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 For the fiscal year ended December 31, 1997 or __ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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. or Organization) Employer Identification No.) Organization) 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 filing requirements 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. x The aggregate market value of the voting stock held by non-affiliates of the Registrant was $253,131,710.94 as of March 12, 1998. As of March 12, 1998, there were outstanding 10,903,149 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, 1997 Definitive Proxy Statement for Part III Annual Meeting of Shareholders to be held April 30, 1998 Exhibit Index on Pages 14 through 18 Page 1 Total Pages in This Filing: 124 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 12 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 Part III Item 10 - Directors and Executive Officers of the Registrant 13 Item 11 - Executive Compensation 13 Item 12 - Security Ownership of Certain Beneficial Owners and Management 13 Item 13 - Certain Relationships and Related Transactions 13 Part IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 14 Signatures 19 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 Irwin Mortgage Corporation ("Irwin Mortgage", formerly Inland Mortgage Corporation), a mortgage banking company; Irwin Union Bank and Trust Company ("Irwin Union Bank"), a commercial bank; Irwin Equipment Finance Corp. (the new name of the parent company of Affiliated Capital Corp.) ("Irwin Equipment"), 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. The Registrant's 1997 Annual Report section on "Management's Discussion and Analysis of Results of Operations and Financial Condition" is included with this filing as Exhibit13(a). Page 53 of the Report states that Irwin Equipment Finance Corp. was previously Affiliated Capital Corp., and page 55 of the Report lists the Irwin Equipment Finance Corp. Senior Officers. This information is incorrect. Affiliated Capital Corp. did not change its name to Irwin Equipment Finance Corp.; the parent company of Affiliated Capital Corp. (formerly Irwin Union Leasing Corporation) changed its name to Irwin Equipment Finance Corp. The Officers listed on page 55 are those of Affiliated Capital Corp.; not Irwin Equipment Finance Corp., with the exception of Matthew Colasanti, who is President of both Irwin Equipment Finance Corp. and Affiliated Capital Corp. The Annual Report had already been published when the error was discovered. When referring to the leasing line of business, the Registrant now uses the name "Irwin Equipment Finance Corp." to include the activities of Affiliated Capital Corp. Business of Subsidiaries Irwin 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. Irwin Mortgage also originates a small amount of commercial mortgages. Irwin Mortgage sells mortgage loans to institutional and private investors but may retain servicing rights to mortgage loans that it originates or purchases from correspondents. Irwin 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. Irwin Mortgage operates 95 production and satellite offices in 28 states. During 1997, Irwin Mortgage established offices in San Diego, California; Pueblo, Colorado; Farmington, Connecticut; Columbus, and Macon, Georgia; New Orleans, Louisiana; Braintree, Massachusetts; Wilmington and Burlington, North Carolina; and Columbia, South Carolina. During 1997, Irwin Mortgage closed offices in Albuquerque, New Mexico; Clackamas, Oregon; Denver and Fort Collins, Colorado; Hayes and Woodbridge, Virginia; Las Vegas, Nevada; LaPorte, Indiana; Montclair (Oakland), Pasadena, Santa Rosa, and West Lake Village, California; North Houston and Plano, Texas; Tempe, Arizona; Seattle/Kirkland and Snohomish, Washington; Crofton and Solomons, Maryland. Irwin Mortgage entered the non-prime first mortgage lending market in 1997. This market is composed of borrowers who do not qualify under the underwriting guidelines established by the government-sponsored secondary market agencies for conforming first mortgages. Irwin Mortgage opened a non-prime lending office in Richmond, Virginia late in the fourth quarter of 1996 and began originating non-prime first mortgages in 1997. Irwin 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, Irwin Mortgage began taking applications from U. S. Borrowers for dollar denominated loans to be secured by residential real estate located in Mexico. The Registrant will continue research of international opportunities to which the 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 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), Bloomington (Monroe County), Franklin and Greenwood (Johnson County - 2), Carmel (Hamilton County), and Greensburg (Decatur County), Indiana. On August 13, 1997, Irwin Union Bank became a member of the Federal Reserve System. On August 29, 1997 Irwin Union Securities, formerly the brokerage Subsidiary of Irwin Union Investor Services, Inc., became a Subsidiary of Irwin Union Bank. As of February 1, 1998, Irwin Union Insurance, Inc., an insurance agency subsidiary of Irwin Union Bank, purchased substantially all the property and casualty assets of Maximum Benefits & Protection Co. Inc., an Indiana corporation. Irwin Equipment, located in Northbrook, Illinois, is the parent company of Affiliated Capital Corp., which is engaged in the small-ticket equipment leasing and commercial lending business. Irwin Equipment offers non-recourse, 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 and lines of credit. The loans are marketed through direct mail and telemarketing in twenty-two states. At year end, Home Equity began offering a first mortgage refinance program in selected 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. Capital 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 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. Irwin Mortgage is registered as a Foreign Financial Institution in Mexico. Competition Irwin Mortgage originates and services residential first mortgage loans from 95 production and satellite offices in Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Massachusetts, Minnesota, Missouri, New Jersey, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, 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. Irwin 