UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
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 MAY 6, 2009
The annual meeting of the shareholders of First Merchants Corporation will be
held at the Horizon Convention Center, 401 South High Street, Muncie, Indiana
47305, on Wednesday, May 6, 2009, at 3:30 p.m., Eastern Daylight Time, for the
following purposes:
(1) To elect five directors, four to hold office for terms of three years
and one to hold office for a term of one year; in each case, the
directors will hold office until their successors are duly elected and
qualified.
(2) To vote on an advisory, non-binding resolution approving the
compensation of the First Merchants Corporation executive officers.
(3) To act on a proposal to approve the First Merchants Corporation 2009
Employee Stock Purchase Plan.
(4) To act on a proposal to approve the First Merchants Corporation 2009
Long-Term Equity Incentive Plan.
(5) To ratify the appointment of the firm of BKD, LLP as the independent
auditor for 2009.
(6) To transact such other business as may properly come before the
meeting.
Only those shareholders of record at the close of business on February 27, 2009
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 27, 2009
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 27, 2009
FIRST MERCHANTS CORPORATION
PROXY STATEMENT FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 6, 2009
To the shareholders of First Merchants Corporation:
This proxy statement has been made available to you on the Internet or has been
sent to you via mail or email in connection with the solicitation on behalf of
the Board of Directors (the "Board") of First Merchants Corporation ("First
Merchants") of proxies to be voted at the annual meeting of First Merchants'
shareholders to be held May 6, 2009. If you received a paper or electronic copy,
the proxy materials also include a proxy card that can be used for voting your
shares. The distribution of these proxy materials is expected to commence on or
about March 27, 2009.
The purpose of this proxy solicitation includes voting on the following items,
as stated in the accompanying notice of the annual meeting:
(1) To elect five directors, four to hold office for terms of three years
and one to hold office for a term of one year; in each case, the
directors will hold office until their successors are duly elected and
qualified.
(2) To vote on an advisory, non-binding resolution approving the
compensation of the First Merchants Corporation executive officers.
(3) To act on a proposal to approve the First Merchants Corporation 2009
Employee Stock Purchase Plan.
(4) To act on a proposal to approve the First Merchants Corporation 2009
Long-Term Equity Incentive Plan.
(5) To ratify the appointment of the firm of BKD, LLP as the independent
auditor for 2009.
(6) To transact such other business as may properly come before the
meeting.
This proxy statement contains information concerning each of the above voting
items. Voting item 2 is new and merits additional explanation. First Merchants
is participating in the U. S. Treasury Department's Capital Purchase Program
(the "CPP") under the Emergency Economic Stabilization Act of 2008 (the "EESA").
First Merchants' decision to participate in the CPP was based on our conclusion
that the Program offers a unique opportunity to add low cost capital to
supplement our existing capital, which will allow us to remain well-capitalized
while continuing to support economic growth in the markets we serve and provide
additional protection against the uncertain duration and severity of the current
economic downturn. On February 20, 2009, First Merchants received $116 million
of equity capital under the CPP by issuing to the Treasury Department 116,000
shares of preferred stock paying cumulative dividends at a rate of 5% per year
for the first 5 years and 9% per year thereafter, and a warrant to purchase up
to 991,453 shares of First Merchants common stock, at an initial per share price
of $17.55 (based on the market price for the stock during the 20 trading days
preceding the Treasury Department's preliminary approval of First Merchants'
participation in the CPP). The number of shares of common stock that can be
purchased under the warrant will be reduced by 50% if First Merchants redeems at
least 50% of the preferred stock within 3 years. Except under limited
circumstances, such as if First Merchants were to fail to pay dividends on the
preferred stock for an aggregate of 6 or more quarterly dividend periods, the
preferred stock is non-voting. On February 17, 2009, President Obama signed into
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law the American Recovery and Reinvestment Act of 2009 (the "ARRA") which, among
other things, amended the EESA by adding several requirements relating to
executive compensation and corporate governance that are applicable to CPP
participants, including First Merchants. One of these requirements is that the
shareholders must have the opportunity to vote on a separate, non-binding
resolution to approve the compensation of a CPP participant's executive
officers, as disclosed and discussed in the participant's proxy statement, in
the compensation discussion and analysis, the compensation tables, and related
material. Voting item 2 fulfills this requirement. Further explanation of this
voting item is contained on page 28. The Compensation Discussion and Analysis,"
the compensation tables, and related material are on pages 11-28.
This is the second year that we haven taken advantage of the Securities and
Exchange Commission ("SEC") rule that allows companies to furnish their proxy
materials over the Internet, enabling us to reduce the cost of delivering these
materials and lessening the environmental impact of our annual meeting. Under
this rule, we are mailing a Notice Regarding the Availability of Proxy Materials
to most of our shareholders who haven't previously informed us that they prefer
a paper copy of the proxy materials. The Notice contains instructions on how to
access the proxy materials over the Internet. It also contains instructions on
how shareholders may receive a paper or electronic copy of the proxy materials,
including a proxy statement, annual report and a proxy card. Any shareholder who
doesn't receive a Notice Regarding the Availability of Proxy Materials will
receive a paper copy of the proxy materials by mail.
VOTING
Each share of First Merchants common stock issued and outstanding as of the
close of business on February 27, 2009, the record date for the annual meeting,
is entitled to be voted on all items being voted upon at the meeting. As of the
close of business on February 27, 2009, there were 21,178,488 shares outstanding
and entitled to vote.
You may vote shares held directly in your name as shareholder of record in
person at the annual meeting. Even if you plan to attend the annual meeting, we
recommend that you also vote by proxy as described below so that your vote will
be counted if you later decide not to attend the meeting.
Whether you hold shares directly as the shareholder of record or through a
broker, trustee or other nominee as the beneficial owner, you may direct how
your shares are voted without attending the annual meeting. There are three ways
to vote by proxy:
o By Internet - Shareholders who received a Notice Regarding the
Availability of Proxy Materials may submit proxies over the Internet
by following the instructions on the Notice. Shareholders who received
a paper or electronic copy of a proxy card may submit proxies over the
Internet by following the instructions on the proxy card.
o By Telephone - Shareholders who live in the United States or Canada
may submit proxies by telephone by calling toll-free 1-800-690-6903 on
a touch-tone telephone and following the instructions. Shareholders
who received a Notice Regarding the Availability of Proxy Materials
should have their Notice in hand when calling, and shareholders who
received a paper or electronic copy of a proxy card should have the
proxy card in hand when calling.
o By Mail - Shareholders who received a paper or electronic copy of a
proxy card may submit proxies by mail by completing, signing and
dating their proxy card and mailing it in the postage-paid envelope we
have provided or return it to First Merchants Corporation, c/o
Broadridge, 51 Mercedes Way, Edgewood, NY 11717.
After submitting a proxy, you have the right to revoke it any time before it is
exercised by giving written notice of revocation to the Secretary received prior
to the annual shareholders' meeting, by submitting a new proxy via Internet,
telephone or mail, or by voting in person at the meeting. Your shares will be
voted in accordance with your specific instructions given when submitting your
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proxies. In the absence of specific instructions to the contrary, proxies will
be voted "for" election to the Board of all nominees listed in Item 1 of the
proxy, "for" the proposal to approve the First Merchants Corporation 2009
Employee Stock Purchase Plan, "for" the proposal to approve the First Merchants
Corporation 2009 Long-Term Equity Incentive Plan, and "for" ratification of the
appointment of the firm of BKD, LLP as First Merchants' independent auditor for
2009. If any director-nominee named in this proxy statement becomes unable or
declines to serve (an event which the Board does not anticipate), the persons
named as proxies will have discretionary authority to vote for a substitute
nominee named by the Board, if the Board determines to fill such nominee's
position.
Each share of First Merchants common stock is entitled to one vote. Directors
are elected by a plurality of the votes cast by the shares entitled to vote in
the election at a meeting at which a quorum is present. Shareholders do not have
a right to cumulate their votes for directors. The affirmative vote of a
majority of the shares present and voting at the meeting in person or by proxy
is required for approval of all items submitted to the shareholders for their
consideration other than the election of directors. Abstentions will be counted
for the purpose of determining whether a quorum is present but for no other
purpose. Broker non-votes will not be counted. The Secretary will count the
votes and announce the preliminary results of the voting at the annual meeting.
The final results will be published in First Merchants' quarterly report on Form
10-Q for the second quarter of 2009.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
To the best of our knowledge, the following table shows the only beneficial
owner of more than 5% of the outstanding common stock of First Merchants as of
February 27, 2009.
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
Dimensional Fund Advisors LP 1,520,459((1)).................7.18%
1299 Ocean Avenue
Santa Monica, CA (90401)
(1) Based on a Schedule 13G filing with the SEC, Dimensional Fund Advisors
LP ("Dimensional"), an investment advisor registered under Section 203
of the Investment Advisors Act of 1940, furnishes investment advice to
four investment companies registered under the Investment Advisors Act
of 1940 and serves as investment manager to certain other commingled
group trusts and separate accounts. These investment companies, trusts
and accounts are the "Funds." In its role as investment advisor or
manager, Dimensional possesses investment and/or voting power over the
shares of First Merchants common stock owned by the Funds and may be
deemed to be the beneficial owner of these shares under rules of the
SEC. However, all of these shares are owned by the Funds, and
Dimensional disclaims beneficial ownership of such shares for any
other purpose.
Security Ownership of Directors and Executive Officers
The following table lists the amount and percent of First Merchants common stock
beneficially owned on February 27, 2009 by directors (including directors who
are retiring as of the 2009 annual meeting of shareholders), director nominees,
the Chief Executive Officer, the Chief Financial Officer, the three other most
highly compensated executive officers, and by the directors and all of First
Merchants' executive officers as a group. Unless otherwise indicated, the
beneficial owner has sole voting and investment power. The information provided
in the table is based on First Merchants' records and information filed with the
SEC and provided to First Merchants.
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The number of shares beneficially owned by each person is determined under rules
of the SEC, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under those rules, beneficial ownership
includes shares which a person has the right to acquire beneficial ownership of
on or before April 28, 2009 (60 days after February 27, 2009) by exercising
stock options ("Vested Options") awarded to participants under First Merchants'
Long-term Equity Incentive Plan. It also includes shares of restricted stock
("Restricted Shares") awarded to participants under that Plan or under First
Merchants' Equity Compensation Plan for Non-Employee Directors that are still
subject to restrictions.
Amount and Nature Percent
Beneficial Owner of Beneficial Ownership of Class
Thomas B. Clark 16,869(1).............................*
Michael L. Cox 171,454((2))............................*
Jerry R. Engle 42,436(3).............................*
Roderick English 5,347(4)............................*
Jo Ann M. Gora 5,347(5)............................*
William L. Hoy 12,739(6).............................*
Barry J. Hudson 459,892((7))............................(2.15)%
Michael C. Rechin 45,746(8)............................*
Charles E. Schalliol 13,177(9)............................*
Patrick A. Sherman 5,550..............................*
Terry L. Walker 23,811(10)............................*
Jean L. Wojtowicz 6,684(1(1))........................*
Robert R. Connors 38,833(1(2)).........................*
Mark K. Hardwick 53,974(1(3)).........................*
David W. Spade 9,899(14)..........................*
Michael J. Stewart 3,868(15)..........................*
Directors and Executive
Officers as a Group (19 persons) (955,039)(16)..........................4.44%
* Percentage beneficially owned is less than 1% of the outstanding
shares.
(1) Includes 10,413 shares that he has the right to acquire by exercising
Vested Options.
(2) Includes 52,754 shares held jointly with his spouse, Sharon Cox, and
110,948 shares that he has the right to acquire by exercising Vested
Options.
(3) Includes 1,600 Restricted Shares and 37,424 shares held jointly with
his spouse, Terri Engle.
(4) Includes 719 Restricted Shares and 4,628 shares that he has the right
to acquire by exercising Vested Options.
(5) Includes 719 Restricted Shares and 4,628 shares that she has the right
to acquire by exercising Vested Options.
(6) Includes 719 Restricted Shares, 917 shares that he holds as custodian
for his daughter, and 1,157 shares that he has the right to acquire by
exercising Vested Options.
(7) Includes 719 Restricted Shares, 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 16,478 shares that he has the
right to acquire by exercising Vested Options.
(8) Includes 7,000 Restricted Shares and 30,000 shares that he has the
right to acquire by exercising Vested Options.
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(9) Includes 1,349 Restricted Shares and 4,628 shares that he has the
right to acquire by exercising Vested Options.
(10) Includes 810 Restricted Shares, 13,611 shares held jointly with his
spouse, Cheryl L. Walker, 551 shares held by his spouse and 2,314
shares that he has the right to acquire by exercising Vested Options.
(11) Includes 899 Restricted Shares and 5,785 shares that she has the right
to acquire by exercising Vested Options.
(12) Includes 3,600 Restricted Shares, 722 shares held jointly with his
spouse, Ann Connors, and 31,056 shares that he has the right to
acquire by exercising Vested Options.
(13) Includes 5,100 Restricted Shares, 401 shares held by his spouse,
Catherine Hardwick, and 40,658 shares that he has the right to acquire
by exercising Vested Options.
(14) Includes 2,000 Restricted Shares, 193 shares held jointly with his
spouse, Sandra Spade, and 4,000 shares that he has the right to
acquire by exercising Vested Options.
(15) Includes 3,000 Restricted Shares and 750 shares held in a joint trust
with his spouse, Barbara Stewart.
(16) Includes 36,534 Restricted Shares and 293,470 shares that First
Merchants' directors and executive officers have the right to acquire
by exercising Vested Options.
INFORMATION REGARDING DIRECTORS
VOTING ITEM 1 - ELECTION OF DIRECTORS
First Merchants' Bylaws allow the Board to fix the number of directors by
resolution. The Board has fixed the number of directors as of the 2009 annual
meeting of shareholders at eleven. The Board is divided into three classes
serving staggered three-year terms or until their successors are elected and
qualified. Directors for each class are elected at the annual meeting of
shareholders held in the year in which the term for their class expires; except
that directors filling vacancies caused by resignation, death or other
incapacity, or an increase in the number of directors, are elected by majority
vote of the Board until the next annual meeting of shareholders.
Five directors will be elected at the annual meeting. Three of the five persons
who have been nominated for election to the Board are currently members of the
Board. They include William L. Hoy and Barry J. Hudson, who have been nominated
to serve three-year terms in Class III that expire as of the 2012 annual meeting
of shareholders, and Michael J. Rechin, who has been nominated to serve a
one-year term in Class I that expires as of the 2010 annual meeting of
shareholders. Mr. Rechin was previously in Class III but is moving to Class I so
that the classes will be as nearly equal in number as possible. The other two
nominees, Jerry R. Engle and Patrick A. Sherman, are former directors of Lincoln
Bancorp ("Lincoln") who have been nominated for election to the Board for
three-year terms in Class III that expire as of the 2012 annual meeting of
shareholders, under an Agreement of Reorganization and Merger between First
Merchants and Lincoln dated as of September 2, 2008. The Agreement provides that
First Merchants will take all necessary action to cause Mr. Engle, who was the
Chairman of the Board of Directors, President and Chief Executive Officer of
Lincoln, and another current director of Lincoln chosen by First Merchants to be
nominated for election as members of First Merchants' Board for a 3-year term at
the first annual meeting of the shareholders of First Merchants following the
merger of Lincoln into First Merchants. Mr. Sherman is the other director of
Lincoln who was chosen by First Merchants to be nominated for election as a
member of First Merchants' Board. There are no family relationships among First
Merchants' executive officers and directors.
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The following persons have been nominated for election to the Board:
Name, Age and Prior Service Business Experience (Past 5 Years)
Class III (Terms expire 2012):
Jerry R. Engle Mr. Engle was the Chairman of the Board of Directors, President and Chief
age 64 Executive Officer of Lincoln and the President and Chief Executive Officer
New director of its wholly owned subsidiary, Lincoln Bank, from 2005 to 2008. From
2004 to 2005 he was Vice Chairman of Lincoln's Board and Executive Vice
President and Chief Operating Officer of Lincoln Bank. On April 17, 2009,
Lincoln Bank will be merged into First Merchants Bank of Central Indiana,
National Association ("FMBCI"), a wholly owned subsidiary of First
Merchants, and Mr. Engle will become the Indianapolis Regional President
of FMBCI.
William L. Hoy Chief Executive Officer of The Columbus Sign Company, a custom sign and
age 60 graphic fabricator, since 1990, and Vice President and Treasurer of
Director since 2007 Innocom Corporation, an environmental graphic design and custom display
company, since 1992.
Barry J. Hudson Retired Chairman of the Board of Directors, President and Chief Executive
age 69 Officer of First National Bank of Portland, a wholly owned subsidiary of
Director since 1999 First Merchants that was merged with First Merchants Bank, National
Association, another wholly owned subsidiary of First Merchants, in 2007.
Patrick A. Sherman Partner, Sherman & Armbruster certified public accountants, since 1975.
age 61
New director
Class I (Term expires 2010):
Michael C. Rechin President and Chief Executive Officer of First Merchants since 2007, and
age 50 Executive Vice President and Chief Operating Officer of First Merchants
Director since 2005 from 2005 to 2007. Mr. Rechin was Executive Vice President of National
City Bank of Indiana from 1995 to 2005.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ELECTION OF EACH NOMINEE
FOR DIRECTOR NAMED ABOVE.
The First Merchants directors whose terms are not expiring as of the 2009 annual
meeting of shareholders are listed below. They will continue to serve as
directors for the remainder of their terms or until otherwise provided in First
Merchants' Bylaws. Information regarding each of the continuing directors is
provided below.
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Continuing Directors
The following persons will continue to serve as directors:
Name, Age and Prior Service Business Experience (Past 5 Years)
Class I (Terms expire 2010):
Charles E. Schalliol Of counsel, Baker & Daniels LLP law firm, since 2007. Mr. Schalliol was
age 61 Director, Indiana State Office of Management and Budget, from 2005 to
Director since 2004 2007, President and Chief Executive Officer of BioCrossroads, an economic
development organization focused on life sciences companies, from 2003 to
2005, Executive Director, Corporate Finance & Investment Banking, Eli
Lilly and Company, a pharmaceuticals company, from 1996 to 2003, and
Founder and Managing Director of Lilly Venture Funds from 1999 to 2003.
Mr. Schalliol is also a director of Heritage-Crystal Clean, Inc., which is
listed on the NASDAQ Stock Market.
Terry L. Walker Chairman of the Board of Directors and Chief Executive Officer, Muncie
age 62 Power Products, Inc., a manufacturer and distributor of power take-offs
Director since 2006 and hydraulic components for the truck equipment industry, since 2005.
Mr. Walker was Muncie Power's President from 2000 to 2008 and its Chief
Operating Officer from 2000 to 2005.
Class II (Terms expire 2011):
Thomas B. Clark Retired Chairman of the Board of Directors, President and Chief Executive
age 63 Officer, Jarden Corporation, a provider of niche consumer products for the
Director since 1989 home.
Roderick English President and Chief Executive Officer, The James Monroe Group, LLC, a
age 57 provider of business management and consulting services, since 2006. Mr.
Director since 2005 English was Senior Vice President of Human Resources and Communications,
Remy International, Inc. (formerly, Delco Remy International, Inc.), a
manufacturer of electrical and powertrain products for autos, trucks and
other vehicles, from 1994 to 2006.
Jo Ann M. Gora President, Ball State University, since 2004. Dr. Gora served as
age 63 Chancellor of the University of Massachusetts at Boston from 2001 to
Director since 2004 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 Management Corp.,
age 51 a manager of non-traditional sources of financing, since 1983. Ms.
Director since 2004 Wojtowicz is also a director of Vectren Corporation, which is listed on
the New York Stock Exchange.
Retiring Director
Michael L. Cox is a current director of First Merchants and is retiring as such
effective May 6, 2009, the date of the 2009 annual meeting of shareholders. He
is retiring as a director in accordance with the provisions of an agreement
entered into between Mr. Cox and First Merchants on January 23, 2007, concerning
his retirement as the President and CEO of First Merchants. Under the terms of
this agreement, Mr. Cox retired as the
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President and CEO of First Merchants on April 24, 2007. He has provided services
to First Merchants as a nonemployee consultant since his retirement, and he will
continue to do so until April 24, 2009. In his capacity as a consultant, he
reports directly to Michael C. Rechin, First Merchants' President and CEO, and
performs services as requested by Mr. Rechin. These services generally include,
among other things, advice and assistance with matters relating to mergers,
acquisitions and other business expansion initiatives. Mr. Cox has also
continued to represent First Merchants as the Past Chairman of the Board of
Directors of the Indiana Bankers Association, and as a director of the Indiana
State Chamber of Commerce. These services generally do not occupy more than 50%
of Mr. Cox's time. He was paid $175,000 in the first year and is being paid
$100,000 in the second year for these services, in substantially equal monthly
installments.
Meetings of the Board
The Board held 6 meetings during 2008. All of the directors except Barry J.
Hudson attended at least 75% of the total number of meetings of the Board and
the committees on which they served. Mr. Hudson attended 6 of the 9 meetings (66
2/3%) of the Board and the committees on which he served during 2008.
Directors' Attendance at Annual Meeting of Shareholders
First Merchants' directors are encouraged to attend the annual meeting of
shareholders. At the 2008 annual meeting, all 11 directors were in attendance.
Board Independence
The Board has determined that each of First Merchants' directors and
director-nominees is an "independent director," as defined in the NASDAQ Stock
Market Rules, except for Michael C. Rechin, First Merchants' President and Chief
Executive Officer, and Jerry R. Engle, Indianapolis Regional President of FMBCI.
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 Stock Market Rules.
Shareholder 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 Chairperson 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
of these Committees has a charter, which is included among the documents under
"Corporate Governance Disclosures" on First Merchants' website at
http://www.firstmerchants.com/about-us.cfm. The following information is
provided regarding the composition, functions and number of meetings held by
these committees in 2008:
Audit Committee
The Audit Committee is composed of directors Jean L. Wojtowicz (Chairperson),
Thomas B. Clark, William L. Hoy and Terry L. Walker. The Committee met 8 times
during 2008. The Audit Committee assists the Board in overseeing senior
management's efforts to monitor, mitigate and manage all types of risk to the
organization through (1) the integrity of the accounting, compiling and
reporting of financial statements and other financial information that the
Corporation provides to governmental bodies and the public; (2) the
Corporation's compliance with legal and regulatory requirements; (3) the
independent auditor's qualifications
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and independence; (4) the performance of the Corporation's independent auditor
and the internal audit function; and (5) the Corporation's compliance with
ethical requirements. The Audit Committee has the sole authority to appoint,
retain, compensate, evaluate and terminate the independent auditor (subject to
shareholder ratification) and the senior internal audit executive. The Audit
Committee reviews and discusses with management and the external auditor First
Merchants' audited financial statements and, based on this review, makes a
recommendation to the Board on inclusion of these financial statements in First
Merchants' annual report on Form 10-K. In accordance with SEC rules, First
Merchants has identified Ms. Wojtowicz and Mr. Clark as "Audit Committee
financial experts." They are both "independent directors" as that term is used
in the NASDAQ Stock Market Rules.
