
Equity and Irwin Commercial Finance due to their status as subsidiaries of Irwin
Union Bank and Trust.

Capital Requirements

The Federal Reserve has published regulations applicable to state member
banks such as Irwin Union Bank and Trust regarding the maintenance of adequate
capital. While retaining the authority to set capital ratios for individual
banks, these regulations group banks into categories based upon total risk-based
capital, Tier 1 risk-based capital and a leverage ratio (Tier 1 capital divided
by average total assets). These categories, and the applicable capital ratios,
are as follows:

The Federal Reserve requires banks to hold capital commensurate with the
level and nature of all of the risks, including the volume and severity of
problem loans, to which they are exposed. The Federal Reserve requires all state
member banks to meet a minimum ratio of qualifying total capital to weighted
risk assets of 8 percent, of which at least 4 percent should be in the form of
Tier 1 capital. For purposes of this ratio, Tier 1 capital is defined as the sum
of core capital elements less goodwill and other intangible assets.

The minimum ratio of Tier 1 capital to total assets for strong banking
institutions (rated composite "1" under the uniform rating system of banks) is 3
percent. For all other institutions, the minimum ratio of Tier 1 capital to
total assets is 4 percent. Banking institutions with supervisory, financial,
operational, or managerial weaknesses are expected to maintain capital ratios
well above the minimum levels, as are institutions with high or inordinate
levels of risk. Banks experiencing or anticipating significant growth are also
expected to maintain capital, including tangible capital positions, well above
the minimum levels. For example, most such institutions generally have operated
at capital levels ranging from 1 to 2 percent above the stated minimums. Higher
capital ratios could be required if warranted by the particular circumstances to
risk profiles of individual banks. The standards set forth above specify minimum
supervisory ratios based primarily on broad credit risk considerations. The
risk-based ratio does not take explicit account of the quality of individual
asset portfolios or the range of other types of risks to which banks may be
exposed, such as interest rate, liquidity, market or operational risks. For this
reason, banks are generally expected to operate with capital positions above the
minimum ratios.

At December 31, 2002, Irwin Union Bank and Trust had a total risk-based
capital ratio of 12.4%, a Tier 1 capital ratio of 10.4%, and a leverage ratio of
9.8% and was considered well-capitalized. See "Bank Holding Company
Regulation -- Minimum Capital Requirements -- Residual Interests" earlier in
this section for a discussion of the impact of the new regulatory capital
treatment rules. We transferred our residual assets held at Irwin Union Bank and
Trust to our holding company in the form of dividends during the fourth quarter
of 2001 and the first quarter of 2002. Because of the amount of the residuals,
we sought and received regulatory approval of these dividends as required. In
connection with our decision in the fourth quarter of 2001 to dividend these
residual assets out of Irwin Union Bank and Trust and after discussions with our
regulators as well as consideration of the risk profile of our organization, our
Board of Directors adopted resolutions regarding maintenance of capital levels
above the well-capitalized minimum requirements beginning March 31, 2002. The
benchmark levels we established are 12% total capital to risk-weighted assets at
Irwin

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Union Bank and Trust, and 11% total capital to risk-weighted assets at Irwin
Financial. Although the dividends of the residual assets did not have a
meaningful impact on our consolidated capital ratios calculated under the New
Rules, the dividends had the effect of increasing regulatory capital ratios at
Irwin Union Bank and Trust.

The Federal Reserve, the OTS, the FDIC and other federal banking agencies
also adopted a rule modifying the risk-based capital standards to provide for
consideration of interest rate risk when assessing capital adequacy of a bank or
savings association. Under this rule, the Federal Reserve, the OTS and the FDIC
must explicitly include a bank or savings association's exposure to declines in
the economic value of their capital due to changes in interest rates as a factor
in evaluating capital adequacy of a bank or savings association. The Federal
Reserve, the OTS, the FDIC and other federal banking agencies also adopted a
joint agency policy statement providing guidance for managing interest rate
risk. The policy statement emphasizes the importance of adequate management
oversight and a sound risk management process. This assessment of interest rate
risk management made by the banks' examiners will be incorporated into the
banks' overall risk management rating and used to determine management's
effectiveness.

Insurance of Deposit Accounts

Under the Federal Deposit Insurance Corporation Improvements Act of 1991
(FDICIA), as FDIC-insured institutions, Irwin Union Bank and Trust and Irwin
Union Bank, F.S.B. are required to pay deposit insurance premiums based on the
risk they pose to BIF and SAIF, respectively. The FDIC also has authority to
raise or lower assessment rates on insured deposits to achieve the statutorily
required reserve ratios in insurance funds and to impose special additional
assessments. Each depository institution is assigned to one of three capital
groups: "well capitalized," "adequately capitalized" or "undercapitalized." An
institution is considered well capitalized if it has a total risk-based capital
ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater,
has a leverage ratio of 5% or greater and is not subject to any order or written
directive to meet and maintain a specific capital level. An "adequately
capitalized" institution has a total risk-based capital ratio of 8% or greater,
has a Tier 1 risk-based capital ratio of 4% or greater, has a leverage ratio of
4% or greater and does not meet the definition of a well capitalized bank. An
institution is considered "undercapitalized" if it does not meet the definition
of "well capitalized" or "adequately capitalized." Within each capital group,
institutions are assigned to one of three supervisory subgroups: "A"
(institutions with few minor weaknesses), "B" (institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the insurance funds), and "C"
(institutions that pose a substantial probability of loss to the insurance funds
unless effective corrective action is taken). There are nine combinations of
capital groups and supervisory subgroups to which varying assessment rates may
apply. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned.