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, Hamilton, Jackson, Johnson, Monroe and Shelby County areas is very competitive. Within these counties, in addition 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, 1997, 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. Irwin Equipment provides, primarily, medical equipment leasing and commercial credit services to medical clinics, small groups of physicians, individual practitioners, chiropractors, dentists, and veterinarians. Irwin Equipment'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 and services home equity loans and lines of credit 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 Reserve Bank of Chicago. Irwin 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 Irwin Union Bank'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 Irwin Union Securities, Inc. operates, and the National Association of Securities Dealers. Employees and Labor Relations As of December 31, 1997, the Registrant and its subsidiaries had a total of 1,969 employees, including full-time and part-time 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, 1997 and is incorporated herein by reference: "Daily Average Consolidated Balance Sheet, Interest Rates and Interest Differential" (p. 74), "Investment Securities" (p. 60), "Short-Term Borrowings" (p. 60), "Summary of Net Interest Income Changes" (p. 57), "Deposits" (p. 60), "Loans and Leases" (p. 59), "Five-Year Selected Financial Data" (p. 28), and the discussion and tabular information under the caption "Credit Risk" on pages 64 to 68 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 (47) was President of Affiliated Capital Corp. from February 28, 1990 to March 3, 1998. Matthew Colasanti (57) is President of Irwin Equipment Finance Corp. and Affiliated Capital Corp. since March 3, 1998. From January through March 2, 1998, Mr. Colasanti was a consultant to Affiliated Capital Corp. From 1992 to 1995, Mr. Colasanti was President of Concord Commercial Corp. a North American subsidiary of Hong Kong Shanghai Bank. Mr. Colasanti has more than thirty years of equipment finance and leasing expertise and leadership, ranging in firm size from large organizations to start-up companies, and from work-outs to high growth. Claude E. Davis (37) is President of Irwin Union Bank since January 2, 1996. He has been an officer since 1988. Elena Delgado (42) 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 (35) is Vice President and Treasurer of the Registrant since August of 1992. Jose M. Gonzalez (39) 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 (45) is Vice President - Human Resources of the Registrant, since 1988. She has been an officer since 1980. Rick L. McGuire, (45) is President of Irwin Mortgage since January 1, 1996. He has been an officer since 1978. William I. Miller (41) is Chairman of the Board, since 1990, and has been a Director of the Registrant since 1985. Ellen Z. Mufson (49) is Vice President - Legal of the Registrant, since September, 1997. She was Vice President - Legal Counsel of Irwin Union Bank and Trust Company from July, 1996 through August, 1997; Corporate Counsel of Irwin Financial Corporation from January, 1995 through June, 1996; Deputy Director/General Counsel of the Indiana Development Finance Authority from March, 1992 through November, 1994. John A. Nash (60) 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 (52) is Vice President - Community Development 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 (41) is Vice President and Secretary of the Registrant. He has been an officer since 1985. Marie C. Strack (35) is Vice President and Controller of the Registrant since May of 1992. Thomas D. Washburn (51) 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 Irwin Mortgage, where administrative and servicing activities are centered, is located at 9265 Counselor's Row, Indianapolis, Indiana and a servicing facility is located at 11800 Exit Five Parkway, Indianapolis, Indiana. Irwin Mortgage also has loan production and satellite offices located in Flagstaff, Phoenix (2), Mesa, Scottsdale, and Tucson, Arizona; Antioch, Bakersfield, Concord, Covina, Fresno, Laguna Hills, Morgan Hill, Richmond, Sacramento, Salinas, San Diego, Temecula, Ventura, Visalia, Walnut Creek, Woodland, Yuba City, and Yreka, California; Castle Rock, Colorado Springs, Denver, Englewood, Woodland Park, and Pueblo, Colorado; Farmington, Connecticut; Newark, Delaware; Clearwater and Orlando/Longwood, Florida; Atlanta, Columbus, and Macon, Georgia; Aiea, Honolulu, Kailua, and Maui, Hawaii; Chicago and Decatur, Illinois; Indianapolis (5), Anderson, Ft. Wayne, Kokomo, Lafayette, South Bend, and Warsaw, Indiana; Lexington and Louisville, Kentucky; Baton Rouge and New Orleans, Louisiana; Columbia, Rockville, and Towson, Maryland; Braintree, Massachusetts; Arden Hills, Burnsville, and Minneapolis, Minnesota; St. Louis, Missouri; Marlton, New Jersey; Cary, Charlotte, Greensboro, Raleigh, Wilmington, and Burlington, North Carolina; Dayton and Independence/Cleveland, Ohio; Tulsa, Oklahoma; Beaverton and Lake Oswego, Oregon; Wyomissing, formerly West Chester, Pennsylvania; Columbia, South Carolina; Austin, Corpus Christi, Dallas, El Paso, and Houston, Texas; Salt Lake City, Utah; Fredericksburg, Glen Allen, Richmond, Springfield, and Suffolk, Virginia; Bellevue, Battleground, Everett, and Mount Lake Terrace, Washington; and Madison, Wisconsin. All offices occupied by Irwin 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 wholly-owned subsidiary of Irwin Union Bank, and are leased by Irwin Union Bank. Irwin Union Bank owns in fee three of its other fifteen 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 Irwin Equipment, 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. 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. In addition to such claims, the Registrant was involved, as of December 31, 1997, in the following actions: Basmoen, et al. v. Inland Mortgage Corporation. As of December 31, 1997, Irwin Mortgage was a defendant in a class action lawsuit initiated in the state of Minnesota in October, 1995. 