Audit Committee Report Concerning Audited Financial Statements
The Audit Committee has reviewed and discussed First Merchants' audited
financial statements for 2008 with management. The Audit Committee has discussed
with the independent auditor, BKD, LLP, 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 Audit Committee has received the
written disclosures and the letter from the independent auditor required by the
applicable requirements of the PCAOB regarding the independent auditor's
communications with the Audit Committee concerning independence and has
discussed with the independent auditor the independent auditor's independence.
Based on these reviews and discussions, the Audit Committee recommended to the
Board that the audited financial statements be included in First Merchants'
Annual Report on Form 10-K for the 2008 fiscal year for filing with the SEC.
The above report is submitted by:
FIRST MERCHANTS CORPORATION AUDIT COMMITTEE
Jean L. Wojtowicz, Chairperson
Thomas B. Clark
William L. Hoy
Terry L. Walker
Nominating and Governance Committee
The Nominating and Governance Committee is composed of directors Thomas B. Clark
(Chairperson), Jo Ann M. Gora, Charles E. Schalliol and Jean L. Wojtowicz. The
Committee met 2 times during 2008. The Nominating and Governance Committee's
goal is to ensure the Board's continued and enhanced effectiveness and
independence. It oversees First Merchants' compliance with laws and regulations
that relate to its governance structure and processes, including those of the
SEC and NASDAQ, makes recommendations concerning the size and composition of the
Board, as well as criteria for Board membership, reviews the credentials of
persons suggested as prospective directors, nominates persons to serve as
directors and as officers of the Board, provides for periodic self-assessment of
the Board's effectiveness, and reviews and makes recommendations for changes to
First Merchants' Code of Business Conduct and the Code of Ethics for Senior
Financial Officers. The Code of Business Conduct and the Code of Ethics for
Senior Financial Officers are included among the documents under "Corporate
Governance Disclosures" on First Merchants' website at
http://www.firstmerchants.com/about-us.cfm.
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 Stock Market Rules) if a non-employee director, residence in First
Merchants' market area, ability and willingness to devote sufficient time to
director responsibilities, and willingness to maintain a meaningful ownership
interest in First Merchants and assist First Merchants in developing new
business. For incumbent directors whose terms are expiring, the Nominating and
Governance Committee also considers the quality of their prior service to First
Merchants, including the nature and extent of their participation in First
Merchants' governance and their contributions of management and financial
expertise and experience to the Board and
9
First Merchants. For new director candidates, the Committee also considers
whether their skills are complementary to those of existing Board members and
whether they will fulfill the Board's needs for management, financial,
technological or other expertise. The Nominating and Governance Committee
considers candidates coming to its attention through current Board members,
search firms, shareholders and other persons.
Article IV, Section 9, of First Merchants' Bylaws, describes the process by
which a shareholder may suggest a candidate for consideration by the Nominating
and Governance Committee as a director nominee. Under this process, a suggestion
by a shareholder of a director nominee must include: (a) the name, address and
number of First Merchants shares owned by the shareholder; (b) the name,
address, age and principal occupation of the suggested nominee; and (c) such
other information concerning the suggested nominee as the shareholder may wish
to submit or the Committee may reasonably request. A suggestion for a director
nominee submitted by a shareholder must be in writing and delivered or mailed to
the Secretary, First Merchants Corporation, 200 East Jackson Street, Muncie,
Indiana 47305. Suggestions for nominees from shareholders are evaluated in the
same manner as other nominees.
Of the directors and director nominees that the Nominating and Governance
Committee approved for inclusion on First Merchant's proxy card for the 2009
annual meeting of shareholders, William L. Hoy, Barry J. Hudson and Michael C.
Rechin are directors standing for re-election, and Jerry R. Engle and Patrick A.
Sherman were nominated under a provision in the Agreement of Reorganization and
Merger between First Merchants and Lincoln dated as of September 2, 2008
requiring that Mr. Engle and another Lincoln director chosen by First Merchants
would be nominated for election to the Board for a 3-year term.
Compensation and Human Resources Committee
The Compensation and Human Resources Committee is composed of directors Charles
E. Schalliol (Chairperson), Thomas B. Clark and Roderick English. The Committee
met 2 times during 2008. The Committee establishes First Merchants' general
compensation philosophy, oversees the development and implementation of policies
and programs to carry out this compensation philosophy, and evaluates the
effectiveness of these policies and programs, in consultation with senior
management. The Committee recommends to the Board the compensation to be paid to
First Merchants' non-employee directors.
The Compensation and Human Resources Committee reviews the performance of and
approves the compensation and benefits to be paid to First Merchants' executive
officers and senior management employees and the chief executive officers and
regional presidents of its subsidiaries. In so doing, the Committee relies in
part on the recommendations of the President and Chief Executive Officer,
Michael C. Rechin, and other executive officers, as appropriate, concerning the
performance, compensation and benefits of First Merchants' executive officers
(other than themselves) and senior management employees, as well as the chief
executive officers and regional presidents of First Merchants' subsidiaries. The
Committee has delegated its authority to review the performance of and approve
the compensation and benefits to be paid to other employees of First Merchants
and its subsidiaries to Mr. Rechin and the respective chief executive officers
of First Merchants' subsidiaries.
The Compensation and Human Resources Committee recommends to the Board the
adoption, amendment and termination of First Merchants' incentive compensation,
equity-based compensation and deferred compensation plans; and it administers or
oversees the administration of these plans, the day-to-day administrative
responsibilities having been delegated to senior management, including President
and CEO, Michael C. Rechin, and the Senior Vice President and Director of Human
Resources, Kimberly J. Ellington. The plans that are being submitted for
shareholder approval at the 2009 annual meeting - the First Merchants
Corporation 2009 Employee Stock Purchase Plan and the First Merchants
Corporation 2009 Long-Term Equity Incentive Plan - will be administered by the
Committee.
The Compensation and Human Resources Committee is authorized to directly engage
counsel and consultants, including compensation consultants, to assist it in
carrying out its responsibilities. The Committee has used compensation
consultants in the past to conduct market assessments and to make
recommendations concerning
10
additions or changes to compensation programs and plan designs, but it did not
do so during 2007 or 2008. From time to time Mr. Rechin and Ms. Ellington
provide information to the Committee and make recommendations, on their own
initiative or as requested by the Committee, concerning existing and proposed
compensation policies and programs for executives and other employees of First
Merchants and its subsidiaries.
Compensation and Human Resources Committee Interlocks and Insider Participation
No member of the Compensation and Human Resources Committee - Charles E.
Schalliol, Thomas B. Clark or Roderick English - was an officer or employee of
First Merchants or any of its subsidiaries during 2008. None of these members
has ever been an officer or employee of First Merchants or any of its
subsidiaries. No member of the Compensation and Human Resources Committee or
executive officer of First Merchants had a relationship during 2008 requiring
disclosure in this proxy statement under SEC regulations.
Compensation and Human Resources Committee Report
The Compensation and Human Resources Committee has reviewed and discussed with
management the Compensation Discussion and Analysis required by SEC regulations
(set forth immediately following this report under "Compensation of Executive
Officers"). Based on this review and discussion, the Compensation and Human
Resources Committee recommended to the Board that the Compensation Discussion
and Analysis be included in First Merchants' proxy statement on Schedule 14A and
incorporated by reference in First Merchants' annual report on Form 10-K for the
fiscal year ended December 31, 2008.
The above report is submitted by:
FIRST MERCHANTS CORPORATION COMPENSATION AND HUMAN RESOURCES COMMITTEE
Charles E. Schalliol (Chairperson)
Thomas B. Clark
Roderick English
COMPENSATION OF EXECUTIVE OFFICERS
Compensation Discussion and Analysis
The Compensation and Human Resources Committee is responsible for the design,
implementation and evaluation of First Merchants' executive compensation
programs, aided by the company's CEO, CFO, the Director of Human Resources, and
other employees and outside advisors as the Committee deems necessary or
helpful. The compensation programs are designed to reward excellent performance
and to provide incentives to achieve current and long-term strategic goals, with
the ultimate objective of achieving a superior return on shareholders'
investment. The programs are intended to be competitive with other companies'
programs in order to attract and retain the most qualified executives.
In its choices of compensation programs, the Committee tries to strike an
appropriate balance between cash and non-cash compensation. The material
elements of these programs are salary, non-equity incentive pay, equity-based
compensation, including both restricted stock awards and stock options,
retirement benefits, and change of control agreements. Salary and non-equity
incentive pay advance shorter-term goals by providing an immediate or near-term
reward for exceptional performance, whereas equity-based compensation is
designed to reward the accomplishment of longer-term goals and to further align
executive officers' financial interests with those of other shareholders by
tying the value of such compensation to sustained increases in the price of
First Merchants stock. The retirement plans, the vesting provisions in
equity-based compensation, and the change of control agreements increase the
company's ability to retain executives.
11
For 2008, First Merchants' "Named Executive Officers" ("NEOs") and their titles
were:
o Michael C. Rechin, the President and Chief Executive Officer;
o Mark K. Hardwick, the Executive Vice President and Chief Financial
Officer;
o Michael J. Stewart, the Executive Vice President and Chief Banking
Officer;
o Robert R. Connors, the Senior Vice President and Chief Information
Officer; and
o David W. Spade, the Senior Vice President and Chief Credit Officer.
The following paragraphs discuss each of the material elements of the
compensation awarded to, earned by, or paid to these NEOs during 2008, with
references to information contained in the compensation tables and related
material on pages 20-28, as appropriate. The compensation tables generally
contain information concerning the NEOs' compensation through December 31, 2008;
however, a complete understanding of First Merchants' compensation programs
going forward requires consideration of important developments during the first
two months of 2009 that will affect some elements of the NEOs' compensation.
They relate to First Merchants' participation in the U. S. Treasury Department's
Capital Purchase Program (the "CPP") under the Emergency Economic Stabilization
Act of 2008, as further described on page 1 of this proxy statement. In order
for First Merchants to participate in the CPP, during the period that preferred
stock issued to the Treasury Department under the CPP remains outstanding, First
Merchants' compensation programs for executive officers must comply with the
standards applicable to CPP participants. They include the following
restrictions imposed by the American Recovery and Reinvestment Act of 2009 (the
"ARRA"), which was signed into law on February 17, 2009:
(1) Compensation must exclude incentives for the NEOs to take
unnecessary and excessive risks that threaten First Merchants'
value.
(2) First Merchants must implement provisions to recover any bonus,
retention award or incentive compensation paid to NEOs and any of
the next 20 most highly-compensated employees based on statements
of earnings, revenues, gains or other criteria that are later
found to be materially inaccurate.
(3) First Merchants must prohibit any compensation plan that would
encourage manipulation of the company's reported earnings to
enhance the compensation of any of its employees.
(4) First Merchants is prohibited from making "golden parachute
payments" or severance payments (essentially, any payment for
departure from the company for any reason, except for payments
for services performed or benefits accrued) to an NEO or any of
the next 5 most highly-compensated employees.
(5) First Merchants is prohibited from paying or accruing any bonus,
retention award or incentive compensation to the NEOs, except
that long-term restricted stock may be paid if that stock (i)
doesn't fully vest while the preferred stock remains outstanding,
(ii) has a value that doesn't exceed 1/3 of the receiving
employee's total annual compensation, and (iii) is subject to
such other terms as the Secretary of the Treasury may determine
is in the public interest. A bonus payment required to be paid
pursuant to a written employment contract executed on or before
February 11, 2009 is not prohibited under this standard.
(6) The Compensation and Human Resources Committee must meet at least
semi-annually to discuss and evaluate employee compensation plans
in light of an assessment of any risk posed to First Merchants by
such plans.
(7) The Board must establish a company-wide policy regarding
excessive or luxury expenditures, which may include excessive
expenditures on (i) entertainment or events, (ii) office and
facility renovations, (iii) aviation or other transportation
services, or (iv) other activities or events that are not
reasonable expenditures for conferences, staff development,
reasonable performance incentives, or other similar measures
conducted in the normal course of the company's business
operations.
12
(8) First Merchants is subject to a $500,000 cap on deductibility of
annual compensation for each of its NEOs under the provisions of
Internal Revenue Code Section 162(m)(5).
(9) First Merchants' CEO and CFO must provide a written certification
of compliance with the above CPP standards and file this
certification with the SEC with the annual filings required under
securities laws.
The Treasury Department has not yet provided much guidance concerning the
interpretation and application of the restrictions imposed by the ARRA, so it is
possible that the NEOs' compensation will be affected by these restrictions in
ways that are not apparent at the present time. The Treasury Department may
issue additional rules and regulations in the future that will restrict or
otherwise affect the compensation of executives of CPP participants. For these
reasons, the discussion of the NEOs' compensation in this section of the proxy
statement may be altered by subsequent developments. Each of the NEOs has
acknowledged in a letter agreement with First Merchants that his compensation
will be subject to the standards and restrictions applicable to executive
officers of CPP participants during the period that the preferred stock issued
to the Treasury Department remains outstanding.
The material elements of First Merchants' compensation programs are discussed
below.
Salaries.
The Compensation and Human Resources Committee annually reviews the NEOs'
salaries each February, after First Merchants' audited financial statements for
the preceding fiscal year have been issued. Salary adjustments, if any, approved
by the Committee become effective as of the first payroll in March. The
Committee believes that, by waiting until the financial statements are issued,
salary adjustments for the NEOs can be more accurately and effectively tied to
their success in meeting financial targets and other strategic goals for the
fiscal year just ended. It also allows First Merchants to communicate decisions
concerning salary adjustments to the NEOs at the same time as those related to
incentive plan payments and equity-based awards, thus ensuring a clear and
consistent message regarding performance and underlining First Merchants'
emphasis on growing a performance-based culture.
The Compensation and Human Resources Committee does not "benchmark" the NEOs'
salaries, which the SEC defines as using compensation data about other companies
as a reference point on which, either wholly or in part, to base, justify or
provide a framework for a compensation decision. However, the Committee does
rely on broad-based third party surveys, particularly those that include
financial institutions of a similar size and/or geographic location as First
Merchants, to gain a general understanding of current compensation practices.
The Committee determines the NEOs' salaries subjectively, based mostly on their
responsibilities and the Committee's review of their individual performance and
contributions to First Merchants' performance - especially its long-term and
short-term financial performance. In assessing the performance of the NEOs other
than the CEO, the Committee relies heavily on the recommendations of the CEO.
The Committee has the sole responsibility for assessing the CEO's performance
and establishing his salary. In determining the NEOs' salaries, the Committee
also takes into account their experience, budgetary considerations, and the
salaries paid to executives holding similar positions with First Merchants'
competitors in the financial services industry. The Committee believes, on the
basis of the information it has compiled through surveys and otherwise that
Messrs. Rechin and Hardwick's salaries as CEO and CFO, respectively, of First
Merchants are below the median for executives holding similar positions with
comparably-sized institutions in the financial services industry, taking into
consideration levels of experience and performance. For this reason, as the
Summary Compensation Table shows, they have been granted larger than usual
salary increases over the past three years with the intent of moving them closer
to the median and recognizing their worth to First Merchants and the importance
of retaining them.
13
Mr. Rechin's 2007 salary of $309,423 was based on an annual salary of $275,000
until April 24, 2007, when he was promoted from Executive Vice President and COO
to President and CEO. Thereafter, it was based on an annual salary of $325,000,
in recognition of his additional responsibilities. In 2008, his salary was
increased to $350,000, a 7.7% increase from $325,000, in recognition of the
level of his performance since becoming CEO. Mr. Hardwick's salary for 2007 was
$209,000; and it was increased to $250,000 in 2008, a 19.6% increase. Mr.
Hardwick's increase was based in part on his performance and in part on the
Committee's belief that the larger increase was merited in order to compensate
him at a level closer to the salaries paid to executives with similar
responsibilities at other companies. First Merchants hired Mr. Stewart in
January 2008 as its first Chief Banking Officer. He came to First Merchants with
substantial valuable and relevant experience with other financial institutions.
His 2008 salary as one of the company's two Executive Vice Presidents, was based
on an annual salary of $245,000 - nearly the same as the salary paid to Mr.
Hardwick, First Merchants' other Executive Vice President. Mr. Connors' 2007
salary of $192,200 was increased to $199,900 in 2008, a 4.0% increase. Mr.
Spade's 2007 salary of $175,000 was increased to $180,700 in 2008, a 3.3%
increase. These increases were generally in line with the merit increases given
to the company's other senior management employees in 2008.
As national and international economic conditions became increasingly worse
during 2008, especially in the financial services industry, financial plans and
goals adopted prior to the beginning of the year became increasingly difficult
to meet. While First Merchants had net income after income taxes totaling $20.6
million in 2008, performing significantly better than most other financial
institutions, its diluted earnings per share decreased to $1.14 from $1.73 per
share in 2007. In consideration of the uncertain economic environment that is
likely to continue throughout the current year and perhaps into 2010, First
Merchants has decided not to increase senior management salaries, including
those of the NEOs, for 2009. The Committee recognizes that in normal times,
applying normal standards, the NEOs' 2008 performance would uniformly justify
merit salary increases; however, it is apparent that the present circumstances
are unique and that it is in the best interests of First Merchants and its
shareholders to not increase executive salaries for 2009. If the economy, and
First Merchants' financial performance, improves more rapidly than presently
expected, the Committee may review this decision prior to its next scheduled
review in February 2010.
The restrictions imposed by the ARRA include a $500,000 cap on the deductibility
of annual compensation under the provisions of Internal Revenue Code Section
162(m)(5). None of the NEOs' annual compensation presently exceeds this limit.
Non-Equity Incentive Pay.
Non-equity incentive compensation is available to the NEOs through the First
Merchants Corporation Senior Management Incentive Compensation Program, which
affords them the opportunity to earn additional cash compensation, determined as
a percentage of their salaries, as incentive pay by meeting individual goals
that are closely related to First Merchants' financial success. Under the
Program, at the beginning of each year - no later than February - the NEOs are
given targets they must meet in order to receive a payout of 100% of their
assigned percentage the following February. The Compensation and Human Resources
Committee determines the payments for a fiscal year and approves their payment
after First Merchants' audited financial statements for the year have been
issued, contemporaneously with its determination of salaries, equity
compensation, and the parameters of the Senior Management Incentive Compensation
Program for the following year. An NEO must be employed at the time the payment
is due under the Program, except in the case of the NEO's death, disability or
retirement. There are thresholds under the Program below which no payout is
made, as well as maximum payouts that are larger than the target payouts. The
amounts paid out increase on the basis of a pre-established schedule between the
thresholds and the targets and the targets and the maximum payouts. The
Committee has the authority to modify the Program, make final award
determinations, set conditions for eligibility and awards, define extraordinary
accounting events in calculating earnings, establish future payout schedules,
determine circumstances and causes for which payouts can be withheld, and
abolish the Program.
The Committee has determined that it would be in the long-term financial
interest of First Merchants and its shareholders to base the target payouts to
Messrs. Rechin, Hardwick and Stewart under the Senior
14
Management Incentive Compensation Program entirely on year-over-year growth in
First Merchants' earnings per share, calculated on a diluted GAAP basis. For
2008, the Committee established Messrs. Rechin, Hardwick and Stewart's incentive
payments under the Program for meeting their targets at 45%, 40% and 40%,
respectively, of their salaries. The Committee established the target at which
they would receive these payments at a 10% increase in earnings per share, with
a threshold of a 3% increase in earnings per share below which no payment would
be made and a maximum of a 20% increase that would earn a payment of twice the
target amount. The range of payments that were possible for Messrs. Rechin,
Hardwick and Stewart under the Program for 2008 is shown in the Grants of
Plan-Based Awards Table on page 22. As the Summary Compensation Table on page 21
shows, Messrs. Rechin and Hardwick received payments of $69,620 and $41,800,
respectively, under the Program for 2007 based on First Merchants' earnings per
share increase of about 5% over 2006. However, since First Merchants' earnings
per share decreased between 2007 and 2008, they did not receive a payment under
the Program for 2008.
For 2008, the target payouts to Messrs. Connors and Spade under the Program were
based 80% on First Merchants' year-over-year growth in First Merchants' earnings
per share, calculated on a diluted GAAP basis, and 20% on their accomplishment
of personal objectives assigned by the CEO at the beginning of the year. The
Committee established the incentive payouts for both of them for meeting their
targets at 30% of their salaries. The earnings per share targets and thresholds
and maximums were the same for Messrs. Connors and Spade as for Messrs. Rechin,
Hardwick and Stewart. Whether they accomplished all or part of their personal
objectives was determined by the CEO. The range of payouts that were possible
for Messrs. Connors and Spade under the Program for 2008 is shown in the Grants
of Plan-Based Awards Table on page 22. Their maximum payouts were 170% of their
target amounts due to the inclusion of the personal objectives component in
their payout calculations. As the Summary Compensation Table on page 21 shows,
Messrs. Connors and Spade received payments for 2007 of $37,479 and $30,188,
respectively, based on First Merchants' earnings per share increase over 2006
and their accomplishment of personal objectives. For 2008, while neither Mr.
Connors nor Mr. Spade received a payment based on their earnings per share
targets due to the decrease in First Merchants' earnings per share between 2007
and 2008, Mr. Connors received $11,520 under the Program because he accomplished
all of his personal objectives and Mr. Spade received $6,180 because he
accomplished part of his personal objectives.
The NEOs will continue to be covered by the Senior Management Incentive
Compensation Program for 2009, with each NEO being eligible for a payment of the
same percentage of his salary for meeting his target as in 2008 - that is, 45%,
40%, 40%, 30% and 30% for Messrs. Rechin, Hardwick, Stewart, Connors and Spade,
respectively; and all of the payouts for Messrs. Rechin, Hardwick and Stewart,
and 80% of the payouts for Messrs. Connors and Spade will be based on the
year-over-year growth in First Merchants' earnings per share, calculated on a
diluted GAAP basis, from 2008. The Compensation and Human Resources Committee
made two changes to the Program for 2009 that may affect the NEOs' payouts.
First, the schedule for incentive payouts based on First Merchants'
year-over-year growth in First Merchants' earnings per share was changed. The
target earnings per share increase, at which the pre-established percentage of
the NEOs' salary will be paid, will continue to be 10%; however, the schedule
for payouts above the target up to the maximum has been changed to require
incrementally higher earnings per share increases in order for an NEO to earn a
larger payout; e.g., for an NEO to earn the maximum payment of twice the
targeted payout, First Merchants' earnings per share would have to increase by
50% compared to 20% under the 2008 schedule. The reason for this change is that
a greater earnings per share percentage increase for 2009 is more achievable
than it was for 2008 because the base is lower due to the decrease in earnings
per share between 2007 and 2008. Second, for Messrs. Connors and Spade only, the
other 20% of their payouts will be tied to improving First Merchants'
consolidated efficiency ratio instead of being based on their accomplishment of
personal objectives as it was in 2008. The Committee and the CEO believe this
incentive is more in line with their responsibilities and, since it can be
measured objectively, is preferable to a reward for accomplishing personal
objectives - which often involves a subjective element.
