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EX-31.1 - EXHIBIT 31.1 - NBT BANCORP INCex31_1.htm
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EX-10.1 - EXHIBIT 10.1 - NBT BANCORP INCex10_1.htm
EX-32.1 - EXHIBIT 32.1 - NBT BANCORP INCex32_1.htm
EX-32.2 - EXHIBIT 32.2 - NBT BANCORP INCex32_2.htm
EX-31.2 - EXHIBIT 31.2 - NBT BANCORP INCex31_2.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 March 31, 2010.
OR
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 April 30, 2010, there were 34,460,268 shares outstanding of the Registrant's common stock, $0.01 par value per share.
 


 
 

 

NBT BANCORP INC.
FORM 10-Q--Quarter Ended March 31, 2010

TABLE OF CONTENTS
 
PART I   FINANCIAL INFORMATION
   
Item 1
   
 
   
 
   
 
   
 
   
 
   
 
   
Item 2
   
Item 3
   
Item 4
   
PART II
OTHER INFORMATION
   
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6
   
   


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)
 
2010
   
2009
 
             
Assets
           
Cash and due from banks
  $ 101,170     $ 107,980  
Short-term interest bearing accounts
    135,606       79,181  
Securities available for sale, at fair value
    1,151,746       1,116,758  
Securities held to maturity (fair value $158,896 and $161,851, respectively)
    157,108       159,946  
Trading securities
    2,593       2,410  
Federal Reserve and Federal Home Loan Bank stock
    33,728       35,979  
Loans and leases
    3,637,622       3,645,398  
Less allowance for loan and lease losses
    70,150       66,550  
Net loans and leases
    3,567,472       3,578,848  
Premises and equipment, net
    66,229       66,221  
Goodwill
    114,841       114,938  
Intangible assets, net
    19,809       20,590  
Bank owned life insurance
    75,732       74,751  
Other assets
    105,026       106,424  
Total assets
  $ 5,531,060     $ 5,464,026  
Liabilities
               
Demand (noninterest bearing)
  $ 758,770     $ 789,989  
Savings, NOW, and money market
    2,408,924       2,269,779  
Time
    1,009,485       1,033,278  
Total deposits
    4,177,179       4,093,046  
Short-term borrowings
    166,942       155,977  
Long-term debt
    504,590       554,698  
Trust preferred debentures
    75,422       75,422  
Other liabilities
    91,451       79,760  
Total liabilities
    5,015,584       4,958,903  
Stockholders’ equity
               
Preferred stock, $0.01 par value. Authorized 2,500,000 shares at March 31, 2010 and December 31, 2009
    -       -  
Common stock, $0.01 par value. Authorized 50,000,000 shares at March 31, 2010 and December 31, 2009; issued 38,035,539 at March 31, 2010 and  December 31, 2009
    380       380  
Additional paid-in-capital
    312,120       311,164  
Retained earnings
    277,158       270,232  
Accumulated other comprehensive income
    2,596       1,163  
Common stock in treasury, at cost, 3,601,082 and 3,650,068 shares at March 31, 2010 and December 31, 2009, respectively
    (76,778 )     (77,816 )
Total stockholders’ equity
    515,476       505,123  
Total liabilities and stockholders’ equity
  $ 5,531,060     $ 5,464,026  

See accompanying notes to unaudited interim consolidated financial statements.

 
NBT Bancorp Inc. and Subsidiaries
 
Three months ended March 31,
 
Consolidated Statements of Income (unaudited)
 
2010
   
2009
 
(In thousands, except per share data)
           
Interest, fee, and dividend income
           
Interest and fees on loans and leases
  $ 53,692     $ 55,411  
Securities available for sale
    10,046       12,375  
Securities held to maturity
    1,137       1,234  
Other
    596       361  
Total interest, fee, and dividend income
    65,471       69,381  
Interest expense
               
Deposits
    8,454       13,839  
Short-term borrowings
    124       147  
Long-term debt
    5,065       6,197  
Trust preferred debentures
    1,027       1,086  
Total interest expense
    14,670       21,269  
Net interest income
    50,801       48,112  
Provision for loan and lease losses
    9,243       6,451  
Net interest income after provision for loan and lease losses
    41,558       41,661  
Noninterest income
               
Service charges on deposit accounts
    6,130       6,297  
Insurance revenue
    5,245       5,338  
Trust
    1,766       1,409  
Net securities gains
    28       -  
Bank owned life insurance
    981       872  
ATM and debit card fees
    2,367       2,182  
Retirement plan administration fees
    2,390       1,741  
Other
    1,434       1,751  
Total noninterest income
    20,341       19,590  
Noninterest expense
               
