##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period endedSeptember 30, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from to .
 Commission File Number: 0-6835
 IRWIN FINANCIAL CORPORATION
 (Exact Name of Corporation as Specified in its Charter)
 Indiana
    
    35-1286807(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 500 Washington Street Columbus, Indiana
    
    47201(Address of Principal Executive Offices)
    
    (Zip Code)
 (812) 376-1909
    
    www.irwinfinancial.com(Corporations Telephone Number, Including Area Code)
    
    (Web Site)
  þ o
  o þ o
  o þ




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##### 



FORM 10-Q
TABLE OF CONTENTS
 PAGENO.PART I
    
    FINANCIAL INFORMATION
    
    
    3Item 1
    
    Financial Statements
    
    
    3Item 2
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    20Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    56Item 4
    
    Controls and Procedures
    
    
    56PART II
    
    OTHER INFORMATION
    
    
    57Item 1
    
    Legal Proceedings
    
    
    57Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    57Item 6
    
    Exhibits
    
    
    58Signatures
    
    
    61CertificationCertificationCertificationCertification
  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)
 September 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Assets:Cash and cash equivalents
    
    $
    85,673
    
    
    $
    145,765Interest-bearing deposits with financial institutions
    
    
    32,841
    
    
    
    53,106Residual interests
    
    
    11,005
    
    
    
    10,320Investment securities- held-to-maturity (Fair value: $17,724 at September
30, 2007
and $17,893 at December 31, 2006)
    
    
    17,721
    
    
    
    18,066Investment securities- available-for-sale
    
    
    124,069
    
    
    
    110,364Loans held for sale
    
    
    3,253
    
    
    
    237,510Loans and leases, net of unearned income  Note 3
    
    
    5,676,690
    
    
    
    5,238,193Less: Allowance for loan and lease losses  Note 4
    
    
    (104,443
    )
    
    
    (74,468
    )5,572,247
    
    
    
    5,163,725Servicing assets  Note 5
    
    
    25,324
    
    
    
    31,949Accounts receivable
    
    
    45,091
    
    
    
    208,585Accrued interest receivable
    
    
    26,295
    
    
    
    26,470Premises and equipment
    
    
    38,604
    
    
    
    36,211Other assets
    
    
    171,361
    
    
    
    139,314Assets held for sale  Note 2
    
    
    8,364
    
    
    
    56,573Total assets
    
    $
    6,161,848
    
    
    $
    6,237,958Liabilities and Shareholders Equity:DepositsNoninterest-bearing
    
    $
    383,142
    
    
    $
    687,626Interest-bearing
    
    
    2,348,819
    
    
    
    1,756,109Certificates of deposit over $100,000
    
    
    771,109
    
    
    
    1,107,7813,503,070
    
    
    
    3,551,516Short-term borrowings  Note 6
    
    
    539,273
    
    
    
    602,443Collateralized debt  Note 7
    
    
    1,288,119
    
    
    
    1,173,012Other long-term debt
    
    
    233,877
    
    
    
    233,889Other liabilities
    
    
    108,713
    
    
    
    146,596Total liabilities
    
    
    5,673,052
    
    
    
    5,707,456Commitments and contingencies  Note 11Shareholders equityPreferred stock, no par value  authorized 4,000,000 shares; none issued
    
    
    
    
    
    
    Noncumulative perpetual preferred stock  15,000 shares authorized and issued
    
    
    14,441
    
    
    
    14,518Common stock, no par value  authorized 40,000,000 shares; issued 29,900,305 shares
and 29,879,773 shares as of September 30, 2007 and December 31, 2006;
701,751 shares 143,543 shares in treasury as of September 30, 2007 and December
31, 2006
    
    
    116,292
    
    
    
    116,192Additional paid-in capital
    
    
    2,772
    
    
    
    1,583Accumulated other comprehensive income (loss), net of deferred income tax
benefit of
$5,113 and $4,813 as of September 30, 2007 and December 31, 2006
    
    
    1,332
    
    
    
    (4,364
    )Retained earnings
    
    
    367,483
    
    
    
    405,835502,320
    
    
    
    533,764Less treasury stock, at cost
    
    
    (13,524
    )
    
    
    (3,262
    )Total shareholders equity
    
    
    488,796
    
    
    
    530,502Total liabilities and shareholders equity
    
    $
    6,161,848
    
    
    $
    6,237,958
  3




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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 For the Three Months Ended September 30,2007
    
    
    2006(Dollars in thousands, except per share)Interest income:Loans and leases
    
    $
    126,180
    
    
    $
    113,923Loans held for sale
    
    
    585
    
    
    
    7,075Residual interests
    
    
    268
    
    
    
    279Investment securities
    
    
    2,738
    
    
    
    2,422Federal funds sold
    
    
    79
    
    
    
    89Total interest income
    
    
    129,850
    
    
    
    123,788Interest expense:Deposits
    
    
    34,747
    
    
    
    34,322Short-term borrowings
    
    
    7,436
    
    
    
    4,344Collateralized debt
    
    
    18,563
    
    
    
    14,305Other long-term debt
    
    
    3,958
    
    
    
    5,520Total interest expense
    
    
    64,704
    
    
    
    58,491Net interest income
    
    
    65,146
    
    
    
    65,297Provision for loan and lease losses  Note 4
    
    
    28,493
    
    
    
    9,135Net interest income after provision for loan and lease losses
    
    
    36,653
    
    
    
    56,162Other income:Loan servicing fees
    
    
    4,415
    
    
    
    6,207Amortization and impairment of servicing assets
    
    
    (2,686
    )
    
    
    (5,343
    )Gain from sales of loans and loans held for sale
    
    
    3,329
    
    
    
    1,640Trading gains
    
    
    876
    
    
    
    968Derivative losses, net
    
    
    (5,673
    )
    
    
    (2,301
    )Other
    
    
    6,771
    
    
    
    6,1767,032
    
    
    
    7,347Other expense:Salaries
    
    
    24,043
    
    
    
    23,815Pension and other employee benefits
    
    
    6,478
    
    
    
    6,586Office expense
    
    
    2,126
    
    
    
    2,413Premises and equipment
    
    
    5,500
    
    
    
    5,040Marketing and development
    
    
    1,354
    
    
    
    614Professional fees
    
    
    2,086
    
    
    
    2,479Other
    
    
    4,758
    
    
    
    9,91746,345
    
    
    
    50,864(Loss) income before income taxes from continuing operations
    
    
    (2,660
    )
    
    
    12,645(Benefit) provision for income taxes
    
    
    (1,857
    )
    
    
    3,550Net (loss) income from continuing operations
    
    
    (803
    )
    
    
    9,095Loss from discontinued operations, net of $11,540 and $8,884 income tax
benefit, respectively  Note 2
    
    
    (17,227
    )
    
    
    (13,302
    )Net loss
    
    $
    (18,030
    )
    
    $
    (4,207
    )Earnings per share from continuing operations:  Note 9Basic
    
    $
    (0.04
    )
    
    $
    0.31Diluted
    
    $
    (0.05
    )
    
    $
    0.30Earnings per share:  Note 9Basic
    
    $
    (0.63
    )
    
    $
    (0.14
    )Diluted
    
    $
    (0.64
    )
    
    $
    (0.14
    )Dividends per share
    
    $
    0.12
    
    
    $
    0.11
  4




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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 For the Nine Months Ended September 30,2007
    
    
    2006(Dollars in thousands, except per share)Interest income:Loans and leases
    
    $
    369,727
    
    
    $
    316,904Loans held for sale
    
    
    6,663
    
    
    
    28,285Residual interests
    
    
    817
    
    
    
    1,409Investment securities
    
    
    7,757
    
    
    
    6,128Federal funds sold
    
    
    602
    
    
    
    138Total interest income
    
    
    385,566
    
    
    
    352,864Interest expense:Deposits
    
    
    103,178
    
    
    
    98,621Short-term borrowings
    
    
    22,054
    
    
    
    11,843Collateralized debt
    
    
    51,491
    
    
    
    37,013Other long-term debt
    
    
    11,726
    
    
    
    14,641Total interest expense
    
    
    188,449
    
    
    
    162,118Net interest income
    
    
    197,117
    
    
    
    190,746Provision for loan and lease losses  Note 4
    
    
    71,155
    
    
    
    25,154Net interest income after provision for loan and lease losses
    
    
    125,962
    
    
    
    165,592Other income:Loan servicing fees
    
    
    15,443
    
    
    
    25,164Amortization and impairment of servicing assets
    
    
    (9,924
    )
    
    
    (16,888
    )Gain from sales of loans and loans held for sale
    
    
    690
    
    
    
    816Trading gains
    
    
    868
    
    
    
    751Derivative (losses) gains, net
    
    
    (10,014
    )
    
    
    1,138Other
    
    
    18,736
    
    
    
    19,40815,799
    
    
    
    30,389Other expense:Salaries
    
    
    73,688
    
    
    
    73,958Pension and other employee benefits
    
    
    20,912
    
    
    
    21,985Office expense
    
    
    7,002
    
    
    
    6,698Premises and equipment
    
    
    16,468
    
    
    
    15,513Marketing and development
    
    
    3,931
    
    
    
    2,004Professional fees
    
    
    6,853
    
    
    
    7,346Other
    
    
    16,839
    
    
    
    27,468145,693
    
    
    
    154,972(Loss) income before income taxes from continuing operations
    
    
    (3,932
    )
    
    
    41,009(Benefit) provision for income taxes
    
    
    (2,507
    )
    
    
    14,255Net (loss) income from continuing operations
    
    
    (1,425
    )
    
    
    26,754Loss from discontinued operations, net of $18,250 and $19,964 income tax
benefit, respectively  Note 2
    
    
    (27,123
    )
    
    
    (29,948
    )Net loss
    
    $
    (28,548
    )
    
    $
    (3,194
    )Earnings per share from continuing operations:  Note 9Basic
    
    $
    (0.08
    )
    
    $
    0.91Diluted
    
    $
    (0.11
    )
    
    $
    0.90Earnings per share:  Note 9Basic
    
    $
    (1.01
    )
    
    $
    (0.11
    )Diluted
    
    $
    (1.03
    )
    
    $
    (0.12
    )Dividends per share
    
    $
    0.36
    
    
    $
    0.33
  5




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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
For the Nine Months Ended September 30, 2007, and 2006
 Accumulated Other Comprehensive IncomeDefined
    
    Additional
    
    
    
    
    
    
    
    
    
    PerpetualRetained
    
    Foreign
    
    Unrealized Gain/Loss
    
    Benefit
    
    Paid in
    
    Common
    
    Treasury
    
    PreferredTotal
    
    Earnings
    
    Currency
    
    Securities
    
    Derivatives
    
    Plans
    
    Capital
    
    Stock
    
    Stock
    
    Stock(Dollars in thousands)Balance at January 1, 2007
    
    $
    530,502
    
    
    $
    405,835
    
    
    $
    2,884
    
    
    $
    (344
    )
    
    $
    (30
    )
    
    $
    (6,874
    )
    
    $
    1,583
    
    
    $
    116,192
    
    
    $
    (3,262
    )
    
    $
    14,518Net loss
    
    
    (28,548
    )
    
    
    (28,548
    )Unrealized loss on investment
securities net of $300 tax benefit
    
    
    (450
    )
    
    
    
    
    
    
    
    
    
    
    (450
    )Unrealized loss on derivatives
net of $318 tax benefit
    
    
    (477
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (477
    )Foreign currency adjustment
    
    
    6,623
    
    
    
    
    
    
    
    6,623Other comprehensive income
    
    
    5,696Total comprehensive income
    
    
    (22,852
    )Cash dividends  common stock
    
    
    (10,543
    )
    
    
    (10,543
    )Cash dividends  preferred stock
    
    
    (1,004
    )
    
    
    (1,004
    )FAS 156 adoption
    
    
    1,743
    
    
    
    1,743Tax benefit on stock option exercises
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91Stock compensation expense
    
    
    1,296
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,296Stock issuance costs
    
    
    (77
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77
    )Stock:Purchase of 671,186 shares
    
    
    (12,781
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,781
    )Sales of 117,715 shares
    
    
    2,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (198
    )
    
    
    100
    
    
    
    2,519Balance at September 30, 2007
    
    $
    488,796
    
    
    $
    367,483
    
    
    $
    9,507
    
    
    $
    (794
    )
    
    $
    (507
    )
    
    $
    (6,874
    )
    
    $
    2,772
    
    
    $
    116,292
    
    
    $
    (13,524
    )
    
    $
    14,441Balance at January 1, 2006
    
    $
    512,334
    
    
    $
    418,784
    
    
    $
    3,341
    
    
    $
    (373
    )
    
    $
    754
    
    
    $
    (274
    )
    
    $
    50
    
    
    $
    112,000
    
    
    $
    (21,948
    )
    
    $
    Net loss
    
    
    (3,194
    )
    
    
    (3,194
    )Unrealized loss on investment
securities net of $50 tax benefit
    
    
    (75
    )
    
    
    
    
    
    
    
    
    
    
    (75
    )Unrealized loss on derivative
net of $250 tax benefit
    
    
    (375
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (375
    )Foreign currency adjustment
    
    
    972
    
    
    
    
    
    
    
    972Other comprehensive income
    
    
    522Total comprehensive income
    
    
    (2,672
    )Cash dividends
    
    
    (9,818
    )
    
    
    (9,818
    )Tax benefit on stock option exercises
    
    
    349
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    349Stock compensation expense
    
    
    1,419
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,419Conversion of trust preferred shares
to 1,013,938 shares of common stock
    
    
    19,513
    
    
    
    (1,058
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,070
    
    
    
    19,501Stock:Purchase of 52,230 shares
    
    
    (1,027
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,027
    )Sales of 187,301 shares
    
    
    2,957
    
    
    
    (508
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (476
    )
    
    
    1,153
    
    
    
    2,788Balance at September 30, 2006
    
    $
    523,055
    
    
    $
    404,206
    
    
    $
    4,313
    
    
    $
    (448
    )
    
    $
    379
    
    
    $
    (274
    )
    
