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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

		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

		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

		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

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

		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

(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

		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			-				-				-				-				-				-				-				-				-
Other securities			5,276				(947	)			5				704				(40	)			1				5,980				(987	)			6
Total securities with unrealized losses		$	81,229			$	(2,707	)			57			$	38,834			$	(627	)			72			$	120,063			$	(3,334	)			129

(In thousands)		Amortized cost				Estimated fair value
Debt securities classified as available for sale
Within one year		$	27,467			$	28,037
From one to five years			318,253				321,542
From five to ten years			315,200				330,189
After ten years			422,996				439,223
		$	1,083,916			$	1,118,991
Debt securities classified as held to maturity
Within one year		$	107,216			$	107,262
From one to five years			37,653				38,852
From five to ten years			18,455				19,232
After ten years			5,334				5,505
		$	168,658			$	170,851

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. (“the Registrant”) 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 Position, 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 2008 Form 10-K for an understanding of the following discussion and analysis. Operating results for the three and nine month periods ended September 30, 2009 are not necessarily indicative of the results of the full year ending December 31, 2009 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.

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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 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 evaluations 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

The following information should be considered in connection with the Company's results for the first nine months of 2009:

 

·

Like all FDIC insured financial institutions, the Company has been subjected to substantial increases in FDIC recurring premiums, as well as a special assessment levied by the FDIC in the second quarter of 2009, which had a significant impact on 2009 year to date earnings. For the three months ended September 30, 2009, FDIC expenses increased $0.9 million over the three months ended September 30, 2008. For the nine months ended September 30, 2009, FDIC expenses increased $6.1 million over the nine months ended September 30, 2008, including the aforementioned special assessment totaling $2.5 million. The FDIC premium increases and special assessment had a $0.02 and $0.13 effect on diluted earnings per share for the three months ended September 30, 2009 and for the nine months ended September 30, 2009, respectively.

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·

Pension expenses increased in 2009 in comparison to 2008 primarily due to the impact of market declines on pension assets. The Company expects pension expense to remain at these increased levels during the remainder of 2009. For the three months ended September 30, 2009, pension expenses increased $0.7 million over the three months ended September 30, 2008. For the nine months ended September 30, 2009, pension expenses increased $2.2 million over the nine months ended September 30, 2008. The pension expense increases had a $0.01 and $0.04 effect on diluted earnings per share for the three months ended September 30, 2009 and for the nine months ended September 30, 2009, respectively.

 

·

The Company's results for the first nine months of 2009, unlike the first nine months of 2008, include the results of Mang for the entire period. Mang was acquired by the Company on September 1, 2008. Mang provides brokered insurance products to individuals and businesses from locations in 19 upstate New York communities.

 

·

In 2009, the Company has strategically expanded into the northwestern Vermont region. A loan production office is currently located in Burlington, Vermont.

 

·

The Company’s results for the first nine months of 2009 include operating costs of new branches from de novo activity for three branches opened in 2007, four branches opened in 2008 and the aforementioned loan production office in Burlington, Vermont, which began operating in 2009. The operating costs for those locations are included in the Company’s noninterest expense for the first nine months of 2009 of approximately $2.3 million, as compared to $2.0 million for the same period in 2008.

 

·

The Company's common stock was added to the Standard & Poor's SmallCap 600 Index during the first quarter of 2009. Simultaneously with being added to the index, the Company launched a public offering of its common stock, which was completed during the second quarter of 2009.

 

·

As a result of the current economic recession, the Company is facing certain challenges in its industry. Given the current low rate environment, the Company’s net interest margin could come under pressure as the cash flows from the loan and securities portfolios are reinvested at lower rates and deposit rates are at or near their lowest level in years. In an effort to mitigate the effect of the recession on its loan portfolio, the Company continues to originate loans using strict underwriting criteria, specifically for consumer lending and has discontinued originating new auto leases since the second quarter of 2009. In addition, the Company has increased sales of newly originated loans to secondary markets to mitigate interest rate risk.

In addition, the Company has not actively pursued the types of loans, such as subprime, alt-A and no-interest loans, that have been the most problematic for many banks. Therefore, the Company has not made substantial changes to its core business of investing deposit funds in loans and leases in its market areas in response to the recent and continuing economic crisis. However, in light of increased margin pressures due in part to the economic crisis, the Company has recently increased its focus on earning noninterest income through organic growth of our retirement plan administration services and the Company’s acquisition of Mang Insurance Agency in September of 2008. The Company has also increased its resources for collecting on past due loans.

Net income per diluted share for the three months ended September 30, 2009 was $0.40 per share, as compared with $0.46 per share for the three months ended September 30, 2008. Net income for the three months ended September 30, 2009 was $13.6 million, down $1.5 million, or 10.0%, from $15.1 million for the third quarter last year. The decrease in net income for the three months ended September 30, 2009 compared with the three months ended September 30, 2008 was primarily the result of the aforementioned increase in FDIC expenses, an increase in the provision for loan and lease losses, and an increase in salaries and employee benefits due to increases in full-time-equivalent employees and pension expenses.

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Net income per diluted share for the nine months ended September 30, 2009 was $1.13 per share, as compared with $1.34 per share for the nine months ended September 30, 2008. Net income for the nine months ended September 30, 2009 was $38.2 million, down $5.2 million, or 12.1%, from the nine months ended September 30, 2008. The decrease in net income for the nine months ended September 30, 2009 compared with the nine months ended September 30, 2008 was primarily the result of the aforementioned increase in FDIC expenses including the $2.5 million special assessment, an increase in the provision for loan and lease losses, and an increase in salaries and employee benefits due to increases in full-time-equivalent employees and pension expenses.

Table 1 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 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%.

Table 1 - Performance Measures

2009		First Quarter				Second Quarter				Third Quarter				Nine Months Ended September 30, 2009
Return on average assets (ROAA)			0.99	%			0.85	%			0.99	%			0.95	%
Return on average equity (ROAE)			12.14	%			9.63	%			11.01	%			10.89	%
Net Interest Margin			4.09	%			3.95	%			3.98	%			4.00	%
2008
Return on average assets (ROAA)			1.07	%			1.12	%			1.13	%			1.11	%
Return on average equity (ROAE)			13.68	%			14.49	%			14.58	%			14.26	%
Net Interest Margin			3.84	%			3.94	%			3.94	%			3.91	%

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. The impact of these actions is further explained in Table 2, which represents an analysis of net interest income on a FTE basis.

FTE net interest income increased $1.6 million, or 3.3%, during the three months ended September 30, 2009, compared to the same period of 2008. The increase in FTE net interest income resulted primarily from a decrease in the rate paid on interest bearing liabilities of 74 bp to 1.83% for the three months ended September 30, 2009 from 2.57% for the same period in 2008. The interest rate spread increased 12 bp during the three months ended September 30, 2009 compared to the same period in 2008. The net interest margin increased by 4 bp to 3.98% for the three months ended September 30, 2009, compared with 3.94% for the same period in 2008. For the three months ended September 30, 2009, total FTE interest income decreased $6.0 million, or 8.0% as compared with the three months ended September 30, 2008. The yield on earning assets for the period decreased 61 bp to 5.48% for the three months ended September 30, 2009 from 6.09% for the same period in 2008. This decrease was partially offset by an increase in average interest earning assets of $94.6 million, or 1.9%, for the three months ended September 30, 2009 when compared to the same period in 2008, 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 9 bp on our net interest margin for the three months ended September 30, 2009.

