SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
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[ ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission Only (as permitted by Rule
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[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to rule 240.14a-11(c) or rule 240.14a-12
1st Source Corporation
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(Name of Registrant as Specified in its Charter)
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1st Source Corporation
100 North Michigan Street
Post Office Box 1602
South Bend, Indiana 46634
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
AND PROXY STATEMENT
TO THE SHAREHOLDERS OF 1ST SOURCE CORPORATION:
The Annual Meeting of the Shareholders of 1st Source Corporation will be
held at the 1st Source Center, 4th Floor Boardroom, 100 North Michigan Street,
South Bend, Indiana, on April 25, 2002, at 10:00 a.m. local time, for the
purpose of considering and voting upon the following matters:
1. ELECTION OF DIRECTORS. Election of one director for a term expiring in 2004
and four directors for terms expiring in 2005.
2. OTHER BUSINESS. Such other matters as may properly come before the meeting or
any adjournment thereof.
Shareholders of record at the close of business on February 19, 2002, are
entitled to vote at the meeting.
By Order of the Board of Directors,
John B. Griffith
Secretary
South Bend, Indiana
March 12, 2002
PLEASE DATE AND SIGN THE ENCLOSED FORM OF PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED ENVELOPE. IF YOU DO ATTEND THE MEETING, YOU MAY, NEVERTHELESS, VOTE IN
PERSON AND REVOKE A PREVIOUSLY SUBMITTED PROXY.
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of proxies to be voted at the Annual Meeting of
Shareholders of 1st Source Corporation ("1st Source"), to be held on April 25,
2002, at 10:00 a.m. local time, at the 1st Source Center, 4th Floor Boardroom,
South Bend, Indiana. Only Shareholders of record at the close of business on
February 19, 2002, will be eligible to vote at the Annual Meeting. The voting
securities of 1st Source consist only of Common Stock, of which 21,060,283
shares were outstanding on the record date. Each Shareholder of record on the
record date will be entitled to one vote for each share. Cumulative voting is
not authorized. The approximate date for making available this Proxy Statement
and the form of proxy to Shareholders is March 12, 2002. With respect to each
matter to be acted upon at the meeting, abstentions on properly executed proxy
cards will be counted for determining a quorum at the meeting; however, such
abstentions and shares not voted by brokers and other entities holding shares on
behalf of beneficial owners will not be counted in calculating voting results on
those matters for which the shareholder has abstained or the broker has not
voted.
The cost of solicitation of proxies will be borne by 1st Source. In
addition to the use of mails, proxies may be solicited through personal
interview, telephone, and telegraph by directors, officers and regular employees
of 1st Source without additional remuneration therefor.
REVOCABILITY
Shareholders may revoke their proxies at any time prior to the meeting by
giving written notice to John B. Griffith, Secretary; 1st Source Corporation;
Post Office Box 1602; South Bend, Indiana 46634, or by voting in person at the
meeting.
PERSONS MAKING THE SOLICITATION
This solicitation is being made by the Board of Directors of 1st Source.
1
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Ownership of beneficial owners of more than 5% of the Common Stock outstanding
at February 19, 2002:
Name and Address Type of Ownership Amount % of Class
Ernestine M. Raclin (1) Indirect(2) 5,780,316 27.45 %
100 North Michigan Street
South Bend, IN 46601
Christopher J. Murphy III Direct 720,733 3.42 %
100 North Michigan Street
South Bend, IN 46601 Indirect(3) 1,605,948 7.63 %
Total 2,326,681 11.05 %
1st Source Bank as Trustee Direct 1,230,785 5.84 %
for the 1st Source
Corporation Employees'
Profit Sharing Plan and Trust
(1) Mrs. Raclin is the mother-in-law of Mr. Murphy.
(2) Owned indirectly by Mrs. Raclin who disclaims beneficial ownership thereof.
Most of these securities are held in trusts, of which 1st Source Bank is the
trustee and has sole voting power. While Mrs. Raclin is an income
beneficiary of many of these trusts, the ultimate benefit and ownership will
reside in her children and grandchildren.
(3) Owned indirectly by Mr. Murphy who disclaims beneficial ownership thereof.
