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Table of Contents

 

 

UNITED STATES

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, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from/to

 

 

NB&T FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Ohio   31-1004998
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)

48 N. South Street, Wilmington, Ohio 45177

(Address of principal executive offices) (Zip Code)

Registrant's telephone number: (937) 382-1441

 

 

Indicate by check mark whether the Registrant (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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated Filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller Reporting Company   x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: As of November 3, 2011, 3,423,252 common shares were issued and outstanding.

 

 

 


Table of Contents

NB&T FINANCIAL GROUP, INC.

September 30, 2011 Form 10-Q

Table of Contents

 

    PART I       
         Page  

Item 1:

  Financial Statements      3   
  Condensed Consolidated Balance Sheets      3   
  Condensed Consolidated Statements of Income      4   
  Condensed Consolidated Statements of Cash Flows      5   
  Notes to Condensed Consolidated Financial Statements      6   
  Report of Independent Registered Public Accounting Firm      25   

Item 2:

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      26   

Item 3:

  Quantitative and Qualitative Disclosures about Market Risk      32   

Item 4:

  Controls and Procedures      33   
  Part II   

Item 1:

  Legal Proceedings      34   

Item 1A:

  Risk Factors      34   

Item 2:

  Unregistered Sales of Equity Securities and Use of Proceeds      34   

Item 3:

  Defaults Upon Senior Securities      34   

Item 4:

  Reserved      34   

Item 5:

  Other Information      34   

Item 6:

  Exhibits and Reports on Form 8-K      34   

Signatures

       35   

Index to Exhibits

     36   

 

2


Table of Contents

Item 1: Financial Statements

NB&T Financial Group, Inc.

Condensed Consolidated Balance Sheets

 

(Dollars in thousands)

  September 30,
2011
    December 31,
2010
 
    (Unaudited)        

Assets

   

Cash and due from banks

  $ 10,419      $ 8,693   

Interest-earning deposits

    54,425        72,678   

Federal funds sold

    375        380   
 

 

 

   

 

 

 

Cash and cash equivalents

    65,219        81,751   
 

 

 

   

 

 

 

Securities-available-for-sale

    145,457        133,855   

Loans held for sale

    172        688   

Loans, net of allowance for loan losses of $3,484 and $3,714

    401,353        410,576   

Premises and equipment

    19,113        20,519   

Federal Reserve and Federal Home Loan Bank stock

    10,025        10,021   

Earned income receivable

    3,023        2,909   

Goodwill

    3,625        3,625   

Core deposits and other intangibles

    918        1,183   

Bank-owned life insurance

    15,367        15,002   

Other real estate owned

    4,236        4,254   

FDIC loss share receivable

    1,979        2,078   

Other assets

    3,543        4,157   
 

 

 

   

 

 

 

Total assets

  $ 674,030      $ 690,618   
 

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

   

Liabilities

   

Deposits

   

Demand

  $ 89,868      $ 105,187   

Savings, NOW and Money Market

    330,132        292,773   

Time

    156,391        186,413   
 

 

 

   

 

 

 

Total deposits

    576,391        584,373   
 

 

 

   

 

 

 

Short-term borrowings

    1,175        12,779   

Long-term debt

    15,310        15,310   

Interest payable and other liabilities

    9,309        7,137   
 

 

 

   

 

 

 

Total liabilities

    602,185        619,599   
 

 

 

   

 

 

 

Commitments and Contingencies

   

Stockholders’ Equity

   

Preferred stock, no par value, authorized 100,000 shares; none issued

   

Common stock, no par value; authorized 6,000,000 shares; issued – 3,818,950 shares

    1,000        1,000   

Additional paid-in capital

    12,144        12,013   

Retained earnings

    60,324        60,221   

Accumulated other comprehensive income

    2,875        2,283   

Treasury stock; 394,788 shares – 2011 and 394,788 shares - 2010

    (4,498     (4,498
 

 

 

   

 

 

 

Total stockholders’ equity

    71,845        71,019   
 

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 674,030      $ 690,618   
 

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

3


Table of Contents

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Income

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(Dollars in thousands, except per share amounts)

  2011     2010     2011     2010  
    (Unaudited)     (Unaudited)  

Interest and Dividend Income

     

Loans

  $ 5,856      $ 6,757      $ 18,114      $ 19,774   

Securities-taxable

    739        1,057        2,660        3,200   

Securities-tax-exempt

    89        115        248        477   

Federal funds sold and other

    40        27        128        90   

Dividends on Federal Home Loan & Federal Reserve Bank stock

    105        113        337        341   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

    6,829        8,069        21,487        23,882   
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

       

Deposits

    861        1,350        3,051        4,046   

Short-term debt

    0        199        31        300   

Long-term debt

    218        322        653        1,250   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

    1,079        1,871        3,735        5,596   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

    5,750        6,198        17,752        18,286   

Provision for Loan Losses

    475        225        1,410        1,185   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income After Provision for Loan Losses

    5,275        5,973        16,342        17,101   
 

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Income

       

Trust income

    256        234        775        690   

Service charges and fees

    1,315        1,169        3,558        3,430   

Gain on bargain purchase

    0        0        0        7,572   

Gain on sale of insurance agency

    0        0        0        1,390   

Gain on sale of available for sale securities

    421        0        1,200        0   

Other-than-temporary losses on investments:

     

Total other-than-temporary losses

    0        0        0        (181

Loss recognized in other comprehensive income (before taxes)

    0        0        0        131   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses recognized in earnings

    0        0        0        (50

Other

    577        485        1,491        1,473   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

    2,569        1,888        7,024        14,505   
 

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Expense

       

Salaries and employee benefits

    3,164        3,003        9,376        10,521   

Net occupancy expense

    594        632        1,810        1,895   

Equipment and data processing expense

    767        746        2,299        2,328   

FDIC insurance

    133        214        500        642   

Professional fees

    404        481        1,470        1,502   

Marketing expense

    162        153        455        477   

State franchise tax

    179        218        613        614   

Amortization of intangibles

    87        103        265        292   

Other

    792        644        2,219        1,685   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

    6,282        6,194        19,007        19,956   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Tax

    1,562        1,667        4,359        11,650   

Provision for Income Taxes

    432        450        1,175        3,559   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 1,130      $ 1,217      $ 3,184      $ 8,091   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic Earnings Per Share

  $ .33      $ .36      $ .93      $ 2.38   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Earnings Per Share

  $ .33      $ .36      $ .93      $ 2.38   
 

 

 

   

 

 

   

 

 

   

 

 

 

Dividends Declared Per Share

  $ .30      $ .29      $ .90      $ .87   
 

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

4


Table of Contents

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows

 

     Nine Months Ended,
September 30,
 

(Dollars in thousands)

   2011     2010  
     (Unaudited)  

Operating Activities

  

Net income

   $ 3,184      $ 8,091   

Items not requiring (providing) cash

    

Depreciation and amortization

     1,310        1,328   

Provision for loan losses

     1,410        1,185   

Amortization of premiums and discounts on securities

     1,463        1,054   

Increase in cash surrender value on bank owned life insurance

     (365     (357

Other-than-temporary impairment of securities

     0        50   

Gain on bargain purchase

     0        (7,572

Gain on sale of insurance agency

     0        (1,390

Gain on sale of available-for-sale securities

     (1,200     0   

Proceeds from sale of loans held for sale

     8,518        9,548   

Originations of loans held for sale

     (7,970     (9,640

Gain from sale of loans

     (32     (66

Proceeds from FDIC loss share receivable

     112        1,120   

Net change in:

    

Loans held for sale

     0        0   

Other assets and liabilities

     1,919        3,794   
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,349        7,145   
  

 

 

   

 

 

 

Investing Activities

    

Purchases of available-for-sale securities

     (96,685     (89,115

Proceeds from sales of available-for-sale securities

     31,021        0   

Proceeds from maturities of available-for-sale securities

     54,691        86,565   

Net change in loans

     9,180        9,895   

Purchase of Federal Reserve Bank stock

     (4     (174

Net cash from acquisition, including $9,493 of proceeds from FDIC

     0        25,821   

Proceeds from sale of insurance agency

     0        2,276   

Purchase of premises and equipment

     (417     (1,371
  

 