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For the quarter ended September 30, 2009, total interest expense decreased $7.6 million, or 28.7%, primarily the result of the 175 basis point drop in the target Fed Funds rate from 2.00% at September 30, 2008 to 0.25% at September 30, 2009, 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 September 30, 2009 when compared to the same period in 2008. Total average interest bearing deposits increased $57.7 million, or 1.8%, for the three months ended September 30, 2009 when compared to the same period in 2008. The rate paid on average interest bearing deposits decreased 80 bp from 2.24% for the three months ended September 30, 2008 to 1.44% for the same period in 2009. For the three months ended September 30, 2009, 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 $313.0 million, or 20.7%, for the three months ended September 30, 2009 when compared to the same period in 2008, while money market accounts and NOW accounts collectively increased approximately $336.0 million, or 26.4%.

Total average borrowings, including trust preferred debentures, decreased $62.4 million, or 7.3%, for the three months ended September 30, 2009 compared with the same period in 2008. Average short-term borrowings decreased by $22.1 million, or 14.3%, from $154.6 million for the three months ended September 30, 2008 to $132.5 million for the three months ended September 30, 2009. The Company has been in a Fed Funds sold position since March 2009 which has decreased reliance on short-term borrowings. Interest expense from short-term borrowings decreased $0.6 million, or 81.4%. The rate paid on short-term borrowings decreased 154 bp from 1.96% for the three months ended September 30, 2008 to 0.42% for the same period in 2009. Average long-term debt decreased $40.3 million, or 6.4%, for the three months ended September 30, 2009, compared with the same period in 2008. The rate paid on long-term debt decreased to 3.90% for the three months ended September 30, 2009, from 4.01% for the same period in 2008. As a result of the decrease in the average balance and rate paid on long-term debt, interest paid on long-term debt decreased $0.5 million, or 8.7%, for the three months ended September 30, 2009 as compared to the same period in 2008.

FTE net interest income increased $7.5 million, or 5.3%, during the nine months ended September 30, 2009, compared to the same period of 2008. The increase in FTE net interest income resulted primarily from a decrease in the rate paid on interest bearing liabilities of 80 bp, to 1.95% for the nine months ended September 30, 2009 from 2.75% for the same period in 2008. The interest rate spread increased 20 bp during the nine months ended September 30, 2009 compared to the same period in 2008. The net interest margin increased by 9 bp to 4.00% for the nine months ended September 30, 2009, compared with 3.91% for the same period in 2008. For the nine months ended September 30, 2009, total FTE interest income decreased $15.9 million, or 7.1%. The yield on earning assets for the period decreased 59 bp to 5.63% for the nine months ended September 30, 2009 from 6.22% for the same period in 2008. This decrease was partially offset by an increase in average interest earning assets of $136.6 million, or 2.8%, for the nine months ended September 30, 2009 when compared to the same period in 2008, principally from growth in average loans and leases and average short-term interest bearing accounts. As a result of our excess liquidity, our Federal Funds sold position had a negative impact of 7 bp on our net interest margin for the nine months ended September 30, 2009.

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For the nine months ended September 30, 2009, total interest expense decreased $23.5 million, or 27.9%, primarily the result of the 175 basis point drop in the target Fed Funds rate from 2.00% at September 30, 2008 to 0.25% at September 30, 2009, which impacts the Company’s short-term borrowing, money market account and time deposit rates. Additionally, average interest bearing liabilities increased $71.2 million, or 1.7%, for the nine months ended September 30, 2009 when compared to the same period in 2008, principally from growth in money market deposit accounts, NOW deposit accounts, and long-term debt, partially offset by the decrease in time deposit accounts and short-term borrowings. Total average interest bearing deposits increased $107.3 million, or 3.3%, for the nine months ended September 30, 2009 when compared to the same period in 2008. The rate paid on average interest bearing deposits decreased 91 bp from 2.47% for the nine months ended September 30, 2008 to 1.56% for the same period in 2009. For the nine months ended September 30, 2009, 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 $286.4 million, or 18.4%, for the nine months ended September 30, 2009 when compared to the same period in 2008, while money market accounts and NOW accounts collectively increased approximately $366.0 million, or 30.5%.

Total average borrowings, including trust preferred debentures, decreased $36.1 million, or 4.2%, for the nine months ended September 30, 2009 compared with the same period in 2008. Average short-term borrowings decreased by $104.5 million, or 43.9%, from $238.2 million for the nine months ended September 30, 2008 to $133.7 million for the nine months ended September 30, 2009. The Company has been in a Fed Funds sold position since March 2009 which has decreased reliance on short-term borrowings. Interest expense from short-term borrowings decreased $4.1 million, or 90.8%. The rate paid on short-term borrowings decreased 209 bp from 2.50% for the nine months ended September 30, 2008 to 0.41% for the same period in 2009. Average long-term debt increased $68.4 million, or 12.7%, for the nine months ended September 30, 2009, compared with the same period in 2008. The rate paid on long-term debt decreased to 3.95% for the nine months ended September 30, 2009, compared with 4.02% for the same period in 2008. As a result of the increase in the average balance of long-term debt, interest paid on long-term debt increased $1.7 million, or 10.6%, for the nine months ended September 30, 2009 as compared to the same period in 2008.

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Table 2

Average Balances and Net Interest Income

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

Three months ended September 30,
		2009												2008
(dollars in thousands)		Average Balance				Interest				Yield/ Rates				Average Balance				Interest				Yield/ Rates
ASSETS
Short-term interest bearing accounts		$	99,501			$	74				0.30	%		$	4,077			$	20				1.95	%
Securities available for sale (1)(excluding unrealized gains or losses)			1,082,655				11,859				4.35	%			1,116,089				14,159				5.05	%
Securities held to maturity (1)			161,915				1,871				4.58	%			148,397				2,026				5.43	%
Investment in FRB and FHLB Banks			37,372				541				5.74	%			40,401				653				6.43	%
Loans and leases (2)			3,627,803				54,857				6.00	%			3,605,700				58,371				6.44	%
Total interest earning assets		$	5,009,246			$	69,202				5.48	%		$	4,914,664			$	75,229				6.09	%
Trading securities			2,109												2,266
Other assets			404,019												384,710
Total assets		$	5,415,374											$	5,301,640
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts		$	1,025,345			$	3,317				1.28	%		$	779,954			$	3,593				1.83	%
NOW deposit accounts			582,307				694				0.47	%			491,673				1,060				0.86	%
Savings deposits			509,258				217				0.17	%			474,602				514				0.43	%
Time deposits			1,199,101				7,774				2.57	%			1,512,072				13,184				3.47	%
Total interest bearing deposits		$	3,316,011			$	12,002				1.44	%		$	3,258,301			$	18,351				2.24	%
Short-term borrowings			132,459				142				0.42	%			154,567				763				1.96	%
Trust preferred debentures			75,422				1,049				5.52	%			75,422				1,154				6.09	%
Long-term debt			585,416				5,761				3.90	%			625,733				6,310				4.01	%
Total interest bearing liabilities		$	4,109,308			$	18,954				1.83	%		$	4,114,023			$	26,578				2.57	%
Demand deposits			737,064												706,803
Other liabilities			79,862												69,355
Stockholders' equity			489,140												411,459
Total liabilities and stockholders' equity		$	5,415,374											$	5,301,640
Net interest income (FTE)							50,248												48,651
Interest rate spread											3.64	%											3.52	%
Net interest margin											3.98	%											3.94	%
Taxable equivalent adjustment							1,566												1,608
Net interest income						$	48,682											$	47,043

