SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ 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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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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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 22, 2003, at 10:00 a.m. local time, for the
purpose of considering and voting upon the following matters:
1. ELECTION OF DIRECTORS. Election of two directors for terms expiring in 2006.
2. APPROVAL OF AMENDMENT TO THE 1982 EXECUTIVE INCENTIVE PLAN AND THE 1982
RESTRICTED STOCK AWARD PLAN. Approval of amendment to the 1982 Executive
Incentive Plan and the 1982 Restricted Stock Award Plan which would allow the
Executive Compensation Committee of the Board of Directors to extend the
forfeiture period on issued shares on a discretionary basis.
3. 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 18, 2003, are
entitled to vote at the meeting.
By Order of the Board of Directors,
John B. Griffith
Secretary
South Bend, Indiana
March 14, 2003
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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.
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1st SOURCE CORPORATION
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100 N. Michigan Street o P.O. Box 1602 o South Bend, Indiana 46634
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 22,
2003, 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 18, 2003, will be eligible to vote at the Annual Meeting. The voting
securities of 1st Source consist only of Common Stock, of which 21,194,232
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 14, 2003. 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 facsimile 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 18, 2003:
Name and Address Type of Ownership Amount % of Class
---------------------------------------------------------------------------------------------------------------------
Ernestine M. Raclin (1) Indirect(2) 5,780,316 27.27%
100 North Michigan Street --------- -------
South Bend, IN 46601
Christopher J. Murphy III Direct 722,733 3.41%
100 North Michigan Street Indirect(3) 2,041,552 9.63%
South Bend, IN 46601 --------- -------
Total 2,764,285 13.04%
========= =======
1st Source Bank as Trustee for the 1st Source Direct 1,261,890 5.95%
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 or
limited partnerships for the benefit of his wife and children. Mr. Murphy
is not a current income beneficiary of most of the trusts. Due to the
structure of various trusts and limited partnerships, 665,308 shares are
shown both in Mr. Murphy's and Mrs. Raclin's ownership.
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 (i) election
to the Board of Directors and (ii) officers may have an interest in Proposal
Number 2, relating to the 1982 Executive Incentive Plan and the 1982 Restricted
Stock Award Plan, as described more fully herein. Directors, executive officers,
and voting trustees have indicated that they intend to vote for all directors as
listed in Proposal Number 1 and for Proposal Number 2.
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 2003 Annual Meeting, two (2) directors
are to be reelected for terms expiring in 2006, 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
--------------------------------------------------------------------------------------------------------------------------
NOMINEES FOR REELECTION TO THE BOARD OF DIRECTORS
TERMS EXPIRING IN APRIL, 2006
-----------------------------
William P. Johnson 60 President, Flying J, LLC (consulting); 1996 17,288 *
prior thereto, Chief Executive Officer,
Goshen Rubber Co., Inc. (rubber and plastic
parts manufacturer); and Director,
Coachmen Industries, Inc.
Claire C. Skinner 48 Chairman of the Board, President, 2000 2,205 *
Chief Executive Officer, and Director,
Coachmen Industries, Inc. (recreational
vehicle and modular home manufacturer)
DIRECTORS CONTINUING IN OFFICE
TERMS EXPIRING IN APRIL, 2004
-----------------------------
Daniel B. Fitzpatrick 45 Chairman, President, Chief Executive 1995 36,870 *
Officer and Director, Quality Dining,
Inc. (quick service and casual dining
restaurant operator)
Wellington D. Jones III 58 Executive Vice President, 1st Source 1998 229,805 1.08%
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. 57 President, Chief Executive Officer and 1987 18,804 *
Director, Biomet, Inc. (medical
products and technology)
Toby S. Wilt 58 Chairman, Christie Cookie Company 2002 1,000 *
(gourmet foods); President, TSW
Investment Company; and Director,
Outback Steakhouse, Inc.
