Irwin Financial Corporation 500 Washington Street, Columbus, Indiana 47201 -------------------------------------------------------------------------------- March 29, 1999 Notice of Annual Meeting of Shareholders -------------------------------------------------------------------------------- To the Shareholders: The Annual Meeting of Shareholders of Irwin Financial Corporation (the "Corporation") will be held at the Ramada Inn, 2485 Jonathan Moore Pike, Columbus, Indiana, on Thursday, April 29, 1999, at 4:00 p.m., Columbus time, for the following purposes: 1. to elect a Board of Directors to serve for the ensuing year; 2. to act upon the confirmation of independent auditors for the calendar year 1999; 3. to approve the Irwin Financial Corporation Employees' Stock Purchase Plan III; 4. to approve the Irwin Financial Corporation 1999 Outside Director Restricted Stock Compensation Plan; 5. to amend the Articles of Incorporation to increase the total number of authorized Preferred Shares of the Corporation; 6. to amend the Articles of Incorporation to delete an outdated section of Article V; 7. to hear such reports as may be presented; and 8. to transact such other business as may properly come before the meeting or any adjournment thereof. Registration of shareholders will start at 3:15 p.m. and the meeting will start at 4:00 p.m. Following the meeting, refreshments will be served. I encourage you to date, sign, and mail the enclosed proxy in the postpaid envelope that is provided. If you are present at the meeting and desire to do so, you may revoke your proxy and vote in person. A copy of the Corporation's Annual Report to Shareholders for 1998 is enclosed and a Proxy Statement accompanies this notice. Matt Souza, Secretary Proxy Statement of Irwin Financial Corporation -------------------------------------------------------------------------------- For Annual Meeting of Shareholders to be held April 29, 1999 General Information -------------------------------------------------------------------------------- This proxy statement and the accompanying form of proxy are furnished in connection with the solicitation by the Board of Directors of Irwin Financial Corporation (the "Corporation") of proxies to be used at the Corporation's Annual Meeting of Shareholders on Thursday, April 29, 1999, at the Ramada Inn, Columbus, Indiana, at 4:00 p.m., Columbus time, or any adjournment thereof. The costs of the solicitation of proxies in the accompanying form will be borne by the Corporation. The solicitation of proxies will be limited to the use of the mails. A shareholder who signs and returns a proxy in such form will have the power to revoke it at any time before it is exercised by giving notice of revocation to the Secretary of the Corporation. All shares represented by the accompanying proxy, if the proxy is executed and returned, will be voted as directed by the shareholder. If a shareholder executes and returns a proxy, but makes no direction as to such shareholder's vote, then the shares will be voted on each matter to come before the meeting in accordance with the recommendation of the Board of Directors. The main offices of the Corporation are located at 500 Washington Street, Columbus, Indiana 47201. This proxy statement will be mailed to shareholders on or about March 30, 1999. 1. Voting Securities and Principal Holders -------------------------------------------------------------------------------- Only shareholders of record at the close of business on March 11, 1999, will be entitled to vote. On March 11, 1999, there were 21,689,574 common shares outstanding and entitled to vote. Each common share is entitled to one vote on each matter to be voted on at the meeting. The following information is given as of March 11, 1999, for persons known by management to beneficially own more than 5% of the common shares of the Corporation. All of the shares listed are beneficially owned through voting and investment power held solely by the reported owner, except as otherwise indicated. ------------------------------------------------------------------------------------------- Title of Amount and Nature of Class Name and Address Beneficial Ownership % of Class ------------------------------------------------------------------------------------------- Common IFC Trust Under Trust 5,160,592(1) 23.79% Shares Agreement dated 6/29/90, Clementine M. Tangeman, Donor, Irwin Miller, Trustee 301 Washington Street Columbus, Indiana Common Irwin Miller 5,304,972(1,2) 24.46% Shares 301 Washington Street Columbus, Indiana Common William I. Miller 10,835,607(1,3) 49.23% Shares 500 Washington Street Columbus, Indiana ------------------------------------------------------------------------------------------- 1. Certain shares owned by the IFC Trust (5,160,592 shares which were donated to the Trust by the Estate of Mrs. Clementine Tangeman) and Mr. Irwin Miller (5,160,544 shares) are subject to an irrevocable proxy held by Mr. William I. Miller to vote such shares. Mr. William I. Miller holds a right to acquire these same 10,321,136 shares, pursuant to options purchased by Mr. Miller from Mrs. Clementine Tangeman and Mr. Irwin Miller, within 60 days but subject to certain contingencies. 2. Includes 130,000 shares owned by Mr. Irwin Miller's wife, Xenia S. Miller, as to which Mr. Miller holds no voting or investment power and for which Mr. Miller expressly disclaims any beneficial interest; 9,024 shares as to which Mr. Miller holds voting and investment power; 4,604 shares held for the account of Mr. Irwin Miller under the Corporation's Outside Director Restricted Stock Compensation Plan as to which Mr. Miller holds sole voting power but no investment power; and 800 shares which Mr. Miller has the right to acquire within 60 days of the record date through the exercise of stock options. See "Outside Director Restricted Stock Compensation Plan." 3. See Footnote 1 above. Includes 167,525 shares as to which Mr. Miller holds voting and investment power; 22,812 shares that Mr. Miller is the custodian of on behalf of his children and for which Mr. Miller expressly disclaims any beneficial interest; 2,289 shares that are held in the 1998 William I. Miller Annual Exclusion Trust, Lynne M. Maguire, Trustee, for which Mr. Miller expressly disclaims any beneficial interest; and 321,845 shares which Mr. Miller has the right to acquire within 60 days of the record date through the exercise of stock options. 2. Security Ownership of Management: The following information is given as of March 11, 1999, for the nominees for directors, individually, and all executive officers of the Corporation as a group. -------------------------------------------------------------------------------- Title of Name of Amount and Nature of Class Beneficial Owner Beneficial Ownership(4) % of Class -------------------------------------------------------------------------------- Common Shares Sally A. Dean(3) 10,558 .05% Common Shares David W. Goodrich(3) 15,144 .07% Common Shares John T. Hackett(3) 28,388 .13% Common Shares William H. Kling(3) 8,609 .04% Common Shares Brenda J. Lauderback(3) 3,408 .02% Common Shares John C. McGinty, Jr.(3) 11,520 .05% Common Shares Irwin Miller(3) 5,304,972(1) 24.46% Common Shares William I. Miller(3) 10,835,607(2) 49.23% Common Shares John A. Nash(3) 603,165 2.75% Common Shares Lance R. Odden(3) 11,601 .05% Common Shares Theodore M. Solso(3) 21,494 .10% Common Shares Director Nominees and Executive Officers as a Group (22 persons) 12,236,741(5) 56.34% ------------- 1. See Footnotes 1 and 2 under "Voting Securities and Principal Holders." 2. See Footnotes 1 and 3 under "Voting Securities and Principal Holders." 3. Director nominee. 4. For director nominees, Dean (5,078 shares), Goodrich (3,668 shares), Hackett (2,800 shares), Kling (5,809 shares), Lauderback (2,288 shares), McGinty (6,752 shares), Irwin Miller (4,604 shares), Odden (5,809 shares) and Solso (5,490 shares), includes shares as to which the director nominee holds sole voting power but no investment power under the Corporation's Outside Director Restricted Stock Compensation Plan. 5. Includes shares which the following director nominees and executive officers have the right to acquire within 60 days of the record date through the exercise of stock options: William Miller (321,845 shares), Nash (278,210 shares), other director nominees and executive officers (307,520 shares). Also includes an aggregate of 42,298 shares held for the accounts of nine director nominees as to which the director nominees hold sole voting power, but limited or no investment power. See "Outside Director Restricted Stock Compensation Plan" and Footnote 4 above. 3. 1. Election of Directors -------------------------------------------------------------------------------- Eleven directors are to be elected to the Corporation's Board of Directors at the Annual Meeting. Proxies granted for use at the Annual Meeting cannot be voted for more than eleven nominees. Directors are elected annually to hold office until the next Annual Meeting of Shareholders and until their successors are elected and have qualified. The persons named as Proxies in the accompanying form of proxy will, unless otherwise indicated in the form of proxy, vote the shares covered by proxies for the election of the nominees named in the following table. Management has no reason to believe that any nominee named herein will be unable to serve. However, should any nominee for director become unavailable for election, and unless the Board of Directors or the Executive Committee shall reduce the size of the Board to a number that shall be equal to the number of nominees who are able and willing to serve, the persons named in the accompanying form of proxy will vote for a substitute who will be designated by the Board of Directors or the Executive Committee. The following table sets forth, as of March 11, 1999, (a) the name, age, year in which the nominee was first elected as a director of the Corporation or of Irwin Union Bank and Trust Company, and principal occupation for the past five years of each nominee for election as a director; (b) the percentage of the total number of meetings of the Board of Directors of the Corporation, and meetings of committees of the Board of Directors of the Corporation of which the director is a member, attended by each director during 1998; and (c) all other directorships held by each nominee in other corporations subject to the reporting requirements of the Securities Exchange Act of 1934 and in any investment company. There are no family relationships among any of the director nominees or executive officers, except that William I. Miller is the son of Irwin Miller. -------------------------------------------------------------- Sally A. Dean Sally A. Dean (Director since 1995) Ms. Dean is a retired Senior Vice President of Dillon, Read & Co. Inc. (investment bank). She serves as Chairman of the Paideia School Endowment Board and Trustee