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BENEFIT PLANS

12 Months Ended

Dec. 31, 2019

NOTE K: BENEFIT PLANS

Pension and post-retirement plans

The Company provides a qualified defined benefit pension to eligible employees and retirees, other post-retirement health and life insurance benefits to certain retirees, an unfunded supplemental pension plan for certain key executives, and an unfunded stock balance plan for certain of its nonemployee directors. Using a measurement date of December 31, the following table shows the funded status of the Company’s plans reconciled with amounts reported in the Company’s consolidated statements of condition:

	Pension Benefits						Post-retirement Benefits
(000’s omitted)	2019			2018			2019			2018
Change in benefit obligation:
Benefit obligation at the beginning of year	$	144,211		$	147,450		$	1,657		$	1,785
Service cost		5,081			4,561			0			0
Interest cost		6,264			5,676			70			69
Plan amendment / acquisition		0			883			0			0
Participant contributions		0			0			35			479
Deferred actuarial (gain)/loss		16,292			(4,177	)		87			191
Benefits paid		(9,764	)		(10,182	)		(172	)		(867	)
Benefit obligation at end of year		162,084			144,211			1,677			1,657
Change in plan assets:
Fair value of plan assets at beginning of year		203,672			217,107			0			0
Actual return of plan assets		25,522			(3,858	)		0			0
Participant contributions		0			0			35			479
Employer contributions		7,893			605			137			388
Plan acquisition		0			0			0			0
Benefits paid		(9,764	)		(10,182	)		(172	)		(867	)
Fair value of plan assets at end of year		227,323			203,672			0			0
Over/(Under) funded status at year end	$	65,239		$	59,461		$	(1,677	)	$	(1,657	)

Amounts recognized in the consolidated statement of condition were:
Other assets	$	81,930		$	72,659		$	0		$	0
Other liabilities		(16,691	)		(13,198	)		(1,677	)		(1,657	)
Amounts recognized in accumulated other comprehensive loss/(income) (“AOCI”) were:
Net loss	$	41,924		$	39,410		$	641		$	592
Net prior service cost (credit)		4,875			4,939			(1,265	)		(1,444	)
Pre-tax AOCI		46,799			44,349			(624	)		(852	)
Taxes		(11,448	)		(10,870	)		155			210
AOCI at year end	$	35,351		$	33,479		$	(469	)	$	(642	)

The benefit obligation for the defined benefit pension plan was $145.4 million and $131.0 million as of December 31, 2019 and 2018, respectively, and the fair value of plan assets as of December 31, 2019 and 2018 was $227.3 million and $203.7 million, respectively. The defined benefit pension plan was amended effective December 31, 2018 to transfer certain obligations from the Company’s non-qualified supplemental pension plan and Restoration Plan (as defined below) into the qualified defined benefit pension plan.

The Company has unfunded supplemental pension plans for certain key active and retired executives. The projected benefit obligation for the unfunded supplemental pension plan for certain key executives was $16.4 million and $13.2 million for 2019 and 2018, respectively. The Company also has an unfunded stock balance plan for certain of its nonemployee directors. The projected benefit obligation for the unfunded stock balance plan was $0.1 million for 2019 and 2018. The plan was frozen effective December 31, 2009.

Effective June 1, 2018, the Company adopted the Community Bank System, Inc. Restoration Plan (“Restoration Plan”). The Restoration Plan is a non-qualified deferred compensation plan for certain employees whose benefits under tax-qualified retirement plans are restricted by the Internal Revenue Code Section 401(a)(17) limitation on compensation. Adoption of the plan resulted in an unfunded initial projected benefit obligation of approximately $0.8 million. The Restoration Plan was amended effective December 31, 2018 to transfer certain obligations into the Company’s qualified defined benefit pension plan. The projected benefit obligation for the unfunded Restoration Plan was $0.3 million for 2019 and $0.1 million for 2018, respectively.

Effective December 31, 2009, the Company terminated its post-retirement medical program for current and future employees. Remaining plan participants will include only existing retirees as of December 31, 2010. This change was accounted for as a negative plan amendment and a $3.5 million, net of income taxes, benefit for prior service was recognized in AOCI in 2009. This negative plan amendment is being amortized over the expected benefit utilization period of remaining plan participants.

Amounts recognized in accumulated other comprehensive income, net of tax, for the year ended December 31, are as follows:

	Pension Benefits					Post-retirement Benefits
(000’s omitted)	2019			2018		2019		2018
Prior service cost/(credit)	$	(49	)	$	1,509	$	136	$	135
Net (gain) loss		1,920			9,431		38		129
Total	$	1,871		$	10,940	$	174	$	264

The estimated costs, net of tax, that will be amortized from accumulated other comprehensive (income) loss into net periodic (income) cost over the next fiscal year are as follows:

(000’s omitted)	Pension Benefits		Post-retirement Benefits
Prior service credit	$	241	$	(179	)
Net loss		3,212		40
Total	$	3,453	$	(139	)

The weighted-average assumptions used to determine the benefit obligations as of December 31 are as follows:

	Pension Benefits						Post-retirement Benefits
	2019			2018			2019			2018
Discount rate		3.50	%		4.50	%		3.60	%		4.45	%
Expected return on plan assets		7.00	%		7.00	%		N/A			N/A
Rate of compensation increase		3.50	%		3.50	%		N/A			N/A

The net periodic benefit cost as of December 31 is as follows:

	Pension Benefits									Post-retirement Benefits
(000’s omitted)	2019			2018			2017			2019			2018			2017
Service cost	$	5,081		$	4,561		$	4,181		$	0		$	0		$	0
Interest cost		6,264			5,676			5,717			70			69			76
Expected return on plan assets		(14,311	)		(14,820	)		(13,354	)		0			0			0
Plan amendment		0			13			0			0			0			0
Amortization of unrecognized net loss/(gain)		2,568			1,193			767			38			21			8
Amortization of prior service cost		64			(293	)		55			(179	)		(179	)		(179	)
Net periodic (benefit)	$	(334	)	$	(3,670	)	$	(2,634	)	$	(71	)	$	(89	)	$	(95	)

Prior service costs in which all or almost all of the plan’s participants are fully eligible for benefits under the plan are amortized on a straight-line basis over the expected future working years of all active plan participants. Unrecognized gains or losses are amortized using the “corridor approach”, which is the minimum amortization required. Under the corridor approach, the net gain or loss in excess of 10 percent of the greater of the projected benefit obligation or the market-related value of the assets is amortized on a straight-line basis over the expected future working years of all active plan participants.

The weighted-average assumptions used to determine the net periodic pension cost for the years ended December 31 are as follows:

	Pension Benefits									Post-retirement Benefits
	2019			2018			2017			2019			2018			2017
Discount rate		4.50	%		4.00	%		4.40	%		4.45	%		4.00	%		4.40	%
Expected return on plan assets		7.00	%		7.00	%		7.00	%		N/A			N/A			N/A
Rate of compensation increase		3.50	%		3.50	%		3.50	%		N/A			N/A			N/A

The amount of benefit payments that are expected to be paid over the next ten years are as follows:

(000’s omitted)	Pension Benefits		Post-retirement Benefits
2020	$	9,947	$	179
2021		10,713		135
2022		10,913		132
2023		11,455		129
2024		11,762		126
2025-2029		59,503		572

The payments reflect future service and are based on various assumptions including retirement age and form of payment (lump-sum versus annuity). Actual results may differ from these estimates.

The assumed discount rate is used to reflect the time value of future benefit obligations. The discount rate was determined based upon the yield on high-quality fixed income investments expected to be available during the period to maturity of the pension benefits. This rate is sensitive to changes in interest rates. A decrease in the discount rate would increase the Company’s obligation and future expense while an increase would have the opposite effect. The expected long-term rate of return was estimated by taking into consideration asset allocation, reviewing historical returns on the type of assets held and current economic factors. Based on the Company’s anticipation of future experience under the defined benefit pension plan, the mortality tables used to determine future benefit obligations under the plan were updated as of December 31, 2019 to the RP-2014 Mortality Table for employees and healthy annuitants, adjusted backward to 2006 with Scale MP-2014, and then adjusted for mortality improvements with the Scale MP-2018 mortality improvement scale on a generational basis. The appropriateness of the assumptions are reviewed annually.

Plan Assets

The investment objective for the defined benefit pension plan is to achieve an average annual total return over a five-year period equal to the assumed rate of return used in the actuarial calculations. At a minimum performance level, the portfolio should earn the return obtainable on high quality intermediate-term bonds. The Company’s perspective regarding portfolio assets combines both preservation of capital and moderate risk-taking. Asset allocation favors fixed income securities, with a target allocation of approximately 60% equity securities and 40% fixed income securities and money market funds. Due to the volatility in the market, the target allocation is not always desirable and asset allocations will fluctuate between acceptable ranges. Prohibited transactions include purchase of securities on margin, uncovered call options, and short sale transactions.

The fair values of the Company’s defined benefit pension plan assets at December 31, 2019 by asset category are as follows:

Asset category (000’s omitted)	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total

Cash equivalents	$	3,983	$	0	$	0	$	3,983
Equity securities:
U.S. large-cap		50,301		0		0		50,301
U.S mid/small cap		10,408		0		0		10,408
CBU stock		6,522		0		0		6,522
International		37,990		0		0		37,990
		105,221		0		0		105,221

Fixed income securities:
Government securities		73,698		8,341		0		82,039
Investment grade bonds		12,884		0		0		12,884
High yield^(a)		6,770		0		0		6,770
		93,352		8,341		0		101,693

Other investments ^(b)		15,856		82		0		15,938

Total ^(c)	$	218,412	$	8,423	$	0	$	226,835

The fair values of the Company’s defined benefit pension plan assets at December 31, 2018 by asset category are as follows:

Asset category (000’s omitted)	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total

Cash equivalents	$	4,856	$	0	$	0	$	4,856
Equity securities:
U.S. large-cap		39,122		0		0		39,122
U.S mid/small cap		9,881		0		0		9,881
CBU stock		7,692		0		0		7,692
International		32,506		0		0		32,506
		89,201		0		0		89,201

Fixed income securities:
Government securities		64,417		11,370		0		75,787
Investment grade bonds		12,054		0		0		12,054
High yield^(a)		6,712		0		0		6,712
		83,183		11,370		0		94,553

Other investments ^(b)		14,267		66		0		14,333

Total ^(c)	$	191,507	$	11,436	$	0	$	202,943

(a)	This category is exchange-traded funds representing a diversified index of high yield corporate bonds.

