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Employee Benefit Plans

12 Months Ended

Dec. 31, 2018

Note 12. Employee Benefit Plans

401(k) Plan. The Company sponsors a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code. New employees who have met the age requirement are automatically enrolled in the plan at a 5% deferral rate. The automatic deferral can be modified by the employee at any time. An eligible employee may contribute up to 15% of annual salary to the plan. For 2017 and 2016, the Company contributed an amount equal to the sum of 1) 100% of the employee’s salary contributed up to 3% and 2) 50% of the employee’s salary contributed between 3% and 5%. Effective January 1, 2018, the Company’s matching contribution was increased to 100% of the employee’s salary contribution up to 6%. The Company’s matching contribution expense was $3.6 million, $2.3 million and $1.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. Although discretionary contributions by the Company are permitted by the plan, the Company did not make any such contributions in 2018, 2017 or 2016. The Company’s matching and discretionary contributions are made according to the same investment elections each participant has established for their deferral contributions.

Pension Plan. Historically, the Company offered a noncontributory defined benefit retirement plan (the “Pension Plan”) that qualified under Section 401(a) of the Internal Revenue Code. The Pension Plan provided for a monthly payment, at normal retirement age of 65, equal to one-twelfth of the sum of (i) 0.75% of Final Average Annual Compensation (five highest consecutive calendar years’ earnings out of the last ten years of employment) multiplied by the employee’s years of service not in excess of 40 years, and (ii) 0.65% of Final Average Annual Compensation in excess of the average social security wage base multiplied by years of service not in excess of 35 years. Benefits were fully vested after five years of service. Effective December 31, 2012, the Company froze the Pension Plan for all participants.

The Company’s contributions to the Pension Plan are based on computations by independent actuarial consultants and are intended to be deductible for income tax purposes. As discussed below, the contributions are invested to provide for benefits under the Pension Plan. The Company did not make any contributions to the Pension Plan in 2018, 2017 or 2016. The Company does not expect to contribute to the Pension Plan in 2019.

The following table reconciles the beginning and ending balances of the Pension Plan’s benefit obligation, as computed by the Company’s independent actuarial consultants, and its plan assets, with the difference between the two amounts representing the funded status of the Pension Plan as of the end of the respective year.

($ in thousands)	2018			2017			2016
Change in benefit obligation
Benefit obligation at beginning of year	$	38,150			36,840			36,164
Service cost		—			—			—
Interest cost		1,312			1,449			1,502
Actuarial (gain) loss		(1,160	)		1,941			1,288
Benefits paid		(1,948	)		(2,080	)		(2,114	)
Benefit obligation at end of year		36,354			38,150			36,840
Change in plan assets
Plan assets at beginning of year		41,306			36,950			35,489
Actual return on plan assets		(188	)		6,436			3,575
Employer contributions		—			—			—
Benefits paid		(1,948	)		(2,080	)		(2,114	)
Plan assets at end of year		39,170			41,306			36,950

Funded status at end of year	$	2,816			3,156			110

The accumulated benefit obligation related to the Pension Plan was $36,354,000, $38,150,000, and $36,840,000 at December 31, 2018, 2017, and 2016, respectively.

The following table presents information regarding the amounts recognized in the consolidated balance sheets at December 31, 2018 and 2017 as it relates to the Pension Plan, excluding the related deferred tax assets.

($ in thousands)	2018		2017

Other assets	$	2,816		3,156
Other liabilities		—		—
	$	2,816		3,156

The following table presents information regarding the amounts recognized in accumulated other comprehensive income (“AOCI”) at December 31, 2018 and 2017, as it relates to the Pension Plan.

($ in thousands)	2018			2017

Net gain (loss)	$	(4,034	)		(3,925	)
Prior service cost		—			—
Amount recognized in AOCI before tax effect		(4,034	)		(3,925	)
Tax (expense) benefit		943			1,452
Net amount recognized as increase (decrease) to AOCI	$	(3,091	)		(2,473	)

The following table reconciles the beginning and ending balances of AOCI at December 31, 2018 and 2017, as it relates to the Pension Plan:

($ in thousands)	2018			2017

Accumulated other comprehensive loss at beginning of fiscal year	$	(2,909	)		(3,692	)
Net gain (loss) arising during period		(143	)		1,686
Amortization of unrecognized actuarial loss		34			244
Tax (expense) benefit of changes during the year, net		(73	)		(711	)
Accumulated other comprehensive gain (loss)		(3,091	)		(2,473	)
Reclassification from AOCI to Retained Earnings due to statutory tax changes		—			(436	)
Accumulated other comprehensive gain (loss) at end of fiscal year	$	(3,091	)		(2,909	)

