(Mark One)

For the quarterly period ended March 31, 2002

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to _____________

(Exact name of registrant as specified in its charter)

(Address or principal executive offices)

(Zip Code)

(Registrant's telephone number, including area code)

____________________________________________________________________

(Former name, former address and former fiscal year if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes __X__ No _____

As of May 10, 2002, there were outstanding 27,556,990 common shares, no par value, of the Registrant.

NOTES TO THE FINANCIAL STATEMENTS (Unaudited)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation: Irwin Financial Corporation and its subsidiaries provide financial services throughout the United States and Canada. We are engaged in the mortgage banking, commercial banking, home equity lending, equipment leasing, and venture capital lines of business. Intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Derivative Instruments: Effective January 1, 2001, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. Under the provisions of this standard, all derivative instruments have been recorded at fair value as assets or liabilities in the December 31, 2001 consolidated balance sheet. Unrealized holding gains and losses from all derivative instruments classified as fair value hedges or freestanding derivative instruments have been recorded in the consolidated statement of income. The adoption of SFAS 133 resulted in a cumulative change in accounting principle, increasing net income by $175 thousand in 2001.

We utilize certain derivative instruments that do not qualify for hedge accounting treatment under SFAS 133. These derivatives are included in other assets and marked to market on the consolidated statement of income as other income or other expense. While we do not seek GAAP hedge accounting treatment for most of these instruments, their economic purpose is to hedge existing exposures to either interest rate risk or foreign currency risk.

We enter into forward contracts to protect against interest rate fluctuations from the date of mortgage loan commitment until the loans are sold. At December 31, 2001, we designated the portion of these transactions hedging the closed mortgage loans as hedges that qualify for hedge accounting treatment under SFAS 133. The basis of the hedged closed loans is adjusted for change in value associated with the risk being hedged. The effect of these hedging activities, which do not have a material impact on our net income, was recorded through earnings as gain from sale of loans. Hedge ineffectiveness recorded in gains from sale of loans related to these hedging activities was immaterial.

Additionally, we enter into commitments to originate loans for which the interest rate is determined prior to funding (rate lock commitments). Rate lock commitments on loans intended to be sold are considered to be derivatives. At the time of interest rate lock commitment, no gain or loss is recognized. Any subsequent changes in fair value are recorded in earnings. These derivatives are recorded on the balance sheet at fair value at period end.

Recent Accounting Developments: In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 140, which replaces SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," provides accounting and reporting standards for securitizations and other transfers of assets. SFAS 140 is based on the application of a financial components approach that focuses on control, and provides consistent standards for distinguishing between transfers of financial assets that are sales and transfers that are secured borrowings. The Standard requires disclosure of information about securitized assets, including the principal outstanding of securitized and other managed assets, accounting policies, key assumptions related to the determination of the fair value of residual interests, delinquencies and credit losses. The accounting requirements of SFAS 140 were effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Adoption of this statement did not have a material impact on our financial position or results of operations.

On June 29, 2001 the FASB approved SFAS No. 141, "Business Combinations," and No. 142 "Goodwill and Other Intangible Assets." SFAS 141 eliminated the pooling-of-interests method of accounting - requiring that purchase accounting, with its recognition of intangible assets separately from goodwill, be applied to all business combinations initiated after June 30, 2001.

Under the provisions of SFAS 142, goodwill is no longer amortized against earnings. Instead, goodwill and intangible assets deemed to have an indefinite life are reviewed for impairment at least annually. The amortization period of intangible assets with finite lives is no longer limited to forty years. This standard became effective January 1, 2002. We discontinued the amortization of goodwill with a net carrying value of $1.8 million on the date of adoption and annual amortization of $0.2 million that resulted from business combinations prior to the adoption of SFAS 141. In addition, as required by the standard, we wrote off, as a cumulative effect of a change in accounting principle, unamortized negative goodwill totaling $0.5 million net of tax at the date of adoption arising from a prior business combination at our leasing line of business.

The FASB has also issued SFAS No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 143 addresses accounting for the retirement of tangible long-lived assets and the associated asset retirement costs. The effective date is for fiscal years beginning after June 15, 2002. SFAS 144, effective for fiscal years beginning after December 15, 2001, supersedes FASB No. 121 "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. Management does not believe the implementation of SFAS 143 or SFAS 144 will have a material effect on our earnings or financial condition.

