NB&T Financial (NBTF) 10-Q 2005 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, 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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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 4, 2005, 3,232,513 common shares were issued and outstanding.

NB&T FINANCIAL GROUP, INC.

September 30, 2005 Form 10-Q

Table of Contents

		Page
PART I
Item 1:	Financial Statements
	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)	September 30, 2005			December 31, 2004
	(Unaudited)
Assets
Cash and due from banks	$	13,601		$	13,248
Interest-bearing demand deposits		1,022			563
Federal funds sold		5,735			16,240
Cash and cash equivalents		20,358			30,051
Securities - available-for-sale		176,154			169,745
Loans, net of allowance for loan losses of $4,073 and $4,212		409,796			398,627
Premises and equipment		13,849			14,096
Federal Reserve and Federal Home Loan Bank stock		8,444			8,176
Earned income receivable		4,060			3,393
Goodwill and other intangibles		6,664			6,969
Bank-owned life insurance		12,511			12,150
Other assets		2,842			2,116
Total assets	$	654,678		$	645,323
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	56,096		$	58,451
Savings, NOW and Money Market		196,448			207,900
Time		196,048			186,242
Total deposits		448,592			452,593
Short-term borrowings		32,603			18,023
Long-term debt		109,709			111,673
Interest payable and other liabilities		5,120			4,433
Total liabilities		596,024			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		10,130			9,828
Retained earnings		55,364			54,688
Unearned employee stock ownership plan shares		(1,197	)		(1,337	)
Accumulated other comprehensive income (loss)		(609	)		225
Treasury stock; 586,437 and 591,887 shares at cost in 2005 and 2004		(6,034	)		(5,803	)
Total stockholders’ equity		58,654			58,601
Total liabilities and stockholders’ equity	$	654,678		$	645,323

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)	2005		2004		2005		2004
	(Unaudited)				(Unaudited)
Interest and Dividend Income
Loans	$	6,474	$	6,197	$	18,861	$	18,709
Securities-Taxable		1,191		1,178		3,479		3,536
Securities-Tax-exempt		467		495		1,418		1,573
Federal funds sold and other		62		34		301		87
Dividends on Federal Home Loan and Federal Reserve Bank stock		105		85		301		250
Total interest and dividend income		8,299		7,989		24,360		24,155
Interest Expense
Deposits		1,807		1,377		4,975		4,062
Short-term borrowings		271		84		611		179
Long-term debt		1,473		1,517		4,370		4,621
Total interest expense		3,551		2,978		9,956		8,862
Net Interest Income		4,748		5,011		14,404		15,293
Provision for Loan Losses		275		450		475		1,350
Net Interest Income After Provision for Loan Losses		4,473		4,561		13,929		13,943
Non-interest Income
Trust income		249		238		766		748
Service charges and fees		855		918		2,432		2,601
ATM network fees		52		83		165		251
Insurance agency commissions		537		583		1,916		1,896
Net gains on sales of securities available-for-sale		13		62		20		589
Other		379		327		1,001		922
Total non-interest income		2,085		2,211		6,300		7,007
Non-interest Expense
Salaries and employee benefits		3,037		2,724		8,799		8,386
Net occupancy expense		461		429		1,371		1,300
Equipment and data processing expense		671		564		2,030		1,765
Professional fees		539		442		1,321		1,123
Marketing expense		162		180		444		395
State franchise tax		189		177		566		519
Amortization of intangibles		156		183		510		516
Other		471		679		1,451		2,202
Total non-interest expense		5,686		5,378		16,492		16,206
Income Before Income Tax		872		1,394		3,737		4,744
Provision for Income Taxes		93		219		593		877
Net Income	$	779	$	1,175	$	3,144	$	3,867
Basic Earnings Per Share	$	.25	$	.37	$	.99	$	1.23
Diluted Earnings Per Share	$	.25	$	.37	$	.99	$	1.22
Dividends Declared Per Share	$	.26	$	.25	$	.78	$	.75

