##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period
from ___________ to___________ . Commission File Number: 0-6835 IRWIN FINANCIAL CORPORATION 
 (Exact Name of Corporation as Specified in its Charter)
 Indiana
    
    35-1286807(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)500 Washington Street Columbus, Indiana
    
    47201(Address of Principal Executive Offices)
    
    (Zip Code)(812) 376-1909
    
    www.irwinfinancial.com(Corporations Telephone Number, Including Area Code)
    
    (Web Site)
 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ]
    
    Yes
    
    [  ]
    
    No
 Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) [ X ]
    
    Yes
    
    [  ]
    
    No
 As of July 26, 2004, there were 28,305,866 outstanding common shares, no par
value, of the Registrant.




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FORM 10-Q
TABLE OF CONTENTS PAGE NO.PART I   FINANCIAL INFORMATIONItem 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
    
    
    50PART II   OTHER INFORMATIONItem 1      Legal Proceedings
    
    
    51Item 4      Submission of Matters to a Vote of Security Holders
    
    
    52Item 6      Exhibits and Reports on Form 8-K
    
    
    53Signatures
    
    
    57Code of By-Laws302 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 31,2004
    
    2003(In thousands, except for shares)Assets:Cash and cash equivalents
    
    $
    149,206
    
    
    $
    140,810Interest-bearing deposits with financial institutions
    
    
    88,588
    
    
    
    81,166Residual interests
    
    
    74,390
    
    
    
    71,491Investment
securities - held-to-maturity (Market value: $ 45,267 at June 30, 2004 and $24,971 at December 31, 2003)
    
    
    45,267
    
    
    
    24,956Investment
securities - available-for-sale
    
    
    76,325
    
    
    
    67,569Loans held for sale
    
    
    1,196,130
    
    
    
    883,895Loans and
leases, net of unearned income - Note 2
    
    
    3,203,279
    
    
    
    3,161,054Less:
Allowance for loan and lease losses - Note 3
    
    
    (53,837
    )
    
    
    (64,285
    )3,149,442
    
    
    
    3,096,769Servicing
assets - Note 4
    
    
    397,828
    
    
    
    380,123Accounts receivable
    
    
    77,121
    
    
    
    62,045Accrued interest receivable
    
    
    15,191
    
    
    
    15,502Premises and equipment, net
    
    
    31,263
    
    
    
    32,208Other assets
    
    
    124,421
    
    
    
    131,825Total assets
    
    $
    5,425,172
    
    
    $
    4,988,359Liabilities and Shareholders Equity:DepositsNoninterest-bearing
    
    $
    1,032,054
    
    
    $
    850,529Interest-bearing
    
    
    1,622,087
    
    
    
    1,352,763Certificates of deposit over $100,000
    
    
    707,123
    
    
    
    696,3703,361,264
    
    
    
    2,899,662Short-term
borrowings - Note 5
    
    
    655,860
    
    
    
    429,758Collateralized debt - Note 6
    
    
    292,457
    
    
    
    590,131Other
long-term debt - Note 7
    
    
    270,178
    
    
    
    270,184Other liabilities
    
    
    375,927
    
    
    
    366,364Total liabilities
    
    
    4,955,686
    
    
    
    4,556,099Commitments
and contingencies - Note 11Shareholders equityPreferred
stock, no par value - authorized 4,000,000 shares; none issued
    
    
    
    
    
    
    Common
stock, no par value - authorized 40,000,000 shares;
issued 29,612,080 shares as of June 30, 2004 and December 31, 2003;
including 1,328,534, and 1,477,778 shares in treasury as of
June 30, 2004 and December 31, 2003, respectively
    
    
    112,000
    
    
    
    112,000Additional paid-in capital
    
    
    579
    
    
    
    1,264Deferred compensation
    
    
    (538
    )
    
    
    (504
    )Accumulated other comprehensive income, net of deferred income tax liability
of $47 and $120 as of June 30, 2004, and December 31, 2003, respectively
    
    
    71
    
    
    
    182Retained earnings
    
    
    386,410
    
    
    
    352,647498,522
    
    
    
    465,589Less treasury stock, at cost
    
    
    (29,036
    )
    
    
    (33,329
    )Total shareholders equity
    
    
    469,486
    
    
    
    432,260Total liabilities and shareholders equity
    
    $
    5,425,172
    
    
    $
    4,988,359
 The accompanying notes are an integral part of the consolidated financial
statements. 3




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##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the Three Months Ended June 30,2004
    
    2003(In thousands, except per share)Interest income:Loans and leases
    
    $
    58,425
    
    
    $
    61,708Loans held for sale
    
    
    22,212
    
    
    
    29,926Residual interests
    
    
    3,285
    
    
    
    6,006Investment securities
    
    
    1,153
    
    
    
    1,148Federal funds sold
    
    
    21
    
    
    
    62Total interest income
    
    
    85,096
    
    
    
    98,850Interest expense:Deposits
    
    
    10,058
    
    
    
    11,557Short-term borrowings
    
    
    2,193
    
    
    
    4,603Collateralized debt
    
    
    2,914
    
    
    
    4,540Other long-term debt
    
    
    5,675
    
    
    
    662Preferred securities distribution
    
    
    
    
    
    
    5,527Total interest expense
    
    
    20,840
    
    
    
    26,889Net interest income
    
    
    64,256
    
    
    
    71,961Provision for loan and lease losses
    
    
    1,794
    
    
    
    13,634Net interest income after provision for loan and lease losses
    
    
    62,462
    
    
    
    58,327Other income:Loan servicing fees
    
    
    33,621
    
    
    
    24,817Amortization of servicing assets  Note 4
    
    
    (29,656
    )
    
    
    (37,239
    )Recovery (impairment) of servicing assets  Note 4
    
    
    71,950
    
    
    
    (40,577
    )Net loan administration income (loss)
    
    
    75,915
    
    
    
    (52,999
    )Gain from sales of loans
    
    
    39,274
    
    
    
    124,000Gain (loss) on sale of mortgage servicing assets
    
    
    1,928
    
    
    
    (4
    )Trading gains (losses)
    
    
    6,669
    
    
    
    (33,131
    )Derivative (losses) gains, net
    
    
    (53,994
    )
    
    
    18,616Other
    
    
    6,314
    
    
    
    7,03976,106
    
    
    
    63,521Other expense:Salaries
    
    
    54,783
    
    
    
    58,208Pension and other employee benefits
    
    
    10,938
    
    
    
    11,033Office expense
    
    
    4,942
    
    
    
    5,679Premises and equipment
    
    
    10,339
    
    
    
    8,916Marketing and development
    
    
    3,932
    
    
    
    4,063Professional fees
    
    
    5,459
    
    
    
    2,878Other
    
    
    17,462
    
    
    
    9,705107,855
    
    
    
    100,482Income before income taxes
    
    
    30,713
    
    
    
    21,366Provision for income taxes
    
    
    12,769
    
    
    
    8,139Net income
    
    $
    17,944
    
    
    $
    13,227Earnings per share:  Note 9Basic
    
    $
    0.64
    
    
    $
    0.47Diluted
    
    $
    0.60
    
    
    $
    0.45Dividends per share
    
    $
    0.08
    
    
    $
    0.07
 The accompanying notes are an integral part of the consolidated financial
statements. 4




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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the Six Months Ended June 30,2004
    
    2003(In thousands, except for per share)Interest income:Loans and leases
    
    $
    119,671
    
    
    $
    119,832Loans held for sale
    
    
    36,285
    
    
    
    52,822Residual interests
    
    
    6,543
    
    
    
    12,969Investment securities
    
    
    2,362
    
    
    
    2,010Federal funds sold
    
    
    38
    
    
    
    99Total interest income
    
    
    164,899
    
    
    
    187,732Interest expense:Deposits
    
    
    19,548
    
    
    
    22,806Short-term borrowings
    
    
    3,815
    
    
    
    8,670Collateralized debt
    
    
    6,719
    
    
    
    7,525Other long-term debt
    
    
    11,358
    
    
    
    1,324Preferred securities distribution
    
    
    
    
    
    
    11,055Total interest expense
    
    
    41,440
    
    
    
    51,380Net interest income
    
    
    123,459
    
    
    
    136,352Provision for loan and lease losses
    
    
    9,940
    
    
    
    22,877Net interest income after provision for loan and lease losses
    
    
    113,519
    
    
    
    113,475Other income:Loan servicing fees
    
    
    66,198
    
    
    
    46,708Amortization of servicing assets  Note 4
    
    
    (61,343
    )
    
    
    (68,048
    )Recovery (impairment) of servicing assets  Note 4
    
    
    24,567
    
    
    
    (43,632
    )Net loan administration income (loss)
    
    
    29,422
    
    
    
    (64,972
    )Gain from sales of loans
    
    
    92,043
    
    
    
    219,511Gain on sale of mortgage servicing assets
    
    
    8,417
    
    
    
    Trading gains (losses)
    
    
    11,342
    
    
    
    (50,919
    )Derivative gains, net
    
    
    4,922
    
    
    
    12,142Other
    
    
    12,414
    
    
    
    10,570158,560
    
    
    
    126,332Other expense:Salaries
    
    
    104,616
    
    
    
    114,631Pension and other employee benefits
    
    
    22,685
    
    
    
    21,858Office expense
    
    
    9,679
    
    
    
    10,870Premises and equipment
    
    
    20,794
    
    
    
    19,218Marketing and development
    
    
    7,567
    
    
    
    7,757Professional fees
    
    
    9,303
    
    
    
    5,684Other
    
    
    33,647
    
    
    
    19,276208,291
    
    
    
    199,294Income before income taxes
    
    
    63,788
    
    
    
    40,513Provision for income taxes
    
    
    25,502
    
    
    
    15,510Net income
    
    $
    38,286
    
    
    $
    25,003Earnings per
share: - Note 9Basic
    
    $
    1.36
    
    
    $
    0.90Diluted
    
    $
    1.27
    
    
    $
    0.86Dividends per share
    
    $
    0.16
    
    
    $
    0.14
 The accompanying notes are an integral part of the consolidated financial
statements. 5




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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
For the Three Months Ended June 30, 2004, and 2003 AccumulatedOther
    
    
    
    
    
    AdditionalRetained
    
    Comprehensive
    
    Deferred
    
    Paid in
    
    Common
    
    TreasuryTotal
    
    Earnings
    
    Income (Loss)
    
    Compensation
    
    Capital
    
    Stock
    
    Stock(Dollars in thousands, except shares)Balance at April 1, 2004
    
    $
    453,185
    
    
    $
    370,728
    
    
    $
    90
    
    
    $
    (540
    )
    
    $
    595
    
    
    $
    112,000
    
    
    $
    (29,688
    )Net income
    
    
    17,944
    
    
    
    17,944Unrealized loss on investment
securities net of $92 tax benefit
    
    
    (138
    )
    
    
    
    
    
    
    (138
    )Unrealized gain on interest rate cap
net of $185 tax liability
    
    
    278
    
    
    
    
    
    
    
    278Foreign currency adjustment
net of $106 tax benefit
    
    
    (159
    )
    
    
    
    
    
    
    (159
    )Total comprehensive income
    
    
    17,925Deferred compensation
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Cash dividends
    
    
    (2,262
    )
    
    
    (2,262
    )Tax benefit on stock option exercises
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Treasury stock:Purchase of 533 shares
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )Sales of 28,057 shares
    
    
    633
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    666Balance June 30, 2004
    
    $
    469,486
    
    
    $
    386,410
    
    
    $
    71
    
    
    $
    (538
    )
    
    $
    579
    
    
    $
    112,000
    
    
    $
    (29,036
    )Balance at April 1, 2003
    
    $
    371,480
    
    
    $
    297,490
    
    
    $
    (524
    )
    
    $
    (558
    )
    
    $
    3,225
    
    
    $
    112,000
    
    
    $
    (40,153
    )Net income
    
    
    13,227
    
    
    
    13,227Unrealized loss on investment
securities net of $7 tax benefit
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )Unrealized loss on interest rate cap
net of $28 tax benefit
    
    
    (42
    )
    
    
    
    
    
    
    (42
    )Foreign currency adjustment net of
$346 tax liability
    
    
    518
    
    
    
    
    
    
    
    518Total comprehensive income
    
    
    13,693Deferred compensation
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    69Cash dividends
    
    
    (1,957
    )
    
    
    (1,957
    )Tax benefit on stock option exercises
    
    
    927
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    927Conversion of 1,700 trust preferred
shares to 2,142 common shares
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    44Treasury stock:Purchase of 109,001 shares
    
    
    (2,674
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,674
    )Sales of 242,689 shares
    
    
    3,254
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,729
    )
    
    
    
    
    
    
    4,983Balance June 30, 2003
    
    $
    384,835
    
    
    $
    308,760
    
    
    $
    (58
    )
    
    $
    (489
    )
    
    $
    2,422
    
    
    $
    112,000
    
    
    $
    (37,800
    )
 The accompanying notes are an integral part of the consolidated financial
statements. 6




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##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited) For the Six Months Ended June 30, 2004, and 2003 AccumulatedOther
    
    
    
    
    
    AdditionalRetained
    
    Comprehensive
    
    Deferred
    
    Paid in
    
    Common
    
    TreasuryTotal
    
    Earnings
    
    Income (Loss)
    
    Compensation
    
    Capital
    
    Stock
    
    Stock(Dollars in thousands, except shares)Balance at January 1, 2004
    
    $
    432,260
    
    
    $
    352,647
    
    
    $
    182
    
    
    $
    (504
    )
    
    $
    1,264
    
    
    $
    112,000
    
    
    $
    (33,329
    )Net income
    
    
    38,286
    
    
    
    38,286Unrealized loss on investment
securities net of $49 tax benefit
    
    
    (73
    )
    
    
    
    
    
    
    (73
    )Unrealized gain on interest rate cap
net of $131 tax liability
    
    
    196
    
    
    
    
    
    
    
    196Foreign currency adjustment net of
$156 tax benefit
    
    
    (234
    )
    
    
    
    
    
    
    (234
    )Total comprehensive income
    
    
    38,175Deferred compensation
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    (34
    )Cash dividends
    
    
    (4,523
    )
    
    
    (4,523
    )Tax benefit on stock option exercises
    
    
    678
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    678Treasury stock:Purchase of 10,440 shares
    
    
    (347
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (347
    )Sales of 159,684 shares
    
    
    3,277
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,363
    )
    
    
    
    
    
    
    4,640Balance at June 30, 2004
    
    $
    469,486
    
    
    $
    386,410
    
    
    $
    71
    
    
    $
    (538
    )
    
    $
    579
    
    
    $
    112,000
    
    
    $
    (29,036
    )Balance at January 1, 2003
    
    $
    360,555
    
    
    $
    287,662
    
    
    $
    (1,142
    )
    
    $
    (240
    )
    
    $
    3,606
    
    
    $
    112,000
    
    
    $
    (41,331
    )Net income
    
    
    25,003
    
    
    
    25,003Unrealized gain on investment
securities net of $8 tax liability
    
    
    12
    
    
    
    
    
    
    
    12Unrealized gain on interest rate
cap net of $48 tax benefit
    
    
    (72
    )
    
    
    
    
    
    
    (72
    )Foreign currency adjustment net of
$593 tax liability
    
    
    889
    
    
    
    
    
    
    
    889Minimum SERP liability net of
$170 tax liability
    
    
    255
    
    
    
    
    
    
    
    255Total comprehensive income
    
    
    26,087Deferred compensation
    
    
    (249
    )
    
    
    
    
    
    
    
    
    
    
    (249
    )Cash dividends
    
    
    (3,905
    )
    
    
    (3,905
    )Conversion of 1,700 trust preferred
shares to 2,142 common shares
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    44Tax benefit on stock option exercises
    
    
    1,009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,009Treasury stock:Purchase of 186,899 shares
    
    
    (2,789
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,789
    )Sales of 305,900 shares
    
    
    4,084
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,192
    )
    
    
    
    
    
    
    6,276Balance at June 30, 2003
    
    $
    384,835
    
    
    $
    308,760
    
    
    $
    (58
    )
    
    $
    (489
    )
    
    $
    2,422
    
    
    $
    112,000
    
    
    $
    (37,800
    )
 The accompanying notes are an integral part of the consolidated financial
statements. 7




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##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30,2004
    
    2003(Dollars in thousands)Net income
    
    $
    38,286
    
    
    $
    25,003Adjustments to reconcile net income to cash provided (used)
by operating activities:Depreciation, amortization, and accretion, net
    
    
    3,536
    
    
    
    5,569Amortization and impairment of servicing assets
    
    
    36,776
    
    
    
    111,680Provision for loan and lease losses
    
    
    9,940
    
    
    
    22,877Gain on sale of mortgage servicing assets
    
    
    (8,417
    )
    
    
    Gain from sales of loans held for sale
    
    
    (92,043
    )
    
    
    (219,511
    )Originations and purchases of loans held for sale
    
    
    (7,504,513
    )
    
    
    (13,456,103
    )Proceeds from sale of mortgage servicing assets
    
    
    28,527
    
    
    
    Proceeds from sales and repayments of loans held for sale
    
    
    7,208,754
    
    
    
    13,161,261Net (increase) decrease in residuals
    
    
    (2,899
    )
    
    
    63,912Net (increase) decrease in accounts receivable
    
    
    (15,076
    )
    
    
    7,692Other, net
    
    
    15,800
    
    
    
    (40,627
    )Net cash used by operating activities
    
    
    (281,329
    )
    
    
    (318,247
    )Lending and investing activities:Proceeds from maturities/calls of investment securities:Held-to-maturity
    
    
    52,876
    
    
    
    451Available-for-sale
    
    
    1,257
    
    
    
    28,486Purchase of investment securities:Held-to-maturity
    
    
    (73,404
    )
    
    
    (14
    )Available-for-sale
    
    
    (9,975
    )
    
    
    (40,689
    )Net increase in interest-bearing deposits with financial institutions
    
    
    (7,422
    )
    
    
    (21,299
    )Net increase in loans, excluding sales
    
    
    (93,055
    )
    
    
    (278,299
    )Proceeds from sale of loans
    
    
    31,416
    
    
    
    30,140Other, net
    
    
    (2,837
    )
    
    
    (3,767
    )Net cash used by lending and investing activities
    
    
    (101,144
    )
    
    
    (284,991
    )Financing activities:Net increase in deposits
    
    
    461,602
    
    
    
    654,733Net increase
(decrease) in short-term borrowings
    
    
    226,102
    
    
    
    (285,761
    )Repayments of long-term debt
    
    
    (6
    )
    
    
    (5
    )Proceeds from issuance of collateralized borrowings
    
    
    32,862
    
    
    
    358,251Repayments of collateralized borrowings
    
    
    (328,685
    )
    
    
    (100,968
    )Purchase of treasury stock for employee benefit plans
    
    
    (347
    )
    
    
    (2,789
    )Proceeds from sale of stock for employee benefit plans
    
    
    3,955
    
    
    
    5,093Dividends paid
    
    
    (4,523
    )
    
    
    (3,905
    )Net cash provided by financing activities
    
    
    390,960
    
    
    
    624,649Effect of exchange rate changes on cash
    
    
    (91
    )
    
    
    (141
    )Net increase in cash and cash equivalents
    
    
    8,396
    
    
    
    21,270Cash and cash equivalents at beginning of period
    
    
    140,810
    
    
    
    157,771Cash and cash equivalents at end of period
    
    $
    149,206
    
    
    $
    179,041Supplemental disclosures of cash flow information:Cash flow during the period:Interest paid
    
    $
    41,975
    
    
    $
    51,993Income tax
(refund) paid
    
    $
    (21,466
    )
    
    $
    42,917Noncash transactions:Loans sold, eligible for repurchase
    
    $
    68,968
    
    
    $
    Conversion of trust preferred to common stock
    
    $
    
    
    
    $
    43
 The accompanying notes are an integral part of the consolidated financial
statements. 8




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1  Summary of Significant Accounting Policies Consolidation:Irwin Financial Corporation and its subsidiaries (the
Corporation) provide financial services throughout the United States and
Canada. We are engaged in the mortgage banking, commercial banking, home equity
lending, commercial finance and venture capital lines of business. Our direct
and indirect subsidiaries include Irwin Mortgage Corporation, Irwin Union Bank
and Trust Company, Irwin Union Bank, F.S.B., Irwin Home Equity Corporation,
Irwin Commercial Finance Corporation and Irwin Ventures, LLC. Intercompany
balances and transactions have been eliminated in consolidation. In
the opinion of management, the financial statements reflect all
material adjustments necessary for a fair presentation. The
Corporation does not meet the criteria as primary beneficiary for our
wholly-owned trusts holding our company-obligated mandatorily redeemable
preferred securities established by Financial Accounting Standards Board (FASB)
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities.
As a result, these trusts are not consolidated. Use of Estimates:The preparation of financial statements in conformity
with generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Residual Interests:Residual interests are stated at fair value.
Unrealized gains and losses are included in earnings. Until we ceased using
gain on sale accounting after the first quarter of 2002, whenever we sold
receivables in securitizations of home equity loans and lines of credit, we
retained residual interests, one or more subordinated tranches, and in some
cases a cash reserve account, all of which are retained interests in the
securitized receivables. Gain or loss on the sale of the loans depended, in
part, on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the retained interests based on
their relative fair value at the date of transfer. To obtain fair value of residual interests, quoted market prices are used
if available. However, quotes are generally not available for residual
interests, so we generally estimate fair value based on the present value of
expected cash flows using estimates of the key assumptions  prepayment speeds,
credit losses, forward yield curves, and discount rates commensurate with the
risks involved  that management believes market participants would use to
value similar assets. Adjustments to carrying values are recorded as trading
gains or losses. Cash and Cash Equivalents Defined:For purposes of the statement of cash
flows, we consider cash and due from banks and federal funds sold to be cash
equivalents. Stock-Based Employee Compensation:We have two stock-based employee
compensation plans. We use the intrinsic value method to account for our plans
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. No
stock-based employee compensation cost is reflected in net income for any of
the periods presented, as all options granted under these plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. To date, the Board of Directors has not chosen to expense stock options.
The Board wishes to analyze new guidance from the FASB, Securities and Exchange
Commission (SEC) and other relevant authorities regarding the standardization
of valuation methods. Accordingly, we will begin expensing options when the new
requirements become effective. We will continue to disclose the impact of
expensing stock options, using our valuation method, which is based on a
Black-Scholes model using assumptions management believes to be reasonable. The
following table illustrates the effect on net income and earnings per share if
we had applied the fair value recognition provisions of Statement of Financial
Accounting Standard (SFAS) 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation: 9




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##### Table of Contents



For the three months
    
    For the six monthsended June 30,
    
    ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Net income as reported
    
    $
    17,944
    
    
    $
    13,227
    
    
    $
    38,286
    
    
    $
    25,003Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (668
    )
    
    
    (841
    )
    
    
    (1,300
    )
    
