NOTE J – RETIREMENT PLANS

The Bank has a 401(k) plan, defined benefit pension plan and supplemental executive retirement plan. Employees are immediately eligible to participate in the 401(k) plan provided they are at least 18 years of age. Participants may elect to contribute, on a tax-deferred basis, up to 100% of gross compensation, as defined, subject to the limitations of Section 401(k) of the Internal Revenue Code. The Bank may, at its sole discretion, make matching contributions to each participant's account based on the amount of the participant's tax deferred contributions. Participants are fully vested in their elective contributions and, after five years of participation in the 401(k) plan, are fully vested (20% vesting per year) in the matching contributions, if any, made by the Bank. The Bank’s expense for matching contributions was $486,000, $441,000 and $396,000 for 2018, 2017 and 2016, respectively.

The Bank has a defined benefit pension plan (“Pension Plan” or “Plan”). An internal management committee (the “Committee”) oversees the affairs of the Plan and acts as named fiduciary. The Committee has retained Vanguard Group, Inc., including its subsidiaries and affiliates (“Vanguard”), to act as discretionary investment agent, trustee and custodian for the Plan. Vanguard has formulated investment recommendations customized to meet the Committee’s objectives and, after approval by the Committee, such investment recommendations are incorporated into the investment guidelines and policies contained in the investment management agreement between the Bank and Vanguard (the “Investment Management Agreement”). The Committee utilizes a formal Investment Policy Statement which includes, among other things, the investment guidelines and policies contained in the Investment Management Agreement. The Investment Policy Statement is periodically revised by the Committee as deemed appropriate.

Employees are eligible to participate in the Pension Plan after attaining 21 years of age and completing 12 full months of service. Pension benefits are generally based on a percentage of average annual compensation during the period of creditable service. The Bank makes contributions to the Pension Plan which, when taken together with participant contributions equal to 2% of their compensation, will be sufficient to fund these benefits. The Bank’s funding method, the unit credit actuarial cost method, is consistent with the funding requirements of applicable federal laws and regulations which set forth both minimum required and maximum tax deductible contributions. Employees become fully vested after four years of participation in the Pension Plan (no vesting occurs during the four-year period).

Significant Actuarial Assumptions. The following table sets forth the significant actuarial assumptions used to determine the benefit obligation at December 31, 2018, 2017 and 2016 and the benefit cost for each of the Plan years then ended.



	2018		2017		2016
Weighted average assumptions used to determine the
benefit obligation at year end:
Discount rate		4.53%		3.93%		4.40%
Rate of increase in compensation levels		3.50%		3.50%		3.50%

Weighted average assumptions used to determine net pension cost:
Discount rate		3.93%		4.40%		4.54%
Rate of increase in compensation levels		3.50%		3.50%		3.50%
Expected long-term rate of return on plan assets		5.50%		5.50%		6.00%

The increase in the discount rate from 3.93% in 2017 to 4.53% in 2018 decreased the projected benefit obligation at December 31, 2018 by approximately $3,093,000. In calculating the benefit obligation at December 31, 2018, the mortality table previously utilized, RP-2014 Healthy Annuitant/Employee Mortality Table with Projection Scale MP-2017, was adjusted to reflect Scale MP-2018. The updated mortality table decreased the projected benefit obligation at December 31, 2018 by approximately $133,000.

The decrease in the discount rate from 4.40% in 2016 to 3.93% in 2017 increased the projected benefit obligation at December 31, 2017 by approximately $2,377,000. In calculating the benefit obligation at December 31, 2017, the mortality table previously utilized, RP-2014 Healthy Annuitant/Employee Mortality Table with Projection Scale MP-2016, was adjusted to reflect Scale MP-2017. The updated mortality table decreased the projected benefit obligation at December 31, 2017 by approximately $277,000.

The decrease in the discount rate from 4.54% in 2015 to 4.40% in 2016 increased the projected benefit obligation at December 31, 2016 by $643,000. In calculating the benefit obligation at December 31, 2016, the mortality table previously utilized, RP-2014 Healthy Annuitant/Employee Mortality Table with Projection Scale MP-2015, was adjusted to reflect Scale MP-2016. The updated mortality table decreased the projected benefit obligation at December 31, 2016 by approximately $536,000. In addition, a change in the withdrawal/turnover assumption from the T-3 table of the Pension Actuary’s Handbook to the 2003 SOA Pension Plan Turnover Table decreased the projected benefit obligation at December 31, 2016 by $157,000.

Net Pension Cost. The following table sets forth the components of net periodic pension cost.



