Summary of IRWIN FINANCIAL CORP

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Strategy
The Corporation is in the middle of a strategic restructuring to refocus on serving small businesses and the communities in which it operates. Raising capital is an important part of the Corporation's restructuring plan, which the Corporation believes will strengthen its capital and position it to return to profitability. The Corporation has chosen to enhance its capital through a rights offering to existing shareholders and a possible exchange of trust preferred securities for common stock. In connection with the rights offering, the Corporation entered into agreements with accredited investors to provide standby commitments to purchase common shares that are not purchased by holders of subscription rights, and the Corporation has received standby commitments to date for $37 million.
A registration statement relating to the rights offering has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. The rights offer remains subject to the registration statement being approved by the Securities and Exchange Commission. The rights offering will be made only by means of a prospectus which will contain the specific terms of the transaction and which will be provided to Irwin shareholders at the commencement of the offer. In addition, this Report on Form 10-Q is not an offer or the solicitation of an offer to exchange the Corporation's trust preferred securities. Any such offers will only be made by registration under federal and state securities laws, or pursuant to an applicable exemption from registration thereunder.
On May 7, the Corporation announced that our Board of Directors was seeking alternatives to achieve our strategic refocusing objectives and resolve our home equity loan exposure. We closed on a securitization with financing treatment of approximately $268 million of home equity whole loans in July. We also signed an agreement to sell the residuals underlying $1 billion of previously securitized home equity loans and the associated $0.9 billion of debt, which would have removed both from our balance sheet. The agreement was subject to third party approvals which were not received by the purchaser by the agreed upon date. Therefore, as previously announced, the residual sale transactions were rescinded in September. It is still our aim to complete a withdrawal from the national mortgage business (outside of the local communities we serve through our bank branches) that was begun in 2006 with the sale of Irwin Mortgage Corporation. We have limited our exposure to future home equity credit losses through securitization activities. Against our $1.28 billion loan portfolio, we have non-recourse collateralized debt of $0.95 billion and an allowance for loan loss reserve of $0.15 billion. Although we will continue making mortgage credit available in our bank branch communities, we have ceased all originations in our national mortgage lines of business, maintaining only servicing platforms to manage our remaining portfolios in run-off mode.
As part of the Board of Director's strategic review, we also concluded that we should exit the small ticket equipment leasing portions of our commercial finance line of business. Sales of the portfolios in both the U.S. and Canada and the platform in Canada were completed in the third quarter of 2008. We had concluded that small ticket equipment leasing was no longer a strategic fit for our company because of their reliance on sources of funding, such as securitizations and structured finance, that are no longer available in a reliable and cost effective manner due to changes in the capital markets.
Going forward, our strategy is to focus on our roots as a small business lender and local community bank, building on our 137-year history. We will have two segments: commercial banking and franchise finance, down from four segments as recently as two years ago.
We seek to create competitive advantage within the banking industry by serving small businesses with lending, leasing, deposit, and advisory services, as well as consumers in the neighborhoods surrounding our bank branches. We intend to fund these activities primarily through deposits gathered through our 35 bank branches.
In our commercial banking segment, we provide a full line of banking services to small businesses and consumers in the communities and neighborhoods served by our bank branch locations. Through this approach, we provide the small businesses that are the backbone of economic growth in our communities with the advice, credit, and other banking products that meet their needs and help them to grow, which large national banks are often unable to do in a flexible manner. Our franchise finance segment also focuses on small businesses - the owners and operators of the leading quick service and casual dining restaurant concepts in the U.S.
While having much in common in terms of competitive positioning and credit culture, these two segments allow us to diversify our revenues, credit risk, and application of capital across borrower types and across geographic regions as a key part of our risk management.

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Reducing our company to two operating segments from four will allow us to simplify our management structure, reduce overhead, and improve our cost structure. We are in the process of identifying areas in which we can coordinate and consolidate non-customer facing operations between these two segments. Our Board of Directors formed a committee to undertake a review of our management structure with the help of an independent consultant. Prior to the engagement of this consultant, we had centralized certain risk management functions, information technologies, procurement, transactional accounting, human resources, and legal functions to enhance senior management and Board oversight and reduce operational costs.
We have long held that strategy needs to evolve in response to changes in environmental conditions. Our former strategy was not producing acceptable results in the current environment of severe stress in housing and related markets and disruptions in the capital markets. We have therefore taken steps to change our strategy to fit the environment in which we operate today and will operate in the future. We believe these changes - returning to our roots of focusing on banking for small businesses and the local communities in which we have branches - will position us to contribute to the economies of our communities by providing the highest quality service to individuals and small businesses by continuing to be an important provider of credit to consumer and small business customers.
Critical Accounting Policies
Accounting estimates are an integral part of our financial statements and are based upon our current judgments. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ from our current judgments or that our use of different assumptions could result in materially different estimates. Our Annual Report on Form 10-K for the year ended 2007 provides a description of the critical accounting policies we apply to material financial statement items, all of which require the use of accounting estimates and/or judgment.

