NBT BANCORP INC - FORM 10-Q

Attached files

file	filename
EX-10.1 - EXHIBIT 10.1 - NBT BANCORP INC	ex10_1.htm
EX-32.2 - EXHIBIT 32.2 - NBT BANCORP INC	ex32_2q.htm
EX-32.1 - EXHIBIT 32.1 - NBT BANCORP INC	ex32_1q.htm
EX-31.2 - EXHIBIT 31.2 - NBT BANCORP INC	ex31_2q.htm
EX-31.1 - EXHIBIT 31.1 - NBT BANCORP INC	ex31_1q.htm

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 March 31, 2017.

	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 April 30, 2017, there were 43,443,866 shares outstanding of the Registrant’s common stock, $0.01 par value per share.

NBT BANCORP INC.

FORM 10-Q-Quarter Ended March 31, 2017

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Balance Sheets at March 31, 2017 and December 31, 2016	3

	Consolidated Statements of Income for the three month periods ended March 31, 2017 and 2016	4

	Consolidated Statements of Comprehensive Income for the three month periods ended March 31, 2017 and 2016	5

	Consolidated Statements of Stockholders’ Equity for the three month periods ended March 31, 2017 and 2016	6

	Consolidated Statements of Cash Flows for the three month periods ended March 31, 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	38

Item 3	Quantitative and Qualitative Disclosures about Market Risk	50

Item 4	Controls and Procedures	50

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	51
Item 1A	Risk Factors	51
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3	Defaults Upon Senior Securities	51
Item 4	Mine Safety Disclosures	51
Item 5	Other Information	51
Item 6	Exhibits	52

SIGNATURES		53

INDEX TO EXHIBITS		54

Table of Contents

Item 1 – FINANCIAL STATEMENTS

NBT Bancorp Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
	March 31,			December 31,
(In thousands, except share and per share data)	2017			2016
Assets
Cash and due from banks	$	137,308		$	147,789
Short-term interest bearing accounts		4,588			1,392
Securities available for sale, at fair value		1,367,574			1,338,290
Securities held to maturity (fair value $513,654 and $525,050, respectively)		515,793			527,948
Trading securities		10,044			9,259
Federal Reserve and Federal Home Loan Bank stock		42,577			47,033
Loans		6,272,303			6,198,057
Less allowance for loan losses		65,700			65,200
Net loans		6,206,603			6,132,857
Premises and equipment, net		83,144			84,187
Goodwill		265,439			265,439
Intangible assets, net		14,848			15,815
Bank owned life insurance		169,423			168,012
Other assets		128,144			129,247
Total assets	$	8,945,485		$	8,867,268

Liabilities
Demand (noninterest bearing)	$	2,205,419		$	2,195,845
Savings, negotiable order withdrawal and money market		4,153,552			3,905,432
Time		826,080			872,411
Total deposits		7,185,051			6,973,688
Short-term borrowings		540,243			681,703
Long-term debt		104,023			104,087
Junior subordinated debt		101,196			101,196
Other liabilities		88,133			93,278
Total liabilities		8,018,646			7,953,952

Stockholders’ equity
Preferred stock, $0.01 par value. Authorized 2,500,000 shares at March 31, 2017 and December 31, 2016		-			-
Common stock, $0.01 par value. Authorized 100,000,000 shares at March 31, 2017 and December 31, 2016; issued 49,651,493 at March 31, 2017 and December 31, 2016		497			497
Additional paid-in-capital		573,627			575,078
Retained earnings		511,925			501,761
Accumulated other comprehensive loss		(19,592	)		(21,520	)
Common stock in treasury, at cost, 6,209,092 and 6,393,743 shares at March 31, 2017 and December 31, 2016, respectively		(139,618	)		(142,500	)
Total stockholders’ equity		926,839			913,316
Total liabilities and stockholders’ equity	$	8,945,485		$	8,867,268

See accompanying notes to unaudited interim consolidated financial statements.

