NB&T Financial (NBTF) 10-Q 2013 Q3 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 September 30, 2013

OR

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

For the transition period from                    to                    

Commission file number 0-23134

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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated Filer	¨
Non-accelerated filer	¨  (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 November 1, 2013, 3,425,865 common shares were issued and outstanding.

NB&T FINANCIAL GROUP, INC.

September  30, 2013 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 Comprehensive Income		6
	Condensed Consolidated Statements of Cash Flows		7
	Notes to Condensed Consolidated Financial Statements		8
	Report of Independent Registered Public Accounting Firm		29
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3:	Quantitative and Qualitative Disclosures about Market Risk		35
Item 4:	Controls and Procedures		36
	Part II
Item 1:	Legal Proceedings		37
Item 1A:	Risk Factors		37
Item 2:	Unregistered Sale of Equity Securities and Use of Proceeds		37
Item 3:	Defaults Upon Senior Securities		37
Item 4:	Mine Safety Disclosures		37
Item 5:	Other Information		37
Item 6:	Exhibits		37
Signatures			39
Index to Exhibits			40

2

NB&T Financial Group, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands)

	September 30, 2013			December 31, 2012
	(Unaudited)
Assets
Cash and due from banks	$	11,960		$	14,085
Interest-bearing deposits		41,611			50,002
Federal funds sold		440			422
Cash and cash equivalents		54,011			64,509
Available-for-sale securities		138,818			133,020
Loans held for sale		245			255
Loans, net of allowance for loan losses of $5,884 and $4,760 at September 30, 2013 and December 31, 2012, respectively		398,416			397,169
Premises and equipment		17,096			18,417
Federal Reserve and Federal Home Loan Bank stock		10,035			10,030
Earned income receivable		2,879			2,732
Goodwill		3,625			3,625
Core deposits and other intangibles		375			556
Bank-owned life insurance		15,995			15,644
Other real estate owned		1,426			1,327
FDIC loss share receivable		823			1,340
Other		1,666			2,451
Total assets	$	645,410		$	651,075
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	112,699		$	105,535
Savings, NOW and money market		345,015			333,041
Time		100,361			120,992
Total deposits		558,075			559,568
Long-term debt		14,310			15,310
Interest payable and other liabilities		4,898			5,377
Total liabilities		577,283			580,255
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		12,659			12,440
Retained earnings		59,832			59,683
Accumulated other comprehensive income (loss)		(703	)		2,333
Treasury stock, at cost
Common; 2013 – 405,503 shares, 2012 – 397,370 shares		(4,661	)		(4,636	)
Total stockholders’ equity		68,127			70,820
Total liabilities and stockholders’ equity	$	645,410		$	651,075

See Notes to Condensed Consolidated Financial Statements

3

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Income

(Dollars in Thousands, except per share amounts)

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Interest and Dividend Income
Loans	$	4,802	$	5,325	$	14,888	$	16,267
Securities
Taxable		193		490		692		1,657
Tax-exempt		372		226		971		585
Dividends on Federal Home Loan and Federal Reserve Bank stock		110		110		331		338
Deposits with financial institutions		32		46		110		155
Total interest and dividend income		5,509		6,197		16,992		19,002
Interest Expense
Deposits		358		567		1,186		1,993
Long-term debt		80		182		244		616
Total interest expense		438		749		1,430		2,609
Net Interest Income		5,071		5,448		15,562		16,393
Provision for Loan Losses		400		1,973		1,840		3,605
Net Interest Income After Provision for Loan Losses		4,671		3,475		13,722		12,788
Noninterest Income
Trust income		308		287		915		832
Service charges on deposits		761		842		2,244		2,391
Other service charges and fees		545		512		1,608		1,576
Investment services commissions		108		114		337		250
Net realized gains on sales of available-for-sale securities		0		1,013		781		1,174
Income from bank owned life insurance		118		121		351		360
Gain on extinguishment of long-term debt		0		0		300		0
Death benefit in excess of life insurance cash value		0		359		0		359
Other-than-temporary losses on investments:
Total other-than-temporary losses		0		0		0		(35	)
Portion of losses recognized in other comprehensive income (before taxes)		0		0		0		0
Net impairment losses recognized in earnings		0		0		0		(35	)
Other		307		742		828		1,501
Total noninterest income		2,147		3,990		7,364		8,408

See Notes to Condensed Consolidated Financial Statements

4

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Income

(Dollars in Thousands, except per share amounts)

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Noninterest Expense
Salaries and employee benefits	$	2,704	$	2,826	$	8,304	$	8,529
Net occupancy expense		523		561		1,619		1,697
Equipment expense		320		363		1,018		1,087
Data processing fees		477		436		1,398		1,297
Professional fees		427		380		1,271		1,247
Marketing expense		56		175		191		339
Printing, postage and supplies		161		159		493		491
State franchise tax		229		228		676		678
FDIC insurance		106		136		342		388
Amortization of intangibles		62		68		182		207
Net costs of operation of other real estate		61		237		420		767
Other		397		365		1,100		1,022
Total non-interest expense		5,523		5,934		17,014		17,749
Income Before Income Tax		1,295		1,531		4,072		3,447
Provision for Income Taxes		227		257		846		657
Net Income	$	1,068	$	1,274	$	3,226	$	2,790
Basic Earnings Per Share	$	.31	$	.37	$	.94	$	.81
Diluted Earnings Per Share	$	.31	$	.37	$	.94	$	.81
Dividends Per Share	$	.30	$	.30	$	.90	$	.90

See Notes to Condensed Consolidated Financial Statements

5

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Dollars in Thousands)

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013			2012
Net income	$	1,068	$	1,274		$	3,226		$	2,790
Other comprehensive income (loss), before tax effect:
Unrealized gains (losses) on securities available for sale		205		866			(5,381	)		1,842
Net unrealized gain (loss) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income		0		56			0			106
Reclassification of gains realized in income		0		(1,013	)		781			(1,139	)
Other comprehensive income (loss), before tax effect		205		(91	)		(4,600	)		809
Tax expense (credit)		70		(31	)		(1,564	)		275
Other comprehensive income (loss)		135		(60	)		(3,036	)		534
Comprehensive Income	$	1,203	$	1,214		$	190		$	3,324

