##### 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, 2007
 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 o
  Large accelerated filer     o               Accelerated filer      þ               Non-accelerated filer     o
  o þ




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##### 



FORM 10-Q
TABLE OF CONTENTS
 PAGENO.PART I
    
    FINANCIAL INFORMATION
    
    
    3Item 1
    
    Financial Statements
    
    
    3Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    50Item 4
    
    Controls and Procedures
    
    
    51PART II
    
    OTHER INFORMATION
    
    
    51Item 1
    
    Legal Proceedings
    
    
    51Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    52Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    53Item 6
    
    Exhibits
    
    
    54Signatures
    
    
    57First Amendment to IFC Amended and Restated Short Term Incentive PlanFirst Amendment to ICF Amended and Restated Short Term Incentive PlanFirst Amendment to IHE Amended and Restated Short Term Incentive PlanFirst Amendment to IUBT Amended and Restated Short Term Incentive PlanAmended and Restated Shareholder Agreement302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 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 31,2007
    
    
    2006(Dollars in thousands)Assets:Cash and cash equivalents
    
    $
    80,234
    
    
    $
    145,765Interest-bearing deposits with financial institutions
    
    
    40,922
    
    
    
    53,106Residual interests
    
    
    10,414
    
    
    
    10,320Investment securities- held-to-maturity (Fair value: $17,335 at June 30, 2007
and $17,893 at December 31, 2006)
    
    
    17,431
    
    
    
    18,066Investment securities- available-for-sale
    
    
    124,882
    
    
    
    110,364Loans held for sale
    
    
    26,886
    
    
    
    237,510Loans and leases, net of unearned income  Note 3
    
    
    5,511,756
    
    
    
    5,238,193Less: Allowance for loan and lease losses  Note 4
    
    
    (92,140
    )
    
    
    (74,468
    )5,419,616
    
    
    
    5,163,725Servicing assets  Note 5
    
    
    27,920
    
    
    
    31,949Accounts receivable
    
    
    70,898
    
    
    
    208,585Accrued interest receivable
    
    
    25,143
    
    
    
    26,470Premises and equipment
    
    
    41,990
    
    
    
    36,211Other assets
    
    
    184,324
    
    
    
    139,314Assets held for sale  Note 2
    
    
    27,262
    
    
    
    56,573Total assets
    
    $
    6,097,922
    
    
    $
    6,237,958Liabilities and Shareholders Equity:DepositsNoninterest-bearing
    
    $
    336,801
    
    
    $
    687,626Interest-bearing
    
    
    1,799,748
    
    
    
    1,756,109Certificates of deposit over $100,000
    
    
    1,181,234
    
    
    
    1,107,7813,317,783
    
    
    
    3,551,516Short-term borrowings  Note 6
    
    
    613,200
    
    
    
    602,443Collateralized debt  Note 7
    
    
    1,327,897
    
    
    
    1,173,012Other long-term debt
    
    
    233,881
    
    
    
    233,889Other liabilities
    
    
    97,516
    
    
    
    146,596Total liabilities
    
    
    5,590,277
    
    
    
    5,707,456Commitments and contingencies  Note 11Shareholders equityPreferred stock, no par value  authorized 4,000,000 shares; none issued
    
    
    
    
    
    
    Noncumulative perpetual preferred stock  15,000 shares authorized and issued
    
    
    14,441
    
    
    
    14,518Common stock, no par value  authorized 40,000,000 shares; issued 29,895,483
shares and 29,879,773 shares as of June 30, 2007 and December 31, 2006; 715,599
shares 143,543 shares in treasury as of June 30, 2007 and December 31, 2006
    
    
    116,246
    
    
    
    116,192Additional paid-in capital
    
    
    2,401
    
    
    
    1,583Accumulated other comprehensive loss, net of deferred income tax benefit of
$4,785 and $4,813 as of June 30, 2007 and December 31, 2006
    
    
    (932
    )
    
    
    (4,364
    )Retained earnings
    
    
    389,349
    
    
    
    405,835521,505
    
    
    
    533,764Less treasury stock, at cost
    
    
    (13,860
    )
    
    
    (3,262
    )Total shareholders equity
    
    
    507,645
    
    
    
    530,502Total liabilities and shareholders equity
    
    $
    6,097,922
    
    
    $
    6,237,958
  3




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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 For the Three Months Ended June 30,2007
    
    
    2006(Dollars in thousands, except per share)Interest income:Loans and leases
    
    $
    124,198
    
    
    $
    105,096Loans held for sale
    
    
    1,136
    
    
    
    9,804Residual interests
    
    
    280
    
    
    
    467Investment securities
    
    
    2,562
    
    
    
    2,221Federal funds sold
    
    
    787
    
    
    
    21Total interest income
    
    
    128,963
    
    
    
    117,609Interest expense:Deposits
    
    
    34,980
    
    
    
    34,618Short-term borrowings
    
    
    7,096
    
    
    
    3,393Collateralized debt
    
    
    17,113
    
    
    
    11,596Other long-term debt
    
    
    3,930
    
    
    
    4,130Total interest expense
    
    
    63,119
    
    
    
    53,737Net interest income
    
    
    65,844
    
    
    
    63,872Provision for loan and lease losses  Note 4
    
    
    19,454
    
    
    
    6,826Net interest income after provision for loan and lease losses
    
    
    46,390
    
    
    
    57,046Other income:Loan servicing fees
    
    
    5,116
    
    
    
    10,849Amortization and impairment of servicing assets
    
    
    (2,288
    )
    
    
    (5,643
    )Gain (loss) from sales of loans and loans held for sale
    
    
    3,268
    
    
    
    (3,591
    )Trading gains
    
    
    256
    
    
    
    1Derivative (losses) gains, net
    
    
    (3,252
    )
    
    
    672Other
    
    
    6,481
    
    
    
    6,7589,581
    
    
    
    9,046Other expense:Salaries
    
    
    23,538
    
    
    
    26,479Pension and other employee benefits
    
    
    6,696
    
    
    
    7,627Office expense
    
    
    2,539
    
    
    
    2,190Premises and equipment
    
    
    5,288
    
    
    
    5,438Marketing and development
    
    
    1,368
    
    
    
    722Professional fees
    
    
    2,681
    
    
    
    2,469Other
    
    
    4,954
    
    
    
    6,37047,064
    
    
    
    51,295Income before income taxes from continuing operations
    
    
    8,907
    
    
    
    14,797Provision for income taxes
    
    
    3,436
    
    
    
    5,828Net income from continuing operations
    
    
    5,471
    
    
    
    8,969Loss from discontinued operations, net of $3,968 and $4,054 income tax
benefit, respectively  Note 2
    
    
    (5,860
    )
    
    
    (6,098
    )Net (loss) income
    
    $
    (389
    )
    
    $
    2,871Earnings per share from continuing operations:  Note 9Basic
    
    $
    0.18
    
    
    $
    0.30Diluted
    
    $
    0.17
    
    
    $
    0.30Earnings per share:  Note 9Basic
    
    $
    (0.02
    )
    
    $
    0.10Diluted
    
    $
    (0.03
    )
    
    $
    0.09Dividends per share
    
    $
    0.12
    
    
    $
    0.11
  4




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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 For the Six Months Ended June 30,2007
    
    
    2006(Dollars in thousands, except per share)Interest income:Loans and leases
    
    $
    243,547
    
    
    $
    202,981Loans held for sale
    
    
    6,078
    
    
    
    21,210Residual interests
    
    
    549
    
    
    
    1,130Investment securities
    
    
    5,019
    
    
    
    3,706Federal funds sold
    
    
    807
    
    
    
    48Total interest income
    
    
    256,000
    
    
    
    229,075Interest expense:Deposits
    
    
    68,431
    
    
    
    64,299Short-term borrowings
    
    
    14,902
    
    
    
    7,499Collateralized debt
    
    
    32,928
    
    
    
    22,707Other long-term debt
    
    
    7,768
    
    
    
    9,121Total interest expense
    
    
    124,029
    
    
    
    103,626Net interest income
    
    
    131,971
    
    
    
    125,449Provision for loan and lease losses  Note 4
    
    
    42,662
    
    
    
    16,019Net interest income after provision for loan and lease losses
    
    
    89,309
    
    
    
    109,430Other income:Loan servicing fees
    
    
    11,028
    
    
    
    18,957Amortization and impairment of servicing assets
    
    
    (7,237
    )
    
    
    (11,545
    )Loss from sales of loans and loans held for sale
    
    
    (2,639
    )
    
    
    (823
    )Trading losses
    
    
    (8
    )
    
    
    (217
    )Derivative (losses) gains, net
    
    
    (4,341
    )
    
    
    3,439Other
    
    
    11,964
    
    
    
    13,2318,767
    
    
    
    23,042Other expense:Salaries
    
    
    49,273
    
    
    
    50,143Pension and other employee benefits
    
    
    14,434
    
    
    
    15,400Office expense
    
    
    4,876
    
    
    
    4,284Premises and equipment
    
    
    10,915
    
    
    
    10,473Marketing and development
    
    
    2,577
    
    
    
    1,390Professional fees
    
    
    4,767
    
    
    
    4,867Other
    
    
    12,507
    
    
    
    17,55199,349
    
    
    
    104,108(Loss) income before income taxes from continuing operations
    
    
    (1,273
    )
    
    
    28,364(Benefit) provision for income taxes
    
    
    (650
    )
    
    
    10,705Net (loss) income from continuing operations
    
    
    (623
    )
    
    
    17,659Loss from discontinued operations, net of $6,710 and $11,080 income tax
benefit, respectively  Note 2
    
    
    (9,895
    )
    
    
    (16,646
    )Net (loss) income
    
    $
    (10,518
    )
    
    $
    1,013Earnings per share from continuing operations:  Note 9Basic
    
    $
    (0.04
    )
    
    $
    0.60Diluted
    
    $
    (0.06
    )
    
    $
    0.59Earnings per share:  Note 9Basic
    
    $
    (0.38
    )
    
    $
    0.03Diluted
    
    $
    (0.39
    )
    
    $
    0.03Dividends per share
    
    $
    0.24
    
    
    $
    0.22
  5




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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
For the Six Months Ended June 30, 2007, and 2006
 Accumulated Other Comprehensive IncomeDefined
    
    Additional
    
    
    
    
    
    
    
    
    
    PerpetualRetained
    
    Foreign
    
    Unrealized Gain/Loss
    
    Benefit
    
    Paid in
    
    Common
    
    Treasury
    
    PreferredTotal
    
    Earnings
    
    Currency
    
    Securities
    
    Derivatives
    
    Plans
    
    Capital
    
    Stock
    
    Stock
    
    Stock(Dollars in thousands)Balance at January 1, 2007
    
    $
    530,502
    
    
    $
    405,835
    
    
    $
    2,884
    
    
    $
    (344
    )
    
    $
    (30
    )
    
    $
    (6,874
    )
    
    $
    1,583
    
    
    $
    116,192
    
    
    $
    (3,262
    )
    
    $
    14,518Net loss
    
    
    (10,518
    )
    
    
    (10,518
    )Unrealized loss on investment
securities net of $307 tax benefit
    
    
    (461
    )
    
    
    
    
    
    
    
    
    
    
    (461
    )Unrealized gain on derivatives
net of $355 tax liability
    
    
    533
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    533Foreign currency adjustment
    
    
    3,360
    
    
    
    
    
    
    
    3,360Other comprehensive income
    
    
    3,432Total comprehensive income
    
    
    (7,086
    )Cash dividends  common stock
    
    
    (7,033
    )
    
    
    (7,033
    )Cash dividends  preferred stock
    
    
    (678
    )
    
    
    (678
    )FAS 156 adoption
    
    
    1,743
    
    
    
    1,743Tax benefit on stock option exercises
    
    
    114
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114Stock compensation expense
    
    
    986
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    986Stock issuance costs
    
    
    (77
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77
    )Stock:Purchase of 668,308 shares
    
    
    (12,753
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,753
    )Sales of 97,376 shares
    
    
    1,927
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (282
    )
    
    
    54
    
    
    
    2,155Balance at June 30, 2007
    
    $
    507,645
    
    
    $
    389,349
    
    
    $
    6,244
    
    
    $
    (805
    )
    
    $
    503
    
    
    $
    (6,874
    )
    
    $
    2,401
    
    
    $
    116,246
    
    
    $
    (13,860
    )
    
    $
    14,441Balance at January 1, 2006
    
    $
    512,334
    
    
    $
    418,784
    
    
    $
    3,341
    
    
    $
    (373
    )
    
    $
    754
    
    
    $
    (274
    )
    
    $
    50
    
    
    $
    112,000
    
    
    $
    (21,948
    )
    
    $
    Net income
    
    
    1,013
    
    
    
    1,013Unrealized loss on investment
securities net of $249 tax benefit
    
    
    (374
    )
    
    
    
    
    
    
    
    
    
    
    (374
    )Unrealized loss on derivative
net of $38 tax benefit
    
    
    (57
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57
    )Foreign currency adjustment
    
    
    1,020
    
    
    
    
    
    
    
    1,020Other comprehensive income
    
    
    589Total comprehensive income
    
    
    1,602Cash dividends
    
    
    (6,541
    )
    
    
    (6,541
    )Tax benefit on stock option exercises
    
    
    319
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319Stock option expense
    
    
    1,107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,107Conversion of trust preferred shares
to 1,013,938 shares of common stock
    
    
    19,513
    
    
    
    (1,058
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,070
    
    
    
    19,501Stock:Purchase of 48,433 shares
    
    
    (952
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (952
    )Sales of 147,636 shares
    
    
    2,199
    
    
    
    (508
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (406
    )
    
    
    603
    
    
    
    2,510Balance at June 30, 2006
    
    $
    529,581
    
    
    $
    411,690
    
    
    $
    4,361
    
    
    $
    (747
    )
    
