UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to ______________________ ________________________ NB&T FINANCIAL GROUP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OHIO 31-1004998 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 48 North South Street, Wilmington, Ohio 45177 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (937) 382 1441 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date: 3,207,804 shares of the Bank's common stock, without par value, were outstanding as of July 31, 2002. 1 NB&T FINANCIAL GROUP, INC. JUNE 30, 2002 FORM 10-Q TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Independent Accountants' Report 8 Item 2. Management's Discussion and Analysis of Financial Condition 9 and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2 Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 2 NB&T Financial Group, Inc. and Subsidiary Consolidated Balance Sheets ($ in thousands) Assets June 30 December 31 2002 2001 ----------------------------------- (Unaudited) Cash and due from banks $ 18,719 $ 27,882 Federal funds sold 342 468 Interest-bearing demand deposits 917 87 ---------------- ---------------- Cash and cash equivalents 19,978 28,437 Investment securities available for sale 182,830 171,600 Investment securities held to maturity 44,459 44,430 Loans held for sale 4,959 1,848 Loans, net of allowance for loan losses of $3,806 and $3,810 380,621 378,904 Premises and equipment 15,006 13,758 Federal Home Loan Bank and Federal Reserve Bank stock 7,200 6,914 Other assets 24,903 25,280 ---------------- ---------------- Total assets $ 679,956 $ 671,171 ================ ================ Liabilities Deposits Noninterest bearing $ 51,489 $ 52,734 Interest bearing 422,592 426,506 ---------------- ---------------- Total deposits 474,081 479,240 Short-term borrowings 24,746 22,055 Long term debt 122,150 114,844 Other liabilities 4,339 4,056 ---------------- ---------------- Total liabilities 625,316 620,195 ---------------- ---------------- Commitments and contingencies Equity for ESOP shares 12,249 12,683 ---------------- ---------------- Stockholders' Equity Preferred stock, no par value Authorized and unissued -- 100,000 shares Common stock, no par value Authorized -- 6,000,000 shares Issued -- 3,818,950 shares 1,000 1,000 Capital surplus 9,140 9,129 Retained earnings 37,825 35,426 Unearned ESOP shares, at cost 122,074 shares (1,872) (1,871) Treasury shares, at cost, 611,146 shares (5,246) (5,246) Accumulated other comprehensive income 1,544 (145) ---------------- ---------------- Total stockholders' equity 42,391 38,293 ---------------- ---------------- Total liabilities and stockholders' equity $ 679,956 $ 671,171 ================ ================ See notes to condensed consolidated financial statements and independent accountants' report. 3 NB&T Financial Group, Inc. and Subsidiary Consolidated Statements of Income ($ in thousands, except per share amounts) Three Months Ended Six Months Ended June 30 June 30 ----------------------------------------------------------------- 2002 2001 2002 2001 ----------------------------------------------------------------- (Unaudited) Interest Income Loans receivable $ 7,332 $ 7,546 $ 14,750 $ 15,564 Investment securities Taxable 2,353 1,766 4,612 3,632 Tax exempt 678 826 1,356 1,503 Federal funds sold 16 256 86 408 Deposits with financial institutions 4 4 5 5 ----------- ----------- ------------ ----------- Total interest income 10,383 10,398 20,809 21,112 ----------- ----------- ------------ ----------- Interest Expense Deposits 2,819 4,431 6,089 8,902 Short-term borrowings 90 354 184 867 Long-term debt 1,434 1,133 2,855 2,257 ----------- ----------- ------------ ----------- Total interest expense 4,343 5,918 9,128 12,026 ----------- ----------- ------------ ----------- Net Interest Income 6,040 4,480 11,681 9,086 Provision for loan losses 475 375 850 750 ----------- ----------- ------------ ----------- Net Interest Income After Provision for 5,565 4,105 10,831 8,336 ----------- ----------- ------------ ----------- Loan Losses Other Income Fiduciary activities 234 255 467 520 Service charges on deposit accounts 593 478 1,150 907 ATM network fees 151 214 316 417 Insurance agency commissions 598 455 1,114 735 Securities gains 34 260 34 260 Other income 696 510 1,184 1,037 ----------- ----------- ------------ ----------- Total other income 2,306 2,172 4,265 3,876 ----------- ----------- ------------ ----------- Other Expenses Salaries and employee benefits 2,711 2,243 5,344 4,350 Net occupancy expenses 288 249 591 488 Equipment expenses 734 649 1,435 1,242 State franchise tax 128 