See Notes to Condensed Consolidated Financial Statements

6

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2013			2012
Operating Activities
Net income	$	3,226		$	2,790
Items not requiring (providing) cash:
Depreciation and amortization		1,178			1,225
Provision for loan losses		1,840			3,605
Amortization of premiums and discounts on securities		2,809			2,689
Increase in cash surrender value on bank owned life insurance		(351	)		(360	)
Death benefit in excess of life insurance cash value		0			(359	)
Proceeds from FDIC loss share receivable		517			319
Stock options expense		140			135
Other-than-temporary impairment on available-for-sale securities		0			35
Net realized gains on sales of available-for-sale securities		(781	)		(1,174	)
Gain on extinguishment of long-term debt		(300	)		0
Net changes in: Loans held for sale		10			(140	)
Other assets and liabilities		2,033			717
Net cash provided by operating activities		10,321			9,482
Investing Activities
Purchases of available-for-sale securities		(72,519	)		(51,236	)
Proceeds from sales of available-for-sale securities		21,436			14,845
Proceeds from maturities of available-for-sale securities		38,657			37,396
Purchase of Federal Reserve Bank stock		(5	)		(5	)
Proceeds from death benefit on bank owned life insurance		0			680
Net change in loans		(3,927	)		1,709
Purchases of premises and equipment		(273	)		(469	)
Net cash provided/(used) in investing activities		(16,631	)		2,920
Financing Activities
Net change in:
Deposits		(1,493	)		(5,035	)
Proceeds from stock options exercised		252			52
Purchase of treasury shares		(198	)		(251	)
Extinguishment of long-term debt		(700	)		0
Proceeds from sale of treasury stock		0			185
Dividends paid		(2,049	)		(3,082	)
Net cash used in financing activities		(4,188	)		(8,131	)
Increase (Decrease) in Cash and Cash Equivalents		(10,498	)		4,271
Cash and Cash Equivalents, Beginning of Period		64,509			75,668
Cash and Cash Equivalents, End of Period	$	54,011		$	79,939
Supplemental Cash Flows Information
Interest paid	$	1,457		$	2,689
Income taxes paid		1,398			650
Transfers of loans into other real estate owned		873			829

See Notes to Condensed Consolidated Financial Statements

7

Notes to Condensed Consolidated Financial Statements

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. Immaterial changes in financial condition and results of operations may not be discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The condensed consolidated balance sheet as of December 31, 2012 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” or “NB&T”) as of September 30, 2013 and December 31, 2012, and the results of its operations and cash flows for the three- and nine-month periods ended September 30, 2013 and 2012. 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 operations 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, 2012 filed with the Securities and Exchange Commission.

Note 2: Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Fair Value
Available-for-Sale Securities:
September 30, 2013:
U.S. Government sponsored entities	$	23,765	$	54	$	(46	)	$	23,773
Mortgage-backed securities:
U.S. Government sponsored entities-residential		60,767		728		(155	)		61,340
Private label-residential		2,061		69		0			2,130
State and political subdivisions		53,290		376		(2,091	)		51,575
	$	139,883	$	1,227	$	(2,292	)	$	138,818
December 31, 2012:
U.S. Government sponsored entities	$	19,668	$	414	$	0		$	20,082
Mortgage-backed securities:
U.S. Government sponsored entities-residential		66,735		1,389		(49	)		68,075
Private label-residential		3,945		131		(53	)		4,023
State and political subdivisions		39,137		1,816		(113	)		40,840
	$	129,485	$	3,750	$	(215	)	$	133,020

8

The amortized cost and fair value of securities available for sale at September 30, 2013, by contractual maturity, are shown below (thousands). Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
Within one year	$	3,131	$	3,149
One to five years		19,967		20,024
Five to ten years		7,269		7,358
After ten years		46,688		44,817
		77,055		75,348
Mortgage-backed securities		62,828		63,470
Totals	$	139,883	$	138,818

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $74,198,720 at September 30, 2013, and $61,727,000 at December 31, 2012.

Gross gains of $817,000 and gross losses of $36,000 resulting from sales of available-for-sale securities were realized during the first nine months of 2013. The $36,000 loss resulted from the sale of a private-label collateralized mortgage obligation for which other-than-temporary impairment charges were recognized in prior periods. The $781,000 net gain for the first nine months of the year is a reclassification from accumulated other comprehensive income and is included in the net realized gains on sales of available-for-sale securities line item in the income statement. The related $266,000 tax expense is a reclassification from accumulated other comprehensive income and is included in the provision for income taxes line item in the income statement. Gross gains of $1,174,000 and gross losses of $0 resulting from sales of available-for-sale securities were realized during the first nine months of 2012. Gross gains and losses 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 September 30, 2013 and December 31, 2012 (thousands):

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
September 30, 2013
U.S. Government sponsored entities	$	4,799	$	(46	)	$	0	$	0		$	4,799	$	(46	)
Mortgage-backed securities:
U.S. Government sponsored entities-residential		12,898		(155	)		0		0			12,898		(155	)
State and political subdivisions		34,498		(2,091	)		0		0			34,498		(2,091	)
Total Securities	$	52,195	$	(2,292	)	$	0	$	0		$	52,195	$	(2,292	)
December 31, 2012
Mortgage-backed securities:
U.S. Government sponsored entities-residential	$	12,902	$	(48	)	$	1,352	$	(1	)	$	14,254	$	(49	)
Private label-residential		0		0			604		(53	)		604		(53	)
State and political subdivisions		6,656		(113	)		0		0			6,656		(113	)
Total Securities	$	19,558	$	(161	)	$	1,956	$	(54	)	$	21,514	$	(215	)

Management evaluates securities for other-than-temporary impairment on a periodic basis. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition of the issuer; and (3) the intent and ability of the company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At September 30, 2013, the unrealized losses less than twelve months old are deemed to be due to changes in interest rates and are not considered other-than-temporary.

9

Credit Losses Recognized on Investments

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 (thousands):

	Accumulated Credit Losses
	Nine Months Ended
	September 30, 2013			September 30, 2012
Balance, beginning of period	$	(119	)	$	(118	)
Additions related to other-than-temporary losses not previously recognized		0			(35	)
Reductions related to losses realized which were previously recognized		119			29
Balance, end of period	$	0		$	(124	)

The beginning accumulated credit loss balance related to one private-label collateralized mortgage obligation. That security was sold during the first quarter of 2013 with an additional loss of $36,000 realized at the time of sale.

