(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):
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.
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 virtually via live webcast at www.virtualshareholdermeeting.com/SRCE2022, on April 21, 2022, at 8:15 a.m. Eastern Daylight Time, for the purpose of considering and voting upon the following matters:
1. Election of Directors. Election of four directors for terms expiring in 2025.
2. Ratification of the appointment of BKD LLP as 1st Source Corporation’s independent registered public accounting firm for the fiscal year ending December 31, 2022.
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 17, 2022, are entitled to vote at the meeting.
By Order of the Board of Directors,
John B. Griffith
Secretary
South Bend, Indiana
March 11, 2022
Please date and sign the proxy and return it promptly. If you do attend the meeting,
you may, nevertheless, vote in person and revoke a previously submitted proxy.
1st SOURCE CORPORATION
P.O. Box 1602 ● South Bend, Indiana 46634
PROXY STATEMENT
This Proxy Statement is furnished in connection with the 2022 Annual Meeting of Shareholders of 1st Source Corporation (“1st Source” or “the Company”).
When and where is the Annual Meeting? April 21, 2022, at 8:15 a.m. Eastern Daylight Time (“EDT”). Due to the continued risk posed by the coronavirus pandemic (COVID-19), shareholders will not be able to attend the Annual Meeting physically in person. The 2022 Annual Meeting will be held virtually via live webcast at www.virtualshareholdermeeting.com/SRCE2022. To participate in the virtual Annual Meeting, you must log-in using the 16-digit control number included on your notice of Internet availability of the proxy materials, on your proxy card, or on the instructions that accompanied your proxy materials. You may begin to log into the meeting platform beginning at 8:00 a.m. EDT on April 21, 2022. Shareholders should give themselves plenty of time to log in and ensure that they can hear streaming audio prior to the start of the meeting. If you experience any technical difficulties during the meeting, a toll-free number will be available on our virtual shareholder meeting site for assistance.
Shareholders will also be able to vote and submit questions during the virtual meeting using the directions on the meeting website that day. All shareholders will need their control number to vote or ask questions. Whether or not shareholders plan to attend the virtual Annual Meeting, 1st Source urges all shareholders to vote in advance of the meeting by one of the methods described in these proxy materials for the Annual Meeting.
Who may vote at the meeting? Shareholders of record at the close of business on February 17, 2022, will be eligible to vote at the Annual Meeting. If shares are held in “street name,” shareholders must obtain a legal proxy from their broker to vote in person.
Why did I receive a notice regarding the Internet availability of proxy materials instead of paper copies of the proxy materials? We are using the SEC notice and access rule that allows us to furnish our proxy materials over the Internet to our shareholders instead of mailing paper copies of those materials to each shareholder. As a result, beginning on or about March 11, 2022, we sent our shareholders (other than those who had previously requested to receive only printed copies of our proxy materials) by mail or email a notice containing instructions on how to access our proxy materials over the Internet and vote online. This notice is not a proxy card and cannot be used to vote your shares. If you received a notice this year, you will not receive paper copies of the proxy materials unless you request the materials by following the instructions on the notice or on the website referred to in the notice.
If I am the record holder of my shares, how do I vote? You may vote by:
•Internet: Go to www.proxyvote.com to transmit your voting instructions.
•Telephone: Use any touch-tone telephone to call 1-800-690-6903 and follow the instructions to transmit your voting instructions.
•Mail: Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided.
•Voting in person at the meeting.
Although you may vote by mail, we ask that you vote instead by Internet or telephone, which saves us postage and processing costs.
If you are a beneficial owner and a broker or other fiduciary is the record holder, then you received access to these proxy materials from the record holder. The record holder should have given you instructions for directing how the record holder should vote your shares. It will then be the record holder’s responsibility to vote your shares for you in the manner you direct.
How many shares are outstanding? There were 25,556,885 shares of our common stock outstanding on the record date. The voting securities of 1st Source consist only of Common Stock. Each shareholder is entitled to one vote for each share. Cumulative voting is not authorized.
What is the required vote? Director nominees will be elected upon receipt of a majority of the votes cast in the election at the Annual Meeting. The ratification of the appointment of the independent auditors will be approved if the votes cast in favor exceed those cast against. The Company knows of no other proposals expected to be presented at the meeting other than the two proposals described herein. Additional proposals, if any, would be approved if votes in favor of such proposal exceed those cast against.
How are abstentions and “non-votes” counted? Abstentions on properly executed proxy cards and shares not voted by brokers and other entities holding shares on behalf of beneficial owners (“broker non-votes”) will be counted for determining a quorum at the meeting. However, abstentions and broker non-votes will not affect the voting results on those matters for which the shareholder has abstained or the broker has not voted.
Who is soliciting proxies? This solicitation is being made by the Board of Directors of 1st Source. The cost of solicitation of proxies will be borne by 1st Source.
How will proxies be solicited? In addition to the use of mails, proxies may be solicited through personal interview, electronic media, telephone, and facsimile by directors, officers and regular employees of 1st Source without additional remuneration therefor.
How may I revoke my proxy? 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. If you hold your shares in the name of your broker or other fiduciary and desire to change your instructions on how to vote your shares, you will need to contact that party.
When were these materials provided? The approximate date for making available this Proxy Statement and the form of proxy to shareholders is March 11, 2022.
1
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Beneficial owners of more than 5% of the Common Stock outstanding at February 17, 2022:
Voting Authority
Investment Authority
Total Beneficial Ownership
Name and Address
Sole
Shared
None
Sole
Shared
None
Amount
% of Class
1st Source Bank (1)(2)
100 North Michigan Street
South Bend, IN 46601
673,897
5,198,773
3,587,804
601,569
5,827,392
1,971,121
6,428,961
25.16
%
Christopher J. Murphy III (2)(3)
Carmen Murphy (2)(4)
100 North Michigan Street
South Bend, IN 46601
1,191,080
—
—
1,191,080
46,806
—
4,363,116
17.07
%
654,272
—
—
654,272
2,517,764
4,363,116
17.07
%
O.C. Carmichael III (2)(5) 3212 W End Avenue Suite 500 Nashville, TN 37203
63,372
—
—
63,372
1,448,118
—
1,511,490
5.91
%
Stanley C. Carmichael (2)(6) 1510 71st St. Fennville, MI 49408
36,730
—
—
36,730
647,760
—
684,490
2.68
%
Ernistine C. Nickle (2)(6) 560 Sea Oak Drive Vero Beach, FL 32963
99,446
—
—
99,446
635,884
—
735,330
2.88
%
Dimensional Fund Advisors LP (7)
Palisades West, Building One,
6300 Bee Cave Road
Austin, TX, 78746
1,637,883
—
—
1,674,523
—
—
1,674,523
6.55
%
BlackRock, Inc. (8) 55 East 52nd Street New York, NY 10055
1,271,453
—
—
1,310,745
—
—
1,310,745
5.13
%
(1)1st Source Bank (“1st Source Bank” or “the Bank”), 1st Source’s subsidiary bank, owns no securities for its own account. These shares are registered in 1st Source Bank’s name or its nominee as fiduciary or agent. The amounts shown as “Shared” in the above table include 5,198,763 shares held in trusts (referred to herein as the “Morris Trusts”) for the benefit of Ernestine M. Raclin, her children, her grandchildren, her great-grandchildren and their spouses, of which 1st Source Bank is the trustee, as further described in Note 2 below. Ms. Raclin is the retired Chairman of the Board of 1st Source, the mother of Carmen C. Murphy and the mother-in-law of Christopher J. Murphy III, Ms. Murphy’s husband.
The amounts shown as “None” in the above table include 1,134,647 shares held by 1st Source Bank as trustee in various trusts or held by 1st Source Bank as agent for shares held by other entities which are included in the totals of Mr. Murphy and Ms. Murphy as described further in Notes 3 and 4 below. 1st Source Bank has no voting or dispositive power over such shares and accordingly disclaims beneficial ownership. These amounts also include 764,776 shares held by participants in the 1st Source Corporation Employee Stock Ownership and Profit Sharing Trust for which the Bank has no voting or investment authority except to the extent imputed by ERISA. The remaining amounts shown as “None” include shares held by 1st Source Bank as trustee in various trusts or held by 1st Source Bank as agent for shares held by other entities. 1st Source Bank has no voting or dispositive power over such shares and accordingly disclaims beneficial ownership.
(2)1st Source Bank is the trustee of all the Morris Trusts (described in Note 1) with voting power and shared power of disposition over shares in the trusts. Ms. Carmen Murphy, Mr. O.C. Carmichael III, Ms. Ernestine C. Nickle and Mr. Stanley Clark Carmichael (each a “family designated representative”) serve as representatives to certain trusts for the benefit of their respective family lines. The shares in each group of respective trusts over which each family designated representative shares dispositive power are as follows:
Ms. Murphy
2,470,958
Mr. O.C. Carmichael III
1,449,161
Ms. Nickle
630,884
Mr. S.C. Carmichael
647,760
Total
5,198,763
The terms of the respective trusts allow the respective family designated representative, as applicable, to direct the trustee to (or appoint a special trustee to) diversify the 1st Source Corporation common stock holdings in the Morris Trusts. The family designated representatives may also (i) direct the trustee to engage an independent proxy service to provide voting recommendations to the trustee, in which case the trustee has agreed to vote the 1st Source Corporation common stock held by the applicable trusts in accordance with the recommendations of such independent proxy service, unless to do so would be contrary to applicable Securities and Exchange Commission (“SEC”) legal and regulatory guidelines and requirements or violate the trustee’s fiduciary obligations, or, (ii) appoint a special trustee, which special trustee would have the power to vote the 1st Source Corporation common stock held by the applicable Morris Trusts. The inclusion of the shares held in the Morris Trusts does not constitute an admission of beneficial ownership by the designated family line representatives for purposes of Section 13(d) or Section 13(g) of the Exchange Act, or for any other purpose.
2
(3)Mr. Murphy has sole voting and dispositive power over (i) 502,651 shares held in a revocable trust or held directly by Mr. Murphy; (ii) 6,352 shares held by Mr. Murphy in an IRA; (iii) 125,893 shares held in a corporation for which Mr. Murphy serves as president; (iv) 59,295 shares held by Mr. Murphy in the Company’s 401(k) Plan; and (v) 496,889 shares held in two limited partnerships for which Mr. Murphy serves as the general partner. Mr. Murphy and Carmen C. Murphy also share voting and dispositive power over 46,806 shares held in a family foundation. In addition to the shares set forth in the above table, 654,272 shares for which Ms. Murphy has sole voting and dispositive power and 2,470,958 shares held in the Morris Trusts as to which Ms. Murphy shares dispositive power as described above may be attributed to Mr. Murphy as her spouse. Mr. Murphy disclaims beneficial ownership of such shares, and the inclusion of such shares does not constitute an admission of beneficial ownership by Mr. Murphy for purposes of Section 13(d) or Section 13(g) of the Exchange Act, or for any other purpose.
(4)Ms. Murphy has sole voting and dispositive power over (i) 69,672 shares held in a revocable trust; and (ii) 584,600 shares held in a limited liability company for which Ms. Murphy serves as the president and voting member. Ms. Murphy also shares dispositive power over 2,470,958 shares held in the Morris Trusts and Christopher J. Murphy III and Ms. Murphy share voting and dispositive power over 46,806 shares held in a family foundation. In addition to the shares set forth in the above table, 1,191,080 shares for which Mr. Murphy has sole voting and dispositive power may be attributed to Ms. Murphy as his spouse. Ms. Murphy disclaims beneficial ownership of such shares, and the inclusion of such shares does not constitute an admission of beneficial ownership by Ms. Murphy for purposes of Section 13(d) or Section 13(g) of the Exchange Act, or for any other purpose.
(5)As reported in Form 13G filed February 29, 2016.
(6)Information for Ernestine C. Nickle, Andrew Nickle, and Stanley C. Carmichael is as reported in their group Form 13G filed February 9, 2022. Shares reported as owned by Ms. Nickle include 16,922 shares held directly by Andrew Nickle, Ms. Nickle’s spouse.
(7)As reported in Form 13G filed February 8, 2022, Dimensional Fund Advisors LP, in its role as investment advisor for various clients, had sole dispositive and/or voting power of the shares.
(8)As reported in Form 13G filed February 4, 2022, BlackRock, Inc., in its role as a parent holding company, has sole dispositive and/or voting power of the shares.
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, or executive officer of 1st Source has any special interest in any matter to be voted upon other than election to the Board of Directors. Executive officers may be considered to have an interest generally in the outcome of the advisory vote on executive compensation. Directors 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 2022 Annual Meeting, four directors are to be elected for terms expiring in 2025 or until the qualification and election of a successor. Director nominees will be elected upon receiving a majority of the votes cast in the election of directors. A majority of votes cast means that the number of votes cast “for” the election of a director must exceed the number of votes cast “against” that director. Abstentions and shares not voted by brokers are not considered “votes cast.”
The following information is submitted for each nominee as well as each director and each non-director executive officer continuing in office.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE ELECTION OF EACH NOMINEE.
Three nominees are incumbent directors and the Board has determined that the continued service of the incumbent nominees and of the remaining incumbent directors whose terms expire in later years is in the best interests of the Corporation. The Board has also determined that all directors and the new director nominee have demonstrated the ability and willingness to participate in and contribute to the Board and its committee activities. Each is actively involved in civic, community and business affairs. Such involvement is noted below with a representative sample of the boards or organizations with which they are involved.
3
DIRECTOR NOMINEES
Terms Expiring in April, 2025
Name: Issac P. Torres
Age: 54
Principal Occupation(1): President and Chief Executive Officer, InterCambio Express, Inc. (Internet-based money transfer service)
Year In Which Directorship Assumed: N/A
Beneficial Ownership of Equity Securities
Common Stock: 300
% of Class: «
●
Over 22 years of experience in an Internet-based industry as founder, President and Chief Executive Officer of InterCambio Express, Inc. InterCambio Express has its USA headquarters in Elkhart, Indiana and a Mexican subsidiary located in Puebla, Mexico. Prior to founding InterCambio Express, Inc., Mr. Torres served as Chief Financial Officer of the German transnational company Hoechst AG (now Sanofi-Aventis) and as a senior auditor for Price Waterhouse Coopers. Mr. Torres contributes long-term perspective, current knowledge and extensive contacts in the state in which the Company is located as well as internationally.
●
Expertise in Internet-based industries and international payments systems as well as extensive skills in finance, accounting and international business.
Qualifies as an audit committee financial expert under SEC guidelines.
●
Active in the community serving on boards including the Community Foundation of Elkhart County, Women’s Care Center, RISE-Moxie, a Committee Member of the South Bend & Elkhart Regional Partnership - Diversity & Inclusion Committee and the Indiana University Foundation Board.
●
Bachelor’s degree in Accounting from The National Autonomous University of Mexico - UNAM (Universidad Nacional Autónoma de Mexico) and an M.B.A. from Indiana University.
Terms Expiring in April, 2022 (April, 2025 if reelected)
Name: John F. Affleck-Graves
Age: 70
Principal Occupation(1): Chaired Professor of Finance, University of Notre Dame; prior thereto, Executive Vice President and Chief Financial Officer, University of Notre Dame; former director, Hi-Crush, Inc.
Year In Which Directorship Assumed: 2019
Beneficial Ownership of Equity Securities
Common Stock: 8,971
% of Class: «
●
Mr. Affleck-Graves served as Executive Vice President and Chief Financial Officer of the University of Notre Dame from 2004 to June 2019. Prior to that he had served as Vice President and Associate Provost for the University and served on the Notre Dame faculty from 1986 to 2000 (the final three years as Chairman of the Department of Finance and Business Economics). He spent one year at Florida State University as the Patty Hill Eminent Scholar in Finance and returned to Notre Dame in 2001.
●
Also serves as a director of Aunalytics, Inc., a provider of managed data center, data analysis, cloud and other technology related services.
●
Author of over 50 finance research articles including several in the leading finance and accounting academic journals.
●
Contributes expertise in financial analysis, statistical analysis and Economic Value Added analysis.
●
Qualifies as an audit committee financial expert under SEC guidelines.
●
Former chair of the Regional Development Authority for the north central region of Indiana.
●
Bachelor’s and Master’s degrees in finance and Doctoral degree in mathematical statistics from the University of Cape Town.
4
Name: Daniel B. Fitzpatrick
Age: 64
Principal Occupation(1): Chairman and Chief Executive Officer, Quality Dining, Inc. (quick service and casual dining restaurant operator)
Year In Which Directorship Assumed: 1995
Beneficial Ownership of Equity Securities
Common Stock: 44,092
% of Class: «
●
40 years of business experience as the founder, Chairman and Chief Executive Officer of Quality Dining, Inc. As head of a locally headquartered, multi-concept restaurant company with operations located in four states, Mr. Fitzpatrick contributes long-term perspective, current sales, marketing and operations knowledge, and extensive contacts in communities in which the Company does business.
●
Expertise in the restaurant industry and general knowledge of food services retailing. Previous public company experience.
●
Qualifies as an audit committee financial expert under SEC guidelines.
