NBT BANCORP INC - FORM 10-Q - November 9, 2009

Attached files

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EX-10.1 - EXHIBIT 10.1 - NBT BANCORP INC	ex10_1.htm
EX-31.2 - EXHIBIT 31.2 - NBT BANCORP INC	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - NBT BANCORP INC	ex31_1.htm
EX-32.1 - EXHIBIT 32.1 - NBT BANCORP INC	ex32_1.htm
EX-10.2 - EXHIBIT 10.2 - NBT BANCORP INC	ex10_2.htm
EX-10.3 - EXHIBIT 10.3 - NBT BANCORP INC	ex10_3.htm
EX-10.6 - EXHIBIT 10.6 - NBT BANCORP INC	ex10_6.htm
EX-10.5 - EXHIBIT 10.5 - NBT BANCORP INC	ex10_5.htm
EX-32.2 - EXHIBIT 32.2 - NBT BANCORP INC	ex32_2.htm
EX-10.7 - EXHIBIT 10.7 - NBT BANCORP INC	ex10_7.htm
EX-10.4 - EXHIBIT 10.4 - NBT BANCORP INC	ex10_4.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2009.

o	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 x No o

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 o No o

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

Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o

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

Yes o No x

As of October 31, 2009, there were 34,338,364 shares outstanding of the Registrant's common stock, $0.01 par value per share.

NBT BANCORP INC.

FORM 10-Q--Quarter Ended September 30, 2009

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION

Item 1	Interim Financial Statements (Unaudited)

	Consolidated Balance Sheets at September 30, 2009 and December 31, 2008

	Consolidated Statements of Income for the three and nine month periods ended September 30, 2009 and 2008

	Consolidated Statements of Stockholders’ Equity for the nine month periods ended September 30, 2009 and 2008

	Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2009 and 2008

	Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2009 and 2008

	Notes to Unaudited Interim Consolidated Financial Statements

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3	Quantitative and Qualitative Disclosures about Market Risk

Item 4	Controls and Procedures

PART II	OTHER INFORMATION

Item 1	Legal Proceedings
Item 1A	Risk Factors
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3	Defaults Upon Senior Securities
Item 4	Submission of Matters to a Vote of Security Holders
Item 5	Other Information
Item 6	Exhibits

SIGNATURES

INDEX TO EXHIBITS

Table of Contents

NBT Bancorp Inc. and Subsidiaries Consolidated Balance Sheets (unaudited)
(In thousands, except share and per share data)	September 30, 2009			December 31, 2008
Assets
Cash and due from banks	$	127,001		$	107,409
Short-term interest bearing accounts		118,224			2,987
Securities available for sale, at fair value		1,132,423			1,119,665
Securities held to maturity (fair value $170,851 and $141,308, respectively)		168,658			140,209
Trading securities		2,263			1,407
Federal Reserve and Federal Home Loan Bank stock		37,103			39,045
Loans and leases		3,615,890			3,651,911
Less allowance for loan and lease losses		64,650			58,564
Net loans and leases		3,551,240			3,593,347
Premises and equipment, net		65,652			65,241
Goodwill		114,942			114,838
Intangible assets, net		21,371			23,367
Bank owned life insurance		73,430			72,276
Other assets		72,080			56,297
Total assets	$	5,484,387		$	5,336,088
Liabilities
Demand (noninterest bearing)	$	744,383		$	685,495
Savings, NOW, and money market		2,204,456			1,885,551
Time		1,155,634			1,352,212
Total deposits		4,104,473			3,923,258
Short-term borrowings		147,792			206,492
Long-term debt		579,712			632,209
Trust preferred debentures		75,422			75,422
Other liabilities		79,446			66,862
Total liabilities		4,986,845			4,904,243
Stockholders’ equity
Preferred stock, $0.01 par value. Authorized 2,500,000 shares at September 30, 2009 and December 31, 2008		-			-
Common stock, $0.01 par value. Authorized 50,000,000 shares at September 30, 2009 and December 31, 2008; issued 38,035,574 and 36,459,344 at September 30, 2009 and December 31, 2008, respectively		380			365
Additional paid-in-capital		310,435			276,418
Retained earnings		263,300			245,340
Accumulated other comprehensive income (loss)		2,335			(8,204	)
Common stock in treasury, at cost, 3,701,456 and 3,853,548 shares at September 30, 2009 and December 31, 2008, respectively		(78,908	)		(82,074	)
Total stockholders’ equity		497,542			431,845
Total liabilities and stockholders’ equity	$	5,484,387		$	5,336,088

See accompanying notes to unaudited interim consolidated financial statements.