(1) Securities are shown at average amortized cost

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

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Nine months ended September 30,
		2009												2008
(dollars in thousands)		Average Balance				Interest				Yield/ Rates				Average Balance				Interest				Yield/ Rates
ASSETS
Short-term interest bearing accounts		$	76,523			$	150				0.26	%		$	6,517			$	145				2.98	%
Securities available for sale (1)(excluding unrealized gains or losses)			1,085,746				37,399				4.61	%			1,112,582				42,689				5.13	%
Securities held to maturity (1)			146,350				5,553				5.07	%			153,010				6,544				5.71	%
Investment in FRB and FHLB Banks			38,143				1,432				5.02	%			39,730				2,042				6.87	%
Loans and leases (2)			3,646,437				165,578				6.07	%			3,544,787				174,635				6.58	%
Total interest earning assets		$	4,993,199			$	210,112				5.63	%		$	4,856,626			$	226,055				6.22	%
Trading securities			1,801												2,388
Other assets			410,331												377,116
Total assets		$	5,405,331											$	5,236,130
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts		$	995,233			$	9,806				1.32	%		$	736,313			$	10,724				1.95	%
NOW deposit accounts		$	571,478				2,328				0.54	%			464,396				2,943				0.85	%
Savings deposits		$	497,040				631				0.17	%			469,335				1,780				0.51	%
Time deposits			1,272,893				26,199				2.75	%			1,559,294				44,314				3.80	%
Total interest bearing deposits		$	3,336,644			$	38,964				1.56	%		$	3,229,338			$	59,761				2.47	%
Short-term borrowings			133,668				413				0.41	%			238,200				4,465				2.50	%
Trust preferred debentures			75,422				3,211				5.69	%			75,422				3,547				6.28	%
Long-term debt			608,408				17,956				3.95	%			539,961				16,241				4.02	%
Total interest bearing liabilities		$	4,154,142			$	60,544				1.95	%		$	4,082,921			$	84,014				2.75	%
Demand deposits			708,513												678,277
Other liabilities			73,440												67,805
Stockholders' equity			469,236												407,127
Total liabilities and stockholders' equity		$	5,405,331											$	5,236,130
Net interest income (FTE)							149,568												142,041
Interest rate spread											3.67	%											3.47	%
Net interest margin											4.00	%											3.91	%
Taxable equivalent adjustment							4,723												4,928
Net interest income						$	144,845											$	137,113

(1) Securities are shown at average amortized cost

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

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The following table presents changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume), and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of change.

Analysis of Changes in Taxable Equivalent Net Interest Income   Three months ended September 30,
		Increase (Decrease)
		2009 over 2008
(in thousands)		Volume				Rate				Total
Short-term interest bearing accounts		$	182			$	(128	)		$	54
Securities available for sale			(408	)			(1,892	)			(2,300	)
Securities held to maturity			870				(1,025	)			(155	)
Investment in FRB and FHLB Banks			(46	)			(66	)			(112	)
Loans and leases			2,324				(5,838	)			(3,514	)
Total interest income			2,922				(8,949	)			(6,027	)
Money market deposit accounts			4,246				(4,522	)			(276	)
NOW deposit accounts			995				(1,361	)			(366	)
Savings deposits			235				(532	)			(297	)
Time deposits			(2,406	)			(3,003	)			(5,409	)
Short-term borrowings			(96	)			(525	)			(621	)
Trust preferred debentures			-				(105	)			(105	)
Long-term debt			(388	)			(162	)			(550	)
Total interest expense			2,586				(10,210	)			(7,624	)
Change in FTE net interest income		$	336			$	1,261			$	1,597

Nine months ended September 30,
		Increase (Decrease)
		2009 over 2008
(in thousands)		Volume				Rate				Total
Short-term interest bearing accounts		$	330			$	(325	)		$	5
Securities available for sale			(1,016	)			(4,274	)			(5,290	)
Securities held to maturity			(277	)			(714	)			(991	)
Investment in FRB and FHLB Banks			(79	)			(531	)			(610	)
Loans and leases			7,316				(16,373	)			(9,057	)
Total interest income			6,274				(22,217	)			(15,943	)
Money market deposit accounts			4,344				(5,262	)			(918	)
NOW deposit accounts			859				(1,474	)			(615	)
Savings deposits			164				(1,313	)			(1,149	)
Time deposits			(7,253	)			(10,862	)			(18,115	)
Short-term borrowings			(1,396	)			(2,656	)			(4,052	)
Trust preferred debentures			-				(336	)			(336	)
Long-term debt			2,183				(468	)			1,715
Total interest expense			(1,099	)			(22,371	)			(23,470	)
Change in FTE net interest income		$	7,373			$	154			$	7,527

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Noninterest Income

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

		Three months ended September 30,								Nine months ended September 30,
		2009				2008				2009				2008
(in thousands)
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 income for the three months ended September 30, 2009 was $20.9 million, up $1.9 million or 10.0% from $19.0 million for the same period in 2008. The increase in noninterest income was due primarily to an increase in insurance and broker/dealer revenue, which increased approximately $2.0 million for the three month period ended September 30, 2009 as compared with the three month period ended September 30, 2008. This increase was due primarily to revenue generated by Mang Insurance Agency, LLC, which was acquired on September 1, 2008. In addition, retirement plan administration fees increased approximately $1.0 million for the three month period ended September 30, 2009 as compared with the three month period ended September 30, 2008 as a result of organic growth from new business. These increases were partially offset by a decrease in net securities gains of approximately $1.4 million for the three months ended September 30, 2009 as compared with the three months ended September 30, 2008.

Noninterest income for the nine months ended September 30, 2009 was $60.3 million, up $8.8 million or 17.1% from $51.5 million for the same period in 2008. The increase in noninterest income was due primarily to an increase in insurance and broker/dealer revenue, which increased approximately $9.1 million for the nine month period ended September 30, 2009 as compared with the nine month period ended September 30, 2008. This increase was due primarily to revenue generated by Mang Insurance Agency, LLC as previously mentioned. In addition, retirement plan administration fees increased approximately $1.5 million for the nine month period ended September 30, 2009 as compared with the nine month period ended September 30, 2008 as a result of organic growth from new business. These increases were partially offset by a decrease in trust administration income of approximately $0.8 million for the nine months ended September 30, 2009 as compared with the nine months ended September 30, 2008 due primariliy to a decline in the fair value of trust assets under administration. In addition, the Company experienced a decrease in net securities gains of approximately $1.4 million for the nine months ended September 30, 2009 as compared with the nine months ended September 30, 2008.