Reclassifications: Certain amounts in the 2001 consolidated financial statements have been reclassified to conform to the 2002 presentation. These changes had no impact on previously reported net income or shareholders' equity.

NOTE 7 -- CONTINGENCIES

Our subsidiary, Irwin Mortgage Corporation, is a defendant in a class action lawsuit in the United States District Court for the Northern District of Alabama alleging that Irwin Mortgage violated the federal Real Estate Settlement Procedures Act (RESPA) relating to Irwin Mortgage's payment of broker fees to mortgage brokers. A second suit was filed September, 2001 seeking consolidation with this case. In July 2001, the plaintiffs filed a motion for partial summary judgment asking the court to find Irwin Mortgage summarily liable for violating RESPA. Irwin Mortgage filed a motion in opposition and these motions are now pending before the district court.

In November 2001, by order of the district court, the parties filed supplemental briefs analyzing the impact of a new HUD policy statement that explicitly disagrees with the judicial interpretation of RESPA by the Court of Appeals for the 11th Circuit in its ruling upholding class certification in this case. Irwin Mortgage filed a petition for certiorari with the United States Supreme Court seeking review of the 11th Circuit's class certification ruling and also filed a motion in the district court seeking a stay of further proceedings until the 11th Circuit renders decisions in the other three RESPA cases pending before it. The Supreme Court denied Irwin Mortgage's petition. On March 8, 2002, the district court granted Irwin Mortgage's motion to stay proceedings in this case.

At this stage of the litigation we are unable to determine the outcome or a reasonable estimate of potential loss. However, we expect that an adverse outcome in this lawsuit could result in substantial monetary damages that could be material to our financial position. We have not established any reserves for this case or for the second suit that seeks consolidation with this one. The second case, which seeks class action status and contains allegations similar to those in the first case, has been stayed until the 11th Circuit renders decisions in the other three RESPA cases pending before it. An adverse outcome in the second case could cause the company to suffer material losses.

In January 2001, we and two subsidiaries, Irwin Leasing Corporation (formerly Affiliated Capital Corp.) and Irwin Equipment Finance Corporation, our indirect and direct subsidiaries, respectively (for purposes of this paragraph, the Irwin companies), were served as defendants in an action filed in the U.S. District Court for the Middle District of Pennsylvania. The suit alleges that a manufacturer/importer of certain medical devices made misrepresentations to health care professionals and to government officials to improperly obtain Medicare reimbursement for treatment using the devices, and that the Irwin companies, through Affiliated Capital's financing activities, aided in making the alleged misrepresentations. The Irwin companies filed a motion to dismiss on February 12, 2001. On August 10, 2001, the court granted our motion in part by dismissing us and Irwin Equipment Finance as defendants in the suit. Irwin Leasing remains a defendant. We have not established any reserves for this case. Because the case is in the early stages of litigation, we are unable at this time to form a reasonable estimate of the amount of potential loss, if any, that we could suffer.

In May 2001, Irwin Union Bank and Trust and Irwin Home Equity, our direct and indirect subsidiaries, respectively (for purposes of this paragraph, Irwin), received notice that they were named as defendants in a lawsuit filed in the U.S. District Court for the District of Rhode Island. The suit alleges that Irwin's disclosures and closing procedure for certain home equity loans did not comply with certain provisions of the Truth in Lending Act. The suit also requests that the court certify a plaintiff class in this action. On June 18, 2001, Irwin filed a motion with the court to compel arbitration pursuant to the provisions in the home equity loan agreement. On October 20, 2001, the Court entered judgment in favor of Irwin compelling arbitration and dismissing the plaintiffs' complaint. The plaintiffs have appealed. We have not established any reserves for this case. If arbitration is ultimately upheld, we do not expect to suffer a material loss in this case.

In an amended complaint, our subsidiary Irwin Union Bank and Trust was named in place of our indirect subsidiary, Irwin Home Equity, as a defendant in a suit originally filed in July, 2001 in the U.S. District Court for the District of Massachusetts. The suit relates to a loan purchased by Irwin Union Bank and Trust and serviced by Irwin Home Equity. The plaintiff alleges that the loan documents did not comply with certain provisions of the Truth in Lending Act relating to high rate loans. The suit also requests that the court certify a plaintiff class in this action. Irwin Union Bank and Trust filed an answer to the amended complaint denying plaintiff's allegations. Because the case is in the early stages of litigation, we are unable at this time to form a reasonable estimate of the amount of potential loss, if any, that we could suffer. We have not established any reserves for this case.

