(Mark One)

For the quarterly period ended September 30, 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 November 6, 2002, there were outstanding 27,760,052 common shares, no par value, of the Registrant.

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, commercial finance, 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. The adoption of SFAS 133 resulted in a cumulative change in accounting principle, increasing net income by $175 thousand in 2001. 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. Unrealized gains and losses from derivative instruments classified as cash flow hedges have been recorded in accumulated other comprehensive income in the equity section of the balance sheet.

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 conforming first 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 changes 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 sales of loans. Hedge ineffectiveness recorded in gain from sales 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 first mortgage 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.

We hedge the fixed versus floating component of certain of our residual interests with three interest rate caps. We classify interest rate caps as other assets on the balance sheet and carry them at their fair values. Two of the interest rate caps qualify for hedge accounting treatment under SFAS 133. As a result, adjustments to fair value for these derivatives are recorded through accumulated other comprehensive income. We record adjustments to fair value for the third interest rate cap as other income on the income statement.

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 commercial finance 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.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement improves financial reporting by requiring that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred rather than at the date of an entity's commitment to an exit plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. Management does not believe the implementation of SFAS 146 will have a material effect on our earnings or financial position.

The FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical corrections" and SFAS No. 147, "Acquisition of Certain Financial Institutions." These Statements rescind the Statements concerning gains and losses from extinguishment of debt and accounting for intangible assets of motor carriers. They also amend the rules for sale-leaseback accounting, require the acquisitions of financial institutions to be accounted for in accordance with business combinations and goodwill and other intangible assets, and make various technical corrections to existing pronouncements. Management believes these Statements will have no impact on our earnings or financial position.

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 8 -- CONTINGENCIES

Our subsidiary, Irwin Mortgage Corporation, is the 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 in 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 have been 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 three other 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 until the 11^th Circuit decides the other RESPA cases pending in that court. On September, 18, 2002, the 11^th Circuit reversed the grant of class certification in one of these cases. We believe the reversal provides grounds to decertify the class in our case. However, the stay in the proceedings continues in effect in our case, and the district court has not yet taken action. The second case seeking consolidation has been stayed as well.

If the class is not decertified and the district court finds that Irwin Mortgage violated RESPA, Irwin Mortgage could be liable for damages equal to three times the amount of that portion of payments made to the mortgage brokers that is ruled unlawful. Based on notices sent by the plaintiffs to date to potential class members and additional notices that might be sent, we believe the class in this case is not likely to exceed 32,000 borrowers who meet the class specifications. We also have other class action lawsuits filed against us alleging RESPA violations and other claims based on payments similar to those at issue in this case, but in one case arguing different RESPA violations. These related lawsuits filed against us after this case, some of which are subject to a similar stay of proceedings, seek class certification of additional borrowers on a different basis than that recently overruled by the Court of Appeals for the 11^th Circuit.

We intend to vigorously defend these lawsuits and believe we have available numerous defenses to the claims. However, we expect that an adverse outcome in this lawsuit or in the one seeking consolidation with it could result in substantial monetary damages that could be material to our financial position. We have not established any reserves for either case or for the other subsequently-filed cases, and at this stage of the litigation we are unable to determine their outcomes or a reasonable estimate of potential loss.

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 (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 alleged 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 requested 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 appealed and in August, 2002, the appeals court upheld the judgment in our favor compelling arbitration and dismissing the case. We consider this case concluded and do not expect to suffer a material loss should arbitration occur.

Our subsidiary Irwin Union Bank and Trust is a defendant in a purported class action lawsuit filed in July, 2001 in the U.S. District Court for the District of Massachusetts. The suit relates to loans purchased by Irwin Union Bank and Trust from an unaffiliated third-party originator. The plaintiffs allege that the loan documents did not comply with certain provisions of the Truth in Lending Act relating to high rate loans. On September 30, 2002, the court granted plaintiffs' motion for certification of a class, subject to certain limitations. Irwin Union Bank and Trust has challenged the grant of class certification. Discovery has not yet commenced and the actual number of class members will be determined only after a review of loan files. We believe that out of approximately 200 loans acquired directly from the third-party originator and approximately 7,800 loans acquired from others through bulk acquisitions, only a portion will qualify for inclusion in the class. 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. We have reserved for this case based upon advice of our legal counsel. 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. In May 2002, the court denied Irwin Mortgage's post-trial motion. In June, 2002, Irwin Mortgage filed a notice of appeal with the Maryland Court of Special Appeals.

