10-K 1 form10k.htm NBT BANCORP INC 10-K 12-31-2015  

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015
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
 
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   No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.  Yes   No
 
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   No  
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will  not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   No
 
Based on the closing price of the registrant's common stock as of June 30, 2015, the aggregate market value of the voting stock, common stock, par value, $0.01 per share, held by non-affiliates of the registrant is $1,107,379,951.
 
The number of shares of common stock outstanding as of February 12, 2016, was 43,126,156.
 

DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant's definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 3, 2016 are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.
 

NBT BANCORP INC.
FORM 10-K – Year Ended December 31, 2015
 
TABLE OF CONTENTS
 
PART I
   
     
ITEM 1
4
     
ITEM 1A
15
     
ITEM 1B
21
     
ITEM 2
22
     
ITEM 3
23
     
ITEM 4
23
     
PART II
   
     
ITEM 5
23
     
ITEM 6
26
     
ITEM 7
28
     
ITEM 7A
50
     
ITEM  8
51
 
51
 
52
 
53
 
54
 
55
 
56
 
58
     
ITEM 9
95
     
ITEM 9A
95
     
ITEM 9B
98
     
PART III
   
     
ITEM 10
98
     
ITEM 11
98
     
ITEM 12
98
     
ITEM 13
98
     
ITEM 14
98
     
PART IV
   
     
ITEM 15
99
     
 
102
 
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, 2015 had assets of $8.3 billion and stockholders' equity of $882.0 million.  
 
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, Vermont, and the greater Portland, Maine 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
   
54
%
   
30
%
   
84
%
Pennsylvania
   
6
%
   
1
%
   
7
%
New Hampshire
   
3
%
   
0
%
   
3
%
Vermont
   
4
%
   
0
%
   
4
%
Massachusetts
   
1
%
   
1
%
   
2
%
     
68
%
   
32
%
   
100
%

 
 
Commercial
   
Consumer
   
Residential Real Estate
   
Total Loan Portfolio
 
New York
   
32
%
   
27
%
   
16
%
   
75
%
Pennsylvania
   
3
%
   
4
%
   
3
%
   
10
%
New Hampshire
   
4
%
   
1
%
   
1
%
   
6
%
Vermont
   
4
%
   
2
%
   
1
%
   
7
%
Massachusetts
   
1
%
   
0
%
   
0
%
   
1
%
Maine
   
1
%
   
0
%
   
0
%
   
1
%
     
45
%
   
34
%
   
21
%
   
100
%


Percentage of total loan portfolio secured by real estate is summarized below:

 
 
Secured By Real Estate
   
Not Secured By Real Estate
 
New York
   
58
%
   
42
%
Pennsylvania
   
68
%
   
32
%
New Hampshire
   
71
%
   
29
%
Vermont
   
56
%
   
44
%
Massachusetts
   
74
%
   
26
%
Maine
   
100
%
   
0
%


Like much of the nation, the market areas that the Company serves are still experiencing economic challenges and volatility.  A variety of factors (e.g., any substantial rise in inflation or rise in unemployment rates, decrease in consumer confidence, adverse international economic conditions, natural disasters, war, or political instability) may affect both the 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.

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, Vermont, and the greater Portland, Maine market areas.

Through its network of branch locations, the Bank offers a wide range of products and services tailored to individuals, 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.

NBT Financial Services, Inc.

Through NBT Financial Services, the Company operates EPIC Advisors, Inc. ("EPIC"), a retirement plan administrator.  Through EPIC, the Company offers services including retirement plan consulting and recordkeeping services.  EPIC's headquarters are located in Rochester, New York.

NBT Holdings, Inc.

Through NBT Holdings, the Company operates NBT-Mang Insurance Agency, LLC ("Mang"), a full-service insurance agency acquired by the Company on September 1, 2008.  Mang's 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 six operating subsidiaries, NBT Capital Corp., Broad Street Property Associates, Inc., NBT Services, Inc., CNB Realty Trust, Alliance Preferred Funding Corp., and Alliance Leasing, Inc. NBT Capital Corp., formed in 1998, is a venture capital corporation formed to assist young businesses to develop and grow primarily in the markets they serve. Broad Street Property Associates, Inc., formed in 2004, is a property management company.  NBT 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.  Alliance Preferred Funding Corp., formed in 1999, is a real estate investment trust.  Alliance Leasing, Inc. was formed in 2002 to provide equipment leasing services.

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 thirty-eight counties of New York, Pennsylvania, New Hampshire, Vermont, Massachusetts, and Maine in which it had customer facilities as of June 30, 2015.  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
 
