UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FIRST MERCHANTS CORPORATION
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FIRST MERCHANTS CORPORATION
200 EAST JACKSON STREET
MUNCIE, INDIANA 47305
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 29, 2008
The annual meeting of the shareholders of First Merchants Corporation will be
held at the Horizon Convention Center, 401 South High Street, Muncie, Indiana
47305, on Tuesday, April 29, 2008, at 3:30 p.m., Eastern Daylight Time, for the
following purposes:
(1) To elect five directors, four to hold office for terms of three years and
one to hold office for a term of one year; in each case, the directors will
hold office until their successors are duly elected and qualified.
(2) To act on a proposal to approve the First Merchants Corporation Equity
Compensation Plan for Non-Employee Directors.
(3) To ratify the appointment of the firm of BKD, LLP as the independent
auditor for 2008.
(4) To transact such other business as may properly come before the meeting.
Only those shareholders of record at the close of business on February 15, 2008
shall be entitled to notice of and to vote at the meeting.
By Order of the Board of Directors
Cynthia G. Holaday
Secretary
Muncie, Indiana
March 19, 2008
YOUR VOTE IS IMPORTANT!
YOU ARE URGED TO SUBMIT YOUR PROXY VIA THE TELEPHONE OR INTERNET,
OR TO SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE, AS SOON AS POSSIBLE SO THAT YOUR SHARES CAN BE VOTED AT
THE MEETING IN ACCORDANCE WITH YOUR INSTRUCTIONS.
March 15,2008
March 19, 2008
FIRST MERCHANTS CORPORATION
PROXY STATEMENT FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 29, 2008
To the shareholders of First Merchants Corporation:
This proxy statement has been made available to you on the Internet or has been
sent to you via mail or email in connection with the solicitation on behalf of
the Board of Directors (the "Board") of First Merchants Corporation ("First
Merchants") of proxies to be voted at the annual meeting of First Merchants'
shareholders to be held April 29, 2008, for the purposes stated in the
accompanying notice of the meeting. If you received a paper or electronic copy,
the proxy materials also include a proxy card which can be used for voting your
shares. The distribution of these proxy materials is expected to commence on or
about March 19, 2008.
This year we are pleased to take advantage of the new Securities and Exchange
Commission ("SEC") rule that allows companies to furnish their proxy materials
over the Internet. As a result, we are mailing many of our shareholders a Notice
Regarding the Availability of Proxy Materials instead of a paper copy of the
proxy materials. The Notice contains instructions on how to access those
documents over the Internet. The Notice also contains instructions on how
shareholders may receive a paper or electronic copy of the proxy materials,
including a proxy statement, annual report and a proxy card. All shareholders
who do not receive a Notice will receive a paper copy of the proxy materials by
mail. We believe this new rule will allow us to provide our shareholders with
the information they need, while lowering the costs of delivery and reducing the
environmental impact of our annual meeting.
VOTING
Each share of First Merchants common stock issued and outstanding as of the
close of business on February 15, 2008, the record date for the annual meeting,
is entitled to be voted on all items being voted upon at the meeting. As of the
close of business on February 15, 2008, there were 18,036,739 shares outstanding
and entitled to vote.
You may vote shares held directly in your name as shareholder of record in
person at the annual meeting. Even if you plan to attend the annual meeting, we
recommend that you also vote by proxy as described below so that your vote will
be counted if you later decide not to attend the meeting.
Whether you hold shares directly as the shareholder of record or through a
broker, trustee or other nominee as the beneficial owner, you may direct how
your shares are voted without attending the annual meeting. There are three ways
to vote by proxy:
o By Internet - Shareholders who received a Notice Regarding the Availability
of Proxy Materials may submit proxies over the Internet by following the
instructions on the Notice. Shareholders who received a paper or electronic
copy of a proxy card may submit proxies over the Internet by following the
instructions on the proxy card.
o By Telephone - Shareholders who live in the United States or Canada may
submit proxies by telephone by calling toll-free 1-800-690-6903 on a
touch-tone telephone and following the instructions. Shareholders who
received a Notice Regarding the Availability of Proxy Materials should have
their Notice in hand when calling, and shareholders who received a paper or
electronic copy of a proxy card should have the proxy card in hand when
calling.
Page 1
o By Mail - Shareholders who received a paper or electronic copy of a proxy
card may submit proxies by mail by completing, signing and dating their
proxy card and mailing it in the postage-paid envelope we have provided or
return it to First Merchants Corporation, c/o Broadridge, 51 Mercedes Way,
Edgewood, NY 11717.
After submitting a proxy, you have the right to revoke it any time before it is
exercised by giving written notice of revocation to the Secretary received prior
to the annual shareholders' meeting, by voting again via Internet, telephone or
mail, or by voting in person at the meeting. Your shares will be voted in
accordance with your specific instructions given when submitting your proxies.
In the absence of specific instructions to the contrary, proxies will be voted
"for" election to the Board of all nominees listed in Item 1 of the proxy, "for"
the proposal to approve the First Merchants Corporation Equity Compensation Plan
for Non-Employee Directors, and "for" ratification of the appointment of the
firm of BKD, LLP as First Merchants' independent auditor for 2008. If any
director-nominee named in this proxy statement becomes unable or declines to
serve (an event which the Board does not anticipate), the persons named as
proxies will have discretionary authority to vote for a substitute nominee named
by the Board, if the Board determines to fill such nominee's position.
Each share of First Merchants common stock is entitled to one vote. Directors
are elected by a plurality of the votes cast by the shares entitled to vote in
the election at a meeting at which a quorum is present. Shareholders do not have
a right to cumulate their votes for directors. The affirmative vote of a
majority of the shares present and voting at the meeting in person or by proxy
is required for approval of all items submitted to the shareholders for their
consideration other than the election of directors. Abstentions will be counted
for the purpose of determining whether a quorum is present but for no other
purpose. Broker non-votes will not be counted. The Secretary will count the
votes and announce the preliminary results of the voting at the annual meeting.
The final results will be published in First Merchants' quarterly report on Form
10-Q for the second quarter of 2008.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
To the best of our knowledge, the following table shows the only beneficial
owners of more than 5% of the outstanding common stock of First Merchants as of
February 15, 2008.
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
============================================================================================================
Dimensional Fund Advisors LP 1,568,780................................8.70%
1299 Ocean Avenue
Santa Monica, CA (90401)
First Merchants Trust Company, N. A. (941,100)................................5.22%
200 East Jackson Street
Muncie, IN 47305
Based on a Schedule 13G filing with the SEC, Dimensional Fund Advisors LP
(formerly, Dimensional Fund Advisors Inc.) ("Dimensional"), an investment
advisor registered under Section 203 of the Investment Advisors Act of
1940, furnishes investment advice to four investment companies registered
under the Investment Advisors Act of 1940 and serves as investment manager
to certain other commingled group trusts and separate accounts. These
investment companies, trusts and accounts are the "Funds." In its role as
investment advisor or manager, Dimensional possesses investment and/or
voting power over the shares of First Merchants common stock owned by the
Funds and may be deemed to be the beneficial owner of these shares under
rules of the SEC. However, all of these shares are owned by the Funds, and
Dimensional disclaims beneficial ownership of such shares for any other
purpose.
Page 2
First Merchants Trust Company, National Association ("FMTC"), is a wholly
owned subsidiary of First Merchants. It holds shares of First Merchants
common stock in various fiduciary capacities, in regular, nominee or street
name accounts. Beneficial ownership of shares so held is disclaimed by
First Merchants. It is FMTC's practice, when holding shares as sole trustee
or sole executor, to vote the shares; but, when it holds shares as
co-trustee or co-executor, FMTC obtains approval from the co-fiduciary
prior to voting.
Security Ownership of Directors and Executive Officers
The following table lists the amount and percent of First Merchants common stock
beneficially owned on February 15, 2008 by directors (including directors who
are retiring as of the 2008 annual meeting of shareholders), director-nominees,
the Chief Executive Officer, the Chief Financial Officer, the three other most
highly compensated executive officers, and by the directors and all of First
Merchants' executive officers as a group. Unless otherwise indicated, the
beneficial owner has sole voting and investment power. The information provided
in the table is based on First Merchants' records and information filed with the
SEC and provided to First Merchants.
The number of shares beneficially owned by each person is determined under rules
of the SEC, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under those rules, beneficial ownership
includes shares which a person has the right to acquire beneficial ownership of
on or before April 15, 2008 (60 days after February 15, 2008) by exercising
stock options ("Vested Options") awarded to participants under First Merchants'
Long-term Equity Incentive Plan. It also includes shares of restricted stock
("Restricted Shares") awarded to participants under that Plan which are still
subject to the restrictions.
Amount and Nature Percent
Beneficial Owner of Beneficial Ownership of Class
========================================================================================================
Richard A. Boehning 26,493..............................*
Thomas B. Clark 16,753..............................*
Michael L. Cox 176,025..............................*
Roderick English 3,471..............................*
Jo Ann M. Gora 3,471..............................*
William L. Hoy 10,863..............................*
Barry J. Hudson 458,016...............................2.50%
Michael C. Rechin 29,257..............................*
Charles E. Schalliol 7,471..............................*
Terry L. Walker 18,844.............................*
Jean L. Wojtowicz 4,628.............................*
Jami L. Bradshaw 4,707.............................*
Robert R. Connors 31,917.............................*
Mark K. Hardwick 43,353.............................*
David W. Spade 4,350.............................*
Directors and Executive
Officers as a Group (18 persons) 867,240............................4.74%
* Percentage beneficially owned is less than 1% of the outstanding shares.
Includes 10,415 shares held jointly with his spouse, Phyllis Boehning,
5,586 shares held in trust for family members for which Mr. Boehning, as
trustee, has voting and investment power, and 6,942 shares that he has the
right to acquire by exercising Vested Options.
Includes 11,454 shares that he has the right to acquire by exercising
Vested Options.
Page 3
Includes 52,754 shares held jointly with his spouse, Sharon Cox, and
115,521 shares that he has the right to acquire by exercising Vested
Options.
Includes 3,471 shares that he has the right to acquire by exercising Vested
Options.
Includes 3,471 shares that she has the right to acquire by exercising
Vested Options.
Includes 917 shares that he holds as custodian for his daughter.
Includes 327,756 shares owned by Mutual Security, Inc., 10,024 shares held
jointly with his spouse, Elizabeth Hudson, 43,521 shares held by his
spouse, 13,626 shares held by his spouse as custodian for his children, and
15,321 shares that he has the right to acquire by exercising Vested
Options.
Includes 5,667 Restricted Shares, and 18,000 shares that he has the right
to acquire by exercising Vested Options.
Includes 3,471 shares that he has the right to acquire by exercising Vested
Options.
Includes 10,611 shares held jointly with his spouse, Cheryl L. Walker,
1,076 shares held by his spouse, 1,157 shares that he has the right to
acquire by exercising Vested Options.
Includes 4,628 shares that she has the right to acquire by exercising
Vested Options.
Includes 1,000 Restricted Shares, and 2,220 shares that she has the right
to acquire by exercising Vested Options.
Includes 722 shares held jointly with his spouse, Ann Connors, 3,000
Restricted Shares, and 26,556 shares that he has the right to acquire by
exercising Vested Options.
Includes 401 shares held by his spouse, Catherine Hardwick, 4,400
Restricted Shares, and 34,973 shares that he has the right to acquire by
exercising Vested Options.
Includes 193 shares held jointly with his spouse, Sandra Spade, and 2,400
Restricted Shares.
Includes 23,667 Restricted Shares, and 266,242 shares that First
Merchants' directors and executive officers have the right to acquire by
exercising Vested Options.
INFORMATION REGARDING DIRECTORS
VOTING ITEM 1 - ELECTION OF DIRECTORS
First Merchants' Bylaws allow the Board to fix the number of directors by
resolution. The number of directors is currently fixed at eleven. The Board is
divided into three classes serving staggered three-year terms or until their
successors are elected and qualified. Directors for each class are elected at
the annual meeting of shareholders held in the year in which the term for their
class expires; except that directors filling vacancies caused by resignation,
death or other incapacity, or an increase in the number of directors, are
elected by majority vote of the Board until the next annual meeting of
shareholders.
Five directors will be elected at the annual meeting. The five persons who have
been nominated for election to the Board are all currently members of the Board.
The four Class II directors are completing three-year terms and have been
nominated to serve three-year terms expiring as of the 2011 annual meeting of
shareholders. William L. Hoy was elected by the Board on October 23, 2007 to
fill a vacancy in Class III caused by an increase in the number of directors. He
has been nominated to serve a one-year term expiring as of the 2009 annual
meeting of shareholders. There are no family relationships among First
Merchants' executive officers and directors.
Page 4
The following persons have been nominated for election to the Board:
Name and Age Present Occupation Director
Since
Class II (Terms expire 2011):
Thomas B. Clark Retired Chairman of the Board of Directors, President and 1989
age 62 Chief Executive Officer, Jarden Corporation, a provider of
niche consumer products for the home.
Roderick English President and Chief Executive Officer, The James Monroe 2005
age 56 Group, LLC, a provider of business management and consulting
services, since 2006. Mr. English was Senior Vice President
of Human Resources and Remy International, Inc. (formerly,
Delco Remy International, Inc.), a manufacturer of
electrical and powertrain products for autos, trucks and
other vehicles from 1994 to 2006.
Jo Ann M. Gora President, Ball State University, since 2004. Dr. Gora 2004
age 62 served as Chancellor of the University of Massachusetts at
Boston from 2001 to 2004. She was Provost and Vice
President for Academic Affairs at Old Dominion University
from 1992 to 2001.
Jean L. Wojtowicz President and Chief Executive Officer, Cambridge Capital 2004
age 50 Management Corp., a manager of non-traditional sources of
financing, since 1983. Ms. Wojtowicz is also a director of
Vectren Corporation and a trustee of Windrose Medical
Properties Trust, which are both listed on the New York
Stock Exchange.
Class III (Term expires 2009):
William L. Hoy Chief Executive Officer of The Columbus Sign Company, a 2007
age 59 custom sign and graphic fabricator, since 1990, and Vice
President and Treasurer of Innocom Corporation, an
environmental graphic design and custom display company,
since 1992.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ELECTION OF EACH NOMINEE
FOR DIRECTOR NAMED ABOVE.
The First Merchants directors whose terms are not expiring as of the 2008 annual
meeting of shareholders are listed below. They will continue to serve as
directors for the remainder of their terms or until otherwise provided in First
Merchants' Bylaws. Information regarding each of the continuing directors is
provided below.
Page 5
Continuing Directors
The following persons will continue to serve as directors:
Director
Name and Age Present Occupation Since
Class I (Terms expire 2010):
Michael L. Cox Retired President and Chief Executive Officer of First 1984
age 63 Merchants. Mr. Cox is a nonemployee consultant to First
Merchants, under the agreement described on page 24 of this
proxy statement, under "Termination of Employment and Change
of Control Arrangements."
Charles E. Schalliol Of counsel, Baker & Daniels LLP law firm, since 2007. Mr. 2004
age 60 Schalliol was Director, Indiana State Office of Management
and Budget, from 2005 to 2007, President and Chief Executive
Officer of BioCrossroads, an economic development
organization focused on life sciences companies, from 2003
to 2005, Executive Director, Corporate Finance, Eli Lilly
and Company, a pharmaceuticals company, from 1996 to 2003,
and Founder and Managing Director of Lilly Venture Funds
from 1999 to 2003.
