Employee Benefit and Deferred Compensation Plans

(In Thousands, Except Share Data)

The Company sponsors a noncontributory defined benefit pension plan, under which participation and future benefit accruals ceased as of December 31, 1996. The Company’s funding policy is to contribute annually to the plan an amount at least equal to the minimum amount determined by consulting actuaries in accordance with the requirements of the Internal Revenue Code of 1986, as amended. No contributions were made to the pension plan in 2014 or 2013. The Company does not anticipate that a contribution will be required in 2015. The plan’s accumulated benefit obligations and the projected benefit obligations are substantially the same since benefit accruals under the plan ceased at 1996 levels. As a result of the acquisition of First M&F, the M&F Bank pension plan was merged into the Company's existing pension plan during the fourth quarter of 2013. The accumulated benefit obligation for the plan was $28,087 and $27,364 at December 31, 2014 and 2013, respectively. There is no additional minimum pension liability required to be recognized.

The Company also provides retiree health care benefits for certain employees who were employed by the Company and enrolled in the Company’s health plan as of December 31, 2004. To receive benefits, an eligible employee must retire from service with the Company and its affiliates between age 55 and 65 and be credited with at least 15 years of service or with 70 points, determined as the sum of age and service at retirement. The Company periodically determines the portion of the premium to be paid by each eligible retiree and the portion to be paid by the Company. Coverage ceases when an employee attains age 65 and is eligible for Medicare. The Company also provides life insurance coverage for each retiree in the face amount of $5 until age 70. Retirees can purchase additional insurance or continue coverage beyond age 70 at their sole expense.

The Company has accounted for its obligation related to these retiree benefits in accordance with ASC 715, “Compensation – Retirement Benefits.” The Company has limited its liability for the rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) to the rate of inflation assumed to be 4% each year. Increasing or decreasing the assumed health care cost trend rates by one percentage point in each year would not materially increase or decrease the accumulated post-retirement benefit obligation or the service and interest cost components of net periodic post-retirement benefit costs as of December 31, 2014, and for the year then ended.

Information relating to the defined benefit pension plan (“Pension Benefits”) and post-retirement health and life plans (“Other Benefits”) as of December 31, 2014 and 2013 is as follows:



	Pension Benefits						Other Benefits
	2014			2013			2014			2013
Change in benefit obligation
Benefit obligation at beginning of year	$	27,364		$	19,428		$	2,082		$	1,543
Service cost	—			—			14			28
Interest cost	1,292			899			84			70
Plan participants’ contributions	—			—			77			95
Actuarial loss (gain)	2,601			(1,344		)	(118		)	505
Benefits paid	(3,170		)	(1,372		)	(198		)	(159		)
Addition from business combination	—			9,753			—			—
Benefit obligation at end of year	$	28,087		$	27,364		$	1,941		$	2,082
Change in fair value of plan assets
Fair value of plan assets at beginning of year	$	27,989		$	16,008
Actual return on plan assets	1,713			3,776
Contribution by employer	—			—
Benefits paid	(3,170		)	(1,372		)
Addition from business combination	—			9,577
Fair value of plan assets at end of year	$	26,532		$	27,989
Funded status at end of year	$	(1,555	)	$	625		$	(1,941	)	$	(2,082	)
Weighted-average assumptions as of December 31
Discount rate used to determine the benefit obligation	4.00		%	4.83		%	3.22		%	4.66		%

The discount rate assumptions at December 31, 2014 were determined using a yield curve approach. A yield curve was developed for a selection of high quality fixed-income investments whose cash flows approximate the timing and amount of expected cash flows from the benefit plans. The selected discount rate is the rate that produces the same present value of the benefit plan's projected benefit payments.

