SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) _x_ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1996 or __ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from _______ to ________ Commission file number 0-6835 IRWIN FINANCIAL CORPORATION (Exact Name of Registrant as Specified in its Charter) Indiana 35-1286807 (State or Other Jurisdiction of Incorporation (I.R.S. Employer or Organization Identification No.) 500 Washington Street Columbus, Indiana 47201 (Address of Principal Executive Offices) (Zip Code) (812) 376-1020 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Shares (Title of Class) 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 filingrequirements for the past 90 days. Yes x No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __ The aggregate market value of the voting stock held by nonaffiliates of the Registrant was $150,757,321.75 as of March 11, 1997. As of March 11, 1997, there were outstanding 11,329,062 common shares of the Registrant. DOCUMENTS INCORPORATED BY REFERENCE Selected Portions of Part of Form 10-K Into Which the Following Documents Incorporated Annual Report to Shareholders Part I, Part II for the year ended December 31, 1996 Definitive Proxy Statement for Part III Annual Meeting of Shareholders to be held April 29, 1997 Exhibit Index on Pages 44 through 47 Page 1 Total Pages in This Filing: 207 XXXPAGE 1XXX FORM 10-K TABLE OF CONTENTS Part I Item 1 - Business 3 Item 2 - Properties 7 Item 3 - Legal Proceedings 8 Item 4 - Submission of Matters to a Vote of Security Holders 9 Part II Item 5 - Market for Registrant's Common Equity and Related Security Holder Matters 9 Item 6 - Selected Financial Data 10 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8 - Financial Statements and Supplementary Data 42 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42 Part III Item 10 - Directors and Executive Officers of the Registrant 42 Item 11 - Executive Compensation 42 Item 12 - Security Ownership of Certain Beneficial Owners and Management 42 Item 13 - Certain Relationships and Related Transactions 42 Part IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 43 Signatures 48 XXXPAGE 2XXX PART I Item 1 Business General Irwin Financial Corporation (the "Registrant") is a diversified financial services company organized as an Indiana bank holding company in May, 1972. The Registrant's principal subsidiaries are Inland Mortgage Corporation ("Inland Mortgage"), a mortgage banking company; Irwin Union Bank and Trust Company ("Irwin Union Bank"), a commercial bank; Affiliated Capital Corp. ("Affiliated"), an equipment leasing company; Irwin Home Equity Corporation ("Home Equity"), a consumer home equity lending company; White River Capital Corporation, a small venture capital company; and Irwin Union Credit Insurance Corporation, a credit insurance company. Registrant is also the sole equity shareholder of IFC Capital Trust I ("Capital Trust"), a special purpose trust. Registrant is in the process of winding down Irwin Union Investor Services, Inc. ("Investor Services") an investment and financial counseling company. Business of Subsidiaries Inland Mortgage originates, purchases and services conventional or government agency backed (i.e., FHA and VA) residential mortgage loans. Most mortgages are either insured by an agency of the federal government, or in the case of a conventional mortgage, meet requirements for resale to the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. Periodically, Inland Mortgage sells loans to private investors pursuant to their requirements. Inland also originates a small amount of commercial mortgages. Inland Mortgage sells mortgage loans to institutional investors but may retain servicing rights to mortgage loans that it originates or purchases from correspondents. Inland Mortgage collects and accounts for the monthly payments on each loan serviced and pays the real estate taxes and insurance necessary to protect the integrity of the mortgage lien, for which it receives a servicing fee. Inland Mortgage operates 106 production and satellite offices in 27 states. During 1996, Inland Mortgage established offices in Temecula, California; Colorado Springs, and Denver Central, Colorado; Marlton previously Cape May, New Jersey; Albuquerque, New Mexico; Austin, Texas. During 1996, Inland Mortgage closed offices in Fresno, Long Beach, Montclair, Orange, Pleasanton, San Francisco, San Mateo, San Rafael, and Selma, California; Prescott, Arizona; Bloomington and St. Louis Park, MN; Kalispell, Montana; Santa Fe, New Mexico; and Orting and Vancouver, Washington. Inland Mortgage will enter the non-prime first mortgage lending market in 1997. This market is comprised of borrowers who do not qualify under the underwriting guidelines established by the government sponsored secondary market agencies for conforming first mortgages. Inland opened a non-prime lending office in Richmond, Virginia late in the fourth quarter of 1996 and will begin originating nonprime first mortgages in 1997. Inland Mortgage and the Registrant have, for several years, been exploring opportunities to test the development of mortgage banking operations in markets outside the United States. In December, 1996, Inland Mortgage began taking applications from U. S. Borrowers for Dollar denominated loans to be secured by residential real estate located in Mexico. Inland does not expect to close any of these loans until the first quarter of 1997. The Registrant hopes to continue research of international opportunities to which Registrant might apply its knowledge and competencies. Irwin Union Bank, organized in 1871, is a full service commercial bank offering a wide variety of services to individual, business, institutional, and governmental customers. Irwin Union Bank's services include personal and commercial checking accounts, savings and time deposit accounts, personal and business loans, credit card services, money transfer, financial counseling, property and casualty insurance agency services, trust services, securities brokerage and safe deposit facilities. Irwin Union Bank XXXPage 3XXX is the largest of nine financial institutions operating in Bartholomew County, Indiana with eight locations throughout the county. Irwin Union Bank also has branch facilities in Seymour (Jackson County - 2), Shelbyville (Shelby County 2), Bloomington (Monroe County), Franklin (Johnson County), and Greensburg (Decatur County), Indiana. Irwin Union Bank has two trust custodial offices in Indianapolis, Indiana. The custodial locations are scheduled to close in January, 1997. Affiliated, acquired in 1990 and located in Northbrook, Illinois, is engaged in the small-ticket equipment leasing and commercial lending business. Affiliated offers nonrecourse, non- operating, full payout leases and commercial lines of credit to physicians, medical clinics, veterinarians, dentists and chiropractors. Home Equity was formed in 1994 and is located in San Ramon, California. Home Equity originates and services home equity loans. The loans are marketed through direct mail and telemarketing in sixteen states. White River Capital Corporation ("White River"), a venture capital company, is located in Columbus, Indiana and currently holds one investment but has suspended making new investments. Irwin Union Credit Insurance Corporation is located in Columbus, Indiana and provides credit life insurance to consumer loan customers of Irwin Union Bank. IFC Capital Trust I ("Capital Trust"), is a statutory business trust created under the laws of Delaware. The Company owns all of the Common Securities of Capital Trust. Trust exists for the purpose of issuing the Preferred Securities and investing the proceeds thereof in an equivalent amount of 9.25% Subordinated Debentures of the Company. The Subordinated Debentures will mature on March 31, 2027, which date may be (i) shortened to a date not earlier than March 31, 2002, or (ii) extended to a date not later than March 31, 2046, in each case if certain conditions are met (including, in the case of shortening the Stated Maturity, the Company having received prior approval of the Board of Governors of the Federal Reserve System ("Federal Reserve") to do so if then required under applicable capital guidelines or policies of the Federal Reserve). The Preferred Securities, which are guaranteed by the Company, will have a preference under certain circumstances with respect to cash distributions and amounts payable on liquidation, redemption or otherwise over the Common Securities. Holders of Preferred Securities are entitled to receive preferential cumulative cash distributions, at the annual rate of 9.25% of the liquidation amount of $25 per Preferred Security accruing from the date of original issuance and payable quarterly in arrears on the last day of March, June, September and December of each year, commencing March 31, 1997. No single part of the business of the Registrant is dependent upon a single customer or upon a very few customers and the loss of any one customer would not have a materially adverse effect upon the business of the Registrant. Inland Mortgage is registered as a Foreign Financial Institution in Mexico but has no foreign operations or export sales. Competition Inland Mortgage originates and services residential first mortgage loans from 106 production and satellite offices in Arizona, California, Colorado, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Minnesota, Missouri, New Jersey, New Mexico, Nevada, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Utah, Washington, Wisconsin and the Washington, D.C. metropolitan area, including offices in Maryland and Virginia. In each of these locations, competition for mortgage loans is vigorous, coming from other national, regional and local mortgage banking companies as well as commercial banks, savings banks and savings & loan associations. Inland Mortgage purchases mortgage loans from correspondents in these and other states as well. The commercial banking business for Irwin Union Bank in the Bartholomew, Decatur, Jackson, Johnson, Monroe and Shelby County areas is very competitive. Within these counties, in addition XXXPAGE 4XXX to the commercial banks, there are a number of savings banks, savings & loan associations and credit unions competing for deposits and loans. Irwin Union Bank also competes for the provision of banking services with banks located elsewhere in Indiana, primarily in south central Indiana, and with a number of nonbank companies located throughout the United States, including insurance companies, retailers, brokerage firms, companies offering money market accounts, and national credit card companies. As of December 31, 1996, Irwin Union Bank ranked first among commercial banking and savings bank institutions on the basis of Bartholomew County deposits. In addition to the above mentioned counties, Irwin Union Bank derives its business from several other counties in south central Indiana. Affiliated provides, primarily, medical equipment leasing and commercial credit services to medical clinics, small groups of physicians, individual practitioners, chiropractors, dentists and veterinarians. Affiliated's primary competitors include other equipment leasing companies with operations that are national in scope, banks and other financial institutions which offer commercial credit products. Such competitors may be headquartered anywhere in the country. Home Equity originates home equity loans for private home owners in several states. Home Equity's primary competitors include banks, thrifts, credit unions and other home equity lenders with operations that are either national, regional or local in scope. Such competitors may be headquartered anywhere in the country. Supervision and Regulation The Registrant is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered with, regulated and examined by the Board of Governors of the Federal Reserve System (the "Board of Governors"). Subject to certain exceptions, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank and from engaging directly or indirectly in activities unrelated to banking or managing or controlling banks. One exception to this prohibition permits activities by a bank holding company or its subsidiary which the Board of Governors determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Board of Governors has adopted regulations prescribing those activities it presently regards as permissible which include the activities engaged in by Registrant and its subsidiaries. The Bank Holding Company Act, the Federal Reserve Act and the Federal Deposit Insurance Act also subject bank holding companies and their subsidiaries to certain restrictions on extensions of credit by subsidiary banks to the bank holding company or any of its subsidiaries, or investments in the securities thereof, and on the taking of such securities as collateral for loans to any borrower. Further, the Bank Holding Company Act and the regulations of the Board of Governors thereunder, prohibit a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of any property or furnishing of services. In addition to the regulation of the Registrant, Irwin Union Bank is subject to extensive regulation and periodic examination, principally by the Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation. Inland Mortgage is subject to audit and examination oversight by the federal department of Housing and Urban Development as well as the Government National Mortgage Association, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation. The insurance subsidiary of the Registrant and the insurance subsidiary of Irwin Union Bank are dependent upon state licenses and upon franchise agreements with private corporations for their continued existence. The home equity subsidiary of the Registrant is also dependent upon state licenses for its ability to extend credit in certain states. Finally, the securities brokerage activities of Registrant's registered broker/dealer are regulated and examined by the Securities and Exchange Commission, the Indiana Securities Division, the securities divisions of the various states in which Investor Services operates, and the National Association of Securities Dealers. XXXPAGE 5XXX Employees and Labor Relations As of December 31, 1996, the Registrant and its subsidiaries had a total of 1,998 employees, including full-time and parttime employees. The Registrant continues a commitment of equal employment opportunity for all job applicants and staff members, and management regards its relations with its employees as satisfactory. Further Information The following information responsive to Guide 3 promulgated under the Securities Exchange Act of 1934, is contained in the "Management's Discussion and Analysis of Financial Conditions and Results of Operations" section of the Annual Report to Shareholders for the year ending December 31, 1996 and is incorporated herein by reference: "Daily Average Consolidated Balance Sheet, Interest Rates and Interest Differential" (p. 70), "Investment Securities" (p. 57), "Short-Term Borrowings" (p. 59), "Summary of Net Interest Income Changes" (p. 55), "Deposits" (p. 58), "Loans and Leases" (p. 56), "Five-Year Selected Financial Data" (p. 28), and the discussion and tabular information under the caption "Credit Risk" on pages 62 to 66 of "Management's Discussion and Analysis of Financial Conditions and Results of Operations". Executive Officers of the Registrant The Executive Officers of the Registrant are elected annually by the Board of Directors and serve for a term of one year or until their successors are elected and qualified. There are no arrangements or understandings between any Executive Officer and any other person pursuant to which the Officer was or is to be selected as an Officer. Robert P. Albert (46) is President of Affiliated Capital Corp. since February 28, 1990. Claude E. Davis (36) is President of Irwin Union Bank since January 2, 1996. He has been an officer since 1988. Elena Delgado (41) is President of Irwin Home Equity Corporation since September 4, 1994. From March through August, 1994, Ms. Delgado was an independent consultant to Irwin Financial Corporation. From 1990 to 1993, Ms. Delgado was Vice President, Second Mortgage Lending of First Deposit Corporation. Gregory F. Ehlinger (34) is Vice President and Treasurer of the Registrant since August of 1992. From 1988 to 1992, Mr. Ehlinger was employed by Irwin Management Company, Inc. (A private management company). Jose M. Gonzalez (38) is Vice President and Director of Internal Audit of the Registrant since October of 1995. From 1993 to 1995, Mr. Gonzalez was Senior Vice President, Audit & Compliance Services of Premier Bank and Trust. From 1991 to 1993, Mr. Gonzalez was Vice President and Senior Compliance Officer at First Empire State Corporation. Theresa L. Hall (44) is Vice President of the Registrant, since 1988. She has been an officer since 1980. Rick L. McGuire, (44) is President of Inland Mortgage since January 1, 1996. He has been an officer since 1978. William I. Miller (40) is Chairman of the Board, since 1990, and has been a Director of the Registrant since 1985. XXXPAGE 6XXX John A. Nash (59) is Chairman of the Executive Committee, since 1990, and President, since 1985, of the Registrant. He has been an officer and Director of the Registrant since 1972. Michael F. Ryan (51) is Vice President Community Relations of the Registrant since January 2, 1996. He was President of Irwin Union Bank from 1981 - 1995. He has been an officer since 1976. Matthew F. Souza (40) is Vice President and Secretary of the Registrant. He has been an officer since 1985. Marie C. Strack (34) is Vice President and Controller of the Registrant since May of 1992. From 1985 to 1992, Ms. Strack was employed by the public accounting firm of Coopers & Lybrand L.L.P., as Audit Manager. Thomas D. Washburn (50) is Senior Vice President and Chief Financial Officer, since 1980, of the Registrant. He has been an officer since 1976. Item 2. Properties The location and general character of the materially important physical properties of the Registrant and its subsidiaries are as follows: The main office of Inland Mortgage, where administrative and servicing activities are centered, is located at 9265 Counselor's Row, Indianapolis, Indiana and a new servicing facility is located at 11800 Exit Five Parkway, Indianapolis, Indiana. Inland Mortgage also has loan production and satellite offices located in Flagstaff, Phoenix (3), Mesa, Scottsdale, Tempe, and Tucson, Arizona; Antioch, Bakersfield, Concord, Covina, Lake Forest, Morgan Hill, Pasadena, Porterville, Richmond, Sacramento, Salinas, Santa Rosa, Temecula, Ventura, Visalia, Walnut Creek, Westlake Village, Woodland, Yuba City, and Yreka, California; Castle Rock, Colorado Springs, Denver (2), Englewood, and Fort Collins , Colorado; Bethany Beach and Newark, Delaware; Clearwater, Longwood, and Orlando, Florida; Atlanta, Georgia; Aiea, Honolulu, Kailua, and Maui, Hawaii; Chicago, Decatur, and Tinley Park, Illinois; Indianapolis (5), Anderson, Ft. Wayne, Kokomo, Lafayette, LaPorte, South Bend, and Warsaw, Indiana; Lexington and Louisville, Kentucky; Baton Rouge, Louisiana; Columbia, Crofton, Rockville, Solomons, and Towson, Maryland; Arden Hills, Burnsville, and Minneapolis, Minnesota; St. Louis, Missouri; Las Vegas, Nevada; Marlton previously Cape May, New Jersey; Albuquerque, New Mexico; Cary, Charlotte, Greensboro, and Raleigh, North Carolina; Cleveland, Dayton, and Independence, Ohio; Tulsa, Oklahoma; Beaverton and Clackamas, Oregon; West Chester, Pennsylvania; Austin, Corpus Christi, Dallas, El Paso, Houston, North Houston, and Plano, Texas; Salt Lake City, Utah; Fredericksburg, Gloucester, Richmond, Springfield, Suffolk, and Woodbridge, Virginia; Bellevue, Battleground, Everett, Mount Lake Terrace, Seattle, and Snohomish, Washington; and Madison, Wisconsin. All offices occupied by Inland Mortgage are leased. The main office of Irwin Union Bank is located in four connected buildings all at 500 and 520 Washington Street, Columbus, Indiana. These buildings and one branch building are owned in fee by Irwin Union Realty Corporation, a whollyowned subsidiary of Irwin Union Bank, and are leased by Irwin Union Bank. Irwin Union Bank owns in fee three of its other thirteen relatively small branch banking premises. The other branch offices are leased. None of the properties owned by Irwin Union Bank are subject to any major encumbrances. The main office of Affiliated, where administrative and lease servicing activities are centered, is located at 707 Skokie Boulevard, Northbrook, Illinois. This office location is leased. The main office of Irwin Home Equity is located at 12677 Alcosta Blvd., Suite 500, San Ramon, California. This office location is leased. XXXPAGE 7XXX The main offices of the Registrant, White River Capital Corporation and Irwin Union Credit Insurance Corporation are located at 500 Washington Street, Columbus, Indiana in space leased from Irwin Union Bank. Item 3. Legal Proceedings As a part of the ordinary course of business, the Registrant and its subsidiary companies 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 their regular business activities. As of December 31, 1996, Inland Mortgage was a defendant to a class action lawsuit initiated in the state of Minnesota. The case is currently pending before a federal Multidistrict Litigation Panel in Chicago, Illinois. Plaintiffs allege that they represent a nationwide class of persons who have or had mortgage escrow accounts allegedly improperly managed by Inland Mortgage. This case is among a series of class action cases commenced against a number of mortgage servicers in several states challenging the practices used in connection with the administration of escrow accounts for single family residential mortgages. Early in January, 1997, class certification was denied to the plaintiff by the court. The plaintiff may still pursue an action against Inland Mortgage as an individual and plaintiff's counsel may still seek to find another mortgagor who would support a new class action against Inland Mortgage so it is impossible to predict the likelihood of an unfavorable outcome or to establish possible extent or amount of liability or potential loss exposure, if any, to which Inland Mortgage might be exposed in this or similar escrow individual or class action cases brought in the future. As of December 31, 1996, Inland Mortgage was a defendant to a class action lawsuit initiated in the state of Indiana. The case is currently pending before the Marion County Superior Court. Plaintiffs allege that lenders do not have the right to require borrowers to pay premiums for private mortgage insurance. This case is among a series of class action cases commenced against a number of mortgage lenders in several states challenging the right of mortgage lenders to collect private mortgage insurance payments from borrowers. In February, 1996, Inland Mortgage filed a motion for summary judgment with the court. In December, 1996, the court denied the motion. The litigation is still at a stage where it is impossible to predict the likelihood of an unfavorable outcome or to establish possible extent or amount of liability or potential loss exposure, if any, to which Inland Mortgage might be exposed. As of December 31, 1996, Inland Mortgage was a defendant to a class action lawsuit initiated in the state of Alabama. This action is one of a breed of "RESPA Section 8" class actions that have been filed against several mortgage lenders challenging the legality of the payment of broker fees by mortgage lenders to mortgage brokers. The litigation is still at an early stage and it is impossible to predict the likelihood of an unfavorable outcome or to establish possible extent or amount of liability loss exposure, if any, to which Inland Mortgage might be exposed. As of December 31, 1996, the Registrant, Home Equity and certain officers of Home Equity were defendants to an action initiated in the State of California. The case is currently pending in the Superior Court of the State of California in and for the City and County of San Francisco. The plaintiff alleges that defendants misappropriated trade secrets of plaintiff due to the employment by Home Equity of former officers and employees of plaintiff. The plaintiff originally sought a preliminary injunction hearing but the hearing was vacated in April, 1996. It is impossible to predict the extent or amount of liability or potential loss exposure, if any, to which Home Equity and the other named defendants might be exposed. As of December 31, 1996, Irwin Union Bank was plaintiff in an action initiated in the State of New York against another depository institution arising from a wire transfer of funds which occurred in September, 1995. The litigation is presently in the discovery stage and it is impossible to predict the likelihood of an unfavorable outcome or to establish the full extent of the potential loss exposure, if any, to which Irwin Union Bank may be exposed. XXXPAGE 8XXX Except as described above, there is no material pending litigation in which the Registrant or any of its subsidiaries is involved or of which any of their property is the subject. Furthermore, there is no pending legal proceeding that is adverse to the Registrant in which any director, officer or affiliate of the Registrant, or any associate of any such director or officer, is a party, or has a material interest. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 1996, no matters were submitted to a vote of security holders of the Registrant, through the solicitation of proxies or otherwise. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Common Stock of the Registrant is quoted on The Nasdaq National Market (NASDAQ-NMS - trading symbol, IRWN). The following table sets forth certain information regarding trading in, and cash dividends paid with respect to, the shares of the Registrant's Common Stock in each quarter of the two most recent calendar years. All data have been adjusted for stock splits. The approximate number of shareholders of record on March 11, 1997 was 1,550. Stock Prices and Dividends: High Low Quarter Cash Total Dividend $ $ End Dividend For Year $ $ $ 1995 (split adjusted) First Quarter 15 7/8 13 3/4 15 1/2 0.055 Second Quarter 17 5/8 15 1/2 17 1/4 0.055 Third Quarter 18 1/4 17 1/4 17 3/4 0.055 Fourth Quarter 20 1/8 17 5/8 20 0.055 0.22 1996 (split adjusted) First Quarter 22 3/4 19 3/4 22 1/8 0.060 Second Quarter 22 1/4 19 5/8 19 5/8 0.060 Third Quarter 21 5/8 17 7/8 21 1/4 0.060 Fourth Quarter 24 3/4 21 1/4 24 3/4 0.060 0.24 The Registrant expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements, and financial condition. On February 27, 1996, the Registrant's Board of Directors a pproved an increase in the Registrant's quarterly dividend to $.12 per share which dividend rate was adjusted to reflect the two-for-one stock split of December 30, 1996. Dividends paid by Irwin Union Bank to the Registrant are restricted by banking law. See Note 14 of Notes to the Consolidated Financial Statements in the attached Annual Report to Shareholders. No sales of unregistered equity securities were made by the Registrant during the fourth quarter of 1996. XXXPAGE 9XXX Item 6. Selected Financial Data The information contained in the Annual Report to Shareholders for the year ended December 31, 1996, under the caption "Five-Year Selected Financial Data", is incorporated herein by reference in response to this item. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements. The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 as to "forward looking" statements in this Form 10-K. This section contains certain forward looking statements within the meaning of such Act, including the statements made under the "1997 Outlook" section for each line of business. Such statements are subject to risks and uncertainties and actual results for subsequent periods could differ materially from those addressed in forward looking statements as a result of various factors, including the following: Economic Conditions. The Company's results are likely to be influenced by general economic conditions. Changes in local, regional or national economies could have a material impact on the credit quality of the Company's assets and the demand for its products and services. Interest Rate Fluctuations. The Company actively manages its interest rate risk exposure as described below in "Interest Rate Sensitivity," but if interest rates should change rapidly or vary substantially from anticipated levels, the Company's results may be impacted in the shortterm. Government Regulation and Monetary Policy. The financial services industry is subject to extensive federal and state regulations. There have been significant changes in the past in such regulations, and there may be future legislation or repeal of or changes in laws or regulations that could have a material impact on the Company's businesses. Further, federal monetary policy particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Company, primarily through open market operations in U.S. government securities, the discount rate for member bank borrowing and bank reserve requirements, and a material change in these conditions would be likely to have an impact on results. Credit Quality and Liquidity Risk. As discussed below under "Risk Management," "Credit Risk" and "Liquidity," the Company's businesses involve the assumption of substantial financial risk. While the Company employs risk management policies and procedures intended to minimize such financial risk exposures as described below, such policies and procedures may not prevent unexpected losses if borrowers' nonperformance significantly exceeds the estimated loan loss levels anticipated by management in establishing loan and lease loss reserves. Computation. The Company competes with numerous financial institutions and other non-depository financial intermediaries in each of its lines of business. Future results may be impacted if circumstances affecting the nature or level of competition change, such as the merger of competing financial institutions or aggressive expansion by existing competitors that may impact net interest margin. Management's Discussion and Analysis of Results of Operations and Financial Condition: Five-Year Selected Financial Data 1996 1995 1994 1993 1992 Financial Data (in thousands) For the year: Net Revenues $197,020 $148,364 $116,908 $119,366 $494,934 XXXPAGE 10XXX Other Operating Expense 159,733 115,915 86,844 93,803 73,811 Net Income 22,428 20,083 18,216 15,588 12,866 Mortgage Loan Closings 5,085,625 3,559,310 2,812,962 4,273,933 3,441,347 Return on Average Equity 20.58% 22.60% 23.91% 24.91% 26.51% Return on Average Assets 1.95 2.28 2.43 2.15 1.97 Dividend Payout Ratio 12.15 12.36 11.38 11.12 8.88 Per share:* Net Income $1.93 $1.75 $1.55 $1.33 $1.12 Cash Dividends 0.24 0.22 0.18 0.15 0.10 Book Value 10.46 8.76 7.21 6.03 4.82 Market Value at December 31, 24.75 19.94 13.38 12.50 11.50 At year end: Assets $1,303,886 $1,038,307 $659,671 $881,864 $602,465 Deposits 640,153 563,999 439,918 500,370 389,323 Mortgage Loans Held for Sale 445,101 378,658 154,964 370,755 218,080 Loans and Leases, Net 522,457 407,904 304,548 252,823 207,138 Shareholders' Equity 118,902 99,216 81,104 70,093 55,343 Mortgage Servicing Portfolio 10,810,988 10,301,914 8,818,502 7,922,299 5,470,505 Equity to Assets Ratio 9.12% 9.56% 12.29% 7.95% 9.19% Risk-based Capital Ratio 14.23 14.49 19.18 15.68 16.46 Leverage Ratio (Tier one) 9.84 10.57 10.82 9.63 8.48 Averages: Assets $1,151,535 $882,164 $748,981 $725,846 $651,517 Equity 108,970 88,867 76,178 62,586 48,539 Shares Outstanding 11,610 11,486 11,766 11,720 11,534 *Adjusted for stock splits Consolidated Overview: Irwin Financial Corporation earned record net income in 1996. This performance was largely due to increased loan originations in the mortgage banking business, continued growth at the community bank, and improved results at the Corporation's newly formed home equity lending business. Net income for 1996 totaled $22,428,338, up 11.7% from 1995 and 23.1% from 1994. Net income per share in 1996 was $1.93 compared to $1.75 in 1995 and $1.55 in 1994. Return on average equity for 1996 was 20.58% compared to 22.60% in 1995 and 23.91% in 1994. Return on average assets was 1.95% compared to 2.28% in 1995 and 2.43% in 1994. Earnings By LineIrwin Financial Corporation is comprised of four lines of business: - Mortgage banking - Community banking XXXPAGE 11XXX - Home equity lending - Equipment leasing To provide an effective report on the Corporation's operations, the results of the activities of Irwin Union Bank which provide funding and invest in assets generated by other Irwin Financial companies have been included with the results of the other asset-generating companies. These combined figures are reported as the results of each line of business. Earnings: (In thousands) 1996 1995 1994 Mortgage Banking $20,422 $19,331 $15,728 Community Banking 4,254 3,639 3,050 Home Equity Lending (816) (3,220) - Equipment Leasing (141) (334) 873 Parent (including consolidating entries) (1,291) 667 (1,435) ---------- --------- -------- $22,428 $20,083 $18,216 Business Profile: Mortgage Banking Selected Financial Data (In thousands) 1996 1995 1994 1993 1992 Selected Income Statement Data: Net interest income $16,828 $13,290 $12,702 $15,067 $15,203 Loan origination fees 43,463 31,871 25,308 37,605 28,548 Gain on sale of loans 25,541 18,020 2,219 14,225 10,337 Loan servicing fees 44,587 36,087 32,426 24,428 15,135 Gain on sale of servicing 16,378 15,271 17,716 2,979 5,133 Other income 888 787 647 550 448 -------------------------------------------------- Total net revenues 147,685 115,326 91,018 94,854 74,804 Operating expense 113,590 83,344 64,571 72,140 54,309 --------------------------------------------------- Income before taxes 34,095 31,982 26,447 22,714 20,495 Income taxes 13,673 12,651 10,719 9,073 8,178 --------------------------------------------------- Net income $20,422 $19,331 $15,728 $13,641 $12,317 ============================================================================ Selected Balance Sheet Data at End of Period: Mortgage loans held for sale $371,058 $309,262 $131,543 $318,453 $179,583 Mortgage servicing rights 67,750 51,783 18,834 11,505 10,156 Total assets 557,275 445,129 216,180 452,365 214,411 Short-term debt 265,646 227,021 68,259 215,014 77,731 Long-term debt 4,914 2,300 2,605 2,934 1,178 Shareholders' equity $66,180 $55,811 $50,805 $42,355 $31,105 Selected Operating Data: Mortgage loan closings $5,085,625 $3,559,310 $2,812,962 $4,273,933 $3,441,347 XXXPAGE 12 XXX Servicing portfolio: Balance at December 31, 10,810,988 10,301,914 8,818,502 7,922,299 5,470,505 Weighted average coupon rate 7.83% 7.83% 7.59% 7.51% 8.37% Weighted average servicing fee 0.38 0.38 0.38 0.37 0.36 Servicing sold as a percent of production 60.9 28.4 49.8 5.6 12.3 Overview & Strategy: The mortgage banking line of business consists of Inland Mortgage Corporation and the related activities of Irwin Union Bank. The business is headquartered in Indianapolis and originates, packages, sells, and services residential mortgage loans throughout the U.S. It has offices in 27 states and ranks among the top 25 mortgage loan originators in the country. Most of the loans originated and serviced are either government-insured through the Veterans' Administration (VA) or Federal Housing Administration (FHA) or conventional loans which conform to the underwriting guidelines of the two principal government-sponsored agencies which support the secondary mortgage markets, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). Mortgage loans are originated through both branches (retail) and third party sources (wholesale). Potential borrowers are identified principally through relationships maintained with housing intermediaries including realtors and home builders. Loans are funded on a short-term basis through credit facilities provided by commercial banks including Irwin Union Bank. Repurchase agreements with investment banks are also used. Individual loans are pooled, securitized, and sold into the secondary mortgage market. Servicing rights are periodically sold for a variety of reasons including cash flow and servicing portfolio management. Over the past five years, servicing rights have been retained on a total of 67.8% of the loans originated by this line of business. 1996 Review: Net income from mortgage banking was $20.4 million in 1996, an increase of 5.6% over 1995 results of $19.3 million and 29.8% over 1994 results of $15.7 million. Mortgage Closings: (In thousands) 1996 1995 1994 Total closings $5,085,625 $3,559,310 $2,812,962 Percent retail loans 41.8% 50.3% 56.6% Percent wholesale loans 52.4 42.5 42.9 Percent brokered 5.8 7.2 0.5 Annual loan closings in 1996 of $5.1 billion were up 42.9% from 1995 and 80.8% from 1994. During 1996 the mortgage bank originated a greater portion of its loans through wholesale channels than had been done in previous years. Income from mortgage loan originations totaled $43.5 million which was $11.6 million over 1995 and $18.2 million over 1994. Mortgage loan applications in process at the end of 1996 totaled $1.5 billion, compared with $1.2 billion at the end of 1995 and $0.5 billion at the end of 1994. Refinances accounted for 19.0% of 1996 loan closings, compared to 11.6% in 1995 and 15.8% in 1994. XXXPAGE 13XXX Gains from the sale of mortgage loans totaled $25.5 million in 1996, up from $18.0 million in 1995 and $2.2 million in 1994. Gains recognized in 1996 and for the last nine months of 1995 reflect the change in generally accepted accounting principles for mortgage banking (SFAS No. 122) which took effect April 1, 1995. Net revenues from loan sales were tempered somewhat by loan pricing concessions which totaled $2.5 million in 1996 compared to $3.8 million in 1995 and $0.1 million in 1994. Mortgage Servicing: Servicing Portfolio: (In billions) 1996 1995 1994 Beginning portfolio $10.3 $8.8 $7.9 Add: Loans originated 2.1 1.8 1.6 Loans purchased 3.0 1.8 1.2 Deduct: Sale of servicing rights (3.1) (1.0) (1.4) Run-off* (1.5) (1.1) (0.5) - ------------------------------------------------------- Ending portfolio $10.8 $10.3 $8.8 ======================================================= Number of loans 140,354 129,270 107,101 Average loan size $83,540 $82,186 $80,038 Percent GNMA 51% 48% 57% Percent FHLMC 15 21 16 Percent FNMA 16 17 20 Delinquency ratio: 5.12% 4.55% 3.25% Capitalized servicing as a percentage of servicing portfolio 0.65% 0.50% 0.23% *Run-off is the reduction in principal balance of the servicing portfolio due to regular principal payments made by mortgagees and early repayment of an entire loan. The mortgage servicing portfolio was $10.8 billion at December 31, 1996, up 4.9% from the same date in 1995 and 22.6% from 1994. The 1996 annual portfolio run-off rate was 10.7%. This is up from the 1995 rate of 10.4% and the 1994 rate of 6.3%. The following table sets forth certain information regarding the interest rates of loans in the servicing portfolio at December 31: Servicing Portfolio by Interest Rate: 1996 1995 1994 Less than 7% 8.9% 10.3% 20.1% 7.00 - 7.99% 44.3 39.8 35.3 8.00 - 8.99% 38.7 33.9 30.7 9% or greater 8.1 16.0 13.9 --------- -------- -------- Total 100% 100% 100% The value of capitalized servicing rights must be adjusted for impairment which could result from interest rate changes. Although impairment write-offs caused by declining interest rates would be accompanied by increased loan origination fees, management has implemented hedging alternatives to avoid significant impairment provisions. Expenses related to mortgage servicing right impairment and hedging totaled $637.9 thousand in 1996 compared to $908.8 thousand in 1995. None were recorded in 1994. The preceding information is related to the servicing portfolio owned by Inland. In addition to the owned servicing portfolio, the business subservices conventional loans for which it does not own XXXPAGE 14XXX servicing rights. The subservicing portfolio totaled $1.7 billion at December 31, 1996, compared to $1.9 billion on the same date in 1995. Servicing and Other Fees: (In thousands) 1996 1995 1994 Servicing fees $44,587 $36,087 $32,426 Other fees 888 787 647 ------------------------------- Total $45,475 $36,874 $33,073 Servicing fee income is recognized by collecting fees which range between 25 and 44 basis points annually on the principal amount of the underlying mortgages. An increase in the average size of the servicing portfolio throughout the year positively affected servicing income which increased 23.6% from 1995 and 37.5% from 1994. Sale of Mortgage Servicing: The mortgage banking business maintains the flexibility to either sell servicing rights for current income and cash flow or retain servicing for future cash flow. The decision to sell or retain servicing is based on current market conditions balanced with the business' interest rate risk tolerance. Servicing rights totaling $3.1 billion were sold in 1996, generating a $16.4 million pre-tax gain on those sales, net of any purchased servicing expense which had been capitalized. This compares to servicing sales of $1.0 billion in 1995 that produced a $15.3 million pre-tax gain and $1.4 billion in 1994 that produced a $17.7 million pretax gain. The lower margin recognized in 1996 reflects the impact of the change in mortgage accounting standards made in 1995. Had all servicing been retained in 1996, gains on sales of loans would have been higher than what was recorded, with a corresponding reduction in gains from sales of servicing. Therefore, the net increase in income as a result of the decision to sell servicing was insignificant. Servicing sales in 1996 represented 60.9% of 1996 closings versus 1995 sales which were 28.4% of that year's closings and 1994 sales which were 49.8% of closings. Net Interest Income: 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 totaled $16.8 million in 1996, compared to $13.3 million in 1995 and $12.7 million in 1994. The increase is due primarily to the increased loan volume experienced in 1996. Operating Expenses: (In thousands) 1996 1995 1994 Salaries and employee benefits $66,153 $51,737 $41,725 Amortization of mortgage servicing rights 13,259 4,865 1,943 Other expenses 34,178 26,742 20,903 ------------------------------------ Total operating expenses $113,590 $83,344 $64,571 ======== ======= ======== Number of employees at December 31, 1,474 1,316 955 Total operating expenses increased 36.3% from 1995 and 75.9% from 1994. The increase reflects the continued expansion of the production system and increased costs associated with technological improvements made during the year. 1997 Outlook: XXXPAGE 15XXX The environment in which the mortgage bank operates is rapidly changing. As a result, technology will play an increasingly important role in the mortgage bank's strategic plans. Management believes that in order to remain competitive, the mortgage bank must advance its use of technology to reduce its costs of production and enhance its distribution methods or develop new channels of distribution. Significant technology initiatives which were started in 1996 will continue during the coming year. Throughout much of its history, the mortgage banking business has concentrated on the origination of FHA and VA loans. As such, the company developed a reputation of effectively serving the mortgage origination needs of first time home buyers. These borrowers generally require more guidance through the origination process than do those borrowers who previously qualified for mortgage loans. Inland Mortgage continues to be interested in leveraging its capabilities to serve those borrowers who have special needs. The business recently began two initiatives to expand its reach in special needs borrowing. Both are in their early stages and are not expected to add materially to results in 1997. They are indicative, however, of efforts the company is making to focus on defensible market segments where a sustainable competitive advantage can be created based upon a dedication to customer service, fast turnaround time, and product innovation. The first such initiative is the mortgage bank's entrance into the non-prime first mortgage lending market which is comprised of borrowers who do not qualify under the underwriting guidelines established by the government sponsored secondary market agencies for conforming first mortgages. The second initiative to expand the company's reach involves making mortgage loans on selected resort properties located outside the United States. In December, 1996, Inland Mortgage began taking applications from U.S. borrowers for dollar denominated loans to be secured by residential real estate located in Mexico. The company is prepared to begin closing such loans during the first quarter of 1997. Employees: As of December 31, 1996, the mortgage banking line of business employed 1,474 people- approximately 74% of the Corporation's total employee base. Total employment expense in 1996 was $66.2 million or 58.2% of operating expenses. Inland Mortgage Corporation Directors John T. Hackett Managing General Partner, CID Equity Partners, L. P. (Venture Capital Partnership) William H. Kling President, Minnesota Public Radio Inland Mortgage Corporation William I. Miller Chairman, Irwin Financial Corporation John A. Nash President, Irwin Financial Corporation Lance R. Odden President and Headmaster, The Taft School James T. Sakai Former Chairman, Contour Hardening, Inc. (Metals Treatment Company) Thomas G. Shafran President, Better Homes Realty Thomas D. Washburn Senior Vice President, Irwin Financial Corporation XXXPage 16XXX Darell E. Zink, Jr. Executive Vice President and Chief Financial Officer Duke Investments, Inc. (Real Estate Development Company) Inland Mortgage Corporation Senior Officers Rick L. McGuire President Herbert B. Tasker Executive Vice President-All Pacific Region T. Lester Acree Senior Vice President- Wholesale Loan Purchasing Kenneth R. Block Senior Vice President-Loan Production Katrina J. Crubaugh Senior Vice President-Human Resources Mark J. Lynch Senior Vice President- Nonconforming Lending William M. Meyer Senior Vice President-Loan Servicing Timothy L. Murphy Senior Vice President-Finance Erik J. Sorensen Senior Vice President-Secondary Marketing Scott G. Beer First Vice President-Secondary Marketing Mark E. Braden First Vice President-Information Technology Richard C. Cargill First Vice President-Metro Phoenix Robert H. Griffith, Jr. First Vice President and Legal Counsel Renee M. Gunderson First Vice President-Underwriting/Closing Post Closing Darla S. Habig First Vice President-Loan Control Allan D. Karlander First Vice President-Central Region John F. Macke First Vice President- Management Information David P. Matern First Vice President-Loan Administration Rachelle E. Mikosz First Vice President-Office Services Kevin M. Murphy First Vice President-Accounting Michael G. Plank First Vice President-Atlantic Coast Region Diana M. Rossetter First Vice President-Quality Control Suzanne C. Samson First Vice President-All Pacific Region Sherri K. Sanford First Vice President-Customer Service Lyle E. Shearer First Vice President-All Pacific Region Richard E. Skiles First Vice President-Appraisals Nicholas Vracas First Vice President-Mid-states Region Business Profile: Community Banking Selected Financial Data (In thousands) 1996 1995 1994 1993 1992 Selected Income Statement Data: Interest income $35,645 $31,965 $23,808 $22,238 $20,267 Interest expense 15,908 14,048 8,822 8,684 8,379 Provision for loan and lease losses 2,284 2,038 1,344 1,551 1,500 ------------------------------------------------------ XXXPAGE 17XXX Net interest income after provision for loan and lease losses 17,453 15,879 13,642 12,003 10,388 Noninterest income 9,384 7,187 5,719 6,192 5,443 --------------------------------------------- Total net revenues 26,837 23,066 19,361 18,195 15,831 Operating expenses 20,311 17,582 14,858 14,264 12,498 - -------------------------------------------------------------------------- Income before taxes 6,526 5,484 4,503 3,931 3,333 Income taxes 2,272 1,845 1,453 1,247 1,001 --------------------------------------------- Net income $4,254 $3,639 $3,050 $2,684 $2,332 ====== ====== ====== ====== ====== Selected Balance Sheet Data at End of Period: Loans and leases, net $331,790 $306,415 $252,226 $210,340 $176,958 Total assets 503,507 440,035 370,462 334,148 318,512 Deposits 453,879 400,149 341,459 298,615 314,773 Shareholders' equity 33,967 28,722 24,686 23,882 20,470 Daily Averages: Assets $459,893 $405,249 $344,691 $302,692 $261,708 Deposits 413,935 358,343 315,229 275,956 236,641 Loans and leases, net 325,291 281,147 228,544 195,304 166,202 Shareholders' equity 31,863 27,661 23,580 20,326 18,290 Shareholders' equity to assets 6.93% 6.83% 6.84% 6.72% 6.99% Overview & Strategy: Community banking is conducted by Irwin Union Bank and Trust Company which is headquartered in Columbus, Indiana. At year-end 1996, it had 15 offices in six counties in south central Indiana. It holds a major share of the market in Bartholomew County where it has operated since 1871. Expansion into surrounding counties has occurred in recent years and has been on a de novo basis. The community bank's strategy in these and other possible new markets is to position itself as "the local bank." The objective is to deliver services in the way customers would expect from a bank headquartered in that market. This means that every effort is made to staff the offices with local people and to give those people the authority to make key customer decisions. Credit, investment, trust, and insurance services are provided to individual and corporate customers. 1996 Review: Community banking net income in 1996 totaled $4.3 million, up 16.9% from 1995 net income of $3.6 million and 39.5% from 1994 net income of $3.1 million. The return on average equity was 13.35% in 1996 as compared to 13.16% in 1995 and 12.93% in 1994. Results include the income and expenses of trust operations and investment advisory services which were previously reported in the investor services line of business and are now managed and reported by the community bank. Also included are credit insurance income and expenses which were previously reported as a separate line of business. Results for previous years have been restated for comparability. Net interest revenue: (In thousands) 1996 1995 1994 Net interest revenue on a taxable equivalent basis* $20,096 $18,362 $14,989 Average interest earning assets 426,290 373,784 312,898 Net interest margin 4.71% 4.91% 4.79% XXX PAGE 18XXX *Reflects what net interest revenue would be if all interest income was subject to federal and state income taxes. Net interest revenue on a taxable equivalent basis increased 9.4% from 1995 and 34.1% from 1994 to a total of $20.1 million. Net interest revenue is the product of net interest margin and average earning assets. Net interest margin was down for the year, coming in at 4.71% for 1996 compared to 4.91% in 1995 and 4.79% in 1994. The decline was principally due to declines in yields in the community bank's loan portfolio. The average yield on all earning assets was 8.45% compared to 8.67% for 1995 and 7.61% for 1994. Provision for Loan and Lease Losses: The provision for loan and lease losses in 1996 was $2.3 million, compared to $2.0 million in 1995 and $1.3 million in 1994. The provision was equal to 0.7% of average loans and leases outstanding in 1996, compared to 0.7% in 1995 and 0.6% in 1994. See the section on credit risk for additional information on asset quality and reserve adequacy. Noninterest Income: (In thousands) 1996 1995 1994 Trust fees $2,571 $2,470 $2,300 Service charges on deposit accounts 1,820 1,596 1,259 Insurance commissions, fees, and premiums 1,105 1,016 915 Gain from sale of consumer and mortgage loans 909 - - Loan servicing fees 690 210 93 Brokerage fees 736 571 - Other $1,553 $1,324 $1,152 ---------- --------- -------- Total noninterest income $9,384 $7,187 $5,719 Noninterest income was up 30.6% from 1995 and 64.1% from 1994. The increase is partially attributed to the sale of $59.5 million of consumer loans during 1996 which generated a pre-tax gain of $676.0 thousand. The community bank retained the right to service the sold loans which contributed to increased loan servicing fees in 1996. Operating Expenses: (In thousands, except for number of employees) 1996 1995 1994 Salaries $10,916 $9,656 $8,278 Other expenses 9,395 7,926 6,580 -------------------------------- Total operating expenses $20,311 $17,582 $14,858 ======= ======= ======= Number of employees at December 31, 304 291 262 Operating expenses increased 15.5% from 1995 and 36.7% from 1994. Costs associated with expanding new products and markets contributed to increases over the past two years. In addition, during 1996 the community bank changed its strategy for offering employee benefits services to customers of the trust department. The decision was made to simplify and streamline the product offering. Also during 1996, the community bank exited the mortgage document custody business. As a result of these two changes, the community bank recorded $1.5 million of restructuring expenses during the year. XXXPAGE 19XXX Balance Sheet: Total assets averaged $459.9 million in 1996, compared to $405.2 million in 1995 and $344.7 million in 1994. Average earning assets for the year were $426.3 million, up $52.5 million or 14.0% from 1995 and up $113.4 million or 36.2% from 1994. The most significant component of the 1996 increase was loans and leases which were up $44.1 million on average in 1996 as a result of the community bank's expansion efforts into new markets. Average deposits were $413.9 million or 15.5% higher in 1996 than 1995 and $98.7 million or 31.3% higher than 1994. The community bank's equity to assets ratio averaged 6.93% for the year, compared to 6.83% in 1995 and 6.84% in 1994. 