UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017.

OR

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

COMMISSION FILE NUMBER 0-14703

NBT BANCORP INC.

(Exact Name of Registrant as Specified in its Charter)

DELAWARE	16-1268674
(State of Incorporation)	(I.R.S. Employer Identification No.)

52 SOUTH BROAD STREET, NORWICH, NEW YORK 13815

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (607) 337-2265

None

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 (Section 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer  Accelerated filer  Non-accelerated filer  Smaller reporting company ☐ Emerging growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   No 

As of October 31, 2017, there were 43,537,673 shares outstanding of the Registrant’s common stock, $0.01 par value per share.

NBT BANCORP INC.

FORM 10-Q - Quarter Ended September 30, 2017

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

Item 1	Financial Statements
	Consolidated Balance Sheets at September 30, 2017 and December 31, 2016	3
	Consolidated Statements of Income for the three and nine month periods ended September 30, 2017 and 2016	4
	Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2017 and 2016	5
	Consolidated Statements of Stockholders’ Equity for the nine month periods ended September 30, 2017 and 2016	6
	Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2017 and 2016	7
	Notes to Unaudited Interim Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3	Quantitative and Qualitative Disclosures about Market Risk	53
Item 4	Controls and Procedures	53
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	54
Item 1A	Risk Factors
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3	Defaults Upon Senior Securities	54
Item 4	Mine Safety Disclosures	54
Item 5	Other Information	54
Item 6	Exhibits	55
SIGNATURES		56

Item 1 – FINANCIAL STATEMENTS

NBT Bancorp Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)

	September 30,			December 31,
	2017			2016
(In thousands, except share and per share data)
Assets
Cash and due from banks	$	175,804		$	147,789
Short-term interest bearing accounts		6,012			1,392
Securities available for sale, at fair value		1,357,614			1,338,290
Securities held to maturity (fair value $495,411 and $525,050)		494,309			527,948
Trading securities		10,883			9,259
Federal Reserve and Federal Home Loan Bank stock		45,070			47,033
Loans		6,466,934			6,198,057
Less allowance for loan losses		68,350			65,200
Net loans		6,398,584			6,132,857
Premises and equipment, net		81,421			84,187
Goodwill		268,043			265,439
Intangible assets, net		15,911			15,815
Bank owned life insurance		171,125			168,012
Other assets		130,620			129,247
Total assets	$	9,155,396		$	8,867,268
Liabilities
Demand (noninterest bearing)	$	2,312,715		$	2,195,845
Savings, NOW and money market		4,141,765			3,905,432
Time		776,756			872,411
Total deposits		7,231,236			6,973,688
Short-term borrowings		681,950			681,703
Long-term debt		88,914			104,087
Junior subordinated debt		101,196			101,196
Other liabilities		96,862			93,278
Total liabilities		8,200,158			7,953,952
Stockholders’ equity
Preferred stock, $0.01 par value. Authorized 2,500,000 shares at September 30, 2017 and December 31, 2016		-			-
Common stock, $0.01 par value. Authorized 100,000,000 shares at September 30, 2017 and December 31, 2016; issued 49,651,493 at September 30, 2017 and December 31, 2016		497			497
Additional paid-in-capital		573,772			575,078
Retained earnings		536,107			501,761
Accumulated other comprehensive loss		(16,664	)		(21,520	)
Common stock in treasury, at cost, 6,122,595 and 6,393,743 shares at September 30, 2017 and December 31, 2016, respectively		(138,474	)		(142,500	)
Total stockholders’ equity		955,238			913,316
Total liabilities and stockholders’ equity	$	9,155,396		$	8,867,268

See accompanying notes to unaudited interim consolidated financial statements.

3

NBT Bancorp Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

	Three months ended September 30,					Nine months ended September 30,
	2017			2016		2017			2016
(In thousands, except per share data)
Interest, fee and dividend income
Interest and fees on loans	$	68,086		$	63,414	$	197,399		$	187,093
Securities available for sale		7,278			6,013		21,505			17,976
Securities held to maturity		2,746			2,544		8,263			7,328
Other		737			538		2,010			1,441
Total interest, fee and dividend income		78,847			72,509		229,177			213,838
Interest expense
Deposits		3,648			3,607		10,658			10,809
Short-term borrowings		1,870			761		4,375			1,668
Long-term debt		589			819		1,794			2,425
Junior subordinated debt		810			660		2,308			1,920
Total interest expense		6,917			5,847		19,135			16,822
Net interest income		71,930			66,662		210,042			197,016
Provision for loan losses		7,889			6,388		22,835			17,266
Net interest income after provision for loan losses		64,041			60,274		187,207			179,750
Noninterest income
Insurance and other financial services revenue		5,536			6,114		17,927			18,685
Service charges on deposit accounts		4,261			4,354		12,399			12,459
ATM and debit card fees		5,557			5,063		16,025			14,580
Retirement plan administration fees		5,272			4,129		14,881			11,937
Trust		4,927			4,535		14,620			13,848
Bank owned life insurance		1,284			1,336		3,913			3,898
Net securities (losses) gains		(4	)		-		(2	)		30
Other		3,945			4,113		10,069			12,188
Total noninterest income		30,778			29,644		89,832			87,625
Noninterest expense
Salaries and employee benefits		32,740			32,783		99,081			98,155
Occupancy		5,174			5,035		16,528			15,780
Data processing and communications		4,399			4,183		12,826			12,354
Professional fees and outside services		3,107			3,343		9,748			9,905
Equipment		3,733			3,656		11,224			10,663
Office supplies and postage		1,432			1,438		4,680			4,661
FDIC expenses		1,257			1,287		3,571			3,838
Advertising		665			634		1,711			1,733
Amortization of intangible assets		993			952		2,999			2,976
Loan collection and other real estate owned, net		1,684			985		3,627			2,535
Other		5,417			5,318		16,209			15,683
Total noninterest expense		60,601			59,614		182,204			178,283
Income before income tax expense		34,218			30,304		94,835			89,092
Income tax expense		11,342			10,303		30,321			30,291
Net income	$	22,876		$	20,001	$	64,514		$	58,801
Earnings per share
Basic	$	0.52		$	0.46	$	1.48		$	1.36
Diluted	$	0.52		$	0.46	$	1.47		$	1.35

See accompanying notes to unaudited interim consolidated financial statements.

4

NBT Bancorp Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
(In thousands)
Net income	$	22,876		$	20,001		$	64,514		$	58,801
Other comprehensive income, net of tax:
Unrealized net holding gains (losses) arising during the period (pre-tax amounts of $1,355, $(2,931), $4,719 and $14,010)		837			(1,790	)		2,896			8,560
Reclassification adjustment for net losses (gains) related to securities available for sale included in net income (pre-tax amounts of $(4), $-, $(2) and $30)		2			-			1			(19	)
Reclassification adjustment for an impairment write-down of equity security (pre-tax amounts of $-, $-, $1,312 and $-)		-			-			811			-
Unrealized (loss) gain on derivatives (cash flow hedges) (pre-tax amounts of $(63), $782, $(167) and $719)		(40	)		478			(103	)		439
Amortization of unrealized net gains related to the reclassification of available for sale investment securities to held to maturity (pre-tax amounts of $212, $267, $675 and $843)		131			162			417			515
Pension and other benefits:
Amortization of prior service cost and actuarial loss (pre-tax amounts of $480, $519, $1,350, $1,544)		297			317			834			943
Total other comprehensive income (loss)		1,227			(833	)		4,856			10,438
Comprehensive income	$	24,103		$	19,168		$	69,370		$	69,239

See accompanying notes to unaudited interim consolidated financial statements.

5

NBT Bancorp Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (unaudited)

	Common Stock		Additional Paid-in- Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Common Stock in Treasury			Total
(In thousands, except share and per share data)
Balance at December 31, 2015	$	497	$	576,726		$	462,232		$	(22,418	)	$	(135,033	)	$	882,004
Net income		-		-			58,801			-			-			58,801
Cash dividends - $0.67 per share		-		-			(28,903	)		-			-			(28,903	)
Purchase of 675,535 treasury shares		-		-			-			-			(17,193	)		(17,193	)
Net issuance of 389,058 shares to employee benefit plans and other stock plans, including tax benefit		-		(6,164	)		-			-			7,270			1,106
Stock-based compensation		-		3,096			-			-			-			3,096
Other comprehensive income		-		-			-			10,438			-			10,438
Balance at September 30, 2016	$	497	$	573,658		$	492,130		$	(11,980	)	$	(144,956	)	$	909,349
Balance at December 31, 2016	$	497	$	575,078		$	501,761		$	(21,520	)	$	(142,500	)	$	913,316
Net income		-		-			64,514			-			-			64,514
Cash dividends - $0.69 per share		-		-			(30,073	)		-			-			(30,073	)
Net issuance of 271,148 shares to employee benefit plans and other stock plans, including tax benefit		-		(4,596	)		-			-			4,026			(570	)
Stock-based compensation		-		3,290			(95	)		-			-			3,195
Other comprehensive income		-		-			-			4,856			-			4,856
Balance at September 30, 2017	$	497	$	573,772		$	536,107		$	(16,664	)	$	(138,474	)	$	955,238

See accompanying notes to unaudited interim consolidated financial statements.

6

NBT Bancorp Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

	Nine months ended September 30,
	2017			2016
(In thousands)
Operating activities
Net income	$	64,514		$	58,801
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		22,835			17,266
Depreciation and amortization of premises and equipment		6,759			6,765
Net accretion on securities		3,628			3,781
Amortization of intangible assets		2,999			2,976
Excess tax benefit on stock-based compensation		1,697			-
Stock-based compensation		3,195			3,096
Bank owned life insurance income		(3,913	)		(3,898	)
Trading security purchases		(1,470	)		(34	)
Gains on trading securities		(154	)		(441	)
Proceeds from sales of loans held for sale		87,095			71,170
Originations and purchases of loans held for sale		(87,246	)		(73,393	)
Net gains on sales of loans held for sale		(292	)		(459	)
Net security losses (gains)		2			(30	)
Net (gain) on sales and write-down of other real estate owned		(189	)		(625	)
Gain on asset sold		-			(2,462	)
Impairment write-down of equity security		1,312			2,565
Net (increase) in other assets		(6,076	)		(16,599	)
Net increase in other liabilities		1,872			11,395
Net cash provided by operating activities		96,568			79,874
Investing activities
Net cash used in acquisitions		(4,000	)		(2,000	)
Securities available for sale:
Proceeds from maturities, calls and principal paydowns		205,327			250,441
Proceeds from sales		9,997			48
Purchases		(232,850	)		(352,056	)
Securities held to maturity:
Proceeds from maturities, calls and principal paydowns		86,055			76,676
Proceeds from sales		764			-
Purchases		(53,212	)		(90,476	)
Other:
Net increase in loans		(293,346	)		(291,349	)
Proceeds from Federal Home Loan Bank stock redemption		177,803			108,227
Purchases of Federal Reserve and Federal Home Loan Bank stock		(175,840	)		(113,872	)
Proceeds from settlement of bank owned life insurance		800			1,478
Purchase of bank owned life insurance		-			(45,000	)
Purchases of premises and equipment, net		(4,177	)		(4,652	)
Proceeds from the sales of other real estate owned		6,767			5,153
Net cash used in investing activities		(275,912	)		(457,382	)
Financing activities
Net increase in deposits		257,548			344,395
Net increase in short-term borrowings		248			142,546
Proceeds from issuance of long-term debt		-			3,880
Repayments of long-term debt		(15,174	)		(20,183	)
Proceeds from the issuance of shares to employee benefit plans and other stock plans		3,012			4,234
Cash paid by employer for tax-withholdings on stock issuance		(3,582	)		(3,128	)
Purchase of treasury stock		-			(17,193	)
Cash dividends		(30,073	)		(28,903	)
Net cash provided by financing activities		211,979			425,648
Net increase in cash and cash equivalents		32,635			48,140
Cash and cash equivalents at beginning of period		149,181			140,297
Cash and cash equivalents at end of period	$	181,816		$	188,437

7

Supplemental disclosure of cash flow information	Nine months ended September 30,
Cash paid during the period for:	2017		2016
Interest	$	19,771	$	17,269
Income taxes paid		22,230		29,173
Noncash investing activities:
Loans transferred to other real estate owned	$	5,227	$	2,363
Acquisitions:
Fair value of assets acquired	$	3,096	$	1,703

See accompanying notes to unaudited interim consolidated financial statements.

8

NBT BANCORP INC. and Subsidiaries

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

1. Description of 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 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, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital 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.

2. Basis of Presentation

The accompanying unaudited interim consolidated financial statements include the accounts of the Registrant and its wholly owned subsidiaries, the Bank, NBT Financial and NBT Holdings. Collectively, the Registrant and its subsidiaries are referred to herein as “the Company.” The interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods in accordance with generally accepted accounting principles in the United States of America (“GAAP”). These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2016 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period. All intercompany transactions have been eliminated in consolidation. Amounts in the prior period financial statements are reclassified whenever necessary to conform to current period presentation. The Company has evaluated subsequent events for potential recognition and/or disclosure and there were none identified.