The securities are held by Mr. Murphy's wife and children, or in trust for
the benefit of his wife and children. Mr. Murphy is not a current income
beneficiary of most of the trusts.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
The Board of Directors knows of no matters to come before the Annual
Meeting other than the matters referred to in this Proxy Statement. However, if
any other matters should properly come before the meeting, the persons named in
the enclosed proxy intend to vote in accordance with their best judgment. No
director, nominee for election as director, nor executive officer of 1st Source
has any special interest in any matter to be voted upon other than election to
the Board of Directors. Directors, executive officers, and voting trustees have
indicated that they intend to vote for all directors as listed in Proposal
Number 1.
PROPOSAL NUMBER 1:ELECTION OF DIRECTORS
The Board of Directors is divided into three (3) groups of directors whose
terms expire at different times. At the 2002 Annual Meeting, one (1) director is
to be elected for a term expiring in 2004 and four (4) directors are to be
reelected for terms expiring in 2005, or until the qualification and election of
a successor. Directors will be elected by a plurality of the votes cast.
2
The following information is submitted for each nominee as well as each director
and each non-director executive officer continuing in office.
Beneficial Ownership
of Equity Securities (1)
Year
in Which
Directorship Common % of
Name Age Principal Occupation (3) Assumed Stock(2) Class
NOMINEE FOR ELECTION TO THE BOARD OF DIRECTORS
Term Expiring in April, 2004
Toby S. Wilt 57 Chairman, Christie Cookie 1,000 *
Company (gourmet foods);
President, TSW Investment
Company; and Director,
Outback Steakhouse, Inc.
Mr. Wilt is a graduate of Vanderbilt University. He began his career as a senior accountant with Ernst & Ernst
in 1969. His involvement in banking started in 1978 and he has served as a director of a variety of banks and
bank holding companies ranging in size from a few hundred million dollars in assets to over $50 billion. He has
served on all critical committees of these companies, including Audit, Executive and Compensation. He has also
served as a director of numerous other public and private companies and organizations. Mr. Wilt was the 2001
chairman of the World Presidents Organization.
NOMINEES FOR REELECTION TO THE BOARD OF DIRECTORS
Terms Expiring in April, 2005
Lawrence E. Hiler 56 Chairman, Hiler Industries 1992 2,166 *
(metal castings)
Rex Martin 50 Chairman, President and 1996 2,769 *
Chief Executive
NIBCO, Inc. (copper
and plastic plumbing
parts manufacturer)
Christopher J. Murphy III 55 Chairman of the Board, 1972 2,326,681 11.05 %
President, and Chief
Executive Officer, 1st Source
Corporation; Chairman of the
Board and Chief Executive
Officer, 1st Source Bank; prior
thereto, President and Chief
Executive Officer, 1st Source
Corporation and 1st Source
Bank; and Director, Quality
Dining, Inc.
3
Timothy K. Ozark 52 Chairman and Chief Executive 1999 5,300 *
Officer, Aim Financial Corporation
(mezzanine funding and leasing)
DIRECTORS CONTINUING IN OFFICE
Terms Expiring in April, 2003
Rev. E. William
Beauchamp, C.S.C 59 Executive Vice President 1989 613 *
Emeritus,University of Notre Dame
William P. Johnson 59 President, Flying J, LLC; 1996 2,288 *
prior thereto, Chief Executive
Officer, Goshen Rubber Co.,
Inc. (rubber and plastic parts
manufacturer); Director,
Coachmen Industries, Inc.
Richard J. Pfeil 69 Chairman and President, 1971 36,664 *
Koontz-Wagner Electric
Company, Inc. (electrical
equipment installer and
supplier)
Claire C. Skinner 47 Chairman of the Board, 2000 2,205 *
President, Chief Executive
Officer, and Director,
Coachmen Industries, Inc.
