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 24, 2007
The annual meeting of the shareholders of First Merchants Corporation (the
"Corporation") will be held at the Horizon Convention Center, 401 South High
Street, Muncie, Indiana 47305, on Tuesday, April 24, 2007, at 3:30 p.m. for the
following purposes:
(1) To elect three directors, to hold office for terms of three years and
until their successors are duly elected and qualified.
(2) To ratify the appointment of the firm of BKD, LLP as the independent
auditor for 2007.
(3) To transact such other business as may properly come before the meeting.
Only those shareholders of record at the close of business on February 16, 2007
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 15, 2007
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, 2007
FIRST MERCHANTS CORPORATION
PROXY STATEMENT FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 24, 2007
This proxy statement is furnished in connection with the solicitation of the
enclosed proxy by and on behalf of the Board of Directors (the "Board") of First
Merchants Corporation (the "Corporation") for use at the annual meeting of
shareholders of the Corporation to be held April 24, 2007. The distribution of
these proxy materials is expected to commence on March 15, 2007.
VOTING
Please sign, date and return your proxy card or submit your proxy via the
telephone or Internet as soon as possible, so that your shares can be voted at
the meeting in accordance with your instructions. If you plan to vote by
telephone or Internet, you should have your control number, which is imprinted
on your proxy card, available when you call or access the web page.
o To vote by telephone, please call toll-free 1-800-PROXIES
(1-800-776-9437) on a touch-tone telephone and follow the
instructions.
o To vote by Internet, please access the web page "www.voteproxy.com"
and follow the on-screen instructions.
Similar instructions are included on the enclosed proxy card.
Any shareholder giving a proxy has 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 in writing or via the
telephone or Internet, or by voting in person at the meeting. The shares
represented by proxies will be voted in accordance with the instructions on the
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
and for ratification of the appointment of the firm of BKD, LLP as the
Corporation's independent auditor for 2007. If any director nominee named in
this proxy statement shall become 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.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Voting Securities
Only shareholders of record at the close of business on February 16, 2007 will
be entitled to notice of and to vote at the annual meeting. 18,497,790 shares of
common stock were outstanding and entitled to vote as of February 16, 2007.
Each share of the Corporation's 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. The Secretary will count the
votes and announce the results of the voting at the meeting.
1
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.
Principal Holders of Securities
To the best of our knowledge, the following table shows the only beneficial
owners of more than 5% of the Corporation's outstanding common stock as of
February 16, 2007.
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
-------------------------------------------------------------------------------------
Dimensional Fund Advisors LP 1,543,846(1)...................8.35%
1299 Ocean Avenue
Santa Monica, CA 90401
First Merchants Trust Company, N. A. 1,099,773(2)...................5.95%
200 East Jackson Street
Muncie, IN 47305
(1) Based on a Schedule 13G filing with the Securities and Exchange
Commission (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 the Corporation's 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.
(2) First Merchants Trust Company, National Association ("FMTC"), is a
wholly owned subsidiary of the Corporation. It holds shares of the
Corporation's common stock in various fiduciary capacities, in
regular, nominee or street name accounts. Beneficial ownership of
shares so held is disclaimed by the Corporation. 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.
The following table lists the amount and percent of the Corporation's common
stock beneficially owned on February 16, 2007 by directors (including directors
who are retiring as of the 2007 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 the Corporation's 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 the Corporation's records and information
filed with the SEC and provided to the Corporation.
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 of which a person has the right to acquire beneficial ownership
on or before April 17, 2007 (60 days after February 16, 2007) by exercising
stock options ("Vested Options") awarded to participants under the Corporation's
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.
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Amount and Nature Percent
Beneficial Owner of Beneficial Ownership of Class
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Richard A. Boehning 25,336(1).......................................*
Thomas B. Clark 15,984(2).......................................*
Michael L. Cox 163,862(3).......................................*
Roderick English 2,314(4).......................................*
Jo Ann M. Gora 2,314(5).......................................*
Barry J. Hudson 456,859(6) ..................................2.45%
Thomas D. McAuliffe 41,868(7).......................................*
Michael C. Rechin 9,000(8).......................................*
Charles E. Schalliol 4,314(9).......................................*
Robert M. Smitson 24,725(10)......................................*
Terry L. Walker 16,162(11)......................................*
Jean L. Wojtowicz 3,471(12)......................................*
Robert R. Connors 26,278(13)......................................*
Mark K. Hardwick 33,786(14)......................................*
David W. Spade 3,944(15) .....................................*
Directors and Executive
Officers as a Group (17 persons) 856,413(16) ..................................4.57%
* Percentage beneficially owned is less than 1% of the outstanding
shares.
(1) 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 5,785
shares that he has the right to acquire by exercising Vested
Options.
(2) Includes 11,338 shares that he has the right to acquire by
exercising Vested Options.
(3) Includes 44,290 shares held jointly with his spouse, Sharon Cox,
3,400 Restricted Shares, and 108,439 shares that he has the right to
acquire by exercising Vested Options.
(4) Includes 2,314 shares that he has the right to acquire by exercising
Vested Options.
(5) Includes 2,314 shares that she has the right to acquire by
exercising Vested Options.
(6) 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 14,164 shares that he has the right to acquire
by exercising Vested Options.
(7) Includes 14,870 shares held jointly with his spouse, Andrea
McAuliffe, 8,398 shares that he and his spouse hold as joint
custodians for his children, 1,900 Restricted Shares, and 16,700
shares that he has the right to acquire by exercising Vested
Options.
(8) Includes 6,334 Restricted Shares.
(9) Includes 2,314 shares that he has the right to acquire by exercising
Vested Options.
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(10) Includes 5,859 shares held by his spouse, Marilyn Smitson, and
11,338 shares that he has the right to acquire by exercising Vested
Options.
(11) Includes 10,611 shares held jointly with his spouse, Cheryl L.
Walker, and 551 shares held by his spouse.
(12) Includes 3,471 shares that she has the right to acquire by
exercising Vested Options.
(13) Includes 722 shares held jointly with his spouse, Ann Connors, 3,000
Restricted Shares, and 22,556 shares that he has the right to
acquire by exercising Vested Options.
(14) Includes 4,400 Restricted Shares, and 28,666 shares that he has the
right to acquire by exercising Vested Options.
(15) Includes 2,400 Restricted Shares.
(16) Includes 26,300 Restricted Shares, and 250,456 shares that the
Corporation's directors and executive officers have the right to
acquire by exercising Vested Options.
INFORMATION REGARDING DIRECTORS
VOTING ITEM 1 - ELECTION OF DIRECTORS
Three directors will be elected at the annual meeting.
The persons named below have been nominated for election to the Board, with
terms expiring as of the 2010 annual meeting of shareholders. All of the
nominees are currently members of the Board.
Director
Name and Age Present Occupation Since
------------ ------------------ -----
Class I (Terms expire 2010):
Michael L. Cox(1) President of the Corporation since 1998, and its Chief 1984
age 62 Executive Officer since 1999. Mr. Cox has also served as
Chairman of the Board of Directors of First Merchants Bank,
National Association, a wholly owned subsidiary of the
Corporation, since 2005.
Charles E. Schalliol Director, Indiana State Office of Management and Budget, since 2004
age 59 2005. Mr. Schalliol was President and Chief Executive Officer
of BioCrossroads, an economic development organization focused
on life sciences companies, from 2003 to 2005. He was
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 60 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.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ELECTION OF EACH NOMINEE
FOR DIRECTOR NAMED ABOVE.
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Continuing Directors
The following persons will continue to serve as directors:
Name and Age Present Occupation Director
------------ ------------------ Since
-----
Class II (Terms expire 2008):
Thomas B. Clark Retired Chairman of the Board of Directors, President and 1989
age 61 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 55 Group, LLC, a provider of business management
and consulting services, since 2006. Mr. English was Senior
Vice President of Human Resources and Communications, 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 61 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 49 Management Corp., a manager of non-traditional sources of
financing, since 1983. Ms. Wojtowicz is a director of
Vectren Corporation and, until December 2006, was a trustee
of Windrose Medical Properties Trust; both are listed on the
New York Stock Exchange.
Class III (Terms expire 2009):
Richard A. Boehning Of counsel, Bennett, Boehning & Clary, since 2001. Prior to 2002
age 69 2001, Mr. Boehning was a partner in that law firm.
Barry J. Hudson Chairman of the Board of Directors of First National Bank of 1999
age 67 Portland, a wholly owned subsidiary of the Corporation,
since 1982. Mr. Hudson was Chief Executive Officer of First
National from 1982 to 2000, and he was its President from
1982 to 1998.
Michael C. Rechin(2) Executive Vice President and Chief Operating Officer of the 2005
age 48 Corporation since 2005. Mr. Rechin was Executive Vice
President of National City Bank of Indiana from 1995 to 2005
and was responsible for its commercial banking operations in
Indiana.