    $
    1,342
    
    
    $
    114,223
    
    
    $
    (686
    )
    
    $
    
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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 For the Nine Months ended September 30,2007
    
    
    2006(Dollars in thousands)(Loss) Income from continuing operations
    
    $
    (1,425
    )
    
    $
    26,754Loss from discontinued operations
    
    
    (27,123
    )
    
    
    (29,948
    )Net loss
    
    
    (28,548
    )
    
    
    (3,194
    )Adjustments to reconcile net loss to cash provided
by operating activities:Depreciation, amortization, and accretion, net
    
    
    7,742
    
    
    
    6,071Amortization and impairment of servicing assets
    
    
    10,174
    
    
    
    57,878Provision for loan and lease losses
    
    
    71,155
    
    
    
    25,183Loss on sale of mortgage servicing assets
    
    
    
    
    
    
    15,829Loss (gain) from sales of loans held for sale
    
    
    11,279
    
    
    
    (44,237
    )Originations and purchases of loans held for sale
    
    
    (497,707
    )
    
    
    (6,969,021
    )Proceeds from sales and repayments of loans held for sale
    
    
    555,820
    
    
    
    8,014,813Proceeds from the sale of mortgage servicing assets
    
    
    137
    
    
    
    79,395Net decrease in residuals
    
    
    132
    
    
    
    13,181Net decrease in accounts receivable
    
    
    163,494
    
    
    
    65,540Other, net
    
    
    (65,082
    )
    
    
    (139,727
    )Net cash provided by operating activities
    
    
    228,596
    
    
    
    1,121,711Investing activities:Proceeds from maturities/calls of investment securities:Held-to-maturity
    
    
    2,438
    
    
    
    1,055Available-for-sale
    
    
    2,818
    
    
    
    9,015Purchase of investment securities:Held-to-maturity
    
    
    (2,167
    )
    
    
    (2,648
    )Available-for-sale
    
    
    (17,316
    )
    
    
    (23,006
    )Net decrease in interest-bearing deposits
    
    
    20,265
    
    
    
    396Net increase in loans, excluding sales
    
    
    (337,626
    )
    
    
    (677,505
    )Proceeds from sale of loans
    
    
    66,748
    
    
    
    46,728Other, net
    
    
    (7,739
    )
    
    
    (9,663
    )Net cash used by investing activities
    
    
    (272,579
    )
    
    
    (655,628
    )Financing activities:Net decrease in deposits
    
    
    (48,445
    )
    
    
    (108,793
    )Net decrease in short-term borrowings
    
    
    (63,170
    )
    
    
    (733,205
    )Proceeds from issuance of collateralized debt
    
    
    364,579
    
    
    
    650,808Repayments of collateralized debt
    
    
    (249,514
    )
    
    
    (276,832
    )Proceeds from the issuance of trust preferred securities
    
    
    
    
    
    
    31,500Repayments of long term debt
    
    
    (11
    )
    
    
    (47,583
    )Purchase of treasury stock for employee benefit plans
    
    
    (12,781
    )
    
    
    (1,027
    )Proceeds from sale of stock for employee benefit plans
    
    
    2,512
    
    
    
    4,053Dividends paid
    
    
    (11,547
    )
    
    
    (9,818
    )Net cash used by financing activities
    
    
    (18,377
    )
    
    
    (490,897
    )Effect of exchange rate changes on cash
    
    
    2,268
    
    
    
    505Net decrease in cash and cash equivalents
    
    
    (60,092
    )
    
    
    (24,309
    )Cash and cash equivalents at beginning of period
    
    
    145,765
    
    
    
    155,486Cash and cash equivalents at end of period
    
    $
    85,673
    
    
    $
    131,177Supplemental disclosures of cash flow information:Cash flow during the period:Interest paid
    
    $
    187,623
    
    
    $
    178,360Income taxes paid
    
    $
    12,001
    
    
    $
    35,150Noncash transactions:Adoption of FAS 156
    
    $
    2,905
    
    
    $
    Loans transferred from held-for-sale to held-for-investment
    
    $
    196,423
    
    
    $
    Other real estate owned
    
    $
    12,729
    
    
    $
    6,805Conversion of trust preferred stock to common stock
    
    $
    
    
    
    $
    19,513
  7




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Accounting Policies, Management Judgments and Accounting Estimates
 Consolidation:
  Use of Estimates:
 Cash and Cash Equivalents Defined:
 Allowance for Loan and Lease Losses:
   Servicing Assets:
 8




---



##### Table of Contents



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




---



##### Table of Contents



Reclassifications:
 Note 2  Discontinued Operations
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Net revenues
    
    $
    (5,127
    )
    
    $
    6,757
    
    
    $
    (13,803
    )
    
    $
    36,271Other expense
    
    
    (23,640
    )
    
    
    (28,943
    )
    
    
    (31,570
    )
    
    
    (86,183
    )Loss before income taxes
    
    
    (28,767
    )
    
    
    (22,186
    )
    
    
    (45,373
    )
    
    
    (49,912
    )Income taxes
    
    
    11,540
    
    
    
    8,884
    
    
    
    18,250
    
    
    
    19,964Net loss from discontinued operations
    
    $
    (17,227
    )
    
    $
    (13,302
    )
    
    $
    (27,123
    )
    
    $
    (29,948
    )September 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)Loans, net of allowance, and Loans held for sale
    
    $
    4,227
    
    
    $
    48,555Net servicing asset
    
    
    
    
    
    
    385Other assets
    
    
    4,137
    
    
    
    7,633Assets held for sale
    
    $
    8,364
    
    
    $
    56,573
 10




---



##### Table of Contents



Note 3  Loans and Leases
  September 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Commercial, financial and agricultural
    
    $
    2,290,394
    
    
    $
    2,249,988Residential real estate-construction
    
    
    381,462
    
    
    
    377,601Residential real estate-mortgage
    
    
    1,737,437
    
    
    
    1,522,616Consumer
    
    
    33,085
    
    
    
    31,581Commercial financingFranchise financing
    
    
    838,317
    
    
    
    699,969Domestic leasing
    
    
    307,958
    
    
    
    296,056Canadian leasing
    
    
    459,798
    
    
    
    358,783Unearned incomeFranchise financing
    
    
    (270,814
    )
    
    
    (211,480
    )Domestic leasing
    
    
    (43,693
    )
    
    
    (42,782
    )Canadian leasing
    
    
    (57,254
    )
    
    
    (44,139
    )Total
    
    $
    5,676,690
    
    
    $
    5,238,193Note 4  Allowance for Loan and Lease LossesChanges in the allowance for loan and lease losses are summarized below:September 30, 2007
    
    December 31, 2006And the Nine Months
    
    And the YearThen Ended
    
    Then Ended(Dollars in thousands)Balance at beginning of year
    
    $
    74,468
    
    
    $
    59,223Provision for loan and lease losses
    
    
    71,155
    
    
    
    35,101Charge-offs
    
    
    (48,619
    )
    
    
    (30,810
    )Recoveries
    
    
    7,881
    
    
    
    11,208Reduction due to reclassification or sale of loans
    
    
    (1,006
    )
    
    
    (246
    )Foreign currency adjustment
    
    
    564
    
    
    
    (8
    )Balance at end of period
    
    $
    104,443
    
    
    $
    74,468
 Note 5  Servicing Assets
   11




---



##### Table of Contents



September 30, 2007
    
    
    December 31, 2006And the Nine Months
    
    
    And the YearThen Ended
    
    
    Then Ended(Dollars in thousands)Beginning balance
    
    $
    27,725
    
    
    NAGain from initial adoption of SFAS 156
    
    
    2,905
    
    
    NAChanges in fair value:Due to changes in valuation inputs or assumptions (1)
    
    
    (1,056
    )
    
    NAOther changes in fair value (2)
    
    
    (7,920
    )
    
    NAMortgage servicing asset from continuing operations
    
    $
    21,654
    
    
    NA
 
 (1)
    
    Principally reflects changes in discount rates and prepayment speed assumptions, primarily due to changes in
interest rates.(2)
    
    Represents changes due to realization of expected cash flows.  September 30, 2007
    
    
    December 31, 2006And the Nine Months
    
    
    And the YearThen Ended
    
    
    Then Ended(Dollars in thousands)Beginning balance
    
    $
    31,949
    
    
    $
    34,445Initial adoption of SFAS 156
    
    
    (27,725
    )
    
    
    Additions
    
    
    396
    
    
    
    17,884Reduction due to clean up call
    
    
    (2
    )
    
    
    Amortization
    
    
    (929
    )
    
    
    (21,027
    )(Impairment) recovery
    
    
    (19
    )
    
    
    647Mortgage servicing asset from continuing operations
    
    $
    3,670
    
    
    $
    31,949
 12




---



##### Table of Contents



September 30, 2007
    
    
    December 31, 2006And the Nine Months
    
    
    And the YearThen Ended
    
    
    Then EndedBalance at beginning of year
    
    $
    483
    
    
    $
    1,152Transfer of assets from amortizing to fair value
    
    
    (332
    )
    
    
    Impairment (recovery)
    
    
    19
    
    
    
    (647
    )Reclass for sales of servicing and clean up calls
    
    
    
    
    
    
    (22
    )Valuation allowance from continuing operations
    
    $
    170
    
    
    $
    483Note 6  Short-Term BorrowingsShort-term borrowings are summarized as follows:September 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)Federal Home Loan Bank borrowings
    
    $
    465,173
    
    
    $
    371,693Federal funds
    
    
    74,100
    
    
    
    230,500Other
    
    
    
    
    
    
    250Total
    
    $
    539,273
    
    
    $
    602,443Weighted average interest rate
    
    
    4.70
    %
    
    
    4.49
    %
   Note 7  Collateralized Debt
  13




---



##### Table of Contents



WeightedAverageInterest Rate atContractual
    
    September 30,
    
    September 30,
    
    December 31,Maturity
    
    2007
    
    2007
    
    2006(Dollars in thousands)Commercial finance line of businessDomestic asset backed note
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    5,797Canadian asset backed notes:Note 1
    
    revolving
    
    
    5.5
    
    
    
    48,799
    
    
    
    30,611Note 2
    
    
    9/2012
    
    
    
    5.3
    
    
    
    221,076
    
    
    
    179,508Note 3
    
    
    10/2009
    
    
    
    4.5
    
    
    
    5,070
    
    
    
    8,157Home equity line of business2004-1 asset backed notes:Variable rate senior note
    
    
    12/2024-12/2034
    
    
    
    5.8
    
    
    
    34,593
    
    
    
    50,072Variable rate subordinate note
    
    
    12/2034
    
    
    
    6.7
    
    
    
    24,775
    
    
    
    24,7752005-1 asset backed notes:Variable rate senior note
    
    
    6/2025-6/2035
    
    
    
    5.7
    
    
    
    24,971
    
    
    
    40,972Fixed rate senior note
    
    
    6/2035
    
    
    
    5.1
    
    
    
    66,981
    
    
    
    94,129Variable rate subordinate note
    
    
    6/2035
    
    
    
    7.3
    
    
    
    10,785
    
    
    
    10,785Fixed rate subordinate note
    
    
    6/2035
    
    
    
    5.6
    
    
    
    52,127
    
    
    
    52,127Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    (68
    )
    
    
    (90
    )2006-1 asset backed notes:Variable rate senior note
    
    
    9/2035
    
    
    
    5.7
    
    
    
    53,953
    
    
    
    102,252Fixed rate senior note
    
    
    9/2035
    
    
    
    5.5
    
    
    
    96,561
    
    
    
    96,561Fixed rate lockout senior note
    
    
    9/2035
    
    
    
    5.6
    
    
    
    24,264
    
    
    
    24,264Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    (19
    )2006-2 asset backed notes:Variable rate senior note
    
    
    2/2036
    
    
    
    5.6
    
    
    
    92,126
    
    
    
    136,386Fixed rate senior note
    
    
    2/2036
    
    
    
    6.3
    
    
    
    80,033
    
    
    
    80,033Fixed rate lockout senior note
    
    
    2/2036
    
    
    
    6.2
    
    
    
    21,348
    
    
    
    21,348Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    (21
    )2006-3 asset backed notes:Variable rate senior note
    
    
    1/2037-9/2037
    
    
    
    5.6
    
    
    
    90,174
    
    
    
    130,326Fixed rate senior note
    
    
    9/2037
    
    
    
    5.9
    
    
    
    67,050
    
    
    
    67,050Fixed rate lockout senior note
    
    
    9/2037
    
    
    
    5.9
    
    
    
    18,000
    
    
    
    18,000Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (11
    )2007-1 asset backed notes:Variable rate senior note
    
    
    8/2037
    
    
    
    5.7
    
    
    
    142,209
    
    
    
    Fixed rate senior note
    
    
    8/2037
    
    
    
    6.0
    
    
    
    91,346
    
    
    
    Fixed rate lockout senior note
    
    
    8/2037
    
    
    
    5.9
    
    
    
    22,000
    
    
    
    Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    Total
    
    
    
    
    
    
    
    
    
    $
    1,288,119
    
    
    $
    1,173,012
 14




---



##### Table of Contents



Note 8  Employee Retirement Plans
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Service cost
    
    $
    1,072
    
    
    $
    990
    
    
    $
    3,217
    
    
    $
    2,970Interest cost
    
    
    707
    
    
    
    614
    
    
    
    2,120
    
    
    
    1,842Expected return on plan assets
    
    
    (627
    )
    
    
    (563
    )
    
    
    (1,880
    )
    
    
    (1,689
    )Amortization of transition obligation
    
    
    3
    
    
    
    2
    
    
    
    8
    
    
    
    6Amortization of prior service cost
    
    
    10
    
    
    
    9
    
    
    
    29
    
    
    
    27Amortization of actuarial loss
    
    
    155
    
    
    
    242
    
    
    
    467
    
    
    
    726Net periodic benefit cost
    
    $
    1,320
    
    
    $
    1,294
    
    
    $
    3,961
    
    
    $
    3,882
  Note 9  Earnings Per Share
  Three Months ended September 30, 2007Basic
    
    
    
    
    
