EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS

12 Months Ended

Dec. 31, 2022

EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS

EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS

13. EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS

DEFINED BENEFIT PLANS

The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length of service requirements. Full-time employees no longer accrue service time toward the Corporation-subsidized portion of the medical benefits. The plan contains a cost-sharing feature which causes participants to pay for all future increases in costs related to benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not significantly affect the liability balance at December 31, 2022 and 2021 and are not expected to significantly affect the Corporation’s future expenses. The Corporation uses a December 31 measurement date for the postretirement plan.

In an acquisition in 2007, the Corporation assumed the Citizens Trust Company Retirement Plan, a defined benefit pension plan. This plan covers certain employees who were employed by Citizens Trust Company on December 31, 2002, when the plan was amended to discontinue admittance of any future participant and to freeze benefit accruals. Information related to the Citizens Trust Company Retirement Plan has been included in the tables that follow. The Corporation uses a December 31 measurement date for this plan.

The following table shows the funded status of the defined benefit plans:

	Pension				Postretirement
(In Thousands)	2022		2021		2022		2021
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year	$	1,128	$	1,101	$	1,297	$	1,347
Service cost		0		0		63		63
Interest cost		22		20		34		33
Plan participants' contributions		0		0		137		148
Actuarial (gain) loss		(199)		12		(394)		(65)
Benefits paid		(5)		(5)		(202)		(229)
Benefit obligation at end of year	$	946	$	1,128	$	935	$	1,297
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year	$	1,175	$	1,062	$	0	$	0
Actual return on plan assets		(169)		118		0		0
Employer contribution		0		0		65		81
Plan participants' contributions		0		0		137		148
Benefits paid		(5)		(5)		(202)		(229)
Fair value of plan assets at end of year	$	1,001	$	1,175	$	0	$	0
Funded status at end of year	$	55	$	47	$	(935)	$	(1,297)

At December 31, 2022 and 2021, the following pension plan and postretirement plan asset and liability amounts were recognized in the consolidated balance sheets:

	Pension				Postretirement
(In Thousands)	2022		2021		2022		2021
Other assets	$	55	$	47	$	0	$	0
Accrued interest and other liabilities		0		0		935		1,297

At December 31, 2022 and 2021, the following items included in accumulated other comprehensive (loss) income had not been recognized as components of expense:

	Pension				Postretirement
(In Thousands)	2022		2021		2022		2021
Prior service cost	$	0	$	0	$	(155)	$	(186)
Net actuarial loss (gain)		179		182		(646)		(271)
Total	$	179	$	182	$	(801)	$	(457)

For the defined benefit pension plan, amortization of the net actuarial loss is expected to be $11,000 in 2023. For the postretirement plan, the estimated amount of prior service cost that will be amortized from accumulated other comprehensive (loss) income into net periodic benefit cost in 2023 is a reduction in expense of $31,000, and net actuarial gain of $36,000 is expected to be amortized in 2023.

The accumulated benefit obligation for the defined benefit pension plan was $946,000 at December 31, 2022 and $1,128,000 at December 31, 2021.

The components of net periodic benefit costs from defined benefit plans are as follows:

	Pension						Postretirement
(In Thousands)	2022		2021		2020		2022		2021		2020
Service cost	$	0	$	0	$	0	$	63	$	63	$	46
Interest cost		22		20		23		34		33		39
Expected return on plan assets		(35)		(30)		(27)		0		0		0
Amortization of prior service cost		0		0		0		(31)		(31)		(31)
Recognized net actuarial loss (gain)		8		19		16		(19)		(5)		(14)
Total net periodic benefit cost	$	(5)	$	9	$	12	$	47	$	60	$	40

The weighted-average assumptions used to determine net periodic benefit cost are as follows:

	Pension						Postretirement
	2022		2021		2020		2022		2021		2020
Discount rate	2.60	%	2.30	%	3.10	%	3.00	%	2.50	%	3.25	%
Expected return on plan assets	5.00	%	4.81	%	4.99	%	N/A		N/A		N/A
Rate of compensation increase	N/A		N/A		N/A		N/A		N/A		N/A

The weighted-average assumptions used to determine benefit obligations as of December 31, 2022 and 2021 are as follows:

	Pension				Postretirement
	2022		2021		2022		2021
Discount rate	5.05	%	2.60	%	5.25	%	3.00	%
Rate of compensation increase	N/A		N/A		N/A		N/A

Estimated future benefit payments, including only estimated employer contributions for the postretirement plan, which reflect expected future service, are as follows:

(In Thousands)	Pension		Postretirement
2023	$	646	$	64
2024		8		74
2025		8		81
2026		13		92
2027		8		87
2028-2032		291		398

No estimated minimum contribution to the defined benefit pension plan is required in 2023, though the Corporation may make discretionary contributions.