(1) Mr. Cox will retire as the President and Chief Executive Officer of
the Corporation on April 24, 2007, the date of the 2007 annual
meeting of shareholders. Under an Agreement between Mr. Cox and the
Board, which is described on page 23 under "Termination of
Employment and Change of Control Arrangements," he has been
nominated for election to an additional term as a director.
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(2) Mr. Rechin will become the President and Chief Executive Officer of
the Corporation on April 24, 2007, the date of the 2007 annual
meeting of shareholders.
Retiring Directors
Robert M. Smitson and Thomas D. McAuliffe will retire as directors of the
Corporation on April 24, 2007, the date of the 2007 annual meeting of
shareholders.
Meetings of the Board
The Board held 6 meetings during 2006. 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
The Corporation's directors are encouraged to attend the annual meeting of
shareholders. At the 2006 annual meeting, all 13 directors were in attendance.
Board Independence
The Board has determined that each of the Corporation's directors and
director-nominees is an "independent director," as defined in the listing
standards of the Nasdaq Stock Market, Inc. ("NASDAQ"), except for the
Corporation's President and CEO, Michael L. Cox, the Corporation's Executive
Vice President and COO, Michael C. Rechin, and the Chairman of the Board of
Directors of First National Bank of Portland, Barry J. Hudson.
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 the Corporation's website,
www.firstmerchants.com. The following information is provided regarding the
composition, functions and number of meetings held by these committees in 2006:
Audit Committee
The Audit Committee is composed of directors Jean L. Wojtowicz (Chairman),
Thomas B. Clark, Jo Ann M. Gora, Robert M. Smitson and Terry L. Walker. The
Committee met 5 times during 2006. Its responsibilities include overseeing the
Corporation's accounting and financial reporting principles and policies and its
internal accounting and disclosure controls and procedures, overseeing and
evaluating the effectiveness of the Corporation's internal audit function,
reviewing the Corporation's procedures to ensure that quarterly and annual
financial statements are accurate and complete, including reviewing
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the certifications of these financial statements by the Corporation's 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 management and the external
auditor the Corporation's audited financial statements and, based on this
review, making a recommendation to the Board on inclusion of these financial
statements in the Corporation's annual report on Form 10-K. In accordance with
Section 407 of the Sarbanes-Oxley Act, the Corporation 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 the Corporation for 2006 with the Corporation's management, and it has
discussed with BKD, LLP, the Corporation's independent auditor for 2006, 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 the Corporation be included in the Corporation's Annual Report on Form 10-K
for the 2006 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
Robert M. Smitson
Terry L. Walker
Nominating and Governance Committee
The Nominating and Governance Committee is composed of directors Thomas B. Clark
(Chairman), Richard A. Boehning, Robert M. Smitson and Jean L. Wojtowicz. The
Committee met 2 times during 2006. 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 the Corporation's Code of Business Conduct and its Code of Ethics for
Senior Financial Officers of the Corporation. 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 the Corporation's
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 the
Corporation's market area, ability and willingness to devote sufficient time
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to director responsibilities, and willingness to maintain a meaningful ownership
interest in the Corporation and assist the Corporation in developing new
business. For incumbent directors whose terms are expiring, the Committee also
considers the quality of their prior service to the Corporation, including the
nature and extent of their participation in the Corporation's governance and
their contributions of management and financial expertise and experience to the
Board and the Corporation. 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,
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 the Corporation's 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 the
Corporation's 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 2007
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, Roderick English and Robert M.
Smitson. The Committee met 2 times during 2006. The Committee is responsible for
establishing the Corporation's 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 the
Corporation's non-employee directors; and it administers the Corporation's
non-equity incentive compensation program (the First Merchants Corporation
Senior Management Incentive Compensation Program), the nonqualified deferred
compensation plans (the First Merchants Corporation Supplemental Executive
Retirement Plan and the First Merchants Corporation Defined Contribution
Supplemental Executive Retirement 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 the Corporation's
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 the Corporation 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 the Corporation and its subsidiaries
to the Corporation's President and Chief Executive Officer and the chief
executive officers of the Corporation's subsidiaries, as appropriate, and the
Committee has done so. The Committee has also delegated the day-to-day
responsibilities for administering the Corporation's non-equity incentive,
deferred compensation, and equity-based programs to Mr. Cox 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. Cox 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 the Corporation and its subsidiaries. As the President and
Chief Executive Officer, Mr. Cox also makes recommendations to the Committee
concerning the performance, compensation and benefits of the Corporation's
executive officers (other than himself) and its senior management employees, as
well as the chief executive officers and regional presidents of the
Corporation's subsidiaries.
8
In 2005, the Committee engaged Watson Wyatt & Company to conduct a competitive
market assessment of the compensation of the Corporation's executive officers
and to review the Corporation's 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 recommendation, the Committee changed the Corporation's 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
prevalence information for executive retirement benefits among companies in
general industry and the banking industry, to analyze the benefit levels and
adequacy of financing of the existing Supplemental Executive Retirement Plan, a
defined benefit nonqualified deferred compensation plan presently covering Mr.
Cox and paying retirement benefits to two other retired executives of the
Corporation, 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
existing 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 the Executive Vice President and Chief
Operating Officer, Michael C. 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, Roderick English or Robert M. Smitson - was an
officer or employee of the Corporation or any of its subsidiaries during 2006.
None of these members has ever been an officer or employee of the Corporation or
any of its subsidiaries. No member of the Compensation and Human Resources
Committee or executive officer of the Corporation had a relationship during 2006
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 the Corporation's annual
report on Form 10-K for the fiscal year ended December 31, 2006 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
Robert M. Smitson
9
COMPENSATION OF EXECUTIVE OFFICERS
Compensation Discussion and Analysis
The Corporation's compensation programs are intended to provide incentives to
employees, and to senior management in particular, to achieve the Corporation's
current and long-term strategic goals. The ultimate objective of the
Corporation's strategic goals, and thus of these compensation programs, is to
obtain a superior return on shareholders' investment. The Corporation's
compensation programs and policies are determined, implemented and evaluated by
the Compensation and Human Resources Committee, in consultation with senior
management and with the assistance of outside consultants as the Committee deems
necessary.
The compensation programs for the Corporation's "Named Executive Officers" (the
President and Chief Executive Officer, Michael L. Cox, the Executive Vice
President and Chief Financial Officer, Mark K. Hardwick, the Executive Vice
President and Chief Operating Officer, Michael C. Rechin, the Senior Vice
President and Chief Information Officer, Robert R. Connors, and the Senior Vice
President and Chief Credit Officer, David W. Spade) and other senior managers
contain four principal components: (1) salary, (2) non-equity incentive pay, (3)
equity-based compensation, consisting of restricted stock awards and stock
options, and (4) retirement benefits. The compensation programs incentivize the
Named Executive Officers and other senior managers to achieve the Corporation's
current and shorter-term goals by paying them current cash compensation (salary
and non-equity incentive pay) that provides an immediate or near-term reward for
exceptional performance; whereas longer-term performance is rewarded through
equity-based compensation and retirement benefits. The equity-based compensation
directly aligns the Named Executive Officers' and other senior managers'
financial interests with those of the shareholders by correlating the amount of
the compensation received with the price of the Corporation's stock. The
equity-based compensation and retirement programs are also designed to encourage
retention of senior management employees.
Each of the four principal components of the Corporation's compensation programs
is described below:
Salaries. The Named Executive Officers' 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 the Corporation's 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 the Corporation's competitors in the financial services
industry, inflation rates and budgetary considerations. The Committee relies
heavily on the recommendations of the Chief Executive Officer in setting the
salaries of the Named Executive Officers other than the Chief Executive Officer.
The Committee has the sole responsibility for establishing the Chief Executive
Officer's salary.
For 2006 and prior years, employee salary determinations were made in December,
and they took effect at the beginning of the following year. However, as
recommended by senior management and approved by the Committee, commencing in
2007 these determinations are delayed until the Corporation's audited financial
statements for the preceding fiscal year are issued (generally in late January
or early February), and the resulting salary adjustments are not effective until
the first payroll in March. The Committee believes that, by waiting until the
financial statements are issued, salary adjustments for the Named Executive
Officers and other employees can be more accurately and effectively tied to
their success in meeting financial targets and other goals for the previous
year. It also allows the Corporation to communicate decisions concerning salary
adjustments to the Named Executive Officers and other employees close to the
time they are informed of incentive plan payments and equity-based awards, thus
ensuring a clear and consistent message regarding performance and underlining
the Corporation's emphasis on growing a performance-based culture.