Terry L. Walker Chairman of the Board of Directors, President and Chief 2006
age 61 Executive Officer, Muncie Power Products, Inc., a
manufacturer and distributor of power take-offs and
hydraulic components for the truck equipment industry, since
2005. Mr. Walker was Muncie Power's President and Chief
Operating Officer from 2000 to 2005.
Class III (Terms expire 2009):
Barry J. Hudson Retired Chairman of the Board of Directors, President and 1999
age 68 Chief Executive Officer of First National Bank of Portland,
a wholly owned subsidiary of First Merchants that was
merged with First Merchants Bank, National Association,
another wholly owned subsidiary of First Merchants, in 2007.
Michael C. Rechin President and Chief Executive Officer of First Merchants 2005
age 49 since 2007, and Executive Vice President and Chief
Operating Officer of First Merchants from 2005 to 2007. Mr.
Rechin was Executive Vice President of National City Bank of
Indiana from 1995 to 2005.
Under an Agreement between Mr. Cox and the Board, which is described on
page 24 of this proxy statement under "Termination of Employment and Change
of Control Arrangements," Mr. Cox will continue to serve as a director
until the 2009 annual meeting of shareholders.
Page 6
Retiring Director
Richard A. Boehning will retire as a director of First Merchants on April 29,
2008, the date of the 2008 annual meeting of shareholders.
Meetings of the Board
The Board held 5 meetings during 2007. All of the directors attended at least
75% of the total number of meetings of the Board and the committees on which
they served.
Directors' Attendance at Annual Meeting of Shareholders
First Merchants' directors are encouraged to attend the annual meeting of
shareholders. At the 2007 annual meeting, all 12 directors were in attendance.
Board Independence
The Board has determined that each of First Merchants' directors and
director-nominees is an "independent director," as defined in the listing
standards of the Nasdaq Stock Market, Inc. ("NASDAQ"), except for Michael L.
Cox, First Merchants' former President and CEO, Michael C. Rechin, First
Merchants' current President and CEO, and Barry J. Hudson, the former Chairman
of the Board of Directors, President and CEO of First National Bank of Portland,
a wholly owned subsidiary of First Merchants that was merged with First
Merchants Bank, National Association, another wholly owned subsidiary of First
Merchants, in 2007.
All of the members of the Nominating and Governance Committee, the Compensation
and Human Resources Committee, and the Audit Committee are "independent
directors," as defined in the NASDAQ listing standards.
Communications with the Board
Shareholders may communicate with the Board by e-mail at bod@firstmerchants.com.
All such e-mails will be automatically forwarded to the Chairman of the
Nominating and Governance Committee, Thomas B. Clark, who will arrange for such
communications to be relayed to the other directors.
COMMITTEES OF THE BOARD
Standing Committees/Committee Charters
The Board's standing committees are the Audit Committee, the Nominating and
Governance Committee, and the Compensation and Human Resources Committee. Each
has a charter, which is included among the documents under the "Corporate
Governance Disclosures" link on First Merchants' website,
www.firstmerchants.com. The following information is provided regarding the
composition, functions and number of meetings held by these committees in 2007:
Audit Committee
The Audit Committee is composed of directors Jean L. Wojtowicz (Chairman),
Thomas B. Clark, Jo Ann M. Gora and Terry L. Walker. The Committee met 9 times
during 2007. Its responsibilities include overseeing First Merchants' accounting
and financial reporting principles and policies and its internal accounting and
disclosure controls and procedures, overseeing and evaluating the effectiveness
of First Merchants' internal audit function, reviewing First Merchants'
procedures to ensure that quarterly and annual financial statements are accurate
and complete, including reviewing the certifications of these financial
statements by First Merchants' Chief Executive Officer and its Chief Financial
Officer, recommending the appointment of the external auditor for approval by
the Board and ratification by the shareholders, approving the external auditor's
compensation and evaluating its independence, reviewing and approving the annual
audit plans of the internal and external auditors, reviewing and discussing with
Page 7
management and the external auditor First Merchants' audited financial
statements and, based on this review, making a recommendation to the Board on
inclusion of these financial statements in First Merchants' annual report on
Form 10-K. In accordance with Section 407 of the Sarbanes-Oxley Act, First
Merchants has identified Ms. Wojtowicz and Mr. Clark as "Audit Committee
financial experts." They are both "independent," as that term is used in the
NASDAQ listing standards.
Audit Committee Report Concerning Audited Financial Statements
The Audit Committee has reviewed and discussed the audited financial statements
of First Merchants for 2007 with First Merchants' management, and it has
discussed with BKD, LLP, First Merchants' independent auditor for 2007, the
matters required to be discussed by the Statement on Auditing Standards No. 61,
as amended (AICPA, Professional Standards, Vol. 1. AU Section 380), as adopted
by the Public Company Accounting Oversight Board ("PCAOB") in Rule 3200T. The
Committee has also received the written disclosures and the letter from BKD, LLP
required by Independence Standards Board Standard No. 1 (Independent Discussions
with Audit Committees), as adopted by the PCAOB in Rule 3600T, and has discussed
with BKD, LLP its independence. Based on these reviews and discussions, the
Audit Committee recommended to the Board that the audited financial statements
of First Merchants be included in First Merchants' Annual Report on Form 10-K
for the 2007 fiscal year for filing with the SEC.
The above report is submitted by:
FIRST MERCHANTS CORPORATION AUDIT COMMITTEE
Jean L. Wojtowicz, Chairman
Thomas B. Clark
Jo Ann M. Gora
Terry L. Walker
Nominating and Governance Committee
The Nominating and Governance Committee is composed of directors Thomas B. Clark
(Chairman), Richard A. Boehning, Charles E. Schalliol and Jean L. Wojtowicz. The
Committee met 5 times during 2007. It is charged with ensuring the continued
effectiveness and independence of the Board. The Committee is responsible for
reviewing the credentials of persons suggested as prospective directors,
nominating persons to serve as directors and as officers of the Board, including
the slate of directors to be elected each year at the annual meeting of
shareholders, making recommendations concerning the size and composition of the
Board, as well as criteria for Board membership, making recommendations
concerning the Board's committee structure and makeup, providing for continuing
education of the directors and self-assessment of the Board's effectiveness, and
overseeing First Merchants' Code of Business Conduct and its Code of Ethics for
Senior Financial Officers of First Merchants. The Code of Business Conduct and
the Code of Ethics for Senior Financial Officers are included among the
documents under the "Corporate Governance Disclosures" link on First Merchants'
website, www.firstmerchants.com.
In nominating persons to serve as directors, the Nominating and Governance
Committee considers the person's ethical character, reputation, relevant
expertise and experience, accomplishments, leadership skills, demonstrated
business judgment, contribution to Board diversity, "independence" (as defined
in the NASDAQ listing standards) if a non-employee director, residency in First
Merchants' market area, ability and willingness to devote sufficient time to
director responsibilities, and willingness to maintain a meaningful ownership
interest in First Merchants and assist First Merchants in developing new
business. For incumbent directors whose terms are expiring, the Committee also
considers the quality of their prior service to First Merchants, including the
nature and extent of their participation in First Merchants' governance and
their contributions of management and financial expertise and experience to the
Board and First Merchants. For new director candidates, the Committee also
considers whether their skills are complementary to those of existing Board
members and whether they will fulfill the Board's needs for management,
Page 8
financial, technological or other expertise. The Nominating and Governance
Committee considers candidates coming to its attention through current Board
members, search firms, shareholders and other persons.
Article IV, Section 9, of First Merchants' Bylaws, describes the process by
which a shareholder may suggest a candidate for consideration by the Committee
as a director nominee. Under this process, a suggestion by a shareholder of a
director nominee must include: (a) the name, address and number of First
Merchants shares owned by the shareholder; (b) the name, address, age and
principal occupation of the suggested nominee; and (c) such other information
concerning the suggested nominee as the shareholder may wish to submit or the
Committee may reasonably request. A suggestion for a director nominee submitted
by a shareholder must be in writing and delivered or mailed to the Secretary,
First Merchants Corporation, 200 East Jackson Street, Muncie, Indiana 47305.
Suggestions for nominees from shareholders are evaluated in the same manner as
other nominees. There are no nominees for election to the Board at the 2008
annual meeting of shareholders other than directors standing for re-election.
Compensation and Human Resources Committee
The Compensation and Human Resources Committee is composed of directors Charles
E. Schalliol (Chairman), Thomas B. Clark and Roderick English. The Committee met
2 times during 2007. The Committee is responsible for establishing First
Merchants' general compensation philosophy, overseeing the development and
implementation of policies and programs to carry out this compensation
philosophy, and evaluating the effectiveness of these policies and programs, in
consultation with senior management. The Committee makes recommendations to the
Board concerning the compensation to be paid to First Merchants' non-employee
directors; and it administers First Merchants' non-equity incentive compensation
program (the First Merchants Corporation Senior Management Incentive
Compensation Program), the non-qualified deferred compensation plans (the First
Merchants Corporation Supplemental Executive Retirement Plan, the First
Merchants Corporation Defined Contribution Supplemental Executive Retirement
Plan, and the First Merchants Corporation Directors' Deferred Compensation
Plan), and the equity-based compensation plan (the First Merchants Corporation
Long-term Equity Incentive Plan). The Long-term Equity Incentive Plan was
submitted to and approved by First Merchants' shareholders in 1999.
The Committee reviews the performance of, and approves the compensation and
benefits to be paid to, the executive officers and senior management employees
of First Merchants and the chief executive officers and regional presidents of
its subsidiaries. The Committee's charter permits the Committee to delegate its
authority to review the performance of, and approve the compensation and
benefits to be paid to, other employees of First Merchants and its subsidiaries
to First Merchants' President and Chief Executive Officer and the chief
executive officers of First Merchants' subsidiaries, as appropriate, and the
Committee has done so. The Committee has also delegated the day-to-day
responsibilities for administering First Merchants' non-equity incentive,
deferred compensation, and equity-based programs to the President and CEO,
Michael C. Rechin, and the Senior Vice President and Director of Human
Resources, Kimberly J. Ellington. The Committee is authorized to directly engage
counsel and consultants, including compensation consultants, to assist it in
carrying out its responsibilities.
Mr. Rechin and Ms. Ellington provide information to the Committee and make
recommendations from time to time, as requested by the Committee, concerning
existing and proposed compensation policies and programs for executives and
other employees of First Merchants and its subsidiaries. As the President and
CEO, Mr. Rechin also makes recommendations to the Committee concerning the
performance, compensation and benefits of First Merchants' executive officers
(other than himself) and its senior management employees, as well as the chief
executive officers and regional presidents of First Merchants' subsidiaries.
In 2005, the Committee engaged Watson Wyatt & Company to conduct a competitive
market assessment of the compensation of First Merchants' executive officers and
to review First Merchants' Long-term Equity Incentive Plan to identify the need
for design changes, if any. At the Committee's request, Watson Wyatt provided
information, which included contemporary data on the extent peer companies have
utilized long-term equity incentive programs and their mix of restricted stock
and stock options, as well as information on accounting and tax considerations.
Following completion of the study, based in part on Watson Wyatt's
Page 9
recommendation, the Committee changed First Merchants' equity-based compensation
program, beginning in 2006, from one utilizing only stock options to one
utilizing a mix of stock options and restricted stock awards for senior managers
and only restricted stock awards for other participating employees. The
Committee's actions were all consistent with the provisions of the Long-term
Equity Incentive Plan.
In 2006, the Committee engaged Mercer Human Resource Consulting to provide
information regarding the prevalence of executive retirement benefits among
companies in general industry and the banking industry, to analyze the benefit
levels and adequacy of financing of the Supplemental Executive Retirement Plan,
a defined benefit non-qualified deferred compensation plan that pays retirement
benefits to three retired executives of First Merchants, and to make plan design
recommendations for a new defined contribution supplemental executive retirement
plan. Based on Mercer's recommendations, the Committee made additional
provisions for financing the Supplemental Executive Retirement Plan and adopted
amendments to the plan necessary for compliance with Internal Revenue Code
Section 409A; and the Committee established a new Defined Contribution
Supplemental Executive Retirement Plan, initially covering only Mr. Rechin.
Compensation and Human Resources Committee Interlocks and Insider Participation
No member of the Compensation and Human Resources Committee - Charles E.
Schalliol, Thomas B. Clark or Roderick English - was an officer or employee of
First Merchants or any of its subsidiaries during 2007. None of these members
has ever been an officer or employee of First Merchants or any of its
subsidiaries. No member of the Compensation and Human Resources Committee or
executive officer of First Merchants had a relationship during 2007 requiring
disclosure in this proxy statement under SEC regulations.
Compensation and Human Resources Committee Report
The Compensation and Human Resources Committee has reviewed and discussed with
management the Compensation Discussion and Analysis set forth immediately
following this report, under "Compensation of Executive Officers." Based on this
review and discussion, the Committee recommended to the Board that the
Compensation Discussion and Analysis be included in First Merchants' annual
report on Form 10-K for the fiscal year ended December 31, 2007 and in this
proxy statement.
The above report is submitted by:
FIRST MERCHANTS CORPORATION COMPENSATION AND HUMAN RESOURCES COMMITTEE
Charles E. Schalliol (Chairman)
Thomas B. Clark
Roderick English
COMPENSATION OF EXECUTIVE OFFICERS
Compensation Discussion and Analysis
The Compensation and Human Resources Committee is responsible for the design,
implementation and evaluation of First Merchants' compensation programs and
policies, aided by the company's executive officers and senior management and
with the support of outside consultants as the Committee deems necessary or
helpful. These programs and policies are intended to give all employees,
including executive officers and other senior management employees, incentives
to achieve First Merchants' current and long-term strategic goals - the ultimate
objective being to obtain a superior return on shareholders' investment.
The compensation programs consist of four principal components: (1) salary, (2)
non-equity incentive pay, (3) equity-based compensation, including both
restricted stock awards and stock options, and (4) retirement benefits. The
salary and non-equity incentive pay components, comprised entirely of current
cash compensation, provide an immediate or near-term reward to executive
officers and senior managers for exceptional performance - thereby advancing
shorter-term goals. The equity-based compensation and retirement benefits
components provide incentives for achieving longer-term goals. The restricted
Page 10
stock awards and stock options both align the executive officers' and senior
managers' financial interests directly with those of the shareholders by
correlating the amount of compensation received with the price (and increase in
price) of First Merchants stock. The equity-based compensation and retirement
plans include vesting provisions, which also promote retention of senior
management employees.
For 2007, First Merchants' "Named Executive Officers" ("NEOs") and their titles
were:
o Michael L. Cox, the President and Chief Executive Officer until his
retirement on April 24, 2007;
o Michael C. Rechin, the President and Chief Executive Officer since April
24, 2007; prior to that, the Executive Vice President and Chief Operating
Officer;
o Mark K. Hardwick, the Executive Vice President and Chief Financial Officer;
o Robert R. Connors, the Senior Vice President and Chief Information Officer;
o David W. Spade, the Senior Vice President and Chief Credit Officer; and
o Jami L. Bradshaw, the Senior Vice President and Chief Accounting Officer.