(in thousands)	2018		2017		2016
Service cost plus expected expenses and net of expected plan
participant contributions	$	1,369	$	1,214	$	1,142
Interest cost		1,587		1,590		1,584
Expected return on plan assets		(3,275)		(2,940)		(2,953)
Amortization of net actuarial loss		—		18		244
Net pension cost (credit)	$	(319)	$	(118)	$	17

As a result of the adoption of ASU 2017-07, for all periods presented, the components of net pension credit other than the service cost component were included in the line item “Other noninterest income” in the consolidated statements of income. The service cost component was included in the line item “Salaries” in the consolidated statements of income. See “Note A – Summary of Significant Accounting Policies” for more information regarding the provisions of ASU 2017-07.

The net actuarial loss for the defined benefit plan that will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost in 2019 is $352,000. Prior service cost was fully amortized from accumulated other comprehensive income (loss) into net periodic pension cost as of December 31, 2014.

Funded Status of the Plan. The following table sets forth the change in the projected benefit obligation and Plan assets for each year and, as of the end of each year, the funded status of the Plan and accumulated benefit obligation.



(in thousands)	2018		2017		2016
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	41,384	$	37,016	$	35,684
Service cost		1,533		1,386		1,283
Interest cost		1,587		1,590		1,584
Benefits paid		(1,574)		(1,510)		(1,364)
Assumption changes		(3,226)		2,100		(50)
Experience loss (gain) and other		766		802		(121)
Projected benefit obligation at end of year		40,470		41,384		37,016

Change in fair value of plan assets:
Fair value of plan assets at beginning of year		60,536		54,332		50,021
Actual return on plan assets		(3,563)		7,497		3,919
Employer contributions		—		—		1,553
Plan participant contributions		333		321		301
Benefits paid		(1,574)		(1,510)		(1,365)
Expenses		(108)		(104)		(97)
Fair value of plan assets at end of year		55,624		60,536		54,332
Funded status at end of year	$	15,154	$	19,152	$	17,316
Accumulated benefit obligation	$	38,042	$	38,544	$	34,451

During 2018, the Bank did not make a contribution to the Plan and the Bank has no minimum required pension contribution for the Plan year ending September 30, 2019. It’s maximum tax-deductible contribution for the tax year beginning January 1, 2019 is $7,700,000. The contribution the Bank will make in 2019, if any, has not yet been determined.

Plan Assets. The objective for the Plan’s assets is to generate long-term investment returns from both income and capital appreciation which outpaces the rate of inflation, while maintaining sufficient liquidity to ensure the Plan’s ability to pay all anticipated benefit and expense obligations when due. The Plan will maintain a de minimis amount of cash equivalents, with the remaining assets allocated across two broadly-defined financial asset categories: (1) equity, both domestic and international; and (2) fixed income of various durations and issuer type. The goal of the equity allocation is to supplement the Bank’s contributions to the Plan when the Plan is underfunded and increase surplus when the Plan is overfunded. The fixed income component will include longer-duration bonds designed to match and hedge the characteristics of the Plan’s liabilities. Cash equivalents, under normal circumstances, will be temporary holdings for the purpose of paying expenses and monthly benefits.

For fixed income investments: (1) the minimum average credit quality shall be investment grade (Standard & Poor’s BBB or Moody’s Baa) or higher; and (2) no more than 5% of the portfolio may be invested in securities with ratings below investment grade, and none may be rated below investment grade at the time of purchase.

Reasonable precautions are taken to avoid excessive concentrations to protect the portfolio against unfavorable outcomes within an asset class. Specifically, the following guidelines are in place:

With the exception of fixed income investments explicitly guaranteed by the U.S. government, no single investment security shall represent more than 5% of total Plan assets; and

With the exception of passively managed investment vehicles seeking to match the returns of broadly diversified market indices or diversified investment vehicles chosen specifically to hedge the interest rate risk embedded in Plan liabilities, no single investment pool or investment company (mutual fund) shall comprise more than 10% of total plan assets.

The portfolio will be rebalanced to the target asset allocation, if needed, no less often than quarterly. Unless expressly authorized in writing by the Committee, the following investing activities are prohibited:

Purchasing securities on margin;

Pledging or hypothecating securities, except for loans of securities that are fully collateralized;

Purchasing or selling derivative securities for speculation or leverage; and

Engaging in investment strategies that have the potential to amplify or distort the risk of loss beyond a level that is reasonably expected given the objectives of the portfolio.

The Plan’s actual asset allocations, target allocations and expected long-term rates of return by asset category at December 31, 2018 and 2017 are set forth in the tables that follow.



