##### Table of Contents



UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the quarterly period ended June 30, 2005
 o
    
    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)
  þ Yes
    
    o No
  þ Yes
    
    o No




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##### Table of Contents



FORM 10-Q
TABLE OF CONTENTS
 PAGENO.PART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial Statements
    
    3Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    22Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    61Item 4
    
    Controls and Procedures
    
    61PART II
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    63Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    64Item 6
    
    Exhibits
    
    65Signatures
    
    68Code of By-lawsCertification of Chief Executive OfficerCertification of Chief Financial OfficerSection 906 Certification of Chief Executive OfficerSection 906 Certification of Chief Financial Officer
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION.
 
 Item 1. Financial Statements.
 IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
 June 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Assets:Cash and cash equivalents
    
    $
    173,416
    
    
    $
    97,101Interest-bearing deposits with financial institutions
    
    
    78,038
    
    
    
    58,936Residual interests
    
    
    44,122
    
    
    
    56,101Investment securities- held-to-maturity (Fair value: $4,673
at June 30, 2005 and $4,952 at December 31, 2004)
    
    
    4,664
    
    
    
    4,942Investment securities- available-for-sale
    
    
    103,049
    
    
    
    103,280Loans held for sale
    
    
    1,047,446
    
    
    
    890,711Loans and leases, net of unearned income  Note 2
    
    
    4,076,511
    
    
    
    3,450,440Less: Allowance for loan and lease losses  Note 3
    
    
    (50,935
    )
    
    
    (44,443
    )4,025,576
    
    
    
    3,405,997Servicing assets  Note 4
    
    
    287,390
    
    
    
    367,032Accounts receivable
    
    
    150,763
    
    
    
    122,131Accrued interest receivable
    
    
    18,402
    
    
    
    15,428Premises and equipment
    
    
    30,803
    
    
    
    30,240Other assets
    
    
    133,147
    
    
    
    87,442Total assets
    
    $
    6,096,816
    
    
    $
    5,239,341Liabilities and Shareholders Equity:DepositsNoninterest-bearing
    
    $
    1,091,352
    
    
    $
    975,925Interest-bearing
    
    
    1,899,589
    
    
    
    1,774,727Certificates of deposit over $100,000
    
    
    850,022
    
    
    
    644,6113,840,963
    
    
    
    3,395,263Short-term borrowings  Note 5
    
    
    402,491
    
    
    
    237,277Collateralized debt  Note 6
    
    
    809,673
    
    
    
    547,477Other long-term debt
    
    
    270,166
    
    
    
    270,172Other liabilities
    
    
    273,052
    
    
    
    286,508Total liabilities
    
    
    5,596,345
    
    
    
    4,736,697Commitments and contingencies  Note 10Shareholders equityPreferred stock, no par value  authorized 4,000,000 shares; none issued
    
    
    
    
    
    
    Common stock, no par value  authorized 40,000,000 shares; issued
29,612,080 shares as of June 30, 2005 and December 31, 2004,
including 1,059,448 and 1,159,684, shares in treasury as of
June 30, 2005 and December 31, 2004, respectively
    
    
    112,000
    
    
    
    112,000Additional paid-in capital
    
    
    
    
    
    
    383Deferred compensation
    
    
    (677
    )
    
    
    (660
    )Accumulated other comprehensive income, net of deferred income tax benefits
of $197 at June 30, 2005 and $129 as of December 31, 2004
    
    
    2,022
    
    
    
    2,454Retained earnings
    
    
    409,881
    
    
    
    413,486523,226
    
    
    
    527,663Less treasury stock, at cost
    
    
    (22,755
    )
    
    
    (25,019
    )Total shareholders equity
    
    
    500,471
    
    
    
    502,644Total liabilities and shareholders equity
    
    $
    6,096,816
    
    
    $
    5,239,341
  3




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##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 For the Three Months Ended June 30,2005
    
    2004(Dollars in thousands, except per share)Interest income:Loans and leases
    
    $
    71,940
    
    
    $
    58,425Loans held for sale
    
    
    21,595
    
    
    
    22,212Residual interests
    
    
    1,994
    
    
    
    3,285Investment securities
    
    
    1,836
    
    
    
    1,153Federal funds sold
    
    
    178
    
    
    
    21Total interest income
    
    
    97,543
    
    
    
    85,096Interest expense:Deposits
    
    
    18,124
    
    
    
    10,058Short-term borrowings
    
    
    4,158
    
    
    
    2,193Collateralized debt
    
    
    4,483
    
    
    
    2,914Other long-term debt
    
    
    5,933
    
    
    
    5,675Total interest expense
    
    
    32,698
    
    
    
    20,840Net interest income
    
    
    64,845
    
    
    
    64,256Provision for loan and lease losses  Note 3
    
    
    8,872
    
    
    
    1,794Net interest income after provision for loan and lease losses
    
    
    55,973
    
    
    
    62,462Other income:Loan servicing fees
    
    
    33,548
    
    
    
    33,621Amortization of servicing assets  Note 4
    
    
    (26,377
    )
    
    
    (29,656
    )(Impairment) recovery of servicing assets  Note 4
    
    
    (50,275
    )
    
    
    71,950Net loan administration (loss) income
    
    
    (43,104
    )
    
    
    75,915Gain from sales of loans
    
    
    21,538
    
    
    
    39,274Gain on sale of mortgage servicing assets
    
    
    5,471
    
    
    
    1,928Trading gains
    
    
    2,229
    
    
    
    6,669Derivative gains (losses), net
    
    
    28,616
    
    
    
    (54,092
    )Other
    
    
    7,663
    
    
    
    6,31422,413
    
    
    
    76,008Other expense:Salaries
    
    
    40,606
    
    
    
    54,783Pension and other employee benefits
    
    
    8,726
    
    
    
    10,938Office expense
    
    
    3,495
    
    
    
    4,942Premises and equipment
    
    
    8,613
    
    
    
    10,339Marketing and development
    
    
    2,284
    
    
    
    3,932Professional Fees
    
    
    3,282
    
    
    
    5,459Other
    
    
    13,132
    
    
    
    17,36480,138
    
    
    
    107,757(Loss) income before income taxes
    
    
    (1,752
    )
    
    
    30,713Provision for income taxes
    
    
    (608
    )
    
    
    12,769Net (loss) income
    
    $
    (1,144
    )
    
    $
    17,944Earnings per share:  Note 8Basic
    
    $
    (0.04
    )
    
    $
    0.64Diluted
    
    $
    (0.04
    )
    
    $
    0.60Dividends per share
    
    $
    0.10
    
    
    $
    0.08
  4




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##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 For the Six Months Ended June 30,2005
    
    2004(Dollars in thousands, except per share)Interest income:Loans and leases
    
    $
    137,431
    
    
    $
    119,671Loans held for sale
    
    
    40,166
    
    
    
    36,285Residual interests
    
    
    4,334
    
    
    
    6,543Investment securities
    
    
    3,551
    
    
    
    2,362Federal funds sold
    
    
    228
    
    
    
    38Total interest income
    
    
    185,710
    
    
    
    164,899Interest expense:Deposits
    
    
    32,798
    
    
    
    19,548Short-term borrowings
    
    
    7,267
    
    
    
    3,815Collateralized debt
    
    
    8,798
    
    
    
    6,719Other long-term debt
    
    
    11,789
    
    
    
    11,358Total interest expense
    
    
    60,652
    
    
    
    41,440Net interest income
    
    
    125,058
    
    
    
    123,459Provision for loan and lease losses  Note 3
    
    
    12,163
    
    
    
    9,940Net interest income after provision for loan and lease losses
    
    
    112,895
    
    
    
    113,519Other income:Loan servicing fees
    
    
    68,167
    
    
    
    66,198Amortization of servicing assets  Note 4
    
    
    (53,696
    )
    
    
    (61,343
    )(Impairment) recovery of servicing assets  Note 4
    
    
    (17,874
    )
    
    
    24,567Net loan administration (loss) income
    
    
    (3,403
    )
    
    
    29,422Gain from sales of loans
    
    
    56,062
    
    
    
    92,043Gain on sale of mortgage servicing assets
    
    
    6,656
    
    
    
    8,417Trading gains
    
    
    3,609
    
    
    
    11,342Derivative (losses) gains, net
    
    
    (8,163
    )
    
    
    4,824Other
    
    
    13,872
    
    
    
    12,41468,633
    
    
    
    158,462Other expense:Salaries
    
    
    90,623
    
    
    
    104,616Pension and other employee benefits
    
    
    20,770
    
    
    
    22,685Office expense
    
    
    7,315
    
    
    
    9,679Premises and equipment
    
    
    18,912
    
    
    
    20,794Marketing and development
    
    
    5,100
    
    
    
    7,567Professional Fees
    
    
    7,895
    
    
    
    9,303Other
    
    
    27,623
    
    
    
    33,549178,238
    
    
    
    208,193Income before income taxes
    
    
    3,290
    
    
    
    63,788Provision for income taxes
    
    
    810
    
    
    
    25,502Net income
    
    $
    2,480
    
    
    $
    38,286Earnings per share:  Note 8Basic
    
    $
    0.09
    
    
    $
    1.36Diluted
    
    $
    0.09
    
    
    $
    1.27Dividends per share
    
    $
    0.20
    
    
    $
    0.16
  5




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##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
For the Three Months Ended June 30, 2005, and 2004
 AccumulatedOther
    
    
    
    
    
    
    AdditionalRetained
    
    
    Comprehensive
    
    
    Deferred
    
    
    Paid in
    
    
    Common
    
    
    TreasuryTotal
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Compensation
    
    
    Capital
    
    
    Stock
    
    
    Stock(Dollars in thousands)Balance at April 1, 2005
    
    $
    503,849
    
    
    $
    414,034
    
    
    $
    2,036
    
    
    $
    (679
    )
    
    $
    
    
    
    $
    112,000
    
    
    $
    (23,542
    )Net loss
    
    
    (1,144
    )
    
    
    (1,144
    )Unrealized gain on investment
securities net of $110 tax liability
    
    
    165
    
    
    
    
    
    
    
    165Unrealized gain on interest rate hedge
net of $19 tax liability
    
    
    29
    
    
    
    
    
    
    
    29Foreign currency adjustment
    
    
    (208
    )
    
    
    
    
    
    
    (208
    )Total comprehensive loss
    
    
    (1,158
    )Deferred compensation
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Cash dividends
    
    
    (2,855
    )
    
    
    (2,855
    )Tax benefit on stock option exercises
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Treasury stock:Purchase of 7,240 shares
    
    
    (153
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (153
    )Sales of 40,824 shares
    
    
    758
    
    
    
    (154
    )
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    940Balance at June 30, 2005
    
    $
    500,471
    
    
    $
    409,881
    
    
    $
    2,022
    
    
    $
    (677
    )
    
    $
    
    
    
    $
    112,000
    
    
    $
    (22,755
    )Balance at April 1, 2004
    
    $
    453,185
    
    
    $
    370,728
    
    
    $
    90
    
    
    $
    (540
    )
    
    $
    595
    
    
    $
    112,000
    
    
    $
    (29,688
    )Net income
    
    
    17,944
    
    
    
    17,944Unrealized loss on investment
securities net of $92 tax benefit
    
    
    (138
    )
    
    
    
    
    
    
    (138
    )Unrealized gain on interest rate cap
net of $185 tax liability
    
    
    278
    
    
    
    
    
    
    
    278Foreign currency adjustment
    
    
    (159
    )
    
    
    
    
    
    
    (159
    )Total comprehensive income
    
    
    17,925Deferred compensation
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Cash dividends
    
    
    (2,262
    )
    
    
    (2,262
    )Tax benefit on stock option exercises
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Treasury stock:Purchase of 533 shares
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )Sales of 28,057 shares
    
    
    633
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    666Balance at June 30, 2004
    
    $
    469,486
    
    
    $
    386,410
    
    
    $
    71
    
    
    $
    (538
    )
    
    $
    579
    
    
    $
    112,000
    
    
    $
    (29,036
    )
  6




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##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
 For the Six Months Ended June 30, 2005, and 2004
 AccumulatedOther
    
    
    
    
    
    
    AdditionalRetained
    
    
    Comprehensive
    
    
    Deferred
    
    
    Paid in
    
    
    Common
    
    
    TreasuryTotal
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Compensation
    
    
    Capital
    
    
    Stock
    
    
    Stock(Dollars in thousands)Balance at January 1, 2005
    
    $
    502,644
    
    
    $
    413,486
    
    
    $
    2,454
    
    
    $
    (660
    )
    
    $
    383
    
    
    $
    112,000
    
    
    $
    (25,019
    )Net income
    
    
    2,480
    
    
    
    2,480Unrealized loss on investment
securities net of $87 tax benefit
    
    
    (131
    )
    
    
    
    
    
    
    (131
    )Unrealized gain on interest rate hedge
net of $19 tax liability
    
    
    28
    
    
    
    
    
    
    
    28Foreign currency adjustment
    
    
    (329
    )
    
    
    
    
    
    
    (329
    )Total comprehensive income
    
    
    2,048Deferred compensation
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    (17
    )Cash dividends
    
    
    (5,706
    )
    
    
    (5,706
    )Tax benefit on stock option exercises
    
    
    527
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    527Treasury stock:Purchase of 44,379 shares
    
