NOTE 14: EMPLOYEE BENEFIT PLANS

Pension Plan

Prior to January 1995, we maintained a noncontributory defined benefit plan (the “Pension Plan”) covering all eligible employees. During 1995, the Pension Plan was curtailed. Accordingly, all accrued benefits were fully vested and no additional years of service or age will be accrued.

We recognize the overfunded or underfunded status of a single employer defined benefit post retirement plan as an asset or liability on the consolidated balance sheets and recognize changes in the funded status in comprehensive income in the year in which the change occurred.

The following tables provide a reconciliation of the changes in the Pension Plan’s benefit obligations and fair value of assets over the two year period ending December 31, 2015, and a statement of the funded status as of December 31 of both years:


(In thousands)	2015		2014
Reconciliation of benefit obligation
Benefit obligation at beginning of year	$	11,556	$	9,611
Service cost including expenses		53		44
Interest cost		442		464
Actuarial (gain) loss		(735)		2,013
Benefits paid and expected expenses		(608)		(576)
Benefit obligation at year-end	$	10,708	$	11,556
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year	$	15,350	$	15,446
Actual return on plan assets		(579)		489
Employer contributions		—		—
Benefits paid and actual expenses		(613)		(585)
Fair value of plan assets at year-end	$	14,158	$	15,350
Funded status at year end	$	3,449	$	3,794

We have no minimum required contribution for 2016.

The accumulated benefit obligation is equal to the projected benefit obligation and was $10.71 million and $11.56 million at December 31, 2015 and 2014, respectively. Amounts recognized in accumulated other comprehensive income for net actuarial losses totaled $5.7 million and $5.2 million at December 31, 2015 and 2014, respectively.

The following tables summarize the components of net periodic benefit cost and other changes in Pension Plan assets and benefit obligations recognized in other comprehensive income for the years ended December 31, 2015, 2014 and 2013, respectively:


(In thousands)	2015		2014		2013
Interest cost	$	442	$	464	$	418
Expected return on plan assets		(1,052)		(1,059)		(988)
Service costs		53		44		53
Net loss amortization		377		137		355
Net periodic pension cost (benefit)	$	(180)	$	(414)	$	(162)


(In thousands)	2015		2014		2013
Net loss (gain)	$	902	$	2,606	$	(1,707)
Net loss amortization		(377)		(137)		(355)
Total recognized in other comprehensive income	$	525	$	2,469	$	(2,062)
Total recognized in net periodic pension cost and other comprehensive income	$	345	$	2,055	$	(2,224)

The estimated net actuarial loss for the Pension Plan that will be amortized from accumulated other comprehensive income into net periodic pension cost for 2016 is $456 thousand.

The following table summarizes the assumptions used to determine the benefit obligations and net periodic benefit costs for the years ended December 31, 2015, 2014 and 2013:


	2015		2014		2013
Benefit obligations
Discount rate	4.48	%	3.97	%	4.98	%
Net periodic benefit cost
Discount rate	3.97	%	4.98	%	3.98	%
Expected long-term return on plan assets	7.00	%	7.00	%	7.00	%

The discount rate reflects the rates at which pension benefits could be effectively settled. We look to rates of return on high-quality fixed income investments currently available and expected to be available during the period of maturity of the pension benefits. Consideration was given to the rates that would be used to settle plan obligations as of December 31, 2015 and to the rates of other indices at year-end. Our actuary constructed a hypothetical high quality bond portfolio with cash flows that match the expected monthly benefit payments under the pension plan and calculated a discount rate based upon that portfolio. The expected long-term rate of return on plan assets reflects long-term earnings expectations on existing plan assets and those contributions expected to be received during the current plan year. In estimating that rate, appropriate consideration was given to historical returns earned by plan assets in the fund and the rates of return expected to be available for reinvestment. Rates of return were adjusted to reflect current capital market assumptions and changes in investment allocations, if any.

The Board of Directors has chosen our Trust division as the investment manager for the Pension Plan. The investment objectives of the Pension Plan are to provide both income and capital appreciation and to assist with current and future spending needs of the Pension Plan while at the same time minimizing the risks of investing. The investment target of the Pension Plan is to achieve a total annual rate of return in excess of the change in the Consumer Price Index for the aggregate investments of the Pension Plan evaluated over a period of five years. A certain amount of risk must be assumed to achieve the Pension Plan's investment target rate of return. The Pension Plan uses a balanced portfolio which has a 5-15 year time horizon and is considered moderate risk. The portfolio strategy followed by the Pension Plan has a baseline allocation of 60% stock and 40% fixed income securities, but the investment manager may allocate funds within certain specified ranges. The range for equities is 35% to 75% and for fixed income securities the range is 25% to 60%. The allocation among categories will vary from the baseline allocation when opportunities are identified to improve returns and/or reduce risk.