    DilutedNet
    
    Preferred
    
    Earnings
    
    Effect of
    
    EarningsIncome (Loss)
    
    Dividends
    
    Per Share
    
    Stock Options
    
    Per Share(Dollars in thousands, except per share amounts)Net income (loss) available
to common shareholders:From Continuing Operations
    
    $
    (803
    )
    
    $
    (326
    )
    
    $
    (1,129
    )
    
    $
    (279
    )
    
    $
    (1,408
    )From Discontinued Operations
    
    
    (17,227
    )
    
    
    
    
    
    
    (17,227
    )
    
    
    
    
    
    
    (17,227
    )Total Net Loss for All Operations
    
    $
    (18,030
    )
    
    $
    (326
    )
    
    
    (18,356
    )
    
    
    (279
    )
    
    
    (18,635
    )Shares
    
    
    
    
    
    
    
    
    
    
    29,191
    
    
    
    1
    
    
    
    29,192Per-share from Continuing Operations
    
    
    
    
    
    
    
    
    
    $
    (0.04
    )
    
    $
    (0.01
    )
    
    $
    (0.05
    )Per-share amount for All Operations
    
    
    
    
    
    
    
    
    
    $
    (0.63
    )
    
    $
    (0.01
    )
    
    $
    (0.64
    )
 Three Months ended September 30, 2006Basic
    
    
    
    DilutedNet
    
    Preferred
    
    Earnings
    
    Effect of
    
    EarningsIncome (Loss)
    
    Dividends
    
    Per Share
    
    Stock Options
    
    Per Share(Dollars in thousands, except per share amounts)Net income (loss) available
to common shareholders:From Continuing Operations
    
    $
    9,095
    
    
    $
    
    
    
    $
    9,095
    
    
    $
    (79
    )
    
    $
    9,016From Discontinued Operations
    
    
    (13,302
    )
    
    
    
    
    
    
    (13,302
    )
    
    
    
    
    
    
    (13,302
    )Total Net Income for All Operations
    
    $
    (4,207
    )
    
    $
    
    
    
    
    (4,207
    )
    
    
    (79
    )
    
    
    (4,286
    )Shares
    
    
    
    
    
    
    
    
    
    
    29,716
    
    
    
    164
    
    
    
    29,880Per-share from Continuing Operations
    
    
    
    
    
    
    
    
    
    $
    0.31
    
    
    $
    (0.01
    )
    
    $
    0.30Per-share amount for All Operations
    
    
    
    
    
    
    
    
    
    $
    (0.14
    )
    
    $
    
    
    
    $
    (0.14
    )
 15




---



##### Table of Contents



Nine Months ended September 30, 2007Basic
    
    
    
    
    
    DilutedNet
    
    Preferred
    
    Earnings
    
    Effect of
    
    EarningsLoss
    
    Dividends
    
    Per Share
    
    Stock Options
    
    Per Share(Dollars in thousands, except per share amounts)Net loss available
to common shareholders:From Continuing Operations
    
    $
    (1,425
    )
    
    $
    (1,004
    )
    
    $
    (2,429
    )
    
    $
    (683
    )
    
    $
    (3,112
    )From Discontinued Operations
    
    
    (27,123
    )
    
    
    
    
    
    
    (27,123
    )
    
    
    
    
    
    
    (27,123
    )Total Net Loss for All Operations
    
    $
    (28,548
    )
    
    $
    (1,004
    )
    
    
    (29,552
    )
    
    
    (683
    )
    
    
    (30,235
    )Shares
    
    
    
    
    
    
    
    
    
    
    29,390
    
    
    
    20
    
    
    
    29,410Per-share from Continuing Operations
    
    
    
    
    
    
    
    
    
    $
    (0.08
    )
    
    $
    (0.03
    )
    
    $
    (0.11
    )Per-share amount for All Operations
    
    
    
    
    
    
    
    
    
    $
    (1.01
    )
    
    $
    (0.02
    )
    
    $
    (1.03
    )Nine Months ended September 30, 2006Net
    
    
    
    
    
    Basic
    
    
    
    
    
    DilutedIncome
    
    Preferred
    
    Earnings
    
    Effect of
    
    Earnings(Loss)
    
    Dividends
    
    Per Share
    
    Stock Options
    
    Per Share(Dollars in thousands, except per share amounts)Net income (loss) available
to common shareholders:From Continuing Operations
    
    $
    26,754
    
    
    $
    
    
    
    $
    26,754
    
    
    $
    (219
    )
    
    $
    26,535From Discontinued Operations
    
    
    (29,948
    )
    
    
    
    
    
    
    (29,948
    )
    
    
    
    
    
    
    (29,948
    )Total Net Income for All Operations
    
    $
    (3,194
    )
    
    $
    
    
    
    
    (3,194
    )
    
    
    (219
    )
    
    
    (3,413
    )Shares
    
    
    
    
    
    
    
    
    
    
    29,448
    
    
    
    183
    
    
    
    29,631Per-share from Continuing Operations
    
    
    
    
    
    
    
    
    
    $
    0.91
    
    
    $
    (0.01
    )
    
    $
    0.90Per-share amount for All Operations
    
    
    
    
    
    
    
    
    
    $
    (0.11
    )
    
    $
    (0.01
    )
    
    $
    (0.12
    )
  Note 10  Industry Segment Information
    16




---



##### Table of Contents



ConsolidatedCommercial
    
    Commercial
    
    Home Equity
    
    
    
    
    
    Continuing
    
    DiscontinuedBanking
    
    Finance
    
    Lending
    
    Other
    
    Operations
    
    Operations
    
    Consolidated(Dollars in thousands)For the Three Months
Ended September 30, 2007Net interest income
    
    $
    27,818
    
    
    $
    20,919
    
    
    $
    5,747
    
    
    $
    (17,831
    )
    
    $
    36,653
    
    
    $
    (550
    )
    
    $
    36,103Intersegment interest
    
    
    (929
    )
    
    
    (10,521
    )
    
    
    (4,875
    )
    
    
    16,325
    
    
    
    
    
    
    
    
    
    
    
    Other revenues
    
    
    4,099
    
    
    
    3,480
    
    
    
    2,150
    
    
    
    (2,697
    )
    
    
    7,032
    
    
    
    (4,577
    )
    
    
    2,455Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    1,058
    
    
    
    (1,058
    )
    
    
    
    
    
    
    
    
    
    
    Total net revenues
    
    
    30,988
    
    
    
    13,878
    
    
    
    4,080
    
    
    
    (5,261
    )
    
    
    43,685
    
    
    
    (5,127
    )
    
    
    38,558Other expense
    
    
    22,650
    
    
    
    7,199
    
    
    
    16,968
    
    
    
    (472
    )
    
    
    46,345
    
    
    
    23,640
    
    
    
    69,985Intersegment expenses
    
    
    932
    
    
    
    400
    
    
    
    670
    
    
    
    (2,002
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) before taxes
    
    
    7,406
    
    
    
    6,279
    
    
    
    (13,558
    )
    
    
    (2,787
    )
    
    
    (2,660
    )
    
    
    (28,767
    )
    
    
    (31,427
    )Income taxes
    
    
    2,697
    
    
    
    2,471
    
    
    
    (5,420
    )
    
    
    (1,605
    )
    
    
    (1,857
    )
    
    
    (11,540
    )
    
    
    (13,397
    )Net income (loss)
    
    $
    4,709
    
    
    $
    3,808
    
    
    $
    (8,138
    )
    
    $
    (1,182
    )
    
    $
    (803
    )
    
    $
    (17,227
    )
    
    $
    (18,030
    )For the Three Months
Ended September 30, 2006Net interest income
    
    $
    29,652
    
    
    $
    16,759
    
    
    $
    26,935
    
    
    $
    (17,184
    )
    
    $
    56,162
    
    
    $
    5,856
    
    
    $
    62,018Intersegment interest
    
    
    618
    
    
    
    (7,955
    )
    
    
    (7,574
    )
    
    
    14,911
    
    
    
    
    
    
    
    
    
    
    
    Other revenue
    
    
    4,691
    
    
    
    2,536
    
    
    
    (820
    )
    
    
    940
    
    
    
    7,347
    
    
    
    901
    
    
    
    8,248Total net revenues
    
    
    34,961
    
    
    
    11,340
    
    
    
    18,541
    
    
    
    (1,333
    )
    
    
    63,509
    
    
    
    6,757
    
    
    
    70,266Other expense
    
    
    22,418
    
    
    
    5,783
    
    
    
    18,198
    
    
    
    4,465
    
    
    
    50,864
    
    
    
    28,943
    
    
    
    79,807Intersegment expenses
    
    
    691
    
    
    
    286
    
    
    
    812
    
    
    
    (1,789
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) before taxes
    
    
    11,852
    
    
    
    5,271
    
    
    
    (469
    )
    
    
    (4,009
    )
    
    
    12,645
    
    
    
    (22,186
    )
    
    
    (9,541
    )Income taxes
    
    
    3,594
    
    
    
    1,997
    
    
    
    (177
    )
    
    
    (1,864
    )
    
    
    3,550
    
    
    
    (8,884
    )
    
    
    (5,334
    )Net income (loss)
    
    $
    8,258
    
    
    $
    3,274
    
    
    $
    (292
    )
    
    $
    (2,145
    )
    
    $
    9,095
    
    
    $
    (13,302
    )
    
    $
    (4,207
    )
 17




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##### Table of Contents



ConsolidatedCommercial
    
    Commercial
    
    Home Equity
    
    
    
    
    
    Continuing
    
    DiscontinuedBanking
    
    Finance
    
    Lending
    
    Other
    
    Operations
    
    Operations
    
    Consolidated(Dollars in thousands)For the Nine Months Ended
September 30, 2007Net interest income
    
    $
    82,010
    
    
    $
    57,695
    
    
    $
    37,448
    
    
    $
    (51,191
    )
    
    $
    125,962
    
    
    $
    (1,766
    )
    
    $
    124,196Intersegment interest
    
    
    (1,084
    )
    
    
    (28,898
    )
    
    
    (18,228
    )
    
    
    48,210
    
    
    
    
    
    
    
    
    
    
    
    Other revenue
    
    
    12,234
    
    
    
    9,218
    
    
    
    (851
    )
    
    
    (4,802
    )
    
    
    15,799
    
    
    
    (12,037
    )
    
    
    3,762Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    2,024
    
    
    
    (2,024
    )
    
    
    
    
    
    
    
    
    
    
    Total net revenues
    
    
    93,160
    
    
    
    38,015
    
    
    
    20,393
    
    
    
    (9,807
    )
    
    
    141,761
    
    
    
    (13,803
    )
    
    
    127,958Other expense
    
    
    68,097
    
    
    
    21,458
    
    
    
    52,121
    
    
    
    4,017
    
    
    
    145,693
    
    
    
    31,570
    
    
    
    177,263Intersegment expenses
    
    
    2,700
    
    
    
    1,209
    
    
    
    1,966
    
    
    
    (5,875
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) before taxes
    
    
    22,363
    
    
    
    15,348
    
    
    
    (33,694
    )
    
    
    (7,949
    )
    
    
    (3,932
    )
    
    
    (45,373
    )
    
    
    (49,305
    )Income taxes
    
    
    8,149
    
    
    
    6,013
    
    
    
    (13,456
    )
    
    
    (3,213
    )
    
    
    (2,507
    )
    
    
    (18,250
    )
    
    
    (20,757
    )Net income (loss)
    
    $
    14,214
    
    
    $
    9,335
    
    
    $
    (20,238
    )
    
    $
    (4,736
    )
    
    $
    (1,425
    )
    
    $
    (27,123
    )
    
    $
    (28,548
    )Assets at September 30, 2007
    
    $
    3,131,124
    
    
    $
    1,251,874
    
    
    $
    1,561,817
    
    
    $
    217,033
    
    
    
    
    
    
    
    
    
    
    $
    6,161,848For the Nine Months Ended
September 30, 2006Net interest income
    
    $
    82,916
    
    
    $
    46,541
    
    
    $
    83,374
    
    
    $
    (47,239
    )
    
    $
    165,592
    
    
    $
    20,236
    
    
    $
    185,828Intersegment interest
    
    
    5,814
    
    
    
    (20,886
    )
    
    
    (27,678
    )
    
    
    42,750
    
    
    
    
    
    
    
    
    
    
    
    Other revenue
    
    
    13,553
    
    
    
    6,684
    
    
    
    10,149
    
    
    
    3
    
    
    
    30,389
    
    
    
    16,035
    
    
    
    46,424Total net revenues
    
    
    102,283
    
    
    
    32,339
    
    
    
    65,845
    
    
    
    (4,486
    )
    
    
    195,981
    
    
    
    36,271
    
    
    
    232,252Other expense
    
    
    64,104
    
    
    
    16,877
    
    
    
    62,683
    
    
    
    11,308
    
    
    
    154,972
    
    
    
    86,183
    
    
    
    241,155Intersegment expenses
    
    
    2,062
    
    
    
    840
    
    
    
    2,519
    
    
    
    (5,421
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) before taxes
    
    
    36,117
    
    
    
    14,622
    
    
    
    643
    
    
    
    (10,373
    )
    
    
    41,009
    
    
    
    (49,912
    )
    
    
    (8,903
    )Income taxes
    
    
    13,245
    
    
    
    5,525
    
    
    
    283
    
    
    
    (4,798
    )
    
    
    14,255
    
    
    
    (19,964
    )
    
    
    (5,709
    )Net income (loss)
    
    $
    22,872
    
    
    $
    9,097
    
    
    $
    360
    
    
    $
    (5,575
    )
    
    $
    26,754
    
    
    $
    (29,948
    )
    
    $
    (3,194
    )Assets at September 30, 2006
    
    $
    3,058,334
    
    
    $
    1,012,502
    
    
    $
    1,536,519
    
    
    $
    389,140
    
    
    
    
    
    
    
    
    
    
    $
    5,996,495
 Note 11  Commitments and Contingencies
 Culpepper v. Inland Mortgage Corporation
  Silke v. Irwin Mortgage Corporation
 Charter One Mortgage Corporation v. Condra, Charter One
 18