and Immediate Past President of the Board of Trustees, Randolph-Macon Woman's College. In 1998, Ms. Dean attended 100% of the Corporation's Board and Committee meetings of which she is a member. Age 50. -------------------------------------------------------------- 4. David W. Goodrich David W. Goodrich (Director since 1986) Mr. Goodrich is President of the Indianapolis, Indiana Colliers Turley Martin Tucker Company (realty company). He is the Vice Chairman of Clarian Health Partners, Inc.; Executive Vice President and board member of Colliers Turley Martin Tucker Company; Vice President of the Board of Citizens Gas and Coke Utility; and board member of American United Life Insurance Company. In 1998, Mr. Goodrich attended 100% of the Corporation's Board and Committee meetings of which he is a member. Age 51. ------------------------------------------------------------------------------------------ John T. Hackett John T. Hackett* (Director since 1981) Mr. Hackett is Managing General Partner of CID Equity Partners, L.P. (a private equity investment partnership). He is a board member of Meridian Insurance Group, Inc., the Wabash National Corp., and the Ball Corporation. In 1998, Mr. Hackett attended 100% of the Corporation's Board and Committee meetings of which he is a member. Age 66. ------------------------------------------------------------------------------------------ William H. King William H. Kling (Director since 1993) Mr. Kling has been President of Minnesota Public Radio since 1966(regional network of 29 public radio stations). In 1987, he became the President of the Greenspring Company (a diversified media, direct marketing, and mail order company). He is a board member of The St. Paul Companies, The Wenger Corporation, Media One of St. Paul and several Funds of the American Funds family of the Capital Group. In 1998, Mr. Kling attended 100% of the Corporation's Board and Committee meetings of which he is a member. Age 56. ------------------------------------------------------------------------------------------ Brenda J. Lauderback Brenda J. Lauderback (Director since 1996) Ms. Lauderback was Former President of the Wholesale Group of the Nine West Group, Inc. She is a board member of Consolidated Stores, a Trustee for the Hord Foundation, and serves on the Advisory Committee of For All Kids Foundation. In 1998, Ms. Lauderback attended 100% of the Corporation's Board meetings. Age 48. ------------------------------------------------------------------------------------------ John C. McGinty, Jr. John C. McGinty, Jr. (Director since 1991) Mr. McGinty is President of Peregrine Associates, Inc. (healthcare, governance, and leadership consulting firm). He is the Managing Director of The Greeley Company (healthcare leadership consulting, strategic planning, education, and publications). From 1986 to 1997, Mr. McGinty was the President and Chief Executive Officer of Southeastern Indiana Health Management, Inc. and Columbus Regional Hospital. In 1998, Mr. McGinty attended 100% of the Corporation's Board and Committee meetings of which he is a member. Age 48. ------------------------------------------------------------------------------------------ 5. Irwin Miller Irwin Miller(1) (Director since 1939) Mr. Miller is the former Chairman of Cummins Engine Company, Inc. (manufacturer of diesel engines). He is a former director of Cummins Engine Company, Inc. and a member of the Business Council, The American Academy of Arts and Sciences, and the American Philosophical Society. In 1998, Mr. Miller attended 40% of the Corporation's Board meetings. Age 89. --------------------------------------------------------------------------------------- William I. Miller William I. Miller* (Director since 1985) Mr. Miller is Chairman of Irwin Financial Corporation. He is a director of Cummins Engine Company, Inc., The Tennant Company, Public Radio International, and the New Perspective Fund, Inc. of the American Funds family of the Capital Group. He is a Trustee of EuroPacific Growth Fund of the American Funds family of the Capital Group and Taft School. In 1998, Mr. Miller attended 100% of the Corporation's Board and Committee meetings of which he is a member. Age 42. --------------------------------------------------------------------------------------- John A. Nash John A. Nash* (Director since 1972) Mr. Nash is Chairman of the Executive Committee and the President of Irwin Financial Corporation. He is the past Chairman of the Columbus Indiana Economic Development Board and the Chairman of the Board of Trustees of Columbus Regional Hospital. In 1998, Mr. Nash attended 100% of the Corporation's Board and Committee meetings of which he is a member. Age 61. --------------------------------------------------------------------------------------- Lance R. Odden Lance R. Odden (Director since 1991) Mr. Odden is President of Taft School (private educational institution). He has been Headmaster since 1972. Mr. Odden is a Trustee of the National Association of Independent Schools, The Gunnery School, and The Mattuck Museum. In 1998, Mr. Odden attended 89% of the Corporation's Board and Committee meetings of which he is a member. Age 59. --------------------------------------------------------------------------------------- Theodore M. Solso Theodore M. Solso* (Director since 1993) Mr. Solso is President and Chief Operating Officer of Cummins Engine Company, Inc. He served as Executive Vice President and Chief Operating Officer of Cummins during 1994 and 1995. Mr. Solso was Executive Vice President-Operations of Cummins from 1992 to 1994. He is a board member of the Cyprus AMAX Minerals Company, and Cummins Engine Company, Inc., and a Trustee of DePauw University. In 1998, Mr. Solso attended 100% of the Corporation's Board meetings. Age 52. --------------------------------------------------------------------------------------- 6. * Member of the Executive Committee. 1. Includes service as a director of Irwin Union Bank and Trust Company prior to the formation of the Corporation in 1972. There are no material proceedings to which any director, executive officer, or affiliate of the Corporation, any owner of record or beneficial owner of more than five percent of any class of voting securities of the Corporation, or any associate of any such director, executive officer, affiliate, or security holder is a party adverse to the Corporation or any of its subsidiaries or has a material interest adverse to the Corporation or any of its subsidiaries. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's directors and executive officers, and persons who own more than ten percent of a registered class of the Corporation's equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common shares and other equity securities of the Corporation. Executive officers, directors, and greater than ten percent shareholders are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms they file. To the Corporation's knowledge, based solely on a review of the copies of such reports furnished to the Corporation and written representations that no other reports were required, all Section 16(a) filing requirements applicable to its executive officers, directors, and greater than ten percent shareholders were met. 7. Director Meetings and Committees -------------------------------------------------------------------------------- The Board of Directors of the Corporation held five meetings in 1998. The Corporation's Audit Committee has primary responsibility for the discharge of the following functions: recommendation of the firm to be employed as the Corporation's independent auditors; consultation with the independent auditors with regard to the plan of audit; review, in consultation with the independent auditors, of the report of audit, or proposed report of audit, and the accompanying management letter, if any; review and direction of the work performed by the internal audit department of the Corporation; review of regulatory examination reports received by the Corporation and its subsidiaries; and consultation with the independent and internal auditors with regard to the adequacy of internal controls. In 1998, the Audit Committee was composed of directors Dean, Hackett, and McGinty. The Committee held four meetings during 1998. The Corporation's Compensation Committee reviews and considers recommendations from management concerning the executive compensation policies, employee benefit plans and the salary administration program of the Corporation, which includes an annual review of the total compensation and recommended adjustments for all officers of the Corporation and its subsidiaries. The Committee administers the Management Performance Plan and the Long-Term Performance Plan. The Committee also administers existing stock option and employee savings plans. The deliberations of the Committee are reported to the Board of Directors for review and approval. The Committee members are Dean, Goodrich, and Kling. The Compensation Committee held two meetings in 1998. The Corporation's Nominating Committee makes recommendations to the Board of Directors regarding general qualifications for nominees as directors, desired areas of community and business representation, size of the Board of Directors, director compensation, and the retirement policy for directors. On the basis of these general determinations, the Committee recommends qualified individuals to serve as directors. Shareholder recommendations for nominees will be accepted by the Committee; however, no formal procedures have been developed to consider such recommendations. In 1998, the members of the Nominating Committee were directors Goodrich, McGinty, W. Miller, Nash, and Odden. The Nominating Committee held four meetings in 1998. The Corporation's Executive Committee acts on the Board's behalf at such times as may be designated by the Board pursuant to the conduct of the business of the Board. In 1998, the members of the Executive Committee were directors Hackett, McGinty, W. Miller, Nash, and Solso. The Executive Committee held no meetings in 1998. 