PENSION AND OTHER POST RETIREMENT BENEFIT PLANS

The Corporation’s defined-benefit pension plans cover approximately 24 percent of the Corporation’s employees. In 2005, the Board of Directors of the Corporation approved the curtailment of the accumulation of defined benefits for future services provided by certain participants in the First Merchants Corporation Retirement Plan. No additional pension benefits have been earned by any employees who had not attained both the age of 55 and accrued at least 10 years of vesting service as of March 1, 2005. The benefits are based primarily on years of service and employees’ pay near retirement. Contributions are intended to provide not only for benefits attributed to service-to-date, but also for those expected to be earned in the future. The Corporation also maintains post retirement benefit plans that provide health insurance benefits to retirees. The plans allow retirees to be carried under the Corporation’s health insurance plan, generally from ages 55 to 65. The retirees pay 100 percent of the premiums due for their coverage.

The table below sets forth the plans’ funded status and amounts recognized in the consolidated balance sheet at December 31, using measurement dates of December 31, 2013 and December 31, 2012.



	2013			2012
Change in benefit obligation
Benefit obligation at beginning of year	$	69,166		$	68,769
Service Cost	131			161
Interest Cost	2,670			2,990
Actuarial Loss (Gain)	(5,597		)	3,168
Benefits paid	(4,100		)	(5,922		)
Benefit obligation at end of year	62,270			69,166
Change in plan assets
Fair value of plan assets at beginning of year	62,865			62,078
Actual return on plan assets	10,610			6,141
Employer contributions	496			568
Benefits Paid	(4,100		)	(5,922		)
End of Year	69,871			62,865
Funded Status at End of Year	$	7,601		$	(6,301	)
Assets and Liabilities Recognized in the Balance Sheets:
Deferred Tax Asset	$	4,266		$	9,200
Assets	$	12,383
Liabilities	$	4,782		$	6,301
Amounts Recognized in Accumulated Other Comprehensive Income Not Yet Recognized as Components of Net Periodic Benefit Cost Consist of:
Accumulated Loss	$	(7,922	)	$	(17,085	)
Prior Service Credit	(28		)	(41		)
	$	(7,950	)	$	(17,126	)

The accumulated benefit obligation for all defined benefit plans was $4,782,000 and $69,139,000 at December 31, 2013 and 2012, respectively.

Information for pension plans with an accumulated benefit obligation in excess of plan assets is included in the table below.



	December 31, 2013		December 31, 2012
Projected Benefit Obligation	$	4,782	$	69,166
Accumulated Benefit Obligation	$	4,782	$	69,139
Fair Value of Plan Assets			$	62,865

The following table shows the components of net periodic pension costs:



	December 31, 2013			December 31, 2012
Service Cost	$	131		$	161
Interest Cost	2,670			2,990
Expected Return on Plan Assets	(4,265		)	(4,216		)
Amortization of Prior Service Costs	25			25
Amortization of Net Loss	2,131			2,207
Net Periodic Pension Cost	$	692		$	1,167

Other changes in plan assets and benefit obligations recognized in other comprehensive income:



	December 31, 2013			December 31, 2012
Net Periodic Pension Cost	$	692		$	1,167
Net gain (loss)	(11,942		)	1,242
Actuarial gain (loss)	(2,131		)	(2,207		)
Amortization of prior service (cost) credit	(25		)	(25		)
Total Recognized in Other Comprehensive Income	(14,098		)	(990		)
Total Recognized in NPPC and OCI	$	(13,406	)	$	177

The estimated net loss and transition obligation for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic pension cost over the next fiscal year are:



	December 31, 2013			December 31, 2012
Amortization of Net Loss	$	(533	)	$	(2,158	)
Amortization of Prior Service Cost	(25		)	(25		)
Total	$	(558	)	$	(2,183	)

Significant assumptions include:



	December 31, 2013		December 31, 2012
Weighted-average Assumptions Used to Determine Benefit Obligation:
Discount Rate	4.80	%	4.00	%
Rate of Compensation Increase for accruing active participants	3.00	%	3.00	%
Weighted-average Assumptions Used to Determine Benefit Cost:
Discount Rate	4.00	%	4.50	%
Expected Return on Plan Assets	7.00	%	7.00	%
Rate of Compensation Increase for accruing active participants	3.00	%	4.00	%

At December 31, 2013 and December 31, 2012, the Corporation based its estimate of the expected long-term rate of return on analysis of the historical returns of the plans and current market information available. The plans’ investment strategies are to provide for preservation of capital with an emphasis on long-term growth without undue exposure to risk. The assets of the plans’ are invested in accordance with the plans’ Investment Policy Statement, subject to strict compliance with Employee Retirement Income Security Act of 1974 ("ERISA") and any other applicable statutes.

The plans’ risk management practices include quarterly evaluations of investment managers, including reviews of compliance with investment manager guidelines and restrictions; ability to exceed performance objectives; adherence to the investment philosophy and style; and ability to exceed the performance of other investment managers. The evaluations are reviewed by management with appropriate follow-up and actions taken, as deemed necessary. The Investment Policy Statement generally allows investments in cash and cash equivalents, real estate, fixed income debt securities and equity securities, and specifically prohibits investments in derivatives, options, futures, private placements, short selling, non-marketable securities and purchases of non-investment grade bonds.