    $
    697
    
    
    $
    (274
    )
    
    $
    1,070
    
    
    $
    113,673
    
    
    $
    (889
    )
    
    $
    
  6




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##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 For the Six Months ended June 30,2007
    
    
    2006(Dollars in thousands)(Loss) Income from continuing operations
    
    $
    (623
    )
    
    $
    17,659Loss from discontinued operations
    
    
    (9,895
    )
    
    
    (16,646
    )Net (loss) income
    
    
    (10,518
    )
    
    
    1,013Adjustments to reconcile net (loss) income to cash provided
by operating activities:Depreciation, amortization, and accretion, net
    
    
    4,834
    
    
    
    3,229Amortization and impairment of servicing assets
    
    
    7,487
    
    
    
    30,663Provision for loan and lease losses
    
    
    42,662
    
    
    
    16,048Loss (gain) from sales of loans held for sale
    
    
    10,071
    
    
    
    (32,333
    )Originations and purchases of loans held for sale
    
    
    (368,697
    )
    
    
    (5,063,058
    )Proceeds from sales and repayments of loans held for sale
    
    
    419,859
    
    
    
    5,573,814Net decrease in residuals
    
    
    456
    
    
    
    8,210Net decrease in accounts receivable
    
    
    137,687
    
    
    
    50,136Other, net
    
    
    (90,289
    )
    
    
    (39,893
    )Net cash provided by operating activities
    
    
    153,552
    
    
    
    547,829Investing activities:Proceeds from maturities/calls of investment securities:Held-to-maturity
    
    
    2,114
    
    
    
    895Available-for-sale
    
    
    1,962
    
    
    
    1,810Purchase of investment securities:Held-to-maturity
    
    
    (1,482
    )
    
    
    (1,426
    )Available-for-sale
    
    
    (17,278
    )
    
    
    (13,184
    )Net decrease in interest-bearing deposits
    
    
    12,184
    
    
    
    855Net increase in loans, excluding sales
    
    
    (156,541
    )
    
    
    (463,668
    )Proceeds from sale of loans
    
    
    34,385
    
    
    
    26,062Other, net
    
    
    (9,213
    )
    
    
    (5,938
    )Net cash used by investing activities
    
    
    (133,869
    )
    
    
    (454,594
    )Financing activities:Net decrease in deposits
    
    
    (233,733
    )
    
    
    (30,640
    )Net increase (decrease) in short-term borrowings
    
    
    10,757
    
    
    
    (243,564
    )Proceeds from issuance of collateralized debt
    
    
    331,781
    
    
    
    351,325Repayments of collateralized debt
    
    
    (176,924
    )
    
    
    (166,109
    )Proceeds from the issuance of trust preferred securities
    
    
    
    
    
    
    31,500Repayments of long term debt
    
    
    (7
    )
    
    
    (32,116
    )Purchase of treasury stock for employee benefit plans
    
    
    (12,753
    )
    
    
    (952
    )Proceeds from sale of stock for employee benefit plans
    
    
    2,091
    
    
    
    2,518Dividends paid
    
    
    (7,711
    )
    
    
    (6,541
    )Net cash used by financing activities
    
    
    (86,499
    )
    
    
    (94,579
    )Effect of exchange rate changes on cash
    
    
    1,285
    
    
    
    538Net decrease in cash and cash equivalents
    
    
    (65,531
    )
    
    
    (806
    )Cash and cash equivalents at beginning of period
    
    
    145,765
    
    
    
    155,486Cash and cash equivalents at end of period
    
    $
    80,234
    
    
    $
    154,680Supplemental disclosures of cash flow information:Cash flow during the period:Interest paid
    
    $
    122,412
    
    
    $
    115,450Income taxes paid
    
    $
    11,491
    
    
    $
    21,231Noncash transactions:Adoption of FAS 156
    
    $
    2,905
    
    
    $
    Loans transferred from held-for-sale to held-for-investment
    
    $
    166,773
    
    
    $
    Other real estate owned
    
    $
    7,703
    
    
    $
    4,437Conversion of trust preferred stock to common stock
    
    $
    
    
    
    $
    19,513
  7




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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:
 Allowance for Loan and Lease Losses:
   Servicing Assets:
 8




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##### Table of Contents



Incentive Servicing Fees:
  Income Taxes:
 Recent Accounting Developments:
    9




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##### Table of Contents



Reclassifications:
 Note 2  Discontinued Operations
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Net revenues
    
    $
    (3,955
    )
    
    $
    21,153
    
    
    $
    (8,676
    )
    
    $
    29,514Other expense
    
    
    (5,873
    )
    
    
    (31,305
    )
    
    
    (7,929
    )
    
    
    (57,240
    )Loss before income taxes
    
    
    (9,828
    )
    
    
    (10,152
    )
    
    
    (16,605
    )
    
    
    (27,726
    )Income taxes
    
    
    3,968
    
    
    
    4,054
    
    
    
    6,710
    
    
    
    11,080Net loss from discontinued operations
    
    $
    (5,860
    )
    
    $
    (6,098
    )
    
    $
    (9,895
    )
    
    $
    (16,646
    )
 June 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)Loans, net of allowance, and Loans held for sale
    
    $
    21,248
    
    
    $
    48,555Net servicing asset
    
    
    35
    
    
    
    385Other assets
    
    
    5,979
    
    
    
    7,633Assets held for sale
    
    $
    27,262
    
    
    $
    56,573
 10




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##### Table of Contents



Note 3  Loans and Leases
  June 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Commercial, financial and agricultural
    
    $
    2,291,303
    
    
    $
    2,249,988Residential real estate-construction
    
    
    337,156
    
    
    
    377,601Residential real estate-mortgage
    
    
    1,698,084
    
    
    
    1,522,616Consumer
    
    
    25,274
    
    
    
    31,581Commercial financingFranchise financing
    
    
    783,102
    
    
    
    699,969Domestic leasing
    
    
    303,102
    
    
    
    296,056Canadian leasing
    
    
    417,460
    
    
    
    358,783Unearned incomeFranchise financing
    
    
    (248,889
    )
    
    
    (211,480
    )Domestic leasing
    
    
    (42,873
    )
    
    
    (42,782
    )Canadian leasing
    
    
    (51,963
    )
    
    
    (44,139
    )Total
    
    $
    5,511,756
    
    
    $
    5,238,193
 Note 4  Allowance for Loan and Lease Losses
  June 30, 2007
    
    December 31, 2006And the Six Months
    
    And the YearThen Ended
    
    Then Ended(Dollars in thousands)Balance at beginning of year
    
    $
    74,468
    
    
    $
    59,223Provision for loan and lease losses
    
    
    42,662
    
    
    
    35,101Charge-offs
    
    
    (29,837
    )
    
    
    (30,810
    )Recoveries
    
    
    5,326
    
    
    
    11,208Reduction due to reclassification or sale of loans
    
    
    (796
    )
    
    
    (246
    )Foreign currency adjustment
    
    
    317
    
    
    
    (8
    )Balance at end of period
    
    $
    92,140
    
    
    $
    74,468
 Note 5  Servicing Assets
   11




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##### Table of Contents



June 30, 2007
    
    
    December 31, 2006And the Six Months
    
    
    And the YearThen Ended
    
    
    Then Ended(Dollars in thousands)Beginning balance
    
    $
    27,725
    
    
    NAGain from initial adoption of SFAS 156
    
    
    2,905
    
    
    NAChanges in fair value
    
    
    (6,554
    )
    
    NAMortgage servicing asset from continuing operations
    
    $
    24,076
    
    
    NA
  June 30, 2007
    
    
    December 31, 2006And the Six Months
    
    
    And the YearThen Ended
    
    
    Then Ended(Dollars in thousands)Beginning balance
    
    $
    31,949
    
    
    $
    34,445Initial adoption of SFAS 156
    
    
    (27,725
    )
    
    
    Additions
    
    
    303
    
    
    
    17,884Amortization
    
    
    (637
    )
    
    
    (21,027
    )(Impairment) recovery
    
    
    (46
    )
    
    
    647Mortgage servicing asset from continuing operations
    
    $
    3,844
    
    
    $
    31,949
  June 30, 2007
    
    
    December 31, 2006And the Six Months
    
    
    And the YearThen Ended
    
    
    Then EndedBalance at beginning of year
    
    $
    483
    
    
    $
    1,152Transfer of assets from amortizing to fair value
    
    
    (332
    )
    
    
    Impairment (recovery)
    
    
    46
    
    
    
    (647
    )Reclass for sales of servicing and clean up calls
    
    
    
    
    
    
    (22
    )Valuation allowance from continuing operations
    
    $
    197
    
    
    $
    483
 Note 6  Short-Term Borrowings
  June 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)Federal Home Loan Bank borrowings
    
    $
    490,173
    
    
    $
    371,693Federal funds
    
    
    123,000
    
    
    
    230,500Other
    
    
    27
    
    
    
    250Total
    
    $
    613,200
    
    
    $
    602,443Weighted average interest rate
    
    
    4.77
    %
    
    
    4.49
    %
  12




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##### Table of Contents



Note 7  Collateralized Debt
   WeightedAverageInterest Rate atContractual
    
    June 30,
    
    June 30,
    
    December 31,Maturity
    
    2007
    
    2007
    
    2006(Dollars in thousands)Commercial finance line of businessDomestic asset backed note
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    5,797Canadian asset backed notes:Note 1
    
    
    revolving
    
    
    
    5.5
    
    
    
    39,727
    
    
    
    30,611Note 2
    
    
    6/2012
    
    
    
    4.4
    
    
    
    206,013
    
    
    
    179,508Note 3
    
    
    10/2009
    
    
    
    4.5
    
    
    
    5,919
    
    
    
    8,157Home equity line of business2004-1 asset backed notes:Variable rate senior note
    
    
    12/2024-12/2034
    
    
    
    5.7
    
    
    
    36,692
    
    
    
    50,072Variable rate subordinate note
    
    
    12/2034
    
    
    
    6.5
    
    
    
    24,775
    
    
    
    24,7752005-1 asset backed notes:Variable rate senior note
    
    
    6/2025-6/2035
    
    
    
    5.5
    
    
    
    27,156
    
    
    
    40,972Fixed rate senior note
    
    
    6/2035
    
    
    
    5.1
    
    
    
    78,169
    
    
    
    94,129Variable rate subordinate note
    
    
    6/2035
    
    
    
    7.1
    
    
    
    10,785
    
    
    
    10,785Fixed rate subordinate note
    
    
    6/2035
    
    
    
    5.6
    
    
    
    52,127
    
    
    
    52,127Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    (74
    )
    
    
    (90
    )2006-1 asset backed notes:Variable rate senior note
    
    
    9/2035
    
    
    
    5.5
    
    
    
    67,871
    
    
    
    102,252Fixed rate senior note
    
    
    9/2035
    
    
    
    5.5
    
    
    
    96,561
    
    
    
    96,561Fixed rate lockout senior note
    
    
    9/2035
    
    
    
    5.6
    
    
    
    24,264
    
    
    
    24,264Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    (19
    )2006-2 asset backed notes:Variable rate senior note
    
    
    2/2036
    
    
    
    5.4
    
    
    
    104,476
    
    
    
    136,386Fixed rate senior note
    
    
    2/2036
    
    
    
    6.3
    
    
    
    80,033
    
    
    
    80,033Fixed rate lockout senior note
    
    
    2/2036
    
    
    
    6.2
    
    
    
    21,348
    
    
    
    21,348Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    (21
    )2006-3 asset backed notes:Variable rate senior note
    
    
    1/2037-9/2037
    
    
    
    5.5
    
    
    
    101,645
    
    
    
    130,326Fixed rate senior note
    
    
    9/2037
    
    
    
    5.9
    
    
    
    67,050
    
    
    
    67,050Fixed rate lockout senior note
    
    
    9/2037
    
    
    
    5.9
    
    
    
    18,000
    
    
    
    18,000Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (11
    )2007-1 asset backed notes:Variable rate senior note
    
    
    8/2037
    
    
    
    5.5
    
    
    
    152,074
    
    
    
    Fixed rate senior note
    
    
    8/2037
    
    
    
    6.0
    
    
    
    91,346
    
    
    
    Fixed rate lockout senior note
    
    
    8/2037
    
    
    
    5.9
    
    
    
    22,000
    
    
    
    Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    Total
    
    
    
    
    
    
    
    
    
    $
    1,327,897
    
    
    $
    1,173,012
 13




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##### Table of Contents



Note 8  Employee Retirement Plans
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Service cost
    
    $
    1,016
    
    
    $
    926
    
    
    $
    2,145
    
    
    $
    1,979Interest cost
    
    
    728
    
    
    
    645
    
    
    
    1,414
    
    
    
    1,226Expected return on plan assets
    
    
    (616
    )
    
    
    (523
    )
    
    
    (1,254
    )
    
    
    (1,126
    )Amortization of transition obligation
    
    
    3
    
    
    
    3
    
    
    
    5
    
    
    
    5Amortization of prior service cost
    
    
    9
    
    
    
    9
    
    
    
    19
    
    
    
    20Amortization of actuarial loss
    
    
    136
    
    
    
    200
    
    
    
    312
    
    
    
    484Net periodic benefit cost
    
    $
    1,276
    
    
    $
    1,260
    
    
    $
    2,641
    
    
    $
    2,588
  Note 9  Earnings Per Share
  Three Months ended June 30, 2007Basic
    
    
    
    
    
    DilutedNet
    
    Preferred
    
    Earnings
    
    Effect of
    
    EarningsIncome (Loss)
    
    Dividends
    
    Per Share
    
    Stock Options
    
    Per Share(Dollars in thousands, except per share amounts)Net income (loss) available to common shareholders:From Continuing Operations
    
    $
    5,471
    
    
    $
    (326
    )
    
