##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to _________. Commission File Number: 0-6835 IRWIN FINANCIAL CORPORATION 
 (Exact Name of Corporation as Specified in its Charter)
 Indiana
    
    35-1286807(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 500 Washington Street Columbus, Indiana
    
    47201(Address of Principal Executive Offices)
    
    (Zip Code)
 (812) 376-1909
    
    www.irwinfinancial.com(Corporations Telephone Number, Including Area Code)
    
    (Web Site)
 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]Yes                    [  ]No Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act [X]Yes                    [  ]No As of April 26, 2004, there were outstanding 28,267,114 common shares, no par
value, of the Registrant.




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FORM 10-Q
TABLE OF CONTENTS PAGENO.PART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial Statements
    
    
    3Item 2
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 4
    
    Controls and Procedures
    
    
    46Item 5
    
    Other Information
    
    
    46PART II
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    47Item 2
    
    Changes in Securities and Use of Proceeds
    
    
    48Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    49Signatures
    
    
    52302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
  2




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PART I. FINANCIAL INFORMATION. 
 Item 1. Financial Statements. IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
 March 31,
    
    December 31,2004
    
    2003(In thousands except forshares)Assets:Cash and cash equivalents
    
    $
    175,704
    
    
    $
    140,810Interest-bearing deposits with financial institutions
    
    
    66,608
    
    
    
    81,166Residual interests
    
    
    69,771
    
    
    
    71,491Investment
securities - held-to-maturity (Market value: 
$35,396 at March 31, 2004 and $24,971 at December 31, 2003)
    
    
    35,356
    
    
    
    24,956Investment
securities - available-for-sale
    
    
    67,411
    
    
    
    67,569Loans held for sale
    
    
    996,219
    
    
    
    883,895Loans and
leases, net of unearned income - Note 2
    
    
    3,222,296
    
    
    
    3,161,054Less:
Allowance for loan and lease losses - Note 3
    
    
    (63,681
    )
    
    
    (64,285
    )3,158,615
    
    
    
    3,096,769Servicing
assets - Note 4
    
    
    332,611
    
    
    
    380,123Accounts receivable
    
    
    65,819
    
    
    
    62,045Accrued interest receivable
    
    
    14,944
    
    
    
    15,502Premises and equipment, net
    
    
    30,641
    
    
    
    32,208Other assets
    
    
    132,471
    
    
    
    131,825Total assets
    
    $
    5,146,170
    
    
    $
    4,988,359Liabilities and Shareholders Equity:DepositsNoninterest-bearing
    
    $
    1,111,581
    
    
    $
    850,529Interest-bearing
    
    
    1,473,812
    
    
    
    1,352,763Certificates of deposit over $100,000
    
    
    723,614
    
    
    
    696,3703,309,007
    
    
    
    2,899,662Short-term
borrowings - Note 5
    
    
    297,016
    
    
    
    429,758Collateralized debt - Note 6
    
    
    526,325
    
    
    
    590,131Other long-term debt  Note 7
    
    
    270,181
    
    
    
    270,184Other liabilities
    
    
    290,456
    
    
    
    366,364Total liabilities
    
    
    4,692,985
    
    
    
    4,556,099Commitments
and contingencies - Note 11Shareholders equityPreferred
stock, no par value - authorized 4,000,000 shares;
none issued as of March 31, 2004 and December 31, 2003
    
    
    
    
    
    
    Common
stock, no par value - authorized 40,000,000 shares; issued
29,612,080 shares as of March 31, 2004 and December 31, 2003,
respectively; including 1,356,058 and 1,477,778 shares in treasury
as of March 31, 2004 and December 31, 2003, respectively
    
    
    112,000
    
    
    
    112,000Additional paid-in capital
    
    
    595
    
    
    
    1,264Deferred compensation
    
    
    (540
    )
    
    
    (504
    )Accumulated other comprehensive income, net of deferred income tax
liability of $57 and $120 at March 31, 2004 and December 31,
2003, respectively
    
    
    90
    
    
    
    182Retained earnings
    
    
    370,728
    
    
    
    352,647482,873
    
    
    
    465,589Less treasury stock, at cost
    
    

    (29,688
    )
    
    
    (33,329
    )Total shareholders equity
    
    
    453,185
    
    
    
    432,260Total liabilities and shareholders equity
    
    $
    5,146,170
    
    
    $
    4,988,359
 The accompanying notes are an integral part of the consolidated financial
statements. 3




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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 For the Three MonthsEnded March 31,2004
    
    2003(In thousands, except pershare)Interest income:Loans and leases
    
    $
    61,246
    
    
    $
    58,124Loans held for sale
    
    
    14,072
    
    
    
    22,896Residual interests
    
    
    3,258
    
    
    
    6,963Investment securities
    
    
    1,209
    
    
    
    862Federal funds sold
    
    
    18
    
    
    
    36Total interest income
    
    
    79,803
    
    
    
    88,881Interest expense:Deposits
    
    
    9,489
    
    
    
    11,249Short-term borrowings
    
    
    1,623
    
    
    
    4,067Collateralized debt
    
    
    3,805
    
    
    
    2,984Other long-term debt
    
    
    5,683
    
    
    
    582Preferred securities distribution
    
    
    
    
    
    
    5,608Total interest expense
    
    
    20,600
    
    
    
    24,490Net interest income
    
    
    59,203
    
    
    
    64,391Provision for loan and lease losses
    
    
    8,146
    
    
    
    9,243Net interest income after provision for loan and lease losses
    
    
    51,057
    
    
    
    55,148Other income:Loan servicing fees
    
    
    32,577
    
    
    
    21,892Amortization
of servicing assets  Note 4
    
    
    (31,687
    )
    
    
    (30,810
    )Impairment of servicing assets  Note 4
    
    
    (47,383
    )
    
    
    (3,054
    )Net loan administration loss
    
    
    (46,493
    )
    
    
    (11,972
    )Gain from sales of loans
    
    
    52,763
    
    
    
    95,511Gain on sale of mortgage servicing assets
    
    
    6,489
    
    
    
    4Trading gains (losses)
    
    
    4,673
    
    
    
    (17,789
    )Derivative gains (losses), net
    
    
    58,948
    
    
    
    (6,474
    )Other
    
    
    6,101
    
    
    
    3,53182,481
    
    
    
    62,811Other expense:Salaries
    
    
    49,834
    
    
    
    56,423Pension and other employee benefits
    
    
    11,747
    
    
    
    10,824Office expense
    
    
    4,737
    
    
    
    5,192Premises and equipment
    
    
    10,455
    
    
    
    10,302Marketing and development
    
    
    3,634
    
    
    
    3,694Professional fees
    
    
    3,844
    
    
    
    2,805Other
    
    
    16,212
    
    
    
    9,572100,463
    
    
    
    98,812Income before income taxes
    
    
    33,075
    
    
    
    19,147Provision for income taxes
    
    
    12,734
    
    
    
    7,371Net income
    
    $
    20,341
    
    
    $
    11,776Earnings per
share: - Note 9Basic
    
    $
    0.72
    
    
    $
    0.42Diluted
    
    $
    0.67
    
    
    $
    0.41Dividends per share
    
    $
    0.08
    
    
    $
    0.07
 The accompanying notes are an integral part of the consolidated financial
statements. 4




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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
 For the Three Months Ended March 31, 2004, and 2003
 AccumulatedOtherComprehensive
    
    
    
    
    
    AdditionalRetained
    
    Income
    
    Deferred
    
    Paid in
    
    Common
    
    TreasuryTotal
    
    Earnings
    
    (Loss)
    
    Compensation
    
    Capital
    
    Stock
    
    Stock(In thousands, except shares)Balance January 1, 2004
    
    $
    432,260
    
    
    $
    352,647
    
    
    $
    182
    
    
    $
    (504
    )
    
    $
    1,264
    
    
    $
    112,000
    
    
    $
    (33,329
    )Net income
    
    
    20,341
    
    
    
    20,341Unrealized gain on investment
securities net of $43 tax
liability
    
    
    64
    
    
    
    
    
    
    
    64Unrealized loss on interest rate
cap net of $56 tax benefit
    
    
    (81
    )
    
    
    
    
    
    
    (81
    )Foreign currency adjustment net
of $50 tax benefit
    
    
    (75
    )
    
    
    
    
    
    
    (75
    )Total comprehensive
income
    
    
    20,249Deferred compensation
    
    
    (36
    )
    
    
    
    
    
    
    
    
    
    
    (36
    )Cash dividends
    
    
    (2,260
    )
    
    
    (2,260
    )Tax benefit on stock option
exercises
    
    
    661
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    661Treasury stock:Purchase of 9,907 shares
    
    
    (333
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (333
    )Sales of 131,627 shares
    
    
    2,644
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,330
    )
    
    
    
    
    
    
    3,974Balance March 31, 2004
    
    $
    453,185
    
    
    $
    370,728
    
    
    $
    90
    
    
    $
    (540
    )
    
    $
    595
    
    
    $
    112,000
    
    
    $
    (29,688
    )Balance January 1, 2003
    
    $
    360,555
    
    
    $
    287,662
    
    
    $
    (1,142
    )
    
    $
    (240
    )
    
    $
    3,606
    
    
    $
    112,000
    
    
    $
    (41,331
    )Net income
    
    
    11,776
    
    
    
    11,776Unrealized gain on investment
securities net of $15 tax
liability
    
    
    22
    
    
    
    
    
    
    
    22Unrealized loss on interest rate
cap net of $20 tax benefit
    
    
    (30
    )
    
    
    
    
    
    
    (30
    )Foreign currency adjustment net
of $247 tax liability
    
    
    370
    
    
    
    
    
    
    
    370Minimum SERP liability net
of $170 tax liability
    
    
    256
    
    
    
    
    
    
    
    256Total comprehensive
income
    
    
    12,394Deferred compensation
    
    
    (318
    )
    
    
    
    
    
    
    
    
    
    
    (318
    )Cash dividends
    
    
    (1,948
    )
    
    
    (1,948
    )Tax benefit on stock option
exercises
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82Treasury stock:Purchase of 6,672 shares
    
    
    (115
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115
    )Sales of 63,211 shares
    
    
    830
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (463
    )
    
    
    
    
    
    
    1,293Balance March 31, 2003
    
    $
    371,480
    
    
    $
    297,490
    
    
    $
    (524
    )
    
    $
    (558
    )
    
    $
    3,225
    
    
    $
    112,000
    
    
    $
    (40,153
    )
 The accompanying notes are an integral part of the consolidated financial
statements. 5




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IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 For the Three Months EndedMarch 31,2004
    
    2003(In thousands)Net income
    
    $
    20,341
    
    
    $
    11,776Adjustments to reconcile net income to cash
used by operating activities:Depreciation, amortization, and accretion, net
    
    
    1,582
    
    
    
    2,754Amortization and impairment of servicing assets
    
    
    79,070
    
    
    
    33,864Provision for loan and lease losses
    
    
    8,146
    
    
    
    9,243Gain on sale of mortgage servicing assets
    
    
    (6,489
    )
    
    
    Gain from sale of loans held for sale
    
    
    (52,763
    )
    
    
    (95,511
    )Originations of loans held for sale
    
    
    (3,304,377
    )
    
    
    (5,837,368
    )Proceeds from sale of mortgage servicing assets
    
    
    15,606
    
    
    
    Proceeds from the sale of loans held for sale
    
    
    3,163,639
    
    
    
    5,545,358Net decrease in residual interests
    
    
    1,720
    
    
    
    24,851(Increase) decrease in accounts receivable
    
    
    (3,774
    )
    
    
    10,979Other, net
    
    
    (36,908
    )
    
    
    (11,780
    )Net cash used by operating activities
    
    
    (114,207
    )
    
    
    (305,834
    )Lending and investing activities:Proceeds from maturities/calls of investment securities:Held-to-maturity
    
    
    20,279
    
    
    
    383Available-for-sale
    
    
    1,074
    
    
    
    15,258Purchase of investment securities:Held-to-maturity
    
    
    (30,897
    )
    
    
    (15,440
    )Available-for-sale
    
    
    (639
    )
    
    
    Net decrease (increase) in interest-bearing deposits with
financial institutions
    
    
    14,558
    
    
    
    (7,225
    )Net increase in loans, excluding sales
    
    
    (83,437
    )
    
    
    (1,170,749
    )Proceeds from the sales of loans
    
    
    13,886
    
    
    
    993,000Other, net
    
    
    (308
    )
    
    
    (2,060
    )Net cash used by lending and investing activities
    
    
    (65,484
    )
    
    
    (186,833
    )Financing activities:Net increase in deposits
    
    
    409,345
    
    
    
    331,259Net decrease in short-term borrowings
    
    
    (132,742
    )
    
    
    (182,450
    )Repayments of other long-term debt
    
    
    (3
    )
    
    
    (3
    )Net (repayments of) proceeds from issuance of collateralized debt
    
    
    (62,703
    )
    
    
    319,642Purchase of treasury stock for employee benefit plans
    
    
    (333
    )
    
    
    (115
    )Proceeds from sale of stock for employee benefit plans
    
    
    3,305
    
    
    
    912Dividends paid
    
    
    (2,260
    )
    
    
    (1,948
    )Net cash provided by financing activities
    
    
    214,609
    
    
    
    467,297Effect of exchange rate changes on cash
    
    
    (24
    )
    
    
    (69
    )Net increase (decrease) in cash and cash equivalents
    
    
    34,894
    
    
    

    (25,439
    )Cash and cash equivalents at beginning of period
    
    
    140,810
    
    
    
    157,771Cash and cash equivalents at end of period
    
    $
    175,704
    
    
    $
    132,332Supplemental disclosures of cash flow information:Cash flows during the period:Interest paid
    
    $
    20,916
    
    
    $
    24,469Income taxes (received) paid
    
    $
    (21,026
    )
    
    $
    13,651Noncash transactions:Loans sold, eligible for repurchase
    
    $
    78,004
    
    
    $
    
 The accompanying notes are an integral part of the consolidated financial
statements. 6




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1  Summary of Significant Accounting Policies Consolidation:Irwin Financial Corporation and its subsidiaries (the
Corporation) provide financial services throughout the United States and
Canada. We are engaged in the mortgage banking, commercial banking, home equity
lending, commercial finance, and venture capital lines of business. Our direct
and indirect subsidiaries include Irwin Mortgage Corporation, Irwin Union Bank
and Trust Company, Irwin Union Bank, F.S.B., Irwin Home Equity Corporation,
Irwin Commercial Finance Corporation, and Irwin Ventures LLC. Intercompany
balances and transactions have been eliminated in consolidation. The
Corporation does not meet the criteria as primary beneficiary for our
wholly-owned trusts holding our company-obligated mandatorily redeemable
preferred securities established by Financial Accounting Standards Board (FASB)
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities.
As a result, these trusts are not consolidated. Use of Estimates:The preparation of financial statements in conformity
with generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Residual Interests:Residual interests are stated at fair value.
Unrealized gains and losses are included in earnings. Until the first quarter
of 2002, when we sold receivables in securitizations of home equity loans and
lines of credit, we retained residual interests, a servicing asset, one or more
subordinated tranches, and in some cases a cash reserve account, all of which
are retained interests in the securitized receivables. Gain or loss on the sale
of the loans depended, in part, on the previous carrying amount of the
financial assets involved in the transfer, allocated between the assets sold
and the retained interests based on their relative fair value at the date of
transfer. To obtain fair value of residual interests, quoted market prices are used
if available. However, quotes are generally not available for residual
interests, so we generally estimate fair value based on the present value of
expected cash flows using estimates of the key assumptions  prepayment speeds,
credit losses, forward yield curves, and discount rates commensurate with the
risks involved  that management believes market participants would use to
value similar assets. Adjustments to carrying values are recorded as trading
gains or losses. Cash and Cash Equivalents Defined:For purposes of the statement of cash
flows, we consider cash and due from banks and federal funds sold to be cash
equivalents. Stock-Based Employee Compensation:We have two stock-based employee
compensation plans. We use the intrinsic value method to account for our plans
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. No
stock-based employee compensation cost is reflected in net income for any of
the periods presented, as all options granted under these plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. To date, the Board of Directors has not chosen to expense stock options.
The Board wishes to analyze new guidance from the FASB, Securities and Exchange
Commission (SEC) or other relevant authority regarding the standardization of
valuation methods, until new requirements become effective. We will continue
to disclose the impact of expensing stock options, using our valuation method,
which is based on a Black-Scholes model using assumptions management believes
to be reasonable. The following table illustrates the effect on net income and
earnings per share if we had applied the fair value recognition provisions of
Statement of Financial Accounting Standard (SFAS) 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation: For the three monthsended March 31,2004
    
    2003(Dollars in thousands)Net income as reported
    
    $
    20,341
    
    
    $
    11,776Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects
    
    
    (632
    )
    
    
    (647
    )Pro forma net income
    
    $
    19,709
    
    
    $
    11,129Basic earnings per shareAs reported
    
    $
    0.72
    
    
    $
    0.42Pro forma
    
    $
    0.70
    
    
    $
    0.40Diluted earnings per shareAs reported
    
    $
    0.67
    
    
    $
    0.41Pro forma
    
    $
    0.65
    
    
    $
    0.39
 7




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Recent Accounting Developments:We adopted FIN 46 as of December 31, 2003
and as a result, deconsolidated IFC Capital Trust II, IFC Capital Trust III,
IFC Capital Trust IV, IFC Capital Trust V, IFC Capital Trust VI, and IFC
Statutory Trust VII (IFC Trusts). The sole assets of the IFC Trusts are
subordinated debentures of Irwin Financial Corporation. The IFC Trusts
liabilities are represented by Trust Preferred Securities, which have
previously been listed as Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts on our consolidated balance sheets. Under FIN
46, the subordinated debentures, which are substantially equal in amount to the
Trust Preferred Securities, cease to be eliminated in consolidation and are
included in other long-term debt in our consolidated balance sheets at
December 31, 2003 and March 31, 2004. Details about the IFC Trusts and
debentures can be found in Note 7, Other Long-Term Debt. The Trust Preferred Securities currently qualify as Tier 1 regulatory
capital. The subordinated debentures do not qualify as Tier 1 regulatory
capital, but do qualify for Tier 2 regulatory capital and we believe would
continue to be treated as such should the Federal Reserve modify its capital
rules due to FIN 46. The Federal Reserve Board has not reached final conclusion
on the continued qualification of deconsolidated Trust Preferred Securities but
has indicated that until further notice, these Trust Preferred Securities will
continue to count as Tier 1 regulatory capital. Should the Federal Reserve
Board reach a conclusion that deconsolidated Trust Preferred Securities would
cease to qualify as Tier 1 regulatory capital, our Tier 1 regulatory capital
would be reduced by approximately $151 million. We believe our Total Capital
ratios, including Tier 2 Capital, would remain unchanged and we would maintain
capital levels above our policy limits. Reclassifications:Certain amounts in the 2003 consolidated financial
statements have been reclassified to conform to the 2004 presentation. These
changes had no impact on previously reported net income or shareholders
equity. Note 2  Loans and Leases Loans and leases are summarized as follows: March 31,
    
    December 31,2004
    
    2003(Dollars in thousands)Commercial, financial and agricultural
    
    $
    1,555,050
    
    
    $
    1,503,619Real estate-construction
    
    
    268,554
    
    
    
    306,669Real estate-mortgage
    
    
    890,477
    
    
    
    859,541Consumer
    
    
    28,546
    
    
    
    27,370Direct financing leasesDomestic
    
    
    377,433
    
    
    
    364,413Foreign
    
    
    213,529
    
    
    
    207,355Unearned incomeDomestic
    
    
    (82,126
    )
    
    
    (78,875
    )Foreign
    
    
    (29,167
    )
    
    
    (29,038
    )Total
    
    $
    3,222,296
    
    
    $
    3,161,054
 Note 3  Allowance for Loan and Lease Losses Changes in the allowance for loan and lease losses are summarized below: As of and forthe three
    
    As of and formonths ended
    
    the year endedMarch 31,
    
    December 31,2004
    
    2003(Dollars in thousands)Balance at beginning of period
    
    $
    64,285
    
    
    $
    50,936Provision for loan and lease losses
    
    
    8,146
    
    
    
    47,583Reduction due to sales and
reclassification of loans and
leases and other
    
    
    (567
    )
    
    
    (924
    )Foreign currency adjustment
    
    
    (25
    )
    
    
    582Recoveries
    
    
    1,417
    
    
    
    3,420Charge-offs
    
    
    (9,575
    )
    
    
    (37,312
    )Balance at end of period
    
    $
    63,681
    
    
    $
    64,285
 8




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Note 4  Servicing Assets Included on the consolidated balance sheet at March 31, 2004 and December
31, 2003 are $332.6 million and $380.1 million, respectively, of capitalized
servicing assets. These amounts relate to the principal balances of mortgage
and home equity loans serviced by us for investors. Changes in our capitalized
servicing assets, net of valuation allowance, are shown below: As of and for thethree months
    
    As of and for theended
    
    year endedMarch 31,
    
    December 31,2004
    
    2003(Dollars in thousands)Beginning balance
    
    $
    380,123
    
    
    $
    174,935Additions
    
    
    40,676
    
    
    
    296,551Amortization
    
    
    (31,687
    )
    
    
    (135,519
    )(Provision for) recovery of impairment
    
    
    (47,383
    )
    