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Noninterest Expense

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

		Three months ended September 30,								Nine months ended September 30,
		2009				2008				2009				2008
(in thousands)
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

Noninterest expense for the three months ended September 30, 2009 was $41.0 million, up from $37.1 million for the same period in 2008. FDIC expenses increased approximately $0.9 million for the three months ended September 30, 2009, compared with the same period in 2008 due to recurring FDIC premiums, which increased to $1.5 million for the three months ended September 30, 2009 as compared with $0.6 million for the same period last year. Salaries and employee benefits increased $4.4 million, or 26.2%, for the three months ended September 30, 2009 compared with the same period in 2008. This increase was due primarily to increases in full-time-equivalent employees during 2009, largely due to the Company’s acquisition of Mang in September 2008 and the aforementioned de novo branch activity. In addition, the Company experienced an increase of approximately $0.8 million in pension expenses for the three months ended September 30, 2009 as compared with the same period in 2008. Amortization of intangible assets was $0.8 million for the three months ended September 30, 2009, up from $0.5 million for same period in 2008 due to the aforementioned acquisition. In addition, professional fees and outside services expenses increased approximately $0.5 million, or 22.0%, for the three months ended September 30, 2009 as compared with the three months ended September 30, 2008. This increase was due primarily to non-recurring systems consulting services. These increases were partially offset by an impairment on lease residual assets incurred during the third quarter of 2008 totaling $2.0 million. The increases were also partially offset by a decrease in other operating expenses. For the three month period ended September 30, 2009, other operating expenses totaled $3.7 million, down $1.0 million or 20.0%, from $4.7 million for the three months ended September 30, 2008. This decrease resulted primarily from a decrease in losses incurred from sales of certain returned lease vehicles totaling approximately $0.9 million during the third quarter of 2008, due to reduced values of the vehicles.

Noninterest expense for the nine months ended September 30, 2009 was $125.3 million, up from $106.5 million for the same period in 2008. FDIC expenses increased approximately $6.1 million for the nine months ended September 30, 2009, compared with the same period in 2008. This increase was due to the special assessment imposed by the FDIC totaling approximately $2.5 million during the second quarter of 2009, in addition to increased recurring FDIC premiums. Salaries and employee benefits increased $12.1 million, or 24.0%, for the nine months ended September 30, 2009 compared with the same period in 2008. This increase was due primarily to increases in full-time-equivalent employees during 2009, largely due to the Company’s acquisition of Mang in September 2008 and the aforementioned de novo branch activity. In addition, the Company experienced increases of approximately $2.2 million and $0.9 million in pension and medical expenses, respectively, for the nine months ended September 30, 2009 as compared with the same period in 2008. Amortization of intangible assets was $2.5 million for the nine months ended September 30, 2009, up from $1.2 million for same period in 2008 due to the aforementioned acquisition. Occupancy expenses were up approximately $0.9 million for the nine months ended September 30, 2009 as compared with the nine months ended September 30, 2008. This increase was due primarily to the Company’s acquisition of Mang in September 2008 and the aforementioned de novo branch activity during the period.

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Income Taxes

Income tax expense for the three month period ended September 30, 2009 was $5.8 million, down from $6.7 million for the same period in 2008. The effective rates were 30.0% and 30.7% for the three month periods ended September 30, 2009 and 2008, respectively. Income tax expense for the nine month period ended September 30, 2009 was $16.9 million, down from $19.2 million for the same period in 2008. The effective rates were 30.7% and 30.6% for the nine month periods ended September 30, 2009 and 2008, respectively.

ANALYSIS OF FINANCIAL CONDITION

Securities

The Company classifies its securities at date of purchase as available for sale, held to maturity or trading. Held to maturity debt securities are those that the Company has the ability and intent to hold until maturity. Held to maturity securities are recorded at amortized cost. Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available for sale securities are excluded from earnings and are reported in stockholders’ equity as a component of accumulated other comprehensive income or loss. For the securities that the Company does not have the intent to sell and will not be more likely than not forced to sell, 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. Securities with an other-than-temporary impairment are generally placed on nonaccrual status. Trading securities are recorded at fair value, with net unrealized gains and losses recognized currently in income. Transfers of securities between categories are recorded at fair value at the date of transfer.

Held to maturity securities increased $28.5 million, or 20.3%, from $140.2 million at December 31, 2008 to $168.7 million at September 30, 2009. This increase is due primarily to an increase in local underwriting activity throughout our municipal banking footprint. At September 30, 2009, the balance of available for sale securities increased by approximately $12.8 million, or 1.1%, from December 31, 2008.

Average total earning securities decreased $19.9 million, or 1.6%, for the three months ended September 30, 2009 when compared to the same period in 2008. The average balance of securities available for sale decreased $33.4 million, or 3.0%, for the three months ended September 30, 2009 when compared to the same period in 2008. The average balance of securities held to maturity increased $13.5 million, or 9.1%, for the three months ended September 30, 2009, compared to the same period in 2008. The average total securities portfolio represents 24.8% of total average earning assets for the three months ended September 30, 2009, down from 25.7% for the same period in 2008.

Average total earning securities decreased $33.5 million, or 2.6%, for the nine months ended September 30, 2009 when compared to the same period in 2008. The average balance of securities available for sale decreased $26.8 million, or 2.4%, for the nine months ended September 30, 2009 when compared to the same period in 2008. The average balance of securities held to maturity decreased $6.7 million, or 4.4%, for the nine months ended September 30, 2009, compared to the same period in 2008. The average total securities portfolio represents 24.7% of total average earning assets for the nine months ended September 30, 2009, down from 26.1% for the same period in 2008.

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

		September 30, 2009				December 31, 2008
Mortgage-backed securities:
With maturities 15 years or less			18	%			22	%
With maturities greater than 15 years			5	%			6	%
Collateral mortgage obligations			25	%			29	%
Municipal securities			23	%			20	%
US agency notes			24	%			17	%
Other			5	%			6	%
Total			100	%			100	%

Our mortgage backed securities, U.S. agency notes, and collateralized mortgage obligations are all “prime/conforming” and are guaranteed by Fannie Mae, Freddie Mac, Federal Home Loan Bank, Federal Farm Credit Banks, or Ginnie Mae (“GNMA”). GNMA securities are considered equivalent to U.S. Treasury securities, as they are backed by the full faith and credit of the U.S. government. Currently, there are no subprime mortgages in our investment portfolio.

Loans and Leases

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

(In thousands)		September 30, 2009				December 31, 2008
Residential real estate mortgages		$	638,001			$	722,723
Commercial			545,001				572,059
Commercial real estate mortgages			683,623				669,720
Real estate construction and development			77,391				67,859
Agricultural and agricultural real estate mortgages			122,691				113,566
Consumer			870,766				795,123
Home equity			609,571				627,603
Lease financing			68,846				83,258
Total loans and leases		$	3,615,890			$	3,651,911

Total loans and leases decreased nominally to $3.6 billion, or 65.9% of assets, at September 30, 2009 compared to $3.7 billion, or 68.4% of assets at December 31, 2008. Residential real estate mortgages decreased by approximately $84.7 million, or 11.7%, from December 31, 2008 to September 30, 2009. This decrease is primarily due to an increase in refinancing activity in the low rate environment and increased sales by the Company of newly originated loans to secondary markets. Home equity loans decreased by approximately $18.0 million, or 2.9%, from December 31, 2008 to September 30, 2009 as the Company decreased home equity loan originations in the first nine months of 2009. Consumer loans increased by approximately $75.6 million, or 9.5%, from December 31, 2008 to September 30, 2009 as the Company continued to grow its indirect installment loan portfolio due to an increase in market share as competitors drop out of the market.

