(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/SRCE2021, on April 22, 2021, at 10:00 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 2024.
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, 2021.
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 16, 2021, are entitled to vote at the meeting.
By Order of the Board of Directors,
John B. Griffith
Secretary
South Bend, Indiana
March 12, 2021
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 2021 Annual Meeting of Shareholders of 1st Source Corporation (“1st Source” or “the Company”).
When and where is the Annual Meeting? April 22, 2021, at 10:00 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 2021 Annual Meeting will be held virtually via live webcast at www.virtualshareholdermeeting.com/SRCE2021. 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 9:45 a.m. EDT on April 22, 2021. 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 16, 2021, 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 12, 2021, 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 26,137,168 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 12, 2021.
1
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Beneficial owners of more than 5% of the Common Stock outstanding at February 16, 2021:
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
896,481
5,229,383
3,766,415
766,771
5,229,746
2,899,577
5,996,517
22.94
%
Christopher J. Murphy III (2)(3)
Carmen Murphy (2)(4)
100 North Michigan Street
South Bend, IN 46601
1,215,272
—
—
1,215,272
46,806
—
4,411,985
16.88
%
680,044
—
—
680,044
2,516,669
4,411,985
16.88
%
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
5.78
%
Stanley C. Carmichael (2)(6) 1510 71st St. Fennville, MI 49408
22,264
—
—
22,264
646,665
—
668,929
2.56
%
Ernistine C. Nickle (2)(6) 560 Sea Oak Drive Vero Beach, FL 32963
120,447
—
—
120,447
679,789
—
800,236
3.06
%
Dimensional Fund Advisors LP (7)
Palisades West, Building One,
6300 Bee Cave Road
Austin, Texas, 78746
1,774,263
—
—
1,843,367
—
—
1,843,367
7.05
%
(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 5,229,383 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 818,525 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
2,469,863
Mr. O.C. Carmichael III
1,448,066
Ms. Nickle
664,789
Mr. S.C. Carmichael
646,665
Total
5,229,383
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) 528,421 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) 57,717 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, 680,044 shares for which Ms. Murphy has sole voting and dispositive power and 2,469,863 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) 95,444 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 2,469,863 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, 1,215,272 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 1, 2021. Shares reported as owned by Ms. Nickle include 37,922 shares held directly by Andrew Nickle, Ms. Nickle’s spouse.
(7)As reported in Form 13G filed February 12, 2021, Dimensional Fund Advisors LP, in its role as investment advisor for various clients, had 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 2021 Annual Meeting, four directors are to be elected for terms expiring in 2024 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. John T. Phair is not standing for re-election to the Board of Directors. James R. Seitz is retiring as Vice Chairman of the Board of 1st Source Bank coincident with the 2021 Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE ELECTION OF EACH NOMINEE.
Two nominees are incumbent directors and the Board has determined that each of these nominees’ continued service is in the best interest of the Corporation. The Board has also determined that all directors and the new director nominees 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
Beneficial Ownership of Equity Securities(2)
Name
Age
Principal Occupation(1)
Year in Which Directorship Assumed
Common Stock
% of Class
Terms Expiring in April, 2024
Tracy D. Graham
47
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 Chair of the Compensation Committee, LCI Industries
—
7,328
«
●
25 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.
●
Currently serves on the boards of 1st Source Bank, Lippert, the Horton Group, Beacon Health System, Davenport University, and the Regional Development Authority of Northern Indiana’s Diversity and Inclusion Committee.
●
Bachelor of Arts in Sociology from the University of Notre Dame and attended the Indiana University Graduate School of Education.
Ronda Shrewsbury Weybright
55
President and Chief Executive Officer, RealAmerica, LLC (real estate development and property management)
—
75
«
●
Over 30 years of experience in multifamily, commercial, land and office development serving as President of RealAmerica Companies for 26 years. As the sole owner and founder, Ms. Weybright 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. Weybright 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.
Terms Expiring in April, 2021 (April, 2024 if reelected)
Melody Birmingham
49
Senior Vice President and Chief Procurement Officer, Duke Energy (electric distribution); prior thereto, President, Duke Energy Indiana (electric utility) and Senior Vice President, Midwest Delivery Operations, Duke Energy (electric distribution)
2018
4,508
«
●
26 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 and project management 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.
4
Beneficial Ownership of Equity Securities(2)
Name
Age
Principal Occupation(1)
Year in Which Directorship Assumed
Common Stock
% of Class
Mark D. Schwabero
68
Retired Chairman, Chief Executive Officer and Director, Brunswick Corporation (2018); prior thereto, President and Chief Operating Officer, Brunswick Corporation; Director, Methode Electronics, Inc.
2004
14,707
«
●
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 these 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 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.
OTHER INCUMBENT DIRECTORS
Terms Expiring in April, 2022
John F. Affleck-Graves
69
Chaired Professor of Finance, University of Notre Dame; Director, Hi-Crush Inc.; prior thereto, Executive Vice President and Chief Financial Officer, University of Notre Dame
2019
6,424
«
●
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.
