SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q


(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005.March 31, 2006.
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.


COMMISSION FILE NUMBER 0-14703


NBT BANCORP INC.
(Exact Name of Registrant as Specified in its Charter)

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

52 SOUTH BROAD STREET, NORWICH, NEW YORK 13815
(Address of Principal Executive Offices) (Zip Code)

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

Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periodsperiod that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act Rule 12b-2).
Yes x No oAct. (Check one):

Large accelerated filer  x
Accelerated filer  ¨
Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act Rule 12b-2)Act).
Yes o¨  No x

AsThe number of October 31, 2005, there were 32,382,755 shares outstanding of the Registrant'sRegistrant’s common stock, $0.01without par value.value, was 34,376,927 at April 30, 2006.


NBT BANCORP INC.
FORM 10-Q--Quarter Ended September 30, 2005March 31, 2006


TABLETABLE OF CONTENTS



PART I
FINANCIAL INFORMATION
  
Item 1
Interim Financial Statements (Unaudited)
  
 
Consolidated Balance Sheets at September 30, 2005,March 31, 2006, December 31, 20042005 and September 30, 2004March 31, 2005
  
 
Consolidated Statements of Income for the three and nine-monththree-month periods ended September 30,March 31, 2006 and 2005and 2004
  
 
Consolidated Statements of Stockholders’ Equity for the nine-monththree-month periods ended September 30,March 31, 2006 and 2005 and 2004
  
 
Consolidated Statements of Cash Flows for the nine-monththree-month periods ended September 30,March 31, 2006 and 2005 and 2004
  
 
Consolidated Statements of Comprehensive Income for the three and nine-monththree-month periods ended September 30,March 31, 2006 and 2005 and 2004
  
 
Notes to Unaudited Interim Consolidated Financial Statements
  
Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
  
Item 3
Quantitative and Qualitative Disclosures about Market Risk
  
Item 4
Controls and Procedures
  
PART II
OTHER INFORMATION
  
Item 1
Legal Proceedings
Item 1A
Risk Factors
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3
Defaults Upon Senior Securities
Item 4
Submission of Matters to a Vote of Security Holders
Item 5
Other Information
Item 6
Exhibits
  
SIGNATURES
  
INDEX TO EXHIBITS


NBT Bancorp Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
 
September 30,
2005
 
December 31,
2004
 
September 30,
2004
  
March 31,
2006
 
December 31,
2005
 
March 31,
2005
 
(in thousands, except share and per share data)              
              
ASSETS
              
Cash and due from banks 
$
134,131
 $98,437 $119,424  
$
123,593
 $134,501 $106,520 
Short-term interest bearing accounts  
7,515
  8,286  7,427   
9,675
  7,987  5,783 
Securities available for sale, at fair value  
942,770
  952,542  978,925   
1,112,118
  954,474  950,555 
Securities held to maturity (fair value - $89,887, $82,712 and $79,007)  
89,660
  81,782  77,826 
Securities held to maturity (fair value - $102,338, $93,701 and $87,407)  
102,754
  93,709  87,063 
Federal Reserve and Federal Home Loan Bank stock  
36,842
  36,842  37,042   
37,962
  40,259  36,942 
Loans and leases  
3,003,103
  2,869,921  2,814,553   
3,247,841
  3,022,657  2,898,187 
Less allowance for loan and lease losses  
47,550
  44,932  44,539   
49,818
  47,455  45,389 
Net loans  
2,955,553
  2,824,989  2,770,014   
3,198,023
  2,975,202  2,852,798 
Premises and equipment, net  
63,611
  63,743  62,557   
67,889
  63,693  63,806 
Goodwill  
47,544
  45,570  47,521   
102,692
  47,544  47,544 
Other intangible assets, net  
3,950
  2,013  2,084   
13,632
  3,808  4,234 
Bank owned life insurance  
33,306
  32,302  31,957   
40,535
  33,648  32,634 
Other assets  
70,739
  65,798  66,312   
76,978
  71,948  67,560 
TOTAL ASSETS
 
$
4,385,621
 $4,212,304 $4,201,089  
$
4,885,851
 $4,426,773 $4,255,439 
                    
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
          
Deposits:                    
Demand (noninterest bearing) 
$
583,289
 $520,218 $506,652  
$
618,531
 $593,422 $509,077 
Savings, NOW, and money market  
1,409,114
  1,435,561  1,513,197   
1,546,840
  1,325,166  1,467,265 
Time  
1,219,770
  1,118,059  1,070,780   
1,454,690
  1,241,608  1,192,585 
Total deposits  
3,212,173
  3,073,838  3,090,629   
3,620,061
  3,160,196  3,168,927 
Short-term borrowings  
356,193
  338,823  319,620   
329,702
  444,977  307,514 
Trust preferred debentures  
18,720
  18,720  18,720   
75,422
  23,875  18,720 
Long-term debt  
419,353
  394,523  394,545   
424,865
  414,330  394,500 
Other liabilities  
47,014
  54,167  52,197   
50,047
  49,452  46,539 
Total liabilities  
4,053,453
  3,880,071  3,875,711   
4,500,097
  4,092,830  3,936,200 
                    
Stockholders’ equity:                    
Common stock, $0.01 par value; shares authorized- 50,000,000;Shares issued 34,400,946, 34,401,008 and 34,401,028 at September 30, 2005, December 31, 2004 and September 30, 2004, respectively  
344
  344  344 
Common stock, $0.01 par value. Authorized 50,000,000 shares at March 31, 2006, December 31, 2005 and March 31, 2005; issued 36,459,560, 34,400,925 and 34,400,991 at March 31, 2006, December 31, 2005 and March 31, 2005, respectively  
365
  344  344 
Additional paid-in-capital  
209,604
  209,523  209,383   
270,462
  219,157  218,167 
Retained earnings  
166,731
  145,812  139,558   
170,330
  163,989  143,831 
Unvested stock awards  
(656
)
 (296) (351)  -  (457) (637)
Accumulated other comprehensive (loss) income  
(3,733
)
 4,989  6,215 
Treasury stock at cost 2,000,978, 1,544,247, and 1,641,115 shares at September 30, 2005, December 31, 2004 and September 30, 2004, respectively  
(40,122
)
 (28,139) (29,771)
Accumulated other comprehensive loss  
(12,210
)
 (6,477) (3,922)
Treasury stock at cost 2,126,450, 2,101,382 and 1,976,636 shares at March 31, 2006, December 31, 2005 and March 31, 2005, respectively  
(43,193
)
 (42,613) (38,544)
Total stockholders’ equity  
332,168
  332,233  325,378   
385,754
  333,943  319,239 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
4,385,621
 $4,212,304 $4,201,089  
$
4,885,851
 $4,426,773 $4,255,439 
See notes to unaudited interim consolidated financial statements.

3

NBT Bancorp Inc. and Subsidiaries
 Three months ended September 30, Nine months ended September 30, 
NBT Bancorp Inc. and Subsidiaries
 Three months ended March 31, 
Consolidated Statements of Income (unaudited)
 
2005
 2004 
2005
 2004  
2006
 2005 
(in thousands, except per share data)          
Interest, fee and dividend income:              
Interest and fees on loans and leases 
$
48,784
 $41,283 
$
138,988
 $120,812  
$
52,833
 $43,944 
Securities available for sale  
10,103
  10,784  
30,576
  31,866   
11,877
  10,247 
Securities held to maturity  
860
  731  
2,494
  2,283   
985
  803 
Other  
535
  295  
1,551
  797   
611
  467 
Total interest, fee and dividend income  
60,282
  53,093  
173,609
  155,758   
66,306
  55,461 
                    
Interest expense:                    
Deposits  
12,842
  9,743  
35,580
  29,462   
17,225
  10,720 
Short-term borrowings  
3,005
  1,192  
7,073
  2,779   
3,937
  1,861 
Long-term debt  
4,176
  3,861  
12,016
  11,103   
4,142
  3,808 
Trust preferred debentures  
308
  245  
851
  588   
883
  258 
Total interest expense  
20,331
  15,041  
55,520
  43,932   
26,187
  16,647 
Net interest income  
39,951
  38,052  
118,089
  111,826   
40,119
  38,814 
Provision for loan and lease losses  
2,752
  2,313  
6,868
  6,865   
1,728
  1,796 
Net interest income after provision for loan and lease losses  
37,199
  35,739  
111,221
  104,961   
38,391
  37,018 
                    
Noninterest income:                    
Trust  
1,292
  1,182  
3,795
  3,431   
1,358
  1,252 
Service charges on deposit accounts  
4,314
  4,159  
12,554
  12,286   
4,219
  3,929 
ATM and debit card fees  
1,631
  1,474  
4,575
  4,128   
1,645
  1,400 
Broker/dealer and insurance fees  
571
  1,696  
2,659
  5,210   
908
  1,352 
Net securities (losses) gains  
(737
)
 18  
(690
)
 56 
Net securities losses  
(934
)
 (4)
Bank owned life insurance income  
339
  348  
1,005
  1,142   
381
  333 
Retirement plan administration fees  
1,195
  -  
3,214
  -   1,231  863 
Other  
1,746
  1,240  
5,005
  4,296   
2,416
  1,586 
Total noninterest income  
10,351
  10,117  
32,117
  30,549   
11,224
  10,711 
                    
Noninterest expenses:                    
Salaries and employee benefits  
15,438
  13,647  
46,142
  40,896   
15,748
  15,451 
Office supplies and postage  
1,135
  1,167  
3,406
  3,341   
1,181
  1,150 
Occupancy  
2,425
  2,445  
7,763
  7,489   
2,988
  2,788 
Equipment  
1,971
  1,941  
5,998
  5,575   
2,156
  2,096 
Professional fees and outside services  
1,447
  1,536  
4,503
  4,592   
1,832
  1,675 
Data processing and communications  
2,613
  2,688  
7,801
  8,232   
2,702
  2,658 
Amortization of intangible assets  
142
  71  
402
  213   
323
  118 
Loan collection and other real estate owned  
115
  339  
724
  810   
211
  401 
Other operating  
3,293
  3,471  
9,417
  9,222   
3,331
  2,544 
Total noninterest expenses  
28,579
  27,305  
86,156
  80,370   
30,472
  28,881 
Income before income tax expense  
18,971
  18,551  
57,182
  55,140   
19,143
  18,848 
Income tax expense  
5,445
  5,934  
17,739
  17,584   
5,555
  6,059 
Net income
 
$
13,526
 $12,617 
$
39,443
 $37,556  
$
13,588
 $12,789 
Earnings per share:                    
Basic 
$
0.42
 $0.39 
$
1.21
 $1.15  
$
0.41
 $0.39 
Diluted 
$
0.41
 $0.38 
$
1.20
 $1.14  
$
0.40
 $0.39 
See notes to unaudited interim consolidated financial statements.

4
 
NBT Bancorp Inc. and Subsidiaries
 
NBT Bancorp Inc. and Subsidiaries
NBT Bancorp Inc. and Subsidiaries
 
Consolidated Statements of Stockholders’ Equity (Unaudited)
Consolidated Statements of Stockholders’ Equity (Unaudited)
 
Consolidated Statements of Stockholders’ Equity (Unaudited)
 
 
 
 
Common
Stock
 
 
Additional
Paid-in-
Capital
 
 
 
Retained
Earnings
 
 
Unvested
Stock
Awards
 
Accumulated
Other
Comprehensive
(Loss)/Income
 
 
 
Treasury
Stock
 
 
 
 
Total
  
Common
Stock
 
Additional
Paid-in-
Capital
 
Retained
Earnings
 
Unvested
Stock
Awards
 
Accumulated
Other
Comprehensive
(Loss)/Income
 
Treasury
Stock
 Total 
(in thousands, except per share data)(in thousands, except per share data)                            
                              
Balance at December 31, 2003
 
$
344
 
$
209,267
 
$
120,016
 
$
(197
)  
$
7,933
 
$
(27,329
)  
$
310,034
 
Net income      37,556       37,556 
Cash dividends - $0.55 per share      (18,014)       (18,014)
Purchase of 416,689 treasury shares            (8,984) (8,984)
Issuance of 354,425 shares to employee benefit plans and other stock plans, including tax benefit    57       6,306 6,363 
Grant of 14,457 shares of restricted stock awards    59   (312)   253 - 
Forfeited 963 shares of restricted stock        17   (17) - 
Amortization of restricted stock awards        141     141 
Other comprehensive loss          (1,718)     (1,718)
Balance at September 30, 2004
 
$
344
 
$
209,383
 
$
139,558
 
$
(351
)
$
6,215
 
$
(29,771
)
$
325,378
 
                
Balance at December 31, 2004
 
$
344
 
$
209,523
 
$
145,812
 
$
(296
)
$
4,989
 
$
(28,139
)
$
332,233
  
$
344
 
$
218,012
 
$
137,323
 
$
(296
)   
$
4,989
 
$
(28,139
)
$
332,233
 
Net income      39,443       39,443       12,789       12,789 
Cash dividends - $0.57 per share      (18,524)         (18,524)
Purchase of 868,743 treasury shares            (19,989) (19,989)
Issuance of 387,337 shares to employee benefit plans and other stock plans, including tax benefit    121       7,340 7,461 
Cash dividends - $0.19 per share      (6,210)       (6,210)
Purchase of 514,683 treasury shares            (11,897) (11,897)
Issuance of 57,619 shares to employee benefit plans and other stock plans, including tax benefit    51 (71)        1,027 1,007 
Grant of 24,675 shares of restricted stock awards    (40)     (626)   666 -     104   (569)   465 - 
Amortization of restricted stock awards        266     266         228     228 
Other comprehensive loss          (8,722)   (8,722)          (8,911)   (8,911)
Balance at September 30, 2005
 
$
344
 
$
209,604
 
$
166,731
 
$
(656
)
$
(3,733
)
$
(40,122
)
$
332,168
 
Balance at March 31, 2005
 
$
344
 
$
218,167
 
$
143,831
 
$
(637
)
$
(3,922
)
$
(38,544
)
$
319,239
 
                
Balance at December 31, 2005
 
$
344
 
$
219,157
 
$
163,989
 
$
(457
)
$
(6,477
)   
$
(42,613
)   
$
333,943
 
Net income      13,588       13,588 
Cash dividends - $0.19 per share      (6,550)       (6,550)
Purchase of 178,404 treasury shares            (4,055) (4,055)
Issuance of 2,058,661 shares of common stock in connection with purchase business combination  
21
 
48,604
         
48,625
 
Issuance of 237,278 incentive stock options in purchase transaction    
1,955
         
1,955
 
2,500 shares of company stock in purchase transaction            
(55
)
 
(55
)
Issuance of 183,345 shares to employee benefit plans and other stock plans, including tax benefit    
234
 
(697
)
     
3,788
 
3,325
 
Reclassification adjustment from the adoption of FAS123R, including 37,395 of restricted shares from issued common stock to treasury stock        
457
   
(457
)
 
-
 
Stock-based compensation    756         756 
Issuance of 9,886 shares of vested restricted and deferred stock    
(199
)
       
199
 
-
 
Forfeit 2,625 shares of restricted stock    (45)            (45)
Other comprehensive loss          (5,733)   (5,733)
Balance at March 31, 2006
 
$
365
 
$
270,462
 
$
170,330
 
$
-
 
$
(12,210
)
$
(43,193
)
$
385,754
 
See notes to unaudited interim consolidated financial statements.