$
863,452
     
90.39
%
   
1
     
11
     
13
 
Fulton
 
NY
   
415,323
     
60.81
%
   
1
     
5
     
6
 
Schoharie
 
NY
   
191,126
     
46.89
%
   
1
     
4
     
4
 
Hamilton
 
NY
   
41,699
     
44.44
%
   
2
     
1
     
1
 
Cortland
 
NY
   
268,435
     
40.55
%
   
1
     
5
     
7
 
Montgomery
 
NY
   
234,727
     
35.02
%
   
2
     
5
     
4
 
Otsego
 
NY
   
323,695
     
33.50
%
   
2
     
8
     
12
 
Delaware
 
NY
   
301,749
     
31.56
%
   
1
     
5
     
4
 
Essex
 
NY
   
161,200
     
25.72
%
   
2
     
3
     
5
 
Susquehanna
 
PA
   
164,428
     
21.87
%
   
2
     
5
     
7
 
Madison
 
NY
   
207,536
     
17.05
%
   
2
     
4
     
6
 
Oneida
 
NY
   
399,069
     
12.43
%
   
5
     
7
     
11
 
Pike
 
PA
   
77,814
     
12.03
%
   
5
     
2
     
2
 
Saint Lawrence
 
NY
   
133,194
     
11.89
%
   
3
     
5
     
5
 
Broome
 
NY
   
303,702
     
11.65
%
   
3
     
8
     
10
 
Herkimer
 
NY
   
55,313
     
9.22
%
   
4
     
2
     
1
 
Wayne
 
PA
   
111,218
     
9.01
%
   
4
     
3
     
4
 
Tioga
 
NY
   
32,787
     
8.00
%
   
5
     
1
     
1
 
Clinton
 
NY
   
99,791
     
7.84
%
   
5
     
3
     
2
 
Oswego
 
NY
   
131,705
     
7.67
%
   
5
     
4
     
6
 
Lackawanna
 
PA
   
388,887
     
7.66
%
   
7
     
13
     
16
 
Franklin
 
NY
   
28,354
     
6.15
%
   
5
     
1
     
1
 
Schenectady
 
NY
   
156,115
     
6.08
%
   
6
     
2
     
2
 
Onondaga
 
NY
   
388,339
     
4.24
%
   
8
     
11
     
13
 
Saratoga
 
NY
   
144,106
     
3.60
%
   
9
     
4
     
4
 
Greene
 
NY
   
36,868
     
3.36
%
   
6
     
2
     
2
 
Monroe
 
PA
   
79,664
     
3.11
%
   
8
     
4
     
5
 
Berkshire
 
MA
   
109,907
     
3.07
%
   
7
     
6
     
6
 
Warren
 
NY
   
47,138
     
3.02
%
   
6
     
2
     
3
 
Cheshire
 
NH
   
31,361
     
2.33
%
   
7
     
1
     
0
 
Chittenden
 
VT
   
84,565
     
2.10
%
   
7
     
3
     
3
 
Albany
 
NY
   
199,318
     
1.66
%
   
10
     
4
     
5
 
Luzerne
 
PA
   
91,977
     
1.62
%
   
13
     
4
     
6
 
Rensselaer
 
NY
   
15,559
     
0.81
%
   
12
     
1
     
1
 
Hillsborough
 
NH
   
65,945
     
0.54
%
   
11
     
2
     
2
 
Rockingham
 
NH
   
18,828
     
0.30
%
   
19
     
2
     
2
 
Rutland
 
VT
   
2,185
     
0.23
%
   
9
     
1
     
1
 
Cumberland
 
ME
   
905
     
0.01
%
   
16
     
1
     
0
 
        
$
6,407,984
                     
155
     
183
 

Deposit market share data is based on the most recent data available (as of June 30, 2015).  Source: SNL Financial LLC
* Branch and ATM data is as of December 31, 2015.

Supervision and Regulation

The Company, the Bank and certain of its non-banking subsidiaries are subject to extensive regulation under federal and state laws.  The regulatory framework applicable to bank holding companies and their subsidiary banks is intended to protect depositors, federal deposit insurance funds, and the stability of the U.S. banking system. This system is not designed to protect equity investors in bank holding companies, such as the Company.  Statutes, regulations and policies are subject to ongoing review by Congress, state legislatures and federal and state agencies.  A change in any statute, regulation or policy applicable to the Company may have a material effect on the results of the Company and its subsidiaries.

Overview

The Company is a registered bank holding company and financial holding company under the Bank Holding Company Act of 1956 (the "BHC Act"), as amended, and is subject to the supervision of and regular examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board" or "FRB") as its primary federal regulator.  The Company is also subject to the jurisdiction of the Securities and Exchange Commission ("SEC") and is subject to the disclosure and other regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. The Company is traded on the NASDAQ under the ticker symbol, "NBTB," and is subject to the NASDAQ stock market rules.

The Bank is organized as a national banking association under the National Bank Act.  The Bank is subject to the supervision of, and to regular examination by, the Office of the Comptroller of the Currency ("OCC") as its chartering authority and primary federal regulator.  The Bank is also subject to the supervision and regulation of the Federal Deposit Insurance Corporation ("FDIC") as its deposit insurer.  Financial products and services offered by the Company and the Bank are subject to federal consumer protection laws and implementing regulations promulgated by the Consumer Financial Protection Bureau ("CFPB").  The Company and the Bank are also subject to oversight by state attorneys general for compliance with state consumer protection laws.  The Bank's deposits are insured by the FDIC up to the applicable deposit insurance limits in accordance with FDIC laws and regulations.  The non-bank subsidiaries of the Company and the Bank are subject to federal and state laws and regulations, including regulations of the FRB and the OCC, respectively.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") has significantly changed the financial regulatory landscape in the U.S.  Several provisions of the Dodd-Frank Act are subject to further rulemaking, guidance and interpretation by the federal banking agencies. As a result, management cannot predict the ultimate impact of the Dodd-Frank Act or the extent to which it could affect operations of the Company and the Bank.

Set forth below is a summary of the significant laws and regulations applicable to the Company and its subsidiaries. The description that follows is qualified in its entirety by reference to the full text of the statutes, regulations, and policies that are described. Such statutes, regulations, and policies are subject to ongoing review by Congress and state legislatures and federal and state regulatory agencies.  A change in any of the statutes, regulations, or regulatory policies applicable to the Company and its subsidiaries could have a material effect on the results of the Company.

Federal Bank Holding Company Regulation

The Company is a bank holding company as defined by the BHCA.  The BHCA generally limits the business of the Company to banking, managing or controlling banks, and other activities that the FRB has determined to be so closely related to banking "as to be a proper incident thereto." The Company has also qualified for and elected to be a financial holding company.  Financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury), or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system (as solely determined by the FRB).  If a bank holding company seeks to engage in the broader range of activities permitted under the BHC Act for financial holding companies, (i) the bank holding company and all of its depository institution subsidiaries must be "well capitalized" and "well managed," as defined in the FRB's Regulation Y, and (ii) it must file a declaration with the FRB that it elects to be a "financial holding company." In order for a financial holding company to commence any activity that is financial in nature, incidental thereto, or complementary to a financial activity, or to acquire a company engaged in any such activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least "satisfactory" in its most recent examination under the Community Reinvestment Act of 1977 (the "CRA").  See the section titled "Community Reinvestment Act of 1977" for further information relating to the CRA.

Regulation of Mergers and Acquisitions

The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of depository institutions and their holding companies. The BHC Act requires prior FRB approval for the direct or indirect acquisition of 5% or more of the voting shares of a bank or its parent holding company. Under the Bank Merger Act, prior approval of the OCC is required for a national bank to merge with another bank where the national bank is the resulting bank or to purchase the assets or assume the deposits of another bank.  In reviewing applications seeking approval of merger and acquisition transactions, the federal banking agencies will consider, among other criteria, the competitive effect and public benefits of the transactions, the capital position of the combined banking organization, the applicant's performance record under the CRA, and the effectiveness of the subject organizations in combating money laundering activities.

As a financial holding company, the Company is permitted to acquire control of non-depository institution companies engaged in activities that are financial in nature and in activities that are incidental and complementary to financial activities without prior FRB approval.  However, the BHC Act, as amended by the Dodd-Frank Act, requires prior written approval from the FRB or prior written notice to the FRB before a financial holding company may acquire control of a company with consolidated assets of $10 billion or more.

Capital Contributions

The principal source of the Company's liquidity is dividends from the Bank. The OCC oversees the ability of the Bank to make capital contributions, including dividends.  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 bank would thereafter be undercapitalized.  The federal banking agencies have indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.  The appropriate federal regulatory authority is authorized to determine, based on the financial condition of a bank holding company or a bank, that the payment of dividends would be an unsafe or unsound practice and to prohibit such payment.

The OCC's prior approval is required if the total of all dividends declared by a national bank in any calendar year would exceed the sum of the bank's net income for that year and its undistributed net income for the preceding two calendar years, less any required transfers to surplus.   The National Bank Act also prohibits national banks from paying dividends that would be greater than the bank's undivided profits after deducting statutory bad debt in excess of the bank's allowance for loan and lease losses.

