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Pension and Other Benefits | 12 Months Ended
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Dec. 31, 2020
Retirement Benefits [Abstract] |
Pension and Other Benefits | CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Pension and Other Benefits Defined Benefit Plans The Company maintains a frozen noncontributory pension plan covering employees of the Company prior to the merger with Legacy ConnectOne. The benefits are based on years of service and the employee’s compensation over the prior five-year period. The plan’s benefits are payable in the form of a ten-year certain and life annuity. The plan is intended to be a tax-qualified defined benefit plan under Section 401(a) of the Internal Revenue Code. Payments may be made under the Pension Plan once attaining the normal retirement age of 65 and are generally equal to 44% of a participant’s highest average compensation over a 5-year period. The following table sets forth changes in projected benefit obligation, changes in fair value of plan assets, funded status, and amounts recognized in the consolidated statements of condition for the Company’s pension plans as of December 31, 2020 and 2019.
|  | 2020 |  |  | 2019 |
|  | (dollars in thousands) |
Change in Benefit Obligation: |  |  |  |  |  |  |  |
Projected benefit obligation as of January 1, |  | $ | 12,533 |  |  | $ | 10,969 |
Interest cost |  |  | 364 |  |  |  | 453 |
Actuarial loss |  |  | 1,300 |  |  |  | 1,909 |
Benefits paid |  |  | (721) |  |  |  | (798) |
Projected benefit obligation as of December 31, |  | $ | 13,476 |  |  | $ | 12,533 |
Change in Plan Assets: |  |  |  |  |  |  |  |
Fair value of plan assets as of January 1, |  | $ | 14,616 |  |  | $ | 13,023 |
Actual return on plan assets |  |  | 1,973 |  |  |  | 2,391 |
Employer contributions |  |  | - |  |  |  | - |
Benefits paid |  |  | (721) |  |  |  | (798) |
Fair value of plan assets as of December 31, |  | $ | 15,868 |  |  | $ | 14,616 |
Funded status |  | $ | 2,392 |  |  | $ | 2,083 |
The accumulated benefit obligation was $13.5 million and $12.5 million as of the year ended December 31, 2020 and 2019, respectively. Amounts recognized as a component of accumulated other comprehensive loss as of year-end that have not been recognized as a component of the net periodic pension expense for the plan are presented in the following table. The Company expects to recognize approximately $0.3 million of the net actuarial loss reported in the following table as of December 31, 2020 as a component of net periodic pension expense during 2021.
|  | 2020 |  |  | 2019 |
|  | (dollars in thousands) |
Net actuarial loss recognized in accumulated other comprehensive income |  | $ | 4,926 |  |  | $ | 5,116 |
The net periodic pension expense and other comprehensive income (before tax) for 2020, 2019 and 2018 includes the following:
|  | 2020 |  |  | 2019 |  |  | 2018 |
|  | (dollars in thousands) |
Interest cost |  | $ | 364 |  |  | $ | 453 |  |  | $ | 427 |
Expected return on plan assets |  |  | (784) |  |  |  | (697) |  |  |  | (765) |
Net amortization |  |  | 301 |  |  |  | 358 |  |  |  | 366 |
Total net periodic pension expense |  | $ | (119) |  |  | $ | 114 |  |  | $ | 28 |
Total gain recognized in other comprehensive income |  |  | (190) |  |  |  | (150) |  |  |  | (595) |
Total recognized in net periodic expense and other comprehensive income (before tax) |  | $ | (309) |  |  | $ | (36) |  |  | $ | (567) |
- 96 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Pension and Other Benefits – (continued) The following table presents the weighted average assumptions used to determine the pension benefit obligations as of December 31, for the following periods:
|  | 2020 |  |  | 2019 |
Discount rate |  |  | 2.17 | % |  |  | 2.99 | %
Rate of compensation increase |  |  | N/A |  |  |  | N/A |
The following table presents the weighted average assumptions used to determine net periodic pension cost for the following three years:
|  | 2021 |  |  | 2020 |  |  | 2019 |
Discount rate |  |  | 2.17 | % |  |  | 2.99 | % |  |  | 4.05 | %
Expected long-term return on plan assets |  |  | 5.50 | % |  |  | 5.50 | % |  |  | 5.50 | %
Rate of compensation increase |  |  | N/A |  |  |  | N/A |  |  |  | N/A |
The process of determining the overall expected long-term rate of return on plan assets begins with a review of appropriate investment data, including current yields on fixed income securities, historical investment data, historical plan performance and forecasts of inflation and future total returns for the various asset classes. This data forms the basis for the construction of a best-estimate range of real investment returns for each asset class. An average weighted real-return range is computed reflecting the plan’s expected asset mix, and that range, when combined with an expected inflation range, produces an overall best-estimate expected return range. Specific factors such as the plan’s investment policy, reinvestment risk and investment volatility are taken into consideration during the construction of the best estimate real return range, as well as in the selection of the final return assumption from within the range. - 97 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Pension and Other Benefits – (continued) Plan Assets The general investment policy of the Pension Trust is for the fund to experience growth in assets that will allow the market value to exceed the value of benefit obligations over time. The Company’s pension plan asset allocation as of December 31, 2020 and 2019, target allocation, and expected long-term rate of return by asset are as follows:
|  | Target Allocation |  |  | % of Plan Assets – Year Ended 2020 |  |  | % of Plan Assets – Year Ended 2019 |  |  | Weighted Average Expected Long-Term Rate of Return |
Equity Securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic |  |  | 50% |  |  |  | 55% |  |  |  | 47% |  |  |  | 3.4% |
International |  |  | 10% |  |  |  | 6% |  |  |  | 7% |  |  |  | 0.7% |
Debt and/or fixed income securities |  |  | 36% |  |  |  | 35% |  |  |  | 37% |  |  |  | 1.2% |
Cash and other alternative investments, including real estate funds, commodity funds, hedge funds and equity structured notes |  |  | 4% |  |  |  | 4% |  |  |  | 9% |  |  |  | 0.2% |
Total |  |  | 100% |  |  | $ | 100% |  |  | $ | 100% |  |  | $ | 5.5% |
- 98 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Pension and Other Benefits – (continued) The fair values of the Company’s pension plan assets as of December 31, 2020 and 2019, by asset class, are as follows:
|  | December 31, 2020 |  |  | Fair Value Measurements at Reporting Date Using |
Asset Class |  |  |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
|  | (dollars in thousands) |
Cash |  | $ | 406 |  |  | $ | 406 |  |  | $ | - |  |  | $ | - |
Equity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. companies |  |  | 8,737 |  |  |  | 8,737 |  |  |  | - |  |  |  | - |
International companies |  |  | 1,031 |  |  |  | 1,031 |  |  |  | - |  |  |  | - |
Debt and/or fixed income securities |  |  | 5,522 |  |  |  | 5,522 |  |  |  |  |  |  |  |  |
Commodity funds |  |  | 115 |  |  |  | 115 |  |  |  |  |  |  |  |  |
Real estate funds |  |  | 57 |  |  |  | 57 |  |  |  | - |  |  |  | - |
Total |  | $ | 15,868 |  |  | $ | 15,868 |  |  | $ | - |  |  | $ | - |
|  | December 31, 2019 |  |  | Fair Value Measurements at Reporting Date Using |
Asset Class |  |  |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
|  | (dollars in thousands) |
Cash |  | $ | 1,171 |  |  | $ | 1,171 |  |  | $ | - |  |  | $ | - |
Equity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. companies |  |  | 6,896 |  |  |  | 6,896 |  |  |  | - |  |  |  | - |
International companies |  |  | 1,023 |  |  |  | 1,023 |  |  |  | - |  |  |  | - |
Debt and/or fixed income securities |  |  | 5,355 |  |  |  | 5,355 |  |  |  |  |  |  |  |  |
Commodity funds |  |  | 115 |  |  |  | 115 |  |  |  |  |  |  |  |  |
Real estate funds |  |  | 56 |  |  |  | 56 |  |  |  | - |  |  |  | - |
Total |  | $ | 14,616 |  |  | $ | 14,616 |  |  | $ | - |  |  | $ | - |
- 99 - Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Pension and Other Benefits – (continued) Fair Value of Plan Assets The Company used the following valuation methods and assumptions to estimate the fair value of assets held by the plan (for further information on fair value methods, see Note 21): Equity securities and real estate funds: The fair values for equity securities and real estate funds are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). Debt and fixed income securities: Certain debt securities are valued at the closing price reported in the active market in which the bond is traded (Level 1 inputs). Other debt securities are valued based upon recent bid prices or the average of recent bid and asked prices when available (Level 2 inputs) and, if not available, they are valued through matrix pricing models developed by sources considered by management to be reliable. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations. The investment manager is not authorized to purchase, acquire or otherwise hold certain types of market securities (subordinated bonds, real estate investment trusts, limited partnerships, naked puts, naked calls, stock index futures, oil, gas or mineral exploration ventures or unregistered securities) or to employ certain types of market techniques (margin purchases or short sales) or to mortgage, pledge, hypothecate, or in any manner transfer as security for indebtedness, any security owned or held by the Plan. Cash Flows Contributions The Bank does not expect to make a contribution in 2021. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, for the following years are as follows (dollars in thousands):
2021 |  | $ | 754 |
2022 |  |  | 733 |
2023 |  |  | 712 |
2024 |  |  | 699 |
2025 |  |  | 697 |
2026-2030 |  |  | 3,664 |
401(k) Plan The Company maintains a 401(k) plan to provide for defined contributions which covers substantially all employees of the Company. Beginning with the 2014 plan year, the 401(k) plan was amended to provide for a match of 50% of elective contributions, up to 6% of an employee’s contribution. In 2018, the 401 (k) plan was amended to provide for 100% matching of employee contributions up to 5% of employee contributions. For 2020, 2019 and 2018, employer contributions amounted to $1.6 million, $1.3 million and $0.9 million, respectively. Supplemental Executive Retirement Plan (“SERP”) During 2019 the Company adopted supplemental executive retirement plans (“SERP’s”) for the benefit of several of its executive officers. Each SERP is a non-qualified plan which provides supplemental retirement benefits to the participating officers of the Company. SERP compensation expense was $0.4 million and $0.3 million for the years ended December 31, 2020 and December 31, 2019 respectively.

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