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##### Table of Contents



Silke
 Cohens v. Inland Mortgage Corporation
  Litigation in Connection with Loans Purchased from Community Bank of Northern Virginia
  Hobson v. Irwin Union Bank and Trust Company Hobson Hobson Hobson
 Kossler v. Community Bank of Northern Virginia Kossler Kossler Kossler
 Hobson Kossler Hobson Hobson
 Hobson Kossler Hobson Hobson Kossler
 (Chatfield v. Irwin Union Bank and Trust Company, et al. Ransom v. Irwin
Union Bank and Trust Company, et al.)
 19




---



##### Table of Contents



Hobson,
Chatfield Ransom.
 Hobson, Chatfield Ransom Kossler Kessler v. RFC, et al Kessler Kessler Kessler Kessler Kessler Amicus Curiae Kessler Kessler
 Putkowski v. Irwin Home Equity Corporation and Irwin Union Bank and Trust Company
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 About Forward-looking Statements
   
    
    our projected revenues, earnings or earnings per share, as well as managements
short-term and long-term performance goals;
 20




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##### Table of Contents




    
    projected trends or potential changes in asset quality (particularly with regard to loans
or other exposures including loan repurchase risk, in sectors in which we deal in real
estate or residential mortgage lending), loan delinquencies, charge-offs, reserves, asset
valuations, capital ratios or financial performance measures;
    
    our plans and strategies, including the expected results or costs and impact of
implementing or changing such plans and strategies;
    
    potential litigation developments and the anticipated impact of potential outcomes of
pending legal matters;
    
    predictions about conditions in the mortgage markets or mortgage industry;
    
    the anticipated effects on results of operations or financial condition from recent
developments or events; and
    
    any other projections or expressions that are not historical facts.
   
    
    potential deterioration of general economic conditions, particularly in sectors relating
to real estate and/or mortgage lending or small business-based manufacturing;
    
    potential changes in direction, volatility and relative movement (basis risk) of interest
rates, which may affect consumer demand for our products and the management and success of
our interest rate risk management strategies;
    
    competition from other financial service providers for experienced managers as well as
for customers;
    
    staffing fluctuations in response to product demand or the implementation of corporate
strategies that affect our work force;
    
    the relative profitability of our lending operations;
    
    the valuation and management of our portfolios, including the use of external and
internal modeling assumptions we embed in the valuation of those portfolios and short-term
swings in the valuation of such portfolios;
    
    borrowers refinancing opportunities, which may affect the prepayment assumptions used in
our valuation estimates and which may affect loan demand;
    
    unanticipated deterioration in the credit quality or collectibility of our loan and lease
assets, including deterioration resulting from the effects of natural disasters;
    
    difficulties in accurately estimating the future repurchase risk of residential mortgage
loans due to alleged violations of representations and warranties we made when selling the
loans to the secondary market;
    
    unanticipated deterioration or changes in estimates of the carrying value of our other
assets, including securities;
    
    difficulties in delivering products to the secondary market as planned;
    
    difficulties in expanding our businesses and obtaining funding sources as needed;
    
    changes in the value of our lines of business, subsidiaries, or companies in which we
invest;
    
    changes in variable compensation plans related to the performance and valuation of lines
of business where we tie compensation systems to line-of-business performance;
 21




---



##### Table of Contents




    
    unanticipated outcomes in litigation;
    
    legislative or regulatory changes, including changes in laws, rules or regulations that
affect tax, consumer or commercial lending, corporate governance and disclosure
requirements, and other laws, rules or regulations affecting the rights and responsibilities
of our Corporation, bank or thrift;
    
    regulatory actions that impact our Corporation, bank or thrift, including the memorandum
of understanding entered into as of March 1, 2007 between Irwin Union Bank and Trust and the
Federal Reserve Bank of Chicago;
    
    changes in the interpretation of regulatory capital or other rules;
    
    the availability of resources to address changes in laws, rules or regulations or to
respond to regulatory actions;
    
    changes in applicable accounting policies or principles or their application to our
business or final audit adjustments, including additional guidance and interpretation on
accounting issues and details of the implementation of new accounting methods;
    
    the final disposition of our remaining assets and obligations of our discontinued
mortgage banking segment; or
    
    governmental changes in monetary or fiscal policies.
  Strategy
   Identify market niches..
 Attract, develop and retain exceptional management with niche expertise.
 Diversify capital and earnings risk.
 22




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##### Table of Contents



Focus on organic growth.
 Identify opportunities for coordination and efficiencies across the Bank.
 Create and maintain risk management systems appropriate to our size, scale and scope.
  Critical Accounting Policies
  23




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##### Table of Contents



Consolidated Overview
  For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Net income (loss) from continuing operations (in thousands)
    
    $
    (803
    )
    
    $
    9,095
    
    
    $
    (1,425
    )
    
    $
    26,754Net loss including discontinued operations (in thousands)
    
    
    (18,030
    )
    
    
    (4,207
    )
    
    
    (28,548
    )
    
    
    (3,194
    )Basic earnings per share from continuing operations
    
    
    (0.04
    )
    
    
    0.31
    
    
    
    (0.08
    )
    
    
    0.91Basic earnings per share including discontinued operations
    
    
    (0.63
    )
    
    
    (0.14
    )
    
    
    (1.01
    )
    
    
    (0.11
    )Diluted earnings per share from continuing operations
    
    
    (0.05
    )
    
    
    0.30
    
    
    
    (0.11
    )
    
    
    0.90Diluted earnings per share including discontinued operations
    
    
    (0.64
    )
    
    
    (0.14
    )
    
    
    (1.03
    )
    
    
    (0.12
    )Return on average equity from continuing operations
    
    
    (0.6
    )%
    
    
    6.7
    %
    
    
    (0.4
    )%
    
    
    6.7
    %Return on average assets from continuing operations
    
    
    (0.1
    )%
    
    
    0.6
    %
    
    
    0.0
    %
    
    
    0.5
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.53
    %
    
    
    4.67
    %
 Consolidated Income Statement Analysis
 Net Income from Continuing Operations
   Net Interest Income from Continuing Operations
  24




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##### Table of Contents



For the Nine Months Ended September 30,2007
    
    
    
    
    
    
    
    
    
    
    2006Annualized
    
    
    
    
    
    
    
    
    
    
    AnnualizedAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)AssetsInterest-earning assets:Interest-bearing deposits withfinancial institutions
    
    $
    52,648
    
    
    $
    2,093
    
    
    
    5.32
    %
    
    $
    73,841
    
    
    $
    2,089
    
    
    
    3.78
    %Federal funds sold
    
    
    19,667
    
    
    
    602
    
    
    
    4.09
    %
    
    
    4,600
    
    
    
    137
    
    
    
    3.98
    %Residual interests
    
    
    10,196
    
    
    
    817
    
    
    
    10.71
    %
    
    
    14,408
    
    
    
    1,409
    
    
    
    13.07
    %Investment securities
    
    
    137,989
    
    
    
    5,664
    
    
    
    5.49
    %
    
    
    112,582
    
    
    
    4,040
    
    
    
    4.80
    %Loans held for sale
    
    
    124,528
    
    
    
    6,677
    
    
    
    7.17
    %
    
    
    1,059,537
    
    
    
    67,610
    
    
    
    8.53
    %Loans and leases, net of unearned
income(1)
    
    
    5,426,759
    
    
    
    371,502
    
    
    
    9.15
    %
    
    
    4,776,255
    
    
    
    318,088
    
    
    
    8.90
    %Total interest earning assets
    
    
    5,771,787
    
    
    $
    387,355
    
    
    
    8.97
    %
    
    
    6,041,223
    
    
    $
    393,373
    
    
    
    8.71
    %Noninterest-earning assets:Cash and due from banks
    
    
    72,880
    
    
    
    
    
    
    
    
    
    
    
    109,991Premises and equipment, net
    
    
    39,092
    
    
    
    
    
    
    
    
    
    
    
    33,293Other assets
    
    
    296,246
    
    
    
    
    
    
    
    
    
    
    
    518,659Less allowance for loan and lease
losses
    
    
    (87,384
    )
    
    
    
    
    
    
    
    
    
    
    (65,865
    )Total assets
    
    $
    6,092,621
    
    
    
    
    
    
    
    
    
    
    $
    6,637,301Liabilities and Shareholders EquityInterest-bearing liabilities:Money market checking
    
    $
    283,746
    
    
    $
    4,890
    
    
    
    2.30
    %
    
    $
    376,826
    
    
    $
    6,772
    
    
    
    2.40
    %Money market savings
    
    
    1,160,416
    
    
    
    38,954
    
    
    
    4.49
    %
    
    
    1,174,114
    
    
    
    35,936
    
    
    
    4.09
    %Regular savings
    
    
    124,113
    
    
    
    2,064
    
    
    
    2.22
    %
    
    
    133,501
    
    
    
    1,799
    
    
    
    1.80
    %Time deposits
    
    
    1,497,477
    
    
    
    57,270
    
    
    
    5.11
    %
    
    
    1,585,335
    
    
    
    54,115
    
    
    
    4.56
    %Short-term borrowings
    
    
    621,873
    
    
    
    24,329
    
    
    
    5.23
    %
    
    
    619,367
    
    
    
    29,564
    
    
    
    6.38
    %Collateralized debt
    
    
    1,223,586
    
    
    
    51,491
    
    
    
    5.63
    %
    
    
    941,966
    
    
    
    37,013
    
    
    
    5.25
    %Other long-term debt
    
    
    233,930
    
    
    
    13,005
    
    
    
    7.43
    %
    
    
    250,866
    
    
    
    17,164
    
    
    
    9.15
    %Total interest-bearing liabilities
    
    $
    5,145,141
    
    
    $
    192,003
    
    
    
    4.99
    %
    
    $
    5,081,975
    
    
    $
    182,363
    
    
    
    4.80
    %Noninterest-bearing liabilities:Demand deposits
    
    
    334,639
    
    
    
    
    
    
    
    
    
    
    
    767,614Other liabilities
    
    
    98,946
    
    
    
    
    
    
    
    
    
    
    
    256,579Shareholders equity
    
    
    513,895
    
    
    
    
    
    
    
    
    
    
    
    531,133Total liabilities and shareholders
equity
    
    $
    6,092,621
    
    
    
    
    
    
    
    
    
    
    $
    6,637,301Net interest income
    
    
    
    
    
    $
    195,352
    
    
    
    
    
    
    
    
    
    
    $
    211,010Net interest income to average
interest earning assets
    
    
    
    
    
    
    
    
    
    
    4.53
    %
    
    
    
    
    
    
    
    
    
    
    4.67
    %Less: Net interest income from discontinued operations
    
    
    
    
    
    
    (1,765
    )
    
    
    
    
    
    
    
    
    
    
    20,264Net interest income from continuing operations
    
    
    
    
    
    $
    197,117
    
    
    
    
    
    
    
    
    
    
    $
    190,746
 
 (1)
    
    For purposes of these computations, nonaccrual loans are included in daily average loan
amounts outstanding. 25




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##### Table of Contents



Provision for Loan and Lease Losses from Continuing Operations
  Noninterest Income from Continuing Operations
  Noninterest Expense from Continuing Operations
  Income Tax Provision from Continuing Operations
  Consolidated Balance Sheet Analysis
  Investment Securities
  September 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)U.S. Treasury and government obligations
    
    $
    13,549
    
    
    $
    13,730Obligations of states and political subdivisions
    
    
    3,436
    
    
    
    3,545Mortgage-backed securities
    
    
    47,398
    
    
    
    45,187Other
    
    
    77,407
    
    
    
    65,968Total
    
    $
    141,790
    
    
    $
    128,430
 26




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##### Table of Contents



Loans Held For Sale
  Loans and Leases
  September 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Commercial, financial and agricultural
    
    $
    2,290,394
    
    
    $
    2,249,988Residential real estate-construction
    
    
    381,462
    
    
    
    377,601Residential real estate-mortgage
    
    
    1,737,437
    
    
    
    1,522,616Consumer
    
    
    33,085
    
    
    
    31,581Commercial financingFranchise financing
    
    
    838,317
    
    
    
    699,969Domestic leasing
    
    
    307,958
    
    
    
    296,056Canadian leasing
    
    
    459,798
    
    
    
    358,783Unearned incomeFranchise financing
    
    
    (270,814
    )
    
    
    (211,480
    )Domestic leasing
    
    
    (43,693
    )
    
    
    (42,782
    )Canadian leasing
    
    
    (57,254
    )
    
    
    (44,139
    )Total
    
    $
    5,676,690
    
    
    $
    5,238,193Allowance for Loans and Lease LossesChanges in the allowance for loan and lease losses are summarized below:September 30, 2007
    
    December 31, 2006And the Nine Months
    
    And the YearThen Ended
    
    Then Ended(Dollars in thousands)Balance at beginning of year
    
    $
    74,468
    
    
    $
    59,223Provision for loan and lease losses
    
    
    71,155
    
    
    
    35,101Charge-offs
    
    
    (48,619
    )
    
    
    (30,810
    )Recoveries
    
    
    7,881
    
    
    
    11,208Reduction due to reclassification or sale of loans
    
    
    (1,006
    )
    
    
    (246
    )Foreign currency adjustment
    
    
    564
    
    
    
    (8
    )Balance at end of period
    
    $
    104,443
    
    
    $
    74,468
 Deposits
  27




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##### Table of Contents



Short-Term Borrowings
   Collateralized and Other Long-Term Debt
   Capital
  28




---



##### Table of Contents



September 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)Tier 1 capital
    
    $
    657,218
    
    
    $
    712,403Tier 2 capital
    
    
    141,246
    
    
    
    125,351Total risk-based capital
    
    $
    798,464
    
    
    $
    837,754Risk-weighted assets
    
    $
    6,174,811
    
    
    $
    6,258,927Risk-based ratios:Tier 1 capital
    
    
    10.6
    %
    
    
    11.4
    %Total capital
    
    
    12.9
    
    
    
    13.4Tier 1 leverage ratio
    
    
    10.8
    
    
    
