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, 1999 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 Corporation as Specified in its Charter) INDIANA 35-1286807 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 500 WASHINGTON STREET 47201 COLUMBUS, INDIANA (Zip Code) (Address of Principal Executive Offices) (812) 376-1020 (Corporation'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 Corporation: (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 Corporation 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 Corporation'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 Corporation was $155,117,904 as of March 9, 2000. As of March 9, 2000, there were outstanding 21,045,469 common shares of the Corporation. DOCUMENTS INCORPORATED BY REFERENCE SELECTED PORTIONS OF THE FOLLOWING DOCUMENTS PART OF FORM 10-K INTO WHICH INCORPORATED -------------------------------------------- ----------------------------------------- Definitive Proxy Statement for Annual Meeting of Shareholders to be held April 27, 2000 Part III Exhibit Index on Pages 64 through 66 Total Pages in This Filing: 177 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 FORM 10-K TABLE OF CONTENTS Part I Item 1 -- Business........................................ 1 Item 2 -- Properties...................................... 5 Item 3 -- Legal Proceedings............................... 6 Item 4 -- Submission of Matters to a Vote of Security Holders................................................ 6 Part II Item 5 -- Market for Corporation's Common Equity and Related Security Holder Matters................. 7 Item 6 -- Selected Financial Data......................... 8 Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 9 Item 8 -- Financial Statements and Supplementary Data..... 38 Item 9 -- Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 62 Part III Item 10 -- Directors and Executive Officers of the Corporation............................................ 63 Item 11 -- Executive Compensation......................... 63 Item 12 -- Security Ownership of Certain Beneficial Owners and Management................................. 63 Item 13 -- Certain Relationships and Related Transactions........................................... 64 Part IV Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 64 Signatures.................................................. 67 3 PART I ITEM 1. BUSINESS GENERAL Irwin Financial Corporation (the "Corporation") is a diversified financial services company organized as an Indiana bank holding company in May, 1972. The Corporation's principal subsidiaries are Irwin Mortgage Corporation ("Irwin Mortgage"), a mortgage banking company; Irwin Union Bank and Trust Company ("Irwin Union Bank"), a commercial bank; Irwin Home Equity Corporation ("Home Equity"), a consumer home equity lending company; Irwin Business Finance ("Business Finance"), an equipment leasing company; Irwin Ventures Incorporated ("Irwin Ventures"), a venture capital company; and Irwin Union Credit Insurance Corporation, a credit insurance company. The Corporation is also the sole equity shareholder of IFC Capital Trust I ("Capital Trust"), a special purpose trust. BUSINESS OF SUBSIDIARIES Irwin Mortgage, acquired in 1981, 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 engages in the non-prime first and second mortgage lending market. 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 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 107 production and satellite offices in twenty-nine states. During 1999, Irwin Mortgage established offices in Irvine, California; Schererville, Indiana; Springfield, Illinois; Ashland, Kentucky; Kalamazoo and Lansing, Michigan; Sunset Hills and Union, Missouri; Reno, Nevada; Charlotte, Creed Moor and Durham, North Carolina; Weatherford, Oklahoma; Portland, Oregon; Lancaster, Pennsylvania; Brentwood, Tennessee; Houston, Texas; Chesapeake, Virginia; and Green Bay, Wisconsin. During 1999, Irwin Mortgage closed offices in Antioch, California; Aiea, Hawaii; Anderson, Kendalville and New Albany, Indiana; Louisville, Kentucky; Towson, Maryland; Braintree, Massachusetts; Jackson, Mississippi; Las Vegas, Nevada; Charlotte and Madison, North Carolina; Broken Arrow, Oklahoma; Lake Oswego, Oregon; Wyomissing, Pennsylvania; Austin and Rockport, Texas; Suffolk, Virginia; Bellevue, Washington; and Green Bay, Wisconsin. 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 eleven financial institutions operating in Bartholomew County, Indiana, with eight locations throughout the county. Irwin Union Bank also has branch facilities in Greensburg (Decatur County), Carmel (Hamilton County), Avon (Hendricks County), Seymour (Jackson County -- 2), Franklin and Greenwood (Johnson County -- 2), Indianapolis (Marion County), Bloomington (Monroe County -- 3) and Shelbyville (Shelby County), Indiana. In January, 1999, Irwin Union Bank opened a loan production office in Brentwood (St. Louis), Missouri. Loan production offices established in 1999 in Kalamazoo and Grandville (Grand Rapids), Michigan became branches of the Bank in June, 1999 and January, 2000, respectively. In December, 1999, the Bank opened a branch office in Carson City, Nevada. In July, 1999, Irwin Union Bank acquired the business of Susan Wier, d/b/a Investment Partners. In January, 2000, Irwin Union Insurance, Inc., an insurance agency subsidiary of Irwin Union Bank, acquired Colvin Brokerage & Insurance Agency, Inc. In 1 4 April, 1999, Irwin Union Advisory Services, Inc., a subsidiary of Irwin Union Bank, became a registered investment advisor. Home Equity was formed in 1994 and is located in San Ramon, California. In conjunction with its affiliate Irwin Union Bank, Home Equity originates, securitizes, and services home equity loans and lines of credit. The products are marketed through direct mail, telemarketing and Internet-based solicitations in twenty-nine states. Products are also offered through the use of independent third-party brokers. Additionally, Home Equity offers a first mortgage refinance program in selected states. In January, 2000, Home Equity introduced a product offering a limited amount of credit with an expedited turnaround time called "Immediate Credit." Business Finance, headquartered in Bellevue, Washington, was organized during the second quarter of 1999 for the purpose of originating and servicing small to medium-sized equipment leases and loans. Business Finance commenced operations in January, 2000. The company originates transactions from an established national network of brokers and vendors through an e-commerce system that provides automated credit scoring, documentation and portfolio management services. Irwin Ventures, located in Columbus, Indiana, is a venture capital subsidiary formed in the third quarter of 1999 for the purpose of making investments in early stage companies in the financial services industry and related fields. In August, 1999, Irwin Ventures established a subsidiary, Irwin Ventures Incorporated-SBIC ("IVI-SBIC"). Irwin Ventures has filed an application with the Small Business Administration for a Small Business Investment Company license on behalf of IVI-SBIC. 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 Corporation 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 Corporation. 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 Corporation 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. The Corporation continues to hold certain small-ticket equipment leases in its subsidiary, Irwin Leasing Corporation (the former Affiliated Capital Corp.). The leases were not part of the 1998 sale of substantially all of the assets of Affiliated Capital to DVI Financial Services, Inc. Irwin Leasing and its parent, Irwin Equipment Finance Corporation, are inactive except for the leases. In December, 1999, the Corporation applied to the Office of Thrift Supervision to establish a federal savings bank subsidiary. The federal savings bank would foster the development of branch banking capabilities in markets outside Indiana. No single part of the business of the Corporation 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 Corporation. 2 5 COMPETITION Irwin Mortgage originates and services residential first and second mortgage loans from 107 production and satellite offices in Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Michigan, Minnesota, Missouri, Nevada, New Jersey, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, 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 comes from other national, regional, local, and web-enabled 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, Hendricks, Jackson, Johnson, Marion, Monroe and Shelby County, Indiana 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, 1999, 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 Union Bank's new branch offices in Kalamazoo and Grandville (Grand Rapids), Michigan and Carson City, Nevada, and its loan production office in Brentwood (St. Louis), Missouri experience competition from existing institutions in those areas. Home Equity's primary competitors for home equity loans and lines of credit include banks, thrifts, credit unions, and other home equity lenders with operations that are either national, regional, local, or web-enabled in scope. Such competitors may be headquartered anywhere in the country. The primary competitors of Business Finance include other funding sources that are independent or affiliated with banks or large equipment leasing companies that operate on a national or regional basis. The primary competitors of Irwin Ventures are other venture capital firms and individuals who invest in start-up companies. Such companies and individuals may be located anywhere in the country. SUPERVISION AND REGULATION The Corporation 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 Corporation 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. 3 6 In addition to the regulation of the Corporation, 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 Corporation 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 reinsurance subsidiary of Irwin Union Bank is subject to examination by the state of Vermont. The home equity and equipment leasing subsidiaries of the Corporation are also dependent upon state licenses for their ability to engage in origination and servicing activities in certain states. 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. The activities of Irwin Union Bank's investment advisor subsidiary are regulated and examined by the Indiana Securities Division and the securities divisions of the states in which Irwin Union Advisory Services, Inc. operates. EMPLOYEES AND LABOR RELATIONS As of December 31, 1999, the Corporation and its subsidiaries had a total of 2,328 employees, including full-time and part-time employees. The Corporation continues a commitment of equal employment opportunity for all job applicants and staff members, and management regards its relations with its employees as satisfactory. EXECUTIVE OFFICERS OF THE CORPORATION The Executive Officers of the Corporation 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. Claude E. Davis (39) is President of Irwin Union Bank since January 2, 1996. He has been an officer since 1988. Elena Delgado (44) is President of Irwin Home Equity Corporation since September 4, 1994. Gregory F. Ehlinger (37) is Senior Vice President and Chief Financial Officer of the Corporation. He has been an officer since August of 1992. Jose M. Gonzalez (41) is Vice President and Director of Internal Audit of the Corporation since October of 1995. From 1993 to 1995, Mr. Gonzalez was Senior Vice President, Audit & Compliance Services of Premier Bank and Trust. Theresa L. Hall (47) is Vice President - Human Resources of the Corporation since 1988. She has been an officer since 1980. Jody A. Littrell (32) is Vice President and Controller of the Corporation since March 13, 2000. He was employed with Arthur Andersen LLP from September, 1990 to March, 2000, most recently as Audit Manager. Rick L. McGuire, (47) is President of Irwin Mortgage since January 1, 1996. He has been an officer since 1978. William I. Miller (43) is Chairman of the Board since 1990, and has been a Director of the Corporation since 1985. Ellen Z. Mufson (51) is Vice President - Legal of the Corporation since September, 1997. She was Vice President - Legal Counsel of Irwin Union Bank and Trust Company from July, 1996 through August, 1997, and Corporate Counsel of Irwin Financial Corporation from January, 1995 through June, 1996. 4 7 John A. Nash (62) is Chairman of the Executive Committee since 1990, and President since 1985, of the Corporation. He has been an officer and Director of the Corporation since 1972. Michael F. Ryan (54) is Vice President - Community Development of the Corporation since January 2, 1996. He was President of Irwin Union Bank from 1981 - 1995. He has been an officer since 1976. Matthew F. Souza (43) is Senior Vice President, Ethics and Secretary of the Corporation. He has been an officer since 1985. Michael E. Taft (59) is President of Irwin Business Finance Corporation since April, 1999. From August of 1998 to April of 1999, he was Executive Vice President of General Electric Capital Business Asset Funding Corp., a subsidiary of General Electric Capital Corporation. From September of 1984 to August of 1998, he was Executive Vice President of MetLife Capital Corp., a subsidiary of Metropolitan Life Insurance Company. (General Electric Capital Corporation acquired MetLife Capital in August of 1998.) Thomas D. Washburn (53) is Executive Vice President of the Corporation. He has been an officer since 1976. ITEM 2. PROPERTIES The location and general character of the materially important physical properties of the Corporation 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, Mesa, Phoenix, Scottsdale and Tucson, Arizona; Bakersfield, Concord, Covina, Irvine, Orinda, Richmond, Sacramento, Salinas, San Diego, Temecula, Ventura, Visalia, Walnut Creek, Woodland, Yreka and Yuba City, California; Castle Rock, Colorado Springs, Denver, Englewood and Woodland Park, Colorado; Rocky Hill, Connecticut; Newark, Delaware; Boca Raton, Clearwater and Longwood, Florida; Atlanta, Georgia; Honolulu, Kailua and Maui, Hawaii; Decatur, Oak Forest and Springfield, Illinois; Indianapolis (5), Carmel, Fishers, Ft. Wayne, Greenwood, Kokomo, Lafayette, Schererville, South Bend and Warsaw, Indiana; Ashland, Kentucky; Baton Rouge, Louisiana; Columbia and Rockville, Maryland; Kalamazoo and Lansing, Michigan; Arden Hills, Burnsville and Minneapolis, Minnesota; Desloge, St. Louis, Sunset Hills and Union, Missouri; Reno, Nevada; Brick, New Jersey; Burlington, Cary, Creed Moor, Durham, Greensboro (2), Raleigh and Wilmington, North Carolina; Dayton, Ohio; Altus, Bristow, Tulsa and Weatherford, Oklahoma; Beaverton, Hillsboro and Portland, Oregon; Lancaster, Pennsylvania; Brentwood, Tennessee; Austin, Corpus Christi, El Paso, Houston (2) and Irving, Texas; Salt Lake City, Utah; Chesapeake, Franklin, Fredericksburg, Glen Allen, Newport News, Richmond, Springfield, and Virginia Beach, Virginia; Battle Ground, 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 at 500 and 520 Washington Street, Columbus, Indiana. These buildings are owned in fee by Irwin Union Realty Corporation, a wholly-owned subsidiary of Irwin Union Bank, and are leased by Irwin Union Bank. The following Irwin Union Bank branch properties are owned in fee by either Irwin Union Bank or Irwin Union Realty: State Street and Eastbrook in Columbus, Indiana; Hope, Taylorsville, and Franklin, Indiana (the Franklin building and a portion of the land are owned; the remaining land is leased). The other branch offices are leased: Avon, Bloomington (3), Carmel, Columbus (3), Greensburg, Greenwood, Indianapolis, Seymour (2) and Shelbyville, Indiana; Grandville (Grand Rapids) and Kalamazoo, Michigan; and Carson City, Nevada. The loan production office in Brentwood (St. Louis), Missouri is also leased. None of the properties owned by Irwin Union Bank or Irwin Union Realty is subject to any major encumbrances. The main office of Irwin Home Equity is located at 12677 Alcosta Blvd., Suite 500, San Ramon, California. A second office was established in January, 2000 at 3000 Executive Parkway, Building Q, Suite 300, San Ramon, California. Both office locations are leased. The main office of Irwin Business Finance is located at 330 120th Avenue NE, Suite 110, Bellevue, Washington. The office location is leased. 5 8 The main offices of the Corporation, Irwin Ventures, Irwin Ventures Incorporated-SBIC 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 Corporation 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 Corporation was involved, as of December 31, 1999, in the following actions: Culpepper, et al. v. Inland Mortgage Corporation. As of December 31, 1999, Irwin Mortgage (previously known as Inland Mortgage Corporation) was a defendant in a class action lawsuit initiated in the United States District Court, Northern District of Alabama in April, 1996. This action is one of a number 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. In June, 1999, the District Court certified a limited class of borrowers. In July, 1999, Irwin Mortgage filed a petition with the Court of Appeals for the Eleventh Circuit for immediate review of the class certification order. In September, 1999, the Court agreed to review the District Court's order. At present, 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. Heifets, et al. v. Matrix Electromedical, et al. As of December 31, 1999, Affiliated Capital Corp. (now, Irwin Leasing Corporation) and Irwin Financial Corporation were defendants in a class action lawsuit initiated against them in August, 1998 in the Superior Court of Los Angeles County, California. The suit alleged that a manufacturer of certain medical devices made misrepresentations to induce doctors to acquire the devices, which Affiliated Capital Corp. financed by means of leases. In August, 1999, the trial court dismissed the plaintiffs' case with prejudice and awarded attorneys' fees to the Irwin companies. The plaintiffs then appealed. In January, 2000, the plaintiffs agreed to dismiss their appeal and pay a portion of the Irwin companies' attorneys' fees. The court of appeals issued an order of dismissal on February 29, 2000. Kruta et al. v. Inland Mortgage Corporation. As of December 31, 1999, Irwin Mortgage was a defendant in a class action lawsuit initiated in the state of Minnesota in October, 1995 and later assigned to a federal Multidistrict Litigation Panel in Chicago, Illinois. Plaintiffs allege 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. On December 9, 1999, the Court issued its preliminary approval of a settlement timetable in this case. Except as described above, there is no material pending litigation in which the Corporation 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 Corporation in which any director, officer or affiliate of the Corporation, or any associate of any such director or officer, is a party, or has a material interest. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1999, no matters were submitted to a vote of security holders of the Corporation, through the solicitation of proxies or otherwise. 6 9 PART II ITEM 5. MARKET FOR CORPORATION'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of the Corporation is quoted on the National Association of Securities Dealers Automated Quotation/National Market System (NASDAQ/NMS -- trading symbol, IRWN). The following table sets forth certain information regarding trading in, and cash dividends paid with respect to, the shares of the Corporation's Common Stock in each quarter of the two most recent calendar years. All data have been adjusted for stock splits. The approximate number of shareholders of record on March 9, 2000 was 1,750. STOCK PRICES AND DIVIDENDS: TOTAL QUARTER CASH DIVIDENDS HIGH LOW END DIVIDEND FOR YEAR $ $ $ $ $ ---- --- ------- -------- --------- 1997 (split adjusted) First Quarter.......................................... 15 1/4 12 1/8 13 5/8 $0.035 Second Quarter......................................... 14 3/4 12 14 3/4 $0.035 Third Quarter.......................................... 18 5/8 14 3/8 18 5/8 $0.035 Fourth Quarter......................................... 21 1/2 18 1/4 21 $0.035 $0.14 1998 (split adjusted) First Quarter.......................................... 28 1/4 19 1/2 28 1/8 $ 0.04 Second Quarter......................................... 30 25 1/8 29 $ 0.04 Third Quarter.......................................... 37 20 1/2 24 5/8 $ 0.04 Fourth Quarter......................................... 31 20 1/8 27 1/5 $ 0.04 $0.16 1999 First Quarter.......................................... 28 7/8 20 20 $ 0.05 Second Quarter......................................... 25 1/2 17 1/2 19 1/2 $ 0.05 Third Quarter.......................................... 25 19 1/3 20 $ 0.05 Fourth Quarter......................................... 22 7/8 17 17 4/5 $ 0.05 $0.20 The Corporation expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements, and financial condition. On February 24, 2000, the Corporation's Board of Directors approved an increase in the first quarter dividend to $.06 per share, payable in March, 2000. Dividends paid by Irwin Union Bank to the Corporation are restricted by banking law. SALES OF UNREGISTERED SECURITIES: In July, 1999, the Corporation issued $30 million of 7.58% subordinated debt, callable in ten years at par, in an institutional private placement. The proceeds will be used to strengthen the Corporation's capital base. 7 10 ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR SELECTED FINANCIAL DATA 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) For the Year: Net Revenues.................. $ 271,445 $ 276,760 $ 205,469 $ 181,117 $ 143,374 Other Operating Expense....... 214,111 221,206 158,818 143,829 110,925 Net Income.................... 33,156 30,503 24,444 22,428 20,083 Return on Average Equity...... 21.51% 22.84% 19.80% 20.58% 22.60% Return on Average Assets...... 2.01 1.85 1.94 1.95 2.28 Dividend Payout Ratio......... 12.93 11.39 12.74 12.15 12.36 Per share:* Net Income -- Basic........... $ 1.54 $ 1.40 $ 1.10 $ 0.99 $ 0.89 Net Income -- Diluted......... 1.51 1.38 1.08 0.98 0.88 Cash Dividends................ 0.20 0.16 0.14 0.12 0.11 Book Value.................... 7.55 6.70 5.82 5.23 4.38 Market Value at December 31,........................ 17.81 27.20 20.94 12.38 9.97 At year end: Assets........................ $ 1,680,847 $ 1,946,179 $ 1,496,794 $ 1,300,122 $ 1,037,541 Deposits...................... 870,318 1,009,211 719,596 640,153 563,999 Mortgage Loans Held for Sale....................... 508,997 936,788 528,739 446,898 378,658 Loans and Leases, Net......... 724,869 547,103 602,281 526,175 407,904 Shareholders' Equity.......... 159,296 145,233 127,983 118,903 99,216 Owned first mortgage servicing portfolio.................. 10,488,112 11,242,470 10,713,549 10,810,988 10,301,914 Managed home equity portfolio.................. 842,403 581,241 358,166 230,450 86,691 Equity to Assets Ratio........ 9.48% 7.46% 8.55% 9.15% 9.56% Risk-based Capital Ratio...... 13.50 12.25 14.85 12.88 14.49 Leverage Ratio (Tier one)..... 12.77 10.51 12.06 9.84 10.57 Averages: Assets........................ $ 1,651,010 $ 1,650,384 $ 1,262,714 $ 1,151,535 $ 882,164 Equity........................ 154,143 133,563 123,483 108,970 88,867 Shares Outstanding* -- Basic...... 21,530 21,732 22,326 22,716 22,560 Shares Outstanding* -- Diluted.... 21,886 22,139 22,722 23,030 22,860 ------------------------- --> * Adjusted for stock splits 8 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis should be read in conjunction with the accompanying consolidated financial statements, footnotes, and tables. This discussion and other sections of this report contain forward-looking statements that are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "intends," "are likely," "estimates," "outlook," "assumption," and similar expressions are intended to identify forward-looking statements, which include but are not limited to projections of business strategies and future activities. These statements are not guarantees of future performance and involve uncertainties that are difficult to predict. Actual future results may differ materially from what is projected due to a variety of factors, including, but not limited to, unexpected changes in interest rates or in the economies served by the Corporation, competition from other financial service providers, unanticipated difficulties in expanding the Corporation's businesses, availability of appropriate investment opportunities, legislative or regulatory changes, or governmental changes in monetary or fiscal policy. CONSOLIDATED OVERVIEW Irwin Financial Corporation's results in 1999 were up significantly from 1998. The Corporation's home equity lending business experienced a significant improvement in earnings as a result of a more favorable competitive environment and a reduction in loan prepayment activity. Results at the Corporation's commercial bank also improved in connection with growth in its commercial loan portfolio. However, a rising interest rate environment led to a reduction in loan originations and lower net income at the Corporation's mortgage banking line of business, partially offsetting the improvements at the Corporation's other lines of business. Results in 1999 and 1998 include one-time after-tax gains of $1.1 million and $3.1 million from a change in statutory tax rates and the sale of the majority of assets of the medical equipment leasing business, respectively. 1999 % CHANGE 1998 % CHANGE 1997 ---- -------- ---- -------- ---- Net Income ($ Millions)............................. $33.2 8.7% $30.5 36.6% $24.4 Basic Earnings per Share*........................... 1.54 10.0 1.40 40.0 1.10 Diluted Earnings per Share*......................... 1.51 9.4 1.38 39.8 1.08 Return on Average Equity............................ 21.51% -- 22.84% -- 19.80% Return on Average Assets............................ 2.01% -- 1.85% -- 1.94% *Adjusted for Stock Split EARNINGS BY LINE OF BUSINESS Irwin Financial Corporation is composed of five principal lines of business: - Mortgage banking - Commercial banking - Home equity lending - Equipment leasing - Venture capital 9 12 EARNINGS: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Mortgage Banking............................................ $23,063 $28,853 $21,300 Commercial Banking.......................................... 7,345 6,509 5,587 Home Equity Lending......................................... 12,606 (6,668) 1,710 Equipment Leasing........................................... (843) -- -- Venture Capital............................................. 656 -- -- Other (including parent, medical equipment leasing, and consolidating entries).................................... (9,671) 1,809 (4,153) ------- ------- ------- $33,156 $30,503 $24,444 ======= ======= ======= SUMMARY OF QUARTERLY FINANCIAL INFORMATION: 1999 ---------------------------------------- FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income......................................... $32,900 $31,644 $30,323 $31,746 Interest expense........................................ 15,336 13,103 12,541 13,814 Provision for loan and lease losses..................... 548 364 2,330 1,201 Non-interest income..................................... 47,281 48,627 53,518 54,643 Non-interest expense.................................... 52,991 51,186 54,823 55,111 Income taxes............................................ 2,272 5,733 5,360 6,116 ------- ------- ------- ------- Net income.............................................. 9,034 9,885 8,787 10,147 ------- ------- ------- ------- Distribution on company obligated mandatorily redeemable preferred securities of subsidiary trust.............. 1,174 1,174 1,174 1,175 ------- ------- ------- ------- Net income available to common shareholders............. $ 7,860 $ 8,711 $ 7,613 $ 8,972 ======= ======= ======= ======= Earnings per share of common stock: Basic................................................. $ 0.37 $ 0.41 $ 0.35 $ 0.41 Diluted............................................... $ 0.36 $ 0.40 $ 0.35 $ 0.41 1998 ---------------------------------------- FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income......................................... $30,183 $33,649 $31,946 $27,409 Interest expense........................................ 13,094 18,256 15,435 12,504 Provision for loan and lease losses..................... 1,350 1,951 1,056 1,638 Non-interest income..................................... 60,472 59,258 50,089 49,038 Non-interest expense.................................... 64,575 54,749 52,697 49,185 Income taxes............................................ 4,162 6,684 4,627 4,881 ------- ------- ------- ------- Net income.............................................. 7,474 11,267 8,220 8,239 ------- ------- ------- ------- Distribution on company obligated mandatorily redeemable preferred securities of subsidiary trust.............. 1,174 1,174 1,174 1,175 ------- ------- ------- ------- Net income available to common shareholders............. $ 6,300 $10,093 $ 7,046 $ 7,064 ======= ======= ======= ======= Earnings per share of common stock: Basic*................................................ $ 0.29 $ 0.47 $ 0.32 $ 0.32 Diluted*.............................................. $ 0.29 $ 0.46 $ 0.32 $ 0.31 10 13 1997 ---------------------------------------- FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income......................................... $27,597 $26,237 $23,127 $22,480 Interest expense........................................ 12,989 11,705 10,032 9,856 Provision for loan and lease losses..................... 1,374 2,042 2,019 803 Non-interest income..................................... 45,970 40,018 35,551 35,309 Non-interest expense.................................... 46,458 39,033 35,837 37,490 Income taxes............................................ 5,404 4,989 3,851 3,490 ------- ------- ------- ------- Net income.............................................. 7,342 8,486 6,939 6,150 ------- ------- ------- ------- Distribution on company obligated mandatorily redeemable preferred securities of subsidiary trust.............. 1,174 1,174 1,171 954 ------- ------- ------- ------- Net income available to common shareholders............. $ 6,168 $ 7,312 $ 5,768 $ 5,196 ======= ======= ======= ======= Earnings per share of common stock: Basic*................................................ $ 0.28 $ 0.33 $ 0.26 $ 0.23 Diluted*.............................................. $ 0.28 $ 0.33 $ 0.26 $ 0.23 ------------------------- --> *Adjusted for the May 27, 1998 two-for-one stock split MORTGAGE BANKING BUSINESS PROFILE: MORTGAGE BANKING SELECTED FINANCIAL DATA: 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS) SELECTED INCOME STATEMENT DATA: Net interest income................. $ 21,745 $ 26,244 $ 17,577 $ 17,178 $ 13,415 Provision for loan losses........... (1,998) (1,721) (1,383) (455) (125) Loan origination fees............... 46,311 59,328 41,045 43,463 31,871 Gain on sale of loans............... 43,599 55,245 22,213 26,179 18,929 Loan servicing fees................. 54,247 52,217 50,194 45,573 36,087 Amortization and impairment of servicing assets, net of hedging.......................... (24,566) (29,805) (15,843) (13,897) (5,774) Gain on sale of servicing........... 37,801 43,308 32,631 16,378 15,271 Other income........................ 3,628 2,422 1,223 891 787 ---------- ---------- ---------- ---------- ---------- Total net revenue................ 180,767 207,238 147,657 135,310 110,461 Operating expense................... 144,915 159,192 111,367 101,215 78,479 ---------- ---------- ---------- ---------- ---------- Income before tax................... 35,852 48,046 36,290 34,095 31,982 Tax................................. 12,789 19,193 14,990 13,673 12,651 ---------- ---------- ---------- ---------- ---------- Net income....................... $ 23,063 $ 28,853 $ 21,300 $ 20,422 $ 19,331 ========== ========== ========== ========== ========== SELECTED BALANCE SHEET DATA AT END OF PERIOD: Mortgage loans held for sale........ $ 277,614 $ 697,542 $ 528,739 $ 446,897 $ 378,658 Mortgage servicing asset............ 132,648 113,131 81,610 71,715 51,783 Total assets........................ 549,966 1,020,249 792,007 629,528 514,525 Short-term debt..................... 217,691 430,859 429,451 339,688 296,417 Long-term debt...................... 223 2,839 54 4,914 2,300 Shareholders' equity................ 98,556 104,696 81,058 66,182 55,811 SELECTED OPERATING DATA: Mortgage loan originations.......... $5,876,750 $8,944,615 $5,397,338 $5,085,625 $3,559,310 Servicing portfolio: Balance at December 31........... 10,488,112 11,242,470 10,713,549 10,810,988 10,301,914 Weighted average coupon rate..... 7.51% 7.56% 7.85% 7.83% 7.83% Weighted average servicing fee... 0.44 0.43 0.40 0.38 0.38 Servicing sold as a % of production....................... 79.9 54.6 71.8 60.9 28.4 11 14 OVERVIEW & STRATEGY: Irwin Mortgage Corporation originates, sells, and services residential mortgage loans throughout the U.S. Most of the loans originated and serviced are either government-insured through the Veterans' Administration (VA) or Federal Housing Administration (FHA) or conventional loans which conform to the underwriting guidelines of the two principal government-sponsored agencies which support the secondary mortgage markets, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). Mortgage loans are originated through branches (retail), third party sources (wholesale), and to a limited degree, the Internet. Potential borrowers are identified principally through relationships maintained with housing intermediaries including realtors, home builders, and brokers. Loans are funded on a short-term basis through credit facilities provided by commercial banks including Irwin Union Bank. Repurchase agreements with investment banks are also used. Individual loans are pooled, securitized, and sold into the secondary mortgage market. Servicing rights are periodically sold for a variety of reasons including cash flow and servicing portfolio management. 1999 REVIEW: Net income from mortgage banking was $23.1 million in 1999, a decrease of 20.1% from 1998 results of $28.9 million and an increase of 8.3% over 1997 results of $21.3 million. Return on average equity was 22.6% in 1999 compared to 31.5% in 1998 and 29.6% in 1997. The 1999 decline was the result of a rising interest rate environment which slowed production activity throughout the mortgage banking industry. 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Total originations:...................................... $5,876,750 $8,944,615 $5,397,338 Percent retail loans..................................... 37.4% 35.9% 36.6% Percent wholesale loans.................................. 57.1 59.7 57.2 Percent brokered......................................... 5.5 4.4 6.2 Percent refinances....................................... 28.6 49.5 22.5 As a result of rising interest rates, the mortgage banking line of business experienced a decline in 1999 loan originations as compared to 1998 when a record number of originations were made in a low interest rate environment. Loan originations in 1999 of $5.9 billion were down 34.3% from 1998 and up 8.9% from 1997. Income from mortgage loan originations totaled $46.3 million which was 21.9% lower than 1998 and 12.8% more than 1997. Refinances accounted for 28.6% of 1999 originations as compared to 49.5% in 1998 and 22.5% in 1997. Because certain fees are not collected for loan refinancings, loan origination fees did not decrease at the same rate as loan production in 1999. Gains from the sale of mortgage loans totaled $43.6 million in 1999, compared to $55.2 million in 1998 and $22.2 million in 1997. Lower loan production levels accounted for the 1999 decline. In 1997, the mortgage bank entered into the nonprime mortgage market which is composed of borrowers who do not qualify under the underwriting guidelines established by the government-sponsored secondary market agencies for conforming first mortgages. Total mortgage banking originations include $148.8 million, $173.5 million, and $66.1 million of nonprime loans in 1999, 1998, and 1997, respectively. These loans are sold on a non-recourse, service-released basis to private investors. 12 15 MORTGAGE SERVICING: SERVICING PORTFOLIO: 1999 1998 1997 ---- ---- ---- (PORTFOLIO IN BILLIONS) Beginning Portfolio......................................... $ 11.2 $ 10.7 $ 10.8 Add: Originated Servicing Rights............................... 2.3 3.2 2.0 Purchased Servicing Rights................................ 3.6 5.7 3.4 Deduct: Sale of Servicing Rights.................................. (4.7) (4.9) (3.9) Run-off*.................................................. (1.9) (3.5) (1.6) ------- ------- ------- Ending Portfolio............................................ $ 10.5 $ 11.2 $ 10.7 ======= ======= ======= Number of Loans............................................. 133,990 135,833 141,737 Average Loan Size........................................... $84,500 $82,900 $82,902 Percent GNMA................................................ 70% 65% 59% Percent FHLMC............................................... 4 5 11 Percent FNMA................................................ 8 13 19 Delinquency ratio........................................... 7.1% 5.0% 6.0% Capitalized servicing as a percentage of servicing portfolio................................................. 1.3% 1.0% 0.8% ------------------------- --> * 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 $10.5 billion at December 31, 1999, down 7.1% from the same date in 1998 and 2.5% from 1997. The mortgage bank has followed a strategy to manage the interest rate risk associated with the servicing portfolio by selling servicing rights on those loans that are most likely to refinance should the interest rates decline. 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: 1999 1998 1997 ---- ---- ---- Less than 7%................................................ 14.9% 15.1% 8.4% 7.00 -- 7.99%............................................... 53.3 52.7 42.5 8.00 -- 8.99%............................................... 29.9 27.6 42.6 9% or greater............................................... 1.9 4.6 6.5 ---- ---- ---- Total.................................................. 100% 100% 100% ==== ==== ==== Mortgage servicing assets are recorded at the lower of their cost or market value, and a valuation allowance is recorded for any impairment. At December 31, 1999, the market value of these assets was estimated to be $180.5 million, or $47.9 million greater than the carrying value on the balance sheet. LOAN ADMINISTRATION INCOME: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Servicing fees..................................... $54,247 $52,217 $50,194 Amortization and impairment of servicing assets.... 13,758 34,123 15,843 ------- ------- ------- Net loan administration income..................... $40,489 $18,094 $34,351 ======= ======= ======= 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. Servicing fee income increased 3.9% 13 16 from 1998 and 8.1% from 1997, reflecting the increase in the average size of the servicing portfolio throughout the year. The value of mortgage servicing assets must be amortized over their estimated life and adjusted for impairment which could result from interest rate changes. The amortization and impairment of servicing assets declined 59.7% from 1998 and 13.2% from 1997. The decline is the result of the rising interest rate environment during 1999 that slowed prepayments in underlying loans and reduced impairment levels in mortgage servicing assets. The 1999 improvement in mortgage servicing asset amortization and impairment was partially offset by corresponding losses on hedging activities. The mortgage bank used options on treasury futures to offset the interest rate risk associated with its mortgage servicing assets. By December 31, 1999, options on the mortgage bank's balance sheet had expired. In 1999, the mortgage bank recorded a $10.8 million market loss on options held during the year. This compares with a market gain of $4.3 million recorded in 1998. No gains or losses were recorded in 1997. The mortgage bank does not satisfy the criteria for "hedge accounting." As a result, options are accounted for as trading assets, and changes in fair value are adjusted through earnings as trading gains or losses. SALE OF MORTGAGE SERVICING: The mortgage banking business maintains the flexibility to either sell servicing 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 totaling $4.7 billion was sold in 1999 generating a $37.8 million pre-tax gain on those sales. This compares to servicing sales of $4.9 billion in 1998 that produced $43.3 million pre-tax gain and $3.9 billion in 1997 that produced a $32.6 million pre-tax gain. Had all servicing been retained, 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 1999 represented 79.9% of 1999 originations versus 1998 sales which were 54.6% of that year's originations and 1997 sales which were 71.8% 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 $21.7 million in 1999, compared to $26.2 million in 1998 and $17.6 million in 1997. The 1999 decline resulted from the decreased loan production during the year. OPERATING EXPENSES: 1999 1998 1997 ---- ---- ---- ($ IN THOUSANDS) Salaries and employee benefits.................. $ 88,473 $101,477 $ 71,389 Other expenses.................................. 56,442 57,715 39,978 -------- -------- -------- Total operating expenses........................ $144,915 $159,192 $111,367 ======== ======== ======== Number of employees at December 31,............. 1,492 1,752 1,411 Total operating expenses decreased 9.0% from 1998 and increased 30.1% from 1997. Salaries and employee benefits were down 12.8% from 1998 and up 23.9% from 1997. The decrease reflects the decreased production activities throughout 1999. 2000 OUTLOOK: The mortgage bank anticipates a decline in loan production throughout the mortgage industry in 2000. Interest rates are expected to remain stable, causing refinance activity to return to normal historic levels. 14 17 Competitive pricing pressures are expected to increase and significant growth is expected in the volume of Internet-originated loans. The mortgage bank's strategy for competing in this changing environment is comprised of three components. The first is to grow its loan production activities through the expansion of retail branches and increased nonprime production. This includes expansion to new markets that are thought to be underserved by the mortgage industry and that value the mortgage bank's service-oriented approach to lending. The second component is to improve profit margins as a result of an important process improvement initiative undertaken in 1999 for loan production activities. This initiative uses e-commerce to increase efficiency by allowing the mortgage bank to process, underwrite, and close loans in a highly automated environment. The final component is to manage servicing asset impairment risk by continuing with the strategy of selling servicing rights associated with those loans that are most likely to refinance in the event of a decline in interest rates. COMMERCIAL BANKING BUSINESS PROFILE: COMMERCIAL BANK SELECTED FINANCIAL DATA: 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS) SELECTED INCOME STATEMENT DATA: Interest income...................... $ 54,452 $ 46,056 $ 41,115 $ 35,645 $ 31,965 Interest expense..................... 23,525 20,957 19,120 15,908 14,048 Provision for loan losses............ 1,813 1,820 2,201 2,284 2,038 -------- -------- -------- -------- -------- Net interest income after provision for loan losses.................... 29,114 23,279 19,794 17,453 15,879 Non-interest income.................. 11,797 11,712 9,256 9,298 7,187 -------- -------- -------- -------- -------- Total net revenues................. 40,911 34,991 29,050 26,751 23,066 -------- -------- -------- -------- -------- Operating expense.................... 29,080 24,515 20,194 20,225 17,582 -------- -------- -------- -------- -------- Income before taxes.................. 11,831 10,476 8,856 6,526 5,484 Income taxes......................... 4,486 3,967 3,269 2,272 1,845 -------- -------- -------- -------- -------- Net income......................... $ 7,345 $ 6,509 $ 5,587 $ 4,254 $ 3,639 ======== ======== ======== ======== ======== SELECTED BALANCE SHEET DATA AT END OF PERIOD: Loans................................ $720,493 $514,950 $410,272 $336,580 $310,083 Allowance for loan losses............ 7,375 6,680 5,525 4,790 3,668 Total assets......................... 789,560 607,992 539,233 503,507 440,035 Deposits............................. 710,899 567,526 486,481 453,879 400,149 Shareholders' equity................. 63,678 46,990 38,390 33,967 28,722 DAILY AVERAGES: Assets............................... $682,632 $567,116 $515,666 $459,893 $405,249 Deposits............................. 619,308 514,694 463,851 413,935 358,343 Loans................................ 600,877 462,319 370,313 329,658 284,713 Allowance for loan losses............ 7,317 6,308 5,332 4,367 3,566 Shareholders' equity................. 52,867 42,026 36,232 31,863 27,661 Shareholders' equity to assets....... 7.74% 7.41% 7.03% 6.93% 6.83% OVERVIEW & STRATEGY: Commercial banking is conducted by Irwin Union Bank and Trust Company. In recent years, the commercial bank has implemented a growth plan that calls for expansion into new markets outside of its traditional markets in south-central Indiana using de novo offices staffed by senior commercial loan officers who have experience with other commercial banks. As a result, the commercial bank currently operates in 15 18 nine counties in Indiana as well as Kalamazoo and Grandville (Grand Rapids), Michigan; Brentwood (St. Louis), Missouri; and Carson City, Nevada. The commercial bank's strategy in these and other possible new markets is to position itself with local management and staff that can provide highly personalized, flexible service to commercial customers who have been negatively affected by bank consolidation. 1999 REVIEW: Commercial banking net income in 1999 totaled $7.3 million, up 12.9% from 1998 net income of $6.5 million and 31.5% from 1997 net income of $5.6 million. The return on average equity was 13.89% in 1999 as compared to 15.49% in 1998 and 15.42% in 1997. Results in 1999 reflect the continued growth and expansion efforts of the commercial bank into new markets. NET INTEREST REVENUE: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Net interest revenue on a taxable equivalent basis*......... $ 31,151 $ 25,367 $ 22,206 Average interest earning assets............................. 645,809 534,439 481,707 Net interest margin......................................... 