 

   

 

 

 

Net cash provided by investing activities

     (2,214     33,897   
  

 

 

   

 

 

 

Financing Activities

    

Net change in:

    

Deposits

     (7,982     (34,370

Short-term borrowings

     (11,604     44   

Cash dividends

     (3,081     (2,950
  

 

 

   

 

 

 

Net cash used in financing activities

     (22,667     (37,276
  

 

 

   

 

 

 

Increase (Decrease) in Cash and Cash Equivalents

     (16,532     3,766   

Cash and Cash Equivalents, Beginning of Year

     81,751        53,599   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 65,219      $ 57,365   
  

 

 

   

 

 

 

Supplemental Cash Flows Information

    

Interest paid

   $ 3,881      $ 5,634   

Income taxes paid (net of refunds)

     698        595   

Assets acquired in business combination

     0        72,313   

Liabilities assumed in business combination

     0        67,316   

See Notes to Condensed Consolidated Financial Statements

 

5


Table of Contents

Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q. The Form 10-Q does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Immaterial changes in financial condition and results of operations may not be discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The condensed consolidated balance sheet as of December 31, 2010 has been derived from the audited consolidated balance sheet of that date.

In the opinion of management, the condensed consolidated financial statements contain all adjustments necessary to present fairly the financial condition of NB&T Financial Group, Inc. (the “Company”) as of September 30, 2011 and December 31, 2010, and the results of its operations and cash flows for the three- and nine-month periods ended September 30, 2011 and 2010. Those adjustments consist of only normal recurring adjustments. The results of operations for the interim periods reported herein are not necessarily indicative of results of operation to be expected for the entire year. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission.

Note 2: Securities

The amortized cost and approximate fair values of securities are as follows (thousands):

 

Available-for-Sale Securities:    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Approximate
Fair Value
 

September 30, 2011:

          

U.S. government sponsored entities

   $ 18,111       $ 584       $ (0   $ 18,695   

Mortgage-backed securities:

          

U.S. Government sponsored entities-residential

     92,553         2,616         (112     95,057   

Private label-residential

     7,587         248         (194     7,641   

State and political subdivisions

     22,850         1,231         (17     24,064   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 141,101       $ 4,679       $ (323   $ 145,457   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2010:

          

U.S. government sponsored entities

   $ 21,081       $ 13       $ 0      $ 21,094   

Mortgage-backed securities:

          

U.S. Government sponsored entities-residential

     82,346         2,985         (20     85,311   

Private label-residential

     9,929         387         (154     10,162   

State and political subdivisions

     17,040         332         (84     17,288   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 130,396       $ 3,717       $ (258   $ 133,855   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

6


Table of Contents

The amortized cost and fair value of securities available for sale at September 30, 2011, by contractual maturity, are shown below (thousands). Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Amortized
Cost
     Fair
Value
 

One year or less

   $ 325       $ 329   

After one year through five years

     12,973         13,348   

After five years through ten years

     14,163         15,011   

After ten years

     13,500         14,071   
  

 

 

    

 

 

 
     40,961         42,759   

Mortgage-backed securities

     100,140         102,698   
  

 

 

    

 

 

 

Totals

   $ 141,101       $ 145,457   
  

 

 

    

 

 

 

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $86,680,000 at September 30, 2011 and $51,867,000 at December 31, 2010.

Gross gains of $421,000 and gross losses of $0 resulting from sales of available-for-sale securities were realized during the third quarter of 2011. Gross gains of $1,210,000 and gross losses of $10,000 resulting from sales of available-for sale securities were realized during the first nine months of 2011. Gross gains are determined under the specific identification method.

The table below indicates the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010. (Thousands)

 

     Less than 12 months     12 months or more     Total  
   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

September 30, 2011

  

            

Mortgage-backed securities:

               

U.S. Government-sponsored entities-residential

     15,744         (112     0         0        15,744         (112

Private label-residential

     923         (28     618         (166     1,541         (194

State and political subdivisions

     3,061         (17     0         0        3,061         (17
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Securities

   $ 19,728       $ (157   $ 618       $ (166   $ 20,346       $ (323
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2010

  

            

Mortgage-backed securities:

               

U.S. Government-sponsored entities-residential

   $ 4,146       $ (20   $ 0       $ 0      $ 4,146       $ (20

Private label-residential

     0         0        1,341         (154     1,341         (154

State and political subdivisions

     4,111         (84     0         0        4,111         (84
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Securities

   $ 8,257       $ (104   $ 1,341       $ (154   $ 9,598       $ (258
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrealized losses outstanding 12 months or more of $166,000 at September 30, 2011 is due to one private-label collateralized mortgage obligation, which has been downgraded by three major bond rating agencies. Based on management’s review of the underlying collateral performance and estimate of projected future cash flows, The National Bank and Trust Company (the “Bank”) has recognized an other-than-temporary impairment charge of $200,000 in prior periods. In the third quarter of 2011, approximately $10,000 of losses were realized on this security with total realized losses through September

 

7


Table of Contents

30, 2011 totaling approximately $70,000. These losses were in line with prior period loss projections.

Other-than-temporary Impairment

Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.

The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities. For securities where the security is a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. For securities where the security is not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment model.

The Company routinely conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred. Economic models are used to determine whether an other-than-temporary impairment has occurred on these securities. While all securities are considered, the securities primarily impacted by other-than-temporary impairment testing are private-label mortgage-backed securities. For each private-label mortgage-backed security in the investment portfolio (including but not limited to those whose fair value is less than their amortized cost basis), an extensive, regular review is conducted to determine if an other-than-temporary impairment has occurred. Various inputs to the economic models are used to determine if an unrealized loss is other than temporary. The most significant inputs are the following:

 

   

Default Rate

 

   

Severity

 

   

Prepayments

Other inputs may include the actual collateral attributes, which include geographic concentrations, credit ratings and other performance indicators of the underlying asset.

To determine if the unrealized loss for private label mortgage-backed securities is other-than-temporary, the Company projects total estimated defaults of the underlying assets (mortgages) and multiplies that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss. The Company also evaluates the current credit enhancement underlying the bond to determine the impact on cash flows. If the Company determines that a given mortgage-backed security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings.

For those securities for which an other-than-temporary impairment was determined to have occurred as of September 30, 2011 (that is, a determination was made that the entire amortized cost bases will not likely be recovered), the following table presents the inputs used to measure the amount of the credit loss recognized in earnings. The table shows the projected weighted average default rates and loss severities for the recent-vintage private-label mortgage-backed securities portfolios at September 30, 2011.

 

     Default Rate     Severity  

Alt-A

     19.3     55.9

 

8


Table of Contents

Credit Losses Recognized on Investments

Certain debt securities have experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired. The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income.(thousands)

 

     Accumulated
Credit  Losses
2011
 

Credit losses on debt securities held

  

Beginning of year

   $ (170

Reductions related to losses realized which were previously recognized

     40   
  

 

 

 

End of period

   $ (130
  

 

 

 

Note 3: Loans

 

Categories of loans include (thousands):    September 30,
2011
    December 31,
2010
 

Commercial

   $ 68,854      $ 65,304   

Agricultural

     34,293        31,354   

Real estate construction

     2,431        5,029   

Commercial real estate

     172,533        177,640   

Residential real estate

     116,610        124,497   

Consumer

     10,171        10,510   
  

 

 

   

 

 

 

Total loans

     404,892        414,334   

Less: Net deferred loan fees, premiums and discounts

     (55     (44

Allowance for loan losses

     (3,484     (3,714
  

 

 

   

 

 

 

Net loans

   $ 401,353      $ 410,576   
  

 

 

   

 

 

 

Activity in the allowance for loan losses was as follows (thousands):

 

     Nine Months Ended September 30,  
     2011     2010  

Balance, beginning of year

   $ 3,714      $ 3,776   

Provision for loan losses

     1,410        1,185   

Recoveries

     229        178   

Charge-offs

     (1,869     (1,204
  

 

 

   

 

 

 

Balance, end of period

   $ 3,484      $ 3,935   
  

 

 

   

 

 

 

 

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The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, except for loans identified as troubled debt restructuring, the Bank does not separately identify individual consumer and residential loans for impairment measurements.