(b)	This category is comprised of exchange-traded funds and mutual funds holding non-traditional investment classes including private equity funds and alternative exchange funds.

(c)	Excludes dividends and interest receivable totaling $0.5 million and $0.7 million at December 31, 2019 and 2018, respectively.

The valuation techniques used to measure fair value for the items in the table above are as follows:

●

Money market funds - Managed portfolios, including commercial paper and other fixed income securities issued by U.S. and foreign corporations, asset-backed commercial paper, U.S. government securities, obligations of foreign governments and U.S. and foreign banks, which are valued at the closing price reported on the market on which the underlying securities are traded.

●

Equity securities and other investments – Mutual funds, equity securities and common stock of the Company which are valued at the quoted market price of shares held at year-end.

●

Fixed income securities - U.S. Treasuries, municipal bonds and notes, government sponsored entities, and corporate debt valued at the closing price reported on the active market on which the individual securities are traded or for municipal bonds and notes based on quoted prices for similar assets in the active market.

The Company makes contributions to its funded qualified pension plan as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected return on such assets, and the value of the accumulated benefit obligation. The Company made a $7.3 million contribution to its defined benefit pension plan in 2019. The Company funds the payment of benefit obligations for the supplemental pension and post-retirement plans because such plans do not hold assets for investment.

401(k) Employee Stock Ownership Plan

The Company has a 401(k) Employee Stock Ownership Plan in which employees can contribute from 1% to 90% of eligible compensation, with the first 3% being eligible for a 100% matching contribution in the form of Company common stock and the next 3% being eligible for a 50% matching contributions in the form of Company common stock. The expense recognized under this plan for the years ended December 31, 2019, 2018 and 2017 was $6.1 million, $5.9 million, and $5.3 million, respectively. Effective January 1, 2010, the defined benefit pension plan was modified to a new plan design that includes an interest credit contribution to be made to the 401(k) plan. The expense recognized for this interest credit contribution for the years ended December 31, 2019, 2018, and 2017 was $1.1 million, $0.9 million, and $0.8 million, respectively.

The Company acquired The Merchants Bank 401(k) ESOP Plan with the Merchants acquisition and The Gordon B. Roberts 401(k) Plan with the GBR acquisition. Effective January 1, 2018, The Merchants Bank 401(k) ESOP Plan and The Gordon B. Roberts 401(k) Plan were merged into and became part of the Community Bank System, Inc. 401(k) Employee Stock Ownership Plan.

Other Deferred Compensation Arrangements

In addition to the supplemental pension plans for certain executives, the Company has nonqualified deferred compensation arrangements for several former directors, officers and key employees. All benefits provided under these plans are unfunded and payments to plan participants are made by the Company. At December 31, 2019 and 2018, the Company has recorded a liability of $2.6 million and $2.8 million, respectively. The expense recognized under these plans for the years ended December 31, 2019, 2018, and 2017 was approximately $0.2 million, $0.08 million, and $0.3 million, respectively.

Deferred Compensation Plans for Directors

Directors of the Company may defer all or a portion of their director fees under the Deferred Compensation Plan for Directors. Under this plan, there is a separate account for each participating director which is credited with the amount of shares that could have been purchased with the director’s fees as well as any dividends on such shares. On the distribution date, the director will receive common stock equal to the accumulated share balance in their account. As of December 31, 2019 and 2018, there were 151,519 and 151,977 shares credited to the participants’ accounts, for which a liability of $4.9 million and $4.6 million was accrued, respectively. The expense recognized under the plan for the years ended December 31, 2019, 2018 and 2017, was $0.2 million, $0.2 million, and $0.2 million, respectively.

The Company acquired deferred compensation plans for certain non-employee directors and trustees of Merchants. Under the terms of these acquired deferred compensation plans, participating directors could elect to have all, or a specified percentage, of their Merchants director’s fees for a given year paid in the form of cash or deferred in the form of restricted shares of Merchants’ common stock. Directors who elected to have their compensation deferred were credited with a number of shares of Merchants’ common stock equal in value to the amount of fees deferred. These shares were converted to shares of Company stock in connection with the acquisition and are held in a rabbi trust. The shares held in the rabbi trust are considered outstanding for purposes of computing earnings per share. The participating director may not sell, transfer or otherwise dispose of these shares prior to distribution. With respect to shares of common stock issued or otherwise transferred to a participating director, the participating director has the right to receive dividends or other distributions thereon.