NB&T Financial (NBTF) 10-Q 2007 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, 2007

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 shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: As of May 2, 2007, 3,232,432 common shares were issued and outstanding.

NB&T FINANCIAL GROUP, INC.

March 31, 2007 Form 10-Q

Table of Contents

	PART I
		Page
Item 1:	Financial Statements
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
	Report of Independent Registered Public 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	15
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 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, 2007			December 31, 2006
	(Unaudited)
Assets
Cash and due from banks	$	9,489		$	15,620
Interest-bearing demand deposits		151			156
Federal funds sold		13,102			3,197
Cash and cash equivalents		22,742			18,973
Securities—available-for-sale		79,104			82,896
Loans held for sale		528			144
Loans, net of allowance for loan losses of $4,614 and $4,762		397,139			405,459
Total Loans		397,667			405,603
Premises and equipment		13,539			13,424
Federal Reserve and Federal Home Loan Bank stock		9,021			9,021
Earned income receivable		3,336			3,675
Goodwill and other intangibles		5,257			5,404
Bank-owned life insurance		13,179			13,053
Other assets		3,067			3,133
Total assets	$	546,912		$	555,182
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	56,856		$	66,479
Savings, NOW and Money Market		205,164			196,929
Time		185,028			189,860
Total deposits		447,048			453,268
Short-term borrowings		853			2,864
Long-term debt		36,748			36,748
Interest payable and other liabilities		3,746			4,079
Total liabilities		488,395			496,959
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		10,265			10,236
Retained earnings		54,041			53,926
Unearned employee stock ownership plan (ESOP) shares		(901	)		(952	)
Accumulated other comprehensive income		184			85
Treasury stock; 586,518 shares—2007 and 586,518 shares—2006		(6,072	)		(6,072	)
Total stockholders’ equity		58,517			58,223
Total liabilities and stockholders’ equity	$	546,912		$	555,182

See Notes to Condensed Consolidated Financial Statements

3

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)		Three Months Ended March 31,
		2007		2006
		(Unaudited)
Interest and Dividend Income
Loans		$	6,946	$	6,843
Securities-taxable			413		1,068
Securities-tax-exempt			418		444
Federal funds sold and other			97		58
Dividends on Federal Home Loan and Federal Reserve Bank stock			142		126
Total interest and dividend income			8,016		8,539
Interest Expense
Deposits	��		3,083		2,376
Short-term borrowings			18		438
Long-term debt			532		1,125
Total interest expense			3,633		3,939
Net Interest Income			4,383		4,600
Provision for Loan Losses			5		610
Net Interest Income After Provision for Loan Losses			4,378		3,990
Non-interest Income
Trust income			229		240
Service charges and fees			747		822
Insurance agency commissions			704		746
Net (losses) on sales of securities			—		(150	)
Other			351		323
Total non-interest income			2,031		1,981
Non-interest Expense
Salaries and employee benefits			2,878		2,896
Net occupancy expense			427		436
Equipment and data processing expense			612		654
Professional fees			359		385
Marketing expense			109		180
State franchise tax			185		184
Amortization of intangibles			147		151
Prepayment penalty on FHLB debt			—		1,363
Other			490		511
Total non-interest expense			5,207		6,760
Income (Loss) Before Income Tax			1,202		(789	)
Provision (Benefit) for Income Taxes			196		(485	)
Net Income (Loss)		$	1,006	$	(304	)
Basic Earnings (Loss) Per Share		$	.32	$	(.10	)
Diluted Earnings (Loss) Per Share		$	.32	$	(.10	)
Dividends Declared Per Share		$	.28	$	.27

See Notes to Condensed Consolidated Financial Statements

4

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)	Three Months Ended, March 31
	2007			2006
	(Unaudited)
Operating Activities
Net income (loss)	$	1,006		$	(304	)
Items not requiring (providing) cash
Depreciation and amortization		476			530
Provision for loan losses		5			610
Amortization of premiums and discounts on securities		97			197
Net realized losses on available-for-sale securities		—			150
FHLB stock dividends		—			(110	)
Net change in:
Loans held for sale		(384	)		—
Other assets and liabilities		(25	)		(1,405	)
Net cash provided by (used) in operating activities		1,175			(332	)
Investing Activities
Purchases of available-for-sale securities		(5,590	)		(12,990	)
Proceeds from sales of available-for-sale securities		—			17,944
Proceeds from maturities of available-for-sale securities		9,435			16,602
Net change in loans		8,315			(7,499	)
Purchase of premises and equipment		(444	)		(206	)
Net cash provided by investing activities		11,716			13,851
Financing Activities
Net change in:
Deposits		(6,220	)		26,916
Short-term borrowings		(2,011	)		6,893
Repayment of FHLB advances		—			(47,678	)
Cash dividends		(891	)		(857	)
Net cash (used in) financing activities		(9,122	)		(14,726	)
Increase (Decrease) in Cash and Cash Equivalents		3,769			(1,207	)
Cash and Cash Equivalents, Beginning of Year		18,973			17,399
Cash and Cash Equivalents, End of Period	$	22,742		$	16,192

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 condensed consolidated balance sheet as of December 31, 2006 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. (the “Company”) as of March 31, 2007, and December 31, 2006, and the results of its operations and cash flows for the three-month periods ended March 31, 2007 and 2006. 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 on Form 10-K for the year ended December 31, 2006 filed with the Commission.

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, 2007:
Available-for-Sale Securities:
U.S. government agencies and sponsored entities	$	21,710	$	—	$	(286	)	$	21,424
Mortgage-backed securities		23,080		41		(281	)		22,840
State and political subdivisions		34,024		844		(38	)		34,830
Other securities		10		—		—			10
	$	78,824	$	885	$	(605	)	$	79,104
December 31, 2006:
Available-for-Sale Securities:
U.S. government agencies and sponsored entities	$	28,796	$	—	$	(434	)	$	28,362
Mortgage-backed securities		20,340		14		(353	)		20,001
State and political subdivisions		33,623		937		(37	)		34,523
Other securities		10		—		—			10
	$	82,769	$	951	$	(824	)	$	82,896

6

Note 3: Loans

Categories of loans include (thousands):

	March 31, 2007			December 31, 2006
Commercial and industrial	$	73,214		$	76,182
Agricultural		23,553			22,916
Real estate construction		19,902			19,958
Commercial real estate		90,874			87,018
Residential real estate		138,194			140,083
Consumer		56,127			64,204
Total loans		401,864			410,361
Less
Net deferred loan fees, premiums and discounts		(111	)		(140	)
Allowance for loan losses		(4,614	)		(4,762	)
Net loans	$	397,139		$	405,459

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

	Three Months Ended March 31,
	2007			2006
Balance, beginning of year	$	4,762		$	4,058
Provision for loan losses		5			610
Recoveries		99			185
Charge-offs		(252	)		(360	)
Balance, end of period	$	4,614		$	4,493

Impaired loans totaled $7,648,000 at March 31, 2007 and $6,854,000 at December 31, 2006. An allowance for loan losses of $1,849,000 and $1,800,000 relates to impaired loans of $6,377,000 and $6,047,000 at March 31, 2007 and December 31, 2006, respectively. At March 31, 2007 and December 31, 2006, impaired loans of $1,271,000 and $807,000 had no related allowance for loan losses.

At March 31, 2007 and December 31, 2006, there were no accruing loans delinquent 90 days or more. Non-accruing loans at March 31, 2007 and December 31, 2006 were $9,542,000 and $8,365,000, respectively.

7

Note 4: Long Term Debt

Long-term debt consisted of the following components (thousands):

	March 31, 2007		December 31, 2006
Federal Home Loan Bank Advances	$	28,500	$	28,500
Junior subordinated debentures		8,248		8,248
Total	$	36,748	$	36,748

Note 5: Commitments

Outstanding commitments to extend credit as of March 31, 2007 totaled $57,000,000. Standby letters of credit as of March 31, 2007 totaled $961,000.

Note 6: 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,
	2007		2006
Numerator:
Net income (loss)	$	1,006	$	(304	)
Denominator:
Weighted-average common shares outstanding (basic)		3,186,129		3,173,699
Effect of stock options		184		—
Weighted-average common shares outstanding (diluted)		3,186,313		3,173,699
Earnings (loss) per share:
Basic	$	.32	$	(.10	)
Diluted	$	.32	$	(.10	)

For the three months ended March 31, 2007, stock options covering 106,000 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 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.

Note 7: 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.

8

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, 2007 and December 31, 2006, 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 8: Comprehensive Income

Total comprehensive income was as follows (thousands):

	Three Months Ended March 31,
	2007		2006
Net Income (Loss)	$	1,006	$	(304	)
Other Comprehensive Income (Loss)	$	99	$	(279	)
Total Comprehensive Income (Loss)	$	1,105	$	(583	)

Note 9: Change in Accounting Principle

The Company or one of its subsidiaries files income tax returns in the U.S. federal and Ohio jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local examinations by tax authorities for years before 2004.

The Company adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48),Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of FIN 48, the Company did not identify any uncertain tax positions that it believes should be recognized in the financial statements.

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 March 31, 2007 and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2007 and 2006. 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, 2006 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 26, 2007, 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, 2006 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

May 7, 2007

10

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

Results of Operations

Net income for the first quarter of 2007 was $1.0 million, or $.32 per diluted share, compared to a net loss of $304,000 for the same quarter in 2006. The increase in earnings was due to a decrease in the provision for loan losses in the first quarter of 2007 and the following losses incurred by the Company in the first quarter of 2006: $1.4 million in prepayment penalties from the early payoff of approximately $47.2 million in Federal Home Loan Bank debt and $150,000 in security losses on securities sold to pay off the debt.

Net Interest Income

Net interest income was $4.38 million for the first quarter of 2007, a decrease of $217,000 compared to the first quarter of 2006. Net interest margin, however, increased to 3.55% for the first quarter of 2007 from 3.13% for the first quarter of 2006. Interest income declined to $8.0 million for the first quarter of 2007 from $8.5 million for the same quarter last year. Average interest-earning assets decreased approximately 16.2% to $500.4 million; however, the average yield increased from 5.80% for the first quarter of 2006 to 6.50% for the first quarter of 2007. Total interest expense decreased $306,000 to $3.63 million during the first quarter of 2007 from $3.94 million for the same quarter last year. Although average interest-bearing liabilities decreased 17.1% from last year to $483.9 million, their cost increased to 3.46% during the first quarter of 2007 from 3.03% for the same quarter last year. This is largely the result of increased rates on money market accounts, certificates of deposit and borrowings.

Provision for Loan Losses

The provision for loan losses was $5,000 in the first quarter of 2007 and $610,000 in the first quarter of 2006. The lower provision for loan losses in 2007 is a result of decreased charged-off loans and management’s evaluation of the overall adequacy of the specific reserves on problem loans. Net charge-offs were $153,000 in the first quarter of 2007, compared to $175,000 in the first quarter of 2006. Non-performing loans totaled $9.5 million at March 31, 2007, compared to $8.1 million at March 31, 2006. The allowance for loan losses to total loans was 1.15% at March 31, 2007, compared to 1.06% at March 31, 2006.

Non-interest Income

Total non-interest income was $2.0 million for the first quarter of 2007, relatively unchanged from the first quarter of 2006. Non-interest income for 2006 includes $150,000 in net security losses. Service charges and fees declined from $822,000 for the first quarter of 2006 to $747,000 in the first quarter of 2007. The decline is largely due to lower service charges on business checking accounts and lower fees on overdrawn accounts. In addition, Insurance Agency commissions declined approximately $42,000 in the first quarter of 2007 due to lower profit sharing with insurance carriers based on their performance and claims experience.

Non-interest Expense

Total non-interest expense was $5.2 million for the first quarter of 2007, compared to $6.8 million for the first quarter of 2006. The first quarter of 2006 includes $1.4 million in prepayment penalties from the early payoff of approximately $47.2 million in Federal Home Loan Bank debt.

Income Taxes

The provision for income taxes for the first quarter of 2007 was $196,000, compared to a credit of $485,000 for the same period in 2006. The tax credit in 2006 was due to the FHLB prepayment penalties and security losses with relatively the same level of tax-exempt income and tax-deductible expenses.

11

Financial Condition

The changes that have occurred in the Company’s financial condition during 2007 are as follows (in thousands):

	March 31, 2007		December 31, 2006		2007 Change
					Amount			Percent
Total Assets	$	546,912	$	555,182	$	(8,270	)	(1.5	)
Federal Funds Sold		13,102		3,197		9,905		309.8
Loans, net*		397,667		405,603		(7,936	)	(2.0	)
Securities		79,104		82,896		(3,792	)	(4.6	)
Demand deposits		56,856		66,479		(9,623	)	(14.5	)
Savings, NOW, MMDA deposits		205,164		196,929		8,235		4.2
CD’s $100,000 and over		41,103		45,490		(4,387	)	(9.6	)
Other time deposits		143,925		144,370		(445	)	(.3	)
Total deposits		447,048		453,268		(6,220	)	(1.4	)
Short-term borrowing		853		2,864		(2,011	)	(70.2	)
Long-term borrowing		36,748		36,748		—		—
Stockholders Equity		58,517		58,223		294		.5

* Includes Loans held for sale

At March 31, 2007, total assets were $546.9 million, a decrease of $8.3 million from December 31, 2006. The decrease is primarily attributable to a decrease in the loan portfolio of $7.9 million. Most of the decline in loans is in the consumer loan portfolio, resulting from the Company’s departure from the indirect lending business in the third quarter of 2006. Total deposits decreased $6.2 million in 2007 with a $4.4 million decline in jumbo certificates of deposit. Short-term borrowings decreased $2.0 million due to the decrease in repurchase agreements. Stockholders’ equity increased $294,000 in the first quarter of 2007 to $58.5 million primarily due to increases in the market value of the securities portfolio.

Average total assets decreased 15.4% to $546.1 million from the first quarter of 2006. Average total gross loans decreased to $404.9 million, a decline of 3.7% from the same quarter last year. The securities portfolio average has declined $82.7 million from the first quarter of 2006 to $88.0 million due to security sales, maturities and principal payments.

Average total deposits declined $11.3 million for the first quarter of 2007 to $445.6 million, compared to an average of $456.9 million for the same quarter last year. Average short-term borrowings decreased $40.2 million to $1.5 million due to the movement of repurchase agreement balances to off-balance sheet cash management funds. Average long-term borrowings decreased $48.1 million, or 56.7%, due to the early payoff of $47.2 million in advances in February 2006 and regular monthly payments on amortizing advances.

12

Allowance for Loan Losses

The following table is a summary of the Company’s loan loss experience for the periods ended March 31, 2007 and 2006 (dollars in thousands):

	Three Months Ended March 31
	2007			2006
Balance at beginning of period	$	4,762		$	4,058
Charge-offs:
Commercial and industrial		(40	)		(7	)
Commercial real estate		—			(16	)
Agricultural		—			—
Residential real estate		(47	)		(59	)
Consumer		(165	)		(278	)
Other		—			—
Total charge-offs		(252	)		(360	)
Recoveries:
Commercial and industrial		2			17
Commercial real estate		25			23
Agricultural		4			11
Residential real estate		29			6
Consumer		39			128
Other		—			—
Total recoveries		99			185
Net charge-offs		(153	)		(175	)
Provision for possible loan losses		5			610
Balance at end of period	$	4,614		$	4,493

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

	March 31, 2007			December 31, 2006			March 31, 2006
Loans accounted for on non-accrual basis	$	9,542		$	8,365		$	8,092
Accruing loans which are past due 90 days		—			—			—
Renegotiated loans		—			—			—
Other real estate owned		1,009			1,154			255
Total non-performing assets	$	10,551		$	9,519		$	8,347
Ratios:
Allowance to total loans		1.15	%		1.16	%		1.06	%
Net charge-offs to average loans (annualized)		.15	%		0.15	%		.17	%
Non-performing assets to total loans and other real estate owned		2.65	%		2.31	%		1.96	%

The allowance is maintained to absorb 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.

13

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, 2007, there was $7.6 million in 18 non-accrual small business relationships. The majority of this amount consisted of one $4.6 million relationship, secured by a nursing home, and one $1.3 million relationship, secured by commercial office buildings. In addition, one relationship, secured by a golf course, was put on non-accrual status during the first quarter of 2007.

Non–accrual residential real estate loans totaled $1.5 million and consisted of 22 loans with the largest balance being $175,000. Non-accrual consumer loans consisted of 43 loans that totaled $234,000, and home equity credit loans consisted of eleven loans totaling $138,000.

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, 2007 was 90.0%, compared to 89.5% at the same date in 2006. Loans to total assets were 73.6% at the end of the first quarter of 2007, compared to 67.1% at the same time last year. The Company has $79.1 million in available-for-sale securities that are readily marketable. Approximately 67.7% 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 89.7% 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, 2007, the Company had a total risk-based capital ratio of 16.02%, a Tier 1 risk-based capital ratio of 14.89%, and a Tier 1 leverage ratio of 11.19%.

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, 2006. 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.

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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.

The Bank manages its interest rate risk regularly through its Asset/Liability Committee. The Committee meets on a monthly basis and reviews various asset and liability management information, including but not limited to, the Bank’s interest rate risk position, liquidity position, projected sources and uses of funds and economic conditions.

The Bank uses simulation models to manage interest rate risk. In the Bank’s simulation models, each asset and liability balance is projected over a one-year horizon. Net interest income is then projected based on expected cash flows and projected interest rates under a stable rate scenario and analyzed on a monthly basis. The results of this analysis are used in decisions made concerning pricing strategies for loans and deposits, balance sheet mix, securities portfolio strategies, liquidity and capital adequacy. The Bank’s current one-year simulation model under stable rates indicates increasing yields on interest-earning assets will exceed increasing costs of interest-bearing liabilities. This position could have a positive effect on projected net interest margin over the next twelve months.

Simulation models are also performed for ramped 100, 200 and 300 basis point increases or decreases in interest rates over one year. The results of these simulation models are compared with the stable rate simulation. The model includes assumptions as to repricing and expected prepayments, anticipated calls, and expected decay rates of transaction accounts under the different rate scenarios. The results of these simulations include changes in both net interest income and market value of equity. ALCO guidelines that measure interest rate risk by the percent of change from stable rates, and capital adequacy, have been established, and as the table below indicates at March 31, 2007, the results of these simulations are within those guidelines.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the simulation modeling. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to

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changes in market rates. In addition, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawals from certificates of deposit may deviate significantly from those assumed in making the risk calculations. The Bank’s rate ramp simulation models provide results in extreme interest rate environments and results are used accordingly. Reacting to changes in economic conditions, interest rates and market forces, the Bank has been able to alter the mix of short-and long-term loans and investments, and increase or decrease the emphasis on fixed- and variable-rate products in response to changing market conditions.

	One Year Net Interest Income Change				Economic Value of Equity Change
Rate Ramp	3/31/07		ALCO Guideline		3/31/07		ALCO Guideline
+ 300	-3.9	%	+ 15	%	7.1	%	+ 20	%
+ 200	-2.4		+ 10		5.2		+ 15
+ 100	-1.2		+ 5		3.0		+ 10
- 100	1.0		+ 5		-3.8		+ 10
- 200	1.4		+ 10		-8.2		+ 15
- 300	1.8		+ 15		-13.2		+ 20

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, 2007, that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) During the quarter ended March 31, 2007, 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 for fiscal year ended December 31, 2006.

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

None

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.
15	Accountants’ acknowledgement
31.1	Certification by CEO.
31.2	Certification by CFO.
32.1	Certification by CEO Pursuant to 18 U.S.C. Section 1350.
32.2	Certification by CFO Pursuant to 18 U.S.C. Section 1350.

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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 10, 2007	/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
15	Accountants’ acknowledgement.
31.1	Certification by CEO.
31.2	Certification by CFO.
32.1	Certification by CEO Pursuant to 18 U.S.C Section 1350.
32.2	Certification by CFO Pursuant to 18 U.S.C. Section 1350.

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