2016A N N U A L R E P O R T
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annual report
financial highlights
(all dollar amounts in thousands except share and per share data)
Corporate Headquarters
NBT Bancorp Inc.
52 South Broad Street
Norwich, N.Y. 13815
800.NBT.BANK
Company Profile
› Financial holding company
› Incorporated in 1986 in the
state of Delaware
› Primarily operates through NBT Bank, N.A.
and two financial services companies
FOR THE YEAR
PERFORMANCE
2016
2015
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
78,409
$
76,425
Return on average assets. . . . . . . . . . . . . . . . . .
Return on average tangible equity . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . .
PER COMMON SHARE DATA
Basic earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Dividend yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.92%
13.13%
3.43%
1.81
1.80
0.90
2.15%
$
$
$
0.96%
13.31%
3.50%
1.74
1.72
0.87
3.12%
› NBT Bank, N.A. offers personal banking,
At December 31
asset management and business
services through 154 locations in six
states, including New York, Pennsylvania,
Vermont, Massachusetts, New Hampshire
and Maine.
› EPIC Advisors, Inc., based in Rochester, N.Y.,
is a full-service 401(k) plan recordkeeping
firm.
› NBT-Mang Insurance Agency, based
in Norwich, N.Y., is a full-service
insurance agency.
Marty Dietrich and John Watt honored NBT’s
past and future at the Nasdaq opening bell
on December 19, 2016.
2
BALANCE SHEET DATA
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,867,268
$ 8,262,646
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,198,057
$ 5,883,133
Allowance for loan losses . . . . . . . . . . . . . . . . . . $
65,200
$
63,018
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,973,688
$ 6,604,843
Total shareholders’ equity. . . . . . . . . . . . . . . . . . $ 913,316
$ 882,004
ASSET QUALITY
Nonperforming loans . . . . . . . . . . . . . . . . . . . . . $
40,522
Nonperforming assets . . . . . . . . . . . . . . . . . . . . . $
46,103
$
$
37,406
42,072
Nonperforming loans to total loans . . . . . . .
0.65%
0.64%
CAPITAL
Common equity tier 1 capital ratio . . . . . . . .
Tier 1 capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . .
Total risk-based capital ratio . . . . . . . . . . . . . . .
9.98%
11.42%
12.39%
Book value per share . . . . . . . . . . . . . . . . . . . . . . $
21.11
Tangible book value per share . . . . . . . . . . . . . $
14.61
Closing stock price . . . . . . . . . . . . . . . . . . . . . . . . $
41.88
$
$
$
10.20%
11.73%
12.74%
20.31
13.79
27.88
Ending shares outstanding . . . . . . . . . . . . . . . .
43,257,750
43,430,702
Market capitalization . . . . . . . . . . . . . . . . . . . . . . $ 1,811,635
$ 1,210,848
WEALTH MANAGEMENT DIVISION
Assets under management and
administration . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,346,337
$ 5,770,229
NBT BANCORP $80,000
$70,000
$60,000
$50,000
$40,000
$30,000
16.00%
12.00%
8.00%
4.00%
0.00%
NET INCOME*
9
0
4
,
8
7
$
5
2
4
,
6
7
$
4
7
0
,
5
7
$
7
4
7
,
1
6
8 $
5
5
,
4
5
$
DILUTED EARNINGS
PER SHARE*
0
8
.
1
$
2
7
.
1
$
9
6
.
1
$
$1.80
$1.50
2
6
.
1
$
6
4
.
1
$
$1.20
$0.90
$0.60
RETURN ON
AVERAGE ASSETS*
%
3
9
.
0
%
7
9
.
% 0
5
8
.
0
%
6
9
.
0
%
2
9
.
0
1.00%
0.75%
0.50%
0.25%
0.00%
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
RETURN ON AVERAGE
TANGIBLE EQUITY*
%
4
1
.
4
1
%
0
9
.
3
1
%
1
1
.
3
1
%
1
3
.
3
1
%
3
1
.
3
1
NET INTEREST
INCOME
1
4
4
,
4
6
2
$
8
7
8
,
1
5
2
$
8
0
6
,
2
5
2
$
9
7
0
,
8
3
2
$
$265,000
$245,000
$225,000
$205,000
$185,000
3
0
2
,
4
0
2
$
$165,000
$120,000
$100,000
NONINTEREST
INCOME**
7
5
3
,
6
1
1
$
5
1
2
,
1
1
1
$
4
3
5
,
6
0
1
$
9
8
7
,
1
0
1
$
$80,000
8
2
7
,
6
8
$
$60,000
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
NET CHARGE-OFFS
TO AVERAGE LOANS
TOTAL NONPERFORMING
LOANS TO TOTAL LOANS
%
5
5
.
0
%
4
4
.
0
%
1
4
.
0
%
8
3
.
0
%
9
3
.
0
0.60%
0.40%
0.20%
0.00%
%
8
9
.
0
%
9
9
.
0
%
2
8
.
0
%
4
6
.
0
%
5
6
.
0
1.00%
0.75%
0.50%
0.25%
0.00%
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Dollar amounts
in thousands
except per share data
* 2013 includes merger
expenses related to the
acquisition of Alliance
Financial Corporation
** Shown excluding
net securities gains (losses)
and gains on the sale
of our ownership in
Springstone Financial, LLC
3
2016 ANNUAL REPORT
to our shareholders
Fellow Shareholders,
Solid Growth—By the Numbers
One of our greatest responsibilities is to ensure that
NBT Bancorp Inc. (NBT) remains fundamentally strong from
the inside out. That means focusing not only on the things
we do as a company, but also on why and how we do them.
As a community bank, we rely on our local teams to develop
new customer relationships and expand existing ones. By
all accounts, they are getting the job done. Organic growth
continued to be a key driver of NBT’s success:
We have long believed that when we live by our corporate
values, we create a culture capable of sustaining consistently
outstanding performance. On this point, NBT’s track record offers
proof positive: For the fourth year in a row, the company set a
new earnings record, generating net income of $78.4 million in
2016, up from $76.4 million in 2015. Earnings per diluted share
were $1.80 for 2016, up 5% from $1.72 the prior year.
Taking a longer look back, NBT has posted net income exceeding
$50 million annually for more than a decade—a period that
included many challenges for the financial services industry,
such as the Great Recession. This equates to an annual return
on average assets of over 90 basis points for all but one of those
years: 2013 when we acquired Alliance Financial Corporation
and finished at 85 basis points. What’s more, we achieved this
profitability while investing in the expansion of our footprint
into New England and completing the Alliance acquisition—
the largest in our history.
• Average demand deposits increased by 10% over 2015,
the seventh consecutive year this growth has been 10%
or higher.
• Loans grew by 5.4% in 2016, compared to 5.1% in 2015.
• 2016 net interest income was up $11.8 million, or 4.7%,
compared to 2015. This was driven by a $510.5 million
increase in earning assets.
• 2016 noninterest income grew by $6 million, or 5%,
compared to 2015 (excluding net securities gains and
the gain on sale of an equity investment). Retirement
plan income was up $2 million, while ATM and debit card
income increased $1 million.
We also depend on our employees at all levels to find ways we
can be more efficient, whether through streamlined processes
or better use of resources. Again, their efforts paid off in 2016
as improved operating efficiencies resulted in flat noninterest
expense year over year.
We have no doubt that the commitment and capabilities of
our employees are at the heart of this success, making what
motivates and guides them of great importance. That’s why our
management team gathered in 2016 to refine and reaffirm the
values that form the foundation for most everything we do.
These values, combined with our vision, promote an
environment where we can be innovative in pursuing new
business opportunities and in responding to shifts in our markets
and industry. They define everyday interactions with customers
and colleagues. Ultimately, they inspire us to act in the best
interests of the company, our customers and our shareholders.
Our shared values and strategic focus areas also help create
continuity. This was on full display as management of the
company transitioned seamlessly during 2016.
4
$50
NBT BANCORP STOCK PRICE
We have always had confidence in our strong fundamentals,
including growth in loan production, core deposit levels and
fee income generation. We believed that investors who took
the long view with respect to the potential of their investment
would see it grow in value when the outlook for interest rates
and the
financial
sector turned
in a favorable
direction. Last
year that time
arrived: NBT’s
stock price
increased by
50% from
year-end 2015
to year-end
2016.
$27.88
12/31/15
6/30/16
3/31/16
9/30/16
$20
$30
$40
$41.88
12/31/16
NBT BANCORP The Road Ahead
Closing Thoughts
We will continue to focus on organic growth, which generates
low-cost core deposits and reduces the company’s need
to borrow. In 2016 alone, average demand deposit
growth saved NBT approximately $4.5 million in
interest expense.
Our New England expansion states of Vermont,
Massachusetts, New Hampshire and Maine will
continue to be an important part of that organic
growth. We maintained our positive trajectory in
New England in 2016 with total loans outstanding exceeding
$1 billion, an increase of more than 24% over the prior year.
We expect that noninterest income, particularly from our Wealth
Management business, will continue to gain momentum as
a significant contributor to the bottom line. Two acquisitions
completed in 2016 added new capabilities that complement our
established wealth management services: Actuarial Designs &
Solutions, Inc. is a retirement plan consulting and services firm,
and Columbia Ridge Capital Management, Inc. is a registered
investment advisor.
NBT has always taken pride in employing technology to better
serve our customers. Our digital capacity is constantly evolving
to address the needs of increasingly mobile customers. We
offer them more tools than ever to manage their finances from
anywhere, at any time, through virtually any device connected
to the Internet.
We continue to extend our digital branch model, recently
completing work on our fourth such location in Hamilton, N.Y.
These branches offer advanced self-service technology and
layouts that facilitate a side-by-side customer/banker experience.
Other digital initiatives include the more robust delivery of
marketing messages through targeted, measurable channels
and the introduction of interactive resources to help our
employees sell, collaborate and grow professionally.
We see last year as the continuation of a remarkable story,
one that now dates back 160 years! NBT ended 2016 with
$8.9 billion in assets, up 7.3% from the close of 2015.
160
YEARS
NBT BANK
HISTORY
SNL Financial ranked NBT the 84th largest bank in the
U.S. based on total assets as of December 31, 2016.
We are that much closer to crossing the threshold
of $10 billion in assets and are on track with our
readiness plan to meet the regulatory compliance
requirements associated with that milestone.
Reflecting its continued confidence in the company’s financial
health, the Board of Directors voted to pay out a 500th
consecutive cash dividend in March 2017—another record
we are very proud of.
For the last decade, the banking industry has grappled with a
sluggish economy, historically low interest rates and significant
new government regulation. Recently, the Federal Reserve
has signaled the likelihood of multiple increases in the Federal
Funds Rate in 2017. Moreover, momentum appears to have
shifted toward viable and reasonable regulatory reform, as well
as corporate tax relief. While we support sensible reforms, we
are also keenly aware of the need to preserve the safety and
soundness of our nation’s financial system. We look forward
to more clarity on these matters in the near future.
We believe NBT is well positioned for continued solid
performance based on our strong fundamentals, outstanding
team, investments in technology and aligned culture. We know
that our values and strategies have produced enviable results
through some challenging times, and we expect even greater
success as conditions improve for our industry.
We would like to thank our directors, shareholders, employees
and our 500,000 customers for all of your enthusiastic support.
John H. Watt, Jr.
President and
Chief Executive Officer
Martin A. Dietrich
Chairman of the Board
5
2016 ANNUAL REPORT
seamless
transitions
NBT executives rang
the Nasdaq opening bell
on December 19, 2016,
celebrating 160 years in business
for NBT Bank and a transition to
new leadership for the company.
When Daryl R. Forsythe was named president and chief
executive officer of NBT Bancorp and NBT Bank in 1995,
Martin A. Dietrich had been with NBT for 14 years, working
in various management capacities. Suffice it to say, they
would come to know each other pretty well and forge a strong
relationship in the years that followed. This set the table for over
two decades of stable, like-minded leadership, as Marty would
eventually succeed Daryl as CEO in 2006 and serve through 2016.
This past year will be remembered for some historic and
seamless transitions in the company’s corporate governance.
In May 2016, Daryl retired from his role as NBT’s chairman,
bringing to a close 28 years of service to the company.
At the same time, the Board of Directors elected Marty chairman
and announced a succession plan, promoting John H. Watt, Jr.
to the position of NBT Bank president and naming him Marty’s
successor as CEO of the holding company and bank at the end
of 2016, when Marty retired from those posts.
John joined NBT in 2014 and has played a key leadership role
in several areas: commercial and consumer lending, credit
administration and marketing. He was previously executive vice
president for commercial banking, investment management
and bank operations and a director with Alliance Financial
Corporation, which was acquired by NBT in 2013.
On December 19, 2016, NBT had the honor of ringing the
bell to open the Nasdaq Stock Market for the second time
in the company’s history, commemorating the bank’s 160th
anniversary and the official transition of the CEO role from
Marty to John.
Also in 2016, the board structure was streamlined so that the
same directors serve on both the holding company and bank
boards. The Board believes this evolution in the company’s
corporate structure represents a step toward more continuity,
efficiency and agility.
The Board and the Executive Management Team would like to
extend many thanks to Brian K. Hanaburgh, Susan H. Kwiatek,
Thomas G. Mazzotta and Russell B. Strait, who completed
terms of service on the bank board last May. In addition,
they recognize V. Daniel Robinson, II, Matthew J. Salanger
and Andrew S. Kowalczyk, III, as they began terms of
service on the holding company board in December.
6
NBT BANCORP executive
management
John H. Watt, Jr.
President and
Chief Executive Officer
Michael J. Chewens
Senior Executive
Vice President and
Chief Financial Officer
Timothy L. Brenner
Executive Vice President
and President of
Wealth Management
Matthew K. Durkee
Executive Vice President
and President of
New England Region
Sarah A. Halliday
Executive Vice President
and President of
Commercial Banking
F. Sheldon Prentice
Executive Vice President,
General Counsel and
Corporate Secretary
Catherine M. Scarlett
Executive Vice President,
Chief Human Resources
Officer and Chief Ethics
Officer
Joseph R. Stagliano
Executive Vice President,
Operations and
Retail Banking
board of
directors
Martin A. Dietrich
Chairman
Patricia T. Civil
Timothy E. Delaney
James H. Douglas
Andrew S. Kowalczyk, III, Esq.
John C. Mitchell
Michael M. Murphy
John H. Watt, Jr.
President and
Chief Executive Officer
V. Daniel Robinson, II
Matthew J. Salanger
Joseph A. Santangelo
Lowell A. Seifter, Esq.
Robert A. Wadsworth
Jack H. Webb
NBT Bank Honorary Directors include:
Carl Barbic, Richard Chojnowski, Daryl R. Forsythe,
Peter B. Gregory, DDS, Paul D. Horger, Esq., Janet H. Ingraham,
Andrew S. Kowalczyk, Jr., Esq., Van Ness D. Robinson,
Paul M. Solomon, Paul O. Stillman and J.K. Weinman.
Additional information regarding our Executive Management
Team and the NBT Bancorp Board of Directors can be found in the
proxy statement for our 2017 Annual Meeting of Shareholders.
shareholder information
Annual Meeting
Tuesday, May 23, 2017
10:00 a.m.
DoubleTree by Hilton Hotel
225 Water Street
Binghamton, N.Y. 13901
607.722.7575
Stock
Traded on:
Nasdaq Global Select
Market
Symbol: NBTB
Financial Reports
and Releases
Copies of the company’s
annual report to the
Securities and Exchange
Commission on Form 10-K,
quarterly reports on Form
10-Q and news releases
may be obtained
without charge by
visiting our website at
www.nbtbancorp.com
or by writing to Chief
Financial Officer Michael J.
Chewens at the corporate
headquarters address
provided on the back cover.
Shareholder Relations
Information regarding
NBT Bancorp, our dividend
reinvestment and stock
purchase plan, and direct
deposit of dividends can
be found on our website at
www.nbtbancorp.com.
Those seeking additional
information should contact
Shareholder Relations
by phone at 800.NBT.BANK
(800.628.2265), Option 7,
or by mail in the care of
NBT Bank at P.O. Box 351,
Norwich, N.Y. 13815.
Stock Transfer and
Registrar Agent
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, N.Y. 11219
800.NBT.BANK
(800.628.2265), Option 7
www.amstock.com
info@amstock.com
Independent
Auditors
KPMG LLP
515 Broadway
Albany, N.Y. 12207
7
2016 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
COMMISSION FILE NUMBER: 0-14703
NBT BANCORP INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
Delaware
16-1268674
(IRS Employer Identification No.)
52 SOUTH BROAD STREET
NORWICH, NEW YORK 13815
(Address of principal executive office) (Zip Code)
(607) 337-2265
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
Title of each class:
Common Stock, par value $0.01 per share
Name of each exchange on which registered:
The NASDAQ Stock Market LLC
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter)
is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive Proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Based on the closing price of the registrant’s common stock as of June 30, 2016, the aggregate market value of the voting stock,
common stock, par value, $0.01 per share, held by non-affiliates of the registrant is $1,187,578,681.
The number of shares of common stock outstanding as of February 10, 2017, was 43,393,972.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 23, 2017 are
incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.
NBT BANCORP 2016 FORM 10-K
1
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4–14
ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14–21
ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 4. MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23–24
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25–26
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26–46
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46–47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48–104
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Consolidated Balance Sheets at December 31, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Consolidated Statements of Income for each of the years in the three-year period
ended December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Consolidated Statements of Comprehensive Income for each of the years
in the three-year period ended December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Consolidated Statements of Changes in Stockholders’ Equity for each of the years
in the three-year period ended December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54–104
2
NBT BANCORP 2016 FORM 10-K
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE . . . . . . . . . . . . . . . . . . 107
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108–110
ITEM 16. FORM 10-K SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
NBT BANCORP 2016 FORM 10-K
3
PART I
ITEM 1. BUSINESS
NBT Bancorp Inc. (the “Registrant” or the “Company”) is a
registered financial holding company incorporated in the state
of Delaware in 1986, with its principal headquarters located in
Norwich, New York. The Company, on a consolidated basis, at
December 31, 2016 had assets of $8.9 billion and stockholders’
equity of $913.3 million.
The principal assets of the Registrant consist of all of the
outstanding shares of common stock of its subsidiaries, includ-
ing: NBT Bank, National Association (the “Bank”), NBT Financial
Services, Inc. (“NBT Financial”), NBT Holdings, Inc. (“NBT Hold-
ings”), Hathaway Agency, Inc., CNBF Capital Trust I, NBT Statutory
Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I,
and Alliance Financial Capital Trust II (collectively, the “Trusts”).
The Company’s principal sources of revenue are the manage-
ment fees and dividends it receives from the Bank, NBT Financial
and NBT Holdings.
The Company’s business, primarily conducted through the
Bank but also through its other subsidiaries, consists of providing
commercial banking and financial services primarily to customers
in its market area, which includes central and upstate New York,
northeastern Pennsylvania, southern New Hampshire, western
Massachusetts, Vermont, and the greater Portland, Maine area.
The Company has been, and intends to continue to be, a com-
munity-oriented financial institution offering a variety of financial
services. The Company’s business philosophy is to operate as a
community bank with local decision-making, principally in non-
metropolitan markets, providing a broad array of banking and
financial services to retail, commercial, and municipal customers.
The financial condition and operating results of the Company
are dependent on its net interest income which is the difference
between the interest and dividend income earned on its earning
assets, primarily loans and investments, and the interest expense
paid on its interest bearing liabilities, primarily consisting of
deposits and borrowings. Among other factors, net income is
also affected by provisions for loan losses and noninterest income,
such as service charges on deposit accounts, insurance and other
financial services fees, trust revenue, and gains/losses on securities
sales, bank owned life insurance income, ATM and debit card
fees, and retirement plan administration fees as well as noninterest
expense, such as salaries and employee benefits, occupancy,
equipment, data processing and communications, professional
fees and outside services, office supplies and postage, amorti-
zation, loan collection and other real estate owned (“OREO”)
expenses, advertising, FDIC expenses, and other expenses.
Like much of the nation, some of the market areas that the
Company serves are still experiencing economic challenges
and volatility. A variety of factors (e.g., any substantial rise in
inflation or rise in unemployment rates, decrease in consumer
confidence, adverse international economic conditions, natural
disasters, war, or political instability) may affect both the Com-
pany’s markets and the national market. The Company will
continue to emphasize managing its funding costs and lending
and investment rates to effectively maintain profitability. In
addition, the Company will continue to seek and maintain rela-
tionships that can generate noninterest income. We anticipate
that this approach should help mitigate profit fluctuations that
are caused by movements in interest rates, business and con-
sumer loan cycles, and local economic factors.
NBT Bank, N.A.
The Bank is a full service commercial bank formed in 1856,
which provides a broad range of financial products to indi-
viduals, corporations and municipalities throughout the central
and upstate New York, northeastern Pennsylvania, western
Massachusetts, southern New Hampshire, Vermont, and the
greater Portland, Maine market areas.
Through its network of branch locations, the Bank offers a
wide range of products and services tailored to individuals, busi-
nesses, and municipalities. Deposit products offered by the Bank
include demand deposit accounts, savings accounts, negotiable
order of withdrawal (“NOW”) accounts, money market deposit
accounts (“MMDA”), and certificate of deposit (“CD”) accounts.
The Bank offers various types of each deposit account to accom-
modate the needs of its customers with varying rates, terms,
and features. Loan products offered by the Bank include consumer
loans, home equity loans, mortgages, business banking loans
and commercial loans, with varying rates, terms and features to
accommodate the needs of its customers. The Bank also offers
various other products and services through its branch network
such as trust and investment services and financial planning and
life insurance services. In addition to its branch network, the Bank
also offers access to certain products and services electronically
enabling customers to check balances, transfer funds, pay bills,
view statements, apply for loans and access various other prod-
uct and service information. The Bank provides 24-hour access
to an automated telephone line whereby customers can check
balances, obtain account information, transfer funds, request
statements, and perform various other activities.
4
NBT BANCORP 2016 FORM 10-K
NBT Financial Services, Inc.
Through NBT Financial Services, the Company operates EPIC
Advisors, Inc. (“EPIC”), a retirement plan administrator. Through
EPIC, the Company offers services including retirement plan
consulting and recordkeeping services. EPIC’s headquarters
are located in Rochester, New York.
NBT Holdings, Inc.
Through NBT Holdings, the Company operates NBT-Mang
Insurance Agency, LLC (“Mang”), a full-service insurance agency
acquired by the Company on September 1, 2008. Mang’s head-
quarters are in Norwich, New York. Through Mang, the Company
offers a full array of insurance products, including personal
property and casualty, business liability and commercial insur-
ance, tailored to serve the specific insurance needs of individuals
as well as businesses in a range of industries operating in the
markets served by the Company.
The Trusts
The Trusts were organized to raise additional regulatory
capital and to provide funding for certain acquisitions. CNBF
Capital Trust I (“Trust I”) and NBT Statutory Trust I are Delaware
statutory business trusts formed in 1999 and 2005, respectively,
for the purpose of issuing trust preferred securities and lending
the proceeds to the Company. In connection with the acquisition
of CNB Bancorp, Inc., the Company formed NBT Statutory Trust
II (“Trust II”) in February 2006 to fund the cash portion of the
acquisition as well as to provide regulatory capital. In connec-
tion with the acquisition of Alliance Financial Corporation
(“Alliance”), the Company acquired two statutory trusts, Alliance
Financial Capital Trust I and Alliance Financial Capital Trust II,
which were formed in 2003 and 2006, respectively. The Company
guarantees, on a limited basis, payments of distributions on
the trust preferred securities and payments on redemption of
the trust preferred securities. The Trusts are variable interest
entities for which the Company is not the primary beneficiary,
as defined by Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”). In accordance with
ASC, the accounts of the Trusts are not included in the Com-
pany’s consolidated financial statements.
Operating Subsidiaries of the Bank
The Bank has seven operating subsidiaries, NBT Capital Corp.,
Broad Street Property Associates, Inc., NBT Services, Inc., CNB
Realty Trust, Alliance Preferred Funding Corp., Alliance Leasing,
Inc. and Columbia Ridge Capital Management, Inc. NBT Capital
Corp., formed in 1998, is a venture capital corporation formed
to assist young businesses to develop and grow primarily in
the markets they serve. Broad Street Property Associates, Inc.,
formed in 2004, is a property management company. NBT Serv-
ices, Inc., formed in 2004, has a 44% ownership interest in Land
Record Services, LLC. Land Record Services, LLC, a title insurance
agency, offers mortgagee and owner’s title insurance coverage
to both retail and commercial customers. CNB Realty Trust,
formed in 1998, is a real estate investment trust. Alliance Preferred
Funding Corp., formed in 1999, is a real estate investment trust.
Alliance Leasing, Inc. was formed in 2002 to provide equipment
leasing services. Columbia Ridge Capital Management, Inc. was
acquired in 2016 and is a registered investment advisor that
provides investment advice and financial consulting services.
Competition
The financial services industry, including commercial banking,
is highly competitive, and we encounter strong competition
for deposits, loans and other financial products and services
in our market area. The increasingly competitive environment
is the result of the continued low rate environment, changes
in regulation, changes in technology and product delivery sys-
tems, additional financial service providers, and the accelerating
pace of consolidation among financial services providers. The
Company competes for loans, deposits, and customers with
other commercial banks, savings and loan associations, securities
and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit
unions, and other nonbank financial service providers.
The financial services industry could become even more
competitive as a result of legislative, regulatory and technological
changes and continued consolidation. Banks, securities firms
and insurance companies can merge under the umbrella of a
financial holding company, which can offer virtually any type
of financial service, including banking, securities underwriting,
insurance (both agency and underwriting) and merchant bank-
ing. Also, technology has lowered barriers to entry and made
it possible for non-banks to offer products and services tradi-
tionally provided by banks, such as automatic transfer and
automatic payment systems.
Some of the Company’s nonbanking competitors have fewer
regulatory constraints and may have lower cost structures. In
addition, some of the Company’s competitors have assets, capital
and lending limits greater than that of the Company, have
greater access to capital markets and offer a broader range of
products and services than the Company. These institutions
may have the ability to finance wide-ranging advertising cam-
paigns and may also be able to offer lower rates on loans and
higher rates on deposits than the Company can offer. Some of
these institutions offer services, such as credit cards and inter-
national banking, which the Company does not directly offer.
NBT BANCORP 2016 FORM 10-K
5
Various in-state market competitors and out-of-state banks
continue to enter or have announced plans to enter or expand
their presence in the market areas in which the Company cur-
rently operates. With the addition of new banking presences
within our market, the Company expects increased competition
for loans, deposits, and other financial products and services.
In order to compete with other financial services providers,
the Company stresses the community nature of its banking
operations and principally relies upon local promotional activ-
ities, personal relationships established by officers, directors,
and employees with their customers, and specialized services
tailored to meet the needs of the communities served. We also
offer certain customer services, such as agricultural lending,
that many of our larger competitors do not offer. While the
Company’s position varies by market, the Company’s manage-
ment believes that it can compete effectively as a result of local
market knowledge, local decision making, and awareness of
customer needs.
The table below summarizes the Bank’s deposits and market
share by the thirty-eight counties of New York, Pennsylvania,
New Hampshire, Massachusetts, Vermont, and Maine in which
it had customer facilities as of June 30, 2016. Market share is
based on deposits of all commercial banks, credit unions, sav-
ings and loans associations, and savings banks.
Deposits Market Market Number Number
County State in thousands* Share Rank of Branches* of ATMs*
Chenango NY $ 877,049 91.26% 1 11 13
Fulton NY 450,106 61.45% 1 5 6
Schoharie NY 208,325 48.03% 1 4 4
Hamilton NY 44,543 45.02% 2 1 1
Cortland NY 276,064 40.09% 1 5 7
Montgomery NY 256,385 36.44% 2 5 4
Otsego NY 340,762 33.20% 2 8 12
Delaware NY 315,836 32.48% 1 5 4
Essex NY 186,437 27.89% 2 3 5
Madison NY 221,459 25.35% 2 4 6
Susquehanna PA 162,173 19.81% 2 5 7
Saint Lawrence NY 158,982 13.76% 4 5 5
Oneida NY 453,441 13.19% 5 7 11
Broome NY 345,188 13.09% 2 8 10
Pike PA 80,147 11.79% 5 2 2
Wayne PA 115,200 9.09% 4 3 4
Herkimer NY 51,319 8.29% 4 2 1
Lackawanna PA 416,307 8.02% 6 13 16
Tioga NY 35,031 7.98% 5 1 1
Clinton NY 104,792 7.92% 5 3 2
Oswego NY 133,627 7.58% 5 4 6
Franklin NY 30,099 5.90% 4 1 1
Schenectady NY 148,378 5.57% 5 2 2
Onondaga NY 422,290 4.38% 7 11 13
Saratoga NY 151,210 3.55% 8 4 4
Greene NY 37,633 3.05% 5 2 2
Berkshire MA 117,648 2.94% 7 6 6
Monroe PA 76,817 2.93% 8 4 4
Warren NY 47,105 2.77% 7 2 3
Chittenden VT 79,324 1.85% 7 3 3
Cheshire NH 25,705 1.82% 7 1 —
Albany NY 219,906 1.40% 9 4 5
Luzerne PA 80,788 1.38% 13 4 6
Rensselaer NY 12,199 0.59% 11 1 1
Hillsborough NH 64,879 0.57% 11 2 2
Rutland VT 3,543 0.36% 9 1 1
Rockingham NH 16,360 0.24% 19 1 2
Cumberland ME 5,776 0.06% 16 1 —
$6,772,833 154 182
Source: SNL Financial LLC
*Branch and ATM data is as of December 31, 2016.
6
NBT BANCORP 2016 FORM 10-K
Supervision and Regulation
The Company, the Bank and certain of its non-banking sub-
sidiaries are subject to extensive regulation under federal and
state laws. The regulatory framework applicable to bank holding
companies and their subsidiary banks is intended to protect
depositors, federal deposit insurance funds, and the stability
of the U.S. banking system. This system is not designed to
protect equity investors in bank holding companies, such as
the Company.
Set forth below is a summary of the significant laws and
regulations applicable to the Company and its subsidiaries.
The description that follows is qualified in its entirety by refer-
ence to the full text of the statutes, regulations, and policies
that are described. Such statutes, regulations, and policies are
subject to ongoing review by Congress and state legislatures
and federal and state regulatory agencies. A change in any of
the statutes, regulations, or regulatory policies applicable to
the Company and its subsidiaries could have a material effect
on the results of the Company.
Overview
The Company is a registered bank holding company and
financial holding company under the Bank Holding Company
Act of 1956, as amended (the “BHC Act”), and is subject to the
supervision of and regular examination by the Board of Gov-
ernors of the Federal Reserve System (the “Federal Reserve
Board” or “FRB”) as its primary federal regulator. The Company
is also subject to the jurisdiction of the Securities and Exchange
Commission (“SEC”) and is subject to the disclosure and other
regulatory requirements of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended,
as administered by the SEC. The Company’s common stock is
listed on the NASDAQ Global Select market under the ticker
symbol, “NBTB,” and the Company is subject to the NASDAQ
stock market rules.
The Bank is chartered as a national banking association
under the National Bank Act. The Bank is subject to the super-
vision of, and to regular examination by, the Office of the Comp-
troller of the Currency (“OCC”) as its chartering authority and
primary federal regulator. The Bank is also subject to the super-
vision and regulation, to a limited extent, of the Federal Deposit
Insurance Corporation (“FDIC”) as its deposit insurer. Financial
products and services offered by the Company and the Bank
are subject to federal consumer protection laws and imple-
menting regulations promulgated by the Consumer Financial
Protection Bureau (“CFPB”). The Company and the Bank are
also subject to oversight by state attorneys general for com-
pliance with state consumer protection laws. The Bank’s deposits
are insured by the FDIC up to the applicable deposit insurance
limits in accordance with FDIC laws and regulations. The non-
bank subsidiaries of the Company and the Bank are subject to
federal and state laws and regulations, including regulations
of the FRB and the OCC, respectively.
The Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 (the “Dodd-Frank Act”) has significantly changed
the financial regulatory landscape in the U.S. Several provisions
of the Dodd-Frank Act are subject to further rulemaking, guid-
ance and interpretation by the federal banking agencies. Con-
sidering the recent changes in administration and controlling
party in the U.S., Congress, state legislatures and financial reg-
ulatory agencies may introduce various legislative and regulatory
initiatives that are likely to impact the financial services industry,
generally. However, it is not clear whether such changes will
be introduced at all or will be implemented successfully. As a
result, management cannot predict the ultimate impact of the
Dodd-Frank Act or potential additional reforms in the regulation
of financial institutions, or the extent to which they could affect
operations of the Company and the Bank.
Federal Bank Holding Company Regulation
The Company is a bank holding company as defined by the
BHC Act. The BHC Act generally limits the business of the Com-
pany to banking, managing or controlling banks, and other
activities that the FRB has determined to be so closely related
to banking “as to be a proper incident thereto.” The Company
has also qualified for and elected to be a financial holding com-
pany. Financial holding companies may engage in any activity,
or acquire and retain the shares of a company engaged in any
activity that is either (i) financial in nature or incidental to such
financial activity (as determined by the FRB in consultation
with the Secretary of the Treasury), or (ii) complementary to a
financial activity, and that does not pose a substantial risk to
the safety and soundness of depository institutions or the finan-
cial system (as solely determined by the FRB). If a bank holding
company seeks to engage in the broader range of activities
permitted under the BHC Act for financial holding companies,
(i) the bank holding company and all of its depository institution
subsidiaries must be “well-capitalized” and “well-managed,” as
defined in the FRB’s Regulation Y, and (ii) it must file a declaration
with the FRB that it elects to be a “financial holding company.”
In order for a financial holding company to commence any
activity that is financial in nature, incidental thereto, or com-
plementary to a financial activity, or to acquire a company
engaged in any such activity permitted by the BHC Act, each
insured depository institution subsidiary of the financial holding
company must have received a rating of at least “satisfactory”
NBT BANCORP 2016 FORM 10-K
7
in its most recent examination under the Community Reinvest-
ment Act of 1977 (the “CRA”). See the section titled “Community
Reinvestment Act of 1977” for further information relating to
the CRA.
Regulation of Mergers and Acquisitions
The BHC Act, the Bank Merger Act, and other federal and
state statutes regulate acquisitions of depository institutions
and their holding companies. The BHC Act requires prior FRB
approval for a bank holding company to acquire, directly or
indirectly, 5% or more of any class of voting securities of a com-
mercial bank or its parent holding company and for a company,
other than a bank holding company, to acquire 25% or more
of any class of voting securities of a bank or bank holding com-
pany. Under the Change in Bank Control Act, any person, includ-
ing a company, may not acquire, directly or indirectly, control
of a bank without providing 60 days’ prior notice and receiving
a non-objection from the appropriate federal banking agency.
Under the Bank Merger Act, prior approval of the OCC is
required for a national bank to merge with another bank where
the national bank is the surviving bank or to purchase the
assets or assume the deposits of another bank. In reviewing
applications seeking approval of merger and acquisition trans-
actions, the federal banking agencies will consider, among
other criteria, the competitive effect and public benefits of the
transactions, the capital position of the combined banking
organization, the applicant’s performance record under the
CRA, and the effectiveness of the subject organizations in com-
bating money laundering activities.
As a financial holding company, the Company is permitted
to acquire control of non-depository institutions engaged in
activities that are financial in nature and in activities that are
incidental and complementary to financial activities without
prior FRB approval. However, the BHC Act, as amended by the
Dodd-Frank Act, requires prior written approval from the FRB
or prior written notice to the FRB before a financial holding
company may acquire control of a company with consolidated
assets of $10 billion or more.
Capital Distributions
The principal source of the Company’s liquidity is dividends
from the Bank. The OCC oversees the ability of the Bank to
make capital distributions, including dividends. The OCC gen-
erally prohibits a depository institution from making any capital
distributions (including payment of a dividend) or paying any
management fee to its parent holding company if the bank
would thereafter be undercapitalized. The OCC’s prior approval
is required if the total of all dividends declared by a national
bank in any calendar year would exceed the sum of the bank’s
net income for that year and its undistributed net income for
the preceding two calendar years, less any required transfers
to surplus. The National Bank Act also prohibits national banks
from paying dividends that would be greater than the bank’s
undivided profits after deducting statutory bad debt in excess
of the bank’s allowance for loan losses.
The federal banking agencies have indicated that paying
dividends that deplete a bank’s capital base to an inadequate
level would be an unsafe and unsound banking practice and
that banking organizations should generally pay dividends
only out of current operating earnings. The appropriate federal
regulatory authority is authorized to determine, based on the
financial condition of a bank holding company or a bank, that
the payment of dividends would be an unsafe or unsound
practice and to prohibit such payment.
Affiliate and Insider Transactions
Transactions between the Bank and its affiliates, including
the Company, are governed by sections 23A and 23B of the
Federal Reserve Act (the “FRA”) and the FRB’s implementing
Regulation W. An “affiliate” of a bank includes any company or
entity that controls, is controlled by, or is under common control
with the Bank. In a bank holding company context, at a mini-
mum, the parent holding company of a bank, and any compa-
nies which are controlled by such parent holding company,
are affiliates of the bank. Generally, sections 23A and 23B of
the FRA are intended to protect insured depository institutions
from losses in transactions with affiliates. These sections place
quantitative and qualitative limitations on covered transactions
between the Bank and its affiliates, and require that all trans-
actions between a bank and its affiliates occur on market terms
that are consistent with safe and sound banking practices.
Section 22(h) of the FRA and its implementing Regulation
O restricts loans to directors, executive officers, and principal
stockholders (“Insiders”). Under Section 22(h), loans to Insiders
and their related interests may not exceed, together with all
other outstanding loans to such persons and affiliated entities,
the institution’s total capital and surplus. Loans to Insiders
above specified amounts must receive the prior approval of
the Bank’s board of directors. Further, under Section 22(h) of
the FRA, loans to directors, executive officers, and principal
stockholders must be made on terms substantially the same
as offered in comparable transactions to other persons, except
that such insiders may receive preferential loans made under
a benefit or compensation program that is widely available to
the Bank’s employees and does not give preference to the
insider over the employees. Section 22(g) of the FRA places
additional limitations on loans to executive officers.
8
NBT BANCORP 2016 FORM 10-K
Federal Deposit Insurance and Brokered Deposits
The FDIC’s deposit insurance limit is $250,000 per depositor,
per insured bank, for each account ownership category. The
Bank’s deposit accounts are fully insured by the FDIC Deposit
Insurance Fund (the “DIF”) up to the deposit insurance limits
in accordance with applicable laws and regulations.
The FDIC uses a risk-based assessment system that imposes
insurance premiums based upon a risk matrix that takes into
account a bank’s capital level and supervisory rating (“CAMELS
rating”). The risk matrix uses different risk categories distin-
guished by capital levels and supervisory ratings. As a result
of the Dodd-Frank Act, the base for deposit insurance assess-
ments is now consolidated average assets less average tan-
gible equity. Assessment rates are calculated using formulas
that take into account the risk of the institution being assessed.
In addition to deposit insurance assessments, the Federal
Deposit Insurance Act (“FDIA”) provides for additional assess-
ments to be imposed on insured depository institutions to
pay for the cost of Financing Corporation funding. Financing
Corporation is a mixed-ownership government corporation
established by the Competitive Equality Banking Act of 1987
whose sole purpose was to function as a financing vehicle for
the now defunct Federal Savings & Loan Insurance Company.
The Financing Corporation assessments are adjusted quarterly
to reflect changes in the assessment base of the DIF and do
not vary depending upon a depository institution’s capitaliza-
tion or supervisory evaluation.
Under FDIC laws and regulations, no FDIC-insured depository
institution can accept brokered deposits unless it is well-cap-
italized, or unless it is adequately capitalized and receives a
waiver from the FDIC. Applicable laws and regulations also
prohibit any depository institution that is not well-capitalized
from paying an interest rate on brokered deposits in excess
of three-quarters of one percentage point over certain pre-
vailing market rates.
The Dodd-Frank Act requires that the FDIC raise the mini-
mum reserve ratio of the DIF from 1.15 percent to 1.35 percent,
and that the FDIC offset the effect of this increase on insured
depository institutions with total consolidated assets of less
than $10 billion. In March 2016, the FDIC issued a final rule
affecting insured depository institutions with total consolidated
assets of more than $10 billion. The final rule imposes a sur-
charge of 4.5 cents per $100 of the institution’s assessment
base on deposit insurance assessment rates paid by these
larger institutions. If the reserve ratio does not reach 1.35%
by December 31, 2018, through implementation of the sur-
charge, the FDIC will impose an additional, one-time shortfall
assessment on insured depository institutions with more than
$10 billion in assets on March 31, 2019, to be paid by June 30,
2019. The FDIC also has authority to further increase deposit
insurance assessments. At this time, the Bank is not subject
to this surcharge.
Under the FDIA, the FDIC may terminate deposit insurance
upon a finding that the institution has engaged in unsafe and
unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regu-
lation, rule, order or condition imposed by the FDIC. The Bank’s
management is not aware of any practice, condition, or violation
that might lead to the termination of its deposit insurance.
Federal Home Loan Bank System
The Bank is also a member of the Federal Home Loan Bank
(“FHLB”) of New York, which provides a central credit facility
primarily for member institutions for home mortgage and
neighborhood lending. The Bank is subject to the rules and
requirements of the FHLB, including the requirement to acquire
and hold shares of capital stock in the FHLB in an amount at
least equal to the sum of 0.35% of the aggregate principal
amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, up to a maximum
of $25.0 million. The Bank was in compliance with FHLB rules
and requirements as of December 31, 2016.
Debit Card Interchange Fees
The Dodd-Frank Act requires that any interchange transaction
fee charged for a debit transaction be reasonable and propor-
tional to the cost incurred by the issuer for the transaction.
FRB regulations mandated by the Dodd-Frank Act limit inter-
change fees on debit cards to a maximum of 21 cents per trans-
action plus 5 basis points of the transaction amount. The rule
also permits a fraud-prevention adjustment of 1 cent per trans-
action conditioned upon an issuer developing, implementing,
and updating reasonably designed fraud-prevention policies
and procedures. Issuers that, together with their affiliates, have
less than $10 billion of assets, such as the Company, are exempt
from the debit card interchange fee standards. However, FRB
regulations prohibit all issuers, including the Company and the
Bank, from restricting the number of networks over which elec-
tronic debit transactions may be processed to less than two
unaffiliated networks.