Table of Contents

NBT Bancorp Inc. and Subsidiaries	Three Months Ended March 31,
Consolidated Statements of Income (unaudited)	2017		2016
(In thousands, except per share data)
Interest, fee, and dividend income
Interest and fees on loans	$	64,027	$	61,230
Securities available for sale		7,009		5,987
Securities held to maturity		2,781		2,288
Other		619		449
Total interest, fee, and dividend income		74,436		69,954
Interest expense
Deposits		3,474		3,597
Short-term borrowings		1,139		328
Long-term debt		606		833
Junior subordinated debt		726		619
Total interest expense		5,945		5,377
Net interest income		68,491		64,577
Provision for loan losses		7,379		6,098
Net interest income after provision for loan losses		61,112		58,479
Noninterest income
Insurance and other financial services revenue		6,770		6,946
Service charges on deposit accounts		3,977		3,939
ATM and debit card fees		4,950		4,583
Retirement plan administration fees		4,172		3,754
Trust		4,532		4,376
Bank owned life insurance		1,411		1,291
Net securities gains		-		29
Other		2,938		3,449
Total noninterest income		28,750		28,367
Noninterest expense
Salaries and employee benefits		33,587		32,441
Occupancy		6,170		5,491
Data processing and communications		4,198		4,050
Professional fees and outside services		3,032		3,231
Equipment		3,698		3,460
Office supplies and postage		1,608		1,547
FDIC expenses		1,178		1,258
Advertising		390		504
Amortization of intangible assets		967		1,096
Loan collection and other real estate owned		1,279		705
Other		5,175		4,441
Total noninterest expense		61,282		58,224
Income before income tax expense		28,580		28,622
Income tax expense		8,301		9,731
Net income	$	20,279	$	18,891
Earnings per share
Basic	$	0.47	$	0.44
Diluted		0.46		0.43

See accompanying notes to unaudited interim consolidated financial statements.

Table of Contents

NBT Bancorp Inc. and Subsidiaries	Three Months Ended March 31,
Consolidated Statements of Comprehensive Income (unaudited)	2017		2016
(In thousands)
Net income	$	20,279	$	18,891
Other comprehensive income, net of tax:
Unrealized net holding gains arising during the period (pre-tax amounts of $836 and $13,211)		497		8,072
Reclassification adjustment for net gains (losses) related to securities available for sale included in net income (pre-tax amounts of $- and $29)		-		(19	)
Reclassification adjustment for an impairment write-down of equity security (pre-tax amounts of $1,312 and $-)		811		-
Unrealized gains on derivatives (cash flow hedges) (pre-tax amounts of $331 and $-)		204		-
Amortization of unrealized net gains related to the reclassification of available for sale investment securities to held to maturity (pre-tax amounts of $238 and $296)		147		181
Pension and other benefits:
Amortization of prior service cost and actuarial loss (pre-tax amounts of $435 and $512)		269		313
Total other comprehensive income		1,928		8,547
Comprehensive income	$	22,207	$	27,438

See accompanying notes to unaudited interim consolidated financial statements.

Table of Contents

NBT Bancorp Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (unaudited)

	Common stock		Additional paid-in-capital			Retained earnings			Accumulated other comprehensive income (loss)			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		-		-			18,891			-			-			18,891
Cash dividends - $0.22 per share		-		-			(9,473	)		-			-			(9,473	)
Purchase of 675,535 treasury shares		-		-			-			-			(17,193	)		(17,193	)
Net issuance of 106,674 shares to employee benefit plans and other stock plans, including tax benefit		-		(4,584	)		-			-			1,923			(2,661	)
Stock-based compensation		-		1,612			-			-			-			1,612
Other comprehensive income		-		-			-			8,547			-			8,547
Balance at March 31, 2016	$	497	$	573,754		$	471,650		$	(13,871	)	$	(150,303	)	$	881,727

Balance at December 31, 2016	$	497	$	575,078		$	501,761		$	(21,520	)	$	(142,500	)	$	913,316
Net income		-		-			20,279			-			-			20,279
Cash dividends - $0.23 per share		-		-			(10,020	)		-			-			(10,020	)
Net issuance of 184,651 shares to employee benefit plans and other stock plans, including tax benefit		-		(3,712	)		-			-			2,882			(830	)
Stock-based compensation		-		2,261			(95	)		-			-			2,166
Other comprehensive income		-		-			-			1,928			-			1,928
Balance at March 31, 2017	$	497	$	573,627		$	511,925		$	(19,592	)	$	(139,618	)	$	926,839

See accompanying notes to unaudited interim consolidated financial statements.