The components of net periodic benefit cost and other amounts recognized in other comprehensive income for the defined benefit pension and post-retirement health and life plans for the year ended December 31, 2014, 2013 and 2012 are as follows:



	Pension Benefits									Other Benefits
	2014			2013			2012			2014			2013			2012
Service cost	$	—		$	—		$	—		$	14		$	28		$	23
Interest cost	1,292			899			863			84			70			65
Expected return on plan assets	(2,160		)	(1,445		)	(1,193		)	—			—			—
Prior service cost recognized	—			—			—			—			—			—
Recognized actuarial loss	207			427			355			89			195			73
Settlement/curtailment/termination losses	453			—			—			—			—			—
Net periodic benefit cost	(208		)	(119		)	25			187			293			161
Net actuarial loss/(gain) arising during the period	3,047			(3,675		)	1,460			(118		)	505			(235		)
Net Settlement/curtailment/termination losses	(453		)	—			—
Amortization of net actuarial loss recognized in net periodic pension cost	(207		)	(427		)	(355		)	(89		)	(195		)	(73		)
Total recognized in other comprehensive income	2,387			(4,102		)	1,105			(207		)	310			(308		)
Total recognized in net periodic benefit cost and other comprehensive income	$	2,179		$	(4,221	)	$	1,130		$	(20	)	$	603		$	(147	)
Weighted-average assumptions as of December 31
Discount rate used to determine net periodic pension cost	4.83		%	3.90		%	5.06		%	4.66		%	3.04		%	4.61		%
Expected return on plan assets	8.00		%	8.00		%	8.00		%	N/A			N/A			N/A

Future estimated benefit payments under the defined benefit pension plan and post-retirement health and life plan are as follows:



	Pension Benefits		Other Benefits
2015	$	1,925	$	260
2016	1,896		233
2017	1,863		234
2018	1,883		240
2019	1,876		210
2020 - 2024	9,210		768

Amounts recognized in accumulated other comprehensive income, before tax, for the year ended December 31, 2014 are as follows:



	Pension Benefits		Other Benefits
Prior service cost	$	—	$	—
Actuarial loss	9,433		687
Total	$	9,433	$	687

The estimated costs that will be amortized from accumulated other comprehensive income into net periodic cost over the next fiscal year are as follows:



	Pension Benefits		Other Benefits
Prior service cost	$	—	$	—
Actuarial loss	293		81
Total	$	293	$	81

The investment objective for the pension or defined benefit plan is to achieve above average income and moderate long term growth. An investment committee appointed by management seeks to accomplish this objective by combining an equity income strategy (approximately 60% - 70%), which generally invests in larger capitalization common stocks, and an intermediate fixed income strategy (approximately 30% to 40%), which generally invests in U.S. Government securities and investment grade corporate bonds. In response to the current interest rate environment, the committee has begun allocating assets to the higher end of the target range for equity funds in order to lessen the impact of anticipated rising interest rates on the fixed income funds. It is the investment committee’s intent to give the investment managers flexibility within the overall guidelines with respect to investment decisions and their timing. However, significant modifications of any previously approved investments or anticipated use of derivatives to execute investment strategies must be approved by the committee.

The plan’s expected long-term rate of return was estimated using market benchmarks for investment classes applied to the plan’s target asset allocation. The expected return on investment classes was computed using a valuation methodology which projected future returns based on current equity valuations rather than historical returns.

The fair values of the Company’s defined benefit pension plan assets by category at December 31, 2014 and 2013 follow below. Equity securities consist primarily of common stocks of both U.S. companies and international companies that are traded in active markets and are valued based on quoted market prices of identical assets (Level 1). Fixed income securities consist of U.S. Government securities and investment grade corporate bonds. The fair values of these instruments are based on quoted market prices of similar instruments or a discounted cash flow model (Level 2).



	Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Totals
December 31, 2014
Cash and cash equivalents	$	1,882	$	—	$	—	$	1,882
Equity securities:
U.S. large cap companies	9,144		—		—		9,144
U.S. mid cap companies	5,210		—		—		5,210
U.S. small cap companies	2,791		—		—		2,791
International companies	1,464		—		—		1,464
Fixed income securities:
U.S. government bonds	—		2,003		—		2,003
Other corporate bonds	—		4,038		—		4,038
	$	20,491	$	6,041	$	—	$	26,532



	Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Totals
December 31, 2013
Cash and cash equivalents	$	10,971	$	—	$	—	$	10,971
Equity securities:
U.S. large cap companies	3,622		—		—		3,622
U.S. mid cap companies	4,079		—		—		4,079
U.S. small cap companies	2,237		—		—		2,237
International companies	1,212		—		—		1,212
Fixed income securities:
U.S. government bonds	—		2,673		—		2,673
Other corporate bonds	—		3,195		—		3,195
	$	22,121	$	5,868	$	—	$	27,989

The Company maintains a 401(k) plan, which is a contributory plan. Employees may contribute pre-tax earnings, subject to a maximum established annually by the IRS. The Company matches employee deferrals, up to 4% of compensation. The Company also makes a nondiscretionary contribution for each eligible employee in an amount equal to 5% of plan compensation and 5% of plan compensation in excess of the Social Security wage base. Employees are automatically enrolled in the plan when employment commences. Company contributions are allocated to participants who are employed on the last day of each plan year and credited with 1000 hours of service during the year. The Company’s costs related to the 401(k) plan, excluding employee deferrals, in 2014, 2013 and 2012 were $7,230, $5,488 and $4,645, respectively.

The Company adopted the “Performance Based Rewards” incentive compensation plan on January 1, 2001, under which annual cash bonuses are paid to eligible officers and employees, subject to the attainment of designated performance criteria. The Company designates minimum levels of performance for all applicable profit centers and rewards employees on performance over the minimum level. The expense associated with the plan for 2014, 2013 and 2012 was $4,100, $4,376 and $1,953, respectively.

The Company maintains three deferred compensation plans: a Deferred Stock Unit Plan and two conventional deferred compensation plans. Nonemployee directors may defer all or any portion of their fees and retainer to the Deferred Stock Unit Plan or the deferred compensation plan maintained for their benefit. Officers may defer base salary and bonus to the Deferred Stock Unit Plan or salary to the deferred compensation plan maintained for their benefit, subject to limits that are determined annually by the Company. Amounts credited to the Deferred Stock Unit Plan are invested in units representing shares of the Company’s common stock. Amounts credited to the conventional deferred compensation plans are invested at the discretion of each participant from among designated investment alternatives. Directors and officers who participated in these deferred compensation plans on or before December 31, 2006, may invest in a preferential interest rate investment that is derived from the Moody’s Average Corporate Bond Rate, adjusted monthly, and the beneficiaries of participants in the deferred compensation plans as of such date may receive a preretirement death benefit in excess of the amounts credited to plan accounts at the time of death. All of the Company’s deferred compensation plans are unfunded. It is anticipated that the two conventional deferred compensation plans will result in no additional cost to the Company because life insurance policies on the lives of the participants have been purchased in amounts estimated to be sufficient to pay plan benefits. The Company is both the owner and beneficiary of the life insurance policies. The expense recorded in 2014, 2013 and 2012 for the Company’s deferred compensation plans, inclusive of deferrals, was $1,383, $2,088 and $1,573, respectively.

The Company assumed four supplemental executive retirement plans (SERPs) in connection with the acquisition of Capital. The SERPs were established by Capital to provide supplemental retirement benefits. The plans provide four officers of the Company specified annual benefits based upon a projected retirement date. These benefits are payable for a 15-year period after retirement. The supplemental executive retirement liabilities totaled $3,094 and $2,842 at December 31, 2014 and 2013, respectively. The plans are not qualified under Section 401 of the Internal Revenue Code.