    
    44,516Reduction for servicing sales
    
    
    (9,118
    )
    
    
    (360
    )$
    332,611
    
    
    $
    380,123
 We have established a valuation allowance to record servicing assets at
their fair value. Changes in the allowance are summarized below: March 31,
    
    December 31,2004
    
    2003(Dollars in thousands)Balance at beginning of period
    
    $
    76,869
    
    
    $
    159,865Provision for (recovery of)
impairment
    
    
    47,383
    
    
    
    (44,516
    )Reduction for servicing sales
    
    
    (18,204
    )
    
    
    Other than
temporary impairment(1)
    
    
    (6,999
    )
    
    
    (38,480
    )Balance at end of period
    
    $
    99,049
    
    
    $
    76,869
  1) Other than temporary impairment was recorded to
reflect our view that the originally recorded value of
certain servicing rights and subsequent impairment
associated with those rights is unlikely to be
recovered in market value. There was no related direct
impact on net income as this other than temporary
impairment affected only balance sheet accounts.
However, the write-down will result in a reduction of
amortization expense and potentially reduced recovery
of impairment in future periods. Note 5  Short-Term Borrowings Short-term borrowings are summarized as follows: March 31,
    
    December 31,2004
    
    2003(Dollars in thousands)Drafts payable related to mortgage loan closings
    
    $
    137,069
    
    
    $
    72,686Commercial paper
    
    
    15,915
    
    
    
    16,415Federal Home Loan Bank borrowings
    
    
    106,348
    
    
    
    286,000Federal funds
    
    
    35,013
    
    
    
    53,600Lines of credit and other borrowings
    
    
    2,671
    
    
    
    1,057$
    297,016
    
    
    $
    429,758
 Drafts payable related to mortgage loan closings are related to mortgage
closings that have not been presented to the banks for payment. When presented
for payment, these borrowings will be funded internally or by borrowing from
the lines of credit. Commercial paper is payable to a company controlled by a significant
shareholder, officer and director of the Corporation. Federal Home Loan Bank borrowings are collateralized by loans and loans
held for sale. We also have lines of credit available to fund loan originations and
operations with variable rates ranging from 1.3% to 3.0% at March 31, 2004. 9




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Note 6  Collateralized Debt We pledge or sell loans structured as secured financings at our home
equity and commercial finance lines of business. Sale treatment is precluded on
these transactions because we fail the true-sale requirements of SFAS 140 as we
maintain effective control over the loans and leases securitized. This type of
structure results in cash being received, debt being recorded, and the
establishment of an allowance for credit losses. The notes associated with
these transactions are collateralized by $0.6 billion in home equity loans,
home equity lines of credit, and leases. The principal and interest on these
debt securities are paid using the cash flows from the underlying loans and
leases. Accordingly, the timing of the principal payments on these debt
securities is dependent on the payments received on the underlying collateral.
The interest rates on the bonds are at a floating rate. We have interest only
senior notes on both securitizations at the home equity lending line of
business that as of March 31, 2004 had a combined notional balance of $61.7
million (which does not represent the amount at risk). These senior notes pay
interest at 10% and mature on December 25, 2004 and September 25, 2005. Collateralized debt is summarized as follows: WeightedAverageInterest RateatContractual
    
    March 31,
    
    March 31,
    
    December 31,Maturity
    
    2004
    
    2004
    
    2003(Dollars in thousands)Commercial finance line of business2003 asset backed note
    
    07/04/2010
    
    
    2.15
    %
    
    $
    45,508
    
    
    $
    51,6942003 asset backed note
    
    11/01/2008
    
    
    3.63
    
    
    
    69,753
    
    
    
    77,902Home equity lending line of business2003-1 asset backed notes:Combined variable rate senior notes
    
    02/25/2028
    
    
    1.63
    
    
    
    133,877
    
    
    
    160,874Combined variable rate subordinate
notes
    
    02/25/2028
    
    
    3.40
    
    
    
    68,625
    
    
    
    61,763Unamortized premium
    
    
    
    
    
    
    
    
    3,939
    
    
    
    4,4462002-1 asset backed notes:07/25/2023-Combined variable rate senior notes
    
    06/25/2029
    
    
    1.37
    
    
    
    128,466
    
    
    
    156,699Combined variable rate subordinate
notes
    
    02/25/2029
    
    
    2.66
    
    
    
    72,551
    
    
    
    72,551Unamortized premium
    
    
    
    
    
    
    
    
    3,606
    
    
    
    4,202Total
    
    
    
    
    
    
    
    $
    526,325
    
    
    $
    590,131
 Note 7  Other Long-Term Debt At March 31, 2004 and December 31, 2003 we had $270 million of other
long-term debt. Included in both years is $30 million of subordinated debt with
an interest rate of 7.58% and a maturity date of July 2014 as well as a
mortgage note outstanding for $0.1 million with an interest rate of 8.50% and a
maturity date of April 2008. We also have obligations represented by subordinated debentures at March
31, 2004 of $240 million. These securities were issued by wholly-owned trusts
of Irwin Financial Corporation that were created for the purpose of issuing
cumulative trust preferred securities. In accordance with FIN 46 we are not
consolidating these trusts. Refer to Note 1 for information regarding the
accounting change for these securities. These debentures are the sole assets of
these trusts as of March 31, 2004. All debentures and securities are 10




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##### Table of Contents



callable at par after five years from origination date. The securities are all
Tier 1 qualifying capital at March 31, 2004. Highlights about these debentures
and the related trusts are listed below: Interest
    
    
    
    Subordinated DebtRate atOrigination
    
    March 31,
    
    Maturity
    
    March 31,
    
    December 31,Name
    
    Date
    
    2004
    
    Date
    
    2004
    
    2003
    
    Other(Dollars in thousands)IFC Capital Trust II
    
    Nov 2000
    
    
    10.50
    %
    
    Sep 2030
    
    $
    53,351
    
    
    $
    53,351IFC Capital Trust III
    
    Nov 2000
    
    
    8.75
    
    
    Sep 2030
    
    
    53,268
    
    
    
    53,268
    
    
    initial conversion ratio of 1.261 shares of common stock to 1 convertible preferred security, currently callable at 15% premiumIFC Capital Trust IV
    
    Jul 2001
    
    
    10.25
    
    
    Jul 2031
    
    
    15,464
    
    
    
    15,464IFC Capital Trust V
    
    Nov 2001
    
    
    9.95
    
    
    Nov 2031
    
    
    30,928
    
    
    
    30,928IFC Capital Trust VI
    
    Oct 2002
    
    
    8.70
    
    
    Sep 2032
    
    
    35,567
    
    
    
    35,567IFC Statutory Trust VII
    
    Nov 2003
    
    
    4.01
    
    
    Nov 2033
    
    
    51,547
    
    
    
    51,547
    
    
    rate changes quarterly at three month LIBOR plus 290 basis points$
    240,125
    
    
    $
    240,125
 Note 8  Employee Retirement Plans Components of net periodic cost of pension benefit: For the Three Months EndedMarch 31,2004
    
    2003(Dollars in thousands)Service cost
    
    $
    494
    
    
    $
    396Interest cost
    
    
    455
    
    
    
    412Expected return on plan assets
    
    
    (405
    )
    
    
    (313
    )Amortization of transition obligation
    
    
    3
    
    
    
    3Amortization of prior service cost
    
    
    10
    
    
    
    10Amortization of actuarial loss
    
    
    175
    
    
    
    193Net periodic benefit cost
    
    $
    732
    
    
    $
    701
 As of March 31, 2004, we have not made any contributions to our pension
plan and do not expect to contribute to this plan in 2004. 11




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##### Table of Contents



Note 9  Earnings Per Share Earnings
Per Share calculations are summarized as follow: Basic
    
    Effect of
    
    Effect of
    
    Effect of
    
    DilutedEarnings
    
    Stock
    
    Preferred
    
    Convertible
    
    EarningsPer Share
    
    Options
    
    Shares
    
    Shares
    
    Per Share(Dollars in thousands, except per share amounts)Three Months Ended
March 31, 2004Net income
    
    $
    20,341
    
    
    $
    
    
    
    $
    
    
    
    $
    678
    
    
    $
    21,019Shares
    
    
    28,191
    
    
    
    492
    
    
    
    
    
    
    
    2,607
    
    
    
    31,290Per-share amount
    
    $
    0.72
    
    
    $
    (0.01
    )
    
    $
    
    
    
    $
    (0.04
    )
    
    $
    0.67Three Months Ended
March 31, 2003Net income
    
    $
    11,776
    
    
    $
    
    
    
    $
    
    
    
    $
    700
    
    
    $
    12,476Shares
    
    
    27,786
    
    
    
    202
    
    
    
    
    
    
    
    2,610
    
    
    
    30,598Per-share amount
    
    $
    0.42
    
    
    $
    
    
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    0.41
 At March 31, 2004 and 2003, 4,000 and 769,534 shares, respectively,
related to stock options, were not included in the dilutive earnings per share
calculation because they had exercise prices below the stock price as of the
respective dates. Note 10  Industry Segment Information We have five principal segments that provide a broad range of financial
services. The mortgage banking line of business originates, sells, and
services residential first mortgage loans. The commercial banking line of
business provides commercial banking services. The home equity lending line of
business originates and services home equity loans. The commercial finance
line of business originates leases and loans against commercial equipment and
real estate. The venture capital line of business invests in early-stage
technology companies focusing on financial services. Our other segment
primarily includes the parent company and eliminations. The accounting policies of each segment are the same as those described in
the Summary of Significant Accounting Policies. Below is a summary of each
segments revenues, net income, and assets for three months ended March 31,
2004, and 2003: Mortgage
    
    Commercial
    
    Home Equity
    
    Commercial
    
    VentureBanking
    
    Banking
    
    Lending
    
    Finance
    
    Capital
    
    Other
    
    Consolidated(In thousands)For the Three Months
Ended March 31, 2004Net interest income
    
    $
    9,086
    
    
    $
    19,756
    
    
    $
    27,076
    
    
    $
    6,754
    
    
    $
    4
    
    
    $
    (3,473
    )
    
    $
    59,203Intersegment interest
    
    
    (424
    )
    
    
    790
    
    
    
    (2,380
    )
    
    
    
    
    
    
    (5
    )
    
    
    2,019
    
    
    
    Provision for loan and
lease losses
    
    
    107
    
    
    
    (1,200
    )
    
    
    (5,899
    )
    
    
    (1,153
    )
    
    
    
    
    
    
    (1
    )
    
    
    (8,146
    )Other revenue
    
    
    59,867
    
    
    
    4,646
    
    
    
    18,279
    
    
    
    475
    
    
    
    9
    
    
    
    (795
    )
    
    
    82,481Intersegment revenues
    
    
    
    
    
    
    130
    
    
    
    (624
    )
    
    
    
    
    
    
    149
    
    
    
    345
    
    
    
    Total net revenues
    
    
    68,636
    
    
    
    24,122
    
    
    
    36,452
    
    
    
    6,076
    
    
    
    157
    
    
    
    (1,905
    )
    
    
    133,538Other expense
    
    
    51,603
    
    
    
    14,634
    
    
    
    24,662
    
    
    
    4,052
    
    
    
    128
    
    
    
    5,384
    
    
    
    100,463Intersegment expenses
    
    
    866
    
    
    
    449
    
    
    
    724
    
    
    
    173
    
    
    
    
    
    
    
    (2,212
    )
    
    
    Net income before
taxes
    
    
    16,167
    
    
    
    9,039
    
    
    
    11,066
    
    
    
    1,851
    
    
    
    29
    
    
    
    (5,077
    )
    
    
    33,075Income taxes
    
    
    6,435
    
    
    
    3,622
    
    
    
    4,433
    
    
    
    2,144
    
    
    
    11
    
    
    
    (3,911
    )
    
    
    12,734Net income (loss)
    
    $
    9,732
    
    
    $
    5,417
    
    
    $
    6,633
    
    
    $
    (293
    )
    
    $
    18
    
    
    $
    (1,166
    )
    
    $
    20,341Assets at March 31, 2004
    
    $
    1,330,505
    
    
    $
    2,311,816
    
    
    $
    1,107,988
    
    
    $
    487,769
    
    
    $
    7,266
    
    
    $
    (99,174
    )
    
    $
    5,146,170
 12




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##### Table of Contents



Mortgage
    
    Commercial
    
    Home Equity
    
    Commercial
    
    VentureBanking
    
    Banking
    
    Lending
    
    Finance
    
    Capital
    
    Other
    
    Consolidated(In thousands)For the Three Months
Ended March 31, 2003Net interest income
    
    $
    16,065
    
    
    $
    19,757
    
    
    $
    26,412
    
    
    $
    4,807
    
    
    $
    7
    
    
    $
    (2,657
    )
    
    $
    64,391Intersegment interest
    
    
    
    
    
    
    (730
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    730
    
    
    
    Provision for loan and
lease losses
    
    
    53
    
    
    
    (1,580
    )
    
    
    (4,880
    )
    
    
    (2,864
    )
    
    
    
    
    
    
    28
    
    
    
    (9,243
    )Other revenue
    
    
    80,983
    
    
    
    5,075
    
    
    
    (14,981
    )
    
    
    835
    
    
    
    (2,237
    )
    
    
    (6,864
    )
    
    
    62,811Intersegment revenues
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    (179
    )
    
    
    Total net revenues
    
    
    97,101
    
    
    
    22,576
    
    
    
    6,551
    
    
    
    2,778
    
    
    
    (2,105
    )
    
    
    (8,942
    )
    
    
    117,959Other expense
    
    
    64,522
    
    
    
    13,454
    
    
    
    21,415
    
    
    
    3,218
    
    
    
    108
    
    
    
    (3,905
    )
    
    
    98,812Intersegment expenses
    
    
    691
    
    
    
    451
    
    
    
    966
    
    
    
    110
    
    
    
    
    
    
    
    (2,218
    )
    
    
    Net income before taxes
    
    
    31,888
    
    
    
    8,671
    
    
    
    (15,830
    )
    
    
    (550
    )
    
    
    (2,213
    )
    
    
    (2,819
    )
    
    
    19,147Income taxes
    
    
    12,249
    
    
    
    3,460
    
    
    
    (6,332
    )
    
    
    (290
    )
    
    
    (885
    )
    
    
    (831
    )
    
    
    7,371Net income (loss)
    
    $
    19,639
    
    
    $
    5,211
    
    
    $
    (9,498
    )
    
    $
    (260
    )
    
    $
    (1,328
    )
    
    $
    (1,988
    )
    
    $
    11,776Assets at March 31, 2003
    
    $
    1,922,008
    
    
    $
    2,069,174
    
    
    $
    1,064,626
    
    
    $
    381,026
    
    
    $
    3,762
    
    
    $
    (74,664
    )
    
    $
    5,365,932
 Note 11  Commitments and Contingencies Our indirect subsidiary, Irwin Mortgage Corporation, is a defendant in a
class action lawsuit in the United States District Court for the Northern
District of Alabama, filed in April 1996, alleging that Irwin Mortgage violated
the federal Real Estate Settlement Procedures Act (RESPA) relating to Irwin
Mortgages payment of broker fees to mortgage brokers. In June 2001, the Court
of Appeals for the 11th Circuit upheld the district courts certification of a
plaintiff class and the case was remanded for further proceedings in the
federal district court. In November 2001, by order of the district court, the parties filed
supplemental briefs analyzing the impact of an October 18, 2001 policy
statement issued by the Department of Housing and Urban Development (HUD) that
explicitly disagreed with the judicial interpretation of RESPA by the Court of
Appeals for the 11th Circuit in its ruling upholding class certification in
this case. In response to a motion from Irwin Mortgage, in March 2002, the
district court granted Irwin Mortgages motion to stay proceedings in this case
until the 11th Circuit decided the three other RESPA cases originally argued
before it with this case. The 11th Circuit subsequently decided all of the RESPA cases pending in
that court. In one of those cases, the 11th Circuit concluded that the trial
court had abused its discretion in certifying a class action under RESPA.
Further, in that decision, the 11th Circuit expressly recognized it was, in
effect, overruling its previous decision upholding class certification in this
case. In March 2003, Irwin Mortgage filed a motion to decertify the class and
the plaintiffs filed a renewed motion for summary judgment. On October 2, 2003
the case was reassigned to another U.S. district court judge. In response to an
order from the court, the parties met and submitted a joint status report at
the end of October 2003. If the class is not decertified and the district court finds that Irwin
Mortgage violated RESPA, Irwin Mortgage could be liable for damages equal to
three times the amount of that portion of payments made to the mortgage brokers
that is ruled unlawful. Based on notices sent by the plaintiffs to date to
potential class members and additional notices that might be sent in this case,
we believe the class is not likely to exceed 32,000 borrowers who meet the
class specifications. As discussed in prior periodic reports, other cases filed against our
mortgage subsidiary alleging RESPA and violations similar to those in this case
were settled in 2003 for nonmaterial amounts. Irwin Mortgage intends to defend
this lawsuit vigorously and believes it has numerous defenses to the alleged
violations. Irwin Mortgage further believes that the 11th Circuits RESPA
rulings in the cases argued before it with this one provide grounds for
reversal of the class certification in this case. We have no assurance,
however, that Irwin Mortgage will be successful in defeating class
certification or will ultimately prevail on the merits. However, we expect that
an adverse outcome in this case could result in substantial monetary damages
that could be material to our financial position. We have not established any
reserves for this case and are unable at this stage of the litigation to form a
reasonable estimate of potential loss that we could suffer. In January 2001, we and Irwin Leasing Corporation (formerly Affiliated
Capital Corp.), our indirect subsidiary, and Irwin Equipment Finance
Corporation, our direct subsidiary (together, the Irwin companies), were served
as defendants in an action filed in the United States District Court for the
Middle District of Pennsylvania. The suit alleges that a manufacturer/importer
of certain medical devices made misrepresentations to health care professionals
and to government officials to improperly obtain Medicare reimbursement for
treatments using the devices, and that the Irwin companies, through Affiliated
Capitals financing activities, aided in making the alleged misrepresentations.
The Irwin companies filed a motion to dismiss on February 12, 2001. On August
10, 2001, 13




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##### Table of Contents



the court granted our motion in part by dismissing Irwin Financial and
Irwin Equipment Finance as defendants in the suit. In June, 2003, Irwin Leasing
filed a motion for summary judgment. Oral argument was held on August 27, 2003.
On October 8, 2003, the court granted Irwin Leasings motion for summary
judgment, dismissing the plaintiffs complaint. On October 22, 2003, the
plaintiff filed a notice of appeal. The appeal is currently in the briefing
process. We have not established any reserves for this case. Although we
believe the trial courts decision is well-reasoned, we cannot predict at this
time whether we will prevail on appeal. Our subsidiary, Irwin Union Bank and Trust Company, is a defendant in a
class action lawsuit, filed in the U.S. District Court in Massachusetts in July
2001. The case involves loans purchased by Irwin Union Bank and Trust from an
unaffiliated third-party originator. The plaintiffs allege a failure to comply
with certain disclosure provisions of the Truth in Lending Act relating to high
rate loans in making second mortgage home equity loans to the plaintiff
borrowers. The complaint seeks rescission of the loans and other damages. On September 30, 2002, the court granted plaintiffs motion for
certification of a class, subject to certain limitations. In October 2002, we
filed a motion for reconsideration with the district court and a petition for
permission to appeal the class certification decision with the Court of Appeals
for the 1st Circuit. In May 2003, the district court denied our motion for
summary judgment and denied in part our motion for reconsideration of class
decertification. However, the court further restricted membership in the
plaintiff class. In October 2003, the court of appeals denied our application
for appellate review of the district courts certification of the class. On
April 1, 2004, the plaintiffs filed a motion for summary judgment and we filed
a motion for summary judgment on class claims. As originally specified, the plaintiff class was limited to those
borrowers who obtained a mortgage loan originated with prepayment penalty
provisions by the third-party originator during the three-year period prior to
the filing of the suit. As more recently defined by the court, the class has
been further restricted to those borrowers who refinanced their loans and paid
a prepayment penalty. Only high-rate loans that are subject to the provisions
of the Home Ownership and Equity Protection Act of 1994 would be included in
the class. Limited discovery on issues pertaining to class certification and the
merits of plaintiffs individual claim has been conducted. The actual number of
plaintiff borrowers will be determined only after a review of loan files.
Nevertheless, after performing a limited analysis of the approximately 200
loans acquired directly from the third-party originator and the approximately
7,800 loans acquired from others through bulk acquisitions that may include
loans from the third-party originator, we believe that fewer than 100 loans
will qualify for inclusion in the class. At the present time, we are unable to
form a reasonable estimate of potential loss, if any, and have not established
any reserves related to this case. Our indirect subsidiary, Irwin Mortgage Corporation, is a defendant in a
case filed in August 1998 in the Baltimore, Maryland, City Circuit Court. On
January 25, 2002, a jury in this case awarded the plaintiffs damages of $1.4
million jointly and severally against defendants, including Irwin Mortgage. The
nine plaintiff borrowers alleged that a home rehabilitation company defrauded
the plaintiffs by selling them defective homes at inflated prices and that
Irwin Mortgage, which provided the plaintiff borrowers mortgage loans on the
home purchases, participated in the fraud. Irwin Mortgage filed an appeal with
the Maryland Court of Special Appeals and oral argument was held on January 7,
2003. On February 27, 2004, the Court of Special Appeals ruled against Irwin
Mortgage and remanded the case to the trial court for a partial retrial on
whether the plaintiffs are entitled to punitive damages. On April 12, 2004,
Irwin Mortgage filed a Petition for Writ of Certiorari with the Maryland Court
of Appeals, seeking further review. We have reserved for this case based upon
the advice of our legal counsel. In April 2003, our indirect subsidiary, Irwin Mortgage Corporation, was
named as a defendant in an action filed in the Marion County, Indiana, Superior
Court. The complaint alleges that Irwin Mortgage charged a document preparation
fee in violation of Indiana law for services performed by clerical personnel in
completing legal documents related to mortgage loans. The plaintiff is seeking
to certify a class consisting of Indiana borrowers who were charged the fee
during the six-year period prior to the filing of the lawsuit. Irwin Mortgage
filed an answer on June 11, 2003 and a motion for summary judgment on October
27, 2003. On November 3, 2003, the court ruled that a determination on class
certification will precede any action on Irwin Mortgages summary judgment
motion. On January 9, 2004, the Plaintiff filed a Supplemental Brief and
Submission of Additional Evidence in Support of Class Certification. On March
15, 2004, the court held a hearing on plaintiffs class certification motion.
Because the case is in the early stages of litigation, we are unable at this
time to form a reasonable estimate of the amount of potential loss, if any,
that Irwin Mortgage could suffer. We have not established any reserves for this
case. 14