9

3. Securities

The amortized cost, estimated fair value and unrealized gains and losses of available for sale (“AFS”) securities are as follows:

(In thousands)	Amortized cost		Unrealized gains		Unrealized losses		Estimated fair value
September 30, 2017
Federal agency	$	139,935	$	27	$	544	$	139,418
State & municipal		42,880		127		88		42,919
Mortgage-backed:
Government-sponsored enterprises		554,466		3,879		1,115		557,230
U.S. government agency securities		26,760		404		168		26,996
Collateralized mortgage obligations:
Government-sponsored enterprises		523,682		626		5,592		518,716
U.S. government agency securities		53,089		169		662		52,596
Other securities		13,537		6,332		130		19,739
Total securities AFS	$	1,354,349	$	11,564	$	8,299	$	1,357,614
December 31, 2016
Federal agency	$	175,135	$	78	$	805	$	174,408
State & municipal		47,053		153		480		46,726
Mortgage-backed:
Government-sponsored enterprises		513,814		3,345		2,492		514,667
U.S. government agency securities		14,955		411		189		15,177
Collateralized mortgage obligations:
Government-sponsored enterprises		513,431		532		7,688		506,275
U.S. government agency securities		60,822		184		708		60,298
Other securities		15,849		6,394		1,504		20,739
Total securities AFS	$	1,341,059	$	11,097	$	13,866	$	1,338,290

The amortized cost, estimated fair value and unrealized gains and losses of held to maturity (“HTM”) securities are as follows:

(In thousands)	Amortized cost		Unrealized gains		Unrealized losses		Estimated fair value
September 30, 2017
Mortgage-backed:
Government-sponsored enterprises	$	99,502	$	239	$	685	$	99,056
U.S. government agency securities		447		67		-		514
Collateralized mortgage obligations:
Government-sponsored enterprises		195,388		1,135		1,103		195,420
State & municipal		198,972		1,983		534		200,421
Total securities HTM	$	494,309	$	3,424	$	2,322	$	495,411
December 31, 2016
Mortgage-backed:
Government-sponsored enterprises	$	96,668	$	-	$	1,176	$	95,492
U.S. government agency securities		533		87		-		620
Collateralized mortgage obligations:
Government-sponsored enterprises		225,213		1,060		1,508		224,765
State & municipal		205,534		434		1,795		204,173
Total securities HTM	$	527,948	$	1,581	$	4,479	$	525,050

Securities with amortized costs totaling $1.2 billion at September 30, 2017 and $1.5 billion at December 31, 2016 were pledged to secure public deposits and for other purposes required or permitted by law.  At September 30, 2017 and December 31, 2016, securities with an amortized cost of $242.6 million and $235.6 million, respectively, were pledged as collateral for securities sold under repurchase agreements.

10

The following table sets forth information with regard to investment securities with unrealized losses, segregated according to the length of time the securities had been in a continuous unrealized loss position:

(Dollars in thousands)	Less than 12 months							12 months or longer							Total
Security Type:	Fair Value		Unrealized losses			Number of Positions		Fair Value		Unrealized losses			Number of Positions		Fair Value		Unrealized losses			Number of Positions
September 30, 2017
AFS securities:
Federal agency	$	45,209	$	(49	)		3	$	54,465	$	(495	)		5	$	99,674	$	(544	)		8
State & municipal		14,720		(39	)		24		6,015		(49	)		8		20,735		(88	)		32
Mortgage-backed		181,600		(1,176	)		42		6,577		(107	)		5		188,177		(1,283	)		47
Collateralized mortgage obligations		339,415		(3,175	)		50		119,108		(3,079	)		16		458,523		(6,254	)		66
Other securities		1,997		(3	)		1		2,979		(127	)		1		4,976		(130	)		2
Total securities with unrealized losses	$	582,941	$	(4,442	)		120	$	189,144	$	(3,857	)		35	$	772,085	$	(8,299	)		155
HTM securities:
Mortgage-backed	$	51,166	$	(685	)		4	$	-	$	-			-	$	51,166	$	(685	)		4
Collateralized mortgage obligations		49,394		(160	)		7		31,627		(943	)		4		81,021		(1,103	)		11
State & municipal		16,811		(188	)		21		12,591		(346	)		21		29,402		(534	)		42
Total securities with unrealized losses	$	117,371	$	(1,033	)		32	$	44,218	$	(1,289	)		25	$	161,589	$	(2,322	)		57
December 31, 2016
AFS securities:
Federal agency	$	119,363	$	(805	)		10	$	-	$	-			-	$	119,363	$	(805	)		10
State & municipal		31,873		(478	)		55		483		(2	)		1		32,356		(480	)		56
Mortgage-backed		277,524		(2,668	)		49		985		(13	)		4		278,509		(2,681	)		53
Collateralized mortgage obligations		473,746		(8,396	)		57		-		-			-		473,746		(8,396	)		57
Other securities		-		-			-		4,363		(1,504	)		2		4,363		(1,504	)		2
Total securities with unrealized losses	$	902,506	$	(12,347	)		171	$	5,831	$	(1,519	)		7	$	908,337	$	(13,866	)		178
HTM securities:
Mortgage-backed	$	95,492	$	(1,176	)		5	$	-	$	-			-	$	95,492	$	(1,176	)		5
Collateralized mortgage obligations		108,587		(319	)		12		35,209		(1,189	)		4		143,796		(1,508	)		16
State & municipal		81,984		(1,795	)		155		-		-			-		81,984		(1,795	)		155
Total securities with unrealized losses	$	286,063	$	(3,290	)		172	$	35,209	$	(1,189	)		4	$	321,272	$	(4,479	)		176

11

Declines in the fair value of HTM and AFS securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses or in other comprehensive income. Depending on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment (“OTTI”) shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be separated into (a) the amount representing the credit loss and (b) the amount related to all other factors. The amount of the total OTTI related to the credit loss shall be recognized in earnings. The amount of the total OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes.

In estimating OTTI losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the historical and implied volatility of the fair value of the security.

Management has the intent to hold the securities classified as HTM until they mature, at which time it is believed the Company will receive full value for the securities. The unrealized losses on HTM debt securities are due to increases in market interest rates over yields at the time the underlying securities were purchased. When necessary, the Company has performed a discounted cash flow analysis to determine whether or not it will receive the contractual principal and interest on certain securities. The fair value is expected to recover as the bond approaches their maturity date or repricing date or if market yields for such investments decline.

Management also has the intent to hold and will not be required to sell, the securities classified as AFS for a period of time sufficient for a recovery of cost, which may be until maturity. The unrealized losses on AFS debt securities are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. When necessary, the Company has performed a discounted cash flow analysis to determine whether or not it will receive the contractual principal and interest on certain securities. For AFS debt and equity securities, OTTI losses are recognized in earnings if the Company intends to sell the security. In other cases the Company considers the relevant factors noted above, as well as the Company’s intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value and whether evidence exists to support a realizable value equal to or greater than the cost basis. Any impairment loss on an equity security is equal to the full difference between the cost basis and the fair value of the security.

As of September 30, 2017 and December 31, 2016, management believes the impairments detailed in the table above are temporary. There were no impairments realized in the three months ended September 30, 2017. For the nine months ended September 30, 2017, $1.3 million of an OTTI loss on an AFS equity investment was realized in the Company’s unaudited interim consolidated statements of income. There were no OTTI losses realized in the Company’s unaudited interim consolidated statements of income for the three and nine months ended September 30, 2016.

During the three and nine months ended September 30, 2017, the Company sold HTM securities with an amortized cost of $0.8 million and an unrealized loss of $2 thousand. Due to significant deterioration in the creditworthiness of the issuers of the HTM securities, the circumstances caused the Company to change its intent to hold the HTM securities sold to maturity, which did not affect the Company’s intent to hold the remainder of the HTM portfolio to maturity. There were no sales of HTM securities in the three and nine month periods ended September 30, 2016.

The following tables set forth information with regard to contractual maturities of debt securities at September 30, 2017:

(In thousands)	Amortized cost		Estimated fair value
AFS debt securities:
Within one year	$	92,405	$	92,429
From one to five years		84,442		84,598
From five to ten years		179,854		180,667
After ten years		984,111		980,181
	$	1,340,812	$	1,337,875
HTM debt securities:
Within one year	$	28,489	$	28,493
From one to five years		38,321		38,702
From five to ten years		144,621		145,547
After ten years		282,878		282,669
	$	494,309	$	495,411

Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives. Actual maturities may differ from estimated average lives or contractual maturities because, in certain cases, borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

12

Except for U.S. Government securities, there were no holdings, when taken in the aggregate, of any single issuer that exceeded 10% of consolidated stockholders’ equity at September 30, 2017 and December 31, 2016.

4. Allowance for Loan Losses and Credit Quality of Loans

Allowance for Loan Losses

The allowance for loan losses is maintained at a level estimated by management to provide adequately for probable incurred losses inherent in the current loan portfolio. The appropriateness of the allowance for loan losses is continuously monitored. It is assessed for appropriateness using a methodology designed to ensure the level of the allowance reasonably reflects the loan portfolio’s risk profile. It is evaluated to ensure that it is sufficient to absorb all reasonably estimable credit losses inherent in the current loan portfolio.

To develop and document a systematic methodology for determining the allowance for loan losses, the Company has divided the loan portfolio into three segments, each with different risk characteristics and methodologies for assessing risk. Those segments are further segregated between our loans accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired in a business combination (referred to as “acquired” loans). Each portfolio segment is broken down into class segments where appropriate. Class segments contain unique measurement attributes, risk characteristics and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses. Unique characteristics such as borrower type, loan type, collateral type and risk characteristics define each class segment. The following table illustrates the portfolio and class segments for the Company’s loan portfolio:

Portfolio	Class
Commercial Loans	Commercial
	Commercial Real Estate
	Agricultural
	Agricultural Real Estate
	Business Banking
Consumer Loans	Indirect
	Home Equity
	Direct
Residential Real Estate Mortgages

Commercial Loans

The Company offers a variety of commercial loan products including commercial (non-real estate), commercial real estate, agricultural, agricultural real estate and business banking loans. The Company’s underwriting analysis for commercial loans typically includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows.

Commercial – The Company offers a variety of loan options to meet the specific needs of our commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment or other assets owned by the borrower. These loans typically carry a higher risk than commercial real estate loans due to the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable, which are generally less liquid than real estate. To reduce the risk, management also attempts to secure real estate as collateral and obtain personal guarantees of the borrowers.

Commercial Real Estate – The Company offers commercial real estate loans to finance real estate purchases, refinancings, expansions and improvements to commercial properties. Commercial real estate loans are made to finance the purchases of real property, which generally consist of real estate with completed structures. These commercial real estate loans are secured by liens on the real estate, which may include both owner occupied and non-owner-occupied properties, such as apartments, commercial structures, housing businesses, health care facilities and other facilities. These loans are typically less risky than commercial loans, since they are secured by real estate and buildings. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows. These loans are typically originated in amounts of no more than 80% of the appraised value of the property.

Agricultural – The Company offers a variety of agricultural loans to meet the needs of our agricultural customers including term loans, time notes and lines of credit. These loans are made to purchase livestock, purchase and modernize equipment and finance seasonal crop expenses. Generally, a collateral lien is placed on the livestock, equipment, produce inventories and/or receivables owned by the borrower. These loans may carry a higher risk than commercial and agricultural real estate loans due to the industry price volatility and in some cases, the perishable nature of the underlying collateral. To reduce these risks, management may attempt to secure these loans with additional real estate collateral, obtain personal guarantees of the borrowers or obtain government loan guarantees to provide further support.

13

Agricultural Real Estate – The Company offers real estate loans to our agricultural customers to finance farm related real estate purchases, refinancings, expansions and improvements to agricultural properties. Agricultural real estate loans are made to finance the purchase and improvements of farm properties that generally consist of barns, production facilities and land. The agricultural real estate loans are secured by liens on the farm real estate. Because they are secured by land and buildings, these loans may be less risky than agricultural loans. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows. These loans are typically originated in amounts of no more than 75% of the appraised value of the property. Government loan guarantees may be obtained to provide further support.

Business Banking –The Company offers a variety of loan options to meet the specific needs of our business banking customers including term loans, business banking mortgages and lines of credit. Such loans are generally less than $0.8 million and are made available to businesses for working capital such as inventory and receivables, business expansion, equipment purchases and agricultural needs. Generally, a collateral lien is placed on equipment or other assets owned by the borrower such as inventory and/or receivables. These loans carry a higher risk than commercial loans due to the smaller size of the borrower and lower levels of capital. To reduce these risks, the Company obtains personal guarantees of the owners for a majority of the loans.

Consumer Loans

The Company offers a variety of consumer loan products including indirect, home equity and direct loans.

Indirect – The Company maintains relationships with many dealers primarily in the communities that we serve. Through these relationships, the Company primarily finances the purchases of automobiles and recreational vehicles (such as campers, boats, etc.) indirectly through dealer relationships. Approximately 70% of the indirect relationships represent automobile financing. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from three to six years, based upon the nature of the collateral and the size of the loan.  The majority of indirect consumer loans are underwritten on a secured basis using the underlying collateral being financed. As of September 30, 2017 and December 31, 2016, respectively, the consumer loan portfolio includes $400.9 million and $374.9 million of unsecured consumer loans across a national footprint originated through our relationship with national technology-driven consumer lending companies. Advances of credit through this specialty lending business line are to prime borrowers and are subject to the Company’s underwriting standards.

Home Equity –The Company offers fixed home equity loans as well as home equity lines of credit to consumers to finance home improvements, debt consolidation, education and other uses. Consumers are able to borrow up to 85% of the equity in their homes. The Company originates home equity lines of credit and second mortgage loans (loans secured by a second lien position on one-to-four-family residential real estate). These loans carry a higher risk than first mortgage residential loans as they are in a second position with respect to collateral. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower’s financial condition and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

Direct – The Company offers a variety of consumer installment loans to finance vehicle purchases, mobile home purchases and personal expenditures. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to ten years, based upon the nature of the collateral and the size of the loan. The majority of consumer loans are underwritten on a secured basis using the underlying collateral being financed or a customer’s deposit account. In addition to installment loans, the Company also offers personal lines of credit and overdraft protection. A minimal amount of loans are unsecured, which carry a higher risk of loss.

Residential Real Estate Mortgages

Residential real estate loans consist primarily of loans secured by first or second deeds of trust on primary residences. We originate adjustable-rate and fixed-rate, one-to-four-family residential real estate loans for the construction, purchase or refinancing of a mortgage. These loans are collateralized by owner-occupied properties located in the Company’s market area. When market conditions are favorable, for longer term, fixed-rate residential mortgages without escrow, the Company retains the servicing, but sells the right to receive principal and interest to Freddie Mac. This practice allows the Company to manage interest rate, liquidity risk and credit risk. Loans on one-to-four-family residential real estate are generally originated in amounts of no more than 85% of the purchase price or appraised value (whichever is lower) or have private mortgage insurance. Mortgage title insurance and hazard insurance are normally required. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period.

