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, 2013
COMMISSION FILE NUMBER: 0-14703

NBT BANCORP INC.
(Exact name of registrant as specified in its charter)

Delaware
 
16-1268674
(State or other jurisdiction of incorporation or organization)
 
(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:
 
Name of each exchange on which registered:
Common Stock, par value $0.01 per share
 
The NASDAQ Stock Market LLC
Stock Purchase Rights Pursuant to Stockholders Rights Plan
 
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 o
 
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 o   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  o
 
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 o
 
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.  o
 
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 o
Non-accelerated filer o Smaller reporting company o
          
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) . o Yes   x No
 
Based on the closing price of the registrant’s common stock as of June 30, 2013, the aggregate market value of the voting stock, common stock, par value, $0.01 per share, held by non-affiliates of the registrant is $887,440,734.
 
The number of shares of common stock outstanding as of February 14, 2014, was 43,867,910.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions  of the registrant’s definitive Proxy Statement for its Annual Meeting  of Stockholders to be held on May 6, 2014 are incorporated by reference into  Part  III,  Items  10,  11,  12,  13  and  14  of  this  Form  10-K.
2
NBT BANCORP INC.
FORM 10-K – Year Ended December 31, 2013

TABLE OF CONTENTS

PART I
 
 
 
 
 
ITEM 1
5
 
 
 
ITEM 1A
18
 
 
 
ITEM 1B
26
 
 
 
ITEM 2
27
 
 
 
ITEM 3
28
 
 
 
ITEM 4
28
 
 
 
PART II
 
 
 
 
 
ITEM 5
28
 
 
 
ITEM 6
31
 
 
 
ITEM 7
33
 
 
 
ITEM 7A
57
 
 
 
ITEM  8
59
 
59
 
60
 
61
 
62
 
63
 
64
 
66
 
 
 
ITEM 9
125
3
ITEM 9A
125
 
 
 
ITEM 9B
127
 
 
 
PART III
 
 
 
 
 
ITEM 10
127
 
 
 
ITEM 11
127
 
 
 
ITEM 12
127
 
 
 
ITEM 13
127
 
 
 
ITEM 14
128
 
 
 
PART IV
 
 
 
 
 
ITEM 15
128
 
 
 
131

4
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, 2013 had assets of $7.7 billion and stockholders’ equity of $816.6 million.  Return on average assets and return on average equity were 0.85% and 8.09%, respectively, for the year ending December 31, 2013.  The Company had net income of $61.7 million or $1.46 per diluted share for 2013 and the fully taxable equivalent (“FTE”) net interest margin was 3.66% for the same year.
 
The principal assets of the Registrant consist of all of the outstanding shares of common stock of its subsidiaries, including:  NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”), NBT Holdings, Inc. (“NBT Holdings”), Hathaway Agency, Inc., and CNBF Capital Trust I, NBT Statutory Trust I and NBT Statutory Trust II (collectively, the “Trusts”).  The Company’s principal sources of revenue are the management 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 to customers in its market area, which includes central and upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts and the greater Burlington, Vermont area.  The Company has been, and intends to continue to be, a community-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, amortization, loan collection and other real estate owned expenses, advertising, FDIC expenses, and other expenses.
 
Substantially all of the Company’s business activities are with customers located in the United States.  Percentage of revenue and loan composition by state is summarized below:

 
 
Interest and Fee Income
   
Noninterest Income
   
Total Revenue
 
New York
   
58
%
   
25
%
   
83
%
Pennsylvania
   
7
%
   
3
%
   
10
%
New Hampshire
   
3
%
   
0
%
   
3
%
Vermont
   
3
%
   
0
%
   
3
%
Massachusetts
   
1
%
   
0
%
   
1
%
 
   
72
%
   
28
%
   
100
%

 
 
Commercial
   
Consumer
   
Residential Real Estate
   
Total Loan Portfolio
 
New York
   
33
%
   
29
%
   
15
%
   
77
%
Pennsylvania
   
4
%
   
4
%
   
3
%
   
11
%
New Hampshire
   
4
%
   
0
%
   
1
%
   
5
%
Vermont
   
3
%
   
2
%
   
1
%
   
6
%
Massachusetts
   
0
%
   
1
%
   
0
%
   
1
%
 
   
44
%
   
36
%
   
20
%
   
100
%
 
Percentage of total loan portfolio secured by real estate is summarized below:

 
 
 
Secured By Real Estate
   
Not Secured By Real Estate
 
New York
   
56
%
   
44
%
Pennsylvania
   
68
%
   
32
%
New Hampshire
   
94
%
   
6
%
Vermont
   
57
%
   
43
%
Massachusetts
   
74
%
   
26
%

Like the rest of the nation, the market areas that the Company serves are still experiencing economic challenges.  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 Company’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 relationships 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 consumer loan cycles, and local economic factors.
 
On March 8, 2013, the Company acquired Alliance Financial Corporation (“Alliance”), the parent company of Alliance Bank, N.A., for total consideration of $226 million.  As part of the acquisition, Alliance was merged with and into the Company and Alliance Bank, with 26 branch locations in the central New York counties of Onondaga, Cortland, Madison, Oneida and Oswego, was merged with and into the Bank.  The merger with Alliance enabled the Company to expand its footprint into demographically attractive and contiguous markets located in the aforementioned New York counties.  The results of Alliance’s operations are included in the Consolidated Statements of Income from the date of acquisition.

NBT Bank, N.A.
 
The Bank is a full service commercial bank formed in 1856, which provides a broad range of financial products to individuals, corporations and municipalities throughout the central and upstate New York, northeastern Pennsylvania, western Massachusetts, southern New Hampshire and greater Burlington, Vermont market areas.
 
Through its network of branch locations, the Bank offers a wide range of products and services tailored to individuals, businesses, 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 accommodate the needs of its customers with varying rates, terms, and features.  Loan products offered by the Bank include consumer loans, home equity loans, mortgages, small business 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 product 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.
The Bank conducts business through two geographic divisions, NBT Bank and Pennstar Bank.  At year end 2013, the NBT Bank division had 125 divisional offices and 145 automated teller machines (ATMs).  At December 31, 2013, the NBT Bank division had total loans of approximately $4.8 billion, or 89% of total loans, and total deposits of $5.0 billion , or 84% of total deposits.  Revenue for the NBT Bank division totaled $335 million for the year ended December 31, 2013.  At year end 2013, the Pennstar Bank division had 32 divisional offices and 42 ATMs, located primarily in northeastern Pennsylvania.  At December 31, 2013, the Pennstar Bank division had total loans of $577 million, or 11% of total loans, and total deposits of $932 million, or 16% of total deposits. Revenue for the Pennstar Bank division totaled $37 million for the year ended December 31, 2013.  In the first quarter of 2014, Pennstar Bank will begin doing business as NBT Bank as part of the Bank’s rebranding initiative.
 
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 Mang Insurance Agency, LLC (“Mang”), a full-service insurance agency acquired by the Company on September 1, 2008.  Mang’s headquarters 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 insurance, 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. The Company raised $51.5 million through Trust II in February 2006. 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 (VIEs) for which the Company is not the primary beneficiary, as defined by Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”).  In accordance with FASB ASC, the accounts of the Trusts are not included in the Company’s consolidated financial statements.
 
Operating Subsidiaries of the Bank
 
The Bank has five operating subsidiaries, NBT Capital Corp., Pennstar Bank Services Company, Broad Street Property Associates, Inc., NBT Services, Inc., and CNB Realty Trust. 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. Pennstar Bank Services Company, formed in 2002, provides administrative and support services to the Pennstar Bank division of the Bank.  Broad Street Property Associates, Inc., formed in 2004, is a property management company.  NBT Services, 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.
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 systems, 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 banking. Also, 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 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 campaigns 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 international banking, which the Company does not directly offer.
 
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 currently 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 activities, 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 management 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 twenty-eight counties of New York, Pennsylvania, New Hampshire, Vermont, and Massachusetts in which it had customer facilities as of June 30, 2013.  Market share is based on deposits of all commercial banks, credit unions, savings and loans associations, and savings banks.
 
County
State
 
Deposits
(in
 thousands)
   
Market
Share
   
Market
Rank
   
Number
of
Branches*
   
Number
of ATMs*
 
Chenango
NY
 
$
571,113
     
85.38
%
   
1
     
11
     
13
 
Fulton
NY
   
391,437
     
58.07
%
   
1
     
6
     
6
 
Schoharie
NY
   
207,935
     
50.44
%
   
1
     
4
     
4
 
Hamilton
NY
   
36,766
     
49.14
%
   
2
     
1
     
1
 
Cortland
NY
   
255,419
     
39.43
%
   
1
     
5
     
6
 
Montgomery
NY
   
227,978
     
35.44
%
   
2
     
5
     
4
 
Delaware
NY
   
304,853
     
31.81
%
   
1
     
5
     
5
 
Otsego
NY
   
317,187
     
31.73
%
   
2
     
9
     
12
 
Essex
NY
   
138,346
     
24.33
%
   
2
     
3
     
5
 
Madison
NY
   
231,480
     
22.78
%
   
2
     
4
     
6
 
Susquehanna
PA
   
151,227
     
20.63
%
   
2
     
5
     
7
 
Wayne
PA
   
158,107
     
12.41
%
   
4
     
3
     
4
 
Broome
NY
   
271,802
     
11.93
%
   
3
     
8
     
11
 
Oneida
NY
   
322,084
     
11.72
%
   
4
     
7
     
12
 
Oswego
NY
   
139,950
     
11.53
%
   
5
     
4
     
6
 
Saint Lawrence
NY
   
121,393
     
10.60
%
   
4
     
5
     
6
 
Pike
PA
   
56,423
     
9.52
%
   
5
     
2
     
2
 
Tioga
NY
   
32,499
     
8.14
%
   
6
     
1
     
1
 
Lackawanna
PA
   
385,841
     
7.84
%
   
7
     
14
     
18
 
Clinton
NY
   
90,801
     
7.55
%
   
5
     
3
     
2
 
Herkimer
NY
   
41,617
     
7.08
%
   
5
     
2
     
1
 
Franklin
NY
   
27,332
     
6.18
%
   
5
     
1
     
1
 
Schenectady
NY
   
114,815
     
4.71
%
   
6
     
3
     
2
 
Onondaga
NY
   
398,144
     
4.56
%
   
8
     
12
     
13
 
Greene
NY
   
38,972
     
3.64
%
   
7
     
3
     
3
 
Berkshire
MA
   
111,313
     
3.62
%
   
7
     
5
     
5
 
Monroe
PA
   
85,303
     
3.48
%
   
8
     
4
     
5
 
Saratoga
NY
   
122,803
     
3.34
%
   
10
     
3
     
4
 
Warren
NY
   
45,482
     
3.08
%
   
7
     
2
     
3
 
Cheshire
NH
   
25,234
     
2.03
%
   
7
     
1
     
-
 
Luzerne
PA
   
113,294
     
1.96
%
   
14
     
4
     
6
 
Chittenden
VT
   
48,975
     
1.25
%
   
7
     
3
     
3
 
Albany
NY
   
160,616
     
1.14
%
   
10
     
4
     
5
 
Hillsborough
NH
   
85,404
     
0.82
%
   
9
     
2
     
2
 
Rensselaer
NY
   
13,198
     
0.72
%
   
12
     
1
     
1
 
Rockingham
NH
   
20,907
     
0.38
%
   
17
     
2
     
2
 
 
  
 
$
5,866,050
                     
157
     
187
 

Deposit market share data is based on the most recent data available (as of June 30, 2013).  Source: SNL Financial LLC
* Branch and ATM data is as of December 31, 2013.

Supervision and Regulation
 
As a bank holding company, the Company is subject to extensive regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board” or “FRB”) as its primary federal regulator. The Company also has qualified for and elected to be registered with the FRB as a financial holding company. The Bank, as a nationally chartered bank, is subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency (“OCC”) as its primary federal regulator and to a limited extent by the Federal Deposit Insurance Corporation (“FDIC”) as its deposit insurer.  The Bank also is subject to certain regulations promulgated by the FRB and  the Bureau of Consumer Financial Protection (“CFPB”).

The Company is also under the jurisdiction of the Securities and Exchange Commission (“SEC”) and is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC.  A summary of material information regarding the laws and regulations applicable to the Company are below.  This summary is not complete and the reader should refer to these laws and regulations for more information.  Failure to comply with applicable laws and regulations could result in a range of sanctions and enforcement actions, including the imposition of civil money penalties, formal agreements and cease and desist orders. Applicable laws and regulations may change in the future and any such change could have a material adverse impact on the Company.

Federal Bank Holding Company Regulation

Transactions between the Bank and any of its affiliates, including the Company, are governed by sections 23A and 23B of the Federal Reserve Act (“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. A subsidiary of a bank that is not also a depository institution is not treated as an affiliate of the bank for purposes of sections 23A and 23B, unless the subsidiary is also controlled through a non-bank chain of ownership by affiliates or controlling shareholders of the bank, the subsidiary is a financial subsidiary that operates under the expanded authority granted to national banks under the Financial Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act (“GLB Act”), or the subsidiary engages in other activities that are not permissible for a bank to engage in directly (except insurance agency subsidiaries). Generally, sections 23A and 23B are intended to protect insured depository institutions from suffering losses arising from transactions with non-insured affiliates, by placing quantitative and qualitative limitations on covered transactions between a bank and with any one affiliate as well as all affiliates of the bank in the aggregate, and requiring that such transactions be on terms that are consistent with safe and sound banking practices.

Under the GLB Act, a financial holding company may engage in certain financial activities that a bank holding company may not otherwise engage in under the Bank Holding Company Act (“BHC Act”). In addition to engaging in banking and activities closely related to banking as determined by the FRB by regulation or order prior to November 11, 1999, a financial holding company may engage in activities that are financial in nature or incidental to financial activities, or activities that are complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.

The GLB Act and the rules promulgated thereunder require all financial institutions, including the Company and the Bank, to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer’s request, and establish procedures and practices to protect customer data from unauthorized access. In addition, the Fair Credit Reporting Act (“FCRA”), as amended by the Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”), includes many provisions affecting the Company, Bank, and/or their affiliates, including provisions concerning obtaining consumer reports, furnishing information to consumer reporting agencies, maintaining a program to prevent identity theft, sharing of certain information among affiliated companies, and other provisions. The FACT Act requires persons subject to FCRA to notify their customers if they report negative information about them to a credit bureau or if they are granted credit on terms less favorable than those generally available. The CFPB and the Federal Trade Commission (“FTC”) have extensive rulemaking authority under the FACT Act, and the Company and the Bank are subject to the rules that have been promulgated under the FACT Act, including rules regarding limitations on affiliate marketing and implementation of programs to identify, detect and mitigate certain identity theft red flags. The Company has developed policies and procedures for itself and its subsidiaries, including the Bank, and believes it is in compliance with all privacy, information sharing, and notification provisions of the GLB Act and the FACT Act.  The Bank is also subject to data security standards and data breach notice requirements, chiefly those issued by the OCC.

Federal Reserve System Regulation

The Company is subject to capital adequacy guidelines of the FRB. The guidelines apply on a consolidated basis and require bank holding companies to maintain a minimum ratio of Tier 1 capital to total average assets (or “leverage ratio”) of 4%. For the most highly rated bank holding companies, the minimum ratio is 3%. The FRB capital adequacy guidelines also require bank holding companies to maintain a minimum ratio of Tier 1 capital to risk-weighted assets of 4% and a minimum ratio of qualifying total capital to risk-weighted assets of 8%. As of December 31, 2013, the Company’s leverage ratio was 8.93%, its ratio of Tier 1 capital to risk-weighted assets was 11.74%, and its ratio of qualifying total capital to risk-weighted assets was 12.99%. The FRB may set higher minimum capital requirements for bank holding companies whose circumstances warrant it, such as companies anticipating significant growth or facing unusual risks. The FRB has not advised the Company of any special capital requirement applicable to it.

Any holding company whose capital does not meet the minimum capital adequacy guidelines is considered to be undercapitalized and is required to submit an acceptable plan to the FRB for achieving capital adequacy. Such a company’s ability to pay dividends to its shareholders and expand its lines of business through the acquisition of new banking or nonbanking subsidiaries also could be restricted.

Pursuant to Federal Reserve Board regulations and supervisory policies that were largely codified in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), bank holding companies also are expected to serve as a source of financial and managerial strength to their subsidiary depository institutions.  Therefore, to the extent the Bank is in need of capital, the Company could be expected to provide additional capital to the Bank, including, potentially, raising new capital for that purpose.

Office of Comptroller of the Currency Regulation

The Bank is supervised and regularly examined by the OCC.  The various laws and regulations administered by the OCC affect corporate practices such as payment of dividends, incurring debt, and acquisition of financial institutions and other companies.  It also affects business practices, such as payment of interest on deposits, the charging of interest on loans, types of business conducted and location of offices.  The OCC generally 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 depository institution would thereafter be undercapitalized.  Undercapitalized institutions are subject to growth limitations and are required to submit a capital restoration plan to the OCC.  If a depository institution fails to submit an acceptable capital restoration plan, it is treated as if it is “significantly undercapitalized.” Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

The Bank is subject to leverage and risk-based capital requirements and minimum capital guidelines of the OCC that are similar to those applicable to the Company.  As of December 31, 2013, the Bank was in compliance with all minimum capital requirements and met the requirements to be considered well-capitalized.  As of that date, the Bank’s leverage ratio was 8.47%, its ratio of Tier 1 capital to risk-weighted assets was 11.16%, and its ratio of qualifying total capital to risk-weighted assets was 12.41%.

Insurance of Deposit Accounts

The Bank is a member of the Deposit Insurance Fund (“DIF”) and deposit accounts at the Bank are insured by the FDIC, generally up to the maximum amount permitted by law. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor per insured institution, retroactive to January 1, 2008.
 
The deposits of the Bank are insured up to regulatory limits by the FDIC. The Federal Deposit Insurance Reform Act of 2005 gave the FDIC increased flexibility in assessing premiums on banks and savings associations, including the Bank, to pay for deposit insurance and in managing its deposit insurance reserves. The FDIC currently maintains a risk-based assessment system under which assessment rates vary based on the level of risk posed by institutions to the DIF.  In February 2011, the FDIC issued new rules that took effect April 1, 2011, to change the way the FDIC differentiates risk and sets appropriate assessment rates.

Those rules also redefined the deposit insurance assessment base, as required by the Dodd-Frank Act, from an institution’s domestic deposits to an institution’s average consolidated total assets minus average tangible equity.  The Bank’s FDIC assessment expenses increased to approximately $4.6 million in 2013 as compared with $3.5 million in 2012 primarily due to the increase in asset size.

In addition to the FDIC deposit insurance, the Federal Deposit Insurance Act provides for additional assessments to be imposed on insured depository institutions to pay for the cost of Financing Corporation (“FICO”) funding.  The FICO assessments are adjusted quarterly to reflect changes in the assessment base of the DIF and do not vary depending upon a depository institution’s capitalization or supervisory evaluation.  The Company incurred approximately $0.4 million in FICO expenses in 2013 and $0.3 million in 2012.

Under FDIC regulations, no FDIC-insured bank can accept brokered deposits unless it is well capitalized, or is adequately capitalized and receives a waiver from the FDIC. In addition, these regulations prohibit any bank that is not well capitalized from paying an interest rate on brokered deposits in excess of three-quarters of one percentage point over certain prevailing market rates. As of December 31, 2013, the Bank’s total brokered deposits were $59.1 million.

  Federal Home Loan Bank

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. The Bank was in compliance with the rules and requirements of the FHLB at December 31, 2013.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

On July 21, 2010, President Obama signed into law the Dodd-Frank Act.  This law significantly changed the bank regulatory landscape and impacted and will continue to impact the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress. Certain of these rules have not yet been finalized and many remain unwritten.

The Collins Amendment to the Dodd-Frank Act 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 Company has not issued any trust preferred securities after May 19, 2010.  The Collins Amendment also directs the appropriate federal banking supervisors, subject to recommendations by the Financial Stability Oversight Council, to develop capital requirements for all insured depository institutions, depository institution holding companies and systemically important non-bank financial companies to address systemically risky activities.

The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments.  The legislation also authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using the company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules requiring the reporting of incentive-based compensation and prohibiting excessive incentive-based compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded or not.  In April 2011, the FRB, along with other federal banking supervisors, issued a joint notice of proposed rulemaking implementing those requirements. This rule has not yet been finalized.
 
The Dodd-Frank Act created the CFPB with wide-ranging powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement 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 protection laws and regulations.  The Dodd-Frank Act also weakened the federal preemption rules that have been applicable to national banks and federal savings associations, and gave state attorneys general certain powers to enforce rules issued by the CFPB.  Further, pursuant to Federal Reserve regulations mandated by the Dodd-Frank Act, effective October 1, 2011, interchange fees on debit cards are limited to a maximum of 21 cents per transaction plus 5 basis points of the transaction amount. A debit card issuer may recover an additional one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements prescribed by the Federal Reserve. Issuers that, together with their affiliates, have less than $10 billion in assets, such as the Company, are exempt from the debit card interchange fee standards.  The FRB also adopted requirements in the final rule that issuers include two unaffiliated networks for routing debit transactions that are applicable to the Company and the Bank.
 
The scope and impact of many of the Dodd-Frank Act’s provisions will be determined over time as regulations are issued and become effective. As a result, we cannot predict the ultimate impact of the Act on the Company or the Bank at this time, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition and results of operations. Nor can we predict the impact or substance of other future legislation or regulation. However, it is expected that, at a minimum, they will increase our operating and compliance costs.  As continued rules and regulations are issued, the Company may need to dedicate additional resources to ensure compliance, which may increase its costs of operations and adversely impact its earnings.

Changes to Capital Adequacy Requirements and Prompt Corrective Action
 
The current U.S. federal bank regulatory agencies' risk-based capital guidelines are based upon the 1988 capital accord (“Basel I”) of the Basel Committee on Banking Supervision (“Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that meet under the auspices of the Bank for International Settlements in Basel, Switzerland to develop broad policy guidelines for use by each country's supervisors in determining the supervisory policies they apply.
 
In July 2013, the FRB, the OCC and the FDIC approved final rules (the “New Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The New Capital Rules generally implement the Basel Committee’s December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including the Company and the Bank, as compared to the current U.S. general risk-based capital rules. The New Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The New Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing general risk-weighting approach, which was derived from Basel I, with a more risk-sensitive approach based, in part, on the “standardized approach” in the Basel Committee’s 2004 “Basel II” capital accords. In addition, the New Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the federal banking agencies’ rules. The New Capital Rules are effective for the Company on January 1, 2015, subject to phase-in periods for certain components and other provisions.
 
The New Capital Rules: (i) introduce a new capital measure called “Common 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 New Capital Rules, for most banking organizations, 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 and lease losses, in each case, subject to the New Capital Rules’ specific requirements.
 
Pursuant to the New Capital Rules, the minimum capital ratios as of January 1, 2015 will be as follows:
 
· 4.5% CET1 to risk-weighted assets;
 
· 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
 
· 8.0% Total capital (that is, 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 New Capital Rules also introduce a new “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 instrument repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, the capital standards applicable to the Company 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 New 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 investments 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.
 
In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss (“AOCI”) items included in shareholders’ equity (for example, marks-to-market of securities held in the available-for-sale portfolio) under U.S. GAAP are reversed for the purposes of determining regulatory capital ratios. Pursuant to the New Capital Rules, the effects of certain AOCI items are not excluded; however, banking organizations not using the advanced approaches, including the Company, may make a one-time permanent election to continue to exclude these items. This election must be made concurrently with the first filing of certain of the Company's periodic regulatory reports in the beginning of 2015. The New 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 will begin on January 1, 2015 and will be 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 will begin 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.
 
With respect to the Bank, the New Capital Rules revise the “prompt corrective action” (“PCA”) regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act (“FDIA”), by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the total risk-based capital requirement for any PCA category.
 
The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, 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.
 
We believe that the Company will be able to comply with the targeted capital ratios upon implementation of the revised requirements, as finalized.

Volcker Rule

In December, 2013, the federal banking agencies jointly adopted final rules implementing Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule.  The Volcker Rule restricts the ability of banking entities, such as the Company, to engage in proprietary trading or to own, sponsor or have certain relationships with hedge funds or private equity funds—so-called “Covered Funds.”  The final rule definition of Covered Fund includes investments such as certain collateralized loan obligation (“CLO”) and collateralized debt obligation (“CDO”) securities. The Company does not believe the implementation of the Volcker Rule will have a significant effect on its financial statements.

Consumer Protection Laws

Financial institutions are prohibited from charging consumers fees for paying overdrafts on ATM and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.  Overdrafts on the payment of checks and regular electronic bill payments are not covered by this new rule.

Home mortgage lenders, including banks, are required under the Home Mortgage Disclosure Act to make available 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 availability of this information has led to increased scrutiny of higher-priced loans at all financial institutions to detect illegal discriminatory practices and to the initiation of a limited number of investigations by federal banking agencies and the U.S. Department of Justice. The Company has no information that it or its affiliates is the subject of any HMDA investigation.
In addition, the Company is also subject to federal consumer protection statutes and regulations promulgated under these laws, including, but not limited to:
 
· Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
 
· Fair Credit Reporting Act, governing the provision of consumer information to credit reporting agencies and the use of consumer information; and
 
· Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies.

On January 10, 2013, the CFPB issued a final rule implementing the ability-to-repay and qualified mortgage (QM) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”).  The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay requirements.  The presumption is a conclusive presumption/safe harbor for prime loans meeting the QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements.  The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA and VA underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits.  The QM Rule became effective January 10, 2014.

USA PATRIOT Act

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.  Under Title III of the USA PATRIOT Act all financial institutions, including the Company and the Bank, are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether 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 financial 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 application 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 for the institution. As of December 31, 2013, the Company and the Bank believe they are in compliance with the USA PATRIOT Act and regulations thereunder.

Community Reinvestment Act of 1977

The Bank has a responsibility under the Community Reinvestment Act of 1977 (“CRA”) to help meet the credit needs of its communities, 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 assess the Bank’s record of compliance with the CRA. In addition, the Equal Credit Opportunity Act 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 provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities and the activities of the Company. The Bank’s failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions against it by its regulators as well as other federal regulatory agencies and the Department of Justice. The Bank’s latest CRA rating was “Satisfactory”.
 
Employees
 
At December 31, 2013, the Company had 1,742 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 is electronically filed or furnished with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also make available through our website other reports filed with or furnished to the SEC under the Exchange Act, including our proxy statements 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.

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., Washington, 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.

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.

Deterioration in local economic conditions may negatively impact our financial performance.

The Company’s success depends primarily on the general economic conditions of central and upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts and Burlington, Vermont 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, Oneonta, Amsterdam-Gloversville, Albany, Binghamton, Utica-Rome, Plattsburg, Glens Falls. and Ogdensburg-Massena, the northeastern Pennsylvania areas of Scranton, Wilkes-Barre and East Stroudsburg, Berkshire County, Massachusetts, southern New Hampshire and the greater Burlington, Vermont 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, Massachusetts, New Hampshire and Vermont, a downturn in these local economies could cause significant increases in nonperforming loans, which could negatively impact our earnings. Declines in real estate values in our market areas could 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 adversely impact our portfolio of residential and commercial real estate loans and could result in the decline of originations 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 interest 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 certainty, 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 competitor pricing. With short-term interest rates at historic lows and the current Federal Funds target rate at 25 bps, the Company’s interest-bearing deposit accounts, particularly core deposits, are repricing at historic lows as well.  With the current outlook of the FRB to maintain the Fed Funds target rate at 25 bps for another 24 to 28 months, the Company’s challenge will be managing the magnitude and scope of the repricing.  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.

Although management believes it has implemented effective asset and liability management strategies to reduce the potential 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 equity markets could materially affect the level of assets under management and the demand for other fee-based services.

Economic downturns could affect the volume of income from and demand for fee-based services.  Revenues 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 administration revenues.

Our lending, and particularly our emphasis on commercial lending, exposes us to the risk of losses upon borrower default.

There are inherent risks associated with the Company’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Company operates as well as those across the states of New York, Pennsylvania, Massachusetts, New Hampshire and Vermont, and the entire United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Company.

As of December 31, 2013, approximately 44% of the Company’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 estimate 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 commercial real estate loans with relatively large balances, the deterioration 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 operations. See the section captioned “Loans” 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 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 estimate 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 concentrations; 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 significant 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. In addition, 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 will 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 Management – 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.

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 operates. Additionally, various banks continue to enter or have announced plans to enter the market areas in which the Company currently operates. The Company also faces competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, 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. 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 banking.  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 systems. 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 and services 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 operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

The Company, primarily through the Bank and certain non-bank subsidiaries, is subject to extensive federal regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect the Company’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 unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. 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 the Company’s business, financial condition and results of operations. 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 “Supervision and Regulation” which is located in Item 1. Business in the Company’s Annual Report on Form 10-K.

Compliance with the Dodd-Frank Act and other regulatory reforms may increase our costs of operations and adversely impact our earnings and capital ratios

On July 21, 2010, President Obama signed the Dodd-Frank Act into law.  The Dodd-Frank Act represented a significant overhaul of many aspects of the regulation of the financial services industry, and has significantly changed the bank regulatory landscape and has impacted, and will continue to impact the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.  Among other things, the Dodd-Frank Act creates a new federal financial consumer protection agency, tightens capital standards, imposes clearing and margining requirements on many derivatives activities, and generally increases oversight and regulation of financial institutions and financial activities.  It requires bank holding companies with assets greater than $500 million to be subject to minimum leverage and risk-based capital requirements and phases out the ability for bank holding companies to count trust preferred securities issued after May 19, 2010 as Tier 1 capital.  The Company has not issued any trust preferred securities after May 19, 2010.
 
The Dodd-Frank Act also weakened the federal preemption rules that have been applicable to national banks and federal savings associations, gave state attorneys general certain powers to enforce rules issued by the CFPB.
 
The scope and impact of many of the Dodd-Frank Act’s provisions will be determined over time as regulations are issued and become effective. As a result, we cannot predict the ultimate impact of the Dodd-Frank Act on us at this time, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition and results of operations. However, it is expected that at a minimum they will increase our operating and compliance costs.  The financial reform legislation and any rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and our business. We will apply resources to ensure that we are in compliance with all applicable provisions of the Dodd-Frank Act and any implemented rules, which may increase our costs of operations and adversely impact our earnings.

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 liquidity 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 repurchase 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 principal source of funds to pay dividends on the Company’s common 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 inability 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 information exchange on a variety of computing platforms and networks, and over the internet.  In addition, we rely on the services of a variety of vendors to meet our data processing and communication 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, information can be lost or misappropriated, resulting in financial loss or costs to us or damages to others. Such costs or losses could exceed the amount of insurance coverage, if any, which would adversely affect our earnings.

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 successfully 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.

Provisions of our certificate of incorporation, bylaws and stockholder rights plan, 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 Company’s stockholder purchase rights plan, the corporate law of the State of Delaware and state and federal banking laws, including regulatory approval requirements, 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 combinations; the election of directors to staggered terms of three years; and advance notice requirements for nominations for election to the Company’s board of directors and for proposing 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 engaging 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. These provisions may discourage potential takeover attempts, discouraging bids for the Company’s common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of the Company’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.

Negative developments in the housing market, financial industry and the domestic and international credit markets may adversely affect our operations and results.

Dramatic declines in the housing market over the past few years, with falling home prices and increasing foreclosures, continued high unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions.

The economic pressure experienced by consumers during the recent fiscal recession and lack of confidence in the financial markets has adversely affected our business, financial condition and results of operations. In particular, we have seen increases in foreclosures in our markets, increases in expenses such as loan collection and OREO expenses, and a low reinvestment rate environment.  While believe the financial crisis is slowly recovering, but we have not yet hit the bottom in many northeast markets.  Therefore, we do not expect that the challenging conditions in the financial and housing markets are likely to improve in the near future.   A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions. In particular, we may be affected in one or more of the following ways:

· We currently face increased regulation of our industry and compliance with such regulation may increase our costs and limit our ability to pursue business opportunities;
 
· Our ability to borrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at all could be adversely affected by further disruptions in the capital markets; or
 
· Competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions.

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, and 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 recovery 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 goodwill and other intangibles is highly subjective and requires significant 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 recognized based on the excess of the carrying amount over the fair value of the assets. Estimates of the future cash flows associated 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, procedures and policies, and the impairment of relationships with the acquired company’s employees and customers as a result of changes in ownership and management.

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, 2013 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 properties. 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 property. 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 transactions 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 services industry generally, have led to market-wide liquidity problems 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 sufficient 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 $30.8 million as of December 31, 2013.

There are 12 branches of the FHLB, including New York.  The 12 FHLB branches 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 such 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.

Trading activity in the Company’s common stock could result in material price fluctuations.

The market price of the Company’s common stock may fluctuate significantly in response to a number of factors including, but not limited to:

· Changes in securities analysts’ expectations 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 by the Financial Accounting Standards Board or other regulatory agencies;
· 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.