Table of Contents

NBT Bancorp Inc. and Subsidiaries	Three Months Ended March 31,
Consolidated Statements of Cash Flows (unaudited)	2017			2016
(In thousands, except per share data)
Operating activities
Net income	$	20,279		$	18,891
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		7,379			6,098
Depreciation and amortization of premises and equipment		2,249			2,244
Net accretion on securities		1,267			799
Amortization of intangible assets		967			1,096
Excess tax benefit on stock-based compensation		1,472			-
Stock-based compensation expense		2,166			1,612
Bank owned life insurance income		(1,411	)		(1,291	)
Trading security purchases		(1,277	)		(568	)
Losses on trading securities		491			40
Proceeds from sales of loans held for sale		24,896			22,098
Originations and purchases of loans held for sale		(27,622	)		(22,133	)
Net gains on sales of loans held for sale		(46	)		(49	)
Net security (gains)		-			(29	)
Net loss (gain) on sales of other real estate owned		157			(306	)
Impairment write-down		1,312			-
Net decrease in other assets		595			2,135
Net (decrease) in other liabilities		(5,145	)		(1,319	)
Net cash provided by operating activities		27,729			29,318
Investing activities
Securities available for sale:
Proceeds from maturities, calls, and principal paydowns		78,038			74,090
Proceeds from sales		1,000			-
Purchases		(110,330	)		(142,613	)
Securities held to maturity:
Proceeds from maturities, calls, and principal paydowns		19,914			15,591
Purchases		(5,943	)		(9,471	)
Other:
Net increase in loans		(82,299	)		(90,342	)
Proceeds from Federal Home Loan Bank stock redemption		56,521			33,886
Purchases of Federal Reserve and Federal Home Loan Bank stock		(52,065	)		(29,475	)
Proceeds from settlement of bank owned life insurance		-			1,457
Purchases of bank owned life insurance		-			(45,000	)
Purchases of premises and equipment, net		(1,269	)		(1,625	)
Proceeds from the sales of other real estate owned		2,430			3,208
Net cash used in investing activities		(94,003	)		(190,294	)
Financing activities
Net increase in deposits		211,363			300,199
Net decrease in short-term borrowings		(141,460	)		(94,613	)
Repayments of long-term debt		(64	)		(70	)
Proceeds from the issuance of shares to employee benefit plans and other stock plans		1,983			(7	)
Cash paid by employer for tax-withholding on stock issuance		(2,813	)		(2,654	)
Purchase of treasury stock		-			(17,193	)
Cash dividends		(10,020	)		(9,473	)
Net cash provided by financing activities		58,989			176,189
Net increase (decrease) in cash and cash equivalents		(7,285	)		15,213
Cash and cash equivalents at beginning of period		149,181			140,297
Cash and cash equivalents at end of period	$	141,896		$	155,510

Table of Contents

Supplemental disclosure of cash flow information	Three Months Ended March 31,
Cash paid during the period for:	2017		2016
Interest	$	6,363	$	5,876
Income taxes paid		1,019		3,405
Noncash investing activities:
Loans transferred to other real estate owned	$	3,946	$	952

See accompanying notes to unaudited interim consolidated financial statements.

Table of Contents

NBT BANCORP INC. and Subsidiaries

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 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 (“GAAP”). These 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.

Table of Contents

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
March 31, 2017
Federal agency	$	160,064	$	80	$	563	$	159,581
State & municipal		47,910		161		227		47,844
Mortgage-backed:
Government-sponsored enterprises		559,228		3,156		2,280		560,104
U.S. government agency securities		17,566		397		40		17,923
Collateralized mortgage obligations:
Government-sponsored enterprises		511,651		562		6,910		505,303
U.S. government agency securities		58,239		180		741		57,678
Other securities		13,537		5,767		163		19,141
Total securities AFS	$	1,368,195	$	10,303	$	10,924	$	1,367,574
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

Securities with amortized costs totaling $1.6 billion at March 31, 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 March 31, 2017 and December 31, 2016, securities with an amortized cost of $244.3 million and $235.6 million, respectively, were pledged as collateral for securities sold under repurchase agreements.