5

NBT Bancorp Inc. and Subsidiaries
 Nine Months Ended September 30, 
NBT Bancorp Inc. and Subsidiaries
 Three Months Ended March 31, 
Consolidated Statements of Cash Flows (unaudited)
 
2005
 2004  
2006
 2005 
(in thousands)          
     
Operating activities:
          
Net income 
$
39,443
 $37,556  
$
13,588
 $12,789 
Adjustments to reconcile net income to net cash providedby operating activities:       
Adjustments to reconcile net income to net cash provided by operating activities:       
Provision for loan losses  
6,868
  6,865   
1,728
  1,796 
Depreciation of premises and equipment  
4,747
  4,541   
1,590
  1,573 
Net amortization on securities  
1,077
  1,959   
135
  384 
Amortization of intangible assets  
402
  213   
323
  118 
Amortization of restricted stock awards  
266
  141 
Stock-based compensation  
711
  228 
Tax benefit from the exercise of stock options  
-
  202 
Bank owned life insurance income  
(1,005
)
 (1,142)  
(381
)
 (333)
Proceeds from sale of loans held for sale  
15,381
  20,576   
8,837
  1,185 
Origination of loans held for sale  
(17,254
)
 (1,363)  
(6,957
)
 (730)
Net gains on sale of loans  
(33
)
 (108)
Net (gains) losses on sale of loans  
(60
)
 5 
Net gain on sale of other real estate owned  
(325
)
 (796)  
(60
)
 (43)
Net security losses (gains)  
690
  (56)
Tax benefit from the exercise of stock options  
1,057
  995 
Net gain on sale of branch  
(470
)
 - 
Net security losses  
934
  4 
Net decrease in other assets  
1,160
  924   
6,025
  4,816 
Net (decrease) increase in other liabilities  
(7,199
)
 6,328 
Net increase in other liabilities  
(2,199
)
 (7,675)
Net cash provided by operating activities  
45,275
  76,633   
23,744
  14,319 
Investing activities:
              
Securities available for sale:              
Proceeds from maturities  
130,882
  212,032   
45,451
  37,054 
Proceeds from sales  
53,044
  12,796   
42,292
  27,868 
Purchases  
(190,357
)
 (226,403)  
(108,488
)
 (78,128)
Securities held to maturity:              
Proceeds from maturities  
34,436
  44,689   
11,013
  8,882 
Purchases  
(42,386
)
 (25,336)  
(11,837
)
 (14,180)
Net purchases of FRB and FHLB stock  
-
  (2,999)
Net purchases (sales) of FRB and FHLB stock  
2,297
  (100)
Net cash paid in sale of branch  
(2,307
)
 - 
Net cash used in CNB Bancorp, Inc. merger  
(20,770
)
 - 
Cash paid for the acquisition of EPIC Advisor’s, Inc.  
(6,129
)
 -   
-
  (6,129)
Cash received for the sale of M. Griffith Inc.  
1,016
  -   
-
  1,016 
Net increase in loans  
(135,826
)
 (199,314)  
(38,054
)
 (30,170)
Purchase of premises and equipment, net  
(4,424
)
 (4,655)  
(599
)
 (1,445)
Proceeds from sales of other real estate owned  
966
  2,134   
210
  138 
Net cash used in investing activities  
(158,778
)
 (187,056)  
(80,792
)
 (55,194 
Financing activities:
              
Net increase in deposits  
138,335
  89,278   
130,856
  95,089 
Net increase in short-term borrowings  
17,370
  16,689 
Proceeds from issuance of long term debt  
60,000
  30,000 
Net decrease in short-term borrowings  
(115,275
)
 (31,309)
Repayments of long-term debt  
(35,170
)
 (5,155)  
(12,020
)
 (23)
Proceeds from the issuance of trust preferred debentures  
51,547
  - 
Proceeds from issuance of treasury shares to employee benefit plans and other stock plans  
6,404
  5,368   
3,012
  805 
Tax benefit from the exercise of stock options  
313
  - 
Purchase of treasury stock  
(19,989
)
 (8,984)  
(4,055
)
 (11,897)
Cash dividends  
(18,524
)
 (18,014)  
(6,550
)
 (6,210)
Net cash provided by financing activities  
148,426
  109,182   
47,828
  46,455 
Net increase (decrease) in cash and cash equivalents  
34,923
  (1,241)
Net (decrease) increase in cash and cash equivalents  
(9,220
)
 5,580 
Cash and cash equivalents at beginning of period  
106,723
  128,092   
142,488
  106,723 
Cash and cash equivalents at end of period
 
$
141,646
 $126,851  
$
133,268
 $112,303 

6

Consolidated Statements of Cash Flows, Continued
 Nine Months Ended September 30,  Three Months Ended March 31, 
Supplemental disclosure of cash flow information:
 
2005
 2004  
2006
 2005 
          
Cash paid during the period for:
          
Interest 
$
54,488
 $44,940  
$
24,820
 $16,608 
Income taxes  
19,574
  9,516   
-
  443 
       
Transfers:
       
Cash received during the period for:
       
Income taxes  
449
  - 
Noncash investing activities:
       
Loans transferred to OREO 
$
300
 $655  
$
164
 $105 
       
Dispositions:
              
Assets sold 
$
1,405
  - 
Fair value of assets sold 
$
3,453
 $1,405 
Fair value of liabilities transferred  389      
5,760
  389 
Acquisitions:
              
Fair value of assets acquired 
$
6,565
  -  
$
431,943
 $6,565 
Fair value of liabilities assumed  
435
  -   
360,648
  435 
Net cash and cash equivalents used in merger  
20,770
  - 
Fair value of equity acquired  
50,525
  - 
See notes to unaudited interim consolidated financial statements.

7

      
Three months ended
March 31,
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
Consolidated Statements of Comprehensive Income (unaudited)
 
2005
 2004 
2005
 2004 
Consolidated Statements of Comprehensive Income (unaudited)
 
2006
 2005 
(in thousands)            
Net income 
$
13,526
 $12,617 
$
39,443
 $37,556  
$
13,588
 $12,789 
                    
Other comprehensive (loss) income, net of tax             
Unrealized holding (losses) gains arising during period [pre-tax amounts of $(10,672), $14,894, $(15,198) and $(2,654)]  
(6,415
)
 8,956  
(9,137
)
 (1,595)
Other comprehensive income, net of tax       
Unrealized holding losses arising during period [pre-tax amounts of $10,089 and $14,827]  
(6,065
)
 (8,913)
Minimum pension liability adjustment  
-
  (89) 
-
  (89)  
(229
)
 - 
Less: Reclassification adjustment for net losses (gains) included in net income [pre-tax amounts of $737, $(18), $690 and $(56)]  
443
  (11) 
415
  (34)
Total other comprehensive (loss) income  
(5,972
)
 8,856  
(8,722
)
 (1,718)
Less: Reclassification adjustment for net losses included in net income [pre-tax amounts of $934 and $4]  
561
  2 
Total other comprehensive loss  
(5,733
)
 (8,911)
Comprehensive income 
$
7,554
 $21,473 
$
30,721
 $35,838  
$
7,855
 $3,878 
See notes to unaudited interim consolidated financial statements.

8

NBT BANCORP INC. and Subsidiary
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005March 31, 2006

Note 1.
Description of Business

NBT Bancorp Inc. (the Company or the Registrant) is a registered financial holding company incorporated in the state of Delaware in 1986, with its principal headquarters located in Norwich, New York. The Company is the parent holding company of NBT Bank, N.A. (the Bank), NBT Financial Services, Inc. (NBT Financial) and, Hathaway Insurance Agency, Inc., CNBF Capital Trust I.I, NBT Statutory Trust I and NBT Statutory Trust II. Through these subsidiaries, the Company operates as one segment focused on community banking operations. The Company’s primary business consists of providing commercial banking and financial services to its customers in its market area. The principal assets of the Company are all of the outstanding shares of common stock of its direct subsidiaries, and its principal sources of revenue are the management fees and dividends it receives from the Bank and NBT Financial.

The Bank is a full service commercial bank formed in 1856, which provides a broad range of financial products to individuals, corporations and municipalities throughout the central and upstate New York and northeastern Pennsylvania market area. The Bank conducts business through two operating divisions, NBT Bank and Pennstar Bank.

Note 2.
Basis of Presentation

The accompanying unaudited interim consolidated financial statements include the accounts of NBT Bancorp Inc. and its wholly owned subsidiaries, NBT Bank, N.A. and NBT Financial Services, Inc. Collectively, the Registrant and its subsidiaries are referred to herein as “the Company”. All intercompany transactions have been eliminated in consolidation. Amounts in the prior period financial statements are reclassified whenever necessary to conform to current period presentation.
 
CNBF Capital Trust I (“Trust I”) is a Delaware statutory business trust formed in 1999, for the purpose of issuing $18 million in trust preferred securities and lending the proceeds to the Company. NBT Statutory Trust I is a Delaware statutory business trust formed in 2005, for the purpose of issuing $5 million in trust preferred securities and lending the proceeds to the Company. NBT Statutory Trust II is a Delaware statutory business trust formed in 2006, for the purpose of issuing $50 million in trust preferred securities and lending the proceeds to the Company to provide funding for the acquisition of CNB Bancorp, Inc during the three months ended March 31, 2006. These three statutory business trusts are collectively referred here in as “the Trusts”. The Company guarantees, on a limited basis, payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities. Trust I is aThe Trusts are variable interest entityentities (VIEs) for which the Company is not the primary beneficiary, as defined in Financial Accounting Standards Board Interpretation (“FIN”) No. 46 “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (Revised December 2003 (FIN 46R)).” In accordance with FIN 46R, which was implemented in the first quarter of 2004, the accounts of Trust Ithe Trusts are not included in the Company’s consolidated financial statements.

Note 3.
New Accounting Pronouncements

During December 2004,In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123R, “Share-Based Payment” (“of Financial Accounting Standard 155 - Accounting for Certain Hybrid Financial Instruments (“SFAS 123R”155”), which requires companieseliminates the exemption from applying SFAS 133 to measure and recognize compensation expenseinterests in securitized financial assets so that similar instruments are accounted for all stock-based payments at fair value. Stock-based payments include stock option grants. The Company grants options to purchase common stock to some of its employees and directors under various plans at prices equal to the market valuesimilarly regardless of the stock onform of the datesinstruments. SFAS 155 also allows the options were granted. SFAS 123Relection of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event. Adoption is effective for all financial instruments acquired or issued after the nextbeginning of the first fiscal year that begins after JuneSeptember 15, 2005. Based on assumptions at September 30, 2005, the Company expects the2006. Early adoption is permitted. The adoption of SFAS 123 R will lower earnings per share by approximately $0.04 for the year ended December 31, 2006.155 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.

9
 
Emerging Issues Task Force (EITF) Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (i) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the Company began presenting the new disclosure requirements in its consolidated financial statements for the year ended December 31, 2003. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provisions was delayed until the finalization of a FASB Staff Position (FSP) to provide additional implementation guidance.

In June, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed its staff to issue proposed FSP EITF 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1,” as final. The final FSP will supersede EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” and EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The final FSP (retitled FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”) will replace the guidance set forth in paragraphs 10-18 of Issue 03-1 with references to existing other-than-temporary impairment guidance, such as FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, SEC Staff Accounting Bulletin No. 59, “Accounting for Noncurrent Marketable Equity Securities”, and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” FSP FAS 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made. The FASB decided that FSP FAS 115-1 would be effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005. The finalized FSP FAS 115-1 should be issued during the fourth quarter of 2005. The Company does not expect the impact of FSP FAS 115-1 will be material to its consolidated financial position, results of operations and cash flows.