At December 31, 2013, the maturities of the plans’ debt securities ranged from 2 days to 9.61 years, with a weighted average maturity of 4.63 years. At December 31, 2012, the maturities of the plans’ debt securities ranged from 31 days to 9.08 years, with a weighted average maturity of 4.97 years.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as of December 31, 2013. The minimum contribution required in 2014 will likely be zero but the Corporation may decide to make a discretionary contribution during the year.



2014	$	4,195
2015	4,318
2016	4,317
2017	4,219
2018	4,241
After 2018	21,458
	$	42,748

Plan assets are re-balanced quarterly. At December 31, 2013 and 2012, plan assets by category are as follows:



	December 31, 2013				December 31, 2012
	Actual		Target		Actual		Target
Cash and cash equivalents	2.7	%	2.0	%	1.3	%	3.0	%
Equity securities	62.2		60.0		53.7		51.0
Debt securities	33.2		36.0		43.0		44.0
Alternative investments	1.9		2.0		2.0		2.0
	100.0	%	100.0	%	100.0	%	100.0	%

Citizens Financial Bank participated in the Pentegra Defined Benefit Plan for Financial Institutions (the "Pentegra Plan”), an industry-wide, tax-qualified defined-benefit pension plan. The Pentegra Plan operates as a multi-employer plan for accounting purposes and as a multiple employer plan under ERISA and the Internal Revenue Code. On September 30, 2013, the Board of Citizens Financial Bank approved a resolution to withdraw as a Participating Employer in the Pentegra Plan. Upon completion of the withdrawal from the Pentegra Plan, the assets and liabilities will be merged into the First Merchants Corporation Retirement Plan. A liability of $6 million has been recorded as the estimated final contribution to the Pentegra Plan to complete the withdrawal. The merging of the plan assets and liabilities is expected in early 2014.

The First Merchants Corporation Retirement and Income Savings Plan (the “Savings Plan”), a Section 401(k) qualified defined contribution plan, was amended on March 1, 2005 to provide enhanced retirement benefits, including employer and matching contributions, for eligible employees of the Corporation and its subsidiaries. The Corporation matches employees’ contributions primarily at the rate of 50 percent for the first 6 percent of base salary contributed by participants.

Beginning in 2005, employees who have completed 1000 hours of service and are an active employee on the last day of the year receive an additional retirement contribution after year-end. The amount of a participant’s retirement contribution varies from 2 to 7 percent of salary based upon years of service. Employees hired after January 1, 2010 do not participate in the additional retirement contribution. The amount of a participant’s retirement contribution varied from 2 to 7 percent of salary based upon years of service through December 31, 2012. Effective January 1, 2013, the amount of all participant’s retirement contribution is 2 percent, regardless of years of service. Full vesting occurs after five years of service. The Corporation’s expense for the Savings Plan, including the additional retirement contribution, was $3,138,000 for 2013, $2,914,000 for 2012 and $2,824,000 for 2011.

The Corporation maintains post retirement benefit plans that provide health insurance benefits to retirees. The plans allow retirees to be carried under the Corporation’s health insurance plan, generally from ages 55 to 65. The retirees pay 100 percent of the premiums due for their coverage. The accrued benefits payable under the plans totaled $1,534,000 and $4,035,000 at December 31, 2013 and 2012, respectively. Post retirement plan expense totaled $519,000, $477,000 and $528,000 for the years ending December 31, 2013, 2012 and 2011, respectively.

Pension Plan Assets

Following is a description of the valuation methodologies used for pension plan assets measured at fair value on a recurring basis, as well as the general classification of pension plan assets pursuant to the valuation hierarchy.

Where quoted market prices are available in an active market, plan assets are classified within Level 1 of the valuation hierarchy. Level 1 plan assets total $51,176,000 and include cash and cash equivalents, common stocks, mutual funds and corporate bonds and notes. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of plan assets with similar characteristics or discounted cash flows. Level 2 plan assets total $18,695,000 and include governmental agencies, taxable municipals, common collective trust investments (which are classified below as Party-in-Interest investments -- common bond fund and common equity fund) and certificates of deposit. In certain cases where Level 1 or Level 2 inputs are not available, plan assets are classified within Level 3 of the hierarchy. There are no assets classified within Level 3 of the hierarchy at December 31, 2013.



			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2013	Fair Value		(Level 1)		(Level 2)		(Level 3)
Cash & Cash Equivalents	$	1,864	$	1,864
Corporate Bonds and Notes	6,076		6,076
Government Agency and Municipal Bonds and Notes	8,263				$	8,263
Certificates of Deposit	607				607
Party-in-Interest Investments
Common Stock	1,375		1,375
Common Bond Fund	5,318				5,318
Common Equity Fund	4,507				4,507
Mutual Funds
Taxable Bond	3,901		3,901
Large Cap Equity	20,617		20,617
Mid Cap Equity	8,721		8,721
Small Cap Equity	3,584		3,584
International Equity	3,727		3,727
Specialty Alternative Equity	1,311		1,311
	$	69,871	$	51,176	$	18,695	$	—