Table of Contents

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

(In thousands)	Amortized cost		Unrealized gains		Unrealized losses		Estimated fair value
March 31, 2017
Mortgage-backed:
Government-sponsored enterprises	$	94,849	$	-	$	1,227	$	93,622
U.S. government agency securities		491		76		-		567
Collateralized mortgage obligations:
Government-sponsored enterprises		215,639		959		1,637		214,961
State & municipal		204,814		972		1,282		204,504
Total securities HTM	$	515,793	$	2,007	$	4,146	$	513,654
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

Table of Contents

The following table sets forth information with regard to investment securities with unrealized losses at March 31, 2017 and December 31, 2016, segregated according to the length of time the securities had been in a continuous unrealized loss position:

	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

March 31, 2017
AFS Securities:
Federal agency	$	94,535	$	(563	)		9	$	-	$	-			-	$	94,535	$	(563	)		9
State & municipal		24,235		(200	)		37		1,528		(27	)		2		25,763		(227	)		39
Mortgage-backed		265,960		(2,307	)		46		974		(13	)		4		266,934		(2,320	)		50
Collateralized mortgage obligations		442,362		(7,651	)		57		-		-			-		442,362		(7,651	)		57
Other securities		1,983		(17	)		1		2,959		(146	)		1		4,942		(163	)		2
Total securities with unrealized losses	$	829,075	$	(10,738	)		150	$	5,461	$	(186	)		7	$	834,536	$	(10,924	)		157

March 31, 2017
HTM securities:
Mortgaged-backed	$	93,622	$	(1,227	)		5	$	-	$	-			-	$	93,622	$	(1,227	)		5
Collateralized mortgage obligations		103,287		(360	)		12		33,841		(1,277	)		4		137,128		(1,637	)		16
State & municipal		48,303		(1,282	)		75		-		-			-		48,303		(1,282	)		75
Total securities with unrealized losses	$	245,212	$	(2,869	)		92	$	33,841	$	(1,277	)		4	$	279,053	$	(4,146	)		96

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

December 31, 2016
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

Table of Contents

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 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. The fair value is expected to recover as the bonds approach 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. The unrealized losses on equity securities are due to declines in the fair value below the cost basis of the securities. For AFS debt and equity securities, the Company considers a decline in fair value to be other-than-temporary if it is probable that the Company will not recover its cost basis. For 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 March 31, 2017 and December 31, 2016, management believes the impairments detailed in the table above are temporary. For the quarter ended March 31, 2017, $1.3 million of an OTTI loss on an equity investment was realized in the Company’s consolidated statements of income. There were no OTTI losses realized in the Company’s consolidated statements of income for the quarter ended December 31, 2016.

The following tables set forth information with regard to contractual maturities of debt securities at March 31, 2017:

(In thousands)	Amortized cost		Estimated fair value
AFS debt securities:
Within one year	$	43,247	$	43,292
From one to five years		163,135		163,417
From five to ten years		162,510		163,494
After ten years		985,766		978,230
	$	1,354,658	$	1,348,433
HTM debt securities:
Within one year	$	38,266	$	38,275
From one to five years		30,155		30,330
From five to ten years		126,026		126,080
After ten years		321,346		318,969
	$	515,793	$	513,654

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.

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 March 31, 2017 and December 31, 2016.

Table of Contents

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 appropriately for risk of 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 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 and is 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 consists of real estate with completed structures. These commercial real estate loans are secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities, and other non owner-occupied 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.

Table of Contents

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 first 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 the risk, 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.

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.

Table of Contents

RESIDENTIAL REAL ESTATE LOANS

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 risk, 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.

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 collectibility 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 collectibility. 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 which 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.