3
Beneficial Ownership
of Equity Securities(1)
Year in Which ------------------------
Directorship Common % of
Name Age Principal Occupation (3) Assumed Stock (2) Class
----------------------------------------------------------------------------------------------------------------------------
DIRECTORS CONTINUING IN OFFICE
TERMS EXPIRING IN APRIL, 2005
-----------------------------
Lawrence E. Hiler 57 Chairman, Hiler Industries 1992 2,166 *
(metal castings)
Rex Martin 51 Chairman, President and Chief 1996 2,768 *
Executive Officer, NIBCO, Inc.
(copper and plastic plumbing
parts manufacturer)
Christopher J. Murphy III 56 Chairman of the Board, President, and 1972 2,764,285 13.04%
Chief Executive Officer, 1st Source
Corporation; and Chairman of the Board
and Chief Executive Officer, 1st Source
Bank; prior thereto, President and
Executive Officer, 1st Source Corporation
and 1st Source Bank; and Director,
Quality Dining, Inc.
Timothy K. Ozark 53 Chairman and Chief Executive Officer, 1999 5,300 *
Aim Financial Corporation
(mezzanine funding and leasing)
NON-DIRECTOR EXECUTIVE OFFICERS
Richard Q. Stifel 61 Executive Vice President, Business 99,666 *
Group, 1st Source Bank (since 1992)
Allen R. Qualey 50 President and Chief Operating Officer, 84,669 *
Specialty Finance Group, 1st Source
(since 1997)
John B. Griffith 45 Senior Vice President, General Counsel 5,107 *
and Secretary, 1st Source Corporation
1st Source Bank (since 2001); prior
Partner, McDermott, Will & Emery, and
Partner, Winston & Strawn
Larry E. Lentych 56 Senior Vice President, Treasurer and 62,865 *
Financial Officer, 1st Source Corporation
1st Source Bank (since 1988)
4
Beneficial Ownership
of Equity Securities(1)
Year in Which ------------------------
Directorship Common % of
Name Age Principal Occupation (3) Assumed Stock (2) Class
----------------------------------------------------------------------------------------------------------------------------
All Directors and Executive Officers as a Group (14 persons) 3,332,798 15.73%
* Represents holdings of less than 1%.
(1) Based on information furnished by the directors and executive officers as
of February 18, 2003.
(2) The amounts shown include shares of Common Stock held directly or
indirectly in the following amount by the spouse and other family members
of the immediate household of Christopher J. Murphy III, who disclaims
beneficial ownership of such securities: 2,041,552 shares. Voting authority
for 959,689 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 2002; 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. 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 2002. 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,
2004. 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;
Daniel B. Fitzpatrick, Lawrence E. Hiler, Dane A. Miller, Timothy K. Ozark and
Toby S. Wilt, 1st Source Directors; Terry L. Gerber, David L. Lerman, and John
T. Phair, 1st Source Bank Directors. The Committee held four meetings in 2002.
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.
5
Human Resources Committee -- Members of the Human Resources Committee were
Richard J. Pfeil, Chairman; Rev. E. William Beauchamp, William P. Johnson, and
Claire C. Skinner, 1st Source Directors; Marilou Eldred, Hollis E. Hughes, Jr.,
H. Thomas Jackson, Craig A. Kapson, and Mark D. Schwabero, 1st Source Bank
Directors. The Committee held three meetings in 2002. The purpose of the
Committee is to establish wage and benefit policies for 1st Source and its
subsidiaries.
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 2002. 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 2002. The only incumbent director 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 he served was Daniel B.
Fitzpatrick. 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 2002 were $205,200.
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
included in the Annual Report on Form 10-K for the year ended December 31, 2002
for filing with the Securities and Exchange Commission.
AUDIT COMMITTEE
Rex Martin, Chairman
Daniel B. Fitzpatrick Terry L. Gerber
Lawrence E. Hiler David L. Lerman
Dane A. Miller Timothy K. Ozark
John T. Phair Toby S. Wilt
6
REMUNERATION OF EXECUTIVE OFFICERS
The following tables set forth all aggregate remuneration accrued by 1st Source and its subsidiaries in 2002 for 1st Source's chief
executive officer and each of 1st Source's other four most highly compensated executive officers.
