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

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

Commission File Number 0-6835

IRWIN FINANCIAL CORPORATION

Indiana		35-1286807
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
500 Washington Street Columbus, Indiana		47201
(Address of Principal Executive Offices)		(Zip Code)

(812) 376-1909		www.irwinfinancial.com
(Corporation’s Telephone Number, Including Area Code)		(Web Site)

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

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of July 31, 2009, there were outstanding 30,154,088 common shares, no par value, of the Registrant.

 

 

FORM 10-Q

TABLE OF CONTENTS

		PAGE
		NO.
About Forward-Looking Statements			3
PART I FINANCIAL INFORMATION
Item 1 Financial Statements			6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3 Quantitative and Qualitative Disclosures About Market Risk			61
Item 4 Controls and Procedures			61
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 1A Risk Factors
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			62
Item 4 Submission of Matters to a Vote of Security Holders			62
Item 5 Other Information			62
Item 6 Exhibits			63
Signatures			67
EX-2.7
EX-2.8
EX-10.41
EX-10.42
EX-31.1
EX-31.2
EX-32.1
EX-32.2

About Forward-looking Statements

     This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We are including this statement for purposes of invoking these safe harbor provisions.

     Forward-looking statements are based on management’s expectations, estimates, projections, and assumptions. These statements involve inherent risks and uncertainties that are difficult to predict and are not guarantees of future performance. Words that convey our beliefs, views, expectations, assumptions, estimates, forecasts, outlook and projections or similar language, or that indicate events we believe could, would, should, may or will occur (or will not or might not occur) or are likely (or unlikely) to occur, and similar expressions, are intended to identify forward-looking statements. These may include, among other things, statements and assumptions about:

•

transactions involved in our strategic restructuring, including capital raising and deleveraging activities;

•

our plans and strategies, including the expected results or costs and impact of implementing or changing such plans and strategies;

•

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 asset quality (particularly with regard to loans or other exposures including loan repurchase risk, in sectors in which we deal in real estate or residential mortgage lending), loan delinquencies, charge-offs, reserves, asset valuations, regulatory capital levels, or financial performance measures;

•

the expected effects on the Corporation’s balance sheet, profitability, liquidity, and capital ratios of the strategic restructuring, our proposed shareholder rights offer, the possible private placement of equity, the possible exchange of trust preferred securities for common shares, asset sales undertaken to de-lever the balance sheet, and other elements of the completion of our capital plan;

•

potential litigation developments and the anticipated impact of potential outcomes of pending legal matters;

•

predictions about conditions in the national or regional economies, housing markets, commercial real estate development, industries associated with housing, mortgage markets, franchise restaurant finance or mortgage industry;

•

the anticipated effects on results of operations or financial condition from recent developments or events; and

•

any other projections or expressions that are not historical facts.

     We qualify any forward-looking statements entirely by these and the following cautionary factors.

     Actual future results may differ materially from our forward-looking statements and we qualify all forward-looking statements by various risks and uncertainties we face, as well as the assumptions underlying the statements, including, but not limited to, the following cautionary factors:

•

difficulties in completing our recapitalization plan, including the failure to sufficiently capitalize through our proposed rights offer, possible private placement of equity, or a possible exchange of term, mezzanine debt and/or trust preferred securities for common shares or by other means, the failure of a sufficient number of shareholders to participate in the rights offer or to exercise fully their rights, the failure to satisfy the conditions that require the standby purchasers to exercise fully their subscription privileges, the failure to receive assistance in substantially the form proposed to the U.S. Treasury and banking regulators, the failure to complete in a timely manner anticipated asset sales to de-lever the balance sheet and provide additional liquidity, or the failure to obtain any necessary regulatory approvals;

•

potential further deterioration or effects of general economic conditions, particularly in sectors relating to real estate and/or real estate lending and small business lending;

•

fluctuations in housing prices;

•

potential effects related to the Corporation’s prior decision to suspend the payment of dividends on its common, preferred and trust preferred securities;

•

potential changes in direction, volatility and relative movement (basis risk) of interest rates, which may affect consumer and commercial demand for our products and the management and success of our interest rate risk management strategies;

•

staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;

•

the relative profitability of our lending and deposit operations;

•

the valuation and management of our portfolios, including the use of external and internal modeling assumptions we embed in the valuation of those portfolios and short-term swings in the valuation of such portfolios;

•

borrowers’ refinancing opportunities, which may affect the prepayment assumptions used in our valuation estimates and which may affect loan demand;

•

unanticipated deterioration in the credit quality or collectability of our loan and lease assets, including deterioration resulting from the effects of natural disasters (including a pandemic);

•

difficulties in accurately estimating any future repurchases of residential mortgage, home equity, or other loans or leases due to alleged violations of representations and warranties we made when selling these loans and leases to the secondary market or in securitizations;

•

unanticipated deterioration or changes in estimates of the carrying value of our other assets, including securities, and reductions in value resulting from changes in ratings by rating agencies;

•

difficulties in delivering products to the secondary market as planned;