Source of Strength Doctrine
FRB policy requires bank holding companies to act as a
source of financial and managerial strength to their subsidiary
banks. Section 616 of the Dodd-Frank Act codifies the require-
ment that bank holding companies serve as a source of financial
NBT BANCORP 2016 FORM 10-K
9
strength to their subsidiary depository institutions. As a result,
the Company is expected to commit resources to support the
Bank, including at times when the Company may not be in a
financial position to provide such resources. Any capital loan
by the Company to the Bank is subordinate in right of payment
to deposits and to certain other indebtedness of such subsidiary
banks. The U.S. Bankruptcy Code provides that, in the event of
a bank holding company’s bankruptcy, any commitment by
the bank holding company to a federal bank regulatory agency
to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to priority of payment.
In addition, under the National Bank Act, if the Bank’s capital
stock is impaired by losses or otherwise, the OCC is authorized
to require payment of the deficiency by assessment upon the
Company. If the assessment is not paid within three months,
the OCC could order a sale of Bank stock held by the Company
to cover any deficiency.
Capital Adequacy and Prompt Corrective Action
In July 2013, the FRB, the OCC and the FDIC approved final
rules (the “Capital Rules”) that established a new capital frame-
work for U.S. banking organizations. The Capital Rules generally
implement the Basel Committee on Banking Supervision’s (the
“Basel Committee”) December 2010 final capital framework
referred to as “Basel III” for strengthening international capital
standards. The Capital Rules revise the definitions and the com-
ponents of regulatory capital, as well as address other issues
affecting the numerator in banking institutions’ regulatory
capital ratios. The Capital Rules also address asset risk weights
and other matters affecting the denominator in banking insti-
tutions’ regulatory capital ratios and replace the existing general
risk-weighting approach with a more risk-sensitive approach.
The Capital Rules: (i) require a capital measure called “Com-
mon Equity Tier 1” (“CET1”) and related regulatory capital ratio
of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital
consists of CET1 and “Additional Tier 1 capital” instruments
meeting certain revised requirements; (iii) mandate that most
deductions/adjustments to regulatory capital measures be
made to CET1 and not to the other components of capital; and
(iv) expand the scope of the deductions from and adjustments
to capital as compared to existing regulations. Under the Capital
Rules, for most banking organizations, including the Company,
the most common form of Additional Tier 1 capital is non-
cumulative perpetual preferred stock and the most common
forms of Tier 2 capital are subordinated notes and a portion of
the allocation for loan losses, in each case, subject to the Capital
Rules’ specific requirements.
Pursuant to the Capital Rules, the minimum capital ratios
as of January 1, 2015 are:
• 4.5% CET1 to risk-weighted assets;
• 6.0% Tier 1 capital (CET1 plus Additional Tier 1 capital) to
risk-weighted assets;
• 8.0% Total capital (Tier 1 capital plus Tier 2 capital) to risk-
weighted assets; and
• 4.0% Tier 1 capital to average consolidated assets as
reported on consolidated financial statements (known as
the “leverage ratio”).
The Capital Rules also require a “capital conservation buffer,”
composed entirely of CET1, on top of these minimum risk-
weighted asset ratios. The capital conservation buffer is designed
to absorb losses during periods of economic stress. Banking
institutions with a ratio of CET1 to risk-weighted assets above
the minimum but below the capital conservation buffer will
face constraints on dividends, equity and other capital instru-
ment repurchases and compensation based on the amount of
the shortfall. When fully phased-in on January 1, 2019, the
capital standards applicable to the Company and the Bank will
include an additional capital conservation buffer of 2.5% of
CET1, effectively resulting in minimum ratios inclusive of the
capital conservation buffer of (i) CET1 to risk-weighted assets
of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at
least 8.5%, and (iii) Total capital to risk-weighted assets of at
least 10.5%. The risk-weighting categories in the Capital Rules
are standardized and include a risk-sensitive number of cate-
gories, depending on the nature of the assets, generally ranging
from 0% for U.S. government and agency securities, to 600%
for certain equity exposures, and resulting in higher risk weights
for a variety of asset classes.
The Capital Rules provide for a number of deductions from
and adjustments to CET1. These include, for example, the
requirement that mortgage servicing rights, deferred tax assets
arising from temporary differences that could not be realized
through net operating loss carrybacks and significant invest-
ments in non-consolidated financial entities be deducted from
CET1 to the extent that any one such category exceeds 10%
of CET1 or all such items, in the aggregate, exceed 15% of CET1.
The deductions and adjustments will be incrementally phased
in between January 1, 2015 and January 1, 2019.
In addition, under the prior general risk-based capital rules,
the effects of accumulated other comprehensive income or
loss (“AOCI”) items included in stockholders’ equity (for example,
marks-to-market of securities held in the available-for-sale
portfolio) under GAAP were excluded for the purposes of
10
NBT BANCORP 2016 FORM 10-K
determining regulatory capital ratios. Under the Capital Rules,
the effects of certain AOCI items are not excluded; however,
banking organizations not using the advanced approaches,
including the Company, and the Bank, were permitted to make
a one-time permanent election to continue to exclude these
items in January 2015. The Capital Rules also preclude certain
hybrid securities, such as trust preferred securities issued
after May 19, 2010, from inclusion in bank holding companies’
Tier 1 capital.
Implementation of the deductions and other adjustments
to CET1 began on January 1, 2015, are phased-in over a 4-year
period (beginning at 40% on January 1, 2015 and an additional
20% per year thereafter). The implementation of the capital
conservation buffer began on January 1, 2016 at the 0.625%
level and increase by 0.625% on each subsequent January 1,
until it reaches 2.5% on January 1, 2019.
Management believes that the Company is in compliance,
and will continue to be in compliance, with the targeted capital
ratios as such requirements are phased in.
Prompt Corrective Action and Safety and Soundness
Pursuant to Section 38 of the Federal Deposit Insurance Act
(“FDIA”), federal banking agencies are required to take “prompt
corrective action” (“PCA”) should an insured depository insti-
tutions fail to meet certain capital adequacy standards. At each
successive lower capital category, an insured depository insti-
tution is subject to more restrictions and prohibitions, including
restrictions on growth, restrictions on interest rates paid on
deposits, restrictions or prohibitions on payment of dividends
and restrictions on the acceptance of brokered deposits. Fur-
thermore, if an insured depository institution is classified in
one of the undercapitalized categories, it is required to submit
a capital restoration plan to the appropriate federal banking
agency, and the holding company must guarantee the per-
formance of that plan. Based upon its capital levels, a bank
that is classified as well-capitalized, adequately capitalized, or
undercapitalized may be treated as though it were in the next
lower capital category if the appropriate federal banking agency,
after notice and opportunity for hearing, determines that an
unsafe or unsound condition, or an unsafe or unsound practice,
warrants such treatment.
For purposes of PCA, to be: (i) well-capitalized, an insured
depository institution must have a total risk based capital ratio
of at least 10%, a Tier 1 risk based capital ratio of at least 8%,
a CET1 risk based capital ratio of at least 6.5%, and a Tier 1
leverage ratio of at least 5%; (ii) adequately capitalized, an
insured depository institution must have a total risk based
capital ratio of at least 8%, a Tier 1 risk based capital ratio of
at least 6%, a CET1 risk based capital ratio of at least 4.5%,
and a Tier 1 leverage ratio of at least 4%; (iii) undercapitalized,
an insured depository institution would have a total risk based
capital ratio of less than 8%, a Tier 1 risk based capital ratio of
less than 6%, a CET1 risk based capital ratio of less than 4.5%,
and a Tier 1 leverage ratio of less than 4%; (iv) significantly
undercapitalized, an insured depository institution would have
a total risk based capital ratio of less than 6%, a Tier 1 risk
based capital ratio of less than 4%, a CET1 risk based capital
ratio of less than 3%, and a Tier 1 leverage ratio of less than
3%.; (v) critically undercapitalized, an insured depository insti-
tution would have a ratio of tangible equity to total assets
that is less than or equal to 2%.
Bank holding companies and insured depository institutions
may also be subject to potential enforcement actions of varying
levels of severity for unsafe or unsound practices in conducting
their business, or for violation of any law, rule, regulation, con-
dition imposed in writing by the agency or term of a written
agreement with the agency. In more serious cases, enforcement
actions may include the issuance of directives to increase capital;
the issuance of formal and informal agreements; the imposition
of civil monetary penalties; the issuance of a cease and desist
order that can be judicially enforced; the issuance of removal
and prohibition orders against officers, directors, and other
institution-affiliated parties; the termination of the insured
depository institution’s deposit insurance; the appointment of
a conservator or receiver for the insured depository institution;
and the enforcement of such actions through injunctions or
restraining orders based upon a judicial determination that
the FDIC, as receiver, would be harmed if such equitable relief
was not granted.
Volcker Rule
Section 619 of the Dodd-Frank Act, commonly known as the
Volcker Rule, restricts the ability of banking entities, such as the
Company, from: (i) engaging in “proprietary trading” and (ii)
investing in or sponsoring certain covered funds, subject to cer-
tain limited exceptions. Under the Volcker Rule, the term “covered
funds” is defined as any issuer that would be an investment
company under the Investment Company Act but for the exemp-
tions in section 3(c)(1) or 3(c)(7) of that Act, which includes col-
lateralized loan obligation (“CLO”) and collateralized debt
obligation securities. The regulation also provides an exemption
for CLOs meeting certain requirements. Compliance with the
Volcker Rule is generally required by July 21, 2017. Given the
Company’s size and the scope of its activities, the Company
does not believe the implementation of the Volcker Rule will
have a significant effect on its consolidated financial statements.
NBT BANCORP 2016 FORM 10-K
11
Depositor Preference
The FDIA provides that, in the event of the “liquidation or
other resolution” of an insured depository institution, the claims
of depositors of the institution, including the claims of the FDIC
as subrogee of insured depositors, and certain claims for admin-
istrative expenses of the FDIC as a receiver, will have priority
over other general unsecured claims against the institution. If
an insured depository institution fails, insured and uninsured
depositors, along with the FDIC, will have priority in payment
ahead of unsecured, non-deposit creditors, including the parent
bank holding company, with respect to any extensions of credit
they have made to such insured depository institution.
Consumer Protection and CFPB Supervision
The Dodd-Frank Act centralized responsibility for consumer
financial protection by creating the CFPB, an independent
agency charged with responsibility for implementing, enforcing,
and examining compliance with federal consumer financial
laws. The CFPB has examination authority over all banks and
savings institutions with more than $10 billion in assets. As the
Company is below this threshold, the OCC continues to exercise
primary examination authority over the Bank with regard to
compliance with federal consumer financial laws and regulations.
Under the Dodd-Frank Act state attorneys general are empow-
ered to enforce rules issued by the CFPB.
The Company is subject to federal consumer financial statutes
and the regulations promulgated thereunder including, but
not limited to:
• The Truth-In-Lending Act, governing disclosures of credit
terms to consumer borrowers;
• The Equal Credit Opportunity Act (“ECOA”), prohibiting
discrimination in connection with the extension of credit;
• The Home Mortgage Disclosure Act (“HMDA”), requiring
home mortgage lenders, including the Bank, to make avail-
able to the public expanded information regarding the
pricing of home mortgage loans, including the “rate spread”
between the annual percentage rate and the average prime
offer rate for mortgage loans of a comparable type;
• The Fair Credit Reporting Act (“FCRA”), governing the pro-
vision of consumer information to credit reporting agencies
and the use of consumer information; and
• The Fair Debt Collection Practices Act, governing the man-
ner in which consumer debts may be collected by collec-
tion agencies.
The Bank’s failure to comply with any of the consumer finan-
cial laws can result in civil actions, regulatory enforcement
action by the federal banking agencies and the U.S. Department
of Justice.
USA PATRIOT Act
The Bank Secrecy Act (“BSA”), as amended by the Uniting
and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (“USA
PATRIOT Act”), imposes obligations on U.S. financial institutions,
including banks and broker-dealer subsidiaries, to implement
policies, procedures and controls which are reasonably
designed to detect and report instances of money laundering
and the financing of terrorism. The USA PATRIOT Act requires
all financial institutions, including the Company and the Bank,
to identify their customers, adopt formal and comprehensive
anti-money laundering programs, scrutinize or prohibit alto-
gether certain transactions of special concern, and be prepared
to respond to inquiries from U.S. law enforcement agencies
concerning their customers and their transactions. The USA
PATRIOT Act also encourages information-sharing among finan-
cial institutions, regulators, and law enforcement authorities
by providing an exemption from the privacy provisions of the
GLB Act for financial institutions that comply with this provision.
The effectiveness of a financial institution in combating money
laundering activities is a factor to be considered in any appli-
cation submitted by the financial institution under the Bank
Merger Act, which applies to the Bank, or the BHC Act, which
applies to the Company. Failure of a financial institution to
maintain and implement adequate programs to combat money
laundering and terrorist financing, or to comply with all of the
relevant laws or regulations, could have serious legal, financial
and reputational consequences. As of December 31, 2016, the
Company and the Bank believe that they are in compliance
with the BSA and the USA PATRIOT Act, and implementing
regulations thereunder.
Identity Theft Prevention
The Fair Credit Reporting Act’s (“FCRA”) Red Flags Rule
requires financial institutions with covered accounts (e.g., con-
sumer bank accounts and loans) to develop, implement, and
administer an identity theft prevention program. This program
must include reasonable policies and procedures to detect sus-
picious patterns or practices that indicate the possibility of
identity theft, such as inconsistencies in personal information
or changes in account activity.
12
NBT BANCORP 2016 FORM 10-K
Office of Foreign Assets Control Regulation
Community Reinvestment Act of 1977
The United States has imposed economic sanctions that
affect transactions with designated foreign countries, nationals,
and others. These are typically known as the “OFAC” rules based
on their administration by the U.S. Treasury Department Office
of Foreign Assets Control (“OFAC”). The OFAC-administered
sanctions targeting countries take many different forms. Gen-
erally, they contain one or more of the following elements: (i)
restrictions on trade with or investment in a sanctioned country,
including prohibitions against direct or indirect imports from
and exports to a sanctioned country and prohibitions on “U.S.
persons” engaging in financial transactions relating to making
investments in, or providing investment-related advice or assis-
tance to, a sanctioned country; and (ii) a blocking of assets in
which the government or specially designated nationals of the
sanctioned country have an interest, by prohibiting transfers
of property subject to U.S. jurisdiction (including property in
the possession or control of U.S. persons). Blocked assets (prop-
erty and bank deposits) cannot be paid out, withdrawn, set
off, or transferred in any manner without a license from OFAC.
Failure to comply with these sanctions could have serious legal
and reputational consequences.
Financial Privacy and Data Security
The Company and the Bank are subject to federal laws,
including the Gramm-Leach-Bliley Act (“GLBA”) and certain
state laws containing consumer privacy protection provisions.
These provisions limit the ability of banks and other financial
institutions to disclose nonpublic information about consumers
to affiliated and non-affiliated third parties and limit the reuse
of certain consumer information received from nonaffiliated
financial institutions. These provisions require notice of privacy
policies to clients and, in some circumstances, allow consumers
to prevent disclosure of certain nonpublic personal information
to affiliates or non-affiliated third parties by means of “opt out”
or “opt in” authorizations.
The GLBA requires that financial institutions implement
comprehensive written information security programs that
include administrative, technical, and physical safeguards to
protect consumer information. Further, pursuant to interpre-
tive guidance issued under the GLBA and certain state laws,
financial institutions are required to notify clients of security
breaches resulting in unauthorized access to their personal
information. The Bank believes it is in compliance with all
GLBA obligations.
The Bank is also subject to data security standards, privacy
and data breach notice requirements, primarily those issued
by the OCC.
The Bank has a responsibility under the CRA, as implemented
by OCC regulations, to help meet the credit needs of its com-
munities, including low- and moderate-income neighborhoods.
The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution’s
discretion to develop the types of products and services that
it believes are best suited to its particular community, consistent
with the CRA. Regulators periodically assess the Bank’s record
of compliance with the CRA. In addition, the ECOA and the Fair
Housing Act prohibit discrimination in lending practices on
the basis of characteristics specified in those statutes. The Bank’s
failure to comply with the CRA could, at a minimum, result in
regulatory restrictions on its activities and the activities of the
Company. The Bank’s latest CRA rating was “Satisfactory.”
Future Legislative Initiatives
Congress, state legislatures, and financial regulatory agencies
are expected to introduce various legislative and regulatory
initiatives that are likely to impact the financial services industry,
generally. Such initiatives may include proposals to expand or
contract the powers of bank holding companies and/or depos-
itory institutions or proposals to substantially change the finan-
cial institution regulatory system. Such legislation could change
banking statutes and the operating environment of the Com-
pany in substantial and unpredictable ways. If enacted, such
legislation could increase or decrease the cost of doing busi-
ness, limit or expand permissible activities, or affect the com-
petitive balance among banks, savings associations, credit
unions, and other financial institutions. The Company cannot
predict whether any such legislation will be enacted, and, if
enacted, the effect that it or any implementing regulations
would have on the financial condition or results of operations
of the Company. A change in statutes, regulations, or regulatory
policies applicable to the Company or any of its subsidiaries
could have a material effect on the business of the Company.
Employees
At December 31, 2016, the Company had 1,704 full-time
equivalent employees. The Company’s employees are not
presently represented by any collective bargaining group.
Available Information
The Company’s website is http://www.nbtbancorp.com. The
Company makes available free of charge through its website its
annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those
reports as soon as reasonably practicable after such material
NBT BANCORP 2016 FORM 10-K
13
is electronically filed or furnished with the SEC pursuant to
Section 13(a) or 15(d) of the Exchange Act. We also make avail-
able through our website other reports filed with or furnished
to the SEC under the Exchange Act, including our proxy state-
ments and reports filed by officers and directors under Section
16(a) of that Act, as well as our Code of Business Conduct and
Ethics and other codes/committee charters. The references to
our website do not constitute incorporation by reference of
the information contained in the website and such information
should not be considered part of this document.
ITEM 1A. RISK FACTORS
There are risks inherent to the Company’s business. The
material risks and uncertainties that management believes
affect the Company are described below. Any of the following
risks could affect the Company’s financial condition and results
of operations and could be material and/or adverse in nature.
You should consider all of the following risks together with all
of the other information in this Annual Report on Form 10-K.
Deterioration in Local Economic Conditions May
Negatively Impact Our Financial Performance
The Company’s success depends primarily on the general
economic conditions in central and upstate New York, north-
eastern Pennsylvania, southern New Hampshire, western Mas-
sachusetts, Vermont, Maine and the specific local markets in
which the Company operates. Unlike larger national or other
regional banks that are more geographically diversified, the
Company provides banking and financial services to customers
primarily in the upstate New York areas of Norwich, Syracuse,
Oneonta, Amsterdam-Gloversville, Albany, Binghamton, Utica-
Rome, Plattsburgh, Glens Falls and Ogdensburg-Massena, the
northeastern Pennsylvania areas of Scranton, Wilkes-Barre and
East Stroudsburg, Berkshire County, Massachusetts, southern
New Hampshire, Vermont and the greater Portland, Maine area.
The local economic conditions in these areas have a significant
impact on the demand for the Company’s products and services
as well as the ability of the Company’s customers to repay loans,
the value of the collateral securing loans and the stability of
the Company’s deposit funding sources.
As a lender with the majority of our loans secured by real
estate or made to businesses in New York, Pennsylvania, New
Hampshire, Massachusetts, Vermont and Maine, a downturn
in these local economies could cause significant increases in
nonperforming loans, which could negatively impact our earn-
ings. Declines in real estate values in our market areas could
Any materials we file with the SEC may be read and copied
at the SEC’s Public Reference Room at 100 F Street, N.E., Wash-
ington, DC, 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-
SEC-0330. The SEC maintains an Internet site (http://www.sec.gov)
that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with
the SEC.
cause any of our loans to become inadequately collateralized,
which would expose us to greater risk of loss. Additionally, a
decline in real estate values could result in the decline of orig-
inations of such loans, as most of our loans and the collateral
securing our loans, are located in those areas.
Variations in Interest Rates May Negatively Affect
Our Financial Performance
The Company’s earnings and financial condition are largely
dependent upon net interest income, which is the difference
between interest earned from loans and investments and inter-
est paid on deposits and borrowings. The narrowing of interest
rate spreads could adversely affect the Company’s earnings
and financial condition. The Company cannot predict with cer-
tainty, or control, changes in interest rates. Regional and local
economic conditions and the policies of regulatory authorities,
including monetary policies of the FRB, affect interest income
and interest expense. High interest rates could also affect the
amount of loans that the Company can originate because
higher rates could cause customers to apply for fewer mortgages
or cause depositors to shift funds from accounts that have a
comparatively lower cost to accounts with a higher cost. The
Company may also experience customer attrition due to com-
petitor pricing. If the cost of interest-bearing deposits increases
at a rate greater than the yields on interest-earning assets
increase, net interest income will be negatively affected. Changes
in the asset and liability mix may also affect net interest income.
Similarly, lower interest rates cause higher yielding assets to
prepay and floating or adjustable rate assets to reset to lower
rates. If the Company is not able to reduce its funding costs
sufficiently, due to either competitive factors or the maturity
schedule of existing liabilities, then the Company’s net interest
margin will decline.
14
NBT BANCORP 2016 FORM 10-K
Although management believes it has implemented effective
asset and liability management strategies to mitigate the poten-
tial adverse effects of changes in interest rates on the Company’s
results of operations, any substantial or unexpected change
in, or prolonged change in market interest rates could have a
material adverse effect on the Company’s financial condition
and results of operations. See the section captioned “Net Interest
Income” in Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations and Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
located elsewhere in this report for further discussion related
to the Company’s management of interest rate risk.
Changes in the Economy or the Financial Markets
Could Materially Affect Our Financial Performance
Downturns in the United States or global economies or
financial markets could adversely affect the demand for and
income received from the Company’s fee-based services. Rev-
enues from the trust and benefit plan administration businesses
depend in large part on the level of assets under management
and administration. Market volatility that leads customers to
liquidate investments, as well as lower asset values, can reduce
our level of assets under management and administration and
thereby decrease our investment management and adminis-
tration revenues.
Our Lending, and Particularly Our Emphasis on
Commercial Lending, Exposes Us to the Risk of Losses
Upon Borrower Default
As of December 31, 2016, approximately 45% of the Com-
pany’s loan portfolio consisted of commercial and industrial,
agricultural, commercial construction and commercial real
estate loans. These types of loans generally expose a lender to
greater risk of non-payment and loss than residential real estate
loans because repayment of the loans often depends on the
successful operation of the property, the income stream of the
borrowers and, for construction loans, the accuracy of the esti-
mate of the property’s value at completion of construction and
the estimated cost of construction. Such loans typically involve
larger loan balances to single borrowers or groups of related
borrowers compared to residential real estate loans. Because
the Company’s loan portfolio contains a significant number of
commercial and industrial, agricultural, construction and com-
mercial real estate loans with relatively large balances, the dete-
rioration of one or a few of these loans could cause a significant
increase in nonperforming loans. An increase in nonperforming
loans could result in a net loss of earnings from these loans,
an increase in the provision for loan losses and/or an increase
in loan charge-offs, all of which could have a material adverse
effect on the Company’s financial condition and results of oper-
ations. See the section captioned “Loans” in Item 7. Manage-
ment’s Discussion and Analysis of Financial Condition and
Results of Operations located elsewhere in this report for further
discussion related to commercial and industrial, agricultural,
construction and commercial real estate loans.
If Our Allowance for Loan Losses is Not Sufficient to
Cover Actual Loan Losses, Our Earnings Will Decrease
The Company maintains an allowance for loan losses, which
is an allowance established through a provision for loan losses
charged to expense, that represents management’s best esti-
mate of probable losses that could be incurred within the
existing portfolio of loans. The allowance, in the judgment of
management, is necessary to reserve for estimated loan losses
and risks inherent in the loan portfolio. The level of the allowance
reflects management’s continuing evaluation of industry con-
centrations; specific credit risks; loan loss experience; current
loan portfolio quality; present economic, political, environmental
and regulatory conditions and unidentified losses inherent in
the current loan portfolio. The determination of the appropriate
level of the allowance for loan losses inherently involves a high
degree of subjectivity and requires the Company to make sig-
nificant estimates of current credit risks and future trends, all
of which may undergo material changes. Changes in economic
conditions affecting borrowers, new information regarding
existing loans, identification of additional problem loans and
other factors, both within and outside of the Company’s control,
may require an increase in the allowance for loan losses. Bank
regulatory agencies periodically review the Company’s allowance
for loan losses and may require an increase in the provision
for loan losses or the recognition of further loan charge-offs,
based on judgments different than those of management. In
addition, if charge-offs in future periods exceed the allowance
for loan losses, the Company may need additional provisions
to increase the allowance for loan losses. These potential
increases in the allowance for loan losses would result in a
decrease in net income and, possibly, capital and may have a
material adverse effect on the Company’s financial condition
and results of operations. See the section captioned “Risk Man-
agement—Credit Risk” in Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
located elsewhere in this report for further discussion related
to the Company’s process for determining the appropriate level
of the allowance for loan losses.
NBT BANCORP 2016 FORM 10-K
15
Strong Competition Within Our Industry and Market
Area Could Hurt Our Performance and Slow Our Growth
The Company faces substantial competition in all areas of
its operations from a variety of different competitors, many of
which are larger and may have more financial resources. Such
competitors primarily include national, regional and community
banks within the various markets in which the Company oper-
ates. Additionally, various banks continue to enter or have
announced plans to enter the market areas in which the Com-
pany currently operates. The Company also faces competition
from many other types of financial institutions, including, with-
out limitation, savings and loans, credit unions, finance com-
panies, brokerage firms, insurance companies and other financial
intermediaries. The financial services industry could become
even more competitive as a result of legislative, regulatory and
technological changes and continued consolidation. Technology
has lowered barriers to entry and made it possible for non-
banks to offer products and services traditionally provided by
banks, such as automatic transfer and automatic payment sys-
tems. Many of the Company’s competitors have fewer regulatory
constraints and may have lower cost structures. Additionally,
due to their size, many competitors may be able to achieve
economies of scale and, as a result, may offer a broader range
of products and services as well as better pricing for those
products and services than the Company can.
The Company’s ability to compete successfully depends on
a number of factors, including, among other things:
• The ability to develop, maintain and build upon long-term
customer relationships based on top quality service, high
ethical standards and safe, sound assets;
• The ability to expand the Company’s market position;
• The scope, relevance and pricing of products and services
offered to meet customer needs and demands;
• The rate at which the Company introduces new products,
services and technologies relative to its competitors;
• Customer satisfaction with the Company’s level of service;
• Industry and general economic trends; and
• The ability to attract and retain talented employees.
Failure to perform in any of these areas could significantly
weaken the Company’s competitive position, which could
adversely affect the Company’s growth and profitability, which,
in turn, could have a material adverse effect on the Company’s
financial condition and results of operations.
We Are Subject to Extensive Government Regulation
and Supervision, Which May Interfere With Our Ability
to Conduct Our Business and May Negatively Impact
Our Financial Results
We, primarily through the Bank and certain non-bank sub-
sidiaries, are subject to extensive federal and state regulation
and supervision. Banking regulations are primarily intended
to protect depositors’ funds, the Federal Deposit Insurance
Fund and the safety and soundness of the banking system as
a whole, not stockholders. These regulations affect the Com-
pany’s lending practices, capital structure, investment practices,
dividend policy and growth, among other things. Congress
and federal regulatory agencies continually review banking
laws, regulations and policies for possible changes. Changes
to statutes, regulations or regulatory policies, including changes
in interpretation or implementation of statutes, regulations or
policies, could affect the Company in substantial and unpre-
dictable ways. Such changes could subject the Company to
additional costs, limit the types of financial services and products
the Company may offer, and/or limit the pricing the Company
may charge on certain banking services, among other things.
Compliance personnel and resources may increase our costs
of operations and adversely impact our earnings.
Failure to comply with laws, regulations or policies could
result in sanctions by regulatory agencies, civil money penalties
and/or reputation damage, which could have a material adverse
effect on our business, financial condition and results of oper-
ations. While the Company has policies and procedures designed
to prevent any such violations, there can be no assurance that
such violations will not occur. See the section captioned “Super-
vision and Regulation” in Item 1. Business of this report for
further information.
We Will be Subject to Heightened Regulatory
Requirements if We Exceed $10 Billion in Total
Consolidated Assets
Based on our historical growth rates and current size, it is
possible that our total assets could exceed $10 billion dollars
in the near future. The Dodd-Frank Act and its implementing
regulations impose enhanced supervisory requirements on
bank holding companies with more than $10 billion in total
consolidated assets. For bank holding companies with more
than $10 billion but less than $50 billion in total consolidated
assets such requirements include, among other things:
• Compliance with the FRB’s annual stress testing requirements;
• Increased capital, leverage, liquidity and risk management
standards;
16
NBT BANCORP 2016 FORM 10-K
• Examinations by the CFPB for compliance with federal
consumer financial protection laws and regulations;
• Limits on interchange fees on debit cards; and
• Changes to the FDIC deposit insurance assessments cal-
culation that would increase our insurance premium costs.
Federal financial regulators may require us to take actions
to prepare for compliance before we exceed $10 billion in total
consolidated assets. Our regulators may consider our preparation
for compliance with these regulatory requirements when exam-
ining our operations or considering any request for regulatory
approval. We may, therefore, incur compliance costs before
we reach $10 billion in total consolidated assets and may be
required to maintain the additional compliance procedures
even if we do not grow at the anticipated rate or at all.
Failure to comply with these new requirements may nega-
tively impact the results of our operations and financial condi-
tion. To ensure compliance, we will be required to investment
significant resources, which may necessitate hiring additional
personnel and implementing additional internal controls. These
additional compliance costs may have a material adverse effect
on our business, results of operations and financial condition.
The Company is Subject to Liquidity Risk Which Could
Adversely Affect Net Interest Income and Earnings
The purpose of the Company’s liquidity management is to
meet the cash flow obligations of its customers for both deposits
and loans. The primary liquidity measurement the Company
utilizes is called basic surplus, which captures the adequacy of
the Company’s access to reliable sources of cash relative to the
stability of its funding mix of average liabilities. This approach
recognizes the importance of balancing levels of cash flow liq-
uidity from short and long-term securities with the availability
of dependable borrowing sources which can be accessed when
necessary. However, competitive pressure on deposit pricing
could result in a decrease in the Company’s deposit base or an
increase in funding costs. In addition, liquidity will come under
additional pressure if loan growth exceeds deposit growth.
These scenarios could lead to a decrease in the Company’s
basic surplus measure below the minimum policy level of 5%.
To manage this risk, the Company has the ability to purchase
brokered time deposits, borrow against established borrowing
facilities with other banks (Federal funds) and enter into repur-
chase agreements with investment companies. Depending on
the level of interest rates, the Company’s net interest income,
and therefore earnings, could be adversely affected. See the
section captioned “Liquidity Risk” in Item 7.
Our Ability to Service Our Debt, Pay Dividends and
Otherwise Pay Our Obligations as They Come Due
is Substantially Dependent on Capital Distributions
From Our Subsidiaries
The Company is a separate and distinct legal entity from
its subsidiaries. It receives substantially all of its revenue from
dividends from its subsidiaries. These dividends are the prin-
cipal source of funds to pay dividends on the Company’s com-
mon stock and interest and principal on the Company’s debt.
Various federal and/or state laws and regulations limit the
amount of dividends that the Bank may pay to the Company.
Also, the Company’s right to participate in a distribution of
assets upon a subsidiary’s liquidation or reorganization is
subject to the prior claims of the subsidiary’s creditors. In the
event the Bank is unable to pay dividends to the Company,
the Company may not be able to service debt, pay obligations
or pay dividends on the Company’s common stock. The inabil-
ity to receive dividends from the Bank could have a material
adverse effect on the Company’s business, financial condition
and results of operations.
A Breach of Information Security, Including as a Result
of Cyber Attacks, Could Disrupt Our Business and
Impact Our Earnings
We depend upon data processing, communication and infor-
mation exchange on a variety of computing platforms and net-
works and over the internet. In addition, we rely on the services
of a variety of vendors to meet our data processing and com-
munication needs. Despite existing safeguards, we cannot be
certain that all of our systems are free from vulnerability to
attack or other technological difficulties or failures. If information
security is breached or difficulties or failures occur, despite the
controls we and our third party vendors have instituted, infor-
mation can be lost or misappropriated, resulting in financial
loss or costs to us, reputational harm or damages to others.
Such costs or losses could exceed the amount of insurance
coverage, if any, which would adversely affect our earnings.
The Company May be Adversely Affected by Fraud
As a financial institution, the Company is inherently exposed
to operational risk in the form of theft and other fraudulent
activity by employees, customers, and other third parties tar-
geting the Company and/or the Company’s customers or data.
Such activity may take many forms, including check fraud, elec-
tronic fraud, wire fraud, phishing, social engineering and other
dishonest acts.
NBT BANCORP 2016 FORM 10-K
17
Although the Company devotes substantial resources to
maintaining effective policies and internal controls to identify
and prevent such incidents, given the increasing sophistication
of possible perpetrators, the Company may experience financial
losses or reputational harm as a result of fraud.
We Continually Encounter Technological Change and
the Failure to Understand and Adapt to These Changes
Could Hurt Our Business
The financial services industry is continually undergoing
rapid technological change with frequent introductions of new
technology-driven products and services. The effective use of
technology increases efficiency and enables financial institutions
to better serve customers and to reduce costs. The Company’s
future success depends, in part, upon its ability to address the
needs of its customers by using technology to provide products
and services that will satisfy customer demands, as well as to
create additional efficiencies in the Company’s operations.
Many of the Company’s competitors have substantially greater
resources to invest in technological improvements. The Company
may not be able to effectively implement new technology-
driven products and services or be successful in marketing
these products and services to its customers. Failure to suc-
cessfully keep pace with technological changes affecting the
financial services industry could have a material adverse impact
on the Company’s business and, in turn, the Company’s financial
condition and results of operations.
The Company Relies on Third Parties to Provide
Key Components of its Business Infrastructure
The Company relies on third parties to provide key compo-
nents for its business operations, such as data processing and
storage, recording and monitoring transactions, online banking
interfaces and services, internet connections, and network
access. While the Company selects these third-party vendors
carefully, it does not control their actions. Any problems caused
by these third parties, including those resulting from breakdowns
or other disruptions in communication services provided by a
vendor, failure of a vendor to handle current or higher volumes,
cyber-attacks and security breaches at a vendor, failure of a
vendor to provide services for any reason, or poor performance
of services by a vendor, could adversely affect the Company’s
ability to deliver products and services to its customers and
otherwise conduct its business. Financial or operational difficulties
of a third-party vendor could also hurt the Company’s operations
if those difficulties interfere with the vendor’s ability to serve
the Company. Replacing these third party vendors also could
create significant delays and expense that adversely affect the
Company’s business and performance.
The Possibility of the Economy’s Return to Recessionary
Conditions and the Possibility of Further Turmoil or
Volatility in the Financial Markets Would Likely Have
an Adverse Effect on Our Business, Financial Position
and Results of Operations
The economy in the United States and globally has experienced
volatility in recent years and may continue to do so for the fore-
seeable future. There can be no assurance that economic con-
ditions will not worsen. Unfavorable or uncertain economic
conditions can be caused by declines in economic growth, busi-
ness activity or investor or business confidence, limitations on
the availability or increases in the cost of credit and capital,
increases in inflation or interest rates, the timing and impact of
changing governmental policies, natural disasters, terrorist attacks,
acts of war or a combination of these or other factors. A worsening
of business and economic conditions recovery could have adverse
effects on our business, including the following:
• Investors may have less confidence in the equity markets
in general and in financial services industry stocks in par-
ticular, which could place downward pressure on the Com-
pany’s stock price and resulting market valuation;
• Economic and market developments may further affect
consumer and business confidence levels and may cause
declines in credit usage and adverse changes in payment
patterns, causing increases in delinquencies and default
rates;
• The Company’s ability to assess the creditworthiness of its
customers may be impaired if the models and approaches
the Company uses to select, manage and underwrite its
customers become less predictive of future behaviors;
• The Company could suffer decreases in demand for loans
or other financial products and services or decreased deposits
or other investments in accounts with the Company;
• Customers of the Company’s trust and benefit plan admin-
istration business may liquidate investments, which
together with lower asset values, may reduce the level of
assets under management and administration and thereby
decrease the Company’s investment management and
administration revenues;
• Competition in the financial services industry could inten-
sify as a result of the increasing consolidation of financial
services companies in connection with current market
conditions or otherwise; and;
• The value of loans and other assets or collateral securing
loans may decrease.
18
NBT BANCORP 2016 FORM 10-K
We are Subject to Other-Than-Temporary
Impairment Risk Which Could Negatively Impact
Our Financial Performance
The Company recognizes an impairment charge when the
decline in the fair value of equity, debt securities and cost-
method investments below their cost basis are judged to be
other-than-temporary. Significant judgment is used to identify
events or circumstances that would likely have a significant
adverse effect on the future use of the investment. The Company
considers various factors in determining whether an impairment
is other-than-temporary, including the severity and duration
of the impairment, forecasted recovery, the financial condition
and near-term prospects of the investee, whether the Company
has the intent to sell and whether it is more likely than not it
will be forced to sell the security in question. Information about
unrealized gains and losses is subject to changing conditions.
The values of securities with unrealized gains and losses will
fluctuate, as will the values of securities that we identify as
potentially distressed. Our current evaluation of other-than-
temporary impairments reflects our intent to hold securities
for a reasonable period of time sufficient for a forecasted recov-
ery of fair value. However, our intent to hold certain of these
securities may change in future periods as a result of facts and
circumstances impacting a specific security. If our intent to
hold a security with an unrealized loss changes and we do not
expect the security to fully recover prior to the expected time
of disposition, we will write down the security to its fair value
in the period that our intent to hold the security changes.
The process of evaluating the potential impairment of good-
will and other intangibles is highly subjective and requires sig-
nificant judgment. The Company estimates the expected future
cash flows of its various businesses and determines the carrying
value of these businesses. The Company exercises judgment
in assigning and allocating certain assets and liabilities to these
businesses. The Company then compares the carrying value,
including goodwill and other intangibles, to the discounted
future cash flows. If the total of future cash flows is less than
the carrying amount of the assets, an impairment loss is rec-
ognized based on the excess of the carrying amount over the
fair value of the assets. Estimates of the future cash flows asso-
ciated with the assets are critical to these assessments. Changes
in these estimates based on changed economic conditions or
business strategies could result in material impairment charges
and therefore have a material adverse impact on the Company’s
financial condition and performance.
The Risks Presented by Acquisitions Could Adversely
Affect Our Financial Condition and Results of Operations
The business strategy of the Company has included and
may continue to include growth through acquisition. Any
future acquisitions will be accompanied by the risks commonly
encountered in acquisitions. These risks may include, among
other things:
• Our ability to realize anticipated cost savings;
• The difficulty of integrating operations and personnel, the
loss of key employees;
• The potential disruption of our or the acquired company’s
ongoing business in such a way that could result in
decreased revenues, the inability of our management to
maximize our financial and strategic position;
• The inability to maintain uniform standards, controls, pro-
cedures and policies; and
• The impairment of relationships with the acquired com-
pany’s employees and customers as a result of changes
in ownership and management.
We cannot provide any assurance that we will be successful
in overcoming these risks or any other problems encountered
in connection with acquisitions. Our inability to overcome these
risks could have an adverse effect on the achievement of our
business strategy and results of operations.
There are Substantial Risks and Uncertainties
Associated With the Introduction or Expansion
of Lines of Business or New Products and Services
Within Existing Lines of Business
From time to time, the Company may implement new lines
of business or offer new products and services within existing
lines of business. There are substantial risks and uncertainties
associated with these efforts, particularly in instances where
the markets are not fully developed. In developing and mar-
keting new lines of business and/or new products and services,
the Company may invest significant time and resources. Initial
timetables for the introduction and development of new
lines of business and/or new products or services may not be
achieved and price and profitability targets may not prove
attainable. External factors, such as compliance with regulations,
competitive alternatives, and shifting market preferences, may
also impact the successful implementation of a new line of
business or a new product or service. Furthermore, any new
NBT BANCORP 2016 FORM 10-K
19
line of business and/or new product or service could have a
significant impact on the effectiveness of the Company’s system
of internal controls. Failure to successfully manage these risks
in the development and implementation of new lines of business
or new products or services could have a material adverse
effect on the Company’s business, results of operations, and
financial condition.
Our Controls and Procedures May Fail or be
Circumvented, Which May Result in a Material
Adverse Effect on Our Business
Management regularly reviews and updates our internal
controls, disclosure controls and procedures and corporate
governance policies and procedures. Any system of controls,
however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute,
assurances that the objectives of the system are met. Any failure
or circumvention of the controls and procedures or failure to
comply with regulations related to controls and procedures
could have a material adverse effect on our business, results
of operations and financial condition.
We Are Exposed to Risk of Environmental Liabilities
With Respect to Properties to Which We Obtain Title
A significant portion of our loan portfolio at December 31,
2016 was secured by real estate. In the course of our business,
we may foreclose and take title to real estate and could be
subject to environmental liabilities with respect to these prop-
erties. We may be held liable to a government entity or to third
parties for property damage, personal injury, investigation and
clean-up costs incurred by these parties in connection with
environmental contamination, or may be required to clean up
hazardous or toxic substances, or chemical releases at a property.
The costs associated with investigation and remediation activities
could be substantial. In addition, if we are the owner or former
owner of a contaminated site, we may be subject to common
law claims by third parties based on damages and costs resulting
from environmental contamination emanating from the prop-
erty. These costs and claims could adversely affect our business,
results of operations and prospects.
We May be Adversely Affected by the Soundness
of Other Financial Institutions Including the
FHLB of New York
Our ability to engage in routine funding transactions could
be adversely affected by the actions and commercial soundness
of other financial institutions. Financial services companies
are interrelated as a result of trading, clearing, counterparty
or other relationships. We have exposure to many different
industries and counterparties, and we routinely execute trans-
actions with counterparties in the financial services industry,
including brokers and dealers, commercial banks, investment
banks, mutual and hedge funds and other institutional clients.