The restrictions imposed by the ARRA includes a requirement that NEOs'
compensation must exclude incentives to take unnecessary and excessive risks
that threaten First Merchants' value. The Compensation and Human Resources
Committee is required to meet at least semi-annually to discuss and evaluate
employee compensation plans in light of an assessment of any risk posed to First
Merchants by such plans. The
15
Committee does not presently believe that First Merchants' incentive
compensation program provide any incentives for NEOs to take unnecessary or
excessive risks that threaten First Merchants' value, in view of the Senior
Management Incentive Compensation Program's reliance on year-over-year earnings
per share increases as the sole (or, in the cases of Messrs. Connors and Spade,
principal) basis for determining incentive payouts. The Program is intended to
reward First Merchants' long-term growth in a way that would normally result in
improvement in its market value as reflected in its share price. Nevertheless,
the Committee plans to meet at least semi-annually with First Merchants' CEO,
CFO and Chief Risk Officer to discuss and evaluate the company's employee
compensation plans and assess the types and level of risk posed by these plans.
The ARRA also prohibits First Merchants from paying or accruing any bonus,
retention award or incentive compensation to the NEOs while preferred stock
issued to the Treasury Department under the CPP remains outstanding. However,
notwithstanding this prohibition, First Merchants may pay compensation to the
NEOs in the form of long-term restricted stock if that stock (i) doesn't fully
vest while the preferred stock remains outstanding, (ii) has a value that
doesn't exceed 1/3 of the receiving NEO's total annual compensation, and (iii)
is subject to such other terms as the Secretary of the Treasury may determine is
in the public interest. A bonus payment required to be paid pursuant to a
written employment contract executed on or before February 11, 2009 is also
permitted under this standard. It appears that this standard will affect the
incentive compensation payable to the NEOs under the Senior Management Incentive
Compensation Program by requiring that, rather than being paid in cash as the
Program provides, any payout earned under the Program be paid to the NEO in the
form of First Merchants restricted stock that doesn't fully vest while any of
the preferred stock issued to the Treasury Department under the CPP remains
outstanding. On the other hand, based on the Committee's prior approach to
allocating compensation between salary and other forms of incentive
compensation, the 1/3 of total annual compensation limit isn't likely to limit
the amount of the NEOs' potential payouts under the Program compensation. Since,
as noted above, the Treasury Department has provided little guidance concerning
the interpretation and application of the restrictions imposed by the ARRA,
uncertainty remains as to exactly how the NEOs' compensation will be affected by
this restriction. In addition, the Treasury Department may impose other
restrictions on the compensation payable to executives of CPP participants. For
these reasons, the discussion of the NEOs' non-equity incentive pay in this
section of the proxy statement may be altered by subsequent developments.
Equity-Based Compensation.
The NEOs have the opportunity to receive equity-based compensation under the
First Merchants Corporation 1999 Long-term Equity Incentive Plan. The awards
available under the Plan include incentive and non-qualified options to acquire
First Merchants stock and grants of restricted First Merchants stock. The Plan
provides that the Compensation and Human Resources Committee has the authority
to grant awards, decide who will receive awards, determine the types and sizes
of awards, determine the terms, conditions, vesting periods, and restrictions
applicable to awards, adopt, alter and repeal administrative rules and practices
governing the Plan, interpret the terms and provisions of the Plan and any
awards granted under the Plan, prescribe the forms of award agreements, and
otherwise supervise the administration of the Plan. The Committee generally
approves stock option and restricted stock awards under the Plan at a meeting
held each year in February, at the same time salary adjustments and non-equity
incentive payments are approved. The Committee also sometimes grants an award at
other times, e.g., when an executive is hired. In making stock option and
restricted stock awards, the Committee relies heavily on the recommendations of
the CEO except for the awards to the CEO.
The annual awards to senior executives, including the NEOs, under the Plan are
comprised of a combination of stock options and restricted stock, whereas the
awards to other participants are generally in the form of restricted stock. The
Committee believes that stock options should be a significant component of First
Merchants' equity-based compensation program for the NEOs because the financial
incentive provided by stock options depends entirely on increasing the price of
First Merchants shares, thus furthering aligning the NEOs' financial interests
with those of First Merchants' shareholders. The ratio of stock options to
restricted stock annually awarded to the NEOs averages about 3-1. A share of
restricted stock is valued at slightly more than 3 times the value of an option
to purchase a share of stock.
16
The stock options granted to the NEOs under the Plan are incentive stock options
up to the statutory limit; and the rest, if any, are non-qualified options. The
exercise price for the stock options is the closing price of First Merchants
stock as recorded by NASDAQ on the date of the grant. The options vest (become
exercisable) 2 years later, or, if earlier, on the date the grantee retires,
dies or becomes disabled. The restricted stock granted to the NEOs under the
Plan vests (the restrictions lapse, giving the grantee complete ownership
rights) if the grantee is still employed by First Merchants 3 years after the
award is made, or, if earlier, on the date the grantee retires, dies or becomes
disabled. The restricted stock partially vests if the grantee's employment is
involuntarily terminated without "cause." Under this circumstance, the vested
portion is 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. The grantee is entitled to vote the shares of
restricted stock and receive the dividends on the stock.
The Outstanding Equity Awards at Fiscal Year-End 2008 Table on page 24 provides
information concerning each of the stock options granted to the NEOs through
December 31, 2008 that have not expired, as well as information concerning the
awards of restricted stock that had not vested as of December 31, 2008. As the
Table shows, the Compensation and Human Resources Committee granted Mr. Rechin
options to purchase 12,000 shares of First Merchants stock on February 8, 2007
and 15,000 shares on February 27, 2008, and it awarded him 3,000 shares of
restricted First Merchants stock on February 8, 2007 and 4,000 shares on
February 27, 2008. The Committee also granted Mr. Rechin options to purchase
20,000 shares of First Merchants stock on February 24, 2009, and it awarded him
4,000 shares of restricted First Merchants stock on the same date. The Committee
granted Mr. Hardwick options to purchase 8,000 shares of First Merchants stock
on February 8, 2007 and 8,000 shares on February 27, 2008, and it awarded him
2,400 shares of restricted First Merchants stock on February 8, 2007 and 2,700
shares on February 27, 2008. The Committee also granted Mr. Hardwick options to
purchase 8,000 shares of First Merchants stock on February 24, 2009, and it
awarded him 3,200 shares of restricted First Merchants stock on the same date.
The Committee granted Mr. Stewart options to purchase 6,000 shares of First
Merchants stock when he was hired on January 29, 2008, and it awarded him 3,000
shares of restricted First Merchants stock on the same date. The Committee also
granted Mr. Stewart options to purchase 8,000 shares of First Merchants stock on
February 24, 2009, and it awarded him 3,200 shares of restricted First Merchants
stock on the same date. The Committee granted Mr. Connors options to purchase
4,500 shares of First Merchants stock on February 8, 2007 and 3,000 shares on
February 27, 2008, and it awarded him 1,600 shares of restricted First Merchants
stock on February 8, 2007 and 2,000 shares on February 27, 2008. The Committee
also granted Mr. Connors options to purchase 3,000 shares of First Merchants
stock on February 24, 2009, and it awarded him 2,000 shares of restricted First
Merchants stock on the same date. The Committee granted Mr. Spade options to
purchase 4,000 shares of First Merchants stock on February 8, 2007 and 4,000
shares on February 27, 2008, and it awarded him 1,000 shares of restricted First
Merchants stock on February 8, 2007 and 1,000 shares on February 27, 2008. The
Committee also granted Mr. Spade options to purchase 3,000 shares of First
Merchants stock on February 24, 2009, and it awarded him 1,000 shares of
restricted First Merchants stock on the same date. The exercise price for the
stock options granted to the NEOs on February 8, 2007 was $26.31/share; the
exercise price for the stock options granted to the NEOs (other than Mr.
Stewart) on February 27, 2008 was $28.25/share; the exercise price for the stock
options granted to Mr. Stewart on January 29, 2008 was $25.44/share: and the
exercise price for the stock options granted to the NEOs on February 24, 2009
was $11.14/share. As of February 27, 2009, the date of this proxy statement, all
of the unexercised stock options granted to the NEOs under the 1999 Long-term
Equity Incentive Plan are out-of-the-money.
The 1999 Long-term Equity Incentive Plan expires in 2009, and no additional
awards of restricted stock or stock options may be made under the Plan after
April 14, 2009. On February 4, 2009, the Board adopted the First Merchants
Corporation 2009 Long-Term Equity Incentive Plan, subject to shareholder
approval which is being sought at the 2009 annual shareholder meeting. The 2009
Equity Incentive Plan is similar to the 1999 Plan; however, it includes two
additional provisions applicable to NEOs participating in the Plan that,
together with the vesting provisions in the 1999 Plan which continue in the 2009
Plan, are intended to encourage additional share ownership by the NEOs and
thereby increase the commonality of interest between the NEOs and the
shareholders. First, the 2009 Plan provides that NEOs are required to hold 25%
of all "net shares" (defined as the number of shares issued to the NOE under an
award after subtracting the number of shares, if any, transferred or surrendered
by the NEO to pay the exercise price of a stock option
17
and/or to pay any withholding taxes associated with the award) issued to the NEO
under the Plan, including both restricted stock awards and shares issued upon
the exercise of stock options, until the earlier of (i) the date of the NEO's
death, retirement or other termination of employment, or (ii) the date of a
change of control. Second, the 2009 Plan includes a guideline stating that NEOs
who are selected as participants in the Plan should acquire and hold shares of
First Merchants common stock equal in value to at least 100% of their then
current annual salary within 6 years after first being selected to participate
in the Plan. This guideline does not constitute a condition, restriction or risk
of forfeiture applicable to any award made to an NEO under the Plan. Additional
information concerning the 2009 Long-Term Equity Incentive Plan is provided on
pages 35-39 under "Voting Item 4 - Proposal to Approve the First Merchants
Corporation 2009 Long-Term Equity Incentive Plan." The full text of the Plan is
set forth in Appendix B.
The ARRA prohibition on paying or accruing any bonus, retention award or
incentive compensation to the NEOs while preferred stock issued to the Treasury
Department under the CPP remains outstanding, discussed above in the section of
this analysis covering the Senior Management Incentive Compensation Program, may
also affect the benefits available to the NEOs under the Long-Term Equity
Incentive Plan. As in the case of the Senior Management Incentive Compensation
Program, uncertainty exists concerning the application of that prohibition, or
the exception for long-term restricted stock, to the Long-Term Equity Incentive
Plan. The exception's limitation of restricted stock to 1/3 of an NEO's total
annual compensation limit is not likely to affect the size of the restricted
stock awards that the Committee has typically made under the Plan. However,
since the Treasury Department has provided little guidance concerning the
interpretation and application of the restrictions imposed by the ARRA,
uncertainty remains as to exactly how the NEOs' compensation under the Long-Term
Equity Incentive Plan will be affected by this restriction. In addition, the
Treasury Department may impose other restrictions on the compensation payable to
executives of CPP participants. For these reasons, the discussion of the NEOs'
equity-based compensation in this section of the proxy statement may be altered
by subsequent developments.
Although not a material element of their equity-based compensation, several of
the NEOs have participated in the First Merchants Corporation 2004 Employee
Stock Purchase Plan, an Internal Revenue Code Section 423 employee stock
purchase plan that is available to all employees of First Merchants and its
participating subsidiaries. Under this Plan, participants could elect, prior to
an annual offering period (July 1 to June 30), to purchase shares of First
Merchants' stock at a price equal to 85% of the lesser of the closing price for
the stock at the beginning of the offering period and the closing price for the
stock at the end of the offering period, as reported by NASDAQ. The Plan has
provided an attractive vehicle for participants to acquire First Merchants
stock, which further aligns their financial interests with those of other
shareholders. For the offering period ending June 30, 2008, the following NEOs
participated in this Plan: Mr. Rechin, who purchased 681 shares, Mr. Hardwick,
who purchased 596 shares, and Mr. Spade who purchased 298 shares. The purchase
price for shares under the Plan was $15.43 per share. The 2004 Employee Stock
Purchase Plan expires on June 30, 2009. On February 4, 2009, the Board adopted
the First Merchants Corporation 2009 Employee Stock Purchase Plan, subject to
shareholder approval which is being sought at the 2009 annual shareholder
meeting. If approved, the 2009 Employee Stock Purchase Plan will become
effective on July 1, 2009. It is similar to the 2004 Plan, except that the
offering periods under the Plan will be 3 months rather than 12 months,
corresponding with the calendar quarters, and the purchase price for shares will
be equal to 85% of the average of the closing prices for the stock on each
trading day during the offering period, as reported by NASDAQ, rather than 85%
of the lesser of the closing price for the stock at the beginning of the
offering period and the closing price for the stock at the end of the offering
period, as reported by NASDAQ. Additional information concerning the 2009
Employee Stock Purchase Plan is provided on pages 31-34 under "Voting Item 3 -
Proposal to Approve the First Merchants Corporation 2009 Employee Stock Purchase
Plan." The full text of the Plan is set forth in Appendix A.
Retirement Benefits.
First Merchants maintains a qualified defined benefit pension plan, the First
Merchants Corporation Retirement Pension Plan, which it "froze" as of March 1,
2005, meaning that, with some exceptions, employees no longer accrued benefits
under the Plan. However, participants who were at least age 55 with 10 or more
years of credited service on the date the Plan was frozen were "grandfathered;"
that is, they continued
18
to accrue benefits under the Plan after that date. Employees who were not
participating in the Plan on March 1, 2005 were not eligible to participate. The
Plan pays benefits at retirement to participating employees of First Merchants
and its participating subsidiaries. The benefits payable under this Plan,
computed as a straight-life annuity although other forms of
actuarially-equivalent benefits are available under the Plan, are based on the
following formula: 1.6% of average final compensation (in general, the
participant's highest 60 consecutive months' W-2 compensation, less incentive
pay) plus .5% of average final compensation in excess of Social Security covered
compensation, both times years of service to a maximum of 25 years. Although
benefits are integrated with Social Security, they are not subject to any
deduction for Social Security or other offset amounts. The benefits payable
under the Plan at age 65 to the participants whose benefits were frozen are
determined under the formula described above, based on their average final
compensation as of March 1, 2005, times a fraction, the numerator of which is
the participant's years of credited service as of March 1, 2005, and the
denominator of which is the participant's years of credited service projected to
age 65.
Of the NEOs, Messrs. Rechin, Stewart and Spade did not participate in the First
Merchants Corporation Retirement Pension Plan. The benefits accruing to Messrs.
Hardwick and Connors were frozen as of March 1, 2005, because they had not
attained age 55 with 10 or more years of credited service as of that date.
Assuming their employment continues to age 65, Messrs. Hardwick's and Connors'
annual benefits under the plan, payable as a straight-life annuity, would be
approximately $8,594 and $7,895, respectively.
First Merchants also maintains the First Merchants Corporation Retirement and
Income Savings Plan, an Internal Revenue Code Section 401(k) qualified defined
contribution plan under which participating employees of First Merchants and its
subsidiaries can make pre-tax contributions to the Plan, up to statutory limits
and limits set forth in the Plan, that are currently matched by the
participant's employer at the rate of 50% of the participant's pre-tax
contributions to the Plan, to a maximum of 6% of compensation (defined as W-2
compensation plus certain voluntary pre-tax contributions, up to the Internal
Revenue Code Section 401(a)(17) maximum, which was $230,000 in 2008 and is
$245,000 in 2009). Thus, the maximum matching employer contribution under the
Plan is generally 3% of pay (less if the participant's compensation exceeds
$245,000). First Merchants made matching contributions for 2008 under the Plan
for NEOs Rechin, Hardwick, Stewart, Connors and Spade in the amounts of $6,900,
$6,900, $6,900, $6,900 and $6,429, respectively. First Merchants also makes
contributions, currently from 2% to 7% of compensation (up to the Internal
Revenue Code Section 401(a)(17) maximum), on behalf of participants based on
their years of service, in five-year increments (i.e., 2% for 0-4 years of
service, 3% for 5-9 years of service, 4% for 10-14 years of service, 5% for
15-19 years of service, 6% for 20-24 years of service, and 7% for 25 or more
years of service). For 2008, the NEOs received service-weighted contributions as
follows: Mr. Rechin, 2% of compensation, or $4,600; Mr. Hardwick, 4% of
compensation, or $9,200; Mr. Stewart, 2% of compensation, or $4,600; Mr.
Connors, 3% of compensation, or $6,900; and Mr. Spade, 2% of compensation, or
$4,286. Finally, First Merchants is making "transition contributions" under the
Plan equal to 3% of compensation for the years 2005 through 2009, for employees
who were participants in the First Merchants Corporation Retirement Pension Plan
when it was frozen and who had attained age 45 with 10 or more years of credited
service as of March 1, 2005 (other than the "grandfathered" participants). None
of the NEOs is eligible for a transition contribution under the Plan. Employee
pre-tax contributions under the Plan are always fully vested, while matching,
service-weighted and transition contributions vest 20% after each year of
service.
First Merchants also maintains the First Merchants Corporation Defined
Contribution Supplemental Executive Retirement Plan, which provides additional
retirement benefits to executives designated by the Compensation and Human
Resources Committee whose benefits under 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 ($230,000 in 2008 and $245,000 in 2009). Mr. Rechin is presently the sole
participant in the Defined Contribution Supplemental Executive Retirement Plan.
First Merchants contributes 12% of Mr. Rechin's annual compensation, including
his base salary and his non-equity incentive pay, to the Plan. The Committee
established this percentage after consulting with Mercer Human Resource
Consulting, which assisted the Committee in designing the Plan in 2006. If Mr.
Rechin continues to be employed by First Merchants until his normal retirement
age, this contribution would provide an income replacement ratio of
approximately 35%, based on a 7% return on the Plan's investments. Mercer Human
Resource Consulting advised the Committee
19
that this income replacement ratio would provide retirement benefits to Mr.
Rechin that are comparable to those paid to executives holding similar positions
at peer companies in the banking industry. Mr. Rechin's benefit under the Plan
is subject to a 5 year "cliff" vesting provision. He is not permitted to make
employee contributions under the Plan. First Merchants' contribution for 2008 to
this plan on behalf of Mr. Rechin was $45,494.
Change of Control Agreements.
First Merchants does not have an employment agreement with any of the NEOs. They
are all deemed to be "at will" employees. However, First Merchants does have
"double trigger" change of control agreements with all five of the NEOs. First
Merchants believes that change of control agreements are in the best interests
of First Merchants and its shareholders, because they would encourage key
executives to remain with First Merchants and continue to act in First
Merchants' and shareholders' interests in the event of a proposed acquisition or
other change of control situation in which they might otherwise be influenced to
leave due to the uncertainties of their own circumstances. Under the "double
trigger" change of control agreements, severance benefits are payable to the
NEOs only if: (1) a change of control occurs; and (2) the NEO's employment is
terminated or constructively terminated following the change of control. Under
First Merchants' agreements with the NEOs, this termination must occur within 24
months following the change of control in order for the agreement to apply and
benefits to be payable. No benefits are payable under the agreements in the
event of the executive's voluntary retirement, death or disability, or if the
executive's employment is terminated for cause. The definitions of "change of
control" and "constructive termination" as used in these agreements are
contained on page 27, under "Termination of Employment and Change of Control
Arrangements." The agreements also contain a definition of "cause" for
termination. Payments under the change of control agreements are determined as a
multiple of the sum of the executive's annual base salary at the time of
receiving notice of termination and the executive's largest annual non-equity
incentive payment under the Senior Management Incentive Compensation Program
during the two years preceding the date of termination. This multiple is 2.99
for Messrs. Rechin, Hardwick and Stewart, and 1.50 for Messrs. Connors and
Spade. The change of control agreements were not entered into in response to any
effort to acquire control of First Merchants, and the Board is not aware of any
such effort. Because they cover relatively few executives and represent a
relatively small percentage of First Merchants' market capitalization, the Board
does not believe that the existence of these agreements would discourage any
such effort.
The restrictions imposed by the ARRA includes a prohibition against making
"golden parachute payments" or severance payments (essentially, any payment for
departure from the company for any reason, except for payments for services
performed or benefits accrued) to an NEO or any of the next 5 most
highly-compensated employees during the period that preferred stock issued to
the Treasury Department under the CPP remains outstanding. This prohibition may
prevent First Merchants from making any payments to NEOs under the provisions of
the change of control agreements with its NEOs as long as the preferred stock
issued by First Merchants to the Treasury Department remains outstanding.
However, since, as noted above, the Treasury Department has provided little
guidance concerning the interpretation and application of the restrictions
imposed by the ARRA, uncertainty remains as to exactly how the NEOs'
compensation will be affected by this prohibition. In addition, the Treasury
Department may impose other restrictions on the compensation payable to
executives of CPP participants. For these reasons, the discussion of the NEOs'
change of control agreements in this section of the proxy statement may be
altered by subsequent developments.
Summary Compensation Table
The following table provides information concerning all of the plan and non-plan
compensation paid to the NEOs for 2006, 2007 and 2008.
20
Summary Compensation Table
------------------------------ -------- ---------- ---------- -------- ---------- ------------ -------------- ------------ ---------
Name and Principal position Year Salary(1) Bonus(2) Stock Option Non-equity Change in All other Total
awards(3)awards(3) incentive pension compensation(6)
plan value and
compen-sation non-qualified
deferred
compensation
earnings(5)
------------------------------ -------- ---------- ---------- -------- ---------- ------------ -------------- ------------ ---------
Michael C. Rechin 2006 280,288 100,100 14,864 21,844 3,300 0 51,788 472,184
President and Chief 2007 309, 423 0 57,833 83,434 69,620 0 69,270 589,580
Executive Officer 2008 346,154 0 31,755 41,694 0 0 67,114 486,717
Mark K. Hardwick
Executive Vice President 2006 193,699 0 14,864 19,113 19,950 2,495 15,434 265,555
and Chief Financial 2007 206,077 0 35,527 44,558 41,800 1,555 20,182 349,699
Officer 2008 243,692 0 21,435 22,237 0 0 22,794 310,158
Michael J. Stewart 2008 221,808 50,000 23,467 16,433 0 0 9,660 321,368
Executive Vice President
and Chief Banking
Officer(7)
Robert R. Connors 2006 185,704 0 10,405 10,922 16,398 4,695 12,310 240,434
Senior Vice President and 2007 190,662 0 24,243 25,256 37,479 3,689 16,374 297,703
Chief Information Officer 2008 198,796 0 15,878 8,339 11,520 0 18,802 253,335
David W. Spade 2006 164,327 0 10,405 0 12,800 0 10,568 198,100
Senior Vice President and 2007 175,000 0 19,547 11,513 30,188 0 12,392 248,640
Chief Credit Officer 2008 179,823 0 7,939 11,119 6,180 0 14,151 219,212
------------------------------ -------- ---------- ---------- -------- ---------- ------------ -------------- ------------ ---------
(1) The amounts shown in the Salary column for 2006 also included service
awards and Christmas gifts. The service awards and Christmas gifts
were discontinued after 2006. For 2006, Mr. Rechin's salary, service
awards and Christmas gifts were $275,000, $0 and $5,288, respectively;
Mr. Hardwick's were $190,000, $45 and $3,654, respectively; Mr.