    
    (1,488
    )Pro forma net income
    
    $
    17,276
    
    
    $
    12,386
    
    
    $
    36,986
    
    
    $
    23,515Basic earnings per shareAs reported
    
    $
    0.64
    
    
    $
    0.47
    
    
    $
    1.36
    
    
    $
    0.90Pro forma
    
    $
    0.61
    
    
    $
    0.44
    
    
    $
    1.31
    
    
    $
    0.84Diluted earnings per shareAs reported
    
    $
    0.60
    
    
    $
    0.45
    
    
    $
    1.27
    
    
    $
    0.86Pro forma
    
    $
    0.58
    
    
    $
    0.42
    
    
    $
    1.23
    
    
    $
    0.81
 Recent Accounting Developments:We adopted FASB Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities as of December 31, 2003
and as a result, deconsolidated IFC Capital Trust II, IFC Capital Trust III,
IFC Capital Trust IV, IFC Capital Trust V, IFC Capital Trust VI, and IFC
Statutory Trust VII (IFC Trusts). The sole assets of the IFC Trusts are
subordinated debentures of Irwin Financial Corporation. The IFC Trusts
liabilities are represented by Trust Preferred Securities, which have
previously been listed as Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts on our consolidated balance sheets. Under FIN
46, the subordinated debentures, which are substantially equal in amount to the
Trust Preferred Securities, cease to be eliminated in consolidation and are
included in other long-term debt in our consolidated balance sheets at
December 31, 2003 and June 30, 2004. Details about the IFC Trusts and
debentures can be found in Note 7, Other Long-Term Debt. The Trust Preferred
Securities currently qualify as Tier 1 regulatory capital. In May 2004, the
Federal Reserve Bank issued proposed rules that retain Tier 1 capital treatment
of Trust Preferred Securities for bank holding companies. In March 2004, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 105 (SAB 105), Application of Accounting Principles to
Loan Commitments. This staff bulletin is effective for interest rate locks
entered into or substantially modified on or after April 1, 2004. This
bulletin and subsequent interpretations impacted the manner in which we account
for interest rate lock commitments. The effect of implementation was a
deferral of $2.2 million of pre-tax earnings this quarter related to built in
pricing gains. Built in pricing gain earnings will now be recognized when our
mortgage line of business sells or securitizes loans rather than when it enters
into interest rate locks. Reclassifications:Certain amounts in the 2003 consolidated financial
statements have been reclassified to conform to the 2004 presentation. These
changes had no impact on previously reported net income or shareholders
equity. 10




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##### Table of Contents



Note 2  Loans and Leases Loans and leases are summarized as follows: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Commercial, financial and agricultural
    
    $
    1,555,756
    
    
    $
    1,503,619Real estate-construction
    
    
    321,939
    
    
    
    306,669Real estate-mortgage
    
    
    783,656
    
    
    
    859,541Consumer
    
    
    31,377
    
    
    
    27,370Direct financing leasesDomestic
    
    
    407,552
    
    
    
    364,413Canadian
    
    
    221,666
    
    
    
    207,355Unearned incomeDomestic
    
    
    (88,936
    )
    
    
    (78,875
    )Canadian
    
    
    (29,731
    )
    
    
    (29,038
    )Total loans and leases, net of unearned income
    
    $
    3,203,279
    
    
    $
    3,161,054
 Note 3  Allowance for Loan and Lease Losses Changes in the allowance for loan and lease losses are summarized below: As of and for
    
    As of and forthe six months ended
    
    the year endedJune 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Balance at beginning of period
    
    $
    64,285
    
    
    $
    50,936Provision for loan and lease losses
    
    
    9,940
    
    
    
    47,583Charge-offs
    
    
    (15,076
    )
    
    
    (37,312
    )Recoveries
    
    
    2,458
    
    
    
    3,420Reduction due to reclassification of loans to loans held for sale
    
    
    (7,461
    )
    
    
    (690
    )Other
    
    
    (309
    )
    
    
    348Balance at end of period
    
    $
    53,837
    
    
    $
    64,285
 11




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##### Table of Contents



Note 4 - Servicing Assets Included on the consolidated balance sheet at June 30, 2004 and December
31, 2003 are $397.8 million and $380.1 million, respectively, of capitalized
servicing assets. These amounts relate to the mortgage and home equity loans
serviced by us for investors. Changes in our capitalized servicing assets, net
of valuation allowance, are shown below: As of and for
    
    As of and forthe six months ended
    
    the year endedJune 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Beginning balance
    
    $
    380,123
    
    
    $
    174,935Additions
    
    
    74,592
    
    
    
    296,551Amortization
    
    
    (61,343
    )
    
    
    (135,519
    )Recovery of impairment
    
    
    24,567
    
    
    
    44,516Reduction for servicing sales
    
    
    (20,111
    )
    
    
    (360
    )$
    397,828
    
    
    $
    380,123
 We have established a valuation allowance to record servicing assets at their
fair market value. Changes in the allowance are summarized below: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Balance at beginning of year
    
    
    76,869
    
    
    
    159,865Recovery of impairment
    
    
    (24,567
    )
    
    
    (44,516
    )Reclass for sales of servicing
    
    
    (18,204
    )
    
    
    Other than
temporary impairment(1)
    
    
    (6,999
    )
    
    
    (38,480
    )Balance at end of year
    
    $
    27,099
    
    
    $
    76,869
   (1) Other than temporary impairment was recorded to reflect
our view that the originally recorded value of certain
servicing rights and subsequent impairment associated with
those rights is unlikely to be recovered in market value.
There was no related direct impact on net income as this
other than temporary impairment affected only balance sheet
accounts. However, the write-down will result in a reduction
of amortization expense and potentially reduced recovery of
impairment in future periods. Note 5 - Short-Term Borrowings Short-term borrowings are summarized as follows: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Federal Home Loan Bank borrowings
    
    $
    536,347
    
    
    $
    286,000Drafts payable related to mortgage loan closings
    
    
    67,508
    
    
    
    72,686Lines of credit and other
    
    
    1,005
    
    
    
    1,057Federal funds
    
    
    51,000
    
    
    
    53,600Commercial paper
    
    
    
    
    
    
    16,415Total
    
    $
    655,860
    
    
    $
    429,758Weighted average interest rate
    
    
    1.82
    %
    
    
    1.61
    %
 Drafts payable related to mortgage loan closings are related to mortgage
closings that have not been presented to the banks for payment. When presented
for payment, these borrowings will be funded internally or by borrowing from
the lines of credit. 12




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##### Table of Contents



Federal Home Loan Bank borrowings are collateralized by loans and loans
held for sale. We have lines of credit available to fund loan originations and operations
with variable rates ranging from 1.6% to 3.3% at June 30, 2004. Note 6  Collateralized Debt We pledge or sell loans structured as secured financings at our home
equity and commercial finance lines of business. Sale treatment is precluded on
these transactions because we fail the true-sale requirements of SFAS 140 as we
maintain effective control over the loans and leases securitized. This type of
structure results in cash being received, debt being recorded, and the
establishment of an allowance for credit losses. The notes associated with
these transactions are collateralized by $0.3 billion in home equity loans,
home equity lines of credit, and leases. The principal and interest on these
debt securities are paid using the cash flows from the underlying loans and
leases. Accordingly, the timing of the principal payments on these debt
securities is dependent on the payments received on the underlying collateral.
The interest rates on the bonds are at a floating rate. We have an interest
only senior note on the securitization at the home equity lending line of
business that as of June 30, 2004 had a notional balance of $30.5 million
(which does not represent the amount at risk), pays interest at 10%, and
matures on September 25, 2005. The 2002-1 asset backed structure was sold
during the second quarter resulting in the recognition of a $2.5 million gain
and the removal of $205 million of loans from our balance sheet. Collateralized debt is summarized as follows: WeightedAverageInterestrate atJune 30,
    
    June 30,
    
    December 31,Maturity
    
    2004
    
    2004
    
    2003(Dollars in thousands)Commercial finance line of business2003 domestic asset backed note
    
    
    7/4/2010
    
    
    
    2.20
    
    
    $
    39,336
    
    
    $
    51,6942003 Canadian asset backed note
    
    
    11/1/2008
    
    
    
    3.63
    
    
    
    80,496
    
    
    
    77,902Home equity line of business2003-1 asset backed notes:Combined variable rate senior note
    
    
    2/28/2028
    
    
    
    1.64
    
    
    
    100,543
    
    
    
    160,874Combined variable rate subordinate note
    
    
    2/28/2028
    
    
    
    3.41
    
    
    
    68,625
    
    
    
    61,763Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    3,457
    
    
    
    4,4462002-1 asset backed notes:Combined variable rate senior note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156,699Combined variable rate subordinate note
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,551Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,202Total
    
    
    
    
    
    
    
    
    
    $
    292,457
    
    
    $
    590,131
 Note 7 -Other Long-Term Debt At June 30, 2004 and December 31, 2003 we had $270 million of other
long-term debt. Included in both years is $30 million of subordinated debt with
an interest rate of 7.58% and a maturity date of July 2014, as well as a
mortgage note outstanding for $0.1 million with an interest rate of 8.50% and a
maturity date of April 2008. We also have obligations represented by subordinated debentures at June
30, 2004 of $240 million. These securities were issued by wholly-owned trusts
of Irwin Financial Corporation that were created for the purpose of issuing
cumulative trust preferred securities. In accordance with FIN 46 we are no
longer consolidating these trusts. Refer to Note 1 for information regarding
the accounting change for these securities implemented in 2003. These
debentures are the sole assets of these trusts as of June 30, 2004. 13




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##### Table of Contents



All debentures and securities are callable at par after five years from
origination date. The securities are all Tier 1 qualifying capital at June 30,
2004. Highlights about these debentures and the related trusts are listed
below: Interest
    
    
    
    
    
    Subordinated DebtRate atOrigination
    
    June 30,
    
    Maturity
    
    June 30,
    
    December 31,Name
    
    Date
    
    2004
    
    Date
    
    2004
    
    2003
    
    Other(Dollars in thousands)IFC Capital Trust II
    
    Nov 2000
    
    
    10.50
    %
    
    Sep 2030
    
    $
    53,351
    
    
    $
    53,351IFC Capital Trust III
    
    Nov 2000
    
    
    8.75
    
    
    Sep 2030
    
    
    53,268
    
    
    
    53,268
    
    
    initial conversion ratio of 1.261 shares ofcommon stock to 1 convertible preferred security, currently callable at 15% premiumIFC Capital Trust IV
    
    Jul 2001
    
    
    10.25
    
    
    Jul 2031
    
    
    15,464
    
    
    
    15,464IFC Capital Trust V
    
    Nov 2001
    
    
    9.95
    
    
    Nov 2031
    
    
    30,928
    
    
    
    30,928IFC Capital Trust VI
    
    Oct 2002
    
    
    8.70
    
    
    Sep 2032
    
    
    35,567
    
    
    
    35,567IFC Statutory Trust VII
    
    Nov 2003
    
    
    4.45
    
    
    Nov 2033
    
    
    51,547
    
    
    
    51,547
    
    
    rate changes quarterly at three month LIBOR plus 290 basis points$
    240,125
    
    
    $
    240,125
 Note 8 - Employee Retirement Plans Components of net periodic cost of pension benefit: For the Three Months Ended June 30,2004
    
    2003(Dollars in thousands)Service cost
    
    $
    494
    
    
    $
    396Interest cost
    
    
    456
    
    
    
    413Expected return on plan assets
    
    
    (404
    )
    
    
    (312
    )Amortization of transition obligation
    
    
    2
    
    
    
    2Amortization of prior service cost
    
    
    9
    
    
    
    9Amortization of actuarial loss
    
    
    176
    
    
    
    192Net periodic benefit cost
    
    $
    733
    
    
    $
    700
 For the Six Months Ended June 30,2004
    
    2003(Dollars in thousands)Service cost
    
    $
    988
    
    
    $
    792Interest cost
    
    
    911
    
    
    
    825Expected return on plan assets
    
    
    (809
    )
    
    
    (625
    )Amortization of transition obligation
    
    
    5
    
    
    
    5Amortization of prior service cost
    
    
    19
    
    
    
    19Amortization of actuarial loss
    
    
    351
    
    
    
    385Net periodic benefit cost
    
    $
    1,465
    
    
    $
    1,401
 As of June 30, 2004, we have not made any contributions to our pension
plan and do not expect to contribute to this plan in 2004. 14




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##### Table of Contents



Note 9  Earnings Per Share Earnings per share calculations are summarized as follow: Effect of
    
    DilutedBasic Earnings
    
    Effect of
    
    Convertible
    
    EarningsPer Share
    
    Stock Options
    
    Shares
    
    Per Share(Dollars in thousands,
except per share data)Three months ended June 30, 2004Net income available to common shareholders
    
    $
    17,944
    
    
    $
    
    
    
    $
    678
    
    
    $
    18,622Shares
    
    
    28,244
    
    
    
    334
    
    
    
    2,607
    
    
    
    31,185Per-Share amount
    
    $
    0.64
    
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    0.60Three months ended June 30, 2003Net income available to common shareholders
    
    $
    13,227
    
    
    $
    
    
    
    $
    679
    
    
    $
    13,906Shares
    
    
    27,888
    
    
    
    321
    
    
    
    2,610
    
    
    
    30,819Per-Share amount
    
    $
    0.47
    
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    0.45Six Months ended June 30, 2004Net income available to common shareholders
    
    $
    38,286
    
    
    $
    
    
    
    $
    1,356
    
    
    $
    39,642Shares
    
    
    28,218
    
    
    
    422
    
    
    
    2,607
    
    
    
    31,247Per-Share amount
    
    $
    1.36
    
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    1.27Six Months ended June 30, 2003Net income available to common shareholders
    
    $
    25,003
    
    
    $
    
    
    
    $
    1,358
    
    
    $
    26,361Shares
    
    
    27,839
    
    
    
    262
    
    
    
    2,610
    
    
    
    30,711Per-Share amount
    
    $
    0.90
    
    
    $
    
    
    
    $
    (0.04
    )
    
    $
    0.86
 At June 30, 2004 and 2003, 94,086 and 882,791 shares, respectively,
related to stock options were not included in the dilutive earnings per share
calculation because they had exercise prices below the stock price as of the
respective dates. Note 10  Industry Segment Information We have five principal segments that provide a broad range of financial
services. The mortgage banking line of business originates, sells, and
services residential first mortgage loans. The commercial banking line of
business provides commercial banking services. The home equity lending line of
business originates, sells and services home equity loans and lines of credit.
The commercial finance line of business originates leases and loans against
commercial equipment and real estate. The venture capital line of business
invests in early-stage technology companies focusing on financial services.
Our other segment primarily includes the parent company and eliminations. The accounting policies of each segment are the same as those described in
the Summary of Significant Accounting Policies. Below is a summary of each
segments revenues, net income, and assets for three months and six months
ended June 30, 2004, and 2003: 15




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##### Table of Contents



Mortgage
    
    Commercial
    
    Home Equity
    
    Commercial
    
    VentureBanking
    
    Banking
    
    Lending
    
    Finance
    
    Capital
    
    Other
    
    Consolidated(Dollars in thousands)For the Three Months ended June 30, 2004Net interest income
    
    $
    11,909
    
    
    $
    20,441
    
    
    $
    29,646
    
    
    $
    6,881
    
    
    $
    (2
    )
    
    $
    (4,619
    )
    
    $
    64,256Intersegment interest
    
    
    (128
    )
    
    
    750
    
    
    
    (3,487
    )
    
    
    
    
    
    
    
    
    
    
    2,865
    
    
    
    Provision for loan and lease losses
    
    
    284
    
    
    
    (750
    )
    
    
    706
    
    
    
    (2,034
    )
    
    
    
    
    
    
    
    
    
    
    (1,794
    )Other revenue
    
    
    53,834
    
    
    
    4,918
    
    
    
    14,833
    
    
    
    2,622
    
    
    
    (321
    )
    
    
    220
    
    
    
    76,106Intersegment revenues
    
    
    12
    
    
    
    143
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    (305
    )
    
    
    Total net revenues
    
    
    65,911
    
    
    
    25,502
    
    
    
    41,698
    
    
    
    7,469
    
    
    
    (173
    )
    
    
    (1,839
    )
    
    
    138,568Other expense
    
    
    55,835
    
    
    
    15,492
    
    
    
    26,129
    
    
    
    4,892
    
    
    
    117
    
    
    
    5,390
    
    
    
    107,855Intersegment expenses
    
    
    881
    
    
    
    374
    
    
    
    726
    
    
    
    173
    
    
    
    
    
    
    
    (2,154
    )
    
    
    Income (loss) before taxes
    
    
    9,195
    
    
    
    9,636
    
    
    
    14,843
    
    
    
    2,404
    
    
    
    (290
    )
    
    
    (5,075
    )
    
    
    30,713Income taxes
    
    
    3,680
    
    
    
    3,867
    
    
    
    5,945
    
    
    
    1,087
    
    
    
    (112
    )
    
    
    (1,698
    )
    
    
    12,769Net income (loss)
    
    $
    5,515
    
    
    $
    5,769
    
    
    $
    8,898
    
    
    $
    1,317
    
    
    $
    (178
    )
    
    $
    (3,377
    )
    
    $
    17,944For the Three Months ended June 30, 2003Net interest income
    
    $
    20,904
    
    
    $
    20,155
    
    
    $
    28,222
    
    
    $
    5,398
    
    
    $
    2
    
    
    $
    (2,720
    )
    
    $
    71,961Intersegment interest
    
    
    
    
    
    
    (717
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    717
    
    
    
    Provision for loan and lease losses
    
    
    (83
    )
    
    
    (1,333
    )
    
    
    (7,970
    )
    
    
    (4,069
    )
    
    
    (215
    )
    
    
    36
    
    
    
    (13,634
    )Other revenue
    
    
    88,824
    
    
    
    5,645
    
    
    
    (22,492
    )
    
    
    2,663
    
    
    
    (165
    )
    
    
    (10,954
    )
    
    
    63,521Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    (150
    )
    
    
    Total net revenues
    
    
    109,645
    
    
    
    23,750
    
    
    
    (2,240
    )
    
    
    3,992
    
    
    
    (228
    )
    
    
    (13,071
    )
    
    
    121,848Other expense
    
    
    71,183
    
    
    
    13,515
    
    
    
    21,404
    
    
    
    3,943
    
    
    
    4
    
    
    
    (9,567
    )
    
    
    100,482Intersegment expenses
    
    
    690
    
    
    
    451
    
    
    
    406
    
    
    
    111
    
    
    
    
    
    
    
    (1,658
    )
    
    
    Income (loss) before taxes
    
    
    37,772
    
    
    
    9,784
    
    
    
    (24,050
    )
    
    
    (62
    )
    
    
    (232
    )
    
    
    (1,846
    )
    
    
    21,366Income taxes
    
    
    14,530
    
    
    
    3,904
    
    
    
    (9,620
    )
    
    
    (63
    )
    
    
    (96
    )
    
    
    (516
    )
    
    
    8,139Net income (loss)
    
    $
    23,242
    
    
    $
    5,880
    
    
    $
    (14,430
    )
    
    $
    1
    
    
    $
    (136
    )
    
    $
    (1,330
    )
    
    $
    13,227
 Mortgage
    
    Commercial
    
    Home Equity
    
    Commercial
    
    VentureBanking
    
    Banking
    
    Lending
    
    Finance
    
    Capital
    
    Other
    
    Consolidated(Dollars in thousands)For the Six months Ended June 30,
2004Net interest income
    
    $
    20,995
    
    
    $
    40,197
    
    
    $
    56,720
    
    
    $
    13,635
    
    
    $
    6
    
    
    $
    (8,094
    )
    
    $
    123,459Intersegment interest
    
    
    (552
    )
    
    
    1,540
    
    
    
    (5,867
    )
    
    
    
    
    
    
    (9
    )
    
    
    4,888
    
    
    
    Provision for loan and lease losses
    
    
    390
    
    
    
    (1,950
    )
    
    
    (5,193
    )
    
    
    (3,187
    )
    
    
    
    
    
    
    
    
    
    
    (9,940
    )Other revenue
    
    
    113,692
    
    
    
    9,552
    
    
    
    32,490
    
    
    
    3,070
    
    
    
    (313
    )
    
    
    69
    
    
    
    158,560Intersegment revenues
    
    
    22
    
    
    
    285
    
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    (607
    )
    
    
    Total net revenues
    
    
    134,547
    
    
    
    49,624
    
    
    
    78,150
    
    
    
    13,518
    
    
    
    (16
    )
    
    
    (3,744
    )
    
    
    272,079Other expense
    
    
    107,437
    
    
    
    30,051
    
    
    
    50,791
    
    
    
    8,917
    
    
    
    245
    
    
    
    10,850
    
    
    
    208,291Intersegment expenses
    
    
    1,748
    
    
    
    897
    
    
    
    1,450
    
    
    
    346
    
    
    
    
    
    
    
    (4,441
    )
    
    
    Income (loss) before taxes
    
    
    25,362
    
    
    
    18,676
    
    
    
    25,909
    
    
    
    4,255
    
    
    
    (261
    )
    
    
    (10,153
    )
    
    
    63,788Income taxes
    
    
    10,114
    
    
    
    7,489
    
    
    
    10,378
    
    
    
    3,231
    
    
    
    (100
    )
    
    
    (5,610
    )
    
    
    25,502Net income (loss)
    
    $
    15,248
    
    
    $
    11,187
    
    
    $
    15,531
    
    
    $
    1,024
    
    
    $
    (161
    )
    
    $
    (4,543
    )
    
    $
    38,286Assets at June 30, 2004
    
    $
    1,353,464
    
    
    $
    2,512,848
    
    
    $
    1,229,790
    
    
    $
    520,883
    
    
    $
    6,953
    
    
    $
    (198,766
    )
    
    $
    5,425,172For the Six months Ended June 30,
2003Net interest income
    
    $
    36,969
    
    
    $
    39,912
    
    
    $
    54,634
    
    
    $
    10,205
    
    
    $
    9
    
    
    $
    (5,377
    )
    
    $
    136,352Intersegment interest
    
    
    
    
    
    
    (1,447
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,447
    
    
    
    Provision for loan and lease losses
    
    
    (30
    )
    
    
    (2,913
    )
    
    
    (12,850
    )
    
    
    (6,933
    )
    
    
    (215
    )
    
    
    64
    
    
    
    (22,877
    )Other revenue
    
    
    169,808
    
    
    
    10,774
    
    
    
    (37,474
    )
    
    
    3,497
    
    
    
    (2,427
    )
    
    
    (17,846
    )
    
    
    126,332Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    (300
    )
    
    
    Total net revenues
    
    
    206,747
    
    
    
    46,326
    
    
    
    4,310
    
    
    
    6,769
    
    
    
    (2,333
    )
    
    
    (22,012
    )
    
    
    239,807Other expense
    
    
    135,705
    
    
    
    26,969
    
    
    
    42,819
    
    
    
    7,160
    
    
    
    111
    
    
    
    (13,470
    )
    
    
    199,294Intersegment expenses
    
    
    1,381
    
    
    
    902
    
    
    
    1,372
    
    
    
    221
    
    
    
    
    
    
    
    (3,876
    )
    
    
    Income (loss) before taxes
    
    
    69,661
    
    
    
    18,455
    
    
    
    (39,881
    )
    
    
    (612
    )
    
    
    (2,444
    )
    
    
    (4,666
    )
    
    
    40,513Income taxes
    
    
    26,780
    
    
    
    7,364
    
    
    
    (15,952
    )
    
    
    (353
    )
    
    
    (980
    )
    
    
    (1,349
    )
    
    
    15,510Net income (loss)
    
    $
    42,881
    
    
    $
    11,091
    
    
    $
    (23,929
    )
    
    $
    (259
    )
    
    $
    (1,464
    )
    
    $
    (3,317
    )
    
    $
    25,003Assets at June 30, 2003
    
    $
    2,009,155
    
    
    $
    2,139,403
    
    
    $
    1,025,284
    
    
    $
    403,466
    
    
    $
    7,767
    
    
    $
    (54,922
    )
    