ITEM 1B.  Unresolved Staff Comments

None.
ITEM 2.  Properties

The Company’s headquarters are located at 52 South Broad Street, Norwich, New York 13815.  The Company operated the following community banking branches and ATMs as of December 31, 2013:

County
Branches
ATMs
 
County
Branches
ATMs
NBT Bank Division
 
 
 
Pennstar Bank Division
 
 
New York
 
 
 
Pennsylvania
 
 
Albany County
4
5
 
Lackawanna County
14
18
Broome County
8
11
 
Luzerne County
4
6
Chenango County
11
13
 
Monroe County
4
5
Clinton County
3
2
 
Pike County
2
2
Cortland County
5
6
 
Susquehanna County
5
7
Delaware County
5
5
 
Wayne County
3
4
Essex County
3
5
 
 
 
 
Franklin County
1
1
 
 
 
 
Fulton County
6
6
 
 
 
 
Greene County
3
3
 
 
 
 
Hamilton County
1
1
 
 
 
 
Herkimer County
2
1
 
 
 
 
Madison County
4
6
 
 
 
 
Montgomery County
5
4
 
 
 
 
Oneida County
7
12
 
 
 
 
Onondaga County
12
13
 
 
 
 
Oswego County
4
6
 
 
 
 
Otsego County
9
12
 
 
 
 
Rensselaer County
1
1
 
 
 
 
Saratoga County
3
4
 
 
 
 
Schenectady County
3
2
 
 
 
 
Schoharie County
4
4
 
 
 
 
St. Lawrence County
5
6
 
 
 
 
Tioga County
1
1
 
 
 
 
Warren County
2
3
 
 
 
 
 
 
 
 
 
 
 
Vermont
 
 
 
 
 
 
Chittenden County
3
3
 
 
 
 
 
 
 
 
 
 
 
Massachusetts
 
 
 
 
 
 
Berkshire County
5
5
 
 
 
 
 
 
 
 
 
 
 
New Hampshire
 
 
 
 
 
 
Cheshire
1
0
 
 
 
 
Hillsborough
2
2
 
 
 
 
Rockingham
2
2
 
 
 
 

The Company leases 64 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
 
The Bank has received preliminary approval of a proposed settlement in connection with the previously disclosed class action lawsuit arising from its assessment and collection of fees on its checking account customers.  The complaint had been filed in the Supreme Court of the State of New York, County of Delaware, on September 12, 2011 and alleged that the Bank engaged in certain unfair practices and failed to make adequate disclosure to customers concerning its overdraft fee assessment practices.  The complaint sought certification of a class of national checking account holders who had incurred overdraft fees and a subclass of such customers who reside in New York.  In addition, the complaint sought actual and punitive damages, disgorgement, interest and costs, including attorneys` fees.  On May 15, 2012, Acting Supreme Court Judge for Delaware County, New York, John F. Lambert, dismissed in its entirety the plaintiff`s case.  On June 20, 2012, the plaintiffs filed an appeal to the Appellate Division, Third Department.  On December 12, 2013, the Court preliminarily approved the proposed settlement under which the Bank would pay an aggregate of $625,000, which if and when finally approved would entirely dispose of the action.  A hearing with respect to such approval has been scheduled for June 27, 2014.  The Company has accrued for the full amount of the settlement as of December 31, 2013.

There are no other 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.

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
 
2013
 
   
   
 
1st quarter
 
$
22.37
   
$
20.15
   
$
0.20
 
2nd quarter
   
22.23
     
19.45
     
0.20
 
3rd quarter
   
23.25
     
21.06
     
0.20
 
4th quarter
   
26.59
     
22.09
     
0.21
 
2012
                       
1st quarter
 
$
24.10
   
$
20.75
   
$
0.20
 
2nd quarter
   
22.50
     
19.19
     
0.20
 
3rd quarter
   
22.89
     
19.91
     
0.20
 
4th quarter
   
22.45
     
18.92
     
0.20
 

The closing price of the Common Stock on February 14, 2014 was $23.20.
As of February 14, 2014, there were 7,207 shareholders of record of Common Stock.  No unregistered securities were sold by the Company during the year ended December 31, 2013.
 
S tock Performance Graph

The following stock performance graph compares the cumulative 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, the KBW Regional Bank Index, and the Index for NASDAQ Financial Stocks.  We have included the KBW Regional Bank Index, which we plan to use as our peer group index going forward, because we have determined that companies included in the KBW Regional Bank Index more closely match our company characteristics than the companies included in the Index for Nasdaq Financial Stocks. The stock performance graph assumes that $100 was invested on December 31, 2008.  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 correspond to December 31 of that year.  We calculate each of the referenced indices in the same manner.  All are market-capitalization-weighted indices, so companies judged by the market to be more important (i.e., more valuable) count for more in all indices.


 
 
Period Ending
 
Index
 
12/31/08
   
12/31/09
   
12/31/10
   
12/31/11
   
12/31/12
   
12/31/13
 
NBT Bancorp
 
$
100.00
   
$
75.60
   
$
92.89
   
$
88.36
   
$
83.99
   
$
111.16
 
KBW Regional Bank Index
 
$
100.00
   
$
77.92
   
$
93.78
   
$
88.97
   
$
100.70
   
$
147.74
 
NASDAQ Financial Stocks
 
$
100.00
   
$
103.43
   
$
118.08
   
$
105.55
   
$
124.25
   
$
176.54
 
NASDAQ Composite Index
 
$
100.00
   
$
145.27
   
$
171.58
   
$
170.25
   
$
200.38
   
$
280.78
 

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 shareholders 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, 2013, the Bank was in compliance with all applicable minimum capital requirements and had the ability to pay dividends of $56.7 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 represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, no dividends 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 “Supervision and Regulation” in Item 1. Business and Note 16 – Stockholders’ Equity in the notes to consolidated financial statements in included in Item 8. Financial Statements and Supplementary Data, which are located elsewhere in this report.

Stock Repurchase

Under a previously disclosed stock repurchase plan, the Company purchased 584,925 shares of its common stock during the twelve month period ended December 31, 2013, for a total of $12.5 million at an average price of $21.30 per share.  This plan expired on December 31, 2013.  On July 22, 2013, the NBT Board of Directors authorized a new repurchase program for NBT to repurchase up to an additional 1,000,000 shares, which were all available for repurchase as of December 31, 2013, of its outstanding common stock.  This plan expires on December 31, 2014.

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. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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)
 
2013
(1)  
2012
(2)  
2011
   
2010
   
2009
 
Interest, fee and dividend income
 
$
268,723
   
$
239,397
   
$
239,997
   
$
255,738
   
$
273,393
 
Interest expense
   
30,644
     
35,194
     
39,721
     
53,210
     
76,924
 
Net interest income
   
238,079
     
204,203
     
200,276
     
202,528
     
196,469
 
Provision for loan and lease losses
   
22,424
     
20,269
     
20,737
     
29,809
     
33,392
 
Noninterest income excluding securities gains
   
101,789
     
86,728
     
80,161
     
80,614
     
79,987
 
Securities gains, net
   
1,426
     
599
     
150
     
3,274
     
144
 
Noninterest expense
   
228,927
     
193,887
     
180,676
     
178,291
     
170,566
 
Income before income taxes
   
89,943
     
77,374
     
79,174
     
78,316
     
72,642
 
Net income
   
61,747
     
54,558
     
57,901
     
57,404
     
52,011
 
 
                                       
Per common share
                                       
Basic earnings
 
$
1.47
   
$
1.63
   
$
1.72
   
$
1.67
   
$
1.54
 
Diluted earnings
   
1.46
     
1.62
     
1.71
     
1.66
     
1.53
 
Cash dividends paid
   
0.81
     
0.80
     
0.80
     
0.80
     
0.80
 
Book value at year-end
   
18.77
     
17.24
     
16.23
     
15.51
     
14.69
 
Tangible book value at year-end
   
12.09
     
12.23
     
11.70
     
11.67
     
10.75
 
Average diluted common shares outstanding
   
42,351
     
33,719
     
33,924
     
34,509
     
33,903
 
 
                                       
Securities available for sale, at fair value
 
$
1,364,881
   
$
1,147,999
   
$
1,244,619
   
$
1,129,368
   
$
1,116,758
 
Securities held to maturity, at amortized cost
   
117,283
     
60,563
     
70,811
     
97,310
     
159,946
 
Loans and leases
   
5,406,795
     
4,277,616
     
3,800,203
     
3,610,006
     
3,645,398
 
Allowance for loan and lease losses
   
69,434
     
69,334
     
71,334
     
71,234
     
66,550
 
Assets
   
7,652,175
     
6,042,259
     
5,598,406
     
5,338,856
     
5,464,026
 
Deposits
   
5,890,224
     
4,784,349
     
4,367,149
     
4,134,352
     
4,093,046
 
Borrowings
   
866,061
     
605,855
     
627,358
     
604,730
     
786,097
 
Stockholders’ equity
   
816,569
     
582,273
     
538,110
     
533,572
     
505,123
 
 
                                       
Key ratios
                                       
Return on average assets
   
0.85
%
   
0.93
%
   
1.06
%
   
1.05
%
   
0.96
%
Return on average equity
   
8.09
     
9.72
     
10.73
     
10.92
     
10.90
 
Average equity to average assets
   
10.50
     
9.55
     
9.90
     
9.63
     
8.79
 
Net interest margin
   
3.66
     
3.86
     
4.09
     
4.15
     
4.04
 
Dividend payout ratio
   
55.48
     
49.38
     
46.78
     
48.19
     
52.29
 
Tier 1 leverage
   
8.93
     
8.54
     
8.74
     
9.16
     
8.35
 
Tier 1 risk-based capital
   
11.74
     
11.00
     
11.56
     
12.44
     
11.34
 
Total risk-based capital
   
12.99
     
12.25
     
12.81
     
13.70
     
12.59
 
 
(1)
Includes the impact of the acquisition of Alliance on March 8, 2013.
 
(2)
Includes the impact of the acquisition of Hampshire First Bank on June 8, 2012.

Selected Quarterly Financial Data
 
 
 
2013
   
2012
 
(Dollars in thousands, except share and per share data)
 
Fourth
   
Third
   
Second
   
First
   
Fourth
   
Third
   
Second
   
First
 
Interest, fee and dividend income
 
$
69,181
   
$
69,569
   
$
69,604
   
$
60,369
   
$
60,857
   
$
61,287
   
$
58,647
   
$
58,606
 
Interest expense
   
7,123
     
7,343
     
7,949
     
8,229
     
8,404
     
8,680
     
8,896
     
9,214
 
Net interest income
   
62,058
     
62,226
     
61,655
     
52,140
     
52,453
     
52,607
     
49,751
     
49,392
 
Provision for loan and lease losses
   
5,166
     
5,198
     
6,402
     
5,658
     
6,940
     
4,755
     
4,103
     
4,471
 
Noninterest income excluding net securities gains (losses)
   
25,289
     
26,818
     
25,598
     
24,084
     
21,941
     
21,601
     
20,585
     
22,601
 
Net securities gains (losses)
   
13
     
329
     
(61
)
   
1145
     
21
     
26
     
97
     
455
 
Noninterest expense
   
55,486
     
56,286
     
56,450
     
60,705
     
48,592
     
49,431
     
47,390
     
48,474
 
Net income
   
17,925
     
19,257
     
16,916
     
7,649
     
13,116
     
14,535
     
13,257
     
13,650
 
Basic earnings per share
 
$
0.41
   
$
0.44
   
$
0.39
   
$
0.21
   
$
0.39
   
$
0.43
   
$
0.40
   
$
0.41
 
Diluted earnings per share
 
$
0.41
   
$
0.44
   
$
0.38
   
$
0.21
   
$
0.39
   
$
0.43
   
$
0.40
   
$
0.41
 
Annualized net interest margin
   
3.61
%
   
3.65
%
   
3.69
%
   
3.68
%
   
3.83
%
   
3.90
%
   
3.82
%
   
3.90
%
Annualized return on average assets
   
0.94
%
   
1.01
%
   
0.90
%
   
0.48
%
   
0.86
%
   
0.97
%
   
0.92
%
   
0.97
%
Annualized return on average equity
   
8.81
%
   
9.62
%
   
8.42
%
   
4.83
%
   
9.01
%
   
10.13
%
   
9.66
%
   
10.12
%
Average diluted common shares outstanding
   
44,121
     
44,135
     
44,317
     
36,794
     
33,987
     
33,961
     
33,493
     
33,442
 

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 statements 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 contemplated 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 international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact; (2) changes in the level of non-performing 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 businesses; (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 Company 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 Financial Accounting Standards Board 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 managing the risks involved in the foregoing items.
 
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 Company’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 statements 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  2013  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, 2013 and 2012 and for each of the years in the three-year period ended December 31, 2013 should be read in conjunction with this review. Amounts in  prior  period  consolidated  financial  statements are reclassified whenever necessary  to  conform  to  the  2013  presentation.

Critical Accounting Policies

The Company has identified policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently 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, other-than-temporary impairment, provision for income taxes and impairment of 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 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 appropriate discount rate. In addition, the Company reviews expected inflationary and merit increases to compensation in determining the rate of increase in future compensation levels.

Management of the Company considers the accounting policy relating to other-than-temporary impairment to be a critical accounting policy.  Management systematically evaluates certain assets for other-than-temporary declines in fair value, primarily investment securities.  Management considers historical values and current market conditions as a part of the assessment.  The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings and the amount of the total other-than-temporary impairment related to other factors is generally recognized in other comprehensive income, net of applicable taxes.

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 transactions.  Management believes that the assumptions and judgments used to record tax-related assets or liabilities have been 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 goodwill 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 impairment 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 conditions and other factors.  Future events or changes in the estimates 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 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 “Risk Management” section 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, respectively, to the consolidated financial statements. All accounting 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 information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (GAAP).  These measures adjust GAAP to exclude the effects of sales of securities and certain non-recurring and merger-related expenses.  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 accompanying table. Management believes that these non-GAAP measures provided useful information that is important to an understanding of the operating results of the Company’s core business due to the non-recurring nature of the excluded items.  Non-GAAP measures should not be considered a substitute for financial measures determined in accordance 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 performance 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 services, technology advancements, market share and peer comparisons.  The following information should be considered in connection with the Company's results for the fiscal year ended December 31, 2013:
 
· Reported net income for 2013 was $61.7 million, up from $54.6 million in 2012.  Reported results for 2013 include the impact of the acquisition of Alliance Financial Corporation (“Alliance”) since March 8, 2013, including $12.4 million in merger related expenses for 2013.
 
· Core net income was $69.9 million for 2013 up 27.5% from $54.8 million for 2012.  Core diluted earnings per share for 2013 was $1.65 up from $1.63 for 2012.  Core return on average assets and return on average equity were 0.96% and 9.16%, respectively, for 2013, compared with 0.93% and 9.77%, respectively for 2012 (A reconciliation of these "core" results is presented in the following table).

Reconciliation of Non-GAAP Financial Measures:
 
(dollars in thousands except per share data)
 
2013
   
2012
 
Reported net income (GAAP)
 
$
61,747
   
$
54,558
 
Adj: (Gain) / Loss on sale of securities, net (net of tax)
   
(990
)
   
(421
)
Adj: Other adjustments (net of tax)
   
512
     
(382
)
Plus: Merger related expenses (net of tax)*
   
8,588
     
1,836
 
Reversal of uncertain tax position
   
-
     
(790
)
Total Adjustments
   
8,110
     
243
 
Core net income
 
$
69,857
   
$
54,801
 
Profitability:
               
Core Diluted Earnings per Share
 
$
1.65
   
$
1.63
 
Core Return on Average Assets
   
0.96
%
   
0.93
%
Core Return on Average Equity
   
9.16
%
   
9.77
%
Core Return on Average Tangible Common Equity
   
14.76
%
   
14.20
%
 
 
*
Reorganization expenses for 2013; prepayment penalty income and flood insurance recoveries, partially offset by an other asset write-down for 2012
 
· Significant strategic expansion during 2013:
 
§ Acquired Alliance Financial Corporation, a $1.4 billion financial holding company headquartered in Syracuse, N.Y. on March 8, 2013 .
 
· Net interest margin for 2013 declined 20 basis points as a result of the continued low rate environment on loans and investments.
 
· 2013 organic loan growth of 5.3%, offsetting aforementioned margin compression, driven by:
 
§ Consumer loan growth of 4.8%; and
 
§ Commercial loan growth of 5.5%.
 
· Asset quality indicators showed stability or improvement from last year:
 
§ Net charge-off ratio was 0.44%, down from 0.55% for last year;
 
§ Nonperforming loans to total loans was 0.99%, up slightly from 0.98% for last year.
 
· Noninterest income was up 18.2% over last year driven primarily by the acquisition of Alliance and expansion into new markets:
 
§ Trust revenue was up $7.5 million, or 81.9%
 
§ ATM and debit card fees were up $3.2 million, or 25.9%.
 
· Achieved targeted cost saves from the Alliance acquisition and benefited from other cost save initiatives during 2013.

The Company continued to experience pressure on net interest income in 2013 as low rates continued to have the effect of causing many assets to prepay or to be redeemed. As a result, reinvestment of cash flows in lower yielding assets has been the primary contributor to a decline in interest income in 2013.  The yield on interest earning assets decreased from 4.51% in 2012 to 4.12% in 2013, with drops in the yields on loans and securities available for sale being the primary drivers.  Rates paid on interest bearing liabilities also decreased in the low rate environment, which partially offset the decrease in earning asset yields.  In particular, the decrease in rates paid on time deposits contributed approximately $3.4 million to the decrease in interest expense in 2013 as compared with 2012.  Average interest bearing liabilities increased approximately $831.9 million from 2012 to 2013, with the primary driver being the increase in interest bearing deposits from acquisition activity.  The Company also took the following steps in 2013 in an effort to help offset the margin pressure created by the low interest rate environment:

· Continued the sale of conforming residential real estate mortgages, taking advantage of favorable interest rate conditions;
 
· Increased efforts to grow noninterest income with focus on organic growth of our trust, financial services, retirement plan administration and insurance businesses; and
 
· Continued strategic expansion into central New York with the acquisition of Alliance.

The Company reported net income of $61.7 million or $1.46 per diluted share for 2013, up 13.2% from net income of $54.6 million or $1.62 per diluted share for 2012.  The provision for loan losses totaled $22.4 million for the year ended December 31, 2013, up $2.1 million, or 10.6%, from $20.3 million for the year ended December 31, 2012.  The increase in provision is attributable to the ongoing modeling of the required levels of reserves which considers historical charge-offs, loan growth and economic trends and is primarily due to the Company’s loan growth.  Noninterest income increased $15.9 million, or 18.2%, from 2012 primarily due to an increase in trust revenue of approximately $7.5 million.  This increase was due primarily to the acquisition of Alliance in March 2013.  In addition, ATM and debit card fees increased $3.2 million due to increased usage from expansion and acquisition activity during 2013.  Noninterest expense for the year ended December 31, 2013 was $228.9 million, up from $193.9 million, or 18.1% for the year ended December 31, 2012.  This increase was driven primarily by an increase in merger related expenses of approximately $9.8 million over 2012 attributable to the acquisition of Alliance.  In addition, salaries and employee benefits were up $8.8 million, or 8.4%, largely due to expansion activity.

2014 Outlook

The Company’s 2013 earnings reflected the Company’s continued ability to manage through the existing and near future economic conditions and challenges in the financial services industry, while investing in the Company’s future.  The Company believes effects of the economic crisis still exist and, as a result, there will be certain challenges faced in 2014.  Significant items that may have an impact on 2014 results include:

· The Company expects that it will experience additional margin compression from the 2013 fourth quarter net interest margin of 3.61%. We expect that payments representing interest and principal on currently outstanding loans and investments will continue to be reinvested at rates that are lower than the rates currently outstanding on those loans and investments.  In addition, deposit and borrowing rates are historically low and there are minimal opportunities for them to be lowered.  Furthermore, the industry as a whole must focus on asset growth to increase interest income, thereby creating general pricing pressure in the entire industry.

· If asset quality trends continue to show improvement, the Company would eventually expect the level of provisioning to decrease.  However, the economy may have an adverse affect on asset quality indicators, particularly indicators related to loans secured by real estate, which could adversely affect charge-offs, the allowance for loan losses, and the provision for loan losses.

· Compliance with regulatory mandates could continue to negatively impact certain fee generating products as well as increase costs to comply, which could negatively impact noninterest income, noninterest expense and earnings.

· Competitive pressure on deposits could result in an increase in interest expense if interest rates begin to rise.

The Company’s 2014 outlook is subject to factors in addition to those identified above and those risks and uncertainties that could impact the Company’s future results are explained in ITEM 1A. RISK FACTORS.

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 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%.

Average Balances and Net Interest Income
 
 
 
2013
   
2012
   
2011
 
 
 
Average
   
   
Yield/
   
Average
   
   
Yield/
   
Average
   
   
Yield/
 
(Dollars in thousands)
 
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
ASSETS
 
   
   
   
   
   
   
   
   
 
Short-term interest bearing accounts
 
$
30,522
   
$
116
     
0.38
%
 
$
66,207
   
$
179
     
0.27
%
 
$
101,224
   
$
269
     
0.27
%
Securities available for sale (1)
   
1,349,887
     
27,357
     
2.03
%
   
1,177,969
     
28,904
     
2.45
%
   
1,123,215
     
33,319
     
2.97
%
Securities held to maturity (1)
   
88,193
     
3,692
     
4.19
%
   
65,582
     
3,583
     
5.46
%
   
81,558
     
4,350
     
5.33
%
Investment in FRB and FHLB Banks
   
37,998
     
1,771
     
4.66
%
   
28,358
     
1,378
     
4.86
%
   
27,089
     
1,389
     
5.13
%
Loans and leases (2)
   
5,106,607
     
239,572
     
4.69
%
   
4,053,420
     
209,370
     
5.17
%
   
3,677,931
     
205,318
     
5.58
%
Total interest earning assets
 
$
6,613,207
   
$
272,508
     
4.12
%
 
$
5,391,536
   
$
243,414
     
4.51
%
 
$
5,011,017
   
$
244,645
     
4.88
%
Other assets
   
653,432
                     
483,248
                     
434,924
                 
Total assets
 
$
7,266,639
                   
$
5,874,784
                   
$
5,445,941
                 
 
                                                                       
LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                       
Money market deposit accounts
 
$
1,343,801
   
$
2,004
     
0.15
%
 
$
1,116,583
   
$
2,054
     
0.18
%
 
$
1,070,003
   
$
3,592
     
0.34
%
NOW deposit accounts
   
882,629
     
1,468
     
0.17
%
   
709,889
     
1,854
     
0.26
%
   
685,542
     
2,313
     
0.34
%
Savings deposits
   
929,226
     
789
     
0.08
%
   
680,092
     
522
     
0.08
%
   
602,918
     
635
     
0.11
%
Time deposits
   
1,069,228
     
12,029
     
1.13
%
   
993,117
     
14,418
     
1.45
%
   
913,330
     
16,480
     
1.80
%
Total interest bearing deposits
 
$
4,224,884
   
$
16,290
     
0.39
%
 
$
3,499,681
   
$
18,848
     
0.54
%
 
$
3,271,793
   
$
23,020
     
0.70
%
Short-term borrowings
   
280,848
     
515
     
0.18
%
   
165,742
     
188
     
0.11
%
   
153,965
     
205
     
0.13
%
Trust preferred debentures
   
96,536
     
2,084
     
2.16
%
   
75,422
     
1,730
     
2.29
%
   
75,422
     
2,092
     
2.77
%
Long-term debt
   
338,697
     
11,755
     
3.47
%
   
368,270
     
14,428
     
3.92
%
   
370,035
     
14,404
     
3.89
%
Total interest bearing liabilities
 
$
4,940,965
   
$
30,644
     
0.62
%
 
$
4,109,115
   
$
35,194
     
0.86
%
 
$
3,871,215
   
$
39,721
     
1.03
%
Demand deposits
   
1,484,193
                     
1,139,896
                     
966,282
                 
Other liabilities
   
78,455
                     
64,551
                     
69,063
                 
Stockholders' equity
   
763,026
                     
561,222
                     
539,381
                 
Total liabilities and stockholders' equity
 
$
7,266,639
                   
$
5,874,784
                   
$
5,445,941
                 
Net interest income (FTE)
           
241,864
                     
208,220
                     
204,924
         
Interest rate spread
                   
3.50
%
                   
3.65
%
                   
3.85
%
Net interest margin
                   
3.66
%
                   
3.86
%
                   
4.09
%
Taxable equivalent adjustment
           
3,785
                     
4,017
                     
4,648
         
Net interest income
         
$
238,079
                   
$
204,203
                   
$
200,276
         
 
1. Securities are shown at average amortized cost.
2. For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding. The interest collected thereon is included in interest income based upon the characteristics of the related loans.
2013 OPERATING RESULTS AS COMPARED TO 2012 OPERATING RESULTS

Net Interest Income

While the rate paid on interest bearing liabilities decreased 24 basis points, the yield on interest earning assets declined 39 basis points compared to the same period for 2012, resulting in margin compression for the year ended December 31, 2013.  The yield on securities available for sale was 2.03% for the year ended December 31, 2013, compared with 2.45% for the year ended December 31, 2012. This decrease was due primarily to the reinvestment of cash flows from maturing securities and cash received from branch acquisitions in 2012 into lower yielding securities in the current rate environment. The average balance of securities available for sale for the year ended December 31, 2013 was $1.3 billion, up approximately $171.9 million, or 14.6%, from the year ended December 31, 2012.  This increase was due primarily to investment of liquidity from acquisition activity and deposit growth. The yield on loans was 4.69% for the year ended December 31, 2013, compared with 5.17% for the year ended December 31, 2012. The average balance of loans for the year ended December 31, 2013 was $5.1 billion, up approximately $1.1 billion (including approximately $904 million of acquired loans from the Alliance acquisition), or 26.0%, from the year ended December 31, 2012.  The reduction in yields on earning assets was partially offset by a reduction in rates paid on interest bearing liabilities.  The rate on time deposits was 1.13% for the year ended December 31, 2013, compared with 1.45% for the year ended December 31, 2012.  The rate on NOW accounts was 0.17% for the year ended December 31, 2013, compared with 0.26% for the year ended December 31, 2012.   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 combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of change.
 
Analysis of Changes in Taxable Equivalent Net Interest Income
 
 
 
Increase (Decrease)
   
Increase (Decrease)
 
 
 
2013 over 2012
   
2012 over 2011
 
(In thousands)
 
Volume
   
Rate
   
Total
   
Volume
   
Rate
   
Total
 
Short-term interest-bearing accounts
 
$
(119
)
 
$
56
   
$
(63
)
 
$
(95
)
 
$
5
   
$
(90
)
Securities available for sale
   
3,884
     
(5,431
)
   
(1,547
)
   
1,562
     
(5,977
)
   
(4,415
)
Securities held to maturity
   
1,063
     
(954
)
   
109
     
(871
)
   
104
     
(767
)
Investment in FRB and FHLB Banks
   
451
     
(58
)
   
393
     
63
     
(74
)
   
(11
)
Loans and leases
   
50,712
     
(20,510
)
   
30,202
     
20,057
     
(16,005
)
   
4,052
 
Total interest income
   
55,991
     
(26,897
)
   
29,094
     
20,716
     
(21,947
)
   
(1,231
)
Money market deposit accounts
   
377
     
(427
)
   
(50
)
   
150
     
(1,688
)
   
(1,538
)
NOW deposit accounts
   
385
     
(771
)
   
(386
)
   
80
     
(539
)
   
(459
)
Savings deposits
   
207
     
60
     
267
     
74
     
(187
)
   
(113
)
Time deposits
   
1,042
     
(3,431
)
   
(2,389
)
   
1,353
     
(3,415
)
   
(2,062
)
Short-term borrowings
   
173
     
154
     
327
     
15
     
(32
)
   
(17
)
Trust preferred debentures
   
461
     
(107
)
   
354
     
-
     
(362
)
   
(362
)
Long-term debt
   
(1,104
)
   
(1,569
)
   
(2,673
)
   
(69
)
   
93
     
24
 
Total interest expense
   
1,541
     
(6,091
)
   
(4,550
)
   
1,603
     
(6,130
)
   
(4,527
)
Change in FTE net interest income
 
$
54,450
   
$
(20,806
)
 
$
33,644
   
$
19,113
   
$
(15,817
)
 
$
3,296
 

Loans and Corresponding Interest and Fees on Loans

The average balance of loans increased by approximately $1.1 billion, or 26.0%, from 2012 to 2013.  The yield on average loans decreased from 5.17% in 2012 to 4.69% in 2013, as loan rates declined due to the continued low rate environment in 2013.  Interest income from loans on a FTE basis increased 14.4%, from $209.4 million in 2012 to $239.6 million in 2013.  This increase was due to the increase in average loan balances noted above, and was partially offset by the decrease in yields.
 
Total loans increased $1.1 billion, or 26.4% (5.3% organic growth) from December 31, 2012 to December 31, 2013.  In March 2013, the Company acquired Alliance, including approximately $904 million in loans, which contributed to this loan growth.  Commercial loans increased $164.2 million, or 23.6%, from $694.8 million at December 31, 2012 to $859.0 million at December 31, 2013, due to strong originations in 2013, particularly in our upstate New York markets and Vermont, as well as from the aforementioned acquisition.  Commercial real estate loans increased $255.5 million, or 23.8%, from $1.1 billion at December 31, 2012 to $1.3 billion at December 31, 2013, in large part due to the acquisition of Alliance as well strong originations in our upstate New York markets and from new markets, particularly Vermont.  The Company acquired approximately $117.8 million in commercial real estate loans from the aforementioned acquisition.  Residential real estate loans increased $390.5 million (including approximately $333.1 million from the aforementioned acquisition), from $651.1 million at December 31, 2012 to $1.0 billion at December 31, 2013.  The Company sold more fixed rate mortgages during 2012 than 2013 as market conditions in 2013 were not as favorable for such sales.  Consumer loans increased $304.8 million from $1.0 billion at December 31, 2012 to $1.4 billion at December 31, 2013 in large part due to the aforementioned acquisition, as well as strong originations in our upstate New York markets and from new markets.  Home equity loans increased modestly in 2013.

The  following  table  reflects  the  loan  portfolio  by major categories  as  of  December  31  for  the  years  indicated:

Composition of Loan Portfolio
 
 
 
December 31,
 
(In thousands)
 
2013
   
2012
   
2011
   
2010
   
2009
 
Residential real estate mortgages
 
$
1,041,637
   
$
651,107
   
$
581,511
   
$
548,394
   
$
618,334
 
Commercial
   
859,026
     
694,799
     
611,298
     
577,731
     
571,107
 
Commercial  real estate
   
1,328,313
     
1,072,807
     
888,879
     
844,458
     
739,395
 
Real estate construction and development
   
93,247
     
123,078
     
93,977
     
45,444
     
67,168
 
Agricultural and agricultural real estate
   
112,035
     
112,687
     
108,423
     
112,738
     
122,466
 
Consumer
   
1,352,638
     
1,047,856
     
946,470
     
905,563
     
923,343
 
Home equity
   
619,899
     
575,282
     
569,645
     
575,678
     
603,585
 
Total loans and leases
 
$
5,406,795
   
$
4,277,616
   
$
3,800,203
   
$
3,610,006
   
$
3,645,398
 

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 primarily of short-term and/or floating rate loans made to small and medium-sized entities.  Consumer loans consist primarily of indirect installment credit to individuals, of which approximately 75% 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.  Indirect installment loans represent $1.3 billion of total consumer loans at December 31, 2013, or 95.1%.  Installment credit for automobiles accounts for approximately 70% of total consumer loans.  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.  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 buildings and other commercial properties and residential construction 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.
 
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, 2013.  Scheduled 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, 2013
 
 
 
   
After One Year But
   
   
 
(In thousands)
 
Within One Year
   
Within Five Years
   
After Five Years
   
Total
 
Floating/adjustable rate
 
   
   
   
 
Commercial, commercial real estate, agricultural  and agricultural real estate
 
$
445,466
   
$
304,859
   
$
871,602
   
$
1,621,927
 
Real estate construction and development
   
17,126
     
3,564
     
27,863
     
48,553
 
Total floating rate loans
   
462,592
     
308,423
     
899,465
     
1,670,480
 
 
                               
Fixed rate
                               
Commercial, commercial real estate, agricultural  and agricultural real estate
   
71,611
     
364,738
     
241,098
     
677,447
 
Real estate construction and development
   
11,140
     
19,564
     
13,990
     
44,694
 
Total fixed rate loans
   
82,751
     
384,302
     
255,088
     
722,141
 
Total
 
$
545,343
   
$
692,725
   
$
1,154,553
   
$
2,392,621
 

Securities and Corresponding Interest and Dividend Income

The average balance of securities available for sale increased $171.9 million, or 14.6%, from 2012 to 2013.  The yield on average securities available for sale was 2.03% for 2013 compared to 2.45% in 2012.
 
The average balance of securities held to maturity increased from $65.6 million in 2012 to $88.2 million in 2013. At December 31, 2013, securities held to maturity were comprised primarily of tax-exempt municipal securities. The yield on securities held to maturity decreased from 5.46% in 2012 to 4.19% in 2013.
 
The average balance of FRB and FHLB stock increased to $38.0 million in 2013 from $28.4 million in 2012.  The yield from investments in FRB and FHLB banks decreased from 4.86% in 2012 to 4.66% in 2013.

