SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 Staff 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
(Name of Registrant as Specified in its Charter)
------------------------------------------------
(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
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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
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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 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 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 28, 2004, at 10:00 a.m. local time, for the purpose of
considering and voting upon the following matters:
1. ELECTION OF DIRECTORS. Election of four directors for terms expiring in
2006 and five directors for terms expiring in 2007.
2. REAPPROVAL OF 1998 PERFORMANCE COMPENSATION PLAN MATERIAL TERMS.
Reapproval of material terms of the 1998 Performance Compensation Plan in
accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended.
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 20, 2004, are
entitled to vote at the meeting.
By Order of the Board of Directors,
John B. Griffith
Secretary
South Bend, Indiana
March 19, 2004
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PLEASE DATE AND SIGN THE ENCLOSED FORM OF PROXY AND RETURN IT PROMPTY 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 - P.O. BOX 1602 - 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 28, 2004, 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 20,
2004, will be eligible to vote at the Annual Meeting. The voting securities of
1st Source consist only of Common Stock, of which 21,366,068 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 19, 2004. 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 20, 2004:
NAME AND ADDRESS TYPE OF OWNERSHIP AMOUNT % OF CLASS
---------------------------------------------------------------------------------------
Ernestine M. Raclin(1) Direct 167,736 0.78%
100 North Michigan Street Indirect (2) 5,612,580 26.27%
South Bend, IN 46601 --------- -----
Total 5,780,316 27.05%
========= =====
Christopher J. Murphy III Direct 719,604 3.37%
100 North Michigan Street Indirect (3) 2,039,838 9.55%
South Bend, IN 46601 --------- -----
Total 2,759,442 12.92%
========= =====
1st Source Bank as Trustee for the Direct 1,354,819 6.34%
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 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 1998 Performance Compensation 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 2004 Annual Meeting, four (4) directors are to
be elected for terms expiring in 2006 and five (5) directors are to be elected
for terms expiring in 2007, 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 CLASS
------------------------------------------------------------------------------------------------------------------
NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS
TERMS EXPIRING IN APRIL, 2006
-----------------------------
Terry L. Gerber 63 President and Chief Executive 9,431 *
Officer, Gerber Manufacturing
Company, Inc. (clothing
manufacturer); and 1st Source Bank
Director since 1989
Craig A. Kapson 53 President, Jordan Automotive Group 24,558 *
(automotive dealerships); and 1st
Source Bank Director since 1988
John T. Phair 54 President, Holladay Properties (real 40,893 *
estate development); and 1st Source
Bank Director since 1989
Mark D. Schwabero 51 Formerly, President and Chief 1,438 *
Executive Officer, Hendrickson
International (heavy-duty
transportation products); and 1st
Source Bank Director since 1996
TERMS EXPIRING IN APRIL, 2007
-----------------------------
David C. Bowers 67 Formerly, Executive Vice President, 2003 1,819 *
Park National Bank and Secretary and
Chief Financial Officer, Park
National Corporation (financial
services)
Daniel B. Fitzpatrick 46 Chairman, President, Chief Executive 1995 36,870 *
Officer and Director, Quality
Dining, Inc. (quick service and
casual dining restaurant operator)
Wellington D. Jones III 59 Executive Vice President, 1st Source 1998 234,125 1.10%
Corporation, and President and Chief
Operating Officer, 1st Source Bank;
prior thereto, Executive Vice
President, 1st Source Corporation
and 1st Source Bank
3
BENEFICIAL OWNERSHIP
OF EQUITY SECURITIES(1)
YEAR -----------------------
IN WHICH
DIRECTORSHIP COMMON % OF
NAME AGE PRINCIPAL OCCUPATION(3) ASSUMED STOCK CLASS
------------------------------------------------------------------------------------------------------------------
NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS
Dane A. Miller, Ph.D. 58 President, Chief Executive Officer 1987 18,804 *
and Director, Biomet, Inc. (medical
products and technology)
Toby S. Wilt 59 Chairman, Christie Cookie Company 2002 10,000 *
(gourmet foods); President, TSW
Investment Company; Director,
Outback Steakhouse, Inc.; and
Director, TLC Vision Corporation
DIRECTORS CONTINUING IN OFFICE
TERMS EXPIRING IN APRIL, 2005
-----------------------------
Lawrence E. Hiler 58 Chairman, Hiler Industries (metal 1992 2,166 *
castings)
Rex Martin 52 Chairman, President and Chief 1996 2,768 *
Executive Officer, NIBCO, Inc.
(copper and plastic plumbing parts
manufacturer); and Director,
Coachmen Industries, Inc.
Christopher J. Murphy III 57 Chairman of the Board, President, 1972 2,759,442 (2) 12.92%
and Chief Executive Officer, 1st
Source Corporation; and 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.
Timothy K. Ozark 54 Chairman and Chief Executive 1999 5,300 *
Officer, Aim Financial Corporation
(mezzanine funding and leasing)
4
BENEFICIAL OWNERSHIP
OF EQUITY SECURITIES(1)
YEAR
IN WHICH
DIRECTORSHIP COMMON % OF
NAME AGE PRINCIPAL OCCUPATION(3) ASSUMED STOCK CLASS
------------------------------------------------------------------------------------------------------------------
DIRECTORS CONTINUING IN OFFICE
TERMS EXPIRING IN APRIL, 2006
-----------------------------
William P. Johnson 61 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.
NON-DIRECTOR EXECUTIVE OFFICERS
Richard Q. Stifel 62 Executive Vice President,
Business Banking Group,
1st Source Bank (since 1992) 101,967 *
Allen R. Qualey 51 President and Chief Operating Officer, 91,475 *
Specialty Finance Group,
1st Source Bank (since 1997)
John B. Griffith 46 Senior Vice President, General Counsel 7,124 *
and Secretary, 1st Source Corporation and
1st Source Bank (since 2001); prior thereto,
Partner, McDermott, Will & Emery, and
Partner, Winston & Strawn
Larry E. Lentych 57 Senior Vice President, Treasurer and Chief 69,590 *
Financial Officer, 1st Source Corporation and
1st Source Bank (since 1988)
All Directors and Executive Officers as a Group (18 persons) 3,435,058 16.08%
* Represents holdings of less than 1%.
