General

The purpose of this discussion and analysis is to provide a concise description of the financial condition and results of operations of NBT Bancorp Inc. ("the Registrant") and its wholly owned consolidated subsidiaries, NBT Bank, N.A. (the "Bank"), NBT Financial Services, Inc. ("NBT Financial"), and NBT Holdings, Inc.("NBT Holdings") (collectively referred to herein as the "Company"). This discussion will focus on Results of Operations, Financial Position, Capital Resources and Asset/Liability Management. Reference should be made to the Company's consolidated financial statements and footnotes thereto included in this Form 10-Q as well as to the Company's 2008 Form 10-K for an understanding of the following discussion and analysis.

The Company's primary market area is central and upstate New York and northeastern Pennsylvania. The Company has been, and intends to continue to be, a community-oriented financial institution offering a variety of commercial banking and financial services. The Company's principal business is attracting deposits from customers within its market area and investing those funds primarily in loans and leases, and, to a lesser extent, in marketable securities. Through its non-bank subsidiaries, the Company also provided insurance brokerage services and retirement plan consulting and recordkeeping services. The financial condition and operating results of the Company are dependent on its net interest income which is the difference between the interest and dividend income earned on its earning assets and the interest expense paid on its interest bearing liabilities, primarily consisting of deposits and borrowings. Net income is also affected by provisions for loan and lease losses and noninterest income, such as service charges on deposit accounts, insurance and broker/dealer fees, trust fees, and gains/losses on securities sales; it is also impacted by noninterest expense, such as salaries and employee benefits, data processing, communications, occupancy, and equipment.

Because the Company has not actively pursued the types of loans, such as subprime, alt-A and no-interest loans, that have been the most problematic for many banks, the Company has not made substantial changes to its core business of investing deposit funds in loans and leases in its market areas in response to the recent and continuing economic crisis. However, in light of increased margin pressures due in part to the economic crisis, the Company has recently increased its focus on earning noninterest income, including through increases in ATM fees and the Company's acquisition of Mang Insurance Agency in September of 2008. The Company has also recently increased its underwriting standards on certain portfolios and increased its resources for collecting on past due loans.

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: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) revenues may be lower than expected; (3) changes in the interest rate environment may affect interest margins; (4) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit; (5) legislative or regulatory changes, including changes in accounting standards or tax laws, may adversely affect the businesses in which the Company is engaged;
(6) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than the Company; (7) adverse changes may occur in the securities markets or with respect to inflation; (8) acts of war or terrorism; (9) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; (10) internal control failures; and (11) the Company's success in managing the risks involved in the foregoing.

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

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

Critical Accounting Policies

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

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

Management of the Company considers the accounting policy relating to other-than-temporary impairment to be a critical accounting policy. Management systematically evaluates certain assets for other-than-temporary declines in market value, primarily investment securities and lease residual assets. Management considers historical values and current market conditions as a part of the assessment. Assets for which declines in market value are deemed to be other-than-temporary are written down to current market value and the resultant changes are included in earnings as noninterest expense.

Overview

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

· FDIC premiums increased in comparison to the first quarter of 2008 based on rate increases primarily due to current economic conditions. The Company expects FDIC premiums to remain at these increased levels during the remainder of 2009. In addition, unless repealed or amended by the FDIC, there will be a one-time special assessment of 20 additional basis points in FDIC premiums during the second quarter of 2009, which will be collected on September 30, 2009.

· Pension expenses increased in comparison to the first quarter of 2008 primarily due to the impact of market declines on pension assets. The Company expects pension expense to remain at these increased levels during the remainder of 2009.

· The Company's results for the quarter, unlike the first quarter of 2008, include the results of Mang, which was acquired by the Company on September 1, 2008. Mang provides brokered insurance products to individuals and businesses from locations in 18 upstate New York communities.

