NB&T Financial (NBTF) 10-Q 2006 Q1 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 March 31, 2006

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  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 share outstanding of each of the issuer’s classes of common stock, as of the last practicable date: As of May 9, 2006, 3,232,513 common shares were issued and outstanding.

NB&T FINANCIAL GROUP, INC.

March 31, 2006 Form 10-Q

Table of Contents

PART I

		Page
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	11
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	16
Item 4:	Controls and Procedures	16
	Part II
Item 1:	Legal Proceedings	17
Item 1A:	Risk Factors	17
Item 2:	Unregistered Sales of Equity Securities and 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)	March 31, 2006			December 31, 2005
Assets	(Unaudited)
Cash and due from banks	$	15,004		$	16,882
Interest-bearing demand deposits		216			285
Federal funds sold		972			232
Cash and cash equivalents		16,192			17,399
Securities - available-for-sale		149,242			171,567
Loans, net of allowance for loan losses of $4,493 and $4,058		420,454			413,565
Premises and equipment		13,376			13,565
Federal Reserve and Federal Home Loan Bank stock		8,666			8,556
Earned income receivable		3,705			4,047
Goodwill and other intangibles		6,338			6,493
Bank-owned life insurance		12,699			12,588
Other assets		2,995			2,468
Total assets	$	633,667		$	650,248
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	53,771		$	60,657
Savings, NOW and Money Market		210,812			197,987
Time		209,959			188,982
Total deposits		474,542			447,626
Short-term borrowings		36,920			30,027
Long-term debt		61,361			109,039
Interest payable and other liabilities		3,719			5,058
Total liabilities		576,542			591,750
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		10,151			10,134
Retained earnings		54,340			55,501
Unearned employee stock ownership plan (ESOP) shares		(1,102	)		(1,152	)
Accumulated other comprehensive income		(1,230	)		(951	)
Treasury stock; 586,437 shares at cost in 2006 and 2005		(6,034	)		(6,034	)
Total stockholders’ equity		57,125			58,498
Total liabilities and stockholders’ equity	$	633,667		$	650,248

See Notes to Condensed Consolidated Financial Statements

3

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Operations

	Three Months Ended, March 31
(Dollars in thousands, except per share amounts)	2006			2005
	(Unaudited)
Interest and Dividend Income
Loans	$	6,843		$	6,061
Securities-Taxable		1,068			1,099
Securities-Tax-exempt		444			473
Federal funds sold and other		58			167
Dividends on Federal Home Loan and Federal Reserve Bank stock		126			93
Total interest and dividend income		8,539			7,893
Interest Expense
Deposits		2,376			1,521.34,3
Short-term borrowings		438			174
Long-term debt		1,125			1,439
Total interest expense		3,939			3,134
Net Interest Income		4,600			4,759
Provision for Loan Losses		610			75
Net Interest Income After Provision for Loan Losses		3,990			4,684
Non-interest Income
Trust income		240			281
Service charges and fees		822			745 70
ATM network fees		20			56
Insurance agency commissions		746			752
Net losses on sales of securities available-for-sale		(150	)		—
Other		303			285
Total non-interest income		1,981			2,119
Non-interest Expense
Salaries and employee benefits		2,896			2,877
Net occupancy expense		436			455
Equipment and data processing expense		654			641
Professional fees		385			389
Marketing expense		180			107
State franchise tax		184			190
Amortization of intangibles		151			170
Other		1,874			470
Total non-interest expense		6,760			5,299
Income (Loss) Before Income Tax		(789	)		1,504
Provision (Benefit) for Income Taxes		(485	)		277
Net Income (Loss)	$	(304	)	$	1,227
Basic Earnings (Loss) Per Share	$	(.10	)	$	.39
Diluted Earnings (Loss) Per Share	$	(.10	)	$	.39
Dividends Declared Per Share	$	.27		$	.26