The following table reconciles the beginning and ending balances of the prepaid pension cost related to the Pension Plan:

($ in thousands)	2018			2017

Prepaid pension cost as of beginning of fiscal year	$	7,082			5,965
Net periodic pension income (cost) for fiscal year		(231	)		1,117
Actual employer contributions		—			—
Prepaid pension asset as of end of fiscal year	$	6,851			7,082

Net pension (income) cost for the Pension Plan included the following components for the years ended December 31, 2018, 2017, and 2016:

($ in thousands)	2018			2017			2016

Service cost – benefits earned during the period	$	—			—			—
Interest cost on projected benefit obligation		1,312			1,449			1,502
Expected return on plan assets		(1,115	)		(2,810	)		(2,698	)
Net amortization and deferral		34			244			238
Net periodic pension (income) cost	$	231			(1,117	)		(958	)

The following table is an estimate of the benefits that will be paid in accordance with the Pension Plan during the indicated time periods, assuming the Pension Plan is operated on an ongoing basis.

($ in thousands)	Estimated benefit payments
Year ending December 31, 2019	$	1,735
Year ending December 31, 2020		1,792
Year ending December 31, 2021		1,898
Year ending December 31, 2022		1,957
Year ending December 31, 2023		2,000
Years ending December 31, 2024-2028		10,582

The investment objective of the Company’s Pension Plan is to ensure that there are sufficient assets to fund regular pension benefits payable to employees over the long-term life of the plan. The Plan seeks to allocate plan assets in a manner that is closely duration-matched with the actuarial projected cash flows of the Plan liabilities, consistent with prudent standards for preservation of capital, tolerance of investment risk, and maintenance of liquidity. Assets of the Plan are held by Fidelity Investments (the “Trustee”).

In 2018, the Plan adopted a liability-driven investment (“LDI”) approach to help meet these objectives. The LDI strategy employs a structured fixed-income portfolio designed to reduce volatility in the Plan’s future funding requirements and funding status. This is accomplished by using a blend of high quality corporate and government fixed-income securities, with both intermediate and long-term durations. Generally, the value of these fixed income securities is inversely correlated to changes in market interest rates, which substantially offsets changes in the value of the pension benefit obligation caused by changes in the interest rate used to discount plan liabilities.

In the fourth quarter 2017, in anticipation of anticipated changes in investment objectives, the Company liquidated all investments and shifted the assets into a money market fund.

The fair values of the Company’s pension plan assets at December 31, 2018, by asset category, were as follows:

($ in thousands)
	Total Fair Value at December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Cash and cash equivalents	$	267		267		—		—

Investment funds
Fixed income funds		38,903		—		38,903		—
Total	$	39,170		267		38,903		—

The fair values of the Company’s pension plan assets at December 31, 2017, by asset category, were as follows:

($ in thousands)
	Total Fair Value at December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Cash and cash equivalents (money market fund)	$	41,306		—		41,306		—
Total	$	41,306		—		41,306		—

The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2018 and 2017.

Cash and cash equivalents (money market fund): Valued at net asset value (“NAV”), which can be validated with a sufficient level of observable activity (i.e. purchases and sales at NAV), and therefore, the funds were classified within Level 2 of the fair value hierarchy.

Fixed income funds consist of commingled funds that primarily include investments in U.S. government securities and corporate bonds. The commingled funds also include an insignificant portion of investments in other asset-based securities, municipal securities, etc. The commingled funds are valued at the NAV for the units in the fund. The NAV, as provided by the Trustee, is used as practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund.

Supplemental Executive Retirement Plan. Historically, the Company sponsored a Supplemental Executive Retirement Plan (the “SERP”) for the benefit of certain senior management executives of the Company. The purpose of the SERP was to provide additional monthly pension benefits to ensure that each such senior management executive would receive lifetime monthly pension benefits equal to 3% of his or her final average compensation multiplied by his or her years of service (maximum of 20 years) to the Company or its subsidiaries, subject to a maximum of 60% of his or her final average compensation. The amount of a participant’s monthly SERP benefit is reduced by (i) the amount payable under the Company’s qualified Pension Plan (described above), and (ii) 50% of the participant’s primary social security benefit. Final average compensation means the average of the five highest consecutive calendar years of earnings during the last ten years of service prior to termination of employment. The SERP is an unfunded plan. Payments are made from the general assets of the Company. Effective December 31, 2012, the Company froze the SERP to all participants.