    $
    5,145
    
    
    $
    (215
    )
    
    $
    4,930From Discontinued Operations
    
    
    (5,860
    )
    
    
    
    
    
    
    (5,860
    )
    
    
    
    
    
    
    (5,860
    )Total Net Loss for All Operations
    
    $
    (389
    )
    
    $
    (326
    )
    
    
    (715
    )
    
    
    (215
    )
    
    
    (930
    )Shares
    
    
    
    
    
    
    
    
    
    
    29,361
    
    
    
    14
    
    
    
    29,375Per-share from Continuing Operations
    
    
    
    
    
    
    
    
    
    $
    0.18
    
    
    $
    (0.01
    )
    
    $
    0.17Per-share amount for All Operations
    
    
    
    
    
    
    
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )
 Three Months ended June 30, 2006Basic
    
    
    
    
    
    DilutedNet
    
    Preferred
    
    Earnings
    
    Effect of
    
    EarningsIncome (Loss)
    
    Dividends
    
    Per Share
    
    Stock Options
    
    Per Share(Dollars in thousands, except per share amounts)Net income (loss) available to common shareholders:From Continuing Operations
    
    $
    8,969
    
    
    $
    
    
    
    $
    8,969
    
    
    $
    (71
    )
    
    $
    8,898From Discontinued Operations
    
    
    (6,098
    )
    
    
    
    
    
    
    (6,098
    )
    
    
    
    
    
    
    (6,098
    )Total Net Income for All Operations
    
    $
    2,871
    
    
    $
    
    
    
    
    2,871
    
    
    
    (71
    )
    
    
    2,800Shares
    
    
    
    
    
    
    
    
    
    
    29,694
    
    
    
    168
    
    
    
    29,862Per-share from Continuing Operations
    
    
    
    
    
    
    
    
    
    $
    0.30
    
    
    $
    
    
    
    $
    0.30Per-share amount for All Operations
    
    
    
    
    
    
    
    
    
    $
    0.10
    
    
    $
    (0.01
    )
    
    $
    0.09
 14




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##### Table of Contents



Six Months ended June 30, 2007Basic
    
    
    
    
    
    DilutedNet
    
    Preferred
    
    Earnings
    
    Effect of
    
    EarningsLoss
    
    Dividends
    
    Per Share
    
    Stock Options
    
    Per Share(Dollars in thousands, except per share amounts)Net loss available to common shareholders:From Continuing Operations
    
    $
    (623
    )
    
    $
    (678
    )
    
    $
    (1,301
    )
    
    $
    (404
    )
    
    $
    (1,705
    )From Discontinued Operations
    
    
    (9,895
    )
    
    
    
    
    
    
    (9,895
    )
    
    
    
    
    
    
    (9,895
    )Total Net Loss for All Operations
    
    $
    (10,518
    )
    
    $
    (678
    )
    
    
    (11,196
    )
    
    
    (404
    )
    
    
    (11,600
    )Shares
    
    
    
    
    
    
    
    
    
    
    29,491
    
    
    
    75
    
    
    
    29,566Per-share from Continuing Operations
    
    
    
    
    
    
    
    
    
    $
    (0.04
    )
    
    $
    (0.02
    )
    
    $
    (0.06
    )Per-share amount for All Operations
    
    
    
    
    
    
    
    
    
    $
    (0.38
    )
    
    $
    (0.01
    )
    
    $
    (0.39
    )
 Six Months ended June 30, 2006Basic
    
    
    
    
    
    DilutedNet
    
    Preferred
    
    Earnings
    
    Effect of
    
    EarningsIncome (Loss)
    
    Dividends
    
    Per Share
    
    Stock Options
    
    Per Share(Dollars in thousands, except per share amounts)Net income (loss) available to common shareholders:From Continuing Operations
    
    $
    17,659
    
    
    $
    
    
    
    $
    17,659
    
    
    $
    (140
    )
    
    $
    17,519From Discontinued Operations
    
    
    (16,646
    )
    
    
    
    
    
    
    (16,646
    )
    
    
    
    
    
    
    (16,646
    )Total Net Income for All Operations
    
    $
    1,013
    
    
    $
    
    
    
    
    1,013
    
    
    
    (140
    )
    
    
    873Shares
    
    
    
    
    
    
    
    
    
    
    29,318
    
    
    
    190
    
    
    
    29,508Per-share from Continuing Operations
    
    
    
    
    
    
    
    
    
    $
    0.60
    
    
    $
    (0.01
    )
    
    $
    0.59Per-share amount for All Operations
    
    
    
    
    
    
    
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.03
  Note 10  Industry Segment Information
    15




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##### Table of Contents



ConsolidatedCommercial
    
    Commercial
    
    Home Equity
    
    
    
    
    
    Continuing
    
    DiscontinuedBanking
    
    Finance
    
    Lending
    
    Other
    
    Operations
    
    Operations
    
    Consolidated(Dollars in thousands)For the Three Months Ended June 30, 2007Net interest income
    
    $
    28,278
    
    
    $
    19,306
    
    
    $
    14,549
    
    
    $
    (15,743
    )
    
    $
    46,390
    
    
    $
    (876
    )
    
    $
    45,514Intersegment interest
    
    
    814
    
    
    
    (9,436
    )
    
    
    (5,677
    )
    
    
    14,299
    
    
    
    
    
    
    
    
    
    
    
    Other revenues
    
    
    4,188
    
    
    
    2,947
    
    
    
    3,679
    
    
    
    (1,233
    )
    
    
    9,581
    
    
    
    (3,079
    )
    
    
    6,502Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    1,084
    
    
    
    (1,084
    )
    
    
    
    
    
    
    
    
    
    
    Total net revenues
    
    
    33,280
    
    
    
    12,817
    
    
    
    13,635
    
    
    
    (3,761
    )
    
    
    55,971
    
    
    
    (3,955
    )
    
    
    52,016Other expense
    
    
    22,006
    
    
    
    7,477
    
    
    
    16,198
    
    
    
    1,383
    
    
    
    47,064
    
    
    
    5,873
    
    
    
    52,937Intersegment expenses
    
    
    917
    
    
    
    457
    
    
    
    670
    
    
    
    (2,044
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) before taxes
    
    
    10,357
    
    
    
    4,883
    
    
    
    (3,233
    )
    
    
    (3,100
    )
    
    
    8,907
    
    
    
    (9,828
    )
    
    
    (921
    )Income taxes
    
    
    4,015
    
    
    
    1,947
    
    
    
    (1,283
    )
    
    
    (1,243
    )
    
    
    3,436
    
    
    
    (3,968
    )
    
    
    (532
    )Net income (loss)
    
    $
    6,342
    
    
    $
    2,936
    
    
    $
    (1,950
    )
    
    $
    (1,857
    )
    
    $
    5,471
    
    
    $
    (5,860
    )
    
    $
    (389
    )For the Three Months Ended June 30, 2006Net interest income
    
    $
    26,753
    
    
    $
    15,262
    
    
    $
    29,817
    
    
    $
    (14,786
    )
    
    $
    57,046
    
    
    $
    7,443
    
    
    $
    64,489Intersegment interest
    
    
    3,321
    
    
    
    (6,940
    )
    
    
    (10,597
    )
    
    
    14,216
    
    
    
    
    
    
    
    
    
    
    
    Other revenue
    
    
    4,593
    
    
    
    1,999
    
    
    
    3,580
    
    
    
    (1,126
    )
    
    
    9,046
    
    
    
    13,710
    
    
    
    22,756Total net revenues
    
    
    34,667
    
    
    
    10,321
    
    
    
    22,800
    
    
    
    (1,696
    )
    
    
    66,092
    
    
    
    21,153
    
    
    
    87,245Other expense
    
    
    20,898
    
    
    
    5,421
    
    
    
    22,628
    
    
    
    2,348
    
    
    
    51,295
    
    
    
    31,305
    
    
    
    82,600Intersegment expenses
    
    
    687
    
    
    
    289
    
    
    
    791
    
    
    
    (1,767
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) before taxes
    
    
    13,082
    
    
    
    4,611
    
    
    
    (619
    )
    
    
    (2,277
    )
    
    
    14,797
    
    
    
    (10,152
    )
    
    
    4,645Income taxes
    
    
    5,230
    
    
    
    1,679
    
    
    
    (238
    )
    
    
    (843
    )
    
    
    5,828
    
    
    
    (4,054
    )
    
    
    1,774Net income (loss)
    
    $
    7,852
    
    
    $
    2,932
    
    
    $
    (381
    )
    
    $
    (1,434
    )
    
    $
    8,969
    
    
    $
    (6,098
    )
    
    $
    2,871
 ConsolidatedCommercial
    
    Commercial
    
    Home Equity
    
    
    
    
    
    Continuing
    
    DiscontinuedBanking
    
    Finance
    
    Lending
    
    Other
    
    Operations
    
    Operations
    
    Consolidated(Dollars in thousands)For the Six Months Ended June 30, 2007Net interest income
    
    $
    54,192
    
    
    $
    36,876
    
    
    $
    31,751
    
    
    $
    (33,510
    )
    
    $
    89,309
    
    
    $
    (1,215
    )
    
    $
    88,094Intersegment interest
    
    
    (155
    )
    
    
    (18,477
    )
    
    
    (13,403
    )
    
    
    32,035
    
    
    
    
    
    
    
    
    
    
    
    Other revenue
    
    
    8,135
    
    
    
    5,738
    
    
    
    (3,051
    )
    
    
    (2,055
    )
    
    
    8,767
    
    
    
    (7,461
    )
    
    
    1,306Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    1,017
    
    
    
    (1,017
    )
    
    
    
    
    
    
    
    
    
    
    Total net revenues
    
    
    62,172
    
    
    
    24,137
    
    
    
    16,314
    
    
    
    (4,547
    )
    
    
    98,076
    
    
    
    (8,676
    )
    
    
    89,400Other expense
    
    
    45,446
    
    
    
    14,259
    
    
    
    35,153
    
    
    
    4,491
    
    
    
    99,349
    
    
    
    7,929
    
    
    
    107,278Intersegment expenses
    
    
    1,768
    
    
    
    809
    
    
    
    1,296
    
    
    
    (3,873
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) before taxes
    
    
    14,958
    
    
    
    9,069
    
    
    
    (20,135
    )
    
    
    (5,165
    )
    
    
    (1,273
    )
    
    
    (16,605
    )
    
    
    (17,878
    )Income taxes
    
    
    5,453
    
    
    
    3,542
    
    
    
    (8,035
    )
    
    
    (1,610
    )
    
    
    (650
    )
    
    
    (6,710
    )
    
    
    (7,360
    )Net income (loss)
    
    $
    9,505
    
    
    $
    5,527
    
    
    $
    (12,100
    )
    
    $
    (3,555
    )
    
    $
    (623
    )
    
    $
    (9,895
    )
    
    $
    (10,518
    )Assets at June 30, 2007
    
    $
    3,099,206
    
    
    $
    1,175,325
    
    
    $
    1,577,785
    
    
    $
    245,606
    
    
    
    
    
    
    
    
    
    
    $
    6,097,922For the Six Months Ended June 30, 2006Net interest income
    
    $
    53,264
    
    
    $
    29,781
    
    
    $
    56,653
    
    
    $
    (30,268
    )
    
    $
    109,430
    
    
    $
    14,380
    
    
    $
    123,810Intersegment interest
    
    
    5,196
    
    
    
    (12,931
    )
    
    
    (20,318
    )
    
    
    28,053
    
    
    
    
    
    
    
    
    
    
    
    Other revenue
    
    
    8,862
    
    
    
    4,149
    
    
    
    10,968
    
    
    
    (937
    )
    
    
    23,042
    
    
    
    15,134
    
    
    
    38,176Total net revenues
    
    
    67,322
    
    
    
    20,999
    
    
    
    47,303
    
    
    
    (3,152
    )
    
    
    132,472
    
    
    
    29,514
    
    
    
    161,986Other expense
    
    
    41,685
    
    
    
    11,094
    
    
    
    44,483
    
    
    
    6,846
    
    
    
    104,108
    
    
    
    57,240
    
    
    
    161,348Intersegment expenses
    
    
    1,371
    
    
    
    554
    
    
    
    1,707
    
    
    
    (3,632
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) before taxes
    
    
    24,266
    
    
    
    9,351
    
    
    
    1,113
    
    
    
    (6,366
    )
    
    
    28,364
    
    
    
    (27,726
    )
    
    
    638Income taxes
    
    
    9,652
    
    
    
    3,528
    
    
    
    460
    
    
    
    (2,935
    )
    
    
    10,705
    
    
    
    (11,080
    )
    
    
    (375
    )Net income (loss)
    
    $
    14,614
    
    
    $
    5,823
    
    
    $
    653
    
    
    $
    (3,431
    )
    
    $
    17,659
    
    
    $
    (16,646
    )
    
    $
    1,013Assets at June 30, 2006
    
    $
    3,004,403
    
    
    $
    969,876
    
    
    $
    1,398,377
    
    
    $
    1,143,335
    
    
    
    
    
    
    
    
    
    
    $
    6,515,991
 16




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##### Table of Contents



Note 11  Commitments and Contingencies
 Culpepper v. Inland Mortgage Corporation
 th
 Silke v. Irwin Mortgage Corporation
 Charter One Mortgage Corporation v. Condra, Charter One Silke Silke
 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 Kossler
 17




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##### Table of Contents



Hobson Kossler Hobson Hobson
 Hobson Kossler Hobson Hobson Kossler
 (Chatfield v. Irwin Union Bank and Trust Company, et al. Ransom v. Irwin
Union Bank and Trust Company, et al.)
 Hobson,
Chatfield Ransom.
 Hobson, Chatfield Ransom Kossler Kessler v. RFC, et al Kessler Kessler Kessler Kessler Kessler Amicus Curiae Kessler Kessler
 Putkowski v. Irwin Home Equity Corporation and Irwin Union Bank and Trust Company
  White v. Irwin Union Bank and Trust Company and Irwin Home Equity Corporation
 (White v. Irwin Union Bank & Trust, et al.)
 18