The four principal components of First Merchants' compensation programs, and how
the NEOs are compensated under them, are described below:
Salaries. The NEOs' salaries are determined annually by the Compensation and
Human Resources Committee. The Committee determines these salaries subjectively,
based on the executive's responsibilities and the Committee's review of the
executive's individual performance and contributions to First Merchants'
performance, especially its long-term and short-term financial performance.
Other factors that the Committee takes into account include the executive's
experience, the salaries paid to executives holding similar positions with First
Merchants' competitors in the financial services industry, inflation rates and
budgetary considerations. The Committee relies heavily on the recommendations of
the CEO in setting the salaries of the NEOs other than the CEO. The Committee
has the sole responsibility for establishing the CEO's salary.
Annual salary adjustments are usually determined in February, after First
Merchants' audited financial statements for the preceding fiscal year have been
issued, and the resulting salary adjustments are effective as of the first
payroll in March. The Committee believes that, by waiting until the financial
statements are issued, salary adjustments for the NEOs and other employees can
be more accurately and effectively tied to their success in meeting financial
targets and other strategic goals for the full year just ended. It also allows
First Merchants to communicate decisions concerning salary adjustments to the
NEOs and other senior management employees at the same time they are informed of
incentive plan payments and equity-based awards, thus ensuring a clear and
consistent message regarding performance and underlining First Merchants'
emphasis on growing a performance-based culture.
Mr. Cox's 2007 salary, payable until his retirement on April 24, 2007, was
$111,962 - based on an annual salary of $355,000. Mr. Rechin's 2007 salary of
$309,423 was based on an annual salary of $275,000 until April 24, 2007, when he
was promoted from Executive Vice President and COO to President and CEO.
Thereafter, it was based on an annual salary of $325,000, in recognition of his
additional responsibilities. In 2008, Mr. Rechin's salary was increased to
$350,000, a 7.7% increase from $325,000, in recognition of his performance since
becoming CEO. Mr. Hardwick's salary for 2007 was $209,000; and it was increased
to $250,000 in 2008, a 19.6% increase. Mr. Hardwick's larger increase was based
in part on his exceptional performance and worth to First Merchants and in part
on surveys of salaries paid to executives with similar responsibilities at other
companies. Mr. Connors' salary for 2007 was $192,200; it was increased to
$199,900 in 2008, a 4.0% increase. Mr. Spade's salary was $175,000 in 2007; it
was increased to $180,700 in 2008, a 3.3% increase. Mr. Connors' and Mr. Spade's
increases were in line with the merit increases given to most other senior
management employees. Ms. Bradshaw's 2007 salary was increased from $110,201 to
$125,000 on July 24, 2007, when she was promoted to Senior Vice President and
Chief Accounting Officer. In 2008, she received a further increase in salary to
$145,000, a 16.0% increase, based on the CEO's recommendation and the
Committee's consideration of her performance and surveys of the compensation
paid to executives with similar responsibilities at other companies that compete
with First Merchants.
Page 11
Non-equity incentive pay. Non-equity incentive compensation is available to the
NEOs and other senior managers through the Senior Management Incentive
Compensation Program. Under the program, the NEOs and other participating senior
management employees are eligible to receive additional cash compensation,
determined as a percentage of their salaries, as incentive pay by meeting
individual goals that are closely related to First Merchants' financial success.
Under the program, at the beginning of the year, participants are given goals,
consisting of a target or targets, and in some cases, personal objectives, which
upon being met, entitles the executive to receive a payout following the end of
the year of 100% of a pre-determined percentage of the executive's salary. The
schedules containing the targets also include thresholds below which no payout
is made, as well as maximum payouts that may be higher than the target bonuses.
For 2007, upon meeting a threshold, participants became entitled to 30% of the
pre-determined percentage of their salary, and the maximum payout, depending on
the executive's pre-established goals, was 170% - 200% of this percentage. The
amounts earned under the program for a fiscal year are determined and paid out
after First Merchants' audited financial statements for the applicable year have
been issued, usually in February, contemporaneously with the determination of
salaries and equity compensation for the following year.
The target bonuses payable to Messrs. Cox, Rechin and Hardwick for 2007 under
the Senior Management Incentive Compensation Program were 45%, 45% and 40%,
respectively, of their salaries, in each case based entirely on growth from the
previous year in First Merchants' GAAP earnings per share. Earnings per share in
2007 grew more than the threshold percentage that made them eligible for
bonuses, but not as much as the target percentage. As a result, Messrs. Cox's,
Rechin's and Hardwick's incentive pay for 2007 was determined on the basis of
22.5%, 22.5%, and 20%, respectively, of their salaries. Mr. Cox's bonus was
pro-rated to 31.2% of his full-year amount, since he retired on April 24, 2007.
For 2007, Messrs. Connors and Spade were each eligible to receive target bonuses
of 30% of their salaries under the Senior Management Incentive Compensation
Program, while Ms. Bradshaw's target bonus was based on 25% of her salary until
she was promoted to Senior Vice President and Chief Accounting Officer on July
24, 2007, when the target bonus was increased to 30% of her salary. For all
three, 70% of their incentive pay depended on the improvement in First
Merchants' operating earnings per share above a pre-established percentage, and
30% was based on achieving pre-established personal objectives established by
the CEO. Operating earnings per share did grow more than the threshold
percentage, thus making them eligible for bonuses; however earnings didn't grow
as much as the target percentage. Mr. Connors and Ms. Bradshaw achieved all of
their personal objectives, and Mr. Spade achieved part of his personal
objectives. Based on these results, Messrs. Connors' and Spade's and Ms.
Bradshaw's incentive pay for 2007 was 19.5%, 17.3% and 16.6%, respectively, of
their salaries.
Until 2006, the Senior Management Incentive Compensation Program provided for
payment of 2/3 of the incentive pay earned each year in cash and the other 1/3
in deferred stock units two years later, based on the price of First Merchants'
stock on the December 31 preceding the payment date, plus accrued dividends.
Under this provision, four of the NEOs - Messrs. Cox, Hardwick, Connors and
Spade - received payments in early 2008, in the amounts of $20,149, $10,892,
$11,049 and $937, respectively, that were based on deferred stock units and
dividends they earned for the 2005 fiscal year that became vested at the end of
2007. Mr. Rechin and Ms. Bradshaw were not participants in the Senior Management
Incentive Compensation Program in 2005 and thus did not receive payments based
on deferred stock units earned for the 2005 fiscal year.
Equity-based compensation. Equity-based compensation is made available to the
NEOs and other plan participants under the Long-term Equity Incentive Plan. The
Compensation and Human Resources Committee approves stock option and restricted
stock awards under the plan at a meeting that is usually held each year in
February, at the same time salary adjustments and non-equity incentive payments
are approved. In making stock option and restricted stock awards, the Committee
relies heavily on the recommendations of the CEO except for the awards to the
CEO.
Until 2006, stock option grants were the only equity-based compensation awarded
under the Long-term Equity Incentive Plan. In 2005, the Compensation and Human
Resources Committee engaged Watson Wyatt & Company to undertake a comprehensive
study of the plan and to make recommendations concerning its design and
administration. At the Committee's request, Watson Wyatt provided information,
which included contemporary data on the extent peer companies have utilized
long-term equity incentive programs and their mix of restricted stock and stock
Page 12
options, as well as information on accounting and tax considerations. Following
completion of the study, based in part on Watson Wyatt's recommendation, the
Committee changed First Merchants' equity-based compensation program, beginning
in 2006, from one utilizing only stock options to one utilizing only restricted
stock awards for most plan participants and a mix of stock options and
restricted stock awards for senior managers. This change in the program was
within the Committee's discretion under the provisions of the plan. The CEO and
the Committee concluded that, for the NEOs and other senior managers, stock
option grants should continue to be a significant component of First Merchants'
equity-based compensation program. This conclusion was based on the rationale
that the financial incentive provided by stock options depends entirely on
increasing the price of First Merchants shares, thus furthering the program's
purpose of aligning senior management's financial interests with those of First
Merchants' shareholders.
The stock options granted to the NEOs and other senior managers under the
Long-term Equity Incentive Plan are incentive stock options up to the statutory
limit, and the rest are nonqualified options. The restricted stock awarded under
the plan vests - giving the awardee complete ownership rights - if the awardee
is still employed by First Merchants three years after the award is made;
however, the awardee's rights in the stock vest immediately and the restrictions
are removed if the awardee's employment terminates in less than three years on
account of retirement, death or disability. The restricted stock partially vests
if the awardee's employment is involuntarily terminated without "cause." Under
this circumstance, the vested portion is based on a fraction, the numerator of
which is the number of full years that have elapsed between the date of the
award and the date of termination and the denominator of which is three.
Notwithstanding the restrictions on the stock, the awardee is entitled to vote
the shares and to receive the dividends thereon.
Mr. Cox did not receive an award under the Long-term Equity Incentive Plan in
either 2007 or 2008 year because he retired on April 24, 2007. The awards made
to the other NEOs under the plan on February 8, 2007 and February 27, 2008,
respectively, were as follows: Mr. Rechin - 12,000 stock options and 3,000
shares of restricted stock in 2007, and 15,000 stock options and 4,000 shares of
restricted stock in 2008; Mr. Hardwick - 8,000 stock options and 2,400 shares of
restricted stock in 2007, and 8,000 stock options and 2,700 shares of restricted
stock in 2008; Mr. Connors - 4,500 stock options and 1,600 shares of restricted
stock in 2007, and 3,000 stock options and 2,000 shares of restricted stock in
2008; Mr. Spade - 4,000 stock options and 1,000 shares of restricted stock in
2007, and 4,000 stock options and 1,000 shares of restricted stock in 2008; Ms.
Bradshaw - 2,000 options and 600 shares of restricted stock in 2007, and 1,500
stock options and 1,500 shares of restricted stock in 2008. The exercise price
for the stock options was the closing price on the date the options were granted
by the Compensation and Human Resources Committee; that is, $26.31 per share on
February 8, 2007 and $28.25 per share on February 27, 2008.
Although not required to be shown in the Summary Compensation Table, the First
Merchants Corporation Employee Stock Purchase Plan is a form of equity-based
compensation that is equally available to all employees of First Merchants and
its participating subsidiaries who have been employed six months or more. Under
this plan, employees (including the NEOs) may elect, prior to the offering
period (July 1 to June 30), to purchase shares of First Merchants' stock at a
price equal to 85% of the lesser of the market price of the stock at the
beginning of the offering period and the market price at the end of the period.
The plan provides an attractive vehicle for employees to acquire First Merchants
stock, which further aligns their financial interests with those of other
shareholders. For the offering period ending June 30, 2007, the following NEOs
participated in this plan: Mr. Rechin, who purchased 322 shares, Mr. Spade who
purchased 193 shares, and Ms. Bradshaw, who purchased 258 shares. The purchase
price for shares under the plan was $20.43 per share.
Retirement benefits. First Merchants maintains a qualified defined benefit
pension plan, the First Merchants Corporation Retirement Pension Plan, which it
"froze" as of March 1, 2005, meaning that, with some exceptions, employees no
longer accrued benefits under the plan. However, participants who were at least
age 55 with 10 or more years of credited service on the date the plan was frozen
were "grandfathered;" that is, they continued to accrue benefits under the plan
after that date. Employees who were not participating in the plan on March 1,
2005 were not eligible to participate. The plan pays benefits at retirement to
participating employees of First Merchants and its participating subsidiaries.
The benefits payable under this plan, computed as a straight-life annuity
although other forms of actuarially-equivalent benefits are available under the
plan, are based on the following formula: 1.6% of average final compensation (in
general, the participant's highest 60 consecutive months' W-2 compensation, less
Page 13
incentive pay) plus .5% of average final compensation in excess of Social
Security covered compensation, both times years of service to a maximum of 25
years. Although benefits are integrated with Social Security, they are not
subject to any deduction for Social Security or other offset amounts. The
benefits payable under the plan at age 65 to the participants whose benefits
were frozen are determined under the formula described above, based on their
average final compensation as of March 1, 2005, times a fraction, the numerator
of which is the participant's years of credited service as of March 1, 2005, and
the denominator of which is the participant's years of credited service
projected to age 65.
Of the NEOs, Mr. Cox was the only one who was "grandfathered" due to having
attained age 55 and 10 or more years of credited service as of March 1, 2005, so
he continued to accrue benefits under the plan until his retirement on April 24,
2007. Upon retiring, Mr. Cox began receiving an annual benefit under the plan
that is the equivalent of a straight-life annuity of $47,234. Since he elected
payment in the form of a joint and 100% survivor annuity, his annual benefit
under the plan is actually $40,149. Messrs. Rechin and Spade did not participate
in the First Merchants Corporation Retirement Pension Plan. The benefits
accruing to Messrs. Hardwick and Connors and Ms. Bradshaw were frozen as of
March 1, 2005, because they had not attained age 55 with 10 or more years of
credited service as of that date. Assuming their employment continues to age 65,
Messrs. Hardwick's and Connor's and Ms. Bradshaw's annual benefits under the
plan, payable as a straight-life annuity, would be approximately $8,594, $7,895,
and $2,712, respectively.
Mr. Cox is also the only NEO who participates in the First Merchants Corporation
Supplemental Executive Retirement Plan, a defined benefit, non-qualified "excess
benefit" plan that provides additional retirement benefits to designated
executives whose benefits under the First Merchants Corporation Retirement
Pension Plan are restricted due to the limit under Internal Revenue Code Section
401(a)(17) on the amount of compensation that can be considered for purposes of
calculating pension benefits under a qualified plan (for 2007, the last year Mr.
Cox accrued benefits under this plan, this amount was $225,000). The plan was
closed to new participants when the First Merchants Corporation Retirement
Pension Plan was frozen. Mr. Cox and two other previously retired First
Merchants executives presently receive benefits under the plan. The benefit is
calculated using the First Merchants Corporation Retirement Pension Plan formula
described two paragraphs above, without applying the Section 401(a)(17) limit
but including non-equity incentive pay in determining average final
compensation, and subtracting the benefit that is payable to the executive under
the Retirement Pension Plan. Mr. Cox began receiving an annual benefit of
$52,431 under the First Merchants Corporation Supplemental Executive Retirement
Plan in January 2008, payable in the form of a fifteen-year certain annuity. Mr.
Cox also received a lump sum payment of $34,954 in January 2008, representing
benefits payable under the plan for the period following his retirement in 2007
that were deferred to 2008.
First Merchants also maintains the First Merchants Corporation Retirement and
Income Savings Plan, an Internal Revenue Code Section 401(k) qualified defined
contribution plan under which participating employees of First Merchants and its
subsidiaries can make pre-tax contributions to the plan, up to statutory limits
and limits set forth in the plan, that are currently matched by the
participant's employer at the rate of 50% of the participant's pre-tax
contributions to the plan, to a maximum of 6% of compensation (defined as W-2
compensation plus certain voluntary pre-tax contributions, up to the Internal
Revenue Code Section 401(a)(17) maximum, which was $225,000 in 2007 and is
$230,000 in 2008). Thus, the maximum matching employer contribution under the
plan is generally 3% of pay (less if the participant's compensation exceeds
$230,000). First Merchants made matching contributions for 2007 under the plan
for NEOs Rechin, Hardwick, Connors, Spade and Bradshaw in the amounts of $6,750,
$6,750, $6,615, $5,700 and $3,827, respectively. For the participants who were
"grandfathered" when the First Merchants Corporation Retirement Pension Plan was
frozen, including Mr. Cox, the matching employer contribution under the First
Merchants Corporation Retirement and Income Savings Plan is less. First
Merchants matches only 25% of their pre-tax contributions under the plan, to a
maximum of 5% of compensation. For 2007, First Merchants made a matching
contribution under the plan for Mr. Cox in the amount of $1,913. First Merchants
also makes contributions on behalf of participants in the plan based on their
years of service, currently from 2% to 7% of compensation in five-year
increments (i.e., 2% for 0-4 years of service, 3% for 5-9 years of service, 4%
for 10-14 years of service, 5% for 15-19 years of service, 6% for 20-24 years of
service, and 7% for 25 or more years of service). The "grandfathered"
participants, including Mr. Cox, are not eligible for these service-weighted
contributions. For 2007, the other NEOs received service-weighted contributions
as follows: Mr. Rechin, 2% of compensation, or $4,500; Mr. Hardwick, 4% of
Page 14
compensation, or $9,000; Mr. Connors, 3% of compensation, or $6,615; Mr. Spade,
2% of compensation, or $3,800; and Ms. Bradshaw, 3% of compensation, or $3,827.