Salaries and employee benefits
    22,204       21,427  
Occupancy
    4,152       4,165  
Equipment
    2,100       2,022  
Data processing and communications
    3,218       3,295  
Professional fees and outside services
    2,284       2,722  
Office supplies and postage
    1,542       1,530  
Amortization of intangible assets
    781       813  
Loan collection and other real estate owned
    1,059       748  
FDIC expenses
    1,553       1,529  
Other
    3,267       4,054  
Total noninterest expense
    42,160       42,305  
Income before income tax expense
    19,739       18,946  
Income tax expense
    5,763       5,874  
Net income
  $ 13,976     $ 13,072  
Earnings per share
               
Basic
  $ 0.41     $ 0.40  
Diluted
  $ 0.41     $ 0.40  

See accompanying notes to unaudited interim consolidated financial statements.


NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity (unaudited)
                         
                     
Accumulated
             
         
Additional
         
Other
   
Common
       
   
Common
   
Paid-in-
   
Retained
   
Comprehensive
   
Stock
       
 
 
Stock
   
Capital
   
Earnings
   
(Loss) Income
   
in Treasury
   
Total
 
(in thousands, except share and per share data)
                                   
                                     
Balance at December 31, 2008
  $ 365     $ 276,418     $ 245,340     $ (8,204 )   $ (82,074 )   $ 431,845  
Net income
    -       -       13,072       -       -       13,072  
Cash dividends - $0.20 per share
    -       -       (6,531 )     -       -       (6,531 )
Net issuance of 12,471 common shares to employee benefit plans and other stock plans, including tax benefit
    -       2       -       -       200       202  
Stock-based compensation
    -       1,183       -       -       -       1,183  
Issuance of 37,268 shares of restricted stock awards
    -       (792 )     -       -       792       -  
Forfeiture of 2,850 shares of restricted stock
    -       66       -       -       (66 )     -  
Other comprehensive income
    -       -       -       2,827       -       2,827  
Balance at March 31, 2009
  $ 365     $ 276,877     $ 251,881     $ (5,377 )   $ (81,148 )   $ 442,598  
                                                 
Balance at December 31, 2009
  $ 380     $ 311,164     $ 270,232     $ 1,163     $ (77,816 )   $ 505,123  
Net income
    -       -       13,976       -       -       13,976  
Cash dividends - $0.20 per share
    -       -       (6,883 )     -       -       (6,883 )
Net issuance of 37,931 shares to employee benefit plans and other stock plans, including tax benefit
    -       760       (167 )     -       720       1,313  
Stock-based compensation
    -       514       -       -       -       514  
Issuance of 13,055 shares of restricted stock awards
    -       (364 )     -       -       364       -  
Forfeiture of 2,000 shares of restricted stock
    -       46       -       -       (46 )     -  
Other comprehensive income
    -       -       -       1,433       -       1,433  
Balance at March 31, 2010
  $ 380     $ 312,120     $ 277,158     $ 2,596     $ (76,778 )   $ 515,476  

See accompanying notes to unaudited interim consolidated financial statements.

 
NBT Bancorp Inc. and Subsidiaries
 
Three Months Ended March 31,
 
Consolidated Statements of Cash Flows (unaudited)
 
2010
   
2009
 
(In thousands, except per share data)
           
Operating activities
           
Net income
  $ 13,976     $ 13,072  
Adjustments to reconcile net income to net cash provided by operating activities
               
Provision for loan and lease losses
    9,243       6,451  
Depreciation and amortization of premises and equipment
    1,324       1,335  
Net accretion on securities
    152       116  
Amortization of intangible assets
    781       813  
Stock based compensation
    514       1,183  
Bank owned life insurance income
    (981 )     (872 )
Trading security purchases
    (80 )     (436 )
Unrealized (gains) losses in trading securities
    (103 )     102  
Deferred income tax benefit
    (3,588 )     (643 )
Proceeds from sales of loans held for sale
    21,789       27,387  
Originations and purchases of loans held for sale
    (21,277 )     (36,586 )
Net gains on sales of loans held for sale
    (263 )     (166 )
Net securities gains
    (28 )     -  
Net gains on sales of other real estate owned
    (118 )     (12 )
Net decrease (increase) in other assets
    1,541       (15,617 )
Net (decrease) increase in other liabilities
    (3,979 )     969  
Net cash provided by (used in) operating activities
    18,903       (2,904 )
Investing activities
               
Securities available for sale:
               
Proceeds from maturities, calls, and principal paydowns
    145,182       113,516  
Proceeds from sales
    702       -  
Purchases
    (160,683 )     (101,283 )
Securities held to maturity:
               