Note 3: Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows (thousands):

	September 30, 2013			December 31, 2012
Net unrealized gain(loss) on available-for-sale securities	$	(1,065	)	$	3,588
Net unrealized loss on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income		0			(53	)
		(1,065	)		3,535
Tax effect		(362	)		1,202
Net-of-tax amount	$	(703	)	$	2,333

Note 4: Loans and Allowance for Loan Losses

	September 30, 2013			December 31, 2012
Categories of loans include (thousands):
Commercial and industrial	$	40,141		$	54,961
Commercial real estate		192,042			179,905
Agricultural		33,361			33,679
Residential real estate		131,123			127,007
Consumer		7,547			6,319
Total loans		404,204			401,871
Less: Net deferred loan costs, premiums and discounts		96			58
Allowance for loan losses		(5,884	)		(4,760	)
Net loans	$	398,416		$	397,169

10

The risk characteristics of each significant loan portfolio segment are as follows:

Commercial & Industrial Loans

Commercial and industrial loans are primarily underwritten on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus non-owner-occupied loans.

Agricultural

Agricultural loans are viewed primarily as cash flow loans where repayment comes from sales of crops and secondarily as loans secured by real estate, farm equipment or livestock. Repayment of these loans is generally dependent on the successful operation of the farming operation and is highly dependent on weather conditions.

Residential real estate and Consumer

Residential and consumer loans consist of two segments—residential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

For all loan classes, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral. Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

11

For all loan portfolio segments except residential and consumer loans, the Company promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges off residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due and charge-down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

For all classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status. Generally, most impaired loans, except for certain troubled debt restructurings, are on nonaccrual.

Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated terms for a period of at least six months.

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.

Allowance for Loan Losses

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. In the second quarter of 2012, NB&T adopted a new methodology for determining the allowance for loan losses. The new methodology involves use of a calculation model, which allows management to analyze key loan –level data for both impaired and non-impaired loans and apply risk factors to the general reserves based on a loan’s past due status and risk rating. In addition, the model uses the borrower’s address and applies unemployment rate risk factors based on the state of residence. The most significant change between the prior methodology and the current methodology is in the agricultural segment of the portfolio. This segment has had very little historical loss, which is now being applied to the segment. In the prior methodology, the historical loss percentages for commercial and industrial loans were applied to the agricultural segment.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on two principal factors: (1) the one- and three-year rolling average charge-off percentage applied to the current outstanding balance by portfolio type; and (2) estimated losses attributable to loan risk ratings and current unemployment rates. Management believes the one-to-three year historical loss experience methodology is appropriate in the current economic environment. Other adjustments (qualitative/environmental considerations) for each segment may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

12

A loan is considered impaired when, based on current information and events, it is probable that the Company 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 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, commercial real estate and agricultural 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. For impaired loans where the Company utilizes the discounted cash flows to determine the level of impairment, the Company includes the entire change in the present value of cash flows as bad debt expense.

The fair values of collateral dependent impaired loans are based on independent appraisals of the collateral. In general, the Company acquires an updated appraisal upon identification of impairment and periodically thereafter for commercial, commercial real estate and multi-family loans. After determining the collateral value as described, the fair value is calculated based on the determined collateral value less selling expenses. The potential for outdated appraisal values is considered in our determination of the allowance for loan losses through our analysis of various trends and conditions, including the local economy, trends in charge-offs and delinquencies, etc., and the related qualitative adjustments assigned by the Company.

Segments of loans with similar risk characteristics are collectively evaluated for impairment based on the segment’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In this scenario, the Company attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Company do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Company may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.

It is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. If a loan was accruing at the time of restructuring, the Company reviews the loan to determine if it is appropriate to continue the accrual of interest on the restructured loan.

With regard to determination of the amount of the allowance for credit losses, troubled debt restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.

13

The following tables present the allowance for loan losses for the three-month and nine-month periods ended September 30, 2013 and 2012 (thousands):

Three Months Ended September 30, 2013

	Commercial			Commercial Real Estate			Agricultural		Residential 1-4 Family			Residential Home Equity			Consumer			Total
Allowance for loan losses:
Beginning balance	$	2,692		$	2,373		$	75	$	444		$	212		$	7		$	5,803
Charge-offs		(302	)		(83	)		0		(26	)		(15	)		(4	)		(430	)
Recoveries		4			79			0		10			0			18			111
Provision		370			(23	)		11		20			35			(13	)		400
Ending Balance	$	2,764		$	2,346		$	86	$	448		$	232		$	8		$	5,884

Three Months Ended September 30, 2012

	Commercial		Commercial Real Estate			Agricultural		Residential 1-4 Family			Residential Home Equity			Consumer			Total
Allowance for loan losses:
Beginning balance	$	764	$	3,000		$	76	$	360		$	224		$	84		$	4,508
Charge-offs		0		(224	)		0		(168	)		(6	)		(16	)		(414	)
Recoveries		6		34			1		12			0			15			68
Provision		1,605		163			5		229			(7	)		(22	)		1,973
Ending Balance	$	2,375	$	2,973		$	82	$	433		$	211		$	61		$	6,135

14

Nine Months Ended September 30, 2013

	Commercial			Commercial Real Estate			Agricultural		Residential 1-4 Family			Residential Home Equity			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,697		$	2,284		$	85	$	460		$	199		$	35		$	4,760
Charge-offs		(344	)		(368	)		0		(109	)		(142	)		(28	)		(991	)
Recoveries		5			193			0		16			1			60			275
Provision		1,406			237			1		81			174			(59	)		1,840
Ending Balance	$	2,764		$	2,346		$	86	$	448		$	232		$	8		$	5,884

Nine Months Ended September 30, 2012

	Commercial			Commercial Real Estate			Agricultural			Residential 1-4 Family			Residential Home Equity			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,380		$	2,372		$	231		$	373		$	195		$	117		$	4,668
Charge-offs		(884	)		(895	)		0			(306	)		(106	)		(95	)		(2,286	)
Recoveries		7			54			3			14			10			60			148
Provision		1,872			1,442			(152	)		352			112			(21	)		3,605
Ending Balance	$	2,375		$	2,973		$	82		$	433		$	211		$	61		$	6,135

15

The following tables present the balance in the allowance for loan losses and the recorded investment in financing receivables based on portfolio segment and impairment method as of September 30, 2013 and December 31, 2012 (thousands):