●
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.
5
Beneficial Ownership of Equity Securities(2)
Name
Age
Principal Occupation(1)
Year in Which Directorship Assumed
Common Stock
% of Class
Daniel B. Fitzpatrick
63
Chairman and Chief Executive Officer, Quality Dining, Inc. (quick service and casual dining restaurant operator)
1995
37,415
«
●
39 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 seven 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.
Christopher J. Murphy IV(3)
51
Owner and Chief Executive Officer, Catharsis Productions, LLC (training programs)
2011
144,238
«
●
21 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 the non-profit organization Interaction.
●
B.A. in Liberal Studies, Communications and Theatre and an M.B.A. from the University of Notre Dame.
Terms Expiring in April, 2023
Vinod M. Khilnani
68
Chairman of the Board, Chair of the Governance and Organization and Executive Committees and member of the Compensation Committee, Materion Corporation; Director, Chairman of the Human Resources & Compensation Committee and member of the Audit & Finance Committee, Esco Technologies, Inc. and Director, Chairman of the Nominating and Corporate Governance Committee and member of the Compensation Committee, Gibraltar Industries, Inc.
2013
12,016
«
●
41 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.
6
Beneficial Ownership of Equity Securities(2)
Name
Age
Principal Occupation(1)
Year in Which Directorship Assumed
Common Stock
% of Class
Christopher J. Murphy III(4)
74
Chairman of the Board, President and Chief Executive Officer, 1st Source and Chairman of the Board and Chief Executive Officer, 1st Source Bank
1972
4,411,985
16.88%
●
Over 48 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 48 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.
Timothy K. Ozark
71
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)
1999
36,532
«
●
41 years of financial experience, including 29 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 Lead Director.
●
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.
7
Beneficial Ownership of Equity Securities(2)
Name
Age
Principal Occupation(1)
Year in Which Directorship Assumed
Common Stock
% of Class
Todd F. Schurz
60
President and Chief Executive Officer, Schurz Communications, Inc. (communications, broadband and cloud services)
2020
1,756
«
●
30 years of financial experience, including 13 years as President and Chief Executive Officer and 2 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.
Executive Officers of the Company (Non-Directors)
Jeffrey L. Buhr
61
Executive Vice President and Chief Credit Officer, 1st Source Bank (since 2014); prior thereto, Senior Vice President and Chief Credit Officer, 1st Source Bank
63,462
«
John B. Griffith
63
Executive Vice President, Chief Administrative Officer, Secretary and General Counsel, 1st Source Corporation and 1st Source Bank (since 2011)
61,075
«
Andrea G. Short
58
Executive Vice President, Treasurer and Chief Financial Officer, 1st Source Corporation and President, Treasurer and Chief Financial Officer, 1st Source Bank (since 2020); prior thereto, Executive Vice President, Treasurer and Chief Financial Officer, 1st Source Corporation and 1st Source Bank (since 2013)
67,565
«
All Directors and Executive Officers as a Group (14 persons)
4,869,086
18.63%
« 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 16, 2021.
(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 2020. Such transactions were in compliance with applicable federal and state laws and regulations. Additional transactions are expected to take place in the ordinary course of business in the future. All outstanding loans and commitments were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with 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.
8
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 2020, 1st Source Bank paid an aggregate of $118,023 for services provided by Aunalytics and $222,114 for services provided by DRNI.
Mr. Murphy is a Director of Aunalytics representing 1st Source’s interests. Mr. Affleck-Graves also is a director of Aunalytics. 1st Source Bank director and Company director nominee Tracy Graham is a principal in Aunalytics and DRNI and is Aunalytics’ CEO.
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 eight of the ten current members of the Board are independent directors: Mr. Affleck-Graves, Ms. Birmingham, Mr. Fitzpatrick, Mr. Khilnani, Mr. Ozark, Mr. Phair, Mr. Schurz and Mr. Schwabero. The Board has also determined that director nominees Mr. Graham and Ms. Weybright will be independent directors 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
X
Melody Birmingham
Yes
X
X
Daniel B. Fitzpatrick
Yes
Chair
X
X
X
X
Tracy D. Graham(2)
No
Chair
Vinod M. Khilnani
Yes
X
X
Chair
X
X
Christopher J. Murphy III
No
X
X
Christopher J. Murphy IV
No
X
X
Timothy K. Ozark
Yes
X
Chair
X
X
X
John T. Phair
Yes
X
X
X
X
Chair
Todd F. Schurz
Yes
X
X
Mark D. Schwabero
Yes
X
X
X
Chair
X
James R. Seitz(2)
No
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) Mr. Graham and Mr. Seitz are directors of 1st Source Bank.
Functions and 2020 meetings for each committee are as follows:
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Committee
Functions
2020 Meetings
Executive(1)
●
Act for the Board of Directors between meetings subject to certain statutory limitations.
2
●
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 personnel, review performance of the Chief Executive Officer and oversee the Company’s stock and other incentive compensation plans.
6
●
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. Ozark, 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 2020.