In May 2005March 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting ChangesStandard 156 - Accounting for Servicing of Financial Assets (“SFAS 156”), which requires all separately recognized servicing assets and Error Corrections, a replacementservicing liabilities be initially measured at fair value. SFAS 156 permits, but does not require, the subsequent measurement of APB Opinion No. 20servicing assets and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless itservicing liabilities at fair value. Adoption is impracticable to determine either the period−specific effects or the cumulative effectrequired as of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effectsbeginning of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. SFAS 154 also requiresfirst fiscal year that a change in depreciation, amortization, or depletion method for long−lived, non−financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginningbegins after DecemberSeptember 15, 2005.2006. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued.permitted. The Company is required to adopt the provisionsadoption of SFAS 154, as applicable, beginning in fiscal 2006. Adoption156 is not expected to have a material effect on our consolidated financial position, results of this statement could have an impact if there are future voluntary accounting changes and correction of errors.

operations or cash flows.
10

Note 4.
Business Combination

On February 10, 2006, the Company completed the acquisition through merger of CNB Bancorp, Inc. (“CNB”). CNB was a bank holding company for City National Bank and Trust Company (“CNB Bank”) and Hathaway Insurance Agency, Inc. (“Hathaway”), headquartered in Gloversville, NY. CNB Bank conducted business from nine community bank offices in four upstate New York counties—Fulton, Hamilton, Montgomery and Saratoga. The stockholders of CNB received approximately $39 million in cash and 2,058,661 shares of NBT common stock. The aggregate transaction value was approximately $89.0 million. The transaction was accounted for under the purchase method of accounting. CNB had total assets of $399.0 million, loans of $197.6 million, deposits of $335.0 million and shareholders equity of $40.1 million. CNB was merged with and into the Company, CNB Bank was merged with and into NBT Bank and Hathaway is a direct subsidiary of the Company. The results of operations are included in the consolidated financial statements from the date of acquisition, February 10, 2006.

Note 5.
Use of Estimates

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

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

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


10
Management believes that the allowance for loan and lease losses is adequate. While management uses available information to recognize loan and lease losses, future additions to the allowance for loan and lease losses may be necessary based on changes in economic conditions or changes in the values of properties securing loans in the process of foreclosure. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan and lease losses. Such agencies may require the Company to recognize additions to the allowance for loan and lease losses based on their judgments about information available to them at the time of their examination which may not be currently available to management.

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

Income taxes are accounted for under the asset and liability method. The Company files consolidated tax returns on the accrual basis. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the available carryback period. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Based on available evidence, gross deferred tax assets will ultimately be realized and a valuation allowance was not deemed necessary at September 30, 2005March 31, 2006 and 2004.2005. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.


Note 5.6.
Commitments and Contingencies

The Company is a party to financial instruments in the normal course of business to meet financing needs of its customers and to reduce its own exposure to fluctuating interest rates. These financial instruments include commitments to extend credit, unused lines of credit, and standby letters of credit. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policy to make such commitments as it uses for on-balance-sheet items. At September 30, 2005,both March 31, 2006, and December 31, 2004,2005, commitments to extend credit and unused lines of credit totaled $501.4 million and $507.4$497.1 million. Since commitments to extend credit and unused lines of credit may expire without being fully drawn upon, this amount does not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management’s credit evaluation of the borrower and may include accounts receivable, inventory, property, land and other items.

The Company guarantees the obligations or performance of customers by issuing stand-by letters of credit to third parties. These stand-by letters of credit are frequently issued in support of third party debt, such as corporate debt issuances, industrial revenue bonds, and municipal securities. The risk involved in issuing stand-by letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have terms of five years or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Standby letters of credit totaled $42.6$43.1 million at September 30, 2005March 31, 2006 and $31.6$42.9 million at December 31, 2004.2005. As of September 30, 2005,March 31, 2006, the fair value of standby letters of credit was not material to the Company’s consolidated financial statements.

Note 6.7.
Earnings per share

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



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

      
Three months ended September 30, 
2005
 2004 
(in thousands, except per share data)     
      
Basic EPS:     
Weighted average common shares outstanding  
32,440
  32,619 
Net income available to common shareholders 
$
13,526
 $12,617 
Basic EPS 
$
0.42
 $0.39 
        
Diluted EPS:       
Weighted average common shares outstanding  
32,440
  32,619 
Dilutive potential common stock  
289
  316 
Weighted average common shares and common share equivalents  
32,729
  32,935 
Net income available to common shareholders 
$
13,526
 $12,617 
        
Diluted EPS 
$
0.41
 $0.38 
          
Nine months ended September 30, 
2005
 2004 
Three months ended March 31, 
2006
 2005 
(in thousands, except per share data)          
          
Basic EPS:          
Weighted average common shares outstanding  
32,478
  32,724   
33,422
  32,674 
Net income available to common shareholders 
$
39,443
 $37,556  
$
13,588
 $12,789 
Basic EPS 
$
1.21
 $1.15  
$
0.41
 $0.39 
              
Diluted EPS:              
Weighted average common shares outstanding  
32,478
  32,724   
33,422
  32,674 
Dilutive potential common stock  
284
  340   
324
  303 
Weighted average common shares and common share equivalents  
32,762
  33,064 
Weighted average common shares and common Share equivalents  
33,746
  32,977 
Net income available to common shareholders 
$
39,443
 $37,556  
$
13,588
 $12,789 
              
Diluted EPS 
$
1.20
 $1.14  
$
0.40
 $0.39 

There were 8,996375,211 stock options for the quarter ended September 30, 2005March 31, 2006 and 28,665339,179 stock options for the quarter ended September 30, 2004 that were not considered in the calculation of diluted earnings per share since the stock options’ exercise price was greater than the average market price during these periods. There were 372,686 stock options for the nine months ended September 30,March 31, 2005 and 347,078 stock options for the nine months ended September 30, 2004 that were not considered in the calculation of diluted earnings per share since the stock options’ exercise price was greater than the average market price during these periods.

Note 7.8.
Stock-Based Compensation

InEffective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, (“FAS 123R”) using the modified-prospective transition method. Under this transition method, compensation cost in 2006 includes costs for stock options granted prior to but not vested as of December 2002,31, 2005, and options vested in 2006. Therefore results for prior periods have not been restated.

The adoption of FAS 123R lowered net income by approximately $0.4 million for the FASB issued SFAS No. 148, “Accountingthree months ended March 31, 2006, compared to if we had continued to account for Stock-Based Compensation - Transition and Disclosure” which provides guidance on how to transition from the intrinsic value method of accounting for stock-based employeeshare-based compensation under Accounting Principles Board (APB) OpinionAPB No. 25, “AccountingAccounting for Stock Issued to Employees” to SFAS No. 123 “Accounting for Stock-Based Compensation,” which accounts for stock-based compensation usingEmployees.

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FAS 123 during the period presented. For the purpose of this pro forma disclosure, the value of options is estimated using a Black-Scholes option-pricing model and amortized to expense over the options vesting periods.

    
  
Three months ended March 31,
 
(in thousands, except per share data) 
2005
 
Net income, as reported $12,789 
Add: Stock-based compensation expense included in reported net income, net of related tax effects  
137
 
Less: Stock-based compensation expense determined under fair value method for all awards, net of related tax effects  (315)
Pro forma net income $12,611 
     
Net income per share:    
Basic - as reported $0.39 
Basic - Pro forma $0.39 
     
Diluted - as reported $0.39 
Diluted - Pro forma $0.38 

As of March 31, 2006, there was approximately $3.3 million of unrecognized compensation cost related to unvested share-based stock option awards granted. That cost is expected to be recognized over the next four years.

In November 2005, the FASB issued Staff Position No. FAS 123(R)-3 (“FSP 123R-3”), Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. FSP 123R-3 provides an elective alternative transition method for calculating the pool of accounting, ifexcess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123R. Companies may take up to one year from the effective date of FSP 123R-3 to evaluate the available transition alternatives and make a company so elects.one-time election as to which method to adopt. The Company is currently accounts for stock-based employee compensation under APB No. 25. As such, compensation expense would be recorded only ifin the market priceprocess of evaluating the underlying stock on the date of grant exceeded the exercise price. Because the fair value on the date of grant of the underlying stock of all stock optionsalternative methods.

Options are granted by the Company isto certain employees and directors at prices equal to the exercise price of the options granted, no compensation cost has been recognized for stock options in the accompanying consolidated statements of income. Compensation expense for restricted stock awards is based on the market pricevalue of the stock on the dates the options were granted. The options granted have a term of ten years from the grant date and granted options for employees vest in the following manner: 40% in the first year and 20% per year for the subsequent three years. Generally, the fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. Prior to the adoption of FAS 123(R), options granted to retirement eligible employees were expensed over the nominal vesting period on a pro forma basis. Beginning on January 1, 2006, options granted to retirement eligible employees are expensed in full on the date of grant and is recognized ratably overgrant. The impact of this change was not material. The Company has estimated the vesting periodfair value of all stock option awards as of the award.date of the grant by applying the Black-Scholes pricing valuation model. The application of this valuation model involves assumptions that are judgmental and sensitive in the determination of compensation expense. The weighted average for key assumptions used in determining the fair value of options granted during the three months ended March 31, 2006 follows:

Three months ended
March 31, 2006
Dividend Yield
3.28% - 3.52%
Expected Volatility
28.41% - 28.62%
Risk-free interest rate
4.36% - 4.58%
Expected life
7 years

HadHistorical information was the Company determined compensation costprimary basis for the selection of the expected volatility, expected dividend yield and the expected lives of the options. The risk-free interest rate was selected based onupon yields of the fair value at the date of grant for its stock options and employee stock purchase plan under SFAS No. 123, the Company’s net income and net income per share would have been reducedU.S. treasury issues with a term equal to the pro forma amounts indicated below:
      
  
Three months ended
September 30,
 
Nine months ended
September 30,
 
(in thousands, except per share data) 
2005
 
2004
 
2005
 
2004
 
Net income, as reported 
$
13,526
 $12,617 
$
39,443
 $37,556 
Add: Stock-based compensation expense included in reported net income, net of related tax effects  
81
  37  
245
  85 
Less: Stock-based compensation expense determined under fair value method for all awards, net of related tax effects  
(361
)
 (323) 
(993
)
 (893)
Pro forma net income 
$
13,246
 $12,331 
$
38,695
 $36,748 
              
Net income per share:             
Basic - as reported 
$
0.42
 $0.39 
$
1.21
 $1.15 
Basic - Pro forma 
$
0.41
 $0.38 
$
1.19
 $1.12 
              
Diluted - as reported 
$
0.41
 $0.38 
$
1.20
 $1.14 
Diluted - Pro forma 
$
0.40
 $0.37 
$
1.18
 $1.11 
expected life of the option being valued.

Stock option activity during the three months ended March 31, 2006 is as follows:

  
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in yrs)
 
Aggregate Intrinsic Value
 
          
Outstanding at January 1, 2006  1,916,624 $18.79       
Granted  287,548 $22.36       
Issued in connection with the CNB transaction  237,278 $16.76       
Exercised  (183,345)$(16.32)      
Lapsed  (22,641)$21.82       
Outstanding at March 31, 2006  2,235,464 $19.21  6.65 $9,049,756 
              
Exercisable at March 31, 2006  1,556,578 $17.94  5.68 $8,272,917 

The Company granted 403,225 stock options for the nine months ended September 30, 2005 with a weighted average exercise pricefair market value of $23.16 per share compared to 375,897 stock options granted for the ninethree months ended September 30, 2004March 31, 2006, was $5.21. Total stock-based compensation expense for stock option awards totaled $0.7 million for the three months ended March 31, 2006. The amount of stock-based compensation expensed deferred under FAS 91 “Accounting for Nonrefundable Fee and Costs Associated with a weighted average exercise priceOrigination or Acquiring Loans and Initial Direct Costs of $22.17 per share. The per share weighted average fairLeases” was less than $0.1 million for the three months ended March 31, 2006. Cash proceeds, tax benefits and intrinsic value of therelated to total stock options granted for the nine months ended September 30, 2005 and 2004 was $5.88 and $5.80. The assumptions used for the grants noted above wereexercised is as follows:

Nine months ended
September 30, 2005
Nine months ended
September 30, 2004
Dividend Yield
3.05% - 3.70%3.01% - 3.74%
Expected Volatility
29.15% - 30.00%29.82% - 31.65%
Risk-free interest rate
3.85% - 4.22%3.56% - 4.41%
Expected life
7 years7 years

  
Three months ended
 
(dollars in thousands) 
March 31, 2006
 March 31, 2005 
Proceeds from stock option exercised $3,012 $805 
Tax benefits related to stock options exercised  313  202 
Intrinsic value of stock options exercised  1,191  506 

The fair valueCompany has outstanding restricted and deferred stock awards granted from various plans at March 31, 2006. The Company recognized $0.1 million in stock-based compensation expense related to these stock awards for the three months ended March 31, 2006 and $0.2 million for the three months ended March 31, 2005. Unrecognized compensation cost related to restricted stock awards totaled $0.8 million at March 31, 2006. The following table summarizes information for unvested restricted stock awards outstanding as of stock options granted was estimated at the date of grant using the Black-Scholes option-pricing model. This model was developed for use in estimating fair value of publicly traded options that have no vesting restrictions and are fully transferable. Additionally, the model requires the input of highly subjective assumptions. Because the Company’s employee and director stock options have characteristics significantly different from those of publicly traded stock options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the Black-Scholes option-pricing model does not provide a single measure of the fair value of the Company’s employee and director stock options.March 31, 2006:


  
Number of Shares
 
Weighted-Average Grant Date Fair Value
 
      
Unvested Restricted Stock Awards
     
Unvested at start of quarter  37,935 $21.46 
Forefited  (2,625)$23.04 
Vested  (9,886)$20.26 
Granted  29,817 $21.74 
Unvested at end of quarter  55,241 $21.75 
As of March 31, 2006, the Company’s Employee and Non-Employee Stock Option Plans had 1,128,799 options available for grant; the Company’s Directors & Deferred Stock Plan had 147,777 shares available for grant; The Company’s Performance Share Plan had 252,750 shares available for grant; the Employees Stock Purchase Plan had 403,279 shares available for issuance.