Dividend Limitations

As a state member bank, Irwin Union Bank and Trust may not, without the
approval of the Federal Reserve, declare a dividend if the total of all
dividends declared in a calendar year, including the proposed dividend, exceeds
the total of its net income for that year, combined with its retained net income
of the preceding two years, less any required transfers to the surplus account.
Under Indiana law, certain dividends require notice to, or approval by, the DFI,
and Irwin Union Bank and Trust may not pay dividends in an amount greater than
its net profits then available, after deducting losses and bad debts. The amount
of the residual assets transferred to the holding company as a dividend from the
bank exceeded the amount that could have been dividended by the bank to the bank
holding company without regulatory approval as described above and, as a result,
we sought and obtained regulatory approval for the dividend. Due to the
limitations described above, we must now obtain prior approval from the DFI and
the Federal Reserve Bank of Chicago before Irwin Union Bank and Trust can pay
additional dividends to us until such time as net income for the year, combined
with retained net income of the preceding two years, less any required transfers
to the surplus account, exceeds the amount to be dividended.

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In most cases, savings and loan associations, such as Irwin Union Bank,
F.S.B., are required either to apply to or to provide notice to the OTS
regarding the payment of dividends. The savings association must seek approval
if it does not qualify for expedited treatment under OTS regulations, or if the
total amount of all capital distributions for the applicable calendar year
exceeds net income for that year to date plus retained net income for the
preceding two years, or the savings association would not be adequately
capitalized following the dividend, or the proposed dividend would violate a
prohibition in any statute, regulation or agreement with the OTS. In other
circumstances, a simple notice is sufficient.

Our ability and the ability of Irwin Union Bank and Trust and Irwin Union
Bank, F.S.B. to pay dividends also may be affected by the various capital
requirements and the capital and noncapital standards established under the
FDICIA, as described above. Our rights and the rights of our shareholders and
our creditors to participate in any distribution of the assets or earnings of
our subsidiaries also is subject to the prior claims of creditors of our
subsidiaries including the depositors of a bank subsidiary.

Interstate Banking and Branching Legislation

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the Interstate Banking Act), banks are permitted, subject to being
adequately or better capitalized, in compliance with Community Reinvestment Act
requirements and in compliance with state law requirements (such as age-of-bank
limits and deposit caps), to merge with one another across state lines and to
create a main bank with branches in separate states. After establishing branches
in a state through an interstate merger transaction, a bank may establish and
acquire additional branches at any location in the state where any bank involved
in the interstate merger could have established or acquired branches under
applicable federal and state law.

Although Irwin Union Bank, F.S.B. has a different primary federal regulator
from Irwin Union Bank and Trust, most, if not all, of the federal statutes and
regulations applicable to Irwin Union Bank also apply to Irwin Union Bank,
F.S.B. However, as a federally chartered savings bank, Irwin Union Bank, F.S.B.
has greater flexibility in pursuing interstate branching than an Indiana state
bank. A federal savings association may establish or operate a branch in any
state outside the state of its home office if the association meets certain
statutory requirements. These requirements do not apply if the law of the state
where the branch is to be located offers reciprocal branching privileges with
the state where the savings association has its home office located. As Irwin
Union Bank and Trust does with its supervisory regulatory agencies, Irwin Union
Bank, F.S.B. must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
before establishing branches or entering into certain transactions such as
mergers with, or acquisitions of, other financial institutions.

Community Reinvestment

Under the Community Reinvestment Act (CRA), a financial institution has a
continuing and affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low-
and moderate-income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions, or limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community that are consistent with the CRA.
Institutions are rated on their performance in meeting the needs of their
communities. Performance is tested in three areas: (a) lending, which evaluates
the institution's record of making loans in its assessment areas; (b)
investment, which evaluates the institution's record of investing in community
development projects, affordable housing and programs benefiting low or moderate
income individuals and business; and (c) service, which evaluates the
institution's delivery of services through its branches, ATMs and other offices.
The CRA requires each federal banking agency, in connection with its examination
of a financial institution, to assess and assign one of four ratings to the
institution's record of meeting the credit needs of its community and to take
this record into account in evaluating certain applications by the institution,
including applications for charters, branches and other deposit facilities,
relocations, mergers, consolidations, acquisitions of assets or assumptions of
liabilities, and savings and loan holding company acquisitions. The CRA also
requires that all institutions publicly disclose their CRA ratings. Both Irwin
Union Bank and Trust and Irwin Union Bank, F.S.B. received a "satisfactory"
rating on their most recent CRA performance evaluations.

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Brokered Deposits

Brokered deposits include funds obtained, directly or indirectly, by or
through a deposit broker for deposit into one or more deposit accounts.
Well-capitalized institutions are not subject to limitations on brokered
deposits, while an adequately capitalized institution is able to accept, renew
or rollover brokered deposits only with a waiver from the FDIC and subject to
certain restrictions on the yield paid on such deposits. Undercapitalized
institutions are not permitted to accept brokered deposits. Irwin Union Bank and
Trust and Irwin Union Bank, F.S.B. are permitted to accept brokered deposits.

