The purpose of this discussion and analysis is to provide a concise description of the financial condition and results of operations of NBT Bancorp Inc. and its wholly owned consolidated subsidiaries, NBT Bank, N.A. (the "Bank"), NBT Financial Services, Inc. ("NBT Financial"), and NBT Holdings, Inc. ("NBT Holdings") (collectively referred to herein as the "Company"). This discussion will focus on results of operations, financial condition, capital resources and asset/liability management. Reference should be made to the Company's consolidated financial statements and footnotes thereto included in this Form 10-Q as well as to the Company's Annual Report on Form 10-K for the year ended December 31, 2011 for an understanding of the following discussion and analysis. Operating results for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results of the full year ending December 31, 2012 or any future period.

Forward-looking Statements

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

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

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

Critical Accounting Policies

Management of the Company considers the accounting policy relating to the allowance for loan 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 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 losses indicates that the allowance is adequate, under different conditions or assumptions, the allowance may need to be increased or decreased. For example, if historical loan loss experience significantly changed or if current economic conditions deteriorated or improved, particularly in the Company's primary market area, provisions for loan losses may be increased or decreased to adjust the allowance. In addition, the assumptions and estimates relating to loss experience, ability to collect and economic conditions used in the internal reviews of the Company's nonperforming loans and potential problem loans has a significant impact on the overall analysis of the adequacy of the allowance for loan losses. While management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral valuations were significantly changed, the Company's allowance for loan policy may require increases or decreases in the provision for loan losses.

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

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

Overview

Significant factors management reviews to evaluate the Company's operating results and financial condition include, but are not limited to: net income and earnings per share, return on assets and equity, net interest margin, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services, technology advancements, market share and peer comparisons. The following information should be considered in connection with the Company's results for the first six months of 2012:

· Net income for the six months ended June 30, 2012 was $26.9 million, down $2.1 million, or 7.1%, from the six months ended June 30, 2011. Net income per diluted share for the six months ended June 30, 2012 was $0.80 per share, down from $0.84 for the six months ended June 30, 2011.

· Net interest margin (on a fully taxable equivalent basis ("FTE")) was 3.86% for the six months ended June 30, 2012 as compared to 4.12% for the same period in 2011.

· Capital ratios at June 30, 2012 declined slightly when compared to December 31, 2011:

o Tier 1 Leverage ratio decreased from 8.74% to 8.59%

o Tier 1 Capital ratio decreased from 11.56% to 10.78%

o Total Risk-Based Capital Ratio decreased from 12.81% to 12.03%

· Past due loans as a percentage of total loans showed significant improvement to 0.54% at June 30, 2012, as compared with 0.89% at December 31, 2011.

· Net charge-offs improved to 0.48% of average loans for the first six months of 2012, down 8 bps from 0.56% for the year ended December 31, 2011.

· The provision for loan losses was $8.6 million for the six months ended June 30, 2012, down from $10.0 million for the same period in 2011.

· Annualized return on average assets was 0.94% for the six months ended June 30, 2012, down from 1.08% for the six months ended June 30, 2011.

· Annualized return on average equity was 9.89% for the six months ended June 30, 2012, down from 10.82% for the six months ended June 30, 2011.

· Continued strategic expansion in the first half of 2012:

o In New York: Completed the acquisition of three branches in Greene County and customer balances of a branch in Schoharie County on January 21, 2012.

o In Massachusetts: Opened a fifth Massachusetts branch in Lenox on February 7, 2012.

o Successfully completed the acquisition of Hampshire First Bank on June 8, 2012.

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

                                   First        Second        Six
2012                              Quarter      Quarter      Months
Return on average assets (ROAA)       0.97 %       0.92 %      0.94 %
Return on average equity (ROAE)      10.12 %       9.66 %      9.89 %
Net Interest Margin                   3.90 %       3.82 %      3.86 %

2011
Return on average assets (ROAA)       1.08 %       1.09 %      1.08 %
Return on average equity (ROAE)      10.78 %      10.86 %     10.82 %
Net Interest Margin                   4.11 %       4.13 %      4.12 %

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 key determining factors in a financial institution's performance as it is the principal source of earnings.