The following tables provide a breakdown of the allowance for loan losses for the three months and nine months ended September 30, 2011 (thousands):

Three Months Ended September 30, 2011:

 

     Commercial     Commercial
Real Estate
    Agricultural     Residential
1-4 Family
    Residential
Home
Equity
    Consumer     Total  

Allowance for loan losses:

              

Beginning balance

   $ 801      $ 1,722      $ 154      $ 477      $ 201      $ 120      $ 3,475   

Charge-offs

     (299     (36     (2     (83     (23     (45     (488

Recoveries

     1        10        1        1        0        9        22   

Provision

     111        264        97        (9     (25     37        475   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 614      $ 1,960      $ 250      $ 386      $ 153      $ 121      $ 3,484   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Nine Months Ended September 30, 2011:

 

     Commercial     Commercial
Real Estate
    Agricultural     Residential
1-4 Family
    Residential
Home
Equity
    Consumer     Total  

Allowance for loan losses:

              

Beginning balance

   $ 474      $ 2,057      $ 184      $ 528      $ 337      $ 134      $ 3,714   

Charge-offs

     (303     (1,125     (2     (217     (66     (156     (1,869

Recoveries

     14        143        4        7        2        59        229   

Provision

     429        885        64        68        (120     84        1,410   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 614      $ 1,960      $ 250      $ 386      $ 153      $ 121      $ 3,484   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in financing receivables based on portfolio segment and impairment method as of September 30, 2011 and December 31, 2010 (thousands):

September 30, 2011:

 

    Commercial     Commercial
Real Estate
    Agricultural     Residential
1-4 Family
    Residential
Home
Equity
    Consumer     Total  

Ending balance: Individually evaluated for impairment

  $ 208      $ 441      $ 0      $ 0      $ 0      $ 0      $ 649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment

  $ 395      $ 1,421      $ 250      $ 386      $ 153      $ 121      $ 2,726   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality:

             

Individually evaluated for impairment

  $ 10      $ 76      $ 0      $ 0      $ 0      $ 0      $ 86   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment

  $ 1      $ 22      $ 0      $ 0      $ 0      $ 0      $ 23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables

             

Ending balance

  $ 68,854      $ 174,806      $ 34,293      $ 84,664      $ 32,104      $ 10,171      $ 404,892   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: Individually evaluated for impairment

  $ 1,834      $ 4,224      $ 0      $ 1,050      $ 0      $ 0      $ 7,108   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment

  $ 66,802      $ 166,875      $ 34,293      $ 83,614      $ 32,104      $ 10,171      $ 393,859   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality:

             

Individually evaluated for impairment

  $ 194      $ 1,578      $ 0      $ 0      $ 0      $ 0      $ 1,772   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment

  $ 24      $ 2,129      $ 0      $ 0      $ 0      $ 0      $ 2,153   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

December 31, 2010:

 

    Commercial     Commercial
Real Estate
    Agricultural     Residential
1-4 Family
    Residential
Home
Equity
    Consumer     Total  

Ending balance: Individually evaluated for impairment

  $ 37      $ 430      $ 0      $ 0      $ 0      $ 0      $ 467   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment

  $ 391      $ 1,479      $ 184      $ 528      $ 337      $ 134      $ 3,053   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

  $ 46      $ 148      $ 0      $ 0      $ 0      $ 0      $ 194   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Receivables

             

Ending balance

  $ 65,304      $ 182,372      $ 31,354      $ 91,901      $ 32,893      $ 10,510      $ 414,334   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: Individually evaluated for impairment

  $ 696      $ 4,420      $ 0      $ 1,061      $ 0      $ 0      $ 6,177   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment

  $ 64,342      $ 173,547      $ 31,354      $ 90,740      $ 32,893      $ 10,510      $ 403,386   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

  $ 266      $ 4,405      $ 0      $ 100      $ 0      $ 0      $ 4,771   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table outlines the Company’s corporate and consumer credit exposure by category and standard regulatory classification as of September 30, 2011 and December 31, 2010 (thousands):

Corporate Credit Exposure

Credit Risk Profile by Creditworthiness Category:

 

    Commercial     Commercial Real Estate     Agricultural  
    September 30,
2011
    December 31,
2010
    September 30,
2011
    December 31,
2010
    September 30,
2011
    December 31,
2010
 

Pass

  $ 58,185      $ 53,758      $ 151,378      $ 153,490      $ 34,019      $ 30,108   

Other Assets Especially Mentioned

    2,560        5,722        7,158        10,312        0        962   

Substandard

    7,961        5,678        15,602        18,529        274        284   

Doubtful

    146        146        143        61        0        0   

Loss

    0        0        0        0        0        0   

Non-rated

    2        0        525        (21     0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 68,854      $ 65,304      $ 174,806      $ 182,372      $ 34,293      $ 31,354   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

    Residential Real Estate        
    1 to 4 Family     Home equity     Consumer  
    September 30,
2011
    December 31,
2010
    September 30,
2011
    December 31,
2010
    September 30,
2011
    December 31,
2010
 

Grade:

           

Pass

  $ 81,627      $ 88,582      $ 31,804      $ 32,761      $ 9,999      $ 10,304   

Substandard

    3,037        3,319        300        132        172        206   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 84,664      $ 91,901      $ 32,104      $ 32,893      $ 10,171      $ 10,510   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For purposes of monitoring the credit quality and risk characteristics of its commercial portfolio segment, the Company disaggregates the segment into the following classes: commercial and industrial, commercial real estate and agricultural.

To facilitate the monitoring of credit quality within the commercial portfolio segment, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan losses for the commercial portfolio segment, the Company utilizes the following categories of credit grades: pass, other assets especially mentioned, substandard, doubtful or loss. The five categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter.

Pass ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis.

The Company assigns an Other Assets Especially Mentioned rating to loans and leases that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or the Company’s credit position.

The Company assigns a substandard rating to loans that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans have well

 

13


Table of Contents

defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans in this grade also are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies noted are not addressed and corrected.

The Company assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans. Loans rated as loss are loans with advances in excess of calculated current fair value which are considered uncollectible.

For purposes of monitoring the credit quality and risk characteristics of its consumer portfolio segment, the Company disaggregates the segment into the following classes: residential mortgage, home equity and other consumer. The Company considers repayment performance as the best indicator of credit quality for residential mortgage and consumer loans. Consumer loans that have principal and interest payments that have become past due ninety days are classified as substandard unless such loans are both well secured and in the process of collection. All other loans are classified as pass. Well secured loans are collateralized by perfected security interests in real and/or personal property for which the Company estimates proceeds from sale would be sufficient to recover the outstanding principal and accrued interest balance of the loan and pay all costs to sell the collateral. The Company considers a loan in the process of collection if collection efforts or legal action is proceeding and the Company expects to collect funds sufficient to bring the loan current or recover the entire outstanding principal and accrued interest balance.