Affiliate and Insider Transactions

Transactions between the Bank and its affiliates, including the Company, are governed by sections 23A and 23B of the Federal Reserve Act (the "FRA") and the FRB's implementing Regulation W.  An "affiliate" of a bank includes any company or entity that controls, is controlled by, or is under common control with the Bank.  Generally, sections 23A and 23B of the FRA are intended to protect insured depository institutions from losses in transactions with affiliates.  These sections place quantitative and qualitative limitations on covered transactions between the Bank and its affiliates, and require that all transactions between a bank and its affiliates occur on market terms that are consistent with safe and sound banking practices.

Section 22(h) of the FRA and its implementing Regulation O restricts loans to directors, executive officers, and principal stockholders ("Insiders").  Under Section 22(h), loans to Insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution's total capital and surplus. Loans to Insiders above specified amounts must receive the prior approval of the Bank's board of directors. Further, under Section 22(h) of the FRA, loans to directors, executive officers, and principal stockholders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the Bank's employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers.

Federal Deposit Insurance and Brokered Deposits

The Dodd-Frank Act increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor per insured institution.  The Bank's deposit accounts are fully insured by the FDIC Deposit Insurance Fund (the "DIF") up to the deposit insurance limits in accordance with applicable laws and regulations.

The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank's capital level and supervisory rating ("CAMELS rating").  The risk matrix uses different risk categories distinguished by capital levels and supervisory ratings.  As a result of the Dodd-Frank Act, the base for deposit insurance assessments is now consolidated average assets less average tangible equity.  Assessment rates are calculated using formulas that take into account the risk of the institution being assessed.  In addition to deposit insurance assessments, the Federal Deposit Insurance Act ("FDIA") provides for additional 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.  

Under FDIC laws and regulations, no FDIC-insured depository institution can accept brokered deposits unless it is well capitalized, or unless it is adequately capitalized and receives a waiver from the FDIC. Applicable laws and regulations also prohibit any depository institution that is not well capitalized from paying an interest rate on brokered deposits in excess of three-quarters of one percentage point over certain prevailing market rates.

Federal Home Loan Bank System

The Bank is also a member of the Federal Home Loan Bank ("FHLB") of New York, which provides a central credit facility primarily for member institutions for home mortgage and neighborhood lending. The Bank is subject to the rules and requirements of the FHLB, including the requirement to acquire and hold shares of capital stock in the FHLB in an amount at least equal to the sum of 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, up to a maximum of $25.0 million. The Bank was in compliance with FHLB rules and requirements as of December 31, 2015.

Debit Card Interchange Fees

The Dodd-Frank Act requires that any interchange transaction fee charged for a debit transaction be reasonable and proportional to the cost incurred by the issuer for the transaction.  FRB regulations mandated by the Dodd-Frank Act limit interchange fees on debit cards to a maximum of 21 cents per transaction plus 5 basis points of the transaction amount.  Issuers that, together with their affiliates, have less than $10 billion of assets, such as the Company, are exempt from the debit card interchange fee standards.  However, FRB regulations prohibit all issuers, including the Company and the Bank, from restricting the number of networks over which electronic debit transactions may be processed to less than two unaffiliated networks.

Source of Strength Doctrine

FRB policy requires bank holding companies to act as a source of financial and managerial strength to their subsidiary banks.  Section 616 of the Dodd-Frank Act codifies the requirement that bank holding companies serve as a source of financial strength to their subsidiary depository institutions.  As a result, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources.  Any capital loan by the Company to the Bank is subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks.  The U.S. bankruptcy code provides that, in the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

In addition, under the National Bank Act, if the Bank's capital stock is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon the Company.  If the assessment is not paid within three months, the OCC could order a sale of the Bank to cover any deficiency.

Capital Adequacy and Prompt Corrective Action

In July 2013, the FRB, the OCC and the FDIC approved final rules (the "Capital Rules") that established a new capital framework for U.S. banking organizations. The Capital Rules generally implement the Basel Committee on Banking Supervision's (the "Basel Committee") December 2010 final capital framework referred to as "Basel III" for strengthening international capital standards. In addition, the 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 Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including the Company and the Bank, as compared to prior U.S. general risk-based capital rules. The Capital Rules revised the definitions and the components of regulatory capital and impacted the calculation of the numerator in banking institutions' regulatory capital ratios.  The Capital Rules became effective for the Company on January 1, 2015, subject to phase-in periods for certain components and other provisions.

The Capital Rules: (i) require a 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 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 losses, in each case, subject to the Capital Rules' specific requirements.
  
Pursuant to the Capital Rules, the minimum capital ratios as of January 1, 2015 are:
 
4.5% CET1 to risk-weighted assets;
 
6.0% Tier 1 capital (CET1 plus Additional Tier 1 capital) to risk-weighted assets;
 
8.0% Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
 
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the "leverage ratio").

The Capital Rules also require a "capital conservation buffer," composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and compensation based on the amount of the shortfall. When fully phased-in on January 1, 2019, the capital standards applicable to the Company 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 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 prior 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. Under the Capital Rules, the effects of certain AOCI items are not excluded; however, banking organizations not using the advanced approaches, including the Company were permitted to make a one-time permanent election to continue to exclude these items in January 2015. The Capital Rules also preclude certain hybrid securities, such as trust preferred securities issued after May 19, 2010, from inclusion in bank holding companies' Tier 1 capital.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015, are phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer 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 Capital Rules revised the "prompt corrective action" ("PCA") regulations adopted pursuant to Section 38 of the 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 6%); and (iii) eliminating the provision that permitted a bank with a composite supervisory rating of 1 and a 3% leverage ratio to be considered adequately capitalized. The Capital Rules did not change the total risk-based capital requirement for any PCA category.

The Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the 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.

Management believes that the Company is in compliance, and will continue to be in compliance, with the targeted capital ratios as such requirements are phased in.

Volcker Rule

Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities, such as the Company, from: (i) engaging in "proprietary trading" and (ii) investing in or sponsoring certain types of funds ("Covered Funds"), subject to certain limited exceptions. The implementing regulation defines a Covered Fund to include certain investments such as collateralized loan obligation ("CLO") and collateralized debt obligation securities. The regulation also provides an exemption for CLOs meeting certain requirements.  Compliance with the Volcker Rule is generally required by July 21, 2017. Given the Company's size and the scope of its activities, the Company does not believe the implementation of the Volcker Rule will have a significant effect on its financial statements.