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##### Table of Contents



In April 2003, our indirect subsidiary, Irwin Mortgage Corporation, was
named as a defendant in an action filed in the District Court of Nueces County,
Texas. The complaint alleges that Irwin Mortgage improperly charged borrowers
fees for the services of third-party vendors in excess of Irwin Mortgages
costs, and charged certain fees to which plaintiffs did not agree. The
plaintiffs are seeking to certify a class consisting of similarly situated
borrowers. Irwin Mortgage filed an answer on July 11, 2003 and responded to
plaintiffs initial discovery requests on December 19, 2003. On February 25,
2004 Irwin Mortgage served its initial discovery requests to the plaintiffs.
Because the case is in the early stages of litigation, we are unable at this
time to form a reasonable estimate of the amount of potential loss, if any,
that Irwin Mortgage could suffer. We have not established any reserves for this
case. In October 2003, our indirect subsidiary, Irwin Mortgage Corporation
(formerly Inland Mortgage Corporation), was named as a defendant, along with
others, in an action filed in the Supreme Court of New York, County of Kings.
The plaintiffs, a mother and two children, allege they were injured from lead
contamination while living in premises allegedly owned by the defendants. The
suit seeks approximately $41 million in damages and alleges negligence, breach
of implied warranty of habitability and fitness for intended use, loss of
services and the cost of medical treatment. Because the case is in the early
stages of litigation, we are unable at this time to form a reasonable estimate
of the amount of potential loss, if any, that Irwin Mortgage could suffer.
However, we are attempting to obtain a voluntary dismissal based on our belief
that there is insufficient nexus between the cause of the alleged injuries and
Irwin Mortgage. We have not established any reserves for this case. We and our subsidiaries are from time to time engaged in various matters
of litigation, including the matters described above, other assertions of
improper or fraudulent loan practices or lending violations, and other matters,
and we have a number of unresolved claims pending. In addition, as part of the
ordinary course of business, we and our subsidiaries are parties to litigation
involving claims to the ownership of funds in particular accounts, the
collection of delinquent accounts, challenges to security interests in
collateral, and foreclosure interests, that is incidental to our regular
business activities. While the ultimate liability with respect to these other
litigation matters and claims cannot be determined at this time, we believe
that damages, if any, and other amounts relating to pending matters are not
likely to be material to our consolidated financial position or results of
operations, except as described above. Reserves are established for these
various matters of litigation, when appropriate, based upon the advice of legal
counsel. 
 Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations. About Forward-looking Statements You should read the following discussion in conjunction with our
consolidated financial statements, footnotes, and tables. This discussion and
other sections of this report contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We intend such forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995 and are
including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements are based on managements expectations,
estimates, projections, and assumptions. These statements involve inherent
risks and uncertainties that are difficult to predict and are not guarantees of
future performance. In addition, our past results of operations do not
necessarily indicate our future results. Words that convey our beliefs,
expectations, assumptions, estimates, forecasts, outlook and projections or
similar language, or that indicate events we believe could, would, should, may
or will occur (or might not occur) or are likely (or unlikely) to occur, and
similar expressions, are intended to identify forward-looking statements. These
may include, among other things, statements and assumptions about:  
    
    our projected revenues, earnings or earnings per share, as well
as managements short-term and long-term performance goals;  
    
    projected trends or potential changes in our asset quality, loan
delinquencies, asset valuations, capital ratios or financial
performance measures;  
    
    our plans and strategies, including the expected results or impact of implementing such plans and strategies;  
    
    potential litigation developments and the anticipated impact of potential outcomes of pending legal matters;  
    
    the anticipated effects on results of operations or financial condition from recent developments or events; and  
    
    any other projections or expressions that are not historical facts. 15




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##### Table of Contents



Actual future results may differ materially from what is projected due to
a variety of factors, including, but not limited to:  
    
    potential changes in and volatility of interest rates, which may
affect consumer demand for our products and the management and success
of our interest rate risk management strategies;  
    
    staffing fluctuations in response to product demand;  
    
    the relative profitability of our lending operations;  
    
    the valuation and management of our servicing and derivative
portfolios, including short-term swings in valuation of such
portfolios due to quarter-end secondary market interest rates, which
are inherently volatile;  
    
    borrowers refinancing opportunities, which may affect the
prepayment assumptions used in our valuation estimates and which may
affect loan demand;  
    
    unanticipated deterioration in the credit quality of our assets;  
    
    unanticipated deterioration in the carrying value of our other assets, including securities;  
    
    difficulties in delivering products to the secondary market as planned;  
    
    difficulties in expanding our businesses or raising capital and other funding sources as needed;  
    
    competition from other financial service providers for experienced managers as well as for customers;  
    
    changes in the value of companies in which we invest;  
    
    changes in variable compensation plans related to the performance
and valuation of lines of business where we tie compensation systems
to line-of-business performance;  
    
    legislative or regulatory changes, including changes in tax laws,
changes in the interpretation of regulatory capital rules, disclosure
or consumer lending rules, or rules affecting corporate governance,
and the availability of resources to address these rules;  
    
    changes in applicable accounting policies or principles or their application to our business; and  
    
    governmental changes in monetary or fiscal policies. We undertake no obligation to update publicly any of these statements in
light of future events, except as required in subsequent periodic reports we
file with the Securities and Exchange Commission (SEC). Consolidated Overview For the three months ended March 31,2004
    
    2003Net income (millions)
    
    $
    20.3
    
    
    $
    11.8Basic earnings per share
    
    
    0.72
    
    
    
    0.42Diluted earnings per share
    
    
    0.67
    
    
    
    0.41Return on average equity
    
    
    18.4
    %
    
    
    13.2
    %Return on average assets
    
    
    1.7
    
    
    
    1.0
 We recorded net income of $20.3 million for the three months ended March
31, 2004, up 73% from net income of $11.8 million for the three months ended
March 31, 2003. Net income per share (diluted) was $0.67 for the quarter ended
March 31, 2004, up 63% from $0.41 per share for the first quarter of 2003.
Return on equity was 18.4% for the three months ended March 31, 2004 and 13.2%
for the same period in 2003. Consolidated Income Statement Analysis Net Interest Income Net interest income for the three months ended March 31, 2004 totaled
$59.2 million, down 8% from the first quarter 2003 net interest income of $64.4
million. Net interest margin for the three months ended March 31, 2004 was
5.59% compared to 6.01% for the same period in 2003. The decline in margin
from 2003 to 2004 was primarily due to the decline in the average balance of
the residual interests. These high-yielding assets declined 52% in the first
quarter of 2004 compared to the same period in 2003 as a result of unrealized
trading losses (reflecting valuation impairment) during the first half of 2003.
Interest from loans held for sale dropped 39% reflecting lower mortgage loan
origination activity. 16




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##### Table of Contents



The following tables show our daily average consolidated balance sheet,
interest rates and interest differential at the dates indicated: Three Months Ended March 31,2004
    
    2003Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate(Dollars in thousands)AssetsInterest-earning assetsInterest-bearing deposits with banks
    
    $
    75,276
    
    
    $
    137
    
    
    
    0.73
    %
    
    $
    47,083
    
    
    $
    94
    
    
    
    0.81
    %Federal funds sold
    
    
    8,526
    
    
    
    18
    
    
    
    0.85
    
    
    
    19,101
    
    
    
    36
    
    
    
    0.76Residual interests
    
    
    70,716
    
    
    
    3,258
    
    
    
    18.53
    
    
    
    146,155
    
    
    
    6,963
    
    
    
    19.32Investment securities
    
    
    77,952
    
    
    
    1,072
    
    
    
    5.53
    
    
    
    57,835
    
    
    
    768
    
    
    
    5.39Loans held for sale
    
    
    803,267
    
    
    
    14,072
    
    
    
    7.05
    
    
    
    1,172,443
    
    
    
    22,896
    
    
    
    7.92Loans and leases, net of unearned
income (1)
    
    
    3,225,210
    
    
    
    61,246
    
    
    
    7.64
    
    
    
    2,899,186
    
    
    
    58,124
    
    
    
    8.13Total interest earning assets
    
    $
    4,260,947
    
    
    $
    79,803
    
    
    
    7.05
    %
    
    $
    4,341,803
    
    
    $
    88,881
    
    
    
    8.30
    %Noninterest-earning assets
Cash and due from banks
    
    $
    105,906
    
    
    
    
    
    
    
    
    
    
    $
    93,705Premises and equipment, net
    
    
    31,595
    
    
    
    
    
    
    
    
    
    
    
    32,348Other assets
    
    
    553,180
    
    
    
    
    
    
    
    
    
    
    
    348,690Less allowance for loan and lease losses
    
    
    (64,447
    )
    
    
    
    
    
    
    
    
    
    
    (52,031
    )Total assets
    
    $
    4,887,181
    
    
    
    
    
    
    
    
    
    
    $
    4,764,515Liabilities and Shareholders EquityInterest-bearing liabilitiesMoney market checking
    
    $
    224,708
    
    
    $
    423
    
    
    
    0.76
    %
    
    $
    144,746
    
    
    $
    148
    
    
    
    0.41
    %Money market savings
    
    
    977,262
    
    
    
    2,954
    
    
    
    1.22
    
    
    
    788,475
    
    
    
    2,714
    
    
    
    1.40Regular savings
    
    
    59,368
    
    
    
    235
    
    
    
    1.59
    
    
    
    63,659
    
    
    
    352
    
    
    
    2.24Time deposits
    
    
    911,719
    
    
    
    5,877
    
    
    
    2.59
    
    
    
    1,008,944
    
    
    
    8,035
    
    
    
    3.23Short-term borrowings
    
    
    273,488
    
    
    
    1,623
    
    
    
    2.39
    
    
    
    708,683
    
    
    
    4,067
    
    
    
    2.33Collateralized debt
    
    
    563,049
    
    
    
    3,805
    
    
    
    2.72
    
    
    
    446,454
    
    
    
    2,984
    
    
    
    2.71Other long-term debt
    
    
    270,183
    
    
    
    5,683
    
    
    
    8.46
    
    
    
    30,069
    
    
    
    582
    
    
    
    7.85Trust preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    233,000
    
    
    
    5,608
    
    
    
    9.76Total interest-bearing liabilities
    
    $
    3,279,777
    
    
    $
    20,600
    
    
    
    2.53
    %
    
    $
    3,424,030
    
    
    $
    24,490
    
    
    
    2.90
    %Noninterest-bearing liabilitiesDemand deposits
    
    $
    866,721
    
    
    
    
    
    
    
    
    
    
    $
    786,196Other liabilities
    
    
    296,774
    
    
    
    
    
    
    
    
    
    
    
    191,731Shareholders equity
    
    
    443,909
    
    
    
    
    
    
    
    
    
    
    
    362,558Total liabilities and
shareholders equity
    
    $
    4,887,181
    
    
    
    
    
    
    
    
    
    
    $
    4,764,515Net interest income
    
    
    
    
    
    $
    59,203
    
    
    
    
    
    
    
    
    
    
    $
    64,391Net interest income to average interest-
earning assets
    
    
    
    
    
    
    
    
    
    
    5.59
    %
    
    
    
    
    
    
    
    
    
    
    6.01
    %
   (1)
    
    For purposes of these computations, nonaccrual loans are included in
daily average loan amounts outstanding. Provision for Loan and Lease Losses The consolidated provision for loan and lease losses for the three months
ended March 31, 2004 was $8.1 million, compared to $9.2 million for the same
period in 2003. More information on this subject is contained in the section
on credit risk. Noninterest Income Noninterest income during the first quarter of 2004 totaled $82.5 million,
compared to $62.8 million for the first three months of 2003. The increase in
2004 versus 2003 was a result of several factors. At the mortgage banking line
of business, higher derivative gains, net of servicing asset impairment, gains
from servicing sales and increased loan servicing fees all contributed to the
increase. At the home equity lending line of business, we experienced a
reversal of impairment on our residual interests during the first quarter of
2004 versus residual impairment in the same period in 2003. Details related to
these fluctuations are discussed later in the mortgage banking and home
equity lending sections of this document. 17




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##### Table of Contents



Noninterest Expense Noninterest expenses for the three months ended March 31, 2004 totaled
$100.5 million, compared to $98.8 million for the same period in 2003. The
increase in consolidated noninterest expense in 2004 is primarily related to
foreign currency transaction losses offset by lower personnel costs associated
with our decreased production at the mortgage banking line of business. Consolidated Balance Sheet Analysis Total assets at March 31, 2004 were $5.1 billion, up 3% from December 31,
2003. However, we believe that changes in the average balance sheet are a more
accurate reflection of the actual changes in the level of activity on the
balance sheet. Average assets for the first quarter of 2004 were $4.9 billion,
down 6% from the average assets in 2003. The decline in the consolidated
average balance sheet primarily relates to a decrease in loans held for sale at
the mortgage banking line of business during the first quarter as a result of
declining production. Loans and Leases Our commercial loans and leases are originated throughout the United
States. Equipment loans and leases are also originated in Canada by our
commercial finance line of business. At March 31, 2004, 94% of our loan and
lease portfolio was associated with our U.S. operations. We also extend credit
to consumers throughout the United States through mortgages, installment loans
and revolving credit arrangements. The majority of the remaining portfolio
consists of residential mortgage loans (1-4 family dwellings) and mortgage
loans on commercial property. Loans by major category for the periods
presented were as follows: March 31,
    
    December 31,2004
    
    2003(In thousands)Commercial, financial and
agricultural
    
    $
    1,555,050
    
    
    $
    1,503,619Real estate construction
    
    
    268,554
    
    
    
    306,669Real estate mortgage
    
    
    890,477
    
    
    
    859,541Consumer
    
    
    28,546
    
    
    
    27,370Direct lease financing:Domestic
    
    
    377,433
    
    
    
    364,413Canadian
    
    
    213,529
    
    
    
    207,355Unearned income:Domestic
    
    
    (82,126
    )
    
    
    (78,875
    )Canadian
    
    
    (29,167
    )
    
    
    (29,038
    )Total
    
    $
    3,222,296
    
    
    $
    3,161,054
 Loans Held For Sale Loans held for sale totaled $1.0 billion at March 31, 2004, an increase
from a balance of $0.9 billion at December 31, 2003. The increase occurred
primarily at our mortgage banking line of business where first mortgage loans
held for sale increased from $0.7 billion at December 31, 2003 to $0.8 billion
at March 31, 2004. Investment Securities The following table shows the composition of our investment securities at the
dates indicated: March 31,
    
    December 31,2004
    
    2003(In thousands)U.S. Treasury and government obligations
    
    $
    30,183
    
    
    $
    20,994Obligations of states and political subdivisions
    
    
    5,824
    
    
    
    3,960Mortgage-backed securities
    
    
    2,412
    
    
    
    2,039Federal Reserve stock, Federal Home Loan Bank
stock and other
    
    
    64,348
    
    
    
    65,532Total
    
    $
    102,767
    
    
    $
    92,525
 18




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##### Table of Contents



Deposits Total deposits for the first quarter of 2004 averaged $3.0 billion
compared to deposits for the year 2003 that averaged $3.1 billion. Demand
deposits for the first quarter of 2004 averaged $866.7 million, a 17% decrease
over the average balance for the year 2003. A significant portion of demand
deposits is related to deposits at Irwin Union Bank and Trust Company, which
are associated with escrow accounts held on loans in the servicing portfolio at
the mortgage banking line of business. During the first quarter of 2004, these
escrow accounts averaged $635.5 million compared to an average of $826.2
million for the year 2003. The decrease in average escrow balances in 2004
relates to the decline in production at the mortgage banking line of business. Irwin Union Bank and Trust utilizes institutional broker-sourced deposits
as funding from time to time to supplement deposits solicited through branches
and other wholesale funding sources. At March 31, 2004, institutional
broker-sourced deposits totaled $342.5 million compared to a balance of $339.4
million at December 31, 2003. Short-Term Borrowings Short-term borrowings during the first quarter of 2004 averaged $273.5
million compared to an average of $595.2 million for the year 2003. Short-term
borrowings declined to $297.0 million at March 31, 2004 compared to $429.8
million at December 31, 2003. The decrease in short-term borrowings at the end
of the first quarter relative to year-end reflects an increase in mortgage
escrow deposits (an alternative funding source for our mortgage warehouse) to
$828.8 million, compared to $566.9 million at year-end. Other Long-Term and Collateralized Borrowings Other long-term debt totaled $270.2 million at March 31, 2004, unchanged
from December 31, 2003. We had obligations represented by subordinated
debentures at March 31, 2004 totaling $240.1 million with our wholly-owned
trusts that were created for the purpose of issuing trust preferred securities.
The subordinated debentures were the sole assets of the trusts at March 31,
2004. In accordance with FIN 46, at the end of 2003 we began deconsolidating
the wholly-owned trusts that issued the trust preferred securities. As a
result, these securities no longer are consolidated on our balance sheet.
Instead, the subordinated debentures held by the trusts are disclosed on the
balance sheet as other long-term debt. Collateralized borrowings totaled $526.3 million at March 31, 2004,
compared to $590.1 million at December 31, 2003. The decreased debt relates to
paydowns on the secured borrowings during the first quarter at our home equity
lending and commercial finance lines of business. These securitization
structures result in loans remaining as assets and debt borrowings being
recorded on the balance sheet. The securitization debt represents match-term
funding for these loans and leases. Capital Shareholders equity averaged $443.9 million during the first quarter of
2004, up 12% compared to the average for the year 2003. Shareholders equity
balance of $453.2 million at March 31, 2004 represented $16.04 per common
share, compared to $15.36 per common share at December 31, 2003. We paid $2.3
million in dividends in the first quarter of 2004, reflecting an increase of
$0.01 per share compared to a year ago. The following table sets forth our capital and regulatory capital ratios
at the dates indicated: March 31,
    
    December 31,2004
    
    2003(In thousands)Tier 1 capital
    
    $
    585,287
    
    
    $
    556,793Tier 2 capital
    
    
    175,906
    
    
    
    183,738Total risk-based capital
    
    $
    761,193
    
    
    $
    740,531Risk-weighted assets
    
    $
    4,965,752
    
    
    $
    4,917,622Risk-based ratios:Tier 1 capital
    
    
    11.8
    %
    
    
    11.4
    %Total capital
    
    
    15.3
    
    
    
    15.1Tier 1 leverage ratio
    
    
    11.8
    
    
    
    11.2Ending shareholders equity to assets
    
    
    8.8
    
    
    
    8.7Average shareholders equity to
assets
    
    
    9.1
    
    
    