On January 25, 2002, a jury awarded the plaintiffs damages of $1.434 million jointly and severally against defendants, including our subsidiary Irwin Mortgage, in a case filed in August 1998 in the Baltimore, Maryland, City Circuit Court. The nine plaintiffs alleged that a home rehabilitation company defrauded them by selling them defective homes at inflated prices and that Irwin Mortgage, which provided the plaintiff borrowers mortgage loans on the home purchases, participated in the fraud. Prior to the outcome of the jury trial, we had no reserves for this case. On February 6, 2002, plaintiffs filed a petition for attorney's fees. On the same date, Irwin Mortgage filed post-trial motions for judgment notwithstanding the verdict, new trial and/or remittitur, which is a request for the court to reduce the amount of damages awarded by the jury. If the court denies Irwin's post-trial motion, Irwin plans to appeal and will continue to defend this case vigorously.

We and our subsidiaries are from time to time engaged in various matters of litigation including the matters described above, other assertions of improper or fraudulent loan practices or lending violations, and other matters, and we have a number of unresolved claims pending. In addition, as part of the ordinary course of business, we and our subsidiaries are parties to litigation involving claims to the ownership of funds in particular accounts, the collection of delinquent accounts, challenges to security interests in collateral, and foreclosure interests, that is incidental to our regular business activities. While the ultimate liability with respect to these other litigation matters and claims cannot be determined at this time, we believe that damages, if any, and other amounts relating to pending matters are not likely to be material to our consolidated financial position, results of operations, or cash flows, except as described above. Reserves have been established for these various matters of litigation, when appropriate, based upon the advice of legal counsel.

• statements and assumptions relating to projected growth, earnings, earnings per share, and other financial performance measures, as well as management's short-term and long-term performance goals;
• statements relating to the anticipated effects on results of operations or financial condition from recent and expected developments or events, including the recently revised regulatory capital rules relating to residual interests;
• statements relating to our business and growth strategies, including potential acquisitions; and
• any other statements, projections or assumptions that are not historical facts.

Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from our expectations of future results, performance or achievements expressed or implied by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. Actual future results may differ materially from what is projected due to a variety of factors, including, but not limited to, unexpected changes in interest rates, which may affect consumer demand for our products and the valuation of our servicing portfolio; borrowers' refinancing opportunities, which may affect the prepayment assumptions used in our valuation estimates; unanticipated deterioration in the credit quality of our assets; difficulties in selling residual assets as contemplated; difficulties in delivering home equity loans to the secondary market as planned or in funding home equity loans through securitization transactions as planned; difficulties in expanding our business or raising additional capital 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; legislative or regulatory changes, including changes in the interpretation of new capital rules; changes in applicable accounting policies or principles or their application to our business; or governmental changes in monetary or fiscal policies. Further, uncertainty in the national economy may negatively impact the financial services industry or cause changes in or exaggerate the effects of the factors described above. We undertake no obligation to update publicly any of these statements in light of future events, except as required in subsequent periodic reports we file with the Securities and Exchange Commission, or SEC.

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⁽¹⁾ Earnings per share of common stock before cumulative effect of change in accounting principle related to SFAS 142, "Goodwill and Other Intangible Assets," for the three months ended March 31, 2002 was $0.39 basic and $0.37 diluted.
⁽²⁾ Earnings per share of common stock before cumulative effect of change in accounting principle related to SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," for the three months ended March 31, 2001 was $0.43 basic and $0.40 diluted.

We recorded net income of $9.9 million for the three-month period ended March 31, 2002, up 8.5% from the same period in 2001. Net income per share (diluted) was $0.39 during the three-month period ended March 31, 2002, down from $0.41 during the same period a year earlier. Return on equity for the three-month period ended March 31, 2002 totaled 14.67% compared with 19.48% during the same period a year earlier.