(1) Based on information furnished by the directors and executive officers as
of February 20, 2004.
(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: 2,039,838 shares. Voting authority
for 961,106 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.
5
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 2003 and in compliance with applicable federal and state laws
and regulations. 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.
Mr. Kapson is President and a principal shareholder of Jordan Motors, Inc., an
automobile dealership. 1st Source Bank has established an ongoing relationship
with Jordan Motors in which Jordan Motors facilitates the purchase of
automobiles by car rental companies that are commercial lending customers of the
Bank. Where the customer chooses to utilize this arrangement, the purchase price
of such vehicles is funded by the Bank as a loan to the customer on customary
terms. During 2003 the Bank loaned customers approximately $4.0 million for the
purchase of automobiles from Jordan Motors, which amount included service fees
paid to Jordan of less than $18,000 in the aggregate. Also during 2003 the Bank
purchased vehicles in an aggregate amount of approximately $456,000 from Jordan
Motors for lease to various commercial finance customers of the Bank on
customary terms. Revenues from all of the foregoing represented less than 0.16%
of 2003 revenues of Jordan Motors.
BOARD COMMITTEES AND OTHER CORPORATE GOVERNANCE MATTERS
In January 2004 the Board of Directors adopted Corporate Governance Guidelines
to ensure and document the Company's existing high standards for corporate
governance. The Corporate Governance Guidelines are in accordance with the
listing standards of the Nasdaq Stock Market and SEC rules. The Corporate
Governance Guidelines are available on the Company's website at
www.1stsource.com.
DIRECTOR INDEPENDENCE -- The Board assesses each director's independence in
accordance with the Corporate Governance Guidelines. The Corporate Governance
Guidelines define an independent director as one who has no relationship to the
Company that would interfere with the exercise of independent judgment in
carrying out responsibilities as a director of the Company and who are otherwise
"independent" under the listing standards of the Nasdaq Stock Market. The Board
has determined, after careful review, that each member of the Board is
independent as defined in the Company's Corporate Governance Guidelines, with
the exception of Mr. Murphy and Mr. Jones, who are employed by the Company.
Accordingly, nine out of the eleven current members of the Board are independent
directors.
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 and Governance, Nominating, Audit, Human Resources and
Executive Compensation Committee members are appointed annually after the Annual
Meeting of Shareholders.
COMMITTEE MEMBERS FUNCTIONS 2003 MEETINGS
------------------------------------------------------------------------------------------------------------------------------------
Executive and Governance(3) Christopher J. Murphy III (1) o Serve as senior committee with 0 (4)
Daniel B. Fitzpatrick oversight responsibility for
William P. Johnson effective governance of the Company.
Rex Martin o Power to act for the Board of
Timothy K. Ozark Directors between meetings subject
Toby S. Wilt certain statutory limitations.
o Identify and monitor the appropriate
structure of the Board.
o Select Board members for committee
assignments.
6
COMMITTEE MEMBERS FUNCTIONS 2003 MEETINGS
------------------------------------------------------------------------------------------------------------------------------------
Nominating(5) William P. Johnson(1) o Identify, evaluate, recruit and select 0
Rex Martin qualified candidates for election,
Timothy K. Ozark re-election or appointment to the
Toby S. Wilt Board of Directors.
o See also "Nominating Committee
Information" below.
Audit Rex Martin(1) o Select the Company's outside independent 4
David C. Bowers accountants.
Daniel B. Fitzpatrick o Review the scope and results of the
Lawrence E. Hiler audits by the internal audit staff
Dane A. Miller and the independent accountants.
Timothy K. Ozark o Review the adequacy of the accounting
Toby S. Wilt and financial controls and presents the
Terry L. Gerber(2) results to the Board of Directors with
David L. Lerman(2) respect to accounting practices and
John T. Phair(2) internal procedures. Also makes
recommendations for improvements in such
procedures.
o See also "Report of the Audit Committee"
below.
Human Resources (6) Craig A. Kapson(1)(2) o Establish wage and benefit policies 3
William P. Johnson for 1st Source and its subsidiaries.
Marilou Eldred(2)
Hollis E. Hughes, Jr.(2)
H. Thomas Jackson(2)
Mark D. Schwabero(2)
Executive Compensation(6) Timothy K. Ozark(1) o Determine compensation for senior 4
William P. Johnson management personnel, review the
Rex Martin Chief Executive Officer and manage
Toby S. Wilt the Company's stock plans.
(1) Committee chairman
(2) 1st Source Bank director
(3) On January 29, 2004 the Board changed this committee's name from the
Executive Committee to the Executive and Governance Committee to reflect
its responsibility for corporate governance issues. The charter of the
committee is available on the Company's website at www.1stsource.com.
(4) An ad hoc subcommittee of the Executive Committee met twice during 2003 to
discuss corporate governance issues.
(5) This committee was formed on January 29, 2004. Its responsibilities
formerly were carried out by the Executive Committee.
(6) On January 29, 2004 the Board combined the Human Resources Committee and
Executive Compensation Committees, effective immediately after the 2004
Annual Meeting of Shareholders.
MEETINGS OF THE BOARD OF DIRECTORS AND DIRECTORS' COMPENSATION -- The Board of
Directors held eight meetings in 2003. No incumbent directors 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. Directors receive
fees in the amount of $10,000 per year, and $750 per board meeting and committee
meeting attended ($1,000 per Audit Committee meeting attended). Committee
chairpersons receive $1,000 per meeting ($1,750 per Audit Committee meeting
attended). Total fees paid in 2003 were $243,750.