•

difficulties in expanding our businesses and obtaining or retaining deposit or other funding sources as needed, including the loss of public fund deposits or any actions that may be taken by the state of Indiana and its political subdivisions;

•

competition from other financial service providers, including companies that have recently purchased our assets, for our staff and customers;

•

changes in the value of our segments, subsidiaries, or companies in which we invest;

•

unanticipated lawsuits or outcomes in litigation;

•

legislative or regulatory changes, including changes in laws, rules or regulations that affect tax, consumer or commercial lending, corporate governance and disclosure requirements, and other laws, rules or regulations affecting the rights and responsibilities of our Corporation, or our state-chartered bank or federal savings bank subsidiary;

•

regulatory actions that impact our Corporation, bank or thrift, including the written agreement the Corporation and its state-chartered bank subsidiary, Irwin Union Bank and Trust Company, entered into with the Federal Reserve Bank of Chicago and the Indiana Department of Financial Institutions on October 10, 2008, and the Stipulation and Consent to the Issuance of an Order to Cease and Desist the Corporation’s federal savings bank subsidiary, Irwin Union Bank, F.S.B., entered into with the Office of Thrift Supervision on July 24, 2009;

•

changes in the interpretation and application of regulatory capital or other rules;

•

the availability of resources to address changes in laws, rules or regulations or to respond to regulatory actions;

•

changes in applicable accounting policies or principles or their application to our business or final audit adjustments, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

•

the final disposition of the remaining assets and obligations of segments we have exited or are exiting, including the mortgage banking segment, small ticket commercial leasing segment and home equity segment; or governmental changes in monetary, regulatory, or fiscal policies.

     In addition, our past results of operations do not necessarily indicate our future results. We undertake no obligation to update publicly any of these statements in light of future events, except as required in subsequent reports we file with the Securities and Exchange Commission (SEC).

PART I. FINANCIAL INFORMATION.

Item 1.		Financial Statements.

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)

		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
Assets:
Cash and cash equivalents		$	192,115			$	233,698
Interest-bearing deposits with financial institutions			5,187				26,023
Residual interests			8,656				9,180
Investment securities- held-to-maturity (Fair value: $16,964 June 30, 2009 and $17,300 at December 31, 2008) — Note 2			16,553				17,258
Investment securities- available-for-sale — Note 2			12,172				31,895
Investment securities- other — Note 2			52,717				61,056
Loans held for sale — Note 3			279,015				841,333
Loans and leases, net of unearned income — Note 4			2,723,261				3,512,048
Less: Allowance for loan and lease losses — Note 5			(148,180	)			(137,015	)
			2,575,081				3,375,033
Servicing assets — Note 6			5,483				18,116
Accounts receivable			23,162				19,706
Accrued interest receivable			10,362				19,673
Premises and equipment			30,012				32,417
Other assets			156,150				228,927
Total assets		$	3,366,665			$	4,914,315
Liabilities and Shareholders’ Equity:
Deposits
Noninterest-bearing		$	342,308			$	319,857
Interest-bearing			1,822,551				2,082,809
Certificates of deposit over $100,000			550,832				615,269
			2,715,691				3,017,935
Other borrowings — Note 8			266,703				512,012
Collateralized debt — Note 9			68,940				912,792
Other long-term debt			233,868				233,868
Other liabilities			123,954				127,046
Total liabilities			3,409,156				4,803,653
Commitments and contingencies — Note 15
Shareholders’ equity
Preferred stock, no par value — authorized 4,000,000 shares: Noncumulative perpetual preferred stock - 15,000 issued;			14,441				14,441
Common stock, no par value — authorized 200,000,000 shares; issued 30,038,450 and 29,913,008 as of June 30, 2009 and December 31, 2008; 315,796 and 389,520 shares in treasury as of June 30, 2009 and December 31, 2008, respectively			117,153				116,893
Additional paid-in capital			—				—
Accumulated other comprehensive loss, net of deferred income tax benefit of $4,251 and $5,258 as of June 30, 2009 and December 31, 2008			(10,718	)			(7,988	)
Retained earnings			(157,236	)			(5,079	)
			(36,360	)			118,267
Less treasury stock, at cost			(6,131	)			(7,605	)
Total shareholders’ equity — Note 16			(42,491	)			110,662
Total liabilities and shareholders’ equity		$	3,366,665			$	4,914,315

The accompanying notes are an integral part of the consolidated financial statements.