Proceeds from maturities, calls, and principal paydowns
    15,400       14,783  
Purchases
    (12,578 )     (13,799 )
Net decrease in loans
    1,539       6,524  
Net decrease in Federal Reserve and FHLB stock
    2,251       1,125  
Cash received from death benefit
    -       1,037  
Purchases of premises and equipment, net
    (1,332 )     (1,045 )
Proceeds from sales of other real estate owned
    811       87  
Net cash (used in) provided by investing activities
    (8,708 )     20,945  
Financing activities
               
Net increase in deposits
    84,133       152,661  
Net increase (decrease) in short-term borrowings
    10,965       (79,305 )
Proceeds from issuance of long-term debt
    -       121  
Repayments of long-term debt
    (50,108 )     (16,252 )
Excess tax benefit from exercise of stock options
    809       32  
Proceeds from the issuance of shares to employee benefit plans and other stock plans
    504       170  
Cash dividends and payment for fractional shares
    (6,883 )     (6,531 )
Net cash provided by financing activities
    39,420       50,896  
Net increase in cash and cash equivalents
    49,615       68,937  
Cash and cash equivalents at beginning of period
    187,161       110,396  
Cash and cash equivalents at end of period
  $ 236,776     $ 179,333  
Supplemental disclosure of cash flow information
Cash paid during the period for:
 
 
   
 
 
Interest
  $ 14,530     $ 21,014  
Income taxes paid
    3,421       164  
Noncash investing activities:
               
Loans transferred to OREO
  $ 324     $ 664  
Increase in securities purchases in process
    18,315       -  

See accompanying notes to unaudited interim consolidated financial statements.

 
   
Three months ended March 31,
 
Consolidated Statements of Comprehensive Income (unaudited)
 
2010
   
2009
 
(In thousands)
 
 
   
 
 
Net income
  $ 13,976     $ 13,072  
Other comprehensive income, net of tax
               
Unrealized net holding gains arising during the period (pre-tax amounts of $2,010 and  $4,026)
    1,213       2,432  
Reclassification adjustment for net gains related to securities available for sale included in net income (pre-tax amounts of ($28) and $0)
    (17 )     -  
Pension and other benefits:
               
Amortization of prior service cost and actuarial gains (pre-tax amounts of $393 and $658)
    237       395  
Total other comprehensive income
    1,433       2,827  
Comprehensive income
  $ 15,409     $ 15,899  

See accompanying notes to unaudited interim consolidated financial statements


NBT BANCORP INC. and Subsidiaries
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010

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, the Company is focused on community banking operations.  Through NBT Financial, the Company operates EPIC Advisors, Inc. (“EPIC”), a retirement plan administrator.  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 Burlington, 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.
 
Note 3.
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 review of these factors and historical and current indicators, 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.

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 March 31, 2010 or December 31, 2009. 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.

Note 4.
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 $585.6 million at March 31, 2010 and $556.6 million at December 31, 2009.  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 $36.6 million at March 31, 2010 and $34.6 million at December 31, 2009. As of March 31, 2010, the fair value of standby letters of credit was not significant to the Company’s consolidated financial statements.


Note 5.
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 March 31,
 
2010
   
2009
 
(in thousands, except per share data)
           
Basic EPS:
           
Weighted average common shares outstanding
    34,230       32,478  
Net income available to common shareholders
    13,976       13,072  
Basic EPS
  $ 0.41     $ 0.40  
Diluted EPS:
               
Weighted average common shares outstanding
    34,230       32,478  
Dilutive effect of common stock options and restricted stock
    195       167  
Weighted average common shares and common share equivalents
    34,425       32,645  
Net income available to common shareholders
    13,976       13,072  
Diluted EPS
  $ 0.41     $ 0.40  

There were 1,464,626 stock options for the quarter ended March 31, 2010 and 1,216,128 stock options for the quarter ended March 31, 2009 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.

Note 6. 
Defined Benefit Postretirement Plans

The Company has a qualified, noncontributory, defined benefit pension plan covering substantially all of its employees at March 31, 2010.  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 March 31,
   
Three months ended March 31,
 
Components of net periodic (benefit) cost:
 
2010
   
2009
   
2010
   
2009
 
Service cost
  $ 462     $ 587     $ 5     $ 6  
Interest cost
    871       862       53       56  
Expected return on plan assets
    (1,777 )     (1,401 )     -       -  
Net amortization
    401       671       (8 )     (13 )
Total (benefit) cost
  $ (43 )   $ 719     $ 50     $ 49  

The Company is not required to make contributions to the plans in 2010.  The Company recorded approximately $0.2 million, net of tax, as amortization of pension amounts previously recognized in Accumulated Other Comprehensive Income during the three months ended March 31, 2010.