Irwin Financial Corporation has five principal lines of business:

• Mortgage banking (includes Irwin Mortgage Corporation and the related activities of Irwin Union Bank and Trust Company ("Irwin Union Bank"))
• Commercial banking (includes Irwin Union Bank and Irwin Union Bank, F.S.B.)
• Home equity lending (includes Irwin Home Equity Corporation, Irwin Residual Holdings Corporation, Irwin Residual Holdings Corporation II, and the related activities of Irwin Union Bank)
• Equipment leasing (Irwin Capital Holdings)
• Venture capital (includes Irwin Ventures LLC and the related activities of Irwin Union Bank)
  
  The following table summarizes our net income (loss) by line of business for the periods indicated:

Our mortgage banking line of business continued to experience strong production as a result of the low interest rate environment, with first quarter originations exceeding $1.9 billion. Our commercial banking line of business continued to grow its loan portfolio during the first quarter of 2002, while its margin increased to 4.10%, up from 3.77% during the fourth quarter of 2001 and up from 3.70% during the first quarter of 2001. Our home equity lending line of business experienced a loan production increase of 37% during the first quarter of 2002 compared to the same period a year earlier. The managed portfolio at this line of business totaled $2.0 billion at March 31, 2002, compared to $1.7 billion a year earlier. Our equipment leasing line of business was profitable during the first quarter of 2002, primarily the result of a one-time $0.5 million cumulative accounting adjustment related to the reversal of unamortized negative goodwill. Our venture capital line of business recorded a loss during the first quarter of 2002, primarily attributable to a valuation write-down in its portfolio investments in order to reflect these investments at fair value.

Our financial results during the remainder of 2002 will be significantly different from our historical performance due to changes we have made in our operating plan to address changes in regulatory capital rules associated with residual interests on sold loans. As previously mentioned, beginning in 2002 we are eliminating our use of securitization structures that require gain-on-sale accounting treatment under SFAS 140 as long as we exceed the 25% concentration limit discussed below. These structures create the residual assets that are the focus of the new rules. See the "Home Equity Lending" section of this report for a discussion of the anticipated impact of these changes on our earnings.

In February 2002, we consummated a public offering of common stock that raised $2.2 million, net of expenses, on the sale of 6,210,000 shares.

Earnings Outlook

Given the current economic and business climate, we expect estimated consolidated net income of approximately $36 million in 2002 and approximately $54 million in 2003¹. The changes in federal banking regulations for securitization residual interests have caused us to eliminate the use of securitization structures that require use of gain-on-sale accounting under SFAS 140 as long as we exceed the 25% concentration limit. This will have the effect of delaying income recognition for our home equity line of business when compared to past practice. Although this change in accounting policy will delay income recognition in 2002 for the home equity line of business, we expect to remain solidly profitable as we transition off gain-on-sale accounting. In addition, management anticipates that, after 2002, we can again achieve our long-term financial objectives of annual earnings per share growth of at least 12 percent and return on common equity of greater than 15 percent.

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¹These estimates include $2.7 million of after-tax interest expense on convertible trust preferred securities, which would be added back to net income for purposes of calculating fully diluted earnings per share under generally accepted accounting principles. These estimates are based on various factors and current assumptions that management believes are reasonable, including current industry forecasts of a variety of economic and competitive factors. However, projections are inherently uncertain, and actual earnings may differ significantly from these estimates in the future due to uncertainties and risks related to our business, including those described in this report.

The following table shows selected financial information for our mortgage banking line of business:

Overview

In our mortgage banking line of business, Irwin Mortgage, in combination with Irwin Union Bank and Trust, originates, purchases, sells and services conventional and government agency-backed residential mortgage loans throughout the United States. Because most of our mortgage originations either are insured by an agency of the federal government, such as the FHA or the VA, or, in the case of conventional mortgages, meet requirements for sale to FNMA or the FHLMC, we are able to remove substantially all of the credit risk of these loans from our balance sheet. We sell mortgage loans to institutional and private investors but may retain servicing rights to the loans we originate or purchase from correspondents. We believe this balance between mortgage loan originations and mortgage loan servicing provides us a partial natural hedge against interest rate changes, which has helped stabilize our revenue stream.

Our mortgage banking line of business is currently our largest contributor to revenue, comprising 64% of our total revenues in the three months ended March 31, 2002, compared to 50% in the three months ended March 31, 2001. Our mortgage banking line of business contributed 104% and 69% of our net income for the three months ended March 31, 2002 and 2001, respectively.


