NB&T Financial (NBTF) 10-Q 2009 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, 2009

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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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	¨  (Do not check if a smaller reporting company)	Smaller Reporting Company	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 August 4, 2009, 3,173,082 common shares were issued and outstanding.

NB&T FINANCIAL GROUP, INC.

June 30, 2009 Form 10-Q

Table of Contents

		Page
	PART I
Item 1:	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
	Report of Independent Registered Public Accounting Firm	14
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	22
Item 4T:	Controls and Procedures	23
	Part II
Item 1:	Legal Proceedings	24
Item 1A:	Risk Factors	24
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3:	Defaults Upon Senior Securities	24
Item 4:	Submission of Matters to a Vote of Security Holders	24
Item 5:	Other Information	24
Item 6:	Exhibits and Reports on Form 8-K	24
Signatures		25
Index to Exhibits		26

2

NB&T Financial Group, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands)	June 30, 2009			December 31, 2008
	(Unaudited)
Assets
Cash and due from banks	$	10,756		$	10,705
Interest-bearing deposits		28,286			43,393
Federal funds sold		383			541
Cash and cash equivalents		39,425			54,639
Securities - available-for-sale		121,761			87,908
Loans held for sale		451			169
Loans, net of allowance for loan losses of $2,912 and $3,411		328,906			332,605
Total loans		329,357			332,774
Premises and equipment		16,232			16,452
Federal Reserve and Federal Home Loan Bank stock		9,367			9,362
Earned income receivable		2,426			3,042
Goodwill and other intangibles		4,695			4,705
Bank-owned life insurance		14,284			14,056
Other assets		3,974			1,903
Total assets	$	541,521		$	524,841
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	64,480		$	65,969
Savings, NOW and Money Market		215,779			180,089
Time		157,639			174,670
Total deposits		437,898			420,728
Short-term borrowings		769			1,693
Long-term debt		39,810			39,810
Interest payable and other liabilities		3,817			3,819
Total liabilities		482,294			466,050
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		10,556			10,513
Retained earnings		54,648			55,004
Unearned employee stock ownership plan (ESOP) shares		(455	)		(551	)
Accumulated other comprehensive income		838			162
Treasury stock; 645,868 shares - 2009 and 644,203 shares - 2008		(7,360	)		(7,337	)
Total stockholders’ equity		59,227			58,791
Total liabilities and stockholders’ equity	$	541,521		$	524,841

See Notes to Condensed Consolidated Financial Statements

3

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Income

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands, except per share amounts)	2009		2008		2009		2008
	(Unaudited)				(Unaudited)
Interest and Dividend Income
Loans	$	4,964	$	5,653	$	10,000	$	11,603
Securities-taxable		1,155		782		2,052		1,541
Securities-tax-exempt		246		385		523		777
Federal funds sold and other		32		270		103		540
Dividends on Federal Home Loan and Federal Reserve Bank stock		106		124		215		244
Total interest and dividend income		6,503		7,214		12,893		14,705
Interest Expense
Deposits		1,353		2,140		2,793		4,663
Short-term borrowings		—		3		—		7
Long-term debt		517		516		1,030		1,026
Total interest expense		1,870		2,659		3,823		5,696
Net Interest Income		4,633		4,555		9,070		9,009
Provision for Loan Losses		225		95		475		190
Net Interest Income After Provision for Loan Losses		4,408		4,460		8,595		8,819
Non-interest Income
Trust income		222		250		434		485
Service charges and fees		911		853		1,705		1,665
Insurance agency commissions		524		599		1,162		1,340
Net gains on sales of securities		38		11		38		11
Other		425		334		715		824
Total non-interest income		2,120		2,047		4,054		4,325
Non-interest Expense
Salaries and employee benefits		2,782		2,994		5,657		6,065
Net occupancy expense		486		496		988		1,008
Equipment and data processing expense		700		717		1,424		1,392
FDIC Insurance		384		12		561		24
Professional fees		402		328		750		673
Marketing expense		133		156		243		228
State franchise tax		190		197		386		390
Amortization of intangibles		42		56		85		112
Other		436		531		849		985
Total non-interest expense		5,555		5,487		10,943		10,877
Income Before Income Tax		973		1,020		1,706		2,267
Provision for Income Taxes		164		156		238		386
Net Income	$	809	$	864	$	1,468	$	1,881
Basic Earnings Per Share	$	.26	$	.28	$	.47	$	.60
Diluted Earnings Per Share	$	.26	$	.28	$	.47	$	.60
Dividends Declared Per Share	$	.29	$	.29	$	.58	$	.58