14

Allowance for Loan Loss Calculation

For purposes of evaluating the adequacy of the allowance, the Company considers a number of significant factors that affect the collectability of the portfolio. For individually analyzed loans, these include estimates of loss exposure, which reflect the facts and circumstances that affect the likelihood of repayment of such loans as of the evaluation date. For homogeneous pools of loans, estimates of the Company’s exposure to credit loss reflect a current assessment of a number of factors, which could affect collectability. These factors include:  past loss experience, size, trend, composition and nature of loans;  changes in lending policies and procedures, including underwriting standards and collection,  charge-offs  and  recoveries; trends experienced in nonperforming and delinquent loans; current economic conditions in the Company’s market; portfolio concentrations that may affect loss experienced across one or more components of the portfolio; the effect of external factors such as competition, legal and regulatory requirements; and the experience, ability and depth of lending management and staff.

In addition, various regulatory agencies, as an integral component of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make loan grade changes as well as recognize additions to the allowance based on their examinations.

After a thorough consideration of the factors discussed above, any required additions or reductions to the allowance for loan losses are made periodically by charges or credits to the provision for loan losses. These charges are necessary to maintain the allowance at a level that management believes is reflective of overall inherent risk of probable loss in the portfolio. While management uses available information to recognize losses on loans, additions and reductions of the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above.

15

The following tables illustrate the changes in the allowance for loan losses by our portfolio segments:

Three months ended September 30,(In thousands)	Commercial Loans			Consumer Loans			Residential Real Estate Mortgages			Unallocated		Total
Balance as of June 30, 2017	$	24,428		$	35,523		$	6,649		$	-	$	66,600
Charge-offs		(574	)		(6,979	)		(421	)		-		(7,974	)
Recoveries		266			1,446			123			-		1,835
Provision		1,434			6,197			258			-		7,889
Ending Balance as of September 30, 2017	$	25,554		$	36,187		$	6,609		$	-	$	68,350
Balance as of June 30, 2016	$	25,222		$	31,471		$	7,875		$	-	$	64,568
Charge-offs		(637	)		(6,046	)		(142	)		-		(6,825	)
Recoveries		512			898			127			-		1,537
Provision		1,514			6,078			(1,481	)		277		6,388
Ending Balance as of September 30, 2016	$	26,611		$	32,401		$	6,379		$	277	$	65,668

Nine months ended September 30,	Commercial Loans			Consumer Loans			Residential Real Estate Mortgages			Unallocated		Total
Balance as of December 31, 2016	$	25,444		$	33,375		$	6,381		$	-	$	65,200
Charge-offs		(2,991	)		(19,742	)		(1,717	)		-		(24,450	)
Recoveries		919			3,680			166			-		4,765
Provision		2,182			18,874			1,779			-		22,835
Ending Balance as of September 30, 2017	$	25,554		$	36,187		$	6,609		$	-	$	68,350
Balance as of December 31, 2015	$	25,545		$	29,253		$	7,960		$	260	$	63,018
Charge-offs		(1,723	)		(16,409	)		(1,119	)		-		(19,251	)
Recoveries		1,616			2,779			240			-		4,635
Provision		1,173			16,778			(702	)		17		17,266
Ending Balance as of September 30, 2016	$	26,611		$	32,401		$	6,379		$	277	$	65,668

For acquired loans, to the extent that we experience deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loan. There was no allowance for loan losses for the acquired loan portfolio as of September 30, 2017 and $0.7 million as of September 30, 2016. There were no charge-offs related to acquired loans during the three months ended September 30, 2017 and totaled $0.1 million during the three months ended September 30, 2016. Net charge-offs related to acquired loans were $0.7 million and $0.4 million during the nine months ended September 30, 2017 and 2016, respectively and are included in the table above.

16

The following tables illustrate the allowance for loan losses and the recorded investment by portfolio segments:

As of September 30, 2017 (In thousands)	Commercial Loans		Consumer Loans		Residential Real Estate Mortgages		Total
Allowance for loan losses	$	25,554	$	36,187	$	6,609	$	68,350
Allowance for loans individually evaluated for impairment		30		-		-		30
Allowance for loans collectively evaluated for impairment	$	25,524	$	36,187	$	6,609	$	68,320
Ending balance of loans	$	2,962,287	$	2,202,070	$	1,302,577	$	6,466,934
Ending balance of originated loans individually evaluated for impairment	$	4,855	$	8,307	$	6,574	$	19,736
Ending balance of acquired loans collectively evaluated for impairment	$	196,444	$	47,986	$	177,393	$	421,823
Ending balance of originated loans collectively evaluated for impairment	$	2,760,988	$	2,145,777	$	1,118,610	$	6,025,375
As of December 31, 2016
Allowance for loan losses	$	25,444	$	33,375	$	6,381	$	65,200
Allowance for loans individually evaluated for impairment		1,517		-		-		1,517
Allowance for loans collectively evaluated for impairment	$	23,927	$	33,375	$	6,381	$	63,683
Ending balance of loans	$	2,786,002	$	2,149,441	$	1,262,614	$	6,198,057
Ending balance of originated loans individually evaluated for impairment	$	13,070	$	8,488	$	6,111	$	27,669
Ending balance of acquired loans individually evaluated for impairment	$	1,205	$	-	$	-	$	1,205
Ending balance of acquired loans collectively evaluated for impairment	$	236,413	$	63,005	$	199,471	$	498,889
Ending balance of originated loans collectively evaluated for impairment	$	2,535,314	$	2,077,948	$	1,057,032	$	5,670,294

17

Credit Quality of Loans

For all loan classes within the Company’s loan portfolio, loans are placed on nonaccrual status when timely collection of principal and interest in accordance with contractual terms is doubtful. Loans are transferred to nonaccrual status generally when principal or interest payments become ninety days delinquent, unless the loan is well-secured and in the process of collection or sooner when management concludes or circumstances indicate that borrowers may be unable to meet contractual principal or interest payments. When a loan is transferred to a nonaccrual status, all interest previously accrued in the current period but not collected is reversed against interest income in that period. Any payment received on a nonaccrual loan is applied to principal. For all loan classes within the Company’s loan portfolio, nonaccrual loans are returned to accrual status when they become current as to principal and interest and demonstrate a period of performance under the contractual terms and, in the opinion of management, are fully collectible as to principal and interest. For loans in all portfolios, the principal amount is charged off in full or in part as soon as management determines, based on available facts, that the collection of principal in full is improbable. For commercial loans, management considers specific facts and circumstances relative to individual credits in making such a determination. For consumer and residential loan classes, management uses specific guidance and thresholds from the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy.

18

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

As of September 30, 2017(In thousands)	31-60 Days Past Due Accruing		61-90 Days Past Due Accruing		Greater Than 90 Days Past Due Accruing		Total Past Due Accruing		Nonaccrual		Current		Recorded Total Loans
Originated
Commercial Loans:
Commercial	$	1	$	156	$	-	$	157	$	430	$	732,535	$	733,122
Commercial Real Estate		1,274		-		-		1,274		2,020		1,477,265		1,480,559
Agricultural		-		-		-		-		391		34,448		34,839
Agricultural Real Estate		234		-		-		234		1,658		33,499		35,391
Business Banking		2,057		91		-		2,148		4,640		475,144		481,932
Total Commercial Loans	$	3,566	$	247	$	-	$	3,813	$	9,139	$	2,752,891	$	2,765,843
Consumer Loans:
Indirect	$	18,755	$	5,112	$	2,452	$	26,319	$	2,069	$	1,602,890	$	1,631,278
Home Equity		2,933		628		213		3,774		2,790		452,189		458,753
Direct		319		47		79		445		78		63,530		64,053
Total Consumer Loans	$	22,007	$	5,787	$	2,744	$	30,538	$	4,937	$	2,118,609	$	2,154,084
Residential Real Estate Mortgages	$	3,812	$	246	$	597	$	4,655	$	6,180	$	1,114,349	$	1,125,184
Total Originated Loans	$	29,385	$	6,280	$	3,341	$	39,006	$	20,256	$	5,985,849	$	6,045,111
Acquired
Commercial Loans:
Commercial	$	-	$	-	$	-	$	-	$	-	$	39,037	$	39,037
Commercial Real Estate		-		-		-		-		501		112,810		113,311
Business Banking		355		275		-		630		773		42,693		44,096
Total Commercial Loans	$	355	$	275	$	-	$	630	$	1,274	$	194,540	$	196,444
Consumer Loans:
Indirect	$	29	$	8	$	3	$	40	$	30	$	2,084	$	2,154
Home Equity		307		-		-		307		160		42,510		42,977
Direct		32		26		7		65		8		2,782		2,855
Total Consumer Loans	$	368	$	34	$	10	$	412	$	198	$	47,376	$	47,986
Residential Real Estate Mortgages	$	660	$	100	$	37	$	797	$	1,725	$	174,871	$	177,393
Total Acquired Loans	$	1,383	$	409	$	47	$	1,839	$	3,197	$	416,787	$	421,823
Total Loans	$	30,768	$	6,689	$	3,388	$	40,845	$	23,453	$	6,402,636	$	6,466,934

19

As of December 31, 2016 (In thousands)	31-60 Days Past Due Accruing		61-90 Days Past Due Accruing		Greater Than 90 Days Past Due Accruing		Total Past Due Accruing		Nonaccrual		Current		Recorded Total Loans
Originated
Commercial Loans:
Commercial	$	33	$	5	$	-	$	38	$	2,964	$	650,568	$	653,570
Commercial Real Estate		-		-		-		-		7,935		1,343,854		1,351,789
Agricultural		-		-		-		-		730		37,186		37,916
Agricultural Real Estate		-		-		-		-		1,803		30,619		32,422
Business Banking		1,609		318		-		1,927		4,860		465,900		472,687
Total Commercial Loans	$	1,642	$	323	$	-	$	1,965	$	18,292	$	2,528,127	$	2,548,384
Consumer Loans:
Indirect	$	19,253	$	4,185	$	2,499	$	25,937	$	2,145	$	1,538,593	$	1,566,675
Home Equity		3,416		1,065		528		5,009		2,851		448,797		456,657
Direct		452		125		20		597		107		62,400		63,104
Total Consumer Loans	$	23,121	$	5,375	$	3,047	$	31,543	$	5,103	$	2,049,790	$	2,086,436
Residential Real Estate Mortgages	$	2,725	$	172	$	1,406	$	4,303	$	6,682	$	1,052,158	$	1,063,143
Total Originated Loans	$	27,488	$	5,870	$	4,453	$	37,811	$	30,077	$	5,630,075	$	5,697,963
Acquired
Commercial Loans:
Commercial	$	-	$	-	$	-	$	-	$	-	$	49,447	$	49,447
Commercial Real Estate		-		-		-		-		1,891		135,398		137,289
Business Banking		236		-		-		236		804		49,842		50,882
Total Commercial Loans	$	236	$	-	$	-	$	236	$	2,695	$	234,687	$	237,618
Consumer Loans:
Indirect		100		5		-		105		47		8,541		8,693
Home Equity		254		53		30		337		237		50,553		51,127
Direct		30		2		-		32		20		3,133		3,185
Total Consumer Loans	$	384	$	60	$	30	$	474	$	304	$	62,227	$	63,005
Residential Real Estate Mortgages	$	609	$	28	$	327	$	964	$	2,636	$	195,871	$	199,471
Total Acquired Loans	$	1,229	$	88	$	357	$	1,674	$	5,635	$	492,785	$	500,094
Total Loans	$	28,717	$	5,958	$	4,810	$	39,485	$	35,712	$	6,122,860	$	6,198,057

There were no material commitments to extend further credit to borrowers with nonperforming loans as of September 30, 2017 and December 31, 2016.

20

Impaired Loans

The methodology used to establish the allowance for loan losses on impaired loans incorporates specific allocations on loans analyzed individually. Classified loans, including all trouble debt restructured loans (“TDRs”) and nonaccrual commercial loans that are graded Substandard or below, with outstanding balances equal to or greater than $0.8 million are evaluated for impairment through the Company’s quarterly status review process. In determining whether we are able to collect all principal and interest payments due in accordance with the contractual terms of the loan agreements, we consider factors such as payment history and changes in the financial condition of individual borrowers, local economic conditions, historical loss experience and the conditions of the various markets in which the collateral may be liquidated. For loans that are evaluated for impairment, impairment is measured by one of three methods: 1) the fair value of collateral less cost to sell, 2) present value of expected future cash flows or 3) the loan’s observable market price. These impaired loans are reviewed on a quarterly basis for changes in the level of impairment. Any change to the previously recognized impairment loss is recognized as a change to the allowance account and recorded in the unaudited interim consolidated statements of income as a component of the provision for loan losses.