4.82% 4.75% 4.61% ------------------------- --> * Reflects what net interest revenue would be if all interest income were subject to federal and state income taxes. Net interest revenue on a taxable equivalent basis increased 22.8% from 1998 and 40.3% from 1997 to a total of $31.2 million. Net interest revenue is the product of net interest margin and average earning assets. The 1999 improvement resulted from an increase in the commercial bank's loan portfolio as a result of its expansion efforts. Net interest margin was up for the year, coming in at 4.82% for 1999 compared to 4.75% in 1998 and 4.61% in 1997. This improvement resulted from a change in mix of the commercial bank's assets in 1999 to a lower percentage of investments and federal funds sold and a higher percentage of loans. NONINTEREST INCOME: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Trust fees.................................................. $ 2,257 $ 2,136 $2,178 Service charges on deposit accounts......................... 2,021 2,076 1,831 Insurance commissions, fees and premiums.................... 1,635 1,265 1,044 Gain from sale of loans..................................... 901 1,346 1,088 Loan servicing fees......................................... 1,458 1,745 972 Brokerage fees.............................................. 1,546 1,050 757 Other....................................................... 1,979 2,094 1,386 ------- ------- ------ Total noninterest income............................... $11,797 $11,712 $9,256 ======= ======= ====== Reflective of the growth at the commercial bank from expansion into new markets, noninterest income was up 0.7% from 1998 and 27.5% from 1997. OPERATING EXPENSES: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Salaries and employee benefits.............................. $16,881 $14,142 $11,333 Other expenses.............................................. 12,199 10,373 8,861 ------- ------- ------- Total operating expenses............................... $29,080 $24,515 $20,194 ======= ======= ======= Number of employees at December 31,......................... 395 353 339 16 19 Operating expenses increased 18.6% from 1998 and 44.0% from 1997. Costs associated with expanding new products and markets contributed to the increase. BALANCE SHEET: Total assets averaged $789.6 million in 1999, compared to $608.0 million in 1998 and $539.2 million in 1997. Average earning assets for the year were $645.8 million, up $111.4 million or 20.8% from 1998 and up $164.1 million or 34.1% from 1997. The most significant component of the 1999 increase was loans which were up $138.6 million on average in 1999 as a result of the commercial bank's expansion efforts into new markets. Average deposits were $619.3 million in 1999, 20.3% higher than 1998 and 33.5% higher than 1997. The commercial bank's risk-based assets ratio was 10.0% at December 31, 1999 compared to 10.1% at the end of 1998 and 10.3% at the end of 1997. Banks having a ratio of at least 10% are considered to be well capitalized by bank regulatory authorities. In 1999, Irwin Financial Corporation commenced offerings under its Preferred Share Program targeted to investors in new commercial banking markets who can assist with deposit growth. Approximately 95 thousand shares under this plan were issued in the first quarter of 2000. More information on this subject is contained in the section on Capital. CREDIT QUALITY: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) At December 31, Nonperforming loans....................................... $1,168 $1,858 $2,856 Other real estate owned................................... -- 48 413 ------ ------ ------ Total nonperforming assets................................ $1,168 $1,906 $3,269 ====== ====== ====== Nonperforming assets as a percentage of total assets...... 0.15% 0.31% 0.60% ====== ====== ====== Allowance for loan losses................................. $7,375 $6,680 $5,525 ====== ====== ====== Allowance for loan losses as a percentage of loans........ 1.02% 1.30% 1.35% ====== ====== ====== For the Year Ended December 31, Provision for loan losses................................. $1,813 $1,820 $2,201 ====== ====== ====== Net charge-offs........................................... $ 963 $ 592 $1,277 ====== ====== ====== 2000 OUTLOOK: The commercial bank expects significant consolidation to continue in the banking and financial services industry. The commercial bank plans to capitalize on the opportunities brought about by consolidation by continuing its growth strategy for small business lending in new markets throughout the United States. The focus will be to provide personalized lending services to small businesses in cities affected by consolidation, using experienced lenders with a strong presence in those cities. In addition to its lending expansion, the commercial bank looks to develop further its insurance and investment operations in order to provide a full range of financial services to its customers. 17 20 HOME EQUITY LENDING BUSINESS PROFILE: HOME EQUITY LENDING SELECTED FINANCIAL DATA: 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS) SELECTED INCOME STATEMENT DATA: Net interest income...................... $ 18,852 $ 5,495 $ 7,129 $ 7,755 $ 1,828 Provision for loan losses................ -- (513) (1,404) (983) (363) Gain on sale of loans.................... 23,998 18,610 15,908 7,798 2,985 Loan servicing fees...................... 4,907 3,323 2,145 710 13 Amortization and impairment of servicing assets................................ (1,445) (842) (334) -- -- Trading gains (losses)................... 2,512 (2,952) (1,961) -- -- Other income............................. 1,742 820 294 140 10 -------- -------- -------- -------- ------- Total net revenues.................... 50,566 23,941 21,777 15,420 4,473 Operating expenses....................... 35,557 30,609 20,067 16,236 7,693 -------- -------- -------- -------- ------- Income before taxes...................... 15,009 (6,668) 1,710 (816) (3,220) Income taxes............................. 2,403 -- -- -- -- -------- -------- -------- -------- ------- Net Income............................ $ 12,606 $ (6,668) $ 1,710 $ (816) $(3,220) ======== ======== ======== ======== ======= SELECTED BALANCE SHEET DATA AT END OF PERIOD: Home equity loans, net of loan loss reserve............................... $ 1,904 $ 7,832 $111,216 $117,588 $36,225 Home equity loans held for sale.......... 231,382 242,702 -- -- -- Interest-only strips..................... 57,833 32,321 22,134 12,661 4,446 Total assets............................. 339,640 311,974 165,242 145,113 50,845 Short-term debt.......................... 260,184 226,998 146,219 129,627 24,981 Shareholders' equity..................... 58,733 40,272 10,936 13,221 5,538 SELECTED OPERATING DATA: Loan Volume: Lines of credit.......................... $ 93,185 $ 98,855 $115,274 $ 80,724 $87,420 Loans.................................... 346,322 290,818 99,244 88,396 -- Servicing portfolio: Balance at December 31,.................. 842,403 581,241 358,166 230,450 86,691 Weighted average coupon rate: Lines of credit....................... 13.48% 11.89% 12.96% 12.80% 13.61% Loans................................. 13.85% 11.86% 13.97% 14.08% -- OVERVIEW & STRATEGY: Irwin Home Equity operates from offices located in San Ramon, California and was incorporated in late 1994. The company markets home equity loans through direct mail, telemarketing, and Internet-based solicitations. The business has the option to either hold the loans in portfolio or securitize and service them. If the loans are held in portfolio, many non production costs incurred during the period to produce the loans are expensed immediately, whereas the revenue from the loans accrues over the lives of the loans. Alternatively, if the loans are securitized and sold on the secondary market to investors, a portion of the present value of the future net revenues from the loans will be recognized in the current period, helping to offset the expenses incurred in producing the loans. 18 21 1999 REVIEW: The home equity lending business recorded net income of $12.6 million in 1999 compared with a pre-tax loss of $6.7 million in 1998 and pre-tax income of $1.7 million in 1997. Results in 1999 are net of $2.4 million of income taxes. It was not until late in 1999 that the net operating losses carried forward by the business were fully used and the business began recording income tax expense. Until that point, income taxes for this business were recorded at the parent company. The improvement in 1999 earnings was the result of higher interest rates, improved competitive environments, and efforts made by the business to shift a substantial portion of its portfolio to product with less prepayment sensitivity. LOAN ORIGINATIONS AND SECURITIZATIONS: During 1999, the home equity lending business originated and acquired $439.5 million of home equity loans, up 12.8% from 1998 volume of $389.7 million and 104.9% from 1997 volume of $214.5 million. The home equity lending business had $233.3 million of loans and loans held for sale at December 31, 1999. This compares to $250.5 million at the end of 1998 and $111.2 million at the end of 1997. The business securitized $420.1 million of loans in 1999 which generated a pre-tax gain of $24.0 million. This compares to a $18.6 million gain recognized in 1998 on the sale of $294.3 million of loans, and a $15.9 million gain recognized in 1997 on the sale of $210.1 million of loans. SERVICING PORTFOLIO: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Balance at December 31,..................................... $842,403 $581,241 $358,166 Delinquency ratio........................................... 1.9% 1.3% 1.5% The home equity lending business continues to service loans it has securitized. The servicing portfolio, which includes loans held on the balance sheet as well as securitized loans, increased 44.9% from 1998 and 135.2% from 1997. The business earns a servicing fee equal to one percent of the outstanding principal balance of the securitized loans. Servicing fee income increased to $4.9 million in 1999 from $3.3 million in 1998 and $2.1 million in 1997. The home equity lending business recognizes on its balance sheet a servicing asset equal to the discounted cash flows of estimated future servicing income and expense. At December 31, 1999, net servicing assets totaled $4.5 million, compared with $3.1 million at the end of 1998 and $1.3 million at the end of 1997. Servicing asset amortization and impairment expense totaled $1.4 million in 1999, up from $0.8 million in 1998 and $0.3 million in 1997. When the home equity lending business securitizes loans, the business recognizes an interest-only strip equal to the discounted future cash flows of the interest paid by borrowers less servicing fees, expected losses, and interest paid to investors. Interest-only strips had a balance of $57.8 million at December 31, 1999, compared with $32.3 million at the same date in 1998 and $22.1 million in 1997. Interest-only strips are recorded on the balance sheet as trading assets and are carried at their market values. Market values are determined using assumptions about the duration and performance of the securitized loans and are calculated on the basis of the expected timing of cash receipts by the company. Included in these assumptions are estimates of the lives of the loans, expected losses, and appropriate discount rates. Management continually evaluates these assumptions to determine the proper carrying values of these items on the balance sheet. Adjustments to carrying values are recorded as trading gains or losses. During 1999, the home equity lending business recorded a trading gain of $2.5 million. This compares with trading losses of $3.0 million recorded in 1998 and $2.0 million recorded in 1997. The 1999 improvement was the result of the rising interest rate environment combined with efforts made to shift a substantial portion of the home equity loan portfolio into product with less prepayment sensitivity. 19 22 At the end of 1999 the company owned rights to excess interest in eight securitizations. All interest-only strips have been computed by discounting expected cash flows using a discount rate of 15%. The other assumptions used in the calculation of carrying value for these interest-only strips at December 31, 1999, were as follows: PREPAYMENT REMAINING CONSTANT EXPECTED PENALTY AVERAGE PREPAYMENT ANNUAL POOL PRODUCT TYPE FEATURES LIFE (YEARS) RATE LOSSES ---- ------------ ---------- ------------ ---------- -------- 1995-2 Home Equity Lines of Credit................ No 1.40 26% 2.8% 1996-1 Home Equity Lines of Credit................ No 1.57 39 0.65 No 1.17 38 0.65 Home Equity Loans.......................... 1997-1 Home Equity Lines of Credit................ No 2.03 38 0.65 No 1.61 37 0.65 Home Equity Loans.......................... 1997-2 Home Equity Lines of Credit................ No 2.38 34 0.65 No 1.87 36 0.65 Home Equity Loans.......................... 1998-1 First Mortgage Loans....................... Mixed 3.06 10 0.50 Mixed 3.06 31 0.50 Home Equity Loans.......................... Mixed 3.69 23 0.50 Home Equity Lines of Credit................ Mixed 3.69 22 2.00 125 LTV Home Equity Lines of Credit........ 1999-1 First Mortgage Loans....................... Yes 4.71 8 0.25 No 4.71 16 0.25 First Mortgage Loans....................... Yes 4.71 21 0.50 Home Equity Lines of Credit................ No 4.71 40 0.50 Home Equity Lines of Credit................ 1999-2 First Mortgage Loans....................... Yes 3.68 8 0.25 No 3.68 16 0.25 First Mortgage Loans....................... Yes 3.68 20 0.50 Home Equity Loans.......................... No 3.68 40 0.50 Home Equity Loans.......................... Yes 3.68 15 2.00 125 LTV Home Equity Loans.................. No 3.68 25 2.00 125 LTV Home Equity Loans.................. 1999-3 First Mortgage Loans....................... Yes 3.96 8 0.25 No 3.96 16 0.25 First Mortgage Loans....................... Yes 3.96 18 0.50 Home Equity Loans.......................... No 3.96 35 0.50 Home Equity Loans.......................... Yes 3.96 14 2.00 125 LTV Home Equity Loans.................. No 3.96 23 2.00 125 LTV Home Equity Loans.................. Yes 3.96 14 2.00 125 LTV Home Equity Lines of Credit........ No 3.96 23 2.00 125 LTV Home Equity Lines of Credit........ No 3.96 23 3.00 Home Equity Loans -- Immediate Credit...... No 3.96 20 3.00 Home Equity Lines of Credit -- Immediate Credit................................... NET INTEREST INCOME: Net interest income was $18.9 million in 1999, compared to $5.5 million in 1998 and $7.1 million in 1997. Included in interest income is income earned on the interest-only strip, net of amortization expense. This amounted to $6.5 million in 1999, compared to $0.4 million in 1998 and $1.8 million in 1997. 20 23 OPERATING EXPENSES: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Salaries and employee benefits.............................. $21,383 $15,480 $11,175 Marketing and development................................... 3,410 5,314 2,731 Other....................................................... 10,764 9,815 6,161 ------- ------- ------- Total operating expenses............................... $35,557 $30,609 $20,067 ======= ======= ======= Number of employees at December 31,......................... 372 266 189 Operating expenses increased 16.2% from 1998 and 77.2% from 1997, reflecting the growth in the company's managed portfolio and growth in production. 2000 OUTLOOK: The competitive environment became more favorable during 1999 with the exit of many home equity lenders who did not survive the competitive pressures and significant refinance activity of 1998. Management anticipates that the competitive environment will remain favorable, and consumer demand for home equity products is expected to remain high in 2000, allowing the home equity business to continue its expansion of operations. The home equity business anticipates increasing its loan production volume in 2000, particularly its high loan-to-value ratio loans. Moreover, distribution channels will be expanded by the addition of brokers, correspondents and Internet sites. The home equity business will also continue an initiative begun in 1999 of purchasing creditworthy, profitable loans produced by other lenders. EQUIPMENT LEASING During 1999, the Corporation also formed a new leasing subsidiary, Irwin Business Finance. The company began organizing in the second quarter of 1999 and began lease originations in early 2000. During 1999, the leasing line of business incurred a pre-tax loss of $0.84 million. 2000 OUTLOOK: The leasing industry experienced strong growth in new business volume in 1998 and 1999, and 2000 is expected to continue this trend. However, because of aggressive competition, margins in the industry have been compressed as lessors have been slow to increase rates offered to customers despite the rising interest rate environment. Irwin Business Finance has developed a strategy to cultivate relationships with brokers as well as direct relationships with vendors to originate the majority of its lease production. The business expects to differentiate itself from its competition by providing a high level of customer service while providing new and improved ways of doing business. Additionally, the business will explore opportunities for the development of direct e-commerce capability. VENTURE CAPITAL During 1999, the Corporation formed Irwin Ventures, Inc., a venture capital company which makes minority investments in early-stage financial services-related businesses. Its primary focus is on businesses which plan to use the Internet, or other forms of technology, as a key component of their competitive strategy. The company seeks to make investments in opportunities where the financial services experience and expertise of Irwin Ventures' management team can add superior value to innovative companies. The Corporation's Board of Directors has approved an allocation of up to 10% of the Corporation's capital base to support this subsidiary. During 1999, the venture capital line of business recorded net income of $0.7 million which resulted principally from valuation increases in its sole portfolio investment. 21 24 Venture capital investments held by Irwin Ventures, Inc. are carried at market value with changes in market value recognized in other income. The investment committee of Irwin Ventures determines the value of the investments at the end of each reporting period and the values are adjusted based upon review of the investee's financial results, condition, and prospectus. Changes in estimated market values can also be made when an event such as a new funding round from other private equity investors would cause a change in estimated market value. In the future, should the company have investments in publicly-traded securities, it would look to the traded market value of the investments as the basis of its mark-to-market. At December 31, 1999, the business had an investment in a single company as follows: INVESTMENT CARRYING COMPANY PUBLIC/PRIVATE AT COST VALUE ------- -------------- ---------- -------- LiveCapital.com..................................... Private $1.76 million $3.07 million 2000 OUTLOOK: Numerous opportunities have arisen in the past few years for technology-focused private equity investment in the financial service industry. Irwin Ventures believes this will continue in 2000 as improvements in technology and entreprenuerial innovation continue to change the manner in which financial services are delivered to businesses and consumers. Irwin Ventures anticipates that its organizational efforts in 1999 will allow it to identify and fund attractive opportunities in 2000 and beyond. In early 2000, Irwin Ventures increased its investment in LiveCapital.com by $0.2 million and increased the carrying value of the entire investment by approximately $4.5 million after-tax, reflecting the valuation used in the fourth round of funding and the introduction into the investment of three new private equity investors. In addition, during the first quarter, the company made a $1.2 million first-round investment in Bremer Associates. Bremer produces enterprise application integration software, a subset of the general category of software known as middleware and which provides a seamless integration among mainframe, client/server, and web-based applications. It has had successful implementations for the federal government and for a private sector financial services company. Irwin Ventures was the only private equity investor in the first round of funding. OTHER (INCLUDES PARENT, MEDICAL EQUIPMENT LEASING, AND CONSOLIDATING ENTRIES): Results at the Corporation's other businesses totaled a net loss of $9.7 million in 1999, compared with net income of $1.8 million in 1998 and a net loss of $4.2 million in 1997. The components of these other results are as follows: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Parent Company operating results............................ $(6,269) $(3,722) $(3,438) Income tax benefit (expense) generated at home equity line of business............................................... (3,601) 2,667 (684) Income tax benefit generated at leasing line of business.... 335 NA NA ------- ------- ------- Total parent company................................. (9,535) (1,055) (4,122) Medical equipment leasing line of business.................. (257) 2,898 151 Other, net.................................................. 121 (34) (182) ------- ------- ------- $(9,671) $ 1,809 $(4,153) ======= ======= ======= Parent company operating losses were higher in 1999 as a result of increased net interest expense for funding to support the growth of its subsidiaries. Tax benefits resulting from the operating losses generated by the home equity line of business were recorded by the parent company until late 1999 when all of the losses carried forward had been used. Each subsidiary pays taxes to the parent company at the statutory rate. Subsidiaries also pay fees to the parent company to cover direct and indirect services. In addition, services are provided from one subsidiary to 22 25 another. Intercompany income and expenses are calculated on an arm's-length, external market basis and are eliminated in consolidation. CONSOLIDATED INCOME STATEMENT ANALYSIS Pre-tax income for 1999 totaled $52.6 million, up 3.5% from 1998 and 24.8% from 1997. The effective income tax rate was 37% in 1999, 40.0% in 1998, and 42.0% in 1997. The lower rate in 1999 was the result of a change in the Indiana Financial Institutions Tax which took effect in 1999. The change in tax law caused the Corporation's current year income taxes to decline and also resulted in a reduction in the Corporation's deferred Indiana income tax liability. Net interest revenue for 1999 totaled $67.4 million, up 16.4% from 1998 and 38.6% from 1997. The net interest margin was 5.36% in 1999 compared to 4.41% in 1998 and 4.95% in 1997. These improvements were primarily due to a shift in composition of mortgage loans held for sale from a concentration in first mortgage loans in 1997 and 1998 to a greater share of higher-yielding second mortgage loans in 1999. The following table sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities on a fully taxable equivalent basis. 1999 OVER 1998 1998 OVER 1997 ------------------------------ ----------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ---- ----- ------ ---- ----- (IN THOUSANDS) Interest Income: Loans and leases................... $ 5,135 $(8,509) $(3,374) $ 1,562 $(5,753) $(4,191) Mortgage loans held for sale....... (15,716) 17,238 1,522 26,051 4,417 30,468 Taxable investment securities...... (277) 102 (175) (731) (577) (1,308) Tax-exempt securities.............. (32) (11) (43) 96 (81) 15 Trading assets..................... 312 5,155 5,467 474 (1,509) (1,035) Interest bearing deposits with financial institutions.......... 314 (250) 64 (84) (210) (294) Federal funds sold................. (56) (23) (79) 47 10 57 -------- ------- ------- ------- ------- ------- Total......................... (10,320) 13,702 3,382 27,415 (3,703) 23,712 -------- ------- ------- ------- ------- ------- Interest Expense: Money market checking.............. 320 (735) (415) 199 4 203 Money market savings............... (13) (19) (32) (82) (2) (84) Regular savings.................... (282) (202) (484) (265) (124) (389) Time deposits...................... 4,627 (1,845) 2,782 3,856 (178) 3,678 Short-term borrowings.............. (10,013) 3,332 (6,681) 13,280 (1,963) 11,317 Long-term debt..................... 269 138 407 (35) 17 (18) -------- ------- ------- ------- ------- ------- Total......................... (5,092) 669 (4,423) 16,953 (2,246) 14,707 -------- ------- ------- ------- ------- ------- Net Interest Revenue............... $ (5,228) $13,033 $ 7,805 $10,462 $(1,457) $ 9,005 ======== ======= ======= ======= ======= ======= The consolidated provision for loan and lease losses for 1999 was $4.4 million, down 25.9% from 1998 and 28.8% from 1997. More information on this subject is contained in the section on credit risk. Other income decreased 6.8% in 1999 to $204.1 million. This compares to $218.9 million in 1998 and $156.8 million in 1997. Improvements at the commercial banking and home equity lines of business were offset by declines at the mortgage bank. Other expenses in 1999 totaled $214.1 million, down 3.2% from 1998 and up 34.8% from 1997. The 1999 decrease in consolidated other expense of $7.1 million was mostly due to lower loan production costs at the mortgage bank, mitigated by operating expenses associated with higher commercial and home equity loan production. 23 26 CONSOLIDATED BALANCE SHEET ANALYSIS Total assets at year-end 1999 were $1.68 billion, down 13.6% from 1998 and up 12.3% from 1997. However, changes in the average balance sheet are a more accurate reflection of the actual changes in the level of activity on the balance sheet. Average assets were $1.65 billion in 1999, relatively unchanged from 1998 and up 30.8% from 1997. Although loans held for sale were down as a result of the decreased production activities at the Corporation's mortgage banking line of business, it was partially offset by the increased loan production at the commercial banking and home equity lines of business. The Corporation's commercial loans are extended primarily to midwest regional businesses. The Corporation also extends credit to consumers through installment loans and revolving credit arrangements. The majority of the remaining portfolio consists of residential mortgage loans (1-4 family dwellings) and mortgage loans on commercial property. Loans by major category at the end of the last five years were as follows: AT DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS) Commercial, financial and agricultural.... $443,985 $278,834 $212,095 $179,650 $150,312 Real estate construction.................. 121,803 97,253 73,279 48,991 36,126 Real estate mortgage...................... 115,265 123,980 222,818 214,696 108,351 Consumer.................................. 48,936 51,730 39,985 38,371 67,756 Direct lease financing.................... 3,890 6,375 78,079 62,372 60,979 Unearned income........................... (455) (1,181) (15,163) (11,030) (10,999) -------- -------- -------- -------- -------- Total................................ $733,424 $556,991 $611,093 $533,050 $412,525 ======== ======== ======== ======== ======== MATURITY DISTRIBUTION OF LOANS: AT DECEMBER 31, 1999 ------------------------------------------------ AFTER ONE BUT WITHIN WITHIN AFTER ONE YEAR FIVE YEARS FIVE YEARS TOTAL -------- ---------- ---------- ----- (IN THOUSANDS) Commercial, financial and agricultural.............. $105,045 $117,297 $221,643 $443,985 Real estate construction............................ 77,502 17,797 26,504 121,803 Real estate mortgage................................ 11,341 20,732 83,192 115,265 Consumer loans...................................... 4,141 27,383 17,412 48,936 Direct lease financing.............................. 2,777 658 -- 3,435 -------- -------- -------- -------- Total.......................................... $733,424 ======== Loans due after one year with: Fixed interest rates.............................. $218,010 Variable interest rates........................... 314,608 -------- Total.......................................... $532,618 ======== On average, investment securities decreased $4.2 million in 1999 to $44.1 million. The decline resulted from a change at the commercial bank to shift assets from investment securities to commercial loans. The carrying value of investments at December 31, 1999 includes $117 thousand of unrealized losses on available-for-sale securities. 24 27 MATURITY DISTRIBUTION OF INVESTMENT SECURITIES: AT DECEMBER 31, 1999 ------------------------------------------------- AFTER ONE AFTER FIVE BUT BUT WITHIN WITHIN WITHIN AFTER ONE YEAR FIVE YEARS TEN YEARS TEN YEARS -------- ---------- ---------- --------- (IN THOUSANDS) U.S. Treasury and government obligations.............. $ -- $7,664 $ -- $18,508 Obligations of states and political subdivisions...... 100 1,022 1,060 2,524 Mortgage-backed securities............................ -- 276 3,501 2,274 Other................................................. 579 -- -- -- ---- ------ ------ ------- Total............................................ $679 $8,962 $4,561 $23,306 ==== ====== ====== ======= Weighted Average Yield Held-to-maturity.................................... 6.65% 6.52% 7.08% 7.81% Available-for-sale.................................. 5.21% 6.29% 6.75% 6.83% Average yield represents the weighted average yield to maturity. The yield on state and municipal obligations has been calculated on a fully taxable equivalent basis, assuming a 35% tax rate. Deposits averaged $944.6 million during 1999, compared to $878.6 million in 1998 and $691.8 million in 1997. Demand deposits were down 6.2% on average, or $23.6 million from 1998. A significant portion of demand deposits is related to deposits at Irwin Union Bank which are associated with escrow accounts held on loans in the servicing portfolio of Irwin Mortgage. These escrow accounts averaged $283.9 million in 1999 and $342.2 million in 1998. Maturities of certificates of deposit of $100 thousand or more are set forth in the following table: AT DECEMBER 31, ------------------------------- 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Under 3 months.............................................. $ 92,965 $ 81,850 $60,379 3 to 6 months............................................... 28,387 17,107 10,123 6 to 12 months.............................................. 40,292 17,807 10,115 after 12 months............................................. 78,872 25,207 5,411 -------- -------- ------- Total.................................................. $240,516 $141,971 $86,028 ======== ======== ======= Short-term borrowings averaged $406.5 million in 1999, compared to $568.8 million in 1998 and $365.0 million in 1997. The decrease in 1999 is due to the decrease in mortgage loan closings in 1999. 25 28 The following table shows the distribution of the Corporation's short-term borrowings and the weighted average rates at the end of each of the last three years. Also provided are the maximum amount of borrowings and the average amounts of borrowings as well as weighted average interest rates for the last three years: REPURCHASE AGREEMENTS & DRAFTS PAYABLE FEDERAL HOME RELATED TO LOAN BANK LINES OF MORTGAGE COMMERCIAL BORROWINGS & CREDIT AND LOAN CLOSINGS PAPER FEDERAL FUNDS OTHER -------------- ---------- ------------- ---------- (IN THOUSANDS) Year Ended December 31: 1999........................................ $ 46,796 $21,894 $173,000 $231,413 1998........................................ 172,126 26,617 266,000 180,118 1997........................................ 240,659 16,375 142,650 112,591 Weighted average interest rates at year-end: 1999........................................ 5.35% 6.00% 5.46% 6.02% 1998........................................ 5.43 5.78 4.93 6.01 1997........................................ 5.88 6.00 6.18 6.87 Maximum amount outstanding at any month's end: 1999........................................ $162,251 $28,215 $249,500 $308,422 1998........................................ 301,849 29,691 316,200 249,519 1997........................................ 274,363 16,375 142,650 151,111 Average amount outstanding during the year: 1999........................................ $105,591 $24,810 $108,422 $167,665 1998........................................ 218,342 26,166 115,479 208,785 1997........................................ 237,953 12,738 48,823 65,490 Weighted average interest rate during the year: 1999........................................ 5.40% 5.82% 5.40% 5.45% 1998........................................ 5.84 6.05 5.63 6.20 1997........................................ 5.82 6.01 6.00 6.65 In 1999, the Corporation issued $30 million of subordinated debt securities which bear interest at a rate of 7.58% and mature in 2014. CAPITAL Shareholders' equity averaged $154.1 million in 1999, up 15.4% from 1998 and 24.8% from 1997. Year-end shareholders' equity of $159.3 million represented book value per share of $7.55, compared to $6.70 and $5.82 at December 31, 1998 and 1997, respectively. The Corporation paid an aggregate of $4.3 million in dividends on the Corporation's common stock in 1999, compared to $3.5 million in 1998 and $3.1 million in 1997. Prior to the adoption of a new mortgage banking accounting standard in the second quarter of 1995, mortgage banking accounting did not allow the full value of mortgage servicing rights to be reflected on the balance sheet. Since a significant portion of the Corporation's mortgage servicing portfolio was generated prior to the adoption of the new accounting standard, it represents substantial economic value which is not recorded on the balance sheet. Management estimated this value to be approximately $29.0 million after-tax or $1.37 per share at December 31, 1999. This estimate was based on the market value of servicing assets related to loans with similar interest rates and servicing fees. With the implementation of the new accounting standard in 1995, this off-balance sheet value will decline over future years and eventually be reduced to zero as the underlying loans pay off, servicing fees are collected, and the income from servicing the loans is fully accreted into earnings. 26 29 CAPITAL 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Tier 1 capital........................................... $ 207,627 $ 191,806 $ 169,366 Tier 2 capital........................................... 38,556 11,505 16,170 ---------- ---------- ---------- Total risk-based capital....................... 246,183 203,311 185,536 Risk weighted assets..................................... 1,823,633 1,649,227 1,249,385 Risk-based ratios: Tier 1 capital......................................... 11.39% 11.63% 13.56% Total capital.......................................... 13.50 12.25 14.85 Tier 1 leverage ratio.................................... 12.77 10.51 12.06 Ending shareholders' equity to assets.................... 9.48 7.46 8.55 Average shareholders' equity to assets................... 9.33 8.09 9.78 Capital is a major focus of regulatory attention, with both book and risk-based capital standards used as capital adequacy measures. Unless an institution has adequate capital in the opinion of the regulators, they may withhold approval for new activities or force additions to capital. Therefore, the Corporation considers both the regulators' viewpoint and its own analysis of the capital structure and leverage amounts that are consistent with underlying business risks. At year-end 1999, the Corporation's total risk-adjusted capital ratio was 13.5% compared to 10.0% which is required to be considered well capitalized by the regulators. The Corporation's ending equity to assets ratio for 1999 was 9.48%. However, as previously discussed, temporary conditions that existed at year-end make the average balance sheet ratio a more accurate measure of capital. The Corporation's average equity to assets for 1999 was 9.33%. In July 1999, the Corporation raised $30 million of 7.58%, 15-year subordinated debt which is callable in 10 years at par, to strengthen and add flexibility in the management of its capital base. The debt was privately placed. These funds qualify as Tier 2 capital. The securities are not convertible into common stock of the Corporation. To assist Irwin Union Bank in generating deposits in new markets, Irwin Financial Corporation initiated a program in 1999 to issue Irwin Financial non-coupon, convertible preferred shares to certain qualified investors thought to be in a position to support deposit growth. Under the program, each preferred share is issued for cash at approximately the market price of one common share. A preferred share automatically converts into one common share at a determined future date. If a banking branch reaches a specified level of deposits prior to the conversion date, the number of common shares into which a preferred share converts is increased by as much as 25%, depending upon the date on which the deposit level was attained. A maximum of approximately 400,000 shares of preferred stock are issuable under the program. Offerings for a portion of these shares are expected to be completed in the first quarter of 2000. In January 1997, the Corporation issued $50 million of 9.25% trust preferred securities through a trust created and controlled by the Corporation. The securities have an initial maturity of 30 years with a 19-year extension option which the Corporation can exercise at any point during the first 30 years. The securities are callable at par after five years, or immediately, in the event of an adverse tax development affecting the Corporation's classification of the securities for federal income tax purposes. The securities are not convertible into common stock of the Corporation. In 1999, the Corporation repurchased approximately 800,000 common shares. Over the past three years repurchases of $46 million of common stock were made in an effort to restructure capital to reach a more optimal mix between common equity and less expensive, hybrid forms of capital. 27 30 RISK MANAGEMENT As a financial intermediary, Irwin Financial Corporation is engaged in businesses which involve the assumption of financial risks including: - Credit risk - Liquidity risk - Interest rate risk Each line of business that assumes financial risk uses a formal process to manage this risk. In all cases, the objectives are to ensure that risk is contained within prudent levels and that we are adequately compensated for the level of risk assumed. The Chairman, the President, and the Chief Financial Officer of the parent company participate in each subsidiary's risk management process. CREDIT RISK The assumption of credit risk is a key source of earnings for the commercial banking and home equity lending lines of business. In addition, the mortgage banking business assumes some credit risk despite the fact that its mortgages are typically insured. The credit risk in the loan portfolios of the commercial bank and the home equity lending business have the most potential to have a significant effect on consolidated financial performance. The commercial bank and home equity lending business manage credit risk through the use of lending policies, credit analysis and approval procedures, periodic loan reviews, and personal contact with borrowers. Loans over a certain size are reviewed by a loan committee prior to approval. An allowance for loan losses is established as an estimate of the probable credit losses on the loans held by the Corporation. A specific allowance is determined by evaluating those loans which are either substandard or have the potential to become substandard. In general, commercial loans, mortgage loans, and leases are evaluated individually. Consumer loans, including home equity loans, are generally evaluated as a group. A specific allowance is set at a level which management considers sufficient to cover probable losses on these loans. A general allowance is determined by analyzing historical loss experience by loan type and then adjusting these loss factors for current conditions not reflected in prior experience. The allowance for loan losses is an estimate which is based on management's judgement combined with a quantitative process of evaluation and analysis. Loans and leases that are determined by management to be uncollectible are charged against the allowance. The allowance is increased by provisions against income and recoveries of loans and leases previously charged off. The table on page 29 analyzes the consolidated allowance for loan and lease losses over the past five years. Net charge-offs in 1999 were $1.7 million, down 11.1% from 1998, and 33.7% from 1997. Net charge-offs to average loans and leases was 0.27% compared to 0.33% in 1998 and 0.46% in 1997. At year-end, the allowance for loan and lease losses was 1.17% of outstanding loans and leases, compared to 1.78% in 1998 and 1.44% in 1997. Total nonperforming loans and leases at year-end were $4.3 million, compared to $11.7 million at the end of 1998 and $7.7 million at the end of 1997. Nonperforming loans and leases as a percent of total loans and leases were 0.59% at year-end 1999 compared to 2.11% in 1998 and 1.26% in 1997. The 1999 decline occurred primarily at the Corporation's mortgage bank in connection with a change in the classification of nonperforming loans to the "loans held for sale" category to more accurately reflect management's intent with respect to the ultimate disposition of these assets. These loans are carried at the lower of their cost or market value. Any impairment provision is recorded through the markdown of the loans to their market value. Other real estate owned totaled $3.8 million at December 31, 1999, up from $3.5 million in 1998 and $1.8 in 1997. Total nonperforming assets were $8.1 million, or 0.48% of total assets at December 31, 1999, as compared to $15.4 million, or 0.78%, at year-end 1998 and $9.5 million, or 0.64% at the end of 1997. 28 31 ANALYSIS OF ALLOWANCE FOR LOAN AND LEASE LOSSES: 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS) Loans and leases outstanding at end of period, net of unearned income.......... $733,424 $556,991 $611,093 $533,050 $412,525 ======== ======== ======== ======== ======== Average loans and leases for the period, net of unearned income.................. $642,435 $585,025 $569,325 $496,729 $369,220 ======== ======== ======== ======== ======== Allowance for possible loan and lease losses: Balance beginning of period............... $ 9,888 $ 8,812 $ 6,875 $ 5,033 $ 4,174 Charge-offs: Commercial, financial and agricultural loans................................ 646 246 800 495 845 Real estate mortgage loans.............. -- 232 356 37 2 Consumer loans.......................... 813 761 734 959 953 Lease financing......................... 772 1,263 1,255 883 690 -------- -------- -------- -------- -------- Total charge-offs.................... 2,231 2,502 3,145 2,374 2,490 -------- -------- -------- -------- -------- Recoveries: Commercial, financial and agricultural loans................................ 32 14 32 133 2 Real estate mortgage loans.............. -- -- 1 -- -- Consumer loans.......................... 307 362 246 214 197 Lease financing......................... 164 183 259 246 191 -------- -------- -------- -------- -------- Total recoveries..................... 503 559 538 593 390 -------- -------- -------- -------- -------- Net charge-offs........................... (1,728) (1,943) (2,607) (1,781) (2,100) Reduction due to sale of loans............ (3,126) (2,976) (1,694) (930) (239) Reclassification of loans to loans held for sale................................ (922) -- -- -- -- Provision charged to expense.............. 4,443 5,995 6,238 4,553 3,198 -------- -------- -------- -------- -------- Balance end of period..................... $ 8,555 $ 9,888 $ 8,812 $ 6,875 $ 5,033 ======== ======== ======== ======== ======== Allowance for possible loan and lease losses: By category of loans and leases: Commercial, financial and agricultural loans................................... $ 5,634 $ 4,240 $ 5,118 $ 3,676 $ 2,349 Real estate mortgage loans................ 1,194 3,299 2,170 281 413 Consumer loans............................ 1,270 1,747 446 1,974 1,420 Lease financing........................... 457 602 1,078 944 851 -------- -------- -------- -------- -------- Totals............................... $ 8,555 $ 9,888 $ 8,812 $ 6,875 $ 5,033 ======== ======== ======== ======== ======== Ratios: Net charge-offs to average loans and leases.................................. 0.27% 0.33% 0.46% 0.36% 0.57% Allowance for possible loan losses to average loans and leases................ 1.33% 1.69% 1.55% 1.38% 1.36% Allowance for possible loan losses to loans and leases outstanding............ 1.17% 1.78% 1.44% 1.29% 1.22% 29 32 NONPERFORMING ASSETS: 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS) Accruing loans past due 90 days or more: Commercial, financial, and agricultural loans.... $ 58 $ 252 $ 382 $ 256 $ 418 Real estate mortgage loans....................... -- 291 534 234 -- Consumer loans................................... 89 89 86 205 202 ------ ------- ------ ------ ------ 147 632 1,002 695 620 ------ ------- ------ ------ ------ Nonaccrual loans and leases: Commercial, financial and agricultural loans..... 748 1,052 777 2,739 670 Real estate mortgage loans....................... 3,049 9,449 5,333 2,481 848 Consumer loans................................... 273 174 63 -- -- Lease financing.................................. 88 426 506 1,261 415 ------ ------- ------ ------ ------ 4,158 11,101 6,679 6,481 1,933 ------ ------- ------ ------ ------ Total nonperforming loans and leases.......... 4,305 11,733 7,681 7,176 2,553 Other real estate owned.......................... 3,752 3,506 1,828 2,239 295 ------ ------- ------ ------ ------ Total nonperforming assets.................... $8,057 $15,239 $9,509 $9,415 $2,848 ====== ======= ====== ====== ====== Nonperforming loans and leases to total loans and leases........................................... 0.59% 2.13% 1.26% 1.35% 0.62% ====== ======= ====== ====== ====== Nonperforming assets to total assets............... 0.48% 0.78% 0.64% 0.72% 0.27% ====== ======= ====== ====== ====== Loans which are past due 90 days or more are placed on nonaccrual status unless, in management's opinion, there is sufficient collateral value to offset both principal and interest. Renegotiated and Nonaccrual Loans: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Interest which would have been recorded under original terms Renegotiated.............................................. $-- $ -- $ -- Nonaccrual................................................ 80 323 302 --- ---- ---- 80 323 302 --- ---- ---- Interest income actually recorded Renegotiated.............................................. -- -- -- Nonaccrual................................................ 33 47 36 --- ---- ---- 33 47 36 --- ---- ---- Reduction in interest income................................ $47 $276 $266 === ==== ==== No loan concentrations existed of more than 10% of total loans to borrowers engaged in similar activities that would be similarly affected by economic or other conditions. Generally, the accrual of income is discontinued when the full collection of principal or interest is in doubt, or when the payment of principal or interest has become contractually 90 days past due unless the obligation is both well secured and in the process of collection. LIQUIDITY Liquidity is the availability of funds to meet the daily requirements of the business. For financial institutions, demand for funds comes principally from extensions of credit and withdrawal of deposits. Liquidity is provided by asset maturities or sales and through short-term borrowings. The objectives of liquidity management are to ensure that funds will be available to meet demands and that funds are available at a reasonable cost. As with other forms of financial risk, liquidity is managed separately at each of the Corporation's lines of business. 