NB&T Financial (NBTF) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

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

Large accelerated filer  ¨	Accelerated Filer  ¨
Non-accelerated filer  ¨	Smaller Reporting Company  x
(Do not check if a smaller reporting company)

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 August 11, 2008, 3,168,876 common shares were issued and outstanding.

NB&T FINANCIAL GROUP, INC.

June 30, 2008 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 Public 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	17
Item 4:	Controls and Procedures	18
	Part II
Item 1:	Legal Proceedings	19
Item 1A:	Risk Factors	19
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3:	Defaults Upon Senior Securities	19
Item 4:	Submission of Matters to a Vote of Security Holders	19
Item 5:	Other Information	19
Item 6:	Exhibits and Reports on Form 8-K	19
Signatures		20
Index to Exhibits		21

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NB&T Financial Group, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands)	June 30, 2008			December 31, 2007
	(Unaudited)
Assets
Cash and due from banks	$	12,082		$	12,707
Interest-bearing deposits		20,746			10,699
Federal funds sold		4,652			2,749
Cash and cash equivalents		37,480			26,155
Interest-bearing time deposits		8,000			—
Securities—available-for-sale		90,906			89,275
Loans held for sale		313			1,503
Loans, net of allowance for loan losses of $3,534 and $3,594		340,482			354,169
Total loans		340,795			355,672
Premises and equipment		16,387			15,453
Federal Reserve and Federal Home Loan Bank stock		9,248			9,023
Earned income receivable		2,820			3,288
Goodwill and other intangibles		4,818			4,930
Bank-owned life insurance		13,816			13,564
Other assets		2,579			1,562
Total assets	$	526,849		$	518,922
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	57,942		$	59,804
Savings, NOW and Money Market		197,626			192,295
Time		167,574			168,155
Total deposits		423,142			420,254
Short-term borrowings		1,485			722
Long-term debt		39,810			34,810
Interest payable and other liabilities		3,829			4,253
Total liabilities		468,266			460,039
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		10,368			10,380
Retained earnings		54,874			54,810
Unearned employee stock ownership plan (ESOP) shares		(650	)		(749	)
Accumulated other comprehensive income		297			658
Treasury stock; 648,649 shares—2008 and 640,638 shares—2007		(7,306	)		(7,216	)
Total stockholders’ equity		58,583			58,883
Total liabilities and stockholders’ equity	$	526,849		$	518,922

See Notes to Condensed Consolidated Financial Statements

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NB&T Financial Group, Inc.

Condensed Consolidated Statements of Income

(Dollars in thousands, except per share amounts)	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008		2007
	(Unaudited)					(Unaudited)
Interest and Dividend Income
Loans	$	5,653		$	7,376	$	11,603	$	14,322
Securities-taxable		782			451		1,541		864
Securities-tax-exempt		385			439		777		857
Federal funds sold and other		270			216		540		314
Dividends on Federal Home Loan and Federal Reserve Bank stock		124			145		244		287
Total interest and dividend income		7,214			8,627		14,705		16,644
Interest Expense
Deposits		2,140			3,161		4,663		6,244
Short-term borrowings		3			9		7		27
Long-term debt		516			508		1,026		1,040
Total interest expense		2,659			3,678		5,696		7,311
Net Interest Income		4,555			4,949		9,009		9,333
Provision for Loan Losses		95			145		190		150
Net Interest Income After Provision for Loan Losses		4,460			4,804		8,819		9,183
Non-interest Income
Trust income		250			237		485		466
Service charges and fees		853			844		1,665		1,591
Insurance agency commissions		599			625		1,340		1,329
Net gains on sales of securities		11			—		11		—
Other		334			442		824		792
Total non-interest income		2,047			2,148		4,325		4,178
Non-interest Expense
Salaries and employee benefits		2,994			2,888		6,065		5,766
Net occupancy expense		496			433		1,008		861
Equipment and data processing expense		717			627		1,392		1,239
Professional fees		328			367		673		726
Marketing expense		156			167		228		276
State franchise tax		197			189		390		374
Amortization of intangibles		56			148		112		294
Other		543			563		1,009		1,053
Total non-interest expense		5,487			5,382		10,877		10,589
Income Before Income Tax		1,020			1,570		2,267		2,772
Provision for Income Taxes		156			323		386		519
Net Income	$	864		$	1,247	$	1,881	$	2,253
Basic Earnings Per Share	$	.28	��	$	.39	$	.60	$	.71
Diluted Earnings Per Share	$	.28		$	.39	$	.60	$	.71
Dividends Declared Per Share	$	.29		$	.28	$	.58	$	.56

See Notes to Condensed Consolidated Financial Statements

4

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)	Six Months Ended, June 30
	2008			2007
	(Unaudited)
Operating Activities
Net income	$	1,881		$	2,253
Items not requiring (providing) cash
Depreciation and amortization		864			967
Provision for loan losses		190			150
Amortization of premiums and discounts on securities		(180	)		133
Gain on sale of securities		(11	)		—
FHLB stock dividends		(222	)		—
Net change in:
Loans held for sale		1,190			(183	)
Other assets and liabilities		(880	)		246
Net cash provided by operating activities		2,832			3,566
Investing Activities
Purchases of available-for-sale securities		(18,965	)		(13,475	)
Proceeds from maturities of available-for-sale securities		16,976			16,389
Net change in interest-bearing time deposits		(8,000	)		—
Net change in loans		13,497			24,646
Purchase of premises and equipment		(1,686	)		(1,158	)
Net cash provided by investing activities		1,822			26,402
Financing Activities
Net change in:
Deposits		2,888			(9,847	)
Short-term borrowings		763			(1,549	)
New FHLB advances		5,000			10,310
Repayment of long-term debt		—			(12,248	)
Purchase of treasury shares		(163	)		(137	)
Cash dividends		(1,817	)		(1,781	)
Net cash provided by (used in) financing activities		6,671			(15,252	)
Increase in Cash and Cash Equivalents		11,325			14,716
Cash and Cash Equivalents, Beginning of Year		26,155			18,973
Cash and Cash Equivalents, End of Period	$	37,480		$	33,689

See Notes to Condensed Consolidated Financial Statements

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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, 2007 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 June 30, 2008, and December 31, 2007, and the results of its operations for the three and six month periods ended June 30, 2008 and 2007 and cash flows for the six-month periods ended June 30, 2008 and 2007. 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, 2007 filed with the Commission.

Note 2: Securities

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

Available-for-Sale Securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Fair Value
June 30, 2008:
U.S. government agencies and sponsored entities	$	10,617	$	45	$	(10	)	$	10,652
Mortgage-backed securities		50,927		325		(409	)		50,843
State and political subdivisions		28,912		517		(18	)		29,411
	$	90,456	$	887	$	(437	)	$	90,906
December 31, 2007:
U.S. government agencies and sponsored entities	$	14,581	$	36	$	(42	)	$	14,575
Mortgage-backed securities		40,970		401		(78	)		41,293
State and political subdivisions		32,725		691		(9	)		33,407
	$	88,276	$	1,128	$	(129	)	$	89,275

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Note 3: Loans

Categories of loans include (thousands):

	June 30, 2008			December 31, 2007
Commercial and industrial	$	57,687		$	62,455
Agricultural		24,642			24,910
Real estate construction		4,419			9,203
Commercial real estate		97,339			95,801
Residential real estate		128,917			124,849
Consumer		31,061			40,552
Total loans		344,065			357,770
Less: Net deferred loan fees, premiums and discounts		(49	)		(7	)
Allowance for loan losses		(3,534	)		(3,594	)
Net loans	$	340,482		$	354,169

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

	Six Months Ended June 30,
	2008			2007
Balance, beginning of year	$	3,594		$	4,762
Provision for loan losses		190			150
Recoveries		172			228
Charge-offs		(422	)		(1,147	)
Balance, end of period	$	3,534		$	3,993

Impaired loans totaled $2,124,000 at June 30, 2008 and $2,046,000 at December 31, 2007. An allowance for loan losses of $535,000 and $65,000 relates to impaired loans of $1,476,000 and $389,000 at June 30, 2008 and December 31, 2007, respectively. At June 30, 2008 and December 31, 2007, impaired loans of $648,000 and $1,657,000 had no related allowance for loan losses.

At June 30, 2008 and December 31, 2007, there were $83,000 and $253,000 accruing loans delinquent 90 days or more. Non-accruing loans at June 30, 2008 and December 31, 2007 were $3,102,000 and $1,729,000, respectively.

Note 4: Long Term Debt

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

	June 30, 2008		December 31, 2007
Federal Home Loan Bank Advances	$	29,500	$	24,500
Junior subordinated debentures		10,310		10,310
Total	$	39,810	$	34,810

On June 25, 2007, NB&T Statutory Trust III (“Trust III”), a wholly owned subsidiary of the Corporation, closed a pooled private offering of 10,000 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 III

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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 III under the Capital Securities. Distributions on the Capital Securities are payable quarterly at a fixed interest rate of 7.071% through September 6, 2012 and thereafter at the annual rate of 1.50% over the 3 month LIBOR. Distributions on the Capital Securities 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 September 6, 2037, at the option of the Corporation. On or after September 6, 2012, 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 September 6, 2012 at a premium. The Corporation has the option to defer distributions on the Capital Securities from time to time for a period not to exceed 20 consecutive semi-annual periods.

As of June 30, 2008 and December 31, 2007, the outstanding principal balance of the Capital Securities was $10,000,000. 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 5: Commitments

Outstanding commitments to extend credit as of June 30, 2008 totaled $47,742,000. Standby letters of credit as of June 30, 2008 totaled $2,806,000.

Note 6: Earnings Per Share

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Numerator:
Net income	$	864	$	1,247	$	1,881	$	2,253
Denominator:
Weighted-average common shares outstanding (basic)		3,136,626		3,188,655		3,139,263		3,187,764
Effect of stock options		429		2,001		619		1,889
Weighted-average common shares outstanding (diluted)		3,137,055		3,190,656		3,139,882		3,189,653
Earnings per share:
Basic	$	.28	$	.39	$	.60	$	.71
Diluted	$	.28	$	.39	$	.60	$	.71

Options to purchase 218,500 shares of common stock were outstanding at June 30, 2008, but not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares. Options to purchase 106,000 shares of common stock were outstanding at June 30, 2007, but not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares.

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Note 7: Comprehensive Income

Total comprehensive income was as follows (thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Net Income	$	864		$	1,247		$	1,881		$	2,253
Other Comprehensive Income (Loss)	$	(716	)	$	(280	)	$	(261	)	$	(181	)
Total Comprehensive Income	$	148		$	967		$	1,620		$	2,072

Note 8: Accounting for Uncertainty in Income Taxes

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 2005.

Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48),Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, 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 of June 30, 2008, the Company did not identify any uncertain tax positions that it believes should be recognized in the financial statements.

Note 9: Fair Value of Assets and Liabilities

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157,Fair Value Measurements (FAS 157). FAS 157 define fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the period.

FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Available-for-Sale Securities

The fair value of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include U.S. government agencies, mortgage-backed securities, and obligations of political and state subdivisions. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or other means.

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The following table presents the fair value measurements of assets and liabilities measured at fair value on a recurring basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fall at June 30, 2008:

Description	Fair Value		Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities	$	90,906	$	—	$	90,906	$	—
The following table presents the fair value measurements of assets and liabilities measured at fair value on a nonrecurring basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fall at June 30, 2008:
Description	Fair Value		Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	941	$	—	$	—	$	941

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Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

NB&T Financial Group, Inc.

Wilmington, Ohio

We have reviewed the accompanying condensed consolidated balance sheet of NB&T Financial Group, Inc. as of June 30, 2008 and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2008 and 2007 and cash flows for the six-month periods ended June 30, 2008 and 2007. 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, 2007 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 15, 2008, 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, 2007 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ BKD, LLP

Cincinnati, Ohio

August 4, 2008

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

Results of Operations

Net income for the second quarter of 2008 was $864,000, or $.28 per diluted share, compared to $1.2 million, or $.39 per diluted share, for the same quarter last year. Net income for the first six months of 2008 was $1.9 million, or $.60 per diluted share, compared to $2.3 million, or $.71 per diluted share, for the first six months of 2007. Last year's net income included $324,000 of paid interest on non-accrual loans returned to accrual status in June 2007. In addition, the Bank opened three new branches in the first half of 2008, increasing its personnel and occupancy expenses approximately $370,000 over last year.

Net Interest Income

Net interest income was $4.6 million for the second quarter of 2008, a decrease of $394,000 compared to the second quarter of 2007. Net interest margin declined to 3.78% for the second quarter of 2008 from 3.98% for the second quarter of 2007. For the first six months of 2008, net interest income was $9.0 million compared to $9.3 million for the same period last year. One reason for the decrease is that the six-month period ending June 30, 2007 included $324,000 of paid interest on non-accrual loans returned to accrual status. Secondly, while average interest-earning assets decreased approximately 2.9%, or $14.6 million, to $483.9 million during the second quarter of 2008 compared to the second quarter of 2007, average loans decreased $40.6 million. The excess funds were reinvested in securities and short-term investments at lower yields due to the Federal Reserve dropping interest rates approximately 325 basis points from last year. As a result, the average yield on earning assets decreased from 6.94% for the second quarter of 2007 to 5.98% for the second quarter of 2008. Finally, offsetting the decrease in interest income was a decrease in interest expense of $1.0 million to $2.7 million during the second quarter of 2008 from $3.7 million for the same quarter last year. Average interest-bearing liabilities decreased 3.7% from last year to $408.7 million, and their cost decreased to 2.61% during the second quarter of 2008 from 3.48% for the same quarter last year.

Provision for Loan Losses

The provision for loan losses was $95,000 in the second quarter of 2008 and $145,000 in the second quarter of 2007. Net charge-offs were $95,000, or 0.11% of total average loans, in the second quarter of 2008, compared to $766,000, or 0.78% of total average loans, in the second quarter of 2007. Non-performing loans totaled $3.2 million at June 30, 2008, compared to $3.3 million at June 30, 2007. The allowance for loan losses to total loans was 1.03% at June 30, 2008, compared to 1.04% at June 30, 2007.

Non-interest Income

Total non-interest income was $2.0 million for the second quarter of 2008, compared to $2.1 million for the same quarter last year. Total non-interest income was $4.3 million for the first half of 2008, compared to $4.2 million for the first half of 2007. The increase is largely due to increased deposit service charges and a gain of approximately $116,000 on the mandatory redemption of Visa shares as a result of the Visa initial public offering.

Non-interest Expense

Total non-interest expense was $5.5 million for the second quarter of 2008, compared to $5.4 million for the second quarter of 2007. Non-interest expense was $10.9 million for the first half of 2008, compared to $10.6 million for the first half of 2007. The increase in non-interest expense is largely due to approximately $370,000 in increased personnel and occupancy costs associated with opening three new branches in the first half of 2008.

Income Taxes

The provision for income taxes for the second quarter of 2008 was $156,000, or 15.3%, compared to $323,000, or 20.6%, for the second quarter of 2007. The decrease in the effective tax rate is due to a decrease in net interest income with relatively the same level of tax-exempt income and tax-deductible expenses.

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Financial Condition

The changes that have occurred in the Company's financial condition during 2008 are as follows (in thousands):

	June 30, 2008		December 31, 2007		2008 Change
					Amount			Percent
Total assets	$	526,849	$	518,922	$	7,927		1.5
Interest-bearing demand deposits		20,746		10,699		10,047		93.9
Federal funds sold		4,652		2,749		1,903		69.2
Interest-bearing time deposits		8,000		—		8,000		NM
Loans, net*		340,795		355,672		(14,877	)	(4.2	)
Securities		90,906		89,275		1,631		1.8
Demand deposits		57,942		59,804		(1,862	)	(3.1	)
Savings, NOW, MMDA deposits		197,626		192,295		5,331		2.8
CD’s $100,000 and over		32,131		30,191		1,940		6.4
Other time deposits		135,443		137,964		(2,521	)	(1.8	)
Total deposits		423,142		420,254		2,888		.7
Short-term borrowing		1,485		722		763		105.7
Long-term borrowing		39,810		34,810		5,000		14.4
Stockholders Equity		58,853		58,883		(30	)	(.1	)

* Includes loans held for sale

At June 30, 2008, total assets were $526.8 million, an increase of $7.9 million from December 31, 2007. The increase is primarily attributable to increases in deposits and long-term borrowings. Total deposit liabilities increased $2.8 million in 2008, with most of the increase in money market accounts and certificates of deposit. Long-term borrowings increased $5.0 million due to a leverage transaction where the funds were borrowed at 2.82% for a year and reinvested in FDIC-insured certificates of deposit at 4.3% for the same term. The additional deposits and the decrease in the loan portfolio was reinvested primarily in interest-bearing demand and time deposits which increased $18.0 million. The loan portfolio decreased $14.9 due to continued runoff of indirect loans and reductions in the real estate construction and commercial loan portfolios. Stockholders’ equity decreased $30,000 in the first half of 2008 to $58.9 million primarily due to decreases in the market value of the securities portfolio.

Average total assets decreased 2.0% to $530.1 million from the second quarter of 2007. Average total gross loans decreased to $342.3 million, a decline of 13.1% from the same quarter last year. Due to the decline in loan volume and the leveraged transaction, excess funds have been invested in securities, which have increased $15.1 million on average, and interest-bearing deposits, which have increased $26.3 million on average, from the same quarter last year.

Average total deposit liabilities declined $18.3 million for the second quarter of 2008 to $427.0 million, compared to an average of $445.4 million for the same quarter last year. Average long-term borrowings increased $5.8 million, or 17.1%, due to the refinancing of the Company’s trust preferred debt in the second quarter of 2007 and the leverage transaction in the first quarter of 2008.

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Allowance for Loan Losses

The following table is a summary of the Company’s loan loss experience for the periods ended June 30, 2008 and 2007 (dollars in thousands):

	Three Months Ended June 30						Six Months Ended June 30
	2008			2007			2008			2007
Balance at beginning of period	$	3,534		$	4,614		$	3,594		$	4,762
Charge-offs:
Commercial and industrial		(18	)		(48	)		(21	)		(88	)
Commercial real estate		—			(707	)		(74	)		(707	)
Agricultural		—			—			—			—
Residential real estate		(27	)		(21	)		(68	)		(68	)
Consumer		(134	)		(119	)		(259	)		(284	)
Total charge-offs		(179	)		(895	)		(422	)		(1,147	)
Recoveries:
Commercial and industrial		8			22			14			24
Commercial real estate		5			25			8			50
Agricultural		9			3			24			7
Residential real estate		30			23			31			52
Consumer		32			56			95			95
Total recoveries		84			129			172			228
Net charge-offs		(95	)		(766	)		(250	)		(919	)
Provision for loan losses		95			145			190			150
Balance at end of period	$	3,534		$	3,993		$	3,534		$	3,993

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

	June 30, 2008			December 31, 2007			June 30, 2007
Loans accounted for on non-accrual basis	$	3,102		$	1,729		$	3,273
Accruing loans which are past due 90 days		83			253			44
Renegotiated loans		—			—			—
Other real estate owned		271			176			722
Total non-performing assets	$	3,456		$	2,158		$	4,039
Ratios:
Allowance to total loans		1.03	%		1.00	%		1.04	%
Net charge-offs to average loans (annualized)		.15	%		0.34	%		.46	%
Non-performing assets to total loans and other real estate owned		1.00	%		.60	%		1.05	%

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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 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 the one- and three-year net charge-off history. In assessing the adequacy of the allowance for loan losses, the Company considers three principal factors: (1) the one- and 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 mortgage and agricultural businesses, and other local economic factors.

As of June 30, 2008, there was $2.2 million in 19 non-accrual small business relationships. The majority of this amount consisted of one $1.1 million relationship, secured by a convenience store.

Non–accrual residential real estate loans totaled $710,000 and consisted of 10 loans with the largest balance being $182,000. Non-accrual consumer loans consisted of 10 loans that totaled $72,000, and home equity credit loans consisted of seven loans totaling $73,000.

Liquidity and Capital Resources

Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as Company cash needs, are met. The Company manages liquidity on both the asset and liability sides of the balance sheet. The loan-to-deposit ratio at June 30, 2008 was 80.5%, compared to 86.8% at the same date in 2007. Loans to total assets were 64.7% at the end of the second quarter of 2008, compared to 71.2% at the same time last year. The Company has $90.9 million in available-for-sale securities that are readily marketable. Approximately 35.4% 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 92.4% core deposits, makes the Company less susceptible to large fluctuations in funding needs. The Company has short-term borrowing lines of credit with several correspondent banks. The Company also has both short- and long-term borrowing available through the Federal Home Loan Bank of Cincinnati. The Company has the ability to obtain deposits in the brokered certificate of deposit market to help provide liquidity to fund loan growth.

The Federal Reserve Board has adopted risk-based capital guidelines that assign risk weightings to assets and off-balance sheet items and also define and set minimum capital requirements (risk-based capital ratios). Bank holding companies must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios of 8%, 4% and 3%, respectively. At June 30, 2008, the Company had a total risk-based capital ratio of 18.27%, a Tier 1 risk-based capital ratio of 17.29%, and a Tier 1 leverage ratio of 12.00%.

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, 2007. 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

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits us to choose to measure certain financial assets and liabilities at fair value that are not currently required to be measured at fair value (i.e. the Fair Value Option). Election of the Fair Value Option is made on an instrument-by-instrument basis and is irrevocable. At the adoption date, unrealized gains and losses on financial assets and liabilities for which the Fair Value Option has been elected would be reported as a cumulative adjustment to beginning retained earnings. If we elect the Fair Value Option for certain financial assets and liabilities, we will report unrealized gains and losses due to changes in their fair value in earnings at each subsequent reporting date. SFAS No. 159 is effective as of January 1, 2008. The Company has not elected the fair value option for any financial assets or liabilities at June 30, 2008.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of FAS 157, guidance for applying fair value was incorporated in several accounting pronouncements. FAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. FAS 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under FAS 157, fair value measurements are disclosed by level within that hierarchy. While FAS 157 does not add any new fair value measurements, it does change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

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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.

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 June 30, 2008, the Bank is within the guidelines established by the Board for net interest income changes, but outside the guidelines for economic value of equity changes for decreasing rate changes of 100 and 200 basis points. A decreasing rate change of 300 basis points is not calculated because the rate would be less than zero for most of the Bank’s liabilities in today’s current low interest rate environment. This current rate environment also reduces the calculated economic value to the Bank the substantial portion of checking and money market account balances maintained by the Bank. In the decreasing 100 and 200 economic value calculations, the calculated value of these same deposits is the primary reason for the Bank exceeding the ALCO guidelines. Both management and the Board believe these deposits have long-term intangible value and help maintain the Bank within the net interest income change guidelines. Therefore, the Board and management will continue to monitor this risk guideline but are not taking any specific action at this time.

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 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.

Rate Ramp	One Year Net Interest Income Change				Economic Value of Equity Change
	6/30/08		ALCO Guideline		6/30/08		ALCO Guideline
+ 300	-1.0	%	±15	%	19.7	%	±20	%
+ 200	-0.7		±10		14.4		±15
+ 100	-0.2		±5		8.2		±10
- 100	-1.2		±5		-10.9		±10
- 200	-2.9		±10		-22.1		±15
- 300	-5.3		±15		NA		±20

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Item 4 – Controls and Procedures

(a) The Company’s principal executive officer and principal financial officer have concluded, based upon their evaluation of the Company's disclosure controls and procedures as of June 30, 2008, 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 June 30, 2008, 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

There are no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

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

(a) Not applicable

(b) Not applicable

(c) Issuer Purchases of Equity Securities—None

Item 3 – Defaults Upon Senior Securities

Not applicable

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

On April 22, 2008, the Annual Meeting of the shareholders of the Company was held.

The following members of the Board of Directors of the Company were reelected for terms expiring in 2010 by the votes indicated:

	TOTAL
	For	Withheld
Charles L. Dehner	2,561,895	48,280
Daniel A. DiBiasio	2,569,043	41,132
G. David Hawley	2,555,003	55,171
John J. Limbert	2,555,018	55,157
Timothy L. Smith	2,376,157	234,017

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.
4	Agreement to furnish instruments and agreements defining rights of holders of long-term debt.
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: August 14, 2008	/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
4	Agreement to furnish instruments and agreements defining rights of holders of long-term debt.
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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