Note 12. Employee Benefit Plans

The Company adopted the Bank of Essex noncontributory, defined benefit pension plan for all full-time pre-merger Bank of Essex employees over 21 years of age. Benefits are generally based upon years of service and the employees’ compensation. The Company funds pension costs, which are included in salaries and employee benefits in the consolidated statement of income, in accordance with the funding provisions of the Employee Retirement Income Security Act.

The Company froze the plan benefits for all defined benefit plan participants effective December 31, 2010. Information pertaining to the activity in the plan for the years ended December 31, 2019 and 2018 is as follows (dollars in thousands):



	2019		2018
Change in Benefit Obligation
Benefit obligation, beginning of year	$	4,112	$	4,560
Interest cost		162		158
Actuarial loss/(gain)		473		(507)
Benefits paid		(635)		(99)
Settlement loss		2		—
Benefit obligation, ending	$	4,114	$	4,112

Change in Plan Assets
Fair value of plan assets, beginning of year	$	4,180	$	4,369
Actual return on plan assets		461		(90)
Benefits paid		(635)		(99)
Fair value of plan assets, ending		4,006		4,180
Funded status	$	(108)	$	68

Amounts Recognized in the Balance Sheet
Other assets	$	—	$	68
Other liabilities		(108)		—
Amounts Recognized in Accumulated Other Comprehensive Income (Loss)
Net loss	$	1,095	$	1,054
Prior service cost		40		45
Deferred tax		(249)		(242)
Total amount recognized	$	886	$	857
Accumulated benefit obligation	$	4,114	$	4,112



Components of net periodic cost (income)
Interest cost	$	162	$	158
Expected return on plan assets		(214)		(238)
Amortization of prior service cost		5		5
Recognized net loss due to settlement		140		—
Recognized net actuarial loss		47		60
Net periodic cost (income)	$	140	$	(15)


Other changes in plan assets and benefit obligations recognized in other comprehensive income

Net (gain) loss	$	41	$	(238)
Amortization of prior service cost		(5)		(5)
Total amount recognized	$	36	$	(243)
Total recognized in net periodic benefit (income) cost and accumulated other comprehensive (loss) income	$	176	$	(258)

The weighted-average assumptions used in the measurement of the Company’s benefit obligation and net periodic benefit cost are shown in the following table:


	December 31
	2019		2018
Discount rate used for net periodic pension cost	4.25	%	3.50	%
Discount rate used to determine obligation	3.25	%	4.25	%
Expected return on plan assets	5.50	%	5.50	%

The estimated amounts that will amortize from accumulated other comprehensive income into net periodic benefit cost in 2020 are as follows (dollars in thousands):


Prior service cost	$	5
Net loss		49
Total amount recognized	$	54

Long-Term Rate of Return

The plan sponsor selects the expected long-term rate of return on assets assumption in consultation with its investment advisors and 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, and for the trust itself. Undue weight is not given to recent experience that 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, solely for this purpose, the plan is assumed to continue in force and not terminate during the period during which 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 pension plan’s weighted-average asset allocations as of December 31, 2019 and 2018 by asset category were as follows:



	2019		2018
Asset Category
Mutual funds — fixed income	74.00	%	77.00	%
Mutual funds — equity	26.00		23.00
Cash and equivalents	—		—
Total	100.00	%	100.00	%

The fair value of plan assets is measured based on the fair value hierarchy as discussed in Note 21, “Fair Values of Assets and Liabilities”, 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.

The following table presents the fair value of plan assets as of December 31, 2019 and 2018 (dollars in thousands):


	Assets measured at Fair Value (Level 1)
	2019		2018

Cash	$	4	$	6
Mutual funds:
Fixed income funds		2,956		3,205
International funds		272		269
Large cap funds		364		342
Mid cap funds		137		125
Small cap funds		79		76
Stock fund		194		157
	$	4,006	$	4,180

The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with a targeted asset allocation of 74% fixed income and 26% equities. 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.

It is the responsibility of the trustee to administer the investments of the trust within reasonable costs, being careful to avoid sacrificing quality. These costs include, but are not limited to, management and custodial fees, consulting fees, transaction costs and other administrative costs chargeable to the trust.

Estimated future contributions and benefit payments, which reflect expected future service, as appropriate, are as follows (dollars in thousands):


Expected Employer Contributions
2020	$	—
Expected Benefit Payments
2020		182
2021		63
2022		125
2023		64
2024		177
2025-2029		2,940

401(k) Plan

The Company maintains the Essex Bank 401(k) plan. The employee may contribute up to 100% of compensation, subject to statutory limitations. The Company matches 100% of employee contributions on the first 3% of compensation, then the Company matches 50% of employee contributions on the next 2% of compensation.

The amounts charged to expense under these plans for the years ended December 31, 2019 and 2018 were $614,000 and $617,000, respectively.

Deferred Compensation Agreements

The Company has deferred compensation agreements with certain key employees and the Board of Directors. The retirement benefits to be provided are fixed based upon the amount of compensation earned and deferred. Deferred compensation expense amounted to $110,000 and $204,000 for the years ended December 31, 2019 and 2018, respectively. The associated liabilities related to these agreements were $2.1 million at each of December 31, 2019 and 2018.

In 2016, the Company commenced a non-qualified defined contribution retirement plan for certain key executive officers. The purpose of the plan is to enhance the retirement benefits that the Company provides to each officer and to recognize each officer for overall performance through additional incentive-based compensation. The planned contributions were based on the same metrics that the Company used for its annual incentive plan for executive officers. All contributions were 100% vested as of December 31, 2019. The expense related to this plan was $444,000 and $343,000 for the years ended December 31, 2019 and 2018, respectively, with an associated liability of $1.6 million and $1.2 million at December 31, 2019 and 2018, respectively.