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 7.
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.  On January 1, 2010, the Company adopted Accounting Standards Update (“ASU”) 2009-17, Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“Topic 810”), which had no impact on the Company’s financial statements.
 
 
As of March 31, 2010, 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
June 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 8.
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:

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.

For the three months ended March 31, 2010, the Company has made no transfers of assets between Level 1 and Level 2, and has had no Level 3 activity.

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

   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Balance as of
March 31, 2010
 
Assets:
                       
Securities Available for Sale:
                       
U.S. Treasury
  $ 20,141     $ -     $ -     $ 20,141  
Federal Agency
    -       356,533       -       356,533  
State & municipal
    -       140,529       -       140,529  
Mortgage-backed
    -       261,068       -       261,068  
Collateralized mortgage obligations
    -       338,560       -       338,560  
Corporate
    -       20,673       -       20,673  
Other securities
    12,225       2,017       -       14,242  
Total Securities Available for Sale
  $ 32,366     $ 1,119,380     $ -     $ 1,151,746  
                                 
Trading Securities
    2,593       -       -       2,593  
Total
  $ 34,959     $ 1,119,380     $ -     $ 1,154,339  

 
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Balance as of
December 31,
2009
 
Assets:
                       
Securities Available for Sale:
                       
U.S. Treasury
  $ 20,086     $ -     $ -     $ 20,086  
Federal Agency
    -       313,157       -       313,157  
State & municipal
    -       137,613       -       137,613  
Mortgage-backed
    -       280,861       -       280,861  
Collateralized mortgage obligations
    -       330,711       -       330,711  
Corporate
    -       20,674       -       20,674  
Other securities
    11,654       2,002       -       13,656  
Total Securities Available for Sale
  $ 31,740     $ 1,085,018     $ -     $ 1,116,758  
                                 
Trading Securities
    2,410       -       -       2,410  
Total
  $ 34,150     $ 1,085,018     $ -     $ 1,119,168  

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 three month period ended March 31, 2010 was related to impaired loans.  During the three month period ended March 31, 2010, the Company established specific reserves of approximately $0.2 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.


The following table sets forth information with regard to estimated fair values of financial instruments at March 31, 2010 and December 31, 2009:
 
   
March 31, 2010
   
December 31, 2009
 
(In thousands)
 
Carrying amount
   
Estimated fair value
   
Carrying amount
   
Estimated fair value
 
Financial assets
                       
Cash and cash equivalents
  $ 236,776     $ 236,776     $ 187,161     $ 187,161  
Securities available for sale
    1,151,746       1,151,746       1,116,758       1,116,758  
Securities held to maturity
    157,108       158,896       159,946       161,851  
Trading securities
    2,593       2,593       2,410       2,410  
Loans (1)
    3,637,622       3,624,431       3,645,398       3,627,198  
Less allowance for loan losses
    70,150       -       66,550       -  
Net loans
    3,567,472       3,624,431       3,578,848       3,627,198  
Accrued interest receivable
    21,053       21,053       22,104       22,104  
Financial liabilities
                               
Savings, NOW, and money market
  $ 2,408,924     $ 2,408,924     $ 2,269,779     $ 2,269,779  
Time deposits
    1,009,485       1,018,487       1,033,278       1,041,370  
Noninterest bearing
    758,770       758,770       789,989       789,989  
Short-term borrowings
    166,942       166,942       155,977       155,977  
Long-term debt
    504,590       504,338       554,698       596,588  
Accrued interest payable
    5,954       5,954       5,814       5,814  
Trust preferred debentures
    75,422       73,728       75,422       73,244  

(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.


Note 9.  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
 
March 31, 2010
                       
U.S. Treasury
  $ 20,092     $ 49     $ -     $ 20,141  
Federal Agency
    353,878       3,033       377       356,534  
State & municipal
    138,424       2,455       350       140,529  
Mortgage-backed
    248,331       12,736       -       261,067  
Collateralized mortgage obligations
    329,405       9,155       -       338,560  
Corporate
    20,009       664       -       20,673  
Other securities
    11,613       2,657       28       14,242  
Total securities available for sale
  $ 1,121,752     $ 30,749     $ 755     $ 1,151,746  
December 31, 2009
                               
U.S. Treasury
  $ 20,102     $ 5     $ 21     $ 20,086  
Federal Agency
    310,012       3,214       69       313,157  
State & municipal
    135,181       2,738       306       137,613  
Mortgage-backed
    269,255       11,606       -       280,861  
Collateralized mortgage obligations
    321,890       9,003       182       330,711  
Corporate
    20,011       663       -       20,674  
Other securities
    12,295       1,483       122       13,656  
Total securities available for sale
  $ 1,088,746     $ 28,712     $ 700     $ 1,116,758  

In the available for sale category at March 31, 2010, federal agency securities were comprised of Government-Sponsored Enterprise (“GSE”) securities; mortgaged-backed securities were comprised of GSE securities with an amortized cost of $219.7 million and a fair value of $230.5 million and US Government Agency securities with an amortized cost of $28.7 million and a fair value of $30.5 million; collateralized mortgage obligations were comprised of GSE securities with an amortized cost of $183.0 million and a fair value of $187.1 million and US Government Agency securities with an amortized cost of $146.4 million and a fair value of $151.4 million.

