NB&T Financial (NBTF) 10-Q 2003 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the quarterly period ended September 30, 2003

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the transition period from/to

NB&T FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

Ohio	31-1004998
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

48 N. South Street, Wilmington, Ohio	45177
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number: (513) 382-1441

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes  ¨  No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: As of November 3, 2003, 3,222,283 common shares were issued and outstanding.

1

NB&T FINANCIAL GROUP, INC.

September 30, 2003 Form 10-Q

Table of Contents

		Page
	PART I
Item 1:	Financial Statements	3
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Income
	Condensed Consolidated Statements of Cash Flows
	Notes to Condensed Consolidated Financial Statements
	Independent Accountants’ Report
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	17
Item 4:	Controls and Procedures	17
	PART II
Item 1:	Legal Proceedings	18
Item 2:	Changes in Securities and Use of Proceeds	18
Item 3:	Defaults Upon Senior Securities	18
Item 4:	Submission of Matters to a Vote of Security Holders	18
Item 5:	Other Information	18
Item 6:	Exhibits and Reports on Form 8-K	18
Signatures		19
Certifications		21

2

NB&T Financial Group, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands)	September 30, 2003			December 31, 2002
	(Unaudited)
Assets
Cash and due from banks	$	17,093		$	18,812
Interest-bearing demand deposits		12			10
Federal funds sold		8,973			6,988
Cash and cash equivalents		26,078			25,810
Securities - available-for-sale		168,433			168,600
Securities - held-to-maturity		38,687			44,490
Loans, net of allowance for loan losses of $4,545 and $4,010		403,212			380,661
Premises and equipment		14,172			14,832
Federal Reserve and Federal Home Loan Bank stock		7,806			7,598
Goodwill and other intangibles		7,219			7,584
Interest receivable and other assets		16,248			15,228
Total assets	$	681,855		$	664,803
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	50,991		$	52,273
Savings, NOW and Money Market		218,451			208,221
Time		188,891			207,595
Total deposits		458,333			468,089
Short-term borrowings		29,753			19,240
Long-term debt		133,714			116,446
Interest payable and other liabilities		2,791			3,724
Total liabilities		624,591			607,499
Commitments and Contingencies
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		9,630			9,270
Retained earnings		53,572			51,792
Unearned employee stock ownership plan (ESOP) shares		(1,623	)		(1,703	)
Accumulated other comprehensive income		480			2,064
Treasury stock; 596,667 and 596,418 shares at cost in 2003 and 2002		(5,795	)		(5,119	)
Total stockholders’ equity		57,264			57,304
Total liabilities and stockholders’ equity	$	681,855		$	664,803

See Notes to Condensed Consolidated Financial Statements

3

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Income

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share amounts)	2003		2002		2003		2002
	(Unaudited)				(Unaudited)
Interest and Dividend Income
Loans	$	6,558	$	7,321	$	19,981	$	22,043
Securities-Taxable		778		2,111		4,237		6,560
Securities-Tax-exempt		831		678		1,900		2,034
Federal funds sold and other		33		30		97		121
Dividends on Federal Home Loan and Federal Reserve Bank stock		82		88		242		251
Total interest and dividend income		8,282		10,228		26,457		31,009
Interest Expense
Deposits		1,521		2,622		5,475		8,711
Short-term borrowings		55		95		158		279
Long-term debt		1,597		1,550		4,718		4,405
Total interest expense		3,173		4,267		10,351		13,395
Net Interest Income		5,109		5,961		16,106		17,614
Provision for Loan Losses		1,289		550		2,316		1,400
Net Interest Income After Provision for Loan Losses		3,820		5,411		13,790		16,214
Non-interest Income
Trust income		218		243		635		710
Service charges and fees		878		750		2,519		2,036
ATM network fees		111		141		338		457
Insurance agency commissions		578		662		1,936		1,776
Net gains on sales of securities available-for-sale		—		—		907		34
Other		339		360		1,058		1,408
Total non-interest income		2,124		2,156		7,393		6,421
Non-interest Expense
Salaries and employee benefits		2,560		2,933		8,426		8,317
Net occupancy expense		305		288		989		879
Equipment and data processing expense		674		712		2,142		2,283
Professional fees		441		311		1,191		904
Marketing expense		138		165		469		563
State franchise tax		170		141		548		413
Amortization of intangibles		180		159		532		457
Other		664		648		2,037		2,313
Total non-interest expense		5,132		5,357		16,334		16,129
Income Before Income Tax		812		2,210		4,849		6,506
Provision for Income Taxes		2		483		811		1,341
Net Income	$	810	$	1,727	$	4,038	$	5,165
Basic Earnings Per Share	$	.26	$	.56	$	1.29	$	1.67
Diluted Earnings Per Share	$	.26	$	.55	$	1.27	$	1.66
Dividends Declared Per Share	$	.24	$	.23	$	.72	$	.69