7
ANNUAL MEETING ATTENDANCE -- Per the Company's Corporate Governance Guidelines,
directors are expected to attend the Annual Meeting of shareholders. The
Chairman of the Board presides at the Annual Meeting, and the Board of Directors
holds one of its regular meetings in conjunction with the Annual Meeting of
shareholders. All members of the Board at the time of the Company's 2003 Annual
Meeting of shareholders attended that meeting.
CODE OF ETHICAL CONDUCT -- The Board of Directors has adopted a Code of Ethical
Conduct for Financial Managers, which is available on the Company's website at
www.1stsource.com. The Code of Ethical Conduct for Financial Managers
constitutes a code of ethics as defined in Section 406(c) of the Sarbanes-Oxley
Act of 2002 and applies to the Chief Executive Officer, Chief Financial Officer,
Controller and other individuals performing similar accounting or financial
reporting functions for the Compnay.
SHAREHOLDER COMMUNICATIONS -- Communications to the Board of Directors from
shareholders are welcomed. All written communications should be directed to the
attention of the Chairman of the Executive and Governance Committee. The
Chairman of the Executive and Governance Committee shall either (i) relay a
shareholder communication to the full board or an appropriate committee
chairman, or (ii) where he feels that the communication is not appropriate to
relay, at least provide a copy of the communication and an indication of his
proposed disposition to the General Counsel, or another independent director,
either of whom may forward the communication to any other directors if they deem
it prudent or appropriate to do so. The Chairman of the Executive and Governance
Committee shall forward all recommendations for board nominees submitted by
shareholders to the Chairman of the Nominating Committee.
NOMINATING COMMITTEE INFORMATION
The Board of Directors formed an independent Nominating Committee in January
2004. Its responsibilities were formerly carried out by the Executive Committee.
The charter of the Nominating Committee is available on the Company's website at
www.1stsource.com. All members of the Nominating Committee (see "Board
Committees" above) comply with the independence requirements of the Nasdaq Stock
Market listing standards.
The purpose of the Nominating Committee is to identify, evaluate, recruit and
select qualified candidates for election, re-election, or appointment to the
Board. The Nominating Committee may use multiple sources for identifying and
evaluating nominees for directors, including referrals from current directors
and executive officers and recommendations by shareholders. Candidates
recommended by shareholders will be evaluated in the same manner as candidates
identified by any other source. In order to give the Nominating Committee
adequate time to evaluate recommended director candidates, shareholder
recommendations should be submitted in writing at least 120 days prior to the
next Annual Meeting to be held on or about April 28, 2005. Nominations should be
addressed to the attention of the Chairman, Executive and Governance Committee,
c/o 1st Source Corporation.
The Nominating Committee will select new or incumbent nominees or recommend to
the Board replacement nominees considering the following criteria:
o Whether the nominee is under the mandatory retirement age of 70;
o Personal qualities and characteristics, accomplishments and reputation in
the business community;
o Current knowledge and contacts in the communities or industries in which
the Company does business;
o Ability and willingness to commit adequate time to Board and Committee
matters;
o The fit of the individual's skills with those of other directors and
potential directors in building a Board that is effective and responsive to
the needs of the Company; and
o Diversity of viewpoints, background, experience and other demographics.
The new nominees for election at the 2004 Annual Meeting (David C. Bowers, Terry
L. Gerber, Craig A. Kapson, John T. Phair, and Mark D. Schwabero) were
recommended by the Chief Executive Officer and by non-management directors and
approved by the Nominating Committee.
8
REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees 1st Source's financial reporting process on behalf
of the Board of Directors, retains and oversees the Company's independent
auditors and approves all audit and non-audit services provided by the
independent auditors. The Board of Directors has adopted a Charter for the Audit
Committee to set forth its authority and responsibilities. A copy of this
Charter is included in this 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 and SEC rules. The Board has determined that David C. Bowers,
Daniel B. Fitzpatrick, Lawrence E. Hiler, Rex Martin, Dane A. Miller, Timothy K.
Ozark, and Toby S. Wilt qualify as audit committee financial experts, as defined
by SEC guidelines.
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 accounting principles
generally accepted in the United States. 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, 2003
for filing with the Securities and Exchange Commission.
AUDIT COMMITTEE
Rex Martin, Chairman
David C. Bowers Daniel B. Fitzpatrick
Terry L. Gerber Lawrence E. Hiler
David L. Lerman Dane A. Miller
Timothy K. Ozark John T. Phair
Toby S. Wilt
9
REMUNERATION OF EXECUTIVE OFFICERS
The following tables set forth all aggregate remuneration accrued by 1st Source
and its subsidiaries in 2003 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 2003 $570,000 $ -(4) $27,996 - $ 43,550 $977,487(4)
Chairman, President & CEO, 2002 565,659 - 27,990 - 129,017 14,000(5)
1st Source, and Chairman 2001 546,101 557,500 27,449 - 179,080 24,242(5)
& CEO, 1st Source Bank
Wellington D. Jones III 2003 306,500 17,500 18,377 - 14,422 14,000
Executive Vice President 2002 303,683 - 20,191 4,843 41,538 14,000
1st Source, and President 2001 292,868 38,000 19,420 - 63,003 15,191
& COO, 1st Source Bank
Allen R. Qualey 2003 220,000 - 5,415 - 11,708 14,000
President and COO, 2002 217,846 - 5,592 - 34,711 14,000
Specialty Finance Group, 2001 207,846 21,500 5,255 - 50,754 15,191
1st Source Bank
Richard Q. Stifel 2003 200,220 10,000 3,066 - 7,102 14,000
Executive Vice President, 2002 196,724 - 5,764 562 20,036 14,000
Business Banking Group, 2001 191,303 12,500 5,404 - 30,944 15,191
1st Source Bank
John B. Griffith(6) 2003 217,913 20,000 3,109 - 17,433 14,000
Senior Vice President, 2002 210,972 20,000 3,471 - 5,693 9,053
General Counsel and Secretary 2001 138,462 20,000 37,179 25,000 - -
(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, 2003, with annual increases of not less than 5% 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. Mr. Murphy waived his right to a base salary
increase in 2003. Under the other four agreements, Mr. Jones, Mr. Qualey,
Mr. Stifel and Mr. Griffith receive base salaries of $306,500, $220,000,
$204,000 and $230,000, respectively, at December 31, 2003, with annual
increases 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 and Mr. Stifel
expire on December 31, 2004. 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
10
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.