Mr. Cox's base salary for 2006 was $355,000, a 3.4% increase over his 2005
salary. Since he will be retiring on April 24, 2007, his salary was not adjusted
in 2007. Mr. Rechin didn't assume his position with the Corporation until
late-November 2005; therefore, his beginning base salary of $275,000 was not
10
adjusted for 2006. He will become the President and Chief Executive Officer on
April 24, 2007, at which time his base salary will increase to $325,000, in
recognition of his additional responsibilities. Mr. Hardwick's base salary for
2006 was $190,000, an 11.8% increase over his 2005 salary; his base salary was
increased by an additional 10% in 2007, to $209,000. Mr. Hardwick's larger
increases were based in part on his exceptional performance and worth to the
Corporation and were in part market-based, resulting from a review of salaries
paid to executives holding similar positions with the Corporation's competitors
in the financial industry. Mr. Connors' base salary for 2006 was $182,200, a
3.4% increase over his 2005 salary; his base salary was increased by an
additional 5.5% in 2007, to $192,200. His larger increase in 2007 was in
recognition of his excellent performance during 2006. Mr. Spade was the
Executive Vice President and Chief Lending Officer of First Merchants Bank,
National Association ("First Merchants Bank"), a wholly owned subsidiary of the
Corporation, with a base salary of $160,000, during the first 11 months of 2006.
He was promoted to Senior Vice President and Chief Credit Officer of the
Corporation as of December 1, 2006, and his base salary was increased to
$175,000 on account of this promotion but was not further adjusted for 2007.
Non-equity incentive pay. Non-equity incentive compensation is available to the
Named Executive Officers and other senior managers through the Senior Management
Incentive Compensation Program. Under the program, the Named Executive Officers
and other participating senior management employees are eligible to receive
additional cash compensation, determined as a percentage of their base salaries,
as incentive pay by meeting individual goals that are generally closely related
to the Corporation's financial success. Under the program, at the beginning of
the year, each participant is 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 base salary. The schedules
containing the targets also include thresholds below which no payout is made, as
well as maximum payouts. For 2006, upon meeting a threshold, the executive
became entitled to 30% of the pre-determined percentage of base salary, and the
maximum payout was 200% of this percentage. The amounts earned under the program
for a fiscal year are determined and paid out after the Corporation's audited
financial statements for the applicable year have been issued (generally in late
January or early February).
Two changes were made to the Senior Management Incentive Compensation Program in
2006, both applicable to the incentive payments made to participants in early
2007 for the 2006 fiscal year. One eliminated the former provision that
mitigated the impact of wide swings in incentive plan payouts from year to year
by basing 60% of each year's payment on the participant's performance under the
program for the current year and 40% of the payment on the participant's
performance under the program for the previous year. The other eliminated the
former provision that was intended to encourage executive retention by paying
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 the Corporation's stock on
the payment date plus accrued dividends. The first change is intended to tie the
incentive pay more directly and more immediately to performance in both good and
bad years. The second change is related to the Corporation's implementation in
2006 of its new practice of awarding restricted stock to participants in the
program that will be forfeited if the employee leaves within three years of the
award. It is anticipated that these awards will be superior to deferred stock
units as a retention tool for senior managers. The effect of these two changes
will be to combine all incentive compensation earned into a one-year cash
payout, which will allow for a greater focus on growth goals, better motivate
high performers, and further strengthen the Corporation's pay-for-performance
culture.
For 2006, Messrs. Cox and Rechin were eligible to receive 45% and 40%,
respectively, of their base salaries as incentive pay by meeting their
individual goals. For both of them, 40% of their incentive pay was dependent on
improving the Corporation's operating earnings per share above a pre-established
percentage, 30% was dependent on improving diluted GAAP earnings per share above
a pre-established percentage, and 30% was dependent on obtaining a return on
equity above a pre-established percentage. The improvements in the Corporation's
operating earnings per share and diluted GAAP earnings per share for 2006 failed
to exceed the thresholds. The Corporation's return on equity did
11
exceed the threshold but was less than the target. As a result, Messrs. Cox's
and Rechin's incentive pay for 2006 was 1.35% and 1.20%, respectively, of their
base salaries. For 2006, Messrs. Hardwick and Connors were eligible to receive
35% and 30%, respectively, of their base salaries as incentive pay by meeting
their individual goals. For both of them, 70% of their incentive pay was
dependent on improving the Corporation's operating earnings per share above a
pre-established percentage, and 30% was dependent on achieving pre-established
personal objectives that were established by the Chief Executive Officer. As
noted above, the improvement in the Corporation's operating earnings per share
for 2006 failed to exceed the threshold; however, Messrs. Hardwick and Connors
achieved all of their personal objectives. As a result, Messrs. Hardwick's and
Connors' incentive pay for 2006 was 10.50% and 9.00%, respectively, of their
base salaries. For 2006, Mr. Spade was eligible to receive 20% of his base
salary as incentive pay by meeting his individual goals. 60% of his incentive
pay was dependent on improving the operating earnings of First Merchants Bank
for 2006 above a pre-established percentage, and 40% was dependent on achieving
pre-established personal objectives that were established by the Bank's Chief
Executive Officer. First Merchants Bank's operating earnings did not improve for
2006; however, Mr. Spade achieved all of his personal objectives. As a result,
Mr. Spade's incentive pay for 2006 was 8.00% of his base salary.
As noted above, 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 the
Corporation's stock on the payment date plus accrued dividends. Under this
provision, three of the Named Executive Officers - Messrs. Cox, Hardwick and
Connors - received payments in early 2007, in the amounts of $16,741, $9,122,
and $9,145, respectively, based on deferred stock units they earned for the 2004
fiscal year under the program prior to its amendment. Messrs. Rechin and Spade
weren't employees of the Corporation in 2004 and were thus not eligible for such
payments. Additional payments will be made in early 2008 to Named Executive
Officers based on deferred stock units they earned for the 2005 fiscal year
under the program prior to its amendment.
The Senior Management Incentive Compensation Program was amended for 2007 to
provide that the incentive pay which the Corporation's President and Chief
Executive Officer and its Executive Vice Presidents can earn under the program
will be entirely dependent on improving diluted GAAP earnings per share above a
pre-established percentage. If diluted GAAP earnings per share increase by the
pre-established target percentage, the President and Chief Executive Officer
will earn an additional 45% of base salary, and Executive Vice Presidents will
earn an additional 40% of base salary. The other Named Executive Officers'
incentive pay for 2007 will be based 70% on improving operating earnings per
share above a pre-established percentage and 30% on achieving pre-established
personal objectives. If operating earnings per share increase by the
pre-established target percentage and they achieve all of their personal
objectives, these Named Executive Officers will earn an additional 30% of base
salary.
Equity-based compensation. Equity-based compensation is made available to the
Named Executive Officers and other plan participants under the Long-term Equity
Incentive Plan. The Compensation and Human Resources Committee approves stock
awards under the plan at a meeting that is usually held each year in early
February. In making these awards, the Committee relies heavily on the
recommendations of the Chief Executive Officer except for the awards to the
Chief Executive Officer.
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
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 the Corporation's equity-based compensation program, beginning
in 2006, from one utilizing only stock options to one utilizing a mix of stock
options and
12
restricted stock awards for senior managers and only restricted stock awards for
other participating employees. This change was within the Committee's discretion
under the provisions of the plan.
After consulting with Watson Wyatt and the Chief Executive Officer, the
Committee concluded that the interests of the Corporation and its shareholders
will be best served if, for the Named Executive Officers and other senior
managers, stock option grants continue to be a significant component of the
Corporation's equity-based compensation program. That conclusion was based on
the rationale that the financial incentive provided by stock options depends
entirely on increasing the price of the Corporation's shares, thus furthering
the program's purpose of aligning senior management's financial interests with
those of the Corporation's shareholders.
13
The stock options granted to the Named Executive Officers and other senior
managers under the Long-term Equity Incentive Plan are incentive stock options
up to the statutory limit; the rest are nonqualified options. The stock options
vest and are exercisable 2 years after the date they are granted or, if earlier,
on the date the grantee's employment terminates on account of retirement, death
or disability. The restricted stock awarded under this plan vests, giving the
awardee complete ownership rights, if the awardee is still employed by the
Corporation 3 years after the award, or if the awardee's employment terminates
in less than 3 years on account of retirement, death or disability. The
restricted stock partially vests if the awardee's employment is involuntarily
terminated without "cause," determined by 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 3. Notwithstanding the
restrictions on the stock, the awardee is entitled to vote the shares and to
receive the dividends thereon.
The awards made to the Named Executive Officers under the Long-term Equity
Incentive Plan on February 10, 2006 and February 8, 2007, respectively, were as
follows: the 2006 award to Mr. Cox was 12,000 stock options and 3,400 shares of
restricted stock; however, since he will retire on April 24, 2007, he did not
receive a 2007 award; the 2006 award to Mr. Rechin was 8,000 stock options and
2,000 shares of restricted stock and the 2007 award was 12,000 stock options and
3,000 shares of restricted stock, the substantial increase in 2007 due to his
becoming President and Chief Executive Officer on April 24, 2007; the 2006 award
to Mr. Hardwick was 7,000 stock options and 2,000 shares of restricted stock and
the 2007 award was 8,000 stock options and 2,400 shares of restricted stock; the
2006 award to Mr. Connors was 4,000 stock options and 1,400 shares of restricted
stock and the 2007 award was 4,500 stock options and 1,600 shares of restricted
stock; and the 2006 award to Mr. Spade was 1,400 shares of restricted stock and
the 2007 award was 4,000 stock options and 1,000 shares of restricted stock. 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. This
price was $25.14 per share on February 10, 2006 and $26.31 per share on February
8, 2007.