(recreational vehicle and
modular home manufacturer)
Terms Expiring in April, 2004
Daniel B. Fitzpatrick 44 Chairman, President, 1995 29,370 *
Chief Executive Officer and
Director, Quality Dining,
Inc. (quick service and casual
dining restaurant operator)
4
Wellington D. Jones III 57 Executive Vice President, 1998 230,427 1.09 %
1st Source Corporation, and
President and Chief Operating
Officer, 1st Source Bank;
prior thereto, Executive
Vice President, 1st Source
Corporation and 1st Source Bank
Dane A. Miller, Ph.D. 56 President, Chief Executive 1987 18,804 *
Officer and Director,
Biomet, Inc. (medical
products and technology)
NON-DIRECTOR EXECUTIVE OFFICERS
Richard Q. Stifel 60 Executive Vice President, 98,463 *
Business Banking Group,
1st Source Bank (since 1992)
Allen R. Qualey 49 President and Chief Operating 78,007 *
Officer, Specialty Finance Group,
1st Source Bank (since 1997);
prior thereto, Executive Vice
President and Senior Vice President,
1st Source Bank
John B. Griffith 44 Senior Vice President, 2,749 *
General Counsel and Secretary,
1st Source Corporation and
1st Source Bank (since 2001); prior
thereto, Partner, McDermott, Will &
Emery, and Partner, Winston & Strawn
Larry E. Lentych 55 Senior Vice President, 67,899 *
Treasurer and Chief Financial
Officer, 1st Source Corporation
and 1st Source Bank (since 1988)
All Directors and Executive Officers as a Group 2,905,405 13.80%
* Represents holdings of less than 1%.
(1) Based on information furnished by the directors and executive officers as
of February 19, 2002.
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(2) The amounts shown include shares of Common Stock held directly or
indirectly in the following amounts by the spouse and other family members
of the immediate household of the following director, who disclaims
beneficial ownership of such securities: Christopher J. Murphy III,
1,605,948 shares. Voting authority for 959,103 shares owned beneficially by
Mr. Murphy is vested in 1st Source Bank as Trustee for various family
trusts. Investment authority for those shares is held by 1st Source Bank as
Trustee of the underlying trusts.
(3) The principal occupation represents the employment for the last five years
for each of the named directors and executive officers. Directorships
presently held in other registered corporations are also disclosed.
Directors and officers of 1st Source and their affiliates were customers of and
had transactions with 1st Source and its subsidiaries in the ordinary course of
business during 2001; additional transactions are expected to take place in the
ordinary course of business in the future. All outstanding loans and commitments
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than the normal risk of collectibility,
or present other unfavorable features. Credit underwriting procedures followed
were no less stringent than those for comparable transactions with other
borrowers.
BOARD COMMITTEES
1st Source and its major subsidiary, 1st Source Bank, share the following
permanent committees made up of board members of both organizations. Executive,
Audit, Human Resources and Executive Compensation Committee members are
appointed annually after the Annual Meeting of Shareholders.
EXECUTIVE COMMITTEE -- Members of the Executive Committee were Christopher
J. Murphy III, Chairman; Daniel B. Fitzpatrick, William P. Johnson, Rex Martin,
Timothy K. Ozark, and Richard J. Pfeil. The committee did not meet in 2001. The
committee has the power to act for the Board of Directors between Board meetings
subject to certain statutory limitations. The committee also carries out the
functions of the Nominating Committee and will consider nominees for election to
the Board of Directors recommended by Shareholders, if submitted in writing at
least 120 days prior to the next Annual Meeting to be held on or about April 22,
2003. Nominations should be addressed to the attention of the Chairman,
Executive Committee, c/o 1st Source Corporation.
AUDIT COMMITTEE -- Members of the Audit Committee were Rex Martin,
Chairman; Rev. E. William Beauchamp, Daniel B. Fitzpatrick, Lawrence E. Hiler,
Dane A. Miller, Timothy K. Ozark and Claire C. Skinner, 1st Source Directors;
Terry L. Gerber, David L. Lerman, and John T. Phair, 1st Source Bank Directors.
The committee held four meetings in 2001. The function of the Audit Committee is
to select the Company's outside independent accountants and to review the scope
and results of the audits by the internal audit staff and the independent
accountants. The committee also reviews the adequacy of the accounting and
financial controls and presents the results to the Board of Directors with
respect to accounting practices and internal procedures. It also makes
recommendations for improvements in such procedures.
HUMAN RESOURCES COMMITTEE -- Members of the Human Resources Committee were
Richard J. Pfeil, Chairman and William P. Johnson, 1st Source Directors; Marilou
Eldred, Hollis E. Hughes, Jr., H. Thomas Jackson, Craig A. Kapson, Mark D.
