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, 2002
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
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 $24.00 per share on February 25, 2003. Based upon such
price, the aggregate market value of the issuer's shares held by nonaffiliates
was $41,690,592.
As of March 19, 2003, 3,231,432 common shares were issued and outstanding.
1
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the definitive Proxy Statement for the 2003 Annual
Meeting of Shareholders of NB&T Financial Group, 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.
NB&T FINANCIAL GROUP, INC.
For the Year Ended December 31, 2002
Table of Contents
Page
----
PART I
Item 1: Business 3
Item 2: Properties 13
Item 3: Legal Proceedings 13
Item 4: Submission of Matters to a Vote of Security Holders 13
Part II
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6: Selected Financial Data 15
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A: Quantitative and Qualitative Disclosures About
Market Risk 26
Item 8: Financial Statements and Supplementary Data 27
Item 9: Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 60
Part III
Item 10: Directors and Executive Officers of the Registrant 60
Item 11: Executive Compensation 60
Item 12: Security Ownership of Certain Beneficial Owners
and Management 60
Item 13: Certain Relationships and Related Transactions 60
Item 14: Controls and Procedures 60
Part IV
Item 15: Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 61
Exhibit Index 61
Signatures 62
Certifications 63
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 65 cash dispensers in convenience stores in three states as of
the end of 2002. The Bank also has a trust department which presently
administers 696 accounts having combined assets of $196 million.
In December 2001, NB&T Financial acquired a majority of the assets, totaling $48
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 2002, the Bank acquired one agency located in
Hillsboro, Ohio for a total of approximately $50,000 cash. This agency was
merged into NB&T Insurance. NB&T Insurance sells 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.
FORWARD-LOOKING STATEMENTS
Statements preceded by, followed by or that otherwise include the words
"believes," "expects," "anticipates," "intends," "estimates," "plans," "may
increase," "may fluctuate," "will likely result," and similar expressions or
future or conditional verbs such as "will," "should," "would," and "could" are
generally forward-looking in nature and not historical facts. Results could
differ materially from those expressed in such forward-looking statements due to
a number of factors, including (1) the effect of economic conditions and
interest rates on a national, regional or international basis; (2) competitive
pressures in the retail banking, financial services, insurance and other
industries; (3) the financial resources of, and products available to,
competitors; (4) changes in laws and regulations, including changes in
accounting standards; (5) changes in policy by regulatory agencies; and (6)
changes in the securities markets. Any forward-looking statements are not
guarantees of future performance. They involve risks, uncertainties and
assumptions, and actual results could differ materially from those contemplated
by those forward-looking statements. Many of the factors that will determine
these results are beyond the Company's ability to control or predict. The
Company disclaims any duty to update any forward-looking statements, all of
which are qualified by the statements in this section.
3
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, 2002, regarding the net dollar amount of certain 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 (thousands):
Due 0-1 Year Due 1-5 Years Due 5+ Years Total
------------ ------------- ------------ --------
Commercial And Industrial $16,353 $36,925 $55,235 $108,513
Commercial Real Estate 278 5,746 22,155 28,179
Agricultural 8,977 4,517 7,363 20,857
------- ------- ------- --------
Total $25,608 $47,188 $84,753 $157,549
======= ======= ======= ========
The following table sets forth the dollar amount of certain loans, due after one
year from December 31, 2002, which have predetermined interest rates and
floating or adjustable interest rates (thousands):
Predetermined Floating or
Rates Adjustable Rates Total
------------- ---------------- --------
Commercial And Industrial $36,676 $55,484 $ 92,160
Commercial Real Estate 5,959 21,943 27,902
Agricultural 3,961 7,918 11,879
------- ------- --------
Total $46,596 $85,345 $131,941
======= ======= ========
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,
2002 the Bank had $108.5 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, 2002, the Bank had $28.2 million, or 7% 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,
2002, the Bank had $20.9 million, or 5% of total loans, invested in agricultural
loans.
Residential Real Estate. The Bank makes loans secured by one- to four-family
residential real estate and multi-family (over four units) real estate 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, 2002, the Bank had $141.4 million, or
37% 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 by 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
4
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, 2002, the Bank had $74.5 million, or 19% 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 Originations, 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.
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, 2002, the
Bank's allowance for loan losses totaled $4.0 million, of which 61% was
allocated to specific credits, and the rest was allocated based on previous
charge-off experience, portfolio risk, economic conditions and anticipated loan
growth.
5
Because the loan loss allowance is based on estimates, it is monitored regularly
and adjusted as necessary to provide an adequate allowance.
The following table sets forth an analysis of the Bank's allowance for
losses on loans for the periods indicated (dollars in thousands):
December 31,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Balance at beginning of period $ 3,810 $ 3,802 $ 3,222 $ 2,641 $ 2,761
Charge-offs:
Commercial and industrial (486) (691) (858) (200) (702)
Commercial real estate (53) (50) (15) (10) (45)
Agricultural (53) (119) (107) (10) --
Residential real estate (238) (150) (66) (9) --
Installment (1,346) (1,318) (825) (842) (681)
Other (9) (18) -- -- (7)
-------- -------- -------- -------- --------
Total charge-offs (2,185) (2,346) (1,871) (1,071) (1,435)
-------- -------- -------- -------- --------
Recoveries:
Commercial and industrial 49 33 62 27 7
Commercial real estate -- -- -- 9 --
Agricultural 10 9 5 -- --
Residential real estate 7 2 1 1 --
Installment 219 188 183 213 145
Other -- -- 1 2 13
-------- -------- -------- -------- --------
Total recoveries 285 232 252 252 165
-------- -------- -------- -------- --------
Net charge-offs (1,900) (2,114) (1,619) (819) (1,270)
Acquired in acquisition 622
Provision for possible loan losses 2,100 1,500 2,199 1,400 1,150
-------- -------- -------- -------- --------
Balance at end of period $ 4,010 $ 3,810 $ 3,802 $ 3,222 $ 2,641
======== ======== ======== ======== ========
Ratio of net charge-offs to average loans
outstanding during the period 0.49% 0.58% 0.44% 0.25% 0.44%
======== ======== ======== ======== ========
Average loans outstanding $385,324 $366,190 $367,419 $330,734 $287,674
======== ======== ======== ======== ========
The distribution of the Company's allowance for losses on loans at December 31,
2002 is as follows (thousands):
Loans in Each Category
as a Percentage of
Amount Total Loans
------ ----------------------
Commercial and industrial $ 314 28%
Commercial real estate 2,130 9
Agricultural 152 6
Residential real estate 332 37
Installment 896 19
Other 4 1
Unallocated 182 --
------ ---
Total $4,010 100%
====== ===
6
Investment Activities
The following table sets forth the composition of the Bank's securities
portfolio, based on amortized cost, at the dates indicated (thousands):
At December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Securities available for sale:
U.S. Treasuries & U.S. agency notes $ 44,315 $ 54,117 $ 49,641
U.S. agency mortgage-backed securities 101,495 96,071 39,857
Other mortgage-backed securities 3,077 5,021 11,164
Municipals 8,576 8,572 8,567
Other securities 8,010 8,010 10
-------- -------- --------
Total securities available for sale 165,473 171,791 109,239
-------- -------- --------
Securities held to maturity:
Municipals 44,490 44,430 44,374
-------- -------- --------
Total securities held to maturity 44,490 44,430 44,374
-------- -------- --------
Total securities $209,963 $216,221 $153,613
======== ======== ========
The following table sets forth the amortized cost of the Bank's securities
portfolio at December 31, 2002. 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 (dollars in
thousands).
Less than 1 Year 1 to 5 Years 5 to 10 Years Over 10 Years
-------------------- -------------------- -------------------- --------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- -------- --------- --------
Securities available for sale:
U.S. Treasuries & U.S. agency
notes $ -- 0% $ 40,075 3.57% $ 4,240 3.59% $ -- 0%
U.S. agency mortgage-backed
securities 3,306 6.48 64,343 5.33 33,193 4.85 654 6.20
Other mortgage-backed securities 3,046 2.04 30 2.57 -- -- -- --
Municipals -- -- -- -- -- -- 8,576 3.78
Other securities -- -- -- -- -- -- 8,010 3.18
------ -------- ------- -------
Total securities available for
sale 6,352 4.35 104,448 3.30 37,433 4.79 17,240 3.59
------ -------- ------- -------
Securities held to maturity:
Municipals 989 9.15 100 4.50 -- -- 43,401 5.04
------ -------- ------- -------
Total securities held to maturity 989 9.15 100 4.50 -- -- 43,401 5.04
------ -------- ------- -------
Total securities $7,341 5.00% $104,548 3.30% $37,433 4.79% $60,641 4.63%
====== ======== ======= =======
Total
--------------------
Weighted
Amortized Average
Cost Yield
--------- --------
Securities available for sale:
U.S. Treasuries & U.S. agency
notes $ 44,315 3.57%
U.S. agency mortgage-backed
securities 101,496 5.22
Other mortgage-backed securities 3,076 2.04
Municipals 8,576 3.78
Other securities 8,010 3.18
--------
Total securities available for
sale 165,473 3.75
--------
Securities held to maturity:
Municipals 44,490 5.13
--------
Total securities held to maturity 44,490 5.13
--------
Total securities $209,963 4.04%
========
7
Trust Services
The Bank received trust powers in 1922 and currently holds $196 million in net
assets held in 696 accounts on December 31, 2002 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 includes 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 $926,000 in fee
income during 2002.
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 (thousands):
Maturity At December 31, 2002
-------------------------- --------------------
Three months or less $13,410
Over 3 months to 6 months 11,511
Over 6 months to 12 months 13,070
Over twelve months 4,642
-------
Total $42,633
=======
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 $108.3 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 (dollars in thousands):
December 31,
---------------------------
2002 2001 2000
------- ------- -------
Maximum amount of short-term borrowings outstanding at any month
end during period $30,145 $44,158 $41,624
Average amount of short-term borrowings outstanding during period $23,445 $34,250 $33,486
Amount of short-term borrowings outstanding at end of period $19,240 $22,055 $40,148
Weighted average interest rate of short-term borrowings during period 1.33% 3.76% 6.05%
Weighted average interest rate of short-term borrowings at end of
period 0.87% 1.39% 6.14%
8
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 (dollars in thousands).
2002 2001
----------------------------------- -----------------------------------
Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/
Balance Yield/Rate Paid Balance Yield/Rate Paid
----------- ---------- -------- ----------- ---------- --------
Loans (1) $385,324 7.55% $29,085 $366,190 8.33% $30,508
Securities available for sale 183,104 4.89 8,946 137,422 6.18 8,493
Securities held to maturity 44,456 5.13 2,281 44,398 5.12 2,275
Deposits in banks 893 1.57 14 461 2.39 11
Federal funds sold 10,270 1.53 157 19,073 3.70 706
-------- ------- -------- -------
Total interest-earning assets 624,047 6.49 40,483 567,544 7.40 41,993
Non-earning assets 56,778 47,082
Allowance for loan losses (3,865) (3,836)
-------- --------
Total assets $676,960 $610,790
======== ========
Savings deposits $ 40,487 1.08 437 $ 31,120 1.55 483
NOW and MMDA 173,392 1.39 2,410 136,002 2.71 3,679
CD's over $100M 40,497 3.57 1,444 53,125 5.45 2,895
Other time deposits 171,380 3.93 6,737 168,385 5.70 9,594
Short-term borrowings 25,571 1.32 339 34,250 3.76 1,287
Long-term debt 117,840 5.04 5,936 93,572 5.25 4,911
-------- ------- -------- -------
Total interest-bearing
liabilities 569,167 3.04 17,303 516,454 4.42 22,849
------- -------
Demand deposits 50,147 40,883
Other liabilities 3,593 2,778
Capital 54,053 50,675
-------- --------
Total liabilities and capital $676,960 610,790
======== ========
Net interest income $23,180 $19,144
======= =======
Interest rate spread 3.45% 2.98%
Net interest income margin 3.71% 3.37%
Ratio of interest-earning
assets to interest-bearing
liablilities 109.64% 109.89%
2000
-----------------------------------
Average Interest
Outstanding Earned/
Balance Yield/Rate Paid
----------- ---------- --------
Loans (1) $367,419 8.59% $31,549
Securities available for sale 104,483 6.77 7,073
Securities held to maturity 44,344 5.17 2,291
Deposits in banks 234 4.49 10
Federal funds sold 2,067 6.11 126
-------- -------
Total interest-earning assets 518,547 7.92 41,049
Non-earning assets 36,631
Allowance for loan losses (3,612)
--------
Total assets $551,566
========
Savings deposits $ 34,069 1.75 595
NOW and MMDA 109,935 3.24 3,565
CD's over $100M 43,672 5.95 2,600
Other time deposits 162,709 5.72 9,315
Short-term borrowings 33,482 6.05 2,024
Long-term debt 79,406 5.81 4,612
-------- -------
Total interest-bearing
liabilities 463,273 4.90 22,711
-------
Demand deposits 39,846
Other liabilities 2,725
Capital 45,722
--------
Total liabilities and capital $551,566
========
Net interest income $18,338
=======
Interest rate spread 3.02%
Net interest income margin 3.54%
Ratio of interest-earning
assets to interest-bearing
liablilities 111.93%
(1) Includes nonaccrual loans and loan fees.