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 the Corporation and
its participating subsidiaries who have been employed six months or more. Under
this plan, employees (including the Named Executive Officers) may elect, prior
to the offering period (July 1 to June 30), to purchase shares of the
Corporation's 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 the Corporation's stock, which further aligns their financial interests
with those of other shareholders. For the offering period ending June 30, 2006,
the following Named Executive Officers participated in this plan: Mr. Cox, who
purchased 1,059 shares, and Mr. Connors, who purchased 264 shares. The purchase
price for shares under the plan was $20.66 per share.
Retirement benefits. The Corporation has long maintained a qualified defined
benefit pension plan, the First Merchants Corporation Retirement Pension Plan,
which pays benefits at retirement to participating employees of the Corporation
and its participating subsidiaries. The benefits payable under this plan at
normal retirement age (age 65), 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. Although benefits are integrated with Social Security, they are not
subject to any deduction for Social Security or other offset amounts. The
Corporation "froze" this plan, effective March 1, 2005, for participants other
than those who were at least age 55 with 10 or more years of credited service,
meaning that these participants no longer accrued benefits under the plan after
that date 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 formula
14
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. The participants who were at
least age 55 with 10 or more years of credited service at the time the plan was
frozen were "grandfathered;" that is, their benefits continue to accrue under
the plan until their retirement.
Of the Named Executive Officers, Messrs. Rechin and Spade were never
participants in the First Merchants Corporation Retirement Pension Plan, because
they first became employees of the Corporation after March 1, 2005. Messrs.
Hardwick and Connors were among the participants whose benefits were frozen,
because they had not attained age 55 with 10 or more years of credited service
as of March 1, 2005. Assuming their employment continues to age 65, Mr.
Hardwick's annual benefit under the plan would be approximately $8,594, and Mr.
Connor's annual benefit would be approximately $7,895. Mr. Cox was
"grandfathered;" because he had attained age 55 with 10 or more years of
credited service as of March 1, 2005, so he has continued to accrue benefits
under the plan. He has elected to retire early, at age 62, on April 24, 2007.
His early retirement benefit under the plan will be an annual benefit of
approximately $47,158, payable in substantially equal monthly amounts.
The First Merchants Corporation Supplemental Executive Retirement Plan, a
defined benefit, nonqualified "excess benefit" plan, 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. This amount was $220,000 for 2006, and it is $225,000 for 2007.
The benefit payable under this plan is calculated using the First Merchants
Corporation Retirement Pension Plan formula described above, 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 Retirement Pension Plan. Mr. Cox is the
only Named Executive Officer who has been designated as a participant in this
plan. Following his retirement on April 24, 2007, he will be eligible to receive
an annual early retirement benefit of approximately $56,734 under the plan,
which the Corporation expects to begin paying in substantially equal monthly
amounts in January 2008, with the first payment to include a retroactive amount
for the last 8 months of 2007. Since the First Merchants Corporation Retirement
Pension Plan has been frozen, no other executives will be designated as
participants under this plan.
The Corporation 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 the Corporation 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 under 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 noted above). Thus, the maximum matching
employer contribution under the plan is generally 3% of pay (less if the
participant's compensation exceeds $225,000). The Corporation made matching
contributions for 2006 under the plan for Messrs. Rechin, Hardwick, Connors and
Spade in the amounts of $6,600, $6,600, $6,433, and $5,028, respectively. For
the participants who were "grandfathered" when the First Merchants Corporation
Retirement Pension Plan was frozen, including Mr. Cox, the matching employer
contribution is only 25% of their pre-tax contributions under the plan, to a
maximum of 5% of compensation. The Corporation made a matching contribution for
2006 under the plan for Mr. Cox in the amount of $2,750. The employer also makes
contributions under the plan on behalf of participants based on their years of
service, currently from 2% to 7% of compensation (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 2006, the service-weighted
contribution for Mr. Hardwick was 3% of compensation, or $6,694; and the
service-weighted contributions for Messrs. Rechin, Connors and Spade were 2% of
compensation, or $7,672, $4,289, and $3,352, respectively.
15
Finally, the employer 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
Named Executive Officers 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 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 a nonqualified plan that
is intended to provide additional retirement benefits to designated executives
whose benefits under the Corporation's 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. 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 the Corporation 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. The Corporation's 2006 contribution to this plan
for Mr. Rechin was $33,396.
Termination of Employment and Change of Control Arrangements. In general, the
Corporation 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. However, on January 23, 2007, the Board approved an agreement between
the Corporation and Mr. Cox concerning his retirement as the President and Chief
Executive Officer of the Corporation on April 24, 2007, the date of the 2007
annual meeting of shareholders, and his provision of consulting services to the
Corporation for a period of 2 years thereafter. The material terms of this
agreement are described on page 23 of this proxy statement, under "Termination
of Employment and Change of Control Arrangements."
The Corporation has change of control agreements with certain of its key
executives, including all of the Named Executive Officers except Mr. Spade. The
Board believes that change of control agreements are in the best interests of
the Corporation and its shareholders, because they encourage key executives to
remain with the Corporation and continue to act in the Corporation's 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. The Board also believes that "double
trigger" agreements are in the Corporation's best interests, so each one
provides that severance benefits will be payable only if both a change of
control occurs and the executive's employment is terminated or constructively
terminated within 24 months after the change of control. No benefits will be
payable in the event of the executive's voluntary retirement, death or
disability, or if the executive's employment is terminated for cause. More
information regarding the definitions of "change of control" and "constructive
termination," as used in these agreements, can be found on pages 23-24 of this
proxy statement, under "Termination of Employment and Change of Control
Arrangements." The lump sum
16
severance benefit 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. Cox, Rechin and Hardwick, and 2.00 for Mr. Connors. The agreements
also provide that the Corporation will: pay any excise tax imposed on the
executive under Section 4999 of the Internal Revenue Code on an "excess
parachute payment;" provide outplacement services and pay reasonable legal fees
and expenses incurred by the executive as a result of the termination; continue
life, disability, accident and health insurance coverage until the earlier of 2
years following the date of termination or the executive's 65th birthday; and
cancel the executive's outstanding stock options and, in lieu thereof, pay the
executive a lump sum amount equal to the bargain element value of these options,
if any. The aggregate of the benefits that would have been payable to key
executives under all of the Corporation's existing change of control agreements,
if both of the triggering events had occurred on December 31, 2006, is only a
little more than 1% of the Corporation's market capitalization - not enough, in
the Board's opinion, to discourage any offer to purchase the Corporation's
shares. This percentage will be even less after Mr. Cox's retirement on April
24, 2007, since he will no longer be covered by a change of control agreement.
The change of control agreements were not entered into in response to any effort
to acquire control of the Corporation, and the Board is not aware of any such
effort.
A change of control would also result in vesting of: the non-vested stock
options and restricted stock awards under the Corporation's Long-term Equity
Incentive Plan; the non-vested deferred stock units under the Corporation's
Senior Management Incentive Compensation Program; the non-vested retirement
benefits under the Corporation's nonqualified Defined Contribution Supplemental
Executive Retirement Plan. Additional information concerning the affect these
provisions for accelerated vesting in the event of a change of control would
have on the Named Executive Officers can be found on pages 24-25 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 Named Executive Officers for 2006.
