NB&T Financial (NBTF) 10-Q 2010 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, 2010

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 6, 2010, 3,410,664 common shares were issued and outstanding.

NB&T FINANCIAL GROUP, INC.

June 30, 2010 Form 10-Q

Table of Contents

		Page
	PART I
Item 1:	Financial Statements	3
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Income
	Condensed Consolidated Statements of Cash Flows
	Notes to Condensed Consolidated Financial Statements
	Report of Independent Registered Public Accounting Firm
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4:	Controls and Procedures	25
	Part II
Item 1:	Legal Proceedings	26
Item 1A:	Risk Factors	26
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3:	Defaults Upon Senior Securities	27
Item 4:	Submission of Matters to a Vote of Security Holders	27
Item 5:	Other Information	27
Item 6:	Exhibits and Reports on Form 8-K	27
Signatures		28
Index to Exhibits		29

2

NB&T Financial Group, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands)	June 30, 2010			December 31, 2009
	(Unaudited)
Assets
Cash and due from banks	$	11,161		$	12,392
Interest-bearing deposits		41,557			40,759
Federal funds sold		402			448
Cash and cash equivalents		53,120			53,599
Securities - available-for-sale		146,979			142,424
Loans held for sale		540			274
Loans, net of allowance for loan losses of $3,842 and $3,776		429,999			391,772
Premises and equipment		20,846			20,455
Federal Reserve and Federal Home Loan Bank stock		10,021			9,847
Earned income receivable		2,886			3,053
Goodwill		3,625			3,825
Core deposit and other intangibles		1,491			1,956
Bank-owned life insurance		14,758			14,522
Other real estate owned		3,894			3,455
FDIC loss share receivable		3,333
Other assets		4,908			4,158
Total assets	$	696,400		$	649,340
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	93,345		$	89,827
Savings, NOW and Money Market		282,367			262,629
Time		200,369			188,966
Total deposits		576,081			541,422
Short-term borrowings		12,378			406
Long-term debt		27,810			39,810
Interest payable and other liabilities		9,432			3,217
Total liabilities		625,701			584,855
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		11,821			11,765
Retained earnings		60,297			55,390
Unearned employee stock ownership plan (ESOP) shares		(262	)		(359	)
Accumulated other comprehensive income		2,494			1,340
Treasury stock; 408,276 shares - 2010 and 408,262 shares - 2009		(4,651	)		(4,651	)
Total stockholders’ equity		70,699			64,485
Total liabilities and stockholders’ equity	$	696,400		$	649,340

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)	2010		2009		2010			2009
	(Unaudited)				(Unaudited)
Interest and Dividend Income
Loans	$	7,007	$	4,964	$	13,017		$	10,000
Securities-taxable		1,042		1,155		2,144			2,052
Securities-tax-exempt		158		246		362			523
Federal funds sold and other		29		32		62			103
Dividends on Federal Home Loan & Federal Reserve Bank stock		114		106		228			215
Total interest and dividend income		8,350		6,503		15,813			12,893
Interest Expense
Deposits		1,362		1,353		2,695			2,793
Short-term debt		102		—		102			—
Long-term debt		415		517		928			1,030
Total interest expense		1,879		1,870		3,725			3,823
Net Interest Income		6,471		4,633		12,088			9,070
Provision for Loan Losses		525		225		960			475
Net Interest Income After Provision for Loan Losses		5,946		4,408		11,128			8,595
Non-interest Income
Trust income		229		222		456			434
Service charges and fees		1,215		911		2,262			1,705
Insurance agency commissions		—		524		—			1,162
Net gains on sales of securities		—		38		—			38
Gain on bargain purchase		—		—		7,572			—
Gain on sale of insurance agency		—		—		1,390			—
Other-than-temporary losses on investments:
Total other-than-temporary losses		—		—		(251	)		—
Loss recognized in other comprehensive income (before taxes)		—		—		201			—
Net impairment losses recognized in earnings		—		—		(50	)		—
Other		574		425		987			715
Total non-interest income		2,018		2,120		12,617			4,054
Non-interest Expense
Salaries and employee benefits		3,105		2,782		7,518			5,657
Net occupancy expense		625		486		1,264			988
Equipment and data processing expense		787		700		1,581			1,424
FDIC insurance		246		384		428			561
Professional fees		501		402		1,021			750
Marketing expense		166		133		324			243
State franchise tax		202		190		396			386
Amortization of intangibles		103		42		189			85
Other		530		436		1,041			849
Total non-interest expense		6,265		5,555		13,762			10,943
Income Before Income Tax		1,699		973		9,983			1,706
Provision for Income Taxes		429		164		3,109			238
Net Income	$	1,270	$	809	$	6,874		$	1,468
Basic Earnings Per Share	$	.37	$	.26	$	2.02		$	.47
Diluted Earnings Per Share	$	.37	$	.26	$	2.02		$	.47
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)	2010			2009
	(Unaudited)
Operating Activities
Net income	$	6,874		$	1,468
Items not requiring (providing) cash
Depreciation and amortization		871			847
Provision for loan losses		960			475
Amortization of premiums and discounts on securities		713			(83	)
Other-than-temporary impairment of securities		50			—
Gain on bargain purchase		(7,572	)		—
Gain on sale of insurance agency		(1,390	)		—
Gain on sale of securities		—			(38	)
Net change in:
Loans held for sale		(266	)		(282	)
Other assets and liabilities		4,961			(1,969	)
Net cash provided by operating activities		5,201			418
Investing Activities
Purchases of available-for-sale securities		(72,467	)		(51,127	)
Proceeds from maturities of available-for-sale securities		68,901			18,414
Purchase of Federal Reserve Bank Stock		(174	)		—
Net cash from acquisition, including $9,493 proceeds from FDIC		25,821			—
Proceeds from sale of insurance agency		2,276			—
Net change in loans		3,028			3,224
Purchase of premises and equipment		(1,058	)		(542	)
Net cash provided by (used in) investing activities		26,327			(30,031	)
Financing Activities
Net change in:
Deposits		(30,012	)		17,170
Short-term borrowings and long-term debt		(28	)		(924	)
Purchase of treasury shares		—			(23	)
Cash dividends		(1,967	)		(1,824	)
Net cash provided by (used in) financing activities		(32,007	)		14,399
Decrease in Cash and Cash Equivalents		(479	)		(15,214	)
Cash and Cash Equivalents, Beginning of Year		53,599			54,639
Cash and Cash Equivalents, End of Period	$	53,120		$	39,425
Supplemental Cash Flows Information
Interest paid	$	3,725		$	3,823
Income taxes paid (net of refunds)		20			39
Assets acquired in business combination		72,313			—
Liabilities assumed in business combination		67,316			—