30 33 Since loans are less marketable than securities, the ratio of total loans to total deposits is the traditional measure of liquidity for banks and bank holding companies. At year-end 1999, this ratio was 84.3%. The Corporation is able to maintain this position due to the position in mortgage loans held for sale. These loans carry an interest rate equal to the current market rate for first and second lien mortgage loans. However, liquidity is significantly improved since nearly all mortgage loans held for sale are in the process of being securitized and sold. The holding period for an individual loan typically does not exceed 90 days. INTEREST RATE RISK Interest rate risk refers to the potential for changes in market rates of interest to cause changes in net interest income and in the market value of assets and liabilities. The Asset-Liability Management Committees of each of the Corporation's lines of business monitor the repricing structure of both assets and liabilities over various time horizons and exposure to changes in interest rates is evaluated by modeling the repricing characteristics of the instruments under multiple rate scenarios. Rate sensitivities can typically be managed by controlling the maturity of loans, securities, and deposits and through the use of prepayment penalties. The Corporation may also use financial futures or interest rate swaps from time to time. The commercial banking and leasing lines of business assume interest rate risk in the pricing of their loan and lease products and mitigate this risk by managing the duration of the liabilities they raise to support their portfolios. The mortgage banking business assumes interest rate sensitivity by entering into commitments to extend loans to borrowers at a fixed price for a limited period of time. Loans are held temporarily until a pool is formed. The mortgage bank buys commitments to deliver loans at a fixed price to manage risk. The mortgage bank and the home equity company are also exposed to interest rate risk through their ownership of servicing assets and excess servicing. As discussed in the analysis of each line of business earlier in this report, the companies also manage their risk using a variety of techniques including: maintaining a strong production operation which offsets the interest rate risk, selective sales of the servicing rights, match funded through asset-backed securities sales, and the use of financial hedges. In some cases, the Corporation uses internal hedges to allow for the risk characteristics of one line of business to offset those of another line. The following tables show management's estimate of the present value of interest-sensitive assets and liabilities, as well as off-balance sheet financial contracts as of December 31, 1999, at then current interest rates as well as simulated rates 1.0% and 2.0% above and below those interest rates. Two tables are presented: 1. An economic analysis showing the net present value impact of changes in interest rates, and 2. An accounting analysis showing the same net present value impact, adjusted for the expected GAAP treatment of the assets and liabilities under the scenarios shown. The analyses do not take into account the book values of the Corporation's non-interest sensitive assets and liabilities, such as cash, accounts receivable, and fixed assets, the value of which is not directly determined by interest rates. As noted above, the analyses are based on discounted cash flows over the remaining estimated lives of the financial instruments. The total measurement of the Corporation's exposure to interest rate risk as presented in the following tables may not be representative of the actual values which might result from a higher or lower rate environment. Such environments would likely result in different lending and borrowing strategies by the Corporation, designed in part to further mitigate the effect on the value of, and the net earnings generated from, the Corporation's net assets. In addition, they do not reflect activities not traditionally measured as financial assets or liabilities. Principal among these activities for the Corporation would be the change in mortgage loan production and the earnings stream the Corporation derives therefrom. ECONOMIC VALUE CHANGE METHOD The figures suggest, based on an economic assessment of balance sheet and off-balance sheet financial assets and before any initiatives to mitigate the impact of changing interest rates, that the present value of the 31 34 Corporation's interest-sensitive assets and liabilities would decline in a falling rate environment principally due to the Corporation's investments in mortgage servicing rights, and would also decline in a rising rate environment due to the influence of its loan portfolio. To mitigate the impact of rising rates, the Corporation periodically sells certain mortgage servicing rights where the risk profile indicates more downside risk than upside opportunity. The Corporation mitigates the risk of falling rates by maintaining a strong production operation which increases in value as interest rates fall. PRESENT VALUE AT DECEMBER 31, 1999 INSTANTANEOUS CHANGE IN INTEREST RATES OF: ----------------------------------------------------------------------- -2% -1% CURRENT +1% +2% --- --- ------- --- --- (IN THOUSANDS) INTEREST SENSITIVE ASSETS Loans and Other Assets........ $ 848,487 $ 831,024 $ 814,495 $ 798,729 $ 783,640 Loans Held for Sale........... 325,486 323,109 320,878 318,721 316,582 Mortgage Servicing Rights..... 109,275 161,169 186,311 189,606 187,020 Interest-only Strips.......... 63,564 67,217 70,914 74,529 77,974 ----------- ----------- ----------- ----------- ----------- TOTAL INTEREST SENSITIVE ASSETS................. 1,346,812 1,382,519 1,392,598 1,381,585 1,365,216 ----------- ----------- ----------- ----------- ----------- INTEREST SENSITIVE LIABILITIES Deposits...................... (718,020) (714,355) (710,762) (707,256) (703,865) Short-term Borrowings......... (272,340) (272,224) (272,103) (271,979) (271,852) Long-term Debt................ (84,985) (80,905) (76,501) (71,434) (66,409) ----------- ----------- ----------- ----------- ----------- TOTAL INTEREST SENSITIVE LIABILITIES............ (1,075,345) (1,067,484) (1,059,366) (1,050,669) (1,042,126) ----------- ----------- ----------- ----------- ----------- INTEREST SENSITIVE OFF-BALANCE SHEET ITEMS................. 370 892 1,751 2,956 4,263 ----------- ----------- ----------- ----------- ----------- NET SENSITIVITY AS OF DECEMBER 31, 1999.................... $ 271,837 $ 315,927 $ 334,983 $ 333,872 $ 327,353 =========== =========== =========== =========== =========== POTENTIAL CHANGE.............. $ (63,146) $ (19,056) $ -- $ (1,111) $ (7,630) =========== =========== =========== =========== =========== NET SENSITIVITY AS OF DECEMBER 31, 1998.................... $ 50,666 $ 78,781 $ 103,290 $ 126,155 $ 140,238 =========== =========== =========== =========== =========== POTENTIAL CHANGE.............. $ (52,624) $ (24,509) $ -- $ 22,865 $ 36,948 =========== =========== =========== =========== =========== 32 35 GAAP-BASED VALUE CHANGE METHOD The figures suggest, based on an accounting assessment of balance sheet and off-balance sheet financial assets and before any initiatives to mitigate the impact of changing interest rates, that the present value of the Corporation's interest-sensitive assets and liabilities would decline in a falling rate environment principally due to the Corporation's investments in mortgage servicing rights and would increase in a rising rate environment. PRESENT VALUE AT DECEMBER 31, 1999 INSTANTANEOUS CHANGE IN INTEREST RATES OF: -------------------------------------------------------- -2% -1% CURRENT +1% +2% --- --- ------- --- --- (IN THOUSANDS) INTEREST SENSITIVE ASSETS Loans and Other Assets(1)................. $ -- $ -- $ -- $ -- $ -- Loans Held for Sale....................... 325,487 323,109 320,877 318,721 316,582 Mortgage Servicing Rights................. 100,690 118,556 125,105 125,215 125,215 Interest-only Strips...................... 63,564 67,217 70,914 74,529 77,974 -------- -------- -------- -------- -------- TOTAL INTEREST SENSITIVE ASSETS...... 489,741 508,882 516,896 518,465 519,771 -------- -------- -------- -------- -------- INTEREST SENSITIVE LIABILITIES Deposits(1)............................... -- -- -- -- -- Short-term Borrowings(1).................. -- -- -- -- -- Long-term Debt(1)......................... -- -- -- -- -- TOTAL INTEREST SENSITIVE LIABILITIES(1)..................... -- -- -- -- -- -------- -------- -------- -------- -------- INTEREST SENSITIVE OFF-BALANCE SHEET ITEMS................................... 370 892 1,751 2,956 4,263 -------- -------- -------- -------- -------- NET SENSITIVITY AS OF DECEMBER 31, 1999... $490,111 $509,774 $518,647 $521,421 $524,034 ======== ======== ======== ======== ======== POTENTIAL CHANGE.......................... $(28,536) $ (8,873) $ -- $ 2,774 $ 5,387 ======== ======== ======== ======== ======== ------------------------- --> (1) Not marked to market under GAAP. DERIVATIVE FINANCIAL INSTRUMENTS The Corporation hedges its interest rate risk on mortgage loans held for sale using mandatory commitments to sell the loans at a future date. The value of mortgage servicing assets is periodically hedged using options on treasury futures. At December 31, 1999, all such options had expired. Certain of the Corporation's interest-only strips are hedged using interest rate caps which had a fair value of $1.2 million at December 31, 1999, and a notional amount of $50.0 million. Options on treasury futures and interest rate caps are classified as trading securities on the balance sheet and carried at their market values. Adjustments to market values are recorded as trading gains or losses on the income statement. In 1999, the Corporation recorded $8.2 million of net trading losses related to these derivative products, compared with $1.4 million in gains in 1998. No gains or losses were reported in 1997. 33 36 Daily Average Consolidated Balance Sheets, Interest Rates and Interest Differential are on the next three pages. FOR THE YEAR ENDED DECEMBER 31, 1999 ------------------------------------ AVERAGE YIELD/ BALANCE INTEREST RATE ------- -------- ------ (IN THOUSANDS) Assets Interest-earning assets: Interest-bearing deposits with banks................... $ 22,334 $ 771 3.45% Federal funds sold..................................... 12,293 652 5.30 Trading assets......................................... 45,637 6,275 13.75 Taxable investment securities.......................... 39,208 2,984 7.61 Tax-exempt investment securities(1).................... 4,916 410 8.34 Loans held for sale.................................... 575,592 66,682 11.58 Loans and leases, net of unearned income(1)(2)......... 642,435 49,063 7.64 ---------- -------- ------ Total interest-earning assets..................... 1,342,415 126,837 9.45% ---------- -------- ====== Noninterest-earning assets: Cash and due from banks................................ 44,775 Premises and equipment, net............................ 22,077 Other assets........................................... 251,251 Less allowance for possible loan and lease losses...... (9,508) ---------- Total assets...................................... $1,651,010 ========== Liabilities and Shareholders' Equity Interest-bearing liabilities: Money market checking.................................. $ 104,641 $ 1,430 1.37% Money market savings................................... 6,801 165 2.43 Regular savings........................................ 36,867 1,015 2.75 Time deposits.......................................... 438,505 22,610 5.16 Short-term borrowings.................................. 406,488 28,425 6.99 Long-term debt......................................... 13,631 1,149 8.43 ---------- -------- ------ Total interest-bearing liabilities................ 1,006,933 54,794 5.44% ---------- -------- ====== Noninterest-bearing liabilities: Demand deposits........................................ 357,771 Other liabilities...................................... 132,163 Shareholders' equity...................................... 154,143 ---------- Total liabilities and shareholders' equity........ $1,651,010 ========== Net interest income.................................... $ 72,043 ======== Net interest income to average interest-earning assets............................................... 5.36% ====== ------------------------- --> Notes: (1) Interest is reported on a fully taxable equivalent basis. The prevailing federal income tax rate was 35%. (2) For purposes of these computations, nonaccrual loans are included in daily average loan amounts outstanding. 34 37 FOR THE YEAR ENDED DECEMBER 31, 1998 -------------------------------- AVERAGE YIELD/ BALANCE INTEREST RATE ------- -------- ------ (IN THOUSANDS) Assets Interest-earning assets: Interest-bearing deposits with banks................... $ 15,462 $ 707 4.57% Federal funds sold..................................... 13,317 731 5.49 Trading assets......................................... 32,920 311 .94 Taxable investment securities.......................... 42,988 3,655 8.50 Tax-exempt investment securities(1).................... 5,291 453 8.56 Loans held for sale.................................... 758,640 65,155 8.59 Loans and leases, net of unearned income(1)(2)......... 585,025 52,443 8.96 ---------- -------- ----- Total interest-earning assets..................... 1,453,643 123,455 8.49% ---------- -------- ===== Noninterest-earning assets: Cash and due from banks................................ 50,754 Premises and equipment, net............................ 18,944 Other assets........................................... 135,693 Less allowance for possible loan and lease losses...... (8,650) ---------- Total assets...................................... $1,650,384 ========== Liabilities and Shareholders' Equity Interest-bearing liabilities: Money market checking.................................. $ 89,158 $ 1,845 2.07% Money market savings................................... 7,281 197 2.70 Regular savings........................................ 45,414 1,500 3.30 Time deposits.......................................... 355,431 19,827 5.57 Short-term borrowings.................................. 568,772 35,106 6.17 Long-term debt......................................... 10,245 814 7.94 ---------- -------- ----- Total interest-bearing liabilities................ 1,076,301 59,289 5.50% ---------- -------- ===== Noninterest-bearing liabilities: Demand deposits........................................ 381,343 Other liabilities...................................... 59,177 Shareholders' equity................................... 133,563 ---------- Total liabilities and shareholders' equity........ $1,650,384 ========== Net interest income.................................... $ 64,166 ======== Net interest income to average interest-earning assets............................................... 4.41% ===== ------------------------- --> Notes: (1) Interest is reported on a fully taxable equivalent basis. The prevailing federal income tax rate was 35%. (2) For purposes of these computations, nonaccrual loans are included in daily average loan amounts outstanding. 35 38 FOR THE YEAR ENDED DECEMBER 31, 1997 -------------------------------- AVERAGE YIELD/ BALANCE INTEREST RATE ------- -------- ------ (IN THOUSANDS) Assets Interest-earning assets Interest-bearing deposits with banks................... $ 16,887 $ 1,001 5.93% Federal funds sold..................................... 12,454 674 5.41 Trading assets......................................... 26,178 1,842 7.03 Taxable investment securities.......................... 51,412 4,467 8.68 Tax-exempt investment securities(1).................... 4,336 438 10.10 Loans held for sale.................................... 433,275 34,691 8.01 Loans and leases, net of unearned income(1)(2)......... 569,325 56,629 9.95 ---------- ------- ------ Total interest-earning assets..................... 1,113,867 99,742 8.95% ---------- ------- ====== Noninterest-earning assets: Cash and due from banks................................ 34,347 Premises and equipment, net............................ 18,568 Other assets........................................... 103,682 Less allowance for possible loan and lease losses...... (7,750) ---------- Total assets...................................... $1,262,714 ========== Liabilities and Shareholders' Equity Interest-bearing liabilities: Money market checking.................................. $ 79,549 $ 1,643 2.07% Money market savings................................... 10,267 280 2.73 Regular savings........................................ 52,843 1,889 3.57 Time deposits.......................................... 286,934 16,151 5.63 Short-term borrowings.................................. 365,005 23,788 6.52 Long-term debt......................................... 10,698 831 7.77 ---------- ------- ------ Total interest-bearing liabilities................ 805,296 44,582 5.54% ---------- ------- ====== Noninterest-bearing liabilities: Demand deposits........................................ 262,190 Other liabilities...................................... 71,745 Shareholders' equity...................................... 123,483 ---------- Total liabilities and shareholders' equity........ $1,262,714 ========== Net interest income.................................... $55,160 ======= Net interest income to average interest-earning assets............................................... 4.95% ====== ------------------------- --> Notes: (1) Interest is reported on a fully taxable equivalent basis. The prevailing federal income tax rate was 35%. (2) For purposes of these computations, nonaccrual loans are included in daily average loan amounts outstanding. YEAR 2000 The Corporation did not experience any significant Year 2000 related computer disruptions. The total cost to the Corporation during the 1997-1999 period to ensure its Year 2000 readiness was $2.9 million. The Corporation's Steering Committee and working groups at each line of business continue to meet periodically to assure continued data and systems integrity in the post-2000 environment. 36 39 ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The quantitative and qualitative disclosures about market risk are reported in the Interest Rate Risk section to Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations found on pages 31 through 33. 37 40 ITEM 8. FINANCIAL STATEMENTS Management Report on Responsibility for Financial Reporting The management of Irwin Financial Corporation and its subsidiaries has the responsibility of preparing the accompanying financial statements and for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles and are not misstated due to material fraud or error. The financial statements include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the financial statements. The Corporation's financial statements have been audited by PricewaterhouseCoopers LLP, independent certified public accountants elected by the shareholders. Management has made available to PricewaterhouseCoopers all the Corporation's financial records and related data, as well as the minutes of stockholders' and directors' meetings. Furthermore, management believes that all representations made to PricewaterhouseCoopers during its audit were valid and appropriate. Management of the Corporation has established and maintains a system of internal control that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. Assessments of the system of internal control are based on criteria for effective internal control over financial reporting described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management continually monitors the system of internal control for compliance. The Corporation maintains a strong internal auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. In addition, as part of its audit of the Corporation's financial statements, PricewaterhouseCoopers completed an assessment of selected internal accounting controls to establish a basis for reliance thereon in determining the nature, timing, and extent of audit tests to be applied. Management has considered the internal auditor's and PricewaterhouseCoopers' recommendations concerning the Corporation's system of internal control and has taken actions to respond appropriately to these recommendations that we believe are cost effective in the circumstances. Management believes that the Corporation's system of internal control is adequate to accomplish the objectives discussed herein. Management also recognized its responsibility for fostering a strong ethical climate so that the Corporation's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Corporation's Guiding Philosophy, which is publicized throughout the Corporation. This responsibility is also reflected in the individual Codes of Conduct of each major operating subsidiary. These Codes of Conduct address, among other things, the necessity of ensuring open communication within the Corporation; potential conflicts of interests; compliance with all domestic and foreign laws, including those related to financial disclosures; and a confidentiality of proprietary information. The Corporation maintains a systematic program to assess compliance with these policies. /s/ John A. Nash /s/ Gregory F. Ehlinger 38 41 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors Irwin Financial Corporation Columbus, Indiana In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Irwin Financial Corporation and its subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Cincinnati, Ohio January 24, 2000 39 42 IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ (IN THOUSANDS, EXCEPT FOR SHARES) ASSETS: Cash and due from banks..................................... $ 47,215 $ 68,942 Federal funds sold.......................................... -- 8,580 ---------- ---------- Cash and cash equivalents.............................. 47,215 77,522 Interest-bearing deposits with financial institutions....... 26,785 18,441 Trading assets.............................................. 59,025 32,148 Investment securities -- Note 3............................. 37,508 48,055 Loans held for sale......................................... 508,997 936,788 Loans and leases, net of unearned income -- Note 4.......... 733,424 556,991 Less: Allowance for loan and lease losses -- Note 5......... (8,555) (9,888) ---------- ---------- 724,869 547,103 Servicing assets -- Note 6................................. 138,500 117,129 Accounts receivable......................................... 49,415 71,087 Accrued interest receivable................................. 8,430 13,071 Premises and equipment...................................... 23,368 21,382 Other assets................................................ 56,735 63,453 ---------- ---------- $1,680,847 $1,946,179 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits Noninterest-bearing....................................... $ 218,402 $ 477,724 Interest-bearing.......................................... 411,400 389,516 Certificates of deposit over $100......................... 240,516 141,971 ---------- ---------- 870,318 1,009,211 Short-term borrowings -- Note 9............................. 473,103 644,861 Long-term debt -- Note 10................................... 29,784 2,839 Other liabilities........................................... 100,275 96,036 ---------- ---------- Total liabilities.................................... 1,473,480 1,752,947 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust -- Note 15................. 48,071 47,999 Shareholders' equity Preferred stock, no par value -- authorized 4,000,000 shares; none issued.................................... -- -- Common stock; no par value -- authorized 40,000,000 shares; issued 23,402,080 shares as of December 31, 1999 and 1998; including 2,297,303 and 1,729,324 shares in treasury as of December 31, 1999 and 1998, respectively........................................... 29,965 29,965 Additional paid-in capital.................................. 4,250 2,595 Net unrealized gain (loss) on investment securities net of deferred income tax liability/(asset) of ($47) in 1999 and $57 in 1998............................................... (70) 85 Retained earnings........................................... 171,101 142,232 ---------- ---------- 205,246 174,877 Less treasury stock, at cost................................ (45,950) (29,644) ---------- ---------- Total shareholders' equity.................................. 159,296 145,233 ---------- ---------- $1,680,847 $1,946,179 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. 40 43 IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------- 1999 1998 1997 ---- ---- ---- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) INTEREST INCOME: Loans held for sale.................................... $ 66,682 $ 65,155 $ 34,691 Loans and leases....................................... 48,978 52,329 56,490 Trading account........................................ 6,275 311 1,842 Investment securities: Taxable............................................. 3,755 4,362 5,469 Tax-exempt.......................................... 271 299 275 Federal funds sold..................................... 652 731 674 -------- -------- -------- Total interest income.......................... 126,613 123,187 99,441 -------- -------- -------- INTEREST EXPENSE: Deposits............................................... 25,220 23,369 19,963 Short-term borrowings.................................. 28,425 35,106 23,788 Long-term debt......................................... 1,149 814 831 -------- -------- -------- Total interest expense......................... 54,794 59,289 44,582 -------- -------- -------- Net interest income.................................... 71,819 63,898 54,859 Provision for loan and lease losses -- Note 5.......... 4,443 5,995 6,238 -------- -------- -------- Net interest income after provision for loan and lease losses.............................................. 67,376 57,903 48,621 -------- -------- -------- OTHER INCOME: Loan origination fees.................................. 47,007 60,013 41,370 Gain from sales of loans............................... 68,851 75,201 39,210 Loan servicing fees.................................... 60,581 57,284 53,257 Amortization and impairment of servicing asset......... (15,702) (35,388) (16,355) -------- -------- -------- Net loan administration income......................... 44,879 21,896 36,902 Gain on sale of servicing assets....................... 37,801 43,308 32,631 Trading gains (losses)................................. (8,296) 1,366 (1,961) Gain from sale of leasing assets....................... -- 5,241 -- Other.................................................. 13,827 11,832 8,696 -------- -------- -------- 204,069 218,857 156,848 -------- -------- -------- OTHER EXPENSE: Salaries............................................... 114,303 120,338 86,533 Pension and other employee benefits.................... 18,402 16,757 13,724 Office expense......................................... 13,181 12,865 10,583 Premises and equipment................................. 24,052 20,214 16,621 Marketing and development.............................. 8,962 11,735 7,697 Other.................................................. 35,211 39,297 23,660 -------- -------- -------- 214,111 221,206 158,818 -------- -------- -------- Income before income taxes............................... 57,334 55,554 46,651 Provision for income taxes............................... 19,481 20,354 17,734 -------- -------- -------- 37,853 35,200 28,917 Distribution on company-obligated mandatorily redeemable preferred securities of subsidiary trust............... 4,697 4,697 4,473 -------- -------- -------- Net income available to common shareholders.............. $ 33,156 $ 30,503 $ 24,444 ======== ======== ======== Earnings per share of common stock available to shareholders: Basic -- Note 17....................................... $ 1.54 $ 1.40 $ 1.10 ======== ======== ======== Diluted -- Note 17..................................... $ 1.51 $ 1.38 $ 1.08 ======== ======== ======== Dividends per share of common stock.................... $ 0.20 $ 0.16 $ 0.14 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 41 44 IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1999 NET UNREALIZED GAIN (LOSS) ADDITIONAL RETAINED ON INVESTMENT COMMON PAID IN TREASURY TOTAL EARNINGS SECURITIES STOCK CAPITAL STOCK ----- -------- -------------- ------ ---------- -------- Balance at January 1, 1997....... $118,902 $ 94,084 $ 56 $29,965 $ -- $ (5,203) Comprehensive Income Net Income..................... 24,444 Other Comprehensive Income..... (1) Total....................... 24,443 Cash dividends -- $0.14 per share*......................... (3,114) (3,114) Tax benefit on exercise of stock options........................ 576 576 Purchase of 940,082 shares of treasury stock*................ (14,412) (14,412) Sales of 204,238 shares of treasury stock*................ 1,588 204 1,384 -------- -------- ----- ------- ------ -------- Balance December 31, 1997........ 127,983 115,414 55 29,965 780 (18,231) -------- -------- ----- ------- ------ -------- Comprehensive Income Net Income..................... 30,503 Other Comprehensive Income..... 30 Total....................... 30,533 Cash dividends -- $0.16 per share*......................... (3,473) (3,473) Tax benefit on exercise of stock options........................ 1,027 1,027 Purchase of 496,455 shares of treasury stock*................ (12,593) (12,593) Sales of 164,411 shares of treasury stock*................ 1,756 (212) 788 1,180 -------- -------- ----- ------- ------ -------- Balance December 31, 1998........ 145,233 142,232 85 29,965 2,595 (29,644) -------- -------- ----- ------- ------ -------- Comprehensive Income Net Income..................... 33,156 Other Comprehensive Income..... (155) Total....................... 33,001 Cash dividends -- $0.20 per share.......................... (4,287) (4,287) Tax benefit on exercise of stock options........................ 1,055 1,055 Purchase of 800,052 shares of treasury stock................. (18,314) (18,314) Sales of 232,073 shares of treasury stock................. 2,608 600 2,008 -------- -------- ----- ------- ------ -------- Balance December 31, 1999........ $159,296 $171,101 $ (70) $29,965 $4,250 $(45,950) ======== ======== ===== ======= ====== ======== ------------------------- --> * Adjusted for the two-for-one stock split on May 27, 1998 The accompanying notes are an integral part of the consolidated financial statements. 42 45 IRWIN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS DECEMBER 31, ----------------------------------- 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) NET INCOME................................................. $ 33,156 $ 30,503 $ 24,444 Adjustments to reconcile net income to cash provided (used) by operating activities: Depreciation and amortization............................ 7,390 5,802 3,910 Amortization and impairment of servicing assets.......... 15,702 35,388 16,355 Provision for loan and lease losses...................... 4,443 5,995 6,238 Amortization of premiums, less accretion of discounts.... 1,145 3,210 1,716 Decrease (increase) in loans held for sale............... 427,791 (408,049) (81,841) Gain on sale of servicing asset.......................... (37,801) (43,308) (32,631) Net increase in trading assets........................... (26,877) (10,015) (9,472) Other, net............................................... 35,387 (23,663) (21,823) --------- --------- --------- Net cash provided (used) by operating activities...... 460,336 (404,137) (93,104) --------- --------- --------- LENDING AND INVESTING ACTIVITIES: Proceeds from maturities/calls of investment securities: Held-to-maturity......................................... 12,058 10,645 6,542 Available-for-sale....................................... 159 280 7,534 Proceeds from sales of investment securities: Available-for-sale....................................... 3,118 6,000 26,309 Purchase of investment securities: Held-to-maturity......................................... (34) (8,932) (3,868) Available-for-sale....................................... (5,899) (4,051) (20,315) Net increase in interest-bearing deposits with financial institutions............................................. (8,344) (201) (6,897) Net increase in loans, excluding sales..................... (205,137) (131,632) (414,205) Sale of loans.............................................. 22,928 175,574 331,861 Sale of leasing assets..................................... -- 5,241 -- Additions to mortgage servicing assets..................... (84,653) (165,910) (84,781) Proceeds from sale of mortgage servicing assets............ 85,380 138,635 90,734 Other, net................................................. (6,520) (4,148) (5,930) --------- --------- --------- Net cash provided (used) by lending and investing activities............................................ (186,944) 21,501 (73,016) --------- --------- --------- FINANCING ACTIVITIES: Net (decrease) increase in deposits........................ (138,893) 289,615 27,897 Net (decrease) increase in short-term borrowings........... (171,758) 132,586 50,409 Repayments of long-term debt............................... (3,055) (11,871) (10,563) Proceeds from long-term debt............................... 30,000 7,614 51,546 Sale of company-obligated manditorily redeemable preferred securities of subsidiary trust........................... -- -- 47,927 Purchase of treasury stock................................. (18,314) (12,593) (14,412) Proceeds from sale of stock for employee benefit plans..... 2,608 1,756 1,588 Dividends paid............................................. (4,287) (3,473) (3,114) --------- --------- --------- Net cash provided (used) by financing activities......... (303,699) 403,634 151,278 --------- --------- --------- Net increase (decrease) in cash and cash equivalents....... (30,307) 20,998 (14,842) Cash and cash equivalents at beginning of year............. 77,522 56,524 71,366 --------- --------- --------- Cash and cash equivalents at end of year................... $ 47,215 $ 77,522 $ 56,524 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period: Interest................................................. $ 52,456 $ 58,689 $ 45,554 ========= ========= ========= Income taxes............................................. $ 14,328 $ 18,947 $ 9,912 ========= ========= ========= The accompanying notes are an integral part of the consolidated financial statements. 43 46 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation: Irwin Financial Corporation and its subsidiaries (the Corporation), provide financial services throughout the United States. The Corporation is engaged in the mortgage banking, commercial banking, home equity lending, equipment leasing, and venture capital lines of business. Intercompany balances and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires the Corporation to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Securities: Those securities which the Corporation has the positive intent and ability to hold until maturity are classified as "held-to-maturity" and are stated at cost adjusted for amortization of premium and accretion of discount. Securities that might be sold prior to maturity are classified as "available-for-sale" and are stated at fair value. Unrealized gains and losses, net of the future tax impact, are reported as a separate component of shareholders' equity until realized. Investment gains and losses are based on the adjusted cost of the specific security. Trading Assets: Trading assets are stated at fair value. Unrealized gains and losses are included in earnings. Included in trading assets are interest only strips. Market values for interest-only strips are determined using assumptions about the duration and performance of the securitized loans and are calculated on the basis of the expected timing of cash receipts by the company. Included in these assumptions are estimates of the lives of the loans, expected losses, and appropriate discount rates. Management continually evaluates these assumptions to determine the proper carrying values of these items on the balance sheet. Adjustments to carrying values are recorded as trading gains or losses. Loans Held For Sale: Loans held for sale are carried at the lower of cost or market, determined on an aggregate basis for both performing and nonperforming loans. Market value is determined by outstanding commitments or by current investor yield requirements. Loans: Loan origination fees and costs are deferred and the net amounts are amortized as an adjustment to yield. When loans are sold, deferred fees and costs are included with outstanding principal balances to determine gains or losses. Interest income on loans is computed daily based on the principal amount of loans outstanding. The accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest. Direct Financing Leases: Interest and service charges, net of initial direct costs, are deferred and reported as income in decreasing amounts over the life of the lease, which averages three to four years, so as to provide an approximate constant yield on the outstanding principal balance. Allowance for Loan and Lease Losses: The allowance for loan and lease losses is maintained at a level considered adequate to provide for loan and lease losses and is based on management's evaluation of expected losses in the portfolio. Loans are considered impaired if it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Servicing Assets: When the Corporation securitizes loans, it retains servicing assets and interest-only strips. A portion of the cost of originating a loan is allocated to the servicing asset and interest-only strip based on their fair values relative to the loan as a whole. The Corporation uses the market prices under comparable servicing sale contracts, when available, or alternatively uses a valuation model that calculates the present value of future cash flows to determine the fair value of the servicing assets. In using this valuation method, the Corporation incorporates assumptions that it is believed market participants would use in estimating future net servicing income which include estimates of the cost of servicing per loan, the discount rate, float value, an 44 47 inflation rate, ancillary income per loan, prepayment speeds, and default rates. Servicing assets are amortized over the estimated lives of the related loans, which are grouped based on loan characteristics, in proportion to estimated net servicing income. In determining servicing value impairment at the end of the year, the servicing portfolio was disaggregated into its predominant risk characteristics. The Corporation has determined those risk characteristics to be interest rate, loan type and investor type. These segments of the portfolio were valued, using market prices under comparable servicing sale contracts, when available, or alternatively, using the same model as was used to originally determine the fair value at origination, using current market assumptions. The calculated value was then compared with the book value of each segment to determine the required reserve for impairment. It is reasonably possible that a change in the impairment reserve will occur in the near term. No reasonable estimate can be made of the range of amounts of loss or gain. Derivative Instruments: The Corporation uses derivative instruments to offset changes in the value of servicing assets and interest-only strips. Derivative instruments on the Corporation's balance sheet are classified as trading assets and carried at market value. Changes in market value are recorded as trading gains or losses on the income statement. The Corporation uses forward contracts to reduce its interest rate exposure on mortgage loans held for sale and on the pipeline of loan applications in process. Gains and losses associated with these contracts are deferred and included in the determination of gain or loss on ultimate sale of the loans, or expensed when it becomes evident the loan sale will not occur. On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," deferring its effective date to fiscal years beginning after June 15, 2000. The Corporation will adopt SFAS 133 on January 1, 2001. The Corporation has not quantified the impact of this statement on its financial position or results of operations. Premises and Equipment: Premises and equipment are recorded at cost. Depreciation is determined by the straight-line method. Venture Capital Investments: Venture capital investments held by Irwin Ventures, Inc. are carried at market value with changes in market value recognized in other income. The investment committee of Irvin Ventures determines the value of the investments at the end of each reporting period and the values are adjusted based upon review of the investee's financial results, condition, and prospectus. Changes in estimated market values can also be made when an event such as a new funding round from other private equity investors would cause a change in estimated market value. In the future, should the company have investments in publicly-traded securities, it would look to the traded market value of the investments as the basis of its mark-to-market. Earnings Per Share: In 1997, the Corporation adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). Under this standard, earnings per share are calculated as "basic" and "diluted" based on the weighted average number of common shares outstanding during the year. Income Taxes: A consolidated tax return is filed for all eligible entities. Deferred income taxes are computed using the liability method which establishes a deferred tax asset or liability based on temporary differences between the tax basis of an asset or liability and the basis recorded in the financial statements. Rehabilitation tax credits and low-income housing tax credits are recorded as a reduction to the provision for federal income taxes in the year the eligible buildings are placed in service. Cash and Cash Equivalents Defined: For purposes of the statement of cash flows, the Corporation considers cash and due from banks to be cash equivalents. 45 48 Reclassifications: Certain amounts in the 1998 and 1997 consolidated financial statements have been reclassified to conform to the 1999 presentation. NOTE 2 -- RESTRICTIONS ON CASH AND INTEREST-BEARING DEPOSITS WITH FINANCIAL INSTITUTIONS Irwin Union Bank and Trust Company is required to maintain a reserve balance with the Federal Reserve Bank. The amount of the reserve balance at December 31, 1999 was $8.1 million. Additionally, the Corporation is required to maintain reserve funds in connection with its loan securitization activities. Included in interest-bearing deposits with financial institutions at December 31, 1999 is $672 thousand of these reserve funds. NOTE 3 -- INVESTMENT SECURITIES The amortized cost, fair value, and carrying value of investments held at December 31, 1999 are as follows: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING COST GAINS LOSSES VALUE VALUE --------- ---------- ---------- ----- -------- (IN THOUSANDS) Held-to-Maturity: U.S. Treasury and Government Obligations..... $21,238 $ 2 $ -- $21,240 $21,238 Obligations of states and political subdivisions............................... 4,706 7 (74) 4,639 4,706 Mortgage-backed securities................... 2,981 21 -- 3,002 2,981 ------- --- ----- ------- ------- Total held-to-maturity.................. 28,925 30 (74) 28,881 28,925 ------- --- ----- ------- ------- Available-for-Sale: U.S. Treasury and Government Obligations..... 4,988 -- (54) 4,934 4,934 Mortgage-backed securities................... 3,133 -- (63) 3,070 3,070 Other........................................ 579 -- -- 579 579 ------- --- ----- ------- ------- Total available-for-sale................ 8,700 -- (117) 8,583 8,583 ------- --- ----- ------- ------- Total investments....................... $37,625 $30 $(191) $37,464 $37,508 ======= === ===== ======= ======= The amortized cost, fair value, and carrying value of investments held at December 31, 1998 are as follows: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING COST GAINS LOSSES VALUE VALUE --------- ---------- ---------- ----- -------- (IN THOUSANDS) Held-to-Maturity: U.S. Treasury and Government Obligations..... $32,158 $235 $-- $32,393 $32,158 Obligations of states and political subdivisions............................... 5,207 117 -- 5,324 5,207 Mortgage-backed securities................... 4,424 130 -- 4,554 4,424 ------- ---- --- ------- ------- Total held-to-maturity.................. 41,789 482 -- 42,271 41,789 ------- ---- --- ------- ------- Available-for-Sale: U.S. Treasury and Government Obligations..... 2,051 46 (1) 2,096 2,096 Mortgage-backed securities................... 4,074 57 -- 4,131 4,131 Other........................................ -- 39 -- 39 39 ------- ---- --- ------- ------- Total available-for-sale................ 6,125 142 (1) 6,266 6,266 ------- ---- --- ------- ------- Total investments....................... $47,914 $624 $(1) $48,537 $48,055 ======= ==== === ======= ======= 46 49 The amortized cost and estimated value of debt securities at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. AMORTIZED FAIR COST VALUE --------- ----- (IN THOUSANDS) Held-to-Maturity: Due in one year or less................................... $ 100 $ 100 Due after one year through five years..................... 3,750 3,754 Due after five years through ten years.................... 1,060 1,044 Due after ten years....................................... 21,034 20,981 ------- ------- 25,944 25,879 Mortgage-backed securities.................................. 2,981 3,002 ------- ------- 28,925 28,881 ------- ------- Available-for-Sale: Due in one year or less................................... 579 579 Due after one year through five years..................... 4,988 4,934 ------- ------- 5,567 5,513 Mortgage-backed securities.................................. 3,133 3,070 ------- ------- 8,700 8,583 ------- ------- Total investments...................................... $37,625 $37,464 ======= ======= Investment securities amounting to $9.6 million were pledged as collateral for borrowings and for other purposes on December 31, 1999. During 1999, 1998, and 1997, sales of "available for sale" investments with proceeds of $3.1 million, $6.0 million, and $26.3 million resulted in a gross loss of $1.2 thousand, and gross gains of $58.9 thousand and $56.1 thousand, respectively. Additionally in 1999, 1998, and 1997, "held-to-maturity" investments totaling $1.8 million, $2.8 million and $7.0 million, respectively, were called. Calls in 1999 and 1997 were at par. Calls in 1998 resulted in a gross gain of $54.3 thousand. NOTE 4 -- LOANS AND LEASES Loans and leases are summarized as follows: DECEMBER 31, -------------------- 1999 1998 ---- ---- (IN THOUSANDS) Commercial, financial, and agricultural..................... $443,985 $278,834 Real estate construction.................................... 