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 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, we believe 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 believe 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 we did yesterday.
Here are some of the ways we endeavor to address the environmental, social and governance issues for the benefit of our stakeholders:
Our People — As a service-oriented business, our long-term success depends on our people. And as the Company grows, the importance of our talent strategy has only intensified. For those reasons, we are committed to taking a multi-dimensional approach to talent and culture.
•Diversity, Equity and Inclusion — In 2020, Forbes Magazine recognized the Company as one of America’s best employers for both diversity and veterans. While we appreciate such recognition, we know we can do better. At 1st Source, we are committed to cultivating and advancing diversity in all forms as well as building a strong culture – one in which inclusion and belonging are paramount, 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. Our culture is rooted in our guiding principles, which you can read more about on our website at www.1stsource.com.
•Oversight of Our Progress — Transparency and accountability 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 of consistent leadership on our Board of female and diverse directors. With our workforce, we track and monitor voluntarily disclosed diversity data to review hiring, promotion and attrition at the firm, 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:
–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 known.
–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. In order 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.
•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 skills 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.
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–1st Source Mastery Programs provide a deep dive into specific roles in order 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.
–The Banking Apprentice Program attracts locally embedded diverse high school graduates and rising seniors to work for the Bank and experience the pride and fulfillment to be found in serving others.
–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.
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.
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 157 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 first priority is to deliver outstanding service to all of our clients without compromising the safe and sound operation of the Bank.
•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 show they have a positive lasting impact on our communities.
•We have an extensive and active financial wellness program designed to support employees of our business clients and the unbanked and underbanked throughout our communities.
•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 Bank 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 recognize we are committed to and accountable for performance under the Community Reinvestment Act (CRA) but, more importantly, we are accountable to our clients and the people who live and work in our markets. If they are successful, so are we.
12
•In 2020, 1st Source Bank and 1st Source Foundation donated more than $2 million to non-profit organizations in our communities. Donations included $600,000 early in the year to the local United Way chapters across our region for support of those organizations serving individuals and families most impacted by COVID-19. That was followed by a contribution later in the year of $320,000 to healthcare networks and facilities across northern Indiana and southwestern Michigan to thank frontline health care workers most exposed to COVID-19 for their tireless work and commitment to the safety of our communities. Additionally, our colleagues, in spite of being “sheltered in place,” 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 2020, 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.
We have particularly focused on solar energy projects and, since developing the line of business four years ago, we have invested $84 million and provided debt financing in 32 solar projects across 12 states with current loan and lease outstandings of $293 million. We estimate the aggregate power capacity of these projects avoids 204,230 metric tons of carbon greenhouse emissions or 225 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 one or multiple solar arrays that are interconnected with the local utility grid. 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. These forms of “Community Solar” are a strategic focus for our energy portfolio. 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 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. 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 Bank’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 participated in the Financial Services Sector Coordinating Council’s pioneering 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 AOC is available upon request.
Meetings of the Board of Directors and Directors’ Compensation — The Board of Directors held 8 meetings in 2020. 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:
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Meeting Fees
July 18, 2019 to December 31, 2019
January 1, 2020 to December 31, 2020
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
$48,926
$47,038
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 2020 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.
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 21, 2022. 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/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;
•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;
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•Since its inception in 1971 the Company has maintained both ethnic and gender diversity among its Board members and that of its Bank subsidiary. The Company is proud of this heritage and will continue to pursue diversity in the selection of qualified individuals representing the markets and constituencies it serves;
•Whether the nominee is under the age of 72; and
•Such other factors the Committee deems relevant.
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.
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, 2020, for filing with the SEC.
Audit Committee
Vinod M. Khilnani, Chairman
John F. Affleck-Graves
Melody Birmingham
Daniel B. Fitzpatrick
Timothy K. Ozark
John T. Phair
Todd F. Schurz
Mark D. Schwabero
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:
•Determine compensation for Named Executive Officers (the executives required by SEC rules to be named in this proxy statement, or “NEOs”) and review and approve recommendations of executive management for other senior management personnel;
•Review performance 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;
•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 Executive Compensation and Human Resources Committee determines the compensation for NEOs and reviews and either adjusts or approves it for other senior management personnel based on executive management’s recommendations after reviewing the Company’s performance against its annual operating plan and its intermediate and long-term tactical and strategic plans. 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 December 2015 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.
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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 2020 performance during early 2021. The Company met many of its quantitative and qualitative objectives for 2020 despite the impact of the COVID-19 pandemic on its operations. Highlights included:
•The Company achieved net income of $81.44 million in 2020. This was a 11.44% decrease from 2019 but was the third highest achieved in the company’s history.
•The Company earned $3.17 per share which was a 11.20% decrease from 2019.
•The Company continued 33 years of dividend increases.
•The Company achieved a return on average assets of 1.14%. This placed it in the top third 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 to $5.46 billion, a 9.27% growth over the prior year, and increased its year-end loans outstanding to $5.49 billion, a 7.94% growth over 2019.