The fair value of Pension Plan assets at December 31, 2015 by asset category are as follows:


			Fair Value Measurements at Reporting Date Using:
			Quoted Prices in
			Active Markets for		Significant Other		Significant
(In thousands)			Identical Assets		Observable Inputs		Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Cash	$	4	$	4	$	—	$	—
Money Market Funds		403		403		—		—
Equity Securities:
Large Cap Equity Mutual Funds		2,831		2,831		—		—
Small Cap Equity Mutual Funds		94		94		—		—
Global Equity Mutual Funds		882		882		—		—
International Equity Mutual Funds		3,019		3,019		—		—
Absolute Return Funds		1,305		1,305		—		—
EFT - International Equity		729		729		—		—
Fixed Income:
Taxable Bond Mutual Funds		4,891		4,891		—		—
Total	$	14,158	$	14,158	$	—	$	—

The fair value of Pension Plan assets at December 31, 2014 by asset category are as follows:


			Fair Value Measurements at Reporting Date Using:
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
(In thousands)			Identical Assets		Observable Inputs		Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Cash	$	6	$	6	$	—	$	—
Money Market Funds		690		690		—		—
Equity Securities:
Large Cap Equity Mutual Funds		3,770		3,770		—		—
Small Cap Equity Mutual Funds		128		128		—		—
Global Equity Mutual Funds		866		866		—		—
International Equity Mutual Funds		2,898		2,898		—		—
Absolute Return Funds		770		770		—		—
Fixed Income:
Taxable Bond Mutual Funds		6,222		6,222		—		—
Total	$	15,350	$	15,350	$	—	$	—

Large Cap Equity Mutual Funds: Funds in this category have a diversified, index and actively managed multi-manager approach to investing in domestic stocks. There are multiple fund managers that are included in the portfolio with multiple categories of industries being invested in by the managers in mid-size, to large-size publicly traded firms with a majority of funds invested in large companies.

Small Cap Equity Mutual Funds: Funds in this category have a diversified, active fund manager approach to investing in small company domestic stocks.

Global Equity Mutual Funds: Funds in this category are diversified, active global equity funds that have exposure to both large company domestic stocks as well as large company developed country international stocks.

International Equity Mutual Funds: Funds in this category have a diversified, index and actively managed multi-manager approach to investing in international developed country stocks and emerging market stocks.

Absolute Return Funds: Funds in this category are invested in a diversified portfolio of stocks, preferred stocks, convertible bonds, and bonds. The portfolio manager’s objective is to take advantage of inefficiencies in the stock and bond markets to capture a return on investment by using specialized trading strategies. The goal of these trading strategies is to provide investors with consistent, positive returns that are not necessarily correlated to the general equity markets.

International Bond Mutual Funds: Funds in this category have a diversified, actively managed approach to investing in international bonds, with an average credit rating for the majority of the portfolio being investment grade.

Taxable Bond Mutual Funds: Funds in this category have a diversified, actively managed multi-manager approach to investing in domestic and international bonds. A majority of funds are invested in domestic bonds with an average credit rating for the majority of the portfolio being investment grade.

The following table summarizes the estimated future benefit payments expected to be paid under the Pension Plan:


	Pension
(In thousands)	Benefits
2016	$	586
2017		625
2018		670
2019		676
2020		700
Years 2021 to 2025	$	3,587

The estimated future benefit payments expected to be paid under the Pension Plan are based on the same assumptions used to measure our benefit obligation at December 31, 2015. No future service estimates were included due to the frozen status of the Pension Plan.

401(k) Employee Stock Ownership Plan

Under the terms of our 401(k) Employee Stock Ownership Plan (“401(k)”) eligible employees are entitled to contribute up to 75% of their compensation, subject to IRS limitations, to the 401(k), and we contribute a percentage of the amounts contributed by the employees as authorized by Merchants’ Bank’s Board of Directors. We contributed approximately 46%, 48% and 46% of the amounts contributed by the employees in 2015, 2014 and 2013, respectively.

Summary of Expense

A summary of expense relating to our various employee benefit plans for each of the years in the three year period ended December 31, 2015 is as follows:


(In thousands)	2015		2014		2013
Pension plan	$	(180)	$	(414)	$	(162)
401(k)		573		585		565
Total	$	393	$	171	$	403