(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 typically are subject to forfeiture over a period of five (5) years. In
2003, the Executive Compensation Committee extended, subject to Board and
shareholder approval, the forfeiture period for the award made in 1997 by
four (4) years for all members of the Executive Incentive Plan except Mr.
Murphy, Mr. Jones and Mr. Qualey, who forfeited the remaining 20% of that
award. It also extended the forfeiture period for the awards made in 1998,
1999, 2000 and 2001 by four (4) years for all members of the Executive
Incentive Plan except Mr. Murphy, who forfeited the remaining 60% of the
1998 award in January 2004. "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
four (4) 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, 2003, are as follows:
11
BOOK VALUE MARKET VALUE CALCULATED
NAME SHARES SHARES VALUE
--------------------------------------------------------------------------------
Christopher J. Murphy III 23,993 12,456 $632,382
Wellington D. Jones III 14,328 4,472 313,835
Allen R. Qualey 10,718 3,748 243,426
Richard Q. Stifel 6,917 1,926 146,497
John B. Griffith 2,675 3,609 118,263
(3) Amounts shown in All Other Compensation for Mr. Jones, Mr. Qualey, Mr.
Stifel, and Mr. Griffith represent 1st Source contributions to defined
contribution retirement plans.
(4) Mr. Murphy did not receive a cash bonus for 2003. The amount in the "All
Other Compensation" column for Mr. Murphy largely relates to termination at
the end of 2003 of the split-dollar insurance benefit for which 1st Source
has been obligated to Mr. Murphy since 1998. Because of changes in the tax
treatment and other regulations affecting split-dollar insurance
arrangements, 1st Source and Mr. Murphy agreed to terminate the existing
split-dollar insurance benefit on terms that also satisfied the company's
obligation to him under the 1998 Performance Compensation Plan. Mr. Murphy
earned a bonus for 2003 under the 1998 Performance Compensation Plan of
$478,850. At the direction of the Executive Compensation Committee of the
Board, and by agreement with Mr. Murphy, the company's obligation for such
bonus, as well as its obligation to fund premiums for the life insurance
benefit, were fully satisfied by the company's assignment to Mr. Murphy (or
his designee) of its right to receive repayment out of any death benefit of
the aggregate amount of previously funded premiums for the policy. $963,487
of the $977,487 included in All Other Compensation for 2003 for Mr. Murphy
directly relates to the termination of the split-dollar arrangement. Of the
$963,487, $758,478 reflects the value of the premium receivables assigned
to Mr. Murphy. The company paid the remaining $205,009 to satisfy a loan
against the cash surrender value of the policy used by Mr. Murphy's
designee trust to fund the 2002 premium for the policy. In connection with
termination of the split-dollar arrangement, Mr. Murphy will incur tax
liability on the $963,487 distribution. Because the taxes were not
envisioned when 1st Source awarded the split-dollar insurance benefit to
Mr. Murphy in 1998, the Executive Compensation Committee also decided to
reimburse Mr. Murphy for his payment of such taxes. The Committee and Mr.
Murphy agreed that any amounts up to $656,000 he may earn in 2004 or
subsequent years, if needed, under the 1998 Performance Compensation Plan
will also serve to satisfy the Company's commitment to reimburse this
additional tax liability. The foregoing, including final payment of the tax
liability either in 2004 or a subsequent year, fully satisfies all
obligations to Mr. Murphy for the split-dollar insurance benefit. The
remaining $14,000 shown in All Other Compensation represents 1st Source
contributions to defined contribution retirement plans.
(5) The amount of All Other Compensation for 2001 includes $9,051 representing
the deemed value of the benefit received in 2001 determined for the period
from the payment of premiums in 2001 until the obligation to repay such
premiums was reassigned to Mr. Murphy in 2003. See footnote 4. This amount
is reduced from $105,369, the amount shown for such value in prior years.
Such value was presented in prior years based on the actuarial value of an
interest free loan from the time the premium was advanced to the time the
premium was actuarially projected to be repaid years hence. The result was
that the compensation deemed received by Mr. Murphy in prior years appeared
higher because of this assumption which is no longer valid. 1st Source did
not pay premiums for Mr. Murphy under the split dollar insurance plan in
2002. The remaining $15,191 and $14,000 shown in All Other Compensation in
2001 and 2002 for Mr. Murphy represent 1st Source contributions to defined
contribution retirement plans.
(6) Mr. Griffith became an executive officer in 2001.
12
EXECUTIVE INCENTIVE PLAN-- AWARDS FOR LAST FISCAL YEAR
NUMBER OF PERFORMANCE PERIOD
NAME BOOK VALUE SHARES UNTIL PAYOUT (1)
--------------------------------------------------------------------------
Wellington D. Jones III 1,153 5 years
Richard Q. Stifel 659 5 years
John B. Griffith 1,317 5 years
(1) 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
EXECUTIVE COMPENSATION COMMITTEE REPORT
1st Source officers are reviewed annually by their immediate supervisor. Due to
the performance of the Company in 2002, the salary review for members of the
Bank's Policy Committee was delayed by at least six months. Reviews for the
three most senior officers were delayed by at least one year. The review
includes an 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. Positions are rated and placed in a salary range. Annually, with the
Board's approval, management establishes a salary performance grid that sets the
range of merit increases that may be given to officers depending on their
individual performance and their position (lower, middle or upper third) in
their respective salary range.