The following table provides information on loans specifically evaluated for impairment:

	September 30, 2017							December 31, 2016
(In thousands)	Recorded Investment Balance (Book)		Unpaid Principal Balance (Legal)		Related Allowance			Recorded Investment Balance (Book)		Unpaid Principal Balance (Legal)		Related Allowance
Originated
With no related allowance recorded:
Commercial Loans:
Commercial	$	-	$	251				$	1,278	$	1,697
Commercial Real Estate		2,239		3,996					3,816		3,841
Agricultural		100		112					130		137
Agricultural Real Estate		1,491		1,663					1,434		1,567
Business Banking		947		1,687					655		728
Total Commercial Loans	$	4,777	$	7,709				$	7,313	$	7,970
Consumer Loans:
Indirect		36		47					5		16
Home Equity		8,153		10,063					8,483		9,429
Direct		118		118					-		-
Total Consumer Loans	$	8,307	$	10,228				$	8,488	$	9,445
Residential Real Estate Mortgages		6,574		8,335					6,111		6,906
Total	$	19,658	$	26,272				$	21,912	$	24,321
With an allowance recorded:
Commercial Loans:
Commercial Real Estate	$	78	$	83		$	30	$	5,553	$	5,736		$	735
Agricultural		-		-			-		49		49			37
Agricultural Real Estate		-		-			-		155		155			54
Total Commercial Loans	$	78	$	83		$	30	$	5,757	$	5,940		$	826
Acquired
With an allowance recorded:
Commercial Loans:
Commercial Real Estate	$	-	$	-		$	-	$	1,205	$	1,321		$	691
Total Commercial Loans	$	-	$	-		$	-	$	1,205	$	1,321		$	691
Total:	$	19,736	$	26,355		$	30	$	28,874	$	31,582		$	1,517

21

The following tables summarize the average recorded investments on impaired loans specifically evaluated for impairment and the interest income recognized:

	For the three months ended
	September 30, 2017				September 30, 2016
(In thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Originated
Commercial Loans:
Commercial	$	1,000	$	-	$	3,204	$	-
Commercial Real Estate		2,415		48		15,799		48
Agricultural		115		-		85		-
Agricultural Real Estate		1,505		11		935		11
Business Banking		955		2		743		-
Consumer Loans:
Indirect		35		1		8		-
Home Equity		8,159		111		8,401		116
Direct		119		2		-		-
Residential Real Estate Mortgage		6,633		82		6,141		76
Total Originated	$	20,936	$	257	$	35,316	$	251
Acquired
Commercial Loans:
Commercial Real Estate	$	-	$	-	$	1,205	$	-
Total Acquired	$	-	$	-	$	1,205	$	-
Total Loans	$	20,936	$	257	$	36,521	$	251

	For the nine months ended
	September 30, 2017				September 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Originated
Commercial Loans:
Commercial	$	2,393	$	-	$	3,041	$	-
Commercial Real Estate		3,906		93		14,782		122
Agricultural		147		1		101		1
Agricultural Real Estate		1,545		32		742		33
Business Banking		837		7		882		7
Consumer Loans:
Indirect		22		2		9		-
Home Equity		8,274		331		8,207		357
Direct		119		2		-		-
Residential Real Estate Mortgage		6,425		211		6,147		211
Total Originated	$	23,668	$	679	$	33,911	$	731
Acquired
Commercial Loans:
Commercial Real Estate	$	121	$	-	$	1,205	$	-
Total Acquired	$	121	$	-	$	1,205	$	-
Total Loans	$	23,789	$	679	$	35,116	$	731

22

Credit Quality Indicators

The Company has developed an internal loan grading system to evaluate and quantify the Company’s loan portfolio with respect to quality and risk. The system focuses on, among other things, financial strength of borrowers, experience and depth of borrower’s management, primary and secondary sources of repayment, payment history, nature of the business and outlook on particular industries. The internal grading system enables the Company to monitor the quality of the entire loan portfolio on a consistent basis and provide management with an early warning system, enabling recognition and response to problem loans and potential problem loans.

Commercial Grading System

For commercial and agricultural loans, the Company uses a grading system that relies on quantifiable and measurable characteristics when available. This would include comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy and comparison of credit history to stated repayment terms and industry averages. Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment and management. Classified loans are graded Doubtful, Substandard, Special Mention and Pass.

● Doubtful

A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as a loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Nonaccrual treatment is required for Doubtful assets because of the high probability of loss.

● Substandard

Substandard loans have a high probability of payment default or they have other well-defined weaknesses. They require more intensive supervision by bank management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some Substandard loans, the likelihood of full collection of interest and principal may be in doubt and those loans should be placed on nonaccrual. Although Substandard assets in the aggregate will have a distinct potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated Substandard.

● Special Mention

Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These loans pose elevated risk, but their weakness does not yet justify a Substandard classification. Borrowers may be experiencing adverse operating trends (i.e., declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (i.e., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a Special Mention rating. Although a Special Mention loan has a higher probability of default than a Pass asset, its default is not imminent.

● Pass

Loans graded as Pass encompass all loans not graded as Doubtful, Substandard or Special Mention. Pass loans are in compliance with loan covenants and payments are generally made as agreed. Pass loans range from superior quality to fair quality.

23

Business Banking Grading System

Business banking loans are graded as either Classified or Non-classified:

● Classified

Classified loans are inadequately protected by the current worth and paying capacity of the obligor or, if applicable, the collateral pledged. These loans have a well-defined weakness or weaknesses, that jeopardize the liquidation of the debt or in some cases make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Classified loans have a high probability of payment default or a high probability of total or substantial loss. These loans require more intensive supervision by management and are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. When the likelihood of full collection of interest and principal may be in doubt, Classified loans are considered to have a nonaccrual status. In some cases, Classified loans are considered uncollectible and of such little value that their continuance as assets is not warranted.

● Non-classified

Loans graded as Non-classified encompass all loans not graded as Classified. Non-classified loans are in compliance with loan covenants and payments are generally made as agreed.

Consumer and Residential Mortgage Grading System

Consumer and Residential Mortgage loans are graded as either Performing or Nonperforming. 

● Nonperforming

Nonperforming loans are loans that are 1) over 90 days past due and interest is still accruing or 2) on nonaccrual status.

● Performing

All loans not meeting any of these criteria are considered Performing.

24

The following tables illustrate the Company’s credit quality by loan class:

As of September 30, 2017
(In thousands)
Originated
Commercial Credit Exposure By Internally Assigned Grade:	Commercial		Commercial Real Estate		Agricultural		Agricultural Real Estate		Total
Pass	$	677,943	$	1,424,353	$	30,233	$	25,546	$	2,158,075
Special Mention		40,123		29,785		3,033		3,343		76,284
Substandard		15,056		26,421		1,573		6,502		49,552
Total	$	733,122	$	1,480,559	$	34,839	$	35,391	$	2,283,911
Business Banking Credit Exposure By Internally Assigned Grade:							Business Banking		Total
Non-classified							$	469,025	$	469,025
Classified								12,907		12,907
Total							$	481,932	$	481,932
Consumer Credit Exposure By Payment Activity:			Indirect		Home Equity		Direct		Total
Performing			$	1,626,757	$	455,750	$	63,896	$	2,146,403
Nonperforming				4,521		3,003		157		7,681
Total			$	1,631,278	$	458,753	$	64,053	$	2,154,084
Residential Mortgage Credit Exposure By Payment Activity:							Residential Mortgage		Total
Performing							$	1,118,407	$	1,118,407
Nonperforming								6,777		6,777
Total							$	1,125,184	$	1,125,184

25

As of September 30, 2017
(In thousands)
Acquired
Commercial Credit Exposure By Internally Assigned Grade:			Commercial		Commercial Real Estate		Total
Pass			$	37,271	$	106,261	$	143,532
Special Mention				327		512		839
Substandard				1,439		6,538		7,977
Total			$	39,037	$	113,311	$	152,348
Business Banking Credit Exposure By Internally Assigned Grade:					Business Banking		Total
Non-classified					$	40,636	$	40,636
Classified						3,460		3,460
Total					$	44,096	$	44,096
Consumer Credit Exposure By Payment Activity:	Indirect		Home Equity		Direct		Total
Performing	$	2,121	$	42,817	$	2,840	$	47,778
Nonperforming		33		160		15		208
Total	$	2,154	$	42,977	$	2,855	$	47,986
Residential Mortgage Credit Exposure By Payment Activity:					Residential Mortgage		Total
Performing					$	175,631	$	175,631
Nonperforming						1,762		1,762
Total					$	177,393	$	177,393

26

As of December 31, 2016
(In thousands)
Originated
Commercial Credit Exposure By Internally Assigned Grade:	Commercial		Commercial Real Estate		Agricultural		Agricultural Real Estate		Total
Pass	$	616,829	$	1,288,409	$	36,762	$	28,912	$	1,970,912
Special Mention		7,750		31,053		25		1,896		40,724
Substandard		28,991		32,327		1,124		1,614		64,056
Doubtful		-		-		5		-		5
Total	$	653,570	$	1,351,789	$	37,916	$	32,422	$	2,075,697
Business Banking Credit Exposure By Internally Assigned Grade:							Business Banking		Total
Non-classified							$	458,864	$	458,864
Classified								13,823		13,823
Total							$	472,687	$	472,687
Consumer Credit Exposure By Payment Activity:			Indirect		Home Equity		Direct		Total
Performing			$	1,562,031	$	453,278	$	62,977	$	2,078,286
Nonperforming				4,644		3,379		127		8,150
Total			$	1,566,675	$	456,657	$	63,104	$	2,086,436
Residential Mortgage Credit Exposure By Payment Activity:							Residential Mortgage		Total
Performing							$	1,055,055	$	1,055,055
Nonperforming								8,088		8,088
Total							$	1,063,143	$	1,063,143

27

As of December 31, 2016
(In thousands)
Acquired
Commercial Credit Exposure By Internally Assigned Grade:			Commercial		Commercial Real Estate		Total
Pass			$	48,194	$	127,660	$	175,854
Special Mention				76		1,231		1,307
Substandard				1,177		7,193		8,370
Doubtful				-		1,205		1,205
Total			$	49,447	$	137,289	$	186,736
Business Banking Credit Exposure By Internally Assigned Grade:					Business Banking		Total
Non-classified					$	47,347	$	47,347
Classified						3,535		3,535
Total					$	50,882	$	50,882
Consumer Credit Exposure By Payment Activity:	Indirect		Home Equity		Direct		Total
Performing	$	8,646	$	50,860	$	3,165	$	62,671
Nonperforming		47		267		20		334
Total	$	8,693	$	51,127	$	3,185	$	63,005
Residential Mortgage Credit Exposure By Payment Activity:					Residential Mortgage		Total
Performing					$	196,508	$	196,508
Nonperforming						2,963		2,963
Total					$	199,471	$	199,471

Troubled Debt Restructured Loans

Substantially all of these modifications included one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; temporary reduction in the interest rate; or change in scheduled payment amount.

When the Company modifies a loan, management evaluates any possible impairment based on the present value of the expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized.  

28

The following tables illustrate the recorded investment and number of modifications for modified loans, including the recorded investment in the loans prior to a modification and the recorded investment in the loans after restructuring:

	Three months ended September 30, 2017
(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Consumer
Indirect		1	$	7	$	7
Home Equity		4		189		222
Total Consumer		5		196		229
Residential Real Estate		1		518		518
Total Troubled Debt Restructurings		6	$	714	$	747

	Three months ended September 30, 2016
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Consumer
Home Equity		10	$	580	$	556
Total Consumer		10		580		556
Residential Real Estate		4		230		126
Total Troubled Debt Restructurings		14	$	810	$	682

	Nine months ended September 30, 2017
(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial
Commercial		1	$	3,300	$	3,239
Business Banking		1		337		333
Total Commercial		2		3,637		3,572
Consumer
Indirect		4		39		37
Home Equity		8		373		414
Direct		1		120		120
Total Consumer		13		532		571
Residential Real Estate		8		1,066		1,068
Total Troubled Debt Restructurings		23	$	5,235	$	5,211

	Nine months ended September 30, 2016
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Consumer
Home Equity		24	$	1,690	$	1,567
Total Consumer		24		1,690		1,567
Residential Real Estate		10		914		692
Total Troubled Debt Restructurings		34	$	2,604	$	2,259

29

TDRs occurring during the three and nine months ended September 30, 2017 and 2016 were due to the reduction in the interest rate or extension of the term. The following table illustrates the recorded investment and number of modifications for TDRs where a concession has been made and subsequently defaulted during the period:

	Three months ended September 30, 2017				Three months ended September 30, 2016
(Dollars in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial
Commercial		-	$	-		1	$	169
Total Commercial		-		-		1		169
Consumer
Indirect		1		13		-		-
Home Equity		12		622		17		847
Total Consumer		13		635		17		847
Residential Real Estate		6		546		8		485
Total Troubled Debt Restructurings		19	$	1,181		26	$	1,501

	Nine months ended September 30, 2017				Nine months ended September 30, 2016
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial
Commercial		1	$	145		1	$	169
Business Banking		1		329		1		67
Total Commercial		2		474		2		236
Consumer
Indirect		2		19		-		-
Home Equity		30		1,381		30		1,634
Total Consumer		32		1,400		30		1,634
Residential Real Estate		12		817		15		1,075
Total Troubled Debt Restructurings		46	$	2,691		47	$	2,945

5. Defined Benefit Post-retirement Plans

The Company has a qualified, noncontributory, defined benefit pension plan (“the Plan”) covering substantially all of its employees at September 30, 2017. 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 Employee Retirement Income Security Act of 1974 standards. Assets of the Plan are invested in publicly traded stocks and mutual funds. The Company is not required to make contributions to the Plan in 2017 and did not do so during the three and nine months ended September 30, 2017. The Company was not required to make contributions during the three and nine months ended September 30, 2016. However, the Company made contributions to the plan totaling $5.6 million during the three months ended September 30, 2016.

In addition to the Plan, the Company also 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 Financial Corporation (“Alliance”) acquisition. These supplemental employee retirement plans and the Plan are collectively referred to herein as “Pension Benefits.”

In addition, 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 the Company on or before January 1, 2000 are eligible to receive post-retirement health care benefits. 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.”

The components of expense for Pension Benefits and Other Benefits are set forth below:

	Pension Benefits						Other Benefits
(In thousands)	Three months ended September 30,						Three months ended September 30,
Components of net periodic (benefit) cost:	2017			2016			2017		2016
Service cost	$	329		$	534		$	3	$	3
Interest cost		1,043			1,050			88		89
Expected return on plan assets		(1,976	)		(1,857	)		-		-
Net amortization		454			504			26		15
Total (benefit) cost	$	(150	)	$	231		$	117	$	107

30

	Pension Benefits						Other Benefits
	Nine months ended September 30,						Nine months ended September 30,
Components of net periodic (benefit) cost:	2017			2016			2017		2016
Service cost	$	1,133		$	1,654		$	9	$	10
Interest cost		3,127			3,151			259		277
Expected return on plan assets		(5,946	)		(5,527	)		-		-
Net amortization		1,284			1,471			66		73
Total (benefit) cost	$	(402	)	$	749		$	334	$	360

6. Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (such as the Company’s dilutive stock options and restricted stock units).