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

The Company earned net income of $13.1 million ($0.40 diluted earnings per share) for the three months ended March 31, 2009, down slightly from net income of $13.7 million ($0.43 diluted earnings per share) for the three months ended March 31, 2008. Net interest income increased approximately $4.0 million, or 9.2%, for the three months ended March 31, 2009 as compared to the same period in 2008. The increase in net interest income was due primarily to a decrease in interest expense of approximately $9.3 million, or 30.5%. In addition, noninterest income increased $3.5 million, or 21.7%, for the three months ended March 31, 2009 as compared to the first quarter of 2008. The increases in net interest income and noninterest income were offset by a $8.3 million, or 24.3%, increase in noninterest expense for the three months ended March 31, 2009 as compared with the same period in 2008.

Table 1 depicts several annualized measurements of performance using U.S. GAAP net income that management reviews in analyzing the Company's performance. Returns on average assets and equity measure how effectively an entity utilizes its total resources and capital, respectively. Net interest margin, which is the net federal taxable equivalent (FTE) interest income divided by average earning assets, is a measure of an entity's ability to utilize its earning assets in relation to the cost of funding. Interest income for tax-exempt securities and loans is adjusted to a taxable equivalent basis using the statutory Federal income tax rate of 35%.

Table 1 - Performance Measures

March 31,                          2009          2008
Return on average assets (ROAA)      0.99 %      1.07 %
Return on average equity (ROAE)     12.14 %     13.68 %
Net Interest Margin                  4.09 %      3.84 %

Net Interest Income

Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest bearing liabilities, primarily deposits and borrowings. Net interest income is affected by the interest rate spread, the difference between the yield on earning assets and cost of interest bearing liabilities, as well as the volumes of such assets and liabilities. Net interest income is one of the major determining factors in a financial institution's performance as it is the principal source of earnings. In response to the financial crisis, the Federal Open Market Committee lowered the target Federal Funds rate 500 bp, from 5.25% to 0.25% from September 2007 to December 2008 resulting in a corresponding drop in the Prime Rate from 8.25% to 3.25%. As a result of the lower rate environment, interest earning assets are repricing downward and the Company has lowered rates paid on interest-bearing liabilities. The impact of these actions is further explained in Table 2, which represents an analysis of net interest income on a FTE basis.

FTE net interest income increased $4.0 million, or 8.7%, during the three months ended March 31, 2009, compared to the same period of 2008. The increase in FTE net interest income resulted primarily from a decrease in the rate paid on interest bearing liabilities of 98 bp, to 2.07% for the three months ended March 31, 2009 from 3.05% for the same period in 2008. The interest rate spread increased 42 bp during the three months ended March 31, 2009 compared to the same period in 2008. The net interest margin increased by 25 bp to 4.09% for the three months ended March 31, 2009, compared with 3.84% for the same period in 2008. For the three months ended March 31, 2009, total FTE interest income decreased $5.3 million, or 7.0%. The yield on earning assets for the period decreased 57 bp to 5.84% for the three months ended March 31, 2009 from 6.41% for the same period in 2008. This decrease was partially offset by an increase in average interest earning assets of $143.0 million, or 3.0%, for the three months ended March 31, 2009 when compared to the same period in 2008, principally from growth in average loans and leases.

For the quarter ended March 31, 2009, total interest expense decreased $9.3 million, or 30.5%, primarily the result of the 200 bp decrease in the Federal Funds target rate since March 31, 2008, which impacts the Company's short-term borrowing, money market account and time deposit rates. Additionally, average interest bearing liabilities increased $130.8 million, or 3.2%, for the three months ended March 31, 2009 when compared to the same period in 2008, principally from growth in long-term debt and money market deposit accounts. Total average interest bearing deposits increased $79.6 million, or 2.5%, for the three months ended March 31, 2009 when compared to the same period in 2008. The rate paid on average interest bearing deposits decreased 113 bp from 2.82% for the three months ended March 31, 2008 to 1.69% for the same period in 2009. For the three months ended March 31, 2009, the Company experienced a shift in its deposit mix from time deposits to money market deposit accounts and NOW accounts. Average time deposit accounts decreased approximately $271.8 million, or 16.8%, when compared to the same period in 2008, while money market accounts and NOW accounts collectively increased approximately $334.7 million, or 28.9%.