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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,
charge-offs, reserves, asset valuations, capital ratios or financial performance measures;
    
    our plans and strategies, including the expected results or costs and impact of
implementing or changing such plans and strategies;
    
    potential litigation developments and the anticipated impact of potential outcomes of pending legal matters;
    
    the anticipated effects on results of operations or financial condition from recent developments or events; and
    
    any other projections or expressions that are not historical facts.
   
    
    potential changes in direction, volatility and relative movement (basis risk) of interest
rates, which may affect consumer demand for our products and the management and success of
our interest rate risk management strategies;
    
    competition from other financial service providers for experienced managers as well as
for customers;
 19




---



##### Table of Contents




    
    staffing fluctuations in response to product demand or the implementation of corporate
strategies that affect our work force;
    
    the relative profitability of our lending operations;
    
    the valuation and management of our portfolios, including the use of external and
internal modeling assumptions we embed in the valuation of those portfolios and short-term
swings in the valuation of such portfolios;
    
    borrowers refinancing opportunities, which may affect the prepayment assumptions used in
our valuation estimates and which may affect loan demand;
    
    unanticipated deterioration in the credit quality or collectibility of our loan and lease
assets, including deterioration resulting from the effects of natural disasters;
    
    unanticipated deterioration or changes in estimates of the carrying value of our other assets, including securities;
    
    difficulties in delivering products to the secondary market as planned;
    
    difficulties in expanding our businesses and obtaining funding sources as needed;
    
    changes in the value of our lines of business, subsidiaries, or companies in which we invest;
    
    changes in variable compensation plans related to the performance and valuation of lines
of business where we tie compensation systems to line-of-business performance;
    
    unanticipated outcomes in litigation;
    
    legislative or regulatory changes, including changes in laws, rules or regulations that
affect tax, consumer or commercial lending, corporate governance and disclosure
requirements, and other laws, rules or regulations affecting the rights and responsibilities
of our Corporation, bank or thrift;
    
    regulatory actions that impact our Corporation, bank or thrift, including the memorandum
of understanding entered into as of March 1, 2007 between Irwin Union Bank and Trust and the
Federal Reserve Bank of Chicago;
    
    changes in the interpretation of regulatory capital or other rules;
    
    the availability of resources to address changes in laws, rules or regulations or to respond to regulatory actions;
    
    changes in applicable accounting policies or principles or their application to our
business or final audit adjustments, including additional guidance and interpretation on
accounting issues and details of the implementation of new accounting methods;
    
    the final disposition of our remaining assets and obligations of our discontinued mortgage banking segment; or
    
    governmental changes in monetary or fiscal policies.
  Strategy
  20




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##### Table of Contents



Identify market niches.
 Attract, develop and retain exceptional management with niche expertise.
 Diversify capital and earnings risk.
 Focus on organic growth.
 Identify opportunities for coordination and efficiencies across the Bank.
 Create and maintain risk management systems appropriate to our size, scale and scope.
  Critical Accounting Policies
  21




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##### Table of Contents



Consolidated Overview
  For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    % Change
    
    2007
    
    2006
    
    % ChangeNet income (loss) from continuing operations (in thousands)
    
    $
    5,471
    
    
    $
    8,969
    
    
    
    (39.0
    %)
    
    $
    (623
    )
    
    $
    17,659
    
    
    NMNet (loss) income including discontinued operations (in thousands)
    
    
    (389
    )
    
    
    2,871
    
    
    NM
    
    
    (10,518
    )
    
    
    1,013
    
    
    NMBasic earnings per share from continuing operations
    
    
    0.18
    
    
    
    0.30
    
    
    
    (40.0
    %)
    
    
    (0.04
    )
    
    
    0.60
    
    
    NMBasic earnings per share including discontinued operations
    
    
    (0.02
    )
    
    
    0.10
    
    
    NM
    
    
    (0.38
    )
    
    
    0.03
    
    
    NMDiluted earnings per share from continuing operations
    
    
    0.17
    
    
    
    0.30
    
    
    
    (43.3
    %)
    
    
    (0.06
    )
    
    
    0.59
    
    
    NMDiluted earnings per share including discontinued operations
    
    
    (0.03
    )
    
    
    0.09
    
    
    NM
    
    
    (0.39
    )
    
    
    0.03
    
    
    NMReturn on average equity from continuing operations
    
    
    4.3
    %
    
    
    6.7
    %
    
    
    
    
    
    
    (0.2
    )%
    
    
    4.5
    %Return on average assets from continuing operations
    
    
    0.4
    %
    
    
    0.5
    %
    
    
    
    
    
    
    0.0
    %
    
    
    0.4
    %
 Consolidated Income Statement Analysis
 Net Income from Continuing Operations
   Net Interest Income from Continuing Operations
  22




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##### Table of Contents



For the Six Months Ended June 30,2007
    
    
    2006Annualized
    
    
    
    
    
    
    
    
    
    
    AnnualizedAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)AssetsInterest-earning assets:Interest-bearing deposits with financial institutions
    
    $
    54,887
    
    
    $
    1,374
    
    
    
    5.05
    %
    
    $
    79,889
    
    
    $
    1,311
    
    
    
    3.31
    %Federal funds sold
    
    
    30,678
    
    
    
    807
    
    
    
    5.30
    %
    
    
    2,244
    
    
    
    48
    
    
    
    4.31
    %Residual interests
    
    
    10,108
    
    
    
    549
    
    
    
    10.95
    %
    
    
    16,207
    
    
    
    1,130
    
    
    
    14.06
    %Investment securities
    
    
    135,968
    
    
    
    3,645
    
    
    
    5.41
    %
    
    
    106,282
    
    
    
    2,395
    
    
    
    4.54
    %Loans held for sale
    
    
    167,480
    
    
    
    6,091
    
    
    
    7.33
    %
    
    
    1,236,293
    
    
    
    50,180
    
    
    
    8.19
    %Loans and leases, net of unearned income(1)
    
    
    5,351,985
    
    
    
    244,910
    
    
    
    9.23
    %
    
    
    4,681,482
    
    
    
    203,526
    
    
    
    8.77
    %Total interest earning assets
    
    
    5,751,106
    
    
    $
    257,376
    
    
    
    9.02
    %
    
    
    6,122,397
    
    
    $
    258,590
    
    
    
    8.52
    %Noninterest-earning assets:Cash and due from banks
    
    
    72,036
    
    
    
    
    
    
    
    
    
    
    
    111,564Premises and equipment, net
    
    
    38,604
    
    
    
    
    
    
    
    
    
    
    
    32,312Other assets
    
    
    305,064
    
    
    
    
    
    
    
    
    
    
    
    528,918Less allowance for loan and lease losses
    
    
    (82,825
    )
    
    
    
    
    
    
    
    
    
    
    (64,106
    )Total assets
    
    $
    6,083,985
    
    
    
    
    
    
    
    
    
    
    $
    6,731,085Liabilities and Shareholders EquityInterest-bearing liabilities:Money market checking
    
    $
    290,790
    
    
    $
    3,406
    
    
    
    2.36
    %
    
    $
    410,471
    
    
    $
    4,923
    
    
    
    2.42
    %Money market savings
    
    
    1,152,525
    
    
    
    25,726
    
    
    
    4.50
    %
    
    
    1,199,666
    
    
    
    23,849
    
    
    
    4.01
    %Regular savings
    
    
    125,220
    
    
    
    1,375
    
    
    
    2.21
    %
    
    
    135,916
    
    
    
    1,154
    
    
    
    1.71
    %Time deposits
    
    
    1,500,068
    
    
    
    37,924
    
    
    
    5.10
    %
    
    
    1,574,336
    
    
    
    34,373
    
    
    
    4.40
    %Short-term borrowings
    
    
    633,603
    
    
    
    16,581
    
    
    
    5.28
    %
    
    
    686,757
    
    
    
    20,818
    
    
    
    6.11
    %Collateralized debt
    
    
    1,181,911
    
    
    
    32,928
    
    
    
    5.62
    %
    
    
    893,536
    
    
    
    22,707
    
    
    
    5.12
    %Other long-term debt
    
    
    233,955
    
    
    
    8,680
    
    
    
    7.48
    %
    
    
    260,414
    
    
    
    10,908
    
    
    
    8.45
    %Total interest-bearing liabilities
    
    $
    5,118,072
    
    
    $
    126,620
    
    
    
    4.99
    %
    
    $
    5,161,096
    
    
    $
    118,732
    
    
    
    4.64
    %Noninterest-bearing liabilities:Demand deposits
    
    
    343,183
    
    
    
    
    
    
    
    
    
    
    
    768,056Other liabilities
    
    
    102,784
    
    
    
    
    
    
    
    
    
    
    
    277,920Shareholders equity
    
    
    519,946
    
    
    
    
    
    
    
    
    
    
    
    524,013Total liabilities and shareholders equity
    
    $
    6,083,985
    
    
    
    
    
    
    
    
    
    
    $
    6,731,085Net interest income
    
    
    
    
    
    $
    130,756
    
    
    
    
    
    
    
    
    
    
    $
    139,858Net interest income to average
interest earning assets
    
    
    
    
    
    
    
    
    
    
    4.58
    %
    
    
    
    
    
    
    
    
    
    
    4.61
    %Less: Net interest income from discontinued operations
    
    
    
    
    
    
    (1,215
    )
    
    
    
    
    
    
    
    
    
    
    14,409Net interest income from continuing operations
    
    
    
    
    
    $
    131,971
    
    
    
    
    
    
    
    
    
    
    $
    125,449
 
 (1)
    
    For purposes of these computations, nonaccrual loans are included in daily average loan
amounts outstanding. 23




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##### Table of Contents



Provision for Loan and Lease Losses from Continuing Operations
  Noninterest Income from Continuing Operations
  Noninterest Expense from Continuing Operations
  Income Tax Provision from Continuing Operations
  Consolidated Balance Sheet Analysis
  Investment Securities
  June 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)U.S. Treasury and government obligations
    
    $
    13,245
    
    
    $
    13,730Obligations of states and political subdivisions
    
    
    3,436
    
    
    
    3,545Mortgage-backed securities
    
    
    48,189
    
    
    
    45,187Other
    
    
    77,443
    
    
    
    65,968Total
    
    $
    142,313
    
    
    $
    128,430
 Loans Held For Sale
  24




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##### Table of Contents



Loans and Leases
  June 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Commercial, financial and agricultural
    
    $
    2,291,303
    
    
    $
    2,249,988Residential real estate-construction
    
    
    337,156
    
    
    
    377,601Residential real estate-mortgage
    
    
    1,698,084
    
    
    
    1,522,616Consumer
    
    
    25,274
    
    
    
    31,581Commercial financingFranchise financing
    
    
    783,102
    
    
    
    699,969Domestic leasing
    
    
    303,102
    
    
    
    296,056Canadian leasing
    
    
    417,460
    
    
    
    358,783Unearned incomeFranchise financing
    
    
    (248,889
    )
    
    
    (211,480
    )Domestic leasing
    
    
    (42,873
    )
    
    
    (42,782
    )Canadian leasing
    
    
    (51,963
    )
    
    
    (44,139
    )Total
    
    $
    5,511,756
    
    
    $
    5,238,193
 Allowance for Loans and Lease Losses
  June 30, 2007
    
    December 31, 2006And the Six Months
    
    And the YearThen Ended
    
    Then Ended(Dollars in thousands)Balance at beginning of year
    
    $
    74,468
    
    
    $
    59,223Provision for loan and lease losses
    
    
    42,662
    
    
    
    35,101Charge-offs
    
    
    (29,837
    )
    
    
    (30,810
    )Recoveries
    
    
    5,326
    
    
    
    11,208Reduction due to reclassification or sale of loans
    
    
    (796
    )
    
    
    (246
    )Foreign currency adjustment
    
    
    317
    
    
    
    (8
    )Balance at end of period
    
    $
    92,140
    
    
    $
    74,468
 Deposits
   Short-Term Borrowings
  25




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##### Table of Contents



Collateralized and Other Long-Term Debt
   Capital
   June 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)Tier 1 capital
    
    $
    680,781
    
    
    $
    712,403Tier 2 capital
    
    
    134,184
    
    
    
    125,351Total risk-based capital
    
    $
    814,965
    
    
    $
    837,754Risk-weighted assets
    
    $
    6,113,756
    
    
    $
    6,258,927Risk-based ratios:Tier 1 capital
    
    
    11.1
    %
    
    
    11.4
    %Total capital
    
    
    13.3
    
    
    
    13.4Tier 1 leverage ratio
    
    
    11.1
    
    
    
    11.5Ending shareholders equity to assets
    
    
    8.3
    
    
    
    8.5Average shareholders equity to assets
    
    
    8.5
    
    
    
    8.1
   26




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##### Table of Contents



Cash Flow Analysis
  Earnings Outlook
     Earnings by Line of Business
  
    
    Commercial Banking
 27




---



##### Table of Contents




    
    Commercial Finance
    
    Home Equity Lending
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Net income (loss):Commercial Banking
    
    $
    6,342
    
    
    $
    7,852
    
    
    $
    9,505
    
    
    $
    14,614Commercial Finance
    
    
    2,936
    
    
    
    2,932
    
    
    
    5,527
    
    
    
    5,823Home Equity Lending
    
    
    (1,950
    )
    
    
    (381
    )
    
    
    (12,100
    )
    
    
    653Other (including consolidating entries)
    
    
    (1,857
    )
    
    
    (1,434
    )
    
    
    (3,555
    )
    