Gramm-Leach-Bliley Act

On November 12, 1999, the Gramm-Leach-Bliley Act (the GLB Act) was enacted,
which amended or repealed certain provisions of the Glass-Steagall Act and other
legislation that restricted the ability of bank holding companies, securities
firms and insurance companies to affiliate with one another. The GLB Act
established a comprehensive framework to permit affiliations among commercial
banks, insurance companies and securities firms. The GLB Act contains provisions
intended to safeguard consumer financial information in the hands of financial
service providers by, among other things, requiring these entities to share
their privacy policies to their customers and allowing customers to "opt out" of
having their financial service providers disclose their confidential financial
information with non-affiliated third parties, subject to certain exceptions.
Financial privacy regulations implementing the GLB provisions became effective
during 2001. Similar to most other consumer-oriented laws, the regulations
contain some specific prohibitions and require timely disclosure of certain
information. We do not anticipate that the GLB Act will have a material adverse
effect on our operations or prospects or those of our subsidiaries. However, to
the extent the GLB Act permits banks, securities firms and insurance companies
to affiliate, the financial services industry may experience further
consolidation. This consolidation could result in a growing number of larger
financial institutions that offer a wider variety of financial services than we
currently offer and that can aggressively compete in the markets we currently
serve.

COMPLIANCE WITH CONSUMER PROTECTION LAWS

Our subsidiaries also are subject to many federal and state consumer
protection statutes and regulations including the Equal Credit Opportunity Act,
the Fair Housing Act, the Truth in Lending Act, the Truth in Savings Act, the
Real Estate Settlement Procedures Act and the Home Mortgage Disclosure Act.
Among other things, these acts:

- require lenders to disclose credit terms in meaningful and consistent
ways;

- prohibit discrimination against an applicant in any consumer or business
credit transaction;

- prohibit discrimination in housing-related lending activities;

- require certain lenders to collect and report applicant and borrower data
regarding loans for home purchases or improvement projects;

- require lenders to provide borrowers with information regarding the
nature and cost of real estate settlements;

- prohibit certain lending practices and limit escrow account amounts with
respect to real estate transactions; and

- prescribe possible penalties for violations of the requirements of
consumer protection statutes and regulations.

Equal Credit Opportunity Act

The federal Equal Credit Opportunity Act prohibits discrimination against
an applicant in any credit transaction, whether for consumer or business
purposes, on the basis of race, color, religion, national origin, sex, marital
status, age (except in limited circumstances), receipt of income from public
assistance programs

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or good faith exercise of any rights under the Consumer Credit Protection Act.
In addition to prohibiting outright discrimination on any of the impermissible
bases listed above, an effects test has been applied to determine whether a
violation of the act has occurred. This means that if a creditor's actions have
had the effect of discriminating, the creditor may be held liable, even when
there is no intent to discriminate. In addition to actual damages, the Equal
Credit Opportunity Act permits regulatory agencies to take enforcement action
and provides for punitive damages. Successful complainants also may be entitled
to an award of court costs and attorneys' fees.

Fair Housing Act

The federal Fair Housing Act regulates many lending practices, including
prohibiting discrimination in a lender's housing-related lending activities
against any person because of race, color, religion, national origin, sex,
handicap or familial status. The Fair Housing Act is broadly written and has
been broadly interpreted by the courts. A number of lending practices have been
found to be, or may be considered, illegal under the Fair Housing Act, including
some that are not specifically mentioned in the act itself. Among those
practices that have been found to be, or may be considered, illegal under the
Fair Housing Act are declining a loan for the purposes of racial discrimination,
making excessively low appraisals of property based on racial considerations and
pressuring, discouraging, or denying applications for credit on a prohibited
basis.

The Fair Housing Act allows a person who believes that he or she has been
discriminated against to file a complaint with the Department of Housing and
Urban Development (HUD). Aggrieved persons also may initiate a civil action. The
Fair Housing Act also permits the Attorney General of the United States to
commence a civil action if there is reasonable cause to believe that a person
has been discriminated against in violation of the Fair Housing Act. Penalties
for violation of the Fair Housing Act include actual damages suffered by the
aggrieved person and injunctive or other equitable relief. The courts also may
assess civil penalties.

Home Mortgage Disclosure Act

The federal Home Mortgage Disclosure Act grew out of public concern over
credit shortages in certain urban neighborhoods. One purpose of the Home
Mortgage Disclosure Act is to provide public information that will help show
whether financial institutions are serving the housing credit needs of the
neighborhoods and communities in which they are located. The Home Mortgage
Disclosure Act also includes a "fair lending" aspect that requires the
collection and disclosure of data about applicant and borrower characteristics
as a way of identifying possible discriminatory lending patterns and enforcing
anti-discrimination statutes. The Home Mortgage Disclosure Act requires
institutions to report data regarding applications for loans for the purchase or
improvement of one-to-four family and multifamily dwellings, as well as
information concerning originations and purchases of such loans. Federal bank
regulators rely, in part, upon data provided under the Home Mortgage Disclosure
Act to determine whether depository institutions engage in discriminatory
lending practices.

