##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to.
 Commission File Number: 0-6835
 IRWIN FINANCIAL CORPORATION
 (Exact Name of Corporation as Specified in its Charter)
 Indiana
    
    35-1286807(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 500 Washington Street Columbus, Indiana
    
    47201(Address of Principal Executive Offices)
    
    (Zip Code)
 (812) 376-1909
    
    www.irwinfinancial.com(Corporations Telephone Number, Including Area Code)
    
    (Web Site)
  þ o
  þ o
  o þ




---



FORM 10-Q
TABLE OF CONTENTS
 PAGENO.PART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial Statements
    
    3Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    22Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    62Item 4
    
    Controls and Procedures
    
    62PART II
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    63Item 6
    
    Exhibits
    
    65Signatures2001 Stock Plan Form of Stock Option Agreement2001 Stock Plan Form of Restricted Stock AgreementAmended and Restated 2001 Stock Plan2001 Stock Plan Form of Stock Option AgreementCertification of Chief Executive OfficerCertification of Chief Financial OfficerSection 906 Certification of Chief Executive OfficerSection 906 Certification of Financial Officer
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION.
 
 Item 1. Financial Statements.
 IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
 September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)(Restated)Assets:Cash and cash equivalents
    
    $
    147,346
    
    
    $
    97,101Interest-bearing deposits with financial institutions
    
    
    89,117
    
    
    
    58,936Residual interests
    
    
    29,883
    
    
    
    56,101Investment securities- held-to-maturity (Fair value: $4,630
at September 30, 2005 and $4,952 at December 31, 2004)
    
    
    4,630
    
    
    
    4,942Investment securities- available-for-sale
    
    
    102,144
    
    
    
    103,280Loans held for sale
    
    
    1,565,460
    
    
    
    890,711Loans and leases, net of unearned income  Note 3
    
    
    4,025,815
    
    
    
    3,450,440Less: Allowance for loan and lease losses  Note 4
    
    
    (53,896
    )
    
    
    (44,443
    )3,971,919
    
    
    
    3,405,997Servicing assets  Note 5
    
    
    302,373
    
    
    
    367,032Accounts receivable
    
    
    129,811
    
    
    
    122,131Accrued interest receivable
    
    
    21,487
    
    
    
    15,428Premises and equipment
    
    
    31,142
    
    
    
    30,240Other assets
    
    
    102,294
    
    
    
    83,921Total assets
    
    $
    6,497,606
    
    
    $
    5,235,820Liabilities and Shareholders Equity:DepositsNoninterest-bearing
    
    $
    930,256
    
    
    $
    975,925Interest-bearing
    
    
    2,254,774
    
    
    
    1,774,727Certificates of deposit over $100,000
    
    
    945,260
    
    
    
    644,6114,130,290
    
    
    
    3,395,263Short-term borrowings  Note 6
    
    
    548,344
    
    
    
    237,277Collateralized debt  Note 7
    
    
    746,841
    
    
    
    547,477Other long-term debt
    
    
    270,163
    
    
    
    270,172Other liabilities
    
    
    293,589
    
    
    
    284,445Total liabilities
    
    
    5,989,227
    
    
    
    4,734,634Commitments and contingencies  Note 11Shareholders equityPreferred stock, no par value  authorized 4,000,000 shares; none issued
    
    
    
    
    
    
    Common stock, no par value  authorized 40,000,000 shares; issued
29,612,080 shares as of September 30, 2005 and December 31, 2004,
including 1,012,054 and 1,159,684, shares in treasury as of
September 30, 2005 and December 31, 2004, respectively
    
    
    112,000
    
    
    
    112,000Additional paid-in capital
    
    
    
    
    
    
    383Deferred compensation
    
    
    (827
    )
    
    
    (660
    )Accumulated other comprehensive income, net of deferred income tax liability
of $137 at September 30, 2005 and tax benefit of $129 as of
December 31, 2004
    
    
    3,505
    
    
    
    2,454Retained earnings
    
    
    415,280
    
    
    
    412,028529,958
    
    
    
    526,205Less treasury stock, at cost
    
    
    (21,579
    )
    
    
    (25,019
    )Total shareholders equity
    
    
    508,379
    
    
    
    501,186Total liabilities and shareholders equity
    
    $
    6,497,606
    
    
    $
    5,235,820
  3




---



##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 For the Three Months Ended September 30,2005
    
    
    2004(Dollars in thousands, except per share)Interest income:
    
    
    
    
    

(Restated)Loans and leases
    
    $
    85,862
    
    
    $
    62,088Loans held for sale
    
    
    25,951
    
    
    
    23,112Residual interests
    
    
    1,491
    
    
    
    3,350Investment securities
    
    
    1,961
    
    
    
    1,371Federal funds sold
    
    
    57
    
    
    
    44Total interest income
    
    
    115,322
    
    
    
    89,965Interest expense:Deposits
    
    
    21,780
    
    
    
    11,984Short-term borrowings
    
    
    7,031
    
    
    
    2,796Collateralized debt
    
    
    8,549
    
    
    
    3,782Other long-term debt
    
    
    8,447
    
    
    
    5,743Total interest expense
    
    
    45,807
    
    
    
    24,305Net interest income
    
    
    69,515
    
    
    
    65,660Provision for loan and lease losses  Note 4
    
    
    5,772
    
    
    
    1,898Net interest income after provision for loan and lease losses
    
    
    63,743
    
    
    
    63,762Other income:Loan servicing fees
    
    
    30,233
    
    
    
    34,667Amortization of servicing assets  Note 5
    
    
    (25,868
    )
    
    
    (28,070
    )Recovery (impairment) of servicing assets  Note 5
    
    
    35,634
    
    
    
    (18,358
    )Net loan administration income (loss)
    
    
    39,999
    
    
    
    (11,761
    )Gain from sales of loans
    
    
    24,648
    
    
    
    48,626Gain on sale of mortgage servicing assets
    
    
    8,585
    
    
    
    440Trading gains
    
    
    333
    
    
    
    4,326Derivative (losses) gains, net
    
    
    (37,653
    )
    
    
    18,779Other
    
    
    7,643
    
    
    
    5,50343,555
    
    
    
    65,913Other expense:Salaries
    
    
    41,009
    
    
    
    53,986Pension and other employee benefits
    
    
    8,740
    
    
    
    12,127Office expense
    
    
    3,453
    
    
    
    4,008Premises and equipment
    
    
    8,191
    
    
    
    10,096Marketing and development
    
    
    1,381
    
    
    
    3,103Professional fees
    
    
    2,765
    
    
    
    5,132Other
    
    
    14,184
    
    
    
    14,04079,723
    
    
    
    102,492Income before income taxes
    
    
    27,575
    
    
    
    27,183Provision for income taxes
    
    
    9,082
    
    
    
    10,858Net income
    
    $
    18,493
    
    
    $
    16,325Earnings per share:  Note 9Basic
    
    $
    0.65
    
    
    $
    0.58Diluted
    
    $
    0.61
    
    
    $
    0.54Dividends per share
    
    $
    0.10
    
    
    $
    0.08
  4




---



##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 For the Nine Months Ended September 30,2005
    
    
    2004(Dollars in thousands, except per share)Interest income:
    
    
    
    
    

(Restated)Loans and leases
    
    $
    223,294
    
    
    $
    181,759Loans held for sale
    
    
    66,117
    
    
    
    59,397Residual interests
    
    
    5,824
    
    
    
    9,893Investment securities
    
    
    5,513
    
    
    
    3,733Federal funds sold
    
    
    284
    
    
    
    82Total interest income
    
    
    301,032
    
    
    
    254,864Interest expense:Deposits
    
    
    54,578
    
    
    
    31,532Short-term borrowings
    
    
    14,297
    
    
    
    6,611Collateralized debt
    
    
    17,348
    
    
    
    10,501Other long-term debt
    
    
    20,236
    
    
    
    17,101Total interest expense
    
    
    106,459
    
    
    
    65,745Net interest income
    
    
    194,573
    
    
    
    189,119Provision for loan and lease losses  Note 4
    
    
    17,935
    
    
    
    11,838Net interest income after provision for loan and lease losses
    
    
    176,638
    
    
    
    177,281Other income:Loan servicing fees
    
    
    99,407
    
    
    
    101,570Amortization of servicing assets  Note 5
    
    
    (79,564
    )
    
    
    (89,413
    )Recovery of servicing assets  Note 5
    
    
    17,759
    
    
    
    6,210Net loan administration income
    
    
    37,602
    
    
    
    18,367Gain from sales of loans
    
    
    80,711
    
    
    
    140,669Gain on sale of mortgage servicing assets
    
    
    15,241
    
    
    
    8,857Trading gains
    
    
    3,942
    
    
    
    15,668Derivative (losses) gains, net
    
    
    (61,001
    )
    
    
    22,035Other
    
    
    21,514
    
    
    
    17,91798,009
    
    
    
    223,513Other expense:Salaries
    
    
    129,541
    
    
    
    158,602Pension and other employee benefits
    
    
    29,510
    
    
    
    34,813Office expense
    
    
    10,768
    
    
    
    12,950Premises and equipment
    
    
    27,103
    
    
    
    30,890Marketing and development
    
    
    6,481
    
    
    
    10,670Professional fees
    
    
    10,660
    
    
    
    14,436Other
    
    
    42,690
    
    
    
    48,325256,753
    
    
    
    310,686Income before income taxes
    
    
    17,894
    
    
    
    90,108Provision for income taxes
    
    
    5,358
    
    
    
    35,599Net income
    
    $
    12,536
    
    
    $
    54,509Earnings per share:  Note 9Basic
    
    $
    0.44
    
    
    $
    1.93Diluted
    
    $
    0.44
    
    
    $
    1.81Dividends per share
    
    $
    0.30
    
    
    $
    0.24
  5




---



##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
For the Three Months Ended September 30, 2005 and 2004
 AccumulatedOther
    
    
    
    
    
    
    AdditionalRetained
    
    
    Comprehensive
    
    
    Deferred
    
    
    Paid in
    
    
    Common
    
    
    TreasuryTotal
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Compensation
    
    
    Capital
    
    
    Stock
    
    
    Stock(Dollars in thousands)Balance at July 1, 2005 (Restated)
    
    $
    490,575
    
    
    $
    399,985
    
    
    $
    2,022
    
    
    $
    (677
    )
    
    $
    
    
    
    $
    112,000
    
    
    $
    (22,755
    )Net income
    
    
    18,493
    
    
    
    18,493Unrealized loss on investment
securities net of $61 tax benefit
    
    
    (91
    )
    
    
    
    
    
    
    (91
    )Unrealized gain on interest rate hedge
net of $394 tax liability
    
    
    591
    
    
    
    
    
    
    
    591Foreign currency adjustment
    
    
    983
    
    
    
    
    
    
    
    983Total comprehensive income
    
    
    19,976Deferred compensation
    
    
    (150
    )
    
    
    
    
    
    
    
    
    
    
    (150
    )Cash dividends
    
    
    (2,859
    )
    
    
    (2,859
    )Tax benefit on stock option exercises
    
    
    89
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89Treasury stock:Purchase of 6,544 shares
    
    
    (137
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )Sales of 53,938 shares
    
    
    885
    
    
    
    (339
    )
    
    
    
    
    
    
    
    
    
    
    (89
    )
    
    
    
    
    
    
    1,313Balance at September 30, 2005
    
    $
    508,379
    
    
    $
    415,280
    
    
    $
    3,505
    
    
    $
    (827
    )
    
    $
    
    
    
    $
    112,000
    
    
    $
    (21,579
    )Balance at July 1, 2004 (Restated)
    
    $
    469,384
    
    
    $
    386,308
    
    
    $
    71
    
    
    $
    (538
    )
    
    $
    579
    
    
    $
    112,000
    
    
    $
    (29,036
    )Net income (Restated)
    
    
    16,325
    
    
    
    16,325Unrealized gain on investment
securities net of $142 tax liability
    
    
    212
    
    
    
    
    
    
    
    212Foreign currency adjustment
    
    
    527
    
    
    
    
    
    
    
    527Total comprehensive income (Restated)
    
    
    17,064Deferred compensation
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Cash dividends
    
    
    (2,266
    )
    
    
    (2,266
    )Tax benefit on stock option exercises
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100Treasury stock:Purchase of 867 shares
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23
    )Sales of 52,342 shares
    
    
    1,095
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (122
    )
    
    
    
    
    
    
    1,217Balance at September 30, 2004 (Restated)
    
    $
    485,376
    
    
    $
    400,367
    
    
    $
    810
    
    
    $
    (516
    )
    
    $
    557
    
    
    $
    112,000
    
    
    $
    (27,842
    )
  6




---



##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
 For the Nine Months Ended September 30, 2005 and 2004
 AccumulatedOther
    
    
    
    
    
    
    AdditionalRetained
    
    
    Comprehensive
    
    
    Deferred
    
    
    Paid in
    
    
    Common
    
    
    TreasuryTotal
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Compensation
    
    
    Capital
    
    
    Stock
    
    
    Stock(Dollars in thousands)Balance at January 1, 2005 (Restated)
    
    $
    501,186
    
    
    $
    412,028
    
    
    $
    2,454
    
    
    $
    (660
    )
    
    $
    383
    
    
    $
    112,000
    
    
    $
    (25,019
    )Net income
    
    
    12,536
    
    
    
    12,536Unrealized loss on investment
securities net of $148 tax benefit
    
    
    (222
    )
    
    
    
    
    
    
    (222
    )Unrealized gain on interest rate hedge
net of $413 tax liability
    
    
    619
    
    
    
    
    
    
    
    619Foreign currency adjustment
    
    
    654
    
    
    
    
    
    
    
    654Total comprehensive income
    
    
    13,587Deferred compensation
    
    
    (167
    )
    
    
    
    
    
    
    
    
    
    
    (167
    )Cash dividends
    
    
    (8,564
    )
    
    
    (8,564
    )Tax benefit on stock option exercises
    
    
    616
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    616Treasury stock:Purchase of 50,923 shares
    
    
    (1,198
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,198
    )Sales of 198,553 shares
    
    
    2,919
    
    
    
    (720
    )
    
    
    
    
    