	Evaluated for Impairment
	Individually		Collectively		Total
September 30, 2013
Allowance for loan losses:
Commercial	$	2,192	$	573	$	2,764
Commercial Real Estate		471		1,875		2,346
Agricultural		0		86		86
Residential-1-4 Family		5		443		448
Residential -Home equity		0		232		232
Consumer		0		7		8
Total	$	2,668	$	3,216	$	5,884
Loans:
Commercial	$	3,583	$	36,558	$	40,141
Commercial Real Estate		5,368		186,674		192,042
Agricultural		38		33,313		33,351
Residential-1-4 Family		968		101,444		102,412
Residential -Home equity		45		28,666		28,711
Consumer		10		7,537		7,547
Total	$	10,012	$	394,192	$	404,204
December 31, 2012
Allowance for loan losses:
Commercial	$	1,029	$	668	$	1,697
Commercial Real Estate		413		1,872		2,285
Agricultural		0		85		85
Residential-1-4 Family		1		459		460
Residential -Home equity		0		199		199
Consumer		0		34		34
Total	$	1,443	$	3,317	$	4,760
Loans:
Commercial	$	4,489	$	50,472	$	54,961
Commercial Real Estate		5,524		174,381		179,905
Agricultural		75		33,604		33,679
Residential-1-4 Family		1,008		95,659		96,667
Residential -Home equity		36		30,304		30,340
Consumer		16		6,303		6,319
Total	$	11,148	$	390,723	$	401,871

16

The following table presents the Company’s corporate and consumer credit exposure by category and standard regulatory classification as of September 30, 2013 and December 31, 2012 (thousands):

Corporate Credit Exposure

Credit Risk Profile by Creditworthiness Category:

	Commercial				Commercial Real Estate				Agricultural
	September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012
Pass	$	33,146	$	47,481	$	176,403	$	161,671	$	33,313	$	33,378
Other Assets Especially Mentioned		1,927		2,647		2,694		3,983		0		226
Substandard		4,922		4,687		12,945		14,251		38		75
Doubtful		146		146		0		0		0		0
Loss		0		0		0		0		0		0
Non-rated		0		0		0		0		0		0
Total	$	40,141	$	54,961	$	192,042	$	179,905	$	33,351	$	33,679

Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

	Residential-1 to 4 Family				Residential Home Equity				Consumer
	September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012
Pass	$	100,014	$	94,262	$	28,626	$	30,110	$	7,472	$	6,295
Substandard		2,398		2,405		85		230		75		24
Total	$	102,412	$	96,667	$	28,711	$	30,340	$	7,547	$	6,319

For purposes of monitoring the credit quality and risk characteristics of its commercial portfolio segment, the Company disaggregates the segment into the following classes: commercial and industrial, commercial real estate and agricultural. During the first quarter of 2013, the Company reclassified approximately $17.5 million in loans classified as commercial and industrial as of December 31, 2012 to commercial real estate loans. The effect on the allowance for loan losses calculation was not material for disclosure.

To facilitate the monitoring of credit quality within the commercial portfolio segment, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan losses for the commercial portfolio segment, the Company utilizes the following categories of credit grades: pass, other assets especially mentioned, substandard, doubtful or loss. The five categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter.

Pass ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis.

The Company assigns an Other Assets Especially Mentioned rating to loans and leases that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or the Company’s credit position.

The Company assigns a substandard rating to loans that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans have well defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans in this grade also are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies noted are not addressed and corrected.

17

The Company assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans. Loans rated as loss are loans with advances in excess of calculated current fair value which are considered uncollectible.

For purposes of monitoring the credit quality and risk characteristics of its consumer portfolio segment, the Company disaggregates the segment into the following classes: residential mortgage, home equity and other consumer. The Company considers repayment performance as the best indicator of credit quality for residential mortgage and consumer loans. Consumer loans that have principal and interest payments that have become past due ninety days are classified as substandard unless such loans are both well secured and in the process of collection. All other loans are classified as pass. Well secured loans are collateralized by perfected security interests in real and/or personal property for which the Company estimates proceeds from sale would be sufficient to recover the outstanding principal and accrued interest balance of the loan and pay all costs to sell the collateral. The Company considers a loan in the process of collection if collection efforts or legal action is proceeding and the Company expects to collect funds sufficient to bring the loan current or recover the entire outstanding principal and accrued interest balance.

Generally, all classes of 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. Most impaired loans are on non-accrual status. Past due status is based on the contractual terms of the loan. 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 present the Company’s past due and nonaccrual loans as of September 30, 2013 and December 31, 2012 (thousands):

September 30, 2013:

											Total		90+ Days
	Past Due Days										Financing		&		Non-
	30-59		60-89		90+		Total		Current		Receivables		Accruing		accrual
Commercial	$	263	$	18	$	3,239	$	3,520	$	36,621	$	40,141	$	30	$	3,568
Commercial Real Estate		123		189		3,139		3,451		188,591		192,042		0		3,384
Agricultural		67		0		28		95		33,256		33,351		0		38
Residential 1-4 Family		327		219		614		1,160		101,252		102,412		0		1,143
Residential Home Equity		63		19		36		118		28,593		28,711		0		70
Consumer		16		0		25		41		7,506		7,547		0		70
Total	$	859	$	445	$	7,081	$	8,385	$	395,819	$	404,204	$	30	$	8,273
December 31, 2012:
											Total		90+ Days
	Past Due Days										Financing		&		Non-
	30-59		60-89		90+		Total		Current		Receivables		Accruing		accrual
Commercial	$	65	$	91	$	4,594	$	4,750	$	50,211	$	54,961	$	620	$	4,418
Commercial Real Estate		602		26		3,590		4,218		175,687		179,905		0		3,950
Agricultural		0		0		53		53		33,626		33,679		0		75
Residential 1-4 Family		460		24		540		1,024		95,643		96,667		134		1,116
Residential Home Equity		54		3		173		230		30,110		30,340		24		196
Consumer		22		38		10		70		6,249		6,319		0		60
Total	$	1,203	$	182	$	8,960	$	10,345	$	391,526	$	401,871	$	778	$	9,815

18

The following tables present impaired loan information at September 30, 2013 and December 31, 2012 and for the periods ended September 30, 2013 and September 30, 2012 and the related allowance for loan losses (thousands).