Schwabero, and Elmer H. Tepe, 1st Source Bank Directors. The committee held
three meetings in 2001. The purpose of the committee is to establish wage and
benefit policies for 1st Source and its subsidiaries.
6
EXECUTIVE COMPENSATION COMMITTEE -- Members of the Executive Compensation
Committee were Timothy K. Ozark, Chairman; William P. Johnson, Rex Martin and
Richard J. Pfeil. The committee held two meetings in 2001. The Executive
Compensation Committee determines compensation for senior management personnel,
reviews the Chief Executive Officer and manages the company's stock plans.
MEETINGS OF THE BOARD OF DIRECTORS AND DIRECTORS' COMPENSATION -- The Board
of Directors held six meetings in 2001. Incumbent directors who attended fewer
than 75% of the aggregate total meetings of the Board of Directors and all
committees of the board of 1st Source on which they served were William P.
Johnson and Rex Martin. Directors receive fees in the amount of $7,000 per year,
and $600 per board meeting and committee meeting attended. Committee
chairpersons receive $700 per meeting. Total fees paid in 2001 were $184,000.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees 1st Source's financial reporting process on
behalf of the Board of Directors. Management has the primary responsibility for
the financial statements and the reporting process including the system of
internal controls. The Board of Directors has adopted a Charter for the Audit
Committee to set forth its authority and responsibilities. A copy of this
Charter was included in the 2001 proxy statement as Exhibit A. All of the
members of the Committee are independent as defined in the listing standards of
the Nasdaq Stock Market.
The Committee reviewed the audited financial statements in the Annual
Report with management. The Committee also reviewed the financial statements
with 1st Source's independent auditors, who are responsible for expressing an
opinion on the conformity of those audited financial statements with generally
accepted accounting principles. The Committee also considered with the auditors
their judgments as to the quality, not just the acceptability, of 1st Source's
accounting principles and such other matters as are required to be discussed
with the Committee under generally accepted auditing standards. In addition, the
Committee has discussed with the independent auditors the auditors' independence
from management and 1st Source, including the matters in the written disclosures
required by the Independence Standard Board, and considered the compatibility of
nonaudit services provided by the independent auditors to 1st Source with the
auditors' independence.
In reliance on the reviews and discussions referred to above, the Committee
recommended to the Board of Directors that the audited financial statements be
incorporated by reference in the Annual Report on Form 10-K for the year ended
December 31, 2001 for filing with the Securities and Exchange Commission.
7
AUDIT COMMITTEE
Rex Martin, Chairman
Rev. E. William Beauchamp
Daniel B. Fitzpatrick
Terry L. Gerber
Lawrence E. Hiler
David L. Lerman
Dane A. Miller
Timothy K. Ozark
John T. Phair
Claire C. Skinner
REMUNERATION OF EXECUTIVE OFFICERS
The following tables set forth all aggregate remuneration accrued by 1st Source
and its subsidiaries for 2001 for 1st Source's chief executive officer and each
of 1st Source's other four most highly compensated executive officers.