    
    (1,061
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,061
    )Sales of 144,615 shares
    
    
    2,036
    
    
    
    (379
    )
    
    
    
    
    
    
    
    
    
    
    (910
    )
    
    
    
    
    
    
    3,325Balance at June 30, 2005
    
    $
    500,471
    
    
    $
    409,881
    
    
    $
    2,022
    
    
    $
    (677
    )
    
    $
    
    
    
    $
    112,000
    
    
    $
    (22,755
    )Balance at January 1, 2004
    
    $
    432,260
    
    
    $
    352,647
    
    
    $
    182
    
    
    $
    (504
    )
    
    $
    1,264
    
    
    $
    112,000
    
    
    $
    (33,329
    )Net income
    
    
    38,286
    
    
    
    38,286Unrealized loss on investment
securities net of $49 tax benefit
    
    
    (73
    )
    
    
    
    
    
    
    (73
    )Unrealized gain on interest rate cap
net of $131 tax liability
    
    
    196
    
    
    
    
    
    
    
    196Foreign currency adjustment
    
    
    (234
    )
    
    
    
    
    
    
    (234
    )Total comprehensive income
    
    
    38,175Deferred compensation
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    (34
    )Cash dividends
    
    
    (4,523
    )
    
    
    (4,523
    )Tax benefit on stock option exercises
    
    
    678
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    678Treasury stock:Purchase of 10,440 shares
    
    
    (347
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (347
    )Sales of 159,684 shares
    
    
    3,277
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,363
    )
    
    
    
    
    
    
    4,640Balance at June 30, 2004
    
    $
    469,486
    
    
    $
    386,410
    
    
    $
    71
    
    
    $
    (538
    )
    
    $
    579
    
    
    $
    112,000
    
    
    $
    (29,036
    )
  7




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##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 For the Six Months Ended June 30,2005
    
    2004(Dollars in thousands)Net income
    
    $
    2,480
    
    
    $
    38,286Adjustments to reconcile net income to cash provided (used)
by operating activities:Depreciation, amortization, and accretion, net
    
    
    5,962
    
    
    
    3,536Amortization and impairment of servicing assets
    
    
    71,570
    
    
    
    36,776Provision for loan and lease losses
    
    
    12,163
    
    
    
    9,940Gain on sale of mortgage servicing assets
    
    
    (6,656
    )
    
    
    (8,417
    )Gain from sales of loans held for sale
    
    
    (56,062
    )
    
    
    (92,043
    )Originations and purchases of loans held for sale
    
    
    (6,474,996
    )
    
    
    (7,504,513
    )Proceeds from sales and repayments of loans held for sale
    
    
    6,329,058
    
    
    
    7,208,754Proceeds from sale of mortgage servicing assets
    
    
    59,424
    
    
    
    28,527Net decrease (increase) in residuals
    
    
    11,979
    
    
    
    (2,899
    )Net increase in accounts receivable
    
    
    (28,632
    )
    
    
    (15,076
    )Other, net
    
    
    (64,764
    )
    
    
    15,800Net cash used by operating activities
    
    
    (138,474
    )
    
    
    (281,329
    )Lending and investing activities:Proceeds from maturities/calls of investment securities:Held-to-maturity
    
    
    274
    
    
    
    52,876Available-for-sale
    
    
    2,712
    
    
    
    1,257Purchase of investment securities:Held-to-maturity
    
    
    
    
    
    
    (73,404
    )Available-for-sale
    
    
    (2,751
    )
    
    
    (9,975
    )Net increase in interest-bearing deposits
    
    
    (19,102
    )
    
    
    (7,422
    )Net increase in loans, excluding sales
    
    
    (652,444
    )
    
    
    (93,055
    )Proceeds from sale of loans
    
    
    21,271
    
    
    
    31,416Other, net
    
    
    (4,429
    )
    
    
    (2,837
    )Net cash used by lending and investing activities
    
    
    (654,469
    )
    
    
    (101,144
    )Financing activities:Net increase in deposits
    
    
    445,700
    
    
    
    461,602Net increase in short-term borrowings
    
    
    165,214
    
    
    
    226,102Repayments of long-term debt
    
    
    (6
    )
    
    
    (6
    )Proceeds from issuance of collateralized borrowings
    
    
    425,154
    
    
    
    32,862Repayments of collateralized borrowings
    
    
    (162,958
    )
    
    
    (328,685
    )Purchase of treasury stock for employee benefit plans
    
    
    (1,061
    )
    
    
    (347
    )Proceeds from sale of stock for employee benefit plans
    
    
    2,563
    
    
    
    3,955Dividends paid
    
    
    (5,706
    )
    
    
    (4,523
    )Net cash provided by financing activities
    
    
    868,900
    
    
    
    390,960Effect of exchange rate changes on cash
    
    
    358
    
    
    
    (91
    )Net increase in cash and cash equivalents
    
    
    76,315
    
    
    
    8,396Cash and cash equivalents at beginning of period
    
    
    97,101
    
    
    
    140,810Cash and cash equivalents at end of period
    
    $
    173,416
    
    
    $
    149,206Supplemental disclosures of cash flow information:Cash flow during the period:Interest paid
    
    $
    58,552
    
    
    $
    41,975Income taxes paid (refund)
    
    $
    4,366
    
    
    $
    (21,466
    )Noncash transactions:Liability for loans held for sale eligible for repurchase
    
    $
    17,346
    
    
    $
    68,968
  8




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1
  Accounting Policies, Management Judgments and Accounting Estimates
 Consolidation:
 Use of Estimates:
 Cash and Cash Equivalents Defined:
 Residual Interests:
 Allowance for Loan and Lease Losses:
  Servicing Assets:
 9




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##### Table of Contents



Incentive Servicing Fees:
 Stock-Based Employee Compensation:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)Net (loss) income as reported
    
    $
    (1,144
    )
    
    $
    17,944
    
    
    $
    2,480
    
    
    $
    38,286Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (543
    )
    
    
    (668
    )
    
    
    (1,073
    )
    
    
    (1,300
    )Pro forma net (loss) income
    
    $
    (1,687
    )
    
    $
    17,276
    
    
    $
    1,407
    
    
    $
    36,986Basic earnings per shareAs reported
    
    $
    (0.04
    )
    
    $
    0.64
    
    
    $
    0.09
    
    
    $
    1.36Pro forma
    
    $
    (0.06
    )
    
    $
    0.61
    
    
    $
    0.05
    
    
    $
    1.31Diluted earnings per shareAs reported
    
    $
    (0.04
    )
    
    $
    0.60
    
    
    $
    0.09
    
    
    $
    1.27Pro forma
    
    $
    (0.06
    )
    
    $
    0.58
    
    
    $
    0.04
    
    
    $
    1.23
 Income Taxes:
 Recent Accounting Developments:
 10




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##### Table of Contents



Reclassifications:
 Note 2  Loans and Leases
  June 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Commercial, financial and agricultural
    
    $
    1,848,143
    
    
    $
    1,697,651Real estate-construction
    
    
    364,926
    
    
    
    287,496Real estate-mortgage
    
    
    1,130,037
    
    
    
    808,875Consumer
    
    
    39,505
    
    
    
    31,166Commercial financeFranchise finance
    
    
    373,737
    
    
    
    330,496Domestic leasing
    
    
    197,585
    
    
    
    174,035Canadian leasing
    
    
    281,930
    
    
    
    265,780Unearned incomeFranchise finance
    
    
    (96,538
    )
    
    
    (86,638
    )Domestic leasing
    
    
    (27,329
    )
    
    
    (23,924
    )Canadian leasing
    
    
    (35,485
    )
    
    
    (34,497
    )Total loans and leases, net of unearned income
    
    $
    4,076,511
    
    
    $
    3,450,440
 Note 3  Allowance for Loan and Lease Losses
  As of and For the
    
    
    As of and For theSix Months Ended
    
    
    Year EndedJune 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Balance at beginning of period
    
    $
    44,443
    
    
    $
    64,285Provision for loan and lease losses
    
    
    12,163
    
    
    
    14,195Charge-offs
    
    
    (9,440
    )
    
    
    (28,180
    )Recoveries
    
    
    4,044
    
    
    
    5,335Reduction due to reclassification of loans
    
    
    
    
    
    
    (10,808
    )Reduction due to sale of loans and leases and other
    
    
    (217
    )
    
    
    (627
    )Foreign currency adjustment
    
    
    (58
    )
    
    
    243Balance at end of period
    
    $
    50,935
    
    
    $
    44,443
 11




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##### Table of Contents



Note 4  Servicing Assets
  As of and For the
    
    
    As of and For theSix Months Ended
    
    
    Year EndedJune 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Beginning balance
    
    $
    367,032
    
    
    $
    380,123Additions
    
    
    44,696
    
    
    
    142,689Amortization
    
    
    (53,696
    )
    
    
    (117,143
    )Impairment
    
    
    (17,874
    )
    
    
    (2,474
    )Reduction for servicing sales
    
    
    (52,768
    )
    
    
    (36,163
    )$
    287,390
    
    
    $
    367,032
  June 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Balance at beginning of year
    
    $
    54,134
    
    
    $
    76,869Impairment
    
    
    17,874
    
    
    
    2,474Reclass for sales of servicing
    
    
    
    
    
    
    (18,210
    )Other than temporary impairment (1)
    
    
    (7,111
    )
    
    
    (6,999
    )Balance at end of period
    
    $
    64,897
    
    
    $
    54,134
 
 (1)
    Other than temporary impairment was recorded to reflect
our view that the originally recorded value of certain servicing rights and
subsequent impairment associated with those rights is unlikely to be
recovered in market value. There was no related direct impact on net income
as this other than temporary impairment affected only balance sheet
accounts. However, the write-down will result in a reduction of amortization
expense and potentially reduced recovery of impairment in future
periods. Note 5  Short-Term Borrowings
  June 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Federal Home Loan Bank borrowings
    
    $
    146,793
    
    
    $
    71,826Drafts payable related to mortgage loan closings
    
    
    124,739
    
    
    
    53,254Lines of credit and other
    
    
    2,359
    
    
    
    2,197Federal funds
    
    
    128,600
    
    
    
    110,000Total
    
    $
    402,491
    
    
    $
    237,277Weighted average interest rate
    
    
    2.15
    %
    
    
    1.64
    %
 12




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##### Table of Contents



Note 6  Collateralized Debt
   WeightedAverageInterest Rate atJune 30,
    
    
    June 30,
    
    
    December 31,Maturity
    
    
    2005
    
    
    2005
    
    
    2004(Dollars in thousands)Commercial finance line of business2003 domestic asset backed note
    
    
    7/2010
    
    
    
    4.52
    
    
    $
    20,182
    
    
    $
    29,050Canadian asset backed note
    
    
    4/2010
    
    
    
    3.36
    
    
    
    117,909
    
    
    
    95,288Canadian asset backed note
    
    
    10/2009
    
    
    
    4.50
    
    
    
    17,798
    
    
    
    21,713Canadian asset backed note
    
    revolving
    
    
    3.73
    
    
    
    50,236
    
    
    
    48,801Home equity line of business2004-1 asset backed notes:Combined variable rate senior notes
    
    
    12/2024-12/2034
    
    
    
    3.44
    
    
    
    228,013
    
    
    
    327,850Combined variable rate subordinate notes
    
    
    12/2034
    
    
    
    4.29
    
    
    
    24,775
    
    
    
    24,7752005-1 asset backed notes:Combined variable rate senior notes
    
    
    6/2025-6/2035
    
    
    
    3.50
    
    
    
    193,894Combined fixed rate senior notes
    
    
    6/2035
    
    
    
    5.01
    
    
    
    94,129Combined variable rate subordinate notes
    
    
    6/2035
    
    
    
    5.09
    
    
    
    10,785Combined fixed rate subordinate notes
    
    
    6/2035
    
    
    
    5.63
    
    
    
    52,127Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    (175
    )Total
    
    
    
    
    
    
    
    
    
    $
    809,673
    
    
    $
    547,477
  13




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##### Table of Contents



Note 7  Employee Retirement Plans
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)
    
    
    (Dollars in thousands)Service cost
    
    $
    747
    
    
    $
    494
    
    
    $
    1,428
    
    
    $
    988Interest cost
    
    
    455
    
    
    
    456
    
    
    
    871
    
    
    
    911Expected return on plan assets
    
    
    (510
    )
    
    
    (404
    )
    
    
    (956
    )
    
    
    (809
    )Amortization of transition obligation
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    5Amortization of prior service cost
    
    
    10
    
    
    
    9
    
    
    
    19
    
    
    
    19Amortization of actuarial loss
    
    
    179
    
    
    
    176
    
    
    
    343
    
    
    
    351Net periodic benefit cost
    
    $
    881
    
    
    $
    733
    
    
    $
    1,705
    
    
    $
    1,465
  Note 8  Earnings Per Share
  Effect of
    
    
    DilutedBasic Earnings
    
    
    Effect of
    
    
    Convertible
    
    
    EarningsPer Share
    
    
    Stock Options
    
    
    Shares *
    
    
    Per Share(Dollars in thousands, except per share data)Three months ended June 30, 2005Net income (loss) available to common shareholders
    
    $
    (1,144
    )
    
    $
    
    
    
    $
    
    
    