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

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

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

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

After a thorough consideration and validation of the factors discussed above, required additions to the allowance for loan and lease losses are made periodically by charges to the provision for loan and lease losses. These charges are necessary to maintain the allowance at a level which management believes is reasonably reflective of the overall inherent risk of probable loss in the portfolio. While management uses available information to recognize losses on loans and leases, additions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. The allowance for loan and lease losses to outstanding loans and leases at September 30, 2009 was 1.79% compared with 1.60% at December 31, 2008. Management considers the allowance for loan losses to be adequate based on evaluation and analysis of the loan portfolio.

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Table 3 reflects changes to the allowance for loan and lease losses for the periods presented. The allowance is increased by provisions for losses charged to operations and is reduced by net charge-offs. Charge-offs are made when the ability to collect loan principal within a reasonable time becomes unlikely. Any recoveries of previously charged-off loans are credited directly to the allowance for loan and lease losses.

Table 3 Allowance For Loan and Lease Losses
		Three months ended
(dollars in thousands)		September 30, 2009								September 30, 2008
Balance, beginning of period		$	62,734							$	54,510
Recoveries			1,253								807
Chargeoffs			(8,438	)							(6,693	)
Net chargeoffs			(7,185	)							(5,886	)
Provision for loan losses			9,101								7,179
Balance, end of period		$	64,650							$	55,803
Composition of Net Chargeoffs
Commercial and agricultural		$	(2,837	)			39	%		$	(3,414	)			58	%
Real estate mortgage			(64	)			1	%			(31	)			1	%
Consumer			(4,284	)			60	%			(2,441	)			41	%
Net chargeoffs		$	(7,185	)			100	%		$	(5,886	)			100	%
Annualized net chargeoffs to average loans and leases			0.79	%							0.65	%

Allowance For Loan and Lease Losses
		Nine months ended
(dollars in thousands)		September 30, 2009								September 30, 2008
Balance, beginning of period		$	58,564							$	54,183
Recoveries			3,310								2,867
Chargeoffs			(21,975	)							(20,707	)
Net chargeoffs			(18,665	)							(17,840	)
Provision for loan losses			24,751								19,460
Balance, end of period		$	64,650							$	55,803
Composition of Net Chargeoffs
Commercial and agricultural		$	(7,255	)			39	%		$	(11,865	)			67	%
Real estate mortgage			(399	)			2	%			(183	)			1	%
Consumer			(11,011	)			59	%			(5,792	)			32	%
Net chargeoffs		$	(18,665	)			100	%		$	(17,840	)			100	%
Annualized net chargeoffs to average loans and leases			0.68	%							0.67	%

Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due and still accruing, restructured loans, OREO, and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become ninety days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs. Nonperforming securities include securities which management believes are other-than-temporarily impaired, carried at their estimated fair value and are not accruing interest.

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Nonperforming Assets
(Dollars in thousands)		September 30, 2009								December 31, 2008
Nonaccrual loans		Amount				%				Amount				%
Commercial and agricultural loans and real estate		$	24,692				68	%		$	15,891				66	%
Real estate mortgages			4,463				13	%			3,803				16	%
Consumer			5,560				16	%			3,468				14	%
Troubled debt restructured loans			899				3	%			1,029				4	%
Total nonaccrual loans			35,614				100	%			24,191				100	%
Loans 90 days or more past due and still accruing
Commercial and agricultural loans and real estate			794				22	%			12				1	%
Real estate mortgages			1,229				35	%			770				33	%
Consumer			1,520				42	%			1,523				66	%
Total loans 90 days or more past due and still accruing			3,543				100	%			2,305				100	%
Total nonperforming loans			39,157								26,496
Other real estate owned (OREO)			3,319								665
Total nonperforming assets			42,476								27,161
Total nonperforming loans to total loans and leases			1.08	%							0.73	%
Total nonperforming assets to total assets			0.77	%							0.51	%
Total allowance for loan and lease losses to nonperforming loans			165.10	%							221.03	%

Loans over 60 days past due but not over 90 days past due were 0.18% of total loans as of September 30, 2009, compared to 0.15% of total loans as of December 31, 2008. In addition to nonperforming loans, the Company has also identified approximately $72.9 million in potential problem loans at September 30, 2009 as compared to $95.4 million at December 31, 2008. Potential problem loans are loans that are currently performing, but known information about possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in classification of such loans as nonperforming at some time in the future. At the Company, potential problem loans are typically defined as loans that are performing but are classified by the Company’s loan rating system as “substandard.” At September 30, 2009, potential problem loans primarily consisted of commercial real estate and commercial and agricultural loans. Management cannot predict the extent to which economic conditions may worsen or other factors which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for loan losses.

The Company recorded a provision for loan and lease losses of $9.1 million during the third quarter of 2009 compared with $7.2 million during the third quarter of 2008. The increase in the provision for loan and lease losses for the three months ended September 30, 2009 was due primarily to an increase in net charge-offs which totaled $7.2 million for the three month period ending September 30, 2009, up from $5.9 million for the three months ending September 30, 2008, due primarily to a charge-off related to one large agricultural loan during the third quarter of 2009, as well as an increase in specific reserves on certain impaired loans and the change in economic conditions. . Net charge-offs to average loans and leases for the three months ended September 30, 2009 were 0.79%, compared with 0.66% for the three months ended September 30, 2008. The Company’s allowance for loan and lease losses increased to 1.79% of loans and leases at September 30, 2009, compared with 1.60% at December 31, 2008, due to an increase in specific reserves on impaired loans. Specific reserves on impaired loans totaled $3.8 million at September 30, 2009 and $0.6 million at December 31, 2008.

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The Company recorded a provision for loan and lease losses of $24.8 million during the nine months ended September 30, 2009 compared with $19.5 million during the nine months ended September 30, 2008. The increase in the provision for loan and lease losses for the nine months ended September 30, 2009 was due primarily to the aforementioned charge-off and an increase in specific reserves on certain impaired loans, along with the change in economic conditions. Net charge-offs totaled $18.7 million for the nine month period ending September 30, 2009, up from $17.8 million for the nine months ending September 30, 2008. Net charge-offs to average loans and leases for the nine months ended September 30, 2009 were 0.68%, compared with 0.67% for the nine months ended September 30, 2008.

Subprime mortgage lending, which has been the riskiest sector of the residential housing market, is not a market that the Company has ever actively pursued. The market does not apply a uniform definition of what constitutes “subprime” lending. Our reference to subprime lending relies upon the “Statement on Subprime Mortgage Lending” issued by the Office of Thrift Supervision and the other federal bank regulatory agencies, or the Agencies, on June 29, 2007, which further referenced the “Expanded Guidance for Subprime Lending Programs,” or the Expanded Guidance, issued by the Agencies by press release dated January 31, 2001. In the Expanded Guidance, the Agencies indicated that subprime lending does not refer to individual subprime loans originated and managed, in the ordinary course of business, as exceptions to prime risk selection standards. The Agencies recognize that many prime loan portfolios will contain such accounts. The Agencies also excluded prime loans that develop credit problems after acquisition and community development loans from the subprime arena. According to the Expanded Guidance, subprime loans are other loans to borrowers which display one or more characteristics of reduced payment capacity. Five specific criteria, which are not intended to be exhaustive and are not meant to define specific parameters for all subprime borrowers and may not match all markets or institutions’ specific subprime definitions, are set forth, including having a FICO score of 660 or below. Based upon the definition and exclusions described above, management believes that the Company is a prime lender. Within the loan portfolio, there are loans that, at the time of origination, had FICO scores of 660 or below. However, since the Company is a portfolio lender, it reviews all data contained in borrower credit reports and does not base underwriting decisions solely on FICO scores. We believe the aforementioned loans, when made, were amply collateralized and otherwise conformed to our prime lending standards. The Company has not originated Alt A loans or no interest loans.