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 2002 $565,659 $ - $27,990 - $129,017 $ 14,000
Chairman, President & CEO, 2001 546,101 557,500 27,449 - 179,080 120,560
1st Source, and Chairman 2000 518,269 1,037,056 23,923 - 153,859 112,786
& CEO, 1st Source Bank
Wellington D. Jones III 2002 303,683 - 20,191 4,843 41,538 14,000
Executive Vice President 2001 292,868 38,000 19,420 - 63,003 15,191
1st Source, and President 2000 276,145 72,943 17,746 - 53,440 15,261
& COO, 1st Source Bank
Allen R. Qualey 2002 217,846 - 5,592 - 34,711 14,000
President and COO, 2001 207,846 21,500 5,255 - 50,754 15,191
Specialty Finance Group, 2000 194,769 55,428 4,416 - 42,578 15,261
1st Source Bank
Richard Q. Stifel 2002 196,724 - 5,764 562 20,036 14,000
Executive Vice President, 2001 191,303 12,500 5,404 - 30,944 15,191
Business Banking Group, 2000 183,877 34,787 5,125 - 27,203 15,261
1st Source Bank
John B. Griffith(4) 2002 210,972 - 3,471 - 5,693 9,053
Senior Vice President, 2001 138,462 20,000 37,179 25,000 - -
General Counsel and Secretary
(1) Mr. Murphy, Mr. Jones, Mr. Qualey and Mr. Stifel signed employment
agreements in April 1998. Mr. Griffith signed an employment agreement in
March 2001. Mr. Murphy's agreement provides for a $570,000 base salary at
December 31, 2002, 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. Griffith receive base
salaries of $306,500, $220,000, $196,980 and $215,000, respectively, at
December 31, 2002, 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
7
extend. The agreements for Mr. Jones, Mr. Qualey and Mr. Stifel expire on
December 31, 2003. Mr. Griffith's agreement expires on March 31, 2004. 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 (in the agreement of Mr. Griffith, an unlimited period with respect
to confidential information or trade secrets) 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" and "Market 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. "Book Value" 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.
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, 2002, are as follows:
Book Value Market Value Calculated
Name Shares Shares Value
---------------------------------------------------------------------------
Christopher J. Murphy III 30,818 15,056 $707,370
Wellington D. Jones III 13,175 5,333 283,923
Allen R. Qualey 10,718 4,447 232,792
Richard Q. Stifel 6,258 2,350 131,793
John B. Griffith 1,358 3,474 78,247
8
(3) Mr. Murphy's amount in the "All Other Compensation" column includes $0,
$105,369, and $97,525 for 2002, 2001, and 2000, 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.
(4) Mr. Griffith became an executive officer in 2001.
EXECUTIVE INCENTIVE PLAN-- AWARDS FOR LAST FISCAL YEAR
There have been no Executive Incentive Plan awards to executive officers for the
last fiscal year.
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
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
2003, we reviewed Mr. Murphy's salary. Under his employment contract described
elsewhere
9
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 2002 credit performance and recommended to us that he be given
no increase. We accepted his recommendation and no increase was granted.
Bonuses under 1st Source's Executive Incentive Plan (EIP) 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 is calculated at
a "partnership level" of 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%. Since the Company performed well below its plan for the year, there are no
awards under the Company's Executive Incentive Plan and, therefore, Mr. Murphy
did not receive an award.
Also, under the EIP, 50% of the Executive Incentive Plan bonus is paid in cash
at the time of the award. The other 50% is paid in book value stock and is
subject to forfeiture over the succeeding five (5) years. The forfeiture lapses
ratably for each year the employee 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, delineated in book
value stock, is transferred to the participant as the forfeiture period lapses.