    $
    (1,144
    )Shares
    
    
    28,506
    
    
    
    240
    
    
    
    
    
    
    
    28,746Per-Share amount
    
    $
    (0.04
    )
    
    $
    
    
    
    $
    
    
    
    $
    (0.04
    )Three months ended June 30, 2004Net income available to common shareholders
    
    $
    17,944
    
    
    $
    
    
    
    $
    678
    
    
    $
    18,622Shares
    
    
    28,244
    
    
    
    334
    
    
    
    2,607
    
    
    
    31,185Per-Share amount
    
    $
    0.64
    
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    0.60Six Months ended June 30, 2005Net income available to common shareholders
    
    $
    2,480
    
    
    $
    
    
    
    $
    
    
    
    $
    2,480Shares
    
    
    28,482
    
    
    
    288
    
    
    
    
    
    
    
    28,770Per-Share amount
    
    $
    0.09
    
    
    $
    
    
    
    $
    
    
    
    $
    0.09Six Months ended June 30, 2004Net income available to common shareholders
    
    $
    38,286
    
    
    $
    
    
    
    $
    1,356
    
    
    $
    39,642Shares
    
    
    28,218
    
    
    
    422
    
    
    
    2,607
    
    
    
    31,247Per-Share amount
    
    $
    1.36
    
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    1.27
  *
    
    The effect of convertible shares was not included in this calculation for 2005 because they
were antidilutive. 14




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##### Table of Contents



Note 9  Industry Segment Information
   15




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##### Table of Contents



Mortgage
    
    
    Commercial
    
    
    Home Equity
    
    
    CommercialBanking
    
    
    Banking
    
    
    Lending
    
    
    Finance
    
    
    Other
    
    
    Consolidated(Dollars in thousands)Three Months Ended June 30, 2005Net interest income
    
    $
    10,317
    
    
    $
    23,976
    
    
    $
    28,475
    
    
    $
    8,340
    
    
    $
    (6,263
    )
    
    $
    64,845Intersegment interest
    
    
    (1,291
    )
    
    
    3,001
    
    
    
    (7,282
    )
    
    
    (412
    )
    
    
    5,984
    
    
    
    Provision for loan and lease losses
    
    
    94
    
    
    
    (1,575
    )
    
    
    (6,181
    )
    
    
    (1,211
    )
    
    
    1
    
    
    
    (8,872
    )Other revenue
    
    
    2,710
    
    
    
    3,742
    
    
    
    13,839
    
    
    
    1,351
    
    
    
    771
    
    
    
    22,413Intersegment revenues
    
    
    34
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    (98
    )
    
    
    Total net revenues
    
    
    11,864
    
    
    
    29,208
    
    
    
    28,851
    
    
    
    8,068
    
    
    
    395
    
    
    
    78,386Other expense
    
    
    26,849
    
    
    
    19,416
    
    
    
    25,203
    
    
    
    5,453
    
    
    
    3,217
    
    
    
    80,138Intersegment expenses
    
    
    861
    
    
    
    428
    
    
    
    747
    
    
    
    193
    
    
    
    (2,229
    )
    
    
    Income (loss) before taxes
    
    
    (15,846
    )
    
    
    9,364
    
    
    
    2,901
    
    
    
    2,422
    
    
    
    (593
    )
    
    
    (1,752
    )Income taxes
    
    
    (6,685
    )
    
    
    3,750
    
    
    
    1,171
    
    
    
    993
    
    
    
    163
    
    
    
    (608
    )Net income (loss)
    
    $
    (9,161
    )
    
    $
    5,614
    
    
    $
    1,730
    
    
    $
    1,429
    
    
    $
    (756
    )
    
    $
    (1,144
    )Three Months Ended June 30, 2004Net interest income
    
    $
    11,909
    
    
    $
    20,441
    
    
    $
    29,646
    
    
    $
    6,881
    
    
    $
    (4,621
    )
    
    $
    64,256Intersegment interest
    
    
    (128
    )
    
    
    750
    
    
    
    (3,487
    )
    
    
    
    
    
    
    2,865
    
    
    
    Provision for loan and lease losses
    
    
    284
    
    
    
    (750
    )
    
    
    706
    
    
    
    (2,034
    )
    
    
    
    
    
    
    (1,794
    )Other revenue
    
    
    53,834
    
    
    
    4,918
    
    
    
    14,833
    
    
    
    2,622
    
    
    
    (199
    )
    
    
    76,008Intersegment revenues
    
    
    12
    
    
    
    143
    
    
    
    
    
    
    
    
    
    
    
    (155
    )
    
    
    Total net revenues
    
    
    65,911
    
    
    
    25,502
    
    
    
    41,698
    
    
    
    7,469
    
    
    
    (2,110
    )
    
    
    138,470Other expense
    
    
    55,835
    
    
    
    15,492
    
    
    
    26,129
    
    
    
    4,892
    
    
    
    5,409
    
    
    
    107,757Intersegment expenses
    
    
    881
    
    
    
    374
    
    
    
    726
    
    
    
    173
    
    
    
    (2,154
    )
    
    
    Income (loss) before taxes
    
    
    9,195
    
    
    
    9,636
    
    
    
    14,843
    
    
    
    2,404
    
    
    
    (5,365
    )
    
    
    30,713Income taxes
    
    
    3,680
    
    
    
    3,867
    
    
    
    5,945
    
    
    
    1,087
    
    
    
    (1,810
    )
    
    
    12,769Net income (loss)
    
    $
    5,515
    
    
    $
    5,769
    
    
    $
    8,898
    
    
    $
    1,317
    
    
    $
    (3,555
    )
    
    $
    17,944
 Mortgage
    
    
    Commercial
    
    
    Home Equity
    
    
    CommercialBanking
    
    
    Banking
    
    
    Lending
    
    
    Finance
    
    
    Other
    
    
    Consolidated(Dollars in thousands)Six Months Ended June 30, 2005Net interest income
    
    $
    19,934
    
    
    $
    46,878
    
    
    $
    53,856
    
    
    $
    16,388
    
    
    $
    (11,998
    )
    
    $
    125,058Intersegment interest
    
    
    (3,185
    )
    
    
    4,659
    
    
    
    (12,231
    )
    
    
    (847
    )
    
    
    11,604
    
    
    
    Provision for loan and lease losses
    
    
    283
    
    
    
    (2,575
    )
    
    
    (6,551
    )
    
    
    (3,321
    )
    
    
    1
    
    
    
    (12,163
    )Other revenue
    
    
    20,548
    
    
    
    8,057
    
    
    
    36,542
    
    
    
    3,259
    
    
    
    227
    
    
    
    68,633Intersegment revenues
    
    
    58
    
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    (188
    )
    
    
    Total net revenues
    
    
    37,638
    
    
    
    57,149
    
    
    
    71,616
    
    
    
    15,479
    
    
    
    (354
    )
    
    
    181,528Other expense
    
    
    67,418
    
    
    
    37,742
    
    
    
    55,698
    
    
    
    11,447
    
    
    
    5,933
    
    
    
    178,238Intersegment expenses
    
    
    1,702
    
    
    
    857
    
    
    
    1,473
    
    
    
    385
    
    
    
    (4,417
    )
    
    
    Income (loss) before taxes
    
    
    (31,482
    )
    
    
    18,550
    
    
    
    14,445
    
    
    
    3,647
    
    
    
    (1,870
    )
    
    
    3,290Income taxes
    
    
    (12,703
    )
    
    
    7,467
    
    
    
    5,795
    
    
    
    1,522
    
    
    
    (1,271
    )
    
    
    810Net income (loss)
    
    $
    (18,779
    )
    
    $
    11,083
    
    
    $
    8,650
    
    
    $
    2,125
    
    
    $
    (599
    )
    
    $
    2,480Assets at June 30, 2005
    
    $
    1,298,455
    
    
    $
    3,031,659
    
    
    $
    1,413,569
    
    
    $
    711,355
    
    
    $
    (358,222
    )
    
    $
    6,096,816Six Months Ended June 30, 2004Net interest income
    
    $
    20,995
    
    
    $
    40,197
    
    
    $
    56,720
    
    
    $
    13,635
    
    
    $
    (8,088
    )
    
    $
    123,459Intersegment interest
    
    
    (552
    )
    
    
    1,540
    
    
    
    (5,867
    )
    
    
    
    
    
    
    4,879
    
    
    
    Provision for loan and lease losses
    
    
    390
    
    
    
    (1,950
    )
    
    
    (5,193
    )
    
    
    (3,187
    )
    
    
    
    
    
    
    (9,940
    )Other revenue
    
    
    113,692
    
    
    
    9,552
    
    
    
    32,490
    
    
    
    3,070
    
    
    
    (342
    )
    
    
    158,462Intersegment revenues
    
    
    22
    
    
    
    285
    
    
    
    
    
    
    
    
    
    
    
    (307
    )
    
    
    Total net revenues
    
    
    134,547
    
    
    
    49,624
    
    
    
    78,150
    
    
    
    13,518
    
    
    
    (3,858
    )
    
    
    271,981Other expense
    
    
    107,437
    
    
    
    30,051
    
    
    
    50,791
    
    
    
    8,917
    
    
    
    10,997
    
    
    
    208,193Intersegment expenses
    
    
    1,748
    
    
    
    897
    
    
    
    1,450
    
    
    
    346
    
    
    
    (4,441
    )
    
    
    Income (loss) before taxes
    
    
    25,362
    
    
    
    18,676
    
    
    
    25,909
    
    
    
    4,255
    
    
    
    (10,414
    )
    
    
    63,788Income taxes
    
    
    10,114
    
    
    
    7,489
    
    
    
    10,378
    
    
    
    3,231
    
    
    
    (5,710
    )
    
    
    25,502Net income (loss)
    
    $
    15,248
    
    
    $
    11,187
    
    
    $
    15,531
    
    
    $
    1,024
    
    
    $
    (4,704
    )
    
    $
    38,286Assets at June 30, 2004
    
    $
    1,353,464
    
    
    $
    2,512,848
    
    
    $
    1,229,790
    
    
    $
    520,883
    
    
    $
    (191,813
    )
    
    $
    5,425,172
 16




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##### Table of Contents



Note 10  Commitments and Contingencies
 Culpepper v. Inland Mortgage Corporation
      United States ex rel. Paranich v. Sorgnard et al.
 rd
 17




---



##### Table of Contents



Stamper v. A Home of Your Own
  Silke v. Irwin Mortgage Corporation
  Cohens v. Inland Mortgage Corporation
  Litigation in Connection with Loans Purchased from Community Bank of Northern Virginia
  Hobson v. Irwin Union Bank and Trust Company Hobson Hobson Hobson
 Kossler v. Community Bank of Northern Virginia Kossler Kossler
 Hobson Kossler
 18




---



##### Table of Contents



Hobson, Hobson
 Hobson Kossler Hobson Hobson Kossler
 (Chatfield v. Irwin Union Bank and Trust Company, et al. and Ransom v. Irwin
Union Bank and Trust Company, et al.) Hobson, Chatfield and Ransom.
 Hobson, Chatfield Ransom Kossler
  Litigation Related to NorVergence, Inc.
  Exquisite Caterers, LLC et al. v. Popular Leasing et al. Exquisite Caterers Exquisite Caterers
 19




---



##### Table of Contents



Delanco
Board of Education et al. v. IFC Credit Corporation, Exquisite Caterers,
 Sterling
Asset & Equity Corp. et al. v. Preferred Capital, Inc. et al.
  (State of Florida v. Commerce Commercial Leasing, LLC et al.). Commerce Commercial
Leasing
     20




---



##### Table of Contents



21




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 About Forward-looking Statements
   
    
    our projected revenues, earnings or earnings per share, as well as managements
short-term and long-term performance goals;
    
    projected trends or potential changes in our asset quality, loan delinquencies,
asset valuations, capital ratios or financial performance measures;
    
    our plans and strategies, including the expected results or impact of implementing such plans and strategies;
    
    potential litigation developments and the anticipated impact of potential outcomes of pending legal matters;
    
    the anticipated effects on results of operations or financial condition from recent developments or events; and
    
    any other projections or expressions that are not historical facts.
  
    
    potential changes in and volatility of interest rates, which may affect consumer
demand for our products and the management and success of our interest rate risk
management strategies;
    
    staffing fluctuations in response to product demand;
    
    the relative profitability of our lending operations;
    
    the valuation and management of our residual, servicing and derivative portfolios,
including assumptions we embed in the valuation and short-term swings in valuation of
such portfolios due to quarter-end movements in secondary market interest rates, which
are inherently volatile;
    
    borrowers refinancing opportunities, which may affect the prepayment assumptions
used in our valuation estimates and which may affect loan demand;
    
    unanticipated deterioration in the credit quality of our loan and lease assets;
    
    unanticipated deterioration in or changes in estimates of the carrying value of our other assets, including securities;
    
    difficulties in delivering products to the secondary market as planned;
    
    difficulties in expanding our businesses and obtaining funding 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;
    
    unanticipated outcomes in litigation;
    
    legislative or regulatory changes, including changes in tax laws or regulations,
changes in the interpretation of regulatory capital rules, changes in consumer or
commercial lending rules, disclosure rules, or rules affecting corporate governance, and
the availability of resources to address these rules;
    
    changes in applicable accounting policies or principles or their application to our
business or final audit adjustments; and
    
    governmental changes in monetary or fiscal policies.
  22




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##### Table of Contents



Strategy
  
    
    Identify underserved niches.We focus on product or market niches in financial services
that we believe are underservedand 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 managerswho have proven track records in the niche for which they are
responsible. Each of our four lines of business has a separate management team that operates
as an independent 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 industry experience. We attempt to create a mix of short-term and long-term
incentives that provide these managers with the incentive to achieve creditworthy,
profitable growthover the long term.
    