●
Serves as a member and Past Chairman of the Holy Cross College Board of Trustees and is a board member for Women’s Care Center Foundation, both in South Bend. Mr. Fitzpatrick has served with nearly two dozen other community organizations.
●
B.A. in Business Administration from the University of Toledo.
Name: Christopher J. Murphy IV(3)
Age: 52
Principal Occupation(1): Owner and Chief Executive Officer, Catharsis Productions, LLC (training programs)
Year In Which Directorship Assumed: 2011
Beneficial Ownership of Equity Securities
Common Stock: 145,538
% of Class: «
●
22 years of business experience as co-founder, owner and Chief Executive Officer (previously Executive Director) of Catharsis Productions, LLC.
●
Contributes general business knowledge, long-term perspective and expertise in entrepreneurship, government contracting and creative marketing and development expertise.
●
Although not eligible to serve on the Audit Committee, meets the criteria to be an audit committee financial expert under SEC guidelines.
●
Served as co-chairperson of MEN (Men Endorsing Non-Violence) Illinois state subcommittee and serves as board member for Interaction (diversity and inclusion non-profit organization.)
●
B.A. in Liberal Studies, Communications and Theatre and an M.B.A. from the University of Notre Dame.
5
OTHER INCUMBENT DIRECTORS
Terms Expiring in April, 2023
Name: Vinod M. Khilnani
Age: 69
Principal Occupation(1): Chairman of the Board, Chair of the Nominating, Governance and Corporate Responsibility and Executive Committees and member of the Compensation and Human Capital Committee, Materion Corporation; Director, Chairman of the Human Resources & Compensation Committee and member of the Audit & Finance Committee, Esco Technologies, Inc.; former director, Gibraltar Industries, Inc.
Year In Which Directorship Assumed: 2013
Beneficial Ownership of Equity Securities
Common Stock: 12,216
% of Class: «
●
42 years of business experience, including 13 years as Executive Chairman, Chairman, President, Chief Executive Officer and Chief Financial Officer of CTS Corporation, headquartered and operating in a community the Company serves, as well as 18 years in various senior executive finance and global leadership positions with Cummins, Inc.
●
Expertise in global operations as well as extensive skills in finance, accounting, mergers and acquisitions, international business and manufacturing, corporate strategy and corporate governance. Previous public company experience. Contributes long-term perspective in all of these areas.
●
Qualifies as an audit committee financial expert under SEC guidelines.
●
Certified Public Accountant (inactive) and Certified Management Accountant.
●
B.A. in Business Administration from Delhi University and an M.B.A. in Finance from the University of New York at Albany.
Name: Christopher J. Murphy III(4)
Age: 75
Principal Occupation(1): Chairman of the Board, President and Chief Executive Officer, 1st Source and Chairman of the Board and Chief Executive Officer, 1st Source Bank
Year In Which Directorship Assumed: 1972
Beneficial Ownership of Equity Securities
Common Stock: 4,363,116
% of Class: 17.07%
●
Over 49 years of banking and business experience, including serving as a Director and/or President and Chief Executive Officer of both 1st Source Corporation or 1st Source Bank for 49 years. Mr. Murphy contributes long-term perspective, current knowledge, and extensive contacts in all communities in which the Company does business. Prior to 1st Source, Mr. Murphy worked at Citibank, and while in college, for the Office of the Comptroller of the Currency, U.S. Department of the Treasury.
●
Extensive knowledge of 1st Source and 1st Source Bank and general knowledge in the finance/banking industry, investments, insurance, venture capital, and real estate investments.
●
Serves as a director of Aunalytics, Inc., representing 1st Source’s investment in this provider of managed data center, data analysis, cloud and other technology related services.
●
Serves on numerous boards including those of the Federal Reserve Bank of Chicago, the Medical Education Foundation (serves on the citizen’s advisory board of Indiana University Medical School at Notre Dame), the Indiana State Chamber of Commerce (emeritus), and the Indiana Commission for Higher Education. Previously served on the Board and Audit Committee of Beacon Health System or its predecessor. Previously served as Chairman of the Board of Regents of the Indiana Academy, on the board of the Independent Colleges of Indiana, on the Community Depository Institutions Advisory Council for the Seventh Federal Reserve District and in Washington, D.C. and on public and private company boards.
●
B.A. in Government from the University of Notre Dame, a J.D. from the University of Virginia Law School and an M.B.A. from the Harvard University School of Business.
6
Name: Timothy K. Ozark
Age: 72
Principal Occupation(1): Chairman and Chief Executive Officer, Aim Financial Corporation (mezzanine funding and leasing) and from 2012 to January 2017, Chairman, CFWF, Inc. (seafood processor and commercial fishing company)
Year In Which Directorship Assumed: 1999
Beneficial Ownership of Equity Securities
Common Stock: 38,969
% of Class: «
●
42 years of financial experience, including 30 years as founder, Chairman and Chief Executive Officer of Aim Financial Corporation, a mezzanine lender to privately held companies. Mr. Ozark also is President and CEO of TKO Finance Corporation, a lender to financial services and manufacturing companies. Mr. Ozark is also Lead Director of White Lodging Corporation, one of America’s most experienced and most strategic hotel developers. From 1980 to 1983, Mr. Ozark served as Executive Vice President of Great American Management Services, Inc. a wholly owned subsidiary of American Financial Corporation of Cincinnati, Ohio which specialized in equipment leasing and lending. From 1984 to 1992, Mr. Ozark served as CEO and President of Meridian Leasing Corporation, one of North America’s largest privately held leasing companies with revenues in excess of $500 million.
●
Expertise in mezzanine funding, lending-leasing and general knowledge of business, finance, and real estate investing. Contributes long-term perspective in all of these areas.
●
Qualifies as an audit committee financial expert under SEC guidelines.
●
Serves as a member of the Visiting Committee to the Division of Biological Sciences and the Pritzker School of Medicine for The University of Chicago and on the board of directors for a number of privately held companies.
●
B.S. in Business Administration from the University of Minnesota and an M.B.A. from St. Cloud State University.
●
Served as an officer in the United States Marine Corps from 1968-1974.
Name: Todd F. Schurz
Age: 61
Principal Occupation(1): President and Chief Executive Officer, Schurz Communications, Inc. (communications, broadband and cloud services)
Year In Which Directorship Assumed: 2020
Beneficial Ownership of Equity Securities
Common Stock: 3,672
% of Class: «
●
31 years of financial experience, including 14 years as President and Chief Executive Officer and 3 years as President and Chief Operating Officer of Schurz Communications, Inc. (SCI), a diversified, privately-owned communications company, with five broadband companies and managed cloud services companies. SCI has a presence in 13 states, including Indiana and Michigan, as well as Great Britain and Romania. Prior to joining SCI, Mr. Schurz was President and Editor of Associated Desert Shoppers in Palm Desert, California from 1991 to 1995. From 1995 to 2000, he was President, Editor and Publisher of the South Bend Tribune. He then served as SCI’s Vice President of Technology from 2000 to 2005 and as President and General Manager of WSBT Television from 2002 to 2005 before becoming President and Chief Operating Officer of SCI in 2005.
●
Serves as lead independent director and Vice Chair of Herschend Enterprises, a themed entertainment company. Mr. Schurz is also an independent board advisor to EBSCO Industries and serves on the University of Notre Dame College of Arts & Letters Advisory Council.
●
Previously served on the boards of Mutual Insurance Company Limited, News Media Alliance, American Press Institute (API), and the CBS Television Network Affiliates Association. Mr. Schurz is also a former Chair of the Memorial Hospital Board, Beacon Health Foundation, the Chamber of Commerce of St. Joseph County, Hoosier State Press Association Foundation, the Poynter Institute’s National Advisory Board, and the coordinating committee for the Regional Approach to Progress.
●
Expertise in media, marketing and communications and general knowledge of business and finance. Contributes long-term perspective in all of these areas.
●
Qualifies as an audit committee financial expert under SEC guidelines.
●
B.A. in History and Economics from Brown University and an M.B.A. from the Wharton School at the University of Pennsylvania.
7
Terms Expiring in April, 2024
Name: Melody Birmingham
Age: 50
Principal Occupation(1): Senior Vice President and Chief Administrative Officer, Duke Energy (electric distribution); prior thereto, Senior Vice President and Chief Procurement Officer, Duke Energy; President, Duke Energy Indiana (electric utility) and Senior Vice President, Midwest Delivery Operations, Duke Energy
Year In Which Directorship Assumed: 2018
Beneficial Ownership of Equity Securities
Common Stock: 5,378
% of Class: «
●
27 years of leadership and managerial experience in the electric and automotive manufacturing industries. Ms. Birmingham contributes long-term perspective, current knowledge and extensive contacts in the state in which the Company is located.
●
Expertise in managing construction, maintenance, operations, engineering, resource, supply chain, project management, information technology and enterprise security as well as managing regulatory affairs, government relations and community affairs.
●
Qualifies as an audit committee financial expert under SEC guidelines.
●
Had previously served on the board of directors of the American Association of Blacks in Energy and on the Financial Research Institute advisory board, Robert J. Trulaske, Sr. College of Business, University of Missouri, Indiana Electric Association, the Indiana Chamber of Commerce, Special Olympics Indiana, Central Indiana Corporate Partnership and United Way of Indiana.
●
B.S. in Organizational Leadership and Supervision from Purdue University, an M.B.A. from Strayer University, an Honorary Doctorate in Humane Letters from Saint Mary of the Woods College and successful completion of the Advanced Management Program at Harvard University.
Name: Tracy D. Graham
Age: 48
Principal Occupation(1): Managing Principal of Graham-Allen Partners, LLC, a private investment company focused on building enterprise data and technology businesses, and the Chief Executive Officer of Aunalytics, Inc, (a provider of enterprise cloud, analytics, and other technology related services); Director and Chairman of the Board of Directors, LCI Industries
Year In Which Directorship Assumed: 2021
Beneficial Ownership of Equity Securities
Common Stock: 8,315
% of Class: «
●
26 years of experience in the information technology industry as entrepreneur and executive. Mr. Graham is the Founder and Managing Principal of Graham Allen Partners, a private equity firm that specializes in investing in, and building, technology and technology-enabled companies. He leverages his long history of successfully acquiring and operating businesses to provide strategic and operational support to a growing portfolio of small and middle-market companies. He is currently focused on leveraging analytics and artificial intelligence to help companies evolve via digital transformation. Prior to Graham Allen Partners, Mr. Graham co-founded GramTel, Inc. (a managed data center provider). Prior to founding GramTel, he founded Internet Services Management Group, where he led the company to become the second largest privately held Internet service provider in the United States (acquiring and integrating 23 companies). Mr. Graham contributes long-term perspective, current knowledge and extensive contacts in the state in which the Company is located.
●
Unique expertise in enterprise technology, cyber security, cloud, data center and Internet services and data analytics and artificial intelligence.
●
Member of 1st Source Bank Board of Directors since 2012. Member of 1st Source Corporation Board of Directors from 2012 to 2014.
●
Currently serves on the boards of Lippert, the Horton Group, Beacon Health System, Davenport University, and the Regional Development Authority of Northern Indiana’s Diversity and Inclusion Committee and as a member of the Board of Trustees of the University of Notre Dame.
●
Bachelor of Arts in Sociology from the University of Notre Dame and attended the Indiana University Graduate School of Education.
8
Name: Mark D. Schwabero
Age: 69
Principal Occupation(1): Retired Chairman, Chief Executive Officer and Director, Brunswick Corporation (2018); prior thereto, President and Chief Operating Officer, Brunswick Corporation; Director, Methode Electronics, Inc.
Year In Which Directorship Assumed: 2004
Beneficial Ownership of Equity Securities
Common Stock: 16,931
% of Class: «
●
Nearly 43 years of total experience in the automotive, marine and commercial vehicle/manufacturing industries, the last 33 of which as a senior executive. Mr. Schwabero had been with Brunswick Corporation for the 15 years preceding his retirement in 2018. He became Chairman and Chief Executive Officer in February 2016 after having served as President and Chief Operating Officer of Brunswick Corporation and prior thereto as President of Mercury Marine.
●
Detailed knowledge of the transportation, recreational and marine industries as well as long-term perspective in manufacturing and general management expertise. Public company experience.
●
Named by CEO Today Magazine as one of the top 100 CEOs in America for U.S. based companies for 2018.
●
Qualifies as an audit committee financial expert under SEC guidelines.
●
Former director of National Exchange Bank & Trust.
●
Serves as Lead Director.
●
Serves on the Advisory Committee of The Ohio State University Center for Automotive Research.
●
Past Chairman of the National Marine Manufacturers Association.
●
B.S. and M.S. in Industrial and Systems Engineering from The Ohio State University.
Name: Ronda Shrewsbury
Age: 56
Principal Occupation(1): President and Chief Executive Officer, RealAmerica, LLC (real estate development and property management)
Year In Which Directorship Assumed: 2021
Beneficial Ownership of Equity Securities
Common Stock: 1,739
% of Class: «
●
Over 30 years of experience in multifamily, commercial, land and office development serving as President of RealAmerica Companies for 27 years. As the sole owner and founder, Ms. Shrewsbury provides strategic direction and vision for four Women Business Enterprise-certified, vertically integrated companies. She holds an active Indiana Principal Brokers License and seeks opportunities to live out her passion of providing quality, supportive housing. Ms. Shrewsbury contributes long-term perspective, current knowledge and extensive contacts in the state in which the Company is located.
●
Extensive knowledge of real estate development, design, construction, and management of affordable, market-rate, commercial, senior living, and self-storage properties. Expertise in tax credit financing, historic tax credits, HUD and other financing products for new construction, adaptive reuse, historic rehab and preservation developments.
●
Founder of Legacy25, a non-profit organization dedicated to providing support and services for affordable housing communities. Serves as Past President of the Indiana Affordable Housing Council and Chair of the Governmental Affairs Committee.
●
Serves on the Executive Board of the Indianapolis Zoo, Near North Development Corporation, Young Presidents Organization, and other philanthropic boards. Her past service includes multiple leadership roles in the YPO including as Chapter Chair in Indiana and Illinois, Central U.S. Regional Board and International Forum Committee.
●
B.S. in Finance/Real Estate from Indiana University School of Business.
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Beneficial Ownership of Equity Securities(2)
Name
Age
Title
Common Stock
% of Class
Executive Officers of the Company (Non-Directors)
Brett A. Bauer
50
Senior Vice President, Treasurer and Chief Financial Officer, 1st Source Corporation and 1st Source Bank (since 2021); prior thereto, Vice President and Chief Investment Officer of the Funds Management Division of 1st Source Bank (since 2012)
18,142
«
Jeffrey L. Buhr
62
Executive Vice President and Chief Credit Officer, 1st Source Bank (since 2014); prior thereto, Senior Vice President and Chief Credit Officer, 1st Source Bank
66,741
«
John B. Griffith
64
Executive Vice President, Chief Risk Officer, General Counsel and Secretary, 1st Source Corporation and 1st Source Bank (since 2011)
64,728
«
Andrea G. Short
59
Executive Vice President, 1st Source Corporation and President, 1st Source Bank (since 2021); prior thereto, Executive Vice President, Treasurer and Chief Financial Officer, 1st Source Corporation and President and Chief Financial Officer, 1st Source Bank (since 2020); and Executive Vice President, Treasurer and Chief Financial Officer, 1st Source Corporation and 1st Source Bank (since 2013)
69,177
«
All Directors and Executive Officers as a Group (16 persons)
4,868,025
19.05%
« Represents holdings of less than 1%.
(1)The principal occupation represents the employment for the last five years for each of the named directors and executive officers. Directorships presently held or held within the last five years in other corporations with publicly registered securities are also disclosed.
(2)Based on information furnished by the directors and executive officers as of February 17, 2022.
(3)Mr. Murphy IV is Mr. and Mrs. Murphy III’s son.
(4)See footnotes (1), (2), and (3) to the Voting Securities and Principal Holders Thereof table above.
TRANSACTIONS WITH RELATED PERSONS
The Audit Committee of 1st Source’s Board of Directors is responsible, under the terms of that Committee’s charter, for reviewing and disclosure of related party transactions that are material to 1st Source’s consolidated financial statements or otherwise require disclosure under Item 404 of SEC Regulation S-K.
Banking Transactions — 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 2021. Such transactions were in compliance with applicable federal and state laws and regulations in all significant respects. 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 persons not related to the Company and did not involve more than the normal risk of collectability, or present other features unfavorable to the Company. Credit underwriting procedures followed were no less stringent than those for comparable transactions with borrowers not related to the Company.
1st Source’s Loan Policy requires prior approval by a majority of the Board of Directors of any extension of credit to an executive officer, director, principal shareholder or persons related to any of the foregoing if aggregate extensions of credit to such executive officer, director, principal shareholder or other person exceeds $500,000. The aggregate of loans to an executive officer may not exceed $100,000 excluding loans 1) to finance the education of the executive officer’s children, 2) to purchase, construct, maintain or improve a residence owned by the executive officer and secured by a first lien, or 3) secured by a perfected security interest in bonds, notes, certificates of indebtedness or other obligations fully guaranteed by the United States, cash or a cash-equivalent. Loans to executive officers are 1) reported to the 1st Source Board at its next regularly scheduled meeting, 2) preceded by the submission of a current personal financial statement, and 3) made subject to the condition that the loan will become due if the executive officer becomes indebted to any other financial institution or financial institutions in an aggregate amount greater than $100,000 (excluding the types of loans noted in 1), 2) and 3) in the preceding sentence). Finally, within 10 days of the date that the aggregate indebtedness to other financial institutions exceeds $100,000 (again excluding the types of loans noted in 1), 2) and 3) above), an executive officer must make a written report to the Board disclosing same.