    7.6
 19




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##### Table of Contents



At March 31, 2004, our total risk-adjusted capital ratio was 15.3%
exceeding the 10.0% required to be considered well-capitalized by our state
and federal banking regulators and our internal minimum target of 11.0%. At
December 31, 2003, our total risk-adjusted capital ratio was 15.1%. Our ending
equity to assets ratio at March 31, 2004 was 8.8% compared to 8.7% at December
31, 2003. Our Tier 1 capital totaled $585.3 million as of March 31, 2004, or
11.8% of risk-weighted assets. Cash Flow Analysis Our cash and cash equivalents increased $34.9 million during the first
quarter of 2004 compared to a decrease of $25.4 million during the same period
in 2003. Cash flows from operating activities resulted in a use of $114.2
million in cash and cash equivalents in the first quarter of 2004 compared to
the first quarter of 2003 when our operations used $305.8 million in cash and
cash equivalents. Changes in loans held for sale impact cash flows from
operations. In a period in which loan production exceeds sales such as we had
in the first quarter of 2004, operating cash flows will decrease reflecting our
investment in cash generating assets. In the first quarter of 2004, our loans
held for sale increased $112.3 million, thus increasing the cash used by
operating activities. Earnings Outlook We have not provided quantitative earnings guidance for 2004. As discussed
before, our strategy is to balance the impact of changes in interest rates and
economic conditions on our mortgage banking production with investments in
mortgage servicing and in our credit retained portfolios. These investments
will typically respond in an opposite and complementary manner. We expect a
higher proportion of 2004 earnings to come from our commercial banking, home
equity lending and commercial finance lines of business than was the case in
2003. We expect these earnings to be more in line with the long-term growth and
segment contribution trends we have seen at Irwin Financial, rather than the
disproportionate contribution to revenues that we had from mortgage
originations during 2002 and 2003. We believe our credit quality is improving
and that our expenses for credit reserves will decline in 2004, allowing us to
increase earnings. In addition, in a strengthening economy in which interest
rates rise, we believe our net revenues from our mortgage servicing activities
should increase. These estimates are based on various factors and current
assumptions management believes are reasonable, including current industry
forecasts of a variety of economic and competitive factors. However,
projections are inherently uncertain, and our actual earnings may differ
significantly from this estimate due to uncertainties and risks related to our
business such as fluctuations in interest rates and other factors mentioned
above in the About Forward-Looking Statements section. Our transition off
securitization gain-on-sale accounting in our home equity line of business has
now had a two-year history at the end of 2003. We assume that the completion of
this transition, coupled with the projected growth of our other lines of
business, will enable us over time to meet or exceed our long-term targets of
double digit growth in earnings per share and 15% return on equity, measured
over several years. A meaningful amount of our earnings comes from activities and
mark-to-market accounting requirements tied directly or indirectly to capital
market activities. For example, the valuation of our mortgage servicing
portfolio is impacted by movements in the bond market. The impact of short-term
movements in interest rates on the valuation of our mortgage servicing rights
is mitigated by a combination of financial derivatives and changes in income
from production of new mortgages likely to be driven by those same movements in
interest rates. However, the correlation within short periods of time (such as
a single quarter) between interest rate movements that impact the reported
value of our mortgage servicing rights at quarter end and the production
effects of those interest rate movements  which may not be reflected until the
following quarter  can be low. In addition, U.S. generally accepted
accounting principles (GAAP) imposes a lower-of-cost-or-market valuation cap on
the value of our servicing asset, while we know of no financial derivatives
available in the secondary market with similarly asymmetric value change
characteristics. This anomaly in accounting for mortgage servicing assets
makes it difficult at times to construct hedges with the desired GAAP
accounting outcome, although the economic balance may still exist. It is
possible, therefore, that our balanced revenue strategy may be successful as
measured over several quarters or years, but may have market-based variances if
measured over short periods. We also have a large amount of income that is
subject to assumptions and pricing for credit risks. We use a variety of
methods for estimating the effects of and accounting for credit losses, but
ultimately, we need to make estimates based on imperfect knowledge of future
events, which may cause actual results to differ materially from our
expectations. For example, if the pace of economic recovery in the U.S. is
slower in 2004 than currently anticipated by consensus estimates, our credit
related costs may increase beyond our current estimates. 20




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##### Table of Contents



Earnings by Line of Business Irwin Financial Corporation is composed of five principal lines of
business:  
    
    Mortgage Banking  
    
    Commercial Banking  
    
    Home Equity Lending  
    
    Commercial Finance  
    
    Venture Capital The following table summarizes our net income (loss) by line of business
for the periods indicated: Three Months Ended March 31,2004
    
    2003(In thousands)Net income (loss):Mortgage Banking
    
    $
    9,732
    
    
    $
    19,639Commercial Banking
    
    
    5,417
    
    
    
    5,211Home Equity Lending
    
    
    6,633
    
    
    
    (9,498
    )Commercial Finance
    
    
    (293
    )
    
    
    (260
    )Venture Capital
    
    
    18
    
    
    
    (1,328
    )Other (including consolidating entries)
    
    
    (1,166
    )
    
    
    (1,988
    )$
    20,341
    
    
    $
    11,776
 Mortgage Banking The following table shows selected financial information for our mortgage
banking line of business: Three Months Ended March 31,2004
    
    2003(In thousands)Selected Income Statement Data:Net interest income
    
    $
    8,662
    
    
    $
    16,065Recovery of loan losses
    
    
    107
    
    
    
    53Other income
    
    
    59,867
    
    
    
    80,983Total net revenue
    
    
    68,636
    
    
    
    97,101Operating expense
    
    
    (52,469
    )
    
    
    (65,213
    )Income before taxes
    
    
    16,167
    
    
    
    31,888Income taxes
    
    
    (6,435
    )
    
    
    (12,249
    )Net income
    
    $
    9,732
    
    
    $
    19,639Selected Operating Data:Mortgage loan originations
    
    $
    2,930,716
    
    
    $
    5,477,292Servicing sold as a % of originations
    
    
    50.6
    %
    
    
    4.5
    %
 Selected Balance Sheet Data at End of
    
    March 31,
    
    December 31,Period:
    
    2004
    
    2003Total assets
    
    $
    1,330,505
    
    
    $
    1,258,641Mortgage loans held for sale
    
    
    781,224
    
    
    
    679,360Mortgage servicing assets
    
    
    298,486
    
    
    
    348,174Short-term debt
    
    
    83,913
    
    
    
    214,877Shareholders equity
    
    
    125,490
    
    
    
    122,671Selected Operating Data:Servicing portfolio:Balance at end of period
    
    
    29,563,330
    
    
    
    29,640,122Weighted average coupon rate
    
    
    5.73
    %
    
    
    5.83
    %Weighted average servicing fee
    
    
    0.32
    
    
    
    0.33
 21




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##### Table of Contents



Overview In our mortgage banking line of business, we originate, purchase, sell and
service conventional and government agency-backed residential mortgage loans
throughout the United States. We also engage in the business of mortgage
reinsurance. Because most of our mortgage originations either are insured by
an agency of the federal government, such as the Federal Housing Administration
(FHA) or the Veterans Administration (VA), or, in the case of conventional
mortgages, meet requirements for sale to Federal National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) or the Federal Home
Loan Bank (FHLB), we are able to remove substantially all of the credit risk
associated with these loans from our balance sheet. While we securitize and
sell mortgage loans to institutional and private investors, we may choose to
retain the servicing rights. Loan origination demand and servicing values
react in opposite directions to changes in interest rates, as explained below.
We believe this balance between mortgage loan originations and mortgage loan
servicing values assists in managing the risk from interest rate changes, which
has helped stabilize our revenue stream. Our mortgage banking line of business is currently our largest contributor
to revenue, comprising 51% of our total net revenues for the first quarter in
2004, compared to 82% for the first quarter in 2003. Our mortgage banking line
of business contributed 48% of our net income this quarter, compared to 167%
for the first quarter last year. Our channels for originating loans consist primarily of retail, wholesale,
and correspondent lending. The retail channel originates loans through retail
branches and identifies potential borrowers mainly through relationships
maintained with housing intermediaries, such as realtors, homebuilders and
brokers. Our wholesale and correspondent divisions purchase loans from third
party sources. The wholesale division purchases primarily from mortgage loan
brokers and issues loan proceeds directly to the borrower. The correspondent
lending division purchases closed mortgage loans primarily from small mortgage
banks and retail banks. We fund our mortgage loan originations using internal
funding sources and through credit facilities provided by third parties.
Generally within a 30-day period after funding, we sell our mortgage loan
originations into the secondary mortgage market by either direct loan sales or
by securitization. Our secondary market sources include government-sponsored
mortgage entities, nationally-sponsored mortgage conduits, and institutional
and private investors. As mentioned, we believe there is a balance between mortgage loan
originations and mortgage loan servicing that assists in managing the risk from
interest rate changes and the impact of rate changes on each part of the
business. In rising interest rate environments, originations typically
decline, while the unrealized value of our mortgage servicing portfolio
generally increases as prepayment expectations decline. In declining interest
rate environments, unrealized servicing values typically decrease as prepayment
expectations increase, while the economic value of our mortgage production
franchise generally increases due to the potential for greater mortgage loan
originations. However, the offsetting impact of changes in production income
and servicing values may not always be recognized in the same quarter under
generally accepted accounting principles - due to the application of
lower-of-cost-or-market treatment under generally accepted accounting
principles to the mortgage servicing asset, but not its equivalent to the
production franchise  causing greater volatility in short-term results than is
apparent in longer-term measurements such as annual income. We sell servicing
rights periodically for many reasons, including income recognition, cash flow,
capital management and servicing portfolio management. Servicing rights sales
occur at the time the underlying loans are sold to an investor (in flow sales)
or in pools from our seasoned servicing portfolio (in bulk sales). Net Income Net income from mortgage banking for the three months ended March 31, 2004
was $9.7 million, compared to $19.6 million for the same period in 2003, a
decrease of 50%. This net income decrease in 2004 primarily relates to a
decline in mortgage originations as a result of an increasing interest rate
environment that began in the latter half of 2003. 22




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##### Table of Contents



The following table shows the composition of our originations by loan
categories for the periods indicated: Three Months Ended March 31,2004
    
    2003(Dollars in thousands)Total originations
    
    $
    2,930,716
    
    
    $
    5,477,292Percent retail loans
    
    
    23
    %
    
    
    27
    %Percent wholesale loans
    
    
    43
    
    
    
    49Percent correspondent
    
    
    25
    
    
    
    21Percent brokered (1)
    
    
    9
    
    
    
    3Percent refinances
    
    
    61
    
    
    
    70
   (1)
    
    Brokered loans are loans we originate for which we receive loan
origination fees, but which are funded, closed and owned by unrelated third
parties. Mortgage loan originations for the three months ended March 31, 2004
totaled $2.9 billion, down 46% from the same period in 2003 as a result of the
increasing interest rate environment. Refinanced loans accounted for 61% of
loan production for the first quarter of 2004 compared to 70% for the same
period in 2003. Net Revenue Three Months Ended March 31,2004
    
    2003(In thousands)Selected Income Statement Data:Net interest income
    
    $
    8,662
    
    
    $
    16,065Recovery of loan losses
    
    
    107
    
    
    
    53Gain on sales of loans
    
    
    42,782
    
    
    
    91,228Servicing fees
    
    
    25,899
    
    
    
    16,755Amortization expense
    
    
    (27,310
    )
    
    
    (27,235
    )Impairment of servicing assets
    
    
    (48,184
    )
    
    
    (1,954
    )Gain on derivatives
    
    
    58,352
    
    
    
    321Gain on sales of servicing assets
    
    
    6,489
    
    
    
    4Other income
    
    
    1,839
    
    
    
    1,864Total net revenue
    
    $
    68,636
    
    
    $
    97,101
 Net interest income is generated from the interest earned on mortgage
loans before they are sold to investors, less the interest expense incurred on
borrowings to fund the loans. Net interest income for the first quarter in
2004 totaled $8.7 million compared to $16.1 million for the first quarter in
2003. The decrease in net interest income in 2004 is a result of decreased
production resulting in a lower average balance of mortgage loans held for sale
on our balance sheet during the quarter. Gain on sale of loans includes the valuation of newly created mortgage
servicing rights and net loan origination fees and is recognized when loans are
pooled and sold into the secondary mortgage market. Also included in gain on
sale of loans are fair value adjustments to forward contracts and interest rate
lock commitments. Gain on sale of loans for the three months ended March 31,
2004 totaled $42.8 million, compared to $91.2 million for the same period in
2003, a decline of 53%. This decrease is attributable to decreased
originations and slightly reduced secondary market margins as a result of the
increasing interest rate environment during the latter half of 2003. Servicing fee income is recognized by collecting fees, which normally
range between 25 and 44 basis points annually on the principal amount of the
underlying mortgages. Servicing fee income totaled $25.9 million for the first
quarter of 2004, an increase of 55% from first quarter of 2003, primarily
reflecting the growth in the servicing portfolio. Amortization expense relates to mortgage servicing rights and is based on
the proportion of current net servicing income to the total expected for the
estimated lives of the underlying loans. Amortization expense totaled $27.3
million for the three months ended March 31, 2004, relatively unchanged
compared to $27.2 million during the first quarter of 2003. Due to changes in
our amortization methodology in the first quarter of 2003 and a $38 million
other-than-temporary impairment adjustment recorded in the fourth quarter of
2003, our amortization expense was relatively unchanged on a year-over-year
basis, notwithstanding the increase in our servicing portfolio. 23




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##### Table of Contents



Impairment expense is recorded when the book value of the mortgage
servicing rights exceeds the fair value on a strata by strata basis. We
determined fair value at March 31, 2004, through the use of internal models,
valuation comparisons to actual servicing sale proceeds, and independent
valuations (each of which produced approximately the same valuation result)
performed by third parties at the end of February and the end of March. We made
various changes to assumptions used in our internal models to ensure our
valuation was consistent with market evidence obtained. Impairment expense
totaled $48.2 million during the first quarter of 2004, compared to $2.0
million during the same period of 2003. The impairment expense in 2004 was a
result of higher loan prepayment expectations trends from declining interest
rates during the first quarter of 2004. Derivative gains of $58.4 million were
recorded during the same period. Derivative gains of $0.3 million were
recorded during the first quarter of 2003. Although mortgage servicing rights
valuations declined in both periods, impairment net of derivative gains/losses
in the first quarter of 2004 was a positive $10.2 million compared to a
negative $1.6 million in the same period a year earlier, reflecting larger
offsetting gains in derivatives in 2004. At March 31, 2004, the mortgage line of business held $10.8 billion
notional amount of interest rate swaptions to manage the risk associated with
our servicing assets. Notional amounts do not represent the amount at risk.
The current risk management activities of the mortgage bank related to
servicing assets do not satisfy the criteria for hedge accounting under SFAS
133. As a result, these derivatives are accounted for as other assets and
other liabilities, and changes in fair value are adjusted through earnings as
derivative gains (losses), while the underlying servicing asset is accounted
for on a strata-by-strata basis at the lower of cost or market. In the first quarter of 2004, we recorded an other-than-temporary
impairment adjustment of $7.0 million to reflect our view that the originally
recorded value of certain servicing rights, net of amortization, and subsequent
impairment associated with those rights is unlikely to be recovered in market
value. There was no related direct impact on net income as this other than
temporary impairment affected only balance sheet accounts. However, the
adjustment will result in a reduction of amortization expense and potentially
reduced recovery of impairment in future periods. Our mortgage banking business maintains the flexibility either to sell
servicing for current cash flow through bulk sales or to retain servicing for
future cash flow through the retention of ongoing servicing fees. Total
servicing sales represented 51% of loan originations during the first quarter
of 2004, compared to 4% during the first quarter of 2003. The decision to sell
or retain servicing is based on current market conditions for servicing assets,
loan origination levels and production expenses, servicing portfolio management
considerations, consolidated capital constraints and the general level of risk
tolerance of the mortgage banking line of business and the Corporation. We sold
$1.1 billion of servicing during the first quarter of 2004, generating a $6.5
million pre-tax gain. There were no bulk sales during the first quarter of
2003. Over the past few years, we have built our servicing portfolio in
anticipation of rising interest rates that would result in lower mortgage loan
production. We sold servicing this quarter to counteract the effect of declines
in production income, as we do in periods of rising interest rates, as well as
to manage the size and composition of our investment in mortgage servicing
assets. Operating Expenses The following table sets forth operating expenses for our mortgage banking
line of business for the periods indicated: Three Months Ended March 31,2004
    
    2003(Dollars in thousands)Salaries and employee benefits
    
    $
    19,740
    
    
    $
    17,999Incentive and commission pay
    
    
    9,788
    
    
    
    23,014Other expenses
    
    
    22,941
    
    
    
    24,200Total operating expenses
    
    $
    52,469
    
    
    $
    65,213Number of employees at period end(1)
    
    
    2,012
    
    
    
    2,055
   (1)
    
    On a full time equivalent basis Operating expenses for the three months ended March 31, 2004 totaled $52.5
million, a 20% decrease over the same period in 2003. Salaries and employee
benefits including incentive and commission pay declined 28% during the first
quarter of 2004 compared to the same period in 2003. These fluctuations
reflect significant decreases in production activities in 2004 versus 2003. 24




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##### Table of Contents



Mortgage Servicing The following table shows information about our managed mortgage servicing
portfolio, including mortgage loans held for sale, for the periods indicated: Three Months Ended
    
    Year EndedMarch 31,
    
    December 31,2004
    
    2003(Portfolio in billions)Beginning servicing portfolio
    
    $
    29.6
    
    
    $
    16.8Mortgage loan closings
    
    
    2.7
    
    
    
    21.9Sales of servicing rights
    
    
    (1.2
    )
    
    
    (0.6
    )Run-off(1)
    
    
    (1.5
    )
    
    
    (8.5
    )Ending servicing portfolio
    
    $
    29.6
    
    
    $
    29.6Number of loans (end of period)
    
    
    226,714
    
    
    
    229,983Average loan size
    
    $
    130,399
    
    
    $
    128,880Weighted average coupon rate
    
    
    5.73
    %
    
    
    5.83
    %Percent Government National Mortgage Association
(GNMA) and state housing programs
    
    
    23
    %
    
    
    26
    %Percent conventional and other
    
    
    77
    
    
    
    74Delinquency ratio
    
    
    2.7
    
    
    
    4.6Mortgage servicing assets to related servicing
portfolio(2)
    
    
    1.02
    
    
    
    1.19
 (1) Run-off is primarily the reduction in principal balance of the
servicing portfolio due to regular principal payments made by
mortgagees and early repayments of entire loans. (2) For this calculation, deferred service release premiums on
warehouse loans are excluded from mortgage servicing assets and loans
held for sale (i.e. warehouse loans) are excluded from the servicing
portfolio. We record originated mortgage servicing assets at allocated cost basis
when the loans are sold and record purchased servicing assets at fair value.
Thereafter, servicing rights are accounted for at the lower of their cost or
fair value. We record a valuation allowance for any impairment on a
disaggregated basis. We determine fair value on a monthly basis based on a
discounted cash flow analysis. These cash flows are projected over the life of
the servicing using prepayment, default, discount rate and cost to service
assumptions that we believe market participants would use to value similar
assets. We then assess these modeled assumptions for reasonableness through
independent third-party valuations, periodic servicing asset sales and through
the use of industry surveys. At March 31, 2004, we estimated the fair value of
these assets to be $302.8 million in the aggregate, or $4.3 million greater
than the carrying value on the balance sheet, the difference between carrying
value and market value being the result of a cap under generally accepted
accounting principles at the lower of cost or market for these assets. At
December 31, 2003, we estimated the fair value of these assets to be $358.9
million in the aggregate, or $10.7 million greater than the carrying value on
the balance sheet. 25




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##### Table of Contents



Commercial Banking The following table shows selected financial information for our
commercial banking line of business: Three Months Ended March 31,2004
    
    2003(Dollars in thousands)Selected Income Statement Data:Interest income
    
    $
    28,385
    
    
    $
    27,630Interest expense
    
    
    (7,839
    )
    
    
    (8,603
    )Net interest income
    
    
    20,546
    
    
    
    19,027Provision for loan and lease losses
    
    
    (1,200
    )
    
    
    (1,580
    )Noninterest income
    
    
    4,776
    
    
    
    5,129Operating expense
    
    
    (15,083
    )
    
    
    (13,905
    )Income before taxes
    
    
    9,039
    
    
    
    8,671Income taxes
    
    
    (3,622
    )
    
    
    (3,460
    )Net income
    
    $
    5,417
    
    
    $
    5,211
 March 31,
    
    December 31,Selected Balance Sheet Data at End of Period
    
    2004
    
    2003Total assets
    
    $
    2,311,816
    
    
    $
    2,203,965Loans
    
    
    2,007,917
    
    
    
    1,988,633Allowance for loan and lease losses
    
    
    22,086
    
    
    
    22,055Deposits
    
    
    2,082,557
    
    
    
    1,964,274Shareholders equity
    
    
    161,676
    
    
    
    162,050
 March 31,
    
    December 31,Year to Date Daily Averages:
    
    2004
    
    2004Assets
    
    $
    2,256,645
    
    
    $
    2,119,944Loans
    
    
    1,996,261
    
    
    
    1,914,608Allowance for loan and lease losses
    
    
    22,310
    
    
    
    21,895Deposits
    
    
    2,020,300
    
    
    
    1,894,406Shareholders equity
    
    
    156,677
    
    
    
    147,886Shareholders equity to assets
    
    
    6.94
    %
    
    
    6.98
    %
 Overview Our commercial banking line of business focuses on providing credit, cash
management and personal banking products to small businesses and business
owners. We offer commercial banking services through our banking subsidiaries,
Irwin Union Bank and Trust, an Indiana state-chartered commercial bank, and
Irwin Union Bank, F.S.B., a federal savings bank. Net Income Commercial banking net income increased to $5.4 million during the first
quarter of 2004, compared to $5.2 million for the same period in 2003. Net Interest Income The following table shows information about net interest income for our
commercial banking line of business: Three Months Ended March 31,2004
    
    2003(Dollars in thousands)Net interest income
    
    $
    20,546
    
    
    $
    19,027Average interest earning assets
    
    
    2,178,870
    
    
    