								For the three months ended September 30, 2013				For the nine months ended September 30, 2013
September 30, 2013:	Recorded Investment		Unpaid Principal Balance			Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	374	$	547		$	0	$	543	$	0	$	782	$	36
Commercial real estate		2,355		2,603			0		2,803		72		3,101		170
Agricultural		38		52			0		38		0		47		3
Residential-1 to 4 Family		882		996			0		931		7		966		22
Residential-Home equity		30		39			0		39		0		37		1
Consumer		10		10			0		11		0		13		1
With an allowance recorded:
Commercial	$	3,209	$	3,216		$	2,192	$	3,209	$	0	$	3,247	$	0
Commercial real estate		3,013		3,096	��		471		2,800		0		2,444		0
Agricultural		0		0			0		0		0		0		0
Residential-1 to 4 Family		86		103			5		43		0		22		0
Residential-Home equity		15		15			0		8		0		4		0
Consumer		0		0			0		0		0		0		0
Total:
Commercial	$	3,583	$	3,763		$	2,192	$	3,751	$	0	$	4,029	$	36
Commercial real estate		5,368		5,699			471		5,603		72		5,545		170
Agricultural		38		52			0		38		0		47		3
Residential-1 to 4 Family		968		1,099			5		974		7		987		22
Residential- Home equity		45		54			0		47		0		41		1
Consumer		10		10			0		11		0		13		1

19

	As of December 31, 2012						For the three months ended September 30, 2012				For the nine months ended September 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	1,255	$	1,571	$	0	$	1,003	$	1	$	904	$	40
Commercial real estate		3,940		4,145		0		3,659		102		3,760		166
Agricultural		75		87		0		53		0		26		0
Residential-1 to 4 Family		1,008		1,126		0		1,028		9		1,041		28
Residential-Home equity		36		40		0		38		0		19		0
Consumer		16		16		0		16		0		8		0
With an allowance recorded:
Commercial	$	3,234	$	3,290	$	1,029	$	3,561	$	0	$	2,456	$	0
Commercial real estate		1,584		1,665		413		3,579		0		3,532		0
Agricultural		0		0		0		18		0		9		0
Residential-1 to 4 Family		0		80		1		80		0		40		0
Residential-Home equity		0		0		0		0		0		0		0
Consumer		0		2		0		1		0		1		0
Total:
Commercial	$	4,489	$	4,861	$	1,029	$	4,564	$	1	$	3,360	$	40
Commercial real estate		5,524		5,810		413		7,238		102		7,292		166
Agricultural		75		87		0		71		0		35		0
Residential-1 to 4 Family		1,008		1,206		1		1,108		9		1,081		28
Residential—Home equity		36		40		0		38		0		19		0
Consumer		16		18		0		17		0		9		0

Interest income recognized is not materially different from cash basis interest.

20

The following tables present information regarding troubled debt restructurings (“TDRs”) by segment: (thousands):

Newly classified troubled debt restructurings:

	Three Months Ended September 30, 2013						Three Months Ended September 30, 2012
	Outstanding Recorded Investment						Outstanding Recorded Investment
	Number of Contracts		Pre- Modification		Post- Modification		Number of Contracts		Pre- Modification		Post- Modification
Commercial		1	$	24	$	22		0	$	0	$	0
Commercial real estate		0		0		0		0		0		0
Residential		0		0		0		0		0		0
Consumer		0		0		0		1		2		2
	Nine Months Ended September 30, 2013						Nine Months Ended September 30, 2012
	Outstanding Recorded Investment						Outstanding Recorded Investment
	Number of Contracts		Pre- Modification		Post- Modification		Number of Contracts		Pre- Modification		Post- Modification
Commercial		1	$	24	$	22		1	$	62	$	22
Commercial real estate		1		447		435		1		19		19
Residential		1		15		15		2		158		117
Consumer		0		0		0		2		20		17

The following table provides information on how restructured loans were modified during the three- and nine-month periods ended September 30, 2013 and 2012 (thousands):

	September 30, 2013
	Three Months Ended				Nine Months Ended
	Recorded Investment		Amount charged off		Recorded Investment		Amount charged off
Extended Maturities	$	22	$	0	$	37	$	0
Lowered interest rate and extended term		0		0		435		0
	September 30, 2012
	Three Months Ended				Nine Months Ended
	Recorded Investment		Amount charged off		Recorded Investment		Amount charged off
Extended Maturities	$	2	$	0	$	73	$	0
Lowered payment		0		0		22		0
Reduced principal and lowered interest rate		0		0		80		36

The allowance for loan losses was not increased for any of the above restructured loans.

21

All TDRs are considered impaired loans. The Company considers TDRs that become 30 days or more past due under the modified terms as subsequently defaulted. The Company had noTDR’s modified in the past twelve months that subsequently defaulted during the year-to-date period.

The Company acquired loans from American National Bank on March 19, 2010 and by its acquisition by merger of Community National Corporation 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. As of September 30, 2013, such acquired credit-impaired loans represent less than one percent of total loans and the disclosures required under ASC 310-30 are not considered material to the overall financial statements.

Note 5: Long-Term Debt

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

	September 30, 2013		December 31, 2012
Federal Home Loan Bank advances	$	5,000	$	5,000
Junior subordinated debentures		9,310		10,310
Total	$	14,310	$	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 Company 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 were 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, which was 1.76% at September 30, 2013. 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 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. Since September 6, 2012, the Capital Securities are redeemable at par. 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 September 30, 2013 and December 31, 2012, the outstanding principal balance of the Capital Securities was $9,000,000 and $10,000,000, respectively. In June 2013, the Company extinguished $1.0 million in debt at a discount with a gain of $300,000 recognized. 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 6: Commitments and Contingencies

Outstanding commitments to extend credit as of September 30, 2013 totaled $86,097,000, compared to $97,512,000 at December 31, 2012. Standby letters of credit as of September 30, 2013 totaled $782,000, compared to $1,742,000 at December 31, 2012.

The National Bank and Trust Company (the “Bank”) is the defendant in a third-party complaint filed in a civil action entitled CitiMortgage, Inc. and Citibank, N.A. vs Security Title and Abstract, LLC pending in United States District Court, for the Middle District of Florida. The dispute involves mortgage loans totaling $1,350,000 made in 2007 by the Plaintiffs to an individual for the purchase of a residence in Cape Coral, Florida. The purchaser later defaulted on the loans. The third-party complaint alleges claims against The Community National Bank (as mortgage broker), for common law indemnification, breach of fiduciary duty, fraud, concealment and negligent misrepresentation. The Bank is involved in the complaint as a result of its 2009 acquisition of The Community National Bank. The Bank denies these claims and intends to defend the third-party action. At this time, the Bank is unable to estimate the likelihood of an unfavorable outcome as to the claims alleged or the amount of damages in the event of an unfavorable outcome, and, as a result, no potential liability has been recognized in the consolidated financial statements.