Other Transactions — The Company has previously reported its investment in Data Realty, LLC, investments by 1st Source Bank in its subsidiary Data Realty Northern Indiana, LLC (DRNI) and payments to Data Realty LLC's subsidiary, Aunalytics, Inc. All of these entities have been consolidated in Aunalytics, Inc. (Aunalytics). Aunalytics is a managed data center, network interconnection cooperative servicing business, data hosting and data and cloud analysis service provider in 1st Source Bank’s headquarters region. 1st Source Bank is a customer of Aunalytics and DRNI and the Bank’s primary operating system hardware is located in the data center owned and operated by Aunalytics. In 2021, 1st Source Bank paid an aggregate of $631,249 for services provided by Aunalytics and $202,249 for services provided by DRNI.
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In October 2021, after a review by the Company’s ad hoc IT and Cyber Security Committee and upon its recommendation and as then approved by the Governance and Nominating Committee and recommended to and approved by the 1st Source Board, the Company entered into a 4-year contract with Aunalytics to provide additional professional services, data center services, managed services, connectivity, cloud services, SaaS services and hardware. The contract is to improve the quality of 1st Source’s infrastructure, equipment, and service at reduced costs over the term of the contract and obviates a major upgrade investment that the Company otherwise would be required to make.
Mr. Murphy III is a Director of Aunalytics representing 1st Source’s interests. Mr. Affleck-Graves also is a director of Aunalytics. Mr. Graham is a principal in Aunalytics and DRNI and is Aunalytics’ CEO. Mr. Graham was excused from the Board meeting when the approval was made. Neither Mr. Murphy III nor Mr. Affleck-Graves serve on the Governance Committee but do serve as members of the Aunalytics Board and remained in the 1st Source Board meeting but abstained from voting.
As part of Aunalytics formalizing its Board structure and fees in anticipation of a multi-million-dollar equity raise, in December it paid directors fees to all directors. Therefore, Messrs. Murphy III and Affleck-Graves received an annual Board Retainer of $40,000 and committee fees ranging between $2,500 and $10,000 depending on which committees they serve. They also received an initial one-time stock grant valued at $100,000. For 2021, Mr. Murphy III and Mr. Affleck-Graves each received a total of $152,000 which includes the one-time stock grant.
BOARD COMMITTEES AND OTHER CORPORATE GOVERNANCE MATTERS
In January 2004, the Board of Directors adopted and has since periodically updated the 1st Source Corporate Governance Guidelines. The Corporate Governance Guidelines are designed to ensure and document the Company’s high standards for corporate governance. The Corporate Governance Guidelines are in accordance with the listing rules of the NASDAQ Stock Market and rules of the SEC. 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 is otherwise “independent” under the listing rules of the NASDAQ Stock Market. The Board has determined, after careful review, that the following nine of the eleven current members of the Board are independent directors: Mr. Affleck-Graves, Ms. Birmingham, Mr. Fitzpatrick, Mr. Graham, Mr. Khilnani, Mr. Ozark, Mr. Schurz, Mr. Schwabero and Ms. Shrewsbury. Mr. Torres will be an independent director if elected.
Board Committees — 1st Source and 1st Source Bank share the following permanent committees made up of board members of both organizations. Executive, Governance and Nominating, Audit, and Executive Compensation and Human Resources Committee members are appointed annually after the Annual Meeting of Shareholders. Current member composition of these committees is as follows:
Director
Independent
Executive Committee
Governance and Nominating Committee
Audit Committee
Executive Compensation and Human Resources Committee
Loan and Funds Management Committee(1)
Trust and Investment Committee(1)
John F. Affleck-Graves
Yes
X
Chair
X
X
Melody Birmingham
Yes
X
X
Chair
Daniel B. Fitzpatrick
Yes
X
X
X
Chair
X
Tracy D. Graham
Yes
X
Chair
Vinod M. Khilnani
Yes
X
X
X
X
Christopher J. Murphy III
No
X
X
Christopher J. Murphy IV
No
X
X
Timothy K. Ozark
Yes
Chair
X
X
X
X
Todd F. Schurz
Yes
X
X
Mark D. Schwabero
Yes
X
Chair
X
X
X
Andrea G. Short(2)
No
X
Ronda Shrewsbury
Yes
X
X
(1) The Loan and Funds Management Committee and the Trust and Investment Committee are committees of the Board of Directors of 1st Source Bank.
(2) Ms. Short is a director of 1st Source Bank.
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Functions and 2021 meetings for each committee are as follows:
Committee
Functions
2021 Meetings
Executive(1)
●
Act for the Board of Directors between meetings subject to certain statutory limitations.
—
●
Give guidance to management regarding actions taken as part of its strategic operating or budget plans.
●
Provide guidance on acquisitions, divestures or other transactions.
Governance and Nominating(1)(2)
●
Provide oversight for effective governance of the Company.
4
●
Identify and monitor the appropriate structure of the Board.
●
Select Board members for committee assignments.
●
Identify, evaluate, recruit and select qualified candidates for election, re-election or appointment to the Board.
●
See also “Governance and Nominating Committee Information” below.
Audit(1)(2)
●
Select the Company’s independent registered public accounting firm.
6
●
Review the scope and results of the audits by the internal audit staff and the independent registered public accounting firm.
●
Review the adequacy of the accounting and financial controls and the risk management process and present the results to the Board of Directors with respect to accounting practices and internal procedures.
●
Make recommendations for improvements in internal procedures.
●
Review and oversight of the Company’s legal and compliance risks, including adherence to ethical standards and bank regulatory requirements as well as other operational risk areas.
●
See also “Report of the Audit Committee” below.
Executive Compensation and Human Resources(1)(2)
●
Determine compensation for executive management, review performance of the Chief Executive Officer and oversee the Company’s stock and other incentive compensation plans.
4
●
Oversee and approve establishment and administration of wage and benefit policies for the Company and its subsidiaries.
●
Review human resources guidelines, policies and procedures.
●
See also the “Executive Compensation and Human Resources Committee Report” below.
Loan and Funds Management
●
Oversee and approve establishment and administration of the credit policy for the Bank.
12
●
Review Bank lending activities, including approvals of loans to new or existing customers of total commitments in excess of stated amounts.
●
Oversee and approve quarterly reviews of the adequacy of the allowance for loan and lease losses and loan concentrations as compared to established limits.
●
Review the Bank’s Funds Management Division in its investment activities, relationships with securities dealers, relationships with other depository institutions, administration of 1st Source’s asset/liability management and liquidity functions and other similar activities.
Trust and Investment
●
Exercise general supervision over the fiduciary activities of the Wealth Advisory Services Group and the Retirement Plan Services Division.
4
●
Assign the administration of those fiduciary powers to such officers, employees and committees as the Committee deems appropriate.
●
Review the actions of individuals or committees used by the Bank in the exercise of the fiduciary powers and services offered to clients.
●
Oversee and approve establishment and administration of appropriate policies, practices and controls to promote high quality fiduciary administration.
●
Oversee appropriate policies and procedures to ensure the Bank makes appropriate investments.
(1)The charter of the committee is available at www.1stsource.com.
(2)The Committee is comprised entirely of independent directors.
Board Leadership Structure — Under 1st Source’s Corporate Governance Guidelines, the Governance and Nominating Committee is responsible for reviewing and making recommendations to the Board regarding the Board’s leadership structure, including whether one individual should serve as Chairman of the Board and Chief Executive Officer and whether the Board should have a Lead Director. The Governance and Nominating Committee reviews the structure of the Board on at least an annual basis and monitors and makes recommendations to the Board on an ongoing basis on other matters concerning Board policies and corporate governance. Additionally, the Executive Compensation and Human Resources Committee of the Board reviews the performance of the Chief Executive Officer on an annual basis. The Board believes it is in the best interest of 1st Source to have Mr. Murphy serve as Chairman of the Board and Chief Executive Officer. The reasons for this include:
•Mr. Murphy’s past performance in both roles and his continuing ability to serve in both;
•The need for decisive leadership and clear accountability in facing 1st Source’s challenges and opportunities;
•Mr. Murphy’s extensive specialized knowledge regarding those challenges and opportunities as well as his large ownership position;
•The composition of the Board includes a majority of independent directors, providing an appropriate amount of independent board oversight; and
•The Board has an independent Lead Director.
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The incumbent chairman of the Governance and Nominating Committee, Mr. Schwabero, presently serves as the Lead Director under the Corporate Governance Guidelines. The Lead Director will normally chair any meetings of the Board at which the Chairman or Vice Chairman (if there is one) of the Board is not present or from which, for whatever reason, each has recused himself. The Lead Director has the power to call meetings of the Board of Directors and to set agendas for meetings. The Lead Director also chairs the executive sessions of the independent directors, which occurred at each Board meeting in 2021.
Board Role in Risk Oversight — The Board exercises oversight of the risk management of 1st Source through the functions of its committees as described above. Additionally, the Board receives quarterly reports from the Strategic Deployment Committee, an executive-level management committee chaired by Mr. Murphy that, among other things, oversees and evaluates risks, controls and the risk management processes for 1st Source and 1st Source Bank.
Our “ESG” Story — We appreciate the continued growing investor interest in “Environmental, Social, and Corporate Governance” frameworks. This perspective is aligned with the way we have always viewed our corporate purpose and the keys to our success. Simply stated, our long-term success is built and dependent on the long-term, sustainable success of all who live, work, and do business in the communities we serve. As stated in our generations-old mission statement, “Our mission is to help individuals, institutions, businesses and communities achieve security, build wealth and realize their dreams.” How well we deliver on our mission will determine how well we create and preserve long-term, sustainable value for our shareholders. Put another way, the interests of our long-term shareholders are wholly aligned with the needs and interests of our clients, colleagues, vendors, regulators, and the communities we serve.
While we have a good ESG story to tell, we also know that our work for the common interests of our stakeholders, particularly those individuals, businesses, not-for-profits and communities we serve as clients, is never finished. Rather, this requires a commitment that extends well beyond the present to living our shared values, to understanding societal needs and impacts of our actions better and making continuous improvements for delivering on our mission today better than it was yesterday.
Here are some of the ways we address important environmental, social and governance issues for the benefit of our stakeholders:
Our People — As a service-driven business, our long-term success depends on our people. And as the Company grows, the importance of our talent strategy has only intensified. For these reasons, we are committed to taking a multi-dimensional approach to talent and culture.
•Diversity, Equity and Inclusion — At 1st Source, we cultivate and advance diversity in all forms as part of building a strong culture, a culture in which inclusion and belonging are paramount, and where all of our colleagues strive to be open and inclusive leaders and teammates. Our culture is what unifies our colleagues across our diverse business model, ensures we are best positioned to serve our diverse clients and propels our continuous evolution. In 2021, Forbes Magazine recognized the Company again as one of America’s best employers for veterans which included our approach to diversity and inclusion. While we appreciate such recognition, we are committed to continuous improvement in this area.
•Oversight of Our Progress — Senior-level oversight and ongoing monitoring are critical to informing and improving our recruiting and development practices as we seek to continually create a more inclusive and diverse organization. We are proud of a 50+ year tradition since 1st Source became independent again in 1971 supported by consistent leadership of a Board representative of racial, ethnic, gender, and experiential diversity. This was highlighted in 2021 as two of our board members, Melody Birmingham and Tracy Graham, were recognized by Savoy Magazine on their list of Most Influential Black Corporate Directors.
•Transparency and Accountability — We reinforce oversight and monitoring by, among other things, setting annual goals for diversity, equity and inclusion in our primary performance incentive plans. In 2021, all employees completed a required series of facilitated training sessions on unconscious bias. For participants in the Company’s primary incentive plans, such completion was a condition for receiving any payout of incentive compensation. This included the executive level incentive plans as noted in this Proxy Statement. As also described herein below, our primary incentive plans also included a goal for the percentage of diverse candidates hired plus existing diverse employees promoted on a management or professional track who had individual development plans created or in place and updated as a percentage of total exempts hired or promoted. In addition, with our workforce, we track and monitor voluntarily disclosed diversity data to review hiring, promotion and attrition at the Company, regional and functional levels. We also review performance data and promotion and compensation information to ensure fair and objective decision-making. During our regular reviews of each business unit, senior management engages in focused conversations with each business about their plans and progress in professional development of their teams and with respect to diversity and inclusion.
•Talent Vision and Strategy — Our people and culture are critical to the Company’s long-term success. As such, our talent vision and strategy focus on:
•Ensuring every candidate selected has a desire to serve others and demonstrates our unique service delivery model in their personal reoccurring patterns of behavior.
•Enabling change management and performance teams that generate career opportunities for our people and create future leaders of the firm.
•Creating an environment of inclusion, belonging and diversity, where we work with purpose and everyone feels seen, heard and engaged.
•Promoting emotional ownership and partnership throughout the Company.
Our talent vision and strategy must be implemented in the context of an evolving business with accelerating velocity of change. To reflect the ongoing transformation in our industry, we are focused on:
•Reinforcing our culture and diversity as a source of competitive advantage.
•Delivering a consistent, fair, and high-quality experience for our people.
•Designing an organizational model that supports our diversified lines of business and growing technology capabilities.
•Developing a scalable technology platform to effectively deploy and manage our people, processes, and technologies.
13
•Talent Development — We believe a critical driver of our firm’s future growth is our ability to grow leaders. We are committed to identifying and developing talent to help our colleagues accelerate their growth and achieve their career goals. We provide developmental opportunities for our colleagues through a robust set of formal and informal programs.
•1st Source University focuses on enabling colleagues to build skills and knowledge in specific facets of our business. These educational experiences and resources include topics such as client relationships, technology, investments, compliance, leadership and management, and professional development.
•The 1st Source L.E.A.D. program is a set of immersive experiences and collaborative interactions, developing leadership capabilities over a fourteen-month period. The program is built around a series of best-in-class leadership principles and their application by participants as they lead their current teams.
•The Business of Banking is a year-long set of presentations for new colleagues and early career program participants to share resources and experiences designed to help colleagues explore our history and engage in shaping our future.
•1st Source Mastery Programs provide a deep dive into skill development and mastery of specific roles to enhance role competencies and increase levels of overall performance. These mastery programs are designed to deliver increased levels of outstanding client service by our colleagues, continually differentiating our service above our competitors over time. They also increase talent/diversity attraction, engagement, and retention for the long term.
•The Commercial Banker Development Program is a two-year rotational program for recent college graduates designed to expose participants to fundamentals of commercial banking, including the funding and pricing of commercial loans, credit analysis and relationship sales.
•The Customer Service Representative Career Development Program is a structured approach to developing and improving one’s career serving clients in our Banking Centers.
•The Tuition Reimbursement Program reflects our philosophy of continuous learning and provides for reimbursement of tuition related expenses incurred through approved and accredited public and private not-for-profit institutions of higher education.
•The IVY Tech Bank Cohort Education Program was developed and made available through a partnership between the Company and IVY Tech Community College to provide opportunities for obtaining a college degree among colleagues in the hourly and lower-level salaried workforce. This newly developed program has been an important investment in education and has had an undeniable jumpstart effect. We have moved from a low of 16 colleagues attending eight colleges and universities in the year prior to the program creation, to now almost 50 colleagues who are attending 22 different schools. Many in our first cohort of students have gone on to obtain their bachelor’s degree and found success in new growth opportunities at 1st Source.
•The Banking Apprentice Program attracts locally embedded diverse high school graduates and rising seniors to work for the Company and experience the pride and fulfillment to be found in serving others and introduce them to the business of banking.
•New Employee Orientation introduces new colleagues to our history, vision, mission, and values.
•We engage in talent review and succession planning continuously but engage in a formal review annually to reaffirm existing and identify new high potential, talented and diverse colleagues as we strive to deepen, enhance, and diversify our leadership bench. We then implement multi-year individual development plans for these colleagues which include special assignments, structured learning, assessments, external coaching, sponsorship and hands-on work, and a blend of full cohort, small group, and individually tailored development opportunities.
•As noted above, all employees in 2021 completed a multi-module unconscious bias training program which gave us an opportunity to collectively work together to identify and address our biases that will improve our interactions and make us a stronger organization.
Sustainability and Social Responsibility — We focus on developing business practices that protect and conserve natural resources. This includes using responsible, reputable, and monitored e-recyclers for our electronic assets. All computers, including desktops, laptops, and monitors, are properly recycled. We are also conscious of our paper usage, recognizing that we depend on printed materials for important day-to-day office work, client communications, and acquiring new clients. Increasingly, consumers demand more environmentally sustainable options and prefer online statements and correspondence rather that printed materials. Most of the paper used in our facilities is recycled through our secure shred program and in 2021 we recycled 221,449 pounds of paper. In recent years, we have transitioned away from the traditional proxy model and have utilized the notice and access or “e-proxy” model for supplying shareholder materials for our Annual Meeting. We have also utilized recycled paper to produce shareholder materials which we are required to print upon shareholder request. The paper we use to produce shareholder materials is also certified by the Forest Stewardship Council (FSC). The FSC promotes environmentally appropriate, socially beneficial, and economically viable management of the world’s forests.