1997 Outlook: During 1997, the community bank plans to take advantage of the opportunities created by further consolidation in the banking industry. It plans to enter two new markets in which it can become the "local banking" alternative. The community bank will continue to expand its offering of non-traditional services in all of its markets. In addition, the community bank plans a test in certain markets of a new personal banker service made possible by the integration of information systems and new customer delivery channels through the use of new technology. Employees: As of December 31, 1996 the community bank employed 304 people. Total employment expense in 1996 was $10.9 million or 53.7% of total operating expenses. Irwin Union Bank and Trust Company Directors Robert H. Claxton Senior Vice President- Finance, Knauf Fiber Glass (Manufacturer of Fiberglass Insulation) Claude E. Davis President, Irwin Union Bank and Trust Company John T. Hackett Managing General Partner, CID Equity Partners, L.P. (Venture Capital Partnership) Robert W. Haddad Chairman and President, Columbus Container, Inc. (Manufacturer of Corrugated Shipping Containers) Carolyn A. Lickerman Homemaker John C. McGinty, Jr. President, Southeastern Indiana Health Management, Inc. President, Columbus Regional Hospital William I. Miller Chairman, Irwin Financial Corporation John A. Nash President, Irwin Financial Corporation Charles A. Rau, M.D. Physician John S. Spangler President, Milestone Contractors, L.P. Christine M. Vujovich Vice President, Cummins Engine Company, Inc. Charles H. Watson President, Historic Columbus Development, Inc. (Community Development Organization) XXXPAGE 20XXX Irwin Union Bank and Trust Company Senior Officers Claude E. Davis President Bradley J. Kime Executive Vice President Kevin P. Barr Senior Vice President and Chief Financial Officer William P. Guffey Senior Vice President and Senior Lending Officer Albert C. Roszczyk Senior Vice President-Bartholomew County William S. Beitler President-Shelby County Karen S. Coldiron President-Decatur County Brian D. Hall President-Monroe County Robert L. Phillips President-Johnson County William R. Redman President-Hamilton County Donald J. Stuart President-Irwin Union Advisory Services Gloria C. Bennett Vice President-Investments and Funds Management David S. Brooks Vice President- Bartholomew County Debora L. Cox Vice President-Operations Patrick K. Crimmins Vice President- Bartholomew County Bradley R. Davis Vice President-Controller Dyar Forkert Vice President- Decatur County Joseph B. Hauersperger Vice President-Shelby County William A. Helmbrecht Vice President-Bartholomew County Carrie K. Houston Vice President-Human Resources James D. Keller Vice President-Bartholomew County Dianne Kelly Vice President-Jackson County Jay N. Morris Vice President-Johnson County Ellen Z. Mufson Vice President-Legal Counsel and Assistant Secretary James D. Parcell Vice President-Bartholomew County Rick L. Smith Vice President- Jackson County Barbara A. Smitherman Vice President-Bartholomew County Jill A. Stanton Vice President-Mortgage Lending Jerrie H. Suckow Vice President-Bartholomew County Craig Teegarden Vice President-Johnson County Selected Financial Data (In thousands) 1996 1995 Net interest income $4,574 $1,298 Gain on sale of loans 7,798 2,985 Loan servicing fees 4,573 13 Other income 141 229 ---------------------- Total net revenues 17,086 4,525 Operating expenses $17,902 7,745 ----------- ---------- Pre-tax loss ($816) ($3,220) ======= ======== Selected Balance Sheet Data at End of Period: Home equity loans net of loan loss allowance $117,588 $36,225 XXXPAGE 21XXX Excess servicing 15,343 5,683 Total assets 147,088 51,611 Short-term debt 129,627 24,981 Shareholders' equity 13,221 5,538 Selected Operating Data: Loan Volume: Lines of credits 80,724 87,420 Loans 88,396 - Servicing portfolio: Balance at December 31, 230,450 86,691 Weighted average coupon rate: Lines of credit 12.80% 13.61% Loans 14.08% - Overview & Strategy: The home equity line of business includes Irwin Home Equity and the related activities of Irwin Union Bank. Irwin Home Equity is located in San Ramon, California and was incorporated in late 1994. The company began marketing home equity loans in early 1995 through direct mail and telemarketing and currently markets in 16 states. The business has the option to either hold the loans in portfolio or securitize and service them. If the loans are held in portfolio, many costs incurred during the period to produce the loans are expensed immediately, whereas the revenue from the loans accrues over the lives of the loans. Alternatively, if the loans are securitized and sold on the secondary market to investors, a portion of the present value of the future net revenues from the loans will be recognized in the current period, helping to offset the expenses incurred in producing the loans. 1996 Review: The home equity lending business recorded a pre-tax loss of $0.8 million in 1996, compared to a $3.2 million pre-tax loss in 1995. Loan Originations: During 1996 the home equity lending business originated $169.1 million of home equity loans, up 93.5% from 1995 volume of $87.4 million. The business securitized and delivered $79.9 million of loans in 1996 which generated a pre-tax gain of $6.8 million. This compares to a $3.0 million gain recognized in 1995 on the sale of $51.6 million of loans. In addition to the $79.9 million of loans that were delivered in 1996, another $60.1 million were securitized. These loans will be delivered in the first quarter of 1997, and the gain on the sale will be recognized at that time. During 1996, the business also recorded a one-time $1.0 million pre-tax adjustment to the gain recorded on the 1995 securitization. The adjustment resulted from the substitution of a letter of credit in 1996 for the cash reserve which had been in place when the transaction was recorded. This revised approach to providing for reserves caused the 1995 gain to be higher than it would have been under the previous approach. If the business uses letters of credit in future transactions, the resulting gains are expected to be similarly affected. Servicing Portfolio: (In thousands) 1996 1995 Balance at December 31 $230,450 $86,691 Delinquency ratio 0.67% 0.85% XXXPAGE 22XXX The home equity lending business continues to service loans it has securitized. The servicing portfolio, which includes loans held on the company's books as well as securitized loans, increased 165.8% from 1995. The business earns a servicing fee equal to one percent of the outstanding principal balance of the securitized loans. Servicing fee income increased to $4.6 million in 1996 from $12.9 thousand in 1995. The level of fees in 1995 reflects the fact that loans were not securitized until late in the year. Net Interest Income: As a result of the increased loan volume in 1996, net interest income before loan loss provision was up 234.6% to $5.6 million. The loan loss provision also increased to $983.5 thousand from $363.0 thousand. Net charge- offs for the home equity lending business were $37.0 thousand in 1996 as compared to $2.1 thousand in 1995. Operating Expenses (In thousands, except for number of employees) 1996 1995 Salaries and employee benefits $8,663 $3,995 Marketing and development 5,063 2,601 Other 4,176 1,149 --------------------- Total operating expenses $17,902 $7,745 ======= ======= Number of employees at December 31, 159 107 Balance Sheet: The home equity lending business had $118.2 million of loans outstanding at December 31, 1996. This compares to $36.4 million at the end of 1995. The loan loss allowance also increased to $589.4 thousand at December 31, 1996 from $146.6 thousand in 1995. 1997 Outlook: During 1997, the home equity lending business looks to develop its business further and to increase its loan production volume. The business plans to continue exploring new products, funding alternatives, and markets where its skills in identifying customers well served by direct marketing of products uniquely tailored to their needs can be best applied. The business will maintain the flexibility of either holding the loans it produces in portfolio or securitizing them in order to accelerate the recognition of income. Management will evaluate these options throughout the year in light of market conditions and financial objectives. Employees: As of December 31, 1996, the home equity business employed 159 people. Total employment expense in 1996 was $8.6 million or 48.4% of total operating expenses. Irwin Home Equity Corporation Directors and Senior Officers Directors Elena Delgado President, Irwin Home Equity Corporation William I. Miller Chairman, XXXPAGE 23XXX Irwin Financial Corporation John A. Nash President, Irwin Financial Corporation Thomas D. Washburn Senior Vice President, Irwin Financial Corporation Senior Officers Elena Delgado President Spencer J. Carlsen Vice President- Production Edwin K. Corbin Vice President-Finance and Servicing Kathryn J. Diamond Vice President-Credit Risk Management J. Christopher Huseby Vice President- Marketing and Business Development Sunita Liggin Vice President-Human Resources Jocelyn Martin-Leano Vice President- Operations Support Jack Nichols Vice President-Information Services Fern Prosnitz Vice President-Legal Counsel Business Profile: Equipment Leasing Selected Financial Data (In thousands) 1996 1995 1994 1993 1992 Net interest income $3,622 $3,409 $4,339 $3,638 $2,349 Noninterest income 418 300 123 47 33 ---------------------------------------------- Total net revenues 4,040 3,709 4,462 3,685 2,382 Operating expenses 4,181 4,043 3,589 3,133 2,278 Pre-tax income (loss) $(141) $(334) $873 $552 $104 ======= ======= ==== ==== ==== Lease and loan volume $36,624 $24,951 $23,585 $22,922 $19,140 Net leases and loans outstanding 53,632 45,765 42,989 37,401 27,738 Number of leases and loans outstanding 9.186 7.766 7.209 6.438 5.032 Average new lease and loan size $9.298 $9.027 $9.152 $8.663 $8.180 Overview & Strategy: The equipment leasing line of business is made up of Affiliated Capital Corp. and the related activities of Irwin Union Bank. Affiliated is a small-ticket leasing company headquartered in Northbrook, Illinois, focused on the medical equipment industry. The company was started by Irwin Financial in 1990 when it hired the staff and acquired the rights to the customers and vendors of the predecessor company which had been in business since 1983. The strategy of the equipment leasing business is to establish relationships with manufacturers and distributors of medical equipment and to place leases with medical professionals through the sales representatives of these vendors. This allows the business to place leases nationwide despite the fact that all employees are located in Northbrook. In response to changing customer needs, in 1995 the business XXXPAGE 24XXX began entering into private-label financing agreements with several equipment manufacturers and began offering a revolving credit product to complement its lease products. The business focuses on relatively low cost (under $50,000) equipment for health care professionals. In general, this equipment provides low cost treatment that is often preventative in nature. Markets covered include both hospitals and alternate care sites. 1996 Review: Equipment leasing recorded a pre-tax loss of $140.8 thousand in 1996, compared with a pre-tax loss of $333.7 thousand in 1995 and pre-tax income of $872.6 in 1994. As a result of the strategy changes implemented in late 1995, lease and loan volume increased to $36.6 million in 1996, up 46.8% from $25.0 million in 1995 and 55.3% from $23.6 million in 1994. However, because of increased competition in the equipment leasing industry which created margin pressures, net interest income did not increase commensurately. Net interest income totaled $3.6 million in 1996, an increase of $212.9 thousand or 6.2% from 1995 and a decrease of $717.4 thousand or 16.5% from 1994. Operating expenses were $4.2 million for the year, 3.4% higher than 1995 and 16.5% higher than 1994. 1997 Outlook: Competition in the small-ticket leasing industry is expected to remain strong in 1997. The equipment leasing business will strive to remain competitive with larger lessors using a strategy that focuses on adding value through product differentiation to targeted business partners. The challenge for the business is to demonstrate that this strategy can achieve an attractive rate of return on equity in the long run. Employees: As of December 31, 1996, equipment leasing employed 38 people. Total employment expense in 1996 was $2.0 million or 48.0% of total operating expenses. Affiliated Capital Corp. Directors and Senior Officers Directors Robert P. Albert President, Affiliated Capital Corp. David E. Levine Senior Vice President, Affiliated Capital Corp. William I. Miller Chairman, Irwin Financial Corporation John A. Nash President, Irwin Financial Corporation Thomas D. Washburn Senior Vice President, Irwin Financial Corporation Senior Officers Robert P. Albert President David E. Levine Senior Vice President Vincent F. D'Andrea Vice President and Controller Stuart A. Simon Vice President-Sales David M. Tustison Vice President-Strategic Planning Other Irwin Financial Businesses XXXPAGE 25XXX During the third quarter of 1996, the Corporation exited the brokered certificate of deposit and institutional brokerage businesses which were the sole businesses operated by the Investor Services line of business. A sale of selected assets of the brokered certificate of deposit program was completed in the third quarter, and its impact on earnings was not material. Parent company results in each period include the results of investor services. The results of parent company operations combined with Investor Services results and consolidating entries are summarized below: (In thousands) 1996 1995 1994 Net revenues $15,494 $17,986 $7,536 Operating expenses (5,353) (4,068) (3,665) Tax credit 903 2,275 238 ------------------------------- 11,044 16,193 4,109 Investor services (283) 177 (186) Eliminations (12,052) (15,703) (5,358) ---------------------------------- Net income (loss) $(1,291) $667 $(1,435) Dividends from subsidiaries are recorded as parent company revenues but are eliminated in determining consolidated net income. Tax benefits result from the operating losses generated by the home equity and equipment leasing businesses whose results have been reported pre-tax. Each subsidiary pays taxes to the parent company at the statutory rate. Subsidiaries also pay fees to the parent company to cover direct and indirect services. In addition, services are provided from one subsidiary to another. Intercompany income and expenses are calculated on an arm's length, external market basis. Consolidated Income Statement Analysis: Pre-tax income for 1996 totaled $37.3 million, up 14.9% from 1995 and 24.0% from 1994. The effective income tax rate was 39.8% in 1996, 38.1% in 1995, and 39.4% in 1994. Please see Note 16 of Notes to the Consolidated Financial Statements for more information on income taxes. Net interest revenue for 1996 totaled $47.8 million, up 28.1% from 1995 and 45.9% from 1994. The increase was due to a combination of increased loan volume at the community bank and home equity lending business and higher mortgage loan originations at the mortgage bank. Net interest margin was 4.94% in 1996, compared to 4.93% in 1995 and 5.03% in 1994. See page 70 for further analysis of the net interest margin. The following table sets forth, for the periods indicated, a summary of the changes in interest earned and interest paid resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities on a fully taxable equivalent basis: 1996 Over 1995 1995 Over 1994 (In thousands) Volume Rate Total Volume Rate Total Interest Income: Loans and leases $13,248 $778 $14,026 $8,550 $3,210 $11,760 Mortgage loans held for sale 6,760 3,456 10,216 3,931 89 4,020 XXXPAGE 26XXX Taxable investment securities 21 51 72 (993) 605 (388) Tax-exempt securities (171) (63) (234) (76) 82 6 Interest-bearing deposits with financial institutions 28 78 106 (390) 203 (187) Federal funds sold (619) (127) (746) (310) 583 273 -------------------------------------------------- Total 19,267 4,173 23,440 10,712 4,772 15,484 --------------------------------------------------- Interest Expense: Money market checking 254 (233) 21 60 146 206 Money market savings (88) (49) (137) (221) 108 (113) Regular savings (23) (134) (157) (44) 458 414 Time deposits (268) 3,406 3,138 5,779 (537) 5,242 Short-term borrowings 6,451 3,685 10,136 2,071 2,884 4,955 Long-term debt 78 (22) 56 10 221 231 ----------------------------------------------------- Total 6,404 6,653 13,057 7,655 3,280 10,935 ----------------------------------------------------- Net interest revenue $12,863 $(2,480) $10,383 $3,057 $1,492 $4,549 Note: Variance not solely due to rate or volume is allocated on the basis of the absolute relationship between volume variances and rate variances. The consolidated provision for loan losses for 1996 was $4.5 million, up 44.8% from 1995 and 157.7% from 1994. More information on this subject is contained in the section on credit risk. Other income increased 34.6% in 1996 to $153.6 million. This compares to $114.1 million in 1995 and $85.9 million in 1994. The most significant increases came in the categories related to mortgage banking and home equity lending activities which were previously discussed on pages 32 and 46. Other expenses in 1996 totaled $159.7 million, up 37.8% from 1995 and 83.9% from 1994. The 1996 increase in consolidated other expense of $43.8 million was mostly due to operating expenses associated with expanded mortgage and home equity loan production. Consolidated Balance Sheet Analysis: Total assets at year-end 1996 were $1.3 billion, up 25.6% from 1995 and 97.7%:from 1994. However, changes in the average balance sheet are a more accurate reflection of the actual changes in the level of activity on the balance sheet. Average assets were $1.2 billion in 1996, up 30.5% from 1995 and 53.7% from 1994. Mortgage loans held for sale increased by $93.2 million, while loans and leases increased by $127.5 million or 34.5% on average in 1996. The Corporation's commercial loans are extended primarily to local regional businesses and to local farming operations in the market area of Irwin Union Bank. The Corporation also extends credit to consumers through installment loans and revolving credit arrangements. The majority of the remaining XXXPAGE 27XXX portfolio consists of residential mortgage loans (1-4 family dwellings) and mortgage loans on commercial property. Loans by major category at the end of the last five years were as follows: Loans by Category: At December 31, (In thousands) 1996 1995 1994 1993 1992 Commercial, financial, and agricultural $179,650 $150,312 $136,083 $121,024 $108,964 Real estate construction 48,991 36,126 21,960 21,258 15,890 Real estate mortgage 210,697 108,351 47,423 30,805 25,177 Consumer 38,371 67,756 55,323 41,101 30,626 Direct lease financing 62,372 60,979 58,348 52,555 38,082 Unearned income (11,030) (10,999) (10,726) (10,627) (8,380) ------------------------------------------------ Total $529,051 $412,525 $308,411 $256,116 $210,359 Maturity Distribution of Loans: After One But At December 31. 1996 Within Within After (In thousands) One Year Five Years Five Years Total Commercial, financial, and agricultural $33,843 $56,688 $89,119 $179,650 Real estate construction 48,991 - - 48,991 Real estate mortgage 81,908 11,424 117,365 210,697 Consumer loans 6,325 29,161 2,885 38,371 Direct lease financing - 62,372 - 62,372 -------- Total $540,081 ======= Loans due after one year with: Fixed interest rates $207,135 Variable interest rates 161,879 ---------- Total $369,014 On average, investment securities decreased $1.3 million in 1996 to $65.4 million. The carrying value of investments at December 31, 1996 includes $51.2 thousand of unrealized losses on available-for-sale securities. The book value of investment securities at the end of the last three years is as follows: At December 31, (In thousands) 1996 1995 1994 Held-to-Maturity: U.S. Treasury and Government obligations $38,317 $26,914 $41,826 Obligations of states and political subdivisions 4,466 6,490 7,549 Mortgage-backed securities 7,154 8,859 9,982 Corporate obligations - - 1,000 ----------------------------- Total held-to-maturity 49,937 42,263 60,357 XXXPAGE 28XXX Available-for-Sale: U.S. Treasury and Government obligations 19,924 15,359 13,834 Mortgage-backed securities 3,237 3,247 3,166 Other 26 - - ------------------------------- Total available-for-sale 23,187 18,606 17,000 ---------------------------------- Total investments $73,124 $60,869 $77,357 Maturity Distribution of Investment Securities: After After Five One But But Within Within Within After One Five Ten Ten Years Years Years Years At December 31, 1996 (In thousands) U.S. Treasury and Government obligations $12,808 $33,247 $ - $12,186 Obligations of states and political subdivisions 481 1,437 1,173 1,375 Mortgage-backed securities 106 356 1,522 8,407 Other 26 - - - ----------------------------------------- Total $13,421 $35,040 $2,695 $21,968 ======= ======= ====== ======= Weighted Average Yield: Held-to-maturity 6.95% 6.50% 8.64% 7.39% Available-for-sale 5.72% 6.30% -% 6.25% The weighted average yield on state and municipal obligations has been calculated on a fully taxable equivalent basis, assuming a 34.5% tax rate. Deposits averaged $632.2 million during 1996, compared to $526.1 million in 1995 and $467.1 million in 1994. Demand deposits were up 78.2% on average, or $104.7 million from 1995. A significant portion of demand deposits is related to deposits at Irwin Union Bank which are associated with escrow accounts held on loans in the servicing portfolio of Inland Mortgage. These escrow accounts averaged $179.0 million in 1996. Maturities of certificates of deposit of $100 thousand or more are set forth in the following table: At December 31, (In thousands) 1996 1995 1994 Under 3 months $47,907 $27,131 $9,197 3 to 6 months 5,127 6,299 4,581 6 to 12 months 7,493 14,378 4,248 After 12 months 5,977 6,268 3,448 ------------------------------ Total $66,504 $54,076 $21,474 Short-term borrowings averaged $334.3 million in 1996, compared to $217.3 million in 1995 and $167.8 million in 1994. The increase in 1996 is due to the increase in mortgage loan closings in 1996. XXXPAGE 29XXX The following table shows the distribution of the Corporation's short-term borrowings and the weighted average rates at the end of each of the last three years. Also provided are the maximum borrowings and the average borrowings as well as weighted average interest rates for the last three years. Repurchase Agreements & Drafts Federal Payable Home Related to Loan Bank Mortgage Borrowings Lines Loan Commercial & Federal of (In thousands) Closings Paper Funds Credit Year Ended 1996 $264,998 $17,175 $74,118 $105,592 December 31: 1995 225,873 21,723 40,000 22,683 1994 75,944 15,538 199 2,300 Weighted average 1996 4.65% 5.95% 5.80% 6.68% interest rates at 1995 4.32 6.32 6.02 7.35 year-end: 1994 4.59 5.65 5.75 8.50 Maximum amount 1996 $270,516 $27,214 $121,000 $135,442 outstanding at any 1995 271,694 21,723 52,448 38,596 month's end: 1994 159,650 19,996 26,000 5,600 Average amount 1996 $218,810 $23,794 $44,139 $47,561 outstanding during 1995 155,726 19,125 20,497 6,109 the year: 1994 146,799 17,372 3,140 507 Weighted average 1996 3.78% 6.02% 5.80% 6.80% interest rate during 1995 4.12 6.41 6.03 8.06 the year: 1994 3.62 4.63 5.71 7.14 Capital: Shareholders' equity averaged $109.0 million in 1996, up 22.6% from 1995 and 43.0% from 1994. Year-end shareholders' equity of $118.9 million represented book value per share of $10.46, compared to $8.76 and $7.21 at December 31, 1995 and 1994, respectively. Prior to the adoption of SFAS No. 122 in the second quarter of 1995, mortgage banking accounting did not allow the full value of mortgage servicing rights to be reflected on the balance sheet. Since a significant portion of the Corporation's mortgage servicing portfolio was generated prior to the adoption of the new accounting standard, it represents substantial economic value which is not recorded on the balance sheet. The following table demonstrates the estimated after-tax value of the servicing portfolio at December 31: (In thousands) 1996 1995 1994 Total loans serviced $10,810,988 $10,301,914 $8,818,502 Value (@ 1.5%) $162,165 $154,529 $132,278 Less capitalized servicing 70,551 51,783 20,302 Tax liability (@ 40%) 36,646 41,098 44,791 --------------------------------------- Net value $54,968 $61,648 $67,185 XXXPAGE 30XXX ======= ======== ========= Per share of common stock $4.84 $5.44 $5.97 With the implementation of the new accounting standard in 1995, this off-balance sheet value will decline over future years and eventually be reduced to zero. Total book value per share including the value of the servicing portfolio was $15.30 at December 31, 1996, up from $14.20 and $13.18 at December 31, 1995 and 1994, respectively. (In thousands) 1996 1995 1994 Tier 1 capital $117,416 $92,554 $80,966 Tier 2 capital 6,594 4,620 3,863 -------------------------------- Total risk-based capital $124,010 $97,174 $84,829 ======== ======= ======= Risk-weighted assets $871,460 $670,675 $442,315 ========================================================= Risk-based ratios: Tier 1 capital 13.47% 13.80% 18.31% Total capital 14.23 14.49 19.18 Tier 1 leverage ratio 9.84 10.57 10.82 Ending shareholders' equity to assets 9.12 9.56 12.29 Average shareholders' equity to assets 9.46 10.07 10.17 Capital is a major focus of regulatory attention, with both book and risk-based capital standards used as capital adequacy measures. Unless an institution has adequate capital in the opinion of the regulators, they may withhold approval for new activities or force additions to capital. Therefore, the Corporation considers both the regulator's viewpoint and its own analysis of the capital structure and leverage amounts that are consistent with underlying business risks. At year-end 1996, the Corporation's total risk-adjusted capital ratio was 14.23% compared to a current regulatory minimum of 8.0%. The Corporation's ending equity to assets ratio for 1996 was 9.12%. However, as previously discussed, temporary conditions which existed at year end make the average balance sheet ratio a more accurate measure of capital. The Corporation's average equity to assets ratio for 1996 was 9.46%. In January 1997, the Corporation issued $50,000,000 of trust preferred securities through a trust created and controlled by the Corporation. The securities, which are publicly traded, were issued at $25 per share with a cumulative dividend rate of 9.25%, payable quarterly. They have an initial maturity of 30 years with a 19-year extension option which the Corporation can exercise at any point during the first 30 years. The securities are callable at par after five years, or immediately, in the event of an adverse tax development affecting the Corporation's classification of the securities for federal income tax purposes. The securities are not convertible into common stock of the Corporation. Stock Prices and Dividends: The common stock of Irwin Financial is quoted on the National Association of Securities Dealers Automated Quotation System National Market System (NASDAQ-NMS- trading symbol, IRWN). The following table sets forth certain information regarding trading in, and cash dividends paid with respect to, the shares of the Corporation's common stock in each quarter of the three most recent calendar years. XXXPAGE 31XXX Total Quarter Cash Dividends 1994 *High *Low *End *Dividends *For Year First quarter $123/4 $107/8 $113/8 $0.045 Second quarter 117/8 101/4 111/8 0.045 Third quarter 14 101/2 135/8 0.045 Fourth quarter 137/8 123/4 133/8 0.045 $0.18 1995 First quarter $157/8 $133/4 $151/2 $0.055 Second quarter 175/8 151/2 171/4 0.055 Third quarter 181/4 171/4 173/4 0.055 Fourth quarter 201/8 175/8 20 0.055 $0.22 1996 First quarter $223/4 $193/4 $221/8 $0.060 Second quarter 221/4 195/8 195/8 0.060 Third quarter 215/8 177/8 211/4 0.060 Fourth quarter 243/4 211/4 243/4 0.060 $0.24 *Adjusted for December 30, 1996 two-for-one stock split. The Corporation expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements, and financial condition. On February 19, 1997, the Corporation's Board of Directors approved an increase in the first quarter dividend to $0.07 per share, payable in March 1997. Dividends by the Irwin Union Bank to the Corporation are restricted by banking law. See Note 15 of Notes to the Consolidated Financial Statements. Risk Management: As a financial intermediary, Irwin Financial Corporation is engaged in businesses which involve the assumption of financial risks including: - Credit risk - Liquidity risk - Interest rate risk Each line of business that assumes financial risk uses a formal process to manage this risk. In all cases, the objectives are to ensure that risk is contained within prudent levels and that we are adequately compensated for the level of risk assumed. The Chairman, the President, and the Chief Financial Officer of the parent company participate in each subsidiary's risk management process. Credit Risk: The assumption of credit risk is a key source of earnings for the community bank, home equity lending, and equipment leasing businesses. In addition, the mortgage banking business assumes some credit risk despite the fact that its mortgages are typically insured. The credit risk in the loan portfolio of the community bank and home equity lending business has the most potential to have a significant effect on consolidated financial performance. XXXPAGE 32XXX The community bank and home equity lending business manage credit risk through the use of lending policies, credit analysis and approval procedures, periodic loan reviews, and personal contact with borrowers. Loans over a certain size are reviewed by a loan committee prior to approval. The equipment leasing business manages credit risk in a manner similar to that used by the community bank and the home equity business. It uses lending policies, credit analysis procedures and personal contact with lessees. An allowance for loan and lease losses is established as an estimate of the potential credit risk of the loans and leases held by the Corporation. In determining the adequacy of this allowance, management evaluates the creditworthiness of significant borrowers, past loan and lease loss experience, and current and anticipated economic conditions. The allowance is increased by provisions against income and recoveries of loans and leases previously charged off. Loans and leases that are determined by management to be uncollectible are charged against the allowance. The table on page 64 analyzes the consolidated allowance for possible loan and lease losses over the past five years. Net charge-offs in 1996 were $1.8 million, down 15.2% from 1995, and up 53.9% from 1994. Net charge-offs to average loans and leases was 0.36%, compared to 0.57% in 1995 and 0.41% in 1994. The provision for loan and lease losses was $4.5 million, 249.9% of net charge-offs. The coverage ratio was 146.3% in 1995 and 149.3% in 1994. At year end, the allowance for possible loan and lease losses was 1.25% of loans and leases, compared to 1.12% in 1995 and 1.25% in 1994. Total nonperforming loans and leases at year end were $5.0 million, compared to $2.4 million at the end of 1995 and $2.8 million at the end of 1994. Nonperforming loans and leases as a percent of total loans and leases were 0.94% at year-end 1996, compared to 0.58% in 1995 and 0.90% in 1994. Other real estate owned totaled $2.2 million at December 31, 1996, up from $0.3 million in 1995 and $0.5 in 1994. Total nonperforming assets were $7.2 million, or 0.55% of total assets at December 31, 1996, as compared to $2.7 million or 0.26% at year-end 1994 and $3.3 million or 0.50% at the end of 1994. Analysis of Allowance for Loan and Lease Losses (In Thousands) 1996 1995 1994 1993 1992 Loans and leases outstanding at end of period, net of unearned income $529,051 $412,525 $308,411 $256,116 $210,359 ================================================= Average loans and leases for the period, net of unearned income $496,729 $369,220 $279,389 $232,898 $195,161 ================================================== Allowance for loan and lease losses: Balance beginning of period $4,620 $3,863 $3,293 $3,220 $2,282 Charge-offs: Commercial, financial, and agricultural loans 495 845 266 1,074 626 Real estate mortgage loans 37 2 - - - Consumer loans 959 953 543 387 392 Lease financing 883 690 757 323 207 ----------------------------------------------- Total charge-offs 2,374 2,490 1,566 1,784 1,225 ------- -------- ------ ------- ------- XXXPAGE 34XXX Recoveries: Commercial, financial, and agricultural loans 133 2 34 82 21 Consumer loans 214 197 180 94 204 Lease financing 246 191 195 104 28 --------------------------------------------- Total recoveries 593 390 409 280 253 -------------------------------------------- Net charge-offs (1,781) (2,100) (1,157) (1,504) (972) Reduction due to sale of loans (695) (216) - - - Provision charged to expense 4,450 3,073 1,727 1,577 1,910 ------------------------------------------------ Balance end of period $6,594 $4,620 $3,863 $3,293 $3,220 ====== ====== ====== ====== ======= Allowance for loan and lease losses: By category of loans and leases Commercial, financial, and agricultural loans $3,676 $2,349 $2,586 $2,031 $1,635 Consumer loans 1,974 1,420 767 650 1,122 Lease financing 944 851 510 612 463 ---------------------------------------------- Total $6,594 $4,620 $3,863 $3,293 $3,220 ====== ====== ====== ======= ====== Ratios: Net charge-offs to average loans and leases 0.36% 0.57% 0.41% 0.65% 0.50% Allowance for loan losses to average loans and leases 1.33% 1.25% 1.38% 1.41% 1.65% Allowance for loan losses to loans and leases outstanding 1.25% 1.12% 1.25% 1.29% 1.53% Nonperforming Assets (In thousands) 1996 1995 1994 1993 1992 Accruing loans past due 90 days or more: Commercial, financial, and agricultural loans $256 $418 $113 $800 $7 Real estate mortgages 234 - - 141 12 Consumer loans 205 202 93 88 121 ------- ------ ------- ------ ----- 695 620 206 1,029 140 ------- ------ ------- ------ ----- Nonaccrual loans and leases: Commercial, financial, and agricultural loans 2,739 670 1,523 1,373 1,500 Real estate mortgages 260 694 689 848 1,540 Consumer loans - - - 39 55 Lease financing receivables 1,261 415 363 242 299 -------- ------- -------- ----- ------- XXXPAGE 34XXX 4,260 1,779 2,575 2,502 3,394 ----------------------------------------------- Total nonperforming loans and leases 4,955 2,399 2,781 3,531 3,534 -------- -------- -------- ------- -------- Other real estate owned 2,239 295 489 623 1,085 -------- -------- --------- ------- ------- Total nonperforming assets $7,194 $2,694 $3,270 $4,154 $4,619 ====== ====== ====== ====== ====== Nonperforming loans and leases to total loans and leases 0.94% 0.58% 0.90% 1.38% 1.68% -------------------------------------------------- Nonperforming assets to total assets 0.55% 0.26% 0.50% 0.47% 0.77% Loans which are past due 90 days or more are placed on nonaccrual status unless, in management's opinion, there is sufficient collateral value to offset both principal and interest. Renegotiated and Nonaccrual Loans (In thousands) 1996 1995 1994 Interest which would have been recorded under original terms Renegotiated $- $- $- Nonaccrual 309 178 232 ----- ---- ----- 309 178 232 ----- ----- ----- Interest income actually recorded Renegotiated - - - Nonaccrual 150 55 110 ---- ---- ---- 150 55 110 ----- ------ ----- Reduction in interest income $159 $123 $122 No loans were made to foreign borrowers and no loan concentrations existed of more than 10% of total loans to borrowers engaged in similar activities that would be similarly affected by economic or other conditions. Generally, the accrual of income is discontinued when the full collection of principal or interest is in doubt, or when the payment of principal or interest has become contractually 90 days past due unless the obligation is both well secured and in the process of collection. Further information regarding the balance of nonaccrual loans at December 31, 1996 and related payment information is as follows: Analysis of Nonaccrual Loans Contractual Cash interest payments Book balance balance applied as December 31, December 31, interest reduction (In thousands) 1996 1996 income of principal XXXPAGE 35XXX Contractually past due with: substantial performance $168 $168 $9 $5 limited performance 2,463 2,849 104 562 no performance 963 1,267 - - Contractually current, however: payment in full of principal or interest in doubt 666 666 37 19 ----- ------ ----- ----- Total $4,260 $4,950 $150 $586 Liquidity: Liquidity is the availability of funds to meet the daily requirements of the business. For financial institutions, demand for funds comes principally from extensions of credit and withdrawal of deposits. Liquidity is provided by asset maturities or sales and through short-term borrowings. The objectives of liquidity management are to ensure that funds will be available to meet demands and that funds are available at a reasonable cost. As with other forms of financial risk, liquidity is managed separately at each of our lines of business. In the case of Irwin Union Bank, this occurs at the monthly meeting of the Asset-Liability Management Committee. Since loans and leases are substantially less marketable than securities, the ratio of total loans to total deposits is the traditional measure of liquidity for banks and bank holding companies. At year-end 1996, this ratio stood at 81.6%. The Corporation is able to maintain this position of high liquidity without a substantial sacrifice in the form of a lower net interest margin due to the position in mortgage loans held for sale. These loans carry an interest rate equal to the current market rate for mortgage loans. However, liquidity is significantly improved since all mortgage loans held for sale are in the process of being securitized and sold. The holding period for an individual loan typically does not exceed 90 days. Interest Rate Sensitivity: Interest rate sensitivity refers to the potential for changes in market rates of interest to cause changes in net interest income. Since net interest income is a major source of income, it is important that potential changes are managed prudently. The Asset-Liability Management Committee of Irwin Union Bank monitors the repricing structure of both assets and liabilities over various time horizons. Exposure to changes in interest rates is evaluated by modeling the repricing characteristics of the portfolio under multiple rate scenarios. Formal policies approved by the Bank's Board of Directors ensure that exposure to changes in net interest revenues is maintained within acceptable levels. The mortgage banking business assumes a form of interest rate risk by entering into commitments to extend loans to borrowers at a fixed price for a limited period of time. Loans are also held temporarily until a pool is formed. Once again, a formal policy ensures that this risk is controlled. The home equity and equipment leasing businesses are exposed to potential interest rate risk that is similar to the lending operations of the community bank. Rate sensitivity at the community bank can typically be managed by controlling the maturity of loans, securities, and deposits. The community bank may also use financial futures or interest rate swaps from time to time. The mortgage bank buys commitments to deliver loans at a fixed price to manage risk. The policy at both the home equity lending business and the equipment leasing business is to match-fund all assets. In some cases, the Corporation uses internal hedges to allow for the risk characteristics of one line of business to offset those of another. XXXPAGE 36XXX As the following table shows, the consolidated one-year gap at year-end 1996 was a positive $133.2 million. This compares to a positive gap of $153.6 million at year-end 1995. The large positive gaps have been due to levels of escrow deposits from the servicing portfolio of the mortgage bank. These deposits are generally held in noninterest-bearing accounts at Irwin Union Bank. However, they are invested in earning assets with rate maturities of less than one year, including mortgage loans held for sale. Since the gap was positive, it means that with respect to net interest income, the Corporation was positioned to benefit from rising interest rates, or to be harmed by declining rates. While traditional interest rate risk focuses on the changes in net interest income due to interest rate changes, the Corporation engages in other activities which are also affected by interest rate changes. Principal among these are mortgage loan origination and servicing. For example, if interest rates decline, management expects an increase in mortgage loan origination income and a decline in the value of mortgage servicing rights. Management attempts to monitor this exposure to traditional interest rate risk as well as interest rate influences on production and servicing value in a comprehensive manner. In addition, the static one-year gap is not a reliable measure of actual exposure to changes in market interest rates. Consequently, management uses simulations of the behavior of net interest revenue to determine exposure and to develop hedging strategies. Within 3 Months After Interest Sensitivity:(In thousands) Months to 1 Year 1 Year Interest-earning assets: Interest-bearing deposits with banks $2,049 $3,294 $6,000 Taxable investment securities 16,679 15,133 36,846 Tax-exempt investment securities 95 386 3,985 Mortgages held for sale 445,100 - - Loans, net of unearned discount 300,393 86,581 142,077 ---------------------------------- Total interest-earning assets 764,316 105,394 188,908 ----------------------------------- Interest-bearing liabilities: Money market checking 17,122 - 57,993 Money market savings 2,867 - 8,798 Regular savings 45,051 2,094 19,801 Time deposits 148,372 53,101 45,606 Short-term borrowings 456,683 5,200 - Long-term debt 1,844 4,181 11,618 ------------------------------------ Total interest-bearing liabilities 671,939 64,576 143,816 -------------------------------------- Interest sensitivity gap $92,377 $40,818 $ 45,092 ======= ======= ========= Cumulative gap $92,377 $133,195 $178,287 Effects of Inflation: The Corporation is affected by inflation primarily as it impacts interest rates. We believe that a financial institution's ability to react to changing interest rates is an indicator of its ability to perform in an inflationary environment. Please see the section on interest rate sensitivity for a discussion on this subject. Daily Average Consolidated Balance Sheet, Interest Rates and Interest Differential XXXPAGE 37XXX For the year ended December 31, 1996 Average Yield/ (In thousands) Balance Interest Rate Assets: Interest-earning assets: Interest-bearing deposits with banks $10,282 $603 5.87% Federal funds sold 24,370 1,290 5.29 Taxable investment securities 60,080 4,076 6.78 Tax-exempt investment securities (1) 5,348 504 9.43 Mortgage loans held for sale 379,027 30,943 8.16 Loans and leases, net of unearned income (2) 496,729 52,391 10.55 ----------- ----------- ------- Total interest-earning assets 975,836 89,807 9.20 ----------- ----------- ------- Noninterest-earning assets: Cash and due from banks 38,309 Premises and equipment, net 17,425 Other assets 125,689 Less allowance for possible loan and lease losses (5,724) --------- Total assets $1,151,535 ========== Liabilities and Shareholders' Equity: Interest-bearing liabilities: Money market checking $79,704 1,571 1.97% Money market savings 12,455 328 2.63 Regular savings 52,657 1,861 3.53 Time deposits 248,694 13,972 5.62 Short-term borrowings 334,304 22,115 6.62 Long-term debt 21,840 1,778 8.14 -------------------------------- Total interest-bearing liabilities 749,654 41,625 5.55 -------------------------------- Noninterest-bearing liabilities: Demand deposits 238,673 Other liabilities 54,238 Shareholders' equity 108,970 ----------- Total liabilities and shareholders' equity $1,151,535 ========== Net interest income $48,182 ==== Net interest income to average interest-earning assets 4.94% For the year ended December 31, 1995 Average Yield/ XXXPAGE 38XXX (In thousands) Balance Interest Rate Assets: Interest-earning assets: Interest-bearing deposits with banks $9,737 $497 5.10% Federal funds sold 35,006 2,036 5.82 Taxable investment securities 59,765 4,004 6.70 Tax-exempt investment securities (1) 6,961 738 10.60 Mortgage loans held for sale 285,808 20,727 7.25 Loans and leases, net of unearned income (2) 369,220 38,364 10.39 ----------------------------- Total interest-earning assets 766,497 66,366 8.66 ==== Noninterest-earning assets: Cash and due from banks 36,263 Premises and equipment, net 15,011 Other assets 68,677 Less allowance for possible loan and lease losses (4,284) ------- Total assets $882,164 ======== Liabilities and Shareholders' Equity: Interest-bearing liabilities: Money market checking $68,491 1,552 2.27% Money market savings 15,376 465 3.02 Regular savings 53,255 2,016 3.79 Time deposits 255,004 10,834 4.25 Short-term borrowings 217,289 11,979 5.51 Long-term debt 20,896 1,722 8.24 ----------------------------- Total interest-bearing liabilities 630,311 28,568 4.53 ---------------------------- ==== Noninterest-bearing liabilities: Demand deposits 133,936 Other liabilities 29,050 Shareholders' equity 88,867 -------- Total liabilities and shareholders' equity $882,164 ========= Net interest income $37,798 ======= Net interest income to average interest-earning assets 4.93% For the year ended December 31, 1994 Average Yield/ (In thousands) Balance Interest Rate XXXPAGE 39XXX Assets: Interest-earning assets: Interest-bearing deposits with banks $22,627 $684 3.02% Federal funds sold 42,466 1,763 4.15 Taxable investment securities 77,230 4,392 5.69 Tax-exempt investment securities (1) 7,764 732 9.43 Mortgage loans held for sale 231,369 16,707 7.22 Loans and leases, net of unearned income (2) 279,389 26,604 9.52 -------------------------------------- Total interest-earning assets 660,845 50,882 7.70 ==== Noninterest-earning assets: Cash and due from banks 32,449 Premises and equipment, net 13,485 Other assets 45,746 Less allowance for possible loan and lease losses (3,543) -------- Total assets $748,982 ======== Liabilities and Shareholders' Equity: Interest-bearing liabilities: Money market checking $65,583 1,347 2.05% Money market savings 24,864 578 2.32 Regular savings 54,770 1,601 2.92 Time deposits 125,415 5,592 4.46 Short-term borrowings 167,818 7,024 4.19 Long-term debt 20,760 1,491 7.18 -------------------------------------- Total interest-bearing liabilities 459,210 17,633 3.84 ==== Noninterest-bearing liabilities: Demand deposits 196,454 Other liabilities 17,139 Shareholders' equity 76,178 -------- Total liabilities and shareholders' equity $748,981 ========== Net interest income $33,249 ======= Net interest income to average interest-earning assets 5.03% ===== Notes: (1) Interest is reported on a fully taxable equivalent basis. The prevailing federal income tax rate was 34.5% in 1996, 34% in 1995 and 35% in 1994. (2) For purposes of these computations, nonaccrual loans are included in daily average loan amounts outstanding. Summary of Quarterly Financial Information XXXPAGE 40XXX 1996 Fourth Third Second First Summary Income Information Quarter Quarter Quarter Quarter Interest income $24,566,540 $23,062,016 $22,003,722 $19,815,562 Interest expense 12,230,121 10,591,010 9,885,847 8,918,120 Provision for loan and lease losses 1,676,000 989,000 841,000 944,000 Noninterest income 42,833,063 38,175,986 38,338,420 34,300,235 Noninterest expense 42,340,666 40,483,443 41,092,558 35,816,441 Income taxes 4,243,000 3,672,000 3,495,000 3,449,000 --------------------------------------------------------------- Net income $6,909,816 $5,502,549 $5,027,737 $4,988,236 --------------------------------------------------------------- Net income per common share* $0.59 $0.48 $0.44 $0.44 1995 Fourth Third Second First Summary Income Information Quarter Quarter Quarter Quarter Interest income $20,631,271 $17,990,434 $14,713,938 $12,552,550 Interest expense 9,919,789 8,020,339 5,926,174 4,701,985 Provision for loan and lease losses 933,000 910,000 580,000 650,000 Noninterest income 33,761,560 30,861,480 24,774,257 24,719,809 Noninterest expense 34,123,371 30,584,492 27,249,576 23,957,371 Income taxes 4,117,000 3,298,000 1,480,000 3,471,000 --------------------------------------------------------- Net income $5,299,671 $6,039,083 $4,252,445 $4,492,003 ====== ====== ====== ====== Net income per common share* $0.46 $0.53 $0.37 $0.39 1994 Fourth Third Second First Summary Income Information Quarter Quarter Quarter Quarter Interest income $12,633,617 $13,019,201 $12,421,802 $12,340,312 Interest expense 4,536,399 4,525,176 3,967,292 4,603,679 Provision for loan and lease losses 799,000 368,000 235,000 325,000 Noninterest income 20,721,089 20,539,407 22,138,704 22,453,283 Noninterest expense 19,221,350 21,245,418 23,498,040 22,879,522 Income taxes 3,421,000 2,942,000 2,689,000 2,796,000 ----------------------------------------------------- Net income $5,376,957 $4,478,014 $4,171,174 $4,189,394 ====== ====== ====== ====== Net income per common share* $0.47 $0.38 $0.35 $0.36 XXXPAGE 41XXX *restated for the two-for one-stock split December 30,1996 Item 8. Financial Statements and Supplementary Data Consolidated financial statements of the Registrant and its subsidiaries are contained in the Annual Report to Shareholders for the year ending December 31, 1996, under the caption "1996 Financial Statements ", and are incorporated herein by reference in response to this item. The financial statement schedules required under Regulation S-X are filed as "Financial Statement Schedules" pursuant to Item 14 hereof. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure In connection with the audits of the Registrant for the two most recent fiscal years ended December 31, 1996, the Registrant has not changed its independent certified public accountants nor have there been any disagreements (as defined in Instruction 4 to Item 304 of Regulation S-K) with such accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. PART III Item 10. Directors and Executive Officers of the Registrant The information contained in the proxy statement of the Registrant for the 1997 Annual Meeting of Shareholders under the caption "Election of Directors", on pages 4 through 6, inclusive, is incorporated herein by reference in response to this item. Item 11. Executive Compensation The information contained in the proxy statement of the Registrant for the 1997 Annual Meeting of Shareholders under the captions "Election of Directors - Outside Director Restricted Stock Compensation Plan", "Executive Compensation and Other Information" and "Board Compensation Committee Report on Executive Compensation" on pages 7 through 13, inclusive, is incorporated herein by reference in response to this item. Item 12. Security Ownership of Certain Beneficial Owners and Management The information contained in the proxy statement of the Registrant for the 1997 Annual Meeting of Shareholders, under the captions "Voting Securities and Principal Holders" and "Security Ownership of Management", on pages 2 and 3, inclusive, is incorporated herein by reference in response to this item. Item 13. Certain Relationships and Related Transactions The information contained in the proxy statement of the Registrant for the 1997 Annual Meeting of Shareholders under the caption "Interest of Management in Certain Transactions" on pages 18 and 19, is incorporated herein by reference in response to this item. XXXPAGE 42XXX PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Page # a. Documents filed as a part of this Report: Form Annual 10-K Report 1. Financial Statements: A. Irwin Financial Corporation and Subsidiaries: Report of Coopers & Lybrand L.L.P., Independent Accountants 76 Consolidated Statement of Income for the years ended December 31, 1996, 1995, and 1994 77 Consolidated Balance Sheet as of December 31, 1996, and 1995 78 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 79 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995, and 1994 80 Notes to Consolidated Financial Statements 81 The above listed report, financial statements,and the notes thereto, set forth on pages 76 through 101 of the Registrant's 1996 Annual Report to Shareholders are incorporated herein by reference. 2. Financial Statement Schedules Report of Independent Accountants, Coopers & Lybrand L.L.P. 50 Schedule I - Indebtedness to Related Parties 51 Schedules other than that listed above are omitted because they are not required or the information is included in the Notes to Consolidated Financial Statements. XXXPAGE 43XXX 3. Exhibits A. Exhibits to Form 10-K Number Assigned Sequential Numbering in Regulation System Page Number of S-K Item 601 Description of Exhibit Exhibit (2) No exhibit. (3) (i) 3(a) Amended Articles of Incorporation, dated December 29, 1972. (Incorporated by reference to Exhibit 3(a) to Form 10-K Report for year ended December 31, 1985, File No. 0-6835.) 3(b) Articles of Amendment, dated March 30, 1973. (Incorporated by reference to Exhibit 3(b) to Form 10-K Report for year ended December 31, 1985, File No. 0-6835.) 3(c) Articles of Amendment, dated September 4, 1990. (Incorporated by reference to Exhibit 3(d) to Form 10-K Report for year ended December 31, 1990, File No. 0-6835.) 3(d) Articles of Amendment, dated April 30, 1992. (Incorporated by reference to Exhibit 3(d) to Form 10-K Report for year ended December 31, 1992, File No. 0-6835.) 3(e) Articles of Amendment, dated April 26, 1994. (Incorporated by reference to Exhibit 3(e) to Form 10-K Report for year ended December 31, 1994, File No. 0-6835.) 3(f) Articles of Amendment, 52 dated April 30, 1996. (ii) 3(a) Code of By-Laws as 114 amended to date. (4) 4(a) Specimen stock certificate. (Incorporated by reference to Exhibit 4(a) to Form 10-K Report for year ended December 31, 1994, File No. 0-6835.) XXXPAGE 44XXX 4(b) Certain instruments defining the rights of the holders oflong-term debt of the Registrant and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis, have not been filed as Exhibits. The Registrant hereby agrees to furnish a copy of any of these agreements to the Commission upon request. (9) No exhibit. (10) 10(a) Amended 1986 Stock Option Plan.@ (Incorporated by reference to Exhibit 10(b) to Form 10-K Report for year ended December 31, 1991, File No. 06835.) 10(b) Amended and Restated Management Bonus Plan.@ (Incorporated by reference to Exhibit 19(a) to Form 10-K Report for year ended December 31, 1986, File No. 06835.) 10(c) Long-Term Management Performance Plan.@ (Incorporated by reference to Exhibit 10(d) to Form 10-K Report for year ended December 31, 1986, File No. 06835.) 10(d) Long-Term Incentive Plan - Summary of Terms.@ (Incorporated by reference to Exhibit 10(e) to Form 10-K Report for year ended December 31, 1986, File No. 0-6835.) 10(e) Irwin Financial Corporation Employees' Stock Purchase Plan.@ (Incorporated by reference to Exhibit 10(f) to Form 10-K Report for year ended December 31, 1991, File No. 06835.) 10(f) Employee Stock Purchase Plan II.@ Incorporated by reference to Exhibit 10(f) to Form 10-K Report for year ended December 31, 1994, File No. 06835.) 10(g) Amended Irwin Financial Corporation Outside Directors Restricted Stock Compensation Plan.@ (Incorporated by reference to Exhibit 10(g) to Form 10-K Report for year ended December 31, 1991, File No. 06835.) XXXPAGE 45XXX 10(h) Irwin Financial Corporation 1992 Stock Option Plan.@ (Incorporated by reference to Exhibit 10(h) to Form 10-K report for year ended December 31, 1992, File No. 06835.) 10(i) Amended Irwin Financial Corporation Outside Director Restricted Stock Compensation Plan.@ (Incorporated by reference to Exhibit 10(i) to Form 10-K report for year ended December 31, 1995, File No. 06835.) 10(j) Inland Mortgage 129 Corporation Long Term Incentive Plan.@ (11) 11(a) Computation of Earnings 137 Per Share. (12) No exhibit. (13) 13(a) Registrant's 1996 Annual 138 Report to Shareholders. This exhibit contains such portions thereof that have been incorporated by reference into this Report. (16) No exhibit. (18) No exhibit. (21) 21(a) Subsidiaries of the 205 Registrant. (22) No exhibit. (23) 23(a) Consent of Independent 206 Accountants. (24) No exhibit. (27) Financial Data Schedule. 207 (28) No exhibit. (99) 99(a) Annual Report on Form 11-K for the Irwin Union Corporation Employees' Savings Plan for the year ending December 31, 1996.* 99(b) Annual Report on Form 11K for the Inland Mortgage Corporation Employees' Savings Plan for the year ending December 31, 1996.* @ Denotes management contract or compensatory plan. * To be filed by amendment pursuant to Rule 15d-21. b. Reports on Form 8-K XXXPAGE 46XXX None. XXXPAGE 47XXX SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the Undersigned, thereunto duly authorized. IRWIN FINANCIAL CORPORATION Date: March 27, 1997 By: /s/ William I. Miller ----------------------------- William I. Miller, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated. Capacity with Signature Registrant Date /s/ Sally A. Dean Director March 27, 1997 - ------------------- Sally A. Dean /s/ David W. Goodrich Director March 27, 1997 - ---------------------- David W. Goodrich /s/ John T. Hackett Director March 27, 1997 - ------------------- John T. Hackett /s/ William H. Kling Director March 27, 1997 - ----------------------- William H. Kling /s/ Brenda J. Lauderback Director March 27, 1997 - ----------------------- Brenda J. Lauderback /s/ John C. McGinty,Jr. Director March 27, 1997 - ----------------------- John C. McGinty, Jr. /s/ Irwin Miller Director March 27, 1997 - ----------------------- Irwin Miller /s/ William I. Miller Director, Chairman March 27, 1997 - ----------------------- of the Board William I. Miller (Principal Executive Officer) /s/ John A. Nash Director, Chairman March 27, 1997 - ----------------------- of the Executive John A. Nash Committee XXXPAGE 48XXX /s/ Lance R. Odden Director March 27, 1997 - ----------------------- Lance R. Odden /s/ James T. Sakai Director March 27, 1997 - ----------------------- James T. Sakai /s/ Theodore M. Solso Director March 27, 1997 - ----------------------- Theodore M. Solso /s/ Thomas D. Washburn Senior Vice President March 27, 1997 - ----------------------- (Principal Financial Officer) Thomas D. Washburn /s/ Marie C. Strack Vice President and March 27, 1997 - ----------------------- Controller Marie C. Strack (Principal Accounting Officer) XXXPAGE 49XXX REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors Irwin Financial Corporation Columbus, Indiana We have audited the consolidated financial statements of Irwin Financial Corporation and Subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which financial statements are included on pages 77 through 101 of the 1996 Annual Report to Shareholders of Irwin Financial Corporation and incorporated by reference herein. We have also audited the financial statement schedules listed in the index on page 43 of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Irwin Financial Corporation and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. As described in Note 1 to the financial statements, the Corporation adopted Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights, as of April 1, 1995. /s/ Coopers & Lybrand L.L.P. Indianapolis, Indiana January 17, 1997 XXXPAGE 50XXX Schedule I SCHEDULE I - INDEBTEDNESS TO RELATED PARTIES (In Thousands) Col. B Col. C Col. D Col. E Balance at Balance at Beginning Additions Deductions End of Name of Person of Period (1) (2) Period Year Ended December 31, 1996: Irwin Management Company $18,005 $632,259 $635,300 $14,964 Year Ended December 31, 1995: Irwin Management Company $11,187 $653,074 $646,256 $18,005 Year Ended December 31, 1994: Irwin Management Company $11,728 $561,502 $562,043 $11,187 (1) The indebtedness disclosed is the purchase of Irwin Financial Corporation commercial paper by Irwin Management Company. Irwin Management Company is owned by a principal shareholder and director. Commercial paper borrowings generally mature within three months from the date of issuance. (2) No deductions occurred that were other than a disbursement of cash. XXXPAGE 51XXX Exhibit 3(i) 3(f) STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE CERTIFICATE OF IRWIN UNION CORPORATION I, LARRY A. CONRAD, Secretary of State of the State of Indiana, hereby certify that Articles of Incorporation of the above Corporation, in the form prescribed by my office, prepared and signed in duplicate by the incorporator(s), and acknowledged and verified by the same before a Notary Public, have been presented to me at my office accompanied by the fees prescribed by law; that I have found such Articles conform to law; that I have endorsed my approval upon the duplicate copies of such Articles; that all fees have been paid as required by law; that one copy of such Articles has been filed in my office; and that the remaining copy of such Articles bearing the endorsement of my approval and filing has been returned by me to the incorporator(s) or his (their) representatives; all as prescribed by the provisions of the Indiana General Corporation Act, as amended. Wherefore, I hereby issue to such Corporation this Certificate of Incorporation, and further certify that its corporate existence has begun. In Witness Whereof, I have hereunto set any hand and affixed the seal of the State of Indiana, at the City of Indianapolis, this 31st day of May, 1972 Larry A. Conrad, Secretary of State XXXPAGE 52XXX ARTICLES OF INCORPORATION OF IRWIN UNION CORPORATION The undersigned incorporator or incorporators, desiring to form a corporation (hereinafter referred to as the "Corporation") pursuant to the provisions of the Indiana General Corporation Act, as amended (herein. after referred to as the "Act,") execute the following Articles of Incorporation. ARTICLE I Name The name of the Corporation is Irwin Union Corporation. ARTICLE II Purposes The purposes for which the Corporation is formed are: The transaction of any and all lawful business for which corporations May be incorporated under the Act, including by way of illustration and not of limitation, the following: XXXPAGE 53XXX Irwin Union Corporation ARTICLE II Purposes 2.01. To Act as Holding Company. To purchase or otherwise acquire, own and hold the stock of other corporations and equity interests in other business entities and to direct the operations of other corporations through the ownership of stock therein and to direct the operation: of other business entities through the ownership of equity interests therein. 2.02. Capacity to Act. To have the capacity to act possessed by natural persons, but to have authority to perform only such acts as are necessary, convenient or expedient to accomplish the purposes for which it is formed and such as are not repugnant to law. 2.03. To Deal in Securities. To acquire, by purchase, subscription or otherwise and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in and with any and all securities (as hereinafter defined) issued or created by any corporation, firm, organization, association or other entity, public or private, whether formed under the laws of the United States of America or any state or commonwealth thereof, or any foreign country, or by any agency, subdivision, territory, dependency, possession or municipality of any of the foregoing, and as owner thereof to possess and exercise all of the rights, powers and privileges of ownership, including the right to execute consents and vote thereon. The term "securities" as used herein shall mean any and all notes, stocks, treasury stocks, bonds, debentures, evidences of indebtedness, certificates of interest or participation in any profit-sharing agreement, collateral trust certificates, pre- organization certificates or subscriptions, transferable shares, investment contracts voting trust certificates, certificates of deposit for a security, fractional undivided interests in oil, gas or other mineral rights or, in general, any interests or instruments commonly known as securities or any and all certificates of interest or participation in temporary or interim certificates for, receipts for, guarantees of, or warrants or rights to subscribe to or purchase any of the foregoing. 2.04. Investment Management. To make, establish and maintain investments in securities, funds or properties of any nature whatsoever and manage such funds; to do any and all acts and things for the preservation, protection, improvement and enhancement of the value of such property or securities or designed to accomplish any such purposes. To make investigations as to the business affairs and property of corporations, partnerships and various forms of business enterprises and to make appraisals and valuations of all kinds and investigate and render opinions as to the advisability from a financial standpoint of creating, merging, combining or otherwise dealing in business enterprise. Article II, Page One XXXPAGE 54XXX Irwin Union Corporation 2.05. Creation of Corporations and Other Entities. To cause to be organized under the laws of the United States of America or of any state, commonwealth, territory, dependency or possession thereof, or of any foreign country, or of any political subdivision, territory, dependency, possession or municipality thereof, one or more corporations, firms, organizations, associations or other entities, and to cause the same to be dissolved, wound up, liquidated, merged or consolidated. 2.06. To Deal in Good Will. To acquire by purchase or exchange, or by transfer, or by merger or consolidation with, the Corporation of any corporation, firm, organization, association or other entity owned or controlled, directly or indirectly, by the Corporation, or otherwise to acquire the whole or any part of the business, good will, rights or other assets of any corporation, firm, organization, association or other entity and to undertake or assume in connection therewith the whole or any part of the liabilities and obligations thereof and to effect any such acquisition in whole or in part by delivery of cash or other property, including securities issued by the Corporation or by any other lawful means. 2.07. To Engage in Lending. To make loans and give other forms of credit including, but not limited to, financing, factoring and leasing, with or without security, and to negotiate and make contracts and agreements in connection therewith and to sell and underwrite credit insurance and life, property and liability insurance, directly or through subsidiaries. 2.08. To Aid Subsidiaries. To aid by loans, subsidy, guaranty or in any other lawful manner any corporation, firm, organization, association or other entity of which any securities (as that term is defined in section 2.03 hereof) are in any manner, directly or indirectly, held by the Corporation or in which the Corporation or any such corporation, firm, organization, association or entity may be or become otherwise interested; to guarantee the payment of dividends on any stock issued by any such corporation, firm, organization, association or entity; to guarantee or, to assume, with or without recourse against any such correlation, firm, organization, association or entity, to do any and all other acts and things for the enhancement, protection or preservation of any securities which are in any manner, directly or indirectly, held , guaranteed or assumed by the Corporation, and to do any and all acts and things designed to accomplish any such purpose. 2.09. To Provide Services. To render service, assistance, counsel and advice to and act as representative or agent in any capacity, (whether managing, operating, financial, purchasing, selling, advertising or otherwise) for any corporation, firm, organization, association or other entity and to gather, compile and disseminate information, data and advice in respect to matters of commercial, financial, statistical and business nature and to act as consultants, counselors and advisors. Article II, Page Two XXXPAGE 55XXX Irwin Union Corporation 2.10. To Deal in Real Estate. To acquire by purchase, exchange, lease as lessee, let as lessor, sell, convey, or mortgage, whether alone or in conjunction with others, real estate of every kind, including, without limiting the generality of the foregoing, the design, development, management, acquisition, and operation of commercial, mercantile and service structures and facilities of every character, recreational structures and facilities, residential properties and structures, and mobile home parks. 2.11. To Deal in Personal Property. To acquire (by purchase, exchange, lease, hire or otherwise), hold, mortgage, pledge, hypothecate, exchange, sell, deal in and dispose of, at wholesale or retail, alone or in syndicates or otherwise in conjunction with others, commodities or other personal property of every kind, character and description and wherever situated, and any interest therein. 2.12. To Deal in its Own Securities. To acquire (by purchase, exchange, lease, hire or otherwise), hold, sell, transfer, reissue, or cancel its own shares, or any securities or other obligations of the Corporation, in the manner and to the extent now or hereafter permitted by the laws of Indiana, except that the Corporation shall not use its funds or other assets for the purchase of its own shares if such use would cause any impairment of the capital of the Corporation, and except that its own shares beneficially owned by the Corporation shall not be voted directly or indirectly. 2.13. To Make Contracts. To enter into, make, perform and carry out, or cancel and rescind, contracts for any lawful purposes to its business. 12.14. To Enter into Partnerships. To enter into any lawful arrangement for sharing profits, union of interest, reciprocal association or cooperative association with any corporation, association, partnership individual or other entity, for the carrying on of any business, transaction, or venture, which the Corporation is authorized to carry on or any business, transaction, or venture deemed necessary, convenient or incidental to carrying out of any of the purposes of the Corporation. 2.15. To Engage in Business Generally. To engage in any commercial, financial, mercantile, industrial, manufacturing, marine, exploration, mining, agricultural, research, licensing, servicing or agency business not prohibited by law and any, some or all of the foregoing. 2.16. To-Borrow Money. To borrow money for any business object or purpose of the Corporation from time to time without limit as to amount, to issue any kind of indebtedness, whether or not in connection with borrowing money, including evidences of indebtedness convertible into stock of the Corporation, to secure the payment of any evidence of indebtedness by the creation of any interest in any of the property or rights of the Corporation, whether at that time owned or thereafter acquired. Article-II, Page Three XXXPAGE 56XXX Irwin Union Corporation 2.17. To Execute Guarantees. To make any guarantee respecting stocks, dividends, securities, indebtedness, interest, contracts or other obligations. 2.18. Stated Capital; Consideration for Shares. To determine the amount of the stated capital and increase or reduce stated capital and determine the consideration to be received for shares issued from time to time. 2.19. Rights, Privileges and Powers. Subject to any limitations or restrictions imposed by law or by these Articles of Incorporation, to have and exercise all the rights, privileges and powers specified in or permitted under the Indiana General Corporation Act. 2.20. General Powers. To do everything necessary, proper, advisable or convenient for the accomplishment of any of the purposes or the attainment of any of the objects of the furtherance of any of the powers herein set forth and to do every other act and thing incident thereto or connected therewith which is not forbidden by the laws of the State of Indiana or by the provisions of these Articles of Incorporation 2.21. Construction. The foregoing sections shall be construe as purposes as well as powers and the matters expressed in each section shall, unless otherwise expressly provided, be in no way limited by reference to or inference from the terms of any other section, each of such sections being regarded as creating independent purposes and powers The enumeration shall not be construed as limiting or restricting in any manner either the meaning or general terms used in any of the sections or the scope of the general powers of the Corporation created thereby. The enumeration herein of any specific purposes or powers shall not be held to limit or restrict in any manner the exercise by the Corporation of the general powers now or hereafter conferred by the laws of the state of Indiana nor shall the expression of one thing be deemed to exclude another not expressed, whether or not it be of like nature. The titles contained herein are solely for convenience and are not to be considered in construing the various sections. 2.22. Limiting Clause. Nothing in this article shall be construed to authorize the conduct by the Corporation, directly or indirectly, of a rural loan and savings association, credit union or a banking, railroad, insurance, surety, trust, safe deposit, mortgage guarantee or building and loan business or receiving deposits or money, bullion or foreign coins or of issuing bills, notes, or other evidences of debt or circulation as money; provided, however, that the Corporation may own, create or otherwise acquire all or part of the issued and outstanding stock of corporations lawfully engaged in any of such activities. Article II, Page Four XXXPAGE 57XXX ARTICLE III Period of Existence The period during which the Corporation shall continue is perpetual. ARTICLE IV Resident Agent and Principal Office Section 1. Resident Agent. The name and address of the Resident Agent in charge of the Corporation's principal office is John A. Nash, 500 Washington Street, Columbus, Indiana 47201. Section 2. Principal Office. The post office address of the principal office of the Corporation is 500 Washington Street, Columbus, Indiana 47201 ARTICLE V Shares Section 1. Number. The total number of shares which the Corporation has authority to issue is 1,000 shares consisting of 500 common shares with the par value of $10.00 per shares, and 500 preferred shares without par value. Section 2. Terms. (see attached) Section 3. Voting Rights. (sec attached) XXXPAGE 58XXX Irwin Union Corporation ARTICLE V 2. Terms Shares 5.20. Classes. The authorized shares of the Corporation (the "Shares")shall be divided into two classes consisting of 500 common shares par value $10, (the "Common Shares") and 500 preferred shares without par value (the "Preferred Shares"). 5.21. Rights. 5.211. Common Shares. -All Common Shares shall have the same rights and privileges. Common Shareholders shall have no preemptive rights. 5.212. Preferred Shares. The Board of Directors is expressly authorized at any time, and from time to time, by resolution, to determine and state the designations, relative rights, preferences, limitations and restrictions of any class or classes of Preferred Shares, or of any series of any class or classes thereof, and to authorize the issuance of such Preferred Shares upon compliance prior to the issuance of any such Preferred Shares with the applicable provisions of the Act. 5.22. Dividends. Dividends or distributions may be declared and paid upon outstanding Shares at the discretion of the Board of Directors from time to time out of earned surplus or capital surplus of the Corporation. Dividends payable on the Shares of any class of Shares or series thereof may be paid to the holders of Shares of that or any other class of Shares or series thereof. 5.23. Issuance of and Consideration for Shares. Shares may be issued for such consideration as may be fixed from time to time by the Board of Directors, which consideration may be equal to, less than or more than the par value thereof. The judgment of the Board of Directors as to (i) the value of any property or services received in full or partial payment for Shares, and (ii) as to the value of the corporate assets in the event of a Share dividend, shall be conclusive. When Shares are issued upon payment of the consideration fixed by the Board of Directors, such Shares shall be taken to be fully paid stock and shall be nonassessable. 5.24. Partial Distributions. The Board of Directors may make distributions to Shareholders out of capital surplus from time to time to the extent permitted by law. 5.25. Facsimile Signatures. Facsimile signatures may be used in lieu of the manual signature of an officer or director of the Corporation. In case any officer of director who has signed or whose facsimile signature has been placed upon any share certificate or other document issued by this Corporation shall have ceased to be such an officer or director before such certificate or other document is used , such certificate or other document may be issued by XXXPAGE 59XXX the Corporation with the same effect as if such person were an officer at the date of its issue. Article V, Page One XXXPAGE 60XXX Irwin Union Corporation 5.26. Transfer of Shares. Transfer of shares shall be governed by the By-Laws of the Corporation subject to applicable law. 3. Voting Rights. 5.30. Voting Rights. 5.301. Common Shares. Every holder of the Common Shares of the Corporation shall have the right at every Shareholders' meeting, to one vote for each Common Share standing in his name on the books of the Corporation. 5.302. Preferred Shares. Holders of Preferred Shares shall have no right to vote upon any question except as shall be affirmatively provided in the Act, or in the remaining sections of this article. 5.31. No Greater Requirements. Nothing in these Articles shall be deemed to require any greater portion of the Shares to concur in any action taken by the Shareholders than is required by law. 5.32. Record Date. The By-Laws may provide for a record date for determining Shareholders entitled to receive payment of dividend or for determining Shareholders for any other purpose. 5.33. Mergers and Consolidations. Any class of Shares of this Corporation shall be entitled to vote as a class if the agreement of merger or consolidation contains any provision which, if contained in a proposed amendment to the Articles of Incorporation of the Corporation, would entitle such class of Shares to vote as a class. 5.34. Voting on Special Corporate Transactions. In voting on adoption of any proposal for a special corporate transaction or for dissolution of the Corporation, all Shares shall vote as a single class and no Shares shall be entitled to vote as a separate class. 5.35. Mergers With Subsidiaries. Nothing herein contained shall limit the power of the Corporation or prescribe the procedures to be followed in any merger or consolidation of any subsidiary of this Corporation, ninety-five percent (95%) (or such lesser percentage as may hereafter be prescribed by law) or more of the outstanding Shares of which subsidiary are owned by this Corporation and any such merger or consolidation of any such subsidiary may be accomplished by the Board of Directors of this Corporation in the manner prescribed by law. 5.36. Class Voting. If the holders of any class of Shares are entitled to vote as a class, the proposal shall be adopted upon receiving the affirmative vote of the holders of at least a majority (or such greater proportion as these Articles of Incorporation may require) of the Shares of each class of Shares entitled to vote thereon as a class and of the total Shares entitled to vote thereon. Article V, Page Two XXXPAGE 61XXX ARTICLE VI Requirements Prior To Doing Business The Corporation will not commence business until consideration of the value of at least $1,000.00 (one thousand dollars) has been received for the issuance of shares. ARTICLE VII Director(s) Section 1. Number of Directors. The initial Board of Directors is composed 3 member(s). The number of directors may be from time to time fixed by the By-Laws of the Corporation at any number. In the absence of a By-Law fixing the number of directors, the number shall be three. Section 2. Names and Post Office Addresses of the Director(s). The name(s) and post office addressees) of the initial Board of Director(s) of the Corporation is (are): Name Number and Street or Building City State Zip Code Paul N. Dinkins 500 Washington Street Columbus, Indiana 47201 John A. Nash 500 Washington Street Columbus, Indiana 47201 Greg W. Rush 500 Washington Street Columbus, Indiana 47201 Section 3. Qualifications of Directors. (If Any) No qualifications are prescribed by these Articles. XXXPAGE 62XXX ARTICLE VIII Incorporator(s) The name(s) and post office addressees) of the incorporator(s) of the Corporation is (are): Name Number and Street or Building City State Zip Code Irwin Miller 301 Washington Street Columbus, Indiana 47201 Paul N. Dinkins 500 Washington Street Columbus, Indiana 47201 John A. Nash 500 Washington Street Columbus, Indiana 47201 ARTICLE IX Provisions for Regulation of Business and Conduct of Affairs of Corporation (see attached) XXXPAGE 63XXX Irwin Union Corporation ARTICLE IX Provisions for Regulation of Business and Conduct of Affairs of Corporation 9.01. Code of By-Laws. The Board of Directors of the Corporation shall have power, without the assent of the Shareholders, to make, alter, amend or repeal the Code of By-Laws of the Corporation, but the affirmative vote of a majority of the members of the Board of Directors for the time being shall be necessary to make such Code or to effect any alteration, amendment or repeal thereof. All provisions for the regulation of business and management of the affairs of the Corporation shall be stated in the By-Laws. 9.02. Meetings of Shareholders. Meetings of the Shareholders of the Corporation shall be held at such place within or without the State of Indiana as may be specified in the respective notices or waiver: of notice thereof or as specified in the By-Laws. 9.03. Meetings of Directors. Meetings of the Board of Directors and committees thereof of the Corporation shall be held at such place within or without the State of Indiana as may be specified in the respective notices or waivers of notice thereof or as specified in the By-Laws. The By-Laws shall prescribe the manner in which notice of such meetings may be given and the time before such meeting in which such notice shall be given, unless waived. 9.04. Interest of Directors in Contracts. Any contract or other transaction between the Corporation and any corporation in which this Corporation owns all or a part of the capital stock shall be valid and binding notwithstanding the fact that the officers and/or directors executing the contract on behalf of this Corporation are the same or a majority of them are the same or the participating directors or officers are the same. With the exception provided above, any contract or other transaction between the Corporation and any one or more of its directors or between the Corporation and any firm of which one or more of its directors are members or employees or in which they are interested or between the Corporation and any corporation or association in which one or more of its directors are stockholders, members, directors, officers or employees or in which they are interested, shall be valid for all purposes notwithstanding the presence of such director or directors at the meeting of the Board of Directors which acts upon or in reference to such contract or transaction and notwithstanding his or their participate in such action if the fact of such interest shall be disclosed or known to the Board of Directors and the Board of Directors shall authorize, approve and ratify such contract or transaction by a vote of the majority of the directors present, such interested director or directors to be counted in determining whether a quorum is present but not to be counted in calculating the majority of such quorum necessary to carry such vote. This section shall not be construed to invalidate any contract or other transaction which would otherwise be valid under the common and statutory law applicable thereto. Article IX, Page One XXXPAGE 64XXX Irwin Union Corporation 9.05. Indemnification of Directors, Officers and Employees. 9.051. "Liability;" "Expense;" As used in this section 9.05 the terms "liability" and "expense" shall include but shall not be limited to attorneys' fees and disbursements and amounts of judgment, fines or penalties against and amounts paid in settlement by the directors, officers or employees. 9.052. "Claim." As used in this section 9.05, the term "claim" 'shall include: (i) any claim, action, suit or proceeding, whether actual or threatened, brought by or in the right of this Corporation or another corporation or otherwise, civil, criminal or administrative or in connection with an investigation or appeal relating thereto, (ii) against a person who is or was a director, officer or employee of this Corporation or a person who was serving as a director, officer or employee of any other corporation at the request of this Corporation, and (iii) which is asserted against or threatened against him, as a party or otherwise, by reason of his having been a director, officer or employee of this Corporation or such other corporation or by reason of any past or future action taken or not taken in his capacity as such director, officer or employee, whether or not he continues to be such at the time the claim is asserted or threatened. 9.053. Indemnity. Any such director, officer or employee who has been wholly successful on the merits or otherwise with respect to any claim of the character described herein shall be entitled to indemnification as of right. Except as provided in the preceding sentence, any indemnification hereunder shall be made at the discretion of the Corporation but only if (i) the Board of Directors acting by a quorum consisting of directors who are not parties to or who have been wholly successful with respect to such claim, action, suit or proceeding shall find that the person to be indemnified acted in good faith in what he reasonably believed to be the best interests of this Corporation or such other corporation, as the case may be, and, in addition, in any criminal action or proceeding (which shall not be deemed to include civil, administrative or investigative actions or proceedings in which conduct which violates a criminal statute is alleged) he had no reasonable cause to believe that his conduct was unlawful, or (ii) independent legal counsel (who may be regular counsel of the Corporation) shall deliver to it its written opinion that the person to be indemnified so acted. Article IX, Page Two XXXPAGE 65XXX Irwin Union Corporation 9.054. No Presumption. The termination of any claim by judgment, settlement (whether with or without court approval)or conviction or upon a plea of guilty or of nolo contendere or its equivalent shall not create a prescription that the person to be indemnified did not meet the standard of conduct set forth in section 9.053. 9.055. Several Claims. If several claims, issues or matters of ac ion are involved, any such person may be entitled to indemnification as to some matters even though he ! is not entitled as to other matters. 9.056. Advances. The Corporation may advance expenses @to or, where appropriate, may at its expense undertake the ,defense of any such director, officer or employee upon receipt of an undertaking by or on behalf of such person to repay such expenses if it should ultimately be determined that he is not entitled to indemnification under this section 9.05. 9.057. Applicability. The provisions of this section 9.05shall be applicable to claims, actions, suits or proceedings made or commenced after the adoption hereof, whether arising from acts or omissions to act during, before or after the adoption hereof. 9.058. Extent of Rights. The rights of indemnification provided hereunder shall be in addition to any rights to which any person concerned may otherwise be entitled by contract or as a matter of law and shall inure to the benefit of the heirs, executors and administrators of any such person. 9.59. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the-Corporation as a director, officer, employee or agent of another corporation against any liability asserted against him and incurred by him in any capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this section 9.05 or otherwise 9.06. Abandoned Property. After it remains unclaimed for a period of six years, any stock or other certificate of ownership, or any dividend, profit, distribution, interest, payment or principal or other property held by this Corporation or owing by this Corporation for the six consecutive years last passed shall revert to and become the property of this Corporation. The secretary shall prepare a written claim of the Corporation to such fund, claim, income or property before the end of the seventh year after its appropriate due date,, distribution date or delivery date. Article IX, Page Three XXXPAGE 66XXX Irwin union Corporation 9.07. Partnerships. The Board of Directors shall have the power to authorize the Corporation to enter into partnerships or any other lawful arrangement for the sharing of profits, union of interest, reciprocal association, cooperative association, partnership, joint venture or syndicate with any corporation, association, partnership, individual, firm or other legal entity for the purpose of carrying on any lawful business. 9.08. Committees. The By-Laws may provide for an executive committee and other committees, which shall have the fullest authority to act for the Board of Directors permitted under the laws of Indiana. 9.09. Removal of Directors. The Shareholders shall have no power to remove directors during their terms of office. Any director may be removed for specific cause found and determined by a vote of not less than two-thirds (2/3) of the entire Board of Directors at any time. 9.10. Term of Directors. When the Board of Directors consist of nine (9) or more directors, the By-Laws may specify that the director shall be apportioned into two or more classes whose terms of office shall expire at different times, but no term shall continue longer than three (3) years. 9.ll. Amendment of Articles of Incorporation. The Corporation reserves the right to alter, amend and repeal any provisions contained in these Articles of Incorporation in the manner now or hereafter prescribed by the provisions of the Act or any other pertinent enactment of the General Assembly of the State of Indiana and all rights and powers conferred hereby on Shareholders, directors and officers of the Corporation are subject to such reserved right. Article IX, Page Four XXXPAGE 67XXX IN WITNESS WHEREOF, the undersigned, being the incorporator(s) designated in Article VIII, execute these Articles of Incorporation and certify to the truth of the facts herein stated, this 30th day of May, 1972. /s/ Irwin Miller Paul N. Dinkins - ------------------------- ----------------------- Irwin Miller Paul N. Dinkins - ------------------------- ----------------------- /s/ John A. Nash ----------------------- STATE OF INDIANA ss: COUNTY OF Bartholomew I, the undersigned, a Notary Public duly commissioned to take acknowledgments and administer oaths in State of Indiana, certify that John A. Nash being one of the incorporator(s) referred to in Article VIII of the foregoing Articles of Incorporation, personally appeared before me; acknowledged the execution thereof; and swore to the truth of the facts therein stated. Witness my hand and Notarial Seal this 30 day of May, 1972 /s/ Antoinette Frenzer ----------------------------- Antoinette Frenzer -------------------------------- (Printed Signature) My Commission Expires: Notary Public December 23, 1972 This instrument was prepared by Donald W. Buttrey, Stephen J. Dutton, Attorneys at Law, McHALE, COOK & WELCH, 906 Chamber of Commerce Building, Indianapolis, Indiana 46204 XXXPAGE 68XXX STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE CERTIFICATE OF AMENDED ARTICLES OF INCORPORATION OF IRWIN UNION CORPORATION I, Larry A. Conrad, Secretary of the State of Indiana, hereby certify that Amended Articles of Incorporation for the above Corporation, in the form prescribed bv my office, prepared and signed in duplicate in accordance with "An Act concerning domestic and foreign corporations for profit, providing penalties for the violation hereof, and repealing all laws or parts of laws in conflict herewith," approved March 16, 1929, and Acts supplemental thereto. Whereas, upon due examination, I find that the Amended Articles of Incorporation conform to law, and have endorsed my approval upon the duplicate copies of such Articles; that all fees have been paid as required by law; that one copy of such Articles bearing the endorsement of my approval and filing has been returned by me to the Corporation. In Witness Whereof, I have hereunto set my hand and affixed the seal of the State of Indiana at the City of Indianapolis, this 29th day of December, 1972. Larry A. Conrad, Secretary of State XXXPAGE 69XXX AMENDED ARTICLES OF INCORPORATION OF Irwin Union Corporation The undersigned officers of Irwin Union Corporation (hereinafter referred to as the "Corporation") existing pursuant to the provisions of The Indiana General Corporation Act, as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating certain Amendments of its Articles of Incorporation by the adoption of new Amended Articles of Incorporation to supersede and take the place of its heretofore existing Articles of Incorporation, certify the following facts: ARTICLE I Text of the Amended Articles The exact text of the entire Articles of Incorporation of the Corporation, as amended (hereinafter referred to as the "Amended Articles"), now is as follows: See Exhibit A attached. XXXPAGE 70XXX ARTICLE III Period of Existence The period during which the Corporation shall continue is Perpetual. ARTICLE IV Resident Agent and Principal Office Section 1. Resident Agent. The name and address of the Resident Agent in charge of the Corporation's principal office is John A. Nash, 500 Washington Street, Columbus, Indiana 47201 Section 2. Principal Office. 'Me post office address of the principal office of the Corporation is 500 Washington Street, Columbus, Indiana 47201 ARTICLE V Shares Section 1. Number. The total number of shares which the Corporation has authority to issue consisting of 500,000 common shares with the par value of $10.00 per shares, and 50,000 preferred shares without par value. Section 2. Terms. (see attached) Section 3. Voting Rights. (see attached) XXXPAGE 71XXX Irwin Union Corporation ARTICLE V 2. Terms Shares 5.20. Classes. The authorized shares of the Corporation (the "Shares")shall be divided into two classes consisting of 500,000 common shares, par value $10, (the "Common Shares") and 50,000 preferred, shares without par value (the "Preferred Shares"). 5.21. Rights. 5.211. Common Shares. All Common Shares shall have the same rights and privileges. Common Shareholders shall have no preemptive rights. 5.212. Preferred Shares. The Board of Directors is expressly authorized at any time, and from time to time, by resolution, to determine and state the designations, relative rights, preferences, limitations and restrictions of any class or classes of Preferred Shares, or of any series of any class or classes thereof, and to authorize the issuance of such Preferred Shares upon compliance prior to the issuance of any such Preferred Shares with the applicable provisions of the Act. 5.22.Dividends. Dividends or distributions may be declared and paid upon outstanding Shares at the discretion of the Board of Directors from time to time out of earned surplus or capital surplus of the Corporation. Dividends payable on the Shares of any class of Shares or series thereof may be paid to the holders of Shares of that or any other class of Shares or series thereof. 5.23. Issuance of and Consideration for Shares. Shares may be issued for such consideration as may be fixed from time to time by the Board of Directors, which consideration may be eaual to, less than or more than the par value thereof. The judgment of the Board of Directors as to (i) the value of any property or services received in full or partial payment for Shares, and (ii) as to the value of the corporate assets in the event of a Share dividend, shall be conclusive. When Shares are issued upon payment of the consideration fixed by the Board of Directors, such Shares shall be taken to be fully paid stock and shall be nonassessable. 5.24. Partial Distributions. The Board of Directors may make distributions to Shareholders out of capital surplus from time to time to the extent permitted by law. 5.25. Facsimile Signatures. Facsimile signatures may be used in lieu of the manual signature of an officer or director of the Corporation. In case any officer or director who has signed or whose facsimile signature has been placed upon any share certificate or other document issued by this Corporation shall have ceased to be such an officer or director before such certificate or other document is used, such certificate XXXPAGE 72XXX or other document may beissued by the Corporation with the same effect as if such person were an officer at the date of its issue. Article V, Page One XXXPAGE 73XXX Irwin Union Corporation 5.26. Transfer of Shares. Transfer of Shares shall be governed by the By-Laws of the Corporation subject to applicable law. 3. Voting Rights 5.30. Voting Rights. 5.301. Common Shares. Every holder of the Common Shares of the Corporation shall have the right at every Shareholders' meeting, to one vote for each Common Share standing in his name on the books of the Corporation. 5.302. Preferred Shares. Holders of Preferred Shares shall have no right to vote upon any question except as shall be affirmatively provided in the Act, or in the remaining sections of this article. 5.31. No Greater Requirements. Nothing in these Articles shall be deemed to require any greater portion of the Shares to concur in any action taken by the Shareholders than is required by law. 5.32. Record Date. The By-Laws may provide for a record date for determining Shareholders entitled to receive payment of any dividend or for determining Shareholders for any other purpose. 5.33. Mergers and Consolidations. Any class of Shares of this Corporation shall be entitled to vote as a class if the agreement of merger or consolidation contains any provision which, if contained in a proposed amendment to the Articles of Incorporation of the Corporation, would entitle such class of Shares to vote as a class. 5.34. Voting on Special Corporate Transactions. In voting on adoption of any proposal for a special corporate transaction or for dissolution of the Corporation, all Shares shall vote as a single class and no Shares shall be entitled to vote as a separate class. 5.35. Mergers With Subsidiaries. Nothing herein contained shall limit the power of the Corporation or prescribe the procedures to be followed in any merger or consolidation of any subsidiary of this Corporation, ninety-five percent (95%) (or such lesser percentage as may hereafter be prescribed by law) or more of the outstanding Shares of which subsidiary are owned by this Corporation and any such merger or consolidation of any such subsidiary may be accomplished by the Board of Directors of this Corporation in the manner prescribed by law. 5.36. Class Voting. If the holders of any class of Shares are entitled to vote as a class, the proposal shall be adopted upon receiving the affirmative vote of the holders of at least a majority (or such greater proportion as these Articles of Incorporation may require) of the Shares of each class of Shares entitled to vote thereon as a class and of the total Shares entitled to vote thereon. Article V, Page Two XXXPAGE 74XXX ARTICLE VI Requirements Prior To Doing Business The stated capital of the Corporation is at least $1000.00. ARTICLE VII Director(s) Section 1. Number of Directors. The Board of Directors is composed of 16 member(s) The number of directors may be from time to time fixed by the By-Laws of the Corporation at any number. In the absence of a By-Law fixing the number of directors, the number shall be sixteen. Section 2. Names and Post Office Addresses of the Director(s). The name(s) and post office addressees) Of the Board of Director(s) of the Corporation (are): Name Number and Street or Building city State Zip Code Eugene I. Anderson 500 Washington Street, Columbus, Indiana 47201 Paul N. Dinkins 500 Washington Street, Columbus, Indiana 47201 George Doup 500 Washington Street, Columbus, Indiana 47201 Edward E. Edwards 500 Washington Street, Columbus, Indiana 47201 Harry J. Embry 500 Washington Street, Columbus, Indiana 47201 Lowell E. Engelking 500 Washington Street, Columbus, Indiana 47201 Frank C. Forster 500 Washington Street, Columbus, Indiana 47201 Clarence 0. Hamilton 500 Washington Street, Columbus, Indiana 47201 William R. Laws, Jr. 500 Washington Street, Columbus, Indiana 47201 Irwin Miller 301 Washinqton Street, Columbus, Indiana 47201 John A. Nash 500 Washington Street, Columbus, Indiana 47201 Paul H. Pardieck 500 Washington Street, Columbus, Indiana 47201 Charles A. Rau 500 Washington Street, Columbus, Indiana 47201 Carl M. Reeves 500 Washington Street, Columbus, Indiana 47201 Albert H. Schumaker 500 Washington Street, Columbus, Indiana 47201 E. Don Tull 500 Washington Street, Columbus, Indiana 47201 Section 3. Qualifications of Directors. (If Any) No qualifications are prescribed by these Articles. XXXPAGE 75XXX ARTICLE VIII Incorporators The name(s) and post office addressees) of the of the Corporation (are): President and Executive Vice President, Secretary Name Number and Street or Building City State Zip Code Paul N. Dinkins 500 Washington Street, Columbus, Indiana 47201 (President) John A. Nash 500 Washington Street, Columbus, Indiana 47201 (Executive Vice President, Secretary) ARTICLE IX Provisions for Regulation of Business and Conduct of Affairs of Corporation (See attached) XXXPAGE 76XXX Irwin Union Corporation ARTICLE IX Provisions for Regulation of Business and Conduct of Affairs of Corporation 9.01. Code of By-Laws. The Board of Directors of the Corporation shall have power, without the assent of the Shareholders, to make, alter, amend or repeal the Code of By-Laws of the Corporation, but the affirmative vote of a majority of the members of the Board of Directors for the time being shall be necessary to make such Code or to effect any alteration, amendment or repeal thereof. All provisions for the regulation of business and management of the affairs of the Corporation shall be stated in the By-Laws. 9.02. Meetings of Shareholders. Meetings of the Shareholders of the Corporation shall e held at such place within or without the State of Indiana as may be specified in the respective notices or waivers of notice thereof or as specified in the By-Laws. 9.03. Meetings of Directors. Meetings of the Board of Directors and committees thereof of the Corporation shall be held at such place within or without the State of Indiana as may be specified in the respective notices or waivers of notice thereof or as specified in the By-Laws. The By-Laws shall prescribe the manner in which notice of such meetings may be given and the time before such meeting in which such notice shall be given, unless waived. 