Securities Portfolio
 
 
 
As of December 31,
 
 
 
2013
   
2012
   
2011
 
 
 
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
 
(In thousands)
 
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
 
Securities available for sale
 
   
   
   
   
   
 
U.S. Treasury
 
$
43,279
   
$
43,616
   
$
63,668
   
$
64,425
   
$
81,006
   
$
82,234
 
Federal Agency
   
285,880
     
278,915
     
281,398
     
282,814
     
254,983
     
255,846
 
State & Municipal
   
113,435
     
113,665
     
82,675
     
86,802
     
99,176
     
104,789
 
Mortgage-backed
   
359,590
     
364,164
     
237,461
     
250,281
     
310,767
     
325,396
 
Collateralized mortgage obligations
   
565,200
     
549,528
     
443,972
     
449,723
     
459,067
     
465,474
 
Other securities
   
12,367
     
14,993
     
11,210
     
13,954
     
8,935
     
10,880
 
Total securities available for sale
 
$
1,379,751
   
$
1,364,881
   
$
1,120,384
   
$
1,147,999
   
$
1,213,934
   
$
1,244,619
 
 
                                               
Securities held to maturity
                                               
Mortgage-backed
 
$
953
   
$
1,081
   
$
1,168
   
$
1,352
   
$
1,447
   
$
1,660
 
Collateralized mortgage obligations
   
62,025
     
57,456
     
-
     
-
     
-
     
-
 
State & Municipal
   
54,305
     
54,739
     
59,395
     
60,183
     
69,364
     
70,538
 
Total securities held to maturity
 
$
117,283
   
$
113,276
   
$
60,563
   
$
61,535
   
$
70,811
   
$
72,198
 

In the available for sale category at December 31, 2013, federal agency securities were comprised of Government-Sponsored Enterprise (“GSE”) securities; mortgaged-backed securities were comprised of GSEs with an amortized cost of $337.7 million and a fair value of $341.3 million and U.S. Government Agency securities with an amortized cost of $21.9 million and a fair value of $22.8 million; collateralized mortgage obligations (“CMOs”) were comprised of GSEs with an amortized cost of $521.3 million and a fair value of $504.9 million and US Government Agency securities with an amortized cost of $43.9 million and a fair value of $44.6 million. At December 31, 2013, all of the mortgaged-backed securities held to maturity were comprised of U.S. Government Agency securities.
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, 2013:
 
(In thousands)
 
Amortized cost
   
Estimated fair value
   
Weighted Average Yield
 
Debt securities classified as available for sale
 
   
   
 
Within one year
 
$
27,894
   
$
28,030
     
2.43
%
From one to five years
   
261,703
     
261,526
     
2.11
%
From five to ten years
   
300,051
     
297,837
     
2.53
%
After ten years
   
777,736
     
762,495
     
2.23
%
 
 
$
1,367,384
   
$
1,349,888
         
Debt securities classified as held to maturity
                       
Within one year
 
$
24,680
   
$
24,766
     
2.72
%
From one to five years
   
22,791
     
23,148
     
3.94
%
From five to ten years
   
5,489
     
5,481
     
4.17
%
After ten years
   
64,323
     
59,881
     
2.06
%
 
 
$
117,283
   
$
113,276
         

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 $831.9 million from 2012 primarily due to the acquisition of Alliance, and totaled $4.9 billion in 2013.  The rate paid on interest-bearing liabilities decreased from 0.86% in 2012 to 0.62% in 2013.  This decrease in rates, offset by an increase in average balances, caused a decrease in interest expense of $4.6 million, or 12.9%, from $35.2 million in 2012 to $30.6 million in 2013.

Deposits

Average interest bearing deposits increased $725.2 million, or 20.7%, from 2012 to 2013, due primarily to the acquisition of Alliance in March 2013.  Average time deposits increased $76.1 million, or 7.7%, during 2013 as compared to 2012.  Average money market deposits increased $227.2 million or 20.3% during 2013 when compared to 2012.  Average NOW accounts increased $172.7 million or 24.3% during 2013 as compared to 2012.  The average balance of savings accounts increased $249.1 million or 36.6% during 2013 when compared to 2012.    The average balance of demand deposits increased $344.3 million, or 30.2%, during 2013 when compared to 2012.  This growth in demand deposits was driven principally by increases in accounts from retail, municipal, and commercial customers spurred by strategic expansion into new markets.

The rate paid on average interest-bearing deposits decreased from 0.54% during 2012 to 0.39% in 2013. The decrease in the rate on interest-bearing deposits was driven primarily by pricing decreases from money market accounts, NOW accounts and time deposits, which are sensitive to interest rate changes. The pricing decreases for these products resulted from the FRB maintaining a historic low Fed Funds target rate as well as an overall decrease in all interest rates.  The rate paid for money market deposit accounts decreased from 0.18% during 2012 to 0.15% during 2013.  The rate paid for NOW accounts decreased from 0.26% during 2012 to 0.17% during 2013.  The rate paid for time deposits decreased from 1.45% during 2012 to 1.13% during 2013.

The following table presents the maturity distribution of time deposits of $100,000 or more at December 31:

Maturity Distribution of Time Deposits of $100,000 or More
 
 
 
December 31,
 
(In thousands)
 
2013
   
2012
 
Within three months
 
$
93,489
   
$
69,205
 
After three but within twelve months
   
172,613
     
96,644
 
After one but within three years
   
79,990
     
153,453
 
Over three years
   
29,316
     
33,027
 
Total
 
$
375,408
   
$
352,329
 

Borrowings

Average short-term borrowings increased to $280.8 million in 2013 from $165.7 million in 2012.  The average rate paid on short-term borrowings increased from 0.11% in 2012 to 0.18% in 2013.  Average long-term debt decreased from $368.3 million in 2012 to $338.7 million in 2013.

The average balance of trust preferred debentures increased to $96.5 million in 2013 compared to $75.4 million in 2012 due to the acquisition of Alliance.  The average rate paid for trust preferred debentures in 2013 was 2.16%, down slightly from 2.29% in 2012.

Short-term borrowings 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. The Company has unused lines of credit and  access  to  brokered  deposits  available  for  short-term  financing  of approximately $1.6 billion and  $1.3 billion  at December 31, 2013 and 2012, respectively.  Securities collateralizing 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 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)
 
2013
   
2012
   
2011
 
Insurance and other financial services revenue
 
$
24,447
   
$
22,387
   
$
20,843
 
Service charges on deposit accounts
   
19,307
     
18,225
     
21,464
 
ATM and debit card fees
   
15,558
     
12,358
     
11,642
 
Retirement plan administration fees
   
11,497
     
10,097
     
8,918
 
Trust
   
16,682
     
9,172
     
8,864
 
Bank owned life insurance income
   
3,793
     
3,077
     
3,085
 
Net securities gains
   
1,426
     
599
     
150
 
Other
   
10,505
     
11,412
     
5,345
 
Total noninterest income
 
$
103,215
   
$
87,327
   
$
80,311
 

Noninterest income for the year ended December 31, 2013 was $103.2 million, up 18.2% from 2012, with the primary drivers being increases in trust revenue and ATM and debit card fees driven primarily by the acquisition of Alliance.  In addition, NBT experienced a 9.2% increase in insurance and financial services revenue for the year ended December 31, 2013 as compared to 2012, due primarily to a $1.0 million, or 6.0%, increase in insurance revenue as well as a $1.0 million, or 19.5%, increase in financial services revenue.  Retirement plan administration fees were also up $1.4 million, or 13.9% for the year ended December 31, 2013 as compared to 2012 due to growth in new business during 2013.

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)
 
2013
   
2012
   
2011
 
Salaries and employee benefits
 
$
113,580
   
$
104,815
   
$
99,212
 
Occupancy
   
20,720
     
17,415
     
16,363
 
Data processing and communications
   
15,353
     
13,437
     
12,271
 
Professional fees and outside services
   
13,309
     
10,463
     
8,921
 
Equipment
   
11,493
     
9,627
     
8,864
 
Office supplies and postage
   
6,563
     
6,489
     
6,073
 
FDIC expenses
   
4,960
     
3,832
     
4,267
 
Advertising
   
3,204
     
2,889
     
3,460
 
Amortization of intangible assets
   
4,872
     
3,394
     
3,046
 
Loan collection and other real estate owned
   
2,619
     
2,560
     
2,631
 
Merger expenses
   
12,364
     
2,608
     
804
 
Other
   
19,890
     
16,358
     
14,764
 
Total noninterest expense
 
$
228,927
   
$
193,887
   
$
180,676
 

Noninterest expense for the year ended December 31, 2013 was $228.9 million, up $35.0 million or 18.1%, from 2012.  Excluding merger expenses totaling $12.4 million and $2.6 million for the years ended December 31, 2013 and 2012, respectively, noninterest expense was up $25.3 million, or 13.2%, for 2013 as compared to 2012.  Several noninterest expense categories were affected by the acquisition of Alliance in March 2013 and the full year impact of the June 2012 acquisition of Hampshire First Bank, with salaries and employee benefits and occupancy expenses being the primary drivers of the increase.

Income Taxes

Income tax expense for the year ended December 31, 2013 was $28.2 million, up from $22.8 million for the same period in 2012.  The effective tax rate was 31.3% for the year ended December 31, 2013, compared to 29.5% for the same period in 2012.

The income tax expense on the Company’s income was different 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.
 
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 subsequent 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 often result in proposed assessments. The Company’s estimate for the potential outcome for any uncertain tax issue is highly judgmental. The Company believes that it has adequately provided for any reasonably foreseeable outcome related to these matters. However, 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 fluctuate significantly on a quarterly or annual basis.

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)
 
2013
   
%
   
2012
   
%
   
2011
   
%
   
2010
   
%
   
2009
   
%
 
Nonaccrual loans
 
   
   
   
   
   
   
   
   
   
 
Commercial, commercial real estate and agricultural loans
 
$
27,033
     
54
%
 
$
20,923
     
53
%
 
$
17,506
     
46
%
 
$
24,402
     
57
%
 
$
25,521
     
66
%
Residential real estate mortgages
   
10,296
     
21
%
   
8,083
     
20
%
   
8,090
     
21
%
   
8,338
     
20
%
   
6,140
     
16
%
Consumer
   
7,213
     
14
%
   
8,440
     
21
%
   
8,724
     
23
%
   
8,765
     
21
%
   
6,249
     
16
%
Troubled debt restructured loans
   
5,423
     
11
%
   
2,230
     
6
%
   
3,970
     
10
%
   
962
     
2
%
   
836
     
2
%
Total nonaccrual loans
   
49,965
     
100
%
   
39,676
     
100
%
   
38,290
     
100
%
   
42,467
     
100
%
   
38,746
     
100
%
 
                                                                               
Loans 90 days or more past due and still accruing
                                                                               
Commercial, commercial real estate and agricultural loans
   
105
     
3
%
   
148
     
6
%
   
50
     
2
%
   
94
     
4
%
   
59
     
2
%
Residential real estate mortgages
   
808
     
22
%
   
330
     
13
%
   
763
     
24
%
   
919
     
40
%
   
602
     
24
%
Consumer
   
2,824
     
75
%
   
1,970
     
81
%
   
2,377
     
74
%
   
1,312
     
56
%
   
1,865
     
74
%
Total loans 90 days or more past due and still accruing
   
3,737
     
100
%
   
2,448
     
100
%
   
3,190
     
100
%
   
2,325
     
100
%
   
2,526
     
100
%
 
                                                                               
Total nonperforming loans
   
53,702
             
42,124
             
41,480
             
44,792
             
41,272
         
Other real estate owned
   
2,904
             
2,276
             
2,160
             
901
             
2,358
         
Total nonperforming assets
 
$
56,606
           
$
44,400
           
$
43,640
           
$
45,693
           
$
43,630
         
 
                                                                               
Total nonperforming loans to loans
   
0.99
%
           
0.98
%
           
1.09
%
           
1.24
%
           
1.13
%
       
Total nonperforming assets to total assets
   
0.74
%
           
0.73
%
           
0.78
%
           
0.86
%
           
0.80
%
       
Total allowance for loan losses to nonperforming loans
   
129.29
%
           
164.60
%
           
171.97
%
           
159.03
%
           
161.25
%
       

Total nonperforming assets were $56.6 million at December 31, 2013, compared to $44.4 million at December 31, 2012.  Nonperforming loans at December 31, 2013 were $53.7 million or 0.99% of total loans compared with $42.1 million or 0.98% at December 31, 2012.  Included in non-performing loans are $16.1 million of non-accrual loans in the acquired loan portfolio. Excluding non-accrual acquired loans, originated non-accruals to originated loans was 0.76% at December 31, 2013.  The Company recorded a provision for loan losses of $22.4 million for the year ended December 31, 2013 compared with $20.3 million for the year ended December 31, 2012.  Net charge-offs to average loans for the year ended December 31, 2013 were 0.44%, compared with 0.55% for the year ended December 31, 2012.  The allowance for loan losses was 129.29% of non-performing loans at December 31, 2013 as compared to 164.60% at December 31, 2012. Excluding acquired loans, the allowance for loan losses as a percentage of total originated loans was 1.56% at December 31, 2013.
Impaired loans, which primarily consist of nonaccruing commercial, commercial real estate, agricultural, agricultural real estate loans and business banking loans, as well as certain consumer and residential real estate mortgage loans that have been modified in a troubled debt restructuring (“TDR”), increased to $31.4 million at December 31, 2013 as compared to $23.1 million at December 31, 2012.  At December 31, 2013, $5.0 million of the total impaired loans had a specific reserve allocation of $0.7 million compared to $8.4 million of impaired loans at December 31, 2012 which had a specific reserve allocation of $2.8 million.
 
The allowance for loan losses is maintained at a level estimated by management to provide adequately for risk of probable 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 consolidated 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 conditions 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 examination 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 determining factors discussed above.

Total net charge-offs for 2013 were $22.3 million, the same as 2012.  Net charge-offs to average loans was 0.44% for 2013 as compared with 0.55% for 2012.  Gross charge-offs increased to $27.7 million for 2013 from $26.5 million for 2012.  Recoveries increased from $4.2 million for the year ended December 31, 2012 to $5.4 million for the year ended December 31, 2013.
 
Allowance for Loan Losses
 
(Dollars in thousands)
 
2013
   
2012
   
2011
   
2010
   
2009
 
Balance at January 1
 
$
69,334
   
$
71,334
   
$
71,234
   
$
66,550
   
$
58,564
 
Loans charged-off
                                       
Commercial and agricultural
   
10,459
     
8,750
     
8,969
     
12,969
     
11,500
 
Residential real estate mortgages
   
1,771
     
1,906
     
1,310
     
1,176
     
705
 
Consumer*
   
15,459
     
15,848
     
14,209
     
15,692
     
17,609
 
Total loans charged-off
   
27,689
     
26,504
     
24,488
     
29,837
     
29,814
 
Recoveries
                                       
Commercial and agricultural
   
1,957
     
1,641
     
1,438
     
1,922
     
1,508
 
Residential real estate mortgages
   
272
     
38
     
7
     
43
     
133
 
Consumer*
   
3,136
     
2,556
     
2,406
     
2,747
     
2,767
 
Total recoveries
   
5,365
     
4,235
     
3,851
     
4,712
     
4,408
 
Net loans charged-off
   
22,324
     
22,269
     
20,637
     
25,125
     
25,406
 
 
                                       
Provision for loan losses
   
22,424
     
20,269
     
20,737
     
29,809
     
33,392
 
Balance at December 31
 
$
69,434
   
$
69,334
   
$
71,334
   
$
71,234
   
$
66,550
 
Allowance for loan losses to loans outstanding at end of year
   
1.28
%
   
1.62
%
   
1.88
%
   
1.97
%
   
1.83
%
Net charge-offs to average loans outstanding
   
0.44
%
   
0.55
%
   
0.56
%
   
0.69
%
   
0.70
%

* Consumer charge-off and recoveries include consumer and home equity.

In addition to the nonperforming loans discussed above, the Company has also identified approximately $89.9 million in potential problem loans at December 31, 2013 as compared to $79.6 million at December 31, 2012. 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, 2013, there were 26 potential problem loans exceeding $1.0 million, totaling $47.5 million in aggregate, compared to 22 potential problem loans exceeding $1.0 million, totaling $44.7 million at December 31, 2012. Management cannot predict the extent to which economic 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 provision for loan losses.  To mitigate this risk, the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry, and originates loans primarily within its footprint.
 
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 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.

Allocation of the Allowance for Loan and Lease Losses
 
 
 
December 31,
 
 
 
2013
   
2012
   
2011
   
2010
   
2009
 
 
 
   
Category
   
   
Category
   
   
Category
   
   
Category
   
   
Category
 
 
 
   
Percent of
   
   
Percent of
   
   
Percent of
   
   
Percent of
   
   
Percent of
 
(Dollars in thousands)
 
Allowance
   
Loans
   
Allowance
   
Loans
   
Allowance
   
Loans
   
Allowance
   
Loans
   
Allowance
   
of Loans
 
Commercial and agricultural
 
$
35,090
     
44
%
 
$
35,624
     
47
%
 
$
38,831
     
45
%
 
$
40,101
     
44
%
 
$
36,599
     
41
%
Real estate mortgages
   
6,520
     
19
%
   
6,252
     
15
%
   
6,249
     
15
%
   
4,627
     
15
%
   
3,002
     
17
%
Consumer
   
27,694
     
37
%
   
27,162
     
38
%
   
26,049
     
40
%
   
26,126
     
41
%
   
26,664
     
42
%
Unallocated
   
130
     
0
%
   
296
     
0
%
   
205
     
0
%
   
380
     
0
%
   
285
     
0
%
Total
 
$
69,434
     
100
%
 
$
69,334
     
100
%
 
$
71,334
     
100
%
 
$
71,234
     
100
%
 
$
66,550
     
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, nonaccruals, historical charge-off experience, and specific economic factors (e.g. milk prices are considered when reviewing agricultural 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 2013, as well as the aforementioned review of the loan portfolio, the allowance for loan losses as a percentage of originated loans decreased from 1.72% as of December 31, 2012 to 1.55% as of December 31, 2013.  These 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 discount 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, 2013, 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 and the Burlington, Vermont area.  Accordingly, the ultimate 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 concentrations 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 lending 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 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.

Liquidity Risk

Liquidity involves the ability to meet the cash flow requirements of customers who may be depositors wanting to withdraw 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 management 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 payments 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 importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources which can be accessed when necessary. At December 31, 2013, the Company’s Basic Surplus measurement was 9.7% of total assets, or $734 million, which was above the Company’s minimum of 5% (calculated at $383 million of period end total assets at December 31, 2013) set forth in its liquidity policies.
 
This Basic Surplus approach enables the Company to adequately manage liquidity from both operational and contingency 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, 2013, the Company considered its Basic Surplus position to be strong.  However, certain events may adversely impact the Company’s liquidity position in 2014.  Improvement in the economy may increase demand for equity related products or 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 2014.  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 $1.2 billion at December 31, 2013.  In addition, the Bank has enhanced its “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile loans.  At December 31, 2013, the Bank had the capacity to borrow $734 million from this program.

At December 31, 2013 and 2012, FHLB advances outstanding totaled $638 million and $339 million, respectively.  The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $497 million at December 31, 2013 and $418 million at December 31, 2012.  In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $426 million at December 31, 2013 or used to collateralize other borrowings, such as repurchase agreements.

At December 31, 2013, a portion of the Company’s loans and securities were pledged as collateral on borrowings.  Therefore, 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.
Net cash flows provided by operating activities totaled $116.6 million in 2013 and $88.9 million in 2012. 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, depreciation and amortization, and cash flows generated through changes in other assets and liabilities.
 
Net cash flows used by investing activities totaled $181.1 million and $126.9 million in 2013 and 2012, respectively. Critical elements of investing activities are loan and investment securities transactions. The change in cash flows from investing activities was due primarily to the decrease in proceeds from maturities, calls, and principal paydowns of available for sale securities, which totaled $376.5 million in 2013 as compared with $573.8 million in 2012.  This was partially offset by a decrease in the purchases of available for sale securities which totaled $353.7 million in 2013 as compared to $483.9 million in 2012.
 
Net cash flows provided by financing activities totaled $59.7 million in 2013 as compared to $72.3 million in 2012. The critical elements of financing activities are proceeds from deposits, borrowings, and stock issuances.  In addition, financing activities are impacted by dividends and treasury stock transactions.
 
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 obligations at December 31, 2013 are as follows:
 
Contractual Obligations
 
(In thousands)
 
 
 
Payments Due by Period
 
 
 
2014
   
2015
   
2016
   
2017
   
2018
   
Thereafter
   
Total
 
Long-term debt obligations
 
$
12,460
   
$
308
   
$
90,313
   
$
115,312
   
$
90,313
   
$
117
   
$
308,823
 
Trust preferred debentures
   
-
     
-
     
-
     
-
     
-
     
101,196
     
101,196
 
Operating lease obligations
   
7,156
     
7,012
     
6,985
     
6,859
     
6,791
     
53,132
     
87,935
 
Retirement plan obligations
   
6,505
     
6,655
     
6,703
     
9,775
     
7,489
     
37,598
     
74,725
 
Capital lease obligations
   
169
     
169
     
113
     
38
     
7
     
-
     
496
 
Data processing commitments
   
11,575
     
11,248
     
10,471
     
10,471
     
8,455
     
13,126
     
65,346
 
Total contractual obligations
 
$
37,865
   
$
25,392
   
$
114,585
   
$
142,455
   
$
113,055
   
$
205,169
   
$
638,521
 

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, 2013 and 2012, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $1.1 billion and $841.7 million, 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 stand-by letters of credit.  The Company guarantees the obligations or performance of customers by issuing stand-by letters of credit to third parties. These stand-by 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 stand-by 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 represent future cash requirements.  At December 31, 2013 and 2012, outstanding stand-by letters of credit were approximately $36.8 million and $37.5 million, respectively. The fair value of the Company’s stand-by letters of credit at December 31, 2013 and 2012 was not significant.  The  following  table  sets  forth  the commitment expiration  period  for  stand-by  letters  of  credit  at  December  31,  2013:
Commitment Expiration of Standby Letters of Credit
 
Within one year
 
$
24,849
 
After one but within three years
   
11,421
 
After three but within five years
   
196
 
After five years
   
371
 
Total
 
$
36,837
 

Interest Rate Swaps

Beginning in June 2012 with the acquisition of Hampshire First Bank, the Bank offers interest rate swap agreements to its customers.  These agreements allow the Bank’s customers to effectively fix the interest rate on a variable rate loan by entering into a separate agreement.  Simultaneous with the execution of such an agreement with a customer, the Bank enters into a matching interest rate swap agreement with an unrelated third party provider, which allows the Bank to continue to receive the historical variable rate under the loan agreement with the customer.  The agreement with the third party is not a hedge contract therefore changes in fair value are recorded through earnings.  Assets and liabilities associated with the agreements are recorded in other assets and other liabilities on the balance sheet.  Gains and losses are recorded as other noninterest income.  The Bank is not subject to any fee or penalty should the customer elect to terminate the interest rate swap agreement prior to maturity.  The Bank is exposed to credit loss equal to the fair value of the derivatives (not the notional amount of the derivatives) in the event of nonperformance by the counterparty to the interest rate swap agreements.  Additionally, the Bank receives a fee from the customer that is recognized when the Bank has fulfilled its obligations under each agreement, which is generally upon execution of the agreement with the Bank’s customer.  Since the terms of the two interest rate swap agreements are identical, the income statement impact to the Bank is limited to the fees it receives from the customer.  The Bank recognized approximately $1.0 million in swap fee income in 2013.  At December 31, 2013, the Bank maintained a $0.2 million deposit with the counterparty to collateralize the swap agreements.

Loans Serviced for Others and Loans Sold with Recourse

The total amount of loans serviced by the Company for unrelated third parties was approximately $554.4 million and $309.2 million at December 31, 2013 and 2012, respectively.  At December 31, 2013 and 2012, the Company had approximately $2.2 million and $1.2 million, respectively, of mortgage servicing rights.  At December 31, 2013 and 2012, the Company serviced $15.7 million and $13.7 million, respectively, of agricultural loans sold with recourse. Due to sufficient collateral on these loans, no reserve is considered necessary at December 31, 2013 and 2012.

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 shareholders 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 regulations, 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, 2013, approximately $56.7 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.

Stock Repurchase Plan

Under a previously disclosed stock repurchase plan, the Company purchased 584,925 shares of its common stock during the twelve month period ended December 31, 2013, for a total of $12.5 million at an average price of $21.30 per share.  This plan expired on December 31, 2013.  On July 22, 2013, the NBT Board of Directors authorized a new repurchase program for NBT to repurchase up to an additional 1,000,000 shares of its outstanding common stock.  This plan expires on December 31, 2014.
2012 OPERATING RESULTS AS COMPARED TO 2011 OPERATING RESULTS

Net Interest Income

While the rate paid on interest bearing liabilities decreased 17 basis points, the yield on interest earning assets declined 37 basis points compared to the same period for 2011, resulting in margin compression for the year ended December 31, 2012.  The yield on securities available for sale was 2.45% for the year ended December 31, 2012, compared with 2.97% for the year ended December 31, 2011. This decrease was due primarily to the reinvestment of cash flows from maturing securities and cash received from branch acquisitions in 2011 and the first quarter of 2012 into lower yielding securities in the current rate environment. The average balance of securities available for sale for the year ended December 31, 2012 was $1.2 billion, up approximately $54.8 million, or 4.9%, from the year ended December 31, 2011. This increase was due primarily to reinvestment of cash flows from held to maturity securities into available for sale securities, and investment of liquidity from branch acquisition activity and deposit growth. The yield on loans was 5.17% for the year ended December 31, 2012, compared with 5.58% for the year ended December 31, 2011. The average balance of loans for the year ended December 31, 2012 was $4.1 billion, up approximately $375.5 million (including approximately $124.3 million from acquisitions), or 10.2%, from the year ended December 31, 2011.  The reduction in yields on earning assets was partially offset by a reduction in rates paid on interest bearing liabilities.  The rate on time deposits was 1.45% for the year ended December 31, 2012, compared with 1.80% for the year ended December 31, 2011.  The rate on money market deposit accounts was 0.18% for the year ended December 31, 2012, compared with 0.34% for the year ended December 31, 2011.
 
Loans and Corresponding Interest and Fees on Loans

The average balance of loans increased by approximately $375.5 million, or 10.2%, from 2011 to 2012.  The yield on average loans decreased from 5.58% in 2011 to 5.17% in 2012, as loan rates declined due to the historically low rate environment in 2012.  Interest income from loans on a FTE basis increased 1.97%, from $205.3 million in 2011 to $209.4 million in 2012.  This increase was due to the increase in average loan balances noted above, and was partially offset by the decrease in yields.
 
Total loans increased $477.4 million, or 12.6% (6.8% organic growth) from December 31, 2011 to December 31, 2012.  In June 2012, the Company acquired Hampshire First Bank in New Hampshire, including approximately $219 million in loans, which contributed to this loan growth.  Commercial loans increased $83.5 million, or 13.7%, from $611.3 million at December 31, 2011 to $694.8 million at December 31, 2012, due to strong originations in 2012, particularly in our upstate New York markets and Vermont, as well as approximately $29.9 million acquired from the aforementioned acquisition.  Commercial real estate loans increased $183.9 million, or 20.7%, from $888.9 million at December 31, 2011 to $1.1 billion at December 31, 2012, in large part due to strong originations in our upstate New York markets as well as originations from new markets, particularly Vermont.  The Company also acquired approximately $149.8 million in commercial real estate loans from the aforementioned acquisition.  Real estate construction and development loans increased $29.1 million from $94.0 million at December 31, 2011 to $123.1 million at December 31, 2012 due to the addition of a few large, commercial development loans during 2012 primarily from existing customers within our footprint.  Residential real estate loans increased $69.6 million (including approximately $32.7 million from the aforementioned acquisition), from $581.5 million at December 31, 2011 to $651.1 million at December 31, 2012.  The Company sold more fixed rate mortgages during 2012 than 2011 as market conditions in 2011 were not as favorable for such sales.  Consumer loans increased $101.4 million from $946.5 million at December 31, 2011 to $1.0 billion at December 31, 2012 in large part due to strong originations in our upstate New York markets as well as originations from new markets.  Home equity loans increased modestly in 2012.
Securities and Corresponding Interest and Dividend Income

The average balance of the amortized cost for securities available for sale increased $54.8 million, or 4.9%, from 2011 to 2012.  The yield on average securities available for sale was 2.45% for 2012 compared to 2.97% in 2011.
 
The average balance of securities held to maturity decreased from $81.6 million in 2011 to $65.6 million in 2012. At December 31, 2012, securities held to maturity were comprised primarily of tax-exempt municipal securities. The yield on securities held to maturity increased from 5.33% in 2011 to 5.46% in 2012.
 
The average balance of FRB and FHLB stock increased to $28.4 million in 2012 from $27.1 million in 2011 due in large part to the aforementioned acquisition of Hampshire First.  The yield from investments in FRB and FHLB banks decreased from 5.13% in 2011 to 4.86% in 2012.

Deposits

Average interest bearing deposits increased $227.9 million, or 7.0%, from 2011 to 2012, due primarily to the acquisition of Hampshire First in June 2012.  Average time deposits increased $79.8 million, or 8.7%, during 2012 as compared to 2011.  Average money market deposits increased $46.6 million or 4.4% during 2012 when compared to 2011.  Average NOW accounts increased $24.3 million or 3.6% during 2012 as compared to 2011.  The average balance of savings accounts increased $77.2 million or 12.8% during 2012 when compared to 2011.    The average balance of demand deposits increased $173.6 million, or 18.0%, from $966.3 million in 2011 to $1.1 billion in 2012.  This growth in demand deposits was driven principally by increases in accounts from retail, municipal, and commercial customers spurred by strategic expansion into new markets.

The rate paid on average interest-bearing deposits decreased from 0.70% during 2011 to 0.54% in 2012. The decrease in the rate on interest-bearing deposits was driven primarily by pricing decreases from money market accounts and time deposits, which are sensitive to interest rate changes. The pricing decreases for these products resulted from the FRB maintaining a historic low Fed Funds target rate as well as an overall decrease in all interest rates.  The rate paid for money market deposit accounts decreased from 0.34% during 2011 to 0.18% during 2012.  The rate paid for NOW accounts decreased from 0.34% during 2011 to 0.26% during 2012.  The rate paid for savings deposits decreased from 0.11% in 2011 to 0.08% in 2012 and the rate paid on time deposits decreased from 1.80% during 2011 to 1.45% during 2012.
 
Borrowings

Average short-term borrowings increased slightly to $165.7 million in 2012 from $154.0 million in 2011.  The average rate paid on short-term borrowings decreased from 0.13% in 2011 to 0.11% in 2012, which was primarily driven by the FRB maintaining a historic low Fed Funds target rate of 0.25% (which directly impacts short-term borrowing rates).  Average long-term debt decreased from $370.0 million in 2011 to $368.3 million in 2012.

The average balance of trust preferred debentures remained at $75.4 million in 2012 compared to 2011.  The average rate paid for trust preferred debentures in 2012 was 2.29%, down from 2.77% in 2011. The decrease in rate on the trust preferred debentures is due primarily to the reset of interest rate terms in two trust preferred debentures to variable rate from fixed rate.  The third trust preferred debenture reset to a variable rate in a prior year and therefore, all associated interest expense on trust preferred debentures is now at a variable rate.

Short-term borrowings 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. The Company has unused lines of credit and  access  to  brokered  deposits  available  for  short-term  financing  of approximately $1.3 billion and  $1.1 billion  at December 31, 2012 and 2011, respectively.  Securities collateralizing 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 blanket  lien  on  its  residential  real  estate  mortgage  loans.

Noninterest Income

Noninterest income for the year ended December 31, 2012 was $87.3 million, up 8.7% or $7.0 million, compared with $80.3 million for the same period in 2011, primarily due to an increase in other noninterest income.  Insurance and other financial services revenue increased approximately $1.5 million for the year ended December 31, 2012, compared to the year ended December 31, 2011.  This increase was due primarily to the acquisition of an insurance agency in 2011 as well as organic growth in commercial product lines.  Retirement plan administration fees increased approximately $1.2 million for the year ended December 31, 2012, compared to the year ended December 31, 2011, due primarily to an increase in customer base.  ATM and debit card fees increased approximately $0.7 million for the year ended December 31, 2012, compared to the year ended December 31, 2011, due primarily to an increase in card usage and customer base.  Other noninterest income increased approximately $6.1 million for the year ended December 31, 2012 as compared to December 31, 2011. This increase was due in part to a $1.1 million payoff gain on a purchased commercial real estate loan.  In addition, the Company recognized nonrecurring items totaling approximately $1.4 million during 2012 including a prepayment penalty fee related to a previously disclosed loss of a retirement plan client and flood related recoveries.  Further, mortgage banking revenue increased approximately $2.6 million for the year ended December 31, 2012 as compared to the same period in 2011, as the Company sold certain residential mortgages as market conditions warranted.  The Company sold approximately $65.2 million residential mortgages during 2012, as compared to sales of approximately $13.5 million during 2011, while also experiencing more favorable gains during 2012.  The Company also realized net securities gains of approximately $0.6 million during the year ended December 31, 2012, as compared to $0.2 million for the same period in 2011.  These increases were partially offset by a decrease in service charges on deposit accounts of approximately $3.2 million, or 15.1%, for the year ended December 31, 2012, compared with the same period in 2011 primarily due to a decrease in overdraft fee income.

Noninterest Expense

Noninterest expense for the year ended December 31, 2012 was $193.9 million, up $13.2 million or 7.3%, for the same period in 2011, primarily due to an increase in employee salaries and benefits, professional fees, and acquisition expenses. Salaries and employee benefits increased $5.6 million, or 5.6%, for the year ended December 31, 2012, compared with the same period in 2011. This increase was due primarily to increases in full-time-equivalent employees from acquisitions, merit increases, and increased pension expense.  Professional fees and outside services increased $1.5 million, or 17.3%, for the year ended December 31, 2012 as compared to 2011.  Data processing and communications, occupancy, and equipment expenses increased approximately $3.0 million collectively, or 7.9%, for the year ended December 31, 2012 as compared to 2011, due primarily to increased activity from recent expansion into new markets.  The Company incurred approximately $2.6 million in merger related expenses for the year ended December 31, 2012, as compared to $0.8 million for the same period in 2011.  These increases were partially offset by a decrease in Federal Deposit Insurance Corporation (“FDIC”) expenses of approximately $0.4 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This decrease was due to the FDIC redefining the deposit insurance assessment base effective the second quarter of 2011.  In addition, advertising expenses were down approximately $0.6 million in 2012 as compared with 2011 due in large part to expense reduction initiatives.