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.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

     You should read the following discussion in conjunction with our consolidated financial statements, footnotes, and tables. This discussion and other sections of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of invoking these safe harbor provisions. Words such as: "achieve," "anticipate(d)(s)," "as long as," "assume," "assuming," "assumption(s)," "believe(s), "continue(d)(s)," "could," "estimate(d)(s)," "expect(ed)(s)," "expectation(s)," "forecasts," "future," "intend," "likely," "may," "might," "objectives," "outlook," "potential," "probable," "projected," "projections," "remain," "should," "unlikely," "will," "would," and similar expressions are intended to identify forward-looking statements, which may include, among other things:

• 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, potential 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 loans to the secondary market as planned or in funding loans through securitization transactions as planned; difficulties in establishing commercial finance vendor relationships; difficulties in expanding our business or raising capital and other funding sources as needed; competition from other financial service providers for experienced managers as well as for customers; changes in the value of companies in which we invest; 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.

Consolidated Overview

__________
⁽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 nine months ended September 30, 2002 was $0.97 basic and $0.94 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 nine months ended September 30, 2001 was $1.57 basic and $1.46 diluted.

     We recorded net income of $8.2 million for the three-month period ended September 30, 2002, down 28.6% from the same period in 2001. Net income per diluted share was $0.29 during the three-month period ended September 30, 2002, down from $0.50 during the same period a year earlier. Return on equity for the third quarter totaled 9.89% compared with 21.74% during the same period a year earlier.

     For the year to date, we recorded net income of $26.1 million or $0.96 per diluted share. This represents decreases of 21.9% and 34.7%, respectively, compared to the same period in 2001. Return on equity for the nine-month period ended September 30, 2002 was 11.25% compared with 22.25% during the same period a year earlier.

     The decreased earnings per share and return on equity listed above reflect the elimination of the use of gain-on-sale securitization accounting in our home equity line of business and dilution from a first quarter common stock offering. The accounting change and dilution combined to offset strong performance by our mortgage and commercial banking lines of business.

     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)
• Commercial banking (includes some of the activities of Irwin Union Bank and Trust 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 and Trust)
• Commercial finance (Irwin Commercial Finance Corporation)
• Venture capital (includes Irwin Ventures LLC and the related activities of Irwin Union Bank and Trust)

     The following table summarizes our net income (loss) by line of business for the periods indicated:

• Our mortgage banking line of business earned $8.0 million during the third quarter, down 25.7% from a year ago. These results were achieved during a period characterized by declining and volatile interest rate changes due to uncertainty in the capital markets. Compared with the same period a year ago, results in the third quarter of 2002 reflect higher loan originations, increased servicing amortization and impairment and increased derivative gains during the quarter.
• Our commercial banking line of business earned $3.5 million in the third quarter, a 26% increase compared to the same period in 2001. The line of business continued to grow its loan portfolio during the third quarter of 2002, while its margin increased to 3.98%, up from 3.90% during the same period a year ago.
• Our home equity lending line of business earned $0.4 million during the quarter, a $0.8 million decrease as compared to the third quarter of 2001, but a $5.0 million increase compared with the second quarter of 2002. The 2002 results reflect its transition from gain-on-sale to portfolio treatment for its secured financings as discussed in the following section.
• Our commercial finance line of business lost $0.7 million during the third quarter of 2002, primarily reflecting deterioration in the credit quality of the broker-based, small ticket portion of the commercial finance portfolio.
• Our venture capital line of business lost $1.7 million during the quarter reflecting a portfolio valuation adjustment.
  

Earnings Outlook

     Given the current economic climate of a gradual recovery and updating for year-to-date 2002 results, we expect estimated consolidated net income of at least $36 million or $1.30 per share in 2002 and approximately $54 million or $1.86 per share in 2003¹. As announced in late 2001, changes in federal banking regulations for securitization residual interests have caused us to eliminate the use of securitization structures that require gain-on-sale accounting under SFAS 140. This change in accounting policy will have the effect of delaying income recognition for our home equity line of business in 2002. Despite this change, 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.

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 and assume approximately 29.7 million and 30.8 fully diluted shares in 2002 and 2003, respectively.  These estimates are based on various factors and current assumptions that management believes are reasonable that are specific to our business such as loan production levels and credit costs as well as 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 and the US and Canadian economies, including those described in this report.

     The following section summarizes our recent performance by line of business.

Mortgage Banking

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 the 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 62.8% and 63.7% of our total revenues in the three- and nine-month periods ended September 30, 2002, compared to 60.2% and 55.1%, respectively, in the same periods in 2001. Our mortgage banking line of business contributed 89.6% and 94.3% of our net income for the three months ended September 30, 2002 and 2001, respectively, and 102.4% and 75.7% of our net income during the nine-month periods ended September 30, 2002 and 2001, respectively.