	December 31, 2018
		Target Allocation	Percentage of Plan Assets	Weighted Average Expected Long-term Rates of Return
Cash equivalents		0% - 1%	.2%	<1.00%
Equity mutual funds		15% - 25%	18.1%	5.9% to 8.3%
Fixed income mutual funds		75% - 85%	81.7%	3.8% to 5.0%
			100.0%	4.2% to 5.6%

	December 31, 2017
Cash equivalents		0% - 1%	.2%	<1.00%
Equity mutual funds		15% - 25%	20.1%	6.2% to 8.4%
Fixed income mutual funds		75% - 85%	79.7%	3.4% to 4.4%
			100.0%	4.5% to 5.5%

The ranges for the weighted average expected long-term rates of return for equity funds, bond funds and total plan assets set forth in the preceding table represent expected 25th to 75th percentile returns provided by Vanguard. For these purposes Vanguard utilizes a proprietary capital markets model (the “model”) developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. The theoretical and empirical foundation of the model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk. At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available historical monthly financial and economic data.

At December 31, 2018, the equity and fixed income components of Plan assets consist of the following Vanguard institutional funds:

Equity

Vanguard Total Stock Market Index Fund (VITSX). This fund seeks to track the performance of the Center for Research in Security Prices (CRSP) U.S. Total Market Index. The fund is passively managed using index sampling and consists of large, small and mid-cap equity securities diversified across growth and value styles.

Vanguard Total International Stock Index Fund (VTSNX). This fund seeks to track the performance of the Financial Times Stock Exchange (FTSE) Global All Cap ex U.S. Index. The fund is passively managed and includes broad exposure across developed and emerging non-U.S. equity markets.

Fixed Income

Vanguard Long-Term Investment-Grade Fund (VWETX). This fund seeks high and sustainable current income. Investments are selected using a fundamental, bottom-up credit selection process and consist of long-term, high-quality bonds broadly diversified by issuer and industry sector.

Vanguard Long-Term Bond Index Fund (VBLLX). This fund seeks high current income with high credit quality and to track the performance of the Barclays U.S. Long Government/Credit Float Adjusted Index. The fund is passively managed using index sampling and includes diversified exposure to long-term, investment-grade U.S. bond market instruments. Obligations of the U.S. government make up a significant portion of the fund’s holdings.

Fair Value of Plan Assets. The fair value of the Plan assets at December 31, 2018 and 2017, by asset category, is summarized below.



			Fair Value Measurements Using:
(in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2018:
Cash equivalents:
Vanguard Prime Money Market Mutual Fund	$	137	$	—	$	137	$	—
Total cash equivalents		137		—		137		—
Equity mutual funds:
Vanguard Total Stock Market Index Fund (VITSX)		5,513		5,513		—		—
Vanguard Total International Stock Index Fund (VTSNX)		4,539		4,539		—		—
Total equity mutual funds		10,052		10,052		—		—
Fixed income mutual funds:
Vanguard Long-Term Investment Grade Fund (VWETX)		27,260		27,260		—		—
Vanguard Long-Term Bond Index Fund (VBLLX)		18,175		18,175		—		—
Total fixed income mutual funds		45,435		45,435		—		—
Total Plan Assets	$	55,624	$	55,487	$	137	$	—

December 31, 2017:
Cash equivalents:
Vanguard Prime Money Market Mutual Fund	$	117	$	—	$	117	$	—
Total cash equivalents		117		—		117		—
Equity mutual funds:
Vanguard Total Stock Market Index Fund (VITSX)		6,658		6,658		—		—
Vanguard Total International Stock Index Fund (VTSNX)		5,479		5,479		—		—
Total equity mutual funds		12,137		12,137		—		—
Fixed income mutual funds:
Vanguard Long-Term Investment Grade Fund (VWETX)		29,065		29,065		—		—
Vanguard Long-Term Bond Index Fund (VBLLX)		19,217		19,217		—		—
Total fixed income mutual funds		48,282		48,282		—		—
Total Plan Assets	$	60,536	$	60,419	$	117	$	—

The fair values of the Vanguard mutual funds represent their net asset values (“NAV”) at December 31, 2018 and 2017. On an ongoing basis, the Plan has the ability to readily redeem its investments in these funds at their NAV per share with no advance notification.

An explanation of matrix pricing and the definitions of Level 1, 2 and 3 fair value measurements are included in “Note M – Fair Value of Financial Instruments” to these consolidated financial statements.

At both December 31, 2018 and 2017, the Plan’s cash and cash equivalents amounted to .2% of the Plan’s total assets and represented investments in the Vanguard Prime Money Market Mutual Fund.

Estimated Future Benefit Payments. The following benefit payments, which reflect expected future service as appropriate, are expected to be made by the Plan.



Year (dollars in thousands)	Amount
2019	$	1,926
2020		2,067
2021		2,169
2022		2,346
2023		2,542
2024 - 2028		14,372

The Bank’s Supplemental Executive Retirement Plan (“SERP”) currently covers the Bank’s Chief Executive Officer (“CEO”). The benefit under the SERP is equal to the additional amount that the CEO would be entitled to under the Pension and 401(k) plans in the absence of Internal Revenue Code limitations. SERP expense was $285,000, $31,000 and $197,000 in 2018, 2017 and 2016, respectively.