•The Company had net loan losses of 0.17% of average net loans and leases outstanding.
•The Company ended the year with a respectable nonperforming assets ratio of 1.16% and a reserve for loan and lease losses of 2.56%.
•The Company continued to exceed the minimum regulatory requirements for Well Capitalized banks.
•The Company was one of 15 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 2 banking centers (1 new and 1 rebuilt) largely on time and on budget.
•The Company maintained its #1 deposit share in its 16 contiguous county market.
•The Company continued development of succession management in a variety of positions.
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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
National C&I Peers
Location
1st Source Corporation*
South Bend, IN
1st Source Corporation*
South Bend, IN
Community Trust Bancorp, Inc*
Pikeville, KY
Amarillo National Bancorp, Inc
Amarillo, TX
Enterprise Financial Group*
Clayton, MO
BancFirst Corporation*
Oklahoma City, OK
First Busey Corporation*
Urbana, IL
CNB Financial Corporation*
Clearfield, PA
First Commonwealth Financial Corp*
Indiana, PA
Columbia Banking System, Inc*
Tacoma, WA
First Defiance Financial Corporation*
Defiance, OH
Cullen/Frost Bankers, Inc*
San Antonio, TX
First Financial Bancorp*
Cincinnati, OH
Discount Bancorp, Inc
New York, NY
First Financial Corporation*
Terre Haute, IN
Hancock Holding Company*
Gulfport, MS
First Merchants Corporation*
Muncie, IN
Heartland Financial*
Dubuque, IA
First Midwest Bancorp, Inc*
Itasca, IL
Mercantile Bank Corporation*
Grand Rapids, MI
German American Bancorp, Inc*
Jasper, IN
Pinnacle Financial Partners*
Nashville, TN
Horizon Bancorp*
Michigan City, IN
S&T Bancorp*
Indiana, PA
Intrust Financial Corporation
Wichita, KS
Sterling Bancorp*
Montebello, NY
Johnson Financial Group, Inc
Racine, WI
Stock Yards Bancorp, Inc*
Louisville, KY
Lakeland Financial Corporation*
Warsaw, IN
Texas Capital Bancshares, Inc*
Dallas, TX
Merchants Bancorp*
Carmel, IN
UMB Financial Corporation*
Kansas City, MO
MidWest One Financial Group, Inc.*
Iowa City, IA
Univest Corporation of Pennsylvania*
Souderton, PA
Old National Bancorp*
Evansville, IN
Western Alliance Bancorporation*
Phoenix, AZ
Park National Corporation*
Newark, OH
Wintrust Financial Corporation*
Lake Forest, IL
Republic Bancorp, Inc*
Louisville, KY
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 2020 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 or average as indicated 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 2020 YTD Median
National Commercial & Industrial Concentration Peer Group (20 members) Sept 2020 YTD Median
National $3 to $10 Billion Assets Peer Group
(142 members)
Sept 2020 YTD
Average(1)
1st Source Sept 2020 YTD
1st Source Dec 2020 YTD
Return on average total assets
1.05% 10
0.85% 4
0.88% 49
1.05%
1.14%
Return on average common equity
8.63% 11
7.31% 7
8.40% 70
8.52%
9.41%
Net income growth
(10.64%) 14
(28.53%) 8
(12.98%) 88
(21.49%)
(11.44%)
EPS Growth
(12.91%) 12 of 18
(31.34%) 7 of 18
(1.55%) 58 of 90
(21.32%)
(11.20%)
Net interest margin on a tax-equivalent basis
3.35% 12
3.25% 8
3.18% 64
3.33%
3.39%
Net charge-offs to average net loans and leases outstanding
0.11% 12
0.16% 8
0.10% 104
0.13%
0.17%
Nonaccrual loans and leases, restructured loans and other real estate to loans and leases and other real estate(2)
0.79% 17
0.64% 18
0.71% 106
1.26%
1.11%
Allowance for loan and lease losses to net loans and leases outstanding
1.37% 1
1.45% 1
1.29% 2
2.43%
2.56%
Noninterest income to average assets (3)
1.06% 6
0.96% 7
0.95% 44
1.17%
1.15%
Noninterest expense to average assets (3)
2.38% 9
2.35% 10
2.45% 64
2.34%
2.35%
Efficiency ratio (3)
56.68% 6
58.14% 6
59.05% 35
54.53%
54.20%
(1) As reported in 1st Source’s September 2020 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, 2015, 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 34 banking companies in Illinois, Indiana, Michigan, Ohio, and Wisconsin. The following company included in this peer group in last year’s proxy statement has not been included this year, due to being acquired during 2020: MutualFirst Financial, Inc.
NOTE: Total return assumes reinvestment of dividends.