Finally, First Merchants is making "transition contributions" under the plan
equal to 3% of compensation for the years 2005 through 2009, for employees who
were participants in the First Merchants Corporation Retirement Pension Plan
when it was frozen and who had attained age 45 with 10 or more years of credited
service as of March 1, 2005 (other than the "grandfathered" participants). None
of the NEOs is eligible for a transition contribution under the plan. Employee
pre-tax contributions under the plan are always fully vested, while matching,
service-weighted and transition contributions vest 20% after each year of
service.
In 2006, the Compensation and Human Resources Committee engaged Mercer Human
Resource Consulting to make plan design recommendations for a new defined
contribution supplemental employee executive retirement plan, in view of the
fact that the primary retirement plan for all of the executive officers other
than Mr. Cox is now a Section 401(k) defined contribution plan rather than a
defined benefit plan. Based on Mercer's recommendations, the Committee
established the First Merchants Corporation Defined Contribution Supplemental
Executive Retirement Plan, effective as of January 1, 2006. Like the existing
defined benefit Supplemental Executive Retirement Plan covering Mr. Cox, the
Defined Contribution Supplemental Executive Retirement Plan is intended to
provide additional retirement benefits to designated executives whose benefits
under First Merchants' qualified retirement plan - in this case the First
Merchants Corporation Retirement and Income Savings Plan - are restricted due to
the limit under Internal Revenue Code Section 401(a)(17) on the amount of
compensation that can be considered for purposes of calculating pension benefits
under a qualified plan ($225,000 in 2007 and is $230,000 in 2008). The Committee
has designated Mr. Rechin as the sole initial participant in the Defined
Contribution Supplemental Executive Retirement Plan, effective as of January 1,
2006. Based on Mercer's recommendation, the Committee established the employer
contribution for Mr. Rechin under the plan at 12% of his annual compensation,
including his base salary and his non-equity incentive pay. Mercer calculated
that, if Mr. Rechin continues to be employed by First Merchants until his normal
retirement age, this contribution will provide an income replacement ratio of
approximately 35%, based on a 7% return on the plan's investments. Mercer
determined, based on its review of retirement benefits paid to executives
holding similar positions at peer companies in the banking industry, that this
income replacement ratio would be competitive with the industry. Mr. Rechin's
benefit under the plan is subject to a 5 year "cliff" vesting provision. He is
not permitted to make employee contributions under the plan. First Merchants'
contribution for 2007 to this plan on behalf of Mr. Rechin was $50,856.
Termination of Employment and Change of Control Arrangements. Although, in
general, First Merchants does not have employment agreements with the Named
Executive Officers or any of its other employees, who are all deemed to be "at
will" employees, it does have "double trigger" change of control agreements with
certain of its key executives, including each of the NEOs. First Merchants
believes that change of control agreements are in the best interests of First
Merchants and its shareholders, because they encourage key executives to remain
with First Merchants and continue to act in First Merchants' and shareholders'
interests in the event of a proposed acquisition or other change of control
situation in which they might otherwise be influenced by the uncertainties of
their own circumstances. A "double trigger" change of control agreement is one
under which severance benefits are payable only if: (1) a change of control
occurs; and (2) the executive's employment is terminated or constructively
terminated following the change of control (under First Merchants' agreements,
this termination must occur within 24 months following the change of control for
the agreement to apply). No benefits are payable under the agreements in the
event of the executive's voluntary retirement, death or disability, or if the
executive's employment is terminated for cause. The definitions of "change of
control" and "constructive termination" as used in these agreements are
contained on page 23 of this proxy statement, under "Termination of Employment
and Change of Control Arrangements." Payments under the change of control
agreements are based on a multiple of the sum of the executive's annual base
salary at the time of receiving notice of termination and the executive's
largest annual non-equity incentive payment under the Senior Management
Incentive Compensation Program during the two years preceding the date of
termination. This multiple is 2.99 for Messrs. Rechin and Hardwick, and 1.50 for
Messrs. Connors and Spade and Ms. Bradshaw. The aggregate of the lump sum
severance benefit amounts that would have been payable to key executives under
all of First Merchants' existing change of control agreements, if both of the
triggering events had occurred on December 31, 2007, totals less than two
percent of First Merchants' market capitalization. The change of control
Page 15
agreements were not entered into in response to any effort to acquire control of
First Merchants, and the Board is not aware of any such effort. Because they
represent such a small percentage of First Merchants' market capitalization, the
Board does not believe that the existence of these agreements would discourage
any such effort.
The only other existing agreement or arrangement providing for payment(s) at,
following, or in connection with the termination of a NEO's or other senior
manager's employment is the agreement that the Board approved on January 23,
2007, concerning Mr. Cox's retirement as the President and CEO of First
Merchants on April 24, 2007. The details of that agreement are set forth in more
detail on page 24 of this proxy statement, under "Termination of Employment and
Change of Control Arrangements."
Summary Compensation Table
The following table provides information concerning all of the plan and non-plan
compensation paid to the NEOs for 2006 and 2007.
Summary Compensation Table
---------------------------- ----- ---------- ---------- ---------- ---------- --------------- ------------ ------------ ----------
Change in
pension
value and
non-qualified
Non-equity deferred
Stock Option incentive compensation All other
Name and Principal position Year Salary Bonus awards awards plan earnings compensationTotal
compensation
---------------------------- ----- ---------- ---------- ---------- ---------- --------------- ------------ ------------ ----------
Michael L. Cox
President and Chief 2006 $361,887 $ 0 $25,268 $32,766 $4,793 $205,052 $27,918 $657,684
Executive Officer 2007 111,962 0 60,208 40,621 24,947 210,608 12,740 461,086
Michael C. Rechin
Executive Vice President 2006 280,288 100,100 14,864 21,844 3,300 0 51,788 472,184
and Chief Operating 2007 309,423 0 57,833 83,434 69,620 0 69,270 589,580
Officer
Mark K. Hardwick
Executive Vice President 2006 193,699 0 14,864 19,113 19,950 2,495 15,434 265,555
and Chief Financial 2007 206,077 0 35,527 44,558 41,800 1,555 20,182 349,699
Officer
Robert R. Connors
Senior Vice President and 2006 185,704 0 10,405 10,922 16,398 4,695 12,310 240,434
Chief Information Officer 2007 190,662 0 24,243 25,256 37,479 3,689 16,374 297,703
David W. Spade
Senior Vice President and 2006 164,327 0 10,405 0 12,800 0 10,568 198,100
Chief Credit Officer 2007 175,000 0 19,547 11,513 30,188 0 12,392 248,640
Jami L. Bradshaw
Senior Vice President and 2006 100,385 0 2,973 0 6,765 1,026 5,675 116,824
Chief Accounting Officer 2007 119,878 0 8,044 5,757 20,760 684 8,958 164,081
---------------------------- ----- ---------- ---------- ---------- ---------- --------------- ------------ ------------ ----------
The amounts shown in the Salary column for 2006 are the aggregate of the
executive's base salary, service award and Christmas gift. For Mr. Cox,
these were $355,000, $60 and $6,827, respectively; for Mr. Rechin, these
were $275,000, $0 and $5,288, respectively; for Mr. Hardwick, these were
$190,000, $45 and $3,654, respectively; for Mr. Connors, these were
$182,200, $0 and $3,504, respectively; for Mr. Spade, these were $161,250,
$0 and $3,077, respectively; and for Ms. Bradshaw, these were $98,458, $0
and $1,927, respectively. The service awards and Christmas gifts were
discontinued for 2007.
First Merchants paid Mr. Rechin a signing bonus of $100,000 when he was
hired in November 2005, to offset a bonus that he would have received from
his previous employer had he not left its employment. This signing bonus
was paid to Mr. Rechin in early 2006. The other $100 was paid to Mr. Rechin
under a customer referral program. No bonuses were paid to any of the other
NEOs during 2006 or 2007 except as part of a non-equity incentive plan.
Page 16
A discussion of the assumptions used in calculating these values is
contained in Note 60 to the 2007 audited financial statements, on page 60
of First Merchants' Annual Report.
The amounts shown in the Non-equity Incentive Plan Compensation column are
payments under the First Merchants Corporation Senior Management Incentive
Compensation Program for 2006 and 2007 performance that were paid in
February 2007 and February 2008, respectively.
The amounts shown in the Change in Pension Value and Nonqualified Deferred
Compensation Earnings column for Messrs. Hardwick and Connors and Ms.
Bradshaw are the changes in the actuarial present value of their frozen
benefits under the First Merchants Corporation Retirement Pension Plan for
2006 and 2007. For Mr. Cox, the amount shown for 2006 is the sum of the
increase in the actuarial present value of his benefits under the First
Merchants Corporation Retirement Pension Plan ($78,517) and the increase in
the actuarial present value of his benefits under the First Merchants
Corporation Supplemental Executive Retirement Plan ($126,535). The amount
shown for 2007 is the sum of the increase in the actuarial present value of
Mr. Cox's benefits under the First Merchants Corporation Retirement Pension
Plan ($91,162) and the increase in the actuarial present value of his
benefits under the First Merchants Corporation Supplemental Executive
Retirement Plan ($119,446). Mr. Cox began receiving monthly benefits under
the First Merchants Corporation Retirement Pension Plan in May 2007 and
under the First Merchants Corporation Supplemental Executive Retirement
Plan in January 2008. Messrs. Rechin and Spade have not participated in any
defined benefit plan or other actuarial pension plan maintained by First
Merchants. No NEO received above-market or preferential earnings on
deferred compensation during 2006 or 2007.
First Merchants made matching contributions to the First Merchants
Corporation Retirement and Income Savings Plan for the benefit of the NEOs
in the following amounts for 2006 and 2007, respectively: Mr. Cox - $2,750
and $1,913; Mr. Rechin - $6,600 and $6,750; Mr. Hardwick - $6,600 and
$6,750; Mr. Connors - $6,433 and $6,615; Mr. Spade - $5,028 and $5,700; and
Ms. Bradshaw - $2,954 and $3,827. First Merchants made service-weighted
employer contributions to the First Merchants Corporation Retirement and
Income Savings Plan for the benefit of the NEOs in the following amounts
for 2006 and 2007, respectively: Mr. Cox - $0 and $0; Mr. Rechin - $4,400
and $4,500; Mr. Hardwick - $6,694 and $9,000; Mr. Connors - $4,289 and
$6,615; Mr. Spade - $3,352 and $3,800; and Ms. Bradshaw - $1,969 and
$3,827. First Merchants also made contributions to the First Merchants
Corporation Defined Contribution Supplemental Executive Retirement Plan in
2006 and 2007 for the benefit of Mr. Rechin in the amounts of $33,396 and
$50,896, respectively. During 2006, Mr. Cox was the only NEO whose
compensation included perquisites in the aggregate amount of $10,000 or
more. The aggregate amount of his perquisites and other personal benefits
for 2006 totaled $21,740, including personal use of a company-owned car,
payment of country club dues, automobile insurance premiums and medical and
travel expenses. During 2007, none of the NEOs received perquisites in the
aggregate amount of $10,000 or more. Mr. Cox received a retirement gift
from First Merchants upon his retirement in April 2007, which had a value
of $9,797. The other amounts shown in the All Other Compensation column
include the dollar value of life insurance premiums and dividends on
restricted stock awards paid to or for the benefit of each of the NEOs
during 2006 and 2007.
First Merchants does not have employment agreements with any of the NEOs.
Grants of Plan-based Awards Table
The following table provides information concerning all of the grants of
plan-based awards made to the NEOs for 2007, which included non-equity incentive
pay and awards of restricted stock and stock options.
Page 17
Grants of Plan-Based Awards for 2007 Fiscal Year
---------------------------------------------------------------------------------------------------------------
All other All other
option option Exercise
awards; awards; or base Grant date
Number Number of price of fair value
Estimated future payouts of shares securities option of stock
Name Grant under Non-equity incentive of stock underlying awards and option
Date plan awards or units options (per share) awards
-------------------------- ------------------------------ ---------- ---------- ---------- ------------
Threshold Target Maximum
------------------- ------- -------- ---------- ---------- ---------- ---------- ---------- ------------
Michael L. Cox
-- $0 $52,083 $104,166
-- 0 146,250 292,500
Michael C. Rechin 2/8/07 3,000 $26.31 $78,930
2/8/07 12,000 64,541
-- 0 83,600 167,200
Mark K. Hardwick 2/8/07 2,400 26.31 63,144
2/8/07 8,000 51,633
-- 0 57,660 98,022
Robert R. Connors 2/8/07 1,600 26.31 42,096
2/8/07 4,500 29,043
-- 0 52,500 89,250
David W. Spade 2/8/07 1,000 26.31 26,310
2/8/07 4,000 25,816
-- 0 37,500 63,750
Jami L. Bradshaw 2/8/07 600 26.31 15,786
2/8/07 2,000 15,256
------------------- ------- -------- ---------- ---------- ---------- ---------- ---------- ------------
The amounts shown in the Estimated Future Payouts under Non-equity
Incentive Plan Awards column are the range of payouts for targeted
performance under the First Merchants Corporation Senior Management
Incentive Compensation Program for 2007, as described in the Section
entitled "Non-equity Incentive Pay" in the Compensation Discussion and
Analysis. The payments made in February 2008 for 2007 performance under the
Program are shown in the Non-equity Incentive Plan Compensation column of
the Summary Compensation Table on page 16 of this proxy statement.
The compensation programs under which the grants in the above Grants of
Plan-Based Awards Table were made are generally described in the Compensation
Discussion and Analysis, on pages 12-13 of this proxy statement, and include the
Senior Management Incentive Compensation Program, a non-equity incentive plan,
and the Long-term Equity Incentive Plan, which provides for stock option grants
and restricted stock awards. The following is a summary of material factors that
will assist in an understanding of the information disclosed in the Grants of
Plan-Based Awards Table.
Under the Senior Management Incentive Compensation Program, each of the NEOs was
given goals at the beginning of 2007, consisting of a target or targets, and in
some cases, personal objectives, which upon being met, entitled the executive to
receive a payout following the end of the year of 100% of a pre-determined
percentage of the executive's base salary. The schedules containing the targets
also included thresholds, at which the executive became entitled to 30% of the
pre-determined percentage and below which no payout would be made, as well as
maximum payouts equal to 200% of the pre-determined percentage, or in some
cases, 170%. The amounts earned under the program for 2007 were paid out in
February 2008.