FTE net interest income decreased $0.5 million during the three months ended June 30, 2012, compared to the same period of 2011. The Company experienced a decrease in the yield on interest earning assets of 45 bp to 4.49% for the three months ended June 30, 2012 from 4.94% for the same period in 2011. This decrease was partially offset by a decrease of 17 bp on the rate paid on interest bearing liabilities for the three months ended June 30, 2012 as compared to the same period in 2011. The interest rate spread decreased to 3.61% during the three months ended June 30, 2012 compared to 3.89% for the same period in 2011. The net interest margin decreased by 31 bp to 3.82% for the three months ended June 30, 2012, compared with 4.13% for the same period in 2011.

For the three months ended June 30, 2012, total interest income decreased $1.6 million, or 2.7%, from the same period in 2011 as a result of the decrease in the yield earned on earning assets. The yield on securities available for sale decreased 58 bp to 2.53% for the three months ended June 30, 2012 from 3.11% for the three months ended June 30, 2011. This decrease was due to the decreasing rate environment from June 30, 2011 to June 30, 2012 resulting in reinvestment of cash flows from maturing securities into lower yielding securities. In addition, the yield on loans decreased 47 bp to 5.18% for the three months ended June 30, 2012 from 5.65% for the three months ended June 30, 2011. Average interest earning assets increased approximately $356.7 million, or 7.2%, for the three months ended June 30, 2012 as compared to the same period in 2011, which partially offset the decrease in total interest income attributed to the decrease in the yields on earning assets. This increase in average earning assets was attributed to aforementioned acquisition activity, as well as strong organic loan growth.

For the three months ended June 30, 2012, total interest expense decreased $1.2 million, or 11.9%, from the three months ended June 30, 2011. This decrease was due primarily to a decrease in the rate paid on average interest bearing liabilities from 1.05% for the three months ended June 30, 2011 to 0.88% for the three months ended June 30, 2012. The rate paid on average interest bearing deposits decreased 18 bp from 0.74% for the three months ended June 30, 2011 to 0.56% for the same period in 2012. The rate paid on average time deposits decreased from 1.85% for the three months ended June 30, 2011 to 1.52% for the three months ended June 30, 2012. The rate paid on average money market deposit accounts decreased from 0.37% for the three months ended June 30, 2011 to 0.19% for the three months ended June 30, 2012. Going forward, additional rate reductions on deposits could be more difficult as deposit rates are at or near their floors.

Average interest bearing liabilities increased approximately $214.8 million, or 5.5%, for the three months ended June 30, 2012 as compared to the same period in 2011, which partially offset the decrease in total interest expense attributed to the decrease in the rates on interest bearing liabilities. The primary driver of this offset was an increase in average time deposits and savings deposits due to the aforementioned acquisition for the three months ended June 30, 2012 as compared with the three months ended June 30, 2011.

FTE net interest income decreased $0.6 million during the six months ended June 30, 2012, compared to the same period of 2011. The Company experienced a decrease in the yield on interest earning assets of 42 bp to 4.55% for the six months ended June 30, 2012 from 4.97% for the same period in 2011. This decrease was partially offset by a decrease of 19 bp on the rate paid on interest bearing liabilities for the six months ended June 30, 2012 as compared to the same period in 2011. The interest rate spread decreased to 3.65% during the six months ended June 30, 2012 compared to 3.88% for the same period in 2011. The net interest margin decreased by 26 bp to 3.86% for the six months ended June 30, 2012, compared with 4.12% for the same period in 2011.

