17. PENSION PLANS

Defined Benefit Retirement Plan

The bank has a defined benefit retirement plan that covered substantially all of its employees who were employed during the period that the plan was in effect. The plan was initially curtailed in 1986, and accordingly, plan benefits were fixed as of that date. Effective January 1, 1991, the bank reactivated its defined benefit retirement plan. As a result of the reactivation, employees for whom benefits were fixed in 1986 began to accrue additional benefits under a new formula that became effective January 1, 1991. Employees who were not participants at curtailment, but who were subsequently eligible to join, became participants effective January 1, 1991. Under the reactivated plan, benefits are based upon the employees' years of service and their highest average annual salaries in a 60-consecutive-month period of service, reduced by benefits provided from the bank's terminated money purchase pension plan. The reactivation of the defined benefit retirement plan resulted in an increase of $5.9 million in the unrecognized prior service cost, which was amortized over a period of 13 years. Effective December 31, 2002, the bank curtailed its defined benefit retirement plan, and accordingly, plan benefits were fixed as of that date.

In December 2016, the Company purchased non-participating annuity contracts totaling $9.4 million to settle the pension obligation for a portion of the Company's plan participants. The purchase of the annuity contracts were settled by using plan assets. As a result of the settlement, we recognized a pro-rata net actuarial loss of $3.8 million in pension expense and other comprehensive income.

The following tables set forth information pertaining to the defined benefit retirement plan:



	Year Ended December 31,
	2018			2017
	(Dollars in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	23,471		$	23,677
Interest cost	796			926
Actuarial (gains) losses	(1,714		)	752
Benefits paid	(1,807		)	(1,884		)
Benefit obligation at end of the year	20,746			23,471

Change in plan assets, at fair value:
Fair value of plan assets at beginning of year	22,832			18,539
Actual return on plan assets	(1,151		)	2,177
Employer contributions	—			4,000
Benefits paid	(1,807		)	(1,884		)
Fair value of plan assets at end of year	19,874			22,832

Funded status at end of year	$	(872	)	$	(639	)

Amounts recognized in AOCI:
Net actuarial losses	$	(8,137	)	$	(8,472	)

Benefit obligation actuarial assumptions:
Weighted average discount rate	4.2		%	3.6		%



	Year Ended December 31,
	2018			2017			2016
	(Dollars in thousands)
Components of net periodic benefit cost:
Interest cost	$	796		$	926		$	1,374
Expected return on plan assets	(1,206		)	(1,036		)	(1,542		)
Amortization of net actuarial losses	979			1,191			1,548
Settlement	—			—			3,847
Net periodic benefit cost	$	569		$	1,081		$	5,227

Net periodic cost actuarial assumptions:
Weighted average discount rate	3.6		%	4.1		%	4.3		%
Expected long-term rate of return on plan assets	5.5		%	5.5		%	6.0		%

The unrecognized net actuarial losses included in AOCI expected to be recognized in net periodic benefit cost during 2019 is approximately $1.0 million.

The long-term rate of return on plan assets reflects the weighted-average long-term rates of return for the various categories of investments held in the plan. The expected long-term rate of return is adjusted when there are fundamental changes in expected returns on the plan investments.

The defined benefit retirement plan assets consist primarily of equity and debt securities. Our asset allocations by asset category were as follows:



	December 31,
	2018		2017
Equity securities	48.4	%	53.9	%
Debt securities	46.9		42.3
Other	4.7		3.8
Total	100.0	%	100.0	%

Equity securities included the Company's common stock in the amount of $0.1 million at December 31, 2018 and 2017.

Our investment strategy for the defined benefit retirement plan is to maximize the long-term rate of return on plan assets while maintaining an acceptable level of risk. The investment policy establishes a target allocation for each asset class that is reviewed periodically and rebalanced when considered appropriate.