Consolidated Overview

                                                   For the Three Months Ended               For the Nine Months Ended
                                                         September 30,                            September 30,
                                                     2008                2007                2008                 2007
Net loss from continuing operations (in
thousands)                                      $    (54,430 )         $  (803 )        $   (183,327 )         $ (1,425 )
Basic loss per share from continuing
operations                                             (1.85 )           (0.04 )               (6.25 )            (0.08 )
Diluted loss per share from continuing
operations                                             (1.85 )           (0.05 )               (6.25 )            (0.11 )
Return on average equity from continuing
operations                                             (74.8 )%           (0.6 )%              (64.1 )%            (0.4 )%
Return on average assets from continuing
operations                                              (4.0 )%           (0.1 )%               (4.2 )%             0.0 %

The financial statements, notes, schedules and discussion within this report for 2007 have been reformatted to conform to the presentation required for "discontinued operations" pursuant to the sale of the assets of our mortgage banking line of business.
Outlook
The restructuring we have announced and described elsewhere in this document will continue to affect our reported results materially in future quarters.
In our second quarter of 2008 10-Q, we estimated that we would record exit costs in the third quarter of 2008 associated with our sale of the small ticket leasing assets of approximately $10 million pretax and exit costs associated with the sale of home equity residuals of approximately $105 million. The small ticket assets sales were consummated in the third quarter. Actual exit costs, including investment banker fees, recorded in the third quarter totaled $14 million, with another $1 million anticipated in the fourth quarter. The sale of the home equity residual was rescinded in the third quarter due to the purchaser's failure to obtain third party consents by the agreed upon date. As a result, the approximately $1.0 billion of home equity assets and $0.9 billion of debt which the residuals underlie remained on our balance sheet at September 30 and we did not incur the home equity exit costs as anticipated. We continue to explore alternatives for selling these residual assets or changing the terms of the securitization to achieve mark to market accounting for the residual asset. If we are able to sell them or mark them to market at a future date, our current estimate of costs associated with this sale are $65 million and to remove the associated assets and debt from our balance sheet.
Due to the unprecedented levels of uncertainty in the financial markets and economy at present, forecasting earnings in the current environment is particularly difficult. At present, we expect our commercial banking and franchise finance segments to be profitable in

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2009. Whether the Corporation as a whole will be profitable next year depends primarily on the timing and size of charges related to our reduction in exposure and eventual exit from the home equity business. Consolidated Income Statement Analysis
Net Income from Continuing Operations
We recorded a loss of $54 million for the three months ended September 30, 2008, compared to a net loss from continuing operations of $0.8 million for the three months ended September 30, 2007. Net loss per share (diluted) was $1.85 for the quarter ended September 30, 2008, compared to $0.05 loss per share in the third quarter of 2007. For the year to date, we recorded a net loss of $183 million or $6.25 loss per diluted share compared to a net loss from continuing operations of $1.4 million or $0.11 loss per share in 2007. The current period and year-to-date losses reflect our restructuring activities, including asset sales as well as significant provisions in excess of realized losses in our home equity and commercial banking portfolios. Net Interest Income from Continuing Operations Net interest income for the nine months ended September 30, 2008 totaled $175 million, down 11% from the net interest income from continuing operations of $197 million for the same period in 2007. Net interest margin is computed by dividing net interest income by average interest earning assets. Net interest margin for the nine months ended September 30, 2008 was 4.16%, down compared to 4.53% for the same period in 2007.

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The following table shows our daily average consolidated balance sheet, interest rates and yield at the dates indicated:

                                                              For the Nine Months Ended September 30,
                                                   2008                                                    2007
                                                                  Annualized                                              Annualized
                                Average                             Yield/             Average                              Yield/
                                Balance          Interest            Rate              Balance          Interest             Rate
                                                                      (Dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing
deposits with financial
institutions                  $    33,290        $   1,208               4.85 %      $    52,648        $   2,093                5.32 %
Federal funds sold                 42,131              678               2.15 %           19,667              602                4.09 %
Residual interests                 12,506              629               6.72 %           10,196              817               10.71 %
Investment securities             127,294            5,133               5.39 %          137,989            5,664                5.49 %
Loans held for sale                41,542            2,817               9.06 %          124,528            6,677                7.17 %
Loans and leases, net of
unearned income (1)             5,350,332          322,030               8.04 %        5,426,759          371,502                9.15 %