As a result, defaults by, or even rumors or questions about,
one or more financial services companies, or the financial serv-
ices industry generally, have led to market-wide liquidity prob-
lems and could lead to losses or defaults by us or by other
institutions. Many of these transactions expose us to credit
risk in the event of default of our counterparty or client. In
addition, our credit risk may be exacerbated if the collateral
held by us cannot be realized or is liquidated at prices not suf-
ficient to recover the full amount of the loan or derivative
exposure due us. There is no assurance that any such losses
would not materially and adversely affect our business, financial
condition or results of operations.
The Company owns common stock of FHLB of New York in
order to qualify for membership in the FHLB system, which
enables it to borrow funds under the FHLB of New York’s advance
program. The carrying value and fair market value of our FHLB
of New York common stock was $31.8 million as of December
31, 2016. There are 11 branches of the FHLB, including New
York, which are jointly liable for the consolidated obligations
of the FHLB system. To the extent that one FHLB branch cannot
meet its obligations to pay its share of the system’s debt, other
FHLB branches can be called upon to make the payment. Any
adverse effects on the FHLB of New York could adversely affect
the value of our investment in its common stock and negatively
impact our results of operations.
Provisions of Our Certificate of Incorporation and Bylaws,
as Well as Delaware Law and Certain Banking Laws,
Could Delay or Prevent a Takeover of Us by a Third Party
Provisions of the Company’s certificate of incorporation and
bylaws, the corporate law of the State of Delaware and state
and federal banking laws, including regulatory approval require-
ments, could delay, defer or prevent a third party from acquiring
the Company, despite the possible benefit to the Company’s
stockholders, or otherwise adversely affect the market price
of the Company’s common stock. These provisions include
supermajority voting requirements for certain business com-
binations and advance notice requirements for nominations
for election to the Company’s board of directors and for pro-
posing matters that stockholders may act on at stockholder
meetings. In addition, the Company is subject to Delaware law,
which among other things prohibits the Company from engag-
ing in a business combination with any interested stockholder
for a period of three years from the date the person became
an interested stockholder unless certain conditions are met.
20
NBT BANCORP 2016 FORM 10-K
These provisions may discourage potential takeover attempts,
discouraging bids for the Company’s common stock at a pre-
mium over market price or adversely affect the market price
of and the voting and other rights of the holders of the Com-
pany’s common stock. These provisions could also discourage
proxy contests and make it more difficult for you and other
stockholders to elect directors other than candidates nominated
by the Board.
The Company’s Common Stock Price
May Fluctuate Significantly
The Company’s common stock price constantly changes,
and has increased substantially since the U.S. Presidential elec-
tion in November 2016. The market price of the Company’s
common stock may continue to fluctuate significantly in
response to a number of factors including, but not limited to:
• The political climate and whether the proposed policies
of the new Presidential administration in the U.S. that
have affected market prices for financial institution stocks
are successfully implemented;
• Changes in securities analysts’ recommendations or expec-
tations of financial performance;
• Volatility of stock market prices and volumes;
• Incorrect information or speculation;
• Changes in industry valuations;
• Variations in operating results from general expectations;
• Actions taken against the Company by various regulatory
agencies;
• Changes in authoritative accounting guidance;
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
• Changes in general domestic economic conditions such
as inflation rates, tax rates, unemployment rates, labor
and healthcare cost trend rates, recessions and changing
government policies, laws and regulations; and
• Severe weather, natural disasters, acts of war or terrorism
and other external events.
There May be Future Sales or Other Dilution
of the Company’s Equity, Which May Adversely
Affect the Market Price of the Company’s Stock
The Company is not restricted from issuing additional com-
mon stock, including any securities that are convertible into
or exchangeable for, or that represent the right to receive, com-
mon stock. The Company also grants a significant number of
shares of common stock to employees and directors under the
Company’s incentive plan each year. The issuance of any addi-
tional shares of the Company’s common stock or preferred
stock or securities convertible into, exchangeable for or that
represent the right to receive common stock, or the exercise
of such securities could be substantially dilutive to stockholders
of the Company’s common stock. Holders of the Company’s
common stock have no preemptive rights that entitle such
holders to purchase their pro rata share of any offering of shares
or any class or series. Because the Company’s decision to issue
securities in any future offering will depend on market condi-
tions, its acquisition activity and other factors, the Company
cannot predict or estimate the amount, timing or nature of its
future offerings. Thus, the Company’s stockholders bear the
risk of the Company’s future offerings reducing the market
price of the Company’s common stock and diluting their stock
holdings in the Company.
NBT BANCORP 2016 FORM 10-K
21
ITEM 2. PROPERTIES
The Company owns its headquarters located at 52 South Broad Street, Norwich, New York 13815. The Company operated the
following community banking branches and ATMs as of December 31, 2016:
County Branches ATMs County Branches ATMs
New York Pennsylvania
Albany 4 5 Lackawanna 13 16
Broome 8 10 Luzerne 4 6
Chenango 11 13 Monroe 4 4
Clinton 3 2 Pike 2 2
Cortland 5 7 Susquehanna 5 7
Delaware 5 4 Wayne 3 4
Essex 3 5
Franklin 1 1 New Hampshire
Fulton 5 6 Cheshire 1 —
Greene 2 2 Hillsborough 2 2
Hamilton 1 1 Rockingham 1 2
Herkimer 2 1
Madison 4 6 Vermont
Montgomery 5 4 Chittenden 3 3
Oneida 7 11 Rutland 1 1
Onondaga 11 13
Oswego 4 6 Massachusetts
Otsego 8 12 Berkshire 6 6
Rensselaer 1 1
Saint Lawrence 5 5 Maine
Saratoga 4 4 Cumberland 1 —
Schenectady 2 2
Schoharie 4 4
Tioga 1 1
Warren 2 3
Total 154 182
The Company leases 66 of the above listed branches from third parties. The Company owns all other banking premises. The
Company believes that its offices are sufficient for its present operations. All of the above ATMs are owned by the Company.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company
or any of its subsidiaries is a party or of which any of their property is subject.
ITEM 4. MINE SAFETY DISCLOSURES
None.
22
NBT BANCORP 2016 FORM 10-K
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The common stock of the Company, par value $0.01 per share (the “Common Stock”), is quoted on the Nasdaq Global Select
Market under the symbol “NBTB.” The following table sets forth the high and low sales prices and dividends declared for the
Common Stock for the periods indicated:
High Low Dividend
2016
1st quarter $27.50 $23.81 $0.22
2nd quarter 29.55 25.67 0.22
3rd quarter 33.04 27.31 0.23
4th quarter 42.49 32.26 0.23
2015
1st quarter $26.46 $22.97 $0.21
2nd quarter 26.89 23.75 0.22
3rd quarter 27.72 24.91 0.22
4th quarter 30.52 25.58 0.22
The closing price of the Common Stock on February 10,
2017 was $40.08.
As of February 10, 2017, there were 6,412 stockholders of
record of Common Stock. No unregistered securities were sold
by the Company during the year ended December 31, 2016.
Stock Performance Graph
The following stock performance graph compares the cumu-
lative total stockholder return (i.e., price change, reinvestment
of cash dividends and stock dividends received) on our Common
Stock against the cumulative total return of the NASDAQ Stock
Market (U.S. Companies) Index and the KBW Regional Bank
Index (Peer Group). The stock performance graph assumes that
$100 was invested on December 31, 2011. The graph further
assumes the reinvestment of dividends into additional shares
of the same class of equity securities at the frequency with
which dividends are paid on such securities during the relevant
fiscal year. The yearly points marked on the horizontal axis cor-
respond to December 31 of that year. We calculate each of the
referenced indices in the same manner. All are market-capital-
ization-weighted indices, so companies judged by the market
to be more important (i.e., more valuable) count for more in
all indices.
NBT BANCORP 2016 FORM 10-K
23
$350
$300
$250
$200
$150
$100
H
B
J
$50
$0
12/31/11
The Company’s Long-Term Total Return Performance vs. Indices
B NBT Bancorp
J KBW Regional Bank Index
H NASDAQ Composite Index
J
B
H
J
H
B
H
J
B
H
J
B
H
J
B
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
Period Ending
Index 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16
NBT Bancorp $100.00 $ 95.06 $125.80 $132.08 $144.83 $223.79
KBW Regional Bank Index $100.00 $113.18 $166.06 $170.01 $180.18 $250.39
NASDAQ Composite Index $100.00 $117.70 $164.92 $189.32 $202.81 $220.91
Source: Bloomberg, L.P.
Dividends
We depend primarily upon dividends from our subsidiaries
for a substantial part of our revenue. Accordingly, our ability
to pay dividends to our stockholders depends primarily upon
the receipt of dividends or other capital distributions from our
subsidiaries. Payment of dividends to the Company from the
Bank is subject to certain regulatory and other restrictions.
Under OCC regulations, the Bank may pay dividends to the
Company without prior regulatory approval so long as it meets
its applicable regulatory capital requirements before and after
payment of such dividends and its total dividends do not exceed
its net income to date over the calendar year plus retained net
income over the preceding two years. At December 31, 2016,
the Bank was in compliance with all applicable minimum capital
requirements and had the ability to pay dividends of $102.5
million to the Company without the prior approval of the OCC.
If the capital of the Company is diminished by depreciation
in the value of its property or by losses, or otherwise, to an
amount less than the aggregate amount of the capital rep-
resented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets, no divi-
dends may be paid out of net profits until the deficiency in the
amount of capital represented by the issued and outstanding
stock of all classes having a preference upon the distribution
of assets has been repaired. See the section captioned “Super-
vision and Regulation” in Item 1. Business and Note 15 to the
consolidated financial statements is included in Item 8. Financial
Statements and Supplementary Data, which are located else-
where in this report.
Stock Repurchase
The Company purchased 675,535 shares of its common
stock during the year ended December 31, 2016 at an average
price of $25.45 per share under a previously announced plan
that expired on December 31, 2016. On March 28, 2016, the
NBT Board of Directors authorized a new repurchase program
for NBT to repurchase up to 1,000,000 shares of its outstanding
stock. This plan expires on December 31, 2017. The Company
did not purchase any shares of its common stock during the
fourth quarter of 2016.
24
NBT BANCORP 2016 FORM 10-K
ITEM 6. SELECTED FINANCIAL DATA
The following summary of financial and other information about the Company is derived from the Company’s audited
consolidated financial statements for each of the last five fiscal years ended December 31 and should be read in conjunction
with Item 7 and the Company’s consolidated financial statements and accompanying notes, included elsewhere in this report:
Year ended December 31,
(In thousands except share and per share data) 2016 2015 2014 2013(1) 2012(2)
Interest, fee and dividend income $ 286,947 $ 273,224 $ 275,081 $ 268,723 $ 239,397
Interest expense 22,506 20,616 23,203 30,644 35,194
Net interest income 264,441 252,608 251,878 238,079 204,203
Provision for loan losses 25,431 18,285 19,539 22,424 20,269
Noninterest income excluding securities gains 116,357 115,394 125,935 101,789 86,728
Securities (losses) gains, net (644) 3,087 92 1,426 599
Noninterest expense 235,922 236,176 246,063 228,927 193,887
Income before income taxes 118,801 116,628 112,303 89,943 77,374
Net income 78,409 76,425 75,074 61,747 54,558
Per common share
Basic earnings $ 1.81 $ 1.74 $ 1.71 $ 1.47 $ 1.63
Diluted earnings 1.80 1.72 1.69 1.46 1.62
Cash dividends paid 0.90 0.87 0.84 0.81 0.80
Book value at year-end 21.11 20.31 19.69 18.77 17.24
Tangible book value at year-end(3) 14.61 13.79 13.22 12.09 12.23
Average diluted common shares outstanding 43,622 44,389 44,395 42,351 33,719
Securities available for sale, at fair value $1,338,290 $1,174,544 $1,013,171 $1,364,881 $1,147,999
Securities held to maturity, at amortized cost 527,948 471,031 454,361 117,283 60,563
Loans 6,198,057 5,883,133 5,595,271 5,406,795 4,277,616
Allowance for loan losses 65,200 63,018 66,359 69,434 69,334
Assets 8,867,268 8,262,646 7,807,340 7,652,175 6,042,259
Deposits 6,973,688 6,604,843 6,299,605 5,890,224 4,784,349
Borrowings 886,986 674,124 548,943 866,061 605,855
Stockholders’ equity 913,316 882,004 864,181 816,569 582,273
Key ratios
Return on average assets 0.92% 0.96% 0.97% 0.85% 0.93%
Return on average equity 8.74% 8.70% 8.84% 8.09% 9.72%
Average equity to average assets 10.49% 10.98% 10.95% 10.50% 9.55%
Net interest margin 3.43% 3.50% 3.61% 3.66% 3.86%
Dividend payout ratio 50.00% 49.92% 49.16% 55.48% 49.38%
Tier 1 leverage 9.11% 9.44% 9.39% 8.93% 8.54%
Common equity tier 1 capital ratio 9.98% 10.20% N/A N/A N/A
Tier 1 risk-based capital 11.42% 11.73% 12.32% 11.74% 11.00%
Total risk-based capital 12.39% 12.74% 13.50% 12.99% 12.25%
(1)Includes the impact of the acquisition of Alliance Financial Corporation (“Alliance”) on March 8, 2013.
(2)Includes the impact of the acquisition of Hampshire First Bank on June 8, 2012.
(3)Tangible book value calculation (non-GAAP):
Year ended December 31,
(In thousands, except share and per share data) 2016 2015 2014 2013 2012
Stockholders’ equity $913,316 $882,004 $864,181 $816,569 $582,273
Intangibles 281,254 283,222 283,951 290,554 169,335
Tangible equity 632,062 598,782 580,229 526,015 412,938
Diluted common shares outstanding 43,258 43,431 43,896 43,513 33,775
Tangible book value $ 14.61 $ 13.79 $ 13.22 $ 12.09 $ 12.23
NBT BANCORP 2016 FORM 10-K
25
Selected Quarterly Financial Data
2016 2015
(Dollars in thousands except share and per share data) Fourth Third Second First Fourth Third Second First
Interest, fee and dividend income $73,109 $72,509 $71,375 $69,954 $68,771 $69,500 $67,727 $67,226
Interest expense 5,684 5,847 5,598 5,377 5,259 5,255 5,042 5,060
Net interest income 67,425 66,662 65,777 64,577 63,512 64,245 62,685 62,166
Provision for loan losses 8,165 6,388 4,780 6,098 5,779 4,966 3,898 3,642
Noninterest income excluding net securities gains 28,762 29,644 29,613 28,338 29,427 31,258 28,189 26,520
Net securities (losses) gains (674) — 1 29 3,044 3 26 14
Noninterest expense 57,639 59,614 60,445 58,224 60,619 59,891 57,964 57,702
Net income 19,608 20,001 19,909 18,891 19,127 19,851 19,281 18,166
Basic earnings per share $ 0.45 $ 0.46 $ 0.46 $ 0.44 $ 0.44 $ 0.45 $ 0.44 $ 0.41
Diluted earnings per share $ 0.45 $ 0.46 $ 0.46 $ 0.43 $ 0.43 $ 0.45 $ 0.43 $ 0.41
Annualized net interest margin 3.41% 3.40% 3.44% 3.47% 3.42% 3.48% 3.51% 3.60%
Annualized return on average assets 0.89% 0.92% 0.94% 0.92% 0.93% 0.97% 0.97% 0.94%
Annualized return on average equity 8.54% 8.80% 9.00% 8.63% 8.58% 8.97% 8.81% 8.46%
Weighted average diluted common shares outstanding 43,703 43,562 43,454 43,707 44,072 44,262 44,530 44,642
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements in this filing and future filings by the
Company with the SEC, in the Company’s press releases or
other public or shareholder communications, or in oral state-
ments made with the approval of an authorized executive
officer, contain forward-looking statements, as defined in the
Private Securities Litigation Reform Act. These statements may
be identified by the use of phrases such as “anticipate,” “believe,”
“expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,”
“could,” “may,” or other similar terms. There are a number of
factors, many of which are beyond the Company’s control that
could cause actual results to differ materially from those con-
templated by the forward-looking statements. Factors that may
cause actual results to differ materially from those contemplated
by such forward-looking statements include, among others,
the following possibilities: (1) local, regional, national and inter-
national economic conditions and the impact they may have
on the Company and its customers and the Company’s assess-
ment of that impact; (2) changes in the level of nonperforming
assets and charge-offs; (3) changes in estimates of future reserve
requirements based upon the periodic review thereof under
relevant regulatory and accounting requirements; (4) the effects
of and changes in trade and monetary and fiscal policies and
laws, including the interest rate policies of the Federal Reserve
Board; (5) inflation, interest rate, securities market and monetary
fluctuations; (6) political instability; (7) acts of war or terrorism;
(8) the timely development and acceptance of new products
and services and perceived overall value of these products and
services by users; (9) changes in consumer spending, borrowings
and savings habits; (10) changes in the financial performance
and/or condition of the Company’s borrowers; (11) technological
changes; (12) acquisitions and integration of acquired busi-
nesses; (13) the ability to increase market share and control
expenses; (14) changes in the competitive environment among
financial holding companies; (15) the effect of changes in laws
and regulations (including laws and regulations concerning
taxes, banking, securities and insurance) with which the Com-
pany and its subsidiaries must comply including those under
the Dodd-Frank Act; (16) the effect of changes in accounting
policies and practices, as may be adopted by the regulatory
agencies, as well as the Public Company Accounting Oversight
Board, the FASB and other accounting standard setters; (17)
changes in the Company’s organization, compensation and
benefit plans; (18) the costs and effects of legal and regulatory
developments including the resolution of legal proceedings
or regulatory or other governmental inquiries and the results
of regulatory examinations or reviews; (19) greater than expected
costs or difficulties related to the integration of new products
and lines of business; and (20) the Company’s success at man-
aging the risks involved in the foregoing items.
26
NBT BANCORP 2016 FORM 10-K
The Company cautions readers not to place undue reliance
on any forward-looking statements, which speak only as of the
date made, and advises readers that various factors including,
but not limited to, those described above, could affect the
Company’s financial performance and could cause the Com-
pany’s actual results or circumstances for future periods to
differ materially from those anticipated or projected.
Except as required by law, the Company does not undertake,
and specifically disclaims any obligations to, publicly release
any revisions that may be made to any forward-looking state-
ments to reflect the occurrence of anticipated or unanticipated
events or circumstances after the date of such statements.
General
The financial review which follows focuses on the factors
affecting the consolidated financial condition and results of
operations of the Company and its wholly-owned subsidiaries,
the Bank, NBT Financial Services and NBT Holdings during 2016
and, in summary form, the preceding two years. Collectively,
the Registrant and its subsidiaries are referred to herein as “the
Company.” Net interest margin is presented in this discussion
on a fully taxable equivalent (“FTE”) basis. Average balances
discussed are daily averages unless otherwise described. The
audited consolidated financial statements and related notes
as of December 31, 2016 and 2015 and for each of the years in
the three-year period ended December 31, 2016 should be
read in conjunction with this review. Amounts in prior period
consolidated financial statements are reclassified whenever
necessary to conform to the 2016 presentation.
Critical Accounting Policies
The Company has identified policies as being critical because
they require management to make particularly difficult, sub-
jective and/or complex judgments about matters that are inher-
ently uncertain and because of the likelihood that materially
different amounts would be reported under different conditions
or using different assumptions. These policies relate to the
allowance for loan losses, pension accounting, provision for
income taxes and impairment of goodwill and intangible assets.
Management of the Company considers the accounting
policy relating to the allowance for loan losses to be a critical
accounting policy given the uncertainty in evaluating the level
of the allowance required to cover credit losses inherent in the
loan portfolio and the material effect that such judgments can
have on the results of operations. While management’s current
evaluation of the allowance for loan losses indicates that the
allowance is adequate, under adversely different conditions or
assumptions, the allowance may need to be increased. For
example, if historical loan loss experience significantly worsened
or if current economic conditions significantly deteriorated,
additional provision for loan losses would be required to increase
the allowance. In addition, the assumptions and estimates used
in the internal reviews of the Company’s nonperforming loans
and potential problem loans have a significant impact on the
overall analysis of the adequacy of the allowance for loan losses.
While management has concluded that the current evaluation
of collateral values is reasonable under the circumstances, if
collateral values were significantly lower, the Company’s
allowance for loan loss policy would also require additional
provision for loan losses.
Management is required to make various assumptions in
valuing its pension assets and liabilities. These assumptions
include the expected rate of return on plan assets, the discount
rate, and the rate of increase in future compensation levels.
Changes to these assumptions could impact earnings in future
periods. The Company takes into account the plan asset mix,
funding obligations, and expert opinions in determining the
various rates used to estimate pension expense. The Company
also considers the Citigroup Pension Liability Index, market
interest rates and discounted cash flows in setting the appro-
priate discount rate. In addition, the Company reviews expected
inflationary and merit increases to compensation in determining
the rate of increase in future compensation levels.
The Company is subject to examinations from various taxing
authorities. Such examinations may result in challenges to the
tax return treatment applied by the Company to specific trans-
actions. Management believes that the assumptions and judg-
ments used to record tax-related assets or liabilities have been
NBT BANCORP 2016 FORM 10-K
27
appropriate. Should tax laws change or the taxing authorities
determine that management’s assumptions were inappropriate,
an adjustment may be required which could have a material
effect on the Company’s results of operations.
As a result of acquisitions, the Company has acquired good-
will and identifiable intangible assets. Goodwill represents the
cost of acquired companies in excess of the fair value of net
assets at the acquisition date. Goodwill is evaluated at least
annually or when business conditions suggest that an impair-
ment may have occurred. Goodwill will be reduced to its carrying
value through a charge to earnings if impairment exists. Core
deposits and other identifiable intangible assets are amortized
to expense over their estimated useful lives. The determination
of whether or not impairment exists is based upon discounted
cash flow modeling techniques that require management to
make estimates regarding the amount and timing of expected
future cash flows. It also requires them to select a discount rate
that reflects the current return requirements of the market in
relation to present risk-free interest rates, required equity market
premiums and Company-specific risk indicators, all of which
are susceptible to change based on changes in economic con-
ditions and other factors. Future events or changes in the esti-
mates used to determine the carrying value of goodwill and
identifiable intangible assets could have a material impact on
the Company’s results of operations.
The Company’s policies on the allowance for loan losses,
pension accounting, provision for income taxes, goodwill and
intangible assets are disclosed in Note 1 to the consolidated
financial statements. A more detailed description of the
allowance for loan losses is included in the section captioned
“Risk Management—Credit Risk” in Item 7. Management’s Dis-
cussion and Analysis of Financial Condition and Results of Oper-
ations of this Form 10-K. All significant pension accounting
assumptions, income tax assumptions, and intangible asset
assumptions and detail are disclosed in Notes 13, 12 and 7 to
the consolidated financial statements, respectively. All account-
ing policies are important, and as such, the Company encourages
the reader to review each of the policies included in Note 1 to
obtain a better understanding of how the Company’s financial
performance is reported.
Non-GAAP Measures
This Annual Report on Form 10-K contains financial infor-
mation determined by methods other than in accordance with
accounting principles generally accepted in the United States
of America (“GAAP”). These measures adjust GAAP measures
to exclude the effects of acquisition related intangible amorti-
zation expense on earnings and equity as well as providing a
fully taxable equivalent yield on securities and loans. Where
non-GAAP disclosures are used in this Annual Report on Form
10-K, the comparable GAAP measure, as well as a reconciliation
to the comparable GAAP measure, is provided in the accom-
panying tables. Management believes that these non-GAAP
measures provide useful information that is important to an
understanding of the operating results of the Company’s core
business as well as provide information standard in the financial
institution industry. Non-GAAP measures should not be con-
sidered a substitute for financial measures determined in accor-
dance with GAAP and investors should consider the Company’s
performance and financial condition as reported under GAAP
and all other relevant information when assessing the perform-
ance or financial condition of the Company.
Overview
Significant factors management reviews to evaluate the
Company’s operating results and financial condition include,
but are not limited to: net income and earnings per share,
return on assets and equity, net interest margin, noninterest
income, operating expenses, asset quality indicators, loan and
deposit growth, capital management, liquidity and interest
rate sensitivity, enhancements to customer products and serv-
ices, technology advancements, market share and peer com-
parisons. The following information should be considered in
connection with the Company’s results for the fiscal year ended
December 31, 2016:
• Net income for 2016 was $78.4 million, the highest in the
Company’s history, and up from $76.4 million in 2015.
• Net interest margin for 2016 declined 7 basis points as a
result of the continued low rate environment on loans
and investments.
28
NBT BANCORP 2016 FORM 10-K
• Asset quality indicators showed stability from last year:
– Nonperforming loans were 0.65% at December 31, 2016
compared to 0.64% at December 31, 2015;
– Past due loans to total loans increased to 0.64% at
December 31, 2016 from 0.62% at December 31, 2015;
and
– Net charge-offs to average loans were 0.39% for 2016
compared to 0.38% in 2015.
• Continued demand deposit growth strategies resulting
in 10.1% growth in average deposits from 2015 to 2016.
• Increased efforts to grow noninterest income with focus
on organic growth of our wealth management businesses;
and
• Improved operating efficiencies resulting in flat noninterest
expense year over year.
The Company reported net income of $78.4 million or $1.80
per diluted share for 2016, up 2.6% from net income of $76.4
million or $1.72 per diluted share for 2015. Net interest income
was $264.4 million for the year ended December 31, 2016, up
$11.8 million, or 4.7% from $252.6 million in 2015. FTE net inter-
est margin was 3.43% for the year ended December 31, 2016,
down from 3.50% for the year ended December 31, 2015. Aver-
age interest earning assets were up $510.5 million, or 7.0%, for
the year ended December 31, 2016 as compared to 2015. The
provision for loan losses totaled $25.4 million for the year ended
December 31, 2016, up $7.1 million, or 39.1%, from $18.3 million
for the year ended December 31, 2015.
2017 Outlook
The Company’s 2016 earnings reflected the Company’s con-
tinued ability to manage through the existing economic con-
ditions and challenges in the financial services industry, while
investing in the Company’s future. Since the 2016 U.S. Presidential
election, financial services stock prices have increased substan-
tially based in part on assumptions related to interest rates,
deregulation and tax policy, the extent, timing and impact of
which remains uncertain. Significant items that may have an
impact on 2017 results include:
• Improving economic conditions may cause interest rates
to rise. This would result in principal and interest payments
on currently outstanding loans and investments being
reinvested at higher rates. In addition, rising market rates
would likely increase deposit and borrowing costs from
current low levels. This could potentially offset or more
than offset the benefits of higher rates on our earning
assets. The magnitude and timing of interest rate increases,
along with the shape of the yield curve, will impact net
interest income in 2017.
• The new administration’s proposed regulatory relief and
income tax reform could have positive impacts on com-
pliance costs and income tax expense for both the Com-
pany and our customers. The extent and speed of these
potential reforms will determine the significance of the
potential benefits in 2017.
• Generally, political turmoil, both in the United States and
globally, may give rise to continued market volatility that
could impact both the Company’s stock price and interest
rates.
• The Company’s continued focus on long-term strategies
including growth in the New England markets, diversifi-
cation of revenue, improving operating efficiencies and
investing in technology.
• The Company’s 2017 outlook is subject to factors in addi-
tion to those identified above and those risks and uncer-
tainties that could impact the Company’s future results
are explained in ITEM 1A. RISK FACTORS.
NBT BANCORP 2016 FORM 10-K
29
Asset/Liability Management
The Company attempts to maximize net interest income
and net income, while actively managing its liquidity and
interest rate sensitivity through the mix of various core deposit
products and other sources of funds, which in turn fund an
appropriate mix of earning assets. The changes in the Company’s
asset mix and sources of funds, and the resulting impact on
net interest income, on a fully tax equivalent basis, are discussed
Average Balances and Net Interest Income
below. The following table includes the condensed consolidated
average balance sheet, an analysis of interest income/expense
and average yield/rate for each major category of earning assets
and interest bearing liabilities on a taxable equivalent basis.
Interest income for tax-exempt securities and loans has been
adjusted to a taxable-equivalent basis using the statutory
Federal income tax rate of 35%.
2016 2015 2014
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets
Short-term interest bearing accounts $ 16,301 $ 95 0.58% $ 10,157 $ 33 0.33% $ 4,344 $ 28 0.65%
Securities available for sale(1)(2) 1,237,930 24,450 1.98% 1,059,284 20,888 1.97% 1,258,999 25,760 2.05%
Securities held to maturity(1) 487,837 12,255 2.51% 459,589 11,296 2.46% 233,465 6,558 2.81%
Investment in FRB and FHLB Banks 38,867 1,973 5.08% 33,044 1,712 5.18% 39,290 2,005 5.10%
Loans(3) 6,035,513 251,723 4.17% 5,743,860 242,587 4.22% 5,528,015 244,162 4.42%
Total interest earning assets $7,816,448 $290,496 3.72% $7,305,934 $276,516 3.78% $7,064,113 $278,513 3.94%
Other assets 740,506 691,583 691,934
Total assets $8,556,954 $7,997,517 $7,756,047
Liabilities and stockholders’ equity
Money market deposit accounts $1,668,555 $ 3,599 0.22% $1,582,078 $ 3,351 0.21% $1,457,770 $ 2,532 0.17%
NOW deposit accounts 1,077,581 546 0.05% 987,638 515 0.05% 949,759 509 0.05%
Savings deposits 1,135,182 652 0.06% 1,071,753 651 0.06% 1,020,974 760 0.07%
Time deposits 905,126 9,569 1.06% 960,188 9,740 1.01% 1,015,748 9,837 0.97%
Total interest bearing deposits $4,786,444 $ 14,366 0.30% $4,601,657 $ 14,257 0.31% $4,444,251 $ 13,638 0.31%
Short-term borrowings 497,654 2,309 0.46% 339,885 783 0.23% 382,451 845 0.22%
Long-term debt 118,860 3,204 2.70% 130,705 3,355 2.57% 224,556 6,555 2.92%
Junior subordinated debt 101,196 2,627 2.60% 101,196 2,221 2.19% 101,196 2,165 2.14%
Total interest bearing liabilities $5,504,154 $ 22,506 0.41% $5,173,443 $ 20,616 0.40% $5,152,454 $ 23,203 0.45%
Demand deposits 2,045,465 1,857,027 1,670,188
Other liabilities 110,105 88,937 83,940
Stockholders’ equity 897,230 878,110 849,465
Total liabilities and stockholders’ equity $8,556,954 $7,997,517 $7,756,047
Net interest income (FTE) 267,990 255,900 255,310
Interest rate spread 3.31% 3.38% 3.49%
Net interest margin 3.43% 3.50% 3.61%
Taxable equivalent adjustment 3,549 3,292 3,432
Net interest income $264,441 $252,608 $251,878
(1)Securities are shown at average amortized cost.
(2)Excluding unrealized gains or losses.
(3)For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding.
Note: Interest income for tax-exempt securities and loans has been adjusted to a Fully Taxable-Equivalent (“FTE”) basis using the statutory Federal income tax rate of 35%.
30
NBT BANCORP 2016 FORM 10-K
2016 OPERATING RESULTS AS COMPARED
TO 2015 OPERATING RESULTS
Net Interest Income
Net interest income was $264.4 million for the year ended
December 31, 2016, up $11.8 million from 2015. Fully taxable
equivalent (“FTE”) net interest margin was 3.43% for the year
ended December 31, 2016, down from 3.50% for the year ended
December 31, 2015. Average interest earning assets were up
$510.5 million, or 7.0%, for the year ended December 31, 2016
as compared to 2015. This increase from last year was driven
primarily by $314.9, or 5.4%, period end loan growth and a
$220.7 million, or 13.4%, increase in investment securities in
2016. The benefit of earning asset growth was partially offset
by a 6 basis point (“bp”) decrease in earning assets yields, driven
by a 5 bp decrease in loan yields from 2015 to 2016. Average
interest bearing liabilities increased $330.7 million, or 6.4%,
from the year ended December 31, 2015 to the year ended
December 31, 2016. Total average deposits increased $373.2
million, or 5.8%, for the year ended December 31, 2016 as com-
pared to the prior year driven primarily by a 10.1% increase in
noninterest bearing demand deposits, as well as increases in
money market deposit accounts, NOW and savings deposits
in 2016. Average short-term borrowings increased $157.8 mil-
lion for the year ended December 31, 2016 as compared to
the prior year funding earning asset growth. The rates paid on
interest bearing liabilities increased by 1 bp for the year ended
December 31, 2016 as compared to 2015. The following table
presents changes in interest income, on a FTE basis, and interest
expense attributable to changes in volume (change in average
balance multiplied by prior year rate), changes in rate (change
in rate multiplied by prior year volume), and the net change in
net interest income. The net change attributable to the com-
bined impact of volume and rate has been allocated to each
in proportion to the absolute dollar amounts of change.
Analysis of Changes in Fully Taxable Equivalent Net Interest Income
Increase (Decrease) Increase (Decrease)
2016 over 2015 2015 over 2014
(In thousands) Volume Rate Total Volume Rate Total
5
Short-term interest-bearing accounts $ 27 $
Securities available for sale 3,527 35 3,562 (3,966) (906) (4,872)
Securities held to maturity 706 253 959 5,649 (911) 4,738
Investment in FRB and FHLB Banks 296 (35) 261 (323) 30 (293)
Loans 12,194 (3,058) 9,136 9,337 (10,912) (1,575)
35 $ 62 $ 24 $ (19) $
Total interest income 16,750 (2,770) 13,980 10,721 (12,718) (1,997)
Money market deposit accounts 186 62 248 229 590 819
NOW deposit accounts 46 (15) 31 20 (14) 6
Savings deposits 37 (36) 1 36 (145) (109)
Time deposits (572) 401 (171) (552) 455 (97)
Short-term borrowings 479 1,047 1,526 (97) 35 (62)
Long-term debt (314) 163 (151) (2,483) (717) (3,200)
Junior subordinated debt — 406 406 0 56 56
Total interest expense (138) 2,028 1,890 (2,847) 260 (2,587)
Change in FTE net interest income $16,888 $(4,798) $12,090 $13,568 $(12,978) $
590
NBT BANCORP 2016 FORM 10-K
31
Loans and Corresponding Interest
and Fees on Loans
The average balance of loans increased by approximately
$291.7 million, or 5.1%, from 2015 to 2016. The yield on average
loans decreased from 4.22% in 2015 to 4.17% in 2016, as loan
rates declined due to the continued low rate environment in
2016. FTE interest income from loans increased 3.8%, from
$242.6 million in 2015 to $251.7 million in 2016. This increase
was due to the decrease in yields, offset by the increase in aver-
age loan balances.
Composition of Loan Portfolio
Total loans increased $314.9 million, or 5.4%, from December
31, 2015 to December 31, 2016. Increases in commercial real
estate loans and commercial loans were the primary drivers of
the increase in total loans from 2015 as the Company experi-
enced strong originations in 2016 in the upstate New York,
Pennsylvania and New England markets.
The following table reflects the loan portfolio by major cat-
egories as of December 31 for the years indicated:
As of December 31,
(In thousands) 2016 2015 2014 2013 2012
Residential real estate mortgages $1,262,614 $1,196,780 $1,115,715 $1,041,502 $ 651,105
Commercial 1,242,701 1,159,089 1,144,761 1,180,995 964,297
Commercial real estate 1,543,301 1,430,618 1,334,984 1,218,988 1,040,600
Consumer 1,641,657 1,568,204 1,430,216 1,345,395 1,046,333
Home equity 507,784 528,442 569,595 619,915 575,281
Total loans $6,198,057 $5,883,133 $5,595,271 $5,406,795 $4,277,616
Residential real estate mortgages consist primarily of loans
secured by first or second deeds of trust on primary residences.
Loans in the commercial and agricultural categories, including
commercial and agricultural real estate mortgages, consist pri-
marily of short-term and/or floating rate loans made to small
and medium-sized entities. Consumer loans include $1.2 billion
of indirect installment loans to individuals which is secured
by automobiles and other personal property including marine,
recreational vehicles and manufactured housing. Consumer
loans also consist of direct installment loans to individuals
secured by similar collateral. Although automobile loans have
generally been originated through dealers, all applications
submitted through dealers are subject to the Company’s normal
underwriting and loan approval procedures. In addition, the
consumer loan portfolio as of December 31, 2016 includes
$374.9 million of unsecured consumer loans across a national
footprint originated through our relationship with a leading
national fintech company that began nine years ago as the
result of our investment in Springstone Financial LLC (“Spring-
stone”). Advances of credit through this specialty lending
business line are to prime borrowers and are subject to the
Company’s underwriting standards. Real estate construction
and development loans include commercial construction and
development and residential construction loans. Commercial
construction loans are for small and medium-sized office build-
ings and other commercial properties and residential construc-
tion loans are primarily for projects located in upstate New
York and northeastern Pennsylvania.
Risks associated with the commercial real estate portfolio
include the ability of borrowers to pay interest and principal
during the loan’s term, as well as the ability of the borrowers
to refinance at the end of the loan term.
32
NBT BANCORP 2016 FORM 10-K
The following table, Maturities and Sensitivities of Certain
Loans to Changes in Interest Rates, summarizes the maturities
of the commercial and agricultural and real estate construction
and development loan portfolios and the sensitivity of those
loans to interest rate fluctuations at December 31, 2016. Sched-
uled repayments are reported in the maturity category in which
the contractual payment is due.
Maturities and Sensitivities of Certain Loans to Changes in Interest Rates
Remaining Maturity at December 31, 2016
After
One Year
Within But Within After
(In thousands) One Year Five Years Five Years Total
Floating/adjustable rate
Commercial, commercial real estate, agricultural, and
agricultural real estate $437,030 $366,779 $1,199,719 $2,003,528
Fixed rate
Commercial, commercial real estate, agricultural, and
agricultural real estate 64,730 366,958 350,786 782,474
Total $501,760 $733,737 $1,550,505 $2,786,002
Securities and Corresponding Interest
and Dividend Income
The average balance of securities available for sale (“AFS”)
increased $178.6 million, or 16.9%, from 2015 to 2016. The yield
on average AFS securities was 1.98% for 2016 compared to
1.97% in 2015.
The average balance of securities held to maturity (“HTM”)
increased from $459.6 million in 2015 to $487.8 million in 2016.
Securities Portfolio
At December 31, 2016, HTM securities were comprised primarily
of tax-exempt municipal securities. The yield on HTM securities
increased from 2.46% in 2015 to 2.51% in 2016.
The average balance of FRB and FHLB stock increased to
$38.9 million in 2016 from $33.0 million in 2015. The yield from
investments in FRB and FHLB banks decreased from 5.18% in
2015 to 5.08% in 2016.
As of December 31,
2016 2015 2014
Amortized Fair Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value Cost Value
AFS securities
U.S. Treasury $
— $ — $ — $ 23,041 $ 23,111
Federal agency 175,135 174,408 312,580 311,272 332,193 329,914
State & municipal 47,053 46,726 31,208 31,637 37,035 37,570
Mortgage-backed 528,769 529,844 406,277 409,896 356,557 364,727
Collateralized mortgage obligations 574,253 566,573 405,635 404,971 240,074 242,129
Other securities 15,849 20,739 13,637 16,768 12,818 15,720
— $
Total AFS securities $1,341,059 $1,338,290 $1,169,337 $1,174,544 $1,001,718 $1,013,171
HTM securities
Mortgage-backed $ 97,201 $ 96,112 $ 10,043 $ 10,031 $ 755 $ 868
Collateralized mortgage obligations 225,213 224,765 272,550 272,401 317,628 317,597
State & municipal 205,534 204,173 188,438 190,708 135,978 136,529
Total HTM securities $ 527,948 $ 525,050 $ 471,031 $ 473,140 $ 454,361 $ 454,994
NBT BANCORP 2016 FORM 10-K
33
Our mortgage backed securities, U.S. agency notes, and
CMOs are all “prime/conforming” and are guaranteed by Fannie
Mae, Freddie Mac, the FHLB, the Federal Farm Credit Banks,
or Ginnie Mae (“GNMA”). GNMA securities are considered
equivalent to U.S. Treasury securities, as they are backed by
the full faith and credit of the U.S. government. Currently,
there are no securities backed by subprime mortgages in our
investment portfolio.
The following tables set forth information with regard to
contractual maturities of debt securities at December 31, 2016:
Amortized Estimated Weighted
(Dollars in thousands) Cost Fair Value Average Yield
Debt securities classified as AFS
Within one year $ 67,803 $ 67,877 1.20%
From one to five years 162,913 162,754 2.20%
From five to ten years 144,957 146,014 2.60%
After ten years 949,537 940,906 2.46%
$1,325,210 $1,317,551
Debt securities classified as HTM
Within one year $ 37,187 $ 37,199 1.62%
From one to five years 27,956 28,019 3.48%
From five to ten years 122,228 121,697 2.88%
After ten years 340,577 338,135 2.09%
$ 527,948 $ 525,050
Funding Sources and Corresponding
Interest Expense
The Company utilizes traditional deposit products such as
time, savings, NOW, money market, and demand deposits as
its primary source for funding. Other sources, such as short-
term FHLB advances, federal funds purchased, securities sold
under agreements to repurchase, brokered time deposits, and
long-term FHLB borrowings are utilized as necessary to support
the Company’s growth in assets and to achieve interest rate
sensitivity objectives. The average balance of interest-bearing
liabilities increased $330.7 million from 2015, and totaled $5.5
billion in 2016. The rate paid on interest-bearing liabilities
increased from 0.40% in 2015 to 0.41% in 2016. This increase
in rates and increase in average balances, caused an increase
in interest expense of $1.9 million, or 9.2%, from $20.6 million
in 2015 to $22.5 million in 2016.