8
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
Awards Payouts
(A) (B) (C) (D) (E) (F) (G) (H)
Securities
Other Annual Underlying LTIP All Other
Name and Principal Position (1) Year Salary Bonus(2) Compensation Options (#Sh) Payouts(2) Compensation(3)
Christopher J. Murphy III 2001 $546,101 $ 557,500 $27,449 - $179,080 $120,560
Chairman, President & CEO, 2000 518,269 1,037,056 23,923 - 153,859 112,786
1st Source, and Chairman 1999 492,308 1,022,493 21,733 - 237,863 108,558
& CEO, 1st Source Bank
Wellington D. Jones III 2001 292,868 38,000 19,420 - 63,003 15,191
Executive Vice President 2000 276,145 72,943 17,746 - 53,440 15,261
1st Source, and President 1999 259,553 45,357 16,179 - 81,234 14,544
& COO, 1st Source Bank
Allen R. Qualey 2001 207,846 21,500 5,255 - 50,754 15,191
President and COO, 2000 194,769 55,428 4,416 - 42,578 15,261
Specialty Finance Group, 1999 180,538 50,209 3,346 - 47,607 14,544
1st Source Bank
Richard Q. Stifel 2001 191,303 12,500 5,404 - 30,944 15,191
Executive Vice President, 2000 183,877 34,787 5,125 - 27,203 15,261
Business Banking Group, 1999 174,035 23,404 4,515 - 45,336 14,544
1st Source Bank
Larry E. Lentych 2001 155,846 20,240 2,490 554 24,950 15,146
Senior Vice President, 2000 147,058 31,894 2,159 - 21,610 15,134
Treasurer and CFO, 1999 139,510 21,115 1,746 - 31,561 14,279
1st Source and 1st Source Bank
9
(1) Mr. Murphy, Mr. Jones, Mr. Qualey, Mr. Stifel, and Mr. Lentych (the
"Executives") signed Employment Agreements (the "Agreements") in April
1998. Mr. Murphy's Agreement provides for a $553,875 base salary at
December 31, 2001, with annual increases of not less than 5% effective
March 31 of each year, and cash bonus payments based on a formula computed
in a manner similar to the awards to executives under the Executive
Incentive Plan and Long-Term Executive Award Program. Under the other four
Agreements, Mr. Jones, Mr. Qualey, Mr. Stifel and Mr. Lentych receive base
salaries of $296,000, $212,000, $190,320 and $158,000, respectively, at
December 31, 2001, with annual increases at March 31 each year as may be
determined by 1st Source, and cash and stock bonuses determined under the
Executive Incentive Plan and the Long-Term Executive Award Program. The
Agreements permit gross-up payments necessary to cover possible excise tax
payments by the Executives and to reimburse the Executives for legal fees
that might be expended in enforcing the Agreements' provisions or
contesting tax issues relating to the Agreements' parachute provisions. Mr.
Murphy's Agreement is a five-year agreement which is extended an additional
year each year unless either party gives notice not to extend. The
Agreements for Mr. Jones, Mr. Qualey, Mr. Stifel, and Mr. Lentych expire on
December 31 of the years 2003, 2003, 2002, and 2002, respectively. In each
case their Agreement will be extended from year to year thereafter unless
either party gives notice not to extend. If any of the Executives terminate
employment because of any adverse change in their status, he will continue
to receive his base salary for a period of twelve months after his
termination. If any of the Executives terminate employment within one year
of a change in control (which term includes any third party which becomes
beneficial owner of 50%, or in the case of Mr. Murphy, 20% or more of the
outstanding stock of 1st Source, the election of a majority of new
directors in connection with a sale, merger, other business combination or
contested Board of Directors election, or any approval of any transaction
which results in a disposition of substantially all of the assets of 1st
Source), he will receive severance pay in cash equal to 2.99 times his
"Annualized Includable Compensation" (as defined under the Internal Revenue
Code of 1986, as amended.) The Agreements also include restrictive
covenants which provide, among other things, that the Executives not
compete with 1st Source in bank or bank-related services within certain
designated counties of Indiana or divulge confidential information or trade
secrets for a twenty-four month period after termination of employment. In
the event of disability, the Executives will receive their base salary for
up to one year, in addition to other disability programs in effect for all
officers of 1st Source. Additionally, 1st Source has entered into a
split-dollar life insurance agreement with Mr. Murphy which insures the
lives of Mr. Murphy and his wife for $10.2 million.
(2) 1st Source has an Executive Incentive Plan (the "Plan") and the 1998
Performance Compensation Plan which are administered by the Executive
Compensation Committee (the "Committee") of the Board. Awards under the
Plan consist of cash and "Book Value" shares of Common Stock. "Book Value"
shares are awarded annually on a discretionary basis and are subject to
forfeiture over a period of five (5) years. The Plan shares may only be
sold to 1st Source, and such sale is mandatory in the event of death,
retirement, disability or termination of employment. 1st Source may
terminate or extend the Plan at any time. During February 2001 and February
1996, 1st Source granted special long-term incentive awards (the "Awards")
to participants in the Executive Incentive Plan administered by the
Committee. The 2001 Award was granted for the attainment of the company's
long-term goals for 2000, which were set in 1995. The 1996 Award was
granted for the attainment of the company's long-term goals for 1995 which
were set in 1990. Each Award was split between cash and 1st Source Common
Stock valued at the market price at the time of the award. Such shares are
subject to forfeiture over a period of ten (10) years. The first 10% of
these shares was vested at the grant of the Award. Subsequent vesting
requires (i) the participant to remain an employee of 1st Source and (ii)
that 1st Source be profitable on an annual basis based on the determination
of the Committee.
