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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|_|  Soliciting Material Pursuant to ss. 240.14a-12

                           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 13, 200624, 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 Thursday,Tuesday, April 13, 2006,24, 2007, at 3:30 p.m. for the
following purposes:

(1)   To elect  three  directors,  to hold  office for a termterms 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
      public accountantsauditor for 2006.2007.

(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 10, 200616, 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 2, 200615, 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 2, 200615, 2007

                           FIRST MERCHANTS CORPORATION

                               PROXY STATEMENT FOR
                         ANNUAL MEETING OF SHAREHOLDERS
                            TO BE HELD APRIL 13, 200624, 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 13, 2006.24, 2007. The  distribution of
these proxy materials is expected to commence on March 2, 2006.15, 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 Directors 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  public accountantsauditor for 2006.2007.  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 10, 200616, 2007 will
be entitled to notice of and to vote at the annual meeting. 18,422,62218,497,790 shares of
common stock were outstanding and entitled to vote as of February 10, 2006.16, 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. 2
Amount and Nature Percent Beneficial Owner of Beneficial Ownership of Class ------------------------------------------------------------------------------------------------------- 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. 3 (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, of Directors, with terms expiring as of the 20092010 annual meeting of shareholders. All of the nominees are currently members of the Board.
Those persons nominated as directors include: Director Name and Age Present Occupation Since Class III (Terms expire 2009): Richard A. Boehning Of counsel, Bennett, Boehning & Clary, since 2001. Prior 2002 age 68 to 2001, Mr. Boehning was a partner in that law firm. Barry J. Hudson Since 1982, Chairman of the Board of Directors of First 1999 age 66 National Bank of Portland ("FNB"), a wholly owned subsidiary of the Corporation. Mr. Hudson was Chief Executive Officer of FNB from 1982 to 2000, and he was its President from 1982 to 1998. Michael C. Rechin Executive Vice President and Chief Operating Officer of 2005 Age 47 the Corporation since November 21, 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. Those persons named below continue to serve as directors:- ------------ ------------------ ----- Class I (Terms expire 2007)2010): Michael L. CoxCox(1) President of the Corporation since 1998, and its Chief 1984 Age 61age 62 Executive Officer since 1999. Mr. Cox has also served as Chairman of the Board of Directors of First Merchants Bank, National Association, ("FMB"), a wholly owned subsidiary of the Corporation, since 2005. Chairman of the Board of Directors, President and Chief Thomas D. McAuliffe(1) Executive Officer, Commerce National Bank ("CNB"), a 2003 age 56 wholly owned subsidiary of the Corporation, since 1991. 2 Director Name and Age Present Occupation Since Charles E. Schalliol Director, Indiana State Office of Management and Budget, since 2004 Age 58 since January 10,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. Robert M. Smitson RetiredTerry L. Walker Chairman of the Board of Directors, President and 1982 Age 69 Chief 2006 age 60 Executive Officer, Maxon Corporation,Muncie Power Products, Inc., a manufacturer and distributor of combustion equipment.power take-offs and hydraulic components for the truck equipment industry, since 2005. Mr. SmitsonWalker was Maxon'sMuncie Power's President and Chief Operating Officer from 19792000 to 1997, CEO from 1985 to 1998,2005.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ELECTION OF EACH NOMINEE FOR DIRECTOR NAMED ABOVE. 4 Continuing Directors The following persons will continue to serve as directors:
Name and Board Chairman from 1998 to 2004.Age Present Occupation Director - ------------ ------------------ Since ----- Class II (Terms expire 2008): Thomas B. Clark Retired Chairman of the Board of Directors, President and 1989 Age 60age 61 Chief Executive Officer, Jarden Corporation, a provider of niche consumer products for the home. Jarden changed its name from Alltrista Corporation in 2002. Mr. Clark was Alltrista'sRoderick English President and CEO from 1995 to 2001,Chief Executive Officer, The James Monroe 2005 age 55 Group, LLC, a provider of business management and Board Chairman from 2000 to 2001. Roderickconsulting services, since 2006. Mr. English was Senior Vice President of Human Resources and 2005 Age 54 Communications, Remy International, Inc. (formerly, Delco Remy International, Inc.), a manufacturer of electrical and powertrain products for autos, trucks and other vehicles, since 1994. Remy changed its name from Delco Remy International, Inc. in 2004.1994 to 2006. Jo Ann M. Gora President, Ball State University, since 2004. Dr. Gora 2004 Age 60age 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 48age 49 Management Corp., a manager of non-traditional sources of financing, since 1983. Ms. Wojtowicz is also a director of Vectren Corporation and, until December 2006, was a trustee of Windrose Medical Properties Trust, whichTrust; both are both 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 New York Stock Exchange.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.
3 (1) Under an AgreementMr. Cox will retire as the President and Chief Executive Officer of Reorganization and Merger between the Corporation and CNBC Bancorp,on April 24, 2007, the Board appointed Mr. McAuliffe as a memberdate of the Board in 2003 and agreed to nominate him for election to a full 3-year term as a director at the 20042007 annual meeting of shareholders. MEETINGS OF THE BOARD TheUnder an Agreement between Mr. Cox and the Board, which is described on page 23 under "Termination of DirectorsEmployment and Change of Control Arrangements," he has been nominated for election to an additional term as a director. 5 (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 2005.2006. All of the directors attended at least 75% of the total number of meetings of the Board and the committees on which they served. COMPENSATION OF DIRECTORSDirectors' Attendance at Annual Meeting of Shareholders The Corporation's directors are encouraged to attend the annual meeting of the Corporation who are employees of the Corporation or one of its subsidiaries received no separate compensation for their services as directors in 2005. The directors of the Corporation who are not employees of the Corporation or one of its subsidiaries, other than the Chairman of the Board, were paid an annual retainer of $15,000, plus $3,000 for each Board Committee on which the director served. The Committee Chairmen received an additional $2,000, except that the Audit Committee Chairman, James F. Ault, who is retiring as a director as ofshareholders. At the 2006 annual shareholders' meeting, received an additional $5,000. The Chairman of theall 13 directors were in attendance. Board Robert M. Smitson, received an annual retainer of $50,000 in 2005, but no retainer for Committee service. In addition, under the provisions of the Corporation's 1999 Long-term Equity Incentive Plan, options were granted to each of the non-employee directors on July 1, 2005 to purchase shares of the Corporation's common stock. Each option was for 1,157 shares at an option price of $25.00 per share, the market price on the date of the grants. Some non-employee directors received additional compensation in 2005 for their services as a director of a subsidiary of the Corporation. James F. Ault was the Chairman of the Board of Directors of The Madison Community Bank, National Association ("MCB"), a wholly owned subsidiary of the Corporation, and was paid $375 and $75, respectively, for each MCB board and committee meeting he attended. Barry J. Hudson was Chairman of the Board of Directors of FNB and was paid $10,976 in 2005 for his services in this capacity, of which $4,356 was deferred compensation under an insurance-funded deferred compensation plan maintained by FNB. Richard A. Boehning and Robert T. Jeffares were directors of Lafayette Bank and Trust Company, National Association ("LBT"), a wholly owned subsidiary of the Corporation, for which Mr. Boehning received a retainer of $19,800 and Mr. Jeffares received a retainer of $13,200 in 2005. The full amount of both retainers was deferred under an unfunded deferred compensation plan maintained by LBT. Mr. Boehning and Mr. Jeffares also received life insurance coverage from LBT in the amount of $6,000. Mr. Jeffares retired as a director of LBT in August 2005 and is retiring as a director of the Corporation as of the 2006 annual shareholders' meeting. BOARD INDEPENDENCEIndependence The Board has determined that each of the director-nomineesCorporation's directors and continuing directorsdirector-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, FNB'sand the Chairman of the Board Chairman,of Directors of First National Bank of Portland, Barry J. Hudson, and CNB's Board Chairman, President and CEO, Thomas D. McAuliffe.