121,803 97,253 Real estate mortgage........................................ 115,265 123,980 Consumer.................................................... 48,936 51,730 Direct financing leases..................................... 3,890 6,375 Unearned income............................................. (455) (1,181) -------- -------- Total.................................................. $733,424 $556,991 ======== ======== Commercial loans are extended primarily to local regional businesses and to local farming operations in the market area of Irwin Union Bank. The Corporation also provides consumer loans to the customers in that market. Real estate loans and direct financing leases are extended throughout the United States. The Bank, in the normal course of business, makes loans to directors, officers, and organizations and individuals with which they are associated. Such loans amounted to approximately $2.2 million and $1.7 million at December 31, 1999 and 1998, respectively. During 1999, $1.6 million of new loans were made and repayments totaled $1.1 million. 47 50 NOTE 5 -- ALLOWANCE FOR LOAN AND LEASE LOSSES Changes in the allowance for loan and lease losses are summarized below: DECEMBER 31, ----------------------------- 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Balance at beginning of year................................ $ 9,888 $ 8,812 $ 6,875 Provision for loan and lease losses......................... 4,443 5,995 6,238 Reduction due to sale of loans and leases................... (3,126) (2,976) (1,694) Reduction due to reclassification of loans.................. (922) -- -- Recoveries.................................................. 503 559 538 Charge-offs................................................. (2,231) (2,502) (3,145) ------- ------- ------- Balance at end of year...................................... $ 8,555 $ 9,888 $ 8,812 ======= ======= ======= At December 31, 1999, 1998, and 1997, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 and SFAS No. 118 totaled $0.9 million, $1.6 million, and $2.7 million, respectively. These loans had a corresponding valuation allowance of $204 thousand, $493 thousand, and $726 thousand, respectively, based on the fair value of the loans' collateral. The Corporation recognized $38 thousand, $103 thousand, and $155 thousand of interest income on these loans in 1999, 1998, and 1997, respectively. NOTE 6 -- SERVICING ASSETS Included on the consolidated balance sheet at December 31, 1999 and 1998 are $138.5 million and $117.1 million, respectively, of capitalized servicing assets. These amounts relate to the principal balances of loans serviced by the Corporation for investors. Although they are not generally held for purposes of sale, there is an active secondary market for servicing assets. Mortgage Servicing Asset: DECEMBER 31, -------------------- 1999 1998 ---- ---- (IN THOUSANDS) Beginning Balance........................................... $117,129 $ 83,044 Additions................................................... 84,653 165,910 Amortization and impairment................................. (15,702) (36,498) Reduction for servicing sales............................... (45,580) (95,327) -------- -------- $138,500 $117,129 ======== ======== The Corporation has established a valuation allowance to record servicing assets at their fair market value. Changes in the allowance are summarized below: DECEMBER 31, --------------------------- 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Balance at beginning of year................................ $ 11,720 $ 600 $ -- Provision................................................... (11,319) 11,120 600 Reductions due to sales of servicing........................ -- -- -- -------- ------- ---- Balance at end of year...................................... $ 401 $11,720 $600 ======== ======= ==== 48 51 Included in the servicing assets are $132.6 million and $113.1 million of servicing assets related to the mortgage bank at December 31, 1999 and 1998, respectively. The servicing assets at the mortgage bank had a fair value of $180.5 million and $117.6 million at December 31, 1999 and 1998, respectively. The mortgage bank's servicing portfolio balance and interest rate stratification are as follows: Servicing Portfolio 1999 1998 1997 ----- ----- ----- (IN BILLIONS) Beginning Portfolio......................................... $11.2 $10.7 $10.8 Add: Originated Servicing Rights............................... 2.3 3.2 2.0 Purchased Servicing Rights................................ 3.6 5.7 3.4 Deduct: Sale of Servicing Rights.................................. (4.7) (4.9) (3.9) Run-off*.................................................. (1.9) (3.5) (1.6) ----- ----- ----- Ending Portfolio............................................ $10.5 $11.2 $10.7 ===== ===== ===== Servicing Portfolio by Interest Rate 1999 1998 1997 ----- ----- ---- Less than 7%.............................................. 14.9% 15.1% 8.4% 7.00 -- 7.99%............................................. 53.3 52.7 42.5 8.00 -- 8.99%............................................. 29.9 27.6 42.6 9% or greater.......................................... 1.9 4.6 6.5 ----- ----- ---- Total................................................ 100% 100% 100% ===== ===== ==== NOTE 7 -- PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: DECEMBER 31, ---------------------------------- USEFUL 1999 1998 LIVES ---- ---- ------ (IN THOUSANDS) Land........................................................ $ 1,734 $ 1,734 n/a Building and leasehold improvements......................... 15,063 13,231 7-40 years Furniture and equipment..................................... 33,297 29,693 3-10 years -------- -------- 50,094 44,658 Less accumulated depreciation............................... (26,726) (23,276) -------- -------- Total.................................................. $ 23,368 $ 21,382 ======== ======== NOTE 8 -- LEASE OBLIGATIONS At December 31, 1999, the Corporation and its subsidiaries leased certain branch locations and office equipment used in its operations. Operating lease rental expense was $16.5 million in 1999, $13.7 million in 1998, and $11.2 million in 1997. 49 52 The future minimum rental payments required under noncancellable operating leases with initial or remaining terms of one year or more are summarized as follows: YEAR ENDED DECEMBER 31, ------------ (IN THOUSANDS) 2000........................................................ $11,963 2001........................................................ 9,149 2002........................................................ 4,559 2003........................................................ 1,389 2004........................................................ 658 Thereafter.................................................. 432 ------- Total minimum rental payments............................... $28,150 ======= NOTE 9 -- SHORT-TERM BORROWINGS Short-term borrowings are summarized as follows: DECEMBER 31, -------------------- 1999 1998 ---- ---- (IN THOUSANDS) Repurchase agreements & drafts payable related to mortgage loan closings............................................. $ 46,796 $172,126 Commercial paper............................................ 21,894 26,617 Federal funds and Federal Home Loan Bank borrowings......... 173,000 266,000 Lines of Credit............................................. 231,413 180,118 -------- -------- $473,103 $644,861 ======== ======== Weighted average interest rate.............................. 5.45% 5.34% Repurchase agreements at December 31, 1999 and 1998, include $0.7 million and $29.8 million in mortgages sold under agreements to repurchase which are used to fund mortgages prior to sale in the secondary market. These repurchase agreements are collateralized by mortgage loans held for sale. Drafts payable related to mortgage loan closings totaled $46.1 million and $142.3 million at December 31, 1999 and 1998. These borrowings are related to mortgage closings at the end of December which have not been presented to the banks for payment. When presented for payment, these borrowings will be funded internally or by borrowing from the lines of credit. Commercial paper includes $15.6 million and $18.8 million at December 31, 1999 and 1998, respectively, payable to a company owned by a significant shareholder and director of the Corporation. The Corporation also has lines of credit available of $217 million to fund loan originations and operations. Interest on the lines of credit is payable monthly or quarterly with rates ranging from 4.8% to 7.5%. NOTE 10 -- LONG-TERM DEBT Long-term debt at December 31, 1999 consists of two notes payable. The first note, scheduled to mature in 2000 allows the Corporation to borrow up to $10 million with a variable interest rate tied to LIBOR (average of 7.7% in 1999). The second note is for $29.6 million with an interest rate of 7.58% that will mature on July 7, 2014. Long-term debt at December 31, 1998 consisted of a note payable with a variable interest rate averaging 7.94% and maturing on July 1, 2002. 50 53 Maturities of long-term debt as of December 31, 1999, are as follows: (IN THOUSANDS) 2000........................................................ $ 2,194 2001........................................................ 1,971 2002........................................................ 1,971 2003........................................................ 1,971 after....................................................... 21,677 ------- Total.................................................. $29,784 ======= NOTE 11 -- COMMITMENTS AND CONTINGENCIES In the normal course of business, Irwin Financial Corporation and its subsidiaries are subject to various claims and other pending and possible legal actions. As of December 31, 1999, Irwin Mortgage Corporation (IMC) was a defendant in class action lawsuits relating to the following: IMC's administration of mortgage escrow accounts and IMC's right to pay broker fees to mortgage brokers. At present, it is not possible for the Corporation to predict the likelihood of an unfavorable outcome or to establish the possible extent or amount of liability or potential exposure with respect to this litigation. As of December 31, 1998, Irwin Leasing Corporation (ILC) and Irwin Financial Corporation were defendants in a class action lawsuit alleging misrepresentations by a manufacturer of certain equipment financed by ILC. The parties agreed to settle this matter in January, 2000 and the court issued an order of dismissal in February, 2000. NOTE 12 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Corporation is party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby letters of credit, and forward commitments relating to mortgage banking activities. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheet. The Corporation's exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments. The collateral pledged for standby letters of credit and commitments varies but may include accounts receivable, inventory, property, plant, and equipment, and residential real estate. Total outstanding commitments to extend credit at December 31, 1999, were $266.2 million. These loan commitments include $172.8 million of floating rate loan commitments and $93.4 million of fixed rate loan commitments related to commercial and mortgage banking activities. The Corporation had approximately $13.6 million and $14.2 million in irrevocable standby letters of credit outstanding at December 31, 1999 and 1998, respectively. Forward commitments are used in mortgage banking activities to offset the interest rate risk associated with mortgage loan commitments and loans held for sale. The contract amount for forward contracts does not represent exposure to credit loss. Forward commitments related to mortgage banking activities were $255.3 million and $810.5 million at December 31, 1999 and 1998, respectively. Derivative instruments are used periodically to offset changes in the value of servicing assets against the effects of increased prepayment activity that generally results from declining interest rates. To the extent that interest rates increase, the value of servicing assets increases while the value of these instruments declines. The Corporations's servicing asset derivative instruments all had expired as of December 31, 1999. Derivative instruments are also used to offset changes in the value of interest-only strips. Interest rate caps are used when interest is received on fixed rate securitized loans and the resulting security pays interest at 51 54 a variable rate. As interest rates change, the values of the interest-only strips and interest rate caps move in opposite directions. At December 31, 1999, the carrying value of the interest rate caps was $1.2 million and the notional amount was $50.0 million. NOTE 13 -- REGULATORY MATTERS The Corporation and its bank subsidiary, Irwin Union Bank (IUB), are subject to various regulatory capital requirements administered by the federal and state banking agencies. Under capital adequacy guidelines, the Corporation and IUB must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and IUB's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and IUB to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital to average assets (as defined). Management believes, as of December 31, 1999, that the Corporation and IUB met all capital adequacy requirements to which they are subject. As of December 31, 1999, the Corporation and IUB were categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Corporation and IUB must significantly exceed minimum total risk-based, Tier I risk-based, and Tier I capital to average assets ratios. There have been no conditions or events that management believes have changed this category. 52 55 The Corporation's and IUB's actual capital amounts and ratios are presented in the following table: ADEQUATELY ACTUAL CAPITALIZED WELL CAPITALIZED ----------------- ----------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (IN THOUSANDS) As of December 31, 1999: Total Capital (to Risk-Weighted Assets): Irwin Financial Corporation........... $246,183 13.5% $145,891 8.0% $182,363 10.0% Irwin Union Bank...................... 144,305 10.0 115,295 8.0 144,119 10.0 Tier I Capital (to Risk-Weighted Assets): Irwin Financial Corporation........... 207,627 11.4 72,945 4.0 109,418 6.0 Irwin Union Bank...................... 136,864 9.5 57,647 4.0 86,471 6.0 Tier I Capital (to Average Assets): Irwin Financial Corporation........... 207,627 12.8 65,046 4.0 81,307 5.0 Irwin Union Bank...................... 136,864 11.0 50,349 4.0 62,936 5.0 As of December 31, 1998: Total Capital (to Risk-Weighted Assets): Irwin Financial Corporation........... $203,311 12.3% $132,742 8.0% $165,927 10.0% Irwin Union Bank...................... 111,935 10.1 88,712 8.0 110,890 10.0 Tier I Capital (to Risk-Weighted Assets): Irwin Financial Corporation........... 191,806 11.6 66,371 4.0 99,556 6.0 Irwin Union Bank...................... 105,215 9.5 44,356 4.0 66,534 6.0 Tier I Capital (to Average Assets): Irwin Financial Corporation........... 191,806 10.5 73,032 4.0 91,290 5.0 Irwin Union Bank...................... 105,215 7.9 53,162 4.0 66,452 5.0 As of December 31, 1997: Total Capital (to Risk-Weighted Assets): Irwin Financial Corporation........... $185,536 14.9% $ 99,951 8.0% $124,939 10.0% Irwin Union Bank...................... 72,150 10.3 55,949 8.0 69,936 10.0 Tier I Capital (to Risk-Weighted Assets): Irwin Financial Corporation........... 169,366 13.6 49,975 4.0 74,963 6.0 Irwin Union Bank...................... 65,549 9.4 27,974 4.0 41,961 6.0 Tier I Capital (to Average Assets) Irwin Financial Corporation........... 169,366 12.1 56,192 4.0 70,240 5.0 Irwin Union Bank...................... 65,549 7.3 36,088 4.0 45,110 5.0 NOTE 14 -- FAIR VALUES OF FINANCIAL INSTRUMENTS Fair value estimates, methods, and assumptions are set forth below for the Corporation's financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Interest-bearing deposits with financial institutions, loans, servicing assets, deposit liabilities, short-term borrowings, long-term debt, and company-obligated mandatorily redeemable preferred securities of subsidiary trust: The fair values were estimated using discounted cash flow analyses, using interest rates currently being offered for like assets with similar terms, to borrowers with similar credit quality, and for the same remaining maturities. Trading assets: The carrying amounts reported in the balance sheet for trading assets approximate those assets' fair values. 53 56 Investment securities: Fair values for investment securities were based on quoted market prices when available. For securities which had no quoted market prices, fair values were estimated by discounting future cash flows using current rates on similar securities. Loans held for sale: Fair values for loans held for sale are based on current market prices for loans with similar terms to borrowers with similar credit quality. Forward contract commitments: The unrealized gains and losses of forward contract commitments is based on the difference between the settlement values of those commitments and the quoted market values of the underlying securities. The estimated fair values of the Corporation's financial instruments at December 31, are as follows: 1999 1998 ---------------------- ------------------------ CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- (IN THOUSANDS) Financial assets: Cash and cash equivalents........................ $ 47,215 $ 47,215 $ 77,522 $ 77,522 Interest-bearing deposits with financial institutions.................................. 26,785 26,764 18,441 18,495 Trading assets................................... 59,025 59,025 32,148 32,148 Investment securities............................ 37,508 37,464 48,055 48,537 Loans held for sale.............................. 508,997 522,033 936,788 959,300 Loans, net of unearned discount.................. 729,534 771,948 556,991 601,338 Servicing assets................................. 138,500 186,311 117,129 121,610 Financial liabilities: Deposits......................................... 870,318 710,762 1,009,211 997,776 Short-term borrowings............................ 473,103 473,785 644,861 636,890 Long-term debt................................... 29,784 28,112 2,839 2,993 Company-obligated mandatorily redeemable preferred securities of subsidiary trust...... 50,000 48,389 50,000 57,757 Forward contract commitments..................... -- 860 -- (551) The fair value estimates consider relevant market information when available. Because no market exists for a significant portion of the Corporation's financial instruments, fair value estimates are determined based on present value of estimated cash flows and consider various factors, including current economic conditions and risk characteristics of certain financial instruments. Changes in factors, or the weight assumed for the various factors, could significantly affect the estimated values. The fair value estimates are presented for existing on- and off-balance sheet financial instruments without attempting to estimate the value of the Corporation's long-term relationships with depositors and the benefit that results from the low cost funding provided by deposit liabilities. In addition, significant assets which were not considered financial instruments and were therefore not a part of the fair value estimates include lease receivables, and premises and equipment. NOTE 15 -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST In January 1997, the Corporation issued $50.0 million of trust preferred securities through IFC Capital Trust I, a trust created and controlled by the Corporation. The securities were issued at $25 per share with a cumulative dividend rate of 9.25%, payable quarterly. They have an initial maturity of 30 years with a 19-year extension option. The securities are callable at par after five years, or immediately, in the event of an adverse tax development affecting the Corporation's classification of the securities for federal income tax purposes. They are not convertible into common stock of the Corporation. The securities are shown on the balance sheet net of capitalized issuance costs. 54 57 The sole assets of IFC Capital Trust I are subordinated debentures of the Corporation with a principal balance of $51.5 million, an interest rate of 9.25%, and an initial maturity of 30 years with a 19-year extension option. NOTE 16 -- SHAREHOLDERS' EQUITY The board of directors of the Corporation approved a two-for-one stock split May 27, 1998. Previously reported shares and per share data have been changed to reflect these splits. The Corporation has a stock plan to compensate Directors of the Corporation with the Corporation's common stock, if so elected, in lieu of cash for their annual retainer and meeting fees. The number of shares issued under the plan is based on the current market value of the Corporation's common stock. The Corporation also has an employee stock purchase plan for all qualified employees. The plan provides for employees to purchase common stock through payroll deduction at approximately 85% of the current market value. The Corporation has three stock option plans (established in 1997, 1992, and 1986) which provide for the issuance of 4,280,000 shares of non-qualified and incentive stock options. The exercise price of each option, which has a ten-year life and a vesting period of four years beginning the year granted, is equal to the market price of the Corporation's stock on the grant date. Vested outstanding stock options have been considered as common stock equivalents in the computation of diluted earnings per share. Activity in the above plans for 1999, 1998, and 1997 is summarized as follows (adjusted for the two-for-one stock split on May 27, 1998): 1999 1998 1997 ---------------------------- ---------------------------- ---------------------------- NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE --------- ---------------- --------- ---------------- --------- ---------------- Outstanding at the beginning of the year............... 1,257,050 $ 9.71 1,231,220 $ 7.40 1,246,600 $ 5.83 Granted............ 216,155 24.02 133,710 27.23 178,220 13.69 Exercised.......... (137,600) 4.19 (103,880) 4.74 (187,400) 2.89 Canceled........... (7,715) 24.88 (4,000) 15.92 (6,200) 9.62 --------- --------- --------- Outstanding at the end of the year.... 1,327,890 12.50 1,257,050 9.71 1,231,220 7.40 ========= ========= ========= Exercisable at the end of the year.... 1,045,650 $ 9.64 1,014,420 $ 7.48 948,506 $ 6.16 ========= ========= ========= Available for future grants............. 1,382,934 1,560,878 1,694,588 ========= ========= ========= The Corporation has not recognized compensation cost for the three non-qualified and incentive stock option plans or the Employee Stock Purchase Plan. Had Compensation cost been determined based on the fair 55 58 value at the grant dates, the Corporation's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income As reported....................... $33,156 $30,503 $24,444 Pro forma......................... 32,176 29,746 23,913 Basic earnings per share As reported....................... 1.54 1.40 1.10 Pro forma......................... 1.49 1.37 1.07 Diluted earnings As reported....................... 1.51 1.38 1.08 per share Pro forma......................... 1.49 1.34 1.06 The fair value of each option was estimated to be $10.97, $12.25, and $6.35 on the date of the grant using the binomial option-pricing model with the following assumptions for 1999, 1998, and 1997, respectively: risk free interest rates of 5.20%, 5.85%, and 6.89%; dividend yield of 0.83% for 1999 and 1.00% for 1998 and 1997; and volatility of .287 for 1999 and .250 for 1998 and 1997. As of December 31, 1999, 1,327,890 options were outstanding under these plans with exercise prices that range between $1.26 and $28.56 and a remaining weighted-average contractual life of 6.00 years. NOTE 17 -- EARNINGS PER SHARE Earnings per share calculations are summarized as follow: BASIC EARNINGS EFFECT OF DILUTED EARNINGS PER SHARE STOCK OPTIONS PER SHARE -------------- ------------- ---------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 Net income......................................... $33,156 $ -- $33,156 Shares............................................. 21,530 356 21,886 ------- ------ ------- Per-Share Amount................................... $ 1.54 $(0.03) $ 1.51 ======= ====== ======= 1998 Net income......................................... $30,503 $ -- $30,503 Shares............................................. 21,732 407 22,139 ------- ------ ------- Per-Share Amount................................... $ 1.40 $(0.02) $ 1.38 ======= ====== ======= 1997 Net income......................................... $24,444 $ -- $24,444 Shares............................................. 22,326 396 22,722 ------- ------ ------- Per-Share Amount................................... $ 1.10 $(0.02) $ 1.08 ======= ====== ======= The Board of Directors of the Corporation approved a two-for-one stock split effective May 27, 1998. Previously reported per share data have been adjusted to reflect these splits. 56 59 NOTE 18 -- INCOME TAXES Income tax expense is summarized as follows: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Current: Federal.......................................... $ 3,251 $ 6,963 $ 8,086 State............................................ 687 2,048 2,268 ------- ------- ------- 3,938 9,011 10,354 ------- ------- ------- Deferred: Federal.......................................... 14,580 9,256 6,162 State............................................ 963 2,087 1,218 ------- ------- ------- 15,543 11,343 7,380 ------- ------- ------- Income tax expense: Federal.......................................... 17,831 16,219 14,248 State............................................ 1,650 4,135 3,486 ------- ------- ------- $19,481 $20,354 $17,734 ======= ======= ======= The Corporation's net deferred tax liability, which is included in other liabilities on the consolidated balance sheet, consisted of the following: DECEMBER 31, -------------------- 1999 1998 ---- ---- (IN THOUSANDS) Mortgage servicing....................................... $(52,464) $(45,059) Deferred securitization income........................... (9,992) (5,357) Loan and lease loss reserve.............................. 6,555 7,676 Deferred origination fees and costs...................... (1,731) (3,488) Deferred compensation.................................... 4,069 3,556 Retirement benefits...................................... 1,018 630 Fixed assets............................................. (1,566) (262) Other, net............................................... (61) (28) -------- -------- Net deferred tax liability............................... $(54,172) $(42,332) ======== ======== A reconciliation of income tax expense to the amount computed by applying the statutory income tax rate to income before income taxes is summarized as follows: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Income taxes computed at the statutory rate................. $18,423 $17,800 $14,762 Increase (decrease) resulting from: Nontaxable interest from investment securities and loans.................................................. (410) (484) (198) State franchise tax, net of federal benefit............... 2,121 2,810 2,330 Change in deferred tax asset or liability resulting from tax rate change........................................ (1,055) -- 292 Other items -- net........................................ 402 228 548 ------- ------- ------- $19,481 $20,354 $17,734 ======= ======= ======= NOTE 19 -- EMPLOYEE RETIREMENT PLANS The Corporation has a defined benefit plan covering eligible employees of adopting subsidiaries. The benefits are based on years of service and the employees' compensation during their employment. Contribu- 57 60 tions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Plan assets are primarily invested in corporate and U.S. bonds, mutual funds and cash equivalents. The mutual funds are invested primarily in common stocks and bonds. The following table sets forth amounts recognized in the Corporation's balance sheet: DECEMBER 31, --------------- 1999 1998 ---- ---- (IN THOUSANDS) Funded status............................................... $ 1,071 $ 31 Unrecognized prior service cost............................. 181 136 Unrecognized net actuarial loss (gain)...................... (1,380) 164 ------- ---- Prepaid (accrued) pension cost.............................. $ (128) $331 ======= ==== Weighted average assumptions: Discount rate............................................. 7.75% 6.75% Return on plan assets..................................... 9.00% 9.00% Rate of compensation increase............................. 4.50% 3.75% A reconciliation of the change in projected benefit obligation and plan assets is presented below: 1999 1998 ---- ---- (IN THOUSANDS) Benefit obligation at January 1,............................ $10,183 $ 9,046 Service cost................................................ 627 568 Interest cost............................................... 713 622 Amendments.................................................. 70 -- Actuarial loss (gain)....................................... (779) 192 Benefits paid............................................... (283) (245) ------- ------- Benefit obligation at December 31,.......................... $10,531 $10,183 ======= ======= Fair value plan assets at January 1,........................ $10,214 $ 9,114 Return on plan assets....................................... 1,671 1,345 Benefits paid............................................... (283) (245) ------- ------- Fair value plan assets at December 31,...................... $11,602 $10,214 ======= ======= The net pension cost for 1999, 1998, and 1997 included the following components: 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Service cost................................................ $ 627 $ 568 $ 475 Interest cost............................................... 713 622 566 Return on plan assets....................................... (906) (863) (745) Amortization of transition obligation....................... -- -- (83) Amortization of prior service cost.......................... 25 20 20 ----- ----- ----- Net pension cost............................................ $ 459 $ 347 $ 233 ===== ===== ===== The Corporation has a supplemental employee retirement plan for certain members of executive management. Balances related to this plan included in other liabilities as of December 31, 1999 and 1998, are $1.8 million and $1.3 million, respectively. 58 61 NOTE 20 -- INDUSTRY SEGMENT INFORMATION The Corporation has three principal segments that provide a broad range of financial services throughout the United States. The Mortgage Banking line of business originates, sells, and services residential first mortgage loans. The Commercial Banking line of business provides commercial banking services. The Home Equity Lending line of business originates and services home equity loans. The Corporation's other segments include equipment leasing, venture capital, and the parent company. 59 62 The accounting policies of each segment are the same as those described in the "Summary of Significant Accounting Policies." Below is a summary of each segment's revenues, net income, and assets for 1999, 1998, and 1997: MORTGAGE COMMERCIAL HOME EQUITY BANKING BANKING LENDING OTHER CONSOLIDATED -------- ---------- ----------- ----- ------------ (IN THOUSANDS) 1999 Net interest income.................. $ 28,411 $ 26,170 $ 11,725 $ 1,070 $ 67,376 Intersegment interest................ (8,664) 2,944 7,127 (1,407) -- Other revenue........................ 161,020 11,622 31,714 (287) 204,069 Intersegment revenues................ -- 175 -- (175) -- ---------- -------- -------- -------- ---------- Total net revenues.............. 180,767 40,911 50,566 (799) 271,445 Other expense........................ 142,439 27,814 34,672 9,186 214,111 Intersegment expenses................ 2,476 1,266 885 (4,627) -- ---------- -------- -------- -------- ---------- Net income before taxes......... 35,852 11,831 15,009 (5,358) 57,334 Income taxes......................... 12,789 4,486 2,403 (197) 19,481 ---------- -------- -------- -------- ---------- Net income...................... 23,063 7,345 12,606 (5,161) 37,853 Distribution on Preferred Securities........................ -- -- -- 4,697 4,697 ---------- -------- -------- -------- ---------- Net income available to shareholders................. $ 23,063 $ 7,345 $ 12,606 $ (9,858) $ 33,156 ========== ======== ======== ======== ========== Assets at December 31,............... $ 549,966 $789,560 $339,640 $ 1,681 $1,680,847 ========== ======== ======== ======== ========== 1998 Net interest income.................. $ 37,088 $ 13,797 $ (2,545) $ 9,563 $ 57,903 Intersegment interest................ (12,565) 9,482 7,527 (4,444) -- Other revenue........................ 182,485 11,557 17,704 1,870 213,616 Gain on sale of leases............... -- -- -- 5,241 5,241 Intersegment revenues................ 230 155 1,255 (1,640) -- ---------- -------- -------- -------- ---------- Total net revenues.............. 207,238 34,991 23,941 10,590 276,760 Other expense........................ 157,382 22,314 27,164 14,346 221,206 Intersegment expenses................ 1,810 2,201 3,445 (7,456) -- ---------- -------- -------- -------- ---------- Net income before taxes......... 48,046 10,476 (6,668) 3,700 55,554 Income taxes......................... 19,193 3,967 -- (2,806) 20,354 ---------- -------- -------- -------- ---------- Net income...................... 28,853 6,509 (6,668) 6,506 35,200 Distribution on Preferred Securities........................ -- -- -- 4,697 4,697 ---------- -------- -------- -------- ---------- Net income available to shareholders................. $ 28,853 $ 6,509 $ (6,668) $ 1,809 $ 30,503 ========== ======== ======== ======== ========== Assets at December 31,............... $1,020,249 $607,992 $311,974 $ (5,964) $1,946,179 ========== ======== ======== ======== ========== 1997 Net interest income.................. $ 19,325 $ 19,678 $ 7,379 $ 2,239 $ 48,621 Intersegment interest................ (3,131) 116 (1,654) 4,669 -- Other revenue........................ 131,412 8,898 16,052 486 156,848 Intersegment revenues................ 51 358 -- (409) -- ---------- -------- -------- -------- ---------- Total Net revenues.............. 147,657 29,050 21,777 6,985 205,469 Other expense........................ 109,762 19,496 20,038 9,522 158,818 Intersegment expenses................ 1,605 698 29 (2,332) -- ---------- -------- -------- -------- ---------- Net income before taxes......... 36,290 8,856 1,710 (205) 46,651 Income taxes......................... 14,990 3,269 -- (525) 17,734 ---------- -------- -------- -------- ---------- Net income...................... 21,300 5,587 1,710 320 28,917 Distribution on Preferred Securities........................ -- -- -- 4,473 4,473 ---------- -------- -------- -------- ---------- Net income available to shareholders................. $ 21,300 $ 5,587 $ 1,710 $ (4,153) $ 24,444 ========== ======== ======== ======== ========== Assets at December 31,............... $ 792,007 $539,233 $165,242 $ 312 $1,496,794 ========== ======== ======== ======== ========== 60 63 NOTE 21 -- IRWIN FINANCIAL CORPORATION (PARENT ONLY) FINANCIAL INFORMATION The condensed financial statements of the parent company as of December 31, 1999 and 1998, and for the three years ended December 31, 1999 are presented below: CONDENSED BALANCE SHEET DECEMBER 31, -------------------- 1999 1998 ---- ---- (IN THOUSANDS) Assets: Cash and short-term investments........................... $ 643 $ 799 Investment in bank subsidiary............................. 137,816 105,807 Investments in non-bank subsidiaries...................... 91,357 81,308 Loans to non-bank subsidiaries............................ 85,523 60,221 Other assets.............................................. 11,978 16,305 -------- -------- $327,317 $264,440 ======== ======== Liabilities: Short-term borrowings..................................... $ 80,744 $ 66,967 Long-term debt............................................ 79,179 49,545 Other liabilities......................................... 8,098 2,695 -------- -------- 168,021 119,207 -------- -------- Shareholders' equity: Common stock.............................................. 29,965 29,965 Other shareholders' equity................................ 129,331 115,268 -------- -------- 159,296 145,233 -------- -------- $327,317 $264,440 ======== ======== CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Income Cash dividends from non-bank subsidiaries................. $ 15,500 $ 18,331 $10,062 Cash dividends from bank subsidiary....................... 14,147 1,000 4,750 Interest income........................................... 4,800 5,348 5,666 Other..................................................... 3,200 3,002 2,219 -------- -------- ------- 37,647 27,681 22,697 -------- -------- ------- Expenses Interest expense.......................................... 9,819 7,825 7,210 Salaries and benefits..................................... 5,398 4,548 4,009 Other..................................................... 2,744 2,056 1,799 -------- -------- ------- 17,961 14,429 13,018 -------- -------- ------- Income before income taxes and equity in undistributed income of subsidiaries.................................... 19,686 13,252 9,679 Income taxes (credits), less amounts charged to subsidiaries.............................................. (10,482) (14,079) (2,590) -------- -------- ------- 30,168 27,331 12,269 Equity in undistributed income of subsidiaries.............. 2,988 3,172 12,175 -------- -------- ------- Net income.................................................. $ 33,156 $ 30,503 $24,444 ======== ======== ======= 61 64 CONDENSED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Net income................................................ $ 33,156 $ 30,503 $ 24,444 Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed income of subsidiaries............ (2,988) (3,172) (12,175) Depreciation and amortization............................. 408 209 160 Increase (decrease) in taxes payable...................... 4,695 (17,244) 1,046 (Decrease) increase in interest receivable................ (159) 217 (314) Increase (decrease) in interest payable................... 763 (4) 146 Net change in other assets and other liabilities.......... 4,322 1,529 (2,321) -------- -------- -------- Net cash provided by operating activities............ 40,197 12,038 10,986 -------- -------- -------- Lending and investing activities: Net decrease (increase) in loans to subsidiaries.......... (25,302) 37,467 (51,571) Investments in subsidiaries............................... (39,122) (48,550) (5,858) Net additions of premises and equipment................... 286 (1,381) (42) -------- -------- -------- Net cash used by lending and investing activities.... (64,138) (12,464) (57,471) -------- -------- -------- Financing activities: Net increase in borrowings................................ 13,778 14,791 11,001 Proceeds from long-term debt.............................. 30,000 -- 51,546 Purchase of treasury stock................................ (18,314) (12,593) (14,411) Proceeds from sale of stock for employee benefit plans.... 2,608 1,756 1,588 Dividends paid............................................ (4,287) (3,473) (3,114) -------- -------- -------- Net cash provided by financing activities............ 23,785 481 46,610 -------- -------- -------- Net increase in cash and cash equivalents................. (156) 55 125 Cash and cash equivalents at beginning of year............ 799 744 619 -------- -------- -------- Cash and cash equivalents at end of year.................. $ 643 $ 799 $ 744 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year: Interest............................................... $ 9,056 $ 7,503 $ 7,064 ======== ======== ======== Income taxes........................................... $ 14,328 $ 18,947 $ 9,912 ======== ======== ======== ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In connection with the audits of the Corporation for the two most recent fiscal years ended December 31, 1999, the Corporation 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. 62 65 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION The information contained in the proxy statement of the Corporation for the 2000 Annual Meeting of Shareholders under the caption "Election of Directors" on pages 4 through 7, inclusive, is incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION The information contained in the proxy statement of the Corporation for the 2000 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 9 through 19, 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 Corporation for the 2000 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 Corporation for the 2000 Annual Meeting of Shareholders under the caption "Interest of Management in Certain Transactions" on pages 20 and 21, inclusive, is incorporated herein by reference in response to this item. 63 66 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K PAGE NO. ----- FORM 10-K A. DOCUMENTS FILED AS A PART OF THIS REPORT: ---- 1. Financial Statements A. Irwin Financial Corporation and Subsidiaries Report of PricewaterhouseCoopers LLP Independent Accountants............................................... 39 Consolidated Balance Sheet as of December 31, 1999, and 1998...................................................... 40 Consolidated Statement of Income for the years ended December 31, 1999, 1998, and 1997......................... 41 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1999, 1998, and 1997..... 42 Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998, and 1997......................... 43 Notes to Consolidated Financial Statements.................. 44-62 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 NUMBER ASSIGNED IN NUMBERING SYSTEM REGULATION S-K PAGE NUMBER ITEM 601 DESCRIPTION OF EXHIBIT OF EXHIBIT ------------------ ---------------------- ---------------- (2) No exhibit. (3)(i) 3(a) Articles of Amendment dated September 8, 1999 and October 28, 1999. (Incorporated by reference to Exhibit 3 to Form 10-Q Report for quarter ended September 30, 1999. File No. 0-6835.) 3(b) Articles of Amendment dated February 2, 2000. 1 (ii) 3(a) Code of By-Laws as amended to date. (Incorporated by reference to Exhibit 3(ii) 3(a) to Form 10-K Report for year ended December 31, 1997, File No. 0-6835.) (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.) 64 67 SEQUENTIAL NUMBER ASSIGNED IN NUMBERING SYSTEM REGULATION S-K PAGE NUMBER ITEM 601 DESCRIPTION OF EXHIBIT OF EXHIBIT ------------------ ---------------------- ---------------- 4(b) Certain instruments defining the rights of the holders of long-term debt of the Corporation and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis, have not been filed as Exhibits. The Corporation 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.) 65 68 SEQUENTIAL NUMBER ASSIGNED IN NUMBERING SYSTEM REGULATION S-K PAGE NUMBER ITEM 601 DESCRIPTION OF EXHIBIT OF EXHIBIT ------------------ ---------------------- ---------------- 10(l) Amendment to 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(m) Employee Stock Purchase Plan III. (Incorporated by reference to Exhibit 10(a) to Form 10-Q report for quarter ended June 30, 1999, File No. 0-6835.) 10(n) 1999 Outside Director Restricted Stock Compensation Plan. (Incorporated by reference to Exhibit 10(b) to Form 10-Q report for quarter ended June 30, 1999, File No. 0-6835.) (11) 11(a) Computation of Earnings Per Share. 108 (12) No exhibit. (13) No exhibit. (16) No exhibit. (18) No exhibit. (21) 21(a) Subsidiaries of the Corporation. 109 (22) No exhibit. (23) 23(a) Consent of Independent Accountants. 110 (24) No exhibit. (27) Financial Data Schedule. 111 (99) 99(a) Annual Report on Form 11-K for the Irwin Financial Corporation Employees' Savings Plan for the year ending December 31, 1999.* 99(b) Annual Report on Form 11-K for the Irwin Mortgage Corporation Retirement and Profit Sharing Plan for the year ending December 31, 1999.* ------------------------- --> * To be filed by amendment pursuant to Rule 15d-21. B. REPORTS ON FORM 8-K None. 66 69 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the Undersigned, thereunto duly authorized. IRWIN FINANCIAL CORPORATION Date: March 21, 2000 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 Corporation and in the capacities on the dates indicated. SIGNATURE CAPACITY WITH CORPORATION DATE --------- ------------------------- ---- /s/ SALLY A. DEAN Director March 21, 2000 ----------------------------------------------------- Sally A. Dean /s/ DAVID W. GOODRICH Director March 21, 2000 ----------------------------------------------------- David W. Goodrich /s/ JOHN T. HACKETT Director March 21, 2000 ----------------------------------------------------- John T. Hackett /s/ WILLIAM H. KLING Director March 21, 2000 ----------------------------------------------------- William H. Kling /s/ BRENDA J. LAUDERBACK Director March 21, 2000 ----------------------------------------------------- Brenda J. Lauderback /s/ JOHN C. MCGINTY, JR. Director March 21, 2000 ----------------------------------------------------- John C. McGinty, Jr. /s/ IRWIN MILLER Director March 21, 2000 ----------------------------------------------------- Irwin Miller /s/ WILLIAM I. MILLER Director, Chairman of the March 21, 2000 ----------------------------------------------------- Board (Principal Executive William I. Miller Officer) /s/ JOHN A. NASH Director, Chairman of the March 21, 2000 ----------------------------------------------------- Executive Committee John A. Nash /s/ LANCE R. ODDEN Director March 21, 2000 ----------------------------------------------------- Lance R. Odden /s/ THEODORE M. SOLSO Director March 21, 2000 ----------------------------------------------------- Theodore M. Solso /s/ GREGORY F. EHLINGER Senior Vice President March 21, 2000 ----------------------------------------------------- (Principal Financial Gregory F. Ehlinger Officer) /s/ JODY A. LITTRELL Vice President and Controller March 21, 2000 ----------------------------------------------------- (Principal Accounting Jody A. Littrell Officer) 67 1 EXHIBIT 3b STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE CERTIFICATE OF IRWIN UNION CORPORATION I, LARRY A. CONRAD, Secretary of State of the State of Indiana, hereby certify that Articles of Incorporation of the above Corporation, in the form prescribed by my office, prepared and signed in duplicate by the incorporator(s), and acknowledged and verified by the same before a Notary Public, have been presented to me at my office accompanied by the fees prescribed by law; that I have found such Articles conform to law; that I have endorsed my approval upon the duplicate copies of such Articles; that all fees have been paid as required by law; that one copy of such Articles has been filed in my office; and that the remaining copy of such Articles bearing the endorsement of my approval and filing has been returned by me to the incorporator(s) or his (their) representatives; all as prescribed by the provisions of the Indiana General Corporation Act, as amended. Wherefore, I hereby issue to such Corporation this Certificate of Incorporation, and further certify that its corporate existence has begun. In Witness Whereof, I have hereunto set any hand and affixed the seal of the State of Indiana, at the City of Indianapolis, this 31st day of May, 1972 Larry A. Conrad, Secretary of State 2 ARTICLES OF INCORPORATION OF IRWIN UNION CORPORATION The undersigned incorporator or incorporators, desiring to form a corporation (hereinafter referred to as the "Corporation") pursuant to the provisions of the Indiana General Corporation Act, as amended (herein. after referred to as the "Act,") execute the following Articles of Incorporation. ARTICLE I Name The name of the Corporation is Irwin Union Corporation. ARTICLE II Purposes The purposes for which the Corporation is formed are: The transaction of any and all lawful business for which corporations May be incorporated under the Act, including by way of illustration and not of limitation, the following: 2 3 Irwin Union Corporation ARTICLE II Purposes 2.01. To Act as Holding Company. To purchase or otherwise acquire, own and hold the stock of other corporations and equity interests in other business entities and to direct the operations of other corporations through the ownership of stock therein and to direct the operation: of other business entities through the ownership of equity interests therein. 