(13) Employee Benefit Plans

Defined Benefit Postretirement Plans

The Company has a qualified, noncontributory, defined benefit pension plan (“the Plan”) covering substantially all of its employees at December 31, 2014. Benefits paid from the plan are based on age, years of service, compensation, social security benefits, and are determined in accordance with defined formulas. The Company’s policy is to fund the pension plan in accordance with ERISA standards. Assets of the plan are invested in bonds and publicly traded stocks and mutual funds. Prior to January 1, 2000, the Plan was a traditional defined benefit plan based on final average compensation. On January 1, 2000, the Plan was converted to a cash balance plan with grandfathering provisions for existing participants. Effective March 1, 2013, the pension plan was amended. Benefit accruals for participants who, as of January 1, 2000, elected to continue participating in the traditional defined benefit plan design were frozen as of March 1, 2013.

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

In addition to the Plan, the Company provides supplemental employee retirement plans to certain current and former executives. The Company also assumed supplemental retirement plans for certain current and former executives in the Alliance acquisition.

The supplemental employee retirement plans and the defined benefit pension plan are collectively referred to herein as “Pension Benefits.”

Also, the Company provides certain health care benefits for retired employees. Benefits are accrued over the employees’ active service period. Only employees that were employed by NBT Bank on or before January 1, 2000 are eligible to receive postretirement health care benefits. The plan is contributory for participating retirees, requiring participants to absorb certain deductibles and coinsurance amounts with contributions adjusted annually to reflect cost sharing provisions and benefit limitations called for in the plan. Employees become eligible for these benefits if they reach normal retirement age while working for the Company. For eligible employees described above, the Company funds the cost of postretirement health care as benefits are paid. The Company elected to recognize the transition obligation on a delayed basis over twenty years. In addition, the Company assumed post-retirement medical life insurance benefits for certain Alliance employees, retirees and their spouses, if applicable, in the Alliance acquisition. These postretirement benefits are referred to herein as “Other Benefits.”

Accounting standards require an employer to: (1) recognize the overfunded or underfunded status of defined benefit postretirement plans, which is measured as the difference between plan assets at fair value and the benefit obligation, as an asset or liability in its balance sheet; (2) recognize changes in that funded status in the year in which the changes occur through comprehensive income; and (3) measure the defined benefit plan assets and obligations as of the date of its year-end balance sheet.

The components of accumulated other comprehensive loss, which have not yet been recognized as components of net periodic benefit cost, related to pensions and other postretirement benefits at December 31, 2014 are summarized below.

The Company expects that $2.4 million in net actuarial loss and $0.2 million in prior service costs will be recognized as components of net periodic benefit cost in 2015.

	Pension Benefits						Other Benefits
(In thousands)	2014			2013			2014				2013
Net actuarial loss		$	28,767		$	11,286		$	2,929			$	1,628
Prior service cost			97			118			(314	)			(521	)
Total amounts recognized in accumulated other comprehensive loss (pre-tax)		$	28,864		$	11,404		$	2,615			$	1,107

A December 31 measurement date is used for the pension, supplemental pension and postretirement benefit plans. The following table sets forth changes in benefit obligations, changes in plan assets, and the funded status of the pension plans and other postretirement benefits:

	Pension Benefits						Other Benefits
(In thousands)	2014			2013			2014			2013
Change in benefit obligation
Benefit obligation at beginning of year	$	85,667		$	85,130		$	7,428		$	4,071
Service cost		2,290			2,493			16			23
Interest cost		4,142			3,223			347			286
Plan participants' contributions		-			-			266			269
Actuarial(gain) loss		12,501			(10,853	)		1,452			(369	)
Amendments		-			-			-			(54	)
Acquisition		-			10,958			-			3,928
Benefits paid		(6,044	)		(5,284	)		(799	)		(726	)
Projected benefit obligation at end of year		98,556			85,667			8,710			7,428
Change in plan assets
Fair value of plan assets at beginning of year		118,574			99,705			-			-
Actual return on plan assets		3,950			18,451			-			-
Acquisition		-			4,994			-			-
Employer contributions		752			708			533			457
Plan participants' contributions		-			-			266			269
Benefits paid		(6,044	)		(5,284	)		(799	)		(726	)
Fair value of plan assets at end of year		117,232			118,574			-			-

Funded status at year end	$	18,676		$	32,907		$	(8,710	)	$	(7,428	)

An asset is recognized for an overfunded plan and a liability is recognized for an underfunded plan. The accumulated benefit obligation for pension benefits was $98.6 million and $85.7 million at December 31, 2014 and 2013, respectively. The accumulated benefit obligation for other postretirement benefits was $8.7 million and $7.4 million at December 31, 2014 and 2013, respectively. The funded status of the pension and other postretirement benefit plans has been recognized as follows in the consolidated balance sheets at December 31, 2014 and 2013.