Additionally, we are utilizing various sustainable practices in some of our facilities such as LED lights, daylight harvesting sensors, programmable thermostats, 95% or higher efficiency furnace systems, drip irrigation, 90% recycled mats, “no mow grasses,” permeable paving, rain gardens, rain barrels, sustainable landscaping, and smart irrigation systems. To reduce our carbon footprint, we have utilized solar panels in two of our banking centers for supplemental sustainable power. These banking centers have supplemented approximately 29% of their total electrical usage (per banking center) with renewable solar power.
Integrity and Business Ethics — We are committed to doing what is right, acting with integrity, and holding ourselves accountable. We have a set of formal Moral and Ethical Standards and a Code of Conduct that provide additional clarity and focus on the ethical behavior we expect of all colleagues and members of our Board. The Code is supported by underlying policies as well as by interactive online training that all colleagues complete annually. Members of the Board also annually acknowledge their obligations under the Code of Conduct. It is critical for colleagues to understand our expectations and always do what is right. Our colleagues also need to be comfortable speaking up with no fear of retaliation if they have a concern or see something that does not seem quite right.
14
Our Code of Conduct requires all colleagues to adhere to our policies, recognize unethical behavior, and report suspected unethical or illegal conduct. The policy also sets additional expectations for managers to report any conduct that may violate policies. We provide for several alternative channels for the reporting of possible illegal or unethical behavior. Under the Code of Conduct, employees are invited to report any possible illegal or unethical activity to their supervisor or anyone else in the reporting line, or to the general Counsel or Chief Auditor, in all cases, without fear of recrimination or retaliation. We also have an Open-Door Policy that encourages colleagues to bring any questions or concerns to their supervisor, their supervisor’s manager, department head, the head of Human Resources or to the Employee Relations Department, without fear of recrimination or retaliation. The procedure for reporting employee concerns directly to the Chief Auditor is yet another channel for escalation of possible illegal or unethical behavior to an executive who is independent from front-line sales and service colleagues.
To further its risk oversight role, our Board adopted an Enterprise Risk Management Policy calling for a culture of honesty and transparency: “Consistent with the Company’s values, built on a foundation of integrity for generations, it is the Board’s expectation that management shall continue its commitment to a culture of transparency that encourages employees to be open, candid and fact-based in discussing risk issues, making all relevant facts and information available so the Company is able to make informed decisions.” Finally, our independent Compliance Review Program and our Customer Complaint Management Program both serve to identify and escalate to executive management and the Board any potentially illegal or unethical behavior or unsafe and unsound practices.
Financial Inclusion & Capacity Building in Our Communities — Community leadership is a core value of 1st Source. For over 159 years, the Company has given back to our communities to help build good places to live, work, worship, raise families, and build businesses. This service to our communities is one of our principal values and has defined who we are and how we do business. To ensure our long-term success, our strategic plan includes strategies for active and effective engagement with all segments of our communities. We serve with a wide range of products and services offered to individuals and to small and medium-sized businesses throughout our footprint. Our aim is to grow our business and achieve appropriate returns for our shareholders by strengthening our communities. Here are some highlights:
•Our priority is to deliver outstanding service to all of our clients without compromising the safe and sound operation of the Company.
•We provide consumer and business products and services designed to support and strengthen all within the communities we serve.
•We give special consideration to the banking needs (including credit needs) of sustainable small businesses, low-to-moderate income individuals and neighborhoods, and community organizations that have a demonstrable positive and lasting impact on our communities.
•For the ninth consecutive year, we were honored to have been recognized with a gold level award from the Indiana District of the U.S. Small Business Administration (SBA). This award recognizes our efforts for delivering the greatest number of SBA loans in the state of Indiana among community banks with less than $10 billion in assets.
•We have an extensive and active financial education program designed to support our own employees and the employees of our business and not-for-profit clients. We have dedicated individuals who partner with these clients to provide financial literacy through presentations, classes, and online videos and educational tools. In 2021, we gave 220 formal presentations and reached over 3,000 employees of our clients and community members. We also provide financial education and information on our online and mobile banking platform from EVERFI (financial education videos) making it available to over 7,000 users of these services.
•As is true with everything we do, our goal with respect to community leadership is to be outstanding.
•We seek to strengthen our communities by supplying financial and human resources to civic, charitable, and other demonstrably successful non-profit community service organizations throughout our footprint. One way we reinforce this effort is through the annual Ernestine M. Raclin Community Leadership Awards established by the Company to honor and encourage leadership in volunteerism through the businesses and governmental agencies in our communities. The award recognizes Ernestine M. Raclin, Chairman Emeritus of 1st Source, who strongly demonstrated the spirit of volunteerism throughout her career by giving of her time and talents to help others.
•We are committed to and accountable for performance under the Community Reinvestment Act (CRA). Our corporate value of supporting our communities aligns closely with this Act which has helped us receive an ‘outstanding’ rating from the Federal Reserve Bank of Chicago for our overall CRA efforts. We have a dedicated CRA Officer who ensures that we are being accountable to our clients and the people who live and work in our markets. If they are successful, so are we.
•We are also committed to and accountable for oversight and implementation of a compliance management system designed to ensure we are compliant with the laws and regulations to which our industry is subject and that we at all times adhere to our values in service to others of all backgrounds without regard to personal characteristics such as ethnicity, race, religious affiliation, marital status, gender, sexual orientation, or any other personal characteristics found in the human race. We serve humans and we do so through our people who embrace and are trained in accordance with our values and who in turn oversee and implement processes and technologies designed to ensure fair and responsible access to the products and services we offer.
•In 2021, 1st Source Foundation took a lead in providing and encouraging funding for special education programs helping underprivileged children left behind because of school closings due to COVID-19 and the requirement of online remote learning. The Foundation also joined in helping seek substantial funding to bring together multiple school systems to attack this problem. The Foundation has been involved in seeking funding for and providing consultative support to efforts to increase the number of lower-income students signing up for Indiana’s 21st Century Scholars Program which offers almost free post-secondary higher education for low-income students who go through the steps to complete it. The Foundation also supported the United Way in their efforts to eradicate poverty in our home market and supported Habitat for Humanity building affordable housing in most of our community bank markets. The Foundation continues to support the economic development efforts of the South Bend Elkhart Regional Partnership as well as other economic development activities in markets the Company serves across northern Indiana and southwestern Michigan. Additionally, our colleagues volunteered over 12,000 hours of service to organizations that assure a safety net of social services, community development, good health care, opportunities for spiritual development, education, and the visual and performing arts.
Environmental, Social, and Governance Factors in Credit Analysis — In 2021, we continued our focus on renewable energy sources through lending and investment partnerships with renewable energy providers. We recognize the opportunities and complexities associated with energy financing and understand the value of innovative technology that leverages the sun, wind and water. These are sustainable sources of power from an environmental and financial perspective.
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We have particularly focused on solar energy projects and, since developing the line of business six years ago, we have invested $96 million and provided debt financing in 41 solar projects across 14 states with current loan and lease outstandings of $348 million. We estimate the aggregate power capacity of these projects avoids 250,521 metric tons of carbon greenhouse emissions or 552 million pounds of coal burned annually.
We employ a values-based, relationship-focused approach to financing solar projects and partner with strong developers who have national project pipelines. Many of the solar projects consist of a single or multiple solar arrays that are interconnected with the local utility grid. We have a strategic focus in community solar projects for our energy portfolio where a group of subscribers, including commercial businesses, small businesses, municipalities, and residential homes, participate in the program and receive the benefits of purchasing their electricity from the community solar array. In addition to our focus on community solar projects, we also finance solar projects that provide clean energy to colleges, universities, school districts, utilities, and municipalities.
We have also purchased and installed solar panels in several of our banking centers and are validating the energy savings and environmental impact as we consider wider adoption of this form of electricity among our banking center locations.
We are committed to investing in and financing solar energy projects and are pleased with the current and ongoing environmental benefits of this portfolio that positively impact the lives of people in communities across the United States. We will continue to finance and invest in sustainable opportunities, and we will explore new opportunities to develop products and solutions that support our clients and advance sustainability.
Data Security and Privacy — Our Board is actively engaged in the oversight of the 1st Source cyber and information security program. Our Audit Committee receives quarterly reports on the program and on developments in the cyber and information security sector from our Chief Information Security Officer (CISO). Additionally, a subcommittee of the Board comprised of directors with technology industry backgrounds periodically receives reports from the leaders of our digital banking, technology and information security teams. On an annual basis, senior members of the Company’s digital banking, technology, risk and information security teams provide a comprehensive overview of the Bank’s cyber and information security program to the Board. Highlights of our cyber and information security governance include:
•The Company employs an in-depth, multi-layered strategy of control programs, including monitoring external and internal threats and events, managing access, facilitating use of appropriate authentication options, validating controls and programs by internal teams and independent third parties and testing various compromise scenarios that are overseen by our information security team.
•The Company invests in threat intelligence and participates in financial services industry and government forums which track and report on cyber and other information security threats.
•The Company’s CISO actively participates in the Financial Services Sector Coordinating Council and Cyber Risk Institute’s development of the cyber and information security framework for the financial services industry, known as “The Profile.” Our CISO is now active in the Cyber Risk Institute established in 2020 to house and maintain the Profile going forward.
•The Company routinely performs penetration tests.
•The Company’s cyber and information security program regularly incorporates external expertise.
•The Company actively maintains PCI/DSS certification at the service provider level and an Attestation of Compliance is available upon request.
Meetings of the Board of Directors and Directors’ Compensation — The Board of Directors held 7 meetings in 2021. 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 he or she served.
Directors receive fees as follows:
Meeting Fees
January 1, 2020 to December 31, 2020
January 1, 2021 to December 31, 2021
Each meeting of Board of Directors attended
$2,500
$2,500
Each meeting of Audit Committee attended
$2,500
$2,500
Each meeting of Loan and Funds Management Committee attended
$2,000
$2,000
Each meeting of other Board committee attended
$2,000
$2,000
Annual Retainers(1):
Board member
$47,038
$49,816
Committee chairs:
Audit Committee
$10,000
$10,000
Executive Committee
$3,000
$3,000
Governance and Nominating Committee
$10,000
$10,000
Executive Compensation and Human Resources Committee
$8,000
$8,000
Loan and Funds Management Committee
$10,000
$10,000
Trust and Investment Committee
$5,000
$5,000
(1) Annual retainers are generally paid in early June.
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 2021 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 Company.
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Shareholder Communications — Communications to the Board of Directors from shareholders are welcomed. All written communications may be submitted through the Company’s website at www.1stsource.com, by e-mail at shareholder@1stsource.com, or by U.S. mail at 1st Source Corporation, 100 North Michigan Street, South Bend, Indiana, 46601, Attn: Chairman, Governance and Nominating Committee, or Attn: Corporate Secretary. The recipient of any such communication shall share it with the Chairman of the Governance and Nominating Committee who shall either (i) relay it to the full Board or an appropriate committee chairperson, or (ii) where he feels that the communication is not appropriate to relay to the Board, 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 he or she deems it prudent or appropriate to do so. The Chairman of the Governance and Nominating Committee shall forward all recommendations for Board nominees submitted by shareholders to the members of the Committee.
GOVERNANCE AND NOMINATING COMMITTEE INFORMATION
The Board of Directors formed an independent Governance and Nominating Committee in January 2004. The charter of the Governance and Nominating Committee was amended in October 2014 to reflect its additional governance responsibilities and is available at www.1stsource.com. See also the description of the Committee under “Board Committees and Other Governance Matters” above. All members of the Governance and Nominating Committee (see “Board Committees” above) comply with the independence requirements of the NASDAQ Stock Market listing rules. One of the purposes of the Governance and Nominating Committee is to identify, evaluate, recruit and select qualified candidates for election, re-election or appointment to the Board. The Governance and 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 except that the Governance and Nominating Committee also may consider the number of shares held and the length of time the shareholder-recommended candidate has invested in the Company. In order to give the Governance and 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 before April 20, 2023. Nominations should be addressed to the attention of the Chairman, Governance and Nominating Committee, c/o 1st Source Corporation.
The Governance and Nominating Committee will select new or incumbent nominees or recommend to the Board replacement nominees considering the following criteria:
•Qualifications, including judgment, skill, capability, conflicts of interest, business experience and technical, professional, and educational background;
•Personal qualities and characteristics, accomplishments and reputation in the business community;
•Whether the nominee currently lives in one of the Company’s markets;
•Current knowledge and contacts in the communities or industries in which the Company does business;
•Current knowledge in one or more of the Company’s lines of business;
•Public company experience;
•Ability to qualify as an audit committee financial expert under SEC guidelines;
•Ability and willingness to commit adequate time, or in the case of incumbent directors, past participation and contribution, to Board and committee matters;
•Whether the nominee’s knowledge and experience is complementary to, or duplicative of, that of the other members of the Board;
•If applicable, whether the nominee would be deemed “independent” under listing rules of the NASDAQ Stock Market and SEC rules;
•Whether the nominee is qualified and likely to remain qualified to serve under the Company’s By-laws and Corporate Governance Guidelines;
•Diversity of personal characteristics and background consistent with the Company’s heritage and record, since the Company’s inception in 1971 of maintaining both ethnic and gender diversity among membership of the respective boards of directors of the Company and its subsidiary bank;
•Whether the nominee is under the age of 72; and
•Such other factors the Committee deems relevant.
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The Governance and Nominating Committee assesses its own performance, including its effectiveness in achieving a diverse Board, and reviews its charter and recommends any proposed changes every other year coincident with the bi-annual self-assessment of the full Board.
Board Diversity Matrix (As of March 11, 2022)
Total Number of Directors:
11
Female
Male
Non-Binary
Did Not Disclose Gender
Part I: Gender Identity
Directors
2
9
0
0
Part II: Demographic Background
African American or Black
1
1
0
0
Alaskan Native or Native American
0
0
0
0
Asian
0
1
0
0
Hispanic or Latinx
0
0
0
0
Native Hawaiian or Pacific Islander
0
0
0
0
White
1
7
0
0
Two or More Races or Ethnicities
0
0
0
0
LGBTQ+
0
Did Not Disclose Demographic Background
0
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 registered public accounting firm, approves all audit and non-audit services provided by the independent registered public accounting firm and oversees the Company’s compliance with ethics policies and the Company’s management of legal, regulatory and other operational risks. The Board of Directors has adopted a charter for the Audit Committee to set forth its authority and responsibilities. All of the members of the Committee are independent as defined in the listing rules of the NASDAQ Stock Market and SEC rules and also qualify as audit committee financial experts, as defined in the rules of the SEC.
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 registered public accounting firm, which is 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 independent registered public accounting firm, the firm’s 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 PCAOB Auditing Standard No. 16, “Communication with Audit Committees.” In addition, the Committee has discussed with the independent registered public accounting firm the firm’s independence from management and 1st Source, including the matters in the written disclosures required by PCAOB Ethics and Independence Rule 3526, “Communication with Audit Committees Concerning Independence,” and considered the compatibility of non-audit services provided by the independent registered public accounting firm to 1st Source with the firm’s 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, 2021, for filing with the SEC.
Audit Committee
John F. Affleck-Graves, Chairman
Melody Birmingham
Daniel B. Fitzpatrick
Tracy D. Graham
Vinod M. Khilnani
Timothy K. Ozark
Todd F. Schurz
Mark D. Schwabero
Ronda Shrewsbury
COMPENSATION DISCUSSION & ANALYSIS
Compensation Oversight
The Executive Compensation and Human Resources Committee of the Board of Directors, comprised entirely of independent directors, administers the Company’s executive compensation program. The responsibilities of the Executive Compensation and Human Resources Committee are described in its charter and include:
•Reviews Chief Executive Officer’s recommendations for compensation for the other Named Executive Officers (the executives required by SEC rules to be named in this proxy statement, or “NEOs”) and either approves or adjusts it and reviews and approves metrics and policy guidelines for salary and incentive compensation for other senior management personnel;
•Review performance and determines compensation of the Chief Executive Officer;
•Oversee and approve establishment and administration of wage and benefit policies for the Company including an annual salary and performance grid for all employees;
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•Review general human resources guidelines, policies and procedures;
•Oversee the Company’s stock and benefit plans;
•Review incentive plans and attest that they do not encourage inappropriate risk taking; and
•Conduct an annual self-assessment.
The Committee also reviews market data and peer and industry information periodically and considers the recommendations of the Chief Executive Officer with regard to cash and stock incentives under the Company’s Executive Incentive Plan and the other incentive plans for officers in the Company as described below.