    Diversify capital and earnings risk.We diversifyour revenuesand 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.
    
    Reinvest in new opportunities.We reinveston 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 dampen short-term earnings growth by investing for
future return. We are biased toward seeking new growth through organic expansion of existing
lines of business. At times we will initiate 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. Those have typically not been in competitive bidding
situations.
  Critical Accounting Policies/Management Judgments and Accounting Estimates
  Incentive Servicing Fees:
 23




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##### Table of Contents



Consolidated Overview


For the three months ended June 30,
    
    For the six months ended June 30,2005
    
    2004
    
    2005
    
    2004Net income (loss) (in millions)
    
    $
    (1.1
    )
    
    $
    17.9
    
    
    $
    2.5
    
    
    $
    38.3Basic earnings per share
    
    
    (0.04
    )
    
    
    0.64
    
    
    
    0.09
    
    
    
    1.36Diluted earnings per share
    
    
    (0.04
    )
    
    
    0.60
    
    
    
    0.09
    
    
    
    1.27Return on average equity
    
    
    (0.9
    )%
    
    
    15.4
    %
    
    
    1.0
    %
    
    
    15.8
    %Return on average assets
    
    
    (0.1
    )
    
    
    1.4
    
    
    
    0.1
    
    
    
    1.5


Consolidated Income Statement Analysis


Net Income
   Net Interest Income
  24




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##### Table of Contents



For the Six Months Ended June 30,2005
    
    
    2004Annualized
    
    
    
    
    
    
    
    
    
    
    AnnualizedAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)AssetsInterest-earning assets:Interest-bearing deposits with financial institutions
    
    $
    75,650
    
    
    $
    658
    
    
    
    1.75
    %
    
    $
    86,791
    
    
    $
    288
    
    
    
    0.67
    %Federal funds sold
    
    
    20,143
    
    
    
    228
    
    
    
    2.28
    %
    
    
    9,057
    
    
    
    38
    
    
    
    0.84
    %Residual interests
    
    
    50,142
    
    
    
    4,334
    
    
    
    17.43
    %
    
    
    71,759
    
    
    
    6,543
    
    
    
    18.34
    %Investment securities (1)
    
    
    108,072
    
    
    
    2,893
    
    
    
    5.40
    %
    
    
    81,509
    
    
    
    2,074
    
    
    
    5.12
    %Loans held for sale
    
    
    1,067,982
    
    
    
    40,166
    
    
    
    7.58
    %
    
    
    974,730
    
    
    
    36,285
    
    
    
    7.49
    %Loans and leases, net of unearned income(2)
    
    
    3,554,203
    
    
    
    137,431
    
    
    
    7.80
    %
    
    
    3,205,776
    
    
    
    119,671
    
    
    
    7.51
    %Total interest earning assets
    
    
    4,876,192
    
    
    $
    185,710
    
    
    
    7.68
    %
    
    
    4,429,622
    
    
    $
    164,899
    
    
    
    7.49
    %Noninterest-earning assets:Cash and due from banks
    
    
    102,685
    
    
    
    
    
    
    
    
    
    
    
    108,951Premises and equipment, net
    
    
    30,057
    
    
    
    
    
    
    
    
    
    
    
    30,988Other assets
    
    
    601,751
    
    
    
    
    
    
    
    
    
    
    
    568,343Less allowance for loan and lease losses
    
    
    (45,730
    )
    
    
    
    
    
    
    
    
    
    
    (60,665
    )Total assets
    
    $
    5,564,955
    
    
    
    
    
    
    
    
    
    
    $
    5,077,239Liabilities and Shareholders EquityInterest-bearing liabilities:Money market checking
    
    $
    489,485
    
    
    $
    4,692
    
    
    
    1.93
    %
    
    $
    247,635
    
    
    $
    1,223
    
    
    
    0.99
    %Money market savings
    
    
    1,099,007
    
    
    
    11,950
    
    
    
    2.19
    %
    
    
    968,869
    
    
    
    6,321
    
    
    
    1.31
    %Regular savings
    
    
    99,697
    
    
    
    600
    
    
    
    1.21
    %
    
    
    60,711
    
    
    
    440
    
    
    
    1.46
    %Time deposits
    
    
    1,003,364
    
    
    
    15,556
    
    
    
    3.13
    %
    
    
    903,905
    
    
    
    11,564
    
    
    
    2.57
    %Short-term borrowings
    
    
    303,331
    
    
    
    7,267
    
    
    
    4.83
    %
    
    
    381,817
    
    
    
    3,815
    
    
    
    2.01
    %Collateralized debt
    
    
    508,324
    
    
    
    8,798
    
    
    
    3.49
    %
    
    
    487,706
    
    
    
    6,719
    
    
    
    2.77
    %Other long-term debt
    
    
    270,169
    
    
    
    11,789
    
    
    
    8.80
    %
    
    
    270,166
    
    
    
    11,358
    
    
    
    8.45
    %Total interest-bearing liabilities
    
    $
    3,773,377
    
    
    $
    60,652
    
    
    
    3.24
    %
    
    $
    3,320,809
    
    
    $
    41,440
    
    
    
    2.51
    %Noninterest-bearing liabilities:Demand deposits
    
    
    1,000,818
    
    
    
    
    
    
    
    
    
    
    
    999,088Other liabilities
    
    
    288,800
    
    
    
    
    
    
    
    
    
    
    
    305,563Shareholders equity
    
    
    501,960
    
    
    
    
    
    
    
    
    
    
    
    451,779Total liabilities and shareholders equity
    
    $
    5,564,955
    
    
    
    
    
    
    
    
    
    
    $
    5,077,239Net interest income
    
    
    
    
    
    $
    125,058
    
    
    
    
    
    
    
    
    
    
    $
    123,459Net interest income to average
interest earning assets
    
    
    
    
    
    
    
    
    
    
    5.17
    %
    
    
    
    
    
    
    
    
    
    
    5.60
    %
 
 (1)
    
    We do not show interest income on a tax equivalent basis because it is immaterial.(2)
    
    For purposes of these computations, nonaccrual loans are included in daily average loan amounts outstanding. Provision for Loan and Lease Losses
  Noninterest Income
  25




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##### Table of Contents



Noninterest Expense
  Income Tax Provision
  Consolidated Balance Sheet Analysis
  Investment Securities
  June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)U.S. Treasury and government obligations
    
    $
    159
    
    
    $
    3,556Obligations of states and political subdivisions
    
    
    5,819
    
    
    
    3,746Mortgage-backed securities
    
    
    31,875
    
    
    
    31,556Federal Reserve stock, Federal Home Loan Bank stock and other
    
    
    69,860
    
    
    
    69,364Total
    
    $
    107,713
    
    
    $
    108,222
 Loans Held For Sale
  Loans and Leases
  26




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##### Table of Contents



June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Commercial, financial and agricultural
    
    $
    1,848,143
    
    
    $
    1,697,651Real estate-construction
    
    
    364,926
    
    
    
    287,496Real estate-mortgage
    
    
    1,130,037
    
    
    
    808,875Consumer
    
    
    39,505
    
    
    
    31,166Commercial financeFranchise finance
    
    
    373,737
    
    
    
    330,496Domestic leasing
    
    
    197,585
    
    
    
    174,035Canadian leasing
    
    
    281,930
    
    
    
    265,780Unearned incomeFranchise finance
    
    
    (96,538
    )
    
    
    (86,638
    )Domestic leasing
    
    
    (27,329
    )
    
    
    (23,924
    )Canadian leasing
    
    
    (35,485
    )
    
    
    (34,497
    )Total loans and leases, net of unearned income
    
    $
    4,076,511
    
    
    $
    3,450,440
 Allowance for Loan and Lease Losses
  As of and For the
    
    As of and For theSix Months Ended
    
    Year EndedJune 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Balance at beginning of period
    
    $
    44,443
    
    
    $
    64,285Provision for loan and lease losses
    
    
    12,163
    
    
    
    14,195Charge-offs
    
    
    (9,440
    )
    
    
    (28,180
    )Recoveries
    
    
    4,044
    
    
    
    5,335Reduction due to reclassification of loans
    
    
    
    
    
    
    (10,808
    )Reduction due to sale of loans and leases and other
    
    
    (217
    )
    
    
    (627
    )Foreign currency adjustment
    
    
    (58
    )
    
    
    243Balance at end of period
    
    $
    50,935
    
    
    $
    44,443
  Deposits
   27




---



##### Table of Contents



Short-Term Borrowings
   Collateralized Debt
  Other Long-Term Debt
  Capital
   June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Tier 1 capital
    
    $
    643,829
    
    
    $
    641,079Tier 2 capital
    
    
    151,461
    
    
    
    141,866Total risk-based capital
    
    $
    795,290
    
    
    $
    782,945Risk-weighted assets
    
    $
    5,746,402
    
    
    $
    4,930,684Risk-based ratios:Tier 1 capital
    
    
    11.2
    %
    
    
    13.0
    %Total capital
    
    
    13.8
    
    
    
    15.9Tier 1 leverage ratio
    
    
    11.3
    
    
    
    11.6Ending shareholders equity to assets
    
    
    8.2
    
    
    
    9.6Average shareholders equity to assets
    
    
    9.0
    
    
    
    9.0
  28




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##### Table of Contents



Cash Flow Analysis
  Earnings Outlook
      29




---



##### Table of Contents



Earnings by Line of Business
  
    
    Mortgage Banking
    
    Commercial Banking
    
    Home Equity Lending
    
    Commercial Finance
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Net income (loss):Mortgage Banking
    
    $
    (9,161
    )
    
    $
    5,515
    
    
    $
    (18,779
    )
    
    $
    15,248Commercial Banking
    
    
    5,614
    
    
    
    5,769
    
    
    
    11,083
    
    
    
    11,187Home Equity Lending
    
    
    1,730
    
    
    
    8,898
    
    
    
    8,650
    
    
    
    15,531Commercial Finance
    
    
    1,429
    
    
    
    1,317
    
    
    
    2,125
    
    
    
    1,024Other (including consolidating entries)
    
    
    (756
    )
    
    
    (3,555
    )
    
    
    (599
    )
    
    
    (4,704
    )$
    (1,144
    )
    
    $
    17,944
    
    
    $
    2,480
    
    
    $
    38,286
 30




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##### Table of Contents



Mortgage Banking
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    9,026
    
    
    $
    11,781
    
    
    $
    16,749
    
    
    $
    20,443Recovery of loan loss
    
    
    94
    
    
    
    284
    
    
    
    283
    
    
    
    390Noninterest income
    
    
    2,744
    
    
    
    53,846
    
    
    
    20,606
    
    
    
    113,714Total net revenue
    
    
    11,864
    
    
    
    65,911
    
    
    
    37,638
    
    
    
    134,547Operating expense
    
    
    (27,710
    )
    
    
    (56,716
    )
    
    
    (69,120
    )
    
    
    (109,185
    )(Loss) income before taxes
    
    
    (15,846
    )
    
    
    9,195
    
    
    
    (31,482
    )
    
    
    25,362Income taxes
    
    
    6,685
    
    
    
    (3,680
    )
    
    
    12,703
    
    
    
    (10,114
    )Net (loss) income
    
    $
    (9,161
    )
    
    $
    5,515
    
    
    $
    (18,779
    )
    
    $
    15,248Selected Operating Data:Mortgage loan originations
    
    $
    2,643,669
    
    
    $
    3,727,591
    
    
    $
    5,456,081
    
    
    $
    6,658,307Servicing sold as a % of originations
    
    
    183
    %
    
    
    65
    %
    
    
    145
    %
    
    
    58
    %
 June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Selected Balance Sheet Data at End of Period:Total assets
    
    $
    1,298,455
    
    
    $
    1,238,136Mortgage loans held for sale
    
    
    724,204
    
    
    
    662,832Mortgage servicing assets
    
    
    239,238
    
    
    
    319,225Deposits
    
    
    705,636
    
    
    
    680,812Short-term borrowing
    
    
    134,106
    
    
    
    133,150Shareholders equity
    
    
    149,288
    
    
    
    123,265Selected Operating Data:Servicing portfolio:Balance at end of period
    
    $
    20,754,361
    
    
    $
    26,196,627Weighted average coupon rate
    
    
    5.66
    %
    
    
    5.75
    %Weighted average servicing fee
    
    
    0.34
    
    
    
    0.35
 Overview
   31




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32




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##### Table of Contents



Originations
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Total originations
    
    $
    2,643,669
    
    
    $
    3,727,591
    
    
    $
    5,456,081
    
    
    $
    6,658,307Percent retail loans
    
    
    9
    %
    
    
    20
    %
    
    
    13
    %
    
    
    22
    %Percent wholesale loans
    
    
    52
    
    
    
    33
    
    
    
    44
    
    
    