8. Outside Director Compensation Under the outside directors' fee schedule, effective January 1, 1997, each outside director of the Corporation earns a retainer of $15,000 for one year's service. $5,000 of the retainer is paid in the form of stock options. The remainder of the retainer is payable in cash, additional stock options, or in common shares issued pursuant to the Outside Director Restricted Stock Compensation Plan. In addition to the annual retainer described above, in 1998, each outside director of the Corporation received $1,000 for attendance at each meeting of the Board of Directors of the Corporation, $1,000 for attendance at each meeting of a subsidiary Board, $500 for attendance at each meeting of a committee of the Board of Directors, and $350 for attendance at each meeting of a committee of the Board of Directors of a subsidiary company. The Outside Director Restricted Stock Compensation Plan (the "Plan") covers only non-employee directors of the Corporation and its subsidiaries. The Plan allows an outside director to elect to receive his or her annual retainer and/or meeting fees in cash or in common shares with a market value equivalent to the cash. The Plan permits the grant of up to 540,000 common shares over a ten-year period. Grants under the Plan may be for one or more years of future service, and in such cases, the common shares granted under the Plan are forfeitable until vested in accordance with the Plan. The Plan is administered by a Committee, appointed by the Board of Directors. Directors may elect vesting of common shares issued pursuant to multiple-year grants in equal amounts at the end of each year covered by the grant. Common share certificates issued by the Plan Committee are held by the Corporation for at least two years prior to their delivery to participants. Upon cessation of a participant's service as an outside director for any reason other than ordinary retirement, permanent disability, or death, non-vested common shares will revert to the Corporation. Directors have voting and dividend rights with respect to granted shares commencing on the date of grant, but may not sell, pledge, or otherwise transfer or encumber any such shares until they are vested, or the director receives certificates representing such shares from the Corporation, whichever is later. During 1998, director nominees Dean, Goodrich, Hackett, Kling, Lauderback, McGinty, Irwin Miller, Odden, and Solso participated in the Plan. At present, a total of 42,298 common shares are registered in the names of the participating director nominees. Other grants made under the Plan since its inception in 1989 total 57,664 common shares. A total of 99,962 shares have been granted to participants in the Plan. No other fees are paid to directors for services rendered in that capacity. Directors who are officers of the Corporation or any of its subsidiaries do not receive any directors' fees. 9. Executive Compensation and Other Information -------------------------------------------------------------------------------- Summary of Cash and Certain Other Compensation -------------------------------------------------------------------------------- The following table provides certain summary information concerning compensation paid or accrued by the Corporation and its subsidiaries, to or on behalf of the Corporation's Chairman (the Corporation does not formally use the title of Chief Executive Officer) and each of the four other most highly compensated executive officers of the Corporation for the fiscal years ended December 31, 1996, 1997 and 1998: SUMMARY COMPENSATION TABLE -------------------------------------------------------------- Long-Term Compensation All Other Annual Compensation(1,4) Awards Compensation(7) ---------------------------------------------------------------------------------------------------- Name & Principal Position Year Salary(2) Bonus(3) Option/SAR(#) (a) (b) (c) (d) (g) (i) ---------------------------------------------------------------------------------------------------- William I. Miller 1998 $393,000 $440,000 28,020 $ 80,624(5,6) Chairman 1997 $374,600 $425,863 42,180 $ 69,481(5,6) 1996 $347,200 $437,588 41,400 $ 49,328(5,6) ---------------------------------------------------------------------------------------------------- John A. Nash 1998 $295,000 $240,000 16,760 $192,988(5,6) President 1997 $281,667 $232,902 27,240 $158,886(5,6) 1996 $273,000 $234,250 33,800 $150,752(5,6) ---------------------------------------------------------------------------------------------------- Rick L. McGuire 1998 $213,333 $289,007 2,420 $ 10,172(6,8) President-Irwin 1997 $200,000 $227,286 4,320 $ 10,172(6,8) Mortgage Corporation 1996 $185,000 $226,700 6,800 $ 9,772(6,8) ---------------------------------------------------------------------------------------------------- Thomas D. Washburn 1998 $186,667 $133,000 6,140 $ 3,269(6) Senior Vice President and 1997 $175,000 $128,709 12,500 $ 3,840(6) Chief Financial Officer 1996 $161,667 $125,606 14,800 $ 2,445(6) ---------------------------------------------------------------------------------------------------- Claude E. Davis 1998 $150,000 $105,710 3,700 $ 2,925(6) President-Irwin Union 1997 $138,000 $110,242 6,960 $ 3,840(6) Bank and Trust Company 1996 $130,000 $ 56,767 11,200 $ 3,840(6) ---------------------------------------------------------------------------------------------------- 1. Amounts other than salary are reported on an accrual basis. 2. Includes amounts directed by the executive officer to be contributed on a pre-tax basis to Corporation savings plans. 3. Includes short-term bonus payments from the Corporation and certain subsidiaries. 4. With respect to each individual named in the Summary Compensation Table there were no perquisites or other personal benefits, securities or property which, in the aggregate, exceeded either $50,000 or 10% of the total of such individual's annual salary and bonus. 5. Includes accruals made under a Supplemental Retirement Benefit Plan. See "Supplemental Retirement Benefit Plan." (See Note 7.) 6. Includes contributions by the Corporation or certain subsidiaries to qualified savings plans. (See Note 7.) 7. Detailed information relevant to the "All Other Compensation" column in the Summary Compensation Table above is shown in the following table. 8. Excludes compensation payable to Rick L. McGuire under the terms of the Inland Mortgage Corporation Long-Term Incentive Plan disclosed elsewhere herein. (See Long-Term Incentive Plans.) 10. -------------------------------------------------------------------------------- Qualified Corporate Life Name SERP Savings Plan Insurance ----------------------------------------------------------------------------------------- 1998 1998 1998 ----------------------------------------------------------------------------------------- William I. Miller $ 76,784 $3,840 0 John A. Nash $189,148 $3,840 0 Rick L. McGuire 0 $7,400 $2,772 Thomas D. Washburn 0 $3,269 0 Claude E. Davis 0 $2,925 0 ----------------------------------------------------------------------------------------- Stock Options and Stock Appreciation Rights -------------------------------------------------------------------------------- The following table contains information concerning the grant of stock options under the Corporation's 1997 Stock Option Plan to the named executive officers: OPTION/SAR GRANTS IN LAST FISCAL YEAR -------------------------------------------------------------- Percent of Alternative to (f) Total and (g): Options/SARs Exercise Grant Date Value Options/ Granted to or Base ------------------ SARs Employees Price Expiration Grant Date Name Granted(1)# in Fiscal Year ($/SH) Date Present Value(2) (a) (b) (c) (d) (e) (h) ------------------------------------------------------------------------------------------------------ William I. Miller 28,020 21.85% $28.1875 4/20/2008 $343,245 John A. Nash 16,760 13.07% $28.1875 4/20/2008 $205,310 Rick L. McGuire 2,420 1.89% $28.1875 4/20/2008 $ 29,645 Thomas D. Washburn 6,140 4.79% $28.1875 4/20/2008 $ 75,215 Claude E. Davis 3,700 2.88% $28.1875 4/20/2008 $ 45,325 -------------------------------------------------------------- 1. All grants are subject to a vesting schedule where 25% of each grant is vested on the date of the grant and 25% of each grant vests on the anniversary date of each grant in each of the three years following the grant. 2. Total option values shown in Column (h) were derived using the Binomial option pricing model. Assumptions used in the valuation included an expected volatility factor of .25, an expected future dividend yield of .01, and a risk-free rate of return of .0585. The Binomial model suggests a valuation of $12.25 per share under these assumptions. The Black-Scholes option pricing model would suggest a valuation of $12.14 per share under these same assumptions. The use of a single value as shown in the table above implies a precision to stock option valuation which the Corporation does not believe exists and which therefore may cause the above table to be misleading. Accordingly, there is no assurance that the value realized on the options, if any, will be at or near the value estimated by the Binomial option pricing model. Future compensation resulting from option grants is based solely upon the performance of the Corporation's stock price. 11. Option/SAR Exercises and Holdings -------------------------------------------------------------------------------- The following table provides information, with respect to the named executive officers, concerning the exercise of options and/or SARs during the last fiscal year and unexercised options and SARs held as of the end of the fiscal year: AGGREGATED OPTIONS/SARs EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES ---------------------------------------------------------------------------------------------------------- Shares Acquired Number of Unexercised on Options/SARs at Fiscal Value of Unexercised Exercise Value Year-End In-the-Money Options/SARs Name (#) Realized (#) at Fiscal Year-End(1) ---------------------------------------------------------------------------------------------------------- (d) (e) (a) (b) (c) Exercisable Unexercisable Exercisable Unexercisable ---------------------------------------------------------------------------------------------------------- William I. Miller n/a n/a 293,945 52,455 $5,890,148 $455,816 John A. Nash n/a n/a 258,760 34,640 $5,397,734 $323,559 Rick L. McGuire 9,000 $309,847.50 41,665 5,675 $ 865,185 $ 57,263 Thomas D. Washburn 6,000 $860,895.00 80,285 14,555 $1,575,723 $145,541 Claude E. Davis 4,000 $ 91,210.00 42,605 9,055 $ 804,283 $ 93,268 ---------------------------------------------------------------------------------------------------------- 1. The 1998 year-end stock price was $27.19 per share. Long-Term Incentive Plans -------------------------------------------------------------------------------- The following table provides information concerning an award made during the last fiscal year under the Inland Mortgage Corporation Long-Term Incentive Plan to named executive Rick McGuire. The award represents an accrued liability. This award is performance based with targets established by the Board of Directors of Irwin Mortgage Corporation. LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR -------------------------------------------------------------- Number of Shares, Performance or Units or Other Period Until Estimated Future Payouts Other Maturation or Under Non-Stock Price-Based Name Rights Payout Plans ($ or #) (a) (b) (c) (d) ---------------------------------------------------------------------------------------- Deferrable Compensation Rick L. McGuire $144,265 under Terms of the Plan $144,265 ---------------------------------------------------------------------------------------- 12. PENSION PLAN TABLE -------------------------------------------------------------- Years of Service ------------------------------------------------------------------------------- Remuneration 15 20 25 30 35 ------------------------------------------------------------------------------- $ 50,000 11,600 15,500 19,300 19,900 20,500 75,000 18,900 25,200 31,500 32,900 34,400 100,000 26,200 35,000 43,700 45,900 48,200 125,000 33,500 44,700 55,900 58,900 62,000 150,000 40,800 54,500 68,100 71,900 75,800 175,000 43,800 58,400 72,900 77,100 81,300 200,000 43,800 58,400 72,900 77,100 81,300 225,000 43,800 58,400 72,900 77,100 81,300 250,000 43,800 58,400 72,900 77,100 81,300 275,000 43,800 58,400 72,900 77,100 81,300 300,000 43,800 58,400 72,900 77,100 81,300 350,000 43,800 58,400 72,900 77,100 81,300 400,000 43,800 58,400 72,900 77,100 81,300 450,000 43,800 58,400 72,900 77,100 81,300 500,000 43,800 58,400 72,900 77,100 81,300 ------------------------------------------------------------------------------- Pension Plan A non-contributory qualified defined benefit Employees' Pension Plan is maintained by the Corporation and certain of its subsidiaries. The Plan provides principally for retirement benefits to substantially all of the officers and employees of these companies. Under the provisions of the Plan, participating companies will contribute assets sufficient to pay all benefits to Plan participants. Contributions to the Plan are actuarially determined to fund the Plan's current service cost on a current basis and to fund initial past service costs over a period of 30 years. Employees who have completed one year of service (1,000 hours worked during a 12-month period) are eligible for participation. Benefits vest after five years of credited service. In addition to benefits paid to retiring employees, death and deferred termination benefits are available to employees who meet certain conditions under the Plan. The table above shows the estimated annual benefits payable, based upon reasonable assumptions, under the Plan as in effect on December 31, 1998. Basic wages considered for the Plan are for the five consecutive Plan years of highest compensation, and include basic compensation, commissions, and payments from short-term bonus plans. In accordance with Section 401(a)(17) of the Internal Revenue Code of 1986, basic wages above $160,000 are not used in the calculation of Plan benefits. The current years of service at December 31, 1998, for the individuals named in the compensation tables above, are as follows: Mr. Nash (32), Mr. Washburn (22), Mr. Davis (11), and Mr. Miller (8). Mr. McGuire is not covered by the Plan. Benefits listed in the pension plan table are payable as straight life annuity amounts and are not subject to any deduction for Social Security or other offset amounts. The Plan was amended effective January 1, 1994. For service after January 1, 1994, Mr. Washburn will receive an additional benefit accrual equal to 45% of his usual benefit. For service after January 1, 1994, Mr. Miller will receive an additional benefit accrual equal to 75% of his usual benefit. 13. Supplemental Retirement Benefit Plan -------------------------------------------------------------------------------- On May 19, 1992, the Board of Directors approved the Compensation Committee's recommendation to provide a supplemental executive retirement benefit to William I. Miller. A similar Plan was approved prior to 1992 for John A. Nash. The Plan provides Mr. Miller with an amount of company- provided benefits not provided under the Pension Plan because of the limitations imposed by Sections 415 and 401(a)(17) of the Internal Revenue Code of 1986, as amended. Criteria used to determine amounts payable under the supplemental Plan are the same as those used by the Pension Plan; that is, service with the Corporation, age at retirement, and earnings. Benefits are measured in the same manner as under the Pension Plan, using credited service with the Corporation. Method of payment of the supplemental benefit is a monthly annuity payable for life, with a guarantee of 180 payments. Compensation Committee Interlocks and Insider Participation -------------------------------------------------------------------------------- No member of the Compensation Committee of the Corporation's Board of Directors was, during 1998, an officer or employee of the Corporation or any of its subsidiaries. Board Compensation Committee Report on Executive Compensation -------------------------------------------------------------------------------- Executive compensation is reviewed and approved annually by the Compensation Committee of the Board of Directors. Each member of the Compensation Committee is a non-employee Director. Members of the Committee are Ms. Sally A. Dean, Mr. David W. Goodrich, and Mr. William H. Kling. Set forth below is a report submitted by Ms. Dean and Messrs. Goodrich and Kling in their capacity as the Board's Compensation Committee addressing the Corporation's compensation policies for 1998. The Corporation does not formally use the title "Chief Executive Officer." The principal executive officer of the Corporation is the Chairman, Mr. William I. Miller. I. Compensation Policy for Executive Officers ------------------------------------------------------------------------- The Compensation Committee believes that compensation plans make up only one element in the overall management system of the Corporation. Furthermore, appropriate compensation policies are a necessary, but not sufficient, condition for achieving the Corporation's goals. A good compensation system will not guarantee that we achieve our goals, but a poor system can result in those goals not being achieved. This interdependence requires that the Corporation's compensation system grow out of and be consistent with our corporate philosophy, our mission and our strategy. Accordingly, what we believe (our Guiding Philosophy), what we want to be (our mission), what we want to do (our strategy), and the kinds of people needed to bring that vision to life are the starting points for developing our philosophy and system of compensation. 14. The Corporation's executive compensation system focuses on the total compensation package of the Corporation's top executives. The Corporation's objective is to correlate total compensation with company performance so that median performance relative to similar companies in its industry will produce median total compensation for individuals relative to comparable positions in peer companies, inferior performance will produce below median compensation, and superior performance will produce above median compensation. This approach requires that the Corporation start by defining the appropriate peer group, both for individual positions and the Corporation as a whole. For individual positions, this decision is based on the relative level and scope of responsibilities inherent in the position, and the talent and skills required for success. The traditional measure for the scope of responsibilities in commercial banks and bank holding companies is asset size. Mortgage banking companies generally look at both loan closing volume and loan servicing size. Consumer finance companies consider origination volume. The Corporation's strategy is to enhance capital productivity, which is defined as generating proportionately larger streams of revenues and profits from a given capital and asset base. Accordingly, asset growth in itself is not one of the strategic objectives of the Corporation, and the Corporation's success at pursuing its strategy is not best defined only by asset size, loan volume, or servicing size. As a result, in calibrating the scope of responsibility of a given position, the Corporation looks at comparable positions in other companies in multiple asset-size groups as well as peer companies defined by other measures (such as total market capitalization or revenues) when they are available. Performance comparisons are generally made from the shareholders' perspective. That is, groups of companies are selected that may be seen as alternative investments by current and prospective investors. Even so, the Corporation's most direct competitors for executive talent are not necessarily all of the companies that would be included in a peer group selected to compare shareholder returns. Thus, although there may be some overlap, the surveys selected for compensation review purposes do not contain information on the same companies as those found in the peer group indices in the Comparison of Five-Year Cumulative Total Return graph which follows this report. All of the Corporation's operating companies (including the Corporation as a separate entity) use multiple sources of both compensation and performance data because experience has shown that results can vary greatly from one survey to the next. In the case of compensation market data, the Compensation Committee is provided with multiple sources of data on each executive position reviewed. When available, the information is in the form of 25th percentile, median, and 75th percentile compensation. Five different market compensation comparisons were considered for the Chairman in 1998. Historically, total compensation has been defined in surveys to include only base salary and the annual bonus. When reliable information on the present value of long-term grants is available, it is used as additional support for compensation decisions. 