    $
    5,530,153
 16




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##### Table of Contents



Note 11  Commitments and Contingencies Our indirect subsidiary, Irwin Mortgage Corporation, is a defendant in a
class action lawsuit in the United States District Court for the Northern
District of Alabama, filed in April 1996, alleging that Irwin Mortgage violated
the federal Real Estate Settlement Procedures Act (RESPA) relating to Irwin
Mortgages payment of broker fees to mortgage brokers. In June 2001, the Court
of Appeals for the 11th Circuit upheld the district courts certification of a
plaintiff class and the case was remanded for further proceedings in the
federal district court. In November 2001, by order of the district court, the parties filed
supplemental briefs analyzing the impact of an October 18, 2001 policy
statement issued by the Department of Housing and Urban Development (HUD) that
explicitly disagreed with the judicial interpretation of RESPA by the Court of
Appeals for the 11th Circuit in its ruling upholding class certification in
this case. In response to a motion from Irwin Mortgage, in March 2002, the
district court granted Irwin Mortgages motion to stay proceedings in this case
until the 11th Circuit decided the three other RESPA cases originally argued
before it with this case. The 11th Circuit subsequently decided all of the RESPA cases pending in
that court. In one of those cases, the 11th Circuit concluded that the trial
court had abused its discretion in certifying a class action under RESPA.
Further, in that decision, the 11th Circuit expressly recognized it was, in
effect, overruling its previous decision upholding class certification in our
case. In March 2003, Irwin Mortgage filed a motion to decertify the class and
the plaintiffs filed a renewed motion for summary judgment. On October 2, 2003
the case was reassigned to another U.S. district court judge. In response to
an order from the court, the parties met and submitted a joint status report at
the end of October 2003. On June 14, 2004, at the courts request, the parties
engaged in mediation, which was unsuccessful. The court then reassigned this
case to a new judge. If the class is not decertified and the district court finds that Irwin
Mortgage violated RESPA, Irwin Mortgage could be liable for damages equal to
three times the amount of that portion of payments made to the mortgage brokers
that is ruled unlawful. Based on notices sent by the plaintiffs to date to
potential class members and additional notices that might be sent in this case,
we believe the class is not likely to exceed 32,000 borrowers who meet the
class specifications. As discussed in prior periodic reports, other cases filed against our
mortgage subsidiary alleging RESPA and violations similar to those in this case
were settled in 2003 for nonmaterial amounts. Irwin Mortgage intends to defend
this lawsuit vigorously and believes it has numerous defenses to the alleged
violations. Irwin Mortgage further believes that the 11th Circuits RESPA
rulings in the cases argued before it with this one provide grounds for
reversal of the class certification in this case. We have no assurance,
however, that Irwin Mortgage will be successful in defeating class
certification or will ultimately prevail on the merits. However, we expect
that an adverse outcome in this case could result in substantial monetary
damages that could be material to our financial position. We have not
established any reserves for this case and are unable at this stage of the
litigation to form a reasonable estimate of potential loss that we could
suffer. In January 2001, we and Irwin Leasing Corporation (formerly Affiliated
Capital Corp.), our indirect subsidiary, and Irwin Equipment Finance
Corporation, our direct subsidiary (together, the Irwin companies), were served
as defendants in an action filed in the United States District Court for the
Middle District of Pennsylvania. The suit alleges that a manufacturer/importer
of certain medical devices made misrepresentations to health care professionals
and to government officials to improperly obtain Medicare reimbursement for
treatments using the devices, and that the Irwin companies, through Affiliated
Capitals financing activities, aided in making the alleged misrepresentations.
The Irwin companies filed a motion to dismiss on February 12, 2001. On August
10, 2001, the court granted our motion in part by dismissing Irwin Financial
and Irwin Equipment Finance as defendants in the suit. In June, 2003, Irwin
Leasing filed a motion for summary judgment. Oral argument was held on August
27, 2003. On October 8, 2003, the court granted Irwin Leasings motion for
summary judgment, dismissing the plaintiffs complaint. On October 22, 2003,
the plaintiff filed a notice of appeal with the Court of Appeals for the Third
Circuit. The appeals court has tentatively scheduled consideration of
the appeal during the week of September 27, 2004. We cannot predict whether we
will prevail on appeal and have not established any reserves for this case. Our subsidiary, Irwin Union Bank and Trust Company, is a defendant in a
class action lawsuit filed in the United States District Court in Massachusetts
in July 2001. The case involves loans purchased by Irwin Union
Bank and Trust Company from an unaffiliated third-party originator. The plaintiffs allege a failure
to comply with certain disclosure provisions of the Truth in Lending Act
relating to 17




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##### Table of Contents



high rate loans in making second mortgage home equity loans to the
plaintiff borrowers. The complaint seeks rescission of the loans and other
damages. A limited class was certified. As originally specified, the plaintiff
class included those borrowers who obtained a mortgage loan originated by the
third-party originator with prepayment penalty provisions during the three-year
period prior to the filing of the suit. Subsequently, the court further
restricted the class to those borrowers with high-rate loans subject to the
Home Ownership and Equity Protection Act who refinanced their loans and paid a
prepayment penalty. A preliminary analysis led us to conclude that fewer than
100 loans qualified for class membership. In June 2004, the parties reached an agreement in principle to settle this
matter for a nonmaterial amount, which has been reserved. The settlement is
contingent upon the negotiation of a final settlement agreement and is subject
to the approval of the district court. Our indirect subsidiary, Irwin Mortgage Corporation, is a defendant in a
case filed in August 1998 in the Baltimore, Maryland, City Circuit Court. On
January 25, 2002, a jury in this case awarded the plaintiffs damages of $1.434
million jointly and severally against defendants, including Irwin Mortgage.
The nine plaintiff borrowers alleged that a home rehabilitation company
defrauded the plaintiffs by selling them defective homes at inflated prices and
that Irwin Mortgage, which provided the plaintiff borrowers mortgage loans on
the home purchases, participated in the fraud. Irwin Mortgage filed an appeal
with the Maryland Court of Special Appeals and oral argument was held on
January 7, 2003. On February 27, 2004, the Court of Special Appeals ruled
against Irwin Mortgage and remanded the case to the trial court for a partial
retrial on whether the plaintiffs are entitled to punitive damages. On April
12, 2004, Irwin Mortgage filed a Petition for Writ of Certiorari with the
Maryland Court of Appeals, seeking further review. The Court of Appeals
accepted the appeal on all issues on June 11, 2004. We have reserved for this
case based upon the advice of our legal counsel. In April 2003, our indirect subsidiary, Irwin Mortgage Corporation, was
named as a defendant in a class action lawsuit filed in the Marion County,
Indiana, Superior Court. The complaint alleges that Irwin Mortgage charged a
document preparation fee in violation of Indiana law for services performed by
clerical personnel in completing legal documents related to mortgage loans.
Irwin Mortgage filed an answer on June 11, 2003 and a motion for summary
judgment on October 27, 2003. On November 3, 2003, the court ruled that a
determination on class certification would precede any action on Irwin
Mortgages summary judgment motion. On March 15, 2004, the court held a
hearing on plaintiffs motion for class certification and certified a class on
June 18, 2004 consisting of Indiana borrowers who were allegedly charged the
fee by Irwin Mortgage any time after April 17, 1997. We are unable at this
time to form a reasonable estimate of the amount of potential loss, if any,
that Irwin Mortgage could suffer. We have not established any reserves for
this case. In April 2003, our indirect subsidiary, Irwin Mortgage Corporation, was
named as a defendant in an action filed in the District Court of Nueces County,
Texas. The complaint alleges that Irwin Mortgage improperly charged borrowers
fees for the services of third-party vendors in excess of Irwin Mortgages
costs, and charged certain fees to which plaintiffs did not agree. The
plaintiffs are seeking to certify a class consisting of similarly situated
borrowers. Irwin Mortgage filed an answer on July 11, 2003 and responded to
plaintiffs initial discovery requests on December 19, 2003. On February 25,
2004, Irwin Mortgage served its initial discovery requests to the plaintiffs.
Discovery is continuing. Because the case is in the early stages of
litigation, we are unable at this time to form a reasonable estimate of the
amount of potential loss, if any, that Irwin Mortgage could suffer. We have
not established any reserves for this case. In October 2003, our indirect subsidiary, Irwin Mortgage Corporation
(formerly Inland Mortgage Corporation), was named as a defendant, along with
others, in an action filed in the Supreme Court of New York, County of Kings.
The plaintiffs, a mother and two children, allege they were injured from lead
contamination while living in premises allegedly owned by the defendants. The
suit seeks approximately $41 million in damages and alleges negligence, breach
of implied warranty of habitability and fitness for intended use,
loss of services and the cost of medical treatment. Because the case is in the
early stages of litigation, we are unable at this time to form a reasonable
estimate of the amount of potential loss, if any, that Irwin Mortgage could
suffer. The parties agreed to delay the filing of an answer in this case until
July 30, 2004. We are attempting to obtain a voluntary dismissal based on our
belief that there is insufficient nexus between the cause of the alleged
injuries and Irwin Mortgage. We have not established any reserves for this
case. We and our subsidiaries are from time to time engaged in various matters
of litigation, including the matters described above, other assertions of
improper or fraudulent loan practices or lending violations, and other matters,
and we have a number of unresolved 18




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##### Table of Contents



claims pending. In addition, as part of the
ordinary course of business, we and our subsidiaries are parties to litigation
involving claims to the ownership of funds in particular accounts, the
collection of delinquent accounts, challenges to security interests in
collateral, and foreclosure interests, that is incidental to our regular
business activities. While the ultimate liability with respect to these other
litigation matters and claims cannot be determined at this time, we believe
that damages, if any, and other amounts relating to pending matters are not
likely to be material to our consolidated financial position or results of
operations, except as described above. Reserves are established for these
various matters of litigation, when appropriate, based upon the advice of legal
counsel. 
 Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations. About Forward-looking Statements You should read the following discussion in conjunction with our
consolidated financial statements, footnotes, and tables. This discussion and
other sections of this report contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We intend such forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995 and are
including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements are based on managements expectations,
estimates, projections, and assumptions. These statements involve inherent
risks and uncertainties that are difficult to predict and are not guarantees of
future performance. In addition, our past results of operations do not
necessarily indicate our future results. Words that convey our beliefs, views,
expectations, assumptions, estimates, forecasts, outlook and projections or
similar language, or that indicate events we believe could, would, should, may
or will occur (or might not occur) or are likely (or unlikely) to occur, and
similar expressions, are intended to identify forward-looking statements. These
may include, among other things, statements and assumptions about:  
    
    our projected revenues, earnings or earnings per share, as well
as managements short-term and long-term performance goals;
    
    projected trends or potential changes in our asset quality, loan
delinquencies, asset valuations, capital ratios or financial
performance measures;
    
    our plans and strategies, including the expected results or impact of implementing such plans and strategies;
    
    potential litigation developments and the anticipated impact of potential outcomes of pending legal matters;
    
    the anticipated effects on results of operations or financial condition from recent developments or events; and
    
    any other projections or expressions that are not historical facts. Actual future results may differ materially from what is projected due to
a variety of factors, including, but not limited to:  
    
    potential changes in and volatility of interest rates, which may
affect consumer demand for our products and the management and success
of our interest rate risk management strategies;
    
    staffing fluctuations in response to product demand;
    
    the relative profitability of our lending operations;
    
    the valuation and management of our servicing and derivative
portfolios, including short-term swings in valuation of such
portfolios due to quarter-end secondary market interest rates, which
are inherently volatile;
    
    borrowers refinancing opportunities, which may affect the
prepayment assumptions used in our valuation estimates and which may
affect loan demand;
    
    unanticipated deterioration in the credit quality of our assets;
    
    unanticipated deterioration in the carrying value of our other assets, including securities;
    
    difficulties in delivering products to the secondary market as planned;
    
    difficulties in expanding our businesses and obtaining funding as needed;
    
    competition from other financial service providers for experienced managers as well as for customers;
    
    changes in the value of companies in which we invest;
    
    changes in variable compensation plans related to the performance
and valuation of lines of business where we tie compensation systems
to line-of-business performance;
    
    legislative or regulatory changes, including changes in tax laws
or regulations, changes in the interpretation of regulatory capital
rules, changes in consumer or commercial lending rules or rules
affecting corporate governance, and the availability of resources to
address these rules;
    
    changes in applicable accounting policies or principles or their application to our business; and
    
    governmental changes in monetary or fiscal policies. 19




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##### Table of Contents



We undertake no obligation to update publicly any of these statements in
light of future events, except as required in subsequent periodic reports we
file with the Securities and Exchange Commission. Consolidated Overview For the three months ended June 30,
    
    For the six months ended June 30,2004
    
    2003
    
    2004
    
    2003Net income (millions)
    
    $
    17.9
    
    
    $
    13.2
    
    
    $
    38.3
    
    
    $
    25.0Basic earnings per share
    
    
    0.64
    
    
    
    0.47
    
    
    
    1.36
    
    
    
    0.90Diluted earnings per share
    
    
    0.60
    
    
    
    0.45
    
    
    
    1.27
    
    
    
    0.86Return on average equity
    
    
    15.4
    %
    
    
    14.2
    %
    
    
    15.8
    %
    
    
    13.7
    %Return on average assets
    
    
    1.4
    
    
    
    1.0
    
    
    
    1.5
    
    
    
    1.0
 We recorded net income of $17.9 million for the three months ended June
30, 2004, up 36% from net income of $13.2 million for the three months ended
June 30, 2003. Net income per share (diluted) was $0.60 for the quarter ended
June 30, 2004, up 33% from $0.45 per share for the second quarter of 2003.
Return on equity was 15.4% for the three months ended June 30, 2004 and 14.2%
for the same period in 2003. For the year to date, we recorded net income of $38.3 million or $1.27 per
diluted share. This represents increases of 53% and 48%, respectively,
compared to the same period in 2003. Return on equity for the six-month period
ended June 30, 2004 was 15.8% compared with 13.7% during the same period a year
earlier. Consolidated Income Statement Analysis Net Interest Income Net interest income for the six months ended June 30, 2004 totaled $123.5
million, down 9% from the first half of 2003 net interest income of $136.4
million. Net interest margin for the six months ended June 30, 2004 was 5.60%
compared to 5.98% for the same period in 2003. The decline in margin from 2003
to 2004 was primarily due to the lower interest rate environment in 2004
relative to 2003 that caused yields on variable rate loans to decline at a more
rapid pace than underlying funding sources, some of which (e.g., mortgage
escrow deposits) have rates close to zero in any interest rate environment and,
therefore, cannot reduce in a declining rate environment. In addition, the
average balance on the high-yielding residual interests declined 46% in the
first half of 2004 compared to the same period in 2003 as a result of
unrealized trading losses (reflecting valuation impairment) during the first
half of 2003. The following table shows our daily average consolidated balance
sheet, interest rates and yield at the dates indicated: 20




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##### Table of Contents



Six Months Ended June 30,2004
    
    2003Average
    
    
    
    
    
    Annualized
    
    Average
    
    
    
    
    
    AnnualizedBalance
    
    Interest
    
    Yield/Rate
    
    Balance
    
    Interest
    
    Yield/Rate(Dollars in thousands)Assets:Interest-earning assets:Interest bearing deposits with banks
    
    $
    86,426
    
    
    $
    288
    
    
    
    0.67
    %
    
    $
    53,642
    
    
    $
    254
    
    
    
    0.95
    %Federal funds sold
    
    
    9,057
    
    
    
    38
    
    
    
    0.84
    %
    
    
    15,430
    
    
    
    99
    
    
    
    1.29
    %Residual interests
    
    
    71,759
    
    
    
    6,543
    
    
    
    18.34
    %
    
    
    132,584
    
    
    
    12,969
    
    
    
    19.73
    %Investment securities
    
    
    81,509
    
    
    
    2,074
    
    
    
    5.12
    %
    
    
    62,500
    
    
    
    1,756
    
    
    
    5.67
    %Mortgage loans held for sale
    
    
    974,730
    
    
    
    36,285
    
    
    
    7.49
    %
    
    
    1,256,211
    
    
    
    52,822
    
    
    
    8.48
    %Loans and leases, net of unearned income (1)
    
    
    3,206,457
    
    
    
    119,671
    
    
    
    7.51
    %
    
    
    3,080,541
    
    
    
    119,832
    
    
    
    7.84
    %Total interest earning assets
    
    
    4,429,938
    
    
    $
    164,899
    
    
    
    7.49
    %
    
    
    4,600,908
    
    
    $
    187,732
    
    
    
    8.23
    %Noninterest-earning assets:Cash and due from banks
    
    
    108,937
    
    
    
    
    
    
    
    
    
    
    $
    99,345Premises and equipment, net
    
    
    30,885
    
    
    
    
    
    
    
    
    
    
    $
    32,443Other assets
    
    
    565,340
    
    
    
    
    
    
    
    
    
    
    $
    356,323Less allowance for loan and lease losses
    
    
    (60,634
    )
    
    
    
    
    
    
    
    
    
    
    (54,127
    )Total assets
    
    $
    5,074,466
    
    
    
    
    
    
    
    
    
    
    $
    5,034,892Liabilities and Shareholders EquityInterest-bearing liabilities:Money market checking
    
    $
    247,737
    
    
    $
    1,223
    
    
    
    0.99
    %
    
    $
    158,524
    
    
    $
    399
    
    
    
    0.51
    %Money market savings
    
    
    969,193
    
    
    
    6,321
    
    
    
    1.31
    %
    
    
    816,350
    
    
    
    5,660
    
    
    
    1.40
    %Regular savings
    
    
    60,711
    
    
    
    440
    
    
    
    1.46
    %
    
    
    63,905
    
    
    
    689
    
    
    
    2.17
    %Time deposits
    
    
    903,905
    
    
    
    11,564
    
    
    
    2.57
    %
    
    
    1,020,243
    
    
    
    16,058
    
    
    
    3.17
    %Short-term borrowings
    
    
    323,913
    
    
    
    3,815
    
    
    
    2.37
    %
    
    
    682,465
    
    
    
    8,670
    
    
    
    2.56
    %Collateralized debt
    
    
    487,706
    
    
    
    6,719
    
    
    
    2.77
    %
    
    
    568,269
    
    
    
    7,525
    
    
    
    2.67
    %Other long-term debt
    
    
    289,465
    
    
    
    11,358
    
    
    
    7.89
    %
    
    
    30,068
    
    
    
    1,324
    
    
    
    8.88
    %Preferred securities distributions(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    232,994
    
    
    
    11,055
    
    
    
    9.57
    %Total interest bearing liabilities
    
    $
    3,282,630
    
    
    $
    41,440
    
    
    
    2.54
    %
    
    
    3,572,818
    
    
    $
    51,380
    
    
    
    2.90
    %Noninterest-bearing liabilities:Demand deposits
    
    
    999,267
    
    
    
    
    
    
    
    
    
    
    
    928,679Other liabilities
    
    
    305,869
    
    
    
    
    
    
    
    
    
    
    
    165,163Shareholders equity
    
    
    486,700
    
    
    
    
    
    
    
    
    
    
    
    368,232Total liabilities and shareholders equity
    
    $
    5,074,466
    
    
    
    
    
    
    
    
    
    
    $
    5,034,892Net interest income
    
    
    
    
    
    $
    123,459
    
    
    
    
    
    
    
    
    
    
    $
    136,352Net interest income to average
interest earning assets
    
    
    
    
    
    
    
    
    
    
    5.60
    %
    
    
    
    
    
    
    
    
    
    
    5.98
    %
   (1)
    
    For purposes of these computations, nonaccrual loans are included in
daily average loan amounts outstanding.(2)
    
    Reclassed to other long-term debt in 2004 Provision for Loan and Lease Losses The consolidated provision for loan and lease losses for the three months
ended June 30, 2004 was $1.8 million, compared to $13.6 million for the same
period in 2003. Year to date, the provision for 2004 was $9.9 million,
compared to $22.9 million in 2003. More information on this subject is
contained in the section on credit risk. 21




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##### Table of Contents



Noninterest Income Noninterest income during the three months ended June 30, 2004 totaled
$76.1 million, compared to $63.5 million for the same period of 2003.
Noninterest income of $158.6 million was recorded for the six months ended June
30, 2004 and $126.3 million for the same period in 2003. The increase in 2004
versus 2003 was a result of several factors. At the home equity lending line of
business, we experienced a $11.3 million recovery in the value of our residual
interests during the first half of 2004 versus residual impairment of $50.9
million that was experienced during the same period in 2003. At the mortgage
banking line of business, we experienced recovery of net impairment of
servicing assets in 2004 versus impairment, net of derivative gains, in 2003.
This was offset by lower gains from the sale of loans during 2004. Details
related to these fluctuations are discussed later in the mortgage banking and
home equity lending sections of this document. Noninterest Expense Noninterest expenses for the three and six months ended June 30, 2004
totaled $107.9 million and $208.3 million, respectively, compared to $100.5
million and $199.3 million for the same periods in 2003. The increase in
consolidated noninterest expense in 2004 is primarily related to foreign
currency transaction gains/losses offset somewhat by lower personnel costs
associated with our decreased production at the mortgage banking line of
business. Consolidated Balance Sheet Analysis Average assets for the first six months of 2004 were $5.1 billion, down 2%
from the average assets at December 31, 2003. The decline in the consolidated
average balance sheet primarily relates to a decrease in loans held for sale at
the mortgage banking line of business as a result of declining production.
Total assets at June 30, 2004 were $5.4 billion, up 9% from December 31, 2003. Loans Held For Sale Loans held for sale totaled $1.2 billion at June 30, 2004, an increase
from a balance of $0.9 billion at December 31, 2003. The increase occurred
primarily at our home equity lending line of business where loans held for sale
increased from $0.2 billion at December 31, 2003 to $0.5 billion at June 30,
2004. Loans and Leases Our commercial loans and leases are originated throughout the United
States. Equipment loans and leases are also originated in Canada by our
commercial finance line of business. At June 30, 2004, 94% of our loan and
lease portfolio was associated with our U.S. operations. We also extend credit
to consumers throughout the United States through mortgages, installment loans
and revolving credit arrangements. The majority of the remaining portfolio
consists of residential mortgage loans (1-4 family dwellings) and mortgage
loans on commercial property. Loans by major category for the periods
presented were as follows: June 30,
    
    December 31,2004
    
    2003(In thousands)Commercial, financial and
agricultural
    
    $
    1,555,756
    
    
    $
    1,503,619Real estate construction
    
    
    321,939
    
    
    
    306,669Real estate mortgage
    
    
    783,656
    
    
    
    859,541Consumer
    
    
    31,377
    
    
    
    27,370Direct lease financing:Domestic
    
    
    407,552
    
    
    
    364,413Canadian
    
    
    221,666
    
    
    
    207,355Unearned income:Domestic
    
    
    (88,936
    )
    
    
    (78,875
    )Canadian
    
    
    (29,731
    )
    
    
    (29,038
    )Total
    
    $
    3,203,279
    
    
    $
    3,161,054
 22




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##### Table of Contents



Allowance for Loan and Lease Losses Changes in the allowance for loan and lease losses are summarized below: As of and for
    
    As of and forthe six months ended
    
    the year endedJune 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Balance at beginning of period
    
    $
    64,285
    
    
    $
    50,936Provision for loan and lease losses
    
    
    9,940
    
    
    
    47,583Charge-offs
    
    
    (15,076
    )
    
    
    (37,312
    )Recoveries
    
    
    2,458
    
    
    
    3,420Reduction due to reclassification of loans to loans held for sale
    
    
    (7,461
    )
    
    
    (690
    )Other
    
    
    (309
    )
    
    
    348Balance at end of period
    
    $
    53,837
    
    
    $
    64,285
 Included in the 2004 provision for loan and lease losses is the reversal
of $6.3 million of allowance related to the sale of portfolio loans associated
with a secured financing transaction at our home equity lending line of
business. Prior to transferring these loans to loans held for sale, we
recorded this negative provision to appropriately reflect the net loans at fair
value. When we transferred the loans to loans held for sale, we also
transferred the remaining $7.2 million of related allowance to a lower of cost
or market valuation allowance included in loans held for sale. Investment Securities The following table shows the composition of our investment securities at
the dates indicated: June 30,
    
    December 31,2004
    
    2003(In thousands)U.S. Treasury and government obligations
    
    $
    40,166
    
    
    $
    20,994Obligations of states and political subdivisions
    
    
    3,746
    
    
    