10
1st Source also has a Restricted Stock Award Plan (the "Restricted Plan")
for key employees. Awards under the Restricted Plan are made to employees
recommended by the Chief Executive Officer and approved by the Committee.
Shares awarded under the Restricted Plan are subject to forfeiture over a
five (5) to ten (10) year period. Vesting is based upon meeting certain
criteria, including continued employment by 1st Source.
The bonus amounts shown represent the annual cash awards under the Plan,
the 1998 Performance Compensation Plan and other cash bonuses. Vested stock
under the Plan, the Awards and the Restricted Plan are included in the LTIP
Payouts column. The value placed on "Book Value" shares is the book value
per share as of December 31 of each year. The value placed on market value
shares is market value as of December 31 of each year. Mr. Murphy receives
this vested amount in cash.
Unvested stock holdings under the Plan, the Awards and the Restricted Plan
as of December 31, 2001, are as follows:
Book Value Market Value Calculated
Name Shares Shares Value
Christopher J. Murphy III 38,473 17,656 $932,186
Wellington D. Jones III 15,576 6,194 357,650
Allen R. Qualey 12,828 5,144 295,437
Richard Q. Stifel 7,021 2,775 160,862
Larry E. Lentych 7,003 2,209 148,880
(3) Mr.Murphy's amount in the "All Other Compensation" column includes
$105,369, $97,525, and $94,014 for 2001, 2000, and 1999, respectively, for
the current value on an actuarial basis of his split-dollar life insurance
agreement. All other amounts reported in the "All Other Compensation"
column represent 1st Source contributions to defined contribution
retirement plans.
EXECUTIVE INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
Number of Performance
Book Value Period Until
Name Shares(1) Payout(2)
Christopher J. Murphy III 4,922 5 years
Wellington D. Jones III 2,580 5 years
Allen R. Qualey 1,460 5 years
Richard Q. Stifel 849 5 years
Larry E. Lentych 1,375 5 years
11
(1) Mr. Murphy will receive his vested awards in cash.
(2) Vesting of awards is tied to 1st Source achieving targeted annual increases
in net income over the next five years. Twenty percent (20%) of the award
vests each year based on attaining the performance.
PENSION PLAN BENEFITS
Annual pension benefits payable to executive officers after their retirement
under annuity contracts received from the terminated Pension Plan
are as follows:
Annual Pension
Name Benefits
Christopher J. Murphy III $17,078
Wellington D. Jones III 6,694
Richard Q. Stifel 3,879
Larry E. Lentych 4,827
EXECUTIVE COMPENSATION COMMITTEE REPORT
1st Source officers are reviewed annually by their immediate supervisor.
The review includes assessment of management performance and achievement of
individual, group, and company goals.
The performance review is a normal part of 1st Source's Salary
Administration Program. All positions are rated and placed in a salary range.
Annually, with our approval, management establishes a salary performance grid
that sets the range of merit increases that may be given to officers depending
on their review and their respective position (lower, middle or upper third) in
their respective salary range.
The categories of performance under the Company's review program are:
-- Substantially and consistently exceeds job requirements
-- Often exceeds job requirements
-- Meets and sometimes exceeds job requirements
-- Meets some job requirements, improvement is required
-- Does not meet minimal job requirements
Management awards salary increases as determined under the guidelines of
the Salary Administration Program in conformance with the salary performance
grid in effect for the year and the annual budget.