Depositor Preference

The FDIA provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution.  If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

Consumer Protection and CFPB Supervision

The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, an independent agency charged with responsibility for implementing, enforcing, and examining compliance with federal consumer financial laws. The CFPB has examination authority over all banks and savings institutions with more than $10 billion in assets.  As the Company is below this threshold, the OCC continues to exercise primary examination authority over the Bank with regard to compliance with federal consumer financial laws and regulations.  Under the Dodd-Frank Act state attorneys general are empowered to enforce rules issued by the CFPB.

The Company is subject to federal consumer financial statutes and the regulations promulgated thereunder including, but not limited to:
 
the Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

the Equal Credit Opportunity Act ("ECOA"), prohibiting discrimination in connection with the extension of credit;

the Home Mortgage Disclosure Act ("HMDA"), requiring home mortgage lenders, including the Bank, to make 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 Fair Credit Reporting Act ("FCRA"), governing the provision of consumer information to credit reporting agencies and the use of consumer information; and

the Fair Debt Collection Practices 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 Rule requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM Rule 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 Rule 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.

The Bank's failure to comply with any of the consumer financial laws can result in civil actions, regulatory enforcement action by the federal banking agencies and the U.S. Department of Justice.

USA PATRIOT Act

The Bank Secrecy Act ("BSA"), as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("USA PATRIOT Act"), imposes obligations on U.S. financial institutions, including banks and broker-dealer subsidiaries, to implement policies, procedures and controls which are reasonably designed to detect and report instances of money laundering and the financing of terrorism.  The USA PATRIOT Act requires all financial institutions, including the Company and the Bank, to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit 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.  As of December 31, 2015, the Company and the Bank believe that they are in compliance with the BSA and the USA PATRIOT Act, and implementing regulations thereunder.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals, and others. These are typically known as the "OFAC" rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control ("OFAC"). The OFAC-administered sanctions targeting countries take many different forms. Generally, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on "U.S. persons" engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons).  Blocked assets (property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Financial Privacy

Section V of the Gramm-Leach-Bliley Act and its implementing regulations 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, 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, privacy and data breach notice requirements, primarily those issued by the OCC.

Community Reinvestment Act of 1977

The Bank has a responsibility under the CRA, as implemented by OCC regulations, 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 periodically assess the Bank's record of compliance with the CRA. In addition, the ECOA and the Fair Housing Act prohibit discrimination in lending practices on the basis of characteristics specified in those statutes. The Bank's failure to comply with the CRA could, at a minimum, result in regulatory restrictions on its activities and the activities of the Company. The Bank's latest CRA rating was "Satisfactory."

Employees

At December 31, 2015, the Company had 1,721 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.  You should consider all of the following risks together with all of the other information in this Annual Report on Form 10-K.

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

The Company's success depends primarily on the general economic conditions in central and upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, 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, Syracuse, Oneonta, Amsterdam-Gloversville, Albany, Binghamton, Utica-Rome, Plattsburgh, Glens Falls and Ogdensburg-Massena, the northeastern Pennsylvania areas of Scranton, Wilkes-Barre and East Stroudsburg, Berkshire County, Massachusetts, southern New Hampshire, Vermont, and the greater Portland, Maine area.  The local economic conditions in these areas have a significant impact on the demand for the Company's products and services as well as the ability of the Company's customers to repay loans, the value of the collateral securing loans and the stability of the Company's deposit funding sources.

As a lender with the majority of our loans secured by real estate or made to businesses in New York, Pennsylvania, Massachusetts, New Hampshire, Vermont, and Maine, 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 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.  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 mitigate the potential adverse effects of changes in interest rates on the Company's results of operations, any substantial or unexpected change in, or prolonged change in market interest rates could have a material adverse effect on the Company's financial condition and results of operations. See the section captioned "Net Interest Income" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosure About Market Risk located elsewhere in this report for further discussion related to the Company's management of interest rate risk.

Changes in the 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.

As of December 31, 2015, 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. 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 are subject to extensive government regulation and supervision, which may interfere with our ability to conduct our business and may negatively impact our financial results.
We, primarily through the Bank and certain non-bank subsidiaries, are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors' funds, the Federal Deposit Insurance Fund and the safety and soundness of the banking system as a whole, not 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 limit the pricing the Company may charge on certain banking services, among other things. Since the global financial crisis, financial institutions generally have been subject to increased scrutiny from regulatory authorities.  Recent changes to the legal and regulatory framework governing our operations, including the passage and continued implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), have drastically revised the laws and regulations under which we operate.  In general, bank regulatory agencies have increased their focus on risk management and customer compliance, and we expect this focus to continue.  Additional compliance requirements are likely and can be costly to implement.  Compliance personnel and resources may increase our costs of operations and adversely impact our earnings.
Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of 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" in Item 1. Business of this report for further information.
 
We will be subject to heightened regulatory requirements if we exceed $10 billion in total consolidated assets.
Based on our historical growth rates and current size, it is possible that our total assets could exceed $10 billion dollars in the near future.  The Dodd-Frank Act and its implementing regulations impose enhanced supervisory requirements on bank holding companies with more than $10 billion in total consolidated assets.  For bank holding companies with more than $10 billion but less than $50 billion in total consolidated assets such requirements include, among other things:
compliance with the FRB's annual stress testing requirements;
increased capital, leverage, liquidity and risk management standards;
examinations by the CFPB for compliance with federal consumer financial protection laws and regulations;
limits on interchange fees on debit cards; and
changes to the FDIC deposit insurance assessments calculation that would increase our insurance premium costs.

Federal financial regulators may require us to take actions to prepare for compliance before we exceed $10 billion in total consolidated assets.  Our regulators may consider our preparation for compliance with these regulatory requirements when examining our operations or considering any request for regulatory approval.  We may, therefore, incur compliance costs before we reach $10 billion in total consolidated assets and may be required to maintain the additional compliance procedures even if we do not grow at the anticipated rate or at all.
Failure to comply with these new requirements may negatively impact the results of our operations and financial condition.  To ensure compliance, we will be required to investment significant resources, which may necessitate hiring additional personnel and implementing additional internal controls. These additional compliance costs may have a material adverse effect on our business, results of operations and financial condition.
The Company is subject to liquidity risk which could adversely affect net interest income and earnings

The purpose of the Company's liquidity management is to meet the cash flow obligations of its customers for both deposits and loans.  The primary liquidity measurement the Company utilizes is called basic surplus, which captures the adequacy of the Company's access to reliable sources of cash relative to the stability of its funding mix of average liabilities.  This approach recognizes the importance of balancing levels of cash flow 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, reputational harm or damages to others. Such costs or losses could exceed the amount of insurance coverage, if any, which would adversely affect our earnings.

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.