    
    (3,431
    )Net income (loss) from continuing
operations
    
    
    5,471
    
    
    
    8,969
    
    
    
    (623
    )
    
    
    17,659Discontinued operations
    
    
    (5,860
    )
    
    
    (6,098
    )
    
    
    (9,895
    )
    
    
    (16,646
    )Net (loss) income
    
    $
    (389
    )
    
    $
    2,871
    
    
    $
    (10,518
    )
    
    $
    1,013
 Commercial Banking
  Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Selected Income Statement Data:Interest income
    
    $
    59,782
    
    
    $
    58,583
    
    
    $
    117,255
    
    
    $
    112,068Interest expense
    
    
    (29,890
    )
    
    
    (27,172
    )
    
    
    (57,777
    )
    
    
    (50,795
    )Net interest income
    
    
    29,892
    
    
    
    31,411
    
    
    
    59,478
    
    
    
    61,273Provision for loan and lease losses
    
    
    (800
    )
    
    
    (1,337
    )
    
    
    (5,441
    )
    
    
    (2,813
    )Noninterest income
    
    
    4,188
    
    
    
    4,593
    
    
    
    8,135
    
    
    
    8,862Total net revenue
    
    
    33,280
    
    
    
    34,667
    
    
    
    62,172
    
    
    
    67,322Operating expense
    
    
    (22,923
    )
    
    
    (21,585
    )
    
    
    (47,214
    )
    
    
    (43,056
    )Income before taxes
    
    
    10,357
    
    
    
    13,082
    
    
    
    14,958
    
    
    
    24,266Income taxes
    
    
    (4,015
    )
    
    
    (5,230
    )
    
    
    (5,453
    )
    
    
    (9,652
    )Net income
    
    $
    6,342
    
    
    $
    7,852
    
    
    $
    9,505
    
    
    $
    14,614Performance Ratios:Return on Average Equity
    
    
    10.70
    %
    
    
    14.46
    %
    
    
    8.19
    %
    
    
    14.18
    %
 June 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Selected Balance Sheet Data at End of Period:Assets
    
    $
    3,099,206
    
    
    $
    3,103,547Loans and leases
    
    
    2,881,748
    
    
    
    2,901,029Allowance for loan and lease losses
    
    
    (26,476
    )
    
    
    (27,113
    )Deposits
    
    
    2,736,451
    
    
    
    2,635,380Shareholders equity
    
    
    241,768
    
    
    
    241,556Daily Averages:Assets
    
    $
    3,157,261
    
    
    $
    3,143,439Loans and leases
    
    
    2,889,207
    
    
    
    2,797,853Allowance for loan and lease losses
    
    
    (27,091
    )
    
    
    (26,175
    )Deposits
    
    
    2,767,725
    
    
    
    2,826,446Shareholders equity
    
    
    234,129
    
    
    
    218,076Shareholders equity to assets
    
    
    7.42
    %
    
    
    6.95
    %
 28




---



##### Table of Contents



Overview
   June 30,
    
    December 31,2007
    
    2006Weighted
    
    
    
    
    
    
    
    
    
    WeightedLoans
    
    Percent
    
    Average
    
    Loans
    
    Percent
    
    AverageMarkets
    
    Outstanding
    
    of Total
    
    Coupon
    
    Outstanding
    
    of Total
    
    Coupon(Dollars in thousands)Indianapolis
    
    $
    530,635
    
    
    
    18.4
    %
    
    
    7.5
    %
    
    $
    561,343
    
    
    
    19.3
    %
    
    
    7.6
    %Western and Central Michigan
    
    
    477,259
    
    
    
    16.6
    %
    
    
    7.6
    
    
    
    519,348
    
    
    
    17.9
    
    
    
    7.7Southern Indiana
    
    
    464,283
    
    
    
    16.1
    %
    
    
    7.2
    
    
    
    475,051
    
    
    
    16.4
    
    
    
    7.2Phoenix
    
    
    468,767
    
    
    
    16.3
    %
    
    
    7.7
    
    
    
    452,919
    
    
    
    15.6
    
    
    
    7.9Las Vegas
    
    
    165,645
    
    
    
    5.7
    %
    
    
    8.2
    
    
    
    154,218
    
    
    
    5.3
    
    
    
    8.1Other
    
    
    775,159
    
    
    
    26.9
    %
    
    
    7.8
    
    
    
    738,150
    
    
    
    25.5
    
    
    
    7.9Total
    
    $
    2,881,748
    
    
    
    100.0
    %
    
    
    7.6
    %
    
    $
    2,901,029
    
    
    
    100.0
    %
    
    
    7.7
    %
 Weighted
    
    
    
    
    
    
    
    
    
    WeightedCore
    
    Percent
    
    Average
    
    Core
    
    Percent
    
    AverageDeposits
    
    of Total
    
    Coupon
    
    Deposits
    
    of Total
    
    CouponIndianapolis
    
    $
    252,885
    
    
    
    10.4
    %
    
    
    3.1
    %
    
    $
    259,835
    
    
    
    10.8
    %
    
    
    2.4
    %Western and Central Michigan
    
    
    222,222
    
    
    
    9.1
    %
    
    
    3.6
    
    
    
    231,666
    
    
    
    9.7
    
    
    
    3.4Southern Indiana
    
    
    795,973
    
    
    
    32.7
    %
    
    
    3.3
    
    
    
    630,060
    
    
    
    26.3
    
    
    
    2.8Phoenix
    
    
    202,945
    
    
    
    8.3
    %
    
    
    4.0
    
    
    
    179,502
    
    
    
    7.5
    
    
    
    3.4Las Vegas
    
    
    455,414
    
    
    
    18.7
    %
    
    
    4.5
    
    
    
    467,708
    
    
    
    19.5
    
    
    
    4.1Other
    
    
    507,983
    
    
    
    20.8
    %
    
    
    3.7
    
    
    
    631,268
    
    
    
    26.2
    
    
    
    3.5Total
    
    $
    2,437,422
    
    
    
    100.0
    %
    
    
    3.7
    %
    
    $
    2,400,039
    
    
    
    100.0
    %
    
    
    3.3
    %
 Net Income
  Net Interest Income
  Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Net interest income
    
    $
    29,892
    
    
    $
    31,411
    
    
    $
    59,478
    
    
    $
    61,273Average interest earning assets
    
    
    3,104,600
    
    
    
    3,164,181
    
    
    
    3,055,570
    
    
    
    3,102,229Net interest margin
    
    
    3.86
    %
    
    
    3.98
    %
    
    
    3.93
    %
    
    
    3.98
    %
  29




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##### Table of Contents



Provision for Loan and Lease Losses
  Noninterest Income
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Trust fees
    
    $
    540
    
    
    $
    478
    
    
    $
    1,114
    
    
    $
    979Service charges on deposit accounts
    
    
    926
    
    
    
    1,102
    
    
    
    1,794
    
    
    
    2,061Insurance commissions, fees and
premiums
    
    
    436
    
    
    
    509
    
    
    
    1,021
    
    
    
    1,158Gain from sales of loans
    
    
    560
    
    
    
    582
    
    
    
    1,016
    
    
    
    1,011Loan servicing fees
    
    
    366
    
    
    
    377
    
    
    
    750
    
    
    
    763Amortization of servicing assets
    
    
    (290
    )
    
    
    (293
    )
    
    
    (569
    )
    
    
    (534
    )Brokerage fees
    
    
    398
    
    
    
    362
    
    
    
    750
    
    
    
    660Other
    
    
    1,252
    
    
    
    1,476
    
    
    
    2,259
    
    
    
    2,764Total noninterest income
    
    $
    4,188
    
    
    $
    4,593
    
    
    $
    8,135
    
    
    $
    8,862
  Operating Expenses
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Salaries and employee benefits
    
    $
    12,917
    
    
    $
    13,280
    
    
    $
    27,269
    
    
    $
    26,767Other expenses
    
    
    10,006
    
    
    
    8,305
    
    
    
    19,945
    
    
    
    16,289Total operating expenses
    
    $
    22,923
    
    
    $
    21,585
    
    
    $
    47,214
    
    
    $
    43,056Efficiency ratio
    
    
    67.3
    %
    
    
    60.0
    %
    
    
    69.8
    %
    
    
    61.4
    %Number of employees at period end(1)
    
    
    
    
    
    
    
    
    
    
    588
    
    
    
    585
 
 (1)
    
    On a full time equivalent basis.  Balance Sheet
  30




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##### Table of Contents



Credit Quality
  June 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)Nonperforming loans
    
    $
    11,323
    
    
    $
    14,455Other real estate owned
    
    
    5,683
    
    
    
    4,423Total nonperforming assets
    
    $
    17,006
    
    
    $
    18,878Nonperforming assets to total
assets
    
    
    0.55
    %
    
    
    0.61
    %Allowance for loan losses
    
    $
    26,476
    
    
    $
    27,113Allowance for loan losses to
total loans
    
    
    0.92
    %
    
    
    0.93
    %
 Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Provision for loan losses
    
    $
    800
    
    
    $
    1,337
    
    
    $
    5,441
    
    
    $
    2,813Net charge-offs
    
    
    1,252
    
    
    
    715
    
    
    
    6,079
    
    
    
    1,307Net charge-offs to average loans
    
    
    0.14
    %
    
    
    0.10
    %
    
    
    0.42
    %
    
    
    0.10
    %
  June 30,
    
    December 31,Markets
    
    2007
    
    2006Indianapolis
    
    
    0.27
    %
    
    
    0.24
    %Western and Central Michigan
    
    
    2.42
    %
    
    
    2.72
    %Southern Indiana
    
    
    0.18
    %
    
    
    0.14
    %Phoenix
    
    
    0.36
    %
    
    
    0.52
    %Las Vegas
    
    
    0.00
    %
    
    
    0.00
    %Other
    
    
    0.19
    %
    
    
    0.06
    %Total
    
    
    0.59
    %
    
    
    0.65
    %
 31




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##### Table of Contents



Commercial Finance
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    12,923
    
    
    $
    10,107
    
    
    $
    24,931
    
    
    $
    19,799Provision for loan and lease losses
    
    
    (3,053
    )
    
    
    (1,785
    )
    
    
    (6,532
    )
    
    
    (2,949
    )Noninterest income
    
    
    2,947
    
    
    
    1,999
    
    
    
    5,738
    
    
    
    4,149Total net revenue
    
    
    12,817
    
    
    
    10,321
    
    
    
    24,137
    
    
    
    20,999Operating expense
    
    
    (7,934
    )
    
    
    (5,710
    )
    
    
    (15,068
    )
    
    
    (11,648
    )Income before taxes
    
    
    4,883
    
    
    
    4,611
    
    
    
    9,069
    
    
    
    9,351Income taxes
    
    
    (1,947
    )
    
    
    (1,679
    )
    
    
    (3,542
    )
    
    
    (3,528
    )Net income
    
    $
    2,936
    
    
    $
    2,932
    
    
    $
    5,527
    
    
    $
    5,823Selected Operating Data:Net charge-offs
    
    $
    2,089
    
    
    $
    868
    
    
    $
    4,035
    
    
    $
    1,615Net interest margin
    
    
    4.69
    %
    
    
    4.50
    %
    
    
    4.67
    %
    
    
    4.58
    %Total funding of loans and leases
    
    $
    174,742
    
    
    $
    164,399
    
    
    $
    303,353
    
    
    $
    284,481Return on average equity
    
    
    10.81
    %
    
    
    16.88
    %
    
    
    11.26
    %
    
    
    17.61
    %
 June 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Selected Balance Sheet Data at End of Period:Total assets
    
    $
    1,175,325
    
    
    $
    1,073,552Loans and leases
    
    
    1,159,939
    
    
    
    1,056,406Allowance for loan and lease losses
    
    
    (15,544
    )
    
    
    (13,525
    )Shareholders equity
    
    
    105,306
    
    
    
    88,587
 Overview
   32




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##### Table of Contents



Portfolio Characteristics
  June 30,
    
    
    December 31,2007
    
    
    2006United StatesCalifornia
    
    
    11.9
    %
    
    
    12.4
    %Texas
    
    
    7.1
    
    
    
    5.9New York
    
    
    4.3
    
    
    
    5.0Florida
    
    
    3.8
    
    
    
    4.0All other states
    
    
    41.4
    
    
    
    42.8Total United States
    
    
    68.5
    %
    
    
    70.1
    %CanadaOntario
    
    
    7.6
    %
    
    
    7.3
    %Quebec
    
    
    7.4
    
    
    
    7.1British Columbia
    
    
    7.3
    
    
    
    7.0Alberta
    
    
    6.3
    
    
    
    5.8All other provinces
    
    
    2.9
    
    
    
    2.6Total Canada
    
    
    31.5
    %
    
    
    29.9
    %Total
    
    
    100.0
    %
    
    
    100.0
    %Total Portfolio
    
    $
    1,159,939
    
    
    $
    1,056,406
  June 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Domestic franchise loans
    
    $
    534,213
    
    
    $
    488,489Weighted average coupon
    
    
    
    %
    
    
    8.79
    %Delinquency ratio
    
    
    0.36
    
    
    
    0.16Domestic leases
    
    $
    260,229
    
    
    $
    253,274Weighted average coupon
    
    
    10.80
    %
    
    
    10.32
    %Delinquency ratio
    
    
    2.41
    
    
    
    1.72Canadian leases (1)
    
    $
    365,497
    
    
    $
    314,644Weighted average coupon
    
    
    9.17
    %
    
    
    9.13Delinquency ratio
    
    
    0.36
    
    
    
    0.36
 
 (1)
    
    In U.S. dollars. Net Income
  33




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##### Table of Contents



Net Interest Income
  Three Months June 30,
    
    Six Months June 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Net interest income
    
    $
    12,923
    
    
    $
    10,107
    
    
    $
    24,931
    
    
    $
    19,799Average interest earning assets
    
    
    1,104,098
    
    
    