2.02. Capacity to Act. To have the capacity to act possessed by natural persons, but to have authority to perform only such acts as are necessary, convenient or expedient to accomplish the purposes for which it is formed and such as are not repugnant to law. 2.03. To Deal in Securities. To acquire, by purchase, subscription or otherwise and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in and with any and all securities (as hereinafter defined) issued or created by any corporation, firm, organization, association or other entity, public or private, whether formed under the laws of the United States of America or any state or commonwealth thereof, or any foreign country, or by any agency, subdivision, territory, dependency, possession or municipality of any of the foregoing, and as owner thereof to possess and exercise all of the rights, powers and privileges of ownership, including the right to execute consents and vote thereon. The term "securities" as used herein shall mean any and all notes, stocks, treasury stocks, bonds, debentures, evidences of indebtedness, certificates of interest or participation in any profit-sharing agreement, collateral trust certificates, pre-organization certificates or subscriptions, transferable shares, investment contracts voting trust certificates, certificates of deposit for a security, fractional undivided interests in oil, gas or other mineral rights or, in general, any interests or instruments commonly known as securities or any and all certificates of interest or participation in temporary or interim certificates for, receipts for, guarantees of, or warrants or rights to subscribe to or purchase any of the foregoing. 2.04. Investment Management. To make, establish and maintain investments in securities, funds or properties of any nature whatsoever and manage such funds; to do any and all acts and things for the preservation, protection, improvement and enhancement of the value of such property or securities or designed to accomplish any such purposes. To make investigations as to the business affairs and property of corporations, partnerships and various forms of business enterprises and to make appraisals and valuations of all kinds and investigate and render opinions as to the advisability from a financial standpoint of creating, merging, combining or otherwise dealing in business enterprise. Article II, Page One 3 4 Irwin Union Corporation 2.05. Creation of Corporations and Other Entities. To cause to be organized under the laws of the United States of America or of any state, commonwealth, territory, dependency or possession thereof, or of any foreign country, or of any political subdivision, territory, dependency, possession or municipality thereof, one or more corporations, firms, organizations, associations or other entities, and to cause the same to be dissolved, wound up, liquidated, merged or consolidated. 2.06. To Deal in Good Will. To acquire by purchase or exchange, or by transfer, or by merger or consolidation with, the Corporation of any corporation, firm, organization, association or other entity owned or controlled, directly or indirectly, by the Corporation, or otherwise to acquire the whole or any part of the business, good will, rights or other assets of any corporation, firm, organization, association or other entity and to undertake or assume in connection therewith the whole or any part of the liabilities and obligations thereof and to effect any such acquisition in whole or in part by delivery of cash or other property, including securities issued by the Corporation or by any other lawful means. 2.07. To Engage in Lending. To make loans and give other forms of credit including, but not limited to, financing, factoring and leasing, with or without security, and to negotiate and make contracts and agreements in connection therewith and to sell and underwrite credit insurance and life, property and liability insurance, directly or through subsidiaries. 2.08. To Aid Subsidiaries. To aid by loans, subsidy, guaranty or in any other lawful manner any corporation, firm, organization, association or other entity of which any securities (as that term is defined in section 2.03 hereof) are in any manner, directly or indirectly, held by the Corporation or in which the Corporation or any such corporation, firm, organization, association or entity may be or become otherwise interested; to guarantee the payment of dividends on any stock issued by any such corporation, firm, organization, association or entity; to guarantee or, to assume, with or without recourse against any such correlation, firm, organization, association or entity, to do any and all other acts and things for the enhancement, protection or preservation of any securities which are in any manner, directly or indirectly, held, guaranteed or assumed by the Corporation, and to do any and all acts and things designed to accomplish any such purpose. 2.09. To Provide Services. To render service, assistance, counsel and advice to and act as representative or agent in any capacity, (whether managing, operating, financial, purchasing, selling, advertising or otherwise) for any corporation, firm, organization, association or other entity and to gather, compile and disseminate information, data and advice in respect to matters of commercial, financial, statistical and business nature and to act as consultants, counselors and advisors. Article II, Page Two 4 5 Irwin Union Corporation 2.10. To Deal in Real Estate. To acquire by purchase, exchange, lease as lessee, let as lessor, sell, convey, or mortgage, whether alone or in conjunction with others, real estate of every kind, including, without limiting the generality of the foregoing, the design, development, management, acquisition, and operation of commercial, mercantile and service structures and facilities of every character, recreational structures and facilities, residential properties and structures, and mobile home parks. 2.11. To Deal in Personal Property. To acquire (by purchase, exchange, lease, hire or otherwise), hold, mortgage, pledge, hypothecate, exchange, sell, deal in and dispose of, at wholesale or retail, alone or in syndicates or otherwise in conjunction with others, commodities or other personal property of every kind, character and description and wherever situated, and any interest therein. 2.12. To Deal in its Own Securities. To acquire (by purchase, exchange, lease, hire or otherwise), hold, sell, transfer, reissue, or cancel its own shares, or any securities or other obligations of the Corporation, in the manner and to the extent now or hereafter permitted by the laws of Indiana, except that the Corporation shall not use its funds or other assets for the purchase of its own shares if such use would cause any impairment of the capital of the Corporation, and except that its own shares beneficially owned by the Corporation shall not be voted directly or indirectly. 2.13. To Make Contracts. To enter into, make, perform and carry out, or cancel and rescind, contracts for any lawful purposes to its business. 12.14. To Enter into Partnerships. To enter into any lawful arrangement for sharing profits, union of interest, reciprocal association or cooperative association with any corporation, association, partnership individual or other entity, for the carrying on of any business, transaction, or venture, which the Corporation is authorized to carry on or any business, transaction, or venture deemed necessary, convenient or incidental to carrying out of any of the purposes of the Corporation. 2.15. To Engage in Business Generally. To engage in any commercial, financial, mercantile, industrial, manufacturing, marine, exploration, mining, agricultural, research, licensing, servicing or agency business not prohibited by law and any, some or all of the foregoing. 2.16. To-Borrow Money. To borrow money for any business object or purpose of the Corporation from time to time without limit as to amount, to issue any kind of indebtedness, whether or not in connection with borrowing money, including evidences of indebtedness convertible into stock of the Corporation, to secure the payment of any evidence of indebtedness by the creation of any interest in any of the property or rights of the Corporation, whether at that time owned or thereafter acquired. Article-II, Page Three 5 6 Irwin Union Corporation 2.17. To Execute Guarantees. To make any guarantee respecting stocks, dividends, securities, indebtedness, interest, contracts or other obligations. 2.18. Stated Capital; Consideration for Shares. To determine the amount of the stated capital and increase or reduce stated capital and determine the consideration to be received for shares issued from time to time. 2.19. Rights, Privileges and Powers. Subject to any limitations or restrictions imposed by law or by these Articles of Incorporation, to have and exercise all the rights, privileges and powers specified in or permitted under the Indiana General Corporation Act. 2.20. General Powers. To do everything necessary, proper, advisable or convenient for the accomplishment of any of the purposes or the attainment of any of the objects of the furtherance of any of the powers herein set forth and to do every other act and thing incident thereto or connected therewith which is not forbidden by the laws of the State of Indiana or by the provisions of these Articles of Incorporation 2.21. Construction. The foregoing sections shall be construe as purposes as well as powers and the matters expressed in each section shall, unless otherwise expressly provided, be in no way limited by reference to or inference from the terms of any other section, each of such sections being regarded as creating independent purposes and powers The enumeration shall not be construed as limiting or restricting in any manner either the meaning or general terms used in any of the sections or the scope of the general powers of the Corporation created thereby. The enumeration herein of any specific purposes or powers shall not be held to limit or restrict in any manner the exercise by the Corporation of the general powers now or hereafter conferred by the laws of the state of Indiana nor shall the expression of one thing be deemed to exclude another not expressed, whether or not it be of like nature. The titles contained herein are solely for convenience and are not to be considered in construing the various sections. 2.22. Limiting Clause. Nothing in this article shall be construed to authorize the conduct by the Corporation, directly or indirectly, of a rural loan and savings association, credit union or a banking, railroad, insurance, surety, trust, safe deposit, mortgage guarantee or building and loan business or receiving deposits or money, bullion or foreign coins or of issuing bills, notes, or other evidences of debt or circulation as money; provided, however, that the Corporation may own, create or otherwise acquire all or part of the issued and outstanding stock of corporations lawfully engaged in any of such activities. Article II, Page Four 6 7 ARTICLE III Period of Existence The period during which the Corporation shall continue is perpetual. ARTICLE IV Resident Agent and Principal Office Section 1. Resident Agent. The name and address of the Resident Agent in charge of the Corporation's principal office is John A. Nash, 500 Washington Street, Columbus, Indiana 47201. Section 2. Principal Office. The post office address of the principal office of the Corporation is 500 Washington Street, Columbus, Indiana 47201 ARTICLE V Shares Section 1. Number. The total number of shares which the Corporation has authority to issue is 1,000 shares consisting of 500 common shares with the par value of $10.00 per shares, and 500 preferred shares without par value. Section 2. Terms. (see attached) Section 3. Voting Rights. (see attached) 7 8 Irwin Union Corporation ARTICLE V 2. Terms Shares 5.20. Classes. The authorized shares of the Corporation (the "Shares") shall be divided into two classes consisting of 500 common shares par value $10, (the "Common Shares") and 500 preferred shares without par value (the "Preferred Shares"). 5.21. Rights. 5.211. Common Shares. All Common Shares shall have the same rights and privileges. Common Shareholders shall have no preemptive rights. 5.212. Preferred Shares. The Board of Directors is expressly authorized at any time, and from time to time, by resolution, to determine and state the designations, relative rights, preferences, limitations and restrictions of any class or classes of Preferred Shares, or of any series of any class or classes thereof, and to authorize the issuance of such Preferred Shares upon compliance prior to the issuance of any such Preferred Shares with the applicable provisions of the Act. 5.22. Dividends. Dividends or distributions may be declared and paid upon outstanding Shares at the discretion of the Board of Directors from time to time out of earned surplus or capital surplus of the Corporation. Dividends payable on the Shares of any class of Shares or series thereof may be paid to the holders of Shares of that or any other class of Shares or series thereof. 5.23. Issuance of and Consideration for Shares. Shares may be issued for such consideration as may be fixed from time to time by the Board of Directors, which consideration may be equal to, less than or more than the par value thereof. The judgment of the Board of Directors as to (i) the value of any property or services received in full or partial payment for Shares, and (ii) as to the value of the corporate assets in the event of a Share dividend, shall be conclusive. When Shares are issued upon payment of the consideration fixed by the Board of Directors, such Shares shall be taken to be fully paid stock and shall be nonassessable. 5.24. Partial Distributions. The Board of Directors may make distributions to Shareholders out of capital surplus from time to time to the extent permitted by law. 5.25. Facsimile Signatures. Facsimile signatures may be used in lieu of the manual signature of an officer or director of the Corporation. In case any officer of director who has signed or whose facsimile signature has been placed upon any share certificate or other document issued by this Corporation shall have ceased to be such an officer or director before such certificate or other document is used, such certificate or other document may be issued by the Corporation with the same effect as if such person were an officer at the date of its issue. Article V, Page One 8 9 Irwin Union Corporation 5.26. Transfer of Shares. Transfer of shares shall be governed by the By-Laws of the Corporation subject to applicable law. 3. Voting Rights. 5.30. Voting Rights. 5.301. Common Shares. Every holder of the Common Shares of the Corporation shall have the right at every Shareholders' meeting, to one vote for each Common Share standing in his name on the books of the Corporation. 5.302. Preferred Shares. Holders of Preferred Shares shall have no right to vote upon any question except as shall be affirmatively provided in the Act, or in the remaining sections of this article. 5.31. No Greater Requirements. Nothing in these Articles shall be deemed to require any greater portion of the Shares to concur in any action taken by the Shareholders than is required by law. 5.32. Record Date. The By-Laws may provide for a record date for determining Shareholders entitled to receive payment of dividend or for determining Shareholders for any other purpose. 5.33. Mergers and Consolidations. Any class of Shares of this Corporation shall be entitled to vote as a class if the agreement of merger or consolidation contains any provision which, if contained in a proposed amendment to the Articles of Incorporation of the Corporation, would entitle such class of Shares to vote as a class. 5.34. Voting on Special Corporate Transactions. In voting on adoption of any proposal for a special corporate transaction or for dissolution of the Corporation, all Shares shall vote as a single class and no Shares shall be entitled to vote as a separate class. 5.35. Mergers With Subsidiaries. Nothing herein contained shall limit the power of the Corporation or prescribe the procedures to be followed in any merger or consolidation of any subsidiary of this Corporation, ninety-five percent (95%) (or such lesser percentage as may hereafter be prescribed by law) or more of the outstanding Shares of which subsidiary are owned by this Corporation and any such merger or consolidation of any such subsidiary may be accomplished by the Board of Directors of this Corporation in the manner prescribed by law. 5.36. Class Voting. If the holders of any class of Shares are entitled to vote as a class, the proposal shall be adopted upon receiving the affirmative vote of the holders of at least a majority (or such greater proportion as these Articles of Incorporation may require) of the Shares of each class of Shares entitled to vote thereon as a class and of the total Shares entitled to vote thereon. Article V, Page Two 9 10 ARTICLE VI Requirements Prior To Doing Business The Corporation will not commence business until consideration of the value of at least $1,000.00 (one thousand dollars) has been received for the issuance of shares. ARTICLE VII Director(s) Section 1. Number of Directors. The initial Board of Directors is composed 3 member(s). The number of directors may be from time to time fixed by the By-Laws of the Corporation at any number. In the absence of a By-Law fixing the number of directors, the number shall be three. Section 2. Names and Post Office Addresses of the Director(s). The name(s) and post office addressees) of the initial Board of Director(s) of the Corporation is (are): Name Number and Street or Building City State Zip Code Paul N. Dinkins 500 Washington Street Columbus, Indiana 47201 John A. Nash 500 Washington Street Columbus, Indiana 47201 Greg W. Rush 500 Washington Street Columbus, Indiana 47201 Section 3. Qualifications of Directors. (If Any) No qualifications are prescribed by these Articles. 10 11 ARTICLE VIII Incorporator(s) The name(s) and post office addressees) of the incorporator(s) of the Corporation is (are): Name Number and Street or Building City State Zip Code Irwin Miller 301 Washington Street Columbus, Indiana 47201 Paul N. Dinkins 500 Washington Street Columbus, Indiana 47201 John A. Nash 500 Washington Street Columbus, Indiana 47201 ARTICLE IX Provisions for Regulation of Business and Conduct of Affairs of Corporation (see attached) 11 12 Irwin Union Corporation ARTICLE IX Provisions for Regulation of Business and Conduct of Affairs of Corporation 9.01. Code of By-Laws. The Board of Directors of the Corporation shall have power, without the assent of the Shareholders, to make, alter, amend or repeal the Code of By-Laws of the Corporation, but the affirmative vote of a majority of the members of the Board of Directors for the time being shall be necessary to make such Code or to effect any alteration, amendment or repeal thereof. All provisions for the regulation of business and management of the affairs of the Corporation shall be stated in the By-Laws. 9.02. Meetings of Shareholders. Meetings of the Shareholders of the Corporation shall be held at such place within or without the State of Indiana as may be specified in the respective notices or waiver: of notice thereof or as specified in the By-Laws. 9.03. Meetings of Directors. Meetings of the Board of Directors and committees thereof of the Corporation shall be held at such place within or without the State of Indiana as may be specified in the respective notices or waivers of notice thereof or as specified in the By-Laws. The By-Laws shall prescribe the manner in which notice of such meetings may be given and the time before such meeting in which such notice shall be given, unless waived. 9.04. Interest of Directors in Contracts. Any contract or other transaction between the Corporation and any corporation in which this Corporation owns all or a part of the capital stock shall be valid and binding notwithstanding the fact that the officers and/or directors executing the contract on behalf of this Corporation are the same or a majority of them are the same or the participating directors or officers are the same. With the exception provided above, any contract or other transaction between the Corporation and any one or more of its directors or between the Corporation and any firm of which one or more of its directors are members or employees or in which they are interested or between the Corporation and any corporation or association in which one or more of its directors are stockholders, members, directors, officers or employees or in which they are interested, shall be valid for all purposes notwithstanding the presence of such director or directors at the meeting of the Board of Directors which acts upon or in reference to such contract or transaction and notwithstanding his or their participate in such action if the fact of such interest shall be disclosed or known to the Board of Directors and the Board of Directors shall authorize, approve and ratify such contract or transaction by a vote of the majority of the directors present, such interested director or directors to be counted in determining whether a quorum is present but not to be counted in calculating the majority of such quorum necessary to carry such vote. This section shall not be construed to invalidate any contract or other transaction which would otherwise be valid under the common and statutory law applicable thereto. Article IX, Page One 12 13 Irwin Union Corporation 9.05. Indemnification of Directors, Officers and Employees. 9.051. "Liability" "Expense." As used in this section 9.05 the terms "liability" and "expense" shall include but shall not be limited to attorneys' fees and disbursements and amounts of judgment, fines or penalties against and amounts paid in settlement by the directors, officers or employees. 9.052. "Claim." As used in this section 9.05, the term "claim" 'shall include: (i) any claim, action, suit or proceeding, whether actual or threatened, brought by or in the right of this Corporation or another corporation or otherwise, civil, criminal or administrative or in connection with an investigation or appeal relating thereto, (ii) against a person who is or was a director, officer or employee of this Corporation or a person who was serving as a director, officer or employee of any other corporation at the request of this Corporation, and (iii) which is asserted against or threatened against him, as a party or otherwise, by reason of his having been a director, officer or employee of this Corporation or such other corporation or by reason of any past or future action taken or not taken in his capacity as such director, officer or employee, whether or not he continues to be such at the time the claim is asserted or threatened. 9.053. Indemnity. Any such director, officer or employee who has been wholly successful on the merits or otherwise with respect to any claim of the character described herein shall be entitled to indemnification as of right. Except as provided in the preceding sentence, any indemnification hereunder shall be made at the discretion of the Corporation but only if (i) the Board of Directors acting by a quorum consisting of directors who are not parties to or who have been wholly successful with respect to such claim, action, suit or proceeding shall find that the person to be indemnified acted in good faith in what he reasonably believed to be the best interests of this Corporation or such other corporation, as the case may be, and, in addition, in any criminal action or proceeding (which shall not be deemed to include civil, administrative or investigative actions or proceedings in which conduct which violates a criminal statute is alleged) he had no reasonable cause to believe that his conduct was unlawful, or (ii) independent legal counsel (who may be regular counsel of the Corporation) shall deliver to it its written opinion that the person to be indemnified so acted. Article IX, Page Two 13 14 Irwin Union Corporation 9.054. No Presumption. The termination of any claim by judgment, settlement (whether with or without court approval) or conviction or upon a plea of guilty or of nolo contendere or its equivalent shall not create a prescription that the person to be indemnified did not meet the standard of conduct set forth in section 9.053. 9.055. Several Claims. If several claims, issues or matters of act ion are involved, any such person may be entitled to indemnification as to some matters even though he ! is not entitled as to other matters. 9.056. Advances. The Corporation may advance expenses @to or, where appropriate, may at its expense undertake the ,defense of any such director, officer or employee upon receipt of an undertaking by or on behalf of such person to repay such expenses if it should ultimately be determined that he is not entitled to indemnification under this section 9.05. 9.057. Applicability. The provisions of this section 9.05 shall be applicable to claims, actions, suits or proceedings made or commenced after the adoption hereof, whether arising from acts or omissions to act during, before or after the adoption hereof. 9.058. Extent of Rights. The rights of indemnification provided hereunder shall be in addition to any rights to which any person concerned may otherwise be entitled by contract or as a matter of law and shall inure to the benefit of the heirs, executors and administrators of any such person. 9.59. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation against any liability asserted against him and incurred by him in any capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this section 9.05 or otherwise 9.06. Abandoned Property. After it remains unclaimed for a period of six years, any stock or other certificate of ownership, or any dividend, profit, distribution, interest, payment or principal or other property held by this Corporation or owing by this Corporation for the six consecutive years last passed shall revert to and become the property of this Corporation. The secretary shall prepare a written claim of the Corporation to such fund, claim, income or property before the end of the seventh year after its appropriate due date, distribution date or delivery date. Article IX, Page Three 14 15 Irwin union Corporation 9.07. Partnerships. The Board of Directors shall have the power to authorize the Corporation to enter into partnerships or any other lawful arrangement for the sharing of profits, union of interest, reciprocal association, cooperative association, partnership, joint venture or syndicate with any corporation, association, partnership, individual, firm or other legal entity for the purpose of carrying on any lawful business. 9.08. Committees. The By-Laws may provide for an executive committee and other committees, which shall have the fullest authority to act for the Board of Directors permitted under the laws of Indiana. 9.09. Removal of Directors. The Shareholders shall have no power to remove directors during their terms of office. Any director may be removed for specific cause found and determined by a vote of not less than two-thirds (2/3) of the entire Board of Directors at any time. 9.10. Term of Directors. When the Board of Directors consist of nine (9) or more directors, the By-Laws may specify that the director shall be apportioned into two or more classes whose terms of office shall expire at different times, but no term shall continue longer than three (3) years. 9.ll. Amendment of Articles of Incorporation. The Corporation reserves the right to alter, amend and repeal any provisions contained in these Articles of Incorporation in the manner now or hereafter prescribed by the provisions of the Act or any other pertinent enactment of the General Assembly of the State of Indiana and all rights and powers conferred hereby on Shareholders, directors and officers of the Corporation are subject to such reserved right. Article IX, Page Four 15 16 IN WITNESS WHEREOF, the undersigned, being the incorporator(s) designated in Article VIII, execute these Articles of Incorporation and certify to the truth of the facts herein stated, this 30th day of May, 1972. /s/ Irwin Miller /s/ Paul N. Dinkins ------------------------- ----------------------- Irwin Miller Paul N. Dinkins ------------------------- ----------------------- /s/ John A. Nash ----------------------- STATE OF INDIANA ss: COUNTY OF Bartholomew I, the undersigned, a Notary Public duly commissioned to take acknowledgments and administer oaths in State of Indiana, certify that John A. Nash in the I being one of the incorporator(s) referred to in Article VTII of the foregoing Articles of Incorporation, personally appeared before me; acknowledged the execution thereof; and swore to the truth of the facts therein stated. Witness my hand and Notarial Seal this 30 day of May, 1972 /s/ Antoinette Frenzer ----------------------------- Antoinette Frenzer ----------------------------- (Printed Signature) My Commission Expires: Notary Public December 23, 1972 This instrument was prepared by Donald W. Buttrey, Stephen J. Dutton, Attorneys at Law, McHALE, COOK & WELCH, 906 Chamber of Commerce Building, Indianapolis, Indiana 46204 16 17 STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE CERTIFICATE OF AMENDED ARTICLES OF INCORPORATION OF IRWIN UNION CORPORATION I, Larry A. Conrad, Secretary of the State of Indiana, hereby certify that Amended Articles of Incorporation for the above Corporation, in the form prescribed by my office, prepared and signed in duplicate in accordance with "An Act concerning domestic and foreign corporations for profit, providing penalties for the violation hereof, and repealing all laws or parts of laws in conflict herewith," approved March 16, 1929, and Acts supplemental thereto. Whereas, upon due examination, I find that the Amended Articles of Incorporation conform to law, and have endorsed my approval upon the duplicate copies of such Articles; that all fees have been paid as required by law; that one copy of such Articles bearing the endorsement of my approval and filing has been returned by me to the Corporation. In Witness Whereof, I have hereunto set my hand and affixed the seal of the State of Indiana at the City of Indianapolis, this 29th day of December, 1972. Larry A. Conrad, Secretary of State 17 18 AMENDED ARTICLES OF INCORPORATION OF Irwin Union Corporation The undersigned officers of Irwin Union Corporation (hereinafter referred to as the "Corporation") existing pursuant to the provisions of The Indiana General Corporation Act, as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating certain Amendments of its Articles of Incorporation by the adoption of new Amended Articles of Incorporation to supersede and take the place of its heretofore existing Articles of Incorporation, certify the following facts: ARTICLE I Text of the Amended Articles The exact text of the entire Articles of Incorporation of the Corporation, as amended (hereinafter referred to as the "Amended Articles"), now is as follows: See Exhibit A attached. 18 19 ARTICLE III Period of Existence The period during which the Corporation shall continue is Perpetual. ARTICLE IV Resident Agent and Principal Office Section 1. Resident Agent. The name and address of the Resident Agent in charge of the Corporation's principal office is John A. Nash, 500 Washington Street, Columbus, Indiana 47201 Section 2. Principal Office. Me post office address of the principal office of the Corporation is 500 Washington Street, Columbus, Indiana 47201 ARTICLE V Shares Section 1. Number. The total number of shares which the Corporation has authority to issue consisting of 500,000 common shares with the par value of $10.00 per shares, and 50,000 preferred shares without par value. Section 2. Terms. (see attached) Section 3. Voting Rights. (see attached) 19 20 Irwin Union Corporation ARTICLE V 2. Terms Shares 5.20. Classes. The authorized shares of the Corporation (the "Shares") shall be divided into two classes consisting of 500,000 common shares, par value $10, (the "Common Shares") and 50,000 preferred, shares without par value (the "Preferred Shares"). 5.21. Rights. 5.211. Common Shares. All Common Shares shall have the same rights and privileges. Common Shareholders shall have no preemptive rights. 5.212. Preferred Shares. The Board of Directors is expressly authorized at any time, and from time to time, by resolution, to determine and state the designations, relative rights, preferences, limitations and restrictions of any class or classes of Preferred Shares, or of any series of any class or classes thereof, and to authorize the issuance of such Preferred Shares upon compliance prior to the issuance of any such Preferred Shares with the applicable provisions of the Act. 5.22. Dividends. Dividends or distributions may be declared and paid upon outstanding Shares at the discretion of the Board of Directors from time to time out of earned surplus or capital surplus of the Corporation. Dividends payable on the Shares of any class of Shares or series thereof may be paid to the holders of Shares of that or any other class of Shares or series thereof. 5.23. Issuance of and Consideration for Shares. Shares may be issued for such consideration as may be fixed from time to time by the Board of Directors, which consideration may be equal to, less than or more than the par value thereof. The judgment of the Board of Directors as to (i) the value of any property or services received in full or partial payment for Shares, and (ii) as to the value of the corporate assets in the event of a Share dividend, shall be conclusive. When Shares are issued upon payment of the consideration fixed by the Board of Directors, such Shares shall be taken to be fully paid stock and shall be nonassessable. 5.24. Partial Distributions. The Board of Directors may make distributions to Shareholders out of capital surplus from time to time to the extent permitted by law. 5.25. Facsimile Signatures. Facsimile signatures may be used in lieu of the manual signature of an officer or director of the Corporation. In case any officer or director who has signed or whose facsimile signature has been placed upon any share certificate or other document issued by this Corporation shall have ceased to be such an officer or director before such certificate or other document is used, such certificate or other document may be issued by the Corporation with the same effect as if such person were an officer at the date of its issue. Article V, Page One 20 21 Irwin Union Corporation 5.26. Transfer of Shares. Transfer of Shares shall be governed by the By-Laws of the Corporation subject to applicable law. 3. Voting Rights 5.30. Voting Rights. 5.301. Common Shares. Every holder of the Common Shares of the Corporation shall have the right at every Shareholders' meeting, to one vote for each Common Share standing in his name on the books of the Corporation. 5.302. Preferred Shares. Holders of Preferred Shares shall have no right to vote upon any question except as shall be affirmatively provided in the Act, or in the remaining sections of this article. 5.31. No Greater Requirements. Nothing in these Articles shall be deemed to require any greater portion of the Shares to concur in any action taken by the Shareholders than is required by law. 5.32. Record Date. The By-Laws may provide for a record date for determining Shareholders entitled to receive payment of any dividend or for determining Shareholders for any other purpose. 5.33. Mergers and Consolidations. Any class of Shares of this Corporation shall be entitled to vote as a class if the agreement of merger or consolidation contains any provision which, if contained in a proposed amendment to the Articles of Incorporation of the Corporation, would entitle such class of Shares to vote as a class. 5.34. Voting on Special Corporate Transactions. In voting on adoption of any proposal for a special corporate transaction or for dissolution of the Corporation, all Shares shall vote as a single class and no Shares shall be entitled to vote as a separate class. 5.35. Mergers With Subsidiaries. Nothing herein contained shall limit the power of the Corporation or prescribe the procedures to be followed in any merger or consolidation of any subsidiary of this Corporation, ninety-five percent (95%) (or such lesser percentage as may hereafter be prescribed by law) or more of the outstanding Shares of which subsidiary are owned by this Corporation and any such merger or consolidation of any such subsidiary may be accomplished by the Board of Directors of this Corporation in the manner prescribed by law. 5.36. Class Voting. If the holders of any class of Shares are entitled to vote as a class, the proposal shall be adopted upon receiving the affirmative vote of the holders of at least a majority (or such greater proportion as these Articles of Incorporation may require) of the Shares of each class of Shares entitled to vote thereon as a class and of the total Shares entitled to vote thereon. Article V, Page Two 21 22 ARTICLE VI Requirements Prior To Doing Business The stated capital of the Corporation is at least $1000.00. ARTICLE VII Director(s) Section 1. Number of Directors. The Board of Directors is composed of 16 member(s) The number of directors may be from time to time fixed by the By-Laws of the Corporation at any number. In the absence of a By-Law fixing the number of directors, the number shall be sixteen. Section 2. Names and Post Office Addresses of the Director(s). The name(s) and post office addressees) Of the Board of Director(s) of the Corporation (are): Name Number and Street or Building City State Zip Code Eugene I. Anderson 500 Washington Street, Columbus, Indiana 47201 Paul N. Dinkins 500 Washington Street, Columbus, Indiana 47201 George Doup 500 Washington Street, Columbus, Indiana 47201 Edward E. Edwards 500 Washington Street, Columbus, Indiana 47201 Harry J. Embry 500 Washington Street, Columbus, Indiana 47201 Lowell E. Engelking 500 Washington Street, Columbus, Indiana 47201 Frank C. Forster 500 Washington Street, Columbus, Indiana 47201 Clarence 0. Hamilton 500 Washington Street, Columbus, Indiana 47201 William R. Laws, Jr. 500 Washington Street, Columbus, Indiana 47201 Irwin Miller 301 Washington Street, Columbus, Indiana 47201 John A. Nash 500 Washington Street, Columbus, Indiana 47201 Paul H. Pardieck 500 Washington Street, Columbus, Indiana 47201 Charles A. Rau 500 Washington Street, Columbus, Indiana 47201 Carl M. Reeves 500 Washington Street, Columbus, Indiana 47201 Albert H. Schumaker 500 Washington Street, Columbus, Indiana 47201 E. Don Tull 500 Washington Street, Columbus, Indiana 47201 Section 3. Qualifications of Directors. (If Any) No qualifications are prescribed by these Articles. 22 23 ARTICLE VIII Incorporators The name(s) and post office addressees) of the of the Corporation (are): President and Executive Vice President, Secretary Name Number and Street or Building City State Zip Code Paul N. Dinkins 500 Washington Street, Columbus, Indiana 47201 (President) John A. Nash 500 Washington Street, Columbus, Indiana 47201 (Executive Vice President, Secretary) ARTICLE IX Provisions for Regulation of Business and Conduct of Affairs of Corporation (See attached) 23 24 Irwin Union Corporation ARTICLE IX Provisions for Regulation of Business and Conduct of Affairs of Corporation 9.01. Code of By-Laws. The Board of Directors of the Corporation shall have power, without the assent of the Shareholders, to make, alter, amend or repeal the Code of By-Laws of the Corporation, but the affirmative vote of a majority of the members of the Board of Directors for the time being shall be necessary to make such Code or to effect any alteration, amendment or repeal thereof. All provisions for the regulation of business and management of the affairs of the Corporation shall be stated in the By-Laws. 9.02. Meetings of Shareholders. Meetings of the Shareholders of the Corporation shall be held at such place within or without the State of Indiana as may be specified in the respective notices or waivers of notice thereof or as specified in the By-Laws. 9.03. Meetings of Directors. Meetings of the Board of Directors and committees thereof of the Corporation shall be held at such place within or without the State of Indiana as may be specified in the respective notices or waivers of notice thereof or as specified in the By-Laws. The By-Laws shall prescribe the manner in which notice of such meetings may be given and the time before such meeting in which such notice shall be given, unless waived. 9.04. Interest of Directors in Contracts. Any contract or other transaction between the Corporation and any corporation in which this Corporation owns all or a part of the capital stock shall be valid and binding notwithstanding the fact that the officers and/or directors executing the contract on behalf of this Corporation are the same or a majority of them are the same or the participating directors or officers are the same. With the exception provided above, any contract or other transaction between the Corporation and any one or more of its directors or between the Corporation and any firm of which one or more of its directors are members or employees or in which they are interested or between the Corporation and any corporation or association in which one or more of its directors are stockholders, members, directors, officers or employees or in which they are interested, shall be valid for all purposes notwithstanding the presence of such director or directors at the meeting of the Board of Directors which acts upon or in reference to such contract or transaction and notwithstanding his or their participation such action if the fact of such interest shall be disclosed or known to the Board of Directors and the Board of Directors shall authorize, approve and ratify such contract or transaction by a vote of the majority, of the directors present, such interested director or directors to be counted in determining whether a quorum is present but not to be counted in calculating the majority of such quorum necessary to carry such vote. This section shall not be construed to invalidate any contract or other transaction-which would otherwise be valid under the common and statutory, law applicable thereto. Article IX, Page One 24 25 Irwin Union Corporation 9.05. Indemnification of Directors, Officers and Employees. 9.051. "Liability;" "Expense;" As used in this section 9.05 The terms "liability" and "expense" shall include but shall not be limited to attorneys' fees and disbursements and amounts of judgment, fines or penalties against and amounts paid in settlement by the directors, officers or employees. 9.052. "Claim." As used in this section 9.05, the term "claim" shall include: (i) any claim, action, suit or proceeding, whether actual or threatened, brought by or in the right of this Corporation or another corporation or otherwise, civil, criminal or administrative or in connection with an investigation or appeal relating thereto, (ii) against a person who is or was a director, officer or employee of this Corporation or a person who was serving as a director, officer or employee of any other corporation at the request of this Corporation, and (iii) which is asserted against or threatened against him, as a party or otherwise, by reason of his having been a director, officer or employee of this Corporation or such other corporation or by reason of any past or future action taken or not taken in his capacity as such director, officer or employee, whether or not he continues to be such at the time the claim is asserted or threatened. 9.053. Indemnity. Any such director, officer or employee who has been wholly successful on the merits or otherwise with respect to any claim of the character described herein shall be entitled to indemnification as of right. Except as provided in the preceding sentence, any indemnification hereunder shall be made at the discretion of the Corporation but only if (i) the Board of Directors acting by a quorum consisting of directors who are not parties to or who have been wholly successful with respect to such claim, action, suit or proceeding shall find that the person to be indemnified acted in good faith in what he reasonably believed to be the best interests of this Corporation or such other corporation, as the case may be, and, in addition, in any criminal action or proceeding (which shall not be deemed to include civil, administrative or investigative actions or proceedings in which conduct which violates a criminal statute is alleged) he had no reasonable cause to believe that his conduct was unlawful, or (ii) independent legal counsel (who may be regular counsel of the Corporation) shall deliver to it its written opinion that the person to be indemnified so acted. Article IX, Page Two 25 26 Irwin Union Corporation 9.054. No Presumption. The termination of any claim by judgment, settlement (whether with or without court approval) or conviction or upon a plea of guilty or of nolo contendere or its equivalent shall not create 8L prescription that the person to be indemnified did not meet the standard of conduct set forth in section 9.053. 9.055. Several Claims. If several claims, issues or matters of action are involved, any such person may be entitled to indemnification as to some matters even though he is not entitled as to other matters. 9.056. Advances. The Corporation may advance expenses to or, where appropriate, may at its expense undertake the defense of any such director, officer or employee upon receipt of an undertaking by or on behalf of such person to repay such expenses if it should ultimately be determined that he is not entitled to indemnification under this section 9.05. 