The Committee also periodically engages outside consultants to review the Company’s compensation programs and underlying data to ensure they are competitive and reflect market realities, and to provide advice with regards to determining compensation for NEOs and other senior management personnel. The Committee engaged Blanchard Consulting Group in November 2021 for this purpose. It did so after considering the independence factors for compensation consultants outlined in the NASDAQ Listing Rules and determining that Blanchard was independent. The Committee’s engagement of Blanchard is described further below.
Compensation Philosophy and Program
The Company’s compensation philosophy rests on the core principle that its executive officers and key employees are all in partnership with each other and with the Company’s shareholders to achieve success over the long-term. Guided by this core principle, the Company’s compensation program can be summarized as follows:
•The Company succeeds best over the long-term when the executive officers and key employees are motivated to work together in this partnership as long-term owners themselves. The Company’s compensation program is designed to compensate executive officers and key employees fairly and continuously reinforce a partnership of long-term owners responsive to our markets and compliant with local, state and federal regulations.
•The program is designed to encourage consistent high-level performance with particular emphasis on building long-term customer relationships and serving well its various constituencies: individuals, businesses, not for profits, municipal governments, communities, employees and shareholders. The Company believes that a strategic focus on building deep, long-term customer relationships is the foundation for strong, high quality, sustainable, long-term performance. Increasing such relationships over the long-term optimizes shareholder value through growth of high quality net revenues.
•The program is based on pay-for-performance with performance evaluated relative to both internal business plans, and tactical and strategic objectives and to the results of the Company compared with its relevant peer groups.
•The program provides competitive compensation opportunities that are consistent with practices of our peers with adjustments made for individual variance in skill and contribution.
•The program is designed to encourage a measured approach to growth that includes necessary attention to understanding and managing the risks of the business.
•The program rewards growth of customer relationships and sound risk management through compensation that is balanced between base salaries and performance-based incentive compensation.
•The program’s incentive compensation is also balanced between cash bonuses and equity awards, with both linked to the Company’s overall performance on a short-term, intermediate-term and long-term basis.
The program also promotes long-term share ownership, with all executive officers expected to maintain a significant investment in the Company and meet stock ownership guidelines.
Company Performance
The Committee evaluated the Company’s 2021 performance during early 2022. The Company met many of its quantitative and qualitative objectives for 2021 despite the impact of the COVID-19 pandemic on its operations. Highlights included:
•The Company achieved net income of $118.53 million in 2021. This was a 45.55% increase from 2020 and was the highest achieved in the company’s history.
•The Company earned $4.70 per share which was a 48.26% increase from 2020.
•The Company continued 34 years of dividend increases.
•The Company achieved a return on average assets of 1.53%. This placed it in the top 14% of all publicly-traded $3 to $10 billion peer companies as of the date of its annual review period.
•The Company grew its average loans outstanding net of PPP loans to $5.14 billion, a 1.05% growth over the prior year.
•The Company funded $261 million of second round PPP loans.
•The Company had net loan losses of 0.16% of average net loans and leases outstanding.
•The Company ended the year with a nonperforming assets ratio of 0.77% and a reserve for loan and lease losses of 2.38%.
•The Company continued to exceed the minimum regulatory requirements for Well Capitalized banks.
•The Company was one of 16 banks to be included in the Keefe, Bruyette & Woods, Inc. (KBW) Bank Honor Roll, which consists of banking institutions that have had 10 consecutive years of increased earnings per share.
•The Company opened a dedicated loan production office in southeast Fort Wayne, a historically underserved and majority-minority neighborhood in our community banking market.
•The Company maintained its #1 deposit share in its 16 contiguous county market.
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•The Company continued development of succession management in a variety of positions.
•The Company actively encouraged its employees to be vaccinated against COVID-19. 79% of full-time employees were vaccinated as of year-end.
•The Company achieved 24% of diverse candidates hired/promoted on management or professional track at an exempt level with specific Individual Development Plans created or in place and updated as % of total exempts hired or promoted.
•All of the Company’s employees completed a required series of facilitated training sessions on unconscious bias.
•The Company achieved advancements in IT and digital applications for marketing and operations use, including new loan origination software, redesign of the Company’s website, mobile deposit account opening, and improvements in its Insight customer information system.
•Charitable contributions of $3 million were made to the 1st Source Foundation during the year to support previously funded COVID-19 initiatives in our community banking markets.
To understand the Company’s performance in relative terms the Committee compared it to a number of other peer groups variously reflecting the Company’s geographic markets, its business line focus, and its size and complexity. These include:
Midwest Peers
Location
Ticker
National C&I Peers
Location
Ticker
1st Source Corporation*
South Bend, IN
SRCE
1st Source Corporation*
South Bend, IN
SRCE
Community Trust Bancorp, Inc*
Pikeville, KY
CTBI
Amarillo National Bancorp, Inc
Amarillo, TX
Enterprise Financial Group*
Clayton, MO
EFSC
BancFirst Corporation*
Oklahoma City, OK
BANF
First Busey Corporation*
Urbana, IL
BUSE
CNB Financial Corporation*
Clearfield, PA
CCNE
First Commonwealth Financial Corp*
Indiana, PA
FCF
Columbia Banking System, Inc*
Tacoma, WA
COLB
First Financial Bancorp*
Cincinnati, OH
FFBC
Cullen/Frost Bankers, Inc*
San Antonio, TX
CFR
First Financial Corporation*
Terre Haute, IN
THFF
Discount Bancorp, Inc
New York, NY
First Merchants Corporation*
Muncie, IN
FRME
Hancock Holding Company*
Gulfport, MS
HWC
First Midwest Bancorp, Inc*
Itasca, IL
FMBI
Heartland Financial*
Dubuque, IA
HTLF
German American Bancorp, Inc*
Jasper, IN
GABC
Mercantile Bank Corporation*
Grand Rapids, MI
MBWM
Horizon Bancorp*
Michigan City, IN
HBNC
Pinnacle Financial Partners*
Nashville, TN
PNFP
Intrust Financial Corporation
Wichita, KS
S&T Bancorp*
Indiana, PA
STBA
Johnson Financial Group, Inc
Racine, WI
Sterling Bancorp*
Montebello, NY
STL
Lakeland Financial Corporation*
Warsaw, IN
LKFN
Stock Yards Bancorp, Inc*
Louisville, KY
SYBT
Merchants Bancorp*
Carmel, IN
MBIN
Texas Capital Bancshares, Inc*
Dallas, TX
TCBI
MidWest One Financial Group, Inc.*
Iowa City, IA
MOFG
UMB Financial Corporation*
Kansas City, MO
UMBF
Old National Bancorp*
Evansville, IN
ONB
Univest Corporation of Pennsylvania*
Souderton, PA
UVSP
Park National Corporation*
Newark, OH
PRK
Western Alliance Bancorporation*
Phoenix, AZ
WTBF
Premier Financial Corp*
Definance, OH
PFC
Wintrust Financial Corporation*
Lake Forest, IL
WTFC
Republic Bancorp, Inc*
Louisville, KY
RBCA
W.T.B. Financial Corporation
Spokane, WA
* Publicly-traded
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The Committee compared the Company’s performance for the first three quarters of 2021 to its selected peer groups using ratios including those shown below. The Company continued to show consistent financial performance equal to or superior to most peers while maintaining stable credit quality and a strongly reserved position. Peer group amounts shown are the median in the peer group and the Company’s ranking in the group is set forth below the peer group metric, with a 1 ranking indicating the best result:
Midwest Peer Group (20 members) Sept 2021 YTD Median
National Commercial & Industrial Concentration Peer Group (20 members) Sept 2021 YTD Median
National $3 to $10 Billion Assets Peer Group
(144 members)
Sept 2021 YTD
Median(1)
1st Source Sept 2021 YTD
1st Source Dec 2021 YTD
Return on average total assets
1.43% 5
1.25% 4
1.29% 22
1.60%
1.53%
Return on average common equity
12.46% 8
11.85% 6
12.44% 50
13.45%
13.07%
Net income growth
43.86% 5
70.03% 12
42.70% 50
65.19%
45.55%
EPS Growth
43.96% 4 of 18
62.69% 8 of 18
52.95% 38 of 87
67.76%
48.26%
Net interest margin on a tax-equivalent basis
3.22% 7
3.15% 6
3.13% 44
3.28%
3.23%
Net charge-offs to average net loans and leases outstanding
0.03% 14
0.08% 11
0.03% 105
0.09%
0.16%
Nonaccrual loans and leases, restructured loans and other real estate to loans and leases and other real estate(2)
0.71% 12
0.62% 14
0.63% 85
0.81%
0.73%
Allowance for loan and lease losses to net loans and leases outstanding
1.42% 1
1.30% 2
1.25% 4
2.50%
2.38%
Noninterest income to average assets (3)
1.06% 5
0.95% 7
0.86% 40
1.14%
1.10%
Noninterest expense to average assets (3)
2.22% 11
2.21% 12
2.24% 70
2.23%
2.23%
Efficiency ratio (3)
56.83% 5
59.05% 5
59.13% 27
52.44%
53.48%
(1) Computed based on the Companies included in the 2021 Bank Holding Company Performance Report.
(2) This is a ratio shown on the Bank Holding Company Performance Report selected to facilitate peer comparisons and different from the nonperforming assets ratio mentioned in the bullet points at the beginning of this section.
(3) Noninterest income and expense computed net of leased equipment depreciation.
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The Committee also compared the Company’s total return over the past five years with the total return of the publicly-traded members of the Midwest and National Commercial & Industrial Concentration Peer Groups as well as the group of publicly-traded banking companies in Illinois, Indiana, Michigan, Ohio, and Wisconsin and all NASDAQ traded companies shown in the Annual Report:
* Assumes $100 invested on December 31, 2016, in 1st Source Corporation common stock, NASDAQ market index, banking companies in Illinois, Indiana, Michigan, Ohio, and Wisconsin, and the In-Market, Midwest, and National Commercial & Industrial Concentration peer group.
** The Morningstar Weighted NASDAQ Index Return is calculated using all companies which trade on the NASDAQ Stock Market. It includes both domestic and foreign companies. The index is weighted by the then current shares outstanding and assumes dividends reinvested. The return is calculated on a monthly basis.
*** The peer group is a market-capitalization-weighted stock index of 35 banking companies in Illinois, Indiana, Michigan, Ohio, and Wisconsin.
NOTE: Total return assumes reinvestment of dividends.
Compensation Consultants
As noted above, the Committee engaged Blanchard Consulting Group in late 2021. A senior management committee interviewed a number of compensation consulting firms and then reviewed the results of those interviews with the Chairman of the Committee. The Chairman then discussed these results with the entire Committee, which approved the Chairman engaging Blanchard on its behalf. The scope of Blanchard’s engagement was to evaluate the Committee’s processes and information, provide advice concerning the competitiveness of the Company’s compensation for NEOs and other members of senior management and recommend improvements in compensation practices. In this regard, Blanchard performed the following:
•Validated the process and information the Committee uses to evaluate base compensation and short and long-term cash and equity incentives of the CEO and CFO as to their competitiveness and appropriateness.
•Similarly collected and validated comparative data for the then next four highest paid officers.
•Constructed the following peer comparison groups that in some cases included similar or the same companies that 1st Source traditionally includes in its peer groups:
◦A regional peer group of 20 banking companies with assets between $4.5 and $15 billion as of December 31, 2020, and headquartered in Iowa, Illinois, Indiana, Kentucky, Missouri, Ohio, Pennsylvania, or Tennessee;
◦Blanchard’s internal database of publicly traded banking companies with assets between $4.5 billion and $15 billion as of year-end 2020;
◦The publicly traded members of the “National Commercial & Industrial Concentration Peer Group” used by the Committee for assessing relative performance of the Company as noted in the tables above under “Company Performance”; and
◦Summarized data from other published banking and financial industry surveys, some of which currently are being used by 1st Source.
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1st Source Bank purchased McLagan’s Equipment & Finance Compensation Survey in 2019. The survey included 75 banks, captives and independent leasing companies and benchmarked the Bank’s Specialty Finance Group’s officers’ pay levels including salary, incentives, and total compensation against comparable market roles in 2021. The Bank also engaged McLagan to run an additional cut of the survey with a refined peer group selected by the Bank. The Committee has determined that McLagan is independent after considering the independence factors for compensation consultants outlined in the NASDAQ listing rules.
Components of Compensation and 2021 Compensation Decisions
The following table summarizes the components of compensation the Company provides to its NEOs and other senior management personnel:
Compensation Component
Frequency
Criteria
Form(s) of Payment
Restrictions
Term of Holding
Salary
Annual
Qualifications, responsibilities and performance
Cash
None
None
Executive Incentive Plan (EIP)
Annual
Weighted corporate, group, division, unit and individual performance goals
Cash and book value stock
None as to cash component. Book value stock subject to forfeiture over a five-year period based on employee remaining with the Company and the Company meeting EPS growth or ROA criteria
Book value stock generally required to be held until retirement. Limited exceptions for up to 50% of stock beginning seven years following lapse of forfeiture period (eight to twelve years from date of grant) but subject to minimum stock ownership requirements
Long-Term Executive Incentive Plan
Every three years
Weighted corporate financial goals for the third year of the three-year planning period and average of individual annual awards for the three-year planning period
Cash and market value stock
None as to cash component. Market value stock subject to forfeiture over a five-year period based on employee remaining with the Company and the Company remaining profitable
Subject to NEO accumulating required minimum stock holdings
Strategic Deployment Incentive Plan
Annual
Company net income and Committee’s determination of success of strategic initiatives embedded in Company’s long-term plans using specific operating and financial metrics
Cash and/or stock as the Committee determines
None
Subject to NEO accumulating required minimum stock holdings
1982 Restricted Stock Award Plan
Discretionary
Discretionary
Market value stock
Market value stock subject to forfeiture over a zero to ten-year period based on employee remaining with the Company and in some cases the attainment of individual, group or Company goals
Subject to NEO accumulating required minimum stock holdings
Each element of compensation is discussed in more detail below. The Committee reviews the salary and incentive history for each NEO.
Base Salaries
•Why we pay this component.
Annual base salaries are designed to provide 1st Source executives with a basic level of cash compensation that is competitive in view of their qualifications, responsibilities and performance. Executive salaries are administered under the 1st Source Salary Administration Program applicable to all exempt employees. Through this program, each exempt job is graded under direction of the Human Resources Division and placed in a salary range with a midpoint targeted for the 50th percentile of the market range. Management monitors and re-calibrates the job grades and salary ranges by regularly evaluating market pay for particular positions as openings occur, as jobs change or as managers raise questions about the competitiveness of the pay for certain jobs. In addition, management periodically studies the competitiveness of its salary structure (ranges and job grades) by reference to market and industry information from a variety of sources, including Pearl Meyer, Compdata Surveys, Salaries.com, Blanchard, Wipfli and McLagan. As noted, in late 2021, the Committee sought validation and advice from Blanchard Consulting Group concerning management’s processes and information for base salaries as well as total compensation.
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•How we determine the amount.
For the NEOs, the Executive Compensation and Human Resources Committee annually evaluates base salaries and total compensation by reference to the same sources used for the Company’s Salary Administration Program. It also reviews the public information available from proxy statements on compensation paid to NEOs of peer organizations. The Committee reviews information for the CEO, CFO and, to the extent peer information is available, other NEOs compared to its Midwest peer group (see list above under Company Performance), a nationwide peer group of banking companies with a concentration of commercial and industrial loans (see list above under Company Performance), a nationwide peer group of banking companies with $3 billion to $10 billion in assets, and a nationwide peer group of publicly traded banking companies of all sizes. The Committee uses the peer group data as a point of reference and one of several factors in setting base salaries and other components of compensation for the NEOs. If any component of compensation for the NEOs varies significantly from the median of those in our peer group, then the Committee considers the circumstances (e.g. tenure, experience, historical performance) and whether an adjustment to one or more components of compensation is warranted. In addition to the foregoing, the Committee reviewed the Blanchard data prior to awarding incentive compensation for 2015 under both the Executive Incentive Plan and the Strategic Deployment Incentive Plan. It took into account 1st Source’s performance as compared to the Blanchard peer groups as well as the peer groups traditionally used by 1st Source. The Committee continued to reference these data sets as it approved base compensation changes in 2021 and awarded incentive compensation for 2021 for the named executive officers.
Increases to base salaries are considered annually. Management evaluates market conditions and proposes a salary performance grid that provides the range of authorized merit increases for each level of performance rating in each quadrant of the applicable salary ranges. The Executive Compensation and Human Resources Committee reviews, adjusts and approves the proposed grid each year. All of the NEOs, including the Chief Executive Officer, are eligible to receive annual salary increases approved under the Salary Administration Program.
An exempt employee’s base salary will increase based on his or her position in the salary range and individual performance rating determined through the annual performance review process. Performance ratings are based on a scale of 1 to 5 with a 3 rating representing performance that meets expectations.