9.04. Interest of Directors in Contracts. Any contract or other transaction between the Corporation and any corporation in which this Corporation owns all or a part of the capital stock shall be valid and binding notwithstanding the fact that the officers and/or directors executing the contract on behalf of this Corporation are the same or a majority of them are the same or the participating directors or officers are the same. With the exception provided above, any contract or other transaction between the Corporation and any one or more of its directors or between the Corporation and any firm of which one or more of its directors are members or employees or in which they are interested or between the Corporation and any corporation or association in which one or more of its directors are stockholders, members, directors, officers or employees or in which they are interested, shall be valid for all purposes notwithstanding the presence of such director or directors at the meeting of the Board of Directors which acts upon or in reference to such contract or transaction and notwithstanding his or their participation such action if the fact of such interest shall be disclosed or known to the Board of Directors and the Board of Directors shall authorize, approve and ratify such contract or transaction by a vote of the majority, of the directors present, such interested director or directors to be counted in determining whether a quorum is present but not to be counted in calculating the majority of such quorum necessary to carry such vote. This section shall not be construed to invalidate any contract or other transaction-which would otherwise be valid under the common and statutory, law applicable thereto. Article IX, Page One XXXPAGE 77XXX Irwin Union Corporation 9.05. Indemnification of Directors, Officers and Employees. 9.051. "Liability;" "Expense;" As used in this section 9.05 The terms "liability" and "expense" shall include but shall not be limited to attorneys' fees and disbursements and amounts of judgment, fines or penalties against and amounts paid in settlement by the directors, officers or employees. 9.052. "Claim." As used in this section 9.05, the term "claim" shall include: (i) any claim, action, suit or proceeding, whether actual or threatened, brought by or in the right of this Corporation or another corporation or otherwise, civil, criminal or administrative or in connection with an investigation or appeal relating thereto, (ii) against a person who is or was a director, officer or employee of this Corporation or a person who was serving as a director, officer or employee of any other corporation at the request of this Corporation, and (iii) which is asserted against or threatened against him, as a party or otherwise, by reason of his having been a director, officer or employee of this Corporation or such other corporation or by reason of any past or future action taken or not taken in his capacity as such director, officer or employee, whether or not he continues to be such at the time the claim is asserted or threatened. 9.053. Indemnity. Any such director, officer or employee who has been wholly successful on the merits or otherwise with respect to any claim of the character described herein shall be entitled to indemnification as of right. Except as provided in the preceding sentence, any indemnification hereunder shall be made at the discretion of the Corporation but only if (i) the Board of Directors acting by a quorum consisting of directors who are not parties to or who have been wholly successful with respect to such claim, action, suit or proceeding shall find that the person to be indemnified acted in good faith in what he reasonably believed to be the best interests of this Corporation or such other corporation, as the case may be, and, in addition, in any criminal action or proceeding (which shall not be deemed to include civil, administrative or investigative actions or proceedings in which conduct which violates a criminal statute is alleged) he had no reasonable cause to believe that his conduct was unlawful, or (ii) independent legal counsel (who may be regular counsel of the Corporation) shall deliver to it its written opinion that the person to be indemnified so acted.. Article IX, Page Two XXXPAGE 78XXX Irwin Union Corporation 9.054. No Presumption. The termination of any claim by judgment, settlement (whether with or without court approval)or conviction or upon a plea of guilty or of nolo contendere or its equivalent shall not create 8L prescription that the person to be indemnified did not meet the standard of conduct set forth in section 9.053. 9.055. Several Claims. If several claims, issues or matters of ac ion are involved, any such person may be entitled to indemnification as to some matters even though he is not entitled as to other matters. 9.056. Advances. The Corporation may advance expenses to or, where appropriate, may at its expense und4rtake the defense of any such director, officer or employee upon receipt of an undertaking by or on behalf of such person to repay such expenses if it should ultimately be determined that he is not entitled to indemnification under this section 9.05. 9.057. Applicability. The provisions of this section 9.05 shall be applicable to claims, actions, suits or proceedings made or commenced after the adoption hereof, whether arising from acts or omissions to act during, before or after the adoption hereof. 9.058. Extent of Rights The rights of indemnification provided hereunder shall be in addition to any rights to which any person concerned Pay otherwise be entitled by contract or as a matter of law and shall inure to the benefit of the heirs, executors and administrators of any such person. 9.059. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation against any liability asserted against him and incurred by him in any capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this section 9.05 or otherwise. Article IX, Page Three XXXPAGE 79XXX Irwin Union Corporation 9.06. Partnerships. The Board of Directors shall have the power to authorize the Corporation to enter into partnerships or any other lawful arrangement for the sharing of profits, union of interest, reciprocal association, cooperative association, partnership, joint venture or syndicate with any corporation, association, partnership, individual, firm or other legal entity for the purpose of carrying on any lawful business. 9.07. Committees. The By-Laws may provide for an executive committee and other committees, which shall have the fullest authority to act for the Board of Directors permitted under the laws of Indiana. 9.08. Removal of Directors. The Shareholders shall have no power to remove directors during their terms of office. Any director may be removed for specific cause found and determined by a vote of not less than two-thirds (2/3) of the entire Board of Directors at any time. 9.09. Term of Directors. When the Board of Directors consists of nine (9) or more directors, the By-Laws may specify that the director shall be apportioned into two or more classes whose terms of office shall expire at different times, but no term shall continue longer than three (3) years. 9.10. Amendment of Articles of Incorporation. The Corporation reserves the right to alter, amend and repeal any provisions contained in these Articles of Incorporation in the manner now or hereafter prescribed by the provisions of the Act or any other pertinent enactment of the General Assembly of the State of Indiana and all rights and powers conferred hereby on Shareholders, directors and officers of the Corporation are subject to such reserved right. Article IX, Page Four XXXPAGE 80XXX ARTICLE 11 Manner of Adoption and Vote (b) By written consent executed on December 18, 1972 signed by all of the members of the Board of Directors of the Corporation entitled to vote in respect of the Amended Articles, that the provisions and terms of Articles V & IX of its Articles of Incorporation be amended so as to read as set forth in the amended Articles, and a meeting of such Shareholders was called to be held January 2, 1973, to adopt or reject the Amended Articles unless the same were so approved prior to such date by unanimous written consent. Section 2. Action by Shareholders (select appropriate paragraph) (b) By written consent executed on December 18, 1972, signed by the holders to 500 common shares of the Corporation, being all of the shares of the Corporation entitled to vote in respect of the Amendments, the Shareholders adopted the Amended Articles. XXXPAGE 81XXX Section 3. Compliance With Legal Requirements The manner of the adoption of the Amended Articles, and the vote by which they were adopted, constitute full legal compliance with the provisions of the Acts, the Articles of Incorporation, and the By-Laws of the Corporation. ARTICLE III Statement of Changes Made With Respect To the Number of Shares Heretofore Authorized Section 1, of Article V of the Articles of Incorporation was amended to increase the number of authorized shares from 1,000 authorized shares to 550,000 authorized shares, consisting of 500,000 common shares with the par value of $10 per share, and 50,000 preferred shares without par value. XXXPAGE 82XXX IN WITNESS WHEREOF, the undersigned officers execute these Amended Articles of Incorporation of the Corporation and certify to the truth of the facts herein stated, this 18th day of December, 1972, /s/ Paul N. Dinkins /s/ John A. Nash - ------------------- ---------------- (Written Signature) (Written Signature) Paul N. Dinkins John A. Nash - ---------------- -------------------- (Printed Signature) (Printed Signature) President of Secretary of Irwin Union Corporation Irwin Union Corporation STATE OF INDIANA COUNTY OF BARTHOLOMEW I, the undersigned, a Notary Public duly commissioned to take acknowledgements and administer oaths in the State of Indiana, certify that Paul N. Dinkins ,the President and John A. Nash, the Secretary of Irwin Union Corporation, the officers executing the foregoing Amended Articles of Incorporation, personally appeared before me, acknowledged the execution thereof; and swore to the truth of the facts herein stated. Witness my hand and Notarial Seal this 18th day of December, 1972. /s/ Antoinette Frenzer ------------------------ (written Signature) Antoinette Frenzer ------------------------ (Printed Signature) My Commission Expires: Notary Public December 23, 1976 This instrument was prepared by Donald W. Buttrey, Stephen J. Dutton Randolph L. Seger Attorneys at Law, McHalle, Cook & Welch, 906 Chamber of Commerce Building, Indianapolis, Indiana 46204 XXXPAGE 83XXX STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE CERTIFICATE OF AMENDMENT OF IRWIN UNION CORPORATION I, LARRY A. CONRAD, Secretary of State of the Slate of Indiana, hereby certify that Articles of Amendment for the above Corporation, in the form prescribed by my office, prepared and signed in duplicate in accordance with "An Act concerning domestic and foreign corporations for profit, providing penalties for the violation hereof, and repealing all laws or parts of laws in conflict herewith," approved March 16, 1929, and Acts supplemental thereto. The Amendment: The exact text of Article V, Section I and Section 5.20 Whereas, upon due examination, I find that the Articles of Amendment conform to law, and have endorsed my approval upon the duplicate copies of such Articles; that all fees have been paid as required by law; that one copy of such Articles has been filed in my office; and that the remaining copy of such Articles bearing the endorsement of my approval and filing has been returned by me to the Corporation. In Witness Whereof, I have hereunto set my hand and affixed the seal of the State of Indiana, at the Citv of Indianapolis, this 3rd day of March, 1973. LARRY A. CONRAD, Secretary of State XXXPAGE 84XXX ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF IRWIN UNION CORPORATION The undersigned officers of IRWIN UNION CORPORATION (hereinafter referred to as the "Corporation") existing pursuant to the provisions of the Indiana General Corporation Act, as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating amendment of certain provisions of its Articles of Incorporation, certify the following facts: ARTICLE I Text of the Amendment The exact text of Article(s).V Section and Section 5.20 of the Articles of Incorporation of the Corporation, as amended (hereinafter referred to as the "Amendments"), now is as follows: Section 1. Number. The number of shares which the Corporation has the authority to issue is 1,050,000 shares consisting of 1,000,000 common shares with a par value of $5 per share, and 50,000 preferred shares without par value. Section 5.20. Classes. The authorized shares of the Corporation (the "Shares") shall be divided into two classes consisting of 1,000,000 common shares, par value $5, (the "Common Shares") and 50,000 preferred shares without par value (the "Preferred Shares"). XXXPAGE 85XXX ARTICLE 11 Manner of Adoption and Vote Section 1. Action by Directors (select appropriate paragraph). (a) The Board of Directors of the Corporation, at a meeting thereof, duly called, constituted and held on at which a quorum of such Board of Directors was present, duly adopted a resolution proposing to the Shareholders of the Corporation entitled to vote in respect the Amendments that the provisions and terms of Article V of its Articles of Incorporation be amended so as to read as set forth in the Amendments; and called a meeting of such shareholders, to be held March 20, 1973, to adopt or reject the Amendments, unless the same were so approved prior to such date by unanimous written consent. Section 2. Action by Shareholders (select appropriate paragraph) (a) The Shareholders of the Corporation entitled to vote in respect of the Amendments, at a meeting thereof, duly called, constituted and held on March 20 1973, the holders at which common shares were present in person or by proxy, adopted the Amendments. The holders of the following classes of shares were entitled to vote as a class in respect of the Amendments: (1) Common shares (2) (3) XXXPAGE 86XXX The number of shares entitled to vote in respect of the Amendments, the number of shares voted in favorof the adoption of the Amendments, and the number of shares voted against such adoption are as follows: Total Shares Entitled to Vote as a Class (as listed immediately above) Total (1) (2) (3) Shares entitled to vote: 282,984 282,984 Shares voted in favor: 238,314 238,314 --------------------- Shares voted against: 85 85 Section 3. Compliance with Legal Requirements. The manner of the adoption of the Amendments, and the vote by which they were adopted, constitute full legal compliance with the provisions of the Act, the Articles of Incorporation, and the By-Laws of the Corporation. ARTICLE III Statement of Changes Made With Respect to Any Increase In The Number of Shares Heretofore Authorized Aggregate Number of Shares Previously Authorized 550,O00 Increase 500,000 Aggregate Number of Shares To Be Authorized After Effect of This Amendment 1,050,000 XXXPAGE 87XXX IN WITNESS WHEREOF, the undersigned officers execute these Articles of Amendment of the Articles of Incorporation of the Corporation, and certify to the truth of the facts herein stated, 18th day of March, 1973. /s/ John A. Nash /s/ Robert E. Kirk - ------------------------------------ ---------------------- (Written Signature Written Signature John A. Nash Robert E. Kirk (Printed Signature) (Printed Signature) Executive Vice President Secretary of of Irwin Union Corporation Irwin Union Corporation STATE OF INDIANA SS: COUNTY OF Bartholomew I, the undersigned, a Notary Public duly commissioned to take acknowledgements acd administer oaths in the State of Indiana, certify that John A. Nash, the Executive Vice President, and Robert E. Kirk, the Secretary of Irwin Union Corporation the officers executing the foregoing Articles of Amendment of the Articles of Incorporation, personally appeared before me, acknowledged the execution thereof, and swore to the truth of the facts therein stated. Witness my hand and Notarial Seal this 27th day of March, 1973. /s/ Gloria Harbaugh -------------------- (Written Signature) Gloria Harbaugh ------------------- (Printed Signature) My Commission Expires: April 22, 1974 Notary Public Stephen J. Dutton This instrument was prepared by Stephen J. Dutton, Attorney at Law, McHALE, COOK & WELCH, 906 Chamber of Commerce Building, Indianapolis, 46204 XXXPAGE 88XXX STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE To Whom These Presents Come, Greeting: WHEREAS, there has been presented to me at this office a Resolution of the Board of Directors electing to be governed by the provisions of the Indiana Businesss Corproation Law prior to August 1, 1987 of IRWIN UNION CORPORATION and said Resolution has been prepared and signed in accordance with the provisions of the Indiana Business Corporation Law. WHEREAS., upon due examination,, I find that it satifies the requirements of I.C. 23-1-17-3(b) and I.C. 23-1-13-1: NOW, THEREFORE, I EDWIN J. SIMCOX, Secretary of State of Indiana, hereby certify that I have this day filed the Resolution of the Board of Directors in this office. Effective date the provisions will apply is JUNE 24th, 1986. In Witness Whereof, I have hereunto set my hand and affixed the seal of the State of Indiana, at the City of Indianapolis, this 23rd day of June, 1986 /s/ Edwin J. Simcox - ------------------- Secretary of State, XXXPAGE 89XXX CERTIFICATE REGARDING ELECTION OF APPLICATION OF INDIANA BUSINESS CORPORATION LAW The undersigned, the duly elected and acting Secretary of Irwin Union Corporation ("Corporation), respectively hereby certify, verify and affirm, subject to the penalties for perjury, that the attached resolutions were adopted by the Board of Directors of the Corporation at a meeting thereof, duly constituted,and held on May 20, 1986; and that the effective date of the election to have the Indiana Business Corporation Law apply to the Corporation, as set forth in such resolutions is June 24, 1986. Dated this 20th day of May 1986. /s/ Matthew F. Souza ---------------------------------- [Name], [Office] of [Corporation] Matthew F. Souza, Secretary Irwin Union Corporation ATTEST: /s/Thomas D. Washburn - ----------------------- Senior Vice President Irwin Union Corporation XXXPAGE 90XXX RESOLUTIONS REGARDING ELECTION TO BE GOVERNED BY THE NEW INDIANA BUSINESS CORPORATION LAW WHEREAS, the Indiana General Assembly has recently adopted new statutory provisions governing business corporations, known as the Indiana Business Corporation Law ("New Statute"); and WHEREAS, the New Statute generally applies to all Indiana corporations after July 31, 1987; although a corporation's board of directors may elect to have the New Statute apply earlier by adopting and filing a resolution electing to have the New Statute apply to that corporation; and WHEREAS, the Board of Directors has carefully considered a summary and presentation of significant provisions of the New Statute prepared by counsel to the Corporation; and WHEREAS, the Board of Directors has determined that it is in the best interests of the Corporation to cause the New Statute to apply to the Corporation prior to August 1, 1987, for the following reasons, among others; (1) The New Statute provides greater flexibility in corporate governance and thereby reduces the time and expense required to ensure compliance with state law; (2) The New Statute provides the Corporation with an increased opportunity to recruit and retain qualified directors by providing them greater protection against potential liability; (3) The New Statute provides the Corporation with greater protection against vexatious or groundless derivative suits, while protecting the rights of shareholders to pursue meritorious derivative claims; and (4) The New Statute provides the Corporation with greater protection against the misuse of information obtained upon inspection by shareholders of corporate records. THEREFORE, BE IT RESOLVED, that the Board of Directors hereby elects to have the New Statute (in particular, Ind. Code 23-1-18 through 23-1-54, excluding Ind. Code 23-1-18-3, 23-1-21 and 23- 1-53-3) apply to the Corporation on and after June 24, 1986; RESOLVED FURTHER, that the President, any Vice President, Secretary and Treasurer, and each of them, be, and hereby are, authorized and directed to (1) file the foregoing resolution in the Office of the Secretary of State of Indiana and (2) take anv and all additional action as may be deemed necessary or desirable to implement the foregoing resolution. XXXPAGE 91XXX EXHIBIT A ARTICLES OF INCORPORATION OF IRWIN UNION CORPORATION The undersigned incorporator or incorporators, desiring to form a corporation (hereinafter referred to as the "Corporation") pursuant to the provisions of the Indiana General Corporation Act, as amended (herein. after referred to as the "Act,") execute the following Articles of Incorporation. ARTICLE I Name The name of the Corporation is Irwin Union Corporation ARTICLE II Purposes The purposes for which the Corporation is formed are: The transaction of any and all lawful business for which corporations may be incorporated under the Act, including by way of illustration and not of limitation, the following: XXXPAGE 92XXX Irwin Union Corporation ARTICLE II Purposes 2.01. To Act as Holding Company. To purchase or otherwise acquire, own and old the stock of other corporations and equity interest in other business entities and to direct the operations of other corporations through the ownership of stock therein and to direct the operations of other business entities through the ownership of equity interests therein. 2.02. Capacity to Act. To have the capacity to-act possessed by natural persons, but to have authority to perform only such acts as are necessary, convenient or expedient to accomplish the purposes for which it is formed and such as are not repugnant to law. 2.03. To Deal in Securities. To acquire, by purchase, subscription or otherwise and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in and with any and all securities (as hereinafter defined) issued or created by any corporation, firm, organization, association or other entity, public or private, whether formed under the laws of the United States of America or any state or commonwealth thereof, or any foreign country, or by any agency, subdivision, territory, dependency, possession or municipality of any of the foregoing, and as owner thereof to possess and exercise all of the rights, powers and privileges of ownership, including the right to execute consents and vote thereon. The term "securities" as used herein shall mean any and all notes, stocks, treasury stocks, bonds, debentures, evidences of indebtedness, certificates of interest or participation in any profit sharing agreement, collateral trust certificates, pre- organization certificates or subscriptions, transferable shares, investment contracts, voting trust certificates, certificates of deposit for a security, fractional undivided interests in oil, gas or other mineral rights or, in general, any interests or instruments commonly known as securities or any and all certificates of interest or participation in temporary or interim certificates for, receipts for, guarantees of, or warrants or rights to subscribe to or purchase any of the foregoing. 2.04. Investment Management. To make, establish and maintain investments in securities, funds or properties of any nature whatsoever and to manage such funds; to do any and all acts and things for the preservation, protection, improvement and enhancement of the value of such property or securities or designed to accomplish any such purposes. To make investigations as to the business affairs and property of corporations, partnerships and various forms of business enterprises and to make appraisals and valuations of all kinds and investigate and render opinions as to the advisability from a financial standpoint of creating, merging, combining or otherwise dealing in business enterprises Article II, Page One XXXPAGE 93XXX Irwin Union Corporation 2.05. Creation of Corporations and Other Entities. To cause to be organized under the laws of the United States of America or of any state, commonwealth, territory, dependency or possession thereof, or of any foreign country, or of any political subdivision, territory, dependency, possession or municipality thereof, one or more corporations, firms, organizations, associations or other entities, and to cause the same to be dissolved, wound up, liquidated, merged or consolidated. 2.06. To Deal in Good Will. To acquire by purchase or exchange, or by transfer, or by merger or consolidation with, the Corporation of any corporation, firm, organization, association or other entity owned or controlled, directly or indirectly, by the Corporation, or otherwise to acquire the whole or any part of the business, good will, rights or other assets of any corporation, firm, organization, association or other entity and to undertake or assume in connection therewith the whole or any part of the liabilities and obligations thereof and to effect any such acquisition in whole or in part by delivery of cash or other property, including securities issued by the Corporation or by any other lawful means. 2.07. To Engage in Lending. To make loans and give other forms of credit including, but not limited to, financing, factoring and leasing, with or without security, and to negotiate and make contracts and agreements in connection therewith and to sell and underwrite credit insurance and life, property and liability insurance, directly or throuc.1 subsidiaries. 2.08. To Aid Subsidiaries. To aid by loans, subsidy, guaranty or in any other lawful manner any corporation, firm, organization, association or other entity of which any securities (as that term is defined in section 2.03 hereof) are in any manner, directly or indirectly, held by the Corporation or in which the Corporation or any such corporation, firm, organization, association or entity may be or become otherwise interested; to guarantee the payment of dividends on any stock issued by any such corporation, firm, organization, association or entity; to guarantee or, to assume, with or without recourse against any such corporation, firm, organization, association or entity, the payment of the principal of, and/or the interest and premium, if any, on any obligations issued or incurred by such corporation, firm, organization ( association or entity; to do any and all other acts and things for the enhancement, protection or preservation of any securities which are in any manner, directly or indirectly, held, guaranteed or assumed by the Corporation, and to do any and all acts and things designed to accomplish, any such purpose. 2.09. To Provide Services. To render service, assistance, counsel and advice to and act as representative or agent in any capacity (whether managing, operating, financial, purchasing, selling, advertising or otherwise) for any corporation, firm, organization, association or other entity and to gather, compile and disseminate information, data and advice in respect to matters of a commercial, financial, statistical and business nature and to act as consultants, counselors and advisors. Article II, Page Two XXXPAGE 94XXX Irwin Union Corporation 2.10. To Deal in Real Estate. To acquire by purchase, exchange, lease or otherwise, and to hold, own, improve, operate, manage, lease as lessee, let as lessor, sell, convey or mortgage, whether alone or in conjunction with others, real estate of every kind, character and description, and wherever situated, or any interest therein including, without limiting the generality of the foregoing, the design, development, management, acquisition, and operation of commercial, mercantile and service structures and facilities of every character, recreational structures and facilities, residential properties and structures, and mobile home parks. 2.11. To Deal in Personal Property. To acquire (by purchase, exchange, lease, hire or otherwise), hold, mortgage, pledge, hypothecate, exchange, sell, deal in and dispose of, at wholesale or retail, alone or in syndicates or otherwise in conjunction with others, commodities or other personal property of every kind, character and description and wherever situated, and any interest therein. 2.12. To Deal in its Own Securities. To acquire (by purchase, exchange, lease, hire or otherwise), hold, sell, transfer, reissue, or cancel its own shares, or any securities or other obligations of the Corporation, in the manner and to the extent now or hereafter permitted by the laws of Indiana, except that the Corporation shall not use its funds or other assets for the purchase of its own shares if such use would cause any impairment of the capital of the Corporation, and except that its own shares beneficially owned by the Corporation shall not be voted directly or indirectly. 2.13.To Make Contracts. To enter into, make, perform and carry out, or cancel and rescind, contracts for any lawful purposes to its business. 2.14. To Enter into Partnerships. To enter into any lawful arrangement for sharing profits, union of interest, reciprocal association or cooperative association with any corporation, association, partnership individual or other entity, for the carrying on of any business, transaction, or venture, which the Corporation is authorized to carry on or any business, transaction, or venture deemed necessary, convenient or incidental to carrying out of any of the purposes of the Corporation. 2.15. To Engage in Business Generally. To engage in any commercial, financial, mercantile, industrial, manufacturing, marine, exploration, mining, agricultural, research, licensing, servicing or agency business not prohibited by law and any, some or all of the foregoing. 2.16. To Borrow Money. To borrow money for any business object or purpose of the Corporation from time to time without limit as to amount, to issue any kind of indebtedness, whether or not in connection with borrowing money, including evidences of indebtedness convertible into stock of the Corporation, to secure the payment of any evidence of indebtedness by the creation of any interest in any of the property or rights of the Corporation, whether at that time owned or thereafter acquired. XXXPAGE 95XXX Article II, Page Three XXXPAGE 96XXX Irwin union Corporation 2.17. To Execute Guarantees. To make any guarantee respecting stocks, dividends, securities, indebtedness, interest, contracts or other obligations. 2.18. Stated Capital; Consideration for Shares. To determine the amount of the stated capital and increase or reduce stated capital and determine the consideration to be received for shares issued from time to time. 2.19. Rights, Privileges and Powers. Subject to any limitations or restrictions imposed by law or by the-se Articles of Incorporation, to have and exercise all the rights, privileges and powers specified in or permitted under the Indiana General Corporation Act. 2.20. General Powers. To do everything necessary, proper, advisable or convenient for the accomplishment of any of the purposes or the attainment of any of the objects of the furtherance of any of the powers herein set forth and to do every other act and thing incidental thereto or connected therewith which is not forbidden by the laws of the State of Indiana or by the provisions of these Articles of Incorporation. 2.21. Construction. The foregoing sections shall be construed as purposes as well as powers and the matters expressed in each section shall, unless otherwise expressly provided, be in no way limited by reference to or inference from the terms of any other section, each of such sections being regarded as creating independent purposes and powers. The enumeration shall not be construed as limiting or restricting in any manner either the meaning or general terms used in any of the sections or the scope of the general powers of the Corporation created thereby. The enumeration herein of any specific purposes or powers shall not be held to limit or restrict in any manner the exercise by the Corporation of the general powers now or hereafter conferred by the laws of the state of Indiana nor shall the expression of one thing be deemed to exclude another not expressed, whether or not it be of like nature. The titles contained herein are solely for convenience and are not to be considered in construing the various sections. 2.22. Limiting Clause. Nothing in this article shall be construed to authorize the conduct by the Corporation, directly or indirectly, of a rural loan and savings association, credit union or a banking, railroad, insurance, surety, trust, safe deposit, mortgage guarantee or building and loan business or receiving deposits of money, bullion or foreign coins or of issuing bills, notes, or other evidences of debt or circulation as money; provided, however, that the Corporation may own, create or otherwise acquire all or part of the issued and outstanding stock of corporations lawfully engaged in any of such activities. Article II, Page Four XXXPAGE 97XXX CERTIFICATE OF CONSENT TO USE OF NAME Irwin Union Bank and Trust Company, an Indiana bank,on its own behalf and on behalf of its wholly-owned subsidiary, Irwin Union Realty Corporation, hereby consents to incorporation under the Indiana General Corporation Act of a incorporation on having the name Irwin Union Corporation; consents that said corporation be authorized to transact business in Indiana; and grants permission to use, and consents to the use of, the name Irwin Union Corporation by said Indiana corporation as is provided by the Indiana General Corporation Act (IC 1971, 23-1-2-4). IN WITNESS WHEREOF said Irwin Union Bank and Trust Company, an Indiana bank, has caused this Certificate of Consent to be executed in its proper corporate name by the officers below this day of May 1972. IRWIN UNION BANK AND TRUST COMPANY An Indiana Bank By: /s/ Paul. N. Dinkins ------------------------- Paul N. Dinkins Attest: /s/ John A. Nash - ------------------ John A. Nash, Secretary STATE OF INDIANA ) SS: COUNTY OF BARTHOLOMEW ) Subscribed and sworn to by Paul N. Dinkins and John A. Nash, to me known to be the President and Secretary of Irwin Union Bank and Trust Company- upon their several oaths before me, a notarv public, this 30 day of May 1972. /s/ Antoinette Frenzer ------------------------------ Notary Public Antoinette Frenzer My commission expires: December 23, 1972 This instrument prepared by Stephen J. Dutton, attorney at law. XXXPAGE 98XXX CERTIFICATE OF CONSENT TO USE OF NAME Irwin Union Foundation, an Indiana foundation hereby consents to the incorporation under the Indiana General Corporation Act of a corporation having the Irwin Union Corporation; consents that said corporation be authorized to transact business in Indiana; and grants permission to use, and consents to the use of, the name Irwin Union Corporation by said Indiana corporation as is provided by the Indiana General Corporation Act (IC 1971, 23-1-2-4). IN WITNESS WHEREOF said Irwin Union Foundation, an Indiana foundation, has caused this Certificate of Consent to be executed in its proper corporate name by the officers below this day of May, 1972. IRWIN UNION FOUNDATION An Indiana Foundation By /s/ Paul N. Dinkins --------------------- Paul N. Dinkins President ATTEST: /s/ James A. Joseph - ---------------------------- James A. Joseph, Secretary STATE OF INDIANA SS: COUNTY OF BARTHOLOMEW Subscribed and sworn to by Paul N. Dinkins and James A. Joseph, to me known to be the President and Secretary of Irwin Union Foundation upon their several oaths before me, a Notary Public, this, day of May, 1972. /s/ Antoinette Frenzer ---------------------- My Commission Expires: Antoinette Frenzer December 23, 1972 This instrument prepared by Stephen J. Dutton, attorney at law. XXXPAGE 99XXX ARTICLES OF INCORPORATION IND. SECRETARY OF STATEOF IRWIN UNION CORPORATION Irwin Union Corporation (hereinafter referred to as the "Corporation") existing pursuant to the Indiana Business Corporation Law, desiring to give notice of corporate action effectuating amendment of certain provisions of its Articles of Incorporation, sets forth the following facts: ARTICLE I AMENDMENT Section 1. The date of incorporation of the Corporation is May 31, 1972. Section 2. The name of the Corporation following this amendment is Irwin Union Corporation. Section 3. The exact text of Article V, Section 1 and Section 5.20 of the Articles of Incorporation is now as follows: Section 1. Number. The number of shares which the Corporation has the authority to issue is 1,550,000 shares consisting of 1,500,000 Common Shares with a par due of $5 per share, and 50,000 preferred shares without par value. Section 5.20. Classes. The authorized shares of the Corporation (the "Shares") shall be divided into two classes consisting of 1,500,000 Common Shares, par value $5, (the "Common Shares") and 50,000 preferred shares without par value (the "Preferred Shares"). Section 4. The Amendment was adopted by the shareholders of the Corporation on March 22, 1989, and are to be effective upon the filing of these Articles of Amendment. XXXPAGE 100XXX ARTICLE II MANNER OF ADOPTION AND VOTE The designation (i.e. common, preferred and any classification where different classes of stock exists), number of outstanding shares, number of votes entitled to be -cast by each voting group entitled to vote separately on the amendment and the number of votes of each voting group represented at the meeting is set forth below: Designation of Voting Group Common Number of Outstanding Shares 630,007 Number of Votes Entitled to be Cast 630,007 Number of Votes Represented at Meeting 522,899 Shares Voted in Favor 512,798 -------- Shares Voted Against 9,238 IN WITNESS WHEREOF, the undersigned officer executes these Articles of Amendment of the Articles of Incorporation of the Corporation, and verifies subject to the penalties of perjury that the facts contained herein are true, this 10 day of May, 1989. IRWIN UNION CORPORATION /s/ Matthew F. Souza --------------------------- Matthew F. Souza, Secretary This instrument was prepared by Stephen J. Hackman, Attorney at Law, ICE MILLER DONADIO & RYAN, One American Square, Box 82001, Indianapolis, Indiana 46282-0002. XXXPAGE 101XXX Exhibit 3(d) ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF Irwin Union Corporation The above corporation (hereinafter referred to as the Corporation existing pursuant to the Indiana Business Corporation Law. desiring to give notice of corporate action effectuating amendment of certain provisions of its Articles of Incorporation, sets forth the following facts: ARTICLE I - AMENDMENT(S) Section 1: Date of Incorporation: May 31, 1972 Section 2: The name of the Corporation following this amendment: Irwin Financial Corporation Section 3: The exact text of Article(s) see attached of the Articles of Incorporation is now as follows (attach additional pages it necessary). Date of each Amendment's Adoption: August 21, 1990 XXXPAGE 102XXX Section 4: (Complete this section only if amendments provides for an exchange, reclassification or cancellation of issued shares and provisions for implementing the amendment are not contained in the amendment itself. Provisons for implementing the exchange, reclassification or cancellation of issued shares are set forth below (Attach additional sheets if necessary): N/A ARTICLE 11 - MANNER OF ADOPTION AND VOTE (Strike not applicable section) SECTION 1: Shareholder vote not required. The amendment(s) was I were adopted by the incorporators or board of directors without shareholder action and shareholder action was not required. SECTION 2: Vote of Shareholders. The designation (i.e. common, preferred and any classification were different classes of stock exists). number of outstanding shares. number of votes entitled to be Cast by each voting group) entitled lo vote separately on the amendment and the number of votes of each voting group represented at the meeting is set forth below: see attached. DESIGNATION OF EACH VOTING GROUP. NUMBER OF OUTSTANDING SHARES: NUMBER OF VOTES ENTITLED TO BE CAST: NUMBER OF VOTES REPRESENTED AT THE MEETING: SHARES VOTED IN FAVOR. SHARES VOTED AGAINST: In Witness Whereof, the undersigned being Vice President and Secretary of said Corporation executes these Articles of Amendments of the Articles of Incorporation and verifies. subject to penalties of perjury that the statements contained herein are true, this 4th day of September, 1990. /s/ Matthew F. Souza Matthew F. Souza Signature Printed XXXPAGE 103XXX ARTICLE I AMENDMENT Section 1. The date of incorporation of the Corporation is May 31, 1972. Section 2. The name of the Corporation following this amendment is Irwin Financial Corporation. Section 3. The exact text of Article I of the Articles of Incorporation is now as follows: Name. The name of the Corporation is Irwin Financial Corporation. Section 4. The Amendment was adopted by the shareholders of the Corporation on August 21, 1990, and are to be effective upon the filing of these Articles of Amendment. ARTICLE II MANNER OF ADOPTION AND VOTE The designation (i.e. common,, preferred and any classification where different classes of stock exists), number of outstanding shares, number of votes entitled to be cast by each voting group entitled to vote separately on the amendment and the number of votes of each voting group represented at the meeting is set forth below: Designation of voting Group Common Number of outstanding shares: 934,780 Number of votes entitled to be cast: 934,780 Number of votes represented at the meeting: 713,402 Shares voted in favor: 701,376 Shares voted against: 10,175 XXXPAGE 104XXX STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE ARTICLES OF AMENDMENT To Whom These Presents Come, Greeting: WHEREAS, there has been presented to em at this office, Articles of Amendment for: Irwin Financial Corporation and said Articles of Amendment have been prepared and signed in accordance with the provisions of the Indiana Business Corporation Law, as amended. NOW, THEREFORE, I JOSEPH H. HOGSETT, Secretary of State of Indiana, hereby certify that I have this day filed said articles in this office. The effective date of these Articles of Amendment is April 30, 1992. IN Witness Whereof, I have hereunto set my hand and affixed the seal of the State of Indiana, at the City of Indianapolis, this Thirtieth day of April, 1992. JOSEPH H. HOGSETT, Secretary of State XXXPAGE 105XXX ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF: The undersigned officers of Irwin Financial Corporation (hereinafter referred to as the "Corporation") existing pursuant to the provisions of: Indiana Business Corporation Law as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating amendment of certain provisions of Articles of Incorporation, certify the following facts: ARTICLE I Amendment(s) SECTION I The date of incorporation of the corporation is: May 31, 1972 SECTION 2 The name of the corporation following this amendment to the Articles of Incorporation is: same as above SECTION 3 The exact text of Article(s): V Section 1 Number of the Articles of Incorporation now as follows: The number of shares which the Corporation has the authority to issue is 7,550,000 shares consisting of common shares with a par value of $5 per share, and 50,000 preferred shares without par value. SECTION 4 Date of each amendment's adoption: April 21, 1992 XXXPAGE 106XXX ARTICLE 11 Manner of Adoption and Vote SECTION 1 Action by Directors: The Board of Directors of the Corporation duly adopted a resolution proposing to amend the terms and provisions of Article(s) of the Articles of Incorporation directing a meeting of the Shareholders, to be held on allowing such Shareholders to- vote on the proposed amendment. The resolution was adopted by (Select appropriate paragraph) (a)Vote of the Board of Directors at a meeting held on ------ --at which a quorum of such Board was present. (b) Written consent executed on --------, and signed by all member of the Board of Directors. SECTION 2 Action by Shareholders: The Shareholders of the Corporation entitled to vote in respect of the Articles of Amendment adopted the proposed amendment. The amendment was adopted by: (Select appropriate paragraph) (a) Vote of such Shareholders during the meeting called by the Board of Directors. The result of such vote is as follows: TOTAL SHAREHOLDERS ENTITLED TO VOTE. 1,417,891 SHAREHOLDERS VOTED IN FAVOR: 1,211,029 SHAREHOLDERS VOTED AGAINST. 10,668 (b) Written consent executed on 19 and signed by all such Shareholders SECTION 3 Compliance with Legal requirements. The manner of the adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal compliance the provisions of the Act. the Articles of Incorporation, and the By-Laws of the Corporation. I hereby verify subject to the Penalties of perjury that the statements contained are true this /s/ Matthew F. Souza ------------------------ Vice President and Secretary XXXPAGE 107XXX STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE ARTICLES OF AMENDMENT To Whom These Presents Come, Greeting: WHEREAS, there has been presented to em at this office, Articles of Amendment for: Irwin Financial Corporation and said Articles of Amendment have been prepared and signed in accordance with the provisions of the Indiana Business Corporation Law, as amended. NOW, THEREFORE, I JOSEPH H. HOGSETT, Secretary of State of Indiana, hereby certify that I have this day filed said articles in this office. The effective date of these Articles of Amendment is April 28, 1994. IN Witness Whereof, I have hereunto set my hand and affixed the seal of the State of Indiana, at the City of Indianapolis, this Twenty-eighth day of April, 1994. /s/ JOSEPH H. HOGSETT - ------------------------------- JOSEPH H. HOGSETT, Secretary of State By /s/ Peggy Runes - ---------------------------- Peggy Runes, Deputy XXXPAGE 108XXX ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF: The undersigned officers of IRWIN FINANCIAL CORPORATION (hereinafter referred to as the "Corporation") existing pursuant to the provisions of: (Indicate appropriate act) Indiana Business Corporation Law as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating amendment certain provisions of Articles of Incorporation, certify the following facts: ARTICLE I Amendment(s) SECTION 1 The date of incorporation of the corporation is: May 31, 1972 SECTION 2 The name of the corporation following this amendment to the Articles of Incorporation is: same as above SECTION 3 The exact text of Article(s) V., Section 1. Number of the Articles of Incorporation now as follows: The number of shares which the Corporation has the authority to issue is 7,550,000 shares consisting of 7,500,000 common shares without par value, and 50,000 preferred shares without par value. SECTION 4 Date of each amendment's adoption: April 26, 1994 XXXPAGE 109XXX ARTICLE II Manner of Adoption and Vote Section 1 Action by Directors: The Board of Directors of the Corporation duly adopt a resolution proposing to amend the terms and provisions of Articles ---------- of the Articles of Incorporation such Shareholders to vote on the proposed amendment. The resolution was adopted by: (Select aPProPtiateoaragrapt7) (a) Vote of the Board of Directors at a meeting held on ------------- 19-- at which a quorum of such Board was present. (b) Written consent executed on ------------------ 19-- and signed by ail members the Board of Directors. The Shareholders of the Corporation entitled to vote in respect of the Articles of Amendment adopted the Proposed amendment. The amendment was adopted by: (Select appropriate paragraph) (a) (a) Vote ot such Shareholders during the meeting called by the Board of Directors. The result of such vote is as follows: SHAREHOLDERS ENTITLED TO VOTE: 5,833,135 SHAREHOLDERS VOTED IN FAVOR: 4,986,081 SHAREHOLDERS VOTED AGAINST: 27,183 (b) Written consent executed on -------------- and signed by all such Shareholder of the adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal Compliance of the Act, the Articles of Incorporation, and the By- Laws of the Corporation. I hereby verify subject to the penalties of perjury that the statements contained are true the 27th day of April, 1994. /s/ Matthew F. Souza Matthew F. Souza Signature Printed Name Officer's Title: Vice President and Secretary XXXPAGE 110XXX ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF: Name of Corporation Irwin Financial Corporation The undersigned officers of: Irwin Financial Corporation (hereinafter referred to as the "Corporation") existing pursuant to the provisions of: (indicate appropriate act) Indiana Business Corporation Law as amended (hereinafter referred to as the 'Act'), desiring to give notice of corporate action effectuating amendment of certain provisions of its Articles of Incorporation, certify the following facts: Article I Amendment(s) SECTION 1 The date of incorporation of the Corporation is: May 31, 1972 SECTION 2 The name of the Corporation following this amendment to the Articles of Incorporation is: same as above SECTION 3 The exact text of Article(s) V. Section 1. Number of Incorporation is now as follows: The number of shares which the Corporation has the authority to issue is of the Articles 40,050,000 shares consisting of 40,000,000 common shares without par value, and 50,000 preferred shares without par value. SECTION 4 Date of each amendment's adoption: April 30, 1996 XXXPAGE 111XXX STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE ARTICLES OF AMENDMENT To Whom These Presents Come, Greeting: WHEREAS, there has been presented to me at this office, Articles of Amendment for: IRWIN FINANCIAL CORPORATION and said Articles of Amendment have been prepared and signed in accordance with the provisions of the Indiana Business Corporation Law, as amended. NOW, THEREFORE, I, SUE ANNE GILROY, Secretary of State of Indiana, hereby certify that I have this day filed said articles in this office. The effective date of these Articles of Amendment is May 02, 1996. In Witness Whereof, I have hereunto set my hand and affixed the seal of the State of Indiana, at the City of Indianapolis, this Second day of May, 1996. /s/ Sue Anne Gilroy - -------------------------- SUE ANNE GILROY, Secretary of State JB - --------------------------- Deputy XXXPAGE 112XXX ARTICLE 11 Manner of Adoption and Vote SECTION I This amendment was adopted by the Board of Directors or incorporators and shareholder action was not required. SECTION 2 The shareholders of the Corporation entitled to vote in respect to the amendment adopted the proposed amendment. The amendment was adopted by: A. Vote of such shareholders during a meeting called by the Board of Directors. The result of such vote is as follows: Shares entitled to vote. 5,670,586 Number of shares represented at the meeting. 5,296,068 Shares voted in favor. 4,928,818 Shares voted against. 