See Notes to Condensed Consolidated Financial Statements

4

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows

	Six Months Ended, June 30
(Dollars in thousands)	2009			2008
	(Unaudited)
Operating Activities
Net income	$	1,468		$	1,881
Items not requiring (providing) cash
Depreciation and amortization		847			864
Provision for loan losses		475			190
Amortization of premiums and discounts on securities		(83	)		(180	)
Gain on sale of securities		(38	)		(11	)
FHLB stock dividends		—			(222	)
Net change in:
Loans held for sale		(282	)		1,190
Other assets and liabilities		(1,969	)		(880	)
Net cash provided by operating activities		418			2,832
Investing Activities
Purchases of available-for-sale securities		(51,127	)		(18,965	)
Proceeds from maturities of available-for-sale securities		18,414			16,976
Net change in interest-bearing time deposits		—			(8,000	)
Net change in loans		3,224			13,497
Purchase of premises and equipment		(542	)		(1,686	)
Net cash provided by (used in) investing activities		(30,031	)		1,822
Financing Activities
Net change in:
Deposits		17,170			2,888
Short-term borrowings		(924	)		763
New FHLB advances		—			5,000
Purchase of treasury shares		(23	)		(163	)
Cash dividends		(1,824	)		(1,817	)
Net cash provided by financing activities		14,399			6,671
Increase (Decrease) in Cash and Cash Equivalents		(15,214	)		11,325
Cash and Cash Equivalents, Beginning of Year		54,639			26,155
Cash and Cash Equivalents, End of Period	$	39,425		$	37,480

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, 2008 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, 2009, and December 31, 2008, and the results of its operations and cash flows for the six-month periods ended June 30, 2009 and 2008. 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, 2008 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
Available-for-Sale Securities:
June 30, 2009:
U.S. government agencies and sponsored entities	$	10,623	$	46	$	—		$	10,669
Mortgage-backed securities		89,599		1,930		(1,146	)		90,383
State and political subdivisions		20,269		442		(2	)		20,709
	$	120,491	$	2,418	$	(1,148	)	$	121,761
December 31, 2008:
U.S. government agencies and sponsored entities	$	10,576	$	137	$	—		$	10,713
Mortgage-backed securities		52,930		717		(1,050	)		52,597
State and political subdivisions		24,156		476		(34	)		24,598
	$	87,662	$	1,330	$	(1,084	)	$	87,908

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The amortized cost and fair value of securities available for sale at June 30, 2009, by contractual maturity, are shown below (thousands). Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
Within one year	$	10,623	$	10,669
One to five years		3,624		3,805
Five to ten years		5,962		6,109
After ten years		10,383		10,795
		30,892		31,378
Mortgage-backed securities		89,599		90,383
Totals	$	120,491	$	121,761

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $38,630,000 at June 30, 2009.

Gross gains of $38,000 were realized on premium calls of municipal bonds during the first six months of 2009. The tax expense for net gains on securities transactions for the first half of 2009 was $13,000.

The table below indicates the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2009. (Thousands)

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
June 30, 2009
U.S. Government sponsored entity notes	$	—	$	—		$	—	$	—		$	—	$	—
Mortgage-backed securities		17,775		(360	)		3,467		(786	)		21,242		(1,146	)
Municipals		645		(2	)		—		—			645		(2	)
Other securities		—		—			—		—			—		—
Total Securities	$	18,420	$	(362	)	$	3,467	$	(786	)	$	21,887	$	(1,148	)

Management evaluates securities for other-than-temporary impairment on a periodic basis. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition of the issuer; and (3) the intent and ability of the company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The unrealized losses of $1,146,000 includes an unrealized loss of $672,000 on one private-label collateralized mortgage obligation, which has been downgraded by two of the three major bond rating agencies as of June 30, 2009. The security continues to pay as expected, and the unrealized loss is not deemed by management to be other-than-temporary.