The following is a reconciliation of basic and diluted EPS for the periods presented in the unaudited interim consolidated statements of income:

Three months ended September 30,	2017		2016
(In thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding		43,595		43,200
Net income available to common stockholders	$	22,876	$	20,001
Basic EPS	$	0.52	$	0.46
Diluted EPS:
Weighted average common shares outstanding		43,595		43,200
Dilutive effect of common stock options and restricted stock		320		362
Weighted average common shares and common share equivalents		43,915		43,562
Net income available to common stockholders	$	22,876	$	20,001
Diluted EPS	$	0.52	$	0.46

Nine months ended September 30,	2017		2016
(In thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding		43,563		43,214
Net income available to common stockholders	$	64,514	$	58,801
Basic EPS	$	1.48	$	1.36
Diluted EPS:
Weighted average common shares outstanding		43,563		43,214
Dilutive effect of common stock options and restricted stock		329		366
Weighted average common shares and common share equivalents		43,892		43,580
Net income available to common stockholders	$	64,514	$	58,801
Diluted EPS	$	1.47	$	1.35

There were 3,250 stock options for the quarter ended September 30, 2017 and no stock options for the quarter ended September 30, 2016, that were not considered in the calculation of diluted EPS since the stock options’ exercise price was greater than the average market price during these periods.

There were 3,014 and 36,865 stock options for the nine months ended September 30, 2017 and September 30, 2016, respectively, that were not considered in the calculation of diluted EPS since the stock options’ exercise price was greater than the average market price during these periods.

31

7. Reclassification Adjustments Out of Other Comprehensive Income

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

Detail About Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income						Affected Line item in the Consolidated Statement of Comprehensive Income
(In thousands)	Three months ended
	September 30, 2017			September 30, 2016
AFS Securities:
Losses on AFS securities	$	4		$	-		Net securities gains
Amortization of unrealized gains and losses related to securities transfer		212			267		Interest income
Income tax (expense)		(83	)		(105	)	Income tax (expense)
Net of tax	$	133		$	162
Pension and other benefits:
Amortization of net losses	$	481		$	565		Salaries and employee benefits
Amortization of prior service costs		(1	)		(46	)	Salaries and employee benefits
Income tax (expense)		(183	)		(202	)	Income tax (expense)
Net of tax	$	297		$	317
Total reclassifications during the period, net of tax	$	430		$	479

Detail About Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income						Affected Line item in the Consolidated Statement of Comprehensive Income
	Nine months ended
	September 30, 2017			September 30, 2016
AFS Securities:
(Gains) losses on AFS securities	$	2			(30	)	Net securities gains
Amortization of unrealized gains and losses related to securities transfer		675			843		Interest income
Impairment write-down of equity security		1,312			-		Other noninterest income
Income tax (expense)		(760	)		(317	)	Income tax (expense)
Net of tax	$	1,229		$	496
Pension and other benefits:
Amortization of net losses	$	1,351		$	1,595		Salaries and employee benefits
Amortization of prior service costs		(1	)		(51	)	Salaries and employee benefits
Income tax (expense)		(516	)		(601	)	Income tax (expense)
Net of tax	$	834		$	943
Total reclassifications during the period, net of tax	$	2,063		$	1,439

8. Fair Value Measurements and Fair Value of Financial Instruments

GAAP states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are not adjusted for transaction costs. A fair value hierarchy exists within GAAP that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 -  Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

32

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, many other sovereign government obligations, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. The Company does not adjust the quoted prices for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid agency securities, less liquid listed equities, state, municipal and provincial obligations and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy. Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). Other investment securities are reported at fair value utilizing Level 1 and Level 2 inputs. The prices for Level 2 instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, amount other things. Management reviews the methodologies used in pricing the securities by its third party providers.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets and changes in financial ratios or cash flows.

For the three and nine month periods ended September 30, 2017, the Company has made no transfers of assets between Level 1 and Level 2 and has had no Level 3 activity.

33

The following tables set forth the Company’s financial assets and liabilities measured on a recurring basis that were accounted for at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement: 

(In thousands)	Level 1		Level 2		Level 3		Balance as of September 30, 2017
Assets:
AFS securities:
Federal agency	$	-	$	139,418	$	-	$	139,418
State & municipal		-		42,919		-		42,919
Mortgage-backed		-		584,226		-		584,226
Collateralized mortgage obligations		-		571,312		-		571,312
Other securities		11,438		8,301		-		19,739
Total AFS securities	$	11,438	$	1,346,176	$	-	$	1,357,614
Trading securities		10,883		-		-		10,883
Derivatives		-		6,653		-		6,653
Total	$	22,321	$	1,352,829	$	-	$	1,375,150
Liabilities:
Derivatives	$	-	$	4,128	$	-	$	4,128
Total	$	-	$	4,128	$	-	$	4,128

(In thousands)	Level 1		Level 2		Level 3		Balance as of December 31, 2016
Assets:
AFS securities:
Federal agency	$	-	$	174,408	$	-	$	174,408
State & municipal		-		46,726		-		46,726
Mortgage-backed		-		529,844		-		529,844
Collateralized mortgage obligations		-		566,573		-		566,573
Other securities		11,493		9,246		-		20,739
Total AFS securities	$	11,493	$	1,326,797	$	-	$	1,338,290
Trading securities		9,259		-		-		9,259
Derivatives		-		3,210		-		3,210
Total	$	20,752	$	1,330,007	$	-	$	1,350,759
Liabilities:
Derivatives	$	-	$	506	$	-	$	506
Total	$	-	$	506	$	-	$	506

GAAP requires disclosure of assets and liabilities measured and recorded at fair value on a non-recurring basis such as loans held for sale, other real estate owned, collateral-dependent impaired loans, mortgage servicing rights and held to maturity securities. The only non-recurring fair value measurements recorded during the three and nine month periods ended  September 30, 2017 and September 30, 2016 were related to impaired loans and a write-down of other real estate owned. The Company uses the fair value of underlying collateral, less costs to sell, to estimate the specific reserves for collateral dependent impaired loans. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses ranging from 10% to 35%. Based on the valuation techniques used, the fair value measurements for collateral dependent impaired loans are classified as Level 3. As of September 30, 2017 and December 31, 2016, the Company had $0.1 million and $7.0 million, respectively, of loans recorded at fair value with specific allowance reserves of $30 thousand and $1.5 million, respectively.

The following table sets forth information with regard to estimated fair values of financial instruments. This table excludes financial instruments for which the carrying amount approximates fair value. Financial instruments for which the fair value approximates carrying value include cash and cash equivalents, securities AFS, trading securities, accrued interest receivable, non-maturity deposits, short-term borrowings, accrued interest payable and interest rate swaps.

34

			September 30, 2017				December 31, 2016
(In thousands)	Fair Value Hierarchy		Carrying amount		Estimated fair value		Carrying amount		Estimated fair value
Financial assets
HTM securities		2	$	494,309	$	495,411	$	527,948	$	525,050
Net loans		3		6,398,584		6,557,674		6,132,857		6,273,233
Financial liabilities
Time deposits		2	$	776,756	$	773,160	$	872,411	$	868,153
Long-term debt		2		88,914		88,948		104,087		104,113
Junior subordinated debt		2		101,196		104,584		101,196		102,262

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature, and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial trust and investment management operation that contributes net fee income annually. The trust and investment management operation is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities include the benefits resulting from the low-cost funding of deposit liabilities as compared to the cost of borrowing funds in the market and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimate of fair value.

Securities Held to Maturity

The fair value of the Company’s investment securities held to maturity is primarily measured using information from a third party pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Net Loans

The fair value of the Company’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made for the same remaining maturities. Loans were first segregated by type and then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

Time Deposits

The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

Long-Term Debt

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

Junior Subordinated Debt

The fair value of junior subordinated debt has been estimated using a discounted cash flow analysis.

35

Interest Rate Swaps

The Company enters into interest rate swaps to facilitate customer transactions and meet their financing needs. These swaps are considered derivatives, but are not designated in hedging relationships. These instruments have interest rate and credit risk associated with them. To mitigate the interest rate risk, the Company enters into offsetting interest rate swaps with counterparties. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Interest rate swaps are recorded within other assets or other liabilities on the unaudited interim consolidated balance sheet at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the unaudited interim consolidated statement of income. At September 30, 2017 the notional amount of these customer derivative agreements and the offsetting derivative counterparty positions each totaled $469.8 million and the fair values included in other assets and other liabilities on the unaudited interim consolidated balance sheet applicable to these agreements amounted to $3.9 million. At December 31, 2016, the notional amount of these customer derivative agreements and the offsetting derivative counterparty positions each totaled $371.1 million and the fair values included in other assets and other liabilities on the unaudited interim consolidated balance sheet applicable to these agreements amounted to $0.3 million.

In 2016, the Company entered into interest rate swaps to modify the interest rate characteristics of certain short-term Federal Home Loan Bank advances from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market interest rate changes. These agreements are designated as cash flow hedges. The notional amount of these interest rate derivative agreements total $250.0 million at September 30, 2017. Fair values included in other assets on the unaudited interim consolidated balance sheet applicable to these agreements amounted to $2.7 million at September 30, 2017 and $2.9 million at December 31, 2016. Fair values included in other liabilities on the unaudited interim consolidated balance sheet applicable to these agreements amounted to $0.2 million at September 30, 2017 and December 31, 2016, respectively.

9. Commitments and Contingencies

The Company is a party to financial instruments in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuating interest rates. These financial instruments include commitments to extend credit, unused lines of credit and standby letters of credit. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit origination guidelines, portfolio maintenance and management procedures as other credit and off-balance sheet products. Commitments to extend credit and unused lines of credit totaled $1.6 billion at September 30, 2017 and $1.5 billion at December 31, 2016.  Since commitments to extend credit and unused lines of credit may expire without being fully drawn upon, this amount does not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management’s credit evaluation of the borrower and may include accounts receivable, inventory, property, land and other items.

The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third parties. These standby letters of credit are frequently issued in support of third party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The credit risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and they are subject to the same credit origination guidelines, portfolio maintenance and management procedures as other credit and off-balance sheet products. Typically, these instruments have terms of five years or less and expire unused; therefore, the total amounts do not necessarily represent future cash commitments. Standby letters of credit totaled $40.9 million at September 30, 2017 and $36.8 million at December 31, 2016.  As of September 30, 2017, the fair value of standby letters of credit was not significant to the Company’s unaudited interim consolidated financial statements.

10. Recent Accounting Pronouncements

Recently Adopted Accounting Standards

Effective January 1, 2017, the Company adopted the provision of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 requires several revisions to equity compensation accounting. Under the new guidance all excess tax benefits and deficiencies that occur when an award vests, is exercised or expires are recognized in income tax expense as discrete period items. Previously, these transactions were typically recorded directly within equity. Consistent with this change, excess tax benefits and deficiencies are no longer included within estimated proceeds when performing the treasury stock method for calculating diluted earnings per share. Excess tax benefits are also recognized at the time an award is exercised or vests compared to the previous requirements to delay recognition until the deduction reduces taxes payable. The presentation of excess tax benefits in the statement of cash flows shifted to an operating activity from the prior classification as a financing activity. ASU 2016-09 also provides an accounting policy election to recognize forfeitures of awards as they occur when estimating stock-based compensation expense rather than the previous requirement to estimate forfeitures from inception. Further, ASU 2016-09 permits employers to use a net settlement feature to withhold taxes on equity compensation awards up to the maximum statutory tax rate without affecting the equity classification of the award.

Transition to the new guidance was accomplished through a combination of cumulative-effect adjustment to equity (forfeitures) and prospective methodologies (cash flows, tax windfalls and shortfalls). The actual effects of adoption in 2017 will primarily depend upon the share price of the common stock, which affects the vesting of certain performance awards, probability of exercise of certain stock options and the magnitude of windfalls for all awards upon either vesting or exercise. The effect on earnings per share calculations and election to account for forfeitures as incurred have not been significant.

Effective July 1, 2017, the Company early adopted the provision of FASB issued ASU No. 2017-04, Intangibles  - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 amends and simplifies the subsequent measurement of goodwill; the amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments were applied on a prospective basis and the adoption did not have a significant impact on the consolidated financial statements.

36

Accounting Standards Issued Not Yet Adopted

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12, which better aligns the accounting and reporting of hedging relationships with the economics of risk management activities. The standard requires the modified retrospective transition approach as of the date of adoption. ASU 2017-12 is effective for the Company on January 1, 2019. Early adoption is permitted. Management is evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures and does not expect the impact to be material.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718). ASU 2017-09 provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. ASU 2017-09 is effective for the Company on January 1, 2018. Management is evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures and does not expect the impact to be material.

In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). ASU 2017-08 requires amortization of premiums to the earliest call date on debt securities with call features that are explicit, on contingent and callable at fixed prices on present dates. The ASU does not impact securities held at a discount; the discount continues to be amortized to the contractual maturity. The guidance is required to be applied with a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. ASU 2017-08 is effective for the Company on January 1, 2019. Early adoption is permitted. Management is evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures and does not expect the impact to be material.

In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715). ASU 2017-07 requires the service cost component of net periodic pension and post-retirement benefit cost to be reported separately in the consolidated statements of income from the other components. Additionally, the amendments in the ASU require presentation of the service cost component in the consolidated statements of income in the same line item as other employee compensation costs and presentation of the other components in a different line item from the service cost component. The amendments in this ASU are required to be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic post-retirement benefit cost in the income statement and prospectively, on or after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic post-retirement benefit in assets with a practical expedient allowed for prior comparative period presentation permitted. ASU 2017-07 is effective for the Company on January 1, 2018. Management is evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures and does not expect the impact to be material.

In February 2017, the FASB issued ASU No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). ASU 2017-05 will clarify the scope of Subtopic 610-20 and add guidance for partial sales of nonfinancial assets. The amendments define the term in substance nonfinancial assets and clarify that a nonfinancial asset within the scope may include nonfinancial assets transferred within a legal entity to a counterparty, in part, as a financial asset promised to a counterparty in a contract. Additionally, the amendments in ASU clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial assets and allocate consideration to each distinct asset. The amendments should be applied either on retrospectively to each period presented or with a modified retrospective approach. ASU 2017-05 is effective for the Company on January 1, 2018 and the Company is required to apply the amendment at the same time that is applies the amendments in 2014-09. Management is evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures and does not expect the impact to be material.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 provides a more robust framework to use in determining when a set of assets and activities (“set”) is a business and to address stakeholder feedback that the definition of a business in current GAAP is applied too broadly. The primary amendments in the ASU provide a screen to exclude transactions where substantially all of the fair value of the transferred set is concentrated in a single asset, or group of similar assets, from being evaluated as a business. ASU 2017-01 is effective for the Company on January 1, 2018 using the prospective method. Management is evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures and does not expect the impact to be material.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 addresses diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing or financing activities or as a combination of those activities in the statement of cash flows. The ASU requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the Statement of Cash Flows. As a result, transfers between such categories will no longer be presented in the Statement of Cash Flows. ASU 2016-18 is effective for the Company on January 1, 2018 using the retrospective method. Management is evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures and does not expect the impact to be material.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments). ASU 2016-15 addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for the Company on January 1, 2018. Management is evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures and does not expect the impact to be material.

