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 March 31, 2010

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 incorporation or organization)		(I.R.S. Employer 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  ¨    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 May 3, 2010, 3,410,674 common shares were issued and outstanding.

 

 

 

---

Table of Contents

NB&T FINANCIAL GROUP, INC.

March 31, 2010 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		18
Item 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3:		Quantitative and Qualitative Disclosures about Market Risk		24
Item 4:		Controls and Procedures		25
		Part II
Item 1:		Legal Proceedings		26
Item 1A:		Risk Factors		26
Item 2:		Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 3:		Defaults Upon Senior Securities		27
Item 4:		Submission of Matters to a Vote of Security Holders		27
Item 5:		Other Information		27
Item 6:		Exhibits and Reports on Form 8-K		27
Signatures				28
Index to Exhibits				29

 

2

---

Table of Contents

NB&T Financial Group, Inc.

Condensed Consolidated Balance Sheets

 

(Dollars in thousands)		March 31, 2010				December 31, 2009
		(Unaudited)
Assets
Cash and due from banks		$	10,128			$	12,392
Interest-bearing deposits			59,709				40,759
Federal funds sold			420				448
Cash and cash equivalents			70,257				53,599
Securities - available-for-sale			152,537				142,424
Loans held for sale			300				274
Loans, net of allowance for loan losses of $3,644 and $3,776			428,427				391,772
Premises and equipment			20,270				20,455
Federal Reserve and Federal Home Loan Bank stock			10,021				9,847
Earned income receivable			2,947				3,053
Goodwill			3,625				3,825
Core deposits and other intangibles			1,580				1,956
Bank-owned life insurance			14,638				14,522
Other real estate owned			4,137				3,455
FDIC loss share receivable			3,309
Other assets			5,174				4,158
Total assets		$	717,222			$	649,340
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand		$	93,253			$	89,827
Savings, NOW and Money Market			284,327				262,629
Time			220,224				188,966
Total deposits			597,804				541,422
Short-term borrowings			505				406
Long-term debt			39,810				39,810
Interest payable and other liabilities			9,226				3,217
Total liabilities			647,345				584,855
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			11,792				11,765
Retained earnings			60,011				55,390
Unearned employee stock ownership plan (ESOP) shares			(311	)			(359	)
Accumulated other comprehensive income			2,036				1,340
Treasury stock; 408,276 shares – 2010 and 408,262 shares – 2009			(4,651	)			(4,651	)
Total stockholders’ equity			69,877				64,485
Total liabilities and stockholders’ equity		$	717,222			$	649,340

See Notes to Condensed Consolidated Financial Statements

 

3

---

Table of Contents

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Income

 

		Three Months Ended March  31,
(Dollars in thousands, except per share amounts)		2010				2009
		(Unaudited)
Interest and Dividend Income
Loans		$	6,010			$	5,037
Securities-taxable			1,146				897
Securities-tax-exempt			161				277
Federal funds sold and other			32				70
Dividends on Federal Home Loan and Federal Reserve Bank stock			114				109
Total interest and dividend income			7,463				6,390
Interest Expense
Deposits			1,333				1,440
Long-term debt			513				513
Total interest expense			1,846				1,953
Net Interest Income			5,617				4,437
Provision for Loan Losses			435				250
Net Interest Income After Provision for Loan Losses			5,182				4,187
Non-interest Income
Trust income			227				212
Service charges and fees			1,048				795
Insurance agency commissions			—				638
Gain on bargain purchase			7,572				—
Gain on sale of insurance agency			1,390				—
Other-than-temporary losses on investments:
Total other-than-temporary losses			(423	)			—
Portion of loss recognized in other comprehensive income (before taxes)			373				—
Net impairment losses recognized in earnings			(50	)			—
Other income			412				289
Total non-interest income			10,599				1,934
Non-interest Expense
Salaries and employee benefits			4,412				2,875
Net occupancy expense			639				502
Equipment and data processing expense			793				724
FDIC Insurance			182				348
Professional fees			520				110
Marketing expense			158				196
State franchise tax			194				177
Amortization of intangibles			86				43
Other			512				413
Total non-interest expense			7,496				5,388
Income Before Income Tax			8,285				733
Provision for Income Taxes			2,680				74
Net Income		$	5,605			$	659
Basic Earnings Per Share		$	1.65			$	.21
Diluted Earnings Per Share		$	1.65			$	.21
Dividends Declared Per Share		$	.29			$	.29

See Notes to Condensed Consolidated Financial Statements

 

4

---

Table of Contents

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows

 