9
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 (thousands).
Years ended December 31,
2002 vs 2001
------------------------------------
Increase (decrease) due to
------------------------------------
Rate/
Volume Rate Volume Total
------- ------- ------ -------
Interest income attributable to:
Loans $1,484 $(2,704) $(203) $(1,423)
Securities available for sale 2,883 (1,942) (487) 454
Securities held to maturity 3 3 -- 6
Deposits in banks 11 (4) (4) 3
Federal funds sold (326) (414) 191 (549)
------ ------- ----- -------
Total interest-earning assets 4,055 (5,061) (503) (1,509)
------ ------- ----- -------
Interest expense attributable to:
Savings deposits 145 (147) (44) (46)
NOW and MMDA 1,012 (1,789) (492) (1,269)
CD's over $100,000 (688) (1,001) 238 (1,451)
Other time deposits 171 (2,975) (53) (2,857)
Short-term borrowings (326) (833) 211 (948)
Long-term debt 1,349 (197) (127) 1,025
------ ------- ----- -------
Total interest-bearing liabilities 1,663 (6,942) (267) (5,546)
------ ------- ----- -------
Net interest income $2,392 $ 1,881 $(236) $ 4,037
====== ======= ===== =======
Years ended December 31,
2001 vs 2000
-----------------------------------
Increase (decrease) due to
-----------------------------------
Rate/
Volume Rate Volume Total
------ ------- ------ -------
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
====== ======= ===== =======
10
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 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
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, 2002. For NB&T
Financial's capital ratios, see Note 13 to the Consolidated Financial Statements
in Item 8.
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
11
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 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. NB&T Insurance is a financial subsidiary.
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, 2002. For the Bank capital ratios, see Note 13 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 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, 2002, 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
12
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, 2002.
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, 2002, it had $446 million
in deposits insured in the BIF, as well as $22.1 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 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, 2002, 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 $6,871,600 at December 31, 2002. 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. Additionally, the Bank has acquired a building at 1600 West Main Street,
Wilmington, Ohio which will serve as an operation center for the Bank and house
the Bank's insurance agency. NB&T Financial's net book value of investments in
land and buildings was $10.5 million as of December 31, 2002.
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.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There were 3,222,532 common shares of the Company outstanding on December 31,
2002 held of record by approximately 470 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 $.23 in each quarter in 2002 and were $.21 per share in each quarter in
2001.
The Company has a stock option plan under which the Company may grant options
that vest over five years to selected employees for up to 7% of the outstanding
shares of the Company, currently 267,326 shares. During 2002, the Company also
had a second stock option plan, pursuant to which all options awarded have been
exercised or expired. This second plan has been terminated by the Board of
Directors. The following table summarizes the securities authorized for issuance
at December 31, 2002 under all equity compensation plans still in existence.
- ---------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plan
outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column (a))
Plan Category (a) (b) (c)
- ---------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 168,976 $18.95 98,350
- ---------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total 168,976 $18.95 98,350
- ---------------------------------------------------------------------------------------------------------------
14
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,
(Dollars in thousands)
----------------------------------------------------
Statement of financial condition and other data: 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Total amount of:
Assets $664,803 $671,171 $579,232 $542,548 $520,553
Cash and due from banks 18,812 27,882 19,331 18,813 18,241
Securities 213,090 216,001 153,951 149,204 171,129
Loans receivable-net 380,661 378,904 370,299 347,733 302,471
Deposits 468,089 479,240 406,688 379,932 374,220
Short-term borrowings 19,240 22,055 40,148 40,358 22,702
Long-term debt 116,446 114,844 80,323 75,431 75,539
Shareholders' equity 57,304 50,976 49,482 44,031 44,723
Number of full service offices 21 21 17 17 16
Year ended December 31,
(in thousands)
-----------------------------------------------
Statement of income data: 2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Interest and loan fee income $40,483 $41,993 $41,049 $37,539 $35,273
Interest expense 17,303 22,849 22,711 19,150 18,540
------- ------- ------- ------- -------
Net interest income 23,180 19,144 18,338 18,389 16,733
Provision for loan losses 2,100 1,500 2,199 1,400 1,150
------- ------- ------- ------- -------
Net interest income after provision for loan losses 21,080 17,644 16,139 16,989 15,583
Non-interest income 9,001 7,987 4,051 5,227 5,526
Non-interest expense 22,159 18,138 15,372 15,227 13,846
------- ------- ------- ------- -------
Income before income taxes 7,922 7,493 4,818 6,989 7,263
Federal income taxes 1,391 1,476 772 1,281 1,889
------- ------- ------- ------- -------
Net income $ 6,531 $ 6,017 $ 4,046 $ 5,708 $ 5,374
======= ======= ======= ======= =======
Year ended December 31,
--------------------------------------
Selected financial ratios: 2002 2001 2000 1999 1998
----- ----- ----- ----- ------
Return on average equity 12.08% 11.87% 8.85% 12.85% 12.56%
Return on average assets 0.96 0.99 0.73 1.08 1.12
Equity-to-assets ratio 8.62 7.60 8.54 8.12 8.59
Dividend payout ratio(1) 43.60 43.98 58.27 37.57 29.71
Ratio of non-performing loans to total loans (2) 1.59 1.49 1.13 0.33 0.31
Ratio of loan loss allowance to total loans 1.04 1.00 1.02 0.91 0.87
Ratio of loan loss allowance to non-performing
loans (2) 65% 67% 90% 307% 280%
Earnings per share (3) $2.11 $1.91 $1.27 $1.81 $ 1.70
Dividends declared per share (3) $0.92 $0.84 $0.76 $0.68 $0.505
(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.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis comparing 2002 to prior years should be
read in conjunction with the audited consolidated financial statements at
December 31, 2002 and 2001 and for the three years ended December 31, 2002.
FORWARD-LOOKING STATEMENTS
Statements preceded by, followed by or that otherwise include the words
"believes," "expects," "anticipates," "intends," "estimates," "plans," "may
increase," "may fluctuate," "will likely result," and similar expressions or
future or conditional verbs such as "will," "should," "would," and "could" are
generally forward-looking in nature and not historical facts. Results could
differ materially from those expressed in such forward-looking statements due to
a number of factors, including (1) the effect of economic conditions and
interest rates on a national, regional or international basis; (2) competitive
pressures in the retail banking, financial services, insurance and other
industries; (3) the financial resources of, and products available to,
competitors; (4) changes in laws and regulations, including changes in
accounting standards; (5) changes in policy by regulatory agencies; and (6)
changes in the securities markets. Any forward-looking statements are not
guarantees of future performance. They involve risks, uncertainties and
assumptions, and actual results could differ materially from those contemplated
by those forward-looking statements. Many of the factors that will determine
these results are beyond the Company's ability to control or predict. The
Company disclaims any duty to update any forward-looking statements, all of
which are qualified by the statements in this section.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 2002 was $6.5 million, or $2.11 per share, compared to $6.0
million, or $1.91 per share, for the year of 2001. Net interest income was $23.2
million for 2002, 21.1% above 2001. Non-interest income, excluding securities
gains and losses, was $8.6 million for 2002, 11.0% above 2001. Non-interest
expense was $22.2 million for 2002, 22.2% above 2001. Performance ratios for
2002 included a return on assets of .96% and a return on equity of 12.08%.
Net income for 2001 was $6.0 million, or $1.91 per share, compared to $4.0
million, or $1.27 per share, for the year of 2000. Net interest income was $19.1
million for 2001, 4.4% above 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%.
TABLE 1 - SELECTED FINANCIAL HIGHLIGHTS
(in thousands, except per share data)
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Net interest income $ 23,180 $ 19,144 $ 18,338 $ 18,389 $ 16,733
Net income 6,531 6,017 4,046 5,708 5,374
Earnings per share 2.11 1.91 1.27 1.81 1.70
Dividends per share 0.92 0.84 0.76 0.68 0.51
AVERAGE BALANCES
Assets $676,960 $610,790 $551,566 $526,455 $478,900
Loans 385,324 366,190 367,419 330,734 287,674
Securities 227,560 181,819 148,827 162,744 155,155
Deposits 475,903 429,514 390,231 376,843 347,087
Long-term debt 117,840 93,572 79,406 75,539 53,753
Shareholders' equity 54,053 50,675 45,722 44,426 42,805
RATIOS AND STATISTICS
Net interest margin (tax equivalent) 3.86% 3.54% 3.72% 3.88% 3.82%
Return on average assets 0.96 0.99 0.73 1.08 1.12
Return on average equity 12.08 11.87 8.85 12.85 12.56
Loans to assets 56.92 57.02 64.59 64.98 58.61
Equity to assets 8.62 7.60 8.54 8.12 8.59
Total risk-based capital ratio 14.66 11.50 14.04 14.29 14.18
Efficiency ratio 67.75 65.20 60.47 61.25 62.20
Full service offices 21 21 17 17 16
16
NET INTEREST INCOME
Net interest income increased 21.1% in 2002 to $23.2 million from $19.1 million
in 2001. Average interest-earning assets for 2002 increased $56.5 million, or
10.0%, from 2001 while the tax equivalent yield decreased to 6.64% in 2002 from
7.56% in 2001. Interest and fees on loans decreased $1.4 million, or 4.7%, from
last year as the average loan balance increase of $19.1 million, or 5.2%, was
offset by a decrease in the average yield from 8.33% in 2001 to 7.55% in 2002.
Interest on securities increased 4.3%, or $556,000 in 2002 from 2001. The
average balance of the securities portfolio increased $45.7 million, or 25.2%,
from 2001, while the tax equivalent yield decreased 109 basis points from 6.43%
to 5.34%.
Interest expense decreased 24.3% in 2002 compared to 2001. Average interest-
bearing liabilities increased $52.7 million, or 10.2%, during 2002, while the
cost decreased from 4.42% in 2001 to 3.04% in 2002. The volume growth in average
interest-bearing liabilities was due to a $37.4 million, or 27.5%, increase in
NOW and money market accounts, a $9.3 million, or 30.1%, increase in savings
deposits, and a $20.1 million, or 21.6% increase in additional borrowing from
the Federal Home Loan Bank (FHLB). These increases were offset by a decrease in
average certificates of deposits of $9.6 million. All categories of
interest-bearing liabilities showed a decrease in cost in 2002 compared to 2001.
As a result, average tax equivalent net interest margin increased from 3.54% in
2001 to 3.86% in 2002.
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
2000 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 15.7% 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 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.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $2.1 million in 2002, an increase of $600,000
from the provision recorded in 2001, which was a decrease of $700,000 from the
provision recorded in 2000. Net charge-offs in 2002 were $1.9 million, compared
to $2.1 million in 2001 and $1.6 million in 2000. The increased provision in
2002 was based on management's evaluation of the loan portfolio and potential
weaknesses of specific loans. The 2001 provision was lower than 2000 as the 2000
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 1.04%
in 2002, 1.00% in 2001, and 1.02% in 2000.
17
NON-INTEREST INCOME
Table 2 details the components of non-interest income, excluding securities
gains and losses, and how they relate each year as a percent of average assets.
