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, 2012

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  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 May 1, 2012, 3,424,814 common shares were issued and outstanding.

 

 

 

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NB&T FINANCIAL GROUP, INC.

March 31, 2012 Form 10-Q

Table of Contents

 

				Page
		PART I
Item 1:		Financial Statements			3
		Condensed Consolidated Balance Sheets			3
		Condensed Consolidated Statements of Income			4
		Condensed Consolidated Statements of Comprehensive Income			6
		Condensed Consolidated Statements of Cash Flows			7
		Notes to Condensed Consolidated Financial Statements			8
		Report of Independent Registered Public Accounting Firm			31
Item 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3:		Quantitative and Qualitative Disclosures about Market Risk			38
Item 4:		Controls and Procedures			39
		Part II
Item 1:		Legal Proceedings			40
Item 1A:		Risk Factors			40
Item 2:		Unregistered Sale of Equity Securities and Use of Proceeds			40
Item 3:		Defaults Upon Senior Securities			40
Item 4:		Reserved			40
Item 5:		Other Information			40
Item 6:		Exhibits and Reports on Form 8-K			40
Signatures					41
Index to Exhibits					42

 

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NB&T Financial Group, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands)

 

		March 31, 2012				December 31, 2011
		(Unaudited)
Assets
Cash and due from banks		$	11,290			$	13,861
Interest-bearing deposits			81,290				61,441
Federal funds sold			385				366
Cash and cash equivalents			92,965				75,668
Available-for-sale securities			154,437				139,744
Loans held for sale			293				0
Loans, net of allowance for loan losses of $4,573 and $4,668 at March 31, 2012 and December 31, 2011, respectively			389,501				399,801
Premises and equipment			18,663				18,934
Federal Reserve and Federal Home Loan Bank stock			10,025				10,025
Earned income receivable			3,104				2,948
Goodwill			3,625				3,625
Core deposits and other intangibles			760				831
Bank-owned life insurance			15,607				15,488
Other real estate owned			3,500				3,520
FDIC loss share receivable			1,736				1,928
Other			3,404				3,076
Total assets		$	697,620			$	675,588
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand		$	103,148			$	97,732
Savings, NOW and money market			352,515				331,524
Time			147,300				152,127
Total deposits			602,963				581,383
Long-term debt			15,310				15,310
Interest payable and other liabilities			8,684				8,105
Total liabilities			626,957				604,798
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			12,236				12,183
Retained earnings			59,247				59,913
Accumulated other comprehensive income			2,676				2,208
Treasury stock, at cost
Common; 2012 — 394,136 shares, 2011 — 395,698 shares			(4,496	)			(4,514	)
Total stockholders’ equity			70,663				70,790
Total liabilities and stockholders’ equity		$	697,620			$	675,588

See Notes to Condensed Consolidated Financial Statements

 

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NB&T Financial Group, Inc.

Condensed Consolidated Statements of Income

(Dollars in Thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended March  31,
		2012				2011
Interest and Dividend Income
Loans		$	5,587			$	6,040
Securities
Taxable			606				1,020
Tax-exempt			161				89
Dividends on Federal Home Loan and Federal Reserve Bank stock			117				117
Deposits with financial institutions			56				44
Total interest and dividend income			6,527				7,310
Interest Expense
Deposits			747				1,137
Short-term borrowings			0				31
Long-term debt			217				217
Total interest expense			964				1,385
Net Interest Income			5,563				5,925
Provision for Loan Losses			1,300				550
Net Interest Income After Provision for Loan Losses			4,263				5,375
Noninterest Income
Trust income			276				264
Service charges on deposits			735				598
Other service charges and fees			510				447
Insurance agency commissions			51				55
Net realized gains on sales of available-for-sale securities			0				789
Income from bank owned life insurance			119				119
Other			425				285
Total noninterest income			2,116				2,557

See Notes to Condensed Consolidated Financial Statements

 

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NB&T Financial Group, Inc.

Condensed Consolidated Statements of Income

(Dollars in Thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended March  31,
		2012				2011
Noninterest Expense
Salaries and employee benefits		$	3,005			$	3,101
Net occupancy expense			569				632
Equipment expense			376				386
Data processing fees			431				396
Professional fees			415				538
Marketing expense			62				138
Printing, postage and supplies			164				223
State franchise tax			220				216
FDIC insurance			128				220
Amortization of intangibles			70				90
Net costs of operation of other real estate			302				280
Other			272				359
Total non-interest expense			6,014				6,579
Income Before Income Tax			365				1,353
Provision for Income Taxes			4				348
Net Income		$	361			$	1,005
Basic Earnings Per Share		$	.11			$	.29
Diluted Earnings Per Share		$	.11			$	.29
Dividends Per Share		$	.30			$	.30

See Notes to Condensed Consolidated Financial Statements

 

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NB&T Financial Group, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Dollars in Thousands)

(Unaudited)

 

		Three Months Ended March  31,
		2012				2011
Net income		$	361			$	1,005
Other comprehensive income (loss), before tax effect:
Unrealized gains (losses) on securities available for sale			711				(578	)
Reclassification of amount realized in income			0				789
Other comprehensive income (loss), before tax effect			711				(1,367	)
Tax expense (credit)			242				(465	)
Other comprehensive income (loss)			469				(902	)
Comprehensive Income		$	830			$	103

See Notes to Condensed Consolidated Financial Statements

 

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NB&T Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Three Months Ended March  31,
(Dollars in thousands)		2012				2011
Operating Activities
Net income		$	361			$	1,005
Items not requiring (providing) cash:
Depreciation and amortization			415				442
Provision for loan losses			1,300				550
Amortization of premiums and discounts on securities			874				315
Increase in cash surrender value on bank owned life insurance			(119	)			(119	)
Proceeds from FDIC loss share receivable			192				224
Stock options expense			46				52
Net realized gains on available-for-sale securities			0				(789	)
Net changes in:
Loans held for sale			(293	)			499
Other assets and liabilities			407				(7,118	)
Net cash provided by (used in) operating activities			3,183				(4,939	)
Investing Activities
Purchases of available-for-sale securities			(25,319	)			(37,827	)
Proceeds from sales of available-for-sale securities			0				23,443
Proceeds from maturities of available-for-sale securities			10,462				24,667
Purchase of Federal Reserve Bank stock			0				(4	)
Net change in loans			8,466				4,061
Purchases of premises and equipment			(73	)			(201	)
Net cash provided by (used in) investing activities			(6,464	)			14,139
Financing Activities
Net change in:
Deposits			21,580				(8,998	)
Short-term borrowings			0				(11,864	)
Proceeds from stock options exercised			25				0
Dividends paid			(1,027	)			(1,027	)
Net cash provided by (used in) financing activities			20,578				(21,889	)
Increase (Decrease) in Cash and Cash Equivalents			17,297				(12,689	)
Cash and Cash Equivalents, Beginning of Period			75,668				81,751
Cash and Cash Equivalents, End of Period		$	92,965			$	69,062
Supplemental Cash Flows Information
Interest paid		$	975			$	1,448
Income taxes paid (net of refunds)			62				0
Transfers of loans into other real estate owned			620				950

See Notes to Condensed Consolidated Financial Statements

 

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Notes to Condensed Consolidated Financial Statements

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, 2011 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, 2012 and December 31, 2011, and the results of its operations and cash flows for the three-month periods ended March 31, 2012 and 2011. 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, 2011 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
March 31, 2012:
U.S. Government sponsored entities		$	19,994			$	117			$	(74	)		$	20,037
Mortgage-backed securities:
U.S. Government sponsored entities-residential			94,157				2,525				(33	)			96,649
Private label-residential			6,290				265				(190	)			6,365
State and political subdivisions			29,940				1,545				(99	)			31,386
		$	150,381			$	4,452			$	(396	)		$	154,437
December 31, 2011:
U.S. Government sponsored entities		$	6,321			$	113			$	0			$	6,434
Mortgage-backed securities:
U.S. Government sponsored entities-residential			97,203				2,080				(115	)			99,168
Private label-residential			6,997				213				(268	)			6,942
State and political subdivisions			25,878				1,322				0				27,200
		$	136,399			$	3,728			$	(383	)		$	139,744

 

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The amortized cost and fair value of securities available for sale at March 31, 2012, 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
Within one year		$	1,558			$	1,569
One to five years			7,604				7,853
Five to ten years			19,153				19,620
After ten years			21,619				22,381
			49,934				51,423
Mortgage-backed securities			100,447				103,014
Totals		$	150,381			$	154,437

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $79,836,000 at March 31, 2012, and $76,915,000 at December 31, 2011.

Gross gains of $789,000 and gross losses of $0 resulting from sales of available-for-sale securities were realized during 2011. There were no sales of securities in 2012. 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 March 31, 2012 and December, 31 2011 (thousands):

 

		Less than 12 months								12 months or more								Total
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
March 31, 2012
U.S. Government sponsored entities Mortgage-backed securities:		$	13,616			$	(74	)		$	0			$	0			$	13,616			$	(74	)
U.S. Government sponsored entities-residential			8,216				(33	)			0				0				8,216			$	(33	)
Private label-residential			0				0				566				(190	)			566				(190	)
Municipal securities			5,210				(99	)			0				0				5,210				(99	)
Total Securities		$	27,042			$	(206	)		$	566			$	(190	)		$	27,608			$	(396	)
December 31, 2011
U.S. Government sponsored entities		$	0			$	0			$	0			$	0			$	0			$	0
Mortgage-backed securities:
U.S. Government sponsored entities-residential			22,560				(115	)			0				0				22,560				(115	)
Private label-residential			1,364				(24	)			525				(244	)			1,889				(268	)
States and political subdivisions			0				0				0				0				0				0
Total Securities		$	23,924			$	(139	)		$	525			$	(244	)		$	24,449			$	(383	)

The unrealized losses outstanding 12 months or more of $190,000 at March 31, 2012 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 Company recognized an other-than- temporary impairment charge of $200,000 in prior periods. In the first quarter of 2012, approximately $10,000 of losses were realized on this security with total realized losses through March 31, 2012 totaling approximately $91,500. These losses were in line with prior period loss projections.

 

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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 March 31, 2012 (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, 2012.

 

		Default Rate				Severity
Alt-A			21.9	%			69.2	%

 

 

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Credit Losses Recognized on Investments

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 2012
Credit losses on debt securities held
Balance, beginning of year		$	(118	)
Reductions related to losses realized which were previously recognized			10
Balance, end of period		$	(108	)

Note 3: Loans and Allowance for Loan Losses

 

Categories of loans include (thousands):		March 31, 2012				December 31, 2011
Commercial and industrial		$	63,468			$	67,298
Real estate construction			1,000				1,064
Commercial real estate			179,563				179,556
Agricultural			24,661				32,460
Residential real estate			114,815				115,920
Consumer			10,604				8,257
Total loans			394,111				404,555
Less: Net deferred loan fees, premiums and discounts			(37	)			(86	)
Allowance for loan losses			(4,573	)			(4,668	)
Net loans		$	389,501			$	399,801

The risk characteristics of each significant loan portfolio segment are as follows:

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area.

 

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Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus non-owner-occupied loans.

Agricultural

Agricultural loans are viewed primarily as cash flow loans where repayment comes from sales of crops and secondarily as loans secured by real estate, farm equipment or livestock. Repayment of these loans is generally dependent on the successful operation of the farming operation and is highly dependent on weather conditions.

Residential and Consumer

Residential and consumer loans consist of two segments — residential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

For all loan classes, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral. Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except residential and consumer loans, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

 

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For all classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status. Generally, most impaired loans, except for certain troubled debt restructurings, are on nonaccrual.

Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated terms for a period of at least six months.

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

 

		Three Months Ended March 31,
		2012				2011
Balance, beginning of year		$	4,668			$	3,714
Provision for loan losses			1,300				550
Recoveries			41				172
Charge-offs			(1,436	)			(930	)
Balance, end of period		$	4,573			$	3,506

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.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical charge-off experience by segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior one to three years. Management believes the one to three year historical loss experience methodology is appropriate in the current economic environment. Other adjustments (qualitative/environmental considerations) for each segment may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

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

 

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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. For impaired loans where the Company utilizes the discounted cash flows to determine the level of impairment, the Company includes the entire change in the present value of cash flows as bad debt expense.

The fair values of collateral dependent impaired loans are based on independent appraisals of the collateral. In general, the Company acquires an updated appraisal upon identification of impairment and periodically thereafter for commercial, commercial real estate and multi-family loans. After determining the collateral value as described, the fair value is calculated based on the determined collateral value less selling expenses. The potential for outdated appraisal values is considered in our determination of the allowance for loan losses through our analysis of various trends and conditions including the local economy, trends in charge-offs and delinquencies, etc. and the related qualitative adjustments assigned by the Company.

Segments of loans with similar risk characteristics are collectively evaluated for impairment based on the segment’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In this scenario, the Company attempts to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Company do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Company may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan.

It is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on nonaccrual status until six months of satisfactory borrower performance at which time management would consider its return to accrual status. If a loan was accruing at the time of restructuring, the Company reviews the loan to determine if it is appropriate to continue the accrual of interest on the restructured loan.

With regard to determination of the amount of the allowance for credit losses, troubled debt restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.

 

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The following tables present a breakdown of the allowance for loan losses for the three-month periods ended March 31, 2012 and 2011.

Three Months Ended March 31, 2012 (thousands):

 

		Commercial				Commercial Real Estate				Agricultural				Residential 1-4 Family				Residential Home Equity				Consumer				Total
Allowance for loan losses:
Beginning balance		$	1,380			$	2,372			$	231			$	373			$	195			$	117			$	4,668
Charge-offs			(884	)			(296	)			0				(99	)			(82	)			(75	)			(1,436	)
Recoveries			1				9				1				1				8				21				41
Provision			161				647				261				91				43				97				1,300
Ending Balance		$	658			$	2,732			$	493			$	366			$	164			$	160			$	4,573

Three Months Ended March 31, 2011 (thousands):

 

		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			(4	)			(828	)			—				(27	)			(4	)			(67	)			(930	)
Recoveries			1				125				2				5				1				38				172
Provision			117				589				(34	)			(28	)			(107	)			13				550
Ending Balance		$	588			$	1,943			$	152			$	478			$	227			$	118			$	3,506

 

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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 March 31, 2012 and December 31, 2011 (thousands):

March 31, 2012:

 

		Commercial				Commercial Real Estate				Agricultural				Residential 1-4 Family				Residential Home Equity				Consumer				Total
Ending balance:
Individually evaluated for impairment		$	81			$	1,215			$	0			$	0			$	0			$	0			$	1,296
Collectively evaluated for impairment			575				1,170				493				366				164				161				2,929
Loans acquired with deteriorated credit quality:
Individually evaluated for impairment			—				328				0				0				0				0				328
Collectively evaluated for impairment			2				18				0				0				0				0				20
Financing Receivables
Ending balance		$	63,468			$	180,236			$	24,661			$	85,120			$	30,022			$	10,604			$	394,111
Ending balance:
Individually evaluated for impairment			1,049				6,460				0				1,109				0				0				8,618
Collectively evaluated for impairment			62,226				170,973				24,661				84,011				30,022				10,604				382,497
Loans acquired with deteriorated credit quality:
Individually evaluated for impairment			186				960				0				0				0				0				1,146
Collectively evaluated for impairment			7				1,843				0				0				0				0				1,850

 

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December 31, 2011:

 

		Commercial				Commercial Real Estate				Agricultural				Residential 1-4 Family				Residential Home Equity				Consumer				Total
Ending balance:
Individually evaluated for impairment		$	1,004			$	634			$	0			$	0			$	0			$	0			$	1,638
Collectively evaluated for impairment			366				1,365				231				373				195				117				2,647
Loans acquired with deteriorated credit quality:
Individually evaluated for impairment			10				354				0				0				0				0				364
Collectively evaluated for impairment			0				19				0				0				0				0				19
Financing Receivables
Ending balance		$	67,298			$	180,257			$	32,460			$	85,254			$	31,029			$	8,257			$	404,555
Ending balance:
Individually evaluated for impairment			2,887				5,914				0				997				0				0				9,798
Collectively evaluated for impairment			64,212				170,953				32,460				84,257				31,029				8,257				391,168
Loans acquired with deteriorated credit quality:
Individually evaluated for impairment			190				1,279				0				—				0				0				1,469
Collectively evaluated for impairment			9				2,111				0				0				0				0				2,120

 

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The following table outlines the Company’s corporate and consumer credit exposure by category and standard regulatory classification as of March 31, 2012 and December 31, 2011 (thousands):

Corporate Credit Exposure

Credit Risk Profile by Creditworthiness Category:

 

		Commercial								Commercial Real Estate								Agricultural
		March 31, 2012				December 31, 2011				March 31, 2012				December 31, 2011				March 31, 2012				December 31, 2011
Pass		$	55,710			$	57,422			$	159,103			$	158,142			$	24,393			$	32,192
Other Assets Especially Mentioned			1,635				1,972				4,971				5,960				0				0
Substandard			5,971				7,758				16,019				16,012				268				268
Doubtful			146				146				143				143				0				0
Loss			0				0				0				0				0				0
Non-rated			6				0				0				0				0				0
Total		$	63,468			$	67,298			$	180,236			$	180,257			$	24,661			$	32,460

Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

		Residential-1 to 4 Family								Residential Home Equity								Consumer
		March 31, 2012				December 31, 2011				March 31, 2012				December 31, 2011				March 31, 2012				December 31, 2011
Pass		$	81,939			$	82,030			$	29,778			$	30,729			$	10,554			$	8,219
Substandard			3,181				3,224				244				300				50				38
Total		$	85,120			$	85,254			$	30,022			$	31,029			$	10,604			$	8,257

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 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.

 

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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 March 31, 2012 and December 31, 2011 (thousands):

 

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March 31, 2012:

 

		Past Due Days																				Total				90+Days
		30-59				60-89				90+				Total				Current				Financing Receivables				& Accruing				Non- accrual
Commercial		$	246			$	331			$	1,445			$	2,022			$	61,446			$	63,468			$	299			$	1,362
Commercial Real Estate			427				239				5,344				6,010				174,226				180,236				0				5,747
Agricultural			180				0				30				210				24,451				24,661				0				30
Residential 1-4 Family			837				363				452				1,652				82,814				85,120				13				2,181
Residential Home Equity			43				101				168				312				29,710				30,022				15				242
Consumer			34				—				24				58				10,546				10,604				0				85
Total		$	1,767			$	1,034			$	7,463			$	10,264			$	383,193			$	394,111			$	327			$	9,647

December 31, 2011:

 

		Past Due Days																				Total				90+Days
		30-59				60-89				90+				Total				Current				Financing Receivables				& Accruing				Non- accrual
Commercial		$	263			$	1,640			$	2,076			$	3,979			$	63,319			$	67,298			$	0			$	3,406
Commercial Real Estate			393				1,363				4,411				6,167				174,090				180,257				0				5,695
Agricultural			90				0				41				131				32,329				32,460				0				41
Residential 1-4 Family			1,142				431				810				2,383				82,871				85,254				116				2,442
Residential Home Equity			171				99				118				388				30,641				31,029				17				275
Consumer			74				53				119				246				8,011				8,257				0				148
Total		$	2,133			$	3,586			$	7,575			$	13,294			$	391,261			$	404,555			$	133			$	12,007

 

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The following table represents loans considered impaired at March 31, 2012 and December 31, 2011 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):

 

March 31, 2012:		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Commercial		$	755			$	818			$	0			$	806			$	0
Commercial real estate			3,716				3,748				0				3,861				31
Agricultural			0				0				0				0				0
Residential-1 to 4 Family			1,109				1,109				0				1,053				5
Residential-Home equity			0				0				0				0				0
Consumer			0				0				0				0				0
With an allowance recorded:
Commercial		$	480			$	480			$	81			$	1,351			$	0
Commercial real estate			3,704				3,783				1,543				3,485				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			0				0				0				0				0
Total:
Commercial		$	1,235			$	1,298			$	81			$	2,157			$	0
Commercial real estate			7,420				7,531				1,543				7,346				31
Agricultural			0				0				0				0				0
Residential-1 to 4 Family			1,109				1,109				0				1,053				5
Residential- Home equity			0				0				0				0				0
Consumer			0				0				0				0				0

 

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		As of December 31, 2011												For the three months  ending March 31, 2011
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Commercial		$	856			$	894			$	0			$	1,524			$	0
Commercial real estate			4,006				4,112				0				5,351				17
Agricultural			0				0				0				0				0
Residential-1 to 4 Family			997				997				0				1,162				0
Residential-Home equity			0				0				0				0				0
Consumer			0				0				0				0				0
With an allowance recorded:
Commercial		$	2,221			$	2,251			$	1,014			$	751			$	0
Commercial real estate			3,187				3,316				988				4,001				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			0				0				0				0				0
Total:
Commercial		$	3,077			$	3,145			$	1,014			$	2,275			$	0
Commercial real estate			7,193				7,428				988				9,352				17
Agricultural			0				0				0				0				0
Residential-1 to 4 Family			997				997				0				1,162				0
Residential-Home equity			0				0				0				0				0
Consumer			0				0				0				0				0

Interest income recognized is not materially different from cash basis interest.

The following tables present information regarding troubled debt restructurings (“TDRs”) by segment: (dollars in thousands):

Newly classified troubled debt restructurings:

 

		Three Months Ending March 31, 2012
		Number  of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Commercial			1			$	62			$	59
Residential			1				42				41
Consumer			1				18				17

 

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The above TDRs involved two loans where the term was extended and the monthly payment lowered and another matured residential loan where the term was extended and the monthly payment increased. All TDRs are considered impaired loans.

The Company had no TDR’s modified in the past twelve months that subsequently defaulted in the period ending March 31, 2012.

The Company acquired loans from American National Bank (“ANB”) on March 19, 2010 and its acquisition by merger of Community National Corporation 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. 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 March 31, 2012. The amounts are as follows (thousands):

 

Commercial		$	3,184
Consumer			9
Outstanding balance		$	3,193
Carrying amount, net of discount of $552		$	2,996
Accretable yield		$	65

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

 

Balance at December 31, 2011		$	76
Additions			0
Accretion			(11	)
Reclassification from nonaccretable difference			0
Disposals			0
Balance at March 31, 2012		$	65

 

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Note 4: Long-Term Debt

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

 

		March 31, 2012				December 31, 2011
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 Company 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 March 31, 2012 and December 31, 2011, the outstanding principal balance of the Capital Securities was $10,000,000. 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: 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,
		2012				2011
Numerator: Net income		$	361			$	1,005
Denominator:
Weighted-average common shares outstanding (basic)			3,424,248				3,424,162
Effect of stock options			9,944				24,179
Weighted-average common shares outstanding (diluted)			3,434,192				3,448,341
Earnings per share:
Basic		$	.11			$	.29
Diluted		$	.11			$	.29

For the three months ended March 31, 2012 and March 31, 2011, stock options covering 184,600 and 51,000 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.

Note 6: Disclosures about Fair Value of Financial Instruments

The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall. 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):

 

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		Fair Value Measurements Using
		Carrying Amount				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
March 31, 2012:
Financial assets
Cash and cash equivalents		$	92,965			$	92,965			$	0			$	0
Available-for-sale securities			154,437				0				154,437				0
Loans including loans held for sale, net			389,501				0				0				405,380
Stock in FRB and FHLB			10,025				0				10,025				0
Earned income receivable			3,104				0				3,104				0
FDIC loss share receivable			1,736				0				0				1,736
Financial liabilities
Deposits			602,963				0				607,003				0
Long-term debt			15,310								9,415				0
Interest payable			202				0				202				0
December 31, 2011:
Financial assets
Cash and cash equivalents		$	75,668			$	75,668			$	0			$	0
Available-for-sale securities			139,744				0				139,744				0
Loans including loans held for sale, net			399,801				0				0				411,499
Stock in FRB and FHLB			10,025				0				10,025				0
Earned income receivable			2,948				0				2,948				0
FDIC loss share receivable			1,928				0				0				1,928
Financial liabilities
Deposits			581,383				0				584,573				0
Long-term debt			15,310								9,938				0
Interest payable			202				0				202				0

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

Cash and Cash Equivalents

The carrying amount approximates fair value.

Loans, including loans held for sale, net

Fair value is estimated by discounting the future cash flows using the market rates at which similar notes would be made to borrowers with similar credit ratings and for the same remaining maturities. The market rates used are based on current rates the Bank would impose for similar loans and reflect a market participant assumption about risks associated with non-performance, illiquidity, and the structure and term of the loans along with local economic and market conditions.

 

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Stock in FRB and FHLB

Fair value is estimated at book value due to restrictions that limit the sale or transfer of such stock.

FDIC loss share receivable

The carrying amount approximates fair value. The carrying amount is based on future expected losses on loans covered under the loss share agreement with the FDIC.

Earned Income Receivable and Interest Payable

The carrying amount approximates fair value. The carrying amount for interest receivable and interest payable is determined using the interest rate, balance and last payment date. Trust income and commissions receivable is based on trust fee schedules, market value of trust assets and brokerage commission schedules.

Deposits

Fair value of term deposits is estimated by discounting the future cash flows using rates of similar deposits with similar maturities. The market rates used were based on current rates the Bank would offer on similar term deposits. The estimated fair value of demand, NOW, savings and money market deposits is the book value since rates are regularly adjusted to market rates and amounts are payable on demand at the reporting date.

Long-term Debt

Fair value of Federal Home Loan debt is estimated by discounting the future cash flows using rates of similar advances with similar maturities. These rates were obtained from current rates offered by FHLB. Fair value of Trust Preferred debt is estimated by discounting the future cash flows using rates of similar trust preferred debt issuances. These rates were obtained from a knowledgeable independent third party and reviewed by the Company.

Note 7: Commitments

Outstanding commitments to extend credit as of March 31, 2012 totaled $89,439,000. Standby letters of credit as of March 31, 2012 totaled $2,027,000.

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 2009.

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, 2012, the Company did not identify any uncertain tax positions that it believes should be recognized in the financial statements.

 

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Note 9: Fair Value Measurements

The Company accounts for fair values in accordance with accounting guidance for Fair Value Measurements prescribed under the FASB Accounting Standards Codification. The ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

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

 

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 value 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 ASC fair value hierarchy in which the fair value measurements fall at March 31, 2012 and December 31, 2011. (See fair values by type of security in Note 2) (thousands):

 

						Fair Value Measurements at Reporting 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, 2012:
Available-for-sale securities		$	154,437			$	0			$	154,437			$	0
December 31, 2011:
Available-for-sale securities		$	139,744			$	0			$	139,744			$	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 sheets, as well as the general classification of such assets pursuant to the valuation hierarchy:

Impaired Loans (Collateral Dependent)

At March 31, 2012 and December 31, 2011, 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, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. As of December 31, 2011, one impaired loan of approximately $191,000 is secured by equipment. Management has determined fair value measurements based on research of current equipment values.

 

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Other Real Estate Owned

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, new appraisals are periodically obtained by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Appraisals are reviewed for accuracy and consistency by the Credit Administration area, and appraisers are selected from the list of approved appraisers maintained by management. OREO is classified within Level 3 of the fair value hierarchy.

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the ASC fair value hierarchy in which the fair value measurements fall at March 31, 2012 and December 31, 2011. The values below only represent those assets with a change in their fair value estimate since the previous year end (thousands).

 

						Fair Value Measurements at Reporting 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, 2012:
Impaired loans		$	2,915			$	0			$	0			$	2,915
Other real estate owned			840				0				0				840
December 31, 2011:
Impaired loans		$	2,647			$	0			$	0			$	2,647
Other real estate owned			2,043				0				0				2,043

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill.

 

Description

Fair Value

Valuation Technique

Unobservable Inputs

Range (Weighted  Average)

March 31, 2012:

Impaired loans

$

2,915

Market comparable properties

Costs to sell

10

%

Other real estate owned

$

840

Market comparable properties

Comparability adjustments

Not available

Note 10: Effect of Recent Accounting Standards

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

 

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require disclosures about quantitative information about the unobservable inputs 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. These disclosures are included in the March 31, 2012 financial statements.

The FASB issued Accounting Standards Update No. 2011-05 and 2011-12, 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. The Company has included this statement in the March 31, 2012 financial statements.

In September 2011, 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 on annual or interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. 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 March 31, 2012 and the related condensed consolidated statements of income, comprehensive income and cash flows for the three-month periods ended March 31, 2012 and 2011. 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, 2011 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 20, 2012, 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, 2011 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 9, 2012

 

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

Results of Operations

Net income for the first quarter of 2012 was $361,000, or $.11 per share. Net income for the first quarter of 2011 was $1.0 million, or $.29 per share. Net income is down primarily due to a $750,000 increase in the provision for loan losses this quarter, compared to the first quarter of 2011. Additionally, NB&T recognized $789,000 in securities sale gains the same period last year, compared to no securities sales this year.

Net Interest Income

Net interest income was $5.6 million for the first quarter of 2012, compared to $5.9 million for the first quarter of 2011. Net interest margin decreased to 3.46% for the first quarter of 2012, compared to 3.84% for the same quarter last year. The net interest margin decreased primarily due to a change in asset mix from higher-yielding loans to lower-yielding securities largely due to decreased loan demand and increased sales of loans. Average loans, which had an average rate of 5.66%, declined $13.3 million, while average securities, with an average rate of 2.23%, increased $14.6 million in the first quarter of 2012.

Provision for Loan Losses

The provision for loan losses for the first quarter of 2012 was $1.3 million, compared to $550,000 in the same quarter last year. Net charge-offs were $1.4 million in the first quarter of 2012, compared to $758,000 in the first quarter of 2011. Charge-offs in 2012 increased primarily due to the write-off of one commercial loan for approximately $850,000, which was fully reserved for in the previous quarter. The provision for loan losses was increased to add specific loan reserves of approximately $622,000 for two commercial real estate loans where lower sales offers are being negotiated on the real estate properties securing these loans and to add general reserves related to increased charge-off experience. Non-performing loans declined to $10.0 million at March 31, 2012, compared to $12.1 million at December 31, 2011. Approximately $1.6 million of the non-performing loans outstanding at March 31, 2012 are covered under the Company’s FDIC loss share agreement, with the FDIC sharing in 80% of any future losses associated with those loans.

Non-interest Income

Total non-interest income was $2.1 million for the first quarter of 2012, compared to $2.6 million for the first quarter of 2011. Non-interest income for 2011 was higher due to the Company realizing $789,000 in gains on the sale of approximately $23.0 million in securities, partially offset by increased overdraft fees in 2012.

Non-interest Expense

Total non-interest expense was $6.0 million for the first quarter of 2012, compared to $6.6 million for the first quarter of 2011. The decline in expense is to due to an overall focus on expense reduction primarily in the areas of personnel, branch hours, marketing and other processing costs.

Income Taxes

The provision for income taxes for the first quarter of 2012 was $4,000, or 1.1%, compared to $348,000, or 25.7%, for the first quarter of 2011. The lower effective tax rate for the first quarter of 2012 is primarily due to the decrease in taxable income at the full 34% marginal rate.

 

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Financial Condition

The changes that have occurred in the Company's financial condition during 2012 are as follows (in thousands):

 

		March 31,				December 31,				2012 Change
		2012				2011				Amount				Percent
Total assets		$	697,620			$	675,588			$	22,032				3.3
Interest-earning deposits			81,290				61,441				19,849				32.3
Federal funds sold			385				366				19				5.2
Loans, net*			389,794				399,801				(10,007	)			(2.5	)
Securities			154,437				139,744				14,693				10.5
Demand deposits			103,148				97,732				5,416				5.5
Savings, NOW, MMDA deposits			352,515				331,524				20,991				6.3
CD’s $100,000 and over			35,969				36,997				(1,028	)			(2.8	)
Other time deposits			111,331				115,130				(3,799	)			(3.3	)
Total deposits			602,963				581,383				21,580				3.7
Long-term borrowings			15,310				15,310				0				0
Stockholders’ equity			70,663				70,790				(127	)			(.2	)

 

*	Includes loans held for sale

At March 31, 2012, total assets were $697.6 million, an increase of $22.0 million from December 31, 2011. The increase is primarily attributable to seasonal increases in public fund deposits, which were invested in short-term, interest-earning deposits.

Average total assets increased $17.6 million, or 2.6%, to $702.1 million from the first quarter of 2011. Average total gross loans decreased to $397.0 million, a decrease of $13.3 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 $3.7 million from the same quarter last year, while home equity and personal loans also declined $1.9 million and $3.6 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 $4.0 million in the first quarter of 2012, compared to the same quarter last year, with the Bank’s serviced portfolio for sold mortgage loans increasing $5.5 million to $30.5 million. Lower rates in the secondary mortgage market have led to increased sales of mortgage loans. Average securities balances increased from the same quarter last year to $148.7 million, an increase of $14.6 million. Average interest-earning deposits and federal funds sold increased $19.0 million.

Average total deposit liabilities increased $18.9 million for the first quarter of 2012 to $608.3 million, compared to an average of $589.4 million for the same quarter last year. Average public fund deposits increased $5.8 million for the first quarter of 2012, compared to the first quarter of 2011 as seasonal tax deposits were maintained in interest-bearing accounts. The Company has also 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.

 

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Allowance for Loan Losses

The following table is a summary of the Company’s loan loss experience for the periods ended March 31, 2012 and 2011 (dollars in thousands):

 

		Three Months Ended March  31
		2012				2011
Balance at beginning of period		$	4,668			$	3,714
Charge-offs:
Commercial and industrial			(884	)			(4	)
Commercial real estate			(296	)			(828	)
Real estate construction			0				0
Agricultural			0				0
Residential real estate			(181	)			(31	)
Consumer			(75	)			(67	)
Total charge-offs			(1,436	)			(930	)
Recoveries:
Commercial and industrial			1				1
Commercial real estate			9				125
Real estate construction			0				0
Agricultural			1				2
Residential real estate			9				6
Consumer			21				38
Total recoveries			41				172
Net charge-offs			(1,395	)			(758	)
Provision for loan losses			1,300				550
Balance at end of period		$	4,573			$	3,506

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

 

		March 31, 2012				December 31, 2011				March 31, 2011
Loans accounted for on non-accrual basis		$	9,647			$	12,007			$	10,023
Accruing loans which are past due 90 days			327				133				1,038
Other real estate owned			3,500				3,520				4,658
Total non-performing assets		$	13,474			$	15,660			$	15,719
Troubled debt restructurings, accruing			2,057				2,050				455
Ratios:
Allowance to total loans			1.16	%			1.15	%			0.86	%
Net charge-offs to average loans (annualized)			1.41	%			0.34	%			0.75	%
Non-performing assets to total loans and other real estate owned			3.39	%			3.84	%			3.91	%

 

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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 allocations 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 quarter of 2012, the Company charged off approximately $850,000 on one commercial loan, which was fully reserved for in the previous quarter. As of March 31, 2012, there was $7.1 million in small business relationships on nonaccrual. Approximately $2.0 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 $923,000 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 $2.2 million with the largest balance being $273,000. In addition, approximately $685,000 were acquired from ANB and are covered under the FDIC loss share agreement. Non-accrual consumer loans totaled $85,000, and home equity credit loans totaled $242,000.

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, 2012 was 65.4%, compared to 69.6% at December 31, 2011 and 68.6% at the same date in 2011. Loans to total assets were 56.5% at March 31, 2012, compared to 59.9% at December 31, 2011 and 61.2% at the same time last year. At March 31, 2012, the Company had $81.3 million in interest-earning deposits. The Company has $154.4 million in available-for-sale securities that are readily marketable. Approximately 51.7% 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 94.0% 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.

 

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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, 2012 and December 31, 2011, 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, 2012
Total Risk-Based Capital (to Risk-Weighted Assets)
Consolidated		$	79,001				19.20	%		$	32,918				8.0	%			N/A				N/A
Bank			71,770				17.46				32,888				8.0			$	41,110				10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated			74,428				18.09				16,459				4.0				N/A				N/A
Bank			67,197				16.35				16,444				4.0				24,666				6.0
Tier I Capital (to Average Assets)
Consolidated			74,428				10.66				27,940				4.0				N/A				N/A
Bank			67,197				9.67				27,807				4.0				34,759				5.0
As of December 31, 2011
Total Risk-Based Capital (to Risk-Weighted Assets)
Consolidated		$	79,620				19.15	%		$	33,270				8.0	%			N/A				N/A
Bank			71,285				17.16				33,242				8.0			$	41,552				10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated			74,952				18.02				16,635				4.0				N/A				N/A
Bank			66,617				16.03				16,621				4.0				24,931				6.0
Tier I Capital (to Average Assets)
Consolidated			74,952				11.03				27,185				4.0				N/A				N/A
Bank			66,617				9.87				27,009				4.0				33,762				5.0

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, 2011. 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.

 

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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

 

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.

 

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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 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, 2012, 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 100, 200 and 300 basis points 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.

 

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		Net Interest Income Change								Economic Value of Equity Change
Rate Ramp		3/31/12				ALCO Guideline				3/31/12				ALCO Guideline
+400			8.20	%		±	20	%			26.3	%		±	30	%
+300			6.46			±	15	%			22.0			±	20
+200			4.92			±	10				17.4			±	15
+100			3.00			±	5				10.2			±	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 March 31, 2012, 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, 2012, 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, 2011, as filed with the SEC on March 20, 2012, 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 – Mine Safety Disclosures

Item 5 – Other Information

Not applicable

Item 6 – Exhibits

Index to Exhibits

 

Exhibit Number
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 March 31, 2012 formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011; (ii) the Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and 2011 (unaudited); (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (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: May 10, 2012				/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 March 31, 2012 formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011; (ii) the Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and 2011 (unaudited); (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited); and (iv) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text (furnished herewith).		Included 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.

 

42