See Notes to Condensed Consolidated Financial Statements

4

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows

	Nine Months Ended, September 30
(Dollars in thousands)	2003			2002
	(Unaudited)
Operating Activities
Net income	$	4,038		$	5,165
Items not requiring (providing) cash
Depreciation and amortization		1,851			1,407
Provision for loan losses		2,316			1,400
Amortization of premiums and discounts on securities		1,604			545
Net realized (gains) losses on available-for-sale securities		(907	)		(34	)
FHLB stock dividends		(208	)		(232	)
Net change in:
Loans held for sale		(328	)		586
Other assets and liabilities		(936	)		737
Net cash provided by operating activities		7,430			9,574
Investing Activities
Purchases of available-for-sale securities		(146,705	)		(103,833	)
Purchase of Federal Reserve Bank stock		-0-			(135	)
Proceeds from sales of available-for-sale securities		34,550			2,459
Proceeds from maturities of available-for-sale securities		109,221			100,606
Proceeds from maturities of held-to-maturity securities		5,805			-0-
Net change in loans		(24,539	)		(6,060	)
Purchase of premises and equipment		(720	)		(2,650	)
Proceeds from sales of premises and equipment		57			110
Net cash (used) in investing activities		(22,331	)		(9,503	)
Financing Activities
Net change in:
Deposits		(9,756	)		(7,061	)
Short-term borrowings		10,513			5,661
Proceeds from trust preferred securities		-0-			8,000
Proceeds from FHLB advances		20,000			-0-
Repayment of FHLB advances		(2,732	)		(1,707	)
Cash dividends		(2,329	)		(2,214	)
Purchase of treasury shares		(1,050	)		-0-
Proceeds from exercise of stock options		523			24
Net cash provided by financing activities		15,169			2,703
Increase in Cash and Cash Equivalents		268			2,774
Cash and Cash Equivalents, Beginning of Year		25,810			28,437
Cash and Cash Equivalents, End of Period	$	26,078		$	31,211

See Notes to Condensed Consolidated Financial Statements

5

NB&T Financial Group, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2003

(Unaudited)

Note 1: Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q. The Form 10-Q does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Only material changes in financial condition and results of operations are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The consolidated balance sheet as of December 31, 2002 has been derived from the audited consolidated balance sheet of that date.

In the opinion of management, the condensed consolidated financial statements contain all adjustments necessary to present fairly the financial condition of NB&T Financial Group, Inc. as of September 30, 2003, and December 31, 2002, and the results of its operations for the three- and nine-month periods and cash flows for the nine months ended September 30, 2003 and 2002. The results of operations for the interim periods reported herein are not necessarily indicative of results of operation to be expected for the entire year. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report and Form 10-K for the year ended December 31, 2002 filed with the Commission.