The appropriate federal banking agency (that is, the Federal Reserve for
Irwin Union Bank and Trust and the OTS for Irwin Union Bank, F.S.B.), or in some
cases, HUD, enforces compliance with the Home Mortgage Disclosure Act and
implements its regulations. Administrative sanctions, including civil money
penalties, may be imposed by supervisory agencies for violations of this act.

Real Estate Settlement Procedures Act

The federal Real Estate Settlement Procedures Act (RESPA), requires lenders
to provide borrowers with disclosures regarding the nature and cost of real
estate settlements. RESPA also prohibits certain abusive practices, such as
kickbacks, and places limitations on the amount of escrow accounts. Violations
of RESPA may result in imposition of penalties, including: (1) civil liability
equal to three times the amount of any charge paid for the settlement services
or civil liability of up to $1,000 per claimant, depending on the violation; (2)
awards of court costs and attorneys' fees; and (3) fines of not more than
$10,000 or imprisonment for not more than one year, or both. A significant
number of individual claims and purported

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consumer class action claims have been commenced against financial institutions
and other mortgage lending companies, including Irwin Mortgage, alleging
violations of the prohibition against kickbacks and seeking civil damages, court
costs and attorneys' fees. See the "Legal Proceedings" section of this report.

Truth in Lending Act

The federal Truth in Lending Act is designed to ensure that credit terms
are disclosed in a meaningful way so that consumers may compare credit terms
more readily and knowledgeably. As a result of the act, all creditors must use
the same credit terminology and expressions of rates, the annual percentage
rate, the finance charge, the amount financed, the total of payments and the
payment schedule.

Violations of the Truth in Lending Act may result in regulatory sanctions
and in the imposition of both civil and, in the case of willful violations,
criminal penalties. Under certain circumstances, the Truth in Lending Act and
Federal Reserve Regulation Z also provide a consumer with a right of rescission,
which relieves the consumer of the obligation to pay amounts to the creditor or
to a third party in connection with the offending transaction, including finance
charges, application fee, commitment fees, title search fees and appraisal fees.
Consumers may also seek actual and punitive damages for violations in the Truth
in Lending Act. See the "Legal Proceedings" section of this report.

State Consumer Protection Laws

In addition to the federal consumer protection laws discussed above, our
subsidiaries are also subject to state consumer protection laws that regulate
the mortgage origination and lending businesses of these subsidiaries. As part
of the home equity line of business in conjunction with its subsidiary, Irwin
Home Equity, Irwin Union Bank and Trust originates home equity loans through its
branch in Nevada. Irwin Union Bank and Trust uses interest rates and loan terms
in its home equity loans and lines of credit that are authorized by Nevada law,
but might not be authorized by the laws of the states in which the borrowers are
located. As a FDIC-insured, state member bank, Irwin Union Bank and Trust is
authorized by Section 27 of the FDIA to charge interest at rates allowed by the
laws of the state where the bank is located regardless of any inconsistent state
law, and to apply these rates to loans to borrowers in other states. The FDIC
has opined that a state bank with branches outside of the state in which it is
chartered may also be located in a state in which it maintains an interstate
branch. Irwin Union Bank and Trust relies on Section 27 of the FDIA and the FDIC
opinion in conducting its home equity lending business described above. From
time to time, state regulators have questioned the application of Section 27 of
the FDIA to credit practices affecting citizens of their states. Any change in
Section 27 of the FDIA or in the FDIC's interpretation of this provision, or any
successful challenge as to the permissibility of these activities, could require
that we change the terms of some of our loans or the manner in which we conduct
our home equity line of business.

EMPLOYEES AND LABOR RELATIONS

At January 31, 2003, we and our subsidiaries had a total of 3,288
employees, including full-time and part-time employees. We continue a commitment
of equal employment opportunity for all job applicants and staff members, and
management regards its relations with its employees as satisfactory.

EXECUTIVE OFFICERS

Our executive officers are elected annually by the Board of Directors and
serve for a term of one year or until their successors are elected and
qualified. In addition to our Chairman, Mr. Miller, and President, Mr. Nash,
both of whom also serve as directors, our executive officers are listed below.

Claude E. Davis (42) has been President of Irwin Union Bank and Trust since
January 1996. He has been an officer since 1988.

Elena Delgado (47) has been President and Chief Executive Officer of Irwin
Home Equity since September 1994.

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Gregory F. Ehlinger (40) has been our Senior Vice President and Chief
Financial Officer since August of 1999. He has been one of our officers since
August 1992.

Paul D. Freudenthaler (38) joined us as Vice President -- Financial Risk
Management in December 2001. From September 2000 through November 2001, he was
Corporate Controller for America Online Latin America, an Internet service
provider. From July 2000 to August 2000 he served as Senior Vice President --
Treasurer of Telscape International, Inc., a development stage
telecommunications company. Prior thereto, he held the position of Chief
Accounting Officer of Telscape from July 1999 until June 2000. Subsequent to his
departure from Telscape, Telscape filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code on April 27, 2001. From February 1999
through June 1999, he was Director -- International of Bank United, F.S.B. From
January 1994 through January 1999, he was Director -- International of Irwin
Mortgage Corporation, our subsidiary.

Jose M. Gonzalez (44) has been our Vice President -- Internal Audit since
October 1995. In 2001, he was also appointed as Vice President -- Operational
Risk Management.