In the available for sale category at December 31, 2009, federal agency securities were comprised of GSE securities; mortgaged-backed securities were comprised of GSE securities with an amortized cost of $238.8 million and a fair value of $248.7 million and US Government Agency securities with an amortized cost of $30.5 million and a fair value of $32.1 million; collateralized mortgage obligations were comprised of GSE securities with an amortized cost of $186.1 million and a fair value of $190.4 million and US Government Agency securities with an amortized cost of $135.8 million and a fair value of $140.3 million.

Others securities primarily represent marketable equity securities.


The following table sets forth information with regard to sales transactions of securities available for sale:
 
   
Three months ended March 31,
 
(In thousands)
 
2010
   
2009
 
Proceeds from sales
  $ 702     $ -  
Gross realized gains
    20       -  
Gross realized losses
    -       -  
Net securities gains
  $ 20     $ -  

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 March 31, 2010 and December 31, 2009, were pledged to secure public deposits and for other purposes required or permitted by law.  Additionally, at March 31, 2010 and December 31, 2009, securities available for sale with an amortized cost of $195.2 million and $178.0 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:

   
Amortized
   
Unrealized
   
Unrealized
   
Estimated
 
(In thousands)
 
cost
   
gains
   
losses
   
fair value
 
March 31, 2010
                       
Mortgage-backed
  $ 1,983     $ 196     $ -     $ 2,179  
State & municipal
    155,125       1,595       3       156,717  
Total securities held to maturity
  $ 157,108     $ 1,791     $ 3     $ 158,896  
December 31, 2009
                               
Mortgage-backed
  $ 2,041     $ 172     $ -     $ 2,213  
State & municipal
    157,905       1,736       3       159,638  
Total securities held to maturity
  $ 159,946     $ 1,908     $ 3     $ 161,851  

At March 31, 2010 and December 31, 2009, all of the mortgaged-backed securities held to maturity were comprised of US Government Agency securities.


The following table sets forth information with regard to investment securities with unrealized losses at March 31, 2010 and December 31, 2009:

   
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, 2010
                                                     
U.S. Treasury
  $ -     $ -           $ -     $ -           $ -     $ -       -  
Federal agency
    90,499       (377 )     9       -       -       -       90,499       (377 )     9  
State & municipal
    9,471       (82 )     18       9,630       (271 )     37       19,101       (353 )     55  
Mortgage-backed
    -       -       -       -       -       -       -       -       -  
Collateralized mortgage obligations
    -       -       -       -       -       -       -       -       -  
Other securities
    -       -       -       52       (28 )     1       52       (28 )     1  
Total securities with unrealized losses
  $ 99,970     $ (459 )     27     $ 9,682     $ (299 )     38     $ 109,652     $ (758 )     65  
                                                                         
December 31, 2009
                                                                       
U.S. Treasury
  $ 20,022     $ (21 )     2     $ -     $ -       -     $ 20,022     $ (21 )     2  
Federal agency
    29,931       (69 )     3       -       -       -       29,931       (69 )     3  
State & municipal
    7,121       (40 )     13       9,629       (269 )     33       16,750       (309 )     46  
Mortgage-backed
    -       -       -       -       -       -       -       -       -  
Collateralized mortgage obligations
    51,882       (124 )     4       33,235       (58 )     2       85,117       (182 )     6  
Other securities
    4,900       (93 )     1       52       (29 )     1       4,952       (122 )     2  
Total securities with unrealized losses
  $ 113,856     $ (347 )     23     $ 42,916     $ (356 )     36     $ 156,772     $ (703 )     59  

Declines in the fair value of held-to-maturity and available-for-sale 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.  If 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 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 entity 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 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 other-than-temporary impairment related to the credit loss shall be recognized in earnings. The amount of the total other-than-temporary impairment related to other factors shall be recognized in other comprehensive income, net of applicable taxes.

In estimating other-than-temporary impairment 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 held to maturity until they mature, at which time it is believed the Company will receive full value for the securities. Furthermore, as of March 31, 2010, management also had the intent to hold, and will not be required to sell, the securities classified as available for sale for a period of time sufficient for a recovery of cost, which may be until maturity.  The unrealized losses 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 fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline.  As of March 31, 2010, management believes the impairments detailed in the table above are temporary and no other-than-temporary impairment losses have been realized in the Company’s consolidated statements of income.

