. 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 requir

ements. Full-time employees

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, 2017

and

December 31, 2016,

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:

(In Thousands)
	Pension						Postretirement
	2017			2016			2017			2016
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year	$	713		$	722		$	1,555		$	1,539
Service cost		0			0			36			37
Interest cost		24			26			57			62
Plan participants' contributions		0			0			211			215
Actuarial loss (gain)		127			3			(103	)		(30	)
Benefits paid		(14	)		(38	)		(259	)		(268	)
Benefit obligation at end of year	$	850		$	713		$	1,497		$	1,555

CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year	$	846		$	839		$	0		$	0
Actual return on plan assets		91			45			0			0
Employer contribution		0			0			48			53
Plan participants' contributions		0			0			211			215
Benefits paid		(14	)		(38	)		(259	)		(268	)
Fair value of plan assets at end of year	$	923		$	846		$	0		$	0

Funded status at end of year	$	73		$	133		$	(1,497	)	$	(1,555	)

December 31,

and

2016,

the following pension plan and postretirement plan asset and liability amounts were recognized in the consolidated balance sheets:

Assets and liabilities:
(In Thousands)	Pension				Postretirement
	2017		2016		2017		2016
Other assets	$	73	$	133
Accrued interest and other liabilities					$	1,497	$	1,555

December 31,

and

2016,

the following items included in accumulated other comprehensive income had

not

been recognized as components of expense:

Items not yet recognized as a component
of net periodic benefit cost:
(In Thousands)	Pension				Postretirement
	2017		2016		2017			2016
Prior service cost	$	0	$	0	$	(309	)	$	(340	)
Net actuarial loss (gain)		221		161		(2	)		101
Total	$	221	$	161	$	(311	)	$	(239	)

For the defined benefit pension plan, amortization of the net actu

arial loss is expected to be

$13,000

2018.

For the postretirement plan, the estimated amount of prior service cost that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in

2018

is a reduction in expense of

$31,000,

and

net actuarial gain is expected to be amortized in

2018.

The accumulated benefit obligation for the defined

benefit pension plan was

$850,000

December 31, 2017

and

$713,000

December 31, 2016.

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

(In Thousands)	Pension									Postretirement
	2017			2016			2015			2017			2016			2015
Service cost	$	0		$	0		$	0		$	36		$	37		$	38
Interest cost		24			26			36			57			62			57
Expected return on plan assets		(31	)		(26	)		(45	)		0			0			0
Amortization of prior service cost		0			0			0			(31	)		(31	)		(31	)
Recognized net actuarial loss		7			9			11			0			0			0
Loss on settlement		0			0			87			0			0			0
Total net periodic benefit cost	$	0		$	9		$	89		$	62		$	68		$	64

2015,

there was a distribution from the

pension plan of

$337,000,

32%

of the plan’s total accumulated benefit obligation prior to the distribution. The Corporation recognized a loss of

$87,000

(included in net periodic benefit cost) in

2015

as a result of this settlement.

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

	Pension									Postretirement
	2017			2016			2015			2017			2016			2015
Discount rate		4.05	%		4.30	%		3.75	%		3.75	%		4.25	%		4.00	%
Expected return on plan assets		6.00	%		5.00	%		5.31	%		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,

and

2016

are as follows:

	Pension						Postretirement
	2017			2016			2017			2016
Discount rate		3.55	%		4.05	%		3.75	%		4.25	%
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
2018	$	312	$	96
20 1 9		41		96
2020		13		104
2021		12		101
2022		14		105
2023-2027		226		516

estimated minimum contribution to the defined benefit

pension plan is required in

2018,

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, 2017

and

2016

are as follows:

	2017			2016
Mut ual funds invested principally in:
Cash and cash equivalents		2	%		2	%
Debt securities		37	%		38	%
Equity securities		45	%		44	%
Alternative funds		16	%		16	%
Total		100	%		100	%

C&N Bank

’s Trust and Financial 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

inputs (as described in Note

). At

December 31, 2017,

the targeted asset allocation of mutual funds for the pension plan was

45%

equity securities,

37%

debt securities,

16%

alternative assets, and

cash. At

December 31, 2016,

the targeted asset allocation of mutual funds for the pension plan was

44%

equity securities,

38%

debt securities,

16%

alternative assets and

cash. The pension 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

$681,000

2017,

$646,000

2016

and

$609,000

2015.

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 on 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

and

years of service (as defined), to sell up to

50%

of their Corporation shares over a period of

years. As of

December 31, 2017

and

2016,

there were

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

419,067

shares of Corporation stock at

December 31, 2017

and

417,753

shares at

December 31, 2016,

all of which had been allocated to Plan participants. The Corporation’s contributions to the ESOP totaled

$588,000

2017,

$549,000

2016

and

$522,000

2015.

The Corporation has a nonqualified supplemental deferred compensation arrangement with its key officers. Charges to

operating expense for officers’ supplemental deferred compensation were

$200,000

2017,

$184,000

2016

and

$167,000

2015.

December 2015,

the Corpo

ration established a nonqualified deferred compensation plan that allows selected officers, beginning in

2016,

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, 2017,

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

months and expire after

years. There are

270,179

shares available for issuance under the Stock Incentive Plan as of

December 31, 2017.