Robert H. Griffith (45) has been President and Chief Executive Officer of
Irwin Mortgage since January 2001. He has been an officer of Irwin Mortgage
since 1993.

Theresa L. Hall (50) has been our Vice President -- Human Resources since
1988 and has been one of our officers since 1980.

Bradley J. Kime (42) has been President of Irwin Union Bank F.S.B. since
December 2000, and is also Chief Operating Officer and Executive Vice President
of Irwin Union Bank and Trust. He has been an officer of Irwin Union Bank and
Trust since 1987, and one of our officers since 1986.

Joseph R. LaLeggia (41) has been our President of Irwin Commercial Finance
Corporation since July of 2002. From April 1998 to July of 2002 he was president
and chief executive officer of Onset Capital Corporation. From January 1997
until April of 1998 he was President of AT&T Capital Canada Inc. He held various
executive positions with AT&T Capital Canada since 1992, including Chief
Financial Officer.

Jody A. Littrell (35) has been our Vice President and Controller since
March 2000. He was employed with Arthur Andersen LLP from September 1990 to
March 2000.

Ellen Z. Mufson (54) has been our Vice President -- Legal and Assistant
Secretary since September 1997. She was Vice President -- Legal Counsel of Irwin
Union Bank and Trust from July 1996 through August 1997, and our Corporate
Counsel from January 1995 through June 1996.

Nancy Roth (46) has been our Vice President -- Assistant General Auditor
since May of 2002. She was employed by Bank One Corp. from May of 1995 through
May of 2002, becoming a Vice President and Accounting Manager with them in
February of 1996.

Steven R. Schultz (37) joined us as Vice President -- Legal in January
2002. From August 1999 through December 2001 he was an attorney in the London
office of Fried, Frank, Harris, Shriver & Jacobson, focusing primarily on
mergers and acquisitions, capital markets financings and private equity
transactions. From August 1993 until July 1999 he practiced corporate and
securities law at Barnes & Thornburg in Indianapolis, Indiana.

Matthew F. Souza (46) has been our Senior Vice President -- Ethics since
August 1999 and our Secretary since 1986. He has been one of our officers since
1986.

Thomas D. Washburn (56) has been our Executive Vice President since August
1999 and has been one of our officers since 1976. From 1981 to August 1999 he
served as our Senior Vice President and Chief Financial Officer.

Brett R. Vanderkolk (37) has been our Vice President -- Treasurer since
September 2000. From August 1996, to September 2000, he served as Manager,
Corporate Finance for Arvin Industries, Inc. (manufacturer of automotive
products).

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ITEM 2. PROPERTIES

Our main office and the main offices of Irwin Ventures LLC and Irwin Union
Credit Insurance Corporation are located at 500 Washington Street, Columbus,
Indiana, in space leased from Irwin Union Bank and Trust. The location and
general character of our other materially important physical properties as of
January 31, 2003 are as follows:

IRWIN MORTGAGE

The main office, where administrative and servicing activities are
centered, is located at 10500 Kincaid Drive, Fishers, Indiana, and is leased.
Loan production and satellite offices, which are leased, are operated from
approximately 153 locations in 34 states.

IRWIN UNION BANK AND TRUST

The main office is located in four connected buildings at 500, 520 and 526
Washington Street, Columbus, Indiana. Irwin Union Realty Corporation, a
wholly-owned subsidiary of Irwin Union Bank and Trust, owns these buildings in
fee and leases them to Irwin Union Bank and Trust. One or the other of Irwin
Union Bank and Trust or Irwin Union Realty owns the branch properties in fee at
5 locations in Columbus and Southern Indiana. These properties have no major
encumbrances. Irwin Union Bank and Trust leases 11 other branch offices in
Central and Southern Indiana, 4 offices in Michigan and 1 office in Nevada.

IRWIN UNION BANK, F.S.B.

The main office is located at 9300 Shelbyville Road, Louisville, Kentucky.
Irwin Union Bank, F.S.B. leases 4 branch offices located in Arizona, Missouri,
Nevada and Utah.

IRWIN HOME EQUITY

The main office is located at 12677 Alcosta Boulevard, Suite 500, San
Ramon, California. Irwin Home Equity also occupies two other offices in San
Ramon, California and a processing center in Carson City, Nevada. Irwin Home
Equity leases all of its offices.

IRWIN COMMERCIAL FINANCE CORPORATION

The main office of Irwin Commercial Finance Corporation is located at 500
Washington Street, Columbus, Indiana. The office location is leased. The office
of our United States commercial finance subsidiary, Irwin Business Finance, is
located in Bellevue, Washington and is leased. Our Canadian commercial finance
subsidiary, Onset Capital Corporation, has its main office in Vancouver, British
Columbia, Canada, and operates 8 other offices, including a subsidiary, in 4
Canadian provinces. All of these offices are leased. The main office of our
franchise leasing subsidiary, Irwin Franchise Capital Corporation, is located in
Purchase, New York and is leased. Irwin Franchise Capital owns the building that
houses its telemarketing center in Columbus, Nebraska, and has 8 other locations
in 6 states, all of which are leased.

ITEM 3. LEGAL PROCEEDINGS

Culpepper and related cases.