    3,960Mortgage-backed securities
    
    
    9,802
    
    
    
    2,039Federal Reserve stock, Federal Home Loan Bank
stock and other
    
    
    67,878
    
    
    
    65,532Total
    
    $
    121,592
    
    
    $
    92,525
 Deposits Total deposits as of June 30, 2004 averaged $3.2 billion compared to
deposits at December 31, 2003 that averaged $3.1 billion for the year. Demand
deposits at June 30, 2004 averaged $1.0 billion, a 4% decrease over the average
balance for the year 2003. A significant portion of demand deposits is related
to deposits at Irwin Union Bank and Trust Company, which are associated with
escrow accounts held on loans in the servicing portfolio at the mortgage
banking line of business. During the first six months of 2004, these escrow
accounts averaged $751.6 million compared to an average of $826.2 million for
the year 2003. The decrease in average escrow balances in 2004 relates to the
decline in production at the mortgage banking line of business. Offsetting this
decrease was an increase in core deposits. Core deposits, which include
deposits less jumbo and brokered CDs and public funds, increased to $2.1
billion at June 30, 2004 compared to $1.8 billion at December 31, 2003. Irwin Union Bank and Trust utilizes institutional broker-sourced deposits
as funding to supplement deposits solicited through branches and other
wholesale funding sources. At June 30, 2004, institutional broker-sourced
deposits totaled $354.1 million compared to a balance of $339.4 million at

December 31, 2003. Short-Term Borrowings Short-term borrowings increased to $655.9 million at June 30, 2004,
compared to $429.8 million at December 31, 2003. The increase in short-term
borrowings at the end of the second quarter relative to year-end reflects the
higher level of loans held for sale at the home equity lending line of business
at the end of the second quarter. 23




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##### Table of Contents



Federal Home Loan Bank borrowings averaged $182.5 million during the six
months ended June 30, 2004, with an average rate of 1.33%. The maximum
outstanding during any month end was the ending balance of $536.3 million at a
rate of 1.33%. At December 31, 2003, Federal Home Loan Bank borrowings
averaged $317.2 million, with an average rate of 1.46%. The ending balance was
$286.0 million at an interest rate of 1.34%. The maximum outstanding at any
month end during 2003 was $977.0 million. Collateralized and Other Long-Term Debt Collateralized borrowings totaled $292.5 million at June 30, 2004,
compared to $590.1 million at December 31, 2003. These securitization
structures result in loans remaining as assets and debt being recorded on the
balance sheet. The securitization debt represents match-term funding for these loans and leases. The decreased debt
relates to the sale of portfolio loans at the home equity lending line of
business during the second quarter discussed in more detail in the Home Equity
Lending section of this document. Other long-term debt totaled $270.2 million at June 30, 2004, unchanged
from December 31, 2003. We had obligations represented by subordinated
debentures at June 30, 2004 totaling $240.1 million with our wholly-owned
trusts that were created for the purpose of issuing trust preferred securities.
The subordinated debentures were the sole assets of the trusts at June 30,
2004. In accordance with FIN 46, at the end of 2003 we began deconsolidating
the wholly-owned trusts that issued the trust preferred securities. As a
result, these securities no longer are consolidated on our balance sheet.
Instead, the subordinated debentures held by the trusts are disclosed on the
balance sheet as other long-term debt. Capital Shareholders equity averaged $486.7 million during the first six months
of 2004, up 23% compared to the average for the year 2003. Shareholders
equity balance of $469.5 million at June 30, 2004 represented $16.60 per common
share, compared to $15.36 per common share at December 31, 2003. We paid $2.3
million and $4.5 million in dividends for the three and six months ended June
30, 2004, respectively, reflecting an increase of $0.01 per share compared to a
year ago. The following table sets forth our capital and regulatory capital ratios
at the dates indicated: June 30,
    
    December 31,2004
    
    2003(In thousands)Tier 1 capital
    
    $
    614,003
    
    
    $
    556,793Tier 2 capital
    
    
    162,878
    
    
    
    183,738Total risk-based capital
    
    $
    776,881
    
    
    $
    740,531Risk-weighted assets
    
    $
    5,258,612
    
    
    $
    4,917,622Risk-based ratios:Tier 1 capital
    
    
    11.7
    %
    
    
    11.4
    %Total capital
    
    
    14.8
    
    
    
    15.1Tier 1 leverage ratio
    
    
    11.5
    
    
    
    11.2Ending shareholders equity to assets
    
    
    8.7
    
    
    
    8.7Average shareholders equity to
assets
    
    
    9.6
    
    
    
    7.6
 At June 30, 2004, our total risk-adjusted capital ratio was 14.8%
exceeding the 10.0% required to be considered well-capitalized by our state
and federal banking regulators and our internal minimum target of 11.0%. At
December 31, 2003, our total risk-adjusted capital ratio was 15.1%. Our ending
equity to assets ratio at June 30, 2004 was 8.7% unchanged from December 31,
2003. Our Tier 1 capital totaled $614.0 million as of June 30, 2004, or 11.7%
of risk-weighted assets. Cash Flow Analysis Our cash and cash equivalents increased $8.4 million during the first six
months of 2004, compared to $21.3 million during the same period in 2003. Cash
flows from operating activities resulted in a use of $281.3 million in cash and
cash equivalents in the six months ended June 30, 2004 compared to the same
period in 2003 when our operations used $318.2 million in cash and cash
equivalents. Changes in loans held for sale impact cash flows from operations.
In a period in which loan production exceeds sales such as we had in the first
half of 2004, operating cash flows will decrease reflecting our investment in
cash generating assets. In the first half of 2004, our loans held for sale
increased $312.2 million, thus increasing the cash used by operating
activities. 24




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##### Table of Contents



Earnings Outlook We have not provided quantitative earnings guidance for 2004. As discussed
before, our strategy is to balance the impact of changes in interest rates and
economic conditions on our mortgage banking production with investments in
mortgage servicing and in our credit retained portfolios. These investments
will typically respond in an opposite and complementary manner. We expect a
higher proportion of 2004 earnings to come from our commercial banking, home
equity lending and commercial finance lines of business than was the case in
2003. We expect segment growth and earnings to be more in line with the
long-term trends we have seen at Irwin Financial, rather than the
disproportionate contribution that we had due to mortgage originations during
2002 and 2003. In the second half of 2004, if rates rise as predicted
by nationally-recognized mortgage economists, leading to an increase
in the value of our servicing portfolio and improved margins in our
commercial and consumer portfolios, we would expect full year
earnings to modestly exceed those produced in 2003. However, should
long-term rates not rise as expected, we would anticipate continued
price competition in the mortgage market, but little or no increase
in servicing value. In this case, we would anticipate that portfolio
loan growth and improving credit quality would likely produce
earnings for the year in a narrow range around those produced in 2003
during the mortgage refinance boom, notwithstanding the difficult
environment for mortgage banking. These estimates are based on various factors and
current assumptions management believes are reasonable, including current
industry forecasts of a variety of economic and competitive factors. However,
projections are inherently uncertain, and our actual earnings may differ
significantly from this estimate due to uncertainties and risks related to our
business such as fluctuations in interest rates and other factors mentioned
above in the About Forward-Looking Statements section. Over periods of normal
economic cycles we strive to meet or exceed our long-term targets of double
digit growth in earnings per share and a return on equity above our cost of
capital. A meaningful amount of our earnings comes from activities and
mark-to-market accounting requirements tied directly or indirectly to capital
market activities. For example, the valuation of our mortgage servicing
portfolio is impacted by movements in the bond market. The impact of
short-term movements in interest rates on the valuation of our mortgage
servicing rights is mitigated by a combination of financial derivatives and
changes in income from production of new mortgages likely to be driven by those
same movements in interest rates. However, the correlation within short
periods of time (such as a single quarter) between interest rate movements that
impact the reported value of our mortgage servicing rights at quarter end and
the production effects of those interest rate movements  which may not be
reflected until the subsequent quarter  can be low. In addition, Accounting
principles generally accepted in the U.S. (GAAP) imposes a
lower-of-cost-or-market valuation cap on the value of our servicing asset,
while we know of no financial derivatives available in the secondary market
with similarly asymmetric value change characteristics. This anomaly in
accounting for mortgage servicing assets makes it difficult at times to
construct hedges with the desired GAAP accounting outcome, although the
economic balance may still exist. It is possible, therefore, that our balanced
revenue strategy may be successful as measured over several quarters or years,
but may have market-based variances if measured over short periods. We also
have a large amount of income that is subject to assumptions and pricing for
credit risks. We use a variety of methods for estimating the effects of and
accounting for credit losses, but ultimately, we need to make estimates based
on imperfect knowledge of future events, which may cause actual results to
differ materially from our expectations. For example, if the pace of economic
recovery in the U.S. is slower in 2004 than currently anticipated by consensus
estimates, our credit related costs may increase beyond our current estimates. Earnings by Line of Business Irwin Financial Corporation is composed of five principal lines of
business:  
    
    Mortgage Banking
    
    Commercial Banking
    
    Home Equity Lending
    
    Commercial Finance
    
    Venture Capital The following table summarizes our net income (loss) by line of business
for the periods indicated: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(In thousands)Net income (loss):Mortgage Banking
    
    $
    5,515
    
    
    $
    23,242
    
    
    $
    15,248
    
    
    $
    42,881Commercial Banking
    
    
    5,769
    
    
    
    5,880
    
    
    
    11,187
    
    
    
    11,091Home Equity Lending
    
    
    8,898
    
    
    
    (14,430
    )
    
    
    15,531
    
    
    
    (23,929
    )Commercial Finance
    
    
    1,317
    
    
    
    1
    
    
    
    1,024
    
    
    
    (259
    )Venture Capital
    
    
    (178
    )
    
    
    (136
    )
    
    
    (161
    )
    
    
    (1,464
    )Other (including
consolidating
entries)
    
    
    (3,377
    )
    
    
    (1,330
    )
    
    
    (4,543
    )
    
    
    (3,317
    )$
    17,944
    
    
    $
    13,227
    
    
    $
    38,286
    
    
    $
    25,003
 25




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##### Table of Contents



Mortgage Banking The following table shows selected financial information for our mortgage
banking line of business: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003(Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    11,781
    
    
    $
    20,904
    
    
    $
    20,443
    
    
    $
    36,969Recovery (provision) of loan loss
    
    
    284
    
    
    
    (83
    )
    
    
    390
    
    
    
    (30
    )Other income
    
    
    53,846
    
    
    
    88,824
    
    
    
    113,714
    
    
    
    169,808Total net revenue
    
    
    65,911
    
    
    
    109,645
    
    
    
    134,547
    
    
    
    206,747Operating expense
    
    
    (56,716
    )
    
    
    (71,873
    )
    
    
    (109,185
    )
    
    
    (137,086
    )Income before taxes
    
    
    9,195
    
    
    
    37,772
    
    
    
    25,362
    
    
    
    69,661Income taxes
    
    
    (3,680
    )
    
    
    (14,530
    )
    
    
    (10,114
    )
    
    
    (26,780
    )Net income
    
    $
    5,515
    
    
    $
    23,242
    
    
    $
    15,248
    
    
    $
    42,881Selected Operating Data:Mortgage loan originations
    
    $
    3,727,591
    
    
    $
    7,237,670
    
    
    $
    6,658,307
    
    
    $
    12,714,962Servicing sold as a % of originations
    
    
    65.0
    %
    
    
    4.5
    %
    
    
    58.0
    %
    
    
    4.5
    %
 June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Selected Balance Sheet Data at End of PeriodTotal assets
    
    $
    1,353,464
    
    
    $
    1,258,641Mortgage loans held for sale
    
    
    735,278
    
    
    
    679,360Mortgage servicing assets
    
    
    365,775
    
    
    
    348,174Short-term borrowing
    
    
    190,337
    
    
    
    214,877Shareholders equity
    
    
    116,622
    
    
    
    122,671Selected Operating Data:Servicing portfolioBalance at end of period
    
    $
    28,844,599
    
    
    $
    29,640,122Weighted average coupon rate
    
    
    5.70
    %
    
    
    5.83
    %Weighted average servicing fee
    
    
    0.33
    
    
    
    0.33
 Overview In our mortgage banking line of business, we originate, purchase, sell and
service conventional and government agency-backed residential mortgage loans
throughout the United States. We also engage in the business of mortgage
reinsurance. Because most of our mortgage originations either are insured by
an agency of the federal government, such as the Federal Housing Administration
(FHA) or the Veterans Administration (VA), or, in the case of conventional
mortgages, meet requirements for sale to the Federal National Mortgage
Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) or the
Federal Home Loan Bank (FHLB), we are able to remove substantially all of the
credit risk associated with these loans from our balance sheet. While we
securitize and sell mortgage loans to institutional and private investors, we
may choose to retain the servicing rights. Loan origination demand and
servicing values react in opposite directions to changes in interest rates, as
explained below. We believe this balance between mortgage loan originations
and mortgage loan servicing values assists in managing the risk from interest
rate changes, which has helped stabilize our revenue stream. Our channels for originating loans consist primarily of retail, wholesale,
and correspondent lending. The retail channel originates loans through retail
branches and identifies potential borrowers mainly through relationships
maintained with housing intermediaries, such as realtors, homebuilders and
brokers. Our wholesale and correspondent divisions purchase loans from third
party sources. The wholesale division purchases primarily from mortgage loan
brokers and issues loan proceeds directly to the borrower. The correspondent
lending division purchases closed mortgage loans primarily from small mortgage
banks and retail banks. We fund our mortgage loan originations using internal
funding sources and through credit facilities provided by third parties.
Generally within a 30-day period after funding, we sell our mortgage loan
originations into the secondary mortgage market by either direct loan sales or
by securitization. Our secondary market sources include government-sponsored
mortgage entities, nationally-sponsored mortgage conduits, and institutional
and private investors. 26




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##### Table of Contents



As mentioned, we believe there is a balance between mortgage loan
originations and mortgage loan servicing that assists in managing the risk from
interest rate changes and the impact of rate changes on each part of the
business. In rising interest rate environments, originations typically
decline, while the value of our mortgage servicing portfolio generally
increases as prepayment expectations decline. In declining interest rate
environments, servicing values typically decrease as prepayment expectations
increase, while the economic value of our mortgage production franchise
generally increases due to the potential for greater mortgage loan
originations. However, the offsetting impact of changes in production income
and servicing values may not always be recognized in the same quarter under
generally accepted accounting principles  due to the application of
lower-of-cost-or-market treatment under generally accepted accounting
principles to the mortgage servicing asset, with no accounting equivalent for
the production franchise  causing greater volatility in short-term results
than is apparent in longer-term measurements such as annual income. We sell
servicing rights periodically for many reasons, including income recognition,
cash flow, capital management and servicing portfolio management. Servicing
rights sales occur at the time the underlying loans are sold to an investor (in
flow sales) or in pools from our seasoned servicing portfolio (in bulk sales).
As interest rates have risen over the past six months, we have chosen to sell
the servicing asset associated with a relatively higher percentage of our
current originations due to the changed interest rate risk and expected total
return profile of owning servicing on loans with current interest rates, as
opposed to our actions over the past several years to add to the portfolio as
rates reached historic lows. Net Income Net income from mortgage banking for the three months ended June 30, 2004
was $5.5 million, compared to $23.2 million for the same period in 2003, a
decrease of 76%. This net income decrease in 2004 primarily relates to a
decline in mortgage originations and compressed margins as a result of an
increasing interest rate environment that began in the latter half of 2003. The following table shows the composition of our originations by loan
categories for the periods indicated: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Total originations
    
    $
    3,727,591
    
    
    $
    7,237,670
    
    
    $
    6,658,307
    
    
    $
    12,714,962Percent retail loans
    
    
    20
    %
    
    
    27
    %
    
    
    22
    %
    
    
    27
    %Percent wholesale loans
    
    
    33
    
    
    
    42
    
    
    
    37
    
    
    
    45Percent correspondent
    
    
    36
    
    
    
    28
    
    
    
    31
    
    
    
    25Percent brokered (1)
    
    
    11
    
    
    
    3
    
    
    
    10
    
    
    
    3Percent refinances
    
    
    54
    
    
    
    75
    
    
    
    57
    
    
    
    73
   (1)
    
    Brokered loans are loans we originate for which we receive loan
origination fees, but which are funded, closed and owned by unrelated third
parties. Mortgage loan originations for the three months ended June 30, 2004
totaled $3.7 billion, down 48% from the same period in 2003. For the year,
originations totaled $6.7 billion, down 48% from 2003. Refinanced loans
accounted for 54% of loan production for the second quarter of 2004 and 57%
year to date compared to 75% and 73%, respectively, for the same periods in
2003. The decreased originations and refinances as a percent of production in
2004 are a result of the increasing interest rate environment that began in the
latter half of 2003. Net Revenue Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(In thousands)Selected Income Statement Data:Net interest income
    
    $
    11,781
    
    
    $
    20,904
    
    
    $
    20,443
    
    
    $
    36,969Recovery of (provision for) loan losses
    
    
    284
    
    
    
    (83
    )
    
    
    390
    
    
    
    (30
    )Gain on sales of loans
    
    
    34,870
    
    
    
    111,511
    
    
    
    77,652
    
    
    
    202,739Servicing fees
    
    
    25,683
    
    
    
    19,157
    
    
    
    51,582
    
    
    
    35,913Amortization expense
    
    
    (24,199
    )
    
    
    (33,233
    )
    
    
    (51,509
    )
    
    
    (60,468
    )Recovery (impairment) of servicing assets
    
    
    71,320
    
    
    
    (40,663
    )
    
    
    23,136
    
    
    
    (42,618
    )Gain (loss) on derivatives
    
    
    (57,808
    )
    
    
    28,927
    
    
    
    544
    
    
    
    29,248Gain on sales of servicing assets
    
    
    1,928
    
    
    
    (4
    )
    
    
    8,418
    
    
    
    Other income
    
    
    2,052
    
    
    
    3,129
    
    
    
    3,891
    
    
    
    4,994Total net revenue
    
    $
    65,911
    
    
    $
    109,645
    
    
    $
    134,547
    
    
    $
    206,747
 27




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##### Table of Contents



Net interest income is generated from the interest earned on mortgage
loans before they are sold to investors, less the interest expense incurred on
borrowings to fund the loans. Net interest income for the second quarter in
2004 totaled $11.8, million compared to $20.9 million for the second quarter in
2003. Net interest income year to date decreased 45% to $20.4 million. The
decrease in net interest income in 2004 is a result of decreased production
resulting in a lower average balance of mortgage loans held for sale on our
balance sheet during the quarter. Gain on sale of loans includes the valuation of newly-created mortgage
servicing rights and net loan origination fees and is recognized when loans are
pooled and sold into the secondary mortgage market. Also included in gain on
sale of loans are changes in fair value of forward contracts and interest rate
lock commitments. Gain on sale of loans for the three months ended June 30,
2004 totaled $34.9 million, compared to $111.5 million for the same period in
2003, a decline of 69%. Gain on sale of loans for the six months ended June
30, 2004 totaled $77.7 million, compared to $202.7 million for the same period
in 2003, a decrease of 62%. This decrease is attributable to decreased
originations and slightly reduced secondary market margins as a result of the
increasing interest rate environment that began in the latter half of 2003. Servicing fee income is recognized by collecting fees, which normally
range between 25 and 44 basis points annually on the principal amount of the
underlying mortgages. Servicing fee income totaled $25.7 million and $51.6
million for the three and six months ended June 30, 2004, an increase of 34%
and 44% from the same periods in 2003, primarily reflecting the growth in the
servicing portfolio. Amortization expense relates to mortgage servicing rights and is based on
the proportion of current net servicing income to the total expected for the
estimated lives of the underlying loans. Amortization expense totaled $24.2
million for the three months ended June 30, 2004, compared to $33.2 million
during the second quarter of 2003. Year-to-date amortization expense totaled
$51.5 million and $60.5 million for 2004 and 2003, respectively. The decrease
in amortization expense in 2004 relates in part to an other-than-temporary
impairment adjustment of $7.0 million taken in the first quarter of 2004 and
$38.5 million taken in the fourth quarter of 2003 to reflect our view that the
originally recorded value of certain servicing rights, net of amortization, and
subsequent impairment associated with those rights is unlikely to be recovered
in market value. There was no related direct impact on net income as this other
than temporary impairment affected only balance sheet accounts. However, the
adjustment has resulted in a reduction of amortization expense. Amortization
expense year to date in 2004 has also decreased as a result of an increase in
the expected servicing life and cash flows caused by an increase in interest
rates. Impairment expense is recorded when the book value of the mortgage
servicing rights exceeds the fair value on a strata by strata basis. We
determined fair value at June 30, 2004, through the use of independent
valuations, valuation comparisons to actual servicing sale proceeds, and
internal models. Impairment recovery totaled $71.3 million and $23.1 million
for three and six months ended June 30, 2004, compared to impairment expense of
$40.7 million and $42.6 million during the same periods of 2003. The
impairment recovery in the second quarter of 2004 was a result of reduced
actual and expected prepayments due to increasing interest rates. Impairment
net of derivative gains/losses was a positive $13.5 million and $23.7 million
during the three and six-month periods ended June 30, 2004, compared to a
negative $11.7 million and $13.4 million during the same periods in 2003. At June 30, 2004, the mortgage line of business held $8.9 billion notional
amount of interest rate swaptions to manage the risk associated with our
servicing assets. Notional amounts do not represent the amount at risk. The
current risk management activities of the mortgage bank related to servicing
assets do not satisfy the criteria for hedge accounting under SFAS 133. As a
result, these derivatives are accounted for as other assets and other
liabilities, and changes in fair value are adjusted through earnings as
derivative gains (losses), while the underlying servicing asset is accounted
for on a strata-by-strata basis at the lower of cost or market. Our mortgage banking business maintains the flexibility either to sell
servicing for current cash flow through bulk sales or to retain servicing for
future cash flow through the retention of ongoing servicing fees. Total
servicing sales represented 65% and 58% of loan originations during the three
and six months ended June 30, 2004, compared to 4% for both the three and six
months ended June 30, 2003. The decision to sell or retain servicing is based
on current market conditions for servicing assets, loan origination levels and
production expenses, servicing portfolio management considerations,
consolidated capital constraints and the general level of risk tolerance of the
mortgage banking line of business and the Corporation. We sold $0.9 billion of
bulk servicing during the second quarter and $2.0 billion year to date in 2004,
generating a $1.9 million and $8.4 million pre-tax gain, respectively. There
were no bulk sales during these periods in 2003. Over the past few years, we
have built our servicing portfolio in anticipation of rising interest rates
that would result in lower mortgage loan production. We sold servicing this
quarter to counteract the effect of declines in production income, as we do in
periods of rising interest rates, as well as to manage the size and composition
of our investment in mortgage servicing assets. 28




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##### Table of Contents



Operating Expenses The following table sets forth operating expenses for our mortgage banking
line of business for the periods indicated: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Salaries and employee benefits
    
    $
    20,259
    
    
    $
    20,733
    
    
    $
    39,999
    
    
    $
    38,731Incentive and commission pay
    
    
    11,395
    
    
    
    24,074
    
    
    
    21,183
    
    
    
    47,088Other expenses
    
    
    25,062
    
    
    
    27,066
    
    
    
    48,003
    
    
    
    51,267Total operating expenses
    
    $
    56,716
    
    
    $
    71,873
    
    
    $
    109,185
    
    
    $
    137,086Number of employees at period
end(1)
    
    
    
    
    
    
    
    
    
    
    2,064
    
    
    
    2,307
   (1)
    