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. 4 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 6 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 Corporation has a Nominating and Governance Committee whose purpose is to seek to ensure continuationcomposed 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 of Directors.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, of Directors, 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, of Directors, 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 Corporate-wideCorporation'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 of the Corporation. As of the date of this proxy statement, the Nominating and Governance Committee is composed of directors Thomas B. Clark (Chairman), James F. Ault, who is retiring as a director of the Corporation as of the 2006 annual meeting, Richard A. Boehning, Robert M. Smitson and Jean L. Wojtowicz. The Nominating and Governance Committee met 4 times during 2005. The Board has adopted a written charter for the Nominating and Governance Committee. A copy of the charter isSenior 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 7 to director responsibilities, and willingness to maintain a meaningful ownership interest in the Corporation and assist the Corporation in developing new business. In addition to considering the criteria described in the preceding paragraph, the Committee's process for identifying and evaluating nominees involves, forFor incumbent directors whose terms are expiring, reviewingthe 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 Corporation's Board of Directors at the 20062007 annual shareholders' meeting of shareholders other than directors standing for re-election. 5 Compensation and Human Resources Committee The Corporation has a Compensation and Human Resources Committee whose functions are: (a)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 reviewcarry out this compensation philosophy, and approveevaluating 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, and (b)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, the executive officers and senior management employees and the compensation ranges and benefits for other officers and employees of the Corporation and its subsidiaries to the Corporation's subsidiaries. The authority to periodically adjust the compensationPresident and benefits of employees, other than executive officers and senior management of the CorporationChief 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 subsidiaries, has been delegatedresponsibilities. 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 of the subsidiaries. The Compensation and Human Resources Committee is responsible for the administrationregional 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 compensationprograms and their mix of restricted stock and stock plans. Asoptions, as well as information on accounting and tax considerations. Following completion of the datestudy, 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 this proxy statement,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 Compensationprovisions 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 Human Resourcesthe 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 is composed of directors Robert M. Smitson (Chairman), Thomas B. Clark, Roderick Englishmade additional provisions for financing the existing Supplemental Executive Retirement Plan and Charles E. Schalliol. Theadopted amendments to the plan necessary for compliance with Internal Revenue Code Section 409A; and the Committee met 5 times during 2005.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 2005.2006. None of these members has ever been an officer or employee of the Corporation or any of its subsidiaries. No other member of the Compensation and Human Resources Committee or executive officer of the Corporation had a relationship during 20052006 requiring disclosure in this proxy statement under SecuritiesSEC regulations. Compensation and Exchange Commission ("SEC") regulations. AuditHuman Resources Committee Report The Corporation has an Audit Committee which assists the Board (1) in its oversight of the Corporation's accountingCompensation and financial reporting principles and policies and internal accounting and disclosure controls and procedures, (2) in its oversight and supervision of the Corporation's internal audit function, (3) in its oversight of the certification of the Corporation's quarterly and annual financial statements and disclosures and assessment of internal disclosure controls by the Corporation's CEO and CFO, (4) in its oversight of the Corporation's consolidated financial statements and the independent external audit thereof, and (5) in evaluating the independence of the external auditors. The Audit Committee recommends the selection of the independent auditor for approval by the Board and ratification by the shareholders, and it approves the independent auditor's compensation. As of the date of this proxy statement, the Audit Committee is composed of directors James F. Ault (Chairman), Thomas B. Clark, Jo Ann M. Gora, Robert T. Jeffares, Robert M. Smitson and Jean L. Wojtowicz. Mr. Ault and Mr. Jeffares are retiring as directors of the Corporation as of the 2006 annual meeting. In accordance with Section 407 of the Sarbanes-Oxley Act, the Corporation has identified Mr. Clark, Mr. Jeffares and Ms. Wojtowicz as "Audit Committee financial experts." All of them are "independent" as that term is used in the NASDAQ listing standards. The Audit Committee met 5 times during 2005. The Board has adopted a written charter for the Audit Committee. The charter was amended by the Board in February 2006. A copy of the amended charter is attached as Appendix A to this proxy statement and is also included among the documents under the "Corporate Governance Disclosures" link on the Corporation's website, www.firstmerchants.com. The AuditHuman Resources Committee has reviewed and discussed with management the audited financial statementsCompensation Discussion and Analysis set forth immediately following this report, under "Compensation of the Corporation for 2005 with the Corporation's management, and it has discussed with BKD, LLP, the Corporation's independent auditors for 2005, the matters required to be discussed by SAS 61 (Codification of Statements on Auditing Standards, AU ss.380), as modified or supplemented. 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 6 Committees), as modified or supplemented, and has discussed with BKD, LLP its independence from the Corporation.Executive Officers." Based on these reviewsthis review and discussions,discussion, the Audit Committee recommended to the Board and the Board has approved, that the audited financial statements of the CorporationCompensation Discussion and Analysis be included in the Corporation's Annual Reportannual report on Form 10-K for the 2005 fiscal year for filing with the SEC.ended December 31, 2006 and in this proxy statement. The above report is submitted by: FIRST MERCHANTS CORPORATION AUDITCOMPENSATION AND HUMAN RESOURCES COMMITTEE James F. Ault, ChairmanCharles E. Schalliol (Chairman) Thomas B. Clark Jo Ann M. Gora Robert T. JeffaresRoderick English Robert M. Smitson Jean L. Wojtowicz9 COMPENSATION OF EXECUTIVE OFFICERS Compensation Discussion and Analysis The following tables contain information concerningCorporation's compensation programs are intended to provide incentives to employees, and to senior management in particular, to achieve the compensationCorporation'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," including the Corporation'sOfficers" (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 four most highly compensated executive officerslong-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 CEO whoChief 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 servingmade 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 officers atto receive a payout following the end of the Corporation's most recentyear 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-end, December 31, 2005,year are determined and Larry R. Helms, who was among the four most highly compensated executive officers other than the CEO for 2005 but was not serving as an executive officer at the fiscal year-end due to his retirement on October 28, 2005.
