14. EMPLOYEE BENEFITS

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

NOTE 14. EMPLOYEE BENEFITS

Defined Benefit Pension Plan

The Company has a qualified noncontributory defined benefit pension plan which covers substantially all of its employees hired before April 1, 2012. The benefits are primarily based on years of service and earnings. The Company uses December 31st as the measurement date for the defined benefit pension plan.

The following table provides a reconciliation of the changes in the benefit obligations and fair value of plan assets for 2016, 2015 and 2014:

	2016			2015			2014
Change in Benefit Obligation
Benefit obligation, beginning	$	10,944,658		$	10,777,415		$	7,933,568
Service cost		631,874			648,334			501,032
Interest cost		452,896			410,944			377,706
Actuarial (gain) loss		872,245			(137,048	)		2,030,583
Benefits paid		(426,628	)		(754,987	)		(65,474	)
Benefit obligation, ending	$	12,475,045		$	10,944,658		$	10,777,415
Change in Plan Assets
Fair value of plan assets, beginning	$	11,678,218		$	11,683,845		$	9,687,226
Actual return on plan assets		780,160			(640	)		562,093
Employer contribution		-			750,000			1,500,000
Benefits paid		(426,628	)		(754,987	)		(65,474	)
Fair value of plan assets, ending	$	12,031,750		$	11,678,218		$	11,683,845
Funded status at the end of the year	$	(443,295	)	$	733,560		$	906,430

The fair value of plan assets is measured based on the fair value hierarchy as discussed in Note 20, “Fair Value Measurements” to the Consolidated Financial Statements. The valuations are based on third party data received as of the balance sheet date. All plan assets are considered Level 1 assets, as quoted prices exist in active markets for identical assets.

	2016			2015			2014
Amount recognized in the Consolidated Balance Sheet
Prepaid benefit cost	$	4,360,788		$	4,799,051		$	4,434,917
Unfunded pension benefit obligation under ASC 325-960		(4,804,083	)		(4,065,491	)		(3,528,487	)
Deferred taxes		1,633,388			1,382,267			1,199,686
Amount recognized in accumulated other
comprehensive income (loss)
Net loss	$	(4,861,211	)	$	(4,137,855	)	$	(3,616,087	)
Prior service cost		57,128			72,364			87,600
Amount recognized		(4,804,083	)		(4,065,491	)		(3,528,487	)
Deferred Taxes		1,633,388			1,382,267			1,199,686
Amount recognized in accumulated comprehensive income	$	(3,170,695	)	$	(2,683,224	)	$	(2,328,801	)
Prepaid benefit detail
Benefit obligation	$	(12,475,045	)	$	(10,944,658	)	$	(10,777,415	)
Fair value of assets		12,031,750			11,678,218			11,683,845
Unrecognized net actuarial loss		4,861,211			4,137,855			3,616,087
Unrecognized prior service cost		(57,128	)		(72,364	)		(87,600	)
Prepaid (accrued) benefits	$	4,360,788		$	4,799,051		$	4,434,917
Components of net periodic benefit cost
Service cost	$	631,874		$	648,334		$	501,032
Interest cost		452,896			410,944			377,706
Expected return on plan assets		(854,414	)		(838,818	)		(698,252	)
Amortization of prior service cost		(15,236	)		(15,236	)		(15,236	)
Recognized net actuarial (gain) loss		223,143			180,642			36,110
Net periodic benefit cost	$	438,263		$	385,866		$	201,360
Other changes in plan assets and benefit obligations
recognized in other comprehensive income (loss)
Net (gain) loss	$	723,356		$	521,768		$	2,130,632
Amortization of prior service cost		15,236			15,236			15,236
Total recognized in other comprehensive income	$	738,592		$	537,004		$	2,145,868
Total recognized in net periodic benefit cost and other
Comprehensive income (loss)	$	1,176,855		$	922,870		$	2,347,228
Additional disclosure information
Accumulated benefit obligation	$	8,788,626		$	7,601,249		$	7,543,340
Vested benefit obligation	$	8,780,087		$	7,539,365		$	7,408,014
Discount rate used for net pension cost		4.25	%		4.00	%		5.00	%
Discount rate used for disclosure		4.00	%		4.25	%		4.00	%
Expected return on plan assets		7.50	%		7.50	%		7.50	%
Rate of compensation increase		3.00	%		3.00	%		3.00	%
Average remaining service (years)		13			13			14

Funding Policy

The Company’s contributions for 2015 and 2014 were $750,000, and $1,500,000, respectively. Due to the current funding status of the plan, the Company did not make a contribution in 2016. The net periodic pension cost of the plan for 2017 will be approximately $601,000.