344,339 B. Written consent executed on 19 and signed by all such shareholders. ARTICLE III Compliance with Legal Requirements The manner of the adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal compliance with tne provisions of the Act, the Articles of Incorporation, and the By-Laws of the Corporation. I hereby verify, subject to the penalties of perjury, that the statements contained herein are true, this lst day of May, 1996 /s/ Matthew F. Souza ------------------------------ Matthew F. Souza Vice President and Secretary XXXPAGE 113XXX CODE OF BY-LAWS IRWIN FINANCIAL CORPORATION ARTICLE 1 Definitions 8.21.90 1.01. Corporation. As used in this Code of By-Laws, the term "Corporation" means IRWIN FINANCIAL CORPORATION. 1.02. Act. As used in this Code of By-Laws, the term "Act" means The Indiana General Corporation Act. 1.03. Articles of Incorporation. As used in this Code of By-Laws, the term "Articles of Incorporation" means the Articles of Incorporation of the Corporation, as amended from time to time. 1.04. By-Laws. As used in this Code of By-Laws, the term "By-Laws" means the Code of By-Laws of the Corporation, as amended from time to time. ARTICLE 2 Identification 8.20.90 2.01. Name. The name of the Corporation is IRWIN FINANCIAL CORPORATION. 2.02. Principal Office and Resident Agent -- Power to Change. The post-office address of the principal office of the Corporation is 500 Washington Street, Columbus, Indiana 47201, and the post -office address of its Resident Agent in charge of such office is John A. Nash, 500 Washington Street, Columbus, Indiana 47201. The location of its principal office, or the designation of its Resident Agent, or both, may be changed at any time or from time to time, when authorized by the Board of Directors, by filling with the Secretary of State of the State of Indiana, on or before the day any such change is to take effect, or within five (5) days after the death of the Resident Agent or other unforeseen termination of his agency, a certificate signed by the President or a Vice President, and the Secretary or an Assistant Secretary, of the Corporation, and Verified under oath by one of such officers signing the same, stating the change to be made and reciting that such change is made pursuant to authorization by the Board of Directors. 2.03. Seal. The seal of the Corporation shall be circular in form and mounted upon a metal die, suitable for impressing the same upon paper. About the upper periphery of the seal shall appear the name of the Corporation, and about the lower periphery thereof the word "Indiana". In the center of the seal shall appear the words "Seal" or " Corporate Seal". XXXPAGE 114XXX 2.04. Fiscal Year. The fiscal year of the Corporation shall be the calendar year. ARTICLE 3 Shares 3.01. Consideration for Shares. The Board of Directors shall cause the Corporation to issue the Shares of the Corporation for such consideration as may be fixed by such Board pursuant to the provisions of the Articles of Incorporation. 3.02. Subscription for Shares. Subscriptions for Shares of Corporation shall be paid to the Treasurer at such time or times, in such installments or calls, and upon such terms, as shall be determined, from time to time, by the board of Directors. Any call made by the Board of Directors for payment on subscriptions shall be uniform as to all shares of the same class or to all Shares of the same series, as the case may be. 3.03. Payment for Shares. Subject to the provisions of the Articles of Incorporation, the consideration for the issuance of Shares of the Corporation may be paid, in whole or in part, in money, in other property, tangible or intangible, or in labor actually performed for, or services actually rendered to, the Corporation; provided, however, that the part of the surplus of the Corporation which is transferred to stated capital upon the issuance of Shares as a Share dividend shall be deemed to be the consideration for the issuance of such Shares. When payment of the consideration for which a Share was authorized to be issued shall have been received by the Corporation, or when surplus shall have been transferred to stated capital upon the issuance of a Share dividend, such Share shall be declared and taken to be fully paid and not liable to any further call or assessment, and the holder thereof shall not be liable for any further payments thereon. In the absence of actual fraud in the transaction, the judgment of the Board of Directors as to the value of such property, labor, or services received as consideration, or the value placed by the Board of Directors upon the corporate assets in the event of a Share dividend, shall be conclusive. Promissory notes, uncertified checks, or future services shall not be accepted in payment or part payment of any of the capital stock of the Corporation. 3.04. Certificates for Shares. Each Shareholder of the Corporation shall be entitled to a certificate, signed by the President or a vice-president, and the Secretary or an Assistant Secretary of the Corporation stating the name of the registered holder, the number of Shares represented thereby and the kind and class thereof, the par value of each Share have been fully paid and are nonassessable. If such certificate is countersigned by the written signature or a registrar other than the Corporation of its employee, the signatures of the transfer agent and the officers of the Corporation may be facsimiles. In case any officer, XXXPAGE 115XXX transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of its issue. Such certificates shall be in such form as the board of Directors may, from time to time, by resolution approve. 3.05. Transfer of Shares. The Shares of the Corporation shall be transferable only on the books of the Corporation upon surrender of the certificate or certificates representing the same, provided: 3.051. Endorsement. The certificate is properly endorsed by the registered holder or his duly authorized attorney; 3.052. Witnessing. The endorsement or endorsements are witnessed by one witness unless this requirement is waived in writing upon the form of endorsement by the President, a Vice-President, or the Secretary of the Corporation; 3.053. Adverse Claims. The Corporation has no notice of any adverse claims or has discharged any duty to inquire into any such claims; and 3.054. Collection and Taxes. Any applicable law related to the collection of taxes has been complied with. 3.06. Lost, Stolen, or Destroyed Certificates. The Corporation may issue a new certificate for Shares of the Corporation in the place of any certificate theretofore issued where the holder of record of the certificate: 3.061. Claim. Makes proof in affidavit form that it has been lost, destroyed, or wrongfully taken; 3.062. Timely Request. Timely Requests the issue of a new certificate before the Corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of any adverse claim; 3.063. Bond. Gives a bond in such form, and with such surety or sureties, with fixed or open penalty, as the Corporation may direct, to indemnify the Corporation against any claim that may be made on account of the alleged loss, destruction, or theft of the certificates; and 3.064. Other Requirements. Satisfies any other reasonable requirements imposed by the Corporation for the transfer or for a new certificate. When a certificate has been lost, apparently destroyed, or wrongfully taken and the holder of record fails to notify the Corporation within a reasonable time after he has notice of it, and the Corporation registers a transfer of Shares represented XXXPAGE 116XXX by the Certificate before receiving such notification, the holder of record is precluded from making any claim against the Corporation for the transfer or for a new certificate. 3.07. Closing of Books or Fixing of Record Dates. For the purpose of determining Shareholders entitled to receive payment of any dividend or in order to make a determination of Shareholders for any other proper purpose, except as otherwise provided in section 4.069 of these By- Laws, the Board of Directors may provide that the share transfer books shall be closed for a stated period, but not to exceed, in any case, fifty (50) days, or may fix in advance a record date for such purpose, such date in any case not to be more than fifty (50) days prior to the date in which the action requiring such determination of Shareholders, is to be taken. If the share transfer books are not closed and no record date is fixed for the determination of Shareholders entitled to receive payment of a dividend, the end of the day on which the resolution of the Board of Directors declaring such dividend is adopted shall be the record date for such determination. ARTICLE 4 Meetings of Shareholders 4.01. Place of Meetings. All meetings of Shareholders of the Corporation shall be held at such place, within or without the State of Indiana, as may be specified in the respective notices or waivers of notice thereof, or proxies to represent Shareholders thereat. 12.20.94 4.02. Annual Meeting. The annual meeting of the Shareholders for the election of Directors and for the transaction of such other business as may properly come before the meeting, shall be on or before the last day of May of each year, the date to be set by the Board of Directors of the Corporation. Failure to hold the annual meeting at the designated time shall not work any forfeiture or a dissolution of the Corporation. 4.03. Special Meeting. Special meetings of the Shareholders may be called by the President, by the Board of Directors, or by Shareholders holding of record not less than one-fourth (1/4/) of all of the Shares outstanding and entitled by the Articles of Incorporation to vote on the business proposed to be transacted thereat. 4.04. Notice of Meetings. A written or printed notice, stating the place, day and hour of the meeting, and in case of a special meeting, or when required by any other provision of the Act, or the Articles of Incorporation, or By-Laws, the purpose or purposes for which the meeting is called, shall be delivered or mailed by the Secretary, or by the officers or persons calling the meeting, to each Shareholder of record entitled by the Articles of Incorporation and by the Act to vote as such meeting, at such address as appears upon the records of the Corporation, at least ten (10) days before the date of the meeting. Notice of any such meeting may be waived in writing by any Shareholder, if the XXXPAGE 117XXX waiver sets forth in reasonable detail the purpose or purposes for which the meeting is called, and the time and place thereof. Attendance at any meeting in person, or by proxy when the instrument of proxy sets forth in reasonable detail the purpose for which the meeting is called, shall constitute a waiver of notice of such meeting. Each Shareholder, who has in the manner above provided waived notice of a Shareholders' meeting, or who personally attends a Shareholders' meeting, or is represented thereat by a proxy authorized to appear by an instrument of proxy complying with the requirements above set forth, shall be conclusively presumed to have been given due notice of such meeting. 4.05. Addresses of Shareholders. The address of any Shareholder appearing upon the records of the Corporation shall be deemed to be (i) the latest address of such Shareholder appearing on the records maintained by the transfer agent or registrar, as the case may be, for the class of Shares held by such Shareholder, if the Corporation has a transfer agent or registrar for such class of Shares and the Board of Directors has provided in the resolutions appointing the transfer agent or registrar that notices of change of address shall be given to one of such agents by Shareholders of such class; or (i) the latest address of such Shareholder appearing on the records maintained by the Secretary for the class of Shares held by such Shareholder, if the Corporation has no transfer agent or registrar for such class of Shares but the resolutions appointing the transfer agent or registrar for such class of Shares but the resolutions appointing the transfer agent or registrar do not provide that notice of change of address shall be given to one of such agents by Shareholders of such class of Shares. 4.06. Voting at Meetings. 4.061. Common Shares. Except as otherwise provided by law or by the provisions of the Articles of the Incorporation, every holder of Common Shares of the Corporation shall have the right, at every Shareholders' meeting, to one vote for each Common Share standing in his name on the books of the Corporation. Cumulative voting shall not be permitted. 4.062. Prohibition Against Voting Certain Shares. No Share shall be voted at any meeting upon which any installment is due and unpaid or which belongs to the Corporation. 4.063. Voting of Shares Owned by Other Corporations. Shares of the Corporation standing in the name of another corporation may be voted by such officer, agent or proxy as the board of directors of such other corporation may appoint, or as the by-laws of such other corporations may prescribe. 4.064. Voting of Shares owned by Fiduciaries. Shares held by fiduciaries may be voted by the fiduciaries in such manner as the instrument or order appointing such fiduciaries may direct. In the absence XXXPAGE 118XXX of such direction or the inability of the fiduciaries to act in accordance therewith, the following provisions shall apply: 4.0641. Joint Fiduciaries. Where Shares are held jointly by three (3) or more fiduciaries, such Shares shall be voted in accordance with the majority. 4.0642. Equally Divided Fiduciaries. Where the fiduciaries, or majority of them, cannot agree, or where they are equally divided, upon the question of voting such Shares, any court of general equity jurisdiction may, upon petition filed by any of such fiduciaries, or by any party in interest, direct the voting of such Shares as it may deem for the best interests of the beneficiaries, and such Shares shall be voted in accordance with such direction. 4.0643. Proxy of Fiduciary. The general proxy of a fiduciary shall be given the same weight and effect as the general proxy of an individual or corporation. 4.065. Voting of Pledged Shares. Shares that are pledged may, unless otherwise provided in the agreement of pledge, be voted by the Shareholder pledging the same until the Shares shall have been transferred to the pledgee on the books of the Corporation, and thereafter they may be voted by the pledgee. 4.066. Proxies. A Shareholder may vote, either in person or by proxy executed in writing by the Shareholder, or a duly authorized attorney- in-fact. No proxy shall be valid after eleven (11) months from the date of its execution, unless a longer time is expressly provided therein. 4.067. Quorum. At any meeting of the Shareholders, a majority of the Common Shares outstanding and entitled to vote, represented in person or by proxy, shall constitute a quorum. 4.068. Voting Lists. The officer or agent having charge of the share transfer books shall make, at least five (5) days before each election of directors, a complete list of the Shareholders entitled by the Articles of Incorporation to vote at such election, arranged in alphabetical order, with the address and number of Shares so entitled to vote held by each, which list shall be on file at the principal office of the Corporation and subject to inspection by any Shareholder. Such list shall be produced and kept open at the time and place of election and subject to the inspection of any Shareholder during the holding of such election. The original share register or transfer book or duplicate thereof, kept in the State of Indiana, XXXPAGE 119XXX Shall be the examine such list, or share register or transfer book, or to vote at any meeting of the Shareholders. 4.069. Fixing of Record Date to Determine Shareholders Entitled to Vote. For the purpose of determining Shareholders entitled to vote at any meeting of Shareholders or any adjournment thereof, the Board of Directors, may fix in advance a date as the record date for any such determination of Shareholders, such date in any case to be not more than fifty (50) days prior to the date of such meeting. In the absence of such a determination by the Board of Directors, such date shall be ten (10) days prior to the date of such meeting. Any person who acquires title to a Share after the record date shall upon written request to the Shareholder of record be entitled to receive from the Shareholder of record a proxy, with power of substitution, to vote that Share. 4.07. Taking Action by Consent. Any action which may be taken at a meeting of the Shareholders, may be taken without a meeting if, prior to such action, a consent in writing, setting forth the action so taken, shall be signed by all of the Shareholders entitled to vote with respect to the subject matter thereof, and such written consent is filed with the minutes of the proceedings of the Shareholders. 4.08. Order of Business. The order of business at annual meetings, and so far as practicable, at all other meetings of Shareholders shall be: Proof of due notice of meeting; Reading and disposal of any unapproved minutes; Annual reports of officers and committees; Election of directors; New business; Adjournment ARTICLE 5 The Board of Directors 8.20.96 5.01. Election and Qualification. At the first annual meeting of the Shareholders, and at each annual meeting thereafter, directors shall be elected by the Shareholders entitled by the Articles of Incorporation to elect directors, for a term of one year; and they shall hold office until their respective successors are chosen and qualified. The Board shall consist of twelve (12) directors. Directors need not be Shareholders of the Corporation. At least a majority of the director of the directors shall be citizens of the United States. The number of directors may be increased or decreased from time to time by amendment to the By-Laws, but no decrease shall have the effect of shortening the term of any incumbent director. XXXPAGE 120XXX 5.02. Vacancies. Any vacancy occurring in the Board of Directors caused by resignation, death or other incapacity, or increase in the number of directors may be filled by a majority vote of the remaining members of the Board of Directors, until the next annual or special meeting of the Shareholders or, at the discretion of the Board of Directors, such vacancy may be filled by vote of the Shareholders at a special meeting called for the purpose. Until any such vacancy is so filled, the existing directors shall constitute the Board of Directors. Shareholders shall be notified of any increase in the number of directors and the name, address, principle occupation, and other pertinent information about any director elected by the Board of Directors to fill any vacancy. 5.03. Annual Meeting. The Board of Directors shall meet each year after the annual meeting of Shareholders (either within or without the State of Indiana), for the purpose of organization, election of officers and consideration of any other business that may properly be brought before the meeting. The time of this meeting shall be no later than the first regular or special meeting of the Board of Directors, at which a quorum shall be present, held after the annual meeting of Shareholders. No additional notice of any kind to either old or new members of the Board of Directors shall be necessary. 5.04. Regular Meetings. Regular meetings of the Board of Directors may be held with notice by letter, telegram, cable, radiogram, telephone, or radiophone, or without any notice whatever, and at such place and times, as may be fixed from time to time by resolution of the Board of Directors. 5.05. Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, President or any Vice- President, and shall be called on the written request of one- fourth (1/4) of the directors. Notice of such a special meeting shall be sent by the Secretary or an Assistant Secretary to each director at his residence or usual place of business by letter, telegram, cable or radiogram, delivered for transmission not later than the second day immediately preceding the day for the meeting, or by word of mouth, telephone, or radiophone received not later than during the day immediately preceding the day for the meeting. In lieu of such notice, a director may sign a written waiver of notice either before the time of the meeting, at the time of the meeting, or after the time of the meeting. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice or waiver of notice of the meeting. Any meeting of the Board of Directors for which notice is required shall be a legal meeting, without notice thereof having been given, if all the directors, who have not waived notice thereof in writing, shall be present in person. 5.06. Place of Meetings. The directors may hold their meetings, have one or more offices, and keep the books of the Corporation, except as may be provided by law, within or without the State of Indiana, at any office or offices of the Corporation, or at any other place, as they may form time to time by resolution determine. If the resolution of the Board of Directors calling a regular meeting or the written request calling a special meeting expressly provides, a meeting of the Board of Directors may be held by conference telephone call or any other medium which allows each director to participate XXXPAGE 121XXX in discussions and to hear the views of the other directors. If a meeting is held, the directors connected to the conference telephone call or other medium shall be counted as present for the purpose of determining a quorum. 5.07. Quorum. One-third (1/3) of the actual number of directors elected and qualified, from time to time, shall be necessary to constitute a quorum for the transaction of any business except the filling of vacancies, and the act of a majority of the directors present at a meeting, at which a quorum is present, shall be the act of the Board of Directors, unless the act of a greater number is required by the Act, by the Articles of Incorporation, or by the By-Laws. A director who is present at a meeting of the Board of Directors at which action on any corporate matter is taken, shall be conclusively presumed to have assented to the action taken, unless (i) his dissent shall be affirmatively stated by him at and before the adjournment of such meeting (in which event the fact of such dissent shall be entered by the secretary of the meeting in the minutes of the meeting, or (ii) he shall forward such dissent by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. The right of dissent provided for by either clause (i) or clause (ii) of the immediately preceding sentence shall not be available, in respect of any matter acted upon at any meeting, to a director who voted at the meeting in favor of such matter and did not change his vote prior to the time that the result of the vote on such matter was announced by the chairman of such meeting. 5.08. Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if prior to such action a written consent to such action is signed by all members of the Board of such committees as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. 5.09. Removal. Any or all of the directors may be removed, with or without cause, at a meeting of the Shareholders called expressly for that purpose by a vote of the holders of a majority of the Shares then entitled to vote at an election of directors. 5.10. Powers of Directors. The Board of Directors shall exercise all the powers of the Corporation, subject to the restrictions imposed by law, by the Articles of Incorporation, or by these By-Laws. 5.11. Dividends. The Board of Directors shall have power, subject to any restrictions contained in the Articles of Incorporation, to declare and pay dividends upon the outstanding Shares of the Corporation, out of the unreserved and unrestricted capital and earned surplus of the Corporation. Dividends may be paid in cash, in property, or in Shares of the Corporation, but no dividend payable in cash or property shall be paid out of surplus due to or arising from unrealized appreciation in value or from revaluation of assets. XXXPAGE 122XXX 5.12. Compensation of Directors. The Board of Directors is empowered and authorized to fix and determine the compensation of directors as directors, and any additional compensation for such additional services any such directors may perform for the Corporation. 5.13. Resignation. A director may resign at any time by filing his written resignation with the Chairman of the Board, the President or the Secretary of the Corporation, or with the Board of Directors, and such resignation shall become effective upon such filing. 5.14. Reliance on Corporation Records. Each Director shall be fully protected in relying in good faith upon the books of account and records of the Corporation or upon statements prepared by any of its officers or employees. ARTICLE 6 Executive Committee 6.01. Designation of Executive Committee. The Board of Directors may, by resolution adopted by a majority of the actual number of directors elected and qualified, from time to time, designate two (2) or more of its number to constitute an executive committee which committee to the extent provided in such resolution, shall have and exercise all of the authority of the Board of Directors but the designation of such committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. No member of the executive committee shall continue to be a member thereof after he ceases to be a director of the Corporation. The Board of Directors shall have the power at any time to increase or diminish the number of members of the executive committee, to fill vacancies thereon, to change any member thereof, ant to change the functions or terminate the existence thereof. 6.02. Powers of the Executive Committee. During the intervals between meetings of the Board of Directors, and subject to such limitations as may be required by law or by resolution of the Board of Directors, the executive committee shall have and may exercise all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, including power to authorize the seal of the Corporation to affixed to all papers which may require it . The executive committee may also from time to time formulate and recommend to the Board of Directors for approval general policies regarding the management of the business and affairs of the Corporation. All minutes of the meetings of the executive committee shall be submitted to the next succeeding meeting of the Board of Directors for approval; but the Corporation upon authorization by the executive committee prior to the time at which the same should have been, or were, submitted as above provided. The executive committee shall not have the authority of the Board of Directors in reference to amending the Articles of Incorporation, adopting an agreement or plan of merger or consolidation, proposing a Special Corporate XXXPAGE 123XXX Transaction as defined in the Act, recommending to the Shareholders a voluntary dissolution of the Corporation or a revocation thereof, or amending these By-Laws. 6.03. Procedure; Meetings; Quorum. The chairman of the executive committee of the Corporation shall, if present, act as chairman at all meetings of the executive committee, and the Secretary of the Corporation shall, if present, act as secretary of the meeting. In case of the absence from any meeting of the executive committee of the chairman of the executive committee or the Secretary of the Corporation, the executive committee shall appoint a chairman or secretary, as the case may be, of the meeting. The executive committee shall keep a record of its acts and proceedings. Regular meetings of the executive committee, of which no notice shall be held on such days and at such places as shall be fixed by resolution adopted by majority of the executive committee shall be called at the request of any member of the executive committee. Written notice of each special meeting of the executive committee shall be sent by the Secretary or an Assistant Secretary to each member of the executive committee at his residence or usual place of business by letter, telegram, cable or radiogram, delivered for transmission not later than during the day immediately preceding the day for the meeting, or by word any such meeting need not be given to any member of the executive committee who has waived such notice either before or after such meeting, or who shall be present at the meeting. Any meeting of the executive committee shall be a legal meeting, without notice thereof having been given, if all members of the executive committee who have not waived notice thereof in writing or by telegram, cable or radiogram shall be present in person. Neither the business to be transacted at, nor the purpose of, any meeting of the executive committee need be specified in the notice or waiver of notice of the meeting. The executive committee may hold its meetings within or without the State of Indiana, as it may from time to time by resolution determine. If the resolution of the executive committee calling a regular meeting or the written request calling a special meeting expressly provides, a meeting of the executive committee may be held by the conference telephone call or any other medium which allows each member to participate in discussion and to hear the views of the other members. If a meeting is held, the members connected to the conference telephone call or other medium shall be counted as present for the purpose of determining a quorum. A majority of the executive committee, from time to time, shall be necessary to constitute a quorum for the transaction of any business, and the act of a majority of the members present shall be the act of the executive committee. The members of the executive committee shall act only as a committee, and the individual member shall have no power as such. The Board of Directors may vote to the members of the executive committee a reasonable fee as compensation for attendance at meetings of such committee. 6.04. Other Committees. From time to time the Board of Directors, by the affirmative vote of a majority of the actual number of directors elected and qualified, may appoint, form among their number, other committees for any purpose or purposes, and each such committee shall have such powers as shall be conferred by the resolution of appointment. XXXPAGE 124XXX 6.05. Audit Committee. The Board of Directors shall by resolution adopted by a majority of the actual number of directors elected and qualified, from time to time, designate two or more of its members who are not officers, to constitute an Audit Committee of the Board of Directors. The Audit Committee shall have, and may exercise the authority of the Board of Directors to the extent provided in such resolutions, as to matters relating to the appointment of independent certified public accountants, the reliability of financial statements, the adequacy of financial controls, the conduct of audits. And such investigations of other financial or operational matters related to the Company as the Board of Directors shall direct. The Audit related recommendations to the Board, (which reports may be relied upon by members of the Board of Directors who are not members of the Audit Committee's designated authority, if the director reasonably feels the Committee merits confidence and has no knowledge concerning the matter in question that would cause such reliance to be unwarranted). A member of the Board of Directors who is not a member of the Audit Committee shall not be liable for any action taken by the Committee if the member has acted in good faith and in a manner reasonably believed to be in the best interests of the Corporation. ARTICLE 7 The Officers 7.01. Number. The officers of the Corporation shall consist of the Chairman of the Board of Directors, if elected, the president, one or more Vice- Presidents, if elected, (to be classified as determined by the Board of Directors, as Executive Vice-Presidents, Senior Vice-Presidents, Vice Presidents or Assistant Vice Presidents), the Treasurer, the Secretary, and such other officers (included a controller) and assistants as the board of Directors may appoint. Any two or more offices may be held by the same person, except that the duties of the 7.02. Election, Term of Office and Qualifications. The officers shall be chosen annually by the Board of Directors. Each officers shall hold office until his successor is chosen and qualified, or until his death, or until he shall have resigned, or shall have been removed in the manner hereinafter provided. 7.03. Removal. Any officer may be removed, either with or without cause, at any time, by the vote of a majority of the actual number of directors elected and qualified, from time to time, at any regular or special meeting of the Board of Directors. 7.04. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors, or the President or the Secretary. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. XXXPAGE 125XXX 7.05. Vacancies. Any vacancy in any office because of death, resignation, removal or any other cause may be filled for the unexpired portion of the term in the manner prescribed in the By-Laws for election or appointment to such office. 7.06. The Chairman of the Board. The Chairman of the Board, if elected, who shall be chosen from among the directors, shall preside at all meetings of the Board of Directors and the Shareholders and shall perform such other duties as the Board of Directors may from time to time assign to him. 7.07. The President. The President shall be chief executive and administrative officer of the Corporation. In the absence of the Chairman of the Board he shall preside at all meetings o f the Shareholders and at meetings of the Board of Directors. He shall exercise such duties as customarily pertain to the office of the President and shall have general and active supervision over the property, business and affairs of the Corporation and over its several Officers. He may appoint officers, agents or employees other than those appointed by the Board of Directors and shall perform such other duties as may be prescribed from time to time by the Board of Directors or by the By-Laws. 7.08. The Vice-Presidents. The Vice- Presidents (including Executive Vice-Presidents, Senior Vice- Presidents and Assistant Vice-Presidents) shall have such powers and perform such duties as the Board of directors may from time to time prescribe or as the President may from time to time delegate to them. At the request of the President, one such officer may, in the case of the absence or inability to act of the President, temporarily act in his place. In case of the death of the President, or in the case of his absence or inability to act without having designated an officer to act temporarily in his place, the officer so to perform the duties of the President shall be designated by the Chairman of the Board. 7.09. The Secretary. The Secretary shall have the custody and care of the Corporate seal, records, minutes and share books of the Corporation. He shall attend all meetings of the Shareholders and of the Board of Directors, and shall keep, or cause to be kept in a book provided for the purpose, a true and complete record of the proceedings of such meetings, and shall perform a like duty for all standing committees appointed by the Board of Directors, when of required. He shall attend to the giving and serving of all notices of the Corporation, shall file and take charge of all papers and documents belonging to the Corporation and shall perform such other duties as these By- Laws may require or the Board of Directors may prescribe. 7.10. The Treasurer. The Treasurer shall be the financial officers of the Corporation; shall have charge and custody of, and such funds in the name of the Corporation in such banks, trust companies or other depositaries as shall be selected by the Board of Directors; shall receive, and give receipts for , moneys due and payable to the Corporation from any source whatsoever; and, in general, shall perform all duties as, from time to time, may be assigned to him by the Board of Directors or by the President. The Treasurer shall render to the President and the Board of Directors, whenever the XXXPAGE 126XXX same shall be required, and account of all of his transactions as Treasurer and of the financial condition of the Corporation. 7.11. The Controller. The Controller, if a controller is elected, shall be responsible to the Board of Directors and the President for all financial control and internal audit of the Corporation and its subsidiaries. He shall perform such other duties as may be assigned to him by the Board of Directors or the President. 7.12. The Assistant Secretaries. The Assistant Secretaries, as directed by the President or the Board of Directors, shall perform the duties of the Secretary during the absence or inability of the Secretary to perform such duties, or any of them. They shall perform such other duties as the President or the Board may prescribe. 7.13. The Assistant Treasurers. The Assistant Treasurers as directed by the President or the Board of Directors, shall perform the duties of the Treasurer during the absence or inability of the Treasurer to perform such duties as the President and the Board may prescribe. 7.14. Other Offices. The Board of Directors may create such other offices as it may from time to time deem desirable with such duties as it may determine. ARTICLE 8 Corporate Acts 8.01. Execution of Deeds, Contracts, etc. All deeds and mortgages made by the Corporation and all other written contracts and agreements to which the Corporation shall be a party shall be (i) executed in its name by the Chairman of the Board, the President or a Vice President and (ii) attested by any officer of the Corporation other than the officer executing the document. 8.02. Execution of Checks, Notes, etc. All checks, drafts, notes, bonds, bills of exchange and orders for the payment of money by the Corporation as the Board of Directors from time to time may authorize and direct. 8.03. Execution of Certain Securities. All assignments or endorsements of stock certificates, registered bonds, or other securities owned by the Corporation shall, unless, otherwise directed by the Board of Directors, or unless otherwise required by law, be (I) signed by the Chairman of the Board, the President or a Vice President and (ii) attested by any officer of the Corporation other than the officer signing the security. The Board of Directors may, however, authorize any one of such officers to sign any of such instruments, for and on behalf of the Corporation, without the necessity of counter-signatures; may designate officers or employees of the Corporation, other than those named above, who may, in the name of the Corporation, sign such instruments; and may authorize the use of facsimile signatures of any of such persons. XXXPAGE 127XXX 8.04. Voting of Shares Owned by Corporation. Subject always to the further orders and directions of the Board of Directors, any share or shares issued by any other corporation and owned or controlled by the Corporation may be voted at any shareholders' meeting of such other corporation by the Chairman of the Board, or in his absence by any Vice-President of the Corporation who may be present. Whenever, in the judgment of the Chairman of he Board or, in his absence, the President, it is desirable for the Corporation to execute a proxy or give a shareholders' consent in respect to any share or shares issued by any other corporation and owned by the Corporation, such proxy or consent shall be executed in the name of the Corporation by the Chairman of the Board, the President or a Vice- President of the Corporation and shall be attested by the Secretary or an Assistant Secretary of the corporate seal. Any person or persons designated in the manner above stated as the proxy or proxies of the Corporation shall have full right, power and authority to vote the share or shares issued by such other corporation and owned by the Corporation, the same as such share or shares might be voted by the Corporation. ARTICLE 9 Amendments The power to make, alter, amend or repeal these By-Laws is vested in the Board of Directors, but the affirmative vote of a majority of the actual number of directors elected and qualified from time to time, shall be necessary to effect any alteration, amendment or repeal of these By-Laws. ARTICLE 10 Miscellaneous 4.26.90 10.01. Control Share Opt-Out. Chapter 42 of the Indiana Business Corporation Law, as amended (the "IBCL"), shall not apply to " control share acquisitions" (as defined in the IBCL) of shares of the Corporation. XXXPAGE 128XXX INLAND MORTGAGE CORPORATION LONG TERM INCENTIVE COMPENSATION PLAN ARTICLE I PURPOSE OF PLAN The continued growth and success of Inland Mortgage Corporation ("Inland") are dependent upon Inland's ability to attract and retain the services of key executives and provide incentive for their superior long term performance. The purpose of the Inland Mortgage Corporation Long Term Incentive Compensation Plan (the "Plan") is to attract, retain and motivate key executives to achieve long-term performance goals ARTICLE II NATURE OF THE PLAN This Plan is an income tax non-qualified, unfunded plan to provide deferred compensation for a "select group of management or highly compensated employees." It is our intention this plan be a Top-Hat Plan under ERISA 29 CFR 2520.104-24. ARTICLE III DEFINITIONS 3.1 Annual Return on Equity. Annual Return on Equity is the amount equal to net income of Inland for a particular year, as determined under Generally Accepted Accounting Principles, divided by the average equity of Inland for the same year. 3.2 Basis Points. The value of each Basis Point will equal one one-hundredth of one percent (.01%). 3.3 Board. Board shall mean the Board of Directors for Inland Mortgage Corporation. 3.4 First Vesting Date. First Vesting Date is the first January 1 following the end of an Incentive Period. 3.5 Incentive Compensation Award. Incentive Compensation Award is the number of Basis Points awarded to a participant by the Board. Those Basis Points will be multiplied by the Net Income for each year in the Incentive Period to create the Participant's annual accrual. XXXPAGE 129XXX 3.6 Incentive Period. An Incentive Period is a period of time during which the value of an award under the Plan to a Participant shall be determined. The first Incentive Period is January 1, 1993 to December 31, 1994. The second Incentive Period is January 1, 1993 to December 31, 1996. The third Incentive Period is January 1, 1995 to December 31, 1998. Each successive Incentive Period (after the third Incentive Period) shall begin on the January 1 two years following the beginning of the immediate previous Incentive Period and end on the fourth December 31 after its beginning. 3.7 Net Income. Net Income as determined under Generally Accepted Accounting Principles. 3.8 Participants. Participants are those employees chosen to participate in the Plan by , and at the sole discretion of, the Board. For each Incentive Period, the Board shall designate which employees shall participate in the Plan. 3.9 Plan Administrator. Plan Administrator means the Company (Inland), except that the Administrator may appoint an individual, committee or an entity to carry out certain functions of the Administrator. 3.10 Retirement. Retirement shall mean that date on or following the Participant's 65th birthday, when the participant ceases to be an employee of Inland. 3.11 Second Vesting Date. Second Vesting Date is the second January 1 following the end of an Incentive Period. XXXPAGE 130XXX ARTICLE IV INCENTIVE COMPENSATION AWARD 4.1 Calculation of Participant's Incentive Compensation Award. For each Participant with respect to an Incentive Period, the Participant's Incentive Compensation Award shall accrue annually and shall be the product of the Incentive Compensation Award (stated in number of Basis Points as determined by the Board) times the Net Income. 4.2 Award Threshold. An Award with respect to an Incentive Period shall only be made to a Participant if the cumulative performance record of Inland for that Incentive Period exceeds a twelve percent (12%) average Annual Return on Equity. The Award Threshold for any prospective Incentive Period may be established at any level according to the discretion of the Board. If the Award Threshold is changed by the Board, a written description of the change and its effective date shall be attached to the Plan and communicated in writing to the participants by the Plan Administrator. 4.3 Right to Receive Award. Subject only to those exceptions set forth in this paragraph 4.3, Participant must continue employment with Inland through the last day of the Incentive Period in order to be entitled to receive any of the Participant's Incentive Compensation Award for such Incentive Period. Nothing in this Plan in general or any of its provisions in particular is intended to constitute an offer of or be a guarantee of employment to the Participant. If a Participant's employment with Inland is terminated prior to the end of the Incentive Period for any reason other than death, disability or Retirement, Participant shall not be entitled to any payment of an Award related to that Incentive Period. If a Participant's employment with Inland is terminated prior to the end of an Incentive Period due to death, disability or Retirement, Participant or the Participant's beneficiary or estate shall be entitled to receive payment of a prorated portion of the Participant's Award related to that Incentive Period. XXXPAGE 131XXX ARTICLE V VESTING An Award will vest fifty percent (50%) on the first January 1 (First Vesting Date) following the end of an Incentive Period and will become one hundred percent (100%) vested on the second January 1 (Second Vesting Date) following the end of an Incentive Period. There are two exceptions to this vesting provision. (1) For the first incentive period (the two year period from January 1, 1993, to December 31, 1994) vesting is immediate. (2) For the first four year incentive period, beginning January 1, 1993 and ending December 31, 1996, the participant will be fifty percent (50%) vested on January 1, 1996 and will become one hundred percent (100%) vested on January 1, 1997. A Participant must be a full time employee of Inland continually in order for the respective portion of an Award to become vested. The termination of a Participant's employment with Inland shall not affect the vested status of Awards which were vested prior to such termination of employment. In the event of a Participant's Retirement , death or disability, vesting shall accelerate immediately to one hundred percent (100%) of the pro rata portion of the Incentive Period(s) during which the Retirement, death or disability occurred and during which Participant was a full time employee. Vesting will accelerate in the same manner if, upon sale or acquisition of Inland, the Plan is terminated. ARTICLE VI PAYMENT OF AWARDS 6.1 Payment Options. At the beginning of an Incentive Period, each Participant for that Incentive Period shall irrevocably elect in writing and have delivered to the Plan Administrator, one of the payment options set forth below for any Award that may be accrued by Inland in such Participant's favor during the respective Incentive Period: (a) Payment in one lump sum within thirty (30) days after the time the Award is one hundred percent (100%) vested; or (b) Payment of the Award in a lump sum on the anniversary date of the date upon which such Award became one hundred percent (100%) vested, which anniversary date shall not be less than two (2) years after such one hundred percent (100%) vested date; or (c) Following Participant's retirement, payment via a lump sum cash payment in March of the next succeeding calendar year; or (d) Payment in ten (10) equal annual installments beginning in March of the calendar year following the calendar year in which the Participant retires; or XXXPAGE 132XXX (e) Such additional methods of payment as the Board, in its sole discretion, may authorize. If no election is made, Participant's Award shall be paid in a lump sum within thirty (30) days after the date such Award becomes fully vested. 6.2 Interest. The unpaid portion with respect to any Award that is not paid out within ninety (90) days after such Award becomes one hundred percent (100%) vested, shall accrue interest at a rate equal to the Federal Reserve's consensus average prime rate as reflected in the Wall Street Journal and the Federal Reserve Bulletin, compounded quarterly. 6.3 Death Benefits. If a Participant who has deferred payment of a one hundred percent (100%) vested Award dies before full payment of the Award, the unpaid balance of the Award, shall be paid in a lump sum to the Participant's beneficiary as designated in writing by the Participant on the Beneficiary Designation form or, if there is no beneficiary, to the Participant's estate within ninety (90) days after written proof of a Participant's death has been received by the Plan Administrator. 6.4 Termination. If a Participant who has deferred payment of an Award under the Plan ceases to be employed by Inland for any reason other than death or Retirement, the Board may, in its sole discretion, pay the Participant's deferred vested Awards in a lump sum within ninety (90) days after the Participant's termination of employment with Inland. ARTICLE VII SOURCE OF BENEFITS This Plan and the benefits payable hereunder shall be unfunded and shall be payable only from the general assets of Inland. Inland does not represent that a specific portion of its assets will be used to provide the benefits hereunder. The Participant or beneficiaries shall not have any security interest in Inland. Nothing contained herein shall be deemed to create a trust of any kind or create any fiduciary relationship or obligation on the part of or on behalf of any Participant. To the extent that any person acquires a right to receive payments from Inland under this Plan, such rights shall be no greater than the right of any unsecured general creditor of Inland. ARTICLE VIII ADMINISTRATION The Plan shall be administered by the Board. The Board shall have the exclusive authority and responsibility for all matters in connection with the operation and administration of the Plan. The administration of the Plan shall include, but shall not be limited to, the following: (a) The completion and maintenance of all records necessary in connection with the Plan; XXXPAGE 133XXX (b) Compliance of the Plan with all applicable laws and regulations (c) Authorizing the payment of all benefits and expenses of the Plan as they become payable under the Plan; and (d) Authority to engage such legal, accounting, and other professional services as appropriate . Decisions by the Board shall be final and binding upon all parties affected by the Plan, including the beneficiaries of Participants. The Board may delegate to a Plan Administrator responsibility for ordinary plan administration and responsibility for decisions that the Board may make or actions that it may take under the terms of the Plan, subject to the Board's reserved right to review such decisions or actions and modify them at the Board's sole discretion. Except as specifically provided herein, the Board shall not allow any beneficiary of the Plan to obtain control over decisions or actions that affect that beneficiary's Plan benefits. ARTICLE IX MISCELLANEOUS 9.1 Non-assignability of Benefits. A Participant's benefits under the Plan cannot be sold, transferred, anticipated, assigned, pledged, hypothecated, seized by legal process, subjected to claims of creditors in any way, or otherwise disposed of by a Participant or the Participant's beneficiaries. 9.2 Governing Law. This Plan and any amendments shall be construed, administered, and governed in all respects in accordance with applicable federal law and the laws of the State of Indiana. 9.3 No Right of Continued Employment. Nothing in this Plan shall confer upon any person the right to continue in the employ of Inland, or interfere in any way with the right of Inland to terminate the person's employment at any time. 9.4 Withholding Taxes. Inland shall withhold any taxes required by law to be withheld in connection with payment of an Award under this Plan. These withholdings will be made by Inland but the responsibility for paying taxes rests solely with the Participants. XXXPAGE 134XXX ARTICLE X CLAIMS PROCEDURE IN CASE OF DISPUTE 10.1 Initial Claim. Any Participant claiming an Award under this Plan (the "Claimant") shall present a claim in writing to the Chairman of the Board of Inland (the "Chairman"). 