The following table reconciles the beginning and ending balances of the SERP’s benefit obligation, as computed by the Company’s independent actuarial consultants:

($ in thousands)	2018			2017			2016
Change in benefit obligation
Projected benefit obligation at beginning of year	$	5,970			5,910			5,778
Service cost		124			118			106
Interest cost		200			227			238
Actuarial (gain) loss		(102	)		85			145
Benefits paid		(398	)		(370	)		(357	)
Projected benefit obligation at end of year		5,794			5,970			5,910
Plan assets		—			—			—
Funded status at end of year	$	5,794			(5,970	)		(5,910	)

The accumulated benefit obligation related to the SERP was $5,794,000, $5,970,000, and $5,910,000 at December 31, 2018, 2017, and 2016, respectively.

The following table presents information regarding the amounts recognized in the consolidated balance sheets at December 31, 2018 and 2017 as it relates to the SERP, excluding the related deferred tax assets.

($ in thousands)	2018			2017

Other assets – prepaid pension asset (liability)	$	(6,608	)		(6,695	)
Other assets (liabilities)		814			725
	$	(5,794	)		(5,970	)

The following table presents information regarding the amounts recognized in AOCI at December 31, 2018 and 2017, as it relates to the SERP:

($ in thousands)	2018			2017

Net gain (loss)	$	814			725
Prior service cost		—			—
Amount recognized in AOCI before tax effect		814			725
Tax (expense) benefit		(190	)		(268	)
Net amount recognized as increase (decrease) to AOCI	$	624			457

The following table reconciles the beginning and ending balances of AOCI at December 31, 2018 and 2017, as it relates to the SERP:

($ in thousands)	2018			2017

Accumulated other comprehensive income at beginning of fiscal year	$	457			533
Net gain (loss) arising during period		102			(85	)
Prior service cost		—			—
Amortization of unrecognized actuarial loss		(13	)		(34	)
Amortization of prior service cost and transition obligation		—			—
Tax benefit (expense) related to changes during the year, net		78			43
Accumulated other comprehensive income (loss) at end of fiscal year	$	624			457

The following table reconciles the beginning and ending balances of the prepaid pension cost related to the SERP:

($ in thousands)	2018			2017

Prepaid pension cost (liability) as of beginning of fiscal year	$	(6,695	)		(6,754	)
Net periodic pension cost for fiscal year		(311	)		(311	)
Benefits paid		398			370
Prepaid pension cost (liability) as of end of fiscal year	$	(6,608	)		(6,695	)

Net pension cost for the SERP included the following components for the years ended December 31, 2018, 2017, and 2016:

($ in thousands)	2018			2017			2016

Service cost – benefits earned during the period	$	124			118			106
Interest cost on projected benefit obligation		200			227			238
Net amortization and deferral		(13	)		(34	)		(35	)
Net periodic pension cost	$	311			311			309

The following table is an estimate of the benefits that will be paid in accordance with the SERP during the indicated time periods:

($ in thousands)	Estimated benefit payments
Year ending December 31, 2019	$	411
Year ending December 31, 2020		408
Year ending December 31, 2021		401
Year ending December 31, 2022		391
Year ending December 31, 2023		380
Years ending December 31, 2024-2028		1,970

Assumptions used in both Plans

The following assumptions were used in determining the actuarial information for the Pension Plan and the SERP for the years ended December 31, 2018, 2017, and 2016:

	2018				2017				2016
	Pension Plan		SERP		Pension Plan		SERP		Pension Plan		SERP
Discount rate used to determine net periodic pension cost		3.46%		3.46%		3.97%		3.97%		4.17%		4.17%
Discount rate used to calculate end of year liability disclosures		4.08%		3.92%		3.46%		3.46%		3.97%		3.97%
Expected long-term rate of return on assets		2.75%		n/a		7.75%		n/a		7.75%		n/a
Rate of compensation increase		n/a		n/a		n/a		n/a		n/a		n/a

The Company’s discount rate policy is based on a calculation of the Company’s expected pension payments, with those payments discounted using the Citigroup Pension Index yield curve.

For each of the years ended December 31, 2017 and 2016, the Company used an expected long-term rate of return on assets assumption of 7.75%. The Company arrived at this rate based primarily on a third-party investment consulting firm’s historical analysis of investment returns, which indicated that the mix of the Pension Plan’s assets (generally 75% equities and 25% fixed income) could be expected to return approximately 7.75% on a long term basis.

As discussed previously, in 2018, the Company changed investment strategies, which resulted in the expected return on assets being adjusted to 2.75% for the year.