Irwin Mortgage (formerly, Inland Mortgage), our indirect subsidiary, is a
defendant in Culpepper v. Inland Mortgage Corporation, filed in April 1996, in
the United States District Court for the Northern District of Alabama by
borrowers purporting to represent a nationwide class. The lawsuit alleges that
Irwin Mortgage violated the federal Real Estate Settlement Procedures Act
(RESPA) in connection with certain payments made to mortgage brokers. A second
lawsuit alleging similar violations was consolidated with Culpepper. 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.

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In September, 2001, Irwin Mortgage received notice that it was named as a
defendant in Beggs v. Irwin Mortgage Corporation, also filed in the United
States District Court for the Northern District of Alabama. The plaintiff,
purporting to represent a nationwide class of borrowers, filed allegations
similar to those in Culpepper but seeks inclusion of borrowers not covered in
Culpepper (those with mortgage loans since early 1999 through the date of class
certification, if a class is certified). The plaintiff is asking the court to
certify a class and to consolidate the case with Culpepper.

On October 18, 2001, the Department of Housing and Urban Development (HUD),
the agency responsible for interpreting and implementing RESPA, issued a
clarifying Policy Statement that explicitly disagreed with the ruling of the
Court of Appeals for the 11(th) Circuit in Culpepper and with the court's
interpretation of RESPA in connection with the types of payments at issue in
Culpepper.

In response to the district court's order, the parties in Culpepper filed
supplemental briefs analyzing the import of the new HUD policy statement on
November 14, 2001. In addition to responding to the district court's order,
Irwin Mortgage filed a petition for certiorari with the United States Supreme
Court seeking review of the 11(th) Circuit's ruling, and on December 28, 2001,
also filed a motion in the district court seeking a stay of further proceedings
until the 11(th) Circuit rendered decisions in the other three RESPA cases
pending in that court. On January 22, 2002, the Supreme Court denied Irwin
Mortgage's petition for certiorari. On March 8, 2002, the district court granted
Irwin Mortgage's motion to stay proceedings in Culpepper until the 11(th)
Circuit decided the other RESPA cases pending in that court. The Beggs case was
similarly stayed.

The 11(th) Circuit has now rendered decisions in all three of the RESPA
cases originally argued before it with Culpepper. On September 18, 2002, the
11(th) Circuit issued the first of these decisions in Heimmermann v. First Union
Mortgage Corp., ruling that the trial court abused its discretion in certifying
a class action under RESPA. In Heimmermann, the court expressly recognized that
it was, in effect, overruling its previous decision in Culpepper. On January 24,
2003, the 11(th) Circuit affirmed the denial of class certification by the
district courts in the remaining two RESPA cases.

On February 20, 2003, the parties in Culpepper filed a joint motion for a
proposed scheduling order with the district court, which contemplates that Irwin
Mortgage will file a motion to decertify the class and the plaintiffs will file
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 Culpepper plaintiffs to
date to potential class members and additional notices that might be sent, we
believe the Culpepper class is not likely to exceed 32,000 borrowers who meet
the class specifications.

In addition to Culpepper and Beggs, there are three lawsuits, filed against
Irwin Mortgage in 2002 in the Circuit Court of Calhoun County, Alabama (Cook v
Irwin Mortgage, Ford v. Irwin Mortgage, and Hill v. Irwin Mortgage). These cases
seek class action status and allege claims based on payments similar to those at
issue in Culpepper. Another case, Gorman v. Irwin Mortgage, filed in 2002 in the
United States District Court for the Northern District of Alabama, alleges RESPA
violations both similar to and different from those in Culpepper in connection
with payments made to mortgage brokers. Before Irwin Mortgage filed an answer in
Gorman, the District Court granted plaintiff's motion to intervene in the Beggs
case.

Irwin Mortgage intends to defend these lawsuits vigorously and believes it
has numerous defenses to the alleged RESPA and similar violations. Irwin
Mortgage further believes that the 11(th) Circuit's recent RESPA decisions
provide grounds for reversal of the class certification by the district court in
Culpepper. We have no assurance, however, that Irwin Mortgage will be successful
in defeating class certification in Culpepper or ultimately prevailing on the
merits in that case or the others. We have not established a reserve for this or
the related cases. We are unable at this stage of the litigation to determine a
reasonable estimate of potential loss Irwin Mortgage could suffer, but an
adverse outcome in Culpepper or the other lawsuits could subject Irwin Mortgage
to substantial monetary damages that could be material to our financial
position.

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United States ex rel. Paranich v. Sorgnard et al.

In January, 2001, we, Irwin Leasing Corporation (formerly Affiliated
Capital Corp.), our indirect subsidiary, and Irwin Equipment Finance
Corporation, our direct subsidiary (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 (Matrix Biokinetics, Inc., and others) 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 in
part the motion of the Irwin companies by dismissing Irwin Financial and Irwin
Equipment Finance as defendants in the suit. Irwin Leasing remains a defendant.
We have not established any reserves for this case. Because the case is in the
early stages of litigation, management is unable at this time to form a
reasonable estimate of the amount of potential loss, if any, that Irwin Leasing
could suffer. The company intends to defend this lawsuit vigorously.

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 has deferred taking action on the
class certification issue until the district court rules on the motion for
reconsideration.