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Note 7: 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 September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Numerator:
Net income	$	1,068	$	1,274	$	3,226	$	2,790
Denominator:
Weighted-average common shares outstanding (basic)		3,415,732		3,424,112		3,416,915		3,424,390
Effect of stock options		22,458		7,507		11,588		7,798
Weighted-average common shares outstanding (diluted)		3,438,190		3,431,619		3,428,503		3,432,188
Earnings per share:
Basic	$	.31	$	.37	$	.94	$	.81
Diluted	$	.31	$	.37	$	.94	$	.81

For the three and nine months ended September 30, 2013, stock options covering 116,100 and 198,100 shares of common stock, respectively, were not considered in computing earnings per share as their exercise prices exceeded the fair market value of the Company’s common shares. For the three and nine months ended September 30, 2012, stock options covering 223,767 and 191,600 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 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 2009.

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 September 30, 2013, the Company did not identify any uncertain tax positions that it believes should be recognized in the financial statements.

Note 9: Fair Value Measurements

The Company accounts for fair values in accordance with accounting guidance forFair Value Measurements prescribed under the FASB Accounting Standards Codification. The ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

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

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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 sheets, as well as the general classification of such assets pursuant to the valuation hierarchy:

Available-for-Sale Securities

The fair value of available-for-sale securities is 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 ASC fair value hierarchy in which the fair value measurements fall at September 30, 2013 and December 31, 2012. (See fair values by type of security in Note 2) (thousands):

	Fair Value		Fair Value Measurements at Reporting Date Using
Description			Level 1		Level 2		Level 3
September 30, 2013:
Available-for-sale securities	$	138,818	$	0	$	138,818	$	0
December 31, 2012:
Available-for-sale securities	$	133,020	$	0	$	133,020	$	0

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 sheets, as well as the general classification of such assets pursuant to the valuation hierarchy:

Impaired Loans (Collateral Dependent)

At September 30, 2013 and December 31, 2012, 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, less estimated cost to sell. Appraisals are reviewed for accuracy and consistency by the Credit Administration area, and appraisers are selected from the list of approved appraisers maintained by management. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. NB&T also has some impaired loans secured by accounts receivable, inventory or equipment. Management has determined fair value measurements based on review of recent financial statements or research of current equipment values.

Other Real Estate Owned

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, new appraisals are periodically obtained by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Appraisals are reviewed for accuracy and consistency by the Credit Administration area, and appraisers are selected from the list of approved appraisers maintained by management. OREO is classified within Level 3 of the fair value hierarchy.

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The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the ASC fair value hierarchy in which the fair value measurements fall at September 30, 2013 and December 31, 2012. The values below only represent those assets with a change in their fair value estimate since the previous year end (thousands).

	Fair		Fair Value Measurements at Reporting Date Using
Description	Value		Level 1		Level 2		Level 3
September 30, 2013:
Impaired loans	$	2,684	$	0	$	0	$	2,684
Other real estate owned		229		0		0		229
December 31, 2012:
Impaired loans	$	2,047	$	0	$	0	$	2,047
Other real estate owned		613		0		0		613

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements (thousands).

Description	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average
September 30, 2013:
Impaired loans	$	2,684	Market comparable properties	Estimated costs to sell		10	%
Other real estate owned	$	229	Market comparable properties	Comparability adjustments		10	%
December 31, 2012:
Impaired loans	$	2,047	Market comparable properties	Estimated costs to sell		10	%
Other real estate owned	$	613	Market comparable properties	Comparability adjustments		10	%

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The following table presents estimated fair values of the Company’s other financial instruments recognized in the accompanying balance sheets at amounts other than fair value and the level within the fair value hierarchy in which the fair value measurements fall. 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):

	Fair Value Measurements Using
	Carrying Amount		Level 1		Level 2		Level 3
September 30, 2013:
Financial assets
Cash and cash equivalents	$	54,011	$	54,011	$	0	$	0
Loans including loans held for sale, net		398,661		0		0		404,404
Stock in FRB and FHLB		10,035		0		10,035		0
Earned income receivable		2,879		0		2,879		0
FDIC loss share receivable		823		0		0		823
Financial liabilities
Deposits		558,075		0		559,922		0
Long-term debt		14,310		0		8,387		0
Interest payable		84		0		84		0
December 31, 2012:
Financial assets
Cash and cash equivalents	$	64,509	$	64,509	$	0	$	0
Loans including loans held for sale, net		397,424		0		0		407,145
Stock in FRB and FHLB		10,030		0		10,030		0
Earned income receivable		2,732		0		2,732		0
FDIC loss share receivable		1,340		0		0		1,340
Financial liabilities
Deposits		559,568		0		561,871		0
Long-term debt		15,310		0		9,165		0
Interest payable		108		0		108		0

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The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

Cash and Cash Equivalents

The carrying amount approximates fair value.

Loans, net

Fair value is estimated by discounting the future cash flows using the market rates at which similar notes would be made to borrowers with similar credit ratings and for the same remaining maturities. The market rates used are based on current rates the Bank would impose for similar loans and reflect a market participant assumption about risks associated with non-performance, illiquidity, and the structure and term of the loans along with local economic and market conditions.

Stock in FRB and FHLB

Fair value is estimated at book value due to restrictions that limit the sale or transfer of such stock.

FDIC loss share receivable

The carrying amount approximates fair value. The carrying amount is based on future expected losses on loans covered under the loss share agreement with the FDIC.

Earned Income Receivable and Interest Payable

The carrying amount approximates fair value. The carrying amount for interest receivable and interest payable is determined using the interest rate, balance and last payment date. Trust income and commissions receivable is based on trust fee schedules, market value of trust assets and brokerage commission schedules.

Deposits

Fair value of term deposits is estimated by discounting the future cash flows using rates of similar deposits with similar maturities. The market rates used were based on current rates the Bank would offer on similar term deposits. The estimated fair value of demand, NOW, savings and money market deposits is the book value since rates are regularly adjusted to market rates and amounts are payable on demand at the reporting date.

Long-term Debt

Fair value of Federal Home Loan debt is estimated by discounting the future cash flows using rates of similar advances with similar maturities. These rates were obtained from current rates offered by the FHLB. Fair value of Trust Preferred debt is estimated by discounting the future cash flows using rates of similar trust preferred debt issuances. These rates were obtained from a knowledgeable independent third party and reviewed by the Company.