10.2 Decision on Initial Claim. (a) Time Period for Denial Notice. A decision shall be made on the claim as soon as practicable and shall be communicated in writing by the Chairman to the Claimant within a reasonable period after receipt of the claim by the Chairman. In no event shall the decision on an initial claim be given more than ninety (90) days after the date the claim was received by the Chairman, unless ,at the Chairman's sole discretion, an extension of time for processing is granted. If there is an extension, the Claimant shall be notified of such within ninety (90) days of the date the claim was filed. The extension notice shall indicate the reason for the extension . The extension shall not exceed ninety (90) days from the end of the initial response period. (b) Contents of Denial Notice. If the claim is wholly or partially denied, the notice of denial shall indicate: (1) The specific reasons for the denial; (2) The specific references to pertinent Plan provisions on which the denial is based; (3) A description of additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary; and (4) An explanation of the Plan's claim review procedure as outlined in 10.3 and 10.4. (c) Deemed Denied. If written notice of the decision wholly or partially denying the claim has not been furnished within ninety (90) days after the claim is filed or there has been an extension and no notice of a decision is furnished by the end of the extension period, and if the claim has not been granted within such period, the claim shall be deemed denied as of the end of the ninety (90) day or one hundred eighty (180) day period for purposes of proceeding to the review stage described 10.3 and 10.4. 10.3 Review of Denied Claim. If a Claimant receives a notice of denial or his or her claim is deemed denied pursuant to 10.2 above, the Claimant may request a review of the claim. The request for review is made by delivering or mailing a written request for review, XXXPAGE 135XXX prepared by either the Claimant or his or her authorized representative, to the Board. The Claimant's request for review must be made within 90 days of receipt of notice of denial or deemed denial In no event shall the Claimant have less than ninety (90) days after receipt of the notice of denial to request review of the denial. If the written request for review is not made on a timely basis, the Claimant shall be deemed to waive his or her right to review. The Claimant or his or her duly authorized representative may, at or after the time of making the request, review all pertinent documents and submit issues and comments in writing. 10.4 Decision on Review. A review shall be made by the Board after receipt of a timely filed request for review. A decision on review shall be made and furnished in writing to the Claimant. The decision shall be made not later than sixty (60) days after receipt of the request for review. If special circumstances require an extension of time for processing (such as the need to hold a hearing), a decision shall be made and furnished to the Claimant not later than one hundred twenty (120) days after such receipt. If an extension is required, the Claimant shall be notified of such within sixty (60) days after the request for review was filed. The written decision shall include the reasons for such decision with reference to the provisions of the Plan upon which the decision is based. The decision shall be final and binding upon the Claimant and Inland and all other persons involved. If the decision on review is not furnished within the applicable time period, the claim shall be deemed denied on review. The scope of any subsequent review of the benefit claim, judicial or otherwise, shall be limited to a determination as to whether the Board acted arbitrarily or capriciously in the exercise of its discretion. In no event shall any such further review be on a de novo basis as the Board has discretionary authority to determine eligibility for benefits and to construe the terms of this Plan. ARTICLE XI AMENDMENTS AND TERMINATION The Board has the power to terminate this Plan at any time or to amend this Plan at any time and in any manner that it may deem advisable. This Plan was approved by the Board on 14th day of May,1993 and revised the 1st day of April 1995. INLAND MORTGAGE CORPORATION By: /s/ Matthew F. Souza ------------------------- Name: Matthew F. Souza Title: Secretary XXXPAGE 136XXX Exhibit 11 (a) IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11(a) - COMPUTATION OF EARNINGS PER SHARE Year Ended December 31, 1996 1995 1994 ----- ----- ----- PRIMARY SHARES OUTSTANDING: Average number of shares outstanding 11,358,121 11,279,870 11,547,034 Assumed exercise of stock options 251,535 206,386 219,178 ----------- ----------- ----------- Total shares (Note 2) 11,609,656 11,486,256 11,766,212 =========== =========== =========== NET INCOME $22,428,337 $20,083,202 $18,215,539 =========== =========== =========== PRIMARY EARNINGS PER SHARE (Note 2) $1.93 $1.75 $1.55 ===== ===== ===== FULLY DILUTED SHARES OUTSTANDING: Average number of shares outstanding 11,358,121 11,279,870 11,547,034 Assumed exercise of stock options (Note 1) 298,210 232,940 234,606 ----------- ----------- ----------- Total shares (Note 2) 11,656,331 11,512,810 11,781,640 =========== =========== =========== NET INCOME $22,428,337 $20,083,202 $18,215,539 =========== =========== =========== FULLY DILUTED EARNINGS PER SHARE (Note 2) $1.92 $1.74 $1.55 ===== ===== ===== (1) The dilutive effect of stock options is based on the Treasury Stock method using the higher of the average market price for the year or the year-end market price. (2) Adjusted for the two-for-one stock split on December 30, 1996 XXXPAGE 137XXX Contents Management's Discussion and Analysis of Results of Operations and Financial Condition: 28 Five-Year Selected Financial Data and Graphs 31 Consolidated Overview 32 Mortgage Banking 40 Community Banking 46 Home Equity Lending 50 Equipment Leasing 54 Other Irwin Financial Businesses 54 Consolidated Income Statement Analysis 56 Consolidated Balance Sheet Analysis 59 Capital 62 Risk Management 62 Credit Risk 67 Liquidity 67 Interest Rate Sensitivity 69 Effects of Inflation Financial Statements: 75 Report of Management 76 Report of Independent Public Accountants 77 Consolidated Statement of Income 78 Consolidated Balance Sheet 79 Consolidated Statement of Changes in Shareholders' Equity 80 Consolidated Statement of Cash Flows 81 Notes to Financial Statements XXX PAGE 27 XXX XXXPAGE 138XXX Management's Discussion Five-Year Selected Financial Data: 1996 1995 1994 1993 1992 - ----------------------------------------------------------------- Financial Data (in thousands) For the year: Net Revenues $197,020 $148,364 $116,908 $119,366 $494,934 Other Operating Expense 159,733 115,915 86,844 93,803 73,811 Net Income 22,428 20,083 18,216 15,588 12,866 Mortgage Loan Closings 5,085,625 3,559,310 2,812,962 4,273,933 3,441,347 Return on Average Equity 20.58% 22.60% 23.91% 24.91% 26.51% Return on Average Assets 1.95 2.28 2.43 2.15 1.97 Dividend Payout Ratio12.15 12.36 11.38 11.12 8.88 Per share:* Net Income $1.93 $1.75 $1.55 $1.33 $1.12 Cash Dividends 0.24 0.22 0.18 0.15 0.10 Book Value 10.46 8.76 7.21 6.03 4.82 Market Value at December 31, 24.75 19.94 13.38 12.50 11.50 At year end: Assets 1,303,886 $1,038,307 $659,671 $881,864 $602,465 Deposits 640,153 563,999 439,918 500,370 389,323 Mortgage Loans Held for Sale 445,101 378,658 154,964 370,755 218,080 Loans and Leases, Net 522,457 407,904 304,548 252,823 207,138 Shareholders' Equity 118,902 99,216 81,104 70,093 55,343 Mortgage Servicing Portfolio 10,810,988 10,301,914 8,818,502 7,922,299 5,470,505 Equity to Assets Ratio 9.12% 9.56% 12.29% 7.95% 9.19% Risk-based Capital Ratio 14.23 14.49 19.18 15.68 16.46 Leverage Ratio (Tier one) 9.84 10.57 10.82 9.63 8.48 Averages: Assets $1,151,535 $882,164 $748,981 $725,846 $651,517 Equity 108,970 88,867 76,178 62,586 48,539 Shares Outstanding 11,610 11,486 11,766 11,720 11,534 - ----------------------------------------------------------------- *Adjusted for stock splits XXX PAGE 28 XXX MANAGEMENTS'S DISCUSSION Consolidated Overview: Irwin Financial Corporation earned record net income in 1996. This performance was largely due to increased loan originations in the mortgage banking business, continued growth at the community bank, and improved results at the Corporation's newly formed home equity lending business. Net income for 1996 totaled $22,428,338, up 11.7% from 1995 and 23.1% from 1994. Net income per share in 1996 was $1.93 compared to $1.75 in 1995 and $1.55 in 1994. Return on average equity for 1996 was 20.58% compared to 22.60% in 1995 and 23.91% in 1994. Return on average assets was 1.95% compared to 2.28% in 1995 and 2.43% in 1994. Earnings By Line Of Business: Irwin Financial Corporation is comprised of four lines of business: - Mortgage banking - Community banking - Home equity lending XXXPAGE 139XXX - Equipment leasing To provide an effective report on the Corporation's operations, the results of the activities of Irwin Union Bank which provide funding and invest in assets generated by other Irwin Financial companies have been included with the results of the other asset- generating companies. These combined figures are reported as the results of each line of business. Earnings: (In thousands) 1996 1995 1994 - ----------------------------------------------------------------- Mortgage Banking $20,422 $19,331 $15,728 Community Banking 4,254 3,639 3,050 Home Equity Lending (816) (3,220) 0 Equipment Leasing (141) (334) 873 Parent (including consolidating entries) (1,291) 667 (1,435) - ----------------------------------------------------------------- $22,428 $20,083 $18,216 - ----------------------------------------------------------------- XXX PAGE 31 XXX Management's Discussion (continued) Business Profile: Mortgage Banking Selected Financial Data (In thousands) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------- Selected Income Statement Data: Net interest income $16,828 $13,290 $12,702 $15,067 $15,203 Loan origination fees 43,463 31,871 25,308 37,605 28,548 Gain on sale of loans 25,541 18,020 2,219 14,225 10,337 Loan servicing fees 44,587 36,087 32,426 24,428 15,135 Gain on sale of servicing 16,378 15,271 17,716 2,979 5,133 Other income 888 787 647 550 448 - -------------------------------------------------------------------- Total net revenues 147,685 115,326 91,018 94,854 74,804 Operating expense 113,590 83,344 64,571 72,140 54,309 - --------------------------------------------------------------------- Income before taxes 34,095 31,982 26,447 22,714 20,495 Income taxes 13,673 12,651 10,719 9,073 8,178 - --------------------------------------------------------------------- Net income $20,422 $19,331 $15,728 $13,641 $12,317 ===================================================================== Selected Balance Sheet Data at End of Period: Mortgage loans held for sale $371,058 $309,262 $131,543 $318,453 $179,583 XXXPAGE 140XXX Mortgage servicing rights 67,750 51,783 18,834 11,505 10,156 Total assets 557,275 445,129 216,180 452,365 214,411 Short-term debt 265,646 227,021 68,259 215,014 77,731 Long-term debt 4,914 2,300 2,605 2,934 1,178 Shareholders' equity $66,180 $55,811 $50,805 $42,355 $31,105 Selected Operating Data: Mortgage loan closings $5,085,625 $3,559,310 $2,812,962 $4,273,933 $3,441,347 Servicing portfolio: Balance at December 31, 10,810,988 10,301,914 8,818,502 7,922,299 5,470,505 Weighted average coupon rate 7.83% 7.83% 7.59% 7.51% 8.37% Weighted average servicing fee 0.38 0.38 0.38 0.37 0.36 Servicing sold as a percent of production 60.9 28.4 49.8 5.6 12.3 - ---------------------------------------------------------------------------- XXX PAGE 32 XX Overview & Strategy: The mortgage banking line of business consists of Inland Mortgage Corporation and the related activities of Irwin Union Bank. The business is headquartered in Indianapolis and originates, packages, sells, and services residential mortgage loans throughout the U.S. It has offices in 27 states and ranks among the top 25 mortgage loan originators in the country. Most of the loans originated and serviced are either government-insured through the Veterans' Administration (VA) or Federal Housing Administration (FHA) or conventional loans which conform to the underwriting guidelines of the two principal government-sponsored agencies which support the secondary mortgage markets, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). Mortgage loans are originated through both branches (retail) and third party sources (wholesale). Potential borrowers are identified principally through relationships maintained with housing intermediaries including realtors and home builders. Loans are funded on a short-term basis through credit facilities provided by commercial banks including Irwin Union Bank. Repurchase agreements with investment banks are also used. Individual loans are pooled, securitized, and sold into the secondary mortgage market. Servicing rights are periodically sold for a variety of reasons including cash flow and servicing portfolio management. Over the past five years, servicing rights have been retained on a total of 67.8% of the loans originated by this line of business. 1996 Review: XXXPAGE 141XXX Net income from mortgage banking was $20.4 million in 1996, an increase of 5.6% over 1995 results of $19.3 million and 29.8% over 1994 results of $15.7 million. Mortgage Closings: (In thousands) 1996 1995 1994 - ----------------------------------------------------------------- Total closings $5,085,625 $3,559,310 $2,812,962 Percent retail loans 41.8% 50.3% 56.6% Percent wholesale loans 52.4 42.5 42.9 Percent brokered 5.8 7.2 0.5 - ----------------------------------------------------------------- XXX PAGE 33 XXX Annual loan closings in 1996 of $5.1 billion were up 42.9% from 1995 and 80.8% from 1994. During 1996 the mortgage bank originated a greater portion of its loans through wholesale channels than had been done in previous years. Income from mortgage loan originations totaled $43.5 million which was $11.6 million over 1995 and $18.2 million over 1994. Mortgage loan applications in process at the end of 1996 totaled $1.5 billion, compared with $1.2 billion at the end of 1995 and $0.5 billion at the end of 1994. Refinances accounted for 19.0% of 1996 loan closings, compared to 11.6% in 1995 and 15.8% in 1994. Gains from the sale of mortgage loans totaled $25.5 million in 1996, up from $18.0 million in 1995 and $2.2 million in 1994. Gains recognized in 1996 and for the last nine months of 1995 reflect the change in generally accepted accounting principles for mortgage banking (SFAS No. 122) which took effect April 1, 1995. Net revenues from loan sales were tempered somewhat by loan pricing concessions which totaled $2.5 million in 1996 compared to $3.8 million in 1995 and $0.1 million in 1994. Mortgage Servicing: Servicing Portfolio: (In billions) 1996 1995 1994 - ----------------------------------------------------------------- Beginning portfolio $10.3 $8.8 $7.9 Add: Loans originated 2.1 1.8 1.6 Loans purchased 3.0 1.8 1.2 Deduct: Sale of servicing rights (3.1) (1.0) (1.4) Run-off* (1.5) (1.1) (0.5) - ----------------------------------------------------------------- Ending portfolio $10.8 $10.3 $8.8 ================================================================= Number of loans 140,354 129,270 107,101 Average loan size $83,540 $82,186 $80,038 Percent GNMA 51% 48% 57% Percent FHLMC 15 21 16 Percent FNMA 16 17 20 Delinquency ratio: 5.12% 4.55% 3.25% Capitalized servicing as a percentage of servicing portfolio 0.65% 0.50% 0.23% - ----------------------------------------------------------------- XXXPAGE 142XXX *Run-off is the reduction in principal balance of the servicing portfolio due to regular principal payments made by mortgagees and early repayment of an entire loan. XXX PAGE 34 XXX The mortgage servicing portfolio was $10.8 billion at December 31, 1996, up 4.9% from the same date in 1995 and 22.6% from 1994. The 1996 annual portfolio run-off rate was 10.7%. This is up from the 1995 rate of 10.4% and the 1994 rate of 6.3%. The following table sets forth certain information regarding the interest rates of loans in the servicing portfolio at December 31: Servicing Portfolio by Interest Rate: 1996 1995 1994 - ----------------------------------------------------------------- Less than 7% 8.9% 10.3% 20.1% 7.00 - 7.99% 44.3 39.8 35.3 8.00 - 8.99% 38.7 33.9 30.7 9% or greater 8.1 16.0 13.9 - ----------------------------------------------------------------- Total 100% 100% 100% - ----------------------------------------------------------------- The value of capitalized servicing rights must be adjusted for impairment which could result from interest rate changes. Although impairment write-offs caused by declining interest rates would be accompanied by increased loan origination fees, management has implemented hedging alternatives to avoid significant impairment provisions. Expenses related to mortgage servicing right impairment and hedging totaled $637.9 thousand in 1996 compared to $908.8 thousand in 1995. None were recorded in 1994. The preceding information is related to the servicing portfolio owned by Inland. In addition to the owned servicing portfolio, the business subservices conventional loans for which it does not own servicing rights. The subservicing portfolio totaled $1.7 billion at December 31, 1996, compared to $1.9 billion on the same date in 1995. Servicing and Other Fees: (In thousands) 1996 1995 1994 - ----------------------------------------------------------------- Servicing fees $44,587 $36,087 $32,426 Other fees 888 787 647 - ----------------------------------------------------------------- Total $45,475 $36,874 $33,073 - ----------------------------------------------------------------- Servicing fee income is recognized by collecting fees which range between 25 and 44 basis points annually on the principal amount of the underlying mortgages. An increase in the average size of the servicing portfolio throughout the year positively affected servicing income which increased 23.6% from 1995 and 37.5% from 1994. XXXPAGE 143XXX XXX PAGE 35 XXX Sale of Mortgage Servicing: The mortgage banking business maintains the flexibility to either sell servicing rights for current income and cash flow or retain servicing for future cash flow. The decision to sell or retain servicing is based on current market conditions balanced with the business' interest rate risk tolerance. Servicing rights totaling $3.1 billion were sold in 1996, generating a $16.4 million pre-tax gain on those sales, net of any purchased servicing expense which had been capitalized. This compares to servicing sales of $1.0 billion in 1995 that produced a $15.3 million pre-tax gain and $1.4 billion in 1994 that produced a $17.7 million pre-tax gain. The lower margin recognized in 1996 reflects the impact of the change in mortgage accounting standards made in 1995. Had all servicing been retained in 1996, gains on sales of loans would have been higher than what was recorded, with a corresponding reduction in gains from sales of servicing. Therefore, the net increase in income as a result of the decision to sell servicing was insignificant. Servicing sales in 1996 represented 60.9% of 1996 closings versus 1995 sales which were 28.4% of that year's closings and 1994 sales which were 49.8% of closings. Net Interest Income: 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 totaled $16.8 million in 1996, compared to $13.3 million in 1995 and $12.7 million in 1994. The increase is due primarily to the increased loan volume experienced in 1996. Operating Expenses: (In thousands) 1996 1995 1994 - ----------------------------------------------------------------- Salaries and employee benefits $66,153 $51,737 $41,725 Amortization of mortgage servicing rights 13,259 4,865 1,943 Other expenses 34,178 26,742 20,903 - ----------------------------------------------------------------- Total operating expenses $113,590 $83,344 $64,571 ================================================================= Number of employees at December 31, 1,474 1,316 955 - ----------------------------------------------------------------- Total operating expenses increased 36.3% from 1995 and 75.9% from 1994. The increase reflects the continued expansion of the production system and increased costs associated with technological improvements made during the year. XXX PAGE 36 1997 Outlook: The environment in which the mortgage bank operates is rapidly changing. XXXPAGE 144XXX As a result, technology will play an increasingly important role in the mortgage bank's strategic plans. Management believes that in order to remain competitive, the mortgage bank must advance its use of technology to reduce its costs of production and enhance its distribution methods or develop new channels of distribution. Significant technology initiatives which were started in 1996 will continue during the coming year. Throughout much of its history, the mortgage banking business has concentrated on the origination of FHA and VA loans. As such, the company developed a reputation of effectively serving the mortgage origination needs of first-time home buyers. These borrowers generally require more guidance through the origination process than do those borrowers who previously qualified for mortgage loans. Inland Mortgage continues to be interested in leveraging its capabilities to serve those borrowers who have special needs. The business recently began two initiatives to expand its reach in special needs borrowing. Both are in their early stages and are not expected to add materially to results in 1997. They are indicative, however, of efforts the company is making to focus on defensible market segments where a sustainable competitive advantage can be created based upon a dedication to customer service, fast turnaround time, and product innovation. The first such initiative is the mortgage bank's entrance into the non- prime first mortgage lending market which is comprised of borrowers who do not qualify under the underwriting guidelines established by the government sponsored secondary market agencies for conforming first mortgages. The second initiative to expand the company's reach involves making mortgage loans on selected resort properties located outside the United States. In December, 1996, Inland Mortgage began taking applications from U.S. borrowers for dollar denominated loans to be secured by residential real estate located in Mexico. The company is prepared to begin closing such loans during the first quarter of 1997. Employees: As of December 31, 1996, the mortgage banking line of business employed 1,474 people-approximately 74% of the Corporation's total employee base. Total employment expense in 1996 was $66.2 million or 58.2% of operating expenses. XXX PAGE 37 XXX Inland Mortgage Corporation Directors John T. Hackett Managing General Partner, CID Equity Partners, L. P. (Venture Capital Partnership) William H. Kling President, Minnesota Public Radio Inland Mortgage Corporation William I. Miller Chairman, Irwin Financial Corporation John A. Nash President, Irwin Financial Corporation XXXPAGE 145XXX Lance R. Odden President and Headmaster, The Taft School James T. Sakai Former Chairman, Contour Hardening, Inc. (Metals Treatment Company) Thomas G. Shafran President, Better Homes Realty Thomas D. Washburn Senior Vice President, Irwin Financial Corporation Darell E. Zink, Jr. Executive Vice President and Chief Financial Officer Duke Investments, Inc. (Real Estate Development Company) XXX PAGE 38 XXX Inland Mortgage Corporation Senior Officers Rick L. McGuire President Herbert B. Tasker Executive Vice President-All Pacific Region T. Lester Acree Senior Vice President-Wholesale Loan Purchasing Kenneth R. Block Senior Vice President-Loan Production Katrina J. Crubaugh Senior Vice President-Human Resources Mark J. Lynch Senior Vice President-Nonconforming Lending William M. Meyer Senior Vice President-Loan Servicing Timothy L. Murphy Senior Vice President-Finance Erik J. Sorensen Senior Vice President-Secondary Marketing Scott G. Beer First Vice President-Secondary Marketing Mark E. Braden First Vice President-Information Technology Richard C. Cargill First Vice President-Metro Phoenix Robert H. Griffith, Jr. First Vice President and Legal Counsel Renee M. Gunderson First Vice President- Underwriting/Closing Post Closing Darla S. Habig First Vice President-Loan Control Allan D. Karlander First Vice President-Central Region John F. Macke First Vice President-Management Information David P. Matern First Vice President-Loan Administration Rachelle E. Mikosz First Vice President-Office Services Kevin M. Murphy First Vice President-Accounting Michael G. Plank First Vice President-Atlantic Coast Region Diana M. Rossetter First Vice President-Quality Control Suzanne C. Samson First Vice President-All Pacific Region Sherri K. Sanford First Vice President-Customer Service Lyle E. Shearer First Vice President-All Pacific Region Richard E. Skiles First Vice President-Appraisals Nicholas Vracas First Vice President-Mid-states Region XXX PAGE 39 XXX XXXPAGE 146XXX Management's Discussion (continued) Business Profile: Community Banking Selected Financial Data (In thousands) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------- Selected Income Statement Data: Interest income $35,645 $31,965 $23,808 $22,238 $20,267 Interest expense 15,908 14,048 8,822 8,684 8,379 Provision for loan and lease losses 2,284 2,038 1,344 1,551 1,500 - ----------------------------------------------------------------- Net interest income after provision for loan and lease losses 17,453 15,879 13,642 12,003 10,388 Noninterest income 9,384 7,187 5,719 6,192 5,443 - ----------------------------------------------------------------- Total net revenues 26,837 23,066 19,361 18,195 15,831 Operating expenses 20,311 17,582 14,858 14,264 12,498 - ----------------------------------------------------------------- Income before taxes 6,526 5,484 4,503 3,931 3,333 Income taxes 2,272 1,845 1,453 1,247 1,001 - ----------------------------------------------------------------- Net income $4,254 $3,639 $3,050 $2,684 $2,332 ================================================================= Selected Balance Sheet Data at End of Period: Loans and leases, net $331,790 $306,415 $252,226 $210,340 $176,958 Total assets 503,507 440,035 370,462 334,148 318,512 Deposits 453,879 400,149 341,459 298,615 314,773 Shareholders' equity 33,967 28,722 24,686 23,882 20,470 Daily Averages: Assets $459,893 $405,249 $344,691 $302,692 $261,708 Deposits 413,935 358,343 315,229 275,956 236,641 Loans and leases, net 325,291 281,147 228,544 195,304 166,202 Shareholders' equity 31,863 27,661 23,580 20,326 18,290 Shareholders' equity to assets 6.93% 6.83% 6.84% 6.72% 6.99% - ----------------------------------------------------------------- XXX PAGE 41 XXX Overview & Strategy: Community banking is conducted by Irwin Union Bank and Trust Company which is headquartered in Columbus, Indiana. At year-end 1996, it had 15 offices in six counties in south central Indiana. It holds a major share of the market in Bartholomew County where it has operated since 1871. Expansion into XXXPAGE 147XXX surrounding counties has occurred in recent years and has been on a de novo basis. The community bank's strategy in these and other possible new markets is to position itself as "the local bank." The objective is to deliver services in the way customers would expect from a bank headquartered in that market. This means that every effort is made to staff the offices with local people and to give those people the authority to make key customer decisions. Credit, investment, trust, and insurance services are provided to individual and corporate customers. 1996 Review: Community banking net income in 1996 totaled $4.3 million, up 16.9% from 1995 net income of $3.6 million and 39.5% from 1994 net income of $3.1 million. The return on average equity was 13.35% in 1996 as compared to 13.16% in 1995 and 12.93% in 1994. Results include the income and expenses of trust operations and investment advisory services which were previously reported in the investor services line of business and are now managed and reported by the community bank. Also included are credit insurance income and expenses which were previously reported as a separate line of business. Results for previous years have been restated for comparability. Net interest revenue: (In thousands) 1996 1995 1994 - ----------------------------------------------------------------- Net interest revenue on a taxable equivalent basis* $20,096 $18,362 $14,989 Average interest earning assets 426,290 373,784 312,898 Net interest margin 4.71% 4.91% 4.79% - ----------------------------------------------------------------- *Reflects what net interest revenue would be if all interest income was subject to federal and state income taxes. Net interest revenue on a taxable equivalent basis increased 9.4% from 1995 and 34.1% from 1994 to a total of $20.1 million. Net interest revenue is the product of net interest margin and average earning assets. Net interest margin was down for the year, coming in at 4.71% for 1996 compared to 4.91% in 1995 and 4.79% in 1994. The decline was principally due to declines in yields in the community bank's loan portfolio. The average yield on all earning assets was 8.45% compared to 8.67% for 1995 and 7.61% for 1994. XXX PAGE 41 XXX Provision for Loan and Lease Losses: The provision for loan and lease losses in 1996 was $2.3 million, compared to $2.0 million in 1995 and $1.3 million in 1994. The provision was equal to 0.7% of average loans and leases outstanding in 1996, compared to 0.7% in 1995 and 0.6% in 1994. See the section on credit risk for additional information on asset quality and reserve adequacy. Noninterest Income: (In thousands) 1996 1995 1994 - ----------------------------------------------------------------- XXXPAGE 148XXX Trust fees $2,571 $2,470 $2,300 Service charges on deposit accounts 1,820 1,596 1,259 Insurance commissions, fees, and premiums 1,105 1,016 915 Gain from sale of consumer and mortgage loans 909 0 0 Loan servicing fees 690 210 93 Brokerage fees 736 571 - Other $1,553 $1,324 $1,152 - ----------------------------------------------------------------- Total noninterest income $9,384 $7,187 $5,719 - ----------------------------------------------------------------- Noninterest income was up 30.6% from 1995 and 64.1% from 1994. The increase is partially attributed to the sale of $59.5 million of consumer loans during 1996 which generated a pre-tax gain of $676.0 thousand. The community bank retained the right to service the sold loans which contributed to increased loan servicing fees in 1996. Operating Expenses: (In thousands, except for number of employees) 1996 1995 1994 - ----------------------------------------------------------------- Salaries $10,916 $9,656 $8,278 Other expenses 9,395 7,926 6,580 - ----------------------------------------------------------------- Total operating expenses $20,311 $17,582 $14,858 ================================================================= Number of employees at December 31, 304 291 262 - ----------------------------------------------------------------- Operating expenses increased 15.5% from 1995 and 36.7% from 1994. Costs associated with expanding new products and markets contributed to increases over the past two years. In addition, during 1996 the community bank changed its strategy for offering employee benefits services to customers of the trust department. The decision was made to simplify and streamline the product offering. Also during 1996, the community bank exited the mortgage document custody business. As a result of these two changes, the community bank recorded $1.5 million of restructuring expenses during the year. XXX PAGE 42 XXX Balance Sheet: Total assets averaged $459.9 million in 1996, compared to $405.2 million in 1995 and $344.7 million in 1994. Average earning assets for the year were $426.3 million, up $52.5 million or 14.0% from 1995 and up $113.4 million or 36.2% from 1994. The most significant component of the 1996 increase was loans and leases which were up $44.1 million on average in 1996 as a result of the community bank's expansion efforts into new markets. Average deposits were $413.9 million or 15.5% higher in 1996 than 1995 and $98.7 million or 31.3% higher than 1994. The community bank's equity to assets ratio averaged 6.93% for the year, compared to 6.83% in 1995 and 6.84% in 1994. XXXPAGE 149XXX 1997 Outlook: During 1997, the community bank plans to take advantage of the opportunities created by further consolidation in the banking industry. It plans to enter two new markets in which it can become the "local banking" alternative. The community bank will continue to expand its offering of non-traditional services in all of its markets. In addition, the community bank plans a test in certain markets of a new personal banker service made possible by the integration of information systems and new customer delivery channels through the use of new technology. Employees: As of December 31, 1996 the community bank employed 304 people. Total employment expense in 1996 was $10.9 million or 53.7% of total operating expenses. XXX PAGE 43 XXX Irwin Union Bank and Trust Company Directors Robert H. Claxton Senior Vice President-Finance, Knauf Fiber Glass (Manufacturer of Fiberglass Insulation) Claude E. Davis President, Irwin Union Bank and Trust Company John T. Hackett Managing General Partner, CID Equity Partners, L.P. (Venture Capital Partnership) Robert W. Haddad Chairman and President, Columbus Container, Inc. (Manufacturer of Corrugated Shipping Containers) Carolyn A. Lickerman Homemaker John C. McGinty, Jr. President, Southeastern Indiana Health Management, Inc. President, Columbus Regional Hospital William I. Miller Chairman, Irwin Financial Corporation John A. Nash President, Irwin Financial Corporation Charles A. Rau, M.D. Physician John S. Spangler President, Milestone Contractors, L.P. Christine M. Vujovich Vice President, Cummins Engine Company, Inc. Charles H. Watson President, Historic Columbus Development, Inc. (Community Development Organization) XXX PAGE 44 XXX Irwin Union Bank and Trust Company XXXPAGE 150XXX Senior Officers Claude E. Davis President Bradley J. Kime Executive Vice President Kevin P. Barr Senior Vice President and Chief Financial Officer William P. Guffey Senior Vice President and Senior Lending Officer Albert C. Roszczyk Senior Vice President-Bartholomew County William S. Beitler President-Shelby County Karen S. Coldiron President-Decatur County Brian D. Hall President-Monroe County Robert L. Phillips President-Johnson County William R. Redman President-Hamilton County Donald J. Stuart President-Irwin Union Advisory Services Gloria C. Bennett Vice President-Investments and Funds Management David S. Brooks Vice President-Bartholomew County Debora L. Cox Vice President-Operations Patrick K. Crimmins Vice President-Bartholomew County Bradley R. Davis Vice President-Controller Dyar Forkert Vice President-Decatur County Joseph B. Hauersperger Vice President-Shelby County William A. Helmbrecht Vice President-Bartholomew County Carrie K. Houston Vice President-Human Resources James D. Keller Vice President-Bartholomew County Dianne Kelly Vice President-Jackson County Jay N. Morris Vice President-Johnson County Ellen Z. Mufson Vice President-Legal Counsel and Assistant Secretary James D. Parcell Vice President-Bartholomew County Rick L. Smith Vice President-Jackson County Barbara A. Smitherman Vice President-Bartholomew County Jill A. Stanton Vice President-Mortgage Lending Jerrie H. Suckow Vice President-Bartholomew County Craig Teegarden Vice President-Johnson County XXX PAGE 45 XXX Management's Discussion (continued) Business Profile: Home Equity Lending Selected Financial Data (In thousands) 1996 1995 - ----------------------------------------------------------------- Net interest income $4,574 $1,298 Gain on sale of loans 7,798 2,985 Loan servicing fees 4,573 13 Other income 141 229 - ----------------------------------------------------------------- Total net revenues 17,086 4,525 Operating expenses $17,902 7,745 - ----------------------------------------------------------------- Pre-tax loss ($816) ($3,220) ================================================================= XXXPAGE 151XXX Selected Balance Sheet Data at End of Period: Home equity loans net of loan loss allowance $117,588 $36,225 Excess servicing 15,343 5,683 Total assets 147,088 51,611 Short-term debt 129,627 24,981 Shareholders' equity 13,221 5,538 Selected Operating Data: Loan Volume: Lines of credits 80,724 87,420 Loans 88,396 0 Servicing portfolio: Balance at December 31, 230,450 86,691 Weighted average coupon rate: Lines of credit 12.80% 13.61% Loans 14.08% 0 - ----------------------------------------------------------------- XXX PAGE 46 XXX Overview & Strategy: The home equity line of business includes Irwin Home Equity and the related activities of Irwin Union Bank. Irwin Home Equity is located in San Ramon, California and was incorporated in late 1994. The company began marketing home equity loans in early 1995 through direct mail and telemarketing and currently markets in 16 states. The business has the option to either hold the loans in portfolio or securitize and service them. If the loans are held in portfolio, many costs incurred during the period to produce the loans are expensed immediately, whereas the revenue from the loans accrues over the lives of the loans. Alternatively, if the loans are securitized and sold on the secondary market to investors, a portion of the present value of the future net revenues from the loans will be recognized in the current period, helping to offset the expenses incurred in producing the loans. 1996 Review: The home equity lending business recorded a pre-tax loss of $0.8 million in 1996, compared to a $3.2 million pre-tax loss in 1995. Loan Originations: During 1996 the home equity lending business originated $169.1 million of home equity loans, up 93.5% from 1995 volume of $87.4 million. The business securitized and delivered $79.9 million of loans in 1996 which generated a pre-tax gain of $6.8 million. This compares to a $3.0 million gain recognized in 1995 on the sale of $51.6 million of loans. In addition to the $79.9 million of loans that were delivered in 1996, another $60.1 million were securitized. These loans will be delivered in the first quarter of 1997, and XXXPAGE 152XXX the gain on the sale will be recognized at that time. During 1996, the business also recorded a one-time $1.0 million pre-tax adjustment to the gain recorded on the 1995 securitization. The adjustment resulted from the substitution of a letter of credit in 1996 for the cash reserve which had been in place when the transaction was recorded. This revised approach to providing for reserves caused the 1995 gain to be higher than it would have been under the previous approach. If the business uses letters of credit in future transactions, the resulting gains are expected to be similarly affected. Servicing Portfolio: (In thousands) 1996 1995 - ----------------------------------------------------------------- Balance at December 31 $230,450 $86,691 Delinquency ratio 0.67% 0.85% - ----------------------------------------------------------------- XXX PAGE 47 XXX The home equity lending business continues to service loans it has securitized. The servicing portfolio, which includes loans held on the company's books as well as securitized loans, increased 165.8% from 1995. The business earns a servicing fee equal to one percent of the outstanding principal balance of the securitized loans. Servicing fee income increased to $4.6 million in 1996 from $12.9 thousand in 1995. The level of fees in 1995 reflects the fact that loans were not securitized until late in the year Net Interest Income: As a result of the increased loan volume in 1996, net interest income before loan loss provision was up 234.6% to $5.6 million. The loan loss provision also increased to $983.5 thousand from $363.0 thousand. Net charge-offs for the home equity lending business were $37.0 thousand in 1996 as compared to $2.1 thousand in 1995. Operating Expenses (In thousands, except for number of employees) 1996 1995 - ----------------------------------------------------------------- Salaries and employee benefits $8,663 $3,995 Marketing and development 5,063 2,601 Other 4,176 1,149 - ----------------------------------------------------------------- Total operating expenses $17,902 $7,745 ================================================================= Number of employees at December 31, 159 107 - ----------------------------------------------------------------- Balance Sheet: The home equity lending business had $118.2 million of loans outstanding at December 31, 1996. This compares to $36.4 million at the end of 1995. The loan loss allowance also increased to $589.4 thousand at December 31, 1996 from $146.6 thousand in 1995. 1997 Outlook: XXXPAGE 153XXX During 1997, the home equity lending business looks to develop its business further and to increase its loan production volume. The business plans to continue exploring new products, funding alternatives, and markets where its skills in identifying customers well served by direct marketing of products uniquely tailored to their needs can be best applied. The business will maintain the flexibility of either holding the loans it produces in portfolio or securitizing them in order to accelerate the recognition of income. Management will evaluate these options throughout the year in light of market conditions and financial objectives. Employees: As of December 31, 1996, the home equity business employed 159 people. Total employment expense in 1996 was $8.6 million or 48.4% of total operating expenses. XXX PAGE 48 Irwin Home Equity Corporation Directors and Senior Officers Directors Elena Delgado President, Irwin Home Equity Corporation William I. Miller Chairman, Irwin Financial Corporation John A. Nash President, Irwin Financial Corporation Thomas D. Washburn Senior Vice President, Irwin Financial Corporation Senior Officers Elena Delgado President Spencer J. Carlsen Vice President-Production Edwin K. Corbin Vice President-Finance and Servicing Kathryn J. Diamond Vice President-Credit Risk Management J. Christopher Huseby Vice President-Marketing and Business Development Sunita Liggin Vice President-Human Resources Jocelyn Martin-Leano Vice President-Operations Support Jack Nichols Vice President-Information Services Fern Prosnitz Vice President-Legal Counsel XXX PAGE 49 XXX Management's Discussion (continued) Business Profile: Equipment Leasing Selected Financial Data XXXPAGE 154XXX (In thousands) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------- Net interest income $3,622 $3,409 $4,339 $3,638 $2,349 Noninterest income 418 300 123 47 33 - ----------------------------------------------------------------- Total net revenues 4,040 3,709 4,462 3,685 2,382 Operating expenses 4,181 4,043 3,589 3,133 2,278 - ----------------------------------------------------------------- Pre-tax income (loss)$(141) $(334) $873 $552 $104 ================================================================= Lease and loan volume $36,624 $24,951 $23,585 $22,922 $19,140 Net leases and loans outstanding 53,632 45,765 42,989 37,401 27,738 Number of leases and loans outstanding 9.186 7.766 7.209 6.438 5.032 Average new lease and loan size $9.298 $9.027 $9.152 $8.663 $8.180 - ----------------------------------------------------------------- XXX PAGE 50 XXX Overview & Strategy: The equipment leasing line of business is made up of Affiliated Capital Corp. and the related activities of Irwin Union Bank. Affiliated is a small-ticket leasing company headquartered in Northbrook, Illinois, focused on the medical equipment industry. The company was started by Irwin Financial in 1990 when it hired the staff and acquired the rights to the customers and vendors of the predecessor company which had been in business since 1983. The strategy of the equipment leasing business is to establish relationships with manufacturers and distributors of medical equipment and to place leases with medical professionals through the sales representatives of these vendors. This allows the business to place leases nationwide despite the fact that all employees are located in Northbrook. In response to changing customer needs, in 1995 the business began entering into private- label financing agreements with several equipment manufacturers and began offering a revolving credit product to complement its lease products. The business focuses on relatively low cost (under $50,000) equipment for health care professionals. In general, this equipment provides low cost treatment that is often preventative in nature. Markets covered include both hospitals and alternate care sites. 