Summary Compensation Table
----------------------------------------------------------------------------------------------------------------------
Change in
pension value
and
nonqualified
Non-equity deferred
Stock Option incentive plan compensation
Name and Principal Position Year Salary(1) Bonus(2) Awards(3) awards(3) compensation(4) earnings(5)
----------------------------------------------------------------------------------------------------------------------
Michael L. Cox 2006 $ 361,887 $ 0 $ 25,268 $ 32,766 $ 4,793 $ 205,052
President and Chief
Executive Officer
----------------------------------------------------------------------------------------------------------------------
Mark K. Hardwick 2006 193,699 0 14,864 19,113 19,950 2,495
Executive Vice President
and Chief Financial Officer
----------------------------------------------------------------------------------------------------------------------
Michael C. Rechin 2006 280,288 100,100 14,864 21,844 3,300 0
Executive Vice President
and Chief Operating
Officer
----------------------------------------------------------------------------------------------------------------------
Robert R. Connors 2006 185,704 0 10,405 10,922 16,398 4,695
Senior Vice President and
Chief Information Officer
----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------
All other
Name and Principal Position compensation(6) Total
-----------------------------------------------------------
Michael L. Cox $ 27,918 $ 657,684
President and Chief
Executive Officer
-----------------------------------------------------------
Mark K. Hardwick 15,434 265,555
Executive Vice President
and Chief Financial Officer
-----------------------------------------------------------
Michael C. Rechin 51,788 472,184
Executive Vice President
and Chief Operating
Officer
-----------------------------------------------------------
Robert R. Connors 12,310 240,434
Senior Vice President and
Chief Information Officer
-----------------------------------------------------------
17
----------------------------------------------------------------------------------------------------------------------
Change in
pension value
and
nonqualified
Non-equity deferred
Stock Option incentive plan compensation
Name and Principal Position Year Salary(1) Bonus(2) Awards(3) awards(3) compensation(4) earnings(5)
----------------------------------------------------------------------------------------------------------------------
David W. Spade 2006 164,327 0 10,405 0 12,800 0
Senior Vice President
and Chief Credit Officer
----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------
All other
Name and Principal Position compensation(6) Total
-----------------------------------------------------------
David W. Spade 10,568 198,100
Senior Vice President
and Chief Credit Officer
-----------------------------------------------------------
(1) The amounts shown in the Salary column 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.
Hardwick, these were $190,000, $45 and 3,654, respectively; for Mr.
Rechin, these were $275,000, $0 and $5,288, respectively; for Mr.
Connors, these were $182,200, $0 and 3,504, respectively; and for
Mr. Spade, these were $$161,250, $0 and $3,077, respectively.
(2) The Corporation agreed to pay Mr. Rechin a signing bonus of $100,000
when he was employed as the Corporation's Executive Vice President
and Chief Operating Officer in November 2005, to offset a bonus that
would have been payable to Mr. Rechin by his previous employer had
he not taken this new position. This signing bonus was paid to Mr.
Rechin early in 2006. The other $100 was paid to Mr. Rechin under a
customer referral program. No bonus was paid to any other Named
Executive Officer during 2006 except as part of a non-equity
incentive plan.
(3) A discussion of the assumptions used in calculating these values is
contained in Note 16 to the 2006 audited financial statements, on
page 42 of the Corporation's Annual Report.
(4) The amounts shown in the Non-equity Incentive Plan Compensation
column are payments for 2006 performance under the First Merchants
Corporation Senior Management Incentive Compensation Program that
were made in February 2007.
(5) The amounts shown in the Change in Pension Value and Nonqualified
Deferred Compensation Earnings column for Messrs. Hardwick and
Connors are the changes in the actuarial present value of their
frozen benefits under the First Merchants Corporation Retirement
Pension Plan, and for Mr. Cox, the change in the actuarial present
value of his benefits under the First Merchants Corporation
Retirement Pension Plan ($78,517) and the First Merchants
Corporation Supplemental Executive Retirement Plan ($126,535) during
2006. Messrs. Rechin and Spade were never participants in a defined
benefit or other actuarial pension plan maintained by the
Corporation. No Named Executive Officer received above-market or
preferential earnings on deferred compensation.
(6) The Corporation made matching and service-weighted employer
contributions to the First Merchants Corporation Retirement and
Income Savings Plan for the benefit of the Named Executive Officers
in the following aggregate amounts for 2006: Mr. Cox - $2,750
($2,750 and $0); Mr. Hardwick - $13,294 ($6,600 and $6,694); Mr.
Rechin - $14,272 ($6,600 and $7,672); Mr. Connors - $10,722 ($6,433
and $4,289); and Mr. Spade - $8,380 ($5,028 and $3,352). The
Corporation also made a contribution to the First Merchants
Corporation Defined Contribution Supplemental Executive Retirement
Plan in the amount of $33,396 for the benefit of Mr. Rechin. Mr. Cox
was the only Named Executive Officer whose compensation included
perquisites in the aggregate amount of $10,000 or more. The
aggregate amount of his perquisites and other personal benefits,
which included personal use of a Corporate-owned automobile, payment
of country club dues, automobile insurance premiums, medical and
travel expenses, totaled $21,740. 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 Named Executive Officers during 2006.
The Corporation does not have employment agreements with any of the Named
Executive Officers.
Grants of Plan-based Awards Table
The following table provides information concerning all of the grants of
plan-based awards made to the Named Executive Officers for 2006, which included
non-equity incentive pay and awards of restricted stock and stock options.
18
Grants of Plan-Based Awards for 2006 Fiscal Year
-----------------------------------------------------------------------------------------------------------------------------------
Estimated future payouts under
Non-equity incentive plan awards(1)
------------------------------------
All other
All other option
stock awards;
awards; Number of Exercise or Grant date
Number of securities base price of fair value of
Grant shares of underlying option awards stock and
Name Date Threshold Target Maximum stock or units options (per share) option awards
-----------------------------------------------------------------------------------------------------------------------------------
Michael L. Cox -- $ 0 $ 159,750 $ 319,500
2/10/06 3,400 $ 25,268
2/10/06 12,000 $ 25.14 32,766
------------------------------------------------------------------------------------------------------------------------------------
Mark K. Hardwick -- 0 66,500 113,050
2/10/06 2,000 14,864
2/10/06 7,000 25.14 19,113
------------------------------------------------------------------------------------------------------------------------------------
Michael C. Rechin -- 0 110,000 220,000
2/10/06 2,000 14,864
2/10/06 8,000 25.14 21,844
------------------------------------------------------------------------------------------------------------------------------------
Robert R. Connors -- 0 54,660 92,922
2/10/06 1,400 10,405
2/10/06 4,000 25.14 10,922
------------------------------------------------------------------------------------------------------------------------------------
David W. Spade -- 0 32,000 51,200
2/10/06 1,400 10,405
------------------------------------------------------------------------------------------------------------------------------------
(1) 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 2006, as described in the Section entitled "Non-equity
Incentive Pay" in the Compensation Discussion and Analysis.
The payments made in February 2007 for 2006 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 11-13, 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 Named
Executive Officers was given goals at the beginning of 2006, 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. The amounts earned under the program for 2006 were paid out in
February 2007.
Under the Long-term Equity Incentive Plan, awards of stock options and
restricted stock were granted to each of the Named Executive Officers in
February 2006 except Mr. Spade, who was not awarded stock options because he was
not a senior manager of the Corporation at the time. In general, the number of
stock options awarded to each executive was 3 - 4 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 10, 2006. The stock
options will vest and become exercisable 2 years after the date they were
granted or, if earlier, on the date the
19
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 the Corporation 3 years after the date of
the award or the executive's employment terminates in less than 3 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 vest to be 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 3.
Notwithstanding the restrictions on the stock, the executive will be 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 Named Executive Officers outstanding as of the end of the
Corporation's 2006 fiscal year.
Outstanding Equity Awards at Fiscal Year-End 2006
------------------------------------------------------------------------------------------------------------------
Option Awards Stock Awards
---------------------------------------------------------------------------------------------
Number of Number of
securities securities
underlying underlying Number of Market value
unexercised unexercised shares or units of shares or
options options(1) Option of stock that units of stock
exercise Option have not that have not
Name (Exercisable) (Unexercisable) price expiration date vested(2) vested
-------------------------------------------------------------------------------------------------------------------
Michael L. Cox 3,400 $ 92,446
851 23,136
6,078 $ 18.07 7/31/07
5,729 24.80 7/31/08
11,575 19.65 7/29/09
11,573 18.28 7/1/10
11,576 19.73 7/1/11
13,781 26.93 7/1/12
13,127 23.46 7/1/13
15,000 25.60 7/1/14
20,000 26.70 9/1/15
12,000 25.14 2/10/16
------------------------------------------------------------------------------------------------------------------
Mark K. Hardwick 2,000 54,380
460 12,506
694 19.65 7/29/09
578 18.28 7/1/10
1,736 19.73 7/1/11
4,409 26.93 7/1/12
5,249 23.46 7/1/13
6,000 25.60 7/1/14
10,000 26.70 9/1/15
7,000 25.14 2/10/16
------------------------------------------------------------------------------------------------------------------
Michael C. Rechin 3,334 90,651
10,000 25.90 11/21/15
8,000 25.14 2/10/16
------------------------------------------------------------------------------------------------------------------
Robert R. Connors 1,400 38,066
467 12,687
3,307 25.33 8/26/12
5,249 23.46 7/1/13
6,000 25.60 7/1/14
8,000 26.70 9/1/15
4,000 25.14 2/10/16
------------------------------------------------------------------------------------------------------------------
David W. Spade 1,400 38,066
------------------------------------------------------------------------------------------------------------------
20
(1) Options were granted to Messrs. Cox, Hardwick, Rechin and Connors to
purchase 12,000, 7,000, 8,000 and 4,000 shares, respectively, of the
Corporation's stock under the Long-term Equity Incentive Plan on
February 10, 2006, which will vest on February 10, 2008. In
addition, Mr. Rechin was granted an option to purchase 10,000 shares
of the Corporation's stock under the Long-term Equity Incentive Plan
on November 21, 2005, which will vest on November 21, 2007. 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.