Table of Contents

NBT Bancorp Inc. and Subsidiaries	Three months ended September 30,				Nine months ended September 30,
Consolidated Statements of Income (unaudited)	2009		2008		2009		2008
(In thousands, except per share data)
Interest, fee, and dividend income
Interest and fees on loans and leases	$	54,666	$	58,154	$	164,963	$	173,991
Securities available for sale		11,116		13,451		35,162		40,614
Securities held to maturity		1,239		1,343		3,682		4,335
Other		615		673		1,582		2,187
Total interest, fee, and dividend income		67,636		73,621		205,389		221,127
Interest expense
Deposits		12,002		18,351		38,964		59,761
Short-term borrowings		142		763		413		4,465
Long-term debt		5,761		6,310		17,956		16,241
Trust preferred debentures		1,049		1,154		3,211		3,547
Total interest expense		18,954		26,578		60,544		84,014
Net interest income		48,682		47,043		144,845		137,113
Provision for loan and lease losses		9,101		7,179		24,751		19,460
Net interest income after provision for loan and lease losses		39,581		39,864		120,094		117,653
Noninterest income
Service charges on deposit accounts		7,110		7,414		20,357		20,877
Insurance and broker/ dealer revenue		4,368		2,338		13,926		4,811
Trust		1,668		1,720		4,838		5,593
Net securities gains		129		1,510		146		1,543
Bank owned life insurance		683		923		2,225		2,438
ATM fees		2,443		2,334		6,993		6,656
Retirement plan administration fees		2,412		1,461		6,347		4,840
Other		2,037		1,262		5,453		4,718
Total noninterest income		20,850		18,962		60,285		51,476
Noninterest expense
Salaries and employee benefits		21,272		16,850		62,646		50,526
Occupancy		3,481		3,359		11,256		10,396
Equipment		1,997		1,908		6,024		5,595
Data processing and communications		3,305		3,155		9,924		9,440
Professional fees and outside services		2,691		2,205		7,820		7,825
Office supplies and postage		1,426		1,322		4,385		3,992
Amortization of intangible assets		827		462		2,465		1,231
Loan collection and other real estate owned		755		505		2,177		1,802
Impairment on lease residual assets		-		2,000		-		2,000
FDIC insurance		1,535		614		7,096		986
Other		3,743		4,678		11,483		12,722
Total noninterest expense		41,032		37,058		125,276		106,515
Income before income tax expense		19,399		21,768		55,103		62,614
Income tax expense		5,821		6,685		16,893		19,158
Net income	$	13,578	$	15,083	$	38,210	$	43,456
Earnings per share
Basic	$	0.40	$	0.47	$	1.14	$	1.36
Diluted	$	0.40	$	0.46	$	1.13	$	1.34

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 Loss			Common Stock in Treasury			Total
(in thousands, except share and per share data)

Balance at December 31, 2007	$	365	$	273,275		$	215,031		$	(3,575	)	$	(87,796	)	$	397,300
Cumulative effect adjustment to record liability for split-dollar life insurance policies							(1,518	)								(1,518	)
Net income							43,456									43,456
Cash dividends - $0.60 per share							(19,314	)								(19,314	)
Purchase of 272,840 treasury shares													(5,939	)		(5,939	)
Net issuance of 461,219 shares to employee benefit plans and other stock plans, including tax benefit				845			(502	)					9,768			10,111
Stock-based compensation				1,540												1,540
Net issuance of 25,200 shares of restricted stock awards				(557	)								526			(31	)
Forfeiture of 8,567 shares of restricted stock				193									(193	)		-
Other comprehensive loss										(4,477	)					(4,477	)
Balance at September 30, 2008	$	365	$	275,296		$	237,153		$	(8,052	)	$	(83,634	)	$	421,128

Balance at December 31, 2008	$	365	$	276,418		$	245,340		$	(8,204	)	$	(82,074	)	$	431,845
Net income							38,210									38,210
Cash dividends - $0.60 per share							(20,250	)								(20,250	)
Net issuance of 1,576,230 common shares		15		33,522									-			33,537
Net issuance of 96,225 shares to employee benefit plans and other stock plans, including tax benefit				(546	)								2,025			1,479
Stock-based compensation				2,359												2,359
Net issuance of 59,717 shares of restricted stock awards				(1,406	)								1,229			(177	)
Forfeiture of 3,850 shares of restricted stock				88									(88	)		-
Other comprehensive income										10,539						10,539
Balance at September 30, 2009	$	380	$	310,435		$	263,300		$	2,335		$	(78,908	)	$	497,542

See accompanying notes to unaudited interim consolidated financial statements.