    
    
    
    
    
    (999
    )
    
    
    
    
    
    
    4,638Balance at September 30, 2005
    
    $
    508,379
    
    
    $
    415,280
    
    
    $
    3,505
    
    
    $
    (827
    )
    
    $
    
    
    
    $
    112,000
    
    
    $
    (21,579
    )Balance at January 1, 2004
    
    $
    432,260
    
    
    $
    352,647
    
    
    $
    182
    
    
    $
    (504
    )
    
    $
    1,264
    
    
    $
    112,000
    
    
    $
    (33,329
    )Net income (Restated)
    
    
    54,509
    
    
    
    54,509Unrealized gain on investment
securities net of $93 tax liability
    
    
    139
    
    
    
    
    
    
    
    139Unrealized gain on interest rate cap
net of $131 tax liability
    
    
    196
    
    
    
    
    
    
    
    196Foreign currency adjustment
    
    
    293
    
    
    
    
    
    
    
    293Total comprehensive income (Restated)
    
    
    55,137Deferred compensation
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    (12
    )Cash dividends
    
    
    (6,789
    )
    
    
    (6,789
    )Tax benefit on stock option exercises
    
    
    778
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    778Treasury stock:Purchase of 11,307 shares
    
    
    (370
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (370
    )Sales of 212,026 shares
    
    
    4,372
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,485
    )
    
    
    
    
    
    
    5,857Balance at September 30, 2004 (Restated)
    
    $
    485,376
    
    
    $
    400,367
    
    
    $
    810
    
    
    $
    (516
    )
    
    $
    557
    
    
    $
    112,000
    
    
    $
    (27,842
    )
 
 7




---



##### Table of Contents



IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 For the Nine Months Ended September 30,2005
    
    
    2004(Dollars in thousands)(Restated)Net income
    
    $
    12,536
    
    
    $
    54,509Adjustments to reconcile net income to cash used
by operating activities:Depreciation, amortization, and accretion, net
    
    
    8,746
    
    
    
    6,056Amortization and impairment of servicing assets, net
    
    
    61,805
    
    
    
    83,203Provision for loan and lease losses
    
    
    17,935
    
    
    
    11,838Gain on sale of mortgage servicing assets
    
    
    (15,241
    )
    
    
    (8,857
    )Gain from sales of loans held for sale
    
    
    (80,711
    )
    
    
    (140,669
    )Originations and purchases of loans held for sale
    
    
    (10,163,992
    )
    
    
    (10,934,035
    )Proceeds from sales and repayments of loans held for sale
    
    
    9,506,670
    
    
    
    10,873,116Proceeds from sale of mortgage servicing assets
    
    
    79,684
    
    
    
    29,494Net decrease in residuals
    
    
    26,218
    
    
    
    523Net increase in accounts receivable
    
    
    (7,932
    )
    
    
    (21,973
    )Other, net
    
    
    (18,176
    )
    
    
    16,538Net cash used by operating activities
    
    
    (572,458
    )
    
    
    (30,257
    )Lending and investing activities:Proceeds from maturities/calls of investment securities:Held-to-maturity
    
    
    307
    
    
    
    92,987Available-for-sale
    
    
    4,281
    
    
    
    1,399Purchase of investment securities:Held-to-maturity
    
    
    
    
    
    
    (98,395
    )Available-for-sale
    
    
    (3,565
    )
    
    
    (10,958
    )Net
(decrease) increase in interest-bearing deposits
    
    
    (30,181
    )
    
    
    22,716Net increase in loans, excluding sales
    
    
    (623,334
    )
    
    
    (303,958
    )Proceeds from sale of loans
    
    
    41,423
    
    
    
    36,279Other, net
    
    
    (6,579
    )
    
    
    (4,857
    )Net cash used by lending and investing activities
    
    
    (617,648
    )
    
    
    (264,787
    )Financing activities:Net increase in deposits
    
    
    735,027
    
    
    
    586,795Net increase (decrease) in short-term borrowings
    
    
    311,067
    
    
    
    (297,067
    )Proceeds from the issuance of long-term debt
    
    
    51,750
    
    
    
    Repayments of long-term debt
    
    
    (51,759
    )
    
    
    (9
    )Proceeds from issuance of collateralized borrowings
    
    
    440,609
    
    
    
    449,223Repayments of collateralized borrowings
    
    
    (241,246
    )
    
    
    (369,277
    )Purchase of treasury stock for employee benefit plans
    
    
    (1,198
    )
    
    
    (370
    )Proceeds from sale of stock for employee benefit plans
    
    
    3,535
    
    
    
    5,150Dividends paid
    
    
    (8,564
    )
    
    
    (6,789
    )Net cash provided by financing activities
    
    
    1,239,221
    
    
    
    367,656Effect of exchange rate changes on cash
    
    
    1,130
    
    
    
    36Net increase in cash and cash equivalents
    
    
    50,245
    
    
    
    72,648Cash and cash equivalents at beginning of period
    
    
    97,101
    
    
    
    140,810Cash and cash equivalents at end of period
    
    $
    147,346
    
    
    $
    213,458Supplemental disclosures of cash flow information:Cash flow during the period:Interest paid
    
    $
    100,401
    
    
    $
    65,765Income taxes paid (refund)
    
    $
    16,241
    
    
    $
    (4,998
    )Noncash transactions:Liability for loans held for sale eligible for repurchase
    
    $
    7,174
    
    
    $
    67,658
  8




---



##### Table of Contents



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




---



##### Table of Contents



Incentive Servicing Fees:
 Stock-Based Employee Compensation:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)(Restated)
    
    
    
    
    
    
    (Restated)Net income as reported
    
    $
    18,493
    
    
    $
    16,325
    
    
    $
    12,536
    
    
    $
    54,509Deduct: Total stock-based employee compensation
expense determined under fair value based
method
for all awards, net of related tax effects
    
    
    (571
    )
    
    
    (670
    )
    
    
    (1,644
    )
    
    
    (1,969
    )Pro forma net income
    
    $
    17,922
    
    
    $
    15,655
    
    
    $
    10,892
    
    
    $
    52,540Basic earnings per shareAs reported
    
    $
    0.65
    
    
    $
    0.58
    
    
    $
    0.44
    
    
    $
    1.93Pro forma
    
    $
    0.63
    
    
    $
    0.55
    
    
    $
    0.38
    
    
    $
    1.86Diluted earnings per shareAs reported
    
    $
    0.61
    
    
    $
    0.54
    
    
    $
    0.44
    
    
    $
    1.81Pro forma
    
    $
    0.59
    
    
    $
    0.52
    
    
    $
    0.38
    
    
    $
    1.75
 Income Taxes:
 Recent Accounting Developments:
 10




---



##### Table of Contents



Reclassifications:
 Note 2
 Restatement of Financials
    11




---



##### Table of Contents



For
the three months endedMarch 31, 2005
    
    
    June 30, 2005As
    
    
    
    
    
    
    AsReported
    
    
    Restated
    
    
    Reported
    
    
    Restated(In thousands)Loan servicing fees
    
    $
    34,619
    
    
    $
    34,944
    
    
    $
    33,548
    
    
    $
    34,230Derivative gains (losses), net
    
    
    (36,778
    )
    
    
    (47,282
    )
    
    
    28,616
    
    
    
    23,934Salaries
    
    
    50,017
    
    
    
    48,196
    
    
    
    40,606
    
    
    
    40,336Other expense
    
    
    14,491
    
    
    
    15,326
    
    
    
    13,132
    
    
    
    13,180Provision for income taxes
    
    
    1,418
    
    
    
    (1,605
    )
    
    
    (608
    )
    
    
    (2,119
    )Net income (loss)
    
    
    3,625
    
    
    
    (2,545
    )
    
    
    (1,144
    )
    
    
    (3,411
    )Earnings per share basic
    
    $
    0.13
    
    
    $
    (0.09
    )
    
    $
    (0.04
    )
    
    $
    (0.12
    )Earnings per share diluted
    
    
    0.13
    
    
    
    (0.09
    )
    
    
    (0.04
    )
    
    
    (0.12
    )Total assets
    
    $
    5,565,481
    
    
    $
    5,551,781
    
    
    $
    6,096,816
    
    
    $
    6,079,116
 For
the three months endedMarch 31, 2004
    
    
    June 30, 2004
    
    
    September 30, 2004
    
    

December 31, 2004As
    
    
    
    
    
    
    As
    
    
    
    
    
    
    As
    
    
    
    
    
    
    AsReported
    
    
    Restated
    
    
    Reported
    
    
    Restated
    
    
    Reported
    
    
    Restated
    
    
    Reported
    
    
    Restated(In thousands)Loan servicing fees
    
    $
    32,577
    
    
    $
    33,048
    
    
    $
    33,621
    
    
    $
    33,855
    
    
    $
    34,423
    
    
    $
    34,667
    
    
    $
    34,987
    
    
    $
    34,987Derivative gains (losses), net
    
    
    58,915
    
    
    
    57,071
    
    
    
    (54,092
    )
    
    
    (53,815
    )
    
    
    21,045
    
    
    
    18,779
    
    
    
    (4,756
    )
    
    
    (5,392
    )Provision for income taxes
    
    
    12,734
    
    
    
    11,800
    
    
    
    12,769
    
    
    
    12,942
    
    
    
    12,011
    
    
    
    10,858
    
    
    
    10,280
    
    
    
    10,132Net income
    
    
    20,341
    
    
    
    19,902
    
    
    
    17,944
    
    
    
    18,282
    
    
    
    17,194
    
    
    
    16,325
    
    
    
    14,424
    
    
    
    13,936Earnings per share basic
    
    $
    0.72
    
    
    $
    0.71
    
    
    $
    0.64
    
    
    $
    0.65
    
    
    $
    0.61
    
    
    $
    0.58
    
    
    $
    0.51
    
    
    $
    0.49Earnings per share diluted
    
    
    0.67
    
    
    
    0.66
    
    
    
    0.60
    
    
    
    0.61
    
    
    
    0.57
    
    
    
    0.54
    
    
    
    0.48
    
    
    
    0.47
 For
the nine months ended
    
For
the twelve months endedSeptember
30, 2004
    
    December
31, 2004As
    
    
    
    
    
    
    AsReported
    
    
    Restated
    
    
    Reported
    
    
    Restated(In thousands)Loan servicing fees
    
    $
    100,620
    
    
    $
    101,570
    
    
    $
    135,608
    
    
    $
    136,557Derivative gains (losses), net
    
    
    25,869
    
    
    
    22,035
    
    
    
    21,113
    
    
    
    16,643Provision for income taxes
    
    
    37,513
    
    
    
    35,600
    
    
    
    47,794
    
    
    
    45,732Net income
    
    
    55,479
    
    
    
    54,509
    
    
    
    69,904
    
    
    
    68,445Earnings per share basic
    
    $
    1.96
    
    
    $
    1.93
    
    
    $
    2.47
    
    
    $
    2.42Earnings per share diluted
    
    
    1.84
    
    
    
    1.81
    
    
    
    2.32
    
    
    
    2.28Total assets
    
    
    5,415,571
    
    
    
    5,412,686
    
    
    
    5,239,341
    
    
    
    5,235,820
 12




---



##### Table of Contents



Note 3  Loans and Leases
  September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Commercial, financial and agricultural
    
    $
    1,994,742
    
    
    $
    1,697,651Real estate-construction
    
    
    350,717
    
    
    
    287,496Real estate-mortgage
    
    
    886,066
    
    
    
    808,875Consumer
    
    
    40,076
    
    
    
    31,166Commercial financeFranchise finance
    
    
    410,247
    
    
    
    330,496Domestic leasing
    
    
    213,264
    
    
    
    174,035Canadian leasing
    
    
    305,896
    
    
    
    265,780Unearned incomeFranchise finance
    
    
    (108,324
    )
    
    
    (86,638
    )Domestic leasing
    
    
    (29,497
    )
    
    
    (23,924
    )Canadian leasing
    
    
    (37,372
    )
    
    
    (34,497
    )Total loans and leases, net of unearned income
    
    $
    4,025,815
    
    
    $
    3,450,440
 Note 4  Allowance for Loan and Lease Losses
  As of and For the
    
    
    As of and For theNine Months Ended
    
    
    Year EndedSeptember 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Balance at beginning of period
    
    $
    44,443
    
    
    $
    64,285Provision for loan and lease losses
    
    
    17,935
    
    
    
    14,195Charge-offs
    
    
    (14,688
    )
    
    
    (28,180
    )Recoveries
    
    
    6,427
    
    
    
    5,335Reduction due to reclassification of loans
    
    
    
    
    
    
    (10,808
    )Reduction due to sale of loans and leases and other
    
    
    (338
    )
    
    
    (627
    )Foreign currency adjustment
    
    
    117
    
    
    
    243Balance at end of period
    
    $
    53,896
    
    
    $
    44,443
  13




---



##### Table of Contents



Note 5  Servicing Assets
  As of and For the
    
    As of and For theNine Months Ended
    
    Year EndedSeptember 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Beginning balance
    
    $
    367,032
    
    
    $
    
    380,123Additions
    
    
    61,589
    
    
    
    
    142,689Amortization
    
    
    (79,564
    )
    
    
    
    (117,143)Recovery of (provision for) impairment
    
    
    17,759
    
    
    
    
    (2,474)Reduction for servicing sales
    
    
    (64,443
    )
    
    
    
    (36,163)$
    302,373
    
    
    $
    
    367,032
  September 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Balance at beginning of year
    
    $
    54,134
    
    
    $
    76,869(Recovery of) provision for impairment
    
    
    (17,759
    )
    
    
    2,474Sales of servicing and clean up calls
    
    
    (148
    )
    
    
    (18,210
    )Other than temporary impairment (1)
    
    
    (7,112
    )
    
    
    (6,999
    )Balance at end of year
    
    $
    29,115
    
    
    $
    54,134
 
 (1)
    
    Other than temporary impairment was recorded to reflect our view that the
originally recorded value of certain servicing rights and subsequent impairment associated
with those rights is unlikely to be recovered in market value. There was no related direct
impact on net income as this other than temporary impairment affected only balance sheet
accounts. However, the write-down will result in a reduction of amortization expense and
potentially reduced recovery of impairment in future periods. Note 6  Short-Term Borrowings
  September 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Federal Home Loan Bank borrowings
    