SUMMARY COMPENSATION TABLE - ------------------------------------------------------------------------------------------------------------ Annual Compensation Long Term Compensation ------------------------------------------------- Awards Payouts - ----------------------------------------------------------------------------------------------------------- Securities Name and Underlying LTIP All Other Principal Position Year Salary Bonus(1) Options(2) Payouts(1)Compensation(3) - ----------------------------------------------------------------------------------------------------------- Michael L. Cox 2005 $350,443 $44,247 20,000 $ 8,371 $3,547 President and Chief 2004 326,855 32,640 15,000 23,333 2,563 Executive Officer 2003 326,715 15,360 13,125 38,988 2,500 Robert R. Connors 2005 180,104 24,264 8,000 3,171 5,169 Senior Vice President, 2004 169,810 17,830 6,000 2,355 2,261 Operations and Technology 2003 166,231 5,085 5,250 0 2,002 Kimberly J. Ellington 2005 94,300 12,043 6,000 1,398 2,700 Senior Vice President, 2004 85,096 7,429 3,600 2,531 821 Director of Human Resources 2003 83,324 2,566 3,150 2,588 1,073 Mark K. Hardwick 2005 173,407 23,918 10,000 3,669 5,023 Executive Vice President 2004 158,112 17,786 6,000 4,713 2,123 and Chief Financial Officer 2003 132,722 6,732 5,250 4,553 1,901 Jeffrey B. Lorentson 2005 124,466 8,682 3,000 1,741 3,510 First Vice President, 2004 114,268 6,653 2,400 8,751 1,518 Corporate Controller 2003 108,656 3,195 2,100 0 1,385 Larry R. Helms 2005 144,443 25,282 8,000 4,592 1,916 Former Senior Vice 2004 138,722 16,226 6,000 8,426 2,018 President, Administrative 2003 135,817 8,426 5,250 10,256 1,918 Services, General Counsel and Corporate Secretary(4)
7 - -------------------------------------------------------------------------------- (1) Underpaid 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 bonusesincentive 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 by each executive officer are paid 2/3year in cash followingand the end of the fiscal year andother 1/3 in Deferred Stock Units that are payable in cashdeferred stock units two years later, unlessbased on the Units are forfeited due to terminationprice of the executive officer'sCorporation'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 for cause or because the executive officer voluntarily terminated employment (exceptterminates on account of retirement, death or disability) priordisability. 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 payment.vote the shares and to receive the dividends thereon. The portionawards 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 each year's bonus paidrestricted 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 Deferred Stock Units is2007 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 reportablerequired to be shown in the Summary Compensation Table, but is disclosed in the Long-term Incentive Plan Awards Table below. The LTIP Payouts column in the Summary Compensation Table sets forth the cash amounts paid in the year indicated for Deferred Stock Units earned by the executive officer two years earlier under the Senior Management Incentive Compensation Program. (2) The information concerning options for 2003 has been adjusted to give retroactive effect to the 5% common stock dividend that was distributed on September 12, 2003 to shareholders of record at the close of business on August 29, 2003. (3) Represents employer and matching contributions for fiscal year to First Merchants Corporation Retirement and Income SavingsEmployee Stock Purchase Plan (a ss.401(k) plan). (4) Mr. Helms retired as Senior Vice President, Administrative Services, General Counsel and Corporate Secretary on October 28, 2005. Because he retired, Mr. Helms' 2005 bonus under the Senior Management Incentive Compensation Program was paid entirely in cash and is reported in full in the Summary Compensation Table. Long-term Incentive Plans Stock Option Grants and Exercises The 1999 Long-term Equity Incentive Plan, which became effective asa form of July 1, 1999, authorizes the Compensation Committeeequity-based compensation that is equally available to grant stock-based incentive awards, including stock options, to eligibleall employees of the Corporation and its participating subsidiaries who have been employed six months or any subsidiary. The following table contains information concerning individual grants of stock options under themore. Under this plan, made during 2005 toemployees (including the Named Executive Officers. Each option wasOfficers) may elect, prior to the offering period (July 1 to June 30), to purchase shares of the Corporation's common stock at a price not less thanequal to 85% of the lesser of the market price of the stock onat the date of grant.
OPTION GRANTS IN LAST FISCAL YEAR - ----------------------------------------------------------------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term - ----------------------------------------------------------------------------------------------------------- Number of Percent of Securities Total Options Underlying Granted to Exercise Options Employees in Price Name Granted Fiscal Year (per share) Expiration Date 5% 10% - ----------------------------------------------------------------------------------------------------------- Michael L. Cox 20,000 8.91 $26.70 September 1, 2015 $336,420 $849,060 Robert R. Connors 8,000 3.57 26.70 September 1, 2015 134,568 339,624 Kimberly J. Ellington 6,000 2.67 26.70 September 1, 2015 100,926 254,718 Mark K. Hardwick 10,000 4.46 26.70 September 1, 2015 168,210 424,530 Jeffrey B. Lorentson 3,000 1.34 26.70 September 1, 2015 50,463 127,359 Larry R. Helms 8,000 3.57 26.70 September 1, 2015 134,568 339,624 - -----------------------------------------------------------------------------------------------------------
The following table contains information concerning exercises of stock options by the Named Executive Officers during 2005 under the 1994 Stock Option Plan or the 1999 Long-term Equity Incentive Plan, as well as the value as of December 31, 2005 of eachbeginning of the Named Executive Officer's unexercised options under these plans on an aggregated basis. 8
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES - -------------------------------------------------------------------------------- Number of Securities Underlying Unexercised Value of Unexercised Shares Acquired Value Optionsoffering period and the market price at In-the-Money Options at Name On Exercise Realized Fiscal Year-End(1) Fiscal Year-End(1) - ----------------------------------------------------------------------------------------------------------- Michael L. Cox 17,320 $233,232 113,652 $393,009 Robert R. Connors 0 0 22,558 17,981 Kimberly J. Ellington 914 5,731 16,059 9,459 Mark K. Hardwick 0 0 28,670 35,533 Jeffrey B. Lorentson 0 0 9,705 6,306 Larry R. Helms 0 0 52,661 211,221 - -----------------------------------------------------------------------------------------------------------
(1) The vesting of the stock options granted to employees under the 1999 Long-term Equity Incentive Plan on July 1, 2004 and September 1, 2005 was accelerated so that these options became fully vested on November 30, 2005. As a result, all options granted to the named executive officers were exercisable at the fiscal year-end. Long-term Cash Incentive Under the Senior Management Incentive Compensation Program, the annual bonuses earned by participating employees are payable 2/3 in cash following the end of the fiscal year and 1/3 in Deferred Stock Units ("DSUs") two years after the bonus is earned. When payable, the DSUs are valued atperiod. The plan provides an amount equalattractive vehicle for employees to the fair market value ofacquire the Corporation's common stock, aswhich further aligns their financial interests with those of other shareholders. For the last day ofoffering period ending June 30, 2006, the calendar year preceding the date of payment, plus accumulated dividends. Paymentsfollowing 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 the DSUs are made in cash, not stock. If the participant's employment is terminated for cause or is voluntarily terminated by the participant (except on account of retirement, death or disability) prior to the date of payment, the DSUs are forfeited. The following table contains information concerning DSU awards for 2005shares under the Senior Management Incentive Compensation Program to each of the Named Executive Officers.plan was $20.66 per share. Retirement benefits. The section of this proxy statement entitled "Report of the Compensation and Human Resources Committee on Executive Compensation -- Incentive Compensation," on page 12, contains additional information about the Senior Management Incentive Compensation Program.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR - -------------------------------------------------------------------------------- Number of Shares, Performance or Other Period Until Name Units or Other Rights Maturation or Payout - ------------------------------------------------------------------------------------------------------------- Michael L. Cox 851 1/01/06 - 1/01/08 Robert R. Connors 467 1/01/06 - 1/01/08 Kimberly J. Ellington 232 1/01/06 - 1/01/08 Mark K. Hardwick 460 1/01/06 - 1/01/08 Jeffrey B. Lorentson 167 1/01/06 - 1/01/08 Larry R. Helms 0 N/A - -------------------------------------------------------------------------------------------------------------
9 Pension Plans The following table shows the estimated annual benefits payable upon retirement at normal retirement age 65 to employees of the Corporation and its subsidiaries who are covered byhas long maintained a qualified defined benefit pension plan, the First Merchants Corporation Retirement Pension Plan, (the "Pension Plan"), a qualified defined benefit pension plan. Forwhich pays benefits at retirement to participating employees who are also covered byof the First Merchants Corporation Supplemental Executive Retirement Plan (the "SERP Plan"), a nonqualified "excess benefit" plan, it includes the estimated annualand its participating subsidiaries. The benefits payable under that plan. Benefitsthis plan at normal retirement age (age 65), computed as a straight-life annuity although other forms of actuarially-equivalent benefits are available under the Pension and SERP plansplan, are computedbased on the basis of straight-life annuity amounts under 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 (toto a maximum of 25 years). Benefitsyears. Although benefits are integrated with Social Security, butthey are not subject to any deduction for Social Security or other offset amounts.