Recent Accounting Updates
 
In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-01 —Investments (Topic 323), Accounting for Investments in Qualified Affordable Housing Projects.  The amendments in this ASU provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this ASU are effective for the Company for annual periods beginning January 1, 2015 and should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments.  The Company does not expect the adoption of this ASU to have a material impact on the financial statements.

In January 2014, the FASB issued ASU No. 2014-04 —Receivables —Troubled Debt Restructurings by Creditors (Subtopic 310-40), Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure.  The amendments in this Update clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments in this ASU are effective for the Company beginning January 1, 2014 and we do not expect they will have a significant impact on the financial statements.

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 currency 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 Company’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 position and profitability, and to recommend strategies for consideration 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 attainment 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 uncertainty 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 a balance sheet/income statement simulation model (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 assumption of a flat rate scenario (i.e. no change in current interest rates) with a static balance sheet over a 12-month period. 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 balance sheet.  Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. 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.

In the declining rate scenario, net interest income is projected to decrease slightly when compared to the forecasted net interest 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 scenarios, 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, 2013 balance sheet position:

Table 10. Interest Rate Sensitivity Analysis
 
Change in interest rates
 
Percent change
 
(In basis points)
 
in net interest income
 
+200
   
(3.77
%)
-100
   
(1.57
%)

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 2014, the Company will continue to focus on increasing earning assets through loan growth, asset mix of loans and investments, and leverage opportunities.

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, 2013 and 2012, 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, 2013. 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, 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, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 3, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/S/ KPMG LLP
Albany, New York
March 3, 2014
Consolidated Balance Sheets
 
 
 
As of December 31,
 
(In thousands, except share and per share data)
 
2013
   
2012
 
Assets
 
   
 
Cash and due from banks
 
$
157,625
   
$
157,094
 
Short-term interest bearing accounts
   
1,301
     
6,574
 
Securities available for sale, at fair value
   
1,364,881
     
1,147,999
 
Securities held to maturity (fair value $113,276 and $61,535)
   
117,283
     
60,563
 
Trading securities
   
5,779
     
3,918
 
Federal Reserve and Federal Home Loan Bank stock
   
46,864
     
29,920
 
Loans
   
5,406,795
     
4,277,616
 
Less allowance for loan losses
   
69,434
     
69,334
 
Net loans
   
5,337,361
     
4,208,282
 
Premises and equipment, net
   
88,327
     
77,875
 
Goodwill
   
264,997
     
152,373
 
Intangible assets, net
   
25,557
     
16,962
 
Bank owned life insurance
   
114,966
     
80,702
 
Other assets
   
127,234
     
99,997
 
Total assets
 
$
7,652,175
   
$
6,042,259
 
Liabilities
               
Demand (noninterest bearing)
 
$
1,645,641
   
$
1,242,712
 
Savings, NOW, and money market
   
3,223,441
     
2,558,376
 
Time
   
1,021,142
     
983,261
 
Total deposits
   
5,890,224
     
4,784,349
 
Short-term borrowings
   
456,042
     
162,941
 
Long-term debt
   
308,823
     
367,492
 
Junior subordinated debt
   
101,196
     
75,422
 
Other liabilities
   
79,321
     
69,782
 
Total liabilities
   
6,835,606
     
5,459,986
 
Stockholders’ equity
               
Preferred stock, $0.01 par value; authorized 2,500,000 shares at December 31, 2013 and 2012
   
-
     
-
 
Common stock, $0.01 par value. Authorized 100,000,000 shares at December 31, 2013 and December 31, 2012; issued 49,651,494 at December 31, 2013 and 39,305,131 at December 31, 2012
   
497
     
393
 
Additional paid-in-capital
   
574,152
     
346,692
 
Retained earnings
   
385,787
     
357,558
 
Accumulated other comprehensive loss
   
(16,765
)
   
(5,880
)
Common stock in treasury, at cost, 6,138,444 and 5,529,781 shares at December 31, 2013 and 2012, respectively
   
(127,102
)
   
(116,490
)
Total stockholders’ equity
   
816,569
     
582,273
 
Total liabilities and stockholders’ equity
 
$
7,652,175
   
$
6,042,259
 

See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
 
 
 
Years ended December 31,
 
(In thousands, except per share data)
 
2013
   
2012
   
2011
 
Interest, fee, and dividend income
 
   
   
 
Interest and fees on loans and leases
 
$
238,672
   
$
208,458
   
$
204,370
 
Securities available for sale
   
25,510
     
27,005
     
31,083
 
Securities held to maturity
   
2,660
     
2,378
     
2,886
 
Other
   
1,881
     
1,556
     
1,658
 
Total interest, fee, and dividend income
   
268,723
     
239,397
     
239,997
 
Interest expense
                       
Deposits
   
16,290
     
18,848
     
23,020
 
Short-term borrowings
   
515
     
188
     
205
 
Long-term debt
   
11,755
     
14,428
     
14,404
 
Junior subordinated debt
   
2,084
     
1,730
     
2,092
 
Total interest expense
   
30,644
     
35,194
     
39,721
 
Net interest income
   
238,079
     
204,203
     
200,276
 
Provision for loan and lease losses
   
22,424
     
20,269
     
20,737
 
Net interest income after provision for loan and lease losses
   
215,655
     
183,934
     
179,539
 
Noninterest income
                       
Insurance and other financial services revenue
   
24,447
     
22,387
     
20,843
 
Service charges on deposit accounts
   
19,307
     
18,225
     
21,464
 
ATM and debit card fees
   
15,558
     
12,358
     
11,642
 
Retirement plan administration fees
   
11,497
     
10,097
     
8,918
 
Trust
   
16,682
     
9,172
     
8,864
 
Bank owned life insurance income
   
3,793
     
3,077
     
3,085
 
Net securities gains
   
1,426
     
599
     
150
 
Other
   
10,505
     
11,412
     
5,345
 
Total noninterest income
   
103,215
     
87,327
     
80,311
 
Noninterest expense
                       
Salaries and employee benefits
   
113,580
     
104,815
     
99,212
 
Occupancy
   
20,720
     
17,415
     
16,363
 
Data processing and communications
   
15,353
     
13,437
     
12,271
 
Professional fees and outside services
   
13,309
     
10,463
     
8,921
 
Equipment
   
11,493
     
9,627
     
8,864
 
Office supplies and postage
   
6,563
     
6,489
     
6,073
 
FDIC expenses
   
4,960
     
3,832
     
4,267
 
Advertising
   
3,204
     
2,889
     
3,460
 
Amortization of intangible assets
   
4,872
     
3,394
     
3,046
 
Loan collection and other real estate owned
   
2,619
     
2,560
     
2,631
 
Merger expenses
   
12,364
     
2,608
     
804
 
Other
   
19,890
     
16,358
     
14,764
 
Total noninterest expense
   
228,927
     
193,887
     
180,676
 
Income before income tax expense
   
89,943
     
77,374
     
79,174
 
Income tax expense
   
28,196
     
22,816
     
21,273
 
Net income
 
$
61,747
   
$
54,558
   
$
57,901
 
Earnings per share
                       
Basic
 
$
1.47
   
$
1.63
   
$
1.72
 
Diluted
   
1.46
     
1.62
     
1.71
 

See accompanying notes to consolidated financial statements.

Consolidated Statements of Comprehensive Income
 
 
 
Years ended December 31,
 
(In thousands)
 
2013
   
2012
   
2011
 
Net income
 
$
61,747
   
$
54,558
   
$
57,901
 
Other comprehensive (loss) income, net of tax
                       
Unrealized net holding (losses) gains arising during the year (pre-tax amounts of $(41,059), $(2,471), and $12,757)
   
(24,794
)
   
(1,492
)
   
7,703
 
Reclassification adjustment for net gains related to securities available for sale included in net income (pre-tax amounts of $1,426, $599, and $150)
   
(861
)
   
(362
)
   
(90
)
Amortization of prior service cost and actuarial gains (pre-tax amounts of $2,790, $3,593, and $1,665)
   
1,601
     
2,092
     
999
 
Decrease (Increase) in prior service costs and unrecognized actuarial loss (pre-tax amounts of $21,923, $(24), and $(15,546))
   
13,169
     
(14
)
   
(9,381
)
Total other comprehensive income (loss)
   
(10,885
)
   
224
     
(769
)
Comprehensive income
 
$
50,862
   
$
54,782
   
$
57,132
 

See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
 
(In thousands except share and per share data)
 
Common
stock
   
Additional
paid-in-
capital
   
Retained
earnings
   
Accumulated
other
comprehensive
(loss) income
   
Common
stock in
treasury
   
Total
 
Balance at December 31, 2010
 
$
380
   
$
314,023
   
$
299,797
   
$
(5,335
)
 
$
(75,293
)
 
$
533,572
 
Net income
   
-
     
-
     
57,901
     
-
     
-
     
57,901
 
Cash dividends - $0.80 per share
   
-
     
-
     
(27,063
)
   
-
     
-
     
(27,063
)
Purchase of 1,458,639 treasury shares
   
-
     
-
     
-
     
-
     
(30,502
)
   
(30,502
)
Net issuance of 112,512 shares to employee stock plans, including tax benefit
   
-
     
62
     
(654
)
   
-
     
2,319
     
1,727
 
Stock-based compensation
   
-
     
3,244
     
-
     
-
     
-
     
3,244
 
Other comprehensive loss
   
-
     
-
     
-
     
(769
)
   
-
     
(769
)
Balance at December 31, 2011
 
$
380
   
$
317,329
   
$
329,981
   
$
(6,104
)
 
$
(103,476
)
 
$
538,110
 
Net income
   
-
     
-
     
54,558
     
-
     
-
     
54,558
 
Cash dividends - $0.80 per share
   
-
     
-
     
(26,712
)
   
-
     
-
     
(26,712
)
Purchase of 769,568 treasury shares
   
-
     
-
     
-
     
-
     
(15,490
)
   
(15,490
)
Net issuance of 1,269,592 shares for acquisition
   
13
     
25,811
     
-
     
-
     
-
     
25,824
 
Net issuance of 118,616 shares to employee stock plans, including tax benefit
   
-
     
(812
)
   
(269
)
   
-
     
2,476
     
1,395
 
Stock-based compensation
   
-
     
4,364
     
-
     
-
     
-
     
4,364
 
Other comprehensive income
   
-
     
-
     
-
     
224
     
-
     
224
 
Balance at December 31, 2012
 
$
393
   
$
346,692
   
$
357,558
   
$ 
(5,880
)
 
$ 
(116,490
)
 
$
582,273
 
Net income
   
-
     
-
     
61,747
     
-
     
-
     
61,747
 
Cash dividends - $0.81 per share
   
-
     
-
     
(33,518
)
   
-
     
-
     
(33,518
)
Purchase of 584,925 treasury shares
   
-
     
-
     
-
     
-
     
(12,459
)
   
(12,459
)
Issuance of 10,346,363 shares, net of 408,957 treasury shares, for acquisition
   
104
     
225,447
     
-
     
-
     
(5,779
)
   
219,772
 
Net issuance of 385,219 shares to employee stock plans, including tax benefit
   
-
     
(2,292
)
   
-
     
-
     
7,626
     
5,334
 
Stock-based compensation
   
-
     
4,305
     
-
     
-
     
-
     
4,305
 
Other comprehensive loss
   
-
     
-
     
-
     
(10,885
)
   
-
     
(10,885
)
Balance at December 31, 2013
 
$
497
   
$
574,152
   
$
385,787
   
$ 
(16,765
)
 
$ 
(127,102
)
 
$
816,569
 

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows
 
 
 
Years ended December 31,
 
(In thousands)
 
2013
   
2012
   
2011
 
Operating activities
 
   
   
 
Net income
 
$
61,747
   
$
54,558
   
$
57,901
 
Adjustments to reconcile net income to net cash provided by operating activities
                       
Provision for loan and lease losses
   
22,424
     
20,269
     
20,737
 
Depreciation and amortization of premises and equipment
   
7,948
     
6,276
     
5,463
 
Net accretion on securities
   
5,058
     
2,408
     
1,597
 
Amortization of intangible assets
   
4,872
     
3,394
     
3,046
 
Stock based compensation
   
4,305
     
4,364
     
3,244
 
Bank owned life insurance income
   
(3,793
)
   
(3,077
)
   
(3,085
)
Trading security purchases
   
(1,085
)
   
(753
)
   
(447
)
(Gains) losses in trading securities
   
(776
)
   
(103
)
   
193
 
Deferred income tax expense (benefit)
   
2,344
     
(10
)
   
(9,478
)
Proceeds from sale of loans held for sale
   
71,342
     
65,160
     
13,545
 
Originations and purchases of loans held for sale
   
(66,512
)
   
(66,252
)
   
(14,167
)
Net gains on sales of loans held for sale
   
(1,288
)
   
(2,469
)
   
(329
)
Net security gains
   
(1,426
)
   
(599
)
   
(151
)
Net gains on sales of other real estate owned
   
(1,106
)
   
(988
)
   
(2,531
)
Net decrease (increase) in other assets
   
20,463
     
6,804
     
(3,579
)
Net (decrease) increase in other liabilities
   
(5,219
)
   
(128
)
   
11,806
 
Net cash provided by operating activities
   
119,298
     
88,854
     
83,765
 
Investing activities
                       
Net cash provided by acquisitions
   
80,883
     
52,871
     
81,467
 
Securities available for sale:
                       
Proceeds from maturities, calls, and principal paydowns
   
376,509
     
573,828
     
541,555
 
Proceeds from sales
   
27,593
     
1,790
     
2,437
 
Purchases
   
(353,714
)
   
(483,858
)
   
(648,048
)
Securities held to maturity:
                       
Proceeds from maturities, calls, and principal paydowns
   
34,413
     
31,506
     
47,186
 
Purchases
   
(84,621
)
   
(20,193
)
   
(20,736
)
Net increase in loans
   
(255,318
)
   
(277,530
)
   
(172,920
)
Net (increase) decrease in Federal Reserve and FHLB stock
   
(8,957
)
   
(1,886
)
   
226
 
Proceeds from bank owned life insurance
   
-
     
-
     
758
 
Purchases of premises and equipment, net
   
(5,766
)
   
(6,994
)
   
(9,954
)
Proceeds from sales of other real estate owned
   
5,224
     
3,616
     
2,531
 
Net cash used in investing activities
   
(183,754
)
   
(126,850
)
   
(175,498
)
Financing activities
                       
Net (decrease) increase in deposits
   
(7,545
)
   
135,095
     
87,992
 
Net increase (decrease) in short-term borrowings
   
271,497
     
(18,651
)
   
22,158
 
Proceeds from issuance of long-term debt
   
-
     
-
     
156
 
Repayments of long-term debt
   
(163,595
)
   
(3,354
)
   
(2,146
)
Excess tax benefit from exercise of stock options
   
(178
)
   
8
     
341
 
Proceeds from the issuance of shares to employee benefit plans and other stock plans
   
5,512
     
1,387
     
1,386
 
Purchase of treasury stock
   
(12,459
)
   
(15,490
)
   
(30,502
)
Cash dividends and payments for fractional shares
   
(33,518
)
   
(26,712
)
   
(27,063
)
Net cash provided by financing activities
   
59,714
     
72,283
     
52,322
 
Net (decrease) increase in cash and cash equivalents
   
(4,742
)
   
34,287
     
(39,411
)
Cash and cash equivalents at beginning of year
   
163,668
     
129,381
     
168,792
 
Cash and cash equivalents at end of year
 
$
158,926
   
$
163,668
   
$
129,381
 
Supplemental disclosure of cash flow information
 
Years ended December 31,
 
Cash paid during the year for:
 
2013
   
2012
   
2011
 
Interest
 
$
31,307
   
$
35,344
   
$
40,135
 
Income taxes, net of refund
   
20,848
     
25,512
     
31,258
 
Noncash investing activities:
                       
Loans transferred to other real estate owned
 
$
4,746
   
$
2,734
   
$
2,927
 
Acquisitions:
                       
Fair value of assets acquired
 
$
1,505,490
   
$
258,467
   
$
67,020
 
Fair value of liabilities assumed
   
1,285,718
     
285,012
     
148,487
 
Fair value of debt issued in purchase combination
   
-
     
502
     
2,460
 
 
See accompanying notes to consolidated financial statements.

NBT BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2013 and 2012

(1)  Summary of Significant Accounting Policies

The accounting and reporting policies of NBT Bancorp Inc. (“NBT Bancorp”) and its subsidiaries, NBT Bank, National Association (“NBT Bank”), NBT Holdings, Inc., and NBT Financial Services, Inc., conform, in all material respects, to U.S. generally accepted accounting principles (“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 instruments, status of contingencies and other-than-temporary impairment on investments and other real estate owned (OREO) 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 subsidiaries is recorded using the equity method of accounting.

The Company determines whether it has a controlling financial 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 characteristics 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 Report

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, northeastern Pennsylvania, western Massachusetts, southern New Hampshire and Burlington, Vermont.  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 available for sale, held to maturity or trading.  Held to maturity debt securities are those that the Company has the ability and intent to hold until maturity.  Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available for sale securities are excluded from earnings and are reported in stockholders’ equity and the statement of comprehensive income as a component of accumulated other comprehensive income or loss. Held to maturity 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 held-to-maturity and available-for-sale 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.  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 other-than-temporary impairment 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 amortized cost basis less any current-period credit loss, the other-than-temporary impairment 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 other-than-temporary impairment related to the credit loss shall be recognized in earnings. The amount of the total other-than-temporary impairment related to other factors shall be recognized in other comprehensive income, net of applicable taxes.

In estimating other-than-temporary impairment 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 circumstances 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 management, 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 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.
 
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, forgiveness 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 operation 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 by segment or class of loan as applicable, through an allowance estimate or a charge-off to the allowance.  Segment and class status is determined by the loan’s classification at origination.

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 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 recoveries 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 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 loans). 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.

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, periodically 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 accumulated depreciation.  Depreciation of premises and equipment is determined using the straight-line method over the estimated useful lives of the respective assets. Expenditures for maintenance, repairs, and minor replacements are charged to expense as incurred.

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 valuation of other real estate owned, management obtains appraisals for properties.  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 minimum down payment requirements prescribed by GAAP.  The balance of OREO at December 31, 2013 and 2012 was approximately $2.9 million and $2.3 million, respectively, and is recorded in Other Assets on the Consolidated Balance Sheet.

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, 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 payments 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 remaining 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 acquisition, regardless of whether the customer is contractually delinquent, 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, 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 nonaccrual policy.

Subsequent to acquisition the estimate of cash flows expected to be collected on loans accounted for in accordance with ASC 310-20 is periodically re-assessed. These re-assessments involve the use of key assumptions and estimates, similar to those used in the initial estimate of fair value. A decrease in expected cash flows in subsequent periods may indicate that the loan pool is impaired, which would require the establishment of an allowance for loan losses by a charge to the provision for credit losses.

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 resolution (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 troubled debt restructurings as the pool, and not the individual loan, represents the unit of account.
Goodwill and Other Intangible Assets

Goodwill and 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 accelerated 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. Goodwill impairment tests are performed on an annual basis or when events or circumstances dictate. In these tests, the fair values of each reporting unit, or segment, is compared to the carrying amount of that reporting unit in order to determine if impairment is indicated. If so, the implied fair value of the reporting unit’s goodwill is compared to its carrying amount and the impairment loss is measured by the excess of the carrying value over fair value.

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 financial 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 taxable 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 recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense.

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 employees.  We recognize compensation expense in our income statement over the requisite service period, based on the grant-date fair value of the award.  The fair values of options are estimated using the Black-Scholes option pricing model.  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 Company’s stock-based employee compensation plan is described in Note 14 “Stock-Based Compensation,” of this Report.
Interest Rate Swaps

The Bank offers interest rate swap agreements to its customers.  These agreements allow the Bank’s customers to effectively fix the interest rate on a variable rate loan by entering into a separate agreement.  Simultaneous with the execution of such an agreement with a customer, the Bank enters into a matching interest rate swap agreement with an unrelated third party provider, which allows the Bank to continue to receive the historical variable rate under the loan agreement with the customer.  The agreement with the third party is not a hedge contract therefore changes in fair value are recorded through earnings.  Assets and liabilities associated with the agreements are recorded in other assets and other liabilities on the balance sheet.  Gains and losses are recorded as other noninterest income.  The Bank is not subject to any fee or penalty should the customer elect to terminate the interest rate swap agreement prior to maturity.  The Bank is exposed to credit loss equal to the fair value of the derivatives (not the notional amount of the derivatives) in the event of nonperformance by the counterparty to the interest rate swap agreements.  Additionally, the Bank receives a fee from the customer that is recognized when the Bank has fulfilled its obligations under each agreement, which is generally upon execution of the agreement with the Bank’s customer.  Since the terms of the two interest rate swap agreements are identical, the income statement impact to the Bank is generally limited to the fees it receives from the customer.
 
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 customers.  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 transactions.  The fair value of stand-by letters of credit is recorded upon inception.

Loan Sales and Loan Servicing

The Company originates and services residential mortgage loans for consumers and sells 15-year, 20-year and 30-year residential real estate mortgages in the secondary market when the interest rate environment is determined to be favorable by management, while retaining servicing rights on the sold loans.  Loan sales are recorded when the sales are funded.  Mortgage 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 financing 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.

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 outstanding 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 earnings of the entity (such as the Company’s dilutive stock options and restricted stock).

Subsequent Events

The Company has evaluated subsequent events for potential recognition and/or disclosure and there were none identified.

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.
 
Pension Costs

The Company maintains a noncontributory, defined benefit pension plan covering substantially all employees, as well as supplemental employee retirement plans covering certain executives 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.
 
Trust Operations

Assets held by the Company in a fiduciary or agency capacity 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.

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 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 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 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 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 adjustments 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 comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

 (2)  Acquisitions

Acquisition of Alliance Financial Corporation
On March 8, 2013, the Company acquired Alliance Financial Corporation (“Alliance”), the parent company of Alliance Bank, N.A., for total consideration of $226 million.  As part of the acquisition, Alliance was merged with and into the Company and Alliance Bank, with 26 branch locations in the central New York counties of Onondaga, Cortland, Madison, Oneida and Oswego, was merged with and into the Bank.  The merger with Alliance enabled the Company to expand its footprint into demographically attractive and contiguous markets located in the aforementioned New York counties.  Alliance operations were integrated into the Company and were included in the Consolidated Statements of Income from the date of acquisition.

Under the terms of the merger agreement, each outstanding share of Alliance common stock was converted into the right to receive 2.1779 shares of the Company’s common stock.  As a result, Alliance shareholders received 10.3 million shares of Company common stock valued at $226 million.

In connection with the merger, the consideration paid and the fair value of the assets acquired and the liabilities assumed on the date of acquisition are as summarized in the following table, in thousands:

Consideration paid:
 
 
NBT Bancorp common stock issued to Alliance common shareholders
 
$
225,551
 
Cash in lieu of fractional shares paid to Alliance common shareholders
   
11
 
Less treasury shares
   
5,779
 
 
       
Net consideration paid
 
$
219,783
 
 
       
Recognized Amounts of Identifiable Assets Acquired and (Liabilities Assumed) At Fair Value:
       
Cash and short term investments
 
$
81,060
 
Securities
   
320,618
 
Loans and leases
   
904,473
 
Intangible assets
   
13,161
 
Other assets
   
72,731
 
Deposits
   
(1,113,420
)
Borrowings
   
(126,530
)
Junior subordinated debt
   
(25,774
)
Other liabilities
   
(19,994
)
Total identifiable net assets
 
$
106,325
 
 
       
Goodwill
 
$
113,458
 

The above recognized amounts of loans, other assets and other liabilities, at fair value, are preliminary estimates and are subject to adjustment but actual amounts are not expected to differ materially from those shown.  During the measurement period, the Company recorded net adjustments for the fair value of premises, litigation accrual and other operational liabilities that resulted in an increase to goodwill totaling approximately $1.2 million.

The estimated fair value of loans acquired from Alliance was determined by utilizing a methodology wherein similar loans were aggregated into pools.  Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments.  Projected monthly cash flows were then discounted to present value based on a current market rate for similar loans. There was no carryover of Alliance’s allowance for credit losses associated with the loans acquired as loans were initially recorded at fair value.  Loans acquired with deteriorated credit quality totaled $0.4 million.
 
Information about the acquired loan portfolio as of March 8, 2013 is as follows (in thousands):

Contractually required principal and interest at acquisition
 
$
908,614
 
Contractual cash flows not expected to be collected
   
(15,466
)
Expected cash flows at acquisition
   
893,148
 
Interest component of expected cash flows
   
11,325
 
Fair value of acquired loans
 
$
904,473
 

The core deposit and trust intangible assets recognized as part of the Alliance merger are being amortized over their estimated useful lives of approximately 10 and 15 years, respectively, utilizing an accelerated method.  The goodwill, which is not amortized for book purposes, is not deductible for tax purposes.

The fair value of savings and transaction deposit accounts acquired from Alliance was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.  Certificates of deposit were valued by projecting the expected cash flows based on the contractual terms of the certificates of deposit.  These cash flows were discounted based on a current market rate for a certificate of deposit with a corresponding maturity.

The fair value of borrowings, which was comprised of FHLB advances, was determined by obtaining settlement quotes from the FHLB.

Direct costs related to the Alliance acquisition were expensed as incurred and amounted to $12.4 million for the year ended December 31, 2013.

The following table presents unaudited pro forma information as if the acquisition had occurred on January 1, 2012 under the “Pro forma” columns.  This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects.  Merger and acquisition integration costs related to the Alliance acquisition are excluded from the periods in which they were incurred.  The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company merged with Alliance at the beginning of 2012.  Cost savings are also not reflected in the unaudited pro forma amounts for the twelve months ended December 31, 2012 and 2013.

 
 
Pro forma
 
 
 
Years Ended December 31,
 
 
 
2013
   
2012
 
Net interest income
 
$
244,383
   
$
244,142
 
Noninterest income
   
107,894
     
106,178
 
Net income
   
70,341
     
62,694
 

Supplemental financial information regarding the former Alliance operations included in our Consolidated Statement of Income from the date of acquisition through December 31, 2013 has not been provided as it would be impracticable to do so.  The operations of Alliance have been integrated into the Bank’s operations and therefore financial information specific to revenues and expense associated with the former Alliance operations is not accessible.
 
Other Goodwill Adjustments
 
During the twelve months ended December 31, 2013, the Company recorded a deferred tax adjustment related to the 2012 acquistion of Hampshire First Bank resulting in a decrease in goodwill of approximately $1.0 million.  In addition, the Company recorded a goodwill adjustment of approximately $0.1 million related to the 2012 acquisition of a financial services company.
(3) Securities

The amortized cost, estimated fair value, and unrealized gains and losses of securities available for sale are as follows:
 
(In thousands)
 
Amortized cost
   
Unrealized gains
   
Unrealized losses
   
Estimated fair value
 
December 31, 2013
 
   
   
   
 
U.S. Treasury
 
$
43,279
   
$
337
   
$
-
   
$
43,616
 
Federal Agency
   
285,880
     
343
     
7,308
     
278,915
 
State & municipal
   
113,435
     
1,842
     
1,612
     
113,665
 
Mortgage-backed:
                               
Government-sponsored enterprises
   
337,666
     
5,788
     
2,131
     
341,323
 
U.S. government agency securities
   
21,924
     
1,002
     
85
     
22,841
 
Collateralized mortgage obligations:
                               
Government-sponsored enterprises
   
521,257
     
1,777
     
18,141
     
504,893
 
U.S. government agency securities
   
43,943
     
794
     
102
     
44,635
 
Other securities
   
12,367
     
2,854
     
228
     
14,993
 
Total securities available for sale
 
$
1,379,751
   
$
14,737
   
$
29,607
   
$
1,364,881
 
December 31, 2012
                               
U.S. Treasury
 
$
63,668
   
$
757
   
$
-
   
$
64,425
 
Federal Agency
   
281,398
     
1,507
     
91
     
282,814
 
State & municipal
   
82,675
     
4,127
     
-
     
86,802
 
Mortgage-backed:
                               
Government-sponsored enterprises
   
221,110
     
11,175
     
-
     
232,285
 
U.S. government securities
   
16,351
     
1,645
     
-
     
17,996
 
Collateralized mortgage obligations:
                               
Government-sponsored enterprises
   
399,147
     
4,418
     
-
     
403,565
 
U.S. government securities
   
44,825
     
1,333
     
-
     
46,158
 
Other securities
   
11,210
     
2,832
     
88
     
13,954
 
Total securities available for sale
 
$
1,120,384
   
$
27,794
   
$
179
   
$
1,147,999
 

The following table sets forth information with regard to sales transactions of securities available for sale:

 
 
Years ended December 31
 
(In thousands)
 
2013
   
2012
   
2011
 
Proceeds from sales
 
$
27,593
   
$
1,790
   
$
2,437
 
Gross realized gains
 
$
1,283
   
$
442
   
$
7
 
Gross realized losses
   
-
     
-
     
(165
)
Net securities (losses) gains
 
$
1,283
   
$
442
   
$
(158
)

In addition to gains (losses) from sales transactions, the Company also recorded gains from calls on securities available for sale of approximately $0.1 million for the year ended December 31, 2013, $0.2 million for the year ended December 31, 2012, and $0.3 million for the year ended December 31, 2011.
 
At December 31, 2013 and 2012, securities available for sale and held to maturity with amortized costs totaling $1.4 billion and $1.2 billion, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.  Additionally, at December 31, 2013, securities available for sale and held to maturity with an amortized cost of $218.4 million were pledged as collateral for securities sold under the repurchase agreements.
 
The amortized cost, estimated fair value, and unrealized gains and losses of securities held to maturity are as follows:

 
 
Amortized
   
Unrealized
   
Unrealized
   
Estimated
 
(In thousands)
 
cost
   
gains
   
losses
   
fair value
 
December 31, 2013
 
   
   
   
 
Mortgage-backed
 
$
953
   
$
128
   
$
-
   
$
1,081
 
Collateralized mortgage obligations
   
62,025
     
-
     
4,569
     
57,456
 
State & municipal
   
54,305
     
442
     
8
     
54,739
 
Total securities held to maturity
 
$
117,283
   
$
570
   
$
4,577
   
$
113,276
 
December 31, 2012
                               
Mortgage-backed
 
$
1,168
   
$
184
   
$
-
   
$
1,352
 
State & municipal
   
59,395
     
788
     
-
     
60,183
 
Total securities held to maturity
 
$
60,563
   
$
972
   
$
-
   
$
61,535
 

At December 31, 2013 and 2012, all of the mortgaged-backed securities held to maturity were comprised of U.S. Government Agency securities.

The following table sets forth information with regard to investment securities with unrealized losses at December 31, 2013 and 2012, 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
 
Security Type:
 
Fair
Value
   
Unrealized
losses
   
Number
 of
 Positions
   
Fair
 Value
   
Unrealized
 losses
   
Number
of
 Positions
   
Fair
Value
   
Unrealized
losses
   
Number
of
 Positions
 
 
 
   
   
   
   
   
   
   
   
 
December 31, 2013
 
   
   
   
   
   
   
   
   
 
Investment securities available for sale:
   
   
   
   
   
   
   
 
Federal agency
 
$
233,935
   
$
(6,927
)
   
20
   
$
9,619
   
$
(381
)
   
1
   
$
243,554
   
$
(7,308
)
   
21
 
State & municipal
   
50,328
     
(1,612
)
   
177
     
-
     
-
     
-
     
50,328
     
(1,612
)
   
177
 
Mortgage-backed
   
143,080
     
(2,216
)
   
79
     
-
     
-
     
-
     
143,080
     
(2,216
)
   
79
 
Collateralized mortgage obligations
   
379,273
     
(18,243
)
   
36
     
-
     
-
     
-
     
379,273
     
(18,243
)
   
36
 
Other securities
   
5,490
     
(203
)
   
2
     
223
     
(25
)
   
1
     
5,713
     
(228
)
   
3
 
Total securities with unrealized losses
 
$
812,106
   
$
(29,201
)
   
314
   
$
9,842
   
$
(406
)
   
2
   
$
821,948
   
$
(29,607
)
   
316
 
 
                                                                       
December 31, 2013
                                                                       
Investment securities held to maturity:
                                                                       
Collateralized mortgage obligations
 
$
57,456
   
$
(4,569
)
   
5
   
$
-
   
$
-
     
-
   
$
57,456
   
$
(4,569
)
   
5
 
State & municipal
   
1,012
     
(8
)
   
1
     
-
     
-
     
-
     
1,012
     
(8
)
   
1
 
Total securities with unrealized losses
 
$
58,468
   
$
(4,577
)
   
6
   
$
-
   
$
-
     
-
   
$
58,468
   
$
(4,577
)
   
6
 
 
                                                                       
December 31, 2012
                                                                       
Investment securities available for sale:
                                                                       
Federal agency
 
$
39,906
   
$
(91
)
   
4
   
$
-
   
$
-
     
-
   
$
39,906
   
$
(91
)
   
4
 
Collateralized mortgage obligations
   
23
     
-
     
2
     
-
     
-
     
-
     
23
     
-
     
2
 
Other securities
   
468
     
(6
)
   
1
     
167
     
(82
)
   
1
     
635
     
(88
)
   
2
 
Total securities with unrealized losses
 
$
40,397
   
$
(97
)
   
7
   
$
167
   
$
(82
)
   
1
   
$
40,564
   
$
(179
)
   
8
 

Management has the intent to hold the securities classified as held to maturity until they mature, at which time it is believed the Company will receive full value for the securities. Furthermore, as of December 31, 2013, management also had intent to hold, and will not be required to sell, the securities classified as available for sale for a period of time sufficient for a recovery of cost, which may be until maturity.  The unrealized losses 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.  As of December 31, 2013, management believes the impairments detailed in the table above are temporary and no other-than-temporary impairment losses have been realized in the Company’s consolidated statements of income.