Commitments to Originate Loans, Forward Sale Commitments, Letters of Credit, and Lines of Credit

The fair value of commitments to originate loans 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 forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality. The fair values of letters of credit and lines of credit are 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 September 30, 2013 and December 31, 2012, the fair value of commitments was not material.

Note 10: Effect of Recent Accounting Standards

In October 2012, the FASB issued Accounting Standards Update (“ASU”) No. 2012-06, Business Combinations: Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. The objective of this ASU is to address the diversity in practice about how to interpret the terms on the same basis and contractual limitations when subsequently measuring an indemnification asset recognized in a government-assisted (Federal Deposit Insurance Corporation) acquisition of a financial institution that includes a loss-sharing agreement (indemnification agreement). When a reporting entity recognizes an indemnification asset as a result of a government-assisted

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acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (i.e., the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). For public and nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. Adoption of this standard did not have a significant impact on the valuation of the FDIC loss share receivable indemnification asset currently on the Company’s balance sheet.

FASB also issued ASU 2013-02, which amended ASU 2011-05, Comprehensive Income, Topic 220: Presentation of Comprehensive Income, and establishes requirements and an effective date for amendments deferred by ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The update requires public companies to report information on reclassifications out of accumulated other comprehensive income (AOCI), in their financial statements in one place (either in the financial statements or in a single note) using information currently required to be disclosed elsewhere in the financial statements. Public companies are also required to comply with the requirements of this ASU at each reporting date. The information may be condensed in accordance with the level of detail required by Subtopic 270-10. The amendments in the update do not change the requirements for reporting net income or other comprehensive income in the financial statements. The new disclosure requirement takes effect prospectively for public companies in interim and annual reporting periods beginning after December 15, 2012. The Company adopted this standard on January 1, 2013. The effect of adopting this standard increased our disclosure of items reclassified out of accumulated other comprehensive income.

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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 September 30, 2013 and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2013 and 2012 and cash flows for the nine month periods ended September 30, 2013 and 2012. 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, 2012 and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 19, 2013, 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, 2012 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

November 14, 2013

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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 third quarter of 2013 was $1.1 million, or $.31 per share, compared to net income of $1.3 million, or $.37 per share, for the third quarter of 2012. Non-interest income was higher in the third quarter of 2012 due to three items: 1) gains of approximately $1 million realized on the sale of securities; 2) termination of the Bank’s single-family FDIC loss share guarantee for approximately $405,000, and 3) realization of non-taxable income of approximately $359,000 on a bank-owned life insurance death benefit in excess of surrender value. These items were partially offset by a $1.5 million higher loan loss provision in the third quarter last year, compared to the same quarter this year. In addition, net income is down due to continued margin compression, partially offset by lower non-interest expenses. Net income for the first nine months of 2013 was $3.2 million, or $.94 per share, compared to $2.8 million, or $.81 per share, for the same period in 2012.

Net Interest Income

Net interest income was $5.1 million for the third quarter of 2013, compared to $5.4 million for the third quarter of 2012. Net interest margin decreased to 3.33% for the third quarter of 2013, compared to 3.42% for the same quarter last year. The net interest margin decreased primarily due to lower loan yields on new loans and continued repricing of variable-rate loans to lower rates due to the competitive market in this historically low interest-rate environment, as well as higher premium amortization on mortgage-related securities due to increased mortgage loan refinancing. Net interest income for the first nine months of 2013 was $15.6 million, compared to $16.4 million for the first nine months of 2012.

Provision for Loan Losses

The provision for loan losses for the third quarter of 2013 was $400,000, compared to $2.0 million in the same quarter last year. Net charge-offs were $319,000 in the third quarter of 2013, compared to $346,000 in the third quarter of 2012. Specific reserves on two large commercial relationships were the primary reason for the higher provision for loan losses in the third quarter of 2012. Year to date net charge-offs for 2013 were $716,000, compared to $2.1 million for the first nine months of 2012. The provision for loan losses for the nine months ended September 30, 2013 was increased to add specific loan reserves of approximately $1.2 million for one commercial loan, bringing the total specific reserve on this loan to $2.0 million. Non-performing loans were $8.3 million at September 30, 2013, compared to $12.4 million at September 30, 2012.

Non-interest Income

Total non-interest income was $2.1 million for the third quarter of 2013, compared to $4.0 million for the third quarter of 2012. The decrease is primarily due to the realization of approximately $1.0 million in securities sale gains in the third quarter last year. No securities were sold in the third quarter of 2013. In addition, the Company realized non-recurring income of $764,000 in the third quarter of 2012 related to the termination of the single-family FDIC loss share guarantee and the bank-owned life insurance death benefit. Non-interest income for the first nine months of 2013 was $7.4 million, compared to $8.4 million for the same period last year.

Non-interest Expense

Total non-interest expense was $5.5 million for the third quarter of 2013, compared to $5.9 million for the third quarter of 2012. The decline in expense is due to continued focus on expense reduction primarily in the areas of personnel and processing efficiency. In addition, net costs associated with the operation of other real estate have declined approximately 74%, or $176,000, compared to the same quarter last year due to a decline in other real estate owned balances from $2.2 million at September 30, 2012 to $1.4 million at September 30, 2013.

Income Taxes

The provision for income taxes for the third quarter of 2013 was $227,000, or 17.6% effective rate, compared to $257,000, or 16.8% effective rate, for the third quarter of 2012. The provision for income taxes for the first nine months of 2013 was $846,000, or 20.8% effective rate, compared to $657,000, or 19.1% effective rate, for the first nine months of 2012.

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Financial Condition

The changes that have occurred in the Company’s financial condition during 2013 are as follows (in thousands):

	September 30, 2013		December 31, 2012		2013 Change
					Amount			Percent
Total assets	$	645,410	$	651,075	$	(5,665	)		(0.9	)
Interest-bearing deposits		41,611		50,002		(8,391	)		(16.8	)
Federal funds sold		440		422		18			4.3
Loans, net *		398,416		397,169		1,247			0.3
Securities		138,818		133,020		5,798			4.4
Demand deposits		112,699		105,535		7,164			6.8
Savings, NOW, MMDA deposits		345,015		333,041		11,974			3.6
CD’s $100 and over		19,166		26,991		(7,825	)		(29.0	)
Other time deposits		81,195		94,001		(12,806	)		(13.6	)
Total deposits		558,075		559,568		(1,493	)		(0.3	)
Long-term borrowings		14,310		15,310		(1,000	)		(6.5	)
Stockholders’ equity		68,127		70,820		(2,693	)		(3.8	)

* Excludes loans held for sale

At September 30, 2013, total assets were $645.4 million, a decrease of $5.7 million from December 31, 2012. Loans have increased $1.2 million from December 31, 2012, primarily due to decreased sales of fixed-rate mortgages in the secondary market, resulting in growth in residential mortgage balances of approximately $4.1 million, partially offset by increased loan payoffs in the commercial loan portfolio. The Company started maintaining more fixed-rate mortgage loans in 2012, cognizant of the fact these loans have inherent interest rate risk, in order to invest excess funds at rates higher than those available in overnight funds and securities and to replace prepayments in the mortgage loan portfolio.