7

Note 3: Loans

Categories of loans include (thousands):

	June 30, 2009			December 31, 2008
Commercial and industrial	$	52,198		$	52,490
Agricultural		26,769			26,265
Real estate construction		5,332			6,064
Commercial real estate		105,010			96,755
Residential real estate		122,929			130,091
Consumer		19,663			24,440
Total loans		331,901			336,105
Less: Net deferred loan fees, premiums and discounts		(83	)		(89	)
Allowance for loan losses		(2,912	)		(3,411	)
Net loans	$	328,906		$	332,605

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

	Six Months Ended June 30,
	2009			2008
Balance, beginning of year	$	3,411		$	3,594
Provision for loan losses		475			190
Recoveries		142			172
Charge-offs		(1,116	)		(422	)
Balance, end of period	$	2,912		$	3,534

Impaired loans totaled $2,167,000 at June 30, 2009 and $2,190,000 at December 31, 2008. An allowance for loan losses of $395,000 and $474,000 relates to impaired loans of $1,549,000 and $1,688,000 at June 30, 2009 and December 31, 2008, respectively. At June 30, 2009 and December 31, 2008, impaired loans of $618,000 and $502,000 had no related allowance for loan losses.

At June 30, 2009 and December 31, 2008, there were $440,000 and $200,000 accruing loans delinquent 90 days or more. Non-accruing loans at June 30, 2009 and December 31, 2008 were $2,396,000 and $2,982,000, respectively.

Note 4: Long-Term Debt

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

	June 30, 2009		December 31, 2008
Federal Home Loan Bank Advances	$	29,500	$	29,500
Junior subordinated debentures		10,310		10,310
Total	$	39,810	$	39,810

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.

8

The sole assets of Trust III 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, 2009 and December 31, 2008, 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, 2009 totaled $73,128,000. Standby letters of credit as of June 30, 2009 totaled $2,277,000.

On June 30, 2009, the Company entered into a definitive agreement for the merger of Community National Corporation (“Community”) into the Company in a cash and stock transaction. The transaction is expected to close in the fourth quarter of 2009, subject to regulatory approval, the approval of Community’s shareholders and other conditions to closing. The proposed transaction is valued at approximately $6.8 million.

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,
	2009		2008		2009		2008
Numerator:
Net income	$	809	$	864	$	1,468	$	1,881
Denominator:
Weighted-average common shares outstanding (basic)		3,149,152		3,136,626		3,149,462		3,139,263
Effect of stock options		—		429		—		619
Weighted-average common shares outstanding (diluted)		3,149,152		3,137,055		3,149,462		3,139,882
Earnings per share:
Basic	$	.26	$	.28	$	.47	$	.60
Diluted	$	.26	$	.28	$	.47	$	.60

Options to purchase 225,000 and 218,500 shares of common stock were outstanding at June 30, 2009 and June 30, 2008, respectively, 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.

9

Note 7: Comprehensive Income

Total comprehensive income was as follows (thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009		2008
Net Income	$	809		$	864		$	1,468	$	1,881
Other Comprehensive Income (Loss):
Unrealized gains (losses) on securities available for sale	$	(452	)	$	(1,096	)	$	986	$	(406	)
Reclassification for realized amount included in income		38			11			38		11
Other comprehensive income (loss, before tax effect		(414	)		(1,085	)		1,024		(395	)
Tax expense (benefit)		(141	)		(369	)		348		(134	)
Other comprehensive income (loss)		(273	)		(716	)		676		(261	)
Total Comprehensive Income	$	536		$	148		$	2,144	$	1,620

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 2006.

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, 2009, 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 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

10

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.