The following tables set forth information with regard to contractual maturities of debt securities at December 31, 2013:

(In thousands)
 
Amortized
cost
   
Estimated fair
 value
 
Debt securities classified as available for sale
 
   
 
Within one year
 
$
27,894
   
$
28,030
 
From one to five years
   
261,703
     
261,526
 
From five to ten years
   
300,051
     
297,837
 
After ten years
   
777,736
     
762,495
 
 
 
$
1,367,384
   
$
1,349,888
 
Debt securities classified as held to maturity
               
Within one year
 
$
24,680
   
$
24,766
 
From one to five years
   
22,791
     
23,148
 
From five to ten years
   
5,489
     
5,481
 
After ten years
   
64,323
     
59,881
 
 
 
$
117,283
   
$
113,276
 

Maturities of mortgage-backed, CMOs 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 obligations 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, 2013 and 2012.
(4)  Loans

A summary of loans, net of deferred fees and origination costs, by category is as follows:

 
 
At December 31,
 
(In thousands)
 
2013
   
2012
 
Residential real estate mortgages
 
$
1,041,637
   
$
651,107
 
Commercial
   
859,026
     
694,799
 
Commercial real estate
   
1,328,313
     
1,072,807
 
Real estate construction and development
   
93,247
     
123,078
 
Agricultural and agricultural real estate mortgages
   
112,035
     
112,687
 
Consumer
   
1,352,638
     
1,047,856
 
Home equity
   
619,899
     
575,282
 
Total loans
 
$
5,406,795
   
$
4,277,616
 

Included in the above loans are net deferred loan origination costs totaling $31.8 million and $25.5 million at December 31, 2013 and 2012, respectively.  The Company had residential loans held for sale totaling $0.1 million as of December 31, 2013 and $3.6 million as of December 31, 2012.

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 incorporate other unfavorable features. The aggregate amount of loans outstanding to qualifying related parties and changes during the years are summarized as follows:

(In thousands)
 
2013
   
2012
 
Balance at January 1
 
$
2,790
   
$
2,537
 
New loans
   
569
     
750
 
Adjustment due to change in composition of related parties
   
376
     
(130
)
Repayments
   
(363
)
   
(367
)
Balance at December 31
 
$
3,372
   
$
2,790
 

(5)  Allowance for Loan Losses and Credit Quality of Loans

Allowance for Loan Losses

The allowance for loan losses is maintained at a level estimated by management to provide adequately for risk of probable 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).  Prior to 2013, separate disclosures for acquired loans were not significant and were included with originated loans in the Company’s asset quality disclosures.  Each portfolio segment is broken down into class segments where appropriate.  Class segments contain unique measurement attributes, risk characteristics and methods 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 including term loans, time notes and lines of credit.  Such loans are made available to businesses for working capital such as inventory and receivables, business expansion and equipment purchases. 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.  Commercial real estate loans are made to finance the purchases of real property which generally consists of real estate with completed 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 typically less risky than commercial loans, since they are secured by real estate and buildings. The Company’s underwriting analysis 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, management may attempt to secure these loans with additional real estate collateral, obtain personal guarantees of the borrowers, 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 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 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 small business customers including term loans, small business mortgages and lines of credit.  Such loans are generally less than $500 thousand and are made available to businesses for working capital such as inventory and receivables, business expansion, equipment purchases, and agricultural needs.  Generally, a collateral lien is placed on equipment or other assets owned by the borrower 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.
 
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 condition, 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 installment 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 favorable.   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.  Mortgage 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 consolidated 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 conditions 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 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 determining factors discussed above.  The following table illustrates the changes in the allowance for loan losses by portfolio segment for the years ended December 31, 2013, 2012 and 2011:

Allowance for Loan Losses
 
(in thousands)
 
 
 
   
   
   
   
 
 
 
   
   
Residential
   
   
 
Years ended December 31
 
Commercial
   
Consumer
   
Real Estate
   
   
 
 
 
Loans
   
Loans
   
Mortgages
   
Unallocated
   
Total
 
Balance as of December 31, 2012
 
$
35,624
   
$
27,162
   
$
6,252
   
$
296
   
$
69,334
 
Charge-offs
   
(10,459
)
   
(15,459
)
   
(1,771
)
   
-
     
(27,689
)
Recoveries
   
1,957
     
3,136
     
272
     
-
     
5,365
 
Provision
   
7,968
     
12,855
     
1,767
     
(166
)
   
22,424
 
Ending Balance as of December 31, 2013
 
$
35,090
   
$
27,694
   
$
6,520
   
$
130
   
$
69,434
 
 
                                       
Balance as of December 31, 2011
 
$
38,831
   
$
26,049
   
$
6,249
   
$
205
   
$
71,334
 
Charge-offs
   
(8,750
)
   
(15,848
)
   
(1,906
)
   
-
     
(26,504
)
Recoveries
   
1,641
     
2,556
     
38
     
-
     
4,235
 
Provision
   
3,902
     
14,405
     
1,871
     
91
     
20,269
 
Ending Balance as of December 30, 2012
 
$
35,624
   
$
27,162
   
$
6,252
   
$
296
   
$
69,334
 
 
                                       
Balance as of December 31, 2010
 
$
40,101
   
$
26,126
   
$
4,627
   
$
380
   
$
71,234
 
Charge-offs
   
(8,969
)
   
(14,209
)
   
(1,310
)
   
-
     
(24,488
)
Recoveries
   
1,438
     
2,406
     
7
     
-
     
3,851
 
Provision
   
6,261
     
11,726
     
2,925
     
(175
)
   
20,737
 
Ending Balance as of December 30, 2011
 
$
38,831
   
$
26,049
   
$
6,249
   
$
205
   
$
71,334
 

For acquired loans, to the extent that we experience deterioration 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.  As of December 31, 2013 and 2012, there was no allowance for loan losses for the acquired loan portfolio. Net charge-offs related to acquired loans totaled approximately $0.6 million during the year ended December 31, 2013, and are included in the table above.

The following table illustrates the allowance for loan losses and the recorded investment by portfolio segment as of December 31, 2013 and 2012:
 
Allowance for Loan Losses and Recorded Investment in Loans
 
(in thousands)
 
 
 
   
   
   
   
 
 
 
   
   
Residential
   
   
 
 
 
Commercial
   
Consumer
   
Real Estate
   
   
 
 
 
Loans
   
Loans
   
Mortgages
   
Unallocated
   
Total
 
As of December 31, 2013
 
   
   
   
   
 
Allowance for loan losses
 
$
35,090
   
$
27,694
   
$
6,520
   
$
130
   
$
69,434
 
 
                                       
Allowance for loans individually evaluated for impairment
   
715
     
-
     
-
             
715
 
 
                                       
Allowance for loans collectively evaluated for impairment
 
$
34,375
   
$
27,694
   
$
6,520
   
$
130
   
$
68,719
 
 
                                       
 
                                       
Ending balance of loans
 
$
2,392,621
   
$
1,972,537
   
$
1,041,637
           
$
5,406,795
 
 
                                       
Ending balance of originated loans individually evaluated for impairment
   
16,120
     
3,248
     
2,012
             
21,380
 
Ending balance of acquired loans individually evaluated for impairment
   
10,060
     
-
     
-
             
10,060
 
Ending balance of acquired loans collectively evaluated for impairment
   
392,329
     
219,587
     
308,416
             
920,332
 
Ending balance of originated loans collectively evaluated for impairment
 
$
1,974,112
   
$
1,749,702
   
$
731,209
           
$
4,455,023
 
 
                                       
 
                                       
As of December 31, 2012
                                       
Allowance for loan and lease losses
 
$
35,624
   
$
27,162
   
$
6,252
   
$
296
   
$
69,334
 
 
                                       
Allowance for loans and leases individually evaluated for impairment
   
2,848
     
-
     
-
             
2,848
 
 
                                       
Allowance for loans and leases collectively evaluated for impairment
 
$
32,776
   
$
27,162
   
$
6,252
   
$
296
   
$
66,486
 
 
                                       
 
                                       
Ending balance of loans and leases
 
$
2,003,371
   
$
1,623,138
   
$
651,107
           
$
4,277,616
 
 
                                       
Ending balance of loans individually evaluated for impairment
   
18,505
     
2,553
     
2,011
             
23,069
 
 
                                       
Ending balance of loans collectively evaluated for impairment
 
$
1,984,866
   
$
1,620,585
   
$
649,096
           
$
4,254,547
 

The following table illustrates the Company’s nonaccrual loans by loan class as of December 31, 2013 and 2012:
 
(In thousands)
 
December 31, 2013
   
December 31, 2012
 
ORIGINATED
 
   
 
Commercial Loans
 
   
 
Commercial
 
$
3,669
   
$
4,985
 
Commercial Real Estate
   
7,834
     
7,977
 
Agricultural
   
1,135
     
699
 
Agricultural Real Estate
   
961
     
1,038
 
Business Banking
   
5,701
     
6,738
 
 
   
19,300
     
21,437
 
 
               
Consumer Loans
               
Indirect
   
1,461
     
1,557
 
Home Equity
   
5,931
     
7,247
 
Direct
   
86
     
266
 
 
   
7,478
     
9,070
 
 
               
Residential Real Estate Mortgages
   
7,105
     
9,169
 
 
               
 
 
$
33,883
   
$
39,676
 
 
               
ACQUIRED
               
Commercial Loans
               
Commercial
 
$
6,599
         
Commercial Real Estate
   
3,559
         
Business Banking
   
1,340
         
 
   
11,498
         
 
               
Consumer Loans
               
Indirect
   
93
         
Home Equity
   
570
         
Direct
   
49
         
 
   
712
         
 
               
Residential Real Estate Mortgages
   
3,872
         
 
               
 
 
$
16,082
         
 
               
TOTAL NONACCRUAL LOANS
 
$
49,965
   
$
39,676
 

The following table sets forth information with regard to past due and nonperforming loans by loan class:

Age Analysis of Past Due Financing Receivables
 
As of December 31, 2013
 
(in thousands)
 
 
 
   
   
   
   
   
   
 
 
 
   
   
Greater
   
   
   
   
 
 
 
31-60 Days
   
61-90 Days
   
Than
90 Days
   
Total
   
   
   
Recorded Total
 
 
 
Past Due
   
Past Due
   
Past Due
   
Past Due
   
   
   
Loans and
 
 
 
Accruing
   
Accruing
   
Accruing
   
Accruing
   
Non-Accrual
   
Current
   
Leases
 
ORIGINATED
 
   
   
   
   
   
   
 
Commercial Loans
 
   
   
   
   
   
   
 
Commercial
 
$
105
   
$
247
   
$
-
   
$
352
   
$
3,669
   
$
612,402
   
$
616,423
 
Commercial Real Estate
   
1,366
     
-
     
-
     
1,366
     
7,834
     
925,116
     
934,316
 
Agricultural
   
150
     
21
     
-
     
171
     
1,135
     
63,856
     
65,162
 
Agricultural Real Estate
   
519
     
-
     
-
     
519
     
961
     
35,172
     
36,652
 
Business Banking
   
1,228
     
122
     
105
     
1,455
     
5,701
     
330,523
     
337,679
 
 
   
3,368
     
390
     
105
     
3,863
     
19,300
     
1,967,069
     
1,990,232
 
 
                                                       
Consumer Loans
                                                       
Indirect
   
14,093
     
2,878
     
1,583
     
18,554
     
1,461
     
1,141,829
     
1,161,844
 
Home Equity
   
6,033
     
1,888
     
1,115
     
9,036
     
5,931
     
517,856
     
532,823
 
Direct
   
679
     
125
     
46
     
850
     
86
     
57,347
     
58,283
 
 
   
20,805
     
4,891
     
2,744
     
28,440
     
7,478
     
1,717,032
     
1,752,950
 
Residential Real Estate Mortgages
   
3,951
     
379
     
808
     
5,138
     
7,105
     
720,978
     
733,221
 
 
 
$
28,124
   
$
5,660
   
$
3,657
   
$
37,441
   
$
33,883
   
$
4,405,079
   
$
4,476,403
 
 
                                                       
 
                                                       
ACQUIRED
                                                       
Commercial Loans
                                                       
Commercial
 
$
24
   
$
-
   
$
-
   
$
24
   
$
6,599
   
$
96,603
   
$
103,226
 
Commercial Real Estate
   
-
     
-
     
-
     
-
     
3,559
     
225,455
     
229,014
 
Business Banking
   
320
     
2
     
-
     
322
     
1,340
     
68,487
     
70,149
 
 
   
344
     
2
     
-
     
346
     
11,498
     
390,545
     
402,389
 
 
                                                       
Consumer Loans
                                                       
Indirect
   
939
     
113
     
71
     
1,123
     
93
     
123,870
     
125,086
 
Home Equity
   
753
     
63
     
-
     
816
     
570
     
85,690
     
87,076
 
Direct
   
76
     
56
     
9
     
141
     
49
     
7,235
     
7,425
 
 
   
1,768
     
232
     
80
     
2,080
     
712
     
216,795
     
219,587
 
Residential Real Estate Mortgages
   
1,725
     
-
     
-
     
1,725
     
3,872
     
302,819
     
308,416
 
 
 
$
3,837
   
$
234
   
$
80
   
$
4,151
   
$
16,082
   
$
910,159
   
$
930,392
 
Total Loans
 
$
31,961
   
$
5,894
   
$
3,737
   
$
41,592
   
$
49,965
   
$
5,315,238
   
$
5,406,795
 

Age Analysis of Past Due Loans
 
As of December 31, 2012
 
(in thousands)
 
 
 
   
   
   
   
   
   
 
 
 
   
   
Greater Than
   
   
   
   
Recorded
 
 
 
31-60 Days
   
61-90 Days
   
90 Days
   
Total
   
   
   
Total
 
 
 
Past Due
   
Past Due
   
Past Due
   
Past Due
   
   
   
Loans and
 
 
 
Accruing
   
Accruing
   
Accruing
   
Accruing
   
Non-Accrual
   
Current
   
Leases
 
Commercial
 
   
   
   
   
   
   
 
Commercial
 
$
-
   
$
-
   
$
-
   
$
-
   
$
4,985
   
$
556,496
   
$
561,481
 
Commercial Real Estate
   
126
     
-
     
-
     
126
     
7,977
     
966,692
     
974,795
 
Agricultural
   
22
     
-
     
-
     
22
     
699
     
63,037
     
63,758
 
Agricultural Real Estate
   
108
     
-
     
103
     
211
     
1,038
     
36,128
     
37,377
 
Business Banking
   
3,019
     
708
     
45
     
3,772
     
6,738
     
355,450
     
365,960
 
 
   
3,275
     
708
     
148
     
4,131
     
21,437
     
1,977,803
     
2,003,371
 
 
                                                       
Consumer
                                                       
Indirect
   
10,956
     
2,477
     
1,205
     
14,638
     
1,557
     
964,802
     
980,997
 
Home Equity
   
6,065
     
1,223
     
681
     
7,969
     
7,247
     
560,066
     
575,282
 
Direct
   
717
     
144
     
84
     
945
     
266
     
65,648
     
66,859
 
 
   
17,738
     
3,844
     
1,970
     
23,552
     
9,070
     
1,590,516
     
1,623,138
 
 
                                                       
Residential Real  Estate Mortgages
   
1,839
     
725
     
330
     
2,894
     
9,169
     
639,044
     
651,107
 
 
 
$
22,852
   
$
5,277
   
$
2,448
   
$
30,577
   
$
39,676
   
$
4,207,363
   
$
4,277,616
 

There were no material commitments to extend further credit to borrowers with nonperforming loans.

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 $500 thousand 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 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 measurement 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 consolidated 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, 2013 and 2012:

Impaired Loans
 
   
   
   
   
   
 
 
 
December 31, 2013
   
December 31, 2012
 
 
 
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
 
$
4,721
   
$
4,777
   
   
$
1,000
   
$
1,000
   
 
Commercial Real Estate
   
4,613
     
5,164
   
     
7,362
     
7,366
   
 
Agricultural
   
125
     
195
   
     
446
     
540
   
 
Agricultural Real Estate
   
1,431
     
1,708
   
     
903
     
1,029
   
 
Business Banking
   
210
     
602
   
     
391
     
783
   
 
Total Commercial Loans
   
11,100
     
12,446
   
     
10,102
     
10,718
   
 
 
                 
                   
 
Consumer Loans
                 
                   
 
Home Equity
   
3,248
     
3,472
   
     
2,553
     
2,657
   
 
 
                 
                   
 
Residential Real Estate Mortgages
   
2,012
     
2,255
   
     
2,011
     
2,308
   
 
Total
   
16,360
     
18,173
   
     
14,666
     
15,683
   
 
 
                 
                   
 
With an allowance recorded:
                 
                   
 
Commercial Loans
                 
                   
 
Commercial
   
-
     
-
     
-
     
4,335
     
4,340
     
2,241
 
Commercial Real Estate
   
5,020
     
6,877
     
715
     
4,068
     
5,689
     
607
 
Agricultural
   
-
     
-
     
-
     
-
     
-
     
-
 
Agricultural Real Estate
   
-
     
-
     
-
     
-
     
-
     
-
 
 
   
5,020
     
6,877
     
715
     
8,403
     
10,029
     
2,848
 
 
                                               
ACQUIRED
                                               
With no related allowance recorded:
                                               
Commercial Loans
                                               
Commercial
   
6,501
     
6,538
                                 
Commercial Real Estate
   
3,559
     
3,842
                                 
Total Commercial Loans
   
10,060
     
10,380
                                 
 
                                               
Total
 
$
31,440
   
$
35,430
   
$
715
   
$
23,069
   
$
25,712
   
$
2,848
 

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, 2013, 2012 and 2011:

 
 
December 31, 2013
   
December 31, 2012
   
December 31, 2011
 
 
 
Average
   
Interest Income
   
Average
   
Interest Income
   
Average
   
Interest Income
 
 
 
Recorded
   
Recognized
   
Recorded
   
Recognized
   
Recorded
   
Recognized
 
(in thousands)
 
Investment
   
Accrual
   
Investment
   
Accrual
   
Investment
   
Accrual
 
ORIGINATED
 
   
   
   
   
   
 
Commercial Loans
 
   
   
   
   
   
 
Commercial
 
$
3,722
   
$
17
   
$
6,682
   
$
56
   
$
1,507
   
$
-
 
Commercial Real Estate
   
11,010
     
130
     
4,944
     
230
     
3,763
     
-
 
Agricultural
   
207
     
1
     
1,767
     
43
     
2,070
     
-
 
Agricultural Real Estate
   
1,167
     
52
     
922
     
72
     
695
     
-
 
Business Banking
   
295
     
57
     
68
     
65
     
17
     
-
 
Consumer Loans
                                               
Home Equity
   
2,969
     
143
     
1,877
     
123
     
1,924
     
60
 
Residential Real Estate Mortgages
   
2,024
     
69
     
1,143
     
54
     
933
     
4
 
ACQUIRED
                                               
Commercial Loans
                                               
Commercial
   
1,625
     
-
     
-
     
-
     
-
     
-
 
Commercial Real Estate
   
1,222
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
24,240
   
$
469
   
$
17,403
   
$
643
   
$
10,909
   
$
64
 

There has been significant disruption and volatility in the financial and capital markets since the second half of 2008.  Turmoil in the mortgage market adversely impacted both domestic and global markets and led to a significant credit and liquidity crisis in many domestic markets.  These market conditions were attributable to a variety of factors, in particular the fallout associated with subprime mortgage loans (a type of lending we have never actively pursued).  The disruption was exacerbated by the decline of the real estate and housing market.  However, in the markets in which the Company does business, the disruption has been less significant than in the national market.  For example, our real estate market has not suffered the extreme declines seen nationally and our unemployment rate, while notably higher than in prior periods, is still below the national average.
 
While we continue to adhere to prudent underwriting standards, 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 management, primary and secondary sources of repayment, payment 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 continuous 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, regulatory environment, and management.  The grading system for commercial and agricultural loans is as follows:
 
· 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 capitalization. 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.
 
· Special Mention
 
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 weakness does not yet justify a substandard classification. Borrowers 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 Mention 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 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 principal 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.
 
· Non-classified
 
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 Performing or Nonperforming.   Nonperforming loans are loans that are 1) over 90 days past due and interest is still accruing or 2) on nonaccrual status.  All loans not meeting any of these three criteria are considered Performing.

The following tables illustrate the Company’s credit quality by loan class for the years ended December 31, 2013 and 2012:
 
Credit Quality Indicators
 
As of December 31, 2013
 
 
 
   
   
   
   
 
ORIGINATED
 
   
   
   
   
 
Commercial Credit Exposure
 
   
Commercial
   
   
Agricultural
   
 
By Internally Assigned Grade:
 
Commercial
   
Real Estate
   
Agricultural
   
Real Estate
   
Total
 
Pass
 
$
576,079
   
$
878,411
   
$
60,043
   
$
33,136
   
$
1,547,669
 
Special Mention
   
16,836
     
22,777
     
381
     
43
     
40,037
 
Substandard
   
23,508
     
33,128
     
4,726
     
3,473
     
64,835
 
Doubtful
   
-
     
-
     
12
     
-
     
12
 
Total
 
$
616,423
   
$
934,316
   
$
65,162
   
$
36,652
   
$
1,652,553
 
 
Business Banking Credit Exposure
 
   
   
   
   
 
By Internally Assigned Grade:
 
Business Banking
   
   
   
   
Total
 
Non-classified
 
$
319,578
   
   
   
   
$
319,578
 
Classified
   
18,101
   
   
   
     
18,101
 
Total
 
$
337,679
   
   
   
   
$
337,679
 
 
         
   
   
         
Consumer Credit Exposure
         
   
   
         
By Payment Activity:
 
Indirect
   
Home Equity
   
Direct
   
   
Total
 
Performing
 
$
1,158,800
   
$
525,777
   
$
58,151
         
$
1,742,728
 
Nonperforming
   
3,044
     
7,046
     
132
             
10,222
 
Total
 
$
1,161,844
   
$
532,823
   
$
58,283
           
$
1,752,950
 
 
 
 
   
   
   
   
 
Residential Mortgage Credit Exposure
 
Residential
   
   
   
   
 
By Payment Activity:
 
Mortgage
   
   
   
   
Total
 
Performing
 
$
725,308
           
 
     
 
   
$
725,308
 
Nonperforming
   
7,913
                             
7,913
 
Total
 
$
733,221
                           
$
733,221
 
Credit Quality Indicators
 
As of December 31, 2013
 
 
ACQUIRED
 
   
   
   
   
 
Commercial Credit Exposure
 
   
Commercial
   
   
   
 
By Internally Assigned Grade:
 
Commercial
   
Real Estate
   
Agricultural
   
   
Total
 
Pass
 
$
85,692
   
$
205,010
   
$
-
         
$
290,702
 
Special Mention
   
2,230
     
6,183
     
-
             
8,413
 
Substandard
   
15,304
     
17,821
     
-
             
33,125
 
Doubtful
   
-
     
-
     
-
             
-
 
Total
 
$
103,226
   
$
229,014
   
$
-
           
$
332,240
 
 
Business Banking Credit Exposure
 
   
   
   
   
 
By Internally Assigned Grade:
 
Business Banking
   
   
   
   
Total
 
Non-classified
 
$
65,437
   
   
   
   
$
65,437
 
Classified
   
4,712
   
   
   
     
4,712
 
Total
 
$
70,149
   
   
   
   
$
70,149
 
 
         
   
   
         
Consumer Credit Exposure
         
   
               
By Payment Activity:
 
Indirect
   
Home Equity
   
Direct
           
Total
 
Performing
 
$
124,922
   
$
86,506
   
$
7,367
           
$
218,795
 
Nonperforming
   
164
     
570
     
58
             
792
 
Total
 
$
125,086
   
$
87,076
   
$
7,425
           
$
219,587
 
 
Residential Mortgage Credit Exposure
 
Residential
   
   
   
   
 
By Payment Activity:
 
Mortgage
   
   
   
   
Total
 
Performing
 
$
304,544
           
 
     
 
   
$
304,544
 
Nonperforming
   
3,872
                             
3,872
 
Total
 
$
308,416
                           
$
308,416
 
Credit Quality Indicators
   
 
As of December 31, 2012
   
 
 
 
   
   
   
   
 
 
 
   
   
   
   
 
Commercial Credit Exposure
 
   
Commercial
   
   
Agricultural
   
 
By Internally Assigned Grade:
 
Commercial
   
Real Estate
   
Agricultural
   
Real Estate
   
Total
 
Pass
 
$
522,985
   
$
901,928
   
$
57,347
   
$
33,472
   
$
1,515,732
 
Special Mention
   
18,401
     
32,135
     
13
     
3
     
50,552
 
Substandard
   
17,351
     
40,732
     
6,362
     
3,902
     
68,347
 
Doubtful
   
2,744
     
-
     
36
     
-
     
2,780
 
Total
 
$
561,481
   
$
974,795
   
$
63,758
   
$
37,377
   
$
1,637,411
 
 
                                       
Business Banking Credit Exposure
 
Business
                                 
By Internally Assigned Grade:
 
Banking
                           
Total
 
Non-classified
 
$
342,528
                           
$
342,528
 
Classified
   
23,432
                             
23,432
 
Total
 
$
365,960
                           
$
365,960
 
 
                                       
Consumer Credit Exposure
                                       
By Payment Activity:
 
Indirect
   
Home Equity
   
Direct
           
Total
 
Performing
 
$
978,235
   
$
567,354
   
$
66,509
           
$
1,612,098
 
Nonperforming
   
2,762
     
7,928
     
350
             
11,040
 
Total
 
$
980,997
   
$
575,282
   
$
66,859
           
$
1,623,138
 
 
                                       
Residential Mortgage Credit Exposure
 
Residential
                                 
By Payment Activity:
 
Mortgage
                           
Total
 
Performing
 
$
641,608
                           
$
641,608
 
Nonperforming
   
9,499
                             
9,499
 
Total
 
$
651,107
                           
$
651,107
 

Troubled Debt Restructuring
 
Troubled debt restructurings made during the year ended December 31, 2013 consisted of four commercial loans totaling $7.0 million, 23 home equity loans totaling $1.0 million and 6 residential real estate mortgages totaling $0.5 million.  For all such modifications, the pre-and post-outstanding recorded investment amount remained unchanged.  During the year ended December 31, 2013, there was one commercial loan classified as TDRs totaling $0.9 million and eight home equity loans totaling $0.4 million that subsequently defaulted on their renegotiated terms.
 
Troubled debt restructurings made during the year ended December 31, 2012 consisted of four commercial loans totaling $6.6 million, one business banking loan totaling $0.1 million, 18 home equity loans totaling $0.9 million and 12 residential real estate mortgages totaling $1.2 million.  For all such modifications, the pre-and post-outstanding recorded investment amount remained unchanged.  During the year ended December 31, 2012, there were two residential real estate loans classified as TDRs totaling $0.3 million and one home equity loan totaling less than $0.1 million that subsequently defaulted on their renegotiated terms.
 
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.
(6) Premises and Equipment, Net

A summary of premises and equipment follows:

 
 
December 31,
 
(In thousands)
 
2013
   
2012
 
Land, buildings, and improvements
 
$
120,098
   
$
109,601
 
Equipment
   
55,729
     
51,321
 
Premises and equipment before accumulated depreciation
   
175,827
     
160,922
 
Accumulated depreciation
   
87,500
     
83,047
 
Total premises and equipment
 
$
88,327
   
$
77,875
 

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 $7.5 million in 2013, $6.4 million in 2012, and $5.6 million in 2011. The future minimum rental payments related to noncancelable operating leases with original terms of one year or more are as follows at December 31, 2013 (in thousands):

Future Minimum Rental Payments
 
 
 
 
2014
 
$
7,156
 
2015
   
7,012
 
2016
   
6,985
 
2017
   
6,859
 
2018
   
6,791
 
Thereafter
   
53,132
 
Total
 
$
87,935
 

(7) Goodwill and other Intangible Assets

A summary of goodwill is as follows:

(In thousands)
 
  
 
January 1, 2013
   
152,373
 
Goodwill Acquired
   
112,624
 
December 31, 2013
 
$
264,997
 
 
       
January 1, 2012
   
132,029
 
Goodwill Acquired
   
20,344
 
December 31, 2012
 
$
152,373
 
 
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 intangible assets are amortized over their estimated useful lives, which range primarily from one to twelve years.

A summary of core deposit and other intangible assets follows:

 
 
December 31,
 
(In thousands)
 
2013
   
2012
 
Core deposit intangibles
 
   
 
Gross carrying amount
 
$
19,401
   
$
13,240
 
Less: accumulated amortization
   
10,083
     
7,794
 
Net carrying amount
   
9,318
     
5,446
 
 
               
Identified intangible assets
               
Gross carrying amount
   
28,509
     
21,743
 
Less: accumulated amortization
   
12,270
     
10,227
 
Net carrying amount
   
16,239
     
11,516
 
 
               
Total intangibles
               
Gross carrying amount
   
47,910
     
34,983
 
Less: accumulated amortization
   
22,353
     
18,021
 
Net carrying amount
 
$
25,557
   
$
16,962
 

Amortization expense on intangible assets with definite useful lives totaled $4.9 million for 2013, $3.4 million for 2012 and $3.0 million for 2011.  Amortization expense on intangible assets with definite useful lives is expected to total $5.0 million for 2014, $4.6 million for 2015, $3.3 million for 2016, $2.8 million for 2017, $2.2 million for 2018 and $5.4 million thereafter.  Other identified intangible assets include customer lists, non-competes, and trademark intangibles, of which $2.0 million will not amortize.

(8)  Deposits

The following table sets forth the maturity distribution of time deposits at December 31, 2013 (in thousands):

Time deposits
 
    
 
Within one year
 
$
661,619
 
After one but within two years
   
184,796
 
After two but within three years
   
86,689
 
After three but within four years
   
52,024
 
After four but within five years
   
20,656
 
After five years
   
15,358
 
Total
 
$
1,021,142
 

Time deposits of $100,000 or more aggregated $375.4 million and $352.3 million December 31, 2013 and 2012, respectively.

(9) Short-Term Borrowings

Short-term borrowings totaled $456.0 million and $162.9 million at December 31, 2013 and 2012, 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.
 
The Company had unused lines of credit with the FHLB available for short-term financing of approximately $497 million and $418 million at December 31, 2013 and 2012, respectively.  Borrowings on these 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:

(In thousands)
 
2013
   
2012
   
2011
 
Federal funds purchased
 
   
   
 
Balance at year-end
 
$
130,000
   
$
10,000
   
$
27,000
 
Average during the year
   
39,907
     
12,658
     
3,017
 
Maximum month end balance
   
130,000
     
60,000
     
28,000
 
Weighted average rate during the year
   
0.26
%
   
0.27
%
   
0.11
%
Weighted average rate at December 31
   
0.18
%
   
0.27
%
   
0.13
%
 
                       
Securities sold under repurchase agreements
                       
Balance at year-end
 
$
176,042
   
$
152,941
   
$
154,592
 
Average during the year
   
169,352
     
153,084
     
150,663
 
Maximum month end balance
   
185,871
     
165,977
     
178,414
 
Weighted average rate during the year
   
0.06
%
   
0.10
%
   
0.13
%
Weighted average rate at December 31
   
0.05
%
   
0.10
%
   
0.10
%
 
                       
Other short-term borrowings
                       
Balance at year-end
 
$
150,000
   
$
-
   
$
-
 
Average during the year
   
71,589
     
-
     
249
 
Maximum month end balance
   
210,000
     
-
     
250
 
Weighted average rate during the year
   
0.43
%
   
-
     
-
 
Weighted average rate at December 31
   
0.55
%
   
-
     
-
 

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 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.  A summary as of December 31, 2013 and 2012 is as follows:

 
 
As of December 31, 2013
   
As of December 31, 2012
 
Maturity
 
Amount
   
Weighted Average Rate
   
Callable Amount
   
Weighted Average Rate
   
Amount
   
Weighted Average Rate
   
Callable Amount
   
Weighted Average Rate
 
2013
   
-
     
-
     
-
     
-
     
119,502
     
3.87
%
   
100,000
     
3.71
%
2014
   
12,460
     
1.33
%
   
-
     
-
     
2,610
     
1.89
%
   
-
     
-
 
2015
   
308
     
0.00
%
   
-
     
-
     
250
     
0.00
%
   
-
     
-
 
2016
   
90,313
     
3.52
%
   
70,000
     
4.21
%
   
70,000
     
4.21
%
   
70,000
     
4.21
%
2017
   
115,312
     
3.55
%
   
75,000
     
3.73
%
   
100,000
     
3.89
%
   
100,000
     
3.89
%
2018
   
90,313
     
3.26
%
   
75,000
     
3.61
%
   
75,000
     
3.61
%
   
75,000
     
3.61
%
2021
   
117
     
4.00
%
   
-
     
-
     
130
     
4.00
%
   
-
     
-
 
 
 
$
308,823
           
$
220,000
           
$
367,492
           
$
345,000
         

(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.  The trusts were formed for the purpose of issuing company-obligated mandatorily redeemable 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.  The debentures held by each trust are the sole assets of that trust.  These five statutory business trusts are collectively referred herein to as “the Trusts.”  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 (“VIEs”) for which the Company is not the primary beneficiary, as defined by U.S. GAAP.  In accordance with U.S. GAAP, the accounts of the Trusts are not included in the Company’s consolidated financial statements. See Note 1 — Summary of Significant Accounting Policies for additional information about the Company’s consolidation policy.   As of December 31, 2013, the Trusts had the following issues of trust preferred debentures, all held by the Trusts, outstanding (dollars in thousands):
 
Description
Issuance Date
 
Trust Preferred Securities Outstanding
 
Interest Rate
 
Trust Preferred Debt Owed To Trust
 
Final Maturity Date
 
 
 
 
 
 
 
      
CNBF Capital Trust I
August-99
 
$
18,000
 
3-month LIBOR plus 2.75%
 
$
18,720
 
August-29
 
 
       
 
       
      
NBT Statutory Trust I
November-05
   
5,000
 
3-month LIBOR plus 1.40%
   
5,155
 
December-35
 
 
       
 
       
      
NBT Statutory Trust II
February-06
   
50,000
 
3-month LIBOR plus 1.40%
   
51,547
 
March-36
 
 
       
 
       
      
Alliance Financial Capital Trust I
December-03
   
10,000
 
3-month LIBOR plus 2.85%
   
10,310
 
January-34
 
 
       
 
       
      
Alliance Financial Capital Trust II
September-06
   
15,000
 
3-month LIBOR plus 1.65%
   
15,464
 
September-36

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 affiliates that were acquired from our merger with CNB Financial Corp. and two statutory trusts acquired from Alliance (the “Trusts”). The Trusts qualify as variable interest entities and were formed to issue mandatorily redeemable trust preferred securities to investors and loan the proceeds to us for general corporate purposes. The Trusts hold, as their sole assets, junior subordinated debentures of the Company with face amounts totaling $98 million at December 31, 2013. The Company owns all of the common securities of the Trusts and have accordingly recorded $3.2 million in equity method investments classified as other assets in our Consolidated Balance Sheets at December 31, 2013. 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.