Under the Long-term Equity Incentive Plan, awards of stock options and
restricted stock were granted to each of the NEOs in February 2007, except that
no awards were made to Mr. Cox because he retired in April 2007. This was in
accordance with the terms of the retirement agreement between the Board and Mr.
Cox, which is described in more detail on page 24 of this proxy statement, under
"Termination of Employment and Change of Control Arrangements." In most cases,
the number of stock options awarded to each executive was approximately 3-4
Page 18
times the number of shares of restricted stock awarded to the executive. The
aggregate number of equity awards to each executive was roughly commensurate
with the executive's position and level of responsibilities. The exercise price
for the stock options was the closing price on the date the options were
granted, February 8, 2007. The stock options will vest and become exercisable
two years after the date they were granted or, if earlier, on the date the
executive's employment terminates on account of retirement, death or disability.
The restricted stock will vest, giving the executive complete ownership rights,
if the executive is still employed by First Merchants three years after the date
of the award of the executive's employment terminates in less than three years
on account of retirement, death or disability. The restricted stock will
partially vest if the executive's employment is involuntarily terminated without
"cause," the number that will vest being a fraction of the shares awarded, the
numerator of which is the number of full years that have elapsed between the
date of the award and the date of termination and the denominator of which is
three. Notwithstanding the restrictions on the stock, the executive is entitled
to vote the shares and to receive the dividends thereon. The normal dividend
rate applies to the restricted shares; the rate is not preferential.
Outstanding Equity Awards at Fiscal Year-end Table
The following table provides information concerning unexercised stock options,
restricted stock awards that have not vested, and equity incentive plan awards
for each of the NEOs outstanding as of the end of First Merchants' 2007 fiscal
year.
Outstanding Equity Awards at Fiscal Year-End 2007
------------------ ---------------------------------------------------- -------------------------
Name Option Awards Stock Awards
------------------ ------------- -------------- ------------ ---------- ------------ ------------
Number of Number of Option Option Number of Market
securities securities exercise expiration shares or value of
underlying underlying price date units of shares or
unexercised unexercised stock that units of
options options have not stock that
vested have not
(Exercisable) (Unexercisable) vested
------------------ ------------- -------------- ------------ ---------- ------------ ------------
Michael L. Cox 5,729 $24.80 07/31/08
11,575 19.65 07/29/09
11,573 18.28 07/01/10
11,576 19.73 07/01/11
13,781 26.93 07/01/12
13,127 23.46 07/01/13
15,000 25.60 07/01/14
20,000 26.70 09/01/15
12,000 25.14 02/10/16
1,157 24.03 07/01/17
Michael C. Rechin 5,667 $123,767
10,000 25.90 11/21/15
8,000 25.14 02/10/16
12,000 26.31 02/08/17
Mark K. Hardwick 4,400 96,096
694 19.65 07/29/09
578 18.28 07/01/10
1,736 19.73 07/01/11
4,409 26.93 07/01/12
5,249 23.46 07/01/13
6,000 25.60 07/01/14
10,000 26.70 09/01/15
7,000 25.14 02/10/16
8,000 26.31 02/08/17
Robert R. Connors 3,000 65,520
3,307 25.33 08/26/12
5,249 23.46 07/01/13
6,000 25.60 07/01/14
8,000 26.70 09/01/15
4,000 25.14 02/10/16
4,500 26.31 02/08/17
David W. Spade 2,400 $52,416
4,000 $26.31 02/08/17
Jami L. Bradshaw 1,000 21,840
420 23.46 07/01/13
800 25.60 07/01/14
1,000 26.70 09/01/15
2,000 26.31 02/08/17
------------------ ------------- -------------- ------------ ---------- ------------ ------------
Page 19
Options were granted to Messrs. Rechin, Hardwick, Connors, Spade and Ms.
Bradshaw to purchase 12,000, 8,000, 4,500, 4,000 and 2,000 shares,
respectively, of First Merchants common stock under the Long-term Equity
Incentive Plan on February 8, 2007, which will vest on February 8, 2009.
All of these options will also vest on the date the executive's employment
terminates on account of retirement, death or disability, if earlier than
the normal vesting dates. As a non-employee director, Cox was granted an
option to purchase 1,157 shares of First Merchants common stock under the
Long-term Equity Incentive Plan on July 1, 2007, which vested on January 1,
2008.
Messrs. Rechin, Hardwick, Connors and Spade and Ms. Bradshaw were awarded
2,000, 2,000, 1,400, 1,400 and 400 restricted shares, respectively, under
First Merchants' Long-term Equity Incentive Plan on February 10, 2006.
These shares will vest on February 10, 2009. Messrs. Rechin, Hardwick,
Connors and Spade and Ms. Bradshaw were also awarded 3,000, 2,400, 1,600,
1,000 and 600 restricted shares, respectively, under the Long-term Equity
Incentive Plan on February 8, 2007. These shares will vest on February 8,
2010. In addition, Mr. Rechin was awarded 2,000 restricted shares under the
Long-term Equity Incentive Plan on December 22, 2005, of which 666 shares
vested on December 22, 2006, 667 shares vested on December 22, 2007, and
667 shares will vest on December 22, 2008.
Option Exercises and Stock Vested Table
The following table provides information concerning each exercise of stock
options and each vesting of stock, including restricted stock and restricted
stock units, during First Merchants' 2007 fiscal year for each of the NEOs.
Option Exercises and Stock Vested During Fiscal Year 2007
----------------------- ---------------------------- ---------------------------
Option awards Stock awards
Name
---------------------------- ---------------------------
Number of Value Number of Value
shares realized shares realized
acquired on on exercise acquired on on
exercise vesting vesting
----------------------- --------------- ------------ -------------- ------------
Michael L. Cox 6,078 $18,903 4,251 $101,749
Michael C. Rechin 0 0 667 15,294
Mark K. Hardwick 0 0 460 10,892
Robert R. Connors 0 0 467 11,049
David W. Spade 0 0 40 937
Jami L. Bradshaw 0 0 0 0
----------------------- --------------- ------------ -------------- ------------
Page 20
All of the amounts shown in the Number of Shares or Units Acquired on
Vesting column for Messrs. Hardwick, Connors and Spade, and 851 of the
shares shown for Mr. Cox, are deferred stock units they earned under the
Senior Management Incentive Compensation Program for the 2005 fiscal year
which vested at the end of the 2007 fiscal year. The amounts shown in the
Value Realized on Vesting column, with respect to these deferred stock
units, were paid in cash to these executives in February 2008, in
accordance with the program's provisions. These payments to Messrs. Cox,
Hardwick, Connors and Spade included dividends that would have been payable
on an equivalent number of shares of First Merchants stock during 2006 and
2007, in the amounts of $1,566, $846, $859 and $73, respectively. The
amount shown in the Number of Shares or Units Acquired on Vesting column
for Mr. Rechin is the portion of the restricted stock award made to him on
December 22, 2005 under the First Merchants' Long-term Equity Incentive
Plan which vested on December 22, 2007. This award is further described in
footnote 2 to the Outstanding Equity Awards at Fiscal Year-End 2007 Table
on page 20 of this proxy statement. The amount shown in the Value Realized
on Vesting column for Mr. Rechin was determined by multiplying the number
of shares that vested (667) times the closing price of First Merchants
stock on December 22, 2007 ($22.93).
Pension Benefits Table
The First Merchants Corporation Retirement Pension Plan (the "Pension Plan") is
a qualified defined benefit pension plan that pays monthly retirement benefits
to eligible employees. The benefits, computed as a straight-life annuity
although other forms of actuarially-equivalent benefits are available under the
plan, are based on the following formula: 1.6% of average final compensation (in
general, the participant's highest 60 consecutive months' W-2 compensation, less
incentive pay) plus .5% of average final compensation in excess of Social
Security covered compensation, both times years of service to a maximum of 25
years. The plan was frozen, effective March 1, 2005, for participants who had
not yet attained age 55 and been credited with 10 or more years of service as of
that date, meaning that their accrued benefits were vested and they no longer
accrued benefits under the plan, and employees who were not participating in the
plan as of that date were not eligible to participate. The benefits payable
under the plan at age 65 to the participants whose benefits were frozen are
determined under the above formula, based on their average final compensation as
of March 1, 2005, times a fraction, the numerator of which is the participant's
years of service as of March 1, 2005, and the denominator of which is the
participant's years of service projected to age 65. The participants who were at
least age 55 with 10 or more years of service at the time the plan was frozen
continued to accrue benefits under the plan until their retirement.
The First Merchants Corporation Supplemental Executive Retirement Plan (the
"SERP"), a defined benefit, nonqualified "excess benefit" plan, provides
additional retirement benefits to designated executives whose benefits under the
Pension Plan are restricted due to the limit under Internal Revenue Code Section
401(a)(17) on the amount of compensation that can be considered for purposes of
calculating pension benefits under a qualified plan. This amount was $220,000
for 2006 and $225,000 for 2007 (there are no executives accruing benefits under
this plan after 2007). The benefit payable under this plan is calculated using
the Pension Plan formula described in the preceding paragraph, without applying
the Section 401(a)(17) limit and including non-equity incentive pay in
determining average final compensation, and then subtracting the benefit which
is payable to the executive under the Pension Plan. The SERP is unfunded and
subject to forfeiture in the event of bankruptcy. The Corporation has
established a "rabbi" trust, with the First Merchants Trust Company, National
Association, a wholly-owned subsidiary of the Corporation, as the trustee. The
Corporation makes annual contributions to the trust to help pay the
Corporation's liabilities under the SERP, with which the trustee pays premiums
on corporate-owned life insurance that is intended to help pay these
liabilities.
The following table shows benefits accrued to the NEOs under the Retirement
Pension Plan and the Supplemental Executive Retirement Plan as of December 31,
2007. The assumptions used in calculating the present value of a NEO's
accumulated benefit are the same as those used for financial reporting purposes
with respect to the Corporation's 2007 audited financial statements, assuming
that the executive retires at age 65, the normal retirement age under the plan.
A discussion of these assumptions is contained in Note 17 to the 2007 audited
financial statements, on page 63 of the Corporation's Annual Report.
Page 21
Accrued Pension Benefits at Fiscal Year-End 2007
------------------------- ------------ -------------- ----------------- ----------------
Name Plan name Number of Present value Payments
years of accumulated during fiscal
credited benefit as of year 2007
service as 12/31/07
of
12/31/07
------------------------- ------------ -------------- ----------------- ----------------
Michael L. Cox 11.90 $593,851 $26,766
Pension
Plan
SERP 11.90 714,427 0
Michael C. Rechin N/A N/A N/A N/A
Mark K. Hardwick Pension 7.32 26,226 0
Plan
Robert R. Connors Pension 2.50 67,117 0
Plan
David W. Spade N/A N/A N/A N/A
Jami L. Bradshaw Pension 1.17 12,032 0
Plan
------------------------- ------------ -------------- ----------------- ----------------
Mr. Cox is the only NEO who had attained age 55 and been credited with more
than 10 years of service when the Pension Plan was frozen, so he is the
only NEO who continued to accrue benefits under the plan after that date
until his retirement on April 24, 2007. He is also the only NEO who was
designated as a participant in the defined benefit SERP. Payment of Mr.
Cox's benefit under the Pension Plan commenced in May 2007, in an annual
amount equal to a straight life annuity of $47,234; however, since he
elected payment in the form of a joint and 100% survivor annuity, his
actual annual benefit is $40,149. Payment of Mr. Cox's benefit under the
SERP commenced in January 2008, payable as a 15-year certain life annuity
in the annual amount of $52,431.
Messrs. Rechin and Spade were not participants in the Pension Plan.
Messrs. Hardwick and Connors and Ms. Bradshaw had not attained age 55 or
been credited with more than 10 years of service when the Pension Plan was
frozen, so their benefits under the plan were frozen.
The NEOs' years of credited service under the Pension Plan and the SERP
were one fewer than their number of actual years of service with the
Corporation.
Nonqualified Deferred Compensation Table
In 2006, First Merchants established the First Merchants Corporation Defined
Contribution Supplemental Executive Retirement Plan (the "Defined Contribution
SERP"), a nonqualified plan that is intended to provide additional retirement
benefits to designated executives whose benefits under the Corporation's
qualified Internal Revenue Code Section 401(k) defined contribution plan - the
First Merchants Corporation Retirement and Income Savings Plan (the "Section
401(k) Plan") - are restricted due to the limit under Internal Revenue Code
Section 401(a)(17) on the amount of compensation that can be considered for
purposes of calculating pension benefits under a qualified plan. The Corporation
annually credits a percentage of the participant's compensation (base salary
plus non-equity incentive pay) for the plan year, as determined by the
Compensation and Human Resources Committee, to a deferred benefit account
established for the participant under the plan. No amount is credited to the
participant's account under the Defined Contribution SERP unless the participant
has made sufficient contributions to the Section 401(k) Plan for the year to
entitle the participant to the maximum matching employer contributions under the
Section 401(k) Plan. Participants are not permitted to make contributions to
their accounts under the Defined Contribution SERP. Participants' interests vest
under the plan upon the earliest of death, disability, involuntary termination
except for cause, a change of control of the Corporation, or 5 years of
participation in the plan. Their account balances, including amounts credited to
the accounts, adjusted for investment gain or loss, are payable in 36 monthly
installments following death, disability or separation from service (the initial
payments are delayed 6 months and made retroactively if made on account of
separation from service). The SERP is unfunded and subject to forfeiture in the
Page 22
event of bankruptcy. The Corporation has established a "rabbi" trust, with the
First Merchants Trust Company, National Association, a wholly-owned subsidiary
of the Corporation, as the trustee. The Corporation makes annual contributions
to the trust to help pay the Corporation's liabilities under the Defined
Contribution SERP. While participants may request that these contributions be
invested in accordance with investment options made available by the
Corporation, the Corporation is under no obligation to comply with such
requests. The accounts' actual investment returns may differ from the returns on
the investments requested by the participants. Participants may request changes
in the investment options daily, by submitting written investment allocation
requests to the trustee.
The following table shows the dollar amounts of contributions, earnings,
withdrawals, distributions and the aggregate balances of the NEOs' deferred
benefit accounts under the Defined Contribution SERP as of December 31, 2007.
Nonqualified Deferred Compensation in 2007
----------------------- ---------------- --------------- ------------ -------------- -------------------
Name Executive Corporation's Aggregate Aggregate Aggregate balance at
contributions contributions earnings withdrawals/ fiscal year-end
in fiscal year in fiscal in fiscal distributions 2007
2007 year 2007 year 2007
----------------------- ---------------- --------------- ------------ -------------- -------------------
----------------------- ---------------- --------------- ------------ -------------- -------------------
Michael L. Cox $0 $ 0 $ 0 $0 $ 0
Michael C. Rechin 0 50,856 1,699 0 35,095
Mark K. Hardwick 0 0 0 0 0
Robert R. Connors 0 0 0 0 0
David W. Spade 0 0 0 0 0
Jami L. Bradshaw 0 0 0 0 0
----------------------- ---------------- --------------- ------------ -------------- -------------------
Mr. Rechin is the only NEO who has been designated as a participant in the
Defined Contribution SERP. The Corporation credited 12 % of Mr. Rechin's
compensation (base salary plus non-equity incentive pay) to his account for
2007. This amount is also reported as compensation to Mr. Rechin in the
Summary Compensation Table on page 16 of this proxy statement, in the
column headed "All Other Compensation."