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

		For the Three Months Ended June 30,
		2009				2008
		(Dollars in thousands, except per share)
Interest income:
Loans and leases		$	51,095			$	109,503
Loans and leases held for sale			906				8
Residual interests			123				195
Investment securities			793				2,035
Federal funds sold			—				161
Total interest income			52,917				111,902
Interest expense:
Deposits			16,750				26,521
Short-term borrowings			3,842				5,926
Collateralized debt			14,140				13,702
Other long-term debt			3,918				3,879
Total interest expense			38,650				50,028
Net interest income			14,267				61,874
Provision for loan and lease losses — Note 5			45,431				157,829
Net interest expense after provision for loan and lease losses			(31,164	)			(95,955	)
Other income:
Loan servicing fees			1,599				2,833
(Amortization) and (impairment) recovery of servicing assets — Note 6			(466	)			1,939
Gain from sales of loans and loans held for sale			115				1,172
Trading losses			(470	)			(1,120	)
Derivative gains, net			726				3,003
Other than temporary impairment — Note 2			(2,227	)			(6,838	)
Other			21,768				5,532
			21,045				6,521
Other expense:
Salaries			15,639				20,006
Pension and other employee benefits			2,631				5,966
Office expense			1,828				2,024
Premises and equipment			10,322				5,289
Marketing and development			899				1,207
Professional fees			3,974				3,328
Other			12,825				6,177
			48,118				43,997
Loss before income taxes			(58,237	)			(133,431	)
Provision for income taxes			(1,079	)			(26,699	)
Net loss		$	(57,158	)		$	(106,732	)
Earnings per share: — Note 12
Basic		$	(1.92	)		$	(3.64	)
Diluted		$	(1.92	)		$	(3.64	)
Dividends per share		$	—			$	—

The accompanying notes are an integral part of the consolidated financial statements.

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

		For the Six Months Ended June 30,
		2009				2008
		(Dollars in thousands, except per share)
Interest income:
Loans and leases		$	106,598			$	226,846
Loans held for sale			22,549				154
Residual interests			146				469
Investment securities			2,095				4,325
Federal funds sold			—				199
Total interest income			131,388				231,993
Interest expense:
Deposits			35,640				55,459
Short-term borrowings			8,152				13,162
Collateralized debt			35,410				28,873
Other long-term debt			7,813				8,190
Total interest expense			87,015				105,684
Net interest income			44,373				126,309
Provision for loan and lease losses — Note 5			109,433				202,350
Net interest expense after provision for loan and lease losses			(65,060	)			(76,041	)
Other income:
Loan servicing fees			4,220				5,291
Amortization and impairment of servicing assets — Note 6			(4,614	)			(2,280	)
(Loss) gain from sales of loans and loans held for sale			(10,221	)			8,003
Loss from sale of servicing asset			(7,262	)			—
Trading losses			(359	)			(2,177	)
Derivative gains, net			292				2,046
Other than temporary impaiment — Note 2			(2,333	)			(19,995	)
Other			30,726				11,177
			10,449				2,065
Other expense:
Salaries			30,004				42,635
Pension and other employee benefits			6,940				13,674
Office expense			3,374				4,235
Premises and equipment			17,142				11,055
Marketing and development			1,877				2,340
Professional fees			5,731				5,426
Other			27,544				16,586
			92,612				95,951
Loss before income taxes			(147,223	)			(169,927	)
Provision for income taxes			3,768				(41,029	)
Net loss		$	(150,991	)		$	(128,898	)
Earnings per share: — Note 12
Basic		$	(5.08	)		$	(4.40	)
Diluted		$	(5.08	)		$	(4.40	)
Dividends per share		$	—			$	—

The accompanying notes are an integral part of the consolidated financial statements.

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the Six Months Ended June 30, 2009, and 2008

										Accumulated Other Comprehensive Income
																						Defined			Additional									Perpetual
						Retained				Foreign				Unrealized Gain/Loss								Benefit				Paid in				Common				Treasury				Preferred
		Total				Earnings				Currency				Securities				Derivatives				Plans				Capital				Stock				Stock				Stock
		(Dollars in thousands)
Balance at January 1, 2009		$	110,662			$	(5,079	)		$	89			$	(1,712	)		$	(191	)		$	(6,174	)		$	—			$	116,893			$	(7,605	)		$	14,441
Net loss			(150,991	)			(150,991	)
Unrealized loss on investment securities			(2,878	)											(2,878	)
Unrealized loss on derivatives			11																11
Foreign currency adjustment			137								137
Other comprehensive loss			(2,730	)
Total comprehensive loss			(153,721	)
Stock compensation expense			502																								502
Stock:
Purchase of 13,449 shares			(81	)																															(81	)
Sales of 87,173 shares			147				(1,166	)																			(502	)			260				1,555
Balance at June 30, 2009		$	(42,491	)		$	(157,236	)		$	226			$	(4,590	)		$	(180	)		$	(6,174	)		$	—			$	117,153			$	(6,131	)		$	14,441
Balance at January 1, 2008		$	459,300			$	337,524			$	9,158			$	(1,445	)		$	(1,576	)		$	(5,105	)		$	2,557			$	116,542			$	(12,796	)		$	14,441
Net loss			(128,898	)			(128,898	)
Unrealized loss on investment securities net of $214 tax benefit			(322	)											(322	)
Unrealized loss on derivatives net of $573 tax benefit			(860	)															(860	)
Foreign currency adjustment			(1,232	)							(1,232	)
Other comprehensive loss			(2,414	)
Total comprehensive loss			(131,312	)
Stock compensation expense			1,356																								1,356
Stock:
Purchase of 3,747 shares			(50	)																															(50	)
Sales of 110,159 shares			597																								(1,549	)			40				2,106
Balance at June 30, 2008		$	329,891			$	208,626			$	7,926			$	(1,767	)		$	(2,436	)		$	(5,105	)		$	2,364			$	116,582			$	(10,740	)		$	14,441

The accompanying notes are an integral part of the consolidated financial statements.

IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

		For the Six Months ended June 30,
		2009				2008
		(Dollars in thousands)
Net loss		$	(150,991	)		$	(128,898	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation, amortization, and accretion, net			8,518				5,291
Other than temporary impairment			2,333				19,995
Amortization and impairment of servicing assets			4,614				2,280
Valuation allowance on deferred taxes			60,133				24,900
Provision for loan and lease losses			109,433				202,350
Loss on sale of mortgage servicing asset			7,262				—
Loss (gain) from sales of loans held for sale			10,221				(8,003	)
Originations and purchases of loans held for sale			(129,113	)			(116,801	)
Proceeds from sales and repayments of loans held for sale			328,149				194,630
Net decrease in residuals			312				3,041
Net (increase) decrease in accounts receivable			(3,456	)			5,862
Other, net			(4,027	)			(86,343	)
Net cash provided by operating activities			243,388				118,304
Investing activities:
Proceeds from maturities/calls of investment securities:
Held-to-maturity			3,634				2,140
Available-for-sale			24,290				2,146
Purchase of investment securities:
Held-to-maturity			(3,134	)			(2,004	)
Available-for-sale			(99	)			(230	)
Net decrease in interest-bearing deposits			20,836				1,797
Net decrease in loans, excluding sales			250,973				46,661
Other, net			(248	)			(272	)
Net cash provided by investing activities			296,252				50,238
Financing activities:
Net (decrease) increase in deposits			(302,244	)			179,299
Net decrease in other borrowings			(245,309	)			(169,014	)
Proceeds from issuance of collateralized debt			—				96,415
Repayments of collateralized debt			(33,759	)			(198,154	)
Repayments of long term debt			—				(5	)
Purchase of treasury stock for employee benefit plans			(81	)			(50	)
Proceeds from sale of stock for employee benefit plans			147				597
Net cash used by financing activities			(581,246	)			(90,912	)
Effect of exchange rate changes on cash			23				(471	)
Net (decrease) increase in cash and cash equivalents			(41,583	)			77,159
Cash and cash equivalents at beginning of period			233,698				78,212
Cash and cash equivalents at end of period		$	192,115			$	155,371
Supplemental disclosures of cash flow information:
Cash flow during the period:
Interest paid		$	85,149			$	100,446
Income taxes (received) paid		$	(75,747	)		$	3,545
Noncash transactions:
Derecognition of loans held for sale, other assets and collateralized debt		$	793,365			$	—
Other real estate owned		$	27,013			$	6,445

The accompanying notes are an integral part of the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies

     Consolidation: Irwin Financial Corporation and its subsidiaries (the Corporation) provide financial services throughout the United States (U.S.). We are engaged in commercial banking and commercial finance, and have a liquidating home equity portfolio. We have exited the mortgage banking segment, our small-ticket equipment leasing portion of the commercial finance segment, and have ceased originating and servicing loans at our home equity segment.

     Our direct and indirect subsidiaries include Irwin Union Bank and Trust Company, Irwin Union Bank, F.S.B., Irwin Commercial Finance Corporation, Irwin Home Equity Corporation and Irwin Mortgage Corporation. Intercompany balances and transactions have been eliminated in consolidation. The Corporation does not meet the criteria as primary beneficiary for our wholly-owned trusts holding our company-obligated mandatorily redeemable preferred securities established by Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” As a result, these trusts are not consolidated.

     Capital, Liquidity, and Going Concern Considerations: The Corporation has been significantly and negatively impacted by the events and conditions impacting the banking industry. We have been adversely affected by rising unemployment, declining real estate and financial asset prices, and rising losses on loans. These in turn have caused significant losses, reduced our capital materially, and had other follow-on consequences. These events could impact our on-going access to liquidity sources.

     The accompanying consolidated financial statements of the Corporation were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Corporation’s abilities in this area are dependent on normal on-going operations, particularly its ability to continue to access its traditional funding sources, some of which are determined by our regulatory capital ratios and regulatory standing. Should management be unable to execute on its plans, including restoring and subsequently maintaining its capital ratios at amounts that would result in its (and its bank and thrift subsidiaries) ratios being sufficient to be declared “well capitalized,” there would be a doubt on our ability to remain a going concern.

     During the first half of 2009, the Corporation lost $151 million, due in part to factors noted above and in part to steps it took in its strategic restructuring. This loss and consequent reduction in retained earnings have put pressure on the Corporation’s regulatory capital ratios, not withstanding significant deleveraging which occurred during the first half of the year. We are operating under regulatory agreements with our principal banking regulators including: written agreements the Corporation and Irwin Union Bank and Trust have entered into with the Federal Reserve Bank of Chicago and the Indiana Department of Financial Institutions on October 10, 2008; and a Stipulation and Consent to the Issuance of an Order to Cease and Desist entered into by Irwin Union Bank, F.S.B. and the Office of Thrift Supervision on July 24, 2009.