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 unconditional 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 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.
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 Company’s consolidated financial statements, $97 million of the $101 million in trust preferred securities issued by these subsidiary 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 Act 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.

 (12) Income Taxes

The significant components of income tax expense attributable to operations are:
 
 
 
Years ended December 31,
 
 
 
2013
   
2012
   
2011
 
Current
 
   
   
 
Federal
 
$
23,536
   
$
21,011
   
$
29,274
 
State
   
2,316
     
1,815
     
1,477
 
 
   
25,852
     
22,826
     
30,751
 
 
                       
Deferred
                       
Federal
   
2,334
     
(13
)
   
(8,129
)
State
   
10
     
3
     
(1,349
)
 
   
2,344
     
(10
)
   
(9,478
)
Total income tax expense
 
$
28,196
   
$
22,816
   
$
21,273
 

Not included in the above table are items that were recorded to stockholders’ equity of approximately $7.0 million, ($0.1 million), and ($0.5 million) for 2013, 2012, and 2011, respectively, relating to deferred taxes on the unrealized (gain) loss on available for sale securities, tax benefits recognized with respect to stock options exercised, and deferred taxes related to pension plans.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

 
 
December 31,
 
(In thousands)
 
2013
   
2012
 
Deferred tax assets
 
   
 
Allowance for loan and lease losses
 
$
26,729
   
$
26,687
 
Deferred compensation
   
7,931
     
5,362
 
Postretirement benefit obligation
   
2,596
     
1,600
 
Unrealized losses on securities available for sale
   
5,900
     
-
 
Fair value adjustments from acquisitions
   
-
     
3,633
 
Accrued liabilities
   
3,265
     
1,524
 
Stock-based compensation expense
   
7,862
     
5,726
 
Equipment leasing
   
1,661
     
-
 
Other
   
2,125
     
1,933
 
Total deferred tax assets
   
58,069
     
46,465
 
Deferred tax liabilities
               
Pension and executive retirement
   
17,417
     
7,676
 
Fair value adjustments from acquisitions
   
2,070
     
-
 
Unrealized gains on securities available for sale
   
-
     
10,939
 
Premises and equipment, primarily due to accelerated depreciation
   
2,270
     
1,980
 
Equipment leasing
   
-
     
582
 
Deferred loan costs
   
1,624
     
873
 
Intangible amortization
   
12,007
     
13,146
 
Other
   
892
     
154
 
Total deferred tax liabilities
   
36,280
     
35,350
 
Net deferred tax asset at year-end
   
21,789
     
11,115
 
Net deferred tax asset (liability) at beginning of year
   
11,115
     
5,953
 
Increase in net deferred tax asset
 
$
10,674
   
$
5,162
 

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, 2013 and 2012.

A reconciliation of the beginning and ending balance of gross unrecognized tax benefits is as follows:

(In thousands)
 
2013
   
2012
   
2011
 
Balance at January 1
 
$
-
   
$
888
   
$
3,081
 
Additions for tax positions of prior years
   
-
     
-
     
-
 
Reduction for tax positions of prior years
   
-
     
(888
)
   
(2,193
)
Balance at December 31
 
$
-
   
$
-
   
$
888
 

At December 31, 2013 and 2012, the Company had no ASC 740-10 unrecognized tax benefits with $.9 million of unrecognized tax benefits at December 31, 2011.   The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months.   During 2012 and 2011 there was a reduction of reserves for Federal tax benefits for expiration of the statute of limitations of prior years’ tax filings and in 2011 the Company reached a settlement with New York State on franchise tax examinations for the years 2003 through 2007.  As a result, unrecognized tax benefits were reduced $0.9 million and $2.2 million for 2012 and 2011, respectively, with a reduction of tax expense of $0.8 million in 2012 and $1.5 million in 2011.

The Company is no longer subject to U.S. Federal tax examination by tax authorities for years prior to 2010 and New York State for years prior to 2008.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense.  The total amount of accrued interest at December 31, 2011 was approximately $0.1 million.  Net interest impacting the Company’s 2011 tax expense was $0.3 million.

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)
 
2013
   
2012
   
2011
 
Federal income tax at statutory rate
 
$
31,482
   
$
27,081
   
$
27,711
 
Tax exempt income
   
(2,433
)
   
(2,536
)
   
(2,925
)
Net increase in CSV of life insurance
   
(1,166
)
   
(908
)
   
(919
)
Low income housing tax credits
   
(819
)
   
(629
)
   
(782
)
State taxes, net of federal tax benefit
   
1,512
     
1,182
     
764
 
State audit settlements
   
-
     
-
     
(681
)
Other, net
   
(380
)
   
(1,374
)
   
(1,895
)
Income tax expense
 
$
28,196
   
$
22,816
   
$
21,273
 
(13) Employee Benefit Plans

Defined Benefit Postretirement Plans
 
The Company has a qualified, noncontributory, defined benefit pension plan (“the Plan”) covering substantially all of its employees at December 31, 2013. Benefits paid from the plan are based on age, years of service, compensation, social security benefits, and are determined in accordance with defined formulas. The Company’s policy is to fund the pension plan in accordance with ERISA standards. Assets of the plan are invested in publicly traded stocks and bonds. 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 converted to a cash balance plan with grandfathering provisions for existing participants.

The Company assumed a noncontributory, defined benefit pension plan in the Alliance acquisition.  This plan covers certain Alliance full-time employees who met eligibility requirements on October 6, 2006, at which time all benefits were frozen.  Under this plan, retirement benefits are primarily a function of both the years of service and the level of compensation.  Effective May 1, 2013, this plan was merged into the Plan.  The merging of the plans required a valuation as of the merger date and resulted in a $2.4 million adjustment to accumulated other comprehensive income.  The merging of the plans did not have a significant impact on the Company’s financial statements and related footnotes.

In addition to the Plan, the Company provides supplemental employee retirement plans to certain current and former executives.  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.”

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 postretirement health care benefits.  The plan is contributory for participating retirees, requiring participants to absorb certain deductibles and coinsurance amounts with contributions 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 postretirement 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 acquisition.  These postretirement benefits are referred to herein as “Other Benefits.”

Accounting standards require an employer to: (1) recognize the overfunded or underfunded status of defined benefit postretirement 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 periodic benefit cost, related to pensions and other postretirement benefits at December 31, 2013 are summarized below.  The Company expects that $0.3 million in net actuarial loss and $0.2 million in prior service costs will be recognized as components of net periodic benefit cost in 2014.
 
 
Pension Benefits
   
Other Benefits
 
(In thousands)
 
2013
   
2012
   
2013
   
2012
 
Net actuarial loss
 
$
11,286
   
$
35,478
   
$
1,628
   
$
2,277
 
Prior service cost
   
118
     
141
     
(521
)
   
(672
)
Total amounts recognized in accumulated other comprehensive loss (pre-tax)
 
$
11,404
   
$
35,619
   
$
1,107
   
$
1,605
 


A December 31 measurement date is used for the pension, supplemental pension and postretirement 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 postretirement benefits:

 
 
Pension Benefits
   
Other Benefits
 
(In thousands)
 
2013
   
2012
   
2013
   
2012
 
Change in benefit obligation
 
   
   
   
 
Benefit obligation at beginning of year
 
$
85,129
   
$
78,024
   
$
4,071
   
$
3,985
 
Service cost
   
2,493
     
3,122
     
23
     
20
 
Interest cost
   
3,223
     
3,145
     
286
     
155
 
Plan participants' contributions
   
-
     
-
     
269
     
233
 
Actuarial(gain) loss
   
(10,853
)
   
5,941
     
(369
)
   
136
 
Amendments
   
-
     
(1,006
)
   
(54
)
   
-
 
Acquisition
   
10,958
     
-
     
3,928
     
-
 
Benefits paid
   
(5,283
)
   
(4,097
)
   
(726
)
   
(458
)
Projected benefit obligation at end of year
   
85,667
     
85,129
     
7,428
     
4,071
 
Change in plan assets
                               
Fair value of plan assets at beginning of year
   
99,704
     
91,575
     
-
     
-
 
Actual return on plan assets
   
18,451
     
11,733
     
-
     
-
 
Acquisition
   
4,994
     
-
     
-
     
-
 
Employer contributions
   
708
     
493
     
457
     
225
 
Plan participants' contributions
   
-
     
-
     
269
     
233
 
Benefits paid
   
(5,283
)
   
(4,097
)
   
(726
)
   
(458
)
Fair value of plan assets at end of year
   
118,574
     
99,704
     
-
     
-
 
 
                               
Funded status at year end
 
$
32,907
   
$
14,575
   
$
(7,428
)
 
$
(4,071
)

Effective March 1, 2013, the pension 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.  This amendment resulted in a reduction to the projected benefit obligation as of December 31, 2012 as noted in the table above.

The funded status of the pension and other postretirement benefit plans has been recognized as follows in the consolidated balance sheets at December 31, 2013 and 2012.  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 $85.7 million and $85.1 million at December 31, 2013 and 2012, respectively.  The accumulated benefit obligation for other postretirement benefits was $7.4 million and $4.1 million at December 31, 2013 and 2012, respectively.

 
 
Pension Benefits
   
Other Benefits
 
(In thousands)
 
2013
   
2012
   
2013
   
2012
 
Other assets
 
$
48,189
   
$
27,062
   
$
-
   
$
-
 
Other liabilities
   
(15,282
)
   
(12,487
)
   
(7,428
)
   
(4,071
)
Funded status
 
$
32,907
   
$
14,575
   
$
(7,428
)
 
$
(4,071
)
The following assumptions were used to determine the benefit obligation and the net periodic pension cost for the years indicated:

 
 
Years ended December 31,
 
 
 
2013
   
2012
   
2011
 
Weighted average assumptions:
 
   
   
 
The following assumptions were used to determine benefit obligations:
 
   
   
 
Discount rate
   
4.90% - 5.05
%
   
3.50
%
   
4.10
%
Expected long-term return on plan assets
   
7.50
%
   
7.50
%
   
7.50
%
Rate of compensation increase
   
3.00
%
   
3.00
%
   
3.00
%
 
                       
The following assumptions were used to determine net periodic pension cost:
                       
Discount rate
   
3.50
%
   
4.10
%
   
5.15
%
Expected long-term return on plan assets
   
7.50
%
   
7.50
%
   
8.00
%
Rate of compensation increase
   
3.00
%
   
3.00
%
   
3.00
%

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)
 
2013
   
2012
   
2011
   
2013
   
2012
   
2011
 
Components of net periodic benefit cost
 
   
   
   
   
   
 
Service cost
 
$
2,493
   
$
3,122
   
$
2,589
   
$
23
   
$
20
   
$
17
 
Interest cost
   
3,223
     
3,145
     
3,544
     
286
     
155
     
202
 
Expected return on plan assets
   
(7,804
)
   
(6,686
)
   
(7,720
)
   
-
     
-
     
-
 
Amortization of prior service cost
   
23
     
283
     
309
     
(205
)
   
(202
)
   
(202
)
Amortization of unrecognized net loss
   
2,692
     
3,330
     
1,353
     
280
     
182
     
205
 
Net periodic pension cost
 
$
627
   
$
3,194
   
$
75
   
$
384
   
$
155
   
$
222
 
 
                                               
Other changes in plan assets and benefit obligations recognized in other comprehensive income (pre-tax)
                                               
Net loss (gain)
 
$
(21,500
)
 
$
894
   
$
16,108
   
$
(369
)
 
$
136
   
$
(562
)
Prior service cost
   
-
     
(1,006
)
   
-
     
(54
)
   
-
     
-
 
Amortization of prior service cost
   
(23
)
   
(283
)
   
(309
)
   
205
     
202
     
202
 
Amortization of unrecognized net gain
   
(2,692
)
   
(3,330
)
   
(1,353
)
   
(280
)
   
(182
)
   
(205
)
Total recognized in other comprehensive loss (income)
   
(24,215
)
   
(3,725
)
   
14,446
     
(498
)
   
156
     
(565
)
 
                                               
Total recognized in net periodic benefit cost and other comprehensive income (loss) - pre-tax
 
$
(23,588
)
 
$
(531
)
 
$
14,521
   
$
(114
)
 
$
311
   
$
(343
)
 
The following table sets forth estimated future benefit payments for the pension plans and other postretirement benefit plans:
 
 
 
Pension
   
Other
 
 
 
Benefits
   
Benefits
 
 
 
   
 
2014
   
5,950
     
555
 
2015
   
6,090
     
565
 
2016
   
6,143
     
560
 
2017
   
9,199
     
576
 
2018
   
6,899
     
590
 
2019 - 2023
   
34,827
     
2,771
 

The Company is not required to make contributions to the defined benefit plan in 2014.
 
For measurement purposes, the annual rates of increase in the per capita cost of covered medical and prescription drug benefits for fiscal year 2013 were assumed to be 5.9 to 8.5 percent. The rates were assumed to decrease gradually to 5.0 percent for fiscal year 2021 and remain at that level thereafter.  Assumed health care cost trend rates have a significant 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, 2014:
 
(In thousands)
 
One Percentage point increase
   
One Percentage point decrease
 
Increase (decrease) on total service and interest cost components
 
$
37
   
$
(27
)
Increase (decrease) on postretirement accumulated benefit obligation
   
768
     
(567
)

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 Company 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 2013
   
2013
   
2012
 
Cash and cash equivalents
   
0 - 20
%
   
6
%
   
5
%
Fixed income securities
   
20 - 40
%
   
27
%
   
29
%
Equities
   
40 - 80
%
   
67
%
   
66
%
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, 2013 and 2012 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, 2013 and 2012:

 
 
Quoted Prices in
   
Significant
   
 
 
 
Active Markets for
   
Other
   
Balance
 
 
 
Identical Assets
   
Observable Inputs
   
as of
 
 
 
(Level 1)
   
(Level 2)
   
December 31, 2013
 
Cash and cash equivalents
 
$
7,533
   
$
-
   
$
7,533
 
Foreign equity mutual funds
   
15,653
     
-
     
15,653
 
Equity mutual funds
   
16,727
     
-
     
16,727
 
US government bonds
   
-
     
9,355
     
9,355
 
Corporate bonds
   
-
     
19,665
     
19,665
 
Common stock
   
44,532
     
-
     
44,532
 
Municipal bonds and notes
   
-
     
1,451
     
1,451
 
Foreign bonds and notes
   
-
     
1,392
     
1,392
 
Foreign equity
   
2,266
     
-
     
2,266
 
Totals
 
$
86,711
   
$
31,863
   
$
118,574
 
 
 
Quoted Prices in
   
Significant
   
 
 
 
Active Markets for
   
Other
   
Balance
 
 
 
Identical Assets
   
Observable Inputs
   
as of
 
 
 
(Level 1)
   
(Level 2)
   
December 31, 2012
 
Cash and cash equivalents
 
$
5,464
   
$
-
   
$
5,464
 
Foreign equity mutual funds
   
9,763
     
-
     
9,763
 
Equity mutual funds
   
13,110
     
-
     
13,110
 
US government bonds
   
-
     
12,744
     
12,744
 
Corporate bonds
   
-
     
13,604
     
13,604
 
Common stock
   
40,430
     
-
     
40,430
 
Municipal bonds and notes
   
-
     
1,805
     
1,805
 
Foreign bonds and notes
   
-
     
1,137
     
1,137
 
Foreign equity
   
1,647
     
-
     
1,647
 
Totals
 
$
70,414
   
$
29,290
   
$
99,704
 

The plan had no financial instruments recorded at fair value on a nonrecurring basis as of December 31, 2013.
 
Determination of Assumed Rate of Return
 
The expected long-term rate-of-return on assets is 7.5% at December 31, 2013.  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 ownership plan (the “401(k) Plan”).  The Company contributes to the 401(k) Plan based on employees’ contributions out of their annual salaries.  In addition, the Company may also make discretionary 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 $2.1 million in 2013, $1.8 million in 2012, and $3.7 million in 2011.

(14) Stock-Based Compensation

In April 2008, the Company adopted the NBT Bancorp Inc. 2008 Omnibus Incentive Plan (the “Plan”). Under the terms of the Plan, options and other equity-based awards are granted to directors and employees to increase their direct proprietary interest in the operations and success of the Company.  The Plan assumed all prior equity-based incentive plans and any new equity-based awards are granted under the terms of the Plan.  Under terms of the 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 Plan may have different terms and conditions.  Performance shares and units granted under the Plan for executives may have different terms and conditions.

The per share weighted average fair value of stock options granted during 2013, 2012, and 2011 was $7.09, $4.57, and $5.45, respectively. The fair value of each award is estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the years ended December 31.  Historical information was the primary basis for the selection of the expected volatility, expected dividend yield and the expected lives of the options. The risk-free interest rate was selected based upon yields of the U.S. Treasury issues with a term equal to the expected life of the option being valued:
 
 
 
Years ended December 31,
 
  
 
2013
   
2012
   
2011
 
Dividend yield
   
3.20
%
   
3.94
%
   
3.31%–3.82
%
Expected volatility
   
34.60
%
   
34.64
%
   
33.75%–34.36
%
Risk-free interest rates
   
2.43
%
   
1.24
%
   
1.48%–2.81
%
Expected life
 
7 years
   
7 years
   
7 years
 

The following table summarizes information concerning stock options outstanding at December 31, 2013:

 
 
Number of Shares
   
Weighted average exercise price
   
Weighted Average Remaining Contractual Term (in yrs)
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2013
   
1,695,562
   
$
22.72
   
   
 
Granted
   
120
     
26.29
   
   
 
Exercised
   
(335,103
)
   
21.77
   
   
 
Forfeited
   
(495
)
   
20.19
   
   
 
Expired
   
(18,584
)
   
21.58
   
  
   
  
 
Outstanding at December 31, 2013
   
1,341,500
   
$
22.98
     
3.89
   
$
3,996,816
 
 
                               
Exercisable at December 31, 2013
   
1,279,560
   
$
23.08
     
3.78
   
$
3,683,178
 
 
                               
Expected to Vest
   
61,044
   
$
20.80
     
5.54
   
$
311,352
 
Total stock-based compensation expense for stock option awards totaled $0.2 million, $0.5 million, and $0.9 million for the years ended December 31, 2013, 2012, and 2011, respectively.  Cash proceeds, tax benefits and intrinsic value related to total stock options exercised is as follows:
 
 
 
Years ended
 
(dollars in thousands)
 
2013
   
2012
   
2011
 
Proceeds from stock options exercised
 
$
7,927
   
$
1,908
   
$
2,255
 
Tax benefits related to stock options exercised
   
178
     
8
     
341
 
Intrinsic value of stock options exercised
   
905
     
498
     
897
 
Fair value of shares vested during the year
   
766
     
1,656
     
1,597
 

The Company has outstanding restricted and deferred stock awards granted from various plans at December 31, 2013. The Company recognized $3.8 million, $3.7 million, and $3.2 million in stock-based compensation expense related to these stock awards for the years ended December 31, 2013, 2012, and 2011, respectively.  Tax benefits recognized with respect to restricted stock awards and stock units were $1.5 million, $1.5 million and $1.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.  Unrecognized compensation cost related to restricted stock awards and stock units totaled $4.6 million at December 31, 2013 and will be recognized over 2.1 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, 2013:

 
 
Number
   
Weighted-
Average
 
 
 
of
   
Grant Date Fair
 
 
 
Shares
   
Value
 
Unvested Restricted Stock Awards
 
   
 
Unvested at January 1, 2013
   
117,150
   
$
24.37
 
Forfeited
   
(2,033
)
   
23.25
 
Vested
   
(48,467
)
   
26.10
 
Unvested at December 31, 2013
   
66,650
   
$
23.15
 

The following table summarizes information for unvested restricted stock units outstanding as of December 31, 2013:

 
 
Number
   
Weighted-
Average
 
 
 
of
   
Grant Date Fair
 
 
 
Shares
   
Value
 
Unvested Restricted Stock Units
 
   
 
Unvested at January 1, 2013
   
406,058
   
$
25.64
 
Forfeited
   
(6,467
)
   
-
 
Vested
   
(69,333
)
   
-
 
Granted
   
209,592
     
20.81
 
Unvested at December 31, 2013
   
539,850
   
$
27.36
 

The Company has 4.1 million securities remaining available to be granted as part of the Plan at December 31, 2013.

(15)  Stockholders’ Equity

In accordance with accounting standards, 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 comprehensive loss.  For the years ended December 31, components of accumulated other comprehensive loss are:

(In thousands)
 
2013
   
2012
 
Unrecognized prior service cost and net actuarial loss on pension plans
 
$
(7,785
)
 
$
(22,555
)
Unrealized net holding (losses) gains on available for sale securities
   
(8,980
)
   
16,675
 
Accumulated other comprehensive loss
 
$
(16,765
)
 
$
(5,880
)

Certain restrictions exist regarding the ability of the subsidiary bank to transfer funds to the Company in the form of cash dividends. The approval of the Office of Comptroller of the Currency (“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, 2013, approximately $56.7 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. 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.
 
In October 2004, the Company adopted a Stockholder Rights Plan (the “Plan”) designed to ensure that any potential acquirer of the Company negotiate with the board of directors and that all Company stockholders are treated equitably in the event of a takeover attempt. At that time, the Company paid a dividend of one Preferred Share Purchase Right (a “Right”) for each outstanding share of common stock of the Company. Similar rights are attached to each share of the Company’s common stock issued after November 16, 2004. Under the Plan, the Rights will not be exercisable until a person or group acquires beneficial ownership of 15% or more of the Company’s outstanding common stock or begins a tender or exchange offer for 15% or more of the Company’s outstanding common stock. Additionally, until the occurrence of such an event, the Rights are not severable from the Company’s common stock and, therefore, the Rights will be transferred upon the transfer of shares of the Company’s common stock. Upon the occurrence of such events, each Right entitles the holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company, no par value and $0.01 stated value per share, at a price of $70.

The Plan also provides that upon the occurrence of certain specified events, the holders of Rights will be entitled to acquire additional equity interests in the Company or in the acquiring entity and such interests will have a market value of two times the Right’s exercise price of $70. The Rights, which expire October 24, 2014, are redeemable in whole, but not in part, at the Company’s option prior to the time they are exercisable, for a price of $0.001 per Right.

Under a previously disclosed stock repurchase plan, the Company purchased 584,925 shares of its common stock during the twelve month period ended December 31, 2013, for a total of $12.5 million at an average price of $21.30 per share.  This plan expired on December 31, 2013.  On July 22, 2013, the NBT Board of Directors authorized a new repurchase program for NBT to repurchase up to an additional 1,000,000 shares of its outstanding common stock.  This plan expires on December 31, 2014.

 ( 16)  Regulatory Capital Requirements
 
The Company and NBT Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  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, NBT 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 NBT 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, 2013 and 2012, the Company and NBT Bank meet all capital adequacy requirements to which they were subject.
 
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 capitalized, under capitalized, significantly under capitalized, and critically under capitalized.  As of December 31, 2013, the most recent notification from NBT Bank’s regulators categorized NBT Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized NBT 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 NBT Bank’s category.

The Company and NBT Bank’s actual capital amounts and ratios are presented as follows:

 
 
Actual
   
Regulatory ratio requirements
 
(Dollars in thousands)
 
Amount
   
Ratio
   
Minimum
capital adequacy
   
For classification
as well capitalized
 
As of December 31, 2013
 
   
   
   
 
Total Capital (to risk weighted assets):
 
   
   
   
 
Company
 
$
723,580
     
12.99
%
   
8.00
%
   
10.00
%
NBT Bank
   
686,194
     
12.41
%
   
8.00
%
   
10.00
%
Tier I Capital (to risk weighted assets)
                               
Company
   
653,950
     
11.74
%
   
4.00
%
   
6.00
%
NBT Bank
   
617,038
     
11.16
%
   
4.00
%
   
6.00
%
Tier I Capital (to average assets)
                               
Company
   
653,950
     
8.93
%
   
4.00
%
   
5.00
%
NBT Bank
   
617,038
     
8.47
%
   
4.00
%
   
5.00
%
 
                               
As of December 31, 2012
                               
Total Capital (to risk weighted assets):
                               
Company
 
$
560,745
     
12.25
%
   
8.00
%
   
10.00
%
NBT Bank
   
505,027
     
11.08
%
   
8.00
%
   
10.00
%
Tier I Capital (to risk weighted assets)
                               
Company
   
503,359
     
11.00
%
   
4.00
%
   
6.00
%
NBT Bank
   
447,909
     
9.83
%
   
4.00
%
   
6.00
%
Tier I Capital (to average assets)
                               
Company
   
503,359
     
8.54
%
   
4.00
%
   
5.00
%
NBT Bank
   
447,909
     
7.62
%
   
4.00
%
   
5.00
%

(17) Earnings Per Share

The following is a reconciliation of basic and diluted earnings per share for the years presented in the consolidated statements of income:

 
 
Years ended December 31,
 
 
 
2013
   
2012
   
2011
 
 
 
   
Weighted
   
   
   
Weighted
   
   
   
Weighted
   
 
 
 
Net
   
average
   
Per share
   
Net
   
average
   
Per share
   
Net
   
average
   
Per share
 
(In thousands, except per share data)
 
income
   
shares
   
amount
   
income
   
shares
   
amount
   
income
   
shares
   
amount
 
Basic earnings per share
 
$
61,747
     
41,930
   
$
1.47
   
$
54,558
     
33,379
   
$
1.63
   
$
57,901
     
33,662
   
$
1.72
 
Effect of dilutive securities
                                                                       
 
                                                                       
Stock based compensation
           
420
                     
340
                     
262
         
Diluted earnings per share
 
$
61,747
     
42,350
   
$
1.46
   
$
54,558
     
33,719
   
$
1.62
   
$
57,901
     
33,924
   
$
1.71
 

There were approximately 1.0 million, 1.2 million, and 1.3 million weighted average stock options for the years ended December 31, 2013, 2012, and 2011, respectively, that were not considered in the calculation of diluted earnings per share since the stock options’ exercise prices were greater than the average market price during  these  periods.

(18) Reclassification Adjustments Out of Other Comprehensive (Loss) Income

The following table summarizes the reclassification adjustments out of accumulated other comprehensive loss (in thousands):

Detail About Accumulated Other Comprehensive (Loss)
Income Components
 
Amount reclassified from accumulated other comprehensive income (loss)
 
Affected line item in the consolidated statement of comprehensive income
 
 
Years ended
 
 
 
 
December 31, 2013
   
December 31, 2012
 
 
Available for sale securities:
 
   
 
   
Gains on available for sale securities
 
$
(1,426
)
 
$
(599
)
Net securities gains
Tax benefit
   
565
     
237
 
Income tax expense
Net of tax
 
$
(861
)
 
$
(362
)
 
 
               
    
Pension and other benefits:
               
   
Amortization of net gains
 
$
2,972
   
$
3,512
 
Salaries and employee benefits
Amortization of prior service costs
   
(182
)
   
81
 
Salaries and employee benefits
Tax expense
   
1,189
     
1,419
 
Income tax expense
Net of tax
 
$
1,601
   
$
2,174
 
 
 
               
    
Total reclassifications during the period, net of tax
 
$
740
   
$
1,812
 
 

(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, commitments to originate new loans and loans sold with recourse generally follow the loan classifications.
 
At December 31, 2013, 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 the greater Burlington, Vermont area.  Accordingly, the ultimate 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 concentrations 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 commitments 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)
 
2013
   
2012
 
Unused lines of credit
 
$
216,658
   
$
163,626
 
Commitments to extend credits, primarily variable rate
   
849,092
     
678,093
 
Standby letters of credit
   
36,837
     
37,510
 
Commercial letters of credit
   
41,263
     
16,607
 
Loans sold with recourse
   
15,741
     
13,690
 

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 stand-by letters of credit to third parties. These stand-by 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 stand-by 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 represent future cash requirements.  The fair value of the Company’s stand-by letters of credit at December 31, 2013 and 2012 was not significant.
 
The total amount of loans serviced by the Company for unrelated third parties was approximately $554.4 million and $309.2 million at December 31, 2013 and 2012, respectively.  At December 31, 2013 and 2012, the Company had approximately $2.2 million and $1.2 million, respectively, of mortgage servicing rights.
In the normal course of business there are various outstanding 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 reasonably estimated.  The Company is a defendant to a class action lawsuit related to a previously disclosed class action lawsuit arising from its assessment and collection of fees on its checking account customers.  As of December 31, 2013, the Company has accrued for the full amount of a preliminarily approved settlement, which if and when finally approved would entirely dispose of the action.  A hearing with respect to such approval has been scheduled for June 27, 2014.  In the opinion of management, the aggregate amount involved in such proceedings at December 31, 2013 is not material to the consolidated balance sheets or results of operations of the Company.

The Company is required to maintain reserve balances with the Federal Reserve Bank of New York. The required average total reserve for NBT Bank for the 14-day maintenance period ending December 25, 2013 was $48.7 million.

(20) Fair Values of Financial Instruments
 
The following table sets forth information with regard to estimated fair values of financial instruments at December 31, 2013 and December 31, 2012.  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, 2013
   
December 31, 2012
 
(In thousands)
 
Fair Value Hierarchy
   
Carrying amount
   
Estimated fair value
   
Carrying amount
   
Estimated fair value
 
Financial assets
 
   
   
   
   
 
Securities held to maturity
   
2
   
$
117,283
   
$
113,276
   
$
60,563
   
$
61,535
 
Net loans
   
3
     
5,337,361
     
5,386,520
     
4,208,282
     
4,313,244
 
Financial liabilities
                                       
Time deposits
   
2
   
$
1,021,142
   
$
1,023,982
   
$
983,261
   
$
994,376
 
Long-term debt
   
2
     
308,823
     
325,195
     
367,492
     
407,404
 
Junior subordinated debt
   
2
     
101,196
     
105,121
     
75,422
     
74,147
 

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 experience, 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 investment 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.

Securities Held to Maturity
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 discounting 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 estimated prepayments.

Time Deposits
The fair value of time deposits was estimated using a discounted 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 consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

Long-Term Debt
The fair value of long-term debt was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments.

Trust Preferred Debentures
The fair value of trust preferred debentures has been estimated using a discounted cash flow analysis.


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, 2013 and December 31, 2012.  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):
 
 
 
Quoted Prices in
   
Significant
   
Significant
   
 
 
 
Active Markets for
   
Other
   
Unobservable
   
Balance
 
 
 
Identical Assets
   
Observable Inputs
   
Inputs
   
as of
 
   
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
December 31, 2013
 
Assets:
 
   
   
   
 
Securities Available for Sale:
 
   
   
   
 
U.S. Treasury
 
$
43,616
   
$
-
   
$
-
   
$
43,616
 
Federal Agency
   
-
     
278,915
     
-
     
278,915
 
State & municipal
   
-
     
113,665
     
-
     
113,665
 
Mortgage-backed
   
-
     
364,164
     
-
     
364,164
 
Collateralized mortgage obligations
   
-
     
549,528
     
-
     
549,528
 
Other securities
   
6,796
     
8,197
     
-
     
14,993
 
Total Securities Available for Sale
 
$
50,412
   
$
1,314,750
   
$
-
   
$
1,364,881
 
Trading Securities
   
5,779
     
-
     
-
     
5,779
 
Interest Rate Swaps
   
-
     
281
     
-
     
281
 
Total
 
$
56,191
   
$
1,314,750
   
$
-
   
$
1,370,941
 
 
                               
Liabilities:
                               
Interest Rate Swaps
 
$
-
   
$
281
   
$
-
   
$
281
 
Total
 
$
-
   
$
281
   
$
-
   
$
281
 
 
 
Quoted Prices in
   
Significant
   
Significant
   
 
 
 
Active Markets for
   
Other
   
Unobservable
   
Balance
 
 
 
Identical Assets
   
Observable Inputs
   
Inputs
   
as of
 
 
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
December 31, 2012
 
Assets:
 
   
   
   
 
Securities Available for Sale:
 
   
   
   
 
U.S. Treasury
 
$
64,425
   
$
-
   
$
-
   
$
64,425
 
Federal Agency
   
-
     
282,814
     
-
     
282,814
 
State & municipal
   
-
     
86,802
     
-
     
86,802
 
Mortgage-backed
   
-
     
250,281
     
-
     
250,281
 
Collateralized mortgage obligations
   
-
     
449,723
     
-
     
449,723
 
Other securities
   
8,672
     
5,282
     
-
     
13,954
 
Total Securities Available for Sale
 
$
73,097
   
$
1,074,902
   
$
-
   
$
1,147,999
 
Trading Securities
   
3,918
     
-
     
-
     
3,918
 
Interest Rate Swaps
   
-
     
1,490
     
-
     
1,490
 
Total
 
$
77,015
   
$
1,076,392
   
$
-
   
$
1,153,407
 
 
                               
Liabilities:
                               
Interest Rate Swaps
 
$
-
   
$
1,490
   
$
-
   
$
1,490
 
Total
 
$
-
   
$
1,490
   
$
-
   
$
1,490
 

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 Company 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 designated security.