    37Percent correspondent
    
    
    37
    
    
    
    36
    
    
    
    37
    
    
    
    31Percent brokered (1)
    
    
    2
    
    
    
    11
    
    
    
    6
    
    
    
    10Percent refinances
    
    
    44
    
    
    
    54
    
    
    
    49
    
    
    
    57
 
 (1)
    
    Brokered loans are loans we originate for which we receive loan origination fees, but which
are funded, closed and owned by unrelated third parties. Net Income
  Net Revenue
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    9,026
    
    
    $
    11,781
    
    
    $
    16,749
    
    
    $
    20,443Recovery of loan losses
    
    
    94
    
    
    
    284
    
    
    
    283
    
    
    
    390Gain on sales of loans
    
    
    17,002
    
    
    
    34,870
    
    
    
    41,976
    
    
    
    77,652Servicing fees
    
    
    23,784
    
    
    
    25,683
    
    
    
    49,410
    
    
    
    51,582Amortization expense
    
    
    (18,269
    )
    
    
    (24,199
    )
    
    
    (39,479
    )
    
    
    (51,509
    )(Impairment) recovery of servicing assets
    
    
    (50,630
    )
    
    
    71,320
    
    
    
    (18,142
    )
    
    
    23,136Gain (loss) on derivatives
    
    
    23,687
    
    
    
    (57,808
    )
    
    
    (23,698
    )
    
    
    544Gain on sales of servicing assets
    
    
    5,471
    
    
    
    1,928
    
    
    
    6,656
    
    
    
    8,418Other income
    
    
    1,699
    
    
    
    2,052
    
    
    
    3,883
    
    
    
    3,891Total net revenue
    
    $
    11,864
    
    
    $
    65,911
    
    
    $
    37,638
    
    
    $
    134,547
   
    
    the valuation of newly-created mortgage servicing rights;
    
    net loan origination fees which are recognized when loans are sold into the secondary mortgage market; and
    
    changes in fair value of forward contracts and interest rate lock commitments.
 33




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)(Impairment) recovery of servicing
    
    $
    (50,630
    )
    
    $
    71,320
    
    
    $
    (18,142
    )
    
    $
    23,136Gain (loss) on derivatives
    
    
    23,687
    
    
    
    (57,808
    )
    
    
    (23,698
    )
    
    
    544Net (impairment) recovery
    
    $
    (26,943
    )
    
    $
    13,512
    
    
    $
    (41,840
    )
    
    $
    23,680
  Operating Expenses
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Salaries and employee benefits
    
    $
    13,709
    
    
    $
    20,259
    
    
    $
    30,890
    
    
    $
    39,999Incentive and comission pay
    
    
    2,334
    
    
    
    11,395
    
    
    
    9,021
    
    
    
    21,183Other expenses
    
    
    11,667
    
    
    
    25,062
    
    
    
    29,209
    
    
    
    48,003Total operating expenses
    
    $
    27,710
    
    
    $
    56,716
    
    
    $
    69,120
    
    
    $
    109,185Number of employees at period end (1)
    
    
    
    
    
    
    
    
    
    
    854
    
    
    
    2,063
 
 (1)
    
    On a full time equivalent basis 34




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##### Table of Contents



Mortgage Servicing
  Six Months Ended
    
    Year EndedJune 30,
    
    December 31,2005
    
    2004(Portfolio in billions)Beginning servicing portfolio
    
    $
    26.2
    
    
    $
    29.6Mortgage loan closings(1)
    
    
    5.1
    
    
    
    11.7Bulk sales of servicing rights(1)
    
    
    (4.4
    )
    
    
    (4.0
    )Flow sales of servicing rights(1)
    
    
    (3.1
    )
    
    
    (4.3
    )Run-off(2)
    
    
    (3.0
    )
    
    
    (6.8
    )Ending servicing portfolio
    
    $
    20.8
    
    
    $
    26.2Number of loans (end of period)
    
    
    159,914
    
    
    
    205,463Average loan size
    
    $
    129,785
    
    
    $
    127,500Weighted average coupon rate
    
    
    5.66
    %
    
    
    5.75
    %Percent Government National Mortgage Association
(GNMA) and state housing programs
    
    
    22
    
    
    
    30Percent conventional and other
    
    
    78
    
    
    
    70Delinquency ratio
    
    
    3.9
    
    
    
    4.6Mortgage servicing assets to related servicing portfolio(3)
    
    
    1.13
    
    
    
    1.20
 
 (1)
    
    Excludes brokered loans that are closed, funded and owned by unrelated third parties.(2)
    
    Run-off is primarily the reduction in principal balance of the
servicing portfolio due to regular principal payments made by mortgagees and early
repayments of entire loans.(3)
    
    For this calculation, deferred service release premiums on warehouse
loans are excluded from mortgage servicing assets, and loans held for sale (i.e.
warehouse loans) are excluded from the servicing portfolio.  35




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##### Table of Contents



Commercial Banking
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Selected Income Statement Data:Interest income
    
    $
    43,135
    
    
    $
    29,607
    
    
    $
    81,184
    
    
    $
    57,992Interest expense
    
    
    (16,158
    )
    
    
    (8,416
    )
    
    
    (29,647
    )
    
    
    (16,255
    )Net interest income
    
    
    26,977
    
    
    
    21,191
    
    
    
    51,537
    
    
    
    41,737Provision for loan and lease losses
    
    
    (1,575
    )
    
    
    (750
    )
    
    
    (2,575
    )
    
    
    (1,950
    )Other income
    
    
    3,806
    
    
    
    5,061
    
    
    
    8,187
    
    
    
    9,837Total net revenue
    
    
    29,208
    
    
    
    25,502
    
    
    
    57,149
    
    
    
    49,624Operating expense
    
    
    (19,844
    )
    
    
    (15,866
    )
    
    
    (38,599
    )
    
    
    (30,948
    )Income before taxes
    
    
    9,364
    
    

    
    9,636
    
    
    
    18,550
    
    
    
    18,676Income taxes
    
    
    (3,750
    )
    
    
    (3,867
    )
    
    
    (7,467
    )
    
    
    (7,489
    )Net income
    
    $
    5,614
    
    
    $
    5,769
    
    
    $
    11,083
    
    
    $
    11,187
 June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Selected Balance Sheet Data at End of Period:Total assets
    
    $
    3,031,659
    
    
    $
    2,622,877Securities and short-term investments (1)
    
    
    425,363
    
    
    
    327,664Loans and leases
    
    
    2,473,621
    
    
    
    2,223,474Allowance for loan and lease losses
    
    
    (23,651
    )
    
    
    (22,230
    )Deposits
    
    
    2,727,654
    
    
    
    2,390,839Shareholders equity
    
    
    134,722
    
    
    
    143,580Year to Date Daily AveragesAssets
    
    $
    2,856,274
    
    
    $
    2,476,835Securities and short-term investments
    
    
    441,916
    
    
    
    296,716Loans and leases
    
    
    2,309,423
    
    
    
    2,094,190Allowance for loan and lease losses
    
    
    (22,965
    )
    
    
    (22,304
    )Deposits
    
    
    2,640,200
    
    
    
    2,258,538Shareholders equity
    
    
    135,435
    
    
    
    147,759Shareholders equity to assets
    
    
    4.74
    %
    
    
    5.97
    %
 
 (1)
    
    Includes $392 million and $293 million of inter-company investments at June 30,
2005 and December 31, 2004, respectively, that are the result of excess liquidity at the commercial
banking line of business related to deposit growth in excess of their asset deployment needs. The
funds have been redeployed in earning assets at our other lines of business. 36




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##### Table of Contents



Overview
  Net Income
  Net Interest Income
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Net interest income
    
    $
    26,977
    
    
    $
    21,191
    
    
    $
    51,537
    
    
    $
    41,737Average interest earning assets
    
    
    2,844,542
    
    
    
    2,341,317
    
    
    
    2,751,839
    
    
    
    2,259,486Net interest margin
    
    
    3.80
    %
    
    
    3.64
    %
    
    
    3.78
    %
    
    
    3.71
    %
  Provision for Loan and Lease Losses
  Noninterest Income
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Trust fees
    
    $
    475
    
    
    $
    477
    
    
    $
    1,008
    
    
    $
    995Service charges on deposit accounts
    
    
    1,009
    
    
    
    1,289
    
    
    
    2,005
    
    
    
    2,749Insurance commissions, fees and premiums
    
    
    427
    
    
    
    421
    
    
    
    960
    
    
    
    1,086Gain from sales of loans
    
    
    615
    
    
    
    845
    
    
    
    1,424
    
    
    
    1,706Loan servicing fees
    
    
    367
    
    
    
    339
    
    
    
    722
    
    
    
    668Amortization of servicing assets
    
    
    (308
    )
    
    
    (481
    )
    
    
    (627
    )
    
    
    (882
    )(Impairment) Recovery of servicing assets
    
    
    (311
    )
    
    
    727
    
    
    
    (97
    )
    
    
    588Brokerage fees
    
    
    303
    
    
    
    419
    
    
    
    604
    
    
    
    849Derivative gains
    
    
    231
    
    
    
    
    
    
    
    72
    
    
    
    Other
    
    
    998
    
    
    
    1,025
    
    
    
    2,116
    
    
    
    2,078Total noninterest income
    
    $
    3,806
    
    
    $
    5,061
    
    
    $
    8,187
    
    
    $
    9,837
 37




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##### Table of Contents



Operating Expenses
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Salaries and employee benefits
    
    $
    12,363
    
    
    $
    9,665
    
    
    $
    24,310
    
    
    $
    18,987Other expenses
    
    
    7,481
    
    
    
    6,201
    
    
    
    14,289
    
    
    
    11,961Total operating expenses
    
    $
    19,844
    
    
    $
    15,866
    
    
    $
    38,599
    
    
    $
    30,948Efficiency ratio
    
    
    64.5
    %
    
    
    60.4
    %
    
    
    64.6
    %
    
    
    60.0
    %Number of employees at period end(1)
    
    
    
    
    
    
    
    
    
    
    553
    
    
    
    492
 
 (1)
    
    On a full time equivalent basis.  Balance Sheet
  Credit Quality
  38




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##### Table of Contents



June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Nonperforming loans
    
    $
    18,697
    
    
    $
    21,247Other real estate owned
    
    
    4,838
    
    
    
    1,533Total nonperforming assets
    
    $
    23,535
    
    
    $
    22,780Nonperforming assets to total assets
    
    
    0.78
    %
    
    
    0.87
    %Allowance for loan losses
    
    $
    23,651
    
    
    $
    22,230Allowance for loan losses to total loans
    
    
    0.96
    %
    
    
    1.00
    %
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Provision for loan losses
    
    $
    1,575
    
    
    $
    750
    
    
    $
    2,575
    
    
    $
    1,950Net charge-offs
    
    
    743
    
    
    
    787
    
    
    
    1,155
    
    
    
    1,957Annualized net charge-offs to average loans
    
    
    0.13
    %
    
    
    0.15
    %
    
    
    0.10
    %
    
    
    0.19
    %
 39




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##### Table of Contents



Home Equity Lending
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    21,193
    
    
    $
    26,159
    
    
    $
    41,625
    
    
    $
    50,853Recovery (provision) for loan and lease losses
    
    
    (6,181
    )
    
    
    706
    
    
    
    (6,551
    )
    
    
    (5,193
    )Other income
    
    
    13,839
    
    
    
    14,833
    
    
    
    36,542
    
    
    
    32,490Total net revenue
    
    
    28,851
    
    
    
    41,698
    
    
    
    71,616
    
    
    
    78,150Operating expense
    
    
    (25,950
    )
    
    
    (26,855
    )
    
    
    (57,171
    )
    
    
    (52,241
    )Income before taxes
    
    
    2,901
    
    
    
    14,843
    
    
    
    14,445
    
    
    
    25,909Income taxes
    
    
    (1,171
    )
    
    
    (5,945
    )
    
    
    (5,795
    )
    
    
    (10,378
    )Net income
    
    $
    1,730
    
    
    $
    8,898
    
    
    $
    8,650
    
    
    $
    15,531Selected Operating Data:Loan volume:Lines of credit
    
    $
    190,448
    
    
    $
    134,810
    
    
    $
    282,774
    
    
    $
    229,636Loans
    
    
    309,835
    
    
    
    269,012
    
    
    
    647,123
    
    
    
    481,064Net home equity charge-offs to average
managed portfolio
    
    
    0.83
    %
    
    
    2.17
    %
    
    
    0.85
    %
    
    
    3.04
    %Gain on sale of loans to loans sold
    
    
    3.47
    %
    
    
    1.36
    %
    
    
    2.80
    %
    
    
    2.75
    %
 June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Selected Balance Sheet Data at End of Period:Total Assets
    
    $
    1,413,569
    
    
    $
    996,500Home equity loans and lines of credit (1)
    
    
    895,033
    
    
    
    590,175Allowance for loan and lease losses
    
    
    (16,452
    )
    
    
    (11,330
    )Home equity loans held for sale
    
    
    322,837
    
    
    
    227,740Residual interests
    
    
    38,438
    
    
    
    51,542Mortgage servicing assets
    
    
    44,575
    
    
    
    44,000Short-term borrowings
    
    
    579,856
    
    
    