		Three Months Ended, March 31
(Dollars in thousands)		2010				2009
		(Unaudited)
Operating Activities
Net income		$	5,605			$	659
Items not requiring (providing) cash
Depreciation and amortization			431				439
Provision for loan losses			435				250
Amortization of premiums and discounts on securities			341				(36	)
Other-than-temporary impairment of securities			50				—
Gain on bargain purchase			(7,572	)			—
Gain on sale of insurance agency			(1,390	)			—
Net change in:
Loans held for sale			(26	)			(388	)
Other assets and liabilities			4,513				(1,489	)
Net cash provided by (used in) operating activities			2,387				(565	)
Investing Activities
Purchases of available-for-sale securities			(61,279	)			(26,496	)
Proceeds from maturities of available-for-sale securities			51,829				7,567
Net change in loans			5,125				9,590
Purchase of Federal Reserve Bank stock			(174	)
Net cash from acquisition, including $9,493 of proceeds from FDIC			25,821				—
Proceeds from sale of insurance agency			2,276				—
Purchase of premises and equipment			(153	)			(292	)
Net cash provided by (used in) investing activities			23,445				(9,631	)
Financing Activities
Net change in:
Deposits			(8,289	)			5,191
Short-term borrowings			99				(861	)
Purchase of treasury shares			—				(23	)
Cash dividends			(984	)			(912	)
Net cash provided by (used in) financing activities			(9,174	)			3,395
Increase (Decrease) in Cash and Cash Equivalents			16,658				(6,801	)
Cash and Cash Equivalents, Beginning of Year			53,599				54,639
Cash and Cash Equivalents, End of Period		$	70,257			$	47,838
Supplemental Cash Flows Information
Interest paid		$	1,827			$	1,946
Income taxes paid (net of refunds)			20				33
Assets acquired in business combination			72,313				—
Liabilities assumed in business combination			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. Only material changes in financial condition and results of operations are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The condensed consolidated balance sheet as of December 31, 2009 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 March 31, 2010, and December 31, 2009, and the results of its operations and cash flows for the three-month periods ended March 31, 2010 and 2009. 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, 2009 filed with the Commission.

Note 2: Business Combination

On March 19, 2010, the Company acquired through its subsidiary, The National Bank and Trust Company (“NB&T”), the banking operations of American National Bank (“American National”), based in Parma, Ohio, under a Purchase and Assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”). The Office of the Comptroller of the Currency declared American National closed and appointed the FDIC as receiver. NB&T did not pay the FDIC a premium for the deposits of American National. In addition to assuming all of the deposits of the failed bank, NB&T agreed to purchase essentially all of the assets. The book value of the net assets of American National were acquired from the FDIC at a $10.0 million discount. The acquisition did not include the mortgage servicing business conducted by American National by its division Leader Financial Services. The FDIC and NB&T entered into a loss-share transaction on $48.2 million of American National assets. NB&T will share in the losses on the asset pools covered under the loss-share agreement. Under the loss-share agreement, NB&T shares in 20% of losses for the first $8.0 million in losses and 5% for any losses in excess of $8.0 million.

The Company engaged in the transaction in the expectation that it would realize increased profits through increasing its loans receivable and deposits within a new market area.

During the quarter, the Company incurred $103,000 of third-party acquisition-related costs. The expenses are included in professional fees in the Company’s condensed consolidated statement of income for the quarter ended March 31, 2010.

The acquisition was accounted for under the acquisition method of accounting in accordance with the Business Combinations topic of the FASB Accounting Standards Codification (“Codification”). The statement of net assets acquired as of March 19, 2010, proceeds from the FDIC and the computation of the gain on bargain purchase related to the merger are presented in the table below. The assets and liabilities of American National were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. The pro forma consolidated condensed statements of income for the Company and American National for the quarters ended March 31, 2010 and 2009, are also presented below. The unaudited pro forma information presented does not necessarily reflect the results of operations that would have resulted had the merger been completed at the beginning of the applicable periods presented, nor does it indicate the results of operations in future periods.

 

6

---

Table of Contents

Statement of Net Assets Acquired (at fair value)

 

ASSETS					Proceeds from FDIC & Gain on Purchase
Cash and cash equivalents		$	16,328
Receivable from FDIC			9,493		Proceeds from FDIC		$	9,493
Covered loans			42,215		ANB carrying value of net assets acquired			507
Core deposit intangible			280		Total Asset Discount			10,000
FDIC loss share receivable			3,309
Other assets			688		Adjustments to reflect assets acquired and liabilities assumed at fair value:
Total assets			72,313		Covered loans			(5,424	)
					FDIC Loss share receivable			3,309
LIABILITIES					Intangible assets			280
Deposits			64,671		Other assets			(593	)
Other liabilities			2,645
Total liabilities			67,316		Fair value of net assets acquired			(2,428	)
					Gain on bargain purchase		$	7,572
Net assets acquired		$	4,997

The fair value of the loans acquired, excluding those considered impaired under the Receivables topic of the Codification, is $39,892,000. The gross amount due under the contracts is $43,341,000, of which $2,572,000 is expected to be uncollectible. The fair value of impaired loans acquired is outlined in Note 4.