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)	2005			2004
	(Unaudited)
Operating Activities
Net income	$	3,144		$	3,867
Items not requiring (providing) cash Depreciation and amortization		1,695			1,834
Provision for loan losses		475			1,350
Amortization of premiums and discounts on securities		762			955
Net realized gains on available-for-sale securities		(20	)		(589	)
FHLB stock dividends		(268	)		(220	)
Net change in:
Loans held for sale		—			86
Other assets and liabilities		(622	)		588
Net cash provided by operating activities		5,166			7,871
Investing Activities
Purchases of available-for-sale securities		(21,392	)		(62,695	)
Proceeds from sales of available-for-sale securities		3,764			35,245
Proceeds from maturities of available-for-sale securities		9,212			45,575
Proceeds from maturities of held-to-maturity securities		—			499
Net change in loans		(11,644	)		(161	)
Purchase of premises and equipment		(1,079	)		(1,968	)
Proceeds from sales of premises and equipment		141			—
Acquisition of insurance agency		—			(654	)
Net cash provided by (used in) investing activities		(20,998	)		15,841
Financing Activities
Net change in:
Deposits		(4,001	)		(9,814	)
Short-term borrowings		14,580			7,149
Repayment of FHLB advances		(1,964	)		(20,207	)
Cash dividends		(2,468	)		(2,361	)
Purchase of treasury shares		(482	)		—
Proceeds from exercise of stock options		474			78
Net cash provided by (used in) financing activities		6,139			(25,155	)
Decrease in Cash and Cash Equivalents		(9,693	)		(1,443	)
Cash and Cash Equivalents, Beginning of Year		30,051			22,218
Cash and Cash Equivalents, End of Period	$	20,358		$	20,775

See Notes to 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 unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. 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 September 30, 2005, and December 31, 2004, and the results of its operations for the three and nine month periods and cash flows for the nine months ended September 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.

Certain reclassifications have been made to the 2004 condensed financial statements to conform to the 2005 condensed financial statement presentation. These reclassifications had no effect on net income.

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,
	2005			2004			2005			2004
Net income, as reported	$	779		$	1,175		$	3,144		$	3,867
Less: Total stock-based employee compensation cost determined under the fair value method, net of income taxes		(9	)		(17	)		(113	)		(54	)
Pro forma net income	$	770		$	1,158		$	3,031		$	3,813
Earnings per share:
Basic – as reported	$	.25		$	.37		$	.99		$	1.23
Basic – pro forma	$	.24		$	.37		$	.96		$	1.21
Diluted – as reported	$	.25		$	.37		$	.99		$	1.22
Diluted – pro forma	$	.24		$	.37		$	.96		$	1.20

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
September 30, 2005:
Available-for-Sale Securities:
U.S. government agencies	$	80,404	$	—	$	(1,905	)	$	78,499
Mortgage-backed securities		59,182		139		(696	)		58,625
State and political subdivisions		37,481		1,578		(39	)		39,020
Other securities		10		—		—			10
	$	177,077	$	1,717	$	(2,640	)	$	176,154
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):

	September 30, 2005			December 31, 2004
Commercial and industrial	$	80,049		$	85,681
Agricultural		26,343			22,284
Real estate construction		9,330			13,114
Commercial real estate		64,680			52,251
Residential real estate		161,251			148,644
Consumer		70,936			80,978
Other		1,399			119
Total loans		413,988			403,071
Less
Net deferred loan fees, premiums and discounts		(119	)		(232	)
Allowance for loan losses		(4,073	)		(4,212	)
Net loans	$	409,796		$	398,627

7

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

	Nine Months Ended September 30,
	2005			2004
Balance, beginning of year	$	4,212		$	4,830
Provision for loan losses		475			1,350
Recoveries		466			444
Charge-offs		(1,080	)		(2,080	)
Balance, end of period	$	4,073		$	4,544

Impaired loans totaled $6,265,000 and $1,017,000 at September 30, 2005 and December 31, 2004, respectively. An allowance for loan losses of $531,000 and $146,000 relates to impaired loans of $2,379,000 and $458,000 at September 30, 2005 and December 31, 2004, respectively. At September 30, 2005 and December 31, 2004, impaired loans of $3,886,000 and $559,000 had no related allowance for loan losses.