Compensation Consultants
As noted above, the Committee engaged Blanchard Consulting Group in late 2015 after interviewing a number of compensation consulting firms. 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 $2 and $12 billion as of September 30, 2015, and headquartered in Iowa, Illinois, Indiana, Kentucky, Michigan, Missouri, Ohio, or Pennsylvania;
◦Blanchard’s internal database of publicly traded banking companies with assets between $2 billion and $10 billion as of year-end 2014;
◦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 participated in McLagan’s Equipment & Finance Compensation Survey in 2019. The survey included over 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 2018. 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 2020 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 Mayer, Compdata Surveys, Salaries.com, Blanchard and McLagan. As noted, in late 2015, 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 2020 and awarded incentive compensation for 2020 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 2020 performance and the Company’s performance against its annual profit plan and using the salary performance grid approved by the Committee for 2021, the Committee granted Mr. Murphy a 2% increase in base salary.
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 2020, the partnership level percentage of the NEOs was 15% of base salary for Mr. Murphy, 10% of base salary for Ms. Short and Messrs. Griffith and Seitz, and 8% of base salary for Mr. Buhr. The “base bonus” for each NEO participant is equal to the participant’s base salary 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 performance and had extensive discussions regarding the appropriate adjustments that should be made for EIP award calculational purposes in its last three 2020 meetings. The Committee chose to use the Company’s reported net income of $81.44 million as the starting metric adjusted by 75% of the excess of the provision for credit losses over its planned amount for the year (net of related income tax effects) to calculate the Company Performance Factor. This approach charged 2020’s Corporate Performance Factor calculation with some of the costs of the COVID-19 pandemic generated losses but not for additional provisions for future losses. The Committee believed this to be the fairest approach and also agreed to apply it to similar net income-based and balance sheet-based corporate-level performance metrics used for EIP goals and to the calculation for the earnout of prior period EIP awards.
For 2020, the adjusted net income metric for EIP calculational purposes of $94.22 million was approximately 0.10% under budget resulting in a negative adjustment of 0.26% for the Company Performance Factor. Thus, the Company Performance Factor for 2020 was 99.74%.
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 2020 included a combination of the following depending upon the NEO’s role and responsibilities:
Objective
Minimum
Target
Maximum
Actual
Net income(1)
$91,955
$94,313
$98,085
$94,215
Return on assets(1)
1.16%
1.36%
1.56%
1.32%
Exceed median ROA results for $3 to $10 billion peers
57 of 97
49 of 97
32 of 97
28 of 97
Return on common equity(1)
10.46%
11.01%
11.45%
10.89%
Revenue growth
1.22%
2.43%
4.25%
2.83%
Expense to revenue ratio
56.60%
55.49%
53.83%
54.20%
Loan growth
2.67%
5.33%
7.73%
9.27%
Core deposit growth(2)
2.30%
4.60%
6.67%
9.60%
Year-end nonperforming assets
1.40%
1.00%
0.35%
1.16%
Net charge offs and other credit-related losses to average loans, leases, repossessed assets and other real estate
0.38%
0.15%
0.08%
0.18%
Electronic product growth
50% of Target
Target
150% of Target
91% of Target
Net new primary relationships
87% of Target
Target
125% of Target
28% of Target
(1) Actual amounts computed using Company Performance Factor approach described above.
(2) Actual amount computed excluding 50% of Paycheck Protection Program average loans (assuming impact on core deposit balances).
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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)
Ms. Short(2)
Mr. Griffith
Mr. Buhr
Corporate Financial Performance Goals
Net income
15%
10%
10%
10%
5%
Return on assets
10%
—
10%
10%
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%
20%
—
Revenue growth
5%
5%
5%
5%
5%
Loan growth
—
10%
—
6%
12%
Core deposit growth
—
15%
—
6%
—
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%
19%
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 Mr. Seitz and 50% of Ms. Short’s calculation.
(2) These goals and weightings were used for 50% of Ms. Short’s calculation.
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 2020, Mr. Murphy received the award as computed based upon quantitative factors. Messrs. Murphy, Seitz, and 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 50% weighted President calculation and as part of staff management personnel for purposes of her 50% original 2020 CFO responsibilities calculation. Mr. Griffith was scored as part of staff management personnel. Mr. Seitz received a 50% prorated award for 2020 due to his transition from President to 1st Source Bank Vice Chairman during the year.
▪Annual cash awards: These are paid following the Committee’s approval of the awards. For the NEOs, the Committee approved cash awards for 2020 performance as follows:
Mr. Murphy
$235,250
Mr. Griffith
$73,350
Mr. Seitz
$38,725
Mr. Buhr
$55,300
Ms. Short
$71,500
These amounts are shown on the 2020 lines of the “Non-Equity Incentive Compensation Plan” column of the Summary Compensation Table below.
23
▪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 2020, the Committee chose a 3% EPS growth requirement or a 1.10% annual return on assets as alternative performance hurdles for releasing the forfeiture restrictions on the awards of book value stock approved for 2020 performance. 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.