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NBT Bancorp Inc. and Subsidiaries	Nine Months Ended September 30,
Consolidated Statements of Cash Flows (unaudited)	2009			2008
(In thousands, except per share data)
Operating activities
Net income	$	38,210		$	43,456
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan and lease losses		24,751			19,460
Depreciation and amortization of premises and equipment		4,016			3,886
Net amortization on securities		363			317
Amortization of intangible assets		2,465			1,231
Stock based compensation		2,359			1,540
Bank owned life insurance income		(2,225	)		(2,438	)
Purchases of trading securities		(497	)		(266	)
Unrealized (gains) losses in trading securities		(359	)		242
Proceeds from sales of loans held for sale		111,042			20,992
Originations of loans held for sale		(113,493	)		(20,608	)
Net gains on sales of loans held for sale		(764	)		(125	)
Net security gains		(146	)		(1,543	)
Net gain on sales of other real estate owned		(138	)		(214	)
Impairment on lease residual assets		-			2,000
Net increase in other assets		(13,685	)		(1,341	)
Net increase (decrease) in other liabilities		7,629			(1,240	)
Net cash provided by operating activities		59,528			65,349
Investing activities
Securities available for sale:
Proceeds from maturities, calls, and principal paydowns		343,117			312,286
Proceeds from sales		2,753			1,140
Purchases		(343,276	)		(288,104	)
Securities held to maturity:
Proceeds from maturities, calls, and principal paydowns		69,240			64,117
Purchases		(97,764	)		(65,046	)
Net decrease (increase) in loans		17,438			(172,374	)
Net decrease (increase) in Federal Reserve and FHLB stock		1,942			(1,020	)
Net cash used in Mang Insurance Agency, LLC acquisition		-			(25,873	)
Cash received from death benefit		1,054			-
Purchases of premises and equipment		(4,427	)		(4,665	)
Proceeds from sales of other real estate owned		617			724
Net cash used in investing activities		(9,306	)		(178,815	)
Financing activities
Net increase in deposits		181,215			118,701
Net decrease in short-term borrowings		(58,700	)		(217,990	)
Proceeds from issuance of long-term debt		-			340,021
Repayments of long-term debt		(52,497	)		(131,446	)
Excess tax benefit from exercise of stock options		144			800
Proceeds from the issuance of shares to employee benefit plans and other stock plans		1,158			9,280
Issuance of common stock		33,537			-
Purchases of treasury stock		-			(5,939	)
Cash dividends and payment for fractional shares		(20,250	)		(19,314	)
Net cash provided by financing activities		84,607			94,113
Net increase (decrease) in cash and cash equivalents		134,829			(19,353	)
Cash and cash equivalents at beginning of period		110,396			162,946
Cash and cash equivalents at end of period	$	245,225		$	143,593

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	62,269		$	87,534
Income taxes paid		10,521			11,463
Noncash investing activities:
Loans transferred to OREO	$	3,133		$	805
Acquisitions:
Fair value of assets acquired	$	-		$	28,875
Fair value of liabilities assumed		-			3,002

See accompanying notes to unaudited interim consolidated financial statements.

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	Three months ended September 30,						Nine months ended September 30,
Consolidated Statements of Comprehensive Income (unaudited)	2009			2008			2009			2008
(In thousands)
Net income	$	13,578		$	15,083		$	38,210		$	43,456
Other comprehensive income (loss), net of tax
Unrealized net holding gains (losses) arising during the period (pre-tax amounts of $11,390, $802, $15,640, and ($5,576))		6,875			480			9,442			(3,711	)
Reclassification adjustment for net gains related to securities available for sale included in net income (pre-tax amounts of ($129), ($1,510), ($146), and ($1,543))		(77	)		(908	)		(88	)		(928	)
Pension and other benefits:
Amortization of prior service cost and actuarial gains (pre-tax amounts of $658, $90, $1,974, and $270)		395			54			1,185			162
Total other comprehensive income (loss)		7,193			(374	)		10,539			(4,477	)
Comprehensive income	$	20,771		$	14,709		$	48,749		$	38,979

See accompanying notes to unaudited interim consolidated financial statements

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NBT BANCORP INC. and Subsidiaries

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

Note 1.