    $
    281,793
    
    
    $
    71,826Drafts payable related to mortgage loan closings
    
    
    102,203
    
    
    
    53,254Lines of credit and other
    
    
    3,348
    
    
    
    2,197Federal funds
    
    
    161,000
    
    
    
    110,000Total
    
    $
    548,344
    
    
    $
    237,277Weighted average interest rate
    
    
    2.20
    %
    
    
    1.64
    %
    14




---



##### Table of Contents



Note 7  Collateralized Debt
   WeightedAverageInterest Rate atSeptember 30,
    
    September 30,
    
    December 31,Maturity
    
    2005
    
    2005
    
    2004(Dollars in thousands)Commercial finance line of business2003 domestic asset backed note
    
    
    7/2010
    
    
    
    4.5
    %
    
    $
    16,658
    
    
    $
    29,050Canadian asset backed note
    
    
    4/2010
    
    
    
    3.4
    
    
    
    147,638
    
    
    
    95,288Canadian asset backed note
    
    
    10/2009
    
    
    
    4.5
    
    
    
    16,757
    
    
    
    21,713Canadian asset backed note
    
    revolving
    
    
    
    3.7
    
    
    
    40,913
    
    
    
    48,801Home equity line of business2004-1 asset backed notes:Combined variable rate senior notes
    
    
    12/2024-12/2034
    
    
    
    4.0
    
    
    
    173,572
    
    
    
    327,850Combined variable rate subordinate notes
    
    
    12/2034
    
    
    
    4.8
    
    
    
    24,775
    
    
    
    24,7752005-1 asset backed notes:Combined variable rate senior notes
    
    
    6/2025-6/2035
    
    
    
    3.8
    
    
    
    169,642Combined fixed rate senior notes
    
    
    6/2035
    
    
    
    5.0
    
    
    
    94,129Combined variable rate subordinate notes
    
    
    6/2035
    
    
    
    5.4
    
    
    
    10,785Combined fixed rate subordinate notes
    
    
    6/2035
    
    
    
    5.6
    
    
    
    52,127Unamortized premium/discount
    
    
    
    
    
    
    
    
    
    
    (155
    )Total
    
    
    
    
    
    
    
    
    
    $
    746,841
    
    
    $
    547,477
 Note 8  Employee Retirement Plans
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)
    
    (Dollars in thousands)Service
    
    $
    714
    
    
    $
    762
    
    
    $
    2,142
    
    
    $
    1,750Interest
    
    
    435
    
    
    
    479
    
    
    
    1,306
    
    
    
    1,390Expected return on plan assets
    
    
    (478
    )
    
    
    (395
    )
    
    
    (1,434
    )
    
    
    (1,204
    )Amortization of transition obligation
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    8Amortization of prior service cost
    
    
    9
    
    
    
    10
    
    
    
    28
    
    
    
    29Amortization of actuarial loss
    
    
    172
    
    
    
    204
    
    
    
    515
    
    
    
    555Net periodic benefit cost
    
    $
    852
    
    
    $
    1,063
    
    
    $
    2,557
    
    
    $
    2,528
  15




---



##### Table of Contents



Note 9  Earnings Per Share
  Effect of
    
    DilutedBasic Earnings
    
    Effect of
    
    Convertible
    
    EarningsPer Share
    
    Stock Options
    
    Shares
    
    Per Share(In thousands, except per share data)Three Months Ended September 30, 2005Net income available to common shareholders
    
    $
    18,493
    
    
    $
    
    
    
    $
    678
    
    
    $
    19,171Shares
    
    
    28,540
    
    
    
    233
    
    
    
    2,606
    
    
    
    31,379Per-Share amount
    
    $
    0.65
    
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    0.61Three Months Ended September 30, 2004Net income available to common shareholders (Restated)
    
    $
    16,325
    
    
    $
    
    
    
    $
    678
    
    
    $
    17,003Shares
    
    
    28,293
    
    
    
    366
    
    
    
    2,607
    
    
    
    31,266Per-Share amount (Restated)
    
    $
    0.58
    
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    0.54Nine Months Ended September 30, 2005Net income available to common shareholders (1)
    
    $
    12,536
    
    
    $
    
    
    
    $
    
    
    
    $
    12,536Shares
    
    
    28,503
    
    
    
    267
    
    
    
    
    
    
    
    28,770Per-Share amount
    
    $
    0.44
    
    
    $
    
    
    
    $
    
    
    
    $
    0.44Nine Months Ended September 30, 2004Net income available to common shareholders (Restated)
    
    $
    54,509
    
    
    $
    
    
    
    $
    2,035
    
    
    $
    56,544Shares
    
    
    28,244
    
    
    
    405
    
    
    
    2,607
    
    
    
    31,256Per-Share amount (Restated)
    
    $
    1.93
    
    
    $
    (0.02
    )
    
    $
    (0.10
    )
    
    $
    1.81
  Note 10  Industry Segment Information
   16




---



##### Table of Contents



Mortgage
    
    Commercial
    
    Home Equity
    
    CommercialBanking
    
    Banking
    
    Lending
    
    Finance
    
    Other
    
    Consolidated(Dollars in thousands)Three Months Ended September 30, 2005Net interest income
    
    $
    13,843
    
    
    $
    26,801
    
    
    $
    32,169
    
    
    $
    9,499
    
    
    $
    (12,797
    )
    
    $
    69,515Intersegment interest
    
    
    (2,539
    )
    
    
    1,838
    
    
    
    (8,769
    )
    
    
    (540
    )
    
    
    10,010
    
    
    
    Provision for loan and lease losses
    
    
    183
    
    
    
    (1,361
    )
    
    
    (3,113
    )
    
    
    (1,481
    )
    
    
    
    
    
    
    (5,772
    )Other revenue
    
    
    30,115
    
    
    
    4,377
    
    
    
    7,825
    
    
    
    2,313
    
    
    
    (1,075
    )
    
    
    43,555Intersegment revenues
    
    
    326
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    (391
    )
    
    
    Total net revenues
    
    
    41,928
    
    
    
    31,720
    
    
    
    28,112
    
    
    
    9,791
    
    
    
    (4,253
    )
    
    
    107,298Other expense
    
    
    31,236
    
    
    
    18,862
    
    
    
    23,369
    
    
    
    5,220
    
    
    
    1,036
    
    
    
    79,723Intersegment expenses
    
    
    861
    
    
    
    429
    
    
    
    1,003
    
    
    
    193
    
    
    
    (2,486
    )
    
    
    Income (loss) before taxes
    
    
    9,831
    
    
    
    12,429
    
    
    
    3,740
    
    
    
    4,378
    
    
    
    (2,803
    )
    
    
    27,575Income taxes
    
    
    3,967
    
    
    
    4,795
    
    
    
    1,503
    
    
    
    1,840
    
    
    
    (3,023
    )
    
    
    9,082Net income (loss)
    
    $
    5,864
    
    
    $
    7,634
    
    
    $
    2,237
    
    
    $
    2,538
    
    
    $
    220
    
    
    $
    18,493Three Months Ended September 30, 2004
    
    
    
    
    
    
    
    
    
    (Restated)
    
    
    
    
    
    (Restated)
    
    (Restated)Net interest income
    
    $
    10,598
    
    
    $
    23,133
    
    
    $
    31,523
    
    
    $
    7,058
    
    
    $
    (6,652
    )
    
    $
    65,660Intersegment interest
    
    
    (396
    )
    
    
    234
    
    
    
    (5,156
    )
    
    
    
    
    
    
    5,318
    
    
    
    Provision for loan and lease losses
    
    
    67
    
    
    
    (607
    )
    
    
    232
    
    
    
    (1,589
    )
    
    
    (1
    )
    
    
    (1,898
    )Other revenue
    
    
    49,659
    
    
    
    3,672
    
    
    
    14,270
    
    
    
    1,366
    
    
    
    (3,054
    )
    
    
    65,913Intersegment revenues
    
    
    (6
    )
    
    
    217
    
    
    
    
    
    
    
    
    
    
    
    (211
    )
    
    
    Total net revenues
    
    
    59,922
    
    
    
    26,649
    
    
    
    40,869
    
    
    
    6,835
    
    
    
    (4,600
    )
    
    
    129,675Other expense
    
    
    52,026
    
    
    
    17,039
    
    
    
    28,332
    
    
    
    4,741
    
    
    
    354
    
    
    
    102,492Intersegment expenses
    
    
    882
    
    
    
    374
    
    
    
    718
    
    
    
    173
    
    
    
    (2,147
    )
    
    
    Income (loss) before taxes
    
    
    7,014
    
    
    
    9,236
    
    
    
    11,819
    
    
    
    1,921
    
    
    
    (2,807
    )
    
    
    27,183Income taxes
    
    
    2,963
    
    
    
    3,719
    
    
    
    4,773
    
    
    
    810
    
    
    
    (1,407
    )
    
    
    10,858Net income (loss)
    
    $
    4,051
    
    
    $
    5,517
    
    
    $
    7,046
    
    
    $
    1,111
    
    
    $
    (1,400
    )
    
    $
    16,325
 Mortgage
    
    Commercial
    
    Home Equity
    
    CommercialBanking
    
    Banking
    
    Lending
    
    Finance
    
    Other
    
    Consolidated(Dollars in thousands)Nine Months Ended September 30, 2005Net interest income
    
    $
    33,776
    
    
    $
    73,678
    
    
    $
    86,026
    
    
    $
    25,886
    
    
    $
    (24,793
    )
    
    $
    194,573Intersegment interest
    
    
    (5,723
    )
    
    
    6,497
    
    
    
    (21,001
    )
    
    
    (1,387
    )
    
    
    21,614
    
    
    
    Provision for loan and lease losses
    
    
    466
    
    
    
    (3,936
    )
    
    
    (9,665
    )
    
    
    (4,801
    )
    
    
    1
    
    
    
    (17,935
    )Other revenue
    
    
    50,663
    
    
    
    12,434
    
    
    
    30,189
    
    
    
    5,573
    
    
    
    (850
    )
    
    
    98,009Intersegment revenues
    
    
    384
    
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    (579
    )
    
    
    Total net revenues
    
    
    79,566
    
    
    
    88,868
    
    
    
    85,549
    
    
    
    25,271
    
    
    
    (4,607
    )
    
    
    274,647Other expense
    
    
    99,722
    
    
    
    56,603
    
    
    
    76,791
    
    
    
    16,668
    
    
    
    6,969
    
    
    
    256,753Intersegment expenses
    
    
    2,563
    
    
    
    1,286
    
    
    
    2,476
    
    
    
    578
    
    
    
    (6,903
    )
    
    
    Income (loss) before taxes
    
    
    (22,719
    )
    
    
    30,979
    
    
    
    6,282
    
    
    
    8,025
    
    
    
    (4,673
    )
    
    
    17,894Income taxes
    
    
    (9,163
    )
    
    
    12,262
    
    
    
    2,537
    
    
    
    3,362
    
    
    
    (3,640
    )
    
    
    5,358Net income (loss)
    
    $
    (13,556
    )
    
    $
    18,717
    
    
    $
    3,745
    
    
    $
    4,663
    
    
    $
    (1,033
    )
    
    $
    12,536Assets at September 30, 2005
    
    $
    1,312,998
    
    
    $
    3,177,757
    
    
    $
    1,584,416
    
    
    $
    774,072
    
    
    $
    (351,637
    )
    
    $
    6,497,606Nine Months Ended September 30, 2004
    
    
    
    
    
    
    
    
    
    (Restated)
    
    
    
    
    
    (Restated)
    
    (Restated)Net interest income
    
    $
    31,593
    
    
    $
    63,330
    
    
    $
    88,807
    
    
    $
    20,692
    
    
    $
    (15,303
    )
    
    $
    189,119Intersegment interest
    
    
    (947
    )
    
    
    1,774
    
    
    
    (11,586
    )
    
    
    
    
    
    
    10,759
    
    
    
    Provision for loan and lease losses
    
    
    457
    
    
    
    (2,557
    )
    
    
    (4,961
    )
    
    
    (4,777
    )
    
    
    
    
    
    
    (11,838
    )Other revenue
    
    
    163,374
    
    
    
    13,299
    
    
    
    45,896
    
    
    
    4,437
    
    
    
    (3,493
    )
    
    
    223,513Intersegment revenues
    
    
    (8
    )
    
    
    427
    
    
    
    
    
    
    
    
    
    
    
    (419
    )
    
    
    Total net revenues
    
    
    194,469
    
    
    
    76,273
    
    
    
    118,156
    
    
    
    20,352
    
    
    
    (8,456
    )
    
    
    400,794Other expense
    
    
    159,464
    
    
    
    47,015
    
    
    
    79,127
    
    
    
    13,658
    
    
    
    11,422
    
    
    
    310,686Intersegment expenses
    
    
    2,630
    
    
    
    1,346
    
    
    
    2,164
    
    
    
    519
    
    
    
    (6,659
    )
    
    
    Income (loss) before taxes
    
    
    32,375
    
    
    
    27,912
    
    
    
    36,865
    
    
    
    6,175
    
    
    
    (13,219
    )
    
    
    90,108Income taxes
    
    
    13,077
    
    
    
    11,208
    
    
    
    14,805
    
    
    
    4,040
    
    
    
    (7,531
    )
    
    
    35,599Net income (loss)
    
    $
    19,298
    
    
    $
    16,704
    
    
    $
    22,060
    
    
    $
    2,135
    
    
    $
    (5,688
    )
    
    $
    54,509Assets at September 30, 2004
    
    $
    1,275,251
    
    
    $
    2,611,473
    
    
    $
    1,160,469
    
    
    $
    569,419
    
    
    $
    (203,926
    )
    
    $
    5,412,686
 17




---



##### Table of Contents



Note
11  Commitments and Contingencies
 Culpepper v. Inland Mortgage Corporation
      Stamper v. A Home of Your Own
  18