Termination of Employment and Change of Control Arrangements
First Merchants has change of control agreements with each of the NEOs, except
for Mr. Cox, whose change of control agreement terminated when he retired on
April 24, 2007. These are "double trigger" change of control agreements, in that
they provide for the payment of severance benefits to the executives only in the
event of both a change of control of First Merchants and a termination or
constructive termination of the employment of the executive within 24 months
after the change of control (but no payment will be made if the termination was
for cause, because of the executive's death, disability or voluntary retirement,
or by the executive other than on account of constructive termination). In
general, a "change of control" means an acquisition by any person of 25% or more
of First Merchants' voting shares, a change in the makeup of a majority of the
Board over a 24-month period, a merger of First Merchants in which the
shareholders before the merger own 50% or less of First Merchants' voting shares
after the merger, or approval by First Merchants' shareholders of a plan of
complete liquidation of First Merchants or an agreement to sell or dispose of
substantially all of First Merchants' assets. A "constructive termination"
means, generally, a significant reduction in duties, compensation or benefits or
a relocation of the executive's office outside of the area described in the
agreement, unless agreed to by the executive.
Upon the occurrence of the two triggering events, a covered executive would be
entitled, in addition to base salary and incentive compensation accrued through
the date of termination, to payment from First Merchants, or its successor in
the event of a purchase, merger or consolidation, of a lump sum severance
benefit in an amount determined by multiplying the sum of (1) the executive's
annual base salary as in effect on the date the executive receives notice of
termination, and (2) the executive's largest bonus under First Merchants' Senior
Page 23
Management Incentive Compensation Program during the 2 years preceding the date
of termination, by 299% in the cases of Messrs. Rechin and Hardwick, and 150% in
the cases of Messrs. Connors and Spade and Ms. Bradshaw. First Merchants would
also pay any excise tax imposed on the executive under Section 4999 of the
Internal Revenue Code on an "excess parachute payment." In addition, the
executive's outstanding stock options would be cancelled; and, in lieu thereof,
the executive would receive a lump sum amount equal to the bargain element value
of these options, if any. The executive would also be entitled to outplacement
services, reasonable legal fees and expenses incurred as a result of the
termination, and life, disability, accident and health insurance coverage until
the earlier of two years following the date of termination or the executive's
65th birthday. The insurance coverage would be similar to what the executive was
receiving immediately prior to the notice of termination, and First Merchants
would pay the same percentage of the cost of such coverage as it was paying on
the executive's behalf on the date of such notice.
The following table shows the lump sum severance benefit amounts that would have
been payable to the NEOs if both of the triggering events under the change of
control agreements had occurred on December 31, 2007, as well as the bargain
element values of their outstanding stock options on that date, the estimated
values of their life, disability, accident and health insurance coverages for
two years following that date, and the estimated amounts of the excise tax that
would have been imposed under Section 4999 of the Internal Revenue Code on the
lump sum severance payments.
Change of Control Agreements
-------------------- ---------- ----------------- --------------------- --------------------- ----------------
Name Multiplier Severance Bargain Element Estimated Values of Estimated
Benefit Amount Values of Insurance Coverages Excise Tax
Outstanding Stock for 2 years Under IRC ss.4999
Options
-------------------- ---------- ----------------- --------------------- --------------------- ----------------
Michael C. Rechin 299% $1,179,980 $ 0 $20,012 $175,912
Mark K. Hardwick 299% 749,892 7,241 18,669 115,529
Robert R. Connors 150% 344,519 0 18,562 0
David W. Spade 150% 307,781 0 14,328 0
Jami L. Bradshaw 150% 218,641 0 13,408 0
-------------------- ---------- ----------------- --------------------- --------------------- ----------------
The change of control agreements were not entered into in response to any effort
to acquire control of First Merchants, and the Board is not aware of any such
effort.
The only other contract, agreement, plan or arrangement, whether written or
unwritten, that provides for payment(s) to a NEO at, following, or in connection
with any termination, including, without limitation, resignation, severance,
retirement or a constructive termination of a NEO, or a change in control of
First Merchants or a change in a NEO's responsibilities, is an agreement
concerning Mr. Cox's retirement as the President and CEO of First Merchants
which the Board approved on January 23, 2007.
Under the terms of the agreement, Mr. Cox retired as the President and CEO of
First Merchants on April 24, 2007. He has provided services to First Merchants
as a nonemployee consultant since his retirement, and he will continue to do so
until the earlier of April 24, 2009 or the date of the 2009 annual meeting of
shareholders. In his capacity as a consultant, he reports directly to Mr. Rechin
and performs services as requested by Mr. Rechin. These services generally
include, among other things, advice and assistance with matters relating to
mergers, acquisitions and other business expansion initiatives. Mr. Cox has also
continued to represent First Merchants as the Immediate Past Chairman of the
Board of Directors of the Indiana Bankers Association, and as a director of the
Indiana State Chamber of Commerce. These services generally do not occupy more
than 50% of Mr. Cox's time. He is being paid $175,000 in the first year and
$100,000 in the second year for these services, in substantially equal monthly
installments. Under the agreement, Mr. Cox was nominated and elected to serve as
a director of First Merchants for one additional three-year term, commencing as
of the 2007 annual meeting of shareholders. The agreement provides that he will
submit his written resignation as director in January 2009, effective as of the
Page 24
2009 annual meeting of shareholders. Under the agreement, Mr. Cox also resigned
as a director of all of First Merchants' subsidiaries and affiliates on which he
was then serving, effective as of the date of his retirement.
COMPENSATION OF DIRECTORS
The directors of First Merchants who are employees of First Merchants or one of
its subsidiaries do not receive separate compensation for their services as
directors. This included Michael C. Rechin and Thomas D. McAuliffe during all of
2007 and Michael L. Cox until his retirement on April 24, 2007. Mr. Cox was also
not separately compensated for his services as a director following his
retirement; however, First Merchants did pay him for his consulting services
during that portion of 2007 under the Agreement between Mr. Cox and the Board
described on page 24 under "Termination of Employment and Change of Control
Agreements."
In general, for their services in 2007, the non-employee directors received
annual retainers of $15,000, plus $3,000 for each Board committee on which a
director served and $2,000 for chairing a committee ($5,000 for chairing the
Audit Committee). The exceptions were the Chairman and Vice Chairman of the
Board, who received annual retainers of $50,000 and $35,000, respectively, but
no compensation for committee service. Robert M. Smitson served as the Chairman
of the Board until his retirement on April 24, 2007, after which the Vice
Chairman, Charles E. Schalliol, became Chairman and the office of Vice Chairman
was left vacant. Mr. Smitson's and Mr. Schalliol's retainers were pro-rated
based on the portions of 2007 each held those offices. William L. Hoy was
elected by the Board as a director on October 23, 2007 to fill a vacancy caused
by an increase in the number of directors. His retainer was pro-rated based on
his service for the remainder of 2007.
Effective August 1, 2007, First Merchants established the 2007 Directors'
Deferred Compensation Plan, an unfunded deferred compensation arrangement under
which the non-employee directors of First Merchants and the non-employee
directors of certain affiliates of First Merchants may elect to defer until a
future date all or a portion of the fees payable to them for their services as
directors. An account is maintained for each participant in the Plan, to which
deferred fees and interest are credited quarterly, at an interest rate equal to
the greater of the Fed Funds Rate or the five-year Treasury Interest Rate as of
the first business day of the quarter, but not to exceed 120% of the Applicable
Long Term Federal Rate for monthly compounding. First Merchants has established
a "rabbi trust," to which it contributes to provide itself with a source of
funds to assist in meeting its liabilities under the Plan; however, First
Merchants' obligations under the Plan remain an unsecured, unfunded promise to
pay benefits to the participants in accordance with the Plan's provisions.
In accordance with the Long-term Equity Incentive Plan, each non-employee
director who was serving in that capacity on July 1, 2007 was granted an option
on that date to purchase 1,157 shares of First Merchants common stock at an
option price of $24.03 per share, the market price on that date.
The following table contains information concerning the compensation paid to
First Merchants' directors, other than Messrs. Rechin and McAuliffe, for their
services as directors for 2007. Messrs. Smitson and Hoy were not serving as
directors on July 1, 2007 and thus were not eligible for stock options under the
Long-term Equity Incentive Plan.
Page 25
Director Compensation for 2007 Fiscal Year
----------------------------- --------------- -------------- ------------------- ------------------
Fees earned Option All Other Total
Name or paid in awards Compensation
cash
----------------------------- --------------- -------------- ------------------- ------------------
Richard A. Boehning $23,000 $2,347 0 $25,347
Thomas B. Clark 26,000 2,347 0 28,347
Michael L. Cox 0 2,347 116,668 119,015
Roderick English 18,000 2,347 0 20,347
Jo Ann M. Gora 18,000 2,347 0 20,347
William L. Hoy 2,836 0 0 2,836
Barry J. Hudson 51,000 2,347 0 53,347
Charles E. Schalliol $46,250 $2,347 0 $48,597
Robert M. Smitson 15,833 0 0 15,833
Terry L. Walker 18,000 2,347 0 20,347
Jean L. Wojtowicz 26,000 2,347 0 28,347
----------------------------- --------------- -------------- ------------------- ------------------
The dollar amounts shown for option awards represent the dollar amounts of
those awards recognized for financial statement reporting purposes for 2007
in accordance with FAS 123R. A discussion of the assumptions used in
calculating these values is contained in Note 16 to the 2007 audited
financial statements, on page 60 of First Merchants' Annual Report.
As of the end of 2007 fiscal year, the non-employee directors had the
following aggregate number of option awards outstanding: Mr. Boehning -
6,942; Mr. Clark - 11,454; Mr. Cox - 103,521; Mr. English - 3,471; Dr. Gora
- 3,471; Mr. Hoy - 0; Mr. Hudson - 15,321; Mr. Schalliol - 3,471; Mr.
Smitson - 10,297; Mr. Walker - 1,157; and Ms. Wojtowicz - 4,628.
Mr. Boehning also received an $11,550 retainer (which was fully deferred
under an unfunded deferred compensation plan) and life insurance coverage
in the amount of $6,000 for his services as a director of Lafayette Bank
and Trust Company, National Association, a wholly owned subsidiary of First
Merchants, in 2007. This retainer was pro-rated due to his retirement as a
Lafayette Bank director on July 31, 2007. Mr. Hoy was paid $4,100 for his
services as a director of Commerce National Bank, a wholly owned subsidiary
of First Merchants, in 2007. Mr. Hudson was paid $3,000 in 2007 (of which
he deferred $1,089 under an insurance-funded deferred compensation plan)
for his services as Chairman of the Board of Directors of First National
Bank of Portland, a wholly owned subsidiary of First Merchants, until First
National was merged into First Merchants Bank, National Association,
another wholly owned subsidiary of First Merchants, on April 1, 2007.
Mr. Clark and Mr. Walker deferred payment of $19,500 and $9,000,
respectively, of their fees earned in 2007, under the provisions of the
2007 Directors' Deferred Compensation Plan described on page 25 of this
proxy statement.
In addition to fees earned in 2007 totaling $18,000, Mr. Hudson was paid
$33,000 in 2007 for his services as a non-employee director in 2005 and
2006, for which he had not previously received payment due to an oversight.
Mr. Cox was paid $116,668 in 2007 for his services as a consultant under
the Agreement between Mr. Cox and the Board described on page 24 of this
proxy statement, under "Termination of Employment and Change of Control
Agreements."
VOTING ITEM 2 - PROPOSAL TO APPROVE THE FIRST MERCHANTS CORPORATION EQUITY
COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
First Merchants' shareholders are asked to approve the First Merchants
Corporation Equity Compensation Plan for Non-Employee Directors (the "Plan"). If
approved, the Plan will provide that at least one-half of the compensation
payable to non-employee directors must be in restricted shares of First
Merchants common stock instead of cash. The following background information and
summary of the major features of the Plan are subject to the specific provisions
contained in the full text of the Plan set forth in Appendix A.
Page 26
Background Information
In 2007, the Compensation and Human Resources Committee undertook a review of
First Merchants non-employee director compensation, studying current trends in
director compensation including information regarding other public companies'
fee arrangements compiled by consulting firms and/or disclosed in recently filed
proxy statements. The data showed that non-employee director compensation has
increased significantly within the past few years in recognition of the
substantial increases in time and effort and levels of personal responsibility
and financial risk demanded of public company directors, underlining the
importance of attracting the most qualified candidates. Further, under
prevailing corporate governance best practices, non-employee director
compensation now generally includes an element of equity-based as well as cash
compensation, in order to further align director pay with company stock
performance. Based on its review, the Committee recommended and the Board
approved, a restructured non-employee director compensation program. The first
element of the program became effective January 1, 2008. The non-employee
directors' annual retainers were increased to $40,000 ($75,000 for the Chairman
of the Board) - a level comparable to peer public companies including, in
particular, other financial holding companies. In recognition of their
additional responsibilities, the Audit Committee Chairman receives an additional
$10,000 and other Committee Chairmen an additional $5,000 (except for the
Chairman of the Board, who doesn't receive additional pay for serving as a
Committee Chairman). Directors do not receive additional amounts for serving on
Board Committees or for attending meetings.
The second element of the program, if approved by the shareholders at the 2008
annual meeting, will provide for payment of at least one-half of non-employee
director compensation in restricted shares of First Merchants common stock
instead of cash. Under NASDAQ Marketplace Rules, this provision for payment of
part of the directors' compensation in the form of First Merchants common stock
must be approved by the shareholders before it can be implemented. If the
shareholders do not approve the First Merchants Corporation Equity Compensation
Plan for Non-Employee Directors, the non-employee directors will continue to
receive all of their compensation, as described in the immediately preceding
paragraph, in the form of cash.
Purpose of First Merchants Corporation Equity Compensation Plan for Non-Employee
Directors
The Plan is intended to be beneficial to First Merchants and its shareholders,
in that non-employee directors will have a greater personal financial stake in
First Merchants through the payment of a significant portion of their
compensation in First Merchants common stock. This will underscore the
non-employee directors' common interest with shareholders in increasing the
long-term value of First Merchants common stock.
Key Terms
Effective Date April 29, 2008
Participant Any member of the First Merchants Board who is not
an employee of First Merchants or any of its
subsidiaries.
Compensation Any retainer, fee or other payment of any kind to
which a Participant is entitled for services as a
non-employee director of First Merchants, but
excluding any stock option granted under First
Merchants' Long-term Equity Incentive Plan.
Restricted Share A share of First Merchants common stock that is
nontransferable and subject to a substantial risk
of forfeiture.
Shares Authorized 500,000 shares (approximately 2.8% of outstanding
shares) over 10 years, subject to automatic
adjustment in the event of a stock split, stock
dividend, recapitalization or similar event.
Page 27
Payment Date Quarterly in arrears, as of the last business day
of the calendar quarter.
Plan Termination April 29, 2018, unless terminated earlier by the Board.