The categories of performance under the Company's review program are:
o Substantially and consistently exceeds job requirements
o Often exceeds job requirements
o Meets and sometimes exceeds job requirements
o Meets some job requirements, improvement is required
o 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
13
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 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. In January 2004, Mr. Murphy again waived his rights under the contract
to a 5% increase and asked that his review be delayed until the second quarter
of 2004. We accepted his recommendation. Consequently, no increase was given,
and he may be reviewed in the second quarter of 2004.
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, Mr. Murphy
asked that no award be made him under the Company's Executive Incentive Plan. We
accepted his recommendation and no award was made in 2004 for 2003 performance.
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. Last year 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, and the Shareholders. We also extended the
forfeiture period for the awards made in 1998, 1999, 2000 and 2001 by four (4)
years for all members of the Executive Incentive Plan except Mr. Murphy, who
forfeited the remaining 60% of the 1998 award in January 2004.
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 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 in 2002. For 2003, Mr. Murphy was
to receive 2.5% under the 1998 Plan. Due to the Company's inability to continue
to provide the Split-Dollar Insurance program originally agreed to in 1998, Mr.
Murphy and 1st Source agreed to terminate the split-dollar arrangement on terms
that also satisfied the Company's obligation to him under the 1998 Performance
Compensation Plan. Under the terms of that plan, Mr. Murphy earned a bonus of
$478,850. Mr. Murphy waived payment of the cash bonus but agreed to accept the
transfer of the Company's right to recoup its premium payments previously made
under the split-dollar plan as an in-kind payment under the 1998 Performance
Compensation Plan. This allowed the Company to meet its obligation under the
Plan, provide a benefit to Mr. Murphy that it had been obligated to since 1998,
and release the Company from having to make any further payments for the
split-dollar insurance. All this had become necessary due to changes in tax
treatment and other regulations affecting split-dollar insurance arrangements.
The distribution of the Company's interest of $963,487 in future cash benefits
is taxable to Mr. Murphy. Since taxes were not envisioned when 1st Source
awarded the split-dollar insurance benefit to Mr. Murphy in 1998, as it was a
tax advantaged plan, we agreed to reimburse Mr. Murphy for payment of such tax.
Any amounts up to his tax liability of $656,000 that he may earn in 2004 (or
subsequent years, if needed) under the 1998 Performance Compensation Plan, which
was set at 2.5% of net income for 2004, will serve to satisfy the Company's
commitment to reimburse this additional tax liability.
EXECUTIVE COMPENSATION COMMITTEE
Timothy K. Ozark, Chairman
William P. Johnson Rex Martin
Richard J. Pfeil
14
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.
OPTION GRANTS IN LAST FISCAL YEAR
There have been no option grants to executive officers in the last fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND DECEMBER 31, 2003 OPTION VALUES
(a) (b) (c) (d) (e)
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 2003 DECEMBER 31, 2003
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------------------------------------------------------------------------------------------------------------
Christopher J. Murphy III - $ - 288,890 - $2,275,944 -
Wellington D. Jones III 4,569 44,950 70,050 - 45,113 -
Allen R. Qualey 6,545 29,742 97,063 - 301,009 -
Richard Q. Stifel - - 66,049 - 315,218 -
John B. Griffith - - 8,334 16,666 - -
15
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG 1ST SOURCE, NASDAQ MARKET INDEX AND PEER GROUP INDEX**
31-Dec-98 31-Dec-99 31-Dec-00 31-Dec-01 31-Dec-02 31-Dec-03
-----------------------------------------------------------------------------------------------------------------------------------
1st Source 100 83 65 78 65 85
Nasdaq Index 100 176 111 88 62 93
Peer Group 100 83 101 102 98 125
* Assumes $100 invested on December 31, 1998, in 1st Source Corporation
common stock, NASDAQ market index, and peer group index.
** The peer group is a market-capitalization-weighted stock index of 101
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 Mr. Jones, Mr. Qualey, and Mr. Stifel each filed late one report
covering one transaction.
PROPOSAL NUMBER 2:
REAPPROVAL OF 1998 PERFORMANCE COMPENSATION PLAN MATERIAL TERMS
1st Source has a 1998 Performance Compensation Plan (the "Plan") previously
approved by the shareholders. The purpose of the Plan is to promote the
interests of 1st Source and its shareholders through the attraction and
retention of executive officers and other key employees (the "Employees"), to
motivate the Employees using performance-related incentives linked to
performance goals, and to enable the Employees to share in the growth and
16
success of 1st Source. There was one participant in the Plan as of December 31,
2003. The Plan is administered by the Executive Compensation Committee, which is
comprised entirely of outside, independent directors and may in its sole and
complete discretion grant awards to Employees each year. Payment of awards is
not contingent upon 1st Source's ability to deduct the awards.
It is 1st Source's intention that awards made under the Plan constitute
"performance-based compensation" as defined by Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). Performance-based compensation is
compensation that is paid solely on the account of the attainment of one or more
pre-established, objective performance goals. To meet the Code's definition, the
material terms of a performance-based compensation plan must be disclosed to and
approved by the shareholders of publicly held corporations such as 1st Source
before the compensation is paid. The material terms of the Plan are identical to
those previously approved by the shareholders and are described below.
Any awards made to Employees under the Plan will be performance-based
compensation subject to the attainment of one or more pre-established objective
performance goals including one or more of the following criteria: (i) net
income, (ii) pre-tax income, (iii) earnings per share, (iv) return on equity,
(v) return on assets, (vi) Economic Value Added and/or increase in Economic
Value Added, (vii) increase in the market price of 1st Source's common stock,
(viii) total shareholder return (stock price appreciation plus dividends), and
(ix) the performance of 1st Source in any of the items mentioned in clauses (i)
through (viii) in comparison to the average performance of companies combined
into a 1st Source-constructed peer group.
