11.EMPLOYEE BENEFITS AND DEFERRED COMPENSATION PLANS

Employees’ Pension Plan

The Bank has a defined benefit pension plan that covered substantially all employees of the Company and its subsidiaries. The Pension Plan provides benefits that are based on the employees’ compensation and years of service. The Bank uses an actuarial method of amortizing prior service cost and unrecognized net gains or losses which result from actual experience and assumptions being different than those that are projected. The amortization method the Bank uses recognizes the prior service cost and net gains or losses over the average remaining service period of active employees which exceeds the required amortization. The Pension Plan was frozen effective January 31, 2008. Under the freeze, eligible employees will receive the benefits already earned through January 31, 2008 at retirement, but will not be able to accrue any additional benefits. As a result, service cost will no longer be incurred.

Selected Financial Information for the Pension Plan is as follows:




	12/31/2016		12/31/2015
Change in benefit obligation:		(in thousands)
Benefit obligation at the beginning of the year	$	5,384	$	5,437
Service cost		-		-
Interest cost		221		205
Assumption change		97		(61)
Actuarial (gain) loss		11		(4)
Benefits paid		(189)		(193)
Benefit obligation at the end of the year		5,524		5,384

Change in plan assets:
Fair value of plan assets at the beginning of year		4,067		4,201
Actual return on plan assets		248		(106)
Employer contributions		140		165
Benefits paid		(189)		(193)
Fair value of plan assets at the end of year		4,266		4,067

Funded status	$	(1,258)	$	(1,317)

Amount recognized in the Consolidated Balance Sheets consist of:
Accrued benefit liabilities	$	(1,258)	$	(1,317)

Amount recognized in the Accumulated Other Comprehensive Loss consists of:
Net actuarial loss	$	2,429	$	2,390
Prior service cost		-		-
Net amount recognized in equity - pre-tax	$	2,429	$	2,390

Net amount recognized on Consolidated Balance Sheets in Other Liabilities	$	1,171	$	1,073

Accumulated benefit obligation at year end	$	5,524	$	5,384

Assumptions used by the Bank in the determination of Pension Plan information consisted of the following:




	2016		2015		2014
Discount rate for projected benefit obligation	3.95	%	4.17	%	3.83	%
Discount rate for net periodic pension cost	4.17	%	3.83	%	4.78	%
Rate of increase in compensation levels	-	%	-	%	-	%
Expected long-term rate of return of plan assets	6.50	%	7.50	%	7.50	%

The components of net periodic benefit cost consisted of the following:




		2016		2015		2014
		(in thousands)
Service cost	$	-	$	-	$	-
Interest cost		221		205		206
Expected return on plan assets		(263)		(308)		(307)
Net amortization and deferral		85		71		22
Net periodic benefit cost	$	43	$	(32)	$	(79)

The estimated amounts to be amortized from accumulated other comprehensive loss into net periodic cost in 2017 for amortization of actuarial loss will be $92 thousand.

The expected long-term rate of return on Pension Plan assets assumption was determined based on historical returns earned by equity and fixed income securities, adjusted to reflect future return expectations based on plan targeted asset allocation. Equity and fixed income securities were assumed to earn returns in the ranges of 5% to 10% and 5% to 6%, respectively. When these overall return expectations are applied to the Pension Plan’s targeted allocation, the expected rate of return is determined to be 6.50%, which is within the range of expected return. The Company’s management will continue to evaluate its actuarial assumptions, including the expected rate of return, at least annually, and will adjust as necessary.

The weighted average asset allocation of the Pension Plan at December 31, 2016 and 2015, the Pension Plan measurement date, was as follows:



Asset Category:	2016		2015
Equity mutual funds	67.97	%	73.51	%
Fixed income mutual funds	30.20	%	18.64	%
Cash/Short-term investments	1.83	%	7.85	%
	100.00	%	100.00	%

The portfolio is invested in accordance with sound investment practices that emphasize long-term investment fundamentals. Consistent with this approach, the investment of the portfolio’s assets is guided by the following underlying goals: to diversify the portfolio in order to reduce risk and to maintain sufficient liquidity to meet the obligations of the Plan. The Plan’s long-term asset allocation under normal market conditions is comprised of 65% equity investments and 35% in fixed income assets and other short term cash equivalents. The portfolio largely adhered to this allocation throughout 2016. The investment objective of the allocation in equity investments emphasizes long term capital appreciation. These equity investments are diversified across market capitalization, industries, style and geographical location. The investment objective of the fixed income allocation is to generally provide a diversified source of income with an awareness of capital preservation.