---



##### Table of Contents



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




---



##### Table of Contents



Hobson
 Hobson Kossler Hobson Hobson Kossler
 (Chatfield v. Irwin Union Bank and Trust Company, et al. and Ransom v. Irwin
Union Bank and Trust Company, et al.) Hobson, Chatfield and Ransom.
 Hobson, Chatfield Ransom Kossler
  Litigation Related to NorVergence, Inc.
  Exquisite Caterers, LLC et al. v. Popular Leasing et al. Exquisite Caterers Exquisite Caterers Exquisite
Caterers
 20




---



##### Table of Contents



Delanco Board of
Education et al. v. IFC Credit Corporation, Exquisite Caterers,
 Sterling Asset &
Equity Corp. et al. v. Preferred Capital, Inc. et al.
  (State of Florida v. Commerce Commercial Leasing, LLC et al.). Commerce Commercial
Leasing
    21




---



##### Table of Contents



Putkowski v. Irwin Home Equity Corporation and Irwin Union Bank and Trust Company
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 About Forward-looking Statements
   
    
    our projected revenues, earnings or earnings per share, as well as managements
short-term and long-term performance goals;
    
    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.
 22




---



##### Table of Contents




    
    potential changes in and volatility of interest rates, which may affect consumer
demand for our products and the management and success of our interest rate risk
management strategies;
    
    staffing fluctuations in response to product demand;
    
    the relative profitability of our lending operations;
    
    the valuation and management of our residual, servicing and derivative portfolios,
including assumptions we embed in the valuation and short-term swings in valuation of
such portfolios due to quarter-end movements in secondary market interest rates, which
are inherently volatile;
    
    borrowers refinancing opportunities, which may affect the prepayment assumptions
used in our valuation estimates and which may affect loan demand;
    
    unanticipated deterioration in the credit quality of our loan and lease assets,
including deterioration resulting from the effects of recent natural disasters;
    
    unanticipated deterioration in or changes in estimates of the carrying value of our other assets, including securities;
    
    difficulties in delivering products to the secondary market as planned;
    
    difficulties in expanding our businesses and obtaining funding as needed;
    
    competition from other financial service providers for experienced managers as well as for customers;
    
    changes in the value of companies in which we invest;
    
    changes in variable compensation plans related to the performance and valuation of
lines of business where we tie compensation systems to line-of-business performance;
    
    unanticipated outcomes in litigation;
    
    legislative or regulatory changes, including changes in tax laws or regulations,
changes in the interpretation of regulatory capital rules, changes in consumer or
commercial lending rules, disclosure rules, or rules affecting corporate governance, and
the availability of resources to address these rules;
    
    changes in applicable accounting policies or principles or their application to our
business or final audit adjustments;
    
    additional input and consultations on the ISF accounting
issue and details of the implementation of the new accounting method; and
    
    governmental changes in monetary or fiscal policies.
  Restatement of Prior Period Results
  23




---



##### Table of Contents



Strategy
  
    
    Identify underserved niches.We focus on product or market niches in financial services
that we believe are underservedand where we believe customers are willing to pay a premium
for value-added services. We dont believe it is necessary to be the largest or leading
market share company in any of our product lines, but we do believe it is important that we
are viewed as a preferred provider in niche segments of those product offerings.
    
    Hire exceptional management with niche expertise.We enter niches only when we have
attracted senior managerswho have proven track records in the niche for which they are
responsible. Each of our four lines of business has a separate management team that operates
as an independent business unit responsible for performance goals specific to that
particular line of business. Our structure allows the senior managers of each line of
business to focus their efforts on understanding their customers and meeting the needs of
the markets they serve. This structure also promotes accountability among managers of each
enterprise. The senior managers at each of our lines of business and at the parent company
have significant industry experience. We attempt to create a mix of short-term and long-term
incentives that provide these managers with the incentive to achieve creditworthy,
profitable growthover the long term.
    
    Diversify capital and earnings risk.We diversifyour revenuesand allocate our capital
across complementary lines of business as a key part of our risk management. Our lines of
business are cyclical, but when combined in an appropriate mix, we believe they provide
sources of diversification and opportunities for growth in a variety of economic conditions.
    
    Reinvest in new opportunities.We reinveston an ongoing basis in the development of new
and existing opportunities. As a result of our attention to long-term value creation, we
believe it is important at times to dampen short-term earnings growth by investing for
future return. We are biased toward seeking new growth through organic expansion of existing
lines of business. At times we will initiate a new line through a start-up, with highly
qualified managers we select to focus on a single line of business. Over the past ten years,
we have made only a few acquisitions. Those have typically not been in competitive bidding
situations.
  Critical Accounting Policies/Management Judgments and Accounting Estimates
  Incentive Servicing Fees:
 24




---



##### Table of Contents



Consolidated Overview
 For the three months ended September 30,
    
    For the nine months ended September 30,2005
    
    2004
    
    2005
    
    2004(Restated)
    
    
    
    
    
    (Restated)Net income (in millions)
    
    $
    18.5
    
    
    $
    16.3
    
    
    $
    12.5
    
    
    $
    54.5Basic earnings per share
    
    
    0.65
    
    
    
    0.58
    
    
    
    0.44
    
    
    
    1.93Diluted earnings per share
    
    
    0.61
    
    
    
    0.54
    
    
    
    0.44
    
    
    
    1.81Return on average equity
    
    
    14.6
    %
    
    
    13.4
    %
    
    
    3.3
    %
    
    
    15.6
    %Return on average assets
    
    
    1.1
    
    
    
    1.2
    
    
    
    0.3
    
    
    
    1.4
 Consolidated Income Statement Analysis
 Net Income
    Mortgage
Banking  Other expense-loan repurchase reserve
    
    $0.7 millionMortgage
Banking  Trading gains-trading asset (lender risk account) valuation
    
    $0.3 millionHome Equity
Lending  Provision for Loans and Lease Losses-allowance for loan and lease losses
    
    $0.6 millionOther (rounding)
    
    $0.1 millionTotal
    
    $1.7 million
 25




---



##### Table of Contents



Net Interest Income
  For the Nine Months Ended September 30,2005
    
    
    2004Annualized
    
    
    
    
    
    
    
    
    
    
    AnnualizedAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    

Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)(Restated)AssetsInterest-earning assets:Interest-bearing deposits with financial institutions
    
    $
    79,431
    
    
    $
    1,207
    
    
    
    2.03
    %
    
    $
    88,208
    
    
    $
    477
    
    
    
    0.72
    %Federal funds sold
    
    
    15,597
    
    
    
    284
    
    
    
    2.43
    %
    
    
    10,962
    
    
    
    82
    
    
    
    1.00
    %Residual interests
    
    
    44,717
    
    
    
    5,824
    
    
    
    17.41
    %
    
    
    71,684
    
    
    
    9,893
    
    
    
    18.43
    %Investment securities (1)
    
    
    107,756
    
    
    
    4,306
    
    
    
    5.34
    %
    
    
    82,777
    
    
    
    3,256
    
    
    
    5.25
    %Loans held for sale
    
    
    1,159,392
    
    
    
    66,117
    
    
    
    7.62
    %
    
    
    1,033,421
    
    
    
    59,397
    
    
    
    7.68
    %Loans and leases, net of unearned income(2)
    
    
    3,761,679
    
    
    
    223,294
    
    
    
    7.94
    %
    
    
    3,268,099
    
    
    
    181,759
    
    
    
    7.43
    %Total interest earning assets
    
    
    5,168,572
    
    
    $
    301,032
    
    
    
    7.79
    %
    
    
    4,555,151
    
    
    $
    254,864
    
    
    
    7.47
    %Noninterest-earning assets:Cash and due from banks
    
    
    106,425
    
    
    
    
    
    
    
    
    
    
    
    102,033Premises and equipment, net
    
    
    30,388
    
    
    
    
    
    
    
    
    
    
    
    31,279Other assets
    
    
    593,912
    
    
    
    
    
    
    
    
    
    
    
    581,738Less allowance for loan and lease losses
    
    
    (48,056
    )
    
    
    
    
    
    
    
    
    
    
    (58,913
    )Total assets
    
    $
    5,851,241
    
    
    
    
    
    
    
    
    
    
    $
    5,211,288Liabilities and Shareholders EquityInterest-bearing liabilities:Money market checking
    
    $
    487,803
    
    
    $
    7,277
    
    
    
    1.99
    %
    
    $
    298,014
    
    
    $
    2,722
    
    
    
    1.22
    %Money market savings
    
    
    1,099,108
    
    
    
    19,706
    
    
    
    2.40
    %
    
    
    1,048,544
    
    
    
    10,262
    
    
    
    1.31
    %Regular savings
    
    
    113,942
    
    
    
    1,043
    
    
    
    1.22
    %
    
    
    61,407
    
    
    
    663
    
    
    
    1.44
    %Time deposits
    
    
    1,073,074
    
    
    
    26,552
    
    
    
    3.31
    %
    
    
    922,773
    
    
    
    17,885
    
    
    
    2.59
    %Short-term borrowings
    
    
    390,548
    
    
    
    14,297
    
    
    
    4.89
    %
    
    
    333,143
    
    
    
    6,611
    
    
    
    2.65
    %Collateralized debt
    
    
    601,681
    
    
    
    17,348
    
    
    
    3.85
    %
    
    
    502,610
    
    
    
    10,501
    
    
    
    2.79
    %Other long-term debt
    
    
    275,502
    
    
    
    20,236
    
    
    
    9.82
    %
    
    
    270,180
    
    
    
    17,101
    
    
    
    8.45
    %Total interest-bearing liabilities
    
    $
    4,041,658
    
    
    $
    106,459
    
    
    
    3.52
    %
    
    $
    3,436,671
    
    
    $
    65,745
    
    
    
    2.56
    %Noninterest-bearing liabilities:Demand deposits
    
    
    1,023,483
    
    
    
    
    
    
    
    
    
    
    
    997,100Other liabilities
    
    
    284,698
    
    
    
    
    
    
    
    
    
    
    
    311,603Shareholders equity
    
    
    501,402
    
    
    
    
    
    
    
    
    
    
    
    465,914Total liabilities and shareholders equity
    
    $
    5,851,241
    
    
    
    
    
    
    
    
    
    
    $
    5,211,288Net interest income
    
    
    
    
    
    $
    194,573
    
    
    
    
    
    
    
    
    
    
    $
    189,119Net interest income to average
interest earning assets
    
    
    
    
    
    
    
    
    
    
    5.03
    %
    
    
    
    
    
    
    
    
    
    
    5.55
    %
 
 (1)
    
    We do not show interest income on a tax equivalent basis because it is immaterial.(2)
    
    For purposes of these computations, nonaccrual loans are included in daily average
loan amounts outstanding. 26




---



##### Table of Contents



Provision for Loan and Lease Losses
   Noninterest Income
  Noninterest Expense
  Income Tax Provision
  Consolidated Balance Sheet Analysis
  27




---



##### Table of Contents



Investment Securities
  September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)U.S. Treasury and government obligations
    
    $
    158
    
    
    $
    3,556Obligations of states and political subdivisions
    
    
    5,840
    
    
    
    3,746Mortgage-backed securities
    
    
    30,007
    
    
    
    31,556Federal Reserve stock, Federal Home Loan Bank
stock and other
    
    
    70,769
    
    
    
    69,364Total
    
    $
    106,774
    
    
    $
    108,222
 Loans Held For Sale
  Loans and Leases
  September 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Commercial, financial and agricultural
    
    $
    1,994,742
    
    
    $
    1,697,651Real estate-construction
    
    
    350,717
    
    
    
    287,496Real estate-mortgage
    
    
    886,066
    
    
    
    808,875Consumer
    
    
    40,076
    
    
    
    31,166Commercial financeFranchise finance
    
    
    410,247
    
    
    
    330,496Domestic leasing
    
    
    213,264
    
    
    
    174,035Canadian leasing
    
    
    305,896
    
    
    
    265,780Unearned incomeFranchise finance
    
    
    (108,324
    )
    
    
    (86,638
    )Domestic leasing
    
    
    (29,497
    )
    
    
    (23,924
    )Canadian leasing
    
    
    (37,372
    )
    
    
    (34,497
    )Total loans and leases, net of unearned income
    
    $
    4,025,815
    
    
    $
    3,450,440
  28




---



##### Table of Contents



Allowance for Loan and Lease Losses
  As of and For the
    
    As of and For theNine Months Ended
    
    Year EndedSeptember 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Balance at beginning of period
    
    $
    44,443
    
    
    $
    64,285Provision for loan and lease losses
    
    
    17,935
    
    
    
    14,195Charge-offs
    
    
    (14,688
    )
    
    
    (28,180
    )Recoveries
    
    
    6,427
    
    
    
    5,335Reduction due to reclassification of loans
    
    
    
    
    
    
    (10,808
    )Reduction due to sale of loans and leases and other
    
    
    (338
    )
    
    
    (627
    )Foreign currency adjustment
    
    
    117
    
    
    
    243Balance at end of period
    
    $
    53,896
    
    
    $
    44,443
  Deposits
   Short-Term Borrowings
   Collateralized Debt
  29




---



##### Table of Contents



Other Long-Term Debt
   Capital
   September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)(Restated)Tier 1 capital
    
    $
    663,394
    
    
    $
    637,875Tier 2 capital
    
    
    150,029
    
    
    
    143,611Total risk-based capital
    
    $
    813,423
    
    
    $
    781,487Risk-weighted assets
    
    $
    6,234,965
    
    
    $
    4,908,012Risk-based ratios:Tier 1 capital
    
    
    10.6
    %
    
    
    13.0
    %Total capital
    
    
    13.1
    
    
    
    15.9Tier 1 leverage ratio
    
    
    10.3
    
    
    
    11.6Ending shareholders equity to assets
    
    
    7.8
    
    
    
    9.6Average shareholders equity to assets
    
    
    8.6
    
    
    
    9.0
  Cash Flow Analysis
  30




---



##### Table of Contents



Earnings Outlook
     Earnings by Line of Business
  
    
    Mortgage Banking
    
    Commercial Banking
    
    Home Equity Lending
    
    Commercial Finance
 31




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)(Restated)
    
    
    
    
    
    
    (Restated)Net income (loss):Mortgage Banking
    
    $
    5,864
    
    
    $
    4,051
    
    
    $
    (13,556
    )
    