Total average borrowings, including trust preferred debentures, increased $51.2 million, or 6.4%, for the three months ended March 31, 2009 compared with the same period in 2008. Average short-term borrowings decreased by $155.1 million, or 51.1%, from $303.6 million for the three months ended March 31, 2008 to $148.4 million for the three months ended March 31, 2009. Interest expense from short-term borrowings decreased $2.2 million, or 93.7%. The rate paid on short-term borrowings decreased 270 bp from 3.10% for the three months ended March 31, 2008 to 0.40% for the same period in 2009. Average long-term debt increased $206.4 million, or 48.6%, for the three months ended March 31, 2009, compared with the same period in 2008. The rate paid on long-term debt decreased to 3.98% for the three months ended March 31, 2009, compared with 4.07% for the same period in 2008. As a result of the increase in the average balance of long-term debt, interest paid on long-term debt increased $1.9 million, or 44.0%, for the three months ended March 31, 2009 as compared to the same period in 2008.

Table 2
Average Balances and Net Interest Income
The following tables include the condensed consolidated average balance sheet,
an analysis of interest income/expense and average yield/rate for each major
category of earning assets and interest bearing liabilities on a taxable
equivalent basis. Interest income for tax-exempt securities and loans has been
adjusted to a taxable-equivalent basis using the statutory Federal income tax
rate of 35%.

Three months ended
March 31,
                                           2009                                          2008
                          Average                        Yield/         Average                        Yield/
(dollars in
thousands)                Balance        Interest        Rates          Balance        Interest        Rates
ASSETS
Short-term interest
bearing accounts        $     2,684     $       13           1.98 %   $     8,400     $       79           3.78 %
Securities available
for sale
(1)(excluding
unrealized gains or
losses)                   1,089,512         13,114           4.88 %     1,120,257         14,419           5.18 %
Securities held to
maturity (1)                138,700          1,861           5.44 %       152,860          2,285           6.01 %
Investment in FRB and
FHLB Banks                   38,852            349           3.64 %        37,509            697           7.47 %
Loans and leases (2)      3,658,682         55,626           6.17 %     3,466,360         58,830           6.83 %
Total interest
earning assets            4,928,430         70,963           5.84 %     4,785,386         76,310           6.41 %
Other assets                423,046                                       378,958
Total assets              5,351,476                                     5,164,344

LIABILITIES AND
STOCKHOLDERS' EQUITY
Money market deposit
accounts                    942,223          3,109           1.34 %       709,962          4,178           2.37 %
NOW deposit accounts        550,241            786           0.58 %       447,852            995           0.89 %
Savings deposits            478,033            210           0.18 %       461,307            762           0.66 %
Time deposits             1,342,097          9,734           2.94 %     1,613,878         16,763           4.18 %
Total interest
bearing deposits          3,312,594         13,839           1.69 %     3,232,999         22,698           2.82 %
Short-term borrowings       148,448            147           0.40 %       303,576          2,340           3.10 %
Trust preferred
debentures                   75,422          1,086           5.84 %        75,422          1,247           6.65 %
Long-term debt              631,238          6,197           3.98 %       424,872          4,302           4.07 %
Total interest
bearing liabilities       4,167,702         21,269           2.07 %     4,036,869         30,587           3.05 %
Demand deposits             680,835                                       659,417
Other liabilities            66,254                                        64,893
Stockholders' equity        436,685                                       403,165
Total liabilities and
stockholders' equity    $ 5,351,476                                   $ 5,164,344
Net interest income
(FTE)                                       49,694                                        45,723
Interest rate spread                                         3.77 %                                        3.36 %
Net interest margin                                          4.09 %                                        3.84 %
Taxable equivalent
adjustment                                   1,582                                         1,658
Net interest income                     $   48,112                                    $   44,065

(1) Securities are shown at average amortized cost.