The Committee applies the salary performance grid used for all exempt employees when determining base salary increases for Mr. Murphy and the other NEOs. The Committee evaluates Mr. Murphy’s performance each year looking at, among other factors, the Company’s return on assets, return on equity, its absolute earnings, and the overall performance of the Company relative to its annual budget plan and long-term strategic plan approved by the Board of Directors. His responsibilities also include representing the Company to its various constituencies, ensuring the Company’s ongoing community engagement, and ensuring the development of a culture of client service, long-term financial performance, teamwork, corporate integrity, and long-term success. Based on Mr. Murphy’s 2021 performance and the Company’s performance against its annual profit plan and using the salary performance grid approved by the Committee for 2022, the Committee would have granted Mr. Murphy a 4% increase in base salary but acceded to his request to have his salary held flat and that the difference be spread to other senior officers.
Mr. Murphy evaluates the performance of the other NEOs and makes recommendations for their annual increases to the Committee. The President of the Company, Ms. Short, also contributes to the evaluation of the other NEOs besides herself. The progression of increases in base salary for each of the NEOs is shown in the Summary Compensation Table below.
Annual Incentive Awards Under the Executive Incentive Plan (EIP)
•Why we pay this component.
The EIP is designed to reward the NEOs and other participants for performance with a long-term emphasis. Annual incentive awards achieve this balance with payments of both cash and stock. The annual cash awards provide participants with immediate recognition of achieving annual performance criteria. The Committee regularly approves a matching award equal to the full value of, or a portion of, the value of the cash award to be paid in the form of book value shares or market value shares so that participants become long term investors in the Company. The Committee has generally made annual matching awards of 1/2 to 1/3 in book value stock to provide participants with the opportunity to build and increase the value of their ownership of 1st Source during the course of a long career with the Company. The value of this stock only grows if the Company continues to perform. Also, a long-term holding requirement for those shares further establishes alignment between the long-term benefit to the participants and the interests of our shareholders. The Company has chosen book value stock as the primary form of incentive stock because book value is the one value that members of management and sales and service personnel directly affect by their individual and collective actions. Earnings of the Company are either added to the book value per share or paid out as dividends on all outstanding shares (including book value shares whether or not still subject to forfeiture). In this way, book value more closely reflects the real economic value of the Company and is not subject to fluctuations in the stock market that are unrelated to the long-term performance of the Company. Inappropriate risk-taking is discouraged through the five year forfeiture period of book value share awards. Inappropriate risk-taking is further discouraged through restrictions on the sale of book value shares that, with limited exceptions, require recipients to hold the shares until retirement and then sell them back to the Company at the then book value, with the purchase price payable in installments over a five year period. The limited exceptions allow executives, subject to the Committee’s approval, to sell back to the Company up to 50% of those book value shares for which the risk of forfeiture has been lapsed for seven or more years and only for the purchase of a personal residence or second home, college education tuition or financial hardship. The Company believes that equity-based compensation using book value stock under the EIP ties participants’ economic incentives directly to the long-term, substantive and sustainable economic performance of the Company. It encourages them to make sound business decisions that will grow the Company carefully over time and strengthen its financial position and should discourage decisions designed only for short-term personal gain. This decision-making for the long-term is reinforced as these stock awards can become a significant portion of a participant’s net worth over time.
•How we determine the amount.
Awards under the EIP are determined annually following the close of the fiscal year based on performance against a series of metrics selected and weighted for each participant at the beginning of the year. The EIP offers participants the potential for an annual cash award and a long-term stock award.
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▪Annual Cash Awards: Each management participant under the EIP is assigned a “partnership level” percentage that is the starting point for determining his or her annual cash award. Partnership level percentages range from 4.25% to 15% of the salary range midpoint assigned by the Committee for purposes of computing the EIP award or the base salary of a participant. For 2021, the partnership level percentage of the NEOs was 15% of base salary for Mr. Murphy, 10% of base salary for Ms. Short and Messrs. Buhr and Griffith. Mr. Bauer’s partnership level for 2021 was 8% of his base salary midpoint for the portion of the year before he became CFO and 10% of his base salary thereafter. The “base bonus” for each NEO participant is equal to the participant’s base salary or salary midpoint multiplied by the relevant partnership share percentage.
That dollar amount is further adjusted up or down by the “Company Performance Factor.” The Company Performance Factor is 2.5 times the percentage by which actual net income for the year exceeded (or missed) budgeted net income with a maximum adjustment of 25%. The Committee is authorized to make adjustments to reported net income for purposes of determining the Corporate Performance Factor. Historically, the Committee has done so when, in the Committee’s judgment, the reported net income included unusual or one-time items that distorted the true substantive or normalized earnings of the Company. The Committee agreed that the COVID-19 pandemic was an event that significantly impacted the Company’s 2020 and 2021 performance and had extensive discussions regarding the appropriate adjustments that should be made for EIP award calculational purposes. The Committee chose to use the Company’s reported net income of $118.53 million as the starting metric. This amount was adjusted by 75% of the excess of the planned credit loss expense over its actual amount for the year (net of related income tax effects). The Committee also chose to exclude the Company’s $3 million contribution to the 1st Source Foundation (net of related income tax effects.) The net income after those two adjustments was used to calculate the Company Performance Factor. This approach excluded from 2021’s Corporate Performance Factor calculation the reversal of some of the estimated costs of the COVID-19 pandemic that had been excluded from the 2020 Company Performance Factor calculation. The 1st Source Foundation contribution was excluded as it was not contemplated during the preparation of the 2021 budget. The Committee believed this to be the fairest approach and also agreed to apply it to similar net income-based corporate-level performance metrics used for EIP goals and to the calculation for the earnout of prior period EIP awards.
For 2021, the adjusted net income metric for EIP calculational purposes of $102.55 million was approximately 14.19% over budget resulting in a positive adjustment of 25.00% for the Company Performance Factor. Thus, the Company Performance Factor for 2021 was 125.00%.
For each individual, the base bonus after adjustment for the Company Performance Factor is further adjusted up or down between 0% and 300% based upon the participant’s performance against a set of corporate, group and individual performance goals established at the beginning of the fiscal year. Target amounts are scored at 150% of weighting for staff management personnel while they are scored at 200% for sales, credit and line management personnel. For example, if the Company achieves a corporate-level goal exactly at target and the goal is weighted for the individual at 10%, a staff person’s result is scored as 15% of their base salary or salary range midpoint assigned for EIP purposes while a sales, credit or line person’s result is scored as 20% of their base salary or salary range midpoint assigned for EIP purposes. The total of the annual cash and stock awards to a single participant may not exceed $1 million.
The corporate-level financial performance goals for each of the NEOs in 2021 included a combination of the following depending upon the NEO’s role and responsibilities:
Objective
Minimum
Target
Maximum
Actual
Net income(1)
$87,559
$89,804
$93,396
$102,546
Return on assets(1)
1.03%
1.21%
1.39%
1.33%
Exceed median ROA results for $3 to $10 billion peers
55 of 94
48 of 94
31 of 94
13 of 94
Return on common equity(1)
9.24%
9.73%
10.12%
11.31%
Revenue growth
1.34%
2.67%
4.67%
4.56%
Expense to revenue ratio(1)
55.62%
54.53%
52.89%
52.55%
Loan growth (all loans including PPP loans)
0.62%
1.25%
1.81%
(0.47)%
Core deposit growth
3.55%
7.11%
10.31%
16.74%
Year-end nonperforming assets
3.29%
2.35%
0.82%
0.77%
Net charge offs and other credit-related losses to average loans, leases, repossessed assets and other real estate
1.25%
0.50%
0.25%
0.15%
Electronic product growth
50% of Target
Target
150% of Target
91% of Target
Net new primary relationships
87% of Target
Target
125% of Target
155% of Target
(1) Actual amounts computed using Company Performance Factor approach described above.
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The corporate financial performance goals assigned to each of the NEOs and the weightings of corporate, group and individual performance goals for each of the NEOs were as follows:
Objective
Mr. Murphy
President(1)
CFO(2)
Mr. Griffith
Mr. Buhr
Corporate Financial Performance Goals
Net income
15%
10%
10%
10%
5%
Return on assets
10%
—
10%
5%
9%
Exceed median ROA results for $3 to $10 billion peers
15%
10%
10%
10%
10%
Return on common equity
10%
—
5%
—
—
Expense to revenue ratio
15%
—
25%
15%
—
Revenue growth
5%
5%
5%
4%
5%
Loan growth
—
10%
—
4%
12%
Core deposit growth
—
15%
—
4%
—
Year-end nonperforming assets
10%
5%
—
—
16%
Net charge offs and other credit-related losses to average loans, leases, repossessed assets and other real estate
10%
5%
—
—
16%
Electronic product growth
—
15%
—
—
—
Net new primary relationships
10%
15%
5%
5%
5%
Group financial performance goals
—
10%
30%
34%
22%
Enhance enterprise risk management
—
—
—
9%
—
Total weighting
100%
100%
100%
100%
100%
Target amount scoring
200%
200%
150%
150%
200%
(1) These goals and weightings were used for 80% of Ms. Short’s calculation.
(2) These goals and weightings were used for 20% of Ms. Short’s calculation and 42% of Mr. Bauer’s.
In assessing performance against these performance goals, the Committee considers quantitative and qualitative factors, and ultimately uses its judgment when determining the amount and terms of individual awards. However, in the calculation of Mr. Murphy’s award, his award was first calculated based upon quantitative factors in order to comply with IRS Code Section 162(m). Then the Committee has the authority to consider qualitative factors to reduce the amount of the award to Mr. Murphy. The qualitative factors the Committee considers to adjust awards include:
•The recommendations of Mr. Murphy with respect to the achievement of group and individual performance goals of the other NEOs and all other participants in the EIP.
•An analysis of competitive marketplace compensation data as described above;
•An analysis of the Company’s performance compared to its peer groups as described above;
•An analysis of the Company’s performance compared to its overall quantitative and qualitative goals;
•The executive’s level of responsibility and ability to influence the Company’s performance;
•The executive’s level of experience, skills and knowledge;
•The need to retain and motivate highly talented executives;
•Corporate governance considerations related to executive compensation; and
•The Company’s current business environment, objectives and strategy.
For 2021, Mr. Murphy received the award as computed based upon quantitative factors. Mr. Murphy and Mr. Buhr were scored as part of sales, credit and line management personnel. Ms. Short was scored as part of sales, credit and line management personnel for purposes of her 80% weighted President calculation and as part of staff management personnel for purposes of her 20% original 2021 CFO responsibilities calculation. Mr. Bauer and Mr. Griffith were scored as part of staff management personnel.
▪Annual cash awards: These are paid following the Committee’s approval of the awards. For the NEOs, the Committee approved cash awards for 2021 performance as follows:
Mr. Murphy
$449,550
Mr. Griffith
$132,850
Ms. Short
$133,100
Mr. Buhr
$114,300
Mr. Bauer
$53,900
These amounts are shown on the 2021 lines of the “Non-Equity Incentive Compensation Plan” column of the Summary Compensation Table below.
▪Annual Book Value Stock Awards: The amount of the annual cash award under the EIP is matched with an equal amount of book value stock that is subject to forfeiture ratably over a five-year period in the event the Company fails to achieve designated annual performance hurdles or the participant’s employment terminates. For 2021, the Committee chose a 3% EPS growth requirement from a $3.67 base or a 1.10% annual return on assets. The Committee believes that this combination of requirements collectively represents a reasonable hurdle for participants to motivate future performance based on, among other factors, the peer group performance documented above. The Committee also has the authority under the EIP to evaluate whether forfeiture of book value shares is appropriate if the Company’s performance results are in the top quartile of its peer groups notwithstanding failure of the Company to achieve the performance hurdles. This additional authority gives the Committee flexibility to respond to external events or market conditions.
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Mr. Murphy’s annual cash award is matched with an equivalent value in book value stock subject to the same performance hurdles as with all employees under the EIP. As the risk of forfeiture lapses over the five year period based on achievement of performance hurdles, he is paid in cash. His book value stock awards ultimately paid in cash are shown in the “Stock Awards” column of the Summary Compensation Table in the year the awards are made, consistent with the presentation for the other NEOs. The Committee believes Mr. Murphy’s ownership interest in the Company is already significant and sufficiently aligned with shareholder interests that the book value share awards under the EIP can be denominated and paid in cash as the forfeiture risk lapses.
The annual stock awards for 2021 performance were made in calendar year 2022. As required by SEC rules, the 2021 stock award amounts for the NEOs will be shown in next year’s proxy statement on the 2022 lines under the Stock Awards column of the Summary Compensation Table. The annual book value stock awards for 2020 (made in 2021) are shown on the 2021 lines of the “Stock Awards” column of the Summary Compensation Table below as required by SEC rules.
Long-Term Plan Awards Under the EIP
•Why we pay this component
In addition to the annual incentive award of cash and book value stock, the EIP also offers participants an additional periodic award of cash and stock in the event the Company achieves longer-term performance goals. These performance goals are established periodically (usually every 3 years) as part of the Company’s ongoing long-term strategic planning process. These awards are also designed to reward consistent individual performance over the long-term as individual performance is calculated based on the participant’s average annual incentive awards under the EIP over the three-year period. These awards further reinforce alignment with the interests of our shareholders by encouraging a long-term view with sound strategic planning and risk management and providing participants with an opportunity for additional ownership of the Company but with the same market risk to which shareholders of the Company are exposed.
•How we determine the amount.
▪Calculation of Amount of the Long-Term Plan Awards: The most recent 3-year performance goal period ended in 2019 with targets set in early 2017 and awards being determined and paid in early 2020. The 2017-2019 targets, results and cash payments to the NEOs were reported in our 2020 proxy statement.
The goals for the 2020-2022 period include the following:
Weighting
Minimum
Target
Maximum
Return on assets
20%
88% of Target
Target
112% of Target
Expense to revenue ratio
10%
104% of Target
Target
96% of Target
Average total assets
20%
95% of Target
Target
105% of Target
Net charge offs and other credit-related losses to average loans, leases, repossessed assets and other real estate
15%
200% of Target
Target
75% of Target
Period-end nonperforming assets
10%
200% of Target
Target
77% of Target
Growth in net new primary checking accounts
25%
75% of Target
Target
150% of Target
Company performance is scored at 50% for minimum, 100% for target and 200% for maximum. The three-year awards then are calculated based upon a pre-determined mathematical formula that multiplies the Company’s weighted performance relative to its long-term goals by an assigned percentage and then by the participant’s average annual incentive award under the EIP over the three-year period. The participant may earn from 0% to 200% of his/her average annual incentive awards over the three-year period. The total of the annual cash and stock awards to a single participant may not exceed $1 million.
For the 2020-2022 period, the assigned percentages of the NEOs for purposes of the three year long-term awards are as follows:
Mr. Murphy
100
%
Mr. Griffith
90
%
Ms. Short
98
%
Mr. Buhr
90
%
Mr. Bauer
79
%
Method of Payment of Periodic Long-Term Awards: The periodic long-term awards are paid with a combination of cash and market value stock, with more senior participants required to take a higher percentage of stock. The stock portion is subject to forfeiture over a five-year period based upon the participant remaining with the Company and the Company remaining profitable during the period.
The cash portions of the 2017-2019 awards are shown on the 2019 lines of the Non-Equity Incentive Compensation Plan column of the Summary Compensation Table. The stock portions of the 2017-2019 awards were made in calendar year 2020 and are shown in this year’s proxy statement on the 2020 lines of the Stock Awards column of the Summary Compensation Table as required by SEC rules.
Annual Incentive Awards Under the Strategic Deployment Incentive Plan (SDIP)
•Why we pay this component.
NEOs have an additional incentive compensation plan available to them which is designed to encourage execution of the Company’s strategic objectives on an annual and a long-term basis. NEOs and other members of senior management are eligible to participate. Mr. Murphy, Ms. Short and Messrs. Buhr and Griffith were participants in the SDIP for 2021.
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Any awards (“Awards”) made to participants under the SDIP are performance-based compensation with three dimensions. First, the SDIP is designed to encourage the participants to focus on initiatives that support the Company’s long-term strategic objectives but not at the expense of meeting or exceeding the expectations of our shareholders as reflected in the annual performance goals approved by the Board. Thus, there will be no Awards unless the Company achieves its minimum net income goal.
Second, the amount of the Awards is calculated as a percentage of the Company’s annual net income. Sharing a modest portion of net income with the participants who successfully lead and execute the initiatives designed to meet the Company’s long-term strategic objectives directly aligns their performance on these initiatives with the long-term interests of shareholders. The Committee sets a range for each of the participants reflected by a minimum, target and maximum percentage of net income. In setting the percentages, the Committee considers the roles and responsibilities of each participant with respect to the Company’s long-term strategic objectives.
Third, the Committee determines the final percentage of net income within the respective pre-established ranges by reference to pre-established shared and/or individual goals for the participants that support the Company’s long-term strategic objectives (“Annual Strategic Goals”). The Committee assigns Annual Strategic Goals to each of the participants at the beginning of each calendar year using objective performance targets or criteria and weightings among the Annual Strategic Goals. The Committee then uses the results achieved during the calendar year (individually or in aggregate) to determine the Award for each participant within the applicable range of percentages of net income. See “How we determine the amount” below for calculation and the payment of awards.