    $
    19,298Commercial Banking
    
    
    7,634
    
    
    
    5,517
    
    
    
    18,717
    
    
    
    16,704Home Equity Lending
    
    
    2,237
    
    
    
    7,046
    
    
    
    3,745
    
    
    
    22,060Commercial Finance
    
    
    2,538
    
    
    
    1,111
    
    
    
    4,663
    
    
    
    2,135Other (including consolidating entries)
    
    
    220
    
    
    
    (1,400
    )
    
    
    (1,033
    )
    
    
    (5,688
    )$
    18,493
    
    
    $
    16,325
    
    
    $
    12,536
    
    
    $
    54,509
 Mortgage Banking
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    11,304
    
    
    $
    10,202
    
    
    $
    28,053
    
    
    $
    30,646Recovery of loan loss
    
    
    183
    
    
    
    67
    
    
    
    466
    
    
    
    457Other income
    
    
    30,441
    
    
    
    49,653
    
    
    
    51,047
    
    
    
    163,366Total net revenue
    
    
    41,928
    
    
    
    59,922
    
    
    
    79,566
    
    
    
    194,469Operating expense
    
    
    (32,097
    )
    
    
    (52,908
    )
    
    
    (102,285
    )
    
    
    (162,094
    )Income (loss) before taxes
    
    
    9,831
    
    
    
    7,014
    
    
    
    (22,719
    )
    
    
    32,375Income taxes
    
    
    (3,967
    )
    
    
    (2,963
    )
    
    
    9,163
    
    
    
    (13,077
    )Net income (loss)
    
    $
    5,864
    
    
    $
    4,051
    
    
    $
    (13,556
    )
    
    $
    19,298Selected Operating Data:Mortgage loan originations
    
    $
    3,203,536
    
    
    $
    2,973,889
    
    
    $
    8,659,616
    
    
    $
    9,632,196Servicing sold as a % of originations
    
    
    125
    %
    
    
    58
    %
    
    
    137
    %
    
    
    58
    %
 September 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Selected Balance Sheet Data at
End of Period:Total assets
    
    $
    1,312,998
    
    
    $
    1,238,136Mortgage loans held for sale
    
    
    757,527
    
    
    
    662,832Mortgage servicing assets
    
    
    259,549
    
    
    
    319,225Deposits
    
    
    569,051
    
    
    
    680,812Short-term borrowing
    
    
    309,480
    
    
    
    133,150Shareholders equity
    
    
    146,098
    
    
    
    123,265Shareholders equity to assets
    
    
    11.13
    %
    
    
    9.96
    %Selected Operating Data:Servicing portfolioBalance at end of period
    
    $
    18,451,674
    
    
    $
    26,196,627Weighted average coupon rate
    
    
    5.73
    %
    
    
    5.75
    %Weighted average servicing fee
    
    
    0.36
    
    
    
    0.35
 32




---



##### Table of Contents



Overview
       33




---



##### Table of Contents



Originations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Total originations
    
    $
    3,203,536
    
    
    $
    2,973,889
    
    
    $
    8,659,616
    
    
    $
    9,632,196Percent retail loans
    
    
    8
    %
    
    
    20
    %
    
    
    11
    %
    
    
    21
    %Percent wholesale loans
    
    
    54
    
    
    
    31
    
    
    
    47
    
    
    
    35Percent correspondent
    
    
    37
    
    
    
    36
    
    
    
    37
    
    
    
    33Percent brokered (1)
    
    
    1
    
    
    
    13
    
    
    
    5
    
    
    
    11Percent refinances
    
    
    46
    
    
    
    40
    
    
    
    48
    
    
    
    52
 
 (1)
    
    Brokered loans are loans we originate for which we receive loan origination fees,
but which are funded, closed and owned by unrelated third parties. Net Income
  Net Revenue
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    11,304
    
    
    $
    10,202
    
    
    $
    28,053
    
    
    $
    30,646Recovery of loan losses
    
    
    183
    
    
    
    67
    
    
    
    466
    
    
    
    457Gain on sales of loans
    
    
    18,518
    
    
    
    39,351
    
    
    
    60,493
    
    
    
    117,003Servicing fees
    
    
    19,173
    
    
    
    26,356
    
    
    
    68,583
    
    
    
    77,937Amortization expense
    
    
    (16,832
    )
    
    
    (22,773
    )
    
    
    (56,311
    )
    
    
    (74,281
    )Recovery (impairment) of
servicing assets
    
    
    34,748
    
    
    
    (17,662
    )
    
    
    16,606
    
    
    
    5,474Gain (loss) on derivatives
    
    
    (35,617
    )
    
    
    22,520
    
    
    
    (59,314
    )
    
    
    23,064Gain on sales of servicing assets
    
    
    8,585
    
    
    
    440
    
    
    
    15,241
    
    
    
    8,857Other income
    
    
    1,866
    
    
    
    1,421
    
    
    
    5,749
    
    
    
    5,312Total net revenue
    
    $
    41,928
    
    
    $
    59,922
    
    
    $
    79,566
    
    
    $
    194,469
  34




---



##### Table of Contents




    
    the valuation of newly-created mortgage servicing rights;
    
    net loan origination fees which are recognized when loans are sold into the secondary mortgage market; and
    
    changes in fair value of forward contracts and interest rate lock commitments.
      Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)Recovery (impairment) of servicing
    
    $
    34,748
    
    
    $
    (17,662
    )
    
    $
    16,606
    
    
    $
    5,474(Loss) gain on derivatives
    
    
    (35,617
    )
    
    
    22,520
    
    
    
    (59,314
    )
    
    
    23,064Net (impairment) recovery
    
    $
    (869
    )
    
    $
    4,858
    
    
    $
    (42,708
    )
    
    $
    28,538
  35




---



##### Table of Contents



Operating Expenses
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    2004
    
    

2005
    2004(Dollars in thousands)Salaries and employee benefits
    
    $
    12,044
    
    
    $
    19,848
    
    
    $
    42,934
    
    
    $
    59,847Incentive
and commission pay
    
    
    4,192
    
    
    
    11,110
    
    
    
    13,213
    
    
    
    32,293Other expenses
    
    
    15,861
    
    
    
    21,950
    
    
    
    46,138
    
    
    
    69,954Total operating expenses
    
    $
    32,097
    
    
    $
    52,908
    
    
    $
    102,285
    
    
    $
    162,094Number of employees at period end (1)
    
    
    
    
    
    
    
    
    
    
    867
    
    
    
    1,871
 
 (1)
    
    On a full time equivalent basis  Mortgage Servicing
  Nine MonthsEnded
    
    
    Year EndedSeptember 30,
    
    
    December 31,2005
    
    
    2004(Portfolio in billions)Beginning servicing portfolio
    
    $
    26.2
    
    
    $
    29.6Mortgage loan closings
    
    
    8.3
    
    
    
    11.7Bulk sales of servicing rights(1)
    
    
    (6.2
    )
    
    
    (4.0
    )Flow sales of servicing rights(1)
    
    
    (5.3
    )
    
    
    (4.3
    )Run-off(2)
    
    
    (4.5
    )
    
    
    (6.8
    )Ending servicing portfolio
    
    $
    18.5
    
    
    $
    26.2Number of loans (end of period)
    
    
    144,529
    
    
    
    205,463Average loan size
    
    $
    127,668
    
    
    $
    127,500Weighted average coupon rate
    
    
    5.73
    %
    
    
    5.75
    %Percent Government National Mortgage Association
(GNMA) and state housing programs
    
    
    23
    
    
    
    30Percent conventional and other
    
    
    77
    
    
    
    70Delinquency ratio
    
    
    4.7
    
    
    
    4.6Mortgage servicing assets to related servicing
portfolio(3)
    
    
    1.39
    
    
    
    1.20
 
 (1)
    
    Excludes brokered loans that are closed, funded and owned by unrelated third
parties.(2)
    
    Run-off is primarily the reduction in principal balance of the servicing portfolio
due to regular principal payments made by mortgagees and early repayments of entire loans.(3)
    
    For this calculation, deferred service release premiums on warehouse loans are
excluded from mortgage servicing assets, and loans held for sale (i.e. warehouse loans) are
excluded from the servicing portfolio. 36




---



##### Table of Contents



Commercial Banking
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Selected Income Statement Data:Interest income
    
    $
    47,891
    
    
    $
    33,245
    
    
    $
    129,074
    
    
    $
    91,237Interest expense
    
    
    (19,252
    )
    
    
    (9,878
    )
    
    
    (48,899
    )
    
    
    (26,133
    )Net interest income
    
    
    28,639
    
    
    
    23,367
    
    
    
    80,175
    
    
    
    65,104Provision for loan and lease losses
    
    
    (1,361
    )
    
    
    (607
    )
    
    
    (3,936
    )
    
    
    (2,557
    )Other income
    
    
    4,442
    
    
    
    3,889
    
    
    
    12,629
    
    
    
    13,726Total net revenue
    
    
    31,720
    
    
    
    26,649
    
    
    
    88,868
    
    
    
    76,273Operating expense
    
    
    (19,291
    )
    
    
    (17,413
    )
    
    
    (57,889
    )
    
    
    (48,361
    )Income before taxes
    
    
    12,429
    
    
    
    9,236
    
    
    
    30,979
    
    
    
    27,912Income taxes
    
    
    (4,795
    )
    
    
    (3,719
    )
    
    
    (12,262
    )
    
    
    (11,208
    )Net income
    
    $
    7,634
    
    
    $
    5,517
    
    
    $
    18,717
    
    
    $
    16,704
 September 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Selected Balance Sheet Data at End of Period:Total assets
    
    $
    3,177,757
    
    
    $
    2,622,877Securities and short-term investments (1)
    
    
    421,395
    
    
    
    327,664Loans and leases
    
    
    2,618,692
    
    
    
    2,223,474Allowance for loan and lease losses
    
    
    (24,421
    )
    
    
    (22,230
    )Deposits
    
    
    2,916,735
    
    
    
    2,390,839Shareholders equity
    
    
    172,355
    
    
    
    143,580Year to Date Daily AveragesAssets
    
    $
    2,931,922
    
    
    $
    2,476,835Securities and short-term investments
    
    
    431,629
    
    
    
    296,716Loans and leases
    
    
    2,392,486
    
    
    
    2,094,190Allowance for loan and lease losses
    
    
    (23,343
    )
    
    
    (22,304
    )Deposits
    
    
    2,684,994
    
    
    
    2,258,538Shareholders equity
    
    
    146,556
    
    
    
    147,759Shareholders equity to assets
    
    
    5.00
    %
    
    
    5.97
    %
 
 (1)
    
    Includes $383 million and $293 million of inter-company investments at September 30,
2005 and December 31, 2004, respectively, that are the result of excess liquidity at the
commercial banking line of business related to deposit growth in excess of their asset
deployment needs. The funds have been redeployed in earning assets at our other lines of
business. 37




---



##### Table of Contents



Overview
  Net Income
  Net Interest Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)Net interest income
    
    $
    28,639
    
    
    $
    23,367
    
    
    $
    80,175
    
    
    $
    65,104Average interest earning assets
    
    
    2,967,687
    
    
    
    2,482,449
    
    
    
    2,824,579
    
    
    
    2,334,660Net interest margin
    
    
    3.83
    %
    
    
    3.74
    %
    
    
    3.80
    %
    
    
    3.72
    %
  Provision for Loan and Lease Losses
  38




---



##### Table of Contents



Noninterest Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)Trust fees
    
    $
    486
    
    
    $
    438
    
    
    $
    1,494
    
    
    $
    1,433Service charges on deposit accounts
    
    
    1,002
    
    
    
    1,215
    
    
    
    3,008
    
    
    
    3,964Insurance commissions, fees and premiums
    
    
    354
    
    
    
    482
    
    
    
    1,314
    
    
    
    1,568Gain from sales of loans
    
    
    956
    
    
    
    616
    
    
    
    2,380
    
    
    
    2,323Loan servicing fees
    
    
    371
    
    
    
    353
    
    
    
    1,092
    
    
    
    1,020Amortization of servicing assets
    
    
    (354
    )
    
    
    (323
    )
    
    
    (981
    )
    
    
    (1,204
    )Recovery (impairment) of servicing assets
    
    
    345
    
    
    
    (247
    )
    
    
    248
    
    
    
    341Brokerage fees
    
    
    376
    
    
    
    299
    
    
    
    980
    
    
    
    1,148Derivative loss
    
    
    (336
    )
    
    
    
    
    
    
    (263
    )
    
    
    Other
    
    
    1,242
    
    
    
    1,056
    
    
    
    3,357
    
    
    
    3,133Total noninterest income
    
    $
    4,442
    
    
    $
    3,889
    
    
    $
    12,629
    
    
    $
    13,726
  Operating Expenses
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)Salaries and employee benefits
    
    $
    11,897
    
    
    $
    11,124
    
    
    $
    36,207
    
    
    $
    30,111Other expenses
    
    
    7,394
    
    
    
    6,289
    
    
    
    21,682
    
    
    
    18,250Total operating expenses
    
    $
    19,291
    
    
    $
    17,413
    
    
    $
    57,889
    
    
    $
    48,361Efficiency ratio
    
    
    58.3
    %
    
    
    63.9
    %
    
    
    62.4
    %
    
    
    61.4
    %Number of employees at period end(1)
    
    
    
    
    
    
    
    
    
    
    561
    
    
    
    444
 
 (1)
    
    On a full time equivalent basis.  Balance Sheet
  39




---



##### Table of Contents



Credit Quality
  September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Nonperforming loans
    
    $
    20,904
    
    
    $
    21,247Other real estate owned
    
    
    5,039
    
    
    
    1,533Total nonperforming assets
    
    $
    25,943
    
    
    $
    22,780Nonperforming assets to total assets
    
    
    0.82
    %
    
    
    0.87
    %Allowance for loan losses
    
    $
    24,421
    
    
    $
    22,230Allowance for loan losses to total loans
    
    
    0.93
    %
    
    
    1.00
    %
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Provision for loan losses
    
    $
    1,361
    
    
    $
    607
    
    
    $
    3,936
    
    
    $
    2,557Net charge-offs
    
    
    590
    
    
    