     Cumulative losses over the last three years have reached the point where consolidated equity is negative. As a result, none of the Corporation’s Subordinated Debentures, Trust Preferred Securities, or allowance for loan and lease losses (ALLL) count as capital in regulatory capital formulas. However, the Corporation’s depository subsidiaries — Irwin Union Bank and Trust Company and Irwin Union Bank, F.S.B. — have equity of $157 million and $41 million respectively as of June 30, 2009. Both are considered “adequately capitalized” under current regulatory capital standards. Completion of our recapitalization plan, which includes both raising additional equity and conversion of roughly half our Trust Preferred Securities into common stock, would restore the Corporation to positive equity and both consolidated and Irwin Union Bank and Trust capital ratios to “well capitalized” regulatory standards.

     The current capital ratios and regulatory status of the Corporation and its bank and thrift subsidiaries could have an adverse impact on our liquidity. The Corporation manages liquidity at both the parent and subsidiary levels. The parent company has no external funding facilities which are immediately affected by these capital ratios. The parent company does not fund loan assets, but does require cash for working capital purposes. Neither Irwin Union Bank and Trust nor Irwin Union Bank, F.S.B. is dependent on the parent company for liquidity. A significant source of funding for Irwin Union Bank and Trust Company is public funds, the majority of which are in the State of Indiana. Indiana public funds are insured by the Indiana Public Deposit Insurance Fund. Irwin Union Bank and Trust continues to be eligible to accept public funds in Indiana. Its ongoing eligibility depends upon continued progress on the Corporation’s plans to improve the bank’s capital ratios through raising additional capital and maintenance of the Banks’ “adequately capitalized” status. As with any

bank or thrift, our bank and thrift regulators may declare the bank undercapitalized at any time regardless of its current capital ratios. Such an occurrence would cause us to lose some sources of funding, including, but not limited to becoming ineligible to accept additional public funds in Indiana that are not insured by the FDIC. Existing non-FDIC-insured public funds in Indiana would continue to be insured to the extent provided by the Public Deposit Insurance Fund statute. In addition, we have traditionally used brokered-sourced deposits to supplement our funding. Due to our current capital ratios, we are ineligible to issue these deposits. An ongoing inability to source these funds could put additional pressure on our overall funding and ability to hold or increase our amount of loans or other assets.

     In assessing the Corporation’s current financial position and operating plans for the future, management has made significant judgments and estimates with respect to the potential future and liquidity effects of the Corporation’s risks and uncertainties.

     It is possible that the actual outcome of management’s plans could be materially different or that one or more of management’s significant judgments or estimates about the potential effects of these risks and uncertainties could prove to be materially incorrect. Notwithstanding this risk, the Corporation’s consolidated financial statements have been prepared on a going concern basis which contemplates the realization of certain balance sheet restructuring, continuity of deposit funding sufficient to support our assets in the normal course of business, and capital raising.

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

     Basis of Presentation: The Corporation is on the accrual basis of accounting for income and expense. The results of operations reflect any interim adjustments, all of which are of a normal recurring nature, unless otherwise disclosed in this Form 10Q, and which, in the view of management, reflect all material adjustments necessary for a fair presentation. The financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for interim financial reporting and should be read in conjunction with the Corporation’s Annual Report on form 10K for the year ended December 31, 2008.

     Recent Accounting Developments: During the six months ended June 30, 2009, the following accounting pronouncements applicable to the Corporation were issued or became effective:

     FASB Staff Position (“FSP”) No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”) became effective for the Corporation for annual and interim reporting periods beginning January 1, 2009. FSP 157-2 amended FASB Statement No. 157, Fair Value Measurements (“SFAS 157”), to delay the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Corporation’s non-financial assets within the scope of SFAS 157, which include goodwill and private equity investments, are reported at fair value on a nonrecurring basis (generally as the result of an impairment assessment) during the period in which the fair value measurement is recorded. We currently have no non-financial liabilities required to be reported at fair value.

     FSP No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”) amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The intent of the FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141, Business Combinations, when the underlying arrangement includes renewal or extension terms. FSP 142-3 permits an entity to use its own assumptions, based on its historical experience, about the renewal or extension of an arrangement to determine the useful life of an intangible asset. These assumptions are to be adjusted for the entity-specific factors detailed in SFAS 142. FSP 142-3 became effective for the Corporation on January 1, 2009. Adoption of FSP 142-3 did not have a significant impact on the Corporation’s consolidated financial statements.

     In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1”). FSP 107-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements of publicly traded companies as well as in annual financial statements. The FSP also amends APB opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial

information at interim reporting periods. FSP 107-1 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. In periods after initial adoption, the FSP requires comparative disclosures only for periods ending after initial adoption. The disclosure requirements associated with the adoption of FSP FAS 107-1 are included in this document.