    1,916,236Net interest margin
    
    
    3.79
    %
    
    
    4.03
    %
 26




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##### Table of Contents



Net interest income was $20.5 million for the first quarter of 2004, an
increase of 8% over first quarter of 2003. The 2004 improvement in net
interest income resulted primarily from an increase in our commercial banking
loan portfolio as a result of growth and expansion efforts. Net interest
margin is computed by dividing net interest income by average interest earning
assets. Net interest margin for the three months ended March 31, 2004 was
3.79%, compared to 4.03% for the same period in 2003. The reduction in 2004
margin is due to slower than anticipated loan growth which has led to greater
than planned excess liquidity, as well as funding sources which have hit
contractual or competitive rate floors at a greater rate than our loan assets. Provision for Loan and Lease Losses Provision for loan and lease losses declined to $1.2 million during the
first quarter of 2004, compared to a provision of $1.6 million during the same
period in 2003. The declining provision relates to a combination of improving
economic conditions, slower loan growth, improved overall loan quality, and a
lower level of potential loss exposure. See further discussion in the Credit
Quality section below. Noninterest Income The following table shows the components of noninterest income for our
commercial banking line of business: Three Months Ended March 31,2004
    
    2003(Dollars in thousands)Trust fees
    
    $
    518
    
    
    $
    477Service charges on deposit accounts
    
    
    1,459
    
    
    
    1,217Insurance commissions, fees and premiums
    
    
    665
    
    
    
    608Gain from sales of loans
    
    
    862
    
    
    
    2,312Loan servicing fees
    
    
    328
    
    
    
    284Amortization and impairment of servicing
assets
    
    
    (540
    )
    
    
    (774
    )Brokerage fees
    
    
    430
    
    
    
    262Other
    
    
    1,054
    
    
    
    743Total noninterest income
    
    $
    4,776
    
    
    $
    5,129Total noninterest income to total net revenues
    
    
    19.8
    %
    
    
    22.7
    %
 Noninterest income during the first quarter of 2004 decreased 7% over
2003. This decrease was due primarily to lower gains from sales of loans
related to decreased mortgage production. The commercial banking line of
business has a first mortgage servicing portfolio totaling $448.9 million,
principally a result of mortgage loan production in its south-central Indiana
markets. Servicing rights are carried on the balance sheet at the lower of
cost or market, estimated at March 31, 2004 to be $3.3 million. Operating Expenses The following table shows the components of operating expenses for our
commercial banking line of business: Three Months Ended March 31,2004
    
    2003(Dollars in thousands)Salaries and employee benefits
    
    $
    9,322
    
    
    $
    8,925Other expenses
    
    
    5,761
    
    
    
    4,980Total operating expenses
    
    $
    15,083
    
    
    $
    13,905Efficiency ratio
    
    
    59.6
    %
    
    
    57.6
    %Number of employees at period end(1)
    
    
    499
    
    
    
    467
   (1)
    
    On a full time equivalent basis. Operating expenses for the three months ended March 31, 2004 totaled $15.1
million, an increase of 8% over the same period in 2003. 27




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##### Table of Contents



Balance Sheet Total assets for the quarter ended March 31, 2004 averaged $2.3 billion
compared to $2.1 billion for the year ended December 31, 2003. Average earning
assets for the quarter ended March 31, 2004 averaged $2.2 billion compared to
$2.0 billion for the year 2003. The most significant component of the increase
in 2004 was an increase in commercial loans as a result of the commercial
banks continued growth and expansion efforts into new markets. Average core
deposits for the first quarter of 2004 totaled $1.8 billion, an increase of 3%
over average core deposits in the fourth quarter 2003. Credit Quality Nonperforming assets to total assets and the allowance for loan losses to
total loans both decreased in 2004 over 2003. The decline in nonperformings is
primarily the result of a satisfactory resolution of a single nonperforming
relationship. Nonperforming loans are not significantly concentrated in any
industry category. The following table shows information about our
nonperforming assets in this line of business and our allowance for loan
losses: March 31,
    
    December 31,2004
    
    2003(Dollars in thousands)Nonperforming loans
    
    $
    20,435
    
    
    $
    25,614Other real estate owned
    
    
    1,255
    
    
    
    995Total nonperforming assets
    
    $
    21,690
    
    
    $
    26,609Nonperforming assets to total assets
    
    
    0.94
    %
    
    
    1.21
    %Allowance for loan losses
    
    $
    22,086
    
    
    $
    22,055Allowance for loan losses to total loans
    
    
    1.10
    %
    
    
    1.11
    %
 March 31,
    
    March 31,For the Period Ended:
    
    2004
    
    2003Provision for loan losses
    
    $
    1,200
    
    
    $
    1,580Net charge-offs
    
    
    1,170
    
    
    
    946Annualized net charge-offs to average loans
    
    
    0.24
    %
    
    
    0.21
    %
 28




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##### Table of Contents



Home Equity Lending The following table shows selected financial information for the home
equity lending line of business: Three Months Ended March 31,2004
    
    2003(Dollars in thousands)Selected Income Statement DataNet interest income
    
    $
    24,696
    
    
    $
    26,412Provision for loan losses
    
    
    (5,899
    )
    
    
    (4,880
    )Other income
    
    
    17,655
    
    
    
    (14,981
    )Total net revenues
    
    
    36,452
    
    
    
    6,551Operating expenses
    
    
    (25,386
    )
    
    
    (22,381
    )Income (loss) before taxes
    
    
    11,066
    
    
    
    (15,830
    )Income taxes
    
    
    (4,433
    )
    
    
    6,332Net income (loss)
    
    $
    6,633
    
    
    $
    (9,498
    )Selected Operating Data:Loan volume (quarterly):Lines of credit
    
    $
    94,825
    
    
    $
    73,459Loans
    
    
    212,052
    
    
    
    205,091Gain on sale of loans to whole loans sold
    
    
    4.29
    %
    
    
    2.29
    %
 March 31,
    
    December 31,2004
    
    2003Selected Balance Sheet Data:Home equity loans and lines of credit (1)
    
    $
    721,685
    
    
    $
    692,637Allowance for loan losses
    
    
    (29,456
    )
    
    
    (29,251
    )Home equity loans held for sale
    
    
    213,864
    
    
    
    202,627Residual interests(2)
    
    
    68,692
    
    
    
    70,519Short-term debt
    
    
    451,296
    
    
    
    368,640Collateralized borrowings
    
    
    411,064
    
    
    
    460,535Shareholders equity
    
    
    135,351
    
    
    
    128,555Selected Operating Data:Total managed portfolio balance at end of period
    
    
    1,473,356
    
    
    
    1,513,289Delinquency ratio
    
    
    4.7
    %
    
    
    5.9
    %Total managed portfolio including credit risk sold
balance at end of period
    
    $
    2,610,459
    
    
    $
    2,568,356Weighted average coupon rate:Lines of credit
    
    
    9.47
    %
    
    
    9.71
    %Loans
    
    
    11.91
    
    
    
    12.07Net home equity charge-offs to average managed portfolio
    
    
    4.07
    
    
    
    4.79
   (1)
 (2) Includes $12.9 million and $12.4 million of residual interests at March
31, 2004 and December 31, 2003, respectively, that are considered
credit-enhancing interest-only strips (CEIOS) under federal banking
regulations. Overview Our home equity lending line of business originates, purchases, sells and
services a variety of home equity lines of credit and fixed-rate home equity
loan products nationwide. We market our home equity products (generally using
second mortgage liens) through a combination of direct mail, brokers, the
Internet, and correspondent channels. We target creditworthy homeowners who
are active credit users. Customers are underwritten using proprietary models
based on several criteria, including the customers previous use of credit. We offer home equity loans with combined loan-to-value (CLTV) ratios of up
to 125% of their collateral value. Home equity loans are priced taking into
account, among other factors, the credit history of our customer and the
relative loan-to-value (LTV) ratio of the loan at origination. For example,
all else being equal, those loans with loan-to-value ratios greater than 100%
(high LTV or HLTVs) are priced with higher coupons than home equity loans with
loan-to-value ratios less than 100% to compensate for increased expected losses
through default. For the quarter ended March 31, 2004, HLTV home equity loans
constituted 55% of our loan originations and 62% of our managed portfolio in
this line of business. In an effort to manage portfolio concentration risk and
to comply with existing banking regulations, we have policies in place
governing the size of our investment in loans secured by real estate where the
LTV is greater than 90%. In accordance with regulatory guidance set forth in
Supervision and Regulation Letter 01-4 and in consultation with our banking
regulators, we made a risk-weighting adjustment in our regulatory Consolidated
Report of Condition and Income, beginning with the third quarter of 2003. This
adjustment reflects a risk-weighting of 200 percent for certain HLTV assets
(approximately $219 million at March 31, 2004) that are described in the
guidance as subprime. 29




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##### Table of Contents



For most of our home equity product offerings, we offer customers the
choice to accept an early repayment fee in exchange for a lower interest rate.
A typical early repayment option provides for a fee equal to up to six months
interest that is payable if the borrower chooses to repay the loan during the
first three to five years of its term. Approximately 84%, or $1.2 billion, of
our home equity managed portfolio at March 31, 2004 have early repayment
provisions, reflecting such customer choice. The following table provides a breakdown of our home equity lending
managed portfolio by product type, outstanding principal balance and weighted
average coupon as of March 31, 2004: WeightAverageAmount
    
    % of Total
    
    Coupon(In thousands)Home equity loans < = 100% CLTV
    
    $
    155,962
    
    
    
    10.59
    %
    
    
    10.76
    %Home equity lines of credit < = 100%
CLTV
    
    
    376,930
    
    
    
    25.58
    
    
    
    8.19Total <= 100% CLTV
    
    
    532,892
    
    
    
    36.17
    
    
    
    8.94Home equity loans > 100% CLTV
    
    
    542,997
    
    
    
    36.85
    
    
    
    13.62Home equity lines of credit > 100% CLTV
    
    
    345,827
    
    
    
    23.48
    
    
    
    11.38Total > 100% CLTV
    
    
    888,824
    
    
    
    60.33
    
    
    
    12.75First mortgages
    
    
    24,030
    
    
    
    1.63
    
    
    
    7.77Other (including Immediate Credit)
    
    
    27,610
    
    
    
    1.87
    
    
    
    13.91Total
    
    $
    1,473,356
    
    
    
    100.00
    %
    
    
    11.31
    %
 Net Income Our home equity lending business recorded net income of $6.6 million
during the three months ended March 31, 2004, compared to a net loss for the
same period in 2003 of $9.5 million. The increased earnings in the first
quarter of 2004 relate primarily to improving credit quality and resulting
differences in fair value adjustments to our residual interests through Trading
Gains/Losses in the respective quarters. Net Revenue Net revenue for the three months ended March 31, 2004 totaled $36.5
million, compared to net revenue for the three months ended March 31, 2003 of
$6.6 million. The increase in revenues is primarily a result of increased
trading gains related to differences in marking the residual interests to fair
value in the respective quarters, reflecting expectation of improved credit
quality of the underlying loan portfolios represented by these residuals.
Trading gains during the three months ended March 31, 2004 totaled $4.6 million
compared to trading losses of $17.8 million during the same period in 2003.
Cash flow received from the residual assets during the quarter totaled $9.7
million compared to our previously modeled estimate of $7.4 million. Losses on
the loans underlying the residual assets occurred at an annualized rate of
6.28% during the first quarter of 2004, as compared to our December 31, 2003,
projection for the first quarter of 9%. We recognized greater gain on sales of loans during the quarter. We sold a
total of $202 million of loans during the first quarter of 2004, or 66% of the
quarters production, compared to $86 million or 31% of production in the first
quarter of 2003. During the first quarter of 2004, our home equity lending business
produced $306.9 million of home equity loans, compared to $278.6 million during
the same period in 2003. Our home equity lending business had $906.1 million
of net loans and loans held for sale at March 31, 2004, compared to $866.0
million at December 31, 2003. Included in the loan balance at March 31, 2004
were $427.0 million of collateralized loans as part of secured financings. The following table sets forth certain information regarding net revenue
for the periods indicated: Three Months Ended March 31,2004
    
    2003(Dollars in thousands)Net interest income
    
    $
    24,696
    
    
    $
    26,412Provision for loan losses
    
    
    (5,899
    )
    
    
    (4,880
    )Gain on sales of loans
    
    
    8,683
    
    
    
    1,971Loan servicing fees
    
    
    6,101
    
    
    
    4,673Amortization of servicing assets
    
    
    (3,977
    )
    
    
    (2,884
    )Recovery (impairment) of servicing assets
    
    
    940
    
    
    
    (1,017
    )Trading gains (losses)
    
    
    4,641
    
    
    
    (17,789
    )Other income
    
    
    1,267
    
    
    
    65Total net revenue
    
    $
    36,452
    
    
    $
    6,551
 30




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##### Table of Contents



Net interest income decreased to $24.7 million for the three months ended
March 31, 2004, compared to $26.4 million for the same period in 2003. This
line of business earns interest income on loans held on the balance sheet and
the accretion of the discount applied to its residual interests. Accretion
totaled $3.3 million during the first three months of 2004 versus $7.0 million
for the same period in 2003. The reduced accretion relates to the 48%
reduction in our residual interests at March 31, 2004 compared to the same
period a year earlier. The increase in the non-accretion interest income from
$19.4 million in the first quarter of 2003 to $21.4 million in the first
quarter of 2004 is a result of the buildup of our on-balance sheet loan
portfolio which grew from $851.8 million at March 31, 2003 to $935.5 million at
March 31, 2004. Provision for loan losses increased to $5.9 million during the quarter
ended March 31, 2004 compared to $4.9 million during the same period in 2003.
The increased provision relates to seasoning of the loan portfolio. Gains on sales of loans for the three months ended March 31, 2004 totaled
$8.7 million, compared to $2.0 million during the same period in 2003. The
increase in gains in 2004 relates to a higher volume of loan sales and improved
margins on those sales. The gain on sales of loans relative to the principal
balance of loans sold increased during the first quarter of 2004 compared to
the same period in 2003 due to secondary market demand, product mix between
Home Equity Loan (HEL) and Home Equity Lines of Credit (HELOC) product, and
cost factors among our various channels. We had a securitization of $0.3
billion of loans during the first quarter of 2003 that we accounted for as a
secured financing with no gain on sale. We completed whole loan sales during
the first quarter of 2004 of $202.4 million resulting in a gain of $8.7
million. The majority of the loans sold in the first quarter of 2004 were
recently originated and funded using short-term, warehouse facilities. We do not record a residual interest as a result of these whole loan sales
as we do not retain a credit loss interest after the sale. These are cash
sales for which we receive a premium, generally record a servicing asset, and
recognize any points and fees at the time of sale. We are provided the right
to an incentive servicing fee that will provide cash payments to us if we meet
certain loan credit and servicing performance metrics. These contracts are
treated as derivatives and classified in other assets. At March 31, 2004, we
were receiving incentive fees for one transaction that had met these
performance metrics. Included in other income was $1.8 million related to these
incentive servicing fees based upon actual and projected performance of the
underlying pools of loans. Of the $1.8 million recognized during the quarter,
$0.5 million was the result of cash collections and $1.3 million represented
the projected value of future cash payments, discounted at 30%. Loan servicing fees totaled $6.1 million during the first quarter of 2004
compared to $4.7 million during the same period in 2003. The servicing
portfolio underlying the mortgage servicing asset at our home equity lending
line of business totaled $1.670 billion and $1.692 billion at March 31, 2004
and 2003, respectively. The increase in loan servicing fees in 2004 relates to
increased servicing income on our whole loans portfolio as well as increased
early repayment fees which totaled $2.4 million during the quarter ended March
31, 2004 compared to $1.2 million during the same period in 2003 on the
portfolio underlying the mortgage servicing asset. Amortization and impairment of servicing assets includes amortization
expenses and valuation adjustments relating to the carrying value of servicing
assets. Our home equity lending business determines fair value of its
servicing asset using discounted cash flows and assumptions as to estimated
future servicing income and cost that we believe market participants would use
to value similar assets. In addition, we assess these modeled assumptions for
reasonableness through independent third-party valuations. At March 31, 2004,
net servicing assets totaled $30.9 million, compared to a balance of $28.4
million at December 31, 2003. Servicing asset amortization and impairment
expense totaled $3.0 million during the first quarter of 2004, compared to $3.9
million for the three months ended March 31, 2003. Trading gains (losses) represent unrealized gains (losses) as a result of
adjustments to the carrying values of our residual interests. Trading gains
totaled $4.6 million in the first quarter of 2004 compared to losses of $17.8
million for the same period in 2003. Residual interests had a balance of $68.7
million at March 31, 2004 and $70.5 million at December 31, 2003. The $68.7
million valuation at March 31, 2004 reflects $87.0 million of anticipated
undiscounted cash flows of which $71.6 million represents existing
securitization overcollateralization and reserve funds, and the remaining $15.4
million represents expected future net spread and prepayment penalties.
Included in the valuation are assumptions for estimated prepayments, expected
losses, and discount rates that we believe market participants would use to
value similar assets. To the extent our expectations of future loss rates,
prepayment speeds and other factors change as we gather additional data over
time, these residual valuations may be subject to additional adjustments in the
future. These adjustments could have a material effect on our earnings. The
increased unrealized trading gains in the first quarter of 2004 principally
reflect lower expected loss rates than previously modeled. These lower
expected loss rates reflect the strengthening economy and recent actual
experience. Our forward loss assumptions are reevaluated monthly and, as such,
our residual asset valuations will be adjusted monthly to reflect changes in
actual and expected loss rates in our portfolio. 31




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##### Table of Contents



Operating Expenses The following table shows operating expenses for our home equity lending
line of business for the periods indicated: Three Months Ended March 31,2004
    
    2003(Dollars in thousands)Salaries and employee benefits
    
    $
    16,126
    
    
    $
    13,062Other
    
    
    9,260
    
    
    
    9,319Total operating expenses
    
    $
    25,386
    
    
    $
    22,381Number of employees at period end (1)
    
    
    639
    
    
    
    686
   (1)
    
    On a full time equivalent basis. Operating expenses were $25.4 million for the three months ended March 31,
2004, compared to $22.4 million for the same period in 2003. Operating
expenses during the first quarter of 2004 included $2.8 million of compensation
expense related to minority ownership interests at the home equity lending line
of business which are accounted for on a mark to market basis. During the same
period in 2003, we had a reversal of approximately $31 thousand due to the
decline in the value of the minority ownership interest during that period. Home Equity Servicing Our home equity lending business continues to service a majority of the
loans it has securitized and sold. We earn a servicing fee of approximately 50
to 100 basis points of the outstanding principal balance of the loans treated
as sales under generally accepted accounting principles. For whole loans sold
with servicing retained, we capitalize servicing fees including rights to
future early repayment fees. These loans are included below in managed
portfolio including credit risk sold. In addition, where applicable, we have
the opportunity to earn additional future servicing incentive fees. Included
below in the category whole loan sales are $961.8 million of loans for which
we have the opportunity to earn an incentive servicing fee. Our managed including credit risk sold portfolio is separated into $1.7
billion of loans and lines of credit originated, securitized, and treated as
sold loans under SFAS 140 and $0.9 billion of loans originated, generally since
2002, and held on balance sheet either as loans held for investment or loans
held for sale. Generally, loans originated prior to 2002 and treated as sold
under SFAS 140 have a reserve methodology that reflects life of account loss
expectations, whereas our policy for on-balance sheet loans requires that we
hold at a minimum, sufficient reserves for potential losses inherent in the
portfolio at the balance sheet date. Such losses for on-balance sheet loans
manifest themselves over a period which management believes approximates twelve
months. The following table sets forth certain information for each of these
portfolios. 32




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##### Table of Contents



March 31,
    
    December 31,Managed Portfolio Including Credit
    
    2004
    
    2003Risk SoldTotal Loans
    
    $
    2,610,459
    
    
    $
    2,568,35630 days past due
    
    
    3.76
    %
    
    
    4.65
    %90 days past due
    
    
    1.64
    
    
    
    1.86Annualized QTD Net Chargeoff Rate
    
    
    2.97
    
    
    
    3.65Managed PortfolioTotal Loans
    
    $
    1,473,356
    
    
    $
    1,513,28930 days past due
    
    
    4.72
    %
    
    
    5.87
    %90 days past due
    
    
    2.02
    
    
    
    2.43Annualized QTD Net Chargeoff Rate
    
    
    4.07
    
    
    
    4.79Unsold LoansTotal Loans (1)
    
    $
    935,479
    
    
    $
    897,22730 days past due
    
    
    2.46
    %
    
    
    2.91
    %90 days past due
    
    
    1.04
    
    
    
    1.25Annualized QTD Net Chargeoff Rate
    
    
    2.61
    
    
    
    3.03Loan Loss Reserve
    
    $
    29,456
    
    
    $
    29,251Owned ResidualTotal Loans
    
    $
    537,877
    
    
    $
    616,06230 days past due
    
    
    8.65
    %
    
    
    10.18
    %90 days past due
    
    
    3.73
    
    
    
    4.15Annualized QTD Net Chargeoff Rate
    
    
    6.28
    
    
    
    7.13Residual Undiscounted Losses
    
    $
    55,220
    
    
    $
    64,598Credit Risk SoldTotal Loans
    
    $
    1,137,103
    
    
    $
    1,055,06830 days past due
    
    
    2.52
    %
    
    
    2.90
    %90 days past due
    
    
    1.15
    
    
    
    1.03Whole Loan SalesTotal Loans
    
    $
    1,083,837
    
    
    $
    993,46730 days past due
    
    
    2.08
    %
    
    
    2.20
    %90 days past due
    
    
    0.92
    
    
    
    0.70Sold ResidualsTotal Loans
    
    $
    53,266
    
    
    $
    61,60130 days past due
    
    
    11.57
    %
    
    
    14.16
    %90 days past due
    
    
    5.98
    
    
    
    6.38
   (1)
    