See Notes to Condensed Consolidated Financial Statements

4

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows

	Three Months Ended, March 31
(Dollars in thousands)	2006			2005
	(Unaudited)
Operating Activities
Net income (loss)	$	(304	)	$	1,227
Items not requiring (providing) cash
Depreciation and amortization		530			570
Provision for loan losses		610			75
Amortization of premiums and discounts on securities		197			260
Net realized losses on available-for-sale securities		150			—
FHLB stock dividends		(110	)		(83	)
Net change in:
Other assets and liabilities		(1,405	)		(455	)
Net cash provided (used) in operating activities		(332	)		1,594
Investing Activities
Purchases of available-for-sale securities		(12,990	)		(12,309	)
Proceeds from sales of available-for-sale securities		17,944			—
Proceeds from maturities of available-for-sale securities		16,602			3,197
Net change in loans		(7,499	)		(2,130	)
Purchase of premises and equipment		(206	)		(314	)
Net cash provided (used) in investing activities		13,851			(7,296	)
Financing Activities
Net change in:
Deposits		26,916			(1,741	)
Short-term borrowings		6,893			10,905
Repayment of FHLB advances		(47,678	)		(647	)
Cash dividends		(857	)		(822	)
Net cash provided (used) in financing activities		(14,726	)		7,695
Increase (Decrease) in Cash and Cash Equivalents		(1,207	)		1,993
Cash and Cash Equivalents, Beginning of Year		17,399			30,051
Cash and Cash Equivalents, End of Period	$	16,192		$	32,044

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, 2005 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 March 31, 2006, and December 31, 2005, and the results of its operations and cash flows for the three month periods ended March 31, 2006 and 2005. 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, 2005 filed with the Commission.

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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
March 31, 2006:
Available-for-Sale Securities:
U.S. government agencies	$	79,131	$	1	$	(1,941	)	$	77,191
Mortgage-backed securities		37,474		19		(971	)		36,522
State and political subdivisions		34,490		1,123		(94	)		35,519
Other securities		10		—		—			10
	$	151,505	$	1,143	$	(3,006	)	$	149,242
December 31, 2005:
Available-for-Sale Securities:
U.S. government agencies	$	80,268	$	—	$	(1,944	)	$	78,324
Mortgage-backed securities		55,251		47		(839	)		54,459
State and political subdivisions		37,480		1,363		(69	)		38,774
Other securities		10		—		—			10
	$	173,009	$	1,410	$	(2,852	)	$	171,567

Note 3: Loans

Categories of loans include (thousands):

	March 31, 2006			December 31, 2005
Commercial and industrial	$	81,686		$	82,898
Agricultural		23,539			23,468
Real estate construction		12,521			9,743
Commercial real estate		87,104			82,616
Residential real estate		148,791			148,358
Consumer		71,481			70,696
Total loans		425,122			417,779
Less
Net deferred loan fees, premiums and discounts		(175	)		(156	)
Allowance for loan losses		(4,493	)		(4,058	)
Net loans	$	420,454		$	413,565

7

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

	Three Months Ended March 31,
	2006			2005
Balance, beginning of year	$	4,058		$	4,212
Provision for loan losses		610			75
Recoveries		185			183
Charge-offs		(360	)		(352	)
Balance, end of period	$	4,493		$	4,118

Impaired loans totaled $6,371,000 at March 31, 2006 and December 31, 2005. An allowance for loan losses of $885,000 and $529,000 relates to impaired loans of $5,140,000 and $5,197,000 at March 31, 2006 and December 31, 2005, respectively. At March 31, 2006 and December 31, 2005, impaired loans of $1,231,000 and $1,174,000 had no related allowance for loan losses.

At March 31, 2006 and December 31, 2005, there were no accruing loans delinquent 90 days or more. Non-accruing loans at March 31, 2006 and December 31, 2005 were $8,092,000 and $8,178,000, respectively.