    900,148
    
    
    
    1,077,182
    
    
    
    870,866Net interest margin
    
    
    4.69
    %
    
    
    4.50
    %
    
    
    4.67
    %
    
    
    4.58
    %
   Provision for Loan and Lease Losses
  Noninterest Income
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Gain from sales of loans
    
    $
    1,466
    
    
    $
    498
    
    
    $
    3,037
    
    
    $
    1,252Derivative losses, net
    
    
    (258
    )
    
    
    (165
    )
    
    
    (274
    )
    
    
    (218
    )Other
    
    
    1,739
    
    
    
    1,666
    
    
    
    2,975
    
    
    
    3,115Total noninterest income
    
    $
    2,947
    
    
    $
    1,999
    
    
    $
    5,738
    
    
    $
    4,149
  34




---



##### Table of Contents



Operating Expenses
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Salaries and employee benefits
    
    $
    4,529
    
    
    $
    3,055
    
    
    $
    9,111
    
    
    $
    6,581Other
    
    
    3,405
    
    
    
    2,655
    
    
    
    5,958
    
    
    
    5,067Total operating expenses
    
    $
    7,934
    
    
    $
    5,710
    
    
    $
    15,069
    
    
    $
    11,648Efficiency ratio
    
    
    50.00
    %
    
    
    47.20
    %
    
    
    49.10
    %
    
    
    48.65
    %Number of employees at period end (1)
    
    
    
    
    
    
    
    
    
    
    217
    
    
    
    195
 
 (1)
    
    On a full time equivalent basis.  Credit Quality
   June 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Nonperforming loans
    
    $
    5,773
    
    
    $
    5,374Allowance for loan losses
    
    
    15,544
    
    
    
    13,525Allowance for loan losses to total loans
    
    
    1.34
    %
    
    
    1.28
    %
 Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Provision for loan losses
    
    $
    3,053
    
    
    $
    1,785
    
    
    $
    6,532
    
    
    $
    2,949Net charge-offs
    
    
    2,089
    
    
    
    868
    
    
    
    4,035
    
    
    
    1,615Annualized net charge-offs to average
loans
    
    
    0.76
    %
    
    
    0.39
    %
    
    
    0.76
    %
    
    
    0.38
    %
 
 (1)
    
    In U.S. dollars. 35




---



##### Table of Contents



Home Equity Lending
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)
    
    
    (Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    24,473
    
    
    $
    22,924
    
    
    $
    49,037
    
    
    $
    46,593Provision for loan and lease losses
    
    
    (15,601
    )
    
    
    (3,704
    )
    
    
    (30,689
    )
    
    
    (10,258
    )Noninterest income
    
    
    4,763
    
    
    
    3,580
    
    
    
    (2,034
    )
    
    
    10,968Total net revenues
    
    
    13,635
    
    
    
    22,800
    
    
    
    16,314
    
    
    
    47,303Operating expenses
    
    
    (16,868
    )
    
    
    (23,419
    )
    
    
    (36,449
    )
    
    
    (46,190
    )Income (loss) before taxes
    
    
    (3,233
    )
    
    
    (619
    )
    
    
    (20,135
    )
    
    
    1,113Income taxes
    
    
    1,283
    
    
    
    238
    
    
    
    8,035
    
    
    
    (460
    )Net income (loss)
    
    $
    (1,950
    )
    
    $
    (381
    )
    
    $
    (12,100
    )
    
    $
    653Selected Operating Data:Loan volume:Lines of credit
    
    $
    7,745
    
    
    $
    31,617
    
    
    $
    20,356
    
    
    $
    94,919Loans
    
    
    115,393
    
    
    
    179,717
    
    
    
    292,002
    
    
    
    400,789Net home equity charge-offs to average
managed portfolio
    
    
    2.18
    %
    
    
    0.58
    %
    
    
    2.61
    %
    
    
    0.80
    %Gain on sale of loans to loans sold
    
    
    1.42
    %
    
    
    0.78
    %
    
    
    0.46
    %
    
    
    1.32
    %
 June 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Selected Balance Sheet Data:Total assets
    
    $
    1,577,785
    
    
    $
    1,617,219Home equity loans and lines of credit(1)
    
    
    1,469,814
    
    
    
    1,280,497Allowance for loan losses
    
    
    (49,905
    )
    
    
    (33,614
    )Home equity loans held for sale
    
    
    26,923
    
    
    
    236,636Residual interests
    
    
    2,730
    
    
    
    2,760Mortgage servicing assets
    
    
    24,465
    
    
    
    28,231Short-term borrowings
    
    
    223,429
    
    
    
    446,163Collateralized debt
    
    
    1,076,239
    
    
    
    948,939Shareholders equity
    
    
    190,157
    
    
    
    155,791Selected Operating Data:Total managed portfolio balance
    
    
    1,656,141
    
    
    
    1,708,975Delinquency ratio(2)
    
    
    3.6
    %
    
    
    3.2
    %Weighted average coupon rate:Lines of credit
    
    
    11.12
    %
    
    
    11.13
    %Loans
    
    
    10.94
    
    
    
    10.75
 
 (1)
    
    Includes $1.2 billion and $1.1 billion of collateralized loans at June 30, 2007 and December
31, 2006, respectively, pledged as part of securitized financings.(2)
    
    Nonaccrual loans are included in the delinquency ratio. Overview
   36




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##### Table of Contents



Production and Portfolio Characteristics
  June 30,
    
    
    December 31,State
    
    2007
    
    
    2006California
    
    
    9.8
    %
    
    
    10.2
    %Michigan
    
    
    8.0
    
    
    
    7.8Colorado
    
    
    7.5
    
    
    
    7.0Florida
    
    
    6.8
    
    
    
    7.8Ohio
    
    
    6.6
    
    
    
    6.2All other states
    
    
    61.3
    
    
    
    61.0Total
    
    
    100.0
    %
    
    
    100.0
    %Total managed portfolio in thousands
    
    $
    1,656,141
    
    
    $
    1,708,975
   June 30, 2007
    
    

December 31, 2006Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    
    AverageAmount
    
    
    % of Total
    
    
    Coupon
    
    
    Amount
    
    
    % of Total
    
    
    Coupon(Dollars in thousands)Loans £ 100% CLTV
    
    $
    459,331
    
    
    
    27.73
    %
    
    
    9.03
    %
    
    $
    536,387
    
    
    
    31.39
    %
    
    
    9.10
    %Lines of credit £ 100% CLTV
    
    
    275,217
    
    
    
    16.62
    
    
    
    9.92
    
    
    
    319,415
    
    
    
    18.69
    
    
    
    9.96First mortgages £ 100% CLTV
    
    
    49,472
    
    
    
    2.99
    
    
    
    7.56
    
    
    
    44,727
    
    
    
    2.62
    
    
    
    7.37Total £ 100% CLTV
    
    
    784,020
    
    
    
    47.34
    
    
    
    9.25
    
    
    
    900,529
    
    
    
    52.70
    
    
    
    9.32Loans > 100% CLTV
    
    
    752,572
    
    
    
    45.44
    
    
    
    12.41
    
    
    
    677,119
    
    
    
    39.62
    
    
    
    12.36Lines of credit > 100% CLTV
    
    
    89,652
    
    
    
    5.41
    
    
    
    14.54
    
    
    
    101,683
    
    
    
    5.95
    
    
    
    14.55First mortgages > 100% CLTV
    
    
    24,166
    
    
    
    1.46
    
    
    
    8.49
    
    
    
    22,916
    
    
    
    1.34
    
    
    
    8.48Total > 100% CLTV
    
    
    866,390
    
    
    
    52.31
    
    
    
    12.52
    
    
    
    801,718
    
    
    
    46.91
    
    
    
    12.53Other (including discontinued
products)
    
    
    5,731
    
    
    
    0.35
    
    
    
    14.96
    
    
    
    6,728
    
    
    
    0.39
    
    
    
    15.03Total managed portfolio(1)
    
    $
    1,656,141
    
    
    
    100.00
    %
    
    
    10.98
    %
    
    $
    1,708,975
    
    
    
    100.00
    %
    
    
    10.85
    %
 
 (1)
    
    We define our Managed portfolio as the portfolio ($1.7 billion) that we service and on
which we carry credit risk. At June 30, 2007, we also serviced another $0.9 billion of loans
for which the credit risk is held by others. 37




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##### Table of Contents



Three Months Ended June 30,Product
    
    2007
    
    2006(Funding amount in thousands)First mortgage loansFunding Amount
    
    
    18,653
    
    
    
    8,952Weighted Average Disposable Income
    
    
    6,311
    
    
    
    4,988Weighted Average FICO score
    
    
    696
    
    
    
    689Weighted Average Coupon
    
    
    8.20
    %
    
    
    8.10
    %First mortgage loans up to 110%Funding Amount
    
    
    588
    
    
    
    943Weighted Average Disposable Income
    
    
    5,115
    
    
    
    4,000Weighted Average FICO score
    
    
    741
    
    
    
    688Weighted Average Coupon
    
    
    8.49
    %
    
    
    8.77
    %Home equity loans up to 100% CLTVFunding Amount
    
    
    24,488
    
    
    
    103,434Weighted Average Disposable Income
    
    
    5,466
    
    
    
    6,629Weighted Average FICO score
    
    
    695
    
    
    
    700Weighted Average Coupon
    
    
    10.27
    %
    
    
    11.08
    %Home equity loans up to 125% CLTVFunding Amount
    
    
    71,664
    
    
    
    66,388Weighted Average Disposable Income
    
    
    4,910
    
    
    
    4,306Weighted Average FICO score
    
    
    696
    
    
    
    698Weighted Average Coupon
    
    
    13.10
    %
    
    
    12.69
    %Home equity lines of credit up to 100% CLTVFunding Amount
    
    
    3,834
    
    
    
    28,556Weighted Average Disposable Income
    
    
    6,607
    
    
    
    5,765Weighted Average FICO score
    
    
    699
    
    
    
    694Weighted Average Coupon
    
    
    11.14
    %
    
    
    9.65
    %Home equity lines of credit up to 125% CLTVFunding Amount
    
    
    3,911
    
    
    
    3,061Weighted Average Disposable Income
    
    
    5,442
    
    
    
    4,393Weighted Average FICO score
    
    
    684
    
    
    
    693Weighted Average Coupon
    
    
    14.56
    %
    
    
    14.93
    %All ProductsFunding Amount
    
    
    123,138
    
    
    
    211,334Weighted Average Disposable Income
    
    
    5,304
    
    
    
    5,557Weighted Average FICO score
    
    
    696
    
    
    
    698Weighted Average Coupon
    
    
    11.76
    %
    
    
    11.31
    %
 Net Income
  38




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##### Table of Contents



Net Revenue
   For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Total originations
    
    $
    123,138
    
    
    $
    211,334
    
    
    $
    312,358
    
    
    $
    495,708Percent broker
    
    
    50
    %
    
    
    29
    %
    
    
    50
    %
    
    
    27
    %Percent correspondent
    
    
    39
    
    
    
    26
    
    
    
    39
    
    
    
    29Percent retail loans
    
    
    11
    
    
    
    14
    
    
    
    8
    
    
    
    20Percent other
    
    
    
    
    
    
    31
    
    
    
    3
    
    
    
    24
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Net interest income
    
    $
    24,473
    
    
    $
    22,924
    
    
    $
    49,037
    
    
    $
    46,593Provision for loan losses
    
    
    (15,601
    )
    
    
    (3,704
    )
    
    
    (30,689
    )
    
    
    (10,258
    )Gain on sales of whole loans
    
    
    1,588
    
    
    
    618
    
    
    
    1,841
    
    
    
    3,004Valuation adjustment on loans held for sale
    
    
    (166
    )
    
    
    (5,088
    )
    
    
    (8,141
    )
    
    
    (5,541
    )Gain (loss) on sales of loans
    
    
    1,422
    
    
    
    (4,470
    )
    
    
    (6,300
    )
    
    
    (2,537
    )Loan servicing fees
    
    
    4,751
    
    
    
    10,472
    
    
    
    10,278
    
    
    
    18,194Amortization of servicing assets
    
    
    (32
    )
    
    
    (5,760
    )
    
    
    (68
    )
    
    
    (11,994
    )(Impairment) recovery of servicing assets
    
    
    (1,966
    )
    
    
    409
    
    
    
    (6,600
    )
    
    
    983Derivative gains (losses)
    
    
    12
    
    
    
    2,934
    
    
    
    (282
    )
    
    
    5,841Other
    
    
    576
    
    
    
    (5
    )
    
    
    938
    
    
    
    481Total net revenue
    
    $
    13,635
    
    
    $
    22,800
    
    
    $
    16,314
    
    
    $
    47,303
   39




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##### Table of Contents



2004
    
    
    2005
    
    
    2006
    
    
    2007(Dollars in thousands)First Quarter
    
    $
    471
    
    
    $
    325
    
    
    $
    1,387
    
    
    $
    1,933Second Quarter
    
    
    234
    
    
    
    681
    
    
    
    4,278
    
    
    
    1,708Third Quarter
    
    
    244
    
    
    
    851
    
    
    
    659
    
    
    NAFourth Quarter
    
    
    
    
    
    
    481
    
    
    
    2,757
    
    
    NAYear to date
    
    $
    949
    
    
    $
    2,338
    
    
    $
    9,081
    
    
    $
    3,641
   Operating Expenses
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)
    
    
    (Dollars in thousands)Salaries and employee benefits
    
    $
    10,391
    
    
    $
    15,127
    
    
    $
    22,553
    
    
    $
    28,727Other
    
    
    6,477
    
    
    
    8,292
    
    
    
    13,896
    
    
    
    17,463Total operating expenses
    
    $
    16,868
    
    
    $
    23,419
    
    
    $
    36,449
    
    
    $
    46,190Number of employees at period end (1)
    