37

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for the Company on January 1, 2020. Early adoption is permitted for all organizations for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Management is evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize right of use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right of use asset and lease liability. Additionally, when measuring assets and liabilities arising from a lease, optional payments should be included only if the lessee is reasonable certain to exercise an option to extend the lease, exercise a purchase option or not exercise an option to terminate the lease. ASU 2016-02 is effective for the Company on January 1, 2019. Early adoption is permitted in any interim or annual period. Management is evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments and requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value. Any changes in fair value on equity investments with readily determinable market value will be recognized in net income unless the investments qualify for a new practicability exception. This ASU also requires entities to recognize changes in instrument-specific credit risk related to financial liabilities measured under the fair value option in other comprehensive income. No changes were made to the guidance for classifying and measuring investments in debt securities and loans. ASU 2016-01 is effective for the Company on January 1, 2018. Management is evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures and does not expect the impact to be material.

In May 2014, the FASB issued ASU No. 2014-09 - Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. ASU 2014-09 was initially effective for the Company on January 1, 2017; however, in August 2015, the FASB issued ASU No. 2015-14 - Revenue from Contracts with Customers - Deferral of the Effective Date, which deferred the effective date to January 1, 2018. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08 - Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10 - Identifying Performance Obligations and Licensing, ASU No. 2016-12 - Narrow-Scope Improvements and Practical Expedients and ASU No. 2016-20 - Technical Corrections and Improvements to Top 606 - Revenue from Contract with Customers. The adoption of these ASUs will be required using one of two retrospective application methods beginning with the Company’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2018. The Company plans to apply the modified retrospective method with a cumulative-effect adjustment to opening retained earnings. Management is currently evaluating the potential impact of this guidance on our consolidated financial statements. In evaluating this standard and completing the initial scoping procedures, management has determined that the majority of revenue earned by the Company is from revenue streams not included in the scope of this standard.  Management is currently reviewing the applicable contracts, and based on the results to date, does not expect the adoption of the new revenue recognition guidance to have a material impact on our consolidated financial statements.

38

NBT BANCORP INC. AND SUBSIDIARIES

Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this discussion and analysis is to provide a concise description of the financial condition and results of operations of NBT Bancorp Inc. (“NBT”) and its wholly owned consolidated subsidiaries, including NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”) and NBT Holdings, Inc. (“NBT Holdings”) (collectively referred to herein as the “Company”). This discussion will focus on results of operations, financial condition, capital resources and asset/liability management. Reference should be made to the Company’s consolidated financial statements and footnotes thereto included in this Form 10‑Q as well as to the Company’s Annual Report on Form 10‑K for the year ended December 31, 2016 for an understanding of the following discussion and analysis. Operating results for the three and nine month periods ending September 30, 2017 are not necessarily indicative of the results of the full year ending December 31, 2017 or any future period.

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 nonperforming 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 (“FASB”) 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 those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the Securities and Exchange Commission, 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.

Unless required by law, the Company does not undertake and specifically disclaims any obligations to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Non-GAAP Measures

This Quarterly Report on Form 10-Q 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 Form 10-Q, 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 results of NBT’s core business as well as provide information standard in the financial institution industry. Non-GAAP measures should not be considered substitutes for financial measures determined in accordance with GAAP and investors should consider NBT’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of NBT.

39

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 and 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 appropriate, 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 the Company’s 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.

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 selection of 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 and goodwill and intangible assets are disclosed in Note 1 to the consolidated financial statements presented in our 2016 Annual Report on Form 10-K. All accounting policies are important and as such, the Company encourages the reader to review each of the policies included in Note 1 to the consolidated financial statements presented in our 2016 Annual Report on Form 10-K to obtain a better understanding of how the Company’s financial performance is reported.

Refer to Note 10 to the unaudited interim consolidated financial statements in this Quarterly Report on Form 10-Q for recently adopted accounting standards.

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 average assets, equity and tangible common 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 three and nine months ended September 30, 2017:

· Quarter-to-date earnings per share up 6.1% from the prior quarter and up 13.0% from prior year

· Quarter-to-date net income up 7.1% from the prior quarter and up 14.4% from the prior year

· Year to date annualized loan growth was 5.8%

· Average demand deposits for the nine months ended September 30, 2017 up 9.2% from the same period in 2016

40

Results of Operations

Net income for the three months ended September 30, 2017 was $22.9 million, up from $20.0 million for the same period last year. Diluted earnings per share for the three months ended September 30, 2017 was $0.52, as compared with $0.46 for the third quarter of 2016. Return on average assets (annualized) was 1.00% for the three months ended September 30, 2017 as compared to 0.92% for the same period last year. Return on average equity (annualized) was 9.55% for the three months ended September 30, 2017 as compared to 8.80% for the three months ended September 30, 2016. Return on average tangible common equity (annualized) was 13.99% for the three months ended September 30, 2017 as compared to 13.16% for the three months ended September 30, 2016.

Net income for the nine months ended September 30, 2017 was $64.5 million, up from $58.8 million for the same period last year. Diluted earnings per share for the nine months ended September 30, 2017 was $1.47, up from $1.35 for the same period last year. Return on average assets (annualized) was 0.96% for the nine months ended September 30, 2017 as compared to 0.92% for the same period last year. Return on average equity (annualized) was 9.20% for the nine months ended September 30, 2017 as compared to 8.81% for the nine months ended September 30, 2016. Return on average tangible common equity (annualized) was 13.57% for the nine months ended September 30, 2017 as compared to 13.29% for the nine months ended September 30, 2016.

Return on average tangible common equity is a non-GAAP measure and excludes amortization of intangible assets (net of tax) from net income and average tangible equity calculated as follows:

	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2017		2016		2017		2016
Net income	$	22,876	$	20,001	$	64,514	$	58,801
Amortization of intangible assets (net of tax)		613		582		1,852		1,818
Net income, excluding intangible amortization	$	23,489	$	20,583	$	66,366	$	60,619
Average stockholders’ equity	$	950,557	$	904,445	$	937,279	$	891,650
Less: average goodwill and other intangibles		284,536		282,307		283,580		282,255
Average tangible common equity	$	666,021	$	622,138	$	653,699	$	609,395

Net Interest Income

Net interest income is the difference between interest income on earning assets, primarily loans and securities and interest expense on interest bearing liabilities, primarily deposits and borrowings. Net interest income is affected by the interest rate spread, the difference between the yield on earning assets and cost of interest bearing liabilities, as well as the volumes of such assets and liabilities. Net interest income is one of the key determining factors in a financial institution’s performance as it is the principal source of earnings.

Net interest income was $71.9 million for the third quarter of 2017, up $2.3 million, or 3.3%, from the previous quarter. Fully taxable-equivalent (“FTE”) net interest margin was 3.47% for the three months ended September 30, 2017, up from 3.44% for the previous quarter. The yield on average earning assets increased five basis points (“bps”) from the prior quarter at 3.80%, and the cost of interest bearing liabilities increased three basis points to 0.47% driven by seasonal deposit migration and higher interest rates on borrowings. Average interest earning assets were up $113.4 million, or 1.4%, as compared to the prior quarter, primarily driven by an $106.2 million increase in loans.

Net interest income was $71.9 million for the third quarter of 2017, up $5.3 million, or 7.9%, from the third quarter of 2016. FTE net interest margin of 3.47% was up seven bps from the third quarter of 2016 as the improvement in asset yields were partially offset by the increase in cost of interest bearing liabilities. Average interest earning assets were up $431.3 million, or 5.5%, from the same period in 2016, which was primarily driven by a $307.9 million increase in loans and a $129.3 million increase in securities.

Net interest income for the first nine months of 2017 was $210.0 million, up $13.0 million, or 6.6%, from the same period in 2016. FTE net interest margin of 3.46% for the nine months ended September 30, 2017, was up from 3.44% for the same period in 2016. Average interest earning assets were up $476.3 million, or 6.1%, for the nine months ended September 30, 2017, as compared to the same period in 2016, which was driven by a $307.4 million increase in loans and a $166.1 million increase in securities. Interest income increased $15.3 million, or 7.2% due to the increase in earning assets combined with a four bp improvement in asset yields. Interest expense was up $2.3 million, or 13.7%, for the nine months ended September 30, 2017 as compared to the same period in 2016 and resulted primarily from a three bp increase in rates driven by higher borrowing costs and increase in the average balance of interest bearing liabilities.

41

Average Balances and Net Interest Income

The following tables include 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%.

Three months ended,
	September 30, 2017							September 30, 2016
(Dollars in thousands)	Average Balance		Interest		Yield/ Rates			Average Balance		Interest		Yield/ Rates
Assets:
Short-term interest bearing accounts	$	9,000	$	55		2.42	%	$	21,279	$	29		0.54	%
Securities available for sale (1)(2)		1,374,739		7,373		2.13	%		1,257,335		6,112		1.93	%
Securities held to maturity (1)		506,324		3,396		2.66	%		494,400		3,158		2.54	%
Investment in FRB and FHLB stock		49,902		682		5.42	%		43,552		509		4.65	%
Loans (3)		6,400,287		68,302		4.23	%		6,092,371		63,601		4.15	%
Total interest earning assets		8,340,252	$	79,808		3.80	%		7,908,937	$	73,409		3.69	%
Other assets		759,636							754,813
Total assets	$	9,099,888						$	8,663,750
Liabilities and stockholders’ equity:
Money market deposit accounts	$	1,652,730	$	978		0.23	%	$	1,636,815	$	888		0.22	%
NOW deposit accounts		1,130,940		272		0.10	%		1,053,590		134		0.05	%
Savings deposits		1,232,823		180		0.06	%		1,146,013		169		0.06	%
Time deposits		805,435		2,218		1.09	%		902,185		2,416		1.07	%
Total interest bearing deposits	$	4,821,928	$	3,648		0.30	%	$	4,738,603	$	3,607		0.30	%
Short-term borrowings		773,074		1,870		0.96	%		611,339		761		0.50	%
Long-term debt		88,935		589		2.63	%		110,703		819		2.94	%
Junior subordinated debt		101,196		810		3.18	%		101,196		660		2.59	%
Total interest bearing liabilities	$	5,785,133	$	6,917		0.47	%	$	5,561,841	$	5,847		0.42	%
Demand deposits		2,260,973							2,079,266
Other liabilities		103,225							118,198
Stockholders’ equity		950,557							904,445
Total liabilities and stockholders’ equity	$	9,099,888						$	8,663,750
Net FTE interest income			$	72,891						$	67,562
Interest rate spread						3.33	%						3.27	%
Net interest margin						3.47	%						3.40	%
Taxable equivalent adjustment				961							900
Net interest income			$	71,930						$	66,662

(1) Securities are shown at average amortized cost.

(2) Excluding unrealized gains or losses.

(3) For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding.

Note: Interest income for tax-exempt securities and loans has been adjusted to a FTE basis using the statutory Federal income tax rate of 35%.

42

Nine months ended,
	September 30, 2017							September 30, 2016
(Dollars in thousands)	Average Balance		Interest		Yield/ Rates			Average Balance		Interest		Yield/ Rates
Assets:
Short-term interest bearing accounts	$	10,927	$	144		1.76	%	$	17,009	$	72		0.57	%
Securities available for sale (1)(2)		1,363,506		21,815		2.14	%		1,224,500		18,286		1.99	%
Securities held to maturity (1)		513,447		10,178		2.65	%		486,299		9,111		2.50	%
Investment in FRB and FHLB stock		47,466		1,866		5.26	%		38,672		1,369		4.73	%
Loans (3)		6,302,494		198,027		4.20	%		5,995,063		187,629		4.18	%
Total interest earning assets		8,237,840	$	232,030		3.77	%		7,761,543	$	216,467		3.73	%
Other assets		753,873							733,771
Total assets	$	8,991,713						$	8,495,314
Liabilities and stockholders’ equity:
Money market deposit accounts	$	1,687,998	$	2,791		0.22	%	$	1,666,687	$	2,720		0.22	%
NOW deposit accounts		1,137,424		682		0.08	%		1,059,787		400		0.05	%
Savings deposits		1,213,990		509		0.06	%		1,131,768		491		0.06	%
Time deposits		825,594		6,676		1.08	%		910,034		7,198		1.06	%
Total interest bearing deposits	$	4,865,006	$	10,658		0.29	%	$	4,768,276	$	10,809		0.30	%
Short-term borrowings		691,919		4,375		0.85	%		488,906		1,668		0.46	%
Long-term debt		97,561		1,794		2.46	%		121,950		2,425		2.66	%
Junior subordinated deb		101,196		2,308		3.05	%		101,196		1,920		2.53	%
Total interest bearing liabilities	$	5,755,682	$	19,135		0.44	%	$	5,480,328	$	16,822		0.41	%
Demand deposits		2,201,309							2,014,963
Other liabilities		97,443							108,373
Stockholders’ equity		937,279							891,650
Total liabilities and stockholders’ equity	$	8,991,713						$	8,495,314
Net FTE interest income			$	212,895						$	199,645
Interest rate spread						3.33	%						3.32	%
Net interest margin						3.46	%						3.44	%
Taxable equivalent adjustment				2,853							2,629
Net interest income			$	210,042						$	197,016

(1) Securities are shown at average amortized cost less OTTI write downs.

(2) Excluding unrealized gains or losses.

(3) For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding.

Note: Interest income for tax-exempt securities and loans has been adjusted to a FTE basis using the statutory Federal income tax rate of 35%.

43

The following table presents changes in interest income 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.

