NB&T Financial (NBTF) 10-Q 2005 Q2 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 June 30, 2005

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: (937) 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 August 5, 2005, 3,231,263 common shares were issued and outstanding.

NB&T FINANCIAL GROUP, INC.

June 30, 2005 Form 10-Q

Table of Contents

PART I
		Page
Item 1:	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
	Report of Independent Registered Accounting Firm	10
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	16
Item 4:	Controls and Procedures	16
Part II
Item 1:	Legal Proceedings	17
Item 2:	Changes in Securities and Use of Proceeds	17
Item 3:	Defaults Upon Senior Securities	17
Item 4:	Submission of Matters to a Vote of Security Holders	17
Item 5:	Other Information	17
Item 6:	Exhibits and Reports on Form 8-K	17
Signatures		18
Index to Exhibits		19

2

NB&T Financial Group, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands)	June 30, 2005			December 31, 2004
	(Unaudited)
Assets
Cash and due from banks	$	13,223		$	13,248
Interest-bearing demand deposits		395			563
Federal funds sold		1,349			16,240
Cash and cash equivalents		14,967			30,051
Securities - available-for-sale		180,578			169,745
Loans, net of allowance for loan losses of $4,067 and $4,212		404,808			398,627
Premises and equipment		13,946			14,096
Federal Reserve and Federal Home Loan Bank stock		8,350			8,176
Earned income receivable		3,706			3,393
Goodwill and other intangibles		6,834			6,969
Bank-owned life insurance		12,388			12,150
Other assets		2,772			2,116
Total assets	$	648,349		$	645,323
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	53,007		$	58,451
Savings, NOW and Money Market		201,339			207,900
Time		191,424			186,242
Total deposits		445,770			452,593
Short-term borrowings		28,091			18,023
Long-term debt		110,371			111,673
Interest payable and other liabilities		4,895			4,433
Total liabilities		589,127			586,722
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		9,895			9,828
Retained earnings		55,408			54,688
Unearned employee stock ownership plan (ESOP) shares		(1,243	)		(1,337	)
Accumulated other comprehensive income		(76	)		225
Treasury stock; 587,687 and 591,887 shares at cost in 2005 and 2004		(5,762	)		(5,803	)
Total stockholders’ equity		59,222			58,601
Total liabilities and stockholders’ equity	$	648,349		$	645,323

See Notes to Condensed Consolidated Financial Statements

3

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Income

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands, except per share amounts)	2005		2004		2005		2004
	(Unaudited)				(Unaudited)
Interest and Dividend Income
Loans	$	6,327	$	6,231	$	12,387	$	12,511
Securities-taxable		1,189		1,203		2,288		2,359
Securities-tax-exempt		478		483		951		1,077
Federal funds sold and other		73		23		239		53
Dividends on Federal Home Loan and Federal Reserve Bank stock		103		83		196		165
Total interest and dividend income		8,168		8,023		16,061		16,165
Interest Expense
Deposits		1,647		1,342		3,168		2,684
Short-term borrowings		165		47		340		95
Long-term debt		1,459		1,545		2,897		3,104
Total interest expense		3,271		2,934		6,405		5,883
Net Interest Income		4,897		5,089		9,656		10,282
Provision for Loan Losses		125		450		200		900
Net Interest Income After Provision for Loan Losses		4,772		4,639		9,456		9,382
Non-interest Income
Trust income		236		257		517		510
Service charges and fees		831		887		1,577		1,683
ATM network fees		57		87		113		168
Insurance agency commissions		627		649		1,379		1,313
Net gains on sales of securities		7		0		7		527
Other		338		282		622		593
Total non-interest income		2,096		2,162		4,215		4,794
Non-interest Expense
Salaries and employee benefits		2,884		2,832		5,761		5,676
Net occupancy expense		455		412		910		868
Equipment and data processing expense		719		719		1,359		1,516
Professional fees		392		346		781		681
Marketing expense		175		95		282		217
State franchise tax		188		167		378		342
Amortization of intangibles		170		166		340		333
Other		524		466		605		1,193
Total non-interest expense		5,507		5,203		10,806		10,826
Income Before Income Tax		1,361		1,598		2,865		3,350
Provision for Income Taxes		223		328		500		658
Net Income	$	1,138	$	1,270	$	2,365	$	2,692
Basic Earnings Per Share	$	.36	$	.40	$	.75	$	.86
Diluted Earnings Per Share	$	.36	$	.40	$	.75	$	.85
Dividends Declared Per Share	$	.26	$	.25	$	.52	$	.50

See Notes to Condensed Consolidated Financial Statements

4

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows

	Six Months Ended, June 30
(Dollars in thousands)	2005			2004
	(Unaudited)
Operating Activities
Net income	$	2,365		$	2,692
Items not requiring (providing) cash
Depreciation and amortization		1,137			1,218
Provision for loan losses		200			900
Amortization of premiums and discounts on securities		513			684
Net realized gains on available-for-sale securities		(7	)		(527	)
FHLB stock dividends		(174	)		(142	)
Net change in:
Loans held for sale		—			86
Other assets and liabilities		(677	)		(237	)
Net cash provided by operating activities		3,357			4,674
Investing Activities
Purchases of available-for-sale securities		(21,465	)		(35,723	)
Proceeds from sales of available-for-sale securities		3,764			20,814
Proceeds from maturities of available-for-sale securities		5,906			23,354
Proceeds from maturities of held-to-maturity securities		—			499
Net change in loans		(6,381	)		(2,602	)
Purchase of premises and equipment		(659	)		(1,748	)
Proceeds from sales of premises and equipment		12			—
Net cash provided by (used) in investing activities		(18,823	)		4,594
Financing Activities
Net change in:
Deposits		(6,823	)		(16,144	)
Short-term borrowings		10,068			2,838
Repayment of FHLB advances		(1,302	)		(1,585	)
Cash dividends		(1,645	)		(1,574	)
Proceeds from exercise of stock options		84			34
Net cash provided by (used in) financing activities		382			(16,431	)
Decrease in Cash and Cash Equivalents		(15,084	)		(7,163	)
Cash and Cash Equivalents, Beginning of Year		30,051			22,218
Cash and Cash Equivalents, End of Period	$	14,967		$	15,055

See Notes to Condensed Consolidated Financial Statements

5

Note 1: Basis of Presentation

The accompanying unaudited condensed 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, 2004 has been derived from the audited consolidated balance sheet of that date.

In the opinion of management, the condensed consolidated financial statements contain all adjustments necessary to present fairly the financial condition of NB&T Financial Group, Inc. as of June 30, 2005, and December 31, 2004, and the results of its operations for the three and six month periods and cash flows for the six months ended June 30, 2005 and 2004. Those adjustments consist of only normal recurring adjustments. 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, 2004 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 June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Net income, as reported	$	1,138		$	1,270		$	2,365		$	2,692
Less: Total stock-based employee compensation cost determined under the fair value method, net of income taxes		(93	)		(17	)		(103	)		(37	)
Pro forma net income	$	1,045		$	1,253		$	2,262		$	2,655
Earnings per share:
Basic – as reported	$	.36		$	.40		$	.75		$	.86
Basic – pro forma	$	.33		$	.40		$	.72		$	.84
Diluted – as reported	$	.36		$	.40		$	.75		$	.85
Diluted – pro forma	$	.33		$	.40		$	.71		$	.84

6

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
June 30, 2005:
Available-for-Sale Securities:
U.S. government agencies	$	80,537	$	38	$	(1,397	)	$	79,178
Mortgage-backed securities		61,705		248		(401	)		61,552
State and political subdivisions		38,391		1,410		(13	)		39,788
Other securities		60		—		—			60
	$	180,693	$	1,696	$	(1,811	)	$	180,578
December 31, 2004:
Available-for-Sale Securities:
U.S. government agencies	$	69,135	$	—	$	(1,046	)	$	68,089
Mortgage-backed securities		61,923		473		(323	)		62,073
State and political subdivisions		38,336		1,269		(32	)		39,573
Other securities		10		—		—			10
	$	169,404	$	1,742	$	(1,401	)	$	169,745

Note 3: Loans

Categories of loans include (thousands):

	June 30, 2005			December 31, 2004
Commercial and industrial	$	82,961		$	85,681
Agricultural		25,527			22,284
Real estate construction		15,870			13,114
Commercial real estate		55,779			52,251
Residential real estate		150,412			148,644
Consumer		78,441			80,978
Other		144			119
Total loans		409,134			403,071
Less
Net deferred loan fees, premiums and discounts		(259	)		(232	)
Allowance for loan losses		(4,067	)		(4,212	)
Net loans	$	404,808		$	398,627

7

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

	Six Months Ended June 30,
	2005			2004
Balance, beginning of year	$	4,212		$	4,830
Provision for loan losses		200			900
Recoveries		354			307
Charge-offs		(699	)		(1,356	)
Balance, end of period	$	4,067		$	4,681

Impaired loans totaled $1,837,000 and $1,017,000 at June 30, 2005 and December 31, 2004, respectively. An allowance for loan losses of $112,000 and $146,000 relates to impaired loans of $312,000 and $458,000 at June 30, 2005 and December 31, 2004, respectively. At June 30, 2005 and December 31, 2004, impaired loans of $1,525,000 and $559,000 had no related allowance for loan losses.

At June 30, 2005 and December 31, 2004, accruing loans delinquent 90 days or more totaled $103,000 and $0, respectively. Non-accruing loans at June 30, 2005 and December 31, 2004 were $3,816,000 and $2,874,000, respectively.

Note 4: Commitments

Outstanding commitments to extend credit as of June 30, 2005 total $51,158,000. Standby letters of credit as of June 30, 2005 total $1,402,000.

Note 5: 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 June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Numerator:
Net income	$	1,138	$	1,270	$	2,365	$	2,692
Denominator:
Weighted-average common shares outstanding (basic)		3,159,172		3,147,129		3,159,087		3,146,958
Effect of stock options		6,565		26,015		8,799		25,809
Weighted-average common shares outstanding (diluted)		3,165,737		3,173,144		3,167,886		3,172,767
Earnings per share:
Basic	$	.36	$	.40	$	.75	$	.86
Diluted	$	.36	$	.40	$	.75	$	.85

For the three and six months ended June 30, 2005, stock options covering 82,200 shares of common stock, respectively, were not considered in computing earnings per share as their exercise prices exceeded the fair market value of the Company’s common shares. For the three and six months ended June 30, 2004, all stock options were considered in computing earnings per share

8

Note 6: Trust Preferred Securities

On June 26, 2002, NB&T Statutory Trust I (“Trust I”), a wholly owned subsidiary of the Corporation, closed a pooled private offering of 8,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Corporation in exchange for junior subordinated debentures with terms similar to the Capital Securities. The sole assets of Trust I are the junior subordinated debentures of the Corporation and payments thereunder. The junior subordinated debentures and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Corporation of the obligations of Trust I under the Capital Securities. Distributions on the Capital Securities are payable quarterly at the annual rate of 3.45% over the 3 month LIBOR and are included in interest expense in the consolidated financial statements. These securities are considered Tier I capital (with certain limitations applicable) under current regulatory guidelines.

The junior subordinated debentures are subject to mandatory redemption, in whole or in part, upon repayment of the Capital Securities at maturity or their earlier redemption at the liquidation amount. Subject to the Corporation having received prior approval of the Federal Reserve, if then required, the Capital Securities are redeemable prior to the maturity date of June 26, 2032, at the option of the Corporation; on or after June 26, 2007 at par. Upon occurrence of specific events defined within the trust indenture, the Capital Securities may also be redeemed prior to June 26, 2007 at a premium. The Corporation has the option to defer distributions on the Capital Securities from time to time for a period not to exceed 20 consecutive semi-annual periods.

As of June 30, 2005 and December 31, 2004, the outstanding principal balance of the Capital Securities was $8,000,000. In accordance with the provisions in FIN 46, the Company accounts for its investment in the trust as assets, its subordinated debentures as debt, and the interest paid thereon as interest expense.

9

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

NB&T Financial Group, Inc.

Wilmington, Ohio

We have reviewed the accompanying condensed consolidated balance sheet of NB&T Financial Group, Inc. as of June 30, 2005 and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2005 and 2004 and cash flows for the six-month periods ended June 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board, 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004 and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated February 5, 2005, 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, 2004 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/BKD,LLP

Cincinnati, Ohio

August 1, 2005

10

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

Results of Operations

Net income for the second quarter of 2005 was $1.14 million, a decrease of $132,000, or 10.4%, from the second quarter of 2004 net income of $1.27 million. Net income per share-basic was $.36 for the second quarter of 2005, compared to $.40 per share for the second quarter of 2004, a decrease of 10.0%. Net income for the first six months of 2005 was $2.37 million, a decrease of $327,000, or 12.1%, from the first six months of 2004 net income of $2.69 million. Net income per share-basic was $.75 for the first six months of 2005, compared to $.86 per share for the first six months of 2004, a decrease of 12.8%. The decrease in earnings for both the second quarter and the first six months of 2005 was due to lower net interest income resulting from increased deposit and borrowing costs and relatively flat residential and consumer loan rates; lower non-interest income, primarily in service charges and fees; and lower security gains, offset by improved loan quality and lower loan loss provisions.

Return on average equity and return on average assets for the second quarter of 2005 were 7.85% and 0.70%, respectively, compared to 8.80% and .76% for the same period in 2004. Return on average equity and return on average assets for the first six months of 2005 were 8.15% and 0.73%, respectively, compared to 9.42% and .81% for the same period in 2004.

Net Interest Income

Net interest income was $4.90 million for the second quarter of 2005 and $9.7 million for the first six months of 2005, a decrease of $192,000 and $626,000 respectively, compared to the same periods last year. The net interest margin decreased to 3.27% for the second quarter of this year from 3.31% for the second quarter of last year, and the net interest margin decreased to 3.22% for the first six months of 2005 from 3.34% for the same period last year.

Interest income totaled $8.17 million and $16.06 million for the second quarter of 2005, an increase of $145,000, or 1.8%, from $8.02 million during the same period last year. Interest income for the first six months of 2005 totaled $16.06 million, a decrease of $104,000, or .64%, from $16.17 million during the same period last year. Unfortunately, interest expense increased $338,000, or 11.5%, during the second quarter of 2005 and $522,000, or 8.9%, during the first six months of 2005. As evidenced by the yields below, the difference in yield between short-term and long-term rates has diminished over the past year, and the deposit and borrowing costs more closely associated with the short end of the yield curve have increased, while residential mortgage and consumer loan pricing associated with the middle to long-end of the curve have remained relatively flat. Additionally, loan yields have been reduced by lower average volumes of non-mortgage consumer loans. The yield on average earning assets increased from 5.21% in the second quarter of 2004 to 5.46% in the second quarter of 2005 and from 6.25% for the first six months of 2004 to 6.36% for the same period in 2005. At the same time, the cost of interest-bearing liabilities increased by a greater amount from 2.14% during the second quarter of last year to 2.47% in the second quarter of 2005, and their cost increased from 2.14% during the first six months of 2004 to 2.42% for the first six months of 2005.

Average loans outstanding for the second quarter and the first six months decreased 1.74% and 2.09%, compared to the prior year. Average securities outstanding, including federal funds sold and other interest-bearing deposits, for the second quarter and the first six months of 2005 decreased 5.1% and 3.0%, compared to the prior year. Average interest-bearing liabilities for the second quarter decreased 3.5% from last year to $531.5 million, and average interest-bearing liabilities for the first six months of 2005 decreased 3.2% from last year to $534.8 million.

Provision for Loan Losses

The provision for credit 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 credit losses inherent in the Bank’s loan portfolio at each balance sheet date. The provision for loan losses decreased 72.2% to $125,000 during the second quarter of 2005 from $450,000 during the second quarter of last year. For the first six months of 2005, the provision decreased 77.8% to $200,000 from $900,000 for the same period last year. The lower provision for loan losses is a result of lower net charge-offs and non-performing loans. Net charge-offs were $176,000, or 0.17% of total average loans (annualized) in the second quarter of 2005, compared to $509,000, or 0.50% (annualized) for the same period in 2004. Net charge-offs were $345,000, or 0.17% of total average loans (annualized) during the first six months of 2005, compared to $1.05 million, or 0.51% (annualized) for the same period in 2004. Non-performing loans totaled $3.9 million at June 30, 2005, down $2.8 million from $ 6.7million at June 30, 2004. The percentage of the allowance for loan losses to total loans was .99% at June 30, 2005 and 1.14% at June 30, 2004.

11

Non-interest Income

Non-interest income was $2.10 million for the second quarter of 2005, a decrease of 3.1% from the $2.16 million earned in the second quarter of 2004. Non-interest income was $4.22 million for the first six months of 2005, compared to $4.79 million for the same period in 2004. Non-interest income for the first six months of 2004 includes $527,000 in realized securities gains from the sale of $6.4 million in municipal securities, compared to only $7,000 in realized securities gains in the first six months of 2005. Excluding the securities gains, the primary reasons for the decrease for the quarter and six months are lower service charge income and ATM network fees. Service charge income decreased 6.3% from the second quarter of last year as customers sought out the Company’s free checking product. In addition, the Company collected less overdraft fees in the second quarter of 2005, compared to the same quarter in 2004. ATM network fees decreased 34.5% from the second quarter of last year as a result of fewer units in operation and higher costs.

Non-interest Expense

Non-interest expense was $5.51 million for the second quarter of 2005, compared to $5.20 million for the second quarter of 2004. Salaries and employee benefits expense increased 1.8% during the second quarter of 2005 due to merit increases and increased cost of health insurance. In addition, the Company incurred additional professional fees in the second quarter of 2005 related to corporate marketing and educational initiatives. For the first six months of 2005, non-interest expense was $10.81 million, compared to $10.83 million for the same period in 2004.

Income Taxes

The provision for income taxes for the second quarter of 2005 was $223,000, compared to $328,000 for the same period in 2004. The provision for income taxes for the first six months of 2005 was $500,000, compared to $658,000 for the same period last year. The effective tax rate for the three months ended and six months ended June 30, 2005 was 16.4% and 17.5%, respectively, compared to 20.5% and 19.6% for the same periods in 2004.

Financial Condition

The changes that have occurred in NB&T Financial Group, Inc.’s financial condition during 2005 are as follows (in thousands):

	June 30 2005		December 31 2004		Amount			Percent
Total Assets	$	648,349	$	645,323	$	3,026		.5
Federal funds sold		1,349		16,240		(14,891	)	(91.7	)
Loans, gross		408,875		402,839		6,036		1.5
Securities		180,578		169,745		10,833		6.4
Demand deposits		53,007		58,451		(5,444	)	(9.3	)
Savings, NOW, MMDA deposits		201,339		207,900		(6.561	)	(3.2	)
CD’s $100,000 and over		48,721		42,977		5,744		13.4
Other time deposits		142,703		143,265		(562	)	(.4	)
Total deposits		445,770		452,593		(6,823	)	(1.5	)
Short-term borrowing		28,091		18,023		10,068		55.9
Long-term borrowing		110,371		111,673		(1,302	)	(1.2	)
Stockholders Equity		59,222		58,601		621		1.1

At June 30, 2005, total assets were $648.3 million, a decrease of $3.0 million from December 31, 2004. The increase is primarily attributable to an increase in the loan portfolio of $6.0 million. Securities and federal funds sold decreased $4.6 million during 2005. Deposits decreased $6.8 million primarily in the public fund demand deposits and money market accounts. Stockholders’ equity increased $621,000 during the year to $59.2 million due to an increase in retained earnings, offset by a decrease in other comprehensive income of $301,000 resulting from a change in market value of securities.

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Average total loans decreased to $403.6 million, a decrease of 1.7% from the same quarter of last year. The real estate loan average declined $4.2 million, a decrease of 3.7%, and the personal loan average declined $11.0 million, a decrease of 12.4%. Commercial loans grew $4.4 million and home equity loans grew $3.3 million. The securities portfolio average has decreased $9.9 million from the second quarter of 2004 to $186.8 million due to security sales and accelerated prepayments.

Average total deposits increased $1.7 million for the second quarter of 2005 to $457.1 million, compared to an average of $455.3 million for the same quarter last year. Average short-term borrowings increased $1.3 million, or 5.5%, from the second quarter of 2004 due to increased public fund balances in repurchase agreements. Average Federal Home Loan Bank borrowings decreased $21.4 million, or 16.2%, due to early payoff of $17.0 million in advances in the third quarter of 2004 and regular principal payments on amortizing advances.

Allowance for Loan Losses

The following table is a summary of the Company’s loan loss experience for the periods ended June 30, 2005 and 2004:

	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
Balance at beginning of period	$	4,118		$	4,740		$	4,212		$	4,830
Charge-offs:
Commercial and industrial		(12	)		(324	)		(47	)		(417	)
Commercial real estate		—			—			(28	)		(42	)
Agricultural		—			(76	)		—			(92	)
Residential real estate		(51	)		(51	)		(73	)		(261	)
Consumer		(284	)		(185	)		(551	)		(544	)
Other		—			—			—			—
Total charge-offs		(347	)		(636	)		(699	)		(1,356	)
Recoveries:
Commercial and industrial		1			—			24			148
Commercial real estate		19			—			36			2
Agricultural		6			37			6			88
Residential real estate		25			10			34			48
Consumer		120			80			254			163
Other		—			—			—			—
Total recoveries		171			127			354			307
Net charge-offs		(176	)		(509	)		(345	)		(1,049	)
Provision for loan losses		125			450			200			900
Balance at end of period	$	4,067		$	4,681		$	4,067		$	4,681

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

	June 30 2005			December 31 2004			June 30 2004
Loans accounted for on non-accrual basis	$	3,816		$	2,874		$	6,692
Accruing loans which are past due 90 days		103			—			—
Renegotiated loans		0			0			0
Other real estate owned		238			389			873
Total non-performing assets	$	4,157		$	3,263		$	7,565
Ratios:
Allowance to total loans		.99	%		1.05	%		1.14	%
Net charge-offs to average loans (annualized)		.17	%		0.87	%		.51	%
Non-performing assets to total loans and other real estate owned		1.02	%		.81	%		1.84	%

The allowance is maintained to absorb potential losses in the portfolio. Management’s determination of the adequacy of the reserve is based on reviews of specific loans, loan loss experience, general economic conditions and other pertinent factors. If, as a result of charge-offs or increases in risk characteristics of the loan portfolio, the reserve is below the level considered by management to be adequate to absorb possible future loan losses, the provision for loan losses is increased. Loans deemed not collectible are charged off and deducted from the reserve. Recoveries on loans previously charged off are added to the reserve.

The Company allocates the allowance for loan losses to specifically classified loans and non-classified loans generally based on 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 rolling average charge-off percentage applied to the current outstanding balance by portfolio type; (2) specific percentage applied to individual loans estimated by management to have a potential loss; and (3) estimated losses attributable to economic conditions. Economic conditions considered include unemployment levels, the condition of the agricultural business, and other local economic factors.

The increase in non-accrual loans from $2.87 million at December 31, 2004 to $3.82 million at June 30, 2005 is primarily the result of two relationships. The first is a worship center and the second is an estate recently added due to the death of the owner. The total of these two relationships is $819,000. No loss is expected with either relationship.

As of June 30, 2005, there were $1.8 million in twenty-seven non-accrual small business relationships, previously discussed. Non–accrual residential real estate loans consisted of twenty-one loans that total $1.5 million with the largest balance being $154,000. Non-accrual personal loans consisted of forty-six loans that total $217,000, and home equity credit lines consisted of 9 loans totaling $219,000.

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 June 30, 2005, was 91.7%, compared to 94.7% at the same date in 2004. Loans to total assets were 63.1% at the end of the second quarter of 2005, compared to 63.3% at the same time last year. Management strives to keep this ratio below 70%. The Company has $180.6 million in available-for-sale securities that are readily marketable. Approximately 72.8% 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 89.1% core deposits, makes the Company less susceptible to large fluctuations in funding needs. The Company has short-term borrowing lines of credit with several correspondent banks. The Company also has both short- and long-term borrowing available through the Federal Home Loan Bank (FHLB). The Company has the ability to obtain deposits in the brokered certificate of deposit market to help provide liquidity to fund loan growth.

The Federal Reserve Board has adopted risk-based capital guidelines that assign risk weightings to assets and off-balance sheet items and also define and set minimum capital requirements (risk-based capital ratios). Bank holding companies must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios of 8%, 4% and 3%, respectively. At June 30, 2005, NB&T Financial Group, Inc. had a total risk-based capital ratio of 14.95%, a Tier 1 risk-based capital ratio of 14.01%, and a Tier 1 leverage ratio of 9.44%.

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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, 2004. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.

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

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

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

Share Based Payments-The Financial Accounting Standards Board issued Standard 123R “Share Based Payments” in 2004, which becomes effective for fiscal years beginning after June 15, 2005. This standard impacts the accounting for and disclosure of stock-based compensation plans. As disclosed in Note 1 “Stock Options” to the financial statements included in Item 1, this standard will increase the Company’s compensation expense related to stock options.

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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, 2005, the Company’s simulation model indicated the twelve-month cumulative gap as a percent of total assets was a negative 0.1%, compared to a positive 7.6% at December 31, 2004. This change is primarily the result of an increase in repurchase agreements during the first half of the year due to public fund receipts and a decrease overnight fed funds sold to fund loan growth and investment purchases with repricing beyond one year. Despite the relatively neutral gap position, rates on loans repricing with base indices tied to the three- and five-year treasury rates are not expected to increase to the same extent as rates on deposits, which are more influenced by the increase in short-term rates. As a result, the current gap position could have a negative effect on projected net interest income over the next twelve months.

Item 4 – Controls and Procedures

(a) The Company’s principal executive officer and principal financial officer have concluded, based upon their evaluation of the Company’s disclosure controls and procedures as of June 30, 2005, that the Company’s disclosure controls and procedures were effective.

(b) During the quarter ended June 30, 2005, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Not applicable

Item 2 – Unregistered Sales of Equity 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

On April 26, 2005, the Annual Meeting of the shareholders of the Company was held.

The following members of the Board of Directors of the Company were re-elected for terms expiring in 2007 by the votes indicated:

	For	Withheld	Abstain
S. Craig Beam	2,622,681	4,232	—
D. Jeffrey Lykins	2,620,545	6,368	—
Darleen M. Myers	2,622,681	4,232	—
Robert A. Raizk	2,618,481	8,432	—
Janet M. Williams	2,622,681	4,232	—

Item 5 - Other Information

Not applicable

Item 6 – Exhibits

(a) Exhibits:

	Index to 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.

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SIGNATURES

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

	NB&T FINANCIAL GROUP, INC.
Date: August 11, 2005	/s/ Craig F. Fortin
	Craig F. Fortin
	Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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Index to 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.

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