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

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

Analysis of Changes in Taxable Equivalent Net Interest Income

Three months ended March 31,
                                               Increase (Decrease)
                                                 2009 over 2008
(in thousands)                          Volume        Rate         Total

Short-term interest bearing accounts   $    (39 )   $     (27 )   $    (66 )
Securities available for sale              (424 )        (881 )     (1,305 )
Securities held to maturity                (209 )        (215 )       (424 )
Investment in FRB and FHLB Banks             26          (374 )       (348 )
Loans and leases                          4,314        (7,518 )     (3,204 )
Total interest income                     3,668        (9,015 )     (5,347 )

Money market deposit accounts             3,254        (4,323 )     (1,069 )
NOW deposit accounts                        388          (597 )       (209 )
Savings deposits                             29          (581 )       (552 )
Time deposits                            (2,549 )      (4,480 )     (7,029 )
Short-term borrowings                      (811 )      (1,382 )     (2,193 )
Trust preferred debentures                    -          (161 )       (161 )
Long-term debt                            1,986           (91 )      1,895
Total interest expense                    2,297       (11,615 )     (9,318 )

Change in FTE net interest income      $  1,371     $   2,600     $  3,971

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

                                         Three months ended March 31,
                                           2009                 2008
(in thousands)
Service charges on deposit accounts   $        6,297       $        6,525
Insurance and Broker/dealer revenue            5,338                1,107
Trust                                          1,409                1,774
Net securities gains                               -                   15
Bank owned life insurance                        872                  807
ATM fees                                       2,182                2,097
Retirement plan administration fees            1,741                1,708
Other                                          1,751                2,062
Total noninterest income              $       19,590       $       16,095

Noninterest income for the three months ended March 31, 2009 was $19.6 million, up $3.5 million or 21.7% from $16.1 million for the same period in 2008. The increase in noninterest income was due primarily to an increase in insurance and broker/dealer revenue of approximately $4.2 million for the three months ended March 31, 2009, primarily due to the acquisition of Mang Insurance Agency, LLC during the third quarter of 2008. This increase was partially offset by a decrease in trust administration income of $0.4 million for the three months ended March 31, 2009, compared with the same period in 2008. This decrease was primarily the result of a decline in the value of trust assets under administration.

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 March 31,
                                                   2009                 2008
(in thousands)
Salaries and employee benefits                $       21,427       $       16,770
Occupancy                                              4,165                3,610
Equipment                                              2,022                1,825
Data processing and communications                     3,295                3,170
Professional fees and outside services                 2,722                3,099
Office supplies and postage                            1,530                1,339
Amortization of intangible assets                        813                  391
Loan collection and other real estate owned              748                  567
FDIC insurance                                         1,529                  188
Other                                                  4,054                3,075
Total noninterest expense                     $       42,305       $       34,034

Noninterest expense for the three months ended March 31, 2009 was $42.3 million, up from $34.0 million for the same period in 2008. Salaries and employee benefits increased $4.7 million, or 27.8%, for the three months ended March 31, 2009, compared with the same period in 2008. The Company experienced increases of approximately $0.8 million and $0.4 million in pension and medical expenses, respectively, for the three months ended March 31, 2009 as compared with the same period in 2008. The balance of the increase was due primarily to increases in full-time-equivalent employees during 2009, largely due to new branch activity and the aforementioned acquisition. In addition, Occupancy, equipment and data processing and communications expenses were $9.5 million for the three months ended March 31, 2009, up $0.9 million, or 10.2%, from $8.6 million for the three months ended March 31, 2008. This increase was due primarily to an increase in expenses related to new branch activity during the past nine months. Professional fees and outside services decreased $0.4 million for the three months ended March 31, 2009, compared with the same period in 2008, due primarily to professional fees incurred in 2008 related to noninterest income initiatives. Amortization of intangible assets was $0.8 million for the three months ended March 31, 2009, up from $0.4 million for same period in 2008 due to the aforementioned acquisition. FDIC insurance increased approximately $1.3 million for the three months ended March 31, 2009, compared with the same period in 2008. Other operating expenses were $4.1 million for the three months ended March 31, 2009, up $1.0 million from $3.1 million for the three months ended March 31, 2008. This increase resulted primarily from various nonrecurring recoveries in 2008.

Income Taxes

Income tax expense for the three months ended March 31, 2009 and 2008 was $5.9 million. The effective rates were 31.0% and 30.2% for the three months ended March 31, 2009 and 2008, respectively.