All performance measures, formulas and determination of eligibility for a
performance period will be established by the Committee in writing no later than
ninety (90) days after the beginning of the performance period or by such other
date as may be permitted under the Code. Performance measures may be based on
one or more of the business criteria listed above. No performance measures will
allow for any discretion by the Committee to increase any award, but discretion
to lower awards is permissible. The payment of any award under the Plan to an
Employee will be contingent upon written certification by the Committee prior to
any such payment that the applicable performance measure(s) relating to the
award have been satisfied. The maximum annual award under this Plan to any
single Employee will not exceed $5 million in any year.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF REAPPROVAL
OF THE MATERIAL TERMS OF THE 1998 PERFORMANCE COMPENSATION PLAN.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of 1st Source are audited annually by independent
accountants. For the year ended December 31, 2003 and the three (3) preceding
years, the audit was performed by Ernst & Young LLP. Fees for professional
services provided by Ernst & Young LLP for the last two years were as follows:
2003 2002
--------------------------------------------- ------------
Audit Fees $200,500 $185,500
Audit-Related Fees 94,870 78,500
Tax Fees 11,610 56,060
Other Fees - -
--------------------------------------------- ------------
TOTAL $306,980 $320,060
==========================================================
Audit fees included fees associated with the annual audit and the reviews of 1st
Source's quarterly reports on Form 10-Q. Audit-related fees included fees for
pension and statutory audits and accounting consultations. Tax fees included
review of 1st Source's federal and state tax returns and tax advice on other
federal and state tax issues.
In 2003 the Audit Committee adopted an Audit and Non-Audit Services Pre-Approval
Policy covering services performed by 1st Source's independent public
17
accountants. Under this policy the annual audit services engagement terms and
fees are subject to the specific pre-approval of the Audit Committee. The Audit
Committee will approve, if necessary, any changes in terms, conditions and fees
resulting from changes in audit scope, company structure, or other matters. Any
other services provided by the independent accountants will require specific
pre-approval by the Audit Committee unless the type of service has received
general pre-approval from the Audit Committee. In addition, a pre-approved type
of service will require specific pre-approval if the current year fee level for
the type of service will exceed the approved fee level established annually by
the Audit Committee. Requests or applications to provide services that require
approval by the Audit Committee will be submitted to the Audit Committee by both
the independent accountants and the Chief Financial Officer, and must include a
joint statement as to whether, in their view, the request or application is
consistent with the SEC's rules on auditor independence. All fees paid to the
independent accountants for their 2003 services were pre-approved by the Audit
Committee in accordance with this policy.
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, 2004, 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, 2004.
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, 2003, 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 19, 2004
18
EXHIBIT A
1ST SOURCE CORPORATION AND 1ST SOURCE BANK AUDIT COMMITTEE CHARTER
PURPOSE -- The purpose of the Audit Committee (the "Committee") of the Board of
Directors of 1st Source Corporation and 1st Source Bank (the "Company") is to
provide assistance to the Board of Directors in fulfilling their oversight
responsibility to the shareholders, potential shareholders, the investment
community, and others relating to: the integrity of the Company's financial
statements; the financial reporting process; the systems of internal accounting
and financial controls; the performance of the Company's internal audit function
and independent auditors; the independent auditor's qualifications and
independence; and the Company's compliance with ethics policies and legal and
regulatory requirements. In so doing, it is the responsibility of the Committee
to maintain free and open communication between the Committee, independent
auditors, the internal auditors, and management of the Company.
In discharging its oversight role, the Committee is empowered to investigate any
matter brought to its attention with full access to all books, records,
facilities, and personnel of the Company and the authority to engage independent
counsel and other advisers as it determines necessary to carry out its duties.
The company shall provide for appropriate funding for payment of compensation to
independent counsel and other advisors employed by the Audit Committee.
COMMITTEE MEMBERSHIP, QUALIFICATIONS AND MEETING SCHEDULE -- The Committee shall
be members of, and appointed by, the Board of Directors, on the recommendation
of the Executive and Governance Committee, and shall be comprised of at least
three directors, each of whom are independent of management and the Company in
accordance with the Nasdaq listing standards and rules of the Securities and
Exchange Commission. Members of the Committee shall be considered independent as
long as they do not accept any consulting, advisory, or other compensatory fee
from the Company and are not an affiliated person of the Company or its
subsidiaries, and meet the independence requirements of the stock exchange
listing standards. All Committee members shall be financially literate, and at
least one member shall be an "Audit Committee financial expert," as defined by
SEC regulations. Members are appointed annually and serve a one-year term with
an expectation that members will serve at least two consecutive terms and
preferably three. The Board shall appoint one member of the Committee as its
chairperson who will serve for a two-year term. Audit Committee members shall
not simultaneously serve on the audit committees of more than two other public
companies. The Committee shall meet at least quarterly, or more frequently as
circumstances dictate. The Committee will cause to be kept adequate minutes of
its proceedings, and will report its actions to the next meeting of the Board.
DUTIES AND RESPONSIBILITIES -- The primary responsibility of the Audit Committee
is to oversee the Company's financial reporting process on behalf of the Board
and report the results of their activities to the Board. While the Audit
Committee has the responsibilities and powers set forth in this Charter, it is
not the duty of the Audit Committee to plan or conduct audits or to determine
that the Company's financial statements are complete and accurate and are in
accordance with generally accepted accounting principles. Management is
responsible for the preparation, presentation, and integrity of the Company's
financial statements and for the appropriateness of the accounting principles
and reporting policies that are used by the Company. The independent auditors
are responsible for auditing the Company's financial statements and for
reviewing the Company's unaudited interim financial statements.