If the class is ultimately upheld, the actual number of plaintiff borrowers
will be determined only after a review of loan files. As specified, the
plaintiff class is 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. 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.

Stamper v. A Home of Your Own, Inc.

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

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

17

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 various
matters of litigation, when appropriate, based upon the advice of legal counsel.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of 2002, no matters were submitted to a vote of
our security holders, through the solicitation of proxies or otherwise.

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PART II

ITEM 5. MARKET FOR CORPORATION'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Until September 20, 2001, our common shares were quoted on the Nasdaq
National Market under the symbol "IRWN." Our common shares were approved for
listing on the New York Stock Exchange on September 5, 2001, and began trading
under the symbol "IFC" on September 21, 2001. The following table sets forth
certain information regarding trading in, and cash dividends paid with respect
to, the shares of our common stock in each quarter of the two most recent
calendar years. The approximate number of shareholders of record on March 10,
2003, was 1,856.

STOCK PRICES AND DIVIDENDS:

We expect to continue our policy of paying regular cash dividends, although
there is no assurance as to future dividends because they are dependent on
future earnings, capital requirements, and financial condition. On February 26,
2003, our Board of Directors approved an increase in the first quarter dividend
to $0.07 per share, payable in March 2003. Dividends paid by Irwin Union Bank
and Irwin Union Bank, F.S.B. to the Corporation are restricted by banking law.

SALES OF UNREGISTERED SECURITIES:

In 2002, we issued 6,360 shares of common stock pursuant to elections made
by six of our outside directors to receive board compensation under the 1999
Outside Director Restricted Stock Compensation Plan in lieu of cash fees. All of
these shares were issued in reliance on the private placement exemption from
registration provided in Section 4(2) of the Securities Act.

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ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR SELECTED FINANCIAL DATA

- ---------------

(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 year ended December 31, 2002 was $1.97 basic and $1.87
diluted. Earnings per share of common stock before cumulative effect of
change in accounting principle related to SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," for the year ended December
31, 2001 was $2.14 basic and $1.99 diluted.

(2) Net interest income divided by average interest-earning assets.

(3) Calculated on a tax-equivalent basis.

(4) Revenues consist of net interest income plus noninterest income.

(5) Noninterest expense divided by net interest income plus noninterest income.

(6) Excludes loans to be sold or securitized.

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ITEM 7. 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
"anticipate," "approximation," "assume," "assumptions," "attempt," "believe,"
"continue," "continuing," "could," "estimate," "expect," "expectation,"
"forecast," "future," "intend," "judgment," "likely," "may," "plan,"
"possibility," "probable," "project," "projections," "seek," "strategy,"
"resume," "unlikely," "will," "would," and similar expressions are intended to
identify forward-looking statements, which may include, among other things:

- statements and assumptions relating to projected growth, earnings,
earnings per share, and other financial performance measures as well as
management's short-term and long-term performance goals;

- statements relating to the anticipated effects on results of operations
or financial condition from recent and expected developments or events;

- statements relating to our business and growth strategies, including
potential acquisitions; and

- any other statements, projections or assumptions that are not historical
facts.

Forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause our actual results, performance or
achievements, or industry results, to differ materially from our expectations of
future results, performance or achievements expressed or implied by these
forward-looking statements. In addition, our past results of operations do not
necessarily indicate our future results. 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 to 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).

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CONSOLIDATED OVERVIEW

- ---------------

(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 year ended December 31, 2002 was $1.97 basic and $1.87
diluted. Earnings per share of common stock before cumulative effect of
change in accounting principle related to SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," for the year ended December
31, 2001 was $2.14 basic and $1.99 diluted.

We recorded net income of $53.3 million for the year ended December 31,
2002, up 17.2% from the $45.5 million for the year ended in 2001. Net income per
share (diluted) was $1.89 for the year ended December 31, 2002, down from $2.00
per share in 2001 and up from $1.67 per share in 2000. Return on equity was
16.66% for the year ended December 31, 2002, 21.82% in 2001 and 20.83% in 2000.

Strategy

Our strategy is to maintain a diverse and balanced revenue stream by
focusing on niches in financial services where we believe we can optimize the
productivity of our capital and where our experience and expertise can provide a
competitive advantage. Our operational objectives are premised on simultaneously
achieving three goals: creditworthiness, profitability and growth. We believe we
must continually balance these goals in order to deliver long-term value to all
of our stakeholders. We have developed a four-part business plan to meet these
goals:

- Identify underserved niches. We focus on product or market niches in
financial services that we believe are underserved and where we believe
customers are willing to pay a premium for value-added services. We don't
believe it is necessary to be the largest or leading market share company
in any of our product lines, but we do believe it is important that we
are viewed as a preferred provider in niche segments of those product
offerings.

- Hire exceptional management with niche expertise. We enter niches only
when we have attracted senior managers who have proven track records in
the niche for which they are responsible. Each line of our five lines of
business has a separate management team that operates its niche as a
separate business unit responsible for performance goals specific to that
particular line of business. Our structure allows the senior managers of
each line of business to focus their efforts on understanding their
customers and meeting the needs of the markets they serve. This structure
also promotes accountability among managers of each enterprise. The
senior managers at each of our lines of business and at the parent
company have significant experience with us and in their respective
industries. We attempt to create a mix of short-term and long-term
incentives (including, in some instances, minority interests in the line
of business) that provide these managers with the incentive to achieve
creditworthy, profitable growth over the long term.