Compensation Payable in Restricted Shares
All Participants will receive a fraction of their Compensation - not less than
one-half - in Restricted Shares, effective for Compensation payable for calendar
quarters ending after the Effective Date; i.e., commencing as of the second
quarter of 2008. The Board will determine this fraction from time-to-time and,
in the absence of such determination, the fraction will be one-half. Thus, if
the fraction is one-half, a Participant who is entitled to a $40,000 annual
retainer will receive $20,000 in cash and $20,000 in Restricted Shares. The
number of Restricted Shares to be issued each quarter will be determined on the
basis of their fair market value as of the Payment Date; that is, the last
reported sale price of a share of First Merchants stock on that date, or if no
sale took place, the last reported sale price of a share on the most recent day
on which a sale of a share of stock took place as reported by NASDAQ or a
national securities exchange on which First Merchants stock is listed on such
date.
Restrictions on Shares
Restricted Shares issued under the Plan will be nontransferable by the
Participant and subject to a substantial risk of forfeiture until the earliest
of the following dates: (i) the third anniversary of the date the shares were
issued if, as of the date the restrictions are to lapse, the Participant has
continued to serve as a non-employee director from the date as of which the
shares were issued to the date of lapse; (ii) the date of the Participant's
retirement as a member of the Board after he or she has attained age 55; (iii)
the date of the Participant's death; (iv) the date the Participant is determined
to be totally and permanently disabled, as defined in Internal Revenue Code
Section 22(e)(3); or (v) the date of a Change of Control, as defined in the
Long-term Equity Incentive Plan. In the event a Participant's service as a
non-employee director terminates prior to the date the restrictions lapse, the
shares still subject to the restrictions will be forfeited. The Participant will
be deemed to be the beneficial owner of the Restricted Shares issued under the
Plan unless and until they are forfeited. As the beneficial owner, the
Participant will have all rights of beneficial ownership in such shares
including the right to vote the shares and receive all dividends and other
distributions paid or made with respect thereto.
Deferral of Compensation Payable in Restricted Shares
A Participant may elect to defer payment of all or part of his or her
Compensation that is payable in Restricted Shares, in accordance with the
provisions of the 2007 Directors' Deferred Compensation Plan described on page
25 of this proxy statement. An account will be established for a Participant who
makes this election, which account: (a) will be credited with deferred stock
units in lieu of the Restricted Shares otherwise issuable to the Participant;
(b) will be credited with earnings each quarter, based on the deferred stock
unit balance in the account, equal to the dividends that would be payable on an
equivalent number of shares of First Merchants common stock; (c) will not be
deemed to be beneficially owned by the Participant or convey any voting rights
to the Participant until distributed to the Participant; (d) will be distributed
to the Participant on the payment date elected by the Participant in a lump sum
in shares of First Merchants stock.
Amendment and Termination of Plan
The Plan may be amended at any time by resolution of the Board, but no amendment
will be effective without shareholder approval if such shareholder approval is
required by law or by the rules of NASDAQ or any national securities exchange on
which First Merchants stock is listed. Any such amendment must comply with
applicable laws and regulations. The Plan will terminate on April 29, 2018,
which is 10 years from the date of the 2008 annual meeting of shareholders,
unless earlier terminated by resolution of the Board.
Page 28
Benefits Payable to Non-Employee Directors under Plan
The following table indicates the total compensation that is expected to be paid
to First Merchants' non-employee directors in 2008, including the portion of
this compensation that would have been payable under the Plan in Restricted
Shares instead of cash had the Plan been in effect for all of 2008. However,
because shareholder approval is required, the Plan cannot become effective until
the second quarter of 2008. Each director's total compensation is based on the
director's status as a First Merchants director and as a Committee Chairman as
of the date of this proxy statement. Because the number of shares to be issued
under the Plan depends on the fair market value of First Merchants common stock
on the date the shares are earned, the number of shares payable to non-employee
directors is not determinable at this time. For purposes of illustration, the
number of shares set forth in the table below was determined by using the
closing price of First Merchants common stock on December 31, 2007, which was
$21.84.
New Plan Benefits
Equity Compensation Plan for Non-Employee Directors
---------------------------- ---------------- ------------------- ---------------- -----------------
Dollar Value Shares of Fees Paid in Total
Name of Restricted Restricted Stock Cash Compensation
Shares
---------------------------- ---------------- ------------------- ---------------- -----------------
Richard A. Boehning $ 7,316 335 $ 7,315 $14,631
Thomas B. Clark 22,500 1,030 22,500 45,000
Roderick English 20,000 916 20,000 40,000
Jo Ann M. Gora 20,000 916 20,000 40,000
William L. Hoy 20,000 916 20,000 40,000
Barry J. Hudson 20,000 916 20,000 40,000
Charles E. Schalliol 37,500 1,719 37,500 75,000
Terry L. Walker 21,687 993 21,687 43,374
Jean L. Wojtowicz 25,000 1,145 25,000 50,000
Executive Officers as a 0 0 0 0
Group
Non-Employee Directors as 194,003 8,886 194,002 388,005
a Group
Non-Executive Officer
Employees as a Group 0 0 0 0
---------------------------- ---------------- ------------------- ---------------- -----------------
Mr. Boehning will retire as a director of First Merchants on April 29,
2008, the date of the 2008 annual meeting of shareholders. He presently
serves as Chairman of the Executive Committee of the Board. Mr. Walker will
become Chairman of the Executive Committee upon Mr. Boehning's retirement.
Shareholder Vote Required to Approve the First Merchants Corporation Equity
Compensation Plan for Non-Employee Directors
The Plan will be approved if it receives the favorable vote of a majority of the
shares present and voting at the annual meeting of shareholders. Abstentions and
broker non-votes will be considered neither a vote "for" nor "against."
Equity Compensation Plan Information
The following table provides information about First Merchants common stock that
may be issued under equity compensation plans, other than the Plan, to employees
or non-employees (such as non-employee directors) of First Merchants as of
December 31, 2007.
Page 29
Equity Compensation Plan Information
------------------------------------ --------------------- --------------------- ----------------------------------
Plan Category Number of
securities to be Number of securities remaining
issued upon Weighted average available for future issuance
exercise of exercise price of under
outstanding outstanding equity compensation plans
options, warrants options, warrants (excluding securities reflected
and rights and rights in first column)
------------------------------------ --------------------- --------------------- ----------------------------------
1,018.076 $24.37 400,000
Equity compensation plans approved
by shareholders
Equity compensation plans not
approved by shareholders 36,354 22.33
-------- -------
Total 1,054,430 $24.30 400,000
------------------------------------ --------------------- --------------------- ----------------------------------
This number does not include shares remaining available for future issuance
under the 1999 Long-term Equity Incentive Plan, which was approved by First
Merchants' shareholders at the 1999 annual meeting. The aggregate number of
shares that are available for grants under that Plan in any calendar year
is equal to the sum of: (a) 1% of the number of First Merchants common
shares outstanding as of the last day of the preceding calendar year; plus
(b) the number of shares that were available for grants, but not granted,
under the Plan in any previous year; but in no event will the number of
shares available for grants in any calendar year exceed 1 1/2% of the
number of First Merchants common shares outstanding as of the last day of
the preceding calendar year. The 1999 Long-term Equity Incentive Plan will
expire in 2009.
The only plan reflected above that was not approved by First Merchants'
shareholders relates to certain First Merchants Corporation Stock Option
Agreements ("Agreements"). These Agreements provided for non-qualified
stock options of First Merchants common stock to be awarded between 1995
and 2002 to each director of First Merchants Bank, National Association
(the "Bank"), who, on the date of the grants: (a) was serving as a director
of the Bank; (b) was not an employee of First Merchants, the Bank, or any
of First Merchants' other affiliated banks or the non-bank subsidiaries;
and (c) was not serving as a director of First Merchants. The exercise
price of the shares was equal to the fair market value of the shares upon
the grant of the option. Options became 100% vested when granted and are
fully exercisable six months after the date of the grant, for a period of
ten years.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE THE
FIRST MERCHANTS CORPORATION EQUITY COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS.
IF THE SHAREHOLDERS DO NOT APPROVE THE PLAN, NON-EMPLOYEE DIRECTORS WILL
CONTINUE TO RECEIVE THE FULL AMOUNT OF THEIR COMPENSATION IN CASH.
Non-Employee Director Stock Ownership Guideline
Although not part of the First Merchants Corporation Equity Compensation Plan
for Non-Employee Directors that is being submitted to the shareholders for
approval at the 2008 annual meeting, the restructured non-employee director
compensation program adopted by the Board effective January 1, 2008 also
includes a guideline providing that all directors will be expected to acquire
and hold First Merchants stock equal in value to at least three times their
total annual director compensation while serving on the Board. Directors will be
expected to meet this guideline as soon as reasonably possible, taking into
account the director's relevant financial and other circumstances, but in no
event more than six years after the director is first elected to the Board.
TRANSACTIONS WITH RELATED PERSONS
Certain directors and executive officers of First Merchants and its subsidiaries
and their associates are customers of, and have had transactions with, First
Merchants' subsidiary banks from time to time in the ordinary course of
business. Additional transactions may be expected to take place in the ordinary
course of business in the future. All loans and commitments included in such
transactions were made on substantially the same terms, including interest rates
Page 30
and collateral, as those prevailing at the time for comparable loans with
persons not related to the lender and did not involve more than the normal risk
of collectibility or present other unfavorable features.
Richard A. Boehning, a director of First Merchants and Lafayette Bank and Trust
Company, National Association, a wholly owned subsidiary of First Merchants, is
of counsel to the law firm of Bennett, Boehning & Clary LLP, Lafayette, Indiana,
which Lafayette Bank and Trust has retained as legal counsel during 2007 and
will continue to retain as legal counsel in 2008. Charles E. Schalliol, a
director of First Merchants, is of counsel to the law firm of Baker & Daniels
LLP, Indianapolis, Indiana, which First Merchants Bank, National Association, a
wholly owned subsidiary of First Merchants, has retained as legal counsel during
2007 and will continue to retain as legal counsel in 2008. The Board has
determined that these relationships do not prevent Mr. Boehning or Mr. Schalliol
from being "independent directors," as defined in the NASDAQ listing standards.
In accordance with First Merchants' Code of Business Conduct, all transactions
in which First Merchants is or is to be a participant and the amount involved
exceeds $120,000, and in which a director or executive officer of First
Merchants, or any member of his or her immediate family, had or will have a
direct or indirect material interest, will be reviewed for potential conflict of
interest and must be approved by the Audit Committee. Under the standards set
forth in the Code of Business Conduct, the Audit Committee will determine
whether the transaction might pose an actual or apparent conflict of interest
and, if so, whether such conflict would prevent the director or executive
officer from complying with his or her obligation never to allow personal
interests to interfere with objectivity in performing responsibilities to First
Merchants and never to use or attempt to use a position with First Merchants to
obtain any improper personal financial or other benefit for the director or
executive officer, his or her family members, or any other person.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires First
Merchants' directors and executive officers to file reports of ownership and
changes in ownership of First Merchants stock with the SEC. Based on its records
and the written representations of its directors and executive officers, First
Merchants believes that during 2007 these persons complied with all Section
16(a) filing requirements; except that: (1) a late Form 4 report was filed on
May 17, 2007 by director and retired executive officer Michael L. Cox to report
the sale of 1,014 shares on April 24, 2007; (2) a late Form 4 report was filed
on June 22, 2007 by executive officer Shawn R. Blackburn to report the sale of
633 shares on June 8, 2007; (3) a late Form 3 report was filed by director Terry
L. Walker on July 27, 2007 to correct a Form 3 report filed on July 26, 2006,
which had omitted 525 shares owned by Mr. Walker's spouse in an investment
management account; and (4) two late Form 4 reports were filed on December 31,
2007 by director Richard A. Boehning, the first to report the purchase of 1,400
shares on August 6, 2007 and the second to report the sale of 1,400 shares on
December 17, 2007.
INDEPENDENT AUDITOR
Fees for Professional Services Rendered by BKD, LLP
The following table shows the aggregate fees billed by BKD, LLP for audit and
other services rendered to First Merchants for 2006 and 2007.
2006 2007
---- ----
Audit Fees $397,500 $382,500
Audit-Related Fees 83,911 66,923
Tax Fees 77,072 100,801
All Other Fees 0 0
--------------- ---------------
Total Fees $558,483 $550,224
=============== ===============
Page 31
The "Audit Fees" were for professional services rendered for the audits of First
Merchants' consolidated financial statements and internal control over financial
reporting, reviews of condensed consolidated financial statements included in
First Merchants' Forms 10-Q, and assistance with regulatory filings. The
"Audit-Related Fees" were for professional services rendered for audits of First
Merchants' benefit plans.
The "Tax Fees" were for professional services rendered for preparation of tax
returns and consultation on various tax matters.
All of the services related to the "Audit-Related Fees," "Tax Fees" and "All
Other Fees" for 2006 and 2007 were pre-approved by the Audit Committee in
accordance with the Committee's pre-approval policy described below.
The Audit Committee has considered whether the provision by BKD, LLP of the
services covered by the fees other than the audit fees is compatible with
maintaining BKD, LLP's independence and believes that it is compatible.
Pre-approval Policies and Procedures
The Audit Committee has established a pre-approval policy, under which the
Committee is required to pre-approve all audit and non-audit services performed
by First Merchants' independent auditor, in order to assure that the provision
of such services does not impair the auditor's independence. These services may
include audit services, audit-related services, tax services and other services.
Under this policy, pre-approval is provided for 12 months from the date of
pre-approval unless the Committee specifically provides for a different period.
The policy is detailed as to the particular services or category of services and
fee levels that are pre-approved. Unless a service or type of service to be
provided by the independent auditor has received general pre-approval, it will
require specific pre-approval by the Audit Committee. The Committee must also
approve any proposed services exceeding the pre-approved fee levels. The
independent auditor is required to provide detailed back-up documentation with
respect to each proposed pre-approved service at the time of approval. The Audit
Committee may delegate pre-approval authority to one or more of its members. The
member or members to whom such authority has been delegated must report any
pre-approval decisions to the Audit Committee at its next scheduled meeting. The
Audit Committee does not delegate its responsibilities to pre-approve services
performed by the independent auditor to management.
VOTING ITEM 3 - RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR FOR 2008
The Board, subject to ratification by the shareholders, has appointed BKD, LLP
as First Merchants' independent auditor for 2008. If the shareholders do not
ratify the appointment of BKD, the Audit Committee and the Board will reconsider
this appointment. Representatives of the firm are expected to be present at the
annual shareholders' meeting. They will have an opportunity to make a statement,
if they desire to do so, and are expected to be available to respond to
appropriate questions.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF THE FIRM OF BKD, LLP AS FIRST MERCHANTS' INDEPENDENT AUDITOR FOR
2008.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the 2009 annual meeting of
the shareholders must be received by the Secretary of First Merchants at First
Merchants' principal office by November 20, 2008, for inclusion in First
Merchants' 2009 proxy statement and form of proxy relating to that meeting.
Shareholder proposals, if any, intended to be presented at the 2008 annual
meeting that were not submitted for inclusion in this proxy statement will be
considered untimely unless they were received by the Secretary of First
Merchants at First Merchants' principal office by January 29, 2008. The
Secretary did not receive any such shareholder proposals by that date.
