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

Show all filings for NB&T FINANCIAL GROUP INC



Quarterly Report

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

Results of Operations

Net income for the third quarter of 2013 was $1.1 million, or $.31 per share, compared to net income of $1.3 million, or $.37 per share, for the third quarter of 2012. Non-interest income was higher in the third quarter of 2012 due to three items: 1) gains of approximately $1 million realized on the sale of securities; 2) termination of the Bank's single-family FDIC loss share guarantee for approximately $405,000, and 3) realization of non-taxable income of approximately $359,000 on a bank-owned life insurance death benefit in excess of surrender value. These items were partially offset by a $1.5 million higher loan loss provision in the third quarter last year, compared to the same quarter this year. In addition, net income is down due to continued margin compression, partially offset by lower non-interest expenses. Net income for the first nine months of 2013 was $3.2 million, or $.94 per share, compared to $2.8 million, or $.81 per share, for the same period in 2012.

Net Interest Income

Net interest income was $5.1 million for the third quarter of 2013, compared to $5.4 million for the third quarter of 2012. Net interest margin decreased to 3.33% for the third quarter of 2013, compared to 3.42% for the same quarter last year. The net interest margin decreased primarily due to lower loan yields on new loans and continued repricing of variable-rate loans to lower rates due to the competitive market in this historically low interest-rate environment, as well as higher premium amortization on mortgage-related securities due to increased mortgage loan refinancing. Net interest income for the first nine months of 2013 was $15.6 million, compared to $16.4 million for the first nine months of 2012.

Provision for Loan Losses

The provision for loan losses for the third quarter of 2013 was $400,000, compared to $2.0 million in the same quarter last year. Net charge-offs were $319,000 in the third quarter of 2013, compared to $346,000 in the third quarter of 2012. Specific reserves on two large commercial relationships were the primary reason for the higher provision for loan losses in the third quarter of 2012. Year to date net charge-offs for 2013 were $716,000, compared to $2.1 million for the first nine months of 2012. The provision for loan losses for the nine months ended September 30, 2013 was increased to add specific loan reserves of approximately $1.2 million for one commercial loan, bringing the total specific reserve on this loan to $2.0 million. Non-performing loans were $8.3 million at September 30, 2013, compared to $12.4 million at September 30, 2012.

Non-interest Income

Total non-interest income was $2.1 million for the third quarter of 2013, compared to $4.0 million for the third quarter of 2012. The decrease is primarily due to the realization of approximately $1.0 million in securities sale gains in the third quarter last year. No securities were sold in the third quarter of 2013. In addition, the Company realized non-recurring income of $764,000 in the third quarter of 2012 related to the termination of the single-family FDIC loss share guarantee and the bank-owned life insurance death benefit. Non-interest income for the first nine months of 2013 was $7.4 million, compared to $8.4 million for the same period last year.

Non-interest Expense

Total non-interest expense was $5.5 million for the third quarter of 2013, compared to $5.9 million for the third quarter of 2012. The decline in expense is due to continued focus on expense reduction primarily in the areas of personnel and processing efficiency. In addition, net costs associated with the operation of other real estate have declined approximately 74%, or $176,000, compared to the same quarter last year due to a decline in other real estate owned balances from $2.2 million at September 30, 2012 to $1.4 million at September 30, 2013.

Income Taxes

The provision for income taxes for the third quarter of 2013 was $227,000, or 17.6% effective rate, compared to $257,000, or 16.8% effective rate, for the third quarter of 2012. The provision for income taxes for the first nine months of 2013 was $846,000, or 20.8% effective rate, compared to $657,000, or 19.1% effective rate, for the first nine months of 2012.

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Financial Condition

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

                               September 30,       December 31,            2013 Change
                                   2013                2012           Amount        Percent
Total assets                  $       645,410     $      651,075     $  (5,665 )        (0.9 )
Interest-bearing deposits              41,611             50,002        (8,391 )       (16.8 )
Federal funds sold                        440                422            18           4.3
Loans, net *                          398,416            397,169         1,247           0.3
Securities                            138,818            133,020         5,798           4.4
Demand deposits                       112,699            105,535         7,164           6.8
Savings, NOW, MMDA deposits           345,015            333,041        11,974           3.6
CD's $100 and over                     19,166             26,991        (7,825 )       (29.0 )
Other time deposits                    81,195             94,001       (12,806 )       (13.6 )
Total deposits                        558,075            559,568        (1,493 )        (0.3 )
Long-term borrowings                   14,310             15,310        (1,000 )        (6.5 )
Stockholders' equity                   68,127             70,820        (2,693 )        (3.8 )

* Excludes loans held for sale

At September 30, 2013, total assets were $645.4 million, a decrease of $5.7 million from December 31, 2012. Loans have increased $1.2 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, partially offset by increased loan payoffs in the commercial loan portfolio. 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.

Total deposit liabilities declined $1.5 million from December 31, 2012. The Company has experienced a decline in time deposits of approximately $20.6 million, largely offset by growth in transaction, savings and money market account of approximately $19.1 million 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. The Company continues to allow higher-priced deposits to leave based on its liquidity position and lower-rate reinvestment alternatives.

Allowance for Loan Losses

The Company's loan loss experience for the periods ended September 30, 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):

                                           September 30,           December 31,           September 30,
                                               2013                    2012                   2012
Loans accounted for on non-accrual
basis                                     $         8,273         $        9,815         $        12,179
Accruing loans which are past due 90
days                                                   30                    778                     247
Other real estate owned                             1,426                  1,327                   2,196

Total non-performing assets               $         9,729         $       11,920         $        14,622

Troubled debt restructurings,
accruing                                  $         2,726         $        2,382         $         2,416
Allowance to total loans                             1.46 %                 1.18 %                  1.53 %
Net charge-offs to average loans
(annualized)                                          .24 %                 1.06 %                   .72 %
Non-performing assets to total loans
and other real estate owned                          2.40 %                 2.96 %                  3.64 %

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.

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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 loan risk ratings and current unemployment rates.

Specific reserves increased to $2.7 million at September 30, 2013, compared to $1.4 million at December 31, 2012. Most of this increase is attributable to a $2.5 million working capital line secured by accounts receivable and inventory where the borrower's financial condition has weakened, and the reserve is based on the estimated discounted value of the accounts receivable not pledged to third parties and inventory securing the loan, resulting in increased specific reserves of $1.2 million in 2013.

As of September 30, 2013, there was $7.0 million in small business relationships on non-accrual. 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 nonaccrual loans were acquired from American National Bank and are covered under the FDIC loss share agreement. Nonaccrual residential real estate loans totaled $1.1 million, with the largest balance being $126,000. Non-accrual agricultural loans totaled $38,000, consumer loans totaled $70,000, and home equity credit loans totaled $70,000.

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 September 30, 2013 was 72.5%, compared to 71.9% at December 31, 2012 and 69.4% at September 30, 2012. Loans to total assets were 62.7% at September 30, 2013, compared to 61.8% at December 31, 2012 and 60.0% at September 30, 2012. At September 30, 2013, the Company had $54.0 million in interest-earning deposits. The Company has $138.8 million in available-for-sale securities that are readily marketable. Approximately 53.5% 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 96.6% 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 September 30, 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):

                                                  Actual               For Capital Adequacy Purposes            To Be Well Capitalized (1)
                                            Amount       Ratio             Amount                Ratio           Amount               Ratio
As of September 30, 2013
Total Risk-Based Capital (to
Risk-Weighted Assets)
Consolidated                               $ 79,942       19.22 %    $           33,275             8.0 %    $        41,594              10.0 %
Bank                                         75,751       18.23                  33,248             8.0               41,560              10.0
Tier I Capital (to Risk-Weighted Assets)
Consolidated                                 74,739       17.97                  16,638             4.0               24,956               6.0
Bank                                         70,548       16.98                  16,624             4.0               24,936               6.0
Tier I Capital (to Average Assets)
Consolidated                                 74,739       11.49                  26,022             4.0                  N/A               N/A
Bank                                         70,548       10.82                  26,069             4.0               32,587               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 Assets)
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

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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