17. Employee Benefits

The Company has a Qualified Defined Benefit Pension Plan (the “Plan”), which had been offered to all employees reaching minimum age and service requirements. In 2006, the Bank became a member of the Savings Bank Employees Retirement Association (“SBERA”) within which it then began maintaining the Qualified Defined Benefit Pension Plan. SBERA offers a common and collective trust as the underlying investment structure for its retirement plans. The target allocation mix for the common and collective trust portfolio calls for an equity-based investment deployment range of 40% to 64% of total portfolio assets. The remainder of the portfolio is allocated to fixed income securities with target range of 15% to 25% and other investments including global asset allocation and hedge funds from 20% to 36%.

The Trustees of SBERA, through its Investment Committee, select investment managers for the common and collective trust portfolio. A professional investment advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager searches. The overall investment objective is to diversify investments across a spectrum of investment types to limit risks from large market swings. The Company closed the plan to employees hired after March 31, 2006.

The measurement date for the Plan is December 31 for each year. The benefits expected to be paid in each year from 2015 to 2019 are $1,212,000, $1,277,000, $1,361,000, $1,398,000, and $1,456,000, respectively. The aggregate benefits expected to be paid in the five years from 2020 to 2024 are $9,124,000. The Company plans to contribute $1,000,000 to the Plan in 2015.

The fair value of plan assets and major categories as of December 31, 2014, is as follows:

Asset Category

Percent

Total

Level 1

Level 2

Level 3

(dollars in thousands)

Collective funds

53.4

18,069

2,757

15,312

—

Equity securities

23.1

7,797

—

Mutual funds

15.5

5,244

4,762

482

—

Hedge funds

7.0

2,360

—

2,360

Short-term investments

1.0

342

—

100.0

33,812

15,658

15,794

2,360

The fair value of plan assets and major categories as of December 31, 2013, is as follows:


Asset Category	Percent			Total		Level 1		Level 2		Level 3
(dollars in thousands)
Collective funds		52.9	%	$	17,092	$	856	$	16,236	$	—
Equity securities		25.9	%		8,355		8,355		—		—
Mutual funds		13.1	%		4,250		3,832		418		—
Hedge funds		7.0	%		2,256		—		—		2,256
Short-term investments		1.1	%		369		249		120		—

		100.0	%	$	32,322	$	13,292	$	16,774	$	2,256

LEVEL 1

The plan assets measured at fair value in Level 1 are based on quoted market prices in an active exchange market.

LEVEL 2

Plan assets measured at fair value in Level 2 are based on pricing models that consider standard input factors, such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

LEVEL 3

Plan assets measured at fair value in Level 3 are based on unobservable inputs, which includes SBERA’s assumptions and the best information available under the circumstance. Level 3 assets consist of hedge funds. The underlying assets are valued based upon quoted exchange prices, over-the-counter trades, bid/ask prices, relative value assessments based on market conditions, and other information, as available. Further adjustments may be made based on factors impacting liquidity.

The asset or liability’s fair value measurement level within fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Below is a description of the valuation methodologies used for assets measured at fair value.

The Trust reports bonds and other obligations, short-term investments and equity securities at fair values based on published quotations, Collective funds and hedge funds (Funds) are valued in accordance with valuations provided by such Funds, which generally value marketable securities at the last reported sales price on the valuation date and other investments at fair value, as determined by each Fund’s manager.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values. Furthermore, although the Trust believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The changes in Level 3 securities are shown in the table below:


Year Ended December 31,	2014			2013
(dollars in thousands)
Balance at beginning of year	$	2,256		$	1,691
Purchases		32			55
Redemptions		(58	)		—
Actual return – assets still being held		130			510

Balance at end of year	$	2,360		$	2,256

There were no transfers in or out of level 3 during the year ended December 31, 2014 and 2013.

The performance of the plan assets is dependent upon general market conditions and specific conditions related to the issuers of the underlying securities.

The Company has a Supplemental Executive Insurance/Retirement Plan (the Supplemental Plan), which is limited to certain officers and employees of the Company. The Supplemental Plan is voluntary. Under the Supplemental Plan, each participant will receive a retirement benefit based on compensation and length of service. Life insurance policies, which are owned by the Company, are purchased covering the lives of each participant.

The benefits expected to be paid in each year from 2015 to 2019 are $1,110,000, $1,544,000, $2,004,000, $2,012,000 and $2,037,000, respectively. The aggregate benefits expected to be paid in the five years from 2020 to 2024 are $11,144,000.