The possibility of the economy's return to recessionary conditions and the possibility of further turmoil or volatility in the financial markets would likely have an adverse effect on our business, financial position and results of operations.
The economy in the United States and globally as experienced volatility in recent years and may continue to do so for the foreseeable future. There can be no assurance that economic conditions will not worsen.  Unfavorable or uncertain economic conditions can be caused by declines in economic growth, business activity, or investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, the timing and impact of changing governmental policies, natural disasters, terrorist attacks, acts of war, or a combination of these or other factors. A worsening of business and economic conditions recovery could have adverse effects on our business, including the following:
investors may have less confidence in the equity markets in general and in financial services industry stocks in particular, which could place downward pressure on the Company's stock price and resulting market valuation; 
economic and market developments may further affect consumer and business confidence levels and may cause declines in credit usage and adverse changes in payment patterns, causing increases in delinquencies and default rates; 
the Company's ability to assess the creditworthiness of its customers may be impaired if the models and approaches the Company uses to select, manage, and underwrite its customers become less predictive of future behaviors;
the Company could suffer decreases in demand for loans or other financial products and services or decreased deposits or other investments in accounts with the Company; 
competition in the financial services industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions, or otherwise; and; 
the value of loans and other assets, or collateral securing loans may decrease.
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.
 
We cannot provide any assurance that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. Our inability to overcome these risks could have an adverse effect on the achievement of our business strategy and results of operations.

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, 2015 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 $21.5 million as of December 31, 2015.  There are 11 branches of the FHLB, including New York, which are jointly liable for the consolidated obligations of the FHLB system.  To the extent that one FHLB branch cannot meet its obligations to pay its share of the system's debt, other FHLB branches can be called upon to make the payment.  Any adverse effects on the FHLB of New York could adversely affect the value of our investment in its common stock and negatively impact our results of operations.

Provisions of our certificate of incorporation and bylaws, as well as Delaware law and certain banking laws, could delay or prevent a takeover of us by a third party.

Provisions of the Company's certificate of incorporation and bylaws, the corporate law of the State of Delaware and state and federal banking laws, including regulatory approval 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 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.

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 owns its headquarters located at 52 South Broad Street, Norwich, New York 13815.  The Company operated the following community banking branches and ATMs as of December 31, 2015:

County
 
Branches
   
ATMs
 
County
 
Branches
   
ATMs
 
New York 
           
Pennsylvania
           
Albany
   
4
     
5
 
Lackawanna
   
13
     
16
 
Broome
   
8
     
10
 
Luzerne
   
4
     
6
 
Chenango
   
11
     
13
 
Monroe
   
4
     
5
 
Clinton
   
3
     
2
 
Pike
   
2
     
2
 
Cortland
   
5
     
7
 
Susquehanna
   
5
     
7
 
Delaware
   
5
     
4
 
Wayne
   
3
     
4
 
Essex
   
3
     
5
                   
Franklin
   
1
     
1
 
New Hampshire
               
Fulton
   
5
     
6
 
Cheshire
   
1
     
0
 
Greene
   
2
     
2
 
Hillsborough
   
2
     
2
 
Hamilton
   
1
     
1
 
Rockingham
   
2
     
2
 
Herkimer
   
2
     
1
                   
Madison
   
4
     
6
 
Vermont
               
Montgomery
   
5
     
4
 
Chittenden
   
3
     
3
 
Oneida
   
7
     
11
 
Rutland
   
1
     
1
 
Onondaga
   
11
     
13
                   
Oswego
   
4
     
6
 
Massachusetts
               
Otsego
   
8
     
12
 
Berkshire
   
6
     
6
 
Rensselaer
   
1
     
1
                   
Saratoga
   
4
     
4
 
Maine
               
Schenectady
   
2
     
2
 
Cumberland
   
1
     
0
 
Schoharie
   
4
     
4
                   
Saint Lawrence
   
5
     
5
                   
Tioga
   
1
     
1
                   
Warren
   
2
     
3
                   
                                   
                 
Total
   
155
     
183
 

The Company leases 74 of the above listed branches from third parties.  The Company owns all other banking premises. The Company believes that its offices are sufficient for its present operations.  All of the above ATMs are owned by the Company.

ITEM 3.  Legal Proceedings
 
There are no material legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is subject.

ITEM 4.  Mine Safety Disclosures
 
None.
 
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
 
2015
             
1st quarter
 
$
26.46
   
$
22.97
   
$
0.21
 
2nd quarter
   
26.89
     
23.75
     
0.22
 
3rd quarter
   
27.72
     
24.91
     
0.22
 
4th quarter
   
30.52
     
25.58
     
0.22
 
2014
                       
1st quarter
 
$
25.81
   
$
22.35
   
$
0.21
 
2nd quarter
   
25.18
     
21.67
     
0.21
 
3rd quarter
   
24.81
     
22.50
     
0.21
 
4th quarter
   
26.88
     
22.22
     
0.21
 

The closing price of the Common Stock on February 12, 2016 was $25.79.

As of February 12, 2016, there were 6,728 shareholders of record of Common Stock.  No unregistered securities were sold by the Company during the year ended December 31, 2015.

Stock 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 and the KBW Regional Bank Index (Peer Group).  The stock performance graph assumes that $100 was invested on December 31, 2010.  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
 
12/31/10
   
12/31/11
   
12/31/12
   
12/31/13
   
12/31/14
   
12/31/15
 
NBT Bancorp
 
$
100.00
   
$
95.13
   
$
90.42
   
$
119.67
   
$
125.64
   
$
137.78
 
KBW Regional Bank Index
 
$
100.00
   
$
94.87
   
$
107.38
   
$
157.54
   
$
161.29
   
$
170.94
 
NASDAQ Composite Index
 
$
100.00
   
$
99.23
   
$
116.79
   
$
163.64
   
$
187.85
   
$
201.24
 

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, 2015, the Bank was in compliance with all applicable minimum capital requirements and had the ability to pay dividends of $81.9 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 15 – Stockholders' Equity in the notes to consolidated financial statements is included in Item 8. Financial Statements and Supplementary Data, which are located elsewhere in this report.