Total non-interest income was $8.6 million in 2002, $7.7 million in 2001, and
$6.1 million in 2000. Non-interest income represents a ratio of 1.27% of average
assets in 2002, 1.26% in 2001, and 1.11% in 2000. Trust income decreased 20.7%
in 2002 and 8.5% in 2001, which was a function of the decline in market value of
funds under management. At December 31 the market value of total assets in the
Trust Department was approximately $192 million in 2002, compared to $218
million in 2001 and $234 million in 2000. Service charges and fees have
increased over the last three years due to increased charges and growth in the
number of accounts. In 2002, the Company also introduced the Overdraft Honor
program that aids customers by paying more and returning fewer overdraft checks.
Standard fees still apply. As a result, their percentage of average assets has
increased to .38 % in 2002 compared to .32% in 2001 and .31% in 2000. ATM
network fees generated were $578,000 in 2002, $804,000 in 2001, and $725,000 in
2000. The decrease is a result of increased competition in the ATM network
business and the Company having fewer machines installed. At the end of 2002,
there were sixty-five machines installed in three states compared to eighty-two
machines installed at the end of 2001. Insurance agency commission income has
increased from $1,140,000 in 2000, to $1,689,000 in 2001, and $2,355,000 in
2002. 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. The Company acquired another agency in March 2002,
and its commission income is included in the 2002 results of operations since
that time. Bank owned life insurance ("BOLI") income increased to $787,000 in
2002 compared to $632,000 in 2001 due to a death benefit claim. During 2002,
other income decreased to $1,081,000 from $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 during 2001.
TABLE 2 - NON-INTEREST INCOME
(in thousands)
2002 2001 2000
------------------- ------------------- -------------------
Percent of Percent of Percent of
average average average
Amount assets Amount assets Amount assets
------ ---------- ------ ---------- ------ ----------
Trust $ 926 0.14% $1,167 0.19% $1,276 0.23%
Service charges on deposits 2,589 0.38 1,961 0.32 1,731 0.31
Other service charges 265 0.04 310 0.05 306 0.06
ATM network fees 578 0.09 804 0.13 725 0.13
Insurance agency commissions 2,355 0.35 1,689 0.28 1,140 0.21
Income from BOLI 787 0.12 632 0.10 161 0.03
Other 1,081 0.15 1,164 0.19 782 0.14
------ ---- ------ ---- ------ ----
Total $8,581 1.27% $7,727 1.26% $6,121 1.11%
====== ==== ====== ==== ====== ====
Gain on sales of securities totaled $420,000 in 2002, compared to $260,000 in
2001. Proceeds from the sale of securities totaled $27.5 million in 2002,
compared to $12.5 million in 2001. In 2000, securities totaling $41.0 million
were sold for a net loss of $2.1 million as the Company restructured a portion
of the investment portfolio.
18
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 $15.4 million in 2000, to $18.1 million in 2001, and $22.2 million in 2002.
These figures represent a percent of average assets of 3.27% in 2002, 2.96% in
2001, and 2.79% in 2000.
Salaries and benefits expense, which is the largest component of non-interest
expense, increased to $11.5 million in 2002 from $9.0 million in 2001. This is
primarily due to the three new branches opened during 2001 being open the entire
year in 2002, the acquisition of the Sabina Bank in December 2001, and the three
insurance agencies acquired since the second quarter of 2001. In addition to the
salaries, officer bonus expense increased due to exceeding performance related
goals, health care costs increased with the increase in personnel, and a
supplemental executive retirement plan was started in 2002. Salaries and
benefits as a percent of average assets was 1.70% in 2002, 1.47% in 2001, and
1.37% in 2000. The average number of full-time equivalent employees was 269 in
2002, 236 in 2001, and 220 in 2000.
The three new branches opened during 2001 and the Sabina Bank acquisition also
contributed to equipment expense increasing 6.0% and occupancy expense
increasing 12.1% from last year. Amortization of intangibles is the amortization
of the core deposit intangible associated with the Sabina Bank acquisition.
Other expenses remained at similar levels as a percent of average assets in
2002, as compared to 2001.
TABLE 3 - NON-INTEREST EXPENSE
(in thousands)
2002 2001 2000
-------------------- -------------------- --------------------
Percent of Percent of Percent of
average average average
Amount assets Amount assets Amount assets
------- ---------- ------- ---------- ------- ----------
Salaries $ 9,627 1.42% $ 7,766 1.27% $ 6,415 1.16%
Benefits 1,885 0.28 1,240 0.20 1,167 0.21
Occupancy 1,171 0.17 1,045 0.17 866 0.16
Equipment 2,748 0.41 2,592 0.42 2,233 0.40
Data processing 146 0.02 170 0.03 152 0.03
Professional fees 1,420 0.21 1,342 0.22 1,187 0.22
Marketing 785 0.12 532 0.09 496 0.09
Printing and office supplies 547 0.08 495 0.08 388 0.07
State franchise tax 552 0.08 569 0.09 477 0.09
Amortization of intangibles 616 0.09 0 0.00 0 0.00
Other 2,662 0.39 2,387 0.39 1,991 0.36
------- ---- ------- ---- ------- ----
Total $22,159 3.27% $18,138 2.96% $15,372 2.79%
======= ==== ======= ==== ======= ====
INCOME TAXES
The effective tax rates were 17.6% for 2002, 19.7% for 2001, and 16.0% for 2000.
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 10.8% during 2002 to $677.0 million. Average
interest-earning assets increased 10.0%, and were 92% of total average assets,
slightly less than the 93% for 2001 and 94% for 2000.
SECURITIES
The majority of the increases in the securities portfolio from 2000 and 2001 to
2002 were the result of purchases of U.S. agency callable bonds and U.S. agency
mortgage-backed securities with projected average lives of three to seven years.
Average securities as a percent of assets was 33.6% in 2002, 29.8% in 2001 and
27.0% in 2000. The securities portfolio at December 31, 2002 consisted of $168.6
million of securities available for sale and $44.5 million of securities that
management intends to hold to maturity. The available-for-sale portion of the
portfolio consisted primarily of fixed-rate securities with a projected average
life of 4.1 years, an average repricing term of 2.1 years, and an average
tax-equivalent yield of 4.73%. Of the total available-for-sale portion, 27%
consisted of callable U.S. agency bonds, 62% consisted of fixed-rate
mortgage-backed securities, 1% consisted of adjustable-rate
19
mortgage-backed securities, and 5% consisted of long-term fixed-rate tax-exempt
municipal securities, and 5% consisted of other securities. The held-to-maturity
portion of the portfolio consisted entirely of long-term fixed-rate tax-exempt
municipal securities with both an average life and a repricing term of 4.3
years. At December 31, 2002 the total security portfolio had approximately $4.3
million market value appreciation.
LOANS
Average total loans as a percent of average assets was 56.9% in 2002, 60.0% in
2001, and 66.6% in 2000. 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 $92.3 million in
2000 to $107.0 million in 2001, and to $108.5 million in 2002 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 2002. Residential real estate
loans decreased $4.3 million in 2002 to $141.4 million. During 2002, loans
sales, prepayments and amortizations exceeded new residential real estate loan
originations. During 2002, the Company sold $4.8 million in residential real
estate loans, compared to $9.1 million in 2001. For interest rate risk
management purposes the Company currently sells, or holds 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 continues to focus its
commercial lending on small- to medium-sized companies with established track
records in its market area.
Installment loans outstanding increased $4.2 million to $74.5 million in 2002
from $70.3 million at December 31, 2001. This increase occurred primarily in
indirect auto loans due to renewed sales efforts in that market. Installment
loans increased to 19% of the portfolio at December 31, 2002 from 18% at
December 31, 2001. The Company has avoided concentration of lending in any one
industry. As of December 31, 2002, the ratio of fixed-rate loans to total loans
was 41.7%, of which 66% matures within five years.
TABLE 4 - LOAN PORTFOLIO
(in thousands)
At December 31,
2002 2001 2000 1999
--------------------- --------------------- --------------------- ---------------------
Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total
-------- ---------- -------- ---------- -------- ---------- -------- ----------
Commercial & industrial $108,513 28% $106,976 28% $ 92,328 25% $ 86,521 25%
Commercial real estate 35,461 9 36,411 10 42,694 11 37,833 11
Agricultural 20,857 6 19,076 5 18,256 5 18,343 5
Residential real estate 141,417 37 145,755 38 145,582 39 117,392 33
Installment 74,533 19 70,345 18 71,414 19 87,996 25
Other 4,247 1 3,883 1 3,209 1 2,069 1
Deferred net origination
costs (357) 0 268 0 618 0 801 0
-------- --- -------- --- -------- --- -------- ---
Total $384,671 100% $382,714 100% $374,101 100% $350,955 100%
======== === ======== === ======== === ======== ===
1998
---------------------
Percent of
Amount Total
-------- ----------
Commercial & industrial $ 78,801 26%
Commercial real estate 29,936 10
Agricultural 17,925 6
Residential real estate 92,069 30
Installment 83,173 27
Other 2,402 1
Deferred net origination
costs 806 0
-------- ---
Total $305,112 100%
======== ===
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 1.04% of total loans as of December 31, 2002,
compared to 1.00% at the end of 2001, and has ranged from .87% to 1.02% for the
years 1998 through 2000. Net charge-offs as a percentage of average loans
decreased to .49% for the year 2002, compared to .58% for the year 2001. Net
charge-offs decreased approximately $200,000 during 2002, with the decrease
occurring primarily in commercial and industrial loans. The Company allocates
the allowance for loan losses to specifically classified loans and generally
based on three-year net charge-off history. In assessing the adequacy of the
allowance for loan losses, the
20
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
economic conditions. 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 $4.7 million at year-end 2002, compared to $4.9 million at
year-end 2001.
As of December 31, 2002 there were $3.0 million in twenty non-accrual small
business relationships. The majority of this amount consisted of two
relationships, one of which is $1.4 million in a nursing home business, which
has been making monthly payments since January 2002 following the signing of a
forbearance agreement. The second relationship amounts to $603,000 and is in the
construction business. The customer has signed a forbearance agreement and is
proceeding 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 seventeen loans that
total $1,345,000 with the largest balance being $314,000. Non-accrual personal
loans consisted of ten loans that total $214,000, and home equity credit lines
consisted of 5 loans totaling $142,000.
All loans are expected to be resolved through term payments or through
liquidation of collateral in the normal course of business. In addition,
management identified three relationships totaling $1.2 million as impaired
loans that were less than 90 days past due and still accruing as of December 31,
2002. Management, through normal credit review procedures, became aware of
possible difficulties these borrowers could have complying with current loan
repayment terms. The anticipated loss in the year 2003 from all relationships is
not expected to be material. Anticipated losses are based on currently available
information and actual losses may differ significantly should the borrowers'
financial condition or collateral values significantly deteriorate.
TABLE 5 - ASSET QUALITY
(in thousands)
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Allowance for loan losses $4,010 $3,810 $3,802 $3,222 $2,641
Provision for loan losses 2,100 1,500 2,199 1,400 1,150
Net charge-offs 1,900 2,114 1,619 819 1,270
Non-accrual loans $4,734 $4,859 $4,098 $ 955 $ 599
Loans 90 days or more past due 1,391 858 113 96 343
Renegotiated loans 0 0 0 0 0
Other real estate owned 226 143 67 80 0
------ ------ ------ ------ ------
Total non-performing assets $6,351 $5,860 $4,278 $1,131 $ 942
====== ====== ====== ====== ======
RATIOS
Allowance to total loans 1.04% 1.00% 1.02% 0.91% 0.87%
Net charge-offs to average loans 0.49 0.58 0.44 0.25 0.50
Non-performing assets to total loans
and other real estate owned 1.65 1.53 1.14 0.32 0.31
OTHER ASSETS
In September 2000, $10 million was used to purchase Bank Owned Life Insurance
with a cash surrender value that increases tax-free during future years at an
adjustable rate. At December 31, 2002, the cash surrender value was $11.1
million. The Company also operates a network of cash dispenser machines located
in convenience stores and supermarkets. There were 65 machines located in Ohio,
Kentucky and Indiana at the end of 2002. The Company's investment in this
segment of business includes $1.4 million in equipment cost and an average of
$3.3 million in cash to supply the machines. Due to changes in the market, the
Company anticipates a reduced commitment to this business in the future. 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 activity of $84,000 in 2002, compared to $92,000 in 2001,
and $82,000 for 2000.