Three months ended September 30,
	Increase (Decrease) 2017 over 2016
(In thousands)	Volume			Rate			Total
Short-term interest bearing accounts	$	(25	)	$	51		$	26
Securities available for sale		608			653			1,261
Securities held to maturity		81			157			238
Investment in FRB and FHLB stock		81			92			173
Loans		3,394			1,307			4,701
Total FTE interest income	$	4,139		$	2,260		$	6,399
Money market deposit accounts	$	9		$	81		$	90
NOW deposit accounts		11			127			138
Savings deposits		13			(2	)		11
Time deposits		(260	)		62			(198	)
Short-term borrowings		244			865			1,109
Junior subordinated debt		-			150			150
Long-term debt		(149	)		(81	)		(230	)
Total interest expense	$	(132	)	$	1,202		$	1,070
Change in FTE net interest income	$	4,271		$	1,058		$	5,329

Nine months ended September 30,
	Increase (Decrease) 2017 over 2016
(In thousands)	Volume			Rate			Total
Short-term interest bearing accounts	$	(34	)	$	106		$	72
Securities available for sale		2,155			1,374			3,529
Securities held to maturity		519			548			1,067
Investment in FRB and FHLB stock		333			164			497
Loans		9,498			900			10,398
Total FTE interest income	$	12,471		$	3,092		$	15,563
Money market deposit accounts	$	34		$	37		$	71
NOW deposit accounts		31			251			282
Savings deposits		35			(17	)		18
Time deposits		(685	)		163			(522	)
Short-term borrowings		885			1,822			2,707
Junior subordinated debt		-			388			388
Long-term debt		(460	)		(171	)		(631	)
Total interest expense	$	(160	)	$	2,473		$	2,313
Change in FTE net interest income	$	12,631		$	619		$	13,250

Note: Interest income for tax-exempt securities and loans has been adjusted to a FTE basis using the statutory Federal income tax rate of 35%.

44

Noninterest Income

Noninterest income is a significant source of revenue for the Company and an important factor in the Company’s results of operations. The following table sets forth information by category of noninterest income for the periods indicated:

	Three months ended September 30,					Nine months ended September 30,
	2017			2016		2017			2016
(In thousands)
Insurance and other financial services revenue	$	5,536		$	6,114	$	17,927		$	18,685
Service charges on deposit accounts		4,261			4,354		12,399			12,459
ATM and debit card fees		5,557			5,063		16,025			14,580
Retirement plan administration fees		5,272			4,129		14,881			11,937
Trust		4,927			4,535		14,620			13,848
Bank owned life insurance		1,284			1,336		3,913			3,898
Net securities gains		(4	)		-		(2	)		30
Other		3,945			4,113		10,069			12,188
Total noninterest income	$	30,778		$	29,644	$	89,832		$	87,625

Noninterest income for the three months ended September 30, 2017 was $30.8 million, up $0.5 million, or 1.6%, from the prior quarter and up $1.1 million, or 3.8%, from the third quarter of 2016. The increase from the prior quarter was driven by higher other noninterest income due to higher swap fee income. The increase in noninterest income from the third quarter of 2016 was driven by higher retirement plan administration, ATM and debit card fees and trust revenue that were offset by lower insurance and other financial services revenue during the third quarter of 2017. Retirement plan administration fees increased in the third quarter of 2017 as compared to the third quarter of 2016 due primarily to the acquisition of Downeast Pension Services (“DPS”) in the second quarter of 2017. ATM and debit card fees increased from the prior quarters due to higher number of accounts and usage. Trust revenue increased due to account growth. The increases were partially offset by lower insurance and other financial services revenue from the same period of 2016.

Noninterest income for the nine months ended September 30, 2017 was $89.8 million, up $2.2 million, or 2.5%, from the same period of 2016. The increase in noninterest income from the prior year was driven by higher retirement plan administration, ATM and debit card fees and trust revenue that were partially offset by lower insurance and other financial services and other noninterest income during the first nine months of 2017 as compared to the same period in 2016. Retirement plan administration fees increased in 2017 as compared to the prior year due primarily to acquisitions completed in 2016 and the acquisition of DPS in the second quarter of 2017. ATM and debit card fees increased from the prior year due to higher number of accounts and usage in 2017 as compared to 2016. Trust revenue increased from the prior year due to account growth.

Noninterest Expense

Noninterest expenses are also an important factor in the Company’s results of operations. The following table sets forth the major components of noninterest expense for the periods indicated:

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
(In thousands)
Salaries and employee benefits	$	32,740	$	32,783	$	99,081	$	98,155
Occupancy		5,174		5,035		16,528		15,780
Data processing and communications		4,399		4,183		12,826		12,354
Professional fees and outside services		3,107		3,343		9,748		9,905
Equipment		3,733		3,656		11,224		10,663
Office supplies and postage		1,432		1,438		4,680		4,661
FDIC expenses		1,257		1,287		3,571		3,838
Advertising		665		634		1,711		1,733
Amortization of intangible assets		993		952		2,999		2,976
Loan collection and other real estate owned		1,684		985		3,627		2,535
Other		5,417		5,318		16,209		15,683
Total noninterest expense	$	60,601	$	59,614	$	182,204	$	178,283

Noninterest expense for the three months ended September 30, 2017 was $60.6 million, up $0.3 million, or 0.5%, from the prior quarter and up $1.0 million, or 1.7%, from the third quarter of 2016. The increases from the prior quarter and the same quarter of the prior year were driven by increases in loan collection and other real estate owned due primarily to the write-down of a commercial property.

45

Noninterest expense for the nine months ended September 30, 2017 was $182.2 million, up $3.9 million, or 2.2%, from the same period of 2016. The increase from the prior year was driven by higher loan collection and other real estate owned expense due primarily to commercial property write-downs. Salaries and employee benefits, occupancy, equipment, data processing and communications and other noninterest expenses also increased in the first nine months of 2017 as compared to the same period of 2016.

Income Taxes

In the first quarter of 2017, NBT adopted new accounting guidance for equity-based transactions requiring that all excess tax benefits and tax deficiencies associated with equity-based compensation be recognized as an income tax benefit or expense in the income statement. Previously, tax effects resulting from changes in NBT’s share price subsequent to the grant date were recorded through stockholders’ equity at the time of vesting or exercise. The adoption of the accounting guidance resulted in income tax benefits of $1.4 million, $0.1 million and $0.2 million, in the first, second and third quarters of 2017, respectively. The year-to-date impact to diluted earnings per share was $0.04.

Income tax expense for the three months ended September 30, 2017 was $11.3 million, up $0.7 million, or 6.2%, from the prior quarter and up $1.0 million, or 10.1%, from the third quarter of 2016. The effective tax rate of 33.1% for the third quarter of 2017 was down from 33.3% for the second quarter of 2017 and down from 34.0% for the third quarter of 2016. The increase in income tax expense from the prior quarter was due to a higher level of taxable income. The decrease in the effective tax rate from the third quarter of 2016 was due to a higher level of non-taxable income in the third quarter of 2017 as compared to the same period of the prior year. Excluding the tax benefit of the new accounting guidance, the effective tax rate was 33.6% and 33.7% for the second and third quarters of 2017, respectively.

Income tax expense for the nine months ended September 30, 2017 was $30.3 million, consistent with the same period of 2016. The effective tax rate of 32.0% for the first nine months of 2017 was down from 34.0% for the same period in the prior year. The decrease from the prior year was primarily due to the $1.7 million income tax benefit related to the adoption of new accounting guidance in 2017 offset by a higher level of taxable income in the first nine months of 2017 compared to the same period in 2016. Excluding the tax benefit of the new accounting guidance, the effective tax rate was 33.8% for the first nine months of 2017.

ANALYSIS OF FINANCIAL CONDITION

Securities

Total securities decreased $12.7 million, or 0.7%, from December 31, 2016 to September 30, 2017. The securities portfolio represents 20.3% of total assets as of September 30, 2017 as compared to 21.2% as of December 31, 2016.

The following table details the composition of securities available for sale, securities held to maturity and regulatory investments for the periods indicated:

	September 30, 2017			December 31, 2016
Mortgage-backed securities:
With maturities 15 years or less		30	%		28	%
With maturities greater than 15 years		6	%		5	%
Collateral mortgage obligations		41	%		42	%
Municipal securities		13	%		14	%
US agency notes		9	%		10	%
Other		1	%		1	%
Total		100	%		100	%

The Company’s mortgage backed securities, U.S. agency notes and collateralized mortgage obligations are all “prime/conforming” and are guaranteed by Fannie Mae, Freddie Mac, Federal Home Loan Bank, Federal Farm Credit Banks or Ginnie Mae (“GNMA”). GNMA securities are considered equivalent to U.S. Treasury securities, as they are backed by the full faith and credit of the U.S. government. Currently, there are no subprime mortgages in our investment portfolio. Refer to Note 3 to the Company’s unaudited interim consolidated financial statements included in this Form 10-Q for information related to other-than-temporary impairment considerations.

46

Loans

A summary of loans, net of deferred fees and origination costs, by category for the periods indicated follows:

(In thousands)	September 30, 2017		December 31, 2016
Residential real estate mortgages	$	1,302,577	$	1,262,614
Commercial		1,307,560		1,242,701
Commercial real estate mortgages		1,654,727		1,543,301
Consumer		1,700,340		1,641,657
Home equity		501,730		507,784
Total loans	$	6,466,934	$	6,198,057

Total loans increased by $268.9 million, or 4.3%, at September 30, 2017 from December 31, 2016, or 5.8% annualized during the nine months ended September 30, 2017. Loan growth in the first nine months of 2017 resulted from growth in the commercial, residential and consumer portfolios. Total loans represent approximately 70.6% of assets as of September 30, 2017, as compared to 69.9% as of December 31, 2016. Total loans represent approximately 89.4% of deposits as of September 30, 2017, as compared to 88.9% as of December 31, 2016.

Allowance for Loan Losses, Provision for Loan Losses and Nonperforming Assets

The allowance for loan losses is maintained at a level estimated by management to provide appropriately for risk of probable incurred losses inherent in the current loan portfolio. The adequacy of the allowance for loan losses is continuously monitored using a methodology designed to ensure that the level of the allowance reasonably reflects the loan portfolio’s risk profile. It is evaluated to ensure that it is sufficient to absorb all reasonably estimable incurred credit losses inherent in the current loan portfolio.

Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the degree of judgment exercised in evaluating the level of the allowance required to cover credit losses in the portfolio and the material effect that such judgments can have on the consolidated results of operations.

For purposes of evaluating the adequacy of the allowance, the Company considers a number of significant factors that affect the collectability of the portfolio. For individually analyzed loans, these factors include estimates of loss exposure, which reflect the facts and circumstances that affect the likelihood of repayment of such loans as of the evaluation date. For homogeneous pools of loans, estimates of the Company’s exposure to credit loss reflect a thorough current assessment of a number of factors, which affect collectability. These factors include: past loss experience; the size, trend, composition and nature of the loans; changes in lending policies and procedures, including underwriting  standards and collection, charge-off and recovery practices; trends experienced in nonperforming and delinquent loans; current economic conditions in the Company’s market; portfolio concentrations that may affect loss experienced across one or more components of the portfolio; the effect of external factors such as competition, legal and regulatory requirements; and the experience, ability and depth of lending management and staff.  In addition, various regulatory agencies, as an integral component of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment about information available to them at the time of their examination, which may not be currently available to management.

After a thorough consideration and validation of the factors discussed above, required additions or reductions to the allowance for loan losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a level which management believes is reasonably reflective of the overall inherent risk of probable loss in the portfolio. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for loan losses to be appropriate based on evaluation and analysis of the loan portfolio.

47

The following table reflects changes to the allowance for loan losses for the periods presented. The allowance is increased by provisions for losses charged to operations and is reduced by net charge-offs. Charge-offs are made when the ability to collect loan principal within a reasonable time becomes unlikely. Any recoveries of previously charged-off loans are credited directly to the allowance for loan losses.

Allowance For Loan Losses
	Three months ended
(Dollars in thousands)	September 30, 2017					September 30, 2016
Balance, beginning of period	$	66,600				$	64,568
Recoveries		1,835					1,537
Charge-offs		(7,974	)				(6,825	)
Net charge-offs	$	(6,139	)			$	(5,288	)
Provision for loan losses		7,889					6,388
Balance, end of period	$	68,350				$	65,668
Composition of Net Charge-offs
Commercial and agricultural	$	(308	)	5	%	$	(125	)	2	%
Real estate mortgage		(298	)	5	%		(15	)	1	%
Consumer		(5,533	)	90	%		(5,148	)	97	%
Net charge-offs	$	(6,139	)	100	%	$	(5,288	)	100	%
Annualized net charge-offs to average loans		0.38	%				0.35	%

Allowance For Loan Losses
	Nine months ended
	September 30, 2017					September 30, 2016
Balance, beginning of period	$	65,200				$	63,018
Recoveries		4,765					4,635
Charge-offs		(24,450	)				(19,251	)
Net charge-offs	$	(19,685	)			$	(14,616	)
Provision for loan losses		22,835					17,266
Balance, end of period	$	68,350				$	65,668
Composition of Net Charge-offs
Commercial and agricultural	$	(2,072	)	11	%	$	(107	)	1	%
Real estate mortgage		(1,551	)	8	%		(879	)	6	%
Consumer		(16,062	)	81	%		(13,630	)	93	%
Net charge-offs	$	(19,685	)	100	%	$	(14,616	)	100	%
Annualized net charge-offs to average loans		0.42	%				0.33	%

Net charge-offs were $6.1 million for the three months ended September 30, 2017, as compared to $6.7 million for the prior quarter and $5.3 million for the third quarter of 2016. Provision expense was $7.9 million for the three months ended September 30, 2017, as compared with $7.6 million for the prior quarter and $6.4 million for the third quarter of 2016. Provision expense increased as compared to the same period of the prior year due to loan growth and higher charge-offs driven by the commercial portfolio. Annualized net charge-offs to average loans for the third quarter of 2017 was 0.38% down from 0.42% for the second quarter of 2017 and up from 0.35% for the third quarter of 2016.