Connors' were $182,200, $0 and $3,504, respectively; and Mr. Spade's
were $161,250, $0 and $3,077, respectively.
(2) First Merchants paid Mr. Rechin a sign-on bonus of $100,000 in early
2006 under an offer of employment made to him when he was hired in
November 2005. The other $100 was paid to Mr. Rechin in 2006 under a
customer referral program. First Merchants paid Mr. Stewart a sign-on
bonus of $50,000 in early 2008 under an offer of employment made to
him when he was hired in January 2008. No bonuses were paid to any of
the other NEOs during 2006, 2007 or 2008 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 2008 audited financial statements, on page
67 of First Merchants' Annual Report on Form 10-K for the year ended
December 31, 2008.
(4) The amounts shown in the Non-equity Incentive Plan Compensation column
are payments under the First Merchants Corporation Senior Management
Incentive Compensation Program for 2006, 2007 and 2008 performance
that were paid in February of the following year.
(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
for 2006, 2007 and 2008. The present value of Messrs. Hardwick's and
Connors' benefits decreased by $3,811 and $2,008, respectively in
2008; however, SEC regulations require that this amount be shown as $0
in the Summary Compensation Table. Messrs. Rechin, Stewart and Spade
have not participated in any defined benefit plan or other actuarial
pension plan maintained by First Merchants. No NEO received
above-market or preferential earnings on deferred compensation during
2006, 2007 or 2008.
21
(6) First Merchants made matching contributions to the First Merchants
Corporation Retirement and Income Savings Plan for the benefit of the
NEOs in the following amounts for 2006, 2007 and 2008, respectively:
Mr. Rechin - $6,600, $6,750 and $6,900; Mr. Hardwick - $6,600, $6,750
and $6,900; Mr. Stewart - $6,900 (for 2008 only); Mr. Connors -
$6,433, $6,615 and $6,900; and Mr. Spade - $5,028, $5,700 and $6,429.
First Merchants made service-weighted employer contributions to the
First Merchants Corporation Retirement and Income Savings Plan for the
benefit of the NEOs in the following amounts for 2006, 2007 and 2008,
respectively: Mr. Rechin - $4,400, $4,500 and $4,600; Mr. Hardwick -
$6,694, $9,000 and $9,200; Mr. Stewart - $0 (for 2008 only); Mr.
Connors - $4,289, $6,615 and $6,900; and Mr. Spade - $3,352, $3,800
and $4,286. First Merchants also made contributions to the First
Merchants Corporation Defined Contribution Supplemental Executive
Retirement Plan in 2006, 2007 and 2008 for the benefit of Mr. Rechin
in the amounts of $33,396, $50,896 and $45,494, respectively. None of
the NEOs received perquisites in the aggregate amount of $10,000 or
more during 2006, 2007 or 2008. The other amounts shown in the All
Other Compensation column include the dollar value of life insurance
premiums and dividends on restricted stock awards paid to or for the
benefit of each of the NEOs during 2006, 2007 and 2008.
(7) Mr. Stewart was employed by First Merchants as its Executive Vice
President and Chief Banking Officer on January 29, 2008.
First Merchants does not have employment agreements with any of the NEOs.
Grants of Plan-based Awards Table
The following table provides information concerning all of the grants of
plan-based awards made to the NEOs for 2008, which included non-equity incentive
pay and awards of restricted stock and stock options.
Grants of Plan-Based Awards for 2008 Fiscal Year
------------------ -------- -------------------------------- ---------- ---------- ---------- ------------
Name Estimated future payouts under All other All other Exercise Grant date
stock option or base fair value
awards; awards; price of stock
Number Number of option and option
of shares of awards awards
of stock or (per share)
Grant Non-equity incentive plan units securities
Date awards(1) underlying
options
------------------ -------- -------------------------------- ---------- ---------- ---------- ------------
------------------ -------- -------- ---------- ------------ ---------- ---------- ---------- ------------
Threshold Target Maximum
------------------ -------- -------- ---------- ------------ ---------- ---------- ---------- ------------
Michael C. Rechin
-- $0 $157,500 $315,000
2/27/08 4,000 $28.25 $113,000
2/27/08 15,000 98,957
-- 0 100,000 200,000
Mark K. Hardwick 2/27/08 2,700 28.25 76,275
2/27/08 8,000 52,777
Michael J. Stewart -- 0 98,000 196,000
1/29/08 3,000 25.44 76,320
1/29/08 6,000 35,645
-- 0 59,970 119,940
Robert R. Connors 2/27/08 2,000 28.25 56,500
2/27/08 3,000 19,791
-- 0 54,210 108,420
David W. Spade 2/27/08 1,000 28.25 28,250
2/27/08 4,000 26,388
------------------ -------- -------- ---------- ------------ ---------- ---------- ---------- ------------
(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 2008, as described in the Section
entitled "Non-equity Incentive Pay" in the Compensation Discussion and
Analysis. The payments made in February 2009 for 2008 performance
under the Program are shown in the Non-equity Incentive Plan
Compensation column of the Summary Compensation Table on page 21.
22
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 14-18 and include the First Merchants
Corporation Senior Management Incentive Compensation Program, a non-equity
incentive plan, and the First Merchants Corporation 1999 Long-term Equity
Incentive Plan, which provides for stock option grants and restricted stock
awards. The following is a summary of material factors that will assist in an
understanding of the information disclosed in the Grants of Plan-Based Awards
Table.
Under the Senior Management Incentive Compensation Program, each of the NEOs was
given goals at the beginning of 2008, consisting of a targeted year-over-year
increase in First Merchants' operating earnings per share on a diluted GAAP
basis (and in the cases of Messrs. Connors and Spade, accomplishment of personal
objectives established by the CEO). If these goals were met for 2008, the NEOs
were entitled to receive a payout following the end of the year of 100% of a
pre-determined percentage of the NEO's base salary. These percentages for
Messrs. Rechin, Hardwick, Stewart, Connors and Spade were 45%, 40%, 40%, 30% and
30%, respectively. The Program also provided thresholds, at which the executive
became entitled to 30% of the pre-determined percentage and below which no
payout would be made; and it provided for maximum payouts equal to 200% of the
pre-determined percentage, or in the cases of Messrs. Connors and Spade, 170% of
the pre-determined percentage. The amounts earned under the program for 2008
were paid out in February 2009.
Under the Long-term Equity Incentive Plan, awards of stock options and
restricted stock were granted to each of the NEOs in February 2008. In most
cases, the number of stock options awarded to each executive was approximately
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 is the closing price on the dates the options were
granted, which for all of the NEOs except Mr. Stewart was $28.25 on February 27,
2008 and for Mr. Stewart was $25.44 on January 29, 2008. The stock options will
vest and become exercisable 2 years after the date they were granted or, if
earlier, on the date the executive's employment terminates on account of
retirement, death or disability. The restricted stock will vest, giving the
executive complete ownership rights, if the executive is still employed by First
Merchants 3 years after the date of the award of the executive's employment or
upon termination of the executive's employment 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 will vest being a fraction of the shares awarded, the numerator of
which is the number of full years that have elapsed between the date of the
award and the date of termination and the denominator of which is 3.
Notwithstanding the restrictions on the stock, the executive is entitled to vote
the shares and to receive the dividends thereon. The normal dividend rate
applies to the restricted shares; the rate is not preferential.
Outstanding Equity Awards at Fiscal Year-End Table
The following table provides information concerning unexercised stock options,
restricted stock awards that have not vested, and equity incentive plan awards
for each of the NEOs outstanding as of the end of First Merchants' 2008 fiscal
year.
23
Outstanding Equity Awards at Fiscal Year-End 2008
------------------- ---------------------------------------------------------- ------------------------------
Name Option Awards Stock Awards
------------------- -------------- -------------- --------------- ------------ -------------- ---------------
Number of Number of Option exercise Option Number of Market value
securities securities price expiration shares or of shares or
underlying underlying date units of units of
unexercised unexercised stock that stock that
options options(1) have not have not
vested(2) vested
(Exercisable)
(Unexercisable)
------------------- -------------- -------------- --------------- ------------ -------------- ---------------
------------------- -------------- -------------- --------------- ------------ -------------- ---------------
Michael C. Rechin 9,000 $199,890
10,000 $25.90 11/21/15
8,000 25.14 2/10/16
12,000 26.31 2/8/17
15,000 28.25 2/27/18
Mark K. Hardwick 7,100 157,691
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
8,000 26.31 2/8/17
8,000 28.25 2/27/18
Michael J. Stewart 3,000 66,630
6,000 25.44 1/29/18
Robert R. Connors 5,000 111,050
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
4,500 26.31 2/8/17
3,000 28.25 2/27/18
David W. Spade 3,400 75,514
4,000 26.31 2/8/17
4,000 28.25 2/27/18
------------------- -------------- -------------- --------------- ------------ -------------- ---------------
(1) Options were granted to Messrs. Rechin, Hardwick, Connors, and
Spade to purchase 12,000, 8,000, 4,500 and 4,000 shares,
respectively, of First Merchants common stock under the Long-term
Equity Incentive Plan on February 8, 2007, which vested on
February 8, 2009. Options were granted to Messrs. Rechin,
Hardwick, Stewart, Connors, and Spade to purchase 15,000, 8,000,
6,000, 3,000 and 4,000 shares, respectively, of First Merchants
common stock under the Long-term Equity Incentive Plan on
February 27, 2008, which will vest on February 27, 2010. 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. Rechin, Hardwick, Connors and Spade were awarded 2,000,
2,000, 1,400 and 1,400 restricted shares, respectively, under the
Long-term Equity Incentive Plan on February 10, 2006. These
shares vested on February 10, 2009. Messrs. Rechin, Hardwick,
Connors and Spade were awarded 3,000, 2,400, 1,600 and 1,000
restricted shares, respectively, under First Merchants' Long-term
Equity Incentive Plan on February 8, 2007. These shares will vest
on February 8, 2010. Messrs. Rechin, Hardwick, Connors and Spade
were awarded 4,000, 2,700, 2,000 and 1,000 restricted shares,
respectively, under the Long-term Equity Incentive Plan on
February 27, 2008. These shares will vest on February 27, 2011.
Mr. Stewart was awarded 3,000 restricted shares under the
Long-term Equity Incentive Plan on January 29, 2008. These shares
will vest on January 29, 2011. Option Exercises and Stock Vested
Table
24
The following table provides information concerning each exercise of stock
options and each vesting of stock, including restricted stock and restricted
stock units, during First Merchants' 2008 fiscal year for each of the NEOs.
Option Exercises and Stock Vested During Fiscal Year 2008
---------------------- ------------------------------- --------------------------
Name Option Option awards Stock awards
------------------------------- --------------------------
------------------- ----------- ------------- ------------
Number of shares Value Number of Value
acquired on realized shares realized
exercise on acquired on on
exercise vesting(1) vesting(1)
---------------------- ------------------- ----------- ------------- ------------
Michael C. Rechin 0 0 667 14,144
Mark K. Hardwick 3,008 28,901 0 0
Michael J. Stewart 0 0 0 0
Robert R. Connors 0 0 0 0
David W. Spade 0 0 0 0
---------------------- ------------------- ----------- ------------- ------------
(1) The amount shown in the Number of Shares or Units Acquired on
Vesting column for Mr. Rechin is the portion of an award of
restricted stock made to him on December 22, 2005 under the First
Merchants' Long-term Equity Incentive Plan that vested during
2008. Of the 2,000 restricted shares awarded to Mr. Rechin on
December 22, 2005, 666 vested on December 22, 2006, 667 vested on
December 22, 2007, and 667 vested on December 22, 2008. The
amount shown in the Value Realized on Vesting column for Mr.
Rechin was determined by multiplying the number of shares that
vested on December 22, 2008 (667) times the closing price of
First Merchants stock on that date ($21.16).
Pension Benefits Table
The First Merchants Corporation Retirement Pension Plan (the "Pension Plan") is
a qualified defined benefit pension plan that pays monthly retirement benefits
to eligible employees. The benefits, computed as a straight-life annuity
although other forms of actuarially-equivalent benefits are available under the
plan, are based on the following formula: 1.6% of average final compensation (in
general, the participant's highest 60 consecutive months' W-2 compensation, less
incentive pay) plus .5% of average final compensation in excess of Social
Security covered compensation, both times years of service to a maximum of 25
years. The plan was frozen, effective March 1, 2005, for participants who had
not yet attained age 55 and been credited with 10 or more years of service as of
that date, meaning that their accrued benefits were vested and they no longer
accrued benefits under the plan, and employees who were not participating in the
plan as of that date were not eligible to participate. The benefits payable
under the plan at age 65 to the participants whose benefits were frozen are
determined under the above formula, based on their average final compensation as
of March 1, 2005, times a fraction, the numerator of which is the participant's
years of service as of March 1, 2005, and the denominator of which is the
participant's years of service projected to age 65. Messrs. Hardwick and Connors
were among the participants in the Pension Plan whose benefits were frozen. The
other three NEOs did not participate in the Pension Plan.
The following table shows benefits accrued to the NEOs under the Retirement
Pension Plan as of December 31, 2008. The assumptions used in calculating the
present value of a NEO's accumulated benefit are the same as those used for
financial reporting purposes with respect to the Corporation's 2008 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 2008 audited financial statements, on page 69 of the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2008.
25
Accrued Pension Benefits at Fiscal Year-End 2008
------------------------- ------------ -------------- ----------------- ----------------
Name Plan name Number of Present value Payments
years of accumulated during fiscal
credited benefit as of year 2008
service as 12/31/08
of
12/31/08(3)
------------------------- ------------ -------------- ----------------- ----------------
Michael C. Rechin(1) N/A N/A N/A N/A
Mark K. Hardwick(2) Pension 7.32 $22,415 $0
Plan
Michael J. Stewart(1) N/A N/A N/A N/A
Robert R. Connors(2) Pension 2.50 65,109 0
Plan
David W. Spade(1) N/A N/A N/A N/A
------------------------- ------------ -------------- ----------------- ----------------
(1) Messrs. Rechin, Stewart and Spade were not participants in the Pension Plan.
(2) Messrs. Hardwick's and Connors' benefits under the plan were frozen, effective March 1,
2005.
(3) The NEOs' years of credited service under the Pension Plan were
one fewer than their number of actual years of service with the
Corporation when the Plan was frozen.
Nonqualified Deferred Compensation Table
The First Merchants Corporation Defined Contribution Supplemental Executive
Retirement Plan (the "SERP") is a nonqualified plan that provides additional
retirement benefits to executives designated by the Compensation and Human
Resources Committee whose benefits under the First Merchants Corporation
Retirement and Income Savings Plan, a qualified Internal Revenue Code Section
401(k) defined contribution plan, (the "Section 401(k) Plan") are restricted due
to the limit under Internal Revenue Code Section 401(a)(17) on the amount of
compensation that can be considered for purposes of calculating pension benefits
under a qualified plan. Mr. Rechin is the only NEO who the Committee has
designated as a participant in the SERP. First Merchants annually credits a
percentage of a participant's compensation (base salary plus non-equity
incentive pay) for the plan year, as determined by the Committee, to a deferred
benefit account established for the participant under the plan. No amount is
credited to the participant's account under the SERP unless the participant has
made sufficient contributions to the Section 401(k) Plan for the year to entitle
the participant to the maximum matching employer contributions under the Section
401(k) Plan. Participants in the SERP are not permitted to make contributions to
their accounts under the SERP. Their interests vest under the plan upon the
earliest of death, disability, involuntary termination except for cause, a
change of control of First Merchants, or after 5 years of participation in the
plan. Their account balances, including amounts credited to the accounts,
adjusted for investment gain or loss, are payable in 36 monthly installments
following death, disability or separation from service (the initial payments are
delayed 6 months and made retroactively if made on account of separation from
service). The SERP is unfunded and subject to forfeiture in the event of
bankruptcy. First Merchants has established a "rabbi" trust, with the First
Merchants Trust Company, National Association, a wholly-owned subsidiary of
First Merchants, as the trustee. First Merchants makes annual contributions to
the trust to help pay its liabilities under the SERP. While participants may
request that these contributions be invested in accordance with investment
options made available by First Merchants, First Merchants is under no
obligation to comply with such requests. The accounts' actual investment returns
may differ from the returns on the investments requested by the participants.
Participants may request changes in the investment options daily, by submitting
written investment allocation requests to the trustee.
The following table shows the dollar amounts of contributions, earnings,
withdrawals, distributions and the aggregate balances of the NEOs' deferred
benefit accounts under the Defined Contribution SERP as of December 31, 2008.
26
Nonqualified Deferred Compensation in 2008
--------------------- ------------- ---------------- ----------------- ---------------- ------------------
Name Executive Corporation's Aggregate Aggregate Aggregate balance
contributions contributions earnings in withdrawals/ at
in fiscal in fiscal year fiscal year 2008 Distributions fiscal year-end
year 2008 2008 2008
--------------------- ------------- ---------------- ----------------- ---------------- ------------------
Michael C. 0 $45,494 ($32,861) 0 $53,508
Rechin(1)
Mark K. Hardwick 0 0 0 0 0
Michael J. Stewart 0 0 0 0 0
Robert R. Connors 0 0 0 0 0
David W. Spade 0 0 0 0 0
--------------------- ------------- ---------------- ----------------- ---------------- ------------------
(1) Mr. Rechin is the only NEO who has been designated as a
participant in the Defined Contribution SERP. The Corporation
credited 12 % of Mr. Rechin's compensation (base salary plus
non-equity incentive pay) to his account for 2008. This amount is
also reported as compensation to Mr. Rechin in the Summary
Compensation Table on page 21, in the column headed "All Other
Compensation."
Termination of Employment and Change of Control Arrangements
First Merchants does not have an employment agreement with any of the NEOs. The
only agreements between First Merchants and the NEOs that would provide for
payment(s) to the NEOs at, following, or in connection with any termination of
employment are the change of control agreements that First Merchants has entered
into with each of the NEOs. These are "double trigger" change of control
agreements, in that they provide for the payment of severance benefits to the
NEOs only in the event of both a change of control of First Merchants and a
termination or constructive termination of the NEO's employment within 24 months
after the change of control (but no payment will be made if the termination was
for cause, because of the NEO's death, disability or voluntary retirement, or by
the NEO other than on account of constructive termination). In general, a
"change of control" means an acquisition by any person of 25% or more of First
Merchants' voting shares, a change in the makeup of a majority of the Board over
a 24-month period, a merger of First Merchants in which the shareholders before
the merger own 50% or less of First Merchants' voting shares after the merger,
or approval by First Merchants' shareholders of a plan of complete liquidation
of First Merchants or an agreement to sell or dispose of substantially all of
First Merchants' assets. A "constructive termination" means, generally, a
significant reduction in duties, compensation or benefits or a relocation of the
NEO's office outside of the area described in the agreement, unless agreed to by
the NEO.
Upon the occurrence of the two triggering events, an NEO would be entitled, in
addition to base salary and incentive compensation accrued through the date of
termination, to payment from First Merchants, or its successor in the event of a
purchase, merger or consolidation, of a lump sum severance benefit in an amount
determined by multiplying the sum of (1) the NEO's annual base salary as in
effect on the date the NEO receives notice of termination, and (2) the NEO's
largest bonus under First Merchants' Senior Management Incentive Compensation
Program during the 2 years preceding the date of termination, by 299% in the
cases of Messrs. Rechin, Hardwick and Stewart, and 150% in the cases of Messrs.
Connors and Spade. First Merchants would also pay any excise tax imposed on the
NEO under Section 4999 of the Internal Revenue Code on an "excess parachute
payment." In addition, the NEO's outstanding stock options would be cancelled;
and, in lieu thereof, the NEO would receive a lump sum amount equal to the
bargain element value of these options, if any. The NEO would also be entitled
to outplacement services, reasonable legal fees and expenses incurred as a
result of the termination, and life, disability, accident and health insurance
coverage until the earlier of 2 years following the date of termination or the
NEO's 65th birthday. The insurance coverage would be similar to what the NEO was
receiving immediately prior to the notice of termination, and First Merchants
would pay the same percentage of the cost of such coverage as it was paying on
the NEO's behalf on the date of such notice.
The following table shows the lump sum severance benefit amounts that would have
been payable to the NEOs if both of the triggering events under the change of
control agreements had occurred on December 31, 2008, as well as the bargain
element values of their outstanding stock options on that date (nearly all of
which are
27
out-of-the-money), the estimated values of their life, disability, accident and
health insurance coverages for two years following that date, and the estimated
amounts of the excise tax that would have been imposed under Section 4999 of the
Internal Revenue Code on the lump sum severance payments.
Change of Control Agreements
------------------ ------------ ----------------- --------------------- --------------------- ----------------
Name Multiplier Severance Bargain Element Estimated Values of Estimated
Benefit Amount Values of Insurance Coverages Excise Tax
Outstanding Stock for 2 years Under IRC ss 4999
Options
------------------ ------------ ----------------- --------------------- --------------------- ----------------
Michael C.Rechin 299% $1,254,730 $ 0 $19,572 $221,582
Mark K. Hardwick 299% 905,856 8,354 18,572 168,150
Michael J. Stewart 299% 732,550 0 13,729 117,874
Robert R. Connors 150% 372,793 0 18,312 0
David W. Spade 150% 317,737 0 13,488 0
------------------ ------------ ----------------- --------------------- --------------------- ----------------
The change of control agreements were not entered into in response to any effort
to acquire control of First Merchants, and the Board is not aware of any such
effort.
As noted on page 20, the restrictions on severance payments added by the
American Recovery and Reinvestment Act of 2009 (the "ARRA") may prevent First
Merchants from making any payments to NEOs under the provisions of the change of
control agreements as long as the preferred stock issued by First Merchants to
the Treasury Department remains outstanding.
VOTING ITEM 2 - NON-BINDING RESOLUTION TO APPROVE COMPENSATION OF FIRST
MERCHANTS CORPORATION EXECUTIVE OFFICERS
As explained on page 1, one of the requirements for First Merchants'
participation in the U. S. Treasury Department's Capital Purchase Program (the
"CPP") that was added when the American Recovery and Reinvestment Act of 2009
(the "ARRA") was signed into law on February 17, 2009 is that shareholders have
the opportunity to have a separate vote on a resolution to approve the
compensation of the NEOs, as disclosed and discussed in the "Compensation
Discussion and Analysis," the compensation tables, and related material, on
pages 11-28 under "Compensation of Executive Officers." The ARRA provides that
this vote is not binding on the Board and may not be construed as overruling a
decision by the Board, nor to create or imply any additional fiduciary duty by
the Board, nor may the vote be construed to restrict or limit the ability of
shareholders to make proposals for inclusion in proxy materials related to
executive compensation. Although your vote is non-binding, the Compensation and
Human Resources Committee will take into account the outcome of the vote when
considering future executive compensation arrangements.
The ARRA contains several restrictions on executive compensation that apply to
CPP participants. They are listed on pages 12-13, in the "Compensation
Discussion and Analysis." The Compensation and Human Resources Committee has
reviewed these restrictions and believes that our compensation programs for
executive officers generally comply with the requirements for CPP recipients.