At September 30, 2005 and December 31, 2004, there were no accruing loans delinquent 90 days or more. Non-accruing loans at September 30, 2005 and December 31, 2004 were $8,222,000 and $2,874,000, respectively.

Note 4: Commitments

Outstanding commitments to extend credit as of September 30, 2005 total $55,069,000. Standby letters of credit as of September 30, 2005 total $1,476,000.

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 September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Numerator:
Net income	$	779	$	1,175	$	3,144	$	3,867
Denominator:
Weighted-average common shares outstanding (basic)		3,163,812		3,148,651		3,160,680		3,147,526
Effect of stock options		5,735		17,772		7,775		23,122
Weighted-average common shares outstanding (diluted)		3,169,547		3,166,423		3,168,455		3,170,648
Earnings per share:
Basic	$	.25	$	.37	$	.99	$	1.23
Diluted	$	.25	$	.37	$	.99	$	1.22

For the three and nine months ended September 30, 2005, stock options covering 76,200 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 nine months ended September 30, 2004, stock options covering 30,000 and 11,000 shares of common stock, respectively, were not considered in computing earnings per share as their exercise prices exceeded the fair marker value of the Company’s common shares.

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, the Capital Securities are redeemable 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 September 30, 2005, December 31, 2004 and September 30, 2004, the outstanding principal balance of the Capital Securities was $8,000,000.

Note 7: Comprehensive Income

Total comprehensive income was as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004		2005			2004
Net Income	$	779		$	1,175	$	3,144		$	3,867
Other Comprehensive Income/ (Loss)	$	(533	)	$	2,291	$	(834	)	$	515
Total Comprehensive Income	$	246		$	3,466	$	2,310		$	4,382

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 September 30, 2005 and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2005 and 2004 and cash flows for the nine-month periods ended September 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.

BKD, LLP

Cincinnati, Ohio

October 28, 2005

10

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

Results of Operations

Net income for the third quarter of 2005 was $779,000, a decrease of $396,000, or 33.7%, from the third quarter of 2004 net income of $1.18 million. Net income per share-basic was $.25 for the third quarter of 2005, compared to $.37 per share for the third quarter of 2004, a decrease of 32.4%. Net income for the first nine months of 2005 was $3.14 million, a decrease of $723,000, or 18.7%, from the $3.87 million of net income for the first nine months of 2004. Net income per share-basic was $.99 for the first nine months of 2005, compared to $1.23 per share for the first nine months of 2004, a decrease of 19.5%. The decrease in earnings for both the third quarter and the first nine 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; increased non-interest expense; and lower security gains, offset by lower loan loss provisions.

Return on average equity and return on average assets for the third quarter of 2005 were 5.20% and 0.47%, respectively, compared to 8.18% and .71% for the same period in 2004. Return on average equity and return on average assets for the first nine months of 2005 were 7.15% and 0.64%, respectively, compared to 9.01% and .78% for the same period in 2004.

Net Interest Income

Net interest income was $4.75 million for the third quarter of 2005 and $14.40 million for the first nine months of 2005, a decrease of $263,000 and $889,000 respectively, compared to the same periods last year. Net interest margin (annualized net interest income as a percent of average earning assets) decreased to 3.10% for the third quarter of this year from 3.28% for the third quarter of last year, and the net interest margin decreased to 3.18% for the first nine months of 2005 from 3.32% for the same period last year.

Interest income totaled $8.30 million for the third quarter of 2005, an increase of $310,000, or 3.9%, from $7.99 million during the same period last year. Interest income for the first nine months of 2005 totaled $24.36 million, an increase of $205,000, or .85%, from $24.16 million during the same period last year. Unfortunately, interest expense increased $573,000, or 19.2%, during the third quarter of 2005 and $1.09 million, or 12.3%, during the first nine months of 2005. The difference in yield between short-term and long-term rates has diminished over the past year, and the deposit and borrowing costs with shorter terms have increased, while residential mortgage and consumer loan pricing with longer terms have remained relatively flat. Additionally, loan yields have been reduced by our lower average volumes of non-mortgage consumer loans. The yield on average earning assets increased from 5.22% in the third quarter of 2004 to 5.43% in the third quarter of 2005 and from 5.25% for the first nine months of 2004 to 5.38% for the same period in 2005. At the same time, the cost of interest-bearing liabilities increased by a greater amount, from 2.18% during the third quarter of last year to 2.62% in the third quarter of 2005, and their cost increased from 2.14% during the first nine months of 2004 to 2.49% for the first nine months of 2005. This increase is the result of market rate increases and the shift of lower costing money market deposits to higher costing time deposits and short-term borrowings more sensitive to current rate increases.

Average loans outstanding for the first nine months decreased 1.30%, compared to the prior year, while average loans outstanding for the third quarter of 2005 increased .24%, compared to the prior year. Average securities outstanding, including federal funds sold and other interest-bearing deposits, for the third quarter and the first nine months of 2005 decreased .69% and 2.2%, compared to the prior year. Average interest-bearing liabilities for the third quarter decreased .64% from last year to $592.8 million, and average interest-bearing liabilities for the first nine months of 2005 decreased 2.2% from last year to $591.6 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 38.9% to $275,000 during the third quarter of 2005 from $450,000 during the third quarter of last year. For the first nine months of 2005, the provision decreased 64.8% to $475,000 from $1.35 million for the same period last year. The lower provision for loan losses is a result of lower net charge-offs and management’s evaluation of the loan portfolio. Net charge-offs were $269,000, or 0.26% of total average loans (annualized) in the third quarter of 2005, compared to $587,000, or 0.57% (annualized) for the same period in 2004. Net charge-offs were $613,000, or 0.20% of total average loans

11

(annualized) during the first nine months of 2005, compared to $1.64 million, or 0.53% (annualized) for the same period in 2004. Non-performing loans at September 30, 2005 increased to 1.99% from 1.48% of total loans at September 30, 2004 due to placing one $5.0 million relationship on non-accrual during September 2005. At September 30, 2005, the relationship was less than 60 days past due; however, management was aware of potential cash flow weaknesses. The percentage of the allowance for loan losses to total loans was .98% at September 30, 2005 and 1.11% at September 30, 2004.

Non-interest Income

Non-interest income was $2.09 million for the third quarter of 2005, a decrease of 5.7% from the $2.21 million earned in the third quarter of 2004. Non-interest income was $6.30 million for the first nine months of 2005, compared to $7.01 million for the same period in 2004. Non-interest income for the first nine months of 2004 includes $589,000 in realized securities gains, compared to only $20,000 in realized securities gains in the first nine months of 2005. Securities gains of $13,000 were realized in the third quarter of 2005, compared to $62,000 in the third quarter of 2004. Excluding the securities gains, the primary reasons for the decrease for the quarter and nine months are lower service charge income and ATM network fees. Service charge income decreased 6.9% from the third quarter of last year as more customers utilize the Company’s free checking product as opposed to a fee-based checking account. In addition, the Company collected less overdraft fees in the third quarter of 2005, compared to the same quarter in 2004. ATM network fees decreased 37.3% from the third quarter of last year as a result of fewer units in operation and higher costs.

Non-interest Expense

Non-interest expense was $5.69 million for the third quarter of 2005, compared to $5.38 million for the third quarter of 2004. Salaries and employee benefits expense increased 11.5% during the third quarter of 2005 due to merit increases and increased benefit costs. Equipment and data processing expense also increased 19.0% during the third quarter of 2005 due to maintenance fees on the Bank’s primary data processing system, which were waived in 2004. In addition, the Company incurred additional professional fees in the third quarter of 2005 related to corporate marketing and educational initiatives. For the first nine months of 2005, non-interest expense was $16.49 million, compared to $16.21 million for the same period in 2004.

Income Taxes

The provision for income taxes for the third quarter of 2005 was $93,000, compared to $219,000 for the same period in 2004. The provision for income taxes for the first nine months of 2005 was $593,000, compared to $877,000 for the same period last year. The effective tax rate for the three months ended and nine months ended September 30, 2005 was 10.7% and 15.9%, respectively, compared to 15.7% and 18.5% 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):

	September 30 2005		December 31 2004		Amount			Percent
Total assets	$	654,678	$	645,323	$	9,355		1.4
Federal funds sold		5,735		16,240		(10,505	)	(64.7	)
Loans, gross		413,869		402,839		11,030		2.7
Securities		176,154		169,745		6,409		3.8
Demand deposits		56,096		58,451		(2,355	)	(4.0	)
Savings, NOW, MMDA deposits		196,448		207,900		(11,452	)	(5.5	)
CD’s $100,000 and over		51,383		42,977		8,406		19.6
Other time deposits		144,665		143,265		1,400		1.0
Total deposits		448,592		452,593		(4,001	)	(.9	)
Short-term borrowing		32,603		18,023		14,580		80.9
Long-term borrowing		109,709		111,673		(1,964	)	(1.8	)
Stockholders equity		58,654		58,601		53		.09

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At September 30, 2005, total assets were $654.7 million, an increase of $9.4 million from December 31, 2004. The increase is primarily attributable to an increase in the loan portfolio of $11.0 million. Securities and federal funds sold decreased $4.1 million during 2005. Deposits decreased $4.0 million primarily in the money market accounts. Stockholders’ equity increased $53,000 during the year to $58.7 million due to an increase in retained earnings, offset by a decrease in other comprehensive income of $834,000 resulting from a change in market value of securities.

Average total loans increased to $412.0 million, an increase of .24% from the same quarter of last year. The residential real estate loan average declined $852,000, a decrease of .77%, and the consumer loan average declined $5.1 million, a decrease of 6.7%. Commercial loans grew $5.6 million and home equity loans grew $1.6 million. The securities portfolio average has remained relatively unchanged at $187.1million for the third quarter of 2005, compared to $186.5 for the third quarter of 2004.

Average total deposits increased $4.9 million for the third quarter of 2005 to $448.8 million, compared to an average of $443.9 million for the same quarter last year. Average short-term borrowings increased $4.8 million, or 16.5%, from the third quarter of 2004 due to increased public fund balances in repurchase agreements. Average long-term debt decreased $13.5 million, or 11.0%, due to early payoff of $17.0 million in Federal Home Loan Bank 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 September 30, 2005 and 2004:

	Three Months Ended September 30						Nine Months Ended September 30
	2005			2004			2005			2004
Balance at beginning of period	$	4,067		$	4,681		$	4,212		$	4,830
Charge-offs:
Commercial and industrial		(29	)		(42	)		(76	)		(459	)
Commercial real estate		—			(10	)		(28	)		(52	)
Agricultural		(69	)		(76	)		(69	)		(168	)
Residential real estate		(50	)		(187	)		(123	)		(448	)
Consumer		(233	)		(409	)		(784	)		(953	)
Other		—			—			—			—
Total charge-offs		(381	)		(724	)		(1,080	)		(2,080	)
Recoveries:
Commercial and industrial		9			12			33			18
Commercial real estate		23			13			59			15
Agricultural		2			36			8			38
Residential real estate		1			15			35			63
Consumer		77			61			331			224
Other		—			—			—			86
Total recoveries		112			137			466			444
Net charge-offs		(269	)		(587	)		(613	)		(1,636	)
Provision for possible loan losses		275			450			475			1,350
Balance at end of period	$	4,073		$	4,544		$	4,073		$	4,544

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

	September 30 2005			December 31 2004			September 30 2004
Loans accounted for on non-accrual basis	$	8,222		$	2,874		$	6,012
Accruing loans which are past due 90 days		—			—			38
Renegotiated loans		0			0			0
Other real estate owned		139			389			187
Total non-performing assets	$	8,361		$	3,263		$	6,237
Ratios:
Allowance to total loans		.98	%		1.05	%		1.11	%
Net charge-offs to average loans (annualized)		.20	%		0.87	%		.53	%
Non-performing assets to total loans and other real estate owned		2.02	%		.81	%		1.53	%

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 percentages 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, 2005, there were $6.3 million in nineteen non-accrual small business relationships. The majority of this amount consisted of one $5.0 million relationship, secured by a nursing home. At September 30, 2005, the relationship was less than 60 days past due; however, management was aware of potential cash flow weaknesses.

Non–accrual residential real estate loans totaled $1.5 million and consisted of 22 loans with the largest balance being $154,000. Non-accrual consumer loans consisted of fifty-seven loans that total $254,000 and home equity credit lines consisted of 9 loans totaling $207,000.

Liquidity and Capital Resources

Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as Company cash needs, are met. The Company manages liquidity on both the asset and liability sides of the balance sheet. The loan to deposit ratio at September 30, 2005, was 92.3%, compared to 92.6% at the same date in 2004. Loans to total assets were 63.2% at the end of the third quarter of 2005, compared to 63.2% at the same time last year. Management strives to keep this ratio below 70%. The Company has $176.2 in available-for-sale securities that are readily marketable. Approximately 84.0% 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 88.5% 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, 2005, NB&T Financial Group, Inc. had a total risk-based capital ratio of 14.94%, a Tier 1 risk-based capital ratio of 14.00%, and a Tier 1 leverage ratio of 9.33%.

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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 September 30, 2005, the Company’s simulation model indicated the twelve-month cumulative static gap as a percent of total assets was a positive 1.6%, compared to a positive 7.6% at December 31, 2004. This change is primarily the result of an increase in repurchase agreements due to public fund receipts, an increase in time deposits maturing within one year and a decrease in federal funds sold to fund loan growth repricing beyond one year. Despite the slightly positive 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 September 30, 2005, that the Company’s disclosure controls and procedures were effective.

(b) During the quarter ended September 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 Securities and Use of Proceeds

Issuer Purchases of Equity Securities

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
7/1/05 to 7/31/05	—			N/A	N/A	N/A
8/1/05 to 8/31/05	20,150	(1)	$	23.90	N/A	N/A
9/1/05 to 9/30/05	—			N/A	N/A	N/A
Total	20,150		$	23.90	N/A	N/A

(1) These shares were purchased from Timothy L. Smith, President & CEO, after exercise of certain stock options.

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

Index to Exhibits

3.1	Third Amended and Restated Articles of Incorporation of NB&T Financial Group, Inc.
3.2	Amended and Restated Code of Regulations of NB&T Financial Group, Inc.
15	Accountants’ awareness letter.
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: November 10, 2005	/s/ Craig F. Fortin
	Craig F. Fortin
	Senior Vice President and Chief Financial Officer
	(On behalf of the registrant and as Principal Financial Officer)

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Index to Exhibits

3.1	Third Amended and Restated Articles of Incorporation of NB&T Financial Group, Inc. Incorporated by reference to Definitive Proxy Statement filed on March 31, 2003, Exhibit A.
3.2	Amended and Restated Code of Regulations of NB&T Financial Group, Inc. Incorporated by reference to Definitive Proxy Statement filed on March 31, 2003, Exhibit B.
15	Accountants’ awareness letter.
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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