The following tables set forth information with regard to contractual maturities of debt securities at March 31, 2010:

(In thousands)
 
Amortized cost
   
Estimated fair value
 
Debt securities classified as available for sale
           
Within one year
  $ 26,880     $ 27,137  
From one to five years
    384,741       387,007  
From five to ten years
    274,950       286,879  
After ten years
    423,568       436,481  
    $ 1,110,139     $ 1,137,504  
Debt securities classified as held to maturity
               
Within one year
  $ 97,134     $ 97,153  
From one to five years
    38,342       39,376  
From five to ten years
    16,919       17,457  
After ten years
    4,713       4,910  
    $ 157,108     $ 158,896  

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, 2010.


NBT BANCORP INC. AND SUBSIDIARIES
Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this discussion and analysis is to provide a concise description of the financial condition and results of operations of NBT Bancorp Inc. and its wholly owned consolidated subsidiaries, NBT Bank, N.A. (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”), and NBT Holdings, Inc. (“NBT Holdings”) (collectively referred to herein as the “Company”). This discussion will focus on results of operations, financial condition, capital resources and asset/liability management. Reference should be made to the Company's consolidated financial statements and footnotes thereto included in this Form 10-Q as well as to the Company's Annual Report on Form 10-K for the year ended December 31, 2009 for an understanding of the following discussion and analysis.  Operating results for the three month period ended March 31, 2010 are not necessarily indicative of the results of the full year ending December 31, 2010 or any future period.

Forward-looking Statements

Certain statements in this filing and future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act. These statements may be identified by the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “could,” or other similar terms.   There are a number of factors, many of which are beyond the Company’s control, that could cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) revenues may be lower than expected; (3) changes in the interest rate environment may affect interest margins; (4) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit; (5) legislative or regulatory changes, including changes in accounting standards or tax laws, may adversely affect the businesses in which the Company is engaged; (6) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than the Company; (7) adverse changes may occur in the securities markets or with respect to inflation; (8) acts of war or terrorism; (9) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; (10) internal control failures; and (11) the Company’s success in managing the risks involved in the foregoing.

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors, including those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the Securities and Exchange Commission, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances for future periods to differ materially from those anticipated or projected.

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


Critical Accounting Policies

Management of the Company considers the accounting policy relating to the allowance for loan and lease losses to be a critical accounting policy given the judgment in evaluating the level of the allowance required to cover credit losses inherent in the loan and lease portfolio and the material effect that such judgments can have on the results of operations. While management’s current evaluation of the allowance for loan and lease losses indicates that the allowance is adequate, under adversely different conditions or assumptions, the allowance may need to be increased. For example, if historical loan and lease loss experience significantly worsened or if current economic conditions further deteriorated, particularly in the Company’s primary market area, additional provisions for loan and lease losses may be required to increase the allowance. In addition, the assumptions and estimates relating to loss experience, ability to collect and economic conditions used in the internal reviews of the Company’s nonperforming loans and potential problem loans has a significant impact on the overall analysis of the adequacy of the allowance for loan and lease losses. While management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral valuations were significantly lowered, the Company’s allowance for loan and lease policy may require additional provisions for loan and lease losses.

Management of the Company considers the accounting policy relating to pension accounting to be a critical accounting policy. Management is required to make various assumptions in valuing its pension assets and liabilities. These assumptions include the expected rate of return on plan assets, the discount rate, and the rate of increase in future compensation levels. Changes to these assumptions could impact earnings in future periods. The Company takes into account the plan asset mix, funding obligations, and expert opinions in determining the various rates used to estimate pension expense. The Company also considers relevant indices and market interest rates in setting the appropriate discount rate. In addition, the Company reviews expected inflationary and merit increases to compensation in determining the rate of increase in future compensation levels.

Management of the Company considers the accounting policy relating to other-than-temporary impairment to be a critical accounting policy.  Management systematically evaluates certain assets for other-than-temporary declines in fair value, primarily investment securities and lease residual assets.  Management considers historical values and current market conditions as a part of the assessment.  The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings and the amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes.

Overview

Significant factors management reviews to evaluate the Company’s operating results and financial condition include, but are not limited to:  net income and earnings per share, return on assets and equity, net interest margin, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services, technology advancements, market share and peer comparisons.  The following information should be considered in connection with the Company's results for the first three months of 2010:
 
 
·
The Company experienced a 2.3% growth in average earning assets for the three months ending March 31, 2010 as compared with the three months ending March 31, 2009, due primarily to increases in average short-term interest bearing accounts and average securities held to maturity.  However, as a result of this excess liquidity, our Federal Funds sold position had a negative impact of 12 basis points (“bp”) on our net interest margin for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009.