    On a full time equivalent basis Operating expenses for the three and six months ended June 30, 2004
totaled $56.7 million and $109.2 million, a 21% and 20% decrease over the same
periods in 2003. These decreases in operating expenses reflect significant
decreases in production activities in 2004 versus 2003. However, the relative
decreases in operating expenses is less than the relative decreases in
production due to the fixed nature of certain operating expenses and the impact
of investments in various process improvement initiatives. Mortgage Servicing The following table shows information about our managed mortgage servicing
portfolio, including mortgage loans held for sale, for the periods indicated: Six Months Ended
    
    Year EndedJune 30,
    
    December 31,2004
    
    2003(Portfolio in billions)Beginning servicing portfolio
    
    $
    29.6
    
    
    $
    16.8Mortgage loan closings
    
    
    6.0
    
    
    
    21.9Sales of servicing rights
    
    
    (3.2
    )
    
    
    (0.6
    )Run-off(1)
    
    
    (3.6
    )
    
    
    (8.5
    )Ending servicing portfolio
    
    $
    28.8
    
    
    $
    29.6Number of loans (end of period)
    
    
    223,213
    
    
    
    229,983Average loan size
    
    $
    129,225
    
    
    $
    128,880Weighted average coupon rate
    
    
    5.70
    %
    
    
    5.83
    %Percent Government National Mortgage Association
(GNMA) and state housing programs
    
    
    25
    %
    
    
    26
    %Percent conventional and other
    
    
    75
    
    
    
    74Delinquency ratio
    
    
    3.3
    
    
    
    4.6Mortgage servicing assets to related servicing
portfolio(2)
    
    
    1.25
    
    
    
    1.19
   (1)
    
    Run-off is primarily the reduction in principal balance of the
servicing portfolio due to regular principal payments made by
mortgagees and early repayments of entire loans.(2)
    
    For this calculation, deferred service release premiums on
warehouse loans are excluded from mortgage servicing assets, and
loans held for sale (i.e. warehouse loans) are excluded from the
servicing portfolio. We record originated mortgage servicing assets at allocated cost basis
when the loans are sold and record purchased servicing assets at fair value.
Thereafter, servicing rights are accounted for at the lower of their cost or
fair value. We record a valuation allowance for any impairment on a
disaggregated basis. We determine fair value on a monthly basis based on a
discounted cash flow analysis. These cash flows are projected over the life of
the servicing using prepayment, default, discount rate and cost to service
assumptions that we believe market participants would use to value similar
assets. We then assess these modeled assumptions for reasonableness through
independent third-party valuations, periodic servicing asset sales and through
the use of industry surveys. At June 30, 2004, we estimated the fair value of
these assets to be $424.4 million in the aggregate, or $58.6 million greater
than the carrying value on the balance sheet. The difference between carrying
value and market value is the result of a cap under generally accepted
accounting principles at the lower of cost or market for these assets. At
December 31, 2003, we estimated the fair value of these assets to be $358.9
million in the aggregate, or $10.7 million greater than the carrying value on
the balance sheet. 29




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##### Table of Contents



Commercial Banking The following table shows selected financial information for our
commercial banking line of business: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars In thousands)Selected Income Statement Data:Interest income
    
    $
    29,607
    
    
    $
    28,156
    
    
    $
    57,992
    
    
    $
    55,786Interest expense
    
    
    (8,416
    )
    
    
    (8,718
    )
    
    
    (16,255
    )
    
    
    (17,321
    )Net interest income
    
    
    21,191
    
    
    
    19,438
    
    
    
    41,737
    
    
    
    38,465Provision for loan and lease losses
    
    
    (750
    )
    
    
    (1,333
    )
    
    
    (1,950
    )
    
    
    (2,913
    )Other income
    
    
    5,061
    
    
    
    5,645
    
    
    
    9,837
    
    
    
    10,774Total net revenue
    
    
    25,502
    
    
    
    23,750
    
    
    
    49,624
    
    
    
    46,326Operating expense
    
    
    (15,866
    )
    
    
    (13,966
    )
    
    
    (30,948
    )
    
    
    (27,871
    )Income before taxes
    
    
    9,636
    
    
    
    9,784
    
    
    
    18,676
    
    
    
    18,455Income taxes
    
    
    (3,867
    )
    
    
    (3,904
    )
    
    
    (7,489
    )
    
    
    (7,364
    )Net income
    
    $
    5,769
    
    
    $
    5,880
    
    
    $
    11,187
    
    
    $
    11,091
 June 30,
    
    December 31,2004
    
    2003Selected Balance Sheet Data at End of PeriodTotal assets
    
    $
    2,512,848
    
    
    $
    2,203,965Securities and short-term investments(1)
    
    
    313,580
    
    
    
    107,668Loans and leases
    
    
    2,081,788
    
    
    
    1,988,633Allowance for loan and lease losses
    
    
    (22,049
    )
    
    
    (22,055
    )Deposits
    
    
    2,280,178
    
    
    
    1,964,274Shareholders equity
    
    
    159,533
    
    
    
    162,050Year to Date Daily AveragesAssets
    
    $
    2,340,041
    
    
    $
    2,119,944Securities and short-term investments
    
    
    238,362
    
    
    
    131,137Loans and leases
    
    
    2,020,079
    
    
    
    1,914,608Allowance for loan and lease losses
    
    
    (22,302
    )
    
    
    (21,895
    )Deposits
    
    
    2,108,011
    
    
    
    1,894,406Shareholders equity
    
    
    156,830
    
    
    
    147,886Shareholders equity to assets
    
    
    6.70
    %
    
    
    6.98
    %
   (1)    Includes $223 million of inter-company investments, the result of excess
liquidity at the commercial banking line of business related to deposit growth
in excess of their asset deployment needs. The funds have been redeployed in
earning assets at our other lines of business. Earnings credited to the
commercial banking line of business from these investments approximate
alternative external investment rates. 30




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##### Table of Contents



Overview Our commercial banking line of business focuses on providing credit, cash
management and personal banking products to small businesses and business
owners. We offer commercial banking services through our banking subsidiaries,
Irwin Union Bank and Trust Company, an Indiana state-chartered commercial bank, and
Irwin Union Bank, F.S.B., a federal savings bank. Earlier in the year, Irwin
Union Bank, F.S.B. sold two of its branches  Las Vegas, Nevada, and Salt Lake
City, Utah  to Irwin Union Bank and Trust. On June 3, 2004, we established a
new branch of Irwin Union Bank, F.S.B. in Brookfield, Wisconsin (near
Milwaukee). Net Income Commercial banking net income of $5.8 million during the second quarter of
2004 was slightly less than $5.9 million for the same period in 2003.
Year-to-date net income totaled $11.2 million in 2004 compared to net income of
$11.1 million in 2003. Net Interest Income The following table shows information about net interest income for our
commercial banking line of business: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Net interest income
    
    $
    21,191
    
    
    $
    19,438
    
    
    $
    41,737
    
    
    $
    38,465Average interest earning assets
    
    
    2,341,317
    
    
    
    2,015,028
    
    
    
    2,259,486
    
    
    
    1,965,905Net interest margin
    
    
    3.64
    %
    
    
    3.87
    %
    
    
    3.71
    %
    
    
    3.95
    %
 Net interest income was $21.2 million for the second quarter of 2004, an
increase of 9% over second quarter of 2003. Net interest income year to date
in 2004 also improved 9% over the same period in 2003. The 2004 improvement in
net interest income resulted primarily from an increase in our commercial
banking loan portfolio as a result of growth and expansion efforts. Net
interest margin, the ratio of net interest income divided by average interest
earning assets, for the three months ended June 30, 2004 was 3.64%, compared to
3.87% for the same period in 2003. Year-to-date net interest margin for 2004
was 3.71%, compared to 3.95% for 2003. The reduction in 2004 margin is due to
slower than anticipated loan growth which has led to greater than planned
excess liquidity, as well as asset yields continuing to decline while some
funding sources have reached contractual or competitive rate floors. Provision for Loan and Lease Losses Provision for loan and lease losses declined to $2.0 million during the
first half of 2004, compared to a provision of $2.9 million during the same
period in 2003. The declining provision relates to a combination of improved
overall credit quality, improving economic conditions and slower loan growth.
See further discussion in the Credit Quality section below. Noninterest Income The following table shows the components of noninterest income for our
commercial banking line of business: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Trust fees
    
    $
    477
    
    
    $
    409
    
    
    $
    995
    
    
    $
    886Service charges on deposit accounts
    
    
    1,289
    
    
    
    1,289
    
    
    
    2,749
    
    
    
    2,506Insurance commissions, fees and premiums
    
    
    421
    
    
    
    535
    
    
    
    1,086
    
    
    
    1,143Gain from sales of loans
    
    
    845
    
    
    
    2,361
    
    
    
    1,706
    
    
    
    4,673Loan servicing fees
    
    
    339
    
    
    
    298
    
    
    
    668
    
    
    
    582Amortization of servicing assets
    
    
    (481
    )
    
    
    (685
    )
    
    
    (882
    )
    
    
    (1,376
    )Recovery of servicing assets
    
    
    727
    
    
    
    151
    
    
    
    588
    
    
    
    68Brokerage fees
    
    
    419
    
    
    
    286
    
    
    
    849
    
    
    
    547Other
    
    
    1,025
    
    
    
    1,001
    
    
    
    2,078
    
    
    
    1,745Total noninterest income
    
    $
    5,061
    
    
    $
    5,645
    
    
    $
    9,837
    
    
    $
    10,774
 Noninterest income during the three and six months ended June 30, 2004
decreased 10% and 9% over the same periods in 2003, respectively. This
decrease was due primarily to lower gains from sales of loans related to
decreased mortgage production, partially 31




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##### Table of Contents



offset by lower servicing asset amortization as well as by servicing asset
impairment reversal. The commercial banking line of business has a first
mortgage servicing portfolio totaling $449.1 million at June 30, 2004,
principally a result of mortgage loan production in its south-central Indiana
markets. Servicing rights related to this portfolio are carried on the balance
sheet at the lower of cost or market, estimated at June 30, 2004 to be $3.9
million. Operating Expenses The following table shows the components of operating expenses for our
commercial banking line of business: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Salaries and employee benefits
    
    $
    9,665
    
    
    $
    8,716
    
    
    $
    18,987
    
    
    $
    17,641Other expenses
    
    
    6,201
    
    
    
    5,250
    
    
    
    11,961
    
    
    
    10,230Total operating expenses
    
    $
    15,866
    
    
    $
    13,966
    
    
    $
    30,948
    
    
    $
    27,871Efficiency ratio
    
    
    60.4
    %
    
    
    55.7
    %
    
    
    60.0
    %
    
    
    56.6
    %Number of employees at period
end(1)
    
    
    
    
    
    
    
    
    
    
    508
    
    
    
    474
   (1)
    
    On a full time equivalent basis. Operating expenses for the three and six months ended June 30, 2004
totaled $15.9 million and $30.9 million, an increase of 14% and 11% over the
same periods in 2003, respectively. Balance Sheet Total assets year to date through June 30, 2004 averaged $2.3 billion
compared to $2.1 billion for the year ended December 31, 2003. Year to date
average earning assets as of June 30, 2004 averaged $2.3 billion compared to
$2.0 billion for the year 2003. The most significant component of the increase
in 2004 was an increase in commercial loans as a result of the commercial
banks continued growth and expansion efforts into new markets. Average core
deposits (deposits less jumbo and brokered certificates of deposits and public
funds) for the second quarter of 2004 totaled $2.0 billion, an annualized
increase of 43% over average core deposits in the first quarter 2004. Credit Quality Nonperforming assets to total assets and the allowance for loan losses to
total loans both decreased at June 30, 2004, compared to December 31, 2003.
The decline in nonperformings in the first half of 2004 was primarily the
result of satisfactory management of delinquent loans and collections made to
nonperforming relationships during the past six months. Nonperforming loans
are not significantly concentrated in any industry category. The following
table shows information about our nonperforming assets in this line of business
and our allowance for loan losses: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Nonperforming loans
    
    $
    21,420
    
    
    $
    25,614Other real estate owned
    
    
    1,277
    
    
    
    995Total nonperforming assets
    
    $
    22,697
    
    
    $
    26,609Nonperforming assets to total assets
    
    
    0.90
    %
    
    
    1.21
    %Allowance for loan losses
    
    $
    22,049
    
    
    $
    22,055Allowance for loan losses to total loans
    
    
    1.06
    %
    
    
    1.11
    %
 For the Three Months ended
    
    For the Six Months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Provision for loan losses
    
    $
    750
    
    
    $
    1,333
    
    
    $
    1,950
    
    
    $
    2,913Net charge-offs
    
    
    787
    
    
    
    1,167
    
    
    
    1,957
    
    
    
    2,113Annualized net charge-offs to average
loans
    
    
    0.15
    %
    
    
    0.25
    %
    
    
    0.19
    %
    
    
    0.23
    %
 32




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##### Table of Contents



Home Equity Lending The following table shows selected financial information for the home
equity lending line of business: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars In thousands)Selected Income Statement Data:Net interest income
    
    $
    26,159
    
    
    $
    28,222
    
    
    $
    50,853
    
    
    $
    54,634Recovery of (provision for) loan and lease losses
    
    
    706
    
    
    
    (7,970
    )
    
    
    (5,193
    )
    
    
    (12,850
    )Other income
    
    
    14,833
    
    
    
    (22,492
    )
    
    
    32,490
    
    
    
    (37,474
    )Total net revenue
    
    
    41,698
    
    
    
    (2,240
    )
    
    
    78,150
    
    
    
    4,310Operating expense
    
    
    (26,855
    )
    
    
    (21,810
    )
    
    
    (52,241
    )
    
    
    (44,191
    )Income (loss) before taxes
    
    
    14,843
    
    
    
    (24,050
    )
    
    
    25,909
    
    
    
    (39,881
    )Income taxes
    
    
    (5,945
    )
    
    
    9,620
    
    
    
    (10,378
    )
    
    
    15,952Net income (loss)
    
    $
    8,898
    
    
    $
    (14,430
    )
    
    $
    15,531
    
    
    $
    (23,929
    )Selected Operating Data:Loan volume:Lines of credit
    
    $
    134,810
    
    
    $
    90,419
    
    
    $
    229,636
    
    
    $
    163,878Loans
    
    
    269,012
    
    
    
    208,536
    
    
    
    481,064
    
    
    
    413,627Net home equity charge-offs to average
managed portfolio
    
    
    2.17
    %
    
    
    4.33
    %
    
    
    3.04
    %
    
    
    4.04
    %
 June 30,
    
    December 31,2004
    
    2003Selected Balance Sheet Data at End of PeriodHome equity loans and lines of credit (1)
    
    $
    598,021
    
    
    $
    692,637Allowance for loan and lease losses
    
    
    (18,902
    )
    
    
    (29,251
    )Home equity loans held for sale
    
    
    460,118
    
    
    
    202,627Residual interests (2)
    
    
    73,219
    
    
    
    70,519Short-term borrowings
    
    
    798,133
    
    
    
    368,640Collateralized debt
    
    
    172,624
    
    
    
    460,535Shareholders equity
    
    
    140,811
    
    
    
    128,555Selected Operating Data at End of PeriodTotal managed portfolio balance
    
    $
    1,543,457
    
    
    $
    1,513,289Delinquency ratio
    
    
    4.2
    %
    
    
    5.9
    %Weighted average coupon rate:Lines of credit
    
    
    9.21
    %
    
    
    10.21
    %Loans
    
    
    11.75
    
    
    
    12.89
   (1)
    
    Includes $178.8 million and $478.7 million of collateralized loans at June
30, 2004 and December 31, 2003, respectively, as part of securitized
financings.(2)
    
    Includes $10.3 million and $12.4 million of residual interests at June 30,
2004 and December 31, 2003, respectively, that are considered credit-enhancing
interest-only strips (CEIOS) under federal banking regulations. Overview Our home equity lending line of business originates, purchases, sells and
services a variety of home equity lines of credit and fixed-rate home equity
loan products nationwide. We market our home equity products (generally using
second mortgage liens) through a combination of direct mail, brokers, the
Internet, and correspondent channels. We target creditworthy homeowners who
are active credit users. Customers are underwritten using proprietary models
based on several criteria, including the customers previous use of credit. We offer home equity loans with combined loan-to-value (CLTV) ratios of up
to 125% of their collateral value. Home equity 33




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##### Table of Contents



loans are priced taking into account, among other factors, the credit history
of our customer and the relative loan-to-value (LTV) ratio
of the loan at origination. For example, all else being equal, those loans
with loan-to-value ratios greater than 100% (high LTV, or HLTVs) are priced
with higher coupons than home equity loans with loan-to-value ratios less than
100% to compensate for increased expected losses through default. For the
six-month period ended June 30, 2004, HLTV home equity loans constituted 49% of
our loan originations versus 52% during the same period in 2003. HLTVs
constituted 55% of our managed portfolio at June 30, 2004 compared to 64% at
December 31, 2003. In an effort to manage portfolio concentration risk and to
comply with existing banking regulations, we have policies in place governing
the size of our investment in loans secured by real estate where the LTV is
greater than 90%. In accordance with regulatory guidance set forth in
Supervision and Regulation Letter 01-4 and in consultation with our banking
regulators, we made a risk-weighting adjustment in our regulatory Consolidated
Report of Condition and Income, beginning with the third quarter of 2003. This
adjustment reflects a risk-weighting of 200 percent for certain HLTV assets
(approximately $184 million at June 30, 2004 compared with $219 million at
March 31) that are described in the guidance as subprime. The designation of
certain loans as subprime and the additional capital requirement for those
loans was a principal driver in our decision to respond to market demand for
seasoned home equity product and sell a portion of our portfolio (approximately
$205 million) in the current quarter, rather than selling exclusively from
current production. For most of our home equity product offerings, we offer customers the
choice to accept an early repayment fee in exchange for a lower interest rate.
A typical early repayment option provides for a fee equal to up to six months
interest that is payable if the borrower chooses to repay the loan during the
first three to five years of its term. Approximately 83%, or $1.3 billion, of
our home equity managed portfolio at June 30, 2004 have early repayment
provisions, reflecting such customer choice. The following table provides a breakdown of our home equity lending
managed portfolio by product type, outstanding principal balance and weighted
average coupon as of June 30, 2004: WeightedAverageAmount
    
    % of Total
    
    Coupon(In thousands)Home equity loans < = 100% CLTV
    
    $
    223,620
    
    
    
    14.49
    %
    
    
    9.79
    %Home equity lines of credit < = 100% CLTV
    
    
    412,608
    
    
    
    26.73
    
    
    
    7.59Total <= 100% CLTV
    
    
    636,228
    
    
    
    41.22
    
    
    
    8.37Home equity loans > 100% CLTV
    
    
    582,925
    
    
    
    37.77
    
    
    
    12.89Home equity lines of credit > 100% CLTV
    
    
    248,943
    
    
    
    16.13
    
    
    
    11.42Total > 100% CLTV
    
    
    831,868
    
    
    
    53.90
    
    
    
    12.45First mortgages
    
    
    50,765
    
    
    
    3.29
    
    
    
    7.31Other
    
    
    24,596
    
    
    
    1.59
    
    
    
    13.86Total
    
    $
    1,543,457
    
    
    
    100.00
    %
    
    
    10.62
    %
 Net Income Our home equity lending business recorded net income of $8.9 million
during the three months ended June 30, 2004, compared to a net loss for the
same period in 2003 of $14.4 million. Year to date income of $15.5 million was
recorded through June 30, 2004, compared to a net loss of $23.9 million during
the same period a year earlier. The increased earnings in the first half of
2004 relate primarily to improving credit quality and resulting adjustments in
fair value made to our residual interests and recorded through Trading
Gains/Losses and the sale of portfolio loans. Net Revenue Net revenue for the three and six months ended June 30, 2004 totaled $41.7
million and $78.2 million, respectively, compared to net revenue for the same
periods in 2003 of negative $2.2 million and a positive $4.3 million. The
increase in revenues is primarily a result of increased trading gains related
to adjustments made in marking the residual interests to fair value in the
respective quarters, reflecting improved credit quality trends in the
underlying loan portfolios represented by these residuals. Trading gains
during the three and six months ended June 30, 2004 totaled $6.7 million and
$11.3 million, compared to trading losses of $33.1 million and $50.9 million
during the same periods in 2003. During the second quarter of 2004, our home equity lending business
produced $403.8 million of home equity loans, compared to $299.0 million during
the same period in 2003. Our home equity lending business had $1.1 billion of
net loans and loans held for sale at June 30, 2004, compared to $0.9 billion at
December 31, 2003. Included in the loan balance at June 30, 2004 were $0.2
billion of collateralized loans as part of secured financings. 34




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##### Table of Contents



The following table sets forth certain information regarding net revenue
for the periods indicated: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Net interest income
    
    $
    26,159
    
    
    $
    28,222
    
    
    $
    50,853
    
    
    $
    54,634Recovery of (provision for) loan losses
    
    
    706
    
    
    
    (7,970
    )
    
    
    (5,193
    )
    
    
    (12,850
    )Gain on sales of loans
    
    
    3,035
    
    
    
    8,280
    
    
    
    11,725
    
    
    
    10,250Loan servicing fees
    
    
    7,385
    
    
    
    5,158
    
    
    
    13,486
    
    
    
    9,831Amortization of servicing assets
    
    
    (4,976
    )
    
    
    (3,321
    )
    
    
    (8,952
    )
    
    
    (6,204
    )Recovery (impairment) of servicing
assets
    
    
    (96
    )
    
    
    (65
    )
    
    
    843
    
    
    
    (1,083
    )Trading gains (losses)
    
    
    6,688
    
    
    
    (33,131
    )
    
    
    11,329
    
    
    
    (50,919
    )Other income
    
    
    2,797
    
    
    
    587
    
    
    
    4,059
    
    
    
    651Total net revenue
    
    $
    41,698
    
    
    $
    (2,240
    )
    
    $
    78,150
    
    
    $
    4,310
 Net interest income decreased to $26.2 million for the three months ended
June 30, 2004, compared to $28.2 million for the same period in 2003.
Year-to-date net interest income for 2004 was $50.9 million, compared to $54.6
million for 2003. This line of business earns interest income on loans held on
the balance sheet and the accretion of the discount applied to its residual
interests. Accretion totaled $3.3 million and $6.5 million during the three and
six months ended June 30, 2004, versus $6.0 million and $13.0 million for the
same periods in 2003. The reduced accretion relates to the 21% reduction in
our residual interests at June 30, 2004 compared to the prior year. The
increase in the non-accretion interest income from $41.7 million in the first
half of 2003 to $44.3 million in the first half of 2004 is a result of the
buildup of our on-balance sheet loan portfolio which grew from $0.8 billion at
June 30, 2003 to $1.1 billion at June 30, 2004. Provision for loan losses decreased to $5.2 million the first half of
2004, compared to $12.9 million during the same period in 2003. The decreased
provision relates to improvements in the credit quality of the loan portfolio
and reduced portfolio balances primarily due to the sale of portfolio loans. Gains on sales of loans for the three months ended June 30, 2004 totaled
$3.0 million, compared to $8.3 million during the same period in 2003. Gains
on sales of loans for the six months ended June 30, 2004 totaled $11.7 million,
compared to $10.3 million during the same period in 2003. The decrease in
gains in the second quarter of 2004 relates to a lower volume of whole loan
sales. During the second quarter of 2004, we completed the sale of portfolio
loans associated with a secured financing transaction we had completed in 2002.
This transaction resulted in a $2.5 million gain on the sale of $205 million
of underlying loans due primarily to the recognition of a mortgage servicing
asset. This transaction also resulted in the reversal of $6.3 million of loan
loss provision before these loans were transferred from loans to loans held for
sale and then sold. We do not record a residual interest as a result of whole loan sales as we
do not retain a credit loss interest after the sale. These are cash sales for
which we receive a premium, generally record a servicing asset, and recognize
any points and fees at the time of sale. For certain sales, we have the right
to an incentive servicing fee that will provide cash payments to us once a
pre-established return for the certificate holders and certain
structure-specific loan credit and servicing performance metrics are met.
These incentive servicing fee contracts are treated as derivatives and
classified in other assets. At June 30, 2004, we were receiving incentive fees
for one transaction that had met these performance metrics. Included in other
income during the first half of 2004 was $1.6 million related to these
incentive servicing fees based upon actual and projected performance of the
underlying pools of loans. Of the $1.6 million recognized during 2004, $0.7
million was the result of cash collections and $0.9 million represented the
projected value of future cash payments, present valued using a discount rate
of 30%. Loan servicing fees totaled $7.4 million during the second quarter of
2004, compared to $5.2 million during the same period in 2003. Year to date,
loan servicing fees totaled $13.5 million, compared to $9.8 million during the
same period in 2003. The servicing portfolio underlying the mortgage servicing
asset at our home equity lending line of business totaled $1.6 billion and $1.7
billion at June 30, 2004 and 2003, respectively. The increase in loan servicing
fees in 2004 relates to increased servicing income on our whole loan portfolio
as well as increased early repayment fees which totaled $3.8 million during the
quarter ended June 30, 2004, compared to $1.9 million during the same period in
2003 on the portfolio underlying the mortgage servicing asset. Amortization and impairment of servicing assets includes amortization
expenses and valuation adjustments relating to the carrying value of servicing
assets. Our home equity lending business determines fair value of its
servicing asset using discounted cash flows and assumptions as to estimated
future servicing income and cost that we believe market participants would use
to value similar assets. In addition, we periodically assess these modeled
assumptions for reasonableness through independent third-party valuations. At
June 30, 2004, net servicing assets totaled $28.1 million, compared to a
balance of $28.4 million at December 31, 2003. Servicing asset amortization
and impairment expense totaled $8.1 million during the first half of 2004,
compared to $7.3 million for the six months ended June 30, 2003. 35