144 272 282 Marketing 240 135 398 270 Other expenses 1,432 983 2,761 1,947 ----------- ----------- ------------ ----------- Total other expenses 5,533 4,404 10,801 8,579 ----------- ----------- ------------ ----------- Income Before Income Tax 2,338 1,873 4,295 3,633 Income tax expense 439 337 857 652 ----------- ----------- ------------ ----------- Net Income $ 1,899 $ 1,536 $ 3,438 $ 2,981 =========== =========== ============ =========== Basic Earnings per Share $ 0.62 $ 0.48 $ 1.11 $ 0.94 =========== =========== ============ =========== Diluted Earnings per Share $ 0.61 $ 0.48 $ 1.10 $ 0.94 =========== =========== ============ =========== See notes to condensed consolidated financial statements and independent accountants' report. 4 NB&T Financial Group, Inc. and Subsidiary Consolidated Statements of Cash Flows ($ in thousands) Six Months Ended June 30 -------------------- 2001 2000 -------- -------- (Unaudited) Operating Activities Net income $ 3,438 $ 2,981 Items not requiring cash Provision for loan losses 850 750 Depreciation and amortization 948 741 Investment securities amortization (accretion), net 290 FHLB stock dividend (151) (214) Other (45) (622) Net change in Loans held for sale (3,111) (26) Other assets and liabilities (210) 562 -------- -------- Net cash provided by operating activities 2,009 4,172 -------- -------- Investing Activities Purchases of securities available for sale (62,174) (54,158) Proceeds from sale of securities available for sale 2,425 8,260 Proceeds from maturities of securities available for sale 50,793 39,725 Purchase of Federal Reserve Bank stock (135) Net change in loans (2,567) 11,626 Proceeds from sale of equipment 98 Acquisition of insurance agencies (468) Purchases of premises and equipment (2,270) (1,806) -------- -------- Net cash provided (used) by investing activities (13,830) 3,179 -------- -------- Financing Activities Net change in Deposits (5,159) 26,585 Short-term borrowings 2,691 (6,988) Proceeds from trust preferred securities 8,248 Proceeds from long-term debt 6,000 Repayment of FHLB advances (942) Cash dividends (1,476) (1,283) Purchase of treasury shares (1,671) Proceeds from exercise of stock options 4 -------- -------- Net cash provided by financing activities 3,362 22,647 -------- -------- Net Change in Cash and Cash Equivalents (8,459) 29,998 Cash and Cash Equivalents, Beginning of Year 28,437 19,395 -------- -------- Cash and Cash Equivalents, End of Year $ 19,978 $ 49,393 ======== ======== See notes to condensed consolidated financial statements and independent accountants' report. 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 (unaudited) Note 1, Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q. The Form 10-Q does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Only material changes in financial condition and results of operations are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations. The consolidated balance sheet as of December 31, 2001 has been derived from the audited consolidated balance sheet of that date. In the opinion of management, the condensed consolidated financial statements contain all adjustments necessary to present fairly the financial condition of NB&T Financial Group, Inc. as of June 30, 2002, and December 31, 2001, and the results of its operations and cash flows for the six months ended June 30, 2002 and 2001. The results of operations for the interim periods reported herein are not necessarily indicative of results of operation to be expected for the entire year. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company's Annual Report and Form 10-K for the year ended December 31, 2001 filed with the Commission. Note 2, Earnings per Share Earnings per share (EPS) were computed as follows: Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------ 2002 2001 2002 2001 ---- ---- ---- ---- Net income $ 1,899 $ 1,536 $ 3,438 $ 2,981 ========== ========== ========== ========== Weighted Average Shares 3,085,730 3,170,377 3,085,730 3,183,192 Effect of dilutive stock options 29,327 13,655 27,843 15,362 ---------- ---------- ---------- ---------- Adjusted Weighted Average Shares used in the calculation of diluted earnings per share 3,115,057 3,184,032 3,113,573 3,198,544 ========== ========== ========== ========== Basic earnings per share $ 0.62 $ 0.48 $ 1.11 $ 0.94 Diluted earnings per share $ 0.61 $ 0.48 $ 1.10 $ .094 6 Note 3, Commitments Outstanding commitments to extend credit as of June 30, 2002 total $34,069. Standby letters of credit as of June 30, 2002 total $2,098. Note 4, Acquisition Update In connection with the December 2001 acquisition of