The fair values of the defined benefit retirement plan as of December 31, 2018 and 2017 by asset category were as follows:



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(Dollars in thousands)
December 31, 2018
Money market accounts	$	931	$	—	$	—	$	931
Mutual funds	10,537		—		—		10,537
Government obligations	—		2,192		—		2,192
Common stocks	4,122		—		—		4,122
Preferred stocks	146		—		—		146
Corporate bonds and debentures	—		1,946		—		1,946
Total	$	15,736	$	4,138	$	—	$	19,874



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(Dollars in thousands)
December 31, 2017
Money market accounts	$	858	$	—	$	—	$	858
Mutual funds	12,258		—		—		12,258
Government obligations	—		1,942		—		1,942
Common stocks	5,509		—		—		5,509
Preferred stocks	176		—		—		176
Corporate bonds and debentures	—		2,089		—		2,089
Total	$	18,801	$	4,031	$	—	$	22,832

We are not required by funding regulations or laws to make any contributions to our defined benefit retirement plan in 2019.

Estimated future benefit payments in each of the next five years and in the aggregate for the five years thereafter are as follows (in thousands):



Year Ending December 31:
2019	$	1,791
2020	1,759
2021	1,713
2022	1,651
2023	1,606
2024-2028	6,997
Total	$	15,517

Supplemental Executive Retirement Plans

In 1995, 2001, 2004 and 2006, our bank established Supplemental Executive Retirement Plans ("SERP") that provide certain officers of the Company with supplemental retirement benefits. On December 31, 2002, the 1995 and 2001 SERP were curtailed. In conjunction with the merger with CB Bancshares, Inc. ("CBBI"), we assumed CBBI's SERP obligation.

In the second quarter of 2017, the Company settled a portion of the SERP obligation of a former executive. As a result of the settlement, the Company remeasured the related SERP obligation and net periodic benefit cost and recognized a pro-rata net actuarial loss of $0.1 million in SERP expense and other comprehensive income.

The following tables set forth information pertaining to the SERP:



	Year Ended December 31,
	2018			2017
	(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year	$	11,219		$	10,292
Interest cost	389			429
Actuarial (gains) losses	(907		)	1,708
Benefits paid	(346		)	(1,210		)
Benefit obligation at end of year	10,355			11,219

Change in plan assets
Fair value of plan assets at beginning of year	—			—
Employer contributions	346			1,209
Benefits paid	(346		)	(1,209		)
Fair value of plan assets at end of year	—			—

Funded status at end of year	$	(10,355	)	$	(11,219	)

Amounts recognized in AOCI
Net transition obligation	$	(82	)	$	(100	)
Prior service cost	(31		)	(49		)
Net actuarial losses	(1,082		)	(2,163		)
Total amounts recognized in AOCI	$	(1,195	)	$	(2,312	)

Benefit obligation actuarial assumptions
Weighted average discount rate	4.2		%	3.5		%



	Year Ended December 31,
	2018			2017			2016
	(Dollars in thousands)
Components of net periodic benefit cost
Interest cost	$	389		$	429		$	465
Amortization of net actuarial (gains) losses	174			102			51
Amortization of net transition obligation	18			18			17
Amortization of prior service cost	18			18			18
Settlement	—			138			—
Net periodic benefit cost	$	599		$	705		$	551

Net periodic cost actuarial assumptions
Weighted average discount rate	3.5		%	4.1		%	4.4		%

The estimated amortization of components included in AOCI that will be recognized into net periodic benefit cost for 2019 is as follows (in thousands):



Amortization of net actuarial losses	$	174
Amortization of net transition obligation	18
Amortization of prior service cost	18

The SERP holds no plan assets other than employer contributions that are paid as benefits during the year. We expect to contribute $0.3 million to the SERP in 2019.

Estimated future benefit payments reflecting expected future service for the SERP in each of the next five years and in the aggregate for the five years thereafter are as follows (in thousands):



Year Ending December 31:
2019	$	330
2020	325
2021	314
2022	307
2023	299
2024-2028	3,621
Total	$	5,196