Note 8.9.
Goodwill and Intangible Assets

A summary of goodwill by operating subsidiaries follows:

(in thousands)
 
January 1,
2004
 
Goodwill
Acquired
 
Goodwill
Disposed
 
September 30,
2004
  
January 1,
2005
 
Goodwill
Acquired
 
Goodwill
Disposed
 
March 31,
2005
 
NBT Bank, N.A. $44,520  -  - $44,520  $44,520  -  - $44,520 
NBT Financial Services, Inc.  3,001  -  -  3,001   1,050  3,024  1,050  3,024 
Total $47,521 $- $- $47,521  $45,570 $3,024 $1,050 $47,544 
 
 
(in thousands)
 
January 1,
2006
 
Goodwill
Acquired
 
Goodwill
Disposed
 
March 31,
2006
 
NBT Bank, N.A. $44,520  54,934  - $99,454 
NBT Financial Services, Inc  3,024  -  -  3,024 
Hathaway Agency, Inc.  -  214  -  214 
Total $47,544 $55,148 $- $102,692 
 
(in thousands)
 
January 1,
2005
 
Goodwill
Acquired
 
Goodwill
Disposed
 
September 30,
2005
 
NBT Bank, N.A. $44,520  -  - $44,520 
NBT Financial Services, Inc.  1,050  3,024  1,050  3,024 
Total $45,570 $3,024 $1,050 $47,544 

In February 2006, the Company acquired CNB. The acquisition resulted in increases to goodwill of $55.1 million, core deposit intangibles of $9.6 million and other intangibles of $0.5 million. The core deposit intangibles will be amortized over ten years.

In January 2005, the Company acquired EPIC Advisors, Inc., a 401(k) record keeping firm located in Rochester, NY. In that transaction, the Company recorded customer relationship intangible assets of $2.1 million and non-compete provision intangible assets of $0.2 million, which have amortization periods of 13 years and 5 years, respectively. Also in connection with the acquisition, the Company recorded $3.0 million in goodwill.

In March 2005, the Company sold its broker/dealer subsidiary, M. Griffith Inc. In connection with the sale of M. Griffith Inc., goodwill was reduced by $1.1 million and was allocated against the sales price. In the fourth quarter of 2004, the Company recorded a $2.0 million goodwill impairment charge in connection with the above mentioned sale. A definitive agreement was signed by the Company and the acquirer in the fourth quarter of 2004. The negotiation and resolution of sale terms for M. Griffith Inc. during the fourth quarter of 2004 resulted in the goodwill impairment charge in that same quarter.


The Company has finite-lived intangible assets capitalized on its consolidated balance sheet in the form of core deposit and other intangible assets. These intangible assets continue to be amortized over their estimated useful lives, which range from one to twenty-five years.


A summary of core deposit and other intangible assets follows:

 
September 30,
  
March 31,
 
 
2005
 
2004
  
2006
 
2005
 
(in thousands)          
Core deposit intangibles:          
Gross carrying amount 
$
2,186
 $2,186  
$
11,806
 $2,186 
Less: accumulated amortization  
1,504
  1,272   
1,924
  1,388 
Net Carrying amount  
682
  914   
9,882
  798 
              
Other intangibles:              
Gross carrying amount  
3,197
  857   
4,164
  3,197 
Less: accumulated amortization  
446
  204   
779
  278 
Net Carrying amount  
2,751
  653   
3,385
  2,919 
              
Other intangibles not subject to amortization: Pension asset  
517
  517   
365
  
517
 
              
Total intangibles with definite useful lives:              
Gross carrying amount  
5,900
  3,560   
16,335
  5,900 
Less: accumulated amortization  
1,950
  1,476   
2,703
  1,666 
Net Carrying amount 
$
3,950
 $2,084  
$
13,632
 $4,234 

Amortization expense on finite-lived intangible assets is expected to total $0.2$1.3 million for the remainder of 2005, $0.52006, $1.7 million for 2007, $1.4 million for each of 2006 and 2007, $0.4 million for 2008, $0.3 million for 2009 and $2.02010, and $6.5 million thereafter.

Note 9.10.
Defined Benefit Pension Plan and Postretirement Health Plan

The Company maintains a qualified, noncontributory, defined benefit pension plan covering substantially all employees. Benefits paid from the plan are based on age, years of service, compensation, social security benefits, and are determined in accordance with defined formulas. The Company’s policy is to fund the pension plan in accordance with ERISA standards. In addition, the Company provides certain health care benefits for retired employees. Benefits are accrued over the employees’ active service period. Only employees that were employed by NBT Bank, N.A. on or before January 1, 2000 are eligible to receive postretirement health care benefits. The Company funds the cost of the postretirement health plan as benefits are paid.

16

The Components of pension expense and postretirement expense are set forth below (in thousands):

 
Three months ended September 30,
 
Nine months ended September 30,
  
Three months ended March 31,
 
Pension plan: 
2005
 
2004
 
2005
 
2004
  
2006
 
2005
 
Service cost $469 $427 $1,407 $1,281  $502 $469 
Interest cost  561  533  1,683  1,599   539  561 
Expected return on plan assets  (947) (934) (2,841) (2,802)  (905) (947)
Net amortization  374  64  1,122  192   179  374 
Total $457 $90 $1,371 $270  $315 $457 
                    
     
Postretirement Health Plan:  
2005
  
2004
  
2005
  
2004
  
2006
 
2005
 
Service cost $9 $9 $27 $27  $1 $9 
Interest cost  67  68  201  204   51  67 
Net amortization  (15) (10) (45) (30)  (24) (15)
Total $61 $67 $183 $201  $28 $61 

Note 10.11.
Business CombinationTrust Preferred Debentures

On June 14,As of March 31, 2006, the CNBF Capital Trust I, NBT Statutory Trust I and NBT Statutory Trust II (“the Trusts”), all wholly-owned unconsolidated subsidiaries of the Company, had the following Trust Preferred Securities outstanding and the Company had the following issues of trust preferred debentures, all held by the Trusts, outstanding (dollars in thousands):

Description
 
Issuance Date
 
Trust Preferred Securities Outstanding
 
Interest Rate
 
Trust Preferred Debt Owed To Trust
 
Final Maturity date
 
CNBF Capital Trust I  August-99 $18,000  3-month LIBOR plus 2.75% $18,720  August-29 
                 
NBT Statutory Trust I  November-05  5,000  6.30% Fixed  5,155  December-35 
                 
NBT Statutory Trust II  February-06  50,000  6.195% Fixed  51,547  March-36 

The Company owns all of the common stock of the three business trusts, which have issued trust preferred securities in conjunction with the Company and issuing trust preferred debentures to the Trusts. The terms of the trust preferred debentures are substantially the same as the terms of the trust preferred securities. In February 2005, NBT announcedthe Federal Reserve Board issued a final rule that allows the continued inclusion of trust preferred securities in the Tier 1 capital of bank holding companies. The Board’s final rule limits the aggregate amount of restricted core capital elements (which includes trust preferred securities, among other things) that may be included in the Tier 1 capital of most bank holding companies to 25% of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. Large, internationally active bank holding companies (as defined) are subject to a 15% limitation. Amounts of restricted core capital elements in excess of these limits generally may be included in Tier 2 capital. The final rule provides a five-year transition period, ending March 31, 2009, for application of the quantitative limits. The Corporation does not expect that the quantitative limits will preclude it had agreed to acquire CNB Bancorp, Inc. (CNB), with total assets at June 30, 2005, of approximately $420 million, which is headquarteredfrom including the trust preferred securities in Gloversville, NY. The considerationTier 1 capital. However, the trust preferred securities could be redeemed without penalty if they were no longer permitted to be paidincluded in the merger will be 45% cash and 55% stock. ShareholdersTier 1 capital.

17

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

The purpose of this discussion and analysis is to provide the reader with a concise description of the financial condition and results of operations of NBT Bancorp Inc. (Bancorp) and its wholly owned subsidiaries, NBT Bank, N.A. (NBT), Hathaway Insurance Agency, Inc. and NBT Financial Services, Inc. (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 20042005 Form 10-K for an understanding of the following discussion and analysis.

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,” or other similar terms. There are a number of factors, many of which are beyond the Company’s control that could cause actual results to differ materially from those contemplated by the forward looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) 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 effect 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; (11) the costs that will be incurred fromCompany may fail to realize projected cost savings, revenue enhancements and the accretive effect of the CNB acquisition and the risk of not obtaining regulatory or CNB shareholder approval;on our earnings; and (12) the Company’s success in managing the risks involved in the foregoing.


The Company wishes to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including those described above, 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 the result of any revisions that may be made to any forward-looking statements to reflect statements to the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Critical Accounting Policies

Management of the Company considers the accounting policy relating to the allowance for loan and lease losses to be a critical accounting policy given the uncertainty 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 would need to be increased. For example, if historical loan and lease loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provisions for loan and lease losses would be required to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Company’s non-performing 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 would also 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 the Moody’s AA and AAA corporate bond yields and other 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. While differences in these rate assumptions could alter pension expense, given not only past history, it is not expected that such estimates could adversely impact pension expense.


Overview

The Company earned net income of $13.5$13.6 million ($0.410.40 diluted earnings per share) for the three months ended September 30, 2005March 31, 2006 compared to net income of $12.6$12.8 million ($0.380.39 diluted earnings per share) for the three months ended September 30, 2004.March 31, 2005. The quarter to quarter increase in net income from 20052006 to 20042005 was primarily the result of increases in net interest income of $1.9$1.3 million, noninterest income of $0.2$0.5 million and a decrease in income tax expense of $0.5 million offset by increases in total noninterest expense of $1.3 million and provision for loan and lease losses of $0.4 million. The increase in net interest income resulted primarily from 8% growth in average loans during the three months ended September 30, 2005 compared to the same period in 2004. The increase in noninterest income reflects retirement plan administration fees of $1.2 million associated with the acquisition of EPIC Advisors, Inc., in January 2005, as well as increases in service charges on deposit accounts, ATM and debit card fees and other income offset by a $0.7 million loss from the sale of securities available for sale and a decrease in broker/dealer and insurance revenue of $1.1 million from the sale of M. Griffith Inc. in March 2005. The decrease in income tax expense resulted from the reversal of a $0.7 million accrued liability that was determined to no longer be required. The increase in total noninterest expense was due primarily to an increase in salaries and employee benefits of $1.8 million.

The Company earned net income of $39.4 million ($1.20 diluted earnings per share) for the nine months ended September 30, 2005 compared to net income of $37.6 million ($1.14 diluted earnings per share) for the nine months ended September 30, 2004. The increase in net income from 2005 to 2004 was primarily the result of increases in net interest income of $6.3 million and noninterest income of $1.6 millionpartially offset by an increase in total noninterest expense of $5.8$1.6 million. The increase in net interest income resulted primarily from 9% growth in average loans during the ninethree months ended September 30, 2005March 31, 2006 compared to the same period in 2004.2005 (driven by the CNB acquisition and organic loan growth). Included in noninterest income for the three months ended March 31, 2006 were $0.9 million in net losses from investment securities sales and a $0.5 million gain from a sale of branch in March 2006. Excluding the effect of these transactions for the three months ended March 31, 2006, noninterest income increased $1.0 million or 9% compared to the same period in 2005. The increase in noninterest income was due mainly to $3.2 million in retirement plan administration fees associated with the previously mentioned acquisition of EPIC Advisors, Inc., as well asresulted from increases in trust fees, service charges on deposit accounts, ATM and debit card fees, retirement plan administration fees and other income partially offset by a decrease in broker/dealerdecline commission and insurance revenue of $2.6 million fromadvisory fees (from the previously mentioned sale of M. Griffith Inc and $0.7in March 2005). The decrease in income tax expense resulted from a $0.5 million in losses on securities available for sale.settlement from a tax refund claim. The increase in total noninterest expense was due primarily to increases in salaries and employee benefits, occupancy expense, amortization of $5.2 million, occupancyintangible assets and other operating expenses.
Table 1 depicts several annualized measurements of performance using GAAP net income. 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%.
 
19
Table 1
Performance Measurements
    
 
2005
First
Quarter
Second
Quarter
Third
Quarter
Nine
Months
Return on average assets (ROAA)
1.23%1.22%
1.23%
1.23%
Return on average equity (ROE)
15.74%16.21%
16.06%
16.03%
Net interest margin (Federal taxable equivalent)
4.09%4.02%
3.99%
4.04%
     
2004
    
Return on average assets (ROAA)
1.23%1.24%1.20%1.23%
Return on average equity (ROE)
15.73%16.05%15.94%15.91%
Net interest margin (Federal taxable equivalent)
4.10%3.99%3.99%4.03%
Table 1
Performance Measurements
2006
First Quarter
Return on average assets (ROAA)
1.18%
Return on average equity (ROE)
15.11%
Net interest margin (Federal taxable equivalent)
3.86%
2005
Return on average assets (ROAA)1.23%
Return on average equity (ROE)15.74%
Net interest margin (Federal taxable equivalent)4.09%

Net Interest Income

Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest-bearing liabilities, primarily deposits and borrowings. Net interest income is affected by the interest rate spread, the difference between the yield on earning assets and cost of interest-bearing liabilities, as well as the volumes of such assets and liabilities. Net interest income is one of the major determining factors in a financial institution’s performance as it is the principal source of earnings. Table 2 represents an analysis of net interest income on a federal taxable equivalent basis.