Net charge-offs were $19.7 million for the nine months ended September 30, 2017, as compared to $14.6 million for the same period of 2016. Provision expense was $22.8 million for the nine months ended September 30, 2017, as compared with $17.3 million for same period of 2016. Provision expense increased as compared to the first nine months of 2016 due to loan growth and higher net charge-offs driven by the commercial portfolio. Annualized net charge-offs to average loans for the first nine months of 2017 was 0.42% compared with 0.33% for the first nine months of 2016.

The allowance for loan losses totaled $68.4 million at September 30, 2017, compared to $66.6 million at June 30, 2017 and $65.7 million at September 30, 2016. The allowance for loan losses as a percentage of loans was 1.06% (1.13% excluding acquired loans) at September 30, 2017, compared to 1.05% (1.13% excluding acquired loans) at June 30, 2017 and 1.07% (1.15% excluding acquired loans) at September 30, 2016.

Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due and still accruing, restructured loans, other real estate owned (“OREO”) and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. In the third quarter of 2016 the threshold for evaluating classified and nonperforming loans specifically evaluated for impairment was increased from $0.5 million to $0.8 million. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs. Nonperforming securities, which include securities which management believes are other-than-temporarily impaired, are carried at their estimated fair value and are not accruing interest.

48

(Dollars in thousands)	September 30, 2017						December 31, 2016
Nonaccrual loans	Amount			%			Amount			%
Commercial and agricultural loans and real estate	$	9,630			41	%	$	19,351			54	%
Real estate mortgages		6,462			28	%		8,027			23	%
Consumer		4,343			18	%		4,653			13	%
Troubled debt restructured loans		3,018			13	%		3,681			10	%
Total nonaccrual loans	$	23,453			100	%	$	35,712			100	%
Loans 90 days or more past due and still accruing
Real estate mortgages	$	634			19	%	$	1,733			36	%
Consumer		2,754			81	%		3,077			64	%
Total loans 90 days or more past due and still accruing	$	3,388			100	%	$	4,810			100	%
Total nonperforming loans	$	26,841					$	40,522
OREO		4,230						5,581
Total nonperforming assets	$	31,071					$	46,103
Total nonperforming loans to total loans		0.42	%					0.65	%
Total nonperforming assets to total assets		0.34	%					0.52	%
Allowance for loan losses to total nonperforming loans		254.65	%					160.90	%

Nonperforming loans to total loans was 0.42% at September 30, 2017, down eight bps from 0.50% for the prior quarter and down 31 bps from 0.73% at September 30, 2016. Past due loans as a percentage of total loans were 0.63% at September 30, 2017, as compared to 0.59% at June 30, 2017 and 0.57% at September 30, 2016.

For acquired loans that are not deemed to be impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and amortized over the life of the asset.

As a result of the application of this accounting methodology, certain credit-related ratios may not necessarily be directly comparable with periods prior to the acquisition or comparable with other institutions. The credit metrics most impacted by our acquisitions were the allowance for loans losses to total loans and total allowance for loan losses to nonperforming loans. As of September 30, 2017, the allowance for loan losses to total originated loans and the total allowance for loan losses to originated nonperforming loans were 1.13% and 289.67%, respectively. As of December 31, 2016, the allowance for loan losses to total originated loans and the total allowance for loan losses to originated nonperforming loans were 1.13% and 186.82%, respectively.

In addition to nonperforming loans, the Company has also identified approximately $63.5 million in potential problem loans at September 30, 2017 as compared to $70.0 million at December 31, 2016. At September 30, 2017, potential problem loans primarily consisted of commercial real estate, commercial and agricultural loans. Potential problem loans are loans that are currently performing, but known information about possible credit problems of the borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms, which may result in classification of such loans as nonperforming at some time in the future. Potential problem loans are typically defined as loans that are performing but are classified by the Company’s loan rating system as “substandard.” Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured or require increased allowance coverage and provision for loan losses.

Deposits

Total deposits were $7.2 billion at September 30, 2017, up $257.5 million, or 3.7%, from December 31, 2016. Total average deposits increased $283.1 million, or 4.2%, for the nine months ended September 30, 2017 as compared to the same period last year driven primarily by growth in non-interest bearing demand deposits of $186.3 million, or 9.2%, combined with a $96.7 million, or 2.0%, increase in interest bearing deposits due to growth in money market deposit accounts, NOW deposit accounts and savings accounts.

Borrowed Funds

The Company’s borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $682.0 million at September 30, 2017 compared to $681.7 million at December 31, 2016. The notional value of interest rate swaps hedging cash flows related to short-term borrowings totaled $250.0 million at September 30, 2017 and December 31, 2016. Long-term debt was $88.9 million at September 30, 2017 compared to $104.1 million at December 31, 2016. Junior subordinated debt was $101.2 million at September 30, 2017 and December 31, 2016.

For more information about the Company’s borrowing capacity and liquidity position, see “Liquidity Risk” below.

49

Capital Resources

Stockholders’ equity of $955.2 million represented 10.43% of total assets at September 30, 2017 compared with $913.3 million, or 10.30% as of December 31, 2016. The increase in stockholders’ equity resulted primarily from net income of $64.5 million for the nine months ending September 30, 2017, partially offset by dividends paid of $30.1 million during the period.

The Company did not purchase shares of its common stock during the nine months ended September 30, 2017. As of September 30, 2017, there were 1,000,000 shares available for repurchase under a plan authorized on March 28, 2016, which expires on December 31, 2017. On October 23, 2017, the NBT Board of Directors authorized a new repurchase program for NBT to repurchase up to an additional 1,000,000 shares of its outstanding common stock. This plan expires on December 31, 2019.

The Board of Directors considers the Company’s earnings position and earnings potential when making dividend decisions. The Company’s Board of Directors approved a 2017 fourth-quarter cash dividend of $0.23 per share at a meeting held on October 23, 2017. The dividend will be paid on December 15, 2017 to stockholders of record as of December 1, 2017. The Company does not have a target dividend pay-out ratio.

As the capital ratios in the following table indicate, the Company remained “well capitalized” at September 30, 2017 under applicable bank regulatory requirements. Capital measurements are well in excess of regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented. To be considered well capitalized, tier 1 leverage, common equity tier 1 capital, tier 1 capital and total risk-based capital ratios must be 5%, 6.5%, 8% and 10%, respectively.

Capital Measurements	September 30, 2017			December 31, 2016
Tier 1 leverage ratio		9.12	%		9.11	%
Common equity tier 1 capital ratio		10.08	%		9.98	%
Tier 1 capital ratio		11.46	%		11.42	%
Total risk-based capital ratio		12.45	%		12.39	%
Cash dividends as a percentage of net income		46.61	%		50.00	%
Per common share:
Book value	$	21.94		$	21.11
Tangible book value (1)	$	15.42		$	14.61

(1) Stockholders’ equity less goodwill and intangible assets divided by common shares outstanding.

50

Liquidity and Interest Rate Sensitivity Management

Market Risk

Interest rate risk is the primary market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities. Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company’s net interest income. Net interest income is susceptible to interest rate risk to the degree that interest bearing liabilities mature or reprice on a different basis than earning assets. When interest bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when earning assets mature or reprice more quickly than interest bearing liabilities, falling interest rates could result in a decrease in net interest income.

In an attempt to manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Management’s Asset Liability Committee (“ALCO”) meets monthly to review the Company’s interest rate risk position and profitability and to recommend strategies for consideration by the Board of Directors. Management also reviews loan and deposit pricing and the Company’s securities portfolio, formulates investment and funding strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential effect of changing interest rates is an uncertainty that can have an adverse effect on net income.

In adjusting the Company’s asset/liability position, the Board and management attempt to manage the Company’s interest rate risk while minimizing net interest margin compression. At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long- and short-term interest rates. Assuming interest rates remain at or near current historical lows, net interest margin will continue to experience compression. Additional rate reductions on deposits are becoming more difficult as deposit rates are at or near their floors and with asset yields continuing to reprice at lower rates, this could result in additional margin pressure as well as a decrease in net interest income.

The primary tool utilized by ALCO to manage interest rate risk is a balance sheet/income statement simulation model (interest rate sensitivity analysis). Information, such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed) and current rates is uploaded into the model to create an ending balance sheet. In addition, ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings.

The model is first run under an assumption of a flat rate scenario (i.e. no change in current interest rates) with a static balance sheet over a 12 month period. Two additional models are run with static balance sheets: (1) a gradual increase of 200 bps and (2) a gradual decrease of 100 bps taking place over a 12 month period. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded into them are handled accordingly based on the interest rate scenario. The resulting changes in net interest income are then measured against the flat rate scenario.

In the declining rate scenario, net interest income is projected to decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period. The decrease in net interest income is a result of earning assets repricing downward at a faster rate than interest bearing liabilities. The inability to effectively lower deposit rates will likely reduce or eliminate the benefit of lower interest rates. In the rising rate scenarios, net interest income is projected to experience a decline from the flat rate scenario. Net interest income is projected to remain at lower levels than in a flat rate scenario through the simulation period primarily due to a lag in assets repricing while funding costs increase. The potential impact on earnings is dependent on the ability to lag deposit repricing. If short-term rates continue to increase, the Company expects competitive pressures will likely lead to core deposit pricing increases, which will likely continue compression of the net interest margin.

Net interest income for the next 12 months in the +200 and -100 bps scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% change in net interest income. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the September 30, 2017 balance sheet position:

51

Interest Rate Sensitivity Analysis

Change in interest rates	Percent change in
(in bps points)	net interest income
+200	(2.03%)
-100	(3.45%)

Liquidity Risk

Liquidity involves the ability to meet the cash flow requirements of customers who may be depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. ALCO is responsible for liquidity management and has developed guidelines, which cover all assets and liabilities, as well as off-balance sheet items that are potential sources or uses of liquidity. Liquidity policies must also provide the flexibility to implement appropriate strategies and tactical actions. Requirements change as loans grow, deposits and securities mature and payments on borrowings are made. Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions.

The primary liquidity measurement the Company utilizes is called the Basic Surplus, which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. Basic Surplus is calculated by subtracting short-term liabilities from liquid assets. This approach recognizes the importance of balancing levels of cash flow liquidity from short- and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary. At September 30, 2017, the Company’s Basic Surplus measurement was 12.7% of total assets or approximately $1.2 billion as compared to the December 31, 2016 Basic Surplus of 13.6% or $1.2 billion and was above the Company’s minimum of 5% or $0.5 billion set forth in its liquidity policies.

This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position.

The Company’s primary source of funds is the Bank. Certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends. The approval of the Office of Comptroller of the Currency (“OCC”) is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for the preceding two years (as defined in the regulations). At September 30, 2017, approximately $98.0 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends is also subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the General Corporation Law of the State of Delaware, the Company may declare and pay dividends either out of its surplus or, in case there is no surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

At September 30, 2017 and December 31, 2016, Federal Home Loan Bank (“FHLB”) advances outstanding totaled approximately $622.4 million and $598.0 million, respectively. The Company’s FHLB advances are collateralized by the FHLB stock owned by the Company, certain of its mortgage-backed securities and a blanket lien on its residential real estate mortgage loans. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $0.9 billion at September 30, 2017 and $0.8 billion at December 31, 2016. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $560.2 million at September 30, 2017 or used to collateralize other borrowings, such as repurchase agreements. At September 30, 2017 the Bank also had additional borrowing capacity from unused collateral at the Federal Reserve of $0.9 billion.

52

Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information called for by Item 3 is contained in the Liquidity and Interest Rate Sensitivity Management section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 4 - CONTROLS AND PROCEDURES

The  Company’s  management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of  the  Company’s  disclosure  controls  and  procedures  (as  defined  in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017, the Company’s disclosure controls and procedures were effective.

There  were  no changes made in the Company’s internal control over financial  reporting  that  occurred  during  the  Company’s  most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

53

PART II.  OTHER INFORMATION

Item 1 – 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, except as described in the Company’s 2016 Annual Report on Form 10-K.

Item 1A – RISK FACTORS

There are no material changes to the risk factors as previously discussed in Part I, Item 1A of our 2016 Annual Report on Form 10-K.

Item 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Not applicable

(b) Not applicable

(c) The Company did not purchase any shares of its common stock during the third quarter of 2017. The Company’s Board of Directors approved a repurchase program on March 28, 2016 for NBT to repurchase up to 1,000,000 shares of its outstanding common stock. No shares have been repurchased under this plan, which expires on December 31, 2017. On October 23, 2017, the NBT Board of Directors authorized a new repurchase program for NBT to repurchase up to an additional 1,000,000 shares of its outstanding common stock. This plan expires on December 31, 2019.

Item 3 – DEFAULTS UPON SENIOR SECURITIES

None

Item 4 – MINE SAFETY DISCLOSURES

None

Item 5 – OTHER INFORMATION

None

54

Item 6 – EXHIBITS

3.1	Restated Certificate of Incorporation of NBT Bancorp Inc. as amended through July 1, 2015 (filed as Exhibit 3.1 to Registrant’s Form 10-Q, filed on August 10, 2015 and incorporated herein by reference)
3.2	Amended and Restated Bylaws of NBT Bancorp Inc. effective January 23, 2017 (filed as Exhibit 3.1 to Registrant’s Form 8-K, filed on January 25, 2017 and incorporated herein by reference).
3.3	Certificate of Designation of the Series A Junior Participating Preferred Stock (filed as Exhibit A to Exhibit 4.1 of the Registrant’s Form 8-K, filed on November 18, 2004 and incorporated herein by reference).
4.3	Specimen common stock certificate for NBT’s Bancorp Inc. common stock (filed as Exhibit 4.3 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-4, filed on December 27, 2005 and incorporated herein by reference).
10.1	Form of Amendment to Employment Agreements, dated September 27, 2017, by and between NBT Bancorp Inc. and John H. Watt, Jr., Timothy L. Brenner, and F. Sheldon Prentice (filed as Exhibit 10.1 to Registrant’s Form 8-K, filed on September 29, 2017 and incorporated herein by reference).
31.1	Certification by the Chief Executive Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange Act of 1934.
31.2	Certification by the Chief Financial Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange Act of 1934.
32.1	Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial  Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

55

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, this 9th day of November 2017.

	NBT BANCORP INC.
By:	/s/ Michael J. Chewens
	Michael J. Chewens, CPA
	Senior Executive Vice President
	Chief Financial Officer

56