Deposits
Average interest bearing deposits increased $184.8 million,
or 4.0%, from 2015 to 2016, due primarily to organic deposit
growth. Average money market deposits increased $86.5 mil-
lion or 5.5% during 2016 when compared to 2015. Average
NOW accounts increased $89.9 million or 9.1% during 2016
as compared to 2015. The average balance of savings accounts
increased $63.4 million or 5.9% during 2016 when compared
to 2015. These increases were partially offset by a decrease
in average time deposits, which decreased $55.1 million, or
5.7%, from 2015 to 2016. The average balance of demand
deposits increased $188.4 million, or 10.1%, during 2016 when
compared to 2015. This growth in demand deposits was driven
principally by increases in accounts from retail, municipal,
and commercial customers.
34
NBT BANCORP 2016 FORM 10-K
The rate paid on average interest-bearing deposits was
0.30% for 2016 and 0.31% for 2015. The rate paid for money
market deposit accounts increased from 0.21% during 2015 to
0.22% during 2016. The rate paid for time deposits increased
from 1.01% during 2015 to 1.06% during 2016. The rate paid
for savings deposits was 0.06% for 2016 and 2015.
The following table presents the maturity distribution of
time deposits of $100,000 or more at December 31:
(In thousands) 2016 2015
Within three months $ 71,459 $ 46,570
After three but within twelve months 69,810 80,674
After one but within three years 71,275 58,834
Over three years 31,356 55,425
Total $243,900 $241,503
Borrowings
Average short-term borrowings increased to $497.7 million
in 2016 from $339.9 million in 2015 funding earning asset
growth. The average rate paid on short-term borrowings
increased from 0.23% in 2015 to 0.46% in 2016. Average long-
term debt decreased from $130.7 million in 2015 to $118.9 mil-
lion in 2016.
The average balance of junior subordinated debt remained
at $101.2 million in 2016. The average rate paid for junior sub-
ordinated debt in 2016 was 2.60%, up from 2.19% in 2015.
Short-term borrowings consist of Federal funds purchased
and securities sold under repurchase agreements, which gen-
erally represent overnight borrowing transactions, and other
short-term borrowings, primarily FHLB advances, with original
maturities of one year or less. The Company has unused lines
of credit and access to brokered deposits available for short-
term financing of approximately $1.9 billion and $2.1 billion
at December 31, 2016 and 2015, respectively. Securities col-
lateralizing repurchase agreements are held in safekeeping
by non-affiliated financial institutions and are under the Com-
pany’s control. Long-term debt, which is comprised primarily
of FHLB advances, are collateralized by the FHLB stock owned
by the Company, certain of its mortgage-backed securities and
a blanket lien on its residential real estate mortgage loans.
Noninterest Income
Noninterest income is a significant source of revenue for
the Company and an important factor in the Company’s results
of operations. The following table sets forth information by
category of noninterest income for the years indicated:
Years ended December 31,
(In thousands) 2016 2015 2014
Insurance and other financial services revenue $ 24,396 $ 24,211 $ 24,517
Service charges on deposit accounts 16,729 17,056 17,941
ATM and debit card fees 19,448 18,248 17,135
Retirement plan administration fees 16,063 14,146 12,129
Trust fees 18,565 19,026 18,950
Bank owned life insurance income 5,195 4,334 5,349
Net securities (losses) gains (644) 3,087 92
Gain on the sale of equity investment — 4,179 19,401
Other 15,961 14,194 10,513
Total noninterest income $115,713 $118,481 $126,027
NBT BANCORP 2016 FORM 10-K
35
Noninterest income for the year ended December 31, 2016
was $115.7 million, down $2.8 million, or 2.3%, from the year
ended December 31, 2015. The decrease was primarily due to
the $4.2 million gain recognized in the third quarter of 2015
from the 2014 sale of Springstone. In addition, net securities
income was down $3.7 million from 2015 due to a $0.6 million
securities loss in 2016 versus a net securities gain for $3.1 million
in 2015. The decreases were offset by increases in retirement
plan administration fees, other noninterest income, ATM and
debit card fees, bank owned life insurance income and insurance
and other financial services revenue. Retirement plan admin-
istration fees were up $1.9 million, or 13.6%, from 2015 due
primarily to the 2015 fourth quarter acquisition of Third Party
Administrators, Inc. and the 2016 third quarter acquisition of
Actuarial Designs & Solutions, Inc. Other noninterest income
was up $1.8 million, or 12.4% primarily due to higher swap fee
income in 2016 than in 2015, an increase in mortgage banking
income and a $0.9 million gain on the sale of equity investments
for compliance with the Dodd-Frank Wall Street Reform and
Consumer Protection Act in the third quarter of 2016. Nonin-
terest income as a percent of total revenue excluding net secu-
rities (losses) gains and the gain on the sale of equity investment
was 30.6% for the years ended December 31, 2016 and 2015.
Noninterest Expense
Noninterest expenses are also an important factor in the
Company’s results of operations. The following table sets
forth the major components of noninterest expense for the
years indicated:
Years ended December 31,
(In thousands) 2016 2015 2014
Salaries and employee benefits $129,702 $124,318 $119,667
Occupancy 20,940 22,095 22,128
Data processing and communications 16,495 16,588 16,137
Professional fees and outside services 13,617 13,407 14,426
Equipment 14,295 13,408 12,658
Office supplies and postage 6,168 6,367 6,983
FDIC expenses 5,111 5,145 4,944
Advertising 2,556 2,654 2,831
Amortization of intangible assets 3,928 4,864 5,047
Loan collection and other real estate owned 3,458 2,620 3,248
Prepayment penalties on long-term debt — — 17,902
Other 19,652 24,710 20,092
Total noninterest expense $235,922 $236,176 $246,063
Noninterest expense for the year ended December 31, 2016
was $235.9 million, down $0.3 million, or 0.1% from 2015. This
decrease was driven primarily by lower other noninterest
expense during 2016 than 2015 primarily due to reorganization
expenses incurred during the third quarter of 2015, offset by
higher salaries and employee benefit expenses in 2016. Salaries
and employee benefits expense increased $5.4 million, or 4.3%
from 2015 to 2016, due to higher salaries and medical insurance
costs that were partially offset by lower pension credit and
contract termination costs.
Income Taxes
Income tax expense for the year ended December 31, 2016
was $40.4 million, up from $40.2 million for the same period
in 2015. The effective tax rate was 34.0% for the year ended
December 31, 2016, compared to 34.5% for the same period
in 2015. The decrease in the effective tax rate was due to the
higher level of tax-exempt income to total income in 2016
compared to 2015.
We calculate our current and deferred tax provision based
on estimates and assumptions that could differ from the actual
results reflected in income tax returns filed during the subse-
quent year. Adjustments based on filed returns are recorded
when identified, which is generally in the third quarter of the
subsequent year for U.S. federal and state provisions.
The amount of income taxes the Company pays is subject
at times to ongoing audits by federal and state tax authorities,
which may result in proposed assessments. Future results may
include favorable or unfavorable adjustments to the estimated
tax liabilities in the period the assessments are proposed or
resolved or when statutes of limitation on potential assessments
expire. As a result, the Company’s effective tax rate may fluc-
tuate significantly on a quarterly or annual basis.
36
NBT BANCORP 2016 FORM 10-K
Risk Management—Credit Risk
Credit risk is managed through a network of loan officers,
credit committees, loan policies, and oversight from the senior
credit officers and Board of Directors. Management follows a
policy of continually identifying, analyzing, and grading credit
risk inherent in each loan portfolio. An ongoing independent
review, subsequent to management’s review, of individual
credits in the commercial loan portfolio is performed by the
independent loan review function. These components of the
Company’s underwriting and monitoring functions are critical
to the timely identification, classification, and resolution of
problem credits.
Nonperforming Assets
As of December 31,
(Dollars in thousands) 2016 % 2015 % 2014 % 2013 % 2012 %
Nonaccrual loans
Commercial, agricultural and
real estate loans $19,351 54% $14,655 43% $18,226 45% $27,033 54% $20,923 53%
Real estate mortgages 8,027 23% 8,625 26% 10,867 26% 10,296 21% 8,083 20%
Consumer 4,653 13% 6,009 18% 8,086 20% 7,213 14% 8,440 21%
Troubled debt restructured loans 3,681 10% 4,455 13% 3,895 9% 5,423 11% 2,230 6%
Total nonaccrual loans 35,712 100% 33,744 100% 41,074 100% 49,965 100% 39,676 100%
Loans 90 days or more past due
and still accruing
Commercial, agricultural and
real estate loans — 0% — 0% 84 2% 105 3% 148 6%
Real estate mortgages 1,733 36% 1,022 28% 1,927 39% 808 22% 330 13%
Consumer 3,077 64% 2,640 72% 2,930 59% 2,824 75% 1,970 81%
Total loans 90 days or more
past due and still accruing 4,810 100% 3,662 100% 4,941 100% 3,737 100% 2,448 100%
Total nonperforming loans 40,522 37,406 46,015 53,702 42,124
Other real estate owned 5,581 4,666 3,964 2,904 2,276
Total nonperforming assets $46,103 $42,072 $49,979 $56,606 $44,400
Total nonperforming loans
to total loans 0.65% 0.64% 0.82% 0.99% 0.98%
Total nonperforming assets
to total assets 0.52% 0.51% 0.64% 0.74% 0.73%
Total allowance for loan losses
to nonperforming loans 160.90% 168.47% 144.21% 129.29% 164.60%
Total nonperforming assets were $46.1 million at December
31, 2016, compared to $42.1 million at December 31, 2015 pri-
marily due to the increase in nonaccrual commercial, agricultural
and real estate loans. Nonperforming loans at December 31,
2016 were $40.5 million or 0.65% of total loans compared with
$37.4 million or 0.64% at December 31, 2015. Included in non-
performing loans are $5.6 million of nonaccrual loans in the
acquired loan portfolio. Excluding nonaccrual acquired loans,
originated nonperforming loans to originated loans was 0.61%
at December 31, 2016. The Company recorded a provision for
loan losses of $25.4 million for the year ended December 31,
2016 compared with $18.3 million for the year ended December
31, 2015. Net charge-offs to average loans for the year ended
December 31, 2016 were 0.39%, compared with 0.38% for the
year ended December 31, 2015. The allowance for loan losses
was 160.90% of nonperforming loans at December 31, 2016
as compared to 168.47% at December 31, 2015. The allowance
for loan losses as a percentage of loans was 1.05% (1.13%
excluding acquired loans with no related allowance recorded)
at December 31, 2016, compared to 1.07% (1.18% excluding
acquired loans with no related allowance recorded) at Decem-
ber 31, 2015.
NBT BANCORP 2016 FORM 10-K
37
Impaired loans, which primarily consist of nonaccruing com-
mercial, commercial real estate, agricultural, and agricultural
real estate loans, as well as loans that have been modified in a
troubled debt restructuring (“TDR”), increased to $28.9 million
at December 31, 2016 as compared to $27.2 million at December
31, 2015. At December 31, 2016, $7.0 million of the total impaired
loans had a specific reserve allocation of $1.5 million compared
to $5.9 million of impaired loans at December 31, 2015 which
had a specific reserve allocation of $2.0 million.
The allowance for loan losses is maintained at a level esti-
mated by management to provide adequately for risk of prob-
able losses inherent in the current loan portfolio. The adequacy
of the allowance for loan losses is continuously monitored. It
is assessed for adequacy using a methodology designed to
ensure the level of the allowance reasonably reflects the loan
portfolio’s risk profile. It is evaluated to ensure that it is sufficient
to absorb all reasonably estimable credit losses inherent in the
current loan portfolio.
Management considers the accounting policy relating to
the allowance for loan losses to be a critical accounting policy
given the inherent uncertainty in evaluating the levels of the
allowance required to cover credit losses in the portfolio and
the material effect that such judgments can have on the con-
solidated results of operations.
For purposes of evaluating the adequacy of the allowance,
the Company considers a number of significant factors that affect
the collectability of the portfolio. For individually analyzed loans,
these include estimates of loss exposure, which reflect the facts
and circumstances that affect the likelihood of repayment of
such loans as of the evaluation date. For homogeneous pools
of loans, estimates of the Company’s exposure to credit loss
reflect a current assessment of a number of factors, which could
affect collectability. These factors include: past loss experience;
size, trend, composition, and nature of loans; changes in lending
policies and procedures, including underwriting standards and
collection, charge-offs and recoveries; trends experienced in
nonperforming and delinquent loans; current economic condi-
tions in the Company’s market; portfolio concentrations that
may affect loss experienced across one or more components of
the portfolio; the effect of external factors such as competition,
legal and regulatory requirements; and the experience, ability,
and depth of lending management and staff. In addition, various
regulatory agencies, as an integral component of their exami-
nation process, periodically review the Company’s allowance for
loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their examinations.
After a thorough consideration of the factors discussed
above, any required additions to the allowance for loan losses
are made periodically by charges to the provision for loan
losses. These charges are necessary to maintain the allowance
at a level which management believes is reasonably reflective
of overall inherent risk of probable loss in the portfolio. While
management uses available information to recognize losses
on loans, additions to the allowance may fluctuate from one
reporting period to another. These fluctuations are reflective
of changes in risk associated with portfolio content and/or
changes in management’s assessment of any or all of the deter-
mining factors discussed above.
38
NBT BANCORP 2016 FORM 10-K
Total net charge-offs for 2016 were $23.2 million, up from
$21.6 million in 2015. Net charge-offs to average loans was
0.39% for 2016 as compared with 0.38% for 2015. For the orig-
inated portfolio, net charge-offs to average loans for the year
ended December 31, 2016 was 0.39%, compared to 0.38% for
last year. Gross charge-offs were up to $29.3 million for 2016
from $26.1 million for 2015. Recoveries increased from $4.5
million for the year ended December 31, 2015 to $6.1 million
for the year ended December 31, 2016.
Allowance for Loan Losses
(Dollars in thousands) 2016 2015 2014 2013 2012
Balance at January 1 $63,018 $66,359 $69,434 $69,334 $71,334
Loans charged-off
Commercial and agricultural 4,592 5,718 9,414 10,459 8,750
Residential real estate mortgages 1,343 2,229 1,417 1,771 1,906
Consumer* 23,364 18,140 16,642 15,459 15,848
Total loans charged-off 29,299 26,087 27,473 27,689 26,504
Recoveries
Commercial and agricultural 1,887 1,014 1,774 1,956 1,641
Residential real estate mortgages 293 320 285 272 38
Consumer* 3,870 3,127 2,800 3,137 2,556
Total recoveries 6,050 4,461 4,859 5,365 4,235
Net loans charged-off 23,249 21,626 22,614 22,324 22,269
Provision for loan losses 25,431 18,285 19,539 22,424 20,269
Balance at December 31 $65,200 $63,018 $66,359 $69,434 $69,334
Allowance for loan losses to loans outstanding at end of year 1.05% 1.07% 1.19% 1.28% 1.62%
Net charge-offs to average loans outstanding 0.39% 0.38% 0.41% 0.44% 0.55%
*Consumer charge-off and recoveries include consumer and home equity.
In addition to the nonperforming loans discussed above,
the Company has also identified approximately $70.0 million
in potential problem loans at December 31, 2016 as compared
to $73.8 million at December 31, 2015. Potential problem loans
are loans that are currently performing, with a possibility of
loss if weaknesses are not corrected. Such loans may need to
be disclosed as nonperforming at some time in the future.
Potential problem loans are classified by the Company’s loan
rating system as “substandard.” At December 31, 2016, there
were 17 potential problem loans exceeding $1.0 million, totaling
$34.9 million in aggregate, compared to 13 potential problem
loans exceeding $1.0 million, totaling $25.0 million at December
31, 2015. Management cannot predict the extent to which eco-
nomic conditions may worsen or other factors which may
impact borrowers and the potential problem loans. Accordingly,
there can be no assurance that other loans will not become
90 days or more past due, be placed on nonaccrual, become
restructured, or require increased allowance coverage and pro-
vision for loan losses. To mitigate this risk, the Company main-
tains a diversified loan portfolio, has no significant concentration
in any particular industry, and originates loans primarily within
its footprint.
NBT BANCORP 2016 FORM 10-K
39
The following table sets forth the allocation of the allowance
for loan losses by category, as well as the percentage of loans
in each category to total loans, as prepared by the Company.
This allocation is based on management’s assessment of the
risk characteristics of each of the component parts of the total
loan portfolio as of a given point in time and is subject to
changes as and when the risk factors of each such component
Allocation of the Allowance for Loan Losses
part change. The allocation is not indicative of either the specific
amounts of the loan categories in which future charge-offs
may be taken, nor should it be taken as an indicator of future
loss trends. The allocation of the allowance to each category
does not restrict the use of the allowance to absorb losses in
any category.
As of December 31,
2016 2015 2014 2013 2012
Category Category Category Category Category
Percent Percent Percent Percent Percent
(Dollars in thousands) Allowance of Loans Allowance of Loans Allowance of Loans Allowance of Loans Allowance of Loans
Commercial and agricultural $25,444 45% $25,545 44% $32,433 44% $35,090 44% $35,624 47%
Real estate mortgages 6,381 20% 7,960 20% 7,130 20% 6,520 19% 6,252 15%
Consumer 33,375 35% 29,253 36% 26,720 36% 27,694 37% 27,162 38%
Unallocated — 0% 260 0% 76 0% 130 0% 296 0%
Total $65,200 100% $63,018 100% $66,359 100% $69,434 100% $69,334 100%
The Company’s accounting policy relating to the allowance
for loan losses requires a review of each significant loan type
within the loan portfolio, considering asset quality trends for
each type, including, but not limited to, delinquencies, nonac-
cruals, historical charge-off experience, and specific economic
factors (e.g. milk prices are considered when reviewing agri-
cultural loans). Based on this review, management believes the
reserve allocations are adequate to address any trends in asset
quality indicators. As a result of the general improvement and
stabilization of asset quality indicators in 2016, as well as the
aforementioned review of the loan portfolio, the allowance for
loan losses as a percentage of originated loans decreased from
1.18% as of December 31, 2015 to 1.13% as of December 31,
2016. Acquired loans were recorded at fair value on the date
of acquisition, with no carryover of the related allowance for
loan losses. Generally, the fair value discount represents expected
credit losses, net of market interest rate adjustments. The dis-
count on loans receivable will be amortized to interest income
over the estimated remaining life of the acquired loans using
the level yield method.
At December 31, 2015, approximately 59% of the Company’s
loans were secured by real estate located in central and northern
New York, northeastern Pennsylvania, western Massachusetts,
southern New Hampshire, Vermont, and Maine. Accordingly,
the ultimate collectability of a substantial portion of the Com-
pany’s portfolio is susceptible to changes in market conditions
of those areas. Management is not aware of any material con-
centrations of credit to any industry or individual borrowers.
Subprime mortgage lending, which has been the riskiest
sector of the residential housing market, is not a market that
the Company has ever actively pursued. The market does not
apply a uniform definition of what constitutes “subprime” lending.
Our reference to subprime lending relies upon the “Statement
on Subprime Mortgage Lending” issued by the OTS and the
other federal bank regulatory agencies (the “Agencies”), on June
29, 2007, which further referenced the “Expanded Guidance for
Subprime Lending Programs,” or the Expanded Guidance, issued
by the Agencies by press release dated January 31, 2001. In the
Expanded Guidance, the Agencies indicated that subprime lend-
ing does not refer to individual subprime loans originated and
managed, in the ordinary course of business, as exceptions to
prime risk selection standards. The Agencies recognize that
many prime loan portfolios will contain such accounts. The
Agencies also excluded prime loans that develop credit problems
after acquisition and community development loans from the
subprime arena. According to the Expanded Guidance, subprime
loans are other loans to borrowers which display one or more
characteristics of reduced payment capacity. Five specific criteria,
which are not intended to be exhaustive and are not meant to
define specific parameters for all subprime borrowers and may
not match all markets or institutions’ specific subprime definitions,
are set forth, including having a FICO score of 660 or below.
Based upon the definition and exclusions described above, the
Company is a prime lender. Within the loan portfolio, there are
loans that, at the time of origination, had FICO scores of 660 or
below. However, since the Company is a portfolio lender, it
40
NBT BANCORP 2016 FORM 10-K
reviews all data contained in borrower credit reports and does
not base underwriting decisions solely on FICO scores. We believe
the aforementioned loans, when made, were amply collateralized
and otherwise conformed to our prime lending standards.
For acquired loans that are not deemed to be impaired at
acquisition, credit discounts representing the principal losses
expected over the life of the loan are a component of the initial
fair value and amortized over the life of the asset.
As a result of the application of this accounting methodology,
certain credit-related ratios may not necessarily be directly
comparable with periods prior to acquisitions, or comparable
with other institutions. The credit metrics most impacted by
our acquisition of loans related to the acquisition of Alliance
Financial Corporation (“Alliance”) were the allowance for loans
losses to total loans, and total allowance for loan losses to non-
performing loans. As of December 31, 2016, the allowance for
loan losses to total originated loans and the total allowance
for loan losses to originated nonperforming loans were 1.13%
and 186.82%, respectively.
Liquidity Risk
Liquidity involves the ability to meet the cash flow require-
ments of customers who may be depositors wanting to with-
draw funds or borrowers needing assurance that sufficient
funds will be available to meet their credit needs. The Asset
Liability Committee (ALCO) is responsible for liquidity manage-
ment and has developed guidelines which cover all assets and
liabilities, as well as off-balance sheet items that are potential
sources or uses of liquidity. Liquidity policies must also provide
the flexibility to implement appropriate strategies. Requirements
change as loans grow, deposits and securities mature, and pay-
ments on borrowings are made. Liquidity management includes
a focus on interest rate sensitivity management with a goal of
avoiding widely fluctuating net interest margins through periods
of changing economic conditions.
The primary liquidity measurement the Company utilizes is
called “Basic Surplus,” which captures the adequacy of its access
to reliable sources of cash relative to the stability of its funding
mix of average liabilities. This approach recognizes the impor-
tance of balancing levels of cash flow liquidity from short and
long-term securities with the availability of dependable bor-
rowing sources which can be accessed when necessary. At
December 31, 2016, the Company’s Basic Surplus measurement
was 13.6% of total assets, or $1.2 billion, which was above the
Company’s minimum of 5% (calculated at $443.4 million of
period end total assets at December 31, 2016) set forth in its
liquidity policies.
This Basic Surplus approach enables the Company to ade-
quately manage liquidity from both operational and contin-
gency perspectives. By tempering the need for cash flow
liquidity with reliable borrowing facilities, the Company is able
to operate with a more fully invested and, therefore, higher
interest income generating securities portfolio. The makeup
and term structure of the securities portfolio is, in part, impacted
by the overall interest rate sensitivity of the balance sheet.
Investment decisions and deposit pricing strategies are
impacted by the liquidity position. At December 31, 2016, the
Company considered its Basic Surplus position to be strong.
However, certain events may adversely impact the Company’s
liquidity position in 2017. Improvement in the economy may
increase competitive pressure on deposit pricing, which, in
turn, could result in a decrease in the Company’s deposit base
or increase funding costs. Additionally, liquidity will come
under additional pressure if loan growth exceeds deposit
growth in 2017. These scenarios could lead to a decrease in
the Company’s Basic Surplus measure below the minimum
policy level of 5%. To manage this risk, the Company has the
ability to purchase brokered time deposits, borrow against
established borrowing facilities with other banks (Federal
funds), and enter into repurchase agreements with investment
companies. The additional liquidity that could be provided by
these measures was $1.6 billion at December 31, 2016. In addi-
tion, the Bank has enhanced its “Borrower-in-Custody” program
with the FRB with the addition of the ability to pledge auto-
mobile loans. At December 31, 2016, the Bank had the capacity
to borrow $832 million from this program.
At December 31, 2016 and 2015, FHLB advances outstanding
totaled $598 million and $432 million, respectively. The Bank
is a member of the FHLB system and had additional borrowing
capacity from the FHLB of approximately $0.8 billion at Decem-
ber 31, 2016 and $1.1 billion at December 31, 2015. In addition,
unpledged securities could have been used to increase bor-
rowing capacity at the FHLB by an additional $706 million at
December 31, 2016 or used to collateralize other borrowings,
such as repurchase agreements.
At December 31, 2016, a portion of the Company’s loans
and securities were pledged as collateral on borrowings. There-
fore, future growth of earning assets will depend upon the
Company’s ability to obtain additional funding, through growth
of core deposits and collateral management, and may require
further use of brokered time deposits, or other higher cost
borrowing arrangements.
NBT BANCORP 2016 FORM 10-K
41
Net cash flows provided by operating activities totaled
$113.5 million in 2016 and $124.5 million in 2015. The critical
elements of net operating cash flows include net income,
adjusted for non-cash income and expense items such as the
provision for loan losses, deferred income tax expense, depre-
ciation and amortization, and cash flows generated through
changes in other assets and liabilities.
Net cash flows used by investing activities totaled $633.9
million and $504.0 million in 2016 and 2015, respectively. Critical
elements of investing activities are loan and investment secu-
rities transactions.
Net cash flows provided by financing activities totaled
$529.3 million in 2016 as compared to $373.1 million in 2015.
The critical elements of financing activities are proceeds from
deposits, borrowings, and stock issuances. In addition, financ-
ing activities are impacted by dividends and treasury stock
transactions.
Contractual Obligations
In connection with its financing and operating activities,
the Company has entered into certain contractual obligations.
The Company’s future minimum cash payments, excluding
interest, associated with its contractual obligations pursuant
to its borrowing agreements, operating leases, and other obli-
gations at December 31, 2016 are as follows:
Payments Due by Period
(In thousands) 2017 2018 2019 2020 2021 Thereafter Total
Long-term debt obligations $40,150 $40,000 $20,000 $ — $ 72 $ 3,865 $104,087
Junior subordinated debt — — — — — 101,196 101,196
Operating lease obligations 7,757 7,375 6,858 6,132 4,954 19,890 52,966
Capital lease obligations 214 187 174 134 63 — 772
IT/Software obligations 7,437 2,365 1,328 284 11 — 11,425
Data processing commitments 4,491 4,425 4,425 4,425 998 250 19,014
Total contractual obligations $60,049 $54,352 $32,785 $10,975 $6,098 $125,201 $289,460
We have obligations under our pension, post-retirement
plan, directors’ retirement and supplemental executive retire-
ment plans as described in Note 13 to the consolidated financial
statements. The supplemental executive retirement, pension
and postretirement benefit and directors’ retirement payments
represent actuarially determined future benefit payments to
eligible plan participants.
Commitments to Extend Credit
The Company makes contractual commitments to extend
credit, which include unused lines of credit, which are subject
to the Company’s credit approval and monitoring procedures.
At December 31, 2016 and 2015, commitments to extend credit
in the form of loans, including unused lines of credit, amounted
to $1.5 billion and $1.3 billion, respectively. In the opinion of
management, there are no material commitments to extend
credit, including unused lines of credit that represent unusual
risks. All commitments to extend credit in the form of loans,
including unused lines of credit, expire within one year.
Standby Letters of Credit
The Company does not issue any guarantees that would
require liability-recognition or disclosure, other than its standby
letters of credit. The Company guarantees the obligations or
performance of customers by issuing standby letters of credit
to third parties. These standby letters of credit are frequently
issued in support of third party debt, such as corporate debt
issuances, industrial revenue bonds, and municipal securities.
The risk involved in issuing standby letters of credit is essentially
the same as the credit risk involved in extending loan facilities
to customers, and they are subject to the same credit origination,
portfolio maintenance and management procedures in effect
to monitor other credit and off-balance sheet products. Typically,
these instruments have terms of five years or less and expire
unused; therefore, the total amounts do not necessarily repre-
sent future cash requirements. At December 31, 2016 and 2015,
outstanding standby letters of credit were approximately $36.8
million and $31.5 million, respectively. The fair value of the
Company’s standby letters of credit at December 31, 2016 and
2015 was not significant. The following table sets forth the
commitment expiration period for standby letters of credit at
December 31, 2016:
Within one year $27,664
After one but within three years 4,593
After three but within five years 3,657
After five years 901
Total $36,815
42
NBT BANCORP 2016 FORM 10-K
Interest Rate Swaps
The Company records all derivatives on the balance sheet
at fair value. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative,
whether the Company has elected to designate a derivative
in a hedging relationship and apply hedge accounting and
whether the hedging relationship has satisfied the criteria
necessary to apply hedge accounting. Derivatives designated
and qualifying as a hedge of the exposure to changes in the
fair value of an asset, liability, or firm commitment attributable
to a particular risk, such as interest rate risk, are considered
fair value hedges. Derivatives designated and qualifying as a
hedge of the exposure to variability in expected future cash
flows, or other types of forecasted transactions, are considered
cash flow hedges. Hedge accounting generally provides for
the matching of the timing of gain or loss recognition on the
hedging instrument with the recognition of the changes in
the fair value of the hedged asset or liability that are attributable
to the hedged risk in a fair value hedge or the earnings effect
of the hedged forecasted transactions in a cash flow hedge.
The Company may enter into derivative contracts that are
intended to economically hedge certain of its risk, even though
hedge accounting does not apply or the Company elects not
to apply hedge accounting.
For derivatives designated as fair value hedges, changes in
the fair value of the derivative and the hedged item related to
the hedged risk are recognized in earnings. Any hedge inef-
fectiveness would be recognized in the income statement line
item pertaining to the hedged item. For derivatives designated
as cash flow hedges, changes in fair value of the effective
portion of the cash flow hedges are reported in OCI. When the
cash flows associated with the hedged item are realized, the
gain or loss included in OCI is recognized in the Consolidated
Statement of Income.
When the Company purchases a portion of a commercial
loan that has an existing interest rate swap, it enters a risk
participation agreement with the counterparty and assumes
the credit risk of the loan customer related to the swap. Any
fee paid to the Company under a risk participation agreement
is in consideration of the credit risk of the counterparties and
is recognized in the income statement. Credit risk on the risk
participation agreements is determined after considering the
risk rating, probability of default and loss given default of
the counterparties.
Loans Serviced for Others and
Loans Sold with Recourse
The total amount of loans serviced by the Company for
unrelated third parties was approximately $604.0 million and
$616.1 million at December 31, 2016 and 2015, respectively.
At December 31, 2016 and 2015, the Company had approxi-
mately $0.9 million and $1.1 million, respectively, of mortgage
servicing rights. At December 31, 2016 and 2015, the Company
serviced $28.5 million and $25.1 million, respectively, of agri-
cultural loans sold with recourse. Due to sufficient collateral
on these loans, no reserve is considered necessary at December
31, 2016 and 2015. As of December 31, 2016 and 2015, the
Company serviced $72.2 million and $47.3 million, respectively,
of consumer loans serviced for Springstone.
Capital Resources
Consistent with its goal to operate a sound and profitable
financial institution, the Company actively seeks to maintain a
“well-capitalized” institution in accordance with regulatory
standards. The principal source of capital to the Company is
earnings retention. The Company’s capital measurements are
in excess of both regulatory minimum guidelines and meet
the requirements to be considered well-capitalized.
The Company’s principal source of funds to pay interest on
trust preferred debentures and pay cash dividends to its share-
holders are dividends from its subsidiaries. Various laws and
regulations restrict the ability of banks to pay dividends to
their shareholders. Generally, the payment of dividends by the
Company in the future as well as the payment of interest on
the capital securities will require the generation of sufficient
future earnings by its subsidiaries.
The Bank also is subject to substantial regulatory restrictions
on its ability to pay dividends to the Company. Under OCC reg-
ulations, the Bank may not pay a dividend, without prior OCC
approval, if the total amount of all dividends declared during
the calendar year, including the proposed dividend, exceeds
the sum of its retained net income to date during the calendar
year and its retained net income over the preceding two years.
At December 31, 2016, approximately $102.5 million of the
total stockholders’ equity of the Bank was available for payment
of dividends to the Company without approval by the OCC.
The Bank’s ability to pay dividends also is subject to the Bank
being in compliance with regulatory capital requirements. The
Bank is currently in compliance with these requirements.
NBT BANCORP 2016 FORM 10-K
43
Stock Repurchase Plan
The Company purchased 675,535 shares of its common
stock during the year ended December 31, 2016 at an average
price of $25.45 per share under a previously announced plan
that expired on December 31, 2016. As of December 31, 2016,
there were 1,000,000 shares available for repurchase under the
repurchase plan that was announced on March 28, 2016, which
expires on December 31, 2017.
Recent Accounting Updates
See Note 24 to the consolidated financial statements for a
detailed discussion of new accounting pronouncements.
2015 OPERATING RESULTS AS COMPARED
TO 2014 OPERATING RESULTS
Net Interest Income
Net interest income was $252.6 million for the year ended
December 31, 2015, up $0.7 million from 2014. FTE net interest
margin was 3.50% for the year ended December 31, 2015, down
from 3.61% for the year ended December 31, 2014. Average
interest earning assets were up $241.8 million, or 3.4%, for the
year ended December 31, 2015 as compared to 2014. This
increase from last year was driven primarily by organic loan
growth. Yields on earning assets decreased from 3.94% during
2014 to 3.78% for 2015, more than offsetting the growth in
earning assets, resulting in a 0.7% decrease in interest income
for the year ended December 31, 2015 as compared to the year
ended December 31, 2014. The yield compression was driven
by a 20 basis-point decrease in loan yields from 2014 to 2015.
Average interest bearing liabilities increased $21.0 million, or
0.4%, from the year ended December 31, 2014 to the year
ended December 31, 2015. Total average deposits increased
$344.2 million, or 5.6%, for the year ended December 31, 2015
as compared to last year driven primarily by an 11.2% increase
in noninterest bearing demand deposits, as well as increases
in money market deposit accounts and savings deposits in
2015. This increase was partially offset by a decrease in average
long-term borrowings of $93.9 million for the year ended
December 31, 2015 as compared to last year due to the debt
restructuring completed during the third quarter of 2014, which
resulted in the prepayment of $165.0 million of long-term debt.
In addition, average short-term borrowings decreased $42.6
million for the year ended December 31, 2015 as compared to
last year driven by deposit growth. The rates paid on interest
bearing liabilities decreased by 5 basis-points for the year ended
December 31, 2015 as compared to 2014. This decrease resulted
primarily from a shift in deposits into lower cost core deposits
as well as the aforementioned debt restructuring.
Loans and Corresponding Interest
and Fees on Loans
The average balance of loans increased by approximately
$215.8 million, or 3.9%, from 2014 to 2015. The yield on average
loans decreased from 4.42% in 2014 to 4.22% in 2015, as loan
rates declined due to the continued low rate environment in
2015. Interest income from loans decreased 0.6%, from $244.2
million in 2014 to $242.6 million in 2015. This decrease was
due to the decrease in yields, partially offset by the increase in
average loan balances.
Total loans increased $287.9 million, or 5.1%, from December
31, 2014 to December 31, 2015. Increases in residential real
estate mortgages, commercial real estate loans, and consumer
loans were the primary drivers of the increase in total loans
from 2014 as the Company experienced strong originations in
2015 in the upstate New York and Vermont markets.
Securities and Corresponding Interest
and Dividend Income
The average balance of AFS securities decreased $199.7 mil-
lion, or 15.9%, from 2014 to 2015. The yield on average AFS
securities was 1.97% for 2015 compared to 2.05% in 2014.
The average balance of HTM securities increased from $233.5
million in 2014 to $459.6 million in 2015. At December 31, 2015,
HTM securities were comprised primarily of tax-exempt munic-
ipal securities. The yield on HTM securities decreased from
2.81% in 2014 to 2.46% in 2015.
During the third quarter of 2014, the Company transferred
$340.5 million in securities from the AFS portfolio to the HTM
portfolio to mitigate the impact of volatility of interest rate
changes on tangible book value.
The average balance of FRB and FHLB stock decreased to
$33.0 million in 2015 from $39.3 million in 2014. The yield from
investments in FRB and FHLB banks increased from 5.10% in
2014 to 5.18% in 2015.
44
NBT BANCORP 2016 FORM 10-K
Funding Sources and Corresponding
Interest Expense
The Company utilizes traditional deposit products such as
time, savings, NOW, money market, and demand deposits as
its primary source for funding. Other sources, such as short-
term FHLB advances, federal funds purchased, securities sold
under agreements to repurchase, brokered time deposits, and
long-term FHLB borrowings are utilized as necessary to support
the Company’s growth in assets and to achieve interest rate
sensitivity objectives. The average balance of interest-bearing
liabilities increased $21.0 million from 2014, and totaled $5.2
billion in 2015. The rate paid on interest-bearing liabilities
decreased from 0.45% in 2014 to 0.40% in 2015. This decrease
in rates, partially offset by an increase in average balances,
caused a decrease in interest expense of $2.6 million, or 11.1%,
from $23.2 million in 2014 to $20.6 million in 2015.
Deposits
Average interest bearing deposits increased $157.4 million,
or 3.5%, from 2014 to 2015, due primarily to organic deposit
growth. Average money market deposits increased $124.3
million or 8.5% during 2015 when compared to 2014. Average
NOW accounts increased $37.9 million or 4.0% during 2015
as compared to 2014. The average balance of savings accounts
increased $50.8 million or 5.0% during 2015 when compared
to 2014. These increases were partially offset by a decrease
in average time deposits, which decreased $55.6 million, or
5.5%, from 2014 to 2015. The average balance of demand
deposits increased $186.8 million, or 11.2%, during 2015 when
compared to 2014. This growth in demand deposits was driven
principally by increases in accounts from retail, municipal,
and commercial customers.
The rate paid on average interest-bearing deposits was
0.31% for 2015 and 2014. The rate paid for money market
deposit accounts increased from 0.17% during 2014 to 0.21%
during 2015. The rate paid for time deposits increased from
0.97% during 2014 to 1.01% during 2015. The rate paid for sav-
ings deposits decreased from 0.07% during 2014 to 0.06%
during 2015.
Borrowings
Average short-term borrowings decreased to $339.9 million
in 2015 from $382.5 million in 2014. The average rate paid on
short-term borrowings increased from 0.22% in 2014 to 0.23%
in 2015. Average long-term debt decreased from $224.6 million
in 2014 to $130.7 million in 2015. This decrease was due to the
long-term debt restructure completed in the third quarter of
2014 which resulted in the prepayment of $165.0 million of
long-term debt.
The average balance of junior subordinated debt remained
at $101.2 million in 2015. The average rate paid for junior
subordinated debt in 2015 was 2.19%, up slightly from 2.14%
in 2014.
Short-term borrowings consist of Federal funds purchased
and securities sold under repurchase agreements, which gen-
erally represent overnight borrowing transactions, and other
short-term borrowings, primarily FHLB advances, with original
maturities of one year or less. The Company has unused lines
of credit and access to brokered deposits available for short-
term financing of approximately $2.0 billion and $1.8 billion
at December 31, 2015 and 2014, respectively. Securities col-
lateralizing repurchase agreements are held in safekeeping by
non-affiliated financial institutions and are under the Company’s
control. Long-term debt, which is comprised primarily of FHLB
advances, are collateralized by the FHLB stock owned by the
Company, certain of its mortgage-backed securities and a blan-
ket lien on its residential real estate mortgage loans.
Noninterest income for the year ended December 31, 2015
was $118.5 million, down $7.5 million, or 6.0%, from the year
ended December 31, 2014. The decrease from 2014 was pri-
marily driven by a $19.4 million gain recognized in 2014 from
the previously disclosed sale of our ownership interest in
Springstone as compared with the $4.2 million gain recognized
in 2015. Excluding the gains recognized from the sale of equity
investments, noninterest income was up $7.7 million, or 7.2%,
from 2014 to 2015. This increase was driven in part to a gain
on the sale of an equity investment totaling $3.0 million in
the fourth quarter of 2015. In addition, retirement plan admin-
istration fees were up $2.0 million, or 16.6%, from 2014 to
2015 due to new business generation as well as the 2015
acquisition of Third Party Administrators, Inc.. ATM and debit
card fees were up $1.1 million, or 6.5%, in 2015 as compared
to 2014 due to an increase in debit card activity. Other nonin-
terest income was up $3.7 million in 2015 as compared with
2014 due primarily to charge-off recoveries on acquired loans
of $1.5 million and a favorable settlement of a prior accrual of
$1.6 million in 2015.
Noninterest Expense
Noninterest expense for the year ended December 31, 2015
was $236.2 million, down $9.9 million from 2014. This decrease
was driven primarily by $17.9 million in prepayment penalties
NBT BANCORP 2016 FORM 10-K
45
resulting from the debt restructuring in 2014. Excluding these
prepayment penalties, noninterest expense was up $8.0 million,
or 3.5%, from 2014 to 2015. This increase was due primarily to
an increase in salaries and employee benefits of $4.7 million,
or 3.9%, from 2014 to 2015. This increase was driven primarily
by a $2.4 million increase in post-retirement expenses as well
as contract termination costs totaling $1.6 million accrued in
the fourth quarter of 2015. In addition, other operating expenses
were up $4.6 million in 2015 as compared with 2014. This
increase was driven primarily by branch reorganization expenses
totaling $3.8 million in 2015.
Income Taxes
Income tax expense for the year ended December 31, 2015
was $40.2 million, up from $37.2 million for the same period
in 2014. The effective tax rate was 34.5% for the year ended
December 31, 2015, compared to 33.2% for the same period
in 2014.
The income tax expense on the Company’s income was dif-
ferent than the income tax expense at the Federal statutory
rate of 35% due primarily to tax exempt income and, to a lesser
extent, the effect of state income taxes and Federal low income
housing tax credits.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest rate risk is the most significant market risk affecting
the Company. Other types of market risk, such as foreign cur-
rency exchange rate risk and commodity price risk, do not arise
in the normal course of the Company’s business activities or
are immaterial to the results of operations.
Interest rate risk is defined as an exposure to a movement
in interest rates that could have an adverse effect on the Com-
pany’s net interest income. Net interest income is susceptible
to interest rate risk to the degree that interest-bearing liabilities
mature or reprice on a different basis than earning assets. When
interest-bearing liabilities mature or reprice more quickly than
earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income.
Similarly, when earning assets mature or reprice more quickly
than interest-bearing liabilities, falling interest rates could result
in a decrease in net interest income.
In an attempt to manage the Company’s exposure to changes
in interest rates, management monitors the Company’s interest
rate risk. Management’s asset/liability committee (“ALCO”)
meets monthly to review the Company’s interest rate risk posi-
tion and profitability, and to recommend strategies for consid-
eration by the Board of Directors. Management also reviews
loan and deposit pricing, and the Company’s securities portfolio,
formulates investment and funding strategies, and oversees
the timing and implementation of transactions to assure attain-
ment of the Board’s objectives in the most effective manner.