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 Irwin 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. In January, 1997, the court denied a motion by the plaintiff for class certification; however, in September, 1997, the court granted a motion by the plaintiff to add a class representative and denied a motion by Irwin Mortgage for summary judgment. In December, 1997, Irwin Mortgage filed a supplemental memorandum in opposition to the plaintiffs' motion for class certification to which the plaintiffs replied. The court has not yet ruled on class certification. At this stage of the litigation, it is impossible to predict the likelihood of an unfavorable outcome or to establish the possible extent or amount of liability or potential loss, if any, to which Irwin Mortgage might be exposed in this or similar escrow individual or class action cases brought in the future. Howell, et al. v. Inland Mortgage Corporation. As of December 31, 1997, Irwin Mortgage was a defendant to a class action lawsuit initiated in the state of Indiana in January, 1995. 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. A decision has not yet been rendered with regard to class certification. Similar suits have been filed in Indianapolis and other jurisdictions against mortgage lenders. Irwin Mortgage filed a motion for summary judgment in this case, which was denied. Irwin Mortgage is aware that the Indiana court has ruled against two other lenders on their respective dismissal and summary judgment motions. One of these lenders has been permitted to appeal the decision against it to the Indiana Court of Appeals. Because the issues in the case before the Indiana Court of Appeals are very much like those in the Irwin Mortgage case, a decision by the Court of Appeals will have a significant effect on the Irwin Mortgage case. At present, however, it is impossible to predict the likelihood of an unfavorable outcome or to establish the possible extent or amount of liability loss exposure, if any, to which Irwin Mortgage might be exposed. Culpepper, et al. v. Inland Mortgage Corporation. As of December 31, 1997, Irwin Mortgage was a defendant to a class action lawsuit initiated in the state of Alabama in April, 1996. 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. On January 9, 1998, the Court of Appeals for the Eleventh Circuit reversed the district court's grant of summary judgment in favor of Irwin Mortgage and vacated the district court's dismissal of class claims and denial of class certification. On January 30, 1998, Irwin Mortgage petitioned the court of appeals for rehearing. On February 4, 1998, the court of appeals issued an order giving plaintiffs a deadline to reply to the rehearing petition. The litigation is still at a stage where it is impossible to predict the likelihood of an unfavorable outcome or to establish the possible extent or amount of liability or potential loss exposure, if any, to which Irwin Mortgage might be exposed. 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. The following litigation, previously reported, was no longer pending as of December 31, 1997: Providian Bankcorp, Inc. v. Irwin Financial Corporation, et al. The parties agreed to dismiss the litigation in April, 1997. The suit, which alleged the misappropriation of trade secrets, was initiated in the State of California in May, 1995. Irwin Union Bank and Trust Company v. United States Trust Company of New York, et al. The parties agreed to dismiss the litigation in May, 1997. The suit, which arose from a wire transfer, was initiated in the United States District Court for the Southern District of New York in August, 1996. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 1997, 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 Marekt (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 12, 1998 was 1,590. Stock Prices and Dividends: High Low Quarter Cash Total $ $ End Dividend Dividends $ $ For Year 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 1997 First Quarter 30 1/2 24 1/4 27 1/4 0.070 Second Quarter 29 1/2 24 29 1/2 0.070 Third Quarter 37 1/4 28 3/4 37 1/4 0.070 Fourth Quarter 43 36 1/2 41 7/8 0.070 0.28 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 19, 1997, the Registrant's Board of Directors approved an increase in the Registrant's quarterly dividend to $.07 per share which dividend rate was unchanged as of December 31, 1997. 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 1997. Item 6. Selected Financial Data The information contained in the Annual Report to Shareholders for the year ended December 31, 1997, 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 The information set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Annual Report to Shareholders for the year ended December 31, 1997, is incorporated herein by reference in response to this item. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Risk: Interest rate risk 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 the commercial 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 commercial bank's portfolio under multiple rate scenarios. Formal policies approved by the commercial 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. The home equity and equipment leasing businesses are exposed to potential interest rate risk that is similar to the lending operations of the commercial bank. Once again, formal policies ensure that this risk is controlled. Rate risk at the commercial bank can typically be managed by controlling the maturity of loans, securities, and deposits. The commercial bank may also use financial futures or interest rate swaps from time to time, although there were none in place at December 31, 1997. 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 between companies to allow for the risk characteristics of one line of business to offset those of another line. The following table shows in summary form the Corporation's interest rate sensitivity based on expected interest rate repricing intervals for the balance sheet as of December 31, 1997 (a "gap" analysis). For example, a 30-year adjustable rate residential mortgage held in the portfolio of Irwin Union Bank is included in the "4-12 month" category since that is the time frame over which the asset will reprice. Some items, such as certain deposit accounts, are non-interest bearing, but will vary in balance due to interest rate changes. Since the Corporation relies on such accounts in its operations and would need to replace them with "at market" liabilities should the non-interest bearing ones be unavailable, they are included in the gap table and in simulations as "non-market" items. As the table shows, the consolidated one-year gap at December 31, 1997 was a positive $143.0 million. This compares to a positive gap of $133.2 million at December 31, 1996. Since the gap was positive at December 31, 1997, it means that the Corporation's net interest income was positioned to benefit from rising 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. Through the use of simulations using regression modeling and option-adjusted valuation techniques for modeling expected customer behavior, the Corporation attempts to analyze and mitigate the interest rate risks associated with the negatively correlated activities of 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 assets. 