	Pension Benefits								Other Benefits
(In thousands)	2014				2013				2014				2013
Other assets		$	39,044			$	48,189			$	-			$	-
Other liabilities			(20,368	)			(15,282	)			(8,710	)			(7,428	)
Funded status		$	18,676			$	32,907			$	(8,710	)		$	(7,428	)

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

	Years ended December 31,
	2014			2013			2012
Weighted average assumptions:
The following assumptions were used to determine benefit obligations:
Discount rate		4.19% - 4.30	%		4.90%-5.05	%		3.50	%
Expected long-term return on plan assets		7.50	%		7.50	%		7.50	%
Rate of compensation increase		3.00%-3.75	%		3.00	%		3.00	%

The following assumptions were used to determine net periodic pension cost:
Discount rate		4.90%-5.05	%		3.50	%		4.10	%
Expected long-term return on plan assets		7.50	%		7.50	%		7.50	%
Rate of compensation increase		3.00%-3.75	%		3.00	%		3.00	%

Net periodic benefit cost and other amounts recognized in other comprehensive income (loss) for the years ended December 31 included the following components:

	Pension Benefits									Other Benefits
(In thousands)	2014			2013			2012			2014			2013			2012
Components of net periodic benefit cost
Service cost	$	2,290		$	2,493		$	3,122		$	16		$	23		$	20
Interest cost		4,142			3,223			3,145			347			286			155
Expected return on plan assets		(8,681	)		(7,804	)		(6,686	)		-			-			-
Amortization of prior service cost		23			23			283			(206	)		(205	)		(202	)
Amortization of unrecognized net loss		79			2,692			3,330			151			280			182
Net periodic pension cost	$	(2,147	)	$	627		$	3,194		$	308		$	384		$	155

Other changes in plan assets and benefit obligations recognized in other comprehensive income (pre-tax)
Net loss (gain)	$	17,233		$	(21,500	)	$	894		$	1,452		$	(369	)	$	136
Prior service cost		-			-			(1,006	)		-			(54	)		-
Amortization of prior service cost		(23	)		(23	)		(283	)		206			205			202
Amortization of unrecognized net gain		(79	)		(2,692	)		(3,330	)		(151	)		(280	)		(182	)
Total recognized in other comprehensive loss (income)		17,131			(24,215	)		(3,725	)		1,507			(498	)		156

Total recognized in net periodic benefit cost and other comprehensive income (loss) - pre-tax	$	14,984		$	(23,588	)	$	(531	)	$	1,815		$	(114	)	$	311

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

(In thousands)	Pension Benefits		Other Benefits
2015		6,011		538
2016		6,221		549
2017		9,473		571
2018		7,100		592
2019		6,953		578
2020 - 2024		40,351		2,881

The Company is not required to make contributions to the defined benefit plan in 2015.

For measurement purposes, the annual rates of increase in the per capita cost of covered medical and prescription drug benefits for fiscal year 2014 were assumed to be 7.0 to 9.0 percent. The rates were assumed to decrease gradually to 3.9 percent for fiscal year 2075 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on amounts reported for health care plans. A one-percentage point change in the health care trend rates would have the following effects as of and for the year ended December 31, 2014:

(In thousands)	One Percentage point increase		One Percentage point decrease
Increase (decrease) on total service and interest cost components	$	39	$	(33	)
Increase (decrease) on postretirement accumulated benefit obligation		895		(764	)

Plan Investment Policy

The Company’s key investment objectives in managing its defined benefit plan assets are to ensure that present and future benefit obligations to all participants and beneficiaries are met as they become due; to provide a total return that, over the long-term, maximizes the ratio of the plan assets to liabilities, while minimizing the present value of required Company contributions, at the appropriate levels of risk; to meet statutory requirements and regulatory agencies’ requirements; and to satisfy applicable accounting standards. The Company periodically evaluates the asset allocations, funded status, rate of return assumption and contribution strategy for satisfaction of our investment objectives.

The target and actual allocations expressed as a percentage of the defined benefit pension plan’s assets are as follows:

	Target 2014			2014			2013
Cash and cash equivalents		0 - 20	%		4	%		6	%
Fixed income securities		20 - 40	%		38	%		27	%
Equities		40 - 80	%		58	%		67	%
Total					100	%		100	%

Only high-quality bonds are to be included in the portfolio. All issues that are rated lower than A by Standard and Poor’s are to be excluded. Equity securities at December 31, 2014 and 2013 do not include any Company common stock.

The following table presents the financial instruments recorded at fair value on a recurring basis by the Plan as of December 31, 2014 and 2013:

(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Balance as of December 31, 2014
Cash and cash equivalents	$	4,423	$	-	$	4,423
Foreign equity mutual funds		38,581		-		38,581
Equity mutual funds		29,718		-		29,718
U.S. government bonds		-		4,420		4,420
Corporate bonds		-		40,090		40,090
Totals	$	72,722	$	44,510	$	117,232

(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Balance as of December 31, 2013
Cash and cash equivalents	$	7,533	$	-	$	7,533
Foreign equity mutual funds		15,653		-		15,653
Equity mutual funds		16,727		-		16,727
U.S. government bonds		-		9,355		9,355
Corporate bonds		-		19,665		19,665
Common stock		44,532		-		44,532
Municipal bonds and notes		-		1,451		1,451
Foreign bonds and notes		-		1,392		1,392
Foreign equity		2,266		-		2,266
Totals	$	86,711	$	31,863	$	118,574

The plan had no financial instruments recorded at fair value on a nonrecurring basis as of December 31, 2014.

Determination of Assumed Rate of Return

The expected long-term rate-of-return on assets was 7.5% at December 31, 2014 and December 31, 2013. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the portfolio considering the asset distribution and related historical rates of return. The appropriateness of the assumption is reviewed annually.

Employee 401(k) and Employee Stock Ownership Plans

The Company maintains a 401(k) and employee stock ownership plan (the “401(k) Plan”). The Company contributes to the 401(k) Plan based on employees’ contributions out of their annual salaries. In addition, the Company may also make discretionary contributions to the 401(k) Plan based on profitability. Participation in the 401(k) Plan is contingent upon certain age and service requirements. The employer contributions associated with the 401(k) Plan were $2.2 million in 2014, $2.1 million in 2013, and $1.8 million in 2012.