Notwithstanding the Company’s interest rate risk management
activities, the potential for changing interest rates is an uncer-
tainty that can have an adverse effect on net income.
In adjusting the Company’s asset/liability position, the Board
and management attempt to manage the Company’s interest
rate risk while minimizing the net interest margin compression.
At times, depending on the level of general interest rates, the
relationship between long and short-term interest rates, market
conditions and competitive factors, the Board and management
may determine to increase the Company’s interest rate risk
position somewhat in order to increase its net interest margin.
The Company’s results of operations and net portfolio values
remain vulnerable to changes in interest rates and fluctuations
in the difference between long and short-term interest rates.
The primary tool utilized by ALCO to manage interest rate
risk is through earnings at risk modeling (interest rate sensitivity
analysis). Information such as principal balance, interest rate,
maturity date, cash flows, next repricing date (if needed), and
current rates is uploaded into the model to create an ending
balance sheet. In addition, ALCO makes certain assumptions
regarding prepayment speeds for loans and mortgage related
investment securities along with any optionality within the
deposits and borrowings. The model is first run under an assump-
tion of a flat rate scenario (i.e. no change in current interest
rates) with a static balance sheet. Two additional models are
run in which a gradual increase of 200 bps and a gradual decrease
of 100 bps takes place over a 12 month period with a static bal-
ance sheet. Under these scenarios, assets subject to prepayments
are adjusted to account for faster or slower prepayment assump-
tions. Any investment securities or borrowings that have callable
options embedded into them are handled accordingly based
on the interest rate scenario. The resultant changes in net interest
income are then measured against the flat rate scenario.
46
NBT BANCORP 2016 FORM 10-K
In the declining rate scenario, net interest income is projected
to decrease slightly when compared to the forecasted net inter-
est income in the flat rate scenario through the simulation
period. The decrease in net interest income is a result of earning
assets repricing downward, given potential higher prepayments
and lower reinvestment rates, slightly faster than the interest
bearing liabilities that are at or near their floors. In the rising
rate scenarios, net interest income is projected to experience
a decline from the flat rate scenario; however, the potential
impact on earnings is dependent on the ability to lag deposit
repricing on NOW, savings, MMDA, and CD accounts. Net interest
income for the next twelve months in the +200/–100 bp sce-
narios, as described above, is within the internal policy risk
limits of not more than a 7.5% change in net interest income.
The following table summarizes the percentage change in net
interest income in the rising and declining rate scenarios over
a 12-month period from the forecasted net interest income in
the flat rate scenario using the December 31, 2016 balance
sheet position:
Interest Rate Sensitivity Analysis
Change in interest rates Percent change in
(In basis points) net interest income
+200 (2.60)%
–100 (2.50)%
The Company anticipates that under the current low rate
environment, on a monthly basis, interest income is expected
to decrease at a faster rate than interest expense given the
potential higher prepayments and reinvestment into lower
rates as deposit rates are at or near their respective floors. In
order to protect net interest income from anticipated net
interest margin compression in 2017, the Company will continue
to focus on increasing earning assets while maintaining a bal-
anced asset mix of loans and investments, and focus on funding
growth through lower cost core deposits.
Another tool used by ALCO to manage interest rate risk is
financial modeling of net portfolio values (discounted present
value of assets minus discounted present value of liabilities).
The table below represents the percent change in net portfolio
values from base case (flat rates) for +200/–100 instantaneous
rate shocks:
Net Portfolio Value Sensitivity Analysis
Change in interest rates Percent change in
(In basis points) net portfolio value
+200 (8.34)%
–100 18.75%
NBT BANCORP 2016 FORM 10-K
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
NBT Bancorp Inc.:
We have audited the accompanying consolidated balance sheets of NBT Bancorp Inc. and subsidiaries (the Company) as of
December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’
equity and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of NBT Bancorp Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and
our report dated March 1, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG LLP
Albany, New York
March 1, 2017
48
NBT BANCORP 2016 FORM 10-K
Consolidated Balance Sheets
As of December 31,
(In thousands except share and per share data) 2016 2015
Assets
Cash and due from banks $ 147,789 $ 130,593
Short-term interest bearing accounts 1,392 9,704
Securities available for sale, at fair value 1,338,290 1,174,544
Securities held to maturity (fair value $525,050 and $473,140) 527,948 471,031
Trading securities 9,259 8,377
Federal Reserve and Federal Home Loan Bank stock 47,033 36,673
Loans 6,198,057 5,883,133
Less allowance for loan losses 65,200 63,018
Net loans 6,132,857 5,820,115
Premises and equipment, net 84,187 88,826
Goodwill 265,439 265,957
Intangible assets, net 15,815 17,265
Bank owned life insurance 168,012 117,044
Other assets 129,247 122,517
Total assets $8,867,268 $8,262,646
Liabilities
Demand (noninterest bearing) $2,195,845 $1,998,165
Savings, negotiable order withdrawal and money market 3,905,432 3,697,851
Time 872,411 908,827
Total deposits 6,973,688 6,604,843
Short-term borrowings 681,703 442,481
Long-term debt 104,087 130,447
Junior subordinated debt 101,196 101,196
Other liabilities 93,278 101,675
Total liabilities 7,953,952 7,380,642
Stockholders’ equity
Preferred stock, $0.01 par value; authorized 2,500,000 shares at December 31, 2016 and 2015 — —
Common stock, $0.01 par value; authorized 100,000,000 shares at December 31, 2016
and December 31, 2015; issued 49,651,493 at December 31, 2016 and 2015 497 497
Additional paid-in-capital 575,078 576,726
Retained earnings 501,761 462,232
Accumulated other comprehensive loss (21,520) (22,418)
Common stock in treasury, at cost, 6,393,743 and 6,220,792 shares at December 31, 2016
and 2015, respectively (142,500) (135,033)
Total stockholders’ equity 913,316 882,004
Total liabilities and stockholders’ equity $8,867,268 $8,262,646
See accompanying notes to consolidated financial statements.
NBT BANCORP 2016 FORM 10-K
49
Consolidated Statements of Income
Years ended December 31,
(In thousands except per share data) 2016 2015 2014
Interest, fee, and dividend income
Interest and fees on loans $250,994 $241,828 $243,324
Securities available for sale 24,033 20,418 24,464
Securities held to maturity 9,852 9,233 5,261
Other 2,068 1,745 2,032
Total interest, fee, and dividend income 286,947 273,224 275,081
Interest expense
Deposits 14,366 14,257 13,638
Short-term borrowings 2,309 783 845
Long-term debt 3,204 3,355 6,555
Junior subordinated debt 2,627 2,221 2,165
Total interest expense 22,506 20,616 23,203
Net interest income 264,441 252,608 251,878
Provision for loan losses 25,431 18,285 19,539
Net interest income after provision for loan losses 239,010 234,323 232,339
Noninterest income
Insurance and other financial services revenue 24,396 24,211 24,517
Service charges on deposit accounts 16,729 17,056 17,941
ATM and debit card fees 19,448 18,248 17,135
Retirement plan administration fees 16,063 14,146 12,129
Trust 18,565 19,026 18,950
Bank owned life insurance income 5,195 4,334 5,349
Net securities (losses) gains (644) 3,087 92
Gain on the sale of equity investment — 4,179 19,401
Other 15,961 14,194 10,513
Total noninterest income 115,713 118,481 126,027
Noninterest expense
Salaries and employee benefits 129,702 124,318 119,667
Occupancy 20,940 22,095 22,128
Data processing and communications 16,495 16,588 16,137
Professional fees and outside services 13,617 13,407 14,426
Equipment 14,295 13,408 12,658
Office supplies and postage 6,168 6,367 6,983
FDIC expenses 5,111 5,145 4,944
Advertising 2,556 2,654 2,831
Amortization of intangible assets 3,928 4,864 5,047
Loan collection and other real estate owned 3,458 2,620 3,248
Prepayment penalties on long-term debt — — 17,902
Other 19,652 24,710 20,092
Total noninterest expense 235,922 236,176 246,063
Income before income tax expense 118,801 116,628 112,303
Income tax expense 40,392 40,203 37,229
Net income $ 78,409 $ 76,425 $ 75,074
Earnings per share
Basic $ 1.81 $ 1.74 $ 1.71
Diluted 1.80 1.72 1.69
See accompanying notes to consolidated financial statements.
50
NBT BANCORP 2016 FORM 10-K
Consolidated Statements of Comprehensive Income
Years ended December 31,
(In thousands) 2016 2015 2014
Net income $78,409 $76,425 $ 75,074
Other comprehensive income, net of tax:
Unrealized net holding (losses) gains arising during the year
(pre-tax amounts of $(8,618), $(3,159), and $18,069) (5,265) (1,930) 10,933
Reclassification adjustment for net losses (gains) related to securities available
for sale included in net income (pre-tax amounts of $644, $(3,087), and $(92)) 393 (1,886) (56)
Unrealized gains on derivatives (cash flow hedges) (pre-tax amounts of $2,901) 1,772 — —
Amortization of unrealized net gains and losses related to the reclassification
of available for sale investment securities to held to maturity
(pre-tax amounts of $(1,094), $(1,311), and $(421)) 668 801 257
Pension and other benefits:
Amortization of prior service cost and actuarial gains
(pre-tax amounts of $2,370, $2,239, and $75) 1,421 1,371 46
Decrease (increase) in unrecognized actuarial loss
(pre-tax amounts of $3,154, $(6,144), and $(19,245)) 1,909 (3,747) (11,442)
Total other comprehensive income (loss) 898 (5,391) (262)
Comprehensive income $79,307 $71,034 $ 74,812
See accompanying notes to consolidated financial statements.
NBT BANCORP 2016 FORM 10-K
51
Consolidated Statements of Changes in Stockholders’ Equity
Accumulated
Additional Other Common
(In thousands except Common Paid-in- Retained Comprehensive Stock in
share and per share data) Stock Capital Earnings (Loss) Income Treasury Total
Balance at December 31, 2013 $497 $574,152 $385,787 $(16,765) $(127,102) $816,569
Net income — — 75,074 — — 75,074
Cash dividends—$0.84 per share — — (36,905) — — (36,905)
Purchase of 3,288 treasury shares — — — — (72) (72)
Net issuance of 386,692 shares to employee
stock plans, including tax benefit — (1,169) — — 7,425 6,256
Stock-based compensation — 3,521 — — — 3,521
Other comprehensive loss — — — (262) — (262)
Balance at December 31, 2014 $497 $576,504 $423,956 $(17,027) $(119,749) $864,181
Net income — — 76,425 — — 76,425
Cash dividends—$0.87 per share — — (38,149) — — (38,149)
Purchase of 1,047,152 treasury shares — — — — (26,797) (26,797)
Net issuance of 581,400 shares to employee
stock plans, including tax benefit — (3,864) — — 11,513 7,649
Stock-based compensation — 4,086 — — — 4,086
Other comprehensive loss — — — (5,391) — (5,391)
Balance at December 31, 2015 $497 $576,726 $462,232 $(22,418) $(135,033) $882,004
Net income — — 78,409 — — 78,409
Cash dividends—$0.90 per share — — (38,880) — — (38,880)
Purchase of 675,535 treasury shares — — — — (17,193) (17,193)
Net issuance of 502,585 shares to employee
stock plans, including tax benefit — (6,026) — — 9,726 3,700
Stock-based compensation — 4,378 — — — 4,378
Other comprehensive income — — — 898 — 898
Balance at December 31, 2016 $497 $575,078 $501,761 $(21,520) $(142,500) $913,316
See accompanying notes to consolidated financial statements.
52
NBT BANCORP 2016 FORM 10-K
Consolidated Statements of Cash Flows
Years ended December 31,
(In thousands) 2016 2015 2014
Operating activities
Net income $ 78,409 $ 76,425 $ 75,074
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 25,431 18,285 19,539
Depreciation and amortization of premises and equipment 9,023 8,646 8,324
Net accretion on securities 5,278 2,554 3,216
Amortization of intangible assets 3,928 4,864 5,047
Stock-based compensation 4,378 4,086 3,521
Bank owned life insurance income (5,195) (4,334) (5,349)
Trading security purchases (287) (810) (1,626)
(Gains) losses in trading securities (594) 226 (388)
Proceeds from sale of loans held for sale 96,603 72,498 7,050
Originations and purchases of loans held for sale (96,692) (69,677) (10,215)
Net gains on sales of loans held for sale (499) (239) (17)
Net security losses (gains) 644 (3,087) (92)
Net gains on sales of other real estate owned (687) (1,337) (459)
Gain on sale of equity investment — (4,179) (19,401)
Gain on asset sold (2,462) — —
Impairment write-down 2,565 — —
Prepayment penalties on long-term debt — — 17,902
Net decrease (increase) in other assets 364 15,386 (19,601)
Net (decrease) increase in other liabilities (10,697) 5,236 5,286
Net cash provided by operating activities 109,510 124,543 87,811
Investing activities
Net cash (used in) acquisitions (2,000) (3,100) —
Securities available for sale:
Proceeds from maturities, calls, and principal paydowns 324,781 299,302 236,133
Proceeds from sales 98,466 15,091 189
Purchases (597,428) (481,262) (197,652)
Securities held to maturity:
Proceeds from maturities, calls, and principal paydowns 100,893 79,212 44,756
Purchases (157,418) (95,272) (49,479)
Other:
Net increase in loans (344,448) (315,363) (212,238)
Proceeds from FHLB stock redemption 158,818 60,852 78,441
Purchases of Federal Reserve and FHLB stock (169,178) (64,899) (64,203)
Proceeds from settlement of bank owned life insurance 1,477 1,541 6,064
Purchase of bank owned life insurance (47,250) — —
Purchases of premises and equipment, net (3,308) (8,193) (9,003)
Proceeds from sale of equity investment — 4,179 19,639
Proceeds from sales of other real estate owned 6,635 3,908 3,612
Net cash used in investing activities (629,960) (504,004) (143,741)
Financing activities
Net increase in deposits 368,845 305,238 409,381
Net increase (decrease) in short-term borrowings 239,222 125,679 (139,240)
Proceeds from issuance of long-term debt 23,880 — 120,051
Repayments of long-term debt (50,240) (498) (315,831)
Proceeds from the issuance of shares to employee benefit plans
and other stock plans 3,700 7,649 6,256
Purchase of treasury stock (17,193) (26,797) (72)
Cash dividends (38,880) (38,149) (36,905)
Net cash provided by financing activities 529,334 373,122 43,640
Net increase (decrease) in cash and cash equivalents 8,884 (6,339) (12,290)
Cash and cash equivalents at beginning of year 140,297 146,636 158,926
Cash and cash equivalents at end of year $ 149,181 $ 140,297 $ 146,636
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 22,466 $ 20,908 $ 23,387
Income taxes, net of refund 40,879 28,684 38,912
Noncash investing activities:
4,330
Loans transferred to other real estate owned $
Preferred stock acquired from sale of equity investment — — 2,762
Transfer of available for sale securities to held to maturity portfolio — — 332,115
Acquisitions:
Fair value of assets acquired $
4,100 $ —
2,584 $
6,863 $
3,293 $
See accompanying notes to consolidated financial statements.
NBT BANCORP 2016 FORM 10-K
53
NBT Bancorp Inc. and Subsidiaries:
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of NBT Bancorp Inc.
(“NBT Bancorp”) and its subsidiaries, NBT Bank, National Asso-
ciation (“NBT Bank” or the “Bank”), NBT Holdings, Inc., and NBT
Financial Services, Inc., conform, in all material respects, with
accounting principles generally accepted in the United States
of America (“GAAP”) and to general practices within the banking
industry. Collectively, NBT Bancorp and its subsidiaries are
referred to herein as “the Company.”
The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from these estimates.
Estimates associated with the allowance for loan losses,
income taxes, pension expense, fair values of financial instru-
ments, status of contingencies and other-than-temporary
impairment (“OTTI”) on investments are particularly susceptible
to material change in the near term.
The following is a description of significant policies and
practices:
Consolidation
The accompanying consolidated financial statements include
the accounts of NBT Bancorp and its wholly-owned subsidiaries
mentioned above. All material intercompany transactions have
been eliminated in consolidation. Amounts previously reported
in the consolidated financial statements are reclassified whenever
necessary to conform to the current year’s presentation. In the
“Parent Company Financial Information,” the investment in sub-
sidiaries is recorded using the equity method of accounting.
The Company determines whether it has a controlling finan-
cial interest in an entity by first evaluating whether the entity
is a voting interest entity or a variable interest entity under
GAAP. Voting interest entities are entities in which the total
equity investment at risk is sufficient to enable the entity to
finance itself independently and provides the equity holders
with the obligation to absorb losses, the right to receive residual
returns and the right to make decisions about the entity’s
activities. The Company consolidates voting interest entities
in which it has all, or at least a majority of, the voting interest.
As defined in applicable accounting standards, variable interest
entities (“VIEs”) are entities that lack one or more of the char-
acteristics of a voting interest entity. A controlling financial
interest in a VIE is present when the Company has both the
power and ability to direct the activities of the VIE that most
significantly impact the VIE’s economic performance and an
obligation to absorb losses or the right to receive benefits
that could potentially be significant to the VIE. The Company’s
wholly-owned subsidiaries CNBF Capital Trust I, NBT Statutory
Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I
and Alliance Financial Capital Trust II are VIEs for which the
Company is not the primary beneficiary. Accordingly, the
accounts of these entities are not included in the Company’s
consolidated financial statements.
Segment Reporting
The Company’s operations are primarily in the community
banking industry and include the provision of traditional banking
services. The Company also provides other services through
its subsidiaries such as insurance, retirement plan administration,
and trust administration. The Company operates solely in the
geographical regions of central and upstate New York, north-
eastern Pennsylvania, western Massachusetts, southern New
Hampshire, Vermont, and the greater Portland, Maine area. The
Company has no reportable operating segments.
Cash Equivalents
The Company considers amounts due from correspondent
banks, cash items in process of collection, and institutional
money market mutual funds to be cash equivalents for purposes
of the consolidated statements of cash flows.
Securities
The Company classifies its securities at date of purchase as
either held to maturity (“HTM”), trading or available for sale
(“AFS”). HTM debt securities are those that the Company has
the ability and intent to hold until maturity. Trading securities
are securities purchased with the intent to sell within a short
period of time. AFS securities are securities that are not classified
as a HTM or trading securities. AFS securities are recorded at
fair value. Unrealized holding gains and losses, net of the
54
NBT BANCORP 2016 FORM 10-K
related tax effect, on AFS securities are excluded from earnings
and are reported in the consolidated statements of stockhold-
ers’ equity and the consolidated statements of comprehensive
income as a component of accumulated other comprehensive
income or loss. HTM securities are recorded at amortized cost.
Trading securities are recorded at fair value, with net unrealized
gains and losses recognized in income. Transfers of securities
between categories are recorded at fair value at the date of
transfer. Declines in the fair value of HTM and AFS securities
below their cost that are deemed to be other than temporary
are reflected in earnings as realized losses or in other com-
prehensive income, depending on whether the Company
intends to sell the security or more likely than not will be
required to sell the security before recovery of its amortized
cost basis less any current-period credit loss. If the Company
intends to sell the security or more likely than not will be
required to sell the security before recovery of its amortized
cost basis less any current-period credit loss, the OTTI shall be
recognized in earnings equal to the entire difference between
the investment’s amortized cost basis and its fair value at the
balance sheet date. If the Company does not intend to sell
the security and it is not more likely than not that the entity
will be required to sell the security before recovery of its amor-
tized cost basis less any current-period credit loss, the OTTI
shall be separated into (a) the amount representing the credit
loss and (b) the amount related to all other factors. The amount
of the total OTTI impairment related to the credit loss shall be
recognized in earnings. The amount of the total OTTI related
to other factors shall be recognized in other comprehensive
income, net of applicable taxes.
In estimating OTTI losses, management considers, among
other things, (i) the length of time and the extent to which the
fair value has been less than cost, (ii) the financial condition
and near-term prospects of the issuer, and (iii) the historical
and implied volatility of the fair value of the security.
Non-marketable equity securities are carried at cost.
Premiums and discounts are amortized or accreted over the
life of the related security as an adjustment to yield using the
interest method. Dividend and interest income are recognized
when earned. Realized gains and losses on securities sold are
derived using the specific identification method for determining
the cost of securities sold.
Investments in Federal Reserve Bank (“FRB”) and Federal
Home Loan Bank (“FHLB”) stock are required for membership
in those organizations and are carried at cost since there is no
market value available. The FHLB New York continues to pay
dividends and repurchase stock. As such, the Company has
not recognized any impairment on its holdings of FHLB stock.
Loans
Loans are recorded at their current unpaid principal balance,
net of unearned income and unamortized loan fees and expenses,
which are amortized under the effective interest method over
the estimated lives of the loans. Interest income on loans is
accrued based on the principal amount outstanding.
For all loan classes within the Company’s loan portfolio,
loans are placed on nonaccrual status when timely collection
of principal and interest in accordance with contractual terms
is doubtful. Loans are transferred to nonaccrual status generally
when principal or interest payments become ninety days
delinquent, unless the loan is well-secured and in the process
of collection, or sooner when management concludes cir-
cumstances indicate that borrowers may be unable to meet
contractual principal or interest payments. When a loan is
transferred to a nonaccrual status, all interest previously
accrued in the current period but not collected is reversed
against interest income in that period. Interest accrued in a
prior period and not collected is charged-off against the
allowance for loan losses.
If ultimate repayment of a nonaccrual loan is expected, any
payments received are applied in accordance with contractual
terms. If ultimate repayment of principal is not expected, any
payment received on a nonaccrual loan is applied to principal
until ultimate repayment becomes expected. For all loan classes
within the Company’s loan portfolio, nonaccrual loans are
returned to accrual status when they become current as to
principal and interest and demonstrate a period of performance
under the contractual terms and, in the opinion of manage-
ment, are fully collectible as to principal and interest. For loans
in all portfolios, the principal amount is charged off in full or
in part as soon as management determines, based on available
facts, that the collection of principal in full is improbable. For
commercial loans, management considers specific facts and
circumstances relative to individual credits in making such a
determination. For consumer and residential loan classes,
management uses specific guidance and thresholds from the
Federal Financial Institutions Examination Council’s Uniform
Retail Credit Classification and Account Management Policy.
Commercial type loans are considered impaired when it is
probable that the borrower will not repay the loan according
to the original contractual terms of the loan agreement, and
all loan types are considered impaired if the loan is restructured
in a troubled debt restructuring (“TDR”). In determining that
we will be unable to collect all principal and interest payments
due in accordance with the contractual terms of the loan agree-
ments, we consider factors such as payment history and changes
in the financial condition of individual borrowers, local economic
NBT BANCORP 2016 FORM 10-K
55
conditions, historical loss experience and the conditions of the
various markets in which the collateral may be liquidated.
A loan is considered to be a TDR when the Company grants
a concession to the borrower because of the borrower’s financial
condition that the Company would not otherwise consider.
Such concessions include the reduction of interest rates, for-
giveness of all or a portion of principal or interest, or other
modifications at interest rates that are less than the current
market rate for new obligations with similar risk. TDR loans are
nonaccrual loans; however, they can be returned to accrual
status after a period of performance, generally evidenced by
six months of compliance with their modified terms.
When the Company modifies a loan, management evaluates
any possible impairment based on the present value of the
expected future cash flows, discounted at the contractual
interest rate of the original loan agreement, except when the
sole (remaining) source of repayment for the loan is the oper-
ation or liquidation of the collateral. In these cases, management
uses the current fair value of the collateral, less selling costs,
instead of discounted cash flows. If management determines
that the value of the modified loan is less than the recorded
investment in the loan (net of previous charge-offs, deferred
loan fees or costs and unamortized premium or discount),
impairment is recognized.
Acquired Loans
Acquired loans are initially measured at fair value as of the
acquisition date without carryover of historical allowance for
loan losses.
For loans that meet the criteria stipulated in ASC 310-30—
Receivables—Loans and Debt Securities Acquired with Deteriorated
Credit Quality, the Company shall recognize the accretable yield,
which is defined as the excess of all cash flows expected at
acquisition over the initial fair value of the loan, as interest
income on a level-yield basis over the expected remaining life
of the loan. The excess of the loan’s contractually required pay-
ments over the cash flows expected to be collected is the
nonaccretable difference. The nonaccretable difference shall
not be recognized as an adjustment of yield, a loss accrual, or
a valuation allowance. Decreases in the expected cash flows
in subsequent periods require the establishment of an allowance
for loan losses. Improvements in expected cash flows in future
periods result in a reduction of the nonaccretable discount,
with such amount reclassified as part of the accretable yield
and subsequently recognized in interest income over the remain-
ing lives of the acquired loans on a level-yield basis if the
amount and timing of future cash flows is reasonably estimable.
Acquired loans that met the criteria for nonaccrual of interest
prior to the acquisition are considered performing upon acqui-
sition, regardless of whether the customer is contractually delin-
quent, if the Company can reasonably estimate the timing and
amount of the expected cash flows on such loans and if the
Company expects to fully collect the new carrying value of the
loans. As such, the Company may no longer consider the loan
to be nonaccrual or nonperforming and may accrue interest
on these loans, including the impact of any accretable yield.
As such, charge-offs on acquired loans are first applied to the
nonaccretable difference and then to any allowance for loan
losses recognized subsequent to acquisition.
For loans that meet the criteria stipulated in ASC 310-20—
Receivables—Nonrefundable Fees and Other Costs (“ASC 310-
20”), the Company shall amortize/accrete into interest income
the premium/discount determined at the date of purchase on
a level-yield basis over the life of the loan. Subsequent to the
acquisition date, the methods utilized to estimate the required
allowance for loan losses are similar to originated loans. Loans
accounted for under ASC 310-20 are placed on nonaccrual
status when past due in accordance with the Company’s nonac-
crual policy.
An acquired loan may be resolved either through receipt
of payment (in full or in part) from the borrower, the sale of
the loan to a third party, or foreclosure of the collateral. In the
event of a sale of the loan, a gain or loss on sale is recognized
and reported within noninterest income based on the difference
between the sales proceeds and the carrying amount of the
loan. In other cases, individual loans are removed from the
pool based on comparing the amount received from its reso-
lution (fair value of the underlying collateral less costs to sell
in the case of a foreclosure) with its outstanding balance. Any
difference between these amounts is recorded as a charge-off
through the allowance for loan losses. Acquired loans subject
to modification are not removed from the pool even if those
loans would otherwise be deemed TDRs as the pool, and not
the individual loan, represents the unit of account.
Allowance for Loan Losses
The allowance for loan losses is the amount which, in the
opinion of management, is necessary to absorb probable losses
inherent in the loan portfolio. The allowance is determined
based upon numerous considerations, including local and
regional conditions, the growth and composition of the loan
portfolio with respect to the mix between the various types of
loans and their related risk characteristics, a review of the value
of collateral supporting the loans, comprehensive reviews of
56
NBT BANCORP 2016 FORM 10-K
the loan portfolio by the independent loan review staff and
management, as well as consideration of volume and trends
of delinquencies, nonperforming loans, and loan charge-offs.
Loan losses are charged off against the allowance, while recov-
eries of amounts previously charged off are credited to the
allowance. As a result of tests of adequacy, required additions
to the allowance for loan losses are made periodically by charges
to the provision for loan losses.
The allowance for loan losses related to impaired loans
specifically allocated for impairment is based on discounted
expected cash flows using the loan’s initial effective interest
rate or the fair value of the collateral for certain loans where
repayment of the loan is expected to be provided solely by
the underlying collateral (“collateral dependent”). The Company’s
impaired loans are generally collateral dependent. The Company
considers the estimated cost to sell, on a discounted basis,
when determining the fair value of collateral in the measurement
of impairment if those costs are expected to reduce the cash
flows available to repay or otherwise satisfy the loans.
The allowance for loan losses for homogeneous non impaired
loans is calculated using a systematic methodology with both
a quantitative and a qualitative analysis that is applied on a
quarterly basis. For purposes of our allowance methodology,
the loan portfolio is segmented as described in Note 5. Each
segment has a distinct set of risk characteristics monitored by
management. We further assess and monitor risk and perform-
ance at a more disaggregated level which includes our internal
risk grading system for the commercial segments.
We first apply historical loss rates to pools of loans with
similar risk characteristics. Loss rates are calculated by historical
charge-offs that have occurred within each pool of loans over
the lookback period (“LBP”), multiplied by the loss emergence
period (“LEP”). The LBP represents the historical data period uti-
lized to calculate loss rates. The LEP is an estimate of the average
amount of time from the point at which a loss is incurred on a
loan to the point at which the loss is confirmed. In general, the
LEP will be shorter in an economic slowdown or recession and
longer during times of economic stability or growth, as customers
are better able to delay loss confirmation after a potential loss
event has occurred. In conjunction with our annual review of
the ALL assumptions, we update our study of LEPs for each
portfolio segment using our loan charge-off history.
After consideration of the historic loss analysis, management
applies additional qualitative adjustments so that the allowance
for loan losses is reflective of the inherent losses that exist in
the loan portfolio at the balance sheet date. Qualitative adjust-
ments are made based upon size, trend, composition, and
nature of loans; changes in lending policies and procedures,
including underwriting standards and collection, charge-offs
and recoveries; trends experienced in nonperforming and delin-
quent loans; current economic conditions in the Company’s
market; portfolio concentrations that may affect loss experience
across one of more components of the portfolio; the effect of
external factors such as competition, legal and regulatory
requirements; and the experience, ability, and depth of lending
management and staff. The evaluation of the various compo-
nents of the allowance for loan losses requires considerable
judgment in order to estimate inherent loss exposures. In addi-
tion, various regulatory agencies, as an integral component of
their examination process, periodically review the Company’s
allowance for loan losses. Such agencies may require the Com-
pany to make loan grade changes as well as recognize additions
to the allowance based on their examinations.
Management believes that the allowance for loan losses is
adequate. While management uses available information to
recognize loan losses, future additions to the allowance for
loan losses may be necessary based on changes in economic
conditions or changes in the values of properties securing loans
in the process of foreclosure. In addition, various regulatory
agencies, as an integral part of their examination process, peri-
odically review the Company’s allowance for loan losses. Such
agencies may require the Company to recognize additions to
the allowance for loan losses based on their judgments about
information available to them at the time of their examination
which may not be currently available to management.
Premises and Equipment
Premises and equipment are stated at cost, less accumu-
lated depreciation. Depreciation of premises and equipment
is determined using the straight-line method over the estimated
useful lives of the respective assets. Expenditures for mainte-
nance, repairs, and minor replacements are charged to expense
as incurred.
Other Real Estate Owned
Other real estate owned (“OREO”) consists of properties
acquired through foreclosure or by acceptance of a deed in
lieu of foreclosure. These assets are recorded at the lower of
fair value of the asset acquired less estimated costs to sell or
“cost” (defined as the fair value at initial foreclosure). At the
time of foreclosure, or when foreclosure occurs in-substance,
the excess, if any, of the loan over the fair market value of the
assets received, less estimated selling costs, is charged to the
allowance for loan losses and any subsequent valuation write-
downs are charged to other expense. In connection with the
determination of the allowance for loan losses and the valu-
ation of OREO, management obtains appraisals for properties.
NBT BANCORP 2016 FORM 10-K
57
Operating costs associated with the properties are charged to
expense as incurred. Gains on the sale of OREO are included
in income when title has passed and the sale has met the min-
imum down payment requirements prescribed by GAAP. The
balance of OREO is recorded in other assets on the consolidated
balance sheets.
Goodwill and Other Intangible Assets
Goodwill represents the cost of acquired business in excess
of the fair value of the related net assets acquired. Goodwill is
not amortized but tested at the reporting unit level for impair-
ment on an annual basis and on an interim basis or when
events or circumstances dictate. The Company has elected June
30 as the annual impairment testing date for the insurance
and retirement services reporting units and December 31 for
the Bank reporting unit.
The Company has the option to first assess qualitative factors,
by performing a step zero qualitative analysis, to determine
whether the existence of events or circumstances leads to a
determination that it is more likely than not that the fair value
of a reporting unit is less than its carrying amount. If, after
assessing the events or circumstances, the Company determines
it is not more likely than not that the fair value of a reporting
unit is greater than its carrying amount, the two-step impairment
test is not required. If the Company concludes otherwise, the
Company is required to perform the first step of the two-step
impairment test. In the first step of the goodwill impairment
test, the estimated fair value of a reporting unit is compared
to the carrying amount in order to determine if impairment is
indicated. If the estimated fair value exceeds the carrying
amount, the reporting unit is not deemed to be impaired. If
the estimated fair value is below the carrying value of the
reporting unit, the second step of the goodwill impairment
test is required to determine the amount of impairment. The
second step of the goodwill impairment test determines the
implied fair value of the goodwill that is compared to the car-
rying value of goodwill for the reporting unit to determine the
amount of the impairment.
Intangible assets that have indefinite useful lives are not
amortized, but are tested at least annually for impairment.
Intangible assets that have finite useful lives are amortized over
their useful lives. Core deposit intangibles and trust intangibles
at the Company are amortized using the sum-of-the-years’-
digits method. Covenants not to compete are amortized on a
straight-line basis. Customer lists are amortized using an accel-
erated method. When facts and circumstances indicate potential
impairment of amortizable intangible assets, the Company
evaluates the recoverability of the asset carrying value, using
estimates of undiscounted future cash flows over the remaining
asset life. Any impairment loss is measured by the excess of
carrying value over fair value.
Determining the fair value of a reporting unit under the first
step of the goodwill impairment testing and determining the
fair value of individual assets and liabilities of a reporting unit
under the second step of the goodwill impairment test and in
determining the fair value of other intangible assets are judg-
mental and often involve the use of significant estimates and
assumptions. Estimates of fair value are primarily determined
using the discounted cash flows method, which uses significant
estimates and assumptions including projected future cash
flows, discount rates reflecting the market rate of return and
projected growth rates. Future events may impact such estimates
and assumptions and could cause the Company to conclude
that our goodwill or intangible assets have become impaired,
which would result in recording an impairment loss.
Bank-Owned Life Insurance
The Bank has purchased life insurance policies on certain
employees, key executives and directors. Bank-owned life insur-
ance is recorded at the amount that can be realized under the
insurance contract at the balance sheet date, which is the cash
surrender value adjusted for other charges or other amounts
due that are probable at settlement.
Treasury Stock
Treasury stock acquisitions are recorded at cost. Subsequent
sales of treasury stock are recorded on an average cost basis.
Gains on the sale of treasury stock are credited to additional
paid-in-capital. Losses on the sale of treasury stock are charged
to additional paid-in-capital to the extent of previous gains,
otherwise charged to retained earnings.
Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred income taxes are recognized for the future
tax consequences attributable to differences between the finan-
cial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to tax-
able income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. The Company rec-
ognizes interest accrued and penalties related to unrecognized
tax benefits in income tax expense.
58
NBT BANCORP 2016 FORM 10-K
Tax positions are recognized as a benefit only if it is “more
likely than not” that the tax position would be sustained in a
tax examination, with a tax examination being presumed to
occur. The amount recognized is the largest amount of tax ben-
efit that is greater than 50 percent likely of being realized on
examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded.
Pension Costs
The Company maintains a noncontributory, defined benefit
pension plan covering substantially all employees, as well as
supplemental employee retirement plans covering certain exec-
utives and a defined benefit postretirement healthcare plan
that covers certain employees. Costs associated with these plans,
based on actuarial computations of current and future benefits
for employees, are charged to current operating expenses.
Stock-Based Compensation
We maintain various long-term incentive stock benefit plans
under which we grant stock options, restricted stock awards,
and restricted stock units to certain directors and key employ-
ees. We recognize compensation expense in our consolidated
statements of income over the requisite service period, based
on the grant-date fair value of the award. For restricted stock
awards and units, we recognize compensation expense ratably
over the vesting period for the fair value of the award, measured
at the grant date. The fair values of options are estimated using
the Black-Scholes option pricing model.
The Company’s stock-based employee compensation plan
is described in Note 14.
Earnings Per Share
Basic earnings per share (“EPS”) excludes dilution and is
computed by dividing income available to common stockholders
by the weighted average number of common shares outstand-
ing for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earn-
ings of the entity (such as the Company’s dilutive stock options
and restricted stock).
Comprehensive Income
At the Company, comprehensive income represents net
income plus other comprehensive income (loss), which consists
primarily of the net change in unrealized gains or losses on
securities available for sale for the period and changes in the
funded status of employee benefit plans. Accumulated other
comprehensive (loss) income represents the net unrealized
gains or losses on securities available for sale and the previously
unrecognized portion of the funded status of employee benefit
plans, net of income taxes, as of the consolidated balance
sheet dates.
Derivative Instruments and Hedging Activities
The Company records all derivatives on the balance sheet
at fair value. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative,
whether the Company has elected to designate a derivative in
a hedging relationship and apply hedge accounting and whether
the hedging relationship has satisfied the criteria necessary to
apply hedge accounting. Derivatives designated and qualifying
as a hedge of the exposure to changes in the fair value of an
asset, liability, or firm commitment attributable to a particular
risk, such as interest rate risk, are considered fair value hedges.
Derivatives designated and qualifying as a hedge of the exposure
to variability in expected future cash flows, or other types of
forecasted transactions, are considered cash flow hedges. Hedge
accounting generally provides for the matching of the timing
of gain or loss recognition on the hedging instrument with the
recognition of the changes in the fair value of the hedged asset
or liability that are attributable to the hedged risk in a fair value
hedge or the earnings effect of the hedged forecasted transac-
tions in a cash flow hedge. The Company may enter into deriv-
ative contracts that are intended to economically hedge certain
of its risk, even though hedge accounting does not apply or
the Company elects not to apply hedge accounting.
For derivatives designated as fair value hedges, changes in
the fair value of the derivative and the hedged item related to
the hedged risk are recognized in earnings. Any hedge ineffec-
tiveness would be recognized in the income statement line item
pertaining to the hedged item. For derivatives designated as
cash flow hedges, changes in fair value of the effective portion
of the cash flow hedges are reported in other comprehensive
income. When the cash flows associated with the hedged item
are realized, the gain or loss included in other comprehensive
income is recognized in the consolidated statements of income.
When the Company purchases a portion of a commercial
loan that has an existing interest rate swap, it enters a risk par-
ticipation agreement with the counterparty and assumes the
credit risk of the loan customer related to the swap. Any fee paid
to the Company under a risk participation agreement is in con-
sideration of the credit risk of the counterparties and is recognized
in the income statement. Credit risk on the risk participation
agreements is determined after considering the risk rating, prob-
ability of default and loss given default of the counterparties.
NBT BANCORP 2016 FORM 10-K
59
Fair Value Measurements
Fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. Fair
value measurements are not adjusted for transaction costs. A
fair value hierarchy prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy gives the highest pri-
ority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurements) and the lowest
priority to unobservable inputs (Level 3 measurements). The
three levels of the fair value hierarchy are described below:
Level 1—Unadjusted quoted prices in active markets that
are accessible at the measurement date for identical, unrestricted
assets or liabilities;
Level 2—Quoted prices for similar assets or liabilities in
active markets, quoted prices in markets that are not active,
or inputs that are observable, either directly or indirectly, for
substantially the full term of the asset or liability;
Level 3—Prices or valuation techniques that require inputs
that are both significant to the fair value measurement and
unobservable (i.e., supported by little or no market activity).
A financial instrument’s level within the fair value hierarchy
is based on the lowest level of input that is significant to the
fair value measurement.
The types of instruments valued based on quoted market
prices in active markets include most U.S. government and
agency securities, many other sovereign government obli-
gations, liquid mortgage products, active listed equities and
most money market securities. Such instruments are generally
classified within Level 1 or Level 2 of the fair value hierarchy.
The Company does not adjust the quoted price for such
instruments.
The types of instruments valued based on quoted prices
in markets that are not active, broker or dealer quotations, or
alternative pricing sources with reasonable levels of price
transparency include most investment-grade and high-yield
corporate bonds, less liquid mortgage products, less liquid
agency securities, less liquid listed equities, state, municipal
and provincial obligations, and certain physical commodities.
Such instruments are generally classified within Level 2 of the
fair value hierarchy.
Level 3 is for positions that are not traded in active markets
or are subject to transfer restrictions, valuations are adjusted
to reflect illiquidity and/or non-transferability, and such adjust-
ments are generally based on available market evidence. In
the absence of such evidence, management’s best estimate
will be used. Management’s best estimate consists of both
internal and external support on certain Level 3 investments.
Subsequent to inception, management only changes Level 3
inputs and assumptions when corroborated by evidence such
as transactions in similar instruments, completed or pending
third-party transactions in the underlying investment or com-
parable entities, subsequent rounds of financing, recapitaliza-
tions and other transactions across the capital structure, offerings
in the equity or debt markets, and changes in financial ratios
or cash flows.
Other Financial Instruments
The Company is a party to certain other financial instruments
with off-balance-sheet risk such as commitments to extend
credit, unused lines of credit, as well as certain mortgage loans
sold to investors with recourse. The Company’s policy is to
record such instruments when funded.
Standby letters of credit are conditional commitments issued
to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to cus-
tomers. Under the standby letters of credit, the Company is
required to make payments to the beneficiary of the letters of
credit upon request by the beneficiary contingent upon the
customer’s failure to perform under the terms of the underlying
contract with the beneficiary. Standby letters of credit typically
have one year expirations with an option to renew upon annual
review. The Company typically receives a fee for these trans-
actions. The fair value of standby letters of credit is recorded
upon inception.
Loan Sales and Loan Servicing
Loan sales are recorded when the sales are funded. Mort-
gage servicing rights are recorded at fair value upon sale of
the loan. Loans held for sale are recorded at the lower of cost
or market.
Repurchase Agreements
Repurchase agreements are accounted for as secured financ-
ing transactions since the Company maintains effective control
over the transferred securities and the transfer meets the other
criteria for such accounting. Obligations to repurchase securities
sold are reflected as a liability in the consolidated balance
sheets. The securities underlying the agreements are delivered
to a custodial account for the benefit of the dealer or bank
with whom each transaction is executed. The dealers or banks,
who may sell, loan or otherwise dispose of such securities to
other parties in the normal course of their operations, agree
to resell to the Company the same securities at the maturities
of the agreements.