    11.5Ending shareholders equity to assets
    
    
    7.9
    
    
    
    8.5Average shareholders equity to assets
    
    
    8.4
    
    
    
    8.1
   Cash Flow Analysis
  Earnings Outlook
    29




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##### Table of Contents



30




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##### Table of Contents



Earnings by Line of Business
  
    
    Commercial Banking
    
    Commercial Finance
    
    Home Equity Lending
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Net income (loss):Commercial Banking
    
    $
    4,709
    
    
    $
    8,258
    
    
    $
    14,214
    
    
    $
    22,872Commercial Finance
    
    
    3,808
    
    
    
    3,274
    
    
    
    9,335
    
    
    
    9,097Home Equity Lending
    
    
    (8,138
    )
    
    
    (292
    )
    
    
    (20,238
    )
    
    
    360Other (including consolidating entries)
    
    
    (1,182
    )
    
    
    (2,145
    )
    
    
    (4,736
    )
    
    
    (5,575
    )Net income (loss) from continuing
operations
    
    
    (803
    )
    
    
    9,095
    
    
    
    (1,425
    )
    
    
    26,754Discontinued operations
    
    
    (17,227
    )
    
    
    (13,302
    )
    
    
    (27,123
    )
    
    
    (29,948
    )Net (loss) income
    
    $
    (18,030
    )
    
    $
    (4,207
    )
    
    $
    (28,548
    )
    
    $
    (3,194
    )
 31




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##### Table of Contents



Commercial Banking
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Selected Income Statement Data:Interest income
    
    $
    58,729
    
    
    $
    58,445
    
    
    $
    175,984
    
    
    $
    170,513Interest expense
    
    
    (28,740
    )
    
    
    (26,507
    )
    
    
    (86,517
    )
    
    
    (77,302
    )Net interest income
    
    
    29,989
    
    
    
    31,938
    
    
    
    89,467
    
    
    
    93,211Provision for loan and lease losses
    
    
    (3,100
    )
    
    
    (1,668
    )
    
    
    (8,541
    )
    
    
    (4,481
    )Noninterest income
    
    
    4,099
    
    
    
    4,691
    
    
    
    12,234
    
    
    
    13,553Total net revenue
    
    
    30,988
    
    
    
    34,961
    
    
    
    93,160
    
    
    
    102,283Operating expense
    
    
    (23,582
    )
    
    
    (23,109
    )
    
    
    (70,797
    )
    
    
    (66,166
    )Income before taxes
    
    
    7,406
    
    
    
    11,852
    
    
    
    22,363
    
    
    
    36,117Income taxes
    
    
    (2,697
    )
    
    
    (3,594
    )
    
    
    (8,149
    )
    
    
    (13,245
    )Net income
    
    $
    4,709
    
    
    $
    8,258
    
    
    $
    14,214
    
    
    $
    22,872Performance Ratios:Return on Average Equity
    
    
    8.05
    %
    
    
    14.76
    %
    
    
    8.14
    %
    
    
    14.38
    %
 September 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Selected Balance Sheet Data at End of Period:Assets
    
    $
    3,131,124
    
    
    $
    3,103,547Securities and short-term investments
    
    
    63,696
    
    
    
    55,116Loans and leases
    
    
    2,941,207
    
    
    
    2,901,029Allowance for loan and lease losses
    
    
    (27,457
    )
    
    
    (27,113
    )Interest-bearing deposits
    
    
    2,390,799
    
    
    
    2,270,946Non-interest bearing deposits
    
    
    385,116
    
    
    
    364,434Shareholders equity
    
    
    234,331
    
    
    
    241,556Daily Averages:Assets
    
    $
    3,137,263
    
    
    $
    3,143,439Loans and leases
    
    
    2,895,985
    
    
    
    2,797,853Allowance for loan and lease losses
    
    
    (26,761
    )
    
    
    (26,175
    )Deposits
    
    
    2,759,638
    
    
    
    2,826,446Shareholders equity
    
    
    233,439
    
    
    
    218,076Shareholders equity to assets
    
    
    0.00
    %
    
    
    6.95
    %Selected Operating Data:Delinquency ratio
    
    
    0.41
    %
    
    
    0.13
    %
 Overview
  32




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##### Table of Contents



September 30, 2007
    
    December 31, 2006Weighted
    
    
    
    
    
    
    
    
    
    WeightedLoans
    
    Percent
    
    Average
    
    Loans
    
    Percent
    
    AverageMarkets
    
    Outstanding
    
    of Total
    
    Coupon
    
    Outstanding
    
    of Total
    
    Coupon(Dollars in thousands)Indianapolis
    
    $
    536,525
    
    
    
    18.2
    %
    
    
    7.4
    %
    
    $
    561,343
    
    
    
    19.3
    %
    
    
    7.6
    %Western and Central Michigan
    
    
    475,341
    
    
    
    16.2
    
    
    
    7.4
    
    
    
    519,348
    
    
    
    17.9
    
    
    
    7.7Phoenix
    
    
    470,766
    
    
    
    16.0
    
    
    
    7.4
    
    
    
    452,919
    
    
    
    15.6
    
    
    
    7.9Southern Indiana
    
    
    461,845
    
    
    
    15.7
    
    
    
    7.1
    
    
    
    475,051
    
    
    
    16.4
    
    
    
    7.2Las Vegas
    
    
    186,587
    
    
    
    6.3
    
    
    
    7.9
    
    
    
    154,218
    
    
    
    5.3
    
    
    
    8.1Other
    
    
    810,143
    
    
    
    27.6
    
    
    
    7.5
    
    
    
    738,150
    
    
    
    25.5
    
    
    
    7.9Total
    
    $
    2,941,207
    
    
    
    100.0
    %
    
    
    7.4
    %
    
    $
    2,901,029
    
    
    
    100.0
    %
    
    
    7.7
    %
 Weighted
    
    
    
    
    
    
    
    
    
    WeightedCore
    
    Percent
    
    Average
    
    Core
    
    Percent
    
    AverageDeposits
    
    of Total
    
    Coupon
    
    Deposits
    
    of Total
    
    CouponIndianapolis
    
    $
    283,969
    
    
    
    11.7
    %
    
    
    2.6
    %
    
    $
    259,835
    
    
    
    10.8
    %
    
    
    2.4
    %Western and Central Michigan
    
    
    205,602
    
    
    
    8.5
    
    
    
    3.3
    
    
    
    231,666
    
    
    
    9.7
    
    
    
    3.4Phoenix
    
    
    237,583
    
    
    
    9.8
    
    
    
    3.6
    
    
    
    179,502
    
    
    
    7.5
    
    
    
    3.4Southern Indiana
    
    
    739,561
    
    
    
    30.5
    
    
    
    2.8
    
    
    
    630,060
    
    
    
    26.3
    
    
    
    2.8Las Vegas
    
    
    443,733
    
    
    
    18.3
    
    
    
    4.1
    
    
    
    467,708
    
    
    
    19.5
    
    
    
    4.1Other
    
    
    517,855
    
    
    
    21.2
    
    
    
    3.2
    
    
    
    631,268
    
    
    
    26.2
    
    
    
    3.5Total
    
    $
    2,428,303
    
    
    
    100.0
    %
    
    
    3.2
    %
    
    $
    2,400,039
    
    
    
    100.0
    %
    
    
    3.3
    %
 Net Income
  Net Interest Income
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Net interest income
    
    $
    29,989
    
    
    $
    31,938
    
    
    $
    89,467
    
    
    $
    93,211Average interest earning assets
    
    
    2,997,178
    
    
    
    2,964,055
    
    
    
    3,035,892
    
    
    
    3,055,665Net interest margin
    
    
    3.97
    %
    
    
    4.27
    %
    
    
    3.94
    %
    
    
    4.08
    %
  33




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##### Table of Contents



Provision for Loan and Lease Losses
  Noninterest Income
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Trust fees
    
    $
    566
    
    
    $
    478
    
    
    $
    1,680
    
    
    $
    1,456Service charges on deposit accounts
    
    
    1,019
    
    
    
    1,086
    
    
    
    2,814
    
    
    
    3,146Insurance
commissions, fees and premiums
    
    
    405
    
    
    
    368
    
    
    
    1,426
    
    
    
    1,527Gain from sales of loans
    
    
    457
    
    
    
    822
    
    
    
    1,474
    
    
    
    1,834Loan servicing fees
    
    
    351
    
    
    
    377
    
    
    
    1,100
    
    
    
    1,141Amortization
& impairment of servicing assets
    
    
    (268
    )
    
    
    (303
    )
    
    
    (836
    )
    
    
    (838
    )Brokerage fees
    
    
    468
    
    
    
    329
    
    
    
    1,219
    
    
    
    989Other
    
    
    1,101
    
    
    
    1,534
    
    
    
    3,357
    
    
    
    4,298Total noninterest income
    
    $
    4,099
    
    
    $
    4,691
    
    
    $
    12,234
    
    
    $
    13,553Noninterest income during the three and nine months ended September 30, 2007 decreased 13% and
10%, respectively, over the same periods in 2006. This decline relates primarily to lower gains on
sales of loans, lower service charges on deposit accounts and to a loss on sale of other real
estate owned (OREO) during 2007.Operating ExpensesThe following table shows the components of operating expenses for our commercial banking line
of business:Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Salaries and employee benefits
    
    $
    13,048
    
    
    $
    13,806
    
    
    $
    40,318
    
    
    $
    40,573Other expenses
    
    
    10,534
    
    
    
    9,303
    
    
    
    30,479
    
    
    
    25,593Total operating expenses
    
    $
    23,582
    
    
    $
    23,109
    
    
    $
    70,797
    
    
    $
    66,166Efficiency ratio
    
    
    69.2
    %
    
    
    63.1
    %
    
    
    69.6
    %
    
    
    62.0
    %Number of employees at period end(1)
    
    
    
    
    
    
    
    
    
    
    593
    
    
    
    577
 
 (1)
    
    On a full time equivalent basis.  34




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##### Table of Contents



Balance Sheet
  Credit Quality
   September 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)Nonperforming loans
    
    $
    20,596
    
    
    $
    14,455Other real estate owned
    
    
    8,512
    
    
    
    4,423Total nonperforming assets
    
    $
    29,108
    
    
    $
    18,878Nonperforming assets to total
assets
    
    
    0.93
    %
    
    
    0.61
    %Allowance for loan losses
    
    $
    27,457
    
    
    $
    27,113Allowance for loan losses to
total loans
    
    
    0.93
    %
    
    
    0.93
    %
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Provision for loan losses
    
    $
    3,100
    
    
    $
    1,668
    
    
    $
    8,541
    
    
    $
    4,481Net charge-offs
    
    
    2,118
    
    
    
    1,315
    
    
    
    8,197
    
    
    
    2,621Net charge-offs to average loans
    
    
    0.29
    %
    
    
    0.19
    %
    
    
    0.38
    %
    
    
    0.13
    %
  September 30,
    
    December 31,Markets
    
    2007
    
    2006Indianapolis
    
    
    0.55
    %
    
    
    0.24
    %Western and Central Michigan
    
    
    2.85
    %
    
    
    2.72
    %Southern Indiana
    
    
    0.16
    %
    
    
    0.14
    %Phoenix
    
    
    0.44
    %
    
    
    0.52
    %Las Vegas
    
    
    0.01
    %
    
    
    0.00
    %Other
    
    
    1.21
    %
    
    
    0.06
    %Total
    
    
    0.99
    %
    
    
    0.65
    %
 35




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##### Table of Contents



Commercial Finance
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    13,258
    
    
    $
    10,417
    
    
    $
    38,189
    
    
    $
    30,217Provision for loan and lease losses
    
    
    (2,860
    )
    
    
    (1,613
    )
    
    
    (9,392
    )
    
    
    (4,562
    )Noninterest income
    
    
    3,480
    
    
    
    2,536
    
    
    
    9,218
    
    
    
    6,684Total net revenue
    
    
    13,878
    
    
    
    11,340
    
    
    
    38,015
    
    
    
    32,339Operating expense
    
    
    (7,599
    )
    
    
    (6,069
    )
    
    
    (22,667
    )
    
    
    (17,717
    )Income before taxes
    
    
    6,279
    
    
    
    5,271
    
    
    
    15,348
    
    
    
    14,622Income taxes
    
    
    (2,471
    )
    
    
    (1,997
    )
    
    
    (6,013
    )
    
    
    (5,525
    )Net income
    
    $
    3,808
    
    
    $
    3,274
    
    
    $
    9,335
    
    
    $
    9,097Selected Operating Data:Net charge-offs
    
    $
    1,651
    
    
    $
    1,211
    
    
    $
    5,686
    
    
    $
    2,826Net interest margin
    
    
    4.44
    %
    
    
    4.27
    %
    
    
    4.59
    %
    
    
    4.47
    %Total funding of loans and leases
    
    $
    185,478
    
    
    $
    147,056
    
    
    $
    488,831
    
    
    $
    431,537Return on average equity
    
    
    13.70
    %
    
    
    18.02
    %
    
    
    12.14
    %
    
    
    17.75
    %
 September 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Selected Balance Sheet Data at End of Period:Total assets
    
    $
    1,251,874
    
    
    $
    1,073,552Loans and leases
    
    
    1,234,312
    
    
    
    1,056,406Allowance for loan and lease losses
    
    
    (16,790
    )
    
    
    (13,525
    )Shareholders equity
    
    
    115,728
    
    
    
    88,587
 Overview
   36




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##### Table of Contents



Portfolio Characteristics
  September 30,
    
    
    December 31,2007
    
    
    2006United StatesCalifornia
    
    
    11.7
    %
    
    
    12.4
    %Texas
    
    
    7.5
    
    
    
    5.9New York
    
    
    4.1
    
    
    
    5.0New Jersey
    
    
    4.1
    
    
    
    3.5All other states
    
    
    40.0
    
    
    
    43.3Total United States
    
    
    67.4
    %
    
    
    70.1
    %Canada(1)Ontario
    
    
    8.2
    %
    
    
    7.3
    %British Columbia
    
    
    7.5
    
    
    