Page 32
OTHER MATTERS
Shareholders who, according to First Merchants' records, share an address may
receive only one Notice Regarding the Availability of Proxy Materials on the
Internet or only one set of proxy materials, unless the shareholders have
provided contrary instructions. Any shareholder who received only one Notice
Regarding the Availability of Proxy Materials or one set of proxy materials, and
who wishes to receive a separate Notice or a separate set of proxy materials now
or in the future, may write or call First Merchants' Shareholder Services
Department to request a separate Notice or a separate set of proxy materials at
First Merchants Corporation, P. O. Box 792, Muncie IN 47308-0792; (800)
262-4261, extension 21522. Similarly, shareholders who share an address and who
have received multiple Notices Regarding the Availability of Proxy Materials or
multiple copies of proxy materials may write or call First Merchants'
Shareholder Services Department at the same address and telephone number to
request delivery of a single Notice or a single copy of these materials in the
future.
The cost of soliciting proxies will be borne by First Merchants. In addition to
solicitations by mail, proxies may be solicited personally or by telephone or
other electronic means, but no solicitation will be made by specially engaged
employees or paid solicitors.
The Board and management are not aware of any matters to be presented at the
annual meeting of the shareholders other than the election of directors, the
proposal to approve the First Merchants Corporation Equity Compensation Plan for
Non-Employee Directors, and the ratification of the appointment of the
independent auditor. However, if any other matters properly come before the
annual meeting or any adjournment thereof, the holders of the proxies are
authorized to vote thereon at their discretion, provided First Merchants did not
have notice of any such matter on or before January 29, 2008.
By Order of the Board of Directors
Muncie, Indiana Cynthia G. Holaday
March 19, 2008 Secretary
Page 33
A-5
APPENDIX A
FIRST MERCHANTS CORPORATION
EQUITY COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
ARTICLE I
ESTABLISHMENT AND PURPOSE
Section 1.01. Establishment of Plan. First Merchants Corporation, an
Indiana corporation (the "Company"), hereby establishes the First Merchants
Corporation Equity Compensation Plan for Non-Employee Directors (the "Plan"),
effective as of April 29, 2008 (the "Effective Date"), subject to the approval
of the Plan at the Company's 2008 annual meeting of shareholders by the holders
of a majority of the shares of the Company's common stock present and voting at
that meeting in person or by proxy.
Section 1.02. Purpose. The purpose of the Plan is to promote the interests
of the Company and its shareholders by more closely aligning the interests of
the Company and its Non-Employee Directors by requiring the payment of at least
one-half (1/2) of the Compensation payable to Non-Employee Directors for their
service in that capacity in Restricted Shares of the Company's common stock. A
"Non-Employee Director" means any member of the board of directors of the
Company (the "Board") who is not an employee of the Company or any of its
Subsidiaries. A "Subsidiary" means a corporation or other form of business
association of which shares (or other ownership interests) having fifty percent
(50%) or more of the voting power are, or in the future become, owned or
controlled, directly or indirectly, by the Company.
ARTICLE II
ADMINISTRATION
The Plan shall be administered by the Compensation and Human Resources
Committee of the Board (the "Committee"), which shall serve at the pleasure of
the Board. The Committee shall have full authority to administer the Plan,
including authority to interpret and construe any provision of the Plan and to
adopt such rules and regulations for administering the Plan as it may deem
necessary to comply with the requirements of the Plan or any applicable law. All
actions taken and interpretations made in good faith by the Committee, or taken
or made by any other person or persons to whom the Committee has delegated
authority, in the administration of the Plan shall be final and binding upon all
interested persons. All decisions by the Committee shall be made with the
approval of not less than a majority of its members. No member of the Committee
shall be liable for anything done or omitted to be done by him or her or by any
other member of the Committee or the Board in connection with the Plan, except
for his or her own willful misconduct or as expressly provided by statute.
ARTICLE III
PARTICIPATION; NON-EMPLOYEE DIRECTOR COMPENSATION
Section 3.01. Participation. All Non-Employee Directors shall automatically
become participants in the Plan with respect to all Compensation payable to them
for calendar quarters ending after the Effective Date, until the Plan is
terminated in accordance with the provisions of Article VII. "Compensation"
means any retainer, fee or other payment of any kind to which a Non-Employee
Director is entitled for services performed in that capacity, including, without
limitation, any additional amount payable to a Non-Employee Director for
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chairing a Board committee, but excluding any "Director Option" granted under
the Company's 1999 Long-Term Equity Incentive Plan (the "1999 Equity Incentive
Plan").
Section 3.02. Non-Employee Director Compensation. The Board shall annually,
or at other times as the Board shall deem appropriate, determine the amount of
Compensation to be payable for services performed by Non-Employee Directors, in
accordance with applicable laws and regulations. Such Compensation shall be paid
quarterly, as of the last business day of each calendar quarter.
Section 3.03. Fraction Payable in Restricted Shares. A fraction of all
Compensation payable to Non-Employee Directors for calendar quarters ending
after the Effective Date, as determined by the Board from time to time, which
fraction shall not be less than one-half (1/2), shall be paid in Restricted
Shares, as defined in Section 3.04. In the absence of such determination, this
fraction shall be one-half (1/2). The number of Restricted Shares to be issued
to each Non-Employee Director shall be determined on the basis of the Fair
Market Value of such Shares as of the date (i.e., the last business day of the
calendar quarter) for which the Compensation is payable. The "Fair Market Value"
of a Restricted Share means the last reported sale price of a share of the
Company's common stock on the relevant date, or if no sale took place, the last
reported sale price of a share on the most recent day on which a sale of a share
of stock took place as reported by NASDAQ or a national securities exchange on
which the Company's stock is listed on such date. The shares shall be issued as
of the last business day of the relevant calendar quarter and shall be credited
to the Non-Employee Director's stock account as soon as administratively
feasible thereafter, but in no event shall any such payment be made later than
the March 15 of the calendar year next following the calendar year in which such
shares were earned. To the extent Compensation payable in Restricted Shares to a
Non-Employee Director under this Section 3.03 would result in a fractional share
of common stock being issuable to such Non-Employee Director, cash shall be paid
to the Non-Employee Director in lieu of such fractional share.
Section 3.04. Restrictions on Shares. A "Restricted Share" means a share of
the Company's common stock that is nontransferable and subject to a substantial
risk of forfeiture, to the extent provided in this Section 3.04. The shares
issued to a Non-Employee Director in accordance with Section 3.03 may be
registered in the name of a nominee or held in such other manner as the
Committee determines to be appropriate. A book entry stock account will be
established in the Non-Employee Director's name. The Non-Employee Director will
be the beneficial owner of the shares issued and credited to his or her stock
account and, subject to the restrictions set forth in this Section 3.04, he or
she will have all rights of beneficial ownership in such shares including the
right to vote the shares and receive all dividends and other distributions paid
or made with respect thereto. The Company or its nominee will retain custody of
the shares issued under this Plan until (i) all of the restrictions have lapsed
in accordance with Subsection 3.04(a), and (ii) the Non-Employee Director makes
a specific request in writing to the Company for such shares to be sold,
transferred or delivered; provided, however, at any time following the lapse of
such restrictions, a Non-Employee Director may request that a stock certificate,
representing all or part of the shares credited to his or her stock account on
which the restrictions have lapsed, be issued and delivered to the Non-Employee
Director. None of the shares issued under this Plan may be sold, transferred,
assigned, pledged, encumbered or otherwise alienated or hypothecated, unless and
until, and then only to the extent that, these restrictions have lapsed in
accordance with Subsection 3.04(a).
(a) Lapse of Restrictions. The restrictions set forth in the first paragraph of
Section 3.04 shall lapse on the earliest of the following dates: (i) the
third anniversary of the date as of which the Restricted Shares were issued
if, as of the date the restrictions are to lapse, the Non-Employee Director
has continued to serve in that capacity from the date as of which the
Restricted Shares were issued to the date of lapse; (ii) the date of the
Non-Employee Director's retirement as a member of the Board after he or she
has attained age fifty-five (55); (iii) the date of the Non-Employee
Director's death; (iv) the date the Non-Employee Director is determined to
be totally and permanently disabled, as defined in Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended (the "Code"), or (v) the date of
a "Change of Control," as defined in the 1999 Equity Incentive Plan.
(b) Forfeiture of Restricted Shares. In the event a Non-Employee Director's
service as a member of the Board terminates prior to the date the
restrictions on all or part of the Restricted Shares issued pursuant to the
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Plan have lapsed in accordance with Subsection 3.04(a), all shares still
subject to the restrictions shall be returned to or canceled by the Company
and shall be deemed to have been forfeited by the Non-Employee Director.
Section 3.05. Deferral of Compensation Paid in Restricted Shares. A
Non-Employee Director may elect to defer payment of all or part of his or her
Compensation that is payable in the form of Restricted Shares under the
provisions of this Article III, in accordance with the First Merchants
Corporation 2007 Directors' Deferred Compensation Plan (the "Directors' Deferred
Compensation Plan"), modified as provided in the following sentences of this
Section 3.05. A Non-Employee Director who makes such an election shall be
credited with Deferred Stock Units (which may include fractional shares) equal
to the number of Restricted Shares that the Non-Employee Director would
otherwise receive in accordance with Section 3.03 of this Plan. The Non-Employee
Director shall not be deemed to be the beneficial owner of any shares of the
Company's stock that the Non-Employee Director would have received had the
election not been made, and he or she shall not have the right to vote any such
shares or to receive any dividends or other distributions paid or made with
respect thereto. However, in lieu of the provision for crediting interest to a
Non-Employee Director's Account under Section 3.4 of the Directors' Deferred
Compensation Plan, the portion of the Non-Employee Director's Account under the
Directors' Deferred Compensation Plan that is credited with Deferred Stock Units
shall be credited with earnings each quarter equal to the dividends that would
be payable on an equivalent number of shares of the Company's common stock.
Notwithstanding Section 4.2 of the Directors' Deferred Compensation Plan, the
only permissible form of payment of the portion of the balance in the
Non-Employee Director's Account under the Directors' Deferred Compensation Plan
credited with Deferred Stock Units shall be a distribution of shares of Company
common stock in a single lump sum payment; provided, however, the Non-Employee
Director shall receive cash in lieu of a fractional share. The provisions of
Section 3.04 of this Plan shall supersede the vesting provisions of Section 4.4
of the Directors' Deferred Compensation Plan to the extent they may conflict.
ARTICLE IV
SHARES ISSUABLE UNDER PLAN
Section 4.01. Number of Shares. The shares issuable under the Plan shall be
the Company's authorized but unissued, or reacquired, common stock, or shares
purchased in the open market. The maximum number of shares of common stock that
may be issued under the Plan shall be 500,000, as adjusted pursuant to Section
4.02.
Section 4.02. Adjustment. If the Company shall at any time increase or
decrease the number of its outstanding shares of common stock or change in any
way the rights and privileges of such shares by means of a payment of a stock
dividend or any other distribution upon such shares payable in common stock, or
through a stock split, reverse stock split, subdivision, consolidation,
combination, reclassification, or recapitalization involving common stock, then
the numbers, rights and privileges of the shares issuable under Section 4.01
shall be increased, decreased or changed in like manner.
ARTICLE V
MISCELLANEOUS PROVISIONS
Section 5.01. No Right to be Elected. Neither the Plan nor any action taken
hereunder shall be construed as giving any Non-Employee Director any right to be
elected or re-elected as a director of the Company.
Section 5.02. Non-Assignment. A participant's rights and interest under the
Plan may not be assigned or transferred, hypothecated or encumbered, in whole or
in part, either directly or by operation of law or otherwise (except, in the
event of a participant's death, by will or the laws of descent and
distribution), including, without limitation, execution, levy, garnishment,
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attachment, pledge, bankruptcy, or in any other manner; and no such right or
interest of any participant in the Plan shall be subject to any obligation or
liability of such participant.
Section 5.03. Compliance with Applicable Laws. No shares of the Company's
common stock shall be issued hereunder unless counsel for the Company shall be
satisfied that such issuance will be in compliance with applicable federal,
state, local and foreign securities, securities exchange, and other applicable
laws and regulations.
Section 5.04. Withholding. It shall be a condition to the obligation of the
Company to issue shares of common stock hereunder that the participant pay to
the Company, to the extent required by law and upon its demand, such amount as
may be requested by the Company for the purpose of satisfying any liability to
withhold federal, state, local or foreign income or other taxes. A participant
in the Plan may satisfy the withholding obligation, in whole or in part, by
electing to have the Company withhold shares of common stock, otherwise issuable
under the Plan, having a Fair Market Value equal to the amount required to be
withheld. If the amount requested is not paid, the Company shall have no
obligation to issue, and the participant shall have no right to receive, shares
of common stock.
Section 5.05. Unfunded Plan. The Plan shall be unfunded. The Company shall
not be required to establish any special or separate fund or to make any other
segregation of assets to assure the issuance of shares hereunder.
Section 5.06. Ratification of Actions Taken. By accepting any payment of
Non-Employee Director Compensation hereunder or other benefit under the Plan,
each participant, and each person claiming under or through him or her, shall be
conclusively deemed to have indicated his or her acceptance and ratification of,
and consent to, any action taken under the Plan by the Company, the Board, or
the Committee.
Section 5.07. Registration. The appropriate officers of the Company shall
cause to be filed any registration statement required by the Securities Act of
1933, as amended, and any reports, returns or other information regarding any
shares of common stock issued pursuant to the Plan as may be required by Section
13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any other applicable statute, rule or regulation.
Section 5.08. Governing Law. The interpretation, validity and enforcement
of this Plan shall, to the extent not otherwise governed by the Code or the
securities laws of the United States, be governed by the laws of the State of
Indiana.
Section 5.09. Headings. Headings are given to the sections of this Plan
solely as a convenience to facilitate reference. Such headings, numbering and
paragraphing shall not in any case be deemed in any way material or relevant to
the construction of this Plan or any provisions hereof. The use of the singular
shall also include within its meaning the plural, where appropriate, and vice
versa.
ARTICLE VI
AMENDMENT
The Board may amend the Plan at any time and from time to time, as it deems
advisable; provided, however, that no amendment shall become effective without
shareholder approval if such shareholder approval is required by any applicable
federal or state law, rule or regulation, or by the rules of NASDAQ or any
national exchange on which the Company's common stock is listed; and provided,
further, that any such amendment shall comply with applicable provisions of Rule
16b-3 under Section 16 of the Exchange Act, as in effect from time to time, the
Code and the rules thereunder as in effect from time to time, and, to the extent
applicable, the Employee Retirement Income Security Act of 1974, as amended, and
the rules thereunder as in effect from time to time. No amendment of the Plan
shall materially and adversely affect any right of any participant with respect
to any shares of common stock of the Company theretofore issued without such
participant's written consent.
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ARTICLE VII
TERMINATION
This Plan shall terminate upon the earlier of (a) the Board's adoption of a
resolution terminating the Plan, or (b) April 29, 2018, which is ten (10) years
from the date the Plan was initially approved and adopted by the shareholders of
the Company in accordance with Article VIII. No termination of the Plan shall
materially and adversely affect any of the rights or obligations of any person
without his or her written consent with respect to any shares of common stock of
the Company theretofore earned and issuable under the Plan.
ARTICLE VIII
SHAREHOLDER APPROVAL
The Plan shall be effective as of the Effective Date, contingent upon
shareholder approval and adoption at the 2008 annual meeting of the shareholders
of the Company. The shareholders shall be deemed to have approved and adopted
the Plan only if it is approved and adopted at a meeting of the shareholders
duly held by vote taken in the manner required by the securities laws of the
United States, the Code, and the laws of the State of Indiana, as applicable.
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