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Trading gains (losses) represent unrealized gains (losses) as a result of
adjustments to the carrying values of our residual interests. Trading gains
totaled $6.7 million in the second quarter of 2004, compared to losses of $33.1
million for the same period in 2003. Year-to-date trading gains totaled $11.3
million for 2004, compared to losses of $50.9 million for the same period in
2003. Losses on the loans underlying the residual assets occurred at an
annualized rate of 4.25% during the second quarter of 2004, as compared to our
March 31, 2004, projection for the second quarter of 8.07%. As a result, cash
flow received from the residual assets during the second quarter totaled $10.8
million compared to our previously modeled estimate of $6.4 million. Residual
interests had a balance of $73.2 million at June 30, 2004 and $70.5 million at
December 31, 2003. The increase reflects performance-based valuation
adjustments and the re-acquisition of $5.3 million of residuals we had sold
between 1999 and 2001. The reacquisition allowed us to address issues between
us and the seller that arose from potential differences in our respective
economic interests in those residuals. Included in the valuation are
assumptions for estimated prepayments, expected losses, and discount rates that
we believe market participants would use to value similar assets. To the
extent our expectations of future loss rates, prepayment speeds and other
factors change as we gather additional data over time, these residual
valuations may be subject to additional adjustments in the future. These
adjustments could have a material effect on our earnings. The increased
unrealized trading gains in the second quarter of 2004 principally reflect
lower actual loss rates than those previously modeled. These lower expected
loss rates reflect the strengthening economy and recent actual experience where
actual cash received was in excess of our previously modeled expectations. Our
forward loss assumptions are reevaluated monthly and, as such, our residual
asset valuations will be adjusted monthly to reflect changes in actual and
expected loss rates in our portfolio. Operating Expenses The following table shows operating expenses for our home equity lending
line of business for the periods indicated: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Salaries and employee benefits
    
    $
    17,865
    
    
    $
    12,664
    
    
    $
    33,991
    
    
    $
    25,726Other
    
    
    8,990
    
    
    
    9,146
    
    
    
    18,250
    
    
    
    18,465Total operating expenses
    
    $
    26,855
    
    
    $
    21,810
    
    
    $
    52,241
    
    
    $
    44,191Number of employees at period
end (1)
    
    
    
    
    
    
    
    
    
    
    646
    
    
    
    686
   (1)
    
    On a full time equivalent basis. Operating expenses were $26.9 million and $52.2 million for the three and
six months ended June 30, 2004, compared to $21.8 million and $44.2 million for
the same periods in 2003. Operating expenses during the first half of 2004
included $5.9 million of compensation expense related to minority ownership
interests at the home equity lending line of business which are accounted for
on a mark-to-market basis. During the same period in 2003, we had a reversal
of approximately $0.3 million due to the decline in the value of the minority
ownership interest during that period. Home Equity Servicing Our home equity lending business continues to service a majority of the
loans it has securitized and sold. We earn a servicing fee of approximately 50
to 100 basis points of the outstanding principal balance of the loans treated
as sales under generally accepted accounting principles. The total servicing
portfolio was $2.7 billion at June 30, 2004 and $2.6 billion at December 31,
2003. For whole loans sold with servicing retained totaling $1.2 billion at
June 30, 2004 and $1.1 billion at December 31, 2003, we capitalize servicing
fees including rights to future early repayment fees. Our Managed Portfolio is separated into two categories: $1.1 billion of
loans originated, generally since 2002, and held on balance sheet either as
loans held for investment or loans held for sale, and $0.5 billion of loans and
lines of credit securitized for which we retained a residual interest.
Generally, these loans categorized as Owned Residual were originated prior to
2002 and treated as sold under SFAS 140 and have a reserve methodology that
reflects life of account loss expectations; whereas our policy for on-balance
sheet loans requires that we hold at a minimum, sufficient reserves for
potential losses inherent in the portfolio at the balance sheet date. Such
losses for on-balance sheet loans manifest themselves over a period which
management believes approximates twelve months. 36




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##### Table of Contents



In addition, where applicable, we have the opportunity to earn additional
future servicing incentive fees. Included below in the category Credit Risk
Sold, Potential Incentive Servicing Fee Retained Portfolio are $856.0 million
of loans at June 30, 2004 and $849.3 million at December 31, 2003 for which we
have the opportunity to earn an incentive servicing fee. The following table
sets forth certain information for each of these portfolios. June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Managed PortfolioTotal Loans
    
    $
    1,543,457
    
    
    $
    1,513,28930 days past due
    
    
    4.16
    %
    
    
    5.87
    %90 days past due
    
    
    1.46
    
    
    
    2.43Annualized QTD Net Chargeoff Rate
    
    
    2.17
    
    
    
    4.79Unsold LoansTotal Loans (1)
    
    $
    1,050,453
    
    
    $
    897,22730 days past due
    
    
    1.45
    %
    
    
    2.91
    %90 days past due
    
    
    0.51
    
    
    
    1.25Annualized QTD Net Chargeoff Rate
    
    
    1.08
    
    
    
    3.03Loan Loss Reserve
    
    $
    18,902
    
    
    $
    29,251Owned ResidualTotal Loans
    
    $
    493,004
    
    
    $
    616,06230 days past due
    
    
    9.92
    %
    
    
    10.18
    %90 days past due
    
    
    3.48
    
    
    
    4.15Annualized QTD Net Chargeoff Rate
    
    
    4.25
    
    
    
    7.13Residual Undiscounted Losses
    
    $
    40,093
    
    
    $
    64,598Credit Risk Sold, Potential Incentive Servicing Fee Retained PortfolioTotal Loans
    
    $
    856,000
    
    
    $
    849,26430 days past due
    
    
    2.63
    %
    
    
    2.44
    %90 days past due
    
    
    0.99
    
    
    
    0.72
   (1)
    
    Excludes deferred fees and costs. The managed portfolio amounts listed above include those loans we service
with credit risk retained. Delinquency rates and losses on our managed
portfolio result from a variety of factors, including loan seasoning, portfolio
mix and general economic conditions. The 30-day and greater delinquency ratio
on our managed portfolio was 4.2% at June 30, 2004, and 5.9% at December 31,
2003. 37




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##### Table of Contents



Commercial Finance The following table shows selected financial information for our
commercial finance line of business for the periods indicated: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    6,881
    
    
    $
    5,398
    
    
    $
    13,635
    
    
    $
    10,205Provision for loan and lease losses
    
    
    (2,034
    )
    
    
    (4,069
    )
    
    
    (3,187
    )
    
    
    (6,933
    )Noninterest income
    
    
    2,622
    
    
    
    2,663
    
    
    
    3,070
    
    
    
    3,497Total net revenue
    
    
    7,469
    
    
    
    3,992
    
    
    
    13,518
    
    
    
    6,769Operating expense
    
    
    (5,065
    )
    
    
    (4,054
    )
    
    
    (9,263
    )
    
    
    (7,381
    )Income (loss) before taxes
    
    
    2,404
    
    
    
    (62
    )
    
    
    4,255
    
    
    
    (612
    )Income taxes
    
    
    (1,087
    )
    
    
    63
    
    
    
    (3,231
    )
    
    
    353Net income (loss)
    
    $
    1,317
    
    
    $
    1
    
    
    $
    1,024
    
    
    $
    (259
    )Selected Operating Data:Net charge-offs
    
    $
    1,051
    
    
    $
    2,659
    
    
    $
    2,345
    
    
    $
    4,471Net interest margin
    
    
    5.62
    %
    
    
    5.45
    %
    
    
    5.68
    %
    
    
    5.73
    %Total funding of loans and leases
    
    $
    88,586
    
    
    $
    66,300
    
    
    $
    160,238
    
    
    $
    123,909
 June 30,
    
    December 31,2004
    
    2003Selected Balance Sheet Data at End of PeriodTotal assets
    
    $
    520,883
    
    
    $
    474,915Loans and leases
    
    
    510,308
    
    
    
    463,423Allowance for loan and lease losses
    
    
    (11,738
    )
    
    
    (11,445
    )Shareholders equity
    
    
    47,657
    
    
    
    44,255
 Overview In our commercial finance line of business, we originate small-ticket
equipment leases through established U.S. and Canadian relationships with
vendors, manufacturers and third-party originators, and provide financing for
franchisees of selected quick service and casual dining restaurant concepts.
The majority of our leases are full payout (no residual), small-ticket assets
secured by commercial equipment. Within the franchise channel, the majority of
our contracts are loans and full payout with higher transaction sizes than in
our small-ticket channel. The franchise channel may also finance real estate
for select franchise systems. We finance a variety of commercial, light
industrial and office equipment types and try to limit the concentrations in
our loan and lease portfolios. Net Income During the three months ended June 30, 2004, the commercial finance line
of business recorded net income of $1.3 million, compared to breaking even for
the same period in the prior year. Year to date, the commercial finance line of
business earned $1.0 million compared to a loss of $0.3 for the same period in
the prior year. Year to date, pre-tax earnings increased to $4.3 million at
June 30, 2004, compared to a pre-tax loss of $0.6 million during the same
period in 2003. The 2004 pre-tax improvement in earnings is attributable to
portfolio growth, improvements in credit quality, and gains from the sale
leases and whole loans without recourse. Net income was negatively affected by
a one-time income tax charge of $1.7 million during the first quarter
reflecting the cumulative impact of tax liabilities acquired, but not recorded
on the books of the company at the time of our purchase of our Canadian
operations from a now bankrupt seller. The impact of this adjustment would not
have been material to any prior reporting periods. 38




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##### Table of Contents



Net Interest Income The following table shows information about net interest income for our
commercial finance line of business: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Net interest income
    
    $
    6,881
    
    
    $
    5,398
    
    
    $
    13,635
    
    
    $
    10,205Average interest earning assets
    
    
    492,259
    
    
    
    397,333
    
    
    
    482,571
    
    
    
    359,033Net interest margin
    
    
    5.62
    %
    
    
    5.45
    %
    
    
    5.68
    %
    
    
    5.73
    %
 Net interest income was $6.9 million for the quarter ended June 30, 2004,
an increase of 27% over 2003. Year to date net interest income was $13.6
million, compared to $10.2 million in 2003. The improvement in net interest
income resulted primarily from an
increase in our commercial finance portfolio. The total loan and lease
portfolio has increased to $510.3 million at June 30, 2004, an increase of 10%
over year-end 2003 and an increase of 28% over June 30, 2003. This line of
business originated $88.6 million in loans and leases during the second quarter
of 2004, compared to $66.3 million during the same period of 2003. Net interest margin for the second quarter of 2004 was 5.62%, compared to
5.45% in 2003 for the same period. The increase in 2004 margin is due primarily
to changes in product mix and intercompany funding changes. Provision for Loan and Lease Losses The provision for loan and lease losses decreased to $3.2 million during
the first six months in 2004 compared to $6.9 million for the same period in
2003. The decreased provisioning levels relate primarily to improvements in
credit quality in our lease portfolio. We did add $1.1 million to the
allowance during the second quarter related to potential loss on lease
receivables on product manufactured and supplied to customers by a single
vendor. Noninterest Income Noninterest income during the three months ended June 30, 2004 decreased
2% over the same period in 2003. Year to date, noninterest income was $3.1
million, compared to $3.5 million during the same period of 2003. This
year-to-date decrease was due primarily to interest rate derivative losses in
our Canadian operation related to mitigating asset-liability mismatches in our
funding of that operation. We had no derivative losses for this line of
business during the same period in 2003. Operating Expenses The following table shows the components of operating expenses for our
commercial finance line of business: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Salaries and employee benefits
    
    $
    3,477
    
    
    $
    2,852
    
    
    $
    6,839
    
    
    $
    5,141Other
    
    
    1,588
    
    
    
    1,202
    
    
    
    2,424
    
    
    
    2,240Total operating expenses
    
    $
    5,065
    
    
    $
    4,054
    
    
    $
    9,263
    
    
    $
    7,381Number of employees at period
end (1)
    
    
    
    
    
    
    
    
    
    
    147
    
    
    
    137
   (1)
    
    On a full time equivalent basis. Operating expenses during the second quarter and first half of 2004
totaled $5.1 million and $9.3 million, respectively, an increase of 25% over
the same periods in 2003. The increased operating expenses relate to the
continued growth in this business since its inception in 1999, including
compensation costs related to higher originations and the achievement of
pre-tax profitability. Credit Quality The commercial finance line of business had nonperforming loans and leases
at June 30, 2004 of $3.4 million compared to $4.1 million as of December 31,
2003. Net charge-offs recorded by this line of business totaled $1.1 million
for the second quarter of 2004, compared to $2.7 million for the second quarter
of 2003. Net charge-offs year to date were $2.3 million, improving from the
$4.5 million net charge-offs recorded in the first half of 2003. Our allowance
for loan and lease losses at June 30, 2004 totaled $11.7 39




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##### Table of Contents



million, representing 2.30% of loans and leases, compared to a balance at
December 31, 2003 of $11.4 million, representing 2.47% of loans and leases. The following table shows information about our nonperforming loans and
leases in this line of business and our allowance for loan and lease losses: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Nonperforming loans
    
    $
    3,439
    
    
    $
    4,083Allowance for loan losses
    
    
    11,738
    
    
    
    11,445Allowance for loan losses to total loans
    
    
    2.30
    %
    
    
    2.47
    %
 Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003For the Period Ended:Provision for loan losses
    
    $
    2,034
    
    
    $
    4,069
    
    
    $
    3,187
    
    
    $
    6,933Net charge-offs
    
    
    1,051
    
    
    
    2,659
    
    
    
    2,345
    
    
    
    4,471Annualized net charge-offs to average
loans
    
    
    0.87
    %
    
    
    2.72
    %
    
    
    0.99
    %
    
    
    2.41
    %
 The following table provides certain information about the loan and lease
portfolio of our commercial finance line of business at the dates shown: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Domestic franchise loans
    
    $
    179,190
    
    
    $
    150,505Weighted average yield
    
    
    8.20
    %
    
    
    8.45
    %Delinquency ratio
    
    
    0.27
    
    
    
    0.45Domestic leases
    
    $
    139,183
    
    
    $
    134,602Weighted average yield
    
    
    9.31
    %
    
    
    9.54
    %Delinquency ratio
    
    
    1.37
    
    
    
    1.32Canadian leases (1)
    
    $
    191,935
    
    
    $
    178,316Weighted average yield
    
    
    9.78
    %
    
    
    10.12
    %Delinquency ratio
    
    
    1.09
    
    
    
    0.89
   (1)
    
    In U.S. dollars. Venture Capital The following table shows selected financial information for our venture
capital line of business for the periods indicated: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(In thousands)Selected Income Statement Data:Net interest income
    
    $
    (2
    )
    
    $
    2
    
    
    $
    (3
    )
    
    $
    9Mark-to-market adjustment on investments
    
    
    (350
    )
    
    
    (162
    )
    
    
    (341
    )
    
    
    (2,421
    )Noninterest income
    
    
    179
    
    
    
    (68
    )
    
    
    328
    
    
    
    79Total net revenues
    
    
    (173
    )
    
    
    (228
    )
    
    
    (16
    )
    
    
    (2,333
    )Operating expense
    
    
    (117
    )
    
    
    (4
    )
    
    
    (245
    )
    
    
    (111
    )Loss before taxes
    
    
    (290
    )
    
    
    (232
    )
    
    
    (261
    )
    
    
    (2,444
    )Income tax benefit
    
    
    112
    
    
    
    96
    
    
    
    100
    
    
    
    980Net loss
    
    $
    (178
    )
    
    $
    (136
    )
    
    $
    (161
    )
    
    $
    (1,464
    )
 June 30,
    
    December 31,2004
    
    2003Selected Balance Sheet Data at End of Period:Investment in portfolio companies (cost)
    
    $
    14,592
    
    
    $
    14,601Mark-to-market adjustment
    
    
    (11,418
    )
    
    
    (11,077
    )Carrying value of portfolio companies
    
    $
    3,174
    
    
    $
    3,524
 40




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Overview In our venture capital line of business, we make minority investments in
early stage companies in the financial services industry and related fields
that intend to use technology as a key component of their competitive strategy.
We provide Irwin Ventures portfolio companies the benefit of our management
experience in the financial services industry. In addition, we expect that
contacts made through venture activities may benefit management of our other
lines of business through the sharing of technologies and market opportunities.
Our venture capital line of business had investments in seven private
companies as of June 30, 2004, with an aggregate investment cost of $14.6
million and a carrying value of $3.2 million. During the three and six months ended June 30, 2004, the venture capital
line of business recorded a net loss of $0.2 million and $0.2 million,
respectively, compared to losses of $0.1 million and $1.5 million for the same
periods in 2003. The losses relate to valuation adjustments to reflect the
companys portfolio investments at market value. Parent and Other Results at the parent company and other businesses totaled a net loss of
$3.4 million and $4.5 million for the three and six months ended June 30, 2004,
compared to a loss of $1.3 million and $3.3 million during the same periods in
2003. The losses at the parent company primarily relate to operating expenses
in excess of management fees charged to the lines of business and interest
income earned on intercompany loans. Included in parent and other expense were
compensation charges related to key employee retention initiatives at the home
equity lending line of business totaling $2.5 million during the first half of
2004. We recognized a $1.8 million benefit with respect to this initiative
during the first half of 2003. Also included in parent company operating
results are allocations to our subsidiaries of interest expense related to our
interest-bearing capital obligations. During the six month period ended June
30, 2004, we allocated $6.6 million of these expenses to our subsidiaries,
compared to $7.4 million during the second quarter of 2003, reflecting reduced
use of parent company-sourced capital funding for the subsidiaries. Each subsidiary pays taxes to us at the statutory rate. Subsidiaries also
pay fees to us to cover direct and indirect services. In addition, certain
services are provided from one subsidiary to another. Intercompany income and
expenses are calculated on an arms-length, external market basis and are
eliminated in consolidation. Risk Management We are engaged in businesses that involve the assumption of financial
risks including:  
    
    Credit risk
    
    Liquidity risk
    
    Interest rate risk
    
    Operational risk Each line of business that assumes financial risk uses a formal process to
manage this risk. In all cases, the objectives are to ensure that risk is
contained within prudent levels and that we are adequately compensated for the
level of risk assumed. Our Chairman, Executive Vice President, Senior Vice Presidents (including
the Chief Financial Officer), and Chief Risk Officer meet on a
regularly-scheduled basis (or more frequently as appropriate) as an
Enterprise-wide Risk Management Committee (ERMC), reporting to the Board of
Directors Audit and Risk Management Committee. The ERMC and its subcommittees
oversee all aspects of our financial, credit, and operational risks. The ERMC
provides senior-level review and enhancement of line manager risk processes and
oversight of our risk reporting, surveillance and model parameter changes. 41




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Credit Risk The assumption of credit risk is a key source of earnings for the home
equity lending, commercial banking and commercial finance lines of business.
The mortgage banking line of business assumes limited credit risk as its
mortgages typically are insured and are sold within a short period of time
after origination. The credit risk in the loan portfolios of the home equity lending,
commercial finance and commercial banking lines of business has the most
potential for a significant effect on our consolidated financial performance.
These lines of business each have a Chief Credit Officer (the Chief Executive
Officer of the Commercial Banking line of business is temporarily assuming
responsibility for this position for this line of business  we are engaged in
a search to find a full time replacement for the Chief Credit Officer) specific
to the product line and manage credit risk through various combinations of the
use of lending policies, credit analysis and approval procedures, periodic loan
reviews, servicing activities, and/or personal contact with borrowers.
Commercial loans over a certain size, depending on the loan type and structure,
are reviewed by a loan committee prior to approval. We perform independent loan
review across the Corporation through a function that reports directly to the
Audit and Risk Management Committee. The allowance for loan and lease losses is an estimate based on our
judgment applying the principles of SFAS 5, Accounting for Contingencies,
SFAS 114, Accounting by Creditors for Impairment of a Loan, and SFAS 118,
Accounting by Creditors for Impairment of a Loan  Income Recognition and
Disclosures. The allowance is maintained at a level we believe is adequate to
absorb probable losses inherent in the loan and lease portfolio. We perform an
assessment of the adequacy of the allowance no less frequently than on a
quarterly basis. Within the allowance, there are specific and expected loss components. The
specific loss component is based on a regular analysis of all loans over a
fixed-dollar amount where the internal credit rating is at or below a
predetermined classification. From this analysis we determine the loans that we
believe to be impaired in accordance with SFAS 114. Management has defined
impaired as nonaccrual loans. An allowance is established when the collateral
value, observable market price or discounted cash flows of an impaired loan is
lower than the carrying value of that loan. In addition to establishing
allowance levels for specifically identified higher risk graded loans,
management determines an allowance for all other loans in the portfolio for
which historical or projected experience indicates that certain losses exist.
These loans are segregated by major product type, and in some instances, by
aging, with an estimated loss ratio or migration pattern applied against each
product type and aging category. For portfolios that are too new to have
adequate historical experience on which to base a loss estimate, we use
estimates derived from industry experience and managements judgment. The loss
ratio or migration patterns are generally based upon historic loss experience
or historic rate migration behaviors, respectively, for each loan type adjusted
for certain environmental factors management believes to be relevant. Net charge-offs for the three months ended June 30, 2004 were $4.5
million, or 0.6% of average loans, compared to $9.7 million, or 1.2% of average
loans during the same period in 2003. Year-to-date net charge-offs were $12.6
million, compared to $15.8 million during the same period in 2003. The
decrease in charge-offs is a result of improvements in credit quality
associated with the steadily improving economy. At June 30, 2004, the
allowance for loan and lease losses was 1.7% of outstanding loans and leases,
down from 2.0% at December 31, 2003. Total nonperforming loans and leases at June 30, 2004, were $32.9 million,
compared to $44.4 million at December 31, 2003. Nonperforming loans and leases
as a percent of total loans and leases at June 30, 2004 were 1.0%, compared to
1.4% at December 31, 2003. The 2004 decrease occurred primarily at the home
equity lending line of business where nonperforming loans decreased from $11.2
million at December 31, 2003 to $5.4 million at June 30, 2004. In addition,
nonperforming loans at the commercial banking line of business decreased to
$21.4 million at June 30, 2004, compared to $26.6 million at the end of 2003. Other real estate we owned totaled $5.5 million at June 30, 2004, down
from $6.4 million at December 31, 2003. Total nonperforming assets at June 30,
2004 were $42.7 million, or 0.79% of total assets compared to nonperforming
assets at December 31, 2003, of $52.5 million, or 1.1% of total assets. 42