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. Interest Sensitivity: (Thousands) Within 3 4 to 12 1 to 5 Over 5 Non - Fair Months Months Years Years Market Total Value Assets - $3,511 $8,412 $10,211 $0 $0 $22,134 $22,134 Trading: Taxable investment securities Assets - Other than Trading: Interest- 10,920 4,027 3,293 0 0 18,240 18,240 bearing deposits with banks Taxable 16,682 9,477 18,021 6,213 0 50,393 51,041 investment securities Tax-exempt 100 500 962 3,252 0 4,814 4,853 investment securities Mortgages 528,739 0 0 0 0 528,739 530,207 held for sale Loans, 269,988 99,787 146,186 95,132 0 611,093 613,513 net of unearned income Total 829,940 122,203 178,673 104,597 01,235,413$1,239,988 interest- earning assets Liabilities - Other than Trading Non-interest 0 0 0 0 287,555 287,555 $287,555 bearing deposits Money 32,625 0 47,148 10,169 0 89,942 89,942 market checking Money 1,758 0 5,487 0 0 7,245 7,245 market savings Regular 25,565 1,939 10,343 7,992 0 45,839 45,839 savings Time 166,381 64,683 57,186 764 0 289,014 289,088 deposits Short- 512,276 0 0 0 0 512,276 512,276 term borrowings Long- 1,399 2,499 3,197 0 0 7,095 7,138 term debt Total 740,004 69,121 123,361 18,925 287,555 1,238,966 $1,239,083 interest- bearing liabilities Trust 0 0 0 50,000 0 50,000 $55,038 preferred securities Interes 89,936 53,082 55,312 35,672 (287,555) (53,553) sensitivity gap Cumu- lative $89,936 $143,018 $198,330 $234,002 $(53,553)$(53,553) interest sensitivity gap (Thousands) Weighted Average Interest Rate Assets - Trading: Taxable invesnment 8.50% securities Assets - Other than Trading: Interest-bearing 5.72 deposits with banks Taxable investment 6.31 securities Tax-exempt 8.88 Mortgages held for 7.36 sale Loans, net of 9.04 unearned income Total interest- 8.15% earning assets Liabilities - Other than Trading Non-Interest bearing n/a deposits Money market 2.07% checking Money market 2.39 savings Regular savings 3.15 Time deposits 5.65 Short-term 4.84 borrowings Long-term debt 7.67 Total interest- 4.74 bearing liabilities Trust preferred 9.25% securities Interest sensitivity gap Cumulitive interest sensitivity gap Note: This analysis is based on certain assumptions, including relative levels of market interest rates, and should not be relied upon as indicative of actual results. 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, 1997, under the caption "1997 Financial Statements", and are incorporated herein by reference in response to this item. 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, 1997, 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 1998 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 1998 Annual Meeting of Shareholders under the captions "Election of Directors - Outside Director Compensation ", "Executive Compensation and Other Information" and "Board Compensation Committee Report on Executive Compensation" on pages 8 through 18, 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 1998 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 1998 Annual Meeting of Shareholders under the caption "Interest of Management in Certain Transactions" on pages 19 and 20, is incorporated herein by reference in response to this item. 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 21 Consolidated Statement of Income for the years ended December 31, 1997, 1996, and 1995 81 Consolidated Balance Sheet as of December 31, 1997, and 1996 82 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 83 Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996, and 1995 84 Notes to Consolidated Financial Statements 85 The above listed report, financial statements, and the notes thereto, set forth on pages 81 through 105 of the Registrant's 1997 Annual Report to Shareholders are incorporated herein by reference. 2. Financial Statement Schedules None Schedules are omitted because they are not required or the information is included in the Notes to Consolidated Financial Statements. 3. Exhibits A. Exhibits to Form 10-K Sequential Numbering Number Assigned System Page in Regulation 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, dated April 30, 1996. (Incorporated by reference to Exhibit 3(f) to Form 10-K Report for year ended December 31, 1996, File No. 0-6835.) (ii) 3(a) Code of By-Laws as 22 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.) 4(b) Certain instruments defining the rights of the holders of long-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. 0- 6835.) 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. 0- 6835.) 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. 0- 6835.) 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. 0- 6835.) 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. 0- 6835.) 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. 0- 6835.) 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. 0- 6835.) 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. 0- 6835.) 10(j) Inland Mortgage Corporation Long Term Incentive Plan. (Incorporated by reference to Exhibit (10)(j) to Form 10-K report for year ended December 31, 1996, File No. 0-6835.) 10(k) Irwin Financial Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit (10) to Form 10-Q report for quarter ended June 30, 1997, File No. 0-6835.) 10(l) Amendment to Irwin 37 Financial Corporation 1997 Stock Option Plan. (Incorporated by reference to Exhibit (10) to Form 10-Q report for quarter ended June 30, 1997, File No. 0-6835.) (11) 11(a) Computation of Earnings 39 Per Share. (12) No exhibit. (13) 13(a) Registrant's 1997 Annual 40 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 122 Registrant. (22) No exhibit. (23) 23(a) Consent of Independent 123 Accountants. (24) No exhibit. (27) Financial Data Schedule. 