     In April 2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP 115-2”). FSP 115-2 amends the other-than-temporary impairment guidance for debt securities. FSP 115-2 modifies the “intent and ability” indicator for recognizing other-than-temporary impairment, and changes the trigger used to assess the collectability of cash flows from “probable that the investor will be unable to collect all amounts due” to “the entity does not expect to recover the entire amortized cost basis of the security.” FSP 115-2 changes the total amount recognized in earnings when there are credit losses associated with an impaired debt security and management asserts that it does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis. In those situations, impairment shall be separated into (a) the amount representing a credit loss and (b) the amount related to non-credit factors. The amount of impairment related to credit losses shall be recognized in earnings. The credit loss component of an other-than-temporary impairment, representing an increase in credit risk, shall be determined by the reporting entity using its best estimate of the present value of cash flows expected to be collected from the debt security. The amount of impairment related to non-credit factors shall be recognized in other comprehensive income. The previous cost basis less impairment recognized in earnings becomes the new cost basis of the security and shall not be adjusted for subsequent recoveries in fair value. However, the cost basis shall be adjusted for accretion of the difference between the new cost basis and the present value of cash flows expected to be collected (portion of impairment in other comprehensive income). The total other-than-temporary impairment is presented in the consolidated statements of income with a reduction for the amount of the other-than-temporary impairment that is recognized in other comprehensive income, if any. FSP 115-2 requires that the cumulative effect of initial adoption be recorded as an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated other comprehensive income. The amortized cost basis of a security for which an other-than-temporary impairment was previously recognized shall be adjusted by the amount of the cumulative effect adjustment before taxes. The difference between the new amortized cost basis and the cash flows expected to be collected shall be accreted as interest income. FSP 115-2 is effective for reporting periods ending after June 15, 2009. The adoption of FSP 115-2 did not have a significant impact on the Corporation’s financial statements.

     In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are not Orderly (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for an asset or liability have significantly decreased. FSP 157-4 identifies several factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for an asset or liability. If the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity, transactions or quoted prices may not be determinative of fair value (for example, there may be increased instances of transactions that are not orderly), further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with SFAS 157. FSP 157-4 reiterates that even in circumstances where there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP 157-4 is effective for reporting periods ending after June 15, 2009. Adoption of FSP 157-4 did not have a significant impact on the consolidated financial statements.

     In May 2009, The FASB issued Statement No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for periods ending after June 15, 2009. The adoption of SFAS 165 did not have a significant impact on the consolidated financial statements. The required disclosures are included in Note 17 to these financial statements.

Note 2 — Investment Securities

     The following table shows the composition of our investment securities at June 30, 2009:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair				Carrying
		Cost				Gains				Losses				Value				Value
		(Dollars in thousands)
Held-to-Maturity:
Debt Issued by U.S. Treasury and Other Government Agencies		$	12,696			$	403			$	—			$	13,099			$	12,696
Debt of States and Political Subdivisions of States			3,200				—				—				3,200				3,200
Residential mortgage-backed securities			657				8				—				665				657
Total Held-to-Maturity		$	16,553			$	411			$	—			$	16,964			$	16,553
Available-for-Sale:
Other Securities		$	3,962			$	—			$	(33	)		$	3,929			$	3,929
Residential mortgage-backed securities			729				15				—				744				744
Collateralized debt obligations			12,077				—				(4,578	)			7,499				7,499
Total Available-for-Sale		$	16,768			$	15			$	(4,611	)		$	12,172				12,172
Other Securities
FHLB stock																		$	46,324
Federal Reserve Bank stock																			6,393
Total Other Securities																		$	52,717

     The following table shows the composition of our investment securities at December 31, 2008:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair				Carrying
		Cost				Gains				Losses				Value				Value
		(Dollars in thousands)
Held-to-Maturity:
Debt Issued by U.S. Treasury and Other Government Agencies		$	13,054			$	266			$	—			$	13,320			$	13,054
Debt of States and Political Subdivisions of States			3,320				—				—				3,320				3,320
Residential mortgage-backed securities			884				—				(224	)			660				884
Total Held-to-Maturity		$	17,258			$	266			$	(224	)		$	17,300			$	17,258
Available-for-Sale:
Other Securities		$	3,863			$	—			$	(122	)		$	3,741			$	3,741
Residential mortgage-backed securities			16,426				155				(27	)			16,554				16,554
Collateralized debt obligations			14,458				1,639				(4,497	)			11,600				11,600
Total Available-for-Sale		$	34,747			$	1,794			$	(4,646	)		$	31,895				31,895
Other Securities
FHLB stock																		$	46,324
Federal Reserve Bank stock																			14,732
Total Other Securities																		$	61,056

The following table discloses the maturity of debt securities at June 30, 2009:

						Due after				Due after
						one year				five years
		Due within				through five				through ten				Due after
		one year				years				years				ten years
		(Dollars in thousands)
Held-to-Maturity:
Debt Issued by U.S. Treasury and Other Government Agencies		$	5,358			$	7,338			$	—			$	—
Debt of States and Political Subdivisions of States			—				530				90				2,580
Residential mortgage-backed securities			145				—				21				491
Total Book Value of Held-to-Maturity Securities		$	5,503			$	7,868			$	111			$	3,071
Total Fair Value of Held-to-Maturity Securities		$	5,581			$	8,191			$	112			$	3,080
Available-for-Sale:
Debt of States and Political
Subdivisions of States		$	—			$	—			$	—			$	—
Residential mortgage-backed securities			—				—				7				737
Collateralized debt obligations			—				—				—				7,499
Total Fair Value of Available-for-Sale Securities		$	—			$	—			$	7			$	8,236