However, the Committee will continue to monitor these requirements and will make
such changes to these programs as may be required after the Treasury Department
provides additional guidance concerning the interpretation and application of
these requirements, especially the ones recently added by the ARRA.
The Committee believes that our compensation programs for executive officers are
strongly aligned with the long-term interests of our shareholders. The material
elements of these programs and their objectives are discussed in the
"Compensation Discussion and Analysis." Shareholders are encouraged to consider
that information, including the compensation tables and related material that
follows, prior to voting on this resolution.
28
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE FOLLOWING
RESOLUTION:
RESOLVED, THAT THE SHAREHOLDERS APPROVE THE COMPENSATION OF THE NAMED
EXECUTIVE OFFICERS AS DISCLOSED IN THE "COMPENSATION DISCUSSION AND
ANALYSIS," THE COMPENSATION TABLES AND THE RELATED MATERIAL IN THE PROXY
STATEMENT FOR THE 2009 ANNUAL MEETING OF SHAREHOLDERS.
COMPENSATION OF DIRECTORS
The directors of First Merchants who are employees of First Merchants or one of
its subsidiaries do not receive separate compensation for their services as
directors. This included Michael C. Rechin during 2008. Michael L. Cox, who is
retiring as a director as of the 2009 annual shareholder meeting, was also not
separately compensated for his services as a director during 2008; however,
First Merchants did pay him for his consulting services during 2008 under the
agreement between Mr. Cox and First Merchants described on pages 7-8 under
"Retiring Director."
The non-employee directors received annual retainers of $40,000 for their
services in 2008, except that Board Chairperson Charles E. Schalliol's retainer
was $75,000, Audit Committee Chairperson Jean L. Wojtowicz' retainer was
$50,000, and Nominating and Governance Committee Chairperson Thomas B. Clark's
retainer was $45,000. Richard A. Boehning retired as Chairperson of the
Executive Committee and as a director of First Merchants as of the 2008 annual
shareholder meeting. He was paid a retainer until his retirement that was
pro-rated based on an annual retainer of $45,000. Upon Mr. Boehning's
retirement, Terry L. Walker became the Executive Committee Chairperson, and the
annual amount on which his retainer was based was increased from $40,000 to
$45,000. During the first calendar quarter of 2008, the non-employee directors
other than Mr. Schalliol also received $750 for each meeting attended; however,
the meeting fee was discontinued as of the beginning of the second calendar
quarter of 2008. Non-employee director compensation is paid quarterly in
arrears, on the last business day of each calendar quarter.
The shareholders approved the First Merchants Corporation Equity Compensation
Plan for Non-employee Directors at the 2008 annual meeting. Under this Plan,
which became effective in the second calendar quarter of 2008, at least one-half
of the compensation payable to non-employee directors is payable in restricted
shares of First Merchants common stock instead of cash. The number of restricted
shares issued each quarter is determined on the basis of their fair market value
(defined as the closing price of the stock as reported by NASDAQ) on that date.
The restricted shares are nontransferable until the restrictions lapse, on the
earliest of the following dates: (i) the third anniversary of the date the
shares were issued if, as of the date the restrictions are to lapse, the
director has continued to serve as a non-employee director from the date the
shares were issued to the date of lapse; (ii) the date of the director's
retirement as a member of the Board after he or she has attained age 55; (iii)
the date of the director's death; (iv) the date the director is determined to be
totally and permanently disabled, as defined in Internal Revenue Code Section
22(e)(3); or (v) the date of a change of control, as defined in the Long-term
Equity Incentive Plan. In the event a director's service as a non-employee
director terminates prior to the date the restrictions lapse, the shares subject
to the restrictions will be forfeited. A director will be deemed to be the
beneficial owner of the restricted shares unless and until they are forfeited.
As the beneficial owner, a director has all rights of beneficial ownership in
such shares including the right to vote the shares and receive all dividends and
other distributions paid or made with respect thereto.
Under the 2007 Directors' Deferred Compensation Plan, an unfunded deferred
compensation arrangement, the non-employee directors of First Merchants may
elect to defer until a future date all or a portion of the cash fees, the fees
payable in shares of restricted stock, or both, that are payable to them for
their services as directors. An account is maintained for each participant in
the Plan, to which deferred fees and earnings are credited quarterly. The
earnings on cash fees are determined on the basis of an interest rate equal to
the greater of the Fed Funds Rate or the five-year Treasury Interest Rate as of
the first business day of the quarter, but not to exceed 120% of the Applicable
Long Term Federal Rate for monthly compounding. The earnings on fees payable in
shares of restricted stock are determined on the basis of the dividends paid on
an equivalent number
29
of shares of First Merchants common stock for the period of time the stock fees
are deferred. First Merchants has established a "rabbi trust," to which it
contributes to provide itself with a source of funds to assist in meeting its
liabilities under the Plan; however, First Merchants' obligations under the Plan
remain an unsecured, unfunded promise to pay benefits to the participants in
accordance with the Plan's provisions. Thomas B. Clark and Terry L. Walker were
the only two directors who participated in the Directord' Deferred Compensation
Plan during 2008. They each deferred all of the fees payable to them in cash and
the fees payable to them in shares of restricted stock.
In accordance with the First Merchants Corporation 1999 Long-term Equity
Incentive Plan, each non-employee director who was serving in that capacity on
July 1, 2008 was granted an option on that date to purchase 1,157 shares of
First Merchants common stock at an option price of $18.67 per share, the market
price on that date.
The Board adopted a guideline, effective January 1, 2008, providing that all
directors are expected to acquire and hold First Merchants stock equal in value
to at least 3 times their total annual director compensation while serving on
the Board. Directors are expected to meet this guideline as soon as reasonably
possible, taking into account the director's relevant financial and other
circumstances, but in no event more than 6 years after the later of (1) the
effective date, or (2) the date the director is first elected to the Board.
The following table contains information concerning the compensation paid to
First Merchants' directors, other than Mr. Rechin, for their services as
directors for 2008.
Director Compensation for 2008 Fiscal Year
----------------------- -------------- ------------ ------------ ----------------- ------------
Name Fees earned Stock Option All Other Total
or paid in awards(1)(2) awards(1)(2) Compensation(3)
cash
----------------------- -------------- ------------ ------------ ----------------- ------------
----------------------- -------------- ------------ ------------ ----------------- ------------
Richard A. Boehning(4) $13,806 $ 285 $ 0 $ 0 $14,091
Thomas B. Clark(5) 29,625 1,418 3,438 199 34,680
Michael L. Cox 0 0 3,438 125,000 128,438
Roderick English 25,768 1,258 3,438 177 30,641
Jo Ann M. Gora 25,768 1,258 3,438 177 30,641
William L. Hoy((6) 25,768 1,258 3,438 177 30,641
Barry J. Hudson(6) 25,768 1,258 3,438 177 30,641
Charles E. Schalliol $46,891 2,361 3,438 332 53,022
Terry L. Walker(5) 27,625 1,418 3,438 199 34,680
Jean L. Wojtowicz 32,018 1,574 3,438 221 37,251
----------------------- -------------- ------------ ------------ ----------------- ------------
(1) The dollar amounts shown for "Stock Awards" and "Option Awards"
represent the dollar amounts of those awards recognized for
financial statement reporting purposes for 2008 in accordance
with FAS 123R. A discussion of the assumptions used in
calculating these values is contained in Note 67 to the 2008
audited financial statements, on page 16 of First Merchants'
Annual Report on Form 10-K for the year ended December 31, 2008.
The grant date fair value of the stock awards to the non-employee
directors during 2008 were: Mr. Boehning - $1,779; Mr. Clark -
$16,875; Mr. Cox - $0; Mr. English - $14,982; Dr. Gora - $14,982;
Mr. Hoy - $14,982; Mr. Hudson - $14,982; Mr. Schalliol - $28,109;
Mr. Walker - $16,875; and Ms. Wojtowicz - $18,732.
(2) As of the end of the 2008 fiscal year, the non-employee directors
had the following aggregate number of option awards outstanding:
Mr. Boehning - 6,942; Mr. Clark - 10,413; Mr. Cox - 110,498; Mr.
English - 4,628; Dr. Gora - 4,628; Mr. Hoy - 1,157; Mr. Hudson -
16,478; Mr. Schalliol - 4,628; Mr. Walker - 2,314; and Ms.
Wojtowicz - 5,785. As of the end of the 2008 fiscal year, the
non-employee directors had been awarded the following aggregate
number of shares of First Merchants common stock on which the
restrictions had not yet lapsed: Mr. Boehning - 98; Mr. Clark -
810; Mr. Cox - 0; Mr. English - 719; Dr. Gora - 719; Mr. Hoy -
719; Mr. Hudson - 719; Mr. Schalliol - 1,349; Mr. Walker - 810;
and Ms. Wojtowicz - 899. As of the end of the 2008 fiscal year,
the non-employee directors had the following aggregate number of
option awards outstanding: Mr. Boehning - 6,942; Mr. Clark -
10,413; Mr. Cox - 110,498; Mr. English - 4,628; Dr. Gora - 4,628;
Mr. Hoy - 1,157; Mr. Hudson - 16,478; Mr. Schalliol - 4,628; Mr.
Walker - 2,314; and Ms. Wojtowicz - 5,785.
30
(3) Except in the case of Mr. Cox, the dollar amounts shown under
"All Other Compensation" represent the dividends paid during 2008
on the stock awards to the non-employee directors under the First
Merchants Corporation Equity Compensation Plan for Non-Employee
Directors. The dollar amount shown for Mr. Cox under "All Other
Compensation" was the amount he was paid in 2008 for his services
as a consultant under the Agreement between First Merchants and
Mr. Cox described on pages 7-8, under "Retiring Director."
(4) Mr. Boehning retired as a director on April 29, 2008, the date of
the 2008 annual shareholder meeting.
(5) Mr. Clark and Mr. Walker deferred payment of all of their fees
earned in 2008 under the provisions of the 2007 Directors'
Deferred Compensation Plan described on pages 29-30, including
both the fees payable in cash and the stock awards, as well as
interest on the cash fees and dividends on the stock awards.
(6) Mr. Hoy was paid $2,900 for his services as a director of
Commerce National Bank, a wholly owned subsidiary of First
Merchants, in 2008. Mr. Hudson received distributions totaling
$197,340 in 2008 under an insurance-funded deferred compensation
plan in which he was a participant prior to his retirement as the
Chairman of the Board of Directors, President and Chief Executive
Officer of the First National Bank of Portland, National
Association ("First National Bank"), a wholly-owned subsidiary of
First Merchants. First National Bank was merged into First
Merchants Bank, National Association, another wholly-owned
subsidiary of First Merchants in 2007.
VOTING ITEM 3 - PROPOSAL TO APPROVE THE FIRST MERCHANTS CORPORATION 2009
EMPLOYEE STOCK PURCHASE PLAN
On February 4, 2009, the Board adopted the First Merchants Corporation 2009
Employee Stock Purchase Plan (the "Stock Purchase Plan"), subject to shareholder
approval. The purpose of the Stock Purchase Plan is to provide eligible
employees of First Merchants and its subsidiaries the opportunity to purchase
shares of First Merchants common stock through quarterly offerings at a slightly
discounted price using payroll deductions. The Board believes that the Plan will
incentivize employees to purchase First Merchants stock, thus more closely
aligns their interests with those of other shareholders. The Stock Purchase
Plan, which is intended to qualify as an employee stock purchase plan under
Internal Revenue Code Section 423, has an effective date of July 1, 2009. It
will replace the existing stock purchase plan that expires on June 30, 2009.
The following summary of the major features of the Stock Purchase Plan is
subject to the specific provisions contained in the full text of the Stock
Purchase Plan set forth in Appendix A.
Administration of the Plan; Term and Termination
The Compensation and Human Resources Committee, which is composed entirely of
"independent directors," as defined in the NASDAQ Stock Market Rules, will
administer the Stock Purchase Plan. The Committee has the authority, subject to
the terms of the Plan, to prescribe rules and regulations for the administration
of the Plan and interpret its provisions. The Plan will continue until June 30,
2019, or, if earlier, until all of the stock allocated to the Plan has been
purchased. However, the Board may terminate the Plan at any time or make such
amendments to the Plan as it deems advisable; except that no such amendment may
be made without the approval of First Merchants' shareholders if it would
materially (1) increase the benefits accruing to Plan participants, (2) modify
the requirements as to eligibility for participation in the Plan, (3) increase
the number of shares which may be issued under the Plan (except as described in
the next paragraph), (4) increase the cost of the Plan to First Merchants, or
(5) alter the allocation of Plan benefits among participants.
31
Stock Available under the Plan
Subject to shareholder approval, an aggregate of 1,000,000 shares of First
Merchants common stock will be reserved for issuance pursuant to the Stock
Purchase Plan over a 10 year period ending on June 30, 2019. The stock to be
issued would be obtained by First Merchants by authorized purchases on the open
market or from private sources, or by issuing authorized but unissued shares of
stock. In the event of a change in the common stock through recapitalization,
merger, consolidation, stock dividend or split, combination or exchanges of
shares or otherwise, the Compensation and Human Resources Committee has the
authority to make such equitable adjustments in the Plan and the then
outstanding shares as it deems necessary and appropriate including, but not
limited to, changing the number of shares of common stock reserved under the
Plan and the price of the current offering. If the number of shares of common
stock that participants become entitled to purchase under the Plan is greater
than the number of shares available, the available shares will be allocated by
the Committee among the participants in such manner as it deems fair and
equitable.
Eligibility
All employees of First Merchants and its participating subsidiaries are eligible
to participate in the Stock Purchase Plan, beginning on the first day of the
calendar quarter after the employee completes an "introductory period"
(generally, 90 calendar days of employment). At the present time, there are
approximately 1,329 employees who would be eligible to participate in the Plan.
Offering Periods
The Stock Purchase Plan provides a series of 3-month offering periods,
commencing on the first day and ending on the last trading day of each calendar
quarter, for purchase of First Merchants common stock by participating
employees. The Compensation and Human Resources Committee has the authority to
change the duration and/or frequency of the offering periods.
Participation; Payroll Deductions
Eligible employees may participate in the Stock Purchase Plan by authorizing a
payroll deduction for such purpose prior to the beginning of an offering period.
The Compensation and Human Resources Committee may, on a nondiscriminatory
basis, establish a maximum percentage of compensation that a participant may
apply to the purchase of stock under the Plan; and it may suspend an offering at
any time if it determines that such action is required by law or is in First
Merchants' best interests. First Merchants will establish payroll deduction
accounts for all funds received or held under the Plan, on which interest will
accrue for the benefit of participants unless otherwise determined by the
Committee. Subject to the rules established from time to time by the Committee,
(1) participants who do not discontinue or change their rate of payroll
deductions will continue to participate in the Plan at the originally elected
rate throughout the offering period and future offering periods, (2)
participants will be allowed to increase or decrease their rate of payroll
deductions as of the beginning of any offering period, and (3) participants will
be allowed, at any time during an offering period, to discontinue payroll
deductions and withdraw the entire balance of their account, if any, and thereby
withdraw from participation in an offering. In the event of a participant's
death, retirement or termination of employment, his or her participation in any
offering under the Plan shall cease.
Purchase of Shares; Limitations; Price
At the end of each offering period, the balance of each participant's payroll
deduction account will be applied towards the purchase of the largest number of
full shares of First Merchants common stock possible, at a price equal to 85% of
the average of the closing prices for the stock on each trading day during the
offering period, as reported by NASDAQ; provided, however, in no event will this
price be less than the lesser of (1) 85% of the closing price of the stock, as
reported by NASDAQ, on the first day of the offering period, or (2) 85% of the
closing price of the stock, as reported by NASDAQ, on the last day of the
offering period. No participant will be allowed to purchase more than $25,000 in
fair market value (determined as the closing price of the stock, as reported by
NASDAQ, on the last day of the offering period for which the purchase right is
granted)
32
of First Merchants common stock under the Stock Purchase Plan, and any other
stock purchase plan maintained by First Merchants or a parent or subsidiary of
First Merchants that is qualified under Internal Revenue Code Section 423, for
any one calendar year. No fractional shares may be purchased under the Plan. Any
balance remaining in a participant's payroll deduction account at the end of an
offering period after the purchase of First Merchants common stock shall be held
in the account and applied to the purchase of shares under the next offering,
unless the participant withdraws from, elects not to participate in, or is
ineligible to participate in the next offering, in which case such balance shall
be paid to the participant.
Stock Accounts; Transfer of Interests
A book entry account will be established in each participant's name. Each
participant will be the beneficial owner and will have all rights of beneficial
ownership in the First Merchants common stock purchased under the Stock Purchase
Plan and credited to the participant's stock account. First Merchants or its
nominee will retain custody of the stock purchased under the Plan until the
participant requests that it be sold, transferred or delivered. A participant
may request that a stock certificate, representing all or part of the shares of
stock credited to his or her account, be issued and delivered to the participant
at any time. The Plan restricts the right of participants to transfer interests,
options, rights or benefits arising under the Plan. However, there are no
restrictions upon the resale of shares issued to or for the benefit of
participants under the Plan.
Federal Income Tax Consequences
The following is a summary of federal income tax consequences to participants
and First Merchants relative to the Stock Purchase Plan. The summary is not
intended to be exhaustive and does not discuss the income tax laws of a state,
local or other jurisdiction which may be applicable to a participant. The Plan
is intended to qualify as an "employee stock purchase plan" under Internal
Revenue Code Section 423. Amounts withheld for the purchase of stock under the
Plan will be taxed as if the amounts were paid directly to the participants.
However, neither the grant nor the exercise of purchase rights on behalf of a
participant under the Plan will cause any federal income tax consequences to the
participant or First Merchants. Taxable income is not recognized until the
participant sells or otherwise disposes of the shares acquired under the Plan.
If the participant holds the shares purchased pursuant to the Plan for more than
one year after the purchase date of the shares and more than two years after the
first day of the offering period for the shares (the "holding period"), upon
selling or disposing of the shares the participant will recognize ordinary
income in the year of sale or disposition equal to the lesser of (1) the amount
by which the fair market value of the shares on the sale or disposition date
exceeded the purchase price paid for the shares, or (2) 15% of the fair market
value of the shares at the beginning of that offering period. Any additional
gain will be taxed as a long-term capital gain. First Merchants will not receive
an income tax deduction with respect to such sale or disposition. If the
participant sells or disposes of the shares prior to the completion of the
holding period, then the participant will realize ordinary income in the year of
sale or disposition equal to the amount by which the fair market value of the
shares on the purchase date for the shares exceeded the purchase price paid for
the shares, and First Merchants will receive an income tax deduction for such
year in the same amount. The participant will also recognize a capital gain to
the extent the amount realized upon the sale of the shares exceeds the sum of
the aggregate purchase price for the shares and the ordinary income realized in
connection with their acquisition.
Plan Benefits
The Stock Purchase Plan will not become effective until July 1, 2009, and then
only if it is approved by First Merchants' shareholders. Therefore, no purchase
rights have been granted or shares of common stock issued under the Plan. As of
February 27, 2009, the closing price of First Merchants common stock was $10.05.
Since benefits under the Plan are dependent on the fair market value of First
Merchants common stock as of various future dates and individual participants"
elections, it is not possible to determine the benefits that will be received by
participants under the Plan, including NEOs who elect to participate.
33
Equity Compensation Plan Information
The following table presents information as of December 31, 2008 with respect to
compensation plans under which equity securities of First Merchants are
authorized for issuance. It does not include information concerning equity
securities that may be authorized for issuance under the Stock Purchase Plan or
the First Merchants Corporation 2009 Long-Term Equity Incentive Plan, which is
described on pages 35-39 and is also being presented for approval at the 2009
annual meeting by the shareholders of First Merchants.
Equity Compensation Plan Information
----------------------------------- ---------------------- --------------------- ---------------------------------
Plan Category Number of securities Weighted average Number of securities remaining
available for future issuance
to be issued upon exercise price of under
exercise of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities reflected
warrants and rights and rights in first column)
----------------------------------- ---------------------- --------------------- ---------------------------------
----------------------------------- ---------------------- --------------------- ---------------------------------
Equity compensation plans
approved by shareholders 921,214 $24.80 226,815(1)
Equity compensation plans not 30,108 $21.50 0
approved by shareholders(2)
Total 951,322 $24.70 226,815(1)
----------------------------------- ---------------------- --------------------- ---------------------------------
(1) This number does not include shares remaining available for
future issuance under the 1999 Long-term Equity Incentive Plan,
which was approved by First Merchants' shareholders at the 1999
annual meeting. The aggregate number of shares that are available
for grants under that Plan in any calendar year is equal to the
sum of: (a) 1% of the number of First Merchants common shares
outstanding as of the last day of the preceding calendar year;
plus (b) the number of shares that were available for grants, but
not granted, under the Plan in any previous year; but in no event
will the number of shares available for grants in any calendar
year exceed 1.5% of the number of First Merchants common shares
outstanding as of the last day of the preceding calendar year. No
awards of stock or stock options may be made under the 1999
Long-term Equity Incentive Plan after April 14, 2009.
(2) The only plan reflected above that was not approved by First
Merchants" shareholders relates to certain First Merchants
Corporation Stock Option Agreements ("Agreements"). These
Agreements provided for non-qualified stock options of First
Merchants common stock to be awarded between 1995 and 2002 to
each director of First Merchants Bank, National Association
("First Merchants Bank"), a wholly-owned subsidiary of First
Merchants, who, on the date of the grants: (a) was serving as a
director of First Merchants Bank; (b) was not an employee of
First Merchants, First Merchants Bank, or any of First Merchants'
other affiliated banks or the non-bank subsidiaries; and (c) was
not serving as a director of First Merchants. The exercise price
of the shares was equal to the fair market value of the shares
upon the grant of the option. Options became 100% vested when
granted and are fully exercisable six months after the date of
the grant, for a period of ten years.
Shareholder Vote Required to Approve the First Merchants Corporation 2009
Employee Stock Purchase Plan
The Stock Purchase Plan will be approved if it receives the favorable vote of a
majority of the shares present and voting at the annual meeting of shareholders.
Abstentions and broker non-votes will be considered neither a vote "for" nor
"against."
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE THE
FIRST MERCHANTS CORPORATION 2009 EMPLOYEE STOCK PURCHASE PLAN.
34
VOTING ITEM 4 - PROPOSAL TO APPROVE THE FIRST MERCHANTS CORPORATION 2009
LONG-TERM EQUITY INCENTIVE PLAN
On February 4, 2009, the Board adopted the First Merchants Corporation 2009
Long-Term Equity Incentive Plan (the "Equity Incentive Plan"), subject to
shareholder approval. The Equity Incentive Plan is designed to promote the
interests of First Merchants and its shareholders by providing stock-based
incentives to participating employees and non-employee directors who are
expected to contribute materially to the success of the Company and its
subsidiaries. The Plan provides a means of rewarding employee performance while
encouraging participants to own First Merchants stock. First Merchants believes
the Plan will assist its efforts to attract and retain quality employees and
non-employee directors. The Equity Incentive Plan will be effective upon
approval by the shareholders of First Merchants. It will replace the existing
long-term equity incentive plan, under which no additional awards of stock or
stock options may be made after April 14, 2009.