Description of Business

NBT Bancorp Inc. (the “Registrant”) is a registered financial holding company incorporated in the State of Delaware in 1986, with its principal headquarters located in Norwich, New York. The Registrant is the parent holding company of NBT Bank, N.A. (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”), NBT Holdings, Inc. (“NBT Holdings”), CNBF Capital Trust I, NBT Statutory Trust I and NBT Statutory Trust II (the “Trusts”). Through the Bank and NBT Financial, the Company is focused on community banking operations and other financial services. Through NBT Holdings, the Company operates Mang Insurance Agency, LLC (“Mang”), a full-service insurance agency. The Trusts were organized to raise additional regulatory capital and to provide funding for certain acquisitions. The Registrant’s primary business consists of providing commercial banking and financial services to customers in its market area. The principal assets of the Registrant are all of the outstanding shares of common stock of its direct subsidiaries, and its principal sources of revenue are the management fees and dividends it receives from the Bank, NBT Financial, and NBT Holdings.

The Bank is a full service commercial bank formed in 1856, which provides a broad range of financial products to individuals, corporations and municipalities throughout upstate New York, northeastern Pennsylvania, and northwestern Vermont market areas.

Note 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.” 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 through November 9, 2009, the date the condensed consolidated financial statements included in the Quarterly Report on Form 10-Q were issued.

Note 3.

New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 166, "Accounting for Transfers of Financial Assets," or SFAS No. 166. This Statement removes the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of financial assets as a sale, clarifies other sale-accounting criteria and changes the initial measurement of a transferor and interest in transferred financial assets.

Enhanced disclosures are required to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets for interim and annual reporting periods. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2009 and for interim and annual reporting periods thereafter. Earlier application is prohibited. Adoption of SFAS No. 166 is not expected to have a material impact on our financial condition or results of operations.

In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)," or SFAS No. 167. This Statement changes the approach to determining a variable interest entity’s (“VIE”) primary beneficiary (the reporting entity that must consolidate the VIE) and requires companies to more frequently reassess whether they must consolidate VIE’s. Enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity. It is possible that application of this revised guidance will change an enterprise’s assessment of which entities with which it is involved are variable interest entities. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2009 and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company is assessing if the adoption of SFAS No. 167 will have a material impact on our financial condition or results of operations.

Table of Contents

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles (“GAAP”)—a replacement of FASB Statement No. 162”, or SFAS No. 168. On the effective date of this standard, Accounting Standards Codification (ASC) will become the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the Securities and Exchange Commission (SEC). FASB ASC significantly changes the way financial statement preparers, auditors, and academics perform accounting research. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. This new standard flattens the GAAP hierarchy to two levels: one that is authoritative (in FASB ASC) and one that is nonauthoritative (not in FASB ASC). Adoption of SFAS No. 168 did not have an impact on our financial condition or results of operations, however will affect technical accounting references in future filings.

Note 4.

Use of Estimates

Preparing financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the allowance for loan and lease losses, other real estate owned (“OREO”), income taxes, pension expense, fair values of lease residual assets, fair values of financial instruments and status of contingencies are particularly susceptible to material change in the near term.

The allowance for loan and lease losses is the amount which, in the opinion of management, is necessary to absorb probable losses inherent in the loan and lease portfolio. The allowance is determined based upon numerous considerations, including local and national economic conditions, the growth and composition of the loan portfolio with respect to the mix between the various types of loans and their related risk characteristics, a review of the value of collateral supporting the loans, comprehensive reviews of the loan portfolio by the independent loan review staff and management, as well as consideration of volume and trends of delinquencies, nonperforming loans, and loan charge-offs. As a result of the test of adequacy, required additions to the allowance for loan and lease losses are made periodically by charges to the provision for loan and lease losses.

The allowance for loan and lease losses related to impaired loans is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain loans where repayment of the loan is expected to be provided solely by the underlying collateral (collateral dependent loans). The Company’s impaired loans are generally collateral dependent loans. The Company considers the estimated cost to sell, on a discounted basis, when determining the fair value of collateral in the measurement of impairment if those costs are expected to reduce the cash flows available to repay or otherwise satisfy the loans.