Total interest earning
assets                          5,607,095        $ 332,495               7.92 %        5,771,787        $ 387,355                8.97 %
Noninterest-earning
assets:
Cash and due from banks            82,220                                                 72,880
Premises and equipment,
net                                37,292                                                 39,092
Other assets                      233,834                                                296,246
Less allowance for loan
and lease losses                 (161,494 )                                              (87,384 )

Total assets                  $ 5,798,947                                            $ 6,092,621

Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Money market checking         $   306,611        $   2,950               1.29 %      $   283,746        $   4,890                2.30 %
Money market savings              971,791           18,358               2.52 %        1,160,416           38,954                4.49 %
Regular savings                   115,260            1,400               1.62 %          124,113            2,064                2.22 %
Time deposits                   1,749,171           57,112               4.36 %        1,497,477           57,270                5.11 %
Other borrowings                  562,206           18,825               4.47 %          621,873           24,329                5.23 %
Collateralized debt             1,098,642           47,123               5.73 %        1,223,586           51,491                5.63 %
Other long-term debt              233,869           12,199               6.97 %          233,930           13,005                7.43 %

Total interest-bearing
liabilities                   $ 5,037,550        $ 157,967               4.19 %      $ 5,145,141        $ 192,003                4.99 %
Noninterest-bearing
liabilities:
Demand deposits                   298,742                                                334,639
Other liabilities                  80,724                                                 98,946
Shareholders' equity              381,931                                                513,895

Total liabilities and
shareholders' equity          $ 5,798,947                                            $ 6,092,621

Net interest income                              $ 174,528                                              $ 195,352
Net interest income to
average interest earning
assets                                                                   4.16 %                                                  4.53 %


Less: Net interest
income from discontinued
operations                                               -                                                 (1,765 )


Net interest income from
continuing operations                            $ 174,528                                              $ 197,117

(1) For purposes of these computations, nonaccrual loans are included in daily average loan amounts outstanding.

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Provision for Loan and Lease Losses from Continuing Operations The consolidated provision for loan and lease losses for the three months ended September 30, 2008 was $58 million, compared to $28 million for the same period in 2007. Year to date, the provision for 2008 was $260 million, compared to $71 million for the same period in 2007. The increase in third quarter and year-to-date provision reflects continued deterioration in the portfolio due to softening in the economy. The year-to-date provision was also impacted by the sale of our small-ticket leasing portfolio in July at a discount to our carrying value. The discount to the carrying value at the time of transfer from loans held for investment to loans held for sale of $53 million was accounted for as a charge-off resulting in a related increase in the loan loss provision. More information on this subject is contained in the section on "Credit Risk." Noninterest Income from Continuing Operations Noninterest income during the three months ended September 30, 2008 totaled $4 million, compared to $7 million for the same period of 2007. This decrease in 2008 relates primarily to a fair value adjustment to our residual interest asset at our home equity line of business. Noninterest income of $6 million was recorded for the nine months ended September 30, 2008 compared to $16 million for the same period in 2007. The 2008 year-to-date decrease is a result of several factors. First, a $22 million other-than-temporary impairment (OTTI) charge was recorded during 2008 related to four mortgage-backed securities for which fair value has declined in 2008. Loan servicing fees declined $7 million in 2008 compared to 2007. Offsetting this were decreased derivative losses of $9 million and an improvement in our gain on sale of loans of $9 million during the year.
Noninterest Expense from Continuing Operations Noninterest expenses for the three and nine months ended September 30, 2008 totaled $70 million and $166 million, respectively, compared to $46 million and $146 million for the same periods in 2007. The increase in noninterest expense in 2008 is primarily attributable to costs associated with our sale of small-ticket leases and other restructuring initiatives. Additional commentary on the increases in noninterest expense is included in the line of business discussions later in this document.
Income Tax Provision
Income tax benefit for the three months and nine months ended September 30, 2008 totaled $22 million and $63 million compared to tax benefit of $2 million and benefit of $3 million during the same periods in 2007. Our effective tax rate was 29% and 26%, respectively, during the three and nine months ended September 30, 2008. The lower effective rate in 2008 relates to an additional $8 million valuation allowance recorded at September 30, 2008 increasing our year to date allowance to $33 million. We believe the valuation allowance is sufficient to reduce the deferred tax asset to an amount that is likely to be realized.
Consolidated Balance Sheet Analysis
Total assets at September 30, 2008 were $5.3 billion, down 15% from December 31, 2007. Average assets for the nine months ending September 30, 2008 were $5.8 billion, down 5% from the average assets for the year ended December 31, 2007. The majority of the decrease in assets relates to the sale of our small-ticket leasing assets in July of 2008.