The following summary of the major features of the Equity Incentive Plan is
subject to the specific provisions contained in the full text of the Equity
Incentive Plan set forth in Appendix B.
Administration of the Plan; Term and Termination
The Compensation and Human Resources Committee, which is composed entirely of
"independent directors," as defined in the NASDAQ Stock Market Rules, will
administer the Equity Incentive Plan. The Committee has the authority, subject
to the terms of the Plan, to: (i) select the employees who will receive awards,
(ii) grant awards, (iii) determine the types and sizes of awards to be granted
to employees (but not to non-employee directors, who are granted a fixed number
of stock options annually), (iv) determine the terms, conditions, vesting
periods, and restrictions applicable to awards (other than non-employee director
stock options), (v) adopt, alter, and repeal administrative rules and practices
governing the Plan, (vi) interpret the terms and provisions of the Plan and any
awards granted under the Plan, (vii) prescribe the forms of any award agreements
or other instruments relating to awards, and (viii) otherwise supervise the
administration of the Plan. The Committee may delegate any of its authority to
any other person or persons that it deems appropriate with respect to awards
granted to employees who are not officers of First Merchants.
The Equity Incentive Plan will continue until May 5, 2019, after which no awards
may be issued under the Plan. However, the Board may suspend or terminate the
Plan at any time or make such amendments to the Plan as it deems advisable;
except that no such amendment may be made without the approval of First
Merchants' shareholders if required to satisfy NASDAQ Stock Market Rules or any
applicable federal or state law or regulation.
Stock Available under the Plan
The aggregate number of shares of First Merchants common stock available for
grants of awards under the Equity Incentive Plan in a fiscal year is equal to
the sum of (i) 1% of the number of common shares outstanding as of the last day
of First Merchants' prior fiscal year, plus (ii) the sum of: (1) the number of
shares that were available for grants of awards but not granted under the Plan
in any previous fiscal year; and (2) the number of shares that were reacquired
by First Merchants during the immediately preceding fiscal year as the result of
(A) the forfeiture of awards and/or the termination or cancellation of awards
that were not exercised or did not vest, and (B) the transfer or surrender by
participants of shares to pay the exercise price of a stock option and/or
withholding taxes associated with an award. However, in no event will the number
of shares available for grants of awards in any fiscal year exceed 1.5% of the
number of common shares outstanding as of the last day of the prior fiscal year.
The aggregate number of common shares that may be issued under the Plan upon the
exercise of
35
incentive stock options, as described in the Plan and under Internal Revenue
Code Section 422, is 1,200,000, subject to the following sentence. In the event
of a change in First Merchants' common stock through merger, consolidation,
reorganization, recapitalization or similar transaction, or in the event of a
stock split, stock dividend or distribution to shareholders (other than normal
cash dividends), spin-off or any other change in First Merchants' corporate
structure, the Compensation and Human Resources Committee is authorized to
adjust the number and class(es) of shares that may be issued under the Plan, the
aggregate number of shares that may be issued under the Plan upon the exercise
of incentive stock options, the number and class(es) of shares subject to
outstanding awards, the exercise price applicable to outstanding awards, and the
fair market value of shares and other value determinations applicable to
outstanding awards, as appropriate.
The aggregate market value of the shares of First Merchants common stock that
would be available for the grant of awards under the Equity Incentive Plan is
not determinable. However, based on the number and market value of First
Merchants common stock outstanding as of February 27, 2009, the shares that
would be available for the grant of awards in a fiscal year under the Plan had
an aggregate market value of $2,145,665.
Eligibility
Employees of First Merchants and its subsidiaries selected by the Compensation
and Human Resources Committee to participate in the Equity Incentive Plan are
eligible to receive restricted stock and stock option awards. In addition, the
Plan provides a stock option grant to non-employee directors on July 1 of each
year during the term of the Plan to purchase 1,500 shares at the fair market
value on that date. While the total number of employees who will be eligible to
receive awards under the Plan is not determinable, the Committee made awards
under the existing long-term equity incentive plan, which this Plan is intended
to replace, to 9 non-employee directors of First Merchants on July 1, 2008, to
10 employees of Lincoln Bank on January 1, 2009, and to 143 employees of First
Merchants and its subsidiaries (including each of the NEOs) on February 24,
2009. The awards to the Lincoln Bank employees were made in accordance with the
provisions of an Agreement of Reorganization and Merger between First Merchants
and Lincoln Bank's parent, Lincoln Bancorp, dated as of September 2, 2008, under
which Lincoln Bancorp was merged into First Merchants. It is anticipated that
there will be 9 non-employee directors who will be eligible to receive a stock
option grant under the Plan on July 1, 2009.
Types of Awards
The awards under the Equity Incentive Plan may consist of restricted stock,
"incentive stock options" as defined in Internal Revenue Code Section 422 and
the regulations thereunder, and/or non-qualified stock options. Awards may be
granted singly or in combination or tandem with other awards. They may also be
granted in replacement of, or in substitution for, other awards granted by First
Merchants, whether or not such other awards were granted under the Plan. The
Compensation and Human Resources Committee has the authority, subject to the
terms of the Plan, to select the employees who will receive awards and to
determine the types and amounts of the awards and the terms, conditions and
restrictions applicable thereto. In general, participants may not transfer or
assign awards granted under the Plan other than by will, pursuant to the laws of
descent and distribution, or pursuant to a qualified domestic relations order.
Incentive stock options may only be awarded to employees. The exercise price for
incentive stock options must be not less than the fair market value of the
shares (the closing price as recorded by NASDAQ) on the date of the grant (110%
of the fair market value for 10% shareholders). Incentive stock options cannot
be exercisable for longer than 10 years after the date of the grant (5 years for
10% shareholders). The aggregate fair market value (determined at the time the
option is granted) of the shares with respect to which incentive stock options
are exercisable for the first time by an employee during any calendar year under
all such plans of First Merchants and its affiliated companies cannot exceed
$100,000. Incentive stock options may only be transferred or assigned by will or
pursuant to the laws of descent and distribution.
Non-employee directors of First Merchants will be granted non-qualified stock
options on July 1 of each year during the term of the Plan, if they are serving
as a director on that date, to purchase 1,500 shares of First Merchants common
stock at an exercise price equal to the fair market value of the shares (the
closing price as recorded by NASDAQ) on the date of the grant. The Committee
will not have the power, without further shareholder approval, to alter the
amount, price or timing of the options granted to the non-employee directors
under the Plan.
36
Payment of Exercise Price and Tax Withholding Obligation
In general, the Committee may permit a participant to pay the exercise price for
a stock option and/or the participant's tax withholding obligation associated
with an award in cash, by the transfer of shares of First Merchants common
stock, by the surrender of all or part of an award (except for incentive stock
options), or by a combination of these methods.
Participant's Retirement, Death, Disability or Other Termination of Employment;
Change of Control
In general, if a participant retires, terminates employment due to disability
(as defined in the Equity Incentive Plan) or dies, he or she (or his or her
executor, personal representative or beneficiary, in the case of the
participant's death) will continue to have the right to exercise all stock
option awards (if entitled to do so at the time of retirement, termination due
to disability or death) for the remainder of the exercise period. With certain
exceptions set forth in the Plan, a participant may after other termination of
employment exercise all stock option awards (if entitled to do so at the time of
termination) for a period of 30 days after the date of termination. In general,
incentive stock options may be exercised as such for 3 months following
retirement or for 1 year following the date of termination due to disability or
death, after which they may be exercised as non-qualified stock options for the
remainder of the exercise period. In the event of a change of control (as
defined in the Plan) of First Merchants, all outstanding stock options will
become fully exercisable.
If a participant terminates employment due to disability or dies, or in the
event of a change of control of First Merchants, all restrictions on the
participant's restricted stock awards will lapse as of the date of such
termination, death or change of control. If a participant retires, his or her
restricted stock awards will continue to be subject to the restrictions until
they expire according to their terms. Upon any other termination of employment,
a participant's restricted stock awards will be forfeited as of the date of
termination unless the restrictions have lapsed prior to such date.
Additional Provisions Applicable to Executive Officers
The Equity Incentive Plan has two additional provisions that are not found in
the existing long'term equity incentive plan, both intended to encourage
additional share ownership by First Merchants' executive officers and thereby
increase the commonality of interest between the executive officers and the
shareholders.
First, executive officers are required to hold 25% of all "net shares" (defined
as the number of shares issued to the executive officer under an award after
subtracting the number of shares, if any, transferred or surrendered by the
executive officer to pay the exercise price of a stock option and/or to pay any
withholding taxes associated with the award) issued to the executive officer
under the Plan, including both restricted stock awards and shares issued upon
the exercise of stock options, until the earlier of (i) the date of the
executive officer's death, retirement or other termination of employment, or
(ii) the date of a change of control.
Second, the Plan includes a guideline stating that executive officers who are
selected as participants in the Plan should acquire and hold shares of First
Merchants common stock equal in value to at least 100% of their then current
annual salary within 6 years after first being selected to participate in the
Plan. However, this guideline does not constitute a condition, restriction or
risk of forfeiture applicable to any award made to an executive officer under
the Plan.
Federal Income Tax Consequences
The following is a summary of federal income tax consequences to participants
and First Merchants relative to the Equity Incentive Plan. The summary is not
intended to be exhaustive and does not discuss the income tax laws of a state,
local or other jurisdiction which may be applicable to a participant. In
general, there are no federal income tax consequences to the recipient or to
First Merchants upon the grant or exercise of an incentive stock option. If the
recipient holds the shares purchased though the exercise of an incentive stock
option for more than 1 year after the exercise date and 2 years after the option
was granted (the "holding period"), the recipient will be eligible upon selling
the shares for long-term capital gain treatment on any
37
excess in the amount of the sale price over the option price. First Merchants
will not receive an income tax deduction in the event the recipient disposes of
the shares after completion of the holding period. However, if the recipient
sells the shares before the expiration of the holding period, the recipient will
have made a "disqualifying disposition" and will realize ordinary income on the
date of sale equal to the difference between the option price and the fair
market value of the shares on the exercise date. The balance of the recipient's
gain, if any, on the sale of the shares is subject to capital gains treatment.
First Merchants will receive an income tax deduction in the same amount and at
the same time as the recipient realizes ordinary income.
The recipient of a non-qualified stock option will realize ordinary income upon
exercising the option, equal to the difference between the option price and the
fair market value on the exercise date of the shares purchased. First Merchants
will receive an income tax deduction in the same amount and at the same time as
the recipient realizes ordinary income. Upon the subsequent sale of any such
shares by the recipient, any appreciation or depreciation in the value of the
shares after the exercise date will be treated as a capital gain or loss.
In general, a recipient will not realize income on the date of an award of
restricted stock, nor will First Merchants be entitled to a deduction at that
time. The recipient will realize ordinary income in an amount equal to the fair
market value of the awarded shares at the time the restrictions lapse on such
shares, and First Merchants will be entitled to a corresponding income tax
deduction. Dividends paid to recipients prior to the lapse of restrictions will
be taxed as ordinary income to the recipient and deductible as such by First
Merchants.
Benefits Payable to Executive Officers and Directors under Plan
The benefits or amounts that will be received by or allocated to the NEOs, to
all current executive officers as a group, and to all employees as a group,
under the Equity Incentive Plan are not determinable. If the Plan had been in
effect for 2008, the benefits and amounts that would have been received by or
allocated to the NEOs, to all current executive officers as a group, and to all
employees as a group, under the Plan also are not determinable. The Equity
Incentive Plan provides a stock option grant to non-employee directors on July 1
of each year during the term of the Plan to purchase 1,500 shares at the fair
market value on that date. The Compensation and Human Resources Committee will
not have the power, without further shareholder approval, to alter the amount,
price, or timing of these options granted to the non-employee directors under
the Plan. The benefits or amounts that will be received by or allocated to all
current directors who are not executive officers as a group under the Equity
Incentive Plan are not determinable. If the Plan had been in effect for 2008,
the benefits or amounts that would have been received by or allocated to all
current directors who are not executive officers as a group under the Plan are
as follows:
New Plan Benefits
First Merchants Corporation 2009 Long-Term Equity Incentive Plan
------------------------------------- ---------------------------------- --------------------------------------
Name and Position Dollar Value Number of Units
------------------------------------- ---------------------------------- --------------------------------------
------------------------------------- ---------------------------------- --------------------------------------
Non-Executive Director Group $0(1)
12,000 shares of First Merchants
Corporation common stock
------------------------------------- ---------------------------------- --------------------------------------
(1) Had the Equity Incentive Plan been in effect for 2008, the stock
options granted to non-employee directors would have been
out-of-the-money.
Equity Compensation Plan Information
The table on page 34 presents information as of December 31, 2008 with respect
to compensation plans under which equity securities of First Merchants are
authorized for issuance. It does not include information concerning equity
securities that may be authorized for issuance under the Equity Incentive Plan
or the First Merchants Corporation 2009 Employee Stock Purchase Plan, which is
described on pages 31-34 and is also being presented for approval at the 2009
annual meeting by the shareholders of First Merchants.
38
Shareholder Vote Required to Approve the First Merchants Corporation 2009
Long-Term Equity Incentive Plan
The Equity Incentive Plan will be approved if it receives the favorable vote of
a majority of the shares present and voting at the annual meeting of
shareholders. Abstentions and broker non-votes will be considered neither a vote
"for" nor "against."
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE THE
FIRST MERCHANTS CORPORATION 2009 LONG-TERM EQUITY INCENTIVE PLAN.
TRANSACTIONS WITH RELATED PERSONS
Certain directors and executive officers of First Merchants and its subsidiaries
and their associates are customers of, and have had transactions with, First
Merchants' subsidiary banks from time to time in the ordinary course of
business. Additional transactions may be expected to take place in the ordinary
course of business in the future. All loans and commitments included in such
transactions were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable loans with
persons not related to the lender and did not involve more than the normal risk
of collectibility or present other unfavorable features.
Richard A. Boehning, who retired as a director of First Merchants on April 29,
2008, the date of the 2008 annual shareholder meeting, is of counsel to the law
firm of Bennett, Boehning & Clary LLP, Lafayette, Indiana, which Lafayette Bank
and Trust Company, National Association, a wholly-owned subsidiary of First
Merchants, has retained as legal counsel during 2008 and will continue to retain
as legal counsel in 2009. Charles E. Schalliol, a director of First Merchants,
is of counsel to the law firm of Baker & Daniels LLP, Indianapolis, Indiana,
which First Merchants Bank, National Association, a wholly owned subsidiary of
First Merchants, has retained as legal counsel during 2008 and will continue to
retain as legal counsel in 2009. The Board has determined that these
relationships do not prevent Mr. Boehning or Mr. Schalliol from being
"independent directors," as defined in the NASDAQ listing standards.
In accordance with First Merchants' Code of Business Conduct, all transactions
in which First Merchants is or is to be a participant and the amount involved
exceeds $120,000, and in which a director or executive officer of First
Merchants, or any member of his or her immediate family, had or will have a
direct or indirect material interest, will be reviewed for potential conflict of
interest and must be approved by the Audit Committee. Under the standards set
forth in the Code of Business Conduct, the Audit Committee will determine
whether the transaction might pose an actual or apparent conflict of interest
and, if so, whether such conflict would prevent the director or executive
officer from complying with his or her obligation never to allow personal
interests to interfere with objectivity in performing responsibilities to First
Merchants and never to use or attempt to use a position with First Merchants to
obtain any improper personal financial or other benefit for the director or
executive officer, his or her family members, or any other person.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires First
Merchants' directors and executive officers to file reports of ownership and
changes in ownership of First Merchants stock with the SEC. Based on its records
and the written representations of its directors and executive officers, First
Merchants believes that during 2008 these persons complied with all Section
16(a) filing requirements; except that late Form 4 reports were filed on March
21, 2008 by executive officers Rechin, Hardwick, Connors, Spade, Bradshaw,
Ellington and Lorentson to report awards to them on February 27, 2008 of 15,000,
8,000, 3,000, 4,000, 1,500, 1,500 and 1,500 stock options, respectively, and
4,000, 2,700, 2,000, 1,000, 1,500, 1,500 and 1,500 shares of restricted stock,
respectively, under First Merchants' Long-term Equity Incentive Plan.
39
INDEPENDENT AUDITOR
Fees for Professional Services Rendered by BKD, LLP
The following table shows the aggregate fees billed by BKD, LLP for audit and
other services rendered to First Merchants for 2007 and 2008.
2007 2008
Audit Fees $382,500 $436,300
Audit-Related Fees 66,923 64,925
Tax Fees 100,801 81,628
All Other Fees 0 0
--------------- ---------------
--------------- ---------------
Total Fees $550,224 $582,853
=============== ===============
The "Audit Fees" were for professional services rendered for the audits of First
Merchants' consolidated financial statements and internal control over financial
reporting, reviews of condensed consolidated financial statements included in
First Merchants' Forms 10-Q, assistance with regulatory filings, and, for 2008
only, consents related to registration statements filed in connection with the
acquisition of Lincoln Bancorp.
The "Audit-Related Fees" were for professional services rendered for audits of
First Merchants' benefit plans.
The "Tax Fees" were for professional services rendered for preparation of tax
returns and consultation on various tax matters.
All of the services related to the "Audit-Related Fees," "Tax Fees" and "All
Other Fees" for 2007 and 2008 were pre-approved by the Audit Committee in
accordance with the Committee's pre-approval policy described below.
The Audit Committee has considered whether the provision by BKD, LLP of the
services covered by the fees other than the audit fees is compatible with
maintaining BKD, LLP's independence and believes that it is compatible.
Pre-approval Policies and Procedures
The Audit Committee has established a pre-approval policy, under which the
Committee is required to pre-approve all audit and non-audit services performed
by First Merchants' independent auditor, in order to assure that the provision
of such services does not impair the auditor's independence. These services may
include audit services, audit-related services, tax services and other services.
Under this policy, pre-approval is provided for 12 months from the date of
pre-approval unless the Committee specifically provides for a different period.
The policy is detailed as to the particular services or category of services and
fee levels that are pre-approved. Unless a service or type of service to be
provided by the independent auditor has received general pre-approval, it will
require specific pre-approval by the Audit Committee. The Committee must also
approve any proposed services exceeding the pre-approved fee levels. The
independent auditor is required to provide detailed back-up documentation with
respect to each proposed pre-approved service at the time of approval. The Audit
Committee may delegate pre-approval authority to one or more of its members. The
member or members to whom such authority has been delegated must report any
pre-approval decisions to the Audit Committee at its next scheduled meeting. The
Audit Committee does not delegate its responsibilities to pre-approve services
performed by the independent auditor to management.
VOTING ITEM 5 - RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR FOR 2009
The Board, subject to ratification by the shareholders, has appointed BKD, LLP
as First Merchants' independent auditor for 2009. 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
40
annual shareholders' meeting. They will have an opportunity to make a statement,
if they desire to do so, and are expected to be available to respond to
appropriate questions.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF THE FIRM OF BKD, LLP AS FIRST MERCHANTS' INDEPENDENT AUDITOR FOR
2009.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the 2010 annual meeting of
the shareholders must be received by the Secretary of First Merchants at First
Merchants' principal office by November 27, 2009, for inclusion in First
Merchants' 2010 proxy statement and form of proxy relating to that meeting.
Shareholder proposals, if any, intended to be presented at the 2009 annual
meeting that were not submitted for inclusion in this proxy statement will be
considered untimely unless they were received by the Secretary of First
Merchants at First Merchants' principal office by February 2, 2009. The
Secretary did not receive any such shareholder proposals by that date.
OTHER MATTERS
Shareholders who, according to First Merchants' records, share an address may
receive only one Notice Regarding the Availability of Proxy Materials on the
Internet, one annual report to shareholders or one set of proxy materials,
unless the shareholders have provided contrary instructions. Any shareholder who
received only one Notice Regarding the Availability of Proxy Materials, one
annual report to shareholders or one set of proxy materials, and who wishes to
receive a separate Notice, a separate annual report to shareholders or a
separate set of proxy materials now or in the future, may write or call First
Merchants' Shareholder Services Department to request a separate Notice or a
separate set of proxy materials at First Merchants Corporation, P. O. Box 792,
Muncie IN 47308-0792; (800) 262-4261, extension 21522. Similarly, shareholders
who share an address and who have received multiple Notices Regarding the
Availability of Proxy Materials, multiple copies of the annual report to
shareholders or multiple copies of proxy materials may write or call First
Merchants' Shareholder Services Department at the same address and telephone
number to request delivery of a single Notice or a single copy of these
materials in the future.
The cost of soliciting proxies will be borne by First Merchants. In addition to
solicitations by mail, proxies may be solicited personally or by telephone or
other electronic means, but no solicitation will be made by specially engaged
employees or paid solicitors.
The Board and management are not aware of any matters to be presented at the
annual meeting of the shareholders other than the election of directors, the
vote on an advisory, non-binding resolution approving the compensation of the
First Merchants executive officers, the proposal to approve the First Merchants
Corporation 2009 Employee Stock Purchase Plan, the proposal to approve the First
Merchants Corporation 2009 Long-Term Equity Incentive Plan, and the ratification
of the appointment of the independent auditor. However, if any other matters
properly come before the annual meeting or any adjournment thereof, the holders
of the proxies are authorized to vote thereon at their discretion, provided
First Merchants did not have notice of any such matter on or before February 2,
2009.
By Order of the Board of Directors
Muncie, Indiana Cynthia G. Holaday
March 27, 2009 Secretary
41
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE
SHAREHOLDERS MEETING TO BE HELD ON 5/06/09
This communication presents only an overview of the more complete proxy
materials that are available to you on the Internet. We encourage you to access
and review all of the important information contained in the proxy materials
before voting.
The following materials are available for view:
Notice and Proxy Statement / Annual Report
To view this material, have the 12-digit Control #(s) available and visit:
www.investorEconnect.com
If you want to receive a paper or e-mail copy of the above listed documents you
must request one. There is no charge to you for requesting a copy. To facilitate
timely delivery please make the request as instructed below on or before
4/15/09.
To request material: INTERNET: www.investorEconnect.com
TELEPHONE: 1-800-579-1639
**EMAIL: sendmaterial@investorEconnect.com
**If requesting material by e-mail please send a blank email with the 12-digit
control # (located on the following page) in the subject line. Requests,
instructions and other inquiries will NOT be forwarded to your investment
advisor.
FIRST MERCHANTS CORPORATION
200 EAST JACKSON STREET
MUNCIE, IN 47305
FIRST MERCHANTS CORPORATION
Vote In Person
Many Shareholder meetings have attendance requirements including, but not
limited to, the possession of an attendance ticket issued by the entity holding
the meeting. Please check the meeting materials for any special requirements for
meeting attendance. At the meeting, you will need to request a ballot to vote
these shares.