Stock Repurchase

The Company purchased 1,047,152 shares of its common stock during the year ended December 31, 2015 at an average price of $25.59 per share under previously announced plans.  As of December 31, 2015, there were 952,848 shares available for repurchase under the repurchase plan that was announced on July 27, 2015, which expires on December 31, 2016.  The Company did not purchase any shares of its common stock during the fourth quarter of 2015.
ITEM  6.  Selected Financial Data
 
The following summary of financial and other information about the Company is derived from the Company's audited consolidated financial statements for each of the last five fiscal years ended December 31 and should be read in conjunction with Item 7. and the Company's consolidated financial statements and accompanying notes, included elsewhere in this report:

   
Year ended December 31,
 
(In thousands, except share and per share data)
 
2015
   
2014
   
2013 (1)
   
2012 (2)
   
2011
 
Interest, fee and dividend income
 
$
273,224
   
$
275,081
   
$
268,723
   
$
239,397
   
$
239,997
 
Interest expense
   
20,616
     
23,203
     
30,644
     
35,194
     
39,721
 
Net interest income
   
252,608
     
251,878
     
238,079
     
204,203
     
200,276
 
Provision for loan and lease losses
   
18,285
     
19,539
     
22,424
     
20,269
     
20,737
 
Noninterest income excluding  securities 
                                       
  gains
   
115,394
     
125,935
     
101,789
     
86,728
     
80,161
 
Securities gains, net
   
3,087
     
92
     
1,426
     
599
     
150
 
Noninterest expense
   
236,176
     
246,063
     
228,927
     
193,887
     
180,676
 
Income before income taxes
   
116,628
     
112,303
     
89,943
     
77,374
     
79,174
 
Net income
   
76,425
     
75,074
     
61,747
     
54,558
     
57,901
 
                                         
Per common share
                                       
Basic earnings
 
$
1.74
   
$
1.71
   
$
1.47
   
$
1.63
   
$
1.72
 
Diluted earnings
   
1.72
     
1.69
     
1.46
     
1.62
     
1.71
 
Cash dividends paid
   
0.87
     
0.84
     
0.81
     
0.80
     
0.80
 
Book value at year-end
   
20.31
     
19.69
     
18.77
     
17.24
     
16.23
 
Tangible book value at year-end (3)
   
13.79
     
13.22
     
12.09
     
12.23
     
11.70
 
Average diluted common shares outstanding
   
44,389
     
44,395
     
42,351
     
33,719
     
33,924
 
                                         
Securities available for sale, at fair value
 
$
1,174,544
   
$
1,013,171
   
$
1,364,881
   
$
1,147,999
   
$
1,244,619
 
Securities held to maturity, at amortized cost
   
471,031
     
454,361
     
117,283
     
60,563
     
70,811
 
Loans and leases
   
5,883,133
     
5,595,271
     
5,406,795
     
4,277,616
     
3,800,203
 
Allowance for loan and lease losses
   
63,018
     
66,359
     
69,434
     
69,334
     
71,334
 
Assets
   
8,262,646
     
7,807,340
     
7,652,175
     
6,042,259
     
5,598,406
 
Deposits
   
6,604,843
     
6,299,605
     
5,890,224
     
4,784,349
     
4,367,149
 
Borrowings
   
674,124
     
548,943
     
866,061
     
605,855
     
627,358
 
Stockholders' equity
   
882,004
     
864,181
     
816,569
     
582,273
     
538,110
 
                                         
Key ratios
                                       
Return on average assets
   
0.96
%
   
0.97
%
   
0.85
%
   
0.93
%
   
1.06
%
Return on average equity
   
8.70
     
8.84
     
8.09
     
9.72
     
10.73
 
Average equity to average assets
   
10.98
     
10.95
     
10.50
     
9.55
     
9.90
 
Net interest margin
   
3.50
     
3.61
     
3.66
     
3.86
     
4.09
 
Dividend payout ratio
   
49.92
     
49.16
     
55.48
     
49.38
     
46.78
 
Tier 1 leverage
   
9.44
     
9.39
     
8.93
     
8.54
     
8.74
 
Common equity tier 1 capital ratio
                                       
Tier 1 risk-based capital
   
11.73
     
12.32
     
11.74
     
11.00
     
11.56
 
Total risk-based capital
   
12.74
     
13.50
     
12.99
     
12.25
     
12.81
 

(1) Includes the impact of the acquisition of Alliance Financial Corporation ("Alliance") on March 8, 2013.

(2) Includes the impact of the acquisition of Hampshire First Bank on June 8, 2012.

(3)
Tangible book value calculation:
 
   
Year ended December 31,
 
(In thousands, except per share data)
 
2015
   
2014
   
2013
   
2012
   
2011
 
Stockholders' equity
 
$
882,004
   
$
864,181
   
$
816,569
   
$
582,273
   
$
538,110
 
Intangibles
   
283,222
     
283,951
     
290,554
     
169,335
     
150,222
 
Tangible equity
   
598,782
     
580,229
     
526,015
     
412,938
     
387,888
 
Diluted common shares outstanding
   
43,431
     
43,896
     
43,513
     
33,775
     
33,157
 
Tangible book value
 
$
13.79
   
$
13.22
   
$
12.09
   
$
12.23
   
$
11.70
 
 
Selected Quarterly Financial Data
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
   
2015
   
2014
 
(Dollars in thousands, except share and per share data)
 
Fourth
   
Third
   
Second
   
First
   
Fourth
   
Third
   
Second
   
First
 
Interest, fee and dividend income
 
$
68,771
   
$
69,500
   
$
67,727
   
$
67,226
   
$
69,414
   
$
69,134
   
$
68,456
   
$
68,077
 
Interest expense
   
5,259
     
5,255
     
5,042
     
5,060
     
5,390
     
5,371
     
5,882
     
6,560
 
Net interest income
   
63,512
     
64,245
     
62,685
     
62,166
     
64,024
     
63,763
     
62,574
     
61,517
 
Provision for loan and lease losses
   
5,779
     
4,966
     
3,898
     
3,642
     
6,892
     
4,885
     
4,166
     
3,596
 
Noninterest income excluding net securities gains
   
29,427
     
31,258
     
28,189
     
26,520
     
27,013
     
26,639
     
46,013
     
26,270
 
Net securities gains
   
3,044
     
3
     
26
     
14
     
33
     
38
     
14
     
7
 
Noninterest expense
   
60,619
     
59,891
     
57,964
     
57,702
     
56,743
     
69,067
     
62,736
     
57,517
 
Net income
   
19,127
     
19,851
     
19,281
     
18,166
     
18,513
     
10,912
     
27,640
     
18,009
 
Basic earnings per share
 
$
0.44
   
$
0.45
   
$
0.44
   
$
0.41
   
$
0.42
   
$
0.25
   
$
0.63
   
$
0.41
 
Diluted earnings per share
 
$
0.43
   
$
0.45
   
$
0.43
   
$
0.41
   
$
0.42
   
$
0.25
   
$
0.62
   
$
0.41
 
Annualized net interest margin
   
3.42
%
   
3.48
%
   
3.51
%
   
3.60
%
   
3.61
%
   
3.61
%
   
3.60
%
   
3.63
%
Annualized return on average assets
   
0.93
%
   
0.97
%
   
0.97
%
   
0.94
%
   
0.94
%
   
0.55
%
   
1.43
%
   
0.95
%
Annualized return on average equity
   
8.58
%
   
8.97
%
   
8.81
%
   
8.46
%
   
8.46
%
   
5.06
%
   
13.12
%
   
8.81
%
Average diluted common shares outstanding
   
44,072
     
44,262
     
44,530
     
44,642
     
44,535
     
44,405
     
44,364
     
44,296
 
 

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 2015 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, 2015 and 2014 and for each of the years in the three-year period ended December 31, 2015 should be read in conjunction with this review. Amounts in prior period consolidated financial statements are reclassified whenever necessary to conform to the 2015 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, provision for income taxes and impairment of goodwill and intangible assets.