Management believes that the allowance for loan and lease losses is adequate. While management uses available information to recognize loan and lease losses, future additions to the allowance for loan and lease losses may be necessary based on changes in economic conditions or changes in the values of properties securing loans in the process of foreclosure. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan and lease losses. Such agencies may require the Company to recognize additions to the allowance for loan and lease losses based on their judgments about information available to them at the time of their examination which may not be currently available to management.

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OREO consists of properties acquired through foreclosure or by acceptance of a deed in lieu of foreclosure. These assets are recorded at the lower of fair value of the asset acquired less estimated costs to sell or “cost” (defined as the fair value at initial foreclosure). At the time of foreclosure, or when foreclosure occurs in-substance, the excess, if any, of the loan over the fair value of the assets received, less estimated selling costs, is charged to the allowance for loan and lease losses and any subsequent valuation write-downs are charged to other expense. Operating costs associated with the properties are charged to expense as incurred. Gains on the sale of OREO are included in income when title has passed and the sale has met the minimum down payment requirements prescribed by U.S. GAAP.

Income taxes are accounted for under the asset and liability method. The Company files consolidated tax returns on the accrual basis. Deferred income taxes are recognized for the future tax consequences and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the available carryback period. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Based on available evidence, gross deferred tax assets will ultimately be realized and a valuation allowance was not deemed necessary at September 30, 2009 or December 31, 2008. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. Uncertain tax positions are recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more than likely than not threshold are measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement.

Management is required to make various assumptions in valuing its pension assets and liabilities. These assumptions include the expected long-term 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 assumptions used to compute pension expense. The Company also considers relevant indices and market interest rates in selecting an appropriate discount rate. A cash flow analysis for expected benefit payments from the plan is performed each year to also assist in selecting the discount rate. In addition, the Company reviews expected inflationary and merit increases to compensation in determining the expected rate of increase in future compensation levels.

One of the most significant estimates associated with leasing operations is the estimated residual value of leased vehicles expected at the termination of the lease. A lease receivable asset, when established, includes the estimated residual value of the leased vehicle at the termination of the lease. Management is required to make various assumptions to estimate the fair value of the vehicle lease residual assets. If it is determined that there has been a decline in the estimated fair value of the residual that is judged by management to be other-than-temporary, an impairment charge would be recognized and recorded with other noninterest expenses in the consolidated statements of income.

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Note 5.

Commitments and Contingencies

The Company is a party to financial instruments in the normal course of business to meet 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 policy to make such commitments as it uses for on-balance-sheet items. Commitments to extend credit and unused lines of credit totaled $580.8 million at September 30, 2009 and $537.6 million at December 31, 2008. 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 stand-by letters of credit to third parties. These stand-by 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 stand-by 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 $33.8 million at September 30, 2009 and $27.6 million at December 31, 2008. As of September 30, 2009, the fair value of standby letters of credit was not significant to the Company’s consolidated financial statements.

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Note 6.

Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share 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).

The following is a reconciliation of basic and diluted earnings per share for the periods presented in the consolidated statements of income.

Three months ended September 30,	2009		2008
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding		34,119		32,137
Net income available to common shareholders		13,578		15,083
Basic EPS	$	0.40	$	0.47
Diluted EPS:
Weighted average common shares outstanding		34,119		32,137
Dilutive effect of common stock options and restricted stock		223		316
Weighted average common shares and common share equivalents		34,342		32,453
Net income available to common shareholders		13,578		15,083
Diluted EPS	$	0.40	$	0.46

Nine months ended September 30,		2009		2008
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding		33,573		32,060
Net income available to common shareholders		38,210		43,456
Basic EPS	$	1.14	$	1.36
Diluted EPS:
Weighted average common shares outstanding		33,573		32,060
Dilutive effect of common stock options and restricted stock		208		255
Weighted average common shares and common share equivalents		33,781		32,315
Net income available to common shareholders		38,210		43,456
Diluted EPS	$	1.13	$	1.34

There were 863,260 stock options for the quarter ended September 30, 2009 and 228,587 stock options for the quarter ended September 30, 2008 that were not considered in the calculation of diluted earnings per share since the stock options’ exercise price was greater than the average market price during these periods.

There were 897,455 stock options for the nine months ended September 30, 2009 and 840,882 stock options for the nine months ended September 30, 2008 that were not considered in the calculation of diluted earnings per share since the stock options’ exercise price was greater than the average market price during these periods.

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Note 7.