    359,902Collateralized debt
    
    
    603,548
    
    
    
    352,625Shareholders equity
    
    
    125,768
    
    
    
    138,372Selected Operating Data at End of PeriodTotal managed portfolio balance
    
    $
    1,434,108
    
    
    $
    1,147,137Delinquency ratio (2)
    
    
    3.1
    %
    
    
    4.8
    %Weighted average coupon rate:Lines of credit
    
    
    9.47
    %
    
    
    9.18
    %Loans
    
    
    10.27
    
    
    
    11.87
 
 (1)
    
    Includes $626 million and $361 million of collateralized loans at June 30, 2005
and December 31, 2004, respectively, as part of securitized financings.(2)
    
    Nonaccrual loans are included in the delinquency ratio. Overview
   40




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##### Table of Contents



Portfolio Mix
  WeightedAverageAmount
    
    % of Total
    
    Coupon(In thousands)Home equity loans < = 100% CLTV
    
    $
    376,970
    
    
    
    26.29
    %
    
    
    7.94
    %Home equity lines of credit < = 100% CLTV
    
    
    407,252
    
    
    
    28.40
    
    
    
    8.15Total <= 100% CLTV
    
    
    784,222
    
    
    
    54.69
    
    
    
    8.05Home equity loans > 100% CLTV
    
    
    430,417
    
    
    
    30.01
    
    
    
    12.65Home equity lines of credit > 100% CLTV
    
    
    162,114
    
    
    
    11.30
    
    
    
    12.41Total > 100% CLTV
    
    
    592,531
    
    
    
    41.31
    
    
    
    12.59First mortgages
    
    
    43,082
    
    
    
    3.00
    
    
    
    6.89Other
    
    
    14,273
    
    
    
    1.00
    
    
    
    13.83Total managed portfolio (1)
    
    $
    1,434,108
    
    
    
    100.00
    %
    
    
    9.95
    %
 
 (1)
    
    We define our Managed portfolio as the portfolio ($1.4 billion) that we service and on
which we carry credit risk. At June 30, 2005, we also serviced another $1.7 billion of
loans for which the credit risk is held by others. 41




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##### Table of Contents



June 30,
    
    December 31,State
    
    2005
    
    2004California
    
    
    13.4
    %
    
    
    15.4
    %Florida
    
    
    7.6
    
    
    
    7.4Michigan
    
    
    6.7
    
    
    
    6.0Illinois
    
    
    5.6
    
    
    
    4.5Washington
    
    
    5.5
    
    
    
    6.1All other states
    
    
    61.2
    
    
    
    60.6Total
    
    
    100.0
    %
    
    
    100.0
    %Total managed portfolio (in thousands)
    
    $
    1,434,108
    
    
    $
    1,147,137
 Loan Volume
  For the Three Months EndedJune 30,State
    
    2005
    
    2004California
    
    
    17.2
    %
    
    
    21.1
    %Florida
    
    
    7.8
    
    
    
    7.2Illinois
    
    
    7.2
    
    
    
    3.6Michigan
    
    
    6.8
    
    
    
    5.2Arizona
    
    
    5.8
    
    
    
    4.2All other states
    
    
    55.2
    
    
    
    58.7Total
    
    
    100.0
    %
    
    
    100.0
    %Total originations
    
    $
    500,283
    
    
    $
    403,822
 42




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##### Table of Contents



Three Months Ended June 30,Product
    
    2005
    
    2004(Funding amount in thousands)First mortgage loansFunding Amount
    
    
    31,546
    
    
    
    38,771Weighted Average Disposable Income
    
    
    5,604
    
    
    
    4,748Weighted Average FICO score
    
    
    692
    
    
    
    696Weighted Average Coupon
    
    
    6.80
    %
    
    
    6.33
    %Home equity loans up to 100% CLTVFunding Amount
    
    
    160,925
    
    
    
    75,278Weighted Average Disposable Income
    
    
    5,177
    
    
    
    5,096Weighted Average FICO score
    
    
    725
    
    
    
    709Weighted Average Coupon
    
    
    7.23
    %
    
    
    7.64
    %Home equity loans up to 125% CLTVFunding Amount
    
    
    117,364
    
    
    
    154,962Weighted Average Disposable Income
    
    
    4,378
    
    
    
    4,188Weighted Average FICO score
    
    
    688
    
    
    
    682Weighted Average Coupon
    
    
    11.76
    %
    
    
    11.36
    %Home equity lines of credit up to 100% CLTVFunding Amount
    
    
    176,981
    
    
    
    110,551Weighted Average Disposable Income
    
    
    6,233
    
    
    
    5,823Weighted Average FICO score
    
    
    711
    
    
    
    697Weighted Average Coupon
    
    
    7.39
    %
    
    
    6.03
    %Home equity lines of credit up to 125% CLTVFunding Amount
    
    
    13,467
    
    
    
    24,259Weighted Average Disposable Income
    
    
    4,570
    
    
    
    4,321Weighted Average FICO score
    
    
    700
    
    
    
    700Weighted Average Coupon
    
    
    11.49
    %
    
    
    10.00
    %All ProductsFunding Amount
    
    
    500,283
    
    
    
    403,822Weighted Average Disposable Income
    
    
    5,181
    
    
    
    4,843Weighted Average FICO score
    
    
    709
    
    
    
    694Weighted Average Coupon
    
    
    8.44
    %
    
    
    8.64
    %
 Net Income
  43




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##### Table of Contents



Net Revenue
    Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Net interest income
    
    $
    21,193
    
    
    $
    26,159
    
    
    $
    41,625
    
    
    $
    50,853Recovery of (provision for) loan losses
    
    
    (6,181
    )
    
    
    706
    
    
    
    (6,551
    )
    
    
    (5,193
    )Gain on sales of loans
    
    
    3,861
    
    
    
    3,035
    
    
    
    12,129
    
    
    
    11,725Loan servicing fees
    
    
    9,525
    
    
    
    7,385
    
    
    
    18,036
    
    
    
    13,486Amortization of servicing assets
    
    
    (7,800
    )
    
    
    (4,976
    )
    
    
    (13,590
    )
    
    
    (8,952
    )Recovery (impairment) of servicing assets
    
    
    667
    
    
    
    (96
    )
    
    
    364
    
    
    
    843Trading gains
    
    
    2,316
    
    
    
    6,688
    
    
    
    2,796
    
    
    
    11,329Derivative gains
    
    
    4,442
    
    
    
    2,414
    
    
    
    15,522
    
    
    
    3,625Other income
    
    
    828
    
    
    
    383
    
    
    
    1,285
    
    
    
    434Total net revenue
    
    $
    28,851
    
    
    $
    41,698
    
    
    $
    71,616
    
    
    $
    78,150
     44




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##### Table of Contents



Operating Expenses
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Salaries and employee benefits
    
    $
    15,514
    
    
    $
    17,865
    
    
    $
    36,583
    
    
    $
    33,991Other
    
    
    10,436
    
    
    
    8,990
    
    
    
    20,588
    
    
    
    18,250Total operating expenses
    
    $
    25,950
    
    
    $
    26,855
    
    
    $
    57,171
    
    
    $
    52,241Number of employees at period end (1)
    
    
    
    
    
    
    
    
    
    
    662
    
    
    
    620
 
 (1)
    
    On a full time equivalent basis .  Home Equity Servicing
  45




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##### Table of Contents



June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Managed PortfolioTotal Loans
    
    $
    1,434,108
    
    
    $
    1,147,13730 days past due
    
    
    3.14
    %
    
    
    4.76
    %90 days past due
    
    
    1.15
    
    
    
    1.60Annualized QTD Net Chargeoff Rate
    
    
    0.83
    
    
    
    1.85Unsold LoansTotal Loans (1)
    
    $
    1,208,436
    
    
    $
    814,59530 days past due
    
    
    1.70
    %
    
    
    1.93
    %90 days past due
    
    
    0.75
    
    
    
    0.78Annualized QTD Net Chargeoff Rate
    
    
    0.43
    
    
    
    0.79Loan Loss Reserve
    
    $
    16,452
    
    
    $
    11,330Owned ResidualTotal Loans
    
    $
    225,672
    
    
    $
    332,54230 days past due
    
    
    10.83
    %
    
    
    11.71
    %90 days past due
    
    
    3.31
    
    
    
    3.61Annualized QTD Net Chargeoff Rate
    
    
    2.46
    
    
    
    4.48Residual Undiscounted Losses
    
    $
    4,580
    
    
    $
    11,323Credit Risk Sold, Potential
Incentive Servicing Fee Retained
PortfolioTotal Loans
    
    $
    1,297,016
    
    
    $
    1,023,58530 days past due
    
    
    2.40
    %
    
    
    3.11
    %90 days past due
    
    
    0.88
    
    
    
    1.10
 
 (1)
    
    Excludes deferred fees and costs.  46




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##### Table of Contents



Commercial Finance
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    7,928
    
    
    $
    6,881
    
    
    $
    15,541
    
    
    $
    13,635Provision for loan and lease losses
    
    
    (1,211
    )
    
    
    (2,034
    )
    
    
    (3,321
    )
    
    
    (3,187
    )Noninterest income
    
    
    1,351
    
    
    
    2,622
    
    
    
    3,259
    
    
    
    3,070Total net revenue
    
    
    8,068
    
    
    
    7,469
    
    
    
    15,479
    
    
    
    13,518Operating expense
    
    
    (5,646
    )
    
    
    (5,065
    )
    
    
    (11,832
    )
    
    
    (9,263
    )Income before taxes
    
    
    2,422
    
    
    
    2,404
    
    
    
    3,647
    
    
    
    4,255Income taxes
    
    
    (993
    )
    
    
    (1,087
    )
    
    
    (1,522
    )
    
    
    (3,231
    )Net income
    
    $
    1,429
    
    
    $
    1,317
    
    
    $
    2,125
    
    
    $
    1,024Selected Operating Data:Net charge-offs
    
    $
    1,448
    
    
    $
    1,051
    
    
    $
    2,816
    
    
    $
    2,345Net interest margin
    
    
    4.77
    %
    
    
    5.62
    %
    
    
    4.81
    %
    
    
    5.68
    %Total funding of loans and leases
    
    $
    110,273
    
    
    $
    88,586
    
    
    $
    193,635
    
    
    $
    160,238Loans sold
    
    
    2,028
    
    
    
    15,939
    
    
    
    14,428
    
    
    
    23,634
 June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Selected Balance Sheet Data at End of Period:Total assets
    
    $
    711,355
    
    
    $
    636,604Loans and leases
    
    
    693,900
    
    
    
    625,140Allowance for loan and lease losses
    
    
    (9,885
    )
    
    
    (9,624
    )Shareholders equity
    
    
    57,540
    
    
    
    55,993
 Overview
   Net Income
  47




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##### Table of Contents



Net Interest Income
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Net interest income
    
    $
    7,928
    
    
    $
    6,881
    
    
    $
    15,541
    
    
    $
    13,635Average interest
earning assets
    
    
    667,300
    
    
    
    492,259
    
    
    
    651,735
    
    
    
    482,571Net interest margin
    
    
    4.77
    %
    
    
    5.62
    %
    
    
    4.81
    %
    
    
    5.68
    %
   Provision for Loan and Lease Losses
  Noninterest Income
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)
    
    (Dollars in thousands)Gain from sales of loans
    
    $
    104
    
    
    $
    792
    
    
    $
    783
    
    
    $
    1,179Derivative gains
(losses), net
    
    
    (159
    )
    
    
    597
    
    
    
    (306
    )
    
    
    (349
    )Other
    
    
    1,406
    
    
    
    1,233
    
    
    
    2,782
    
    
    
    2,240Total noninterest income
    
    $
    1,351
    
    
    $
    2,622
    
    
    $
    3,259
    
    
    $
    3,070
  48




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##### Table of Contents



Operating Expenses
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Salaries and employee benefits
    
    $
    4,409
    
    
    $
    3,477
    
    
    $
    8,357
    
    
    $
    6,839Other
    
    
    1,237
    
    
    
    1,588
    
    
    
    3,475
    
    
    
    2,424Total operating expenses
    
    $
    5,646
    
    
    $
    5,065
    
    
    $
    11,832
    
    
    $
    9,263Number of employees at period
end (1)
    
    
    
    
    
    
    
    
    
    
    180
    
    
    
    146
 
 (1)
    
    On a full time equivalent basis.  Credit Quality
   June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Nonperforming loans and leases
    
    $
    3,572
    
    
    $
    3,936Allowance for loan and lease losses
    
    
    9,885
    
    
    
    9,624Allowance for loan and lease losses to total loans
and leases
    
    
    1.42
    %
    
    
    1.54
    %
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Provision for loan and lease losses
    
    $
    1,211
    
    
    $
    2,034
    
    
    $
    3,321
    
    
    $
    3,187Net charge-offs
    
    
    1,448
    
    
    
    1,051
    
    
    
    2,816
    
    
    
    2,345Annualized net charge-offs to average loans and leases
    
    
    0.88
    %
    
    
    0.87
    %
    
    
    0.88
    %
    
    
    0.99
    %
 49




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##### Table of Contents



June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Domestic franchise loans
    
    $
    277,198
    
    
    $
    243,859Weighted average yield
    
    
    8.55
    %
    
    
    8.11
    %Delinquency ratio
    
    
    0.22
    
    
    