PENSION PLAN TABLE - ----------------------------------------------------------------------------------------------------------- Compensation Years of Service - ----------------------------------------------------------------------------------------------------------- 15 20 25 30 35 - ----------------------------------------------------------------------------------------------------------- $125,000 $35,052 $ 46,736 $58,421 $58,421 $58,421 150,000 42,927 57,236 71,546 71,546 71,546 175,000 50,802 67,736 84,671 84,671 84,671 200,000 58,677 78,236 97,796 97,796 97,796 250,000 74,427 99,236 124,046 124,046 124,046 300,000 90,177 120,236 150,296 150,296 150,296 350,000 105,927 141,236 176,546 176,546 176,546 400,000 121,677 162,236 202,796 202,796 202,796 450,000 137,427 183,236 229,046 229,046 229,046 500,000 153,177 204,236 255,296 255,296 255,296 - -----------------------------------------------------------------------------------------------------------
The benefits shown in the above table are based on covered compensation of $57,636, the covered compensation set forth in the 2005 covered compensation table for persons born in 1944 (Mr. Cox's birth year). Mr. Cox is the only one of the Named Executive Officers who is currently accruing benefits under the Pension Plan, and he is the only Named Executive Officer who participates in the SERP Plan. Compensation for purposes of the Pension Plan consists of the base salary and service award components of the amounts reported in the "Salary" column in the Summary Compensation Table on page 7. ForCorporation "froze" this plan, years beginning on or after January 1, 2005, $210,000 is the maximum amount of compensation that can be considered for purposes of calculating pension benefits accruing under the Pension Plan. This amount increased to $220,000 for plan years beginning on or after January 1, 2006. Compensation for purposes of the SERP Plan, which provides benefits to designated executives that would otherwise be payable under the Pension Plan if Internal Revenue Code Section 401(a)(17) did not limit the amount of compensation that can be considered for purposes of calculating benefits accruing under the Pension Plan and if incentive compensation were included in compensation, also includes the amounts reported in the "Bonus" column in the Summary Compensation Table. Mr. Cox's 2005 compensation used for purposes of calculating his pension benefits under the Pension and SERP plans was $409,426, and he had 10.5 years of credited years of service as of January 1, 2006. Effectiveeffective March 1, 2005, the benefits accruing tofor participants in the Pension Plan other than those who were at least age 55 with 10 or more credited years of credited service, including four ofmeaning that these participants no longer accrued benefits under the Named Executive Officers - Mr. Connors, Ms. Ellington, Mr. Hardwick and Mr. Lorentson, were "frozen,"plan after that date and employees of the Corporation and its subsidiaries who were not participating in the plan onas of that date couldwere not become 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 in the paragraph immediately preceding the Pension Plan Table above, based on their average final compensation as of March 1, 2005, times a fraction, the numerator of which is the employee'sparticipant'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 employee's creditedparticipant's years of service projected to age 65. The average final compensation and the fractions 10 used to determine the benefits payable under the Pension Plan to the Named Executive Officers whose benefits were frozen are: Mr. Connors, $166,499 (2.50/12.00), Ms. Ellington, $69,868 (8.24/27.99), Mr. Hardwick, $106,541 (7.32/38.32), and Mr. Lorentson $105,565 (3.40/26.82). The Pension Plan participants who were at least age 55 with 10 or more credited years of service on March 1, 2005, including Mr. Cox and Mr. Helms, were "grandfathered;" that is, their benefitsat 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 until their retirement,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 provisionsSupplemental 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 SavingsCorporation'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 that were in effect prior to its amendmentwas frozen, so he is the only one of them who has continued to apply to them.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. Helms retiredCox 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 October 28, 2005April 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 33 creditedmore 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 receives a benefit under that plan based on the formula that was in effect prior to 1990, equal to 2%SERP were one fewer than their number of his average final compensation times his creditedactual years of service (towith 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 maximum of 25 years). Mr. Helms' average final compensation usednonqualified plan that is intended to determine his Pension Plan benefit was $130,042. Theprovide 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 "Savings"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) qualified defined contributionPlan 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 was amended on March 1, 2005 to provide enhanced retirement benefits, including employer and matching contributions,upon the earliest of death, disability, involuntary termination except for eligible employeescause, 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 its subsidiaries whose benefits undermade retroactively if made on account of separation from service). The SERP is unfunded and subject to forfeiture in the Pension Plan were frozen and employeesevent of bankruptcy. The Corporation has established a "rabbi" trust, with the First Merchants Trust Company, National Association, a wholly-owned subsidiary of the Corporation, and its subsidiaries who were not participating inas the plan on that date. Because a participant's benefittrustee. The Corporation makes annual contributions to the trust to help pay the Corporation's liabilities under the Savings Plan is determinedDefined Contribution SERP. While participants may request that these contributions be invested in accordance with investment options made available by the amounts ofCorporation, the annual employer, employee, and matching contributions and by theCorporation 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 underlying assets, itNamed 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 possibleexperience any gain or loss during 2006. The Corporation credited 12 % of Mr. Rechin's compensation (base salary plus non-equity incentive pay) to determinehis account for 2006. This amount is also reported as compensation to Mr. Rechin in the amountSummary Compensation Table on page 16 of a participant's Savings Plan benefit at any future time.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 each of the Named Executive Officers exceptMessrs. Cox, Rechin, Hardwick and Connors, but not with Mr. Helms, whose change of control agreement terminated when he retired on October 28, 2005.Spade. These are "double trigger" change of control agreements, in that they provide for the payment of severance benefits to the executives only in the event of both a change of control of the Corporation and a termination or constructive termination of the executive's employment of the executive within 24 months after the change of control (butcontrol. However, no payment will be made if the termination was for cause, because of the executive's death, disability or disability,voluntary retirement, or by the executive other than on account of constructive termination).