The Committee, in carrying out its responsibilities, believes its policies and
procedures should remain flexible, in order to best react to changing conditions
and circumstances. The Committee should take appropriate actions to set the
overall corporate "tone" for quality financial reporting, sound business risk
practices, and ethical behavior. The following shall be the principal duties and
responsibilities of the Audit Committee. These are set forth as a guide with the
understanding that the Committee may supplement them as appropriate.
RESPONSIBILITY FOR RELATIONSHIP WITHIN DEPENDENT AUDITOR
The Committee shall be directly responsible for the appointment, retention,
and termination of the independent auditors (subject, if applicable, to
shareholder ratification), and the independent auditors must report
directly to the Audit Committee.
19
The Committee shall be directly responsible for the oversight of the work
of the independent auditors, including resolution of disagreements between
management and the auditor regarding financial reporting.
The Committee shall pre-approve all audit and non-audit services provided
by the independent auditors and shall not engage the independent auditors
to perform the specific non-audit services proscribed by law or regulation.
The Committee may delegate pre-approval authority to a member of the Audit
Committee. The decisions of any Audit Committee member to whom pre-approval
authority is delegated must be presented to the full Audit Committee at its
next scheduled meeting.
The Committee shall set clear hiring policies for employees or former
employees of the independent auditors that meet the SEC regulations and
stock exchange listing standards
At least annually the Committee shall obtain and review a report by the
independent auditors describing:
The firm's quality control procedures.
Any material issues raised by the most recent internal quality control
review, or peer review, of the firm or by any inquiry or investigation by
governmental or professional authorities, within the preceding five years,
respecting one or more independent audits carried out by the firm, and any
steps taken to deal with any such issues.
All relationships between the independent auditor and the Company (to
assess the auditor's independence).
RESPONSIBILITIES WITH RESPECT TO INDEPENDENT AUDITOR, EXTERNAL AUDIT AND
FINANCIAL STATEMENTS
The Committee shall discuss with the internal auditors and the independent
auditors the overall scope and plans for their respective audits, including
the adequacy of staffing and compensation.
The Committee shall discuss with management, the internal auditors, and the
independent auditors the adequacy and effectiveness of the accounting and
financial controls, including the Company's policies and procedures to
assess, monitor, and manage business risk, and legal and ethical compliance
programs (e.g., Company's Code of Conduct).
The Committee shall meet separately periodically with management, the
internal auditors, and the independent auditors to discuss issues and
concerns warranting Committee attention.
The Committee shall provide sufficient opportunity for the internal
auditors and the independent auditors to meet privately with the members of
the Committee.
The Committee shall review with the independent auditor any audit problems
or difficulties and management's response.
The Committee shall receive a report from the independent auditor, prior to
the filing of its audit report with the SEC, on all critical accounting
policies and practices of the Company, all material alternative treatments
of financial information within generally accepted accounting principles
that have been discussed with management, including the ramifications of
the use of such alternative treatments and disclosures and the treatment
preferred by the independent auditor, and other material written
communications between the independent auditor and management.
The Committee shall review management's assertion on its assessment of the
effectiveness of internal controls as of the end of the most recent fiscal
year and the independent auditors' report on management's assertion.
The Committee shall review and discuss earnings press releases, as well as
financial information and earnings guidance provided to analysts and rating
agencies.
20
The Committee shall review the interim financial statements and disclosures
under Management's Discussion and Analysis of Financial Condition and
Results of Operations with management and the independent auditors prior to
the filing of the Company's Quarterly Report on Form 10-Q.
The Committee shall discuss the results of the quarterly review and any
other matters required to be communicated to the Committee by the
independent auditors under generally accepted auditing standards.
The Committee shall review with management and the independent auditors the
financial statements and disclosures under Management's Discussion and
Analysis of Financial Condition and Results of Operations to be included in
the Company's Annual Report on Form 10-K (or the annual report to
shareholders if distributed prior to the filing of Form 10-K), including
their judgment about the quality, not just the acceptability, of accounting
principles, the reasonableness of significant judgments, and the clarity of
the disclosures in the financial statements.
The Committee shall discuss the results of the annual audit and any other
matters required to be communicated to the Committee by the independent
auditors under generally accepted auditing standards.
The Committee shall prepare a report to be included in the Company's annual
proxy statement, as required by SEC regulations.
OTHER PERIODIC AND PROCEDURAL MATTERS
The Committee shall establish procedures for the receipt, retention, and
treatment of complaints received by the issuer regarding accounting,
internal accounting controls, or auditing matters, and the confidential,
anonymous submission by employees of the issuer of concerns regarding
questionable accounting or auditing matters.
The Committee shall receive corporate attorneys' reports of evidence of a
material violation of securities laws or breaches of fiduciary duty.
The Committee shall, as needed, review with the Company's General Counsel,
legal matters that may have a material impact on the financial statements,
the Company's compliance policies, and any material reports or inquiries
received from regulators or governmental agencies.
The Committee shall on an ongoing basis review for potential conflict of
interest situations and approve all "related party transactions" between
the Company and any director, executive officer, shareholder who owns more
than 5% of the Company's stock, or director nominee, as such term is
defined in Item 404 of SEC Regulation S-K.
The Committee shall perform an evaluation of its performance at least
annually to determine whether it is functioning effectively.
The Committee shall review and reassess the charter at least annually and
obtain the approval of the Board of Directors.
LIMITATION -- Nothing in this charter is intended to alter in any way the
standard of conduct that applies to any of the directors under Ind. Code ss.
23-1-35 or ss. 28-13-11, as applicable, as amended, and this charter does not
impose, nor shall it be interpreted to impose, any duty on any director greater
than, or in addition to, the duties or standard established by such provisions.
ADOPTED BY THE BOARD OF DIRECTORS this 29th day of January, 2004.