Generally, all classes of loans are placed on non-accrual status at ninety days past due and interest is considered a loss, unless the loan is well-secured and in the process of collection. Most impaired loans are on non-accrual status. Past due status is based on the contractual terms of the loan. Payments made while a loan is on nonaccrual are treated as reductions of principal. Typically, loans are not returned to accrual status until all loan payments have been current for at least six months. The following tables outline the Company’s past due and nonaccrual loans as of September 30, 2011 and December 31, 2010 (thousands):

 

14


Table of Contents

September 30, 2011:

 

    30-59
Days
Past Due
    60-89
Days
Past Due
    90 Days
or More
    Total
Past
Due
    Current     Total
Financing
Receivables
    90 Days
and
Accruing
    Nonaccrual  

Commercial

  $ 2,098      $ 271      $ 1,912      $ 4,281      $ 64,573      $ 68,854      $ 0      $ 2,211   

Commercial real estate

    854        175        3,743        4,772        170,034        174,806        0        4,237   

Agricultural

    84        0        41        125        34,168        34,293        0        41   

Residential:

               

1-4 Family

    1,049        431        714        2,194        82,470        84,664        0        2,632   

Home equity

    141        0        233        374        31,730        32,104        0        329   

Consumer

    67        18        159        244        9,927        10,171        3        196   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,293      $ 895      $ 6,802      $ 11,990      $ 392,902      $ 404,892      $ 3      $ 9,646   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2010:

 

    30-59
Days

Past Due
    60-89
Days

Past Due
    90 Days
or More
    Total
Past
Due
    Current     Total
Financing
Receivables
    90 Days
and
Accruing
    Nonaccrual  

Commercial

  $ 526      $ 380      $ 1,807      $ 2,713      $ 62,591      $ 65,304      $ 1,037      $ 1,025   

Commercial real estate

    1,145        282        4,158        5,585        176,787        182,372        0        5,725   

Agricultural

    36        0        0        36        31,318        31,354        0        43   

Residential:

               

1-4 Family

    835        761        1,028        2,624        89,277        91,901        0        2,365   

Home equity

    54        41        68        163        32,730        32,893        0        126   

Consumer

    41        1        148        190        10,320        10,510        0        206   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $   2,650      $   1,465      $   7,196      $   11,311      $   403,023      $ 414,334      $ 1,037      $ 9,490   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

The below table represents loans considered impaired at September 30, 2011 and December 31, 2010 and the related allowance for loan losses. Interest income recognized is not materially different than interest income that would have been recognized on a cash basis (thousands):

September 30, 2011:

 

                      Average Recorded
Investment
    Interest Income
Recognized
 
    Recorded
Investment
    Unpaid
Principal
Balance
    Related
Allowance
    Three
months
ended

September  30,
2011
    Nine
months
ended

September  30,
2011
    Three
months
ended

September  30,
2011
    Nine
months
ended
September 30,
2011
 

With no related allowance recorded:

             

Commercial

  $ 1,292      $ 1,315      $ 0      $ 897      $ 1,013      $ 0      $ 0   

Commercial real estate

    3,170        3,256        0        4,205        3,572        41        63   

Agricultural

    0        0        0        0        0        0        0   

Residential-1 to 4 Family

    1,050        1,050        0        1,103        1,132        0        0   

Residential-Home equity

    0        0        0        0        0        0        0   

Consumer

    0        0        0        0        0        0        0   

With an allowance recorded:

             

Commercial

  $ 736      $ 766      $ 218      $ 1,221      $ 808      $ 0      $ 0   

Commercial real estate

    2,632        2,717        517        1,473        1,943        0        0   

Agricultural

    0        0        0        0        0        0        0   

Residential-1 to 4 Family

    0        0        0        0        0        0        0   

Residential-Home equity

    0        0        0        0        0        0        0   

Consumer

    0        0        0        0        0        0        0   

Total:

             

Commercial

  $ 2,028      $ 2,081      $ 218      $ 2,118      $ 1,845      $ 0      $ 0   

Commercial real estate

    5,802        5,973        517        5,678        5,515        41        63   

Agricultural

    0        0        0        0        0        0        0   

Residential-1 to 4 Family

    1,050        1,050        0        1,103        1,132        0        0   

Residential- Home equity

    0        0        0        0        0        0        0   

Consumer

    0        0        0        0        0        0        0   

 

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Table of Contents
December 31, 2010:    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest Income
Recognized
 

With no related allowance recorded:

              

Commercial

   $ 711       $ 734       $ 0       $ 814       $ 19   

Commercial real estate

     3,178         3,204         0         7,638         526   

Agricultural

     0         0         0         33         0   

Residential-1 to 4 Family

     1,163         1,165         0         411         38   

Residential-Home equity

     0         0         0         0         0   

Consumer

     0         0         0         0         0   

With an allowance recorded:

              

Commercial

   $ 191       $ 222       $ 82       $ 0       $ 0   

Commercial real estate

     2,681         2,752         560         0         0   

Agricultural

     0         0         0         0         0   

Residential-1 to 4 Family

     0         0         0         0         0   

Residential-Home equity

     0         0         0         0         0   

Consumer

              

Total:

              

Commercial

   $ 902       $ 956       $ 82       $ 814       $ 19   

Commercial real estate

     5,859         5,956         560         7,638         526   

Agricultural

     0         0         0         33         0   

Residential-1 to 4 Family

     1,163         1,165         0         411         38   

Residential-Home equity

     0         0         0         0         0   

Consumer

     0         0         0         0         0   

The Company’s financing receivables contain certain loans restructured in 2011 and determined to be troubled debt restructurings (“TDRs”) under Accounting Standards Update (“ASU”) No. 2011-02, which are summarized below (thousands):

 

     Three Months Ending
September 30, 2011
     Nine Months Ending
September 30, 2011
 
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
   Post-Modification
Outstanding
Recorded
Investment
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Commercial

     0          $ 0         0       $ 0       $ 0   

Commercial Real Estate

     0            0         2         1,681         1,610   

Residential

     0            0         0         0         0   

The above TDRs involved one loan where the term was extended and another loan restructured into two notes where the second note of approximately $65,000 was charged off by the Company. All TDRs are considered impaired loans.

 

17


Table of Contents

The Company had no loans classified as a TDR in the last twelve months where there was a payment default during the quarterly and year-to-date periods.

As a result of adopting the amendments in ASU 2011-02, the Company reassessed all restructurings occurring on or after January 1, 2011 for identification as TDRs. The Company identified as TDRs certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology. Upon identifying those receivables as TDRs, the Company identified them as impaired under the guidance in Accounting Standards Codification (“ASC”) 310-10-35. The ASU requires prospective application of the impairment measurement guidance in ASC 301-10-35 for those receivables newly identified as impaired. At the end of the first interim period of adoption, the recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under ASC 310-10-35 was $675,000, and the allowance for credit losses associated with those receivables, on the basis of a current evaluation of loss, was $0.

The Company acquired loans in the acquisition of the business of American National Bank on March 19, 2010 and the acquisition by merger of The Community National Bank on December 31, 2009. At the time of each acquisition, there was evidence of deterioration of credit quality since origination for which it was probable, at acquisition, all contractually required payments would not be collected. Accounting Codification Standard (“ASC”) 310-30 requires that acquired credit-impaired loans be recorded at fair value and prohibits carryover of the related allowance for loan losses. Loans within the scope of this accounting standard were initially recorded by the Company at fair value. The process of estimating fair value involves estimating the principal and interest cash flows expected to be collected on the credit impaired loans and discounting those cash flows at a market rate of interest. Under this accounting standard, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan in situations where there is reasonable expectation about the timing and amount of cash flows collected. The difference between contractually required payments at acquisition and the cash flows expected at acquisition to be collected, considering the impact of prepayments, is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will generally result in a charge to the provision for loan losses resulting in an increase to the allowance for loan losses. Subsequent increases in cash flows result in reversal of non-accretable discount (or allowance for loan losses to the extent any had been recorded) with a positive impact on interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, foreclosure, or troubled debt restructurings result in removal of the loan from the impaired loan portfolio at its carrying amount. Loans subject to this accounting standard are written down to an amount estimated to be collectible. Accordingly, such loans are no longer classified as nonaccrual even though they may be contractually past due. We expect to fully collect the new carrying values of such loans. If a loan, or a pool of loans, deteriorates post acquisition, a provision for loan losses is recorded. Acquired loans subject to this accounting standard are also excluded from the disclosure of loans 90 days or more past due and still accruing interest; however, the Bank’s regulatory reporting instructions require these loans to be reported as past due based upon the borrower’s contractual obligations. Even though substantially all of them are 90 days or more contractually past due, they are considered to be accruing because the interest income on these loans relates to the establishment of an accretable yield.

