(18) Employee Benefit Plans

Defined Benefit Postretirement Plans

The Company has a qualified, noncontributory, defined benefit pension plan covering substantially all of its employees at December 31, 2011. 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 Company's 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.

In addition to the pension plan, the Company also provides supplemental employee retirement plans to certain current and former executives. These 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. 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, 2011 are summarized below. The Company expects that $3.3 million in net actuarial loss and $0.1 million in prior service cost will be recognized as components of net periodic benefit cost in 2012.

	Pension Benefits				Other Benefits
(In thousands)	2011		2010		2011			2010
Net actuarial loss	$	37,914	$	23,161	$	2,323		$	3,089
Prior service cost		1,430		1,739		(874	)		(1,076	)
Total amounts recognized in accumulated other comprehensive loss (pre-tax)	$	39,344	$	24,900	$	1,449		$	2,013

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)	2011			2010			2011			2010
Change in benefit obligation
Benefit obligation at beginning of year	$	70,229		$	63,408		$	4,554		$	3,838
Service cost		2,589			2,254			17			17
Interest cost		3,544			3,613			202			228
Plan participants' contributions		-			-			263			277
Actuarial loss (gain)		5,935			4,940			(562	)		955
Amendments		-			21			-			-
Benefits paid		(4,273	)		(4,007	)		(489	)		(761	)
Projected benefit obligation at end of year		78,024			70,229			3,985			4,554
Change in plan assets
Fair value of plan assets at beginning of year		97,821			90,891			-			-
Actual return (loss) on plan assets		(2,452	)		10,487			-			-
Employer contributions		479			450			226			484
Plan participants' contributions		-			-			263			277
Benefits paid		(4,273	)		(4,007	)		(489	)		(761	)
Fair value of plan assets at end of year		91,575			97,821			-			-

Funded status at year end	$	13,551		$	27,592		$	(3,985	)	$	(4,554	)

The funded status of the pension and other postretirement benefit plans has been recognized as follows in the consolidated balance sheets at December 31, 2011 and 2010. 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 $76.5 million and $68.6 million at December 31, 2011 and 2010, respectively. The accumulated benefit obligation for other postretirement benefits was $4.0 million and $4.6 million at December 31, 2011 and 2010, respectively.

	Pension Benefits						Other Benefits
(In thousands)	2011			2010			2011			2010
Other assets	$	23,973		$	35,895		$	-		$	-
Other liabilities		(10,422	)		(8,303	)		(3,985	)		(4,554	)
Funded status	$	13,551		$	27,592		$	(3,985	)	$	(4,554	)

The following assumptions were used to determine the benefit obligation and the net periodic pension cost for the years indicated:

	Years ended December 31,

(In thousands)	2011			2010			2009
Weighted average assumptions:
The following assumptions were used to determine benefit obligations:
Discount rate		4.10	%		5.15	%		5.70	%
Expected long-term return on plan assets		7.50	%		8.00	%		8.00	%
Rate of compensation increase		3.00	%		3.00	%		3.00	%

The following assumptions were used to determine net periodic pension cost:
Discount rate		5.15	%		5.70	%		6.30	%
Expected long-term return on plan assets		8.00	%		8.00	%		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)	2011			2010			2009			2011			2010			2009
Components of net periodic benefit cost
Service cost	$	2,589		$	2,254		$	2,222		$	17		$	17		$	17
Interest cost		3,544			3,613			3,413			202			228			205
Expected return on plan assets		(7,720	)		(7,166	)		(5,591	)		-			-			-
Amortization of initial unrecognized asset		-			-			(23	)		-			-			-
Amortization of prior service cost		309			322			296			(202	)		(202	)		(202	)
Amortization of unrecognized net loss		1,353			1,447			2,374			205			201			136
Net periodic pension cost	$	75		$	470		$	2,691		$	222		$	244		$	156

Other changes in plan assets and benefit obligations recognized in other comprehensive income (pre-tax)

Net loss (gain)	$	16,108		$	1,620		$	(6,053	)	$	(562	)	$	955		$	289
Prior service cost		-			21			127			-			-			-
Amortization of initial unrecognized asset		-			-			23			-			-			-
Amortization of prior service cost		(309	)		(322	)		(296	)		202			202			202
Amortization of unrecognized net gain		(1,353	)		(1,447	)		(2,374	)		(205	)		(201	)		(136	)
Total recognized in other comprehensive loss (income)		14,446			(128	)		(8,573	)		(565	)		956			355

Total recognized in net periodic benefit cost and other comprehensive income (loss) - pre-tax	$	14,521		$	342		$	(5,882	)	$	(343	)	$	1,200		$	511

The following table sets forth estimated future benefit payments for the pension plans and other postretirement benefit plans:

	Pension		Other
	Benefits		Benefits

2012		5,010		204
2013		5,236		218
2014		5,361		232
2015		7,034		244
2016		5,590		254
Thereafter		29,745		1,358

The Company is not required to make contributions to the defined benefit plan in 2012.