Management of the Company considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover credit losses inherent in the loan portfolio and the material effect that such judgments can have on the results of operations. While management’s current evaluation of the allowance for loan losses indicates that the allowance is adequate, under adversely different conditions or assumptions, the allowance may need to be increased. For example, if historical loan loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provision for loan losses would be required to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Company’s nonperforming loans and potential problem loans have a significant impact on the overall analysis of the adequacy of the allowance for loan losses. While management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral values were significantly lower, the Company’s allowance for loan loss policy would also require additional provision for loan losses.

Management is required to make various assumptions in valuing its pension assets and liabilities. These assumptions include the expected rate of return on plan assets, the discount rate, and the rate of increase in future compensation levels. Changes to these assumptions could impact earnings in future periods. The Company takes into account the plan asset mix, funding obligations, and expert opinions in determining the various rates used to estimate pension expense. The Company also considers the Citigroup Pension Liability Index, market interest rates and discounted cash flows in setting the 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.

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, goodwill and intangible assets are disclosed in Note 1 to the consolidated financial statements. A more detailed description of the allowance for loan losses is included in the section captioned “Risk Management – Credit Risk” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.  All significant pension accounting assumptions, income tax assumptions, and intangible asset assumptions and detail are disclosed in Notes 13, 12 and 7 to the consolidated financial statements, respectively. All 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 measures to exclude the effects of acquisition related intangible amortization expense on earnings and equity as well as providing a fully taxable equivalent yield on securities and loans. Where non-GAAP disclosures are used in this Annual Report on Form 10-K, the comparable GAAP measure, as well as a reconciliation to the comparable GAAP measure, is provided in the accompanying tables. Management believes that these non-GAAP measures provide useful information that is important to an understanding of the operating results of the Company’s core business as well as provide information standard in the financial institution industry.  Non-GAAP measures should not be 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, 2015:
   
Reported net income for 2015 was $76.4 million, the highest in the Company's history, and up from $75.1 million in 2014.
 
Net interest margin for 2015 declined 11 basis points as a result of the continued low rate environment on loans and investments.
Asset quality indicators showed stability or improvement from last year:
 
Nonperforming loans to total loans improved to 0.64% at December 31, 2015 from 0.82% at December 31, 2014;
 
Past due loans to total loans improved to 0.62% at December 31, 2015 from 0.69% at December 31, 2014; 
 
Net charge-offs to average loans improved to 0.38% for 2015 from 0.41% in 2014.
Noninterest income was down 6.0% from last year driven primarily by the $19.4 million gain on the sale of our ownership interest in Springstone, LLC ("Springstone") recorded in 2014 as compared to the $4.2 million gain recorded in 2015 from the same.

Continued the sale of conforming residential real estate mortgages, taking advantage of favorable interest rate conditions when possible;
Increased efforts to grow noninterest income with focus on organic growth of our wealth management businesses; and
Continued demand deposit growth strategies resulting in 8.7% growth from 2014 to 2015.
The Company reported net income of $76.4 million or $1.72 per diluted share for 2015, up 1.8% from net income of $75.1 million or $1.69 per diluted share for 2014. The provision for loan losses totaled $18.3 million for the year ended December 31, 2015, down $1.3 million, or 6.4%, from $19.5 million for the year ended December 31, 2014.  The Company continued to experience pressure on net interest income in 2015 as low rates continued to have the effect of causing many assets to prepay or to be redeemed. Net interest income was $252.6 million for the year ended December 31, 2015, up $0.7 million from 2014.  Fully taxable equivalent (“FTE”) net interest margin was 3.50% for the year ended December 31, 2015, down from 3.61% for the year ended December 31, 2014.
 
2016 Outlook

The Company’s 2015 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 2016. Significant items that may have an impact on 2016 results include:

The Company expects that it will experience some additional margin compression from the 2015 fourth quarter net interest margin of 3.42%. 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.

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 2016 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
                                           
   
2015
   
2014
   
2013
 
(Dollars in thousands)
  
Average
Balance
      Interest      
Yield/
Rate
     
Average
Balance
      Interest      
Yield/
Rate
     
Average
Balance
      Interest      
Yield/
Rate
  
ASSETS
                                                     
Short-term interest bearing accounts
 
$
10,157
   
$
33
     
0.33
%
 
$
4,344
   
$
28
     
0.65
%
 
$
30,522
   
$
116
     
0.38
%
Securities available for sale (1)
   
1,059,284
     
20,888
     
1.97
%
   
1,258,999
     
25,760
     
2.05
%
   
1,349,887
     
27,357
     
2.03
%
Securities held to maturity (1) 
   
459,589
     
11,296
     
2.46
%
   
233,465
     
6,558
     
2.81
%
   
88,193
     
3,692
     
4.19
%
Investment in FRB and FHLB Banks
   
33,044
     
1,712
     
5.18
%
   
39,290
     
2,005
     
5.10
%
   
37,998
     
1,771
     
4.66
%
Loans and leases (2) 
   
5,743,860
     
242,587
     
4.22
%
   
5,528,015
     
244,162
     
4.42
%
   
5,106,607
     
239,572
     
4.69
%
 Total interest earning assets
 
$
7,305,934
   
$
276,516
     
3.78
%
 
$
7,064,113
   
$
278,513
     
3.94
%
 
$
6,613,207
   
$
272,508
     
4.12
%
Other assets
   
691,583
                     
691,934
                     
653,432
                 
Total assets
 
$
7,997,517
                   
$
7,756,047
                   
$
7,266,639
                 
                                                                         
LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                       
Money market deposit accounts
 