    7.0Quebec
    
    
    7.4
    
    
    
    7.1Alberta
    
    
    6.6
    
    
    
    5.8All other provinces
    
    
    2.9
    
    
    
    2.6Total Canada
    
    
    32.6
    %
    
    
    29.9
    %Total
    
    
    100.0
    %
    
    
    100.0
    %Total Portfolio
    
    $
    1,234,312
    
    
    $
    1,056,406
 
 (1)
    
    In U.S. dollars  September 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)Domestic franchise loans
    
    $
    567,503
    
    
    $
    488,489Weighted average coupon
    
    
    9.34
    %
    
    
    8.79
    %Delinquency ratio
    
    
    0.30
    
    
    
    0.16Domestic leases
    
    $
    264,265
    
    
    $
    253,274Weighted average coupon
    
    
    10.83
    %
    
    
    10.32
    %Delinquency ratio
    
    
    2.30
    
    
    
    1.72Canadian leases (1)
    
    $
    402,544
    
    
    $
    314,644Weighted average coupon
    
    
    9.16
    %
    
    
    9.13
    %Delinquency ratio
    
    
    0.45
    
    
    
    0.36
 
 (1)
    
    In U.S. dollars. Net Income
  37




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##### Table of Contents



Net Interest Income
  Three Months September 30,
    
    
    Nine Months September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Net interest income
    
    $
    13,258
    
    
    $
    10,417
    
    
    $
    38,189
    
    
    $
    30,217Average interest earning assets
    
    
    1,184,323
    
    
    
    968,008
    
    
    
    1,113,288
    
    
    
    903,603Net interest margin
    
    
    4.44
    %
    
    
    4.27
    %
    
    
    4.59
    %
    
    
    4.47
    %
   Provision for Loan and Lease Losses
  Noninterest Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Gain from sales of loans
    
    $
    1,768
    
    
    $
    939
    
    
    $
    4,805
    
    
    $
    2,191Derivative (losses) gains, net
    
    
    (51
    )
    
    
    26
    
    
    
    (325
    )
    
    
    (192
    )Other
    
    
    1,763
    
    
    
    1,571
    
    
    
    4,738
    
    
    
    4,685Total noninterest income
    
    $
    3,480
    
    
    $
    2,536
    
    
    $
    9,218
    
    
    $
    6,684
  38




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##### Table of Contents



Operating Expenses
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Salaries and employee benefits
    
    $
    4,629
    
    
    $
    3,340
    
    
    $
    14,112
    
    
    $
    9,921Other
    
    
    2,970
    
    
    
    2,729
    
    
    
    8,555
    
    
    
    7,796Total operating expenses
    
    $
    7,599
    
    
    $
    6,069
    
    
    $
    22,667
    
    
    $
    17,717Efficiency ratio
    
    
    45.40
    %
    
    
    46.85
    %
    
    
    47.81
    %
    
    
    48.01
    %Number of employees at period end (1)
    
    
    
    
    
    
    
    
    
    
    192
    
    
    
    195
 
 (1)
    
    On a full time equivalent basis.  Credit Quality
   September 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Nonperforming loans
    
    $
    6,459
    
    
    $
    5,374Allowance for loan losses
    
    
    16,790
    
    
    
    13,525Allowance
for loan losses to total loans
    
    
    1.36
    %
    
    
    1.28
    %
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Provision for loan losses
    
    $
    2,860
    
    
    $
    1,613
    
    
    $
    9,392
    
    
    $
    4,562Net charge-offs
    
    
    1,651
    
    
    
    1,211
    
    
    
    5,686
    
    
    
    2,826Annualized net
charge-offs to average
loans
    
    
    0.56
    %
    
    
    0.50
    %
    
    
    0.69
    %
    
    
    0.42
    %
 39




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##### Table of Contents



Home Equity Lending
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)
    
    
    (Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    23,405
    
    
    $
    25,215
    
    
    $
    72,442
    
    
    $
    71,807Provision for loan and lease losses
    
    
    (22,533
    )
    
    
    (5,854
    )
    
    
    (53,222
    )
    
    
    (16,111
    )Noninterest income
    
    
    3,208
    
    
    
    (820
    )
    
    
    1,173
    
    
    
    10,149Total net revenues
    
    
    4,080
    
    
    
    18,541
    
    
    
    20,393
    
    
    
    65,845Operating expenses
    
    
    (17,638
    )
    
    
    (19,010
    )
    
    
    (54,087
    )
    
    
    (65,202
    )Income (loss) before taxes
    
    
    (13,558
    )
    
    
    (469
    )
    
    
    (33,694
    )
    
    
    643Income taxes
    
    
    5,420
    
    
    
    177
    
    
    
    13,456
    
    
    
    (283
    )Net income (loss)
    
    $
    (8,138
    )
    
    $
    (292
    )
    
    $
    (20,238
    )
    
    $
    360Selected Operating Data:Loan volume:Lines of credit
    
    $
    7,554
    
    
    $
    29,940
    
    
    $
    27,909
    
    
    $
    124,859Loans
    
    
    96,005
    
    
    
    224,250
    
    
    
    388,008
    
    
    
    625,039Net home equity charge-offs to average
managed portfolio
    
    
    3.10
    %
    
    
    0.86
    %
    
    
    2.77
    %
    
    
    0.82
    %Gain on sale of loans to loans sold
    
    
    0.94
    %
    
    
    0.65
    %
    
    
    0.53
    %
    
    
    1.16
    %
 September 30,
    
    December 31,2007
    
    2006(Dollars in thousands)Selected Balance Sheet Data:Total assets
    
    $
    1,561,817
    
    
    $
    1,617,219Home equity loans and lines of credit(1)
    
    
    1,500,919
    
    
    
    1,280,497Allowance for loan losses
    
    
    (59,981
    )
    
    
    (33,614
    )Home equity loans held for sale
    
    
    3,732
    
    
    
    236,636Residual interests
    
    
    3,250
    
    
    
    2,760Mortgage servicing assets
    
    
    22,047
    
    
    
    28,231Short-term borrowings
    
    
    281,641
    
    
    
    446,163Collateralized debt
    
    
    1,013,174
    
    
    
    948,939Shareholders equity
    
    
    184,007
    
    
    
    155,791Selected Operating Data:Total managed portfolio balance
    
    
    1,653,606
    
    
    
    1,708,975Delinquency ratio(2)
    
    
    4.7
    %
    
    
    3.2
    %Weighted average coupon rate:Lines of credit
    
    
    11.16
    %
    
    
    11.13
    %Loans
    
    
    11.06
    
    
    
    10.75
 
 (1)
    
    Includes $1.2 billion and $1.1 billion of collateralized loans at September 30, 2007 and
December 31, 2006, respectively, pledged as part of securitized financings.(2)
    
    Nonaccrual loans are included in the delinquency ratio. Overview
  40




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##### Table of Contents



Production and Portfolio Characteristics
  September 30,
    
    
    December 31,2007
    
    
    2006StateCalifornia
    
    
    9.7
    %
    
    
    10.2
    %Michigan
    
    
    7.9
    
    
    
    7.8Colorado
    
    
    7.6
    
    
    
    7.0Ohio
    
    
    6.7
    
    
    
    6.2Florida
    
    
    6.5
    
    
    
    7.8All other states
    
    
    61.6
    
    
    
    61.0Total
    
    
    100.0
    %
    
    
    100.0
    %Total managed portfolio in thousands
    
    $
    1,653,606
    
    
    $
    1,708,975
   September 30, 2007
    
    
    December 31,2006Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    
    AverageAmount
    
    
    % of Total
    
    
    Coupon
    
    
    Amount
    
    
    % of Total
    
    
    Coupon(Dollars in thousands)Loans ≤ 100% CLTV
    
    $
    445,641
    
    
    
    26.95
    %
    
    
    9.06
    %
    
    $
    536,387
    
    
    
    31.39
    %
    
    
    9.10
    %Lines of credit ≤ 100% CLTV
    
    
    259,976
    
    
    
    15.72
    
    
    
    9.92
    
    
    
    319,415
    
    
    
    18.69
    
    
    
    9.96First mortgages ≤ 100% CLTV
    
    
    47,813
    
    
    
    2.89
    
    
    
    7.67
    
    
    
    44,727
    
    
    
    2.62
    
    
    
    7.37Total ≤ 100% CLTV
    
    
    753,430
    
    
    
    45.56
    
    
    
    9.27
    
    
    
    900,529
    
    
    
    52.70
    
    
    
    9.32Loans > 100% CLTV
    
    
    781,372
    
    
    
    47.25
    
    
    
    12.49
    
    
    
    677,119
    
    
    
    39.62
    
    
    
    12.36Lines of credit > 100% CLTV
    
    
    89,660
    
    
    
    5.42
    
    
    
    14.57
    
    
    
    101,683
    
    
    
    5.95
    
    
    
    14.55First mortgages > 100% CLTV
    
    
    23,771
    
    
    
    1.44
    
    
    
    8.48
    
    
    
    22,916
    
    
    
    1.34
    
    
    
    8.48Total > 100% CLTV
    
    
    894,803
    
    
    
    54.11
    
    
    
    12.59
    
    
    
    801,718
    
    
    
    46.91
    
    
    
    12.53Other (including discontinued products)
    
    
    5,373
    
    
    
    0.33
    
    
    
    14.16
    
    
    
    6,728
    
    
    
    0.39
    
    
    
    15.03Total managed portfolio(1)
    
    $
    1,653,606
    
    
    
    100.00
    %
    
    
    11.08
    %
    
    $
    1,708,975
    
    
    
    100.00
    %
    
    
    10.85
    %
 
 (1)
    
    We define our managed portfolio as the portfolio ($1.7 billion) that we service and on
which we carry credit risk. At September 30, 2007, we also serviced another $0.8 billion of
loans for which the credit risk is held by others. 41




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##### Table of Contents



Three Months Ended September 30,Product
    
    2007
    
    2006(Funding amount in thousands)First mortgage loansFunding Amount
    
    $
    23,416
    
    
    $
    15,716Weighted Average Disposable Income
    
    
    5,526
    
    
    
    4,707Weighted Average FICO score
    
    
    703
    
    
    
    686Weighted Average Coupon
    
    
    8.35
    %
    
    
    8.43
    %First mortgage loans up to 110%Funding Amount
    
    $
    
    
    
    $
    10,726Weighted Average Disposable Income
    
    
    
    
    
    
    6,872Weighted Average FICO score
    
    
    
    
    
    
    703Weighted Average Coupon
    
    
    0.00
    %
    
    
    8.53
    %Home equity loans up to 100% CLTVFunding Amount
    
    $
    15,405
    
    
    $
    131,859Weighted Average Disposable Income
    
    
    5,436
    
    
    
    6,788Weighted Average FICO score
    
    
    707
    
    
    
    705Weighted Average Coupon
    
    
    10.68
    %
    
    
    11.52
    %Home equity loans up to 125% CLTVFunding Amount
    
    $
    57,184
    
    
    $
    65,949Weighted Average Disposable Income
    
    
    4,906
    
    
    
    4,346Weighted Average FICO score
    
    
    700
    
    
    
    699Weighted Average Coupon
    
    
    13.54
    %
    
    
    12.84
    %Home equity lines of credit up to 100% CLTVFunding Amount
    
    $
    2,297
    
    
    $
    25,439Weighted Average Disposable Income
    
    
    6,890
    
    
    
    6,582Weighted Average FICO score
    
    
    710
    
    
    
    686Weighted Average Coupon
    
    
    11.21
    %
    
    
    10.49
    %Home equity lines of credit up to 125% CLTVFunding Amount
    
    $
    5,256
    
    
    $
    4,501Weighted Average Disposable Income
    
    
    5,489
    
    
    
    5,118Weighted Average FICO score
    
    
    693
    
    
    
    682Weighted Average Coupon
    
    
    15.02
    %
    
    
    15.72
    %All ProductsFunding Amount
    
    $
    103,559
    
    
    $
    254,190Weighted Average Disposable Income
    
    
    5,199
    
    
    
    5,817Weighted Average FICO score
    
    
    701
    
    
    
    700Weighted Average Coupon
    
    
    11.97
    %
    
    
    11.52
    %
 42




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##### Table of Contents



Net Income
  Net Revenue
   For the Three Months Ended September 30,
    
    For the Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)Total originations
    
    $
    103,559
    
    
    $
    254,190
    
    
    $
    415,917
    
    
    $
    749,898Percent correspondent
    
    
    31
    %
    
    
    21
    %
    
    
    37
    %
    
    
    26
    %Percent retail loans
    
    
    9
    
    
    
    11
    
    
    
    8
    
    
    
    17Percent brokered
    
    
    60
    
    
    
    31
    
    
    
    53
    
    
    
    28Percent other
    
    
    
    
    
    
    37
    
    
    
    2
    
    
    
    29
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Net interest income
    
    $
    23,405
    
    
    $
    25,215
    
    
    $
    72,442
    
    
    $
    71,807Provision for loan losses
    
    
    (22,533
    )
    
    
    (5,854
    )
    
    
    (53,222
    )
    
    
    (16,111
    )Gain on sales of whole loans
    
    
    223
    
    
    
    496
    
    
    
    893
    
    
    
    3,740Gain on intercompany transactions
    
    
    985
    
    
    
    
    
    
    
    2,087
    
    
    
    (36
    )Valuation adjustment on loans held for sale
    
    
    (86
    )
    
    
    (404
    )
    
    
    (8,158
    )
    
    
    (6,149
    )Gain (loss) on sales of loans
    
    
    1,122
    
    
    
    92
    
    
    
    (5,178
    )
    
    
    (2,445
    )Loan servicing fees
    
    
    4,065
    
    
    
    5,830
    
    
    
    14,343
    
    
    
    24,024Amortization of servicing assets
    
    
    (24
    )
    
    
    (5,040
    )
    
    
    (92
    )
    
    
    (17,034
    )(Impairment) recovery of servicing assets
    
    
    (2,395
    )
    
    
    
    
    
    
    (8,995
    )
    
    
    984Derivative (losses) gains
    
    
    (39
    )
    
    
    (2,788
    )
    