 

		Pro Forma Quarter Ended March 31, 2010			Pro Forma Quarter Ended March 31, 2009
Interest income		$	8,127		$	7,366
Interest expense			2,023			2,422
Net interest income			6,104			4,944
Provision for loan losses			493			342
Non-interest income			10,657			9,621
Non-interest expenses			8,060			5,941
Income before income taxes			8,208			8,282
Income taxes			2,680			2,648
Net income		$	5,528		$	5,634

The proforma consolidated condensed statements of income do not reflect any adjustments to American National’s historical provision for loan losses and goodwill impairment charges.

 

7

---

Table of Contents

Note 3: 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
March 31, 2010:
U.S. government sponsored entities		$	28,586		$	9		$	(21	)		$	28,574
Mortgage-backed securities:
U.S. Government sponsored entities-residential			90,898			2,734			(64	)			93,568
Private label-residential			13,342			387			(546	)			13,183
State and political subdivisions			16,626			586			—				17,212
		$	149,452		$	3,716		$	(631	)		$	152,537
December 31, 2009:
U.S. government sponsored entities		$	14,633		$	10		$	(17	)		$	14,626
Mortgage-backed securities:
U.S. Government sponsored entities-residential			95,298			2,083			(220	)			97,161
Private label-residential			13,030			364			(623	)			12,771
State and political subdivisions			17,431			438			(3	)			17,866
		$	140,392		$	2,895		$	(863	)		$	142,424

The amortized cost and fair value of securities available for sale at March 31, 2010, 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		$	28,586		$	28,574
After one year through five years			3,611			3,862
After five years through ten years			4,961			5,158
After ten years			8,054			8,192
			45,212			45,786
Mortgage-backed securities			104,240			106,751
Totals		$	149,452		$	152,537

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $73,038,000 at March 31, 2010 and $49,966,000 at December 31, 2009.

 

8

---

Table of Contents

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 March 31, 2010 and December 31, 2009. (Thousands)

 

		Less than 12 months							12 months or more							Total
		Fair Value			Unrealized Loss				Fair Value			Unrealized Loss				Fair Value			Unrealized Loss
March 31, 2010
U.S. Government sponsored entity notes		$	19,282		$	(21	)		$	—		$	—			$	19,282		$	(21	)
Mortgage-backed securities:
U.S. Government-sponsored entities-residential			10,368			(63	)			2			(1	)			10,370			(64	)
Private label-residential			3,399			(49	)			2,224			(497	)			5,623			(546	)
Municipals			—			—				—			—				—			—
Total Securities		$	33,049		$	(133	)		$	2,226		$	(498	)		$	35,275		$	(631	)
December 31, 2009
U.S. Government sponsored entity notes		$	9,517		$	(17	)		$	—		$	—			$	9,517		$	(17	)
Mortgage-backed securities:
U.S. Government-sponsored entities-residential			11,632			(220	)										11,632			(220	)
Private label-residential			10,485			(90	)			2,288			(533	)			12,773			(623	)
Municipals			1,008			(3	)			—			—				1,008			(3	)
Total Securities		$	32,642		$	(330	)		$	2,288		$	(533	)		$	34,930		$	(863	)

The unrealized losses of $631,000 at March 31, 2010 includes an unrealized loss of $423,000 on one private-label collateralized mortgage obligation, which has been downgraded by three major bond rating agencies. While the security continues to pay as expected, based on management’s review of the underlying collateral performance and estimate of projected future cash flows, the bank recognized an additional temporary impairment charge in the first quarter. An impairment charge of $50,000 was recognized on this security in the first quarter of 2010. An impairment charge of $150,000 was recognized on the same security in the fourth quarter of 2009.

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:

 

9

---

Table of Contents

•

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 March 31, 2010 (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 March 31, 2010.

 

		Default Rate			Severity
Alt-A		34.2	%		62.2	%

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.

 

		Accumulated Credit  Losses 2010
Credit losses on debt securities held
Beginning of year		$	(150	)
Additions related to other-than-temporary losses not previously recognized			(50	)
End of period		$	(200	)

 

10

---

Table of Contents

Note 4: Loans

Categories of loans include (thousands):

 

		March 31, 2010				December 31, 2009
Commercial and industrial		$	63,180			$	58,013
Agricultural			26,439				28,130
Real estate construction			6,212				6,732
Commercial real estate			180,672				133,545
Residential real estate			140,332				153,172
Consumer			15,280				15,995
Total loans			432,115				395,587
Less: Net deferred loan fees, premiums and discounts			(44	)			(39	)
Allowance for loan losses			(3,644	)			(3,776	)
Net loans		$	428,427			$	391,772

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

 

		Three Months Ended March 31,
		2010				2009
Balance, beginning of year		$	3,776			$	3,411
Provision for loan losses			435				250
Recoveries			41				82
Charge-offs			(608	)			(785	)
Balance, end of period		$	3,644			$	2,958

Impaired loans totaled $12,936,000 at March 31, 2010 and $9,990,000 at December 31, 2009. An allowance for loan losses of $1,406,000 and $1,635,000 relates to impaired loans of $8,043,000 and $9,200,000 at March 31, 2010 and December 31, 2009, respectively. At March 31, 2010 and December 31, 2009, impaired loans of $6,637,000 and $790,000 had no related allowance for loan losses.