The Company contributed $140 thousand to the Pension Plan in 2016 and estimates that it will contribute another $140 thousand to the Pension Plan in 2017.

The major categories of assets in the Bank’s Pension Plan as of year-end are presented in the following table. Assets are segregated according to their investment objective by the level of the valuation inputs within the fair value hierarchy established by ASC Topic 820 utilized to measure fair value (see Note 19 – Fair Value of Financial Instruments).




	2016		2015
	(in thousands)
Level 1:
Cash	$	-	$	44
Mutual funds:
Short-term investments:
Money market		78		275
Fixed Income:		1,288		394
Equities:
Small cap		307		375
Large cap		1,008		-
Real estate		101		234
International large cap		923		757
International small cap		201		-
Emerging markets		254		388
Currency		-		177
Commodity		106		35
Bank loans		-		187

Exchange -traded funds (ETFs):
Large cap		-		844
Mid cap		-		357
	$	4,266	$	4,067

The mutual funds and ETFs are actively traded with market quotes available on at least a daily basis. Therefore, they are Level 1 assets.

The discount rate utilized by the Company for determining future pension obligations is based on a review of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. The discount rate determined on this basis decreased from 4.17% at December 31, 2015 to 3.95% at December 31, 2016 for the Company's Pension Plan.

Expected benefit payments under the Pension Plan over the next ten years at December 31, 2016 are as follows:



	(in thousands)
2017	$	202
2018		212
2019		211
2020		210
2021		225
Year 2022 - 2026		1,540

Supplemental Executive Retirement Plans

The Bank also maintains a non-qualified supplemental executive retirement plan (the “SERP”) covering certain members of the Company’s senior management. The SERP was amended during 2003 to provide a benefit based on a percentage of final average earnings, as opposed to the fixed benefit that was provided for in the superseded plan.

On April 8, 2010, the Compensation Committee of the Board of Directors of the Company approved the adoption of the Evans Bank, N.A. Supplemental Executive Retirement Plan for Senior Executives (“the Senior Executive SERP”). The “old” SERP plan will keep its participants at the time of the creation of the Senior Executive SERP, but any future executives identified by the Board of Directors as eligible for SERP benefits will participate in the Senior Executive SERP. A participant is generally entitled to receive a benefit under the Senior Executive SERP upon a termination of employment, other than for “cause”, after the participant has completed 10 full calendar years of service with the Bank. No benefit is payable under the Senior Executive SERP if the participant’s employment is terminated for “cause” or if the participant voluntarily terminates before completing 10 full calendar years of service with the Bank. In addition, the payment of benefits under the Senior Executive SERP is conditioned upon certain agreements of the participant related to confidentiality, cooperation, non-competition, and non-solicitation. A participant will be entitled to a retirement benefit under the Senior Executive SERP if his or her employment with the Bank terminates other than for “cause”. The “accrued benefit” is based on a percentage of the participant’s final average earnings, which is determined based upon the participant’s total annual compensation over the highest consecutive five calendar years of the participant’s employment with the Bank, accrued over the participant’s “required benefit service”. The percentages and years of service requirements are set forth in each participant’s Participation Agreement, and range from 25% to 35% and from 15 to 20 years.

The obligations related to the two SERP plans are indirectly funded by various life insurance contracts naming the Bank as beneficiary. The Bank has also indirectly funded the SERPs, as well as other benefits provided to other employees through bank-owned life insurance. The Bank uses an actuarial method of amortizing unrecognized net gains or losses which result from actual experience and assumptions being different than those that are projected. The amortization method the Bank is using recognizes the net gains or losses over the average remaining service period of active employees, which exceeds the required amortization.