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 Corporation's Board of Directors 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 severance benefits payable under each of 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, would beto 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 Mr.Michael L. Cox, Michael C. Rechin and Mr.Mark K. Hardwick, 200% in the cases of Mr. Connors and Ms. Ellington and 100%200% in the case of Mr. Lorentson.Robert R. Connors. The Corporation also has a change of control agreement with Michael C. Rechin, who became Executive Vice President and Chief Operating Officer of the Corporation on November 21, 2005 and a director on December 13, 2005. The multiplier for Mr. Rechin's change of control agreement is 299%. The Corporation wouldwill also pay any excise tax imposed on the executive under Section 4999 of the Internal Revenue Code on an "excess parachute payment;payment." In addition, the executive's outstanding stock options will be cancelled; and, it would provide toin lieu thereof, the executive 2 years' life, disability, accident and health insurance coverage,will receive a lump sum amount equal to the bargain element value of outstanding stockthese options, if any. The executive will also be entitled to outplacement services, and reasonable legal fees and expenses incurred as a result of the termination.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 changeinsurance coverage will be similar to what the executive was receiving immediately prior to the notice of control agreements were not entered 11 into in response to any effort to acquire controltermination, and the Corporation will pay the same percentage of the Corporation, and the Boardcost of Directors is not aware of any such effort. Report of the Compensation and Human Resources Committee on Executive Compensation General Compensation Policy The Compensation and Human Resources Committee establishes the salaries and administers the executive compensation program applicable to the Corporation's executive officers, including the Named Executive Officers. The Corporation's compensation policy is designed to provide incentives to executive officers to achieve short-term and long-term corporate strategic management goals, with the ultimate objective of obtaining a superior returncoverage as it was paying on the shareholders' investment.executive's behalf on the date of such notice. The Committee believesfollowing table shows the lump sum severance benefit amounts that a competitive compensation program, combining salary, employee benefits, incentive compensation, and equity-based compensation, is necessary to attract and retain qualified executives. The incentive compensation for executive officers, including the Chief Executive Officer, is tied to the Corporation's financial performance and the executive's individual contributions to that performance. The equity-based compensation programs encourage ownership and retention of the Corporation's stock by key employees, assuring that theywould have a meaningful stake in the Corporation's continued success and thereby aligning their interests more closely with the interests of shareholders. Cash Compensation. The annual salaries paid to the Corporation's executive officers for 2005, including the Chief Executive Officer, were determined by the Compensation and Human Resources Committee. The salaries for 2005 paidbeen payable to the Named Executive Officers are shown in the "Salary" columnif both of the Summary Compensation Tabletriggering events under the change of control agreements had occurred on page 7. These salaries were subjectively determined after considerationDecember 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 executive officer's individual responsibilities, performance, experience, the CEO's evaluationexcise tax that would have been imposed under Section 4999 of the other executive officers, a review of several measurements of the Corporation's short-term and long-term financial results compared with industry peers, various industry salary surveys, and other factors such as budgetary considerations and inflation rates. Incentive Compensation The incentive compensation paid to the Corporation's executive officers for 2005, including the Chief Executive Officer, was determined under the Senior Management Incentive Compensation Program. This program incorporates modern incentive plan techniques and executive retention features for the purpose of closely aligning the interests of executives with those of shareholders. Under the program, at or near the beginning of each calendar year, the Committee assigns each of the program participants a target bonus for the year that is a percentage of salary. The participant's incentive compensation for the year is based on accomplishment of specific performance levels set forth in the program. The Chief Executive Officer's and Chief Operating Officer's bonuses for 2005 depended on meeting targets with respect to the Corporation's return on equity and improvements in the Corporation's operating earnings per share and diluted GAAP earnings per share compared to the previous year. The other executive officers' bonuses depended on meeting targets with respect to improvement in the Corporation's operating earnings per share compared to the previous year and accomplishing personal objectives as determined at or near the beginning of the year by the CEO. In order to avoid wide swings in payouts and to better focus the program participants on long-term results, 60% of any bonus paid to the participants is based on current year performance and 40% is basedInternal Revenue Code on the previous year's payout. To furtherlump 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 purposeevent of executive retention, 2/3a change of each participant's bonus is payable in cash following the end of the calendar year,control (as defined above), all non-vested stock options and the other 1/3 is payable in Deferred Stock Units ("DSUs") two years after the bonus is earned (unless the portion payable in DSUs is less than $1,000, in which case the entire bonus is payable in cash). When payable, the DSUs are valued at an amount equal to the fair market value of the Corporation's commonrestricted stock on the December 31 preceding the payment date plus accumulated 12 dividends. Payment is made to the participant in cash. The DSUs are forfeited if the participant's employment is terminated for cause or is voluntarily terminated by the participant (except on account of retirement, death or disability) prior to the date of payment. The participant may elect to defer payment of all or part of the cash portion of the bonus by filing an election to do so in the manner described in the program. Deferred amounts will be credited with interest quarterly based on the current 5-year U.S. Treasury Bond rate. The cash portion of the bonuses for 2005 for the Named Executive Officers is set forth in the "Bonus" column of the Summary Compensation Table on page 7, and the DSU portion of these bonuses is set forth in the Long-Term Incentive Plan Awards Table on page 9. Cash amounts paid to these executive officers for DSUs earned for 2003 are set forth in the "LTIP Payouts" column of the Summary Compensation Table on page 7. For 2005, Mr. Cox's target bonus was 45% of salary, and his actual bonus, based 60% on 2005 performance and 40% on 2004 payout, was 19.35% of salary. The target bonuses for Mr. Connors, Ms. Ellington, Mr. Hardwick and Mr. Helms were each 30% of salary, and their actual bonuses, based 60% on 2005 performance and 40% on 2004 