    611
    
    
    
    1,745
    
    
    
    2,567Annualized net charge-offs to average loans
    
    
    0.09
    %
    
    
    0.11
    %
    
    
    0.10
    %
    
    
    0.17
    %
 40




---



##### Table of Contents



Home Equity Lending
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)(Restated)
    
    
    
    
    
    (Restated)Selected Income Statement Data:Net interest income
    
    $
    23,400
    
    
    $
    26,367
    
    
    $
    65,025
    
    
    $
    77,221(Provision) recovery for loan and lease losses
    
    
    (3,113
    )
    
    
    232
    
    
    
    (9,665
    )
    
    
    (4,961
    )Other income
    
    
    7,825
    
    
    
    14,270
    
    
    
    30,189
    
    
    
    45,896Total net revenue
    
    
    28,112
    
    
    
    40,869
    
    
    
    85,549
    
    
    
    118,156Operating expense
    
    
    (24,372
    )
    
    
    (29,050
    )
    
    
    (79,267
    )
    
    
    (81,291
    )Income before taxes
    
    
    3,740
    
    
    
    11,819
    
    
    
    6,282
    
    
    
    36,865Income taxes
    
    
    (1,503
    )
    
    
    (4,773
    )
    
    
    (2,537
    )
    
    
    (14,805
    )Net income
    
    $
    2,237
    
    
    $
    7,046
    
    
    $
    3,745
    
    
    $
    22,060Selected Operating Data:Loan volume:Lines of credit
    
    $
    84,142
    
    
    $
    172,724
    
    
    $
    366,915
    
    
    $
    402,361Loans
    
    
    359,464
    
    
    
    224,052
    
    
    
    1,006,587
    
    
    
    705,115Net home equity charge-offs to average
managed portfolio
    
    
    0.44
    %
    
    
    1.42
    %
    
    
    0.70
    %
    
    
    2.56
    %Gain on sale of loans to loans sold
    
    
    2.48
    %
    
    
    2.08
    %
    
    
    2.72
    %
    
    
    2.42
    %
 September 30,
    
    December 31,2005
    
    2004(Dollars in thousands)(Restated)Selected Balance Sheet Data at End of Period:Total assets
    
    $
    1,584,416
    
    
    $
    992,979Home equity loans and lines of credit (1)
    
    
    635,435
    
    
    
    590,175Allowance for loan and lease losses
    
    
    (18,343
    )
    
    
    (11,330
    )Home equity loans held for sale
    
    
    807,673
    
    
    
    227,740Residual interests
    
    
    23,720
    
    
    
    51,542Mortgage servicing assets
    
    
    38,950
    
    
    
    44,000Short-term borrowings
    
    
    825,613
    
    
    
    359,902Collateralized debt
    
    
    524,875
    
    
    
    352,625Shareholders equity
    
    
    136,203
    
    
    
    136,260Shareholders equity to assets
    
    
    8.60
    %
    
    
    13.72
    %Selected Operating Data at End of Period:Total managed portfolio balance
    
    $
    1,577,238
    
    
    $
    1,147,137Delinquency ratio (2)
    
    
    2.9
    %
    
    
    4.8
    %Weighted average coupon rate:Lines of credit
    
    
    9.76
    %
    
    
    9.18
    %Loans
    
    
    9.90
    
    
    
    11.87
 
 (1)
    
    Includes $550 million and $361 million of collateralized loans at September 30, 2005
and December 31, 2004, respectively, as part of securitized financings.(2)
    
    Nonaccrual loans are included in the delinquency ratio. 41




---



##### Table of Contents



Overview
     Portfolio Mix
  WeightedAverageAmount
    
    
    % of Total
    
    
    Coupon(In thousands)Home equity loans £ 100% CLTV
    
    $
    509,505
    
    
    
    32.30
    %
    
    
    7.61
    %Home equity lines of credit £ 100% CLTV
    
    
    351,327
    
    
    
    22.28
    
    
    
    8.31Total £ 100% CLTV
    
    
    860,832
    
    
    
    54.58
    
    
    
    7.90Home equity loans > 100% CLTV
    
    
    507,234
    
    
    
    32.16
    
    
    
    12.43Home equity lines of credit > 100% CLTV
    
    
    159,198
    
    
    
    10.09
    
    
    
    12.63Total > 100% CLTV
    
    
    666,432
    
    
    
    42.25
    
    
    
    12.47First mortgages
    
    
    37,707
    
    
    
    2.39
    
    
    
    6.90Other
    
    
    12,267
    
    
    
    0.78
    
    
    
    13.89Total managed portfolio (1)
    
    $
    1,577,238
    
    
    
    100.00
    %
    
    
    9.85
    %
 
 (1)
    
    We define our Managed portfolio as the portfolio ($1.6 billion) that we service
and on which we carry credit risk. At September 30, 2005, we also serviced another $1.8
billion of loans for which the credit risk is held by others. 42




---



##### Table of Contents



September 30,
    
    
    December 31,State
    
    2005
    
    
    2004California
    
    
    12.6
    %
    
    
    15.4
    %Michigan
    
    
    8.2
    
    
    
    6.0Florida
    
    
    7.1
    
    
    
    7.4Pennsylvania
    
    
    5.6
    
    
    
    4.8Colorado
    
    
    5.6
    
    
    
    4.7All other states
    
    
    60.9
    
    
    
    61.7Total
    
    
    100.0
    %
    
    
    100.0
    %Total managed portfolio in thousands
    
    $
    1,577,238
    
    
    $
    1,147,137
 Loan Volume
  For the Three Months EndedSeptember 30,State
    
    2005
    
    
    2004California
    
    
    13.7
    %
    
    
    20.1
    %Michigan
    
    
    9.7
    
    
    
    6.6Florida
    
    
    8.5
    
    
    
    6.8Virginia
    
    
    5.5
    
    
    
    6.0Pennsylvania
    
    
    5.4
    
    
    
    4.9All other states
    
    
    57.2
    
    
    
    55.6Total
    
    
    100.0
    %
    
    
    100.0
    %Total originations
    
    $
    443,606
    
    
    $
    396,776
 43




---



##### Table of Contents



Three Months Ended September 30,Product
    
    2005
    
    
    2004(Funding amount in thousands)First mortgage loansFunding Amount
    
    
    26,381
    
    
    
    17,166Weighted Average Disposable Income
    
    
    7,300
    
    
    
    4,716Weighted Average FICO score
    
    
    685
    
    
    
    685Weighted Average Coupon
    
    
    7.14
    %
    
    
    7.32
    %Home equity loans up to 100% CLTVFunding Amount
    
    
    218,020
    
    
    
    78,358Weighted Average Disposable Income
    
    
    4,981
    
    
    
    5,063Weighted Average FICO score
    
    
    724
    
    
    
    709Weighted Average Coupon
    
    
    7.37
    %
    
    
    8.27
    %Home equity loans up to 125% CLTVFunding Amount
    
    
    115,063
    
    
    
    128,528Weighted Average Disposable Income
    
    
    4,199
    
    
    
    4,214Weighted Average FICO score
    
    
    688
    
    
    
    683Weighted Average Coupon
    
    
    11.88
    %
    
    
    12.08
    %Home equity lines of credit up to 100% CLTVFunding Amount
    
    
    72,987
    
    
    
    143,147Weighted Average Disposable Income
    
    
    6,286
    
    
    
    5,798Weighted Average FICO score
    
    
    698
    
    
    
    698Weighted Average Coupon
    
    
    7.63
    %
    
    
    6.16
    %Home equity lines of credit up to 125% CLTVFunding Amount
    
    
    11,154
    
    
    
    29,577Weighted Average Disposable Income
    
    
    4,608
    
    
    
    4,293Weighted Average FICO score
    
    
    699
    
    
    
    696Weighted Average Coupon
    
    
    12.16
    %
    
    
    10.25
    %All ProductsFunding Amount
    
    
    443,606
    
    
    
    396,776Weighted Average Disposable Income
    
    
    5,141
    
    
    
    4,912Weighted Average FICO score
    
    
    707
    
    
    
    695Weighted Average Coupon
    
    
    8.69
    %
    
    
    8.85
    %
 Net Income
  44




---



##### Table of Contents



Net Revenue
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)(Restated)
    
    
    
    
    
    
    (Restated)Net interest income
    
    $
    23,400
    
    
    $
    26,367
    
    
    $
    65,025
    
    
    $
    77,221(Provision for) recovery of loan losses
    
    
    (3,113
    )
    
    
    232
    
    
    
    (9,665
    )
    
    
    (4,961
    )Gain on sales of loans
    
    
    3,734
    
    
    
    8,438
    
    
    
    15,863
    
    
    
    20,163Loan servicing fees
    
    
    10,689
    
    
    
    7,726
    
    
    
    29,732
    
    
    
    21,917Amortization of servicing assets
    
    
    (8,682
    )
    
    
    (4,975
    )
    
    
    (22,272
    )
    
    
    (13,927
    )Recovery (impairment) of servicing assets
    
    
    541
    
    
    
    (449
    )
    
    
    905
    
    
    
    394Trading gains
    
    
    324
    
    
    
    4,310
    
    
    
    3,120
    
    
    
    15,640Derivative gains
    
    
    268
    
    
    
    (979
    )
    
    
    605
    
    
    
    1,076Other income
    
    
    951
    
    
    
    199
    
    
    
    2,236
    
    
    
    633Total net revenue
    
    $
    28,112
    
    
    $
    40,869
    
    
    $
    85,549
    
    
    $
    118,156
     45




---



##### Table of Contents



Operating Expenses
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)(Restated)
    
    
    
    
    
    
    (Restated)Salaries and employee benefits
    
    $
    15,701
    
    
    $
    18,627
    
    
    $
    50,193
    
    
    $
    52,618Other
    
    
    8,671
    
    
    
    10,423
    
    
    
    29,074
    
    
    
    28,673Total operating expenses
    
    $
    24,372
    
    
    $
    29,050
    
    
    $
    79,267
    
    
    $
    81,291Number of
employees at period end (1)
    
    
    
    
    
    
    
    
    
    
    616
    
    
    
    681
 
 (1)
    
    On a full time equivalent basis .  46




---



##### Table of Contents



Home Equity Servicing
     September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Managed PortfolioTotal Loans
    
    $
    1,577,238
    
    
    $
    1,147,13730 days past due
    
    
    2.92
    %
    
    
    4.76
    %90 days past due
    
    
    1.02
    
    
    
    1.60Annualized QTD Net Chargeoff Rate
    
    
    0.44
    
    
    
    1.85Unsold LoansTotal Loans(1)
    
    $
    1,430,131
    
    
    $
    814,59530 days past due
    
    
    2.01
    %
    
    
    1.93
    %90 days past due
    
    
    0.76
    
    
    
    0.78Annualized QTD Net Chargeoff Rate
    
    
    0.36
    
    
    
    0.79Loan Loss Reserve
    
    $
    18,343
    
    
    $
    11,330Owned ResidualTotal Loans
    
    $
    147,106
    
    
    $
    332,54230 days past due
    
    
    11.75
    %
    
    
    11.71
    %90 days past due
    
    
    3.52
    
    
    
    3.61Annualized QTD Net Chargeoff Rate
    
    
    1.06
    
    
    
    4.48Residual Undiscounted Losses
    
    $
    2,680
    
    
    $
    11,323Credit Risk Sold, Potential Incentive Servicing Fee Retained PortfolioTotal Loans
    
    $
    1,118,506
    
    
    $
    1,023,58530 days past due
    
    
    3.20
    %
    
    
    3.11
    %90 days past due
    
    
    1.09
    
    
    
    1.10
 
 (1)
    
    Excludes deferred fees and costs. 47




---



##### Table of Contents



Commercial Finance
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)Selected Income Statement Data:Net interest income
    
    $
    8,959
    
    
    $
    7,058
    
    
    $
    24,499
    
    
    $
    20,692Provision for loan and lease losses
    
    
    (1,481
    )
    
    
    (1,589
    )
    
    
    (4,801
    )
    
    
    (4,777
    )Noninterest income
    
    
    2,313
    
    
    
    1,366
    
    
    
    5,573
    
    
    
    4,437Total net revenue
    
    
    9,791
    
    
    
    6,835
    
    
    
    25,271
    
    
    
    20,352Operating expense
    
    
    (5,413
    )
    
    
    (4,914
    )
    
    
    (17,246
    )
    
    
    (14,177
    )Income before taxes
    
    
    4,378
    
    
    
    1,921
    
    
    
    8,025
    
    
    
    6,175Income taxes
    
    
    (1,840
    )
    
    
    (810
    )
    
    
    (3,362
    )
    
    
    (4,040
    )Net income
    
    $
    2,538
    
    
    $
    1,111
    
    
    $
    4,663
    
    
    $
    2,135Selected Operating Data:Net charge-offs
    
    $
    1,052
    
    
    $
    1,958
    
    
    $
    3,869
    
    
    $
    4,303Net interest margin
    
    
    4.95
    %
    
    
    5.25
    %
    
    
    4.86
    %
    
    
    5.53
    %Total funding of loans and leases
    
    $
    119,345
    
    
    $
    90,966
    
    
    $
    312,980
    
    
    $
    251,204Loans sold
    
    
    19,804
    
    
    
    3,863
    
    
    
    34,232
    
    
    
    27,497
 September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Selected Balance Sheet Data at End of Period:Total assets
    
    $
    774,072
    
    
    $
    636,604Loans and leases
    
    
    754,214
    
    
    
    625,140Allowance for loan and lease losses
    
    
    (10,366
    )
    
    
    (9,624
    )Shareholders equity
    
    
    69,477
    
    
    
    55,993Shareholders equity to assets
    
    
    8.98
    %
    
    
    8.80
    %
 Overview
   Net Income
  48




---



##### Table of Contents



Net Interest Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)Net interest income
    
    $
    8,959
    
    
    $
    7,058
    
    
    $
    24,499
    
    
    $
    20,692Average interest earning assets
    
    
    717,364
    
    
    
    536,882
    
    
    
    673,852
    
    
    
    504,290Net interest margin
    
    
    4.95
    %
    
    
    5.23
    %
    
    
    4.86
    %
    
    
    5.48
    %
   Provision for Loan and Lease Losses
  Noninterest Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)
    