60
NBT BANCORP 2016 FORM 10-K
Trust Operations
Reclassifications
Assets held by the Company in a fiduciary or agency capac-
ity for its customers are not included in the accompanying
consolidated balance sheets, since such assets are not assets
of the Company. Trust income is recognized on the accrual
method based on contractual rates applied to the balances
of trust accounts.
Amounts in prior period consolidated financial statements
are reclassified whenever necessary to confirm with current
period presentation.
Subsequent Events
The Company has evaluated subsequent events for potential
recognition and/or disclosure and there were none identified.
(2) Acquisitions
In 2016, the Company acquired Actuarial Designs & Solutions,
Inc. for total consideration of $3.0 million and Columbia Ridge
Capital Management, Inc., for total consideration of $1.3 million.
As part of the acquisitions, the Company recorded goodwill of
$1.3 million and $0.8 million, respectively.
In 2015, the Company acquired Third Party Administrators,
Inc., a retirement plan administration company for total con-
sideration of $4.1 million. As part of the acquisition, the Com-
pany recorded goodwill of $2.3 million.
(3) Securities
The amortized cost, estimated fair value, and unrealized gains and losses of AFS securities are as follows:
Amortized Unrealized Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
December 31, 2016
Federal agency $ 175,135 $ 78 $ 805 $ 174,408
State & municipal 47,053 153 480 46,726
Mortgage-backed:
Government-sponsored enterprises 513,814 3,345 2,492 514,667
U.S. government agency securities 14,955 411 189 15,177
Collateralized mortgage obligations:
Government-sponsored enterprises 513,431 532 7,688 506,275
U.S. government agency securities 60,822 184 708 60,298
Other securities 15,849 6,394 1,504 20,739
Total securities AFS $1,341,059 $11,097 $13,866 $1,338,290
December 31, 2015
Federal agency $ 312,580 $ 203 $1,511 $ 311,272
State & municipal 31,208 446 17 31,637
Mortgage-backed:
Government-sponsored enterprises 398,086 4,141 1,068 401,159
U.S. government securities 8,191 560 14 8,737
Collateralized mortgage obligations:
Government-sponsored enterprises 364,936 931 1,828 364,039
U.S. government securities 40,699 348 115 40,932
Other securities 13,637 3,249 118 16,768
Total securities AFS $1,169,337 $9,878 $4,671 $1,174,544
NBT BANCORP 2016 FORM 10-K
61
The components of net realized gains and losses on the sale of AFS securities are as follows. These amounts were reclassified
out of accumulated other comprehensive income (loss) and into earnings:
Years ended December 31,
(In thousands) 2016 2015 2014
683 $3,099 $49
Gross realized gains $
Gross realized (losses) (1,327) (12) —
Net AFS realized (losses) gains $ (644) $3,087 $49
In addition to (losses) gains from sales transactions, the
Company also recorded gains from calls on AFS securities of
approximately $0.1 million for each of the years ended Decem-
ber 31, 2016, December 31, 2015, December 31, 2014.
other purposes required or permitted by law. Additionally, at
December 31, 2016, AFS and HTM securities with an amortized
cost of $235.6 million were pledged as collateral for securities
sold under the repurchase agreements.
At December 31, 2016 and 2015, AFS and HTM securities
with amortized costs totaling $1.5 billion and $1.4 billion,
respectively, were pledged to secure public deposits and for
The amortized cost, estimated fair value, and unrealized
gains and losses of HTM securities are as follows:
Amortized Unrealized Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
December 31, 2016
Mortgage-backed:
Government-sponsored enterprises $ 96,668 $ — $1,176 $ 95,492
U.S. government agency securities 533 87 — 620
Collateralized mortgage obligations:
Government-sponsored enterprises 225,213 1,060 1,508 224,765
State & municipal 205,534 434 1,795 204,173
Total HTM securities $527,948 $1,581 $4,479 $525,050
December 31, 2015
Mortgage-backed:
Government-sponsored enterprises $ 9,432 $ — $ 107 $ 9,325
U.S. government agency securities 611 95 — 706
Collateralized mortgage obligations:
Government-sponsored enterprises 272,550 1,411 1,560 272,401
State & municipal 188,438 2,288 18 190,708
Total HTM securities $471,031 $3,794 $1,685 $473,140
At December 31, 2016 and 2015, all of the mortgaged-backed HTM securities were comprised of U.S. government agency
securities.
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NBT BANCORP 2016 FORM 10-K
The following table sets forth information with regard to investment securities with unrealized losses at December 31, 2016
and 2015, segregated according to the length of time the securities had been in a continuous unrealized loss position:
Less Than 12 Months 12 Months or Longer Total
Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized Number of
Value Losses Positions Value Losses Positions Value Losses Positions
December 31, 2016
AFS securities:
Federal agency $119,363 $ (805) 10 $
— $ — — $119,363 $ (805) 10
State & municipal 31,873 (478) 55 483 (2) 1 32,356 (480) 56
Mortgage-backed 277,524 (2,668) 49 985 (13) 4 278,509 (2,681) 53
Collateralized mortgage
obligations 473,746 (8,396) 57 — — — 473,746 (8,396) 57
Other securities — — — 4,363 (1,504) 2 4,363 (1,504) 2
Total securities with
unrealized losses $902,506 $(12,347) 171 $ 5,831 $(1,519) 7 $908,337 $(13,866) 178
HTM securities:
Mortgage-backed $ 95,492 $ (1,176) 5 $
Collateralized mortgage
— $ — — $ 95,492 $ (1,176) 5
obligations 108,587 (319) 12 35,209 (1,189) 4 143,796 (1,508) 16
State & municipal 81,984 (1,795) 155 — — — 81,984 (1,795) 155
Total securities with
unrealized losses $286,063 $ (3,290) 172 $35,209 $(1,189) 4 $321,272 $ (4,479) 176
December 31, 2015
AFS securities:
Federal agency $186,685 $(1,312) 15 $19,801 $ (199) 2 $206,486 $(1,511) 17
State & municipal 4,599 (14) 7 502 (3) 1 5,101 (17) 8
Mortgage-backed 177,270 (1,068) 33 1,066 (14) 5 178,336 (1,082) 38
Collateralized mortgage
obligations 256,265 (1,889) 24 5,218 (54) 2 261,483 (1,943) 26
Other securities — — — 3,235 (118) 2 3,235 (118) 2
Total securities with
unrealized losses $624,819 $(4,283) 79 $29,822 $ (388) 12 $654,641 $(4,671) 91
HTM securities:
Mortgage-backed $ 9,325 $ (107) 1 $ — $ — — $ 9,325 $ (107) 1
Collateralized mortgage
obligations 105,604 (281) 12 41,523 (1,279) 4 147,127 (1,560) 16
State & municipal 2,200 (18) 3 — — — 2,200 (18) 3
Total securities with
unrealized losses $117,129 $ (406) 16 $41,523 $(1,279) 4 $158,652 $(1,685) 20
Declines in the fair value of HTM and AFS securities below
their cost that are deemed to be other-than-temporary are
reflected in earnings as realized losses or in other comprehensive
income, depending on whether the Company intends to sell
the security or more likely than not will be required to sell the
security before recovery of its amortized cost basis less any
current-period credit loss, the OTTI shall be recognized in earn-
ings equal to the entire difference between the investment’s
amortized cost basis and its fair value at the balance sheet
date. If the Company does not intend to sell the security and
it is not more likely than not that the entity will be required to
sell the security before recovery of its amortized cost basis less
any current-period credit loss, the OTTI shall be separated into
(a) the amount representing the credit loss and (b) the amount
related to all other factors. The amount of the total OTTI related
to the credit loss shall be recognized in earnings. The amount
of the total OTTI related to other factors shall be recognized in
other comprehensive income, net of applicable taxes.
NBT BANCORP 2016 FORM 10-K
63
In estimating OTTI losses, management considers, among
other things, (i) the length of time and the extent to which the
fair value has been less than cost, (ii) the financial condition
and near-term prospects of the issuer and (iii) the historical
and implied volatility of the fair value of the security.
Management has the intent to hold the securities classified
as HTM until they mature, at which time it is believed the Com-
pany will receive full value for the securities. The unrealized
losses on HTM debt securities are due to increases in market
interest rates over the yields available at the time the underlying
securities were purchased. When necessary, the Company has
performed a discounted cash flow analysis to determine whether
or not it will receive the contractual principal and interest on
certain securities. The fair value is expected to recover as the
bonds approach their maturity date or repricing date or if
market yields for such investments decline.
Management also has the intent to hold and will not be
required to sell, the securities classified as AFS for a period of
time sufficient for a recovery of cost, which may be until maturity.
The unrealized losses on AFS debt securities are due to increases
in market interest rates over the yields available at the time the
underlying securities were purchased. When necessary, the
Company has performed a discounted cash flow analysis to
determine whether or not it will receive the contractual principal
and interest on certain securities. The unrealized losses on equity
securities are due to declines in the fair value below the cost
basis of the securities. For AFS debt and equity securities, the
Company considers a decline in fair value to be other-than-tem-
porary if it is probable that the Company will not recover its
cost basis. For equity securities, OTTI losses are recognized in
earnings if the Company intends to sell the security. In other
cases the Company considers the relevant factors noted above,
as well as the Company’s intent and ability to retain its investment
for a period of time sufficient to allow for any anticipated recovery
in market value, and whether evidence exists to support a real-
izable value equal to or greater than the cost basis. Any impair-
ment loss on an equity security is equal to the full difference
between the cost basis and the fair value of the security.
As of December 31, 2016 and 2015, management believes
the impairments detailed in the table above are temporary
and no OTTI losses have been realized in the Company’s con-
solidated statements of income.
The following tables set forth information with regard to
contractual maturities of debt securities at December 31, 2016:
Amortized Estimated
(In thousands) Cost Fair Value
AFS debt securities
Within one year $ 67,803 $ 67,877
From one to five years 162,913 162,754
From five to ten years 144,957 146,014
After ten years 949,537 940,906
$1,325,210 $1,317,551
HTM debt securities
Within one year $ 37,187 $ 37,199
From one to five years 27,956 28,019
From five to ten years 122,228 121,697
After ten years 340,577 338,135
$ 527,948 $ 525,050
Maturities of mortgage-backed, collateralized mortgage
obligations and asset-backed securities are stated based on
their estimated average lives. Actual maturities may differ from
estimated average lives or contractual maturities because, in
certain cases, borrowers have the right to call or prepay obli-
gations with or without call or prepayment penalties.
Except for U.S. Government securities, there were no holdings,
when taken in the aggregate, of any single issuer that exceeded
10% of consolidated stockholders’ equity at December 31, 2016
and December 31, 2015.
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NBT BANCORP 2016 FORM 10-K
(4) Loans
A summary of loans, net of deferred fees and origination costs, by category is as follows:
At December 31,
(In thousands) 2016 2015
Residential real estate mortgages $1,262,614 $1,196,780
Commercial 1,242,701 1,159,089
Commercial real estate 1,543,301 1,430,618
Consumer 1,641,657 1,568,204
Home equity 507,784 528,442
Total loans $6,198,057 $5,883,133
Included in the above loans are net deferred loan origination
costs totaling $40.3 million and $38.7 million at December 31,
2016 and 2015, respectively. The Company had $0.6 million res-
idential loans held for sale as of December 31, 2016. The Company
had no residential loans held for sale as of December 31, 2015.
The total amount of loans serviced by the Company for
unrelated third parties was $604.0 million and $616.1 million
at December 31, 2016 and 2015, respectively. At December 31,
2016 and 2015, the Company had $0.9 million and $1.1 million,
respectively, of mortgage servicing rights.
At December 31, 2016 and 2015, the Company serviced
$28.5 million and $25.1 million, respectively, of agricultural
loans sold with recourse. Due to sufficient collateral on these
loans, no reserve is considered necessary at December 31, 2016
and 2015.
FHLB advances are collateralized by a blanket lien on the
Company’s residential real estate mortgages.
In the ordinary course of business, the Company has made
loans at prevailing rates and terms to directors, officers, and
other related parties. Such loans, in management’s opinion, do
not present more than the normal risk of collectability or incor-
porate other unfavorable features. The aggregate amount of
loans outstanding to qualifying related parties and changes
during the years are summarized as follows:
(In thousands) 2016 2015
Balance at January 1 $2,346 $ 3,576
New loans 936 390
Adjustment due to change in composition of related parties (406) (265)
Repayments (826) (1,355)
Balance at December 31 $2,050 $ 2,346
(5) Allowance for Loan Losses and Credit Quality of Loans
Allowance for Loan Losses
The allowance for loan losses is maintained at a level esti-
mated by management to provide adequately for risk of prob-
able losses inherent in the current loan portfolio. The adequacy
of the allowance for loan losses is continuously monitored. It
is assessed for adequacy using a methodology designed to
ensure the level of the allowance reasonably reflects the loan
portfolio’s risk profile. It is evaluated to ensure that it is sufficient
to absorb all reasonably estimable credit losses inherent in the
current loan portfolio.
To develop and document a systematic methodology for
determining the allowance for loan losses, the Company has
divided the loan portfolio into three segments, each with different
risk characteristics and methodologies for assessing risk. Those
segments are further segregated between our loans accounted
for under the amortized cost method (referred to as “originated”
loans) and loans acquired in a business combination (referred
to as “acquired” loans). Each portfolio segment is broken down
into class segments where appropriate. Class segments contain
unique measurement attributes, risk characteristics and methods
NBT BANCORP 2016 FORM 10-K
65
for monitoring and assessing risk that are necessary to develop
the allowance for loan losses. Unique characteristics such as
borrower type, loan type, collateral type, and risk characteristics
define each class segment. The following table illustrates the
portfolio and class segments for the Company’s loan portfolio:
Portfolio Class
Commercial Loans Commercial
Commercial Real Estate
Agricultural
Agricultural Real Estate
Business Banking
Consumer Loans Indirect
Home Equity
Direct
Residential Real Estate Mortgages
Commercial Loans
Commercial—The Company offers a variety of loan options
to meet the specific needs of our commercial customers includ-
ing term loans, time notes and lines of credit. Such loans are
made available to businesses for working capital such as inven-
tory and receivables, business expansion and equipment pur-
chases. Generally, a collateral lien is placed on equipment or
other assets owned by the borrower. These loans carry a higher
risk than commercial real estate loans by the nature of the
underlying collateral, which can be business assets such as
equipment and accounts receivable and is generally less liquid
than real estate. To reduce the risk, management also attempts
to secure real estate as collateral and obtain personal guarantees
of the borrowers.
Commercial Real Estate—The Company offers commercial
real estate loans to finance real estate purchases, refinancings,
expansions and improvements to commercial properties. Com-
mercial real estate loans are made to finance the purchases of
real property which generally consists of real estate with com-
pleted structures. These commercial real estate loans are secured
by first liens on the real estate, which may include apartments,
commercial structures, housing businesses, healthcare facilities,
and other non owner-occupied facilities. These loans are typ-
ically less risky than commercial loans, since they are secured
by real estate and buildings. The Company’s underwriting analy-
sis includes credit verification, independent appraisals, a review
of the borrower’s financial condition, and a detailed analysis
of the borrower’s underlying cash flows. These loans are typically
originated in amounts of no more than 80% of the appraised
value of the property.
Agricultural—The Company offers a variety of agricultural
loans to meet the needs of our agricultural customers including
term loans, time notes, and lines of credit. These loans are made
to purchase livestock, purchase and modernize equipment,
and finance seasonal crop expenses. Generally, a collateral lien
is placed on the livestock, equipment, produce inventories,
and/or receivables owned by the borrower. These loans may
carry a higher risk than commercial and agricultural real estate
loans due to the industry price volatility and the perishable
nature of the underlying collateral. To reduce these risks, man-
agement may attempt to secure these loans with additional
real estate collateral, obtain personal guarantees of the bor-
rowers, or obtain government loan guarantees to provide
further support.
Agricultural Real Estate—The Company offers real estate
loans to our agricultural customers to finance farm related real
estate purchases, refinancings, expansions, and improvements
to agricultural properties. Agricultural real estate loans are
made to finance the purchases and improvements of farm
properties that generally consist of barns, production facilities,
and land. The agricultural real estate loans are secured by first
liens on the farm real estate. Because they are secured by land
and buildings, these loans may be less risky than agricultural
loans. The Company’s underwriting analysis includes credit ver-
ification, independent appraisals, a review of the borrower’s
financial condition, and a detailed analysis of the borrower’s
underlying cash flows. These loans are typically originated in
amounts of no more than 75% of the appraised value of the
property. Government loan guarantees may be obtained to
provide further support.
Business Banking—The Company offers a variety of loan
options to meet the specific needs of our business banking
customers including term loans, business banking mortgages
and lines of credit. Such loans are generally less than $0.8
million and are made available to businesses for working capital
such as inventory and receivables, business expansion, equip-
ment purchases, and agricultural needs. Generally, a collateral
lien is placed on equipment or other assets owned by the bor-
rower such as inventory and/or receivables. These loans carry
a higher risk than commercial loans due to the smaller size of
the borrower and lower levels of capital. To reduce the risk, the
Company obtains personal guarantees of the owners for a
majority of the loans.
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NBT BANCORP 2016 FORM 10-K
Consumer Loans
Indirect—The Company maintains relationships with many
dealers primarily in the communities that we serve. Through
these relationships, the company finances the purchases of
automobiles and recreational vehicles (such as campers, boats,
etc.) indirectly through dealer relationships. Approximately
70% of the indirect relationships represent automobile financing.
Most of these loans carry a fixed rate of interest with principal
repayment terms typically ranging from three to six years,
based upon the nature of the collateral and the size of the loan.
The majority of indirect consumer loans are underwritten on
a secured basis using the underlying collateral being financed.
Home Equity—The Company offers fixed home equity loans
as well as home equity lines of credit to consumers to finance
home improvements, debt consolidation, education and other
uses. Consumers are able to borrower up to 85% of the equity
in their homes. The Company originates home equity lines of
credit and second mortgage loans (loans secured by a second
lien position on one-to-four-family residential real estate). These
loans carry a higher risk than first mortgage residential loans
as they are in a second position with respect to collateral. Risk
is reduced through underwriting criteria, which include credit
verification, appraisals, a review of the borrower’s financial con-
dition, and personal cash flows. A security interest, with title
insurance when necessary, is taken in the underlying real estate.
Direct—The Company offers a variety of consumer install-
ment loans to finance vehicle purchases, mobile home purchases
and personal expenditures. Most of these loans carry a fixed
rate of interest with principal repayment terms typically ranging
from one to ten years, based upon the nature of the collateral
and the size of the loan. The majority of consumer loans are
underwritten on a secured basis using the underlying collateral
being financed or a customer’s deposit account. In addition to
installment loans, the Company also offers personal lines of
credit and overdraft protection. A minimal amount of loans
are unsecured, which carry a higher risk of loss.
Residential Real Estate Loans
Residential real estate loans consist primarily of loans secured
by first or second deeds of trust on primary residences. We
originate adjustable-rate and fixed-rate, one-to-four-family
residential real estate loans for the construction, purchase or
refinancing of a mortgage. These loans are collateralized by
owner-occupied properties located in the Company’s market
area. When market conditions are favorable, for longer term,
fixed-rate residential mortgages without escrow, the Company
retains the servicing, but sells the right to receive principal
and interest to Freddie Mac when market conditions are favor-
able. This practice allows the Company to manage interest
rate risk, liquidity risk, and credit risk. Loans on one-to-four-
family residential real estate are generally originated in amounts
of no more than 85% of the purchase price or appraised value
(whichever is lower), or have private mortgage insurance. Mort-
gage title insurance and hazard insurance are normally required.
Construction loans have a unique risk, because they are secured
by an incomplete dwelling. This risk is reduced through periodic
site inspections, including one at each loan draw period.
Allowance for Loan Loss Calculation
Management considers the accounting policy relating to
the allowance for loan losses to be a critical accounting policy
given the inherent uncertainty in evaluating the levels of the
allowance required to cover credit losses in the portfolio and
the material effect that such judgments can have on the con-
solidated results of operations.
In addition, various regulatory agencies, as an integral com-
ponent of their examination process, periodically review the
Company’s allowance for loan losses. Such agencies may require
the Company to make loan grade changes as well as recognize
additions to the allowance based on their examinations.
After a thorough consideration of the factors discussed
above, any required additions to the allowance for loan losses
are made periodically by charges to the provision for loan
losses. These charges are necessary to maintain the allowance
at a level which management believes is reasonably reflective
of overall inherent risk of probable loss in the portfolio. While
management uses available information to recognize losses
on loans, additions to the allowance may fluctuate from one
reporting period to another. These fluctuations are reflective
of changes in risk associated with portfolio content and/or
changes in management’s assessment of any or all of the deter-
mining factors discussed above.
NBT BANCORP 2016 FORM 10-K
67
The following table illustrates the changes in the allowance for loan losses by portfolio segment for the years ended December
31, 2016, 2015 and 2014:
Residential
Commercial Consumer Real Estate
(In thousands) Loans Loans Mortgages Unallocated Total
Balance as of December 31, 2015 $25,545 $ 29,253 $ 7,960 $ 260 $ 63,018
Charge-offs (4,592) (23,364) (1,343) — (29,299)
Recoveries 1,887 3,870 293 — 6,050
Provision 2,604 23,616 (529) (260) 25,431
Ending Balance as of December 31, 2016 $25,444 $ 33,375 $ 6,381 $ — $ 65,200
Balance as of December 31, 2014 $ 32,433 $ 26,720 $ 7,130 $
76 $ 66,359
Charge-offs (5,718) (18,140) (2,229) — (26,087)
Recoveries 1,014 3,127 320 — 4,461
Provision (2,184) 17,546 2,739 184 18,285
Ending Balance as of December 31, 2015 $ 25,545 $ 29,253 $ 7,960 $ 260 $ 63,018
Balance as of December 31, 2013 $ 35,090 $ 27,694 $ 6,520 $ 130 $ 69,434
Charge-offs (9,414) (16,642) (1,417) — (27,473)
Recoveries 1,774 2,800 285 — 4,859
Provision 4,983 12,868 1,742 (54) 19,539
Ending Balance as of December 31, 2014 $ 32,433 $ 26,720 $ 7,130 $
76 $ 66,359
For acquired loans, to the extent that we experience dete-
rioration in borrower credit quality resulting in a decrease in
our expected cash flows subsequent to acquisition of the loans,
an allowance for loan losses would be established based on
our estimate of future credit losses over the remaining life of
the loans. The allowance for loan losses for the acquired loan
portfolio totaled $0.7 million as of December 31, 2016 and
December 31, 2015. Net charge-offs related to acquired loans
totaled approximately $0.5 million, $2.7 million, and $4.8 million
during the years ended December 31, 2016, December 31,
2015 and December 31, 2014, respectively, and are included
in the table above.
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NBT BANCORP 2016 FORM 10-K
The following table illustrates the allowance for loan losses and the recorded investment by portfolio segment as of December
31, 2016 and 2015:
Residential
Commercial Consumer Real Estate
(In thousands) Loans Loans Mortgages Unallocated Total
As of December 31, 2016
Allowance for loan losses $ 25,444 $ 33,375 $ 6,381 $ — $ 65,200
Allowance for loans individually evaluated
for impairment 1,517 — — — 1,517
Allowance for loans collectively evaluated
for impairment $ 23,927 $ 33,375 $ 6,381 $ — $ 63,683
Ending balance of loans $2,786,002 $2,149,441 $1,262,614 $6,198,057
Ending balance of originated loans individually
evaluated for impairment 13,070 8,488 6,111 27,669
Ending balance of acquired loans individually
evaluated for impairment 1,205 — — 1,205
Ending balance of acquired loans collectively
evaluated for impairment 236,413 63,005 199,471 498,889
Ending balance of originated loans collectively
evaluated for impairment $2,535,314 $2,077,948 $1,057,032 $5,670,294
As of December 31, 2015
Allowance for loan losses $
Allowance for loans individually evaluated
25,545 $
29,253 $
7,960 $ 260 $
63,018
for impairment 2,005 — — — 2,005
Allowance for loans collectively evaluated
for impairment $
23,540 $
29,253 $
7,960 $ 260 $
61,013
Ending balance of loans $ 2,589,707 $ 2,096,646 $ 1,196,780 $ 5,883,133
Ending balance of originated loans individually
evaluated for impairment 12,253 7,693 6,017 25,963
Ending balance of acquired loans individually
evaluated for impairment 1,205 — — 1,205
Ending balance of acquired loans collectively
evaluated for impairment 284,524 95,427 230,358 610,309
Ending balance of originated loans collectively
evaluated for impairment $ 2,291,725 $ 1,993,526 $
960,405 $ 5,245,656
NBT BANCORP 2016 FORM 10-K
69
The following table sets forth information with regard to past due and nonperforming loans by loan class as of December 31,
2016 and 2015:
As of December 31, 2016
Greater
Than
31-60 Days 61-90 Days 90 Days Total Recorded
Past Due Past Due Past Due Past Due Total
(In thousands) Accruing Accruing Accruing Accruing Non-Accrual Current Loans
ORIGINATED
Commercial Loans
Commercial $ 33 $ 5 $ — $ 38 $ 2,964 $ 650,568 $ 653,570
Commercial Real Estate — — — — 7,935 1,343,854 1,351,789
Agricultural — — — — 730 37,186 37,916
Agricultural Real Estate — — — — 1,803 30,619 32,422
Business Banking 1,609 318 — 1,927 4,860 465,900 472,687
Total Commercial Loans 1,642 323 — 1,965 18,292 2,528,127 2,548,384
Consumer Loans
Indirect 19,253 4,185 2,499 25,937 2,145 1,538,593 1,566,675
Home Equity 3,416 1,065 528 5,009 2,851 448,797 456,657
Direct 452 125 20 597 107 62,400 63,104
Total Consumer Loans 23,121 5,375 3,047 31,543 5,103 2,049,790 2,086,436
Residential Real Estate Mortgages 2,725 172 1,406 4,303 6,682 1,052,158 1,063,143
Total Originated Loans $27,488 $5,870 $4,453 $37,811 $30,077 $5,630,075 $5,697,963
ACQUIRED
Commercial Loans
Commercial $ — $ — $ — $ — $ — $ 49,447 $ 49,447
Commercial Real Estate — — — — 1,891 135,398 137,289
Business Banking 236 — — 236 804 49,842 50,882
Total Commercial Loans 236 — — 236 2,695 234,687 237,618
Consumer Loans
Indirect 100 5 — 105 47 8,541 8,693
Home Equity 254 53 30 337 237 50,553 51,127
Direct 30 2 — 32 20 3,133 3,185
Total Consumer Loans 384 60 30 474 304 62,227 63,005
Residential Real Estate Mortgages 609 28 327 964 2,636 195,871 199,471
Total Acquired Loans 1,229 88 357 1,674 5,635 492,785 500,094
Total Loans $28,717 $5,958 $4,810 $39,485 $35,712 $6,122,860 $6,198,057
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NBT BANCORP 2016 FORM 10-K
As of December 31, 2015
Greater
Than
31-60 Days 61-90 Days 90 Days Total Recorded
Past Due Past Due Past Due Past Due Total
(In thousands) Accruing Accruing Accruing Accruing Non-Accrual Current Loans
ORIGINATED
Commercial Loans
Commercial $ 782 $ 23 $ — $ 805 $ 2,817 $ 640,696 $ 644,318
Commercial Real Estate 39 32 — 71 5,546 1,189,280 1,194,897
Agricultural 94 — — 94 897 33,633 34,624
Agricultural Real Estate — — — — 1,046 28,172 29,218
Business Banking 912 394 — 1,306 4,247 395,368 400,921
Total Commercial Loans 1,827 449 — 2,276 14,553 2,287,149 2,303,978
Consumer Loans
Indirect 15,731 2,963 2,271 20,965 1,786 1,454,499 1,477,250
Home Equity 3,396 1,671 340 5,407 4,835 454,473 464,715
Direct 425 201 28 654 49 58,551 59,254
Total Consumer Loans 19,552 4,835 2,639 27,026 6,670 1,967,523 2,001,219
Residential Real Estate Mortgages 3,301 365 696 4,362 7,713 954,347 966,422
Total Originated Loans $24,680 $5,649 $3,335 $33,664 $28,936 $5,209,019 $5,271,619
ACQUIRED
Commercial Loans
Commercial $ — $ — $ — $ — $ — $ 68,991 $ 68,991
Commercial Real Estate — — — — 1,313 165,630 166,943
Business Banking 288 — — 288 307 49,200 49,795
Total Commercial Loans 288 — — 288 1,620 283,821 285,729
Consumer Loans
Indirect 143 11 1 155 104 27,516 27,775
Home Equity 327 132 — 459 457 62,811 63,727
Direct 76 20 — 96 43 3,786 3,925
Total Consumer Loans 546 163 1 710 604 94,113 95,427
Residential Real Estate Mortgages 1,443 293 326 2,062 2,584 225,712 230,358
Total Acquired Loans 2,277 456 327 3,060 4,808 603,646 611,514
Total Loans $26,957 $6,105 $3,662 $36,724 $33,744 $5,812,665 $5,883,133
There were no material commitments to extend further
credit to borrowers with nonperforming loans as of December
31, 2016 and 2015.
The methodology used to establish the allowance for loan
losses on impaired loans incorporates specific allocations on
loans analyzed individually. Classified loans, including all TDRs
and nonaccrual commercial loans that are graded Substandard
or below, with outstanding balances of $0.8 million or more
are evaluated for impairment through the Company’s quarterly
status review process. In determining that we will be unable
to collect all principal and interest payments due in accordance
with the contractual terms of the loan agreements, we consider
factors such as payment history and changes in the financial
condition of individual borrowers, local economic conditions,
historical loss experience and the conditions of the various
markets in which the collateral may be liquidated. For loans
that are evaluated for impairment, impairment is measured
by one of three methods: 1) the fair value of collateral less
NBT BANCORP 2016 FORM 10-K
71
cost to sell, 2) present value of expected future cash flows or
3) the loan’s observable market price. These impaired loans
are reviewed on a quarterly basis for changes in the measure-
ment of impairment. For impaired loans measured using the
present value of expected cash flow method, any change to
the previously recognized impairment loss is recognized as a
change to the allowance account and recorded in the consol-
idated statement of income as a component of the provision
for credit losses.
The following provides additional information on loans
specifically evaluated for impairment for the years ended
December 31, 2016 and 2015:
December 31, 2016 December 31, 2015
Recorded Unpaid Recorded Unpaid
Investment Principal Investment Principal
Balance Balance Related Balance Balance Related
(In thousands) (Book) (Legal) Allowance (Book) (Legal) Allowance
ORIGINATED
With no related allowance recorded:
Commercial Loans
Commercial $ 1,278 $ 1,697 $ 2,244 $ 2,490
Commercial Real Estate 3,816 3,841 3,165 3,175
Agricultural 130 137 576 1,164
Agricultural Real Estate 1,434 1,567 618 744
Business Banking 655 728 983 1,033
Total Commercial Loans 7,313 7,970 7,586 8,606
Consumer Loans
Indirect 5 16 12 21
Home Equity 8,483 9,429 7,681 8,574
Total Consumer Loans 8,488 9,445 7,693 8,595
Residential Real Estate Mortgages 6,111 6,906 6,017 6,627
Total 21,912 24,321 21,296 23,828
With an allowance recorded:
Commercial Loans
Commercial — — — 457 457 300
Commercial Real Estate 5,553 5,736 735 4,210 6,059 970
Agricultural 49 49 37 — — —
Agricultural Real Estate 155 155 54 — — —
Total Commercial Loans 5,757 5,940 826 4,667 6,516 1,270
ACQUIRED
With an allowance recorded:
Commercial Loans
Commercial Real Estate 1,205 1,321 691 1,205 1,321 735
Total Commercial Loans 1,205 1,321 691 1,205 1,321 735
Total $28,874 $31,582 $1,517 $27,168 $31,665 $2,005
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NBT BANCORP 2016 FORM 10-K
The following table summarizes the average recorded investments on loans specifically evaluated for impairment and the
interest income recognized for the years ended December 31, 2016, 2015 and 2014:
December 31, 2016 December 31, 2015 December 31, 2014
Interest Interest Interest
Average Income Average Income Average Income
Recorded Recognized Recorded Recognized Recorded Recognized
(In thousands) Investment Accrual Investment Accrual Investment Accrual
ORIGINATED
Commercial Loans
Commercial $ 6,217 $ — $ 2,219 $ 71 $ 1,954 $115
Commercial Real Estate 5,828 167 8,538 164 9,679 169
Agricultural 715 1 148 1 91 1
Agricultural Real Estate 908 44 628 45 1,346 46
Business Banking 830 9 960 21 610 55
Consumer Loans
Indirect 8 — — — — —
Home Equity 8,278 480 7,070 374 5,198 267
Residential Real Estate Mortgages 6,143 269 5,128 219 3,039 119
ACQUIRED
Commercial Loans
Commercial — — 2,045 — 5,756 —
Commercial Real Estate 1,205 — 5,734 — 3,386 —
Total $30,132 $970 $32,470 $895 $31,059 $772
While we continue to adhere to prudent underwriting stan-
dards, as a lender we may be adversely impacted by general
economic weaknesses and, in particular, a sharp downturn in
the housing market nationally. Decreases in real estate values
could adversely affect the value of property used as collateral
for our loans. Adverse changes in the economy may have a
negative effect on the ability of our borrowers to make timely
loan payments, which would have an adverse impact on our
earnings. A further increase in loan delinquencies would
decrease our net interest income and adversely impact our
loan loss experience, causing increases in our provision and
allowance for loan losses.
The Company has developed an internal loan grading system
to evaluate and quantify the Bank’s loan portfolio with respect
to quality and risk. The system focuses on, among other things,
financial strength of borrowers, experience and depth of man-
agement, primary and secondary sources of repayment, pay-
ment history, nature of the business, outlook on particular
industries. The internal grading system enables the Company
to monitor the quality of the entire loan portfolio on a contin-
uous basis and provide management with an early warning
system, enabling recognition and response to problem loans
and potential problem loans.
Commercial Grading System
For commercial and agricultural loans, the Company uses a
grading system that relies on quantifiable and measurable
characteristics when available. This would include comparison
of financial strength to available industry averages, comparison
of transaction factors (loan terms and conditions) to loan policy,
and comparison of credit history to stated repayment terms
and industry averages. Some grading factors are necessarily
more subjective such as economic and industry factors, regu-
latory environment, and management. Commercial loans are
graded as Doubtful, Substandard, Special Mention and Pass.
NBT BANCORP 2016 FORM 10-K
73
• Doubtful
A Doubtful loan has a high probability of total or substantial
loss, but because of specific pending events that may
strengthen the asset, its classification as loss is deferred.
Doubtful borrowers are usually in default, lack adequate
liquidity or capital, and lack the resources necessary to
remain an operating entity. Pending events can include
mergers, acquisitions, liquidations, capital injections, the
perfection of liens on additional collateral, the valuation
of collateral, and refinancing. Generally, pending events
should be resolved within a relatively short period and
the ratings will be adjusted based on the new information.
Because of high probability of loss, nonaccrual treatment
is required for Doubtful assets.
• Substandard
Substandard loans have a high probability of payment
default, or they have other well-defined weaknesses. They
require more intensive supervision by bank management.
Substandard loans are generally characterized by current
or expected unprofitable operations, inadequate debt
service coverage, inadequate liquidity, or marginal capi-
talization. Repayment may depend on collateral or other
credit risk mitigants. For some Substandard loans, the
likelihood of full collection of interest and principal
may be in doubt and should be placed on nonaccrual.
Although Substandard assets in the aggregate will have
a distinct potential for loss, an individual asset’s loss
potential does not have to be distinct for the asset to be
rated Substandard.
in compliance with loan covenants, and payments are
generally made as agreed. Pass loans range from superior
quality to fair quality.
Business Banking Grading System
Business Banking loans are graded as either Classified or
Non-classified.
• Classified
Classified loans are inadequately protected by the current
worth and paying capacity of the obligor or, if applicable,
the collateral pledged. These loans have a well-defined
weakness, or weaknesses, that jeopardize the liquidation
of the debt, or in some cases make collection or liquidation
in full, on the basis of currently existing facts, conditions,
and values, highly questionable and improbable. They are
characterized by the distinct possibility that the Company
will sustain some loss if the deficiencies are not corrected.
Classified loans have a high probability of payment default,
or a high probability of total or substantial loss. These
loans require more intensive supervision by management
and are generally characterized by current or expected
unprofitable operations, inadequate debt service coverage,
inadequate liquidity, or marginal capitalization. Repayment
may depend on collateral or other credit risk mitigants.
When the likelihood of full collection of interest and prin-
cipal may be in doubt; classified loans are considered to
have a nonaccrual status. In some cases, Classified loans
are considered uncollectible and of such little value that
their continuance as assets is not warranted.
• Special Mention
• Non-classified
Special Mention loans have potential weaknesses that
may, if not checked or corrected, weaken the asset or
inadequately protect the Company’s position at some
future date. These loans pose elevated risk, but their weak-
ness does not yet justify a Substandard classification. Bor-
rowers may be experiencing adverse operating trends
(declining revenues or margins) or may be struggling with
an ill-proportioned balance sheet (e.g., increasing inventory
without an increase in sales, high leverage, tight liquidity).
Adverse economic or market conditions, such as interest
rate increases or the entry of a new competitor, may also
support a special mention rating. Although a Special Men-
tion loan has a higher probability of default than a pass
asset, its default is not imminent.
• Pass
Loans graded as Pass encompass all loans not graded as
Doubtful, Substandard, or Special Mention. Pass loans are
Loans graded as Non-classified encompass all loans not
graded as Classified. Non-classified loans are in compliance
with loan covenants, and payments are generally made
as agreed.
Consumer and Residential Mortgage
Grading System
Consumer and Residential Mortgage loans are graded as
either Nonperforming or Performing.
• Nonperforming
Nonperforming loans are loans that are 1) over 90 days
past due and interest is still accruing or 2) on nonaccrual
status.
• Performing
All loans not meeting any of these criteria are considered
Performing.
74
NBT BANCORP 2016 FORM 10-K
The following tables illustrate the Company’s credit quality by loan class for the years ended December 31, 2016 and 2015:
Credit Quality Indicators
As of December 31, 2016
Commercial Agricultural
(In thousands) Commercial Real Estate Agricultural Real Estate Total
ORIGINATED
Commercial Credit Exposure
By Internally Assigned Grade
Pass $616,829 $1,288,409 $36,762 $28,912 $1,970,912
Special Mention 7,750 31,053 25 1,896 40,724
Substandard 28,991 32,327 1,124 1,614 64,056
Doubtful — — 5 — 5
Total $653,570 $1,351,789 $37,916 $32,422 $2,075,697
Business
Banking Total
Business Banking Credit Exposure
By Internally Assigned Grade
Non-classified $458,864 $458,864
Classified 13,823 13,823
Total $472,687 $472,687
Indirect Home Equity Direct Total
Consumer Credit Exposure
By Payment Activity
Performing $1,562,031 $453,278 $62,977 $2,078,286
Nonperforming 4,644 3,379 127 8,150
Total $1,566,675 $456,657 $63,104 $2,086,436
Residential
Mortgage Total
Residential Mortgage Credit Exposure
By Payment Activity
Performing $1,055,055 $1,055,055
Nonperforming 8,088 8,088
Total $1,063,143 $1,063,143
NBT BANCORP 2016 FORM 10-K
75
Credit Quality Indicators
As of December 31, 2016
Commercial
(In thousands) Commercial Real Estate Total
ACQUIRED
Commercial Credit Exposure
By Internally Assigned Grade
Pass $48,194 $127,660 $175,854
Special Mention 76 1,231 1,307
Substandard 1,177 7,193 8,370
Doubtful — 1,205 1,205
Total $49,447 $137,289 $186,736
Business
Banking Total
Business Banking Credit Exposure
By Internally Assigned Grade
Non-classified $47,347 $47,347
Classified 3,535 3,535
Total $50,882 $50,882
Indirect Home Equity Direct Total
Consumer Credit Exposure
By Payment Activity
Performing $8,646 $50,860 $3,165 $62,671
Nonperforming 47 267 20 334
Total $8,693 $51,127 $3,185 $63,005
Residential
Mortgage Total
Residential Mortgage Credit Exposure
By Payment Activity
Performing $196,508 $196,508
Nonperforming 2,963 2,963
Total $199,471 $199,471
76
NBT BANCORP 2016 FORM 10-K
Credit Quality Indicators
As of December 31, 2015
Commercial Agricultural
(In thousands) Commercial Real Estate Agricultural Real Estate Total
ORIGINATED
Commercial Credit Exposure
By Internally Assigned Grade
Pass $604,405 $1,144,832 $33,565 $27,320 $1,810,122
Special Mention 9,726 21,587 311 429 32,053
Substandard 30,187 28,478 740 1,469 60,874
Doubtful — — 8 — 8
Total $644,318 $1,194,897 $34,624 $29,218 $1,903,057
Business
Banking Total
Business Banking Credit Exposure
By Internally Assigned Grade
Non-classified $386,397 $386,397
Classified 14,524 14,524
Total $400,921 $400,921
Indirect Home Equity Direct Total
Consumer Credit Exposure
By Payment Activity
Performing $1,473,193 $459,540 $59,177 $1,991,910
Nonperforming 4,057 5,175 77 9,309
Total $1,477,250 $464,715 $59,254 $2,001,219
Residential
Mortgage Total
Residential Mortgage Credit Exposure
By Payment Activity
Performing $958,013 $958,013
Nonperforming 8,409 8,409
Total $966,422 $966,422
NBT BANCORP 2016 FORM 10-K
77
Credit Quality Indicators
As of December 31, 2015
Commercial
(In thousands) Commercial Real Estate Total
ACQUIRED
Commercial Credit Exposure
By Internally Assigned Grade
Pass $67,241 $154,871 $222,112
Special Mention 802 2,174 2,976
Substandard 948 9,898 10,846
Doubtful — — —
Total $68,991 $166,943 $235,934
Business
Banking Total
Business Banking Credit Exposure
By Internally Assigned Grade
Non-classified $46,032 $46,032
Classified 3,763 3,763
Total $49,795 $49,795
Indirect Home Equity Direct Total
Consumer Credit Exposure
By Payment Activity
Performing $27,670 $63,270 $3,882 $94,822
Nonperforming 105 457 43 605
Total $27,775 $63,727 $3,925 $95,427
Residential
Mortgage Total
Residential Mortgage Credit Exposure
By Payment Activity
Performing $227,448 $227,448
Nonperforming 2,910 2,910
Total $230,358 $230,358
78
NBT BANCORP 2016 FORM 10-K
Troubled Debt Restructuring
Substantially all modifications include one or a combination
of the following: an extension of the maturity date at a stated
rate of interest lower than the current market rate for new debt
with similar risk; temporary reduction in the interest rate; or
change in scheduled payment amount. Residential and home
equity TDRs occurring during 2016 and 2015 were due to the
reduction in the interest rate or extension of the term. In 2015,
commercial and business banking TDRs were both a reduction
of the interest rate and change in terms.