payout, were 20.66%, 19.57%, 21.10% and 17.68% of salary, respectively. The target bonus for Mr. Lorentson was 15% of salary, and his actual bonus, based 60% on 2005 performance and 40% on 2004 payout, was 10.67% of salary. Equity-based Compensation. In addition to the DSUs under the Senior Management Incentive Compensation Program described above, the Corporation's executive officers, including the Chief Executive Officer, received equity-based compensation for 2005awards under the Corporation's Long-term Equity Incentive Plan will vest. The Named Executive Officers' non-vested stock options and its 2004 Employee Stock Purchase Plan. The Long-term Equity Incentive Plan is briefly describedrestricted stock awards as of December 31, 2006 are shown in the paragraph"Outstanding Equity Awards at Fiscal Year-End 2006" table on page 8 immediately19 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 Option Grants in Last Fiscal Year Table."Nonqualified Deferred Compensation" table on page 22 of this proxy statement) will vest. The number of shares for which the Compensation and Human Resources Committee awarded options under that plan to the NamedCorporation's nonqualified defined benefit Supplemental Executive Officers during 2005 is set forthRetirement Plan (described in the "Numbernarrative preceding the "Pension Benefits" table on page 21 of Securities Underlying Options Granted" columnthis 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 Option Grants in Last Fiscal Year Table on page 8. The 2004 Employee Stock Purchase Plan generally provides that full-timeCorporation who are employees of the Corporation or a participating subsidiary with more than 6 monthsone of service may elect, prior to the offering period (July 1 to June 30), to purchase common sharesits subsidiaries do not receive separate compensation for their services as directors. During 2006, these employee-directors included two of the Corporation at a price equal to 85% of the lesser of the market price of the stock at the beginning of the period and the market price at the end of the period. For the offering period ending June 30, 2005, Mr. Cox, Mr. Conners, Ms. Ellington, Mr. Lorentson and Mr. Helms purchased 995, 248, 161, 62 and 124 shares, respectively, under the 2004 Employee Stock Purchase Plan. Mr. Hardwick did not participate in the Plan during this offering period. Other Compensation. The Corporation's executive officers, including the Named Executive Officers, are also covered by medical and retirement plans that are generally applicable to full-time employees of the Corporation and its subsidiaries. The retirement plans covering each of the executive officers are the First Merchants Corporation Retirement Pension Plan (the "Pension Plan"), a qualified defined benefit pension plan (described on page 10 under "Pension Plans"), and the First Merchants Corporation Retirement and Income Savings Plan (the "Savings Plan"), a qualified Internal Revenue Code ss.401(k) defined contribution pension plan (described on page 11 under "Pension Plans" and referred to in note (3) to the Summary Compensation Table on pages 7 and 8). Mr. Cox is also covered by the First Merchants Corporation Supplemental Executive Retirement Plan, a nonqualified "excess benefit" plan (described on page 10 under "Pension Plans"). As explained on page 10, the Pension Plan was "frozen" on March 1, 2005 and the Savings plan was amended to provide enhanced retirement benefits for eligible employees of the Corporation and its subsidiaries. The Pension Plan participants 13 who were at least age 55 with 10 or more credited years of service on March 1, 2005, including Mr. Cox and Mr. Helms, were "grandfathered;" that is, their benefits continueRechin, 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 accrue under the Pension Plan until their retirement and$35,000 in October 2006, with no retainer for Committee service. Under the provisions of the SavingsCorporation's Long-term Equity Incentive Plan, thatoptions were in effect priorgranted to its amendment continue to apply to them. The above report is submitted by: FIRST MERCHANTS CORPORATION COMPENSATION AND HUMAN RESOURCES COMMITTEE Robert M. Smitson, Chairman Thomas B. Clark Roderick English Charles E. Schalliol PERFORMANCE GRAPH The following graph compares the yearly change in the Corporation's cumulative total shareholder return on its common stock with the cumulative total returnseach of the Russell 2000 Index and the Russell 2000 Financial Services Sector Index for the five-year period ending December 31, 2005. Comparative Five-Year Total Returns First Merchants Corp., Russell 2000, Russell 2000 - Financial Services [GRAPHIC OMITTED][GRAPHIC OMITTED]
2000 2001 2002 2003 2004 2005 - ----------------------- ------------- ------------ -------------- ------------ ------------ --------------- FRME $100.00 $115.62 $119.50 $145.69 $167.61 $159.50 Russell 2000 $100.00 $102.49 $81.49 $120.00 $142.00 $148.46 R2-Finl Svcs $100.00 $115.64 $118.08 $164.69 $200.02 $204.67 - ----------------------- ------------- ------------ -------------- ------------ ------------ ---------------
Notes: Assumes $100 investednon-employee directors on December 31, 2000. Total return assumes reinvestment of dividends. 14 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT To the best of our knowledge, the following table shows the only beneficial owners of more than 5%July 1, 2006 to purchase shares of the Corporation's outstanding common stock asstock. Each option was for 1,157 shares at an option price of February 10, 2006.
Name and Address Amount and Nature Percent of Beneficial Owner of Beneficial Ownership of Class Dimensional Fund Advisors Inc. 935,378(1)..................................5.00% 1299 Ocean Avenue, (11)th Floor Santa Monica, CA (90401) Merchants Trust Company, N. A. 1,440,001(2)..................................7.68% 200 East Jackson Street Muncie, IN 47305
(1) Based$24.31 per share, the market price on a Schedule 13G filing with the SEC, Dimensional Fund Advisors Inc. ("Dimensional"), an investment advisor registered under Section 203date of the Investment Advisors Actgrants. 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 1940, furnishes investment advicethe 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 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 thepurchase shares of the Corporation's common stock owned byunder the Funds and may be deemed to be the beneficial owner of these shares under rulesLong-term Equity Incentive Plan in 2006 because they were not serving as directors 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) As of February 10, 2006, the Corporation's wholly owned subsidiary, Merchants Trust Company, National Association ("MTC"), held 1,440,001 shares of the Corporation's common stock in various fiduciary capacities, in regular, nominee or street name accounts, consisting of 7.68% of the Corporation's outstanding shares. Beneficial ownership of shares so held is disclaimed by the Corporation. It is MTC'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, MTC obtains approval from the co-fiduciary prior to voting. The following table lists the amount and percent of the Corporation's common stock beneficially ownedCorporation on February 10, 2006 by directors (including directors who are retiring as of the 2006 annual meeting of shareholders), director nominees and the Named Executive Officers, and by the Corporation's directors and 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 which a person has the right to acquire as of April 11, 2006 (60 days after February 10, 2006) by exercising stock options ("Vested Options"). 15 July 1, 2006.