    
    (Dollars in thousands)Gain on sales of loans
    
    
    1,530
    
    
    
    225
    
    
    
    2,313
    
    
    
    1,404Derivative losses, net
    
    
    (227
    )
    
    
    (225
    )
    
    
    (533
    )
    
    
    (574
    )Other
    
    
    1,010
    
    
    
    1,366
    
    
    
    3,793
    
    
    
    3,607Total noninterest income
    
    $
    2,313
    
    
    $
    1,366
    
    
    $
    5,573
    
    
    $
    4,437
  49




---



##### Table of Contents



Operating Expenses
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)Salaries and employee benefits
    
    $
    4,680
    
    
    $
    3,646
    
    
    $
    13,037
    
    
    $
    10,486Other
    
    
    733
    
    
    
    1,268
    
    
    
    4,209
    
    
    
    3,691Total operating expenses
    
    $
    5,413
    
    
    $
    4,914
    
    
    $
    17,246
    
    
    $
    14,177Number of employees at period end(1)
    
    
    
    
    
    
    
    
    
    
    179
    
    
    
    156
 
 (1)
    
    On a full time equivalent basis.  Credit Quality
   September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Nonperforming loans
    
    $
    3,961
    
    
    $
    3,936Allowance for loan losses
    
    
    10,366
    
    
    
    9,624Allowance for loan losses to total loans
    
    
    1.37
    %
    
    
    1.54
    %
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Dollars in thousands)Provision for loan losses
    
    $
    1,481
    
    
    $
    1,589
    
    
    $
    4,801
    
    
    $
    4,777Net charge-offs
    
    
    1,052
    
    
    
    1,958
    
    
    
    3,869
    
    
    
    4,303Annualized net charge-offs to average loans
    
    
    0.58
    %
    
    
    1.47
    %
    
    
    0.77
    %
    
    
    1.16
    %
 50




---



##### Table of Contents



September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Domestic franchise loans
    
    $
    301,924
    
    
    $
    243,859Weighted average yield
    
    
    8.51
    %
    
    
    8.11
    %Delinquency ratio
    
    
    0.35
    
    
    
    0.35Domestic leases
    
    $
    183,767
    
    
    $
    149,999Weighted average yield
    
    
    8.53
    %
    
    
    8.95
    %Delinquency ratio
    
    
    1.23
    
    
    
    1.09Canadian leases(1)
    
    $
    268,524
    
    
    $
    231,282Weighted average yield
    
    
    9.26
    %
    
    
    9.77
    %Delinquency ratio
    
    
    0.43
    
    
    
    0.82
 
 (1)
    
    In U.S. dollars. Parent and Other
    Risk Management
  
    
    Credit risk
    
    Liquidity risk
    
    Interest rate risk
    
    Operational risk
   51




---



##### Table of Contents



Credit Risk
       52




---



##### Table of Contents



September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Accruing loans past due 90 days or more:Commercial, financial and agricultural loans
    
    $
    
    
    
    $
    Real estate mortgages
    
    
    
    
    
    
    219Consumer loans
    
    
    599
    
    
    
    426Commercial financing:Franchise financing
    
    
    
    
    
    
    Domestic leasing
    
    
    45
    
    
    
    Canadian leasing
    
    
    29
    
    
    
    12673
    
    
    
    657Nonaccrual loans and leases:Commercial, financial and agricultural loans
    
    
    19,199
    
    
    
    20,394Real estate mortgages
    
    
    11,883
    
    
    
    8,590Consumer loans
    
    
    1,106
    
    
    
    128Commercial financing:Franchise financing
    
    
    745
    
    
    
    1,193Domestic leasing
    
    
    1,423
    
    
    
    1,029Canadian leasing
    
    
    1,719
    
    
    
    1,70236,075
    
    
    
    33,036Total nonperforming loans and leases
    
    
    36,748
    
    
    
    33,693Nonperforming Loans held for Sale not guaranteed
    
    
    888
    
    
    
    2,066Other real estate owned
    
    
    12,692
    
    
    
    9,427Total nonperforming assets
    
    $
    50,328
    
    
    $
    45,186Nonperforming loans and leases to total loans and leases
    
    
    0.9
    %
    
    
    1.0
    %Nonperforming assets to total assets
    
    
    0.8
    %
    
    
    0.9
    %
   September 30,
    
    
    December 31,2005
    
    
    2004(In millions)           Mortgage banking
    
    $
    4.7
    
    
    $
    8.5           Commercial banking
    
    
    25.9
    
    
    
    22.8           Home equity lending
    
    
    15.7
    
    
    
    10.0           Commercial finance
    
    
    4.0
    
    
    
    3.9
  53




---



##### Table of Contents



Liquidity Risk
         54




---



##### Table of Contents




    
    Warehouse lines of credit to fund first mortgages and home equity loans: none outstanding
on a $300 million borrowing facility, of which $150 million is committed
    
    Warehouse borrowing facilities to fund first mortgage loans: none outstanding on a $150
million committed borrowing facility
    
    Lines of credit with correspondent banks, including fed funds lines: $161 million
outstanding out of $225 million available but not committed
    
    Line of credit with a correspondent bank collateralized by mortgage servicing rights:
none outstanding out of $50 million committed borrowing facility
    
    Warehouse lines of credit to fund Canadian sourced small ticket leases: $205 million
outstanding on $291 million of borrowing facilities
  
    
    Committed warehouse sale facility: $220 million unsettled on a $600 million facility
    
    Uncommitted warehouse sale facility: none unsettled on a $150 million facility
    
    Investor warehouse sale facility: $124 million unsettled
 Interest Rate Risk
    55




---



##### Table of Contents




    
    the type of risk we are trying to mitigate;
    
    offsetting factors elsewhere in the Corporation;
    
    the level of current capital above our target minimums;
    
    time remaining in the quarter (i.e., days until quarter end);
    
    current level of derivative gain or loss relative to accounting and economic basis;
    
    basis risk: the degree to which the interest rates underlying our derivative instruments
might not move parallel to the interest rate driving our asset valuation;
    
    convexity: the degree to which asset values, or risk management derivative instrument
values, do not change in a linear fashion as interest rates change; and
    
    volatility: the level of volatility in market interest rates and the related impact on
our asset values and derivatives instrument values.
  1.
    
    Provide adequate hedge coverage for falling rates;2.
    
    minimize premium costs to establish hedge positions;3.
    
    provide a moderate amount of net impairment recapture if interest rates rise;4.
    
    when near or above the MSR LOCOM cap, maintain an acceptable range over which interest
rates may rise without causing hedge losses to significantly exceed accounting gains.
    56




---



##### Table of Contents




    
    The net asset value sensitivities do not necessarily represent the changes in the lines
of business net asset value that would actually occur under the given interest rate
scenarios, as sensitivities do not reflect changes in value of the companies as a going
concern, nor consider potential rebalancing or other management actions that might be taken
in the future under asset/liability management as interest rates change.
    
    Specifically, the volume of derivative contracts entered into to manage the risk of MSRs
fluctuates from quarter to quarter and within a given quarter, depending upon market
conditions, the size of our MSR portfolio and various additional factors. We monitor
derivative positions frequently and rebalance them as needed. Therefore, our derivative
positions, shown in the table below as of September 30, 2005, may or may not be
representative of our risk position during the succeeding quarter. Additionally, it is
unlikely that the volume of derivative positions would remain constant over large
fluctuations in interest rates, although the tables below assume they do. MSR risk
management derivative contracts appear under the category Interest Sensitive Financial
Derivatives in the tables below.
    
    The tables below show modeled changes in interest rates for individual asset classes.
Asset classes in our portfolio have interest rate sensitivity tied to different underlying
indices or instruments. While the rate sensitivity of individual asset classes presented
below is our best estimate of changes in value due to interest rate changes, the total
potential change figures are subject to basis risk between value changes of individual
assets and liabilities which has not been included in the model.
    
    Few of the asset classes shown react to interest rate changes in a linear fashion. That
is, the point estimates we have made at Current and +/2% and +/1% are good estimates
at those amounts of rate change, but it may not be accurate to interpolate linearly between
those points. This is most evident in products that contain options in payment timing or
pricing such as mortgage servicing or nonmaturity transaction deposits.
    
    Finally, the tables show theoretical outcomes for dramatic changes in interest rates
which do not consider potential rebalancing or repositioning of hedges.
 57




---



##### Table of Contents



Economic Value Change Method
 Present Value at September 30, 2005Change in Interest Rates of:-2%
    
    
    -1%
    
    
    Current
    
    
    +1%
    
    
    +2%(In Thousands)Interest Sensitive AssetsLoans and other assets
    
    $
    4,312,809
    
    
    $
    4,268,995
    
    
    $
    4,223,599
    
    
    $
    4,178,117
    
    
    $
    4,133,266Loans held for sale
    
    
    1,607,556
    
    
    
    1,601,313
    
    
    
    1,592,646
    
    
    
    1,578,571
    
    
    
    1,561,614Mortgage servicing rights
    
    
    154,356
    
    
    
    208,118
    
    
    
    317,693
    
    
    
    392,263
    
    
    
    432,500Residual interests
    
    
    30,995
    
    
    
    30,474
    
    
    
    29,883
    
    
    
    29,388
    
    
    
    28,541Interest sensitive financial derivatives
    
    
    36,280
    
    
    
    36,806
    
    
    
    3,747
    
    
    
    (56,442
    )
    
    
    (126,741
    )Total interest sensitive assets
    
    $
    6,141,996
    
    
    $
    6,145,706
    
    
    $
    6,167,568
    
    
    $
    6,121,897
    
    
    $
    6,029,180Interest Sensitive LiabilitiesDeposits
    
    $
    (4,087,086
    )
    
    $
    (4,055,850
    )
    
    $
    (4,031,595
    )
    
    $
    (4,009,446
    )
    
    $
    (3,990,138
    )Short-term
borrowings (1)
    
    
    (751,846
    )
    
    
    (751,077
    )
    
    
    (750,340
    )
    
    
    (749,628
    )
    
    
    (748,938
    )Long-term debt
    
    
    (810,213
    )
    
    
    (799,337
    )
    
    
    (786,383
    )
    
    
    (771,789
    )
    
    
    (754,675
    )Total interest sensitive liabilities
    
    $
    (5,649,145
    )
    
    $
    (5,606,264
    )
    
    $
    (5,568,318
    )
    
    $
    (5,530,863
    )
    
    $
    (5,493,751
    )Net market value as of September 30, 2005
    
    $
    492,851
    
    
    $
    539,442
    
    
    $
    599,250
    
    
    $
    591,034
    
    
    $
    535,429Change from current
    
    $
    (106,399
    )
    
    $
    (59,808
    )
    
    $
    
    
    
    $
    (8,216
    )
    
    $
    (63,821
    )Net market value as of June 30, 2005
    
    $
    522,235
    
    
    $
    467,611
    
    
    $
    487,372
    
    
    $
    531,054
    
    
    $
    531,397Potential change
    
    $
    34,863
    
    
    $
    (19,761
    )
    
    $
    
    
    
    $
    43,682
    
    
    $
    44,025
 
 (1)
    
    Includes certain debt which is categorized as collateralized borrowings in
other sections of this document GAAP-Based Value Change Method
 Present Value at September 30, 2005Change in Interest Rates of:-2%
    
    
    -1%
    
    
    Current
    
    
    +1%
    
    
    +2%(In Thousands)Interest Sensitive AssetsLoans and
other assets (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loans held for sale
    
    $
    1,565,460
    
    
    $
    1,565,460
    
    
    $
    1,565,460
    
    
    $
    1,551,386
    
    
    $
    1,534,428Mortgage servicing rights
    
    $
    154,605
    
    
    $
    207,511
    
    
    $
    302,373
    
    
    $
    326,255
    
    
    $
    332,129Residual interests
    
    $
    30,995
    
    
    $
    30,474
    
    
    $
    29,883
    
    
    $
    29,388
    
    
    $
    28,541Interest sensitive financial derivatives
    
    $
    36,280
    
    
    $
    36,806
    
    
    $
    3,747
    
    
    $
    (56,442
    )
    
    $
    (126,741
    )Total interest sensitive assets
    
    $
    1,787,340
    
    
    $
    1,840,251
    
    
    $
    1,901,463
    
    
    $
    1,850,587
    
    
    $
    1,768,357Interest Sensitive LiabilitiesDeposits
(1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Short-term
borrowings (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term
debt (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Total
interest sensitive liabilities (1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Net market value as of September 30, 2005
    
    $
    1,787,340
    
    
    $
    1,840,251
    
    
    $
    1,901,463
    
    
    $
    1,850,587
    
    
    $
    1,768,357Potential change
    
    $
    (114,123
    )
    
    $
    (61,212
    )
    
    $
    
    
    
    $
    (50,876
    )
    
    $
    (133,106
    )Net market value as of June 30, 2005
    
    $
    1,397,764
    
    
    $
    1,351,164
    
    
    $
    1,386,733
    
    
    $
    1,376,200
    
    
    $
    1,344,554Potential change
    
    $
    11,031
    
    
    $
    (35,569
    )
    
    $
    
    
    
    $
    (10,533
    )
    
    $
    (42,179
    )
 
 (1)
    
    Value does not change in GAAP presentation 58




---



##### Table of Contents



Operational risk
      Off-Balance Sheet Instruments
   59




---



##### Table of Contents



Derivative Financial Instruments
       
    
    We deliver fixed rate leases into a second commercial paper conduit. Although the leases
and funding are in Canadian dollars (CAD), the interest rate mismatch is similar in nature
to that described above. To lessen the repricing mismatch between fixed rate CAD-denominated
leases and floating rate CAD commercial paper, a series of amortizing CAD interest rate
swaps have been executed. As of September 30, 2005, the commercial paper conduit was
providing $171 million of variable rate funding. In total, our interest rate swaps were
effectively converting $158 million of this funding to a fixed interest rate. The
year-to-date losses on these swaps at September 30, 2005 were $0.1 million.
    
