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NBTF > SEC Filings for NBTF > Form 10-Q on 14-May-2013All Recent SEC Filings

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Quarterly Report

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Net income for the first quarter of 2013 was $1.0 million, or $.30 per share, compared to net income of $361,000, or $.11 per share, for the same period last year. Net income is up primarily due to a $1.2 million decrease in the loan losses provision this quarter, compared to the first quarter of 2012.

Net Interest Income

Net interest income was $5.4 million for the first quarter of 2013, compared to $5.6 million for the first quarter of 2012. The yields on earning assets decreased from 4.06% the same quarter last year to 3.84% for the current quarter. This drop exceeded the decrease in funding costs, which only fell to .30% this quarter from .49% for the same quarter last year. The declining rates on earning assets were offset by allowing certificates of deposit and money market accounts with higher costs to run-off and investing excess short-term funds in loans and higher yielding long-term securities. As a result, net interest margin increased to 3.50% for the first quarter of 2013, compared to 3.46% for the same quarter last year.

Provision for Loan Losses

The provision for loan losses for the first quarter of 2013 was $140,000, compared to $1.3 million in the same quarter last year. Net charge-offs dropped approximately 84% to $230,000 in the first quarter of 2013, compared to $1.4 million in the first quarter of 2012. Charge-off s in 2012 were higher primarily due to the write-off of one commercial loan for approximately $850,000. This reduction in net charge-offs reduced the historical loss experience applied to the loan portfolio, resulting in a lower quarterly year-over-year loan losses provision. Non-performing loans were $10.4 million at March 31, 2013, compared to $10.6 million at December 31, 2012.

Non-interest Income

Total non-interest income was $2.0 million for the first quarter of 2013, compared to $2.1 million for the first quarter of 2012. In the first quarter of 2013, the Company realized $36,000 in losses on the sale of one security, which had been previously considered other-than-temporarily impaired. Non-interest income is also down due to a reduction in other income for special processing services provided to one customer in 2012 and no longer provided in 2013.

Non-interest Expense

Total non-interest expense was $5.9 million for the first quarter of 2013, compared to $6.0 million for the first quarter of 2012. The decline in expense is due to continued focus on expense reduction primarily in the areas of personnel, reduced branch hours and processing efficiency. In January 2013, the Company closed its Parma branch due to low growth and increased costs associated with operating a branch outside our southwestern Ohio branch network. In addition, net costs associated with the operation of other real estate have declined approximately 22%, or $67,000, compared to the same quarter last year, due to a decline in other real estate owned balances from $3.5 million at March 31, 2012 to $1.9 million at March 31, 2013. Other costs increased over the same quarter last year due to severance payments associated with the Parma branch closing and higher collection and appraisal costs associated with problem loans.

Income Taxes

The provision for income taxes for the first quarter of 2013 was $282,000, or 21.7% effective rate, compared to $4,000, or 1.1% effective rate, for the first quarter of 2012. The higher effective tax rate for 2013 is primarily due to the increase in taxable income at the full 34% marginal rate.

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Financial Condition

The changes that have occurred in the Company's financial condition during 2013
are as follows (in thousands):

                                                                        2013 Change
                                 March 31,       December 31,
                                    2013             2012           Amount       Percent
   Total assets                  $  673,729     $      651,075     $ 22,654           3.5
   Interest-earning deposits         58,595             50,002        8,593          17.2
   Federal funds sold                   432                422           10           2.4
   Loans, net *                     403,148            397,169        5,979           1.5
   Securities                       144,156            133,020       11,136           8.4
   Demand deposits                  114,310            105,535        8,775           8.3
   Savings, NOW, MMDA deposits      348,757            333,041       15,716           4.7
   CD's $100 and over                23,530             26,991       (3,461 )       (12.8 )
   Other time deposits               90,752             94,001       (3,249 )        (3.5 )
   Total deposits                   577,349            559,568       17,781           3.2
   Long-term borrowings              15,310             15,310            0             0
   Stockholders' equity              70,290             70,820         (530 )        (.80 )