Amount and Nature Percent Beneficial Owner of Beneficial Ownership of Class -------------------------------------------------------------------------------------------Director Compensation for 2006 Fiscal Year - ------------------------------------------------------------------------------------ Fees earned or Option Name paid in cash awards(1) Total - ------------------------------------------------------------------------------------ James F. Ault 27,291(1)...............................*$ 8,286 $ 0 $ 8,286 - ------------------------------------------------------------------------------------ Richard A. Boehning 24,180(2)...............................*Boehning(2) 23,000 7,700 30,700 - ------------------------------------------------------------------------------------ Thomas B. Clark 14,831(3)...............................* Michael L. Cox 162,348(4)...............................*26,000 7,700 33,700 - ------------------------------------------------------------------------------------ Roderick English 1,157(5)...............................*18,000 7,700 25,700 - ------------------------------------------------------------------------------------ Jo Ann M. Gora 1,157(6)...............................*18,000 7,700 25,700 - ------------------------------------------------------------------------------------ Barry J. Hudson 455,702(7)...............................2.43%Hudson(2) 18,000 7,700 25,700 - ------------------------------------------------------------------------------------ Robert T. Jeffares 14,734(8)...............................* Thomas D. McAuliffe 56,353(9)...............................* Michael C. Rechin 4,000..................................*5,143 0 5143 - ------------------------------------------------------------------------------------ Charles E. Schalliol 2,157(10)..............................*25,500 7,700 33,200 - ------------------------------------------------------------------------------------ Robert M. Smitson 23,573(11)..............................*50,000 7,700 57,700 - ------------------------------------------------------------------------------------ Terry L. Walker 8,250 0 8,250 - ------------------------------------------------------------------------------------ Jean L. Wojtowicz 2,314(12)..............................* Robert R. Connors 23,016(13)..............................* Kimberly J. Ellington 16,782(14)..............................* Mark K. Hardwick 29,390(15)..............................* Larry R. Helms 77,802(16) .............................* Jeffrey B. Lorentson 9,913(17)..............................* Directors and Executive Officers as a Group (19 persons) 951,700(18)..............................5.08%24,750 7,700 32,450 - ------------------------------------------------------------------------------------
* Percentage beneficially owned is less than 1%26 (1) As of the outstanding shares. (1) Includes 12,718 shares held by his spouse, Marilynend 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 4,629 shares that he hasMs. Wojtowicz - 3,471. (2) Mr. Boehning is also a director of Lafayette Bank and Trust Company, National Association, a wholly-owned subsidiary of the right to acquire by exercising Vested Options. (2) Includes 10,415 shares held jointly with his spouse, Phyllis Boehning, 5,586 shares held in trust for family membersCorporation, 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. Boehning, as trustee, has votingHudson is also the Chairman of the Board of Directors of First National Bank of Portland, a wholly-owned subsidiary of the Corporation, and investment power, and 4,629 shares that he has the right to acquire by exercising Vested Options. (3) Includes 11,227 shares that he has the right to acquire by exercising Vested Options. (4) Includes 40,298 shares held jointly with his spouse, Sharon Cox, and 113,652 shares that he has the right to acquire by exercising Vested Options. (5) Includes 1,157 shares that he has the right to acquire by exercising Vested Options. (6) Includes 1,157 shares that she has the right to acquire by exercising Vested Options. (7) 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 custodianwas paid $12,000 in 2006 for his children, and 13,007 shares thatservices in this capacity, of which he has the right to acquiredeferred $4,356 under an insurance-funded deferred compensation plan maintained by exercising Vested Options. 16 (8) Includes 3,595 shares held by his spouse, Olga Jeffares, 2,900 shares held jointly with his spouse, Olga Jeffares, 1,835 shares held in trust for family members for which Mr. Jeffares, as trustee, has voting and investment power, and 4,629 shares that he has the right to acquire by exercising Vested Options. (9) Includes 31,255 shares held jointly with his spouse, Andrea McAuliffe, 8,398 shares that he and his spouse hold as joint custodians for his children, and 16,700 shares that he has the right to acquire by exercising Vested Options. (10) Includes 1,157 shares that he has the right to acquire by exercising Vested Options. (11) Includes 5,859 shares held by his spouse, Marilyn Smitson, and 11,227 shares that he has the right to acquire by exercising Vested Options. (12) Includes 2,314 shares that she has the right to acquire by exercising Vested Options. (13) Includes 458 shares held jointly with his spouse, Ann Connors, and 22,558 shares that he has the right to acquire by exercising Vested Options. (14) Includes 34 shares held jointly with her spouse, William Ellington, and 16,059 shares that she has the right to acquire by exercising Vested Options. (15) Includes 28,670 shares that he has the right to acquire by exercising Vested Options. (16) Includes 25,140 shares held jointly with his spouse, Sandra Helms, and 52,661 shares that he has the right to acquire by exercising Vested Options. (17) Includes 208 shares held jointly with his spouse, Susan Lorentson, and 9,705 shares that he has the right to acquire by exercising Vested Options. (18) Includes 320,139 shares that the Corporation's directors and executive officers have the right to acquire by exercising Vested Options. INTEREST OF MANAGEMENT IN CERTAINFirst 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 transactionsloans with other persons not related to the lender and did not involve more than the normal risk of collectibility or present other unfavorable features. Richard A. Boehning,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 LBT, ismust be approved by the Audit Committee. Under the standards set forth in the Code of counselBusiness 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 law firm of Bennett, Boehning & Clary, Lafayette, Indiana, which LBT has retained as legal counsel during 2005Corporation and proposesnever to retain as such during 2006. COMMUNICATIONS WITH THE BOARD Shareholders may communicateuse or attempt to use a position with the Corporation's Board of Directors by submitting an e-mailCorporation to obtain any improper personal financial or other benefit for the Board 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 thedirector or executive officer, his or her family members, or any other directors. 17 DIRECTORS' ATTENDANCE AT ANNUAL SHAREHOLDERS MEETING The Corporation's directors are encouraged to attend the annual meeting of shareholders. At the 2005 annual meeting, all 17 directors were in attendance.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 20052006 these persons complied with all Section 16(a) filing requirements.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 PUBLIC ACCOUNTANTS Selection of Independent Public Accountants The Board, subject to ratification by the shareholders, has appointed BKD, LLP as the Corporation's independent public accountants for 2006. If the shareholders do not ratify the appointment of BKD, the Audit Committee and the Board will reconsider this appointment. Representatives of the firm are expected to be present at the annual shareholders' meeting. They will have an opportunity to make a statement, if they desire to do so, and are expected to be available to respond to appropriate questions. The Board of Directors unanimously recommends a vote "FOR" ratification of the appointment of the firm of BKD, LLP as independent public accountants for 2006.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 20042005 and 2005. 20042006. 2005 2006 ---- ---- Audit Fees $352,428 $383,400$ 383,400 $ 397,500 Audit-Related Fees 43,489 76,292 83,911 Tax Fees 79,920 93,320 77,072 All Other Fees 14,230 0 14,230 -------------- ----------------------- --------- Total Fees $475,837 $567,242 ============== ==============$ 567,242 $ 558,483 ========= ========= The audit fees"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"Audit-Related Fees" were for professional services rendered for audits of the Corporation's benefit plans. The tax fees"Tax Fees" were for professional services rendered for preparation of tax returns and consultation on various tax matters. The other 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 these audit-related, taxthe "Audit-Related Fees," "Tax Fees" and other fees"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. 18 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 auditors,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 auditorsauditor 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 auditors areauditor 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 auditorsauditor 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 20072008 annual meeting of the shareholders must be received by the Secretary of the Corporation at the Corporation's principal office by November 2, 2006,16, 2007, for inclusion in the Corporation's 20072008 proxy statement and form of proxy relating to that meeting. Shareholder proposals, if any, intended to be presented at the 20062007 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 17, 2006.16, 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 7278.27278. 