NBT Bancorp - 10-Q quarterly report FY

Washington, D. C. 20549

(Mark One)

For the quarterly period ended September 30, 2005.

For the transition period from ________ to ________.

(Exact Name of Registrant as Specified in its Charter)

(Address of Principal Executive Offices) (Zip Code)

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

As of October 31, 2005, there were 32,382,755 shares outstanding of the Registrant's common stock, $0.01 par value.

 

 

See notes to unaudited interim consolidated financial statements.

 

See notes to unaudited interim consolidated financial statements.

 

See notes to unaudited interim consolidated financial statements.

 

 

See notes to unaudited interim consolidated financial statements.

 

See notes to unaudited interim consolidated financial statements.

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 CNBF Capital Trust I. 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.

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. 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 a variable interest entity (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 I are not included in the Company’s consolidated financial statements.

 

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 2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period−specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. SFAS 154 also requires 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 beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The Company is required to adopt the provisions of SFAS 154, as applicable, beginning in fiscal 2006. Adoption of this statement could have an impact if there are future voluntary accounting changes and correction of errors.

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.

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, 2005 and 2004. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

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, and December 31, 2004, commitments to extend credit and unused lines of credit totaled $501.4 million and $507.4 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 million at September 30, 2005 and $31.6 million at December 31, 2004. As of September 30, 2005, the fair value of standby letters of credit was not material to the Company’s consolidated financial statements.

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.

There were 8,996 stock options for the quarter ended September 30, 2005 and 28,665 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, 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.

Had the Company determined compensation cost based on 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 reduced to the pro forma amounts indicated below:

 

The Company granted 403,225 stock options for the nine months ended September 30, 2005 with a weighted average exercise price of $23.16 per share compared to 375,897 stock options granted for the nine months ended September 30, 2004 with a weighted average exercise price of $22.17 per share. The per share weighted average fair value of the 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 were as follows:

The fair value 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.

A summary of goodwill by operating subsidiaries follows:

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.

Amortization expense on finite-lived intangible assets is expected to total $0.2 million for the remainder of 2005, $0.5 million for each of 2006 and 2007, $0.4 million for 2008, $0.3 million for 2009, and $2.0 million thereafter.

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.

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

On June 14, 2005, NBT announced that it had agreed to acquire CNB Bancorp, Inc. (CNB), with total assets at June 30, 2005, of approximately $420 million, which is headquartered in Gloversville, NY. The consideration to be paid in the merger will be 45% cash and 55% stock. Shareholders of CNB will be able to elect to receive either $38.00 in cash or 1.64 shares of Company common stock, for each share of CNB common stock, subject to pro ration and allocation procedures. The merger is subject to regulatory and CNB shareholder approval.

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), 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 2004 Form 10-K for an understanding of the following discussion and analysis.

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 from the CNB acquisition and the risk of not obtaining regulatory or CNB shareholder approval; 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.

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.

The Company earned net income of $13.5 million ($0.41 diluted earnings per share) for the three months ended September 30, 2005 compared to net income of $12.6 million ($0.38 diluted earnings per share) for the three months ended September 30, 2004. The quarter to quarter increase in net income from 2005 to 2004 was primarily the result of increases in net interest income of $1.9 million, noninterest income of $0.2 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 million offset by an increase in total noninterest expense of $5.8 million. The increase in net interest income resulted primarily from 9% growth in average loans during the nine months ended September 30, 2005 compared to the same period in 2004. 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 as increases in trust fees, service charges on deposit accounts, ATM and debit card fees and other income offset by a decrease in broker/dealer and insurance revenue of $2.6 million from the previously mentioned sale of M. Griffith Inc and $0.7 million in losses on securities available for sale. The increase in total noninterest expense was due primarily to increases in salaries and employee benefits of $5.2 million, occupancy of $0.3 million, and equipment expense of $0.4 million.

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%.

 

 

Federal taxable equivalent (FTE) net interest income increased $2.0 million during the three months ended September 30, 2005 compared to the same period of 2004. The increase in FTE net interest income resulted primarily from 5% growth in average earning assets. The Company’s interest rate spread declined 12 bp during the three months ended September 30, 2005 compared to the same period in 2004. The yield on earning assets for the period increased 44 bp to 5.97% for the three months ended September 30, 2005 from 5.53% for the same period in 2004. Meanwhile, the rate paid on interest-bearing liabilities increased 56 bp, to 2.37% for the three months ended September 30, 2005 from 1.81% for the same period in 2004.

Total FTE interest income for the three months ended September 30, 2005 increased $7.2 million compared to the same period in 2004, a result of the previously mentioned increase in average earning assets as well as the increase in yield on earning assets of 44 bp. The growth in earning assets during the period was driven primarily by growth in average loans and leases of 8%. The growth in average loans and leases resulted primarily from growth in consumer and commercial loans. 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 250 bp since July 1, 2004.

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.

Another important performance measurement of net interest income is the net interest margin. Despite a 12 bp decrease in the Company’s net interest spread, the net interest margin remained unchanged at 3.99% for the three months ended September 30, 2005 and 2004. The margin remained stable 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, compared to the same period in 2004, as this deposit source provides a positive benefit towards the Company’s net interest margin.

Federal taxable equivalent (FTE) net interest income increased $6.2 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 in the Company’s net interest margin is primarily attributable to an 10% increase in average demand deposits when compared to the same period in the prior year. The yield on earning assets increased 33 bp to 5.89% for the nine months ended September 30, 2005 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.

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%.