Net Income

Net income from mortgage banking for the three months ended March 31, 2002 was $10.3 million, compared to $6.3 million during the same period in 2001, an increase of 63%. This increase primarily relates to favorable secondary market conditions and a steep yield curve. The following table shows the composition of our originations by loan categories for the periods indicated:

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⁽¹⁾ Brokered loans are loans we originate for which we receive loan origination fees, but which are funded, closed and owned by unrelated third parties.

Mortgage loan originations for the three months ended March 31, 2002 totaled $1.9 billion, up 3.1% from the same period in 2001 as a result of the continuing low interest rate environment. Refinanced loans accounted for 53.8% of loan production for the first three months of 2002 compared to 56.3% for the same period in 2001. Higher secondary market deliveries caused mortgage loan origination income to increase 27.2% during the first quarter in 2002 to $14.6 million, compared to $11.4 million during the same period in 2001. As a result of favorable secondary market conditions and a steep yield curve during the first quarter of 2002, gains on the sale of loans during this period increased 55.9% and net interest income increased 154.6% compared to the same period in 2001. 

Net Revenue

Net revenue for the three months ended March 31, 2002 totaled $57.8 million, compared to $45.2 million for the three months ended March 31, 2001. The following table sets forth certain information regarding net revenue for the periods indicated:

Net interest income is generated from the interest earned on mortgage loans before they are sold to investors, less the interest expense incurred on borrowings to fund the loans. Net interest income for the first three months in 2002 totaled $8.2 million, compared to $3.2 million for the same period in 2001, an increase of 154.6%. This increase is a result of an increase in spread between short term warehouse interest rates we pay and longer term interest rates paid to us by our borrowers while the mortgage loans are on our balance sheet.

Loan origination fees for the three months ended March 31, 2002 totaled $14.5 million, compared to $11.4 million for the three months ended March 31, 2001, an increase of 27.2% related to increased production.

Gain on sale of loans is income recognized when loans are pooled and sold into the secondary mortgage market. Gain on sale of loans for the first three months of 2002 totaled $28.2 million, compared to $18.1 million for the same period in 2001, an increase of 55.9% related to favorable secondary market conditions.

Servicing fee income is recognized by collecting fees, which normally range between 25 and 44 basis points annually on the principal amount of the underlying mortgages. Servicing fee income totaled $14.7 million for the three months ended March 31, 2002, an increase of 17.2% compared to the same period in 2001, primarily reflecting the increasing size of the servicing portfolio.

Amortization expense relates to mortgage servicing rights and is based on the estimated lives of the underlying loans. Amortization expense totaled $12.1 million for the three months ended March 31, 2002, compared to $6.5 million for the same period in 2001. This increase in 2002 relates to the increase in the underlying servicing portfolio.

Impairment expense is recorded when the book value of the mortgage servicing rights exceeds the fair market value on a strata by strata basis. Impairment recovery of valuation allowance totaled $10.7 million during the first quarter of 2002, compared to impairment expense of $0.3 million during the same period in 2001. Fluctuating interest rates impacted the impairment recovery or expense recorded over these periods.

The impairment recovery recorded in the first quarter of 2002 was offset by hedging losses of $8.1 million during the same period. Hedging gains of $3.3 million were recorded during the same period in 2001. At March 31, 2002, the mortgage line of business held a $9.5 billion notional amount of Eurodollar future contracts related to economically hedging these servicing assets. The current hedging activities of the mortgage bank related to servicing assets do not satisfy the criteria for "hedge accounting" under SFAS 133. As a result, these derivatives are accounted for as other assets, and changes in fair value are adjusted through earnings as other income, while the underlying servicing asset being hedged is accounted for at the lower of cost or market.

Our mortgage banking business maintains the flexibility either to sell servicing for current cash flow or to retain servicing for future cash flow, whether through bulk sales or ongoing servicing fees. The decision to sell or retain servicing is based on a balance of current market conditions and the interest rate risk tolerance of the business. Total servicing sales represented 7.4% of the loan portfolio in for the first quarter of 2002 based on loan originations, compared to 63.9% of the loan portfolio for the first quarter of 2001. The decrease in 2002 compared to 2001 is a result of management's decision to retain more servicing in the current period.