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.directors and the ratification of the appointment of the independent public accountants. However, if any other matters properly come before such meeting or any 19 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 17, 2006.16, 2007. By Order of the Board of Directors Muncie, Indiana Cynthia G. Holaday March 2, 200615, 2007 Secretary 20 APPENDIX A FIRST MERCHANTS CORPORATION AUDIT COMMITTEE CHARTER Role The Audit Committee (the "Committee") is appointed by the Board of Directors (the "Board") of First Merchants Corporation (the "Corporation") to assist the Board: 1. In its oversight of the Corporation's accounting and financial r eporting principles and policies and internal accounting and disclosure controls and procedures; 2. In its oversight and supervision of the Corporation's internal audit function; 3. In its oversight of the certification of the Corporation's quarterly and annual financial statements and disclosures and assessment of internal disclosure controls by the Corporation's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"); 4. In its oversight of the Corporation's consolidated financial statements and the independent external audit thereof, including the appointing, compensating, overseeing (including resolving any disagreements between management and the independent external auditor regarding financial reporting); and 5. In evaluating the independence of the external auditors. Membership The members of the Committee shall meet the independence and experience requirements of the NASDAQ and any other applicable laws and regulations. These requirements specifically include the rules of the Securities and Exchange Commission ("SEC") regarding audit committee financial experts, as defined. 1. The number and names of person determined to be audit committee financial experts will be disclosed in the Corporation's annual report. 2. The Corporation will disclose in the annual report whether the audit committee financial experts are independent of management, and if not, why. 3. If it is determined that the Corporation does not have a financial expert on the Committee, it must disclose that fact and explain why it does not. Members of the Committee shall be appointed annually by majority vote of the Board and will serve until the next annual meeting of the Board. Meetings The Committee shall meet four times annually or more frequently as circumstances require: 1. To discuss with the Senior Staff Auditor and/or the outsourced internal auditor the status of completion of the annual audit plan and audit reports arising therefrom. 2. To discuss with management the annual audited financial statements and quarterly financial results and the required certifications of the CEO and CFO. 3. At least annually, the Committee will meet separately with the internal auditor and the independent external auditor, without any members of management being present, to discuss matters that the Committee or any of these persons or firms believes should be discussed privately. 4. The Committee may request any officer or employee of the Corporation, or independent counsel, or independent external auditors to attend a meeting. Responsibilities Overseeing Financial Reporting and Disclosures The Committee shall: 1. Review and approve, prior to filing, the Corporation's annual audited financial statements filed with the SEC and consider whether they accurately and appropriately reflect their knowledge of the financial condition of the Corporation and its results of operations. Specific consideration will be given to the accuracy A-1 of the financial statements, off-balance-sheet transactions, disclosure of pro forma financial information, and real time issuer disclosure matters. 2. Determine that management has put in place procedures to report to the SEC changes in Corporation stockholdings by directors, executive officers and more than 10% stockholders of the Corporation. 3. Ensure that the Corporation has established adequate procedures to ensure that quarterly and annual financial statements and disclosures are accurate and complete. This will include reviewing and approving the quarterly and annual CEO and CFO certifications. 4. Determine that the Corporation has complied with requirements of the SEC to disclose in periodic reports whether or not the Corporation has established a Code of Ethics. 5. Determine that the Corporation has complied with requirements of the SEC to disclose the approval by the Committee of all non-audit services to be performed by the Corporation's independent external auditor. Internal Audit Supervision The Committee shall: 1. Review the appointment of the Senior Staff Auditor and/or outsourced internal auditor; and 2. Evaluate the effectiveness of the internal audit function. Independent External Auditor The Committee shall: 1. Recommend the appointment and/or discharge of the independent external auditor; 2. Pre-approve the external auditor's fees; 3. Evaluate the external auditor's independence; and 4. Pre-approve all permissible non-audit services to be provided by the external auditors. Internal and External Audit Plans and Results The Committee shall: 1. Review and approve the annual audit plans of the internal audit function and the independent external auditor; 2. Approve any changes to the annual audit plans; 3. Meet with the Senior Staff Auditor and/or outsourced internal auditor to discuss the status of completion of the annual internal audit plans and the periodic internal audit reports; 4. Review with management the results of the independent external auditor's quarterly financial statements reviews; 5. Review with management and the independent external auditor the results of the annual financial statements audit; 6. Review with management and the independent external auditor their assessment of the quality of the Corporation's accounting principles, the adequacy of internal accounting and disclosure controls and resolution of identified significant deficiencies or material weaknesses and reportable conditions in internal accounting and disclosure controls; 7. Review compliance with laws and regulations and other audit reports deemed significant by the Committee: 8. Receive certain communications from the independent external auditors on an annual basis which include required communications under generally accepted auditing standards; and 9. Based on these reviews, the Committee shall make its recommendation to the Board as to the inclusion of the audited consolidated financial statements in the Corporation's annual report on Form 10-K. A-2 Annual Proxy Statement Disclosure The Committee should report activities to the Board and issue an annual report to be included in the Corporation's proxy statement. In addition, the Committee shall re-approve the Committee Charter annually, with a copy of the charter filed with the SEC every three (3) years, and after any amendments. Fraud Reporting and Handling of Complaints The Committee shall have the responsibility for establishing procedures for: 1. Receipt, retention, and treatment of complaints received by the Corporation regarding accounting, internal controls, or auditing matters; and 2. The confidential, anonymous submission by employees of the Corporation of concerns regarding questionable accounting or auditing matters. Regulatory Responsibilities The Committee shall advise the Board with respect to any significant change in the regulatory ratings of the Corporation and/or any subsidiary bank. Resources and Authority The Committee shall: 1. Meet with the counsel to the Corporation's Board when appropriate; and 2. Engage independent legal counsel, auditors, or other advisors as it determines necessary to carry out its duties. Funding The Corporation shall provide the Committee with appropriate funding, as determined by the Committee, for payment of compensation: 1. To the registered independent external auditor employed by the Corporation for the purpose of rendering or issuing an audit report, and 2. To any advisors employed by the Committee. A-329 ANNUAL MEETING OF SHAREHOLDERS OF FIRST MERCHANTS CORPORATION April 13, 200624, 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 ( ) Richard A. BoehningMichael L. Cox ( ) Barry J. HudsonCharles E. Schalliol |_| WITHHOLD AUTHORITY ( ) Michael C. RechinTerry 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 public accountantsauditor for 2006.2007. 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 17, 2006.16, 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 13, 200624, 2007 The undersigned hereby appoints Clell W. DouglassCharles E. Schalliol and Hamer D. Shafer,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 13, 2006,24, 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 13, 200624, 2007 ------------------------- PROXY VOTING INSTRUCTIONS ------------------------- MAIL - Date, sign and mail your proxy card in the envelope provided as soon as possible. - OR - ------------------------- COMPANY NUMBER TELEPHONE - Call toll-free 1-800-PROXIES ---------------------------------------------------- (1-800-776-9437) from any touch-tone telephone and ACCOUNTCOMPANY 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 ( ) Richard A. BoehningMichael L. Cox ( ) Barry J. HudsonCharles E. Schalliol |_| WITHHOLD AUTHORITY ( ) Michael C. RechinTerry 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 public accountantsauditor for 2006.2007. 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 17, 2006.16, 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.