(2) Messrs. Cox, Hardwick, Rechin, Connors and Spade were awarded 3,400,
2,000, 2,000, 1,400 and 1,400 restricted shares, respectively, of
the Corporation's stock under the Long-term Equity Incentive Plan on
February 10, 2006, which will vest on February 10, 2009. In
addition, Mr. Rechin was awarded 2,000 restricted shares of the
Corporation's stock under the plan on December 22, 2005, of which
666 shares vested on December 22, 2006, 667 shares will vest on
December 22, 2007, and 667 shares will vest on December 22, 2008.
Messrs. Cox, Hardwick and Connors earned 851, 460 and 467 deferred
stock units, respectively, under the Corporation's Senior Management
Incentive Compensation Program for the 2005 fiscal year. These units
will vest at the end of the 2007 fiscal year and will result in
payments of cash, not shares of stock, to these executive officers
early in 2008 in amounts equal to the December 31, 2007 fair market
value of an equivalent number of shares of the Corporation's stock,
plus dividends that would have accrued on an equivalent number of
shares during 2006 and 2007. All of these restricted stock awards
and deferred stock units 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.
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 the Corporation's 2006 fiscal year for each of the Named
Executive Officers.
Option Exercises and Stock Vested During Fiscal Year 2006
-----------------------------------------------------------------------------------------------------------
Option awards Stock awards
---------------------------------------------------------------------------------
Number of shares Value realized on Number of shares or Value realized
Name acquired on exercise exercise units acquired on on vesting(1)
vesting(1)
-----------------------------------------------------------------------------------------------------------
Michael L. Cox 5,209 $ 50,163 577 $ 16,741
-----------------------------------------------------------------------------------------------------------
Mark K. Hardwick 0 0 314 9,122
-----------------------------------------------------------------------------------------------------------
Michael C. Rechin 0 0 666 17,915
-----------------------------------------------------------------------------------------------------------
Robert R. Connors 0 0 315 9,145
-----------------------------------------------------------------------------------------------------------
David W. Spade 0 0 0 0
-----------------------------------------------------------------------------------------------------------
(1) The amounts shown in the Number of Shares or Units Acquired on
Vesting column for Messrs. Cox, Hardwick and Connors are deferred
stock units they earned under the Senior Management Incentive
Compensation Program for the 2004 fiscal year which vested at the
end of the 2006 fiscal year. The amounts shown in the Value Realized
on Vesting column were paid in cash to these executives in February
2007, in accordance with the program's provisions. These payments to
Messrs. Cox, Hardwick and Connors included dividends that would have
been payable on an equivalent number of shares of the Corporation's
stock during 2005 and 2006, in the amounts of $1,061, $578 and $580,
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
Long-term Equity Incentive Plan which vested on December 22, 2006.
This award is further described in footnote 2 to the Outstanding
Equity Awards at Fiscal Year-End 2006 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 (666) times the closing price of the Corporation's stock
on December 22, 2006 ($26.90).
21
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 it is $225,000 for 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 Named Executive Officers under
the Retirement Pension Plan and the Supplemental Executive Retirement Plan as of
December 31, 2006. The assumptions used in calculating the present value of a
Named Executive Officer's accumulated benefit are the same as those used for
financial reporting purposes with respect to the Corporation's 2006 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 2006 audited financial statements, on page 46 of the
Corporation's Annual Report.
Accrued Pension Benefits at Fiscal Year-End 2006
-----------------------------------------------------------------------------------------------------------------
Number of years Present value of
credited service as of accumulated benefit as Payments during
Name Plan name 12/31/06(4) of 12/31/06 fiscal year 2006
-----------------------------------------------------------------------------------------------------------------
Michael L. Cox(1) Pension Plan 11.50 $ 502,689 $ 0
SERP 11.50 594,981 0
-----------------------------------------------------------------------------------------------------------------
Mark K. Hardwick(2) Pension Plan 8.32 24,671 0
-----------------------------------------------------------------------------------------------------------------
Michael C. Rechin(3) N/A N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------
Robert R. Connors(2) Pension Plan 3.50 63,427 0
-----------------------------------------------------------------------------------------------------------------
David W. Spade(3) N/A N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------
22
(1) Mr. Cox is the only Named Executive Officer 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 one of them who has
continued to accrue benefits under the plan after that date. He is
also the only Named Executive Officer who has been designated as a
participant in the SERP. Mr. Cox has met the eligibility
requirements for early retirement - attainment of age 55 and 10 or
more years of service - and he has elected early retirement on April
24, 2007. His monthly benefits will commence in May 2007 under the
Pension Plan and in January 2008 under the SERP. His normal
retirement benefits accrued under both plans will be reduced 5/24%
for each month by which his early retirement date precedes his
normal retirement date.
(2) Neither Mr. Hardwick nor Mr. Connors had 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.
(3) Messrs. Rechin and Spade were never participants in the Pension
Plan.
(4) The Named Executive Officers' 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, the Corporation 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
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 Named Executive
Officers' deferred benefit accounts under the Defined Contribution SERP as of
December 31, 2006.
23
Nonqualified Deferred Compensation in 2006
------------------------------------------------------------------------------------------------------------------------
Executive Corporation's Aggregate Aggregate
contributions in contributions in earnings in withdrawals/ Aggregate balance at
Name fiscal year 2006 fiscal year 2006 fiscal year 2006 distributions fiscal year-end 2006
------------------------------------------------------------------------------------------------------------------------
Michael L. Cox $ 0 $ 0 $ 0 $ 0 $ 0
------------------------------------------------------------------------------------------------------------------------
Mark K. Hardwick 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------
Michael C. Rechin(1) 0 33,396 0 0 33,396
------------------------------------------------------------------------------------------------------------------------
Robert R. Connors 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------
David W. Spade 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------
(1) Mr. Rechin is the only Named Executive Officer who has been
designated as a participant in the Defined Contribution SERP. Since
the Corporation's contribution to the plan was made at the end of
the plan year, his deferred benefit account did not experience any
gain or loss during 2006. The Corporation credited 12 % of Mr.
Rechin's compensation (base salary plus non-equity incentive pay) to
his account for 2006. 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
Other than the change of control agreements described below, the only contract,
agreement, plan or arrangement that provides for payment(s) to a Named Executive
Officer at, following, or in connection with any termination, is an agreement
concerning Mr. Cox's retirement as the President and Chief Executive Officer of
the Corporation which the Board approved on January 23, 2007. Under the terms of
this agreement, Mr. Cox will retire as the President and Chief Executive Officer
of the Corporation on April 24, 2007. He will provide services to the
Corporation as a nonemployee consultant for a period of two years thereafter,
until the earlier of April 24, 2009 or the date of the 2009 annual meeting of
shareholders. Mr. Cox will report directly to Mr. Rechin and will perform
services as requested by Mr. Rechin. These services are expected to include,
among other things, advice and assistance with matters relating to mergers,
acquisitions and other business expansion initiatives. Mr. Cox will also
continue to represent the Corporation as an officer and director of the Indiana
Bankers Association, which he currently serves as Chairman of the Board of
Directors, and as a director of the Indiana State Chamber of Commerce. These
services are not expected to occupy more than 50% of Mr. Cox's time. He will be
paid $175,000 in the first year and $100,000 in the second year for these
services, in substantially equal monthly installments. The agreement also
provides that the Nominating and Governance Committee will nominate Mr. Cox to
serve as a director of the Corporation for one additional three-year term,
subject to the vote of the shareholders, commencing as of the 2007 annual
meeting of shareholders and that he will submit his written resignation as
director in January 2009, effective as of the 2009 annual meeting of
shareholders. The agreement also provides that Mr. Cox will resign from the
boards of directors of all of the Corporation's subsidiaries and affiliates on
which he is currently serving, effective as of the date of his retirement.
The Corporation has change of control agreements with Messrs. Cox, Rechin,
Hardwick and Connors, but not with Mr. Spade. These are "double trigger"
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 the Corporation and
a termination or constructive termination of the executive's employment within
24 months after the change of control. However, 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 the Corporation's voting shares, a change in the makeup
of a majority of the Board over a 24-month period, a merger of the Corporation
in which the shareholders before the merger own 50% or less of the Corporation's
voting shares after the merger, or approval by the Corporation's shareholders of
a plan of complete liquidation of the Corporation or an agreement to sell or
dispose of substantially
24
all of the Corporation's 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. The change of control agreements were not entered
into in response to any effort to acquire control of the Corporation, and the
Board is not aware of any such effort.
Upon the occurrence of the two triggering events, a covered executive will be
entitled, in addition to base salary and incentive compensation accrued through
the date of termination, to payment from the Corporation, 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 the Corporation's
Senior Management Incentive Compensation Program during the 2 years preceding
the date of termination, by 299% in the cases of Michael L. Cox, Michael C.