The following tables illustrate the recorded investment
and number of modifications for modified loans, including
the recorded investment in the loans prior to a modification
and the recorded investment in the loans after restructuring
that occurred during the years ended December 31, 2016
and 2015:
Year ended December 31, 2016
Pre-Modification Post-Modification
Number of Outstanding Outstanding
(In thousands) Contracts Recorded Investment Recorded Investment
Consumer
Home Equity 28 $ 1,886 $ 1,743
Total Consumer 28 1,886 1,743
Residential Real Estate 13 1,084 843
Total Troubled Debt Restructurings 41 $2,970 $2,586
Year ended December 31, 2015
Pre-Modification Post-Modification
Number of Outstanding Outstanding
(In thousands) Contracts Recorded Investment Recorded Investment
Commercial
Commercial 1 $ 186 $ 186
Business Banking 1 220 171
Total Commercial 2 406 357
Consumer
Home Equity 50 3,664 3,261
Total Consumer 50 3,664 3,261
Residential Real Estate 37 3,085 3,085
Total Troubled Debt Restructurings 89 $7,155 $6,703
The following table illustrates the recorded investment and number of modifications for TDRs within the years ended December
31, 2016 and 2015 where a concession has been made and subsequently defaulted during the period:
Year ended December 31, 2016 Year ended December 31, 2015
Number of Recorded Number of Recorded
(In thousands) Contracts Investment Contracts Investment
Consumer
Home Equity 2 $121 4 $344
Total Consumer 2 121 4 344
Residential Real Estate 2 296 3 208
Total Troubled Debt Restructurings 4 $417 7 $552
NBT BANCORP 2016 FORM 10-K
79
(6) Premises and Equipment, Net
A summary of premises and equipment follows as of December 31, 2016 and 2015:
December 31,
(In thousands) 2016 2015
Land, buildings, and improvements $121,037 $125,428
Equipment 56,243 59,574
Premises and equipment before accumulated depreciation 177,280 185,002
Accumulated depreciation 93,093 96,176
Total premises and equipment $ 84,187 $ 88,826
Buildings and improvements are depreciated based on useful
lives of 15 to 40 years. Equipment is depreciated based on
useful lives of three to ten years.
Rental expense included in occupancy expense amounted
to $7.8 million in 2016, $7.9 million in 2015, and $8.0 million in
2014. The future minimum rental payments related to non-
cancelable operating leases with original terms of one year or
more are as follows at December 31, 2016:
(In thousands)
2017 $ 7,757
2018 7,375
2019 6,858
2020 6,132
2021 4,954
Thereafter 19,890
Total $52,966
(7) Goodwill and Other Intangible Assets
A summary of goodwill is as follows as of December 31, 2016 and 2015:
(In thousands)
January 1, 2016 $265,957
Goodwill Acquired 2,047
Goodwill Adjustments (2,565)
December 31, 2016 $265,439
January 1, 2015 $263,634
Goodwill Acquired 2,323
December 31, 2015 $265,957
The Company has intangible assets with definite useful lives
capitalized on its consolidated balance sheet in the form of
core deposit and other identified intangible assets. These intan-
gible assets are amortized over their estimated useful lives,
which range primarily from one to twenty years.
During the twelve month period ended December 31, 2016,
as a result of the disposition of a line of business in the Com-
pany’s insurance agency subsidiary, the Company performed
a goodwill impairment test that resulted in an impairment
charge of $2.6 million.
80
NBT BANCORP 2016 FORM 10-K
A summary of core deposit and other intangible assets follows as of December 31, 2016 and 2015:
December 31,
(In thousands) 2016 2015
Core deposit intangibles
Gross carrying amount $ 8,975 $19,401
Less: accumulated amortization 5,626 14,800
Net carrying amount 3,349 4,601
Identified intangible assets
Gross carrying amount 32,338 29,525
Less: accumulated amortization 19,872 16,861
Net carrying amount 12,466 12,664
Total intangibles
Gross carrying amount 41,312 48,926
Less: accumulated amortization 25,497 31,661
Net carrying amount $15,815 $17,265
Amortization expense on intangible assets with definite
useful lives totaled $3.9 million for 2016, $4.9 million for 2015
and $5.0 million for 2014. Amortization expense on intangible
assets with definite useful lives is expected to total $3.3 million
for 2017, $2.6 million for 2018, $1.9 million for 2019, $1.5 million
for 2020, $1.1 million for 2021 and $3.9 million thereafter. Other
identified intangible assets include customer lists, non-competes,
and trademark intangibles.
(8) Deposits
The following table sets forth the maturity distribution of time deposits at December 31, 2016:
(In thousands)
Within one year $405,327
After one but within two years 143,401
After two but within three years 231,417
After three but within four years 37,030
After four but within five years 35,028
After five years 20,208
Total $872,411
Time deposits of $250,000 or more aggregated $84.3 million and $84.9 million December 31, 2016 and 2015, respectively.
(9) Short-Term Borrowings
In addition to the liquidity provided by balance sheet cash
flows, liquidity must also be supplemented with additional
sources such as credit lines from correspondent banks as well
as borrowings from the FHLB and the Federal Reserve Bank.
Other funding alternatives may also be appropriate from time
to time, including wholesale and retail repurchase agreements
and brokered certificate of deposit (“CD”) accounts.
Short-term borrowings totaled $681.7 million and $442.5
million at December 31, 2016 and 2015, respectively, and consist
of Federal funds purchased and securities sold under repurchase
agreements, which generally represent overnight borrowing
transactions, and other short-term borrowings, primarily FHLB
advances, with original maturities of one year or less.
NBT BANCORP 2016 FORM 10-K
81
The Company has unused lines of credit with the FHLB and
access to brokered deposits available for short-term financing
of approximately $1.9 billion and $2.1 billion at December 31,
2016 and 2015, respectively. Borrowings on the FHLB lines are
secured by FHLB stock, certain securities and one-to-four family
first lien mortgage loans. Securities collateralizing repurchase
agreements are held in safekeeping by nonaffiliated financial
institutions and are under the Company’s control.
Information related to short-term borrowings is summarized
as follows as of December 31, 2016, 2015 and 2014:
(In thousands) 2016 2015 2014
Federal funds purchased
Balance at year-end $ 50,000 $ 99,500 $ 68,000
Average during the year 65,257 97,424 110,154
Maximum month end balance 85,000 159,000 183,000
Weighted average rate during the year 0.98% 0.36% 0.29%
Weighted average rate at December 31 1.19% 0.51% 0.34%
Securities sold under repurchase agreements
Balance at year-end $173,703 $167,981 $148,802
Average during the year 168,821 162,201 165,858
Maximum month end balance 189,875 178,326 182,861
Weighted average rate during the year 0.06% 0.06% 0.06%
Weighted average rate at December 31 0.07% 0.06% 0.06%
Other short-term borrowings
Balance at year-end $458,000 $175,000 $100,000
Average during the year 263,575 80,260 106,438
Maximum month end balance 424,000 175,000 320,000
Weighted average rate during the year 0.59% 0.42% 0.40%
Weighted average rate at December 31 0.70% 0.56% 0.36%
See Note 3 for additional information regarding securities pledged as collateral for securities sold under the repurchase agreements.
(10) Long-Term Debt
Long-term debt consists of obligations having an original
maturity at issuance of more than one year. A majority of the
Company’s long-term debt is comprised of FHLB advances col-
lateralized by the FHLB stock owned by the Company, certain
of its mortgage-backed securities and a blanket lien on its res-
idential real estate mortgage loans. A summary as of December
31, 2016 and 2015 is as follows (dollars in thousands):
As of December 31, 2016 As of December 31, 2015
Weighted Weighted Weighted Weighted
Average Callable Average Average Callable Average
Maturity Amount Rate Amount Rate Amount Rate Amount Rate
— — $
2016 $
— — $ 50,360 2.92% $30,000 4.15%
2017 40,150 2.67% 25,000 3.48% 40,000 2.68% 25,000 3.48%
2018 40,000 2.57% 25,000 3.15% 40,000 2.57% 25,000 3.15%
2019 20,000 1.96% — — — — — —
2021 72 4.00% — — 87 4.00% — —
2031 3,865 2.45% — — — — — —
$104,087 $50,000 $130,447 $80,000
82
NBT BANCORP 2016 FORM 10-K
(11) Junior Subordinated Debt
The Company sponsors five business trusts, CNBF Capital
Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance
Financial Capital Trust I and Alliance Financial Capital Trust II
(collectively, the “Trusts”). The Company’s junior subordinated
debentures include amounts related to the Company’s NBT
Statutory Trust I and II as well as junior subordinated debentures
associated with one statutory trust affiliate that was acquired
from our merger with CNB Financial Corp. and two statutory
trusts that were acquired from our acquisition of Alliance Finan-
cial Corporation (“Alliance”). The Trusts were formed for the pur-
pose of issuing company-obligated mandatorily redeemable
trust preferred securities to third-party investors and investing
in the proceeds from the sale of such preferred securities solely
in junior subordinated debt securities of the Company for gen-
eral corporate purposes. The Company guarantees, on a limited
basis, payments of distributions on the trust preferred securities
and payments on redemption of the trust preferred securities.
The Trusts are VIEs for which the Company is not the primary
beneficiary, as defined by GAAP. In accordance with GAAP,
the accounts of the Trusts are not included in the Company’s
consolidated financial statements. See Note 1 for additional
information about the Company’s consolidation policy.
The debentures held by each trust are the sole assets of
that trust. The Trusts hold, as their sole assets, junior subordinated
debentures of the Company with face amounts totaling $98.0
million at December 31, 2016. The Company owns all of the
common securities of the Trusts and has accordingly recorded
$3.2 million in equity method investments classified as other
assets in our consolidated balance sheets at December 31,
2016. The Company owns all of the common stock of the Trusts,
which have issued trust preferred securities in conjunction with
the Company issuing trust preferred debentures to the Trusts.
The terms of the trust preferred debentures are substantially
the same as the terms of the trust preferred securities.
As of December 31, 2016, the Trusts had the following
trust preferred securities outstanding and held the following
junior subordinated debentures of the Company (dollars in
thousands):
Trust Trust
Preferred Preferred
Securities Debt Owed Final
Description Issuance Date Outstanding Interest Rate to Trust Maturity Date
CNBF Capital Trust I August 1999 $18,000 3-month LIBOR plus 2.75% $18,720 August 2029
NBT Statutory Trust I November 2005 5,000 3-month LIBOR plus 1.40% 5,155 December 2035
NBT Statutory Trust II February 2006 50,000 3-month LIBOR plus 1.40% 51,547 March 2036
Alliance Financial Capital Trust I December 2003 10,000 3-month LIBOR plus 2.85% 10,310 January 2034
Alliance Financial Capital Trust II September 2006 15,000 3-month LIBOR plus 1.65% 15,464 September 2036
The Company’s junior subordinated debentures are
redeemable prior to the maturity date at our option upon each
trust’s stated option repurchase dates, and from time to time
thereafter. These debentures are also redeemable in whole at
any time upon the occurrence of specific events defined within
the trust indenture. Our obligations under the debentures and
related documents, taken together, constitute a full and uncon-
ditional guarantee by the Company of the issuers’ obligations
under the trust preferred securities. The Company owns all of
the common stock of the Trusts, which have issued trust pre-
ferred securities in conjunction with the Company issuing trust
preferred debentures to the Trusts. The terms of the trust pre-
ferred debentures are substantially the same as the terms of
the trust preferred securities.
With respect to the Trusts, the Company has the right to
defer payments of interest on the debentures issued to the
Trusts at any time or from time to time for a period of up to
ten consecutive semi-annual periods with respect to each
deferral period. Under the terms of the debentures, if in certain
circumstances there is an event of default under the debentures
or the Company elects to defer interest on the debentures,
the Company may not, with certain exceptions, declare or pay
any dividends or distributions on its capital stock or purchase
or acquire any of its capital stock.
Despite the fact that the Trusts are not included in the Com-
pany’s consolidated financial statements, $97 million of the
$101 million in trust preferred securities issued by these sub-
sidiary trusts is included in the Tier 1 capital of the Company
for regulatory capital purposes as allowed by the Federal Reserve
Board (NBT Bank owns $1.0 million of CNBF Trust I securities).
The Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 requires bank holding companies with assets greater
than $500 million to be subject to the same capital requirements
as insured depository institutions, meaning, for instance, that
such bank holding companies will not be able to count trust
preferred securities issued after May 19, 2010 as Tier 1 capital.
The aforementioned Trusts are grandfathered with respect to
this enactment based on their date of issuance.
NBT BANCORP 2016 FORM 10-K
83
(12) Income Taxes
The significant components of income tax expense attributable to operations are as of December 31, 2016, 2015 and 2014:
Years ended December 31,
(In thousands) 2016 2015 2014
Current
Federal $30,492 $32,871 $26,059
State 5,628 4,329 2,823
36,120 37,200 28,882
Deferred
Federal 3,994 2,521 6,648
State 278 482 1,699
4,272 3,003 8,347
Total income tax expense $40,392 $40,203 $37,229
Not included in the above table are items that were
recorded to stockholders’ equity of approximately $0.4 million,
$3.4 million, and $(1.1) million for 2016, 2015, and 2014,
respectively, relating to deferred taxes on the unrealized (gain)
loss on available for sale securities, tax benefits recognized
with respect to stock options exercised, pension plans and
cash flow hedges.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows as of December 31, 2016 and 2015:
As of December 31,
(In thousands) 2016 2015
Deferred tax assets
Allowance for loan losses $24,925 $24,090
Deferred compensation 11,578 10,023
Postretirement benefit obligation 2,929 2,988
Fair value adjustments from acquisitions 1,883 2,543
Unrealized losses on securities 3,259 589
Accrued liabilities 1,775 2,889
Stock-based compensation expense 4,817 5,394
Equipment leasing 256 476
Other 892 1,477
Total deferred tax assets 52,314 50,469
Deferred tax liabilities
Pension benefits 17,303 11,908
Amortization of intangible assets 17,557 19,082
Premises and equipment, primarily due to accelerated depreciation 4,375 2,444
Deferred loan costs 1,759 1,591
Cash flow hedges 1,129 —
Other 501 504
Total deferred tax liabilities 42,624 35,529
Net deferred tax asset at year-end 9,690 14,940
Net deferred tax asset at beginning of year 14,940 14,517
(Decrease) increase in net deferred tax asset $ (5,250) $ 423
84
NBT BANCORP 2016 FORM 10-K
Realization of deferred tax assets is dependent upon the
generation of future taxable income or the existence of sufficient
taxable income within the available carryback period. A valuation
allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. Based on
available evidence, gross deferred tax assets will ultimately be
realized and a valuation allowance was not deemed necessary
at December 31, 2016 and 2015.
The following is a reconciliation of the provision for income
taxes to the amount computed by applying the applicable
Federal statutory rate of 35% to income before taxes:
Years ended December 31,
(In thousands) 2016 2015 2014
Federal income tax at statutory rate $41,581 $40,820 $39,306
Tax exempt income (2,205) (2,037) (2,250)
Net increase in CSV of life insurance (1,712) (1,373) (1,734)
Federal tax credit (1,323) (939) (880)
State taxes, net of federal tax benefit 3,838 3,127 2,939
Other, net 213 605 (152)
Income tax expense $40,392 $40,203 $37,229
A reconciliation of the beginning and ending balance of Federal and State gross unrecognized tax benefits (“UTBs”) is as follows:
(In thousands) 2016
Balance at January 1 $ —
Additions for tax positions of prior years 425
Current period tax positions 134
Balance at December 31 559
Amount that would affect the effective tax rate if recognized $363
At December 31, 2015 and 2014 the Company had no UTBs.
We recognize interest and penalties on the income tax expense
line in the accompanying consolidated statements of income.
We monitor changes in tax statutes and regulations to deter-
mine if significant changes will occur over the next 12 months.
As of December 31, 2016, no significant changes to UTBs
are projected; however, tax audit examinations are possible.
The Company recognized an insignificant amount of interest
expense related to UTBs in the consolidated statement of
income for the year ended December 31, 2016.
The Company is no longer subject to U.S. Federal tax exami-
nation by tax authorities for years prior to 2013 and New York
State for years prior to 2011. The Company is currently under
audit in the state of New York for tax years 2011, 2012 and 2013.
(13) Employee Benefit Plans
Defined Benefit Post-retirement Plans
The Company has a qualified, noncontributory, defined ben-
efit pension plan (“the Plan”) covering substantially all of its
employees at December 31, 2016. Benefits paid from the plan
are based on age, years of service, compensation, social security
benefits, and are determined in accordance with defined for-
mulas. The Company’s policy is to fund the Plan in accordance
with Employee Retirement Income Security Act of 1974 stan-
dards. Assets of the Plan are invested in bonds and publicly
traded stocks and mutual funds. Prior to January 1, 2000, the
Plan was a traditional defined benefit plan based on final
average compensation. On January 1, 2000, the Plan was con-
verted to a cash balance plan with grandfathering provisions
for existing participants. Effective March 1, 2013, the Plan was
amended. Benefit accruals for participants who, as of January
1, 2000, elected to continue participating in the traditional
defined benefit plan design were frozen as of March 1, 2013.
In May 2013, the noncontributory, frozen, defined benefit
pension plan assumed from Alliance in the acquisition was
merged into the Plan.
In addition to the Plan, the Company provides supplemental
employee retirement plans to certain current and former exec-
utives. The Company also assumed supplemental retirement
plans for certain current and former executives in the Alliance
acquisition.
The supplemental employee retirement plans and the
defined benefit pension plan are collectively referred to herein
as “Pension Benefits.”
NBT BANCORP 2016 FORM 10-K
85
Also, the Company provides certain health care benefits for
retired employees. Benefits are accrued over the employees’
active service period. Only employees that were employed by
NBT Bank on or before January 1, 2000 are eligible to receive
post-retirement health care benefits. The Plan is contributory
for participating retirees, requiring participants to absorb
certain deductibles and coinsurance amounts with contribu-
tions adjusted annually to reflect cost sharing provisions and
benefit limitations called for in the Plan. Employees become
eligible for these benefits if they reach normal retirement age
while working for the Company. For eligible employees
described above, the Company funds the cost of post-retire-
ment health care as benefits are paid. The Company elected
to recognize the transition obligation on a delayed basis over
twenty years. In addition, the Company assumed post-retirement
medical life insurance benefits for certain Alliance employees,
retirees and their spouses, if applicable, in the Alliance acqui-
sition. These post-retirement benefits are referred to herein as
“Other Benefits.”
Accounting standards require an employer to: (1) recognize
the overfunded or underfunded status of defined benefit post-
retirement plans, which is measured as the difference between
plan assets at fair value and the benefit obligation, as an asset
or liability in its balance sheet; (2) recognize changes in that
funded status in the year in which the changes occur through
comprehensive income; and (3) measure the defined benefit
plan assets and obligations as of the date of its year-end
balance sheet.
The components of accumulated other comprehensive loss,
which have not yet been recognized as components of net peri-
odic benefit cost, related to pensions and other post-retirement
benefits at December 31, 2016 and 2015 are summarized below:
Pension Benefits Other Benefits
(In thousands) 2016 2015 2016 2015
Net actuarial loss $28,328 $33,070 $1,430 $2,333
Prior service cost (credit) 140 76 (38) (95)
Total amounts recognized in accumulated other
comprehensive income (loss) (pre-tax) $28,468 $33,146 $1,392 $2,238
A December 31 measurement date is used for the pension, supplemental pension and post-retirement benefit plans. The
following table sets forth changes in benefit obligations, changes in plan assets, and the funded status of the pension plans and
other post-retirement benefits:
Pension Benefits Other Benefits
(In thousands) 2016 2015 2016 2015
Change in benefit obligation
Benefit obligation at beginning of year $ 92,445 $ 98,556 $ 8,322 $ 8,710
Service cost 2,162 2,677 14 17
Interest cost 4,223 3,977 353 374
Plan participants’ contributions — — 234 263
Actuarial (gain) (1,635) (5,225) (786) (333)
Curtailment/ settlement (715) (200) — —
Benefits paid (6,003) (7,340) (659) (709)
Projected benefit obligation at end of year 90,477 92,445 7,478 8,322
Change in plan assets
Fair value of plan assets at beginning of year 107,529 117,232 — —
Actual return (loss) on plan assets 8,259 (3,159) — —
Employer contributions 6,431 796 425 446
Plan participants’ contributions — — 234 263
Benefits paid (6,003) (7,340) (659) (709)
Fair value of plan assets at end of year 116,216 107,529 — —
Funded status at year end $ 25,739 $ 15,084 $(7,478) $(8,322)
86
NBT BANCORP 2016 FORM 10-K
An asset is recognized for an overfunded plan and a liability
is recognized for an underfunded plan. The accumulated
benefit obligation for pension benefits was $90.5 million and
$92.4 million at December 31, 2016 and 2015, respectively.
The accumulated benefit obligation for other post-retirement
benefits was $7.5 million and $8.3 million at December 31,
2016 and 2015, respectively. The funded status of the pension
and other post-retirement benefit plans has been recognized
as follows in the consolidated balance sheets at December 31,
2016 and 2015.
Pension Benefits Other Benefits
(In thousands) 2016 2015 2016 2015
Other assets $ 45,344 $ 34,965 $ — $ —
Other liabilities (19,605) (19,881) (7,478) (8,322)
Funded status $ 25,739 $ 15,084 $(7,478) $(8,322)
The following assumptions were used to determine the benefit obligation and the net periodic pension cost for the years indicated:
Years ended December 31,
2016 2015 2014
Weighted average assumptions:
The following assumptions were used to determine benefit obligations:
Discount rate 4.76%–4.84% 4.69%–4.71% 4.19%–4.30%
Expected long-term return on plan assets 7.00% 7.00% 7.50%
Rate of compensation increase 3.00% 3.00% 3.00%–3.75%
The following assumptions were used to determine net periodic pension cost:
Discount rate 4.69%–4.71% 4.19%–4.30% 4.90%–5.05%
Expected long-term return on plan assets 7.00% 7.50% 7.50%
Rate of compensation increase 3.00% 3.00%–3.75% 3.00%–3.75%
Net periodic benefit cost and other amounts recognized in other comprehensive income (loss) for the years ended December
31 included the following components:
Pension Benefits Other Benefits
(In thousands) 2016 2015 2014 2016 2015 2014
Components of net periodic benefit cost
Service cost $ 2,162 $ 2,677 $ 2,290 $ 14 $ 17 $ 16
Interest cost 4,223 3,977 4,142 353 374 347
Expected return on plan assets (7,430) (8,589) (8,681) — — —
Amortization of gain due to curtailment (768) (154) — — — —
Amortization of prior service cost (credit) 32 21 23 (57) (219) (206)
Amortization of unrecognized net loss 2,235 2,174 79 117 263 151
Net periodic pension cost $
454 $ 106 $ (2,147) $ 427 $ 435 $ 308
Other changes in plan assets and benefit obligations
recognized in other comprehensive income (pre-tax)
Net (gain) loss $(2,464) $ 6,523 $17,233 $(786) $(333) $1,452
Prior service cost 96 — — — — —
Amortization of gain due to settlement (43) (46) — — — —
Amortization of prior service (cost) credit (32) (21) (23) 57 219 206
Amortization of unrecognized net (loss) (2,235) (2,174) (79) (117) (263) (151)
Total recognized in other comprehensive income (4,678) 4,282 17,131 (846) (377) 1,507
Total recognized in net periodic benefit cost and
other comprehensive income, pre-tax $(4,224) $ 4,388 $14,984 $(419) $ 58 $1,815
NBT BANCORP 2016 FORM 10-K
87
The Company expects that $1.7 million in net actuarial loss
and nominal prior service costs will be recognized as compo-
nents of net periodic benefit cost in 2017.
The following table sets forth estimated future benefit pay-
ments for the pension plans and other post-retirement benefit
plans as of December 31, 2016:
Pension Other
(In thousands) Benefits Benefits
2017 $ 7,876 $ 551
2018 7,169 572
2019 7,042 559
2020 6,884 572
2021 6,725 546
2022–2026 $36,011 $2,724
The Company made contributions to the plan totaling $5.6
million during the twelve months ended December 31, 2016.
The Company did not make any contributions to the plan
during the twelve months ended December 31, 2015 and 2014.
For measurement purposes, the annual rates of increase
in the per capita cost of covered medical and prescription
drug benefits for fiscal year 2016 were assumed to be 6.5%
to 10.5% percent. The rates were assumed to decrease grad-
ually to 3.9% for fiscal year 2075 and remain at that level
thereafter. Assumed health care cost trend rates have a sig-
nificant effect on amounts reported for health care plans. A
one-percentage point change in the health care trend rates
would have the following effects as of and for the year ended
December 31, 2016:
One Percentage One Percentage
(In thousands) Point Increase Point Decrease
Increase (decrease) on total service and interest cost components $ 34 $ (29)
Increase (decrease) on postretirement accumulated benefit obligation 667 (576)
Plan Investment Policy
The Company’s key investment objectives in managing its
defined benefit plan assets are to ensure that present and
future benefit obligations to all participants and beneficiaries
are met as they become due; to provide a total return that,
over the long-term, maximizes the ratio of the plan assets to
liabilities, while minimizing the present value of required Com-
pany contributions, at the appropriate levels of risk; to meet
statutory requirements and regulatory agencies’ requirements;
and to satisfy applicable accounting standards. The Company
periodically evaluates the asset allocations, funded status, rate
of return assumption and contribution strategy for satisfaction
of our investment objectives.
The target and actual allocations expressed as a percentage
of the defined benefit pension plan’s assets are as follows:
Target 2016 2016 2015
Cash and cash equivalents 0–20% 2% 2%
Fixed income securities 25–55% 46% 42%
Equities 40–65% 52% 56%
Total 100% 100%
Only high-quality bonds are to be included in the portfolio.
All issues that are rated lower than A by Standard and Poor’s
are to be excluded. Equity securities at December 31, 2016 and
2015 do not include any Company common stock.
The following table presents the financial instruments
recorded at fair value on a recurring basis by the Plan as of
December 31, 2016 and 2015:
(In thousands) Level 1 Level 2 December 31, 2016
Cash and cash equivalents $ 3,500 $ — $ 3,500
Foreign equity mutual funds 33,687 — 33,687
Equity mutual funds 28,256 — 28,256
U.S. government bonds — 1,283 1,283
Corporate bonds — 49,490 49,490
Totals $65,443 $50,773 $116,216
88
NBT BANCORP 2016 FORM 10-K
(In thousands) Level 1 Level 2 December 31, 2015
Cash and cash equivalents $ 2,513 $ — $ 2,513
Foreign equity mutual funds 33,342 — 33,342
Equity mutual funds 26,993 — 26,993
U.S. government bonds — 3,410 3,410
Corporate bonds — 41,271 41,271
Totals $62,848 $44,681 $107,529
The plan had no financial instruments recorded at fair value
on a non-recurring basis as of December 31, 2016 and 2015.
Determination of Assumed Rate of Return
The expected long-term rate-of-return on assets was 7.0%
at December 31, 2016 and December 31, 2015. This assumption
represents the rate of return on plan assets reflecting the
average rate of earnings expected on the funds invested or to
be invested to provide for the benefits included in the projected
benefit obligation. The assumption has been determined by
reflecting expectations regarding future rates of return for the
portfolio considering the asset distribution and related historical
rates of return. The appropriateness of the assumption is
reviewed annually.
Employee 401(k) and Employee
Stock Ownership Plans
The Company maintains a 401(k) and employee stock own-
ership plan (the “401(k) Plan”). The Company contributes to the
(14) Stock-Based Compensation
401(k) Plan based on employees’ contributions out of their
annual salaries. In addition, the Company may also make dis-
cretionary contributions to the 401(k) Plan based on profitability.
Participation in the 401(k) Plan is contingent upon certain age
and service requirements. The employer contributions associated
with the 401(k) Plan were $2.7 million in 2016, $2.5 million in
2015, and $2.8 million in 2014.
Other Retirement Benefits
Included in other liabilities is $2.6 million and $2.8 million
at December 31, 2016 and December 31, 2015, respectively,
for supplemental retirement benefits for retired executives
from legacy plans assumed in acquisitions. The Company rec-
ognized $0.2, $0.3 and $0.1 million in expense for the years
ended December 31, 2016, December 31, 2015, and December
31, 2014, respectively, related to these plans.
In April 2008, the Company adopted the NBT Bancorp Inc.
2008 Omnibus Incentive Plan (the “Stock Plan”). Under the terms
of the Stock Plan, options and other equity-based awards are
granted to directors and employees to increase their direct pro-
prietary interest in the operations and success of the Company.
The Stock Plan assumed all prior equity-based incentive plans
and any new equity-based awards are granted under the terms
of the Stock Plan. Under terms of the Stock Plan, stock options
are granted to purchase shares of the Company’s common stock
at a price equal to the fair market value of the common stock
on the date of the grant. Options granted have a vesting period
of four years and terminate ten years from the date of the grant.
Shares issued as a result of stock option exercises and vesting
of restricted shares and stock unit awards are funded from the
Company’s treasury stock. Restricted shares granted under the
Plan vest after five years for employees and three years for non-
employee directors. Restricted stock units granted under the
Stock Plan may have different terms and conditions. Performance
shares and units granted under the Stock Plan for executives
may have different terms and conditions. Since 2011, the Com-
pany primarily grants restricted stock unit awards. Stock option
grants since that time were reloads of existing grants.
NBT BANCORP 2016 FORM 10-K
89
The following table summarizes information concerning stock options outstanding at December 31, 2016:
Weighted
Weighted Average
Average Remaining Aggregate
Number Exercise Contractual Intrinsic
of Shares Price Term (in yrs) Value
Outstanding at January 1, 2016 541,564 $23.23
Granted 50,508 28.95
Exercised (360,147) 23.32
Forfeited — —
Expired (1,750) 22.93
Outstanding at December 31, 2016 230,175 $24.35 4.43 $4,035,063
Exercisable at December 31, 2016 163,925 $22.70 2.47 $3,144,022
Expected to Vest 66,249 $28.43 9.28 $ 891,041
Total stock-based compensation expense for stock option awards totaled $0.2 million, $0.2 million, and $0.1 million for the
years ended December 31, 2016, 2015, and 2014, respectively. Cash proceeds, tax benefits and intrinsic value related to total
stock options exercised is as follows:
Years ended December 31,
(In thousands) 2016 2015 2014
Proceeds from stock options exercised $8,398 $12,044 $6,554
Tax benefits related to stock options exercised 1,223 952 307
Intrinsic value of stock options exercised 3,143 2,446 789
Fair value of shares vested during the year 105 63 393
The Company has outstanding restricted and deferred stock
awards granted from various plans at December 31, 2016. The
Company recognized $4.2 million, $3.9 million, and $3.4 million
in stock-based compensation expense related to these stock
awards for the years ended December 31, 2016, 2015, and 2014,
respectively. Tax benefits recognized with respect to restricted
stock awards and stock units were $2.9 million, $1.5 million
and $1.1 million for the years ended December 31, 2016, 2015
and 2014, respectively. Unrecognized compensation cost related
to restricted stock awards and stock units totaled $4.5 million
at December 31, 2016 and will be recognized over 2.8 years
on a weighted average basis. Shares issued are funded from
the Company’s treasury stock. The following table summarizes
information for unvested restricted stock awards outstanding
as of December 31, 2016:
Weighted-Average
Number of Shares Grant Date Fair Value
Unvested at January 1, 2016 23,000 $24.17
Forfeited — —
Vested (23,000) 24.17
Unvested at December 31, 2016 — $ —
90
NBT BANCORP 2016 FORM 10-K
The following table summarizes information for unvested restricted stock units outstanding as of December 31, 2016:
Weighted-Average
Number of Shares Grant Date Fair Value
Unvested at January 1, 2016 665,008 $ 21.45
Forfeited (20,969) 20.92
Vested (254,445) 21.32
Granted 223,569 24.47
Unvested at December 31, 2016 613,163 $22.62
The Company has 2,994,517 securities remaining available to be granted as part of the Plan at December 31, 2016.
(15) Stockholders’ Equity
In accordance with GAAP, unrealized gains on available for sale securities and unrecognized actuarial gains or losses and prior
service costs associated with the Company’s pension and postretirement benefit plans are included in accumulated other com-
prehensive loss, net of tax. For the years ended December 31, components of accumulated other comprehensive loss are:
(In thousands) 2016 2015
Unrecognized prior service cost and net actuarial loss on pension plans $ (18,227) $(21,557)
Unrealized losses on derivatives (cash flow hedges) 1,772 —
Unrealized net holding (losses) gains on AFS securities (5,065) (861)
Accumulated other comprehensive loss $ (21,520) $(22,418)
Certain restrictions exist regarding the ability of the subsidiary
bank to transfer funds to the Company in the form of cash div-
idends. The approval of the Office of Comptroller of the Currency
(the “OCC”) is required to pay dividends when a bank fails to
meet certain minimum regulatory capital standards or when
such dividends are in excess of a subsidiary bank’s earnings
retained in the current year plus retained net profits for the
preceding two years as specified in applicable OCC regulations.
At December 31, 2016, approximately $102.5 million of the
total stockholders’ equity of the Bank was available for payment
of dividends to the Company without approval by the OCC.
The Bank’s ability to pay dividends also is subject to the Bank
(16) Regulatory Capital Requirements
being in compliance with regulatory capital requirements. The
Bank is currently in compliance with these requirements. Under
the State of Delaware General Corporation Law, the Company
may declare and pay dividends either out of accumulated net
retained earnings or capital surplus.
Under a previously disclosed stock repurchase plan, the
Company purchased 675,535 shares of its common stock during
the twelve month period ended December 31, 2016, for a total
of $17.2 million at an average price of $25.45 per share. There
are 1,000,000 shares available for repurchase under this plan,
which expires on December 31, 2017.
The Company and the Bank are subject to various regulatory
capital requirements administered by the federal banking agen-
cies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material
effect on the consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of NBT Bank’s assets, liabilities,
and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classifications
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios (set forth in the table below) of
total and Tier 1 Capital to risk-weighted assets and of Tier 1
capital to average assets. As of December 31, 2016 and 2015,
the Company and the Bank meet all capital adequacy require-
ments to which they were subject.
NBT BANCORP 2016 FORM 10-K
91
Under their prompt corrective action regulations, regulatory
authorities are required to take certain supervisory actions
(and may take additional discretionary actions) with respect
to an undercapitalized institution. Such actions could have a
direct material effect on an institution’s financial statements.
The regulations establish a framework for the classification of
banks into five categories: well-capitalized, adequately capi-
talized, under capitalized, significantly under capitalized, and
critically under capitalized. As of December 31, 2016, the most
recent notification from the Bank’s regulators categorized the
Bank as well-capitalized under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized
the Bank must maintain minimum total risk-based, Tier 1 risk-
based, and Tier 1 Capital to Average Asset ratios as set forth
in the table below. There are no conditions or events since
that notification that management believes have changed the
Bank’s category.
Beginning in 2016, in addition to maintaining minimum
capital ratios, the Company is subject to a capital conservation
buffer (“Buffer”) above the minimum to avoid restriction on
capital distributions and discretionary bonus paychecks to
officers. At December 31, 2016 the Buffer was 0.625%. The
Buffer regulatory minimum ratio will be phased in over four
years starting in 2016 with minimum requirement of 0.625%
until fully phased in for fiscal year 2019 at 2.5%.
The Company and NBT Bank’s actual capital amounts
and ratios are presented as follows as of December 31, 2016
and 2015:
Actual Regulatory Ratio Requirements
Minimum For Classification
Capital as Well
(Dollars in thousands) Amount Ratio Adequacy Capitalized
AS OF DECEMBER 31, 2016
Total Capital (to risk weighted assets)
Company $839,152 12.39% 8.00% 10.00%
NBT Bank 790,034 11.75% 8.00% 10.00%
Tier I Capital (to risk weighted assets)
Company 773,111 11.42% 4.00% 6.00%
NBT Bank 723,992 10.76% 4.00% 6.00%
Tier I Capital (to average assets)
Company 773,111 9.11% 4.00% 5.00%
NBT Bank 723,992 8.59% 4.00% 5.00%
Common Equity Tier 1 Capital
Company 676,111 9.98% 4.50% 6.50%
NBT Bank 723,992 10.76% 4.50% 6.50%
AS OF DECEMBER 31, 2015
Total Capital (to risk weighted assets)
Company $809,685 12.74% 8.00% 10.00%
NBT Bank 724,238 11.47% 8.00% 10.00%
Tier I Capital (to risk weighted assets)
Company 745,341 11.73% 4.00% 6.00%
NBT Bank 659,894 10.45% 4.00% 6.00%
Tier I Capital (to average assets)
Company 745,341 9.44% 4.00% 5.00%
NBT Bank 659,894 8.41% 4.00% 5.00%
Common Equity Tier 1 Capital
Company 648,341 10.20% 4.50% 6.50%
NBT Bank 659,894 10.45% 4.50% 6.50%
92
NBT BANCORP 2016 FORM 10-K
(17) Earnings Per Share
The following is a reconciliation of basic and diluted EPS for the years presented in the consolidated statements of income:
Years ended December 31,
2016 2015 2014
Weighted Per Weighted Per Weighted Per
(In thousands, except share Net Average Share Net Average Share Net Average Share
and per share data) Income Shares Amount Income Shares Amount Income Shares Amount
Basic EPS $78,409 43,244 $1.81 $76,425 43,836 $1.74 $75,074 43,877 $1.71
Effect of dilutive securities:
Stock-based compensation 378 553 518
Diluted EPS $78,409 43,622 $1.80 $76,425 44,389 $1.72 $75,074 44,395 $1.69
There was a nominal number of weighted average stock
options outstanding for the years ended December 31, 2016,
2015, and 2014, respectively, that were not considered in the
calculation of diluted EPS since the stock options’ exercise
prices were greater than the average market price during
these periods.
(18) Reclassification Adjustments Out of Other Comprehensive Income (Loss)
The following table summarizes the reclassification adjustments out of accumulated other comprehensive income (loss)
(in thousands):
Amount Reclassified Affected Line Item in the
Detail About Accumulated Other From Accumulated Other Consolidated Statements of
Comprehensive Income (Loss) Components Comprehensive Income (Loss) Comprehensive Income (Loss)
Years ended December 31,
2016 2015
AFS securities
Losses (gains) on AFS securities $ 644 $(3,087) Net securities losses (gains)
Amortization of unrealized gains and losses
related to securities transfer 1,094 1,311 Interest income
Tax benefit (expense) (677) 691 Income tax expense
Net of tax $1,061 $(1,085)
Pension and other benefits
Amortization of net losses $2,395 $ 2,437 Salaries and employee benefits
Amortization of prior service costs (25) (198) Salaries and employee benefits
Tax expense 949 868 Income tax expense
Net of tax $1,421 $ 1,371
Total reclassifications during the period, net of tax $2,482 $
286
NBT BANCORP 2016 FORM 10-K
93
(19) Commitments and Contingent Liabilities
The Company’s concentrations of credit risk are reflected
in the consolidated balance sheets. The concentrations of credit
risk with standby letters of credit, unused lines of credit, com-
mitments to originate new loans and loans sold with recourse
generally follow the loan classifications.
At December 31, 2016, approximately 59% of the Company’s
loans were secured by real estate located in central and upstate
New York, northeastern Pennsylvania, western Massachusetts,
southern New Hampshire, and Vermont. Accordingly, the ulti-
mate collectability of a substantial portion of the Company’s
portfolio is susceptible to changes in market conditions of
those areas. Management is not aware of any material concen-
trations of credit to any industry or individual borrowers.
The Company is a party to certain financial instruments with
off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments
include commitments to extend credit, unused lines of credit,
standby letters of credit, and certain mortgage loans sold to
investors with recourse. The Company’s exposure to credit loss
in the event of nonperformance by the other party to the com-
mitments to extend credit, unused lines of credit, standby
letters of credit, and loans sold with recourse is represented
by the contractual amount of those instruments. The credit
risk associated with commitments to extend credit and standby
and commercial letters of credit is essentially the same as that
involved with extending loans to customers and is subject to
normal credit policies. Collateral may be obtained based on
management’s assessment of the customer’s creditworthiness.
At December 31,
(In thousands) 2016 2015
Unused lines of credit $ 292,140 $ 252,953
Commitments to extend credits, primarily variable rate 1,177,842 1,062,425
Standby letters of credit 36,815 31,503
Commercial letters of credit — 11,332
Loans sold with recourse 28,463 25,122
Since many loan commitments, standby letters of credit,
and guarantees and indemnification contracts expire without
being funded in whole or in part, the contract amounts are
not necessarily indicative of future cash flows. The Company
does not issue any guarantees that would require liability-
recognition or disclosure, other than its standby letters of credit.
The Company guarantees the obligations or performance
of customers by issuing standby letters of credit to third parties.
These standby letters of credit are frequently issued in support
of third party debt, such as corporate debt issuances, industrial
revenue bonds, and municipal securities. The risk involved in
issuing standby letters of credit is essentially the same as the
credit risk involved in extending loan facilities to customers,
and letters of credit are subject to the same credit origination,
portfolio maintenance and management procedures in effect
to monitor other credit and off-balance sheet products. Typically,
these instruments have terms of five years or less and expire
unused; therefore, the total amounts do not necessarily repre-
sent future cash requirements. The fair value of the Company’s
standby letters of credit at December 31, 2016 and 2015 was
not significant.