    Excludes deferred fees and costs. In our home equity lending business, we generally have retained credit
risk on loans we originate, whether funded on- or off-balance sheet. The
managed portfolio amounts listed above include those loans we service with
credit risk retained. Delinquency rates and losses on our managed portfolio
result from a variety of factors, including loan seasoning, portfolio mix and
general economic conditions. The 30-day and greater delinquency ratio on our
managed portfolio was 4.7% at March 31, 2004, and 5.9% at December 31, 2003. 33




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##### Table of Contents



Commercial Finance The following table shows selected financial information for our
commercial finance line of business for the periods indicated: Three Months Ended March 31,2004
    
    2003(Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    6,754
    
    
    $
    4,807Provision for loan and lease losses
    
    
    (1,153
    )
    
    
    (2,864
    )Noninterest income
    
    
    475
    
    
    
    835Total net revenues
    
    
    6,076
    
    
    
    2,778Operating expense
    
    
    (4,225
    )
    
    
    (3,328
    )Income (loss) before taxes
    
    
    1,851
    
    
    
    (550
    )Income taxes
    
    
    (2,144
    )
    
    
    290Net loss
    
    $
    (293
    )
    
    $
    (260
    )Selected Operating Data:Net charge-offs
    
    $
    1,294
    
    
    $
    1,812Net interest margin
    
    
    5.74
    %
    
    
    5.47
    %Total fundings of loans and leases
    
    $
    71,652
    
    
    $
    57,609
 March 31,
    
    December 31,Selected Balance Sheet Data at End of Period:
    
    2004
    
    2003Total assets
    
    $
    487,769
    
    
    $
    474,915Loans and leases
    
    
    479,364
    
    
    
    463,423Allowance for loan and lease losses
    
    
    (10,962
    )
    
    
    (11,445
    )Shareholders equity
    
    
    44,127
    
    
    
    44,255
 Overview In our commercial finance line of business, we originate small-ticket
equipment leases through established U.S. and Canadian relationships with
vendors, manufacturers and third-party originators, and provide financing for
franchisees of selected quick service and casual dining restaurant concepts.
The majority of our leases are full payout (no residual), small-ticket assets
secured by commercial equipment. Within the franchise channel, the majority of
our contracts are loans and are full payout with higher transaction sizes than
in our small-ticket channel. The franchise channel may also finance real estate
for select franchise systems. We finance a variety of commercial and office
equipment types and try to limit the concentrations in our loan and lease
portfolios. Net Income During the three months ended March 31, 2004, the commercial finance line
of business incurred a loss of $0.3 million, relatively unchanged from the same
period in the prior year. Pre-tax earnings increased to $1.9 million for the
quarter ended March 31, 2004, compared to a pre-tax loss of $0.6 million during
the same period in 2003. The 2004 pre-tax improvement in earnings is
attributable to portfolio growth, improvements in credit quality, and gains
from the sale of whole loans. Net income was negatively affected by a one-time
income tax charge of $1.7 million during the first quarter reflecting the
cumulative impact of tax liabilities acquired, but not recorded on the books of
the company at the time of our purchase of our Canadian operations from a now
bankrupt seller. The impact of this adjustment would not have been material to
any prior reporting periods. Net Interest Income The following table shows information about net interest income for our
commercial finance line of business: Three Months Ended March 31,2004
    
    2003(Dollars in thousands)Net interest income
    
    $
    6,754
    
    
    $
    4,807Average interest earning assets
    
    
    472,883
    
    
    
    356,692Net interest margin
    
    
    5.74
    %
    
    
    5.47
    %
 34




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##### Table of Contents



Net interest income was $6.8 million for the quarter ended March 31, 2004,
an increase of 41% over 2003. The improvement in net interest income resulted
primarily from an increase in our commercial finance portfolio. The total loan
and lease portfolio has increased to $479.4 million at March 31, 2004, an
increase of 3% over year-end 2003 and an increase of 26% over March 31, 2003.
This line of business originated $71.7 million in loans and leases during the
first quarter of 2004, compared to $57.6 million during the same period of
2003. Net interest margin is computed by dividing net interest income by average
interest earning assets. Net interest margin for the first quarter of 2004 was
5.74%, compared to 5.47% in 2003 for the same period. The increase in 2004
margin is due primarily to changes in product mix and intercompany funding
changes. Provision for Loan and Lease Losses The provision for loan and lease losses decreased to $1.2 million during
the first three months in 2004 compared to $2.9 million for the same period in
2003. The decreased provisioning levels relate primarily to improvements in
credit quality and reduction in the broker-based, small-ticket portion of our
domestic portfolio. As previously announced, we largely exited the
broker-sourced channel a year ago. Noninterest Income Noninterest income during the three months ended March 31, 2004 decreased
67% over the same period in 2003. This decrease was due primarily to derivative
losses offset partially by gains from sales of whole loans in our franchise
unit during the quarter ended March 31, 2004. We had no derivative losses and
no loan sales for this line of business during the same period in 2003. Operating Expenses The following table shows the components of operating expenses for our
commercial finance line of business: Three Months Ended March 31,2004
    
    2003(Dollars in thousands)Salaries and employee benefits
    
    $
    3,362
    
    
    $
    2,606Other
    
    
    863
    
    
    
    722Total operating expenses
    
    $
    4,225
    
    
    $
    3,328Number of employees at period end (1)
    
    
    137
    
    
    
    131
   (1)
    
    On a full time equivalent basis. Operating expenses during the first quarter in 2004 totaled $4.2 million,
an increase of 27% over the same period in 2003. The increased operating
expenses relate to the continued growth in this business since its inception in
1999, including compensation costs related to higher originations and the
achievement of pre-tax profitability. Credit Quality The commercial finance line of business had nonperforming loans and leases
at March 31, 2004 of $3.4 million compared to $4.1 million as of December 31,
2003. Net charge-offs recorded by this line of business totaled $1.3 million
for the first quarter of 2004 compared to $1.8 million for the first quarter of
2003. The improvement in nonperformings and net charge-offs relates primarily
to our broker-based domestic lease portfolio. As noted above, we exited this
business channel in mid-2003 and will now manage the portfolio as it runs off
while focusing our efforts in originating vendor-sourced small ticket leases in
the U.S. Our allowance for loan and lease losses at March 31, 2004 totaled
$11.0 million, representing 2.29% of loans and leases, compared to a balance at
December 31, 2003 of $11.4 million, representing 2.47% of loans and leases. 35




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##### Table of Contents



The following table shows information about our nonperforming loans and
leases in this line of business and our allowance for loan and lease losses: March 31,
    
    December 31,2004
    
    2003(Dollars in thousands)Nonperforming loans
    
    $
    3,393
    
    
    $
    4,083Allowance for loan losses
    
    $
    10,962
    
    
    $
    11,445Allowance for loan losses to total loans
    
    
    2.29
    %
    
    
    2.47
    %
 March 31,
    
    March 31,For the Period Ended:
    
    2004
    
    2003Provision for loan losses
    
    $
    1,153
    
    
    $
    2,864Net charge-offs
    
    $
    1,294
    
    
    $
    1,812Annualized net charge-offs to average loans
    
    
    1.11
    %
    
    
    2.06
    %
 The following table provides certain information about the loan and lease
portfolio of our commercial finance line of business at the dates shown: March 31,
    
    December 31,2004
    
    2003(Dollars in thousands)Franchise loans
    
    $
    157,505
    
    
    $
    150,505Weighted average yield
    
    
    8.24
    %
    
    
    8.45
    %Delinquency ratio
    
    
    0.30
    
    
    
    0.45Domestic leases
    
    $
    137,497
    
    
    $
    134,602Weighted average yield
    
    
    9.44
    %
    
    
    9.54
    %Delinquency ratio
    
    
    1.17
    
    
    
    1.32Canadian leases (1)
    
    $
    184,362
    
    
    $
    178,316Weighted average yield
    
    
    9.95
    %
    
    
    10.12
    %Delinquency ratio
    
    
    1.26
    
    
    
    0.89
   (1)
    
    In U.S. dollars. Venture Capital The following table shows selected financial information for our venture
capital line of business for the periods indicated: Three Months Ended March 31,2004
    
    2003(In thousands)Selected Income Statement Data:Net interest income
    
    $
    (1
    )
    
    $
    7Mark-to-market adjustment on investments
    
    
    9
    
    
    
    (2,259
    )Noninterest income
    
    
    149
    
    
    
    147Total net revenues
    
    
    157
    
    
    
    (2,105
    )Operating expense
    
    
    (128
    )
    
    
    (108
    )Income (loss) before taxes
    
    
    29
    
    
    
    (2,213
    )Income taxes
    
    
    (11
    )
    
    
    885Net income (loss)
    
    $
    18
    
    
    $
    (1,328
    )
 March 31,
    
    December 31,Selected Balance Sheet Data at End of Period:
    
    2004
    
    2003Investment in portfolio companies (cost)
    
    $
    14,592
    
    
    $
    14,601Mark-to-market adjustment
    
    
    (11,068
    )
    
    
    (11,077
    )Carrying value of portfolio companies
    
    $
    3,524
    
    
    $
    3,524
 36




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##### Table of Contents



Overview In our venture capital line of business, we make minority investments in
early stage companies in the financial services industry and related fields
that intend to use technology as a key component of their competitive strategy.
We provide Irwin Ventures portfolio companies the benefit of our management
experience in the financial services industry. In addition, we expect that
contacts made through venture activities may benefit management of our other
lines of business through the sharing of technologies and market opportunities.
Our venture capital line of business had investments in seven private
companies as of March 31, 2004, with an aggregate investment cost of $14.6
million and a carrying value of $3.5 million. Our carrying value for
investments in three of the seven has been reduced through valuation
adjustments to zero. During the three months ended March 31, 2004, the venture capital line of
business had net income of $18 thousand, compared to a net loss of $1.3 million
for the first quarter in 2003. The 2003 loss was due to valuation adjustments
to reflect the companys portfolio investments at market value. Parent and Other Results at the parent company and other businesses totaled a net loss of
$1.2 million for the three months ended March 31, 2004, compared to a loss of
$2.0 million during the same period in 2003. These losses at the parent
company primarily relate to operating expenses in excess of management fees
charged to the lines of business and interest income earned on intracompany
loans. Included in parent and other expense were compensation charges related
to key employee retention initiatives at the home equity lending line of
business totaling $1.2 million for the quarter ended March 31, 2004. We
recognized a $45 thousand benefit with respect to this initiative during the
first quarter of 2003. Also included in parent company operating results are
allocations to our subsidiaries of interest expense related to our
interest-bearing capital obligations. During the quarter ended March 31, 2004,
we allocated $3.3 million of these expenses to our subsidiaries, compared to
$3.7 million during the first quarter of 2003. During the first quarter, we released a $1.7 million tax reserve relating
to Canadian tax issues and re-examined other exposures relating to potential
challenges from tax authorities. After reviewing the exposures and computing
the required level of tax reserves, the Parent released an additional $0.5
million to adjust the reserve balance to a level commensurate with identified
tax exposures. Each subsidiary pays taxes to us at the statutory rate. Subsidiaries also
pay fees to us to cover direct and indirect services. In addition, certain
services are provided from one subsidiary to another. Intercompany income and
expenses are calculated on an arms-length, external market basis and are
eliminated in consolidation. Risk Management We are engaged in businesses that involve the assumption of financial
risks including:  
    
    Credit risk  
    
    Liquidity risk  
    
    Interest rate risk  
    
    Operational risk Each line of business that assumes financial risk uses a formal process to
manage this risk. In all cases, the objectives are to ensure that risk is
contained within prudent levels and that we are adequately compensated for the
level of risk assumed. Our Chairman, Executive Vice President, Senior Vice Presidents (including
the Chief Financial Officer), and Chief Risk Officer meet on a regularly
scheduled basis (or more frequently as appropriate) as an Enterprise-wide Risk
Management Committee (ERMC), reporting to the Board of Directors Audit and
Risk Management Committee. The ERMC and its subcommittees oversee all aspects
of our financial, credit, and operational risks. The ERMC provides
senior-level review and enhancement of line manager risk processes and
oversight of our risk reporting, surveillance and model parameter changes. 37




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Credit Risk The assumption of credit risk is a key source of earnings for the home
equity lending, commercial banking and commercial finance lines of business.
The mortgage banking line of business assumes limited credit risk as its
mortgages typically are insured and are sold within a short period of time
after origination. The credit risk in the loan portfolios of the home equity lending,
commercial finance and commercial banking lines of business has the most
potential for a significant effect on our consolidated financial performance.
These lines of business each have a Chief Credit Officer specific to the
product line and manage credit risk through various combinations of the use of
lending policies, credit analysis and approval procedures, periodic loan
reviews, servicing activities, and/or personal contact with borrowers.
Commercial loans over a certain size are reviewed by a loan committee prior to
approval. We perform independent loan review across the Corporation through a
function that reports directly to the Audit and Risk Management Committee. The allowance for loan and lease losses is an estimate based on our
judgment applying the principles of SFAS 5, Accounting for Contingencies,
SFAS 114, Accounting by Creditors for Impairment of a Loan, and SFAS 118,
Accounting by Creditors for Impairment of a Loan  Income Recognition and
Disclosures. The allowance is maintained at a level we believe is adequate to
absorb probable losses inherent in the loan and lease portfolio. We perform an
assessment of the adequacy of the allowance no less frequently than on a
quarterly basis. Within the allowance, there are specific and expected loss components. The
specific loss component is based on a regular analysis of all loans over a
fixed-dollar amount where the internal credit rating is at or below a
predetermined classification. From this analysis we determine the loans that we
believe to be impaired in accordance with SFAS 114. Management has defined
impaired as nonaccrual loans. An allowance is established when the collateral
value, observable market price or discounted cash flows of an impaired loan is
lower than the carrying value of that loan. In addition to establishing
allowance levels for specifically identified higher risk graded loans,
management determines an allowance for all other loans in the portfolio for
which historical or projected experience indicates that certain losses exist.
These loans are segregated by major product type, and in some instances, by
aging, with an estimated loss ratio or migration pattern applied against each
product type and aging category. For portfolios that are too new to have
adequate historical experience on which to base a loss estimate, we use
estimates derived from industry experience and managements judgment. The loss
ratio or migration patterns are generally based upon historic loss experience
or historic rate migration behaviors, respectively, for each loan type adjusted
for certain environmental factors management believes to be relevant. Net charge-offs for the three months ended March 31, 2004 were $8.2
million, or 1.0% of average loans, compared to $6.1 million, or 0.9% of average
loans during the same period in 2003. The increase in charge-offs is a result
of loan growth and deteriorating credit quality in late 2003 manifesting itself
as higher charge-offs in early 2004 as portfolios season. At March 31, 2004,
the allowance for loan and lease losses was 2.0% of outstanding loans and
leases, unchanged from year end 2003. Total nonperforming loans and leases at March 31, 2004, were $36.1
million, compared to $44.4 million at December 31, 2003. Nonperforming loans
and leases as a percent of total loans and leases at March 31, 2004 were 1.1%,
compared to 1.4% at December 31, 2003. The 2004 decrease occurred primarily at
the commercial banking line of business where nonperforming loans decreased to
$20.4 million at March 31, 2004, compared to $25.6 million at the end of 2003.
The majority of this decrease was due to satisfactory resolution of a single
nonperforming relationship at the commercial banking line of business. Other real estate we owned totaled $6.3 million at March 31, 2004, down
from $6.4 million at December 31, 2003. Total nonperforming assets at March
31, 2004 were $44.9 million, or 0.87% of total assets compared to nonperforming
assets at December 31, 2003, of $52.5 million, or 1.1% of total assets. 38




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The following table shows information about our nonperforming assets at
the dates shown: March 31,
    
    December 31,2004
    
    2003(In thousands)Accruing loans past due 90 days or more:Commercial, financial and agricultural loans
    
    $
    559
    
    
    $
    4,172Real estate mortgages
    
    
    
    
    
    
    Consumer loans
    
    
    62
    
    
    
    226Lease financing:Domestic
    
    
    142
    
    
    
    159Canadian
    
    
    188
    
    
    
    70951
    
    
    
    4,627Nonaccrual loans and leases:Commercial, financial and agricultural loans
    
    
    19,104
    
    
    
    20,447Real estate mortgages
    
    
    12,270
    
    
    
    14,663Consumer loans
    
    
    709
    
    
    
    769Lease financing:Domestic
    
    
    1,380
    
    
    
    1,916Canadian
    
    
    1,682
    
    
    
    1,94335,145
    
    
    
    39,738Total nonperforming loans and leases
    
    
    36,096
    
    
    
    44,365Other real estate owned:Nonperforming loans held for sale not guaranteed
    
    
    2,456
    
    
    
    1,695Other real estate owned
    
    
    6,309
    
    
    
    6,431Total nonperforming assets
    
    $
    44,861
    
    
    $
    52,491Nonperforming loans and leases to total loans
and leases
    
    
    1.1
    %
    
    
    1.4
    %Nonperforming assets to total assets
    
    
    0.9
    %
    
    
    1.1
    %
 For the periods presented, the balances of any restructured loans are
reflected in the table above either in the amounts shown for accruing loans
past due 90 days or more or in the amounts shown for nonaccrual loans and
leases. Loans that are past due 90 days or more are placed on nonaccrual status
unless, in managements opinion, there is sufficient collateral value to offset
both principal and accrued interest. The nonperforming assets at March 31,
2004 and December 31, 2003 were held at our lines of business as follows: March 31,
    
    December 31,2004
    
    2003(In millions) Mortgage banking
    
    $
    7.6
    
    
    $
    6.8 Commercial banking
    
    
    21.7
    
    

    
    26.6 Home equity
lending
    
    
    12.2
    
    
    
    15.0 Commercial finance
    
    
    3.4
    
    
    
    4.1
 Generally, the accrual of income is discontinued when the full collection
of principal or interest is in doubt, or when the payment of principal or
interest has become contractually 90 days past due unless the obligation is
both well secured and in the process of collection. Liquidity Risk Liquidity is the availability of funds to meet the daily requirements of
our business. For financial institutions, demand for funds results principally
from extensions of credit and withdrawal of deposits. Liquidity is provided
through deposits and short-term and long-term borrowings, by asset maturities
or sales, and through equity capital. The objectives of liquidity management are to ensure that funds will be
available to meet current and future demands and that funds are available at a
reasonable cost. We manage liquidity via daily interaction with the lines of
business and periodic liquidity planning sessions. Since loans are less
marketable than securities, the ratio of total loans to total deposits is a
traditional measure of liquidity for banks and bank holding companies. At
March 31, 2004, the ratio of loans and loans held for sale to total deposits
was 127%. We are comfortable with this relatively high level due to our
position in first mortgage loans held for sale ($0.8 billion) and second
mortgage loans and leases financed through matched-term secured financing ($0.6
billion). The first mortgage loans carry an interest rate at or near current
market rates for first mortgage loans and are generally sold within a short
period. Excluding these two items, our loans to deposit ratio at March 31,
2004 was 84%. 39




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The mortgage banking line of business sells virtually all of its mortgage
loan originations within 30 days of funding, taking them off our balance sheet.
Therefore, the on-balance sheet funding of first mortgage loans is for the
brief period of time from origination to sale/securitization. In the first
quarter of 2004, the home equity lending line of business produced $0.3 billion
and home equity loan sales totaled $0.2 billion, thus requiring increases in
funding facilities for this line of business of $0.1 billion. Deposits consist of three primary types: non-maturity transaction account
deposits, certificates of deposit, and escrow account deposits. Non-maturity
transaction account deposits are generated by our commercial banking line of
business and include deposits placed into checking, savings, money market and
other types of deposit accounts by our customers. These types of deposits have
no contractual maturity date and may be withdrawn at any time. While these
balances fluctuate daily, a large percentage typically remains for much longer.
At March 31, 2004, these deposit types totaled $1.5 billion, an increase of
$0.4 billion from December 31, 2003. Certificates of deposit (CDs) differ from non-contractual maturity
accounts in that they do have contractual maturity dates. We issue CDs both
directly to customers and through brokers. As of March 31, 2004, CDs issued
directly to customers totaled $0.6 billion, which was up slightly from December
31, 2003. Brokered CDs are typically considered to have higher liquidity
(renewal) risk than CDs issued directly to customers, since brokered CDs are
often done in large blocks and since a direct relationship does not exist with
the depositor. In recognition of this, we manage the size and maturity
structure of brokered CDs closely. For example, the maturities of brokered CDs
are laddered to mitigate liquidity risk. CDs issued through brokers totaled
$0.3 billion at March 31, 2004, and had an average remaining life of 15 months,
as compared to $0.3 billion outstanding with an 18 month average remaining life
at December 31, 2003. Escrow account deposits are related to the servicing of our originated
first mortgage loans. When a first mortgage borrower makes a monthly mortgage
payment, consisting of interest and principal due on the loan and often a real
estate tax and insurance portion, we hold the payment on a non-interest earning
basis, except where otherwise required by law, until the payment is remitted to
the current owner of the loan or the proper tax authority and insurance
carrier. Escrow deposits may also include proceeds from the payoff of loans in
our servicing portfolio prior to the transmission of those proceeds to
investors. At March 31, 2004, these escrow balances totaled $0.8 billion, which
was up $0.2 billion from December 31, 2003. Short-term borrowings consist of borrowings from several sources. Our
largest borrowing source is the Federal Home Loan Bank of Indianapolis (FHLBI),
of which we are an active member. We utilize their collateralized borrowing
programs to help fund qualifying first mortgage, home equity and commercial
real estate loans. As of March 31, 2004, FHLBI borrowings outstanding totaled
$0.1 billion, a $0.2 billion decrease from December 31, 2003. We had sufficient
collateral pledged to FHLBI at March 31, 2004 to borrow an additional $0.7
billion, if needed. In addition to borrowings from the FHLBI, we use other lines of credit as
needed. At March 31, 2004, the amount of short-term borrowings outstanding on
our major credit lines and the total amount of the borrowing lines were as
follows:  
    