All of the officers reported herein, including Mr. Murphy, are under the
1st Source Salary Administration Program. In his case, he is evaluated by us
against a series of objectives set in the Company's annual budget plan and in
its long-term strategic plan as annually approved by our full Board. In January
2002, we reviewed Mr. Murphy's salary. Under his employment contract described
elsewhere in this proxy statement, Mr. Murphy has a right to receive a minimum
annual increase of 5%. Mr. Murphy waived his right to a 5% increase for this
review due to the Company's 2001 credit performance. With this in mind, we
reviewed his performance against the Company's 2001 Plan and his progress toward
achieving the Company's long-
12
term plan. Despite the 2001 credit performance, the Company met a number of its
other quantitative and qualitative objectives in 2001. We determined that Mr.
Murphy's performance "meets and sometimes exceeds job requirements," and he was
therefore eligible under the plan to receive up to a 4% base salary increase.
We determined it to be in the best interest of the Company to increase Mr.
Murphy's salary to $570,000 effective March 31, 2002, up from the previous
amount of $553,875 approved by us in January 2001 and effective March 31, 2001.
Bonuses under 1st Source's Executive Incentive Plan are determined annually
following the close of the year. The bonus is calculated based on the officer's
"partnership level" adjusted for the Company's performance relative to plan and
for the individual's performance relative to weighted objectives set at the
beginning of the year. In Mr. Murphy's case, the base bonus calculation is 25%
of his salary. For each 1% that the company varies from its profit plan for the
year, the base bonus is adjusted up or down by 2.5%.
Once the base bonus is calculated, an officer can receive 100% to 300% of
the amount depending on their individual performance. As with all Executive
Incentive Plan participants, the reviewer assesses performance relative to an
agreed upon set of objectives. In Mr. Murphy's case, these are the annual
business objectives, including net income, return on equity, return on assets,
net charge-offs and the achievement of a set of general management objectives,
and a composite of the performance of the senior officers reporting directly to
Mr. Murphy. In 2001, the Company recorded an increase in net income despite a
more difficult credit environment, significantly expanded its branch network and
generally met its qualitative objectives. Accordingly, Mr. Murphy was awarded a
bonus of $145,000 for 2001's performance.
Under the Company's Executive Incentive Plan, 50% of the Executive
Incentive Plan bonus will be paid in cash in March 2002 to Mr. Murphy. The other
50% is subject to forfeiture over the next five (5) years. The forfeiture lapses
ratably for each year Mr. Murphy remains with the Company and for each year or
period of years the Company grows its net income by a targeted minimum per year.
During this period, the "at risk" portion of the bonus is delineated in book
value stock but is paid in cash to Mr. Murphy as the forfeiture lapses.
In addition, the Executive Compensation Committee awarded Mr. Murphy a cash
bonus under the 1998 Performance Compensation Plan previously approved by the
shareholders and based on goals established by us at the beginning of 2001. For
2001 the award level set was 2.5% of net income, or $962,000, the same
percentage as set for the three previous years. However, due to the increasse of
nonperforming assets and the general deterioration of credit quality in the
company, the bonus was reduced to $485,000 (1.26% of net income). This bonus was
awarded in recognition of 1st Source's partial achievement of the specific
goals.
EXECUTIVE COMPENSATION COMMITTEE
Timothy K. Ozark, Chairman
William P. Johnson
Rex Martin
Richard J. Pfeil
13
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The persons named on page 13 were the only persons who served on the
Executive Compensation Committee of the Board of Directors during the last
fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
(a) (b) (c) (d) (e) (f)
Number of % of Total
Securities Options
Underlying Granted to Exercise Grant
Options Employees Price Expiration Date
Name Granted(1) in Fiscal Year $/Share Date Value(2)
Larry E. Lentych 554 1% $24.00 12/31/2003 $3,700
(1) The date the options are first exercisable is August 22, 2002. Options are
subject to a three-year holding period after exercise.
(2) Grant date values have been determined using the Black-Scholes option
pricing model. The assumptions used in calculating the Black-Scholes
present value for these grants were as follows: dividend yield of 1.86%;
expected volatility of 45.49%; risk-free interest rate of 3.86%; and
expected life of 2.36 years.