At March 31, 2010 and December 31, 2009, there were $292,000 and $19,000 accruing loans delinquent 90 days or more. Non-accruing loans at March 31, 2010 and December 31, 2009 were $6,471,000 and $6,857,000, respectively.

The Company acquired loans in the American National acquisition 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, that all contractually required payments would not be collected. 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.

 

11

---

Table of Contents

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. 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 March 31, 2010. The amounts are as follows (thousands):

 

Commercial		$	8,516
Consumer			745
Outstanding balance		$	9,261
Carrying amount, net of discount of $2,303		$	5,571
Accretable yield		$	396

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

 

Balance at December 31, 2009		$	169
Additions			247
Accretion			(20	)
Balance at March 31, 2010		$	396

Loans acquired during 2010 for which it was probable at acquisition that all contractually required payments would not be collected are as follows (thousands):

 

		2010
Contractually required payments receivable at acquisition:
Commercial		$	6,485
Consumer			435
Subtotal		$	6,920
Cash flows expected to be collected at acquisition		$	2,442
Basis in acquired loans at acquisition		$	2,304

Note 5: Goodwill

Goodwill was $3,625,000 at March 31, 2010 and $3,825,000 at December 31, 2009. The decline in goodwill relates to the sale of the insurance agency in the first quarter of 2010.

Note 6: Long-Term Debt

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

 

		March 31, 2010			December  31, 2009
Federal Home Loan Bank Advances		$	29,500		$	29,500

 

12

---

Table of Contents

Junior subordinated debentures			10,310			10,310
Total		$	39,810		$	39,810

On June 25, 2007, NB&T Statutory Trust III (“Trust III”), a wholly owned subsidiary of the Corporation, 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 Corporation 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 Corporation 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 Corporation 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 Corporation. 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 Corporation 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 March 31, 2010 and December 31, 2009, 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.

Note 7: Commitments

Outstanding commitments to extend credit as of March 31, 2010 totaled $81,332,000. Standby letters of credit as of March 31, 2010 totaled $2,376,000.

Note 8: 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 March 31,
		2010			2009
Numerator: Net income		$	5,605		$	659
Denominator:
Weighted-average common shares outstanding (basic)			3,393,962			3,147,382
Effect of stock options			—			—
Weighted-average common shares outstanding (diluted)			3,393,962			3,147,382
Earnings per share:
Basic		$	1.65		$	.21
Diluted		$	1.65		$	.21

For the three months ended March 31, 2010 and March 31, 2009, stock options covering 262,500 and 217,000 shares of common stock, respectively, were not considered in computing earnings per share as their exercise prices exceeded the fair market value of the Company’s common shares.

 

13

---

Table of Contents

Note 9: Comprehensive Income

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

 

		Three Months Ended March  31, 2010				Three Months Ended March  31, 2009
Unrealized gains on securities available for sale		$	1,038			$	1,438
Net unrealized (gain) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income			(35	)			—
Reclassification for realized amount included in income			50				—
Other comprehensive income (loss), before tax effect			1,053				1,438
Tax expense			359				489
Other comprehensive income		$	696			$	949

Total comprehensive income was as follows (thousands):

 

		Three Months Ended March  31, 2010			Three Months Ended March  31, 2009
Net Income		$	5,605		$	659
Other Comprehensive Income			696			949
Total Comprehensive Income		$	6,301		$	1,608

Note 10: 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 2007.

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 March 31, 2010, the Company did not identify any uncertain tax positions that it believes should be recognized in the financial statements.

Note 11: Fair Value of Assets and Liabilities

The Company has adopted Fair Value Measurements as prescribed under the Financial Instruments Topic of the Codification. The codification defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements, and the updated standard has been applied prospectively as of the beginning of the period.

The Financial Instruments Topic of the Codification 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 accounting standard 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 accounting 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

 

14

---

Table of Contents

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

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 and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy as prescribed under the Financial Instruments Topic of the Codification, in which the fair value measurements fall at March 31, 2010, December 31, 2009 and March 31, 2009 (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)
March 31, 2010:
Available-for-sale securities		$	152,537					$	152,537		$	—
December 31, 2009: Available-for-sale securities		$	142,424		$	—		$	142,424		$	—
March 31, 2009: Available-for-sale securities		$	108,306		$	—		$	108,306		$	—

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

Impaired Loans

At March 31, 2010, December 31, 2009 and March 31, 2009, 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. As of March 31, 2010, one impaired loan of approximately $342,000 is secured by accounts receivable and equipment. 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.

The following table presents the fair value measurements of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2010, December 31, 2009 and March 31, 2009:

 

15

---

Table of Contents

					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)
March 31, 2010:
Impaired loans		$	5,331		$	—		$	—		$	5,331
Foreclosed assets, net			2,333			—			—			2,333
December 31, 2009:
Impaired loans		$	7,565		$	—		$	—		$	7,565
Foreclosed assets, net			3,405			—			—			3,405
March 31, 2009:
Impaired loans		$	—		$	—		$	—		$	—
Foreclosed assets, net			879			—			—			879

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):

 

		March 31, 2010						December 31, 2009
		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets
Cash and cash equivalents		$	70,257		$	70,257		$	53,599		$	53,599
Available-for-sale securities			152,537			152,537			142,424			142,424
Loans including loans held for sale, net			428,727			432,255			392,046			397,425
Stock in FRB and FHLB			10,021			10,021			9,847			9,847
Interest receivable			2,947			2,947			3,053			3,053
Financial liabilities
Deposits			597,804			600,056			541,422			543,226
Short-term borrowings			505			505			406			406
Long-term debt			39,810			41,108			39,810			41,173
Interest payable			507			507			488			488

For purposes of the above disclosures of estimated fair value, the following assumptions were used as of March 31, 2010 and December 31, 2009. The estimated fair value for cash and cash equivalents, interest-bearing deposits, FRB and FHLB stock, accrued interest 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 March 31, 2010 and December 31, 2009 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 borrowings is based on estimates of the rate the Bank would pay on such liabilities at March 31, 2010 and December 31, 2009, applied for the 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

 

16

---

Table of Contents

obligations with the counterparties at the reporting date. At March 31, 2010 and December 31, 2009, the fair value of commitments was not material.

Note 12: Effect of Recent Accounting Standards

In May 2009 the FASB issued the Subsequent Events Topic of the Codification, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new standard is effective for interim or annual financial periods ending after June 15, 2009 and did not have a material effect on the Company’s financial position or results of operations.

In June 2009 the FASB amended the Transfers of Financial Assets Topic of the Codification, which modified the financial components of sale accounting and the definition of a participating interest. The new standard is effective for interim or annual financial periods ending after November 15, 2009 and for interim periods within that first annual reporting period, applies only to transfers occurring on or after the effective date, and did not have a material effect on the Company’s financial position or results of operations.

 

17

---

Table of Contents

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 March 31, 2010 and the related condensed consolidated statements of income for the three-month periods ended March 31, 2010 and 2009 and cash flows for the three-month periods ended March 31, 2010 and 2009. 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, 2009 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 16, 2010, 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, 2009 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

May 14, 2010

 

18

---

Table of Contents

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

Results of Operations

Net income for the first quarter of 2010 increased to $5.6 million, or $1.65 per share, from net income of $659,000, or $.21 per share, for the first quarter of 2009. Net income for the quarter was up primarily due to the 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.

On March 19, 2010, NB&T acquired the banking operations of ANB, located in Parma, Ohio, through a purchase and assumption agreement with the FDIC. NB&T acquired approximately $65 million in assets, including $48 million in loans and $65 million in deposits. No premium was paid on the deposits. In addition to assuming all of the deposits, NB&T agreed to purchase substantially all of the assets of ANB at a $10 million discount. Additionally, the FDIC is obligated to reimburse NB&T for 80% of losses of up to $8 million with respect to covered assets and will reimburse NB&T for 95% of losses that exceed $8 million according to the loss sharing agreements. Based upon the estimated fair value of the assets and liabilities assumed, including the estimated value of the loss sharing agreements, NB&T recorded pre-tax bargain purchase gain of approximately $7.6 million and $5.0 million after tax.

Also in the first quarter of 2010, NB&T sold its insurance agency subsidiary to two officers of the insurance agency. The agency was sold to allow management to focus 100% on the business of banking. NB&T recognized a pre-tax gain of approximately $1.4 million on this sale.

Net Interest Income

Net interest income was $5.6 million for the first quarter of 2010, compared to $4.4 million for the first quarter of 2009. Net interest margin increased to 3.75% for the first quarter of 2010, compared to 3.72% for the same quarter last year. The net interest margin increased primarily due to two factors. First, average loans outstanding for 2010, which had an average rate of 6.18%, increased $63.8 million, largely a result of the Community National Bank (“CNB”) acquisition in December 2009. The CNB acquisition added approximately $22.6 million in commercial loans and $36.6 million in 1-4 family mortgage loans at purchased yields ranging from 5.81% to 6.51%. Second, the average cost of interest-bearing liabilities declined from 1.98% in the first quarter of 2009 to 1.48% in the first quarter of 2010 on increased average deposits of $125.9 million. Due to increased liquidity from an increase in transaction deposit accounts, the Company was able to lower rates and rely less on non-transaction accounts for liquidity over the last year.

Provision for Loan Losses

The provision for loan losses for the first quarter of 2010 was $435,000, compared to $250,000 in the same quarter last year. Net charge-offs were $567,000 in the first quarter of 2010, compared to $703,000 in the first quarter of 2009. Charge-offs in 2010 included one commercial real estate development loan charge-off of $300,000 for which $300,000 in specific reserves had been previously allocated. The provision for loan losses was increased to add specific loan reserves and increase the general allowance due to estimating the impact of current economic conditions based on recent delinquency trends in the commercial real estate portfolio. The commercial real estate development loan plus other real estate owned acquired in the ANB transaction of approximately $325,000 increased other real estate owned to $4.1 million at March 31, 2010 from $3.5 million at December 31, 2009. Non-performing loans decreased approximately $100,000 during the first quarter of 2010 to $6.8 million.

Non-interest Income

Total non-interest income was $10.6 million for the first quarter of 2010, compared to $1.9 million for the first quarter of 2009. The increase is due to the ANB bargain purchase gain and insurance agency sale previously discussed. Partially offsetting this gain in the first quarter of 2010 was an other-than-temporary impairment charge of $50,000 on one private-label collateralized mortgage obligation.

 

19

---

Table of Contents

Non-interest Expense

Total non-interest expense was $7.5 million for the first quarter of 2010, compared to $5.4 million for the first quarter of 2009. The increase for the quarter was due to increased bonus plan accruals of $1.5 million, personnel and operating expenses of approximately $355,000 related to the CNB branches acquired in December 2009 and acquisition related expenses of approximately $103,000. The estimated bonus accrual was based on exceeding performance objectives for 2010 during the first quarter. Those objectives included increasing earings per share and net operating income in 2010 over 2009 results. Non-interest expenses, primarily compensation and occupancy, will continue to exceed prior year results due to the addition of the six CNB and ANB locations since December 31, 2009 and related branch personnel.

Income Taxes

The provision for income taxes for the first quarter of 2010 was $2,680,000, or 32.4%, compared to $74,000, or 10.1%, for the first quarter of 2009. The increase in the effective tax rate for the first quarter of 2010 is 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 2009 are as follows (in thousands):

 

		March 31,			December 31,			2010 Change
		2010			2009			Amount				Percent
Total assets		$	717,222		$	649,340		$	67,882			10.5
Interest-bearing deposits			59,709			40,759			18,950			46.5
Federal funds sold			420			448			(28	)		(6.3	)
Loans, net*			428,727			392,046			36,681			9.4
Securities			152,537			142,424			10,113			7.1
Demand deposits			93,253			89,827			3,426			3.8
Savings, NOW, MMDA deposits			284,327			262,629			21,698			8.3
CD’s $100,000 and over			54,227			42,318			11,909			28.1
Other time deposits			165,997			146,648			19,349			13.2
Total deposits			597,804			541,422			56,382			10.4
Short-term borrowings			505			406			99			24.4
Long-term borrowings			39,810			39,810			—			—
Stockholders Equity			69,877			64,485			5,392			8.4

 

*	Includes loans held for sale

At March 31, 2010, total assets were $717.2 million, an increase of $67.9 million from December 31, 2009. The increase is primarily attributable to the purchase of ANB on March 19, 2010, which resulted in an increase of $72.3 million in total assets.

Average total assets increased $132.4 million, or 25.0%, to $663.0 million from the first quarter of 2009. Average total gross loans increased to $394.4 million, an increase of $63.8 million from the same quarter last year. The increase is largely the result of the acquisition of CNB on December 31, 2009 with $59.2 million in loans acquired. The loans acquired from CNB consisted of $22.6 million in commercial loans and $36.6 million in 1-4 family mortgage loans. In addition, the purchase of ANB’s business added $42.2 million in loans on March 19, 2010. A majority of the loans acquired from ANB were commercial real estate. Although commercial real estate loan volume increased throughout 2009 and 2010 as many business borrowers sought out new lenders, outstanding balances for residential mortgages and consumer loans declined. Residential mortgage balances, excluding those acquired from CNB, declined due to increased sales of fixed-rate loans into the secondary market, and consumer loans continued to decline due to the Company’s departure from the indirect lending market in 2006. The excess funds from the slower loan volume were reinvested in securities, which increased to $152.5 million on average in the first quarter of 2010, an increase of $10.1 million from the same quarter last year. In addition, excess funds have been invested in interest-bearing deposits, which have increased $19.0 million on average, from the same quarter last year.

 

20

---

Table of Contents

Average total deposit liabilities increased $126.0 million for the first quarter of 2010 to $554.5 million, compared to an average of $428.5 million for the same quarter last year. Deposits of $75.5 million, including transaction accounts of $22.5 million and $53.0 million in non-transaction accounts, were acquired from CNB in December of 2009, and $64.7 million, including $8.0 million in transaction accounts and $56.7 million in non-transaction accounts, were acquired from ANB in March of 2010. ANB’s deposits included approximately $40.0 million in out-of-state deposits, which the Company did not expect to retain long term. As of March 31, 2010, approximately $20.0 million of the deposits acquired from ANB were withdrawn from the Bank as part of the Bank’s strategy to lower the pricing on certain high-rate accounts and manage its overall liquidity position. The Company has experienced little runoff in the deposits acquired from CNB.

Allowance for Loan Losses

The following table is a summary of the Company’s loan loss experience for the periods ended March 31, 2010 and 2009 (dollars in thousands):

 

		Three Months Ended March  31
		2010				2009
Balance at beginning of period		$	3,776			$	3,411
Charge-offs:
Commercial and industrial			—				(168	)
Commercial real estate			(421	)			(511	)
Real estate construction			—				—
Agricultural			—				—
Residential real estate			(134	)			(24	)
Consumer			(53	)			(62	)
Total charge-offs			(608	)			(785	)
Recoveries:
Commercial and industrial			1				3
Commercial real estate			6				1
Real estate construction			1				17
Agricultural			1				12
Residential real estate			0				49
Consumer			32				—
Total recoveries			41				82
Net charge-offs			(567	)			(703	)
Provision for loan losses			435				250
Balance at end of period		$	3,644			$	2,958

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

 

		March 31, 2010			December 31, 2009			March 31, 2009
Loans accounted for on non-accrual basis		$	6,471		$	6,857		$	2,570
Accruing loans which are past due 90 days			292			19			330
Renegotiated loans			—			—			—
Other real estate owned			4,137			3,455			1,111
Total non-performing assets		$	10,900		$	10,331		$	4,011

 

21

---

Table of Contents

Ratios:
Allowance to total loans		0.84	%		0.95	%		0.91	%
Net charge-offs to average loans (annualized)		0.58	%		0.36	%		0.86	%
Non-performing assets to total loans and other real estate owned		2.50	%		2.95	%		1.23	%

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 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 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. Specifically, the Company also continues to consider the impact of DHL Express (USA), Inc. and DHL Network Operations (USA), Inc. (collectively, “DHL”) and ABX Air significantly reducing their operations in Wilmington and Clinton County, Ohio. DHL and ABX Air combined employed more people than any other employer in Clinton County. DHL has decided to outsource its United States transportation and sorting services to another company. Thousands of local jobs have been eliminated. Not all the individuals with these jobs live in Clinton County. We do, however, expect this job reduction to have a negative short-term and potentially negative long-term impact on the local economy. While the Company has no direct relationship with either DHL or ABX Air, the Company did estimate its direct exposure, both loans and deposits, from employees of DHL and ABX Air and considered this in evaluating the allowance. The Bank estimated this exposure at less than 1% of total assets. To date, this part of the overall portfolio continues to perform as expected. What is uncertain and not estimated is the potential impact of the spending habits of the DHL and ABX employees on other Bank customers in the area.

During the first quarter of 2010, the Company foreclosed on a $1.2 million commercial real estate loan for which specific reserves of $300,000 had been previously allocated. Approximately $300,000 was charged off with the balance of $900,000 transferred to other real estate owned. As of March 31, 2010, there was $4.4 million in small business relationships on nonaccrual. The majority of this amount consisted of two relationships. In addition, the Company had one renegotiated loan of approximately $942,000 secured by commercial real estate where the loan payments were lowered temporarily to assist the borrower with short-term cash flow issues.

Non–accrual residential real estate loans totaled $1,836,000 with the largest balance being $249,000. Non-accrual consumer loans totaled $35,000, and home equity credit loans totaled $168,000.

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 March 31, 2010 was 71.7%, compared to 73.1% at December 31, 2009 and 72.4% at the same date in 2009. Loans to total assets were 59.8% at the end of the first quarter of 2010, compared to 61.0% at December 31, 2009 and 60.4% at the same time last year. At March 31, 2010, the Company had $59.7 million in interest-bearing deposits, of which $9.0 million was held in fully-insured certificates of deposit with maturities laddered over 90 days to meet short-term funding needs. The Company has $152.5 million in available-for-sale securities that are readily marketable. Approximately 47.9% of the 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 90.9% core deposits, makes the Company less susceptible to large fluctuations in

 

22

---

Table of Contents

funding needs. The Company has short-term borrowing lines of credit with several correspondent banks. 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 March 31, 2010 and December 31, 2009, 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 March 31, 2010
Total Risk-Based Capital (to Risk-Weighted Assets)
Consolidated		$	76,942		17.50	%		$	35,165		8.0	%			N/A		N/A
Bank			72,768		16.58				35,118		8.0			$	43,898		10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated			73,298		16.68				14,562		4.0				N/A		N/A
Bank			69,124		15.75				14,543		4.0				26,339		6.0
Tier I Capital (to Average Assets)
Consolidated			73,298		11.13				26,339		4.0				N/A		N/A
Bank			69,124		10.52				26,289		4.0				32,861		5.0
As of December 31, 2009
Total Risk-Based Capital (to Risk-Weighted Assets)
Consolidated		$	67,338		18.80	%		$	28,649		8.0	%			N/A		N/A
Bank			59,489		16.66				28,568		8.0			$	35,710		10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated			63,927		17.85				14,324		4.0				N/A		N/A
Bank			56,078		15.70				14,284		4.0				21,426		6.0
Tier I Capital (to Average Assets)
Consolidated			63,927		12.21				20,935		4.0				N/A		N/A
Bank			56,078		10.72				20,931		4.0				26,164		5.0

The decrease in the Company’s capital ratios from December 31, 2009 is largely due to the increase in assets from the purchase of ANB. Under the loss-sharing agreement with the FDIC, the loans acquired from ANB are subject to a lower risk weighting than other loans in the Company’s portfolio; however, there was still some impact on total risk-weighted assets. The impact of the increased assets was cushioned, though, by the additional net income from the gain on bargain purchase related to the ANB purchase and the gain on sale of the insurance agency.

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, 2009. 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

 

23

---

Table of Contents

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.

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 one-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

 

24

---

Table of Contents

projected net interest margin over the next twelve months.

Simulation models are also performed for ramped 100, 200 and 300 basis point increases. Historically, simulation models are also performed for ramped 100, 200 and 300 basis point decreases. However, these decreasing rate changes are not calculated because the rates would be less than zero for most of the Bank’s liabilities in today’s current low interest rate environment. 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 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 March 31, 2010, the Bank is within the guidelines established by the Board for net interest income changes and economic value of equity changes for increasing rate changes of 100, 200 and 300 basis points.

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.

 

One Year Net Interest Income Change

Economic Value of Equity Change

Rate Ramp

3/31/10

ALCO Guideline

3/31/10

ALCO Guideline

+300

-2.98

%

± 15

%

10.1

%

± 20

%

+200

-2.27

± 10

7.8

± 15

+100

-1.04

±   5

4.7

± 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 of March 31, 2010, 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 March 31, 2010, 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.

 

25

---

Table of Contents

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Not applicable

Item 1A – Risk Factors

The Company faces risks with respect to future expansion of our business, which may adversely affect our results of operations and financial condition.

In December 2009 and March 2010, we acquired the banking businesses of two other banks, the first through a merger and the second through an asset acquisition and liability assumption. The Company may acquire other financial institutions or parts of institutions in the future and may engage in de novo branch expansion. The Company may also enter into new lines of business or offer new products or services. Acquisitions, mergers and expansions involve a number of expenses and risks, including:

 

•

the time and costs associated with identifying, evaluating, negotiating and consummating potential acquisitions;

 

•

the time and costs of evaluating new markets, hiring management and opening new offices, and the time between commencement of incurring the costs of the expansion and the generation of sufficient assets and deposits to support the costs of the expansion;

 

•

the possible inaccuracy of estimates and judgments used to evaluate credit, operations, management and market risk with respect to the target institution;

 

•

the possible inaccuracy of estimates and judgments used to evaluate new markets for a new branch expansion or new products or services;

 

•

the difficulty or expense of obtaining financing of an acquisition or expansion and the possible dilution of the interests of our existing shareholders;

 

•

the diversion of our management’s attention to the negotiation of a transaction and the integration of the operations and personnel of the combining businesses;

 

•

the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse effects on our results of operations; and

 

•

the risk of loss of key employees and customers.

There can be no assurance that integration efforts for any of our past mergers or acquisitions will be successful. In addition, the Company may incur substantial costs to expand, and can give no assurance that such expansion will result in the levels of profits we seek or even profits comparable to or better than our historical experience. Moreover, the Company may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to our current shareholders.

The Company undertakes no obligation and disclaims any intention to publish any information with respect to future mergers or acquisitions unless and until expressly required to do so by applicable securities laws or regulations.

The risk factors described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, 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 materially adversely affect the

 

26

---

Table of Contents

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 representatives 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 – Submission of Matters to a Vote of Security Holders

Not applicable

Item 5 – Other Information

Not applicable

Item 6 – Exhibits

 

Exhibit Number		Index to Exhibits
2		Purchase and Assumption Agreement Whole Bank All Deposits, Among Federal Deposit Insurance Corporation, Receiver of American National Bank, Parma, Ohio, Federal Deposit Insurance Corporation and the National Bank and Trust Company, dated as of March 19, 2010
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.

 

27

---

Table of Contents

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: May 14, 2010				/s/ Craig F. Fortin
				Craig F. Fortin
				Senior Vice President and Chief Financial Officer (Principal Financial Officer)

 

28

---

Table of Contents

Index to Exhibits

 

Exhibit Number		Description		Location
2		Purchase and Assumption Agreement Whole Bank All Deposits, Among Federal Deposit Insurance Corporation, Receiver of American National Bank, Parma, Ohio, Federal Deposit Insurance Corporation and the National Bank and Trust Company, dated as of March 19, 2010		Incorporated by reference to registrant’s Current Report on Form 8-K filed on March 23, 2010, Exhibit 2.1 (SEC File No. 000-23134)
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
4		Agreement to furnish instruments and agreements defining rights of holders of long-term debt		(SEC File No. 000-23134) 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

 

29