Stock Based Compensation

As of December 31, 2015, the Company had four active stock-based employee compensation plans. These plans include three executive stock award plans, the Executive Incentive Plan (EIP), the Restricted Stock Award Plan (RSAP), the Strategic Deployment Incentive Plan (SDP) - formerly known as the 1998 Performance Compensation Plan; and the Employee Stock Purchase Plan (ESPP). The 2011 Stock Option Plan was approved by the shareholders on April 21, 2011 but the Company had not made any grants through December 31, 2015. These stock-based employee compensation plans were established to help retain and motivate key employees. All of the plans have been approved by the shareholders of 1st Source Corporation. The Executive Compensation and Human Resources Committee (the “Committee”) of the 1st Source Corporation Board of Directors has sole authority to select the employees, establish the awards to be issued, and approve the terms and conditions of each award under the stock-based compensation plans.

Stock-based compensation to employees is recognized as compensation cost in the Statements of Income based on their fair values on the measurement date, which, for 1st Source, is the date of grant. Stock-based compensation expense is recognized ratably over the requisite service period for all awards. The total fair value of share awards vested was $4.37 million during 2015, $3.66 million in 2014, and $1.97 million in 2013.

The following table shows the combined summary of activity regarding active stock option and stock award plans.



			Non-Vested Stock Awards Outstanding*				Stock Options Outstanding*
	Shares Available for Grant*		Number of Shares		Weighted-Average Grant-Date Fair Value		Number of Shares		Weighted-Average Exercise Price
Balance, January 1, 2013	2,525,382		476,526		$	18.31	8,250		$	10.95
Shares authorized - 2013 EIP	68,167		—		—		—		—
Shares authorized - Strategic Deployment Incentive Plan	2,211		—		—		—		—
Granted	(98,197	)	98,197		22.01		—		—
Stock options exercised	—		—		—		(8,250	)	10.95
Stock awards vested	—		(94,903	)	17.83		—		—
Forfeited	6,206		(11,830	)	18.83		—		—
Canceled	—		—		—		—		—
Balance, December 31, 2013	2,503,769		467,990		19.17		—		—

Shares authorized - 2014 EIP	76,230		—		—		—		—
Granted	(123,154	)	123,154		23.56		—		—
Stock awards vested	—		(144,941	)	18.57		—		—
Forfeited	3,363		(6,168	)	18.97		—		—
Canceled	—		—		—		—		—
Balance, December 31, 2014	2,460,208		440,035		20.60		—		—

Shares authorized - 2015 EIP	70,202		—		—		—		—
Granted	(81,591	)	81,591		24.44		—		—
Stock awards vested	—		(159,381	)	19.51		—		—
Forfeited	1,980		(3,384	)	23.85		—		—
Canceled	—		—		—		—		—
Balance, December 31, 2015	2,450,799		358,861		$	21.93	—		$	—

*Share and per share data gives retrospective recognition to a 10% stock dividend declared on July 22, 2015 and issued on August 14, 2015.

Stock Option Plans — Incentive stock option plans include the 2001 Stock Option Plan (the “2001 Plan”) and the 2011 Stock Option Plan (the “2011 Plan”). The 2001 Plan was terminated, except for outstanding options, after the 2011 Plan was approved by the shareholders. During 2013, all remaining shares available for issuance upon exercise from previous grants under the 2001 Plan were exercised. No additional grants will be made under the 2001 Plan. There were 2,200,000 shares available for issuance under the 2011 Plan.

Each award from all plans is evidenced by an award agreement that specifies the option price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the Committee determines. The option price is equal to the fair market value of a share of 1st Source Corporation’s common stock on the date of grant. Options granted expire at such time as the Committee determines at the date of grant and in no event does the exercise period exceed a maximum of ten years. Upon merger, consolidation, or other corporate consolidation in which 1st Source Corporation is not the surviving corporation, as defined in the plans, all outstanding options immediately vest.

There were zero stock options exercised during 2015 and 2014 and 8,250 stock options exercised during 2013. All shares issued in connection with stock option exercises and non-vested stock awards are issued from available treasury stock.

No stock-based compensation expense related to stock options was recognized in 2015, 2014 or 2013.

The fair value of each option on the date of grant is estimated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility estimated over a period equal to the expected life of the options. In estimating the fair value of stock options under the Black-Scholes valuation model, separate groups of employees that have similar historical exercise behavior are considered separately. The expected life of the options granted is derived based on past experience and represents the period of time that options granted are expected to be outstanding.

Stock Award Plans — Incentive stock award plans include the EIP, the SDP and the RSAP. The EIP is administered by the Committee. Awards under the EIP and SDP include “book value” shares and “market value” shares of common stock. These shares are awarded annually based on weighted performance criteria and generally vest over a period of five years. The EIP book value shares may only be sold to 1st Source and such sale is mandatory in the event of death, retirement, disability, or termination of employment. The RSAP is designed for key employees. Awards under the RSAP are made to employees recommended by the Chief Executive Officer and approved by the Committee. Shares granted under the RSAP vest over two to ten years and vesting is based upon meeting certain various criteria, including continued employment with 1st Source.

Stock-based compensation expense relating to the EIP, SDP and RSAP totaled $3.84 million in 2015, $3.18 million in 2014, and $2.90 million in 2013. The total income tax benefit recognized in the accompanying Statements of Income related to stock-based compensation was $1.45 million in 2015, $1.20 million in 2014, and $1.10 million in 2013. Unrecognized stock-based compensation expense related to non-vested stock awards (EIP/SDP/RSAP) was $5.04 million at December 31, 2015. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 3.21 years.

The fair value of non-vested stock awards for the purposes of recognizing stock-based compensation expense is market price of the stock on the measurement date, which, for the Company’s purposes is the date of the award.

Employee Stock Purchase Plan — The Company offers an ESPP for substantially all employees with at least two years of service on the effective date of an offering under the plan. Eligible employees may elect to purchase any dollar amount of stock, so long as such amount does not exceed 25% of their base rate of pay and the aggregate stock accrual rate for all offerings does not exceed $25,000 in any calendar year. The purchase price for shares offered is the lower of the closing market bid price for the offering date or the average market bid price for the five business days preceding the offering date. The purchase price and premium/(discount) to the actual market closing price on the offering date for the 2015, 2014, and 2013 offerings were $28.80 (0.23%), $27.63 (-0.88%), and $22.11 (-1.82%), respectively. Payment for the stock is made through payroll deductions over the offering period, and employees may discontinue the deductions at any time and exercise the option or take the funds out of the program. The most recent offering began June 1, 2015 and runs through May 31, 2017, with $172,380 in stock value to be purchased at $28.80 per share.

All share and per share data in the preceding sections give retrospective recognition to a 10% stock dividend declared July 22, 2015 and issued on August 14, 2015.