Federal taxable equivalent (FTE) net interest income increased $2.0$1.5 million during the three months ended September 30, 2005March 31, 2006 compared to the same period of 2004.2005. The increase in FTE net interest income resulted primarily from 5%10% growth in average earning assets. The Company’s interest rate spread declined 1238 bp during the three months ended September 30, 2005March 31, 2006 compared to the same period in 2004.2005. The yield on earning assets for the period increased 4451 bp to 5.97%6.31% for the three months ended September 30, 2005March 31, 2006 from 5.53%5.80% for the same period in 2004.2005. Meanwhile, the rate paid on interest-bearing liabilities increased 5689 bp, to 2.37%2.91% for the three months ended September 30, 2005March 31, 2006 from 1.81%2.02% for the same period in 2004.2005.

Total FTE interest income for the three months ended September 30, 2005March 31, 2006 increased $7.2$11.0 million compared to the same period in 2004,2005, a result of the previously mentioned increase in average earning assets as well as the increase in yield on earning assets of 4451 bp. The growth in earning assets during the period was driven primarily by growth inthe CNB acquisition and organic loan growth. Average securities available for sale increased $101.5 million or 11%, mainly from the CNB acquisition, which increased average securities available for sale by $81.2 million for the three months ended March 31, 2006. Average loans and leases increased $270.3 million or 9%, driven mainly by loans acquired from the CNB transaction of 8%. The$103.2 million and organic loan growth in average loans and leases resulted primarily from growth in consumer and commercial loans.of $167.1 million or 6%. The increase in the yield on earning assets can be primarily attributed to variable rate earning assets that are tied to the Prime lending rate, which has increased 250200 bp since July 1, 2004.March 31, 2005.

During the same time period, total interest expense increased $5.3 million, primarily the result of the previously mentioned 250 bp increase in the Federal Funds rate since July 1, 2004, which impacts the Company’s short-term borrowing and time deposit rates. Additionally, average interest-bearing liabilities increased $107.1 million for the three months ended September 30, 2005 when compared to the same period in 2004. Total average interest-bearing deposits increased $49.0 million for the three months ended September 30, 2005 when compared to the same period in 2004. The rate paid on average interest-bearing deposits increased 44 bp from 1.52% for the three months ended September 30, 2004 to 1.96% for the same period in 2005. The increase in interest-bearing deposits resulted primarily from an increase in time deposits, which were up $159.4 million for the three months ended September 30, 2005 as compared to the same period in 2004. The increase in time deposits was driven mainly by an increase in municipal time deposits. Total borrowings increased $58.1 million for the three months ended September 30, 2005 compared to the same period in 2004, primarily from loan growth exceeding deposit growth.


During the same time period, total interest expense increased $9.5 million, primarily the result of the previously mentioned 200 bp increase in the Federal Funds rate since March 31, 2005, which impacts the Company’s short-term borrowing, money market account and time deposit rates. Additionally, average interest-bearing liabilities increased $309.7 million for the three months ended March 31, 2006 when compared to the same period in 2005, principally from deposits assumed from the CNB transaction and increases in short-term borrowings and trust preferred debentures. Total average interest-bearing deposits increased $205.3 million for the three months ended March 31, 2006 when compared to the same period in 2005. The rate paid on average interest-bearing deposits increased 82 bp from 1.67% for the three months ended March 31, 2005 to 2.49% for the same period in 2006. The increase in interest-bearing deposits resulted primarily from the previously mentioned deposits assumed from the CNB transaction, which increased average interest bearing deposits $153.3 million for the three months ended March 31, 2006 as compared to the same period in 2005. Excluding the effects of the CNB transaction, the Company experienced a shift in its deposit mix from savings and NOW accounts to money market and time deposit accounts, as interest sensitive customers shifted funds into higher paying interest bearing accounts. Excluding the CNB transaction, savings and NOW accounts collectively decreased $98.8 million and money market and time deposit accounts collectively increased $150.7 million (time deposits was the primary driver of the increase). If short-term rates continue to rise, the Company anticipates that this trend will continue placing greater pressure on the net interest margin.

Total borrowings, including trust preferred debentures increased $104.4 million for the three months ended March 31, 2006 compared with the same period in 2005, primarily from loan growth exceeding deposit growth and funding the cash portion of the CNB transaction. Average short-term borrowings increased $41.9 million for the three months ended March 31, 2006, compared with the same period in 2005, principally from the previously mentioned loan growth that exceeded deposit growth during this same period. Interest expense from short-term borrowings increased $2.1 million, driven by the above mentioned increase in the average balance as well as an increase in rate from 2.29% for the three months ended March 31, 2005 to 4.30% for the same period in 2006 (due to increases in short-term rates). Trust preferred debentures increased $34.9 million for the three months ended March 31, 2006, compared with the same period in 2005, primarily from the issuance of $51.5 million in trust preferred debentures in February 2006 to fund the cash portion of the CNB transaction and to provide regulatory capital. The rate paid on trust preferred debentures increased to 6.68% for the three months ended March 31, 2006, compared with 5.60% for the same period in 2005, driven primarily by $51.5 million in trust preferred debentures issued in February 2006 with a fixed rate of 6.195% and $18.7 million in trust preferred debentures that reprice quarterly at 3-month LIBOR plus 275 bp (3-month LIBOR is up approximately 200 bp).

Another important performance measurement of net interest income is the net interest margin. Despite a 1238 bp decrease in the Company’s net interest spread, the net interest margin remained unchanged at 3.99%only declined by 23 bp to 3.86% for the three months ended September 30, 2005 and 2004.March 31, 2006, compared with 4.09% for the same period in 2005. The Company thus far has mitigated some of the margin remained stablepressure by growing noninterest bearing demand deposit accounts. Average demand deposits are up $85.6 million or 17% for the three months ended September 30, 2005, despite recent increases in the discount rate from 1.50% to 3.75% charged by the Federal Reserve Bank which drives short-term interest rates. The Company thus far has been successful in lagging deposit pricing increases and offsetting the impact of increased short-term borrowing costs from increases in prime-based earning assets and investing cash flow from loan and securities repayments at relatively similar or higher rates. Additionally, average demand deposits are up 13% for the three months ended September 30, 2005,March 31, 2006, compared to the same period in 2004, as this deposit source provides a positive benefit towards2005. This increase was driven mainly by the Company’s net interest margin.

Federal taxable equivalent (FTE) net interest income increased $6.2CNB transaction, which accounted for $25.1 million during the nine months ended September 30, 2005 compared to the same period of 2004. The increase in FTE net interest income resulted primarily from 9% growth in average loans. The Company’s interest rate spread declined 6 bp to 3.69% for the nine months ended September 30, 2005 compared to 3.75% for the same period in 2004. However, the Company’s net interest margin increased 1 bp during this same period, to 4.04% for the nine months ended September 30, 2005 from 4.03% for the same period a year ago. As noted above, the increase inand strong organic growth of $60.5 million (12% growth). Sustaining the Company’s net interest margin is primarily attributable to an 10% increase in averagegrowth rate for noninterest bearing demand deposits when compared to the same periodwill be key factor in the prior year. The yield on earning assets increased 33 bp to 5.89% for the nine months ended September 30, 2005mitigating anticipated margin pressure from 5.56% for the same period in 2004. Meanwhile, the rate paid on interest-bearing liabilities increased 39 bp, to 2.20% for the nine months ended September 30, 2005 from 1.81% for the same period in 2004.rising deposit costs.


Table 2
Average Balances and Net Interest Income
The following table includes 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,  Three months ended March 31, 
 
2005
 2004  
2006
 2005 
(dollars in thousands)
 
Average
Balance
 
 
Interest
 
Yield/
Rates
 
Average
Balance
 
 
Interest
 
Yield/
Rates
  
Average
Balance
 
 
Interest
 
Yield/
Rates
 
Average
Balance
 
 
Interest
 
Yield/
Rates
 
ASSETS
                          
Short-term interest bearing accounts 
$
8,357
 
$
71
 
3.37
%
$7,395 $39 2.10% 
$
7,742
 
$
78
 
4.09
%
$6,578 $39 2.41%
Securities available for sale (2)  
944,062
 
10,589
 
4.45
%
 985,202 11,350 4.58%  
1,054,370
 
12,437
 
4.79
%
 952,848 10,774 4.59%
Securities held to maturity (2)  
87,663
 
1,275
 
5.77
%
 78,310 1,055 5.36%  
97,347
 
1,464
 
6.11
%
 84,783 1,175 5.63%
Investment in FRB and FHLB Banks  
37,965
 
464
 
4.85
%
 37,012 256 2.75%  
40,549
 
533
 
5.34
%
 36,535 429 4.77%
Loans (1)  
3,002,016
  
48,953
  
6.47
%
 2,784,851  41,406  5.91%  
3,147,115
  
53,016
  
6.84
%
 2,876,853  44,076  6.22%
Total earning assets  
4,080,063
  
61,352
  
5.97
%
 3,892,770  54,106  5.53%  
4,347,123
  
67,528
  
6.31
%
 3,957,597  56,493  5.80%
Other assets  
284,652
        275,615         
319,040
        280,030       
Total assets 
$
4,364,715
        4,168,385        
$
4,666,163
        4,237,627       
                            
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
           
Money market deposit accounts 
$
389,699
 
$
1,918
 
1.95
%
$444,554 $1,364 1.22% 
$
451,822
 
$
3,239
 
2.91
%
$416,774 $1,451 1.41%
NOW deposit accounts  
428,454
 
577
 
0.53
%
 458,593 484 0.42%  
431,503
 
646
 
0.61
%
 451,453 512 0.46%
Savings deposits  
564,967
 
1,018
 
0.72
%
 590,331 959 0.65%  
545,754
 
1,076
 
0.80
%
 572,475 976 0.69%
Time deposits  
1,216,631
  
9,329
  
3.04
%
 1,057,259  6,936  2.61%  
1,380,617
  
12,264
  
3.61
%
 1,163,739  7,781  2.71%
Total interest bearing deposits  
2,599,751
 
12,842
 
1.96
%
 2,550,737 9,743 1.52%  
2,809,696
 
17,225
 
2.49
%
 2,604,441 10,720 1.67%
Short-term borrowings  
367,736
 
3,005
 
3.24
%
 336,077 1,192 1.41%  
371,632
 
3,937
 
4.30
%
 329,726 1,861 2.29%
Trust preferred debentures  
18,720
 
308
 
6.53
%
 18,720 245 5.21%  
53,658
 
883
 
6.68
%
 18,720 258 5.60%
Long-term debt  
419,367
 
4,176
  
3.95
%
 392,927 3,861  3.91%  
422,097
 
4,142
  
3.98
%
 394,513 3,808  3.92%
Total interest bearing liabilities  
3,405,574
  
20,331
  
2.37
%
 3,298,461  15,041  1.81%  
3,657,083
  
26,187
  
2.91
%
 3,347,400  16,647  2.02%
Demand deposits  
572,450
     504,457       
591,087
     505,457     
Other liabilities  
52,265
     50,521       
52,978
     54,823     
Stockholders’ equity  
334,426
        314,946         
365,015
        329,947       
Total liabilities and stockholders’ equity
  
4,364,715
        4,168,385         
4,666,163
        4,237,627       
Net interest income (FTE basis)
     
41,021
        39,065         
41,341
        39,846    
Interest rate spread
       ��
3.60
%
       3.72%        
3.40
%
       3.78%
Net interest margin
        
3.99
%
       3.99%        
3.86
%
       4.09%
Taxable equivalent adjustment     
1,070
        1,013         
1,222
        1,032    
Net interest income
    
$
39,951
       $38,052        
$
40,119
       $38,814    


(1)For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding.
(2)Securities are shown at average amortized cost.

 
  Nine months ended September 30, 
  
2005
 2004 
 
(dollars in thousands)
 
Average
Balance
 
 
Interest
 
Yield/
Rates
 
Average
Balance
 
 
Interest
 
Yield/
Rates
 
ASSETS
             
Short-term interest bearing accounts 
$
7,171
 
$
158
  
2.95
%
$7,638 $187  3.27%
Securities available for sale (2)  
950,660
  
32,087
  
4.52
%
 974,671  33,652  4.61%
Securities held to maturity (2)  
86,959
  
3,678
  
5.67
%
 87,322  3,275  5.01%
Investment in FRB and FHLB Banks  
37,044
  
1,393
  
5.04
%
 34,778  610  2.34%
Loans (1)  
2,941,292
  
139,430
  
6.35
%
 2,710,147  121,195  5.97%
Total earning assets  
4,023,126
  
176,746
  
5.89
%
 3,814,556  158,919  5.56%
Other assets  
280,455
        276,996       
Total assets 
$
4,303,581
       $4,091,552       
                    
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Money market deposit accounts 
$
402,086
 
$
5,002
  
1.67
%
$440,350 $3,900  1.18%
NOW deposit accounts  
441,313
  
1,616
  
0.49
%
 455,817  1,603  0.47%
Savings deposits  
569,810
  
3,001
  
0.71
%
 575,565  2,889  0.67%
Time deposits  
1,207,237
  
25,961
  
2.88
%
 1,070,889  21,070  2.63%
Total interest bearing deposits  
2,620,446
  
35,580
  
1.82
%
 2,542,621  29,462  1.55%
Short-term borrowings  
339,344
  
7,073
  
2.79
%
 303,251  2,779  1.22%
Trust preferred debentures  
18,720
  
851
  
6.09
%
 18,155  588  4.33%
Long-term debt  
408,628
  
12,016
  
3.94
%
 377,466  11,103  3.93%
Total interest bearing liabilities  
3,387,138
  
55,520
  
2.20
%
 3,241,493  43,932  1.81%
Demand deposits  
533,330
        485,679       
Other liabilities  
53,372
        49,052       
Stockholders’ equity  
329,741
        315,328       
Total liabilities and stockholders’ equity
 
$
4,303,581
        4,091,552       
Net interest income (FTE basis)
     
121,226
        114,987    
Interest rate spread
        
3.69
%
       3.75%
Net interest margin
        
4.04
%
       4.03%
Taxable equivalent adjustment     
3,137
        3,161    
Net interest income
    
$
118,089
       $111,826    


(1)For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding.
(2)Securities are shown at average amortized cost.