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

135,000

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

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

17,396

shares available for issuance under the Independent Directors Stock Incentive Plan as of

December 31, 2017.

Total stock-based compensation expense is as follows:

(In Thousands)	2017		2016		2015
Restricted stock	$	627	$	578	$	606
Stock options		0		0		0
Total	$	627	$	578	$	606

he following summarizes non-vested restricted stock activity for the year ended

December 31, 2017:

				Weighted
				Average
	Number			Grant Date
	of Shares			Fair Value
Outstanding, December 31, 2016		63,362		$	20.35
Granted		30,782		$	25.97
Vested		(28,981	)	$	20.21
Forfeited		(4,406	)	$	21.74
Outstanding, December 31, 2017		60,757		$	23.17

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, 2017,

there was

$671,000

total unrecognized compensation cost related to restricted stock, which is expected to be recognized over a weighted average period of

1.3

years.

2017

and

2016,

the Corporation awarded shares of restricted stock under the Stock Incentive Plan, as follows:

	2017		2016
Executive Officers		14,897		17,289
Other employees		7,415		10,304
Total		22,312		27,593

Restricted stock awards in

2017

and

2016

to employees other than executive officers

vest over a

three

-year term, subject to continued employment and satisfactory job performance, with

additional performance conditions (time vesting). Restricted stock awards in

2017

and

2016

to Executive Officers vest over a

three

-year term, with vesting for half of the shares based on time vesting and vesting for half of the shares based on time vesting and upon the Corporation meeting an annual return on average equity (“ROAE”) performance ratio, as defined. The minimum level for satisfying the performance condition defined in the

2017

and

2016

awards was an ROAE at the

percentile of the defined Peer Group’s results. The Corporation did

not

meet the performance condition defined in the

2017

and

2016

awards, as the Corporation’s return on average equity ROAE was in the

percentile of the Peer Group’s results for the

-month period ended

September 30, 2017

and in the

percentile of the Peer Group’s results for the

-month period ended

September 30, 2016.

For purposes of the

2017

and

2016

awards, the Peer Group included all publicly traded commercial banks and bank holding companies with headquarters in Pennsylvania, New York, New Jersey and Ohio, and total assets ranging between

$750

million and

$3.5

billion as of the beginning of the applicable period.

Most of the restricted stock awards issued under this Plan

prior to

2016,

for which a portion of the awards vested in

2017

and

2016,

include a condition that the Corporation must meet an annual targeted ROAE performance ratio, as defined, in order for participants to vest. In

2017,

2016

and

2015,

the Corporation met the ROAE target applicable to these awards, which is based on the Corporation’s ROAE for

-month periods ended

September 30

of each year as compared to the applicable peer group of bank holding companies based in Pennsylvania and

one

local competitor based in New York with total assets of

$750

million to

billion as of the beginning of each applicable period.

201

a total of

8,470

restricted shares were granted under the Independent Directors Stock Incentive Plan, subject to time vesting over a term of

one

year. In

2016,

a total of

7,834

restricted shares were granted under the Independent Directors Stock Incentive Plan, also with time vesting over a term of

one

year.

There were

stock options granted in

2017,

2016

2015.

A summary of stock option activity is presented below:

	2017					2016					2015
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding, beginning of year		202,037		$	18.58		248,486		$	18.59		316,157		$	19.05
Granted		0					0					0
Exercised		(24,976	)	$	17.50		(35,880	)	$	18.86		(29,557	)	$	17.56
Forfeited		(635	)	$	19.88		(10,569	)	$	18.03		(20,211	)	$	19.76
Expired		(10,766	)	$	22.33		0					(17,903	)	$	27.00
Outstanding, end of year		165,660		$	18.49		202,037		$	18.58		248,486		$	18.59
Options exercisable at year-end		165,660		$	18.49		202,037		$	18.58		248,486		$	18.59
Weighted-average fair value of options forfeited				$	4.21				$	4.04				$	4.86

The weighted-average remaining contractual term of outstanding stock options at

December 31,

was

3.5

years. The aggregate intrinsic value of stock options outstanding was

$913,000

December 31, 2017.

The total intrinsic value of options exercised was

$164,000

2017,

$183,000

2016

and

$77,000

2015.

The Corporation has issued shares from treasury stock for almost all stock option exercises through

December 31,

201

Management does

not

anticipate that stock repurchases will be necessary to accommodate stock option exercises in

2018.

January 2018,

the Corporation awarded

25,416

shares of restricted stock under the Stock Incentive Plan and

9,086

shares of restricted stock under the Independent Directors Stock Incentive Plans. The

2018

restricted stock awards under the Stock Incentive Plan vest ratably over

three

years, and vesting for

one

-half of the

16,578

restricted shares awarded to Executive Officers depends on the Corporation meeting a ROAE target each year. The

2018

restricted stock issued under the Independent Directors Stock Incentive Plan vests over

one

year. Total estimated stock-based compensation for

2018

$716,000.

The restricted stock awards made in

January 2018

are

not

included in the tables above.