FASB ASC Topic 820 requires disclosure of assets and liabilities measured and recorded at fair value on a nonrecurring basis.  In accordance with the provisions of FASB ASC Topic 310, the Company had collateral dependent impaired loans with a carrying value of approximately $5.0 million which had specific reserves included in the allowance for loan losses of $0.7 million at December 31, 2013.  The Company uses the fair value of underlying 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 identifiable. The appraisals may be adjusted by management for qualitative 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.

FASB ASC Topic 825 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 recognizes 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, 2013 and 2012, the Company did not elect the fair value option for any eligible items.

(21)  Parent Company Financial Information

Condensed Balance Sheets

 
 
December 31,
 
(In thousands)
 
2013
   
2012
 
Assets
 
   
 
Cash and cash equivalents
 
$
3,741
   
$
23,095
 
Securities available for sale, at estimated fair value
   
11,008
     
12,866
 
Trading securities
   
4,742
     
3,371
 
Investment in subsidiaries, on equity basis
   
896,479
     
635,851
 
Other assets
   
49,530
     
48,324
 
Total assets
 
$
965,500
   
$
723,507
 
Liabilities and Stockholders’ Equity
               
Total liabilities
 
$
148,931
   
$
141,234
 
Stockholders’ equity
   
816,569
     
582,273
 
Total liabilities and stockholders’ equity
 
$
965,500
   
$
723,507
 

Condensed Income Statements

 
 
Years ended December 31,
 
(In thousands)
 
2013
   
2012
   
2011
 
Dividends from subsidiaries
 
$
13,500
   
$
79,175
   
$
54,400
 
Management fee from subsidiaries
   
84,778
     
78,665
     
69,430
 
Securities gains (losses)
   
1,273
     
442
     
(31
)
Interest, dividend and other income
   
636
     
720
     
628
 
Total revenue
   
100,187
     
159,002
     
124,427
 
Operating expense
   
83,675
     
79,015
     
75,254
 
Income before income tax benefit and equity in undistributed income of subsidiaries
   
16,512
     
79,987
     
49,173
 
Income tax (expense) benefit
   
(1,046
)
   
(284
)
   
1,340
 
Dividends in excess of income (equity in undistributed income) of subsidiaries
   
46,285
     
(25,145
)
   
7,388
 
Net income
 
$
61,751
   
$
54,558
   
$
57,901
 

Statements of Cash Flow

 
 
Years ended December 31,
 
(In thousands)
 
2013
   
2012
   
2011
 
Operating activities
 
   
   
 
Net income
 
$
61,751
   
$
54,558
   
$
57,901
 
Adjustments to reconcile net income to net cash provided by operating activities
                       
Stock-based compensation
   
4,305
     
4,364
     
3,244
 
Gain on sales of available-for-sale securities
   
1,273
     
442
     
31
 
Equity in undistributed income of subsidiaries
   
(59,785
)
   
(54,030
)
   
(61,788
)
Cash dividend from subsidiaries
   
13,500
     
79,175
     
54,400
 
Net change in other liabilities
   
(18,077
)
   
(3,181
)
   
15,311
 
Net change in other assets
   
14,924
     
2,030
     
(11,607
)
Net cash provided by operating activities
   
17,891
     
83,358
     
57,492
 
Investing activities
                       
Purchases of available-for-sale securities
   
-
     
(4,163
)
   
(968
)
Sales and maturities of available-for-sale securities
   
1,948
     
1,445
     
71
 
Net cash provided by (used in) acquisitions
   
2,232
     
(14,612
)
   
-
 
Purchases of premises and equipment
   
(782
)
   
(1,240
)
   
(1,656
)
Net cash provided by (used in) investing activities
   
3,398
     
(18,570
)
   
(2,553
)
Financing activities
                       
Proceeds from the issuance of shares to employee benefit plans and other stock plans
   
5,512
     
1,387
     
1,386
 
Payments on long-term debt
   
-
     
(3,340
)
   
(140
)
Purchases of treasury shares
   
(12,459
)
   
(15,490
)
   
(30,502
)
Cash dividends and payments for fractional shares
   
(33,518
)
   
(26,712
)
   
(27,063
)
Excess tax benefit from exercise of stock options
   
(178
)
   
8
     
341
 
Net cash used in financing activities
   
(40,643
)
   
(44,147
)
   
(55,978
)
Net (decrease )increase in cash and cash equivalents
   
(19,354
)
   
20,641
     
(1,039
)
Cash and cash equivalents at beginning of year
   
23,095
     
2,454
     
3,493
 
Cash and cash equivalents at end of year
 
$
3,741
   
$
23,095
   
$
2,454
 

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.

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 Securities 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 supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with generally accepted accounting principles.

As of December 31, 2013, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control — Integrated Framework (1992),” 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, 2013 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, 2013. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, is included in this Item under the heading “Report of Independent Registered Public Accounting Firm” on the following page.
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, 2013, based on criteria established in Internal Control — Integrated Framework (1992) 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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) 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, 2013 and 2012 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, 2013, and our report dated March 3, 2014 expressed an unqualified opinion on those financial statements.

/s/  KPMG LLP

Albany, New York
March 3, 2014

ITEM 9B. Other Information

None.
 
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 6, 2014 (the “Proxy Statement”), which will be filed with the SEC within 120 days after the Company’s 2013 fiscal year end.

ITEM 11. Executive Compensation
 
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 6, 2014 (the “Proxy Statement”), which will be filed with the SEC within 120 days after the Company’s 2013 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:
 
Plan Category
 
A. Number of securities to
 be issued upon exercise
of outstanding options,
warrants and rights
   
B. Weighted-average
 exercise price of
outstanding options,
warrants and rights
   
Number of securities
 remaining available for 
future issuance under
equity compensation plans
 (excluding securities
reflected in column A.)
 
Equity compensation plans approved by stockholders
   
1,341,500
   
$
22.98
     
4,071,578
 
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 2013 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 2013 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 2013 fiscal year end.

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, 2013 and 2012.
 
Consolidated Statements of Income for each of the three years ended December 31, 2013, 2012 and 2011.
 
Consolidated Statements of Changes in Stockholders’ Equity for each of the three years ended December 31, 2013, 2012 and 2011.
 
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2013, 2012 and 2011.
 
Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2013, 2012 and 2011.
 
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 Certificate of Incorporation of NBT Bancorp Inc. as amended through July 23, 2001 (filed as Exhibit 3.1 to Registrant’s Form 10-K for the year ended December 31, 2008, filed on March 2, 2009 and incorporated herein by reference).
3.2 Bylaws of NBT Bancorp Inc. as amended and restated through May 7, 2013 (filed as Exhibit 3.1 to Registrant’s Form 8-K, filed on May 7, 2013 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).
4.2 Rights Agreement, dated as of November 15, 2004, between NBT Bancorp Inc. and Registrar and Transfer Company, as Rights Agent (filed as Exhibit 4.1 to Registrant's Form 8-K, file number 0-14703, filed on November 18, 2004, and incorporated by reference herein).
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. Employee Stock Purchase Plan (filed as Exhibit 10.4 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. 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).*
10.5 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).*
10.6 NBT Bancorp Inc. 2014 Executive Incentive Compensation Plan.*
10.7 2006 Non-Executive Restricted Stock Plan (filed as Exhibit 99.1 to Registrant’s Form S-8 Registration Statement, file number 333-139956, filed on January 12, 2007, and incorporated herein by reference).*
10.8 Supplemental Retirement Agreement between NBT Bancorp Inc., NBT Bank, National Association and Daryl R. Forsythe as amended and restated Effective January 1, 2005  (filed as Exhibit 10.11 to Registrant’s Form 10-K for the year ended December 31, 2005, filed on March 15, 2006 and incorporated herein by reference).*
10.9 Death Benefits Agreement between NBT Bancorp Inc., NBT Bank, National Association and Daryl R. Forsythe made August 22, 1995 (filed as Exhibit 10.12 to Registrant’s Form 10-K for the year ended December 31, 2005, filed on March 15, 2006 and incorporated herein by reference).*
10.10 Amendment dated January 28, 2002 to Death Benefits Agreement between NBT Bancorp Inc., NBT Bank, National Association and Daryl R. Forsythe made August 22, 1995 (filed as Exhibit 10.12 to Registrant’s Form 10-K for the year ended December 31, 2008, filed on March 2, 2009 and incorporated herein by reference).*
10.11 Employment Agreement between NBT Bancorp Inc. and Martin A. Dietrich as amended and restated November 5, 2009 (filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarterly period ended September 30, 2009, filed on November 9, 2009 and incorporated herein by reference).*
10.12 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).*
10.13 Form of Change in Control Agreement, dated November 5, 2009, by and between NBT Bancorp Inc. and Messrs. Dietrich, Chewens, Raven and Levy (filed as Exhibit 10.5 to Registrant’s Form 10-Q for the quarterly period ended September 30, 2009, filed on November 9, 2009 and incorporated herein by reference).*
Form of First Amendment to the Form of Change in Control Agreement for Messrs. Dietrich, Chewens, Levy and Raven.*
10.15 Form of Amendment to Three-Year Change in Control Agreement for Messrs. Dietrich, Chewens, Levy and Raven ( filed as Exhibit 10.1 to Registrant’s Form 8-K, filed on January 29, 2013 and incorporated herein by reference).*
10.16 Employment Agreement between NBT Bancorp Inc. and Michael J. Chewens as amended and restated November 5, 2009 (filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarterly period ended September 30, 2009, filed on November 9, 2009 and incorporated herein by reference).*
10.17 Form of Amended and Restated NBT Bancorp Inc. Supplemental Retirement Agreement, dated as of November 5, 2009, between NBT Bancorp Inc. and Messrs. Chewens, Levy and Raven (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).*
10.18 Employment Agreement between NBT Bancorp Inc. and David E. Raven as amended and restated November 5, 2009 (filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarterly period ended September 30, 2009, filed on November 9, 2009 and incorporated herein by reference).*
10.19 Employment Agreement between NBT Bancorp Inc. and Jeffrey M. Levy made as amended and restated November 5, 2009 (filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarterly period ended September 30, 2009, filed on November 9, 2009 and incorporated herein by reference).*
10.20 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).*
10.21 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).*
10.22 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).*
10.23 Description of Arrangement for Directors Fees.*
10.24 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).*
10.25 Consulting Agreement, dated October 7, 2012, by and between NBT Bancorp, Inc. and Joseph Nasser (filed as Exhibit 10.1 to the Registrant’s Form 8-K, File Number 0-14703, filed on October 12, 2012, and incorporated herein by reference).*
10.26 Employment Agreement, dated May 4, 2012, by and between Timothy L. Brenner and NBT Bancorp Inc. (filed as Exhibit 10.4 to Registrant’s Form S-4, filed on January 28, 2013 and incorporated herein by reference).*
10.27 Change in Control Agreement, dated May 4, 2013, by and between Timothy L. Brenner and NBT Bancorp Inc. (filed as Exhibit 10.5 to Registrant’s Form S-4, filed on January 28, 2013 and incorporated herein by reference).*
10.28 Form of Amendment to Two-Year Change in Control Agreement for   Mr. Brenner ( filed as Exhibit 10.1 to Registrant’s Form 8-K, filed on January 29, 2013 and incorporated herein by reference).*
10.28 Employment Agreement dated October 7, 2012 between NBT Bancorp, Inc. and Jack H. Webb. (filed as Exhibit 10.28 to Registrant’s Form 10-K for the year ended December 31, 2012, filed on March 1, 2013 and incorporated herein by reference).*
10.29 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.*
10.30
Split Dollar Agreement between the Alliance Bank N.A. and Jack H. Webb.*
21 A list of the subsidiaries of the Registrant.
23 Consent of KPMG LLP.
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.

* Management contract or compensatory plan or arrangement
(b) Exhibits to this Form 10-K are attached or incorporated herein by reference as noted above.

(c) Not applicable
SIGNATURES

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.

NBT BANCORP INC. (Registrant)
March 3, 2014
 
/s/ Martin A. Dietrich
Martin A. Dietrich
 
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/ Daryl R. Forsythe
 
Daryl R. Forsythe
Chairman and Director
Date:   March 3, 2014
 
/s/ Martin A. Dietrich
 
Martin A. Dietrich
NBT Bancorp Inc. President, CEO, and Director (Principal Executive Officer)
Date:   March 3, 2014
 
/s/ Michael J. Chewens
 
Michael J. Chewens
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Date:   March 3, 2014
 
/s/ Richard Chojnowski
 
Richard Chojnowski, Director
Date:   March 3, 2014
 
/s/ Patricia T. Civil
 
Patricia T. Civil, Director
Date:   March 3, 2014
 
/s/ Timothy E. Delaney
 
Timothy E. Delaney, Director
Date:   March 3, 2014
/s/ James H. Douglas
 
James H. Douglas, Director
Date:   March 3, 2014
 
/s/ John C. Mitchell
 
John C. Mitchell, Director
Date:   March 3, 2014
 
/s/ Michael M. Murphy
 
Michael M. Murphy, Director
Date:   March 3, 2014
 
/s/ Joseph A. Santangelo
 
Joseph A. Santangelo, Director
Date:   March 3, 2014
 
/s/ Robert A. Wadsworth
 
Robert A. Wadsworth, Director
Date:   March 3, 2014
 
/s/ Lowell A. Seifter
 
Lowell A. Seifter, Director
Date:   March 3, 2014
 
/s/ Paul M. Solomon
 
Paul M. Solomon, Director
Date:   March 3, 2014
 
/s/ Jack H. Webb
 
Jack H. Webb, Director
Date:   March 3, 2014
 
 
132
Exhibit 10.6

Ja nu a r y 2014

NBT BANCORP INC . AND SUBSIDIARIES

2014   E X E C U T I VE   I N C EN T I VE   C OMPENSA T I ON   P L AN
NBT BANCORP INC. AND SUBSIDIARIES
2014   E X E C UT I V E   I N C E NT I V E C O M P E N S A T I O N P L A N
 
Ta b l e   o f   C o n t en t s

 
P ag e
 
 
 
 
Appendix A
3
 
 
Introduction
4
 
 
Plan Highlights
5
 
 
I n c ent iv e   P la n
 
 
 
Section I - Definitions
6 - 7
 
 
Section II - Participation
7
 
 
Section III - Activating the Plan
7 - 8
 
 
Section IV - Calculation of Awards
8
 
 
Section V - President's Special Recommendations
8
 
 
Section VI - Distribution of Awards
9
 
 
Section VII - Plan Administration
9
 
 
Section VIII - Amendment, Modification, Suspension or Termination
9
 
 
Section IX - Exclusivity
 
 
 
Section IX - Effective Date
10
 
 
Section X - Employer Relations with Participants
10
 
 
Section XI - Governing Law
10
Int r o duct io n

It is important to examine the benefits that accrue to the organization through the operation of the Executive Incentive Compensation Plan (EICP) . The Plan impacts directly on the success of the organization and its purpose can be summarized as follows:

*           P r o vi d es   M ot iva t i on: The opportunity for incentive awards provides Executives with the impetus to "stretch" for challenging , yet attainable, goals .

*           P r o vi d es   Retent i on:   B y   enh a n c i ng   the   o r g a n i z a t i on ' s   c om p et i t i v e   c om p en s a t i on   p o s t u r e.

*           P r o vi d es   M a n ag eme n t   T e a m   Bu i l d i n g : By making the incentive award dependent on the attainment of organization goals , a "team orientation" is fostered among the participant group.

*           P r o vi d es   I n d ivi d u a l   M ot iva t i o n : By encouraging the participant to make significant personal contribution to the corporate effort.

*           P r o v i d es   Com p et i t iv e   Com p en s a t i on   S t r a te gy : The implementation of incentive arrangements is competitive with current practice in the banking industry .

Highlights of the 2014   E x e c u t iv e   I n c e nt iv e   C om p en s a t i on   P la n   (E I C P )   a r e l i s ted   b e l o w :

1. The Plan is competitive compared with similar sized banking organizations and the banking industry in general .

2. The Compensation Committee of the Board of Directors makes all determinations regarding the Plan.

3. All active Executives are eligible for participation.

4. The financial criteria necessary for Plan operation consist of achieving certain levels of Earnings Per Share (EPS) for the Company and its Subsidiaries as applicable. The Committee may provide in any such Award that any evaluation of performance may include or exclude any of the following events that occur during a Performance Period: (a) the effect of changes in tax laws , accounting principles , or other laws or provisions affecting reported results; (b) any reorganization and restructuring programs; and (c) acquisitions or divestitures and related expenses . To the extent such inclusions or exclusions affect Awards to Covered Employees; they shall be prescribed in a form that meets the requirements of Code Section 162(m) for deductibility .

5. Incentive distributions will be made on or before March 15 of the year following the Plan Year and will be based on the matrix in Appendix A .

6.
Maximum incentive awards will be based on attainment of corporate EPS goals. No bonus will be paid unless the Corporation achieves the threshold EPS goal set forth in Appendix A. The actual amount paid out for each Covered Employee cannot exceed the maximum award determined based upon level of the corporate EPS goals that have been achieve. The actual amount awarded would include an assessment of each Covered Employee’s contribution towards the Company’s overall success in accomplishing its corporate goals and may include, but is not limited to, consideration of financial metrics, special projects, leadership and professional development.
NBT BANCORP INC . AND SUBSIDIARIES
 
The Board of Directors has established this 2014   E xe cu t i v e   I n c ent iv e   C om p en s a t i o n   Pla n.   T h e   2014 E x e cu t i ve I nc e n t i v e   C om p e n s a t i o n   Pl a n   i s   i m p l e me n te d   pursu a n t   t o   t h e   pr o v i s i o n s   o f   t h e   2 00 8   O m n i b u s   I nc e n t i v e   P l a n   f o r   purp o s e s   of p a y i n g   p e rf o r m a nc e - b a s e d   c o m p e ns a t i o n   w i t h i n   t h e   m e a n i n g   o f   S e c t i o n   16 2 ( m )   o f t h e Co d e .   T he   p u rp o s e   of t h e   Pla n   i s   to meet   a nd   e x c eed   f i n a n c ia l   g o a l s   a nd   to   pr omote   a s u p e r i or   l e v el   of   p e r f o r m a n c e   r e la t iv e   to   the   c om p et i t i on   i n   our   m a rk et a r e a s .   T h r ou g h   p ay m ent   of i n c ent iv e   c om p en s a t i on   b e y ond   b a s e   s ala r i e s ,   the   P l a n   pr o vi d es   r e wa r d   f or   meet i ng   a nd e x c ee d i ng   f i n a n c i a l   g o al s .
 
SECTION I – DEFINITIONS

Various terms used in the Plan are defined as follows:

Awar d :   An award granted under this Plan .

B ase   S alary:   The base salary at the end of the Plan Year , excluding any bonuses , contributions to Executive benefit programs , or other compensation not designated as salary .

B oard   of   D ir e ct ors:   The Board of Directors of NBT Bancorp Inc.

C E O :   The CEO of NBT Bancorp Inc.

C o d e :   The Internal Revenue Code of 1986, as now in effect or as hereafter amended .

C or p ora t e   G oals:   Those pre - established objectives and goals of NBT Bancorp Inc . which are required to activate distribution of awards under the Plan.

C ov e r e d   E m p loy ee :   A Participant who is a Covered Employee within the meaning of Section 162(m)(3) of the Code.

C o m p e n sa t ion   C o m m i tt ee :   The Compensation and Benefits Committee of the NBT Bancorp Inc . Board of Directors .
Plan   Par t i c i p a n t :   An eligible Executive as recommended by the CEO and approved by the Compensation Committee for participation for the Plan Year.

Plan   Y e ar:   T he   2014     c al en d a r   y e a r.

SECTION II - ELIGIBILITY TO PARTICIPATE

To be eligible for an award under the Plan, a Plan participant must be an Executive in full - time service at the start and close of the calendar year and at the time of the award unless mutually agreed upon prior to the Executive leaving the company . Newly hired employees may be recommended by the CEO and approved by the Compensation Committee as eligible for an award as determined by their date of hire or any relevant employment agreement. A Plan participant must be in the same or equivalent position, at year-end as they were when named a participant or have been promoted during the course of the year , to be eligible for an award . If a Plan participant voluntarily leaves the company prior to the payment of the award , he/she is not eligible to receive an award unless mutually agreed upon prior to the Executive leaving the company . However , if the active full - time service of a participant in the Plan is terminated by death, disability , retirement, or if the participant is on an approved leave of absence, an award may be recommended for such a participant based on the proportion of the Plan Year that he/she was in active service.

SECTION III - ACTIVATING THE PLAN

If and to the extent that the Committee determines that a bonus to be granted under the Plan to a Plan participant who is designated by the Compensation Committee as likely to be a Covered Employee should qualify as “performance - based compensation” for purposes of Code Section 162(m), the bonus as to that Plan participant shall be determined consistently with the terms of the NBT Bancorp Inc . 20 0 8 Omnibus Incentive Plan.

The operation of the Plan is predicated on attaining and exceeding management performance goals . The goals will consist of the attainment of certain Earnings Per Share (EPS) levels as applicable. Non-recurring events , as previously detailed , may be excluded from the financial results at the recommendation of the CEO and upon approval of the Compensation Committee; subject to the terms of the NBT Bancorp Inc . 2008 Omnibus Incentive Plan as applied to any Covered Employee whose bonus is intended to qualify for purposes of Code Section 162(m) .

EPS goals shall be established not later than 9 0 days after the beginning of any performance period applicable to the bonus , or at such other date as may be required or permitted for “performance - based compensation” under Code Section

162(m) . In addition, the maximum value of a bonus awarded under the Plan to a single Covered Employee may not exceed $2 , 0 0 0 , 0 0 0 per Plan Year .

Prior to payment of any bonus amount under the Plan to a Covered Employee whose bonus is intended to qualify for purposes of Code Section 162(m) , the Compensation Committee shall certify in writing that the EPS goal(s) and all other material terms stated herein have been attained . For this purpose, the approved minutes of a Compensation Committee meeting in which a certification is made shall be treated as a written certification.

The Corporation must achieve a threshold EPS goal set forth in Appendix A to trigger an award pursuant to the terms of this Plan . The bonus awards can range from 0 to 150 % of t he   t a r g et   a w a r d   f or   Pla n   p a r t i c i p a nt s.

S E C TIO N   I V   - C A L C UL A TIO N   O F AWA R DS

The Compensation Committee approves the incentive formula as shown in Appendix A.  The Compensation Committee will make final determinations with respect to all incentive awards and will have final approval over all incentive awards , including the discretion to lower any such award . If the threshold EPS goal is met but below the baseline budget threshold established by the Company , the CEO may provide the Compensation Committee with a qualitative analysis of the Company’s earnings and its performance which the Compensation Committee shall consider in its exercise of discretion under the plan. Prior to payment of any bonus amount under the Plan to a Covered Employee whose bonus is intended to qualify for purposes of Code Section 162(m), the Compensation Committee shall certify in writing that the EPS goal(s) and all other material terms stated herein have been attained . For this purpose, the approved minutes of a Compensation Committee meeting in which a certification is made shall be treated as a written certification. The individual participant data regarding maximum award and formulas used in calculation has been customized and appears as Appendix A . The actual amount awarded is subject to the NBT Bancorp Inc. Incentive Compensation Clawback Policy .

The actual amount awarded for each Covered Employee cannot exceed the maximum award determined based upon achievement of the corporate EPS goals . The actual amount awarded would include an assessment of each Covered Employee’s contribution towards the Company’s overall success in accomplishing its corporate goals and may include, but is not limited to, consideration of financial metrics , special projects , leadership and professional development .

SECTION V - DISTRIBUTION OF AWARDS

Distribution of the EICP will be made by March 15 of the year following the plan year . Distribution of the award must be approved by the Compensation Committee.
 
In the event of death, any approved award earned under the provisions of this plan will become payable to the designated beneficiary of the participant as recorded under the Company’s group life insurance program; or in the absence of a valid designation, to the participant's estate.
 
SECTION VI - PLAN ADMINISTRATION

The Compensation Committee shall , with respect to the Plan have full power and authority to construe, interpret, manage, control and administer this Plan. The Committee shall decide upon cases in conformity with the objectives of the Plan under such rules as the Board of Directors may establish.
 
Any decision made or action taken by NBT Bancorp Inc . , the Board of Directors , or the Compensation Committee arising out of, or in connection with, the administration, interpretation, and effect of the Plan shall be at their absolute discretion and will be conclusive and binding on all parties . No member of the Board of Directors , Compensation Committee, or employee shall be liable for any act or action hereunder , whether of omission or commission, by a Plan participant or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated in accordance with the provision of the Plan.
 
SECTION VII - AMENDMENT , MODIFICATION , SUSPENSION OR TERMINATION
 
NBT Bancorp Inc . reserves the right, by and through its Board of Directors to amend, modify, suspend , reinstate or terminate all or part of the Plan at any time. The Compensation Committee will give prompt written notice to each participant of any amendment, suspension or termination or any material modification of the Plan . In the event of a merger or acquisition, the Plan and related financial formulas may be reviewed and adjusted to take into account the effect of such activities.
SECTION VIII – NONEXCLUSIVITY

NBT Bancorp Inc . reserves the right, by and through its Board of Directors and Compensation Committee to award bonus and other forms of incentive compensation outside the terms of this Plan .

SECTION IX - EFFECTIVE DATE OF THE PLAN

T he   e ff e c t iv e   d a te of t he   Pla n   s h a l l   b e   Ja n u a r y   1 ,   2014 .

SECTION X - EMPLOYER RELATION WITH PARTICIPANTS

Neither establishment nor the maintenance of the Plan shall be construed as conferring any legal rights upon any participant or any person for a continuation of employment, nor shall it interfere with the right of an employer to discharge any participant or otherwise deal with him/her without regard to the existence of the Plan.

SECTION XI - GOVERNING LAW

Except to the extent pre - empted under federal law , the provisions of the Plan shall be construed , administered and enforced in accordance with the domestic internal law of the State of New York . In the event of relevant changes in the Internal Revenue Code, related rulings and regulations , changes imposed by other regulatory agencies affecting the continued appropriateness of the Plan and awards made thereunder , the Board may, at its sole discretion, accelerate or change the manner of payments of any unpaid awards or amend the provisions of the Plan.
 
 
Exhibit 10.14

First Amendment to Agreement
 
This First Amendment to the Agreement (“Amendment”) is entered into as of this ___ day of ______________, 2010 (the “Amendment Effective Date”), by and between NBT Bancorp Inc. (the “Company”) and Martin Dietrich (“Executive”).
 
WHEREAS, the Company and Executive are parties to that certain Agreement dated as of November 5, 2009 (the “Agreement”); and
 
WHEREAS, the Company and Executive desire to amend the Agreement as set forth in this Amendment.
 
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties hereby amend the Agreement as follows:
 
3.         Term .  Section 3(b)(ii) of the Agreement is hereby deleted in its entirety and replaced with the following:
 
As severance pay, an amount equal to the product of 2.99 multiplied by the greater of the sum of your annualized salary for the calendar year in which the change in control of the Company occurs, the maximum bonus that could have been paid to you for such year if all applicable targets and objectives had been achieved, or if no formal bonus program is in effect, the largest bonus amount paid to you during any one of the three preceding calendar years.  No other amounts will be included for purposes of determining the amount of severance pay.

2.              Installment Payout .  Section 3€ of the Agreement is hereby deleted in its entirety and replaced with the following:
 
The amounts described in this subsection will be paid to you in three equal annual payments with the first payment to be made within 30 days of your termination and the remaining two installments paid on the first business day in January of each of the next two calendar years, provided that under no circumstances will two payments be made during a single tax year of the recipient.

3.              Except as set forth in this Amendment, the Agreement shall remain unchanged and shall continue in full force and effect.

IN WITNESS WHEREOF, the undersigned have duly executed and delivered this First Amendment to the Agreement, or have caused this Amendment to be duly executed and delivered on their behalf.

 
 
[EXECUTIVE]
 
 
 
 
 
 
 
 
NBT BANCORP INC.
 
 
 
 
 
By:
 
 
Its:
 
 
Exhibit 10.23
Description of Arrangement for Directors Fees

Except as set forth below, the following sets forth the amount of fees payable to outside directors for their services as Directors in fiscal year 2014:

 
 
   
Restricted
 
Fees
 
Cash
   
Stock Units
 
Annual Retainer Fee
 
   
 
Company:
 
   
 
Chair
 
$
50,000
   
$
54,000
 
Director
 
$
12,500
   
$
13,000
 
NBT Bank N.A.:
               
Chair
   
-
   
$
11,000
 
Director
 
$
12,500
   
$
8,000
 
Committee Chair:
               
Audit and Risk Management
 
$
10,000
     
-
 
All Other Committees
 
$
5,000
     
-
 
Affiliate Board Member
 
$
1,000
     
-
 
 
               
Fee per Board Meeting
 
$
1,000
     
-
 
 
               
Fee per Committee Meeting
 
$
800
     
-
 
 
 
Exhibit 10.29
 
AMENDED AND RESTATED
SUPPLEMENTAL RETIREMENT AGREEMENT
 
THIS SETS FORTH an amended and restated Agreement to provide supplemental retirement income, made and entered into this 28 th day of November, 2006, by and between ALLIANCE FINANCIAL CORPORATION , a New York corporation and registered bank holding company (“Corporation”) and ALLIANCE BANK, N.A ., a national banking institution and a wholly-owned subsidiary of the Corporation (hereinafter referred to as the “Bank”), and JACK H. WEBB , who resides at                                         (hereinafter referred to as the “Employee”).
 
W I T N E S S E T H :
 
WHEREAS, the parties previously entered a Supplemental Retirement Agreement on May 1, 2000 (the “Prior Agreement”); and
 
WHEREAS, the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) require modifications to the Prior Agreement; and
 
WHEREAS, the parties wish to restate the Prior Agreement to incorporate such modifications, which restatement below shall be referred to herein as “the Agreement”.
 
NOW, THEREFORE, in consideration of foregoing and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby amend and restate the Prior Agreement to read as follows:
 
1.        Supplemental Retirement Benefit.    In partial consideration for Employee’s past services to the Bank, and subject to the other terms and conditions of this Agreement, the Bank shall pay Employee an annual benefit (“Supplemental Retirement Benefit”) equal to the excess of (a) 70% of Employee’s Final Average Compensation over (b) Employee’s Other Retirement Benefits determined as of the Determination Date; such benefit to be paid in the form of a straight life annuity in monthly installments for Employee’s life, with the last payment made in the month preceding Employee’s death.
 
2.        Definitions.    For purposes of this Agreement:
 
(a)        “Final Average Compensation” shall mean the annualized average of Employee’s monthly base salary actually paid by the Bank over the thirty-six (36) consecutive months prior to Employee’s termination of employment;
 
(b)        “Other Retirement Benefits” shall mean the sum of:
 
(1)        the annual benefit that could be provided by (A) Bank contributions (other than Employee’s elective deferral contributions) made on Employee’sbehalf under the Internal Revenue Section 401(k) plan maintained by the Bank (and any successor or additional plan), and (B) actual earnings on contributions described in (A), if such contributions and earnings were converted to an actuarially equivalent benefit payable to Employee at age sixty-five (65) in the same form as the benefit paid under this Agreement; plus
 
(2)        the estimated benefit payable to Employee commencing at age sixty-five (65) pursuant to the Federal Social Security Act; plus
 
(3)        the annual benefit payable to Employee at age sixty-five (65) pursuant to any other pension, profit sharing, or similar plan maintained by any prior employer in which Employee was a participant prior to his employment with the Bank (converted, if necessary, to an actuarially equivalent benefit payable in the same form as the benefit paid under this Agreement) to the extent such benefit is provided by contributions of the prior employer and earnings on those contributions.
 
The amount of Other Retirement Benefits shall be determined by an actuary selected by the Bank. The determination of the amount of such benefits shall be made without reduction for payment of benefits prior to any stated “normal retirement date” and without regard to whether Employee is receiving payment of such benefits on the Determination Date. To the extent Employee receives a payment of Other Retirement Benefits described in subparagraph (b)(1) or (3) prior to the date the Supplemental Retirement Benefit is determined pursuant to this Agreement, the total of such Other Retirement Benefits shall be determined by including amounts received and assuming that such amounts earned interest at an annual rate of 8% from the date received to the date Other Retirement Benefits are calculated for purposes of this Agreement. Employee shall provide such financial and other information as the Bank may reasonably require to determine Other Retirement Benefits.
 
(c)         “Determination Date” shall mean the earlier of Employee’s termination of employment or August 1, 20017 (the first day of the month following Employee’s attainment of age sixty-five (65)).
 