In Mr. Murphy's case, while determined in book value stock, the award is paid in
cash as the forfeiture lapses. Due to the Company's performance in 2002, the
remaining 20% of the award made in 1997 would be forfeited. Mr. Murphy asked
that the forfeiture period for these awards be extended for four (4) years for
all members of the Executive Incentive Plan except himself, Mr. Jones, and Mr.
Qualey, as they are the most senior officers of the Corporation with credit and
management authority and should bear full responsibility for the Company's
performance. The recommendation for the extension was made in an effort to
encourage the management team throughout the Company to accelerate their efforts
to return 1st Source to its former earnings levels. We approved this extension,
as did the Board of Directors, subject to the approval of the Shareholders as is
sought elsewhere in this proxy statement.
Mr. Murphy was also eligible for 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 2002. For 2002, the award level set was
2.5% of net income, or the same percentage as set for the three (3) previous
years. However, due to the continuing credit problems experienced by the
Company, Mr. Murphy recommended that no award be made and waived his right to
receive any. The Committee concurred and no award was made.
EXECUTIVE COMPENSATION COMMITTEE
Timothy K. Ozark, Chairman
William P. Johnson Rex Martin
Richard J. Pfeil
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The persons named above were the only persons who served on the Executive
Compensation Committee of the Board of Directors during the last fiscal year.
10
OPTION GRANTS IN LAST FISCAL YEAR
(a) (b) (c) (d) (e) (f)
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise Expiration Grant Date
Name Granted(1) in Fiscal Year $/Share Date Value(2)
-----------------------------------------------------------------------------------------------------------------
Wellington D. Jones III 4,843 20% $20.75 07/31/2006 $30,923
Richard Q. Stifel 562 2% 20.75 12/31/2003 2,966
(1) The date the options are first exercisable is January 22, 2003. 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 were as follows:
Dividend Expected Risk-free Expected
Name Yield Volatility Interest Rate Life (Years)
----------------------------------------------------------------------------------------------------------
Wellington D. Jones III 1.72% 35.60% 4.08% 4.52
Richard Q. Stifel 1.72% 46.62% 2.92% 1.94
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND DECEMBER 31, 2002 OPTION VALUES
(a) (b) (c) (d) (e)
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options at Options at
December 31, 2002 December 31, 2002
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---------------------------------------------------------------------------------------------------------------------
Christopher J. Murphy III 134,957 $1,846,270 288,890 - $1,478,097 -
Wellington D. Jones III - - 69,776 4,843 39,367 -
Allen R. Qualey 9,277 158,626 103,608 - 178,940 -
Richard Q. Stifel 1,158 19,230 66,049 562 174,008 -
John B. Griffith - - 4,167 20,833 - -
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COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG 1ST SOURCE, NASDAQ MARKET INDEX AND PEER GROUP INDEX**
{GRAPH}
31-Dec-97 31-Dec-98 31-Dec-99 31-Dec-00 31-Dec-01 31-Dec-02
--------- --------- --------- --------- --------- ---------
1st Source 100 117 97 75 91 75
NASDAQ Index 100 141 249 156 125 87
Peer Group 100 111 92 112 113 108
* Assumes $100 invested on December 31, 1997, in 1st Source Corporation common stock, NASDAQ market index, and
peer group index.
** The peer group is a market-capitalization-weighted stock index of banking companies in Indiana, Illinois,
Michigan, Ohio, and Wisconsin.
NOTE: Total return assumes reinvestment of dividends.
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, except that one report covering one transaction was filed late by Mr.
Murphy and an initial report of ownership was filed late by Mr. Wilt.