assets and assumption of liabilities of Sabina Bank, the allocation of the purchase price was completed in the first quarter of 2002 and is summarized as follows: December 10, 2001 -------------------------------------------------------------- Interest earning assets $ 46,266 Property and equipment 1,627 Core deposit intangible 3,196 Goodwill 3,490 Other assets 497 --------------- Total assets acquired 55,076 --------------- Deposits 41,977 Other liabilities 145 --------------- Total liabilities assumed 42,122 --------------- Net assets acquired $ 12,954 =============== Note 5, Trust Preferred Securities During the second quarter of 2002, the Company participated in a securities sale commonly referred to as a "pooled trust preferred securities offering". In that offering, the Company issued to a trust controlled by the Company $8.248 million in thirty-year debt securities at a rate of interest adjustable quarterly equal to the three-month LIBOR rate plus 3.45% (currently 5.34%), and the trust issued capital securities to an unrelated party. The securities issued by the Company are classified as Tier 1 capital for regulatory purposes, and the interest is deductible for federal income tax purposes. The Company made a capital contribution of $8 million of these funds to the Bank to improve its regulatory capital ratios. 7 Independent Accountants' Report Board of Directors NB&T Financial Group, Inc. Wilmington, Ohio We have reviewed the accompanying condensed consolidated balance sheet of NB&T Financial Group, Inc. as of June 30, 2002 and the related condensed consolidated statements of income for the three- and six-month periods and cash flows for the six-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. The consolidated balance sheet as of December 31, 2001 and the related consolidated statements of income, retained earnings and cash flows for the year then ended (not presented herein), were audited by other auditors whose report dated February 5, 2002, expressed an unqualified opinion on those statements. /s/ BKD, LLP Cincinnati, Ohio July 18, 2002 8 PART I - FINANCIAL INFORMATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operation Net income for the second quarter of 2002 was $1.90 million, an increase of 23.6% when compared to $1.54 million for the second quarter of 2001. Net income per share-basic was $0.62 for the second quarter of 2002, an increase of 29.2% from the $0.48 for the second quarter of 2001. Net income for the first six months of 2002 was $3.44 million, an increase of 15.3% from the same period of 2001. Net income per share-basic was $1.11 through June 30, 2002, compared to $0.94 through the same date in 2001, an increase of 18.1%. Net interest income increased 34.8% to $6.04 million during the second quarter of 2002 compared to $4.48 million during the same quarter last year. Although interest income was approximately the same, interest expense decreased 26.6% when comparing these two amounts to the same period last year. Average interest-earning assets increased 10.4% to $618.5 million during the second quarter of 2002 compared to the second quarter of 2001, but the average tax-equivalent yield decreased to 6.73% from 7.44%. Average loans increased 5.4% to $384.7 million, while their average yield decreased from 8.29% in the second quarter of 2001 to 7.64% in the second quarter of 2002. Average securities increased 34.8% to $229.3 million, but their average tax-equivalent yield decreased from 7.03% for the second quarter last year to 5.70% for the second quarter of this year. Average interest-bearing liabilities increased 11.3% to $566.7 million from the second quarter of last year, and were primarily invested in the securities portfolio. The volume growth in average interest-bearing liabilities was composed of $48.3 million in NOW and money market accounts and $27.9 million in additional long-term borrowing from The Federal Home Loan Bank of Cincinnati (FHLB), while retail certificates of deposit decreased $21.1 million. The cost of interest-bearing liabilities decreased from 4.66% during the second quarter of last year to 3.07% in the second quarter of this year. Year to date net interest income increased 28.6% during the first half of 2002 compared to the first half of last year. The tax equivalent net interest margin increased from 3.56% in the second quarter of 2001 to 4.06% in the second quarter of 2002. Net interest income for the first six months of 2002 increased 28.6% from the same period last year. Average interest-earning assets increased 12.4% from last year, and the tax equivalent yield on these decreased from 