Defined Benefit Postretirement Plans

The Company has a qualified, noncontributory, defined benefit pension plan covering substantially all of its employees at September 30, 2009. Benefits paid from the plan are based on age, years of service, compensation and 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 (“ERISA”) standards. Assets of the plan are invested in publicly traded stocks and bonds. Prior to January 1, 2000, the Company’s plan was a traditional defined benefit plan based on final average compensation. On January 1, 2000, the plan was converted to a cash balance plan with grandfathering provisions for existing participants.

In addition to the pension plan, the Company also provides supplemental employee retirement plans to certain current and former executives. These supplemental employee retirement plans and the defined benefit pension plan are collectively referred to herein as “Pension Benefits.”

Also, the Company provides certain health care benefits for retired employees. Benefits are accrued over the employees’ active service period. Only employees that were employed by the Company on or before January 1, 2000 are eligible to receive postretirement health care benefits. The plan is contributory for participating retirees, requiring participants to absorb certain deductibles and coinsurance amounts with contributions adjusted annually to reflect cost sharing provisions and benefit limitations called for in the plan. Eligibility is contingent upon the direct transition from active employment status to retirement without any break in employment from the Company. Employees also must be participants in the Company’s medical plan prior to their retirement. The Company funds the cost of postretirement health care as benefits are paid. The Company elected to recognize the transition obligation on a delayed basis over twenty years. These postretirement benefits are referred to herein as “Other Benefits.”

The components of expense for pension and other benefits are set forth below (in thousands):

	Pension Benefits						Other Benefits
	Three months ended September 30,						Three months ended September 30,
Components of net periodic benefit cost:	2009			2008			2009			2008
Service cost	$	587		$	573		$	6		$	6
Interest cost		860			804			56			60
Expected return on plan assets		(1,401	)		(1,502	)		-			-
Net amortization		670			96			(12	)		(6	)
Total cost (benefit)	$	716		$	(29	)	$	50		$	60

	Pension Benefits						Other Benefits
	Nine months ended September 30,						Nine months ended September 30,
Components of net periodic benefit cost:	2009			2008			2009			2008
Service cost	$	1,760		$	1,718		$	18		$	18
Interest cost		2,582			2,414			167			180
Expected return on plan assets		(4,202	)		(4,507	)		-			-
Net amortization		2,011			289			(37	)		(19	)
Total cost (benefit)	$	2,151		$	(86	)	$	148		$	179

The Company is not required to make contributions to the plans in 2009. However, the Company made contributions to the plans totaling approximately $12.0 million during the nine months ended September 30, 2009. The Company recorded approximately $1.2 million, net of tax, as amortization of pension amounts previously recognized in Accumulated Other Comprehensive Loss during the nine months ended September 30, 2009.

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Recent market conditions have resulted in an unusually high degree of volatility and increased the risks and short term liquidity associated with certain investments held by the Company’s defined benefit pension plan (“the Plan”) which could impact the value of these investments.

Note 8.

Trust Preferred Debentures

CNBF Capital Trust I is a Delaware statutory business trust formed in 1999, for the purpose of issuing $18 million in trust preferred securities and lending the proceeds to the Company. NBT Statutory Trust I is a Delaware statutory business trust formed in 2005, for the purpose of issuing $5 million in trust preferred securities and lending the proceeds to the Company. NBT Statutory Trust II is a Delaware statutory business trust formed in 2006, for the purpose of issuing $50 million in trust preferred securities and lending the proceeds to the Company to provide funding for the acquisition of CNB Bancorp, Inc. These three statutory business trusts are collectively referred herein to as “the Trusts.” The Company guarantees, on a limited basis, payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities. The Trusts are variable interest entities (“VIEs”) for which the Company is not the primary beneficiary, as defined by U.S. GAAP. In accordance with U.S. GAAP, the accounts of the Trusts are not included in the Company’s consolidated financial statements.

As of September 30, 2009, the Trusts had the following issues of trust preferred debentures, all held by the Trusts, outstanding (dollars in thousands):

Description	Issuance Date	Trust Preferred Securities Outstanding		Interest Rate	Trust Preferred Debt Owed To Trust		Final Maturity date
CNBF Capital Trust I	August 1999		18,000	3-month LIBOR plus 2.75%	$	18,720	August 2029

NBT Statutory Trust I	November 2005		5,000	6.30% Fixed *		5,155	December 2035

NBT Statutory Trust II	February 2006		50,000	6.195% Fixed *		51,547	March 2036

* Fixed for 5 years, converts to floating at 3-month LIBOR plus 140 basis points

The Company owns all of the common stock of the Trusts, which have issued trust preferred securities in conjunction with the Company issuing trust preferred debentures to the Trusts. The terms of the trust preferred debentures are substantially the same as the terms of the trust preferred securities.