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EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of Securities
Remaining Available
for Future Issuance
Number of Securities to be Weighted-average Under Equity
Issued upon Exercise of Exercise Price of Compensation Plans
Outstanding Options, Outstanding Options, (excluding securities
Warrants and Rights Warrants and Rights reflected in column a)
-------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by shareholders
1992 stock option plan 758,582 $ 20.14 -
2001 stock option plan 67,700 22.58 1,932,300
1997 employee stock purchase plan 23,306 21.29 192,692
1982 executive incentive plan - - 100,000(1)(2)
1982 restricted stock award plan - - 200,000(1)
-------------------------------------------------------------------------------------------------------------------
Total plans approved by shareholders 849,588 $ 20.37 2,424,992
-------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by shareholders
Stock option agreement effective
January 1, 1992 108,584 $ 5.48 -
-------------------------------------------------------------------------------------------------------------------
Total equity compensation plans 958,172 $ 18.68 2,424,992
===================================================================================================================
(1) Amount is to be awarded by grants administered by the Executive Compensation Committee of the 1st Source Board
of Directors
(2) Amount includes market value stock only. Book value shares used for annual awards may only be sold to 1st Source.
PROPOSAL NUMBER 2: AMENDMENT OF SECTION 7(d) OF 1982 EXECUTIVE INCENTIVE PLAN
AND SECTION 7(c) OF 1982 RESTRICTED STOCK AWARD PLAN
On December 17, 2002 the Board of Directors approved an amendment to the 1st
Source Corporation 1982 Executive Incentive Plan (the "Executive Incentive Plan)
and to the 1st Source Corporation 1982 Restricted Stock Award Plan (the
"Restricted Plan"). The amendments become effective upon shareholder approval.
The amendments add the following language to Section 7(d) of the Executive
Incentive Plan and Section 7(c) of the Restricted Plan:
Not withstanding the foregoing, the Committee may in its sole discretion
at any time extend the Forfeiture Period on issued shares for the current
or prior year(s), despite the Corporation's failure to meet the required
annual or cumulative rate of return.
1st Source shareholders approved each plan in 1982. Each plan is administered by
the Executive Compensation Committee (the "Committee") of the Board of
Directors. Each plan provides for the grant of restricted shares to selected
executives and other key employees of the Company as a means of inducing
continued future employment and performance of such key employees and provides
that the shares shall vest over a period of time if the company meets certain
financial requirements which are set by the Committee at the time of grant.
There were approximately 80 participants in the plans as of December 31, 2002.
If 1st Source does not meet the financial requirements by the end of the vesting
period, the shares are forfeited. While the plans give the Committee broad power
to interpret, implement, and administer the plan, the plans do not specifically
give the Committee the power to extend the vesting period.
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1st Source did not meet the financial requirements necessary to remove the
restrictions on certain restricted shares when the vesting period ended
effective with the announcement of 1st Source's 2002 annual earnings on January
21, 2003. As discussed previously in the Executive Compensation Committee
Report, the Committee, with the Board's approval, amended selected existing
grants to extend the vesting period for a period of 4 years on those shares that
would otherwise have been forfeited in January provided that the shareholders
approve the amendment to the plans authorizing the Committee to extend the
vesting period applicable to restricted shares issued under the plans. This was
done to recognize the catastrophic impact of 9/11 on 1st Source's Specialty
Finance Group and provide an opportunity to the participants to earn out the
affected awards for future performance. If the shareholders do not approve the
amendment, the shares will be forfeited. The Committee also wishes to have the
power to extend the vesting period at its discretion in the future to maximize
the usefulness of the plans in attracting, retaining and motivating key
employees.
Copies of the full text of the amended Section 7(d) of the Executive Incentive
Plan and Section 7(c) of the Restricted Plan are attached as Exhibits A and B,
respectively.
THE BOARD RECOMMENDS A VOTE FOR THE AMENDMENT TO SECTION 7(d) OF THE 1982
EXECUTIVE INCENTIVE PLAN AND SECTION 7(c) OF THE 1982 RESTRICTED STOCK AWARD
PLAN.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of 1st Source are audited annually by independent
accountants. For the year ended December 31, 2002 and the two (2) proceeding
years, the audit was performed by Ernst & Young LLP. Fees for the last annual
audit were $185,500 and all other fees were $134,560, including audit related
services of $78,500 and nonaudit services of $56,060. Audit related services
generally include fees for pension and statutory audits. 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, 2003, as approved by the Audit Committee.
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 7, 2003.