124 (99) 99(a) Annual Report on Form 11- K for the Irwin Financial Corporation Employees' Savings Plan for the year ending December 31, 1997.* 99(b) Annual Report on Form 11- K for the Inland Mortgage Corporation Retirement and Profit Sharing Plan for the year ending December 31, 1997.* * To be filed by amendment pursuant to Rule 15d-21. b. Reports on Form 8-K None. 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 26, 1998 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 26, 1998 Sally A. Dean /s/ David W. Goodrich Director March 26, 1998 David W. Goodrich /s/ John T. Hackett Director March 26, 1998 John T. Hackett /s/ William H. Kling Director March 26, 1998 William H. Kling /s/ Brenda J. Lauderback Director March 26, 1998 Brenda J. Lauderback /s/ John C. McGinty, Jr. Director March 26, 1998 John C. McGinty, Jr. /s/ Irwin Miller Director March 26, 1998 Irwin Miller /s/ William I. Miller Director, March 26, 1998 William I. Miller Chairman of the Board (Principal Executive Officer) /s/ John A. Nash Director, March 26, 1998 John A. Nash Chairman of the Executive Committee /s/ Lance R. Odden Director March 26, 1998 Lance R. Odden /s/ Theodore M. Solso Director March 26, 1998 Theodore M. Solso /s/ Thomas D. Washburn Senior Vice March 26, 1998 Thomas D. Washburn President (Principal Financial Officer) /s/ Marie C. Strack Vice President March 26, 1998 Marie C. Strack and Controller (Principal Accounting Officer) 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". 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 of a registrar other than the Corporation or its employee, the signatures of the transfer agent and the officers of the Corporation may be facsimiles. In case any officer, 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 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. 12.20.94 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 atsuch 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 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 (ii) 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 or if it has a transfer agent or registrar for such class of Shares but the resolutions appointing the transfer agent or registrar do not provide that notice of changed 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 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, shall be the only evidence as to who are the Shareholders entitled to 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 8.19.97 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 eleven (11) directors. Directors need not be Shareholders of the Corporation. At least a majority 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. 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 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. 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, and 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 failure to submit the same or to receive the approval thereof shall not invalidate any completed or incompleted action taken by 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 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 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, or by word any such meeting need not be given to any member of the executive committee who has waived such notice either in writing or by telegram, cable or radiogram arriving 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, from 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. 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 to the Committee shall make appropriate reports and other 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, as to matters within 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 (including 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 President and Secretary shall not be performed by the same person. 7.02. Election, Term of Office and Qualifications. The officers shall be chosen annually by the Board of Directors. Each officer 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. 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 officer of the Corporation; shall have charge and custody of, and be responsible for, all funds of the Corporation, and deposit all 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 same shall be required, an 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 shall be signed by such officer or officers of 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. 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 10.02 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. Updated 8/20/97 IRWIN FINANCIAL CORPORATION AMENDMENT NUMBER ONE TO 1997 STOCK OPTION PLAN The terms and conditions of paragraph 8 of the Irwin Financial Corporation Stock Option Plan (the "Plan") shall be amended so as to read as follows, effective February 19, 1998: 8. Limitations on Exercise of Options/SARs. (a) Except with respect to those options granted under subparagraph (b) of this paragraph, each option and/or SAR granted under this Plan shall be exercisable by the grantee only in accordance with the following schedule: (i) During the first year following the grant of the option and/or SAR, up to 25% of the optioned Shares, or Shares represented by the SAR, may be exercised: (ii) During the second year following the grant of the option and/or SAR, up to an additional 25% of the optioned Shares, or Shares represented by the SAR, may be exercised; (iii) During the third year following the grant of the option and/or SAR, up to an additional 25% of the optioned Shares, or Shares represented by the SAR, may be exercised: and (iv) After the end of the third year following the grant of the option and/or SAR and until the expiration of the option and/or SAR, any and all remaining Shares under the option or Shares represented by the SAR, may be exercised. The limitations on exercise set forth above shall be cumulative; for example, during the second year after the grant a combined total of 50% of the optioned Shares, or Shares represented by the SAR, may be exercised if none were exercised during the first year. The limitations set forth in this paragraph 8 shall not apply in the event of the death of a grantee while serving on the Board of Directors or in the employ of IFC or its subsidiaries. (b) Options designated at the time of the grant as "Special Y2K Series Stock Options" shall be exercisable