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, 2009, December 31, 2008 and June 30, 2008 (thousands):

			Fair Value Measurements at Report Date Using
Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. government agencies and sponsored entities	$	10,669	$	—	$	10,669	$	—
Mortgage-backed securities		90,383		—		90,383		—
State and political subdivisions		20,709		—		20,709		—
Total available-for-sale securities	$	121,761			$	121,761
December 31, 2008:
Available-for-sale securities	$	87,908	$	—	$	87,908	$	—
June 30, 2008:
Available-for-sale securities	$	90,906	$	—	$	90,906	$	—

The following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Impaired Loans

At June 30, 2009, December 31, 2008 and June 30, 2008, impaired loans consisted primarily of loans secured by commercial real estate. Management has determined fair value measurements on impaired loans primarily through evaluations of appraisals performed. As of June 30, 2009, one impaired loan of approximately $342,000 is secured by accounts receivable and equipment. Management has determined fair value measurements based on management’s assessment of the collectability of current receivables and research of current equipment values.

Foreclosed assets

Real estate acquired through, or in lieu of, loan foreclosure is held for sale and initially recorded at fair value (based on current appraised value) at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Management has determined fair value measurements on real estate owned primarily through evaluations of appraisals performed.

11

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, 2009, December 31, 2008 and June 30, 2008:

			Fair Value Measurements at Report Date Using
Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2009:
Impaired loans	$	1,376	$	—	$	—	$	1,376
Foreclosed assets, net		1,995		—		—		1,995
December 31, 2008:
Impaired loans	$	1,214	$	—	$	—	$	1,214
Foreclosed assets, net		—		—		—		—
June 30, 2008:
Impaired loans	$	941	$	—	$	—	$	941
Foreclosed assets, net		—		—		—		—

Note 10: Disclosures about Fair Value of Financial Instruments

The following table presents estimated fair values of the Company’s financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate (thousands):

	June 30, 2009				December 31, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	39,425	$	39,425	$	54,639	$	54,639
Available-for-sale securities		121,761		121,761		87,908		87,908
Loans including loans held for sale, net		329,357		331,580		332,774		339,502
Stock in FRB and FHLB		9,367		9,367		9,362		9,362
Interest receivable		2,426		2,426		3,042		3,042
Financial liabilities
Deposits		437,898		439,686		420,728		423,452
Short-term borrowings		769		769		1,693		1,693
Long-term debt		39,810		41,101		39,810		41,381
Interest payable		403		403		469		469

For purposes of the above disclosures of estimated fair value, the following assumptions were used as of June 30, 2009 and December 31, 2008. The estimated fair value for cash and cash equivalents, interest-bearing deposits, FRB and FHLB stock, accrued interest receivable, demand deposits, savings accounts, NOW accounts, certain money market deposits, short-term borrowings, and interest payable is considered to approximate cost. The estimated fair value for securities is based on quoted market values for the individual securities or for equivalent securities. The estimated fair value for loans receivable, including loans held for sale, net, is based on estimates of the rate the Bank would charge for similar loans at June 30, 2009 and December 31, 2008 applied for the time period until the loans are assumed to reprice or be paid. The estimated fair value

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for fixed-maturity time deposits as well as borrowings is based on estimates of the rate the Bank would pay on such liabilities at June 30, 2009 and December 31, 2008, applied for the time period until maturity. The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit and lines of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

Note 11: Subsequent Events

Subsequent events have been evaluated through August 13, 2009, which is the date the financial statements were issued.

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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, 2009 and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2009 and 2008 and cash flows for the six-month periods ended June 30, 2009 and 2008. 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, 2008 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 23, 2009, 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, 2008 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 13, 2009

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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 2009 was $809,000, or $.26 per diluted share, compared to net income of $864,000, or $.28 per diluted share, for the same quarter last year. Net income for the first six months of 2009 was $1.5 million, or $.47 per diluted share, compared to $1.9 million, or $.60 per diluted share, for the first six months of 2008. The decrease in earnings from last year is primarily due to an additional Federal Deposit Insurance Corporation (“FDIC”) assessment for insurance of deposits, an increase in the provision for loan losses and lower non-interest income for the six-month period.

Net Interest Income

Net interest income was $4.6 million for the second quarter of 2009, which is comparable to the net interest income earned in the second quarter of 2008. Net interest margin increased to 3.81% for the second quarter of 2009, compared to 3.78% for the second quarter of 2008. Interest income declined to $6.5 million for the second quarter of 2009 from $7.2 million for the same quarter last year. Average interest-earning assets increased less than 1% to $488.3 million; however, the average yield decreased from 5.98% for the second quarter of 2008 to 5.34% for the second quarter of 2009 due to declining rates, slower loan volume, and reinvestment of funds into lower-yielding short-term investments. Total interest expense decreased a similar amount to $1.9 million during the second quarter of 2009 from $2.7 million for the same quarter last year. Average interest-bearing liabilities decreased less than 1% from last year to $407.1 million, and their cost decreased to 1.84% during the second quarter of 2009 from 2.61% for the same quarter last year. For the first six months of 2009, net interest income was $9.1 million compared to $9.0 million for the same period last year.

Provision for Loan Losses

The provision for loan losses was $225,000 in the second quarter of 2009 and $95,000 in the second quarter of 2008. Year-to-date provision for loan losses was $475,000 for 2009, compared to $190,000 for 2008. Net charge-offs were $272,000 in the second quarter of 2009, compared to $94,000 in the second quarter of 2008. These increases in the provision were required as a result of management’s evaluation of the loan portfolio and reflect the increase in net charge-off experience and non-performing loans. Net charge-offs were $974,000 for the first six months of 2009, compared to $250,000 for the same period in 2008. Year-to-date net charge-offs included one loan charged off for $511,000 for which specific reserves of $300,000 had been previously allocated. Non-performing loans totaled $3.8 million at June 30, 2009, compared to $3.2 million at June 30, 2008. The allowance for loan losses to total loans was 0.88% at June 30, 2009, compared to 1.03% at June 30, 2008.

Non-interest Income

Total non-interest income was $2.1 million for the second quarter of 2009, compared to $2.0 million for the same quarter last year. For the first six months of 2009 and 2008, non-interest income was $4.1 million, compared to $4.3 million last year. This decrease for the year is primarily due to lower non-sufficient funds fees on checking accounts and lower insurance agency revenues.

Non-interest Expense

Total non-interest expense was $5.6 million for the second quarter of 2009 and $5.5 million for the same quarter in 2008. FDIC insurance premiums increased $372,000 in the second quarter of 2009 from the second quarter of 2008. This increased expense has been partially offset by reductions in compensation expense largely due to reductions in employee bonuses in 2009. Total non-interest expense for the first half of 2009 was relatively unchanged from 2008 at $10.9 million.

Income Taxes

The provision for income taxes for the second quarter of 2009 was $164,000, or 16.9%, compared to $156,000, or 15.3%, for the second quarter of 2008. For the first six months of 2009, the provision for income taxes was $238,000, or 14.0%, compared to $386,000, or 17.0%, for the same period last year. The decrease in the effective tax rate for the six-month period is due to a decrease in net income before taxes 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 2009 are as follows (in thousands):

	June 30, 2009		December 31, 2008		2009 Change
					Amount			Percent
Total assets	$	541,521	$	524,841	$	16,680		3.2
Interest-bearing deposits		28,286		43,393		(15,107	)	(34.8	)
Federal funds sold		383		541		(158	)	(29.2	)
Loans, net*		329,357		332,774		(3,417	)	(1.0	)
Securities		121,761		87,908		33,853		38.5
Demand deposits		64,480		65,969		(1,489	)	(2.3	)
Savings, NOW, MMDA deposits		215,779		180,089		35,690		19.8
CD’s $100,000 and over		29,374		31,940		(2,566	)	(8.0	)
Other time deposits		128,265		142,730		(14,465	)	(10.1	)
Total deposits		437,898		420,728		17,170		4.1
Short-term borrowings		769		1,693		(924	)	(54.6	)
Long-term borrowings		39,810		39,810		—		—
Stockholders Equity		59,227		58,791		436		.70

* Includes loans held for sale

At June 30, 2009, total assets were $541.5 million, an increase of $16.7 million from December 31, 2008. The increase is primarily attributable to an increase in securities of $33.9 million, offset by a decrease in interest-bearing deposits of $15.1 million and a decline in the loan portfolio of $3.4 million. As loan volume slowed, excess funds have been invested in such investment securities. Total deposit liabilities increased $17.2 million in 2009, with most of the increase in public fund NOW and money market accounts. Stockholders’ equity increased $436,000 in the first half of 2009 to $59.2 million primarily due to increases in the market value of the securities portfolio.

Average total assets increased less than one percent to $535.3 million from the second quarter of 2008. Average total gross loans decreased to $327.9 million, a decline of $14.4 million from the same quarter last year. The decline is the result of the Company discontinuing its indirect lending activity in the third quarter of 2006 due to profit margins not meeting expectations. In addition, one large commercial loan of approximately $4.5 million was paid off in the fourth quarter of 2008. Both the local and national decline in the economy appear to have impacted new loan volume. Based on discussions with both current and prospective loan customers, borrowers are reducing debt when possible and being more cautious when seeking additional bank funding. Also, many borrowers are quoted higher rates than anticipated due to additional uncertainty regarding the timing of their cash flows and fewer banks bidding for the business. Due to the decline in loan volume, excess funds have been invested in interest-bearing deposits and securities, which have increased $18.8 million on average, from the same quarter last year.

Average total deposit liabilities increased $5.4 million for the second quarter of 2009 to $432.4 million, compared to an average of $427.0 million for the same quarter last year. Non-interest bearing deposits and NOW accounts increased on average $17.7 million, and savings accounts increased $4.1 million on average from the second quarter of 2008, offset by declines in average money market and certificate of deposit balances.

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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, 2009 and 2008 (dollars in thousands):

	Three Months Ended June 30						Six Months Ended June 30
	2009			2008			2009			2008
Balance at beginning of period	$	2,958		$	3,534		$	3,411		$	3,594
Charge-offs:
Commercial and industrial		(18	)		(18	)		(186	)		(21	)
Commercial real estate		(54	)		—			(565	)		(74	)
Agricultural		(4	)		—			(4	)		—
Residential real estate		(86	)		(27	)		(110	)		(68	)
Consumer		(169	)		(134	)		(251	)		(259	)
Total charge-offs		(331	)		(179	)		(1,116	)		(422	)
Recoveries:
Commercial and industrial		12			8			15			14
Commercial real estate		9			5			10			8
Agricultural		3			9			20			24
Residential real estate		3			30			15			31
Consumer		33			32			82			95
Total recoveries		60			84			142			172
Net charge-offs		(271	)		(95	)		(974	)		(250	)
Provision for loan losses		225			95			475			190
Balance at end of period	$	2,912		$	3,534		$	2,912		$	3,534

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

	June 30, 2009			December 31, 2008			June 30, 2008
Loans accounted for on non-accrual basis	$	2,396		$	2,982		$	3,102
Accruing loans which are past due 90 days		440			200			83
Renegotiated loans		935			—			—
Other real estate owned		2,045			321			271
Total non-performing assets	$	5,816		$	3,503		$	3,456
Ratios:
Allowance to total loans		0.88	%		0.95	%		1.03	%
Net charge-offs to average loans (annualized)		0.60	%		0.30	%		0.15	%
Non-performing assets to total loans and other real estate owned		1.74	%		1.04	%		1.00	%

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

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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 estimated changes in real estate values, unemployment levels, the condition of the agricultural business, and other local economic factors. Specifically, the Company also continues to consider the impact of DHL Express (USA), Inc. and DHL Network Operations (USA), Inc. (collectively, “DHL”) and ABX Air significantly reducing their operations in Wilmington and Clinton County, Ohio. DHL and ABX Air combined employed more people than any other employer in Clinton County. DHL has decided to outsource its United States transportation and sorting services to another company. Thousands of local jobs have been eliminated. Not all the individuals with these jobs live in Clinton County. We do, however, expect this job reduction to have a negative short-term and potentially negative long-term impact on the local economy. While the Company has no direct relationship with either DHL or ABX Air, the Company did estimate its direct exposure, both loans and deposits, from employees of DHL and ABX Air and considered this in evaluating the allowance. The Bank estimated this exposure at less than 1% of total assets. To date, this part of the overall portfolio continues to perform as expected. What is uncertain and not estimated is the potential impact of the spending habits of the DHL and ABX employees on other Bank customers in the area.

During the first quarter of 2009, the Company foreclosed on a $1.2 million commercial loan for which specific reserves of $300,000 had been previously allocated. Approximately $511,000 was charged off with the balance of $700,000 transferred to other real estate owned. In addition, one loan secured by residential lots for approximately $689,000 was transferred to other real estate owned during the current quarter. Another $340,000 loan secured by a convenience store for which specific reserves of $35,000 had been previously allocated was transferred to other real estate owned in the second quarter with $50,000 charged off. As of June 30, 2009, there was $1.2 million in 17 non-accrual small business relationships. The majority of this amount consisted of two relationships, one secured by accounts receivable and equipment and the other secured by a commercial office building.

Non–accrual residential real estate loans totaled $1,025,000 and consisted of 17 loans with the largest balance being $172,000. Non-accrual consumer loans consisted of two loans that totaled $11,000, and home equity credit loans consisted of seven loans totaling $128,000.

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, 2009 was 75.9%, compared to 80.5% at the same date in 2008. Loans to total assets were 61.4% at the end of the second quarter of 2009, compared to 64.7% at the same time last year. At June 30, 2009, the Company had $28.3 million in interest-bearing deposits, of which $20.0 million was held in fully-insured certificates of deposit with maturities laddered over 90 days to meet short-term funding needs. The Company has $121.8 million in available-for-sale securities that are readily marketable. Approximately 31.7% 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 93.3% 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.

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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). At June 30, 2009 and December 31, 2008, the Company had the following risk-based capital ratios, which are well above the regulatory minimum requirements:

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of June 30, 2009
Total Risk-Based Capital (to Risk-Weighted Assets)
Consolidated	$	67,173	18.74	%	$	28,676	8.0	%		N/A	N/A
Bank		60,797	16.99			28,623	8.0		$	35,778	10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		64,261	17.93			14,338	4.0			N/A	N/A
Bank		57,885	16.18			14,311	4.0			21,467	6.0
Tier I Capital (to Average Assets)
Consolidated		64,261	12.10			21,248	4.0			N/A	N/A
Bank		57,885	10.94			21,166	4.0			26,457	5.0
As of December 31, 2008
Total Risk-Based Capital (to Risk-Weighted Assets)
Consolidated	$	67,338	18.80	%	$	28,649	8.0	%		N/A	N/A
Bank		59,489	16.66			28,568	8.0		$	35,710	10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		63,927	17.85			14,324	4.0			N/A	N/A
Bank		56,078	15.70			14,284	4.0			21,426	6.0
Tier I Capital (to Average Assets)
Consolidated		63,927	12.21			20,935	4.0			N/A	N/A
Bank		56,078	10.72			20,931	4.0			26,164	5.0

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, 2008. 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

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subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, collateral values, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

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

Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company’s evaluation of risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.

Goodwill and Other Intangibles-The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required by SFAS 141. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition.

EFFECT OF RECENT ACCOUNTING STANDARDS

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, 2009.

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.

Effective October 10, 2008, and for prior periods, the FASB issued FASB Staff Position (FSP) FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset Is Not Active. The FSP clarifies the application of FASB

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Statement No. 157, Fair Value Measurements, in a market that is not active. As of June 30, 2009, the Company was able to obtain all market values using the Level II hierarchy measurements adopted under FAS 157.

In December 2007, the FASB issued Statement of Financial Accounting Standards 141 (revised 2007), Business Combinations, (FAS 141R), which changes accounting and reporting requirements for business acquisitions in fiscal years beginning on or after Dec. 15, 2008. FAS 141R replaces the original FAS 141 in its entirety. In general, FAS 141R will require measuring and recognizing the business acquired at full acquisition-date fair value. This replaces Statement 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. FAS 141R also requires the direct costs of a business combination be recognized as expenses of the period in which they are incurred and no longer included in the measurement of the business acquired. In addition, in accordance with Statement 141, restructuring costs that the acquirer expected but was not obligated to incur were recognized as if they were a liability assumed at the acquisition date. FAS 141R requires the acquirer to recognize those costs separately from the business combination.

In June of 2009 the FASB issued FASB Statement 168, FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles. Statement 168 establishes the FASB Accounting Standards Codification (Codification) as the single source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. Statement 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. When effective, the Codification will supersede all existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature non included in the Codification will become nonauthoritative. Following Statement 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the quidance; and (c) provide the bases for conclusions on the change(s) in the Codification. Adoption of this Statement will not have a material effect on the Company’s financial position or results of operations.

In May of 2009 the FASB issued Statement 165, Subsequent Events. Statement 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, Statement 165 provides:

The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;

The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

The disclosure that an entity should make about events or transactions that occurred after the balance sheet date.

Statement 165 is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. Adoption of statement 165 did not have a material effect on the Company’s financial position or results of operations.

On April 9, 2009, the FASB finalized three FASB Staff Positions (“FSPs”) regarding the accounting treatment for investments including mortgage-backed securities. These FSPs changed the method for determining if an Other-Than-Temporary Impairment (“OTTI”) exists and the amount of OTTI to be recorded through an entity’s income statement. The changes brought about by the FSPs provide greater clarity and reflect a more accurate representation of the credit and noncredit components of an OTTI event. The three FSPs are as follows:

• FSP “SFAS 157-4 Determining Fair Value When the Volume and Level of Activity for the Assets or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” addresses the criteria to be used in the determination of an active market in determining whether observable transactions are Level 1 or Level 2 under the framework established by SFAS 157, “Fair Value Measurements.” The FSP reiterates that fair value is based on the notion of exit price in an orderly transaction between willing market participants at the valuation date.

• FSP “SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-than-Temporary Impairments” provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on debt securities.

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• FSP “SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments” enhances consistency in financial reporting by increasing the frequency of fair value disclosures.

These staff positions are effective for financial statements issued for periods ending after June 15, 2009. Adoption of these staff positions did not have a material effect on the Company’s financial position or results of operations.

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. Historically, simulation models are also performed for ramped 100, 200 and 300 basis point decreases. However, these decreasing rate changes are not calculated because the rates would be less than zero for most of the Bank’s liabilities in today’s current low interest rate environment. 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, 2009, the Bank is within the guidelines established by the Board for net interest income changes and economic value of equity changes for increasing rate changes of 100, 200 and 300 basis points.

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.

	One Year Net Interest Income Change		Economic Value of Equity Change
Rate Ramp	6/30/09	ALCO Guideline	6/30/09	ALCO Guideline
+300	-0.20%	±15%	9.2%	±20%
+200	-0.10	±10	7.4	±15
+100	-0.16	±5	4.8	±10

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Item 4T – 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, 2009, 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, 2009, 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

Not applicable

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

(a) Not applicable

(b) Not applicable

(c) Not applicable

Item 3 – Defaults Upon Senior Securities

Not applicable

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

On April 28, 2009, 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 2011 by the votes indicated:

	TOTAL
	For	Withheld
S. Craig Beam	2,693,358	24,843
Brooke W. James	2,696,942	21,259
D. Jeffery Lykins	2,634,551	83,650
Robert A. Raizk	2,688,084	30,117

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
10.1	Agreement and Plan of Merger
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 13, 2009	/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 21, 2003, Exhibit A (SEC File No. 000-23134)
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 21, 2003, Exhibit B
4	Agreement to furnish instruments and agreements defining rights of holders of long-term debt	(SEC File No. 000-23134)
10.1	Agreement and Plan of Merger	Incorporated by reference to registrant’s Form 8-K filed on June 30, 2009 (SEC File No. 000-23134)
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.

26