The carrying amount of those loans is included in the balance sheet amounts of loans receivable at September 30, 2011. The amounts are as follows (thousands):

 

Commercial

   $ 5,194   

Consumer

     9   
  

 

 

 

Outstanding balance

   $ 5,203   
  

 

 

 

Carrying amount, net of discount of $589

   $ 3,925   
  

 

 

 

Accretable yield

   $ 113   
  

 

 

 

 

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Accretable yield, or income expected to be collected, is as follows (thousands):

 

Balance at December 31, 2010

   $ 279   

Additions

     0   

Accretion

     (149

Disposals

     (17
  

 

 

 

Balance at September 30, 2011

   $ 113   
  

 

 

 

Note 4: Long-Term Debt

Long-term debt consisted of the following components (thousands):

 

     September 30,
2011
     December 31,
2010
 

Federal Home Loan Bank Advances

   $ 5,000       $ 5,000   

Junior subordinated debentures

     10,310         10,310   
  

 

 

    

 

 

 

Total

   $ 15,310       $ 15,310   
  

 

 

    

 

 

 

On June 25, 2007, NB&T Statutory Trust III (“Trust III”), a wholly owned subsidiary of the Company, closed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Capital Securities. The sole assets of Trust III are the junior subordinated debentures of the Corporation and payments thereunder. The junior subordinated debentures and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of Trust III under the Capital Securities. Distributions on the Capital Securities are payable quarterly at a fixed interest rate of 7.071% through September 6, 2012 and thereafter at the annual rate of 1.50% over the 3 month LIBOR. Distributions on the Capital Securities are included in interest expense in the consolidated financial statements. These securities are considered Tier I capital (with certain limitations applicable) under current regulatory guidelines.

The junior subordinated debentures are subject to mandatory redemption, in whole or in part, upon repayment of the Capital Securities at maturity or their earlier redemption at the liquidation amount. Subject to the Company having received prior approval of the Federal Reserve, if then required, the Capital Securities are redeemable prior to the maturity date of September 6, 2037, at the option of the Company. On or after September 6, 2012, the Capital Securities are redeemable at par. Upon occurrence of specific events defined within the trust indenture, the Capital Securities may also be redeemed prior to September 6, 2012 at a premium. The Company has the option to defer distributions on the Capital Securities from time to time for a period not to exceed 20 consecutive semi-annual periods.

As of September 30, 2011 and December 31, 2010, the outstanding principal balance of the Capital Securities was $10,000,000. As required by the Consolidation Topic of the Codification, the Company accounts for its investment in the trust as assets, its subordinated debentures as debt, and the interest paid thereon as interest expense.

 

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Note 5: Commitments

Outstanding commitments to extend credit as of September 30, 2011 totaled $80,452,000. Standby letters of credit as of September 30, 2011 totaled $2,450,000.

Note 6: Earnings Per Share

The factors used in the earnings per share computation were as follows (thousands, except share and per share amounts):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2011      2010      2011      2010  

Numerator:

           

Net income

   $ 1,130       $ 1,217       $ 3,184       $ 8,091   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted-average common shares outstanding (basic)

     3,424,162         3,398,773         3,424,162         3,398,781   

Effect of stock options

     6,137         1,457         11,894         902   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding (diluted)

     3,430,299         3,400,230         3,436,056         3,399,683   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ .33       $ .36       $ .93       $ 2.38   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ .33       $ .36       $ .93       $ 2.38   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2011 and September 30, 2010, stock options covering 217,200 and 248,000 shares of common stock, respectively, were not considered in computing earnings per share as their exercise prices exceeded the fair market value.

Note 7: Comprehensive Income

Other comprehensive income (loss) components and related taxes were as follows (thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2011     2010      2011     2010  

Unrealized gains on securities available for sale

   $ 1,632      $ 439       $ 2,097      $ 2,079   

Net unrealized gain on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income

     0        0         0        59   

Reclassification for amount realized in income

     (421     0         (1,200     50   
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income, before tax effect

     1,211        439         897        2,188   

Tax expense

     412        149         305        744   
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income

   $ 799      $ 29       $ 592      $ 1,444   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Total comprehensive income was as follows (thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2011      2010      2011      2010  

Net Income

   $ 1,130       $ 1,217       $ 3,184       $ 8,091   

Other Comprehensive Income

     799         290         592         1,444   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Comprehensive Income

   $ 1,929       $ 1,507       $ 3,776       $ 9,535   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 8: Accounting for Uncertainty in Income Taxes

The Company or one of its subsidiaries files income tax returns in the U.S. federal and Ohio jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local examinations by tax authorities for years before 2008.

The Income Taxes Topic of the Codification prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of September 30, 2011, the Company did not identify any uncertain tax positions that it believes should be recognized in the financial statements.

Note 9: Fair Value of Assets and Liabilities

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1

     Quoted prices in active markets for identical assets or liabilities

Level 2

     Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3

     Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

The following is a description of the valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such assets pursuant to the valuation hierarchy:

 

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Available-for-Sale Securities

The fair values of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include U.S. government agencies, mortgage-backed securities, and obligations of political and state subdivisions. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means.

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2011 and December 31, 2010 (thousands):

 

     Fair Value Measurements at Report Date Using  
Description    Fair
Value
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

September 30, 2011:

           

Available-for-sale securities

   $ 145,457       $ 0       $ 145,457       $ 0   

December 31, 2010:

           

Available-for-sale securities

   $ 133,855       $ 0       $ 133,855       $ 0   

The following is a description of the valuation methodologies used for assets measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such assets pursuant to the valuation hierarchy:

Impaired Loans (Collateral Dependent)

At September 30, 2011 and December 31, 2010, collateral-dependent impaired loans consisted primarily of loans secured by commercial real estate. Management has determined fair value measurements on impaired loans primarily through evaluations of appraisals performed. Management has determined fair value measurements based on management’s assessment of the collectability of current receivables and research of current equipment values.

Foreclosed assets

Real estate acquired through, or in lieu of, loan foreclosure is held for sale and initially recorded at fair value (based on current appraised value) at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Management has determined fair value measurements on real estate owned primarily through evaluations of appraisals performed.

 

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The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2011 and December 31, 2010:

 

     Fair Value Measurements at Report Date Using  
Description    Fair
Value
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

September 30, 2011:

           

Impaired loans

   $ 3,457       $ 0       $ 0       $ 3,457   

Foreclosed assets, net

     1,774         0         0         1,774   

December 31, 2010:

           

Impaired loans

   $ 2,792       $ 0       $ 0       $ 2,792   

Foreclosed assets, net

     72         0         0         72   

The following table presents estimated fair values of the Company’s financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate (thousands):

 

     September 30, 2011      December 31, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Financial assets

           

Cash and cash equivalents

   $ 65,219       $ 65,219       $ 81,751       $ 81,751   

Available-for-sale securities

     145,457         145,457         133,855         133,855   

Loans, including loans held for sale, net

     401,525         411,673         411,264         418,683   

Stock in FRB and FHLB

     10,025         10,025         10,021         10,021   

Earned income receivable

     3,023         3,023         2,909         2,909   

FDIC loss share receivable

     1,979         1,979         2,078         2,078   

Financial liabilities

           

Deposits

     576,391         579,801         584,373         588,424   

Short-term borrowings

     1,175         1,175         12,779         12,779   

Long-term debt

     15,310         21,889         15,310         21,746   

Interest payable

     206         206         352         352   

For purposes of the above disclosures of estimated fair value, the following assumptions were used as of September 30, 2011 and December 31, 2010. The estimated fair value for cash and cash equivalents, FRB and FHLB stock, FDIC loss share receivable, earned income receivable, demand deposits, savings accounts, NOW accounts, certain money market deposits, short-term borrowings, and interest payable is considered to approximate cost. The estimated fair value for loans receivable, including loans held for sale, net, is based on estimates of the rate the Bank would charge for similar loans at September 30, 2011 and December 31, 2010 applied for the time period until the loans are assumed to reprice or be paid. The estimated fair value for fixed-maturity time deposits as well as long-term debt is based on estimates of the rate the Bank would pay on such liabilities at September 30, 2011 and December 31, 2010, applied for the

 

23


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time period until maturity. The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit and lines of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. At September 30, 2011 and December 31, 2010, the fair value of commitments was not material.