by the grantee only in accordance with the following terms, and the provisions of subparagraph (a) shall not apply thereto: (i) If the Board of Directors determines, in its sole discretion, that the Company's Year 2000 computer programming project has been brought to a successful conclusion, then the Special Y2K Series Options will be exercisable in full from and after March 31, 2001. (ii) If the Board of Directors determines, in its sole discretion that the Year 2000 project has not been brought to a successful conclusion, but that the remaining problems are not significant, then the Special Y2K Series Options will be exercisable as to one-half the shares subject to those options from and after March 31, 2001, and the remaining shares subject to the options will be forfeited. (iii) If the Board of Directors determines, in its sole discretion, that the Year 2000 project has not been brought to a successful conclusion, and that the remaining problems are significant, then none of the Special Y2K Series Options will be exercisable and all of the shares subject to the options will be forfeited. The determinations of the Board of Directors described in this subparagraph shall be made by it on or before March 31, 2001. Exhibit 11 (a) IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11(a) - COMPUTATION OF EARNINGS PER SHARE Year Ended December 31, 1997 1996 1995 [S] [C] [C] [C] AVERAGE NUMBER OF SHARES 11,163,155 11,358,121 11,279,870 OUTSTANDING NET INCOME $24,444,150 $22,428,337 $20,083,202 BASIC EARNINGS PER SHARE (Note 2) $2.19 $1.97 $1.78 DILUTED SHARES OUTSTANDING: Average number of shares 11,163,155 11,358,121 11,279,870 outstanding Assumed exercise of stock options 197,932 156,871 149,949 (Note 1) Total shares (Note 2) 11,361,087 11,514,992 11,429,819 NET INCOME $24,444,150 $22,428,337 $20,083,202 DILUTED EARNINGS PER SHARE (Note 2) $2.15 $1.95 $1.76 (1) The dilutive effect of stock options is based on the Treasury Stock method. Adjusted for the two-for-one stock split on December 30, 1996 Management's Discussion and Analysis of Results of Operations and Financial Condition 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 52 Equipment Leasing 56 Other Irwin Financial Businesses 56 Consolidated Income Statement Analysis 58 Consolidated Balance Sheet Analysis 61 Capital 64 Risk Management 64 Credit Risk 68 Liquidity 69 Interest Rate Risk Financial Statements: 79 Report of Management 80 Report of Independent Public Accountants 81 Consolidated Statement of Income 82 Consolidated Balance Sheet 83 Consolidated Statement of Changes in Shareholders' Equity 84 Consolidated Statement of Cash Flows 85 Notes to Financial Statements Five-Year Selected Financial Data 1997 1996 1995 1994 1993 ----------------------------------------------------------------------------------------------- Financial Data (in thousands) For the year: Net Revenues $223,185 $195,448 $148,239 $116,908 $119,366 Other Operating Expense 176,534 158,160 115,790 86,844 93,803 Net Income 24,444 22,428 20,083 18,216 15,588 Mortgage Loan Closings 5,397,338 5,085,625 3,559,310 2,812,962 4,273,933 Return on Average Equity 19.80% 20.58% 22.60% 23.91% 24.91% Return on Average Assets 1.94 1.95 2.28 2.43 2.15 Dividend Payout Ratio 12.74 12.15 12.36 11.38 11.12 Per share:* Net Income - Basic $2.19 $1.97 $1.78 $1.58 $1.35 Net Income - Diluted 2.15 1.95 1.76 1.57 1.34 Cash Dividends 0.28 0.24 0.22 0.18 0.15 Book Value 11.23 10.46 8.76 7.21 6.03 Market Value at December 31, 41.88 24.75 19.94 13.38 12.50 At year end: Assets $1,496,794 $1,300,122 $1,037,541 $659,671 $881,864 Deposits 719,596 640,153 563,999 439,918 500,370 Mortgage Loans Held for Sale 528,739 446,898 378,658 154,964 370,755 Loans and Leases, Net 602,281 526,175 407,904 304,548 252,823 Shareholders' Equity 127,983 118,902 99,216 81,104 70,093 Owned Mortgage Servicing Portfolio 10,713,549 10,810,988 10,301,914 8,818,502 7,922,299 Equity to Assets Ratio 8.55% 9.15% 9.56% 12.29% 7.95% Risk-based Capital Ratio 17.54 14.23 14.49 19.18 15.68 Leverage Ratio (Tier 1) 12.06 9.84 10.57 10.82 9.63 Averages: Assets $1,262,714 $1,151,535 $882,164 $748,981 $725,846 Equity 123,483 108,970 88,867 76,178 62,586 Shares Outstanding* - Basic 11,163 11,358 11,280 11,547 11,545 Shares Outstanding* - Diluted 11,361 11,515 11,430 11,639 11,628 ----------------------------------------------------------------------------------------------- *Adjusted for stock splits Total Net Revenuew $ Millions 1990 43.3 1991 60.0 1992 94.9 1993 119.4 1994 116.9 1995 148.2 1996 195.4 1997 223.2 Net Income $ Millions 1990 4.6 1991 6.7 1992 12.9 1993 15.6 1994 18.2 1995 20.1 1996 22.4 1997 24.4 Return on Avernage Equity Percent 1990 13.50 1991 16.93 1992 26.51 1993 24.91 1994 23.91 1995 22.60 1996 20.58 1997 19.80 Management's Discussion Management's discussion and analysis should be read in conjunction with the accompanying consolidated financial statements, footnotes, and tables. Forward- looking statements contained in the following discussion are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond the Corporation's control and are subject to change. These uncertainties can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements in this discussion. Consolidated Overview: Irwin Financial Corporation earned record net income in 1997 for the eighth consecutive year. This performance was due to improved results at each of the Corporation's lines of business. Net income for 1997 totaled $24,444,150, up 9.0% from 1996 and 21.7% from 1995. Basic earnings per share were $2.19 in 1997, up from $1.97 in 1996 and $1.78 in 1995. Diluted earnings per share in 1997 were $2.15 compared to $1.95 in 1996 and $1.76 in 1995. The Corporation has made investments to expand current operations and enter new segments of the financial services industry. These initiatives are evidenced by the growth in loan volume throughout the Corporation and the start up of Irwin Home Equity Corporation in 1995. Because the Corporation does not receive an immediate return on these long-term investments, the return on average equity and return on average assets have declined in recent years. However, the Corporation has achieved its objective of earning a return on average equity that exceeds its cost of capital, estimated to have been approximately 12.5% during the last three years. Return on average equity for 1997 was 19.80% compared to 20.58% in 