$
1,582,078
   
$
3,351
     
0.21
%
 
$
1,457,770
   
$
2,532
     
0.17
%
 
$
1,343,801
   
$
2,004
     
0.15
%
NOW deposit accounts
   
987,638
     
515
     
0.05
%
   
949,759
     
509
     
0.05
%
   
882,629
     
1,468
     
0.17
%
Savings deposits
   
1,071,753
     
651
     
0.06
%
   
1,020,974
     
760
     
0.07
%
   
929,226
     
789
     
0.08
%
Time deposits
   
960,188
     
9,740
     
1.01
%
   
1,015,748
     
9,837
     
0.97
%
   
1,069,228
     
12,029
     
1.13
%
  Total interest bearing deposits
 
$
4,601,657
   
$
14,257
     
0.31
%
 
$
4,444,251
   
$
13,638
     
0.31
%
 
$
4,224,884
   
$
16,290
     
0.39
%
Short-term borrowings
   
339,885
     
783
     
0.23
%
   
382,451
     
845
     
0.22
%
   
280,848
     
515
     
0.18
%
Trust preferred debentures
   
101,196
     
2,221
     
2.19
%
   
101,196
     
2,165
     
2.14
%
   
96,536
     
2,084
     
2.16
%
Long-term debt
   
130,705
     
3,355
     
2.57
%
   
224,556
     
6,555
     
2.92
%
   
338,697
     
11,755
     
3.47
%
  Total interest bearing liabilities
 
$
5,173,443
   
$
20,616
     
0.40
%
 
$
5,152,454
   
$
23,203
     
0.45
%
 
$
4,940,965
   
$
30,644
     
0.62
%
Demand deposits
   
1,857,027
                     
1,670,188
                     
1,484,193
                 
Other liabilities
   
88,937
                     
83,940
                     
78,455
                 
Stockholders' equity
   
878,110
                     
849,465
                     
763,026
                 
Total liabilities and stockholders' equity
 
$
7,997,517
                   
$
7,756,047
                   
$
7,266,639
                 
  Net interest income (FTE)
           
255,900
                     
255,310
                     
241,864
         
Interest rate spread
                   
3.38
%
                   
3.49
%
                   
3.50
%
Net interest margin
                   
3.50
%
                   
3.61
%
                   
3.66
%
Taxable equivalent adjustment 
           
3,292
                     
3,432
                     
3,785
         
Net interest income
         
$
252,608
                   
$
251,878
                   
$
238,079
         

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.
 
2015 OPERATING RESULTS AS COMPARED TO 2014 OPERATING RESULTS

Net Interest Income

Net interest income was $252.6 million for the year ended December 31, 2015, up $0.7 million from 2014.  Fully taxable equivalent (“FTE”) net interest margin was 3.50% for the year ended December 31, 2015, down from 3.61% for the year ended December 31, 2014.  Average interest earning assets were up $241.8 million, or 3.4%, for the year ended December 31, 2015 as compared to 2014.  This increase from last year was driven primarily by organic loan growth.  Yields on earning assets decreased from 3.94% during 2014 to 3.78% for 2015, more than offsetting the growth in earning assets, resulting in a 0.7% decrease in interest income for the year ended December 31, 2015 as compared to the year ended December 31, 2014.  The yield compression was driven by a 20 basis-point decrease in loan yields from 2014 to 2015.  Average interest bearing liabilities increased $21.0 million, or 0.4%, from the year ended December 31, 2014 to the year ended December 31, 2015.  Total average deposits increased $344.2 million, or 5.6%, for the year ended December 31, 2015 as compared to last year driven primarily by an 11.2% increase in non-interest bearing demand deposits, as well as increases in money market deposit accounts and savings deposits in 2015.  This increase was partially offset by a decrease in average long-term borrowings of $93.9 million for the year ended December 31, 2015 as compared to last year due to the debt restructuring completed during the third quarter of 2014, which resulted in the prepayment of $165.0 million of long-term debt.  In addition, average short-term borrowings decreased $42.6 million for the year ended December 31, 2015 as compared to last year driven by deposit growth.  The rates paid on interest bearing liabilities decreased by 5 basis-points for the year ended December 31, 2015 as compared to 2014.  This decrease resulted primarily from a shift in deposits into lower cost core deposits as well as the aforementioned debt restructuring.  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)
 
   
2015 over 2014
   
2014 over 2013
 
(In thousands)
 
Volume
   
Rate
   
Total
   
Volume
   
Rate
   
Total
 
Short-term interest-bearing accounts
 
$
24
   
$
(19
)
 
$
5
   
$
(138
)
 
$
50
   
$
(88
)
Securities available for sale
   
(3,966
)
   
(906
)
   
(4,872
)
   
(1,857
)
   
260
     
(1,597
)
Securities held to maturity
   
5,649
     
(911
)
   
4,738
     
4,414
     
(1,548
)
   
2,866
 
Investment in FRB and FHLB Banks
   
(323
)
   
30
     
(293
)
   
63
     
171
     
234
 
Loans and leases
   
9,337
     
(10,912
)
   
(1,575
)
   
19,093
     
(14,503
)
   
4,590
 
Total interest income
   
10,721
     
(12,718
)
   
(1,997
)
   
21,575
     
(15,570
)
   
6,005
 
Money market deposit accounts
   
229
     
590
     
819
     
179
     
349
     
528
 
NOW deposit accounts
   
20
     
(14
)
   
6
     
104
     
(1,063
)
   
(959
)
Savings deposits
   
36
     
(145
)
   
(109
)
   
74
     
(103
)
   
(29
)
Time deposits
   
(552
)
   
455
     
(97
)
   
(580
)
   
(1,612
)
   
(2,192
)
Short-term borrowings
   
(97
)
   
35
     
(62
)
   
211
     
119
     
330
 
Junior subordinated debt
   
-
     
56
     
56
     
100
     
(19
)
   
81
 
Long-term debt
   
(2,483
)
   
(717
)
   
(3,200
)
   
(3,534
)
   
(1,666
)
   
(5,200
)
Total interest expense
   
(2,847
)
   
260
     
(2,587
)
   
(3,446
)
   
(3,995
)
   
(7,441
)
Change in FTE net interest income
 
$
13,568
   
$
(12,978
)
 
$
590
   
$
25,021
   
$
(11,575
)
 
$
13,446
 

Loans and Corresponding Interest and Fees on Loans

The average balance of loans increased by approximately $215.8 million, or 3.9%, from 2014 to 2015. The yield on average loans decreased from 4.42% in 2014 to 4.22% in 2015, as loan rates declined due to the continued low rate environment in 2015. Interest income from loans decreased 0.6%, from $244.2 million in 2014 to $242.6 million in 2015. This decrease was due to the decrease in yields, partially offset by the increase in average loan balances.

Total loans increased $287.9 million, or 5.1%, from December 31, 2014 to December 31, 2015.  Increases in residential real estate mortgages, commercial real estate loans, and consumer loans were the primary drivers of the increase in total loans from 2014 as the Company experienced strong originations in 2015 in the upstate New York and Vermont markets.

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

Composition of Loan and Lease Portfolio
                             
   
December 31,
 
(In thousands)
 
2015
   
2014
   
2013
   
2012
   
2011
 
Residential real estate mortgages
 
$
1,196,780
   
$
1,115,715
   
$
1,041,502
   
$
651,105
   
$
581,502
 
Commercial
   
1,159,089
     
1,144,761
     
1,180,995
     
964,297
     
847,059
 
Commercial  real estate
   
1,430,618
     
1,334,984
     
1,218,988
     
1,040,600
     
863,594
 
Consumer
   
1,568,204
     
1,430,216
     
1,345,395
     
1,046,333
     
938,412
 
Home equity
   
528,442
     
569,595
     
619,915
     
575,281
     
569,636