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.
 
Table 3
Analysis of Changes in Taxable Equivalent Net Interest Income
Three months ended September 30,
 
  
Increase (Decrease)
2005 over 2004
 
(in thousands) 
Volume
 
Rate
 
Total
 
        
Short-term interest bearing accounts 
$
6
 
$
26
 
$
32
 
Securities available for sale  
(466
)
 
(295
)
 
(761
)
Securities held to maturity  
132
  
88
  
220
 
Investment in FRB and FHLB Banks  
7
  
201
  
208
 
Loans  
3,368
  
4,179
  
7,547
 
Total FTE interest income  
2,682
  
4,564
  
7,246
 
           
Money market deposit accounts  
(186
)
 
740
  
554
 
NOW deposit accounts  
(33
)
 
126
  
93
 
Savings deposits  
(42
)
 
101
  
59
 
Time deposits  
1,129
  
1,264
  
2,393
 
Short-term borrowings  
122
  
1,691
  
1,813
 
Trust preferred debentures  
-
  
63
  
63
 
Long-term debt  
263
  
52
  
315
 
Total interest expense  
503
  
4,787
  
5,290
 
           
Change in FTE net interest income
 
$
2,188
 
$
(232
)
$
1,956
 

    
 
Nine months ended September 30,
 
Increase (Decrease)
2005 over 2004
 
(in thousands) 
Volume
 
Rate
 
Total
 
        
Short-term interest bearing accounts 
$
(11
)
$
(18
)
$
(29
)
Securities available for sale  
(819
)
 
(746
)
 
(1,565
)
Securities held to maturity  
(14
)
 
417
  
403
 
Investment in FRB and FHLB Banks  
42
  
741
  
783
 
Loans  
10,701
  
7,534
  
18,235
 
Total FTE interest income  
8,926
  
8,901
  
17,827
 
           
Money market deposit accounts  
(363
)
 
1,465
  
1,102
 
NOW deposit accounts  
(52
)
 
65
  
13
 
Savings deposits  
(29
)
 
141
  
112
 
Time deposits  
2,827
  
2,064
  
4,891
 
Short-term borrowings  
367
  
3,927
  
4,294
 
Trust preferred debentures  
19
  
244
  
263
 
Long-term debt  
916
  
(3
)
 
913
 
Total interest expense  
2,047
  
9,541
  
11,588
 
           
Change in FTE net interest income
 
$
6,975
 
$
(736
)
$
6,239
 

Table 3
 
Analysis of Changes in Taxable Equivalent Net Interest Income
 
Three months ended March 31, 
  
Increase (Decrease)
2006 over 2005
 
(in thousands) 
Volume
 
Rate
 
Total
 
        
Short-term interest bearing accounts 
$
8
 
$
31
 
$
39
 
Securities available for sale  
1,183
  
480
  
1,663
 
Securities held to maturity  
184
  
105
  
289
 
Investment in FRB and FHLB Banks  
50
  
54
  
104
 
Loans  
434
  
4,599
  
5,033
 
Total FTE interest income  
5,819
  
5,216
  
11,035
 
           
Money market deposit accounts  
132
  
1,656
  
1,788
 
NOW deposit accounts  
(24
)
 
158
  
134
 
Savings deposits  
(47
)
 
147
  
100
 
Time deposits  
1,623
  
2,860
  
4,483
 
Short-term borrowings  
263
  
1,813
  
2,076
 
Trust preferred debentures  
566
  
59
  
625
 
Long-term debt  
270
  
64
  
334
 
Total interest expense  
1,658
  
7,882
  
9,540
 
           
Change in FTE net interest income
 
$
4,161
 
$
(2,666
)
$
1,495
 
 
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 years indicated:

 
Three months ended
September 30,
 
Nine months ended
September 30,
  
Three months ended
March 31,
 
 
2005
 
2004
 
2005
 
2004
  
2006
 
2005
 
(in thousands)              
Service charges on deposit accounts 
$
4,314
 $4,159 
$
12,554
 $12,286  
$
4,219
 $3,929 
ATM and debit card fees  
1,631
  1,474  
4,575
  4,128   
1,645
  1,400 
Broker/dealer and insurance fees  
571
  1,696  
2,659
  5,210   
908
  1,352 
Trust  
1,292
  1,182  
3,795
  3,431   
1,358
  1,252 
Net securities (losses) gains  
(737
)
 18  
(690
)
 56 
Net securities losses  
(934
)
 (4)
Retirement plan administration fees  
1,195
  -  
3,214
  -   
1,231
  863 
Bank owned life insurance income  
339
  348  
1,005
  1,142   
381
  333 
Other  
1,746
  1,240  
5,005
  4,296   
2,416
  1,586 
Total 
$
10,351
 $10,117 
$
32,117
 $30,549  
$
11,224
 $10,711 

Noninterest income for the quarter ended September 30, 2005, was $10.4 million, up $0.2 million from $10.1 million for the same period in 2004. Excluding net securities losses of $0.7 million during the quarter ended September 30, 2005, total noninterest income increased $1.0 million or 10% from the same period in 2004. Net securities losses of $0.7 million resulted from the sale of $25 million in securities available for sale to improve investment portfolio yield going forward. Retirement plan administration fees were $1.2 million. This is a new service from the acquisition of EPIC Advisors, Inc. in January 2005. Other income increased $0.5 million from increases in consumer and commercial banking fees, mortgage banking income and title insurance revenue. Offsetting these increases was a $1.1 million decrease in broker/dealer and insurance revenue due to the sale of the Company’s broker/dealer subsidiary M. Griffith Inc. in March 2005.

Noninterest income for the nine months ended September 30, 2005, was $32.1 million, up $1.6 million from $30.5 million for the same period in 2004. Excluding net securities losses of $0.7 million during the nine months ended September 30, 2005, total noninterest income increased $2.3 million or 7% from the same period in 2004. Retirement plan administration fees totaled $3.2 million, from the previously mentioned acquisition of EPIC Advisors, Inc. in January 2005. ATM and debit card fees increased $0.4 million compared with the same period a year ago, due to growth from transaction deposit accounts, which has led to an increase in the Company’s debit card base. Other income increased $0.7 million from increases in consumer and commercial banking fees, mortgage banking income and title insurance revenue. Offsetting these increases was a $2.6 million decrease in broker/dealer and insurance revenue due to the previously mentioned sale of the Company’s broker/dealer subsidiary M. Griffith Inc. in March 2005.

2523

Noninterest income for the three months ended March 31, 2006, totaled $11.2 million, up $0.5 million from the $10.7 million reported in the same period of 2005. Included in noninterest income for the three months ended March 31, 2006 were $0.9 million in net losses from investment securities sales and a $0.5 million gain from a sale of branch in March 2006. Excluding the effect of these transactions for the three months ended March 31, 2006, noninterest income increased $1.0 million or 9% compared with the same period in 2005. Retirement plan administration fees for the three months ended March 31, 2006, increased $0.4 million compared with the same period in 2005. This increase resulted from a full quarter of revenue for the three months ended March 31, 2006 compared with a partial quarter of revenue in the same period in 2005 when we acquired EPIC Advisors, Inc. in January 2005. Excluding the $0.5 million gain on sale of a branch mentioned above, other noninterest income increased $0.4 million compared with the same period in 2005, principally from increases in retail and commercial banking fees. Fees from service charges on deposit accounts and ATM and debit cards collectively increased $0.5 million from solid growth in demand deposit accounts. Broker/dealer and insurance revenue for the three months ended March 31, 2006, decreased $0.4 million, primarily from the sale of the Company’s broker/dealer subsidiary M. Griffith Inc., in March 2005.

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,
  
Three months ended
March 31,
 
 
2005
 
2004
 
2005
 
2004
  
2006
 
2005
 
(in thousands)              
Salaries and employee benefits 
$
15,438
 $13,647 
$
46,142
 $40,896  
$
15,748
 $15,451 
Occupancy  
2,425
  2,445  
7,763
  7,489   
2,988
  2,788 
Equipment  
1,971
  1,941  
5,998
  5,575   
2,156
  2,096 
Data processing and communications  
2,613
  2,688  
7,801
  8,232   
2,702
  2,658 
Professional fees and outside services  
1,447
  1,536  
4,503
  4,592   
1,832
  1,675 
Office supplies and postage  
1,135
  1,167  
3,406
  3,341   
1,181
  1,150 
Amortization of intangible assets  
142
  71  
402
  213   
323
  118 
Loan collection and other real estate owned  
115
  339  
724
  810   
211
  401 
Other  
3,293
  3,471  
9,417
  9,222   
3,331
  2,544 
Total noninterest expense 
$
28,579
 $27,305 
$
86,156
 $80,370  
$
30,472
 $28,881 

NoninterestTotal noninterest expense for the quarterthree months ended September 30, 2005, was $28.6March 31, 2006, increased $1.6 million up $1.3 million from $27.3 million forcompared with the same period in 2004.for 2005. Salaries and employee benefits for the quarterthree months ended September 30, 2005,March 31, 2006, increased $1.8$0.3 million over the same period in 2004. This increase resulted mainly2005, primarily from higher SERP costs, salaries from merit and staffing increases and a $0.6the previously mentioned stock option expense of $0.7 million charge for a one-time bonus to help offsetthat reflects the impactadoption of rising energy costs for Company employees whose base salary is under $50,000.

NoninterestFAS 123R. Other operating expense increased $0.8 million for the ninethree months ended September 30, 2005, was $86.2 million, up $5.8 million from $80.4 million forMarch 31, 2006, compared with the same period in 2004. The increase in noninterest expense was driven by increases in salaries and employee benefits, occupancy and equipment expense offset by a decrease in data processing and communications expense. Salaries and employee benefits increased $5.2 million, mainly2005, primarily from increases in salary expense driven by merit and staffing increases, higher pension and SERP costs andmerger related expenses from the previously mentioned $0.6 million charge for a one-time bonus to help offset the impact of rising energy costs for Company employees whose base salary is under $50,000. EquipmentCNB transaction. Occupancy expense increased $0.4$0.2 million, principally from ATMincreasing energy costs and technology upgrades. Occupancyoccupancy costs from the CNB branches. Amortization of intangible assets increased $0.3$0.2 million from branch expansion in the Albany and Binghamton markets. Data processing and communications decreased $0.4 million, primarily as a result of lower costscore deposit intangible amortization associated with contract renewalsthe CNB transaction. Loan collection and other real estate owned (OREO) decreased $0.2 million, from low delinquency rates and expense recoveries associated with sold OREO.
24

Income Taxes

Income tax expense for the quarter ended September 30, 2005,March 31, 2006, was $5.4$5.6 million, down $0.5 million from the $5.9$6.1 million recorded during the same period in 2004.2005. The effective rate for the quarter ended September 30, 2005,March 31, 2006, was 28.7%29.0%, down from 32.0%32.1% for the same period in 2004.2005. The decrease in tax expense and the effective tax rate for the quarter ended September 30, 2005,March 31, 2006, was due primarily to the reversala settlement for a tax refund claim of a previously accrued $0.7 million liability$0.5 million. The Company anticipates that was determined to no longer be required. Income tax expense for the nine months ended September 30, 2005, was $17.7 million, up $0.1 million from the $17.6 million recorded during the same period in 2004. The effective rate for the nine months ended September 30, 2005, was 31.0%, down from 31.9% for the same period in 2004. The decrease in the effective tax rate will be approximately 32% for the nine months ended September 30, 2005, was due toremainder of the previously mentioned reversal of a previously accrued $0.7 million liability that was determined to no longer be required in the third quarter of 2005.

year.
26

ANALYSIS OF FINANCIAL CONDITION

Loans and Leases

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

 
September 30,
2005
 
December 31,
2004
 
September 30,
2004
  
March 31,
2006
 
December 31,
2005
 
March 31,
2005
 
(in thousands)              
Residential real estate mortgages 
$
692,528
 $721,615 $708,428  
$
747,912
 $701,734 $718,142 
Commercial and commercial real estate mortgages  
1,036,748
  1,018,548  1,003,742   
1,126,838
  1,032,977  1,025,937 
Real estate construction and development  
154,936
  136,934  116,259   
176,854
  163,863  158,169 
Agricultural and agricultural real estate mortgages  
112,536
  108,181  106,750   
114,008
  114,043  108,377 
Consumer  
471,179
  412,139  416,906   
523,381
  463,955  418,186 
Home equity  
452,733
  391,807  385,035   
477,173
  463,848  390,163 
Lease financing  
82,443
  80,697  77,433   
81,675
  82,237  79,213 
Total loans and leases 
$
3,003,103
 $2,869,921 $2,814,553  
$
3,247,841
 $3,022,657 $2,898,187 


Total loans and leases were $3.0$3.2 billion, or 68.5%66.5% of assets, at September 30,March 31, 2006, and $3.0 billion at December 31, 2005, and $2.9 billion, at December 31, 2004, and $2.8 billion, or 67.0%68.1%, at September 30, 2004.March 31, 2005. Total loans and leases increased $188.6$349.7 million or 7%12% at September 30, 2005March 31, 2006 over September 30, 2004.March 31, 2005. The year over year loan growthincrease in loans and leases was driven mainly by increases in homethe CNB transaction and organic loan growth. Home equity loans of $67.7increased $87.0 million or 18%22%, primarily from the CNB transaction of $12.1 million and $74.9 million in organic growth from market expansion and continued success in marketing this product throughout the Company’s branch network. This market expansion has also helped drive the increase in real estate construction and development loans of $38.7 million. Consumer loans increased $54.3$105.2 million or 13%25%, mainly from organic loan growth of $47.4 million driven by increases in indirect automobile loans.loans and from the CNB transaction of $57.8 million. Commercial loans and commercial mortgages increased $33.0$100.9 million or 3%. Lastly, residential10%, driven by the CNB transaction of $61.9 million and organic growth of $39.0 million as the Company continues to face strong competition for these loan types in its markets. Residential real estate mortgages decreased $15.9increased $29.8 million when compared to September 30, 2004.March 31, 2006. The CNB transaction provided $69.8 million in growth offset by a decline in the core portfolio of $40.0 million. The decrease in the core residential mortgage portfolio resulted mainly from mortgage repayments exceeding originations retained for the loan portfolio as the Company began selling 20-year and 30-year residential mortgages from its pipeline in the second quarter 2005. At September 30, 2005, commercial loans, including commercial mortgages, represented approximately 35%Furthermore, long-term rates have modestly increased, leading to a softening in demand for this loan product.
25

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. 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. Held to maturity securities are recorded at amortized cost. 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. A decline in the fair value of any available for sale or held to maturity security below cost that is deemed other-than-temporary is charged to earnings resulting in the establishment of a new cost basis for the security. Securities with an other-than-temporary impairment are generally placed on nonaccrual status.