Note 4: Commitments

Outstanding commitments to extend credit as of March 31, 2006 total $64,267,000. Standby letters of credit as of March 31, 2006 total $1,067,000.

Note 5: Earnings (Loss) Per Share

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

	Three Months Ended March 31,
	2006			2005
Numerator:
Net income/(loss)	$	(304	)	$	1,227
Denominator:
Weighted-average common shares outstanding (basic)		3,173,699			3,159,001
Effect of stock options		—			11,033
Weighted-average common shares outstanding (diluted)		3,173,699			3,170,034
Earnings (Loss) per share:
Basic	$	(.10	)	$	.39
Diluted	$	(.10	)	$	.39

For the three months ended March 31, 2006, the effect of stock options was not included in the earnings per share calculation due to the net loss for the quarter. For the three months ended March 31, 2005, stock options covering 44,500 shares of common stock were not considered in computing earnings per share as their exercise prices exceeded the fair market 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 March 31, 2006 and December 31, 2005, 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.

Note 7: Comprehensive Income

Total comprehensive income was as follows:

	Three Months Ended March 31,
	2006			2005
Net Income (Loss)	$	(304	)	$	1,227
Other Comprehensive (Loss)	$	(279	)	$	(1,219	)
Total Comprehensive Income (Loss)	$	(583	)	$	8

Note 8: Change in Accounting Principle

In 2006, the Company adopted SFAS 123(R) Share-Based Payments. The Company adopted FAS 123(R) using the modified prospective method and previous years have not been restated. The Company has a fixed option plan under which the Company may grant options that vest over five years to selected employees for up to 267,327 shares of common stock. The exercise price of each option is intended to equal the fair value of the Company’s stock on the date of grant. An option’s maximum term is ten years. The compensation cost for the stock option expense recognized in 2006 was calculated for all grants based on the grant date’s fair value and totaled $15,000 for the first quarter of 2006. The Company has used the Black-Scholes option pricing model for all grant date estimations of fair value as the Company believes that its stock options have characteristics for which the Black-Scholes model provides an acceptable measure of fair value. For all of the Company’s option plans, options are issued to employees at the current market price on the grant date. The expected term of an option represents the period of time that the Company expects the options granted to be outstanding. The Company bases this estimate on a number of factors including vesting period, historical data and expected volatility. The expected volatility used in the option pricing calculation is estimated considering historical volatility. The expected dividend yield represents the dividends expected to be paid on the underlying shares during the current year. The Company’s options do not permit option holders to receive dividends and therefore the expected dividend yield was factored into the

9

calculation. The risk-free rate is assumed to be a short-term treasury rate on the date of grant such as a U.S. Treasury issue with a term equal to the expected term of the option. Our adoption of SFAS 123(R) impacted our results of operations by increasing salaries and benefits expense. The amount of the impact was immaterial to the Company for the three months ended March 31, 2006 and is not expected to be material in the future.

For purposes of pro forma disclosure, for the period ended March 31, 2005, the estimated fair value of the options is amortized to expense over the vesting period. Under the fair value method, the Company’s net income and earnings per share would have been (thousands, except per share amounts):

	For the three months ended March 31, 2005
Net income, as reported	$	1,227
Less: Total stock-based employee compensation cost determined under the fair value method, net of income taxes		(11	)
Pro forma net income	$	1,216
Earnings per share:
Basic – as reported	$	.39
Basic – pro forma	$	.39
Diluted – as reported	$	.39
Diluted – pro forma	$	.38

10

Report of Independent Registered Public Accounting Firm

Audit Committee

NB&T Financial Group, Inc.

Wilmington, Ohio

We have reviewed the accompanying condensed consolidated balance sheet of NB&T Financial Group, Inc. as of March 31, 2006 and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 2006 and 2005. 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, 2005 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 2, 2006 and February 17, 2006, 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, 2005 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

April 28, 2006

11

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

Results of Operations

NB&T Financial Group, Inc. (Nasdaq: NBTF), parent company of The National Bank and Trust Company, Wilmington, Ohio, announced a net loss for the first quarter of 2006 of $304,000, or $.10 per diluted share, compared to net income of $1.23 million, or $.39 per diluted share, for the same period last year. The net loss is a result of approximately $1.5 million in prepayment penalties from the early payoff of approximately $47.2 million in Federal Home Loan Bank debt in February 2006. In addition, certain securities were sold at a net loss of approximately $150,000 in order to pay off the debt. The decrease in net income was also due to an increase in the provision for loan losses of $535,000 over the same period last year. The losses in 2006 represented .19% of assets and 2.11% of equity, compared to a return on assets of .76% and a return on equity of 8.45% for the first quarter of 2005.

Net Interest Income

Net interest income was $4.60 million for the first quarter of 2006, a decrease of $159,000 compared to the same quarter last year. Net interest margin decreased to 3.13% for the first quarter of this year from 3.18% for the first quarter of last year. Interest income increased to $8.54 million for the first quarter of 2006 from $7.89 million for the same period last year. Average interest-earning assets decreased approximately 2.0% to $596.9 million, while the average yield increased from 5.26% for the first quarter of 2005 to 5.80% for the first quarter of 2006 with a shift in earning assets from investment securities to higher-yielding loans. Total interest expense increased $805,000 to $3.94 million during the first quarter of 2006 from $3.13 million during the same period last year. Although average interest bearing liabilities decreased 2.1% from last year to $527.1 million, their cost increased to 3.03% during the first quarter of this year from 2.36% in the first quarter of last year. This is largely the result of increased rates on money market accounts, certificates of deposit and repurchase agreements.

Provision for Loan Losses

The provision for loan losses increased to $610,000 during the first quarter of 2006 from $75,000 during the first quarter of last year. The higher provision for loan losses in the first quarter of 2006 is a result of increased bankruptcy filings by Bank customers associated with recent bankruptcy law changes and additional specific reserves on two commercial loans. Net charge-offs were $175,000, or 0.17% of total average loans outstanding (annualized) in the first quarter of 2006, compared to $169,000, or 0.17% (annualized), for the same period of 2005. Non-performing loans totaled $8.1 million at March 31, 2006, relatively unchanged from December 31, 2005. The percentage of the allowance for loan losses to total loans was 1.06% at March 31, 2006.

Non-interest Income

Non-interest income, excluding losses on sales of securities, was $2.13 million for the first quarter of 2006, relatively unchanged from the $2.12 million earned in the first quarter of 2005. Service charges and fees increased 10.3% from last year due to an increase in fees on overdrawn accounts. Trust income decreased 14.6% from 2005 due to fewer accounts, and ATM network fees continued to decline following the Company’s decision to significantly decrease its ATM network. The Company realized $150,000 in net securities losses in the first quarter of 2006 from the sale of $17.9 million in securities. No securities were sold in the first quarter of 2005.

Non-interest Expense

Non-interest expense increased $1.5 million, or 27.6%, to $6.76 million for the first quarter of 2006 from $5.30 million for the first quarter of 2005. This increase is largely the result of $1.5 million in prepayment penalties from the early payoff of approximately $47.2 million in Federal Home Loan Bank debt. In addition, marketing expense increased $73,000, or 68.2%, from the first quarter last year due to new corporate marketing initiatives.

Income Taxes

The provision for income taxes for the first quarter of 2006 was a credit of $485,000 compared to $277,000 expense for the same period in 2005. The effective tax benefit for the three months ended March 31, 2006 was 61.5% compared to 18.4% for the same period in 2005. The increase in the effective tax rate is due to the net loss in the first quarter of 2006 with relatively the same level of tax-exempt income and tax-deductible expenses.

12

Financial Condition

The changes that have occurred in NB&T Financial Group, Inc.’s financial condition during 2006 are as follows (in thousands):

	March 31, 2006		December 31, 2005		2006 Change
					Amount			Percent
Total Assets	$	633,667	$	650,248	$	(16,581	)	(2.5	)
Federal Funds Sold		972		232		740		319.0
Loans, net		420,454		413,565		6,889		1.7
Securities		149,242		171,567		(22,325	)	(13.0	)
Demand deposits		53,771		60,657		(6,886	)	(11.4	)
Savings, NOW, MMDA deposits		210,812		197,987		12,825		6.5
CD’s $100,000 and over		52,894		47,013		5,881		12.5
Other time deposits		157,065		141,969		15,096		10.6
Total deposits		474,542		447,626		26,916		6.0
Short-term borrowing		36,920		30,027		6,893		23.0
Long-term borrowing		61,361		109,039		(47,678	)	(43.7	)
Stockholders Equity		57,125		58,498		(1,373	)	(2.3	)

At March 31, 2006, total assets were $633.7 million, a decrease of $16.6 million from December 31, 2005. The decrease is primarily attributable to a decrease in the securities portfolio of $22.3 million, resulting from the sale of approximately $17.9 million in securities to payoff Federal Home Loan Bank debt. Loans increased $6.9 million during 2006. Total deposits increased $26.9 million in 2006 with approximately $15.2 million in new brokered deposits to partially fund the payoff of Federal Home Loan Bank debt. In addition, the Company has experienced growth in its personal money market accounts and small certificates of deposit due to increased interest rates. Short-term borrowings increased $6.9 million due to increased public funds in repurchase agreements. Long-term borrowings decreased $47.7 million due to the early payoff of Federal Home Loan Bank debt. Stockholders’ equity decreased $1.4 million during the year to $57.1 million primarily due to a net loss in the first quarter of $304,000, a decrease in other comprehensive income of $279,000 resulting from a decrease in market value of securities available for sale and the payment of dividends of $857,000.

Average total assets decreased 1.7% to $645.8 million from the first quarter of 2005. Average total loans increased to $420.8 million, an increase of 5.0% from the same quarter of last year. The securities portfolio average has decreased $10.2 million from the first quarter of 2005 to $162.1 million due to security sales and principal payments. Average federal funds sold also declined $17.4 million from the first quarter of 2005.

Average total deposits increased $4.9 million for the first quarter of 2006 to $456.9 million, compared to an average of $452.0 million for the same quarter last year. Average short-term borrowings increased $10.1 million to $41.7 million due to increased public fund deposits in repurchase agreements. Average long-term borrowings decreased $26.4 million, or 23.7%, due to the early payoff of $47.2 million in advances in February 2006 as well as regular monthly payments on amortizing advances.

13

Allowance for Loan Losses

The following table is a summary of the Company’s loan loss experience for the periods ended March 31, 2006 and 2005 (dollars in thousands):

	Three Months Ended March 31
	2006			2005
Balance at beginning of period	$	4,058		$	4,212
Charge-offs:
Commercial and industrial		(7	)		(35	)
Commercial real estate		(16	)		(27	)
Agricultural		—			—
Residential real estate		(59	)		(23	)
Consumer		(278	)		(267	)
Other		—			—
Total charge-offs		(360	)		(352	)
Recoveries:
Commercial and industrial		17			22
Commercial real estate		23			16
Agricultural		11			1
Residential real estate		6			10
Consumer		128			134
Other		—			—
Total recoveries		185			183
Net charge-offs		(175	)		(169	)
Provision for possible loan losses		610			75
Balance at end of period	$	4,493		$	4,118

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

	March 31, 2006			December 31, 2005			March 31, 2005
Loans accounted for on non-accrual basis	$	8,092		$	8,178		$	2,513
Accruing loans which are past due 90 days		—			—			350
Renegotiated loans		0			0			0
Other real estate owned		255			334			132
Total non-performing assets	$	8,347		$	8,512		$	2,995
Ratios:
Allowance to total loans		1.06	%		.97	%		1.03	%
Net charge-offs to average loans (annualized)		.17	%		0.25	%		.17	%
Non-performing assets to total loans and other real estate owned		1.96	%		2.04	%		.75	%

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.

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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 March 31, 2006, there were $6.2 million in eighteen non-accrual small business relationships. The majority of this amount consisted of one $4.8 million relationship, secured by a nursing home.

Non–accrual residential real estate loans totaled $1.5 million and consisted of 26 loans with the largest balance being $153,000. Non-accrual consumer loans consisted of fifty-nine loans that totaled $346,000, and home equity credit loans consisted of 7 loans totaling $72,000.

Liquidity and Capital Resources

Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as Company cash needs, are met. The Company manages liquidity on both the asset and liability sides of the balance sheet. The loan-to-deposit ratio at March 31, 2006 was 89.5%, compared to 93.3% at the same date in 2005. Loans to total assets were 67.1% at the end of the first quarter of 2006, compared to 64.2% at the same time last year. Management strives to keep this ratio below 70%. The Company has $149.2 million in available-for-sale securities that are readily marketable. Approximately 83.0% 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 86.7% 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 March 31, 2006, NB&T Financial Group, Inc. had a total risk-based capital ratio of 14.78%, a Tier 1 risk-based capital ratio of 13.75%, and a Tier 1 leverage ratio of 9.39%.

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, 2005. 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.

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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

None

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 March 31, 2006, the Company’s simulation model indicated the twelve-month cumulative static gap as a percent of total assets was a negative 4.8%, compared to a positive 3.0% at December 31, 2005. This change is primarily the result of a decrease in investments maturing within one year , an increase in time deposits with maturities less than one year, and projected conversion of certain fixed-rate Federal Home Loan Bank advances to three-month adjustable-rate advances. Despite this gap position, rates on loans repricing with base indices tied to the three- and five-year treasury rates may not change to the same extent as rates on deposits, which are more influenced by short-term rates. As a result, this 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 March 31, 2006, that the Company’s disclosure controls and procedures were effective.

(b) During the quarter ended March 31, 2006, 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 1A – Risk Factors

No material changes from risk factors disclosed in Form 10-K

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

None

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

Exhibit Number	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.
10.1	Amended and Restated National Bank & Trust Incentive Plan
10.2	Employment Agreement of John J. Limbert
10.3	NB&T Financial Group, Inc. 2006 Equity Plan
10.4	Stock Option Award Agreement for John J. Limbert
10.5	Consulting Agreement for Timothy L. Smith
10.6	Amendment to Employment Agreement for John J. Limbert
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.

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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: May 11, 2006	/s/ Craig F. Fortin
	Craig F. Fortin
	Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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Index to Exhibits

Exhibit Number	Description	Page Reference
3.1	Third Amended and Restated Articles of Incorporation of NB&T Financial Group, Inc.	Incorporated by reference to registrant’s 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 registrant’s Definitive Proxy Statement filed on March 31, 2003, Exhibit B
10.1	Amended and Restated National Bank & Trust Incentive Plan	Incorporated by reference to registrant’s Current Form 8-K filed on February 24, 2006
10.2	Employment Agreement of John J. Limbert	Incorporated by reference to registrant’s Current Form 8-K filed on March 2, 2006
10.3	NB&T Financial Group, Inc. 2006 Equity Plan	Incorporated by reference to registrant’s Definitive Proxy Statement filed on March 28, 2006, Exhibit A
10.4	Stock Option Award Agreement for John J. Limbert	Page 21
10.5	Consulting Agreement for Timothy L. Smith	Incorporated by reference to registrant’s Current Report on Form 8-K filed on March 22, 2006, Exhibit 99.1
10.6	Amendment to Employment Agreement for John J. Limbert	Page 26
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.

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