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 2020 performance were made in calendar year 2021. As required by SEC rules, the 2020 stock award amounts for the NEOs will be shown in next year’s proxy statement on the 2021 lines under the Stock Awards column of the Summary Compensation Table. The annual book value stock awards for 2019 (made in 2020) are shown on the 2020 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 included the following:
Weighting
Minimum
Target
Maximum
Return on assets
15%
88% of Target
Target
112% of Target
Expense to revenue ratio
15%
104% of Target
Target
96% of Target
Net interest margin
10%
96% of Target
Target
106% 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
15%
200% of Target
Target
75% of Target
Growth in net new primary checking accounts
30%
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
%
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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, Griffith and Seitz were participants in the SDIP for 2020.
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. At the beginning of each calendar year, 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 later than ninety (90) days after the beginning of the calendar year or by such other date as may be permitted under Section 162(m) of the Internal Revenue Code of 1986 and regulations thereunder. 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 2020. All awards are subject to the Company achieving a minimum net income of $57 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%
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For 2020, the goals and weightings were as follows:
Weighting
1. Achieve green on the Company’s Health and Financial Index for the Internal Financial Indicators for the year vs. yellow or red.
20%
While external health indicators were in the “red” (higher risk) range for most months, the Company was able to maintain its Financial Indicators in the “green” or positive performance range.
The three indicators for Stage 1 actions were:
a)Monthly net income down by 10% for two consecutive months compared to the prior year
b)Monthly non-interest income down by 10% consecutively for two months vs. prior year
c)Cash flow down 10% for two consecutive months
Indices for Stage 2 and Stage 3 were reductions of 20% and 30%
Performance: The Company was in the green or positive performance range for every month with its Financial Indicators but did implement many of the Stage 1 actions. The Government’s response helped immensely. The Company’s ability to organize and optimize its efforts with PPP helped with clients and improved the Company’s financial performance.
2. Delivering to the Company’s clients on its service commitment.
20%
The Company’s COVID-19 actions to successfully put in place protocols to ensure client and employee safety while also delivering transactional services, doing 3,540 PPP loans, originating and funding record numbers of home mortgage loans, and processing tens of thousands of stimulus checks all point to success in providing good client service.
3. Keeping the Company’s colleagues safe.
20%
The Company achieved its goal of keeping people safe by moving people around, sending high risk colleagues home to work if they could, and reinforcing over and over again the importance of following the protocols the Company put in place to ensure everyone’s safety. Generally these protocols had minimal negative impact on the availability and efficiency of the Company’s operations as there was little or no spread of COVID-19 among its colleagues.
4. Continuing to take and play a leadership role in the community.
20%
a) At the opening of the COVID-19 pandemic, Mr. Murphy (the CEO) did a video for employees, one for clients, and one for the community at large reinforcing the importance of following the CDC guidelines. This message was repeated numerous times. The CEO also did an op-ed piece for the newspapers in the Company’s markets and reached out to the community in other ways encouraging people to follow these guidelines.
b) To help address the pandemic challenges faced by most of the medical and health care, social service, economic development, education and other nonprofit organizations serving our communities, the Company continued to support such organizations throughout 2020 with aggregate donations of approximately $422,000 made to numerous such organizations.
c) In addition, the Company counseled and partnered with the 1st Source Foundation and the local United Ways to identify organizations doing the most to help those impacted by COVID 19 and later with the 1st Source Foundation and major health care providers to recognize and thank those front-line healthcare workers and first responders for their heroic service across northern Indiana and southwestern Michigan. The Foundation responded with aggregate donations in 2020 of $920,000 to such organizations and healthcare providers.
d) In spite of the COVID-19 pandemic and local shelter-in-place restrictions, the Company’s colleagues contributed 12,000 plus hours of volunteer service to numerous non-profit organizations serving our communities. These are the organizations that provide critical services and ensure a safety net for those most disadvantaged and also help create an environment for economic development and cultural engagement that collectively and immeasurably improve the quality of life for those who live, work, raise families and build businesses in the communities we serve.
e) The CEO led a special effort to raise funds for the local Boys and Girls Club to fund programs for the most at-risk and underrepresented students who were being left behind by the closing of schools and their inability to access technology for on-line classes.
f) After the tragic events surrounding the death of George Floyd, the CEO addressed the issue of diversity and inclusion in the Company and its embedded values. In particular, he stressed that the Company believes in the dignity of every human being and that all people should be treated with deep respect and that it is here to serve!
g) At the close of the year, the CEO and his wife did a Holiday video extending thanks to the Company’s colleagues. He also did one for the Company’s clients and the community, reinforcing our commitment to serve and the importance of working together to defeat COVID-19 and to support our local businesses.
5. Making Paycheck Protection Program loans easy for the Company’s clients with the majority being able to have the loans forgiven by the government.
20%
During the year, once PPP was offered, the Company processed and funded over 3,540 loan applications for $597 million. By the end of the year, the Company had processed and received forgiveness for 1,672 loans to our clients of $236 million. Another 375 had been submitted to the SBA for $121 million. Only 897 had not started the forgiveness process with us.
Total weighting using metrics set at the beginning of the year
100%
6. 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.