Note 9.

Fair Value Measurements and Fair Value of Financial Instruments

U.S. 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 U.S. 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:

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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).

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 price 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.

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.

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The following table sets 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):

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of September 30, 2009
Assets:
Securities Available for Sale:
U.S. Treasury		64		-		-		64
Federal Agency		-		324,618		-		324,618
State & municipal				143,265		-		143,265
Mortgage-backed		-		301,476		-		301,476
Collateralized mortgage obligations		-		328,836		-		328,836
Corporate				20,732		-		20,732
Other securities		10,417		3,015		-		13,432
Total Securities Available for Sale	$	10,481	$	1,121,942	$	-	$	1,132,423

Trading Securities		2,263		-		-		2,263
Total	$	12,744	$	1,121,942	$	-	$	1,134,686

Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). The majority of the other investment securities are reported at fair value utilizing Level 2 inputs. The prices for these 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, among other things. Management reviews the methodologies used in pricing the securities by its third party providers.

U.S. GAAP require disclosure of assets and liabilities measured and recorded at fair value on a nonrecurring basis such as goodwill, loans held for sale, other real estate owned, lease residuals, collateral-dependent impaired loans, mortgage servicing rights, and held-to-maturity securities. The only nonrecurring fair value measurement recorded during the nine month period ended September 30, 2009 was related to impaired loans. The Company had collateral dependent impaired loans with a carrying value of approximately $13.2 million which had specific reserves included in the allowance for loan and lease losses of $3.8 million at September 30, 2009. During the three month period ended September 30, 2009, the Company established specific reserves of approximately $2.2 million, which were included in the provision for loan and lease losses for the respective period. During the nine month period ended September 30, 2009, the Company established specific reserves of approximately $3.3 million, which were included in the provision for loan and lease losses for the respective period. The Company uses the fair value of underlying collateral to estimate the specific reserves for collateral dependent impaired loans. Based on the valuation techniques used, the fair value measurements for collateral dependent impaired loans are classified as Level 3.

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The following table sets forth information with regard to estimated fair values of financial instruments at September 30, 2009 and December 31, 2008:

	September 30, 2009				December 31, 2008
(In thousands)	Carrying amount		Estimated fair value		Carrying amount		Estimated fair value
Financial assets
Cash and cash equivalents	$	245,225	$	245,225	$	110,396	$	110,396
Securities available for sale		1,132,423		1,132,423		1,119,665		1,119,665
Securities held to maturity		168,658		170,851		140,209		141,308
Trading securities		2,263		2,263		1,407		1,407
Loans (1)		3,615,890		3,602,116		3,651,911		3,650,428
Less allowance for loan losses		64,650		-		58,564		-
Net loans		3,551,240		3,602,116		3,593,347		3,650,428
Accrued interest receivable		21,021		21,021		22,746		22,746
Financial liabilities
Savings, NOW, and money market	$	2,204,456	$	2,204,456	$	1,885,551	$	1,885,551
Time deposits		1,155,634		1,164,501		1,352,212		1,367,425
Noninterest bearing		744,383		744,383		685,495		685,495
Short-term borrowings		147,792		147,792		206,492		206,492
Long-term debt		579,712		629,220		632,209		660,246
Accrued interest payable		6,984		6,984		8,709		8,709
Trust preferred debentures		75,422		78,913		75,422		79,411

(1) Lease receivables are included in the estimated fair value amounts at their carrying amounts.

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.

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Note 10.

Securities

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

(In thousands)	Amortized cost		Unrealized gains		Unrealized losses		Estimated fair value
September 30, 2009
U.S. Treasury	$	59	$	5	$	-	$	64
Federal Agency		320,015		4,603		-		324,618
State & municipal		138,022		5,374		131		143,265
Mortgage-backed		287,025		14,451		-		301,476
Collateralized mortgage obligations		318,783		10,415		362		328,836
Corporate		20,012		720		-		20,732
Other securities		12,295		1,595		458		13,432
Total securities available for sale	$	1,096,211	$	37,163	$	951	$	1,132,423
December 31, 2008
U.S. Treasury	$	59	$	8	$	-	$	67
Federal Agency		213,997		5,211		41		219,167
State & municipal		126,369		2,374		770		127,973
Mortgage-backed		351,973		8,755		99		360,629
Collateralized mortgage obligations		376,058		5,656		1,437		380,277
Corporate		20,016		769		-		20,785
Other securities		10,475		1,279		987		10,767
Total securities available for sale	$	1,098,947	$	24,052	$	3,334	$	1,119,665