 
·
The Company continues to strategically focus on noninterest income initiatives. Retirement plan administration fees increased approximately 37% for the three months ended March 31, 2010 as compared with the same period in 2009 due to new business from Epic Advisors, Inc., a full-service 401(k) plan recordkeeping firm. In addition, trust income increased approximately $0.4 million for the three months ended March 31, 2010 as compared to the same period in 2009 as a result of an increase in fair value of trust assets under administration.


 
·
Pension expenses decreased by approximately $0.8 million for the first quarter of 2010 as compared with the first quarter of 2009, due in large part to the increase in the expected return on pension plan assets.

 
·
The Company continues to make strategic investments into new markets in an effort to position itself for future growth. In February 2010, the Company opened an office in Queensbury, NY, continuing our expansion into the Glens Falls, NY region. The Company also has plans for 2010 to open a financial center and branch office in Schenectady, NY and branch office in Williston, VT.

 
·
The Company recorded a provision for loan and lease losses of $9.2 million during the first quarter of 2010 compared with $6.5 million during the first quarter of 2009. This increase was due primarily to the increase in the required level of allowance to loan and lease losses as a result of consistent application of the Company’s migration analysis model for calculating the allowance for loan and lease losses, combined with the impacts that New York State and local economic conditions have on customers’ ability to pay, collateral values and loan charge-offs. Despite the increase in the provision for loan and lease losses, several asset quality indicators have remained stable or improved. Net charge-offs to average loans and leases for the three months ended March 31, 2010 were 0.63%, compared with 0.70% for the three months ended March 31, 2009. Past due loans as a percentage of total loans has improved slightly to 0.87% at March 31, 2010, as compared with 0.89% at December 31, 2009 and 0.93% at March 31, 2009.

Net income per diluted share for the three months ended March 31, 2010 was $0.41 per share, as compared with $0.40 per share for the three months ended March 31, 2009.  Net income for the three months ended March 31, 2010 was $14.0 million, up $0.9 million, or 6.9%, from $13.1 million for the first quarter last year.  The increase in net income for the three months ended March 31, 2010 compared with the three months ended March 31, 2009 was primarily the result of increases in net interest income, trust income, and retirement plan administration income, offset by increased provision for loan and lease losses.

The following table depicts several annualized measurements of performance using U.S. GAAP net income that management reviews in analyzing the Company’s performance. Returns on average assets and average equity measure how effectively an entity utilizes its total resources and capital, respectively. Net interest margin, which is the net federal taxable equivalent (FTE) interest income divided by average earning assets, is a measure of an entity's ability to utilize its earning assets in relation to the cost of funding. Interest income for tax-exempt securities and loans is adjusted to a taxable equivalent basis using the statutory Federal income tax rate of 35%.

Performance Measures
           
             
For the three months ended March 31
 
2010
   
2009
 
Return on average assets (ROAA)
    1.03 %     0.99 %
Return on average equity (ROAE)
    11.05 %     12.14 %
Net Interest Margin
    4.21 %     4.09 %


Net Interest Income

Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest bearing liabilities, primarily deposits and borrowings.  Net interest income is affected by the interest rate spread, the difference between the yield on earning assets and cost of interest bearing liabilities, as well as the volumes of such assets and liabilities. Net interest income is one of the major determining factors in a financial institution’s performance as it is the principal source of earnings. In response to the financial crisis, the Federal Open Market Committee lowered the target Federal Funds rate 500 bp, from 5.25% to 0.25% between September 2007 and December 2008 resulting in a corresponding drop in the Prime Rate from 8.25% to 3.25%.  Since December 2008, there has been no action taken to change the rate.  As a result of these changes, the yield curve has steepened, thus far allowing the Company to lower its cost of funds more quickly than the repricing of earning assets, resulting in a higher net interest margin.  In addition, the Company has lowered rates paid on interest-bearing liabilities.

FTE net interest income increased $2.6 million, or 5.2%, during the three months ended March 31, 2010, compared to the same period of 2009. The increase in FTE net interest income resulted primarily from a decrease in the rate paid on interest bearing liabilities of 63 bp to 1.44% for the three months ended March 31, 2010 from 2.07% for the same period in 2009.  The interest rate spread increased 18 bp during the three months ended March 31, 2010 compared to the same period in 2009.  The net interest margin increased by 12 bp to 4.21% for the three months ended March 31, 2010, compared with 4.09% for the same period in 2009.  For the three months ended March 31, 2010, total FTE interest income decreased $4.0 million, or 5.6% as compared with the three months ended March 31, 2009.  The yield on earning assets for the period decreased 45 bp to 5.39% for the three months ended March 31, 2010 from 5.84% for the same period in 2009.  This decrease was partially offset by an increase in average interest earning assets of $114.9 million, or 2.3%, for the three months ended March 31, 2010 when compared to the same period in 2009, principally from growth in short-term interest bearing accounts.  As a result of our excess liquidity, our Federal Funds sold position had a negative impact of 12 bp on our net interest margin for the three months ended March 31, 2010.