9.057. Applicability. The provisions of this section 9.05 shall be applicable to claims, actions, suits or proceedings made or commenced after the adoption hereof, whether arising from acts or omissions to act during, before or after the adoption hereof. 9.058. Extent of Rights The rights of indemnification provided hereunder shall be in addition to any rights to which any person concerned Pay otherwise be entitled by contract or as a matter of law and shall inure to the benefit of the heirs, executors and administrators of any such person. 9.059. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation against any liability asserted against him and incurred by him in any capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this section 9.05 or otherwise. Article IX, Page Three 26 27 Irwin Union Corporation 9.06. Partnerships. The Board of Directors shall have the power to authorize the Corporation to enter into partnerships or any other lawful arrangement for the sharing of profits, union of interest, reciprocal association, cooperative association, partnership, joint venture or syndicate with any corporation, association, partnership, individual, firm or other legal entity for the purpose of carrying on any lawful business. 9.07. Committees. The By-Laws may provide for an executive committee and other committees, which shall have the fullest authority to act for the Board of Directors permitted under the laws of Indiana. 9.08. Removal of Directors. The Shareholders shall have no power to remove directors during their terms of office. Any director may be removed for specific cause found and determined by a vote of not less than two-thirds (2/3) of the entire Board of Directors at any time. 9.09. Term of Directors. When the Board of Directors consists of nine (9) or more directors, the By-Laws may specify that the director shall be apportioned into two or more classes whose terms of office shall expire at different times, but no term shall continue longer than three (3) years. 9.10. Amendment of Articles of Incorporation. The Corporation reserves the right to alter, amend and repeal any provisions contained in these Articles of Incorporation in the manner now or hereafter prescribed by the provisions of the Act or any other pertinent enactment of the General Assembly of the State of Indiana and all rights and powers conferred hereby on Shareholders, directors and officers of the Corporation are subject to such reserved right. Article IX, Page Four 27 28 ARTICLE 11 Manner of Adoption and Vote (b) By written consent executed on December 18, 1972 signed by all of the members of the Board of Directors of the Corporation entitled to vote in respect of the Amended Articles, that the provisions and terms of Articles V & IX of its Articles of Incorporation be amended so as to read as set forth in the amended Articles, and a meeting of such Shareholders was called to be held January 2, 1973, to adopt or reject the Amended Articles unless the same were so approved prior to such date by unanimous written consent. Section 2. Action by Shareholders (select appropriate paragraph) (b) By written consent executed on December 18, 1972, signed by the holders to 500 common shares of the Corporation, being all of the shares of the Corporation entitled to vote in respect of the Amendments, the Shareholders adopted the Amended Articles. 28 29 Section 3. Compliance With Legal Requirements The manner of the adoption of the Amended Articles, and the vote by which they were adopted, constitute full legal compliance with the provisions of the Acts, the Articles of Incorporation, and the By-Laws of the Corporation. ARTICLE III Statement of Changes Made With Respect To the Number of Shares Heretofore Authorized Section 1, of Article V of the Articles of Incorporation was amended to increase the number of authorized shares from 1,000 authorized shares to 550,000 authorized shares, consisting of 500,000 common shares with the par value of $10 per share, and 50,000 preferred shares without par value. 29 30 IN WITNESS WHEREOF, the undersigned officers execute these Amended Articles of Incorporation of the Corporation and certify to the truth of the facts herein stated, this 18th day of December, 1972, /s/ Paul N. Dinkins /s/ John A. Nash ------------------- ---------------- (Written Signature) (Written Signature) Paul N. Dinkins John A. Nash ---------------- -------------------- (Printed Signature) (Printed Signature) President of Secretary of Irwin Union Corporation Irwin Union Corporation STATE OF INDIANA SS: COUNTY OF BARTHOLOMEW. I, the undersigned, a Notary Public duly commissioned to take acknowledgments and administer oaths in the State of Indiana, certify that Paul N. Dinkins, the President and John A. Nash, the Secretary of Irwin Union Corporation, the officers executing the foregoing Amended Articles of Incorporation, personally appeared before me, acknowledged the execution thereof; and swore to the truth of the facts herein stated. Witness my hand and Notarial Seal this 18th day of December, 1972. /s/ Antoinette Frenzer ------------------------ (written Signature) Antoinette Frenzer (Printed Signature) Notary Public My Commission Expires: December 23, 1976 30 31 This instrument was prepared by Donald W. Buttrey, Stephen J. Dutton Randolph L. Seger Attorneys at Law, McHalle, Cook & Welch, 906 Chamber of Commerce Building, Indianapolis, Indiana 46204 31 32 STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE CERTIFICATE OF AMENDMENT OF IRWIN UNION CORPORATION I, LARRY A. CONRAD, Secretary of State of the Slate of Indiana, hereby certify that Articles of Amendment for the above Corporation, in the form prescribed by my office, prepared and signed in duplicate in accordance with "An Act concerning domestic and foreign corporations for profit, providing penalties for the violation hereof, and repealing all laws or parts of laws in conflict herewith," approved March 16, 1929, and Acts supplemental thereto. The Amendment: The exact text of Article V, Section I and Section 5.20 Whereas, upon due examination, I find that the Articles of Amendment conform to law, and have endorsed my approval upon the duplicate copies of such Articles; that all fees have been paid as required by law; that one copy of such Articles has been filed in my office; and that the remaining copy of such Articles bearing the endorsement of my approval and filing has been returned by me to the Corporation. In Witness Whereof, I have hereunto set my hand and affixed the seal of the State of Indiana, at the City of Indianapolis, this 3rd day of March, 1973. LARRY A. CONRAD, Secretary of State 32 33 ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF IRWIN UNION CORPORATION The undersigned officers of IRWIN UNION CORPORATION (hereinafter referred to as the "Corporation") existing pursuant to the provisions of the Indiana General Corporation Act, as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating amendment of certain provisions of its Articles of Incorporation, certify the following facts: ARTICLE I Text of the Amendment The exact text of Article(s).V Section and Section 5.20 of the Articles of Incorporation of the Corporation, as amended (hereinafter referred to as the "Amendments"), now is as follows: Section 1. Number. The number of shares which the Corporation has the authority to issue is 1,050,000 shares consisting of 1,000,000 common shares with a par value of $5 per share, and 50,000 preferred shares without par value. Section 5.20. Classes. The authorized shares of the Corporation (the "Shares") shall be divided into two classes consisting of 1,000,000 common shares, par value $5, (the "Common Shares") and 50,000 preferred shares without par value (the "Preferred Shares"). 33 34 ARTICLE II Manner of Adoption and Vote Section 1. Action by Directors (select appropriate paragraph). (a) The Board of Directors of the Corporation, at a meeting thereof, duly called, constituted and held on at which a quorum of such Board of Directors was present, duly adopted a resolution proposing to the Shareholders of the Corporation entitled to vote in respect the Amendments that the provisions and terms of Article V of its Articles of Incorporation be amended so as to read as set forth in the Amendments; and called a meeting of such shareholders, to be held March 20, 1973, to adopt or reject the Amendments, unless the same were so approved prior to such date by unanimous written consent. Section 2. Action by Shareholders (select appropriate paragraph) (a) The Shareholders of the Corporation entitled to vote in respect of the Amendments, at a meeting thereof, duly called, constituted and held on March 20 1973, the holders at which common shares were present in person or by proxy, adopted the Amendments. The holders of the following classes of shares were entitled to vote as a class in respect of the Amendments: (1) Common shares (2) (3) 34 35 The number of shares entitled to vote in respect of the Amendments, the number of shares voted in favor of the adoption of the Amendments, and the number of shares voted against such adoption are as follows: Total Shares Entitled to Vote as a Class (as listed immediately above) Total (1) (2) (3) Shares entitled to vote: 282,984 282,984 Shares voted in favor: 238,314 238,314 --------------------------- Shares voted against: 85 85 Section 3. Compliance with Legal Requirements. The manner of the adoption of the Amendments, and the vote by which they were adopted, constitute full legal compliance with the provisions of the Act, the Articles of Incorporation, and the By-Laws of the Corporation. ARTICLE III Statement of Changes Made With Respect to Any Increase In The Number of Shares Heretofore Authorized Aggregate Number of Shares Previously Authorized 550,000 Increase 500,000 Aggregate Number of Shares To Be Authorized After Effect of This Amendment 1,050,000 35 36 IN WITNESS WHEREOF, the undersigned officers execute these Articles of Amendment of the Articles of Incorporation of the Corporation, and certify to the truth of the facts herein stated, 18th day of March, 1973. /s/ John A. Nash /s/ Robert E. Kirk ------------------- ------------------- (Written Signature Written Signature John A. Nash Robert E. Kirk (Printed Signature) (Printed Signature) Executive Vice President Secretary of of Irwin Union Corporation Irwin Union Corporation STATE OF INDIANA SS: COUNTY OF Bartholomew I, the undersigned, a Notary Public duly commissioned to take acknowledgments and administer oaths in the State of Indiana, certify that John A. Nash, the Executive Vice President, and Robert E. Kirk, the Secretary of Irwin Union Corporation the officers executing the foregoing Articles of Amendment of the Articles of Incorporation, personally appeared before me, acknowledged the execution thereof, and swore to the truth of the facts therein stated. Witness my hand and Notarial Seal this 27th day of March, 1973. /s/ Gloria Harbaugh (Written Signature) Gloria Harbaugh (Printed Signature) Notary Public My Commission Expires: April 22, 1974 Stephen J. Dutton This instrument was prepared by Stephen J. Dutton, Attorney at Law, McHALE, COOK & WELCH, 906 Chamber of Commerce Building, Indianapolis, 46204 36 37 STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE To Whom These Presents Come, Greeting: WHEREAS, there has been presented to me at this office a Resolution of the Board of Directors electing to be governed by the provisions of the Indiana Business Corporation Law prior to August 1, 1987 of IRWIN UNION CORPORATION and said Resolution has been prepared and signed in accordance with the provisions of the Indiana Business Corporation Law. WHEREAS., upon due examination,, I find that it satisfies the requirements of I.C. 23-1-17-3(b) and I.C. 23-1-13-1: NOW, THEREFORE, I EDWIN J. SIMCOX, Secretary of State of Indiana, hereby certify that I have this day filed the Resolution of the Board of Directors in this office. Effective date the provisions will apply is JUNE 24th, 1986. In Witness Whereof, I have hereunto set my hand and affixed the seal of the State of Indiana, at the City of Indianapolis, this 23rd day of June, 1986 /s/ Edwin J. Simcox Secretary of State, 37 38 CERTIFICATE REGARDING ELECTION OF APPLICATION OF INDIANA BUSINESS CORPORATION LAW The undersigned, the duly elected and acting Secretary of Irwin Union Corporation ("Corporation), respectively hereby certify, verify and affirm, subject to the penalties for perjury, that the attached resolutions were adopted by the Board of Directors of the Corporation at a meeting thereof, duly constituted, and held on May 20, 1986; and that the effective date of the election to have the Indiana Business Corporation Law apply to the Corporation, as set forth in such resolutions is June 24, 1986. Dated this 20th day of May 1986. /s/ Matthew F. Souza ---------------------------------- [Name], [Office] of [Corporation] Matthew F. Souza, Secretary Irwin Union Corporation ATTEST: /s/Thomas D. Washburn ----------------------- Senior Vice President Irwin Union Corporation 38 39 RESOLUTIONS REGARDING ELECTION TO BE GOVERNED BY THE NEW INDIANA BUSINESS CORPORATION LAW WHEREAS, the Indiana General Assembly has recently adopted new statutory provisions governing business corporations, known as the Indiana Business Corporation Law ("New Statute"); and WHEREAS, the New Statute generally applies to all Indiana corporations after July 31, 1987; although a corporation's board of directors may elect to have the New Statute apply earlier by adopting and filing a resolution electing to have the New Statute apply to that corporation; and WHEREAS, the Board of Directors has carefully considered a summary and presentation of significant provisions of the New Statute prepared by counsel to the Corporation; and WHEREAS, the Board of Directors has determined that it is in the best interests of the Corporation to cause the New Statute to apply to the Corporation prior to August 1, 1987, for the following reasons, among others; (1) The New Statute provides greater flexibility in corporate governance and thereby reduces the time and expense required to ensure compliance with state law; (2) The New Statute provides the Corporation with an increased opportunity to recruit and retain qualified directors by providing them greater protection against potential liability; (3) The New Statute provides the Corporation with greater protection against vexatious or groundless derivative suits, while protecting the rights of shareholders to pursue meritorious derivative claims; and (4) The New Statute provides the Corporation with greater protection against the misuse of information obtained upon inspection by shareholders of corporate records. THEREFORE, BE IT RESOLVED, that the Board of Directors hereby elects to have the New Statute (in particular, Ind. Code 23-1-18 through 23-1-54, excluding Ind. Code 23-1-18-3, 23-1-21 and 23-1-53-3) apply to the Corporation on and after June 24, 1986; RESOLVED FURTHER, that the President, any Vice President, Secretary and Treasurer, and each of them, be, and hereby are, authorized and directed to (1) file the foregoing resolution in the Office of the Secretary of State of Indiana and (2) take any and all additional action as may be deemed necessary or desirable to implement the foregoing resolution. 39 40 EXHIBIT A ARTICLES OF INCORPORATION OF IRWIN UNION CORPORATION The undersigned incorporator or incorporators, desiring to form a corporation (hereinafter referred to as the "Corporation") pursuant to the provisions of the Indiana General Corporation Act, as amended (herein. after referred to as the "Act,") execute the following Articles of Incorporation. ARTICLE I Name The name of the Corporation is Irwin Union Corporation ARTICLE II Purposes The purposes for which the Corporation is formed are: The transaction of any and all lawful business for which corporations may be incorporated under the Act, including by way of illustration and not of limitation, the following: 40 41 Irwin Union Corporation ARTICLE II Purposes 2.01. To Act as Holding Company. To purchase or otherwise acquire, own and old the stock of other corporations and equity interest in other business entities and to direct the operations of other corporations through the ownership of stock therein and to direct the operations of other business entities through the ownership of equity interests therein. 2.02. Capacity to Act. To have the capacity to-act possessed by natural persons, but to have authority to perform only such acts as are necessary, convenient or expedient to accomplish the purposes for which it is formed and such as are not repugnant to law. 2.03. To Deal in Securities. To acquire, by purchase, subscription or otherwise and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in and with any and all securities (as hereinafter defined) issued or created by any corporation, firm, organization, association or other entity, public or private, whether formed under the laws of the United States of America or any state or commonwealth thereof, or any foreign country, or by any agency, subdivision, territory, dependency, possession or municipality of any of the foregoing, and as owner thereof to possess and exercise all of the rights, powers and privileges of ownership, including the right to execute consents and vote thereon. The term "securities" as used herein shall mean any and all notes, stocks, treasury stocks, bonds, debentures, evidences of indebtedness, certificates of interest or participation in any profit sharing agreement, collateral trust certificates, pre-organization certificates or subscriptions, transferable shares, investment contracts, voting trust certificates, certificates of deposit for a security, fractional undivided interests in oil, gas or other mineral rights or, in general, any interests or instruments commonly known as securities or any and all certificates of interest or participation in temporary or interim certificates for, receipts for, guarantees of, or warrants or rights to subscribe to or purchase any of the foregoing. 2.04. Investment Management. To make, establish and maintain investments in securities, funds or properties of any nature whatsoever and to manage such funds; to do any and all acts and things for the preservation, protection, improvement and enhancement of the value of such property or securities or designed to accomplish any such purposes. To make investigations as to the business affairs and property of corporations, partnerships and various forms of business enterprises and to make appraisals and valuations of all kinds and investigate and render opinions as to the advisability from a financial standpoint of creating, merging, combining or otherwise dealing in business enterprises Article II, Page One 41 42 Irwin Union Corporation 2.05. Creation of Corporations and Other Entities. To cause to be organized under the laws of the United States of America or of any state, commonwealth, territory, dependency or possession thereof, or of any foreign country, or of any political subdivision, territory, dependency, possession or municipality thereof, one or more corporations, firms, organizations, associations or other entities, and to cause the same to be dissolved, wound up, liquidated, merged or consolidated. 2.06. To Deal in Good Will. To acquire by purchase or exchange, or by transfer, or by merger or consolidation with, the Corporation of any corporation, firm, organization, association or other entity owned or controlled, directly or indirectly, by the Corporation, or otherwise to acquire the whole or any part of the business, good will, rights or other assets of any corporation, firm, organization, association or other entity and to undertake or assume in connection therewith the whole or any part of the liabilities and obligations thereof and to effect any such acquisition in whole or in part by delivery of cash or other property, including securities issued by the Corporation or by any other lawful means. 2.07. To Engage in Lending. To make loans and give other forms of credit including, but not limited to, financing, factoring and leasing, with or without security, and to negotiate and make contracts and agreements in connection therewith and to sell and underwrite credit insurance and life, property and liability insurance, directly or throuc.1 subsidiaries. 2.08. To Aid Subsidiaries. To aid by loans, subsidy, guaranty or in any other lawful manner any corporation, firm, organization, association or other entity of which any securities (as that term is defined in section 2.03 hereof) are in any manner, directly or indirectly, held by the Corporation or in which the Corporation or any such corporation, firm, organization, association or entity may be or become otherwise interested; to guarantee the payment of dividends on any stock issued by any such corporation, firm, organization, association or entity; to guarantee or, to assume, with or without recourse against any such corporation, firm, organization, association or entity, the payment of the principal of, and/or the interest and premium, if any, on any obligations issued or incurred by such corporation, firm, organization (association or entity; to do any and all other acts and things for the enhancement, protection or preservation of any securities which are in any manner, directly or indirectly, held, guaranteed or assumed by the Corporation, and to do any and all acts and things designed to accomplish, any such purpose. 2.09. To Provide Services. To render service, assistance, counsel and advice to and act as representative or agent in any capacity (whether managing, operating, financial, purchasing, selling, advertising or otherwise) for any corporation, firm, organization, association or other entity and to gather, compile and disseminate information, data and advice in respect to matters of a commercial, financial, statistical and business nature and to act as consultants, counselors and advisors. Article II, Page Two 42 43 Irwin Union Corporation 2.10. To Deal in Real Estate. To acquire by purchase, exchange, lease or otherwise, and to hold, own, improve, operate, manage, lease as lessee, let as lessor, sell, convey or mortgage, whether alone or in conjunction with others, real estate of every kind, character and description, and wherever situated, or any interest therein including, without limiting the generality of the foregoing, the design, development, management, acquisition, and operation of commercial, mercantile and service structures and facilities of every character, recreational structures and facilities, residential properties and structures, and mobile home parks. 2.11. To Deal in Personal Property. To acquire (by purchase, exchange, lease, hire or otherwise), hold, mortgage, pledge, hypothecate, exchange, sell, deal in and dispose of, at wholesale or retail, alone or in syndicates or otherwise in conjunction with others, commodities or other personal property of every kind, character and description and wherever situated, and any interest therein. 2.12. To Deal in its Own Securities. To acquire (by purchase, exchange, lease, hire or otherwise), hold, sell, transfer, reissue, or cancel its own shares, or any securities or other obligations of the Corporation, in the manner and to the extent now or hereafter permitted by the laws of Indiana, except that the Corporation shall not use its funds or other assets for the purchase of its own shares if such use would cause any impairment of the capital of the Corporation, and except that its own shares beneficially owned by the Corporation shall not be voted directly or indirectly. 2.13. To Make Contracts. To enter into, make, perform and carry out, or cancel and rescind, contracts for any lawful purposes to its business. 2.14. To Enter into Partnerships. To enter into any lawful arrangement for sharing profits, union of interest, reciprocal association or cooperative association with any corporation, association, partnership individual or other entity, for the carrying on of any business, transaction, or venture, which the Corporation is authorized to carry on or any business, transaction, or venture deemed necessary, convenient or incidental to carrying out of any of the purposes of the Corporation. 2.15. To Engage in Business Generally. To engage in any commercial, financial, mercantile, industrial, manufacturing, marine, exploration, mining, agricultural, research, licensing, servicing or agency business not prohibited by law and any, some or all of the foregoing. 2.16. To Borrow Money. To borrow money for any business object or purpose of the Corporation from time to time without limit as to amount, to issue any kind of indebtedness, whether or not in connection with borrowing money, including evidences of indebtedness convertible into stock of the Corporation, to secure the payment of any evidence of indebtedness by the creation of any interest in any of the property or rights of the Corporation, whether at that time owned or thereafter acquired. Article II, Page Three 43 44 Irwin union Corporation 2.17. To Execute Guarantees. To make any guarantee respecting stocks, dividends, securities, indebtedness, interest, contracts or other obligations. 2.18. Stated Capital; Consideration for Shares. To determine the amount of the stated capital and increase or reduce stated capital and determine the consideration to be received for shares issued from time to time. 2.19. Rights, Privileges and Powers. Subject to any limitations or restrictions imposed by law or by these Articles of Incorporation, to have and exercise all the rights, privileges and powers specified in or permitted under the Indiana General Corporation Act. 2.20. General Powers. To do everything necessary, proper, advisable or convenient for the accomplishment of any of the purposes or the attainment of any of the objects of the furtherance of any of the powers herein set forth and to do every other act and thing incidental thereto or connected therewith which is not forbidden by the laws of the State of Indiana or by the provisions of these Articles of Incorporation. 2.21. Construction. The foregoing sections shall be construed as purposes as well as powers and the matters expressed in each section shall, unless otherwise expressly provided, be in no way limited by reference to or inference from the terms of any other section, each of such sections being regarded as creating independent purposes and powers. The enumeration shall not be construed as limiting or restricting in any manner either the meaning or general terms used in any of the sections or the scope of the general powers of the Corporation created thereby. The enumeration herein of any specific purposes or powers shall not be held to limit or restrict in any manner the exercise by the Corporation of the general powers now or hereafter conferred by the laws of the state of Indiana nor shall the expression of one thing be deemed to exclude another not expressed, whether or not it be of like nature. The titles contained herein are solely for convenience and are not to be considered in construing the various sections. 2.22. Limiting Clause. Nothing in this article shall be construed to authorize the conduct by the Corporation, directly or indirectly, of a rural loan and savings association, credit union or a banking, railroad, insurance, surety, trust, safe deposit, mortgage guarantee or building and loan business or receiving deposits of money, bullion or foreign coins or of issuing bills, notes, or other evidences of debt or circulation as money; provided, however, that the Corporation may own, create or otherwise acquire all or part of the issued and outstanding stock of corporations lawfully engaged in any of such activities. Article II, Page Four 44 45 CERTIFICATE OF CONSENT TO USE OF NAME Irwin Union Bank and Trust Company, an Indiana bank, on its own behalf and on behalf of its wholly-owned subsidiary, Irwin Union Realty Corporation, hereby consents to incorporation under the Indiana General Corporation Act of a incorporation on having the name Irwin Union Corporation; consents that said corporation be authorized to transact business in Indiana; and grants permission to use, and consents to the use of, the name Irwin Union Corporation by said Indiana corporation as is provided by the Indiana General Corporation Act (IC 1971, 23-1-2-4). IN WITNESS WHEREOF said Irwin Union Bank and Trust Company, an Indiana bank, has caused this Certificate of Consent to be executed in its proper corporate name by the officers below this day of May 1972. IRWIN UNION BANK AND TRUST COMPANY An Indiana Bank By: /s/ Paul. N. Dinkins ------------------------- Paul N. Dinkins Attest: -------------------------------------------------------------------------------- --> /s/ John A. Nash ------------------ John A. Nash, Secretary STATE OF INDIANA ) SS: COUNTY OF BARTHOLOMEW ) Subscribed and sworn to by Paul N. Dinkins and John A. Nash, to me known to be the President and Secretary of Irwin Union Bank and Trust Company upon their several oaths before me, a notary public, this 30 day of May 1972. /s/ Antoinette Frenzer ------------------------------ Antoinette Frenzer Notary Public My commission expires: December 23, 1972 This instrument prepared by Stephen J. Dutton, attorney at law. 45 46 CERTIFICATE OF CONSENT TO USE OF NAME Irwin Union Foundation, an Indiana foundation hereby consents to the incorporation under the Indiana General Corporation Act of a corporation having the Irwin Union Corporation; consents that said corporation be authorized to transact business in Indiana; and grants permission to use, and consents to the use of, the name Irwin Union Corporation by said Indiana corporation as is provided by the Indiana General Corporation Act (IC 1971, 23-1-2-4). IN WITNESS WHEREOF said Irwin Union Foundation, an Indiana foundation, has caused this Certificate of Consent to be executed in its proper corporate name by the officers below this day of May, 1972. IRWIN UNION FOUNDATION An Indiana Foundation By /s/ Paul N. Dinkins --------------------- Paul N. Dinkins President ATTEST: /s/ James A. Joseph ---------------------------- James A. Joseph, Secretary STATE OF INDIANA SS: COUNTY OF BARTHOLOMEW Subscribed and sworn to by Paul N. Dinkins and James A. Joseph, to me known to be the President and Secretary of Irwin Union Foundation upon their several oaths before me, a Notary Public, this, day of May, 1972. /s/ Antoinette Frenzer ---------------------- Antoinette Frenzer My Commission Expires: December 23, 1972 This instrument prepared by Stephen J. Dutton, attorney at law. 46 47 ARTICLES OF INCORPORATION IND. SECRETARY OF STATE OF IRWIN UNION CORPORATION Irwin Union Corporation (hereinafter referred to as the "Corporation") existing pursuant to the Indiana Business Corporation Law, desiring to give notice of corporate action effectuating amendment of certain provisions of its Articles of Incorporation, sets forth the following facts: ARTICLE I AMENDMENT Section 1. The date of incorporation of the Corporation is May 31, 1972. Section 2. The name of the Corporation following this amendment is Irwin Union Corporation. Section 3. The exact text of Article V, Section 1 and Section 5.20 of the Articles of Incorporation is now as follows: Section 1. Number. The number of shares which the Corporation has the authority to issue is 1,550,000 shares consisting of 1,500,000 Common Shares with a par due of $5 par share, and 50,000 preferred shares without par value. Section 5.20. Classes. The authorized shares of the Corporation (the "Shares") shall be divided into two classes consisting of 1,500,000 Common Shares, par value $5, (the "Common Shares") and 50,000 preferred shares without par value (the "Preferred Shares"). Section 4. The Amendment was adopted by the shareholders of the Corporation on March 22, 1989, and are to be effective upon the filing of these Articles of Amendment. 47 48 ARTICLE II MANNER OF ADOPTION AND VOTE The designation (i.e. common, preferred and any classification where different classes of stock exists), number of outstanding shares, number of votes entitled to be -cast by each voting group entitled to vote separately on the amendment and the number of votes of each voting group represented at the meeting is set forth below: Designation of Voting Group Common Number of Outstanding Shares 630,007 Number of Votes Entitled to be Cast 630,007 Number of Votes Represented at Meeting 522,899 Shares Voted in Favor 512,798 -------- Shares Voted Against 9,238 IN WITNESS WHEREOF, the undersigned officer executes these Articles of Amendment of the Articles of Incorporation of the Corporation, and verifies subject to the penalties of perjury that the facts contained herein are true, this 10 day of May, 1989. IRWIN UNION CORPORATION /s/ Matthew F. Souza --------------------------- Matthew F. Souza, Secretary This instrument was prepared by Stephen J. Hackman, Attorney at Law, ICE MILLER DONADIO & RYAN, One American Square, Box 82001, Indianapolis, Indiana 46282-0002. 48 49 EXHIBIT 3(d) ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF Irwin Union Corporation The above corporation (hereinafter referred to as the Corporation existing pursuant to the Indiana Business Corporation Law. desiring to give notice of corporate action effectuating amendment of certain provisions of its Articles of Incorporation, sets forth the following facts: ARTICLE I - AMENDMENT(S) Section 1: Date of Incorporation: May 31, 1972 Section 2: The name of the Corporation following this amendment: Irwin Financial Corporation Section 3: The exact text of Article(s) see attached of the Articles of Incorporation is now as follows (attach additional pages it necessary). Date of each Amendment's Adoption: August 21, 1990 49 50 Section 4: (Complete this section only if amendments provides for an exchange, reclassification or cancellation of issued shares and provisions for implementing the amendment are not contained in the amendment itself. Provisions for implementing the exchange, reclassification or cancellation of issued shares are set forth below (Attach additional sheets if necessary): N/A ARTICLE 11 - MANNER OF ADOPTION AND VOTE SECTION 1: Shareholder vote not required. The amendment(s) was/were adopted by the incorporators or board of directors without shareholder action and shareholder action was not required. SECTION 2: Vote of Shareholders. The designation (i.e. common, preferred and any classification were different classes of stock exists). number of outstanding shares. number of votes entitled to be Cast by each voting group) entitled to vote separately on the amendment and the number of votes of each voting group represented at the meeting is set forth below: see attached. DESIGNATION OF EACH VOTING GROUP. NUMBER OF OUTSTANDING SHARES: NUMBER OF VOTES ENTITLED TO BE CAST: NUMBER OF VOTES REPRESENTED AT THE MEETING: SHARES VOTED IN FAVOR. SHARES VOTED AGAINST: In Witness Whereof, the undersigned being Vice President and Secretary of said Corporation executes these Articles of Amendments of the Articles of Incorporation and verifies. subject to penalties of perjury that the statements contained herein are true, this 4th day of September, 1990. /s/ Matthew F. Souza Matthew F. Souza Signature Printed 50 51 ARTICLE I AMENDMENT Section 1. The date of incorporation of the Corporation is May 31, 1972. Section 2. The name of the Corporation following this amendment is Irwin Financial Corporation. Section 3. The exact text of Article I of the Articles of Incorporation is now as follows: Name. The name of the Corporation is Irwin Financial Corporation. Section 4. The Amendment was adopted by the shareholders of the Corporation on August 21, 1990, and are to be effective upon the filing of these Articles of Amendment. ARTICLE II MANNER OF ADOPTION AND VOTE The designation (i.e. common, preferred and any classification where different classes of stock exists), number of outstanding shares, number of votes entitled to be cast by each voting group entitled to vote separately on the amendment and the number of votes of each voting group represented at the meeting is set forth below: Designation of voting Group Common Number of outstanding shares: 934,780 Number of votes entitled to be cast: 934,780 Number of votes represented at the meeting: 713,402 Shares voted in favor: 701,376 Shares voted against: 10,175 51 52 STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE ARTICLES OF AMENDMENT To Whom These Presents Come, Greeting: WHEREAS, there has been presented to me at this office, Articles of Amendment for: Irwin Financial Corporation and said Articles of Amendment have been prepared and signed in accordance with the provisions of the Indiana Business Corporation Law, as amended. NOW, THEREFORE, I JOSEPH H. HOGSETT, Secretary of State of Indiana, hereby certify that I have this day filed said articles in this office. The effective date of these Articles of Amendment is April 30, 1992. IN Witness Whereof, I have hereunto set my hand and affixed the seal of the State of Indiana, at the City of Indianapolis, this Thirtieth day of April, 1992. JOSEPH H. HOGSETT, Secretary of State 52 53 ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF: The undersigned officers of Irwin Financial Corporation (hereinafter referred to as the "Corporation") existing pursuant to the provisions of: Indiana Business Corporation Law as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating amendment of certain provisions of Articles of Incorporation, certify the following facts: ARTICLE I Amendment(s) SECTION I The date of incorporation of the corporation is: May 31, 1972 SECTION 2 The name of the corporation following this amendment to the Articles of Incorporation is: same as above SECTION 3 The exact text of Article(s): V Section 1 Number of the Articles of Incorporation now as follows: The number of shares which the Corporation has the authority to issue is 7,550,000 shares consisting of common shares with a par value of $5 per share, and 50,000 preferred shares without par value. SECTION 4 Date of each amendment's adoption: April 21, 1992 53 54 ARTICLE 11 Manner of Adoption and Vote SECTION 1 Action by Directors: The Board of Directors of the Corporation duly adopted a resolution proposing to amend the terms and provisions of Article(s) of the Articles of Incorporation directing a meeting of the Shareholders, to be held on allowing such Shareholders to-vote on the proposed amendment. The resolution was adopted by (Select appropriate paragraph) (a)Vote of the Board of Directors at a meeting held on at which a quorum of such Board was present. (b) Written consent executed on , and signed by all member of the Board of Directors. SECTION 2 Action by Shareholders: The Shareholders of the Corporation entitled to vote in respect of the Articles of Amendment adopted the proposed amendment. The amendment was adopted by: (Select appropriate paragraph) (a) Vote of such Shareholders during the meeting called by the Board of Directors. The result of such vote is as follows: TOTAL SHAREHOLDERS ENTITLED TO VOTE. 1,417,891 SHAREHOLDERS VOTED IN FAVOR: 1,211,029 SHAREHOLDERS VOTED AGAINST. 10,668 (b) Written consent executed on 19 and signed by all such Shareholders SECTION 3 Compliance with Legal requirements. The manner of the adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal compliance the provisions of the Act. the Articles of Incorporation, and the By-Laws of the Corporation. I hereby verify subject to the Penalties of perjury that the statements contained are true this /s/ Matthew F. Souza ------------------------- Vice President and Secretary -------------------------------------------------------------------------------- --> 54 55 STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE ARTICLES OF AMENDMENT To Whom These Presents Come, Greeting: WHEREAS, there has been presented to them at this office, Articles of Amendment for: Irwin Financial Corporation and said Articles of Amendment have been prepared and signed in accordance with the provisions of the Indiana Business Corporation Law, as amended. NOW, THEREFORE, I JOSEPH H. HOGSETT, Secretary of State of Indiana, hereby certify that I have this day filed said articles in this office. The effective date of these Articles of Amendment is April 28, 1994. IN Witness Whereof, I have hereunto set my hand and affixed the seal of the State of Indiana, at the City of Indianapolis, this Twenty-eighth day of April, 1994. /s/ JOSEPH H. HOGSETT ------------------------------- JOSEPH H. HOGSETT, Secretary of State By /s/ Peggy Runes ---------------------------- Peggy Runes, Deputy -------------------------------------------------------------------------------- --> 55 56 ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF: The undersigned officers of IRWIN FINANCIAL CORPORATION (hereinafter referred to as the "Corporation") existing pursuant to the provisions of: (Indicate appropriate act) Indiana Business Corporation Law as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating amendment certain provisions of Articles of Incorporation, certify the following facts: ARTICLE I Amendment(s) SECTION 1 The date of incorporation of the corporation is: May 31, 1972 SECTION 2 The name of the corporation following this amendment to the Articles of Incorporation is: same as above SECTION 3 The exact text of Article(s) V., Section 1. Number of the Articles of Incorporation now as follows: The number of shares which the Corporation has the authority to issue is 7,550,000 shares consisting of 7,500,000 common shares without par value, and 50,000 preferred shares without par value. SECTION 4 Date of each amendment's adoption: April 26, 1994 56 57 ARTICLE II Manner of Adoption and Vote Section 1 Action by Directors: The Board of Directors of the Corporation duly adopt a resolution proposing to amend the terms and provisions of Articles of the Articles of Incorporation such Shareholders to vote on the proposed amendment. The resolution was adopted by: (Select appropriate paragraph) (a) Vote of the Board of Directors at a meeting held on 19 at which a quorum of such Board was present. (b) Written consent executed on 19 and signed by all members the Board of Directors. The Shareholders of the Corporation entitled to vote in respect of the Articles of Amendment adopted the Proposed amendment. The amendment was adopted by: (Select appropriate paragraph) (a) (a) Vote of such Shareholders during the meeting called by the Board of Directors. The result of such vote is as follows: SHAREHOLDERS ENTITLED TO VOTE: 5,833,135 SHAREHOLDERS VOTED IN FAVOR: 4,986,081 SHAREHOLDERS VOTED AGAINST: 27,183 (b) Written consent executed on and signed by all such Shareholder of the adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal Compliance of the Act, the Articles of Incorporation, and the By-Laws of the Corporation. I hereby verify subject to the penalties of perjury that the statements contained are true the 27th day of April, 1994. /s/ Matthew F. Souza Matthew F. Souza Signature Printed Name Officer's Title: Vice President and Secretary 57 58 STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE ARTICLES OF AMENDMENT To Whom These Presents Come, Greeting: WHEREAS, there has been presented to me at this office, Articles of Amendment for: IRWIN FINANCIAL CORPORATION and said Articles of Amendment have been prepared and signed in accordance with the provisions of the Indiana Business Corporation Law, as amended. NOW, THEREFORE, I, SUE ANNE GILROY, Secretary of State of Indiana, hereby certify that I have this day filed said articles in this office. The effective date of these Articles of Amendment is May 02, 1996. In Witness Whereof, I have hereunto set my hand and affixed the seal of the State of Indiana, at the City of Indianapolis, this Second day of May, 1996. /s/ Sue Anne Gilroy -------------------------- SUE ANNE GILROY, Secretary of State JB Deputy 58 59 ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF: Name of Corporation Irwin Financial Corporation The undersigned officers of: Irwin Financial Corporation (hereinafter referred to as the "Corporation") existing pursuant to the provisions of: (indicate appropriate act) Indiana Business Corporation Law as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating amendment of certain provisions of its Articles of Incorporation, certify the following facts: Article I Amendment(s) SECTION 1 The date of incorporation of the Corporation is: May 31, 1972 SECTION 2 The name of the Corporation following this amendment to the Articles of Incorporation is: same as above SECTION 3 The exact text of Article(s) V. Section 1. Number of Incorporation is now as follows: The number of shares which the Corporation has the authority to issue is of the Articles 40,050,000 shares consisting of 40,000,000 common shares without par value, and 50,000 preferred shares without par value. SECTION 4 Date of each amendment's adoption: April 30, 1996 59 60 ARTICLE 11 Manner of Adoption and Vote SECTION I This amendment was adopted by the Board of Directors or incorporators and shareholder action was not required. SECTION 2 The shareholders of the Corporation entitled to vote in respect to the amendment adopted the proposed amendment. The amendment was adopted by: A. Vote of such shareholders during a meeting called by the Board of Directors. The result of such vote is as follows: Shares entitled to vote. 5,670,586 Number of shares represented at the meeting. 5,296,068 Shares voted in favor. 4,928,818 Shares voted against. 344,339 B. Written consent executed on 19 and signed by all such shareholders. ARTICLE III Compliance with Legal Requirements The manner of the adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal compliance with the provisions of the Act, the Articles of Incorporation, and the By-Laws of the Corporation. I hereby verify, subject to the penalties of perjury, that the statements contained herein are true, this lst day of May, 1996 /s/ Matthew F. Souza ------------------------------ Matthew F. Souza Vice President and Secretary ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF: Name of Corporation Irwin Financial Corporation Date of Incorporation May 31, 1972 60 61 The undersigned officers above referenced Corporation (hereinafter referred to as the "Corporation") existing pursuant to the provisions of. (Indicate appropriate act) X Indiana Business Corporation Law as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating amendment of certain provisions of its Article of Incorporation, certify the following facts: ARTICLE I The exact text of Article(s) V., Section I of the Articles (NOTE. if amending the name of corporation, write Article "I" in space above and write, "The name of the Corporation is below.) "Section 1. Number and Classes of Shares." The total number of shares, which the Corporation shall have the authority to issue, is 44,000,000 shares. The total authorized shares of the Corporation shall be divided into two classes: a class of up to 40,000,000 Common Shares without par value (the "Common Shares") and a class of up to 4,000,000 Preferred Shares without par value (the "Preferred Shares"). The Common Shares and the Preferred Shares are collectively referred to herein as the "Shares." ARTICLE II Date of each amendments adoption: April 29, 1999 ARTICLE III Manner of Adoption and Vote Mark applicable section: NOTE - Only in limited situations does Indiana law permit an Amendment without shareholder approval. Because a name change requires shareholder approval, Section 2 must be marked and either A or B completed. SECTION 1 This amendment was adopted by the Board of Directors or incorporators and shareholder action was not required. X SECTION 2 The shareholders of the Corporation entitled to vote in respect to the amendment adopted the proposed amendment. The amendment was adopted by: (Shareholder approval may be by either A or B.) A. Vote of such shareholders during a meeting called by the Board of Directors. The result of such vote is as follows: 21689574 Shares entitled to vote. 19149002 Number of shares represented at the meeting. 