13. Employee Benefit Plans

Defined Benefit Post-retirement Plans

The Company has a qualified, noncontributory, defined benefit pension plan (“the Plan”) covering substantially all of its employees at December 31, 2016. Benefits paid from the plan are based on age, years of service, compensation, social security benefits, and are determined in accordance with defined formulas. The Company’s policy is to fund the Plan in accordance with Employee Retirement Income Security Act of 1974 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 Plan was amended. Benefit accruals for participants who, as of January 1, 2000, elected to continue participating in the traditional defined benefit plan design were frozen as of March 1, 2013.

In May 2013, the noncontributory, frozen, defined benefit pension plan assumed from Alliance in the acquisition was merged into the Plan.

In addition to the Plan, the Company provides supplemental employee retirement plans to certain current and former 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 post-retirement 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 post-retirement 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 post-retirement benefits are referred to herein as “Other Benefits.”

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

The components of accumulated other comprehensive loss, which have not yet been recognized as components of net periodic benefit cost, related to pensions and other post-retirement benefits at December 31, 2016 and 2015 are summarized below:

	Pension Benefits				Other Benefits
(In thousands)	2016		2015		2016			2015
Net actuarial loss	$	28,328	$	33,070	$	1,430		$	2,333
Prior service cost (credit)		140		76		(38	)		(95	)
Total amounts recognized in accumulated other comprehensive income (loss) (pre-tax)	$	28,468	$	33,146	$	1,392		$	2,238

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

	Pension Benefits						Other Benefits
(In thousands)	2016			2015			2016			2015
Change in benefit obligation
Benefit obligation at beginning of year	$	92,445		$	98,556		$	8,322		$	8,710
Service cost		2,162			2,677			14			17
Interest cost		4,223			3,977			353			374
Plan participants' contributions		-			-			234			263
Actuarial (gain)		(1,635	)		(5,225	)		(786	)		(333	)
Curtailment/ settlement		(715	)		(200	)		-			-
Benefits paid		(6,003	)		(7,340	)		(659	)		(709	)
Projected benefit obligation at end of year		90,477			92,445			7,478			8,322
Change in plan assets
Fair value of plan assets at beginning of year		107,529			117,232			-			-
Actual return (loss) on plan assets		8,259			(3,159	)		-			-
Employer contributions		6,431			796			425			446
Plan participants' contributions		-			-			234			263
Benefits paid		(6,003	)		(7,340	)		(659	)		(709	)
Fair value of plan assets at end of year		116,216			107,529			-			-

Funded status at year end	$	25,739		$	15,084		$	(7,478	)	$	(8,322	)

An asset is recognized for an overfunded plan and a liability is recognized for an underfunded plan. The accumulated benefit obligation for pension benefits was $90.5 million and $92.4 million at December 31, 2016 and 2015, respectively. The accumulated benefit obligation for other post-retirement benefits was $7.5 million and $8.3 million at December 31, 2016 and 2015, respectively. The funded status of the pension and other post-retirement benefit plans has been recognized as follows in the consolidated balance sheets at December 31, 2016 and 2015.

	Pension Benefits						Other Benefits
(In thousands)	2016			2015			2016			2015
Other assets	$	45,344		$	34,965		$	-		$	-
Other liabilities		(19,605	)		(19,881	)		(7,478	)		(8,322	)
Funded status	$	25,739		$	15,084		$	(7,478	)	$	(8,322	)

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

	Years ended December 31,
	2016			2015			2014
Weighted average assumptions:
The following assumptions were used to determine benefit obligations:
Discount rate		4.76%-4.84	%		4.69%-4.71	%		4.19%-4.30	%
Expected long-term return on plan assets		7.00	%		7.00	%		7.50	%
Rate of compensation increase		3.00	%		3.00	%		3.00%-3.75	%

The following assumptions were used to determine net periodic pension cost:
Discount rate		4.69%-4.71	%		4.19%-4.30	%		4.90%-5.05	%
Expected long-term return on plan assets		7.00	%		7.50	%		7.50	%
Rate of compensation increase		3.00	%		3.00%-3.75	%		3.00%-3.75	%

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

	Pension Benefits									Other Benefits
(In thousands)	2016			2015			2014			2016			2015			2014
Components of net periodic benefit cost
Service cost	$	2,162		$	2,677		$	2,290		$	14		$	17		$	16
Interest cost		4,223			3,977			4,142			353			374			347
Expected return on plan assets		(7,430	)		(8,589	)		(8,681	)		-			-			-
Amortization of gain due to curtailment		(768	)		(154	)		-			-			-			-
Amortization of prior service cost (credit)		32			21			23			(57	)		(219	)		(206	)
Amortization of unrecognized net loss		2,235			2,174			79			117			263			151
Net periodic pension cost	$	454		$	106		$	(2,147	)	$	427		$	435		$	308