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ADDITIONAL INFORMATION
As to the proposals presented for approval, a plurality of the shares voted is
required for approval.
A COPY OF 1ST SOURCE'S MOST RECENT ANNUAL REPORT ON FORM 10-K WILL BE PROVIDED,
WITHOUT CHARGE (EXCEPT FOR EXHIBITS), ON WRITTEN REQUEST TO: TREASURER, 1ST
SOURCE CORPORATION, POST OFFICE BOX 1602, SOUTH BEND, INDIANA 46634.
A copy of 1st Source's Annual Report on Form 10-K is furnished herewith to
Shareholders for the calendar year ended December 31, 2002, 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 14, 2003
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EXHIBIT A
AMENDMENT TO 1ST SOURCE CORPORATION 1982 EXECUTIVE INCENTIVE PLAN
Section 7(d) of the Company's 1982 Executive Incentive Plan is amended in its
entirety to read as follows:
(d) The term "Forfeiture Period" with respect to any allocation of shares
issued to a Participant under this Plan shall mean a period commencing on
the date of issuance of such shares to the Participant and ending over a
five (5) year period (for annual awards) or a nine (9) year period (for
long-term awards) thereafter. The forfeiture period shall terminate at an
equal and proportionate rate for each year in which:
(1) the Participant served continuously as an employee for the full Plan
Year, or in which the employee died, became totally disabled or
retired at his normal retirement date while an employee, and during
which,
(2) for book value shares only, the Corporation's consolidated earnings
grew at a rate not less than the rate of growth established in advance
by the Committee in connection with the applicable award.
With respect to book value shares only, for any year in which the
cumulative growth rate is equal to or has exceeded the rate established for
the accumulated years subsequent to the date of the award, all risk of
forfeiture is removed for those shares which were not released in that year
or any prior year in which the Corporation failed to meet the required
annual or cumulative rate of return.
Notwithstanding the foregoing, the Committee may in its sole discretion at
any time extend the Forfeiture Period on issued shares for the current or
prior year(s), despite the Corporation's failure to meet the required
annual or cumulative rate of return.
If the Amendment is approved by a plurality of votes cast, the Amendment shall
be deemed to be effective as of January 17, 2003.
EXHIBIT B
AMENDMENT TO 1ST SOURCE CORPORATION 1982 RESTRICTED STOCK AWARD PLAN
Section 7(c) of the Company's 1982 Restricted Stock Award Plan is amended in its
entirety to read as follows:
(c) The term "Restricted Period" with respect to any allocation of shares
issued to a Participant under this Plan shall mean a period commencing on
the date of issuance of such shares to the Participant and ending ten (10)
years or such other period as the Committee may designate in the notice of
allocation thereafter. The restricted period shall terminate at an equal
and proportionate amount of the allocation of shares for each year in
which:
(1) the Participant has served continuously as an employee, and was
employed or retired at year end, or in which such employee dies while
employed or retired.
(2) the company return on equity meets or exceeds the rate of return on
common equity established in advance by the Committee, or the
Participant meets or exceeds the individual performance goal(s)
established in advance by the Committee, as applicable.
Any year in which the cumulative rate of return on equity meets or exceeds
the rate established for the accumulated years subsequent to the year of
the award, will remove the restrictions for that year and any prior year
for which the yearly rate failed to meet the established rate.
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Notwithstanding the foregoing, the Committee may in its sole discretion at
any time extend the Restricted Period on issued shares for the current or
prior year(s), despite the Corporation's failure to meet the required
annual or cumulative rate of return.
With respect to individual performance goals, if a Participant fails to
meet or exceed his/her individual performance goal(s) for a given year, all
shares so restricted with respect to that year will be forfeited.
The Committee may designate the particular shares with respect to which
such restrictions end at the expiration of each such yearly period either
by authorizing the issuance of separate certificates or by other
instruments or documentation as deemed feasible by the Committee, and such
certificates shall be delivered to Participant forthwith.
The Amendment shall become effective on the date the Amendment is approved by a
plurality of votes cast.
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