Long-Term Rate of Return

The Company, as plan sponsor, selects the expected long-term rate of return on assets assumption in consultation with investment advisors and the plan actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation) for the major asset classes held or anticipated to be held by the trust. Undue weight is not given to recent experience, which may not continue over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions.

Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, and solely for this purpose, the plan is assumed to continue in force and not terminate during the period during which the assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).

Asset Allocation

The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with a targeted asset allocation of 40% fixed income and 60% equity. The Investment Manager selects investment fund managers with demonstrated experience and expertise, and funds with demonstrated historical performance, for the implementation of the Plan’s investment strategy. The Investment Manager will consider both actively and passively managed investment strategies and will allocate funds across the asset classes to develop an efficient investment structure. The pension plan’s allocations as of December 31, 2016, and 2015 were 61% equity and 39% fixed and 60% equity and 40% fixed, respectively.

Estimated Future Benefit Payments, which reflect expected future service, as appropriate, as of December 31, 2016, are as follows:

2017	$	595,435
2018		1,284,377
2019		669,286
2020		549,902
2021		152,296
2022-2026		5,655,187
	$	8,906,483

Employee Stock Ownership Plan (ESOP)

The Company sponsors an ESOP which provides stock ownership to substantially all employees of the Company. The Plan provides total vesting upon the attainment of five years of service. Contributions to the plan are made at the discretion of the Board of Directors and are allocated based on the compensation of each employee relative to total compensation paid by the Company. All shares issued and held by the Plan are considered outstanding in the computation of earnings per share. Dividends on Company stock are allocated and paid to participants at least annually. Shares of Company stock, when distributed, have restrictions on transferability. The Company contributed $470,000 in 2016, $420,000 in 2015, and $360,000 in 2014 to the Plan and charged this expense to operations. The shares held by the ESOP totaled 190,271 and 188,596 at December 31, 2016 and 2015, respectively.

401(K) Plan

The Company sponsors a 401(k) savings plan under which eligible employees may choose to save up to 20 percent of their salary on a pretax basis, subject to certain IRS limits. Under the Federal Safe Harbor rules employees are automatically enrolled at 3% (in the third year this increases by 1% per year up to 6%) of their salary unless elected otherwise. The Company matches a hundred percent of the first 1% contributed by the employee and fifty percent from 2% to 6% of employee contributions. Vesting in the contributions made by the Company is 100% after two years of service. Contributions under the plan amounted to $242,415, $211,987 and $190,057 in 2016, 2015 and 2014, respectively.

Deferred Compensation Plan

The Company has a nonqualified deferred compensation plan for several of its key employees and directors. The Company may make annual contributions to the plan, and the employee or director has the option to defer a portion of their salary or bonus based on qualifying annual elections. Contributions to the plan totaled $110,000 in 2016, $110,000 in 2015 and $100,000 in 2014. A liability is accrued for the obligation under the plan and totaled $2,766,902 and $2,423,358 at December 31, 2016 and 2015, respectively.

Investments in Life Insurance Contracts

The Bank currently offers a variety of benefit plans to all full-time employees. While the costs of these plans are generally tax deductible to the Bank, the cost has been escalating greatly in recent years. To help offset escalating benefit costs and to attract and retain qualified employees, the Bank purchased Bank Owned Life Insurance (BOLI) contracts that will provide benefits to employees during their lifetime. Dividends received on these policies are tax-deferred and the death benefits under the policies are tax exempt. Rates of return on a tax-equivalent basis are very favorable when compared to other long-term investments which the Bank might make. The accrued liability related to the BOLI contracts was $412,142 and $393,405 for December 31, 2016 and 2015, respectively.