For the six months ended June 30, 2012, total interest income decreased $3.1 million, or 2.5%, from the same period in 2011 as a result of the decrease in the yield earned on earning assets. The yield on securities available for sale decreased 55 bp to 2.57% for the six months ended June 30, 2012 from 3.12% for the six months ended June 30, 2011. This decrease was due to the decreasing rate environment from June 30, 2011 to June 30, 2012 resulting in reinvestment of cash flows from maturing securities into lower yielding securities. In addition, the yield on loans decreased 44 bp to 5.25% for the six months ended June 30, 2012 from 5.69% for the six months ended June 30, 2011. Average interest earning assets increased approximately $289.9 million, or 5.8%, for the six months ended June 30, 2012 as compared to the same period in 2011, which partially offset the decrease in total interest income attributed to the decrease in the yields on earning assets. This increase in average earning assets was attributed to aforementioned acquisition activity, as well as strong organic loan growth.

For the six months ended June 30, 2012, total interest expense decreased $2.8 million, or 13.3%, from the six months ended June 30, 2011. This decrease was due primarily to a decrease in the rate paid on average interest bearing liabilities from 1.09% for the six months ended June 30, 2011 to 0.90% for the six months ended June 30, 2012. The rate paid on average interest bearing deposits decreased 17 bp from 0.76% for the six months ended June 30, 2011 to 0.59% for the same period in 2012. The rate paid on average time deposits decreased from 1.87% for the six months ended June 30, 2011 to 1.58% for the six months ended June 30, 2012. The rate paid on average money market deposit accounts decreased from 0.39% for the six months ended June 30, 2011 to 0.21% for the six months ended June 30, 2012. Going forward, additional rate reductions on deposits could be more difficult as deposit rates are at or near their floors.

Average interest bearing liabilities increased approximately $158.7 million, or 4.1%, for the six months ended June 30, 2012 as compared to the same period in 2011, which partially offset the decrease in total interest expense attributed to the decrease in the rates on interest bearing liabilities. The primary driver of this offset was an increase in average time deposits and savings deposits for the six months ended June 30, 2012 as compared with the six months ended June 30, 2011.

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 June 30,

                                           2012                                          2011
                          Average                        Yield/         Average                        Yield/
(dollars in
thousands)                Balance        Interest        Rates          Balance        Interest        Rates
ASSETS
Short-term interest
bearing accounts        $   102,192     $       84           0.33 %   $   128,799     $      111           0.35 %
Securities available
for sale
(1)(excluding
unrealized gains or
losses)                   1,208,384          7,605           2.53 %     1,098,964          8,512           3.11 %
Securities held to
maturity (1)                 68,472            931           5.47 %        85,615          1,125           5.27 %
Investment in FRB and
FHLB Banks                   27,886            328           4.73 %        27,071            329           4.87 %
Loans (2)                 3,938,592         50,741           5.18 %     3,648,343         51,359           5.65 %
Total interest
earning assets          $ 5,345,526     $   59,689           4.49 %   $ 4,988,792     $   61,436           4.94 %
Other assets                465,058                                       424,187
Total assets            $ 5,810,584                                   $ 5,412,979

LIABILITIES AND
STOCKHOLDERS' EQUITY
Money market deposit
accounts                $ 1,115,812            539           0.19 %   $ 1,091,001     $    1,009           0.37 %
NOW deposit accounts        704,896            480           0.27 %       672,345            627           0.37 %
Savings deposits            676,794            127           0.08 %       607,533            182           0.12 %
Time deposits               973,051          3,688           1.52 %       919,590          4,233           1.85 %
Total interest
bearing deposits        $ 3,470,553     $    4,834           0.56 %   $ 3,290,469     $    6,051           0.74 %
Short-term borrowings       171,545             48           0.11 %       135,618             52           0.15 %
Trust preferred
debentures                   75,422            434           2.31 %        75,422            400           2.13 %
Long-term debt              368,251          3,580           3.91 %       369,459          3,591           3.90 %
Total interest
bearing liabilities     $ 4,085,771     $    8,896           0.88 %   $ 3,870,968     $   10,094           1.05 %
Demand deposits           1,111,804                                       932,066
Other liabilities            61,144                                        68,596
Stockholders' equity        551,865                                       541,349
Total liabilities and
stockholders' equity    $ 5,810,584                                   $ 5,412,979
Net interest income
(FTE)                                       50,793                                        51,342
Interest rate spread                                         3.61 %                                        3.89 %
Net interest margin                                          3.82 %                                        4.13 %
Taxable equivalent
adjustment                                   1,042                                         1,178
Net interest income                     $   49,751                                    $   50,164

