EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS

12 Months Ended

Dec. 31, 2023

EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS

EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS

12. 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, 2023 and 2022 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)	2023		2022		2023		2022
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year	$	946	$	1,128	$	935	$	1,297
Service cost		0		0		54		63
Interest cost		31		22		48		34
Plan participants' contributions		0		0		129		137
Actuarial loss (gain)		63		(199)		37		(394)
Benefits paid		(5)		(5)		(190)		(202)
Settlement of plan obligation		(139)		0		0		0
Benefit obligation at end of year	$	896	$	946	$	1,013	$	935
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year	$	1,001	$	1,175	$	0	$	0
Actual return on plan assets		89		(169)		0		0
Employer contribution		0		0		61		65
Plan participants' contributions		0		0		129		137
Benefits paid		(5)		(5)		(190)		(202)
Settlement of plan obligation		(139)		0		0		0
Fair value of plan assets at end of year	$	946	$	1,001	$	0	$	0
Funded status at end of year	$	50	$	55	$	(1,013)	$	(935)

At December 31, 2023 and 2022, the following pension plan and postretirement plan asset and liability amounts were recognized in the consolidated balance sheets:

	Pension				Postretirement
(In Thousands)	2023		2022		2023		2022
Other assets	$	50	$	55	$	0	$	0
Accrued interest and other liabilities		0		0		1,013		935

At December 31, 2023 and 2022, the following items included in accumulated other comprehensive loss had not been recognized as components of expense:

	Pension				Postretirement
(In Thousands)	2023		2022		2023		2022
Prior service cost	$	0	$	0	$	(124)	$	(155)
Net actuarial loss (gain)		139		179		(573)		(646)
Total	$	139	$	179	$	(697)	$	(801)

For the defined benefit pension plan, amortization of the net actuarial loss is expected to be $6,000 in 2024. For the postretirement plan, effective in January 2024, adjustments to the plan resulted in an increase of $413,000 in unrecognized prior service cost.  In 2024, the estimated reduction in expense related to prior service cost is $481,000, including a curtailment of $469,000 related to the plan adjustments. Also in 2024 for the postretirement plan, the net actuarial gain to be amortized as a reduction in expense is $77,000.

The accumulated benefit obligation for the defined benefit pension plan was $896,000 at December 31, 2023 and $946,000 at December 31, 2022.

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

	Pension						Postretirement
(In Thousands)	2023		2022		2021		2023		2022		2021
Service cost	$	0	$	0	$	0	$	54	$	63	$	63
Interest cost		31		22		20		48		34		33
Expected return on plan assets		(18)		(35)		(30)		0		0		0
Amortization of prior service cost		0		0		0		(31)		(31)		(31)
Recognized net actuarial loss (gain)		11		8		19		(36)		(19)		(5)
Settlement of plan obligation		21		0		0		0		0		0
Total net periodic benefit cost	$	45	$	(5)	$	9	$	35	$	47	$	60

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

	Pension						Postretirement
	2023		2022		2021		2023		2022		2021
Discount rate	5.05	%	2.60	%	2.30	%	3.00	%	3.00	%	2.50	%
Expected return on plan assets	4.22	%	5.00	%	4.81	%	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, 2023 and 2022 are as follows:

	Pension				Postretirement
	2023		2022		2023		2022
Discount rate	4.80	%	5.05	%	5.00	%	5.25	%
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
2024	$	570	$	74
2025		8		85
2026		14		98
2027		8		88
2028		260		97
2029-2033		36		493

No estimated minimum contribution to the defined benefit pension plan is required in 2024, 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, 2023 and 2022 are as follows:

	2023		2022
Mutual funds invested principally in:
Cash and cash equivalents	54	%	3	%
Debt securities	18	%	39	%
Equity securities	24	%	50	%
Alternative funds	4	%	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 cash and cash equivalents,  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 20). 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 $1,419,000 in 2023, $1,415,000 in 2022 and $1,299,000 in 2021.

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, 2023 and 2022, 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 579,567 shares of Corporation stock at December 31, 2023, 564,353 shares at December 31, 2022 and 513,494 shares at December 31, 2021, all of which had been allocated to Plan participants. The Corporation’s contributions to the ESOP totaled $1,244,000 in 2023, $1,170,000 in 2022 and $1,040,000 in 2021.

The Corporation has a nonqualified supplemental deferred compensation arrangement with its key officers. Charges to operating expense for officers’ supplemental deferred compensation were $489,000 in 2023, $391,000 in 2022 and $301,000 in 2021.