15. The percent of total compensation that is variable increases with the executive's position with the Corporation. This approach is consistent both with the individual's influence on results and his/her economic capacity to tolerate volatility in compensation levels. In addition to information on the market level of compensation, members of the Committee review a summary of individual performance over the past year including key accomplishments, strengths, and weaknesses. They also may consider their own subjective assessments of an executive's performance and relative contribution to the organization. II. The Elements of Executive Compensation and Corporate Performance ------------------------------------------------------------------------- There are three elements of Executive Compensation and Corporate Performance: Base Salary, Annual Short-Term Bonus, and Long-Term Incentives. A. Base Salary Turning to a review of each of the elements of the total compensation package, base salary is important in achieving one of the Corporation's compensation goals which is attracting and retaining qualified executives. Base salary is generally targeted to be at the median of similar positions in the industry. Exceptions may exist when a higher level of base salary would be required to attract or retain a uniquely qualified executive officer. In order to maintain the target position, annual increases are approximately equal to the median increases in the respective industries in which our operating companies compete unless the growth of the company warrants comparison with a larger peer group in that industry. The total base salary paid to the Chairman in 1998 was $393,000, up 5% from 1997. B. Annual Short-Term Bonus The annual bonus is the component that provides a variable current cash compensation reward for above median current performance. Each executive officer participating in the annual bonus plan has a payment target expressed as a percentage of base salary. The Corporation believes that this method, when combined with properly selected performance targets, rewards managers for making investments in future performance, valuing consistency, and managing risk. Operating company presidents receive part of their target annual bonuses based upon the performance of their respective companies, and part based upon consolidated performance of the Corporation. Thus, they have financial incentives to achieve synergies between operating companies. We believe that the best performance targets are those which are objectively and consistently measured, as well as easily understood by participants. The bonus plans of the Corporation and its operating companies include return on equity or a proxy therefor as a key performance measure. Specific performance targets for each year are approved by the board of directors of each operating company and of the Corporation and are based upon a variety of factors including historical and expected industry performance, the estimated required rate of return by investors, 16. and the prior year's budgeted and actual performance. Bonus payments begin at a threshold level and increase proportionately as performance increases. The short-term bonus design includes a mechanism to smooth, over three year rolling periods, the payment of amounts greater than twice target performance and less than threshold performance. C. Long-Term Incentives Long-term incentive plans are provided to supplement the incentive provided by annual bonus plans for building the value of the Corporation over the long term. Operating company heads may receive the majority of their long-term compensation based upon growth in the value of their subsidiary operating company. Certain holding company executive officers and some operating company executive officers are provided with long-term incentive compensation through grants of non-qualified stock options. Existing stock option plans of the Corporation include the ability to grant stock appreciation rights in addition to options. 17. III. Formulation of the Chairman's Compensation ------------------------------------------------------------------------- The Chairman's current compensation package includes a base salary of $400,000 plus an annual bonus at target performance of 55% of base salary or $220,000. As noted above, there is no single, clear measure of market compensation for executive positions in the Corporation. The Compensation Committee used five different market surveys for the Chairman's position in 1998. Based on these surveys, estimates of the 25th percentile, median, and 75th percentile points of total annual compensation were made. Actual total cash compensation paid to the Chairman for 1998 was $833,000, up 4% from 1997. Return on average equity for 1998 was 22.84%, compared to 19.66% in 1997. We believe that both returns are in the top decile of peer performance. Total shareholder return (including dividends and price appreciation) was 30.59% for 1998 and 70.6% for 1997 for Irwin Financial. These returns compare to -9.74% in 1998 and 20.6% in 1997 for the Russell 2000 Financial Services Sector Index. For long-term incentive compensation purposes, the Chairman received an option grant of 28,020 shares in 1998 at an exercise price of $28.1875 per share (representing the mean between the high and low prices on the grant date). The Chairman also has received the following grants: -------------------------------------------------------------------------------- Year Number of Options Exercise Price ---------------------------------------------------------------------------------- 1997 42,180 $13.6875 1996 41,400 10.65625 1995 54,800 7.84375 1994 66,400 5.6875 1993 57,600 5.525 1992 56,000 2.953125 ---------------------------------------------------------------------------------- These seven grants are the only long-term grants outstanding for the Chairman. Through employment of the "Binomial" option pricing models, we estimate that the present value of the 1998 options at grant date was $343,245. Sally A. Dean David W. Goodrich William H. Kling 18. Comparison of Five-Year Cumulative Total Return Irwin Financial Corporation, Russell 2000 & Russell 2000 Financial Services Sector(1) -------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 1998 ---------------------------------------------------------------------------------------------- Irwin Financial 100 109 164 206 351 458 ---------------------------------------------------------------------------------------------- Russell 2000 100 98 126 147 177 173 ---------------------------------------------------------------------------------------------- Russell 2000 Financial Services Sector 100 101 140 177 231 208 ---------------------------------------------------------------------------------------------- 1. The Corporation is included in both the Russell 2000 and the Russell 2000 Financial Services indices. Interest of Management in Certain Transactions -------------------------------------------------------------------------------- Certain directors and officers of the Corporation or its subsidiaries, and the associates of such persons, were customers of and had transactions with subsidiaries of the Corporation in the ordinary course of business during the past year, including insurance services, corporate and personal trust services, and general commercial and mortgage banking business. Additional transactions may be expected to take place between such persons and these subsidiaries. All outstanding loans and commitments included in such transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other employees and did not involve more than the normal risk of collectibility or present other unfavorable features. Companies controlled by Irwin Miller, the Estate of Clementine M. Tangeman, and William I. Miller purchased commercial paper from the Corporation from time to time during the year. The maximum amount outstanding during 1998 was $21,602,536 and the amount outstanding at year end was $18,807,537. In the opinion of management, the rates paid by the Corporation on these commercial paper transactions were comparable to the prevailing rates for such transactions at the time of the respective transactions. 19. In addition to corporate and personal trust services and general banking business, companies owned or controlled by Messrs. Miller and the Estate of Clementine M. Tangeman purchased insurance services (offered by a subsidiary of Irwin Union Bank, Irwin Union Insurance, Inc., to the companies and to the public, generally, as a regular service) for the sale of which Irwin Union Insurance, Inc. received gross commissions in 1998 of approximately $26,004. The commissions paid were at the same rate as those prevailing on comparable sales to the general public. During 1998, the Corporation made payments totaling $45,600 to a company controlled by Messrs. Miller and the Estate of Clementine M. Tangeman in exchange for the administrative and support services of an employee of such company. In the opinion of management, such payment was comparable to, or more favorable to the Corporation than, the cost of hiring an additional employee. On November 3, 1998, the Corporation purchased a 12.5% interest in a Hawker 800 aircraft owned by Cummins Engine Company, Inc., primarily for the purpose of enhancing the Chairman's productivity by reducing travel time, leading to increased time available at business meetings and the office. The Corporation paid $1,176,888 for its ownership interest. Concurrently, Cummins agreed to provide maintenance and flight services for the aircraft for management fees and operating costs estimated to be $139,984 for 1999. The agreement terminates on December 31, 2001 at which time Cummins will repurchase the aircraft. The Corporation also entered into a timeshare agreement with Cummins for the use of a substitute aircraft when the jointly-owned aircraft is undergoing major maintenance. The costs charged under the timeshare agreement are those permitted by Federal Aviation Regulations. The costs and terms associated with the ownership interest and operation of the aircraft were considered at least as favorable as other alternative aircraft arrangements. Director nominee William I. Miller is also a director of Cummins Engine Company, Inc. Director nominee Irwin Miller is the former Chairman of Cummins Engine Company, Inc. and was a director of Cummins Engine Company, Inc. until April 7, 1998. Director nominee Theodore M. Solso is President and Chief Operating Officer and a board member of Cummins Engine Company, Inc. In 1979, Irwin Union Insurance, Inc., as an independent property/casualty insurance agency, was appointed to represent and offer property/casualty and liability products of The St. Paul Companies to its customers. Director nominee Kling is also a director of The St. Paul Companies. In 1998, Irwin Union Insurance, Inc. received gross agency commissions of $77,221 from The St. Paul Companies. Director nominee Hackett is a director of Meridian Insurance Group, Inc. In 1998, Irwin Union Insurance, Inc. received gross agency commissions of $103,226 from Meridian Insurance Group, Inc. 2. Confirming Appointment of Auditors -------------------------------------------------------------------------------- The Board of Directors recommends confirmation of the appointment of PricewaterhouseCoopers L.L.P., certified public accountants, to audit the books and accounts of the Corporation for 1999. No member of the firm has any material interest, financial or otherwise, in the Corporation or any of its subsidiaries. 20. Although the selection and appointment of independent public accountants is not required to be submitted to a vote of the shareholders, the Board of Directors has decided, as in the past, to ask the Corporation's shareholders to confirm the appointment. The Board of Directors reserves the right, however, to select a new independent accounting firm at any time during the year if the Board of Directors believes, in its discretion, that such a change would be in the best interests of the Corporation and its shareholders. In accordance with past practice, management has invited representatives of PricewaterhouseCoopers L.L.P. to be present at the Annual Shareholders' Meeting. Management expects the representatives to attend the meeting. If present, these representatives will have an opportunity to make a statement, if they so desire, and will be available to respond to appropriate questions from shareholders. See "Director Meetings and Committees" for information regarding the Corporation's Audit Committee. 