1996 Review: Equipment leasing recorded a pre-tax loss of $140.8 thousand in 1996, compared with a pre-tax loss of $333.7 thousand in 1995 and pre-tax income of $872.6 in 1994. As a result of the strategy changes implemented in late 1995, lease and loan volume increased to $36.6 million in 1996, up 46.8% from $25.0 million in 1995 and 55.3% from $23.6 million in 1994. However, because of increased competition in the equipment leasing industry which created margin pressures, net interest income did not increase commensurately. Net interest income XXXPAGE 155XXX totaled $3.6 million in 1996, an increase of $212.9 thousand or 6.2% from 1995 and a decrease of $717.4 thousand or 16.5% from 1994. Operating expenses were $4.2 million for the year, 3.4% higher than 1995 and 16.5% higher than 1994. XXX PAGE 51 XXX 1997 Outlook: Competition in the small-ticket leasing industry is expected to remain strong in 1997. The equipment leasing business will strive to remain competitive with larger lessors using a strategy that focuses on adding value through product differentiation to targeted business partners. The challenge for the business is to demonstrate that this strategy can achieve an attractive rate of return on equity in the long run. Employees: As of December 31, 1996, equipment leasing employed 38 people. Total employment expense in 1996 was $2.0 million or 48.0% of total operating expenses. XXX PAGE 52 XXX Affiliated Capital Corp. Directors and Senior Officers Directors Robert P. Albert President, Affiliated Capital Corp. David E. Levine Senior Vice President, Affiliated Capital Corp. William I. Miller Chairman, Irwin Financial Corporation John A. Nash President, Irwin Financial Corporation Thomas D. Washburn Senior Vice President, Irwin Financial Corporation Senior Officers Robert P. Albert President David E. Levine Senior Vice President Vincent F. D'Andrea Vice President and Controller Stuart A. Simon Vice President-Sales David M. Tustison Vice President-Strategic Planning XXX PAGE 53 XXX Management's Discussion (continued) Other Irwin Financial Businesses XXXPAGE 156XXX During the third quarter of 1996, the Corporation exited the brokered certificate of deposit and institutional brokerage businesses which were the sole businesses operated by the Investor Services line of business. A sale of selected assets of the brokered certificate of deposit program was completed in the third quarter, and its impact on earnings was not material. Parent company results in each period include the results of investor services. The results of parent company operations combined with Investor Services results and consolidating entries are summarized below: (In thousands) 1996 1995 1994 - ----------------------------------------------------------------- Net revenues $15,494 $17,986 $7,536 Operating expenses (5,353) (4,068) (3,665) Tax credit 903 2,275 238 - ----------------------------------------------------------------- 11,044 16,193 4,109 Investor services (283) 177 (186) Eliminations (12,052) (15,703) (5,358) - ----------------------------------------------------------------- Net income (loss) $(1,291) $667 $(1,435) - ----------------------------------------------------------------- Dividends from subsidiaries are recorded as parent company revenues but are eliminated in determining consolidated net income. Tax benefits result from the operating losses generated by the home equity and equipment leasing businesses whose results have been reported pre-tax. Each subsidiary pays taxes to the parent company at the statutory rate. Subsidiaries also pay fees to the parent company to cover direct and indirect services. In addition, services are provided from one subsidiary to another. Inter-company income and expenses are calculated on an arm's-length, external market basis. Consolidated Income Statement Analysis: Pre-tax income for 1996 totaled $37.3 million, up 14.9% from 1995 and 24.0% from 1994. The effective income tax rate was 39.8% in 1996, 38.1% in 1995, and 39.4% in 1994. Please see Note 16 of Notes to the Consolidated Financial Statements for more information on income taxes. Net interest revenue for 1996 totaled $47.8 million, up 28.1% from 1995 and 45.9% from 1994. The increase was due to a combination of increased loan volume at the community bank and home equity lending business and higher mortgage loan originations at the mortgage bank. Net interest margin was 4.94% in 1996, compared to 4.93% in 1995 and 5.03% in 1994. See page 70 for further analysis of the net interest margin. XXX PAGE 54 XXX The following table sets forth, for the periods indicated, a summary of the changes in interest earned and interest paid resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities on a fully taxable equivalent basis: XXXPAGE 157XXX 1996 Over 1995 1995 Over 1994 - ----------------------------------------------------------------- (In thousands) Volume Rate Total Volume Rate Total - ----------------------------------------------------------------- Interest Income: Loans and leases $13,248 $778 $14,026 $8,550 $3,210 $11,760 Mortgage loans held for sale 6,760 3,456 10,216 3,931 89 4,020 Taxable investment securities 21 51 72 (993) 605 (388) Tax-exempt securities (171) (63) (234) (76) 82 6 Interest-bearing deposits with financial institutions 28 78 106 (390) 203 (187) Federal funds sold (619) (127) (746) (310) 583 273 - ----------------------------------------------------------------- Total 19,267 4,173 23,440 10,712 4,772 15,484 - ----------------------------------------------------------------- Interest Expense: Money market checking 254 (233) 21 60 146 206 Money market savings (88) (49) (137) (221) 108 (113) Regular savings (23) (134) (157) (44) 458 414 Time deposits (268) 3,406 3,138 5,779 (537) 5,242 Short-term borrowings 6,451 3,685 10,136 2,071 2,884 4,955 Long-term debt 78 (22) 56 10 221 231 - ----------------------------------------------------------------- Total 6,404 6,653 13,057 7,655 3,280 10,935 - ----------------------------------------------------------------- Net interest revenue $12,863 $(2,480)$10,383 $3,057 $1,492 $4,549 - ----------------------------------------------------------------- Note: Variance not solely due to rate or volume is allocated on the basis of the absolute relationship between volume variances and rate variances. XXX PAGE 55 XXX The consolidated provision for loan losses for 1996 was $4.5 million, up 44.8% from 1995 and 157.7% from 1994. More information on this subject is contained in the section on credit risk. Other income increased 34.6% in 1996 to $153.6 million. This compares to $114.1 million in 1995 and $85.9 million in 1994. The most significant increases came in the categories related to mortgage banking and home equity lending activities which were previously discussed on pages 32 and 46. XXXPAGE 158XXX Other expenses in 1996 totaled $159.7 million, up 37.8% from 1995 and 83.9% from 1994. The 1996 increase in consolidated other expense of $43.8 million was mostly due to operating expenses associated with expanded mortgage and home equity loan production. Consolidated Balance Sheet Analysis: Total assets at year-end 1996 were $1.3 billion, up 25.6% from 1995 and 97.7%from 1994. However, changes in the average balance sheet are a more accurate reflection of the actual changes in the level of activity on the balance sheet. Average assets were $1.2 billion in 1996, up 30.5% from 1995 and 53.7% from 1994. Mortgage loans held for sale increased by $93.2 million, while loans and leases increased by $127.5 million or 34.5% on average in 1996. The Corporation's commercial loans are extended primarily to local regional businesses and to local farming operations in the market area of Irwin Union Bank. The Corporation also extends credit to consumers through installment loans and revolving credit arrangements. The majority of the remaining portfolio consists of residential mortgage loans (1-4 family dwellings) and mortgage loans on commercial property. Loans by major category at the end of the last five years were as follows: Loans by Category: At December 31, (In thousands) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------- Commercial, financial, and agricultural $179,650 $150,312 $136,083 $121,024 $108,964 Real estate construction 48,991 36,126 21,960 21,258 15,890 Real estate mortgage 210,697 108,351 47,423 30,805 25,177 Consumer 38,371 67,756 55,323 41,101 30,626 Direct lease financing 62,372 60,979 58,348 52,555 38,082 Unearned income (11,030) (10,999) (10,726) (10,627) (8,380) - ---------------------------------------------------------------------------- Total $529,051 $412,525 $308,411 $256,116 $210,359 - --------------------------------------------------------------------------- XXX PAGE 56 XXX Maturity Distribution of Loans: After One But At December 31, 1996 Within Within After (In thousands) One Year Five Years Five Years Total - ----------------------------------------------------------------- Commercial, financial, and agricultural $33,843 $56,688 $89,119 $179,650 Real estate construction 48,991 0 0 48,991 Real estate mortgage 81,908 11,424 117,365 210,697 Consumer loans 6,325 29,161 2,885 38,371 Direct lease financing 0 62,372 0 62,372 -------- Total $540,081 ======== XXXPAGE 159XXX Loans due after one year with: Fixed interest rates $207,135 Variable interest rates 161,879 - ----------------------------------------------------------------- Total $369,014 - ----------------------------------------------------------------- On average, investment securities decreased $1.3 million in 1996 to $65.4 million. The carrying value of investments at December 31, 1996 includes $51.2 thousand of unrealized losses on available-for-sale securities. The book value of investment securities at the end of the last three years is as follows: At December 31, (In thousands) 1996 1995 1994 - ----------------------------------------------------------------- Held-to-Maturity: U.S. Treasury and Government obligations $38,317 $26,914 $41,826 Obligations of states and political subdivisions 4,466 6,490 7,549 Mortgage-backed securities 7,154 8,859 9,982 Corporate obligations 0 0 1,000 - ----------------------------------------------------------------- Total held-to-maturity 49,937 42,263 60,357 - ----------------------------------------------------------------- Available-for-Sale: U.S. Treasury and Government obligations 19,924 15,359 13,834 Mortgage-backed securities 3,237 3,247 3,166 Other 26 0 0 - ----------------------------------------------------------------- Total available-for-sale 23,187 18,606 17,000 - ----------------------------------------------------------------- Total investments $73,124 $60,869 $77,357 - ----------------------------------------------------------------- XXX PAGE 57 XXX Maturity Distribution of Investment Securities: After After Five One But But Within Within Within After One Five Ten Ten At December 31, 1996 (In thousands) Year Years Years Years - ----------------------------------------------------------------- U.S. Treasury and Government obligations $12,808 $33,247 $0 $12,186 Obligations of states and political subdivisions 481 1,437 1,173 1,375 Mortgage-backed securities 106 356 1,522 8,407 Other 26 0 0 - - ----------------------------------------------------------------- XXXPAGE 160XXX Total $13,421 $35,040 $2,695 $21,968 ================================================================= Weighted Average Yield: Held-to-maturity 6.95% 6.50% 8.64% 7.39% Available-for-sale 5.72% 6.30% 0% 6.25% - ----------------------------------------------------------------- The weighted average yield on state and municipal obligations has been calculated on a fully taxable equivalent basis, assuming a 34.5% tax rate. Deposits averaged $632.2 million during 1996, compared to $526.1 million in 1995 and $467.1 million in 1994. Demand deposits were up 78.2% on average, or $104.7 million from 1995. A significant portion of demand deposits is related to deposits at Irwin Union Bank which are associated with escrow accounts held on loans in the servicing portfolio of Inland Mortgage. These escrow accounts averaged $179.0 million in 1996. Maturities of certificates of deposit of $100 thousand or more are set forth in the following table: At December 31, (In thousands) 1996 1995 1994 - ----------------------------------------------------------------- Under 3 months $47,907 $27,131 $9,197 3 to 6 months 5,127 6,299 4,581 6 to 12 months 7,493 14,378 4,248 After 12 months 5,977 6,268 3,448 - ----------------------------------------------------------------- Total $66,504 $54,076 $21,474 - ----------------------------------------------------------------- Short-term borrowings averaged $334.3 million in 1996, compared to $217.3 million in 1995 and $167.8 million in 1994. The increase in 1996 is due to the increase in mortgage loan closings in 1996. XXX PAGE 58 XXX The following table shows the distribution of the Corporation's short-term borrowings and the weighted average rates at the end of each of the last three years. Also provided are the maximum borrowings and the average borrowings as well as weighted average interest rates for the last three years. Repurchase Agreements & Drafts Federal Payable Home Related to Loan Bank Mortgage Borrowings Lines Loan Commercial & Federal of (In thousands) Closings Paper Funds Credit - ------------------------------------------------------------------- Year Ended 1996 $264,998 $17,175 $74,118 $105,592 December 31: 1995 225,873 21,723 40,000 22,683 1994 75,944 15,538 199 2,300 XXXPAGE 161XXX Weighted average 1996 4.65% 5.95% 5.80% 6.68% interest rates at 1995 4.32 6.32 6.02 7.35 year-end: 1994 4.59 5.65 5.75 8.50 Maximum amount 1996 $270,516 $27,214 $121,000 $135,442 outstanding at any 1995 271,694 21,723 52,448 38,596 month's end: 1994 159,650 19,996 26,000 5,600 Average amount 1996 $218,810 $23,794 $44,139 $47,561 outstanding during 1995 155,726 19,125 20,497 6,109 the year: 1994 146,799 17,372 3,140 507 Weighted average 1996 3.78% 6.02% 5.80% 6.80% interest rate during 1995 4.12 6.41 6.03 8.06 the year: 1994 3.62 4.63 5.71 7.14 - ----------------------------------------------------------------- Capital: Shareholders' equity averaged $109.0 million in 1996, up 22.6% from 1995 and 43.0% from 1994. Year-end shareholders' equity of $118.9 million represented book value per share of $10.46, compared to $8.76 and $7.21 at December 31, 1995 and 1994, respectively. Prior to the adoption of SFAS No. 122 in the second quarter of 1995, mortgage banking accounting did not allow the full value of mortgage servicing rights to be reflected on the balance sheet. Since a significant portion of the Corporation's mortgage servicing portfolio was generated prior to the adoption of the new accounting standard, it represents substantial economic XXX PAGE 59 XXX value which is not recorded on the balance sheet. The following table demonstrates the estimated after-tax value of the servicing portfolio at December 31: (In thousands) 1996 1995 1994 - ----------------------------------------------------------------- Total loans serviced $10,810,988 $10,301,914 $8,818,502 - ----------------------------------------------------------------- Value (@ 1.5%) $162,165 $154,529 $132,278 Less capitalized servicing 70,551 51,783 20,302 Tax liability (@ 40%) 36,646 41,098 44,791 - ----------------------------------------------------------------- Net value $54,968 $61,648 $67,185 ================================================================= Per share of common stock $4.84 $5.44 $5.97 - ----------------------------------------------------------------- With the implementation of the new accounting standard in 1995, this off-balance sheet value will decline over future years and eventually be reduced to zero. XXXPAGE 162XXX Total book value per share including the value of the servicing portfolio was $15.30 at December 31, 1996, up from $14.20 and $13.18 at December 31, 1995 and 1994, respectively. (In thousands) 1996 1995 1994 - ----------------------------------------------------------------- Tier 1 capital $117,416 $92,554 $80,966 Tier 2 capital 6,594 4,620 3,863 - ----------------------------------------------------------------- Total risk-based capital $124,010 $97,174 $84,829 ================================================================= Risk-weighted assets $871,460 $670,675 $442,315 ================================================================= Risk-based ratios: Tier 1 capital 13.47% 13.80% 18.31% Total capital 14.23 14.49 19.18 Tier 1 leverage ratio 9.84 10.57 10.82 Ending shareholders' equity to assets 9.12 9.56 12.29 Average shareholders' equity to assets 9.46 10.07 10.17 - ----------------------------------------------------------------- Capital is a major focus of regulatory attention, with both book and risk-based capital standards used as capital adequacy measures. Unless an institution has adequate capital in the opinion of the regulators, they may withhold approval for new activities or force additions to capital. Therefore, the Corporation con-siders both the regulator's viewpoint and its own analysis of the capital structure and leverage amounts that are consistent with underlying business risks. At year-end 1996, the Corporation's total risk-adjusted capital ratio was 14.23% compared to a current regulatory minimum of 8.0%. The Corporation's ending equity to assets ratio for 1996 was 9.12%. However, as previously XXX PAGE 60 XXX discussed, temporary conditions which existed at year end make the average balance sheet ratio a more accurate measure of capital. The Corporation's average equity to assets ratio for 1996 was 9.46%. In January 1997, the Corporation issued $50,000,000 of trust preferred securities through a trust created and controlled by the Corporation. The securities, which are publicly traded, were issued at $25 per share with a cumulative dividend rate of 9.25%, payable quarterly. They have an initial maturity of 30 years with a 19-year extension option which the Corporation can exercise at any point during the first 30 years. The securities are callable at par after five years, or immediately, in the event of an adverse tax development affecting the Corporation's classification of the securites for federal income tax purposes. The securities are not corvertible into common stock of the Corporation. Stock Prices and Dividends: XXXPAGE 163XXX The common stock of Irwin Financial is quoted on the National Association ofSecurities Dealers Automated Quotation System National Market System (NASDAQ-NMS- trading symbol, IRWN). The following table sets forth certain information regarding trading in, and cash dividends paid with respect to, the shares of the Corporation's common stock in each quarter of the three most recent calendar years. Total Quarter Cash Dividends 1994 *High *Low *End*Dividends *For Year - ----------------------------------------------------------------- First quarter $123/4 $107/8 $113/8 $0.045 Second quarter 117/8 101/4 111/8 0.045 Third quarter 14 101/2 135/8 0.045 Fourth quarter 137/8 123/4 133/8 0.045 $0.18 1995 - ----------------------------------------------------------------- First quarter $157/8 $133/4 $151/2 $0.055 Second quarter 175/8 151/2 171/4 0.055 Third quarter 181/4 171/4 173/4 0.055 Fourth quarter 201/8 175/8 20 0.055 $0.22 1996 - ----------------------------------------------------------------- First quarter $223/4 $193/4 $221/8 $0.060 Second quarter 221/4 195/8 195/8 0.060 Third quarter 215/8 177/8 211/4 0.060 Fourth quarter 243/4 211/4 243/4 0.060 $0.24 - ----------------------------------------------------------------- *Adjusted for December 30, 1996 two-for-one stock split. XXX PAGE 61 XXX The Corporation expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements, and financial condition. On February 19, 1997, the Corporation's Board of Directors approved an increase in the first quarter dividend to $0.07 per share, payable in March 1997. Dividends by the Irwin Union Bank to the Corporation are restricted by banking law. See Note 15 of Notes to the Consolidated Financial Statements. Risk Management: As a financial intermediary, Irwin Financial Corporation is engaged in businesses which involve the assumption of financial risks including: - Credit risk - Liquidity risk - Interest rate risk Each line of business that assumes financial risk uses a formal process to manage this risk. In all cases, the objectives are to ensure that risk is contained within prudent levels and that we are adequately compensated for the level of risk assumed. The Chairman, the President, and the Chief Financial Officer of the parent company participate in each subsidiary's risk management process. XXXPAGE 164XXX Credit Risk: The assumption of credit risk is a key source of earnings for the community bank, home equity lending, and equipment leasing businesses. In addition, the mortgage banking business assumes some credit risk despite the fact that its mortgages are typically insured. The credit risk in the loan portfolio of the community bank and home equity lending business has the most potential to have a significant effect on consolidated financial performance. The community bank and home equity lending business manage credit risk through the use of lending policies, credit analysis and approval procedures, periodic loan reviews, and personal contact with borrowers. Loans over a certain size are reviewed by a loan committee prior to approval. The equipment leasing business manages credit risk in a manner similar to that used by the community bank and the home equity business. It uses lending policies, credit analysis procedures and personal contact with lessees. XXX PAGE 62 XXX An allowance for loan and lease losses is established as an estimate of the potential credit risk of the loans and leases held by the Corporation. In determining the adequacy of this allowance, management evaluates the creditworthiness of significant borrowers, past loan and lease loss experience, and current and anticipated economic conditions. The allowance is increased by provisions against income and recoveries of loans and leases previously charged off. Loans and leases that are determined by management to be uncollectible are charged against the allowance. The table on page 64 analyzes the consolidated allowance for possible loan and lease losses over the past five years. Net charge-offs in 1996 were $1.8 million, down 15.2% from 1995, and up 53.9% from 1994. Net charge-offs to average loans and leases was 0.36%, compared to 0.57% in 1995 and 0.41% in 1994. The provision for loan and lease losses was $4.5 million, 249.9% of net charge-offs. The coverage ratio was 146.3% in 1995 and 149.3% in 1994. At year end, the allowance for possible loan and lease losses was 1.25% of loans and leases, compared to 1.12% in 1995 and 1.25% in 1994. Total nonperforming loans and leases at year end were $5.0 million, compared to $2.4 million at the end of 1995 and $2.8 million at the end of 1994. Nonperforming loans and leases as a percent of total loans and leases were 0.94% at year-end 1996, compared to 0.58% in 1995 and 0.90% in 1994. Other real estate owned totaled $2.2 million at December 31, 1996, up from $0.3 million in 1995 and $0.5 in 1994. Total nonperforming assets were $7.2 million, or 0.55% of total assets at December 31, 1996, as compared to $2.7 million or 0.26% at year-end 1994 and $3.3 million or 0.50% at the end of 1994. XXX PAGE 63 XXX XXXPAGE 165XXX Analysis of Allowance for Loan and Lease Losses (In Thousands) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------- Loans and leases outstanding at end of period, net of unearned income $529,051 $412,525 $308,411 $256,116 $210,359 ================================================================= Average loans and leases for the period, net of unearned income $496,729 $369,220 $279,389 $232,898 $195,161 ================================================================= Allowance for loan and lease losses: Balance beginning of period $4,620 $3,863 $3,293 $3,220 $2,282 Charge-offs: Commercial, financial, and agricultural loans 495 845 266 1,074 626 Real estate mortgage loans 37 2 0 0 0 Consumer loans 959 953 543 387 392 Lease financing 883 690 757 323 207 - ----------------------------------------------------------------- Total charge-offs 2,374 2,490 1,566 1,784 1,225 - ----------------------------------------------------------------- Recoveries: Commercial, financial, and agricultural loans 133 2 34 82 21 Consumer loans 214 197 180 94 204 Lease financing 246 191 195 104 28 - ----------------------------------------------------------------- Total recoveries 593 390 409 280 253 - ----------------------------------------------------------------- Net charge-offs (1,781) (2,100) (1,157) (1,504) (972) Reduction due to sale of loans (695) (216) 0 0 0 Provision charged to expense 4,450 3,073 1,727 1,577 1,910 - ----------------------------------------------------------------- Balance end of period $6,594 $4,620 $3,863 $3,293 $3,220 ================================================================= Allowance for loan and lease losses: By category of loans and leases Commercial, financial, and agricultural loans $3,676 $2,349 $2,586 $2,031 $1,635 Consumer loans 1,974 1,420 767 650 1,122 Lease financing 944 851 510 612 463 - ----------------------------------------------------------------- Total $6,594 $4,620 $3,863 $3,293 $3,220 ================================================================= XXXPAGE 166XXX Ratios: Net charge-offs to average loans and leases 0.36% 0.57% 0.41% 0.65% 0.50% Allowance for loan losses to average loans and leases 1.33% 1.25% 1.38% 1.41% 1.65% Allowance for loan losses to loans and leases outstanding1.25% 1.12% 1.25% 1.29% 1.53% - ----------------------------------------------------------------- XXX PAGE 64 XXX Nonperforming Assets (In thousands) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------- Accruing loans past due 90 days or more: Commercial, financial, and agricultural loans $256 $418 $113 $800 $7 Real estate mortgages 234 0 0 141 12 Consumer loans 205 202 93 88 121 - ----------------------------------------------------------------- 695 620 206 1,029 140 - ----------------------------------------------------------------- Nonaccrual loans and leases: Commercial, financial, and agricultural loans 2,739 670 1,523 1,373 1,500 Real estate mortgages 260 694 689 848 1,540 Consumer loans 0 0 0 39 55 Lease financing receivables 1,261 415 363 242 299 - ----------------------------------------------------------------- 4,260 1,779 2,575 2,502 3,394 - ----------------------------------------------------------------- Total nonperforming loans and leases 4,955 2,399 2,781 3,531 3,534 - ----------------------------------------------------------------- Other real estate owned2,239 295 489 623 1,085 - ----------------------------------------------------------------- Total nonperforming assets $7,194 $2,694 $3,270 $4,154 $4,619 ================================================================= Nonperforming loans and leases to total loans and leases 0.94% 0.58% 0.90% 1.38% 1.68% ================================================================= Nonperforming assets to total assets 0.55% 0.26% 0.50% 0.47% 0.77% - ----------------------------------------------------------------- XXXPAGE 167XXX Loans which are past due 90 days or more are placed on nonaccrual status unless, in management's opinion, there is sufficient collateral value to offset both principal and interest. XXX PAGE 65 XXX Renegotiated and Nonaccrual Loans (In thousands) 1996 1995 1994 - ----------------------------------------------------------------- Interest which would have been recorded under original terms Renegotiated $0 $0 $0 Nonaccrual 309 178 232 - ----------------------------------------------------------------- 309 178 232 - ----------------------------------------------------------------- Interest income actually recorded Renegotiated 0 0 0 Nonaccrual 150 55 110 - ----------------------------------------------------------------- 150 55 110 - ----------------------------------------------------------------- Reduction in interest income $159 $123 $122 - ----------------------------------------------------------------- No loans were made to foreign borrowers and no loan concentrations existed of more than 10% of total loans to borrowers engaged in similar activities that would be similarly affected by economic or other conditions. Generally, the accrual of income is discontinued when the full collection of principal or interest is in doubt, or when the payment of principal or interest has become contractually 90 days past due unless the obligation is both well secured and in the process of collection. Further information regarding the balance of nonaccrual loans at December 31, 1996 and related payment information is as follows: Analysis of Nonaccrual Loans Contractual Cash interest payments Book balance balance applied as: December 31,December 31, interest reduction (In thousands) 1996 1996 income of principal - ----------------------------------------------------------------- Contractually past due with: substantial performance $168 $168 $9 $5 limited performance 2,463 2,849 104 562 no performance 963 1,267 0 0 Contractually current, however: payment in full of principal or interest in doubt 666 666 37 19 - ----------------------------------------------------------------- Total $4,260 $4,950 $150 $586 - ----------------------------------------------------------------- XXXPAGE 168XXX XXX PAGE 66 XXX Liquidity: Liquidity is the availability of funds to meet the daily requirements of the business. For financial institutions, demand for funds comes principally from extensions of credit and withdrawal of deposits. Liquidity is provided by asset maturities or sales and through short-term borrowings. The objectives of liquidity management are to ensure that funds will be available to meet demands and that funds are available at a reasonable cost. As with other forms of financial risk, liquidity is managed separately at each of our lines of business. In the case of Irwin Union Bank, this occurs at the monthly meeting of the Asset-Liability Management Committee. Since loans and leases are substantially less marketable than securities, the ratio of total loans to total deposits is the traditional measure of liquidity for banks and bank holding companies. At year-end 1996, this ratio stood at 81.6%. The Corporation is able to maintain this position of high liquidity without a substantial sacrifice in the form of a lower net interest margin due to the position in mortgage loans held for sale. These loans carry an interest rate equal to the current market rate for mortgage loans. However, liquidity is significantly improved since all mortgage loans held for sale are in the process of being securitized and sold. The holding period for an individual loan typically does not exceed 90 days. Interest Rate Sensitivity: Interest rate sensitivity refers to the potential for changes in market rates of interest to cause changes in net interest income. Since net interest income is a major source of income, it is important that potential changes are managed prudently. The Asset-Liability Management Committee of Irwin Union Bank monitors the repricing structure of both assets and liabilities over various time horizons. Exposure to changes in interest rates is evaluated by modeling the repricing characteristics of the portfolio under multiple rate scenarios. Formal policies approved by the Bank's Board of Directors ensure that exposure to changes in net interest revenues is maintained within acceptable levels. The mortgage banking business assumes a form of interest rate risk by entering into commitments to extend loans to borrowers at a fixed price for a limited period of time. Loans are also held temporarily until a pool is formed. Once again, a formal policy ensures that this risk is controlled. The home equity and equipment leasing businesses are exposed to potential interest rate risk that is similar to the lending operations of the community bank. XXX PAGE 67 XXX Rate sensitivity at the community bank can typically be managed by controlling the maturity of loans, securities, and deposits. The community bank may also use financial futures or interest rate swaps from time to time. The mortgage XXXPAGE 169XXX bank buys commitments to deliver loans at a fixed price to manage risk. The policy at both the home equity lending business and the equipment leasing business is to match-fund all assets. In some cases, the Corporation uses internal hedges to allow for the risk characteristics of one line of business to offset those of another. As the following table shows, the consolidated one-year gap at year-end 1996 was a positive $133.2 million. This compares to a positive gap of $153.6 million at year-end 1995. The large positive gaps have been due to levels of escrow deposits from the servicing portfolio of the mortgage bank. These deposits are generally held in noninterest-bearing accounts at Irwin Union Bank. However, they are invested in earning assets with rate maturities of less than one year, including mortgage loans held for sale. Since the gap was positive, it means that with respect to net interest income, the Corporation was positioned to benefit from rising interest rates, or to be harmed by declining rates. While traditional interest rate risk focuses on the changes in net interest income due to interest rate changes, the Corporation engages in other activities which are also affected by interest rate changes. Principal among these are mortgage loan origination and servicing. For example, if interest rates decline, management expects an increase in mortgage loan origination income and a decline in the value of mortgage servicing rights. Management attempts to monitor this exposure to traditional interest rate risk as well as interest rate influences on production and servicing value in a comprehensive manner. In addition, the static one-year gap is not a reliable measure of actual exposure to changes in market interest rates. Consequently, management uses simulations of the behavior of net interest revenue to determine exposure and to develop hedging strategies. XXX PAGE 68 XXX Within 3 Months After Interest Sensitivity:(In thousands) 3 Months to 1 Year 1 Year - ----------------------------------------------------------------- Interest-earning assets: Interest-bearing deposits with banks $2,049 $3,294 $6,000 Taxable investment securities 16,679 15,133 36,846 Tax-exempt investment securities 95 386 3,985 Mortgages held for sale 445,100 0 0 Loans, net of unearned discount 300,393 86,581 142,077 - ----------------------------------------------------------------- Total interest-earning assets 764,316 105,394 188,908 - ----------------------------------------------------------------- Interest-bearing liabilities: Money market checking 17,122 0 57,993 Money market savings 2,867 0 8,798 Regular savings 45,051 2,094 19,801 Time deposits 148,372 53,101 45,606 Short-term borrowings 456,683 5,200 0 Long-term debt 1,844 4,181 11,618 - ----------------------------------------------------------------- XXXPAGE 170XXX Total interest-bearing liabilities 671,939 64,576 143,816 - ----------------------------------------------------------------- Interest sensitivity gap $92,377 $40,818 $ 45,092 ================================================================= Cumulative gap $92,377 $133,195 $178,287 - ----------------------------------------------------------------- Effects of Inflation: The Corporation is affected by inflation primarily as it impacts interest rates. We believe that a financial institution's ability to react to changing interest rates is an indicator of its ability to perform in an inflationary environment. Please see the section on interest rate sensitivity for a discussion on this subject. XXX PAGE 69 XXX Daily Average Consolidated Balance Sheet, Interest Rates and Interest Differential For the year ended December 31, 1996 - ----------------------------------------------------------------- Average Yield/ (In thousands) Balance Interest Rate - ----------------------------------------------------------------- Assets: Interest-earning assets: Interest-bearing deposits with banks $10,282 $603 5.87% Federal funds sold 24,370 1,290 5.29 Taxable investment securities 60,080 4,076 6.78 Tax-exempt investment securities (1) 5,348 504 9.43 Mortgage loans held for sale 379,027 30,943 8.16 Loans and leases, net of unearned income (2) 496,729 52,391 10.55 - ----------------------------------------------------------------- Total interest-earning assets 975,836 89,807 9.20 - ----------------------------------------------------------------- Noninterest-earning assets: Cash and due from banks 38,309 Premises and equipment, net 17,425 Other assets 125,689 Less allowance for possible loan and lease losses (5,724) - ------------------------------------------------------ Total assets $1,151,535 ========== Liabilities and Shareholders' Equity: Interest-bearing liabilities: XXXPAGE 171XXX Money market checking $79,704 1,571 1.97% Money market savings 12,455 328 2.63 Regular savings 52,657 1,861 3.53 Time deposits 248,694 13,972 5.62 Short-term borrowings 334,304 22,115 6.62 Long-term debt 21,840 1,778 8.14 - ----------------------------------------------------------------- Total interest-bearing liabilities 749,654 41,625 5.55 - ----------------------------------------------------------------- Noninterest-bearing liabilities: Demand deposits 238,673 Other liabilities 54,238 Shareholders' equity 108,970 - ------------------------------------------------------ Total liabilities and shareholders' equity $1,151,535 ========== Net interest income $48,182 ======= Net interest income to average interest-earning assets 4.94% - ----------------------------------------------------------------- Notes: (1) Interest is reported on a fully taxable equivalent basis. The prevailing federal income tax rate was 34.5% in 1996, 34% in 1995 and 35% in 1994. (2) For purposes of these computations, nonaccrual loans are included in daily average loan amounts outstanding. XXX PAGE 70 XXX For the year ended December 31, 1995 - ----------------------------------------------------------------- Average Yield/ (In thousands) Balance Interest Rate - ----------------------------------------------------------------- Assets: Interest-earning assets: Interest-bearing deposits with banks $9,737 $497 5.10% Federal funds sold 35,006 2,036 5.82 Taxable investment securities 59,765 4,004 6.70 Tax-exempt investment securities (1) 6,961 738 10.60 Mortgage loans held for sale 285,808 20,727 7.25 Loans and leases, net of unearned income (2) 369,220 38,364 10.39 - ----------------------------------------------------------------- Total interest-earning assets 766,497 66,366 8.66 Noninterest-earning assets: Cash and due from banks 36,263 Premises and equipment, net 15,011 XXXPAGE 172XXX Other assets 68,677 Less allowance for possible loan and lease losses (4,284) - ------------------------------------------------------- Total assets $882,164 ======== Liabilities and Shareholders' Equity: Interest-bearing liabilities: Money market checking $68,491 1,552 2.27% Money market savings 15,376 465 3.02 Regular savings 53,255 2,016 3.79 Time deposits 255,004 10,834 4.25 Short-term borrowings 217,289 11,979 5.51 Long-term debt 20,896 1,722 8.24 - ----------------------------------------------------------------- Total interest-bearing liabilities 630,311 28,568 4.53 ==== Noninterest-bearing liabilities: Demand deposits 133,936 Other liabilities 29,050 Shareholders' equity 88,867 - ----------------------------------------------------------------- Total liabilities and shareholders' equity $882,164 ======== Net interest income $37,798 ======== Net interest income to average interest-earning assets 4.93%% - ----------------------------------------------------------------- For the year ended December 31, 1994 - ----------------------------------------------------------------- Average Yield/ (In thousands) Balance Interest Rate - ----------------------------------------------------------------- Assets: Interest-earning assets: Interest-bearing deposits with banks 22,627 $684 3.02% Federal funds sold 42,466 1,763 4.15 Taxable investment securities 77,230 4,392 5.69 Tax-exempt investment securities (1) 7,764 732 9.43 Mortgage loans held for sale 231,369 16,707 7.22 Loans and leases, net of unearned income (2) 279,389 26,604 9.52 - ----------------------------------------------------------------- Total interest-earning assets 660,845 50,882 7.70 ==== Noninterest-earning assets: Cash and due from banks 32,449 Premises and equipment, net 13,485 XXXPAGE 173XXX Other assets 45,746 Less allowance for possible loan and lease losses (3,543) - ------------------------------------------------------ Total assets $748,982 ======== Liabilities and Shareholders' Equity: Interest-bearing liabilities: Money market checking $65,583 1,347 2.05% Money market savings 24,864 578 2.32 Regular savings 54,770 1,601 2.92 Time deposits 125,415 5,592 4.46 Short-term borrowings 167,818 7,024 4.19 Long-term debt 20,760 1,491 7.18 - ----------------------------------------------------------------- Total interest-bearing liabilities 459,210 17,633 3.84 ==== Noninterest-bearing liabilities: Demand deposits 196,454 Other liabilities 17,139 Shareholders' equity 76,178 - ------------------------------------------------------ Total liabilities and shareholders' equity $748,981 ======== Net interest income $33,249 ======= Net interest income to average interest-earning assets 5.03% ==== Notes: (1) Interest is reported on a fully taxable equivalent basis. The prevailing federal income tax rate was 34.5% in 1996, 34% in 1995 and 35% in 1994. (2) For purposes of these computations, nonaccrual loans are included in daily average loan amounts outstanding. XXX PAGE 71 XXX Summary of Quarterly Financial Information 1996 ---- Fourth Third Second First Summary Income Information Quarter Quarter Quarter Quarter - ----------------------------------------------------------------- Interest income $24,566,540 $23,062,016 $22,003,722 $19,815,562 Interest expense 12,230,121 10,591,010 9,885,847 8,918,120 Provision for loan and lease losses 1,676,000 989,000 841,000 944,000 Noninterest income 42,833,063 38,175,986 38,338,420 34,300,235 Noninterest expense 42,340,666 40,483,443 41,092,558 35,816,441 Income taxes 4,243,000 3,672,000 3,495,000 3,449,000 - --------------------------------------------------------------------------- XXXPAGE 174XXX Net income $6,909,816 $5,502,549 $5,027,737 $4,988,236 =========================================================================== Net income per common share* $0.59 $0.48 $0.44 $0.44 - --------------------------------------------------------------------------- 1995 ---- Fourth Third Second First Summary Income Information Quarter Quarter Quarter Quarter - ----------------------------------------------------------------- Interest income $20,631,271 $17,990,434 $14,713,938 $12,552,550 Interest expense 9,919,789 8,020,339 5,926,174 4,701,985 Provision for loan and lease losses 933,000 910,000 580,000 650,000 Noninterest income 33,761,560 30,861,480 24,774,257 24,719,809 Noninterest expense 34,123,371 30,584,492 27,249,576 23,957,371 Income taxes 4,117,000 3,298,000 1,480,000 3,471,000 - --------------------------------------------------------------------------- Net income $5,299,671 $6,039,083 $4,252,445 $4,492,003 =========================================================================== Net income per common share* $0.46 $0.53 $0.37 $0.39 - --------------------------------------------------------------------------- 1994 ---- Fourth Third Second First Summary Income Information Quarter Quarter Quarter Quarter - ----------------------------------------------------------------- Interest income $12,633,617 $13,019,201 $12,421,802 $12,340,312 Interest expense 4,536,399 4,525,176 3,967,292 4,603,679 Provision for loan and lease losses 799,000 368,000 235,000 325,000 Noninterest income 20,721,089 20,539,407 22,138,704 22,453,283 Noninterest expense 19,221,350 21,245,418 23,498,040 22,879,522 Income taxes 3,421,000 2,942,000 2,689,000 2,796,000 - -------------------------------------------------------------------------- Net income $5,376,957 $4,478,014 $4,171,174 $4,189,394 ========================================================================= Net income per common share* $0.47 $0.38 $0.35 $0.36 - ------------------------------------------------------------------------- *restated for the two-for one-stock split December 30,1996 XXX PAGE 72 XXX Management Report on Responsibility for Financial Reporting The management of Irwin Financial Corporation and its subsidiaries has the responsibility of preparing the accompanying financial statements and for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles and are not misstated due to XXXPAGE 175XXX material fraud or error. The financial statements include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the financial statements. The Corporation's financial statements have been audited by Coopers & Lybrand L.L.P., independent certified public accountants elected by the shareholders. Management has made available to Coopers & Lybrand all the Corporation's financial records and related data, as well as the minutes of stockholders' and directors' meetings. Furthermore, management believes that all representations made to Coopers & Lybrand during its audit were valid and appropriate. Management of the Corporation has established and maintains a system of internal control that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. Management continually monitors the system of internal control for compliance. The Corporation maintains a strong internal auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. In addition, as part of its audit of the Corporation's financial statements, Coopers & Lybrand completed an assessment of selected internal accounting controls to establish a basis for reliance thereon in determining the nature, timing, and extent of audit tests to be applied. Management has considered the internal auditor's and Coopers & Lybrand's recommendations concerning the Corporation's system of internal control and has taken actions to respond appropriately to these recommendations that we believe are cost effective in the circumstances. Management believes that the Corporation's system of internal control is adequate to accomplish the objectives discussed herein. Management also recognizes its responsibility for fostering a strong ethical climate so that the Corporation's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Corporation's Creed, which is publicized throughout the Corporation. This responsibility is also reflected in the individual Codes of Conduct of each major operating subsidiary of the Corporation, which are publicized throughout each respective subsidiary. These Codes of Conduct address, among other things, the necessity of ensuring open communication within the Corporation; potential conflicts of interests; compliance with all domestic and foreign laws, including those related to financial disclosures; and a confidentiality of proprietary information. The Corporation maintains a systematic program to assess compliance with these policies. John A. Nash, President Thomas D. Washburn, Chief Financial Officer XXX PAGE 75 XXX Report of Coopers & Lybrand L.L.P. Independent Accountants XXXPAGE 176XXX To the Shareholders and Board of Directors Irwin Financial Corporation Columbus, Indiana We have audited the accompanying consolidated balance sheet of Irwin Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Irwin Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As described in Note 1, the Corporation adopted Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights, as of April 1, 1995. Indianapolis, Indiana January 17, 1997 XXX PAGE 76 XXX CONSOLIDATED STATEMENTS OF INCOME For the year ended December 31, 1996 1995 1994 - ----------------------------------------------------------------- Interest income: Loans and leases $52,202,866 $38,176,878 $26,386,067 Investment securities: Taxable 4,678,752 4,501,359 5,075,361 Tax-exempt 332,866 447,353 483,018 Loans held for sale 30,943,144 20,726,833 16,706,854 Federal funds sold 1,290,212 2,035,770 1,763,632 - ------------------------------------------------------------------------ Total interest income 89,447,840 65,888,193 50,414,932 - ------------------------------------------------------------------------- XXXPAGE 177XXX Interest expense: Deposits 17,732,481 14,868,026 9,117,721 Short-term borrowings 22,115,307 11,978,591 7,223,035 Long-term debt 1,777,521 1,721,670 1,291,790 - ------------------------------------------------------------------------ Total interest expense 41,625,309 28,568,287 17,632,546 - ------------------------------------------------------------------------ Net interest income 47,822,531 37,319,906 32,782,386 Provision for loan and lease losses - Note 5 4,450,000 3,073,000 1,727,000 - ------------------------------------------------------------------------ Net interest income after provision for possible loan and lease losses 43,372,531 34,246,906 31,055,386 - ------------------------------------------------------------------------ Loan origination income 43,779,433 32,133,179 25,544,575 Loan servicing fees 49,753,163 36,155,560 32,426,480 Gain on sale of loans 34,247,800 21,005,875 2,219,132 Gain on sale of mortgage servicing 16,378,230 15,271,081 17,715,696 Brokerage fees and commissions 2,010,318 2,792,436 2,148,946 Trust fees 1,995,153 2,009,864 1,902,620 Service charges on deposit accounts 1,444,669 1,238,731 1,258,818 Insurance commissions, fees and premiums 1,544,053 1,304,625 1,076,258 Other 2,494,885 2,205,755 1,559,958 - ------------------------------------------------------------------------ 153,647,704 114,117,106 85,852,483 - ------------------------------------------------------------------------ Other expense: Salaries 79,435,165 61,082,725 47,839,918 Pension and other employee benefits 12,651,154 10,638,338 8,205,547 Amortization of mortgage servicing rights 13,344,821 4,865,340 1,943,146 Premises and equipment 13,902,901 12,307,288 8,838,121 Office expense 10,387,037 7,859,511 5,891,352 Marketing and development 9,965,604 6,845,335 3,311,775 Other 20,046,215 12,316,273 10,814,471 - ------------------------------------------------------------------------ 159,732,897 115,914,810 86,844,330 - ------------------------------------------------------------------------ Income before income taxes 37,287,338 32,449,202 30,063,539 Federal income taxes 11,730,000 9,872,000 9,524,000 State income taxes 3,129,000 2,494,000 2,324,000 - ------------------------------------------------------------------------ Net income $22,428,338 $20,083,202 $18,215,539 ======================================================================== Net income per share of common stock: Net income - Note 1 $1.93 $1.75 $1.55 ======================================================================== Dividends per share of common stock $0.24 $0.22 $0.18 ======================================================================== Weighted average shares of common stock outstanding 11,609,656 11,486,258 11,766,212 ======================================================================== The accompanying notes are an integral part of the consolidated financial statements. XXXPAGE 178XXX XXX PAGE 77 XXX CONSOLIDATED BALANCE SHEET December 31, 1996 1995 - ----------------------------------------------------------------- Assets: Cash and due from banks $71,365,788 $49,256,953 Federal funds sold 0 15,000,000 - ----------------------------------------------------------------- Cash and cash equivalents 71,365,788 64,256,953 Interest-bearing deposits with financial institutions 11,343,546 7,937,740 Investment securities - Note 3 73,124,455 60,869,413 Mortgage loans held for sale - - Note 9 445,100,504 378,658,247 Loans and leases, net of unearned income - Note 4 529,050,970 412,524,601 Less: Allowance for loan and lease losses - Note 5 (6,593,836) (4,620,167) - ----------------------------------------------------------------- 522,457,134 407,904,434 Mortgage servicing rights - Note 6 67,450,101 48,535,326 Accounts receivable 41,712,662 19,888,880 Accrued interest receivable 6,724,973 4,239,435 Premises and equipment - Note 7 18,687,620 16,377,889 Other assets 45,919,328 29,638,258 - ----------------------------------------------------------------- $1,303,886,111 $1,038,306,575 ================================================================= Liabilities and Shareholders' Equity: Deposits Noninterest-bearing $239,347,589 $207,379,192 Interest-bearing 334,301,111 302,543,544 Certificates of deposit over $100,000 66,504,205 54,075,911 - ----------------------------------------------------------------- 640,152,905 563,998,647 Short-term borrowings - Note 9 461,882,725 310,278,659 Long-term debt - Note 10 17,642,526 21,574,792 Other liabilities 65,305,875 43,237,996 - ----------------------------------------------------------------- Total liabilities 1,184,984,031 939,090,094 - ----------------------------------------------------------------- Shareholders' equity Preferred stock, no par value - authorized 50,000 shares; none issued 0 0 Common stock; no par value - authorized 40,000,000 shares; issued 11,701,040 shares in 1996 and 1995; including XXXPAGE 179XXX 332,268 and 371,208 shares in treasury in 1996 and 1995, respectively 29,965,287 29,965,287 Additional paid-in capital 0 0 Net unrealized gain (loss) on investment securities net of deferred income taxes of $20,463 in 1996 and $6,435 in 1995. 