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Investment Securities
   The following table shows the composition of our investment securities at the
dates indicated:

                                                                   September 30,          December 31,
                                                                       2008                   2007
                                                                         (Dollars in thousands)
Held-to-Maturity:
U.S. Treasury and government obligations                          $        14,443        $       13,970
Obligations of states and political subdivisions                            3,321                 3,436
Mortgage-backed securities                                                    926                   717

Total held-to-maturity                                                     18,690                18,123


Available-for-Sale:
Mortgage-backed securities                                                 22,912                45,499
Other                                                                      13,228                14,185

Total available-for-sale                                                   36,140                59,684

Federal Home Loan Bank and Federal Reserve Bank stock                      62,588                62,588

Total investment securities                                       $       117,418        $      140,395

At September 30, 2008, we held four private-label mortgage-backed securities that were estimated to have a fair market value of $5 million. These securities were issued by entities other than government-sponsored enterprises and backed by first mortgage liens. The decline in value of these securities is deemed to be other-than-temporary. Accordingly, we recognized other-than-temporary impairment expense of $2 million and $22 million during the three and nine month periods ended September 30, 2008, respectively. Loans and Leases Held For Sale
Loans and leases held for sale totaled $44 million at September 30, 2008, an increase from a balance of $6 million at December 31, 2007. The majority of this balance relates to loans and leases at our commercial finance segment. During the quarter $0.3 billion of small ticket leases that were classified as held-for-sale as of June 30, 2008 were sold. Loans and Leases
Our commercial loans and leases are originated throughout the United States. In July, 2008, we sold nearly all of our portfolio that had been originated in Canada. To a more limited extent, we also extend credit to consumers through mortgages, installment loans and revolving credit through our bank branches. The decrease in loans and leases relates primarily to the sale of our small ticket leases and run off in our home equity portfolios.

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Loans by major category for the periods presented were as follows:

                                                   September 30,      December 31,
                                                        2008              2007
                                                       (Dollars in thousands)
    Commercial, financial and agricultural         $   1,972,507      $ 2,099,451
    Real estate-construction & land development          512,971          586,037
    Real estate-mortgage                               1,517,294        1,691,450
    Consumer                                              26,608           32,232
    Commercial financing
    Franchise financing                                  904,666          925,741
    Domestic leasing                                      12,506          306,301
    Foreign leasing                                            -          462,036
    Unearned income
    Franchise financing                                 (293,677 )       (306,681 )
    Domestic leasing                                      (1,369 )        (42,723 )
    Foreign leasing                                            -          (57,614 )

    Total                                          $   4,651,506      $ 5,696,230

Allowance for Loans and Lease Losses
   Changes in the allowance for loan and lease losses are summarized below:

                                                      Three Months Ended September 30,                Nine Months Ended September 30,
                                                        2008                    2007                    2008                    2007
                                                                                   (Dollars in thousands)
Balance at beginning of period                    $      215,714          $       92,140          $       144,855          $      74,468
Provision for loan and lease losses                       58,033                  28,493                  260,384                 71,155
Charge-offs                                              (42,865 )               (18,782 )               (176,595 )              (48,619 )
Recoveries                                                 1,318                   2,555                    4,325                  7,881
Reduction due to reclassification and sales
of loans                                                    (449 )                  (210 )                 (1,087 )               (1,006 )
Foreign currency adjustment                                   51                     247                      (80 )                  564

Balance at end of period                          $      231,802          $      104,443          $       231,802          $     104,443

The provision for loans and lease losses and charge-offs saw dramatic increases in 2008 related to the deterioration in our portfolio due to the softening in the overall economy. In addition, both the provision and charge-off accounts were impacted by the sale of the small-ticket leasing portfolio at a discount. See "Credit Risk" section for further discussion. Deposits
Year to date total deposits averaged $3.4 billion, relatively unchanged from deposits for the year 2007. Year to date demand deposits in 2008 averaged $0.3 billion, a 9% decrease from the average balance for the year 2007.
Irwin Union Bank and Trust utilizes institutional broker-sourced deposits as funding to supplement deposits solicited through branches and other wholesale funding sources. At September 30, 2008, institutional broker-sourced deposits totaled $0.9 billion, a $0.2 billion increase from December 31, 2007. Other Borrowings
Year to date other borrowings during 2008 averaged $562 million compared to an average of $599 million for the year 2007. Other borrowings totaled $527 million at September 30, 2008, compared to $802 million at December 31, 2007. The decrease in other borrowings relates primarily to a $228 million decline in federal funds purchased at September 30, 2008 as compared to December 31, 2007.

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Federal Home Loan Bank borrowings averaged $507 million for the nine months . . .