Rechin and Mark K. Hardwick, and 200% in the case of Robert R. Connors. The
Corporation will 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 will be cancelled; and, in lieu
thereof, the executive will receive a lump sum amount equal to the bargain
element value of these options, if any. The executive will 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 2 years following the date of termination or the
executive's 65th birthday. The insurance coverage will be similar to what the
executive was receiving immediately prior to the notice of termination, and the
Corporation will 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 Named Executive Officers if both of the triggering events
under the change of control agreements had occurred on December 31, 2006, 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 2 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
------------------------------------------------------------------------------------------------------------------------------
Estimated Values of
Bargain Element Insurance Estimated Excise
Severance Values of Outstanding Coverages for 2 Tax Under
Name Multiplier Benefit Amount Stock Options years IRC ss.4999
------------------------------------------------------------------------------------------------------------------------------
Michael L. Cox 299% $ 1,259,899 $ 456,668 $ 28,988 $ 262,023
------------------------------------------------------------------------------------------------------------------------------
Mark K. Hardwick 299% 675,372 72,849 36,031 113,694
------------------------------------------------------------------------------------------------------------------------------
Michael C. Rechin 299% 832,117 29,300 38,319 0
------------------------------------------------------------------------------------------------------------------------------
Robert R. Connors 200% 437,192 47,390 35,931 0
------------------------------------------------------------------------------------------------------------------------------
David W. Spade N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
In the event of a change of control (as defined above), all non-vested stock
options and restricted stock awards under the Corporation's Long-term Equity
Incentive Plan will vest. The Named Executive Officers' non-vested stock options
and restricted stock awards as of December 31, 2006 are shown in the
"Outstanding Equity Awards at Fiscal Year-End 2006" table on page 19 of this
proxy statement. They include the options granted to Messrs. Cox, Rechin,
Hardwick and Connors on February 10, 2006 for 12,000, 8,000, 7,000 and 4,000
shares, respectively; the options granted to Mr. Rechin on November 21, 2005 for
10,000 shares; the restricted stock awarded to Messrs. Cox, Rechin, Hardwick,
Connors and Spade on February 10, 2006 for 3,400, 2,000, 2,000, 1,400 and 1,400
shares, respectively; and, of the 2,000 shares of restricted stock awarded to
Mr. Rechin on December 22, 2005, the 1,334 shares that still have restrictions.
25
In the event of a change of control, the non-vested deferred stock units that
Messrs. Cox, Hardwick and Connors earned for the 2005 fiscal year under the
Corporation's Senior Management Incentive Compensation Program (851, 460 and 467
units, respectively, shown as stock awards in the "Outstanding Equity Awards at
Fiscal Year-End 2006" table on page 19 of this proxy statement) will vest upon
the involuntary termination of their employment, except for cause.
Finally, in the event of a change of control, Mr. Rechin's non-vested benefit
under the Corporation's nonqualified Defined Contribution Supplemental Executive
Retirement Plan (described in the narrative preceding the "Nonqualified Deferred
Compensation" table on page 22 of this proxy statement) will vest. The
Corporation's nonqualified defined benefit Supplemental Executive Retirement
Plan (described in the narrative preceding the "Pension Benefits" table on page
21 of this proxy statement), which covers Mr. Cox, does not contain a similar
provision accelerating the vesting of his benefit in the event of a change of
control.
Compensation of Directors
The directors of the Corporation who are employees of the Corporation or one of
its subsidiaries do not receive separate compensation for their services as
directors. During 2006, these employee-directors included two of the Named
Executive Officers, Mr. Cox and Mr. Rechin, and Thomas D. McAuliffe.
The non-employee directors received annual retainers of $15,000, plus $3,000 for
each Board committee on which the director served and an additional $2,000 if
the director chaired the committee (an additional $5,000 for the Audit Committee
Chair, Jean L. Wojtowicz); except that: (a) the Chairman of the Board, Robert M.
Smitson, received an annual retainer of $50,000 with no retainer for committee
service; and (b) the annual retainer of the Vice Chairman of the Board, Charles
E. Schalliol, was increased to $35,000 in October 2006, with no retainer for
Committee service. Under the provisions of the Corporation's Long-term Equity
Incentive Plan, options were granted to each of the non-employee directors on
July 1, 2006 to purchase shares of the Corporation's common stock. Each option
was for 1,157 shares at an option price of $24.31 per share, the market price on
the date of the grants.
The following table contains information concerning the compensation paid to the
Corporation's directors, other than the Named Executive Officers and Mr.
McAuliffe, for their services as directors for 2006. James F. Ault and Robert T.
Jeffares retired as directors on April 13, 2006, the date of the 2006 annual
meeting of shareholders; and Terry L. Walker became a director on July 25, 2006.
Therefore, their retainers for 2006 were prorated. Messrs. Ault, Jeffares and
Walker were not eligible for grants of options to purchase shares of the
Corporation's common stock under the Long-term Equity Incentive Plan in 2006
because they were not serving as directors of the Corporation on July 1, 2006.
Director Compensation for 2006 Fiscal Year
------------------------------------------------------------------------------------
Fees earned or Option
Name paid in cash awards(1) Total
------------------------------------------------------------------------------------
James F. Ault $ 8,286 $ 0 $ 8,286
------------------------------------------------------------------------------------
Richard A. Boehning(2) 23,000 7,700 30,700
------------------------------------------------------------------------------------
Thomas B. Clark 26,000 7,700 33,700
------------------------------------------------------------------------------------
Roderick English 18,000 7,700 25,700
------------------------------------------------------------------------------------
Jo Ann M. Gora 18,000 7,700 25,700
------------------------------------------------------------------------------------
Barry J. Hudson(2) 18,000 7,700 25,700
------------------------------------------------------------------------------------
Robert T. Jeffares 5,143 0 5143
------------------------------------------------------------------------------------
Charles E. Schalliol 25,500 7,700 33,200
------------------------------------------------------------------------------------
Robert M. Smitson 50,000 7,700 57,700
------------------------------------------------------------------------------------
Terry L. Walker 8,250 0 8,250
------------------------------------------------------------------------------------
Jean L. Wojtowicz 24,750 7,700 32,450
------------------------------------------------------------------------------------
26
(1) As of the end of 2006 fiscal year, the above directors had the
following aggregate number of option awards outstanding: Mr. Ault -
4,628; Mr. Boehning - 5,785; Mr. Clark - 11,338; Mr. English -
2,314; Dr. Gora - 2,314; Mr. Hudson - 14,164; Mr. Jeffares - 4,628;
Mr. Schalliol - 2,314; Mr. Smitson - 11,338; Mr. Walker - 0; and Ms.
Wojtowicz - 3,471.
(2) Mr. Boehning is also a director of Lafayette Bank and Trust Company,
National Association, a wholly-owned subsidiary of the Corporation,
for which he received a retainer of $19,800 in 2006 and life
insurance coverage in the amount of $6,000. He deferred the full
amount of the retainer under an unfunded deferred compensation plan
maintained by Lafayette Bank and Trust. Mr. Hudson is also the
Chairman of the Board of Directors of First National Bank of
Portland, a wholly-owned subsidiary of the Corporation, and was paid
$12,000 in 2006 for his services in this capacity, of which he
deferred $4,356 under an insurance-funded deferred compensation plan
maintained by First National.
TRANSACTIONS WITH RELATED PERSONS
Certain directors and executive officers of the Corporation and its subsidiaries
and their associates are customers of, and have had transactions with, the
Corporation's 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
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.
In accordance with the Corporation's Code of Business Conduct, all transactions
in which the Corporation is or is to be a participant and the amount involved
exceeds $120,000, and in which a director or executive officer of the
Corporation, 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 the
Corporation and never to use or attempt to use a position with the Corporation
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 the
Corporation's directors and executive officers to file reports of ownership and
changes in ownership of the Corporation's stock with the SEC. Based on its
records and the written representations of its directors and executive officers,
the Corporation believes that during 2006 these persons complied with all
Section 16(a) filing requirements; except that: (1) a late Form 4 report was
filed on March 2, 2006 by director Thomas D. McAuliffe to report sales of 4,000
shares and 4,485 shares on February 18, 2006 and February 24, 2006,
respectively; (2) a late Form 4 report was filed on March 9, 2006 by director
Thomas B. Clark to report the exercise on March 3, 2006 of an option granted
under the 1999 Long-term Equity Incentive Plan to purchase 1,042 shares; and (3)
late Form 4 reports were filed on July 31, 2006 by director and executive
officer Michael L. Cox and executive officers Robert R. Connors and Kimberly J.
Ellington to report the purchase on June 30, 2006 of 1,059 shares, 264 shares
and 185 shares, respectively, under the First Merchants Corporation Employee
Stock Purchase Plan.