Stock Options

The Company accounts for its stock option 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):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Net income, as reported	$	810		$	1,727		$	4,038		$	5,165
Less: Total stock-based employee compensation determined under the fair value based method, net of income taxes		(18	)		(18	)		(56	)		(53	)
Pro forma net income	$	792		$	1,709		$	3,982		$	5,112
Earnings per share:
Basic – as reported	$	.26		$	.56		$	1.29		$	1.67
Basic – pro forma	$	.25		$	.55		$	1.27		$	1.66
Diluted – as reported	$	.26		$	.55		$	1.27		$	1.66
Diluted – pro forma	$	.25		$	.55		$	1.26		$	1.64

6

NB&T Financial Group, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2003

(Unaudited)

Note 2: Securities

The amortized cost and approximate fair values of securities are as follows (thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
September 30, 2003:
Available-for-Sale Securities:
U.S. government agencies	$	60,569	$	367	$	280	$	60,656
Mortgage-backed securities		91,355		896		561		91,690
State and political subdivisions		7,809		279		0		8,088
Other securities		7,974		25		0		7,999
	$	167,707	$	1,567	$	841	$	168,433
Held-to-Maturity Securities:
State and political subdivisions	$	38,687	$	1,198	$	63	$	39,822
December 31, 2002:
Available-for-Sale Securities:
U.S. government agencies	$	44,315	$	339	$	0	$	44,654
Mortgage-backed securities		104,572		2,531		3		107,100
State and political subdivisions		8,576		265		0		8,841
Other securities		8,010		8		13		8,005
	$	165,473	$	3,143	$	16	$	168,600
Held-to-Maturity Securities:
State and political subdivisions	$	44,490	$	1,216	$	76	$	45,630

Note 3: Loans

Categories of loans include (thousands):

	September 30, 2003			December 31, 2002
Commercial and industrial	$	91,115		$	108,513
Agricultural		24,208			20,857
Real estate construction		10,973			7,282
Commercial real estate		34,870			28,179
Residential real estate		155,602			141,417
Consumer		87,239			74,533
Other		4,124			4,247
Total loans		408,131			385,028
Less
Net deferred loan fees, premiums and discounts		(374	)		(357	)
Allowance for loan losses		(4,545	)		(4,010	)
Net loans	$	403,212		$	380,661

7

NB&T Financial Group, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2003

(Unaudited)

Note 3: Loans (continued)

Activity in the allowance for loan losses was as follows (thousands):

	Nine Months Ended September 30,
	2003			2002
Balance, beginning of year	$	4,010		$	3,810
Provision for loan losses		2,316			1,400
Recoveries		403			245
Charge-offs		(2,184	)		(1,651	)
Balance, end of period	$	4,545		$	3,804

Impaired loans totaled $3,878,000 and $4,214,000 at September 30, 2003 and December 31, 2002, respectively. An allowance for loan losses of $1,163,000 and $1,542,000 relates to impaired loans of $3,072,000 and $4,196,000 at September 30, 2003 and December 31, 2002, respectively. At September 30, 2003 and December 31, 2002, impaired loans of $806,000 and $18,000 had no related allowance for loan losses.

At September 30, 2003 and December 31, 2002, accruing loans delinquent 90 days or more totaled $266,000 and $1,391,000, respectively. Non-accruing loans at September 30, 2003 and December 31, 2002 were $5,761,000 and $4,734,000, respectively.

Note 4: Commitments

Outstanding commitments to extend credit as of September 30, 2003 totaled $46,861,000. Standby letters of credit as of September 30, 2003 totaled $840,000.