Note 10: Effect of Recent Accounting Standards

In July 2010, the FASB issued an update to the Financial Accounting Standards Codification (ASU No. 2010-20), which requires companies to provide more information in their financial statement disclosures about the credit quality of their loans and the credit reserves held against them. The additional disclosures include aging of past-due loans and credit quality indicators. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. As of September 30, 2011, these new disclosures are included in Note 3 of the financial statements.

The Financial Accounting Standards Board finalized Accounting Standards Update No. 2011-02 in April 2011 to give banks new criteria for determining whether a particular loan modification represents a troubled debt restructuring for accounting purposes. The determination is significant because it signals when a bank should also record an impairment loss associated with the same loan. The new guidance is effective for quarterly and annual reports for periods beginning on or after June 15, 2011 and should be applied retroactively to the beginning of the annual period of adoption. As of September 30, 2011, these new disclosures are included in Note 3 of the financial statements.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, which contains amendments explaining further how to measure fair value. The amendments in this Update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, liability or a financial instrument. The amendments also require disclosures about quantitative information about the unobservable inputs under in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The amendments are to be applied prospectively and are effective for periods beginning after December 15, 2011. The Company is currently in the process of evaluating the impact of adopting the amended guidance on the Company’s Condensed Consolidated Financial Statements.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, which will increase the prominence of other comprehensive income (“OCI”) in the financial statements, no longer allowing OCI to be presented in the Statement of Changes in Equity. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, but the Company has not elected early application. This new disclosure will be provided, starting in 2012.

In September 2001, the FASB issued Accounting Standards Update No. 2011-08 regarding the testing for goodwill impairment. Under the revised standard, an entity will be allowed to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amendments are effective or annual or interim goodwill impairment tests performed for fiscal years beginning after December 15, 2001. Early adoption is permitted.

 

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Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

NB&T Financial Group, Inc.

Wilmington, Ohio

We have reviewed the accompanying condensed consolidated balance sheet of NB&T Financial Group, Inc. as of September 30, 2011 and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2011 and 2010 and cash flows for the nine-month periods ended September 30, 2011 and 2010. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2010 and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 15, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ BKD, LLP

Cincinnati, Ohio

November 10, 2011

 

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Table of Contents

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Net income for the third quarter of 2011 was $1.1 million, or $.33 per share, compared to net income for the third quarter of 2010 of $1.2 million, or $.36 per share. Net income for the first nine months of 2011 was $3.2 million, or $.93 per share, compared to $8.1 million, or $2.38 per share for the same period in 2010. Net income for 2010 was higher largely due to a bargain purchase pre-tax gain of approximately $7.6 million in the Federal Deposit Insurance Corporation (“FDIC”) assisted acquisition of certain of the assets and liabilities of American National Bank (“ANB”). In addition, the Company realized a pre-tax gain of $1.4 million on the sale of its insurance agency in January 2010.

Net Interest Income

Net interest income was $5.8 million for the third quarter of 2011, compared to $6.2 million for the third quarter of 2010. Net interest margin decreased to 3.67% for the third quarter of 2011, compared to 3.84% for the same quarter last year. The net interest margin decreased primarily due to a decline in higher-yielding loans and reinvestment in lower-yielding overnight funds and investments. Average loans outstanding for the third quarter of 2011, which had an average rate of 5.74%, decreased to $404.9 million from $432.2 million from the same quarter last year. Due to increased liquidity from lower loan demand, the Company lowered rates on interest-bearing deposits and reduced higher cost Federal Home Loan Bank debt by $24.5 million, decreasing the cost of interest-bearing liabilities from 1.40% for the third quarter of 2010 to .84% for the third quarter of 2011. Net interest margin for the first nine months of 2011 was 3.82%, compared to 3.88% for the first nine months of 2010.

Provision for Loan Losses

The provision for loan losses for the third quarter of 2011 was $475,000, compared to $225,000 in the same quarter last year. Net charge-offs were $466,000 in the third quarter of 2011, compared to $132,000 in the third quarter of 2010. The provision for loan losses was $1,410,000 for the first nine months of 2011, compared to $1,185,000 for the first nine months of 2010. Net charge-offs for the first nine months of 2011 were $1.6 million, compared to $1.0 million for the same period last year. Charge-offs in 2011 increased primarily due to the first quarter write-down of one commercial real estate loan. The Company later foreclosed on this loan and the property securing the loan was sold. The provision for loan losses is based on management’s evaluation of the loan loss allowance considering specific loan reserves, general reserves related to charge-off experience and current economic conditions. Non-performing loans increased to $11.1 million at September 30, 2011, compared to $8.8 million at September 30, 2010. The year-over-year increase in non-performing loans is due primarily to two southwest Ohio commercial relationships, each between $850,000 and $950,000 and secured by commercial real estate or all business assets and one restructured mortgage loan for approximately $450,000.

Non-interest Income

Total non-interest income was $2.6 million for the third quarter of 2011, compared to $1.9 million for the third quarter of 2010. In the third quarter of 2011, the Company sold approximately $7.2 million in securities and realized gains of $421,000. No securities were sold in the third quarter of last year. In addition, NSF fee income and commission income on the sales of non-deposit investment products increased in the third quarter of 2011. Total non-interest income for the first nine months of 2011 was $7.0 million, compared to $14.5 million for the first nine months of 2010. In the first nine months of 2010, the Company had a bargain purchase pre-tax gain of approximately $7.6 million in the FDIC assisted acquisition of certain of the assets and liabilities of ANB. In addition, the Company realized a pre-tax gain of $1.4 million on the sale of its insurance agency in January 2010. In the first nine months of 2011, the Company sold approximately $31.0 million in securities and realized gains of $1.2 million, compared to no

 

26


Table of Contents

securities sales gains for the same period in 2010. The securities were sold to take advantage of significant increases in market values due to recent declines in interest rates.

Non-interest Expense

Total non-interest expense was $6.2 million for the third quarter of 2011, relatively unchanged from the $6.2 million for the third quarter of 2010. For the first nine months of 2011, non-interest expense was $19.0 million, compared to $20.0 million for the first nine months of 2010. Non-interest expenses for the first nine months of 2010 were higher due to increased bonus plan expense and acquisition related expenses.

Income Taxes

The provision for income taxes for the third quarter of 2011 was $432,000, or 27.7%, compared to $450,000, or 27.0%, for the third quarter of 2010. The provision for income taxes for the first nine months of 2011 was $1.2 million, or 27.0%, compared to $3.6 million, or 30.5%, for the first nine months of 2010. The higher effective tax rate for the first half of 2010 was primarily due to the increase in taxable income at the full 34% marginal rate.

Financial Condition

The changes that have occurred in the Company’s financial condition during 2011 are as follows (in thousands):

 

     September 30,      December 31,      2011 Change  
     2011      2010      Amount     Percent  

Total assets

   $ 674,030       $ 690,618       $ (16,588     (2.4

Interest-earning deposits

     54,425         72,678         (18,253     (25.1

Federal funds sold

     375         380         (5     (1.3

Loans, net*

     401,525         411,264         (9,739     (2.4

Securities

     145,457         133,855         11,602        8.7   

Demand deposits

     89,868         105,187         (15,319     (14.6

Savings, NOW, MMDA deposits

     330,132         292,773         37,359        12.8   

CD’s $100,000 and over

     39,739         48,217         (8,478     (17.6

Other time deposits

     116,652         138,196         (21,544     (15.6

Total deposits

     576,391         584,373         (7,982     (1.4

Short-term borrowings

     1,175         12,779         (11,604     (90.8

Long-term borrowings

     15,310         15,310         0        0   

Stockholders equity

     71,845         71,019         826        1.2   

 

* Includes loans held for sale

At September 30, 2011, total assets were $674.0 million, a decrease of $16.6 million from December 31, 2010. The decrease is primarily attributable to the use of interest-earning deposits to pay off $12.0 million in maturing Federal Home Loan Bank debt in January 2011. In addition, net loans declined $9.7 million in the first nine months of 2011 due to decreased loan demand and increased competitive factors.

Average total assets declined $20.8 million, or 3.0%, to $678.9 million from the third quarter of 2010. Average total gross loans decreased to $404.9 million, a decrease of $27.3 million from the same quarter last year. The decline is largely the result of decreased loan demand and increased sales of fixed-rate residential mortgage loans into the secondary market. Commercial loan balances declined $8.4 million from the same quarter last year, while home equity and personal loans also declined $1.6 million and $4.2 million, respectively. Most of the decline in loan demand has occurred as borrowers uncertain about current economic conditions choose to reduce their debt. Residential mortgage loans declined $13.1

 

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million in the third quarter of 2011, compared to the same quarter last year, with the bank’s serviced portfolio for sold mortgage loans increasing $12.0 million. Lower rates in the secondary mortgage market have led to increased sales of mortgage loans. Average securities balances declined from the same quarter last year to $143.0 million, a decrease of $8.4 million, while average interest-earning deposits and federal funds sold increased $17.8 million.

Average total deposit liabilities increased $4.8 million for the third quarter of 2011 to $585.6 million, compared to an average of $580.8 million for the same quarter last year. The Company has experienced growth in transaction and money market accounts and a decline in certificates of deposit as depositors have chosen to keep their funds in more liquid deposits that offer comparable rates to shorter-term certificates of deposit. As loan demand declined, the Company lowered rates on interest-bearing deposits in order to lower its cost of funds, resulting in a small decline in deposit balances. Average borrowings also declined to $16.1 million in the third quarter of 2011, compared to $40.5 million in the same quarter last year due to the payoff of $24.5 million in FHLB debt in December 2010 and January 2011.

Allowance for Loan Losses

The following table is a summary of the Company’s loan loss experience for the periods ended September 30, 2011 and 2010 (dollars in thousands):

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2011     2010     2011     2010  

Balance at beginning of period

   $ 3,475      $ 3,842      $ 3,714      $ 3,776   

Charge-offs:

        

Commercial and industrial

     (299     (77     (303     (77

Commercial real estate

     (36     (9     (1,125     (540

Real estate construction

     0        0        (2     0   

Agricultural

     (2     0        0        0   

Residential real estate

     (106     (84     (283     (439

Consumer

     (45     (44     (156     (148
  

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (488     (214     (1,869     (1,204
  

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

        

Commercial and industrial

     1        2        14        4   

Commercial real estate

     10        55        143        74   

Real estate construction

     0        2        0        4   

Agricultural

     1        1        4        6   

Residential real estate

     1        0        9        9   

Consumer

     9        22        59        81   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     22        82        229        178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (466     (132     (1,640     (1,026

Provision for loan losses

     475        225        1,410        1,185   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 3,484      $ 3,935      $ 3,484      $ 3,935   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth selected information regarding the Company’s loan quality at the dates indicated (in thousands):

 

    September 30,
2011
    December 31,
2010
    September 30,
2010
 

Loans accounted for on non-accrual basis

  $ 9,646      $ 9,490      $ 8,847   

Accruing loans which are past due 90 days

    3        1,037        0   

Renegotiated loans

    2,060        457        0   

Other real estate owned

    4,236        4,254        3,995   
 

 

 

   

 

 

   

 

 

 

Total non-performing assets

  $ 15,945      $ 15,238      $ 12,842   
 

 

 

   

 

 

   

 

 

 

Ratios:

     

Allowance to total loans

    0.86     0.89     0.92

Net charge-offs to average loans (annualized)

    0.54     0.40     0.33

Non-performing assets to total loans and other real estate owned

    3.90     3.63     2.98

The allowance is maintained to absorb losses in the portfolio. Management’s determination of the adequacy of the reserve is based on reviews of specific loans, loan loss experience, general economic conditions and other pertinent factors. If, as a result of charge-offs or increases in risk characteristics of the loan portfolio, the reserve is below the level considered by management to be adequate to absorb possible loan losses, the provision for loan losses is increased. Loans deemed not collectible are charged off and deducted from the reserve. Recoveries on loans previously charged off are added to the reserve.

The Company allocates the allowance for loan losses to specifically classified loans and non-classified loans generally based on the one- and three-year net charge-off history. In assessing the adequacy of the allowance for loan losses, the Company considers three principal factors: (1) the one- and three-year rolling average charge-off percentage applied to the current outstanding balance by portfolio type; (2) specific percentages applied to individual loans estimated by management to have a potential loss; and (3) estimated losses attributable to economic conditions. Economic conditions considered include estimated changes in real estate values, unemployment levels, the condition of the agricultural business, and other local economic factors.

During the first nine months of 2011, the Company charged off approximately $591,000 on one commercial real estate loan. The property securing the loan was obtained in foreclosure, and the Company sold the property to a third party in the third quarter. As of September 30, 2011, there was $6.5 million in small business relationships on nonaccrual. Approximately $2.1 million of this amount consisted of two relationships, all secured by commercial real estate or business assets. Several other non-performing commercial loans totaling approximately $697,000 were acquired from ANB, which are covered under the Company’s FDIC loss share agreement with the FDIC sharing in 80% of any future losses on these loans. Non–accrual residential real estate loans totaled $2,632,000 with the largest balance being $305,000. In addition, approximately $726,000 were acquired from ANB and are covered under the FDIC loss share agreement. Non-accrual consumer loans totaled $196,000, and home equity credit loans totaled $329,000.

Liquidity and Capital Resources

Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as Company cash needs, are met. The Company manages liquidity on both the asset and liability sides of the balance sheet. The loan-to-deposit ratio at September 30, 2011 was 70.3%, compared to 71.0% at December 31, 2010 and 71.7% at the same date in 2010. Loans to total assets were 60.1% at the end of the third quarter of 2011, compared to 60.1% at December 31, 2010 and 59.8% at the same time last year. At September 30, 2011, the Company had $54.4 million in interest-earning deposits. The Company has $145.5 million in available-for-sale securities that are readily marketable. Approximately 59.6% of the

 

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available-for-sale portfolio is pledged to secure public deposits, short-term and long-term borrowings and for other purposes as required by law. The balance of the available-for-sale securities could be sold if necessary for liquidity purposes. Also, a stable deposit base, consisting of 93.1% core deposits, makes the Company less susceptible to large fluctuations in funding needs. The Company has the ability to borrow short-term funds from two correspondent banks and the Federal Reserve Bank. The Company also has both short- and long-term borrowing available through the Federal Home Loan Bank (FHLB). The Company has the ability to obtain deposits in the brokered certificate of deposit market to help provide liquidity to fund loan growth.

The Federal Reserve Board has adopted risk-based capital guidelines that assign risk weightings to assets and off-balance sheet items and also define and set minimum capital requirements (risk-based capital ratios). At September 30, 2011 and December 31, 2010, the Company had the following risk-based capital ratios, which are well above the regulatory minimum requirements (dollar amounts in thousands):

 

     Actual     For Capital Adequacy
Purposes
    To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of September 30, 2011

               

Total Risk-Based Capital
(to Risk-Weighted Assets)

               

Consolidated

   $ 78,655         18.86   $ 33,366         8.0     N/A         N/A   

Bank

     73,171         17.56        33,337         8.0      $ 41,671         10.0

Tier I Capital
(to Risk-Weighted Assets)

               

Consolidated

     75,171         18.02        16,683         4.0        N/A         N/A   

Bank

     69,687         16.72        16,669         4.0        25,003         6.0   

Tier I Capital
(to Average Assets)

               

Consolidated

     75,171         11.09        27,005         4.0        N/A         N/A   

Bank

     69,687         10.35        26,925         4.0        33,656         5.0   

As of December 31, 2010

               

Total Risk-Based Capital
(to Risk-Weighted Assets)

               

Consolidated

   $ 78,385         18.36   $ 34,161         8.0     N/A         N/A   

Bank

     69,514         16.31        34,099         8.0      $ 42,623         10.0

Tier I Capital
(to Risk-Weighted Assets)

               

Consolidated

     74,671         17.49        17,081         4.0        N/A         N/A   

Bank

     65,800         15.44        17,049         4.0        25,574         6.0   

Tier I Capital
(to Average Assets)

               

Consolidated

     74,671         10.65        28,033         4.0        N/A         N/A   

Bank

     65,800         9.45        27,846         4.0        34,807         5.0   

 

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CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The Company’s significant accounting policies are described in detail in the notes to the Company’s consolidated financial statements for the year ended December 31, 2010. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.

