11. EMPLOYEE RETIREMENT PLANS

The Company has a defined benefit pension plan covering substantially all employees, as well as an unfunded supplemental pension plan for key executives. Retirement benefits are provided based on employees’ years of credited service and average earnings or stated amounts for years of service. Normal retirement age is 65 with provisions for earlier retirement. The plan also has provisions for disability and death benefits. The plan closed to new participants as of August 1, 2011. Additionally, benefit accruals under the plan were frozen effective December 31, 2016.

The Company’s funding policy for the defined benefit pension plan is to make contributions to the plan such that all employees’ benefits will be fully provided by the time they retire. Plan assets are stated at market value and consist primarily of equity securities and fixed income securities, mainly U.S. government and corporate obligations.

The Company follows ASC 715, Compensation — Retirement Benefits (“ASC 715”) which requires employers to recognize the funded status of defined benefit pension and other postretirement benefit plans as an asset or liability in their statements of financial position and to recognize changes in the funded status in the year in which the changes occur as a component of comprehensive income. In addition, ASC 715 requires employers to measure the funded status of their plans as of the date of their year-end statements of financial position. ASC 715 also requires additional disclosures regarding amounts included in accumulated other comprehensive loss.

The Company’s pension plan’s weighted average asset allocation at December 31, 2016 and 2015, by asset category, was as follows:


	Plan Assets at December 31,
	2016			2015
Asset Category:
Equity Securities		54	%		52	%
Fixed Income Securities		38	%		40	%
Other		8	%		8	%
Total		100	%		100	%

The Company has a Retirement Plan Committee, consisting of the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, to manage the operations and administration of all benefit plans and related trusts. The committee has an investment policy for the pension plan assets that establishes target asset allocation ranges for the above listed asset classes as follows: equity securities: 20% – 80%; fixed income securities: 20% – 80%; and other, principally cash: 0% – 20%. On a semi-annual basis, the committee reviews progress towards achieving the pension plan’s performance objectives.

To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the 7.50% long-term rate of return on assets assumption for 2016.

Assumptions used in determining the funded status at December 31, 2016 and 2015 were:


	2016			2015
Discount rate		4.35	%		4.62	%
Rate of compensation increase		4.00	%		4.00	%

The following is a reconciliation of the change in benefit obligation and plan assets of both the defined benefit pension plan and the unfunded supplemental pension plan for the years ended December 31, 2016 and 2015:

	Defined Benefit Pension Plan						Supplemental Pension Plan
	2016			2015			2016			2015
	(Dollars in thousands)
*Change in projected benefit obligation*
Projected benefit obligation, beginning of year	$	48,677		$	50,932		$	14,261		$	14,841
Service cost		1,328			1,345			310			291
Interest cost		1,833			2,051			616			614
Plan curtailment		(5,098	)		—			(919	)		—
Actuarial loss (gain)		2,282			(3,806	)		1,527			(1,135	)
Benefits paid		(3,943	)		(1,845	)		(386	)		(350	)
Projected benefit obligation, end of year	$	45,079		$	48,677		$	15,409		$	14,261
*Change in plan assets*
Fair value of plan assets, beginning of year		32,345			32,027			—			—
Actual return on plan assets		1,791			(320	)		—			—
Administrative expenses		(315	)		(150	)		—			—
Contributions		2,400			2,633			386			350
Benefits paid		(3,943	)		(1,845	)		(386	)		(350	)
Fair value of plan assets, end of year	$	32,278		$	32,345		$	—		$	—
Funded status of plan	$	(12,801	)	$	(16,332	)	$	(15,409	)	$	(14,261	)
*Amounts recognized in the consolidated balance sheets consist of:*
Accrued liabilities – other	$	—		$	—		$	(409	)	$	(405	)
Long-term pension liability		(12,801	)		(16,332	)		(15,000	)		(13,856	)
Net amount recognized	$	(12,801	)	$	(16,332	)	$	(15,409	)	$	(14,261	)
*Amounts recognized in accumulated other comprehensive loss consist of:*
Accumulated loss, net of income tax benefit of $5,373, $6,631, $1,802 and $1,808, respectively	$	8,403		$	10,371		$	2,820		$	2,828
Prior service cost, net of income tax liability of $0, $0, ($91) and ($270), respectively		—			—			(143	)		(423	)
Net amount recognized	$	8,403		$	10,371		$	2,677		$	2,405

On September 15, 2016, the pension plan was amended to offer an immediate pension payout either as a one-time lump sum or annuity payment to certain former employees who had not yet commenced benefits under the plan. Benefits were calculated as of December 1, 2016, with lump sum payments being paid in December 2016 and annuity payments beginning January 1, 2017. As of December 31, 2016, $1.9 million in lump sum payments were paid as a result of this amendment. These lump sum payments are included in the “Benefits paid” line item in the above table.

On November 7, 2016, the Board of Directors of the Company authorized the freezing of the pension plan, whereby benefit accruals would be frozen effective December 31, 2016. The effect of the freeze was a reduction of the projected benefit obligation (“PBO”) to the amount of the plans’ accumulated benefit obligations. The decrease in the PBO reduced the unrecognized net actuarial loss of the plan, which is reported on an after-tax basis in accumulated other comprehensive loss within the Consolidated Balance Sheets. No curtailment gain was recognized in earnings. These plan changes will reduce the service and interest cost of the plan for periods subsequent to the curtailment.