For the quarter ended March 31, 2010, total interest expense decreased $6.6 million, or 31.0%, primarily the result of the decrease in target Fed Funds rate over the past two years, which impacts the Company’s short-term borrowing, money market account and time deposit rates.  Average interest bearing liabilities decreased nominally for the three months ended March 31, 2010 when compared to the same period in 2009.  Total average interest bearing deposits increased $63.6 million, or 1.9%, for the three months ended March 31, 2010 when compared to the same period in 2009.  The rate paid on average interest bearing deposits decreased 67 bp from 1.69% for the three months ended March 31, 2009 to 1.02% for the same period in 2010.  For the three months ended March 31, 2010, the Company experienced a shift in its deposit mix from time deposits to money market deposit accounts and NOW accounts. Average time deposit accounts decreased approximately $314.8 million, or 23.5%, for the three months ended March 31, 2010 when compared to the same period in 2009, while money market accounts and NOW accounts collectively increased approximately $323.7 million, or 21.7%.

Total average borrowings, including trust preferred debentures, decreased $96.1 million, or 11.2%, for the three months ended March 31, 2010 compared with the same period in 2009.  Average short-term borrowings increased by $8.9 million, or 5.9%, from $148.4 million for the three months ended March 31, 2009 to $157.3 million for the three months ended March 31, 2010.  Average long-term debt decreased $104.9 million, or 16.6%, for the three months ended March 31, 2010, compared with the same period in 2009.  The rate paid on long-term debt decreased to 3.90% for the three months ended March 31, 2010, from 3.98% for the same period in 2009.  As a result of the decrease in the average balance and rate paid on long-term debt, interest paid on long-term debt decreased $1.1 million, or 18.3%, for the three months ended March 31, 2010 as compared to the same period in 2009.


Average Balances and Net Interest Income
The following tables include the condensed consolidated average balance sheet, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest bearing liabilities on a taxable equivalent basis. Interest income for tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory Federal income tax rate of 35%.

Three months ended March 31,
                                   
   
Average
   
2010
   
Yield/
   
Average
   
2009
   
Yield/
 
(dollars in thousands)
 
Balance
   
Interest
   
Rates
   
Balance
   
Interest
   
Rates
 
ASSETS
                                   
Short-term interest bearing accounts
  $ 124,018     $ 67       0.22 %   $ 2,684     $ 13       1.96 %
Securities available for sale (1)(excluding unrealized gains or losses)
    1,088,604       10,781       4.02 %     1,089,512       13,114       4.88 %
Securities held to maturity (1)
    155,800       1,714       4.46 %     138,700       1,861       5.44 %
Investment in FRB and FHLB Banks
    34,728       529       6.17 %     38,852       349       3.64 %
Loans and leases (2)
    3,640,137       53,880       6.00 %     3,658,682       55,626       6.17 %
Total interest earning assets
  $ 5,043,287     $ 66,971       5.39 %   $ 4,928,430     $ 70,963       5.84 %
Other assets
    446,257                       423,046                  
Total assets
  $ 5,489,544                     $ 5,351,476                  
                                                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                                               
Money market deposit accounts
  $ 1,093,986     $ 1,896       0.70 %   $ 942,223     $ 3,109       1.34 %
NOW deposit accounts
    722,179       822       0.46 %     550,241       786       0.58 %
Savings deposits
    532,677       193       0.15 %     478,033       210       0.18 %
Time deposits
    1,027,343       5,543       2.19 %     1,342,097       9,734       2.94 %
Total interest bearing deposits
  $ 3,376,185     $ 8,454       1.02 %   $ 3,312,594     $ 13,839       1.69 %
Short-term borrowings
    157,255       124       0.32 %     148,448       147       0.40 %
Trust preferred debentures
    75,422       1,027       5.52 %     75,422       1,086       5.84 %
Long-term debt
    526,326       5,065       3.90 %     631,238       6,197       3.98 %
Total interest bearing liabilities
  $ 4,135,188     $ 14,670       1.44 %   $ 4,167,702     $ 21,269       2.07 %
Demand deposits
    759,533                       680,835                  
Other liabilities
    81,649                       66,254                  
Stockholders' equity
    513,174                       436,685                  
Total liabilities and stockholders' equity
  $ 5,489,544