In March 2011, the Company adopted a long-term equity incentive plan, which provides for the grant of stock options and the award of restricted stock. The plan replaced the long-term incentive plan adopted in 2001, which expired in October 2011. The Company issues shares of treasury stock to satisfy stock options exercised or restricted stock granted under the plan. Options granted under the plan allow participants to acquire shares of the Company’s common stock at a fixed exercise price and expire ten years after the grant date. Options vest and become exercisable in installments over a three-year period measured from the grant date. Options that have not vested are forfeited and cancelled upon the termination of a participant’s employment. The Company recorded compensation expense of $262, $469 and $538 for the years ended December 31, 2014, 2013 and 2012, respectively, for options granted under the plan. There were no stock options granted during the year ended December 31, 2014.

The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions for each option grant:



	2013 Grant			2012 Grant
Dividend yield	3.55		%	4.55		%
Expected volatility	37		%	37		%
Risk-free interest rate	0.76		%	0.79		%
Expected lives	6 years			6 years
Weighted average fair value	$	4.47		$	3.10

The following table summarizes information about options issued under the long-term equity incentive plan as of and for the three years ended December 31, 2014:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at January 1, 2012	1,327,275		$	18.77
Granted	172,000		14.96
Exercised	(163,652	)	13.54
Forfeited	(56,375	)	21.81
Outstanding at December 31, 2012	1,279,248		$	18.79	5.14	$	2,838
Exercisable at December 31, 2012	949,082		$	19.92	4.01	$	1,646
Assumed in acquisition	11,557		21.16
Granted	52,500		19.14
Exercised	(272,957	)	19.22
Forfeited	(10,000	)	27.20
Outstanding at December 31, 2013	1,060,348		$	18.64	4.89	$	13,592
Exercisable at December 31, 2013	843,237		$	19.21	4.08	$	10,331
Granted	—		—
Exercised	(227,499	)	18.39
Forfeited	(1,899	)	20.77
Outstanding at December 31, 2014	830,950		$	18.70	4.48	$	8,680
Exercisable at December 31, 2014	745,949		$	18.95	4.15	$	7,628

The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $4,184, $633 and $757, respectively. The total grant date fair value of options vested during the same periods was $458, $535, and $479, respectively.

The Company awards performance-based restricted stock to executives and other officers and time-based restricted stock to directors, executives, and other officers and employees under the long-term equity incentive plan. The performance-based restricted stock vests upon completion of a one-year service period and the attainment of certain performance goals. Performance-based restricted stock is issued at the target level; the number of shares ultimately awarded is determined at the end of each year and may be increased or decreased depending upon the Company meeting or exceeding financial performance measures defined by the Board of Directors. Time-based restricted stock vests at the end of the service period defined in the respective grant. The fair value of each restricted stock grant is the closing price of the Company’s common stock on the day immediately preceding the grant date. The Company recorded compensation expense of $3,647, $2,330 and $830 for the years ended December 31, 2014, 2013 and 2012, respectively, for restricted stock awarded under the plan. The following table summarizes the changes in restricted stock as of and for the year ended December 31, 2014:



	Performance- Based Restricted Stock			Weighted Average Grant-Date Fair Value		Time- Based Restricted Stock		Weighted Average Grant-Date Fair Value
Nonvested at beginning of year	—			$	—	22,338		$	24.30
Granted	93,848		⁽¹⁾	31.46		34,336		30.26
Vested	(93,848	)		31.46		(18,338	)	28.22
Cancelled	—			—		—		—
Nonvested at end of year	—			$	—	38,336		$	27.26


(1)	In January 2014, the Company awarded 78,250 shares of performance-based restricted stock based on the target level of performance goals. The Company exceeded the financial performance measures for the award; therefore, an additional 15,598 shares were issued for a total award of 93,848 shares.

Unrecognized stock-based compensation expense related to stock options and restricted stock totaled $73 and $558, respectively, at December 31, 2014. At such date, the weighted average period over which this unrecognized expense is expected to be recognized was approximately 1.0 and 1.4 years for stock options and restricted stock, respectively.

At December 31, 2014, an aggregate of 1,332,196 shares of Company common stock were reserved for issuance under the Company’s employee benefit plans.