In the available for sale category at September 30, 2009, federal agency securities were comprised of Government-Sponsored Enterprise (“GSE”) securities; mortgaged-backed securities were comprised of GSE securities with an amortized cost of $254.8 million and a fair value of $267.4 million and US Government Agency securities with an amortized cost of $32.2 million and a fair value of $34.0 million; collateralized mortgage obligations were comprised of GSE securities with an amortized cost of $165.3 million and a fair value of $169.8 million and US Government Agency securities with an amortized cost of $153.4 million and a fair value of $159.1 million.

In the available for sale category at December 31, 2008, federal agency securities were comprised of GSE securities; mortgaged-backed securities were comprised of GSE securities with an amortized cost of $313.7 million and a fair value of $321.0 million and US Government Agency securities with an amortized cost of $38.2 million and a fair value of $39.7 million; collateralized mortgage obligations were comprised of GSE securities with an amortized cost of $204.1 million and a fair value of $205.6 million and US Government Agency securities with an amortized cost of $172.0 million and a fair value of $174.6 million.

Others securities primarily represent marketable equity securities.

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The following table sets forth information with regard to sales transactions of securities available for sale:

	Three months ended September 30,					Nine months ended September 30,
(In thousands)	2009			2008		2009			2008
Proceeds from sales	$	2,753		$	5,660	$	2,753		$	6,800
Gross realized gains		154			1,661		154			1,661
Gross realized losses		(49	)		-		(49	)		(46	)
Net securities (losses) gains	$	105		$	1,661	$	105		$	1,615

During the periods presented above, the Company also recognized securities gains and losses from calls and maturities.

Securities available for sale with amortized costs totaling $1.1 billion at September 30, 2009 and December 31, 2008, were pledged to secure public deposits and for other purposes required or permitted by law. Additionally, at September 30, 2009 and December 31, 2008, securities available for sale with an amortized cost of $169.4 million and $165.7 million, respectively, were pledged as collateral for securities sold under repurchase agreements.

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

(In thousands)	Amortized cost		Unrealized gains		Unrealized losses		Estimated fair value
September 30, 2009
Mortgage-backed	$	2,128	$	168	$	-	$	2,296
State & municipal		166,530		2,030		5		168,555
Total securities held to maturity	$	168,658	$	2,198	$	5	$	170,851
December 31, 2008
Mortgage-backed	$	2,372	$	95	$	-	$	2,467
State & municipal		136,259		1,048		44		137,263
Other securities		1,578		-		-		1,578
Total securities held to maturity	$	140,209	$	1,143	$	44	$	141,308

At September 30, 2009, all of the mortgaged-backed securities held to maturity were comprised of US Government Agency securities.

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The following table sets forth information with regard to investment securities with unrealized losses at September 30, 2009 and December 31, 2008:

	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, 2009
U.S. Treasury	$	-	$	-			-	$	-	$	-			-	$	-	$	-			-
Federal agency		-		-			-		-		-			-		-		-			-
State & municipal		1,001		(5	)		2		8,641		(126	)		38		9,642		(131	)		40
Mortgage-backed		-		-			-		-		-			-		-		-			-
Collateralized mortgage obligations		-		-			-		41,739		(362	)		3		41,739		(362	)		3
Corporate		-		-			-		-		-			-		-		-			-
Other securities		4,565		(428	)		1		51		(30	)		1		4,616		(458	)		2
Total securities with unrealized losses	$	5,566	$	(433	)		3	$	50,431	$	(518	)		42	$	55,997	$	(951	)		45

December 31, 2008
U.S. Treasury	$	-	$	-			-	$	-	$	-			-	$	-	$	-			-
Federal agency		9,959		(41	)		1		-		-			-		9,959		(41	)		1
State & municipal		17,024		(390	)		31		15,112		(380	)		57		32,136		(770	)		88
Mortgage-backed		2,105		(28	)		15		7,336		(71	)		5		9,441		(99	)		20
Collateralized mortgage obligations		46,865		(1,301	)		5		15,682		(136	)		9		62,547		(1,437	)		14
Corporate		-		-