Allowance for Loan Losses - The allowance for loan losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, collateral values, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and historical loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for loan losses relating to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.

Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company’s evaluation of risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.

Fair Value of Securities - The Company uses the Fair Value Measurements prescribed under the FASB Accounting Standards Codification to value its securities. The ASC defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The ASC also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1

   Quoted prices in active markets for identical assets or liabilities

Level 2

   Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

 

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Level 3

   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

The fair value of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include U.S. Government agency securities, mortgage-backed securities, and obligations of political and state subdivisions. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means.

Goodwill and Other Intangibles - The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required by the “Intangibles – Goodwill & Other” topic of the FASB Accounting Standards Codification. Goodwill is subject, at a minimum, to annual tests for impairment. Testing includes evaluating the current market price of the stock versus book value, the current economic value of equity versus current book value, and recent market sales of financial institutions. Based on the review of all three factors, management has concluded goodwill is not impaired. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to interest rate risk, exchange rate risk, equity price risk and commodity price risk. The Company does not maintain a trading account for any class of financial instrument, and is not currently subject to foreign currency exchange rate risk, equity price risk or commodity price risk. The Company’s market risk is composed primarily of interest rate risk.

The Bank manages its interest rate risk regularly through its Asset/Liability Committee. The Committee meets on a monthly basis and reviews various asset and liability management information, including but not limited to, the Bank’s interest rate risk position, liquidity position, projected sources and uses of funds and economic conditions.

The Bank uses simulation models to manage interest rate risk. In the Bank’s simulation models, each asset and liability balance is projected over a two-year horizon. Net interest income is then projected based on expected cash flows and projected interest rates under a stable rate scenario and analyzed on a monthly basis. The results of this analysis are used in decisions made concerning pricing strategies for loans and deposits, balance sheet mix, securities portfolio strategies, liquidity and capital adequacy. The Bank’s current one-year simulation model under stable rates indicates increasing yields on interest-earning assets will exceed increasing costs of interest-bearing liabilities. This position could have a positive effect on projected net interest margin over the next twelve months.

Simulation models are performed for 100, 200, 300 and 400 basis point increases ramped up over a two year period and also for immediate rate shocks. Due to the low interest rate environment, the down rate changes were not modeled. These rate changes are modeled using both projected dynamic balance sheets and a flat static balance sheet over a two-year period. The results of these simulation models are compared with the stable rate simulation. The model includes assumptions as to repricing and expected prepayments, anticipated calls, and expected decay rates of transaction accounts under the different rate scenarios. The results of these simulations include changes in both net interest income and market value of equity. ALCO

 

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guidelines that measure interest rate risk by the percent of change from stable rates, and capital adequacy, have been established, and as the table below indicates at September 30, 2011, the Bank was within the guidelines established by the Board for net interest income changes for increasing rate changes of 100, 200, 300 and 400 basis points. Economic value of equity changes for the same rate changes exceeded the ALCO guidelines due to increasing value of the Bank’s core deposit base. This variance was reviewed by the Board. Because the variance indicates a long-term positive impact, the Board approved the exception at this time.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the simulation modeling. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market rates. In addition, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawals from certificates of deposit may deviate significantly from those assumed in making the risk calculations. The Bank’s rate ramp simulation models provide results in extreme interest rate environments and results are used accordingly. Reacting to changes in economic conditions, interest rates and market forces, the Bank has been able to alter the mix of short-and long-term loans and investments, and increase or decrease the emphasis on fixed- and variable-rate products in response to changing market conditions.

 

    Net Interest Income
Change
    Economic Value of Equity
Change
 

Rate Ramp

  9/30/11     ALCO
Guideline
    9/30/11     ALCO
Guideline
 
+400     3.52     +20     25.6     +30
+300     2.17        +15     22.1        +20   
+200     .97        +10        17.4        +15   
+100     .14        +5          10.3        +10   

Item 4 – Controls and Procedures

(a) The Company’s principal executive officer and principal financial officer have concluded, based upon their evaluation of the Company’s disclosure controls and procedures (as defined in Rule 12a-15e under the Securities Exchange Act of 1934) as of September 30, 2011, that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) During the quarter ended September 30, 2011, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Not applicable

Item 1A – Risk Factors

For a discussion of the Company’ risk factors, please see Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 15, 2011, and available at www.sec.gov. These risk factors could materially affect the Company’s business, financial condition or future results. The risk factors described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that management currently deems to be immaterial also may adversely affect the Company’s business, financial condition and/or operating results. Moreover, the Company undertakes no obligation and disclaims any intention to publish revised information or updates to forward-looking statements contained in such risk factors or in any other statement made at any time by any director, officer, employee or other representative of the Company unless and until any such revisions or updates are expressly required to be disclosed by applicable securities laws or regulations.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable

(c) Not applicable

Item 3 – Defaults Upon Senior Securities

Not applicable

Item 4 – Reserved

Item 5 – Other Information

Not applicable

Item 6 – Exhibits

 

Exhibit

Number

 

Index to Exhibits

 3.1   Third Amended and Restated Articles of Incorporation of NB&T Financial Group, Inc.
 3.2   Amended and Restated Code of Regulations of NB&T Financial Group, Inc.
4      Agreement to furnish instruments and agreements defining rights of holders of long-term debt
15       Accountants’ acknowledgement
31.1   Certification by CEO.
31.2   Certification by CFO.
32.1   Certification by CEO Pursuant to 18 U.S.C. Section 1350.
32.2   Certification by CFO Pursuant to 18 U.S.C. Section 1350.
101*        The following materials from NB&T Financial Group, Inc.’s, Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010; (ii) the Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2011 and 2010 (unaudited); (iii) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (unaudited); and (iv) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text (furnished herewith). *As provided in Rule 406T of SEC Regulation S-T, the Interactive Data Files are furnished and not deemed filed or part of a Registration Statement or prospectus for purposes of Sections 11 and 12 of the Securities Exchange Act of 1933, as amended, and are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      NB&T FINANCIAL GROUP, INC.
Date: November 10, 2011      

/s/ Craig F. Fortin

      Craig F. Fortin
     

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

 

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Index to Exhibits

 

Exhibit

Number

    

Description

    

Location

 3.1

     Third Amended and Restated Articles of Incorporation of NB&T Financial Group, Inc.      Incorporated by reference to registrant’s Definitive Proxy Statement filed on March 21, 2003, Exhibit A (SEC File No. 000-23134)

3.2

     Amended and Restated Code of Regulations of NB&T Financial Group, Inc.     

Incorporated by reference to registrant’s Definitive Proxy Statement filed on March 21, 2003, Exhibit B

(SEC File No. 000-23134)

4   

     Agreement to furnish instruments and agreements defining rights of holders of long-term debt      Included herewith

15   

     Accountants’ acknowledgement.      Included herewith

31.1

     Certification by CEO.      Included herewith

31.2

     Certification by CFO.      Included herewith

32.1

     Certification by CEO Pursuant to 18 U.S.C Section 1350.      Included herewith

32.2

     Certification by CFO Pursuant to 18 U.S.C. Section 1350.      Included herewith

101*     

     The following materials from NB&T Financial Group, Inc.’s, Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010; (ii) the Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2011 and 2010 (unaudited); (iii) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (unaudited); and (iv) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text (furnished herewith). *As provided in Rule 406T of SEC Regulation S-T, the Interactive Data Files are furnished and not deemed filed or part of a Registration Statement or prospectus for purposes of Sections 11 and 12 of the Securities Exchange Act of 1933, as amended, and are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.      Included herewith

 

36