PENSION AND OTHER POST RETIREMENT BENEFIT PLANS

The Corporation’s defined-benefit pension plans cover approximately 15 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 maintained a post retirement benefit plan that provided health insurance benefits to retirees. The plan allowed retirees to be carried under the Corporation’s health insurance plan, generally from ages 55 to 65. The retirees paid 100 percent of the premiums due for their coverage. In 2016, the Corporation elected to terminate this plan effective December 31, 2017. The table below sets forth the plans’ funded status and amounts recognized in the consolidated balance sheets at December 31, using measurement dates of December 31, 2017 and 2016.



	2017			2016
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	84,090		$	71,747
Service cost	10			9
Interest cost	3,353			3,273
Actuarial loss	3,686			2,679
Benefits paid	(5,179		)	(5,263		)
Plan settlements	(3,803		)
Net transfers in from Ameriana acquisition				11,645
Benefit obligation at end of year	$	82,157		$	84,090

Change in Plan Assets:
Fair value of plan assets at beginning of year	$	83,557		$	71,396
Actual return on plan assets	9,968			6,959
Employer contributions	670			739
Benefits paid	(5,179		)	(5,263		)
Plan settlements	(3,803		)
Ameriana acquisition				9,726
End of year	85,213			83,557
Funded status at end of year	$	3,056		$	(533	)

Assets and Liabilities Recognized in the Balance Sheets:
Deferred tax asset	$	3,474		$	7,041
Assets	$	7,660		$	5,028
Liabilities	$	4,604		$	5,561

Amounts Recognized in Accumulated Other Comprehensive Income Not Yet Recognized as Components of Net Periodic Cost, net of tax, consist of:
Accumulated loss	$	(10,360	)	$	(12,624	)
Prior service cost	(393		)	(451		)
	$	(10,753	)	$	(13,075	)

In 2017, the Corporation offered certain terminated vested pension plan participants the opportunity to elect a lump sum payment during a specific distribution window. The lump sums paid, or plan settlements, released $4.6 million of benefit obligation, while lump sum payments were $3.8 million. The total amount of lump sum payment elections and lump sums paid under regular operation of the plan, triggered pension plan settlement accounting, resulting in a $761,000 settlement charge, which is reflected in the Corporation's CONSOLIDATED STATEMENTS OF INCOME in the line titled "Salaries and employee benefits."

Ameriana 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 operated as a multi-employer plan for accounting purposes and as a multiple employer plan under ERISA and the Internal Revenue Code. On November 20, 2015, Ameriana provided Pentegra a 60-day written notice of withdrawal as a Participating Employer in the Pentegra Plan. Upon completion of the withdrawal from the Pentegra Plan, the assets and liabilities were merged into the First Merchants Corporation Retirement Plan in 2016.

The accumulated benefit obligation for all defined benefit plans was $82,157,000 and $84,090,000 at December 31, 2017 and 2016, respectively.

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



	December 31, 2017		December 31, 2016
Projected benefit obligation	$	4,604	$	5,561
Accumulated benefit obligation	$	4,604	$	5,561
Fair value of plan assets	$	—	$	—

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



	December 31, 2017			December 31, 2016			December 31, 2015
Service cost	$	10		$	9		$	55
Interest cost	3,353			3,273			3,087
Expected return on plan assets	(4,778		)	(4,508		)	(4,471		)
Amortization of prior service costs	90			79			64
Amortization of net loss	1,218			1,656			1,722
Settlement loss recognized	761
Net periodic pension cost	$	654		$	509		$	457

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



	December 31, 2017		December 31, 2016			December 31, 2015
Net periodic pension cost	$	654	$	509		$	457
Net gain (loss)	1,504		(228		)	1,299
Amortization of loss	1,979		1,656			1,722
Amortization of prior service cost	90		79			64
Total recognized in other comprehensive income	3,573		1,507			3,085
Total recognized in net periodic pension cost and other comprehensive income	$	2,919	$	998		$	2,628

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, 2017			December 31, 2016			December 31, 2015
Amortization of net loss	$	(830	)	$	(1,208	)	$	(1,505	)
Amortization of prior service cost	(87		)	(90		)	(61		)
Total	$	(917	)	$	(1,298	)	$	(1,566	)

Significant assumptions include:



	December 31, 2017		December 31, 2016		December 31, 2015
Weighted-average Assumptions Used to Determine Benefit Obligation:
Discount rate	3.60	%	4.20	%	4.50	%
Rate of compensation increase for accruing active participants	n/a		3.00	%	3.00	%
Weighted-average Assumptions Used to Determine Cost:
Discount rate	4.20	%	4.50	%	4.00	%
Expected return on plan assets	6.00	%	6.00	%	6.00	%
Rate of compensation increase for accruing active participants	n/a		3.00	%	3.00	%

At December 31, 2017 and 2016, 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 ERISA and any other applicable statutes.