For measurement purposes, the annual rates of increase in the per capita cost of covered medical and prescription drug benefits for fiscal year 2011 were assumed to be 8.0 to 9.75 percent. The rates were assumed to decrease gradually to 5.0 percent for fiscal year 2018 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, 2011:

(In thousands)	One Percentage point increase		One Percentage point decrease
Increase (decrease) on total service and interest cost components	$	29	$	(24	)
Increase (decrease) on postretirement accumulated benefit obligation		482		(410	)

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 2012			2011			2010
Cash and cash equivalents		0 - 20	%		2	%		2	%
Fixed income securities		20 - 40	%		34	%		26	%
Equities		40 - 80	%		64	%		72	%
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, 2011 and 2010 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, 2011 and 2010:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2011
Cash and Cash Equivalents	$	1,503	$	-	$	-	$	1,503
Foreign Equity Mutual Funds		6,577		-		-		6,577
Equity Mutual Funds		9,902		-		-		9,902
US Government Bonds		-		15,683		-		15,683
Corporate Bonds		-		12,954		-		12,954
Common Stock		33,850		-		-		33,850
Municipal bonds and Notes		-		1,799		-		1,799
Foreign Bonds and Notes		-		1,096		-		1,096
Foreign Equity		8,211		-		-		8,211
Totals	$	60,043	$	31,532	$	-	$	91,575

(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2010
Cash and Cash Equivalents	$	1,604	$	-	$	-	$	1,604
Foreign Equity Mutual Funds		6,577		-		-		6,577
Equity Mutual Funds		22,515		-		-		22,515
US Government Bonds		-		16,219		-		16,219
Corporate Bonds		-		5,003		-		5,003
Common Stock		31,213		-		-		31,213
Municipal bonds and Notes		-		2,294		-		2,294
Foreign Bonds and Notes		-		1,666		-		1,666
Foreign Equity		10,730		-		-		10,730
Totals	$	72,639	$	25,182	$	-	$	97,821

The Plan had no financial instruments recorded at fair value on a nonrecurring basis as of December 31, 2011.

Determination of Assumed Rate of Return

The expected long-term rate-of-return on assets is 7.5% at December 31, 2011. 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 $3.7 million in 2011, $3.5 million in 2010, and $3.4 million in 2009.

Omnibus Incentive Plan

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 assumes 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 2011, 2010, and 2009 was $5.45, $5.03, and $5.71, 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,
	2011	2010	2009
Dividend yield	3.31%–3.82%	3.27%–3.96%	2.86%–3.65%
Expected volatility	33.75%–34.36%	33.00%–33.86%	30.20%–32.91%
Risk-free interest rates	1.48%–2.81%	1.90%–3.17%	1.71%–3.20%
Expected life	7 years	7 years	7 years

The following table summarizes information concerning stock options outstanding at December 31, 2011:

	Number of Shares			Weighted average exercise price		Weighted Average Remaining Contractual Term (in yrs)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		2,031,578		$	22.05
Granted		50,700			22.21
Exercised		(142,178	)		16.11
Forfeited		(26,085	)		24.42
Expired		(50,425	)		24.64
Outstanding at December 31, 2011		1,863,590		$	22.41		5.37	$	3,869,134

Exercisable at December 31, 2011		1,457,710		$	22.50		4.71	$	2,872,729

Expected to Vest		399,034		$	22.08		7.73	$	979,661

Total stock-based compensation expense for stock option awards totaled $0.9 million for the year ended December 31, 2011, $1.8 million for the year ended December 31, 2010, and $1.6 million for the year ended December 31, 2009. There were no new stock option awards issued in 2011 which caused the aforementioned decrease. Cash proceeds, tax benefits and intrinsic value related to total stock options exercised is as follows:

	Years ended
(dollars in thousands)	2011		2010		2009
Proceeds from stock options exercised	$	1,793	$	1,778	$	2,728
Tax benefits related to stock options exercised		341		140		(243	)
Intrinsic value of stock options exercised		897		574		406
Fair value of shares vested during the year		1,597		1,800		1,700

The Company has outstanding restricted and deferred stock awards granted from various plans at December 31, 2011. The Company recognized $2.3 million in stock-based compensation expense related to these stock awards for the year ended December 31, 2011, $2.0 million for the year ended December 31, 2010, and $1.5 million for the year ended December 31, 2009. Tax benefits recognized with respect to restricted and deferred stock-based compensation expense were $1.2 million, $0.7 million and $0.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. Unrecognized compensation cost related to restricted stock awards and stock units totaled $4.4 million at December 31, 2011 and will be recognized over 2.8 years on a weighted average basis. Shares issued are funded from the Company's treasury stock. The following table summarizes information for unvested restricted stock awards outstanding as of December 31, 2011:

	Number of Shares			Weighted- Average Grant Date Fair Value
Unvested Restricted Stock Awards
Unvested at January 1, 2011		202,039		$	24.09
Forfeited		(14,000	)		24.44
Vested		(58,110	)		24.48
Granted		25,447			24.09
Unvested at December 31, 2011		155,376		$	23.92

The following table summarizes information for unvested restricted stock units outstanding as of December 31, 2011:

	Number of Shares			Weighted- Average Grant Date Fair Value
Unvested Restricted Stock Units
Unvested at January 1, 2011		57,400		$	22.59
Forfeited		(3,520	)		-
Vested		(625	)		-
Granted		188,652			23.84
Unvested at December 31, 2011		241,907		$	23.95

The Company has 4.6 million securities remaining available to be granted as part of the Plan at December 31, 2011.