    0.35Domestic leases
    
    $
    170,257
    
    
    $
    149,999Weighted average yield
    
    
    8.54
    %
    
    
    8.95
    %Delinquency ratio
    
    
    0.94
    
    
    
    1.09Canadian leases (1)
    
    $
    246,445
    
    
    $
    231,282Weighted average yield
    
    
    9.08
    %
    
    
    9.77
    %Delinquency ratio
    
    
    0.61
    
    
    
    0.82
 
 (1)
    
    In U.S. dollars. Parent and Other
   Risk Management
  
    
    Credit risk
    
    Liquidity risk
    
    Interest rate risk
    
    Operational risk
    50




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##### Table of Contents



Credit Risk
       51




---



##### Table of Contents



June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Accruing loans past due 90 days or more:Commercial, financial and agricultural loans
    
    $
    1
    
    
    $
    Real estate mortgages
    
    
    
    
    
    
    219Consumer loans
    
    
    77
    
    
    
    426Commercial financing:Franchise financing
    
    
    
    
    
    
    Domestic leasing
    
    
    
    
    
    
    Canadian leasing
    
    
    178
    
    
    
    12256
    
    
    
    657Nonaccrual loans and leases:Commercial, financial and agricultural loans
    
    
    17,391
    
    
    
    20,394Real estate mortgages
    
    
    10,745
    
    
    
    8,590Consumer loans
    
    
    1,228
    
    
    
    128Commercial financing:Franchise financing
    

    
    862
    
    
    
    1,193Domestic leasing
    
    
    1,063
    
    
    
    1,029Canadian leasing
    
    
    1,468
    
    
    
    1,70232,757
    
    
    
    33,036Total nonperforming loans and leases
    
    
    33,013
    
    
    
    33,693Nonperforming Loans held for Sale not guaranteed
    
    
    885
    
    
    
    2,066Other real estate owned
    
    
    12,877
    
    
    
    9,427Total nonperforming assets
    
    $
    46,775
    
    
    $
    45,186Nonperforming loans and leases to total loans
and leases
    
    
    0.8
    %
    
    
    1.0
    %Nonperforming assets to total assets
    
    
    0.8
    %
    
    
    0.9
    %
   June 30,
    
    December 31,2005
    
    2004(In millions)
    
    
    Mortgage banking
    
    $
    5.9
    
    
    $
    8.5
    
    
    Commercial banking
    
    
    23.6
    
    
    
    22.8
    
    
    Home equity lending
    
    
    13.8
    
    
    
    10.0
    
    
    Commercial finance
    
    
    3.6
    
    
    
    3.9
  Liquidity Risk
   52




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##### Table of Contents




    
    Warehouse lines of credit to fund first mortgages and home equity loans: none outstanding
on a $300 million borrowing facility, of which $150 million is committed
    
    Warehouse borrowing facilities to fund first mortgage loans: none outstanding on a $150
million committed borrowing facility
 53




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##### Table of Contents




    
    Lines of credit with correspondent banks, including fed funds lines: $129 million
outstanding out of $215 million available but not committed
    
    Line of credit with a correspondent bank collateralized by mortgage servicing rights:
none outstanding out of $50 million committed borrowing facility
    
    Warehouse lines of credit to fund Canadian sourced small ticket leases: $186 million
outstanding on $279 million of borrowing facilities
   
    
    Committed warehouse sale facility: $75 million unsettled on a $600 million facility
    
    Uncommitted warehouse sale facility: $37 million unsettled on a $150 million facility
    
    Investor warehouse sale facility: $121 million unsettled
 Interest Rate Risk
      54




---



##### Table of Contents




    
    the type of risk we are trying to mitigate;
    
    offsetting factors elsewhere in the Corporation;
    
    the level of current capital above our target minimums;
    
    time remaining in the quarter (i.e., days until quarter end);
    
    current level of derivative gain or loss relative to accounting and economic basis;
    
    basis risk: the degree to which the interest rates underlying our derivative instruments
might not move parallel to the interest rate driving our asset valuation;
    
    convexity: the degree to which asset values, or risk management derivative instrument
values, do not change in a linear fashion as interest rates change; and
    
    volatility: the level of volatility in market interest rates and the related impact on
our asset values and derivatives instrument values.
  1.
    
    Provide adequate hedge coverage for falling rates;2.
    
    minimize premium costs to establish hedge positions;3.
    
    provide a moderate amount of net impairment recapture if interest rates rise;4.
    
    when near or above the MSR LOCOM cap, maintain an acceptable range over which interest
rates may rise without causing hedge losses to significantly exceed accounting gains.
     55




---



##### Table of Contents




    
    The net asset value sensitivities do not necessarily represent the changes in the lines
of business net asset value that would actually occur under the given interest rate
scenarios, as sensitivities do not reflect changes in value of the companies as a going
concern, nor consider potential rebalancing or other management actions that might be taken
in the future under asset/liability management as interest rates change.
    
    Specifically, the volume of derivative contracts entered into to manage the risk of MSRs
fluctuates from quarter to quarter and within a given quarter, depending upon market
conditions, the size of our MSR portfolio and various additional factors. We monitor
derivative positions frequently and rebalance them as needed. Therefore, our derivative
positions, shown in the table below as of June 30, 2005, may or may not be representative of
our risk position during the succeeding quarter. Additionally, it is unlikely that the
volume of derivative positions would remain constant over large fluctuations in interest
rates, although the tables below assume they do. MSR risk management derivative contracts
appear under the category Interest Sensitive Financial Derivatives in the tables below.
    
    The tables below show modeled changes in interest rates for individual asset classes.
Asset classes in our portfolio have interest rate sensitivity tied to different underlying
indices or instruments. While the rate sensitivity of individual asset classes presented
below is our best estimate of changes in value due to interest rate changes, the total
potential change figures are subject to basis risk between value changes of individual
assets and liabilities which has not been included in the model.
    
    Few of the asset classes shown react to interest rate changes in a linear fashion. That
is, the point estimates we have made at Current and
+/2% and +/1% are good estimates
at those amounts of rate change, but it may not be accurate to interpolate linearly between
those points. This is most evident in products that contain optionality in payment timing or
pricing such as mortgage servicing or nonmaturity transaction deposits.
    
    Finally, the tables show theoretical outcomes for dramatic changes in interest rates
which do not consider potential rebalancing or repositioning of hedges.
 56




---



##### Table of Contents



Change in Interest Rates of:-2%
    
    -1%
    
    Current
    
    +1%
    
    +2%(In Thousands)Interest Sensitive AssetsLoans and other assets
    
    $
    4,354,356
    
    
    $
    4,312,830
    
    
    $
    4,267,961
    
    
    $
    4,222,251
    
    
    $
    4,176,690Loans held for sale
    
    
    1,059,297
    
    
    
    1,053,599
    
    
    
    1,046,681
    
    
    
    1,037,447
    
    
    
    1,026,909Mortgage servicing rights
    
    
    158,031
    
    
    
    191,063
    
    
    
    290,369
    
    
    
    406,235
    
    
    
    460,522Residual interests
    
    
    46,367
    
    
    
    45,431
    
    
    
    44,122
    
    
    
    43,023
    
    
    
    41,630Interest sensitive financial derivatives
    
    
    147,361
    
    
    

    68,930
    
    
    
    7,775
    
    
    
    (44,195
    )
    
    
    (74,585
    )Total interest sensitive assets
    
    $
    5,765,412
    
    
    $
    5,671,853
    
    
    $
    5,656,908
    
    
    $
    5,664,761
    
    
    $
    5,631,166Interest Sensitive LiabilitiesDeposits
    
    $
    (3,793,907
    )
    
    $
    (3,765,146
    )
    
    $
    (3,743,177
    )
    
    $
    (3,723,286
    )
    
    $
    (3,705,450
    )Short-term borrowings (1)
    
    
    (563,437
    )
    
    
    (563,031
    )
    
    
    (562,628
    )
    
    
    (562,227
    )
    
    
    (561,830
    )Long-term debt
    
    
    (885,833
    )
    
    
    (876,065
    )
    
    
    (863,731
    )
    
    
    (848,194
    )
    
    
    (832,489
    )Total interest sensitive liabilities
    
    $
    (5,243,177
    )
    
    $
    (5,204,242
    )
    
    $
    (5,169,536
    )
    
    $
    (5,133,707
    )
    
    $
    (5,099,769
    )Net market value as of June 30, 2005
    
    $
    522,235
    
    
    $
    467,611
    
    
    $
    487,372
    
    
    $
    531,054
    
    
    $
    531,397Potential change
    
    $
    34,863
    
    
    $
    (19,761
    )
    
    $
    
    
    
    $
    43,682
    
    
    $
    44,025Net market value as of March 31, 2005
    
    $
    378,963
    
    
    $
    433,991
    
    
    $
    550,252
    
    
    $
    550,317
    
    
    $
    451,240Potential change
    
    $
    (171,289
    )
    
    $
    (116,261
    )
    
    $
    
    
    
    $
    65
    
    
    $
    (99,012
    )
 
 (1)
    
    Includes certain debt which is categorized as collateralized borrowings in other sections of this document GAAP-Based Value Change Method
 Present Value at June 30, 2005Change in Interest Rates of:-2%
    
    -1%
    
    Current
    
    +1%
    
    +2%(In Thousands)Interest Sensitive AssetsLoans and other assets (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loans held for sale
    
    $
    1,047,446
    
    
    $
    1,047,446
    
    
    $
    1,047,446
    
    
    $
    1,038,212
    
    
    $
    1,027,674Mortgage servicing rights
    
    $
    156,590
    
    
    $
    189,357
    
    
    $
    287,390
    
    
    $
    339,160
    
    
    $
    349,835Residual interests
    
    $
    46,367
    
    
    $
    45,431
    
    
    $
    44,122
    
    
    $
    43,023
    
    
    $
    41,630Interest sensitive financial derivatives
    
    $
    147,361
    
    
    $
    68,930
    
    
    $
    7,775
    
    
    $
    (44,195
    )
    
    $
    (74,585
    )Total interest sensitive assets
    
    $
    1,397,764
    
    
    $
    1,351,164
    
    
    $
    1,386,733
    
    
    $
    1,376,200
    
    
    $
    1,344,554Interest Sensitive LiabilitiesDeposits (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Short-term borrowings (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Total interest sensitive liabilities (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Net market value as of June 30, 2005
    
    $
    1,397,764
    
    
    $
    1,351,164
    
    
    $
    1,386,733
    
    
    $
    1,376,200
    
    
    $
    1,344,554Potential change
    
    $
    11,031
    
    
    $
    (35,569
    )
    
    $
    
    
    
    $
    (10,533
    )
    
    $
    (42,179
    )Net market value as of March 31, 2005
    
    $
    1,321,354
    
    
    $
    1,389,204
    
    
    $
    1,497,556
    
    
    $
    1,401,145
    
    
    $
    1,259,555Potential change
    
    $
    (176,202
    )
    
    $
    (108,352
    )
    
    $
    
    
    
    $
    (96,411
    )
    
    $
    (238,001
    )
 
 (1)
    
    Value does not change in GAAP presentation 57




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Operational risk
      Off-Balance Sheet Instruments
   Derivative Financial Instruments
  58




---



##### Table of Contents




    
    In two instances, this funding mismatch is partially mitigated by a combination of
amortizing interest rate caps and Eurodollar futures contracts. The interest rate caps have
a strike price of 5% and provide protection against a large increase in short-term interest
rates. As of June 30, 2005, the notional value and 2005 loss on the interest rate caps were
$16 million and $4 thousand, respectively. As of June 30, 2005, the total notional amount
and year-to-date loss on the Eurodollar futures were $45 million and $9 thousand,
respectively.
    