The following tables illustrate the changes in the allowance for loan losses by our portfolio segments for the three months ended March 31, 2017 and 2016:

(In thousands)	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		(1,294	)		(6,502	)		(598	)		-			(8,394	)
Recoveries		447			1,035			33			-			1,515
Provision		130			6,861			388			-			7,379
Ending Balance as of March 31, 2017	$	24,727		$	34,769		$	6,204		$	-		$	65,700

Balance as of December 31, 2015	$	25,545		$	29,253		$	7,960		$	260		$	63,018
Charge-offs		(437	)		(5,413	)		(709	)		-			(6,559	)
Recoveries		765			974			22			-			1,761
Provision		(574	)		6,221			711			(260	)		6,098
Ending Balance as of March 31, 2016	$	25,299		$	31,035		$	7,984		$	-		$	64,318

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 March 31, 2017 and $0.7 million as of December 31, 2016. Net charge-offs related to acquired loans totaled approximately $0.4 million and $0.1 million during the three months ended March 31, 2017 and March 31, 2016, respectively, and are included in the table above.

Table of Contents

The following tables illustrate the allowance for loan losses and the recorded investment by portfolio segments as of March 31, 2017 and December 31, 2016:

(In thousands)	Commercial Loans		Consumer Loans		Residential Real Estate Mortgages		Total
As of March 31, 2017
Allowance for loan losses	$	24,727	$	34,769	$	6,204	$	65,700
Allowance for loans individually evaluated for impairment		422		-		-		422
Allowance for loans collectively evaluated for impairment	$	24,305	$	34,769	$	6,204	$	65,278
Ending balance of loans	$	2,824,936	$	2,171,593	$	1,275,774	$	6,272,303
Ending balance of originated loans individually evaluated for impairment		10,736		8,379		6,194		25,309
Ending balance of acquired loans individually evaluated for impairment		-		-		-		-
Ending balance of acquired loans collectively evaluated for impairment		228,021		56,852		193,253		478,126
Ending balance of originated loans collectively evaluated for impairment	$	2,586,179	$	2,106,362	$	1,076,327	$	5,768,868

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

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. Interest accrued in a prior period and not collected is charged-off against the allowance for loan losses.

If ultimate repayment of a nonaccrual loan is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment of principal is not expected, any payment received on a nonaccrual loan is applied to principal until ultimate repayment becomes expected. 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.

Table of Contents

The following tables set forth information with regard to past due and nonperforming loans by loan class as of March 31, 2017 and December 31, 2016:

As of March 31, 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	$	292	$	-	$	-	$	292	$	4,913	$	702,383	$	707,588
Commercial Real Estate		286		-		-		286		2,516		1,346,470		1,349,272
Agricultural		-		-		-		-		685		36,052		36,737
Agricultural Real Estate		-		-		-		-		1,771		30,314		32,085
Business Banking		2,965		428		-		3,393		4,766		463,074		471,233
Total Commercial Loans		3,543		428		-		3,971		14,651		2,578,293		2,596,915
Consumer Loans:
Indirect		15,407		3,552		2,222		21,181		2,135		1,575,393		1,598,709
Home Equity		2,635		614		58		3,307		2,926		447,902		454,135
Direct		246		71		103		420		63		61,414		61,897
Total Consumer Loans		18,288		4,237		2,383		24,908		5,124		2,084,709		2,114,741
Residential Real Estate Mortgages		2,444		322		-		2,766		8,585		1,071,170		1,082,521
Total Originated Loans	$	24,275	$	4,987	$	2,383	$	31,645	$	28,360	$	5,734,172	$	5,794,177

ACQUIRED
Commercial Loans:
Commercial	$	-	$	-	$	-	$	-	$	-	$	45,908	$	45,908
Commercial Real Estate		-		-		-		-		889		132,611		133,500
Business Banking		441		-		-		441		800		47,372		48,613
Total Commercial Loans		441		-		-		441		1,689		225,891		228,021
Consumer Loans:
Indirect		37		1		9		47		39		5,713		5,799
Home Equity		177		-		-		177		196		47,716		48,089
Direct		24		1		-		25		13		2,926		2,964
Total Consumer Loans		238		2		9		249		248		56,355		56,852
Residential Real Estate Mortgages		1,300		15		-		1,315		2,377		189,561		193,253
Total Acquired Loans	$	1,979	$	17	$	9	$	2,005	$	4,314	$	471,807	$	478,126
Total Loans	$	26,254	$	5,004	$	2,392	$	33,650	$	32,674	$	6,205,979	$	6,272,303

Table of Contents

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	$	-	$

NBT BANCORP INC - FORM 10-Q - May 10, 2017

Attached files