The plans’ risk management practices include semi-annual 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 individual non-investment grade bonds.

At December 31, 2017, the maturities of the plans’ debt securities ranged from 15 days to 8.83 years, with a weighted average maturity of 4.53 years. At December 31, 2016, the maturities of the plans’ debt securities ranged from 15 days to 8.03 years, with a weighted average maturity of 3.97 years.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as of December 31, 2017. The minimum contribution required in 2018 will likely be zero, but the Corporation may decide to make a discretionary contribution during the year.



2018	$	5,586
2019	5,641
2020	5,609
2021	5,476
2022	5,377
After 2022	25,652
	$	53,341

Plan assets are re-balanced quarterly. At December 31, 2017 and 2016, plan assets by category are as follows:



	December 31, 2017				December 31, 2016
	Actual		Target		Actual		Target
Cash and cash equivalents	6.0	%	3.0	%	4.5	%	3.0	%
Equity securities	52.4		55.0		55.8		55.0
Debt securities	39.6		40.0		37.7		40.0
Alternative investments	2.0		2.0		2.0		2.0
	100.0	%	100.0	%	100.0	%	100.0	%

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 at the rate of 100 percent for the first 3 percent of base salary contributed by participants and 50 percent of the next 3 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. Employees hired after January 1, 2010 do not participate in the additional retirement contribution. Effective January 1, 2013, the additional retirement contribution was fixed at 2 percent. Full vesting occurs after five years of service. The Corporation’s expense for the Savings Plan, including the additional retirement contribution, was $3,691,000, $3,441,000 and $3,526,000 for 2017, 2016 and 2015, respectively.

The Corporation maintained a post retirement benefit plan that provided health insurance benefits to retirees. The plan allowed retirees to be carried under the Corporation’s health insurance plan, generally from ages 55 to 65. The retirees paid 100 percent of the premiums due for their coverage. In 2016, the Corporation elected to terminate this plan effective December 31, 2017. As a result of the termination, in 2016, the Corporation recognized a curtailment gain of $2,157,000 as a component of "Salaries and benefits expense" in the accompanying CONSOLIDATED STATEMENTS OF INCOME. The obligation payable under the plan totaled $54,000 at December 31, 2016. Post retirement plan expense totaled $(301,000), $(2,437,000) and $(127,000) for the years ending December 31, 2017, 2016 and 2015, 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 $78,280,000 and $64,064,000 as of December 31, 2017 and 2016, respectively, 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 $6,933,000 and $19,493,000 as of December 31, 2017 and 2016, respectively, and include governmental agencies, taxable municipal bonds, 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, 2017 and 2016.



			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2017	Fair Value		(Level 1)		(Level 2)		(Level 3)
Cash & Cash Equivalents	$	5,123	$	5,123
Corporate Bonds and Notes	14,598		14,598
Government Agency and Municipal Bonds and Notes	5,679				$	5,679
Certificates of Deposit	1,254				1,254
Party-in-Interest Investments
Common Stock	2,545		2,545
Mutual Funds
Taxable Bond	12,198		12,198
Large Cap Equity	22,137		22,137
Mid Cap Equity	10,676		10,676
Small Cap Equity	5,264		5,264
International Equity	4,030		4,030
Specialty Alternative Equity	1,709		1,709
	$	85,213	$	78,280	$	6,933



			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2016	Fair Value		(Level 1)		(Level 2)		(Level 3)
Cash & Cash Equivalents	$	3,778	$	3,778
Corporate Bonds and Notes	10,646		10,646
Government Agency and Municipal Bonds and Notes	6,855				$	6,855
Certificates of Deposit	1,268				1,268
Party-in-Interest Investments
Common Stock	2,278		2,278
Common Bond Fund	4,744				4,744
Common Equity Fund	6,626				6,626
Mutual Funds
Taxable Bond	7,974		7,974
Large Cap Equity	19,611		19,611
Mid Cap Equity	10,304		10,304
Small Cap Equity	4,680		4,680
International Equity	3,093		3,093
Specialty Alternative Equity	1,700		1,700
	$	83,557	$	64,064	$	19,493