56,523 (9,657) Retained earnings 94,083,540 74,647,711 - ----------------------------------------------------------------- 124,105,350 104,603,341 Less treasury stock, at cost (5,203,270) (5,386,860) - ----------------------------------------------------------------- Total shareholders' equity 118,902,080 99,216,481 - ----------------------------------------------------------------- $1,303,886,111 $1,038,306,575 ================================================================= The accompanying notes are an integral part of the consolidated financial statements. XXX PAGE 78 XXX CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY Net Unrealized Additional Gain (Loss) Common Paid-In on Investment Retained Treasury Stock Capital Securities Earnings Stock - ------------------------------------------------------------------------- Balance at January 1, 1994 $29,050,125 $6,163 87,293 40,949,286 $0 Common stock issued for employee stock purchase plan 893,496 0 0 0 0 Conversion of common stock for no par value 21,666 (21,666) Net income 0 0 0 18,215,539 0 Cash dividends - $.0.18 per share* 0 0 0 (2,073,733) 0 Unrealized losses on investment securities 0 0 (366,356) 0 0 Purchase of 490,950 shares of treasury stock* 0 0 0 0 6,207,150 Sale of 49,486 shares of treasury stock* 0 15,503 0 (10,556) (544,336) - ------------------------------------------------------------------------- Balance at December 31, 1994 29,965,287 0 (279,063) 57,080,536 5,662,814 - --------------------------------------------------------------------------- Net income 0 0 0 20,083,202 0 Cash dividends - $0.22 per share* 0 0 0 (2,482,705) 0 Unrealized gains on investment securities 0 0 269,406 0 0 Tax benefit on exercise of stock options 704,394 Purchase of 177,570 shares of XXXPAGE 180XXX treasury stock* 0 0 0 0 2,887,611 Sale of 247,826 shares of treasury stock* 0 (704,394) 0 (33,322) (3,163,565) - ----------------------------------------------------------------- Balance at December 31, 1995 $29,965,287 $- $(9,657) $74,647,711 $5,386,860 - -------------------------------------------------------------------------- Net income 0 0 0 22,428,338 0 Cash dividends - $0.24 per share* 0 0 0 (2,725,921) 0 Unrealized gains on investment securites 0 0 66,180 0 0 Tax benefit on exercise of stock options 516,431 Purchase of 89,428 shares of treasury stock* 0 0 0 0 1,930,831 Sale of 128,368 shares of treasury stock* 0 (516,431) 0 (266,588) (2,114,421) - --------------------------------------------------------------------------- Balance at December 31, 1996 $29,965,287 $0 $56,523 $94,083,540 $5,203,270 ========================================================================== *Adjusted for the two-for-one stock split on December 30,1996. The accompanying notes are an integral part of the consolidated financial statements. XXX PAGE 79 XXX CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended December 31,1996 1995 1994 - ----------------------------------------------------------------- Adjustment to reconcile net income to cash provided (used)by operating activities: Net Income $22,428,338 $20,083,202 $18,215,539 Depreciation and amortization 20,367,079 9,605,234 4,075,249 Provision for loan and lease losses 4,449,789 3,073,000 1,727,000 Amortization of premiums, less accretion of discounts 1,588,570 574,956 (659,363) Mortgage loan originations (5,085,625,446) (3,559,310,152) (2,812,961,911) Sale of mortgage loans 5,019,183,189 3,335,616,389 3,028,752,763 Gain on sale of mortgage servicing (16,378,230) (15,271,081) (17,715,696) Other, net (22,137,641) (5,781,443) 1,088,287 - ------------------------------------------------------------------- Net cash provided (used) by operating activities (56,124,352) (211,409,895) 222,521,868 Lending and investing activities: Proceeds from maturities/calls of XXXPAGE 181XXX investment securities: Held-to-maturity 5,045,000 53,491,466 47,502,478 Available-for-sale 29,740,946 9,507,979 46,139,448 Proceeds from sales of investment securities: Available-for-sale 2,028,462 3,008,031 2,029,289 Purchase of investment securities: Held-to-maturity (14,286,470) (35,814,475) (68,407,912) Available-for-sale (36,371,550) (14,280,795) (8,610,870) Net (increase) decrease in interest-bearing deposits with financial institutions (3,405,806) 4,226,466 22,915,401 Net increase in loans, excluding sales (258,412,078) (158,013,297) (53,452,273) Sale of loans 139,409,589 51,583,722 - Additions to mortgage servicing rights (81,044,704) (49,486,423) (22,103,888) Proceeds from sale of mortgage servicing rights 65,163,338 30,190,930 30,547,293 Other, net (5,650,679) (5,270,777) (3,490,108) - ----------------------------------------------------------------- Net cash used by lending and investing activities (157,783,952) (110,857,173) (6,931,142) Financing activities: Net increase (decrease) in deposits 76,154,258 124,080,673 (60,452,108) Net increase (decrease) in short-term borrowings 151,604,066 216,297,587 (179,819,319) Repayment of long-term debt (12,771,802) (7,747,676) (5,102,780) Proceeds from long-term debt 8,839,536 5,293,058 11,351,485 Purchase of treasury stock (1,930,831) (2,887,611) (6,207,150) Proceeds from sale of stock for employee benefit plans 1,847,833 3,130,243 1,442,779 Dividends paid (2,725,921) (2,482,705) (2,073,733) - ----------------------------------------------------------------- Net cash provided (used) by financing activities 221,017,139 335,683,569 (240,860,826) - ----------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 7,108,835 13,416,501 (25,270,100) Cash and cash equivalents at beginning of year 64,256,953 50,840,452 76,110,552 - ----------------------------------------------------------------- Cash and cash equivalents at end of year $71,365,788 $64,256,953 $50,840,452 ================================================================= Cash paid during the year: Interest $41,248,019 $27,551,606 $17,457,343 ================================================================= Income taxes $6,230,350 $3,829,990 $11,569,195 ================================================================= The accompanying notes are an integral part of the consolidated financial statements. XXXPAGE 182XXX XXX PAGE 80 XXX 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. The Corporation is engaged in the mortgage banking, commercial banking, home equity lending, and equipment leasing 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 the Corporation to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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. Securities: Those securities which the Corporation has the positive intent and ability to hold until maturity are classified as ''held-to-maturity'' and are stated at cost adjusted for amortization of premium and accretion of discount. Securities that might be sold prior to maturity are classified as "available- for-sale'' and are stated at fair value. Unrealized gains and losses, net of the future tax impact, are reported as a separate component of shareholders' equity until realized. Investment gains and losses are based on the adjusted cost of the specific security. Mortgage Banking Activities: Mortgage loans held for sale are carried at the lower of cost or market, determined on an aggregate basis. On May 12, 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 122, ''Accounting for Mortgage Servicing Rights'' (SFAS No. 122), an amendment to SFAS No. 65. The Corporation elected to adopt this standard for its financial statement reporting in the second quarter of 1995. SFAS No. 122 prohibits retroactive application to 1994. Accordingly, the Corporation's 1994 and first quarter 1995 mortgage banking activities reported in the financial statements were accounted for under the original SFAS No. 65. SFAS No. 122 requires a portion of the cost of originating a mortgage loan to be allocated to the mortgage servicing right based on its fair value relative to the loan as a whole. To determine the fair value of the servicing rights created since the second quarter of 1995, the Corporation used the market prices under comparable servicing sale contracts, when available, or alternatively used a valuation model that calculates the present value of future cash flows to determine the fair value of the servicing rights. In using this valuation method, the Corporation incorporated assumptions that it is believed market participants would use in estimating future net servicing income which included estimates of the cost of servicing per loan, the discount rate, float value, an inflation rate, ancillary income per loan, prepayment speeds, and default rates. Capitalized servicing rights are amortized over the estimated lives of the related loans, which are grouped based on loan characteristics, in proportion to estimated net servicing income. XXXPAGE 183XXX In determining servicing value impairment at the end of the year, the post-implementation servicing portfolio is disaggregated into its predominant risk characteristics. The Corporation has determined those risk characteristics to be interest rate, loan type, and investor type. These segments of the XXX PAGE 83 XXX portfolio were valued using market prices under comparable servicing sale contracts, when available, or alternatively using the same model as was used to originally determine the fair value at origination, using current assumptions. The calculated value was then compared with the book value of each segment to determine the required reserve for impairment. It is reasonably possible that a change in the impairment reserve will occur in the near term. No estimate can be made of the range of amounts of loss or gain. The effect of the change in accounting standards to 1995 results was an increase to net income of approximately $11,800,000 for the last three quarters of 1995 over what would have been earned under SFAS 65. Loans: Loan origination fees and costs are deferred and the net amounts are amortized as adjustments of the loans' yields. When loans are sold, deferred fees and costs are included with outstanding principal balances to determine gains or losses. Interest income on loans is computed daily based on the principal amount of loans outstanding. The accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest. Direct Financing Leases: Interest and service charges, net of initial direct costs, are deferred and reported as income in decreasing amounts over the life of the lease, which averages three to four years, so as to provide an approximate constant yield on the outstanding principal balance. Allowance for Loan and Lease Losses: The allowance for loan and lease losses is maintained at a level considered adequate to provide for future loan and lease losses and is based on management's evaluation of expected losses in the portfolios, as well as prevailing and anticipated economic conditions. In 1995, the Corporation adopted Statement of Financial Accounting Standards No. 114, ''Accounting by Creditors for Impairment of a Loan'' (SFAS No. 114) and Statement of Financial Accounting Standards No. 118 which amends SFAS No. 114. Under these standards, certain loans are considered impaired if it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. The adoption of these standards did not have a material effect on the Corporation's financial position or results of operations in 1995. XXX PAGE 84 XXX XXXPAGE 184XXX Premises and Equipment: Premises and equipment are recorded at cost. Depreciation is determined by the straight-line method. Income Per Share: Income per share computations are based on the weighted average number of common shares outstanding during the year. The net income and cash dividend per share information has been adjusted to reflect the two-for-one stock split on December 30, 1996. Income Taxes: A consolidated tax return is filed for all eligible entities. Income taxes are deferred for temporary differences between pre-tax accounting income and taxable income. Rehabilitation tax credits and low-income housing tax credits are recorded as a reduction to the provision for federal income taxes in the year the eligible buildings are placed in service. Transfers of Assets: The FASB issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities'' (SFAS No. 125) in June 1996. This statement establishes the accounting treatment to be used for the securitization of all financial assets beginning in 1997. Under this standard, the net carrying values of assets sold and retained are allocated based on their relative fair values. The Corporation does not expect the adoption of this standard to have a material effect on its financial position or results of operations in 1997. Postretirement Benefits: The Corporation provides health insurance benefits to its retirees and accrues the costs as incurred. Cash and Cash Equivalents Defined: For purposes of the statement of cash flows, the Corporation considers cash and due from banks and federal funds sold to be cash equivalents. Forward Commitments: The Corporation uses forward contracts to reduce its interest rate exposure associated with mortgage banking activities. Reclassifications: Certain amounts in the 1995 and 1994 consolidated financial statements have been reclassified to conform to the 1996 presentation. Note 2: Restrictions on Cash And Due From Banks Irwin Union Bank and Trust Company is required to maintain a reserve balance with the Federal Reserve Bank. The amount of the reserve balance for the period including December 31, 1996 was approximately $8,276,000. XXX PAGE 85 XXX Note 3: Investment Securities The amortized cost, fair value, and carrying value of investments held at December 31, 1996 are as follows: Gross Gross Amortized Unrealized Unrealized Fair Carrying December 31, 1996 Cost Gains Losses Value Value - -------------------------------------------------------------------------- XXXPAGE 185XXX Held-to-Maturity: U.S. Treasury and Government obligations $38,317,039 $249,615 $(47,039) $38,519,615 $38,317,039 Obligations of states and political subdivisions 4,466,043 299,937 (1,106) 4,764,874 4,466,043 Mortgage-backed securities 7,153,865 193,341 0 7,347,206 7,153,865 - ------------------------------------------------------------------------------ Total held- to-maturity 49,936,947 742,893 (48,145) 50,631,695 49,936,947 - ------------------------------------------------------------------------------ Available-for-Sale: U.S. Treasury and Government obligations 19,886,179 64,280 (26,412) 19,924,047 19,924,047 Mortgage-backed securities 3,224,342 15,418 (2,127) 3,237,633 3,237,633 Other 25,828 0 0 25,828 25,828 - ------------------------------------------------------------------------------ Total available- for-sale 23,136,349 79,698 (28,539) 23,187,508 23,187,508 - ------------------------------------------------------------------------------ Total investments $73,073,296 $822,591 $(76,684) $73,819,203 $73,124,455 ============================================================================== The amortized cost, fair value, and carrying value of investments held at December 31, 1995 are as follows: Gross Gross Amortized Unrealized Unrealized Fair Carrying December 31, 1995 Cost Gains Losses Value Value - ----------------------------------------------------------------------------- Held-to-Maturity: U.S. Treasury and Government obligations $26,914,375 $479,575 $0 $27,393,950 $26,914,375 Obligations of states and political subdivisions 6,490,223 322,077 (2,151) 6,810,149 6,490,223 Mortgage-backed securities 8,858,431 215,550 0 9,073,981 8,858,431 - ----------------------------------------------------------------------------- Total held- to-maturity 42,263,029 1,017,202 (2,151) 43,278,080 42,263,029 - ------------------------------------------------------------------------------ Available-for-Sale: U.S. Treasury and Government obligations 15,362,687 34,678 (37,927) 15,359,438 15,359,438 Mortgage-backed securities 3,259,791 2,676 (15,521) 3,246,946 3,246,946 - ------------------------------------------------------------------------------ Total available- for-sale 18,622,478 37,354 (53,448) 18,606,384 18,606,384 - ------------------------------------------------------------------------------ Total investments $60,885,507 $1,054,556 $(55,599) $61,884,464 $60,869,413 ============================================================================== XXX PAGE 86 XXX XXXPAGE 186XXX The amortized cost and fair value of debt securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value - ----------------------------------------------------------------- Held-to-Maturity: Due in one year or less $6,432,813 $6,500,066 Due after one year through five years 21,616,745 21,797,458 Due after five years through ten years 1,172,925 1,248,569 Due after ten years 1,375,000 1,552,796 - ----------------------------------------------------------------- 30,597,483 31,098,889 Mortgage-backed securities 7,153,864 7,347,206 Federal Home Loan Bank stock 12,185,600 12,185,600 - ----------------------------------------------------------------- 49,936,947 50,631,695 - ----------------------------------------------------------------- Available-for-Sale: Due in one year or less 6,879,522 6,881,750 Due after one year through five years 13,032,485 13,068,125 - ----------------------------------------------------------------- 19,912,007 19,949,875 Mortgage-backed securities 3,224,342 3,237,633 - ----------------------------------------------------------------- 23,136,349 23,187,508 - ----------------------------------------------------------------- Total investments $73,073,296 $73,819,203 ================================================================= Investment securities amounting to $20,533,106 were pledged as collateral for borrowings and for other purposes on December 31, 1996. During 1996, sales of "available-for-sale" investments with proceeds of $2,028,462 resulted in a gross loss of $8,899. "Held- to-maturity" investments totaling $1,499,o00 were called at their par value. In 1995, sales of "available-for-sale" investments with proceeds of $3,008,031 resulted in a gross loss of $15,786. Additionally in 1995, "held-to-maturity" investments totaling $4,446,100 were called at their par value. In 1994, sales of ''available-for-sale'' investments with proceeds of $2,029,289 resulted in a gross gain of $4,374. Proceeds from calls of ''held- to-maturity" investments were $2,721,183, resulting in a gross gain of $5,000. Sales of "held-to-maturity" investments in 1996, 1995, and 1994 were due to calls on the securities. As permitted by the November 1995 FASB Special Report on the accounting for investments, the Corporation transferred $8,850,000 of investment securities from the "held-to-maturity" category to the "available-for-sale" category in 1995. These investments had a market value of $8,862,955 at the time of transfer. XXX PAGE 87 XXX Note 4: Loans and Leases XXXPAGE 187XXX Loans and leases are summarized as follows: December 31, 1996 1995 - ----------------------------------------------------------------- Commercial, financial, and agricultural $179,650,053 $150,311,871 Real estate-construction 48,990,519 36,125,577 Real estate-mortgage 210,697,305 108,350,683 Consumer 38,371,100 67,755,702 Direct financing leases 62,371,808 60,979,310 Unearned income (11,029,815) (10,998,542) - ----------------------------------------------------------------- Total $529,050,970 $412,524,601 ================================================================= ============= Commercial loans are extended primarily to local regional businesses and to local farming operations in the market area of Irwin Union Bank. The Corporation also provides consumer loans to the customers in that market. Real estate loans and direct financing leases are extended throughout the United States. The Bank, in the normal course of business, makes loans to directors, officers, and organizations and individuals with which they are associated. These transactions are consistent with sound banking practices and are within applicable bank regulatory guidelines and limitations. Such loans amounted to approximately $4,277,000 and $4,145,000 at December 31, 1996 and 1995, respectively. During 1996, $5,315,000 of new loans were made and repayments totaled $5,110,000. The Corporation leases small-ticket medical and other equipment under direct financing leases generally with terms from one to five years. At December 31, 1996, information pertaining to the Corporation's investment in direct financing leases is as follows: Future minimum lease payments receivable $55,449,691 Estimated unguaranteed residual value of leased assets 6,922,117 - ----------------------------------------------------------------- Investment in direct financing leases 62,371,808 Unearned income (11,029,815) - ----------------------------------------------------------------- Net investment in direct financing leases $51,341,993 ================================================================= Future minimum lease payments receivable during the next five years are as follows: 1997 $25,525,630 1998 15,350,802 1999 8,877,463 2000 4,186,174 2001 1,509,622 - -------------------------------------------- Total $55,449,691 ============================================ XXXPAGE 188XXX XXX PAGE 88 Note 5: Allowance for Possible Loan and Lease Losses Changes in the allowance for possible loan and lease losses are summarized below: December 31, 1996 1995 1994 - ----------------------------------------------------------------- Balance at beginning of year $4,620,167 $3,863,223 $3,293,402 Provision for possible loan and lease losses $4,450,000 3,073,000 1,727,000 Reduction due to sale of loans (696,195) (215,833) 0 Recoveries 593,421 389,674 408,821 Charge-offs (2,373,557) (2,489,897) (1,566,000) - ------------------------------------------------------------------- Balance at end of year $6,593,836 $4,620,167 $3,863,223 =================================================================== At December 31, 1996 and 1995, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 and SFAS No. 118 totaled $4,334,968 and $6,543,932, respectively. These loans had a corresponding valuation allowance of $1,167,184, and $742,901, determined based on the fair value of the loans' collateral. The Corporation recognized $356,917 and $260,886 of interest income on these loans in 1996 and 1995, respectively. Note 6: Mortgage Servicing Rights Included on the consolidated balance sheet at December 31, 1996 and 1995 are $67,450,101 and $48,535,326, respectively, of capitalized mortgage servicing rights. These amounts relate to the principal balances of mortgage loans serviced by the Corporation for investors which total $10,810,987,768 and $10,301,914,063 at December 31, 1996 and 1995, respectively. Although they are not generally held for purposes of sale, there is an active secondary market for mortgage servicing rights. In accordance with the requirements of SFAS No. 122, in 1995 the Corporation established a valuation allowance to record mortgage servicing rights at their fair market value. Changes in the allowance are summarized below: December 31, 1996 1995 - -------------------------------------------------------------------------- Balance at beginning of year $908,778 0 Valuation changes during the period (254,427) 908,778 Reductions due to sales of servicing (654,351) 0 - -------------------------------------------------------------------------- Balance at end of year 0 $908,778 ========================================================================== Note 7: Premises and Equipment Premises and equipment are summarized as follows: XXXPAGE 189XXX December 31, 1996 1995 - ----------------------------------------------------------------- Land $1,221,918 $1,221,918 Building and leasehold improvements 10,824,250 9,846,001 Furniture and equipment 24,524,817 20,315,099 - ----------------------------------------------------------------- 36,570,985 31,383,018 Less accumulated depreciation (17,883,365) (15,005,129) - ----------------------------------------------------------------- Total $18,687,620 $16,377,889 ================================================================= XXX PAGE 89 XXX Note 8: Lease Obligations At December 31, 1996, the Corporation and its subsidiaries leased certain branch locations and office equipment used in its operations. Operating lease rental expense was $8,699,930 in 1996, $7,754,388 in 1995, and $5,075,119 in 1994. The future minimum rental payments required under noncancellable operating leases with initial or remaining terms of one year or more are summarized as follows: Year ended December 31: 1997 $4,888,026 1998 2,698,033 1999 1,678,581 2000 1,191,363 2001 1,135,006 Thereafter 646,759 - --------------------------------------------- Total minimum rental payments $12,237,768 ============================================= Note 9: Short-Term Borrowings Short-term borrowings are summarized as follows: December 31, 1996 1995 - ----------------------------------------------------------------- Repurchase agreements and drafts payable related to mortgage loan closings $264,998,449 $225,872,594 Commercial paper 17,174,751 21,722,935 Federal funds 74,118,000 40,000,000 Lines of credit 105,591,525 22,683,130 - -------------------------------------------------------------------- Total $461,882,725 $310,278,659 ==================================================================== Weighted average interest rate 5.34% 5.51% Repurchase agreements at December 31, 1996 and 1995 include $183,869,533 and $151,104,931 in mortgages sold under agreements to repurchase, which are used XXXPAGE 190XXX to fund mortgages prior to sale in the secondary market. These repurchase agreements are collateralized by mortgage loans held for sale. Drafts payable related to mortgage loan closings totaled $74,042,188 and $69,395,883 at December 31, 1996 and 1995, respectively. These borrowings are related to mortgage closings at the end of December which have not been presented to the banks for payment. When presented for payment, these borrowings will be funded internally or by borrowing from available lines of credit. Commercial paper includes $14,963,694 and $18,005,000 at December 31, 1996 and 1995, respectively, payable to a company owned by a significant shareholder and director of the Corporation. The Corporation also has lines of credit available of $222,000,000 to fund loan originations and other operations. Interest on the lines of credit is payable monthly or quarterly with rates ranging from 6.09% to 8.25%. XXX PAGE 90 XXX Note 10: Long-Term Debt Long-term debt at December 31, 1996 of $17,642,526 consists of various notes payable at annual interest rates ranging from 6.3% to 9.6% and maturity dates through April 30, 2002. Long-term debt as of December 31, 1995, was $21,574,792 and consisted of various notes payable at annual interest rates ranging from 6.0% to 9.6% and maturity dates through April 3o, 2001. Maturities of long-term debt at December 31, 1996 are as follows: 1997 $7,420,309 1998 4,454,762 1999 2,738,434 2000 1,689,605 2001 1,339,146 Thereafter 270 - ---------------------------------------------- Total $17,642,526 ============================================== Note 11 : Contingencies In the normal course of business, Irwin Financial Corporation and its subsidiaries are subject to various claims and other pending and possible legal actions. As of December 31, 1996, Inland Mortgage Corporation (Inland) was a defendant to three separate class action lawsuits relating to the following: Inland's administration of mortgage escrow accounts, Inland's right to require its borrowers to pay premiums for private mortgage insurance, and Inland's right to pay broker fees to mortgage brokers. As of December 31, 1996, Irwin Financial Corporation, Irwin Home Equity and certain employees of Irwin Home Equity were defendents to a lawsuit alleging misappropriation of trade secrets. At present, it is not possible for the Corporation to predict the likelihood of an unfavorable outcome or to establish the possible extent or amount of liability or potential loss exposure with respect to the litigation. XXXPAGE 191XXX Note 12: Financial Instruments with Off-Balance Sheet Risk The Corporation is party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby letters of credit, and forward commitments relating to mortgage banking activities. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheet. The Corporation's exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments. The collateral pledged for standby letters of credit and commitments varies but may include accounts receivable, inventory, property, plant, and equipment, and residential real estate. Total outstanding commitments to extend credit at December 31, 1996, were $188,898,000. These loan commitments include $37,949,000 of floating rate loan commitments and $150,949,000 of fixed rate loan commitments related to commercial and mortgage banking activities. The interest rate risk of mortgage banking commitments is hedged by forward commitments. The Corporation had approximately $14,710,000 XXX PAGE 91 XXX and $11,898,000 in irrevocable standby letters of credit outstanding at December 31, 1996 and 1995, respectively. Forward commitments are used in mortgage banking activities to hedge the interest rate risk associated with mortgage loan commitments and loans held for sale. The contract amount for forward contracts does not represent exposure to credit loss. Forward commitments related to mortgage banking activities were $364,876,000 and $432,370,000 at December 31, 1996 and 1995, respectively. Derivative contracts are used to hedge the value of mortgage servicing rights against the effects of increased prepayment activity that generally results from declining interest rates. To the extent that interest rates increase, the value of mortgage servicing rights increases while the value of the hedge instruments declines. However, the Corporation is not exposed to loss beyond its initial outlay to acquire the hedge instruments. The Corporation's mortgage servicing rights hedge instruments consist entirely of long call options on U.S. Treasury futures. There were no hedge instruments outstanding as of December 31, 1996. At December 31, 1995, the carrying value of these options was approximately $445,000 and the notional amount was $100,000,000, all of which related to 1995 additions and no dispositions. There can be no assurance that the Corporation's hedge instruments will generate gains in the future. The Corporation's commercial bank grants credit to customers in south central Indiana. Its mortgage banking operations are located in 27 states throughout the United States. Note 13: Fair Value of Financial Instruments XXXPAGE 192XXX Fair value estimates, methods and assumptions are set forth below for the Corporation's financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Interest-bearing deposits with financial institutions: Fair values were estimated by discounting future cash flows using the current rates offered on similar deposits. Investment securities: Fair values for investment securities were based on quoted market prices. Mortgage loans held for sale: The current market price of similar loans sold was used to estimate the fair value of mortgage loans held for sale. Loan receivables: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values were based on carrying values. The fair values of commercial, consumer, real estate-mortgage, and real estate-construction loans were estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality and for the same remaining maturities. Derivative contracts: The carrying amounts of derivative contracts equal their fair values which are based on quoted market prices. XXX PAGE 92 XXX Deposit liabilities: The fair value of demand deposits, including interest and non-interest checking, passbook savings, and certain types of money market accounts, are assumed to be equal to the amount payable on demand at the reporting date. The carrying amounts for variable-rate money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates with similar remaining maturities. Short-term borrowings: For variable-rate short-term borrowings that reprice frequently, fair values were based on carrying values. Fair values for fixed-rate short-term borrowings were estimated using a discounted cash flow calculation that applies interest rates currently being offered on borrowings with similar remaining terms. Long-term debt: The fair values of variable-rate long-term debt, which reprices frequently, were based on carrying values. For fixed-rate long-term debt, fair values were estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements. Commitments to extend credit and standby letters of credit: The carrying values of these financial instruments are based on fees charged to enter into the agreements and approximate their fair values. The carrying values are XXXPAGE 193XXX insignificant to the Corporation's balance sheet and have been included in the carrying values of loans. The estimated fair values of the Corporation's financial instruments at December 31 are as follows: 1996 1995 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - ----------------------------------------------------------------- Financial assets: Cash and cash equivalents $71,365,788 $71,366,000 $64,256,953 $64,257,000 Interest-bearing deposits with financial institutions 11,343,546 11,344,000 7,937,740 7,926,000 Investment securities 73,124,455 73,819,000 60,869,413 61,884,000 Mortgage loans held for sale 445,100,504 445,101,000 378,658,247 380,135,000 Loans, net of allowance for loan losses 472,058,689 470,208,000 358,213,904 358,135,000 Derivative contracts 0 0 445,000 445,000 Financial liabilities: Deposits 640,152,905 640,505,000 563,998,647 564,282,000 Short-term borrowings 461,882,725 461,919,000 310,278,659 310,279,000 Long-term debt $17,642,526 $17,695,000 $21,574,792 $21,683,000 The fair value estimates consider relevant market information when available. Because no market exists for a significant portion of the Corporation's financial instruments, fair value estimates are determined judgmentally and consider various factors, including current economic conditions and risk characteristics of certain financial instruments. Changes in factors, or the weight assumed for the various factors, could significantly affect the estimated values. XXX PAGE 93 XXX The fair value estimates are presented for existing on- and off- balance sheet financial instruments without attempting to estimate the value of the Corporation's long-term relationships with depositors and the benefit that results from the low cost funding provided by deposit liabilities. In addition, significant assets which were not considered financial instruments and were therefore not a part of the fair value estimates include lease receivables, mortgage servicing rights, deferred taxes, and premises and equipment. Note 14: Shareholders' Equity The Board of Directors of the Corporation approved a two-for-one stock split effective December 30, 1996. Previously reported per share data have been adjusted to reflect this split. The shareholders of the Corporation approved an increase in common shares authorized from 7,500,000 to 40,000,000 as of April 30, 1996. The Corporation has a stock plan to compensate directors of the Corporation with the Corporation's common stock, if so elected, in lieu of cash for their XXXPAGE 194XXX annual retainer fee and meeting fees. The number of shares issued under the plan is based on the current market value of the Corporation's common stock. The Corporation also has an employee stock purchase plan for all qualified employees. The plan provides for employees to purchase common stock through payroll deduction at approximately 85% of the current market value. The Corporation has two stock option plans (established in 1992 and 1986) which provide for the issuance of 1,440,000 shares of non-qualified and incentive stock options. The exercise price of each option, which has a ten year life and a vesting period of four years beginning the year granted, is equal to the market price of the Corporation's stock on the grant date. The 1986 plan also provides for stock appreciation rights (SARs) that may be granted with respect to options issued. The holder of an SAR has the right to surrender the related option at any time the option could be exercised (subject to limitations described in the plan) and to receive its value at that date in cash or common stock. Vested outstanding stock options have been considered as common stock equivalents in the computation of earnings per share. Activity in the above plans for 1996, 1995 and 1994 is summarized as follows adjusted for the 1996 two-for-one stock split: 1996 1995 1994 - ----------------------------------------------------------------- Weighted Weighted Weighted average average average Number exercise Number exercise Number exercise of shares price of shares price of shares price - ----------------------------------------------------------------- Outstanding at the beginning of the year 618,800 $9.19 650,804 $6.51 $523,954 $5.57 Granted 104,700 21.31 120,700 15.69 136,900 11.38 Exercised (87,948) 5.01 (151,754) 2.85 (10,050) 2.59 Cancelled (12,252) 17.85 (950) 11.21 0 0 -------- -------- -------- Outstanding at the end of year 623,300 11.65 618,800 9.19 650,804 6.51 ======== ======== ======== Exercisable at the end of year 461,300 $9.63 429,426 $7.34 409,126 $5.47 ======== ======== ======== Available for future grants 236,404 341,104 463,804 ======== ======== ======== XXX PAGE 94 The Corporation has not recognized compensation cost for the two non-qualified and incentive stock option plans or the employee stock purchase plan. Had compensation cost been determined based on the fair value at the grant dates the Corporation's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1996 1995 XXXPAGE 195XXX - ----------------------------------------------------------------- Net income As reported $22,428,338 $20,083,202 Pro forma 22,071,004 19,885,813 Primary earnings per share As reported $1.93 $1.75 Pro forma 1.91 1.73 Fully diluted earnings per share As reported $1.93 $1.75 Pro forma 1.90 1.72 - ----------------------------------------------------------------- The fair value of each option was estimated to be $9.13 and $7.41 on the date of the grant using the binomial option-pricing model with the following assumptions for 1996 and 1995, respectively: risk free interest rates of 6.75% and 7.25%; dividend yield of 1.25% both years; and volatility of 0.2284 and 0.275o. As of December 31, 1996, 587,900 options were outstanding under these plans with exercise prices that range between $2.52 and $21.31 and a remaining weighted average contractual life of 7.9 years. Note 15: Dividends from Subsidiary Bank Consolidated retained earnings include undistributed earnings of Irwin Union Bank and Trust Company. At December 31, 1996, the Bank may pay dividends of up to $12,650,807 from its undistributed earnings without obtaining approval from bank regulatory agencies. In practice, the Corporation further limits dividends from the Bank to maintain adequate capital. Note 16 : Income Taxes Income taxes are summarized as follows: December 31, 1996 1995 1994 - ----------------------------------------------------------------- Current $6,554,000 $(487,000) $11,338,000 Deferred 8,305,000 12,853,000 510,000 - ----------------------------------------------------------------- $14,859,000 $12,366,000 $11,848,000 ================================================================= The Corporation's net deferred tax liability, which is included in other liabilities on the consolidated balance sheet, consisted of the following: December 31, 1996 1995 - ----------------------------------------------------------------- Mortgage servicing $(25,965,001) $(16,542,988) Deferred compensation 2,763,430 2,328,595 Loan and lease loss allowance 4,047,304 2,952,967 Deferred origination fees and costs 709,498 367,360 Lease financing income (4,639,948) (4,413,995) Fixed assets (1,017,670) (810,346) Other, net (135,813) (305,958) - --------------------------------------------------------------------- Net deferred tax liability $(24,238,200) $(16,424,365) ================================================================= XXXPAGE 196XXX XXX PAGE 95 XXX A reconciliation of income tax expense to the amount computed by applying the statutory income tax rate to income before income taxes is summarized as follows: 1996 1995 1994 - ----------------------------------------------------------------- Income taxes computed at the statutory rate $12,864,133 $11,032,729 $10,522,239 Increase (decrease) resulting from: Nontaxable interest from investment securities and loans (230,942) (308,157) (319,805) State franchise tax, net of federal benefit 2,075,973 1,820,400 1,661,011 Rehabilitation and low-income tax credits (127,000) (30,000) (30,000) Other items - net 276,836 (148,972) 14,555 - ---------------------------------------------------------------------- $14,859,000 $12,366,000 $11,848,000 ====================================================================== Note 17: Employee Retirement Plans The Corporation has a defined benefit plan covering eligible employees of adopting subsidiaries. The benefits are based on years of service and the employees' compensation during their employment. The Corporation's funding policy is consistent with the funding requirements of federal laws and regulations. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Plan assets are primarily invested in corporate and U.S. bonds, mutual funds, and cash equivalents. The mutual funds are invested primarily in common stocks and bonds. The following table sets forth the plan's funded status and amounts recognized in the Corporation's consolidated balance sheet December 31, 1996 1995 - ----------------------------------------------------------------- Actuarial present value of benefits based on service to date and present pay levels: Accumulated benefit obligation Vested $6,090,545 $5,948,210 Non-vested 251,938 174,990 - ----------------------------------------------------------------- 6,342,483 6,123,200 Additional amounts related to projected pay increases 1,405,887 1,693,455 - ----------------------------------------------------------------- XXXPAGE 197XXX Projected benefit obligation 7,748,370 7,816,655 Plan assets at fair value 8,160,620 7,002,188 - ----------------------------------------------------------------- Excess of assets over (under) projected benefit obligation 412,250 (814,467) Prior service cost not yet recognized in net periodic pension cost 175,224 (19,368) Unrecognized net loss from past experience different from that assumed 191,707 1,523,009 Unrecognized net transition asset (83,298) (213,769) - ----------------------------------------------------------------- Prepaid pension costs included in other assets $695,883 $475,405 ================================================================= XXX PAGE 96 XXX The net pension cost for 1996, 1995, and 1994 included the following components: 1996 1995 1994 - ----------------------------------------------------------------- Service cost - benefits earned during the period $443,865 $344,825 $345,337 Interest cost on projected benefit obligation 519,358 483,011 439,596 Actual (return) loss on plan assets (926,681) (916,317) 159,110 Net amortization and deferral 205,364 249,940 (846,569) - ----------------------------------------------------------------- Net pension cost $241,906 $161,459 $97,474 ================================================================= The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% and 7.0% at December 31, 1996 and 1995, respectively. The expected rate of increase in future compensation levels was 4.25% and 4.0% at December 31, 1996 and 1995, respectively. The expected long-term rate of return on plan assets was 9.0% at December 31, 1996 and 1995. In addition to the defined benefit plan, the Corporation also provides certain health care and life insurance benefits to eligible retirees and their dependents. The plan is contributory, with retirees' contributions determined based on their years of service with the Corporation. In 1993, the Corporation adopted SFAS No. 106 which sets forth the accounting standards for these benefits. The Corporation elected the prospective transition approach and is amortizing the transition obligation over a 20- year period. The following sets forth the plan's funded status reconciled with amounts reported in the Corporation's consolidated balance sheet at December 31, 1996 and 1995. 1996 1995 - ----------------------------------------------------------------- Accumulated postretirement benefit obligation (APBO): Retirees $1,099,334 $1,202,196 Fully eligible active plan participants 112,913 100,712 XXXPAGE 198XXX Other active plan participants 172,610 285,605 - ----------------------------------------------------------------- Total APBO 1,384,857 1,588,513 Plan assets at fair value 0 0 - ----------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets 1,384,857 1,588,513 Less: Unrecognized transition obligation 1,002,018 1,056,767 Unrecognized net (gain) loss (53,847) 181,134 - ----------------------------------------------------------------- Accrued postretirement benefit liability $436,686 $350,612 ================================================================= Net periodic postretirement benefit cost for 1996 and 1995 included the following components: Service cost $24,217 $24,565 Interest cost 96,323 109,072 Amortization of transition obligation 54,749 54,749 Unrecognized net loss 0 36,857 - ----------------------------------------------------------------- Net periodic postretirement benefit cost $175,289 $225,243 ================================================================= XXX PAGE 97 XXX For 1996, a 12.9% and 11.0% annual rate of increase in the per capita costs of covered health care benefits was assumed for participants under 65 and over 65, respectively. It was assumed that those rates would gradually decrease to 5.5% by the year 2011. Increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $81,707, and increase the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for 1996 by $5,866. The rate of increase in future compensation levels used in determining the accumulated postretirement benefit obligation was 5.0% at December 31, 1996 and 1995. The weighted average discount rate was 7.5% and 7.0% at December 31, 1996 and 1995, respectively. Note 18: Subsequent Event In January 1997, the Corporation issued $50,000,000 of trust preferred securities through a trust created and controlled by the Corporation. The securities, which are publicly traded, were issued at $25 per share with a cumulative dividend rate of 9.25%, payable quarterly. They have an initial maturity of 30 years with a 19-year extension option which the Corporation can exercise at any point during the first 30 years. The securities are callable at par after five years, or immediately, in the event of an adverse tax development affecting the Corporation's classification of the securities for federal income tax purposes. The securities are not convertible into common stock of the Corporation. Note 19: Irwin Financial Corporation (Parent Only) Financial Information XXXPAGE 199XXX The condensed financial statements of the parent company as of December 31, 1996 and 1995, and for the three years ended December 31, 1996 are presented below: Condensed Balance Sheet December 31, 1996 1995 - ----------------------------------------------------------------- Assets: Cash and short-term investments $618,516 $269,947 Investment in bank subsidiary 56,672,845 46,701,976 Investments in non-bank subsidiaries 60,866,068 49,517,885 Loans to non-bank subsidiaries 46,117,124 37,513,805 Other assets 2,167,152 1,829,380 - ----------------------------------------------------------------- $166,441,705 $135,832,993 ================================================================= Liabilities: Short-term borrowings $41,174,751 $ 28,972,281 Long-term debt 0 3,000,000 Other liabilities 6,364,874 4,644,231 - ----------------------------------------------------------------- 47,539,625 36,616,512 - ----------------------------------------------------------------- Shareholders' equity: Common stock 29,965,287 29,965,287 Other shareholders' equity 88,936,793 69,251,194 - ----------------------------------------------------------------- 118,902,080 99,216,481 - ----------------------------------------------------------------- $166,441,705 $135,832,993 ================================================================= XXX PAGE 98 XXX Condensed Statement of Income For the year ended December 31, 1996 1995 1994 - ----------------------------------------------------------------- Income: Cash dividends from non-bank subsidiaries $10,053,000 $14,431,000 $4,446,000 Cash dividends from bank subsidiary 2,000,000 1,200,000 900,000 Interest income 2,376,154 1,806,896 1,425,410 Other 2,507,041 2,000,573 1,794,997 - --------------------------------------------------------------------- 16,936,195 19,438,469 8,566,407 - --------------------------------------------------------------------- Expenses: Salaries 2,549,195 2,163,509 2,077,865 Deferred compensation and employee benefits 879,616 875,533 602,133 Interest expense 2,064,651 1,491,873 1,030,645 XXXPAGE 200XXX Other 1,963,287 1,028,813 984,724 - --------------------------------------------------------------------- 7,456,749 5,559,728 4,695,367 - --------------------------------------------------------------------- Income before income taxes and equity in undistributed income of subsidiaries 9,479,446 13,878,741 3,871,040 Income taxes (credits), less amounts charged to subsidiaries (2,665,745) (2,844,056) (561,914) - --------------------------------------------------------------------- 12,145,191 16,722,797 4,432,954 Equity in undistributed income of subsidiaries 10,283,147 3,360,405 13,782,585 - --------------------------------------------------------------------- Net income $22,428,338 $20,083,202 $18,215,539 ===================================================================== XXX PAGE 99 XXX Condensed statement of cash flows for the year ended December 31, 1996 1995 1994 - ----------------------------------------------------------------- Adjustments to reconcile net income to cash provided: Net income $22,428,338 $20,083,202 $18,215,539 Equity in undistributed income of subsidiaries (10,283,147) (3,360,405) (13,782,585) Depreciation 88,571 80,077 76,772 Increase (decrease) in taxes payable 314,595 (1,159,924) 598,149 Increase in interest receivable (39,301) (75,606) (19,118) Increase (decrease) in interest payable 164,279 41,276 46,351 Net change in other assets and other liabilities 877,205 (27,117) 733,740 - ---------------------------------------------------------------------- Net cash provided by operating activities 13,550,540 15,581,503 5,868,848 - ----------------------------------------------------------------------- Lending and investing activities: Net (increase) decrease in loans to subsidiaries (8,603,320) (19,640,805) 3,554,000 activities: Net increase in investments in subsidiarie (11,500,000) (7,260,000) (250,000) Net (additions) disposals to premises and equipment (21,548) 192,206 (94,839) - --------------------------------------------------------------------- Net cash provided (used) by lending and investing activities (20,124,868) (26,708,599) 3,209,161 - --------------------------------------------------------------------- Financing activities: Net (increase) decrease in borrowings 9,731,816 13,434,195 (5,621,284) Payments to acquire treasury stock (1,930,831) (2,887,611) (6,207,150) Proceeds from sale of treasury stock 1,847,833 3,130,243 549,282 XXXPAGE 201XXX Proceeds from sale of stock for employee benefit plan 0 0 893,496 Dividends paid (2,725,921) (2,482,705) (2,073,733) - ---------------------------------------------------------------------- Net cash provided (used) by financing activities 6,922,897 11,194,122 (12,459,389) - ---------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 348,569 67,026 (3,381,380) Cash and cash equivalents at beginning of year 269,947 202,921 3,584,301 - ---------------------------------------------------------------------- Cash and cash equivalents at end of year $618,516 $269,947 $202,921 ====================================================================== Supplemental disclosures of cash flow information: Cash paid during the year: Interest 1,900,372 $1,450,597 $984,295 ====================================================================== Income taxes $6,230,350 $3,829,990 $11,569,195 ====================================================================== XXX PAGE 100 XXX Note 20: Regulatory Matters The Corporation and its bank subsidiary are subject to various regulatory capital requirements administered by federal and state banking agencies. Under capital adequacy guidelines, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 1996, that the Corporation meets all capital adequacy requirements to which it is subject. As of December 31, 1996 the Corporation was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Corporation must significantly exceed minimum total risk-based, Tier 1 risk- based, and Tier 1 leverage ratios. There have been no conditions or events that management believes have changed this category. The Corporation's actual capital amounts and ratios are presented in the following table: Adequately Well Actual Capitalized Capitalized - ---------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------- As of December 31, 1996: Total Capital (to Risk- Weighted Assets) $124,010 14.3% $69,716 8.0% $87,146 10.0% Tier 1 Capital (to Risk- Weighted Assets) 117,416 13.5 34,858 4.0 52,288 6.0 Tier 1 Capital (to Average Assets) 117,416 9.8 47,730 4.0 59,663 5.0 As of December 31, 1995: Total Capital (to Risk- Weighted Assets) $97,174 14.5% $53,654 8.0% $67,068 10.0% Tier 1 Capital (to Risk- Weighted Assets) 92,554 13.8 26,827 4.0 40,241 6.0 Tier 1 Capital (to Average Assets) 92,554 10.6 35,025 4.0 43,781 5.0 As of December 31, 1994: Total Capital (to Risk- Weighted Assets) $84,829 19.2% $35,385 8.0% $44,232 10.0% Tier 1 Capital (to Risk- Weighted Assets) 80,966 18.3 17,693 4.0 26,539 6.0 Tier 1 Capital (to Average Assets) 80,966 10.8 29,932 4.0 37,415 5.0 XXX PAGE 101 XXX Irwin Financial Corporation Directors Sally Abrams Dean Consultant, Retired Senior Vice President, Dillon, Read & Co. Inc. David W. Goodrich Executive Vice President, F. C. Tucker Company, Inc. (Realty Company) John T. Hackett Managing General Partner, CID Equity Partners, L.P. (Venture Capital Partnership) William H. Kling President, Minnesota Public Radio Brenda J. Lauderback President, Footwear Wholesale Group, Nine West Group John C. McGinty, Jr. President, Southeastern Indiana Health Management, Inc. President, Columbus Regional Hospital Irwin Miller Former Chairman, Cummins Engine Company, Inc. William I. Miller Chairman, Irwin Financial Corporation John A. Nash President, XXXPAGE 203XXX Irwin Financial Corporation Lance R. Odden President and Headmaster, The Taft School James T. Sakai Former Chairman, Contour Hardening, Inc. (Metals Treatment Company) Theodore M. Solso President and Chief Operating Officer, Cummins Engine Company, Inc. XXX PAGE 102 XXX Irwin Financial Corporation Senior Officers William I. Miller Chairman John A. Nash President Thomas D. Washburn Senior Vice President and Chief Financial Officer Gregory F. Ehlinger Vice President and Treasurer Theresa L. Hall Vice President-Human Resources Jose M. Gonzalez Vice President-Internal Audit Michael F. Ryan Vice President-Community Development Matthew F. Souza Vice President-Legal and Secretary Marie C. Strack Vice President and Controller XXX PAGE 103 XXX XXXPAGE 204XXX EXHIBIT 21(a). SUBSIDIARIES OF THE REGISTRANT State of Name Organization Irwin Union Bank and Trust Company Indiana Irwin Union Collateral, Inc. Indiana Irwin Union Realty Corporation Indiana Irwin Union Insurance, Inc. Indiana Irwin Mortgage Corporation Indiana Inland Mortgage Corporation Indiana Irwin Union Investor Services, Inc. Indiana Irwin Union Securities, Inc. Indiana Irwin Union Advisory Services, Inc. Indiana Irwin Home Equity Corporation Indiana IHE Funding Corp. Delaware Irwin Union Leasing Corporation Indiana Affiliated Capital Corp.1 Illinois Irwin Union Credit Insurance Corporation Arizona White River Capital Corporation Indiana IFC Capital Trust I Delaware _______________________________ 1 80%owned by Registrant XXXPAGE 205XXX CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in Registration Statement No. 33-8506 on Form S-8 effective September 25, 1986; in Registration Statement No. 33-25931 on Form S-8 effective December 28, 1988; in Registration Statement No. 33-29493 on Form S-8 as amended by Post-Effective Amendment No. 1 effective December 22, 1989; in Registration Statement No. 33-32783 on Form S-8 effective January 11, 1990; in Registration Statement No. 272249 on Form S-3 as amended by Post-Effective Amendment No. 3 to Form S-16 effective January 17, 1990; in Post-Effective Amendment No. 2 to Registration Statement No. 33-6880 on Form S-8 effective April 9, 1990; in Registration Statement No. 33-32783 on Form S-8 as amended by Post-Effective Amendment No. 1 effective April 9, 1990; in Registration Statement no. 33- 47680 on Form S-8 effective May 5, 1992; in Registration Statement No. 2-72249 on Form S-3 as amended by Post- Effective Amendment No. 4 to Form S16 effective April 7, 1994; in Registration Statement No. 33-80800 on Form S-8 effective June 28, 1994; in Registration Statement No. 33- 29493 on Form S-8 as amended by Post-Effective Amendment No. 2 effective September 27, 1994; in Registration Statement No. 33-62671 on Form S-8 effective September 15, 1995; and in Registration Statement No. 33-62669 on Form S-8 effective September 15, 1995 of Irwin Financial Corporation of our report, dated January 17, 1997, on our audits of the consolidated financial statements and financial statement schedule of Irwin Financial Corporation as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Indianapolis, Indiana March 21, 1997 XXXPAPGE 206XXX