The expected return on pension plan assets is a significant assumption used in the calculation of net periodic benefit cost. This assumption reflects the average long-term rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation.

The fair values of pension plan assets at December 31, 2022 and 2021 are as follows:

	2022		2021
Mutual funds invested principally in:
Cash and cash equivalents	3	%	3	%
Debt securities	39	%	38	%
Equity securities	50	%	51	%
Alternative funds	8	%	8	%
Total	100	%	100	%

C&N Bank’s Wealth Management Department manages the investment of the pension plan assets. The Plan’s securities include mutual funds invested principally in debt securities, a diversified mix of large, mid- and small-capitalization U.S. stocks, foreign stocks and alternative asset classes such as real estate, commodities, and inflation-protected securities. The fair values of plan assets are determined based on Level 1 inputs (as described in Note 21). The Plan’s assets do not include any shares of the Corporation’s common stock.

PROFIT SHARING AND DEFERRED COMPENSATION PLANS

The Corporation has a profit sharing plan that incorporates the deferred salary savings provisions of Section 401(k) of the Internal Revenue Code. The Corporation’s matching contributions to the Plan depend upon the tax deferred contributions of employees. The Corporation’s total basic and matching contributions were $1,415,000 in 2022, $1,299,000 in 2021 and $1,050,000 in 2020.

The Corporation has an Employee Stock Ownership Plan (ESOP). Contributions to the ESOP are discretionary, and the ESOP uses funds contributed to purchase Corporation stock for the accounts of ESOP participants. These purchases are made in the market (not directly from the Corporation), and employees are not permitted to purchase Corporation stock under the ESOP. The ESOP includes a diversification feature, which allows participants, upon reaching age 55 and 10 years of service (as defined), to sell up to 50% of their Corporation shares over a period of 6 years. As of December 31, 2022 and 2021, there were no shares allocated for repurchase by the ESOP.

Dividends paid on shares held by the ESOP are charged to retained earnings. All Corporation shares owned through the ESOP are included in the calculation of weighted-average shares outstanding for purposes of calculating earnings per share – basic and diluted. The ESOP held 564,353 shares of Corporation stock at December 31, 2022, 513,494 shares at December 31, 2021 and 481,478 shares at December 31, 2020, all of which had been allocated to Plan participants. The Corporation’s contributions to the ESOP totaled $1,170,000 in 2022, $1,040,000 in 2021 and $912,000 in 2020.

The Corporation has a nonqualified supplemental deferred compensation arrangement with its key officers. Charges to operating expense for officers’ supplemental deferred compensation were $391,000 in 2022, $301,000 in 2021 and $286,000 in 2020.

In connection with the Covenant acquisition, the Corporation assumed an obligation to provide a supplemental retirement benefit to a former Covenant executive. Under the terms of the agreement, the executive or his heirs will receive monthly payments totaling $1 million over a 10-year period starting in October 2025. Effective July 1, 2020, the Corporation recorded a liability of $499,000 representing the present value of the obligation prior to the executive fully vesting in the benefit. In 2020, the Corporation recorded expense of $360,000, which is included in merger-related expenses in the consolidated statements of income, representing the impact of the executive fully vesting upon the change in control. In addition, the Corporation recorded expense of $14,000 in 2022, $13,000 in 2021 and $6,000 in 2020, which is included in pensions and other employee benefits in the consolidated statements of income, representing the effective interest cost on the obligation. The discount rate used to measure the liability is 1.5%. The balance of the liability, which is included in accrued interest and other liabilities in the consolidated balance sheets, is $892,000 at December 31, 2022 and $878,000 at December 31, 2021.

The Corporation also has a nonqualified deferred compensation plan that allows selected officers the option to defer receipt of cash compensation, including base salary and any cash bonuses or other cash incentives. This nonqualified deferred compensation plan does not provide for Corporation contributions.