Average total earning securities decreased $31.8increased $114.1 million for the three months ended September 30, 2005March 31, 2006 when compared to the same period in 2004.2005. The average balance of securities available for sale decreased $41.1increased $101.5 million for the three months ended September 30, 2005March 31, 2006 when compared to the same period in 2004.2005, mainly from the CNB transaction. The average balance of securities held to maturity increased $9.3$12.6 million for the three months ended September 30, 2005,March 31, 2006, compared to the same period in 2004.2005. The average total securities portfolio represents 25%26% of total average earning assets for the three months ended September 30, 2005 downMarch 31, 2006, up from 27%25% for the same period in 2004. The decrease in the securities portfolio for the period was primarily due to the Company’s efforts to limit exposure to rising interest rates.2005.

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

At September 30,
 
At March 31,
 
2005
2004
 
2006
 
2005
 
      
Mortgage-backed securities:      
With maturities 15 years or less39%49%  33% 44%
With maturities greater than 15 years6%8%  4% 7%
Collateral mortgage obligations16%12%  17% 14%
Municipal securities15%14%  16% 15%
US agency notes20%12%  26% 16%
Other4%5%  4% 4%
Total100%  100% 100%

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. It is assessed for adequacy 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 inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that such judgements can have on the consolidated results of operations.

2826

For purposes of evaluating the adequacy of the allowance, the Company considers a number of significant factors that affect the collectibility of the portfolio. For individually analyzed loans, these include estimates of loss exposure, which reflect the facts and circumstances that affect the likelihood of repayment of such loans as of the evaluation date. For homogeneous pools of loans 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 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, 2005March 31, 2006 was 1.58%1.53% compared towith 1.57% at December 31, 20042005, and 1.58% at September 30, 2004.March 31, 2005. Management considers the allowance for loan losses to be adequate based on evaluation and analysis of the loan portfolio.

2927

Table 4 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 collectability of loan principal within a reasonable time is unlikely. Any recoveries of previously charged-off loans are credited directly to the allowance for loan and lease losses.

Table 4
Allowance for Loan Losses
      
 Three months ended September 30,  Three months ended March 31, 
(dollars in thousands) 
2005
   
2004
    
2006
   
2005
   
Balance, beginning of period 
$
46,411
    $43,482     
$
47,455
    $44,932    
Recoveries  
936
     1,479      
1,175
     1,079    
Charge-offs  
(2,549
)
    (2,735)     
(2,950
)
    (2,418)   
Net charge-offs  
(1,613
)
    (1,256)     
(1,775
)
    (1,339)   
Allowance related to purchase acquisition  
2,410
     -    
Provision for loan losses  
2,752
     2,313      
1,728
     1,796    
Balance, end of period 
$
47,550
    $44,539     
$
49,818
    $45,389    
Composition of Net Charge-Offs
                          
Commercial and agricultural 
$
(536
)
 
33
%   
$(51) 4% 
$
(858
)
 
48
%   
$(105) 8%
Real estate mortgage  
(37
)
 
2
%
 (118) 10%  
(71
)
 
4
%
 (326) 24%
Consumer  
(1,040
)
 
65
%
 (1,087) 86%  
(846
)
 
48
%
 (908) 68%
Net charge-offs 
$
(1,613
)
 
100
%
$(1,256) 100% 
$
(1,775
)
 
100
%
$(1,339) 100%
Annualized net charge-offs to average loans  
0.21
%
    0.18%     
0.23
%
    0.19%   

    
  Nine months ended September 30, 
(dollars in thousands) 
2005
   
2004
   
Balance, beginning of period 
$
44,932
    $42,651    
Recoveries  
3,348
     3,029    
Charge-offs  
(7,598
)
    (8,006)   
Net charge-offs  
(4,250
)
    (4,977)   
Provision for loan losses  
6,868
     6,865    
Balance, end of period 
$
47,550
    $44,539    
Composition of Net Charge-Offs
             
Commercial and agricultural 
$
(1,030
)
 
24
%   
$(1,366) 27%
Real estate mortgage  
(214
)
 
5
%
 (187) 4%
Consumer  
(3,006
)
 
71
%
 (3,424) 69%
Net charge-offs 
$
(4,250
)
 
100
%
$(4,977) 100%
Annualized net charge-offs to average loans  
0.19
%
    0.25%   

Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due, restructured loans, other real estate owned (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 market 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.


Total nonperforming assets were $13.6$13.3 million at September 30, 2005,March 31, 2006, and $16.6$14.6 million at December 31, 2004,2005, and $16.4$17.8 million at September 30, 2004. The decrease in nonperforming assets when compared to DecemberMarch 31, 2004 resulted primarily from the sale of approximately $5 million in nonperforming loans during the quarter ended June 30, 2005. Nonaccrual loans decreased from $15.0$14.3 million at December 31, 20042005 to $12.4$13.3 million at September 30, 2005,March 31, 2006, primarily from the previously mention sale ofdecreases in nonperforming consumer and mortgage loans. OREO has remained at relatively low levels throughout 20052006 and 2004,2005, as the Company’s nonperforming loans have remained relatively stable and credit quality remains solid.

In addition to the nonperforming loans discussed above, the Company has also identified approximately $76.5$60.2 million in potential problem loans at September 30, 2005March 31, 2006 as compared to $48.0$69.5 million at December 31, 2004.2005. The increasedecrease in potential problem loans resulted mainly from the downgraderepayments of onetwo large commercial loan relationship totaling $15 million to substandard during the three months ended March 31, 2005 as well as the downgrade of several creditspotential problem loans during the three months end September 30, 2005.March 31, 2006. Potential problem loans are loans that are currently performing, but where known information about possible credit problems of the related 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 disclosure of such loans as nonperforming at some time in the future. At the Company, potential problem loans are typically loans that are performing but are classified by the Company’s loan rating system as “substandard.” At September 30, 2005,March 31, 2006, 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 non-accrual, become restructured, or require increased allowance coverage and provision for loan losses.

Net charge-offs totaled $1.6 million for the three months ended September 30, 2005, up $0.3 million from the $1.3 million charged-off during the same period in 2004. The increase in net charge-offs resulted primarily from larger recoveries during the three months ended September 30, 2004 for commercial loans. The provision for loan and lease losses totaled $2.8 million for the three months ended September 30, 2005, up from the $2.3 million provided during the same period in 2004. The increase in provision was primarily due to the increase in potential problem loans during the three months ended September 30, 2005 (up $10 million from the June 30, 2005) and an increase in net charge-offs offset by a decrease in nonperforming loans.

Net charge-offs totaled $4.3 million for the nine months ended September 30, 2005, down $0.7 million from the $5.0 million charged-off during the same period in 2004. The decrease in net charge-offs resulted primarily from lower charge-offs and higher recoveries during the nine months ended September 30, 2005. The provision for loan and lease losses totaled $6.9 million for the nine months ended September 30, 2005 and 2004. The provision remained relatively flat for both periods resulted primarily because of decreases in net charge-offs and nonperforming loans offset by loan growth and increases in potential problem loans during the first nine months of 2005 when compared to the same period in 2004.

 
Table 5
Nonperforming Assets
       
 
(dollars in thousands)
 
September 30,
2005
 
December 31,
2004
 
September 30,
2004
 
Commercial and agricultural 
$
8,810
 $10,550 $9,524 
Real estate mortgage  
1,854
  2,553  2,725 
Consumer  
1,748
  1,888  2,369 
Total nonaccrual loans  
12,412
  14,991  14,618 
Loans 90 days or more past due and still accruing:          
Commercial and agricultural  
-
  -  3 
Real estate mortgage  
395
  737  888 
Consumer  
518
  449  456 
Total loans 90 days or more past due and still accruing  
913
  1,186  1,347 
Total nonperforming loans  
13,325
  16,177  15,965 
Other real estate owned (OREO)  
235
  428  446 
Total nonperforming loans and OREO  
13,560
  16,605  16,411 
Total nonperforming assets 
$
13,560
 $16,605 $16,411 
Total nonperforming loans to loans and leases  
0.44
%  
 0.56% 0.57%
Total nonperforming assets to assets  
0.31
%
 0.39% 0.39%
Total allowance for loan and lease losses to nonperforming loans  
356.85
%
 277.75% 278.98%
Net charge-offs totaled $1.8 million for the three months ended March 31, 2006, up $0.5 million from the $1.3 million charged-off during the same period in 2005. The increase in net charge-offs resulted primarily from an increase in charge-offs for commercial and agricultural loans during the three months ended March 31, 2006. The provision for loan and lease losses totaled $1.7 million for the three months ended March 31, 2006, compared with the $1.8 million provided during the same period in 2005. The slight decrease for the provision for loan and lease losses for the three months ended March 31, 2006, compared with the same period in 2005 resulted primarily from continued improvement in credit quality (decreases in nonperforming loans and potential problem loans).


Table 5
Nonperforming Assets
       
 
(dollars in thousands)
 
March 31,
2006
 
December 31,
2005
 
March 31,
2005
 
Commercial and agricultural 
$
9,188
 $9,373 $11,523 
Real estate mortgage  
1,816
  2,009  3,202 
Consumer  
1,612
  2,037  1,887 
Total nonaccrual loans  
12,616
  13,419  16,612 
Loans 90 days or more past due and still accruing:          
Commercial and agricultural  
-
  -  64 
Real estate mortgage  
55
  465  130 
Consumer  
665
  413  566 
Total loans 90 days or more past due and still accruing  
720
  878  760 
Total nonperforming loans  
13,336
  14,297  17,372 
Other real estate owned (OREO)  
279
  265  438 
Total nonperforming assets 
$
13,615
 $14,562 $17,810 
Total nonperforming loans to loans and leases  
0.41
%
 0.47% 0.60%
Total nonperforming assets to assets  
0.28
%
 0.28% 0.42%
Total allowance for loan and lease losses to nonperforming loans  
373.56
%
 
331.92
%
 
261.28
%

Deposits

Total deposits were $3.2$3.6 billion at September 30, 2005,March 31, 2006, up $138.3$459.9 million from year-end 2004,2005, and an increase of $121.5$451.1 million, or 4%14%, from the same period in the prior year. The increase in deposits compared with March 31, 2005, was driven primarily by the CNB transaction, which provided $335.0 million in deposits and organic deposit growth of $116.0 million. Total average deposits for the three months ended September 30, 2005March 31, 2006 increased $117.0$290.9 million, or 4%9%, from the same period in 2004.2005. The Company experienced an increase in time deposits, as average time deposits increased $159.4$216.9 million or 15%19%, for the three months ended September 30, 2005March 31, 2006 compared to the same period in 2004,2005, primarily from an increasethe CNB transaction, which provided $72.1 million in time deposits as well as increases in municipal, jumbo and retail time deposits.deposits, as the Company experienced a shift in its deposit mix from interest sensitive customers into higher paying time accounts. Meanwhile, excluding the effect of the CNB transaction, which provided $52.1 million in average core deposits decreased $42.4savings and NOW accounts, these deposit categories experienced a decrease of $98.8 million, or 2%, forfrom the three months ended September 30, 2005 comparedpreviously mentioned shift in deposit mix from lower cost deposit accounts to higher cost deposit accounts with more attractive interest rates (which have increased due to the same period in 2004, mainly from a $54.9 million decrease in money market deposit accounts (primarily municipalrising rate environment). Average money market accounts which migrated to time deposits) and savings accounts of $25.4increased $35.0 million, offset somewhat by a $68.0 million increase inmainly from the CNB transaction. Average demand deposit accounts. At September 30, 2005, total checking, savingsaccounts increased $85.6 million, due in part to solid organic growth of $60.5 million and money market accounts represented 62.0%$25.1 million from the CNB transaction.
Borrowed Funds

The Company's borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $356.2$329.7 million at September 30, 2005March 31, 2006 compared to $338.8$445.0 million and $319.6$307.5 million at December 31, and June 30, 2004,March 31, 2005, respectively. Long-term debt was $419.4$424.9 million at September 30, 2005,March 31, 2006, and was $394.5$414.3 and 394.5 million at December 31, and June 30, 2004.March 31, 2005, respectively. For more information about the Company’s borrowing capacity and liquidity position, see the section with the title caption of “Liquidity Risk” on page 35-3633 in this discussion.