Vote By Internet
To vote now by internet, go to WWW.PROXYVOTE.COM. Use the internet to transmit
your voting instructions and for exectronic delivery of informatino up until
11:59P.M. Eastern Time the day before the cut-off date or meeting date. Have
your notice in hand when you access the web site and follow the instructions.
42
Meeting Location
The Annual Meeting for holders as of 3/10/09
is to be held on 5/06/09 at 3:30 p.m.
at: Horizon Convention Center
401 South High Street
Muncie, IN 47305
------------------------------------
For meeting directions
Please call: 800-262-4261
================================================================================
43
Voting Items
THE BOARD OF DIRECTORS RECOMMEND A VOTE
"FOR" ITEMS 1, 2 AND 3.
1. ELECTION OF DIRECTORS
Nominees
01) Jerry R. Engle 04) Patrick A. Sherman
02) William L. Hoy 05) Michael C. Rechin
03) Barry J. Hudson
2. Proposal to approve, on an advisory, non-binding basis, the compensation of
the First Merchants Corporation executive officers.
3. Proposal to approve the First Merchants Corporation 2009 Employee Stock
Purchase Plan
4. Proposal to approve the First Merchants Corporation 2009 Long-Term Equity
Incentive Plan.
5. Proposal to ratify the appointment of the firm BKD, LLP as the independent
auditor for 2009.
To transact other business as may properly come before the meeting.
================================================================================
44
APPENDIX A
FIRST MERCHANTS CORPORATION
2009 EMPLOYEE STOCK PURCHASE PLAN
I. INTRODUCTION
The First Merchants Corporation 2009 Employee Stock Purchase Plan (the "Plan")
was adopted by the Board of Directors (the "Board") of First Merchants
Corporation (the "Company") on February 4, 2009, subject to approval of the
Company's shareholders at their annual meeting on May 6, 2009. The effective
date of the Plan shall be July 1, 2009, if it is approved by the shareholders.
The purpose of the Plan is to provide eligible employees of the Company and its
subsidiaries a convenient opportunity to purchase shares of common stock of the
Company through quarterly offerings financed by the use of payroll deductions.
As used in this Plan, "subsidiary" means a corporation or other form of business
association of which shares (or other ownership interests) having 50% or more of
the voting power are, or in the future become, owned or controlled, directly or
indirectly, by the Company.
The Plan shall continue until all the stock allocated to it has been purchased
or until June 30, 2019, whichever is earlier; provided, however, the Board may
terminate the Plan at any time or make such amendment(s) to the Plan as it may
deem advisable. No such amendment may be made without the approval of the
Company's shareholders if it would materially: (i) increase the benefits
accruing to participants under the Plan; (ii) modify the requirements as to
eligibility for participation in the Plan; (iii) increase the number of shares
which may be issued under the Plan (except as permitted under Section III); (iv)
increase the cost of the Plan to the Company; or (v) alter the allocation of
Plan benefits among participating employees.
A-1
The Plan is not qualified under Section 401(a) of the Internal Revenue Code of
1986 (the "Code") and is not subject to any provisions of the Employee
Retirement Income Security Act of 1974 (ERISA). It is the Company's intention to
have the Plan qualify as an "employee stock purchase plan" under Section 423 of
the Code, and the provisions of the Plan shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that Section
of the Code.
II. ADMINISTRATION
The Plan is administered by the Compensation and Human Resources Committee (the
"Committee"), which consists of two or more members of the Board, none of whom
are eligible to participate in the Plan and all of whom are "non-employee
directors," as such term is defined in Rule 16b-3(b)(3) of the Securities and
Exchange Commission, under the Securities Exchange Act of 1934, as amended (the
"1934 Act"). The Committee shall prescribe rules and regulations for the
administration of the Plan and interpret its provisions. The Committee may
correct any defect, reconcile any inconsistency or resolve any ambiguity in the
Plan. The actions and determinations of the Committee on matters relating to the
Plan are conclusive. The Committee and its members may be addressed in care of
the Company at its principal office. The members of the Committee do not serve
for fixed periods but may be appointed or removed at any time by the Board.
III. STOCK SUBJECT TO THE PLAN
An aggregate of 1,000,000 shares of common stock, without par value, of the
Company (the "Common Stock") is available for purchase under the Plan. Shares of
Common Stock which are to be delivered under the Plan may be obtained by the
Company by authorized purchases on the open market or from private sources, or
by issuing authorized but unissued shares of Common Stock. In the event of any
change in the Common Stock through recapitalization, merger, consolidation,
stock dividend or split, combination or exchanges of shares or otherwise, the
Committee may make such equitable adjustments in the Plan and the then
outstanding offering as it deems necessary and appropriate including, but not
limited to, changing the number of shares of Common Stock reserved under the
Plan and the price of the current offering. If the number of shares of Common
Stock that participating employees become entitled to purchase is greater than
the number of shares of Common Stock available, the available shares shall be
allocated by the Committee among such participating employees in such manner as
it deems fair and equitable. No fractional shares of Common Stock shall be
issued or sold under the Plan.
IV. ELIGIBILITY
All employees of the Company and such of its subsidiaries as shall be designated
by the Committee will be eligible to participate in the Plan. No employee shall
be eligible to participate in an offering until the first day of the calendar
quarter after he or she has completed an "introductory period," as described in
the Company's Employee Handbook (generally, ninety (90) calendar days of
employment). No employee shall be eligible to participate in the Plan if,
immediately after an option is granted under the Plan, the employee owns or is
considered to own (within the meaning of Code Section 424(d)) stock, including
outstanding options to purchase stock, possessing five percent (5%) or more of
the total combined voting power or value of all classes of stock of the Company
or of any parent or subsidiary of the Company.
V. OFFERING PERIODS
The Plan shall be implemented by a series of consecutive three (3) - month
offering periods, with each new offering period commencing on the first day of
each calendar quarter (beginning July 1, 2009), or at such other time or times
as may be determined by the Committee (the "Offering Date"), and ending on the
last trading day of each calendar quarter, or at such other time or times as may
be determined by the Committee (the "Purchase Date"). The Plan shall continue
until terminated in accordance with Section I. Subject to the provisions
concerning termination in Section I, the Committee shall have the power to
change the duration and/or frequency of offering periods with respect to future
offerings and shall use reasonable efforts to notify employees of any such
change at least five (5) days prior to the scheduled beginning of the first
offering period to be affected. In no event shall any option granted hereunder
be exercisable more than twenty-seven (27) months from its date of grant.
VI. PARTICIPATION, PAYROLL DEDUCTIONS
An eligible employee may participate in an offering by authorizing a payroll
deduction for such purpose in whole dollar amounts at any time prior to the
Offering Date for such offering. The Committee may at any time, prior to the
Offering Date for an offering, establish a maximum percentage of a participating
employee's compensation that he or she may apply to the purchase of Common Stock
with respect to that and/or future offerings under the Plan. The Committee may
at any time suspend an offering if required by law or determined by the
Committee to be in the Company's best interests.
The Company will maintain or cause to be maintained payroll deduction accounts
for all participating employees. All funds received or held by the Company or
its subsidiaries under the Plan may be, but need not be, segregated from other
corporate funds. Interest shall accrue on or be payable to participating
employees with respect to such payroll deductions, at the rate determined from
time to time by Human Resources, unless the Committee determines that the
accounts shall not earn interest.
Each participating employee will receive a statement of his or her payroll
deduction account and the number of shares of Common Stock purchased therewith
following the Purchase Date for each offering.
Subject to such limitations, if any, prescribed by the Committee from time to
time and such rules and procedures established by Human Resources, a
participating employee may during or following an offering period prospectively
increase or decrease his or her rate of payroll deductions or discontinue
payroll deductions and withdraw the entire balance of his or her payroll
deduction account, if any, and thereby withdraw from participation in an
offering. Such withdrawal shall not have any effect upon the employee's
eligibility to elect to participate in any succeeding offering. Under the
initial rules established by the Committee, payroll deductions may be increased
or decreased only as of a quarterly Offering Date, by filing a new payroll
deduction authorization with Human Resources at least ten (10) days prior to the
Offering Date. Under such initial rules, any request to withdraw from an
offering may be submitted to Human Resources at any time during the offering
period. An election by a participating employee not to participate in a future
A-2
offering must be received by Human Resources prior to the Offering Date for such
offering. In the event of a participating employee's retirement, death or
termination of employment, his or her participation in any offering under the
Plan shall cease, no further amounts shall be deducted pursuant to the Plan, and
the balance in the employee's payroll deduction account, if any, shall be paid
to the employee, or, in the event of the employee's death, to the employee's
beneficiary designated on a form approved by the Committee (or, if the employee
has not designated a beneficiary, to his or her estate).
If a participating employee has not changed the rate of his or her payroll
deductions, discontinued payroll deductions, or elected not to participate in a
future offering in accordance with the rules and procedures set forth in the
immediately preceding paragraph, his or her payroll deductions shall continue at
the originally elected rate throughout the offering period and future offering
periods unless reduced to reflect a change by the Committee in the maximum
permissible rate. Such employee shall be deemed to have accepted each new offer
and to have authorized payroll deductions in respect thereof during each such
future offering period.
VII. PURCHASE, LIMITATIONS, PRICE
Each employee participating in any offering under the Plan shall be granted an
option, as of the Offering Date, for as many full shares of Common Stock as the
amount of his or her payroll deduction account can purchase as of the Purchase
Date for such offering at the price determined in accordance with the third
paragraph of this Section (the "Purchase Price"). No employee may be granted an
option under the Plan which permits his or her rights to purchase Common Stock
under the Plan, and any other stock purchase plan of the Company or a parent or
subsidiary of the Company qualified under Section 423 of the Code, to accrue at
a rate which exceeds $25,000 in Fair Market Value of such Common Stock
(determined at the time the option is granted) for each calendar year in which
any option granted to the employee is outstanding at any time. "Fair Market
Value" of a share of Common Stock on a given date is defined as the closing
price of a share on such date, or if no sale took place, the closing price of a
share of stock on the most recent day on which a sale of a share of stock took
place as recorded on the NASDAQ stock market or national securities exchange on
which the Common Stock of the Company is listed on such date. If the Common
Stock of the Company isn't listed on NASDAQ or any other national securities
exchange on such date, "Fair Market Value" is defined as the fair market value
of a share on such date as determined in good faith by the Committee.
As of the Purchase Date for each offering, the payroll deduction account of each
participating employee (except those who have withdrawn from participation in
the offering as provided in Section VI) shall be totaled. If such account
contains sufficient funds to purchase one or more full shares of Common Stock as
of that date, the employee shall be deemed to have exercised an option to
purchase the largest number of full shares of Common Stock that can be purchased
at the Purchase Price with such funds. Such employee's account will be charged
for the amount of the purchase and the employee's book entry stock account will
be credited with the number of shares of Common Stock purchased. No fractional
shares of Common Stock may be purchased under the Plan. Any balance remaining in
a participating employee's payroll deduction account at the end of an offering
period after the purchase of Common Stock shall be held in such account and
applied to the purchase of shares of Common Stock under the next offering under
the Plan, unless such employee withdraws from, elects not to participate in, or
is not eligible to participate in the next offering, in which case the balance
in the employee's payroll deduction account, if any, shall be paid to the
employee.
The Committee shall determine the Purchase Price of the shares of Common Stock
which are to be sold under each offering, which price (so long as the Common
Stock of the Company is listed on NASDAQ or another national securities
exchange) shall be equal to 85% of the average of the closing prices for the
Common Stock on each trading day during the offering period, as reported by
NASDAQ (or the national securities exchange on which the Common Stock of the
Company is listed during the offering period); provided, however, in no event
shall such Purchase Price be less than the lesser of (i) an amount equal to 85%
of the Fair Market Value of the Common Stock on the Offering Date, or (ii) an
amount equal to 85% of the Fair Market Value of the Common Stock on the Purchase
Date.
A-3
VIII. STOCK ACCOUNTS, TRANSFER OF INTERESTS
Shares of Common Stock purchased under the Plan may be registered in the name of
a nominee or held in such other manner as the Committee determines to be
appropriate. A book entry stock account will be established in each
participating employee's name. Each participating employee will be the
beneficial owner of the Common Stock purchased under the Plan and credited to
his or her stock account, and he or she will have all rights of beneficial
ownership in such Common Stock. The Company or its nominee will retain custody
of the Common Stock purchased under the Plan until specifically requested in
writing by the participating employee to be sold, transferred or delivered. A
participating employee may request that a stock certificate, representing all or
part of the shares of Common Stock credited to his or her stock account, be
issued and delivered to the participating employee at any time.
No option, right or benefit under the Plan may be transferred by a participating
employee other than by will or the laws of descent and distribution, and all
options, rights and benefits under the Plan may be exercised during the
participating employee's lifetime only by such employee or the employee's
guardian or legal representative. There are no restrictions imposed by or under
the Plan upon the resale of shares of Common Stock issued under the Plan.
Certain officers of the Company are subject to restrictions under Section 16(b)
of the 1934 Act. With respect to such officers, transactions under the Plan are
intended to comply with all applicable conditions of Rule 16b-3 or its
successors under the 1934 Act. To the extent any provision of the Plan or action
by the Committee fails to so comply, it shall be deemed null and void if
permitted by law and deemed advisable by the Committee.
Beneficial ownership of the shares of Common Stock purchased under the Plan may
be held only in the name of the participating employee, or, if such employee so
indicates on his or her authorization form, in his or her name jointly with a
member of his or her family, with right of survivorship. A participating
employee who is a resident of a jurisdiction which does not recognize such a
joint tenancy may hold shares in the employee's name as tenant in common with a
member of his or her family, without right of survivorship.
A-4
APPENDIX B
FIRST MERCHANTS CORPORATION
2009 LONG-TERM EQUITY INCENTIVE PLAN
ARTICLE I
ESTABLISHMENT AND PURPOSE
Section 1.01. Establishment and Term of Plan. First Merchants Corporation,
an Indiana corporation (the "Company"), hereby establishes the First Merchants
Corporation 2009 Long-Term Equity Incentive Plan (the "Plan"), conditioned upon
and effective as of the date of approval of the Plan at a duly constituted
meeting of the Company's shareholders by the holders of the requisite number of
shares of the Company's stock, necessary to satisfy the requirements of the
Company's Articles of Incorporation and Bylaws, the rules of NASDAQ or any
national exchange on which the Common Shares are listed, and any applicable
federal or state law or regulation. Unless sooner terminated by the Board of
Directors in accordance with Section 11.01, the Plan shall automatically
terminate at the end of the business day on May 5, 2019.
Section 1.02. Purpose. The Plan is designed to promote the interests of the
Company and its shareholders by providing stock-based incentives to selected
Employees and Non-Employee Directors who are expected to contribute materially
to the success of the Company and its subsidiaries. The purpose of the Plan is
to provide a means of rewarding performance and to provide an opportunity to
increase the personal ownership interests of Employees and Non-Employee
Directors in the continued success of the Company and its subsidiaries. The
Company believes that the Plan will assist its efforts to attract and retain
quality Employees and Non-Employee Directors.
ARTICLE II
DEFINITIONS
Section 2.01. Definitions. When capitalized in this Plan, unless the
context otherwise requires:
(a) "Award" means a grant made to a Participant pursuant to Article
VI of this Plan.
(b) "Award Agreement" means a written instrument between the Company
and a Participant evidencing an Award and prescribing the terms,
conditions, and restrictions applicable to the Award.
(c) "Board of Directors" means the Board of Directors of the Company,
as constituted at any time.
(d) "Change of Control" means the first to occur of the following
events:
(i) any "person," as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") other than the Company, is or becomes
the "beneficial owner" (as determined under Exchange Act
Regulations ss. 240.13d-3), directly or indirectly, of
securities of the Company representing twenty-five percent
(25%) or more of the combined voting power of the Company's
then outstanding securities;
(ii) persons constituting a majority of the Board of Directors of
the Company were not directors of the Company for at least
the twenty-four (24) months preceding months;
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation,
other than (1) a merger or consolidation which would result
in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting
securities of the surviving entity) more than fifty percent
(50%) of the combined voting power of the voting securities
of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (2) a
merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in
which no person acquires fifty percent (50%) or more of the
combined voting power of the Company's then outstanding
securities; or
B-1
(iv) the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of
the Company's assets.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee" means the Compensation and Human Resources Committee
of the Board of Directors, consisting of two or more Non-Employee
Directors who are "non-employee directors" as defined in Exchange
Act Regulations ss. 240.16b-3.
(g) "Common Share" means a share of common stock of First Merchants
Corporation.
(h) "Common Shares Outstanding" means the total number of Common
Shares outstanding as reflected in the Company's financial
statements as of the most recent fiscal year-end.
(i) "Company" means First Merchants Corporation.
(j) "Director" means a director of the Company.
(k) "Director Option" means a right to purchase Common Shares granted
to a Non-Employee Director pursuant to Article VII.
(l) "Disabled" or "Disability" means total and permanent disability
as defined in Code Section 22(e)(3).
(m) "Employee" means any individual employed by the Company or any of
its Subsidiaries.
(n) "Executive Officer" means an officer of the Company as defined in
Exchange Act Regulations ss. 240.3b-7.
(o) "Fair Market Value" of a Common Share means the value of the
share on a particular date, determined as follows:
(i) the closing price of a share of common stock on such date,
or if no sale took place, the last reported closing price of
a share on the most recent day on which a sale of a share of
stock took place as recorded on the NASDAQ stock market or
the national securities exchange on which the common stock
of the Company is listed on such date; or
(ii) if the Company's common stock is not listed on NASDAQ or any
other national securities exchange on such date, the fair
market value of a share on such date as determined in good
faith by the Committee.
(p) "Incentive Stock Options" means stock options issued to Employees
which qualify under and meet the requirements of Code Section
422.
B-2
(q) "Non-Employee Director" means any Director of the Company who is
not an Employee of the Company or any of its Subsidiaries.
(r) "Non-Qualified Stock Options" means stock options which do not
qualify under or meet the requirements of Code Section 422.
(s) "Participant" means any person to whom an Award has been granted
under this Plan.
(t) "Plan" means this First Merchants Corporation 2009 Long-Term
Equity Incentive Plan authorized by the Board of Directors at its
meeting held on February 4, 2009, conditioned upon and effective
as of the date of approval of the Plan by the Company's
shareholders, as such Plan may be amended from time to time as
provided in Section 11.01.
(u) "Restricted Stock" means an Award of Common Shares that are
nontransferable and/or subject to a substantial risk of
forfeiture and/or other restrictions as provided in the Award
Agreement.
(v) "Retirement" means, in the case of an Employee, the termination
of all employment with the Company and its Subsidiaries for any
reason other than death or Disability on or after the day on
which the Employee has attained his or her "early retirement
age," as defined in the Company's qualified defined contribution
plan; and, in the case of a Non-Employee Director, "Retirement"
means the termination of service as a Director of the Company
other than the Director's removal as provided in the Bylaws of
the Company.
(w) "Stock Options" means the Incentive Stock Options and the
Non-Qualified Stock Options issued pursuant to the Plan.
(x) "Subsidiary' means a corporation or other form of business
association of which shares (or other ownership interests) having
fifty percent (50%) or more of the voting power are, or in the
future become, owned or controlled, directly or indirectly, by
the Company.
ARTICLE III
ADMINISTRATION
Section 3.01. Administrative Committee. The Plan shall be administered by
the Committee, which shall serve at the pleasure of the Board of Directors. The
Committee shall have full authority to administer the Plan, including authority
to interpret and construe any provision of the Plan and to adopt such rules and
regulations for administering the Plan as it may deem necessary to comply with
the requirements of the Plan or any applicable law.
Section 3.02. Powers of the Committee. The Committee shall, subject to the
terms of this Plan, have the authority to: (i) select the eligible Employees who
shall receive Awards, (ii) grant Awards, (iii) determine the types and sizes of
Awards to be granted to Employees under the Plan (but not to Non-Employee
Directors, who shall receive Director Options in accordance with Article VII of
this Plan), (iv) determine the terms, conditions, vesting periods, and
restrictions applicable to Awards (other than Director Options), (v) adopt,
alter, and repeal administrative rules and practices governing this Plan, (vi)
interpret the terms and provisions of this Plan and any Awards granted under
this Plan, (vii) prescribe the forms of any Award Agreements or other
instruments relating to Awards, and (viii) otherwise supervise the
administration of this Plan. The Committee may delegate any of its authority to
any other person or persons that it deems appropriate with respect to Awards
granted to Employees who are not officers of the Company.
Section 3.03. Actions of the Committee. All actions taken and all
interpretations and determinations made in good faith by the Committee, or made
by any other person or persons to whom the Committee has delegated authority,
shall be final and binding upon all Participants, the Company, and all other
interested persons. All decisions by the Committee shall be made with the
approval of not less than a majority of its
B-3
members. Members of the Committee who are eligible for Awards may vote on any
matters affecting the administration of the Plan or the grant of any Awards
pursuant to the Plan, except that no such member shall act upon the granting of
an Award to himself or herself; but any such member may be counted in
determining the existence of a quorum of the Committee.
ARTICLE IV
ELIGIBILITY
Section 4.01. Employees. Any Employee of the Company or any of its
Subsidiaries who is selected by the Committee to be a Participant under the Plan
shall be eligible for the grant of Awards (other than Director Options). The
selection of the Employees to receive Awards (other than Director Options) shall
be within the discretion of the Committee. More than one Award may be granted to
the same Employee.
The Company has established a guideline stating that each Executive Officer
who is selected as a Participant under the Plan should acquire and hold Common
Shares equal in value to at least one hundred percent (100%) of his or her then
current annual salary within six (6) years after he or she is first selected as
a Participant. However, this guideline is not intended and shall not be
construed to be a condition, restriction or risk of forfeiture applicable to any
Award granted to a Participant under the Plan. Other Participants are also
encouraged to acquire and hold Common Shares; however, the guideline only
applies to Executive Officers.
Section 4.02. Non-Employee Directors. All Non-Employee Directors are
eligible for the grant of Director Options, as provided in Article VII of this
Plan. Non-Employee Directors are not, however, eligible for the grant of any
Awards other than Director Options.
ARTICLE V
SHARES SUBJECT TO AWARDS
Section 5.01. Number of Common Shares. The shares subject to the Awards and
other provisions of the Plan shall be the Company's authorized but unissued or
reacquired Common Shares. The aggregate number of Common Shares that may be
subject to Awards granted under this Plan in any fiscal year shall be equal to
the sum of (i) one percent (1%) of the number of Common Shares Outstanding as of
the last day of the Company's prior fiscal year, plus (ii) the sum of: (1) the
number of Common Shares that were available for the grant of Awards but not
granted under this Plan in any previous fiscal year; and (2) the number of
Common Shares that were reacquired by the Company during the immediately
preceding fiscal year as the result of (A) the forfeiture of Awards and/or the
termination or cancellation of Awards that were not exercised or did not vest,
and (B) the transfer or surrender by Participants of Common Shares to pay the
exercise price of a Stock Option in accordance with Section 6.03(c) and/or
withholding taxes associated with an Award in accordance with Article VIII.