STOCK-BASED COMPENSATION PLANS

The Corporation has a Stock Incentive Plan for a selected group of senior officers. A total of 850,000 shares of common stock may be issued under the Stock Incentive Plan. Awards may be made under the Stock Incentive Plan in the form of qualified options (“Incentive Stock Options,” as defined in the Internal Revenue Code), nonqualified options, stock appreciation rights or restricted stock. Historically through December 31, 2022, all awards made under this Plan have consisted of Incentive Stock Options or restricted stock. Incentive Stock Options have an exercise price equal to the market value of the stock at the date of grant, vest after 6 months and expire after 10 years. There are 52,128 shares available for issuance under the Stock Incentive Plan as of December 31, 2022.

Also, the Corporation has an Independent Directors Stock Incentive Plan. This plan permits awards of nonqualified stock options and/or restricted stock to non-employee directors. A total of 235,000 shares of common stock may be issued under the Independent Directors Stock Incentive Plan. The recipients’ rights to exercise stock options under this plan expire 10 years  from the date of grant. The exercise prices of all stock options awarded under the Independent Directors Stock Incentive Plan are equal to market value as of the dates of grant. There are 87,520 shares available for issuance under the Independent Directors Stock Incentive Plan as of December 31, 2022.

Total stock-based compensation expense is as follows:

(In Thousands)	2022		2021		2020
Restricted stock	$	1,260	$	1,214	$	1,050
Stock options		0		0		0
Total	$	1,260	$	1,214	$	1,050

The following summarizes non-vested restricted stock activity for the year ended December 31, 2022:

		Weighted
		Average
	Number	Grant Date
	of Shares	Fair Value
Outstanding, December 31, 2021	127,027	$	21.37
Granted	78,243	$	25.03
Vested	(59,268)	$	21.54
Forfeited	(10,782)	$	23.71
Outstanding, December 31, 2022	135,220	$	23.23

Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures. As of December 31, 2022, there was $1,678,000 total unrecognized compensation cost related to restricted stock, which is expected to be recognized over a weighted average period of 1.4 years.

In 2022 and 2021, the Corporation awarded shares of restricted stock under the Stock Incentive Plan, as follows:

	2022	2021
Time-based awards to independent directors	9,588	10,989
Time-based awards to employees	51,638	50,178
Performance-based awards to employees	17,017	17,224
Total	78,243	78,391

Time-based restricted stock awards granted under the Independent Directors Stock Incentive Plan in 2022 and 2021 vest over one-year terms. Time-based restricted stock awards granted to employees in 2022 and 2021 vest ratably over three-year terms, subject to continued employment and satisfactory job performance. Performance-based restricted stock awards granted in 2022 and 2021 vest ratably over three-year terms, with vesting contingent upon meeting conditions based on the Corporation’s earnings as specified in the agreements.

There were no stock options granted in 2022, 2021, or 2020. A summary of stock option activity is presented below:

	2022			2021			2020
		Weighted			Weighted			Weighted
		Average			Average			Average
		Exercise			Exercise			Exercise
	Shares	Price		Shares	Price		Shares	Price
Outstanding, beginning of year	24,218	$	20.01	57,111	$	18.92	75,897	$	18.69
Granted	0			0			0
Exercised	(13,654)	$	19.67	(22,429)	$	18.96	(17,222)	$	18.25
Forfeited	0			(3,156)	$	19.20	(1,564)	$	15.06
Expired	0			(7,308)	$	15.06	0	$
Outstanding, end of year	10,564	$	20.45	24,218	$	20.01	57,111	$	18.92
Options exercisable at year-end	10,564	$	20.45	24,218	$	20.01	57,111	$	18.92
Weighted-average fair value of options forfeited			N/A		$	4.59		$	4.26

The weighted-average remaining contractual term of outstanding stock options at December 31, 2022 was 1.0 years. The aggregate intrinsic value of stock options outstanding was $25,000 at December 31, 2022. The total intrinsic value of options exercised was $76,000 in 2022, $97,000 in 2021 and $128,000 in 2020.

The Corporation has issued shares from treasury stock for almost all stock option exercises through December 31, 2022. Management does not anticipate that stock repurchases will be necessary to accommodate stock option exercises in 2023.

In January 2023, the Corporation awarded 42,788 shares of restricted stock under the Stock Incentive Plan and 11,000 shares of restricted stock under the Independent Directors Stock Incentive Plans. The January 2023 restricted stock awards under the Stock Incentive Plan vest ratably over three years. The 2023 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year. Total estimated stock-based compensation expense for 2023 is $1,500,000. The restricted stock awards made in January 2023 are not included in the tables above.