Other changes in plan assets and benefit obligations recognized in other comprehensive income (pre-tax)
Net (gain) loss	$	(2,464	)	$	6,523		$	17,233		$	(786	)	$	(333	)	$	1,452
Prior service cost		96			-			-			-			-			-
Amortization of gain due to settlement		(43	)		(46	)		-			-			-			-
Amortization of prior service (cost) credit		(32	)		(21	)		(23	)		57			219			206
Amortization of unrecognized net (loss)		(2,235	)		(2,174	)		(79	)		(117	)		(263	)		(151	)
Total recognized in other comprehensive income		(4,678	)		4,282			17,131			(846	)		(377	)		1,507

Total recognized in net periodic benefit cost and other comprehensive income, pre-tax	$	(4,224	)	$	4,388		$	14,984		$	(419	)	$	58		$	1,815

The Company expects that $1.7 million in net actuarial loss and nominal prior service costs will be recognized as components of net periodic benefit cost in 2017.

The following table sets forth estimated future benefit payments for the pension plans and other post-retirement benefit plans as of December 31, 2016:

(In thousands)	Pension Benefits		Other Benefits
2017	$	7,876	$	551
2018		7,169		572
2019		7,042		559
2020		6,884		572
2021		6,725		546
2022 - 2026	$	36,011	$	2,724

The Company made contributions to the plan totaling $5.6 million during the twelve months ended December 31, 2016. The Company did not make any contributions to the plan during the twelve months ended December 31, 2015 and 2014.

For measurement purposes, the annual rates of increase in the per capita cost of covered medical and prescription drug benefits for fiscal year 2016 were assumed to be 6.5 % to 10.5 % percent. The rates were assumed to decrease gradually to 3.9 % 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, 2016:

(In thousands)	One Percentage point increase		One Percentage point decrease
Increase (decrease) on total service and interest cost components	$	34	$	(29	)
Increase (decrease) on post-retirement accumulated benefit obligation		667		(576	)

Plan Investment Policy

The Company’s key investment objectives in managing its defined benefit plan assets are to ensure that present and future benefit obligations to all participants and beneficiaries are met as they become due; to provide a total return that, over the long-term, maximizes the ratio of the plan assets to liabilities, while minimizing the present value of required 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 2016			2016			2015
Cash and cash equivalents		0 - 20	%		2	%		2	%
Fixed income securities		25 - 55	%		46	%		42	%
Equities		40 - 65	%		52	%		56	%
Total					100	%		100	%

Only high-quality bonds are to be included in the portfolio. All issues that are rated lower than A by Standard and Poor’s are to be excluded. Equity securities at December 31, 2016 and 2015 do not include any Company common stock.

The following table presents the financial instruments recorded at fair value on a recurring basis by the Plan as of December 31, 2016 and 2015:

(In thousands)	Level 1		Level 2		December 31, 2016
Cash and cash equivalents	$	3,500	$	-	$	3,500
Foreign equity mutual funds		33,687		-		33,687
Equity mutual funds		28,256		-		28,256
U.S. government bonds		-		1,283		1,283
Corporate bonds		-		49,490		49,490
Totals	$	65,443	$	50,773	$	116,216

(In thousands)	Level 1		Level 2		December 31, 2015
Cash and cash equivalents	$	2,513	$	-	$	2,513
Foreign equity mutual funds		33,342		-		33,342
Equity mutual funds		26,993		-		26,993
U.S. government bonds		-		3,410		3,410
Corporate bonds		-		41,271		41,271
Totals	$	62,848	$	44,681	$	107,529

The plan had no financial instruments recorded at fair value on a non-recurring basis as of December 31, 2016 and 2015.

Determination of Assumed Rate of Return

The expected long-term rate-of-return on assets was 7.0% at December 31, 2016 and December 31, 2015. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the portfolio considering the asset distribution and related historical rates of return. The appropriateness of the assumption is reviewed annually.

Employee 401(k) and Employee Stock Ownership Plans

The Company maintains a 401(k) and employee stock 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 $2.7 million in 2016, $2.5 million in 2015, and $2.8 million in 2014.

Other Retirement Benefits

Included in other liabilities is $2.6 million and $2.8 million at December 31, 2016 and December 31, 2015, respectively, for supplemental retirement benefits for retired executives from legacy plans assumed in acquisitions. The Company recognized $0.2, $0.3 and $0.1 million in expense for the years ended December 31, 2016, December 31, 2015, and December 31, 2014, respectively, related to these plans.