UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 2001
Commission file number 0-23134
NB&T FINANCIAL GROUP, INC.
(Formerly knows as INTERCOUNTY BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1004998
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
48 North South Street, Wilmington, Ohio 45177
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(937) 382-1441
----------------------------------------------------
(Registrant's telephone number, including area code)
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
The number of shares outstanding of the issuer's common stock, without par
value, as of November 1, 2001, was 3,124,172.
NB&T FINANCIAL GROUP, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2001, December 31, 2000
and September 30, 2000. . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2001
and 2000. . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Comprehensive Income
and Changes in Shareholders' Equity -
Nine Months Ended September 30, 2000 and 2001 . . . . . .3-4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2001 and 2000 . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . .6-9
Independent Accountants' Review Report . . . . . . . . . . 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . 11-19
Item 3. Quantitative and Qualitative Disclosures
about Market Risks. . . . . . . . . . . . . . . . . . .19
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 20
Item 2. Changes in Securities and Use of Proceeds . . . . . . . 20
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders . . 20
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 20
Part I - Financial Information
Item 1. Financial Statements
NB&T FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At September 30, 2001, December 31, 2000 and September 30, 2000
(thousands)
September 30, December 31, September 30,
2001 2000 2000
(unaudited) (a) (unaudited)
<s> <c> <c> <c>
ASSETS:
Cash and due from banks $ 19,927 $ 19,331 $ 16,566
Federal funds sold 30,257 15 13,038
Interest bearing deposits in banks 175 49 77
------- ------- -------
Total cash and cash equivalents 50,359 19,395 29,681
Securities available for sale, at
market value 158,668 115,836 97,161
Securities held to maturity (market
value-$45,373, $44,268, and $42,454) 44,409 44,374 44,361
------- ------- -------
Total securities 203,077 160,210 141,522
Loans 361,629 374,101 374,158
Less-allowance for loan losses 3,653 3,802 4,002
------- ------- -------
Net loans 357,976 370,299 370,156
Loans held for sale 1,494 1,519 1,556
Premises and equipment 12,942 11,532 11,267
Earned income receivable 5,344 5,002 4,528
Other assets 12,298 11,275 12,203
------- ------- -------
TOTAL ASSETS $643,490 $579,232 $570,913
======= ======= =======
LIABILITIES:
Demand deposits $ 37,607 $ 42,965 $ 37,530
Savings, NOW, and money market
deposits 175,675 147,470 151,623
Certificates $100,000 and over 50,359 43,040 44,852
Other time deposits 169,757 173,213 170,767
------- ------- -------
Total deposits 433,398 406,688 404,772
Short-term borrowings 43,448 40,148 36,159
Long-term debt 111,323 80,323 80,431
Other liabilities 4,063 2,591 2,382
------- ------- -------
TOTAL LIABILITIES 592,232 529,750 523,744
------- ------- -------
SHAREHOLDERS' EQUITY:
Preferred shares-no par value,
authorized 100,000 shares; none
issued
Common shares-no par value,
authorized 6,000,000 shares;
issued 3,818,950 shares 1,000 1,000 1,000
Surplus 8,161 8,128 8,093
Unearned ESOP shares, at cost (304) (299) (407)
Retained earnings 47,133 44,742 44,021
Accumulated other comprehensive
income (loss), net of taxes 1,232 223 (1,224)
Treasury shares, at cost, 697,028
shares at September 30, 2001; 615,166
at December 31, 2000; 630,636 shares
at September 30, 2000 (5,964) (4,312) (4,314)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 51,258 49,482 47,169
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $643,490 $579,232 $570,913
======= ======= =======
<FN>
(a) Financial information as of December 31, 2000, has been derived from the
audited, consolidated financial statements of the Registrant.
</FN>
The accompanying notes to financial statements are an integral part of these
statements.
-1-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
NB&T FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(thousands, except shares and per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
2001 2000 2001 2000
<s> <c> <c> <c> <c>
INTEREST INCOME:
Interest and fees on loans $ 7,547 $ 8,118 $23,111 $23,401
Interest on securities
available for sale:
Taxable 2,010 1,687 5,792 4,957
Non-taxable 109 108 325 325
Interest on securities held
to maturity - non-taxable 570 568 1,707 1,722
Interest on deposits in banks 4 1 9 10
Interest on federal funds sold 208 43 616 61
------ ------ ------ ------
TOTAL INTEREST INCOME 10,448 10,525 31,560 30,476
------ ------ ------ ------
INTEREST EXPENSE:
Interest on savings, NOW and
money market deposits 1,049 1,048 3,340 3,007
Interest on time certificates
$100,000 and over 711 722 2,342 1,911
Interest on other deposits 2,404 2,501 7,384 6,708
Interest on short-term borrowings 280 548 1,147 1,523
Interest on long-term debt 1,209 1,194 3,466 3,411
------ ------ ------ ------
TOTAL INTEREST EXPENSE 5,653 6,013 17,679 16,560
------ ------ ------ ------
NET INTEREST INCOME 4,795 4,512 13,881 13,916
PROVISION FOR LOAN LOSSES 375 725 1,125 1,575
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,420 3,787 12,756 12,341
------ ------ ------ ------
NON-INTEREST INCOME:
Trust services 324 333 936 957
Service charges on deposits 514 463 1,421 1,302
Other service charges and fees 83 81 237 250
ATM network fees 203 187 620 523
Insurance agency commissions 444 227 1,179 859
Securities losses, net - (2,070) 260 (2,070)
Income from BOLI 159 - 479 -
Other 272 192 743 560
------ ------ ------ ------
TOTAL NON-INTEREST INCOME 1,999 (587) 5,875 2,381
------ ------ ------ ------
NON-INTEREST EXPENSES:
Salaries 2,019 1,448 5,685 4,787
Employee benefits 335 229 1,011 875
Equipment 675 543 1,906 1,692
Occupancy 268 214 756 646
State franchise tax 143 119 425 358
Marketing 134 123 404 374
Other 1,115 960 3,081 2,813
------ ----- ------ ------
TOTAL NON-INTEREST EXPENSE 4,689 3,636 13,268 11,545
----- ----- ------ ------
INCOME BEFORE INCOME TAX 1,730 (436) 5,363 3,177
INCOME TAX (BENEFIT) PROVISION 342 (304) 994 458
----- ----- ------ ------
NET INCOME (LOSS) $ 1,388 $ (132) $ 4,369 $ 2,719
====== ===== ===== ======
Basic earnings per common share $0.45 $(0.04) $ 1.38 $ 0.85
Diluted earnings per common share 0.45 (0.04) 1.38 0.84
Dividends declared per common share 0.21 0.19 0.63 0.57
AVERAGE SHARES OUTSTANDING:
To compute basic earnings
per common share 3,116,523 3,192,988 3,160,725 3,194,260
To compute diluted earnings
per common share 3,132,049 3,207,656 3,175,134 3,206,367
The accompanying notes to financial statements are an integral part of these
statements.
-2-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
NB&T FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME and CHANGES IN SHAREHOLDERS' EQUITY
(thousands, except per share data)
(unaudited)
Retained
Unearned Earnings Accumulated
ESOP Less Cost Other Total Total
Common Shares of Treasury Comprehensive Shareholders' Comprehensive
Shares Surplus at Cost Shares Income (Loss) Equity Income
<s> <c> <c> <c> <c> <c> <c> <c>
Balance January 1, 2000 $1,000 $7,921 $(405) $38,846 $(3,331) $44,031
Comprehensive
Income:
Net income 2,851 2,851 $2,851
Net unrealized gains
on securities available
for sale (net of taxes
of $102) 196 196 196
-----
Total comprehensive income $3,047
=====
Dividends declared
($0.38 per share) (1,210) (1,210)
Treasury shares purchased (221) (221)
Stock options exercised 133 172 305
ESOP shares earned 26 (1) 25
----- ----- --- ------ ----- ------
Balance
September 30, 2000 $1,000 $8,080 $(406) $40,438 $(3,135) $45,977
===== ===== === ====== ===== ======
-3-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
NB&T FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME and CHANGES IN SHAREHOLDERS' EQUITY (Continued)
(thousands, except per share data)
(unaudited)
Retained
Unearned Earnings Accumulated
ESOP Less Cost Other Total Total
Common Shares of Treasury Comprehensive Shareholders' Comprehensive
Shares Surplus at Cost Shares Income (Loss) Equity Income
<s> <c> <c> <c> <c> <c> <c> <c>
Balance January 1, 2001 $1,000 $8,128 $(299) $40,430 $ 223 $49,482
Comprehensive
Income:
Net income 4,369 4,369 $4,369
Net unrealized gains
on securities available
for sale (net of taxes
of $608) 1,181 1,181 1,181
Reclassification
adjustment for net
realized gain on sale
of available-for-sale
securities included in
net income (net of
tax benefit of $88) (172) (172) (172)
-----
Total comprehensive income $5,378
=====
Dividends declared
($0.63 per share) (1,980) (1,980)
Treasury shares purchased (1,671) (1,671)
Stock options exercised 9 21 30
ESOP shares earned 24 (5) 19
----- ----- --- ------ ----- ------
Balance
September 30, 2001 $1,000 $8,161 $(304) $41,169 $ 1,232 $51,258
===== ===== === ====== ===== ======
-4-
Part I - Financial Information
(Continued)
Item 1. Financial Statements
NB&T FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
Nine Months Ended
September 30,
------------------
2001 2000
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,369 $ 2,719
Adjustments for non-cash items -
Depreciation, amortization and accretion 1,067 1,129
Provision for loan losses 1,125 1,575
Net realized (gains) losses on securities
available for sale (260) 2,070
Gain on loan sale (82) -
Increase in BOLI (479) -
Origination of mortgage loans held for sale (7,042) -
Proceeds from mortgage loans held for sale 7,100 -
Decrease in mortgage loans held for sale 25 43
Increase (decrease) in income receivable (274) (207)
Decrease (increase) in other assets (72) (503)
Increase in interest payable 18 381
Decrease in income taxes payable 25 (303)
Increase (decrease) in other liabilities 868 (398)
FHLB stock dividends (322) (306)
ESOP shares earned 24 40
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,090 6,240
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available
for sale 66,837 7,117
Proceeds from sales of securities available for sale 8,260 40,998
Purchases of securities available for sale (115,770) (33,195)
Proceeds from loan sales 8,950 -
Net decrease (increase) in loans 2,330 (23,998)
Purchase of bank-owned life insurance policies - (10,000)
Purchases of premises and equipment (2,618) (638)
Acquisition of insurance agencies (540) -
------- -------
NET CASH USED IN INVESTING ACTIVITIES (32,551) (19,716)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 26,710 24,840
Net increase (decrease) in short-term borrowings 3,300 (4,199)
Advances of long-term debt 31,000 5,000
Cash dividends paid (1,938) (1,750)
Proceeds from stock options exercised 24 149
Purchase of treasury shares (1,671) (221)
------- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 57,425 23,819
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 30,964 10,343
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,395 19,338
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 50,359 $29,681
======= ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 17,661 $16,179
Income taxes paid 969 888
The accompanying notes to financial statements are an integral part of these
statements.
-5-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements
NB&T FINANCIAL GROUP, INC. AND SUBSIDIARY
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management of NB&T Financial
Group, Inc. (the "Company") the unaudited consolidated financial statements
include all adjustments (consisting of normal, recurring accruals) considered
necessary for a fair presentation of financial position, results of
operations and cash flows for the interim periods.
The financial information presented on pages 1 through 9 of this Form 10-Q
has been subject to a review by J.D. Cloud & Co. L.L.P., the Company's
independent certified public accountants, as described in their report on
page 10.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Results of operations and cash flows for the nine-month period ended
September 30, 2001, are not necessarily indicative of the results to be
expected for the full year to end December 31, 2001. These unaudited
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, 2000 filed with the Securities and Exchange Commission.
LOANS
During the quarter ended March 31, 2001, the Company sold $8.8 million of
real estate loans and recognized a gain of $82 thousand.
Changes in the allowance for loan losses for the nine-month periods ended
September 30 were as follows:
2001 2000
---- ----
<s> <c> <c>
Balance at beginning of period $ 3,802 $ 3,222
Provision for loan losses 1,125 1,575
Charge-offs (1,461) (1,006)
Recoveries 187 211
----- -----
Balance at end of period $ 3,653 $ 4,002
===== =====
-6-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements (Continued)
SECURITIES
The increase in securities held for sale from December 31, 2000 is
attributable to purchases of $67 million in U.S. Agency Notes with
maturities ranging from two to ten years, $45 million in mortgage-backed
securities, and $4 million in corporate notes.
LONG TERM DEBT
In September 2001, an additional $25 million was borrowed from the
Federal Home Loan Bank at an average interest rate of 4.74%. $12.5
million fully matures in 2006, with principal and interest payments
due on a monthly basis. The remaining $12.5 million of the borrowings
is a fixed rate note maturing in 2011. Beginning in 2002 this note
can be converted to a variable-rate instrument that adjusts quarterly
at the three-month LIBOR rate if that rate equals or exceeds 7.50%.
EMPLOYEE STOCK OPTIONS
The Company applies APB No. 25 in accounting for its stock option plans.
Had compensation expense for the Company's stock options granted after
1996 been recognized under the methodology prescribed in SFAS No. 123,
the Company's net income would have been reduced by $20 and $16 thousand
in the three-month periods ended September 30, 2001 and 2000, respectively,
and $61 and $42 thousand in nine-month periods then ended. Earnings per
share would have been reduced by $.01 in each of the three-month periods
ended September 30, 2001 and 2000, and $.02 in the nine-month period ended
September 30, 2001.
RECENT ACQUISITIONS
On May 3, 2001, The National Bank and Trust Company (NB&T) acquired two
related insurance agencies located in Wilmington and Greenfield, Ohio for
approximately $865 thousand in cash and other obligations. The acquisition
was accounted for as a purchase transaction, and the aggregate purchase
price was assigned to the net assets acquired based on their fair value on
the dates of acquisition. The assets, liabilities and results of operation
since the acquisition date are included in the accompanying financial
statements.
On July 9, 2001, NB&T and Sabina Bank, subsidiary of Premier Financial
Bancorp, Inc., jointly announced the signing of a definitive agreement for
the acquisition by NB&T of the business of Sabina Bank. Sabina Bank operates
three offices in Sabina, Ada and Waynesfield, Ohio. Under the terms of the
Agreement, NB&T will acquire substantially all of the assets and assume
specified liabilities, including the deposits, of Sabina Bank. NB&T will
pay to Premier Financial Bancorp in cash an amount equal to 2.25 times the
regulatory Tier I capital of Sabina Bank, less intangible assets and certain
other amounts. Based on financial data as of March 31, 2001, that amount
would have been $11.5 million. The transaction is expected to be consummated
before the end of the year, subject to regulatory approval and customary
conditions of closing, and will be accounted for as a purchase transaction.
-7-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements (Continued)
EFFECT OF RECENT ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill will no
longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue
to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. During 2002,
the Company will perform the first of the required impairment tests of
goodwill as of January 1, 2002 and has not yet determined what the effect
of these tests will be on the earnings and financial position of the
Company.
SFAS No. 143, "Accounting for Asset Retirement Obligations", was issued by
the FASB in August 2001. The FASB focuses on accounting for closure costs
for certain assets that cannot be simply abandoned or disposed of at the end
of their useful lives. The Company believes this statement will have no
impact on the financial statements when it becomes effective in 2003.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", Was issued by the FASB on
October 3, 2001 and is effective for fiscal years beginning after December
15, 2001. This statement effectively supersedes SFAS No. 121 and APB Opinion
No. 30 and requires that long-lived assets, including discontinued operation,
that are to be disposed of by sale be measured at the lower of carrying
amount or fair value less cost to sell. The statement also resolves certain
implementation issues regarding SFAS No. 121. The applicability of this
statement to financial statements of the Company relates primarily to
intangible assets acquired and to be acquired in connection with recent and
announced acquisitions. The Company has not yet determined the impact of the
statement, if any, on the financial statements.
COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial statements include commitments to extend credit
and standby letters of credit. They involve, to varying degrees, elements
of credit risk in excess of the amount recognized in the balance sheet. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by contract amount of those instruments.
-8-
PART I. FINANCIAL INFORMATION
(Continued)
Item 1. Notes to Consolidated Financial Statements (Continued)
The Company used the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent off-balance-sheet
credit risk at September 30, 2001 were as follows (thousands):
<s> <c>
Commitments to extend credit $33,622
Standby letters of credit 1,734
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
The Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the Company
is based on management's credit evaluation of the counter party. Collateral
held varies, but may include accounts receivable, crops, inventory, property,
plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. At September 30,
2001, standby letters of credit were primarily issued to support public
bond financing by state and local government units and entities involved in
development and maintenance and repair. They expire during the period from
2001 through 2012.
The Company is party to various claims and proceedings arising in the normal
course of business. Management, after consultation with legal counsel,
believes that the liabilities, if any, arising from such proceedings and
claims will not be material to the consolidated financial position or results
of operations.
-9-
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Shareholders and Board of Directors
NB&T FINANCIAL GROUP, INC.
We have reviewed the accompanying consolidated balance sheets of NB&T
Financial Group, Inc. (formerly known as InterCounty Bancshares, Inc.) and
subsidiaries as of September 30, 2001 and 2000, the related consolidated
statements of income for each of the three-month and nine-month periods
ended September 30, 2001 and 2000, and the related consolidated statements
of comprehensive income and changes in shareholders' equity, and cash flows
for each of the nine-month periods ended September 30, 2001 and 2000. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. 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 U.S. generally accepted auditing standards, 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 review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements
for them to be in conformity with U.S. generally accepted accounting
principles.
We previously audited, in accordance with U.S. generally accepted auditing
standards, the consolidated balance sheet as of December 31, 2000 (presented
herein), and the related consolidated statements of income, comprehensive
income and changes in shareholders' equity, and cash flows for the year then
ended (not presented herein), and in our report dated February 7, 2001, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 2000, is fairly stated in all material
respects.
/s/ J.D. Cloud & Co. L.L.P.
-----------------------------
J.D. Cloud & Co. L.L.P.
Cincinnati, Ohio
November 8, 2001
-10-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operation
Net income for the third quarter of 2001 was $1.39 million, compared to a net
loss of $132,000 for the third quarter of 2000. Net income per share-basic
was $.45 for the third quarter of 2001, compared to a net loss of $.04 per
share for the third quarter of 2000. Net income for the first nine months of
2001 was $4.37 million, compared to $2.72 million for the first nine months
of 2000. Net income per share-basic was $1.38 for the nine months ended
September 30, 2001, compared to $.85 through the same date in 2000.
In the third quarter of 2000, the Company restructured a portion of its
securities portfolio, resulting in the recognition of an after-tax loss of
$1.37 million, and increased its provision for loan losses to $725,000.
The third quarter of 2001 showed an increase in net interest income of 6.3%
compared to the same quarter last year. This increase resulted primarily
from a decrease of 6.0% in interest expense, partially offset by a 0.7%
decreased in interest income. Average loans had a slight decrease of 2.4%
and therefore excess funds were invested in short-term funds and the
securities portfolio. Average securities and short-term funds increased
34.7% when compared to the same period last year. This change in the mix of
the balance sheet, and significant decreases in market rates, decreased the
tax equivalent yield on interest-earning assets from 8.13% in the third
quarter of 2000 to 7.43% in the third quarter of 2001.
Average interest-bearing liabilities increased 11.0% to $522.4 million, and
their cost decreased to 4.29% from 5.08% when comparing the third quarter of
2001 to the third quarter of 2000. The volume growth in average interest-
bearing liabilities was composed of $35.7 million in NOW and money market
accounts, $8.1 million in large certificates of deposit, and $11.2 million in
additional long-term borrowing from the Federal Home Loan Bank (FHLB).
The tax equivalent net interest margin decreased from 3.59% in the third
quarter of 2000 to 3.50% in the third quarter of 2001.
Net interest income for the first nine months of 2001 decreased 0.3% from the
same period last year. Although average interest-earning assets increased
8.5% from last year, the tax equivalent yield on these decreased from 8.07%
to 7.70%. Interest-bearing liabilities increased 10.7%, while the cost
decreased from 4.82% to 4.65%. Tax equivalent net interest margin was 3.48%
during the first nine months of 2001 versus 3.78% in 2000.
The provision for loan losses was $350,000 less than the third quarter of
last year as a result of the additional provision that was recorded in the
third quarter of last year in anticipation of potential losses on specific
-11-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
loans. Net charge-offs for the third quarter of 2001 were $704,000, .19% of
average loans, compared to $231,000, .06% of average loans, for the prior
year. The provision for loan losses year-to-date 2001 was $1,125,000,
compared to $1,575,000 for the same period in 2000. Net charge-offs year-to-
date 2001 were .35% of average loans, compared to .22% for the prior year.
The allowance is an amount that management believes will be adequate to
absorb potential losses on existing loans that may become uncollectible.
This evaluation is based on prior loan loss experience and such factors as
canges in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions
that may affect the borrowers' ability to pay.
The following table sets forth certain information regarding the past-due,
non-accrual and renegotiated loans of the Company at the dates indicated (in
thousands):
<CAPTIO>
September 30 December 31 September 30
2001 2000 2000
------ ------ ------
<s> <c> <c> <c>
Loans accounted for on
non-accrual basis $4,205 $4,098 $2,701
Accruing loans which are
past due 90 days or more 501 113 546
Renegotiated loans 0 0 0
----- ----- -----
Total $4,706 $4,211 $3,247
----- ----- -----
As of September 30, 2001 the $4,205,000 in non-accrual loans consisted of
seventeen loans collateralized by first mortgages, eleven with second
mortgages, three with government guarantees, three with titled vehicles, two
with a general chattel on inventory, fixtures, furniture and equipment, and
one with a default judgment on personal property.
All loans are expected to be resolved through term payments or through
liquidation of collateral in the normal course of business. The anticipated
loss in the year 2001 from all but two of these relationships is $254,000.
One of the remaining accounts is with a longstanding customer whose
outstanding balances with the Bank total approximately $5.9 million. $1.8
million is accounted for on a non-accrual basis. The remaining amount of
$4.1 million consists of a loan collateralized by a first mortgage on
commercial property with an 80% U.S. Department of Agriculture (USDA)
-12-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
government guarantee. This loan had been on non-accrual status since April
of this year and in September of this year was placed back on accrual status
due to the improved financial condition of the borrower. Several meetings
have taken place with the customer with the intent of restructuring a portion
of the debt. Due to the many variables affecting the restructuring, a loss,
if any to the Company cannot be determined. The other relationship is with
Bush Leasing, Inc., a company whose primary owner is George F. Bush, a former
director of the Company. The servicing and collection of the related
receivables of $570,000 has been outsourced. Management has determined the
potential losses on these accounts will be approximately $200,000. Projected
losses are based on currently available information and actual losses may
differ significantly from those discussed above.
In addition, management has identified one relationship that is not included
in the non-performing categories at September 30, 2001, but which management
through normal credit review procedures, has developed information regarding
possible credit problems that could cause the borrowers future difficulties
in complying with present loan repayment terms. That one relationships' total
outstanding is $932,000 with real estate and titled vehicle inventory as
collateral. Management is unable to determine any loss potential at this
time.
At September 30, 2001, the Company's allowance for loan losses totaled $3.65
million and was allocated to specifically classified loans and was generally
based on a three-year net charge-off history. The following table sets forth
an analysis of the Company's allowance for losses on loans for the periods
indicated (in thousands):
Nine Months Ended
September 30
2001 2000
------------------
<s> <c> <c>
Balance, beginning of period $3,802 $3,222
Charge-offs:
Commercial 432 447
Residential real estate 44 2
Installment 969 536
Credit Card - -
Other 16 21
----- -----
Total 1,461 1,006
----- -----
-13-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Nine Months Ended
September 30
2001 2000
------------------
<s> <c> <c>
Recoveries:
Commercial 29 52
Residential real estate - -
Installment 156 157
Credit Card - 1
Other 2 1
----- -----
Total 187 211
----- -----
Net Charge-offs (1,274) (795)
Provision for loan losses 1,125 1,575
----- -----
Balance, end of period $3,653 $4,002
===== =====
Non-interest income, excluding securities gains and losses, was $2.0 million
for the third quarter of 2001, an increase of 34.8% from the $1.5 million
earned in the third quarter of 2000. This increase was primarily due to
increases in ATM network fees as a result of increased transaction volume,
income on Bank Owned Life Insurance (BOLI) purchased at the end of the third
quarter last year, and higher insurance agency commissions due to increased
sales and two agency acquisitions. For the first nine months of 2001, non-
interest income, excluding securities gains and losses, was $5.6 million,
26.2% above the first nine months of 2000.
In October this year the Company contracted to sell the servicing on a $28.0
million real estate loan portfolio now being performed by the Company. These
are loans originated and subsequently sold with servicing retained by the
Company. The sale is scheduled for December 15, 2001, and is expected to
result in recording a gain on the sale of approximately $150,000.
Non-interest expense increased 29.0% for the quarter over the same period in
2000. Salaries and benefits increased 40.4% for the quarter partially due to
certain performance related officer bonus expense and retirement plan expense
being reduced in the third quarter of 2000 by $350,000. Also, the opening of
three new branches during 2001 contributed to the increase in personnel
expense as well as to equipment expense increasing 24.3% and occupancy
-14-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
expense increasing 25.2% from the third quarter of last year. State
franchise tax increased 20.2% from the third quarter last year due to the
increase in capital on which it is based. Other increases include legal and
professional fees related to outsourcing internal audit functions and problem
loan workouts, up 48.0% from the third quarter of last year. For the first
nine months of 2001, non-interest expense was $13.3 million, 14.9% above the
first nine months of 2000.
The Company's effective tax rate was 19.8% during the third quarter of 2001,
primarily due to non-taxable investment income.
Performance ratios for the third quarter of 2001 included a return on assets
of .89%, and a return on equity of 10.93%. For the first nine months of
2001, return on assets was .97%, and return on equity was 11.61%.
Financial Condition
The changes that have occurred in the Company's financial condition during
2001 are as follows (in thousands):
September 30 December 31 Change Change
2001 2000 Amount Percent
------- --------- ------ --------
<s> <c> <c> <c> <c>
Total Assets $643,490 $579,232 $64,258 11%
Federal Funds Sold 30,257 15 30,242 N/M
Loans 361,629 374,101 (12,472) (3)
Securities 203,077 160,210 42,867 27
Demand deposits 37,607 42,965 (5,358) (12)
Savings, Now, MMDA deposits 175,675 147,470 28,205 19
CD's $100,000 and over 50,359 43,040 7,319 17
Other time deposits 169,757 173,213 (3,456) (2)
Total deposits 433,398 406,688 26,710 7
Short-term borrowing 43,448 40,148 3,300 8
Long-term borrowing 111,323 80,323 31,000 39
Total assets have increased $64.3 million as a result of funds generated from
increases in deposits and short- and long-term borrowing during 2001. The
loan portfolio shows a net decrease from December 31, 2000 due to an $8.8
million loan sale at the end of the first quarter and decreased loan demand
in the commercial and indirect personal loan portfolios. The investment of
these excess funds resulted in the securities portfolio increasing $42.9
million and Federal Funds sold increasing $30.4 million since year-end. The
securities portfolio investments were primarily in U.S. Agency callable bonds
and mortgage-backed instruments. Deposit growth has occurred in the more
liquid transaction accounts and large certificates of public funds deposits.
The short-term borrowing increase is primarily in overnight repurchase
agreements with public fund and corporate customers.
-15-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Total assets grew 12.7% from the end of the third quarter of 2000, to a total
of $643.5 million. Total loans decreased to $361.6 million, a decrease of
3.3% from September 30, 2000. The average amount of commercial loans in the
third quarter of 2001 grew $6.7 million (4.4%) compared to the third quarter
of 2000, and the home equity loan average grew $2.9 million (11.7%) between
the two comparable periods. Average real estate loans decreased 10.6%
because of the $8.8 million sale, and average personal loans decreased 9.2%
as a result of a decreased emphasis on indirect loans because of thinner
margins in the product.
The securities portfolio average for the third quarter 2001 increased $30.7
million (20.4%) from the third quarter of last year. Most of the purchases
were of U.S. Agency callable bonds and mortgage-backed securities with
average maturities in the two-year to five-year range. In September of this
year, $25 million in 20-year mortgage-backed securities with an average life
of 5.7 years were purchased with funds borrowed from FHLB at a projected
spread of 130 basis points.
Total deposits increased 7.1% from the end of the third quarter of 2000.
Third quarter average interest-bearing liabilities grew $51.9 million (11.0%)
from the third quarter average in 2000. Third quarter 2001 average interest-
bearing transaction accounts increased $35.7 million (33.3%), and average
large certificates increased $8.1 million (17.3%), all from the third quarter
average in 2000.
Average long-term borrowing increased $11.2 million (14.0%) from the third
quarter of 2000. At September 30, 2001 and 2000, the Bank had outstanding
$111.0 million and $80.0 million, respectively, of long-term borrowing from
the FHLB. In January 2001 a $30 million variable-rate note that adjusts
quarterly at the three-month LIBOR rate was paid off and restructured into
three $12 million notes with a weighted average rate of 5.01% and maturity
dates in January 2011. In September of this year an additional $25 million
was borrowed at an average rate of 4.74% to fund the security purchase
mentioned above. Half of the borrowing was structured as a five-year
amortizing advance with monthly principal and interest payments. The other
half was a fixed-rate note maturing in 2011. At the option of the FHLB,
beginning in September 2002, this note can be converted to a variable-rate
instrument that adjusts quarterly at the three-month LIBOR rate if that rate
equals or exceeds 7.50%.
Total equity increased 8.7% from September 30, 2000 to $51.3 million at
September 30, 2001. Book value per share was $16.41 at September 30, 2001,
compared to $14.72 at September 30, 2000. These increases are attributable,
in part, to the general decreases in market interest rates and the resulting
net unrealized gain on securities available for sale of $1.2 million at
September 30, 2001, compared to a net unrealized loss of $1.2 million a year
ago. Also, on June 1 the Company purchased 83,632 of Company shares from
-16-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Wilmington College at $20 per share for a total purchase price of $1.7
million. These shares represent 2.6% of the shares outstanding. These
shares will initially be held in treasury, although the Company may
eventually use these shares for employee stock benefit plans. Equity to
assets was 7.97%, compared to 8.26% at the end of the third quarter of last
year. This increase is the result of the increase in assets mentioned
previously.
Effect of Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill will no
longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. During 2002, the
Company will perform the first of the required impairment tests of goodwill
as of January 1, 2002 and has not yet determined what the effect of these
tests will be on the earnings and financial position of the Company.
SFAS No. 143, "Accounting for Asset Retirement Obligations", was issued by
the FASB in August 2001. The FASB focuses on accounting for closure costs
for certain assets that cannot be simply abandoned or disposed of at the end
of their useful lives. The Company believes this statement will have no
impact on the financial statements when it becomes effective in 2003.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", Was issued by the FASB on
October 3, 2001 and is effective for fiscal years beginning after December
15, 2001. This statement effectively supersedes SFAS No. 121 and APB Opinion
No. 30 and requires that long-lived assets, including discontinued operation,
that are to be disposed of by sale be measured at the lower of carrying
amount or fair value less cost to sell. The statement also resolves certain
implementation issues regarding SFAS No. 121. The applicability of this
statement to financial statements of the Company relates primarily to
intangible assets acquired and to be acquired in connection with recent and
announced acquisitions. The Company has not yet determined the impact of the
statement, if any, on the financial statements.
-17-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Recent Acquisitions
On May 3, 2001, The National Bank and Trust Company (NB&T), a subsidiary of
NB&T Financial Group, Inc, acquired Bacon & Associates Agency, Inc. in
Wilmington, Ohio and Bacon & Dettwiller Affiliated Insurance Agencies, Inc.
in Greenfield, Ohio, which were then merged into the NB&T Insurance Agency.
The transaction was structured as a purchase of the shares of the two
agencies for cash.
On July 9, 2001, NB&T and Sabina Bank, subsidiary of Premier Financial
Bancorp, Inc., jointly announced the signing of a definitive agreement for
the acquisition by NB&T of the business of Sabina Bank. Sabina Bank operates
three offices in Sabina, Ada and Waynesfield, Ohio.
Under the terms of the Agreement, NB&T will acquire substantially all of the
assets and assume specified liabilities, including the deposits, of Sabina
Bank. NB&T will pay to Premier Financial Bancorp in cash an amount equal to
2.25 times the regulatory Tier I capital of Sabina Bank, less intangible
assets and certain other amounts. Based on financial data as of March 31,
2001, that amount would have been $11.5 million.
The acquisition will not require the approval of the shareholders of either
NB&T Financial Group or Premier Financial Bancorp. The transaction is
expected to close on December 1, 2001, subject to regulatory approval and
customary conditions of closing.
Liquidity and Capital Resources
Effective liquidity management ensures that the cash flow requirements of
depositors and borrowers, as well as Company cash needs, are met. The
Company manages liquidity on both the asset and liability sides of the
balance sheet. The loan to deposit ratio at September 30, 2001, was 83.8%,
compared to 94.8% at the same date in 2000. Loans to total assets were 56.4%
at the end of the third quarter of 2001, compared to 65.8% at the same time
last year. Management strives to keep this ratio below 70%. Of the total
securities portfolio, 78% consists of available-for-sale securities that are
readily marketable. Approximately 71% 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 88% core deposits, makes the Company less
susceptible to large fluctuations in funding needs. The Company has short-
term borrowing lines of credit with several correspondent banks. The Company
also has both short- and long-term borrowing available through the FHLB. The
Company has the ability to obtain deposits in the brokered certificate of
deposit market to help provide liquidity to fund loan growth.
-18-
PART I. FINANCIAL INFORMATION
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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). Bank
holding companies must maintain total risk-based, Tier 1 risk-based and Tier
1 leverage ratios of 8%, 4% and 3%, respectively. At September 30, 2001,
NB&T had a total risk-based capital ratio of 13.96%, a Tier 1 risk-based
capital ratio of 13.01%, and a Tier 1 leverage ratio of 7.77%.
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.
Techniques used to measure interest rate risk include both interest rate gap
management and simulation modeling that measures the effect of rate changes
on net interest income and market value of equity under different rate
scenarios. Since December 31, 2000, the Company has become slightly asset
sensitive compared to being liability sensitive in the zero- to one-year
range. This is the result of a 6.6% deposit growth and a 3.3% decrease in
loans being invested in short-term instruments. This change has not caused
any guidelines established by the Asset Liability Management Committee to be
violated.
-19-
PART II. OTHER INFORMATION
NB&T FINANCIAL GROUP, INC.
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
No. Description
11 Computation of Consolidated
Earnings Per Common Share
For the Three and Six Months
Ended September 30, 2001 and 2000
15 Letter of J.D. Cloud & Co. L.L.P.
Independent Certified Public
Accountants, dated November 8, 2001,
relating to Financial Information
99 Safe Harbor Under the Private
Securities Litigation Reform Act
of 1995.
b. The Company filed a Form 8-K with the Securities and Exchange
Commission on July 24, 2001 regarding a press release announcing
the results of operations for the second quarter 2001.
-20-
PART II. OTHER INFORMATION
NB&T FINANCIAL GROUP, INC.
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.
Registrant
Date: November 13, 2001 /s/Charles L. Dehner
-----------------------------------
Charles L. Dehner
Treasurer, Executive Vice President
and Principal Accounting Officer
-21-