Deposits

Total deposits were $4.1 billion at September 30, 2009, up $181.2 million, or 4.6%, from December 31, 2008. The increase in deposits compared with December 31, 2008 was driven primarily by increases in money market accounts, NOW, and demand deposit accounts, offset by a decrease in time deposits, and reflects the Company’s commitment to increase core deposits in 2009.

Total average deposits for the three months ended September 30, 2009 increased $88.0 million, or 2.2%, from the same period in 2008. The Company experienced an increase in average money market accounts of $245.4 million, or 31.5%, for the three months ended September 30, 2009 compared to the same period in 2008. Average NOW accounts increased $90.6 million, or 18.4%, to $582.3 million for the three months ended September 30, 2009 from $491.7 million for the same period in 2008. This increase in average money market and NOW accounts was primarily due to a shift from time deposit accounts to money market accounts and NOW accounts due to a decline in interest rates offered on time deposits as a result of the decrease in the Fed Funds rate. Average savings accounts increased $34.7 million, or 7.3%, for the three month period ending September 30, 2009 as compared to the same period in 2008. Average time deposits decreased $313.0 million, or 20.7%, for the three months ended September 30, 2009 from the same period in 2008. Average demand deposit accounts increased $30.3 million, or 4.3%, for the three months ended September 30, 2009 as compared to the same period in 2008. This was due primarily to an increasing customer base, as the Company continues to expand into new markets.

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Total average deposits for the nine months ended September 30, 2009 increased $137.5 million, or 3.5%, from the same period in 2008. The Company experienced an increase in average money market accounts of $258.9 million, or 35.2%, for the nine months ended September 30, 2009 compared to the same period in 2008. Average NOW accounts increased $107.1 million, or 23.1%, to $571.5 million for the nine months ended September 30, 2009 from $464.4 million for the same period in 2008. This increase in average money market and NOW accounts was primarily due to a shift from time deposit accounts to money market accounts and NOW accounts due to a decline in interest rates offered on time deposits as a result of the decrease in the Fed Funds rate. Average savings accounts increased $27.7 million, or 5.9%, for the nine month period ending September 30, 2009 as compared to the same period in 2008. Average time deposits decreased $286.4 million, or 18.4%, for the nine months ended September 30, 2009 from the same period in 2008. Average demand deposit accounts increased $30.2 million, or 4.5%, for the nine months ended September 30, 2009 as compared to the same period in 2008. This was due primarily to an increasing customer base, as the Company continues to expand into new markets.

Borrowed Funds

The Company's borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $147.8 million at September 30, 2009 compared to $206.5 million at December 31, 2008. The Company has been in a Fed Funds sold position since March 2009 which has decreased reliance on short-term borrowings. Long-term debt was $579.7 million at September 30, 2009, as compared to $632.2 million at December 31, 2008. This decrease was mainly due to the repayment of a loan. For more information about the Company’s borrowing capacity and liquidity position, see the section with the title caption of “Liquidity Risk” on page 42 of this report.

Capital Resources

Stockholders' equity of $497.5 million represented 9.1% of total assets at September 30, 2009, compared with $431.8 million, or 8.1% as of December 31, 2008. On April 1, 2009, the Company completed a public offering of 1,576,230 shares of its common stock and raised approximately $33.5 million in net proceeds.

The Company did not purchase shares of its common stock during the nine month period ended September 30, 2009. At September 30, 2009, there were 1,000,000 shares available for repurchase under previously announced plans, which expire on December 31, 2009. On October 26, 2009, the Company’s Board of Directors authorized a new repurchase program for NBT to repurchase up to an additional 1,000,000 shares (approximately 3%) of its outstanding common stock, effective January 1, 2010, as market conditions warrant in open market and privately negotiated transactions. The new plan expires on December 31, 2011.

The Board of Directors considers the Company's earnings position and earnings potential when making dividend decisions. The Company does not have a target dividend pay out ratio.

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As the capital ratios in Table 4 indicate, the Company remains “well capitalized” under applicable bank regulatory requirements. Capital measurements are well in excess of regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented. Tier 1 leverage, Tier 1 capital and Risk-based capital ratios have regulatory minimum guidelines of 3%, 4% and 8% respectively, with requirements to be considered well capitalized of 5%, 6% and 10%, respectively.

Table 4
Capital Measurements		September 30, 2009				December 31, 2008
Tier 1 leverage ratio			8.30	%			7.17	%
Tier 1 capital ratio			11.20	%			9.75	%
Total risk-based capital ratio			12.46	%			11.00	%
Cash dividends as a percentage of net income			53.00	%			44.27	%
Per common share:
Book value		$	14.49			$	13.24
Tangible book value		$	10.52			$	9.01

Table 5 presents the high, low and closing sales price for the common stock as reported on the NASDAQ Stock Market, and cash dividends declared per share of common stock. The Company's price to book value ratio was 1.56 at September 30, 2009 and 2.31 in the comparable period of the prior year. The Company's price was 14.1 times trailing twelve months earnings at September 30, 2009, compared to 18.2 times for the same period last year.

Table 5
Quarterly Common Stock and Dividend Information
Quarter Endings		High				Low				Close				Cash Dividends Declared
2009
March 31		$	28.37			$	15.42			$	21.64			$	0.20
June 30			25.22				20.49				21.71				0.20
September 30			24.16				20.57				22.54				0.20
2008
March 31		$	23.65			$	17.95			$	22.20			$	0.20
June 30			25.00				20.33				20.61				0.20
September 30			36.47				19.05				29.92				0.20
December 31			30.83				21.71				27.96				0.20

On October 26, 2009, the Company announced the declaration of a regular quarterly cash dividend of $0.20 per share. The cash dividend will be paid on December 15, 2009 to stockholders of record as of December 1, 2009.

Liquidity and Interest Rate Sensitivity Management

Market Risk

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

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

In adjusting the Company’s asset/liability position, the Board and management attempt to manage the Company’s interest rate risk while minimizing net interest margin compression. At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long- and short-term interest rates.

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

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

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

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Net interest income for the next 12 months in the + 200/- 100 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% change in net interest income. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the September 30, 2009 balance sheet position:

Table 6 Interest Rate Sensitivity Analysis
Change in interest rates (in bp points)	Percent change in net interest income
+200	(1.46%)
-100	(1.00%)

The Company has taken several measures to mitigate exposure to an upward rate scenario. The Company has extended short term wholesale borrowings (three months or less) into longer term borrowings with maturities of three, four and five years along with purchasing monthly floating rate investments. In addition, the Company will continue to focus on growing noninterest bearing demand deposits and prudently managing deposit costs. Lastly, the Company originates 15-year, 20-year and 30-year residential real estate mortgages with the intent to sell.

Liquidity and Liquidity Risk

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

The primary liquidity measurement the Company utilizes is called the Basic Surplus, which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short- and long-term securities with the availability of dependable borrowing sources which can be accessed when necessary. At September 30, 2009, the Company’s Basic Surplus measurement was 7.6% of total assets or $419 million as compared to the December 31, 2008 Basic Surplus of 6.6%, and was above the Company’s minimum of 5% or $274 million set forth in its liquidity policies. Since March 2009, the Company has been in a Fed Funds sold position as a result of excess liquidity.