1996 and 22.60% in 1995. Return on average assets was 1.94% compared to 1.95% in 1996 and 2.28% in 1995. Earnings By Line of Business: Irwin Financial Corporation is comprised of four principal lines of business: - Mortgage banking - Community banking - Home equity lending - Equipment leasing Earnings: (In thousands) 1997 1996 1995 ----------------------------------------------------------------------------------- Mortgage Banking $21,300 $20,422 $19,331 Community Banking 5,587 4,254 3,639 Home Equity Lending 1,710 (816) (3,220) Equipment Leasing 151 (141) (334) Parent (including consolidating entries) (4,304) (1,291) 667 ------- -------- ------- $24,444 $22,428 $20,083 ---------------------------------------------------------------------------------- Management's Discussion (continued) Business Profile: Mortgage Banking Selected Financial Data (In thousands) 1997 1996 1995 1994 1993 ----------------------------------------------------------------------------------------------- Selected Income Statement Data: Net interest income $17,577 $17,178 $13,415 $12,942 $15,103 Provision for loan losses (1,383) (455) (125) (240) (36) Loan origination fees 41,045 43,463 31,871 25,308 37,605 Gain on sale of loans 21,613 25,541 18,020 2,219 14,225 Loan servicing fees 50,194 45,573 36,087 32,426 24,428 Gain on sale of servicing 32,631 16,378 15,271 17,716 2,979 Other income 1,223 891 787 647 550 -------- -------- -------- -------- -------- Total net revenues 162,900 148,569 115,326 91,018 94,854 Operating expense 126,610 114,474 83,344 64,571 72,140 -------- -------- -------- -------- -------- Income before taxes 36,290 34,095 31,982 26,447 22,714 Income taxes 14,990 13,673 12,651 10,719 9,073 -------- -------- -------- -------- -------- Net income $21,300 $20,422 $19,331 $15,728 $13,641 ======== ======== ======== ======== ======== Selected Balance Sheet Data at End of Period: Mortgage loans held for sale $435,123 $372,855 $309,262 $131,543 $318,453 Mortgage servicing assets 81,610 71,715 51,783 18,834 11,505 Total assets 698,391 555,486 445,129 216,180 452,365 Short-term debt 335,835 265,646 227,021 68,259 215,014 Long-term debt 54 4,914 2,300 2,605 2,934 Shareholders' equity $81,058 $66,182 $55,811 $50,805 $42,355 Selected Operating Data: Mortgage loan closings $5,397,338 $5,085,625 $3,559,310 $2,812,962 $4,273,933 Servicing portfolio: Balance at December 31, 10,713,549 10,810,988 10,301,914 8,818,502 7,922,299 Weighted average coupon rate 7.85% 7.83% 7.83% 7.59% 7.51% Weighted average servicing fee 0.40 0.38 0.38 0.38 0.37 Servicing sold as a percent of production 71.8 6o.9 28.4 49.8 5.6 ----------------------------------------------------------------------------------------------- Overview & Strategy: The mortgage banking line of business consists of Irwin Mortgage Corporation (as of January 1,1998, Inland Mortgage Corporation changed its name to Irwin Mortgage Corporation) and the related activities of Irwin Union Bank and Trust. The business is headquartered in Indianapolis and originates, packages, sells, and services residential mortgage loans throughout the U.S. It has offices in 28 states and ranks among the top 30 mortgage loan originators in the country. The majority 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 direct 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. Financing 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 54.5% of the loans originated. 1997 Review: Net income from mortgage banking was $21.3 million in 1997, an increase of 4.3% over 1996 results of $20.4 million and 10.2% over 1995 results of $19.3 million. Return on average equity was 29.6% in 1997 compared to 33.4% in 1996 and 37.4% in 1995. Mortgage Closings: (In thousands) 1997 1996 1995 ------------------------------------------------------------------ Total closings $5,397,338 $5,085,625 $3,559,310 Percent retail loans 36.6% 41.8% 50.3% Percent wholesale loans 57.2 52.4 42.5 Percent brokered 6.2 5.8 7.2 ------------------------------------------------------------------ Annual loan originations in 1997 of $5.4 billion were up 6.1% from 1996 and 51.6% from 1995. During 1997 the mortgage bank originated a greater portion of its loans through wholesale channels than in previous years. Income from mortgage loan originations totaled $41.0 million which was $2.4 million less than 1996 and $9.2 million over 1995. The change in production mix resulted in this decline as lower fees are collected on wholesale originations. Mortgage loan applications in process and loans held for sale at the end of 1997 totaled $1.7 billion, compared with $1.8 billion at the end of 1996 and $1.6 billion at the end of 1995. Refinances accounted for 22.5% of 1997 loan closings, compared to 19.0% in 1996 and 11.6% in 1995. Gains from the sale of mortgage loans totaled $21.6 million in 1997, compared to $25.5 million in 1996 and $18.0 million in 1995. In early 1997 the mortgage bank entered into the nonprime mortgage 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. Total originations in 1997 include $66.1 million of nonprime loans. These loans are sold on a non-recourse, service released basis to private investors. Mortgage Servicing: Servicing Portfolio: (In billions) 1997 1996 1995 --------------------------------------------------------------------------------- Beginning portfolio $10.8 $10.3 $8.8 Add: Loans originated 2.0 2.1 1.8 Loans purchased 3.4 3.0 1.8 Deduct: Sale of servicing rights (3.9) (3.1) (1.0) Run-off* (1.6) (1.5) (1.1) -------- -------- -------- Ending portfolio $10.7 $10.8 $10.3 ======== ======== ======== Number of loans 141,737 140,354 129,270 Average loan size $82,902 $83,540 $82,186 Percent GNMA 59% 51% 48% Percent FHLMC 11 15 21 Percent FNMA 19 16 17 Delinquency ratio: 5.99% 5.12% 4.55% Capitalized servicing as a percentage of servicing portfolio 0.76% 0.65% 0.50% -------------------------------------------------------------------------------- *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 $10.7 billion at December 31, 1997, down 0.9% from the same date in 1996 and up 4.0% from 1995. The 1997 annual portfolio run-off rate was 12.3%. This is up from the 1996 rate of 10.7% and the 1995 rate of 10.4%. 