14
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND DECEMBER 31, 2001 OPTION VALUES
(a) (b) (c) (d) (e)
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options at Options at
December 31, 2001 December 31, 2001
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Christopher J. Murphy III - $ - 423,847 - $3,945,959 $ -
Wellington D. Jones III 8,070 66,885 69,776 - 75,463 -
Allen R. Qualey 2,205 20,766 110,217 2,668 452,895 11,728
Richard Q. Stifel 1,431 18,115 67,207 - 304,767 -
Larry E. Lentych 2,348 24,777 62,510 554 267,003 -
15
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Securities Exchange Act of 1934 requires executive officers and
directors to file reports of ownership and changes in ownership of 1st Source
Corporation stock with the Securities and Exchange Commission and to furnish 1st
Source with copies of all reports filed. Based solely on a review of the copies
of such reports furnished to 1st Source and written representations from the
executive officers and directors that no other reports were required, 1st Source
believes that all filing requirements were complied with during the last fiscal
year.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of 1st Source are audited annually by independent
accountants. For the year ended December 31, 2001 the audit was performed by
Ernst & Young LLP. Fees for the last annual audit were $142,000 and all other
fees were $181,500, including audit related services of $164,000 and nonaudit
services of $17,500. Audit related services generally include fees for pension
and statutory audits, accounting consultations, and SEC registration statements.
Representatives of the firm of Ernst & Young LLP will be available to respond to
questions during the Annual Meeting. These representatives have indicated that
they do not presently intend to make a statement at the Annual Meeting. Ernst &
Young LLP will continue as 1st Source's independent accountants for the year
ending December 31, 2002, as recommended by the Audit Committee and approved by
the Board of Directors.
1st Source notified its former accountant, PricewaterhouseCoopers LLP
("PwC") on April 18, 2000 that it would be conducting a request for proposals
for a possible change in independent accountants. 1st Source invited PwC to
submit a proposal. On May 26, 2000, PwC informed 1st Source that it would not be
submitting a proposal in response to 1st Source's request and, therefore, it
declined to stand for reelection as 1st Source's independent accountants.
PwC's report on the financial statements of 1st Source for the years ended
December 31, 1999 and 1998 contained no adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope or accounting
principles.
There was a disagreement with PwC concerning income recognition on
securitized loans in accordance with SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
disagreement was resolved to PwC's satisfaction in mid-February, 2000 after 1st
Source changed its method of estimating the timing of cash flows and certain
assumptions relating to the securitized loans as well as 1st Source's retained
interests in such loans. These changes in the estimates used resulted in a
difference in the timing of revenue recognition, but had no effect on total cash
flows to be derived from the securitized transactions. Such changes resulted in
1st Source filing an amended Form 10-K for 1998, including a revised auditor's
report referring to the revisions, and related amended forms 10-Q for the
affected periods. The changes increased net earnings for 1998 from $31,020,000
to $31,457,000 (a change of 1.4%) with no change in total earnings for 1999.
Management reported regularly to the Audit Committee regarding these matters
prior to reaching resolution of the disagreement with PwC. The Audit Committee
also discussed the matter directly with PwC on April 18, 2000. 1st Source has
authorized PwC to respond fully to inquiries of its successor auditor concerning
these matters.
17
On June 14, 2000 the Audit Committee of 1st Source's Board of Directors
engaged the firm of Ernst & Young LLP as independent accountants for fiscal year
2000. The decision to change accountants was recommended and approved by the
Audit Committee of the Board of Directors of 1st Source.
PROPOSALS OF SECURITY HOLDERS
Proposals submitted by security holders for presentation at the next Annual
Meeting must be submitted in writing to the Secretary, 1st Source Corporation,
on or before November 5, 2002.
ADDITIONAL INFORMATION
As to the proposals presented for approval, a plurality of the shares voted
is required for approval.
COPIES OF 1ST SOURCE'S MOST RECENT FORM 10-K WILL BE PROVIDED, WITHOUT
CHARGE, ON WRITTEN REQUEST TO: TREASURER, 1ST SOURCE CORPORATION, POST OFFICE
BOX 1602, SOUTH BEND, INDIANA 46634.
A copy of 1st Source's Annual Report is furnished herewith to Shareholders
for the calendar year ended December 31, 2001, containing financial statements
for such year. The financial statements and the Report of Independent
Accountants are incorporated by reference in this Proxy Statement.
By Order of the Board of Directors,
John B. Griffith
Secretary
South Bend, Indiana
March 12, 2002
18