15586607 Shares voted in favor. 2023197 Shares voted against. B. Unanimous written consent executed on _______ 19__ and signed by all shareholders entitled to vote. 61 62 ARTICLE IV Compliance with Legal Requirements The manner of the adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal compliance with the provisions of the Act, the Articles of Incorporation, and the By-Laws of the Corporation. I hereby verify, subject to the penalties of perjury, that the statements contained herein are true, this 3rd day of May, 1999 Signature of current officer or chairman of the board Printed name of officer or chairman of the board Matthew F. Souza Signature's title /s/ Matthew F. Souza Secretary 62 63 ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF: Name of Corporation Irwin Financial Corporation Date of Incorporation May 31, 1972 The undersigned officers above referenced Corporation (hereinafter referred to as the 'Corporation") existing pursuant to the provisions of. (Indicate appropriate act) X Indiana Business Corporation Law as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating amendment of certain provisions of its Article of Incorporation, certify the following facts: ARTICLE I The exact text of Article(s) V., Section 2, 5.20 of the Articles (NOTE. if amending the name of corporation, write Article "I" in space above and write, "The name of the Corporation is below.) Section Deleted. ARTICLE II Date of each amendments adoption: April 29, 1999 ARTICLE III Manner of Adoption and Vote Mark applicable section: NOTE - Only in limited situations does Indiana law permit an Amendment without shareholder approval. Because a name change requires shareholder approval, Section 2 must be marked and either A or B completed. SECTION 1 This amendment was adopted by the Board of Directors or incorporators and shareholder action was not required. X SECTION 2 The shareholders of the Corporation entitled to vote in respect to the amendment adopted the proposed amendment. The amendment was adopted by: (Shareholder approval may be by either A or B.) A. Vote of such shareholders during a meeting called by the Board of Directors. The result of such vote is as follows: 21689574 Shares entitled to vote. 19149002 Number of shares represented at the meeting. 18987492 Shares voted in favor. 81949 Shares voted against. 63 64 B. Unanimous written consent executed on _______ 19__ and signed by all shareholders entitled to vote. ARTICLE IV Compliance with Legal Requirements The manner of the adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal compliance with the provisions of the Act, the Articles of Incorporation, and the By-Laws of the Corporation. I hereby verify, subject to the penalties of perjury, that the statements contained herein are true, this 3rd day of May, 1999 Signature of current officer or chairman of the board Printed name of officer or chairman of the board Matthew F. Souza Signature's title /s/ Matthew F. Souza Secretary ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION IRWIN FINANCIAL CORPORATION Article I Amendment The exact text of Article V., Section 2 of the Articles is amended to add a new Section 5.27, as set forth in Exhibit A and Exhibit B attached hereto, respectively. Article II Date of each amendment's adoption: August 26, 1999. Article III Manner of Adoption and Vote SECTION 1 This amendment was adopted by the Board of Directors or incorporators and shareholder action was not required. Article IV Compliance with Legal Requirements The manner of the adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal compliance with the provisions of the Act, the Articles of Incorporation, and the By-Laws of the Corporation. I hereby verify, subject to the penalties of perjury, that the statements contained herein are true, this 2nd day of September, 1999. /s/ Matthew F. Souza Matthew F. Souza, Secretary 64 65 EXHIBIT A IRWIN FINANCIAL CORPORATION TERMS OF SERIES A CONVERTIBLE PREFERRED SHARES By resolutions adopted on April 29, 1999 and August 26, 1999, the Board of Directors of Irwin Financial Corporation (the "Corporation"), has established and designated a series of Preferred shares to be called the Series A Convertible Preferred Shares (the "Series A Preferred Shares"), to consist of 67,000 shares having the following terms. 1. Definitions. "Bank" means Irwin Union Bank and Trust Company, a commercial bank chartered under the laws of the State of Indiana and a wholly-owned subsidiary of the Corporation. "Banking Office" means, collectively, the banking offices operated by the Bank in Monroe County, Indiana, including locations at 300 W 6th St., Bloomington, IN 47404; 1175 College Mall Rd., Box A, Bloomington, IN 47401; and 528 S. College Ave., Box A, Bloomington, IN 47401. "Board" means the Board of Directors of the Corporation. "Common Shares" means the common shares of the Corporation. "Corporation" means Irwin Financial Corporation, an Indiana corporation. "Deposit Goal" means the goal that the average deposits at the Bank on behalf of the Banking Office for any calendar quarter equal or exceed $34,000,000, with the calculations to be made as set forth in Section 4(b)(iii) herein. "Person" means an individual, a partnership, a joint venture, a corporation, an association, a trust, or any other entity or organization. "Purchase Price" means the price per share at which the Series A Preferred Shares have been offered and sold by the Corporation to qualified investors pursuant to a Confidential Private Placement Memorandum. "Series A Preferred Shares" means the Series A Convertible Preferred Shares of the Corporation. "Start Date" means the first day of the calendar quarter following the closing date of the offering. The Start Date is the date from which 65 66 the Corporation will measure the amount of deposits at the Bank on behalf of the Banking Office for the purposes of determining conversion rights. 2. Dividends. The holders of outstanding Series A Preferred Shares shall not be entitled to receive any dividends on the Series A Preferred Shares. 3. Redemption. (a) The outstanding Series A Preferred Shares are redeemable at the option of the Corporation, out of the assets of the Corporation legally available therefor, at any time or from time to time, in whole and not in part, at a redemption price per share of Series A Preferred Shares (the "Redemption Price") equal to the Purchase Price; provided, however, that for a period of not less than 30 days prior to the date fixed for redemption (the "Redemption Date"), the holders of the outstanding Series A Preferred Shares shall have an option to convert each Series A Preferred Share into 1.25 Common Shares. (b) Notice of any redemption of Series A Preferred Shares, specifying the date fixed for redemption, the redemption price and the place at which shareholders may obtain payment of the Redemption Price upon surrender of their certificates, and the option of the shareholders to convert their Series A Preferred Shares into Common Shares, shall be mailed to each holder of record of the shares to be redeemed, at such holder's address of record, not less than 35, nor more than 90 days prior to the Redemption Date. Such notice shall set forth the manner in which shareholders may convert their Series A Preferred Shares into Common Shares, or to receive the Redemption Price, upon surrender of their certificates. (c) Unless the Corporation defaults in the payment in full of the Redemption Price, (i) all rights of the holders of such Series A Preferred Shares as shareholders of the Corporation by reason of the ownership of such shares (including, without limitation, the right to convert the Series A Preferred Shares into Common Shares) shall cease on the Redemption Date except the right to receive the amount payable upon redemption of such shares upon presentation and surrender of the respective certificates evidencing such shares, and (ii) such shares shall be deemed not to be outstanding after the Redemption Date. (d) Any Series A Preferred Shares that have been redeemed shall, after such redemption, not be reissued as Series A Preferred Shares, but shall become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled. (e) Any notice required by the provisions of this Section 3 to be given to the holders of Series A Preferred Shares shall be deemed given if deposited in the United States mail postage prepaid, and addressed to each holder of record at his, her or its address appearing on the books of the Corporation. 66 67 4. Conversion Rights. The Series A Preferred Shares shall be convertible into Common Shares as follows: (a) No Optional Conversion. Other than pursuant to a redemption of the Series A Preferred Shares as set forth in Section 3 above, the holders of Series A Preferred Shares shall have no optional rights to convert such shares into Common Shares. (b) Automatic Conversion. Each Series A Preferred Share shall be automatically converted, without any further act of the Corporation or the holders of Series A Preferred Shares, into fully paid and nonassessable Common Shares in the manner and at the times specified below: (i) Second Anniversary after Start Date. If the Deposit Goal is met prior to twenty-four (24) months from the Start Date, (A) the date of the automatic conversion into Common Shares shall be twenty-seven (27) months after the Start Date, and (B) each Series A Preferred Share shall automatically be converted into 1.25 Common Shares. If the Deposit Goal has not been met prior to twenty-four (24) months from the Start Date, the Series A Preferred Shares will not be converted into Common Shares until after the third anniversary of the Start Date. (ii) Third Anniversary after Start Date. If the conversion of the Series A Preferred Shares into Common Shares has not previously taken place within thirty-six (36) months after the Start Date, then, thirty-nine (39) months after the Start Date, each outstanding Series A Preferred Share shall automatically be converted into (A) 1.10 Common Shares if the Deposit Goal has been met prior to the end of thirty-six (36) months after the Start Date, and (B) 1.02 Common Shares if the Deposit Goal has not been met prior to the end of thirty-six (36) months after the Start Date. (iii) Determination of Whether Deposit Goal Has Been Met. The Deposit Goal shall have been met prior to a specified date if the average deposits at the Bank on behalf of the Banking Office for any calendar quarter prior to such date equal or exceed $34,000,000. For the purposes of determining whether the Deposit Goal has been met, the corporation will follow the following procedures: Deposits: For the purpose of making the Deposit Goal calculations, "deposits" means the book balances of all accounts which are insurable by the Federal Deposit Insurance Corporation (such as demand, savings, time, money market and NOW accounts and certificates of deposit), including the balances in such accounts in excess of $100,000; provided, however, that certificates of deposit shall be included in the total amount of deposits only to the extent that they do not exceed 10% of total deposits. 67 68 Credit for Deposits: The specific banking office at which a deposit account is opened receives the credit for the account; provided, however, that if the Banking Office is not authorized to accept deposits or has not yet opened for business, a deposit account may be established at another banking office on behalf of the Banking Office if designated as such. The Bank's accounting system tracks and accounts for all depository accounts on a daily basis. Calendar Quarter Average: After a calendar quarter has expired, the Bank will calculate the calendar quarter average of deposits for accounts designated as gathered on behalf of the Banking Office by adding the sum of the daily general ledger balance for such deposits and then dividing this sum by the number of days in the calendar quarter. All determinations regarding whether the Deposit Goal has been met as of any date shall be made by the Board of Directors of the Corporation, whose determinations in this regard shall be final and conclusive for all purposes. (c) Mechanics of Conversion. Upon the occurrence of the dates specified in Section 4(b) above, the outstanding Series A Preferred Shares shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue to any holder certificates evidencing the Common Shares issuable upon such conversion unless certificates evidencing the Series A Preferred Shares are delivered either to the Corporation or any transfer agent designated by the Corporation. Conversion shall be deemed to have been effected on the date of the occurrence of the dates specified in Section 4(b) above, as the case may be, and such date is referred to herein as the "Conversion Date." Subject to the provisions of Section 4(b) above, as promptly as practicable thereafter (and after surrender of the certificate or certificates representing the Series A Preferred Shares to the Corporation or any transfer agent designated by the Corporation), the Corporation shall issue and deliver to such holder a certificate or certificates for the number of full Common Shares to which such holder is entitled as provided in Section 4(b) hereof. Subject to the provisions of Section 4(b), the person in whose name the certificate or certificates for Common Shares are to be issued shall be deemed to have become a holder of record of such Common Shares on the applicable Conversion Date. (d) Fractional Shares. No fractional Common Shares or scrip shall be issued upon conversion of Series A Preferred Shares. In lieu of any fractional Common Shares which would otherwise be issuable upon conversion of any Series A Preferred Shares, the number of full Common Shares issuable upon conversion thereof shall be increased to the next higher number of whole shares. (e) Rights After Conversion Date. From and after the Conversion Date (unless the Corporation defaults in issuing Common Shares in 68 69 conversion for the outstanding Series A Preferred Shares on the Conversion Date), such Series A Preferred Shares shall be deemed not to be outstanding and all rights of the holders of such shares as Shareholders of the Corporation by reason of the ownership of such shares shall cease, except the right to receive Common Shares as provided in Section 4(b) herein on presentation and surrender of the respective certificates evidencing such Series A Preferred Shares. Upon presentation and surrender, on or after the Conversion Date, of any certificate evidencing Series A Preferred Shares (properly endorsed or assigned for transfer, if the Corporation shall so require), such shares shall be converted by the Corporation for Common Shares as provided in this Section 4. (f) Authorized, But Unissued Shares. Any Series A Preferred Shares that shall at any time have been converted into Common Shares pursuant to this Section 4 shall, after such conversion become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled. (g) Reservation of Shares. The Corporation shall reserve at all times so long as any Series A Preferred Shares remain outstanding, free from preemptive rights, out of its treasury shares or its authorized but unissued Common Shares, or both, solely for the purpose of effecting the conversion of the Series A Preferred Shares, sufficient Common Shares to provide for the conversion of all outstanding Series A Preferred Shares. (h) Fully Paid and Nonassessable Shares. All Common Shares or other securities which may be issued upon conversion of the Series A Preferred Shares will upon issuance by the Corporation be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof and the Corporation shall take no action which would cause a contrary result. 5. Conversion Ratio Adjustments. The number of Common Shares into which the Series A Preferred Shares shall be converted pursuant to Section 4 (the "Conversion Ratios") and the securities or other property deliverable upon conversion of the Series A Preferred Shares shall be subject to adjustment from time to time as follows: (a) Share Subdivisions or Split-Ups. If the number of Common Shares outstanding at any time after the date of issuance of the Series A Preferred Shares is increased by a subdivision or split-up of Common Shares, then immediately after the record date fixed for the determination of holders of Common Shares entitled to receive such subdivision or split-up, as the case may be, the Conversion Ratios shall be appropriately increased so that the holder of any Series A Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series A Preferred Shares been converted immediately prior thereto. (b) Combinations of Shares. If the number of Common Shares outstanding at any time after the date of issuance of the Series A Preferred Shares is decreased by a combination of the outstanding Common 69 70 Shares, then, immediately after the effective date of such combination, the Conversion Ratios applicable thereto shall be appropriately decreased so that the holder of any Series A Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series A Preferred Shares been converted immediately prior thereto. (c) Reorganization, Reclassification, Merger, Sale of All Assets, etc. In case of any capital reorganization of the Corporation, or of any reclassification of the Common Shares, or in case of the consolidation of the Corporation with or the merger of the Corporation with or into any other Person or of the sale, lease or other transfer of all or substantially all of the assets of the Corporation to any other Person, or in the case of any distribution of cash or other assets or of notes or other indebtedness of the Corporation or any other securities of the Corporation (except Common Shares) to the holders of its Common Shares, each Series A Preferred Share shall, after such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution, be convertible into the number of shares or other securities or property to which the Common Shares issuable (at the time of such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution) upon conversion of such Series A Preferred Shares would have been entitled upon such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution in place of (or in addition to, in the case of any such event after which Common Shares remain outstanding) the Common Shares into which such Series A Preferred Shares would otherwise have been convertible; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interest thereafter of the holders of Series A Preferred Shares shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares or other securities or property thereafter deliverable on the conversion of the Series A Preferred Shares. (d) Rounding of Calculations; Minimum Adjustment. All calculations under this Section 5 shall be made to the nearest one hundredth (1/100th) of a Common Share, as the case may be. Any provision of this Section 5 to the contrary notwithstanding, no adjustment in the Conversion Ratios shall be made if the amount of such adjustment would be less than one hundredth of a Common Share, but any such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate one hundredth of a Common Share or more. (e) Timing of Issuance of Additional Common Shares upon Certain Adjustments. In any case in which the provisions of this Section 5 shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event issuing to the holder of any Series A Preferred Shares converted after such record date and before the occurrence of such event the additional Common Shares or other property issuable or 70 71 deliverable upon such conversion by reason of the adjustment required by such event over and above the Common Shares other property issuable or deliverable upon such conversion before giving effect to such adjustment; provided, however, that the Corporation upon request shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares or other property, and such cash, upon the occurrence of the event requiring such adjustment. (f) Statement Regarding Adjustments. Whenever the Conversion Ratios shall be adjusted as provided in this Section 5, the Corporation shall forthwith file, at the office of any transfer agent for the Series A Preferred Shares and at the principal office of the Corporation a statement showing in detail the facts requiring such adjustment and the Conversion Ratios that shall be in effect after such adjustment, and the Corporation shall also cause a copy of such statement to be mailed, first class postage prepaid, to each holder of Series A Preferred Shares at its address appearing on the Corporation's records. (g) Cost. The Corporation shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of Common Shares of the Corporation or other securities or property upon conversion of any Series A Preferred Shares; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares or securities in the name other than that of the holder of Series A Preferred Shares in respect of which such shares are being issued. 6. Voting. The holders of Series A Preferred Shares shall have no right or power to vote on any matter except as required by law. In any matter on which the holders of Series A Preferred Shares shall, as a matter of law, be entitled to vote, the holders shall be entitled to one vote for each Series A Preferred Share held. 7. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of Series A Preferred Shares then outstanding shall be entitled to receive out of the assets of the Corporation available for distribution to equity holders, an amount per share in cash equal to the Purchase Price before any payment or distribution shall be made on the Common Shares or on any other class of capital shares of the Corporation ranking junior to the Series A Preferred Shares upon liquidation. All outstanding shares of any other series of preferred shares shall rank at parity with the Series A Preferred Shares. The consolidation or merger of the Corporation, or a sale, exchange or transfer of all or substantially all of its assets as an entirety, shall not be regarded as a "dissolution, liquidation or winding up of the Corporation" within the meaning of this Section 7(a). (b) After the payment to the holders of Series A Preferred Shares of the full preferential amounts fixed hereby for Series A 71 72 Preferred Shares, the holders of Series A Preferred Shares as such shall have no right or claim to any of the remaining assets of the Corporation. (c) If the assets of the Corporation available for distribution to the holders of Series A Preferred Shares upon dissolution, liquidation or winding up of the Corporation are insufficient to pay in full all amounts to which such holders are entitled pursuant to Section 7(a), no distribution shall be made on account of any shares of a class or series of capital shares of the Corporation ranking on a parity with the Series A Preferred Shares, if any, upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the Series A Preferred Shares, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. 8. Reports to Holders of Series A Preferred Shares. For so long as there shall remain outstanding any Series A Preferred Shares, the Corporation shall furnish to each holder of record of Series A Preferred Shares (i) all reports or other correspondence sent by the Corporation to holders of record of the Common Shares of the Corporation, and (ii) a quarterly report setting forth the average monthly deposits on behalf of the Banking Office. 9. Certain Covenants. So long as any Series A Preferred Shares are outstanding, without the prior written consent of the holders of a majority of the outstanding Series A Preferred Shares, the Corporation shall not amend, alter or repeal any provisions of this Resolution Establishing Series A Convertible Preferred Shares, or otherwise amend, alter or repeal any provision of the Articles of Incorporation of the Corporation so as to affect adversely the preferences, rights, powers or privileges of the Series A Preferred Shares. 10. Certain Events. If any event occurs of the type contemplated but not expressly provided for by the provisions of Section 4 or Section 5 herein, then the Corporation's Board of Directors will make an appropriate adjustment in the Conversion Ratios for the Series A Preferred Shares to protect the rights of the holders thereof. 11. Exclusion of Other Rights. Unless otherwise required by law, the Series A Preferred Shares shall not have any voting powers, preferences or relative, participating, optional or other special rights other than those specifically set forth herein. ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF: Name of Corporation Irwin Financial Corporation Date of Incorporation May 31, 1972 72 73 The undersigned officers above referenced Corporation (hereinafter referred to as the 'Corporation") existing pursuant to the provisions of. (Indicate appropriate act) X Indiana Business Corporation Law as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating amendment of certain provisions of its Article of Incorporation, certify the following facts: ARTICLE I Amendment(s) The exact text of Article(s) V., Section 2 of the Articles (NOTE: if amending the name of corporation, write Article 'I' in space above and write, "The name of the Corporation is_____" below.) 1. Section 5.27 is amended as set forth in Exhibit A attached hereto, respectively. 2. Section 5/28 is amended as set forth in Exhibit B attached hereto, respectively. 3. Amended to add a new Section 5.29 as set forth in Exhibit C attached hereto, respectively. ARTICLE II Date of each amendment's adoption: October 8, 1999 ARTICLE III Manner of Adoption and Vote Mark applicable section: NOTE - Only in limited situations does Indiana law permit an Amendment without shareholder approval. Because a name change requires shareholder approval, Section 2 must be marked and either A or B completed. X SECTION 1 This amendment was adopted by the Board of Directors or incorporators and shareholder action was not required. ARTICLE IV Compliance with Legal Requirements The manner of the adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal compliance with the provisions of the Act, the Articles of Incorporation, and the By-Laws of the Corporation. 73 74 I hereby verify, subject to the penalties of perjury, that the statements contained herein are true, this 26th day of October, 1999. Signature of current officer or chairman of the board /s/ Ellen Z. Mufson Printed name of officer or chairman of the board Ellen Z. Mufson Signature's title Assistant Secretary CERTIFIED COPY OF A RESOLUTION I HEREBY CERTIFY that I am the Assistant Secretary of Irwin Financial Corporation, an Indiana corporation, and that the following resolution was adopted by the Board of Directors of said Corporation on October 8, 1999: [Attached Herein] IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the corporate seal this 26th day of October 1999. /s/ Ellen Z. Mufson --------------------------------- Ellen Z. Mufson, Assistant Secretary EXHIBIT A IRWIN FINANCIAL CORPORATION AMENDMENT TO TERMS OF SERIES A CONVERTIBLE PREFERRED SHARES By Unanimous Written Consent effective as of October 8, 1999, the Board of Directors of Irwin Financial Corporation (the "Corporation"), has amended the terms of its Series A Convertible Preferred Shares (the "Series A Preferred Shares"), to consist of 66,666 shares, and further as follows: 1. Definitions. "Bank" means Irwin Union Bank and Trust Company, a commercial bank chartered under the laws of the State of Indiana and a wholly-owned subsidiary of the Corporation. "Banking Office" means, collectively, the banking offices operated by the Bank in Monroe County, Indiana, including locations at 300 W. 6th St., Bloomington, IN 47404; 1175 College Mall Rd., Box A, Bloomington, IN 47401; and 528 S. College Ave., Box A, Bloomington, IN 47401. "Board" means the Board of Directors of the Corporation. 74 75 "Common Shares" means the common shares of the Corporation. "Corporation" means Irwin Financial Corporation, an Indiana corporation. "Deposit Goal" means the goal that the average deposits at the Bank on behalf of the Banking Office for any calendar quarter equal or exceed $50,000,000, with the calculations to be made as set forth in Section 4(b)(iii) herein. "Person" means an individual, a partnership, a joint venture, a corporation, an association, a trust, or any other entity or organization. "Purchase Price" means the price per share at which the Series A Preferred Shares have been offered and sold by the Corporation to qualified investors pursuant to a Confidential Private Placement Memorandum. "Series A Preferred Shares" means the Series A Convertible Preferred Shares of the Corporation. "Start Date" means the first day of the calendar quarter following the closing date of the offering. The Start Date is the date from which the Corporation will measure the amount of deposits at the Bank on behalf of the Banking Office for the purposes of determining conversion rights. 2. Dividends. The holders of outstanding Series A Preferred Shares shall not be entitled to receive any dividends on the Series A Preferred Shares. 3. Redemption. (a) The outstanding Series A Preferred Shares are redeemable at the option of the Corporation, out of the assets of the Corporation legally available therefor, at any time or from time to time, in whole and not in part, at a redemption price per share of Series A Preferred Shares (the "Redemption Price") equal to the Purchase Price; provided, however, that for a period of not less than 30 days prior to the date fixed for redemption (the "Redemption Date"), the holders of the outstanding Series A Preferred Shares shall have an option to convert each Series A Preferred Share into 1.25 Common Shares. (b) Notice of any redemption of Series A Preferred Shares, specifying the date fixed for redemption, the redemption price and the place at which shareholders may obtain payment of the Redemption Price upon surrender of their certificates, and the option of the shareholders to convert their Series A Preferred Shares into Common Shares, shall be mailed to each holder of record of the shares to be redeemed, at such holder's address of record, not less than 35, nor more than 90 days prior to the Redemption Date. Such notice shall set forth the manner in which shareholders may convert their Series A Preferred Shares into 75 76 Common Shares, or to receive the Redemption Price, upon surrender of their certificates. (c) Unless the Corporation defaults in the payment in full of the Redemption Price, (i) all rights of the holders of such Series A Preferred Shares as shareholders of the Corporation by reason of the ownership of such shares (including, without limitation, the right to convert the Series A Preferred Shares into Common Shares) shall cease on the Redemption Date except the right to receive the amount payable upon redemption of such shares upon presentation and surrender of the respective certificates evidencing such shares, and (ii) such shares shall be deemed not to be outstanding after the Redemption Date. (d) Any Series A Preferred Shares that have been redeemed shall, after such redemption, not be reissued as Series A Preferred Shares, but shall become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled. (e) Any notice required by the provisions of this Section 3 to be given to the holders of Series A Preferred Shares shall be deemed given if deposited in the United States mail postage prepaid, and addressed to each holder of record at his, her or its address appearing on the books of the Corporation. 4. Conversion Rights. The Series A Preferred Shares shall be convertible into Common Shares as follows: (a) No Optional Conversion. Other than pursuant to a redemption of the Series A Preferred Shares as set forth in Section 3 above, the holders of Series A Preferred Shares shall have no optional rights to convert such shares into Common Shares. (b) Automatic Conversion. Each Series A Preferred Share shall be automatically converted, without any further act of the Corporation or the holders of Series A Preferred Shares, into fully paid and nonassessable Common Shares in the manner and at the times specified below: (i) Second Anniversary after Start Date. If the Deposit Goal is met prior to twenty-four (24) months from the Start Date, (A) the date of the automatic conversion into Common Shares shall be twenty-seven (27) months after the Start Date, and (B) each Series A Preferred Share shall automatically be converted into 1.25 Common Shares. If the Deposit Goal has not been met prior to twenty-four (24) months from the Start Date, the Series A Preferred Shares will not be converted into Common Shares until after the third anniversary of the Start Date. (ii) Third Anniversary after Start Date. If the conversion of the Series A Preferred Shares into Common Shares has not previously taken place within thirty-six (36) months after the Start Date, then, thirty-nine (39) months after the Start Date, each outstanding Series A Preferred Share shall automatically be 76 77 converted into (A) 1.10 Common Shares if the Deposit Goal has been met prior to the end of thirty-six (36) months after the Start Date, and (B) 1.02 Common Shares if the Deposit Goal has not been met prior to the end of thirty-six (36) months after the Start Date. (iii) Determination of Whether Deposit Goal Has Been Met. The Deposit Goal shall have been met prior to a specified date if the average deposits at the Bank on behalf of the Banking Office for any calendar quarter prior to such date equal or exceed $50,000,000. For the purposes of determining whether the Deposit Goal has been met, the Corporation will follow the following procedures: Deposits: For the purpose of making the Deposit Goal calculations, "deposits" means the book balances of all accounts which are insurable by the Federal Deposit Insurance Corporation (such as demand, savings, time, money market and NOW accounts and certificates of deposit), including the balances in such accounts in excess of $100,000; provided, however, that certificates of deposit in amounts of $100,000 or more shall be included in the total amount of deposits only to the extent such certificates of deposit do not exceed 10% of total deposits. Credit for Deposits: The specific banking office at which a deposit account is opened receives the credit for the account; provided, however, that if the Banking Office is not authorized to accept deposits or has not yet opened for business, a deposit account may be established at another banking office on behalf of the Banking Office if designated as such. The Bank's accounting system tracks and accounts for all depository accounts on a daily basis. Calendar Quarter Average: After a calendar quarter has expired, the Bank will calculate the calendar quarter average of deposits for accounts designated as gathered on behalf of the Banking Office by adding the sum of the daily general ledger balance for such deposits and then dividing this sum by the number of days in the calendar quarter. All determinations regarding whether the Deposit Goal has been met as of any date shall be made by the Corporation. Such determinations in this regard shall be final and conclusive for all purposes. (c) Mechanics of Conversion. Upon the occurrence of the dates specified in Section 4(b) above, the outstanding Series A Preferred Shares shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue to any holder certificates evidencing the Common Shares issuable upon such conversion unless certificates evidencing the 77 78 Series A Preferred Shares are delivered either to the Corporation or any transfer agent designated by the Corporation. Conversion shall be deemed to have been effected on the date of the occurrence of the dates specified in Section 4(b) above, as the case may be, and such date is referred to herein as the "Conversion Date." Subject to the provisions of Section 4(b) above, as promptly as practicable thereafter (and after surrender of the certificate or certificates representing the Series A Preferred Shares to the Corporation or any transfer agent designated by the Corporation), the Corporation shall issue and deliver to such holder a certificate or certificates for the number of full Common Shares to which such holder is entitled as provided in Section 4(b) hereof. Subject to the provisions of Section 4(b), the person in whose name the certificate or certificates for Common Shares are to be issued shall be deemed to have become a holder of record of such Common Shares on the applicable Conversion Date. (d) Fractional Shares. No fractional Common Shares or scrip shall be issued upon conversion of Series A Preferred Shares. In lieu of any fractional Common Shares which would otherwise be issuable upon conversion of any Series A Preferred Shares, the number of full Common Shares issuable upon conversion thereof shall be increased to the next higher number of whole shares. (e) Rights After Conversion Date. From and after the Conversion Date (unless the Corporation defaults in issuing Common Shares in conversion for the outstanding Series A Preferred Shares on the Conversion Date), such Series A Preferred Shares shall be deemed not to be outstanding and all rights of the holders of such shares as Shareholders of the Corporation by reason of the ownership of such shares shall cease, except the right to receive Common Shares as provided in Section 4(b) herein on presentation and surrender of the respective certificates evidencing such Series A Preferred Shares. Upon presentation and surrender, on or after the Conversion Date, of any certificate evidencing Series A Preferred Shares (properly endorsed or assigned for transfer, if the Corporation shall so require), such shares shall be converted by the Corporation for Common Shares as provided in this Section 4. (f) Authorized, But Unissued Shares. Any Series A Preferred Shares that shall at any time have been converted into Common Shares pursuant to this Section 4 shall, after such conversion become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled. (g) Reservation of Shares. The Corporation shall reserve at all times so long as any Series A Preferred Shares remain outstanding, free from preemptive rights, out of its treasury shares or its authorized but unissued Common Shares, or both, solely for the purpose of effecting the conversion of the Series A Preferred Shares, sufficient Common Shares to provide for the conversion of all outstanding Series A Preferred Shares. (h) Fully Paid and Nonassessable Shares. All Common Shares or other securities which may be issued upon conversion of the Series A Preferred Shares will upon issuance by the Corporation be duly and 78 79 validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof and the Corporation shall take no action which would cause a contrary result. 5. Conversion Ratio Adjustments. The number of Common Shares into which the Series A Preferred Shares shall be converted pursuant to Section 4 (the "Conversion Ratios") and the securities or other property deliverable upon conversion of the Series A Preferred Shares shall be subject to adjustment from time to time as follows: (a) Share Subdivisions or Split-Ups. If the number of Common Shares outstanding at any time after the date of issuance of the Series A Preferred Shares is increased by a subdivision or split-up of Common Shares, then immediately after the record date fixed for the determination of holders of Common Shares entitled to receive such subdivision or split-up, as the case may be, the Conversion Ratios shall be appropriately increased so that the holder of any Series A Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series A Preferred Shares been converted immediately prior thereto. (b) Combinations of Shares. If the number of Common Shares outstanding at any time after the date of issuance of the Series A Preferred Shares is decreased by a combination of the outstanding Common Shares, then, immediately after the effective date of such combination, the Conversion Ratios applicable thereto shall be appropriately decreased so that the holder of any Series A Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series A Preferred Shares been converted immediately prior thereto. (c) Reorganization, Reclassification, Merger, Sale of All Assets, etc. In case of any capital reorganization of the Corporation, or of any reclassification of the Common Shares, or in case of the consolidation of the Corporation with or the merger of the Corporation with or into any other Person or of the sale, lease or other transfer of all or substantially all of the assets of the Corporation to any other Person, or in the case of any distribution of cash or other assets or of notes or other indebtedness of the Corporation or any other securities of the Corporation (except Common Shares) to the holders of its Common Shares, each Series A Preferred Share shall, after such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution, be convertible into the number of shares or other securities or property to which the Common Shares issuable (at the time of such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution) upon conversion of such Series A Preferred Shares would have been entitled upon such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution in place of (or in addition to, in the case of any such event after which Common Shares remain outstanding) the Common Shares into which such Series A Preferred Shares would otherwise have been 79 80 convertible; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interest thereafter of the holders of Series A Preferred Shares shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares or other securities or property thereafter deliverable on the conversion of the Series A Preferred Shares. (d) Rounding of Calculations; Minimum Adjustment. All calculations under this Section 5 shall be made to the nearest one hundredth (1/100th) of a Common Share, as the case may be. Any provision of this Section 5 to the contrary notwithstanding, no adjustment in the Conversion Ratios shall be made if the amount of such adjustment would be less than one hundredth of a Common Share, but any such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate one hundredth of a Common Share or more. (e) Timing of Issuance of Additional Common Shares upon Certain Adjustments. In any case in which the provisions of this Section 5 shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event issuing to the holder of any Series A Preferred Shares converted after such record date and before the occurrence of such event the additional Common Shares or other property issuable or deliverable upon such conversion by reason of the adjustment required by such event over and above the Common Shares or other property issuable or deliverable upon such conversion before giving effect to such adjustment; provided, however, that the Corporation upon request shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares or other property, and such cash, upon the occurrence of the event requiring such adjustment. (f) Statement Regarding Adjustments. Whenever the Conversion Ratios shall be adjusted as provided in this Section 5, the Corporation shall forthwith file, at the office of any transfer agent for the Series A Preferred Shares and at the principal office of the Corporation a statement showing in detail the facts requiring such adjustment and the Conversion Ratios that shall be in effect after such adjustment, and the Corporation shall also cause a copy of such statement to be mailed, first class postage prepaid, to each holder of Series A Preferred Shares at its address appearing on the Corporation's records. (g) Cost. The Corporation shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of Common Shares of the Corporation or other securities or property upon conversion of any Series A Preferred Shares; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares or securities in the name other than that of the holder of Series A Preferred Shares in respect of which such shares are being issued. 80 81 6. Voting. The holders of Series A Preferred Shares shall have no right or power to vote on any matter except as required by law. In any matter on which the holders of Series A Preferred Shares shall, as a matter of law, be entitled to vote, the holders shall be entitled to one vote for each Series A Preferred Share held. 7. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of Series A Preferred Shares then outstanding shall be entitled to receive out of the assets of the Corporation available for distribution to equity holders, an amount per share in cash equal to the Purchase Price before any payment or distribution shall be made on the Common Shares or on any other class of capital shares of the Corporation ranking junior to the Series A Preferred Shares upon liquidation. All outstanding shares of any other series of preferred shares shall rank at parity with the Series A Preferred Shares. The consolidation or merger of the Corporation, or a sale, exchange or transfer of all or substantially all of its assets as an entirety, shall not be regarded as a "dissolution, liquidation or winding up of the Corporation" within the meaning of this Section 7(a). (b) After the payment to the holders of Series A Preferred Shares of the full preferential amounts fixed hereby for Series A Preferred Shares, the holders of Series A Preferred Shares as such shall have no right or claim to any of the remaining assets of the Corporation. (c) If the assets of the Corporation available for distribution to the holders of Series A Preferred Shares upon dissolution, liquidation or winding up of the Corporation are insufficient to pay in full all amounts to which such holders are entitled pursuant to Section 7(a), no distribution shall be made on account of any shares of a class or series of capital shares of the Corporation ranking on a parity with the Series A Preferred Shares, if any, upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the Series A Preferred Shares, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. 8. Reports to Holders of Series A Preferred Shares. For so long as there shall remain outstanding any Series A Preferred Shares, the Corporation shall furnish to each holder of record of Series A Preferred Shares (i) all reports or other correspondence sent by the Corporation to holders of record of the Common Shares of the Corporation, and (ii) a quarterly report setting forth the average monthly deposits on behalf of the Banking Office. 