At March 31, 2013, total assets were $673.7 million, an increase of $22.7 million from December 31, 2012. Loans have increased $5.9 million from December 31, 2012, primarily due to decreased sales of fixed-rate mortgages in the secondary market, resulting in growth in residential mortgage balances of approximately $4.1 million. The Company started maintaining more fixed-rate mortgage loans in 2012, cognizant of the fact these loans have inherent interest rate risk, in order to invest excess funds at rates higher than those available in overnight funds and securities and to replace prepayments in the mortgage loan portfolio. Although the Company recognizes an increased exposure to interest rate risk if interest rates rise from current historic low levels, Commercial and industrial and commercial real estate loan balances have increased approximately $6.4 million since December 31, 2012, largely due to the addition of two large commercial real estate loan relationships in the first quarter. This growth was partially offset by seasonal declines in agricultural loan balances of approximately $7.1 million. Securities increased $11.1 million in the first quarter of 2013 with purchases of approximately $6.2 million in long-term municipal securities. The remaining growth was in shorter-term mortgage-backed securities.

Total deposit liabilities increased $17.8 million from December 31, 2012. The Company has experienced growth in transaction, savings and money market accounts and a decline in certificates of deposit as depositors have chosen to either keep their funds in more liquid deposits that offer comparable rates to shorter-term certificates of deposit or seek out longer-term, higher rate certificates elsewhere.

Allowance for Loan Losses

The Company's loan loss experience for the periods ended March 31, 2013 and 2012
is outlined in Note 4 of the financial statements. The following table sets
forth selected information regarding the Company's loan quality at the dates
indicated (in thousands):

                                                March 31,          December 31,          March 31,
                                                  2013                 2012                2012
Loans accounted for on non-accrual basis       $     9,097        $        9,815        $     9,647
Accruing loans which are past due 90 days            1,285                   778                327
Other real estate owned                              1,868                 1,327              3,500

Total non-performing assets                    $    12,250        $       11,920        $    13,474

Troubled debt restructurings, accruing         $     2,762        $        2,382        $     2,057
Allowance to total loans                              1.15 %                1.18 %             1.16 %
Net charge-offs to average loans
(annualized)                                           .23 %                1.06 %             1.41 %
Non-performing assets to total loans and
other real estate owned                               2.96 %                2.96 %             3.39 %

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The allowance is maintained to absorb losses in the portfolio. Management's determination of the adequacy of the allowance 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 allowance is below the level considered by management to be adequate to absorb possible loan losses, the provision for loan losses is increased. Loans deemed not collectible are charged off and deducted from the allowance. Recoveries on loans previously charged off are added to the allowance.

The Company allocates the allowance for loan losses to specifically classified loans and non-classified loans generally based on the one- and three-year net charge-off history. In assessing the adequacy of the allowance for loan losses, the Company considers three principal factors: (1) the one- and three-year rolling average charge-off percentage applied to the current outstanding balance by portfolio type; (2) specific allocations applied to individual loans estimated by management to have a potential loss; and (3) estimated losses attributable to current unemployment rates.

Specific reserves remained relatively unchanged at $1.5 million at March 31, 2013, compared to $1.4 million at December 31, 2012. The three-year rolling average charge-off percentage on commercial real estate loans also declined at March 31, 2013.

As of March 31, 2013, there was $7.5 million in small business relationships on nonaccrual. Approximately $3.2 million of this amount consisted of one relationship, all secured by commercial real estate or business assets. In addition, approximately $1.2 million of loans were acquired from ANB and are covered under the FDIC loss share agreement. Non-accrual residential real estate loans totaled $1.2 million, with the largest balance being $113,000. Non-accrual agricultural loans totaled $38,000, consumer loans totaled $90,000, and home equity credit loans totaled $194,000.

Liquidity and Capital Resources

Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as Company cash needs, are met. The Company manages liquidity on both the asset and liability sides of the balance sheet. The loan-to-deposit ratio at March 31, 2013 was 70.6%, compared to 71.9% at December 31, 2012 and 68.6% at March 31, 2012. Loans to total assets were 60.5% at March 31, 2013, compared to 61.8% at December 31, 2012 and 61.2% at March 31, 2012. At March 31, 2013, the Company had $58.6 million in interest-earning deposits. The Company has $144.2 million in available-for-sale securities that are readily marketable. Approximately 51.1% 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 95.9% core deposits, makes the Company less susceptible to large fluctuations in funding needs. The Company has the ability to borrow short-term funds from two correspondent banks and the Federal Reserve Bank. The Company also has both short- and long-term borrowing available through the Federal Home Loan Bank (FHLB). The Company has the ability to obtain deposits in the brokered certificate of deposit market to help provide liquidity.

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The Federal Reserve Board has adopted risk-based capital guidelines that assign risk weightings to assets and off-balance sheet items and also define and set minimum capital requirements (risk-based capital ratios). At March 31, 2013 and December 31, 2012, the Company had the following risk-based capital ratios, which are well above the regulatory minimum requirements (dollar amounts in thousands):

                                                                  For Capital  Adequacy            To Be Well  Capitalized
                                             Actual                      Purposes                            (1)
                                       Amount       Ratio          Amount           Ratio          Amount             Ratio
As of March 31, 2013
Total Risk-Based Capital (to
Risk-Weighted Assets)
Consolidated                          $ 79,868       19.08 %    $      33,481          8.0 %    $      41,851             10.0 %
Bank                                    72,936       17.44             33,454          8.0             41,817             10.0
Tier I Capital (to Risk-Weighted
Consolidated                            75,198       17.97             16,740          4.0             25,111              6.0
Bank                                    68,266       16.32             16,727          4.0             25,090              6.0
Tier I Capital (to Average Assets)
Consolidated                            75,198       11.20             26,851          4.0                N/A              N/A
Bank                                    68,266       10.22             26,708          4.0             33,386              5.0
As of December 31, 2012
Total Risk-Based Capital (to
Risk-Weighted Assets)
Consolidated                          $ 79,975       19.51 %    $      32,791          8.0 %    $      40,989             10.0 %
Bank                                    71,899       17.55             32,766          8.0             40,957             10.0
Tier I Capital (to Risk-Weighted
Consolidated                            75,215       18.35             16,396          4.0             24,593              6.0
Bank                                    67,139       16.39             16,383          4.0             24,574              6.0
Tier I Capital (to Average Assets)
Consolidated                            75,215       11.27             26,701          4.0                N/A              N/A
Bank                                    67,139       10.12             26,534          4.0             33,167              5.0

(1) The amounts and percentages set forth for the Bank are established by the prompt corrective action regulations of the Office of the Comptroller of the Currency. The amounts and percentages set forth for the Company are established by the Federal Reserve Board. The Bank Holding Company Act requires the Company to be well capitalized in order to remain a financial holding company.


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, 2012. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company's financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.

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Allowance for Loan Losses - The allowance for loan losses provides coverage for probable losses inherent in the Company's loan portfolio. Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of specific and expected losses, including volatility of default probabilities, collateral values, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and historical loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for loan losses relating to impaired loans is based on the loan's observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan's effective interest rate.

Regardless of the extent of the Company's analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customer's financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company's evaluation of risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.

Fair Value of Securities - The Company uses the Fair Value Measurements prescribed under the FASB Accounting Standards Codification to value its securities. The ASC defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The ASC also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

The fair value of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include U.S. Government agency securities, mortgage-backed securities, and obligations of political and state subdivisions. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means.

Goodwill and Other Intangibles- The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required by the "Intangibles - Goodwill & Other" topic of the FASB Accounting Standards Codification. Goodwill is subject, at a minimum, to annual tests for impairment. Testing includes evaluating the current market price of the stock versus book value, the current economic value of equity versus current book value, and recent market sales of financial institutions. Based on the review of all three factors, management has concluded goodwill is not impaired. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition.

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