    
    
    
    
    
    
    
    
    
    458
    
    
    
    472
 
 (1)
    
    On a full time equivalent basis. 40




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##### Table of Contents



Home Equity Servicing
     June 30,
    
    December 31,
    
    June 30,2007
    
    2006
    
    2006Managed Portfolio
    
    (Dollars in thousands)Total Loans
    
    $
    1,656,141
    
    
    $
    1,708,975
    
    
    $
    1,600,28830 days past due
    
    
    3.64
    %
    
    
    3.16
    %
    
    
    2.67
    %90 days past due
    
    
    1.52
    
    
    
    1.19
    
    
    
    1.01Annualized QTD Net Chargeoff Rate
    
    
    2.18
    
    
    
    1.50
    
    
    
    0.58Unsold LoansTotal Loans (1)
    
    $
    1,490,752
    
    
    $
    1,515,881
    
    
    $
    1,301,61830 days past due
    
    
    3.97
    %
    
    
    3.54
    %
    
    
    2.61
    %90 days past due
    
    
    1.67
    
    
    
    1.32
    
    
    
    1.04Annualized QTD Net Chargeoff Rate
    
    
    2.43
    
    
    
    1.71
    
    
    
    0.68Loan Loss Reserve
    
    $
    49,905
    
    
    $
    33,614
    
    
    $
    28,262Owned ResidualTotal Loans
    
    $
    165,389
    
    
    $
    193,094
    
    
    $
    298,67030 days past due
    
    
    0.73
    %
    
    
    0.20
    %
    
    
    2.94
    %90 days past due
    
    
    0.17
    
    
    
    0.18
    
    
    
    0.88Annualized QTD Net Chargeoff Rate
    
    
    
    
    
    
    
    
    
    
    (0.53
    )Residual Undiscounted Losses
    
    $
    610
    
    
    $
    430
    
    
    $
    470Credit Risk Sold, Potential Incentive
Servicing Fee Retained PortfolioTotal Loans
    
    $
    528,846
    
    
    $
    627,838
    
    
    $
    772,06630 days past due
    
    
    5.43
    %
    
    
    5.40
    %
    
    
    3.83
    %90 days past due
    
    
    2.00
    
    
    
    2.30
    
    
    
    1.38
 
 (1)
    
    Excludes deferred fees and costs. 41




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##### Table of Contents



Discontinued OperationsMortgage Banking
    Parent and Other
   Risk Management
  
    
    Credit risk
    
    Liquidity risk
    
    Market risk (including interest rate and foreign exchange risk)
    
    Operational risk
    
    Compliance risk
  42




---



##### Table of Contents



Credit Risk
    43




---



##### Table of Contents



June 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)Accruing loans past due 90 days or more:Commercial, financial and
agricultural loans
    
    $
    146
    
    
    $
    Consumer loans
    
    
    4
    
    
    
    73Commercial financingDomestic leasing
    
    
    45
    
    
    
    83Foreign leasing
    
    
    128
    
    
    
    236323
    
    
    
    392Nonaccrual loans and leases:Commercial, financial and
agricultural loans
    
    
    10,040
    
    
    
    13,296Real estate mortgages
    
    
    26,233
    
    
    
    18,125Consumer loans
    
    
    724
    
    
    
    696Commercial financingFranchise financing
    
    
    1,818
    
    
    
    791Domestic leasing
    
    
    2,366
    
    
    
    2,495Foreign leasing
    
    
    1,416
    
    
    
    1,76842,597
    
    
    
    37,171Total nonperforming
loans and leases
    
    
    42,920
    
    
    
    37,563Nonperforming Loans held for Sale not guaranteed
    
    
    993
    
    
    
    5,564Other real estate owned
    
    
    16,716
    
    
    
    15,170Total nonperforming assets
    
    $
    60,629
    
    
    $
    58,297Nonperforming loans and leases to total
loans and leases
    
    
    0.8
    %
    
    
    0.7
    %Nonperforming assets total
assets
    
    
    1.0
    %
    
    
    0.9
    %
 44




---



##### Table of Contents



June 30,
    
    December 31,2007
    
    2006(In millions)
    
    
    
    Commercial banking
    
    $
    17
    
    
    $
    19
    
    
    
    Commercial finance
    
    
    6
    
    
    
    5
    

    
    
    Home equity lending
    
    
    30
    
    
    
    23

    
    
    
    Mortgage banking
    
    
    8
    
    
    
    11
  Liquidity Risk
       45




---



##### Table of Contents




    
    Warehouse lines of credit to fund primarily home equity loans: none outstanding on a $300
million borrowing facility, of which $150 million is committed
 
    
    Lines of credit with correspondent banks, including fed funds lines: none outstanding out
of $175 million available but not committed
 
    
    Lines of credit with non-correspondent banks: $130 million outstanding
 
    
    Warehouse lines of credit and conduits to fund Canadian sourced small ticket leases: $252
million outstanding on $366 million of borrowing facilities
 https://www.element-direct.com
 Market Risk (including Interest Rate and Foreign Exchange Risk)
    46




---



##### 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.
 
    
    The tables below show modeled changes in interest rates for individual asset and
liability classes. Asset and liability classes in our portfolio have interest rate
sensitivity tied to different underlying indices or instruments. While the rate sensitivity
of individual classes presented below is our best estimate of changes in value due to
interest rate changes, the total potential change figures are subject to basis risk if all
yield curve do not move in parallel as the model assumes.
 
    
    Few of the asset classes shown react to interest rate changes in a linear fashion. That
is, the point estimates we have made at Current and +/-2% and +/-1% are appropriate
estimates at those amounts of rate change, but it may not be accurate to interpolate
linearly between those points. This is most evident in products that contain optionality in
payment timing or pricing such as mortgage servicing or nonmaturity transaction deposits.
 
    
    Finally, the tables show theoretical outcomes for dramatic changes in interest rates
which do not consider potential rebalancing or repositioning of hedges and balance sheet
mix.
 47




---



##### Table of Contents



Economic Value Change Method
 Present Value at June 30, 2007Change in Interest Rates of:-2%
    
    
    -1%
    
    
    Current
    
    
    +1%
    
    
    +2%(In Thousands)Interest Sensitive AssetsLoans and other assets
    
    $
    5,905,829
    
    
    $
    5,827,698
    
    
    $
    5,744,817
    
    
    $
    5,658,588
    
    
    $
    5,574,025Loans held for sale
    
    
    28,323
    
    
    
    28,077
    
    
    
    27,540
    
    
    
    26,752
    
    
    
    25,880Mortgage servicing rights
    
    
    21,408
    
    
    
    25,408
    
    
    
    29,381
    
    
    
    33,466
    
    
    
    35,070Residual interests
    
    
    10,398
    
    
    
    10,453
    
    
    
    10,414
    
    
    
    10,018
    
    
    
    11,044Interest sensitive financial derivatives
    
    
    (10,940
    )
    
    
    (4,104
    )
    
    
    2,399
    
    
    
    9,292
    
    
    
    16,505Total interest sensitive assets
    
    
    5,955,018
    
    
    
    5,887,532
    
    
    
    5,814,551
    
    
    
    5,738,116
    
    
    
    5,662,524Interest Sensitive LiabilitiesDeposits
    
    
    (3,241,268
    )
    
    
    (3,220,022
    )
    
    
    (3,197,661
    )
    
    
    (3,169,421
    )
    
    
    (3,139,199
    )Short-term borrowings (1)
    
    
    (855,020
    )
    
    
    (843,805
    )
    
    
    (833,107
    )
    
    
    (822,900
    )
    
    
    (813,153
    )Long-term debt
    
    
    (1,334,808
    )
    
    
    (1,324,073
    )
    
    
    (1,307,805
    )
    
    
    (1,288,064
    )
    
    
    (1,261,037
    )Total interest sensitive liabilities
    
    
    (5,431,096
    )
    
    
    (5,387,900
    )
    
    
    (5,338,573
    )
    
    
    (5,280,385
    )
    
    
    (5,213,389
    )Net market value as of June 30, 2007
    
    $
    523,922
    
    
    $
    499,632
    
    
    $
    475,978
    
    
    $
    457,731
    
    
    $
    449,135Change from current
    
    $
    47,944
    
    
    $
    23,654
    
    
    $
    
    
    
    $
    (18,247
    )
    
    $
    (26,843
    )Net market value as of March 31, 2007
    
    $
    426,550
    
    
    $
    404,159
    
    
    $
    378,861
    
    
    $
    353,311
    
    
    $
    327,944Potential change
    
    $
    47,689
    
    
    $
    25,298
    
    
    $
    
    
    
    $
    (25,550
    )
    
    $
    (50,917
    )
 
 (1)
    
    Includes certain debt which is categorized as collateralized borrowings in other sections
of this document GAAP-Based Value Change Method
 Present Value at June 30, 2007Change in Interest Rates of:-2%
    
    
    -1%
    
    
    Current
    
    
    +1%
    
    
    +2%(In Thousands)Interest Sensitive AssetsLoans and other assets (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loans held for sale
    
    
    26,886
    
    
    
    26,886
    
    
    
    26,886
    
    
    
    26,098
    
    
    
    25,227Mortgage servicing rights
    
    
    21,317
    
    
    
    24,785
    
    
    
    27,920
    
    
    
    31,519
    
    
    
    32,942Residual interests
    
    
    10,398
    
    
    
    10,453
    
    
    
    10,414
    
    
    
    10,018
    
    
    
    11,044Interest sensitive financial derivatives
    
    
    (10,940
    )
    
    
    (4,104
    )
    
    
    2,399
    
    
    
    9,292
    
    
    
    16,505Total interest sensitive assets
    
    
    47,661
    
    
    
    58,020
    
    
    
    67,619
    
    
    
    76,927
    
    
    
    85,718Interest Sensitive LiabilitiesDeposits (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short-term borrowings (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total interest sensitive liabilities (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net market value as of June 30, 2007
    
    $
    47,661
    
    
    $
    58,020
    
    
    $
    67,619
    
    
    $
    76,927
    
    
    $
    85,718Potential change
    
    $
    (19,958
    )
    
    $
    (9,599
    )
    
    $
    
    
    
    $
    9,308
    
    
    $
    18,099Net market value as of March 31, 2007
    
    $
    71,214
    
    
    $
    78,188
    
    
    $
    85,512
    
    
    $
    92,069
    
    
    $
    97,805Potential change
    
    $
    (14,298
    )
    
    $
    (7,324
    )
    
    $
    
    
    
    $
    6,557
    
    
    $
    12,293
 
 (1)
    
    Value does not change in GAAP presentation Off-Balance Sheet Instruments
  48




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Derivative Financial Instruments
        49




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Operational and Compliance Risk.
      
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  50




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Item 4. Controls and Procedures.
   
 PART II. Other Information.
 
 Item 1. Legal Proceedings
 Since the time we filed our Report on Form 10-Q for the quarter ended March 31, 2007, we
experienced developments as noted in the litigation described below. For a full description of the
litigation, see Note 11, Commitments and Contingencies, in the Notes to Consolidated Financial
Statements, Part I, Item 1, of this Report.
 Culpepper v. Inland Mortgage Corporation
 th
 Silke v. Irwin Mortgage Corporation
 Silke Silke
 Cohens v. Inland Mortgage Corporation
  51




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##### Table of Contents



Litigation in Connection with Loans Purchased from Community Bank of Northern Virginia
 Amicus Curiae Amicus Curiae
 White v. Irwin Union Bank and Trust Company and Irwin Home Equity Corporation
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  Total Number of
    
    Approximate DollarShares Purchased as
    
    Value of SharesTotal Number of
    
    
    
    
    
    Part of Publicly
    
    that May Yet BeShares Purchased
    
    Average Price Paid
    
    Announced Plan or
    
    Purchased under theCalendar Month
    
    (1)
    
    per Share
    
    Program
    
    Plan or ProgramApril
    
    
    4,566
    
    
    $
    16.26
    
    
    
    
    
    
    
    May
    
    
    233,500
    
    
    $
    16.61
    
    
    
    233,500
    
    
    
    36,107,236June
    
    
    72,875
    
    
    $
    16.08
    
    
    
    70,272
    
    
    $
    34,977,252Total
    
    
    310,941
    
    
    $
    16.48
    
    
    
    303,772
 
 (1)
    
    Includes shares repurchased in connection with the Corporations equity-based compensation
plans. 52




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders.
 a)
    
    We held our Annual Meeting of Shareholders on May 9, 2007.
 b)
    
    Proposal No. 1. The following Director Nominees were elected to serve on the Board until
the 2010 Annual Meeting, by the votes set forth below.
 Nominees
    
    Shares For
    
    Shares WithheldSally A. Dean
    
    
    25,081,438
    
    
    
    2,539,003William H. Kling
    
    
    26,814,128
    
    
    
    806,313Lance R. Odden
    
    
    26,748,498
    
    
    
    871,943
  David W. Goodrich
    
    
    2009R. David Hoover
    
    
    2008Brenda J. Lauderback
    
    
    2009John C. McGinty, Jr.
    
