PENSION AND OTHER BENEFIT PLANS

12 Months Ended

Dec. 31, 2023

PENSION AND OTHER BENEFIT PLANS

PENSION AND OTHER BENEFIT PLANS

NOTE J: PENSION AND OTHER 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)	2023		2022		2023		2022
Change in benefit obligation:
Benefit obligation at the beginning of year	$	151,361	$	183,270	$	1,656	$	1,529
Service cost		4,433		4,959		0		0
Interest cost		7,561		5,334		92		68
Plan amendment / acquisition		0		1,851		0		536
Participant contributions		0		0		0		0
Deferred actuarial loss/(gain)		5,530		(31,759)		165		(306)
Benefits paid		(10,605)		(12,294)		(199)		(171)
Benefit obligation at end of year		158,280		151,361		1,714		1,656
Change in plan assets:
Fair value of plan assets at beginning of year		244,332		290,687		0		0
Actual return of plan assets		28,746		(34,967)		0		0
Participant contributions		0		0		0		0
Employer contributions		4,989		906		199		171
Plan acquisition		0		0		0		0
Benefits paid		(10,605)		(12,294)		(199)		(171)
Fair value of plan assets at end of year		267,462		244,332		0		0
Over/(Under) funded status at year end	$	109,182	$	92,971	$	(1,714)	$	(1,656)
Amounts recognized in the consolidated statement of condition were:
Other assets	$	123,263	$	106,986	$	0	$	0
Other liabilities		(14,081)		(14,015)		(1,714)		(1,656)
Amounts recognized in accumulated other comprehensive loss/(income) (“AOCI”) were:
Net loss	$	33,977	$	38,894	$	398	$	255
Net prior service cost (credit)		2,292		3,112		(549)		(728)
Pre-tax AOCI		36,269		42,006		(151)		(473)
Taxes		(8,955)		(10,351)		41		119
AOCI at year end	$	27,314	$	31,655	$	(110)	$	(354)

The benefit obligation for the defined benefit pension plan was $144.2 million and $137.3 million as of December 31, 2023 and 2022, respectively, and the fair value of plan assets as of December 31, 2023 and 2022 was $267.5 million and $244.3 million, respectively. The defined benefit pension plan was amended effective December 31, 2022 to transfer certain obligations from the Company’s non-qualified supplemental pension plan, deferred compensation 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 $13.6 million and $14.0 million for 2023 and 2022, 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 immaterial for 2023 and 2022, respectively.

The Company has a non-qualified deferred compensation plan for certain employees (“Restoration Plan”) whose benefits under tax-qualified retirement plans are restricted by the Internal Revenue Code Section 401(a)(17) limitation on compensation. The projected benefit obligation for the unfunded Restoration Plan was $0.4 million for 2023 and immaterial for 2022.

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)	2023		2022		2023		2022
Prior service (credit)/cost	$	(620)	$	(648)	$	135	$	135
Net (gain) loss		(3,720)		16,593		108		(249)
Total	$	(4,340)	$	15,945	$	243	$	(114)

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

	Pension Benefits				Post-retirement Benefits
	2023		2022		2023		2022
Discount rate	5.20	%	5.40	%	5.20	%	5.40	%
Expected return on plan assets	7.00	%	6.70	%	N/A		N/A
Rate of compensation increase	3.50% for 2024	+	3.50% for 2024	+	N/A		N/A
Interest crediting rates	6.00% while employed,		6.00% while employed,		N/A		N/A
	4.47% after termination		3.55% after termination

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

	Pension Benefits						Post-retirement Benefits
(000’s omitted)	2023		2022		2021		2023		2022		2021
Service cost	$	4,433	$	4,959	$	5,920	$	0	$	0	$	0
Interest cost		7,561		5,334		5,036		92		68		44
Expected return on plan assets		(16,079)		(19,025)		(18,783)		0		0		0
Plan amendment		0		(556)		0		0		0		0
Amortization of unrecognized net loss		(2,220)		842		3,600		22		23		45
Amortization of prior service cost		820		615		379		(179)		(179)		(179)
Net periodic benefit	$	(5,485)	$	(7,831)	$	(3,848)	$	(65)	$	(88)	$	(90)