In connection with an acquisition, the Corporation assumed an obligation to provide a supplemental retirement benefit to a former 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. The Corporation recorded expense of $13,000 in 2023, $14,000 in 2022 and $13,000 in 2021, 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 $905,000 at December 31, 2023 and $892,000 at December 31, 2022.

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

At the Annual Meeting of Shareholders on April 20, 2023, the Citizens & Northern Corporation 2023 Equity Incentive Plan (“2023 Equity Incentive Plan”) was approved. A total of 500,000 shares of common stock may be issued under the 2023 Equity Incentive Plan. Awards may be made to participating employees and independent directors under the 2023 Equity Incentive Plan in the form of qualified options (“Incentive Stock Options,” as defined in the Internal Revenue Code), nonqualified options, restricted stock units or restricted stock, any or all of which can be granted with performance-based vesting conditions. As of December 31, 2023, no awards had been granted under this plan.

Outstanding restricted stock awards granted prior to adoption of the 2023 Equity Incentive Plan, including awards made in 2023, are governed under the 1995 Stock Incentive Plan and the Independent Directors Stock Incentive Plan. The restricted stock awards in 2023 under the 1995 Stock Incentive Plan and the Independent Directors Stock Incentive Plan  are the final awards under these plans.  

Total stock-based compensation expense is as follows:

(In Thousands)	2023		2022		2021
Restricted stock	$	1,472	$	1,260	$	1,214
Stock options		0		0		0
Total	$	1,472	$	1,260	$	1,214

The following summarizes non-vested restricted stock activity for the year ended December 31, 2023:

		Weighted
		Average
	Number	Grant Date
	of Shares	Fair Value
Outstanding, December 31, 2022	135,220	$	23.23
Granted	53,788	$	23.35
Vested	(53,738)	$	23.46
Forfeited	(25,261)	$	22.11
Outstanding, December 31, 2023	110,009	$	23.44

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, 2023, there was $1,262,000 total unrecognized compensation cost related to restricted stock, which is expected to be recognized over a weighted average period of 1.3 years.

In 2023 and 2022, the Corporation awarded shares of restricted stock under the Stock Incentive Plan, as follows:

	2023	2022
Time-based awards to independent directors	11,000	9,588
Time-based awards to employees	31,684	51,638
Performance-based awards to employees	11,104	17,017
Total	53,788	78,243

Time-based restricted stock awards granted to independent (non-employee) directors in 2023 and 2022 vest over one-year terms. Time-based restricted stock awards granted to employees in 2023 and 2022 vest ratably over three-year terms, subject to continued employment and satisfactory job performance. Performance-based restricted stock awards granted in 2023 and 2022 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 2023, 2022, or 2021. A summary of stock option activity is presented below.

	2023			2022			2021
		Weighted			Weighted			Weighted
		Average			Average			Average
		Exercise			Exercise			Exercise
	Shares	Price		Shares	Price		Shares	Price
Outstanding, beginning of year	10,564	$	20.45	24,218	$	20.01	57,111	$	18.92
Granted	0			0			0
Exercised	(8,288)	$	20.45	(13,654)	$	19.67	(22,429)	$	18.96
Forfeited	(1,630)	$	20.45	0			(3,156)	$	19.20
Expired	0			0			(7,308)	$	15.06
Outstanding, end of year	646	$	20.45	10,564	$	20.45	24,218	$	20.01
Options exercisable at year-end	646	$	20.45	10,564	$	20.45	24,218	$	20.01
Weighted-average fair value of options forfeited		$	5.50			N/A		$	4.59

The 646 shares of outstanding stock options at December 31, 2023 expired on January 3, 2024. The aggregate intrinsic value of stock options outstanding was $1,000 at December 31, 2023. The total intrinsic value of options exercised was $14,000 in 2023, $76,000 in 2022 and $97,000 in 2021.

In January 2024, the Corporation granted 53,514 shares of time-based restricted stock awards under the 2023 Equity Incentive Plan. Of the 53,514 restricted shares, 43,514 vest ratably over three years while 10,000 issued to independent directors’ vest over one year. In February 2024, the Corporation granted 19,346 shares of performance-based restricted stock awards. These performance-based restricted stock awards vest ratably over three years, with vesting contingent upon meeting earnings-related conditions specified in agreements. Total estimated stock-based compensation expense for 2024 is $1,500,000. The restricted stock awards made in January and February 2024 are not included in the tables above.