Capital Resources

Stockholders' equity of $332.2$385.8 million represents 7.6%7.9% of total assets at September 30, 2005,March 31, 2006, compared with $325.4$319.2 million, or 7.7%7.5% in the comparable period of the prior year, and $332.2$333.9 million, or 7.9%7.5% at December 31, 2004.2005. The increase in stockholders’ equity resulted mainly from the issuance of 2,058,661 shares of Company common stock in connection with the CNB transaction. Under previously announced stock repurchase plans, the Company acquired 868,743178,404 shares of its common stock at an average price of $23.01$22.73 per share, totaling $20.0$4.1 million for the ninethree months ended September 30, 2005.March 31, 2006. At September 30, 2005,March 31, 2006, there were 627,6221,324,747 shares available for repurchase under previously announced plans. The Company does not have a target dividend pay out ratio, rather the Board of Directors considers the Company's earnings position and earnings potential when making dividend decisions.


As the capital ratios in Table 6 indicate, the Company remains “well capitalized”. Capital measurements are significantly 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 6
          
Capital Measurements
2005
 
March 31,
2005
 
June 30,
2005
 
September 30,
2005
 
Capital Measurements
   
2006
 
March 31
 
Tier 1 leverage ratio  6.89% 6.91% 
6.99
%
  7.77%
Tier 1 capital ratio  9.41% 9.23% 
9.56
%
  10.30%
Total risk-based capital ratio  10.67% 10.48% 
10.82
%
  11.56%
Cash dividends as a percentage of net income  48.57% 47.67% 
46.97
%
  48.20%
Per common share:              
Book value $9.85 $10.22 
$
10.25
  $11.22 
Tangible book value $8.25 $8.62 
$
8.66
  $7.84 
2004          
2005    
Tier 1 leverage ratio  6.96% 6.90% 6.96%  6.89%
Tier 1 capital ratio  10.12% 9.74% 9.61%  9.41%
Total risk-based capital ratio  11.37% 11.00% 10.86%  10.67%
Cash dividends as a percentage of net income  45.20% 49.50% 47.97%  48.57%
Per common share:              
Book value $9.80 $9.43 $9.93  $9.85 
Tangible book value $8.29 $7.91 $8.42  $8.25 

The accompanying Table 7 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 2.302.07 at September 30, 2005March 31, 2006 and 2.362.28 in the comparable period of the prior year. The Company's price was 14.914.2 times trailing twelve months earnings at September 30, 2005,March 31, 2006, compared to 15.715.3 times for the same period last year.

Table 7
Quarterly Common Stock and Dividend Information
 
 
 
Quarter Ending
 
 
 
High
 
 
 
Low
 
 
 
Close
 
Cash
Dividends
Declared
 
2004         
March 31 $23.00 $21.21 $22.50 $0.170 
June 30  23.18  19.92  22.34  0.190 
September 30  24.34  21.02  23.43  0.190 
December 31  26.84  21.94  25.72  0.190 
2005
             
March 31 $25.66 $21.48 $22.41 $0.190 
June 30 $24.15 $20.10 $23.64 $0.190 
September 30
 
$
25.50
 
$
22.79
 
$
23.58
 
$
0.190
 

Table 7
Quarterly Common Stock and Dividend Information
 
 
 
Quarter Ending
 
 
 
High
 
 
 
Low
 
 
 
Close
 
Cash
Dividends
Declared
 
2005         
March 31 $25.66 $21.48 $22.41 $0.190 
June 30  24.15  20.10  23.64  0.190 
September 30  25.50  22.79  23.58  0.190 
December 31  23.79  20.75  21.59  0.190 
2006
             
March 31 $23.90 $21.02 $23.25 $0.190 
33

Liquidity and Interest Rate Sensitivity Management

Market Risk

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

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

31

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. ThreeTwo additional models are run with static balance sheets; (1) a gradual increase of 200 bp, (2) a gradual increase of 400 bp and (3) a gradual decrease of 200 bp takes 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 result inlead to core deposit pricing increases, which should lead towill likely continue compression of the net interest margin.


Net interest income for the next twelve months in the + 200/+ 400/- 200 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, 2005March 31, 2006 balance sheet position:

Table 8
Interest Rate Sensitivity Analysis
 
Change in interest rates
(in basis points)
Percent change in
net interest income
+400
(5.42%)
+200
(1.64%(0.42%)
-200
(1.47%(2.86%)

Under the flat rate scenario with a static balance sheet, net interest income is anticipated to decrease 1.3% from annualized net interest income for the three months ended September 30, 2005. If the Company cannot continue to grow earning assets at September 30, 2005, the Company expects net interest income to decline for the remainder of the year and 2006 from the annualized amount recognized in the third quarter of 2005. The Company has taken several measures to mitigate net interest margin compression. The Company began originating 20-year and 30-year residential real estate mortgages with the intent to sell at the end of the second quarter of 2005. TheOver time, the Company has also shortened the average life of its investment securities portfolio by limiting purchases of mortgage-backed securities and redirecting proceeds into short-duration CMOs and US Agency notes and bonds. Lastly, the Company has increased its long-term debt in the second quarterwill continue to focus on growing noninterest bearing demand deposits and prudently managing deposit costs.
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 2005,March 31, 2006, the Company’s Basic Surplus measurement was 5.8%7.7% of total assets or $252$374 million, which was above the Company’s minimum of 5% or $219$244 million set forth in its liquidity policies.


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. At September 30, 2005,March 31, 2006, the Company Basic Surplus is tightening, as theimproved compared to December 31, 2005, Basic Surplus has decreased from 7.2% at September 30, 2004. Ifof 5.2%, driven primarily by the Company’s Basic Surplus continues to tighten, the Company will likely utilize brokered time deposits or price retail time deposits or money market accounts in selected markets more competitively to fund loan and lease growth in the near term. These sources of funds are typically more costly than FHLB borrowings and may have an adverse effect on the Company’s net interest margin.CNB transaction.

The Company’s primary source of funds is from its subsidiary, NBT Bank. Certain restrictions exist regarding the ability of the Company’s subsidiary 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, 2005,March 31, 2006, approximately $51.7$52.9 million of the total stockholders’ equity of NBT Bank was available for payment of dividends to the Company without approval by the OCC. The Company expects that the issuance of NBT Statutory Trust II will result in increased dividend payments of approximately $0.8 million per quarter from NBT Bank to the Company to fund interest obligations associated with Trust Preferred Debentures of NBT Statutory Trust II.  NBT Bank’s ability to pay dividends also is subject to the Bank being in compliance with regulatory capital requirements. NBT Bank is currently in compliance with these requirements. Under the State of Delaware Business Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.

Item
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Quantitative and Qualitative Disclosure About Market Risk

Information called for by Item 3 is contained in the Liquidity and Interest Rate Sensitivity Management section of the Management Discussion and Analysis.


Item 4. Controls and Procedures
Controls and Procedures

The Company's management, including 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 15(d)-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2005.March 31, 2006. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective in timely alerting them to any material information relating to the Company and its subsidiaries required to be included in the Company's periodic SEC filings.

There were no changes made in the Company's internal controls 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 controls over financial reporting.

PPARTART II. OTHER INFORMATION

ItemItem 1 -- Legal Proceedings

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

ItemItem 1A. ----- Risk Factors

Management of the Company does not believe there have been any material changes in the risk factors that were disclosed in the Form 10-K filed with the Securities and Exchange Commission on March 15, 2006.

Item 2 -- Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securitries


(a)Not applicable

(b)Not applicable
 
(c)The table below sets forth the information with respect to purchases made by the Company (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the quarter ended June 30, 2005:March 31, 2006:
 
Period
Total Number of
Shares Purchased
Average Price
Paid Per Share
Total Number of
Shares Purchased
As Part of
Publicly
Announced Plans
Maximum
Number of Shares
That May Yet Be
Purchased Under
The Plans (1)
7/1/05 - 7/31/05---839,722
8/1/05 - 8/31/05113,00023.60113,000726,722
9/1/05 - 9/30/0599,10023.4799,100627,622
Total
212,100 (2)
$23.54
212,100
627,622


Period
Total Number of
Shares Purchased
Average Price
Paid Per Share
Total Number of
Shares Purchased
As Part of
Publicly
Announced Plans
Maximum
Number of Shares
That May Yet Be
Purchased Under
The Plans (1)
1/1/06 - 1/31/06---1,503,151
2/1/06 - 2/28/0631,40122.5131,4011,471,750
3/1/06 - 3/31/06147,00322.78147,0031,324,747
Total
178,404
$22.73
178,404
1,324,747
(1)On January 24, 2005,23, 2006, NBT announced that the NBT Board of Directors approved a new repurchase program whereby NBT is authorized to repurchase up to an additional 1,500,0001,000,000 shares (approximately 5%3%) of its outstanding common stock from time to time as market conditions warrant in open market and privately negotiated transactions. At that time, there were 719,800503,151 shares remaining under a previous authorization that was be superseded bycombined with the new repurchase program. During the period January 1, 2005 and January 24, 2005, the Company purchased 11,265 shares of its common stock under the superseded plan.
(2)14,900 shares included in the total above settled in October 2005 and will be reflected in stockholders’ equity in the fourth quarter 2005.

ItemItem 3 -- Defaults Upon Senior Securities

None

IItem tem 4 -- Submission of Matters to a Vote of Security Holders

None

IteItemm 5 -- Other Information

On July 25, 2005,April 24, 2006, NBT Bancorp Inc. announced the declaration of a regular quarterly cash dividend of $0.19 per share. The cash dividend waswill be paid on SeptemberJune 15, 20052006 to stockholders of record as of SeptemberJune 1, 2005.


Item 6 -- Exhibits

(a)Exhibits

2.1Agreement and Plan of Merger by and between NBT Bancorp Inc., and CNB Bancorp, Inc., dated as of June 13, 2005 (filed as Exhibit 2.1 to Registrant’s Form 8-K, filed on June 14, 2005 and incorporated herein by reference).
3.1Certificate of Incorporation of NBT Bancorp Inc. as amended through July 23, 2001 (filed as Exhibit 3.1 to theRegistrant's Form 10-K of NBT Bancorp Inc.,for the year ended December 31, 2001, filed on March 29, 2002 and incorporated herein by reference).
3.2By-laws of NBT Bancorp Inc. as amended and restated through July 23, 2001 (filed as Exhibit 3.2 to theRegistrant's Form 10-K of NBT Bancorp Inc.,for the year ended December 31, 2001, filed on March 29, 2002 and incorporated herein by reference).
4.1Specimen common stock certificate for NBT’s common stock (filed as Exhibit 4.3 to the Form S-4 of NBT Bancorp, Inc. filed on August 2, 2005 and incorporated herein by reference)
4.2
3.3		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’sRegistrant's Form 8-K, file number 0-14703, filed on November 18, 2004, and incorporated by reference herein).
3.4Certificate 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).
4.1Specimen common stock certificate for NBT’s common stock (filed as exhibit 4.1 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-4 filed on December 27, 2005 and incorporated herein by reference).
10.1Form of Employment Agreement between NBT Bancorp Inc. and Martin A. Deitrich as amended and restated January 1, 2006.

10.2First Amendment to Supplemental Executive Retirement Agreement between NBT Bancorp Inc. and Martin A. Dietrich effective January 1, 2006.

10.3Amendment dated January 20, 2006 to Change in Control Agreement with Ronald M. Bentley made as of May 1, 2003.
31.1Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

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


SIGNATURESSIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on FORM 10-Q to be signed on its behalf by the undersigned thereunto duly authorized, this 7th day of November 2005.



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


EXHIBITEXHIBIT INDEX

2.1Agreement and Plan of Merger by and between NBT Bancorp Inc., and CNB Bancorp, Inc., dated as of June 13, 2005 (filed as Exhibit 2.1 to Registrant’s Form 8-K, filed on June 14, 2005 and incorporated herein by reference).
3.1Certificate of Incorporation of NBT Bancorp Inc. (filed as Exhibit 3.1 to the Form 10-K of NBT Bancorp Inc., filed on March 29, 2002 and incorporated herein by reference).
3.2By-laws of NBT Bancorp Inc. (filed as Exhibit 3.2 to the Form 10-K of NBT Bancorp Inc., filed on March 29, 2002 and incorporated herein by reference).
4.1Specimen common stock certificate for NBT’s common stock (filed as Exhibit 4.3 to the Form S-4 of NBT Bancorp, Inc. filed on August 2, 2005 and incorporated herein by reference)
4.2
10.1
RightsForm of Employment Agreement dated as of November 15, 2004, between NBT Bancorp Inc. and RegistrarMartin A. Dietrich as amended and Transfer Company, as Rights Agent (filed as Exhibit 4.1 to Registrant’s Form 8-K, filed on November 18, 2004 and incorporated herein by reference).restated January 1, 2006.

10.2
First Amendment to Supplemental Executive Retirement Agreement between NBT Bancorp Inc. and Martin A. Dietrich effective January 1, 2006.

10.3
Amendment dated January 20, 2006 to Change in Control Agreement with Ronald M. Bentley made as of May 1, 2003.

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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