3. Proposal to Adopt an Employee Stock Purchase Plan -------------------------------------------------------------------------------- Subject to approval by the shareholders, the Board of Directors has adopted the Irwin Financial Corporation Employees' Stock Purchase Plan III (the "Plan") pursuant to which full-time employees with six months or more of service will be permitted to purchase common shares of the Corporation. The Corporation intends to register the common shares to be issued under the Plan under the federal securities laws and the Plan will become effective at the same time as such registration. No common shares will be issued or delivered until all applicable federal and state requirements pertaining to the offer and sale of the shares to be issued under the Plan have been satisfied. The essential features of the Plan are summarized below. Copies of the Plan may be obtained by any shareholder upon written request to Matthew F. Souza, Secretary of the Corporation. The Plan is designed to replace the Irwin Financial Corporation Employees' Stock Purchase Plan II, which expires on June 30, 1999 and which was approved by shareholders on April 26, 1994. Purpose The purpose of the Plan is to provide employees of the Corporation and its subsidiaries with the opportunity and incentive to purchase Corporation common shares in order to provide such employees with a more direct and proprietary interest in the welfare of the Corporation. All employees of the Corporation or its subsidiaries are eligible to participate in the Plan after the completion of six (6) or more months of service, except employees with customary employment of less than twenty (20) hours per week, and employees with customary employment of not more than five (5) months in any calendar year. Management estimates that approximately 1700 employees will be eligible to participate in the Plan. Administration The Plan will be administered by a committee which shall consist of three members appointed by and serving at the discretion of the Board of Directors (the "Committee"). Each member will be a director, officer, or other employee of the Corporation. The Committee will have the power to interpret and construe the provisions of the Plan. The Board of Directors will appoint a custodian to maintain a record of each participant's interest in the Plan. The custodian may be removed by the Board of Directors on thirty (30) days' written notice. The 21. Corporation will register common shares as designated by participants and deliver such common shares to participants in the Plan. Participants will have no right to assign, transfer, pledge or otherwise dispose of funds or rights credited to the Plan on the participant's behalf except pursuant to the terms of the Plan. Option to The Plan grants to eligible employees who become participants Purchase the option to purchase up to an aggregate of 750,000 common shares of the Corporation. Shares required to satisfy exercises of this option may be provided out of the Corporation's treasury shares or its authorized and unissued common shares. The Plan provides that no participant may be granted an option under the Plan if such option, when aggregated with similar options under any other stock purchase plan of the Corporation or any of its affiliates, would entitle the participant to purchase common shares having a fair market value in excess of $25,000 for each calendar year in which such option is outstanding at any time. The Plan also prohibits the granting of an option to a participant who, after the option is granted, would own shares possessing five percent (5%) or more of the total combined voting power or value of all classes of shares of the Corporation or any of its affiliates. Unless terminated earlier by the Board of Directors, the Plan will terminate on the exercise date on which the remaining common shares reserved for the grant of options are insufficient to enable each participant on such date to purchase at least one share. Payroll In order to participate in the Plan, an eligible employee must Deductions authorize his or her employer to deduct a specified amount from the employee's compensation. A participant's authorization remains effective until the participant revokes it by giving notice to the Corporation. The Corporation will transfer all amounts withheld from the participating employee's compensation to the custodian designated by the Board of Directors. The custodian will credit the appropriate amounts to a separate account for each participant. No amount withheld from an employee's compensation pursuant to an authorization under the Plan may be used by the Corporation or any affiliate for any purpose other than the purchase of shares pursuant to the Plan. The Plan provides that the minimum amount of a participant's payroll deduction must be at least $5.00. Purchase of The option granted under the Plan will be exercised Shares automatically on behalf of each participant on the first business day following a payday or at such frequency as may be established by the Committee. On the date of each exercise, the custodian will use the funds accumulated in each participant's account to purchase from the Corporation for the participant the largest number of whole shares for which sufficient funds are available in the participant's account. Initially, the option price for the common shares purchased by the custodian under the Plan will be 85% of the closing price of such shares as reported by the National Association of Securities Dealers Automated Quotation/National Market System ("NASDAQ/NMS") for the last trading day prior to each exercise date or, if not so reported, as reported by such other source as the Committee shall designate. On March 11, 1999, the closing price of the common shares as reported by the NASDAQ/NMS was $22.875. Upon written request to the Committee, a participant shall be entitled to receive a certificate representing the number of whole common shares credited to the participant's account. No certificate will be issued representing fractional shares purchased under the Plan. Amounts credited 22. to a participant's account and not used to purchase shares on any exercise date will remain credited to the account and will be available for future purchases. No interest will be paid on amounts held for a participant's account under the Plan. Withdrawals A participant may suspend payroll deductions or withdraw from the Plan at any time with proper notice to the Committee. Upon such withdrawal, the custodian will pay any balance in the participant's account to the participant. An employee who withdraws from the Plan will be eligible to participate again in the Plan as of the next quarterly enrollment. If a participant's employment terminates for any reason, the balance of the participant's account with the custodian will be paid to the participant or to the beneficiary designated by the participant in case of the participant's death. Federal Income The Plan is intended to be an "employee stock purchase plan" Tax Consequences as defined in Section 423 of the Internal Revenue Code. As a general matter, an employee who purchases shares under the Plan will not realize any taxable income until disposition of the shares, and the employee's basis in the shares will be the purchase price. If an employee remains in the employ of the Corporation and holds the shares acquired under the Plan for at least two years from the date of purchase ("holding period"), on disposition of the shares the employee will realize ordinary income in an amount equal to the excess of (i) the lesser of the fair market value of the shares at the date of purchase or date of disposition, over (ii) the purchase price. Any additional gain on the sale after the holding period is long-term capital gain or, if there is no gain on the disposition of the shares after the holding period, any loss incurred is long-term capital loss. For tax purposes, if an employee dies during the holding period, he or she is deemed to have met the holding period as of the date of death. If a participant disposes of shares purchased under the Plan before the expiration of the holding period, other than by death, he or she will recognize taxable ordinary income in an amount equal to the excess of the fair market value of the shares on the date of purchase over the purchase price, and the difference between the fair market value of the shares on the date of purchase and the disposition price will be capital gain or loss. The Corporation will not be entitled to any tax deduction in connection with the grant or exercise of the option under the Plan unless a participant disposes of shares acquired under the Plan before the expiration of the holding period, in which case the Corporation will be entitled to a tax deduction in an amount equal to the amount of ordinary income recognized by the participant at the time of such disposition. Recapitalization The Plan provides that the number of shares subject to purchase thereunder shall be adjusted to account for certain recapitalizations, share dividends, or share splits effected without receipt of consideration by the Corporation. Amendments The Plan may be altered, amended, suspended or discontinued at any time by the Board of Directors with respect to any common shares for which an option has not been granted, except that the Board of Directors may not, without further approval by the holders of a majority of the outstanding common shares of the Corporation, approve an amendment which would (a) increase the maximum number of shares which may be issued under the Plan; (b) change the class of shares which may be issued under the Plan; (c) modify the requirements as to 23. eligibility for participation in the Plan, or (d) change the provisions of the Plan concerning the option price. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THIS PLAN. 4. Proposal to Adopt an Outside Director Restricted Stock Compensation Plan -------------------------------------------------------------------------------- Subject to approval by the shareholders, the Board of Directors has adopted the Irwin Financial Corporation 1999 Outside Director Restricted Stock Compensation Plan (the "Plan") pursuant to which outside directors may receive Corporation common shares in lieu of payment of directors fees. The affirmative vote of holders of not less than a majority of the issued and outstanding common shares is required to adopt the Plan. Common shares issued under the Plan will not be issued or delivered until all applicable federal and state securities requirements pertaining to the offer and sale of securities issued under the Plan have been met. The essential features of the Plan are summarized below and copies of the Plan may be obtained by any shareholder upon written request to Matthew F. Souza, Secretary of the Corporation. Purpose The Plan is designed to encourage ownership of Corporation common shares by outside directors in order to provide such directors with a more direct and proprietary interest in the welfare of the Corporation and to encourage their continuation as directors. The Plan provides outside directors with the opportunity to elect to receive their annual retainer fees and/or meeting attendance fees (collectively "Director Fees") in the form of common shares rather than in cash. Only outside directors of the Corporation or of its subsidiaries (currently, a total of 16 persons) will be eligible to participate in the Plan. Administration The Plan will be administered by a Plan Committee, which shall initially consist of the Secretary of the Corporation. The Plan Committee will have the power to interpret and construe the provisions of the Plan. Reservation of The Plan permits the issuance of up to 100,000 common shares Shares of the Corporation from July 1, 1999 through December 31, 2009. Authorized but unissued shares and reacquired shares may be made available for issuance under the Plan. The Plan provides that the number of shares that may be issued and subject to each outstanding election shall be adjusted to account for a subdivision or consolidation of shares or other capital adjustment, share dividend, share split, or other increase or decrease in the common shares effected without receipt of consideration by the Corporation. Election to The Plan provides that unless an outside director makes an ReceiveCommon election, Director Fees will be paid in cash. Either or both Shares of the retainer fees and/or meeting fees will be payable at the election of the outside director in the form of a grant of Corporation common shares equal to the cash value of the fees. The number of common shares issued to a director under the Plan will be determined by dividing the market value of one common share into the dollar amount of Director Fees covered by an election. On March 11, 1999 the closing price of the common shares as reported by NASD was $22.875. 24. Except for 1999 and an election for a calendar year in which a person first becomes an outside director, each election shall be effective for not less than one calendar year but may be made for additional calendar years subject to any limitation imposed by the Plan Committee at the time an election is made. A grant of common shares for multiple years of service will be equal to the value of the cash retainer and meeting fees multiplied by the number of service years covered by the grant. Each outside director may elect to receive grants under the Plan by delivering to the Plan Committee a written election form. Each election made under the Plan will be irrevocable and will be effective only for the Plan year or Plan years to which such election relates. In the event that an outside director elects to receive a grant covering multiple years of prospective service, such director will not be eligible to make another election under the Plan until all years of service pertaining to the multiple year election have been served. Issuance of Before delivery to outside directors, certificates issued by Certificates the Plan Committee will be held by the Corporation's Secretary for one year after the last date covered by the election pursuant to which the common shares were issued, or an earlier date determined by the Committee. Certificates issued under the Plan are subject to forfeiture on a pro rata basis if the outside director recipient does not serve until the end of the Plan year to which such certificates apply. Common shares so forfeited will revert to the Corporation. If cessation of service is due to retirement, death or disability, the Committee may waive the forfeiture provisions with the result that the outside director may receive the common shares to be issued for the full Plan year in which the cessation of service occurs. Recapitalization The aggregate number of common shares which may be issued under the Plan will be proportionately adjusted for any increase or decrease in the number of issued and outstanding common shares resulting from a subdivision or consolidation of shares of the Corporation or any other capital adjustment of the Corporation, the payment of a share dividend, a share split, or any other increase or decrease in common shares effected without receipt of consideration by the Corporation. Other than with regard to the laws of descent and distribution and by will, no right to receive shares under the Plan will be assignable or transferable. Rights as a An outside director shall have no rights as a shareholder with Shareholder respect to common shares subject to an election until the date of issuance of a certificate representing those shares. Upon the issuance of a certificate, the shares represented thereby shall be fully paid and nonassessable common shares of the Corporation, the outside director shall have the power to vote those common shares on all matters presented to a vote of the shareholders of the Corporation and shall be entitled to receive all dividends and other distributions declared or paid by the Corporation on those shares. No adjustment will be made for dividends or other rights for which the record date is prior to the date such certificate is issued. An outside director shall have no right to sell, pledge, encumber or otherwise dispose of any common shares issued pursuant to the Plan during the time the certificates representing common shares are held by the Secretary, other than for transactions between the outside director and the Corporation or any director of the Corporation or an affiliate. 25. Term of the Plan If approved by the holders of a majority of the issued and and Amendments outstanding common shares voting in person or by proxy at the 1999 Annual Meeting of Shareholders of the Corporation, the Plan shall become effective on July 1, 1999. The Plan shall terminate on December 31, 2009, or on such earlier date as the Board of Directors may determine. No common shares shall be issued under the Plan after the termination date. The Board of Directors, except any members participating in the Plan, may from time to time, alter, amend, suspend, or discontinue the Plan with respect to any common shares for which certificates have not been issued. Federal Income The issuance of shares to an outside director pursuant to the Tax Plan will have no income tax consequences to the Corporation Consequences or the director to the extent the shares are nontransferable and subject to a substantial risk of forfeiture under Section 83(a) of the Internal Revenue Code ("Code"). Unless a Code Section 83(b) election is made, the director will be deemed to have received ordinary income in an amount equal to the fair market value of the shares on the date the shares first become either transferable or no longer subject to a substantial risk of forfeiture. Pursuant to Code Section 83(b) and the Treasury Regulations thereunder, directors receiving shares which are nontransferable and subject to a substantial risk of forfeiture may elect in the alternative to include in income the fair market value of the shares on the date of issuance. An election pursuant to Code Section 83(b) must be made in writing within 30 days of the issuance of the shares to the director pursuant to the Plan, and the election may not be revoked without the consent of the Commissioner of the Internal Revenue Service. The director's basis in the shares will equal the fair market value of the shares on the date used to determine the amount to be included in the director's income as ordinary income. The Corporation generally will be entitled to a deduction, in an amount equal to the amount included in the director's income as ordinary income, in the tax year in which the director is required to include the amount in income. Upon the disposition of shares acquired pursuant to the Plan, the director generally will recognize capital gain or capital loss, as the case may be, to the extent of the difference between the director's basis in the shares and the sale price, provided the director is not a dealer in securities. The Plan does not impose any obligation on the Corporation or any affiliate to nominate any individual for reelection as a director by the shareholders of the Corporation or an affiliate. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THIS PLAN. 5. Approval of Amendment of Articles of Incorporation to Increase Authorized Preferred Shares of the Corporation. -------------------------------------------------------------------------------- The Corporation currently has two authorized classes of shares: common shares and preferred shares. The Board of Directors has adopted, subject to shareholder approval, a proposed amendment to Article V, Section 1 of the Articles of Incorporation of the Corporation, pursuant to which the number of authorized preferred shares would be increased from 50,000 to 4,000,000 shares. 26. No preferred shares are presently outstanding. Under the terms of the Articles of Incorporation, the Board of Directors has full authority to issue preferred shares and to determine the terms thereof without further approval by the shareholders. The terms of any preferred shares, when issued, could include dividend rates, conversion prices and terms, voting rights, redemption prices, maturity dates and similar matters. The ability of the Board of Directors to determine the terms of preferred shares and approve their issuance could operate as a deterrent to a change in control of the Corporation resulting from the accumulation of outstanding common shares by a third party, as it allows the Board of Directors to grant voting and other rights to a person or persons determined by the Board of Directors and thereby dilute the voting power of the outstanding common shares and/or to otherwise affect their value. To the knowledge of management, no third party has expressed interest in acquiring control of the Corporation. The Board of Directors has had this authority since the Corporation was formed in 1972. Increasing the number of authorized preferred shares will not in substance change the authority of the Board of Directors in this regard. The Board of Directors believes that the increase in the authorized preferred shares is appropriate in light of the substantial increase in the number of authorized common shares since the time at which the Corporation's capital structure was initially determined, and in order to provide additional flexibility to the Board of Directors in managing the Corporation's capital needs. In 1972, when the number of 50,000 authorized Preferred Shares was set, the Corporation had authorized common shares of 500,000. Since then, the number of authorized common shares has increased to 40,000,000. The proposal to increase the authorized preferred shares to 4,000,000 would restore the original ratio of authorized preferred shares to authorized common shares. The preferred