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The following table shows information about our nonperforming assets at
the dates shown: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Accruing loans past due 90 days or more:Commercial, financial and agricultural loans
    
    $
    885
    
    
    $
    4,172Real estate mortgages
    
    
    0
    
    
    
    Consumer loans
    
    
    30
    
    
    
    226Lease financing:Domestic
    
    
    54
    
    
    
    159Canadian
    
    
    109
    
    
    
    701,078
    
    
    
    4,627Nonaccrual loans and leases:Commercial, financial and agricultural loans
    
    
    19,720
    
    
    
    20,447Real estate mortgages
    
    
    8,078
    
    
    
    14,663Consumer loans
    
    
    784
    
    
    
    769Lease financing:Domestic
    
    
    1,630
    
    
    
    1,916Canadian
    
    
    1,647
    
    
    
    1,94331,859
    
    
    
    39,738Total nonperforming loans and leases
    
    
    32,937
    
    
    
    44,365Other real estate owned:Nonperforming Loans held for Sale not guaranteed
    
    
    1,697
    
    
    
    1,695Other real estate owned
    
    
    5,501
    
    
    
    6,431Total nonperforming assets
    
    $
    40,135
    
    
    $
    52,491Nonperforming loans and leases to total loans and leases
    
    
    1.0
    %
    
    
    1.4
    %Nonperforming assets to total assets
    
    
    0.7
    %
    
    
    1.1
    %
 For the periods presented, the balances of any restructured loans are
reflected in the table above either in the amounts shown for accruing loans
past due 90 days or more or in the amounts shown for nonaccrual loans and
leases. Loans that are past due 90 days or more are placed on nonaccrual status
unless, in managements opinion, there is sufficient collateral value to offset
both principal and accrued interest. The nonperforming assets at June 30, 2004
and December 31, 2003 were held at our lines of business as follows: June 30,
    
    December 31,2004
    
    2003(In millions) Mortgage banking
    
    $
    7.2
    
    
    $
    6.8 Commercial banking
    
    
    22.7
    
    
    
    26.6 Home equity lending
    
    
    6.8
    
    
    
    15.0 Commercial finance
    
    
    3.4
    
    
    
    4.1
 Generally, the accrual of income is discontinued when the full collection
of principal or interest is in doubt, or when the payment of principal or
interest has become contractually 90 days past due unless the obligation is
both well secured and in the process of collection. Liquidity Risk Liquidity is the availability of funds to meet the daily requirements of
our business. For financial institutions, demand for funds results principally
from extensions of credit and withdrawal of deposits. Liquidity is provided
through deposits and short-term and long-term borrowings, by asset maturities
or sales, and through equity capital. The objectives of liquidity management are to ensure that funds will be
available to meet current and future demands and that funds are available at a
reasonable cost. We manage liquidity centrally via daily interaction with the
lines of business and periodic liquidity 43




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planning sessions. Since loans are less marketable than securities, the ratio
of total loans to total deposits is a traditional measure of liquidity for
banks and bank holding companies. At June 30, 2004, the ratio of loans and
loans held for sale to total deposits was 131%. We are comfortable with this
relatively high level due to our position in mortgage loans held for sale ($1.2
billion) and second mortgage loans and leases financed through matched-term
secured financing ($0.3 billion). The mortgage loans carry an interest rate
at or near current market rates and are generally sold within a short period
after origination. Excluding these items, our loans to deposit ratio at June
30, 2004 was 85%. Deposits consist of three primary types: non-maturity transaction account
deposits, certificates of deposit (CDs), and escrow account deposits. Core
deposits include deposits less jumbo and brokered CDs and public funds. Core
deposits totaled $2.1 billion at June 30, 2004 compared to $1.8 billion at
December 31, 2003. Non-maturity transaction account deposits are generated by our commercial
banking line of business and include deposits placed into checking, savings,
money market and other types of deposit accounts by our customers. These types
of deposits have no contractual maturity date and may be withdrawn at any time.
While these balances fluctuate daily, a large percentage typically remains for
much longer. At June 30, 2004, these deposit types totaled $1.8 billion, an
increase of $0.7 billion from December 31, 2003. CDs differ from non-contractual maturity accounts in that they do have
contractual maturity dates. We issue CDs both directly to customers and through
brokers. As of June 30, 2004, CDs issued directly to customers totaled $0.5
billion, unchanged from December 31, 2003. Brokered CDs are typically
considered to have higher liquidity (renewal) risk than CDs issued directly to
customers, since brokered CDs are often done in large blocks and since a direct
relationship does not exist with the depositor. In recognition of this, we
manage the size and maturity structure of brokered CDs closely. For example,
the maturities of brokered CDs are laddered to mitigate liquidity risk. CDs
issued through brokers totaled $0.4 billion at June 30, 2004, and had an
average remaining life of 16 months, as compared to $0.3 billion outstanding
with an 18 month average remaining life at December 31, 2003. Escrow account deposits are related to the servicing of our originated
first mortgage loans. When a first mortgage borrower makes a monthly mortgage
payment, consisting of interest and principal due on the loan and often a real
estate tax and insurance portion, we hold the payment on a non-interest earning
basis, except where otherwise required by law, until the payment is remitted to
the current owner of the loan or the proper tax authority and insurance
carrier. Escrow deposits may also include proceeds from the payoff of loans in
our servicing portfolio prior to the transmission of those proceeds to
investors. At June 30, 2004, these escrow balances totaled $0.7 billion, which
was up $0.1 billion from December 31, 2003. Short-term borrowings consist of borrowings from several sources. Our
largest borrowing source is the Federal Home Loan Bank of Indianapolis (FHLBI),
of which we are an active member. We utilize their collateralized borrowing
programs to help fund qualifying first mortgage, home equity and commercial
real estate loans. As of June 30, 2004, FHLBI borrowings outstanding totaled
$0.5 billion, a $0.2 billion increase from December 31, 2003. We had sufficient
collateral pledged to FHLBI at June 30, 2004 to borrow an additional $0.4
billion, if needed. In addition to borrowings from the FHLBI, we use other lines of credit as
needed. At June 30, 2004, the amount of short-term borrowings outstanding on
our major credit lines and the total amount of the borrowing lines were as
follows:  
    
    Warehouse lines of credit to fund first mortgages and home equity
loans: none outstanding on a $300 million borrowing facility, of which
$150 million is committed
    
    Warehouse borrowing facilities to fund first mortgage loans: $1
million outstanding on a $150 million committed borrowing facility
    
    Lines of credit with correspondent banks, including fed funds lines:
$51 million outstanding out of $165 million available but not committed
    
    Line of credit with a correspondent bank collateralized by mortgage
servicing rights: none outstanding out of $75 million committed
borrowing facility 44




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##### Table of Contents



In addition to short-term borrowings from the aforementioned credit lines,
sale facilities are used to effect sale of Government Sponsored Enterprise
(GSE) conforming first mortgage loans before scheduled GSE settlement dates.
The first two of these sale facilities listed below have specific dollar limits
as noted. The size of the third facility is limited only by the amount of
mortgage-backed securities we can package for purchase by the facility
provider. At June 30, 2004, the amount unsettled by the GSE on these facilities
and the total facility amount were as follows:  
    
    Committed warehouse sale facility: $88 million unsettled on a $600 million facility
    
    Uncommitted warehouse sale facility: $87 million unsettled on a $150 million facility
    
    Investor warehouse sale facility: $0 million unsettled Interest Rate Risk Because all of our assets are not perfectly match funded with like-term
liabilities, our earnings are affected by interest rate changes. Interest rate
risk is measured by the sensitivity of both net interest income and fair market
value of net interest sensitive assets to changes in interest rates. An asset/liability management committee (ALMC) at each of our lines of
business that has interest rate risk monitors the repricing structure of
assets, liabilities and off-balance sheet items and uses a financial simulation
model to measure interest rate risk over multiple interest rate scenarios. Our
parent company ALMC oversees the interest rate risk profile of all of our lines
of business as a whole and is represented on each of the line of business
ALMCs. We incorporate many factors into the financial model, including
prepayment speeds, deposit rate forecasts for non-maturity transaction
accounts, fee income and a comprehensive mark-to-market valuation process. We
reevaluate risk measures and assumptions regularly and enhance modeling tools
as needed. Our commercial banking, home equity lending, and commercial finance lines
of business assume interest rate risk in the form of repricing structure
mismatches between their loans and leases and funding sources. We manage this
risk by adjusting the duration of their interest sensitive liabilities and
through the use of hedging via financial derivatives. Our mortgage banking line of business assumes interest rate risk by
entering into commitments to extend loans to borrowers at a fixed rate for a
limited period of time. We hold closed loans only temporarily until a pool is
formed and sold in a securitization or under a flow sale arrangement. To
mitigate the risk that interest rates will rise between loan origination and
sale, the mortgage bank buys commitments to deliver loans at a fixed price.
Interest rate risk also exists for the mortgage pipeline period, which is the
period starting when a rate lock commitment is made and ending at the time a
loan originates or the rate lock expires. To mitigate this risk, the mortgage
bank also buys commitments to deliver loans at a fixed rate for a portion of
our pipeline. Our mortgage, commercial banking and home equity lending lines of business
also are exposed to the risk that interest rates will decline, increasing
prepayment speeds on loans and decreasing the value of servicing assets and
residual interests. Some offsets to these exposures exist in the form of
strong production operations, selective sales of servicing rights, match-funded
asset-backed securities sales and the use of financial instruments to manage
the economic performance of the assets. Since there are accounting timing
differences between the recognition of gains or losses on financial derivatives
and the realization of economic gains or losses on certain offsetting exposures
(e.g., strong production operations), our decisions on the degree to which we
manage risk with derivative instruments to insulate against short-term price
volatility depends on a variety of factors, including:  
    
    the type of risk we are trying to mitigate;
    
    offsetting factors elsewhere in the Corporation;
    
    the level of current capital above our target minimums;
    
    time remaining in the quarter (i.e., days until quarter-end);
    
    current level of derivative gain or loss relative to accounting and economic basis;
    
    basis risk: the degree to which the interest rates underlying our
derivative instruments might not move parallel to the interest rate
driving our asset valuation; and
    
    convexity: the degree to which asset values, or risk management
derivative instrument values, do not change in a linear fashion as
interest rates change. 45




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##### Table of Contents



This strategy may, at times, result in variability in quarterly results
that are not reflective of underlying trends for the Corporation. The following tables reflect our estimate of the present value of interest
sensitive assets, liabilities, and off-balance sheet items at June 30, 2004.
In addition to showing the estimated fair market value at current rates, they
also provide estimates of the fair market values of interest sensitive items
based upon a hypothetical instantaneous move both up and down 100 and 200 basis
points in the entire yield curve. The first table is an economic analysis showing the present value impact
of changes in interest rates, assuming a comprehensive mark-to-market
environment. The second table is an accounting analysis showing the same net
present value impact, adjusted for expected GAAP treatment. Neither analysis
takes into account the book values of the noninterest sensitive assets and
liabilities (such as cash, accounts receivable, and fixed assets), the values
of which are not directly determined by interest rates. The analyses are based on discounted cash flows over the remaining
estimated lives of the financial instruments. The interest rate sensitivities
apply only to transactions booked as of June 30, 2004, although certain
accounts such as Official Checks and Due From are normalized whereby the
three- or six-month average balance is included rather than the quarter-end
balance in order to avoid having the analysis skewed by a significant increase
or decrease to an account balance at quarter-end. The net asset value sensitivities do not necessarily represent the changes
in the lines of business net asset value that would actually occur under the
given interest rate scenarios, as sensitivities do not reflect changes in value
of the companies as a going concern, nor consider potential rebalancing or
other hedging actions that might be taken in the future under asset/liability
management as interest rates change. Specifically, the volume of derivative contracts entered into to manage
the risk of mortgage servicing rights (MSRs) fluctuates from quarter to quarter
and within a given quarter, depending upon market conditions, the size of our
MSR portfolio and various additional factors. We monitor derivative positions
frequently and rebalance them as needed. Therefore, our derivative positions,
shown in the table below as of June 30, 2004, may or may not be representative
of our risk position during the succeeding quarter. Additionally, it is
unlikely that the volume of derivative positions would remain constant over
large fluctuations in interest rates, although the tables below assume they do.
MSR risk management derivative contracts appear under the category Interest
Sensitive Financial Derivatives in the tables below. Economic Value Change Method Present Value at June 30, 2004Change in Interest Rates of:-2%
    
    -1%
    
    Current
    
    +1%
    
    +2%(In Thousands)Interest Sensitive AssetsLoans and other assets
    
    $
    3,508,960
    
    
    $
    3,481,108
    
    
    $
    3,452,403
    
    
    $
    3,423,727
    
    
    $
    3,395,457Loans held for sale
    
    $
    1,199,356
    
    
    $
    1,191,330
    
    
    $
    1,180,174
    
    
    $
    1,167,915
    
    
    $
    1,153,200Mortgage servicing rights
    
    $
    200,245
    
    
    $
    290,581
    
    
    $
    456,303
    
    
    $
    564,452
    
    
    $
    619,756Residual interests
    
    $
    78,648
    
    
    $
    77,233
    
    
    $
    74,390
    
    
    $
    71,197
    
    
    $
    67,135Interest sensitive financial derivatives
    
    $
    76,414
    
    
    $
    4,453
    
    
    $
    (48,422
    )
    
    $
    (53,499
    )
    
    $
    (55,720
    )Total interest sensitive assets
    
    $
    5,063,623
    
    
    $
    5,044,705
    
    
    $
    5,114,848
    
    
    $
    5,173,792
    
    
    $
    5,179,828Interest Sensitive LiabilitiesDeposits
    
    $
    (3,351,357
    )
    
    $
    (3,330,730
    )
    
    $
    (3,314,296
    )
    
    $
    (3,299,663
    )
    
    $
    (3,285,611
    )Short-term borrowings (1)
    
    $
    (741,335
    )
    
    $
    (741,069
    )

    
    $
    (740,384
    )
    
    $
    (739,703
    )
    
    $
    (739,018
    )Long-term debt
    
    $
    (468,496
    )
    
    $
    (459,933
    )
    
    $
    (449,740
    )
    
    $
    (438,126
    )
    
    $
    (425,447
    )Total interest sensitive liabilities
    
    $
    (4,561,188
    )
    
    $
    (4,531,732
    )
    
    $
    (4,504,420
    )
    
    $
    (4,477,492
    )
    
    $
    (4,450,076
    )Net market value as of June 30, 2004
    
    $
    502,435
    
    
    $
    512,973
    
    
    $
    610,428
    
    
    $
    696,300
    
    
    $
    729,752Change from current
    
    $
    (107,993
    )
    
    $
    (97,455
    )
    
    $
    
    
    
    $
    85,872
    
    
    $
    119,324Net market value as of March 31, 2004
    
    $
    400,764
    
    
    $
    433,976
    
    
    $
    529,282
    
    
    $
    591,842
    
    
    $
    635,791Potential change
    
    $
    (128,518
    )
    
    $
    (95,306
    )
    
    $
    
    
    
    $
    62,560
    
    
    $
    106,509
   (1)
    
    Includes certain debt which is categorized as collateralized borrowings in other sections of this document 46




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GAAP-Based Value Change Method Present Value at June 30, 2004Change in Interest Rates of:-2%
    
    -1%
    
    Current
    
    +1%
    
    +2%(In Thousands)Interest Sensitive AssetsLoans and other assets (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loans held for sale
    
    $
    1,196,130
    
    
    $
    1,196,130
    
    
    $
    1,196,130
    
    
    $
    1,183,450
    
    
    $
    1,168,225Mortgage servicing rights
    
    $
    200,457
    
    
    $
    286,585
    
    
    $
    397,828
    
    
    $
    413,578
    
    
    $
    422,577Residual interests
    
    $
    78,648
    
    
    $
    77,233
    
    
    $
    74,390
    
    
    $
    71,197
    
    
    $
    67,135Interest sensitive financial derivatives
    

    $
    76,414
    
    
    $
    4,453
    
    
    $
    (48,422
    )
    
    $
    (53,499
    )
    
    $
    (55,720
    )Total interest sensitive assets
    
    $
    1,551,649
    
    
    $
    1,564,401
    
    
    $
    1,619,926
    
    
    $
    1,614,726
    
    
    $
    1,602,217Interest Sensitive LiabilitiesDeposits (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Short-term borrowings (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Total interest sensitive liabilities (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Net market value as of June 30, 2004
    
    $
    1,551,649
    
    
    $
    1,564,401
    
    
    $
    1,619,926
    
    
    $
    1,614,726
    
    
    $
    1,602,217Potential change
    
    $
    (68,277
    )
    
    $
    (55,525
    )
    
    $
    
    
    
    $
    (5,200
    )
    
    $
    (17,709
    )Net market value as of March 31, 2004
    
    $
    1,275,525
    
    
    $
    1,317,389
    
    
    $
    1,421,626
    
    
    $
    1,406,457
    
    
    $
    1,221,490Potential change
    
    $
    (146,101
    )
    
    $
    (104,237
    )
    
    $
    
    
    
    $
    (15,169
    )
    
    $
    (200,136
    )
   (1)
    
    Value does not change in GAAP presentation Operational risk Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events. Irwin
Financial, like other financial services organizations, is exposed to a variety
of operational risks. These risks include regulatory, reputational and legal
risks, as well as the potential for processing errors, internal or external
fraud, failure of computer systems, and external events that are beyond the
control of the Corporation, such as natural disasters. Our Board of Directors has ultimate accountability for the level of
operational risk assumed by us. The Board guides management by approving our
business strategy and significant policies. Our management and Board have also
established and continue to improve a control environment that encourages a
high degree of awareness and proactivity in alerting senior management and the
Board to potential control issues on a timely basis. The Board has directed that primary responsibility for the management of
operational risk rests with the managers of our business units, who are
responsible for establishing and maintaining internal control procedures that
are appropriate for their operations. In 2002, we started implementing a
multi-year program to provide a more integrated firm-wide approach for the
identification, measurement, monitoring and mitigation of operational risk. The
new enterprise-wide operational risk oversight function reports to the Audit
and Risk Management Committee of our Board of Directors and to our
Enterprise-Wide Risk Management Committee, which is led by the Chairman of the
Board of Directors. We recently established an enterprise-wide compliance
oversight function to devote increased attention and resources to banking
regulatory compliance as we have grown more complex and as our home equity,
commercial finance and mortgage banking businesses are now all being conducted
under Irwin Union Bank and Trust Company. The compliance oversight function
reports to our Chief Risk Officer, who in turn reports to the Audit and Risk
Management Committee of the Board of Directors. We have identified 75 key
processes in the Corporation for which we have Risk and Control Summaries
(RACS) for line managers to identify operational risks, internal controls and
residual or unmitigated risks. These RACS constitute an integral part of our
Board(s), CEO and CFOs oversight and assessment of the adequacy of our
internal controls. 47




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The financial services business is highly regulated. Failure to comply
with these regulations could result in substantial monetary or other damages
that could be material to our financial position. Statutes and regulations may
change in the future. We cannot predict what effect these changes, if made,
will have on our operations. It should be noted that the supervision,
regulation and examination of banks, thrifts and mortgage companies by
regulatory agencies are intended primarily for the protection of depositors and
other customers rather than shareholders of these institutions. We are registered as a bank holding company with the Board of Governors of
the Federal Reserve System under the Bank Holding Company Act of 1956, as
amended, and the related regulations. We are subject to regulation, supervision
and examination by the Federal Reserve, and as part of this process we must
file reports and additional information with the Federal Reserve. The
regulation, supervision and examinations occur at the local, state and federal
levels and involve, but are not limited to minimum capital requirements,
consumer protection, community reinvestment, and deposit insurance. Off-Balance Sheet Instruments In the normal course of our business as a provider of financial services,
we are party to certain financial instruments with off-balance sheet risk to
meet the financial needs of our customers. These financial instruments include
loan commitments and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized on the consolidated balance sheet. Our exposure to credit loss, in the form of nonperformance by the
counterparty on commitments to extend credit and standby letters of credit, is
represented by the contractual amount of those instruments. Collateral pledged
for standby letters of credit and commitments varies but may include accounts
receivable; inventory; property, plant, and equipment; and residential real
estate. Total outstanding commitments to extend credit at June 30, 2004 and
December 31, 2003, respectively, were $613.0 million and $548.2 million. We had
$30.0 million and $30.8 million in irrevocable standby letters of credit
outstanding at June 30, 2004 and December 31, 2003, respectively. Derivative Financial Instruments Financial derivatives are used as part of the overall asset/liability risk
management process. We use certain derivative instruments that do not qualify
for hedge accounting treatment under SFAS 133. These derivatives are
classified as other assets and other liabilities and marked to market on the
income statement. While we do not seek GAAP hedge accounting treatment for the
assets that these instruments are hedging, the economic purpose of these
instruments is to manage the risk inherent in existing exposures to either
interest rate risk or foreign currency risk. We entered into an interest rate swap that has a notional amount (which
does not represent the amount at risk) of $25 million as of June 30, 2004.
Under the terms of the swap agreement, we receive a fixed rate of interest and
pay a floating rate of interest based upon one-month LIBOR. We recognized a
loss of $0.2 million included in derivative gains during the six month period
ended June 30, 2004 related to this swap. By receiving a fixed rate of
interest and paying a floating rate on the swap, we are converting the
economics of a $25 million fixed rate funding source into a floating rate
funding source. We enter into forward contracts to protect against interest rate
fluctuations from the date of mortgage loan commitment until the loans are
sold. A portion of the transactions hedging the closed mortgage loans qualify
for hedge accounting treatment under SFAS 133. The notional amount of our
forward contracts (which does not represent the amount at risk) totaled $1.0
billion at June 30, 2004. The closed mortgage loans hedged by forward contracts
qualify for hedge accounting treatment under SFAS 133. The basis of the hedged
closed loans is adjusted for change in value associated with the risk being
hedged. We value closed loan contracts at period end based upon the current
secondary market value of securities with similar characteristics. The
unrealized loss on our forward contracts at June 30, 2004 was $6.9 million and
the hedge ineffectiveness year to date was a loss of $2.2 million. The effect
of these hedging activities was recorded through earnings as a component of
gain from sale of loans. We enter into commitments to originate loans whereby the interest rate on
the loan is determined prior to funding (rate lock commitments). Rate lock
commitments on loans intended to be sold are considered to be derivatives. We
record changes in the fair value of these commitments based upon the current
secondary market value of securities with similar characteristics. A net
decrease in fair value of these derivatives totaling $1.7 million was recorded
in the first half of 2004 in gain from sale of loans. At June 30, 2004, we had
a notional amount of rate lock commitments outstanding totaling $0.9 billion
with a fair value of $5.2 million. Notional amounts do not represent the amount
of risk. 48




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Our commercial finance line of business delivered fixed rate leases into
conduits that fund them using floating rate commercial paper, which creates an
interest rate risk mismatch.  
    
    In two instances, this funding mismatch is lessened by a combination
of amortizing interest rate caps and Eurodollar futures contracts. The
interest rate caps have a strike price of 5% and provide protection
against a large increase in short-term interest rates. As of June 30,
2004, the notional value and year-to-date loss on the interest rate caps
were $35.8 million and $25
thousand, respectively. In addition, we also used Eurodollar futures
contracts to hedge rate risk in this structure. As of June 30, 2004, the
total notional amount and year-to-date gain on the Eurodollar futures were
$120.0 million and $0.1 million, respectively.
    