     During the second quarter of 2009, we sold $14 million of available-for-sale debt securities recording a realized gain $0.3 million using a specific identification cost basis methodology. The following table presents the fair value and unrealized losses for certain available-for-sale securities by aging category:

		Securities with unrealized losses at June 30, 2009
		less than 12 months								12 months or more								Total
						Gross								Gross								Gross
		Fair				unrealized				Fair				unrealized				Fair				unrealized
		value				losses				value				losses				value				losses
		(Dollars in thousands)
Residential mortgage-backed securities		$	—			$	—			$	—			$	—			$	—			$	—
Collateralized debt obligations			—				—				6,767				(4,578	)			6,767				(4,578	)
Total securities with unrealized losses		$	—			$	—			$	6,767			$	(4,578	)		$	6,767			$	(4,578	)

		Securities with unrealized losses at December 31, 2008
		less than 12 months								12 months or more								Total
						Gross								Gross								Gross
		Fair				unrealized				Fair				unrealized				Fair				unrealized
		value				losses				value				losses				value				losses
		(Dollars in thousands)
Residential mortgage-backed securities		$	444			$	(2	)		$	7,152			$	(25	)		$	7,596			$	(27	)
Collateralized debt obligations			—				—				8,040				(4,497	)			8,040				(4,497	)
Other securities			—				—				3,741				(122	)			3,741				(122	)
Total securities with unrealized losses		$	444			$	(2	)		$	18,933			$	(4,644	)		$	19,377			$	(4,646	)

     Impairment is evaluated considering numerous factors, and their relative significance varies case to case. Factors considered include the length of time and extent to which the market value has been less than cost; the financial condition and near-term prospects of the issuer; and the intent and ability to retain the security in order to allow for an anticipated recovery in market value. If, based on the analysis, it is determined that the impairment is other-than-temporary, the security is written down to fair value, and a loss is recognized through earnings. Based on the factors listed above, we do not believe these securities with losses greater than one year are other than temporarily impaired at June 30, 2009.

     At June 30, 2009, we held four mortgage-backed securities acquired over the course of 2006 and 2007 at their par values. All of the securities were rated “AA” or “AA+” by S&P at origination. These securities had an original par value of $26 million and now have an estimated fair value of $0.7 million at June 30, 2009. The decline in fair value related to these securities is deemed to be other-than-temporary and related principally to credit factors. Accordingly, we have recognized other-than-temporary impairment (OTTI) charges of $25 million since the beginning of 2008. We recorded $20 million of impairment during the first half of 2008, $3 million in the second half of 2008, and we recorded $2 million in the first half of 2009. These OTTI adjustments reflect our estimate of fair value for these securities at June 30, 2009. The estimates of fair value were based on estimates of future cash flows and based on assumptions related to discount rates that management believes market participants would use to value similar assets based on input from dealers in these and similar securities.

Note 3 — Loans and Leases Held for Sale

     We had loans and leases held for sale of $279 million at June 30, 2009 compared to $841 million at December 31, 2008. During the second quarter of 2009 we derecognized $109 million of loans that collateralized secured borrowings after selling the related servicing rights and removing all forms of continuing involvement with these loans. Year to date, we have derecognized a total of $762 million of loans from our balance sheet in 2009 and the related debt (see Note 9). The majority of the remaining balance in loans held for sale relates to loans that we intend to sell from our commercial banking segment and our franchise finance segment in the third quarter of 2009 in order to maintain capital ratios while we seek to complete our recapitalization. See Note 16 for further discussion.

Note 4 — Loans and Leases

     Loans and leases are summarized as follows:

		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
Commercial, financial and agricultural		$	1,467,175			$	1,862,877
Real estate-construction & land development			353,882				466,598
Real estate-mortgage			456,200				523,837
Consumer			17,800				24,022
Commercial financing
Franchise financing			587,413				922,429
Domestic leasing			8,444				11,305
Unearned income
Franchise financing			(166,713	)			(297,600	)
Domestic leasing			(940	)			(1,420	)
Total		$	2,723,261			$	3,512,048

     At June 30, 2009, mortgage loans and leases held for investment with a carrying value of $0.2 billion were pledged as collateral for bonds payable to investors (see Note 9). We pledged $0.8 billion of loan and loans held for sale as collateral at the Federal Home Loan Bank at June 30, 2009 (see Note 8).

     Commercial loans are extended primarily to businesses in the market areas of our commercial banking branches. To a lesser extent, we also provide consumer loans to the customers in those markets. Real estate loans, franchise loans and direct financing leases are extended throughout the United States.