    Warehouse lines of credit to fund first mortgages and home equity
loans: none outstanding on a $300 million borrowing facility, of which
$150 million is committed  
    
    Warehouse borrowing facilities to fund first mortgage loans: $1
million outstanding on a $150 million committed borrowing facility  
    
    Lines of credit with correspondent banks, including fed funds lines:
$26 million outstanding out of $205 million available but not committed  
    
    Line of credit with a correspondent bank collateralized by mortgage
servicing rights: none outstanding out of $75 million committed
borrowing facility 40




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##### Table of Contents



In addition to short-term borrowings from the aforementioned credit lines, sale
facilities are used to effect sale of Government Sponsored Enterprise (GSE)
conforming first mortgage loans before scheduled GSE settlement dates. The
first two of these sale facilities listed below have specific dollar limits as
noted. The size of the third facility is limited only by the amount of
mortgage-backed securities we can package for purchase by the facility
provider. At March 31, 2004, the amount unsettled by the GSE on these
facilities and the total facility amount were as follows:  
    
    Committed warehouse sale facility: $133 million unsettled on a $600 million facility  
    
    Uncommitted warehouse sale facility: $64 million unsettled on a $150 million facility  
    
    Investor warehouse sale facility: $150 million unsettled Interest Rate Risk Because all of our assets are not perfectly match funded with like-term
liabilities, our earnings are affected by interest rate changes. Interest rate
risk is measured by the sensitivity of both net interest income and fair market
value of net interest sensitive assets to changes in interest rates. An asset/liability management committee (ALMC) at each of our lines of
business that has interest rate risk monitors the repricing structure of
assets, liabilities and off-balance sheet items and uses a financial simulation
model to measure interest rate risk over multiple interest rate scenarios. Our
parent company ALMC oversees the interest rate risk profile of all of our lines
of business as a whole and is represented on each of the line of business
ALMCs. We incorporate many factors into the financial model, including
prepayment speeds, net interest margin, fee income and a comprehensive
mark-to-market valuation process. We reevaluate risk measures and assumptions
regularly and enhance modeling tools as needed. Our commercial banking, home equity lending, and commercial finance lines
of business assume interest rate risk in the pricing structure of their loans
and leases, and manage this risk by adjusting the duration of their interest
sensitive liabilities and through the use of hedging using purchases and sales
of financial derivatives. Our mortgage banking line of business assumes interest rate risk by
entering into commitments to extend loans to borrowers at a fixed rate for a
limited period of time. We hold closed loans only temporarily until a pool is
formed and sold in a securitization or under a flow sale arrangement. To
mitigate the risk that interest rates will rise between loan origination and
sale, the mortgage bank buys commitments to deliver loans at a fixed price for
a portion of our pipeline. Our mortgage, commercial banking and home equity lending lines of business
also are exposed to the risk that interest rates will decline, increasing
prepayment speeds on loans and decreasing the value of servicing assets and
residual interests. Some offsets to these exposures exist in the form of
strong production operations, selective sales of servicing rights, match-funded
asset-backed securities sales and the use of financial instruments to manage
the economic performance of the assets. Since there are accounting timing
differences between the recognition of gains or losses on financial derivatives
and the realization of economic gains or losses on certain offsetting exposures
(e.g., strong production operations), our decisions on the degree to which we
manage risk with derivative instruments to insulate against short-term price
volatility depends on a variety of factors, including:  
    
    the type of risk we are trying to mitigate;  
    
    offsetting factors elsewhere in the Corporation;  
    
    the level of current capital above our target minimums;  
    
    time remaining in the quarter (i.e., days until quarter-end);  
    
    current level of derivative gain or loss relative to accounting and economic basis;  
    
    basis risk: the degree to which the interest rates underlying our
derivative instruments might not move parallel to the interest rate
driving our asset valuation; and  
    
    convexity: the degree to which asset values, or risk management
derivative instrument values, do not change in a linear fashion as
interest rates change. 41




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##### Table of Contents



This strategy may, at times, result in variability in quarterly results
that are not reflective of underlying trends for the Corporation. The following tables reflect our estimate of the present value of interest
sensitive assets, liabilities, and off-balance sheet items at March 31, 2004.
In addition to showing the estimated fair market value at current rates, they
also provide estimates of the fair market values of interest sensitive items
based upon a hypothetical instantaneous move both up and down 100 and 200 basis
points in the entire yield curve. The first table is an economic analysis showing the present value impact
of changes in interest rates, assuming a comprehensive mark-to-market
environment. The second table is an accounting analysis showing the same net
present value impact, adjusted for expected GAAP treatment. Neither analysis
takes into account the book values of the noninterest sensitive assets and
liabilities (such as cash, accounts receivable, and fixed assets), the values
of which are not directly determined by interest rates. The analyses are based on discounted cash flows over the remaining
estimated lives of the financial instruments. The interest rate sensitivities
apply only to transactions booked as of March 31, 2004, although certain
accounts such as Official Checks and Due From are normalized whereby the
three- or six-month average balance is included rather than the quarter-end
balance in order to avoid having the analysis skewed by a significant increase
or decrease to an account balance at quarter-end. The net asset value sensitivities do not necessarily represent the changes
in the lines of business net asset value that would actually occur under the
given interest rate scenarios, as sensitivities do not reflect changes in value
of the companies as a going concern, nor consider potential rebalancing or
other hedging actions that might be taken in the future under asset/liability
management as interest rates change. Specifically, the volume of derivative contracts entered into to manage
the risk of mortgage servicing rights (MSRs) fluctuates from quarter to
quarter, depending upon market conditions, the size of our MSR portfolio and
various additional factors. We monitor derivative positions frequently and
rebalance them as needed. Therefore, our derivative positions, shown in the
table below as of March 31, 2004, may or may not be representative of our risk
position during the succeeding quarter. Additionally, it is unlikely that the
volume of derivative positions would remain constant over large fluctuations in
interest rates, although the tables below assume they do. MSR risk management
derivative contracts appear under the category Interest Sensitive Financial
Derivatives in the tables below. Economic Value Change Method Present Value at March 31, 2004,Change in Interest Rates of:-2%
    
    -1%
    
    Current
    
    +1%
    
    +2%(In thousands)Interest Sensitive AssetsLoans and other assets
    
    $
    3,545,810
    
    
    $
    3,517,231
    
    
    $
    3,482,667
    
    
    $
    3,447,669
    
    
    $
    3,412,675Loans held for sale
    
    
    1,007,890
    
    
    
    1,003,023
    
    
    
    996,219
    
    
    
    988,914
    
    
    
    980,634Mortgage servicing rights
    
    
    168,919
    
    
    
    209,656
    
    
    
    336,859
    
    
    
    500,781
    
    
    
    585,084Residual interests
    
    
    74,587
    
    
    
    72,867
    
    
    
    69,771
    
    
    
    66,234
    
    
    
    61,972Interest sensitive financial derivatives
    
    
    35,799
    
    
    
    38,822
    
    
    
    23,025
    
    
    
    (58,759
    )
    
    
    (243,970
    )Total interest sensitive assets
    
    $
    4,833,005
    
    
    $
    4,841,599
    
    
    $
    4,908,541
    
    
    $
    4,944,839
    
    
    $
    4,796,395Interest Sensitive LiabilitiesDeposits
    
    
    (3,328,446
    )
    
    
    (3,311,811
    )
    
    
    (3,294,563
    )
    
    
    (3,280,315
    )
    
    
    (3,267,158
    )Short-term borrowings(1)
    
    
    (397,631
    )
    
    
    (397,530
    )
    
    
    (397,185
    )
    
    
    (396,820
    )
    
    
    (396,461
    )Long-term debt
    
    
    (706,164
    )
    
    
    (698,282
    )
    
    
    (687,511
    )
    
    
    (675,862
    )
    
    
    (664,131
    )Total interest sensitive liabilities
    
    
    (4,432,241
    )
    
    
    (4,407,623
    )
    
    
    (4,379,259
    )
    
    
    (4,352,997
    )
    
    
    (4,327,750
    )Net market value as of March 31, 2004
    
    $
    400,764
    
    
    $
    433,976
    
    
    $
    529,282
    
    
    $
    591,842
    
    
    $
    468,645Change from current
    
    $
    (128,518
    )
    
    $
    (95,306
    )
    
    $
    
    
    
    $
    62,560
    
    
    $
    (60,637
    )Net market value as of December 31, 2003
    
    $
    531,596
    
    
    $
    567,923
    
    
    $
    575,450
    
    
    $
    645,981
    
    
    $
    635,791Potential change
    
    $
    (43,854
    )
    
    $
    (7,527
    )
    
    $
    
    
    
    $
    70,531
    
    
    $
    60,341
   (1)
    
    Includes certain debt which is categorized as collateralized
borrowings in other sections of this document. 42




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##### Table of Contents



GAAP-Based Value Change Method Present Value at March 31, 2004,Change in Interest Rates of:-2%
    
    -1%
    
    Current
    
    +1%
    
    +2%(In thousands)Interest Sensitive AssetsLoans and other assets (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loans held for sale
    
    
    996,219
    
    
    
    996,219
    
    
    
    996,219
    
    
    
    988,914
    
    
    
    980,634Mortgage servicing rights
    
    
    168,920
    
    
    
    209,481
    
    
    
    332,611
    
    
    
    410,068
    
    
    
    422,854Residual interests
    
    
    74,587
    
    
    
    72,867
    
    
    
    69,771
    
    
    
    66,234
    
    
    
    61,972Interest sensitive financial derivatives
    
    
    35,799
    
    
    
    38,822
    
    
    
    23,025
    
    
    
    (58,759
    )
    
    
    (243,970
    )Total interest sensitive assets
    
    $
    1,275,525
    
    
    $
    1,317,389
    
    
    $
    1,421,626
    
    
    $
    1,406,457
    
    
    $
    1,221,490Interest Sensitive LiabilitiesDeposits (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short-term borrowings (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total interest sensitive liabilities (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net market value as of March 31, 2004
    
    $
    1,275,525
    
    
    $
    1,317,389
    
    
    $
    1,421,626
    
    
    $
    1,406,457
    
    
    $
    1,221,490Potential change
    
    $
    (146,101
    )
    
    $
    (104,237
    )
    
    $
    
    
    
    $
    (15,169
    )
    
    $
    (200,136
    )Net market value as of December 31, 2003
    
    $
    1,260,307
    
    
    $
    1,303,782
    
    
    $
    1,313,410
    
    
    $
    1,279,691
    
    
    $
    1,222,645Potential change
    
    $
    (53,103
    )
    
    $
    (9,628
    )
    
    $
    
    
    
    $
    (33,719
    )
    
    $
    (90,765
    )
   (1)
    
    Value does not change in GAAP presentation. Operational risk Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events. Irwin
Financial, like other financial services organizations, is exposed to a variety
of operational risks. These risks include regulatory, reputational and legal
risks, as well as the potential for processing errors, internal or external
fraud, failure of computer systems, and external events that are beyond the
control of the Corporation, such as natural disasters. Our Board of Directors has ultimate accountability for the level of
operational risk assumed by us. The Board guides management by approving our
business strategy and significant policies. Our management and Board have also
established and continue to improve a control environment that encourages a
high degree of awareness and proactivity in alerting senior management and the
Board to potential control issues on a timely basis. The Board has directed that primary responsibility for the management of
operational risk rests with the managers of our business units, who are
responsible for establishing and maintaining internal control procedures that
are appropriate for their operations. In 2002, we started implementing a
multi-year program to provide a more integrated firm-wide approach for the
identification, measurement, monitoring and mitigation of operational risk. The
new enterprise-wide operational risk oversight function reports to the Audit
and Risk Management Committee of our Board of Directors and to our
Enterprise-Wide Risk Management Committee, which is led by the Chairman of the
Board of Directors. We recently established an enterprise-wide compliance
oversight function to devote increased attention and resources to banking
regulatory compliance as we have grown more complex and as our home equity,
commercial finance and mortgage banking businesses are now all being conducted
under Irwin Union Bank and Trust Company. The compliance oversight function
reports to our Chief Risk Officer, who in turn reports to the Audit and Risk
Management Committee of the Board of Directors. We have identified 75 key
processes in the Corporation for which we have Risk and Control Summaries
(RACS) for line managers to identify operational risks, internal controls and
residual or unmitigated risks. These RACS constitute an integral part of our
Board(s), CEO and CFOs oversight and assessment of the adequacy of our
internal controls. The financial services business is highly regulated. Failure to comply
with these regulations could result in substantial monetary or other damages
that could be material to our financial position. Statutes and regulations may
change in the future. We cannot predict what effect these changes, if made,
will have on our operations. It should be noted that the supervision,
regulation and examination of banks, thrifts and mortgage companies by
regulatory agencies are intended primarily for the protection of depositors and
other customers rather than shareholders of these institutions. We are registered as a bank holding company with the Board of Governors of
the Federal Reserve System under the Bank Holding Company Act of 1956, as
amended, and the related regulations. We are subject to regulation, supervision
and examination by the Federal Reserve, and as part of this process we must
file reports and additional information with the Federal Reserve. The
regulation, supervision and examinations occur at the local, state and federal
levels and involve, but are not limited to minimum capital requirements,
consumer protection, community reinvestment, and deposit insurance. 43




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Off-Balance Sheet Instruments In the normal course of our business as a provider of financial services,
we are party to certain financial instruments with off-balance sheet risk to
meet the financial needs of our customers. These financial instruments include
loan commitments and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized on the consolidated balance sheet. Our exposure to credit loss, in the form of nonperformance by the
counterparty on commitments to extend credit and standby letters of credit, is
represented by the contractual amount of those instruments. Collateral pledged
for standby letters of credit and commitments varies but may include accounts
receivable; inventory; property, plant, and equipment; and residential real
estate. Total outstanding commitments to extend credit at March 31, 2004 and
December 31, 2003, respectively, were $543.6 million and $546.5 million. We had
$30.0 million and $30.8 million in irrevocable standby letters of credit
outstanding at March 31, 2004 and December 31, 2003, respectively. Derivative Financial Instruments Financial derivatives are used as part of the overall asset/liability risk
management process. We use certain derivative instruments that do not qualify
for hedge accounting treatment under SFAS 133. These derivatives are
classified as other assets and other liabilities and marked to market on the
income statement. While we do not seek GAAP hedge accounting treatment for the
assets that these instruments are hedging, the economic purpose of these
instruments is to manage the risk inherent in existing exposures to either
interest rate risk or foreign currency risk. We entered into an interest rate swap that has a notional amount (which
does not represent the amount at risk) of $25 million as of March 31, 2004.
Under the terms of the swap agreement, we receive a fixed rate of interest and
pay a floating rate of interest based upon one-month LIBOR. We recognized a
gain of $0.1 million included in derivative gains during the quarter ended
March 31, 2004 related to this swap. By receiving a fixed rate of interest and
paying a floating rate on the swap, we are converting the economics of a $25
million fixed rate funding source into a floating rate funding source. We enter into forward contracts to protect against interest rate
fluctuations from the date of mortgage loan commitment until the loans are
sold. At March 31, 2004, we designated the portion of these transactions
hedging the closed mortgage loans as hedges that qualify for hedge accounting
treatment under SFAS 133. The notional amount of our forward contracts (which
does not represent the amount at risk) totaled $1.8 billion at March 31, 2004.
The closed mortgage loans hedged by forward contracts qualify for hedge
accounting treatment under SFAS 133. The basis of the hedged closed loans is
adjusted for change in value associated with the risk being hedged. We value
closed loan contracts at period end based upon the current secondary market
value of securities with similar characteristics. The unrealized gain on our
forward contracts at March 31, 2004 was $3.7 million and the hedge
ineffectiveness for the quarter then ended was a gain of $0.3 million. The
effect of these hedging activities was recorded through earnings as a component
of gain from sale of loans. We enter into commitments to originate loans whereby the interest rate on
the loan is determined prior to funding (rate lock commitments). Rate lock
commitments on loans intended to be sold are considered to be derivatives and
are recorded at fair value. We value these commitments at period end based upon
the current secondary market value of securities with similar characteristics.
A net decrease in fair value of these derivatives totaling $0.7 million was
recorded in the first quarter 2004 in gain from sale of loans. At March 31,
2004, we had a notional amount of rate lock commitments outstanding totaling
$1.7 billion with a fair value of $3.0 million. Notional amounts do not
represent the amount of risk. Our commercial finance line of business delivered fixed rate leases into
conduits that fund them using floating rate commercial paper, which creates an
interest rate risk mismatch.  
    
    In two instances, this funding mismatch is lessened by a combination
of amortizing interest rate caps and Eurodollar futures contracts. The
interest rate caps have a strike price of 5% and provide protection
against a large increase in short-term interest rates. As of March 31,
2004, the notional value and year-to-date loss on the interest rate caps
were $41.4 million and $27 thousand, respectively. In addition, we also
used Eurodollar futures contracts to hedge rate risk in this structure.
As of March 31, 2004, the total notional amount and year-to-date loss on
the Eurodollar futures were $120.0 million and $0.2 million,
respectively.  
    
    In the fourth quarter of 2003, we delivered fixed rate leases into a
second commercial paper conduit. Although the leases and funding were in
Canadian dollars (CAD), the interest rate mismatch was similar in nature
to that described above. To lessen the 44




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repricing mismatch between fixed rate CAD-denominated leases and floating
rate CAD commercial paper, a series of three amortizing CAD interest rate
swaps were executed, although Irwin was only a counterparty on two of the
swaps. The third swap was between the commercial paper conduit and an
outside party, but has an impact on us as it affects the conduit funding
cost. Of the first of the two swaps on Irwins books, we pay a fixed rate
of interest and receive a floating rate. The U.S. dollar-equivalents of the
CAD-based notional and year-to-date loss on this swap at March 31, 2004
were $68.9 million and $0.8 million, respectively. For the second swap, we
pay a floating rate of interest and receive a fixed rate. The U.S.
dollar-equivalents of the CAD-based notional and year-to-date gain on this
swap at March 31, 2004 are $69.6 million and $0.5 million, respectively. Our home equity line of business originates a relatively small amount of
first mortgage loans. We enter into forward commitments to protect against
interest rate fluctuation between the date of origination until a sale price is
locked in. These loans are typically sold within a month of origination. As of
March 31, 2004, we had no outstanding commitments. We recorded a derivative
loss on this activity of $6 thousand in the first quarter of 2004. Certain of our home equity fixed rate residual interests are funded with
floating rate liabilities. To manage such mismatches, we own three interest
rate caps and, in the first quarter of 2004, entered into Eurodollar futures
contracts. The interest rate caps had a fair value of $0.3 million and a
notional amount of $55.9 million at March 31, 2004. We classify interest rate
caps as other assets on the consolidated balance sheets and carry them at their
fair values. Two of the interest rate caps qualify for cash flow hedge
accounting treatment under SFAS 133. As a result, a negative adjustment to fair
value of $81 thousand net of tax on these cash flow derivatives was recorded
through accumulated other comprehensive income in the first quarter of 2004. We
record adjustments to fair value for the third interest rate cap (and the
Eurodollar futures), which does not qualify for hedge accounting, as derivative
gain or losses on the consolidated income statements. For the quarter ended
March 31, 2004, we recorded a $3 thousand loss related to this cap. We entered
into Eurodollar futures contracts with a notional value of $840 million with
expiration dates ranging from June 2004 through June 2006. As of March 31,
2004, the fair value and year-to-date loss recorded on these contracts were
($0.6 million) and $0.6 million, respectively. In connection with certain of our whole loan servicing retained second
mortgage sales we have the opportunity to earn an additional incentive
servicing fee (ISF) in the future. The whole loan sales have been to firms,
(the buyer) who securitize the loans and contract with us to service the loans.
We recognize a mortgage servicing asset or liability for these contracts. As a
part of the buyers securitization, the buyer issues an Incentive Servicing
Agreement to us as Master Servicer. Once a pre-established return for the
certificate holders has been met, the ISF provides potential cash payments to
us in the event certain structure-specific loan credit and servicing
performance metrics are met. We have characterized these contracts as
derivative instruments. The first of these deals was dated September 27, 2002
for loans that were sold March 28, 2002. Included in derivative gains or losses
in the first quarter of 2004 was $1.8 million related to these incentive

servicing fees based upon actual and projected performance of the underlying
pools of loans. Of the $1.8 million recognized during the quarter, $0.5 million
was the result of cash collections and $1.3 million represented the projected
value of future cash payments, discounted at 30%. The pool of loans which we
service underlying the derivative contract we valued this quarter was $98.3
million. In total, we have sold $1.0 billion for which we hold such derivative
contracts. Our accounting policy is to recognize a derivative asset on a
mark-to-market basis at such time that the credit and prepayment performance
models we use for valuing like pools of loans indicate that we are likely to
receive cash payments on the derivatives within a twelve-month period. We use
assumptions to value the ISFs that we believe market participants would use to
value similar assets. As of March 31, 2004, only one of five whole loan sales
with this derivative has met this expected performance trigger. We manage the interest rate risk associated with our mortgage servicing
rights through the use of Eurodollar futures contracts and interest rate
options. The financial instrument underlying the Eurodollar futures contracts
is based on the three-month LIBOR rate. For the first quarter of 2004, we
recorded losses of $2.4 million on these derivatives. Both the futures
contracts and options were marked-to-market and included in other assets with
changes in value recorded in the consolidated income statements as derivative
gains or losses. At March 31, 2004, we held open swaption positions with a
notional value totaling $10.8 billion at March 31, 2004, with a final maturity
of April 1, 2004. For the quarter ended March 31, 2004, we recorded gains on
swaptions, including premiums paid, totaling $60.8 million. The size and mix of
these positions change during the year, so period-end positions may not be
indicative of our net risk exposure throughout the year. Notional amounts do
not represent the amount at risk. We own foreign currency forward contracts to protect the U.S. dollar value
of intercompany loans made to Onset Capital Corporation that are denominated in
Canadian dollars. We had a notional amount of $97 million in forward contracts
outstanding as of March 31, 2004. For the quarter ended March 31, 2004, we
recognized losses on these contracts of $0.2 million. These contracts are
marked-to-market with gains and losses included in derivative gains or losses
on the consolidated income statements. The foreign currency transaction loss on
the intercompany loans was $0.9 million during the quarter ended March 31,
2004. 45