7.84% to 6.87%. Interest-bearing liabilities increased 14.4%, while the cost decreased from 4.84% to 3.21%. Tax equivalent net interest margin was 3.92% during the first six months of 2002 versus 3.46% in 2001. The provision for loan losses for the second quarter of 2002 was increased by $100,000 to $475,000 when compared to the second quarter of last year. Net charge-offs for the second quarter of 2002 were $537,000, .14% of average loans, compared to $316,000, .09% of average loans for the prior year. The provision for loan losses year-to-date 2002 was $850,000, compared to $750,000 for the same period in 2001. Net charge-offs year-to-date 2002 were .22% of average loans, compared to .15% for the prior year. Non-interest income, excluding securities gains, was $2.27 million, 18.8% above the second quarter of 2001. Gains on the sale of securities totaled $34,000 in the second quarter of 2002, compared to 9 $260,000 in the second quarter of 2001. The increase in non-interest income was primarily due to increases in service charges on deposits, Bank Owned Life Insurance (BOLI) income and insurance agency commissions. Service charges on deposits increased 24.1% and were the result of increased accounts from acquired and opened branches. The increase in BOLI income was $258,000 and was related to a death benefit claim. Insurance agency commissions increased 31.4% as a result of higher annuity and property and casualty sales. Year-to-date non-interest income, excluding securities gains, was $4.23 million, 17.0% above the first half of 2001. Non-interest expense increased 25.6% from the second quarter of last year, the primary reasons being a 20.8% increase in salaries and benefits expense, a 13.8% increase in occupancy and equipment expense related to the opening of three new branches, and the amortization of intangibles related to the acquisition of The Sabina Bank and two insurance agencies during 2001. The number of full-time equivalent employees has increased by forty-two as a result of this expansion. Other expense this quarter included a $70,000 donation related to the sale of excess buildings in Sabina as a result of that acquisition. For the first six months of 2002, non-interest expense was $10.80 million, 25.9% above the first six months of 2001. Performance ratios for the second quarter of 2002 included a return on assets of 1.13%, and a return on equity of 14.83%. For the first half of 2002, return on assets was 1.02%, and return on equity was 13.50%. Financial Condition The changes that have occurred in the Company's financial condition during 2002 are as follows (in thousands): June 30 December 31 Change Change 2002 2001 Amount Percent ------- ----------- ------ -------- Total Assets $679,956 $671,171 $ 8,785 1% Loans 384,427 382,714 1,713 - Securities 227,289 216,030 11,259 5 Demand deposits 51,489 52,734 (1,245) (2) Savings, Now, MMDA deposits 210,608 206,749 3,859 2 CD's $100,000 and over 39,187 45,158 (5,971) (13) Other time deposits 172,797 174,599 (1,802) (1) Total deposits 474,081 479,240 (5,159) (1) Short-term borrowing 24,746 22,055 2,691 12 Long-term borrowing 122,150 114,844 7,306 6 Shareholders' Equity 54,640 50,976 3,664 - Total assets have increased $8.8 million as a result of funds generated from increases in short- and long-term borrowing during 2002. The increase in funds was primarily invested in the securities portfolio. Although the loan portfolio has remained at about the same level during the year, an $8.0 million increase in commercial loans was offset by a $7.6 million decrease in personal loans. The decrease in deposits has occurred primarily in the large certificates of public funds deposits. During the second quarter of 2002, the Company participated in a securities sale commonly referred to as a "pooled trust preferred securities offering." In that offering, the Company issued to a trust controlled by the Company $8.248 million in thirty-year debt securities at a rate of interest adjustable quarterly equal to the three-month LIBOR rate plus 3.45% (currently 5.34%), and the trust issued capital securities to an unrelated party. The securities issued by the Company are classified as Tier 1 capital for 10 regulatory purposes, and the interest is deductible for federal income tax purposes. The Company made a capital contribution of $8 million of these funds to the Bank to improve its regulatory capital ratios. Average total assets grew 11.5% from the second quarter of 2001, to $671.5 million. This growth was primarily the result of the Sabina Bank acquisition in December of 2001, which added $47 million in assets to the