- Diversify capital and earnings risk. We diversify our revenues and
allocate our capital across complementary lines of business as a key part
of our risk management. Our lines of business are cyclical, but when
combined in an appropriate mix, we believe they provide sources of
diversification and opportunities for growth in a variety of economic
conditions. For example, both the origination and servicing of
residential mortgage loans are very cyclical businesses, tied to changes
in interest rates. We believe our participation in these markets has been
profitable over time due to our dedication to participating in both
segments of the mortgage banking business, rather than one or the other,
which would otherwise leave us more susceptible to swings in interest
rates.

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- Reinvest in new opportunities. We reinvest on an ongoing basis in the
development of new and existing opportunities. As a result of our
attention to long-term value creation, we believe it is important at
times to limit short-term growth by investing for future return. We are
biased toward seeking new growth through organic expansion of existing
lines of business or the initiation of a new line through a start-up,
with highly qualified managers we select to focus on a single line of
business. Over the past ten years, we have made only a few acquisitions
and those have typically been in non-competitive bidding situations.

We believe our historical growth and profitability is the result of our
endeavors to pursue complementary consumer and commercial lending niches through
our bank holding company structure, our experienced management, our diverse
product and geographic markets, and our willingness and ability to align the
compensation structure of each of our lines of business with the interests of
our stakeholders. Through various economic environments and cycles, we have had
a relatively stable revenue and earnings stream on a consolidated basis
generated primarily through internal growth rather than acquisitions.

CONSOLIDATED INCOME STATEMENT ANALYSIS

Net Income

We recorded net income of $53.3 million for the year ended December 31,
2002, up 17.2% from net income of $45.5 million for the year ended December 31,
2001, and compared to $35.7 million in 2000. Net income per share (diluted) was
$1.89 for the year ended December 31, 2002, down from $2.00 per share in 2001
and up from $1.67 per share in 2000. Return on equity was 16.66% for the year
ended December 31, 2002, 21.82% in 2001 and 20.83% in 2000. The effective income
tax rate for 2002 was 39%, compared to 39% and 40% in 2001 and 2000,
respectively. Net income per share reflects dilution from our February 2002
common stock offering.

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Net Interest Income

Net interest income for the year ended December 31, 2002 totaled $213.6
million, up 45.1% from 2001 net interest income of $147.2 million and up 134.1%
from 2000. Net interest margin for the year ended December 31, 2002 was 6.02%
compared to 5.36% in 2001 and 5.38% in 2000. The improvement in margin from 2001
to 2002 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:

- ---------------

(1) Interest is reported on a fully taxable equivalent basis using a federal
income tax rate of 35%.

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

The following table sets forth, for the periods indicated, a summary of the
changes in interest earned and interest paid resulting from changes in volume
and rates for the major components of interest-earning assets and
interest-bearing liabilities on a fully taxable equivalent basis:

The variance not due solely to rate or volume has been allocated on the
basis of the absolute relationship between volume and rate variances.

Provision for Loan and Lease Losses

The consolidated provision for loan and lease losses for the year 2002 was
$44.0 million, compared to $17.5 million and $5.4 million in 2001 and 2000,
respectively. More information on this subject is contained in the section on
credit risk.

Noninterest Income

Noninterest income during the year 2002 totaled $257.4 million, compared to
$271.2 million for 2001 and $211.6 million in 2000. The decrease in 2002 versus
2001 was primarily a result of decreased gain from sale of loans at the home
equity lending line of business related to the transition away from
securitization structures accounted for using gain-on-sale accounting treatment
under SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Also contributing to the decrease is the higher
amortization and impairment expense related to mortgage servicing rights as a
result of declining interest rates.

Noninterest Expense

Noninterest expenses for the year ended December 31, 2002 totaled $340.9
million, compared to $326.7 million and $238.0 million in 2001 and 2000,
respectively. The increase in consolidated other expense in 2002 and 2001 is
primarily related to our mortgage banking line of business.

CONSOLIDATED BALANCE SHEET ANALYSIS

Total assets at December 31, 2002 were $4.9 billion, up 41.7% from December
31, 2001. 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 2002 were $4.0 billion up 27.8% from December
31, 2001, and up 98.0% from December 31, 2000. The growth in the consolidated
balance sheet reflects increases in portfolio loans and leases at the commercial
banking, home equity lending and commercial finance lines of business. Also,
there was significant growth in loans held for sale at the mortgage banking line
of business at December 31, 2002.

Loans

Our commercial loans are extended primarily to Midwest and Rocky Mountain
regional businesses and our leases are originated throughout the United States
and Canada. We also extend credit to consumers nationally 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. As of December 31, 2001,
$342.6 million of loans held for sale at the home equity lending line of
business were reclassified to loans held for investment. These loans are
included in the real estate mortgage category in the tables below. This
reclassification was the result of a management decision

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during 2001 to eliminate securitization structures that require gain on sale
accounting treatment under SFAS No. 140. Loans by major category for the periods
presented were as follows:

The following table shows our contractual maturity distribution of loans at
December 31, 2002. Actual principal payments may differ depending on customer
prepayments:

Investment Securities

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

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The following table shows maturity distribution of our investment
securities at December 31, 2002: