UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23134
NB&T FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1004998
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
48 N. South Street, Wilmington, Ohio 45177
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (513) 382-1441
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act:
Common Shares, without par value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The issuer's common shares are not traded on any securities exchange and are
not quoted by a national quotation service. Management is aware of a sale of
the issuer's shares for $19.50 per share on January 7, 2002. Based upon such
price, the aggregate market value of the issuer's shares held by
nonaffiliates was $32,285,721.
As of March 20, 2002, 3,207,804 common shares were issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the definitive Proxy Statement for the 2002 Annual
Meeting of Shareholders of NB&T Financial G2roup, Inc. (the "Proxy
Statement"), are incorporated by reference into Part III of this Form 10-K:
1. Board of Directors;
2. Executive Officers;
3. Section 16(a) Beneficial Ownership Reporting Compliance;
4. Compensation of Executive Officers and Directors;
5. Voting Securities and Ownership of Certain Beneficial Owners
and Management; and
6. Certain Relationships and Related Transactions.
-1-
NB&T FINANCIAL GROUP, INC.
For the Year Ended December 31, 2001
Table of Contents
PART I
Page
----
<s> <c> <c>
Item 1: Business 3
Item 2: Properties 21
Item 3: Legal Proceedings 22
Item 4: Submission of Matters to a Vote of Security Holders 22
Part II
-------
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 23
Item 6: Selected Financial Data 23
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 7A: Quantitative and Qualitative Disclosures About
Market Risk 44
Item 8: Financial Statements and Supplementary Data 45
Item 9: Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 73
Part III
--------
Item 10: Directors and Executive Officers of the Registrant 73
Item 11: Executive Compensation 73
Item 12: Security Ownership of Certain Beneficial Owners
and Management 73
Item 13: Certain Relationships and Related Transactions 73
Part IV
-------
Item 14: Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 74
Exhibit Index 75
Signatures 76
-2-
PART I
Item 1. Description of Business
GENERAL
NB&T Financial Group, Inc. ("NB&T Financial"), an Ohio corporation, is a bank
holding company which owns all of the issued and outstanding common shares of
The National Bank and Trust Company, chartered under the laws of the United
States (the "Bank"). The Bank is engaged in the commercial banking business
in Southwestern Ohio, providing a variety of consumer and commercial
financial services. The primary business of the Bank consists of accepting
deposits, through various consumer and commercial deposit products, and using
such deposits to fund consumer loans, including automobile loans, loans
secured by residential and non-residential real estate, and commercial and
agricultural loans. All of the foregoing deposit and lending services are
available at each of the Bank's 21 full-service offices. In addition, the
Bank has one office which has drive-in facilities only and two remote service
units. The Bank has also installed 82 cash dispensers in convenience stores
in three states as of the end of 2001. The Bank also has a trust department
which presently administers 754 accounts having combined assets of $218
million.
In December 2001, NB&T Financial acquired a majority of the assets, totaling
$49 million, and assumed the deposit liabilities, totaling $42 million, of
Sabina Bank located in Sabina, Ohio, for an aggregate cash purchase price
of approximately $12.9 million.
The Bank operates its wholly-owned subsidiary NB&T Insurance Agency, Inc.
("NB&T Insurance"). NB&T Insurance has four locations, with its principal
office in Wilmington, Ohio. During 2001, the Bank acquired two related
agencies located in Wilmington and Greenfield, Ohio, and one other agency
for a total of approximately $958,000 in cash and other obligations. These
three agencies were then merged into NB&T Insurance. The agencies sell a
full line of insurance products, including: property and casualty, life,
health, and annuities.
Because of its ownership of all the outstanding stock of the Bank, NB&T
Financial is subject to regulation, examination and oversight by the Board
of Governors of the Federal Reserve System (the "FRB") under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). The Bank, as a national bank,
is subject to regulation, examination and oversight by the Office of the
Comptroller of the Currency (the "OCC") and special examination by the FRB.
The Bank is a member of the Federal Reserve Bank of Cleveland. In addition,
since its deposits are insured by the Federal Deposit Insurance Corporation
(the "FDIC"), the Bank is also subject to some regulation, oversight and
special examination by the FDIC. The Bank must file periodic financial
reports with the FDIC, the OCC and the Federal Reserve Bank of Cleveland.
Examinations are conducted periodically by these federal regulators to
determine whether the Bank and NB&T Financial are in compliance with various
regulatory requirements and are operating in a safe and sound manner.
Since its incorporation in 1980, NB&T Financial's activities have been
limited primarily to holding the common shares of the Bank. Consequently,
the following discussion focuses primarily on the business of the Bank.
-3-
Since its incorporation in 1980, NB&T Financial's activities have been
limited primarily to holding the common shares of the Bank. Consequently,
the following discussion focuses primarily on the business of the Bank.
FORWARD LOOKING STATEMENTS
In addition to the historic financial information contained herein with
respect to NB&T Financial, the following discussion contains forward-looking
statements that involve risks and uncertainties. Economic circumstances,
NB&T Financial's operations and NB&T Financial's actual results could differ
significantly from those discussed in the forward-looking statements. Some
of the factors that could cause or contribute to such differences are
discussed herein but also include changes in the economy and interest rates
in the nation and NB&T Financial's general market area. The forward-looking
statements contained herein include those with respect to the following
matters:
1. Management's expectation that it will continue to expand its
consumer lending activities, other than automobile loans;
2. Management's determination of the adequacy of the loan loss
allowance;
3. The effect of changes in interest rates;
4. Management's expectation that it will continue its emphasis on
growth in the real estate and commercial portfolios; and
5. Management's belief that a substantial percentage of the
certificates of deposit maturing within one year will renew with
the Bank at maturity.
Lending Activities
General. The Bank's income consists primarily of interest income generated
by lending activities, including the origination of loans secured by
residential and nonresidential real estate, commercial and agricultural
loans, and consumer loans.
Loan Maturity Schedule. The following table sets forth certain information
at December 31, 2001, regarding the net dollar amount of loans maturing in
the Bank's portfolio, based on contractual terms to maturity. Demand loans,
loans having no stated schedule of repayment and no stated maturity and
overdrafts are reported as due in one year or less:
Due 0-1 Year Due 1-5 Years Due 5 + Years Total
(In thousands)
<s> <c> <c> <c> <c>
Commercial and
industrial $20,918 $36,718 $49,340 $106,976
Commercial real estate 3,052 5,336 28,023 36,411
Agricultural 9,016 2,500 7,560 19,076
------ ------ ------ -------
Total $32,986 $44,554 $84,923 $162,463
====== ====== ====== =======
-4-
The following table sets forth the dollar amount of certain loans, due after
one year from December 31, 2001, which have predetermined interest rates and
floating or adjustable interest rates:
Predetermined Floating or
rates adjustable rates Total
------------- ---------------- -------
(In thousands)
<s> <c> <c> <c>
Commercial and industrial $19,325 $ 66,733 $ 86,058
Commercial real estate 4,334 29,025 33,359
Agricultural 671 9,389 10,060
------ ------- -------
Total $24,330 $105,147 $129,477
====== ======= =======
Commercial and Industrial Lending. Commercial and industrial lending has
been an area of growth for the Bank. The Bank originates loans to businesses
in its market area, including "floor plan" loans to automobile dealers and
loans guaranteed by the Small Business Administration. The typical
commercial borrower is a small to mid-sized company with annual sales under
$5,000,000. The majority of commercial loans are made at adjustable rates of
interest tied to the prime rate. Commercial loans typically have terms of up
to five years. At December 31, 2001 the Bank had $107.0 million, or 28% of
total loans, invested in commercial and industrial loans. Commercial and
industrial lending entails significant risks. Such loans are subject to
greater risk of default during periods of adverse economic conditions.
Because such loans are secured by equipment, inventory, accounts receivable
and other non-real estate assets, the collateral may not be sufficient to
ensure full payment of the loan in the event of a default.
Commercial Real Estate. The Bank makes loans secured by commercial real
estate located in its market area. Such loans generally are adjustable-rate
loans for terms of up to 20 years. The types of properties securing loans
in the Bank's portfolio include warehouses, retail outlets and general
industrial use properties. At December 31, 2001, the Bank had $36.4 million,
or 10% of total loans, invested in commercial real estate loans. Commercial
real estate lending generally entails greater risks than residential real
estate lending. Such loans typically involve larger balances and depend on
the income of the property to service the debt. Consequently, the risk of
default on such loans may be more sensitive to adverse economic conditions.
The Bank attempts to minimize such risks through prudent underwriting
practices.
Agricultural Loans. The Bank makes agricultural loans, which include loans
to finance farm operations, equipment purchases, and land acquisition. The
repayment of such loans is significantly dependent upon income from farm
operations, which can be adversely affected by weather and other physical
conditions, government policies and general economic conditions. At December
31, 2001, the Bank had $19.1 million, or 5% of total loans, invested in
agricultural loans.
-5-
Residential Real Estate. The Bank makes loans secured by one- to four-
family residential real estate and multi-family (over four units) real
state located in its market area. The Bank originates both fixed-rate
mortgage loans and adjustable-rate mortgage loans ("ARMs"). Fixed-rate
loans with terms of 15 to 30 years are typically originated for sale in the
secondary market. ARMs are held in the Bank's portfolio. At December 31,
2001, the Bank had $145.8 million, or 38% of total loans, invested in
residential real estate loans.
Installment Loans. The Bank makes a variety of consumer installment loans,
including home equity loans, automobile loans, recreational vehicle loans,
and overdraft protection. Consumer loans involve a higher risk of default
than loans secured by one- to four-family residential real estate,
particularly in the case of consumer loans which are unsecured or secured
y rapidly depreciating assets, such as automobiles. Repossessed collateral
for a defaulted consumer loan may not provide an adequate source of repayment
of the outstanding loan balance as a result of the greater likelihood of
damage, loss or depreciation, and the remaining deficiency may not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections depend on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
illness or personal bankruptcy. Various federal and state laws, including
federal and state bankruptcy and insolvency laws, may also limit the amount
which can be recovered on such loans. Management believes that the Bank's
underwriting practices have resulted in a favorable delinquency ratio and
loan loss experience for this portion of the Bank's total loan portfolio.
At December 31, 2001, the Bank had $70.3 million, or 18% of total loans,
invested in installment loans. The Bank has reduced its efforts to originate
new and used automobile loans due to increased competition and narrowing
interest rate spreads. The Bank expects to continue, subject to market
conditions, to expand its other consumer lending activities as part of its
plan to provide a wide range of personal financial services to its
customers.
Credit Card Service. The Bank offers credit card services directly through
a correspondent bank.
Loan Processing. Loan officers are authorized by the Board of Directors
to approve loans up to specified limits. Loans exceeding the loan officers'
approval authority are referred to the Bank's Senior Loan Committee. Any
loans made by the Bank in excess of the limits established for the Senior
Loan Committee must be approved by the Chairman of the Board and the
President of the Bank as representatives of the Board of Directors. All
loans in excess of $50,000 are reported to the Board on a monthly basis.
Loan, Originated, Purchases and Sales. Although the Bank generally does not
purchase loans, purchases could occur in the future. Fixed-rate residential
real estate loans are originated for sale in the secondary market. From time
to time, the Bank sells participation interests in loans it originates.
-6-
Allowance for Loan Losses. Federal regulations require that the Bank
establish prudent general allowances for loan losses. Senior management,
with oversight responsibility provided by the Board of Directors, reviews
on a monthly basis the allowance for loan losses as it relates to a number
of relevant factors, including but not limited to, historical trends in the
level of non-performing assets and classified loans, current charge-offs and
the amount of the allowance as a percent of the total loan portfolio. While
management believes that it uses the best information available to determine
the allowance for loan losses, unforeseen market conditions could result in
adjustments, and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the
final determination. At December 31, 2001, the Bank's allowance for loan
losses totaled $3.8 million and 43% was allocated to specific credits, and
the rest was allocated based on previous charge-off experience, portfolio
risk, economic conditions and anticipated loan growth.
Because the loan loss allowance is based on estimates, it is monitored
regularly and adjusted as necessary to provide an adequate allowance.
-7-
The following table sets forth an analysis of the Bank's allowance for losses
on loans for the periods indicated:
December 31,
------------------------------------------
2001 2000 1999 1998 1997
(Dollars in thousands)
<s> <c> <c> <c> <c> <c>
Balance at beginning of
period $ 3,802 $ 3,222 $ 2,641 $ 2,761 $ 2,686
Charge-offs:
Commercial and industrial (691) (858) (200) (702) (178)
Commercial real estate (50) (15) (10) (45) -
Agricultural (119) (107) (10) - -
Residential real estate (150) (66) (9) - (6)
Installment (1,318) (825) (842) (681) (694)
Credit card - - - - (64)
Other (18) - - (7) -
------- ------- ------- ------- -------
Total charge-offs (2,346) (1,871) (1,071) (1,435) (942)
------- ------- ------- ------- -------
Recoveries:
Commercial and industrial 33 62 27 7 63
Commercial real estate - - 9 - -
Agricultural 9 5 - - -
Residential real estate 2 1 1 - 2
Installment 188 183 213 145 133
Credit card - 1 2 12 17
Other - - - 1 2
------ ----- ----- ----- -----
Total recoveries 232 252 252 165 217
------ ----- ----- ----- -----
Net charge-offs (2,114) (1,619) (819) (1,270) (725)
Acquired in acquisition 622 - - - -
Provision for possible
loan losses 1,500 2,199 1,400 1,150 800
------- ------- ------- ------- -------
Balance at end of period $ 3,810 $ 3,802 $ 3,222 $ 2,641 $ 2,761
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding
during the period 0.58% 0.44% 0.25% 0.44% 0.26%
==== ==== ==== ==== ====
Average loans outstanding $366,190 $367,419 $330,734 $287,674 $274,372
======= ======= ======= ======= =======
-8-
Investment Activities
The following table sets forth the composition of the Bank's securities
portfolio, based on amortized cost, at the dates indicated:
At December 31,
-----------------------------------
2001 2000 1999
(In thousands)
<s> <c> <c> <c>
Securities available
for sale:
U.S. Treasuries & U.S.
Agency notes $ 54,117 $49,641 $ 34,730
U.S. Agency mortgage-
backed securities 96,071 39,857 55,324
Other mortgage-backed
securities 5,021 11,164 11,320
Municipals 8,572 8,567 8,563
Other securities 14,953 6,269 5,833
------- ------- -------
Total securities available
for sale 178,734 115,498 115,770
------- ------- -------
Securities held to
maturity:
Municipal securities 44,430 44,374 44,304
------- ------- -------
Total securities held
to maturity 44,430 44,374 44,304
------- ------- -------
Total securities $223,164 $159,872 $160,074
======= ======= =======
The following table sets forth the amortized cost of the Bank's securities
portfolio at December 31, 2001. U.S. agency mortgage-backed securities
are categorized according to their expected prepayment speeds. All other
securities are categorized based on contractual maturity. Actual maturities
may differ from contractual maturities when borrowers have the right to call
or prepay obligations. Yields do not include the effect of income taxes.
-9-
Less than 1 year 1 to 5 years 5 to 10 years Over 10 years Total
---------------- ------------- ------------- ------------- -----
Weighted Weighted Weighted Weighted Weighted
Amortized average Amortized average Amortized average Amortized average Amortized average
cost yield cost yield cost yield cost yield cost yield
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Securities available
for sale:
U.S. Treasuries
and U.S. Agency
notes $ 6,000 1.75% $29,044 5.32% $19,073 6.12% $ - 4.48% $ 54,117 4.76%
U.S. Agency
mortgage-backed
securities 13,728 6.32 47,394 6.16 24,590 6.07 10,359 6.12 96,071 6.16
Other mortgage-
backed
securities 4,108 5.00 803 6.03 24 6.03 86 6.03 5,021 5.19
Municipals - - - - - - 8,572 5.04 8,572 5.04
Other securities - - 10 - - - 14,943 4.27 14,953 4.27
------ ------ ------ ------ -------
Total securities
available for
sale 23,836 4.94 77,251 5.91 43,687 6.08 33,960 3.63 178,734 5.14
------ ------ ------ ------ -------
Securities held
to maturity:
Municipal
securities - - 904 9.15 100 4.50 43,426 5.05 44,430 5.13
------ ------ ------ ------ -------
Total securities
held to maturity - - 904 9.15 100 4.50 43,426 5.05 44,430 5.13
------ ------ ------ ------ -------
Total securities $23,836 4.94% $78,155 5.95% $43,787 6.08% $77,386 4.27% $223,164 5.14%
====== ====== ====== ====== =======
-10-
Trust Services
The Bank received trust powers in 1922 and currently holds $214 million in
net assets held in 723 accounts on December 31, 2001 in the Trust Department.
These assets are not included in the Bank's balance sheet because, under
federal law, neither the Bank nor its creditors can assert any claim against
funds held by the Bank in its fiduciary capacity. In addition to
administering trusts, the services offered by the Trust Department include
investment management, estate planning and administration, tax and financial
planning and employee benefit plan administration. The Trust Department also
provides investment services to customers of the Bank and others, enabling
them to purchase fixed annuities, variable annuities, mutual funds, and
stocks and bonds. The Trust Department is staffed by four officers and
five staff members and generated $1,167,000 in fee income during 2001.
Deposits and Borrowings
General. Deposits have traditionally been the primary source of the Bank's
funds for use in lending and other investment activities. In addition to
deposits, the Bank derives funds from interest payments and principal
repayments on loans and income on earning assets. Loan payments are a
relatively stable source of funds, while deposit inflows and outflows
fluctuate more in response to general interest rates and money market
conditions.
Deposits. Deposits are attracted principally from within the Bank's market
area through the offering of numerous deposit instruments, including checking
accounts, regular passbook savings accounts, NOW accounts, money market
deposit accounts, term certificate accounts and individual retirement
accounts ("IRAs"). Interest rates paid, maturity terms, service fees and
withdrawal penalties for the various types of accounts are established
periodically by the Bank's Asset/Liability Committee and the Executive
Committee based on the Bank's liquidity requirements, growth goals and market
trends. The Company has not used brokers in the past to attract deposits,
although competition from banks and other financial institutions has caused
the Company to include this as a viable alternative to funding needs.
Currently the amount of deposits from outside the Bank's market area is not
significant.
The following table sets forth the dollar amount of time deposits greater
than $100,000 maturing in the periods indicated:
Maturity At December 31, 2001
-------- --------------------
(In thousands)
<s> <c>
Three months or less $13,296
Over 3 months to 6 months 15,138
Over 6 months to 12 months 11,341
Over twelve months 5,383
------
Total $45,158
======
-11-
Borrowings. The Federal Reserve System functions as a central reserve bank
providing credit for its member banks and certain other financial
institutions. As a member in good standing of the Federal Reserve Bank of
Cleveland, the Bank is authorized to apply for advances, provided certain
standards of credit-worthiness have been met. The Bank is also a member of
the Federal Home Loan Bank system. The Bank currently has outstanding $114.8
million of borrowings from the Federal Home Loan Bank used primarily to fund
the purchase of U.S. Agency mortgage-backed securities and municipal bonds.
The following table sets forth certain information regarding the Bank's
outstanding borrowings at the dates and for the periods indicated:
December 31,
--------------------------
2001 2000 1999
(Dollars in thousands)
<s> <c> <c> <c>
Maximum amount of short-term
borrowings outstanding at any
month end during period $44,158 $41,624 $40,358
Average amount of short-term
borrowings outstanding during
period 34,250 33,486 26,518
Amount of short-term borrowings
outstanding at end of period 22,055 40,148 40,358
Weighted average interest rate of
short-term borrowings during period 3.76% 6.05% 4.78%
Weighted average interest rate of
short-term borrowings at end of
period 1.39% 6.14% 4.45%
-12-
Average Balance Sheets
The following table presents, for the years indicated, the total dollar amounts of interest
from average interest-earning assets and the resultant yields, as well as the interest expense
on average interest-bearing liabilities, expressed both in dollars and rates. The table does
not reflect any effect of income taxes and includes non-performing loans in the calculations.
2001 2000 1999
---------------------------- ---------------------- ------------------------------
Average Interest Average Interest Average Interest
outstanding Yield/ earned/ outstanding Yield/ earned/ outstanding Yield/ earned/
balance rate paid balance rate paid balance rate paid
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Loans (1) $366,190 8.33% 30,508 $367,419 8.59% $31,549 $330,734 8.38% $27,728
Securities
available
for sale 137,422 6.18 8,493 104,483 6.77 7,073 123,212 6.27 7,725
Securities
held to
maturity 44,398 5.12 2,275 44,344 5.17 2,291 39,533 5.03 1,989
Deposits in
banks 461 2.39 11 234 4.49 10 283 4.73 14
Federal funds
sold 19,073 3.70 706 2,067 6.11 126 1,708 4.86 83
------- ------ ------- ------ ------- ------
Total interest-
earning
assets 567,544 7.40 41,993 518,547 7.92 41,049 495,470 7.58 37,539
Non-earning
assets 47,082 36,631 33,930
Allowance for
loan losses (3,836) (3,612) (2,945)
------- ------- -------
Total assets $610,790 $551,566 $526,455
======= ======= =======
-13-
Savings
deposits $ 31,120 1.55 483 $ 34,069 1.75 595 $ 36,566 2.01 734
NOW and MMDA 136,002 2.71 3,679 109,935 3.24 3,565 107,664 2.81 3,025
CD's over
$100M 53,125 5.45 2,895 43,672 5.95 2,600 43,186 5.28 2,281
Other time
deposits 168,385 5.70 9,594 162,709 5.72 9,315 147,890 5.20 7,685
Short-term
borrowings 34,250 3.76 1,287 33,482 6.05 2,024 26,554 4.77 1,267
Long-term debt 93,572 5.25 4,911 79,406 5.81 4,612 75,539 5.51 4,158
------- ------ ------- ------ ------- ------
Total interest-
bearing
liabilities 516,454 4.42 22,849 463,273 4.90 22,711 437,399 4.38 19,150
------ ------ ------
Demand
deposits 40,883 39,846 41,536
Other
liabilities 2,778 2,725 3,094
Capital 50,675 45,722 44,426
------- ------- -------
Total
liabilities
and capital $610,790 $551,566 $526,455
======= ======= =======
Net interest
income $19,144 $18,338 $18,389
====== ====== ======
Interest rate
spread 2.98% 3.01% 3.20%
Net interest
income margin 3.37 3.54 3.71
Ratio of
interest-earning
assets to
interest-bearing
liabilities 109.89% 111.93% 113.28%
<FN>
(1) Includes nonaccrual loans.
</FN>
-14-
The following table describes the extent to which the changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Bank's interest income and expense during the periods indicated
for each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes
in volume (the difference between the average volume for the periods
compared, multiplied by the prior year's yield or rate paid), (ii) changes in
rate (the difference between the weighted average yield or rate paid for the
periods compared, multiplied by the prior year's average volume) and (iii)
changes not solely attributable to either volume or rate.
Years ended December 31,
------------------------------------
2001 vs 2000
------------------------------------
Increase (decrease) due to
------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------- -----
(In thousands)
<s> <c> <c> <c> <c>
Interest income attributable to:
Loans $ (79) $ (869) $ (93) $(1,041)
Securities available for sale 2,273 (639) (214) 1,420
Securities held to maturity 3 (19) - (16)
Deposits in banks 10 (5) (4) 1
Federal funds sold 1,040 (50) (410) 580
----- ----- --- -----
Total interest-earning assets 3,247 (1,582) (721) 944
----- ----- --- -----
Interest expense attributable to:
Savings deposits (52) (67) 7 (112)
NOW and MMDA 845 (590) (141) 114
CD's over $100,000 563 (220) (48) 295
Other time deposits 325 (44) (2) 279
Short-term borrowings 46 (767) (16) (737)
Long-term debt 823 (444) (80) 299
----- ----- --- -----
Total interest-bearing
liabilities 2,550 (2,132) (280) 138
----- ----- --- -----
Net interest income $ 697 $ 550 $(441) $ 806
===== ===== === =====
-15-
Years ended December 31,
------------------------------------
2000 vs 1999
------------------------------------
Increase (decrease) due to
------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------- -----
(In thousands)
<s> <c> <c> <c> <c>
Interest income attributable to:
Loans $ 3,067 $ 708 $ 46 $3,821
Securities available for sale (1,176) 620 (96) (652)
Securities held to maturity 242 53 7 302
Deposits in banks (3) (1) - (4)
Federal funds sold 17 21 5 43
----- ----- --- -----
Total interest-earning assets 2,147 1,401 (38) 3,510
----- ----- --- -----
Interest expense attributable to:
Savings deposits (50) (95) 6 (139)
NOW and MMDA 64 466 10 540
CD's over $100,000 26 291 2 319
Other time deposits 770 782 78 1,630
Short-term borrowings 331 338 88 757
Long-term debt 209 234 11 454
----- ----- --- -----
Total interest-bearing
liabilities 1,350 2,016 195 3,561
----- ----- --- -----
Net interest income $ 797 $ (615) $(233) $ (51)
===== ===== === =====
Competition
The Bank competes for deposits with other commercial banks, savings
associations and credit unions and with the issuers of commercial paper
and other securities, such as shares in money market mutual funds. The
primary factors in competing for deposits are interest rates and convenience
of office location. In making loans, the Bank competes with other commercial
banks, savings associations, mortgage bankers, consumer finance companies,
credit unions, leasing companies, insurance companies and other lenders. The
Bank competes for loan originations primarily through the interest rates and
loan fees it charges and through the efficiency and quality of services it
provides to borrowers. Competition is affected by, among other things, the
general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not
readily predictable. For years the Bank has competed within its market area
with several regional bank holding companies, each with assets far exceeding
-16-
those of the Bank. The size of these financial institutions and others
competing with the Bank is likely to increase further as a result of changes
in statutes and regulations eliminating various restrictions on interstate
and inter-industry branching and acquisitions. Community banks will be
challenged by these larger competitors and the greater capital resources they
control.
REGULATION
General
Because of its ownership of all the outstanding stock of the Bank,
NB&T Financial is subject to regulation, examination and oversight by the
FRB as a bank holding company under the BHCA. The Bank, as a national bank,
is subject to regulation, examination and oversight by the OCC and special
examination by the FRB. The Bank is a member of the Federal Reserve Bank of
Cleveland and a member of the Federal Home Loan Bank of Cincinnati. In
addition, since its deposits are insured by the FDIC, the Bank is also
subject to some regulation, oversight and special examination by the FDIC.
The Bank must file periodic financial reports with the FDIC, the OCC and the
Federal Reserve Bank of Cleveland. Examinations are conducted periodically
by these federal regulators to determine whether the Bank and NB&T Financial
are in compliance with various regulatory requirements and are operating in a
safe and sound manner. In general, the FRB may initiate enforcement actions
for violations of law and regulations.
Bank Holding Company Regulation
As a bank holding company, NB&T Financial may be subject to restrictions on
share repurchases.
The FRB has also adopted capital adequacy guidelines for bank holding
companies, pursuant to which, on a consolidated basis, NB&T Financial must
maintain total capital of at least 8% of risk-weighted assets. Risk-weighted
assets consist of all assets, plus credit equivalent amounts of certain off-
balance sheet items, which are weighted at percentage levels ranging from 0%
to 100%, based on the relative credit risk of the asset. At least half of
the total capital to meet this risk-based requirement must consist of core or
"Tier 1" capital, which includes common stockholders' equity, qualifying
perpetual preferred stock (up to 25% of Tier 1 capital) and minority
interests in the equity accounts of consolidated subsidiaries, less goodwill,
certain other intangibles, and effective April 1, 2001, portions of certain
nonfinancial equity investments. The remainder of total capital may
consist of supplementary or "Tier 2 capital". In addition to this risk-
based capital requirement, the FRB requires bank holding companies to meet
a leverage ratio of a minimum level of Tier 1 capital to average total
consolidated assets of 3%, if they have the highest regulatory examination
rating, well-diversified risk and minimal anticipated growth or expansion.
All other bank holding companies are expected to maintain a leverage ratio
of at least 4% of average total consolidated assets. NB&T Financial was in
compliance with these capital requirements at December 31, 2001. For NB&T
Financial's capital ratios, see Note 17 to the Consolidated Financial
Statements in Item 8.
-17-
A bank holding company is required by law to guarantee the compliance of
any insured depository institution subsidiary that may become
"undercapitalized" (defined in the regulations as not meeting minimum capital
requirements) with the terms of the capital restoration plan filed by such
subsidiary with its appropriate federal banking agency.
The BHCA restricts NB&T Financial's ownership or control of the outstanding
shares of any class of voting stock of any company engaged in a
nonbanking business, other than companies engaged in certain activities
determined by the FRB to be closely related to banking. In addition, the
FRB has the authority to require a bank holding company to terminate any
activity or relinquish control of any nonbank subsidiary (other than a
nonbank subsidiary of a bank) upon the determination by the FRB that such
activity or control constitutes a serious risk to the financial soundness
and stability of any bank subsidiary of the bank holding company.
NB&T Financial currently has no nonbank subsidiaries, except subsidiaries of
the Bank. The ownership of subsidiaries of the Bank is regulated by the
OCC, rather than the FRB.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act (also known as the Financial Services Modernization Act of 1999).
The Financial Services Modernization Act permits, effective March 11, 2000,
bank holding companies to become financial holding companies and thereby
affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. A bank holding company may
become a financial holding company if each of its subsidiary banks is well
capitalized under the Federal Deposit Insurance Corporation Act of 1991
prompt corrective action provisions is well managed, and has at least a
satisfactory rating under the Community Reinvestment Act, by filing a
declaration that the bank holding company wishes to become a financial
holding company. No regulatory approval will be required for a financial
holding company to acquire a company, other than a bank or savings
association, engaged in activities that are financial in nature or
incidental to activities that are financial in nature, as determined by
the Federal Reserve Board.
The Financial Services Modernization Act defines "financial in nature" to
include:
- securities underwriting, dealing and market making;
- sponsoring mutual funds and investment companies;
- insurance underwriting and agency;
- merchant banking; and
- activities that the Federal Reserve Board has determined to be
closely related to banking.
A national bank also may engage, subject to limitations on investment, in
activities that are financial in nature, other than insurance underwriting,
insurance company portfolio investment, real estate development and real
estate investment, through a financial subsidiary of the bank, if the bank is
well capitalized, well managed and has at least a satisfactory Community
-18-
Reinvestment Act rating. Subsidiary banks of a financial holding company or
national banks with financial subsidiaries must continue to be well
capitalized and well managed in order to continue to engage in activities
that are financial in nature without regulatory actions or restrictions,
which could include divestiture of the financial in nature subsidiary or
subsidiaries. In addition, a financial holding company or a bank may not
acquire a company that is engaged in activities that are financial in nature
unless each of the subsidiary banks of the financial holding company or the
bank has a Community Reinvestment Act rating of satisfactory or better.
Transactions between NB&T Financial and the Bank are subject to statutory
limits in Sections 23A and 23B of the Federal Reserve Act (the "FRA"). See
National Bank Regulation -- Office of the Comptroller of the Currency."
The FRB must approve the application of a bank holding company to acquire any
bank or savings association.
National Bank Regulation
Office of the Comptroller of the Currency. The OCC is an office in the
Department of the Treasury and is subject to the general oversight of the
Secretary of the Treasury. The OCC is responsible for the regulation and
supervision of all national banks, including the Bank. The OCC issues
regulations governing the operation of national banks and, in accordance
with federal law, prescribes the permissible investments and activities of
national banks. The Bank is authorized to exercise trust powers in
accordance with OCC guidelines. See "Description of Business-Trust
Services." National banks are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosure, equal credit opportunity, fair credit
reporting and community reinvestment.
The Bank is required to meet certain minimum capital requirements set by the
OCC. These requirements consist of risk-based capital guidelines and a
leverage ratio, which are substantially the same as the capital requirements
imposed on NB&T Financial. The Bank was in compliance with those capital
requirements at December 31, 2001. For the Bank capital ratios, see Note 17
to the Consolidated Financial Statements in Item 8. The OCC may adjust the
risk-based capital requirement of a national bank on an individualized basis
to take into account risks due to concentrations of credit or nontraditional
activities.
The OCC has adopted regulations governing prompt corrective action to resolve
the problems of capital deficient and otherwise troubled national banks. At
each successively lower defined capital category, a national bank is subject
to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OCC has less flexibility in determining how to
resolve the problems of the institution. In addition, the OCC generally can
downgrade a national bank's capital category, notwithstanding its capital
level, if, after notice and opportunity for hearing, the national bank is
-19-
deemed to be engaging in an unsafe or unsound practice, because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. The Bank's capital at December 31, 2001, met
the standards for the highest capital category, a well-capitalized bank.
A national bank is subject to restrictions on the payment of dividends,
including dividends to a holding company. A dividend may not be paid if it
would cause the bank not to meet its capital requirements. In addition,
the dividends that a Bank subsidiary can pay to its holding company without
prior approval of regulatory agencies is limited to net income plus its
retained net income for the preceding two years. Based on the current
financial condition of the Bank, these provisions are not expected to
affect the current ability of the Bank to pay dividends to NB&T Financial
in an amount customary for the Bank.
OCC regulations generally limit the aggregate amount that a national bank can
lend to one borrower or aggregated groups of related borrowers to an amount
equal to 15% of the bank's unimpaired capital and surplus. A national bank
may loan to one borrower an additional amount not to exceed 10% of the
association's unimpaired capital and surplus, if the additional amount is
fully secured by certain forms of "readily marketable collateral." Loans to
executive officers, directors and principal shareholders and their related
interests must conform to the OCC lending limits. All transactions between
national banks and their affiliates, including NB&T Financial, must comply
with Sections 23A and 23B of the FRA, which limit the amounts of such
transactions and require that the terms of the transactions be at least
as favorable to the Bank as the terms would be of a similar transaction
between the Bank and an unrelated party. The Bank was in compliance with
these requirements and restrictions at December 31, 2001.
Federal Deposit Insurance Corporation. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and thrifts and safeguards the safety and soundness
of the banking and thrift industries. The FDIC administers two separate
insurance funds, the BIF for commercial banks and state savings banks and
the SAIF for savings associations and for banks that have acquired SAIF
deposits. The FDIC is required to maintain designated levels of reserves in
each fund.
The Bank is a member of the BIF, and, at December 31, 2001, it had $458.8
million in deposits insured in the BIF, as well as $20.4 million, acquired
in a merger, insured in the SAIF.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance for members of each of the BIF and the SAIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
-20-
time and may decrease such rates if such target level has been met. The FDIC
has established a risk-based assessment system for both SAIF and BIF members.
Under this system, assessments vary based on the risk the institution poses
to its deposit insurance fund. The risk level is determined based on the
institution's capital level and the FDIC's level of supervisory concern about
the institution. Insurance of deposits may be terminated by the FDIC if
it finds that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated
any applicable law, regulation, rule, order or condition enacted or imposed
by the institution's regulatory agency.
Federal Reserve Board. The FRA requires national banks to maintain reserves
against their net transaction accounts (primarily checking and NOW accounts).
The amounts are subject to adjustment by the FRB. At December 31, 2001, the
Bank was in compliance with its reserve requirements.
Federal Home Loan Banks. The Federal Home Loan Banks (the FHLBs) provide
credit to their members in the form of advances. As a member, the Bank must
maintain an investment in the capital stock of the FHLB of Cincinnati in an
amount equal to the greater of 1% of the aggregate outstanding principal
amount of the Bank's residential real estate loans, home purchase contracts
and similar obligations at the beginning of each year, or 5% of its advances
from the FHLB. The Bank is in compliance with this requirement with an
investment in FHLB of Cincinnati stock having a book value of $6,563,000 at
December 31, 2001. The FHLB advances are secured by collateral in one or
more specified categories. The amount a member may borrow from the FHLB is
limited based upon the amounts of various assets held by the member. All
long-term advances by each FHLB must be made only to provide funds for
residential housing finance.
Ohio Department of Insurance. The Bank's insurance agency operating
subsidiary is subject to the insurance laws and regulations of the State
of Ohio and the Ohio Department of Insurance. The insurance laws and
regulations require education and licensing of agencies and individual
agents, require reports and impose business conduct rules.
Item 2. Properties
NB&T Financial Group, Inc. and The National Bank and Trust Company own and
occupy their main offices located at 48 North South Street, Wilmington,
Ohio. The National Bank and Trust Company also owns or leases 21 full-
service branch offices, one remote drive-through ATM facility, and one remote
drive-in facility, all of which are located in Adams, Auglaize, Brown,
Clermont, Clinton, Fayette, Hardin, Highland, and Warren Counties in Ohio.
The Bank also owns a building at 52 E. Main Street, Wilmington, Ohio that
houses the Bank's insurance agency. NB&T Financial's net book value of
investments in land and buildings was $9.2 million as of December 31, 2001.
-21-
Item 3. Legal Proceedings
Neither NB&T Financial nor the Bank is presently involved in any legal
proceedings of a material nature. From time to time, the Bank is a party
to legal proceedings incidental to its business to enforce its security
interest in collateral pledged to secure loans made by the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
-22-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
There were 3,207,804 common shares of the Company outstanding on December 31,
2001 held of record by approximately 428 shareholders. There is presently no
active trading market for the Company's shares, nor are the prices at which
common shares have been traded published by any national securities
association or automated quotation service. Information about the Company's
shares is posted on the OTC Bulletin Board under the symbol NBTF. Dividends
per share declared were $.21 in each quarter in 2001 and were $.19 per share
in each quarter in 2000.
Item 6. Selected Financial Data
The following table sets forth certain information concerning the
consolidated financial condition, earnings and other data regarding the
Company at the dates and for the periods indicated:
December 31,
Statement of financial 2001 2000 1999 1998 1997
condition and other data: (Dollars in thousands)
<s> <c> <c> <c> <c> <c>
Total amount of
Assets $671,171 $579,232 $542,548 $520,553 $436,605
Cash and due from banks 27,882 19,331 18,813 18,241 17,807
Securities 222,944 160,210 155,027 176,580 123,139
Loans receivable-net 378,904 370,299 347,733 302,471 274,950
Deposits 479,240 406,688 379,932 374,220 329,332
Short-term borrowings 22,055 40,148 40,358 22,702 32,734
Long-term debt 114,844 80,323 75,431 75,539 30,716
Shareholders' equity 50,976 49,482 44,031 44,723 40,980
Number of full service
offices 21 17 17 16 14
-23-
Year ended December 31,
2001 2000 1999 1998 1997
Statement of income data: (In thousands)
<s> <c> <c> <c> <c> <c>
Interest and loan fee
income $ 41,993 $ 41,049 $37,539 $35,273 $31,604
Interest expense 22,849 22,711 19,150 18,540 15,490
------- ------- ------ ------ ------
Net interest income 19,144 18,338 18,389 16,733 16,114
Provision for loan
losses 1,500 2,199 1,400 1,150 800
------- ------- ------- ------ ------
Net interest income
after provision for
loan losses 17,644 16,139 16,989 15,583 15,314
Non-interest income 7,987 4,051 5,227 5,526 4,533
Non-interest expense 18,138 15,372 15,227 13,846 12,600
------- ------- ------ ------ ------
Income before income
taxes 7,493 4,818 6,989 7,263 7,247
Federal income taxes 1,476 772 1,281 1,889 2,259
------- ------- ------ ------ ------
Net income $ 6,017 $ 4,046 $ 5,708 $ 5,374 $ 4,988
======= ======= ====== ====== ======
Year ended December 31,
Selected financial ratios: 2001 2000 1999 1998 1997
<s> <c> <c> <c> <c> <c>
Return on average equity 11.87% 8.85% 12.85% 12.56% 12.98%
Return on average assets .99 .73 1.08 1.12 1.23
Equity-to-assets ratio 7.60 8.54 8.12 8.59 9.39
Dividend payout ratio(1) 43.98 58.27 37.57 29.71 23.90
Ratio of non-performing
loans to total loans(2) 1.49 1.13 0.33 0.31 0.31
Ratio of loan loss allowance
to total loans 1.00 1.02 0.91 0.87 0.99
Ratio of loan loss allowance
to non-performing loans(2) 67% 90% 307% 280% 316%
Earnings per share(3) $1.91 $1.27 $1.81 $1.70 $1.59
Dividends declared
per share(3) 0.84 0.76 0.68 0.505 0.38
- -------------------------------
<FN>
(1) Dividends paid per share divided by earnings per share.
(2) Non-performing loans include non-accrual loans, renegotiated loans and
accruing loans 90 days or more past due.
(3) All share information and per share data has been retroactively restated
to reflect a two-for-one stock split in the form of a stock dividend effected
on October 26, 1998.
</FN>
-24-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis comparing 2001 to prior years should be
read in conjunction with the audited consolidated financial statements at
December 31, 2001 and 2000 and for the three years ended December 31, 2001.
In addition to the historical information contained herein with respect to
NB&T Financial Group, Inc. and subsidiaries (the "Company"), the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operation and the
Company's actual results could differ significantly from those discussed in
the forward-looking statements. Some of the factors that could cause or
contribute to such differences include changes in the economy and interest
rates in the nation and the Company's general market area.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 2001 was $6.0 million, or $1.91 per share, compared to $4.1
million, or $1.27 per share, for the year of 2000. Non-interest income,
excluding securities gains and losses, was $7.7 million for 2001, 26.2% above
2000. Non-interest expense was $18.1 million for 2001, 18.0% above 2000.
Performance ratios for 2001 included a return on assets of .99% and a return
on equity of 11.87%.
Net income for 2000 was $4.1 million, a decrease of 29.1% from 1999. Net
income per share was $1.27 in 2000, compared to $1.81 in 1999. In the third
quarter of 2000, the Company restructured a portion of its securities
portfolio and during the third and fourth quarters increased its provision for
loan losses. Both of these items had a significant negative impact on Company
net income for the year 2000. The restructuring of the securities portfolio,
resulting in the recognition of an after-tax loss of $1.4 million, was
undertaken to enhance future earnings and reduce interest rate risk. Net
interest income decreased slightly from $18.4 million in 1999 to $18.3 million
in 2000. The provision for loan losses was increased 57.1% to $2.2 million
in 2000 from the $1.4 million recorded in 1999. Non-interest income increased
9.4%, excluding securities losses, to $6.1 million for 2000. Non-interest
expense was held to a 1.0% increase for 2000 compared to 1999. Performance
ratios for 2000 included a return on average assets of .73% and a return on
average equity of 8.85%.
-25-
Table 1 - Selected Financial Highlights
(dollars in thousands)
2001 2000 1999 1998 1997
------------------------------------------------
<s> <c> <c> <c> <c> <c>
Net interest income $ 19,144 $ 18,338 $ 18,389 $ 16,733 $ 16,114
Net income 6,017 4,046 5,708 5,374 4,988
Earnings per share 1.91 1.27 1.81 1.70 1.59
Dividends per share 0.84 0.76 0.68 0.51 0.38
AVERAGE BALANCES
Assets $610,790 $551,566 $526,455 $478,900 $405,752
Loans 366,190 367,419 330,734 287,674 274,372
Securities 181,819 148,827 162,744 155,155 102,896
Deposits 429,514 390,231 376,843 347,087 319,809
Long-term debt 93,572 79,406 75,539 53,753 6,792
Shareholders' equity 50,675 45,722 44,426 42,805 38,443
RATIOS AND STATISTICS
Net interest margin
(tax equivalent) 3.54% 3.72% 3.88% 3.82% 4.28%
Return on average
assets 0.99 0.73 1.08 1.12 1.23
Return on average
equity 11.87 8.85 12.85 12.56 12.98
Loans to assets 57.02 64.59 64.98 58.61 63.63
Equity to assets 7.60 8.54 8.12 8.59 9.39
Total risk-based
capital ratio 11.55 14.04 14.29 14.18 14.66
Efficiency ratio 65.20 60.47 61.25 62.20 61.03
Full service offices 21 17 17 16 14
NET INTEREST INCOME
Net interest income increased to $19.1 million in 2001 from $18.3 million in
2000, an increase of 4.4%. Average interest-earning assets for 2001 increased
$49.0 million, or 9.4%, from 2000 while the tax equivalent yield decreased to
7.56% in 2001 from 8.09% in 2000. Interest and fees on loans decreased 3.3%
from last year as the average loan balance declined $1.2 million, or 0.3%, and
the average yield decreased from 8.59% in 2000 to 8.33% in 2001. Interest on
securities increased 15.0% in 2001 from 2000. The average balance of the
securities portfolio increased $33.0 million, or 22.2%, from 2000, while the
tax equivalent yield decreased from 6.91% to 6.43%.
Interest expense increased 0.6% in 2001 compared to 2000. Average interest-
bearing liabilities increased $53.2 million, or 11.5%, during 2001, while the
cost decreased from 4.90% in 2000 to 4.42% in 2001. The volume growth in
average interest-bearing liabilities was due to a 23.7% increase in NOW and
money market accounts, a 21.6% increase in large certificates of deposit, and
an 18.1% increase in additional long-term borrowing from the Federal Home Loan
Bank (FHLB). All categories showed a decrease in cost in 2001 compared to
2000. Average tax equivalent net interest margin decreased from 3.72% in 2000
to 3.54% in 2001.
-26-
Net interest income decreased to $18.3 million in 2000 from $18.4 million in
1999, a decrease of 0.3%. The Company's tax equivalent yield on average
interest-earning assets increased to 8.09% in 2000 from 7.74% in 1999.
Average interest-earning assets increased $23.1 million, or 4.7%, from 1999.
Interest and fees on loans increased 13.8% from 1999 as the average balance
rose $36.7 million, or 11.1%, and the average yield increased from 8.38% in
1999 to 8.59% in 2000.
The securities portfolio during 2000 showed decreased in average balance and
a increased in yield. The average balance of the portfolio decreased $13.9
million (8.6%) in 2000 from 1999, and the tax equivalent yield increased from
6.48% to 6.91%. The restructuring of the securities portfolio during 2000
involved the sale of $38.0 million book value of long-term fixed-rate
securities with a weighted average life of 7.3 years and a weighted average
yield of 6.27%, resulting in an after-tax loss of $1.4 million. A portion of
the proceeds of the sale, $26.7 million, was reinvested in similar securities
with a weighted average life of 5.3 years and a weighted average yield of
7.33%. $10 million of the proceeds were used to purchase Bank Owned Life
Insurance (BOLI) with a cash surrender value that increases during the first
year at a tax-equivalent yield of 9.97% and increases during future years at
an adjustable rate. Another important result of the restructuring was to
reduce the interest rate risk of the Company by shortening the weighted
average maturity of the Company's assets and reducing the amount of fixed-rate
assets with maturities over five years.
Rising interest rates caused interest expense to increase 18.6% in 2000
compared to 1999. Average interest-bearing liabilities increased $25.9
million, or 5.9%, during 2000, and the cost increased from 4.38% in 1999 to
4.90% in 2000. The average balance of retail certificates of deposit
increased $14.8 million, or 10.0%, and average short-term borrowing increased
$6.9 million, or 26.1%. All categories showed an increase in cost in 2000
compared to 1999. Average tax equivalent net interest margin decreased from
3.88% in 1999 to 3.72% in 2000.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $1.5 million in 2001, a decrease of $700,000
from the provision recorded in 2000, which was an increase of $800,000 from
the provision recorded in 1999. Net charge-offs in 2001 were $2.1 million,
compared to $1.6 million in 2000 and $800,000 in 1999. The increased
provision in 2000 and 1999 was in response to 11.1% and 15.0% respective
increases in average loans for those years. Additionally, in 2000 the
provision was increased in contemplation of certain potential losses
associated with $6.0 million in loans to a longstanding Bank customer. The
ratio of the allowance for loan losses as a percent of total loans at December
31 was 1.00% in 2001, 1.02% in 2000, and .91% in 1999.
-27-
NON-INTEREST INCOME
Table 2 details the components of non-interest income, excluding securities
gains and losses as discussed above, and how they relate each year as a
percent of average assets. Total non-interest income was $7.7 million in
2001, $6.1 million in 2000, and $5.6 million in 1999. Non-interest income
represents a ratio of 1.26% of average assets in 2001, 1.11% in 2000, and
1.06% in 1999. Trust income decreased 8.6% in 2001, which was a function of
the decline in market value of funds under management, and increased 7.0% in
2000, due to increases in fees during 2000. At December 31 the market value
of total assets in the Trust Department were approximately $218 million in
2001, compared to $234 million in 2000 and $236 million in 1999. Service
charges and fees have increased over the last three years due to increased
charges and growth in the number of accounts. Also, their percentage of
average assets has increased to .32% in 2001 compared to .31% for 2000 and
.28% in 1999. ATM network fees generated were $804,000 in 2001, $725,000 in
2000, and $701,000 in 1999. As of the end of 2001, there were eighty-two
machines installed in three states. Insurance agency commission income has
increased from $966,000 in 1999, to $1,140,000 in 2000, and to $1,689,000 in
2001. In the second quarter of 2001, the Company acquired two insurance
agencies, and their commission income is included in the 2001 results of
operations since that time. Other income increased to $1,164,000 in 2001
primarily due to a $148,000 gain recognized on the sale of servicing on
$28 million of real estate loans and $150,000 increase in gains on sales
of real estate loans. BOLI income increased to $632,000 in 2001 compared
to $161,000 in 2000.
-28-
Table 2 - Non-Interest Income
(in thousands)
2001 2000 1999
---- ---- ----
Percent Percent Percent
of average of average of average
Amount Assets Amount Assets Amount Assets
-----------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Trust income $1,167 0.19% $1,276 0.23% $1,192 0.23%
Service charge on
deposits 1,961 0.32 1,731 0.31 1,485 0.28%
Other service charges 310 0.05 306 0.06 376 0.07
ATM network fees 804 0.13 725 0.13 701 0.13
Insurance agency
commissions 1,689 0.28 1,140 0.21 966 0.18
Income from BOLI 632 0.10 161 0.03 - -
Other 1,164 0.19 782 0.14 875 0.17
----- ---- ----- ---- ----- ----
Total non-interest
income $7,727 1.26% $6,121 1.11% $5,595 1.06%
===== ==== ===== ==== ===== ====
-29-
NON-INTEREST EXPENSE
Table 3 details the components of non-interest expense and how they relate
each year as a percent of average assets. Total non-interest expense has
increased from $15.2 million in 1999, to $15.4 million in 2000, and to $18.1
million in 2001. These figures represent a percent of average assets of 2.96%
in 2001, 2.79% in 2000 and 2.89% in 1999.
Salaries and benefits expense, which is the largest component of non-interest
expense, increased to $9.0 million in 2001 from $7.6 million in 2000. This is
primarily due to the opening of three new branches during 2001 and the
reduction of officer bonus expense in 2000 as a result of not meeting
performance related goals. Salaries and benefits as a percent of average
assets was 1.47% in 2001, 1.37% in 2000 and 1.46% in 1999. The average number
of full-time equivalent employees was 236 in 2001, 220 in 2000, and 222 in
1999.
The opening of three new branches during 2001 also contributed to equipment
expense increasing 16.1% and occupancy expense increasing 20.6% from last
year. State franchise tax increased 19.3% in 2001 from 2000 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 23.1% from 2000. Other expense includes $174,000 in
acquisition expenses related to the purchases of two insurance agencies and
The Sabina Bank.
Other non-interest expense categories have increased slightly as a percent of
average assets from 1999 and 2000 to 2001. Equipment expense increased to
.42% from .40%, and occupancy expense increased to .17% from .16% of average
assets. Other expense as a percent of average assets has increased to .72% in
2001 from .68% in 2000 and .68% in 1999.
-30-
Table 3 - Non-Interest Expense
(in thousands)
2001 2000 1999
---- ---- ----
Percent Percent Percent
of average of average of average
Amount Assets Amount Assets Amount Assets
-------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Salaries $ 7,766 1.27% $ 6,415 1.16% $ 6,563 1.25%
Benefits 1,240 0.20 1,167 0.21 1,130 0.21
Equipment 2,592 0.42 2,233 0.40 2,108 0.40
Occupancy 1,045 0.17 866 0.16 824 0.16
State franchise tax 569 0.09 477 0.09 488 0.09
Marketing 532 0.09 496 0.09 509 0.10
Other 4,394 0.72 3,718 0.68 3,605 0.68
------ ---- ------ ---- ------ ----
Total $18,138 2.96% $15,372 2.79% $15,227 2.89%
====== ==== ====== ==== ====== ====
-31-
INCOME TAXES
The effective tax rates were 19.7% for 2001, 16.0% for 2000, and 18.4% for
1999. The effective tax rate being lower than the statutory rate was
primarily due to tax-exempt municipal bond interest income and BOLI income.
FINANCIAL CONDITION
ASSETS
Average total assets increased 10.7% during 2001 to $610.8 million. Average
interest-earning assets increased 9.4%, and was 93% of total average assets,
slightly less than the 94% for 2000 and 1999.
SECURITIES
The majority of the increases in the securities portfolio from 1999 and 2000
to 2001 were the result of purchases of U.S. Agency callable bonds and U.S.
Agency mortgage-backed securities.
Average securities as a percent of assets was 30.9% in 1999, 27.0% in 2000,
and 29.8% in 2001. The securities portfolio at December 31, 2001 consists of
$178.5 million of securities available for sale and $44.4 million of
securities that management intends to hold to maturity. The available-for-
sale portion of the portfolio consists primarily of fixed-rate securities with
a projected average life of 5.1 years, an average repricing term of 4.3 years,
and an average tax-equivalent yield of 5.72%. Of the total available-for-sale
portion, 29% consists of callable U.S. Agency bonds, 58% consists of fixed-
rate mortgage-backed securities, 3% consists of adjustable-rate mortgage-
backed securities, and 5% consists of long-term fixed-rate tax-exempt
municipal securities, and 5% other securities. During 2000 and 2001 additions
to the available-for-sale portfolio have included medium-term callable U.S.
Agency bonds, mortgage-backed securities with projected average lives of three
to seven years. Some of these purchases were funded with borrowed funds from
the Federal Home Loan Bank. The held-to-maturity portion of the portfolio
consisted entirely of long-term fixed-rate tax-exempt municipal securities
with both average life and repricing term of 9.2 years. At December 31, 2001
the total security portfolio had $424,000 market value depreciation.
LOANS
Average total loans as a percent of average assets was 62.8% in 1999, 66.6%
in 2000, and 60.0% in 2001. Table 4 shows loans outstanding at period end by
type of loan. The portfolio composition remained relatively consistent during
the last three years. Commercial and industrial loans grew from $86.5 million
in 1999 to $92.3 million in 2000 and to $107.0 million in 2001, primarily as a
result of increased origination of working capital and equipment loans.
Commercial and industrial loans as a percent of the total loan portfolio
ranged from 25-28% during the five-year period ending 2001. Residential real
estate loans grew $28.2 million during 2000 as the result of increased efforts
by the Company in originating loans locally through the branch network.
During the first quarter of 2001, the Company sold $8.8 million of real estate
loans, as a result of which the balance remained flat compared to 2000. For
interest rate risk management purposes the Company currently sells, or holds
-32-
for sale, the majority of fixed-rate residential real estate loans originated,
while holding the adjustable-rate loans in the portfolio. The Company has
experienced an increase in residential real estate lending and commercial
lending, both real estate and industrial, because of the movement of the
Company into new markets, such as Clermont, Highland and Warren Counties. The
Company focused its commercial lending on small- to medium-sized companies in
its market area, most of which are companies with long established track
records. The Company expects to continue the emphasis on growth in the real
estate and commercial portfolios. Installment loans outstanding have
decreased from $88.0 million in 1999 to $70.3 in 2001 because the Company
has reduced its efforts to originate indirect automobile loans due to
increased competition and narrowing interest rate spreads. Installment
loans have decreased to 18% of the portfolio at December 31, 2001 from 25%
at December 31, 2000. The Company has avoided concentration of lending in
any one industry. As of December 31, 2001, the percent of fixed-rate loans
to total loans was 41.0%, of which 82% matures within five years.
Table 4 - Loan Portfolio
(in thousands)
at December 31,
2001 2000
---- ----
Percent of Percent of
Amount Total Amount Total
---------------------------------------------
<s> <c> <c> <c> <c>
Commercial and industrial $106,976 28% $ 92,328 25%
Commercial real estate 36,411 10 42,694 11
Agricultural 19,076 5 18,256 5
Residential real estate 145,755 38 145,582 39
Installment 70,345 18 71,414 19
Other 3,883 1 3,209 1
Deferred net origination
costs 268 - 618 -
------- --- ------- ---
Total $382,714 100% $374,101 100%
======= === ======= ===
-33-
1999 1998
Percent of Percent of
Amount Total Amount Total
---------------------------------------------
Commercial and industrial $ 86,521 25% 78,801 26%
Commercial real estate 37,833 11 29,936 10
Agricultural 18,343 5 17,925 6
Residential real estate 117,392 33 92,069 30
Installment 87,996 25 83,173 27
Other 2,069 1 2,402 1
Deferred net origination costs 801 - 806 -
------- --- ------- ---
Total $350,955 100% $305,112 100%
======= === ======= ===
1997
Percent of
Amount Total
------------------------
Commercial and industrial $ 63,661 23%
Commercial real estate 30,835 11
Agricultural 18,387 7
Residential real estate 82,838 30
Installment 79,115 28
Other 2,097 1
Deferred net origination costs 778 -
------- ---
Total $277,711 100%
======= ===
ALLOWANCE FOR LOAN LOSSES
Table 5 shows selected information relating to the Company's loan quality and
allowance for loan losses. The allowance is maintained to absorb potential
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
future loan losses, the provision for loan losses is increased. Loans deemed
not collectible are charged off and deducted from the reserve. Recoveries on
loans previously charged off are added to the reserve.
The allowance for loan losses was 1.00% of total loans as of December 31,
2001, compared to 1.02% at the end of 2000, and has ranged from .87% to .99%
for the years 1997 through 1999. Net charge-offs as a percentage of average
loans increased to .58% for the year 2001, compared to .44% for the year 2000.
The increase in net charge-offs during 2001 was concentrated in the commercial
and personal loan areas. The Company allocates the allowance for loan losses
to specifically classified loans and generally based on three-year net charge-
-34-
off history. In assessing the adequacy of the allowance for loan losses, the
Company considers three principal factors: (1) the three-year rolling average
charge-off percentage applied to the current outstanding balance by portfolio
type; (2) specific percentage applied to individual loans estimated by
management to have a potential loss; and (3) estimated losses attributable
to anticipated portfolio growth, economic conditions and portfolio risk.
Economic conditions considered include unemployment levels, the condition of
the agricultural business, and other local economic factors.
Non-accrual loans for the last five years are listed in Table 5. The amount
of non-accrual loans was $4.9 million at year-end 2001, compared to $4.1
million at year-end 2000. Non-accrual loans as of December 31, 2001
consisted of twenty five relationships collateralized by first mortgages,
six by second mortgages, eight by titled vehicles awaiting sale, and two
with partial government guarantees.
One relationship is with a longstanding customer whose outstanding balances
with the Company are approximately $5.9 million, of which $1.8 million is
being accounted for on a non-accrual basis, and the remaining $4.1 million is
supported by an 80% US Department of Agriculture (USDA) guarantee and is
paying as agreed. The customer has agreed to terms of a forebearance
agreement on the non-accrual portion, which provides for repayment starting
in early 2002. Another large relationship consists of two loans totaling
$905,000 at December 31, 2001. This customer has agreed to terms of a
forebearnace agreement, which provides for repayment staring in January.
The Bank has accepted a surrender-of-collateral agreement on $612,000 of
the balance and has begun to liquidate the collateral. The balance of
this relationship is secured with real estate. The Bank does not anticipate
any loss on either of these two relationships. The anticipated loss in the
year 2002 from all relationships is not expected to be material. For loans
classified as nonaccrual at December 31, 2001, interest income that would
have been recorded during 2001was $371,000, and the interest income actually
recorded was $147,000. Projected losses are based on currently available
information and actual losses may differ significantly from those discussed
above.
-35-
Table 5 - Asset Quality
(in thousands)
2001 2000 1999 1998 1997
-------------------------------------------------
<s> <c> <c> <c> <c> <c>
Allowance for loan
losses $3,810 $3,802 $3,222 $2,641 $2,761
Provision for loan
losses 1,500 2,199 1,400 1,150 800
Net charge-offs 2,114 1,619 819 1,270 725
Non-accrual loans $4,859 $4,098 $ 955 $ 599 $ 509
Loans 90 days or more
past due 858 113 96 343 241
Renegotiated loans - - - - -
Other real estate owned 143 67 80 - 125
----- ----- ----- ----- -----
Total non-performing
assets $5,860 $4,278 $1,131 $ 942 $ 875
===== ===== ===== ===== =====
RATIOS
Allowance to total loans 1.00% 1.02% 0.91% 0.87% 0.99%
Net charge-offs to
average loans 0.58 0.44 0.25 0.50 0.26
Non-performing assets
to total loans 1.53 1.14 0.32 0.31 0.31
OTHER ASSETS
As part of the investment portfolio restructure in September 2000, $10 million
was used to purchase Bank Owned Life Insurance with a cash surrender value
that increased during the first year at a tax-equivalent yield of 9.97% and
the cash surrender value increases during future years at an adjustable rate.
Beginning in the fourth quarter of 1996 and during the ensuing years the
Company has been installing cash dispenser machines in convenience stores and
supermarkets. There were 82 machines located in Ohio, Kentucky and Indiana at
the end of 2001. The Company's investment in this segment of business
includes $1.4 million in equipment cost and an average of $4.1 million in cash
to supply the machines. The Company anticipates little change in the number
of machines installed at the end of 2001. The Company charges a fee for
withdrawals from anyone who does not have a transaction account with the
Company. The Company recorded a net book income before taxes on this segment
of business of $92,000 in 2001, compared to $82,000 for 2000, and $29,000 for
1999.
In December 2001, the Company acquired the majority of the assets and assumed
the deposit liabilities of Sabina Bank (a subsidiary of Premier Financial
Bancorp, Inc.) located in Sabina, Ohio, for an aggregate cash purchase price
of approximately $12.9 million. This business combination is being
-36-
accounted for as a purchase transaction in accordance with SFAS No. 141,
"Business Combinations". The Company is in the process of obtaining
third-party valuations of certain intangible assets; thus, the
allocation of the purchase price has not been completed. In connection
with the transaction, the Company acquired approximately $49 million in
assets consisting primarily of loans and investments, and assumed
deposit liabilities approximating $42 million and recorded an intangible
asset of $7.1 million.
DEPOSITS
Table 6 presents a summary of period end deposit balances. Deposit categories
have remained fairly constant as a percent of total deposits throughout the
five-year period. Interest-bearing NOW accounts have increased to 22% of
deposits due to the introduction of a high yielding, high balance checking
account early in 2000. Savings accounts continued to be 8-9% of deposits for
the last three years. Money market accounts increased to 13% and certificates
of deposit decreased to 36% of deposits by the end of 2001 as a result of
consumers unwilling to extend maturities. Certificates of $100,000 and over
are primarily short-term public funds. Balances of such large certificates
fluctuate depending on the Company's pricing strategy and funding needs at
any particular time and were about the same percent of total deposits in 2001
as in 2000. Deposits are attracted principally from within the Company's
market area through the offering of numerous deposit instruments. Interest
rates, maturity terms, service fees, and withdrawal penalties for the various
types of accounts are established periodically by management based on the
Company's liquidity requirements, growth goals and market trends. The
Company has not used brokers in the past to attract deposits, although
competition from banks and other financial institutions has caused the Company
to consider broker deposits as a viable alternative to funding needs. The
amount of deposits currently from outside the Company's market area is not
significant.
Table 6 - Deposits
(in thousands)
at December 31,
2001 2000 1999
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
--------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Demand $ 52,734 11% $ 42,965 11% $ 43,715 12%
NOW 103,905 22 81,540 20 67,027 18
Savings 42,854 9 32,628 8 35,903 9
Money market 59,990 13 33,533 8 42,780 11
CD's less than
$100,000 174,599 36 172,982 43 150,281 40
CD's $100,000
and over 45,158 9 43,040 10 40,226 10
------- --- ------- --- ------- ---
Total $479,240 100% $406,688 100% $379,932 100%
======= === ======= === ======= ===
-37-
1998 1997
Percent of Percent of
Amount Total Amount Total
--------------------------------------
Demand $ 41,748 11% $ 38,662 12%
NOW 61,616 16 53,386 16
Savings 36,213 10 34,659 11
Money market 39,935 11 29,721 9
CD's less than
$100,000 147,003 39 146,005 44
CD's $100,000
and over 47,705 13 26,899 8
------- --- ------- ---
Total $374,220 100% $329,332 100%
======= === ======= ===
OTHER BORROWINGS
Periodically during the past five years the Company has purchased investment
securities with funds borrowed from the FHLB. The effect of these
transactions has been an enhancement to earnings and an effective use of
capital. At December 31, 2001, the Bank had outstanding $114.6 million of
total borrowings from the FHLB, $98.5 million of which consists of seven
fixed-rate notes with a weighted average rate of 5.20% and with maturities
in 2008, 2010 and 2001. At the option of the FHLB, these notes can be
converted at certain dates to instruments that adjust quarterly at the
three-month LIBOR rate. The note amount and nearest optional conversion dates
at December 31, 2001, are; $44.5 million in 2002; $30 million in 2003;
$12 million in 2004; and $12 million in 2006. The remaining $16.1 million
consists of $12.1 million in a 4.67% fixed rate monthly amortizing note
with a final maturity in 2006, and $4 million in a note with an interest
rate that varies quarterly at the three-month LIBOR rate and that matures
in 2002.
CAPITAL
The declaration and payment of dividends by the Company are subject to the
discretion of the Board of Directors and to the earnings and financial
condition of the Company and applicable laws and regulations. The dividend
rate was increased 10.5% in 2001 and 11.8% in 2000. The Company's equity to
assets ratio at December 31, 2001 was 7.6%. As of that same date, tier 1
risk-based capital was 10.60%, and total risk-based capital was 11.55%.
The minimum tier 1 and total risk-based capital ration required by the
Board of Governors of the Federal Reserve are 4% and 8%, respectively.
-38-
LIQUIDITY
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.
Community bank liquidity management currently involves the challenge of
attracting deposits while maintaining positive loan growth at a reasonable
interest rate spread. The loan to deposit ratio at December 31, 2001, was
79.9%, compared to 92.0% at the same date in 2000. Loans to total assets
were 57.0% at the end of 2001, compared to 64.6% at the same time last year.
The securities portfolio is 80% available-for-sale securities that are
readily marketable. Approximately 68% of the available-for-sale portfolio
is pledged to secure public deposits, short-term and long-term borrowings and
for other purposes as required by law. The balance of the available-for-sale
securities could be sold if necessary for liquidity purposes. Also, a stable
deposit base, consisting of 90% 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.
MARKET RISK MANAGEMENT
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 Company's Asset/Liability Committee (ALCO) is responsible for reviewing
the interest rate sensitivity position of the Company and establishing
policies to monitor and limit exposure to interest rate risk. The guidelines
established by ALCO are approved by the Company's Board of Directors. The
primary goal of the asset/liability management function is to maximize net
interest income within the interest rate risk limits set by ALCO. Interest
rate risk is monitored on a quarterly basis through ALCO meetings. Techniques
used 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. The interest rate gap analysis
schedule (Table 7) quantifies the asset/liability static sensitivity as of
December 31, 2001. As shown, the Company was liability sensitive for periods
zero through one year, and one- to five-year period and asset sensitive within
the over-five-year period. The cumulative gap as a percent of total assets
through one year at the end of 2001 was negative 7.2% compared to negative
12.0% at the end of 2000. The balances of transaction type NOW and MMDA
accounts are scheduled to run off over their expected lives. Although the
entire balance of these deposits is subject to repricing or withdrawal in a
relatively short period of time, they have been a stable base of retail core
deposits for the Company. Also, their sensitivity to changes in interest
rates is significantly less than some other deposits, such as certificates
of deposit.
-39-
Table 7 - Interest Rate Gap Analysis
(in thousands)
at December 31, 2001
0-3 3-6 6-12 1-5 5+
Total Months Months Months Years Years
-----------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Loans (1) $384,562 $ 30,861 $ 27,079 $ 35,858 $166,197 $124,567
Securities (2) 222,944 34,977 18,364 14,619 69,730 85,254
Short-term funds 555 555 - - - -
------- ------- ------ ------ ------- -------
Total earning
assets 608,061 66,393 45,443 50,477 235,927 209,821
------- ------- ------ ------ ------- -------
Savings, NOW and
MMDA 206,749 7,392 7,392 14,784 118,158 59,023
Other time deposits 219,757 49,294 57,988 57,006 55,071 398
Short-term
borrowings 22,055 1,073 777 1,554 12,434 6,217
Long-term debt 114,844 4,752 570 1,271 9,751 98,500
------- ------- ------ ------ ------- -------
Total interest-
bearing funds 563,405 62,511 66,727 74,615 195,414 164,138
------- ------- ------ ------ ------- -------
Period gap 44,656 3,882 (21,284) (24,138) 40,513 45,683
Cumulative gap 3,882 (17,402) (41,540) (1,027) 44,656
Gap as a percent
of assets 7.71% 0.67% (3.00)% (7.17)% (0.18)% 7.71%
<FN>
(1) Excludes adjustments for deferred net origination costs and allowance for
losses.
(2) At amortized cost.
</FN>
In the Company's simulation models, each asset and liability balance is
projected over a one-year horizon. Net interest income is then projected
based on expected cash flows and projected interest rates under a stable rate
scenario and analyzed on a quarterly 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 Company's current one-year simulation models under stable
rates indicate a decreasing yield on both interest-earning assets and in the
cost of interest-bearing liabilities. This position should have a slightly
positive effect on projected net interest margin over the next twelve months.
-40-
Simulation models are also performed under an instantaneous parallel 300 basis
point increase or decrease in interest rates. 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 of December 31, 2001, the results of these simulations
are within those guidelines.
The Company's rate shock 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 Company
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. By managing the interest rate
sensitivity of its asset composition in this manner, the Company has been able
to maintain a fairly stable flow of net interest income. Table 8 provides
information about the Company's market sensitive financial instruments other
than cash and cash equivalents, FHLB and Federal Reserve Bank stock, and
demand deposit accounts as of December 31, 2001. The information presented
is based on repricing opportunities and projected cash flows that include
expected prepayment speeds and likely call dates.
-41-
Table 8 - Financial Instruments Market Risk
(in thousands)
At December 31, 2001
Later Fair
2002 2003 2004 2005 2006 Years Total Value
---------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Fixed rate loans $ 44,251 $27,119 $32,037 $16,175 $10,480 $27,771 $157,833 $163,358
Average interest rate 8.07% 8.99% 8.53% 8.49% 8.30% 8.56% 8.47%
Adjustable rate loans 95,120 51,056 49,737 19,708 8,710 2,398 226,729 228,929
Average interest rate 6.64 7.82 7.60 8.20 7.42 5.71 7.27
Securities 68,055 26,160 15,203 13,643 14,630 85,253 222,944 222,740
Average interest rate 5.00 5.68 6.03 5.92 5.71 5.44 5.42
Savings, NOW and MMDA 206,749 - - - - - 206,749 206,749
Average interest rate 1.63 - - - - - 1.63
Time deposits 164,969 36,651 16,402 1,011 326 398 219,757 222,559
Average interest rate 4.95 4.26 4.88 5.61 4.85 2.77 4.83
Short-term borrowings 22,055 - - - - - 22,055 22,055
Average interest rate 1.39 - - - - - 1.39
Long-term debt 6,299 2,517 2,632 2,643 2,253 98,500 114,844 120,026
Average interest rate 2.96 4.67 4.67 4.67 4.67 5.20 5.03
-42-
IMPACT OF INFLATION AND CHANGING PRICES
The majority of a financial institution's assets and liabilities are monetary
in nature. Changes in interest rates affect the financial condition of a
financial institution to a greater degree than inflation. Although interest
rates are determined in large measure by changes in the general level of
inflation, they do not change at the same rate or in the same magnitude, but
rather react in correlation to changes in expected rate of inflation and to
changes in monetary and fiscal policy. The Company's ability to react to
changes in interest rates has a significant impact on financial results. As
discussed previously, management attempts to control interest rate sensitivity
in order to protect against wide interest rate fluctuations.
EFFECT OF RECENT ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statements on
Financial Accounting Standards (SFAS) No. 141 "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS
No. 142. SFAS No. 142 will also require that intangible assets with
estimable useful lives be amortized over their respective estimated
useful lives to their residual values, and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of", as superseded by
SFAS No. 144.
In connection with the Sabina Bank acquisition, the Company expects to
complete its allocation of the purchase price to identifiable assets and
liabilities in 2002, and anticipates recording tax-deductible goodwill
which will not be subject to amortization. At December 31, 2001,
approximately $7.1 million in intangibles have been recorded in
connection with this transaction. The ultimate amount of the purchase
price allocated to goodwill is uncertain. The Company believes the
initial impairment tests required by SFAS No. 142 will have no effect
on the financial statements.
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
FASB on October 3, 2001 and is effective for fiscal years beginning
-43-
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 believes this statement will
have no impact on the financial statements when it becomes effective.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See "Market Risk Management" in Item 7, which is incorporated herein by
reference.
-44-
Item 8. Financial Statements and Supplementary Data
- I N D E X -
PAGE
INDEPENDENT AUDITORS' REPORT 46
FINANCIAL STATEMENTS
Consolidated Balance Sheets 47
Consolidated Statements of Income 48
Consolidated Statements of Shareholders' Equity 49
Consolidated Statements of Cash Flows 50
Notes to Consolidated Financial Statements 51-72
-45-
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
NB&T Financial Group, Inc. and Subsidiaries
Wilmington, Ohio
We have audited the accompanying consolidated balance sheets of NB&T Financial
Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NB&T Financial
Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001, in conformity with U.S. generally
accepted accounting principles.
/s/J.D. CLOUD & CO. L.L.P.
Certified Public Accountants
Cincinnati, Ohio
February 5, 2002
-46-
NB&T FINANCIAL GROUP, INC. AND SUBSIDIAARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31 2001 2000
<s> <c> <c>
ASSETS:
Cash and due from banks $ 27,882 $19,331
Federal funds sold 468 15
Interest bearing deposits in banks 87 49
------- -------
Total cash and cash equivalents 28,437 19,395
Securities available for sale, at market value 178,514 115,836
Securities held to maturity (market value -
$44,226 in 2001 and $44,268 in 2000) 44,430 44,374
------- -------
Total securities 222,944 160,210
Loans 382,714 374,101
Less - allowance for loan losses 3,810 3,802
------- -------
Net loans 378,904 370,299
Loans held for sale 1,848 1,519
Premises and equipment 13,758 11,532
Earned income receivable 5,017 5,002
Other assets 20,263 11,275
------- -------
TOTAL ASSETS $671,171 $579,232
======= =======
LIABILITIES:
Demand deposits $ 52,734 $ 42,964
Savings, NOW, and money market deposits 206,749 147,470
Certificates $100,000 and over 45,158 43,040
Other time deposits 174,599 173,213
------- -------
Total deposits 479,240 406,687
Short-term borrowings 22,055 40,148
Long-term debt 114,844 80,323
Other liabilities 4,056 2,592
------- -------
TOTAL LIABILITIES 620,195 529,750
------- -------
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
Surplus 9,129 8,128
Unearned ESOP shares, at cost (1,871) (299)
Accumulated other comprehensive income
(loss), net of taxes (145) 223
Retained earnings 48,109 44,742
Treasury stock, 611,146 shares in 2001
and 613,666 shares in 2000 (5,246) (4,312)
------- -------
TOTAL SHAREHOLDERS' EQUITY 50,976 49,482
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $671,171 $579,232
======= =======
The accompanying notes to financial statements are an integral part of these
statements.
-47-
NB&T FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2001, 2000 and 1999
(thousands, except per common share data)
2001 2000 1999
<s> <c> <c> <c>
INTEREST INCOME:
Interest and fees on loans $30,508 31,549 27,728
Interest on securities available-for-sale
Taxable 8,060 6,640 7,289
Non-taxable 433 433 436
Interest on securities held-to-maturity 2,275 2,291 1,989
Interest on deposits in banks 11 10 14
Interest on federal funds sold 706 126 83
------ ------ ------
TOTAL INTEREST INCOME 41,993 41,049 37,539
------ ------ ------
INTEREST EXPENSE:
Interest on savings, NOW and money
market deposits 4,162 4,160 3,759
Interest on time certificates $100,000
and over 2,895 2,600 2,281
Interest on other deposits 9,594 9,315 7,685
------ ------ ------
Total Interest on Deposits 16,651 16,075 13,725
Interest on short-term borrowings 1,287 2,024 1,267
Interest on long-term debt 4,911 4,612 4,158
------ ------ ------
TOTAL INTEREST EXPENSE 22,849 22,711 19,150
------ ------ ------
NET INTEREST INCOME 19,144 18,338 18,389
PROVISION FOR LOAN LOSSES 1,500 2,199 1,400
------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 17,644 16,139 16,989
------ ------ ------
NON-INTEREST INCOME:
Trust income 1,167 1,276 1,192
Service charges on deposits 1,961 1,731 1,485
Other service charge and fees 310 306 376
ATM network fees 804 725 701
Insurance agency commissions 1,689 1,140 966
Securities gains (losses) 260 (2,070) (368)
Income from BOLI 632 161 -
Other 1,164 782 875
------ ------ ------
TOTAL NON-INTEREST INCOME 7,987 4,051 5,227
------ ------ ------
NON-INTEREST EXPENSE:
Salaries 7,766 6,415 6,563
Pension and benefits 1,240 1,167 1,130
Equipment 2,592 2,233 2,108
Occupancy 1,045 866 824
State franchise tax 569 477 488
Marketing 532 496 509
Other 4,394 3,718 3,605
------ ------ ------
TOTAL NON-INTEREST EXPENSE 18,138 15,372 15,227
------ ------ ------
INCOME BEFORE INCOME TAX 7,493 4,818 6,989
PROVISION FOR INCOME TAX 1,476 772 1,281
------ ------ ------
NET INCOME $ 6,017 $ 4,046 $ 5,708
====== ====== ======
Earnings per common share $1.91 $1.27 $1.81
Earnings per common share, assuming dilution 1.90 1.26 1.77
The accompanying notes to financial statements are an integral part of these
statements.
-48-
NB&T FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
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
(thousands)
<c> <c> <c> <c> <c> <c> <c> <c>
Balance
January 1, 1999 $1,000 $7,368 $ (511) $36,678 $ 188 $44,723
Comprehensive Income:
Net income 5,708 5,708 $ 5,708
Net unrealized losses
on securities
available for sale
(net of tax benefit
of $1,937) (3,761) (3,761) (3,761)
Reclassification
adjustment for net
realized loss on sale
of available-for-sale
securities included
in net income (net of
tax benefit of $126) 242 242 242
-----
Total comprehensive
income $ 2,189
=====
Dividends declared-
$.68 per share (2,144) (2,144)
Treasury shares purchased (1,843) (1,843)
Stock options exercised 464 447 911
ESOP shares earned 89 106 195
----- ----- ---- ------ ----- ------
Balance
December 31, 1999 1,000 7,921 (405) 38,846 (3,331) 44,031
Comprehensive Income:
Net income 4,046 4,046 $ 4,046
Net unrealized
gains on securities
available-for-sale (net
of taxes of $1,127) 2,188 2,188 2,188
Reclassification
adjustment for net
realized loss on sale
of available-for-sale
securities included
in net income (net of
tax benefit of $704) 1,366 1,366 1,366
-----
Total comprehensive
income $ 7,600
=====
Dividends declared-
$.76 per share (2,423) (2,423)
Treasury shares purchased (221) (221)
Stock options exercised 151 182 333
ESOP shares earned 56 106 162
----- ----- ---- ------ ----- ------
Balance
December 31, 2000 1,000 8,128 (299) 40,430 223 49,482
Comprehensive Income:
Net income 6,017 6,017 $ 6,017
Net unrealized
losses on securities
available-for-sale
(net of tax benefit
of $101) (196) (196) (196)
Reclassification
adjustment for
net realized gain
on sale of
available-for-sale
securities included
in net income (net
of taxes of $88) (172) (172) (172)
-----
Total comprehensive
income $ 5,649
=====
Dividends declared-
$.84 per share 2,650) (2,650)
Treasury shares purchased (1,673) (1,673)
Stock options exercised 9 21 30
ESOP shares earned 37 101 138
Shares sold to ESOP 955 (1,673) 718
----- ----- ----- ------ ----- ------
Balance
December 31, 2001 $1,000 $9,129 $(1,871) $42,863 $ (145) $50,976
===== ===== ===== ====== ===== ======
The accompanying notes to financial statements are an integral part of these
statements.
-49-
NB&T FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000 and 1999
(thousands)
2001 2000 1999
<s> <c> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,017 $ 4,046 $ 5,708
Adjustments to reconcile net
income to net cash provided by operating
activities:
Depreciation, amortization and accretion 2,151 1,714 1,513
Provision for loan losses 1,500 2,199 1,400
Provision for deferred taxes 371 (78) 71
Net realized losses (gains) on
securities available-for-sale (260) 2,070 368
Origination of mortgage loans held
for sale (9,611) (1,241) (6,104)
Proceeds from sales of mortgage
loans held for sale 9,110 1,241 9,904
Gain on sale of loans (166) - -
(Increase) decrease in income receivable 254 (653) (75)
Increase (decrease) in other assets (1,075) (402) 372
Increase (decrease) in other liabilities 960 33 (399)
FRB/FHLB stock dividends (412) (436) (372)
ESOP shares earned 138 162 195
------- ------ ------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 8,977 8,655 12,581
------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
available-for-sale 12,452 40,998 23,044
Purchases of securities available-for-sale (170,525) (52,525) (27,856)
Proceeds from maturities of securities
available-for-sale 99,913 10,212 28,244
Purchases of securities held-to-maturity - - (8,993)
Proceeds from maturities of securities
held-to-maturity - - 1,540
Purchase of bank-owned life insurance
policies - (10,000) -
Proceeds from loan sales 8,950 - -
Net change in loans 11,349 (25,015) (46,448)
Purchases of premises and equipment (2,739) (1,283) (1,530)
Acquisitions of bank and insurance agencies (2,300) - -
------- ------ ------
NET CASH USED IN INVESTING ACTIVITIES (42,900) (37,613) (31,999)
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 30,778 26,756 5,712
Cash dividends paid (2,593) (2,356) (2,017)
Net change in short-term borrowings (18,093) (210) 17,656
Advances of long-term debt 34,522 5,000 -
Repayment of long-term debt - (108) (108)
Proceeds from stock options exercised 24 154 437
Purchase of treasury shares (1,673) (221) (1,843)
------- ------ ------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 42,965 29,015 19,837
------- ------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 9,042 57 419
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 19,395 19,338 18,919
------- ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,437 $ 19,395 $ 19,338
======= ====== ======
The accompanying notes to financial statements are an integral part of these
statements.
-50-
NB&T FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2000 and 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NB&T Financial Group, Inc. (the Company) formerly known as InterCounty
Bancshares, Inc., is a one-bank holding company. Its wholly-owned
subsidiary, The National Bank and Trust Company (the Bank), provides full
banking services, including trust and brokerage services, to customers
located principally in Adams, Auglaize, Brown, Clermont, Clinton, Fayette,
Hardin, Highland and Warren counties in Ohio. The Bank grants agribusiness,
commercial, consumer, and residential loans to customers throughout its
market area. The Bank offers insurance products including property,
casualty and life through its wholly-owned subsidiary, NB&T Insurance
Agency, Inc. (formerly known as Phillips Insurance Agency, Inc.).
BASIS OF PRESENTATION-
The consolidated financial statements include the accounts of NB&T Financial
Group, Inc. and its direct and indirect subsidiaries. All intercompany
accounts and transactions are eliminated in consolidation. Certain prior
period data has been reclassified to conform to current period presentation.
USE OF ESTIMATES-
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.
SECURITIES-
Investment securities that management has the intent and ability to hold to
maturity are reported at amortized cost, adjusted for amortization of
premiums and accretion of discounts using the interest method. Securities
that are available for sale are reported at fair value with unrealized
holding gains and losses reported, net of income taxes, as Accumulated Other
Comprehensive Income, a separate component of shareholders' equity.
Realized gains and losses on the sale of securities available for sale are
determined using the specific identification method.
Federal Home Loan Bank (FHLB) stock is an equity interest in the Federal
Home Loan Bank of Cincinnati. It can be sold only at its par value of $100
per share and only to the FHLB or to another member institution. In
addition, the equity ownership rights are more limited than would be the
case for a public company, because of the oversight role exercised by the
Federal Housing Finance Board in the process of budgeting and approving
dividends. Federal Reserve Bank stock is similarly restricted in
marketability and value. The Bank is required to maintain six percent of
its capital plus surplus in Federal Reserve Bank stock. Although
classified as securities available for sale, both investments are carried
at cost, which is their par value.
-51-
LOANS HELD FOR SALE-
Mortgage loans originated for sale in the secondary market are carried at
the lower of cost or estimated market value in the aggregate. Net unrealized
losses are recognized through a valuation allowance by charges to income.
LOANS AND ALLOWANCE FOR LOAN LOSSES-
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses and net of any deferred origination fees or costs. Net
deferred fees and costs are amortized over the lives of the related loans
using the interest method as an adjustment of loan yields. The aggregate
amount of overdrawn demand deposit accounts are included in net loans. The
allowance for loan losses is established through provisions charged to
expense. 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 changes 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 borrower's ability to pay. Loans
are considered impaired when management believes, based on current
information and events, it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Impaired loans are measured by the present value of expected
future cash flows using the loan's effective interest rate. Impaired
collateral-dependent loans may be measured based on collateral value.
Smaller-balance homogenous loans, including residential mortgage and
consumer installment loans, are collectively evaluated for impairment.
Credit losses are charged against the allowance when management believes
that the collectibility of the principal is unlikely. Accrual of interest
is discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts, that the borrower's
financial condition is such that collection of interest is doubtful.
Subsequent cash receipts on nonaccrual loans are recorded as a reduction
of principal, and interest income is recorded once principal recovery is
reasonably assured. Installment loans are generally charged off if four
payments have been missed. Generally, all other loans are placed on non-
accrual status if they are 90 days or more delinquent. A loan may remain
on accrual status after it is 90 days delinquent if it is probable the
account will be settled in its entirety or brought current within a 30-day
period. The current year's accrued interest on loans placed on non-accrual
status is charged against earnings. Previous years' accrued interest is
charged against the allowance for loan losses.
PREMISES AND EQUIPMENT-
Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation is computed using principally the straight-line method over the
estimated useful lives of the related assets.
INTANGIBLE ASSETS-
Indentifiable intangible assets with definite lives are amortized over
the expected lives of the assets.
-52-
MARKETING EXPENSE-
Marketing costs are expensed as incurred.
NON-QUALIFIED STOCK OPTIONS-
Stock options are accounted for under Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees. " Options are
granted at a price equal to market value of a common share on the day of
grant. Under the intrinsic value method of APB No. 25, the Company does not
recognize compensation expense for options granted. Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" prescribes the recognition of compensation expense based on
the fair value of options determined on the grant date. The pro forma
disclosures required by SFAS No. 123 are shown in Note 13.
INCOME TAXES-
Certain income and expenses are recognized in different periods for
financial reporting than for purposes of computing income taxes currently
payable. Deferred taxes are provided on such temporary differences. These
differences relate principally to the allowance for loan losses,
depreciation and FHLB stock dividends.
STATEMENTS OF CASH FLOWS-
For purposes of reporting cash flows, cash equivalents include all highly
liquid investments with a maturity of three months or less when purchased.
EARNINGS PER COMMON SHARE-
Earnings per common share (EPS) is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
Certain shares held in suspense by the Company's employee stock ownership
plan are not considered outstanding until they are committed to be released
for allocation to participants' accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS-
For cash and due from banks, federal funds sold and other short-term
investments, the carrying amounts reported in the Consolidated Balance Sheet
approximate fair value. For securities, fair market value equals quoted
market price, if available. If a quoted market price was not available,
fair value was estimated using quoted market prices for similar securities.
The estimated fair value of loans was based on the discounted value of
future cash flows expected to be received. The discount rate used was the
rate at which the same loans would be made under current conditions.
The approximate fair value of demand deposits, savings accounts, and other
deposit liabilities without defined maturities is the carrying amount at the
reporting date. The fair value of fixed-maturity certificates of deposit was
estimated using a discounted cash flow calculation applying interest rates
currently offered for deposits of similar remaining maturities. Carrying
value approximates fair value for short-term borrowings and the Company's
variable rate long-term debt. The fair value of fixed rate long-term debt
is based on discounted cash flows using current market rates for debt with
similar terms and remaining maturities.
-53-
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS-
In July 2001, the Financial Accounting Standards Board issued Statements on
Financial Accounting Standards (SFAS) No. 141 Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS
No. 142. SFAS 142 will also require that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed of, as superceded by SFAS No. 144.
The Company adopted provisions of SFAS No. 141 in 2001 and is required to
adopt SFAS No. 142 in its entirety effective January 1, 2002. The
applicability of these pronouncements relates primarily to the acquisitions
completed in 2001 as disclosed in Note 2, and any future acquisitions. The
Company believes the initial impairment tests required by SFAS No. 142 will
not have a significant effect on the financial statements.
NOTE 2 - ACQUISITIONS
In 2001, the Company acquired two related insurance agencies located in
Wilmington and Greenfield, Ohio, and one other agency for approximately
$958,000 in cash and other obligations. These acquisitions were accounted
for as purchase transactions, and substantially all of the purchase prices
paid will be assigned to non tax-deductible, identifiable intangible assets
amortizable over the estimated useful lives, yet to be determined.
In December 2001, the Company acquired a majority of the assets and assumed
the deposit liabilities of Sabina Bank (a subsidiary of Premier Financial
Bancorp, Inc.) located in Sabina, Ohio, for an aggregate cash purchase price
of approximately $12.9 million. This business combination is being
accounted for as a purchase transaction in accordance with SFAS No. 141,
"Business Combinations". The Company is in the process of obtaining third-
party valuations of certain intangible assets; thus, the allocation of the
purchase price has not been completed. In connection with the transaction,
the Company acquired approximately $49 million in assets consisting
primarily of loans and investments, and assumed deposit liabilities
approximating $42 million and recorded an intangible asset of approximately
$7 million.
These transactions would have had an immaterial effect on the pro forma
results of operations and earnings per share assuming the combinations
occurred at the beginning of 2001 or 2000.