In the normal course of business there are various outstand-
ing legal proceedings. If legal costs are deemed material by
management, the Company accrues for the estimated loss from
a loss contingency if the information available indicates that
it is probable that a liability had been incurred at the date of
the financial statements, and the amount of loss can be rea-
sonably estimated.
The Company is required to maintain reserve balances with
the FRB. The required average total reserve for NBT Bank for
the 14-day maintenance period ending December 21, 2016
was $56.2 million.
94
NBT BANCORP 2016 FORM 10-K
(20) Derivative Instruments and Hedging Activities
The Company is exposed to certain risks arising from both
its business operations and economic conditions. The Company
principally manages its exposures to a wide variety of business
and operational risks through management of its core business
activities. The Company manages economic risks, including
interest rate, primarily by managing the amount, sources, and
duration of its assets and liabilities, and through the use of
derivative instruments. Specifically, the Company enters into
derivative financial instruments to manage exposures that arise
from business activities that result in the receipt or payment
of future known and uncertain cash amounts, the value of
which are determined by interest rates. The Company’s derivative
financial instruments are used to manage differences in the
amount, timing, and duration of the Company’s known or
expected cash receipts and its known or expected cash pay-
ments principally related to certain fixed rate borrowings. The
Company also has interest rate derivatives that result from a
service provided to certain qualifying customers and, therefore,
are not used to manage interest rate risk in the Company’s
assets or liabilities. The Company manages a matched book
with respect to its derivative instruments in order to minimize
its net risk exposure resulting from such transactions.
Derivatives Not Designated
as Hedging Instruments
The Company enters into interest rate swaps to facilitate
customer transactions and meet their financing needs. These
swaps are considered derivatives, but are not designated in
hedging relationships. These instruments have interest rate
and credit risk associated with them. To mitigate the interest
rate risk, the Company enters into offsetting interest rate swaps
with counterparties. The counterparty swaps are also considered
derivatives and are also not designated in hedging relationships.
Interest rate swaps are recorded within other assets or other
liabilities on the consolidated balance sheet at their estimated
fair value. Changes to the fair value of assets and liabilities
arising from these derivatives are included, net, in other oper-
ating income in the consolidated statement of income.
The Company has two risk participation agreements with
financial institution counterparties for interest rate swaps related
to loans in which we are a participant. The risk participation
agreement provides credit protection to the financial institution
should the borrower fail to perform on its interest rate derivative
contract with the financial institution.
Derivatives Designated as Hedging Instruments
In 2016, the Company entered into interest rate swaps to
modify the interest rate characteristics of certain short-term
FHLB advances from variable rate to fixed rate in order to reduce
the impact of changes in future cash flows due to market
interest rate changes. These agreements are designated as cash
flow hedges. Fair values included in other assets and other lia-
bilities on the consolidated balance sheet applicable to these
agreements amounted to $2.9 million and $0.2 million respec-
tively at December 31, 2016. For the year ended December 31,
2016 the amount included in other comprehensive income
totaled $1.8 million net of tax.
The following table depicts the fair value adjustment
recorded related to the notional amount of derivatives out-
standing as well as the notional amount of risk participation
agreements as December 31:
(In thousands) 2016 2015
Derivatives not designated as hedging instruments
Fair value adjustment $ 309 $ 6,224
Notional amount
Interest rate derivatives 371,101 192,625
Risk participation agreements 11,421 —
Derivatives designated as hedging instruments
Fair value adjustment—interest rate derivatives 2,704 —
Notional amount—interest rate derivatives 250,000 —
NBT BANCORP 2016 FORM 10-K
95
The following table indicates the gain or loss recognized in income on derivatives for the years ended December 31:
(In thousands) 2016 2015 2014
Non-hedging interest rate derivatives
Increase in interest income $ 95 $ 33 $88
Increase in other income 3,480 684 59
Hedging interest rate derivatives
(Decrease) in interest expense (70) — —
(21) Fair Values of Financial Instruments
GAAP states that fair value is an exit price, representing the
amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants. Fair value measurements are not adjusted for
transaction costs. A fair value hierarchy exists within GAAP that
prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value
hierarchy are described below:
Level 1—Unadjusted quoted prices in active markets that
are accessible at the measurement date for identical, unrestricted
assets or liabilities;
Level 2—Quoted prices for similar assets or liabilities in
active markets, quoted prices in markets that are not active,
or inputs that are observable, either directly or indirectly, for
substantially the full term of the asset or liability;
Level 3—Prices or valuation techniques that require inputs
that are both significant to the fair value measurement an
unobservable (i.e., supported by little or no market activity).
A financial instrument’s level within the fair value hierarchy
is based on the lowest level of input that is significant to the
fair value measurement.
The types of instruments valued based on quoted market
prices in active markets includes most U.S. government and
agency securities, many other sovereign government obligations,
liquid mortgage products, active listed equities and most money
market securities. Such instruments are generally classified
within Level 1 or Level 2 of the fair value hierarchy. The Company
does not adjust the quoted prices for such instruments.
The types of instruments valued based on quoted prices
in markets that are not active, broker or dealer quotations, or
alternative pricing sources with reasonable levels of price
transparency include most investment-grade and high-yield
corporate bonds, less liquid mortgage products, less liquid
agency securities, less liquid listed equities, state, municipal
and provincial obligations and certain physical commodities.
Such instruments are generally classified within Level 2 of the
fair value hierarchy.
Level 3 is for positions that are not traded in active markets
or are subject to transfer restrictions, valuations are adjusted
to reflect illiquidity and/or non-transferability and such adjust-
ments are generally based on available market evidence. In
the absence of such evidence, management’s best estimate
will be used. Management’s best estimate consists of both
internal and external support on certain Level 3 investments.
Subsequent to inception, management only changes Level 3
inputs and assumptions when corroborated by evidence such
as transactions in similar instruments, completed or pending
third-party transactions in the underlying investment or com-
parable entities, subsequent rounds of financing, recapitaliza-
tions and other transactions across the capital structure, offerings
in the equity or debt markets and changes in financial ratios
or cash flows.
For the years ended December 31, 2016 and 2015, the Com-
pany has made no transfers of assets between Level 1 and
Level 2 or Level 3.
96
NBT BANCORP 2016 FORM 10-K
The following table sets forth the Company’s financial assets and liabilities measured on a recurring basis that were accounted
for at fair value as of December 31, 2016 and December 31, 2015. Assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurement:
(In thousands) Level 1 Level 2 Level 3 December 31, 2016
Assets
AFS securities:
Federal agency $ — $ 174,408 $ — $ 174,408
State & municipal — 46,726 — 46,726
Mortgage-backed — 529,844 — 529,844
Collateralized mortgage obligations — 566,573 — 566,573
Other securities 11,493 9,246 — 20,739
Total AFS securities $11,493 $1,326,797 $ — $1,338,290
Trading securities 9,259 — — 9,259
Interest rate swaps — 3,210 — 3,210
Total $20,752 $1,330,007 $ — $1,350,759
Liabilities
Interest rate swaps $ — $ 506 $ — $ 506
Total $ — $ 506 $ — $ 506
(In thousands) Level 1 Level 2 Level 3 December 31, 2015
Assets
AFS securities:
Federal agency $ — $ 311,272 $ — $ 311,272
State & municipal — 31,637 — 31,637
Mortgage-backed — 409,896 — 409,896
Collateralized mortgage obligations — 404,971 — 404,971
Other securities 7,526 9,242 — 16,768
Total AFS securities $ 7,526 $1,167,018 $ — $1,174,544
Trading securities 8,377 — — 8,377
Interest rate swaps — 6,224 — 6,224
Total $15,903 $1,173,242 $ — $1,189,145
Liabilities
Interest rate swaps $ — $ 6,224 $ — $ 6,224
Total $ — $ 6,224 $ — $ 6,224
Certain common equity securities are reported at fair value
utilizing Level 1 inputs (exchange quoted prices). The majority
of the other investment securities are reported at fair value
utilizing Level 2 inputs. The prices for these instruments are
obtained through an independent pricing service or dealer
market participants with whom the Company has historically
transacted both purchases and sales of investment securities.
Prices obtained from these sources include prices derived
from market quotations and matrix pricing. The fair value meas-
urements consider observable data that may include dealer
quotes, market spreads, cash flows, the U.S. Treasury yield curve,
live trading levels, trade execution data, market consensus
prepayment speeds, credit information, and the bond’s terms
and conditions, among other things. Management reviews
the methodologies used in pricing the securities by its third
party providers.
GAAP requires disclosure of assets and liabilities measured
and recorded at fair value on a non-recurring basis such as
goodwill, loans held for sale, OREO, collateral-dependent
impaired loans, mortgage servicing rights and held to maturity
securities.
NBT BANCORP 2016 FORM 10-K
97
The Company had collateral dependent impaired loans with
a carrying value of $7.0 million, which had specific reserves
included in the allowance for loan losses of $1.5 million at
December 31, 2016. The Company uses the fair value of under-
lying collateral to estimate the specific reserves for collateral
dependent impaired loans. The fair value of underlying collateral
is generally determined through independent appraisals, which
generally include various Level 3 inputs which are not identifi-
able. The appraisals may be adjusted by management for qual-
itative factors such as economic conditions and estimated
liquidation expenses ranging from 10% to 35%. Based on the
valuation techniques used, the fair value measurements for
collateral dependent impaired loans are classified as Level 3.
The following table sets forth information with regard to
estimated fair values of financial instruments at December 31,
2016 and December 31, 2015. This table excludes financial
instruments for which the carrying amount approximates fair
value. Financial instruments for which the fair value approximates
carrying value include cash and cash equivalents, securities
available for sale, trading securities, accrued interest receivable,
non-maturity deposits, short-term borrowings, accrued interest
payable, and interest rate swaps.
December 31, 2016 December 31, 2015
Fair Value Carrying Estimated Carrying Estimated
(In thousands) Hierarchy Amount Fair Value Amount Fair Value
Financial assets
HTM securities 2 $ 527,948 $ 525,050 $ 471,031 $ 473,140
Net loans 3 6,132,857 6,273,233 5,820,115 5,958,427
Financial liabilities
Time deposits 2 $ 872,411 $ 868,153 $ 908,827 $ 903,501
Long-term debt 2 104,087 104,113 130,447 131,268
Junior subordinated debt 2 101,196 102,262 101,196 97,346
Fair value estimates are made at a specific point in time,
based on relevant market information and information about
the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at
one time the Company’s entire holdings of a particular financial
instrument. Because no market exists for a significant portion
of the Company’s financial instruments, fair value estimates
are based on judgments regarding future expected loss expe-
rience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates
are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates are based on existing on and off-balance
sheet financial instruments without attempting to estimate
the value of anticipated future business and the value of assets
and liabilities that are not considered financial instruments.
For example, the Company has a substantial trust and invest-
ment management operation that contributes net fee income
annually. The trust and investment management operation is
not considered a financial instrument, and its value has not
been incorporated into the fair value estimates. Other significant
assets and liabilities include the benefits resulting from the
low-cost funding of deposit liabilities as compared to the cost
of borrowing funds in the market, and premises and equipment.
In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in the
estimate of fair value.
Fair values for securities are based on quoted market prices
or dealer quotes, where available. Where quoted market prices
are not available, fair values are based on quoted market
prices of comparable instruments. When necessary, the Com-
pany utilizes matrix pricing from a third party pricing vendor
to determine fair value pricing. Matrix prices are based on
quoted prices for securities with similar coupons, ratings, and
maturities, rather than on specific bids and offers for the des-
ignated security.
GAAP gives entities the option to measure eligible financial
assets, financial liabilities and Company commitments at fair
value (i.e., the fair value option), on an instrument-by-instrument
basis, that are otherwise not permitted to be accounted for at
fair value under other accounting standards. The election to
use the fair value option is available when an entity first rec-
ognizes a financial asset or financial liability or upon entering
into a Company commitment. Subsequent changes in fair value
must be recorded in earnings. As of December 31, 2016 and
2015, the Company did not elect the fair value option for any
eligible items.
98
NBT BANCORP 2016 FORM 10-K
Securities Held to Maturity
Long-Term Debt
The fair value of the Company’s investment securities held
to maturity is primarily measured using information from a
third party pricing service. The fair value measurements consider
observable data that may include dealer quotes, market spreads,
cash flows, the U.S. Treasury yield curve, live trading levels,
trade execution data, market consensus prepayment speeds,
credit information and the bond’s terms and conditions, among
other things.
Net Loans
The fair value of the Company’s loans was estimated by dis-
counting the expected future cash flows using the current
interest rates at which similar loans would be made for the
same remaining maturities. Loans were first segregated by
type, and then further segmented into fixed and variable rate
and loan quality categories. Expected future cash flows were
projected based on contractual cash flows, adjusted for esti-
mated prepayments.
Time Deposits
The fair value of time deposits was estimated using a dis-
counted cash flow approach that applies prevailing market
interest rates for similar maturity instruments. The fair values
of the Company’s time deposit liabilities do not take into con-
sideration the value of the Company’s long-term relationships
with depositors, which may have significant value.
The fair value of long-term debt was estimated using a dis-
counted cash flow approach that applies prevailing market
interest rates for similar maturity instruments.
Junior Subordinated Debt
The fair value of trust preferred debentures has been esti-
mated using a discounted cash flow analysis.
Interest Rate Swaps
The Company enters into interest rate swaps to facilitate
customer transactions and meet their financing needs. These
swaps are considered derivatives, but are not designated in
hedging relationships. These instruments have interest rate
and credit risk associated with them. To mitigate the interest
rate risk, the Company enters into offsetting interest rate swaps
with counterparties. The counterparty swaps are also considered
derivatives and are also not designated in hedging relationships.
Interest rate swaps are recorded within other assets or other
liabilities on the consolidated balance sheet at their estimated
fair value. Changes to the fair value of assets and liabilities
arising from these derivatives are included, net, in other oper-
ating income in the consolidated statement of income.
In 2016, the Company entered into interest rate swaps to
modify the interest rate characteristics of certain short-term
FHLB advances from variable rate to fixed rate in order to reduce
the impact of changes in future cash flows due to market
interest rate changes. These agreements are designated as cash
flow hedges.
(22) Sale of Equity Investment
On April 17, 2014, NBT Capital Corp., a wholly-owned sub-
sidiary of NBT, sold to LendingClub Corporation (“LendingClub”),
its 20% ownership interest in Springstone Financial, LLC
(“Springstone”), which NBT originally acquired in exchange
for a $3.0 million investment, as part of LendingClub’s acqui-
sition of all of the outstanding equity in Springstone. In total,
LendingClub paid the group of selling equity holders a purchase
price equal to $140.0 million in cash and preferred stock. As a
result of this sale, the Company recognized a gain of $19.4
million in 2014 and a gain of $4.2 million in 2015. There is $0.9
million in proceeds being held in escrow for indemnification
provisions of the sale contract which will be recognized into
income when the conditions of the contract have been deemed
to be satisfied.
NBT BANCORP 2016 FORM 10-K
99
(23) Parent Company Financial Information
Condensed Balance Sheets
As of December 31,
(In thousands) 2016 2015
Assets
Cash and cash equivalents $ 4,152 $ 28,682
Securities available for sale, at estimated fair value 15,273 12,711
Trading securities 8,968 8,042
Investment in subsidiaries, on equity basis 1,006,444 941,731
Other assets 44,178 65,133
Total assets $1,079,015 $1,056,299
Liabilities and Stockholders’ Equity
Total liabilities $ 165,699 $ 174,295
Stockholders’ equity 913,316 882,004
Total liabilities and stockholders’ equity $1,079,015 $1,056,299
Condensed Income Statements
Years ended December 31,
(In thousands) 2016 2015 2014
Dividends from subsidiaries $ 10,200 $ 78,200 $ 35,400
Management fee from subsidiaries 95,244 92,629 87,116
Securities gains 652 3,034 49
Interest, dividend and other income 976 693 800
Total revenue 107,072 174,556 123,365
Operating expense 97,977 94,332 89,834
Income before income tax benefit and equity in undistributed income
of subsidiaries 9,095 80,224 33,531
Income tax benefit (expense) 321 (515) 631
Dividends in excess of income (equity in undistributed income) of subsidiaries 68,993 (3,284) 40,912
Net income $ 78,409 $ 76,425 $ 75,074
100
NBT BANCORP 2016 FORM 10-K
Condensed Statements of Cash Flow
Years ended December 31,
(In thousands) 2016 2015 2014
Operating activities
Net income $ 78,409 $ 76,425 $ 75,074
Adjustments to reconcile net income to net cash provided
by operating activities
Stock-based compensation 4,378 4,086 3,521
(Losses) gains on sales of available-for-sale securities (652) (3,034) 49
Equity in undistributed income of subsidiaries (79,193) (74,916) (75,824)
Cash dividend from subsidiaries 10,200 78,200 35,400
Net change in other liabilities (8,596) 6,770 18,594
Net change in other assets 22,372 (6,944) (25,151)
Net cash provided by operating activities 26,918 80,587 31,663
Investing activities
Purchases of available-for-sale securities (580) (3,083) (597)
Sales and maturities of available-for-sale securities 1,783 5,297 140
Purchases of premises and equipment (278) (408) (640)
Net cash provided by (used in) investing activities 925 1,806 (1,097)
Financing activities
Proceeds from the issuance of shares to employee benefit plans
and other stock plans 2,645 7,692 5,943
Purchases of treasury shares (17,193) (26,797) (72)
Cash dividends and payments for fractional shares (38,880) (38,149) (36,905)
Net tax benefit (expense) from stock-based compensation 1,055 (43) 313
Net cash used in financing activities (52,373) (57,297) (30,721)
Net (decrease) increase in cash and cash equivalents (24,530) 25,096 (155)
Cash and cash equivalents at beginning of year 28,682 3,586 3,741
Cash and cash equivalents at end of year $ 4,152 $ 28,682 $ 3,586
A statement of changes in stockholders’ equity has not been presented since it is the same as the consolidated statement of
changes in stockholders’ equity previously presented.
NBT BANCORP 2016 FORM 10-K
101
(24) Recent Accounting Pronouncements
In February 2017, the FASB issued Accounting Standards
Update (“ASU”) No. 2017-05, Other Income—Gains and Losses
from the Derecognition of Nonfinancial Assets (Subtopic 610-
20). ASU 2017-05 will clarify the scope of Subtopic 610-20
and add guidance for partial sales of nonfinancial assets. The
amendments define the term in substance nonfinancial assets,
and clarify that a nonfinancial asset within the scope may
include nonfinancial assets transferred within a legal entity
to a counterparty, in part, as a financial asset promised to a
counterparty in a contract. Additionally, the amendments in
ASU clarify that an entity should identify each distinct nonfi-
nancial asset or in substance nonfinancial assets and allocate
consideration to each distinct asset. The amendments should
be applied either retrospectively to each period presented
or with a modified retrospective approach. ASU 2017-05 is
effective for the Company on January 1, 2018 and the Company
is required to apply the amendment at the same time that it
applies the amendments in 2014-09. Early adoption is per-
mitted but only as of annual reporting period beginning after
December 15, 2016. Management is evaluating the effect that
this guidance will have on the consolidated financial state-
ments and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangi-
bles—Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. ASU 2017-04 will amend and simplify the
subsequent measurement of goodwill, the amendments elim-
inate Step 2 from the goodwill impairment test. The amend-
ments also eliminate the requirements for any reporting unit
with a zero or negative carrying amount to perform Step 2 of
the goodwill impairment test. An entity still has the option to
perform the qualitative assessment for a reporting unit to deter-
mine if the qualitative impairment test is necessary. The amend-
ments should be applied on a prospective basis. The nature of
and reason for the change in accounting principle should be
disclosed upon transition. ASU 2017-04 is effective for the Com-
pany on January 1, 2020. Early adoption is permitted on testing
dates after January 1, 2017. Management is evaluating the
effect that this guidance will have on the consolidated financial
statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business
Combinations (Topic 805): Clarifying the Definition of a Business.
ASU 2017-01 provides a more robust framework to use in deter-
mining when a set of assets and activities (“set”) is a business
and to address stakeholder feedback that the definition of a
business in current GAAP is applied too broadly. The primary
amendments in the ASU provide a screen to exclude transactions
where substantially all of the fair value of the transferred set is
concentrated in a single asset, or group of similar assets, from
being evaluated as a business. ASU 2017-01 is effective for the
Company on January 1, 2018 using the prospective method.
Early adoption is permitted. Management is evaluating the
effect that this guidance will have on the consolidated financial
statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, State-
ment of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18
address diversity in practice from entities classifying and pre-
senting transfers between cash and restricted cash as operating,
investing, or financing activities, or as a combination of those
activities in the Statement of Cash Flows. The ASU requires
entities to show the changes in the total of cash, cash equiva-
lents, restricted cash, and restricted cash equivalents in the
Statement of Cash Flows. As a result, transfers between such
categories will no longer be presented in the Statement of
Cash Flows. ASU 2016-18 is effective for the Company on Jan-
uary 1, 2018 using the retrospective method. Early adoption
is permitted provided that all amendments are adopted in the
same period. Management is evaluating the effect that this
guidance will have on the consolidated financial statements
and related disclosures.
In August 2016, the FASB issued Accounting Standards
Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 addresses diversity in practice in how certain cash
receipts and cash payments are presented and classified in the
statement of cash flows. This standard addresses the following
eight specific cash flow issues: Debt prepayment or debt extin-
guishment costs; settlement of zero-coupon debt instruments
or other debt instruments with coupon interest rates that are
insignificant in relation to the effective interest rate of the bor-
rowing; contingent consideration payments made after a busi-
ness combination; proceeds from the settlement of insurance
claims; proceeds from the settlement of corporate-owned life
insurance policies; distributions received from equity method
investees; beneficial interests in securitization transactions; and
separately identifiable cash flows and application of the pre-
dominance principle. ASU 2016-15 is effective for the Company
on January 1, 2018. Early adoption is permitted, including adop-
tion in an interim period. Management is evaluating the effect
that this guidance will have on the consolidated financial state-
ments and related disclosures.
102
NBT BANCORP 2016 FORM 10-K
In June 2016, the FASB issued Accounting Standards Update
No. 2016-13, Financial Instruments—Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. ASU 2016-
13 requires the measurement of all expected credit losses for
financial assets held at the reporting date based on historical
experience, current conditions and reasonable and supportable
forecasts. Financial institutions and other organizations will
now use forward-looking information to better inform their
credit loss estimates. Many of the loss estimation techniques
applied today will still be permitted, although the inputs to
those techniques will change to reflect the full amount of
expected credit losses. In addition, ASU 2016-16 amends the
accounting for credit losses on available for sale debt securities
and purchased financial assets with credit deterioration. ASU
2016-13 is effective for the Company on January 1, 2020. Early
adoption is permitted for all organizations for fiscal years and
interim periods within those fiscal years, beginning after Decem-
ber 15, 2019. Management is evaluating the effect that this
guidance will have on the consolidated financial statements
and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compen-
sation—Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting. ASU 2016-09 sim-
plifies the accounting for stock-based payment transactions,
including the income tax consequences, classification of awards
as either equity or liabilities and classification on the statement
of cash flows. ASU 2016-09 is effective for the Company on
January 1, 2017. Early adoption is permitted in any interim or
annual period. Management is evaluating the effect that this
guidance will have on the consolidated financial statements
and related disclosures. Effective January 1, 2017, the Company
adopted ASU 2016-09. As a result of the adoption of this new
guidance, the Company made an accounting policy election
to account for forfeitures when they occur. The guidance was
required to be applied with a modified retrospective approach,
and, accordingly, the Company made a cumulative effect adjust-
ment recorded to opening retained earnings as of January 1,
2017 which was not material to the Company’s consolidated
financial statements.
In March 2016, the FASB issued ASU No. 2016-07, Invest-
ments—Equity Method and Joint Ventures (Topic 323): Simplifying
the Transition to the Equity Method of Accounting. ASU 2016-07
eliminates the requirement for an investor to adjust an equity
method investment, results of operations and retained earn-
ings retroactively on a step-by-step basis as if the equity
method had been in effect during all previous periods that
the investment had been held as a result of an increase in
the level of ownership interest or degree of influence. Addi-
tionally, an entity that has an available for sale equity security
that becomes qualified for the equity method of accounting
must recognize through earnings the unrealized holding gain
or loss in accumulated other comprehensive income at the
date the investment becomes qualified for use of the equity
method. ASU 2016-07 is effective for the Company on January
1, 2017. Early adoption is permitted in any interim or annual
period. Management does not believe the guidance will have
a material impact on the consolidated financial statements
and related disclosures.
In March 2016, the FASB issued ASU No. 2016-06, Derivatives
and Hedging (Topic 815): Contingent Put and Call Options in Debt
Instruments. ASU 2016-06 clarifies the requirements for assessing
whether contingent call (put) options that can accelerate the
payment of principal on debt instruments are clearly and closely
related to their debt hosts. An entity performing the assessment
under the amendments in this Update is required to assess the
embedded call (put) options solely in accordance with the four-
step decision sequence. The amendments in this ASU clarify
what steps are required when assessing whether the economic
characteristics and risks of call (put) options are clearly and
closely related to the economic characteristics and risks of their
debt hosts, which is one of the criteria for bifurcating an embed-
ded derivative. Consequently, when a call (put) option is con-
tingently exercisable, an entity does not have to assess whether
the event that triggers the ability to exercise a call (put) option
is related to interest rates or credit risks. The amendments are
an improvement to GAAP because they eliminate diversity in
practice in assessing embedded contingent call (put) options
in debt instruments. ASU 2016-07 is effective for the Company
on January 1, 2017. Early adoption is permitted in any interim
or annual period. Management does not believe this guidance
will have a material impact on the consolidated financial state-
ments and related disclosures.
In March 2016, the FASB issued ASU No. 2016-05, Derivatives
and Hedging (Topic 815): Effect of Derivative Contract Novations
on Existing Hedge Accounting Relationships. ASU 2016-05 clarifies
that a change in the counterparty to a derivative instrument
that has been designated as a hedging instrument does not
in and of itself, require de-designation of that hedging rela-
tionship provided that all other hedge accounting criteria con-
tinue to be met. ASU 2016-05 is effective for the Company on
January 1, 2017. Early adoption is permitted in any interim or
annual period. Management does not believe this guidance
will have a material impact on the consolidated financial state-
ments and related disclosures.
NBT BANCORP 2016 FORM 10-K
103
In February 2016, the FASB issued ASU No. 2016-02, Leases
(Topic 842). ASU 2016-02 requires lessees to recognize right of
use assets and lease liabilities on the balance sheet for all leases
with terms longer than 12 months. For leases with a term of 12
months or less, a lessee is permitted to make an accounting
policy election by class of underlying asset not to recognize a
right of use asset and lease liability. Additionally, when measuring
assets and liabilities arising from a lease, optional payments
should be included only if the lessee is reasonable certain to
exercise an option to extend the lease, exercise a purchase
option or not exercise an option to terminate the lease. ASU
2016-07 is effective for the Company on January 1, 2019. Early
adoption is permitted in any interim or annual period. Manage-
ment is evaluating the effect that this guidance will have on
the consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU No. 2016-01, Financial
Instruments—Overall (Subtopic 825-10)—Recognition and
Measurement of Financial Assets and Financial Liabilities. ASU
2016-01 addresses certain aspects of recognition, measure-
ment, presentation and disclosure of financial instruments
and requires entities to measure equity investments that do
not result in consolidation and are not accounted for under
the equity method at fair value. Any changes in fair value will
be recognized in net income unless the investments qualify
for a new practicability exception. This ASU also requires entities
to recognize changes in instrument-specific credit risk related
to financial liabilities measured under the fair value option in
other comprehensive income. No changes were made to the
guidance for classifying and measuring investments in debt
securities and loans. ASU 2016-01 is effective for the Company
on January 1, 2018. Early adoption is permitted in any interim
or annual period. Management is evaluating the effect that
this guidance will have on the consolidated financial statements
and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09—Revenue
from Contracts with Customers (Topic 606). ASU 2014-09 is a
comprehensive new revenue recognition standard that will
supersede nearly all existing revenue recognition guidance
under GAAP and is based on the principle that revenue is rec-
ognized to depict the transfer of goods or services to customers
in an amount that reflects consideration to which the entity
expects to be entitled in exchange for those goods and services.
The ASU also requires additional disclosure about the nature,
amount, timing and uncertainty of revenue and cash flows
arising from customer contracts, including significant judgments
and changes in judgments and assets recognized from costs
incurred to obtain or fulfill a contract. For financial reporting
purposes, the standard allows for either full retrospective adop-
tion, meaning the standard is applied to all of the periods pre-
sented, or modified retrospective adoption, meaning the
standard is applied only to the most current period presented
in the financial statements with the cumulative effect of initially
applying the standard recognized at the date of initial appli-
cation. ASU 2014-09 was initially effective for the Company on
January 1, 2017; however, in August 2015, the FASB issued ASU
No. 2015-14—Revenue from Contracts with Customers—Deferral
of the Effective Date, which deferred the effective date to January
1, 2018. Early adoption is not permitted. In addition, the FASB
has begun to issue targeted updates to clarify specific imple-
mentation issues of ASU 2014-09. These updates include ASU
No. 2016-08—Principal versus Agent Considerations (Reporting
Revenue Gross versus Net), ASU No. 2016-10—Identifying Per-
formance Obligations and Licensing, ASU No. 2016-12—Narrow-
Scope Improvements and Practical Expedients, and ASU No.
2016-20—Technical Corrections and Improvements to Top 606—
Revenue from Contract with Customers. Management is evaluating
the effect that this guidance will have on the consolidated
financial statements and related disclosures.
104
NBT BANCORP 2016 FORM 10-K
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report
on Form 10-K, an evaluation was carried out by the Company’s
management, with the participation of its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the Company’s
disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures were
effective as of the end of the period covered by this report. No
changes were made to the Company’s internal control over
financial reporting (as defined in Rule 13a-15(f) under the Secu-
rities Exchange Act of 1934) during the last fiscal quarter that
materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
Management Report on Internal Controls
Over Financial Reporting
The management of NBT Bancorp, Inc. (the “Company”) is
responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control
over financial reporting is a process designed under the super-
vision of the Company’s Chief Executive Officer and Chief Finan-
cial Officer to provide reasonable assurance regarding the
ITEM 9B. OTHER INFORMATION
None.
reliability of financial reporting and the preparation of the Com-
pany’s consolidated financial statements for external purposes
in accordance with generally accepted accounting principles.
As of December 31, 2016, management assessed the effec-
tiveness of the Company’s internal control over financial report-
ing based on the criteria for effective internal control over
financial reporting established in “Internal Control—Integrated
Framework (2013),” issued by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission. Based on
the assessment, management determined that the Company’s
internal control over financial reporting as of December 31,
2016 was effective at the reasonable assurance level based on
those criteria.
KPMG LLP, the independent registered public accounting
firm that audited the consolidated financial statements of the
Company included in this Annual Report on Form 10-K, has
issued a report on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2016. The
report, which expresses an unqualified opinion on the effec-
tiveness of the Company’s internal control over financial report-
ing as of December 31, 2016, is included in this Item under the
heading “Report of Independent Registered Public Accounting
Firm” on the following page.
NBT BANCORP 2016 FORM 10-K
105
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
NBT Bancorp Inc.:
We have audited NBT Bancorp, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December
31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in
the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016, based on the criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of NBT Bancorp Inc. and subsidiaries as of December 31, 2016 and 2015 and the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the years
in the three-year period ended December 31, 2016, and our report dated March 1, 2017 expressed an unqualified opinion on
those financial statements.
/s/ KPMG LLP
Albany, New York
March 1, 2017
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NBT BANCORP 2016 FORM 10-K
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to the Company’s definitive Proxy Statement for its
Annual Meeting of shareholders to be held on May 23, 2017 (the “Proxy Statement”), which will be filed with the SEC within 120
days after the Company’s 2016 fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the Proxy Statement which will be filed with the
SEC within 120 days after the Company’s 2016 fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table provides information with respect to shares of common stock that may be issued under the Company’s
existing equity compensation plans:
Number of Securities
A. Number of Remaining Available for
Securities to be Issued B. Weighted-Average Future Issuance Under
Upon Exercise of Exercise Price of Equity Compensation Plans
Outstanding Options, Outstanding Options, (Excluding Securities
Plan Category Warrants and Rights Warrants and Rights Reflected in Column A)
Equity compensation plans approved
by stockholders 230,174 $24.35 2,994,517
Equity compensation plans not approved
by stockholders None None None
The other information required by this item is incorporated herein by reference to the Proxy Statement which will be filed
with the SEC within 120 days of the Company’s 2016 fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the Proxy Statement which will be filed with the
SEC within 120 days of the Company’s 2016 fiscal year end.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the Proxy Statement which will be filed with the
SEC within 120 days of the Company’s 2016 fiscal year end.
NBT BANCORP 2016 FORM 10-K
107
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following Consolidated Financial Statements are included in Part II, Item 8 hereof:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2016 and 2015.
Consolidated Statements of Income for each of the three years ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Changes in Stockholders’ Equity for each of the three years ended December 31, 2016,
2015 and 2014.
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2016, 2015 and 2014.
Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2016, 2015
and 2014.
Notes to the Consolidated Financial Statements.
(a)(2) There are no financial statement schedules that are required to be filed as part of this form since they are not applicable
or the information is included in the consolidated financial statements.
(a)(3) See below for all exhibits filed herewith and the Exhibit Index.
3.1 Restated Certificate of Incorporation of NBT Bancorp Inc. as amended through July 1, 2015 (filed as Exhibit 3.1 to
Registrant’s Form 10-Q, filed on August 10, 2015, and incorporated herein by reference).
3.2 Amended and Restated Bylaws of NBT Bancorp Inc. effective January 23, 2017 (filed as Exhibit 3.1 to Registrant’s Form
8-K, filed on January 25, 2017, and incorporated herein by reference).
3.3 Certificate of Designation of the Series A Junior Participating Preferred Stock (filed as Exhibit A to Exhibit 4.1 of the
Registrant’s Form 8-K, filed on November 18, 2004, and incorporated herein by reference).
4.1 Specimen common stock certificate for NBT’s Bancorp Inc. common stock (filed as Exhibit 4.1 to the Registrant’s Amendment
No. 1 to Registration Statement on Form S-4, filed on December 27, 2005, and incorporated herein by reference).
10.1 NBT Bancorp Inc. 1993 Stock Option Plan (filed as Exhibit 99.1 to Registrant’s Form S-8 Registration Statement, file
number 333-71830, filed on October 18, 2001, and incorporated by reference herein).*
10.2 NBT Bancorp Inc. Non-Employee Director, Divisional Director and Subsidiary Director Stock Option Plan (filed as Exhibit
99.1 to Registrant’s Form S-8 Registration Statement, file number 333-73038, filed on November 9, 2001, and incorporated
by reference herein).*
10.3 NBT Bancorp Inc. Non-employee Directors Restricted and Deferred Stock Plan (filed as Exhibit 10.5 to Registrant’s Form
10-K for the year ended December 31, 2008, filed on March 2, 2009, and incorporated herein by reference).*
10.4 NBT Bancorp Inc. Performance Share Plan (filed as Exhibit 10.6 to Registrant’s Form 10-K for the year ended December
31, 2008, filed on March 2, 2009, and incorporated herein by reference).*
10.5 NBT Bancorp Inc. 2017 Executive Incentive Compensation Plan.*
10.6 Supplemental Executive Retirement Agreement between NBT Bancorp Inc. and Martin A. Dietrich as amended and
restated January 20, 2010 (filed as Exhibit 10.14 to Registrant’s Form 10-K for the year ended December 31, 2009, filed
on March 1, 2010, and incorporated herein by reference).*
10.7 Amended and Restated Employment Agreement, dated December 19, 2016, by and between NBT Bancorp Inc. and
Michael J. Chewens (filed as Exhibit 10.3 to Registrant’s Form 8-K, filed on December 20, 2016, and incorporated herein
by reference).*
108
NBT BANCORP 2016 FORM 10-K
10.8 Form of Amended and Restated NBT Bancorp Inc. Supplemental Retirement Agreement, dated as of November 5,
2009, between NBT Bancorp Inc. and Messrs. Chewens and Levy (filed as Exhibit 10.7 to Registrant’s Form 10-Q for the
quarterly period ended September 30, 2009, filed on November 9, 2009, and incorporated herein by reference).*
10.9 Amendment to the Supplemental Executive Retirement Agreement, dated March 10, 2015, by and between NBT
Bancorp Inc. and Michael J. Chewens (filed as Exhibit 10.6 to Registrant’s Form 8-K, filed on March 16, 2015, and
incorporated herein by reference).*
10.10 Amendment to the Supplemental Executive Retirement Agreement, dated March 10, 2015, by and between NBT
Bancorp Inc. and Jeffrey M. Levy (filed as Exhibit 10.8 to Registrant’s Form 8-K, filed on March 16, 2015, and incorporated
herein by reference).*
10.11 Employment Agreement, dated March 10, 2015, by and between NBT Bancorp Inc. and Jeffrey M. Levy (filed as Exhibit
10.4 to Registrant’s Form 8-K, filed on March 16, 2015, and incorporated herein by reference).*
10.12 Split-Dollar Agreement between NBT Bancorp Inc., NBT Bank, National Association and Martin A. Dietrich made
November 10, 2008 (filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarterly period ended September 30, 2008,
filed on November 10, 2008, and incorporated herein by reference).*
10.13 First Amendment dated November 5, 2009 to Split-Dollar Agreement between NBT Bancorp Inc., NBT Bank, National
Association and Martin A. Dietrich made November 10, 2008 (filed as Exhibit 10.6 to Registrant’s Form 10-Q for the
quarterly period ended September 30, 2009, filed on November 9, 2009, and incorporated herein by reference).*
10.14 Second Amendment dated July 28, 2014 to Split-Dollar Agreement between NBT Bancorp, Inc., NBT Bank, National
Association, and Martin A. Dietrich made November 10, 2008 (filed as Exhibit 10.1 to Registrant’s Form 8-K, filed on
August 1, 2014, and incorporated herein by reference).*
10.15 NBT Bancorp Inc. 2008 Omnibus Incentive Plan (filed as Appendix A of Registrant’s Definitive Proxy Statement on Form
14A, filed on March 31, 2008, and incorporated herein by reference).*
10.16 Long-Term Incentive Compensation Plan for Named Executive Officers (filed as Exhibit 10.24 to Registrant’s Form 10-K
for the year ended December 31, 2011, filed on February 29, 2012, and incorporated herein by reference).*
10.17 Amended and Restated Employment Agreement, dated December 19, 2016, by and between NBT Bancorp Inc. and
Timothy L. Brenner (filed as Exhibit 10.4 to Registrant’s Form 8-K, filed on December 20, 2016, and incorporated herein
by reference).*
10.18 Amended and Restated Supplemental Retirement Agreement and First Amendment to the Supplemental Retirement
Agreement between Alliance Financial Corporation, Alliance Bank, N.A. and Jack H. Webb (filed as Exhibit 10.29 to
Registrant’s Form 10-K for the year ended December 31, 2013, filed on March 3, 2014, and incorporated herein by
reference).*
10.19 Employment Agreement, dated December 19, 2016, by and between NBT Bancorp Inc. and John H. Watt, Jr. (filed as
Exhibit 10.1 to Registrant’s Form 8-K, filed on December 20, 2016, and incorporated herein by reference).*
10.20 Supplemental Executive Retirement Agreement, dated December 19, 2016 by and between NBT Bancorp Inc. and
John H. Watt, Jr. (filed as Exhibit 10.2 to Registrant’s Form 8-K, filed on December 20, 2016, and incorporated herein
by reference).*
10.21 Employment Agreement, dated December 19, 2016, by and between NBT Bancorp Inc. and F. Sheldon Prentice.*
21 A list of the subsidiaries of the Registrant.
23 Consent of KPMG LLP.
*Management contract or compensatory plan or arrangement
NBT BANCORP 2016 FORM 10-K
109
31.1 Certification by the Chief Executive Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange
Act of 1934.
31.2 Certification by the Chief Financial Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange Act
of 1934.
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
(b) Exhibits to this Form 10-K are attached or incorporated herein by reference as noted above.
(c) Not applicable.
ITEM 16. FORM 10-K SUMMARY
None.
110
NBT BANCORP 2016 FORM 10-K
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, NBT Bancorp Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
NBT BANCORP INC. (Registrant)
March 1, 2017
/s/ John H. Watt Jr.
John H. Watt Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Martin A. Dietrich
Martin A. Dietrich
Chairman and Director
Date: March 1, 2017
/s/ John H. Watt Jr.
John H. Watt Jr.
NBT Bancorp Inc. President, CEO, and Director
(Principal Executive Officer)
Date: March 1, 2017
/s/ Michael J. Chewens
Michael J. Chewens
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Date: March 1, 2017
/s/ Patricia T. Civil
Patricia T. Civil, Director
Date: March 1, 2017
/s/ Timothy E. Delaney
Timothy E. Delaney, Director
Date: March 1, 2017
/s/ James H. Douglas
James H. Douglas, Director
Date: March 1, 2017
/s/ Andrew S. Kowalczyk III
Andrew S. Kowalczyk III, Director
Date: March 1, 2017
/s/ John C. Mitchell
John C. Mitchell, Director
Date: March 1, 2017
/s/ Michael M. Murphy
Michael M. Murphy, Director
Date: March 1, 2017
/s/ V. Daniel Robinson II
V. Daniel Robinson II, Director
Date: March 1, 2017
/s/ Matthew J. Salanger
Matthew J. Salanger, Director
Date: March 1, 2017
/s/ Joseph A. Santangelo
Joseph A. Santangelo, Director
Date: March 1, 2017
/s/ Lowell A. Seifter
Lowell A. Seifter, Director
Date: March 1, 2017
/s/ Robert A. Wadsworth
Robert A. Wadsworth, Director
Date: March 1, 2017
/s/ Jack H. Webb
Jack H. Webb, Director
Date: March 1, 2017
NBT BANCORP 2016 FORM 10-K
111
www.nbtbancorp.com
52 South Broad Street | Norwich, N.Y. 13815 | www.nbtbancorp.com | 800.NBT.BANK
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