    In two instances, this funding mismatch is partially mitigated by a combination of
amortizing interest rate caps and Eurodollar futures contracts. The interest rate caps have
a strike price of 5% and provide protection against a large increase in short-term interest
rates. As of September 30, 2005, the notional value and 2005 loss on the interest rate caps
were $12 million and $2 thousand, respectively. As of September 30, 2005, the total notional
amount and year-to-date gain on the Eurodollar futures were $20 million and $0.1 million,
respectively.
  60




---



##### Table of Contents



61




---



##### Table of Contents



Ending
    
    
    Change inGNMA
    
    
    GNMA
    
    
    (Impairment)
    
    
    
    
    
    
    NetRate
    
    
    Rate (in bps)
    
    
    recovery
    
    
    Hedge
    
    
    Impairment(Dollars in millions)Q1 02
    
    
    
    
    
    
    6.66
    %
    
    
    21
    
    
    $
    10.7
    
    
    $
    (8.1
    )
    
    $
    2.6Q2 02
    
    
    
    
    
    
    6.08
    %
    
    
    (58
    )
    
    
    (48.0
    )
    
    
    45.4
    
    
    
    (2.6
    )Q3 02
    
    
    
    
    
    
    5.15
    %
    
    
    (93
    )
    
    
    (86.8
    )
    
    
    81.2
    
    
    
    (5.6
    )Q4 02
    
    
    
    
    
    
    5.02
    %
    
    
    (13
    )
    
    
    (19.4
    )
    
    
    7.1
    
    
    
    (12.3
    )Total 2002
    
    
    
    
    
    
    (143
    )
    
    
    
    
    
    
    
    
    
    $
    (17.9
    )Q1 03
    
    
    
    
    
    
    4.97
    %
    
    
    (5
    )
    
    $
    (2.0
    )
    
    $
    0.3
    
    
    $
    (1.7
    )Q2 03
    
    
    
    
    
    
    4.51
    %
    
    
    (46
    )
    
    
    (40.7
    )
    
    
    28.9
    
    
    
    (11.8
    )Q3 03
    
    
    
    
    
    
    4.99
    %
    
    
    48
    
    
    
    41.8
    
    
    
    (27.6
    )
    
    
    14.2Q4 03
    
    
    
    
    
    
    5.24
    %
    
    
    25
    
    
    
    46.2
    
    
    
    (22.9
    )
    
    
    23.3Total 2003
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    $
    24.0Q1 04
    
    
    
    
    
    
    4.90
    %
    
    
    (34
    )
    
    $
    (48.2
    )
    
    $
    58.4
    
    
    $
    10.2Q2 04
    
    
    
    
    
    
    5.54
    %
    
    
    64
    
    
    
    71.3
    
    
    
    (57.8
    )
    
    
    13.5Q3 04
    
    
    
    
    
    
    5.16
    %
    
    
    (38
    )
    
    
    (17.7
    )
    
    
    22.6
    
    
    
    4.9Q4 04
    
    
    
    
    
    
    5.05
    %
    
    
    (11
    )
    
    
    (9.7
    )
    
    
    (4.2
    )
    
    
    (13.9
    )Total 2004
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    $
    14.7Q1 05
    
    
    
    
    
    
    5.33
    %
    
    
    28
    
    
    
    32.5
    
    
    
    (47.4
    )
    
    $
    (14.9
    )Q2 05
    
    
    
    
    
    
    4.82
    %
    
    
    (51
    )
    
    
    (50.6
    )
    
    
    23.7
    
    
    
    (26.9
    )Q3 05
    
    
    
    
    
    
    5.29
    %
    
    
    47
    
    
    
    34.7
    
    
    
    (35.6
    )
    
    
    (0.9
    )
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4. Controls and Procedures.
 Disclosure
Controls and Procedures 
 Identification of Material Weakness 
 Changes in Internal Control Over Financial Reporting 
   62




---



##### Table of Contents



PART II. Other Information.
 
 Item 1. Legal Proceedings.
 Since the time we filed our Report on Form 10-Q for the period ended June 30, 2005, we
experienced developments as noted in the litigation described below. For a full description of the
litigation, see Note 11, Commitments and Contingencies, in the Notes to Consolidated Financial
Statements, Part I, Item 1, of this Report.
 Stamper v. A Home of Your Own
  Litigation in Connection with Loans Purchased from Community Bank of Northern Virginia
(Community)
  Litigation Related to NorVergence, Inc.
   63




---



##### Table of Contents



Putkowski v. Irwin Home Equity Corporation and Irwin Union Bank and Trust Company.
  64




---



##### Table of Contents



Item 6. Exhibits.
 ExhibitNumber
    
    Description of Exhibit3.1
    
    Restated Articles of Incorporation of Irwin Financial Corporation, as amended April 7, 2005. (Incorporated by
reference to Exhibit 3.1 of Form 10-Q Report for the quarter ended March 31, 2005, File No. 001-16691.)3.2
    
    Code of By-laws of Irwin Financial Corporation, as amended, dated May 4, 2005.4.1
    
    Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4(a) to Form 10-K report for year ended
December 31, 1994, File No. 0-06835.).4.2
    
    Certain instruments defining the rights of the holders of long-term debt of Irwin Financial Corporation and
certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the
total assets of the Corporation and its subsidiaries on a consolidated basis, have not been filed as Exhibits.
The Corporation hereby agrees to furnish a copy of any of these agreements to the Commission upon request.4.3
    
    Rights Agreement, dated as of March 1, 2001, between Irwin Financial Corporation and Irwin Union Bank and Trust.
(Incorporated by reference to Exhibit 4.1 to Form 8-A filed March 2, 2001, File No. 000-06835.)4.4
    
    Appointment of Successor Rights Agent dated as of May 11, 2001 between Irwin Financial Corporation and National
City Bank. (Incorporated by reference to Exhibit 4.5 to Form S-8 filed on September 7, 2001, File No.
333-69156.)10.1
    
    *Irwin Financial Corporation 1992 Stock Option Plan. (Incorporated by reference to Exhibit 10(h) to Form 10-K
Report for year ended December 31, 1992, File No. 000-06835.)10.2
    
    *Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit 10 to Form 10-Q
Report for period ended June 30, 1994, File No. 000-06835.)10.3
    
    *Amendment to Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit 10(i) to
Form 10-Q Report for period ended June 30, 1997, File No. 000-06835.)10.4
    
    *Irwin Financial Corporation Amended and Restated 2001 Stock Plan. (Incorporated by reference to Exhibit 1 to
the Corporations proxy statement for its 2004 Annual Meeting, filed with the Commission on March 18, 2004, File
No. 001-16691.)10.5
    
    *Irwin Financial Corporation 2001 Stock Plan Form of Stock Option Agreement. (Incorporated by reference to
Exhibit 99.1 of the Corporations 8-K Current Report, dated May 9, 2005, File No. 001-16691.)10.6
    
    *Irwin Financial Corporation 2001 Stock Plan Form of Restricted Stock Agreement (Incorporated by reference to
Exhibit 99.2 of the Corporations 8-K Current Report, dated May 9, 2005, File No. 001-16691.)10.7
    
    *Irwin Financial Corporation Amended and Restated 2001 Stock Plan revised August 24, 2005.10.8
    
    *Irwin Financial Corporation 2001 Stock Plan Form of Stock Option Agreement (Canada).10.9
    
    *Irwin Financial Corporation 1999 Outside Director Restricted Stock Compensation Plan. (Incorporated by
reference to Exhibit 2 to the Corporations proxy statement for its 2004 Annual Meeting, filed with the
Commission on March 18, 2004, File No. 001-16691.)10.10
    
    *Employee Stock Purchase Plan III. (Incorporated by reference to Exhibit 10(a) to Form 10-Q Report for period
ended June 30, 1999, File No. 000-06835.)10.11
    
    *Long-Term Management Performance Plan. (Incorporated by reference to Exhibit 10(a) to Form 10-K Report for year
ended December 31, 1986, File No. 000-06835.)10.12
    
    *Long-Term Incentive Plan-Summary of Terms. (Incorporated by reference to Exhibit 10(a) to Form 10-K Report for
year ended December 31, 1986, File No. 000-06835.)
 65




---



##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.13
    
    *Inland Mortgage Corporation Long-Term Incentive Plan. (Incorporated by reference to Exhibit 10(j) to Form 10-K
Report for year ended December 31, 1995, File No. 000-06835.)10.14
    
    *Amended and Restated Management Bonus Plan. (Incorporated by reference to Exhibit 10(a) to Form 10-K Report for
year ended December 31, 1986, File No. 000-06835.)10.15
    
    *Limited Liability Company Agreement of Irwin Ventures LLC. (Incorporated by reference to Exhibit 10(a) to Form
10-Q/A Report for period ended March 31, 2001, File No. 000-06835.)10.16
    
    *Limited Liability Company Agreement of Irwin Ventures Co-Investment Fund LLC, effective as of April 20, 2001.
(Incorporated by reference to Exhibit 10.17 to Form S-1/A filed February 14, 2002, File No. 333-69586.)10.17
    
    *Promissory Note dated January 30, 2002 from Elena Delgado to Irwin Financial Corporation. (Incorporated by
reference to Exhibit 10.19 to Form S-1/A filed February 14, 2002, File No. 333-69586.)10.18
    
    *Consumer Pledge Agreement dated January 30, 2002 between Elena Delgado and Irwin Financial Corporation.
(Incorporated by reference to Exhibit 10.20 to Form S-1/A filed February 14, 2002, File No. 333-69586.)10.19
    
    *Redemption and Loan Repayment Agreement dated December 22, 2004 between Irwin Financial Corporation, Irwin Home
Equity Corporation and Elena Delgado. (Incorporated by reference to Exhibit 10.15 of Form 10-K Report for year
ended December 31, 2004, File No. 001-16691.)10.20
    
    *Irwin Home Equity Corporation Amendment and Restatement of Shareholder Agreement dated December 22, 2004
between Irwin Home Equity Corporation, Irwin Financial Corporation and Elena Delgado. (Incorporated by reference
to Exhibit 10.16 of Form 10-K Report for year ended December 31, 2004, File No. 001-16691.)10.21
    
    *Deferred Compensation Agreement dated December 22, 2004 between Irwin Home Equity Corporation, Irwin Financial
Corporation and Elena Delgado. (Incorporated by reference to Exhibit 10.17 of Form 10-K Report for year ended
December 31, 2004, File No. 001-16691.)10.22
    
    *Tax Gross-up Agreement dated December 22, 2004 between Irwin Financial Corporation and Elena Delgado as
Shareholder. (Incorporated by reference to Exhibit 10.18 of Form 10-K Report for year ended December 31, 2004,
File No. 001-16691.)10.23
    
    *Amendment No. 1 to Irwin Home Equity Corporation Amendment and Restatement of Shareholder Agreement dated April
7, 2005 between Irwin Home Equity Corporation, Irwin Financial Corporation and Elena Delgado.10.24
    
    *Amendment No. 1 to the Deferred Compensation Agreement dated April 7, 2005 between Irwin Home Equity
Corporation, Irwin Financial Corporation and Elena Delgado.10.25
    
    *Irwin Financial Corporation Amended and Restated Short Term Incentive Plan effective January 1, 2002.
(Incorporated by reference to Exhibit 3 to the Corporations proxy statement for its 2004 Annual Meeting, filed
with the Commission on March 18, 2004, File No. 001-16691.)10.26
    
    *Irwin Commercial Finance Amended and Restated Short Term Incentive Plan (Incorporated by reference to Exhibit 4
of the Corporations proxy statement for its 2004 Annual Meeting, filed with the Commission on March 18, 2004,
File No. 001-16691.)10.27
    
    *Irwin Home Equity Amended and Restated Short Term Incentive Plan (Incorporated by reference to Exhibit 5 to the
Corporations proxy statement for its 2004 Annual Meeting, filed with the Commission on March 18, 2004, File No.
001-16691.)10.28
    
    *Irwin Mortgage Corporation Amended and Restated Short Term Incentive Plan effective January 1, 2002.
(Incorporated by reference to Exhibit 6 of the Corporations proxy statement for its 2004 Annual Meeting, filed
with the Commission on March 18, 2004, File No. 001-16691.)
 66




---



##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.29
    
    *Irwin Union Bank and Trust Company Amended and Restated Short Term Incentive Plan effective January 1, 2002.
(Incorporated by reference to Exhibit 7 to the Corporations proxy statement for its 2004 Annual Meeting, filed
with the Commission on March 18, 2004, File No. 001-16691.)10.30
    
    *Irwin Capital Holdings Short Term Incentive Plan effective January 1, 2002. (Incorporated by reference to
Exhibit 10.25 to Form 10-Q Report for period ended March 31, 2002, File No. 000-06835.)10.31
    
    *Onset Capital Corporation Employment Agreement. (Incorporated by reference to Exhibit 10.26 to Form 10-Q Report
for period ended June 30, 2002, File No. 000-06835.)10.32
    
    *Irwin Financial Corporation Restated Supplemental Executive Retirement Plan for Named Executives. (Incorporated
by reference to Exhibit 10.27 to Form 10-Q Report for period ended June 30, 2002, File No. 000-06835.)10.33
    
    *Irwin Financial Corporation Supplemental Executive Retirement Plan for Named Executives. (Incorporated by
reference to Exhibit 10.28 to Form 10-Q Report for period ended June 30, 2002, File No. 000-06835.)10.34
    
    *Onset Capital Corporation Shareholders Agreement (Incorporated by reference to Exhibit 10.29 to Form 10-K
Report for period ended December 31, 2002, File No. 000-06835.)11.1
    
    Computation of Earnings Per Share is included in the footnotes to the financial statements.31.1
    
    Certification pursuant to 18 U.S.C. Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer.31.2
    
    Certification pursuant to 18 U.S.C. Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer.32.1
    
    Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates management contract or compensatory plan or arrangement. 67




---



##### Table of Contents



SIGNATURES
  DATE:November 9, 2005
    IRWIN FINANCIAL CORPORATIONBy:
    
    /s/ Gregory F. EhlingerGREGORY F. EHLINGER,CHIEF FINANCIAL OFFICERBy:
    
    /s/ Jody A. LittrellJODY A. LITTRELL,CORPORATE CONTROLLER,
(Chief Accounting Officer) 68