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

The Company’s primary source of funds is the Bank. Certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends. The approval of the Office of Comptroller of the Currency (OCC) is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for the preceding two years (as defined in the regulations). At September 30, 2009, approximately $47.7 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends is also subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.

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At September 30, 2009 and December 31, 2008, FHLB advances outstanding totaled $551 million and $601 million, respectively. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $198 million at September 30, 2009 and $230 million at December 31, 2008. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $123 million at September 30, 2009 or used to collateralize other borrowings, such as repurchase agreements. At September 30, 2009 the Bank also had additional borrowing capacity from unused collateral at the Federal Reserve of $454 million.

I te m 3. Quantitative and Qualitative Disclosures About Market Risk

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

I te m 4. Controls and Procedures

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2009. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2009, the Company's disclosure controls and procedures were effective.

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

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PART II. OTHER INFORMATION

Item 1 – Legal Pr oc eedings

There are no material legal proceedings, other than ordinary routine litigation incidental to the business to which the Company or any of its subsidiaries is a party or of which any of their property is subject.

Item 1A – Ri sk Factors

Management of the Company does not believe there have been any material changes in the risk factors that were disclosed in the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 11, 2009, which superseded and replaced the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Item 2 – U nreg istered Sales of Equity Securities and Use of Proceeds

None

Item 3 – De fau lts Upon Senior Securities

None

Item 4 – Subm iss ion of Matters to a Vote of Security Holders

None

Item 5 – Ot her Information

None

 

Item 5.02(b)

As a result of a special election held on November 3, 2009, director William L. Owens was elected to the United States House of Representatives to represent the 23 rd Congressional District of New York.  Mr. Owens was subsequently sworn in as a member of the House of Representatives on November 6, 2009.  As a result of the election, Mr. Owens resigned from his position as a member of the Board of Directors of the Company effective November 5, 2009.

 

Item 5.02(e)

Amended Employment Agreements of Certain Named Executive Officers

On November 5, 2009, the Company entered into amended and restated employment agreements with Martin A. Dietrich, President and Chief Executive Officer of the Company and NBT Bank, N.A. (the “Bank”), Michael J. Chewens, Senior Executive Vice President and Chief Financial Officer of the Company and the Bank, and David E. Raven, Executive Vice President of the Company and President and Chief Executive Officer of Pennstar Bank, a division of the Bank (the “Amended Employment Agreements”).

The Amended Employment Agreements amend and restate the terms of the previously existing employment agreements, as amended, of each of Messrs. Dietrich, Chewens and Raven, which terms were amended by the Amended Employment Agreements to, among other things:

·

allow the Company to cure an event or condition giving rise the executive’s resignation for “good reason” (as such term is defined in the Amended Employment Agreement);

·

provide that if an executive is terminated “without cause” (as such term is defined in the Amended Employment Agreement) or resigns for good reason, any payments received are conditioned upon the executive executing a separation agreement and release;

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·

provide that the executive, for a period of one year following the Termination Date (as defined in the Amended Employment Agreement), shall not become an officer, employee, consultant, director or trustee of any saving bank, savings and loan association, savings and loan holding company, bank or bank holding company, where such position entails providing services to such company in any city, town or county where the Company or the Bank or their affiliates has an office, where the executive’s position or service for such company is competitive with or similar to the executive’s position or service with the Company or the Bank (the “Non-Compete Clause”); and

·

require that, if the Company prepares an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with regard to any financial reporting under the securities laws, and the executive is subject to automatic forfeiture under the Sarbanes-Oxley Act of 2002, and he knowingly engaged in misconduct, was grossly negligent in engaging in the misconduct, knowingly failed to prevent the misconduct or was grossly negligent in failing to prevent the misconduct, the executive shall reimburse the Company for the amount of any payment earned or accrued during the 12-month period following the first public issuance or filing with the Securities and Exchange Commission of the financial document that contained such material noncompliance (the “SOX Clawback Clause”). In addition, if the Company is required to prepare an accounting restatement, the executive will forfeit any payments made based on the achievement of pre-established performance goals that are later determined, as a result of the accounting restatement, not to have been achieved (the “Bonus Clawback Clause,” and together with the SOX Clawback Clause, the “Clawback Clause”).

A description of the other material terms of the employment arrangements of each of Messrs. Dietrich, Chewens and Raven, which were restated but not modified by the Amended Employment Agreements, is included in the Company’s definitive proxy statement for its 2009 annual meeting of stockholders filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2009.

The foregoing summary of the Amended Employment Agreements does not purport to be complete and is qualified in its entirety by reference to the Amended Employment Agreements of each of Messrs. Dietrich, Chewens and Raven, copies of which are filed with this Quarterly Report on Form 10-Q as Exhibits 10.1, 10.2 and 10.3, respectively, and are incorporated herein by reference.

Jeffrey M. Levy Employment Agreement

On November 5, 2009, the Company entered into an employment agreement (the “Levy Employment Agreement”) with Mr. Jeffrey M. Levy, Executive Vice President of the Company and President of Commercial Banking of the Bank, which replaces a previous employment agreement that Mr. Levy entered into in April 2007.

In addition to an annual base salary of $250,000, the Levy Employment Agreement provides that Mr. Levy will be eligible to be considered for a performance bonus commensurate with Mr. Levy’s title and salary grade in accordance with the compensation policies of the Company, and provides for the ability to participate in stock benefit plans and other fringe benefits applicable to executive personnel. The Levy Employment Agreement will terminate upon the earlier to occur of the executive’s death, disability, discharge for “cause,” resignation, termination “without cause” (as such terms are defined in the Levy Employment Agreement) or January 1, 2012. The Levy Employment Agreement also provides for an automatic one-year extension occurring annually on each January 1.

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Upon termination of the Levy Employment Agreement, Mr. Levy is entitled to receive accrued and unpaid salary, accrued rights under our employee plans and arrangements, unpaid expense reimbursements and the cash equivalent of accrued annual vacation. Additionally, if Mr. Levy’s employment is terminated by us other than for cause, or by Mr. Levy for “good reason” (as such term is defined in the Levy Employment Agreement), then, upon execution of a separation agreement and release, Mr. Levy will be entitled to receive (i) his base salary in a manner consistent with our normal payroll practices for a period of between two to three years following the termination date, depending on the date Mr. Levy was terminated, and (ii) a relocation payment if he relocates within 18 months after termination of employment from the Albany, New York area, such relocation payment to include a make-whole payment and related gross-up tax payment if he sells his primary residence at a loss. If Mr. Levy is terminated due to a change of control covered by his change in control agreement, as described below, Mr. Levy will be entitled to receive his accrued and unpaid salary, accrued rights under our employee plans and arrangements, unpaid expense reimbursements, the cash equivalent of his accrued annual vacation, a relocation payment and the severance payments determined under his change in control agreement.

Under the Levy Employment Agreement, during the term of his employment, Mr. Levy may not disclose confidential information about the Company or its subsidiaries to any other person or entity. Mr. Levy has also agreed to a Non-Compete Clause and Clawback Clause, each in the form substantially as described above in connection with the Amended Employment Agreements.