Note 5 — Allowance for Loan and Lease Losses

     Changes in the allowance for loan and lease losses are summarized below:

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Dollars in thousands)								(Dollars in thousands)
Balance at beginning of period		$	155,403			$	158,598			$	137,015			$	144,855
Provision for loan and lease losses			45,431				157,829				109,433				202,350
Charge-offs			(48,106	)			(101,936	)			(94,559	)			(133,730	)
Recoveries			1,552				1,401				2,391				3,008
Reduction due to reclassification to loans held for sale			(6,100	)			(176	)			(6,100	)			(638	)
Foreign currency adjustment			—				(2	)			—				(131	)
Balance at end of period		$	148,180			$	215,714			$	148,180			$	215,714

     Nonperforming loans and leases are summarized below:

		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
Accruing loans past due 90 days or more		$	446			$	3,031
Nonaccrual loans and leases			216,781				165,154
Total nonperforming loans and leases		$	217,227			$	168,185

Note 6 — Servicing Assets

     We account for servicing assets associated with second mortgage and high loan-to-value first mortgages that were originated and sold by our home equity segment at fair value. Changes to fair value are recorded through “amortization and impairment of servicing assets.” All other servicing assets, primarily related to first mortgage loans originated and sold by our commercial banking segment, are accounted for using the amortization method with impairment recognized. These mortgage servicing assets are recorded at lower of their amortized cost basis or fair value and a valuation allowance is recorded for any stratum that is impaired.

     We estimate the fair value of the servicing assets using a cash flow model to project future expected cash flows based upon a set of valuation assumptions we believe market participants would use for similar assets. We review these assumptions on a regular basis to ensure that they remain consistent with current market conditions. Additionally, we periodically receive third party estimates of the portfolio value from independent valuation firms. Inaccurate assumptions in valuing mortgage servicing rights could adversely affect our results of operations. For servicing rights accounted for under the amortization method, we also review these mortgage servicing assets for other-than-temporary impairment each quarter and recognize a direct write-down when the recoverability of a recorded valuation allowance is determined to be remote. Unlike a valuation allowance, a direct write-down permanently reduces the unamortized cost of the mortgage servicing rights asset and the valuation allowance, precluding subsequent reversals. Changes in our fair value servicing assets are shown below:

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Dollars in thousands)
Beginning balance		$	2,310			$	15,864			$	14,804			$	19,724
Sale of Servicing Asset			—				—				(9,194	)			—
Changes in fair value:
Due to changes in valuation inputs or assumptions (1)			0				3,390				(2,700	)			800
Other changes in fair value (2)			(100	)			(1,180	)			(700	)			(2,450	)
Balance at the end of the period		$	2,210			$	18,074			$	2,210			$	18,074

     Changes in our amortizing servicing assets are shown below:

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Dollars in thousands)
Beginning balance		$	3,097			$	3,479			$	3,312			$	3,510
Additions			543				291				1,243				619
Sales			—				—				(68	)			—
Amortization			(411	)			(307	)			(1,401	)			(646	)
Recovery			44				36				187				16
Balance at the end of the period		$	3,273			$	3,499			$	3,273			$	3,499

Note 7 — Income Taxes

     A reconciliation of income tax benefit to the amount computed by applying the statutory income tax rate of 35% to income before income taxes is summarized as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Dollars in thousands)
Income taxes computed at the statutory rate		$	(20,383	)		$	(46,701	)		$	(51,528	)		$	(59,475	)
Increase (decrease) resulting from:
Nontaxable interest from investment securities and loans			(18	)			(28	)			(37	)			(58	)
Nontaxable income from bank owned life insurance			45				(158	)			83				(350	)
State tax, net of federal benefit			(1,931	)			(4,536	)			(4,880	)			(5,904	)
Foreign operations			(1	)			(29	)			6				44
Reserve adjustment (1)			137				190				271				346
Federal tax credits			(326	)			(448	)			(652	)			(721	)
Other items — net			135				111				372				189
Valuation allowance			21,263				24,900				60,133				24,900
		$	(1,079	)		$	(26,699	)		$	3,768			$	(41,029	)

     SFAS 109 requires both positive and negative evidence be considered in determining the need for a valuation allowance. Our recent losses increased our deferred tax asset balance. Although net operating losses can be carried forward 20 years under the Internal Revenue Code, events may occur in the future that could cause the ability to realize these deferred tax assets to be in doubt, requiring the need for a valuation allowance under GAAP. We provided a valuation allowance for all of our deferred tax assets that could not be realized through carrybacks and reversals of existing temporary differences. Our deferred tax assets are recorded based on management’s judgment about whether realization of these assets is more likely than not. Despite being in a cumulative loss position in light of recent operations, we believe that as of June 30, 2009 approximately $23 million of our deferred tax asset was realizable due to the ability to apply net operating loss carrybacks to recover taxes paid in prior years and due to the reversal of existing temporary differences.

Note 8 — Other Borrowings

     Other borrowings are summarized as follows:

		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
Federal Home Loan Bank borrowings		$	266,703			$	487,012
Federal funds			—				25,000
Total		$	266,703			$	512,012
Weighted average interest rate			4.46	%			4.48	%