Note 5: Income Taxes

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Computed at the statutory rate (34%)	$	276		$	751		$	1,649		$	2,212
Increase (decrease) resulting from:
Tax exempt interest		(194	)		(212	)		(599	)		(635	)
ESOP dividend		(41	)		0			(123	)		0
Bank owned life insurance		(45	)		(44	)		(135	)		(221	)
Other		6			(12	)		19			(15	)
Actual tax expense	$	2		$	483		$	811		$	1,341

8

NB&T Financial Group, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2003

(Unaudited)

Note 6: Earnings Per Share

The factors used in the earnings per share computation were as follows (thousands, except share and per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2003		2002		2003		2002
Numerator:
Net income	$	810	$	1,727	$	4,038	$	5,165
Denominator:
Weighted-average common shares outstanding (basic)		3,132,344		3,086,331		3,135,985		3,085,933
Effect of stock options		30,391		27,659		31,449		27,840
Weighted-average common shares outstanding (diluted)		3,162,735		3,113,990		3,167,434		3,113,412
Earnings per share:
Basic	$	.26	$	.56	$	1.29	$	1.67
Diluted	$	.26	$	.55	$	1.27	$	1.66

For the three months ended September 30, 2003 and 2002, stock options covering 11,000 and 73,600 shares of common stock were not considered in computing earnings per share, as the exercise prices exceeded fair market value and, thus, were not dilutive. For the nine months ended September 30, 2003 and 2002, stock options covering 49,200 and 73,600 shares of common stock were not considered in computing earnings per share, as they were not dilutive.

Note 7: Subsequent Events

On October 3, 2003, NB&T Financial Group, Inc. announced that it is undertaking several initiatives designed to lower the Company’s non-interest expense by closing three of its banking offices and reducing its workforce. The Bank’s Waynesfield office in Auglaize County will be closed and its customers will be served by the Bank’s Ada, Ohio office. The Washington Court House office, which is an in-store branch in Wal-Mart, will be closed and its customers will be served by the Bank’s Sabina office. The third location is the Georgetown Courthouse Square office, which will be served by the Bank’s other Georgetown location. The office closings are subject to regulatory approval.

9

Independent Accountants’ Report

Board of Directors

NB&T Financial Group, Inc.

Wilmington, Ohio

We have reviewed the accompanying condensed consolidated balance sheet of NB&T Financial Group, Inc. as of September 30, 2003 and the related condensed consolidated statements of income for the three and nine month periods and cash flows for the nine-month periods ended September 30, 2003 and 2002. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002 and the related consolidated statements of income, retained earnings and cash flows for the year then ended (not presented herein), and in our report dated February 5, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

BKD,LLP

Cincinnati, Ohio

October 14, 2003

10

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Net income for the third quarter of 2003 was $810,000, a decrease of $917,000, or 53.1%, from the third quarter of 2002 net income of $1.73 million. Net income per share-basic was $.26 for the third quarter of 2003, compared to $.56 per share for the third quarter of 2002, a decrease of 53.6%. Return on average equity and return on average assets for the third quarter of 2003 were 5.46% and 0.47%, respectively, compared to 12.42% and 1.01% for the same period in 2002. Net income for the first nine months of 2003 was $4.04 million, a decrease of $1.13 million, or 21.8%, from the net income of $5.17 million for the first nine months of 2002. Net income per share-basic was $1.29 for the first nine months of 2003, compared to $1.67 per share for the first nine months of 2002, a decrease of 22.8%. Return on average equity and return on average assets for the first nine months of 2003 were 9.25% and 0.78%, respectively, compared to 13.12% and 1.02% for the same period in 2002.

Net Interest Income

Net interest income was $5.11 million for the third quarter of 2003 and $16.11 million for the first nine months of 2003, a decrease of $852,000 and $1.51 million respectively, compared to the same periods last year. Interest income totaled $8.28 million for the third quarter of 2003, a decrease of 19.00% from $10.23 million during the same period last year. Interest income for the first nine months of 2003 totaled $26.46 million, a decrease of 14.7% from $31 million during the same period last year. Although average loans outstanding for the third quarter and the first nine months increased 3.51% and 2.55%, compared to the prior year, the effect of the decline in their average yields exceeded the effect of those gains. The yield on average loans decreased from 7.46% in the third quarter of 2002 to 6.46% in the third quarter of 2003 while the yield on average loans decreased from 7.62% for the first nine months of 2002 to 6.74% for the same period in 2003. The tax-equivalent yield on average securities decreased from 5.33% for the third quarter last year to 3.38% for the third quarter of this year, and the tax-equivalent yield on average securities decreased from 5.58% for the first nine months of 2002 to 4.04% for the same period this year. The decline in the securities yield is due to increased prepayments on mortgage backed securities and reinvestment of called and matured bonds at lower rates. A decrease in interest expense of 25.6% to $3.17 million during the third quarter of 2003 from $4.27 million during the same period last year offset most of the decrease in the third quarter’s interest income. Similarly, a decrease in interest expense of 22.7% to $10.35 million during the first nine months of 2003 from $13.40 million during the same period last year offset most of the decrease in year-to-date interest income. Average interest-bearing liabilities for the third quarter increased 0.57% from last year to $575.2 million, and their cost decreased from 2.96% during the third quarter of last year to 2.19% in the third quarter of this year. Average interest-bearing liabilities for the first nine months of 2003 increased 0.80% from last year to $577.3 million, and their cost decreased from 3.13% to 2.40%. Tax-equivalent net interest margin decreased to 3.30% for the third quarter of this year from 3.91% for the third quarter of last year while the tax-equivalent net interest margin decreased to 3.50% for the first nine months of 2003 from 3.92% for the same period last year.

11

Provision for Loan Losses

The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the estimated probable losses inherent in the Bank’s loan portfolio at each balance sheet date. The provision for loan losses increased 134.4% to $1.29 million during the third quarter of 2003 from $550,000 during the third quarter of last year. For the first nine months of 2003, the provision increased 65.4% to $2.32 million from $1.40 million for the same period last year. The higher provision for loan losses for the three and nine months ended September 30, 2003 was attributable to two factors. First, net charge-offs were $802,000, or 0.79% (annualized), and $1.78 million, or 0.60% (annualized), for the three and nine months ended September 30, 2003, compared to $552,000, or 0.56% (annualized), and $1.40 million, or 0.49% (annualized), for the same periods in 2002. Secondly, management increased the specific reserve against a relationship based on reappraisal of collateral securing the loans. Weakness in the local economy has had a negative impact on the value of income-producing collateral securing certain loans.

Non-interest Income

Non-interest income, excluding gains on sales of securities, was $2.12 million for the third quarter of 2003, a decrease of 1.5% over the $2.16 million earned in the third quarter of 2002. Non-interest income, excluding gains on sales of securities, was $6.49 million for the first nine months of 2003, an increase of 1.6% over the $6.39 million in the same period in 2002. Service charges and fees increased 17.1% from the third quarter last year and 23.7% from the first nine months of last year due to increases in overdraft fees and debit card revenue. In August 2002, the Company introduced the Overdraft Honor program that aids customers by paying more and returning fewer overdraft checks. Insurance agency commissions decreased 12.7% in the third quarter of 2003 but increased 9% in the first nine months of 2003, compared to the same periods last year, due to increased sales of annuity products. These revenue increases were partially offset by decreases in Trust and ATM network fees and income from bank-owned life insurance. Trust income decreased 10.2% from the third quarter of last year and 10.5% from the first nine months of last year as a result of market value decreases in the accounts managed. ATM network fees decreased 21.5% from the third quarter of last year and 26.2% from the first nine months of last year as a result of fewer units in operation during 2003 compared to the same periods in 2002. Other income decreased primarily due to a decrease in BOLI income of $254,000 from 2002 to 2003 as a result of a death benefit claim made in May 2002.

Security gains for the first nine months of 2003 totaled $907,000, resulting from the sale of $34.5 million in mortgage-backed securities and U.S. agency notes.

Non-interest Expense

Non-interest expense was $5.13 million for the third quarter of 2003, compared to $5.36 million for the third quarter of 2002. Salaries and employee benefits expense declined $373,000 in the third quarter from the same quarter last year due to reductions in employee bonus incentive plans for the current year. For the first nine months of 2003, non-interest expense was $16.3 million, compared to $16.1 million for the same period in 2002. The increase occurred primarily due to increases in salaries and benefits expense. The average number of full-time equivalent employees has increased to 272 for the nine months ended September 30, 2003, from 269 for the same period in 2002. In addition, health care and retirement benefit expenses, including the 401(k) and employee stock ownership plans, were higher for the nine months ended September 30, 2003, compared to the same period last year.

Income Taxes

The provision for income taxes for the third quarter of 2003 was $2,000, compared to $483,000 for the same period in 2002. The provision for income taxes for the first nine months of 2003 was $811,000, compared to $1.34 million for the same period last year. The effective tax rate for the three months ended and nine months ended September 30, 2003 was .25% and 16.7%, respectively, compared to 21.9% and 20.6% for the same periods in 2002. The decrease in the effective tax rate in the third quarter is due to tax-exempt income and the ESOP dividends paid tax deduction exceeding taxable income for the quarter. The decrease in the effective tax rate for the first nine months of 2003, compared to the prior year, is due to certain tax exemptions and deductions not being fully recognized until the fourth quarter of 2002.

12

Financial Condition

The changes that have occurred in NB&T Financial Group, Inc.’s financial condition during 2003 are as follows (in thousands):

	September 30 2003		December 31 2002		Amount			Percent
Total Assets	$	681,855	$	664,803	$	17,052		2.6
Federal Funds Sold		8,973		6,988		1,985		28.4
Loans		407,757		384,671		23,086		6.0
Securities		207,120		213,090		(5,970	)	(2.8	)
Demand deposits		50,991		52,273		(1,282	)	(2.5	)
Savings, NOW, MMDA deposits		218,451		208,221		10,230		4.9
CD’s $100,000 and over		39,517		42,633		(3,116	)	(7.3	)
Other time deposits		149,374		164,962		(15,588	)	(9.4	)
Total deposits		458,333		468,089		(9,756	)	(2.1	)
Short-term borrowing		29,753		19,240		10,513		54.6
Long-term borrowing		133,714		116,446		17,268		14.8
Stockholders Equity		57,264		57,304		(40	)	(0.1	)

At September 30, 2003, total assets were $681.9 million, an increase of $17.1 million from December 31, 2002. The increase is primarily attributable to an increase in the loan portfolio of $23.1 million. The loan growth was funded by increases in repurchase agreements and Federal Home Loan Bank advances and runoff in the securities portfolio. Deposits decreased $9.8 million during the year primarily in time deposits less than $100,000. Stockholders’ equity decreased $40,000 during the year to $57.3 million due to reduced earnings and a decrease in other comprehensive income of $1.6 million due to a change in market value of securities available for sale.

Average total assets for the third quarter of 2003 increased 1.1% to $687.5 million from the third quarter of 2002. Average total loans increased to $403.7 million, an increase of 3.5% from the same quarter of last year. The commercial loan average grew $5.8 million, an increase of 3.3%, and the personal loan average grew $7.8 million, an increase of 10.6%. Commercial and industrial lending to small to mid-sized companies continues to be an area of growth for the Company, and the Bank has increased its efforts to originate automobile loans through its dealer network. Real estate loans remained relatively unchanged at $110.9 million for the third quarter of 2003. The securities portfolio average has decreased $8.6 million from the third quarter of 2002 to $222.6 million. During the first nine months of 2003, the Company has purchased $146.7 million in agency notes and mortgage-backed securities, $30.0 million of which was leveraged with $20 million in Federal Home Loan Bank advances. In that same time period, $34.5 million in securities were sold at a gain of $907,000, $67.6 million in bonds were called and approximately $47.4 million in payments on mortgage-backed securities were received.

Average total deposits decreased $11.2 million from the third quarter of 2002 to $411.7 million. Average small certificates of deposit decreased $19.4 million, or 11.3%, as the Company reduced its cost of funds and customers continued to seek out higher rates of return. Average large-dollar certificates increased $5.2 million, or 13.8%, and average short-term borrowings increased $1.9 million, or 6.9%, from the third quarter of last year due to increased public fund balances. Average Federal Home Loan Bank borrowings increased $12.9 million, or 11.4%, due to the Company leveraging security purchases in the first quarter with an additional $20 million in fixed-rate advances.

13

Allowance for Loan Losses

The following table is a summary of the Company’s loan loss experience for the periods ended September 30, 2003 and 2002:

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
Balance at beginning of period	$	4,058		$	3,806		$	4,010		$	3,810
Charge-offs:
Commercial and industrial		(236	)		(198	)		(565	)		(419	)
Commercial real estate		(21	)		(30	)		(68	)		(31	)
Agricultural		(129	)		(41	)		(204	)		(53	)
Residential real estate		(273	)		(36	)		(372	)		(134	)
Consumer		(244	)		(350	)		(974	)		(1,006	)
Other		—			—			(1	)		(8	)
Total charge-offs		(903	)		(655	)		(2,184	)		(1,651	)
Recoveries:
Commercial and industrial		42			20			190			44
Commercial real estate		1			—			3			—
Agricultural		1			10			14			10
Residential real estate		4			—			12			2
Consumer		53			73			184			189
Other		—			—			—			—
Total recoveries		101			103			403			245
Net charge-offs		(802	)		(552	)		(1,781	)		(1,406	)
Provision for loan losses		1,289			550			2,316			1,400
Balance at end of period	$	4,545		$	3,804		$	4,545		$	3,804

The following table sets forth selected information regarding the Company’s loan quality at the dates indicated (in thousands):

	September 30 2003			December 31 2002			September 30 2002
Loans accounted for on non-accrual basis	$	5,761		$	4,734		$	4,205
Accruing loans which are past due 90 days		266			1,391			1,825
Renegotiated loans		0			0			0
Other real estate owned		312			226			260
Total non-performing assets	$	6,339		$	6,351		$	6,290
Ratios:
Allowance to total loans		1.11	%		1.04	%		.98	%
Net charge-offs to average loans (annualized)		.60	%		0.49	%		.49	%
Non-performing assets to total loans and other real estate owned		1.55	%		1.65	%		1.62	%

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.

14

The Company allocates the allowance for loan losses to specifically classified loans and non-classified loans generally based on the three-year net charge-off history. In assessing the adequacy of the allowance for loan losses, the Company considers three principal factors: (1) the three-year average charge-off percentage applied to the current outstanding balance by portfolio type; (2) a 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.

As of September 30, 2003, there were $3.7 million in thirty non-accrual small business relationships. The majority of this amount consisted of two relationships, one of which is $1.2 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 $1.1 million and is in the hotel business, which is in the process of liquidation.

Non–accrual residential real estate loans consisted of twenty-three loans that total $1.5 million, with the largest balance being $185,300. Non-accrual personal loans consisted of eleven loans that totaled $189,900, and home equity credit lines consisted of 8 loans totaling $316,300.

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, 2003, was 89%, compared to 82.3% at the same date in 2002. Loans to total assets were 59.8% at the end of the third quarter of 2003, compared to 57% at the same time last year. Management strives to keep this ratio below 70%. Of the total securities portfolio, 81.3% consists of available-for-sale securities that are readily marketable. Approximately 88.2% 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 91.4% core deposits, makes the Company less susceptible to large fluctuations in funding needs. The Company has short-term borrowing lines of credit with several correspondent banks. The Company also has both short- and long-term borrowing available through the Federal Home Loan Bank (FHLB). The Company has the ability to obtain deposits in the brokered certificate of deposit market to help provide liquidity to fund loan growth.

The Federal Reserve Board has adopted risk-based capital guidelines that assign risk weightings to assets and off-balance sheet items and also define and set minimum capital requirements (risk-based capital ratios). Bank holding companies must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios of 8%, 4% and 3%, respectively. At September 30, 2003, NB&T Financial Group, Inc. had a total risk-based capital ratio of 14.45%, a Tier 1 risk-based capital ratio of 13.40%, and a Tier 1 leverage ratio of 8.37%.

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.

15

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.

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

Accounting for Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, which amends SFAS No. 123, “Accounting for Stock-Based Compensation”. This statement provides the alternative methods of transition for a voluntary change to a fair-value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The expanded annual disclosure requirements and the transition provisions are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. SFAS No. 148 is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

Accounting Guarantees of Indebtedness of Others

In November 2002, the FASB issued Financial Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others”. FIN 45 requires guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing a guarantee, and also expands the related disclosures. The provisions of initial recognition are effective for guarantees issued or modified after December 31, 2002. Management believes that the adoption of FIN 45 will not have a significant impact on the Company’s consolidated financial statements.

Consolidation of Variable Interest Entities

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities”. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the

16

variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns, or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. FIN 46 is not expected to have a material effect on the Company’s consolidated financial statements.

Derivative Instruments and Hedging Activities

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain embedded derivative, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. This Statement amends SFAS No. 133 to reflect the decisions made as part of the Derivatives Implementation Group (DIG) and in other FASB projects or deliberations. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements.

Financial Instruments with Characteristics of Both Liabilities and Equity

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. This Statement establishes standards for how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to interest rate risk, exchange rate risk, equity price risk and commodity price risk. The Company does not maintain a trading account for any class of financial instrument, and is not currently subject to foreign currency exchange rate risk, equity price risk or commodity price risk. The Company’s market risk is composed primarily of interest rate risk.

Techniques used to measure interest rate risk include both interest rate gap management and simulation modeling that measures the effect of rate changes on net interest income and market value of equity under different rate scenarios. At June 30, 2003, the Company’s simulation model indicated the twelve-month cumulative gap as a percent of total assets was a positive 8.2%, compared to a positive 15.6% at December 31, 2002. Also, similar to the results at year- end, June 30, 2003 results indicate a decreasing yield on interest-earning assets, the cost of interest-bearing liabilities, and net interest margin. This position could have a negative effect on projected net interest income over the next twelve months. Currently, the Company is in the process of updating its simulation model as of September 30, 2003. Based on preliminary information, however, the Company does not believe that its market risk changed significantly between June 30, 2003 and September 30, 2003.

Item 4 – Controls and Procedures

The Company’s principal executive officer and principal financial officer have concluded, based upon their evaluation of the Company’s disclosure controls and procedures, that the Company’s disclosure controls and procedures were effective as of September 30, 2003. There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2003, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

17

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Not applicable

Item 2 – Changes in Securities and Use of Proceeds

Not applicable

Item 3 – Defaults Upon Senior Securities

Not applicable

Item 4 – Submission of Matters to a Vote of Security Holders

Not applicable

Item 5 – Other Information

Not applicable

Item 6 – Exhibits and Reports on Form 8-K

(a) Exhibits:

15	Accountants’ acknowledgement.
31.1	Certification by CEO.
31.2	Certification by CFO.
32.1	Financial statements certification by CEO.
32.2	Financial statements certification by CFO.
99	Safe harbor under the Private Securities Litigation Reform Act of 1995.

(b) Filings on Form 8-K:

The Company filed a Form 8-K with the Securities and Exchange Commission on July 17, 2003 regarding a press release announcing the results of operations for the second quarter of 2003.

The Company filed a Form 8-K with the Securities and Exchange Commission on September 16, 2003 regarding a press release announcing declaration of its third quarter dividend.

18

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NB&T FINANCIAL GROUP, INC.

Date: November 5, 2003	/s/ Craig F. Fortin
	Craig F. Fortin Senior Vice President and Chief Financial Officer (Principal Financial Officer)

19