27
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 the Corporation for 2005 and 2006.
2005 2006
---- ----
Audit Fees $ 383,400 $ 397,500
Audit-Related Fees 76,292 83,911
Tax Fees 93,320 77,072
All Other Fees 14,230 0
--------- ---------
Total Fees $ 567,242 $ 558,483
========= =========
The "Audit Fees" were for professional services rendered for the audits of the
Corporation's consolidated financial statements and internal control over
financial reporting, reviews of condensed consolidated financial statements
included in the Corporation's Forms 10-Q, and assistance with regulatory
filings.
The "Audit-Related Fees" were for professional services rendered for audits of
the Corporation's benefit plans.
The "Tax Fees" were for professional services rendered for preparation of tax
returns and consultation on various tax matters.
The fees for 2005 under "All Other Fees" were for professional investigatory
services rendered by BKD, LLP at the request of the Audit Committee.
All of the "Audit-Related Fees," "Tax Fees" and "All Other Fees" for 2005 and
2006 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 the Corporation's 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 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR FOR 2007
The Board, subject to ratification by the shareholders, has appointed BKD, LLP
as the Corporation's independent auditor for 2007. 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
28
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 THE CORPORATION'S INDEPENDENT AUDITOR FOR
2007.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the 2008 annual meeting of
the shareholders must be received by the Secretary of the Corporation at the
Corporation's principal office by November 16, 2007, for inclusion in the
Corporation's 2008 proxy statement and form of proxy relating to that meeting.
Shareholder proposals, if any, intended to be presented at the 2007 annual
meeting that were not submitted for inclusion in this proxy statement will be
considered untimely unless they were received by the Secretary of the
Corporation at the Corporation's principal office by January 16, 2007.
OTHER MATTERS
The Corporation is delivering only one set of proxy materials, including this
proxy statement and the annual report, to shareholders who, according to the
Corporation's records, share an address and whom it believes are members of the
same family. A separate proxy card is included for each of these shareholders.
Any shareholder who received only one set of proxy materials, and who wishes to
receive a separate set now or in the future, may write or call the Corporation's
Shareholder Services Department to request a separate copy of these materials at
First Merchants Corporation, P. O. Box 792, Muncie IN 47308-9915; (800)
262-4261, extension 27278. Similarly, shareholders who share an address and are
members of the same family, and who have received multiple copies of the proxy
materials, may write or call the Corporation's Shareholder Services Department
at the same address and telephone number to request delivery of a single copy of
these materials in the future.
The cost of soliciting proxies will be borne by the Corporation. 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 the directors and
the ratification of the appointment of the independent public accountants.
However, if any other matters properly come before such meeting or any
adjournment thereof, the holders of the proxies are authorized to vote thereon
at their discretion, provided the Corporation did not have notice of any such
matter on or before January 16, 2007.
By Order of the Board of Directors
Muncie, Indiana Cynthia G. Holaday
March 15, 2007 Secretary
29
ANNUAL MEETING OF SHAREHOLDERS OF
FIRST MERCHANTS CORPORATION
April 24, 2007
Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible.
| |
v Please detach along perforated line and mail in the envelope provided. v
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND MANAGEMENT OF FIRST MERCHANTS CORPORATION
RECOMMEND A VOTE "FOR" THE PROPOSALS LISTED.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR
VOTE IN BLUE OR BLACK INK AS SHOWN HERE |X|
--------------------------------------------------------------------------------
1. Election of Directors:
NOMINEES:
|_| FOR ALL NOMINEES ( ) Michael L. Cox
( ) Charles E. Schalliol
|_| WITHHOLD AUTHORITY ( ) Terry L. Walker
FOR ALL NOMINEES
|_| FOR ALL EXCEPT
(See instructions below)
INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the circle next to each nominee you
wish to withhold, as shown here: (X)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
To change the address on your account, please check the box at right
and indicate your new address in the address space above. Please note |_|
that changes to the registered name(s) on the account may not be
submitted via this method.
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
2. Proposal to ratify the appointment of the firm of |_| |_| |_|
BKD, LLP as the independent auditor for 2007.
3. In their discretion, the proxies are authorized to vote on such other
matters as may properly come before the meeting, provided the Corporation
did not have notice of any such matter on or before January 16, 2007.
This proxy will be voted as directed, but if not otherwise directed this proxy
will be voted "FOR" items 1 and 2.
TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS' AND MANAGEMENT'S
RECOMMENDATIONS, JUST SIGN BELOW; NO BOXES NEED TO BE CHECKED.
MARK "X" HERE IF YOU PLAN TO ATTEND THE MEETING. |_|
_________________________________ _______________
Signature of Shareholder _________________________________ Date: _______________
_________________________________ _______________
Signature of Shareholder _________________________________ Date: _______________
Note: Please sign exactly as your name or names appear on this Proxy. When
shares are held jointly, each holder should sign. When signing as
executor, administrator, attorney, trustee or guardian, please give
full title as such. If the signer is a corporation, please sign full
corporate name by duly authorized officer, giving full title as such.
If signer is a partnership, please sign in partnership name by
authorized person.
PROXY
FIRST MERCHANTS CORPORATION
PROXY SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF FIRST MERCHANTS CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
APRIL 24, 2007
The undersigned hereby appoints Charles E. Schalliol and Robert M.
Smitson, and each of them, as proxies with power of substitution, to represent
and to vote all shares of common stock of First Merchants Corporation which the
undersigned would be entitled to vote at the Annual Meeting of Shareholders of
First Merchants Corporation to be held at the Horizon Convention Center, 401
South High Street, Muncie, Indiana 47305, at 3:30 PM EST on April 24, 2007, and
at any adjournment thereof, with all of the powers the undersigned would possess
if personally present. If any of the nominees for election as Directors is
unable or declines to serve for any reason, the persons listed above have the
authority to vote for any substitute nominee named by the Board of Directors of
First Merchants Corporation.
(Continued, and to be marked, dated and signed on the reverse side)
ANNUAL MEETING OF SHAREHOLDERS OF
FIRST MERCHANTS CORPORATION
April 24, 2007
-------------------------
PROXY VOTING INSTRUCTIONS
-------------------------
MAIL - Date, sign and mail your proxy card in the
envelope provided as soon as possible.
- OR -
TELEPHONE - Call toll-free 1-800-PROXIES ---------------------------
(1-800-776-9437) from any touch-tone telephone and COMPANY NUMBER
follow the instructions. Have your proxy card ---------------------------
available when you call. ACCOUNT NUMBER
- OR - ---------------------------
INTERNET - Access "www.voteproxy.com" and follow ---------------------------
the on-screen instructions. Have your proxy card
available when you access the web page.
--------------------------------------------------------------------------------
You may enter your voting instructions at 1-800-PROXIES (1-800-776-9437) or
www.voteproxy.com up until 11:59 PM Eastern Time the day before the cut-off or
meeting date.
--------------------------------------------------------------------------------
| |
v Please detach along perforated line and mail in the envelope provided IF v
you are not voting via telephone or the Internet.
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND MANAGEMENT OF FIRST MERCHANTS CORPORATION
RECOMMEND A VOTE "FOR" THE PROPOSALS LISTED.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR
VOTE IN BLUE OR BLACK INK AS SHOWN HERE |X|
--------------------------------------------------------------------------------
1. Election of Directors:
NOMINEES:
|_| FOR ALL NOMINEES ( ) Michael L. Cox
( ) Charles E. Schalliol
|_| WITHHOLD AUTHORITY ( ) Terry L. Walker
FOR ALL NOMINEES
|_| FOR ALL EXCEPT
(See instructions below)
INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the circle next to each nominee you
wish to withhold, as shown here: (X)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
To change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that changes
to the registered name(s) on the account may not be submitted via this method.
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
2. Proposal to ratify the appointment of the firm of |_| |_| |_|
BKD, LLP as the independent auditor for 2007.
3. In their discretion, the proxies are authorized
to vote on such other matters as may properly
come before the meeting, provided the Corporation
did not have notice of any such matter on or
before January 16, 2007.
This proxy will be voted as directed, but if not otherwise directed this proxy
will be voted "FOR" items 1 and 2.
TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS' AND MANAGEMENT'S
RECOMMENDATIONS, JUST SIGN BELOW; NO BOXES NEED TO BE CHECKED.
MARK "X" HERE IF YOU PLAN TO ATTEND THE MEETING. |_|
_________________________________ _______________
Signature of Shareholder _________________________________ Date: _______________
_________________________________ _______________
Signature of Shareholder _________________________________ Date: _______________
Note: Please sign exactly as your name or names appear on this Proxy. When
shares are held jointly, each holder should sign. When signing as
executor, administrator, attorney, trustee or guardian, please give
full title as such. If the signer is a corporation, please sign full
corporate name by duly authorized officer, giving full title as such.
If signer is a partnership, please sign in partnership name by
authorized person.