All determinations of eligibility, Annual Strategic Goals, financial metrics and formulas for calculation of Awards for a calendar year are established by the Committee in writing. No Award to any single participant can exceed $1 million in one calendar year. No performance measures for a participant’s Annual Strategic Goals will allow for any discretion by the Committee to increase an Award over the maximum percentage of net income determined by the Committee at the beginning of the calendar year, but the Committee does have discretion to reduce an Award below the maximum percentage of net income to any amount it believes is justified based on the actual results achieved related to the Annual Strategic Goals. The payment of any Award under the SDIP to a participant with respect to a relevant calendar year is contingent upon certification by the Committee prior to any such payment that the applicable performance measure(s) or criteria for the participant’s Annual Strategic Goals have been satisfied. All awards under the SDIP are subject to potential forfeiture and/or recovery by the Company in the event they are based upon financial results that are subsequently determined to have been overstated.
•How we determine the amount.
Under this program, awards for participants are based on the net income of the Company. The Committee set the range from 0.00% to 1.13% of net income for the total program with a target of 0.57% for 2021. All awards are subject to the Company achieving a minimum net income of $57.5 million. The Committee set the following individual award levels as a percentage of the Company’s net income:
Minimum
Target
Maximum
Mr. Murphy
0%
0.26%
0.51%
Ms. Short
0%
0.13%
0.26%
Mr. Griffith
0%
0.09%
0.18%
Mr. Buhr
0%
0.09%
0.18%
For 2021, the goals and weightings were as follows:
Weight
Min
Target
Max
Result
1. Optimize response to COVID-19
35%
a. Second round PPP success
20%
$190 million
$225 million
$275 million
$261 million
b. % of full-time employees vaccinated
15%
60%
80%
95%
79%
2. Diversity and inclusion
25%
a. Bias Training (facilitated) - % of employees
15%
Maximum 100%
b. % of diverse candidates hired/promoted on management or professional track at an exempt level with specific Individual Development Plans created or in place and updated as % of total exempts hired or promoted
10%
13%
18%
25%
24%
3. Advance IT and digital applications for marketing and operations use
25%
a. New loan origination software implementation and adoption
85% of Maximum
i.InSight Commercial Loan Team was launched on June 7, 2021 with all employees having gone through appropriate training. The transition from Sourcelink was relatively smooth with only a handful of loans delayed. No customer impact. The Credit Policy Committee (CPC) has fully adopted the use of the system-generated Credit Memos. Due to complexity and limited resources, the standard form legal documents and client portal projects are now targeted to be implemented in Q2 of 2022.
ii.Major Accomplishments: (1) New pipeline management that includes both opportunity and loan in one view, (2) Over 14,000 loans have been entered including sub loans on credit limits, (3) Over 200 defects addressed successfully with less than 10 remaining open, (4) Steering Committee reestablished and meeting monthly, and (5) Two new employees to support product.
Challenges: (1) Over 100 enhancements have been identified, and (2) Two FTEs remain open for the additional talent required to support the current system and continuous improvement
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Weight
Min
Target
Max
Result
b. Redesign of website to be more client-friendly
Minimum
i.We split the project into two parts: (1) Voice Of Customer, Prototype Design & Content Management System (CMS) recommendation, and (2) build, test and execution.
ii.Initial expectation was to complete part one by end of Q3.
iii.Page template designs were completed at the end of December 2021.
iv.The user testing of the prototype was an added project in December and kicked off on January 11, 2022.
v.Marketing has narrowed down the CMS selection to two and IT has reviewed each vendor - scope conversations to take place in January/February 2022.
vi.Major accomplishments: (1) Client Usability/UX (personal and business) Testing, (2) Internal Stakeholder Interviews, (3) Heuristic Evaluation, (4) Messaging Strategy Workshop, (5) Competitive Analysis, (6) SEO Analysis, (7) Tech Confirmation and Review, (8) Wireframe Design, (9) Content Mapping, (10) Visual Sitemap, (11) 22 various page templates, and (12) prototype creation.
c. Insight improvements
Maximum 100%
i.Successfully converted remaining 592 users to new interface by December 31st as planned.
ii.Major Accomplishments: (1) Resolved all open defects and required enhancements to transition user base, (2) Trained 8 trainers and held 61 training sessions, and (3) Less than 1% of users switching back to prior version daily indicating strong adoption.
d. Mobile deposit account opening
Target
i.After a thorough vetting and MEP process, we have signed the contract with vendor for our new deposit account opening process. Project set to begin in early February, with a planned go-live date of August 2022.
ii.Major accomplishments: (1) Negotiated the contract with vendor to save on cost, but also pull some functionality forward to allow for earlier branch implementation, (2) Thorough review of our current onboarding process with CIF, CDD and other friction points identified key areas to improve our process and reduce time to open, and (3) Initiated discussions and inquiries around downstream impacts of moving deposit accounts to e-sign.
4. Digital adoption and Data Analytics - Continuing the Proof of Concept with Marketing leading the effort. Executive discussion between Aunalytics and 1st Source in January 2022.
15%
Did not achieve minimum
5. Qualitative goal to be judgmentally used by the Committee to adjust downward the awards under the above metrics either for the group or for each NEO individually.
The Committee assesses performance against these goals and each individual’s contributions to the achievement of the goals including the quality of teamwork exhibited and the individual’s contribution to the team. In assessing performance against these performance goals, the Committee considers quantitative factors first and may adjust downward for qualitative factors, and ultimately uses its judgment when determining the amount and terms of individual awards.
Due to the extraordinary impact of the COVID-19 pandemic, the minimum income for receiving an SDIP award was set at an amount that would allow the Company to leave its record of 34 year annual increases in dividends intact while also maintaining a dividend payout ratio below 50% of the current year’s income. That number was calculated to be $57.5 million. Consistent with its calculation of the EIP Corporate Performance Factor and related EIP metrics, the Committee chose to use the Company’s reported net income of $118.53 million adjusted by 75% of the excess of the planned credit loss expense over its actual amount for the year and the Company’s $3 million contribution to the 1st Source Foundation (net of related income tax effects) to calculate net income for SDIP purposes. The Committee believed this to be the fairest way to be consistent with its 2020 approach and accordingly used the adjusted net income metric of $102.55 million to compute the SDIP awards. The Committee chose to pay the entire bonus amounts in cash. The annual cash awards are paid following the Committee’s approval of the awards. For the 2021 participants, the Committee approved cash awards for 2021 performance as follows:
2021 Award
2020 Correction(1)
Total 2021 Award
Mr. Murphy
$338,400
$39,600
$378,000
Ms. Short
$174,300
$20,400
$194,700
Mr. Griffith
$112,800
$12,800
$125,600
Mr. Buhr
$112,800
$14,000
$126,800
(1) The calculation of the 2020 award under the Company’s SDIP plan did not include the adjustment of the Corporate Performance Factor as disclosed in the 2021 proxy resulting in an underpayment in 2021. The underpayment of the 2020 award is being paid to the qualified NEO’s with the 2021 award.
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Awards Under the 1982 Restricted Stock Award Plan
•Why we pay this component.
The Restricted Stock Award 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. The Restricted Stock Award Plan provides that the shares shall vest over a period of time if the participant continues to serve as an employee. Additionally, the Committee may set additional vesting requirements at the time of grant based on the individual participant’s performance, the Company’s financial performance or both. If the participant does not meet or exceed his or her individual performance goal(s) for a given year, all shares so restricted with respect to that year will be forfeited. If 1st Source does not meet the financial requirements by the end of the vesting period, the shares so restricted are forfeited. The Committee retains discretion to make periodic stock awards from time to time in the future to maximize the usefulness of the Restricted Stock Award Plan in attracting, retaining and motivating key employees.
•How we determine the amount.
No named executive officers received awards under the Restricted Stock Award Plan in 2019. In 2020, Ms. Short received a restricted stock award in conjunction with her promotion in 2020, to be earned over the following five years subject to her remaining with the Company. In 2021, Mr. Bauer received a restricted award in conjunction with his promotion in 2021, to be earned over the following five years subject to his remaining with the Company. The Committee made these awards in recognition of Ms. Short’s and Mr. Bauer’s increased responsibilities and past performance, as a retention incentive, and to tie their long-term financial incentives more closely to that of the Company’s shareholders. The Committee made the award after reviewing Ms. Short’s and Mr. Bauer’s total compensation at the time of their respective promotions.
Stock Ownership Guidelines
In February 2015, the Company established stock ownership guidelines for its NEOs. The Company requires the CEO to own Company stock with value at least equal to five times the CEO’s current base salary and other NEOs to own Company stock with a value at least equal to three times the NEO’s current base salary. All of the Company’s NEOs are currently in compliance with this requirement.
Hedging or Pledging Company Securities
In February 2015, the Company adopted a policy prohibiting directors, NEOs and other Senior Vice Presidents or above from pledging shares of the Company on margin, trading in derivative securities of the Company’s common stock, engaging in short sales or buying or selling put or call options on the Company’s common stock, and purchasing or selling other financial instruments designed to hedge or offset any decrease in the market value of the Company’s common stock. Shares owned by directors, NEOs and other Senior Vice Presidents in excess of those required to be owned by Company stock ownership guidelines may be used as collateral for the owner’s personal or business borrowing purposes upon notification of and prior approval by the Governance and Nominating Committee.
Most Recent Shareholder Advisory Vote
The Executive Compensation and Human Resources Committee carefully considered the results of the 2020 shareholder advisory vote on executive compensation. The CEO also reviewed and discussed the results of the vote with selected larger shareholders. The result of the advisory vote was that 98% of votes cast approved of the executive compensation of the NEOs as described in the 2020 Proxy Statement. The results indicated shareholder support for the Company’s executive compensation decisions and policies and the Committee has continued to make its compensation decisions consistent with historical practice and existing policies. The Committee also carefully considered the results of the 2017 shareholder advisory vote on the frequency of future advisory votes on executive compensation. The result of the advisory vote was that 67% of votes cast supported a vote every three years. The Committee elected to continue its practice of having a vote every three years.
Shareholders are given an opportunity to cast an advisory vote on the Company’s executive compensation program every three years with the next opportunity occurring in connection with the annual shareholder meeting in April 2023.
Shareholders are also given an opportunity to cast an advisory vote on the frequency of future shareholder advisory votes on executive compensation with the next opportunity occurring in connection with the annual shareholder meeting in April 2023.
Risk Management
As discussed above, the senior executive officer compensation plans and other management incentive programs include both equity and cash components that link compensation to the Company’s overall performance on both a short-term and long-term basis, subject to forfeiture based on the senior executive officers or participating management officers failing to remain with the Company and on long-term real economic performance of the Company. As such, these plans do not encourage the senior executive officers or participating management officers to take unnecessary and excessive risks that threaten the Company. Nor do they encourage the manipulation of earnings of the Company to enhance the compensation of any employee.
The Committee also identified and reviewed the Company’s five business unit incentive plans, each of which rewards measurable performance in the Company’s five major product and service segments: Business Banking, Consumer Banking, Specialty Finance, Trust and Asset Management, and Insurance. Each of these incentive plans has common features that encourage high quality, long-term relationship business and discourage unnecessary or excessive risks for short-term gain. In particular, short-term cash awards generally are capped at a specific dollar amount or a percentage of a participant’s salary midpoint or base salary. In practice, actual awards generally have been much less than the maximum amount after applying the respective individual performance metrics under the plans. Annual stock awards are similarly limited to a percentage of a participant’s salary midpoint and have long-term attributes. They carry substantial risks of forfeiture over a five-year period if performance hurdles that are tied to Company performance are not cleared. They are made in book value common stock transferable only to the Company upon death, disability, normal retirement, early termination of employment, or with discretionary approval of the Committee, with less favorable payout terms upon early termination of employment. The incentive plans for lenders further mitigate excessive risks by including substantial weightings or deductions for credit quality and net charge-offs. The Committee also identified and reviewed the Company’s referral programs designed to encourage internal referrals by providing small, immaterial cash incentives to eligible participants.
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These features, combined with the systems of controls in place to mitigate the risks of the products and services the Company offers, limit and discourage the taking of unnecessary or excessive risks. They also discourage and mitigate the risk of manipulation of reported earnings to enhance the compensation of any employee. None of these incentive plans or referral programs, alone or in aggregate, encourages unnecessary or excessive risks or presents significant risks to the Company as a whole.
Clawbacks
If the Company (i) is required to prepare an accounting restatement of its financial statements due to the Company’s noncompliance with any financial reporting requirement under the securities laws, or (ii) otherwise determines that financial results or other metrics used to determine the amount of any incentive awards paid or awarded to any Participants were misstated or otherwise inaccurate, then the Committee shall, except in the case of any Participant who had no responsibility for the accounting that led to the misstatement or inaccuracy, recoup any excess incentive compensation received by any such Participant. The Committee shall recoup all incentive compensation received by any Participant who had responsibilities for the accounting that led to the misstatement or inaccuracy or who the Committee determines committed fraud or other malfeasance while employed by the Company.
Employment Agreements Severance Provisions
Among the NEOs, the Company has entered into employment agreements with Mr. Murphy, Ms. Short, Mr. Griffith, Mr. Buhr, and Mr. Bauer. The agreements provide for severance payments in the event of the executive’s termination of employment by the Company without cause or by the executive because of good reason, including a material adverse change in his or her status such as a material diminution of responsibility or relocation. In such event, the executive would continue to receive only his or her base salary for a period of time after his or her termination. Mr. Murphy would receive the equivalent of 36 months of base salary with the first six months payable in a lump sum. Ms. Short, Mr. Griffith, Mr. Buhr, and Mr. Bauer would receive the equivalent of twelve months of base salary with the first six months payable in a lump sum. The Committee believes that providing severance payments to certain executives in the event the executives terminate employment because of a material adverse change in status is necessary and fair given the critical nature of the roles of the executives. As of December 31, 2021, Mr. Murphy, Ms. Short, Mr. Griffith, Mr. Buhr, and Mr. Bauer would receive $2.43 million, $390,000, $385,000, $345,000, and $250,000, respectively under the agreements.
The employment agreements also provide for severance payments in the event Mr. Murphy, Ms. Short, Mr. Griffith, Mr. Buhr, or Mr. Bauer terminates his or her employment for good reason within one year of a change in control transaction. Under these circumstances, the executive would receive severance pay in cash equal to 2.99 times his or her “Annualized Includable Compensation for the Base Period” (as defined under the Internal Revenue Code of 1986, as amended) without a gross-up provision. The Committee reaffirmed its long-standing view that such a “two-trigger” change in control provision for key executives is consistent with the interests of shareholders and fair protection to the executives.
Tax Deductibility of Pay
Federal income tax law caps at $1,000,000 the deductible compensation per year for each of the NEOs, subject to certain exceptions (some of which changed in 2018). In developing and implementing executive compensation policies and programs, the Executive Compensation and Human Resources Committee considers whether particular payments and awards are deductible for federal income tax purposes, along with other relevant factors. It is the general intention of the Executive Compensation and Human Resources Committee to meet the requirements for deductibility whenever possible. The Company will continue to review and monitor the deductibility of compensation and provide any necessary information on new developments in this area to the Committee.
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SUMMARY COMPENSATION TABLE
The following table provides information regarding compensation earned by the Company’s Chief Executive Officer, Chief Financial Officer, and the three other executive officers employed at the end of 2021 who were the most highly compensated in 2021 among the major policy-making executives of the Company.
Name and Principal Position
Year
Salary($)(1)
Stock Awards ($)(2)
Non-Equity Incentive Plan Compensation($)
All Other Compensation($)(3)
Total(8)
Christopher J. Murphy III
2021
$808,269
$235,254
$827,550
$139,138
$2,010,211
Chairman of the Board, President and
2020
822,461
888,361
487,750
122,754
2,321,326
Chief Executive Officer
2019
770,942
235,258
636,109
126,843
1,769,152
Andrea G. Short
2021
385,385
71,502
327,800
103,558
888,245
President, 1st Source Bank
2020
363,908
581,897
201,870
48,859
1,196,534
2019
333,077
65,169
207,007
40,357
645,610
John B. Griffith
2021
383,462
73,353
259,877
42,974
759,666
Executive Vice President, Chief Administrative
2020
387,500
188,981
155,671
43,185
775,337
Officer, General Counsel and Secretary
2019
369,808
58,371
168,980
40,605
637,764
Jeffrey L. Buhr
2021
342,692
55,329
241,100
38,759
677,880
Executive Vice President and Chief Credit
2020
340,385
172,547
144,900
38,910
696,742
Officer, 1st Source Bank
2019
316,462
56,213
162,509
36,417
571,601
Brett A. Bauer(7)
2021
226,154
252,019
53,900
30,488
562,561
Senior Vice President, Treasurer and
Chief Financial Officer
(1)
2020 totals are more than year-end base salary as they include 27 pay periods instead of the normal 26.
(2)
Amounts included in Stock Awards represent the aggregate grant date fair value of all awards computed in accordance with FASB ASC Topic 718 granted during the year. These amounts generally relate to the prior year’s performance and are subject to forfeiture over the succeeding five (5) years. The 2020 amounts also include the stock awards included in the 2019 long-term EIP plan awards. The 2019 amounts include 10 shares of stock awarded in early 2019 to all employees who were employed by the Company on December 31, 2017, and remained employed with the Company through December 31, 2018.