    We deliver fixed rate leases into a second commercial paper conduit. Although the leases
and funding were in Canadian dollars (CAD), the interest rate mismatch is similar in nature
to that described above. To lessen the repricing mismatch between fixed rate CAD-denominated
leases and floating rate CAD commercial paper, a series of amortizing CAD interest rate
swaps have been executed. As of June 30, 2005, the commercial paper conduit was providing
$118 million of variable rate funding. In
total, our interest rate swaps were effectively converting $108 million of this funding to a
fixed interest rate. The year-to-date losses on these swaps at June 30, 2005 were $0.3
million.
   59




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60




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##### Table of Contents



Ending
    
    Change inGNMA
    
    GNMA
    
    (Impairment)
    
    
    
    
    
    NetRate
    
    Rate (in bps)
    

recovery
    
    Hedge
    
    Impairment(Dollars in millions)Q1 02
    
    
    
    
    
    
    6.66
    %
    
    
    21
    
    
    $
    10.7
    
    
    $
    (8.1
    )
    
    $
    2.6Q2 02
    
    
    
    
    
    
    6.08
    %
    
    
    (58
    )
    
    
    (48.0
    )
    
    
    45.4
    
    
    
    (2.6
    )Q3 02
    
    
    
    
    
    
    5.15
    %
    
    
    (93
    )
    
    
    (86.8
    )
    
    
    81.2
    
    
    
    (5.6
    )Q4 02
    
    
    
    
    
    
    5.02
    %
    
    
    (13
    )
    
    
    (19.4
    )
    
    
    7.1
    
    
    
    (12.3
    )Total 2002
    
    
    
    
    
    
    (143
    )
    
    
    
    
    
    
    
    
    
    $
    (17.9
    )Q1 03
    
    
    
    
    
    
    4.97
    %
    
    
    (5
    )
    
    $
    (2.0
    )
    
    $
    0.3
    
    
    $
    (1.7
    )Q2 03
    
    
    
    
    
    
    4.51
    %
    
    
    (46
    )
    
    
    (40.7
    )
    
    
    28.9
    
    
    
    (11.8
    )Q3 03
    
    
    
    
    
    
    4.99
    %
    
    
    48
    
    
    
    41.8
    
    
    
    (27.6
    )
    
    
    14.2Q4 03
    
    
    
    
    
    
    5.24
    %
    
    
    25
    
    
    
    46.2
    
    
    
    (22.9
    )
    
    
    23.3Total 2003
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    $
    24.0Q1 04
    
    
    
    
    
    
    4.90
    %
    
    
    (34
    )
    
    $
    (48.2
    )
    
    $
    58.4
    
    
    $
    10.2Q2 04
    
    
    
    
    
    
    5.54
    %
    
    
    64
    
    
    
    71.3
    
    
    
    (57.8
    )
    
    
    13.5Q3 04
    
    
    
    
    
    
    5.16
    %
    
    
    (38
    )
    
    
    (17.7
    )
    
    
    22.6
    
    
    
    4.9Q4 04
    
    
    
    
    
    
    5.05
    %
    
    
    (11
    )
    
    
    (9.7
    )
    
    
    (4.2
    )
    
    
    (13.9
    )Total 2004
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    $
    14.7Q1 05
    
    
    
    
    
    
    5.33
    %
    
    
    28
    
    
    
    32.5
    
    
    
    (47.4
    )
    
    $
    (14.9
    )Q2 05
    
    
    
    
    
    
    4.82
    %
    
    
    (51
    )
    
    
    (50.6
    )
    
    
    23.7
    
    
    
    (26.9
    )
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4. Controls and Procedures.
    61




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##### Table of Contents



62




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##### Table of Contents



PART II. Other Information.
 
 Item 1. Legal Proceedings
 Since the time we filed our Report on Form 10-Q for the period ended March 31, 2005, we
experienced developments as noted in the litigation described below. For a full description of the
litigation, see Note 10, Commitments and Contingencies, in the Notes to Consolidated Financial
Statements, Part I, Item 1, of this Report.
 United States ex rel. Paranich v. Sorgnard et al .
  Cohens
v. Inland Mortgage Corporation
  Litigation in Connection with Loans Purchased from Community Bank of Northern Virginia
(Community)
 Hobson v. Irwin Union Bank and Trust Company Chatfield v. Irwin Union Bank and Trust Company Ransom v. Irwin Union Bank and
Trust Company) Kossler v. Community Bank of Northern Virginia.
Kossler Hobson, Chatfield, Ransom Kossler Kossler
 Litigation Related to NorVergence, Inc.
   Sterling Asset & Equity Corp. et al. v. Preferred Capital, Inc. et al.
 63




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##### Table of Contents



Exquisite Caterers
   
 Item 4. Submission of Matters to a Vote of Security Holders.
   Nominee
    
    For
    
    WithheldR. David Hoover
    
    
    25,136,002
    
    
    
    1,034,966William I. Miller
    
    
    25,148,015
    
    
    
    1,022,953Theodore M. Solso
    
    
    20,376,194
    
    
    
    5,794,774
  MATTER
    
    FOR
    
    AGAINST
    
    ABSTAINProposal to amend the Restated
Articles of Incorporation regarding
the indemnification of directors,
officers and employees, by moving
the current indemnification
provisions of the Restated Articles
to the By-laws and replacing the
indemnification provisions in the
Restated Articles with a general
provision authorizing
indemnification to the fullest
extent of the law.
    
    
    20,361,677
    
    
    
    5,560,728
    
    
    
    246,612
 64




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##### Table of Contents



Item 6. Exhibits.
 ExhibitNumber
    
    Description of Exhibit3.1
    
    Restated Articles of Incorporation of Irwin Financial Corporation, as amended April 7,
2005. (Incorporated by reference to Exhibit 3.1 of Form 10-Q Report for the quarter ended
March 31, 2005, File No. 001-16691.)3.2
    
    Code of By-laws of Irwin Financial Corporation, as amended, dated May 4, 2005.4.1
    
    Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4(a) to Form 10-K
report for year ended December 31, 1994, File No. 0-06835.).4.2
    
    Certain instruments defining the rights of the holders of long-term debt of Irwin
Financial Corporation and certain of its subsidiaries, none of which authorize a total
amount of indebtedness in excess of 10% of the total assets of the Corporation and its
subsidiaries on a consolidated basis, have not been filed as Exhibits. The Corporation
hereby agrees to furnish a copy of any of these agreements to the Commission upon request.4.3
    
    Rights Agreement, dated as of March 1, 2001, between Irwin Financial Corporation and Irwin
Union Bank and Trust. (Incorporated by reference to Exhibit 4.1 to Form 8-A filed March 2,
2001, File No. 000-06835.)4.4
    
    Appointment of Successor Rights Agent dated as of May 11, 2001 between Irwin Financial
Corporation and National City Bank. (Incorporated by reference to Exhibit 4.5 to Form S-8
filed on September 7, 2001, File No. 333-69156.)10.1
    
    *Irwin Financial Corporation 1992 Stock Option Plan. (Incorporated by reference to Exhibit
10(h) to Form 10-K Report for year ended December 31, 1992, File No. 000-06835.)10.2
    
    *Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit
10 to Form 10-Q Report for period ended June 30, 1994, File No. 000-06835.)10.3
    
    *Amendment to Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by
reference to Exhibit 10(i) to Form 10-Q Report for period ended June 30, 1997, File No.
000-06835.)10.4
    
    *Irwin Financial Corporation Amended and Restated 2001 Stock Plan. (Incorporated by
reference to Exhibit 1 to the Corporations proxy statement for its 2004 Annual Meeting,
filed with the Commission on March 18, 2004, File No. 001-16691.10.5
    
    *Irwin Financial Corporation 1999 Outside Director Restricted Stock Compensation Plan.
(Incorporated by reference to Exhibit 2 to the Corporations proxy statement for its 2004
Annual Meeting, filed with the Commission on March 18, 2004, File No. 001-16691.)10.6
    
    *Employee Stock Purchase Plan III. (Incorporated by reference to Exhibit 10(a) to Form
10-Q Report for period ended June 30, 1999, File No. 000-06835.)10.7
    
    *Long-Term Management Performance Plan. (Incorporated by reference to Exhibit 10(a) to
Form 10-K Report for year ended December 31, 1986, File No. 000-06835.)10.8
    
    *Long-Term Incentive Plan-Summary of Terms. (Incorporated by reference to Exhibit 10(a) to
Form 10-K Report for year ended December 31, 1986, File No. 000-06835.)10.9
    
    *Inland Mortgage Corporation Long-Term Incentive Plan. (Incorporated by reference to
Exhibit 10(j) to Form 10-K Report for year ended December 31, 1995, File No. 000-06835.)10.10
    
    *Amended and Restated Management Bonus Plan. (Incorporated by reference to Exhibit 10(a)
to Form 10-K Report for year ended December 31, 1986, File No. 000-06835.)10.11
    
    *Limited Liability Company Agreement of Irwin Ventures LLC. (Incorporated by reference to
Exhibit 10(a) to Form 10-Q/A Report for period ended March 31, 2001, File No. 000-06835.)10.12
    
    *Limited Liability Company Agreement of Irwin Ventures Co-Investment Fund LLC, effective
as of April 20, 2001. (Incorporated by reference to Exhibit 10.17 to Form S-1/A filed
February 14, 2002, File No. 333-69586.)10.13
    
    *Promissory Note dated January 30, 2002 from Elena Delgado to Irwin Financial Corporation.
(Incorporated by reference to Exhibit 10.19 to Form S-1/A filed February 14, 2002, File
No. 333-69586.)
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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.14
    
    *Consumer Pledge Agreement dated January 30, 2002 between Elena Delgado and Irwin
Financial Corporation. (Incorporated by reference to Exhibit 10.20 to Form S-1/A filed
February 14, 2002, File No. 333-69586.)10.15
    
    *Redemption and Loan Repayment Agreement dated December 22, 2004 between Irwin Financial
Corporation, Irwin Home Equity Corporation and Elena Delgado. (Incorporated by reference
to Exhibit 10.15 of Form 10-K Report for year ended December 31, 2004, File No.
001-16691.)10.16
    
    *Irwin Home Equity Corporation Amendment and Restatement of Shareholder Agreement dated
December 22, 2004 between Irwin Home Equity Corporation, Irwin Financial Corporation and
Elena Delgado. (Incorporated by reference to Exhibit 10.16 of Form 10-K Report for year
ended December 31, 2004, File No. 001-16691.)10.17
    
    *Deferred Compensation Agreement dated December 22, 2004 between Irwin Home Equity
Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference to
Exhibit 10.17 of Form 10-K Report for year ended December 31, 2004, File No. 001-16691.)10.18
    
    *Tax Gross-up Agreement dated December 22, 2004 between Irwin Financial Corporation and
Elena Delgado as Shareholder. (Incorporated by reference to Exhibit 10.18 of Form 10-K
Report for year ended December 31, 2004, File No. 001-16691.)10.19
    
    *Amendment No. 1 to Irwin Home Equity Corporation Amendment and Restatement of Shareholder
Agreement dated April 7, 2005 between Irwin Home Equity Corporation, Irwin Financial
Corporation and Elena Delgado.10.20
    
    *Amendment No. 1 to the Deferred Compensation Agreement dated April 7, 2005 between Irwin
Home Equity Corporation, Irwin Financial Corporation and Elena Delgado.10.21
    
    *Irwin Financial Corporation Amended and Restated Short Term Incentive Plan effective
January 1, 2002. (Incorporated by reference to Exhibit 3 to the Corporations proxy
statement for its 2004 Annual Meeting, filed with the Commission on March 18, 2004, File
No. 001-16691.)10.22
    
    *Irwin Commercial Finance Amended and Restated Short Term Incentive Plan (Incorporated by
reference to Exhibit 4 of the Corporations proxy statement for its 2004 Annual Meeting,
filed with the Commission on March 18, 2004, File No. 001-16691.)10.23
    
    *Irwin Home Equity Amended and Restated Short Term Incentive Plan (Incorporated by
reference to Exhibit 5 to the Corporations proxy statement for its 2004 Annual Meeting,
filed with the Commission on March 18, 2004, File No. 001-16691.)10.24
    
    *Irwin Mortgage Corporation Amended and Restated Short Term Incentive Plan effective
January 1, 2002. (Incorporated by reference to Exhibit 6 of the Corporations proxy
statement for its 2004 Annual Meeting, filed with the Commission on March 18, 2004, File
No. 001-16691.)10.25
    
    *Irwin Union Bank and Trust Company Amended and Restated Short Term Incentive Plan
effective January 1, 2002. (Incorporated by reference to Exhibit 7 to the Corporations
proxy statement for its 2004 Annual Meeting, filed with the Commission on March 18, 2004,
File No. 001-16691.)10.26
    
    *Irwin Capital Holdings Short Term Incentive Plan effective January 1, 2002. (Incorporated
by reference to Exhibit 10.25 to Form 10-Q Report for period ended March 31, 2002, File
No. 000-06835.)10.27
    
    *Onset Capital Corporation Employment Agreement. (Incorporated by reference to Exhibit
10.26 to Form 10-Q Report for period ended June 30, 2002, File No. 000-06835.)10.28
    
    *Irwin Financial Corporation Restated Supplemental Executive Retirement Plan for Named
Executives. (Incorporated by reference to Exhibit 10.27 to Form 10-Q Report for period
ended June 30, 2002, File No. 000-06835.)10.29
    
    *Irwin Financial Corporation Supplemental Executive Retirement Plan for Named Executives.
(Incorporated by reference to Exhibit 10.28 to Form 10-Q Report for period ended June 30,
2002, File No. 000-06835.)10.30
    
    *Onset Capital Corporation Shareholders Agreement (Incorporated by reference to Exhibit
10.29 to Form 10-K Report for period ended December 31, 2002, File No. 000-06835.)
 66




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit11.1
    
    Computation of Earnings Per Share is included in the footnotes to the financial statements.31.1
    
    Certification pursuant to 18 U.S.C. Section 302 of the Sarbanes-Oxley Act of 2002 by the
Chief Executive Officer.31.2
    
    Certification pursuant to 18 U.S.C. Section 302 of the Sarbanes-Oxley Act of 2002 by the
Chief Financial Officer.32.1
    
    Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act
of 2002.32.2
    
    Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act
of 2002.
 
 *
    
    Indicates management contract or compensatory plan or arrangement. 67




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##### Table of Contents



SIGNATURES
  IRWIN FINANCIAL CORPORATIONDATE:July 29, 2005
    
    BY:
    
    /s/ Gregory F. EhlingerGREGORY F. EHLINGERCHIEF FINANCIAL OFFICERBY:
    
    /s/ Jody A. LittrellJODY A. LITTRELLCORPORATE CONTROLLER(Chief Accounting Officer)
 68