Operating Expenses

The following table sets forth operating expenses for our mortgage banking line of business for the periods indicated:

Operating expenses for the three months ended March 31, 2002 totaled $40.8 million, a 16.8% increase over the same period in 2001. Salaries and employee benefits during the first quarter of 2002 increased 15.1% over the same period of 2001. These increases are reflective of the increased production environment during 2001 and continuing into 2002.

Mortgage Servicing

The following table shows information about our mortgage servicing portfolio for the periods indicated:

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⁽¹⁾ Run-off is the reduction in principal balance of the servicing portfolio due to regular principal payments made by mortgagees and early repayments of entire loans.

Our mortgage servicing portfolio totaled $13.9 billion at March 31, 2002, an 8.2% increase from the December 31, 2001 balance of $12.9 billion. Irwin Mortgage has followed a strategy of managing interest rate risk associated with the servicing portfolio by selling servicing rights on those loans that are most likely to refinance should interest rates decline. Consistent with our sales strategy, in recent months the line of business has chosen to retain more servicing in its portfolio due to current market pricing.

We record mortgage servicing assets at the lower of their cost or market value, and we record a valuation allowance for any impairment. At March 31, 2002, the market value of these assets was estimated to be $274.0 million in the aggregate, or $34.7 million greater than the carrying value on the balance sheet. At December 31, 2001, we estimated the market value of these assets to be $239.7 million in the aggregate, or $28.5 million greater than the carrying value on the balance sheet.

Commercial Banking

The following table shows selected financial information for our commercial banking line of business:

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⁽¹⁾ Reflects what net interest income would be if all interest income were subject to federal and state income taxes.

Net interest income on a taxable equivalent basis was $16.1 million for the first quarter of 2002, an increase of 55.7% over the same period in 2001 net interest income on a tax equivalent basis of $10.4 million. The 2002 increase in net interest income relates primarily to an improvement in net interest margin, as discussed below, and a $458.4 million increase in average interest earning assets compared to the same period in 2001.

Net interest margin is computed by dividing annualized net interest income by average interest earning assets. Net interest margin for the first quarter of 2002 was 4.10%, compared to 3.70% for the first quarter of 2001. The improvement in 2002 reflects a more stable interest rate environment and reduced reliance on wholesale funding sources.

Noninterest Income

The following table shows the components of noninterest income for our commercial banking line of business:

Due primarily to increased mortgage production and increased fee income on deposit accounts related to new fee structures put into place mid-2001, noninterest income during the first quarter of 2002 increased 39.1% over 2001. 

The following table shows the components of operating expenses for our commercial banking line of business:

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⁽¹⁾ On a full time equivalent basis.

Operating expenses during the first quarter of 2002 were $12.0 million, an increase of 16.5% over the same period of 2001. Increases in operating expenses are reflective of increased revenues and assets over the same period.

Balance Sheet

Total assets for the first quarter ended March 31, 2002 averaged $1.7 billion compared to $1.4 billion as of December 31, 2001. Average earning assets for the quarter ended March 31, 2002 were $1.6 billion compared to $1.3 billion as of December 31, 2001. The most significant component of the increase was an increase in commercial loans as a result of the commercial bank's continued growth and expansion efforts in new markets. Average deposits for the first three months totaled $1.5 billion, an increase of 2.3% over average deposits in the fourth quarter of 2001 of $1.4 billion.

Credit Quality

The allowance for loan losses and provision for loan losses have increased in the first three months of 2002 over 2001 reflecting general economic conditions, portfolio growth and increased charge-offs. Nonperforming loans are down from year end but have increased $2.5 million since March 31, 2001. Nonperforming loans are not significantly concentrated in any industry category. The following table shows information about our nonperforming assets in this line of business and our allowance for loan losses:

Home Equity Lending

The following table shows selected financial information for the home equity lending line of business:

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⁽¹⁾ Includes residual assets derived from present value of overcollateralization and early repayment fees totaling $49 million and $20 million, respectively, at March 31, 2002.

Overview

In our home equity lending line of business we originate, purchase, securitize and service home equity loans and lines of credit nationwide. We generally sell the loans through securitization transactions. We continue to service the loans we securitize. We target creditworthy, homeowning consumers who are active, unsecured credit card debt users. Target customers are underwritten using proprietary models based on several criteria, including the customers' previous use of credit. We market our home equity products through direct mail and telemarketing, mortgage brokers and correspondent lenders nationwide and through Internet-based solicitations. To address the new capital rules discussed later in this section, in 2002 we are using on-balance sheet financing and whole loan sales and eliminating our use of securitization structures requiring gain-on-sale accounting and creation of residual interests.