(3)
Amounts included in All Other Compensation for the most recent fiscal year are as follows:
Company Contributions to Defined Contribution Retirement Plans
Dividends on Stock Awards
Directors’ Fees
Perquisites(4)(5)
Value of Life Insurance Benefits
Other
Total
Mr. Murphy
$24,388
$44,846
$49,816
$12,981
$7,107
$
—
$139,138
Ms. Short(6)
24,388
25,742
49,816
«
3,612
—
103,558
Mr. Griffith
24,388
10,841
—
«
7,745
—
42,974
Mr. Buhr
24,388
9,315
—
«
5,056
—
38,759
Mr. Bauer
21,226
7,979
—
«
1,283
—
30,488
«
Not included - total of perquisites and benefits is less than $10,000
(4)
Mr. Murphy’s perquisites included business club dues and personal usage of the company plane. These are values at the incremental cost to the Company. For personal use of the company plane, the incremental cost is the SIFL (Standard Industrial Fare Level) cost.
(5)
Mr. Murphy reimbursed the Company $1,000 in 2021 and 2020 and $5,000 in 2019 for miscellaneous incalculable personal benefits. This amount has not been deducted in computing the disclosable perquisites above.
(6)
Ms. Short serves on the 1st Source Bank Board of Directors and receives the fees shown for her services.
(7)
Mr. Bauer was promoted to Treasurer and Chief Financial Officer effective July 22, 2021.
(8)
There were no bonus awards, option awards or changes in pension value and non-qualified deferred compensation earnings for the named executive officers in 2021, 2020 or 2019.
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2021 Grants Of Plan-Based Awards
Estimated Future Payouts Under Equity Incentive Plan
Book Value Awards (#Shares)
Market Value Awards (#Shares)
Name
Grant Date
Threshold
Target
Maximum
Grant Date Fair Value of Stock Awards
Grant Date
Threshold
Target
Maximum
Grant Date Fair Value of Stock Awards
Christopher J. Murphy III
2/12/21(1)
—
6,735
—
$235,254
—
—
—
$
—
Andrea G. Short
2/12/21(1)
—
2,047
—
71,502
—
—
—
—
—
—
—
—
John B. Griffith
2/12/21(1)
—
2,100
—
73,353
—
—
—
—
Jeffrey L. Buhr
2/12/21(1)
—
1,584
—
55,329
—
—
—
—
Brett A. Bauer
2/12/21(1)
—
732
—
25,569
8/3/21(2)
—
5,000
—
226,450
Note: There were no non-equity incentive plan awards with future payouts made during 2021. Also, there were no other stock awards or option awards made during 2021.
(1)
Annual Executive Incentive Plan award for 2020 subject to forfeiture over a five-year period based on the executive remaining with the Company and the Company achieving annual financial performance hurdles as discussed above under “Annual Incentive Awards Under the EIP.”
(2)
Restricted stock award subject to forfeiture over a five-year period based on the executive remaining with the Company.
Narrative Disclosure To Summary Compensation Table And Grants Of Plan-Based Awards Table
Employment Agreements:
Messrs. Murphy and Griffith each entered into an employment agreement effective January 1, 2008. Ms. Short entered into an employment agreement effective January 1, 2013. Mr. Buhr entered into an employment agreement effective May 23, 2017. Mr. Bauer entered into an employment agreement effective August 1, 2021.
Mr. Murphy’s agreement provides for a $810,000 base salary at January 1, 2022, with annual increases as the Committee may deem appropriate each year, and bonus payments (paid in cash or stock at Mr. Murphy’s election) under the Executive Incentive Plan and the Strategic Deployment Incentive Plan. Under the other four agreements, Ms. Short, Mr. Griffith, Mr. Buhr, and Mr. Bauer receive base salaries of $390,000, $385,000, $345,000, and $250,000 respectively, at January 1, 2022, with increases thereafter as may be determined by 1st Source, and cash and stock bonuses determined under the Executive Incentive Plan and the Strategic Deployment Incentive Plan.
Mr. Murphy’s agreement expires on December 31, 2025. Ms. Short’s, Mr. Griffith’s, Mr. Buhr’s, and Mr. Bauer’s agreements expire on December 31, 2022. Each will continue to be extended from year-to-year unless either party gives a notice of non-renewal to the other. The term of Mr. Murphy’s agreement will end on December 31 of the third year following the year in which any notice of non-renewal is given. The term of the agreements with Mr. Griffith, Mr. Buhr, and Ms. Short will end on December 31 of the same year in which any non-renewal notice is given.
In the event of an executive’s death, the executive’s beneficiaries would receive a payment in the amount of twice the executive’s current base salary (reduced to 65%, 45% and 30% of this amount at ages 65, 70 and 75, respectively) up to a maximum of $750,000 under a group term life insurance policy provided by the Company. Mr. Griffith’s beneficiaries also would receive a payment of $600,000 under an individual policy for which the Company pays the premiums.
The employment agreements also include restrictive covenants which require, among other things, that the executives not compete with 1st Source in bank or bank-related services within the geographic region in which full-service retail branches of 1st Source Bank or any affiliate are located. The agreements also prohibit the executives from ever divulging confidential information or trade secrets after termination of employment.
In the event an executive’s employment is terminated because of disability and in addition to other disability programs in effect for all officers of 1st Source, the executive will receive twelve months of base salary, with the first six months payable in a lump sum and the balance paid in monthly installments beginning on the first day of the seventh month following the date of termination.
See Compensation Discussion & Analysis above for discussion of certain severance benefits provided for under the employment agreements.
Bonus Plan:
See discussion above in the Compensation Discussion & Analysis
The amounts shown in the Stock Awards column of the Summary Compensation Table represent the aggregate grant date fair value of all awards granted during the fiscal year computed in accordance with FASB ASC Topic 718. The amounts shown in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table represent the annual and long-term cash awards under the EIP and the SDIP Plan. Estimated future payout amounts for 2021 stock awards and the corresponding grant date fair values are shown in the Grants of Plan-Based Awards Table.
Recipients of unvested book value and market value shares granted under the EIP and the SDIP Plan receive dividends at the same time and in the same amount as all other holders of 1st Source common stock.
The relative amounts of salary and bonus are discussed above under “Components of Compensation and 2021 Compensation Decisions.”
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Outstanding Equity Awards At Fiscal Year-End 2021
Stock Awards(4)
Name
Number of Shares of Stock That Have Not Vested(1)(2)
Market Value of Shares of Stock That Have Not Vested(1)
Equity Incentive Plan Awards: Number of Unearned Shares That Have Not Vested(1)(2)
Equity Incentive Plan Awards: Payout or Market Value of Unearned Shares That Have Not Vested(1)(3)
Christopher J. Murphy III
Book Value Shares
23,893
$899,333
Market Value Shares
11,838
$587,165
Andrea G. Short
Book Value Shares
6,488
244,208
Market Value Shares
13,520
670,592
John B. Griffith
Book Value Shares
6,299
237,094
Market Value Shares
2,464
122,214
Jeffrey L. Buhr
Book Value Shares
5,359
201,713
Market Value Shares
2,107
104,507
Brett A. Bauer
Book Value Shares
2,428
91,390
Market Value Shares
5,425
269,080
(1)
Shares vested for purposes of this table and the following table are awarded shares which are no longer subject to forfeiture under the terms of the Executive Incentive Plan or the Restricted Stock Award Plan.
(2)
Vesting dates for these awards are as follows:
Book Value Shares
Market Value Shares
Mr. Murphy
12/2021 - 12/2025
12/2021 - 12/2024
Ms. Short
12/2021 - 12/2025
12/2021 - 7/2025
Mr. Griffith
12/2021 - 12/2025
12/2021 - 12/2024
Mr. Buhr
12/2021 - 12/2025
12/2021 - 12/2024
Mr. Bauer
12/2021 - 12/2025
12/2021 - 12/2025
Note: Shares vesting based on calendar year results (e.g., 12/2021 above is based on 2021 results) are not released until audited financial results are publicly announced early in the following year.
(3)
The values shown in respect of Book Value Shares are based on the book value of our Common Stock because that is the value that NEOs can ultimately realize from Book Value Shares absent extraordinary circumstances.
(4)
The named executive officers have no outstanding stock option awards at December 31, 2021.
Option Exercises And Stock Vested — 2021
Stock Awards(1)
Name
Number of Book Value Shares Acquired on Vesting
Number of Market Value Shares Acquired on Vesting
Value Realized on Full Vesting(2)
Christopher J. Murphy III
8,128
4,164
$451,720
Andrea G. Short
2,001
4,154
251,095
John B. Griffith
2,051
869
106,662
Jeffrey L. Buhr
1,803
751
93,244
Brett A. Bauer
837
1,416
96,181
(1)
The named executive officers did not exercise any stock option awards during 2021.
(2)
The values shown in respect of Book Value Shares are based on the book value of our Common Stock because that is the value that NEOs can ultimately realize from Book Value Shares absent extraordinary circumstances.
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CEO Pay Ratio Disclosure
The 2021 compensation disclosure ratio of the annual total compensation of the Company’s Chief Executive Officer and the median annual total compensation of all other Company employees is as follows:
Annual total compensation of Christopher J. Murphy III, Chairman of the Board and Chief Executive Officer(1) (A)
$2,010,211
Median annual total compensation of all employees (excluding Mr. Murphy)(2) (B)
$57,693
Ratio of (A) to (B)
34.8 to 1
(1) From Summary Compensation Table
(2) Median employee selected from all employees as of December 31, 2021, on basis of annual total compensation reported for tax purposes. Compensation was annualized for all employees not employed for the full year of 2021. Annual total compensation for the median employee was computed in the same manner as that of NEOs included in the Summary Compensation Table.
DIRECTOR COMPENSATION – 2021
Name
Total
Fees Earned or Paid in Cash(1)
Fees Received in Stock(1)
Amount
Shares
Grant Date Fair Value
John F. Affleck-Graves(1)
$123,816
$109
$123,707
2,547
$48.57
Melody Birmingham(1)
114,316
72,550
41,766
870
48.01
Daniel B. Fitzpatrick(1)
114,316
56,549
57,767
1,177
49.08
Tracy D. Graham(1)
92,816
45,082
47,734
987
48.36
Vinod M. Khilnani(1)
106,316
96,500
9,816
200
49.08
Christopher J. Murphy III(3)
See Summary Compensation Table
—
—
—
Christopher J. Murphy IV(1)
106,316
96,500
9,816
200
49.08
Timothy K. Ozark(1)
118,316
84
118,232
2,437
48.52
John T. Phair(4)
32,000
32,000
—
—
—
Todd F. Schurz(1)
93,316
71
93,245
1,916
48.67
Mark D. Schwabero(1)
108,316
132
108,184
2,224
48.64
Ronda Shrewsbury(1)
80,816
111
80,705
1,664
48.50
(1) These directors received a portion of their annual fees in the form of shares of stock rather than cash at their election. These shares had the weighted grant date fair values shown in accordance with FASB ASC Topic 718.
(2) There were no stock awards, option awards, non-equity incentive plan compensation, pension or other deferred compensation earnings or other compensation paid to non-employee directors in 2021.
(3) Mr. Murphy received all his fees in cash.
(4) Mr. Phair did not stand for reelection to the Board of Directors at the 2021 Annual Meeting.
EXECUTIVE COMPENSATION AND HUMAN RESOURCES COMMITTEE REPORT
The Executive Compensation and Human Resources Committee has reviewed and discussed the Compensation Discussion & Analysis section of this Proxy Statement with management. In reliance on these reviews and discussions, the Committee recommended to the Board of Directors that the Compensation Discussion & Analysis section be included in this Proxy Statement.
Executive Compensation and Human Resources Committee
Daniel B. Fitzpatrick, Chairman
John F. Affleck-Graves
Vinod M. Khilnani
Timothy K. Ozark
Mark D. Schwabero
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Executive Compensation and Human Resources Committee is or was formerly an officer or employee of the Company. No executive officer of the Company currently serves or in the past year has served as a member of the compensation committee or board of directors of another company of which an executive officer serves on the Executive Compensation and Human Resources Committee. Nor does any executive officer of the Company serve or has in the past year served as a member of the compensation committee of another company of which an executive officer serves as a Director of the Company.
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DELINQUENT SECTION 16(A) REPORTS
The Securities Exchange Act of 1934 requires executive officers, directors and beneficial owners of 10% or more of the issuer’s equity securities to file reports of ownership and changes in ownership of 1st Source Corporation stock with the SEC 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 by such persons during the last fiscal year.
Based solely on a review of the copies of reports furnished to 1st Source by persons known to be 10% beneficial owners of 1st Source, 1st Source believes that all filing requirements were complied with by such persons during the last fiscal year.
PROPOSAL NUMBER 2: RATIFICATION OF THE APPOINTMENT OF BKD LLP AS 1ST SOURCE CORPORATION’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING DECEMBER 31, 2022
The Audit Committee has appointed BKD LLP (BKD) as the independent registered public accounting firm for 1st Source for the fiscal year ending December 31, 2022. The Audit Committee made their decision on a number of factors, including the strength and reputation of the firm and its proposed service team, its expertise in the commercial banking and financial services industries, its legal and regulatory record, its relative cost, its ability to provide research and professional development resources to 1st Source personnel and other factors. The Board of Directors has determined that the appointment will be submitted for ratification by the shareholders. The Board of Directors and the Audit Committee recommend that shareholders ratify the appointment of BKD as the independent registered accounting firm for the Company and its subsidiaries for the fiscal year ending December 31, 2022. If our shareholders do not ratify the appointment, the Audit Committee will investigate the basis for the negative vote and will reconsider its appointment in light of the results of such investigation.
2022 will be the eighth year that BKD will serve as the independent registered public accounting firm for the Company. Representatives of BKD will be present at the Annual Meeting and will be afforded an opportunity to make a statement, if they desire to do so, and to respond to questions from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF BKD LLP AS 1ST SOURCE CORPORATION’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING DECEMBER 31, 2022.
RELATIONSHIP WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The financial statements of 1st Source are audited annually by an independent registered public accounting firm. For the years ended December 31, 2021, 2020, and 2019, the audit was performed by BKD LLP. Fees for professional services provided by BKD LLP for the last three (3) years were as follows:
BKD
BKD
BKD
2021
2020
2019
Audit Fees
$410,400
$397,650
$386,400
Audit-Related Fees(1)
47,400
31,000
18,500
Tax Fees
10,375
10,075
24,285
Other Fees
—
—
—
Total
$468,175
$438,725
$429,185
(1) Amounts billed for employee benefit plan audits and other assurance services performed during the fiscal years indicated.
The Audit Committee Charter requires that the Audit Committee shall pre-approve all audit and non-audit services provided by the independent auditors and that the Audit Committee 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. All fees paid to BKD LLP in 2021 for non-audit services were pre-approved by the Audit Committee.
36
PROPOSALS OF SECURITY HOLDERS
Proposals intended for inclusion in our 2023 proxy statement pursuant to SEC Rule 14a-8 submitted by shareholders for presentation at the next Annual Meeting must be submitted in writing to the Secretary, 1st Source Corporation, on or before November 11, 2022. Proposals not intended for inclusion in our 2023 proxy statement pursuant to the process under Rule 14a-8 must be submitted by shareholders in writing to the Secretary, 1st Source Corporation, on or before January 26, 2023.
ADDITIONAL INFORMATION
Receipt of a favorable vote of a majority of the votes cast in the election of directors at the annual meeting is required for election of directors. Ratification of the appointment of independent auditors requires that the votes cast in favor exceed the votes cast against. The Company knows of no other proposals expected to be presented at the meeting. Such a proposal, if any, would be approved if votes in favor of such proposal exceed those cast against.
The SEC’s rules permit a company to deliver a single proxy statement, annual report, notice of Internet availability of proxy materials or prospectus to an address shared by two or more of its shareholders. This method of delivery is referred to as “householding.” Unless shareholders request otherwise, 1st Source will “household” their proxy statement and annual report, as well as any prospectus or notice of Internet availability of proxy materials, which may be sent to them. Regardless of how many 1st Source shareholders live under one roof, they will receive a single copy of each proxy statement, annual report, notice of Internet availability of proxy materials or prospectus that is being mailed to shareholders. However, 1st Source will continue to deliver to every 1st Source shareholder in a household an individual proxy card in connection with any meeting of its shareholders where votes are being cast.
If a shareholder prefers to receive individual copies of proxy statements, annual reports, notice of Internet availability of proxy materials or prospectuses, the shareholder should write to Chuck Ditto, Trust Operations, 1st Source Corporation, P. O. Box 1602, South Bend, IN 46634. 1st Source will start sending separate documents to a requesting shareholder of record within 30 days of the request.
Beneficial shareholders can request information about householding from their banks, brokers or other holders of record.
Important Notice Regarding The Availability Of Proxy Materials For The Shareholder Meeting To Be Held On April 21, 2022: The Notice of Annual Meeting of Shareholders and Proxy Statement, Annual Report and Proxy Card are available at www.proxyvote.com.
A copy of 1st Source’s Annual Report on Form 10-K is furnished herewith to shareholders for the calendar year ended December 31, 2021, containing financial statements for such year.