Selected financial information for the two SERP plans is as follows:




	12/31/2016		12/31/2015
Change in benefit obligation:		(in thousands)
Benefit obligation at the beginning of the year	$	4,349	$	4,555
Service cost		188		194
Interest cost		144		146
Actuarial (gain) loss		(234)		(354)
Benefits paid		(192)		(192)
Benefit obligation at the end of the year		4,255		4,349

Change in plan assets:
Fair value of plan assets at the beginning of year		-		-
Actual return on plan assets		-		-
Employer contributions		192		192
Benefits paid		(192)		(192)
Fair value of plan assets at the end of year		-		-

Funded status	$	(4,255)	$	(4,349)

Amount recognized in the Consolidated Balance Sheets consist of:
Accrued benefit liabilities	$	(4,255)	$	(4,349)

Amount recognized in the Accumulated Other Comprehensive Loss consists of:
Net actuarial loss	$	747	$	1,117
Prior service cost		187		218
Net amount recognized in equity - pre-tax	$	934	$	1,335

Net amount recognized on Consolidated Balance Sheets in Other Liabilities	$	(3,321)	$	(3,014)

Accumulated benefit obligation at year end	$	3,902	$	3,876

Assumptions used by the Bank in both years in the determination of SERP information consisted of the following:



	2016		2015		2014
Discount rate for projected benefit obligation	3.30	%	3.38	%	3.30	%
Discount rate for net periodic pension cost	3.38	%	3.30	%	4.15	%
Salary scale	3.00	%	3.50	%	3.50	%

The discount rate utilized by the Company for determining future pension obligations is based on a review of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. The discount rate determined on this basis decreased from 3.38% at December 31, 2015 to 3.30% at December 31, 2016 (i.e. the measurement date) for the SERP.

The components of net periodic benefit cost consisted of the following:



	2016		2015		2014
	(in thousands)
Service cost	$	188	$	194	$	168
Interest cost		144		146		159
Net amortization and deferral		167		161		115
Net periodic benefit cost	$	499	$	501	$	442

The estimated amounts to be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2016 for prior service costs and actuarial loss will be $31 thousand and $81 thousand, respectively.

Expected benefit payments under the SERP over the next ten years at December 31, 2016 are as follows:



	(in thousands)
2017	$	193
2018		193
2019		1,848
2020		193
2021		277
Year 2022 - 2026		1,410

Other Compensation Plans

The Company has a non-qualified deferred compensation plan whereby directors and certain officers may defer a portion of their base pre-tax compensation. Additionally, the Company has a non-qualified executive incentive retirement plan, whereby the Company defers on behalf of certain officers a portion of their base compensation until retirement or termination of service, subject to certain vesting arrangements. Aggregate expense under these plans was approximately $110 thousand in 2016, $105 thousand in 2015, and $210 thousand in 2014. The benefit obligation, included in other liabilities in the Company’s consolidated balance sheets, was $2.2 million at December 31, 2016 and 2015.

These benefit plans are indirectly funded by bank-owned life insurance contracts with a total aggregate cash surrender value of approximately $21.5 million and $21.0 million at December 31, 2016 and 2015, respectively. Increases in cash surrender value are included in other non-interest income on the Company’s Consolidated Statements of Income. Endorsement split-dollar life insurance benefits have also been provided to directors and certain officers of the Bank and its subsidiaries during employment.

The Bank also has a defined contribution retirement and thrift 401(k) Plan (the “401(k) Plan”) for its employees who meet certain length of service and age requirements. The provisions of the 401(k) Plan allow eligible employees to contribute a portion of their annual salary, up to the IRS statutory limit. The 401(k) plan includes a Qualified Automatic Contribution Arrangement (“QACA”). This arrangement features automatic deferred contributions with annual escalation, a QACA matching contribution, and an additional matching contribution. Employees vest in employer contributions over six years. The Company’s expense under the 401(k) Plan was approximately $727 thousand, $751 thousand, and $719 thousand for the years ended December 31, 2016, 2015, and 2014, respectively.