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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 33 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 million. The Committee also had extensive discussions regarding the appropriate net income that should be used for SDIP award calculation purposes in its last three 2020 meetings. 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 $81.44 million adjusted by 75% of the excess of the provision for credit losses over its planned amount for the year (net of related income tax effects) to calculate the Company Performance Factor. This approach charged 2020’s Corporate Performance Factor calculation with some of the costs of the COVID-19 pandemic generated provision for losses but not for additional provisions for future losses. The Committee believed this to be the fairest approach and accordingly used the adjusted net income metric of $94.22 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 2020 participants, the Committee approved cash awards for 2020 performance as follows:
Mr. Murphy
$252,500
Ms. Short
$130,300
Mr. Griffith
$81,400
Mr. Buhr
$89,600
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 2018 or 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. The Committee made this award in recognition of Ms. Short’s increased responsibilities and past performance, as a retention incentive, and to tie her long-term financial incentives more closely to that of the Company’s shareholders. The Committee made the award after reviewing Ms. Short’s total compensation at the time of her promotion.
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.
27
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.
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, and Mr. Buhr. 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, and Mr. Buhr 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, 2020, Mr. Murphy, Ms. Short, Mr. Griffith, and Mr. Buhr would receive $2.39 million, $360,000, $375,000, and $330,000, respectively under the agreements.
The employment agreements also provide for severance payments in the event Mr. Murphy, Mr. Seitz, Ms. Short, Mr. Griffith, or Mr. Buhr 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 $1,000,000 the deductible compensation per year for each of the NEOs, subject to certain exceptions (some of which changed in 2018). In developing and implementing executive compensation policies and programs, the Executive Compensation and Human Resources Committee considers whether particular payments and awards are deductible for federal income tax purposes, along with other relevant factors. The Executive Compensation and Human Resources Committee has taken what it believes to be appropriate steps to maximize the deductibility of executive compensation. It is the general intention of the Executive Compensation and Human Resources Committee to meet the requirements for deductibility whenever possible. The Executive Compensation and Human Resources Committee will continue to review and monitor the deductibility of compensation.
28
SUMMARY COMPENSATION TABLE
The following table provides information regarding compensation earned by the Company’s Chief Executive Officer, Chief Financial Officer, and the three other executive officers employed at the end of 2020 who were the most highly compensated in 2020 among the major policy-making executives of the Company.
Name and Principal Position
Year
Salary($)(1)
Stock Awards ($)(2)
Non-Equity Incentive Plan Compensation($)
All Other Compensation($)(3)
Total(6)
Christopher J. Murphy III
2020
$822,461
$888,361
$487,750
$122,754
$2,321,326
Chairman of the Board, President and
2019
770,942
235,258
636,109
126,843
1,769,152
Chief Executive Officer
2018
746,154
288,025
515,050
120,584
1,669,813
James R. Seitz
2020
242,179
245,021
38,725
88,263
614,188
Vice Chairman of the Board
2019
363,077
75,604
208,857
89,249
736,787
1st Source Bank
2018
353,077
73,460
215,300
79,605
721,442
Andrea G. Short
2020
363,908
581,897
201,870
48,859
1,196,534
Executive Vice President, Treasurer and
2019
333,077
65,169
207,007
40,357
645,610
Chief Financial Officer
2018
320,385
69,555
204,850
38,911
633,701
John B. Griffith
2020
387,500
188,981
155,671
43,185
775,337
Executive Vice President, Chief Administrative
2019
369,808
58,371
168,980
40,605
637,764
Officer, General Counsel and Secretary
2018
352,500
77,920
149,570
39,291
619,281
Jeffrey L. Buhr
2020
340,385
172,547
144,900
38,910
696,742
Executive Vice President and Chief Credit
2019
316,462
56,213
162,509
36,417
571,601
Officer, 1st Source Bank
2018
308,077
48,170
146,500
34,516
537,263
(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)
Value of Life Insurance Benefits
Other
Total
Mr. Murphy
$25,210
$43,399
$47,038
«
$7,107
$
—
$122,754
Mr. Seitz(5)
25,210
12,106
47,038
«
3,909
—
88,263
Ms. Short
25,210
20,192
—
«
3,457
—
48,859
Mr. Griffith
25,210
10,230
—
«
7,745
—
43,185
Mr. Buhr
25,210
8,905
—
«
4,795
—
38,910
«
Not included - total of perquisites and benefits is less than $10,000
(4)
Mr. Murphy reimbursed the Company $5,000 in each year shown for miscellaneous incalculable personal benefits. This amount has not been deducted in computing the disclosable perquisites above.
(5)
Mr. Seitz serves on the 1st Source Bank Board of Directors and receives the fees shown for his services.
(6)
There were no bonus awards, option awards or changes in pension value and non-qualified deferred compensation earnings for the named executive officers in 2020, 2019 or 2018.