3.        Payment Upon Change in Control.
 
(a)        In the event of a Change in Control while Employee is employed by the Bank, then notwithstanding anything herein to the contrary, Employee shall be entitled to receive payment of his Supplemental Retirement Benefit, payable in the manner as described in Paragraph 1, but subject to a similar adjustment as provided in Paragraph 6(c), beginning on the first day of the first month after the earlier of Employee’s termination of employment or his attaining age sixty-five (65).
 
(b)        For purposes hereof, a Change in Control occurs under any one of the following circumstances:
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(1)        Change in Ownership.    A Change in Control occurs on the date that any one person, or more than one person acting as a group (as defined in applicable Treasury Regulations), acquires ownership of a company (either by direct purchase or indirectly through the redemption of the company’s ownership interests) that, together with the interest held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the ownership interests, excluding the acquisition of additional ownership interests by a person or more than one person acting as a group who is considered to already own more than 50% of the total fair market value or total voting power of such interests.
 
(2)         Change in Effective Control.    A Change in Control of a company occurs on the date that either:
 
(A)        any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of interests possessing 35% or more of the total voting power of such ownership interests of the company; or
 
(B)        a majority of the members of the board of directors of the company is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the board of directors prior to the date of the appointment or election; provided, that this subparagraph (b)(2)(B) shall apply only to a company for which no other company is a majority owner;
 
(3)        Change in Ownership of Substantial Assets.    A Change in Control occurs on the date that any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from a company that have a total gross fair market value of 40% or more of the total gross fair market value of the assets of the company immediately prior to such acquisition(s). For this purpose, gross fair market value means the value of the assets of the company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. No Change in Control under this subparagraph (b)(3) occurs when transfer of assets is made to the owners, or entity controlled by them, of the transferring company immediately after the transfer, as provided in Treasury Regulations.
 
(c)        For purposes of this Agreement, the Change in Control must relate to (i) a company that is the employer of Employee at the time of the Change in Control; (ii) a company that is liable for the payment of benefits under this Agreement; (iii) a company that is a majority owner of the company described in (i) or (ii); or (iv) any company in a chain of companies in which each company is a majority owner of another company in the chain, ending with the company described in (i) or (ii). A Change in Control shall not be deemed to have occurred until a majority of the members of the Board of Directors of the Corporation receives written certification from the Bank that one of the events set forth in subparagraph (b) has occurred. The occurrence of an event described in subparagraph (b) must be objectively determinable by the Administrator and,if made in good faith on the basis of information available at the time, such determination shall be conclusive and binding on the Administrator, the Bank, Employee and his beneficiaries for all purposes of this Agreement.
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(d)        In the event of such Change in Control, this Agreement may not be amended or terminated and any successor shall, prior to such Change in Control, agree to be bound by the terms hereof.
 
4.        Termination With Cause.    Except as provided in Paragraph 3, in the event of the termination of Employee for cause (determined pursuant to the terms of his employment agreement with the Bank) prior to his attaining age sixty-five (65), Employee’s rights to any deferred compensation hereunder shall be forfeited and this Agreement shall thereupon terminate.
 
5.        Death.    Notwithstanding anything in this Agreement to the contrary, no benefit shall be paid hereunder under this Agreement upon or following Employee’s death.
 
6.        Time of Payment.
 
(a)        Distributable Events.    Payment of Employee’s Supplemental Retirement Benefit shall be paid upon the earlier to occur of the following distributable events:
 
(1)        Employee’s termination of employment with the Bank, except as provided in Paragraphs 4 or 5; or
 
(2)        Employee’s attainment of age sixty-five (65).
 
(b)        Commencement of Payment.    Except as may otherwise be elected by Employee pursuant to subparagraph (d) below, payment of Employee’s Supplemental Retirement Benefit shall be paid by the Bank commencing (i) on the first day of the seventh month following Employee’s termination of employment with the Bank or (ii) on the first day of the first month following his attaining age sixty-five (65) if that is the distributable event.
 
(c)        Reduction for Early Retirement.    If payment of Employee’s Supplemental Retirement Benefit commences before August 1, 2017, the amount of such benefit shall equal the product obtained by multiplying (i) the Supplemental Retirement Benefit calculated under the terms of Paragraph 1, by (ii) a fraction, the numerator of which shall be the number of complete months of Employee’s employment with the Bank (using May 1, 2000 as Employee’s employment commencement date), and the denominator of which is 207 (being the number of complete months of employment Employee would have had if he remained employed by the Bank through his 65th birthday).

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(d)        Delay in Payment. With the consent of the Bank, Employee may delay payment of his Supplemental Retirement Benefit, and/or elect to receive his Supplemental Retirement Benefit in an actuarial equivalent single sum, subject to the following requirements of this subparagraph (d) and the prohibitions of Paragraph 7:
 
(1)        Employee’s election shall not take effect until at least twelve (12) months after the date on which the election is made; and
 
(2)        Employee’s election must provide for the deferral of payment for a period of five (5) years from the date such payment would otherwise have been made. The foregoing shall be applied solely to that specific distributable event for which Employee’s election is made.
 
(e)        If payment of the Supplemental Retirement Benefit commences before August 1, 2017 and payment is made in a single sum pursuant to subparagraph (d) of this Paragraph 6, the reduction described in subparagraph (c) shall be applied before any actuarial equivalent is determined under subparagraph (d).
 
7.        Acceleration Prohibited.    Except as expressly provided under this Agreement and under Treasury Regulations promulgated under Code Section 409A, the acceleration of the time or schedule of any payment due under this Agreement is prohibited.
 
8.        Income, FICA and Withholding Taxes.
 
(a)        Disqualification.    If at any time the Bank determines that this Agreement does not meet the requirements imposed under Code Section 409A, the Bank shall immediately pay to Employee in a single sum an amount equal to the amount of benefit that Employee is required to report as taxable compensation for federal income tax purposes.
 
(b)        FICA Taxes and Gross Up.    Upon request by Employee, the Bank shall immediately pay to or on behalf of Employee, as a prepayment of a portion of his Supplemental Retirement Benefit, an amount equal to the sum of (i) the taxes then imposed under Code Sections 3101, 3121(a) or 3121(v)(2) on amounts of compensation deferred under this Agreement (the “FICA Amount”), plus (ii) the total federal withholding amount under Code Section 3401, and corresponding state and local income tax withholding amounts that are attributable to the FICA Amount (the “initial gross-up amount”) and (iii) the additional income tax withholdings attributable to the initial gross-up amount.
 
(c)        Withholdings.    The Bank shall reduce any benefit payment being made under this Agreement by an amount the Bank deems necessary to comply with any federal or state tax withholding requirements.

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9.        Actuarial Assumptions.    To the extent interest rate, mortality and/or other assumptions are needed to determine an actuarial equivalent amount under this Agreement, the Bank shall select such reasonable actuarial assumptions as the Bank shall consider necessary or appropriate.
 
10.      Administration.    The Bank shall have the exclusive authority and absolute and total discretion to interpret, construe and apply all of the terms and provisions of this Agreement. The Bank’s exercise of its discretionary authority to interpret, construe and apply the terms and provisions of this Agreement, and all its determinations, shall be conclusive and binding upon Employee, the Bank, the Corporation and all other persons having or claiming interest under this Agreement, shall be entitled to deference upon review by any court, agency or other entity empowered to review its decisions, and shall not be overturned or set aside by any court, agency or other entity unless found to be arbitrary, capricious or made in bad faith.
 
11.      Non-Alienation of Benefits.
 
(a)        General Restriction.    Except as otherwise provided in this Paragraph 11, no right or benefit under this Agreement shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge, or encumbrance of any kind, nor in any manner be subject to the debts or liabilities of any person, except to the extent such debt or liability arises by reason of a fraud, embezzlement or other felonious action against or which damages the Bank. Any attempt to so alienate or subject any such right or benefit in violation of the foregoing, whether or not such benefit is currently payable, shall be void. If any person shall or attempt to alienate, sell, transfer, assign, pledge, attach, charge or otherwise encumber any amount payable under this Agreement, or any part thereof, or if by reason of his bankruptcy or other event happening at any time such amounts would be made subject to his debts or liabilities or would otherwise not be enjoyed by him in violation of the foregoing, then the Bank, in its sole discretion, may direct that such amount be withheld and the same or any part thereof be paid or applied to or for the benefit of such person, his spouse, children or other dependents, or any of them in such manner and proportion as the Bank may deem proper.
 
(b)        Qualified Domestic Relations Order.    Notwithstanding the prohibitions contained in subparagraph (a), all or a portion of Employee’s benefit under this Agreement shall be paid to one or more Alternate Payees in accordance with the terms of a Qualified Domestic Relations Order. For purposes of this Agreement:
 
(1)        “Qualified Domestic Relations Order” shall mean a domestic relations order that meets the requirements of Code Section 414(p).
 
(2)        “Domestic relations order” shall mean any judgment, decree or order, including approval of a property settlement agreement, which relates to the provision of child support, alimony payments, or marital property rights of a spouse, former spouse, child or other dependent of Employee, and which is made pursuant to a state domestic relations law (including community property law).
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(3)        “Alternate Payee” shall mean a spouse, former spouse, child or other dependent of Employee who is recognized by a domestic relations order as entitled to receive all or a portion of the benefits payable with respect to Employee.
 
Payment to an Alternate Payee under a Qualified Domestic Relations Order shall be limited to concurrent payment with any portion of the Supplemental Retirement Benefit payable to Employee, and if there remains no benefit payable to Employee hereunder after considering the terms of the Qualified Domestic Relations Order, payment shall only be made at such times as Employee would have been entitled to payment hereunder had there been no Qualified Domestic Relations Order.
 
12.      Unsecured Creditor.    Nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Bank and Employee, his designated beneficiary or any other person. Employee shall have no interest in any fund or in any specific assets of the Bank by reason of this Agreement. To the extent that any person acquires a right to receive payments from the Bank under this Agreement, such right shall be no greater than the right of any unsecured general creditor of the Bank.
 
13.      Claims Procedure.
 
(a)        Employee, if seeking payment of the any benefit hereunder, must submit a written request to the Bank. If a claim for benefits is wholly or partially denied, notice of the denial, prepared in accordance with subparagraph (b), shall be furnished to Employee within a reasonable period of time, not to exceed ninety (90) days, after receipt of the request by the Bank (“Determination Period”), unless special circumstances require an extension of time for processing the request. If such an extension of time is required, written notice of the extension shall be furnished to Employee prior to the termination of the initial Determination Period. In no event shall such extension exceed a period of ninety (90) days from the end of the initial Determination Period. Each extension notice shall indicate the special circumstances requiring an extension of time and the date on which the Bank expects to render a decision.
 
(b)        The Bank shall provide Employee whose request for benefits is denied a written notice setting forth, in a manner calculated to be understood by Employee, the following:
 
(1)        the specific reason(s) for the denial;
 
(2)        specific references to the pertinent provisions of the Agreement upon which the denial is based;

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(3)        a description of any additional material or information necessary for Employee to perfect the request and an explanation of why such material or information is necessary;
 
(4)        an explanation of the review procedure as set forth in subparagraphs (c) and (d) below, and a statement of Employee’s right to bring a civil action in a court of law after final administrative review; and
 
(5)        if an internal rule, guideline, protocol or other similar criterion was relied on in making the determination, either (A) a recitation of such rule, guideline, protocol or other similar criterion, or (B) a statement that such criterion was relied upon and that a copy of it will be provided free of charge to Employee upon request.
 
(c)        The purpose of the review procedure set forth in this subparagraph and subparagraph (d) is to provide a procedure by which Employee may have a reasonable opportunity to appeal to the Bank a denial of a request for benefits. To accomplish this purpose, Employee (or Employee’s duly authorized representative) may (i) review pertinent documents and records; and (ii) submit issues, documents, records and comments in writing. Employee (or Employee’s duly authorized representative) may request a review by filing a written request for review with the Bank at any time within sixty (60) days after receipt by Employee of written notice of the denial of Employee’s request for benefits.
 
(d)        A decision on review of a denied request for benefits shall be made by the Board of Directors of the Bank, after taking into account all comments, documents, records and other pertinent information regardless of when submitted. It shall make a decision promptly, but not later than sixty (60) days after receipt of the request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of the request of review. If such an extension of time for review is required, written notice of the extension shall be furnished to Employee prior to the commencement of the extension. The decision on review shall be in writing, shall be written in a manner calculated to be understood by Employee, and shall include specific reasons for the decision and specific references to the pertinent provisions of the Agreement upon which the decision is based.
 
14.        Amendment; Termination.
 
(a)        This Agreement may be modified or amended only in writing by mutual agreement of the parties hereto.
 
(b)        This Agreement may be terminated by mutual agreement of the parties hereto.

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(c)        This Agreement may be terminated in the discretion of the Bank upon any of the following events:
 
(i)        the dissolution of the Bank in a manner that is taxed under Code Section 331, in which case termination must occur (if at all) within twelve (12) months following such dissolution;
 
(ii)       the dissolution of the Bank with approval of a bankruptcy court pursuant to the provisions of 11 U.S.C. 503(b)(1)(A);
 
(iii)      a Change in Control as defined in Paragraph 3(b) above, in which case termination must occur within thirty (30) days prior or twelve (12) months following such Change in Control;
 
(iv)      the concurrent termination of all arrangements with Employee and all other employees of the Bank that are similar to the arrangement under this Agreement in accordance with the conditions set out in Treasury Regulations promulgated under Code Section 409A that permit acceleration of payment of benefits upon termination of deferred compensation arrangements; and
 
(v)       such other events, and subject to such conditions, as prescribed by Treasury Regulations promulgated under Code Section 409A.
 
(d)        The termination of this Agreement upon any of the events described in subparagraph (c) above shall entitle Employee to immediate payment of the single sum actuarial equivalent of his Supplemental Retirement Benefit, adjusted in accordance with the provisions of Paragraph 6, with payment made as soon as feasible after the date of such event
 
(e)         Except as provided in the foregoing provisions of this Paragraph, no acceleration of the time or form of payment of any benefit under this Agreement may occur as a result of termination of this Agreement.
 
15.      Binding Effect.    This Agreement shall be binding upon the parties hereto, their heirs, executors, administrators or successors, and the assigns of the Bank.
 
16.      Construction: Governing Law.
 
(a)        The provisions of this Agreement shall be construed after taking into account the intentions of the parties as follows:
 
(1)        that this Agreement is an unfunded arrangement maintained by the Bank primarily for the purpose of providing deferred compensation for a key executive within the Bank’s management group and is, therefore, exempt from most of the parts of Title I of ERISA; and
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(2)        that this Agreement satisfy the requirements set out in Code Section 409A and Treasury Regulations promulgated thereunder for the effective deferral of compensation for income tax purposes.
 
(b)        This Agreement shall be governed by the laws of the State of New York except to the extent such laws are superceded by federal law.
 
17.      Effect of Restatement.    This restated Agreement constitutes the entire Agreement and understanding of the parties and supercedes all prior agreements or understandings including, without limitation, the Prior Agreement between the parties relating to deferred compensation and/or supplemental retirement income.
 
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written.

 
/s/ Jack H. Webb
 
Jack H. Webb, Employee
 
 
 
ALLIANCE FINANCIAL CORPORATION
 
 
 
 
By:
/s/ Donald H. Dew
 
 
 
 
ALLIANCE BANK, N.A.
 
 
 
 
By:
/s/ J. Daniel Mohr

First Amendment
to the
Amended and Restated Supplemental Retirement Agreement between
Alliance Financial Corporation, Alliance Bank, N.A. and Jack H. Webb
 
WHEREAS , Alliance Financial Corporation, Alliance Bank, N.A., and Jack H. Webb have previously entered into an Amended and Restated Supplemental Retirement Agreement (the “SERP”) dated November 28, 2006;
 
WHEREAS , Section 14 of the SERP provides for the amendment of the SERP by mutual agreement of the parties; and
 
WHEREAS , the parties have determined that certain modifications to the SERP are necessary and appropriate;
 
NOW, THEREFORE , in consideration of the foregoing and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby amend the SERP as follows:
 
FIRST CHANGE
 
Section 1 of the SERP is hereby amended to read as follows:
 
“1.     Supplemental Retirement Benefit .   In partial consideration for Employee’s past services to the Bank, and subject to the other terms and conditions of this Agreement, the Bank shall pay Employee an annual benefit (“Supplemental Retirement Benefit”) equal to the excess of (a) 70% of Employee’s Final Average Compensation over (b) Employee’s Other Retirement Benefits determined as of the Determination Date; such benefit to paid to the Executive in monthly installments for his life with 120 monthly installments guaranteed. If Employee dies after payments have commenced under Section 6(b) of this Agreement but prior to the receipt of 120 monthly installment payments, any remaining monthly installment payments shall be paid to Employee’s designated beneficiar(ies) or, if none, to his estate, until a total of 120 monthly installments have been paid to Employee and his designated beneficiar(ies). Employee may, from time to time, designate one or more beneficiaries under rules established, and on a form provided, by the Bank for such purpose .”
 
SECOND CHANGE
 
Section 5 of the SERP is hereby amended to read as follows:
 
“5.     Death .   Notwithstanding anything in this Agreement to the contrary, (a) no benefit shall be paid hereunder upon or following Employee’s death if Employee’s death occurs prior to the occurrence of a distributable event described in Section 6(a) of this Agreement and (b) Employee’s death while employed by the Bank shall not be treated as termination of employment for purposes of Section 6(a).”
THIRD CHANGE
 
The SERP is amended by adding the following new Section 18:
 
“18.        Investment of Other Retirement Benefits .   Employee agrees that he will manage the investment of his Other Retirement Benefits prudently and with regard to the avoidance of undue risk.”
 
IN WITNESS WHEREOF , the parties have executed this first amendment to the SERP on the 27 th day of January, 2009.

 
ALLIANCE FINANCIAL CORPORATION
 
 
 
 
By:
/s/ Lowell A. Seifter
 
 
 
ALLIANCE BANK, N.A.
 
 
 
 
By:
/s/ Lowell A. Seifter
 
 
 
/s/ Jack H. Webb
 
Jack H. Webb, Employee
 
 
Exhibit 10.30
 
ALLIANCE BANK, N.A.
SPLIT DOLLAR AGREEMENT
 
THIS SPLIT DOLLAR AGREEMENT (this “Agreement”) is made as of this 27th day of January, 2009 by and between Alliance Bank, N.A., and Jack H. Webb (the “Employee”).
 
WHEREAS, to encourage the Employee to remain a Employee of the Bank, the Bank is willing to allocate a portion of the death proceeds of a life insurance policy on the Employee’s life to the Employee’s beneficiary(ies) if the Employee dies while actively employed by the Bank. The Bank will pay life insurance premiums from its general assets.
 
NOW, THEREFORE , in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Bank and the Employee hereby agree as follows.
 
ARTICLE 1
DEFINITIONS
 
Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
 
1.1        Employee’s Interest means the benefit set forth in Section 2
 
1.2        Insurer means each life insurance carrier with a Split Dollar Policy Endorsement attached to this Split Dollar Agreement.
 
1.3        Net Amount At Risk means, on any date, the difference in the Death Benefit payable by the insurance carrier and the cash surrender value of the policy(ies) owned by the Bank on the Employee’s life.
 
1.4        Policy means the specific life insurance policy or policies issued by the Insurer(s).
 
1.5        Split Dollar Policy Endorsement means the form required by the Administrator or the Insurer to indicate the Employee’s interest, if any, in a Policy on the Employee’s life.
 
1.6        Termination of Employment means that the Employee shall have ceased to be employed by the Bank for any reason whatsoever, excepting a leave of absence approved by the Bank. For purposes of this Agreement, if there is a dispute over the status of the Employee or the date of termination of the Employee’s service, the Bank shall have the sole and absolute right to decide the dispute.
 
ARTICLE 2
POLICY OWNERSHIP/INTERESTS
 
2.1        Bank Ownership . The Bank is the sole owner of the Policy and shall have the right to exercise all incidents of ownership. The Bank shall be the beneficiary of any death proceeds remaining after the Employee’s Interest has been paid under Section 2.2 of this Split Dollar Agreement.
 
2.2        Employee’s Interest . Upon the Employee’s death before Termination of Employment, the Employee shall have the right to designate the beneficiary(ies) of death proceeds in an amount determined under the schedule set forth in Appendix A to this Agreement but, in no event, an amount in excess of the Net Amount at Risk on the Employee’s date of death. Subject to the terms of this Split Dollar Agreement, the Bank hereby endorses the Employee’s Interest to the Employee and agrees to execute any other or further documents that may be required to effectuate this Split Dollar Agreement. The Employee shall have the right to elect and change settlement options specified in the Policy that may be permitted. However, the Employee, the Employee’s transferee, and the Employee’s beneficiary(ies) or estate shall have no rights or interests in the Policy for that portion of the death proceeds designated in this Section 2.2 if the Employee’s Termination of Employment occurs before the Employee’s death.
 
2.3        Premium Payment . The Bank shall pay any premiums due on the Policy.
2.4        Imputed Income . The Bank shall impute income to the Employee annually to reflect the value of the coverage provided under this Split Dollar Agreement in an amount determined in accordance with applicable federal tax requirements.
 
2.5        Internal Revenue Code Section 1035 Exchanges . The Employee recognizes and agrees that the Bank may after this Split Dollar Agreement is adopted wish to exchange the Policy of life insurance on the Employee’s life for another contract of life insurance insuring the Employee’s life. Provided that the Policy is replaced (or intended to be replaced) with a comparable policy of life insurance, the Employee agrees to provide medical information and cooperate with medical insurance-related testing required by a prospective insurer for implementing the Policy or, if necessary, for modifying or updating to a comparable insurer.
 
ARTICLE 3
BENEFICIARIES
 
3.1        Beneficiary Designations . The Employee shall designate a beneficiary by filing a written designation with the Bank. The Employee’s beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Employee, or if the Employee names a spouse as beneficiary and the marriage is subsequently dissolved. If the Employee dies without a valid beneficiary designation, all payments shall be made to the Employee’s estate.
 
ARTICLE 4
GENERAL LIMITATIONS
 
4.1        Termination of Employment . Notwithstanding any provision of this Agreement to the contrary, the Employee’s Interest in the Policy shall terminate if the Employee’s employment with the Bank terminates or is terminated for any reason (other than his death while actively employed), and the Bank’s obligations under this Agreement shall terminate as of the effective date of the Employee’s Termination of Employment.
 
4.2        Insurer . The Insurer shall be bound only by the terms of the Policy. Any payments the Insurer makes or actions it takes in accordance with the Policy shall fully discharge it from all claims, suits and demands of all entities or persons. The Insurer shall not be bound by or be deemed to have notice of the provisions of this Split Dollar Agreement.
 
ARTICLE 5
CLAIMS AND REVIEW PROCEDURES
 
5.1        Claims Procedure . If the Administrator denies part of or the entire claim, the claimant shall have the opportunity for a full and fair review by the Administrator of the denial, as follows:
 
5.1.1       Initiation: Written Claim . The claimant initiates a claim by submitting to the Administrator a written claim for the benefits.
 
5.1.2       Timing of Administrator Response . The Administrator shall respond to such claimant within 90 days after receiving the claim. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Administrator expects to render its decision.
 
5.1.3       Notice of Decision . If the Administrator denies part or all of the claim, then the Administrator shall notify the claimant in writing of such denial. The Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:

(a) the specific reasons for the denial,

(b) a reference to the specific provisions of this Agreement on which the denial is based,
(c) a description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,

(d) an explanation of this Agreement’s review procedures and the time limits applicable to such procedures, and

(e) a statement of the claimant’s right, if any, to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.
 
5.2        Review Procedure . If the Administrator denies part or all of the claim, then the claimant shall have the opportunity for a full and fair review by the Administrator of the denial, as follows:
 
5.2.1       Initiation of Written Request . To initiate the review, the claimant must file with the Administrator a written request for review within 60 days after receiving the Administrator’s notice of denial.
 
5.2.2       Additional Submissions for Information Access . The claimant shall then have the opportunity to submit written comments, documents, records, and other information relating to the claim. The Administrator shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits.
 
5.2.3       Considerations on Review . In considering the review, the Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.
 
5.2.4       Timing of Administrator Response . The Administrator shall respond in writing to such claimant within 60 days after receiving the request for review. If the Administrator determines that special circumstances require additional time for processing the claim, then the Administrator can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Administrator expects to render its decision.
 
5.2.5       Notice of Decision . The Administrator shall notify the claimant in writing of its decision on review. The Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:

(a) the specific reasons for the denial,

(b) a reference to the specific provisions of this Agreement on which the denial is based,
(c) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits, and

(d) a statement of the claimant’s right, if any, to bring a civil action under ERISA Section 502(a).
 
ARTICLE 6
ADMINISTRATION
 
6.1       Administration . This Split Dollar Agreement shall be administered by an Administrator, which shall consist of the Bank’s board of directors or such committee as the board shall appoint. The Administrator shall also have the discretion and authority to:
 
  (a)        make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Split Dollar Agreement, and
 
  (b)        decide or resolve any and all questions, including interpretations of this Split Dollar Agreement, as may arise in connection with the Split Dollar Agreement.
6.2       Named Agents . In the administration of this Split Dollar Agreement, the Administrator may employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel, who may be counsel to the Bank.
 
6.3       Binding Effect of Decisions . The decision or action of the Administrator with respect to any question arising out of or in connection with the administration, interpretation, and application of this Split Dollar Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in this Split Dollar Agreement.
 
6.4       Indemnity of Administrator . The Bank shall indemnify and hold harmless the members of the Administrator against any and all claims, losses, damages, expenses, or liabilities arising from any action or failure to act with respect to this Split Dollar Agreement, except in the case of willful misconduct by the Administrator or any of its members.
 
6.5       Information . To enable the Administrator to perform its functions, the Bank shall supply full and timely information to the Administrator on all matters relating to the date and circumstances of the retirement, death, or Termination of Employment of the Employee and such other pertinent information as the Administrator may reasonably require.

ARTICLE 7
MISCELLANEOUS
 
7.1       Amendment and Termination . This Split Dollar Agreement shall terminate automatically if the Employee’s Termination of Employment occurs before the Employee’s death. This Split Dollar Agreement shall also terminate upon the occurrence of any one of the following:

(a) surrender, lapse, or other termination of the Policy by the Bank, which the Bank reserves the absolute right to do,

(b) cessation of the Bank’s business, which is not continued by the Bank’s successor, if any,

(c) written notice of termination by the Employee,

(d) bankruptcy, receivership, or dissolution of the Bank, or

(e) distribution of the death benefit proceeds in accordance with Section 2.2 above.
 
If this Split Dollar Agreement is terminated, the Bank may in its sole discretion retain or terminate the Policy.
 
7.2       Binding Effect . This Agreement shall bind the Employee and the Bank and their beneficiaries, survivors, executors, administrators, and transferees.
 
7.3       Non-Transferability . Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached, or encumbered in any manner without the consent of the Administrator.
 
7.4       Applicable Law . Except to the extent preempted by federal law, the validity, interpretation, construction, and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the principles of conflict of laws of such state.
 
7.5       Entire Agreement . This Agreement constitutes the entire agreement between the Bank and the Employee concerning the subject matter hereof. No rights are granted to the Employee’s beneficiary(ies) under this Agreement other than those specifically set forth herein.
 
7.6       Severability . If for any reason any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and to the full extent consistent with law each such other provision shall continue in full force and effect. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of such provision, and to the full extent consistent with law the remainder of such provision shall, together with all other provisions of this Agreement, continue in full force and effect.
7.7       Headings . The captions and section headings in this Agreement are included solely for convenience of reference and shall not affect the meaning or interpretation of any provision of this Agreement.
 
7.8       Notices . All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, to the following addresses or to such other address as either party may designate by like notice.
 
  (a) If to the Bank:
Chairman
Compensation Committee
Board of Directors
Alliance Bank, N.A.
120 Madison Street
Syracuse, New York 13202

(b) If to the Employee:

the address maintained in the records of the Bank
 
and to such other or additional person or persons as either party shall have designated to the other party in writing by like notice.
 
7.10     Successors . The Bank shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Bank to expressly assume and agree to perform this Split Dollar Agreement in the same manner and to the same extent that the Bank would be required to perform this Split Dollar Agreement if no succession had occurred.

IN WITNESS WHEREOF, the Employee and a duly authorized Bank officer have executed this Agreement as of the day and year first written above.

 
ALLIANCE BANK, N.A.
 
 
/s/ Jack H. Webb
By:
/s/ Lowell A. Seifter
Jack H. Webb
 
 

Appendix A
 
Schedule of Employee’s Interest Under Section 2.2
of the Split Dollar Agreement with Jack H. Webb*

Year of Death
 
Employee’s Interest Under Section 2.2
 
 
2010
 
$958,152
 
 
2011
 
$1,114,890
 
 
2012
 
$1,268,799
 
 
2013
 
$1,432,353
 
 
2014
 
$1,605,706
 
 
2015
 
$1,788,379
 
 
2016
 
$1,980,482
 
 
2017 or later
 
$2,129,831

* The Employee’s Interest is the lesser of (i) the dollar amount specified above or (ii) the Net Amount at Risk; provided the Employee is employed by the Bank on his date of death.
 
 
EXHIBIT 21
 
List of Subsidiaries of the Registrant

 
 
  
 
Names Under Which
 
 
Jurisdiction of
 
Subsidiary does
 
 
Incorporation
 
Business
NBT Bancorp Inc. Subsidiaries:
 
 
 
 
NBT Bank, National Association
 
New York
 
NBT Bank
NBT Financial Services, Inc.
 
Delaware
 
NBT Financial Services
Hathaway Agency, Inc.
 
New York
 
Hathaway Agency
CNBF Capital Trust I
 
Delaware
 
CNBF Capital Trust I
NBT Statutory Trust I
 
Delaware
 
NBT Statutory Trust I
NBT Statutory Trust II
 
Delaware
 
NBT Statutory Trust II
NBT Holdings, Inc.
 
New York
 
NBT Holdings
Alliance Financial Capital Trust I
 
Delaware
 
Alliance Financial Capital Trust I
Alliance Financial Capital Trust II
 
Delaware
 
Alliance Financial Capital Trust II
 
 
 
 
 
NBT Bank, National Association Subsidiaries:
 
 
 
 
NBT Capital Corp.
 
New York
 
NBT Capital Corp.
LA Lease, Inc.
 
Pennsylvania
 
LA Lease
Colonial Financial Services, Inc.
 
New York
 
Colonial Financial Services
NBT Services, Inc.
 
Delaware
 
NBT Services
Broad Street Property Associates, Inc.
 
New York
 
Broad Street Property Associates
Pennstar Bank Services Company
 
Delaware
 
Pennstar Bank Services
FNB Financial Services, Inc.
 
Delaware
 
FNB Financial Services
CNB Realty Trust
 
Maryland
 
CNB Realty Trust
Alliance Preferred Funding Corp.
 
Delaware
 
Alliance Preferred Funding
Alliance Leasing, Inc.
 
New York
 
Alliance Leasing
 
 
 
 
 
NBT Financial Services, Inc. Subsidiaries:
 
 
 
 
Pennstar Financial Services, Inc.
 
Pennsylvania
 
Pennstar Financial Services
EPIC Advisors, Inc.
 
New York
 
EPIC Advisors
 
 
 
 
 
NBT Holdings, Inc. Subsidiaries:
 
 
 
 
Mang Insurance Agency, LLC
 
New York
 
Mang Insurance Agency
 
 
EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors
NBT Bancorp Inc.:

We consent to incorporation by reference in the Registration Statements on Form S-3 (File No. 333-181134) and Forms S-8 (File Nos. 333-71830, 333-72772, 333-73038, 333-66472, 333-97995, 333-107479, 333-107480, 333-127098, 333-139956, 333-150956 and 333-168332) of NBT Bancorp Inc. of our reports dated March 3, 2014, with respect to the consolidated balance sheets of NBT Bancorp Inc. and subsidiaries as of December 31, 2013 and 2012, 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, 2013, and the effectiveness of internal control over financial reporting as of December 31, 2013, which reports appear in the December 31, 2013 annual report on Form 10-K of NBT Bancorp Inc.

/s/  KPMG LLP

Albany, New York
March 3, 2014
 
 
EXHIBIT 31.1

CERTIFICATION – Rule 13a-14(a) Certification of Chief Executive Officer

I, Martin A. Dietrich, certify that:
 
1. I have reviewed this annual report on Form 10-K of NBT Bancorp Inc.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:   March 3, 2014
/s/ Martin A. Dietrich
Martin A. Dietrich
Chief Executive Officer
 
 
EXHIBIT 31.2

CERTIFICATION - Rule 13a-14(a) Certification of Chief Financial Officer

I, Michael J. Chewens, certify that:
 
1. I have reviewed this annual report on Form 10-K of NBT Bancorp Inc.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operations of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:   March 3, 2014
/s/ Michael J. Chewens
Michael J. Chewens
Senior Executive Vice President and Chief Financial Officer
 
 
EXHIBIT 32.1
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
 
906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned, the Chief Executive Officer of NBT Bancorp Inc. (the “Company”), hereby certifies that to his knowledge on the date hereof:
 
(a) the Form 10-K of the Company for the Annual Period Ended December 31, 2013, filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Martin A. Dietrich

Martin A. Dietrich
Chief Executive Officer

March 3, 2014

The forgoing certification is being furnished solely pursuant to Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
 
 
EXHIBIT 32.2
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
 
906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned, the Chief Financial Officer of NBT Bancorp Inc. (the “Company”), hereby certifies that to his knowledge on the date hereof:
 
(a) the Form 10-K of the Company for the Annual Period Ended December 31, 2013, filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael J. Chewens

Michael J. Chewens
Senior Executive Vice President and
Chief Financial Officer

March 3, 2014

The forgoing certification is being furnished solely pursuant to Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.