    
    2009William I. Miller
    
    
    2008Dayton H. Molendorp
    
    
    2008Marita Zuraitis
    
    
    2009
 
 c)
    
    In addition to the election of directors, the shareholders voted on and approved the
following proposal: Matter
    
    Shares For
    
    Shares Against
    
    Shares AbstainedProposal No. 2. Approval of the Irwin Financial Corporation
2007 Performance Unit Plan and grants made under the Plan
    
    
    26,896,013
    
    
    
    670,040
    
    
    
    54,385
 53




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##### Table of Contents



Item 6. Exhibits.
 ExhibitNumber
    
    Description of Exhibit2.1
    
    Asset Purchase Agreement by and among Irwin Financial Corporation, Irwin Mortgage Corporation and Freedom
Mortgage Corporation dated as of August 7, 2006. (Incorporated by reference to Exhibits 2.1 and 2.2 of Form 8-K
filed October 2, 2006, File No. 001-16691.)3.1
    
    Restated Articles of Incorporation of Irwin Financial Corporation, as amended December 20, 2006. (Incorporated
by reference to Exhibit 3.1 of Form 10-K filed March 9, 2007, File No. 001-16691.)3.2
    
    Code of By-laws of Irwin Financial Corporation, as amended, February 15, 2007. (Incorporated by reference to
Exhibit 3.2 of Form 10-K filed March 9, 2007, File No. 001-16691.)4.1
    
    Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 of Form 10-K filed March 9, 2007,
File No. 001-16691.)4.2
    
    Certain instruments defining the rights of the holders of long-term debt of Irwin Financial Corporation and
certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the
total assets of the Corporation and its subsidiaries on a consolidated basis, have not been filed as Exhibits.
The Corporation hereby agrees to furnish a copy of any of these agreements to the Commission upon request.4.3
    
    Rights Agreement, dated as of March 1, 2001, between Irwin Financial Corporation and Irwin Union Bank and Trust.
(Incorporated by reference to Exhibit 4.1 to Form 8-A filed March 2, 2001, File No. 000-06835.)4.4
    
    Appointment of Successor Rights Agent dated as of May 11, 2001 between Irwin Financial Corporation and National
City Bank. (Incorporated by reference to Exhibit 4.5 to Form S-8 filed on September 7, 2001, File No.
333-69156.)10.1
    
    *Irwin Financial Corporation 1992 Stock Option Plan. (Incorporated by reference to Exhibit 10(h) to Form 10-K
Report for year ended December 31, 1992, File No. 000-06835.)10.2
    
    *Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit 10 to Form 10-Q
Report for period ended June 30, 1997, File No. 000-06835.)10.3
    
    *Amendment to Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit 10(i) to
Form 10-Q Report for period ended June 30, 1997, File No. 000-06835.)10.4
    
    *Irwin Financial Corporation Amended and Restated 2001 Stock Plan, as amended and restated May 10, 2007.
(Incorporated by reference to Exhibit 99.1 of Form 8-K filed May 16, 2007, File No. 001-16691.)10.5
    
    *Irwin Financial Corporation 2001 Stock Plan Form of Stock Option Agreement. (Incorporated by reference to
Exhibit 99.1 of the Corporations 8-K Current Report, dated May 9, 2005, File No. 001-16691.)10.6
    
    *Irwin Financial Corporation 2001 Stock Plan Form of Restricted Stock Agreement (Incorporated by reference to
Exhibit 99.2 of the Corporations 8-K Current Report, dated May 9, 2005, File No. 001-16691.)10.7
    
    *Irwin Financial Corporation 2001 Stock Plan Form of Stock Option Agreement (Canada) (Incorporated by reference
to Exhibit 10.8 of the Corporations 10-Q Report for period ended September 30, 2005, File No. 001-16691.)10.8
    
    *Irwin Financial Corporation 2001 Stock Plan Form of Restricted Stock Agreement, with Performance Criteria, and
Notice. (Incorporated by reference to Exhibit 99.2 of Form 8-K filed May 16, 2007, File No. 001-16691).10.9
    
    *Irwin Financial Corporation 1999 Outside Director Restricted Stock Compensation Plan. (Incorporated by
reference to Exhibit 2 to the Corporations proxy statement for its 2004 Annual Meeting, filed with the
Commission on March 18, 2004, File No. 001-16691.)10.10
    
    *Employee Stock Purchase Plan III. (Incorporated by reference to Exhibit 10(a) to Form 10-Q Report for period
ended June 30, 1999, File No. 000-06835.)10.11
    
    *Long-Term Management Performance Plan. (Incorporated by reference to Exhibit 10(a) to Form 10-K Report for year
ended December 31, 1986, File No. 000-06835.)10.12
    
    *Long-Term Incentive Plan-Summary of Terms. (Incorporated by reference to Exhibit 10(a) to Form 10-K Report for
year ended December 31, 1986, File No. 000-06835.)10.13
    
    *Inland Mortgage Corporation Long-Term Incentive Plan. (Incorporated by reference to Exhibit 10(j) to Form 10-K
Report for year ended December 31, 1995, File No. 000-06835.)
 54




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ExhibitNumber
    
    Description of Exhibit10.14
    
    *Amended and Restated Management
Bonus Plan. (Incorporated by reference to Exhibit 10(a) to Form 10-K Report for
year ended December 31, 1986, File No. 000-06835.)10.15
    
    *Limited Liability Company Agreement of Irwin Ventures LLC. (Incorporated by reference to Exhibit 10(a) to Form
10-Q/A Report for period ended March 31, 2001, File No. 000-06835.)10.16
    
    *Limited Liability Company Agreement of Irwin Ventures Co-Investment Fund LLC, effective as of April 20, 2001.
(Incorporated by reference to Exhibit 10.17 to Form S-1/A filed February 14, 2002, File No. 333-69586.)10.17
    
    *Promissory Note dated January 30, 2002 from Elena Delgado to Irwin Financial Corporation. (Incorporated by
reference to Exhibit 10.19 to Form S-1/A filed February 14, 2002, File No. 333-69586.)10.18
    
    *Consumer Pledge Agreement dated January 30, 2002 between Elena Delgado and Irwin Financial Corporation.
(Incorporated by reference to Exhibit 10.20 to Form S-1/A filed February 14, 2002, File No. 333-69586.)10.19
    
    *Redemption and Loan Repayment Agreement dated December 22, 2004 between Irwin Financial Corporation, Irwin Home
Equity Corporation and Elena Delgado. (Incorporated by reference to Exhibit 10.15 of Form 10-K Report for year
ended December 31, 2004, File No. 001-16691.)10.20
    
    *Irwin Home Equity Corporation Amendment and Restatement of Shareholder Agreement dated December 22, 2004
between Irwin Home Equity Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference
to Exhibit 10.16 of Form 10-K Report for year ended December 31, 2004, File No. 001-16691.)10.21
    
    *Deferred Compensation Agreement dated December 22, 2004 between Irwin Home Equity Corporation, Irwin Financial
Corporation and Elena Delgado. (Incorporated by reference to Exhibit 10.17 of Form 10-K Report for year ended
December 31, 2004, File No. 001-16691.)10.22
    
    *Tax Gross-up Agreement dated December 22, 2004 between Irwin Financial Corporation and Elena Delgado as
Shareholder. (Incorporated by reference to Exhibit 10.18 of Form 10-K Report for year ended December 31, 2004,
File No. 001-16691.)10.23
    
    *Amendment No. 1 to Irwin Home Equity Corporation Amendment and Restatement of Shareholder Agreement dated April
7, 2005 between Irwin Home Equity Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by
reference to Exhibit 10.19 of Form 10-Q Report for the quarter ended March 31, 2005, File No. 001-16691.)10.24
    
    *Amendment No. 1 to the Deferred Compensation Agreement dated April 7, 2005 between Irwin Home Equity
Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference to Exhibit 10.20 of Form
10-Q Report for the quarter ended March 31, 2005, File No. 001-16691.)10.25
    
    *Amendment No. 2 to the Deferred Compensation Agreement dated November 15, 2005 between Irwin Home Equity
Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference to Exhibit 99.1 of Form
8-K Current Report dated November 18, 2005, File No. 001-16691.)10.26
    
    *Election to Terminate the Deferred Compensation Agreement dated November 15, 2005 between Irwin Home Equity
Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference to Exhibit 99.2 of Form
8-K Current Report dated November 18, 2005, File No. 001-16691.)10.27
    
    *Irwin Financial Corporation Amended and Restated Short Term Incentive Plan effective January 1, 2006.
(Incorporated by reference to Exhibit 10.27 of Form 10-Q Report for the quarter ended June 30 2006, File No.
001-16691.)10.28
    
    *First Amendment to the Irwin Financial Corporation Amended and Restated Short Term Incentive Plan.10.29
    
    *Irwin Commercial Finance Amended and Restated Short Term Incentive Plan effective January 1, 2006.
(Incorporated by reference to Exhibit 10.28 of Form 10-Q for the quarter ended June 30, 2006, File No.
001-16691.)10.30
    
    *First Amendment to the Irwin
Commercial Finance Amended and Restated Short Term Incentive Plan.10.31
    
    *Irwin Home Equity Amended and Restated Short Term Incentive Plan effective January 1, 2006. (Incorporated by
reference to Exhibit 10.29 of Form 10-Q for the quarter ended June 30, 2006, File No. 001-16691.)10.32
    
    *First Amendment to the Irwin Home Equity Amended and Restated Short Term Incentive Plan.10.33
    
    *Irwin Mortgage Corporation Amended and Restated Short Term Incentive Plan effective January 1, 2002.
(Incorporated by reference to Exhibit 6 of the Corporations proxy statement for its 2004 Annual Meeting, filed
with the Commission on March 18, 2004, File No. 001-16691.)10.34
    
    *Irwin Union Bank and Trust Company Amended and Restated Short Term Incentive Plan effective January 1, 2006.
(Incorporated by reference to Exhibit 10.31 of Form 10-Q Report for the quarter ended June 30, 2006, File No.
001-16691.)10.35
    
    *First Amendment to the Irwin Union Bank and Trust Company Amended and Restated Short Term Incentive Plan.10.36
    
    *Onset Capital Corporation Employment Agreement. (Incorporated by reference to Exhibit 10.26 to Form 10-Q Report
for period ended June 30, 2002, File No. 000-06835.)10.37
    
    *Irwin Financial Corporation Restated Supplemental Executive Retirement Plan for Named Executives. (Incorporated
by reference to Exhibit 10.27 to Form 10-Q Report for period ended June 30, 2002, File No. 000-06835.)
 55




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ExhibitNumber
    
    Description of Exhibit10.38
    
    *Irwin Financial Corporation Supplemental Executive Retirement Plan for Named Executives. (Incorporated by
reference to Exhibit 10.28 to Form 10-Q Report for period ended June 30, 2002, File No. 000-06835.)10.39
    
    *Stock Purchase Agreement by and between Onset Holdings Inc. and Irwin International Corporation dated December
23, 2005. (Incorporated by reference to Exhibit 10.36 of Form 10-K Report for period ended December 31, 2005,
File No. 001-16691.).10.40
    
    *Shareholder Agreement Termination Agreement by and between Irwin Commercial Finance Canada Corporation and
Irwin International Corporation dated December 23, 2005. (Incorporated by reference to Exhibit 10.37 of Form
10-K Report for period ended December 31, 2005, File No. 001-16691.)10.41
    
    *Irwin Commercial Finance Corporation First Amended and Restated Shareholder Agreement dated May 15, 2007.10.42
    
    *Irwin Commercial Finance Corporation 2005 Stock Option Agreement Grant of Option to Joseph LaLeggia dated
December 23, 2005. (Incorporated by reference to Exhibit 10.39 of Form 10-K Report for period ended December 31,
2005, File No. 001-16691.)10.43
    
    *Irwin Commercial Finance Corporation 2005 Notice of Stock Option Grant to Joseph LaLeggia dated December 23,
2005. (Incorporated by reference to Exhibit 10.40 of Form 10-K Report for period ended December 31, 2005, File
No. 001-16691.)10.44
    
    *Irwin Union Bank Amended and Restated Performance Unit Plan. (Incorporated by reference to Exhibit 10.41 of
Form 10-K Report for period ended December 31, 2005, File No. 001-16691.)10.45
    
    *Irwin Commercial Finance Amended and Restated Performance Unit Plan. (Incorporated by reference to Exhibit
10.42 of Form 10-K Report for period ended December 31, 2005, File No. 001-16691.)10.46
    
    *First Amendment to the Irwin Commercial Finance Amended and Restated Performance Unit Plan, dated October 31,
2006. (Incorporated by reference to Exhibit 10.41 of Form 10-K filed March 9, 2007, File No. 001-16691.)10.47
    
    *Irwin Home Equity Corporation Performance Unit Plan. (Incorporated by reference to Exhibit 10.43 of Form 10-K
Report for period ended December 31, 2005, File No. 001-16691.)10.48
    
    *First Amendment to Limited Liability Company Agreement of Irwin Ventures LLC. (Incorporated by reference to
Exhibit 10.44 of Form 10-K Report for period ended December 31, 2005, File No. 001-16691.)10.49
    
    *Second Amendment to Limited Liability Company Agreement of Irwin Ventures Co-Investment Fund LLC. (Incorporated
by reference to Exhibit 10.45 of Form 10-K Report for period ended December 31, 2005, File No. 001-16691.)10.50
    
    *Supplemental Performance Unit Grant-Jocelyn Martin-Leano, dated February 6, 2007. (Incorporated by reference to
Exhibit 10.45 of Form 10-K filed March 9, 2007, File No. 001-16691.)10.51
    
    *Irwin Financial Corporation 2007 Performance Unit Plan. (Incorporated by reference to Appendix B of the
Corporations Proxy Statement for its 2007 Annual Meeting, filed April 16, 2007, File No. 001-16691.)11.1
    
    Computation of Earnings Per Share is included in the footnotes to the financial statements.31.1
    
    Certification pursuant to 18 U.S.C. Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer.31.2
    
    Certification pursuant to 18 U.S.C. Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer.32.1
    
    Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates management contract or compensatory plan or arrangement. 56




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SIGNATURES
  DATE:August 1, 2007
    IRWIN FINANCIAL CORPORATIONBy:
    /s/ Gregory F. EhlingerGREGORY F. EHLINGERCHIEF FINANCIAL OFFICERBy:
    /s/ Jody A. LittrellJODY A. LITTRELLCORPORATE CONTROLLER (Chief Accounting Officer) 57