    In the fourth quarter of 2003, we delivered fixed rate leases into a
second commercial paper conduit. Although the leases and funding were in
Canadian dollars (CAD), the interest rate mismatch was similar in nature
to that described above. To lessen the repricing mismatch between fixed
rate CAD-denominated leases and floating rate CAD commercial paper, a
series of three amortizing CAD interest rate swaps were executed,
although Irwin was only a counterparty on two of the swaps. The third
swap was between the commercial paper conduit and an outside party, but
has an impact on us as it affects the conduit funding cost. Of the
first of the two swaps on Irwins books, we pay a fixed rate of interest
and receive a floating rate. The U.S. dollar-equivalents of the
CAD-based notional and year-to-date loss on this swap at June 30, 2004
were $62.6 million and $0.1 million, respectively. For the second swap,
we pay a floating rate of interest and receive a fixed rate. The U.S.
dollar-equivalents of the CAD-based notional and year-to-date loss on
this swap at June 30, 2004 are $80.1 million and $0.2 million,
respectively. Certain of our home equity fixed rate residual interests are funded with
floating rate liabilities. To manage such mismatches, starting in the first
quarter of 2004, we entered into Eurodollar futures contracts. The current
notional value outstanding is $695 million with expiration dates ranging from
September 2004 through June 2006. As of June 30, 2004, the fair value and
year-to-date gain recorded on these contracts were $1.2 million and $1.3
million, respectively. Our home equity line of business originates loans that it regularly sells
or securitizes. In the second quarter of 2004, we entered into two swaption
agreements with a combined notional value of $195 million to economically hedge
the value of a portion of our fixed rate home equity loans. The instrument
underlying both swaptions is the 3-year swap rate and both have expiration
dates in the third quarter of 2004. The combined fair values were $0.2 million
and the year-to-date losses totaled $0.3 million. In addition, we entered into
an interest rate swap agreement to economically hedge a portion of portfolio
loans that were sold during the second quarter. The year-to-date gain on this
contract totaled $1.1 million. In connection with certain of our whole loan servicing retained second
mortgage sales we have the opportunity to earn an additional incentive
servicing fee (ISF) in the future. The whole loan sales have been to firms,
(the buyers) who securitize the loans and contract with us to service the
loans. We recognize a mortgage servicing asset or liability for these
contracts. As a part of the buyers securitizations, the buyers issue an
Incentive Servicing Agreement to us as Master Servicer. Once a pre-established
return for the certificate holders has been met, the ISF provides potential
cash payments to us in the event certain structure-specific loan credit and
servicing performance metrics are met. We have characterized these contracts
as derivative instruments. The first of these transactions was dated September
27, 2002 for loans that were sold March 28, 2002. Included in derivative gains
or losses for the six months ended June 30, 2004 was a $1.6 million gain
related to these incentive servicing fees based upon actual and projected
performance of the underlying pools of loans. Of the $1.6 million recognized
during the year, $0.7 million was the result of cash collections and $0.9
million represented the projected value of future cash payments, present valued
using a discount rate of 30%. The pool of loans which we service underlying
the derivative contract we valued was $83.6 million. In total, we have sold
$0.9 billion in loans for which we hold such derivative contracts. Our
accounting policy is to recognize a derivative asset on a mark-to-market basis
at such time that the credit and prepayment performance models we use for
valuing like pools of loans indicate that we are likely to receive cash
payments on the derivatives within a twelve-month period. We use assumptions
to value the ISFs that we believe market participants would use to value
similar assets. As of June 30, 2004, only one of six whole loan sales with this
derivative has met this expected performance trigger. 49




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We manage the interest rate risk associated with our mortgage servicing
rights through the use of Eurodollar futures contracts and interest rate
options. The financial instrument underlying the Eurodollar futures contracts
is based on the three-month LIBOR rate. Year to date, we recorded losses of
$2.4 million on these derivatives. Both the futures contracts and options were
marked-to-market and included in other assets with changes in value recorded in
the consolidated income statements as derivative gains or losses. At June 30,
2004, we held open swaption positions with a notional value totaling $8.9
billion, with a final maturity of July 1, 2004. Year to date, we recorded gains
on swaptions, including premiums paid, totaling $3.0 million. The size and mix
of these positions change during the year, so period-end positions may not be indicative of our net
risk exposure throughout the year. Notional amounts do not represent the amount
at risk. We own foreign currency forward contracts to protect the U.S. dollar value
of intercompany loans made to Onset Capital Corporation that are denominated in
Canadian dollars. We had a notional amount of $92 million in forward contracts
outstanding as of June 30, 2004. Year to date, we recognized gains on these
contracts of $1.1 million. These contracts are marked-to-market with gains and
losses included in derivative gains or losses on the consolidated income
statements. The foreign currency transaction loss on the intercompany loans was
$2.3 million for the six months ended June 30, 2004. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk. The quantitative and qualitative disclosures about market risk are
reported in the Interest Rate Risk section of Item 2, Managements Discussion
and Analysis of Financial Condition and Results of Operations found on pages 45
through 47. 
 Item 4. Controls and Procedures. In the ordinary course of internal process and control review by
management and internal and external audit, we will periodically identify
processes and controls that need improvement. When these are identified, we
have procedures in place to bring the matter to the attention of the
appropriate management and Board committees and to put into place project plans
to address the improvement opportunity. As of June 30, 2004, we performed an evaluation under the supervision and
with the participation of our management, including the Chief Executive Officer
and the Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e)). Based on that evaluation, our management, including the CEO
and CFO, concluded that our disclosure controls and procedures were effective
as of June 30, 2004, to ensure that material information relating to the
Corporation would be made known to them by others within the Corporation. Based on an evaluation by management of our internal control over
financial reporting, performed with the participation of our Chief Executive
Officer and Chief Financial Officer, there have been no changes
during the second quarter of 2004 in our internal control over
financial reporting that have materially affected or are
reasonably likely to materially affect the Corporations internal control over
financial reporting. 50




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##### Table of Contents



PART II. Other Information. 
 Item 1. Legal Proceedings. Since the time of filing our report on Form 10-Q for the period ended
March 31, 2004, we experienced developments as noted in the litigation
described below: Culpepper v. Inland Mortgage Corporation As described in our Annual Report on Form 10-K for the Year Ended 2003,
our indirect subsidiary, Irwin Mortgage Corporation, is a defendant in
Culpepper v. Inland Mortgage Corporation,a class action lawsuit in the United
States District Court for the Northern District of Alabama, filed in April
1996, that alleges violations of the federal Real Estate Settlement Procedures
Act. We reported that on October 2, 2003 Culpepperwas reassigned to U.S.
District Judge, R. David Proctor, who ordered the parties to meet and submit a
joint status report. On June 14, 2004 at the courts request, the parties
engaged in mediation, which was unsuccessful. The court then reassigned this
case to a new judge. United States ex rel. Paranich v. Sorgnard et al. As described in our Annual Report on Form 10-K for the Year Ended 2003, we
and Irwin Leasing Corporation (formerly Affiliated Capital Corp.), our indirect
subsidiary, and Irwin Equipment Finance Corporation, our direct subsidiary
(together, the Irwin companies), were served as defendants in January 2001 in
an action in the United States District Court for the Middle District of
Pennsylvania. The suit alleges that a manufacturer/importer of certain medical
devices (Matrix Biokinetics, Inc. and others) made misrepresentations to health
care professionals and to government officials to improperly obtain Medicare
reimbursement for treatments using the devices, and that the Irwin companies,
through Affiliated Capitals financing activities, aided in making the alleged
misrepresentations. The Irwin companies prevailed on a motion for summary
judgment in the district court on October 8, 2003, and the plaintiff appealed.
The Court of Appeals for the Third Circuit has tentatively scheduled
consideration of the appeal during the week of September 27, 2004. We cannot
predict whether we will prevail on appeal and have not established any reserves
for this case. McIntosh v. Irwin Home Equity Corporation As described in our Quarterly Report on Form 10-Q for the period ended
March, 31, 2004, our subsidiary, Irwin Union Bank and Trust Company, is a
defendant in a class action lawsuit filed in the United States District Court
in Massachusetts in July 2001. The case involves loans purchased by Irwin
Union Bank from FirstPlus Financial, Inc., an unaffiliated third-party lender.
The plaintiffs allege a failure to comply with certain disclosure provisions of
the Truth in Lending Act relating to high rate loans in making second mortgage
home equity loans to the plaintiff borrowers. The complaint seeks rescission
of the loans and other damages. A limited class was certified. As originally specified, the plaintiff
class included those borrowers who obtained a mortgage loan originated by
FirstPlus with prepayment penalty provisions during the three-year period prior
to the filing of the suit. Subsequently, the court further restricted the
class to borrowers with high-rate loans subject to the Home Ownership and
Equity Protection Act who refinanced their loans and paid a prepayment penalty.
A preliminary analysis led us to conclude that fewer than 100 loans qualified
for class membership. In June 2004, the parties agreed in principle to settle this matter for a
nonmaterial amount, which has been reserved. The settlement is contingent upon
the negotiation of a final settlement agreement and is subject to the approval
of the district court. Stamper v. A Home of Your Own, Inc. As described in our Quarterly Report on Form 10-Q for the period ended
March, 31, 2004, on January 25, 2002, a jury in this case awarded the
plaintiffs damages of $1.434 million, jointly and severally, against
defendants, including our indirect subsidiary, Irwin Mortgage Corporation. The
case, which was filed in August 1998 in the Baltimore, Maryland, City Circuit
Court, alleged that a home rehabilitation company and its principal defrauded
the plaintiffs by selling them defective homes at inflated prices and that
Irwin Mortgage, which provided the plaintiff borrowers with mortgage loans,
participated in the fraud. Irwin Mortgage filed an appeal with the Maryland
Court of Special Appeals, and on February 27, 2004, the Court of Special
Appeals ruled against Irwin Mortgage, remanding the case to the trial court for
a partial retrial on whether the plaintiffs are entitled to punitive damages.
On April 12, 2004, 51




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##### Table of Contents



Irwin Mortgage filed a Petition for Writ of Certiorari with the Maryland
Court of Appeals, seeking further review. The Court of Appeals accepted the
appeal on all issues on June 11, 2004. We have reserved for this case based
upon the advice of our legal counsel. Silke v. Irwin Mortgage Corporation As described in our Quarterly Report on Form 10-Q for the period ended
March 31, 2004, our indirect subsidiary, Irwin Mortgage Corporation, was named
as a defendant in a class action lawsuit filed in the Marion County, Indiana,
Superior Court in April, 2003. The complaint alleges that Irwin Mortgage
charged a document preparation fee in violation of Indiana law for services
performed by clerical personnel in completing legal documents related to
mortgage loans. Irwin Mortgage filed a motion for summary judgment on October
27, 2003. On November 3, 2003, the court ruled that a determination of class
certification would precede any action on Irwin Mortgages summary judgment
motion. On March 15, 2004, the court held a hearing on plaintiffs motion for
class certification and certified a class on June 18, 2004 consisting of
Indiana borrowers who were allegedly charged the fee by Irwin Mortgage any time
after April 17, 1997. We are unable at this time to form a reasonable estimate
of the amount of potential loss, if any, that Irwin Mortgage could suffer. We
have not established any reserves for this case. Cohens v. Inland Mortgage Company As described in our Quarterly Report on Form 10-Q for the period ended
March, 31, 2004, our indirect subsidiary, Irwin Mortgage Corporation (formerly
Inland Mortgage Corporation), was named as a defendant, along with others, in
an action filed in the Supreme Court of New York, County of Kings in October
2003. The plaintiffs, a mother and two children, allege they were injured from
lead contamination while living in premises allegedly owned by the defendants.
The suit seeks approximately $41,000,000 in damages and alleges negligence,
breach of implied warranty of habitability and fitness for intended use, loss
of services and the cost of medical treatment. Because the case is in the
early stages of litigation, we are unable at this time to form a reasonable
estimate of the amount of potential loss, if any, that Irwin Mortgage could
suffer. The parties agreed to delay the filing of an answer in this case until
July 30, 2004. We are attempting to obtain a voluntary dismissal based on our
belief that there is insufficient nexus between the cause of the alleged
injuries and Irwin Mortgage. We have not established any reserves for this
case. We and our subsidiaries are from time to time engaged in various matters
of litigation, including the matters described above, and other assertions of
improper or fraudulent loan practices or lending violations, and other matters,
and we have a number of unresolved claims pending. In addition, as part of the
ordinary course of business, we and our subsidiaries are parties to litigation
involving claims to the ownership of funds in particular accounts, the
collection of delinquent accounts, challenges to security interests in
collateral, and foreclosure interests, that is incidental to our regular
business activities. While the ultimate liability with respect to these other
litigation matters and claims cannot be determined at this time, we believe
that damages, if any, and other amounts relating to pending matters are not
likely to be material to our consolidated financial position or results of
operations, except as described above. Reserves are established for these
various matters of litigation, when appropriate, based upon the advice of legal
counsel. 
 Item 4. Submission of Matters to a Vote of Security Holders.  (a)
    
    We held our Annual Meeting of Shareholders on April 8, 2004.(b)
    
    The following Directors were elected to serve on the Board until the
2007 Annual Meeting, by the votes set forth below: Nominee
    
    For
    
    WithheldSally. A Dean
    
    
    23,539,161
    
    
    
    1,505,307William H. Kling
    
    
    23,641,829
    
    
    
    1,402,639Lance R. Odden
    
    
    24,171,964
    
    
    
    872,504
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##### Table of Contents



The following directors are currently serving terms that expire as
indicated: David W. Goodrich
    
    
    2006R. David Hoover
    
    
    2005Brenda J. Lauderback
    
    
    2006John C. McGinty
    
    
    2006William I. Miller
    
    
    2005Theodore M. Solso
    
    
    2005
  (c)
    
    In addition to the election of directors, the shareholders voted on
and approved the following proposals: MATTER
    
    FOR
    
    AGAINST
    
    ABSTAINProposal to amend the Irwin
Financial Corporation 2001 Stock
Plan
    
    
    14,002,595
    
    
    
    8,163,442
    
    
    
    154,266Proposal to amend the Irwin
Financial Corporation 1999 Outside
Director Restricted Stock
Compensation Plan
    
    
    20,466,042
    
    
    
    1,705,140
    
    
    
    149,121Proposal to approve the Irwin
Financial Corporation Short Term
Incentive Program
    
    
    20,903,814
    
    
    
    1,265,001
    
    
    
    151,488
 
 Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits. ExhibitNumber
    
    Description of Exhibit3.1
    
    Restated Articles of Incorporation of Irwin Financial Corporation. (Incorporated
by reference to Exhibit 3(a) to Form 10-K Report for year ended December 31,
2000, File No. 0-06835.)3.2
    
    Articles of Amendment to Restated Articles of Incorporation of Irwin Financial
Corporation dated March 2, 2001. (Incorporated by reference to Exhibit 3(b) to
Form 10-K Report for year ended December 31, 2000, File No. 0-06835.)3.3
    
    Code of By-laws of Irwin Financial Corporation, as amended, dated April 30, 2004.4.1
    
    Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4(a) to
Form 10-K report for year ended December 31, 1994, File No. 0-06835.)4.2
    
    Certain instruments defining the rights of the holders of long-term debt of
Irwin Financial Corporation and certain of its subsidiaries, none of which
authorize a total amount of indebtedness in excess of 10% of the total assets of
the Corporation and its subsidiaries on a consolidated basis, have not been
filed as Exhibits. The Corporation hereby agrees to furnish a copy of any of
these agreements to the Commission upon request.
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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit4.3
    
    Rights Agreement, dated as of March 1, 2001, between Irwin Financial Corporation
and Irwin Union Bank and Trust. (Incorporated by reference to Exhibit 4.1 to
Form 8-A filed March 2, 2001, File No. 0-06835.)4.4
    
    Appointment of Successor Rights Agent dated as of May 11, 2001 between Irwin
Financial Corporation and National City Bank. (Incorporated by reference to
Exhibit 4.5 to Form S-8 filed on September 7, 2001, File No. 333-69156.)10.1
    
    *Amended 1986 Stock Option Plan. (Incorporated by reference to Exhibit 10(b) to
Form 10-K Report for year ended December 31, 1991, File No. 0-06835.)10.2
    
    *Irwin Financial Corporation 1992 Stock Option Plan. (Incorporated by reference
to Exhibit 10(h) to Form 10-K Report for year ended December 31, 1992, File No.
0-06835.)10.3
    
    *Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by reference
to Exhibit 10 to Form 10-Q Report for period ended June 30, 1994, File No.
0-06835.)10.4
    
    *Amendment to Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated
by reference to Exhibit 10(i) to Form 10-Q Report for period ended June 30, 1997,
File No. 0-06835.)10.5
    
    *Irwin Financial Corporation Amended and Restated 2001 Stock Plan (Incorporated
by reference to Exhibit 1 to the Corporations proxy statement for its 2004
Annual Meeting, filed with the Commission on March 18, 2004.)10.6
    
    *Amended Irwin Financial Corporation Outside Directors Restricted Stock
Compensation Plan. (Incorporated by reference to Exhibit 10(g) to Form 10-K
Report for year ended December 31, 1991, File No. 0-06835.)10.7
    
    *Irwin Financial Corporation Outside Directors Restricted Stock Compensation
Plan. (Incorporated by reference to Exhibit 10(i) to Form 10-K Report for year
ended December 31, 1995, File No. 0-06835.)10.8
    
    *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.)10.9
    
    *Irwin Financial Corporation Employees Stock Purchase Plan. (Incorporated by
reference to Exhibit 10(d) to Form 10-K Report for year ended December 31, 1991,
File No. 0-06835.)10.10
    
    *Employee Stock Purchase Plan II. (Incorporated by reference to Exhibit 10(f) to
Form 10-K Report for year ended December 31, 1994, File No. 0-06835.)10.11
    
    *Employee Stock Purchase Plan III. (Incorporated by reference to Exhibit 10(a)
to Form 10-Q Report for period ended June 30, 1999, File No. 0-06835.)10.12
    
    *Long-Term Management Performance Plan. (Incorporated by reference to Exhibit
10(a) to Form 10-K Report for year ended December 31, 1986, File No. 0-06835.)10.13
    
    *Long-Term Incentive Plan-Summary of Terms. (Incorporated by reference to
Exhibit 10(a) to Form 10-K Report for year ended December 31, 1986, File No.
0-06835.)10.14
    
    *Inland Mortgage Corporation Long-Term Incentive Plan. (Incorporated by
reference to Exhibit 10(j) to Form 10-K Report for year ended December 31, 1995,
File No. 0-06835.)
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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.15
    
    *Amended and Restated Management Bonus Plan. (Incorporated by reference to
Exhibit 10(a) to Form 10-K Report for year ended December 31, 1986, File No.
0-06835.)10.16
    
    *Limited Liability Company Agreement of Irwin Ventures LLC. (Incorporated by
reference to Exhibit 10(a) to Form 10-Q/A Report for period ended March 31,
2001, File No. 0-06835.)10.17
    
    *Limited Liability Company Agreement of Irwin Ventures Co-Investment Fund LLC,
effective as of April 20, 2001. (Incorporated by reference to Exhibit 10.17 to
Form S-1/A filed February 14, 2002, File No. 333-69586.)10.18
    
    *Irwin Home Equity Corporation Shareholder Agreement and Amendments.
(Incorporated by reference to Exhibit 10(b) to Form 10-Q/A Report for period
ended March 31, 2001, File No. 0-06835.)10.19
    
    *Promissory Note dated January 30, 2002 from Elena Delgado to Irwin Financial
Corporation. (Incorporated by reference to Exhibit 10.19 to Form S-1/A filed
February 14, 2002, File No. 333-69586.)10.20
    
    *Consumer Pledge Agreement dated January 30, 2002 between Elena Delgado and
Irwin Financial Corporation. (Incorporated by reference to Exhibit 10.20 to Form
S-1/A filed February 14, 2002, File No. 333-69586.)10.21
    
    *Irwin Financial Corporation Amended and Restated Short Term Incentive Plan
(Incorporated by reference to Exhibit 3 to the Corporations proxy statement for
its 2004 Annual Meeting, filed with the Commission on March 18, 2004.)10.22
    
    *Irwin Union Bank and Trust Company Amended and Restated Short Term Incentive
Plan (Incorporated by reference to Exhibit 7 to the Corporations proxy
statement for its 2004 Annual Meeting, filed with the Commission on March 18,
2004.)10.24
    
    *Irwin Mortgage Corporation Amended and Restated Short Term Incentive Plan.
(Incorporated by reference to Exhibit 6 to the Corporations proxy statement for
its 2004 Annual Meeting, filed with the Commission on March 18, 2004.)10.25
    
    *Irwin Capital Holdings Short Term Incentive Plan effective January 1, 2002.
(Incorporated by reference to Exhibit 10.25 to Form 10-Q Report for period ended
March 31, 2002, File No. 0-06835.)10.26
    
    *Onset Capital Corporation Employment Agreement. (Incorporated by reference to
Exhibit 10.26 to Form 10-Q Report for period ended June 30, 2002, File No.
0-06835.)10.27
    
    *Irwin Financial Corporation Restated Supplemental Executive Retirement Plan for
Named Executives. (Incorporated by reference to Exhibit 10.27 to Form 10-Q
Report for period ended June 30, 2002, File No. 0-06835.)10.28
    
    *Irwin Financial Corporation Supplemental Executive Retirement Plan for Named
Executives. (Incorporated by reference to Exhibit 10.28 to Form 10-Q Report for
period ended June 30, 2002, File No. 0-06835.)10.29
    
    *Onset Capital Corporation Shareholders Agreement (Incorporated by reference to
Exhibit 10.29 to Form 10-K Report for year ended December 31, 2002, File No.
0-06835.)10.30
    
    *Irwin Commercial Finance Amended and Restated Short Term Incentive Plan
(Incorporated by reference to Exhibit 4 to the Corporations proxy statement for
its 2004 Annual Meeting, filed with the Commission on March 18, 2004.)
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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.31
    
    *Irwin Home Equity Amended and Restated Short Term Incentive Plan (Incorporated
by reference to Exhibit 5 to the Corporations proxy statement for its 2004
Annual Meeting, filed with the Commission on March 18, 2004.)11.1
    
    Computation of earnings per share is included in the footnotes to the financial
statements.31.1
    
    Certification of the Chief Executive Officer under Section 302 of the Sarbanes -
Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer under Section 302 of the Sarbanes -
Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer under Section 906 of the Sarbanes -
Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer under Section 906 of the Sarbanes -
Oxley Act of 2002.
   *
    
    Indicates management contract or compensatory plan or arrangement.  (b)
    
    Reports onForm 8-K. SECOND QUARTER 8-K
    
    April 9, 2004
    
    IFC Makes Reg FD Disclosure on Presentation made
at the Annual Meeting of Shareholders, April 8,
2004.8-K
    
    April 30, 2004
    
    IFC Announces 2004 First Quarter Earnings
Conference Call.8-K/A
    
    April 30, 2004
    
    IFC Announces 2004 First Quarter Earnings
Conference Call.8-K
    
    May 3, 2004
    
    IFC Announces 2004 First Quarter Earnings.8-K
    
    May 3, 2004
    
    IFC Announces Second Quarter Dividend.
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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. IRWIN FINANCIAL CORPORATIONDATE:July 30, 2004
    
    BY:
    
    /s/ Gregory F. EhlingerGREGORY F. EHLINGERCHIEF FINANCIAL OFFICERBY:
    
    /s/ Jody A. LittrellJODY A. LITTRELLCORPORATE CONTROLLER(Chief Accounting Officer)
 57