Company. Average total loans increased 5.4% to $384.7 million. The Sabina Bank acquisition added $31.3 million to the loan portfolio: $16.1 million in residential real estate loans, $8.0 million in personal loans, and $7.1 million in commercial loans. The average amount of commercial loans in the second quarter of 2002 grew $18.8 million (12.1%) compared to the second quarter of 2001, and the average amount of residential real estate loans grew $9.8 million (9.7%) between the two comparable periods. The securities portfolio average for the second quarter 2002 has increased $59.2 million (34.8%) from the second quarter of last year. Most of the purchases were of U.S. Agency mortgage-backed securities with average lives in the three-year to five-year range. Average total deposits increased 9.8% from the second quarter of 2001 to $426.5 million. Second quarter average interest-bearing liabilities grew $57.4 million (11.3%) from the second quarter average in 2001. Second quarter 2002 average interest-bearing transaction accounts increased $48.3 million (17.8%), average large certificates increased $17.6 million (40.4%), and average small certificates increased $10.3 million (6.5%), all from the second quarter average in 2001. Average long-term borrowing increased $27.9 million (32.4%) from the second quarter of 2001. This increase was primarily invested in the securities portfolio. At June 30, 2002, the Bank had outstanding $113.7 million of total borrowings from the Federal Home Loan Bank (FHLB). Total equity increased 9.3% from June 30, 2001 to $54.6 million at June 30, 2002. Book value per share was $17.03 at June 30, 2002, compared to $16.01 at June 30, 2001. Equity to assets was 8.04%, compared to 8.24% at the end of the second quarter of last year. The increases in total equity and book value per share are attributable primarily to net income and an increase in net unrealized gain on securities available for sale. 11 Allowance for Loan Losses The following table sets forth certain information regarding the past due, non-accrual and renegotiated loans of the Company at the dates indicated (in thousands): June 30 December 31 June 30 2002 2001 2001 ------ ------ ------ Loans accounted for on non-accrual basis $5,290 $4,859 $7,896 Accruing loans which are past due 90 days or more 1,208 858 352 Renegotiated loans 0 0 0 ------ ------ ------ Total $6,498 $5,860 $8,248 ====== ====== ====== As of June 30, 2002 there were $4.1 million in thirteen non-accrual small business loans. The majority of this amount consisted of two relationships, one of which is $1.6 million in the nursing home business and has been making monthly payments since January 2002 following the signing of a forbearance agreement. The second relationship amounts to $1.7 million and is in the construction business. The customer has signed a forbearance agreement and has proceeded with an orderly liquidation of collateral, which should be adequate to satisfy the balance owed to the Company. Non-accrual residential real estate loans consisted of twenty loans that total $1.0 million with the largest balance being $108,000. Non-accrual personal loans consisted of nine loans that total $137,000 with the largest balance being $40,000. All loans are expected to be resolved through term payments or through liquidation of collateral in the normal course of business. Management is aware of one other loan totaling $2.0 million, which is not included in the non-performing categories at June 30, 2002, in which management through normal credit review procedures, has developed information regarding possible credit problems that could cause this borrower future difficulties in complying with present loan repayment terms. The allowance for loan losses 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 borrowers' ability to pay. 12 At June 30, 2002, the Company's allowance for loan losses totaled $3.81 million and was allocated to specifically classified loans and was generally based on a three-year net charge-off history. The following table sets forth an analysis of the Company's allowance for losses on loans for the periods indicated (in thousands): Six Months Ended June 30 2002 2001 ------------------ Balance, beginning of period $3,810 $3,802 Charge-offs: Commercial 294 89 Residential real estate 81 44 Installment 621 551 Credit Card - - Other - 15 ------ ------ Total 996 699 ------ ------ Recoveries: Commercial 26 10 Residential real estate 2 - Installment 114 115 Credit Card - - Other - 2 ------ ------ Total 142 127 ------ ------ Net Charge-offs (854) (571) Provision for loan losses 850 750 ------ ------ Balance, end of period $3,806 $3,981 ====== ====== Liquidity and Capital Resources Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as Company cash needs, are met. The Company manages liquidity on both the asset and liability sides of the balance sheet. The loan to deposit ratio at June 30, 2002, was 81.1%, compared to 83.5% at the same date in 2001. Loans to total assets were 56.5% at the end of the second quarter of 2002, compared to 59.7% at the same time last year. Management strives to keep this ratio below 70%. Of the total securities portfolio, 80% consists of available-for-sale securities that are readily marketable. Approximately 48% 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 92% 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 Federal Home Loan Bank (FHLB). The Company has the ability to obtain deposits in the brokered certificate of deposit market to help provide liquidity to fund loan growth. The Federal Reserve Board has adopted risk-based capital guidelines that assign risk weightings to assets and off-balance sheet items and also define and set minimum capital requirements (risk-based capital ratios). Bank holding companies must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios of 8%, 4% and 3%, respectively. At June 30, 2002, NB&T Financial Group, Inc. had a total risk-based capital ratio of 14.03%, a Tier 1 risk-based capital ratio of 13.09%, and a Tier 1 leverage ratio of 8.03%. 13 Item 3 - Quantitative and Qualitative Disclosures about Market Risk Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to interest rate risk, exchange rate risk, equity price risk and commodity price risk. The Company does not maintain a trading account for any class of financial instrument, and is not currently subject to foreign currency exchange rate risk, equity price risk or commodity price risk. The Company's market risk is composed primarily of interest rate risk. Techniques used to measure interest rate risk include both interest rate gap management and simulation modeling that measures the effect of rate changes on net interest income and market value of equity under different rate scenarios. Since December 31, 2001, the Company has experienced no significant change in market risk. Currently, the Company is not in violation of any interest-rate risk policy guidelines established by the Asset Liability Management Committee. 14 PART II - OTHER INFORMATION Item 1 - Legal Proceedings Not applicable Item 2 Changes in Securities and Use of Proceeds On June 26, 2002, the Company issued $8.248 million in thirty-year Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Debentures") to NB&T Statutory Trust I (the "Trust"), a trust created by the Company for this purpose. On the same date, the Trust sold for $8.0 million 8,000 Floating Rate Capital Securities, liquidation amount $1,000.00 each (the "Capital Securities"), to Preferred Term Securities VI, Ltd. A fee of $248,000 was paid to FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc., which acted as placement agents. The sale of the Debentures was exempt from registration under the Securities Act of 1933 (the "Act") as a non-public offering to a wholly-owned subsidiary of the Company under Section 4(2) of the Act. The Company made a capital contribution of $8.0 million of the proceeds from the issuance of the Debentures to the Bank to improve its regulatory capital ratios. The issuance of the Capital Securities was exempt from registration under the Act by Regulation S, as the Capital Securities were offered and sold solely to Preferred Term Securities VI, Ltd., a company organized under the laws of the Cayman Islands, to be held by Preferred Term Securities VI, Ltd. Item 3 Defaults Upon Senior Securities Not applicable Item 4 Submission of Matters to a Vote of Security Holders Not applicable Item 6 - Exhibits and Reports on Form 8-K Exhibit 11. Statement regarding computation of earnings per share is contained in Part I. Exhibit 15 Accountants' acknowledgement. Exhibit 99 Safe harbor under the Private Securities Litigation Reform Act of 1995. Exhibit 99.2 Financial statements certification by CEO. Exhibit 99.3 Financial statements certification by CFO. The Company filed a Form 8-K with the Securities and Exchange Commission on April 24, 2002 regarding a press release announcing the results of operations for the first quarter of 2002. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NB&T FINANCIAL GROUP, INC. Date: August 8, 2002 /s/ Charles L. Dehner ------------------------------- Charles L. Dehner Treasurer, Executive Vice President, And Principal Accounting Officer 16