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2020 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
2/12/20(1)
—
8,590
—
$278,917
2/12/20(2)
—
12,790
—
$609,444
James R. Seitz
2/12/20(1)
—
2,310
—
75,006
2/12/20(2)
—
3,568
—
170,015
Andrea G. Short
2/12/20(1)
—
2,250
—
73,058
2/12/20(2)
—
2,779
—
132,419
6/17/20(3)
—
11,000
—
376,420
John B. Griffith
2/12/20(1)
—
1,921
—
62,375
2/12/20(2)
—
2,657
—
126,606
Jeffrey L. Buhr
2/12/20(1)
—
1,996
—
64,810
2/12/20(2)
—
2,261
—
107,737
Note: There were no non-equity incentive plan awards with future payouts made during 2020. Also, there were no other stock awards or option awards made during 2020.
(1)
Annual Executive Incentive Plan award for 2019 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)
Long-term Executive Incentive Plan shares awarded for 2017 - 2019 performance subject to forfeiture over a five-year period based on the executive remaining with the Company and the continued financial performance of the Company.
(3)
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. Murphy’s agreement provides for a $795,000 base salary at January 1, 2021, 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 three agreements, Ms. Short, Mr. Griffith, and Mr. Buhr receive base salaries of $360,000, $375,000, and $330,000 respectively, at January 1, 2021, 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, 2023. Ms. Short’s, Mr. Griffith’s, and Mr. Buhr’s agreements expire on December 31, 2021. 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% and 45% of this amount at ages 65 and 70, 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 2020 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 2020 Compensation Decisions.”
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Outstanding Equity Awards At Fiscal Year-End 2020
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
25,286
$883,240
Market Value Shares
16,002
$644,881
James R. Seitz
Book Value Shares
7,060
246,606
Market Value Shares
4,442
179,013
Andrea G. Short
Book Value Shares
6,442
225,019
Market Value Shares
17,674
712,262
John B. Griffith
Book Value Shares
6,250
218,313
Market Value Shares
3,333
134,320
Jeffrey L. Buhr
Book Value Shares
5,578
194,840
Market Value Shares
2,858
115,177
(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
12/2020 - 12/2024
12/2020 - 12/2024
Mr. Seitz
12/2020 - 12/2024
12/2020 - 12/2024
Ms. Short
12/2020 - 12/2024
12/2020 - 7/2025
Mr. Griffith
12/2020 - 12/2024
12/2020 - 12/2024
Mr. Buhr
12/2020 - 12/2024
12/2020 - 12/2024
Note: Shares vesting based on calendar year results (e.g., 12/2020 above is based on 2020 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, 2020.
Option Exercises And Stock Vested — 2020
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
8,544
1,606
$360,743
James R. Seitz
2,366
438
99,547
Andrea G. Short
2,011
1,397
137,774
John B. Griffith
2,173
339
88,145
Jeffrey L. Buhr
1,796
298
73,776
(1)
The named executive officers did not exercise any stock option awards during 2020.
(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 2020 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)
$2,321,326
Median annual total compensation of all employees (excluding Mr. Murphy)(2) (B)
$60,225
Ratio of (A) to (B)
38.5 to 1
(1) From Summary Compensation Table
(2) Median employee selected from all employees as of December 31, 2020, on basis of annual total compensation reported for tax purposes. Compensation was annualized for all employees not employed for the full year of 2020. 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 – 2020
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)
$108,038
$78
$107,960
3,062
$35.26
Melody Birmingham(1)
103,538
69
103,469
2,936
35.24
Daniel B. Fitzpatrick(1)
104,538
54,533
50,005
1,421
35.19
Vinod M. Khilnani(1)
125,538
118,500
7,038
200
35.19
Rex Martin(1)(3)
76,538
29,524
47,014
1,336
35.19
Christopher J. Murphy III(4)
See Summary Compensation Table
—
—
—
Christopher J. Murphy IV(1)
109,538
102,500
7,038
200
35.19
Timothy K. Ozark(1)
133,038
117
132,921
3,763
35.32
John T. Phair(1)
132,038
75,030
57,008
1,620
35.19
Todd F. Schurz
62,538
84
62,454
1,756
35.57
Mark D. Schwabero(1)
112,038
35,013
77,025
2,161
35.64
(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 2020.
(3) Mr. Martin resigned from his position on the Board on June 29, 2020.
(4) Mr. Murphy received all his fees in cash.
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
Mark D. Schwabero, Chairman
Daniel B. Fitzpatrick
Vinod M. Khilnani
Timothy K. Ozark
John T. Phair
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, 2021
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, 2021. 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, 2021. 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.
2021 will be the seventh 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, 2021.
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, 2020, 2019, and 2018, 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
2020
2019
2018
Audit Fees
$397,650
$386,400
$375,450
Audit-Related Fees(1)
31,000
18,500
18,000
Tax Fees
10,075
24,285
25,910
Other Fees
—
—
—
Total
$438,725
$429,185
$419,360
(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 2020 for non-audit services were pre-approved by the Audit Committee.
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PROPOSALS OF SECURITY HOLDERS
Proposals intended for inclusion in our 2022 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 12, 2021. Proposals not intended for inclusion in our 2022 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, 2022.
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 22, 2021: 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, 2020, containing financial statements for such year.