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1ST SOURCE CORPORATION
1998 PERFORMANCE COMPENSATION PLAN
1. PURPOSE. The purpose of the 1st Source Corporation ("Company") 1998
Performance Compensation Plan ("Plan") is to promote the interests of the
Company and its shareholders through the (i) attraction and retention of
executive officers and other key employees ("Employees") essential to the
success of the Company and its subsidiaries; (ii) motivation of Employees using
performance-related incentives linked to longer range performance goals and the
interests of Company shareholders; and (iii) enabling of the Employees to share
in the long term growth and success of the Company.
2. ADMINISTRATION. The Plan will be administered by the Executive Compensation
Committee ("Committee") of the Board of Directors of the Company, which will
consist of two or more members. The Committee will have the sole, final and
conclusive authority to administer, construe and interpret the Plan. All members
of the Committee must be non-employee, outside directors as defined in
applicable IRS Regulations.
3. ELIGIBILITY. The Committee in its sole and complete discretion will select
full-time Employees of the Company and its subsidiaries, who in its opinion, can
contribute significantly to the growth and profitability of, or perform services
of major importance to, the Company and its subsidiaries. No non-employee
director of the Company will be eligible to participate under the Plan. No
member of the Committee will be eligible to participate under the Plan.
4. PERFORMANCE-BASED COMPENSATION. Any awards made to Employees under the Plan
will be performance-based compensation ("Awards") subject to the attainment of
pre-established objective performance goals, including one or more of the
following criteria:
(i) net income; (ii) pre-tax income; (iii) earnings per share; (iv) return on
equity; (v) return on assets; (vi) Economic Value Added and/or increase in
Economic Value Added; (vii) increase in the market price of the Company's common
stock; (viii) total shareholder return (stock price appreciation plus
dividends); and (ix) the performance of the Company in any of the items
mentioned in clauses (i) through (viii) in comparison to the average performance
of companies combined into a Company-constructed peer group.
All performance measures, formulas and determination of eligibility for a
performance period will be established by the Committee in writing no later than
ninety (90) days after the beginning of the performance period or by such other
date as may be permitted under Section 162(m) of the Internal Revenue Code of
1986 and the regulations. Performance measures may be based on one or more of
the business criteria listed herein. No Award to any single Employee will exceed
$5 million in one calendar year. No performance measures will allow for any
discretion by the Committee to increase any Award, but discretion to lower
Awards is permissible. The payment of any Award under the Plan to an Employee
with respect to a relevant performance period will be contingent upon
certification by the Committee prior to any such payment that the applicable
performance measure(s) relating to the Award have been satisfied. Payment of the
award will not be conditioned upon it being deductible by the Company.
Notwithstanding any other provision of the Plan, the Committee may impose such
conditions on any Award, and the Board may amend the plan in any such respects,
as may be required to satisfy the requirements of Section 162(m) of the Internal
Revenue Code (or any successor or similar rule relating thereto).
If an Employee's employment with the Company is terminated by reason of death or
total and permanent disability that occurs before the end of a Performance
Period, the Employee will be entitled to a pro rata award based upon the number
of days elapsed at the time of termination. The amount of any Award due a
deceased Employee will be paid to the beneficiary designated by the Employee in
writing to the Company, or if none, the Employee's Estate.
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5. NO EMPLOYMENT CONTRACT. The Plan is not and is not intended to be an
employment contract with respect to any of the Employees, and the Company's
rights to continue or to terminate the employment relationship of any Employee
will not be affected by the Plan.
6. AMENDMENT AND TERMINATION. The Board of Directors of the Company may amend,
suspend or terminate the Plan or any portion thereof at any time, but it may not
adversely affect the rights of any Employee under an award. Any material
amendment will require shareholder approval.
7. INDEMNITY. Each person who is or will have been a member of the Board of
Directors or the Committee will be indemnified and held harmless by the Company
against and from any loss, cost, liability, or expense that may be imposed upon
or reasonably incurred in connection with or resulting from any claim, action,
suit, or proceeding to which such person may be a party or in which they may be
involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by such persons in settlement thereof
with the Company's approval, or paid in satisfaction of a judgment in any such
action, suit or proceeding against them, provided they will give the Company an
opportunity, at its own expense, to handle and defend the same before they
undertake to handle and defend it on their behalf. The foregoing right of
indemnification will not be exclusive of any other rights of indemnification to
which such persons may be entitled under the Company Articles of Incorporation
or Code of By-Laws, as a matter of law, or otherwise, or any power that the
Company may have to indemnify them or hold them harmless.
8. EXPENSES OF PLAN. The expenses of administering the Plan will be borne by the
Company.
9. SUCCESSORS. The Plan will be binding upon the successors and assigns of the
Company.
10. TAX WITHHOLDING. The Company will have the right to withhold from the
payment of any Award the amount of any federal, state or local taxes which the
Company is required to withhold.
11. GOVERNING LAW AND NOTICE. The Plan, and its rules, rights, agreements and
regulations, will be governed, construed, interpreted and administered solely in
accordance with the laws of the State of Indiana. In the event any provision of
the Plan will be held invalid, illegal or unenforceable, in whole or in part,
for any reason, such determination will not affect the validity, legality or
enforceability of any remaining provision, portion of provision or Plan overall,
which will remain in full force and effect as if the Plan has been absent the
invalid, illegal or unenforceable provision or portion thereof.
Unless otherwise specifically provided herein, any notice to be given to the
Committee under the Plan will be given in writing and will be deemed delivered
for all purposes of the Plan if personally delivered to a member of the
Committee or mailed to such Committee addressed to the Company by postpaid,
certified United States mail.
12. EFFECTIVE DATE AND DURATION OF PLAN. The Plan was adopted on February 19,
1998, by the Executive Committee of the Board of Directors of the Company and
will be effective as of that date, subject to shareholder approval at the annual
shareholders meeting of the Company to be held in South Bend, Indiana, on April
16, 1998. The Plan will have no termination date, unless otherwise required by
law or otherwise terminated by the Committee.
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