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
	2023		2022		2021		2023		2022		2021
Discount rate	5.40	%	3.10	%	2.80	%	5.40	%	3.10	%	2.80	%
Expected return on plan assets	6.70	%	6.70	%	7.00	%	N/A		N/A		N/A
Rate of compensation increase	4.50% for 2023,		4.00% for 2022,
	3.50% for 2024	+	3.50% for 2023	+	3.50	%	N/A		N/A		N/A
Interest crediting rates	6.00% while employed,		6.00% while employed,		6.00% while employed,
	3.55% after termination		1.94% after termination		1.42% after termination		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:

		Pension		Post-retirement
(000’s omitted)		Benefits		Benefits
2024	$	13,680	$	182
2025		11,811		161
2026		13,040		158
2027		13,065		156
2028		12,625		152
2029-2033		66,724		690

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, long-term capital market assumptions, reviewing historical returns on the type of assets held and current economic factors. The mortality tables used to determine future benefit obligations under the plan as of December 31, 2023 were the sex-distinct Pri-2012 Mortality Tables for employees, healthy annuitants and contingent survivors, adjusted for mortality improvements using Scale MP-2021 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, 2023 by asset category are as follows:

	Quoted Prices
	in Active		Significant		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
Asset category (000’s omitted)	Level 1		Level 2		Level 3		Total
Cash equivalents	$	13,441	$	0	$	0	$	13,441
Equity securities:
U.S. large-cap		66,709		0		0		66,709
U.S. mid/small cap		23,127		0		0		23,127
CBU common stock		5,691		0		0		5,691
International		50,270		0		0		50,270
Other		1,966		0		0		1,966
		147,763		0		0		147,763
Fixed income securities:
Government securities		59,107		15,491		0		74,598
Investment grade bonds		0		17,968		0		17,968
		59,107		33,459		0		92,566
Other investments (b)		12,759		0		0		12,759
Total (c)	$	233,070	$	33,459	$	0	$	266,529

The fair values of the Company’s defined benefit pension plan assets at December 31, 2022 by asset category are as follows:

	Quoted Prices
	in Active		Significant		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
Asset category (000’s omitted)	Level 1		Level 2		Level 3		Total
Cash equivalents	$	18,625	$	0	$	0	$	18,625
Equity securities:
U.S. large-cap		52,682		0		0		52,682
U.S. mid/small cap		16,432		0		0		16,432
CBU common stock		6,427		0		0		6,427
International		51,725		0		0		51,725
Other		1,273		0		0		1,273
		128,539		0		0		128,539
Fixed income securities:
Government securities		49,665		6,897		0		56,562
Investment grade bonds		3,648		14,854		0		18,502
High yield(a)		7,134		0		0		7,134
		60,447		21,751		0		82,198
Other investments (b)		14,342		0		0		14,342
Total (c)	$	221,953	$	21,751	$	0	$	243,704

(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 $0.9 million and $0.6 million at December 31, 2023 and 2022, 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 $4.3 million and $0.1 million contribution to its defined benefit pension plan in 2023 and 2022, respectively. 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, 2023, 2022 and 2021 was $7.7 million, $7.1 million, and $6.9 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, 2023, 2022, and 2021 was $1.9 million, $1.4 million, and $1.1 million, respectively.

The Company acquired Fringe Benefits Design of Minnesota, Inc. 401(k) Profit Sharing Plan with the FBD acquisition and The Steuben Trust Company 401(k) Plan with the Steuben acquisition. Effective January 1, 2022 and January 1, 2021, the Fringe Benefits Design of Minnesota, Inc. 401(k) Profit Sharing Plan and the Steuben Trust Company 401(k) Plan were merged into and became part of the Community Bank System, Inc. 401(k) Employee Stock Ownership Plan, respectively.

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, 2023 and 2022, the Company has recorded a liability of $3.8 million and $4.5 million, respectively. The expense recognized under these plans for the years ended December 31, 2023, 2022, and 2021 was approximately $0.2 million, $0.2 million, and $0.2 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, 2023 and 2022, there were 138,787 and 136,256 shares credited to the participants’ accounts, for which a liability of $5.8 million and $5.5 million was accrued, respectively. The expense recognized under the plan for the years ended December 31, 2023, 2022 and 2021, 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 Bancshares, Inc. (“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.