9. Certain Covenants. So long as any Series A Preferred Shares are outstanding, without the prior written consent of the holders of a majority of the outstanding Series A Preferred Shares, the Corporation shall not amend, alter or repeal any provisions of this Resolution Establishing Series A Convertible Preferred Shares, or otherwise amend, alter or repeal any 81 82 provision of the Articles of Incorporation of the Corporation so as to affect adversely the preferences, rights, powers or privileges of the Series A Preferred Shares. 10. Certain Events. If any event occurs of the type contemplated but not expressly provided for by the provisions of Section 4 or Section 5 herein, then the Corporation's Board of Directors will make an appropriate adjustment in the Conversion Ratios for the Series A Preferred Shares to protect the rights of the holders thereof. 11. Exclusion of Other Rights. Unless otherwise required by law, the Series A Preferred Shares shall not have any voting powers, preferences or relative, participating, optional or other special rights other than those specifically set forth herein. EXHIBIT B IRWIN FINANCIAL CORPORATION AMENDMENT TO TERMS OF SERIES B CONVERTIBLE PREFERRED SHARES By Unanimous Written Consent effective as of October 8, 1999, the Board of Directors of Irwin Financial Corporation (the "Corporation"), has amended the terms of its Series B Convertible Preferred Shares (the "Series B Preferred Shares"), to consist of 66,666 shares, and further as follows: 1. Definitions. "Bank" means Irwin Union Bank and Trust Company, a commercial bank chartered under the laws of the State of Indiana and a wholly-owned subsidiary of the Corporation. "Banking Office" means the banking office operated by the Bank at 555 W. Crosstown Parkway, Kalamazoo, Michigan 49008. "Board" means the Board of Directors of the Corporation. "Common Shares" means the common shares of the Corporation. "Corporation" means Irwin Financial Corporation, an Indiana corporation. "Deposit Goal" means the goal that the average deposits at the Bank on behalf of the Banking Office for any calendar quarter equal or exceed $25,000,000, with the calculations to be made as set forth in Section 4(b)(iii) herein. "Person" means an individual, a partnership, a joint venture, a corporation, an association, a trust, or any other entity or organization. 82 83 "Purchase Price" means the price per share at which the Series B Preferred Shares have been offered and sold by the Corporation to qualified investors pursuant to a Confidential Private Placement Memorandum. "Series B Preferred Shares" means the Series B Convertible Preferred Shares of the Corporation. "Start Date" means the first day of the calendar quarter following the closing date of the offering. The Start Date is the date from which the Corporation will measure the amount of deposits at the Bank on behalf of the Banking Office for the purposes of determining conversion rights. 2. Dividends. The holders of outstanding Series B Preferred Shares shall not be entitled to receive any dividends on the Series B Preferred Shares. 3. Redemption. (a) The outstanding Series B Preferred Shares are redeemable at the option of the Corporation, out of the assets of the Corporation legally available therefor, at any time or from time to time, in whole and not in part, at a redemption price per share of Series B Preferred Shares (the "Redemption Price") equal to the Purchase Price; provided, however, that for a period of not less than 30 days prior to the date fixed for redemption (the "Redemption Date"), the holders of the outstanding Series B Preferred Shares shall have an option to convert each Series B Preferred Share into 1.25 Common Shares. (b) Notice of any redemption of Series B Preferred Shares, specifying the date fixed for redemption, the redemption price and the place at which shareholders may obtain payment of the Redemption Price upon surrender of their certificates, and the option of the shareholders to convert their Series B Preferred Shares into Common Shares, shall be mailed to each holder of record of the shares to be redeemed, at such holder's address of record, not less than 35, nor more than 90 days prior to the Redemption Date. Such notice shall set forth the manner in which shareholders may convert their Series B Preferred Shares into Common Shares, or to receive the Redemption Price, upon surrender of their certificates. (c) Unless the Corporation defaults in the payment in full of the Redemption Price, (i) all rights of the holders of such Series B Preferred Shares as shareholders of the Corporation by reason of the ownership of such shares (including, without limitation, the right to convert the Series B Preferred Shares into Common Shares) shall cease on the Redemption Date except the right to receive the amount payable upon redemption of such shares upon presentation and surrender of the respective certificates evidencing such shares, and (ii) such shares shall be deemed not to be outstanding after the Redemption Date. (d) Any Series B Preferred Shares that have been redeemed shall, after such redemption, not be reissued as Series B Preferred Shares, but 83 84 shall become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled. (e) Any notice required by the provisions of this Section 3 to be given to the holders of Series B Preferred Shares shall be deemed given if deposited in the United States mail postage prepaid, and addressed to each holder of record at his, her or its address appearing on the books of the Corporation. 4. Conversion Rights. The Series B Preferred Shares shall be convertible into Common Shares as follows: (a) No Optional Conversion. Other than pursuant to a redemption of the Series B Preferred Shares as set forth in Section 3 above, the holders of Series B Preferred Shares shall have no optional rights to convert such shares into Common Shares. (b) Automatic Conversion. Each Series B Preferred Share shall be automatically converted, without any further act of the Corporation or the holders of Series B Preferred Shares, into fully paid and nonassessable Common Shares in the manner and at the times specified below: (i) Second Anniversary after Start Date. If the Deposit Goal is met prior to twenty-four (24) months from the Start Date, (A) the date of the automatic conversion into Common Shares shall be twenty-seven (27) months after the Start Date, and (B) each Series B Preferred Share shall automatically be converted into 1.25 Common Shares. If the Deposit Goal has not been met prior to twenty-four (24) months from the Start Date, the Series B Preferred Shares will not be converted into Common Shares until after the third anniversary of the Start Date. (ii) Third Anniversary after Start Date. If the conversion of the Series B Preferred Shares into Common Shares has not previously taken place within thirty-six (36) months after the Start Date, then, thirty-nine (39) months after the Start Date, each outstanding Series B Preferred Share shall automatically be converted into (A) 1.10 Common Shares if the Deposit Goal has been met prior to the end of thirty-six (36) months after the Start Date, and (B) 1.02 Common Shares if the Deposit Goal has not been met prior to the end of thirty-six (36) months after the Start Date. (iii) Determination of Whether Deposit Goal Has Been Met. The Deposit Goal shall have been met prior to a specified date if the average deposits at the Bank on behalf of the Banking Office for any calendar quarter prior to such date equal or exceed $25,000,000. For the purposes of determining whether the Deposit Goal has been met, the Corporation will follow the following procedures: 84 85 Deposits: For the purpose of making the Deposit Goal calculations, "deposits" means the book balances of all accounts which are insurable by the Federal Deposit Insurance Corporation (such as demand, savings, time, money market and NOW accounts and certificates of deposit), including the balances in such accounts in excess of $100,000; provided, however, that certificates of deposit in amounts of $100,000 or more shall be included in the total amount of deposits only to the extent such certificates of deposit do not exceed 10% of total deposits. Credit for Deposits: The specific banking office at which a deposit account is opened receives the credit for the account; provided, however, that if the Banking Office is not authorized to accept deposits or has not yet opened for business, a deposit account may be established at another banking office on behalf of the Banking Office if designated as such. The Bank's accounting system tracks and accounts for all depository accounts on a daily basis. Calendar Quarter Average: After a calendar quarter has expired, the Bank will calculate the calendar quarter average of deposits for accounts designated as gathered on behalf of the Banking Office by adding the sum of the daily general ledger balance for such deposits and then dividing this sum by the number of days in the calendar quarter. All determinations regarding whether the Deposit Goal has been met as of any date shall be made by the Corporation. Such determinations in this regard shall be final and conclusive for all purposes. (c) Mechanics of Conversion. Upon the occurrence of the dates specified in Section 4(b) above, the outstanding Series B Preferred Shares shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue to any holder certificates evidencing the Common Shares issuable upon such conversion unless certificates evidencing the Series B Preferred Shares are delivered either to the Corporation or any transfer agent designated by the Corporation. Conversion shall be deemed to have been effected on the date of the occurrence of the dates specified in Section 4(b) above, as the case may be, and such date is referred to herein as the "Conversion Date." Subject to the provisions of Section 4(b) above, as promptly as practicable thereafter (and after surrender of the certificate or certificates representing the Series B Preferred Shares to the Corporation or any transfer agent designated by the Corporation), the Corporation shall issue and deliver to such holder a certificate or certificates for the number of full Common Shares to which such holder is entitled as provided in Section 4(b) hereof. Subject to the provisions of Section 4(b), the person in whose name the certificate or certificates for Common Shares are to be issued shall be 85 86 deemed to have become a holder of record of such Common Shares on the applicable Conversion Date. (d) Fractional Shares. No fractional Common Shares or scrip shall be issued upon conversion of Series B Preferred Shares. In lieu of any fractional Common Shares which would otherwise be issuable upon conversion of any Series B Preferred Shares, the number of full Common Shares issuable upon conversion thereof shall be increased to the next higher number of whole shares. (e) Rights After Conversion Date. From and after the Conversion Date (unless the Corporation defaults in issuing Common Shares in conversion for the outstanding Series B Preferred Shares on the Conversion Date), such Series B Preferred Shares shall be deemed not to be outstanding and all rights of the holders of such shares as Shareholders of the Corporation by reason of the ownership of such shares shall cease, except the right to receive Common Shares as provided in Section 4(b) herein on presentation and surrender of the respective certificates evidencing such Series B Preferred Shares. Upon presentation and surrender, on or after the Conversion Date, of any certificate evidencing Series B Preferred Shares (properly endorsed or assigned for transfer, if the Corporation shall so require), such shares shall be converted by the Corporation for Common Shares as provided in this Section 4. (f) Authorized, But Unissued Shares. Any Series B Preferred Shares that shall at any time have been converted into Common Shares pursuant to this Section 4 shall, after such conversion become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled. (g) Reservation of Shares. The Corporation shall reserve at all times so long as any Series B Preferred Shares remain outstanding, free from preemptive rights, out of its treasury shares or its authorized but unissued Common Shares, or both, solely for the purpose of effecting the conversion of the Series B Preferred Shares, sufficient Common Shares to provide for the conversion of all outstanding Series B Preferred Shares. (h) Fully Paid and Nonassessable Shares. All Common Shares or other securities which may be issued upon conversion of the Series B Preferred Shares will upon issuance by the Corporation be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof and the Corporation shall take no action which would cause a contrary result. 5. Conversion Ratio Adjustments. The number of Common Shares into which the Series B Preferred Shares shall be converted pursuant to Section 4 (the "Conversion Ratios") and the securities or other property deliverable upon conversion of the Series B Preferred Shares shall be subject to adjustment from time to time as follows: (a) Share Subdivisions or Split-Ups. If the number of Common Shares outstanding at any time after the date of issuance of the Series B Preferred Shares is increased by a subdivision or split-up of Common 86 87 Shares, then immediately after the record date fixed for the determination of holders of Common Shares entitled to receive such subdivision or split-up, as the case may be, the Conversion Ratios shall be appropriately increased so that the holder of any Series B Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series B Preferred Shares been converted immediately prior thereto. (b) Combinations of Shares. If the number of Common Shares outstanding at any time after the date of issuance of the Series B Preferred Shares is decreased by a combination of the outstanding Common Shares, then, immediately after the effective date of such combination, the Conversion Ratios applicable thereto shall be appropriately decreased so that the holder of any Series B Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series B Preferred Shares been converted immediately prior thereto. (c) Reorganization, Reclassification, Merger, Sale of All Assets, etc. In case of any capital reorganization of the Corporation, or of any reclassification of the Common Shares, or in case of the consolidation of the Corporation with or the merger of the Corporation with or into any other Person or of the sale, lease or other transfer of all or substantially all of the assets of the Corporation to any other Person, or in the case of any distribution of cash or other assets or of notes or other indebtedness of the Corporation or any other securities of the Corporation (except Common Shares) to the holders of its Common Shares, each Series B Preferred Share shall, after such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution, be convertible into the number of shares or other securities or property to which the Common Shares issuable (at the time of such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution) upon conversion of such Series B Preferred Shares would have been entitled upon such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution in place of (or in addition to, in the case of any such event after which Common Shares remain outstanding) the Common Shares into which such Series B Preferred Shares would otherwise have been convertible; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interest thereafter of the holders of Series B Preferred Shares shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares or other securities or property thereafter deliverable on the conversion of the Series B Preferred Shares. (d) Rounding of Calculations; Minimum Adjustment. All calculations under this Section 5 shall be made to the nearest one hundredth (1/100th) of a Common Share, as the case may be. Any provision of this Section 5 to the contrary notwithstanding, no adjustment in the Conversion Ratios shall be made if the amount of such adjustment would be less than one hundredth of a Common Share, but any 87 88 such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate one hundredth of a Common Share or more. (e) Timing of Issuance of Additional Common Shares upon Certain Adjustments. In any case in which the provisions of this Section 5 shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event issuing to the holder of any Series B Preferred Shares converted after such record date and before the occurrence of such event the additional Common Shares or other property issuable or deliverable upon such conversion by reason of the adjustment required by such event over and above the Common Shares or other property issuable or deliverable upon such conversion before giving effect to such adjustment; provided, however, that the Corporation upon request shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares or other property, and such cash, upon the occurrence of the event requiring such adjustment. (f) Statement Regarding Adjustments. Whenever the Conversion Ratios shall be adjusted as provided in this Section 5, the Corporation shall forthwith file, at the office of any transfer agent for the Series B Preferred Shares and at the principal office of the Corporation a statement showing in detail the facts requiring such adjustment and the Conversion Ratios that shall be in effect after such adjustment, and the Corporation shall also cause a copy of such statement to be mailed, first class postage prepaid, to each holder of Series B Preferred Shares at its address appearing on the Corporation's records. (g) Cost. The Corporation shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of Common Shares of the Corporation or other securities or property upon conversion of any Series B Preferred Shares; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares or securities in the name other than that of the holder of Series B Preferred Shares in respect of which such shares are being issued. 6. Voting. The holders of Series B Preferred Shares shall have no right or power to vote on any matter except as required by law. In any matter on which the holders of Series B Preferred Shares shall, as a matter of law, be entitled to vote, the holders shall be entitled to one vote for each Series B Preferred Share held. 7. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of Series B Preferred Shares then outstanding shall be entitled to receive out of the assets of the Corporation available for distribution to equity holders, an amount per share in cash equal to the Purchase Price 88 89 before any payment or distribution shall be made on the Common Shares or on any other class of capital shares of the Corporation ranking junior to the Series B Preferred Shares upon liquidation. All outstanding shares of any other series of preferred shares shall rank at parity with the Series B Preferred Shares. The consolidation or merger of the Corporation, or a sale, exchange or transfer of all or substantially all of its assets as an entirety, shall not be regarded as a "dissolution, liquidation or winding up of the Corporation" within the meaning of this Section 7(a). (b) After the payment to the holders of Series B Preferred Shares of the full preferential amounts fixed hereby for Series B Preferred Shares, the holders of Series B Preferred Shares as such shall have no right or claim to any of the remaining assets of the Corporation. (c) If the assets of the Corporation available for distribution to the holders of Series B Preferred Shares upon dissolution, liquidation or winding up of the Corporation are insufficient to pay in full all amounts to which such holders are entitled pursuant to Section 7(a), no distribution shall be made on account of any shares of a class or series of capital shares of the Corporation ranking on a parity with the Series B Preferred Shares, if any, upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the Series B Preferred Shares, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. 8. Reports to Holders of Series B Preferred Shares. For so long as there shall remain outstanding any Series B Preferred Shares, the Corporation shall furnish to each holder of record of Series B Preferred Shares (i) all reports or other correspondence sent by the Corporation to holders of record of the Common Shares of the Corporation, and (ii) a quarterly report setting forth the average monthly deposits on behalf of the Banking Office. 9. Certain Covenants. So long as any Series B Preferred Shares are outstanding, without the prior written consent of the holders of a majority of the outstanding Series B Preferred Shares, the Corporation shall not amend, alter or repeal any provisions of this Resolution Establishing Series B Convertible Preferred Shares, or otherwise amend, alter or repeal any provision of the Articles of Incorporation of the Corporation so as to affect adversely the preferences, rights, powers or privileges of the Series B Preferred Shares. 10. Certain Events. If any event occurs of the type contemplated but not expressly provided for by the provisions of Section 4 or Section 5 herein, then the Corporation's Board of Directors will make an appropriate adjustment in the Conversion Ratios for the Series B Preferred Shares to protect the rights of the holders thereof. 11. Exclusion of Other Rights. Unless otherwise required by law, the Series B Preferred Shares shall not have any voting powers, preferences or 89 90 relative, participating, optional or other special rights other than those specifically set forth herein. EXHIBIT C IRWIN FINANCIAL CORPORATION TERMS OF SERIES C CONVERTIBLE PREFERRED SHARES By Unanimous Written Consent effective as of October 8, 1999, the Board of Directors of Irwin Financial Corporation (the "Corporation"), has approved and adopted the terms of Series C Convertible Preferred Shares (the "Series C Preferred Shares"), to consist of 133,332 shares, as follows: 1. Definitions. "Bank" means Irwin Union Bank and Trust Company, a commercial bank chartered under the laws of the State of Indiana and a wholly-owned subsidiary of the Corporation. "Banking Office" means, collectively, the banking offices operated by the Bank in Hamilton County, Indiana, and Marion County, Indiana, including locations at 11611 N. Meridian St., Suite 100, Carmel, Indiana 46032 and 300 N. Meridian St., Suite 1200, Indianapolis, Indiana 46204. "Board" means the Board of Directors of the Corporation. "Common Shares" means the common shares of the Corporation. "Corporation" means Irwin Financial Corporation, an Indiana corporation. "Deposit Goal" means the goal that the average deposits at the Bank on behalf of the Banking Office for any calendar quarter equal or exceed $50,000,000, with the calculations to be made as set forth in Section 4(b)(iii) herein. "Person" means an individual, a partnership, a joint venture, a corporation, an association, a trust, or any other entity or organization. "Purchase Price" means the price per share at which the Series C Preferred Shares have been offered and sold by the Corporation to qualified investors pursuant to a Confidential Private Placement Memorandum. "Series C Preferred Shares" means the Series C Convertible Preferred Shares of the Corporation. "Start Date" means the first day of the calendar quarter following the closing date of the offering. The Start Date is the date from which the Corporation will measure the amount of deposits at the Bank on 90 91 behalf of the Banking Office for the purposes of determining conversion rights. 2. Dividends. The holders of outstanding Series C Preferred Shares shall not be entitled to receive any dividends on the Series C Preferred Shares. 3. Redemption. (a) The outstanding Series C Preferred Shares are redeemable at the option of the Corporation, out of the assets of the Corporation legally available therefor, at any time or from time to time, in whole and not in part, at a redemption price per share of Series C Preferred Shares (the "Redemption Price") equal to the Purchase Price; provided, however, that for a period of not less than 30 days prior to the date fixed for redemption (the "Redemption Date"), the holders of the outstanding Series C Preferred Shares shall have an option to convert each Series C Preferred Share into 1.25 Common Shares. (b) Notice of any redemption of Series C Preferred Shares, specifying the date fixed for redemption, the redemption price and the place at which shareholders may obtain payment of the Redemption Price upon surrender of their certificates, and the option of the shareholders to convert their Series C Preferred Shares into Common Shares, shall be mailed to each holder of record of the shares to be redeemed, at such holder's address of record, not less than 35, nor more than 90 days prior to the Redemption Date. Such notice shall set forth the manner in which shareholders may convert their Series C Preferred Shares into Common Shares, or to receive the Redemption Price, upon surrender of their certificates. (c) Unless the Corporation defaults in the payment in full of the Redemption Price, (i) all rights of the holders of such Series C Preferred Shares as shareholders of the Corporation by reason of the ownership of such shares (including, without limitation, the right to convert the Series C Preferred Shares into Common Shares) shall cease on the Redemption Date except the right to receive the amount payable upon redemption of such shares upon presentation and surrender of the respective certificates evidencing such shares, and (ii) such shares shall be deemed not to be outstanding after the Redemption Date. (d) Any Series C Preferred Shares that have been redeemed shall, after such redemption, not be reissued as Series C Preferred Shares, but shall become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled. (e) Any notice required by the provisions of this Section 3 to be given to the holders of Series C Preferred Shares shall be deemed given if deposited in the United States mail postage prepaid, and addressed to each holder of record at his, her or its address appearing on the books of the Corporation. 91 92 4. Conversion Rights. The Series C Preferred Shares shall be convertible into Common Shares as follows: (a) No Optional Conversion. Other than pursuant to a redemption of the Series C Preferred Shares as set forth in Section 3 above, the holders of Series C Preferred Shares shall have no optional rights to convert such shares into Common Shares. (b) Automatic Conversion. Each Series C Preferred Share shall be automatically converted, without any further act of the Corporation or the holders of Series C Preferred Shares, into fully paid and nonassessable Common Shares in the manner and at the times specified below: (i) Second Anniversary after Start Date. If the Deposit Goal is met prior to twenty-four (24) months from the Start Date, (A) the date of the automatic conversion into Common Shares shall be twenty-seven (27) months after the Start Date, and (B) each Series C Preferred Share shall automatically be converted into 1.25 Common Shares. If the Deposit Goal has not been met prior to twenty-four (24) months from the Start Date, the Series C Preferred Shares will not be converted into Common Shares until after the third anniversary of the Start Date. (ii) Third Anniversary after Start Date. If the conversion of the Series C Preferred Shares into Common Shares has not previously taken place within thirty-six (36) months after the Start Date, then, thirty-nine (39) months after the Start Date, each outstanding Series C Preferred Share shall automatically be converted into (A) 1.10 Common Shares if the Deposit Goal has been met prior to the end of thirty-six (36) months after the Start Date, and (B) 1.02 Common Shares if the Deposit Goal has not been met prior to the end of thirty-six (36) months after the Start Date. (iii) Determination of Whether Deposit Goal Has Been Met. The Deposit Goal shall have been met prior to a specified date if the average deposits at the Bank on behalf of the Banking Office for any calendar quarter prior to such date equal or exceed $50,000,000. For the purposes of determining whether the Deposit Goal has been met, the Corporation will follow the following procedures: Deposits: For the purpose of making the Deposit Goal calculations, "deposits" means the book balances of all accounts which are insurable by the Federal Deposit Insurance Corporation (such as demand, savings, time, money market and NOW accounts and certificates of deposit), including the balances in such accounts in excess of $100,000; provided, however, that certificates of deposit in amounts of $100,000 or more shall be included in the total amount of deposits only to the extent such certificates of deposit do not exceed 10% of total deposits. 92 93 Credit for Deposits: The specific banking office at which a deposit account is opened receives the credit for the account; provided, however, that if the Banking Office is not authorized to accept deposits or has not yet opened for business, a deposit account may be established at another banking office on behalf of the Banking Office if designated as such. The Bank's accounting system tracks and accounts for all depository accounts on a daily basis. Calendar Quarter Average: After a calendar quarter has expired, the Bank will calculate the calendar quarter average of deposits for accounts designated as gathered on behalf of the Banking Office by adding the sum of the daily general ledger balance for such deposits and then dividing this sum by the number of days in the calendar quarter. All determinations regarding whether the Deposit Goal has been met as of any date shall be made by the Corporation. Such determinations in this regard shall be final and conclusive for all purposes. (c) Mechanics of Conversion. Upon the occurrence of the dates specified in Section 4(b) above, the outstanding Series C Preferred Shares shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue to any holder certificates evidencing the Common Shares issuable upon such conversion unless certificates evidencing the Series C Preferred Shares are delivered either to the Corporation or any transfer agent designated by the Corporation. Conversion shall be deemed to have been effected on the date of the occurrence of the dates specified in Section 4(b) above, as the case may be, and such date is referred to herein as the "Conversion Date." Subject to the provisions of Section 4(b) above, as promptly as practicable thereafter (and after surrender of the certificate or certificates representing the Series C Preferred Shares to the Corporation or any transfer agent designated by the Corporation), the Corporation shall issue and deliver to such holder a certificate or certificates for the number of full Common Shares to which such holder is entitled as provided in Section 4(b) hereof. Subject to the provisions of Section 4(b), the person in whose name the certificate or certificates for Common Shares are to be issued shall be deemed to have become a holder of record of such Common Shares on the applicable Conversion Date. (d) Fractional Shares. No fractional Common Shares or scrip shall be issued upon conversion of Series C Preferred Shares. In lieu of any fractional Common Shares which would otherwise be issuable upon conversion of any Series C Preferred Shares, the number of full Common Shares issuable upon conversion thereof shall be increased to the next higher number of whole shares. (e) Rights After Conversion Date. From and after the Conversion Date (unless the Corporation defaults in issuing Common Shares in 93 94 conversion for the outstanding Series C Preferred Shares on the Conversion Date), such Series C Preferred Shares shall be deemed not to be outstanding and all rights of the holders of such shares as Shareholders of the Corporation by reason of the ownership of such shares shall cease, except the right to receive Common Shares as provided in Section 4(b) herein on presentation and surrender of the respective certificates evidencing such Series C Preferred Shares. Upon presentation and surrender, on or after the Conversion Date, of any certificate evidencing Series C Preferred Shares (properly endorsed or assigned for transfer, if the Corporation shall so require), such shares shall be converted by the Corporation for Common Shares as provided in this Section 4. (f) Authorized, But Unissued Shares. Any Series C Preferred Shares that shall at any time have been converted into Common Shares pursuant to this Section 4 shall, after such conversion become authorized but unissued Preferred Shares of the Corporation, and the certificates evidencing such shares shall be canceled. (g) Reservation of Shares. The Corporation shall reserve at all times so long as any Series C Preferred Shares remain outstanding, free from preemptive rights, out of its treasury shares or its authorized but unissued Common Shares, or both, solely for the purpose of effecting the conversion of the Series C Preferred Shares, sufficient Common Shares to provide for the conversion of all outstanding Series C Preferred Shares. (h) Fully Paid and Nonassessable Shares. All Common Shares or other securities which may be issued upon conversion of the Series C Preferred Shares will upon issuance by the Corporation be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof and the Corporation shall take no action which would cause a contrary result. 5. Conversion Ratio Adjustments. The number of Common Shares into which the Series C Preferred Shares shall be converted pursuant to Section 4 (the "Conversion Ratios") and the securities or other property deliverable upon conversion of the Series C Preferred Shares shall be subject to adjustment from time to time as follows: (a) Share Subdivisions or Split-Ups. If the number of Common Shares outstanding at any time after the date of issuance of the Series C Preferred Shares is increased by a subdivision or split-up of Common Shares, then immediately after the record date fixed for the determination of holders of Common Shares entitled to receive such subdivision or split-up, as the case may be, the Conversion Ratios shall be appropriately increased so that the holder of any Series C Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series C Preferred Shares been converted immediately prior thereto. (b) Combinations of Shares. If the number of Common Shares outstanding at any time after the date of issuance of the Series C Preferred Shares is decreased by a combination of the outstanding Common 94 95 Shares, then, immediately after the effective date of such combination, the Conversion Ratios applicable thereto shall be appropriately decreased so that the holder of any Series C Preferred Shares thereafter converted shall be entitled to receive the number of Common Shares of the Corporation which the holder would have owned immediately following such action had such Series C Preferred Shares been converted immediately prior thereto. (c) Reorganization, Reclassification, Merger, Sale of All Assets, etc. In case of any capital reorganization of the Corporation, or of any reclassification of the Common Shares, or in case of the consolidation of the Corporation with or the merger of the Corporation with or into any other Person or of the sale, lease or other transfer of all or substantially all of the assets of the Corporation to any other Person, or in the case of any distribution of cash or other assets or of notes or other indebtedness of the Corporation or any other securities of the Corporation (except Common Shares) to the holders of its Common Shares, each Series C Preferred Share shall, after such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution, be convertible into the number of shares or other securities or property to which the Common Shares issuable (at the time of such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution) upon conversion of such Series C Preferred Shares would have been entitled upon such capital reorganization, reclassification, consolidation, merger, sale, lease or other transfer or such distribution in place of (or in addition to, in the case of any such event after which Common Shares remain outstanding) the Common Shares into which such Series C Preferred Shares would otherwise have been convertible; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interest thereafter of the holders of Series C Preferred Shares shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares or other securities or property thereafter deliverable on the conversion of the Series C Preferred Shares. (d) Rounding of Calculations; Minimum Adjustment. All calculations under this Section 5 shall be made to the nearest one hundredth (1/100th) of a Common Share, as the case may be. Any provision of this Section 5 to the contrary notwithstanding, no adjustment in the Conversion Ratios shall be made if the amount of such adjustment would be less than one hundredth of a Common Share, but any such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate one hundredth of a Common Share or more. (e) Timing of Issuance of Additional Common Shares upon Certain Adjustments. In any case in which the provisions of this Section 5 shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event issuing to the holder of any Series C Preferred Shares converted after such record date and before the occurrence of such event the additional Common Shares or other property issuable or 95 96 deliverable upon such conversion by reason of the adjustment required by such event over and above the Common Shares or other property issuable or deliverable upon such conversion before giving effect to such adjustment; provided, however, that the Corporation upon request shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares or other property, and such cash, upon the occurrence of the event requiring such adjustment. (f) Statement Regarding Adjustments. Whenever the Conversion Ratios shall be adjusted as provided in this Section 5, the Corporation shall forthwith file, at the office of any transfer agent for the Series C Preferred Shares and at the principal office of the Corporation a statement showing in detail the facts requiring such adjustment and the Conversion Ratios that shall be in effect after such adjustment, and the Corporation shall also cause a copy of such statement to be mailed, first class postage prepaid, to each holder of Series C Preferred Shares at its address appearing on the Corporation's records. (g) Cost. The Corporation shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of Common Shares of the Corporation or other securities or property upon conversion of any Series C Preferred Shares; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares or securities in the name other than that of the holder of Series C Preferred Shares in respect of which such shares are being issued. 6. Voting. The holders of Series C Preferred Shares shall have no right or power to vote on any matter except as required by law. In any matter on which the holders of Series C Preferred Shares shall, as a matter of law, be entitled to vote, the holders shall be entitled to one vote for each Series C Preferred Share held. 7. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of Series C Preferred Shares then outstanding shall be entitled to receive out of the assets of the Corporation available for distribution to equity holders, an amount per share in cash equal to the Purchase Price before any payment or distribution shall be made on the Common Shares or on any other class of capital shares of the Corporation ranking junior to the Series C Preferred Shares upon liquidation. All outstanding shares of any other series of preferred shares shall rank at parity with the Series C Preferred Shares. The consolidation or merger of the Corporation, or a sale, exchange or transfer of all or substantially all of its assets as an entirety, shall not be regarded as a "dissolution, liquidation or winding up of the Corporation" within the meaning of this Section 7(a). (b) After the payment to the holders of Series C Preferred Shares of the full preferential amounts fixed hereby for Series C 96 97 Preferred Shares, the holders of Series C Preferred Shares as such shall have no right or claim to any of the remaining assets of the Corporation. (c) If the assets of the Corporation available for distribution to the holders of Series C Preferred Shares upon dissolution, liquidation or winding up of the Corporation are insufficient to pay in full all amounts to which such holders are entitled pursuant to Section 7(a), no distribution shall be made on account of any shares of a class or series of capital shares of the Corporation ranking on a parity with the Series C Preferred Shares, if any, upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the Series C Preferred Shares, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. 8. Reports to Holders of Series C Preferred Shares. For so long as there shall remain outstanding any Series C Preferred Shares, the Corporation shall furnish to each holder of record of Series C Preferred Shares (i) all reports or other correspondence sent by the Corporation to holders of record of the Common Shares of the Corporation, and (ii) a quarterly report setting forth the average monthly deposits on behalf of the Banking Office. 9. Certain Covenants. So long as any Series C Preferred Shares are outstanding, without the prior written consent of the holders of a majority of the outstanding Series C Preferred Shares, the Corporation shall not amend, alter or repeal any provisions of this resolution establishing Series C Convertible Preferred Shares, or otherwise amend, alter or repeal any provision of the Articles of Incorporation of the Corporation so as to affect adversely the preferences, rights, powers or privileges of the Series C Preferred Shares. 10. Certain Events. If any event occurs of the type contemplated but not expressly provided for by the provisions of Section 4 or Section 5 herein, then the Corporation's Board of Directors will make an appropriate adjustment in the Conversion Ratios for the Series C Preferred Shares to protect the rights of the holders thereof. 11. Exclusion of Other Rights. Unless otherwise required by law, the Series C Preferred Shares shall not have any voting powers, preferences or relative, participating, optional or other special rights other than those specifically set forth herein. ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF: Name of Corporation Irwin Financial Corporation Date of Incorporation May 31, 1972 97 98 The undersigned officers above referenced Corporation (hereinafter referred to as the 'Corporation") existing pursuant to the provisions of. (Indicate appropriate act) X Indiana Business Corporation Law as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating amendment of certain provisions of its Article of Incorporation, certify the following facts: ARTICLE I Amendment(s) The exact text of Article(s) V., Section 2 of the Articles (NOTE: if amending the name of corporation, write Article 'I' in space above and write, "The name of the Corporation is_____" below.) is amended to add a new Section 5.30, as set forth in Exhibit A attached hereto, respectively. ARTICLE II Date of each amendment's adoption: December 16, 1999 ARTICLE III Manner of Adoption and Vote Mark applicable section: NOTE - Only in limited situations does Indiana law permit an Amendment without shareholder approval. Because a name change requires shareholder approval, Section 2 must be marked and either A or B completed. X SECTION 1 This amendment was adopted by the Board of Directors or incorporators and shareholder action was not required. ARTICLE IV Compliance with Legal Requirements The manner of the adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal compliance with the provisions of the Act, the Articles of Incorporation, and the By-Laws of the Corporation. 98 99 I hereby verify, subject to the penalties of perjury, that the statements contained herein are true, this 31st day of January, 2000. Signature of current officer or chairman of the board /s/ Ellen Z. Mufson Printed name of officer or chairman of the board Ellen Z. Mufson Signature's title Assistant Secretary CERTIFIED COPY OF A RESOLUTION I HEREBY CERTIFY that I am the Assistant Secretary of Irwin Financial Corporation, an Indiana corporation, and that the following resolution was adopted by the Board of Directors of said Corporation on December 16, 1999: [Attached Herein] IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the corporate seal this 31st day of January 2000. /s/ Ellen Z. Mufson --------------------------------- Ellen Z. Mufson, Assistant Secretary EXHIBIT A IRWIN FINANCIAL CORPORATION TERMS OF SERIES D CONVERTIBLE PREFERRED SHARES By Resolution effective as of December 16, 1999, the Board of Directors of Irwin Financial Corporation (the "Corporation"), has approved and adopted the terms of Series D Convertible Preferred Shares (the "Series D Preferred Shares"), to consist of 66,666 shares, as follows: 1. Definitions. "Bank" means Irwin Union Bank and Trust Company, a commercial bank chartered under the laws of the State of Indiana and a wholly-owned subsidiary of the Corporation. "Banking Office" means, collectively, the banking offices operated by the Bank at 0-185 44th Street, Grandville, Michigan 49418. "Board" means the Board of Directors of the Corporation. "Common Shares" means the common shares of the Corporation. 99 100 "Corporation" means Irwin Financial Corporation, an Indiana corporation. "Deposit Goal" means the goal that the average deposits at the Bank on behalf of the Banking Office for any calendar quarter equal or exceed $25,000,000, with the calculations to be made as set forth in Section 4(b)(iii) herein. "Person" means an individual, a partnership, a joint venture, a corporation, an association, a trust, or any other entity or organization. "Purchase Price" means the price per share at which the Series D Preferred Shares have been offered and sold by the Corporation to qualified investors pursuant to a Confidential Private Placement Memorandum. "Series D Preferred Shares" means the Series D Convertible Preferred Shares of the Corporation. "Start Date" means the first day of the calendar quarter following the closing date of the offering. The Start Date is the date from which the Corporation will measure the amount of deposits at the Bank on behalf of the Banking Office for the purposes of determining conversion rights. 2. Dividends. The holders of outstanding Series D Preferred Shares shall not be entitled to receive any dividends on the Series D Preferred Shares. 3. Redemption. (a) The outstanding Series D Preferred Shares are redeemable at the option of the Corporation, out of the assets of the Corporation legally available therefor, at any time or from time to time, in whole and not in part, at a redemption price per share of Series D Preferred Shares (the "Redemption Price") equal to the Purchase Price; provided, however, that for a period of not less than 30 days prior to the date fixed for redemption (the "Redemption Date"), the holders of the outstanding Series D Preferred Shares shall have an option to convert each Series D Preferred Share into 1.25 Common Shares. (b) Notice of any redemption of Series D Preferred Shares, specifying the date fixed for redemption, the redemption price and the place at which shareholders may obtain payment of the Redemption Price upon surrender of their certificates, and the option of the