    
    (321
    )
    
    
    3,053Other
    
    
    479
    
    
    
    1,086
    
    
    
    1,416
    
    
    
    1,567Total net revenue
    
    $
    4,080
    
    
    $
    18,541
    
    
    $
    20,393
    
    
    $
    65,845
  43




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##### Table of Contents



2004
    
    
    2005
    
    
    2006
    
    
    2007(Dollars in thousands)First Quarter
    
    $
    471
    
    
    $
    325
    
    
    $
    1,387
    
    
    $
    1,933Second Quarter
    
    
    234
    
    
    
    681
    
    
    
    4,278
    
    
    
    1,708Third Quarter
    
    
    244
    
    
    
    851
    
    
    
    659
    
    
    
    1,424Fourth Quarter
    
    
    
    
    
    
    481
    
    
    
    2,757
    
    
    NAYear to date
    
    $
    949
    
    
    $
    2,338
    
    
    $
    9,081
    
    
    $
    5,065
   44




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##### Table of Contents



Operating Expenses
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)
    
    
    (Dollars in thousands)Salaries and employee benefits
    
    $
    11,172
    
    
    $
    11,247
    
    
    $
    33,725
    
    
    $
    39,975Other
    
    
    6,466
    
    
    
    7,763
    
    
    
    20,362
    
    
    
    25,227Total operating expenses
    
    $
    17,638
    
    
    $
    19,010
    
    
    $
    54,087
    
    
    $
    65,202Number of employees at period end (1)
    
    
    
    
    
    
    
    
    
    
    464
    
    
    
    485
 
 (1)
    
    On a full time equivalent basis.   Home Equity Servicing
    45




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##### Table of Contents



September 30,
    
    December 31,
    
    September 30,2007
    
    2006
    
    2006(Dollars in thousands)Managed PortfolioTotal Loans
    
    $
    1,653,606
    
    
    $
    1,708,975
    
    
    $
    1,648,23630 days past due
    
    
    4.72
    %
    
    
    3.16
    %
    
    
    3.07
    %90 days past due
    
    
    2.06
    
    
    
    1.19
    
    
    
    1.18Annualized QTD Net Chargeoff Rate
    
    
    3.10
    
    
    
    1.50
    
    
    
    0.86Quarterly Net Chargeoffs
    
    $
    12,945
    
    
    $
    6,383
    
    
    $
    3,530Unsold LoansTotal Loans (1)
    
    $
    1,498,239
    
    
    $
    1,515,881
    
    
    $
    1,438,95230 days past due
    
    
    5.05
    %
    
    
    3.54
    %
    
    
    3.49
    %90 days past due
    
    
    2.25
    
    
    
    1.32
    
    
    
    1.35Annualized QTD Net Chargeoff Rate
    
    
    3.41
    
    
    
    1.71
    
    
    
    0.98Quarterly Net Chargeoffs
    
    $
    12,884
    
    
    $
    6,383
    
    
    $
    3,468Loan Loss Reserve
    
    $
    59,981
    
    
    $
    33,614
    
    
    $
    31,403Owned ResidualTotal Loans
    
    $
    155,368
    
    
    $
    193,094
    
    
    $
    209,28530 days past due
    
    
    1.45
    %
    
    
    0.20
    %
    
    
    0.12
    %90 days past due
    
    
    0.33
    
    
    
    0.18
    
    
    
    Annualized QTD Net Chargeoff Rate
    
    
    0.15
    
    
    
    
    
    
    
    0.11Quarterly Net Chargeoffs
    
    $
    61
    
    
    $
    
    
    
    $
    63Residual Undiscounted Losses
    
    $
    800
    
    
    $
    430
    
    
    $
    380Credit Risk Sold, Potential
Incentive Servicing Fee Retained
PortfolioTotal Loans
    
    $
    491,551
    
    
    $
    627,838
    
    
    $
    694,97330 days past due
    
    
    5.87
    %
    
    
    5.40
    %
    
    
    4.41
    %90 days past due
    
    
    2.21
    
    
    
    2.30
    
    
    
    1.57
 
 (1)
    
    Excludes deferred fees and costs. Discontinued Operations-Mortgage Banking
    46




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##### Table of Contents



Parent and Other
   47




---



##### Table of Contents



Risk Management
  
    
    Credit risk
    
    Liquidity risk
    
    Market risk (including interest rate and foreign exchange risk)
    
    Operational risk
    
    Compliance risk
      Credit Risk
  48




---



##### Table of Contents



49




---



##### Table of Contents



September 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)Accruing loans past due 90 days or more:Commercial, financial and agricultural loans
    
    $
    104
    
    
    $
    Consumer loans
    
    
    78
    
    
    
    73Commercial financingDomestic leasing
    
    
    241
    
    
    
    83Foreign leasing
    
    
    87
    
    
    
    236510
    
    
    
    392Nonaccrual loans and leases:Commercial, financial and agricultural loans
    
    
    18,845
    
    
    
    13,296Real estate mortgages
    
    
    34,704
    
    
    
    18,125Consumer loans
    
    
    378
    
    
    
    696Commercial financingFranchise financing
    
    
    1,165
    
    
    
    791Domestic leasing
    
    
    3,069
    
    
    
    2,495Foreign leasing
    
    
    1,896
    
    
    
    1,76860,057
    
    
    
    37,171Total nonperforming loans and leases
    
    
    60,567
    
    
    
    37,563Nonperforming Loans held for Sale not guaranteed
    
    
    2,367
    
    
    
    5,564Other real estate owned
    
    
    19,273
    
    
    
    15,170Total nonperforming assets
    
    $
    82,207
    
    
    $
    58,297Nonperforming loans and leases to total
loans and leases
    
    
    1.1
    %
    
    
    0.7
    %Nonperforming assets to total assets
    
    
    1.3
    %
    
    
    0.9
    %
   September 30,
    
    December 31,2007
    
    2006(In millions)   Commercial banking
    
    $
    29
    
    
    $
    19   Commercial finance
    
    
    8
    
    
    
    5   Home equity lending
    
    
    39
    
    
    
    23   Mortgage banking
    
    
    6
    
    
    
    11
  50




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##### Table of Contents



Liquidity Risk
         51




---



##### Table of Contents




    
    Lines of credit with correspondent banks, including fed funds lines: none outstanding out
of $175 million available but not committed
    
    Lines of credit with non-correspondent banks, including fed
funds lines: $74 million outstanding
    
    Warehouse lines of credit and conduits to fund Canadian sourced small ticket leases: $275
million outstanding on $387 million of borrowing facilities
 https://www.element-direct.com
 Market Risk (including Interest Rate and Foreign Exchange Risk)
      52




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##### Table of Contents




    
    The net asset value sensitivities do not necessarily represent the changes in the lines
of business net asset value that would actually occur under the given interest rate
scenarios, as sensitivities do not reflect changes in value of the companies as a going
concern, nor consider potential rebalancing or other management actions that might be taken
in the future under asset/liability management as interest rates change.
    
    The tables below show modeled changes in interest rates for individual asset and
liability classes. Asset and liability classes in our portfolio have interest rate
sensitivity tied to different underlying indices or instruments. While the rate sensitivity
of individual classes presented below is our best estimate of changes in value due to
interest rate changes, the total potential change figures are subject to basis risk if all
yield curves do not move in parallel as the model assumes.
    
    Few of the asset classes shown react to interest rate changes in a linear fashion. That
is, the point estimates we have made at Current and +/-2% and +/-1% are appropriate
estimates at those amounts of rate change, but it may not be accurate to interpolate
linearly between those points. This is most evident in products that contain optionality in
payment timing or pricing such as mortgage servicing or nonmaturity transaction deposits.
    
    Finally, the tables show theoretical outcomes for dramatic changes in interest rates
which do not consider potential rebalancing or repositioning of hedges and balance sheet
mix.
 Economic Value Change Method
 Present Value at September 30, 2007 
Change in Interest Rates of:-2%
    
    
    -1%
    
    
    Current
    
    
    +1%
    
    
    +2%(In Thousands)Interest Sensitive AssetsLoans and other assets
    
    $
    6,129,731
    
    
    $
    6,036,542
    
    
    $
    5,943,618
    
    
    $
    5,851,491
    
    
    $
    5,761,705Loans held for sale
    
    
    4,020
    
    
    
    3,916
    
    
    
    3,783
    
    
    
    3,614
    
    
    
    3,425Mortgage servicing rights
    
    
    21,156
    
    
    
    23,845
    
    
    
    26,979
    
    
    
    30,006
    
    
    
    31,443Residual interests
    
    
    11,128
    
    
    
    11,055
    
    
    
    11,005
    
    
    
    11,013
    
    
    
    11,108Interest sensitive financial
derivatives
    
    
    (15,729
    )
    
    
    (8,275
    )
    
    
    (1,033
    )
    
    
    6,379
    
    
    
    14,329Total interest sensitive assets
    
    
    6,150,306
    
    
    
    6,067,083
    
    
    
    5,984,352
    
    
    
    5,902,503
    
    
    
    5,822,010Interest Sensitive LiabilitiesDeposits
    
    
    (3,429,923
    )
    
    
    (3,402,461
    )
    
    
    (3,375,535
    )
    
    
    (3,346,180
    )
    
    
    (3,315,570
    )Short-term borrowings (1)
    
    
    (841,431
    )
    
    
    (828,672
    )
    
    
    (816,517
    )
    
    
    (804,928
    )
    
    
    (793,871
    )Long-term debt
    
    
    (1,301,014
    )
    
    
    (1,286,287
    )
    
    
    (1,269,910
    )
    
    
    (1,250,076
    )
    
    
    (1,227,891
    )Total interest sensitive liabilities
    
    
    (5,572,368
    )
    
    
    (5,517,420
    )
    
    
    (5,461,962
    )
    
    
    (5,401,184
    )
    
    
    (5,337,332
    )Net market value as of September
30, 2007
    
    $
    577,938
    
    
    $
    549,663
    
    
    $
    522,390
    
    
    $
    501,319
    
    
    $
    484,678Change from current
    
    $
    55,548
    
    
    $
    27,273
    
    
    $
    
    
    
    $
    (21,071
    )
    
    $
    (37,712
    )Net market value as of June 30, 2007
    
    $
    523,922
    
    
    $
    499,632
    
    
    $
    475,978
    
    
    $
    457,731
    
    
    $
    449,135Potential change
    
    $
    47,944
    
    
    $
    23,654
    
    
    $
    
    
    
    $
    (18,247
    )
    
    $
    (26,843
    )
 
 (1)
    
    Includes certain debt which is categorized as collateralized borrowings in other sections
of this document 53




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##### Table of Contents



GAAP-Based Value Change Method
 Present Value at September 30, 2007Change in Interest Rates of:-2%
    
    
    -1%
    
    
    Current
    
    
    +1%
    
    
    +2%(In Thousands)Interest Sensitive AssetsLoans and other assets (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loans held for sale
    
    
    3,253
    
    
    
    3,253
    
    
    
    3,253
    
    
    
    3,084
    
    
    
    2,895Mortgage servicing rights
    
    
    20,871
    
    
    
    23,028
    
    
    
    25,324
    
    
    
    27,866
    
    
    
    29,122Residual interests
    
    
    11,128
    
    
    
    11,055
    
    
    
    11,005
    
    
    
    11,013
    
    
    
    11,108Interest sensitive financial derivatives
    
    
    (15,729
    )
    
    
    (8,275
    )
    
    
    (1,033
    )
    
    
    6,379
    
    
    
    14,329Total interest sensitive assets
    
    
    19,523
    
    
    
    29,061
    
    
    
    38,549
    
    
    
    48,342
    
    
    
    57,454Interest Sensitive LiabilitiesDeposits (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short-term borrowings (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total interest sensitive liabilities (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net market value as of September 30, 2007
    
    $
    19,523
    
    
    $
    29,061
    
    
    $
    38,549
    
    
    $
    48,342
    
    
    $
    57,454Potential change
    
    $
    (19,026
    )
    
    $
    (9,488
    )
    
    $
    
    
    
    $
    9,793
    
    
    $
    18,905Net market value as of June 30, 2007
    
    $
    47,661
    
    
    $
    58,020
    
    
    $
    67,619
    
    
    $
    76,927
    
    
    $
    85,718Potential change
    
    $
    (19,958
    )
    
    $
    (9,599
    )
    
    $
    
    
    
    $
    9,308
    
    
    $
    18,099
 
 (1)
    
    Value does not change in GAAP presentation Off-Balance Sheet Instruments
   Derivative Financial Instruments
   54




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Operational and Compliance Risk.
  55




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4. Controls and Procedures.
   56




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##### Table of Contents



PART II. Other Information.
 