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, 2009 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, 2010, and December 31, 2009, and the results of its operations and cash flows for the three-month and six-month periods ended June 30, 2010 and 2009. 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, 2009 filed with the Commission.

Note 2: Business Combination

On March 19, 2010, the Company acquired through its subsidiary, The National Bank and Trust Company (“NB&T”), the banking operations of American National Bank (“American National”), based in Parma, Ohio, under a Purchase and Assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”). The Office of the Comptroller of the Currency declared American National closed and appointed the FDIC as receiver. NB&T did not pay the FDIC a premium for the deposits of American National. In addition to assuming all of the deposits of the failed bank, NB&T agreed to purchase essentially all of the assets. The book value of the net assets of American National were acquired from the FDIC at a $10.0 million discount. The acquisition did not include the mortgage servicing business conducted by American National by its division Leader Financial Services. The FDIC and NB&T entered into a loss-share transaction on $48.2 million of American National assets. NB&T will share in the losses on the asset pools covered under the loss-share agreement. Under the loss-share agreement, NB&T shares in 20% of losses for the first $8.0 million in losses and 5% for any losses in excess of $8.0 million.

The Company engaged in the transaction in the expectation that it would realize increased profits through increasing its loans receivable and deposits within a new market area.

During the first six months of 2010, the Company incurred $103,000 of third-party acquisition-related costs. The expenses are included in professional fees in the Company’s condensed consolidated statement of income for the six months ended June 30, 2010.

The acquisition was accounted for under the acquisition method of accounting in accordance with the Business Combinations topic of the FASB Accounting Standards Codification (“Codification”). The statement of net assets acquired as of March 19, 2010, proceeds from the FDIC and the computation of the gain on bargain purchase related to the merger are presented in the table below. The assets and liabilities of American National were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. The pro forma consolidated condensed statements of income for the Company and American National for the periods ended June 30, 2010 and 2009, are also presented below. The unaudited pro forma information presented does not necessarily reflect the results of operations that would have resulted had the merger been completed at the beginning of the applicable periods presented, nor does it indicate the results of operations in future periods.

6

Statement of Net Assets Acquired (at fair value and in thousands)

ASSETS
Cash and cash equivalents	$	16,328
Receivable from FDIC		9,493
Covered loans		42,215
Core deposit intangible		280
FDIC loss share receivable		3,309
Other assets		688
Total assets		72,313
LIABILITIES
Deposits		64,671
Other liabilities		2,645
Total liabilities		67,316
Net assets acquired	$	4,997

Proceeds from FDIC & Gain on Purchase
Proceeds from FDIC	$	9,493
ANB carrying value of net assets acquired		507
Total Asset Discount		10,000
Adjustments to reflect assets acquired and liabilities assumed at fair value:
Covered loans		(5,424	)
FDIC Loss share receivable		3,309
Intangible assets		280
Other assets		(593	)
Fair value of net assets acquired		(2,428	)
Gain on bargain purchase	$	7,572

The fair value of the loans acquired, excluding those considered impaired under the Receivables topic of the Codification, is $39,892,000. The gross amount due under the contracts is $43,341,000, of which $2,572,000 is expected to be uncollectible. The fair value of impaired loans acquired is outlined in Note 4.

	Proforma Three Months  Ended				Proforma Six Months  Ended
	June 30, 2010		June 30, 2009		June 30, 2010		June 30, 2009
	(thousands)
Interest income	$	8,350	$	7,514	$	16,476	$	14,879
Interest expense		1,879		2,286		3,902		4,708
Net interest income		6,471		5,228		12,574		10,171
Provision for loan losses		525		608		1,018		932
Non-interest income		2,018		2,225		12,675		11,846
Non-interest expenses		6,265		6,106		14,326		12,047
Income before income taxes		1,699		739		9,905		9,038
Income taxes		429		164		3,109		2,812
Net income	$	1,270	$	575	$	6,796	$	6,226

The proforma consolidated condensed statements of income do not reflect any adjustments to American National’s historical provision for loan losses and goodwill impairment charges.

7

Note 3: 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, 2010:
U.S. government sponsored entities	$	30,594	$	18	$	—		$	30,612
Mortgage-backed securities:
U.S. Government sponsored entities-residential		84,037		3,122		(138	)		87,021
Private label-residential		12,207		386		(251	)		12,342
State and political subdivisions		16,360		644		—			17,004
	$	143,198	$	4,170	$	(389	)	$	146,979
December 31, 2009:
U.S. government sponsored entities	$	14,633	$	10	$	(17	)	$	14,626
Mortgage-backed securities:
U.S. Government sponsored entities-residential		95,298		2,083		(220	)		97,161
Private label-residential		13,030		364		(623	)		12,771
State and political subdivisions		17,431		438		(3	)		17,866
	$	140,392	$	2,895	$	(863	)	$	142,424

The amortized cost and fair value of securities available for sale at June 30, 2010, 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
One year or less	$	27,480	$	27,497
After one year through five years		6,720		6,980
After five years through ten years		5,150		5,358
After ten years		7,604		7,781
		46,954		47,616
Mortgage-backed securities		96,244		99,363
Totals	$	143,198	$	146,979

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $74,989,000 at June 30, 2010 and $49,966,000 at December 31, 2009.

No securities were sold in the first six months of 2010; however, there was a write down on one collateral mortgage obligation of $50,000 in 2010 due to an other than temporary impairment charge. Gross gains of $38,000 were realized on premium calls on municipal bonds in 2009.

8

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, 2010 and December 31, 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, 2010
Mortgage-backed securities:
U.S. Government-sponsored entities-residential	$	8,152	$	(138	)	$	—	$	—		$	8,152	$	(138	)
Private label-residential		—		—			1,441		(251	)		1,441		(251	)
States and political subdivisions		—		—			—		—			—		—
Total Securities	$	8,152	$	(138	)	$	1,441	$	(251	)	$	9,593	$	(389	)
December 31, 2009
U.S. Government sponsored entity notes	$	9,517	$	(17	)	$	—	$	—		$	9,517	$	(17	)
Mortgage-backed securities:
U.S. Government-sponsored entities-residential		11,632		(220	)							11,632		(220	)
Private label-residential		10,485		(90	)		2,288		(533	)		12,773		(623	)
States and political subdivisions		1,008		(3	)		—		—			1,008		(3	)
Total Securities	$	32,642	$	(330	)	$	2,288	$	(533	)	$	34,930	$	(863	)

The unrealized losses of $251,000 at June 30, 2010 relates to one private-label collateralized mortgage obligation, which has been downgraded by three major bond rating agencies. While the security continues to pay as expected, based on management’s review of the underlying collateral performance and estimate of projected future cash flows, the bank recognized an additional temporary impairment charge in the first quarter. An impairment charge of $50,000 was recognized on this security in the first quarter of 2010. An impairment charge of $150,000 was recognized on the same security in the fourth quarter of 2009.

Other-than-temporary Impairment

Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.

The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities. For securities where the security is a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. For securities where the security is not a beneficial interest in securitized financial assets, the Company uses the debt and equity securities impairment model.

The Company routinely conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred. Economic models are used to determine whether an other-than-temporary impairment has occurred on these securities. While all securities are considered, the securities primarily impacted by other-than-temporary impairment testing are private-label mortgage-backed securities. For each private-label mortgage-backed security in the investment portfolio (including but not limited to those whose fair value is less than their amortized cost basis), an extensive, regular review is conducted to determine if an other-than-temporary impairment has occurred. Various inputs to the economic models are used to determine if an unrealized loss is other-than-temporary.

9

The most significant inputs are the following:

• Default Rate

• Severity

• Prepayments

Other inputs may include the actual collateral attributes, which include geographic concentrations, credit ratings and other performance indicators of the underlying asset.

To determine if the unrealized loss for private label mortgage-backed securities is other-than-temporary, the Company projects total estimated defaults of the underlying assets (mortgages) and multiplies that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss. The Company also evaluates the current credit enhancement underlying the bond to determine the impact on cash flows. If the Company determines that a given mortgage-backed security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings.

For the security for which an other-than-temporary impairment was determined to have occurred as of June 30, 2010 (that is, a determination was made that the entire amortized cost bases will not likely be recovered), the following table presents the inputs used to estimate the security’s projected cash flows and projected credit losses. The table shows the projected weighted average default rates and loss severities for the recent-vintage private-label mortgage-backed securities portfolios at June 30, 2010.

	Default Rate		Severity
Alt-A	22.1	%	53.7	%

Credit Losses Recognized on Investments

Certain debt securities have experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired.

The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income.

	Accumulated Credit  Losses 2010 (thousands)
Credit losses on debt securities held
Balance, beginning of year	$	(150	)
Additions related to other-than-temporary losses not previously recognized		(50	)
Balance, end of period	$	(200	)

10

Note 4: Loans

Categories of loans include (thousands):	June 30, 2010			December 31, 2009
Commercial and industrial	$	70,840		$	58,013
Agricultural		29,566			28,130
Real estate construction		8,359			6,732
Commercial real estate		176,160			133,545
Residential real estate		135,017			153,172
Consumer		13,961			15,995
Total loans		433,903			395,587
Less: Net deferred loan fees, premiums and discounts		(62	)		(39	)
Allowance for loan losses		(3,842	)		(3,776	)
Net loans	$	429,999		$	391,772

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

	Six Months Ended June 30,
	2010			2009
Balance, beginning of year	$	3,776		$	3,411
Provision for loan losses		960			475
Recoveries		96			142
Charge-offs		(990	)		(1,116	)
Balance, end of period	$	3,842		$	2,912

Impaired loans totaled $6,666,000 at June 30, 2010 and $9,990,000 at December 31, 2009. An allowance for loan losses of $936,000 and $1,635,000 relates to impaired loans of $4,072,000 and $9,200,000 at June 30, 2010 and December 31, 2009, respectively. At June 30, 2010 and December 31, 2009, impaired loans of $2,594,000 and $790,000 had no related allowance for loan losses.

At June 30, 2010 and December 31, 2009, there were $1,000 and $19,000 accruing loans delinquent 90 days or more. Non-accruing loans at June 30, 2010 and December 31, 2009 were $7,587,000 and $6,857,000, respectively.

The Company acquired loans in the American National acquisition on March 19, 2010 and the acquisition by merger of The Community National Bank on December 31, 2009 at the time of each acquisition, there was evidence of deterioration of credit quality since origination for which it was probable, at acquisition, that all contractually required payments would not be collected. Accounting Codification Standard (“ASC”) 310-30 requires that acquired credit-impaired loans be recorded at fair value and prohibits carryover of the related allowance for loan losses. Loans within the scope of this accounting standard were initially recorded by the Company at fair value. The process of estimating fair value involves estimating the principal and interest cash flows expected to be collected on the credit impaired loans and discounting those cash flows at a market rate of interest. Under this accounting standard, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan in situations where there is reasonable expectation about the timing and amount of cash flows collected. The difference between contractually required payments at acquisition and the cash flows expected at acquisition to be collected, considering the impact of prepayments, is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will generally result in a charge to the provision for loan losses resulting in an increase to the allowance for loan losses. Subsequent increases in cash flows result in reversal of non-accretable discount (or allowance for loan losses to the extent any had been recorded) with a positive impact on interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, foreclosure, or troubled debt restructurings result in removal of the loan from the impaired loan portfolio at its carrying amount. Loans subject to this accounting standard are written down to an amount

11

estimated to be collectible. Accordingly, such loans are no longer classified as nonaccrual even though they may be contractually past due. We expect to fully collect the new carrying values of such loans. If a loan, or a pool of loans, deteriorates post acquisition, a provision for loan losses is recorded. Acquired loans subject to this accounting standard are also excluded from the disclosure of loans 90 days or more past due and still accruing interest; however, the Bank’s regulatory reporting instructions require these loans to be reported as past due based upon the borrower’s contractual obligations. Even though substantially all of them are 90 days or more contractually past due, they are considered to be accruing because the interest income on these loans relates to the establishment of an accretable yield.

The carrying amount of those loans is included in the balance sheet amounts of loans receivable at June 30, 2010. The amounts are as follows (thousands):

Commercial	$	8,188
Consumer		224
Outstanding balance	$	8,412
Carrying amount, net of discount of $1,757	$	4,369
Accretable yield	$	368

Accretable yield, or income expected to be collected, is as follows (thousands):

Balance at December 31, 2009	$	169
Additions		247
Accretion		(48	)
Balance at June 30, 2010	$	368

Loans acquired during 2010 for which it was probable at acquisition that all contractually required payments would not be collected are as follows (thousands):

	2010
Contractually required payments receivable at acquisition:
Commercial	$	6,485
Consumer		435
Subtotal	$	6,920
Cash flows expected to be collected at acquisition	$	2,442
Basis in acquired loans at acquisition	$	2,304

Note 5: Goodwill

Goodwill was $3,625,000 at June 30, 2010 and $3,825,000 at December 31, 2009. The decline in goodwill relates to the sale of the insurance agency in the first quarter of 2010.

12

Note 6: Long-Term Debt

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

	June 30, 2010		December 31, 2009
Federal Home Loan Bank advances	$	17,500	$	29,500
Junior subordinated debentures		10,310		10,310
Total	$	27,810	$	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. 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, 2010 and December 31, 2009, the outstanding principal balance of the Capital Securities was $10,000,000. As required by the Consolidation Topic of the Codification, the Company accounts for its investment in the trust as assets, its subordinated debentures as debt, and the interest paid thereon as interest expense.

Note 7: Commitments

Outstanding commitments to extend credit as of June 30, 2010 totaled $72,138,000. Standby letters of credit as of June 30, 2010 totaled $2,218,000.

Note 8: 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,
	2010		2009		2010		2009
Numerator:
Net income	$	1,270	$	809	$	6,874	$	1,468
Denominator:
Weighted-average common shares outstanding (basic)		3,396,380		3,149,152		3,396,380		3,149,462
Effect of stock options		1,038		—		118		—
Weighted-average common shares outstanding (diluted)		3,397,418		3,149,152		3,396,498		3,149,462

13

Earnings per share:
Basic	$	.37	$	.26	$	2.02	$	.47
Diluted	$	.37	$	.26	$	2.02	$	.47

For the three months ended June 30, 2010 and June 30, 2009, stock options covering 248,000 and 225,000 shares of common stock, respectively, were not considered in computing earnings per share as their exercise prices exceeded the fair market value of the Company’s common shares.

Note 9: Comprehensive Income (Loss)

Other comprehensive income (loss) components and related taxes were as follows (thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2010		2009			2010		2009
Unrealized gains (losses) on securities available for sale	$	696	$	(376	)	$	1,692	$	1,062
Net unrealized gain on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income		—		—			7		—
Reclassification for realized amount included in income		—		(38	)		50		(38	)
Other comprehensive income (loss), before tax effect		696		(414	)		1,749		1,024
Tax expense (benefit)		238		(141	)		595		348
Other comprehensive income (loss)	$	458	$	(273	)	$	1,154	$	676

Total comprehensive income was as follows (thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2010		2009			2010		2009
Net Income	$	1,270	$	809		$	6,874	$	1,468
Other Comprehensive Income (Loss)		458		(273	)		1,154		676
Total Comprehensive Income	$	1,728	$	536		$	8,028	$	2,144

Note 10: 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 2007.

The Income Taxes Topic of the Codification 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. This topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and

14

transition. As of June 30, 2010, the Company did not identify any uncertain tax positions that it believes should be recognized in the financial statements.

Note 11: Fair Value of Assets and Liabilities

The Company has adoptedFair Value Measurements as prescribed under the Financial Instruments Topic of the Codification. The codification defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements, and the updated standard has been applied prospectively as of the beginning of the period.

The Financial Instruments Topic of the Codification 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. The accounting standard 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 accounting 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
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 values 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 fair value hierarchy in which the fair value measurements fall at June 30, 2010 and December 31, 2009 (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)
Available-for-sale securities:
June 30, 2010	$	146,979			$	146,979	$	—
December 31, 2009	$	142,424	$	—	$	142,424	$	—

The following is a description of the valuation methodologies used for assets 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, 2010 and December 31, 2009, collateral-dependent 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, 2010, one impaired loan of approximately $341,000 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.

15

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.

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 fair value hierarchy in which the fair value measurements fall at June 30, 2010 and December 31, 2009 (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)
June 30, 2010:
Impaired loans	$	2,275	$	—	$	—	$	2,275
Foreclosed assets, net		1,493		—		—		1,493
December 31, 2009:
Impaired loans	$	7,565	$	—	$	—	$	7,565
Foreclosed assets, net		3,405		—		—		3,405

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, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	53,120	$	53,120	$	53,599	$	53,599
Available-for-sale securities		146,979		146,979		142,424		142,424
Loans including loans held for sale, net		430,539		435,446		392,046		397,425
Stock in FRB and FHLB		10,021		10,021		9,847		9,847
Earned income receivable		2,886		2,886		3,053		3,053
FDIC loss share receivable		3,333		3,333		—		—
Financial liabilities
Deposits		576,081		578,097		541,422		543,226
Short-term borrowings		12,378		12,675		406		406
Long-term debt		27,810		28,739		39,810		41,173
Interest payable		472		472		488		488

For purposes of the above disclosures of estimated fair value, the following assumptions were used as of June 30, 2010 and December 31, 2009. The estimated fair value for cash and cash equivalents, interest-bearing deposits, FRB and FHLB stock, earned income 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 loans receivable, including

16

loans held for sale, net, is based on estimates of the rate the Bank would charge for similar loans at June 30, 2010 and December 31, 2009 applied for the time period until the loans are assumed to reprice or be paid. The estimated fair value 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, 2010 and December 31, 2009, 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. At June 30, 2010 and December 31, 2009, the fair value of commitments was not material.

The FDIC loss share receivable is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable with the assets should the Bank choose to dispose of them. Fair value was estimated using projected cash flows related to the loss sharing agreement based on the expected reimbursements for losses and the applicable loss sharing percentages. These expected reimbursements do not include reimbursable amounts related to future covered expenditures. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.

Note 12: Effect of Recent Accounting Standards

In July 2010, the FASB issued an update to the Financial Accounting Standards Codification (ASU No. 2010-20), which requires companies to provide more information in their financial statement disclosures about the credit quality of their loans and the credit reserves held against them. The additional disclosures include aging of past-due loans, credit quality indicators and modifications of loans. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after Dec. 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after Dec. 15, 2010.

17

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, 2010 and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2010 and 2009 and cash flows for the six-month periods ended June 30, 2010 and 2009. 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, 2009 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 March 16, 2010, 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, 2009 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 12, 2010

18

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

Results of Operations

Net income for the second quarter of 2010 increased 57.0% to $1.3 million, or $.37 per diluted share, from net income of $809,000, or $.26 per diluted share, for the second quarter of 2009. Average earning assets for the second quarter of 2010 were $648.2 million, compared to $488.3 million, for the second quarter of 2009. Most of this growth is attributable to the acquisition of Community National Bank (“CNB”) in December 2009 and American National Bank (“ANB”) in March 2010. These acquisitions also contributed to net income for the first half of 2010 increasing to $6.9 million, or $2.02 per diluted share, from net income of $1.5 million, or $.47 per diluted share, for the first half of 2009. The increase in net income over last year is primarily due to the bargain purchase pre-tax gain of approximately $7.6 million in the Federal Deposit Insurance Corporation (“FDIC”) assisted acquisition of certain of the assets and liabilities of ANB. In addition, the Company realized a pre-tax gain of $1.4 million on the sale of its insurance agency in January 2010.

Net Interest Income

Net interest income was $6.5 million for the second quarter of 2010, compared to $4.6 million for the second quarter of 2009. Net interest margin increased to 4.00% for the second quarter of 2010, compared to 3.81% for the same quarter last year. The net interest margin increased primarily due to two factors. First, average loans outstanding for 2010, which had an average rate of 6.41%, compared to 6.07% in 2009, increased $110.2 million, primarily due to the CNB and ANB acquisitions. Second, the average cost of interest-bearing liabilities declined from 1.84% in the second quarter of 2009 to 1.42% in the second quarter of 2010 on increased average deposits of $154.4 million. Due to increased liquidity, NB&T was able to lower rates on non-transaction accounts over the last year.

Provision for Loan Losses

The provision for loan losses for the second quarter of 2010 was $525,000, compared to $225,000 in the same quarter last year. Net charge-offs were $326,000 in the second quarter of 2010, compared to $272,000 in the second quarter of 2009. The provision for loan losses was higher due to an increased general allowance related to the estimated negative impact of current economic conditions on commercial real estate collateral values and an increased level of non-performing loans. Non-performing loans increased approximately $800,000 during the second quarter of 2010 to $7.6 million, primarily due to one commercial real estate relationship of approximately $700,000. The provision for loan losses for the first half of 2010 was $960,000, compared to $475,000 for the first half of 2009.

Non-interest Income

Total non-interest income was $2.0 million for the second quarter of 2010, compared to $2.1 million for the second quarter of 2009. Total non-interest income was $12.6 million for the first six months of 2010, compared to $4.1 million for the first six months of 2009. The increase in the six-month period is due to the bargain purchase gain of $7.6 million and the $1.4 million pre-tax gain on the sale of NB&T’s insurance agency.

Non-interest Expense

Total non-interest expense was $6.3 million for the second quarter of 2010, compared to $5.6 million for the second quarter of 2009. Non-interest expense was $13.8 million for the first half of 2010, compared to $10.9 million for the first half of 2009. The increase for both periods was due to increased compensation costs, including benefits, and operating expenses related to the six new acquired branches. Data processing is up due to the systems conversions and number of accounts processed, and professional fees have increased due to acquisition-related services.

Income Taxes

The provision for income taxes for the second quarter of 2010 was $429,000, or 25.3%, compared to $164,000, or 16.9%, for the second quarter of 2009. The provision for income taxes for the first six months of 2010 was $3.1 million, or 31.1%, compared to $238,000, or 14.0% for the first half of 2009. The increase in the effective tax rate for the second quarter and first six months of 2010 is primarily due to the increase in taxable income at the full 34% marginal rate.

19

Financial Condition

The changes that have occurred in the Company’s financial condition during 2010 are as follows (in thousands):

					2010 Change
	June 30, 2010		December 31, 2009		Amount			Percent
Total assets	$	696,400	$	649,340	$	47,060		7.3
Interest-bearing deposits		41,557		40,759		798		2.0
Federal funds sold		402		448		(46	)	(10.3	)
Loans, net*		430,539		392,046		38,493		9.8
Securities		146,979		142,424		4,555		3.2
Demand deposits		93,345		89,827		3,518		3.9
Savings, NOW, MMDA deposits		282,367		262,629		19,738		7.5
CD’s $100,000 and over		50,618		42,318		8,300		19.6
Other time deposits		149,751		146,648		3,103		2.1
Total deposits		576,081		541,422		34,659		6.4
Short-term borrowings		12,378		406		11,972		NM
Long-term borrowings		27,810		39,810		(12,000	)	(30.1	)
Stockholders Equity		70,699		64,485		6,214		9.6

* Includes loans held for sale

At June 30, 2010, total assets were $696.4 million, an increase of $47.1 million from December 31, 2009. The increase is primarily attributable to the purchase on March 19, 2010, of approximately $72.3 million in total assets on ANB. Since acquisition, out-of-state time deposits have been redeemed, reducing total time deposits acquired and available cash on hand.

Average total assets increased $168.8 million, or 31.5%, to $704.1 million from the second quarter of 2009. Average total gross loans increased to $438.2 million, an increase of $110.2 million from the same quarter last year. The increase is largely the result of the acquisition of CNB on December 31, 2009 with $59.2 million in loans acquired. The loans acquired from CNB consisted of $22.6 million in commercial loans and $36.6 million in 1-4 family mortgage loans. In addition, the purchase of ANB’s business added $42.2 million in loans on March 19, 2010. A majority of the loans acquired from ANB were commercial real estate. Although commercial real estate loan volume increased throughout 2009 and 2010 as many business borrowers sought out new lenders, outstanding balances for residential mortgages and consumer loans declined. Residential mortgage balances, excluding those acquired from CNB, declined due to increased sales of fixed-rate loans into the secondary market, and consumer loans continued to decline due to the Company’s departure from the indirect lending market in 2006. The excess funds from the slower loan volume were reinvested in securities, which increased to $148.5 million on average in the second quarter of 2010, an increase of $32.6 million from the same quarter last year. In addition, excess funds have been invested in interest-bearing deposits, which have increased $16.4 million on average, from the same quarter last year.

Average total deposit liabilities increased $183.4 million for the second quarter of 2010 to $586.8 million, compared to an average of $403.3 million for the same quarter last year. Deposits of $75.5 million, including transaction accounts of $22.5 million and $53.0 million in non-transaction accounts, were acquired from CNB in December of 2009, and $64.7 million, including $8.0 million in transaction accounts and $56.7 million in non-transaction accounts, were acquired from ANB in March of 2010. ANB’s deposits included approximately $40.0 million in out-of-state deposits, which the Company did not expect to retain long term. As of June 30, 2010, approximately $49.3 million of the deposits acquired from ANB were withdrawn from the Bank as part of the Bank’s strategy to lower the pricing on certain high-rate accounts and manage its overall liquidity position. The Company has experienced little runoff in the deposits acquired from CNB.

20

Allowance for Loan Losses

The following table is a summary of the Company’s loan loss experience for the periods ended June 30, 2010 and 2009 (dollars in thousands):

	Three Months Ended June 30						Six Months Ended June 30
	2010			2009			2010			2009
Balance at beginning of period	$	3,644		$	2,958		$	3,776		$	3,411
Charge-offs:
Commercial and industrial		—			(18	)		—			(186	)
Commercial real estate		(110	)		(54	)		(531	)		(565	)
Real estate construction		—
Agricultural		—			(4	)		—			(4	)
Residential real estate		(221	)		(86	)		(355	)		(110	)
Consumer		(51	)		(169	)		(104	)		(251	)
Total charge-offs		(382	)		(331	)		(990	)		(1,116	)
Recoveries:
Commercial and industrial		1			12			2			15
Commercial real estate		13			9			19			10
Real estate construction		2			—			2			—
Agricultural		4			3			5			20
Residential real estate		9			3			9			15
Consumer		26			33			59			82
Total recoveries		55			60			96			142
Net charge-offs		(327	)		(271	)		(894	)		(974	)
Provision for loan losses		525			225			960			475
Balance at end of period	$	3,842		$	2,912		$	3,842		$	2,912

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

	June 30, 2010			December 31, 2009
Loans accounted for on non-accrual basis	$	7,587		$	6,857
Accruing loans which are past due 90 days		1			19
Renegotiated loans		—			—
Other real estate owned		3,894			3,455
Total non-performing assets	$	11,482		$	10,331
Ratios:
Allowance to total loans		0.88	%		0.95	%
Net charge-offs to average loans (annualized)		0.58	%		0.36	%
Non-performing assets to total loans and other real estate owned		2.62	%		2.95	%

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

21

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 decided to outsource its United States transportation and sorting services to another company, and 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 2010, the Company foreclosed on a $1.2 million commercial real estate loan for which specific reserves of $300,000 had been previously allocated. Approximately $300,000 was charged off with the balance of $900,000 transferred to other real estate owned. As of June 30, 2010, there was $5.6 million in small business relationships on nonaccrual. The majority of this amount consisted of four relationships.

Non–accrual residential real estate loans totaled $1,818,000 with the largest balance being $249,000. Non-accrual consumer loans totaled $97,000, and home equity credit loans totaled $87,000.

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, 2010 was 75.4%, compared to 73.1% at December 31, 2009 and 75.9% at the same date in 2009. Loans to total assets were 62.4% at the end of the first quarter of 2010, compared to 61.0% at December 31, 2009 and 61.4% at the same time last year. At June 30, 2010, the Company had $41.6 million in interest-bearing deposits, most of which was held in on deposit with the Federal Reserve Bank of Cleveland. The Company has $147.0 million in available-for-sale securities that are readily marketable. Approximately 51.0% of the available-for-sale portfolio is pledged to secure public deposits, short-term and long-term borrowings and for other purposes as required by law. The balance of the available-for-sale securities could be sold if necessary for liquidity purposes. Also, a stable deposit base, consisting of 91.2% core deposits, makes the Company less susceptible to large fluctuations in funding needs. The Company has short-term borrowing lines of credit with several correspondent banks. The Company also has both short- and long-term borrowing available through the Federal Home Loan Bank (FHLB). The Company has the ability to obtain deposits in the brokered certificate of deposit market to help provide liquidity to fund loan growth.

The Federal Reserve Board has adopted risk-based capital guidelines that assign risk weightings to assets and off-balance sheet items and also define and set minimum capital requirements (risk-based capital ratios). At June 30, 2010 and December 31, 2009, the Company had the following risk-based capital ratios, which are well above the regulatory minimum requirements (dollar amounts in thousands):

22

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of June 30, 2010
Total Risk-Based Capital to Risk-Weighted Assets
Consolidated	$	77,693	17.95	%	$	34,621	8.0	%		N/A	N/A
Bank		75,143	17.39			34,566	8.0		$	43,207	10.0	%
Tier I Capital to Risk-Weighted Assets
Consolidated		73,851	17.06			17,311	4.0			N/A	N/A
Bank		71,301	16.50			17,283	4.0			25,924	6.0
Tier I Capital to Average Assets
Consolidated		73,851	10.55			27,989	4.0			N/A	N/A
Bank		71,301	10.24			27,857	4.0			34,822	5.0
As of December 31, 2009
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

The decrease in the Company’s capital ratios from December 31, 2009 is largely due to the increase in assets from the purchase of ANB. Under the loss-sharing agreement with the FDIC, the loans acquired from ANB are subject to a lower risk weighting than other loans in the Company’s portfolio; however, there was still some impact on total risk-weighted assets. The impact of the increased assets was cushioned, though, by the additional net income from the gain on bargain purchase related to the ANB purchase and the gain on sale of the insurance agency.

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, 2009. 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.

23

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 the “Intangibles – Goodwill & Other” topic of the FASB Accounting Standards Codification. Goodwill is subject, at a minimum, to annual tests for impairment. Testing includes evaluating the current market price of the stock versus book value, the current economic value of equity versus current book value, and recent market sales of financial institutions. Based on the review of all three factors, management has concluded goodwill is not impaired. 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.

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, 2010, 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.

24

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	6/30/10		ALCO Guideline		6/30/10		ALCO Guideline
+ 300	-.24	%	± 15	%	18.44	%	± 20	%
+ 200	-.30		± 10		14.28		± 15
+ 100	-.16		± 5		6.11		± 10

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, 2010, 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, 2010, 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.

25

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Not applicable

Item 1A – Risk Factors

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). This new law will significantly change the regulation of financial institutions and the financial services industry. Because the Dodd-Frank Act requires various federal agencies to adopt a broad range of regulations with significant discretion, many of the details of the new law and the effects they will have on our company will not be known for months and even years.

Many of the provisions of the Dodd-Frank Act apply directly only to institutions much larger than ours, and some will affect only institutions with different charters than ours or institutions that engage in activities in which we do not engage. Among the changes to occur pursuant to the Dodd-Frank Act that can be expected to have an effect on our business are the following:

• the Dodd-Frank Act creates a Consumer Financial Protection Bureau with broad powers to adopt and enforce consumer protection regulations;

• new capital regulations for bank holding companies will be adopted, which may impose stricter requirements, and any new trust preferred securities will no longer count toward Tier I capital;

• the federal law prohibition on the payment of interest on commercial demand deposit accounts will be eliminated effective in July 2011;

• the standard maximum amount of deposit insurance per customer is permanently increased to $250,000, and non-interest bearing transaction accounts will have unlimited insurance through December 31, 2012;

• the assessment base for determining deposit insurance premiums will be expanded to include liabilities other than just deposits; and

• new corporate governance requirements applicable generally to all public companies in all industries will require new compensation practices, including requiring companies to “claw back” incentive compensation under certain circumstances, to provide shareholders the opportunity to cast a non-binding vote on executive compensation, and to consider the independence of compensation advisers, and new executive compensation disclosure requirements.

Although it is impossible for us to predict at this time all the effects the Dodd-Frank Act will have on us and the rest of our industry, it is possible that our interest expense could increase and deposit insurance premiums could change, and steps may need to be taken to increase qualifying capital. We expect that our operating and compliance costs will increase and could adversely affect our financial condition and results of operations.

You are encouraged to read the risk factors described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010. Such risks are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. Moreover, the Company undertakes no obligation and disclaims any intention to publish revised information or updates to forward looking statements contained in such risk factors or in any other statement made at any time by any director, officer, employee or other representatives of the Company

26

unless and until any such revisions or updates are expressly required to be disclosed by applicable securities laws or regulations.

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 – Reserved

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.

27

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 12, 2010	/s/ Craig F. Fortin
	Craig F. Fortin
	Senior Vice President and Chief Financial Officer (Principal Financial Officer)

28

Index to Exhibits

Exhibit Number	Description	Location
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 (SEC File No. 000-23134)
4	Agreement to furnish instruments and agreements defining rights of holders of long-term debt	Included herewith
15	Accountants’ acknowledgement.	Included herewith
31.1	Certification by CEO.	Included herewith
31.2	Certification by CFO.	Included herewith
32.1	Certification by CEO Pursuant to 18 U.S.C Section 1350.	Included herewith
32.2	Certification by CFO Pursuant to 18 U.S.C. Section 1350.	Included herewith

29