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: 1997 1996 1995 -------------------------------------------------------------- Less than 7% 8.4% 8.9% 10.3% 7.00 - 7.99% 42.5 44.3 39.8 8.00 - 8.99% 42.6 38.7 33.9 9% or greater 6.5 8.1 16.0 ----- ----- ----- Total 100% 100% 100% -------------------------------------------------------------- The value of mortgage servicing assets 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 from time to time to avoid significant impairment provisions. Expenses related to mortgage servicing rights impairment and hedging totaled $600.0 thousand in 1997 compared to $637.9 thousand in 1996 and $908.8 thousand in 1995. No hedges were in place at December 31, 1997. Servicing and Other Fees: (In thousands) 1997 1996 1995 -------------------------------------------------------------- Servicing fees $50,194 $45,573 $36,087 Other fees 1,223 891 787 ----- ----- ----- Total $51,417 $46,464 $36,874 -------------------------------------------------------------- Servicing fee income is recognized by collecting fees which normally range between 25 and 44 basis points annually on the principal amount of the underlying mortgages. A change in the portfolio mix to a higher percentage of government loans positively affected servicing income which increased 10.1% from 1996 and 39.1% from 1995. Sale of Mortgage Servicing: The mortgage banking business maintains the flexibility to either sell servicing assets for current 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 interest rate risk tolerance of the business. Servicing assets totaling $3.9 billion were sold in 1997, generating a $32.6 million pre-tax gain on those sales. This compares to servicing sales of $3.1 billion in 1996 that produced $16.4 million pre-tax gain and $1.0 billion in 1995 that produced a $15.3 million pre-tax gain. The 1997 gain reflects improved market pricing and better margins on wholesale loans. Had all servicing been retained in 1997, gains on sales of loans would have been higher than what was recorded, with a corresponding reduction in gains from sales of servicing. Servicing sales in 1997 represented 71.8% of 1997 originations versus 1996 sales which were 60.9% of that year's originations and 1995 sales which were 28.4% of originations. 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 $17.6 million in 1997, compared to $17.2 million in 1996 and $13.4 million in 1995. Operating Expenses: (In thousands, except for number of employees) 1997 1996 1995 ----------------------------------------------------------------------------------------------- Salaries and employee benefits $71,389 $66,153 $51,737 Amortization of mortgage servicing rights 15,243 14,245 4,865 Other expenses 39,978 34,076 26,742 -------- -------- -------- Total operating expenses $126,610 $114,474 $83,344 ======== ======== ======== Number of employees at December 31, 1,411 1,474 1,316 ----------------------------------------------------------------------------------------------- Total operating expenses increased 10.6% from 1996 and 51.9% from 1995. The increase reflects the continued expansion of the production system. Also during 1997 the mortgage bank made significant technological improvements with the conversion to a new loan origination system, the installation of personal computer-based networks at branch locations, and an initiative to provide loan originators with laptop computers. The business has adopted a strategy of leasing all of its systems and related equipment. As a result, 1997 operating expenses include lease expense related to these technological improvements. Credit Quality: (In thousands) 1997 1996 1995 ----------------------------------------------------------------------------------------------- At December 31, Nonperforming loans $3,784 $2,221 $154 Other real estate owned 1,415 1,839 295 -------- -------- -------- Total nonperforming assets $5,199 $4,060 $449 ======== ======== ======== Allowance for loan losses $1,606 $633 $413 ======== ======== ======== Allowance for loan losses as a percentage of loans 6.0% 2.7% 2.1% For the year ended December 31, Provision for loan losses $1,383 $455 $125 ----------------------------------------------------------------------------------------------- Although most mortgages are either government-insured or conform to the underwriting guidelines of the government-sponsored agencies that support the secondary mortgage market, the mortgage bank has credit risk on those loans that do not get government insurance or that must be repurchased from agencies due to lack of conformity to underwriting guidelines. Over the last two years the government-sponsored agencies which provide credit enhancement on the loans underwritten by the mortgage bank have become more stringent in their adherence to their right to seek recourse from the originator of loans. As such, the mortgage bank has had an increase in the number of loans it has repurchased from the agencies. This has resulted in an increase in the nonperforming loans and other real estate owned at the mortgage bank. The mortgage bank seeks to cure the underwriting defect in these loans and resell them to the agencies or sell them to alternative investors. As a result of the increase in nonperforming loans in 1997, the allowance for loan losses and the provision for loan losses have increased from previous years. In providing for the loan loss allowance, management reviews each loan individually to assess expected future losses based on information about the borrower and the underlying collateral. 1998 Outlook: The mortgage bank is developing a strategy which will allow it to proceed with its expansion efforts in the current environment of consolidation in the mortgage banking industry. The business is focusing on ways that it can continue to be both a competitive loan originator and loan servicer. Production strategies include initiatives to enhance the profitability of both retail and wholesale channels. New production and underwriting technologies, the redesign of compensation systems, and new product offerings are anticipated in 1998. As noted earlier, during 1997 the mortgage bank entered the nonprime mortgage market. Management views this area as a potentially important source of growth. In addition, last year the mortgage bank began making dollar denominated mortgage loans to U.S. and Canadian citizens on selected properties in Mexico. Originations in 1997 totaled $1.1 million. In 1998, the mortgage bank plans to increase promotion and distribution efforts in Mexico in order to expand its presence in this new