 Item 1. Legal Proceedings
 Since the time we filed our Report on Form 10-Q for the quarter ended June 30, 2007, we
experienced developments as noted in the litigation described below. For a full description of the
litigation, see Note 11, Commitments and Contingencies, in the Notes to Consolidated Financial
Statements, Part I, Item 1, of this Report.
 Silke v. Irwin Mortgage Corporation
 Charter One
Mortgage Corporation v. Condra, Silke
 Cohens v. Inland Mortgage Corporation
  Litigation in Connection with Loans Purchased from Community Bank of Northern Virginia
 Amicus Curiae Amicus Curiae
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  57




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##### Table of Contents



Item 6. Exhibits.
 ExhibitNumber
    
    Description of Exhibit2.1
    
    
    Asset Purchase Agreement by and among Irwin Financial Corporation, Irwin Mortgage Corporation and Freedom
Mortgage Corporation dated as of August 7, 2006. (Incorporated by reference to Exhibits 2.1 and 2.2 of Form 8-K
filed October 2, 2006, File No. 001-16691.)3.1
    
    
    Restated Articles of Incorporation of Irwin Financial Corporation, as amended December 20, 2006. (Incorporated
by reference to Exhibit 3.1 of Form 10-K filed March 9, 2007, File No. 001-16691.)3.2
    
    
    Code of By-laws of Irwin Financial Corporation, as amended, February 15, 2007. (Incorporated by reference to
Exhibit 3.2 of Form 10-K filed March 9, 2007, File No. 001-16691.)4.1
    
    
    Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 of Form 10-K filed March 9, 2007,
File No. 001-16691.)4.2
    
    
    Certain instruments defining the rights of the holders of long-term debt of Irwin Financial Corporation and
certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the
total assets of the Corporation and its subsidiaries on a consolidated basis, have not been filed as Exhibits.
The Corporation hereby agrees to furnish a copy of any of these agreements to the Commission upon request.4.3
    
    
    Rights Agreement, dated as of March 1, 2001, between Irwin Financial Corporation and Irwin Union Bank and Trust.
(Incorporated by reference to Exhibit 4.1 to Form 8-A filed March 2, 2001, File No. 000-06835.)4.4
    
    
    Appointment of Successor Rights Agent dated as of May 11, 2001 between Irwin Financial Corporation and National
City Bank. (Incorporated by reference to Exhibit 4.5 to Form S-8 filed on September 7, 2001, File No.
333-69156.)10.1
    
    
    *Irwin Financial Corporation 1992 Stock Option Plan. (Incorporated by reference to Exhibit 10(h) to Form 10-K
Report for year ended December 31, 1992, File No. 000-06835.)10.2
    
    
    *Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit 10 to Form 10-Q
Report for period ended September 30, 1997, File No. 000-06835.)10.3
    
    
    *Amendment to Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit 10(i) to
Form 10-Q Report for period ended September 30, 1997, File No. 000-06835.)10.4
    
    
    *Irwin Financial Corporation Amended and Restated 2001 Stock Plan, as amended and restated May 10, 2007.
(Incorporated by reference to Exhibit 99.1 of Form 8-K filed May 16, 2007, File No. 001-16691.)10.5
    
    
    *Irwin Financial Corporation 2001 Stock Plan Form of Stock Option Agreement. (Incorporated by reference to
Exhibit 99.1 of the Corporations 8-K Current Report, dated May 9, 2005, File No. 001-16691.)10.6
    
    
    *Irwin Financial Corporation 2001 Stock Plan Form of Restricted Stock Agreement (Incorporated by reference to
Exhibit 99.2 of the Corporations 8-K Current Report, dated May 9, 2005, File No. 001-16691.)10.7
    
    
    *Irwin Financial Corporation 2001 Stock Plan Form of Stock Option Agreement (Canada) (Incorporated by reference
to Exhibit 10.8 of the Corporations 10-Q Report for period ended September 30, 2005, File No. 001-16691.)10.8
    
    
    *Irwin Financial Corporation 2001 Stock Plan Form of Restricted Stock Agreement, with Performance Criteria, and
Notice. (Incorporated by reference to Exhibit 99.2 of Form 8-K filed May 16, 2007, File No. 001-16691).10.9
    
    
    *Irwin Financial Corporation 1999 Outside Director Restricted Stock Compensation Plan. (Incorporated by
reference to Exhibit 2 to the Corporations proxy statement for its 2004 Annual Meeting, filed with the
Commission on March 18, 2004, File No. 001-16691.)10.10
    
    
    *Employee Stock Purchase Plan III. (Incorporated by reference to Exhibit 10(a) to Form 10-Q Report for period
ended September 30, 1999, File No. 000-06835.)10.11
    
    
    *Long-Term Management Performance Plan. (Incorporated by reference to Exhibit 10(a) to Form 10-K Report for year
ended December 31, 1986, File No. 000-06835.)10.12
    
    
    *Long-Term Incentive Plan-Summary of Terms. (Incorporated by reference to Exhibit 10(a) to Form 10-K Report for
year ended December 31, 1986, File No. 000-06835.)10.13
    
    
    *Inland Mortgage Corporation Long-Term Incentive Plan. (Incorporated by reference to Exhibit 10(j) to Form 10-K
Report for year ended December 31, 1995, File No. 000-06835.)10.14
    
    
    *Amended and Restated Management Bonus Plan. (Incorporated by reference to Exhibit 10(a) to Form 10-K Report for
year ended December 31, 1986, File No. 000-06835.)10.15
    
    
    *Limited Liability Company Agreement of Irwin Ventures LLC. (Incorporated by reference to Exhibit 10(a) to Form
10-Q/A Report for period ended March 31, 2001, File No. 000-06835.)10.16
    
    
    *Limited Liability Company Agreement of Irwin Ventures Co-Investment Fund LLC, effective as of April 20, 2001.
(Incorporated by reference to Exhibit 10.17 to Form S-1/A filed February 14, 2002, File No. 333-69586.)10.17
    
    
    *Promissory Note dated January 30, 2002 from Elena Delgado to Irwin Financial Corporation. (Incorporated by
reference to Exhibit 10.19 to Form S-1/A filed February 14, 2002, File No. 333-69586.)
 58




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.18
    
    
    *Consumer Pledge Agreement dated January 30, 2002 between Elena Delgado and Irwin Financial Corporation.
(Incorporated by reference to Exhibit 10.20 to Form S-1/A filed February 14, 2002, File No. 333-69586.)10.19
    
    
    *Redemption and Loan Repayment Agreement dated December 22, 2004 between Irwin Financial Corporation, Irwin Home
Equity Corporation and Elena Delgado. (Incorporated by reference to Exhibit 10.15 of Form 10-K Report for year
ended December 31, 2004, File No. 001-16691.)10.20
    
    
    *Irwin Home Equity Corporation Amendment and Restatement of Shareholder Agreement dated December 22, 2004
between Irwin Home Equity Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference
to Exhibit 10.16 of Form 10-K Report for year ended December 31, 2004, File No. 001-16691.)10.21
    
    
    *Deferred Compensation Agreement dated December 22, 2004 between Irwin Home Equity Corporation, Irwin Financial
Corporation and Elena Delgado. (Incorporated by reference to Exhibit 10.17 of Form 10-K Report for year ended
December 31, 2004, File No. 001-16691.)10.22
    
    
    *Tax Gross-up Agreement dated December 22, 2004 between Irwin Financial Corporation and Elena Delgado as
Shareholder. (Incorporated by reference to Exhibit 10.18 of Form 10-K Report for year ended December 31, 2004,
File No. 001-16691.)10.23
    
    
    *Amendment No. 1 to Irwin Home Equity Corporation Amendment and Restatement of Shareholder Agreement dated April
7, 2005 between Irwin Home Equity Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by
reference to Exhibit 10.19 of Form 10-Q Report for the quarter ended March 31, 2005, File No. 001-16691.)10.24
    
    
    *Amendment No. 1 to the Deferred Compensation Agreement dated April 7, 2005 between Irwin Home Equity
Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference to Exhibit 10.20 of Form
10-Q Report for the quarter ended March 31, 2005, File No. 001-16691.)10.25
    
    
    *Amendment No. 2 to the Deferred Compensation Agreement dated November 15, 2005 between Irwin Home Equity
Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference to Exhibit 99.1 of Form
8-K Current Report dated November 18, 2005, File No. 001-16691.)10.26
    
    
    *Election to Terminate the Deferred Compensation Agreement dated November 15, 2005 between Irwin Home Equity
Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference to Exhibit 99.2 of Form
8-K Current Report dated November 18, 2005, File No. 001-16691.)10.27
    
    
    *Irwin Financial Corporation Amended and Restated Short Term Incentive Plan effective January 1, 2006.
(Incorporated by reference to Exhibit 10.27 of Form 10-Q Report for the quarter ended September 30 2006, File
No. 001-16691.)10.28
    
    
    *First Amendment to the Irwin Financial Corporation Amended and Restated Short Term Incentive Plan.
(Incorporated by reference to Exhibit 10.28 of Form 10-Q Report for the quarter ended June 30, 2007, File No.
001-16691.)10.29
    
    
    *Irwin Commercial Finance Amended and Restated Short Term Incentive Plan effective January 1, 2006.
(Incorporated by reference to Exhibit 10.28 of Form 10-Q for the quarter ended September 30, 2006, File No.
001-16691.)10.30
    
    
    *First Amendment to the Irwin Commercial Finance Amended and Restated Short Term Incentive Plan. (Incorporated
by reference to Exhibit 10.30 of Form 10-Q Report for the quarter ended June 30, 2007, File No. 001-16691.)10.31
    
    
    *Irwin Home Equity Amended and Restated Short Term Incentive Plan effective January 1, 2006. (Incorporated by
reference to Exhibit 10.29 of Form 10-Q for the quarter ended September 30, 2006, File No. 001-16691.)10.32
    
    
    *First Amendment to the Irwin Home Equity Amended and Restated Short Term Incentive Plan. (Incorporated by
reference to Exhibit 10.32 of Form 10-Q Report for the quarter ended June 30, 2007, File No. 001-16691.)10.33
    
    
    *Irwin Mortgage Corporation Amended and Restated Short Term Incentive Plan effective January 1, 2002.
(Incorporated by reference to Exhibit 6 of the Corporations proxy statement for its 2004 Annual Meeting, filed
with the Commission on March 18, 2004, File No. 001-16691.)10.34
    
    
    *Irwin Union Bank and Trust Company Amended and Restated Short Term Incentive Plan effective January 1, 2006.
(Incorporated by reference to Exhibit 10.31 of Form 10-Q Report for the quarter ended September 30, 2006, File
No. 001-16691.)10.35
    
    
    *First Amendment to the Irwin Union Bank and Trust Company Amended and Restated Short Term Incentive Plan.
(Incorporated by reference to Exhibit 10.35 of Form 10-Q Report for the quarter ended June 30, 2007, File No.
001-16691.)10.36
    
    
    *Onset Capital Corporation Employment Agreement. (Incorporated by reference to Exhibit 10.26 to Form 10-Q Report
for period ended September 30, 2002, File No. 000-06835.)10.37
    
    
    *Irwin Financial Corporation Restated Supplemental Executive Retirement Plan for Named Executives. (Incorporated
by reference to Exhibit 10.27 to Form 10-Q Report for period ended September 30, 2002, File No. 000-06835.)10.38
    
    
    *Irwin Financial Corporation Supplemental Executive Retirement Plan for Named Executives. (Incorporated by
reference to Exhibit 10.28 to Form 10-Q Report for period ended September 30, 2002, File No. 000-06835.)10.39
    
    
    *Stock Purchase Agreement by and between Onset Holdings Inc. and Irwin International Corporation dated December
23, 2005. (Incorporated by reference to Exhibit 10.36 of Form 10-K Report for period ended December 31, 2005,
File No. 001-16691.).
 59




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.40
    
    
    *Shareholder Agreement Termination Agreement by and between Irwin Commercial Finance Canada Corporation and
Irwin International Corporation dated December 23, 2005. (Incorporated by reference to Exhibit 10.37 of Form
10-K Report for period ended December 31, 2005, File No. 001-16691.)10.41
    
    
    *Irwin Commercial Finance Corporation First Amended and Restated Shareholder Agreement dated May 15, 2007.
(Incorporated by reference to Exhibit 10.41 of Form 10-Q Report for the quarter ended June 30, 2007, File No.
001-16691.)10.42
    
    
    *Irwin Commercial Finance Corporation 2005 Stock Option Agreement Grant of Option to Joseph LaLeggia dated
December 23, 2005. (Incorporated by reference to Exhibit 10.39 of Form 10-K Report for period ended December 31,
2005, File No. 001-16691.)10.43
    
    
    *Irwin Commercial Finance Corporation 2005 Notice of Stock Option Grant to Joseph LaLeggia dated December 23,
2005. (Incorporated by reference to Exhibit 10.40 of Form 10-K Report for period ended December 31, 2005, File
No. 001-16691.)10.44
    
    
    *Irwin Union Bank Amended and Restated Performance Unit Plan. (Incorporated by reference to Exhibit 10.41 of
Form 10-K Report for period ended December 31, 2005, File No. 001-16691.)10.45
    
    
    *Irwin Commercial Finance Amended and Restated Performance Unit Plan. (Incorporated by reference to Exhibit
10.42 of Form 10-K Report for period ended December 31, 2005, File No. 001-16691.)10.46
    
    
    *First Amendment to the Irwin Commercial Finance Amended and Restated Performance Unit Plan, dated October 31,
2006. (Incorporated by reference to Exhibit 10.41 of Form 10-K filed March 9, 2007, File No. 001-16691.)10.47
    
    
    *Irwin Home Equity Corporation Performance Unit Plan. (Incorporated by reference to Exhibit 10.43 of Form 10-K
Report for period ended December 31, 2005, File No. 001-16691.)10.48
    
    
    *First Amendment to Limited Liability Company Agreement of Irwin Ventures LLC. (Incorporated by reference to
Exhibit 10.44 of Form 10-K Report for period ended December 31, 2005, File No. 001-16691.)10.49
    
    
    *Second Amendment to Limited Liability Company Agreement of Irwin Ventures Co-Investment Fund LLC. (Incorporated
by reference to Exhibit 10.45 of Form 10-K Report for period ended December 31, 2005, File No. 001-16691.)10.50
    
    
    *Supplemental Performance Unit Grant-Jocelyn Martin-Leano, dated February 6, 2007. (Incorporated by reference to
Exhibit 10.45 of Form 10-K filed March 9, 2007, File No. 001-16691.)10.51
    
    
    *Irwin Financial Corporation 2007 Performance Unit Plan. (Incorporated by reference to Appendix B of the
Corporations Proxy Statement for its 2007 Annual Meeting, filed April 16, 2007, File No. 001-16691.)11.1
    
    
    Computation of Earnings Per Share is included in the footnotes to the financial statements.31.1
    
    
    Certification pursuant to 18 U.S.C. Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer.31.2
    
    
    Certification pursuant to 18 U.S.C. Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer.32.1
    
    
    Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates management contract or compensatory plan or arrangement. 60




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SIGNATURES
  DATE:October 31, 2007
    IRWIN FINANCIAL CORPORATIONBy:
    /s/ Gregory F. EhlingerGREGORY F. EHLINGERCHIEF FINANCIAL OFFICER By:
    /s/ Jody A. LittrellJODY A. LITTRELLCORPORATE CONTROLLER
(Chief Accounting Officer) 61