	Defined Benefit Pension Plan						Supplemental Insurance/ Retirement Plan
	2014			2013			2014			2013
(dollars in thousands)
Change projected in benefit obligation
Benefit obligation at beginning of year	$	29,879		$	31,910		$	25,502		$	25,835
Service cost		1,034			1,196			1,555			1,554
Interest cost		1,467			1,257			1,325			1,072
Actuarial (gain)/loss		8,398			(3,734	)		4,650			(1,916	)
Benefits paid		(767	)		(750	)		(1,043	)		(1,043	)

Projected benefit obligation at end of year	$	40,011		$	29,879		$	31,989		$	25,502

Change in plan assets
Fair value of plan assets at beginning of year	$	32,322		$	23,983
Actual return on plan assets		1,337			4,619
Employer contributions		920			4,470
Benefits paid		(767	)		(750	)

Fair value of plan assets at end of year	$	33,812		$	32,322

(Unfunded) Funded status	$	(6,199	)	$	2,443		$	(31,989	)	$	(25,502	)

Accumulated benefit obligation	$	40,011		$	29,747		$	29,023		$	22,278

Weighted-average assumptions as of December 31
Discount rate — Liability		4.00	%		5.00	%		4.00	%		5.00	%
Discount rate — Expense		5.00	%		4.00	%		5.00	%		4.00	%
Expected return on plan assets		8.00	%		8.00	%		NA			NA
Rate of compensation increase		4.00	%		4.00	%		4.00	%		4.00	%
Components of net periodic benefit cost
Service cost	$	1,034		$	1,196		$	1,555		$	1,554
Interest cost		1,467			1,257			1,325			1,072
Expected return on plan assets		(2,543	)		(1,880	)		—			—
Recognized prior service cost		(104	)		(104	)		114			114
Recognized net losses		12			630			355			514

Net periodic cost	$	(134	)	$	1,099		$	3,349		$	3,254

Other changes in plan assets and benefit obligations recognized in other comprehensive income
Amortization of prior service cost	$	104		$	104		$	(114	)	$	(114	)
Net (gain) loss		9,592			(6,956	)		4,268			(2,401	)

Total recognized in other comprehensive income		9,696			(6,852	)		4,154			(2,515	)

Total recognized in net periodic benefit cost and other comprehensive income	$	9,562		$	(5,753	)	$	7,503		$	739


	December 31, 2014									December 31, 2013
	Plan			Supplemental Plan			Total			Plan			Supplemental Plan			Total
(dollars in thousands)
Prior service cost	$	412		$	(877	)	$	(465	)	$	516		$	(991	)	$	(475	)
Net actuarial loss		(12,953	)		(12,169	)		(25,122	)		(3,361	)		(7,901	)		(11,262	)

Total	$	(12,541	)	$	(13,046	)	$	(25,587	)	$	(2,845	)	$	(8,892	)	$	(11,737	)

The following table summarizes the amounts included in Accumulated Other Comprehensive Loss at December 31, 2014, expected to be recognized as components of net periodic benefit cost in the next year:


	Plan			Supplemental Plan
Amortization of prior service cost to be recognized in 2015	$	(104	)	$	114
Amortization of loss to be recognized in 2015		812			598

Assumptions for the expected return on plan assets and discount rates in the Company’s Plan and Supplemental Plan are periodically reviewed. As part of the review, management in consultation with independent consulting actuaries performs an analysis of expected returns based on the plan’s asset allocation. This forecast reflects the Company’s and actuarial firm’s expected return on plan assets for each significant asset class or economic indicator. The range of returns developed relies on forecasts and on broad market historical benchmarks for expected return, correlation and volatility for each asset class. Also, as a part of the review, the Company’s management in consultation with independent consulting actuaries performs an analysis of discount rates based on expected returns of high-grade fixed income debt securities. Mortality assumptions are based on the RP 2014 Mortality Table projected with Scale MP 2014.

The Company offers a 401(k) defined contribution plan for all employees reaching minimum age and service requirements. The plan is voluntary and employee contributions are matched by the Company at a rate of 33.3% for the first 6% of compensation contributed by each employee. The Company’s match totaled $346,000 for 2014, $322,000 for 2013 and $308,000 for 2012. Administrative costs associated with the plan are absorbed by the Company.

The Company has a cash incentive plan that is designed to reward our executives and officers for the achievement of annual financial performance goals of the Company as well as business line, department and individual performance. The plan supports the philosophy that management be measured for their performance as a team in the attainment of these goals. Discretionary bonus expense amounted to $1,434,000, $1,313,000 and $1,289,000 in 2014, 2013, and 2012, respectively.

The Company does not offer any postretirement programs other than pensions.