As noted above, the accumulated benefit obligations for the defined benefit pension plan and the supplemental pension plan were equal to the respective plans’ projected benefit obligations as of December 31, 2016, due to the pension plan curtailment. As of December 31, 2015, the accumulated benefit obligations for the defined benefit pension plan and the supplemental pension plan were $43.7 million and $14.2 million, respectively.

Assumptions used in determining net periodic pension cost for the years ended December 31, 2016, 2015 and 2014 were:


	Defined Benefit Pension Plan									Supplemental Pension Plan
	2016			2015			2014			2016			2015			2014
Discount rate for determining projected benefit obligation		4.60	%		4.17	%		5.03	%		4.67	%		4.17	%		5.03	%
Discount rate in effect for determining service cost		4.81	%		4.17	%		5.03	%		4.84	%		4.17	%		5.03	%
Discount rate in effect for determining interest cost		3.93	%		4.17	%		5.03	%		4.18	%		4.17	%		5.03	%
Rate of compensation increase		4.00	%		4.00	%		4.00	%		4.00	%		4.00	%		4.00	%
Long-term rate of return on plan assets		7.50	%		7.50	%		7.50	%		—			—			—

Effective January 1, 2016, the Company adopted the spot-rate approach to determine the interest cost component of pension expense. Under the spot-rate approach, the interest cost is calculated by applying interest to the discounted cash flow expected at each payment date. The interest is determined using the same spot rate along the yield curve that was used to determine the present value of the associated payment. Prior to 2016, the Company used a single weighted-average rate in the determination of pension expense.

The Company considered the adoption of the spot rate approach a change in accounting estimate and recognized the effects of the change on a prospective basis. The effects of adopting the spot rate approach reduced net pension expense by approximately $522,000 in 2016, primarily due to a reduction in interest cost.

The components of net pension expense for the years ended December 31, 2016, 2015 and 2014, were:

	2016			2015			2014
	(Dollars in thousands)
Benefits earned during the period	$	1,638		$	1,636		$	1,263
Interest cost on projected benefit obligation⁽¹⁾		2,449			2,665			2,586
Expected return on plan assets		(2,430	)		(2,364	)		(2,343	)
Net amortization and deferral		1,527			1,762			706
Net pension expense	$	3,184		$	3,699		$	2,212

(1)

The decrease in interest cost in 2016 was primarily due to the adoption of the spot-rate approach, as described above.

Due to the pension plan amendments described above, the Company expects net pension expense to decrease by approximately $2.1 million in 2017.

The Company expects to recognize expense of $544,000 due to the amortization of unrecognized loss and income of $63,000 due to the amortization of prior service credit as components of net periodic expense in 2017, which are included in accumulated other comprehensive loss at December 31, 2016.

It is the Company’s intention to satisfy the minimum funding requirements and maintain at least an 80% funding percentage in its defined benefit retirement plan in future years. At this time, the Company expects that any cash contributions necessary to satisfy these requirements would not be material in 2017.

Projected benefit payments for the plans as of December 31, 2016, were estimated as follows:

	Defined Benefit Pension Plan		Supplemental Pension Plan
	(Dollars in thousands)
2017	$	2,308	$	409
2018	$	2,390	$	423
2019	$	2,530	$	470
2020	$	2,554	$	504
2021	$	2,572	$	536
2022 – 2026	$	13,183	$	4,035

The following table summarizes the fair value of the Company’s pension plan assets as of December 31, 2016, by asset category within the fair value hierarchy (for further level information, see Note 3):

	December 31, 2016
	Quoted Prices in Active Markets Level 1		Significant Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total
	(Dollars in thousands)
Common stocks	$	12,656	$	970	$	—	$	13,626
Preferred stocks		227		17		—		244
Exchange traded funds		3,742		—		—		3,742
Corporate obligations		—		5,113		—		5,113
State and municipal obligations		—		1,538		—		1,538
Pooled fixed income funds		4,345		—		—		4,345
U.S. government securities		—		1,061		—		1,061
Cash and cash equivalents		2,519		—		—		2,519
Subtotal	$	23,489	$	8,699	$	—	$	32,188
Other assets⁽¹⁾								90
Total							$	32,278

(1)

This category represents trust receivables that are not leveled.

The following table summarizes the fair value of the Company’s pension plan assets as of December 31, 2015, by asset category within the fair value hierarchy (for further level information, see Note 3):

	December 31, 2015
	Quoted Prices in Active Markets		Significant Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Common stocks	$	12,352	$	1,027	$	—	$	13,379
Preferred stocks		409		22		—		431
Exchange traded funds		3,375		—		—		3,375
Corporate obligations		—		4,503		—		4,503
State and municipal obligations		—		1,337		—		1,337
Pooled fixed income funds		5,423		—		—		5,423
U.S. government securities		—		1,103		—		1,103
Cash and cash equivalents		2,703		—		—		2,703
Subtotal	$	24,262	$	7,992	$	—	$	32,254
Other assets⁽¹⁾								91
Total							$	32,345

(1)

This category represents trust receivables that are not leveled.

The Company also has a defined contribution plan covering substantially all employees. The Company contributed $417,000, $350,000 and $302,000 to the plan in 2016, 2015 and 2014, respectively. Effective January 1, 2017, the Company amended its defined contribution plan to increase the Company match formula for all plan participants. With this amendment, the Company estimates that total match contributions will increase by approximately $450,000 in 2017.