Net Income

Our home equity lending business recorded a net loss of $2.9 million during the three months ended March 31, 2002, compared to net income for the same period in 2001 of $3.4 million. The decline is reflective of the transition this line of business is making away from securitization structures accounted for under SFAS 140 using gain-on-sale accounting treatment.

Net Revenue

Net revenue for the three months ended March 31, 2002 totaled $14.2 million, compared to net revenue for the three months ended March 31, 2001 of $32.0 million. The reduction in revenues is a result of additional impairment charges against the residual asset reflecting higher anticipated credit losses, increased provision for loan losses as the line of business begins to build an on-balance sheet loan portfolio, and reduced gain-on-sale revenues related to the transition away from gain-on-sale accounting.

During the first quarter of 2002, our home equity lending business produced $246.7 million of home equity loans, compared to $180.8 million during the same period of 2001, a 36.5% increase. Our home equity lending business had $397.9 million of net loans in portfolio at March 31, 2002, compared to net loans of $344.0 million at December 31, 2001.

The following table sets forth certain information regarding net revenue for the periods indicated:

Net interest income increased to $18.1 million for the three months ended March 31, 2002, compared to the first quarter of 2001 net interest income of $14.6 million. This line of business earns interest income on loans held on the balance sheet and the accretion of the discount applied to its residual interests, which totaled $9.3 million during the first quarter of 2002 versus $7.2 million for the same period in 2001.

Gains on sales of loans for the three months ended March 31, 2002 totaled $6.9 million, compared to $14.6 million during the same period in 2001. In the home equity line of business, we securitized $31.7 million of loans in the first quarter as part of a final delivery of a third quarter 2001 securitization transaction. This compares to $183.3 million of loans securitized in the first quarter of 2001. We also completed a whole loan sale of $149.1 million in the first quarter resulting in a gain of $4.4 million, with servicing retained.

Amortization and impairment of servicing assets includes amortization expense and valuation adjustments relating to the carrying value of servicing assets. Our home equity lending business recognizes on its balance sheet a servicing asset equal to the discounted cash flows of estimated future servicing income and cost. At March 31, 2002, net servicing assets totaled $18.7 million, compared to a balance of $15.3 million at December 31, 2001. Servicing asset amortization and impairment expense totaled $1.7 million for the first quarter of 2002, compared to $0.6 million for the same period in 2001.

Trading losses of $7.3 million includes a $7.4 million unrealized trading loss to adjust the carrying values of our residual interests to their estimated fair values and a $0.1 million unrealized gain from securitizations. The unrealized trading loss reflects additional credit reserves resulting from increased charge-offs. Residual interests had a balance of $191.0 million at March 31, 2002 and $199.1 million at December 31, 2001. Included in the market valuation assumptions are estimated lives of the loans, expected losses, and appropriate discount rates. Management continually evaluates these assumptions to determine the proper carrying values of these items on the balance sheet. Loss experience relative to assumptions to date has been favorable with respect to the portfolio.

Operating Expenses

The following table shows operating expenses for our home equity lending line of business for the periods indicated:

Operating expenses were $19.0 million for the three months ended March 31, 2002, compared to $26.3 for the same quarter in 2001. These decreases reflect the effort we have made to align costs with income recognition associated with the move away from gain-on-sale accounting treatment.

Credit Quality

Our home equity lending line of business blends aspects of the credit card and mortgage banking industries. The home equity products are designed to appeal to homeowners who have high levels of unsecured (credit card) debt, who through the use of a debt-consolidating mortgage loan can meaningfully reduce their after-tax monthly cash outflows. We underwrite our loans as if the credit is unsecured, but we believe that the mortgage lien associated with the loan has a meaningful, positive influence on the payment priority of our customers.

A provision for loan losses of $6.6 million was recorded during the first quarter. The first quarter provision increases the allowance for loan losses to $8.1 million. This allowance represents our estimate of inherent losses over the next year in the $0.4 billion on-balance sheet loan portfolio at this line of business. There was no provision during the same period in 2001 as the line of business had its loans classified as held for sale at that time and carried the loans at lower of cost or market.

The following table shows information about our nonperforming assets in this line of business and our allowance for loan losses: