NB&T Financial (NBTF) 10-Q 2011 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

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 May 3, 2011, 3,424,162 common shares were issued and outstanding.

NB&T FINANCIAL GROUP, INC.

March 31, 2011 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		22
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3:	Quantitative and Qualitative Disclosures about Market Risk		29
Item 4:	Controls and Procedures		30
	Part II
Item 1:	Legal Proceedings		31
Item 1A:	Risk Factors		31
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 3:	Defaults Upon Senior Securities		31
Item 4:	Submission of Matters to a Vote of Security Holders		31
Item 5:	Other Information		31
Item 6:	Exhibits and Reports on Form 8-K		31
Signatures			32
Index to Exhibits			33

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Item 1: Financial Statements

NB&T Financial Group, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands)	March 31, 2011			December 31, 2010
	(Unaudited)
Assets
Cash and due from banks	$	8,834		$	8,693
Interest-earning deposits		59,808			72,678
Federal funds sold		420			380
Cash and cash equivalents		69,062			81,751
Securities - available-for-sale		122,679			133,855
Loans held for sale		189			688
Loans, net of allowance for loan losses of $3,506 and $3,714		405,015			410,576
Premises and equipment		19,590			20,519
Federal Reserve and Federal Home Loan Bank stock		10,025			10,021
Earned income receivable		2,880			2,909
Goodwill		3,625			3,625
Core deposits and other intangibles		1,094			1,183
Bank-owned life insurance		15,121			15,002
Other real estate owned		4,658			4,254
FDIC loss share receivable		1,867			2,078
Trade date security sale receivable		8,700			—
Other assets		3,615			4,157
Total assets	$	668,120		$	690,618
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	87,482		$	105,187
Savings, NOW and Money Market		308,406			292,773
Time		179,487			186,413
Total deposits		575,375			584,373
Short-term borrowings		915			12,779
Long-term debt		15,310			15,310
Interest payable and other liabilities		6,372			7,137
Total liabilities		597,972			619,599
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		12,066			12,013
Retained earnings		60,199			60,221
Accumulated other comprehensive income		1,381			2,283
Treasury stock; 394,788 shares – 2011 and 394,788 shares - 2010		(4,498	)		(4,498	)
Total stockholders’ equity		70,148			71,019
Total liabilities and stockholders’ equity	$	668,120		$	690,618

See Notes to Condensed Consolidated Financial Statements

3

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Income

	Three Months Ended March 31,
(Dollars in thousands, except per share amounts)	2011		2010
	(Unaudited)
Interest and Dividend Income
Loans	$	6,040	$	6,010
Securities-taxable		1,020		1,146
Securities-tax-exempt		89		161
Federal funds sold and other		44		32
Dividends on Federal Home Loan and Federal Reserve Bank stock		117		114
Total interest and dividend income		7,310		7,463
Interest Expense
Deposits		1,137		1,333
Short-term borrowings		31
Long-term debt		217		513
Total interest expense		1,385		1,846
Net Interest Income		5,925		5,617
Provision for Loan Losses		550		435
Net Interest Income After Provision for Loan Losses		5,375		5,182
Non-interest Income
Trust income		264		227
Service charges and fees		1,045		1,048
Gain on bargain purchase		—		7,572
Gain on sale of insurance agency		—		1,390
Gain on sale of available for sale securities		789		—
Other-than-temporary losses on investments:
Total other-than-temporary losses		—		(423	)
Portion of loss recognized in other comprehensive income (before taxes)		—		373
Net impairment losses recognized in earnings		—		(50	)
Other income		459		412
Total non-interest income		2,557		10,599
Non-interest Expense
Salaries and employee benefits		3,101		4,412
Net occupancy expense		632		639
Equipment and data processing expense		782		793
FDIC Insurance		220		182
Professional fees		538		520
Marketing expense		138		158
State franchise tax		216		194
Amortization of intangibles		90		86
Other		862		512
Total non-interest expense		6,579		7,496
Income Before Income Tax		1,353		8,285
Provision for Income Taxes		348		2,680
Net Income	$	1,005	$	5,605
Basic Earnings Per Share	$	.29	$	1.65
Diluted Earnings Per Share	$	.29	$	1.65
Dividends Declared Per Share	$	.30	$	.29

See Notes to Condensed Consolidated Financial Statements

4

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows

	Three Months Ended, March 31
(Dollars in thousands)	2011			2010
	(Unaudited)
Operating Activities
Net income	$	1,005		$	5,605
Items not requiring (providing) cash
Depreciation and amortization		442			431
Provision for loan losses		550			435
Amortization of premiums and discounts on securities		315			341
Increase in cash surrender value on bank owned life insurance		(119	)		(116	)
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 available-for-sale securities		(789	)		—
Proceeds from FDIC loss share receivable		224			—
Net change in:
Loans held for sale		499			(26	)
Other assets and liabilities		(7,066	)		4,629
Net cash provided by (used in) operating activities		(4,939	)		2,387
Investing Activities
Purchases of available-for-sale securities		(37,827	)		(61,279	)
Proceeds from sales of available-for-sale securities		23,443			—
Proceeds from maturities of available-for-sale securities		24,667			51,829
Net change in loans		4,061			5,125
Purchase of Federal Reserve Bank stock		(4	)		(174	)
Net cash from acquisition, including $9,493 of proceeds from FDIC		—			25,821
Proceeds from sale of insurance agency		—			2,276
Purchase of premises and equipment		(201	)		(153	)
Net cash provided by investing activities		14,139			23,445
Financing Activities
Net change in:
Deposits		(8,998	)		(8,289	)
Short-term borrowings		(11,864	)		99
Cash dividends		(1,027	)		(984	)
Net cash provided (used in) financing activities		(21,889	)		(9,174	)
Increase (Decrease) in Cash and Cash Equivalents		(12,689	)		16,658
Cash and Cash Equivalents, Beginning of Year		81,751			53,599
Cash and Cash Equivalents, End of Period	$	69,062		$	70,257
Supplemental Cash Flows Information
Interest paid	$	1,448		$	1,827
Income taxes paid (net of refunds)		—			20
Assets acquired in business combination		—			72,313
Liabilities assumed in business combination		—			67,316

See Notes to Condensed Consolidated Financial Statements

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Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q. The Form 10-Q does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Only material changes in financial condition and results of operations are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The condensed consolidated balance sheet as of December 31, 2010 has been derived from the audited consolidated balance sheet of that date.

In the opinion of management, the condensed consolidated financial statements contain all adjustments necessary to present fairly the financial condition of NB&T Financial Group, Inc. (the “Company”) as of March 31, 2011 and December 31, 2010, and the results of its operations and cash flows for the three-month periods ended March 31, 2011 and 2010. 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, 2010 filed with the Securities and Exchange Commission.

Note 2: Securities

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

Available-for-Sale Securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Fair Value
March 31, 2011:
U.S. government sponsored entities	$	32,495	$	26	$	(56	)	$	32,465
Mortgage-backed securities:
U.S. Government sponsored entities-residential		62,078		1,719		(27	)		63,770
Private label-residential		8,910		351		(147	)		9,114
State and political subdivisions		17,104		349		(123	)		17,330
	$	120,587	$	2,445	$	(353	)	$	122,679
December 31, 2010:
U.S. government sponsored entities	$	21,081	$	13	$	—		$	21,094
Mortgage-backed securities:
U.S. Government sponsored entities-residential		82,346		2,985		(20	)		85,311
Private label-residential		9,929		387		(154	)		10,162
State and political subdivisions		17,040		332		(84	)		17,288
	$	130,396	$	3,717	$	(258	)	$	133,855

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The amortized cost and fair value of securities available for sale at March 31, 2011, 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	$	19,044	$	19,054
After one year through five years		5,613		5,718
After five years through ten years		16,584		16,670
After ten years		8,358		8,353
		49,599		49,795
Mortgage-backed securities		70,988		72,884
Totals	$	120,587	$	122,679

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $79,340,000 at March 31, 2011 and $51,867,000 at December 31, 2010.

Gross gains of $789,000 and gross losses of $0 resulting from sales of available-for-sale securities were realized during the first quarter of 2011. Gross gains are determined under the specific identification method.

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 March 31, 2011 and December 31, 2010. (Thousands)

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
March 31, 2011
U.S. Government sponsored entity notes	$	18,475	$	(56	)	$	—	$	—		$	18,475	$	(56	)
Mortgage-backed securities:
U.S. Government-sponsored entities-residential		7,737		(27	)		—		—			7,737		(27	)
Private label-residential		—		—			1,256		(147	)		1,256		(147	)
Municipals		4,133		(123	)		—		—			4,133		(123	)
Total Securities	$	30,345	$	(206	)	$	1,256	$	(147	)	$	31,601	$	(353	)
December 31, 2010
Mortgage-backed securities:
U.S. Government-sponsored entities-residential	$	4,146	$	(20	)	$	—	$	—		$	4,146	$	(20	)
Private label-residential		—		—			1,341		(154	)		1,341		(154	)
Municipal securities		4,111		(84	)		—		—			4,111		(84	)
Total Securities	$	8,257	$	(104	)	$	1,341	$	(154	)	$	9,598	$	(258	)

The unrealized losses outstanding 12 months or more of $147,000 at March 31, 2011 is due to one private-label collateralized mortgage obligation, which has been downgraded by three major bond rating agencies. Based on management’s review of the underlying collateral performance and estimate of projected future cash flows, The National Bank and Trust Company (the “Bank”) has recognized an other-than-temporary

7

impairment charge of $200,000 in prior periods. In the first quarter of 2011, approximately $18,000 of losses were realized on this security with total realized losses through March 31, 2011 totaling approximately $48,000. These losses were in line with prior period loss projections.

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 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. 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 those securities for which an other-than-temporary impairment was determined to have occurred as of March 31, 2011 (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 measure the amount of the credit loss recognized in earnings. The table shows the projected weighted average default rates and loss severities for the recent-vintage private-label mortgage-backed securities portfolios at March 31, 2011.

	Default Rate			Severity
Alt-A		21.4	%		55.3	%

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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 2011
Credit losses on debt securities held
Beginning of year	$	(170	)
Reductions related to losses realized which were previously recognized		18
End of period	$	(152	)

Note 3: Loans

Categories of loans include (thousands):	March 31, 2011			December 31, 2010
Commercial	$	67,294		$	65,304
Agricultural		28,441			31,354
Real estate construction		3,594			5,029
Commercial real estate		176,927			177,640
Residential real estate		122,812			124,497
Consumer		9,492			10,510
Total loans		408,560			414,334
Less: Net deferred loan fees, premiums and discounts		(39	)		(44	)
Allowance for loan losses		(3,506	)		(3,714	)
Net loans	$	405,015		$	410,576

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

	Three Months Ended March 31,
	2011			2010
Balance, beginning of year	$	3,714		$	3,776
Provision for loan losses		550			435
Recoveries		172			41
Charge-offs		(930	)		(608	)
Balance, end of period	$	3,506		$	3,644

9

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment measurements.

The following table provides a breakdown of the allowance for loan losses as of March 31, 2011 (thousands):

	Commercial			Commercial Real Estate			Agricultural			Residential 1-4 Family			Residential Home Equity			Consumer			Total
Allowance for loan losses:
Beginning balance	$	474		$	2,057		$	184		$	528		$	337		$	134		$	3,714
Charge-offs		(4	)		(828	)		—			(27	)		(4	)		(67	)		(930	)
Recoveries		1			125			2			5			1			38			172
Provision		117			589			(34	)		(28	)		(107	)		13			550
Ending Balance	$	588		$	1,943		$	152		$	478		$	227		$	118		$	3,506

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The following tables provide the recorded investment in financing receivables as of March 31, 2011 and December 31, 2010 (thousands):

March 31, 2011:

	Commercial		Commercial Real Estate		Agricultural		Residential 1-4 Family		Residential Home Equity		Consumer		Total
Ending balance: Individually evaluated for impairment	$	162	$	177	$	—	$	—	$	—	$	—	$	339
Collectively evaluated for impairment	$	381	$	1,688	$	152	$	478	$	227	$	118	$	3,044
Loans acquired with deteriorated credit quality	$	45	$	78	$	—	$	—	$	—	$	—	$	123
Financing Receivables
Ending balance	$	67,294	$	180,405	$	28,441	$	91,084	$	31,844	$	9,492	$	408,560
Ending balance: Individually evaluated for impairment	$	1,813	$	2,680	$	—	$	1,058	$	—	$	—	$	5,551
Collectively evaluated for impairment	$	65,149	$	175,561	$	28,441	$	89,924	$	31,844	$	9,492	$	400,411
Loans acquired with deteriorated credit quality	$	332	$	2,164	$	—	$	102	$	—	$	—	$	2,598

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December 31, 2010:

	Commercial		Commercial Real Estate		Agricultural		Residential 1-4 Family		Residential Home Equity		Consumer		Total
Ending balance: Individually evaluated for impairment	$	37	$	430	$	—	$	—	$	—	$	—	$	467
Collectively evaluated for impairment	$	392	$	1,497	$	184	$	528	$	337	$	134	$	3,072
Loans acquired with deteriorated credit quality	$	45	$	130	$	—	$	—	$	—	$	—	$	175
Financing Receivables
Ending balance	$	65,304	$	182,372	$	31,354	$	91,901	$	32,893	$	10,510	$	414,334
Ending balance: Individually evaluated for impairment	$	696	$	4,420	$	—	$	1,061	$	—	$	—	$	6,177
Collectively evaluated for impairment	$	64,401	$	176,514	$	31,354	$	90,738	$	32,893	$	10,510	$	406,410
Loans acquired with deteriorated credit quality	$	207	$	1,438	$	—	$	102	$	—	$	—	$	1,747

The following table outlines the Company’s corporate and consumer credit exposure by category and standard regulatory classification as of March 31, 2011 and December 31, 2010 (thousands):

Corporate Credit Exposure

Credit Risk Profile by Creditworthiness Category:

	Commercial				Commercial Real Estate					Agricultural
	March 31, 2011		December 31, 2010		March 31, 2011		December 31, 2010			March 31, 2011		December 31, 2010
Pass	$	55,571	$	53,758	$	154,782	$	153,490		$	28,157	$	30,108
Other Assets Especially Mentioned		4,771		5,722		8,438		10,312			2		962
Substandard		6,806		5,678		16,904		18,529			282		284
Doubtful		146		146		281		61			—		—
Loss		—		—		—		—			—		—
Non-rated		—		—		—		(21	)		—		—
Total	$	67,294	$	65,304	$	180,405	$	182,372		$	28,441	$	31,354

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Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

	Residential Real Estate
	1 to 4 Family				Home equity				Consumer
	March 31, 2011		December 31, 2010		March 31, 2011		December 31, 2010		March 31, 2011		December 31, 2010
Grade:
Pass	$	87,722	$	88,582	$	31,712	$	32,761	$	9,299	$	10,304
Substandard		3,362		3,319		132		132		193		206
Total	$	91,084	$	91,901	$	31,844	$	32,893	$	9,492	$	10,510

Credit quality ratings are updated at least quarterly and are determined as follows:

Pass– Borrower is a reasonable credit risk and demonstrates the ability to repay debt from normal business operations.

Other Assets Especially Mentioned – Borrower has weak or deteriorating credit strength or assets securing the borrowing are potentially weak.

Substandard– Loans are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral.

Doubtful – These loans have all the weaknesses inherent in substandard loans with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable.

Loss– Advances in excess of calculated current fair value which are considered uncollectible.

Generally, loans are placed on non-accrual status at ninety days past due and interest is considered a loss, unless the loan is well-secured and in the process of collection. Payments made while a loan is on nonaccrual are treated as reductions of principal. Typically, loans are not returned to accrual status until all loan payments have been current for at least six months. The following tables outline the Company’s past due and nonaccrual loans as of March 31, 2011 and December 31, 2010:

March 31, 2011:

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More		Total Past Due		Current		Total Financing Receivables		90 Days and Accruing		Nonaccrual
Commercial	$	806	$	160	$	2,798	$	3,764	$	63,530	$	67,294	$	1,038	$	2,198
Commercial real estate		3,230		212		3,154		6,596		173,809		180,405		—		4,896
Agricultural		—		—		—		—		28,441		28,441		—		43
Residential:
1-4 Family		1,043		388		730		2,161		88,923		91,084		—		2,563
Home equity		100		99		95		294		31,550		31,844		—		130
Consumer		147		24		128		299		9,193		9,492		—		193
Total	$	5,326	$	883	$	6,905	$	13,114	$	395,446	$	408,560	$	1,038	$	10,023

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December 31, 2010:

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More		Total Past Due		Current		Total Financing Receivables		90 Days and Accruing		Nonaccrual
Commercial	$	526	$	380	$	1,807	$	2,713	$	62,591	$	65,304	$	1,037	$	1,025
Commercial real estate		1,145		282		4,158		5,585		176,787		182,372		—		5,725
Agricultural		36		—		—		36		31,318		31,354		—		43
Residential:
1-4 Family		835		761		1,028		2,624		89,277		91,901		—		2,365
Home equity		54		41		68		163		32,730		32,893		—		126
Consumer		41		1		148		190		10,320		10,510		—		206
Total	$	2,650	$	1,465	$	7,196	$	11,311	$	403,023	$	414,334	$	1,037	$	9,490

The below table represents loans considered impaired at March 31, 2011 and December 31, 2010 and the related allowance for loan losses. Interest income recognized is not materially different than interest income that would have been recognized on a cash basis (thousands):

March 31, 2011:	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	1,547	$	1,570	$	—	$	1,524	$	—
Commercial real estate		2,700		2,932		—		5,351		17
Agricultural		—		—		—		—		—
Residential-1 to 4 Family		1,160		1,161		—		1,162		—
Residential-Home equity		—		—		—		—		—
Consumer		—		—		—		—		—
With an allowance recorded:
Commercial	$	598	$	628	$	207	$	751	$	—
Commercial real estate		2,144		2,150		255		4,001		—
Agricultural		—		—		—		—		—
Residential-1 to 4 Family		—		—		—		—		—
Residential-Home equity		—		—		—		—		—
Consumer
Total:
Commercial	$	2,145	$	2,198	$	207	$	2,275	$	—
Commercial real estate		4,844		5,082		255		9,352		17
Agricultural		—		—		—		—		—
Residential - 1 to 4 Family		1,160		1,161		—		1,162		—
Residential - Home equity		—		—		—		—		—
Consumer		—		—		—		—		—

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December 31, 2011:	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	711	$	734	$	—	$	814	$	19
Commercial real estate		3,178		3,204		—		7,638		526
Agricultural		—		—		—		33		—
Residential-1 to 4 Family		1,163		1,165		—		411		38
Residential-Home equity		—		—		—		—		—
Consumer		—		—		—		—		—
With an allowance recorded:
Commercial	$	191	$	222	$	82	$	—	$	—
Commercial real estate		2,681		2,752		560		—		—
Agricultural		—		—		—		—		—
Residential-1 to 4 Family		—		—		—		—		—
Residential-Home equity		—		—		—		—		—
Consumer
Total:
Commercial	$	902	$	956	$	82	$	814	$	19
Commercial real estate		5,859		5,956		560		7,638		526
Agricultural		—		—		—		33		—
Residential - 1 to 4 Family		1,163		1,165		—		411		38
Residential - Home equity		—		—		—		—		—
Consumer		—		—		—		—		—

The Company acquired loans in the acquisition of the business of American National Bank 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, 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 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

15

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 March 31, 2011. The amounts are as follows (thousands):

Commercial	$	5,802
Consumer		109
Outstanding balance	$	5,911
Carrying amount, net of discount of $693	$	4,800
Accretable yield	$	217

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

Balance at December 31, 2010	$	279
Additions		—
Accretion		(54	)
Disposals		(8	)
Balance at March 31, 2011	$	217

Note 4: Long-Term Debt

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

	March 31, 2011		December 31, 2010
Federal Home Loan Bank Advances	$	5,000	$	5,000
Junior subordinated debentures		10,310		10,310
Total	$	15,310	$	15,310

On June 25, 2007, NB&T Statutory Trust III (“Trust III”), a wholly owned subsidiary of the Company, 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 Company 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 Company 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

16

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 Company 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 Company. 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 Company has the option to defer distributions on the Capital Securities from time to time for a period not to exceed 20 consecutive semi-annual periods.

As of March 31, 2011 and December 31, 2010, 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 5: Commitments

Outstanding commitments to extend credit as of March 31, 2011 totaled $80,053,000. Standby letters of credit as of March 31, 2011 totaled $2,377,000.

Note 6: Earnings Per Share

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

	Three Months Ended March 31,
	2011		2010
Numerator:
Net income	$	1,005	$	5,605
Denominator:
Weighted-average common shares outstanding (basic)		3,424,162		3,393,962
Effect of stock options		24,179		—
Weighted-average common shares outstanding (diluted)		3,448,341		3,393,962
Earnings per share:
Basic	$	.29	$	1.65
Diluted	$	.29	$	1.65

For the three months ended March 31, 2011 and March 31, 2010, stock options covering 51,000 and 262,500 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.

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Note 7: Comprehensive Income

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

	Three Months Ended March  31, 2011			Three Months Ended March  31, 2010
Unrealized gains (losses) on securities available for sale	$	(578	)	$	1,038
Net unrealized (gain) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income		—			(35	)
Reclassification for realized gain amount included in income		789			50
Other comprehensive income (loss), before tax effect		(1,367	)		1,053
Tax expense (benefit)		(465	)		359
Other comprehensive income (loss)	$	(902	)	$	696

Total comprehensive income was as follows (thousands):

	Three Months Ended March  31, 2011			Three Months Ended March  31, 2010
Net Income	$	1,105		$	5,605
Other Comprehensive Income (Loss)		(902	)		696
Total Comprehensive Income	$	203		$	6,301

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 2008.

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 transition. As of March 31, 2011, 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

ASC Topic 820,Fair Value Measurements, 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. Topic 820 also specifies 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

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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

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

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 measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2011 and December 31, 2010 (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)
March 31, 2011:
Available-for-sale securities	$	122,679			$	122,679	$	—
December 31, 2010:
Available-for-sale securities	$	133,855	$	—	$	133,855	$	—

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 assets pursuant to the valuation hierarchy:

Impaired Loans (Collateral Dependent)

At March 31, 2011 and December 31, 2010, 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. Management has determined fair value measurements based on management’s assessment of the collectability of current receivables and research of current equipment values.

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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 measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2011 and December 31, 2010:

	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)
March 31, 2011:
Impaired loans	$	849	$	—	$	—	$	849
Foreclosed assets, net		145		—		—		145
December 31, 2010:
Impaired loans	$	2,792	$	—	$	—	$	2,792
Foreclosed assets, net		72		—		—		72

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):

	March 31, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	69,062	$	69,062	$	81,751	$	81,751
Available-for-sale securities		122,679		122,679		133,855		133,855
Loans, including loans held for sale, net		405,204		416,092		411,264		418,683
Stock in FRB and FHLB		10,025		10,025		10,021		10,021
Earned income receivable		2,880		2,880		2,909		2,909
FDIC loss share receivable		1,867		1,867		2,078		2,078
Financial liabilities
Deposits		575,375		579,018		584,373		588,424
Short-term borrowings		915		915		12,779		12,779
Long-term debt		15,310		21,763		15,310		21,746
Interest payable		289		289		352		352

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For purposes of the above disclosures of estimated fair value, the following assumptions were used as of March 31, 2011 and December 31, 2010. The estimated fair value for cash and cash equivalents, interest-bearing deposits, FRB and FHLB stock, FDIC loss share receivable, 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 loans held for sale, net, is based on estimates of the rate the Bank would charge for similar loans at March 31, 2011 and December 31, 2010 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 March 31, 2011 and December 31, 2010, 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 March 31, 2011 and December 31, 2010, the fair value of commitments was not material.

Note 10: 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 and credit quality indicators. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. As of March 31, 2011, these new disclosures are included in Note 3 of the financial statements.

The Financial Accounting Standards Board finalized Accounting Standards Update No. 2011-02 in April 2011 to give banks new criteria for determining whether a particular loan modification represents a troubled debt restructuring for accounting purposes. The determination is significant because it signals when a bank should also record an impairment loss associated with the same loan. The new guidance is effective for quarterly and annual reports for periods beginning on or after June 15, 2011 and should be applied retroactively to the beginning of the annual period of adoption. Early application is permitted.

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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 March 31, 2011 and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 2011 and 2010. 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, 2010 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 15, 2011, 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, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/BKD, LLP

Cincinnati, Ohio

May 12, 2011

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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 first quarter of 2011 was $1.0 million, or $.29 per share. Net income for the first quarter of 2010 was $5.6 million, or $1.65 per share, largely due to a 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 American National Bank (“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 $5.9 million for the first quarter of 2011, compared to $5.6 million for the first quarter of 2010. Net interest margin increased to 3.84% for the first quarter of 2011, compared to 3.75% for the same quarter last year. The net interest margin increased primarily due to two factors. First, average loans outstanding for 2011, which had an average rate of 5.97%, increased $17.0 million, largely a result of the ANB acquisition in March 2010. Second, the average cost of interest-bearing liabilities declined from 1.48% in the first quarter of 2010 to 1.10% in the first quarter of 2011 on increased average deposits of $12.8 million. Due to increased liquidity, the Company was able to lower rates on interest-bearing deposits and reduce higher cost Federal Home Loan Bank debt by $24.5 million.

Provision for Loan Losses

The provision for loan losses for the first quarter of 2011 was $550,000, compared to $435,000 in the same quarter last year. Net charge-offs were $758,000 in the first quarter of 2011, compared to $567,000 in the first quarter of 2010. Charge-offs in 2011 increased primarily due to the write-down of one commercial real estate loan as a result of a recently updated collateral valuation. The provision for loan losses was increased to add specific loan reserves and increase the general reserves related to increased charge-off experience. Non-performing loans increased to $11.5 million at March 31, 2011, compared to $6.8 million at March 31, 2010. The year-over-year increase in non-performing loans is due primarily to an increase in non-performing loans from the December 2009 Community National Bank and March 2010 ANB acquisitions. Approximately $2.1 million of the non-performing loans outstanding at March 31, 2011 are covered under the Company’s FDIC loss share agreement with the FDIC sharing in 80% of any future losses associated with those loans.

Non-interest Income

Total non-interest income was $2.6 million for the first quarter of 2011, compared to $10.6 million for the first quarter of 2010. Non-interest income for 2010 was higher due to the ANB bargain purchase gain and insurance agency sale previously discussed. In the first quarter of 2011, the Company realized $789,000 in gains on the sale of approximately $23.0 million in securities. The securities sold had an expected average life of less than two years and were sold to realize gains and offset losses related to foreclosures and closed bank properties.

Non-interest Expense

Total non-interest expense was $6.6 million for the first quarter of 2011, compared to $7.5 million for the first quarter of 2010. In the first quarter of 2011, the Company recognized additional expenses and losses on sales of foreclosed and closed bank properties of approximately $350,000. Non-interest expenses for the first quarter of 2010 were significantly higher due to increased bonus plan expense and acquisition related expenses.

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Income Taxes

The provision for income taxes for the first quarter of 2011 was $348,000, or 25.7%, compared to $2,680,000, or 32.4%, for the first quarter of 2010. The higher effective tax rate for the first quarter of 2010 was primarily due to the increase in taxable income at the full 34% marginal rate.

Financial Condition

The changes that have occurred in the Company’s financial condition during 2011 are as follows (in thousands):

					2011 Change
	March 31, 2011		December 31, 2010		Amount			Percent
Total assets	$	667,552	$	690,618	$	(23,066	)		(3.3	)
Interest-earning deposits		59,808		72,678		(12,870	)		(17.7	)
Federal funds sold		420		380		40			(10.5	)
Loans, net*		405,204		411,264		(6,060	)		(1.5	)
Securities		122,679		133,855		(11,176	)		(8.4	)
Demand deposits		87,482		105,187		(17,705	)		(16.8	)
Savings, NOW, MMDA deposits		308,406		292,773		15,633			5.3
CD’s $100,000 and over		44,183		48,217		(4,034	)		(8.4	)
Other time deposits		135,304		138,196		(2,892	)		(2.1	)
Total deposits		575,375		584,373		(8,998	)		(1.5	)
Short-term borrowings		915		12,779		(11,864	)		(92.8	)
Long-term borrowings		15,310		15,310		—			—
Stockholders equity		70,148		71,019		(871	)		(1.2	)

* Includes loans held for sale

At March 31, 2011, total assets were $667.6 million, a decrease of $23.1 million from December 31, 2010. The decrease is primarily attributable to the use of interest-earning deposits to pay off $12.0 million in maturing Federal Home Loan Bank debt in January 2011. In addition, net loans declined $6.1 million in the first quarter of 2011 due to decreased loan demand and increased competitive factors. In March 2011, the Company sold $23.0 million in available-for-sale securities, which was reinvested in interest-earning assets.

Average total assets increased $21.4 million, or 3.2%, to $684.4 million from the first quarter of 2010. Average total gross loans increased to $410.2 million, an increase of $17.0 million from the same quarter last year. The increase is largely the result of the purchase of ANB’s business, which added $42.2 million in loans on March 19, 2010. A majority of the loans acquired from ANB were commercial loans, which have increased $46.6 million on average from the first quarter of last year. This increase was partially offset by a decline in average balances on residential mortgage loans, which declined approximately $22.1 million from the same quarter last year due to increased sales of fixed-rate loans into the secondary market. Home equity and consumer loans also continued to decline from the same quarter last year by approximately $7.7 million. Average securities balances declined from the same quarter last year to $134.1 million, a decrease of $16.9 million, while average interest-earning deposits increased $19.1 million.

Average total deposit liabilities increased $34.9 million for the first quarter of 2011 to $589.4 million, compared to an average of $554.5 million for the same quarter last year. The increase is partially due to increased deposits acquired from ANB in March of 2010, which averaged $16.6 million in the first quarter of 2011. Average public fund deposit balances also increased approximately $15.0 million from the same quarter last year as many public fund customers chose to invest their non-interest bearing balances in fully-insured bank deposits rather than uninsured mutual fund sweep programs. Average borrowings also declined to $18.3 million in the first quarter of 2011, compared to $40.4 million in the same quarter last year due to the payoff of $24.5 million in FHLB debt in December 2010 and January 2011.

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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 March 31, 2011 and 2010 (dollars in thousands):

	Three Months Ended March 31
	2011			2010
Balance at beginning of period	$	3,714		$	3,776
Charge-offs:
Commercial and industrial		(4	)		—
Commercial real estate		(828	)		(421	)
Real estate construction		—			—
Agricultural		—			—
Residential real estate		(31	)		(134	)
Consumer		(67	)		(53	)
Total charge-offs		(930	)		(608	)
Recoveries:
Commercial and industrial		1			1
Commercial real estate		125			6
Real estate construction		—			1
Agricultural		2			1
Residential real estate		6			0
Consumer		38			32
Total recoveries		172			41
Net charge-offs		(758	)		(567	)
Provision for loan losses		550			435
Balance at end of period	$	3,506		$	3,644

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

	March 31, 2011			December 31, 2010			March 31, 2010
Loans accounted for on non-accrual basis	$	10,023		$	9,490		$	6,471
Accruing loans which are past due 90 days		1,038			1,037			292
Renegotiated loans		455			457			—
Other real estate owned		4,658			4,254			4,137
Total non-performing assets	$	16,174		$	15,238		$	10,900
Ratios:
Allowance to total loans		0.86	%		0.89	%		0.84	%
Net charge-offs to average loans (annualized)		0.75	%		0.40	%		0.58	%
Non-performing assets to total loans and other real estate owned		3.91	%		3.63	%		2.50	%

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The allowance is maintained to absorb losses in the portfolio. Management’s determination of the adequacy of the reserve is based on reviews of specific loans, loan loss experience, general economic conditions and other pertinent factors. If, as a result of charge-offs or increases in risk characteristics of the loan portfolio, the reserve is below the level considered by management to be adequate to absorb possible loan losses, the provision for loan losses is increased. Loans deemed not collectible are charged off and deducted from the reserve. Recoveries on loans previously charged off are added to the reserve.

The Company allocates the allowance for loan losses to specifically classified loans and non-classified loans generally based on the one- and three-year net charge-off history. In assessing the adequacy of the allowance for loan losses, the Company considers three principal factors: (1) the one- and three-year rolling average charge-off percentage applied to the current outstanding balance by portfolio type; (2) specific percentages applied to individual loans estimated by management to have a potential loss; and (3) estimated losses attributable to economic conditions. Economic conditions considered include estimated changes in real estate values, unemployment levels, the condition of the agricultural business, and other local economic factors.

During the first quarter of 2011, the Company charged off $432,000 on a commercial real estate loan, related to a new collateral valuation. As of March 31, 2011, there was $7.1 million in small business relationships on nonaccrual. Approximately $2.0 million of this amount consisted of two relationships, one secured by commercial real estate and another secured by a commercial building. Several other non-performing loans totaling approximately $4.1 million were acquired from CNB and ANB.

Non–accrual residential real estate loans totaled $2,563,000 with the largest balance being $301,000. Non-accrual consumer loans totaled $193,000, and home equity credit loans totaled $130,000.

Liquidity and Capital Resources

Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as Company cash needs, are met. The Company manages liquidity on both the asset and liability sides of the balance sheet. The loan-to-deposit ratio at March 31, 2011 was 68.6%, compared to 71.0% at December 31, 2010 and 71.7% at the same date in 2010. Loans to total assets were 61.2% at the end of the first quarter of 2011, compared to 60.1% at December 31, 2010 and 59.8% at the same time last year. At March 31, 2011, the Company had $59.8 million in interest-earning deposits, of which $8.0 million was held in fully-insured certificates of deposit with maturities laddered over 90 days to meet short-term funding needs. The Company has $122.7 million in available-for-sale securities that are readily marketable. Approximately 64.7% 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 92.6% core deposits, makes the Company less susceptible to large fluctuations in funding needs. The Company has the ability to borrow short-term funds from two correspondent banks and the Federal Reserve Bank. 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 March 31, 2011 and December 31, 2010, the Company had the following risk-based capital ratios, which are well above the regulatory minimum requirements (dollar amounts in thousands):

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	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2011
Total Risk-Based Capital (to Risk-Weighted Assets)
Consolidated	$	78,298		18.57	%	$	33,732		8.0	%		N/A		N/A
Bank		70,550		16.75			33,705		8.0		$	42,131		10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		74,792		17.74			16,866		4.0			N/A		N/A
Bank		67,044		15.91			16,852		4.0			25,279		6.0
Tier I Capital (to Average Assets)
Consolidated		74,792		10.99			27,217		4.0			N/A		N/A
Bank		67,044		9.99			27,101		4.0			33,876		5.0
As of December 31, 2010
Total Risk-Based Capital (to Risk-Weighted Assets)
Consolidated	$	78,385		18.36	%	$	34,161		8.0	%		N/A		N/A
Bank		69,514		16.31			34,099		8.0		$	42,623		10.0	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		74,671		17.49			17,081		4.0			N/A		N/A
Bank		65,800		15.44			17,049		4.0			25,574		6.0
Tier I Capital (to Average Assets)
Consolidated		74,671		10.65			28,033		4.0			N/A		N/A
Bank		65,800		9.45			27,846		4.0			34,807		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, 2010. 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,

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

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and historical loss experience. 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.

Fair Value of Securities- The Company uses the Fair Value Measurements prescribed under the FASB Accounting Standards Codification to value its securities. The ASC 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 ASC 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
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

The fair value of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include U.S. Government agency securities, 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.

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 –

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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 two-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 performed for 100, 200, 300 and 400 basis point increases ramped up over a two year period and also for immediate rate shocks. Due to the low interest rate environment, the down rate changes were not modeled. These rate changes are modeled using both projected dynamic balance sheets and a flat static balance sheet over a two-year period. The results of these simulation models are compared with the stable rate simulation. The model includes assumptions as to repricing and expected prepayments, anticipated calls, and expected decay rates of transaction accounts under the different rate scenarios. The results of these simulations include changes in both net interest income and market value of equity. ALCO guidelines that measure interest rate risk by the percent of change from stable rates, and capital adequacy, have been established, and as the table below indicates at March 31, 2011, the Bank was 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, 300 and 400 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

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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.

		Net Interest Income Change						Economic Value of Equity Change
Rate Ramp		3/31/11			ALCO Guideline			3/31/11			ALCO Guideline
	+400		2.18	%		±20	%		14.4	%		±30	%
	+300		1.36			±15	%		12.1			±20
	+200		.50			±10			9.3			±15
	+100		-.04			±5			5.5			±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 defined in Rule 12a-15e under the Securities Exchange Act of 1934) as of March 31, 2011, that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) During the quarter ended March 31, 2011, 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

For a discussion of the Company’ risk factors, please see Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 15, 2011, and available at www.sec.gov. These risk factors could materially affect the Company’s business, financial condition or future results. The risk factors described in the Annual Report on Form 10-K 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 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 representative of the Company 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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NB&T FINANCIAL GROUP, INC.
Date: May 12, 2011	/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	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

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