However, in no event shall the number of Common Shares available for the grant
of Awards in any fiscal year in accordance with the preceding sentence exceed
one-and-one-half percent (1.5%) of the Common Shares Outstanding as of the last
day of the prior fiscal year. The aggregate number of Common Shares that may be
issued under the Plan upon the exercise of Incentive Stock Options is 1,200,000,
as adjusted pursuant to Section 5.02. No fractional shares shall be issued under
this Plan; if necessary, the Committee shall determine the manner in which the
value of fractional shares will be treated.
The assumption of awards granted by an organization acquired by the Company
or the grant of Awards under this Plan in substitution for any such awards shall
not reduce the number of Common Shares available for the grant of Awards under
this Plan.
Section 5.02. Adjustment. In the event of any change in the Common Shares by
reason of a merger, consolidation, reorganization, recapitalization or similar
transaction, or in the event of a stock split, stock dividend or distribution to
shareholders (other than normal cash dividends), spin-off or any other change in
the corporate structure of the Company, the Committee shall adjust the number
and class of shares that may be issued under this Plan, the aggregate number of
Common Shares that may be issued under the Plan upon the exercise of Incentive
Stock Options, the number and class of shares subject to outstanding Awards, the
exercise price applicable to outstanding Awards, and the Fair Market Value of
the Common Shares and other
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value determinations applicable to outstanding Awards, as appropriate. All
determinations made by the Committee with respect to adjustments under this
Section 5.02 shall be conclusive and binding for all purposes of the Plan.
ARTICLE VI
AWARDS
Section 6.01. Grant of Awards. Awards authorized under this Article VI may
be granted pursuant to another incentive program which incorporates by reference
the terms and conditions of this Plan. Awards may be granted singly or in
combination or tandem with other Awards. Awards may also be granted in
replacement of, or in substitution for, other awards granted by the Company
whether or not such other awards were granted under this Plan; without limiting
the foregoing, if a Participant pays all or part of the exercise price or taxes
associated with an Award by the transfer of Common Shares or the surrender of
all or part of an Award (including the Award being exercised), the Committee
may, in its discretion, grant a new Award to replace the Common Shares that were
transferred or the Award that was surrendered. The Company may assume awards
granted by an organization acquired by the Company or may grant Awards in
replacement of, or in substitution for, any such awards.
Section 6.02. Types of Awards. Awards may include, but are not limited to,
the following:
(a) Director Option. A right to purchase Common Shares granted to a
Non-Employee Director pursuant to Article VII of this Plan.
(b) Stock Award. An Award that is made in Common Shares or Restricted
Stock or that is otherwise based on, or valued in whole or in part by
reference to, the Common Shares. All or part of any Stock Award may be
subject to conditions, restrictions and risks of forfeiture, as and to the
extent established by the Committee. Stock Awards may be based on the Fair
Market Value of the Common Shares, or on other specified values or methods
of valuation, as determined by the Committee.
(c) Stock Option. A right to purchase a specified number of Common
Shares during a specified period and at a specified exercise price, as
determined by the Committee. A Stock Option may be an Incentive Stock
Option or a Non-Qualified Stock Option. Incentive Stock Options may only be
issued to Employees. In addition to the terms, conditions, vesting periods,
and restrictions established by the Committee in the Award Agreement,
Incentive Stock Options must comply with the requirements of Code Section
422, Section 6.03(f), and this Article VI.
Section 6.03. Terms and Conditions of Awards; Agreements. Awards granted
under the Plan shall be evidenced by an Award Agreement executed by the Company
and the Participant, which shall contain such terms and be in such form as the
Committee may from time to time approve, subject to the following limitations
and conditions:
(a) Number of Shares. The Award Agreement shall state, as appropriate,
the type and total number of shares granted, and/or the type and total
number of shares with respect to which Stock Options are granted.
(b) Award Prices. The Award Agreement shall state, as applicable, the
price per share of the Common Shares with respect to which Stock Options
are issued. The price or other value shall be determined by the Committee.
For Incentive Stock Options, the exercise price shall satisfy all of the
requirements of the Code and of Section 6.03(f) of this Plan.
(c) Payment of Exercise Price; Deferral. The exercise price of a Stock
Option (other than an Incentive Stock Option), Director Option, and any
Stock Award for which the Committee has established an exercise price, may
be paid in cash, by the transfer of Common Shares, by the surrender of all
or part of an Award (including the Award being exercised), or by a
combination of these methods, as and to the extent permitted by the
Committee. The exercise price of an Incentive Stock Option may be paid in
cash, by the transfer of Common Shares, or by a combination of these
methods, as and to the extent permitted by the Committee at the time of
grant, but may not be paid by the surrender of all or part of an Award
unless otherwise approved by the Committee. The Committee may prescribe any
other method of paying the exercise price that it determines to be
consistent with applicable law and the purpose of this Plan.
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With the approval of the Committee, the delivery of the Common Shares,
cash, or any combination thereof subject to an Award (other than Director
Options) may be deferred, either in the form of installments or a single
future delivery. The Committee may also permit selected Participants to
defer the payment of some or all of their Awards, as well as other
compensation, in accordance with procedures established by the Committee to
assure that the recognition of taxable income is deferred under the Code.
The Committee may also establish rules and procedures for the crediting of
interest on deferred cash payments and dividend equivalents on Awards.
(d) Issuance of Shares and compliance with Securities Laws. The
Company may postpone the issuance and delivery of certificates representing
shares until (a) the admission of such shares to listing on any stock
exchange on which shares of the Company of the same class are then listed,
and (b) the completion of such registration or other qualification of such
shares under any state or federal law, rule or regulation as the Company
shall determine to be necessary or advisable, which registration or other
qualification the Company shall use it best efforts to complete; provided,
however, a person purchasing shares pursuant to the Plan has no right to
require the Company to register the Common Shares under federal or state
securities laws at any time. Any person purchasing shares pursuant to the
Plan may be required to make such representations and furnish such
information as may, in the opinion of counsel for the Company, be
appropriate to permit the Company, in light of the existence or
non-existence with respect to such shares of an effective registration
under the Securities Act of 1933, as amended, or any similar state statute,
to issue the shares in compliance with the provisions of those or any
comparable acts.
(e) Rights as a Shareholder. Except as provided in Section 6.05,
unless otherwise provided by the Board of Directors or the Committee, a
Participant shall have rights as a shareholder with respect to shares
covered by an Award, including voting rights or rights to dividends, only
upon the date of issuance of a certificate to him or her, and, if payment
is required, only after such shares are fully paid.
(f) Incentive Stock Options. To the extent any Award granted pursuant
to this Plan contains an Incentive Stock Option, the following limitations
and conditions shall apply to such Incentive Stock Option and the Award
Agreement relating thereto in addition to the terms and conditions provided
herein:
(i) Price. The price of an Incentive Stock Option shall be an
amount per share not less than the Fair Market Value per
share of the Common Shares on the date of granting of the
option. In the case of Incentive Stock Options granted to an
Employee of the Company who is a 10% shareholder, the option
price shall be an amount per share not less than one hundred
ten percent (110%) of the Fair Market Value per share of the
Common Shares on the date of the granting of the Incentive
Stock Option.
(ii) Exercise Period. Unless terminated earlier pursuant to other
terms and provisions of the Award Agreement, the term of
each Incentive Stock Option shall expire within the period
prescribed in the Agreement relating thereto, which shall
not be more than five (5) years from the date the Incentive
Stock Option is granted if the Participant is a ten percent
(10%) shareholder, and not more than ten (10) years from the
date the Incentive Stock Option is granted if the
Participant is not a ten percent (10%) shareholder.
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(iii) Limitation on Grants. No Incentive Stock Option shall be
granted under this Plan after May 5, 2019.
(iv) Limitation on Transferability. No Incentive Stock Option
shall be assignable or transferable except by will or under
the laws of descent and distribution. Notwithstanding the
foregoing, a Participant may, by delivering written notice
to the Company in a form satisfactory to the Company,
designate a person who, in the event of the Participant's
death, shall thereafter be entitled to exercise the Option.
During the lifetime of a Participant, the Incentive Stock
Option shall be exercisable only by the Participant and may
not be transferred or assigned pursuant to a qualified
domestic relations order.
(v) Maximum Exercise Rule. The aggregate Fair Market Value
(determined at the time the option is granted) of the shares
with respect to which Incentive Stock Options are
exercisable for the first time by an Employee during any
calendar year under all such plans of the Company and any
parent or Subsidiary of the Company shall not exceed One
Hundred Thousand Dollars ($100,000). To the extent that such
aggregate Fair Market Value exceeds One Hundred Thousand
Dollars ($100,000), the Stock Option(s) or portions thereof
that exceed such limit (according to the order in which they
were granted) shall be treated as Non-Qualified Stock
Option(s), notwithstanding any contrary provision of the
applicable Award Agreement.
(g) Termination of Awards under Certain Conditions. The Committee may
cancel any unexpired, unpaid or deferred Awards at any time, if the
Participant is not in compliance with all applicable provisions of this
Plan or with any Award Agreement, or if the Participant, whether or not he
or she is currently employed by the Company, engages in any of the
following activities without the prior written consent of the Company:
(i) Directly or indirectly renders services to or for an
organization, or engages in a business that is, in the
judgment of the Committee, in competition with the Company.
(ii) Discloses to anyone outside of the Company, or uses for any
purpose other than the Company's business, any confidential
or proprietary information or material relating to the
Company, whether acquired by the Participant during or after
employment with the Company.
The Committee may, in its discretion and as a condition to the
exercise of an Award, require a Participant to acknowledge in writing that
he or she is in compliance with all applicable provisions of this Plan and
of any Award Agreement and has not engaged in any activities referred to in
clauses (i) and (ii) above.
(h) Nontransferability. Unless otherwise determined by the Committee
and provided in the Award Agreement, (i) no Award granted under this Plan
may be transferred or assigned by the Participant to whom it is granted
other than by will, pursuant to the laws of descent and distribution, or
pursuant to a qualified domestic relations order, and (ii) an Award granted
under this Plan may be exercised, during the Participant's lifetime, only
by the Participant or by the Participant's guardian or legal
representative. Notwithstanding the foregoing, a Participant may, by
delivering written notice to the Company in a form satisfactory to the
Company, designate a person who, in the event of the Participant's death,
shall thereafter be entitled to exercise the Award. An Incentive Stock
Option transferred pursuant to a domestic relations order may be deemed to
be a Non-Qualified Stock Option as a result of such transfer.
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Section 6.04. Election to Defer Grant or Receipt of Award. Notwithstanding
any provision herein to the contrary, the Committee may provide, in any Award
Agreement or in any program granting Awards under this Plan, that the
Participant may elect to defer receipt of the Award as provided in the Award
Agreement or program.
Section 6.05. Restriction on Sale or Transfer of Shares Issued Under Plan.
In addition to any other conditions or restrictions established under the terms
of this Plan or by the Committee in any Award Agreement, all Common Shares
issued to an Executive Officer under any Award, including both Stock Awards and
Common Shares issued upon the exercise of Stock Options, shall be subject to the
following restriction: twenty-five percent (25%) of the "net shares" issued
under any such Award shall not be sold, assigned, transferred, pledged,
encumbered or otherwise alienated or hypothecated by the Executive Officer until
the earlier of (i) the date of the Executive Officer's death, Retirement or
other termination of employment, or (ii) the date of a Change of Control. For
this purpose, "net shares" shall mean the number of whole Common Shares issued
to the Executive Officer under an Award after subtracting the number of Common
Shares, if any, transferred or surrendered by the Executive Officer to pay the
exercise price of a Stock Option in accordance with Section 6.03(c) and/or to
pay the Executive Officer's withholding taxes associated with the Award in
accordance with Article VIII.
A book entry stock account shall be established in the name of each
Executive Officer to whom Common Shares are issued subject to the restriction
set forth in this Section 6.05, to which account the number of shares that are
subject to such restriction shall be credited. The Executive Officer will be the
beneficial owner of the Common Shares issued and credited to his or her stock
account and, subject to the restriction set forth in this Section, shall have
all rights of beneficial ownership in such shares including the right to vote
the shares and receive the dividends and other distributions paid or made with
respect thereto. The Company or its nominee will retain custody of the Common
Shares until the restriction has lapsed in accordance with this Section and the
Executive Officer makes a specific request in writing to the Company for such
shares to be sold, transferred or delivered; provided, however, at any time
following the lapse of such restriction, the Executive Officer may request that
a stock certificate be issued and delivered to the Executive Officer
representing all or part of the Common Shares credited to his or her stock
account on which the restriction has lapsed.
ARTICLE VII
DIRECTOR OPTIONS
Section 7.01. Grant of Director Options.
(a) Administration. A committee formed by only those Directors other
than Non-Employee Directors shall have full authority to administer
Director Options, including authority to require that any Non-Employee
Director sign an Award Agreement as a condition of receiving a Director
Option.
(b) Granting of Director Options. Until this Plan is terminated, each
individual serving as a Non-Employee Director on July 1 in any year after
2008 shall automatically receive a Director Option, effective on such date.
Section 7.02. Number of Common Shares Subject to Each Director Option. Each
Director Option shall entitle the Non-Employee Director the right to purchase
one thousand five hundred (1,500) Common Shares on the terms and conditions
specified herein.
Section 7.03. Exercise Price. The exercise price of the Common Shares
subject to each Director Option shall be the Fair Market Value of the Common
Shares at the date of grant.
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Section 7.04. Date Director Options Become Exercisable. Unless otherwise
established by the Board of Directors, each Director Option shall become
exercisable in full six (6) months after the date of grant; provided, however,
all Director Options shall become exercisable in full (i) upon a Change of
Control, (ii) in accordance with the terms of Section 7.06, or (iii) upon
attainment by the Non-Employee Director of age 70.
Section 7.05. Expiration Date. Unless terminated earlier pursuant to the
terms of this Plan, each Director Option shall terminate, and the right of the
holder to purchase Common Shares upon exercise of the Director Option shall
expire, at the close of business on the tenth anniversary date of the date of
grant.
Section 7.06. Continuous Service as a Director. No Director Option may be
exercised unless the Non-Employee Director to whom the Director Option was
granted has continued to be a Non-Employee Director from the time of grant
through the time of exercise, except as provided in Section 7.04 and this
Section 7.06.
(a) Retirement or Disability. If the service in office of a
Non-Employee Director is terminated due to the Retirement or Disability of
the Non-Employee Director, the Non-Employee Director (or his or her legal
representative if he or she becomes incapacitated), shall have the right,
on or after the date of such termination but in no event following the
expiration of the Director Option, to exercise the Director Option in full,
whether or not the Non-Employee Director would otherwise have been entitled
to exercise the Director Option at such date; provided, however, this
acceleration of the right to exercise a Director Option shall not apply in
the case of a Non-Employee Director who ceases to be a Non-Employee
Director by reason of his or her employment by the Company.
(b) Death. If the service in office of a Non-Employee Director is
terminated due to the death of the Non-Employee Director, the Non-Employee
Director's estate, executor, administrator, personal representative or
beneficiary shall have the right to exercise the Director Option in full
prior to the earlier of (i) one (1) year after the date of his or her
death, or (ii) the expiration of the Director Option.
(c) Employed by Company. If a Non-Employee Director ceases to be a
Non-Employee Director by reason of his or her employment by the Company,
the Director Option granted to that Non-Employee Director shall be treated
the same as Non-Qualified Stock Options held by Employees and shall
continue to be exercisable prior to the expiration of the Director Option,
subject to the limitations on exercise following termination of employment
established by the Committee pursuant to Article IX of this Plan.
ARTICLE VIII
TAX WITHHOLDING OBLIGATIONS
Prior to the payment of an Award, the Company may withhold, or require a
Participant to remit to the Company, an amount sufficient to pay any federal,
state and local withholding taxes associated with the Award. The Committee may,
in its discretion and subject to such rules as the Committee may adopt, permit a
Participant to pay any or all withholding taxes associated with the Award in
cash, by the transfer of Common Shares, by the surrender of all or part of an
Award (including the Award being exercised), or by a combination of these
methods.
ARTICLE IX
TERMINATION OF EMPLOYMENT
Section 9.01. Termination of Employment. Unless the Committee provides
otherwise in the Award Agreement, if a Participant's employment with the Company
or a Subsidiary terminates for any reason other than the Participant's
Retirement, Disability or death: (1) the Participant shall forfeit all
Restricted Stock Awards that are subject to a risk of forfeiture as of the date
of his or her termination; and (2) the Participant may, only within the thirty
(30)-day period immediately following the date of his or her termination (but in
no event later than the expiration date specified in the Award Agreement),
exercise all Stock Option Awards to the extent he or she was entitled to
exercise them at the date of such termination; provided, however, if a
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Participant's employment is terminated for deliberate, willful or gross
misconduct, as determined by the Board of Directors, all of his or her rights
under any Award shall expire upon receipt of the notice of such termination. The
transfer of an Employee from the employ of the Company to a Subsidiary, or vice
versa, or from one Subsidiary to another Subsidiary, shall not be deemed a
termination of employment for purposes of the Plan.
Section 9.02. Retirement. Unless the Committee provides otherwise in the
Award Agreement, if a Participant's employment with the Company or a Subsidiary
terminates due to the Participant's Retirement: (1) the Participant shall not
forfeit any Stock Awards, including Restricted Stock Awards, to which he or she
was entitled as of the date of his or her Retirement; however, any Restricted
Stock Awards shall continue to be subject to the restrictions that were
applicable to these Awards as of such date; and (2) the Participant may, on or
after the date of his or her Retirement (but in no event later than the
expiration date specified in the Award Agreement), exercise all Stock Option
Awards to the extent he or she was entitled to exercise them at the date of such
Retirement. If the Award being exercised under this Section is an Incentive
Stock Option, the Award may continue to be exercised as an Incentive Stock
Option during the three (3) month period immediately following the date of the
Participant's Retirement (but in no event later than the expiration date of the
Award); and, during the remainder of the exercise period, if any, the Award may
be exercised as a Non-Qualified Stock Option.
Section 9.03. Disability. Unless the Committee provides otherwise in the
Award Agreement, if a Participant's employment with the Company or a Subsidiary
terminates due to the Participant's Disability: (1) the Participant shall not
forfeit any Stock Awards, including Restricted Stock Awards, to which he or she
was entitled as of the date of his or her termination due to Disability; and all
restrictions applicable to Restricted Stock Awards, including restrictions on
transferability, shall lapse as of such date; and (2) the Participant (or the
Participant's legal representative if he or she becomes incapacitated) may, on
or after the date of his or her termination due to Disability (but in no event
later than the expiration date specified in the Award Agreement), exercise all
Stock Option Awards to the extent he or she was entitled to exercise them at the
date of such termination due to Disability. If the Award being exercised under
this Section is an Incentive Stock Option, the Award may continue to be
exercised as an Incentive Stock Option during the one (1) year period
immediately following the date of the Participant's termination due to
Disability (but in no event later than the expiration date of the Award); and,
during the remainder of the exercise period, if any, the Award may be exercised
as a Non-Qualified Stock Option.
Section 9.04. Death. Unless the Committee provides otherwise in the Award
Agreement, if a Participant dies (whether prior to or after termination of his
or her employment): (1) the Participant shall not forfeit any Stock Awards,
including Restricted Stock Awards, to which he or she was entitled as of the
date of his or her death; and all restrictions applicable to Restricted Stock
Awards, including restrictions on transferability, shall lapse as of such date;
and (2) the Participant's estate, executor, administrator, personal
representative or beneficiary may, on or after the date of the Participant's
death (but in no event later than the expiration date specified in the Award
Agreement), exercise all Stock Option Awards to the extent the Participant was
entitled to exercise them at the date of his or her death. If the Award being
exercised under this Section is an Incentive Stock Option and the Participant
dies prior to termination of his or her employment or within three (3) months
following such termination, the Award may continue to be exercised as an
Incentive Stock Option during the entire one (1) year period immediately
following the Participant's death (but in no event later than the expiration
date of the Award); and, during the remainder of the exercise period, if any,
the Award may be exercised as a Non-Qualified Stock Option.
ARTICLE X
CHANGE OF CONTROL
Unless and to the extent the terms and conditions of a Change of Control
agreement between the Company and a Participant provide otherwise, in the event
of a Change of Control of the Company, (i) all Stock Options then outstanding
shall become fully exercisable as of the date of the Change of Control, and (ii)
all restrictions and conditions applicable to Restricted Stock and other Stock
Awards shall be deemed to have been satisfied as of the date of the Change of
Control. Any such determination by the Board of Directors
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that is made after the occurrence of a Change of Control will not be effective
unless a majority of the Directors then in office were in office at the
beginning of a period of twenty-four (24) consecutive months and the
determination is approved by a majority of such Directors.
ARTICLE XI
AMENDMENT OR TERMINATION
Section 11.01. Amendment, Suspension or Termination of Plan. The Board of
Directors may amend, suspend or terminate this Plan at any time, and, in
accordance with such amendments, may thereupon change terms and conditions of
any Awards not theretofore issued. Shareholder approval for any such amendment
will be required only to the extent necessary to satisfy the rules of NASDAQ or
any national exchange on which the Common Shares are listed, or to satisfy any
applicable federal or state law or regulation. Unless sooner terminated by the
Board of Directors, the Plan shall automatically terminate at the end of the
business day on May 5, 2019. No Awards may be issued under the Plan while it is
suspended or after it is terminated.
Section 11.02. Amendment of Outstanding Awards. The Committee may, in its
discretion, amend the terms of any Award (other than a Director Option),
prospectively or retroactively, but no such amendment may impair the rights of
any Participant without his or her consent. Shareholder approval for any such
amendment will be required only to the extent necessary to satisfy the rules of
NASDAQ or any national exchange on which the Common Shares are listed, or to
satisfy any applicable federal or state law or regulation. The Committee may, in
whole or in part, waive any restrictions or conditions applicable to, or
accelerate the vesting of, any Award (other than a Director Option).
ARTICLE XII
MISCELLANEOUS
Section 12.01. Governing Law. The interpretation, validity and enforcement
of this Plan will, to the extent not otherwise governed by the Code or the
securities laws of the United States, be governed by the laws of the State of
Indiana.
Section 12.02. Compliance with Code ss. 409A. To the extent the Committee
determines that any Award granted under this Plan is subject to Code ss. 409A,
the Award Agreement evidencing such Award shall incorporate the terms and
conditions required by Code ss. 409A. To the extent applicable, the Plan and
Award Agreements shall be interpreted in accordance with Code ss. 409A.
Notwithstanding any provision of the Plan to the contrary, in the event that,
following the Plan's effective date, the Board of Directors determines that any
Award may be subject to Code ss. 409A, the Board of Directors may adopt such
amendments to the Plan and the applicable Award Agreements or adopt such other
policies and procedures (including amendments, policies and procedures with
retroactive effect), or take such other actions that the Board of Directors
determines are necessary or appropriate to (i) exempt the Award from Code ss.
409A and/or preserve the intended tax treatment of the benefits provided with
respect to the Award, or (ii) comply with the requirements of Code ss. 409A.
Section 12.03. Rights of Employees. Nothing in this Plan will confer upon
any Participant the right to continued employment by the Company or limit in any
way the Company's right to terminate any Participant's employment at will.
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