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Item 3. Quantitative and Qualitative Disclosures about Market Risk. The quantitative and qualitative disclosures about market risk are
reported in the Interest Rate Risk section of Item 2, Managements Discussion
and Analysis of Financial Condition and Results of Operations found on pages 41
through 43. 
 Item 4. Controls and Procedures. In the ordinary course of internal process and control review by
management, internal and external audit, we will periodically identify
processes and controls that need improvement. When these are identified, we
have procedures in place to bring the matter to the attention of the
appropriate management and Board committees and to put into place project plans
to address the improvement opportunity. As of March 31, 2004, we performed an evaluation under the supervision and
with the participation of our management, including the Chief Executive Officer
and the Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e)). Based on that evaluation, our management, including the CEO
and CFO, concluded that our disclosure controls and procedures were effective
as of March 31, 2004, to ensure that material information relating to the
Corporation would be made known to them by others within the Corporation. There have been no changes since the fourth quarter of 2003 in our
internal controls that have materially affected or are reasonably likely to
materially affect the Corporations internal control over financial reporting. 
 Item 5. Other Information. Executive Officers Our executive officers are elected annually by the Board of Directors and
serve for a term of one year or until their successors are elected and
qualified. In addition to our Chairman and Chief Executive Officer, Mr.
Miller, who also serves as a director, the executive officers designated by the
Board at their meeting on February 20, 2004 are listed below. Richard Barbercheck(45) has been a Vice President of Irwin Financial
Corporation since October 2003. He was an officer of Irwin Union Bank and Trust
since March 1998. Claude E. Davis(43) has been Chairman of Irwin Union Bank and Trust and Senior
Vice President of Irwin Financial Corporation since May 2003. He served as
President of Irwin Union Bank and Trust from January 1996 to May 2003. He has
been an officer since 1988. He was elected to the Federal Home Loan Bank of
Indianapolis (FHLBI) Board of Directors in 2003. We are a member of the FHLBI. Elena Delgado(48) has been President and Chief Executive Officer of Irwin Home
Equity since September 1994. Gregory F. Ehlinger(41) has been our Senior Vice President and Chief Financial
Officer since August of 1999. He has been one of our officers since August
1992. Paul D. Freudenthaler(39) was recently promoted to Chief Risk Officer in
December 2003. He was Vice President  Financial Risk Management from December
2001 to December 2003. From September 2000 through November 2001, he was
Corporate Controller for America Online Latin America, an Internet service
provider. From July 2000 to August 2000 he served as Senior Vice President 
Treasurer of Telscape International, Inc., a development stage
telecommunications company. Prior thereto, he held the position of Chief
Accounting Officer of Telscape from July 1999 until June 2000. Subsequent to
his departure from Telscape, Telscape filed a voluntary petition for relief
under Chapter 11 of the U.S. Bankruptcy Code on April 27, 2001. From February
1999 through June 1999, he was Director  International of Bank United, F.S.B.
From January 1994 through January 1999, he was Director  International of
Irwin Mortgage Corporation, our indirect subsidiary. Jose M. Gonzalez(45) has been our Vice President  Internal Audit since
October 1995. Robert H. Griffith(46) has been President and Chief Executive Officer of Irwin
Mortgage since January 2001. He has been an officer of Irwin Mortgage since
1993. 46




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Bradley J. Kime(43) has been President of Irwin Union Banks commercial line
of business since May 2003. He has been President of Irwin Union Bank F.S.B.
since December 2000. He has been an officer of Irwin Union Bank and Trust since
1987, and one of our officers since 1986. Joseph R. LaLeggia(42) has been President of Irwin Commercial Finance
Corporation since July of 2002. He has been the President and Chief Executive
Officer of Onset Capital Corporation since April 1998. From January 1997 until
April of 1998 he was President of AT&T Capital Canada Inc. Matthew F. Souza(47) has been our Senior Vice President  Ethics since August
1999 and our Secretary since 1986. He has been one of our officers since 1986. Thomas D. Washburn(57) has been our Executive Vice President since August 1999
and has been one of our officers since 1976. From 1981 to August 1999 he served
as our Senior Vice President and Chief Financial Officer. 
 PART II. Other Information. 
 Item 1. Legal Proceedings. Since the time of filing our report on Form 10-K for the year ended December
31, 2003, we experienced developments as noted in the litigation described
below: McIntosh v. Irwin Home Equity Corporation Our subsidiary, Irwin Union Bank and Trust Company, is a defendant in a
class action lawsuit filed in the U.S. District Court in Massachusetts in July
2001. The case involves loans purchased by Irwin Union Bank from FirstPlus, an
unaffiliated third-party lender. The plaintiffs allege a failure to comply with
certain disclosure provisions of the Truth in Lending Act relating to high rate
loans in making second mortgage home equity loans to the plaintiff borrowers.
The complaint seeks rescission of the loans and other damages. On September 30, 2002, the court granted plaintiffs motion for
certification of a class subject to certain limitations. In October 2002, we
filed a motion for reconsideration with the district court and a petition for
permission to appeal the class certification decision with the Court of Appeals
for the 1st Circuit. In May 2003, the district court denied our motion for
summary judgment and denied in part our motion for reconsideration of class
decertification. However, the court further restricted membership in the
plaintiff class. In October 2003, the court of appeals denied our application
for appellate review of the district courts certification of the class. On
April 1, 2004, the plaintiffs filed a motion for summary judgment and we filed
a motion for summary judgment on class claims. As originally specified, the plaintiff class was limited to those
borrowers who obtained a mortgage loan originated with prepayment penalty
provisions by FirstPlus during the three-year period prior to the filing of the
suit. As more recently defined by the court, the class has been further
restricted to those borrowers who refinanced their loans and paid a prepayment
penalty. Only high-rate loans that are subject to the provisions of the Home
Ownership and Equity Protection Act of 1994 would be included in the class. Limited discovery on issues pertaining to class certification and the
merits of plaintiffs individual claim has been conducted. The actual number of
plaintiff borrowers will be determined only after a review of loan files.
Nevertheless, after performing a limited analysis of the approximately 200
loans acquired directly from FirstPlus through our correspondent lending
channel and the approximately 7,800 loans acquired from others through bulk
acquisitions that may include FirstPlus originations, we believe that fewer
than 100 loans will qualify for inclusion in the class. We believe we have
available numerous defenses to the allegations and intend to vigorously defend
this lawsuit. At the present time, we are unable to form a reasonable estimate
of potential loss, if any, and have not established any reserves related to
this case. Stamper v. A Home of Your Own, Inc. On January 25, 2002, a jury in this case awarded the plaintiffs damages of
$1.434 million, jointly and severally, against defendants, including our
indirect subsidiary, Irwin Mortgage Corporation. The case was filed in August
1998 in the Baltimore, Maryland, City Circuit Court. The nine plaintiff
borrowers alleged that A Home of Your Own, Inc., a home rehabilitation company, 47




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and its principal, Robert Beeman, defrauded the plaintiffs by selling them
defective homes at inflated prices and that Irwin Mortgage, which provided the
plaintiff borrowers mortgage loans on the home purchases, participated in the
fraud. Irwin Mortgage filed an appeal with the Maryland Court of Special
Appeals, and oral argument was held on January 7, 2003. On February 27, 2004,
the Court of Special Appeals ruled against Irwin Mortgage and remanded the case
to the trial court for a partial retrial on whether the plaintiffs are entitled
to punitive damages. On April 12, 2004, Irwin Mortgage filed a Petition for
Writ of Certiorari with the Maryland Court of Appeals, seeking further review.
We have reserved for this case based upon the advice of our legal counsel. Silke v. Irwin Mortgage Corporation In April 2003, our indirect subsidiary, Irwin Mortgage Corporation, was
named as a defendant in an action filed in the Marion County, Indiana, Superior
Court. The complaint alleges that Irwin Mortgage charged a document preparation
fee in violation of Indiana law for services performed by clerical personnel in
completing legal documents related to mortgage loans. The plaintiff is seeking
to certify a class consisting of Indiana borrowers who were charged the fee
during the six-year period prior to the filing of the lawsuit. Irwin Mortgage
filed an answer on June 11, 2003 and a motion for summary judgment on October
27, 2003. On November 3, 2003, the court ruled that a determination of class
certification will precede any action on Irwin Mortgages summary judgment
motion. On January 9, 2004, the plaintiff filed a Supplemental Brief and
Submission of Additional Evidence in Support of Class Certification. On March
15, 2004, the court held a hearing on plaintiffs class certification motion.
Because the case is in the early stages of litigation, we are unable at this
time to form a reasonable estimate of the amount of potential loss, if any,
that Irwin Mortgage could suffer. We have not established any reserves for this
case. Gutierrez v. Irwin Mortgage Corporation In April 2003, our indirect subsidiary, Irwin Mortgage Corporation, was
named as a defendant in an action filed in the District Court of Nueces County,
Texas. The complaint alleges that Irwin Mortgage improperly charged borrowers
fees for the services of third-party vendors in excess of Irwin Mortgages
costs, and charged certain fees to which plaintiffs did not agree. The
plaintiffs are seeking to certify a class consisting of similarly situated
borrowers. Irwin Mortgage filed an answer on July 11, 2003 and responded to
plaintiffs initial discovery requests on December 19, 2003. On February 25,
2004 Irwin Mortgage served its initial discovery requests on the plaintiffs.
Because the case is in the early stages of litigation, we are unable at this
time to form a reasonable estimate of the amount of potential loss, if any,
that Irwin Mortgage could suffer. We have not established any reserves for this
case. We and our subsidiaries are from time to time engaged in various matters
of litigation, including the matters described above, and other assertions of
improper or fraudulent loan practices or lending violations, and other matters,
and we have a number of unresolved claims pending. In addition, as part of the
ordinary course of business, we and our subsidiaries are parties to litigation
involving claims to the ownership of funds in particular accounts, the
collection of delinquent accounts, challenges to security interests in
collateral, and foreclosure interests, that is incidental to our regular
business activities. While the ultimate liability with respect to these other
litigation matters and claims cannot be determined at this time, we believe
that damages, if any, and other amounts relating to pending matters are not
likely to be material to our consolidated financial position or results of
operations, except as described above. Reserves are established for these
various matters of litigation, when appropriate, based upon the advice of legal
counsel. 
 Item 2. Changes in Securities and Use of Proceeds. (c) The Corporation issued shares of common stock pursuant to elections
made by four out of the nine of our outside directors to receive board
compensation under the 1999 Outside Director Restricted Stock Compensation Plan
in lieu of cash fees as indicated in the table below. All of these shares were
issued in reliance on the private placement exemption from registration
provided in Section 4(2) of the Securities Act. Number ofDate Issued
    
    SharesDecember 31, 2003
    
    
    531January 2, 2004
    
    
    3,184February 24, 2004
    
    
    1,658March 31, 2004
    
    
    582
 48




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Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits. ExhibitNumber
    
    Description of Exhibit3.1
    
    Restated Articles of Incorporation of Irwin Financial Corporation.
(Incorporated by reference to Exhibit 3(a) to Form 10-K Report for
year ended December 31, 2000, File No. 0-06835.)3.2
    
    Articles of Amendment to Restated Articles of Incorporation of
Irwin Financial Corporation dated March 2, 2001. (Incorporated by
reference to Exhibit 3(b) to Form 10-K Report for year ended
December 31, 2000, File No. 0-06835.)3.3
    
    Code of By-laws of Irwin Financial Corporation. (Incorporated by
reference to Exhibit 3.3 to Form 10-K for period ended December
31, 2003, File No. 0-06835.)4.1
    
    Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4(a) to Form 10-K report for year ended December 31, 1994,
File No. 0-06835.)4.2
    
    Certain instruments defining the rights of the holders of
long-term debt of Irwin Financial Corporation and certain of its
subsidiaries, none of which authorize a total amount of
indebtedness in excess of 10% of the total assets of the
Corporation and its subsidiaries on a consolidated basis, have not
been filed as Exhibits. The Corporation hereby agrees to furnish a
copy of any of these agreements to the Commission upon request.4.3
    
    Rights Agreement, dated as of March 1, 2001, between Irwin
Financial Corporation and Irwin Union Bank and Trust.
(Incorporated by reference to Exhibit 4.1 to Form 8-A filed March
2, 2001, File No. 0-06835.)4.4
    
    Appointment of Successor Rights Agent dated as of May 11, 2001
between Irwin Financial Corporation and National City Bank.
(Incorporated by reference to Exhibit 4.5 to Form S-8 filed on
September 7, 2001, File No. 333-69156.)10.1
    
    *Amended 1986 Stock Option Plan. (Incorporated by reference to
Exhibit 10(b) to Form 10-K Report for year ended December 31,
1991, File No. 0-06835.)10.2
    
    *Irwin Financial Corporation 1992 Stock Option Plan.
(Incorporated by reference to Exhibit 10(h) to Form 10-K Report
for year ended December 31, 1992, File No. 0-06835.)10.3
    
    *Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated
by reference to Exhibit 10 to Form 10-Q Report for period ended
June 30, 1994, File No. 0-06835.)10.4
    
    *Amendment to Irwin Financial Corporation 1997 Stock Option Plan.
(Incorporated by reference to Exhibit 10(i) to Form10-Q Report for
period ended June 30, 1997, File No. 0-06835.)10.5
    
    *Irwin Financial Corporation 2001 Stock Plan. (Incorporated by
reference to Exhibit 10.18 to Form S-1/A filed February 14, 2002,
File No. 333-69586.)10.6
    
    *Amended Irwin Financial Corporation Outside Directors Restricted
Stock Compensation Plan. (Incorporated by reference to Exhibit
10(g) to Form 10-K Report for year ended December 31, 1991, File
No. 0-06835.)10.7
    
    *Irwin Financial Corporation Outside Directors Restricted Stock
Compensation Plan. (Incorporated by reference to Exhibit 10(i) to
Form 10-K Report for year ended December 31, 1995, File No.
0-06835.)
 49




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ExhibitNumber
    
    Description of Exhibit10.8
    
    *1999 Outside Director Restricted Stock Compensation Plan.
(Incorporated by reference to Exhibit 10(b) to Form 10-Q Report
for period ended June 30, 1999, File No. 0-06835.)10.9
    
    *Irwin Financial Corporation Employees Stock Purchase Plan.
(Incorporated by reference to Exhibit 10(d) to Form 10-K Report
for year ended December 31, 1991, File No. 0-06835.)10.10
    
    *Employee Stock Purchase Plan II. (Incorporated by reference to
Exhibit 10(f) to Form 10-K Report for year ended December 31,
1994, File No. 0-06835.)10.11
    
    *Employee Stock Purchase Plan III. (Incorporated by reference to
Exhibit 10(a) to Form 10-Q Report for period ended June 30, 1999,
File No. 0-06835.)10.12
    
    *Long-Term Management Performance Plan. (Incorporated by reference
to Exhibit 10(a) to Form 10-K Report for year ended December 31,
1986, File No. 0-06835.)10.13
    
    *Long-Term Incentive Plan-Summary of Terms. (Incorporated by
reference to Exhibit 10(a) to Form 10-K Report for year ended
December 31, 1986, File No. 0-06835.)10.14
    
    *Inland Mortgage Corporation Long-Term Incentive Plan.
(Incorporated by reference to Exhibit 10(j) to Form 10-K Report
for year ended December 31, 1995, File No. 0-06835.)10.15
    
    *Amended and Restated Management Bonus Plan. (Incorporated by
reference to Exhibit 10(a) to Form 10-K Report for year ended
December 31, 1986, File No. 0-06835.)10.16
    
    *Limited Liability Company Agreement of Irwin Ventures LLC.
(Incorporated by reference to Exhibit 10(a) to Form 10-Q/A Report
for period ended March 31, 2001, File No. 0-06835.)10.17
    
    *Limited Liability Company Agreement of Irwin Ventures
Co-Investment Fund LLC, effective as of April 20, 2001.
(Incorporated by reference to Exhibit 10.17 to Form S-1/A filed
February 14, 2002, File No. 333-69586.)10.18
    
    *Irwin Home Equity Corporation Shareholder Agreement and
Amendments. (Incorporated by reference to Exhibit 10(b) to Form
10-Q/A Report for period ended March 31, 2001, File No. 0-06835.)10.19
    
    *Promissory Note dated January 30, 2002 from Elena Delgado to
Irwin Financial Corporation. (Incorporated by reference to Exhibit
10.19 to Form S-1/A filed February 14, 2002, File No. 333-69586.)10.20
    
    *Consumer Pledge Agreement dated January 30, 2002 between Elena
Delgado and Irwin Financial Corporation. (Incorporated by
reference to Exhibit 10.20 to Form S-1/A filed February 14, 2002,
File No. 333-69586.)10.21
    
    *Irwin Financial Corporation Short Term Incentive Plan effective
January 1, 2002. (Incorporated by reference to Exhibit 10.21 to
Form 10-Q Report for period ended March 31, 2002, File No.
0-06835.)10.22
    
    *Irwin Union Bank Short Term Incentive Plan effective January 1,
2002. (Incorporated by reference to Exhibit 10.22 to Form 10-Q
Report for period ended March 31, 2002, File No. 0-06835.)10.24
    
    *Irwin Mortgage Corporation Short Term Incentive Plan effective
January 1, 2002. (Incorporated by reference to Exhibit 10.24 to
Form 10-Q Report for period ended March 31, 2002, File No.
0-06835.)
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ExhibitNumber
    
    Description of Exhibit10.25
    
    *Irwin Capital Holdings Short Term Incentive Plan effective
January 1, 2002. (Incorporated by reference to Exhibit 10.25 to
Form 10-Q Report for period ended March 31, 2002, File No.
0-06835.)10.26
    
    *Onset Capital Corporation Employment Agreement. (Incorporated by
reference to Exhibit 10.26 to Form 10-Q Report for period ended
June 30, 2002, File No. 0-06835.)10.27
    
    *Irwin Financial Corporation Restated Supplemental Executive
Retirement Plan for Named Executives. (Incorporated by reference
to Exhibit 10.27 to Form 10-Q Report for period ended June 30,
2002, File No. 0-06835.)10.28
    
    *Irwin Financial Corporation Supplemental Executive Retirement
Plan for Named Executives. (Incorporated by reference to Exhibit
10.28 to Form 10-Q Report for period ended June 30, 2002, File No.
0-06835.)10.29
    
    *Onset Capital Corporation Shareholders Agreement (Incorporated by
reference to Exhibit 10.29 to Form 10-K Report for year ended
December 31, 2002, File No. 0-06835.)11.1
    
    Computation of earnings per share is included in the footnotes to
the financial statements.31.1
    
    Certification of the Chief Executive Officer under Section 302 of
the Sarbanes  Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer under Section 302 of
the Sarbanes  Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer under Section 906 of
the Sarbanes  Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer under Section 906 of
the Sarbanes  Oxley Act of 2002.
   *
    
    Indicates management contract or compensatory plan or arrangement.  (b)
    
    Reports onForm 8-K. 8-K
    
    January 22, 2004
    
    IFC Announces 2003 Fourth Quarter and Annual
Earnings Conference Call.8-K
    
    January 23, 2004
    
    IFC Announces 2003 Fourth Quarter Earnings and
Management Succession.8-K
    
    February 20, 2004
    
    IFC Announces First Quarter Dividend .8-K
    
    February 20, 2004
    
    IFC Announces Addition to Board of Directors .8-K
    
    March 22, 2004
    
    IFC Announces Retirement of John T. Hackett
from the Board of Directors.
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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. IRWIN FINANCIAL CORPORATIONDATE:May 3, 2004
    
    BY:
    
    /s/ Gregory F. EhlingerGREGORY F. EHLINGERCHIEF FINANCIAL OFFICERBY:
    
    /s/ Jody A. LittrellJODY A. LITTRELLCORPORATE CONTROLLER(Chief Accounting Officer)
 52