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

Net Income

     Net income from mortgage banking for the three months ended September 30, 2002 was $8.0 million, compared to $10.8 million during the same period in 2001, a decrease of 25.7%. The third quarter 2002 results were achieved in an interest rate environment characterized by declining and volatile interest rate changes due to uncertainty in the capital markets. The coupon on GNMA securities, which underlies the pricing of a substantial portion of our mortgage loans and the valuation of our mortgage servicing asset, declined 93 basis points during the quarter and ended at 5.15% on September 30, 2002. As compared to the year earlier period, loan origination fees increased substantially, but not enough to offset increased servicing amortization and impairment, net of derivative gains. Year to date, net income was $27.6 million compared to $25.3 million in 2001. The following table shows the composition of our originations by loan categories for the periods indicated:

__________
⁽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 September 30, 2002 totaled $3.0 billion, up 48.5% from the same period in 2001. For the year to date, originations totaled $6.9 billion, up 7.4% from 2001. Increased production in 2002 was a result of refinanced loans that accounted for 62.4% of loan production for the third quarter of 2002 and 53.2% year to date. This compares to 45.0% and 49.8%, respectively, for 2001.

Net Revenue

     Net revenue for the three and nine months ended September 30, 2002 totaled $61.3 million and $176.4 million, compared to $60.7 million and $159.8 million for the three and nine months ended September 30, 2001.

     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 third quarter of 2002 totaled $10.2 million, compared to $8.4 million for the same period in 2001, an increase of 21.1%. Net interest income year to date increased 44.5% to $26.1 million. This increase is a result of increased loan volumes due to lower interest rates as well as 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.

     Origination fees are recognized when loans are sold. Higher secondary market deliveries caused mortgage loan origination fees to increase 21.8% during the third quarter in 2002 to $18.8 million, compared to $15.5 million during the same period in 2001. Year-to-date origination fees were up 12.3% to $48.3 million.

     Gain on sale of loans, including valuation of newly created mortgage servicing rights, is recognized when loans are pooled and sold into the secondary mortgage market. As a result of increased originations and secondary market activity during the third quarter of 2002, gains on the sale of loans during this period increased 19.6% compared to the same period in 2001. Year-to-date, gain on sales of loans increased 19.3% to $89.0 million.

     Servicing fee income is recognized by collecting fees, which range between 25 and 44 basis points base fee, annually on the principal amount of the underlying mortgages. Servicing fee income totaled $14.5 million and $43.2 million for the three and nine months ended September 30, 2002, an increase of 11.1% and 13.9%, respectively, compared to the same periods 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 $14.5 million for the three months ended September 30, 2002, compared to $9.5 million for the same period in 2001. Year-to-date amortization expense totaled $39.1 million and $23.7 million for 2002 and 2001, respectively. This increase in 2002 relates primarily to the increase in the underlying servicing portfolio and decrease in interest rates.

     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 expense totaled $86.8 million and $124.0 million during the third quarter and year-to-date 2002, compared to impairment expense of $41.9 million and $42.5 million during the same periods in 2001. Generally falling interest rates impacted the impairment expense recorded over these periods.

     The impairment recorded in the third quarter of 2002 was largely offset by hedging gains of $81.2 million during the same period. Hedging gains of $43.2 million were recorded during the same period in 2001. Year to date hedging gains of $118.5 million offset impairment of $124.0 million. Year to date hedging gains for 2001 totaled $42.5 million. At September 30, 2002, the mortgage banking line of business held a $22.1 billion notional amount of Eurodollar future contracts and $3.8 billion notional amount in interest rate swaptions to hedge our mortgage servicing assets economically. 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. Total servicing sales represented 8.0% and 33.3% of loan originations for the third quarter and year-to-date 2002, compared to 10.2% and 32.9% of originations for the third quarter and year-to-date 2001. The decision to sell or retain servicing is based on current market conditions for servicing assets, loan origination level and production expenses, and the general level of risk tolerance of the line of business and the Corporation.

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 and nine months ended September 30, 2002 totaled $48.2 million and $131.1 million, respectively, an increase of 12.6% and 10.8%, respectively, over the same periods in 2001. Salaries and employee benefits during the third quarter of 2002 increased 11.7% over the same period of 2001. Year to date, salaries and employee benefits increased 8.4% to $85.8 million. These increases in salaries and employee benefits are reflective of increased headcount as a result of strong production levels over the past few quarters. Other expenses during the third quarter of 2002 increased 14.5% over the same period of 2001. Year to date, other expenses increased 15.6% to $45.3 million. These increases in other expenses occurred as a result of increased production levels.

Mortgage Servicing

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