The foregoing summary of the Levy Employment Agreement does not purport to be complete and is qualified in its entirety by reference to the Levy Employment Agreement, a copy of which is filed with this Quarterly Report on Form 10-Q as Exhibit 10.4 and is incorporated herein by reference.

Change in Control Agreements of Certain Named Executive Officers

On November 5, 2009, the Company entered into amended and restated change in control agreements with each of Messrs. Dietrich, Chewens, Raven and Levy (the “Amended Change in Control Agreements”).

The Amended Change in Control Agreements amend and restate the terms of the previously existing change in control agreements of each of Messrs. Dietrich, Chewens, Raven and Levy, which terms were amended by the Amended Change in Control Agreements to, among other things:

·

clarify the circumstances under which each executive would receive a gross-up payment to compensate for the imposition of any excise taxes under section 4999 of the Code; and

·

insert a Clawback Clause applicable to any payments received under the Amended Change in Control Agreement, in substantially the same form as described above in connection with the Amended Employment Agreements.

A description of the other material terms of the change in control arrangements of each of Messrs. Dietrich, Chewens, Raven and Levy, which were not modified by the Amended Change in Control Agreements, is included in the Company’s definitive proxy statement for its 2009 annual meeting of stockholders filed with the SEC on March 31, 2009.

The foregoing summary of the Amended Change in Control Agreements does not purport to be complete and is qualified in its entirety by reference to the form of Amended Change in Control Agreement, a copy of which is filed with this Quarterly Report on Form 10-Q as Exhibit 10.5, and is incorporated herein by reference.

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Amendment to Split-Dollar Agreement

On November 5, 2009, the Company entered into the First Amendment to Split-Dollar Agreement (the “Split-Dollar Amendment”) with the Bank, and the Bank, in its capacity as corporate trustee for the Martin A. Dietrich Irrevocable Life Insurance Trust No. 1 (the “Trust”), which amended the Split Dollar Agreement by and among the Company, the Bank, and the Bank, as corporate trustee for the Trust. The Split-Dollar Amendment clarifies when the Bank may terminate the Split-Dollar Agreement. The foregoing summary of the Split-Dollar Amendment does not purport to be complete and is qualified in its entirety by reference to the Split-Dollar Amendment, a copy of which is filed with this Quarterly Report on Form 10-Q as Exhibit 10.6, and is incorporated herein by reference.

Supplemental Retirement Benefit

On November 5, 2009, the Company amended and restated its Supplemental Retirement Agreements (the “Amended SERPs”) with each of Messrs. Dietrich, Chewens and Raven to comply with Section 409A of the Code. A description of the other material terms of the SERPs of each of Messrs. Dietrich, Chewens and Raven, which were restated but not modified by the Amended SERPs, is included in the Company’s definitive proxy statement for its 2009 annual meeting of stockholders filed with the SEC on March 31, 2009. The foregoing summary of the Amended SERPs does not purport to be complete and is qualified in its entirety by reference to the form of Amended SERP, a copy of which is filed with this Quarterly Report on Form 10-Q as Exhibit 10.7, and is incorporated herein by reference.

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Item 6 – Exh ib its

3.1 Certificate of Incorporation of NBT Bancorp Inc. as amended through July 23, 2001 (filed as Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2008, filed on March 2, 2009 and incorporated herein by reference).

3.2 By-laws of NBT Bancorp Inc. as amended and restated through July 23, 2001 (filed as Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2008, filed on March 2, 2009 and incorporated herein by reference).

3.3 Certificate of Designation of the Series A Junior Participating Preferred Stock (filed as Exhibit A to Exhibit 4.1 of the Registration's Form 8-K, file Number 0-14703, filed on November 18, 2004, and incorporated herein by reference).

4.1 Specimen common stock certificate for NBT's common stock (filed as exhibit 4.3 to the Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed on December 27, 2005 and incorporated herein by reference).

4.2 Rights Agreement, dated as of November 15, 2004, between NBT Bancorp Inc. and Registrar and Transfer Company, as Rights Agent (filed as Exhibit 4.1 to Registrant's Form 8-K, file number 0-14703, filed on November 18, 2004, and incorporated by reference herein).

10.1 Employment Agreement, dated November 5, 2009, by and between Martin A. Dietrich and NBT Bancorp Inc.

10.2 Employment Agreement, dated November 5, 2009, by and between Michael J. Chewens and NBT Bancorp Inc.

10.3 Employment Agreement, dated November 5, 2009, by and between David E. Raven and NBT Bancorp Inc.

10.4 Employment Agreement, dated November 5, 2009, by and between Jeffrey M. Levy and NBT Bancorp Inc.

10.5 Form of Change in Control Agreement, dated November 5, 2009, by and between NBT Bancorp Inc. and certain executive officers.

10.6 First Amendment to Split-Dollar Agreement, dated November 5, 2009, by and between NBT Bancorp Inc. and NBT Bank N.A.

10.7 Form of Amended and Restated NBT Bancorp Inc. Supplemental Retirement Agreement, dated as of November 5, 2009, between NBT Bancorp Inc. and certain executive officers.

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Written Statement of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Written Statement of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGN AT URES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, this 9th day of November 2009.

 

NBT BANCORP INC.
By:	/S/ Michael J. Chewens, CPA
Michael J. Chewens, CPA
Senior Executive Vice President
Chief Financial Officer and Corporate Secretary

 

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EXH IBIT INDEX

3.1   Certificate of Incorporation of NBT Bancorp Inc. as amended through July 23, 2001 (filed as Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2008, filed on March 2, 2009 and incorporated herein by reference).

3.2   By-laws of NBT Bancorp Inc. as amended and restated through July 23, 2001 (filed as Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2008, filed on March 2, 2009 and incorporated herein by reference).

3.3   Certificate of Designation of the Series A Junior Participating Preferred Stock (filed as Exhibit A to Exhibit 4.1 of the Registration's Form 8-K, file Number 0-14703, filed on November 18, 2004, and incorporated herein by reference).

4.1  Specimen common stock certificate for NBT's common stock (filed as exhibit 4.3 to the Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed on December 27, 2005 and incorporated herein by reference).

4.2   Rights Agreement, dated as of November 15, 2004, between NBT Bancorp Inc. and Registrar and Transfer Company, as Rights Agent (filed as Exhibit 4.1 to Registrant's Form 8-K, file number 0-14703, filed on November 18, 2004, and incorporated by reference herein).

10.1    Employment Agreement, dated November 5, 2009, by and between Martin A. Dietrich and NBT Bancorp Inc.

10.2    Employment Agreement, dated November 5, 2009, by and between Michael J. Chewens and NBT Bancorp Inc.

10.3    Employment Agreement, dated November 5, 2009, by and between David E. Raven and NBT Bancorp Inc.

10.4    Employment Agreement, dated November 5, 2009, by and between Jeffrey M. Levy and NBT Bancorp Inc.

10.5    Form of Change in Control Agreement, dated November 5, 2009, by and between NBT Bancorp Inc. and certain executive officers.

10.6    First Amendment to Split-Dollar Agreement, dated November 5, 2009, by and between NBT Bancorp Inc. and NBT Bank N.A.

10.7    Form of Amended and Restated NBT Bancorp Inc. Supplemental Retirement Agreement, dated as of November 5, 2009, between NBT Bancorp Inc. and certain executive officers.

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Written Statement of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Written Statement of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.