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

Six Months ended June 30,

                                          2012                                         2011
                          Average                       Yield/         Average                       Yield/
(dollars in
thousands)                Balance       Interest        Rates          Balance       Interest        Rates
ASSETS
Short-term interest
bearing accounts        $    91,159     $     120           0.26 %   $   135,019     $     180           0.27 %
Securities available
for sale
(1)(excluding
unrealized gains or
losses)                   1,210,575        15,460           2.57 %     1,098,506        17,013           3.12 %
Securities held to
maturity (1)                 69,507         1,896           5.48 %        89,833         2,327           5.22 %
Investment in FRB and
FHLB Banks                   27,453           685           5.02 %        27,158           754           5.60 %
Loans (2)                 3,874,027       101,184           5.25 %     3,632,355       102,451           5.69 %
Total interest
earning assets          $ 5,272,721     $ 119,345           4.55 %   $ 4,982,871     $ 122,725           4.97 %
Other assets                462,300                                      422,191
Total assets            $ 5,735,021                                  $ 5,405,062

LIABILITIES AND
STOCKHOLDERS' EQUITY
Money market deposit
accounts                $ 1,102,579         1,151           0.21 %   $ 1,088,456     $   2,125           0.39 %
NOW deposit accounts        699,917         1,010           0.29 %       685,171         1,261           0.37 %
Savings deposits            659,381           242           0.07 %       591,043           347           0.12 %
Time deposits               964,701         7,574           1.58 %       925,528         8,605           1.87 %
Total interest
bearing deposits        $ 3,426,578     $   9,977           0.59 %   $ 3,290,198     $  12,338           0.76 %
Short-term borrowings       167,176            89           0.11 %       144,447           110           0.15 %
Trust preferred
debentures                   75,422           883           2.35 %        75,422         1,289           3.45 %
Long-term debt              369,323         7,161           3.90 %       369,717         7,162           3.91 %
Total interest
bearing liabilities     $ 4,038,499     $  18,110           0.90 %   $ 3,879,784     $  20,899           1.09 %
Demand deposits           1,087,180                                      918,483
Other liabilities            62,096                                       67,006
Stockholders' equity        547,246                                      539,789
Total liabilities and
stockholders' equity    $ 5,735,021                                  $ 5,405,062
Net interest income
(FTE)                                     101,235                                      101,826
Interest rate spread                                        3.65 %                                       3.88 %
Net interest margin                                         3.86 %                                       4.12 %
Taxable equivalent
adjustment                                  2,092                                        2,410
Net interest income                     $  99,143                                    $  99,416

(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 June 30,
                                               Increase (Decrease)
                                                 2012 over 2011
(in thousands)                          Volume        Rate         Total

Short-term interest bearing accounts   $    (22 )   $      (5 )   $    (27 )
Securities available for sale             4,105        (5,012 )       (907 )
Securities held to maturity                (449 )         255         (194 )
Investment in FRB and FHLB Banks             39           (40 )         (1 )
Loans                                    16,366       (16,984 )       (618 )
Total interest income                    20,039       (21,786 )     (1,747 )

Money market deposit accounts               154          (624 )       (470 )
NOW deposit accounts                        184          (331 )       (147 )
Savings deposits                            114          (169 )        (55 )
Time deposits                             1,344        (1,889 )       (545 )
Short-term borrowings                        54           (58 )         (4 )
Trust preferred debentures                    -            34           34
Long-term debt                              (50 )          39          (11 )
Total interest expense                    1,800        (2,998 )     (1,198 )

Change in FTE net interest income      $ 18,239     $ (18,788 )   $   (549 )



Six months ended June 30,
                                               Increase (Decrease)
                                                 2012 over 2011
(in thousands)                          Volume        Rate         Total
. . .