21
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 accounted for as
a purchase transaction in accordance with SFAS No. 141, "Business Combinations".
In connection with the transaction, the Company acquired approximately $48
million in assets, consisting primarily of loans and investments, and assumed
deposit liabilities approximating $42 million, and recorded intangible assets of
$6.7 million. The intangible assets consisted of core deposit intangibles of
$3.1 million, which is amortized over the expected life of the related core
deposits, and goodwill of $3.6 million, which is not amortized in accordance
with SFAS No. 141, but is tested annually for impairment. In 2002, no goodwill
was expensed due to impairment of value.
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 24% 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 decreased to 12%. Certificates of
deposit decreased to 35% of deposits by the end of 2002, as consumers are less
willing to extend maturities in the current low interest rate environment.
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 2002 as in 2001. 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,
2002 2001 2000 1999 1998
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Demand $ 52,273 11% $ 52,734 11% $ 42,965 11% $ 43,715 12% $ 41,748 11%
NOW 111,680 24% 103,905 22% 81,540 20% 67,027 18% 61,616 16%
Savings 41,853 9% 42,854 9% 32,628 8% 35,903 9% 36,213 10%
Money market 54,688 12% 59,990 13% 33,533 8% 42,780 11% 39,935 11%
CD's less than $100,000 164,962 35% 174,599 36% 172,982 43% 150,281 40% 147,003 39%
CD's $100,000 and over 42,633 9% 45,158 9% 43,040 10% 40,226 10% 47,705 13%
-------- --- -------- --- -------- --- -------- --- -------- ---
Total $468,089 100% $479,240 100% $406,688 100% $379,932 100% $374,220 100%
======== === ======== === ======== === ======== === ======== ===
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, 2002, the Bank had outstanding $108.4 million of total borrowings from the
FHLB, $98.5 million of which consisted 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, 2002, are: $74.5 million in 2003; $12
million in 2004; and $12 million in 2006. The remaining $9.9 million consists of
a 4.67% fixed-rate monthly amortizing note with a final maturity in 2006.
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 $8.2 million
in thirty-year debt securities at a rate of interest adjustable quarterly equal
to the three-month LIBOR rate plus 3.45% (currently 5.24%), and the trust issued
capital securities of $8.0 million 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.
22
CAPITAL
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 December 31, 2002, NB&T Financial Group, Inc.
had a total risk-based capital ratio of 14.66%, a Tier 1 risk-based capital
ratio of 13.68%, and a Tier 1 leverage ratio of 8.48%.
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.
The loan to deposit ratio at December 31, 2002, was 82.2%, compared to 79.9% at
the same date in 2001. Loans to total assets were 56.9% at the end of 2002,
compared to 57.0% at the same time last year. Management strives to keep this
ratio below 70%. The securities portfolio is 79% available-for-sale securities
that are readily marketable. Approximately 53% 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 over 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 Company's Board of
Directors approves the guidelines established by ALCO. 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, 2002 for the Bank only. As
shown, the Bank was asset sensitive for periods zero through one year, and one-
to five-year period and liability sensitive within the over-five-year period.
The cumulative gap as a percent of total assets through one year at the end of
2002 was a positive 15.3% compared to a negative 7.2% at the end of 2001. 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 Bank. Also, historically their
sensitivity to changes in interest rates has been significantly less than some
other deposits, such as certificates of deposit. However, considering today's
low interest rate environment, the future rate sensitivity of these deposits
could be significantly different.
23
Table 7 - Interest Rate Gap Analysis
(in thousands)
At December 31, 2002
0-3 3-6 6-12 1-5 5+
Total Months Months Months Years Years
-------- -------- -------- -------- -------- ---------
Loans $384,671 $ 99,512 $ 40,874 $ 66,419 $171,902 $ 5,964
Securities 220,688 25,669 8,888 42,144 90,228 53,759
Short-term funds & BOLI 18,098 6,990 3 11,105 -- --
-------- -------- -------- -------- -------- ---------
Total Earning Assets 623.457 132,171 49,765 119,668 262,130 59,723
-------- -------- -------- -------- -------- ---------
Savings, NOW & MMDA 208,221 6,752 6,752 13,504 94,373 86,840
Other time deposits 207,595 43,157 45,243 52,827 65,060 1,308
Short term borrowings 19,240 19,240 -- -- -- --
Long term debt 108,338 615 610 1,242 7,371 98,500
-------- -------- -------- -------- -------- ---------
Total Interest Bearing Funds 543,394 69,764 52,605 67,573 166,804 186,648
-------- -------- -------- -------- -------- ---------
Period gap 80,063 62,407 (2,840) 52,095 95,326 (126,925)
Cumulative gap 62,407 59,567 111,662 206,988 80,063
Gap as a percent of assets 12.04% 9.39% 8.96% 16.80% 31.13% 12.04%
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 could have a slightly negative
effect on projected net interest margin over the next twelve months.
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, 2002, the results of 300 basis points increase simulations are
within those guidelines; however, the results of the 300 basis points decrease
simulations exceeded those guidelines. Interest rates have declined to
historically low levels. As a result, many of the Bank's deposits are within 300
basis points of a zero interest rate floor, and the Bank's inability to reduce
rates below the zero floor could negatively impact the Bank's future earnings
and market value of equity.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the simulation modeling. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market rates. In addition, the interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market rates, while interest rates on other types may lag behind changes in
market rates. Further, in the event of a change in interest rates, expected
rates of prepayment on loans and mortgage-backed securities and early
withdrawals from certificates of deposit may deviate significantly from those
assumed in making the risk calculations. The 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, 2002. The
information presented is based on repricing opportunities and projected cash
flows that include expected prepayment speeds and likely call dates.
24
Table 8 - Financial Instruments Market Risk
(in thousands)
December 31, 2002
Over 5
2003 2004 2005 2006 2007 Years Total Value
-------- ------- ------- ------- ------- ------- -------- --------
Fixed-rate loans $ 76,273 $42,930 $21,137 $10,154 $ 5,198 $ 5,866 $161,559 $164,995
Average interest rate 7.76% 8.13% 8.12% 8.05% 8.08% 8.71%
Adjustable-rate Loans 130,532 50,559 24,550 7,841 9,532 98 223,112 225,701
Average interest rate 6.43 6.90 6.68 6.70 6.23 6.01
Securities 76,701 34,737 23,972 16,206 15,313 53,759 220,688 214,230
Average interest rate 4.74 4.72 4.62 5.08 5.16 4.33
Savings, NOW & MMDA 208,221 -- -- -- -- -- 208,221 208,221
Average interest rate 0.94 -- -- -- -- --
Time deposits 141,227 46,418 15,014 1,587 2,041 1,308 207,595 210,612
Average interest rate 2.82 3.90 3.94 4.48 4.37 3.85
Short term borrowings 19,240 -- -- -- -- -- 19,240 19,240
Average interest rate 0.87 -- -- -- -- --
Long term debt 2,467 2,572 2,694 2,105 -- 98,500 108,338 124,288
Average interest rate 4.67 4.67 4.67 4.67 -- 5.20
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.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States and conform to
general practices within the banking industry. The Company's significant
accounting policies are described in detail in the notes to the Company's
consolidated financial statements for the year ended December 31, 2002. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions. The
financial position and results of operations can be affected by these estimates
and assumptions and are integral to the understanding of reported results.
Critical accounting policies are those policies that management believes are the
most important to the portrayal of the Company's financial condition and
results, and they require management to make estimates that are difficult,
subjective, or complex.
Allowance for Loan Losses- The allowance for loan losses provides coverage for
probable losses inherent in the Company's loan portfolio. Management evaluates
the adequacy of the allowance for loan losses each quarter based on changes, if
any, in underwriting activities, the loan portfolio composition (including
product mix and geographic, industry or customer-specific concentrations),
trends in loan performance, regulatory guidance and economic factors. This
evaluation is inherently subjective, as it requires the use of significant
management estimates. Many factors can affect management's estimates of specific
and expected losses, including volatility of default probabilities, collateral
values, rating migrations, loss severity and economic and political conditions.
The allowance is increased through provisions charged to operating earnings and
reduced by net charge-offs.
The Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and historical loss
experience. The allowance recorded for homogeneous consumer loans is based on an
analysis of loan mix, risk characteristics of the portfolio, and historical
losses, adjusted for current trends, for each homogeneous category or group of
loans. The allowance for loan losses relating to impaired loans is based on the
loan's observable market price, the collateral for certain collateral-dependent
loans, or the discounted cash flows using the loan's effective interest rate.
25
Regardless of the extent of the Company's analysis of customer performance,
portfolio trends or risk management processes, certain inherent but undetected
losses are probable within the loan portfolio. This is due to several factors,
including inherent delays in obtaining information regarding a customer's
financial condition or changes in their unique business conditions, the
judgmental nature of individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or customer-specific
conditions affecting the identification and estimation of losses for larger
non-homogeneous credits and the sensitivity of assumptions utilized to establish
allowances for homogenous groups of loans are among other factors. The Company
estimates a range of inherent losses related to the existence of these
exposures. The estimates are based upon the Company's evaluation of risk
associated with the commercial and consumer allowance levels and the estimated
impact of the current economic environment.
Goodwill and Other Intangibles- The Company records all assets and liabilities
acquired in purchase acquisitions, including goodwill and other intangibles, at
fair value as required by SFAS 141. Goodwill is subject, at a minimum, to annual
tests for impairment. Other intangible assets are amortized over their estimated
useful lives using straight-line and accelerated methods, and are subject to
impairment if events or circumstances indicate a possible inability to realize
the carrying amount. The initial goodwill and other intangibles recorded and
subsequent impairment analysis requires management to make subjective judgments
concerning estimates of how the acquired asset will perform in the future.
Events and factors that may significantly affect the estimates include, among
others, customer attrition, changes in revenue growth trends, specific industry
conditions and changes in competition.
EFFECT OF RECENT ACCOUNTING STANDARDS
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See "Market Risk Management" in Item 7, which is incorporated herein by
reference.
26
Item 8. Financial Statements and Supplementary Data
- I N D E X -
PAGE
INDEPENDENT ACCOUNTANTS' REPORT 28-29
FINANCIAL STATEMENTS
Consolidated Balance Sheets 30
Consolidated Statements of Income 31-32
Consolidated Statements of Shareholders' Equity 33
Consolidated Statements of Cash Flows 34-35
Notes to Consolidated Financial Statements 36-59
27
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
NB&T Financial Group, Inc.
Wilmington, Ohio
We have audited the accompanying consolidated balance sheet of NB&T Financial
Group, Inc. as of December 31, 2002, and the related consolidated statements of
income, shareholders' equity, and cash flows for the year ended December 31,
2002. 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. The consolidated financial statements of NB&T
Financial Group, Inc. for the year ended December 31, 2001 and for each of the
two-year periods then ended, were audited by other auditors whose opinion dated
February 5, 2002 was unqualified.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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. as of December 31, 2002, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ BKD, LLP
----------------------------
Cincinnati, Ohio
February 5, 2003
28
INDEPENDENT ACCOUNTANTS' 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 the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the two 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 the results of their
operations and their cash flows for each of the two 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
29
NB&T Financial Group, Inc.
Consolidated Balance Sheets
December 31, 2002 and 2001
(Dollars in Thousands)
2002 2001
-------- --------
Assets
Cash and due from banks $ 18,812 $ 27,882
Interest-bearing demand deposits 10 87
Federal funds sold 6,988 468
-------- --------
Cash and cash equivalents 25,810 28,437
-------- --------
Available-for-sale securities 168,600 171,571
Held-to-maturity securities 44,490 44,430
Loans held for sale -- 1,848
Loans, net of allowance for loan losses of $4,010
and $3,810 at December 31, 2002 and 2001 380,661 378,904
Premises and equipment 14,832 14,205
Federal Reserve and Federal Home Loan Bank stock 7,598 6,914
Interest receivable 4,113 4,974
Goodwill 3,625 3,625
Core deposits and other intangibles 3,959 4,261
Other 11,115 12,002
-------- --------
Total assets $664,803 $671,171
======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand $ 52,273 $ 52,734
Savings, NOW and money market 208,221 206,749
Time 207,595 219,757
-------- --------
Total deposits 468,089 479,240
-------- --------
Short-term borrowings 19,240 22,055
Long-term debt 116,446 114,844
Interest payable and other liabilities 3,724 4,056
-------- --------
Total liabilities 607,499 620,195
-------- --------
Commitments and Contingencies
Equity From ESOP Shares 12,511 12,683
-------- --------
Stockholders' Equity
Preferred stock, no par value, authorized
100,000 shares; none issued
Common stock, no par value; authorized
6,000,000 shares; issued - 3,818,950 shares 1,000 1,000
Additional paid-in capital 9,270 9,129
Retained earnings 39,281 35,426
Unearned employee stock ownership plan (ESOP) shares (1,703) (1,871)
Accumulated other comprehensive income (loss) 2,064 (145)
Treasury stock, at cost
Common; 2002 - 596,418 shares, 2001 -
611,146 shares (5,119) (5,246)
-------- --------
Total stockholders' equity 44,793 38,293
-------- --------
Total liabilities and stockholders' equity $664,803 $671,171
======== ========
See Notes to Consolidated Financial Statements
30
NB&T Financial Group, Inc.
Consolidated Statements of Income
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands, except per share amounts)
2002 2001 2000
------- ------- -------
Interest and Dividend Income
Loans $29,085 $30,508 $31,549
Securities
Taxable 8,178 7,627 6,205
Tax-exempt 2,713 2,708 2,724
Federal funds sold 157 706 126
Dividends on Federal Home Loan and Federal
Reserve Bank stock 336 433 435
Deposits with financial institutions 14 11 10
------- ------- -------
Total interest and dividend income 40,483 41,993 41,049
------- ------- -------
Interest Expense
Deposits 11,028 16,651 16,075
Short-term borrowings 338 1,287 2,024
Long-term debt 5,937 4,911 4,612
------- ------- -------
Total interest expense 17,303 22,849 22,711
------- ------- -------
Net Interest Income 23,180 19,144 18,338
Provision for Loan Losses 2,100 1,500 2,199
------- ------- -------
Net Interest Income After Provision for Loan
Losses 21,080 17,644 16,139
------- ------- -------
Noninterest Income
Trust income 926 1,167 1,276
Service charges on deposits 2,589 1,961 1,731
Other service charges and fees 265 310 306
ATM network fees 578 804 725
Insurance agency commissions 2,355 1,689 1,140
Net realized gains (losses) on sales of
available-for-sale securities 420 260 (2,070)
Income from bank owned life insurance 787 632 161
Other 1,081 1,164 782
------- ------- -------
Total noninterest income 9,001 7,987 4,051
------- ------- -------
See Notes to Consolidated Financial Statements
31
NB&T Financial Group, Inc.
Consolidated Statements of Income
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands, except per share amounts)
Noninterest Expense
Salaries and employee benefits $11,512 $ 9,006 $ 7,582
Net occupancy expense 1,171 1,045 866
Equipment expense 2,748 2,592 2,233
Data processing fees 146 170 152
Professional fees 1,420 1,342 1,187
Marketing expense 785 532 496
Printing and office supplies 547 495 388
State franchise tax 552 569 477
Amortization of intangibles 616 -- --
Other 2,662 2,387 1,991
------- ------- -------
Total noninterest expense 22,159 18,138 15,372
------- ------- -------
Income Before Income Tax 7,922 7,493 4,818
Provision for Income Taxes 1,391 1,476 772
------- ------- -------
Net Income $ 6,531 $ 6,017 $ 4,046
======= ======= =======
Basic Earnings Per Share $ 2.11 $ 1.91 $ 1.27
======= ======= =======
Diluted Earnings Per Share $ 2.10 $ 1.90 $ 1.26
======= ======= =======
See Notes to Consolidated Financial Statements
32
NB&T Financial Group, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands)
Accumulated
Common Additional Unearned Other
Stock Paid-in Retained ESOP Comprehensive Treasury
Amount Capital Earnings Shares Income (Loss) Stock Total
------ ---------- -------- -------- ------------- -------- -------
Balance, January 1, 2000 $1,000 $7,921 $28,482 $ (405) $(3,331) $(4,091) $29,576
Comprehensive income
Net income 4,046 4,046
Change in unrealized gain on
securities available for sale, net of
reclassification adjustment and tax
effect 3,554 3,554
-------
Total comprehensive income 7,600
-------
Dividends on common stock, $.76 per share (2,423) (2,423)
Purchase of stock (9,900 shares) (221) (221)
Stock options exercised 151 182 333
ESOP shares earned 56 106 162
Net change in equity from ESOP shares 2,204 2,204
------ ------ ------- ------- ------- ------- -------
Balance, December 31, 2000 1,000 8,128 32,491 (299) 223 (4,312) 37,231
Comprehensive income
Net income 6,017 6,017
Change in unrealized (loss) on
securities available for sale, net of
reclassification adjustment and tax
effect (368) (368)
-------
Total comprehensive income 5,649
-------
Dividends on common stock, $.84 per share (2,650) (2,650)
Purchase of stock (83,632 shares) (739) (934) (1,673)
Stock options exercised 9 21 30
Shares sold to ESOP 955 718 (1,673)
ESOP shares earned 37 101 138
Net change in equity from ESOP shares (432) (432)
------ ------ ------- ------- ------- ------- -------
Balance, December 31, 2001 1,000 9,129 35,426 (1,871) (145) (5,246) 38,293
Comprehensive income
Net income 6,531 6,531
Change in unrealized gain on
securities available for sale, net of
reclassification adjustment and tax
effect 2,209 2,209
-------
Total comprehensive income 8,740
-------
Dividends on common stock, $.92 per share (2,848) (2,848)
Sale of stock to ESOP (5,728 shares) 83 49 132
Stock options exercised 30 78 108
ESOP shares earned 28 168 196
Net change in equity from ESOP shares 172 172
------ ------ ------- ------- ------- ------- -------
Balance, December 31, 2002 $1,000 $9,270 $39,281 $(1,703) $ 2,064 $(5,119) $44,793
====== ====== ======= ======= ======= ======= =======
See Notes to Consolidated Financial Statements
33
NB&T Financial Group, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands)
2002 2001 2000
--------- --------- --------
Operating Activities
Net income $ 6,531 $ 6,017 $ 4,046
Items not requiring (providing) cash
Depreciation and amortization 1,855 1,702 1,496
Provision for loan losses 2,100 1,500 2,199
Amortization of premiums and discounts on securities 946 449 218
ESOP shares earned 196 138 162
Deferred income taxes (440) 371 (78)
Proceeds from sale of loans held for sale 4,791 9,110 1,241
Originations of loans held for sale (3,856) (9,611) (1,241)
Gain from sale of loans (143) (166) --
Net realized (gains) losses on available-for-sale securities (420) (260) 2,070
FHLB stock dividends (309) (412) (436)
Changes in
Interest receivable 861 254 (653)
Other assets 1,189 (1,075) (402)
Interest payable and other liabilities (1,029) 960 33
--------- --------- --------
Net cash provided by operating activities 12,272 8,977 8,655
--------- --------- --------
Investing Activities
Purchases of available-for-sale securities (159,328) (170,525) (52,525)
Proceeds from maturities of available-for-sale securities 137,539 99,913 10,212
Proceeds from the sales of available-for-sale securities 27,520 12,452 40,998
Purchases of Federal Reserve Bank stock (375) -- --
Proceeds from loan sales -- 8,950 --
Net change in loans (2,801) 11,349 (25,015)
Purchase of premises and equipment (2,482) (2,739) (1,283)
Purchase of bank owned life insurance policies -- -- (10,000)
Acquisitions of bank and insurance agencies -- (2,300) --
--------- --------- --------
Net cash provided (used) in investing activities 73 (42,900) (37,613)
--------- --------- --------
See Notes to Consolidated Financial Statements
34
NB&T Financial Group, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands)
2002 2001 2000
-------- -------- --------
Financing Activities
Net increase in demand deposits, money market, NOW and savings
accounts $ 1,011 $ 43,575 $ 1,255
Net increase (decrease) in certificates of deposit (12,162) (12,797) 25,501
Net decrease in short-term borrowings (2,815) (18,093) (210)
Proceeds from long-term debt 8,000 34,522 5,000
Repayment of long-term debt (6,398) -- (108)
Proceeds from stock options exercised 108 24 154
Sale (purchase) of treasury stock 132 (1,673) (221)
Dividends paid (2,848) (2,593) (2,356)
-------- -------- --------
Net cash provided by (used in) financing activities (14,972) 42,965 29,015
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents (2,627) 9,042 57
Cash and Cash Equivalents, Beginning of Year 28,437 19,395 19,338
-------- -------- --------
Cash and Cash Equivalents, End of Year $ 25,810 $ 28,437 $ 19,395
======== ======== ========
Supplemental Cash Flows Information
Interest paid $ 17,705 $ 23,037 $ 22,470
Income taxes paid (net of refunds) 1,977 1,060 596
See Notes to Consolidated Financial Statements
35
NB&T Financial Group, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
NB&T Financial Group, Inc. ("Company") is a bank holding company whose
principal activity is the ownership and management of its wholly-owned
subsidiaries, The National Bank and Trust Company (the "Bank") and NB&T
Statutory Trust I ("Trust I"). The Bank is primarily engaged in providing a
full range of banking and financial services to individual and corporate
customers in Adams, Auglaize, Brown, Clermont, Clinton, Fayette, Hardin,
Highland, and Warren counties in Ohio. The Bank offers insurance products
including property, casualty and life through its wholly-owned subsidiary,
NB&T Insurance Agency, Inc. ("Agency"). The Bank is subject to competition
from other financial institutions. The Bank is subject to the regulation of
certain federal and state agencies and undergoes periodic examinations by
those regulatory authorities.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
Trust I, Bank and the Agency. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. In connection
with the determination of the allowance for loan losses, management obtains
independent appraisals for significant properties.
Cash Equivalents
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents.
Securities
Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell but which may be sold in the future,
are carried at fair value. Unrealized gains and losses are recorded, net of
related income tax effects, in other comprehensive income.
Held-to-maturity securities, which include any security for which the
Company has the positive intent and ability to hold until maturity, are
carried at historical cost adjusted for amortization of premiums and
accretion of discounts.
Amortization of premiums and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are recorded as
net security gains (losses). Gains and losses on sales of securities are
determined on the specific-identification method.
36
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income.
Loans
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoffs are reported at their
outstanding principal balances adjusted for any charge-offs, the allowance
for loan losses, any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans. Interest income is
reported on the interest method and includes amortization of net deferred
loan fees and costs over the loan term. Generally, loans are placed on
non-accrual status at ninety days past due and interest is considered a
loss, unless the loan is well-secured and in the process of collection.
Discounts and premiums on purchased residential real estate loans are
amortized to income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. Discounts and
premiums on purchased consumer loans are recognized over the expected lives
of the loans using methods that approximate the interest method.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to income. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogenous loans are collectively evaluated
for impairment. Accordingly, the Bank does not separately identify
individual consumer and residential loans for impairment measurements.
Premises and Equipment
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over the
estimated useful lives of the assets.
37
Federal Reserve and Federal Home Loan Bank Stock
Federal Reserve and Federal Home Loan Bank stock are required investments
for institutions that are members of the Federal Reserve and Federal Home
Loan Bank systems. The required investment in the common stock is based on
a predetermined formula.
Foreclosed Assets Held for Sale
Assets acquired through, or in lieu of, loan foreclosure are held for sale
and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the
lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are
included in net income or expense from foreclosed assets.
Goodwill
Goodwill is annually tested for impairment. If the implied fair value of
goodwill is lower than its carrying amount, a goodwill impairment is
indicated and goodwill is written down to its implied fair value.
Subsequent increases in goodwill value are not recognized in the financial
statements.
Intangible Assets
Intangible assets are being amortized on an accelerated basis over periods
ranging from seven to eleven years. Such assets are periodically evaluated
as to the recoverability of their carrying value.
Treasury Stock
Treasury stock is stated at cost. Cost is determined based on the average
cost of all shares.
38
Stock Options
At December 31, 2002, the Company has a stock-based employee compensation
plan, which is described more fully in Note 16. The Company accounts for
this plan under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in
net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the grant date.
The following table illustrates the effect on net income and earnings per
share if the company had applied the fair value provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation (thousands, except per share amounts):
Year Ended December 31
------------------------
2002 2001 2000
------ ------ ------
Net income, as reported $6,531 $6,017 $4,046
Less: Total stock-based employee
compensation cost determined
under the fair value based method,
net of income taxes (107) (82) (58)
------ ------ ------
Pro forma net income $6,424 $5,935 $3,988
====== ====== ======
Earnings per share:
Basic - as reported $ 2.11 $ 1.91 $ 1.27
====== ====== ======
Basic - pro forma $ 2.08 $ 1.88 $ 1.25
====== ====== ======
Diluted - as reported $ 2.10 $ 1.90 $ 1.26
====== ====== ======
Diluted - pro forma $ 2.06 $ 1.88 $ 1.24
====== ====== ======
Income Taxes
Deferred tax assets and liabilities are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that a deferred tax asset will not be
realized. The Company files consolidated income tax returns with its
subsidiary.
Earnings Per Share
Earnings per share have been computed based upon the weighted-average
common shares outstanding during each year. Unearned ESOP shares which have
not vested have been excluded from the computation of average shares
outstanding.
Reclassifications
Certain reclassifications have been made to the 2001 financial statements
to conform to the 2002 financial statement presentation. These
reclassifications had no effect on net income.
Note 2: Restriction on Cash and Due From Banks
The Bank is required to maintain reserve funds in cash and/or on deposit
with the Federal Reserve Bank. The reserve required at December 31, 2002
was $6,293,000.
39
Note 3: Securities
The amortized cost and approximate fair values of securities are as follows
(thousands):
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
Available-for-Sale Securities:
December 31, 2002:
U.S. government agencies $ 44,315 $ 339 $ -- $ 44,654
Mortgage-backed securities 104,572 2,531 3 107,100
State and political subdivision 8,576 265 -- 8,841
Other securities 8,010 8 13 8,005
-------- ------ ------ --------
$165,473 $3,143 $ 16 $168,600
======== ====== ====== ========
December 31, 2001:
U.S. government agencies $ 54,117 $ 399 $ 378 $ 54,138
Mortgage-backed securities 101,092 762 930 100,924
State and political subdivisions 8,572 9 82 8,499
Other securities 8,010 -- -- 8,010
-------- ------ ------ --------
$171,791 $1,170 $1,390 $171,571
======== ====== ====== ========
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
Held-to-Maturity Securities:
December 31, 2002:
State and political subdivisions $44,490 $1,216 $ 76 $45,630
======= ====== ==== =======
December 31, 2001:
State and political subdivisions $44,430 $ 373 $577 $44,226
======= ====== ==== =======
40
The amortized cost and fair value of securities available for sale and held
to maturity at December 31, 2002, by contractual maturity, are shown below
(thousands). Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Available for Sale Held to Maturity
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- -------
Within one year $ -- $ -- $ 989 $ 998
One to five years 28,075 28,250 -- --
Five to ten years 16,240 16,404 100 109
After ten years 8,586 8,851 43,401 44,523
-------- -------- ------ ------
52,901 53,505 44,490 45,630
Mortgage-backed securities 104,572 107,100 -- --
Other asset-backed securities 8,000 7,995 -- --
-------- -------- ------- -------
Totals $165,473 $168,600 $44,490 $45,630
======== ======== ======= =======
The carrying value of securities pledged as collateral, to secure public
deposits and for other purposes, was $132,495,000 at December 31, 2002, and
$141,512,000 at December 31, 2001.
The book value of securities sold under agreements to repurchase amounted
to $19,360,000 and $26,340,000 at December 31, 2002 and 2001, respectively.
Gross gains of $420,000, $260,000 and $0 and gross losses of $0, $0 and
$2,070,000 resulting from sales of available-for-sale securities were
realized for 2002, 2001 and 2000, respectively.
41
Note 4: Loans and Allowance for Loan Losses
Categories of loans at December 31, include (thousands):
2002 2001
-------- --------
Commercial and industrial $108,513 $106,976
Agricultural 20,857 19,076
Real estate construction 7,282 5,389
Commercial real estate 28,179 31,022
Residential real estate 141,417 145,755
Consumer 74,533 70,345
Other 4,247 3,883
-------- --------
Total loans 385,028 382,446
Less
Net deferred loan fees, premiums and discounts (357) 268
Allowance for loan losses (4,010) (3,810)
-------- --------
Net loans $380,661 $378,904
======== ========
Activity in the allowance for loan losses was as follows (thousands):
2002 2001 2000
------ ------- -------
Balance, beginning of year $3,810 $ 3,802 $ 3,222
Provision charged to expense 2,100 1,500 2,199
Amounts assumed in acquisition -- 622 --
Losses charged off, net of recoveries of $285,000 in
2002, $232,000 in 2001 and $252,000 in 2000 (1,900) (2,114) (1,619)
------ ------- -------
Balance, end of year $4,010 $ 3,810 $ 3,802
====== ======= =======
Impaired loans totaled $4,214,000 and $4,859,000 at December 31, 2002 and
2001, respectively. An allowance for loan losses of $1,542,000 and
$1,327,000 relates to impaired loans of $4,196,000 and $3,937,000, at
December 31, 2002 and 2001, respectively. At December 31, 2002 and 2001,
impaired loans of $18,000 and $922,000 had no related allowance for loan
losses.
Interest of $104,000 and $166,000 was recognized on average impaired loans
of $4,406,000 and $4,800,000 for 2002 and 2001. Interest of $133,000 and
$166,000 was recognized on impaired loans on a cash basis during 2002 and
2001.
At December 31, 2002 and 2001, accruing loans delinquent 90 days or more
totaled $1,391,000 and $858,000, respectively. Non-accruing loans at
December 31, 2002 and 2001 were $4,734,000 and $4,859,000, respectively.
42
Note 5: Premises and Equipment
Major classifications of premises and equipment, stated at cost, are as
follows (thousands):
2002 2001
------- -------
Land $ 1,880 $ 1,892
Buildings and improvements 11,571 11,640
Leasehold improvements 482 480
Construction in progress 1,303 --
Equipment 9,236 9,114
------- -------
24,472 23,126
Less accumulated depreciation (9,640) (8,921)
------- -------
Net premises and equipment $14,832 $14,205
======= =======
Construction in progress consists of a building purchased for $1,004,000
and remodeling in the amount of $299,000 to date. Additional commitment to
complete the remodeling is approximately $200,000.
Note 6: Goodwill
During 2002, the Company changed its method of accounting and financial
reporting for goodwill and other intangible assets by adopting the
provisions of Statement of Financial Accounting Standards No. 142. There
was no material impact of the adoption on the financial statements.
All goodwill is allocated to the banking segment of the business and
totaled $3,625,000 at December 31, 2002 and 2001.
Note 7: Other Intangible Assets
The carrying basis and accumulated amortization of recognized intangible
assets at December 31, 2002 and 2001, were (thousands):
2002 2001
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Core deposits $3,051 $(514) $3,051 $--
Other 1,524 (102) 1,210 --
------ ----- ------ ---
$4,575 $(616) $4,261 $ 0
====== ===== ====== ===
Amortization expense for the years ended December 31, 2002 and 2001, was
$616,000 and $0, respectively. Estimated amortization expense for each of
the following five years is (thousands):
2003 $696
2004 615
2005 538
2006 457
2007 374
43
Note 8: Interest-Bearing Deposits
Interest-bearing deposits in denominations of $100,000 or more were
$42,633,000 on December 31, 2002, and $45,158,000 on December 31, 2001.
At December 31, 2002, the scheduled maturities of time deposits are as
follows (thousands):
2003 $139,692
2004 47,953
2005 15,014
2006 1,587
2007 2,041
Thereafter 1,308
--------
$207,595
========
Note 9: Short-Term Borrowings
Short-term borrowings included the following (thousands):
2002 2001
------- -------
Securities sold under repurchase agreements $17,188 $21,759
U.S. Treasury demand notes 2,052 296
------- -------
Total short-term borrowings $19,240 $22,055
======= =======
Securities sold under agreements to repurchase consist of obligations of
the Company to other parties. The obligations are secured by U.S. agency
notes and such collateral is held by the Federal Reserve Bank. The maximum
amount of outstanding agreements at any month end during 2002 and 2001
totaled $30,145,000 and $44,158,000 and the daily average of such
agreements totaled $23,445,000 and $34,250,000. The agreements at December
31, 2002, mature daily.
The Bank has an unused letter of credit with the Federal Home Loan Bank in
the amount of $15,000,000 expiring March 31, 2003.
44
Note 10: Long-Term Debt
Long-term debt consisted of the following components (thousands):
2002 2001
-------- --------
Federal Home Loan Bank Advances $108,338 $114,628
Junior subordinated debentures 8,000 --
ESOP Trust debt guarantee 108 216
-------- --------
Total $116,446 $114,844
======== ========
The Federal Home Loan Bank advances are secured by mortgage loans and
investment securities totaling $162,555,000 at December 31, 2002. Advances,
at interest rates from 4.67 to 6.26 percent are subject to restrictions or
penalties in the event of prepayment.
On June 26, 2002, NB&T Statutory Trust I ("Trust I"), a wholly owned
subsidiary of the Corporation, closed a pooled private offering of 8,000
Capital Securities with a liquidation amount of $1,000 per security. The
proceeds of the offering were loaned to the Corporation in exchange for
junior subordinated debentures with terms similar to the Capital
Securities. The sole assets of Trust I are the junior subordinated
debentures of the Corporation and payments thereunder. The junior
subordinated debentures and the back-up obligations, in the aggregate,
constitute a full and unconditional guarantee by the Corporation of the
obligations of Trust I under the Capital Securities. Distributions on the
Capital Securities are payable quarterly at the annual rate of 3.45% over
the 3 month LIBOR and are included in interest expense in the consolidated
financial statements. These securities are considered Tier 1 capital (with
certain limitations applicable) under current regulatory guidelines.
The junior subordinated debentures are subject to mandatory redemption, in
whole or in part, upon repayment of the Capital Securities at maturity or
their earlier redemption at the liquidation amount. Subject to the
Corporation having received prior approval of the Federal Reserve, if then
required, the Capital Securities are redeemable prior to the maturity date
of June 26, 2032, at the option of the Corporation; on or after June 26,
2007 at par. Upon occurrence of specific events defined within the trust
indenture, the Capital Securities may also be redeemed prior to June 26,
2007 at a premium. The Corporation has the option to defer distributions on
the Capital Securities from time to time for a period not to exceed 20
consecutive semi-annual periods.
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, 4.25% at December 31, 2002.
Final scheduled payment of $106,000 is due December 31, 2003.
Aggregate annual maturities of Federal Home Loan Bank Advances and ESOP
Trust Debt Guarantee at December 31, 2002, are (thousands):
Debt
--------
2003 $ 2,508
2004 2,514
2005 2,634
2006 2,290
2007 --
Thereafter 98,500
--------
$108,446
========
45
Note 11: Income Taxes
The provision for income taxes includes these components (thousands):
2002 2001 2000
------ ------ ----
Taxes currently payable $1,831 $1,105 $854
Deferred income taxes (440) 371 (82)
------ ------ ----
Income tax expense $1,391 $1,476 $772
====== ====== ====
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below (thousands):
2002 2001 2000
------ ------ ------
Computed at the statutory rate (34%) $2,693 $2,547 $1,641
Increase (decrease) resulting from
Tax exempt interest (847) (809) (816)
ESOP dividend (142) -- --
Bank owned life insurance (267) (217) (53)
Other (46) (45) --
------ ------ ------
Actual tax expense $1,391 $1,476 $ 772
====== ====== ======
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were (thousands):
2002 2001
------- -----
Deferred tax assets
Allowance for loan losses $ 1,171 $ 753
Accruals not currently deductible 64 8
Unrealized losses on securities available for sale -- 74
------- -----
1,235 835
------- -----
Deferred tax liabilities
Depreciation (192) (245)
FHLB stock dividends (824) (719)
Intangible asset amortization (9) (27)
Unrealized gains on available-for-sale securities (1,063) --
------- -----
(2,088) (991)
------- -----
Net deferred tax asset (liability) $ (853) $(156)
======= =====
46
Note 12: Other Comprehensive Income (Loss)
Other comprehensive income (loss) components and related taxes were as
follows (thousands):
2002 2001 2000
------ ----- -------
Unrealized gains (losses) on securities
available for sale $3,767 $(298) $ 3,315
Reclassification for realized amount
included in income 420 260 (2,070)
------ ----- -------
Other comprehensive income
(loss), before tax effect 3,347 (558) 5,385
Tax expense (benefit) 1,138 (190) 1,831
------ ----- -------
Other comprehensive income (loss) $2,209 $(368) $ 3,554
====== ===== =======
Note 13: Regulatory Matters
The Company and the subsidiary bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the subsidiary bank must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 2002, that the Company and the subsidiary bank
meet all capital adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the regulators
categorized the Company as well capitalized under the regulatory framework
for prompt corrective action. To be categorized, the Company must maintain
capital ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Company's
category.
47
The Company and subsidiary bank's actual capital amounts and ratios are
also presented in the following table (thousands):
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
--------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
As of December 31, 2002
Total Risk-Based Capital
(to Risk-Weighted Assets)
Consolidated $59,915 14.66% $32,700 8.0% $ N/A
Bank 52,617 12.87 32,700 8.0 40,875 10.0
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 55,905 13.68 16,350 4.0 N/A
Bank 48,607 11.89 16,350 4.0 24,525 6.0
Tier I Capital
(to Average Assets)
Consolidated 55,905 8.48 26,373 4.0 N/A
Bank 48,607 7.37 26,373 4.0 32,967 5.0
As of December 31, 2001
Total Risk-Based Capital
(to Risk-Weighted Assets)
Consolidated $46,684 11.50% $32,476 8.0% $ N/A
Bank 40,499 10.05 32,249 8.0 40,311 10.0
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 42,874 10.60 16,179 4.0 N/A
Bank 36,689 9.10 16,124 4.0 24,187 6.0
Tier I Capital
(to Average Assets)
Consolidated 42,874 6.83 25,109 4.0% N/A
Bank 36,689 5.85 25,090 4.0 31,362 5.0
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At December 31, 2002,
approximately $7,050,000 of retained earnings were available for dividend
declaration without prior regulatory approval.
48
Note 14: Related Party Transactions
The Bank had loans outstanding to executive officers, directors,
significant shareholders and their affiliates (related parties). A summary
of the related party loan activity follows (thousands):
2002 2001
------ -------
Balance, January 1 $2,988 $ 3,004
New loans 2,391 1,981
Payments (708) (1,997)
Other changes (578) --
------ -------
Balance, December 31 $4,093 $ 2,988
====== =======
In management's opinion, such loans and other extensions of credit and
deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral) as
those prevailing at the time for comparable transactions with other
persons. Further, in management's opinion, these loans did not involve more
than normal risk of collectibility or present other unfavorable features.
Deposits from related parties held by the Bank at December 31, 2002 and
2001 totaled $899,000 and $601,000, respectively.
Note 15: Employee Benefits
The Company has a retirement savings 401(k) plan covering substantially all
employees. Employees may contribute up to 50% of their compensation with
the Bank matching 3% of the employee's contribution on the first 8% of the
employee's compensation. Employer contributions charged to expense for
2002, 2001and 2000 were $148,000, $108,000 and $106,000, respectively.
Also, the Bank has a deferred compensation agreement with certain active
and retired officers. The agreement provides level monthly or annual
payments ranging from four to twenty years after retirement. The charge to
expense for the agreement was $167,000 for 2002 and $0 for 2001. Such
charges reflect the straight-line accrual over the period until full
eligibility of the present value of benefits due each participant on the
full eligibility date, using a 6.1% discount factor.
The Company sponsors a leveraged employee stock ownership plan (ESOP) that
covers substantially all 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 Company makes annual contributions to the ESOP equal to
the ESOP's debt service less dividends on unallocated shares received by
the ESOP. All dividends on unallocated shares received by the ESOP are used
to pay debt service. The ESOP shares initially were pledged as collateral
for its debt. As the debt is repaid, shares are released from collateral
and allocated to plan participants, based on the proportion of debt service
paid in the year to total expected debt service. The Bank accounts for its
ESOP in accordance with Statement of Position 93-6, with the exception of
shares acquired in 1986. Accordingly, the external debt of the ESOP is
recorded as debt of the Company and the shares pledged as collateral are
reported as unearned ESOP shares in the balance sheet. As shares are
released from collateral, the Company reports compensation expense equal to
the current fair value of the shares. Dividends on allocated ESOP shares
are recorded as a reduction of retained earnings; dividends on unallocated
ESOP shares are recorded as a reduction of debt and accrued interest.
Compensation expense for ESOP shares acquired in 1986 is equal to the
principal repaid on the related borrowing plus any additional cash
contributions.
ESOP compensation expense was $201,000, $129,000 and $154,000 for years
2002, 2001 and 2000, respectively. The ESOP shares as of December 31 were
as follows:
49
2002 2001
-------------------- --------------------
SOP 93-6 1986 SOP 93-6 1986
Shares Shares Shares Shares
---------- ------- ---------- -------
Allocated shares 22,717 510,542 26,449 509,283
Shares released for
allocation 6,657 16,448 3,578 18,165
Unearned shares 83,302 15,668 89,959 32,115
---------- ------- ---------- -------
Total ESOP shares 112,676 542,658 119,986 559,563
========== ======= ========== =======
Fair value of unearned
shares at December 31 $1,895,000 $1,989,000
========== ==========
The Company is obligated at the option of each beneficiary to repurchase
shares of the ESOP upon the beneficiary's termination or after retirement.
At December 31, 2002, the fair value, as estimated by The Phoenix Group,
Inc., of the 22,717 allocated shares held by the ESOP is $22.75 per share.
In addition, there are 9.69 outstanding shares held by former employees
that are subject to an ESOP-related repurchase option. The fair value of
all shares subject to the repurchase obligation is $220.
Note 16: Stock Option Plan
The Company has a fixed option plan under which the Company may grant
options that vest over five years to selected employees for up to 267,326
shares of common stock. The exercise price of each option is intended to
equal the fair value of the Company's stock on the date of grant. An
option's maximum term is ten years.
A summary of the status of the plan at December 31, 2002, 2001 and 2000,
and changes during the years then ended is presented below:
2002 2001 2000
------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- --------- ------- ---------
Outstanding, beginning
of year 141,476 $18.06 115,766 $18.20 112,436 $13.77
Granted 36,500 20.71 30,000 17.25 30,200 23.57
Exercised (9,000) 12.00 (2,520) 9.69 (26,870) 5.71
Expired -- (1,770) 25.81 --
------- ------ ------- ------ ------- ------
Outstanding, end of year 168,976 18.95 141,476 18.06 115,766 18.20
======= ====== ======= ====== ======= ======
Options exercisable, end
of year 82,956 16.96 70,126 15.37 56,846 13.61
======= ====== ======= ====== ======= ======
50
The fair value of options granted is estimated on the date of the grant
using an option-pricing model with the following weighted-average
assumptions:
2002 2001 2000
------- ------- -------
Dividend yields 4.4% 3.0% 3.0%
Volatility factors of expected market price
of common stock 17.0% 19.0% 19.0%
Risk-free interest rates 2.0% 6.5% 6.5%
Expected life of options 9 years 9 years 9 years
Weighted-average fair value of options
granted during the year $1.62 $4.45 $6.42
The following table summarizes information about stock options under the
plan outstanding at December 31, 2002:
Options
Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted-Average
Range of Exercise Number Remaining Weighted-Average Number Weighted-Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
----------------- ----------- ---------------- ---------------- ----------- ----------------
$ 9.63 to $13.63 49,276 3.23 years $12.50 49,276 $12.50
$17.25 to $21.50 75,500 8.61 years $19.41 9,600 $18.80
$23.25 to $28.00 44,200 6.49 years $25.35 24,080 $25.35
Note 17: Earnings Per Share
Earnings per share (EPS) were computed as follows (thousands, except per
share amounts):
Year Ended December 31, 2002
-------------------------------
Weighted-
Average Per Share
Income Shares Amount
------ ---------- ---------
Net income $6,531
Basic earnings per share
Income available to common
stockholders 6,531 3,088,976 $2.11
=====
Effect of dilutive securities
Stock options 27,926
----------
Diluted earnings per share
Income available to common
stockholders and assumed
conversions $6,531 $3,116,902 $2.10
====== ========== =====
Options to purchase 51,700 shares of common stock at $21.375 to $28.00 per
share were outstanding at December 31, 2002, but were not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares.
51
Year Ended December 31, 2001
-------------------------------
Weighted-
Average Per Share
Income Shares Amount
------ ---------- ---------
Net income $6,017
Basic earnings per share
Income available to common
stockholders 6,017 3,149,587 $1.91
=====
Effect of dilutive securities
Stock options 15,280
----------
Diluted earnings per share
Income available to common
stockholders and assumed
conversions $6,017 $3,164,867 $1.90
====== ========== =====
Options to purchase 54,700 shares of common stock at $24.77 per share were
outstanding at December 31, 2001, but were not included in the computation
of diluted EPS because the options' exercise price was greater than the
average market price of the common shares.
Year Ended December 31, 2000
-------------------------------
Weighted-
Average Per Share
Income Shares Amount
------ ---------- ---------
Net income $4,046
Basic earnings per share
Income available to common
stockholders 4,046 3,185,157 $1.27
Effect of dilutive securities
Stock options 21,350
----------
Diluted earnings per share
Income available to common
stockholders and assumed
conversions $4,046 $3,206,507 $1.26
====== ========== =====
Options to purchase 54,700 shares of common stock at $24.77 per share were
outstanding at December 31, 2000, but were not included in the computation
of diluted EPS because the options' exercise price was greater than the
average market price of the common shares.
52
Note 18: Business Acquisitions
On December 10, 2001, the Company acquired substantially all of the assets
and all of the deposits of Sabina Bank. The results of Sabina Bank's
operations have been included in the consolidated financial statements
since that date. Sabina Bank, located in Sabina, Ohio, was a subsidiary of
Premier Financial Bancorp, Inc. As a result of the acquisition, the Company
will have an opportunity to increase its deposit base and reduce
transaction costs. The Company also expects to reduce costs through
economies of scale.
The aggregate cash purchase price was $12.9 million.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition (thousands):
Cash and cash equivalents $15,511
Loans 30,639
Premises and equipment 1,618
Core deposits 3,051
Goodwill 3,625
Other assets 324
-------
Total assets acquired 54,768
-------
Deposits 41,773
Long-term debt --
Other liabilities 52
-------
Total liabilities acquired 41,825
-------
Net assets acquired $12,943
=======
The only significant intangible asset acquired, other than goodwill, was
the core deposit base, which has a useful life of approximately eight years
and will be amortized using an accelerated method. The $3,625,000 of
goodwill was assigned entirely to the banking segment of the business. Of
that total amount, $3,625,000 is expected to be deductible for tax
purposes.
The following pro forma disclosures, including the effect of the purchase
accounting adjustments, depict the results of operations as though the
merger had taken place at the beginning of each period.
Year Ended December 31
----------------------
2001 2000
------- -------
Net interest income $21,191 $20,640
Net income 6,105 4,256
Per share - combined:
Basic net income 1.94 1.34
Diluted net income 1.93 1.33
53
Note 19: Disclosures about Fair Value of Financial Instruments
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which involves significant
judgments by management and uncertainties. Fair value is the estimated
amount at which financial assets or liabilities could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. Because no market exists for certain of these financial
instruments and because management does not intend to sell these financial
instruments, the Company does not know whether the fair values shown below
represent values at which the respective financial instruments could be
sold individually or in the aggregate. (thousands):
December 31, 2002 December 31, 2001
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial assets
Cash and cash equivalents $ 25,810 $ 25,810 $ 28,437 $ 28,437
Available-for-sale securities 168,600 168,600 171,571 171,571
Held-to-maturity securities 44,490 45,630 44,430 44,226
Loans including loans held for sale, net 380,661 386,686 380,752 388,477
Stock in FRB and FHLB 7,598 7,598 6,914 6,914
Cash surrender value of life insurance 11,100 11,100 10,793 10,793
Interest receivable 4,113 4,113 4,974 4,974
Financial liabilities
Deposits 468,089 471,106 479,240 482,042
Short-term borrowings 19,240 19,240 22,055 22,055
Long-term debt 116,446 124,288 114,844 120,026
Interest payable 912 912 1,177 1,177
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 2002 and 2001. The
estimated fair value for cash and cash equivalents, interest-bearing
deposits, FRB and FHLB stock, cash surrender value of life insurance,
accrued interest receivable, demand deposits, savings accounts, NOW
accounts, certain money market deposits, short-term borrowings, and
interest payable is considered to approximate cost. The estimated fair
value for securities is based on quoted market values for the individual
securities or for equivalent securities. The estimated fair value for loans
receivable, including loans held for sale, net, is based on estimates of
the rate the Bank would charge for similar loans at December 31, 2002 and
2001 applied for the time period until the loans are assumed to reprice or
be paid. The estimated fair value for fixed-maturity time deposits as well
as borrowings is based on estimates of the rate the Bank would pay on such
liabilities at December 31, 2002 and 2001, applied for the time period
until maturity. The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of letters of credit and lines of credit is based on
fees currently charged for similar agreements or on the estimated cost to
terminate or otherwise settle the obligations with the counterparties at
the reporting date.
54
Note 20: Commitments and Credit Risk
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 and may require payment of a fee. Since a portion of the
commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. Each
customer's creditworthiness is evaluated on a case-by-case basis. The
amount of collateral obtained, if deemed necessary, is based on
management's credit evaluation of the counterparty. Collateral held varies,
but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate.
At December 31, 2002 and 2001, the Bank had outstanding commitments to
originate loans aggregating approximately $2,170,000 and $6,395,000,
respectively. The commitments extended over varying periods of time with
the majority being disbursed within a one-year period. Loan commitments at
fixed rates of interest amounted to $164,000 and $1,395,000 at December 31,
2002 and 2001, respectively, with the remainder at floating market rates.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loans to customers.
The Bank had total outstanding letters of credit amounting to $1,347,000
and $1,831,000, at December 31, 2002 and 2001, respectively, with terms
ranging from 30 days to 4 years.
Mortgage loans in the process of origination represent amounts that the
Bank plans to fund within a normal period of 60 to 90 days, some of which
are intended for sale to investors in the secondary market. Forward
commitments to sell mortgage loans are obligations to deliver loans at a
specified price on or before a specified future date. The Bank acquires
such commitments to reduce market risk on mortgage loans in the process of
origination and mortgage loans held for sale.
Total mortgage loans in the process of origination amounted to $398,000 and
$2,039,000 and mortgage loans held for sale amounted to $0 and $1,848,000,
at December 31, 2002 and 2001, respectively. Included in mortgage loans in
the process of origination were commitments to originate loans at fixed
rates of interest of $0 and $2,039,000 at December 31, 2002 and 2001,
respectively.
Lines of credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may
expire without being drawn upon, the total unused lines do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, commercial real estate and
residential real estate. Management uses the same credit policies in
granting lines of credit as it does for on-balance-sheet instruments.
At December 31, 2002, the Bank had granted unused lines of credit to
borrowers aggregating approximately $20,258,000 and $17,969,000 for
commercial lines and open-end consumers lines, respectively. At December
31, 2001, unused lines of credit to borrowers aggregated approximately
$23,086,000 for commercial lines and $16,603,000 for open-end consumer
lines.
At December 31, 2002, the Bank had approximately $7,018,000 on deposit with
the US Bank.
55
Note 21: Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial
position, results of operations and cash flows of the Company (thousands):
Condensed Balance Sheets
2002 2001
------- -------
Assets
Cash and due from banks $ 7,513 $ 1,056
Securities available for sale -- 5,992
Investment in common stock of banking subsidiary 57,995 44,791
Investment in nonbanking subsidiary 248 --
Other assets 370 2
------- -------
Total assets $66,126 $51,841
======= =======
Liabilities
Long-term debt $ 8,356 $ 216
Other liabilities 466 649
------- -------
Total liabilities 8,822 865
Equity From ESOP Shares 12,511 12,683
Stockholders' Equity 44,793 38,293
------- -------
Total liabilities and stockholders' equity $66,126 $51,841
======= =======
56
Condensed Statements of Income
2002 2001 2000
------- ------ ------
Income
Dividends from banking subsidiary $ 8,000 $4,000 $4,000
Other income 8 30 11
------- ------ ------
Total income 8,008 4,030 4,011
------- ------ ------
Expenses
Interest expense 215 23 40
Amortization of core deposit
intangibles and fair value
adjustments 4 -- --
Other expenses 4 39 64
------- ------ ------
Total expenses 223 62 104
------- ------ ------
Income Before Income Tax and
Equity in Undistributed Income
of Banking Subsidiary 7,785 3,968 3,907
Income Tax Expense (Benefit) (251) (15) 1
------- ------ ------
Income Before Equity in
Undistributed Income of Banking
Subsidiary 8,036 3,983 3,906
Equity in Undistributed Income of
Banking Subsidiary (1,505) 2,034 140
------- ------ ------
Net Income $ 6,531 $6,017 $4,046
======= ====== ======
57
Condensed Statements of Cash Flows
2002 2001 2000
-------- ------- -------
Operating Activities
Net income $ 6,531 $ 6,017 $ 4,046
Items not requiring (providing) cash 1,150 (1,985) (16)
-------- ------- -------
Net cash provided by (used in) by operating activities 7,681 4,032 4,030
-------- ------- -------
Investing Activities
Investment in banking subsidiary (12,500) -- --
Investment in nonbanking subsidiary (248) -- --
Purchases of securities available for sale -- (5,992) (6,169)
Proceeds from sale of securities available for sale 5,992 6,169 4,936
-------- ------- -------
Net cash provided by (used in) investing activities (6,756) 177 (1,233)
-------- ------- -------
Financing Activities
Cash dividends paid (2,848) (2,594) (2,356)
Proceeds from the issuance of subordinated debt 8,248 -- --
Repayment of long-term debt (108) -- --
Proceeds from stock options exercised 108 24 154
Sale/(Purchase) of treasury stock 132 (1,673) (221)
-------- ------- -------
Net cash provided by (used in) financing activities 5,532 (4,243) (2,423)
-------- ------- -------
Net Change in Cash and Cash Equivalents 6,457 (34) 374
Cash and Cash Equivalents at Beginning of Year 1,056 1,090 716
-------- ------- -------
Cash and Cash Equivalents at End of Year $ 7,513 $ 1,056 $ 1,090
======== ======= =======
58
Note 22: Selected Quarterly Data (Unaudited)
The following tables summarize selected quarterly results of operations for
2002 and 2001 (thousands, except per share amounts):
December 31, 2002 March June September December
------- ------- --------- --------
Interest and dividend income $10,446 $10,383 $10,242 $9,412
Interest expense 4,785 4,343 4,267 3,908
------- ------- ------- ------
Net interest income 5,661 6,040 5,975 5,504
Provision for loan losses 375 475 550 700
------- ------- ------- ------
Net interest income after provision for loan
losses 5,286 5,565 5,425 4,804
Noninterest income 1,959 2,306 2,156 2,580
Noninterest expense 5,288 5,533 5,370 5,968
------- ------- ------- ------
Income before income tax 1,957 2,338 2,211 1,416
Income tax expense 418 439 484 50
------- ------- ------ ------
Net income $ 1,539 $ 1,899 $ 1,727 $1,366
======= ======= ======= ======
Earnings per share
Basic $ 0.50 $ 0.62 $ 0.56 $ 0.44
Diluted 0.49 0.61 0.55 .044
Dividends per share 0.23 0.23 0.23 0.23
December 31, 2001 March June September December
------- ------- --------- --------
Interest and dividend income $10,714 $10,398 $10,448 $10,433
Interest expense 6,108 5,918 5,653 5,170
------- ------- ------- -------
Net interest income 4,606 4,480 4,795 5,263
Provision for loan losses 375 375 375 375
------- ------- ------- -------
Net interest income after provision for loan
losses 4,231 4,105 4,420 4,888
Noninterest income 1,704 2,172 1,999 2,112
Noninterest expense 4,175 4,404 4,689 4,870
------- ------- ------- -------
Income before income tax 1,760 1,873 1,730 2,130
Income tax expense 315 337 342 482
------- ------- ------- -------
Net income $ 1,445 $ 1,536 $ 1,388 $ 1,648
======= ======= ======= =======
Earnings per share
Basic $ 0.46 $ 0.49 $ 0.46 $ 0.54
Diluted 0.45 0.48 0.45 0.53
Dividends per share 0.21 0.21 0.21 0.21
59
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 Proxy Statement 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.
Item 14. Controls and Procedures
(a) The Company's principal executive officer and principal financial officer
have concluded, based upon their evaluation of the Company's disclosure controls
and procedures as of a date within 90 days of the filing of this report, that
the Company's disclosure controls and procedures are effective.
(b) There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
60
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements - See Index to Consolidated Financial Statements on
page 27 of this Form 10-K.
(2) Financial Statement Schedules - None
(3) Exhibits - See Exhibit Index at page 63 of this Form 10-K.
(b) On October 24, 2002, 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 January 23, 2003, the Company filed a Form 8-K with the Securities and
Exchange Commission regarding a fourth quarter earnings press release issued on
or about that date.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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.
10.3 NB&T Financial Group, Inc. Supplemental Executive Retirement Plan:
Incorporated by reference to Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 2002, Exhibit 10.1.
10.4 NB&T Financial Group, Inc. Supplemental Executive Retirement Plan
Participation Agreement - Timothy L. Smith: Incorporated by reference
to Quarterly Report on Form 10-Q for the Quarter Ended September 30,
2002, Exhibit 10.2.
10.5 NB&T Financial Group, Inc. Supplemental Executive Retirement Plan
Participation Agreement - Charles L. Dehner
21 Subsidiaries of NB&T Financial Group, Inc.
23.1 Consent of Independent Accountants - BKD, LLP
23.2 Consent of Independent Accountants - JD Cloud & Co., LLP
99.1 Safe Harbor Under the Private Securities Litigation Reform Act of 1995
99.2 Financial Statement Certification by CEO
99.3 Financial Statement Certification by CFO
99.4 Proxy Statement for 2003 annual meeting of shareholders; incorporated
by reference to definitive proxy statement to be filed on or before
March 25, 2003.
61
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 18, 2003 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/ Craig F. Fortin By /s/ Timothy L. Smith
- ---------------------------- -------------------------------------
Craig F. Fortin Timothy L. Smith
Senior Vice President and President, Chief Executive Officer
Chief Financial Officer and a Director
(Principal Accounting Officer)
Date March 18, 2003 Date March 18, 2003
By /s/ James W. Foland By /s/ Daniel A. DiBiasio
- ---------------------------- -------------------------------------
James W. Foland Daniel A. DiBiasio
Secretary and a Director Director
Date March 18, 2003 Date March 18, 2003
By /s/ S. Craig Beam By /s/ Janet M. Williams
- ---------------------------- -------------------------------------
S. Craig Beam Janet M. Williams
Director Director
Date March 18, 2003 Date March 18, 2003
By /s/ Georgia H. Miller By /s/ Robert A. Raizk
- ---------------------------- -------------------------------------
Georgia H. Miller Robert A. Raizk
Director Director
Date March 18, 2003 Date March 18, 2003
By /s/ Darleen M. Myers By /s/ G. David Hawley
- ---------------------------- -------------------------------------
Darleen M. Myers G. David Hawley
Director Director
Date March 18, 2003 Date March 18, 2003
By /s/ Charles L. Dehner
- ----------------------------
Charles L. Dehner
Director
Date March 18, 2003
62
CERTIFICATIONS
I, Timothy L. Smith, Chairman, President and Chief Executive Officer, certify
that:
1. I have reviewed this annual report on Form 10-K of NB&T Financial Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 18, 2003 /s/ Timothy L. Smith
-------------------------------------------------
Timothy L. Smith
Chairman, President and Chief Executive Officer
63
I, Craig F. Fortin, Senior Vice President and Chief Financial Officer, certify
that:
1. I have reviewed this annual report on Form 10-K of NB&T Financial Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 18, 2003 /s/ Craig F. Fortin
-------------------------------------------------
Craig F. Fortin
Senior Vice President and Chief Financial Officer
64