shares could be issued in order to raise capital to support the operations of the Corporation or as consideration for the acquisition of other companies or assets. Except as described below, the Board of Directors has no plans or commitments for the issuance of preferred shares. The Board of Directors has approved in principle a program under which preferred shares convertible into up to 250,000 common shares could be issued to investors thought to be in a position to assist the Corporation's subsidiary, Irwin Union Bank and Trust Company, in generating deposits for branch banking operations. It is contemplated that each preferred share issued to those investors would be issued for cash at a price bearing a close relationship to the current market value of one common share and would automatically convert into one common share at a specified future date. However, if the branch banking operation reached a specified level of deposits prior to the conversion date, then the number of common shares into which a preferred share converts would be increased by as much as 25%, depending upon the date on which the deposit level was attained. As noted above, the Board of Directors already has the authority to implement this program. If the proposal to increase the number of authorized preferred shares is passed, preferred shares issued under this program could have a one-for-one conversion ratio into common shares, as described above. Without the increase in the number of authorized preferred shares, the conversion ratio would 27. need to be much higher; for example, a ratio of 1,000 common shares for one preferred share could be used. The implementation of this program is subject to continuing review and development by management and to the resolution of certain legal and regulatory issues. THE BOARD OF DIRECTORS BELIEVES THAT THE INCREASE IN THE NUMBER OF AUTHORIZED PREFERRED SHARES IS IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE AMENDMENT. 6. Approval of Amendment of the Articles of Incorporation to Delete an Outdated Section of Article V. -------------------------------------------------------------------------------- The Corporation's Articles of Incorporation contain two similar sections: Article V, Section 1 and Article V, Section 5.20. Article V, Section 1, which shareholders have been asked to amend in item 5 above, has been amended over the years to increase authorized shares and eliminate par value. Article V, Section 5.20 is a remnant of an earlier version of the Articles and still authorizes the issuance of 500 common shares, par value $10, and 500 preferred shares without par value. THE BOARD OF DIRECTORS BELIEVES THAT SECTION 5.20 OF ARTICLE V IS OUTDATED AND NO LONGER APPLICABLE AND RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE DELETION OF THIS SECTION. Voting Procedures -------------------------------------------------------------------------------- Shareholders owning a majority of all the common shares outstanding must be present in person or represented by proxy in order to constitute a quorum for the transaction of business. Thus, approximately 10,844,788 shares will be required at the meeting for such quorum. The eleven nominees receiving the greatest number of votes at the meeting, either in person or by proxy, will be elected as directors for the ensuing year. In order to confirm the appointment of PricewaterhouseCoopers as the Corporation's principal auditors, a majority of the votes present at the meeting, either in person or by proxy, will be required. In order to adopt each of the Irwin Financial Corporation Employees' Stock Purchase Plan III, and the Irwin Financial Corporation 1999 Outside Director Restricted Stock Compensation Plan, the approval at the meeting of a majority of the holders of the issued and outstanding common shares of the Corporation, either in person or by proxy, will be required. In order to amend the Articles of Incorporation, a majority of the outstanding common shares of the Corporation will be required. Proxies returned by brokers as "non-votes" on behalf of shares held in street name because the beneficial owner has withheld voting instructions, and proxies returned with abstentions, will be treated as present for purposes of determining a quorum but will not be counted as voting on any matter as to which a non-vote or abstention is indicated on the proxy. 28. Annual Report on Form 10-K -------------------------------------------------------------------------------- Management will furnish to any shareholder, without charge, a copy of the Corporation's Annual Report on Form 10-K for 1998, together with all financial statements, the schedules thereto, and a list of the Exhibits filed therewith. If any shareholder wishes a copy of the Exhibits filed with the Corporation's Annual Report on Form 10-K, the Corporation will furnish the Exhibits without charge. All requests for copies should be in writing and directed to Thomas D. Washburn, Chief Financial Officer, Irwin Financial Corporation, P.O. Box 929, Columbus, Indiana 47202. The Annual Report on Form 10-K will be available to requesting shareholders on or about March 31, 1999. Deadline for Shareholder Proposals for the 2000 Annual Meeting -------------------------------------------------------------------------------- As required by law, all proposals of shareholders of the Corporation which are otherwise eligible for inclusion in the Corporation's proxy material must be received at the Corporation's principal executive offices, 500 Washington Street, Columbus, Indiana 47201, prior to December 1, 1999, in order for the proposals to be considered for inclusion in the Corporation's proxy statement and form of proxy for the 2000 Annual Meeting. Miscellaneous -------------------------------------------------------------------------------- As of the date of this proxy statement, the Board of Directors of the Corporation has no knowledge of any matters to be presented for consideration at the meeting other than the matters described herein. If (a) any matters not within the knowledge of the Board of Directors as of the date of this proxy statement should properly come before the meeting; (b) a person not named herein is nominated at the meeting for election as a director because a nominee named herein is unable to serve or for good cause will not serve; (c) any proposals properly omitted from this proxy statement and the form of proxy should come before the meeting; or (d) any matters should arise incident to the conduct of the meeting, then the proxies will be voted in accordance with the recommendation of the Board of Directors of the Corporation. MATT SOUZA, Secretary March 30, 1999 29. IRWIN FINANCIAL CORPORATION ANNUAL SHAREHOLDER MEETING APRIL 29, 1999 - 4:00 P.M. (E.S.T.) RAMADA INN 3485 JONATHAN MOORE PIKE (ROUTE 46) [MAP] -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- IRWIN FINANCIAL CORPORATION PROXY FOR ANNUAL MEETING OF SHAREHOLDERS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned does hereby nominate, constitute, and appoint John A. Nash and William I. Miller and each of them (with full power to act without the other), with full power of substitution to each, the true and lawful Proxies of the undersigned to attend the Annual Meeting of the Shareholders of the Corporation, to be held at the Ramada Inn, 2485 Jonathan Moore Pike, Columbus, Indiana, on Thursday, April 29, 1999, at 4:00 p.m. (Columbus time), or at any adjournment thereof, and to vote all shares of the Corporation which the undersigned is entitled to vote upon the matters referred to in this proxy and in the notice of said meeting to the same extent and with all the powers the undersigned would possess if personally present and voting at such meeting or at any adjournment thereof, and the Proxies are directed to: 1. Vote FOR [ ] or WITHHOLD AUTHORITY to vote for [ ] the election of the 11 directors listed below. (The Board of Directors recommends a VOTE FOR this proposal.) S. A. Dean; D. W. Goodrich; J. T. Hackett; W. H. Kling; B. J. Lauderback, J. C. McGinty, Jr.; Irwin Miller; W. I. Miller; J. A. Nash; L. R. Odden and T. M. Solso. Instructions: to withhold authority to vote for any individual nominee, print that nominee's name in the space provided below. ---------------------------------------------------------------------- 2. Vote FOR [ ] or AGAINST [ ] or ABSTAIN from voting for [ ] confirmation of the appointment of the firm of PricewaterhouseCoopers, certified public accountants, as the Corporation's independent auditors. (The Board of Directors recommends a VOTE FOR this proposal.) 3. Vote FOR [ ] or AGAINST [ ] or ABSTAIN from voting for [ ] the approval of the Employees' Stock Purchase Plan III. (The Board of Directors recommends a VOTE FOR this proposal.) 4. Vote FOR [ ] or AGAINST [ ] or ABSTAIN from voting for [ ] the approval of the 1999 Outside Director Restricted Stock Compensation Plan. (The Board of Directors recommends a VOTE FOR this proposal.) 5. Vote FOR [ ] or AGAINST [ ] or ABSTAIN from voting for [ ] the amendment to the Articles of Incorporation to increase the number of authorized Preferred Shares. (The Board of Directors recommends a VOTE FOR this proposal.) (Continued on other side) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- (Continued from other side) 6. Vote FOR [ ] or AGAINST [ ] or ABSTAIN from voting for [ ] the amendment to the Articles of Incorporation to delete an outdated section of Article V. (The Board of Directors recommends a VOTE FOR this proposal.) 7. Vote in their discretion upon such other business as may properly come before the meeting or any adjournments thereof. This proxy will be voted as you specify on this proxy card. IF NO SPECIFICATION IS MADE, THE SHARES REPRESENTED BY THE PROXY WILL BE VOTED FOR THE DIRECTORS NAMED IN THE PROXY STATEMENT, FOR THE APPROVAL OF THE EMPLOYEES' STOCK PURCHASE PLAN III, FOR THE APPROVAL OF THE OUTSIDE DIRECTOR PLAN, FOR THE AMENDMENTS TO THE ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED PREFERRED SHARES AND TO DELETE AN OUTDATED SECTION OF ARTICLE V, FOR THE CONFIRMATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS AS THE CORPORATION'S INDEPENDENT AUDITORS, AND THE PROXIES MAY VOTE IN THEIR DISCRETION UPON SUCH OTHER MATTERS AS PROPERLY MAY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF. The undersigned acknowledges receipt of notice of said meeting and the accompanying proxy statement and hereby revokes all proxies heretofore given by the undersigned for said meeting. THIS PROXY MAY BE REVOKED AT ANY TIME PRIOR TO THE VOTING Dated: 1999 THEREOF. ------------------------------------------------ SIGN EXACTLY AS NAME(S) APPEAR(S) HERE. ------------------------------------------------ ------------------------------------------------ (If there are two or more co-owners, all must sign.) IMPORTANT: Please sign, date, and return this proxy promptly in the enclosed envelope. No postage required if mailed in the United States.)