-54-
NOTE 3 - SECURITIES
The following tables present amortized cost and estimated fair values of
securities at December 31 (thousands):
2001
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<s> <c> <c> <c> <c>
Securities available-
for-sale:
U.S. Agency notes $ 54,117 $ 399 $ 378 $ 54,138
U.S. Agency mortgage-
backed securities 96,071 672 928 95,815
Other mortgage-backed
securities 5,021 90 2 5,109
Municipals 8,572 9 82 8,499
Federal Reserve/FHLB
stock 6,914 - - 6,914
Other 8,039 - - 8,039
------- ----- ----- --------
$178,734 $1,170 $1,390 $178,514
======= ===== ===== ========
Securities held to maturity:
Municipals $ 44,430 $ 373 $ 577 $ 44,226
======= ===== ===== =======
2000
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<s> <c> <c> <c> <c>
Securities available
for sale:
U.S. Agency notes $ 49,641 $629 $ 31 $ 50,239
U.S. Agency mortgage-
backed securities 39,857 214 162 39,909
Other mortgage-backed
securities 11,164 12 270 10,906
Municipals 8,567 20 74 8,513
Federal Reserve/FHLB
stock 6,259 - - 6,259
Other 10 - - 10
------- --- --- -------
$115,498 $875 537 $115,836
======= === === =======
Securities held to maturity:
Municipals $ 44,374 $165 $271 $ 44,268
======= === === =======
-55-
Gross gains realized on sales of securities available for sale were
$260,000 for 2001, $-0- for 2000. Gross losses realized on sales of
securities available for sale were $-0- for 2001 and $2,070,000 for
2000. Securities with a carrying value of approximately $145.3 million,
and $94.6 million at December 31, 2001 and 2000, respectively, were
pledged to secure public deposits, short-term and long-term borrowings
and for other purposes as required or permitted by law.
At December 31, 2001 the amortized cost and estimated market value of
debt securities by contractual maturity was as follows. Expected
maturities may differ from contractual maturities when borrowers have
the right to call or prepay obligations (thousands):
Available for Sale Held to Maturity
--------------------- -------------------
Amortized Market Amortized Market
Cost Value Cost Value
<s> <c> <c> <c> <c>
Due within one year $ 6,000 $ 6,000 $ - $ -
Due from one to five years 29,044 29,407 904 969
Due from five to ten years 19,073 18,731 100 102
Due after ten years 8,572 8,499 43,426 43,155
------- ------- ------ ------
62,689 62,637 44,430 44,226
U.S. Agency mortgage-backed
securities 96,071 95,815 - -
Other mortgage-backed
securities 5,021 5,109 - -
Federal Reserve/FHLB
stock/other 14,953 14,953 - -
------- ------- ------ ------
Total securities $178,734 $178,514 $44,430 $44,226
======= ======= ====== ======
NOTE 4 - LOANS
Major classifications of loans as of December 31 were as follows
(thousands):
2001 2000
<s> <c> <c>
Commercial and industrial $106,975 $ 92,328
Commercial real estate 36,411 42,694
Agricultural 19,076 18,256
Residential real estate 145,755 145,582
Installment 70,345 71,414
Other 3,883 3,209
------- -------
Total 382,446 373,483
Deferred net origination costs 268 618
Allowance for loan losses (3,810) (3,802)
------- -------
Net loans $378,904 $370,299
======= =======
-56-
Mortgage loans serviced for the Federal Home Loan Mortgage Corporation
and excluded from the Consolidated Balance Sheets at December 31, 2001
and 2000 were $-0- and $15,345,000, respectively. In 2001, the Company
recorded a $148,000 gain related to the sale of servicing rights on
$28 million of real estate loans.
Changes in the allowance for loan losses for the years ended December 31
were as follows (thousands):
2001 2000 1999
<s> <c> <c> <c>
Balance at beginning of period $ 3,802 $ 3,222 $ 2,641
Provision for loan losses 1,500 2,199 1,400
Amounts assumed in acquisition 622 - -
Charge offs (2,346) (1,871) (1,071)
Recoveries 232 252 252
------ ------ ------
Balance at end of period $ 3,810 $ 3,802 $ 3,222
====== ====== ======
Impaired loans, under SFAS No.114, including loans evaluated by the
Company and place in nonaccrual status, at December 31 are summarized
as follows (thousands):
2001 2000
<s> <c> <c>
Impaired loans without a valuation allowance $ 922 $ 730
Impaired loans with a valuation allowance 3,937 4,015
----- -----
Total impaired loans $4,859 $4,745
===== =====
Valuation reserve on impaired loans $1,327 $1,356
===== =====
Average impaired loans were $4.8 million in 2001, $3.9 million in 2000
and $3.7 million in 1999. Interest income recognized on impaired loans
was $166,000 in 2001, $480,000 in 2000, and $191,000 in 1999. At
December 31, 2001, the Bank had no material commitments to lend additional
funds to customers whose loans are considered impaired.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment were as follows at December 31 (thousands):
2001 2000
<s> <c> <c>
Land $ 1,775 $ 1,793
Buildings and leasehold improvements 12,066 9,847
Equipment 10,401 8,108
------ ------
Total cost 24,242 19,748
Accumulated depreciation and amortization (10,484) (8,216)
------ ------
Premises and equipment $ 13,758 $11,532
====== ======
-57-
Depreciation expense related to premises and equipment was $1,702,000,
$1,496,000 and $1,244,000 for the years ended December 31, 2001, 2000
and 1999, respectively.
NOTE 6 - OTHER ASSETS
At December 31, 2001, other assets include bank-owned life insurance (BOLI)
with cash surrender values totaling $10,793,000. Under the terms of the
policies, the cash surrender values will increase at credited adjustable
rates over the policy terms. Income is recorded on the policies based on
the reported increase in cash surrender value and is reflected in other non-
interest income in the consolidated statements of income.
Other assets include intangible assets of $8,247,000 and $250,000 at
December 31, 2001 and 2000, respectively. At December 31, 2001,
approximately $7,071,000 was recorded in connection with the Sabina Bank
acquisition in December 2001. The Company is currently in the process of
obtaining third-party valuations of certain intangible assets, the most
significant of which will relate to core deposit intangibles, to be
amortized over the expected life of the transaction account deposit base.
The amortization on all intangible assets recorded in connection with this
transaction will be tax-deductible over a fifteen year period.
Intangible assets at December 31, 2001 also include $541,000 of customer
contract-related identifiable intangibles acquired in connection with the
insurance agency acquisitions. The related non tax-deductible asset
amortization will be recorded over the expected life of the customer
relationship, yet to be determined. The remaining balance of the intangible
asset at December 31, 2001 relates to non-compete arrangements which will be
amortized over three- to five-year periods beginning at the retirement date
of certain key employees.
NOTE 7 - DEPOSITS
Contractual maturities of certificates of deposit at December 31, 2001
were as follows (thousands):
Other
Certificates Time
over $100,000 Deposits Total
<s> <c> <c> <c>
Year ending December 31
2002 $39,775 $125,199 $164,974
2003 4,145 32,506 36,651
2004 904 15,496 16,400
2005 100 911 1,011
2006 - 325 325
Thereafter 234 162 396
------ ------- -------
$45,158 $174,599 $219,757
====== ======= =======
-58-
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) salary deferral plan. Substantially all
employees who meet minimum age and length of service requirements are
eligible to participate. Employee deferrals may be subject to employer-
matching contributions up to specified limits. Discretionary contributions
may also be made to the Plan. Total matching and discretionary contributions
made by the Company amounted to $108,000, $106,000 and $98,000 in 2001, 2000
and 1999, respectively.
The Company sponsors a leveraged employee stock ownership plan (ESOP)
covering substantially all of its employees who meet minimum age and length
of service requirements. Shares of the Company's common stock held by the
ESOP were purchased with the proceeds of external borrowings and borrowings
from the Company. The external ESOP borrowings are guaranteed by the
Company and are included in long-term debt. The Company is obligated to
make annual contributions sufficient to enable the ESOP to repay the
external and internal loans, including interest. The shares pledged as
collateral are reported as unearned ESOP shares in the consolidated balance
sheets. Additional contributions to the Trust are determined by the Board of
Directors. Total Company contributions were $90,000 in 2001 and 2000, and
$78,000 in 1999.
Shares are held in a suspense account for allocation among participants as
the loan is repaid. The number of shares released is based on the proportion
of debt service paid in the year. Released shares are allocated to
participants' accounts on the basis of compensation. Dividends on
unallocated shares are used to repay the loan. Dividends on allocated
shares are allocated to the participants' accounts.
Benefits are payable upon retirement, death, disability or separation from
service. Benefits are paid in common shares of the Company. If the common
shares of the Company are not tradable on an established market when
benefits are distributed, participants have the option to put the shares to
the Company at a value determined by independent appraisal. In 2000, the
Company purchased 9,900 shares from ESOP participants. The estimated fair
value at December 31, 2001 was $11.9 million and is based on those shares of
allocated shares remaining in the ESOP multiplied by the 2000 per share
appraised value.
Shares purchased by the ESOP since 1993 are accounted for in accordance with
Statement of Position 93-6 (SOP 93-6). Accordingly, as these shares are
released from collateral, the Company reports compensation expense equal to
the current estimated fair value of the released shares. Once released, the
shares are considered outstanding for earnings-per-share (EPS) computations.
Dividends on allocated shares reduce retained earnings; dividends on
unallocated shares are recorded as a reduction of ESOP debt.
Compensation expense for ESOP shares acquired in 1986 is equal to the
principal repaid on the related borrowing plus any additional cash
contributions. Dividends on 1986 ESOP shares are charged to retained
earnings. These shares are considered outstanding for EPS computations.
-59-
The ESOP shares as of December 31 were as follows:
2001 2000
----------------- -----------------
SOP SOP
93-6 1986 93-6 1986
Shares Shares Shares Shares
<s> <c> <c> <c> <c>
Allocated shares 26,449 509,283 23,475 507,410
Shares released for allocation 3,578 18,165 3,835 19,355
Unreleased shares 89,959 32,115 9,952 50,233
------- ------- ------ -------
Total ESOP shares 119,986 559,563 37,262 576,998
======= ======= ====== =======
At December 31, 2000, the estimated fair value of unreleased 1993 shares was
$2.0 million. ESOP compensation expense was $129,000, $154,000 and $178,000
for 2001, 2000 and 1999, respectively.
NOTE 9 - SHORT-TERM BORROWINGS
A summary of short-term borrowings follows (thousands):
2001 2000
------------ -------------
Amount Rate Amount Rate
<s> <c> <c> <c> <c>
At December 31:
Securities sold under agreements
to repurchase $21,759 1.37% $17,258 5.29%
U.S. Treasury demand notes 296 1.71 890 6.75
Federal Home Loan Bank notes - 6,000 6.93
Federal funds purchased - 16,000 6.75
------ ------
Total short-term borrowings $22,055 1.39 $40,148 6.14
====== ======
Years ended December 31:
Average amount outstanding $34,250 $33,486
Maximum month-end balance 44,158 41,624
Weighted average interest rate 3.76% 6.05%
-60-
NOTE 10 - LONG-TERM DEBT
Long-term debt consisted of the following at December 31 (thousands):
2001 2000
<s> <c> <c>
Federal Home Loan Bank notes $114,628 $80,000
ESOP Trust debt guarantee 216 323
------- ------
$114,844 $80,323
======= ======
Maturities of long-term debt are as follows (thousands):
<s> <c>
2002 $ 6,378
2003 2,625
2004 2,632
2005 2,643
2006 2,066
Thereafter 98,500
At December 31, 2001, the Bank had outstanding $114.6 million of total
borrowings from the FHLB, $98.5 million of which consists of seven fixed-
rate notes with a weighted average rate of 5.20% and with maturities in
2008, 2010 and 2011. At the option of the FHLB, these notes can be
converted at certain dates to instruments that adjust quarterly at the
three-month LIBOR rate. The note amount and nearest optional conversion
dates at December 31, 2001, are: $44.5 million in 2002; $30 million in
2003; $12 million in 2004; and $12 million in 2006. The remaining $16.1
million consists of $12.1 million in a 4.67% fixed-rate monthly amortizing
note with a final maturity in 2006, and $4 million in a note with an
interest rate that varies quarterly at the three-month LIBOR rate and that
matures in 2002.
At December 31, 2001, FHLB borrowings were collateralized by a blanket
pledge of certain residential real estate loans totaling approximately $100
million and primarily mortgage-backed securities with a carrying value of
$64 million. Additionally, the Company is required to hold minimum levels
of FHLB stock based on the outstanding borrowings.
The ESOP Trust loan agreement contains various covenants for the Company
which include a minimum net worth and restrictions on additional
indebtedness. The note may be prepaid without penalty with prepayments
applying in the inverse order of the maturities of the scheduled payments.
Interest is due quarterly at the prime rate, 4.75% at December 31, 2001.
Scheduled principal payments are approximately $108,000 annually through
2003.
-61-
NOTE 11 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid was $23,037,000, $22,470,000 and $19,123,000 in 2001, 2000
and 1999, respectively. Federal income taxes paid were $1,060,000,
$596,000 and $1,586,000 in 2001, 2000 and 1999, respectively. In 2001,
the Company sold 83,632 treasury shares to the ESOP in exchange for a
$1,673,000 note receivable.
NOTE 12 - INCOME TAXES
Income taxes provided for in the statements of income at December 31 consist
of the following (thousands):
2001 2000 1999
<s> <c> <c> <c>
Income taxes currently payable:
Applicable to income exclusive of
securities transactions $1,017 $1,558 $1,335
Applicable to securities transactions 88 (704) (125)
----- ----- -----
Total income taxes currently payable 1,105 854 1,210
----- ----- -----
Deferred income taxes resulting
from temporary differences:
Provision for loan losses 209 (198) (197)
Depreciation (35) (58) (20)
Stock option accruals 2 61 161
FHLB stock dividends 141 141 126
Alternative minimum tax credit 34 (34) -
Other 20 6 1
----- ----- -----
Total deferred income taxes 371 (82) 71
----- ----- -----
Provision for income tax $1,476 $ 772 $1,281
===== ===== =====
-62-
A reconciliation of the statutory income tax rate to the Company's effective
tax rate at December 31 follows:
2001 2000 1999
<s> <c> <c> <c>
Statutory tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax exempt interest (10.8) (16.9) (10.4)
Non-qualified stock options (.1) (1.6) (5.8)
Bank-owned life insurance (2.9) (1.1) -
Other-net (.5) 1.6 .6
---- ---- ----
Effective tax rate 19.7% 16.0% 18.4%
==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and their basis for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31 were as
follows (thousands):
2001 2000
<s> <c> <c>
Deferred tax assets:
Allowance for loan losses $ 753 $ 950
Stock option accruals - 2
Unrealized losses on securities
available-for-sale 74 -
Alternative minimum tax credit - 24
Accruals not currently deductible 8 8
----- -----
Total deferred tax assets 835 994
----- -----
Deferred tax liabilities:
Depreciation of premises and equipment (245) (280)
Unrealized gains on securities
available-for-sale - (114)
FHLB stock dividends (719) (579)
Intangible asset amortization (27) -
Other - net - (7)
----- ----
Total deferred tax liability (991) (980)
----- -----
Net deferred taxes (liability) $ (156) $ 14
===== =====
Due primarily to the Company's taxable position in prior years, a
valuation allowance for deferred tax assets was unnecessary at
December 31, 2001 and 2000.
-63-
NOTE 13 - SHAREHOLDERS' EQUITY
Under the terms of the Company's nonqualified compensatory stock option
plan, 7% of the authorized and issued common shares of the Company are
reserved for the purpose of granting options to key bank personnel.
Awards under the stock option plan are made at the discretion of the Board
of Directors. The option price is not less than the fair market value
of the shares at the date of grant. The options granted have a term of
ten years and become exercisable in equal installments on the first
through fifth anniversaries of the date of grant.
The Company has elected to follow APB No. 25 in accounting for its stock
option plan. Pro forma information regarding net income and earnings per
share is required by SFAS No. 123. This information is required to be
determined as if the Company had accounted for its stock options
granted subsequent to December 31, 1996 under the fair value method of
that statement. Had compensation expense for the Company's stock options
been recognized under the methodology prescribed by SFAS No. 123, the
Company's net income and earnings per share would have been impacted as
follows (thousands, except for per share data):
2001 2000 1999
<s> <c> <c> <c>
Reported net income $6,017 $4,046 $5,708
Pro forma net income 5,935 3,988 5,670
Reported earnings per share-
assuming dilution 1.90 1.26 1.77
Pro forma earnings per share-
assuming dilution 1.88 1.24 1.76
The estimated fair value of options granted during 2001, 2000 and 1999 was
$4.45, $6.42 and $8.13, respectively. The fair value, which is amortized to
expense over the option vesting period in determining the pro forma results,
was estimated at the date of grant using a Black-Scholes option pricing
model. Pricing model assumptions fro 2001, 2000 and 1999 included a risk-
free interest rate of 6.5%, expected lives of 9 years, expected volatility
of 19.0% and expected dividend yields of approximately 3.0%.
-64-
Details of the stock option plan are as follows:
Wtd. Avg. Option Option Shares
Exercise Shares Shares Available
Price Outstanding Exercisable for Grant
<s> <c> <c> <c> <c>
Balance, January 1, 1999 $ 8.96 173,276 127,735 94,050
Granted 28.00 15,500 (15,500)
Became exercisable 15,261
Exercised 5.64 (76,340) (76,340) 76,340
------- ------- -------
Balance, December 31, 1999 13.77 112,436 66,656 154,890
Granted 23.57 30,200 (30,200)
Became exercisable 17,060
Exercised 5.71 (26,870) (26,870) 26,870
------- ------- -------
Balance, December 31, 2000 18.20 115,766 56,846 151,560
Granted 17.25 30,000 (30,000)
Became exercisable 16,400
Exercised 9.69 (2,520) (2,520) 2,520
Expired 25.81 (1,770) (600) 1,770
------- ------- -------
Balance, December 31, 2001 $18.06 141,476 70,126 125,850
======= ======= =======
The weighted-average exercise price of exercisable options at December 31,
2001, 2000 and 1999 was $15.37, $13.61 and $9.64, respectively. The
following table summarizes information for options currently outstanding
and exercisable at December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Range of Wtd. Avg. Wtd. Avg. Wtd. Avg.
Prices Number Remaining Life Exercise Price Number Exercise Price
<s> <c> <c> <c> <c> <c>
$ 9.63-13.93 58,276 4.2 $ 12.42 53,086 $ 12.30
17.25-24.50 69,200 8.3 20.79 11,440 23.42
28.00 14,000 7.2 28.00 5,600 28.00
------- ------
9.63-28.00 141,476 6.5 17.82 70,126 15.37
======= ======
-65-
The following is a reconciliation of weighted average shares for earnings
per share (EPS) computations to the weighted average shares including the
effect of stock options for diluted EPS computations:
2001 2000 1999
<s> <c> <c> <c>
Weighted average shares for EPS 3,149,587 3,185,157 3,156,727
Effect of dilutive stock options 15,280 21,350 64,864
--------- --------- ---------
Weighted average shares for EPS -
assuming dilution 3,164,867 3,206,507 3,221,591
========= ========= =========
NOTE 14 - 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 instruments 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 the contract amount of those instruments.
The Company uses 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 December 31 were as follows (thousands):
2001 2000
<s> <c> <c>
Commitments to extend credit $39,689 $41,804
Standby letters of credit 1,831 1,691
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.
-66-
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. At December
31, 2001 and 2000, 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 2000 through 2012. Approximately 83% and 76% of the
amount outstanding at December 31, 2001 and 2000, respectively, was secured.
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.
NOTE 15 - RELATED PARTY TRANSACTIONS
At December 31, 2001 and 2000, executive officers, directors and companies
in which they have a direct or indirect interest, were indebted to the
Company directly or as guarantors in the aggregate amount of $4,213,000 and
$3,004,000, respectively. During 2001, $1,981,000 in new loans were made;
repayments totaled $1,997,000. Such transactions originate in the normal
course of the Company's operations as a depository and lending institution.
NOTE 16 - FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the provisions of SFAS
No. 107, "Disclosures About Fair Value of Financial Instruments, " which
requires disclosure of fair value information about both on- and off-balance
sheet financial instruments for which it is practicable to estimate that
value. Because SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements, any aggregation
of the fair value amounts presented would not represent the underlying value
of the Company.
-67-
Carrying amounts and estimated fair values for financial instruments
as of December 31 were as follows (thousands):
2001 2000
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<s> <c> <c> <c> <c>
Financial Assets:
Cash and due from banks $ 27,882 $ 27,882 $ 19,331 $ 19,331
Federal funds sold 468 468 15 15
Interest bearing deposits
in banks 87 87 49 49
Securities available for sale 178,514 178,514 115,836 115,836
Securities held to maturity 44,430 44,226 44,374 44,268
Loans, net 378,904 386,603 370,299 369,707
Loans held for sale 1,848 1,874 1,519 1,519
Financial Liabilities:
Deposits $479,240 $482,042 $406,688 $407,346
Short-term borrowings 22,055 22,055 40,148 40,148
Long-term debt 114,844 120,026 80,323 79,347
The fair value of off-balance-sheet financial instruments at December 31,
2001 and 2000, was not material.
NOTE 17 - REGULATORY MATTERS
The principal source of income and funds for NB&T Financial Group, Inc. is
dividends paid by the Bank subsidiary. During the year 2002, dividends that
the Bank subsidiary can pay to NB&T Financial Group, Inc. without prior
approval of regulatory agencies is limited to 2000 and 2001 retained net
income plus 2002 retained net income.
Banks and bank holding companies must meet certain minimum capital
requirements set by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. The minimum
regulatory capital ratios are 8% for total risk-based, 4% for Tier I risk-
based, and 4% for leverage. For various regulatory purposes, institutions
are classified into categories based upon capital adequacy. The highest
"well capitalized" category requires capital ratios of at least 10% for
total risk-based, 6% for Tier I risk-based, and 5% for leverage. As of the
most recent notification from their regulators, NB&T Financial Group, Inc.
and the Bank were categorized as "well capitalized" under the regulatory
framework for prompt corrective action. There are no conditions or events
since that notification that management believes would have changed the
Company's classification.
-68-
A summary of the regulatory capital of NB&T Financial Group, Inc. and
the Bank at December 31 follows ($'s in thousands):
2001 2000
------------------------- -------------------------
NB&T The National NB&T The National
Financial Bank & Trust Financial Bank & Trust
Group, Inc. Company Group, Inc. Company
----------- ------------ ----------- -------------
<s> <c> <c> <c> <c>
Regulatory Capital:
Shareholders' equity $50,976 $44,791 $49,482 $43,142
Net unrealized
securities (gains)/
losses 145 145 - -
Intangibles (8,247) (8,247) (223) (223)
------ ------ ------ ------
Tier I risk-based
capital 42,874 36,689 49,259 42,919
Eligible allowance for
loan losses 3,810 3,810 3,802 3,802
------ ------ ------ ------
Total risk-based
capital $46,684 $40,499 $53,061 $46,721
====== ====== ====== ======
Capital Ratios:
Total risk-based 11.55% 10.05% 14.04% 12.41%
Tier I risk-based 10.60 9.10 13.03 11.40
Tier I leverage 6.83 5.85 8.70 7.58
The Federal Reserve Act requires depository institutions to maintain cash
reserves with the Federal Reserve Bank. In 2001 and 2000, the Bank's average
reserve balances were $10,576,000 and $7,811,000, respectively.
NOTE 18 - SEGMENTS
The Company has four principal business units that offer different
products and services. They are managed separately for various reasons
including differing technologies, marketing strategies, and regulations.
Revenues from these business segments for the years ended December 31
were as follows (thousands):
2001 2000 1999
<s> <c> <c> <c>
Banking $46,320 $41,959 $39,906
Trust services 1,167 1,276 1,192
ATM network 804 725 702
Insurance agencies 1,689 1,140 966
------ ------ ------
$49,980 $45,100 $42,766
====== ====== ======
-69-
Reportable segment information under SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" are not applicable since
the information as it relates solely to the banking operations would be the
same as the consolidated financial statements in all material respects.
NOTE 19 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for NB&T Financial Group, Inc.
(parent company only) follows (thousands):
Condensed Balance Sheets
December 31
2001 2000
<s> <c> <c>
Assets:
Cash on deposit with the Bank $ 1,056 $ 1,090
Securities available for sale, market value 5,992 6,169
Investment in subsidiary 44,791 43,142
Other assets 2 3
------ ------
Total assets $51,841 $50,404
====== ======
Liabilities:
Long-term debt $ 216 $ 323
Other liabilities 649 599
------ ------
Total liabilities 865 922
Shareholders' equity 50,976 49,482
------ ------
Total liabilities and shareholders' equity $51,841 $50,404
====== ======
-70-
Condensed Statements of Income
Years ended December 31
2001 2000 1999
<s> <c> <c> <c>
Income:
Interest on securities available-
for-sale $ 30 $ 11 $ 4
Dividends from subsidiary 4,000 4,000 -
----- ----- -----
Total income 4,030 4,011 4
----- ----- -----
Expenses:
Interest on long-term debt 23 40 44
Other expense 39 64 100
----- ----- -----
Total expense 62 104 144
----- ----- -----
Income before income tax benefit
and equity in undistributed
income of subsidiary 3,968 3,907 (140)
Income tax (expense) benefit 15 (1) -
Equity in undistributed income of
subsidiary 2,034 140 5,848
----- ----- -----
Net income $6,017 $4,046 $5,708
===== ====== =====
Condensed Statements of Cash Flows
Years ended December 31
2001 2000 1999
<s> <c> <c> <c>
Cash flows from operating activities:
Net income $6,017 $ 4,046 $ 5,708
Adjustments for non-cash items-
Equity in undistributed income
of subsidiary (2,034) (140) (5,848)
Payment of interest on long-term
debt by subsidiary 23 40 44
(Increase) decrease in other assets 20 30 (29)
Deferred tax provision (benefit) - 1 -
Release of earned ESOP shares 6 53 87
----- ----- ------
Net cash provided by operating
activities 4,032 4,030 (38)
----- ----- ------
-71-
Cash flows from investing activities:
Purchases of securities available-
For-sale (5,992) (6,169) (4,936)
Proceeds from sale of securities
available-for-sale 6,169 4,936 -
------ ----- -----
Net cash used in investing
activities 177 (1,233) (4,936)
----- ----- -----
Cash flows from financing activities:
Cash dividends paid (2,594) (2,356) (2,017)
Payments to acquire treasury shares (1,673) (221) (1,843)
Proceeds from stock options exercised 24 154 437
----- ----- -----
Net cash used in financing activities (4,243) (2,423) (3,423)
----- ----- -----
Net change in cash (34) 374 (8,397
Cash at beginning of year 1,090 716 9,113
----- ----- -----
Cash at end of year $1,056 $1,090 $ 716
===== ===== =====
-72-
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information contained in the Proxy Statement under the captions "BOARD OF
DIRECTORS," "EXECUTIVE OFFICERS" and "SECTION (16)a BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" is incorporated herein by reference.
Item 11. Executive Compensation.
The information contained in the under the caption "COMPENSATION OF EXECUTIVE
OFFICERS AND DIRECTORS" is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained in the Proxy Statement under the caption "VOTING
SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information contained in the Proxy Statement under the caption "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" is incorporated herein by reference.
-73-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements - See Index to Consolidated Financial
Statements on page 45 of this Form 10-K.
(2) Financial Statement Schedules - None
(3) Exhibits - See Exhibit Index at page 75 of this Form 10-K.
(b) On October 24, 2001, the Company filed a Form 8-K with the
Securities and Exchange Commission regarding a third quarter
earnings press release issued on or about that date.
On December 11, 2001, the Company filed a Form 8-K with the
Securities and Exchange Commission regarding a press release
issued on or about that date announcing the acquisition of the
assets and assumption of the deposits and certain other
liabilities of The Sabina Bank by The National Bank and Trust
Company, NB&T Financial's wholly-owned subsidiary.
-74-
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
<c> <s>
3.1 Articles of Incorporation of
NB&T Financial Group, Inc. as amended:
Incorporated by reference to Quarterly
Report on Form 10-Q for Quarter Ended
June 30, 2001, Exhibit 3.1.
3.2 Code of Regulations of
NB&T Financial Group, Inc. as amended:
Incorporated by reference to Quarterly
Report on Form 10-Q for Quarter Ended
June 30, 2001, Exhibit 3.2.
10.1 InterCounty Bancshares, Inc. 1993 Stock Option
Plan: Incorporated by reference to the
Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on
March 23, 1995, Exhibit 4(c).
10.2 InterCounty Bancshares, Inc. Non-qualified
Stock Option Plan: Incorporated by reference
to the S-1, Exhibit 10.1.
21 Subsidiaries of NB&T Financial Group, Inc.
23 Consent of Independent Certified Public
Accountants
99.1 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
99.2 Proxy Statement for 2002 annual meeting of
shareholders; incorporated by reference to
definitive proxy statement to be filed on or
before March 25, 2002.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ Timothy L. Smith
------------------------------------
March 19, 2002 Timothy L. Smith
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/Charles L. Dehner By /s/Timothy L. Smith
- ---------------------------- -----------------------------------
Charles L. Dehner Timothy L. Smith
Executive Vice President, President, Chief Executive Officer
Treasurer and a Director and a Director
(Principal Accounting Officer)
Date March 19, 2002 Date March 19, 2002
By /s/James W. Foland By /s/Daniel A. DiBiasio
- --------------------------- -----------------------------------
James W. Foland Daniel A. DiBiasio
Secretary and a Director Director
Date March 19, 2002 Date March 19, 2002
By /s/S. Craig Beam By /s/Janet M. Williams
- --------------------------- -----------------------------------
S. Craig Beam Janet M. Williams
Director Director
Date March 19, 2002 Date March 19, 2002
By /s/Georgia H. Miller By /s/Robert A. Raizk
- --------------------------- -----------------------------------
Georgia H. Miller Robert A. Raizk
Director Director
Date March 19, 2002 Date March 19, 2002
By /s/Darleen M. Myers By /s/G. David Hawley
- --------------------------- -----------------------------------
Darleen M. Myers G. David Hawley
Director Director
Date March 19, 2002 Date March 19, 2002
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