Total deposit liabilities declined $1.5 million from December 31, 2012. The Company has experienced a decline in time deposits of approximately $20.6 million, largely offset by growth in transaction, savings and money market account of approximately $19.1 million as depositors have chosen to either keep their funds in more liquid deposits that offer comparable rates to shorter-term certificates of deposit or seek out longer-term, higher rate certificates elsewhere. The Company continues to allow higher-priced deposits to leave based on its liquidity position and lower-rate reinvestment alternatives.

Allowance for Loan Losses

The Company’s loan loss experience for the periods ended September 30, 2013 and 2012 is outlined in Note 4 of the financial statements. The following table sets forth selected information regarding the Company’s loan quality at the dates indicated (in thousands):

	September 30, 2013			December 31, 2012			September 30, 2012
Loans accounted for on non-accrual basis	$	8,273		$	9,815		$	12,179
Accruing loans which are past due 90 days		30			778			247
Other real estate owned		1,426			1,327			2,196
Total non-performing assets	$	9,729		$	11,920		$	14,622
Troubled debt restructurings, accruing	$	2,726		$	2,382		$	2,416
Ratios:
Allowance to total loans		1.46	%		1.18	%		1.53	%
Net charge-offs to average loans (annualized)		.24	%		1.06	%		.72	%
Non-performing assets to total loans and other real estate owned		2.40	%		2.96	%		3.64	%

The allowance is maintained to absorb losses in the portfolio. Management’s determination of the adequacy of the allowance 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 allowance 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 allowance. Recoveries on loans previously charged off are added to the allowance.

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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 allocations applied to individual loans estimated by management to have a potential loss; and (3) estimated losses attributable to loan risk ratings and current unemployment rates.

Specific reserves increased to $2.7 million at September 30, 2013, compared to $1.4 million at December 31, 2012. Most of this increase is attributable to a $2.5 million working capital line secured by accounts receivable and inventory where the borrower’s financial condition has weakened, and the reserve is based on the estimated discounted value of the accounts receivable not pledged to third parties and inventory securing the loan, resulting in increased specific reserves of $1.2 million in 2013.

As of September 30, 2013, there was $7.0 million in small business relationships on non-accrual. Approximately $3.2 million of this amount consisted of one relationship, all secured by commercial real estate or business assets. In addition, approximately $1.2 million of nonaccrual loans were acquired from American National Bank and are covered under the FDIC loss share agreement. Nonaccrual residential real estate loans totaled $1.1 million, with the largest balance being $126,000. Non-accrual agricultural loans totaled $38,000, consumer loans totaled $70,000, and home equity credit loans totaled $70,000.

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 September 30, 2013 was 72.5%, compared to 71.9% at December 31, 2012 and 69.4% at September 30, 2012. Loans to total assets were 62.7% at September 30, 2013, compared to 61.8% at December 31, 2012 and 60.0% at September 30, 2012. At September 30, 2013, the Company had $54.0 million in interest-earning deposits. The Company has $138.8 million in available-for-sale securities that are readily marketable. Approximately 53.5% 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 96.6% 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.

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The Federal Reserve Board has adopted risk-based capital guidelines that assign risk weightings to assets and off-balance sheet items and also define and set minimum capital requirements (risk-based capital ratios). At September 30, 2013 and December 31, 2012, the Company had the following risk-based capital ratios, which are well above the regulatory minimum requirements (dollar amounts in thousands):

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized (1)
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2013
Total Risk-Based Capital (to Risk-Weighted Assets)
Consolidated	$	79,942		19.22	%	$	33,275		8.0	%	$	41,594		10.0	%
Bank		75,751		18.23			33,248		8.0			41,560		10.0
Tier I Capital (to Risk-Weighted Assets)
Consolidated		74,739		17.97			16,638		4.0			24,956		6.0
Bank		70,548		16.98			16,624		4.0			24,936		6.0
Tier I Capital (to Average Assets)
Consolidated		74,739		11.49			26,022		4.0			N/A		N/A
Bank		70,548		10.82			26,069		4.0			32,587		5.0
As of December 31, 2012
Total Risk-Based Capital (to Risk-Weighted Assets)
Consolidated	$	79,975		19.51	%	$	32,791		8.0	%	$	40,989		10.0	%
Bank		71,899		17.55			32,766		8.0			40,957		10.0
Tier I Capital (to Risk-Weighted Assets)
Consolidated		75,215		18.35			16,396		4.0			24,593		6.0
Bank		67,139		16.39			16,383		4.0			24,574		6.0
Tier I Capital (to Average Assets)
Consolidated		75,215		11.27			26,701		4.0			N/A		N/A
Bank		67,139		10.12			26,534		4.0			33,167		5.0

(1) The amounts and percentages set forth for the Bank are established by the prompt corrective action regulations of the Office of the Comptroller of the Currency. The amounts and percentages set forth for the Company are established by the Federal Reserve Board. The Bank Holding Company Act requires the Company to be well capitalized in order to remain a financial holding company.

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, 2012. 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.

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Allowance for Loan Losses - The allowance for loan losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, collateral values, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

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

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Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to interest rate risk, exchange rate risk, equity price risk and commodity price risk. The Company does not maintain a trading account for any class of financial instrument, and is not currently subject to foreign currency exchange rate risk, equity price risk or commodity price risk. The Company’s market risk is composed primarily of interest rate risk.

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

The Bank uses simulation models to manage interest rate risk. In the Bank’s simulation models, each asset and liability balance is projected over a 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 September 30, 2013, the Bank was within the guidelines established by the Board for net interest income changes for increasing rate changes of 100, 200, 300 and 400 basis points. Economic value of equity changes are also within the ALCO guidelines.

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

	Net Interest Income Change						Economic Value of Equity Change
Rate Ramp	9/30/13			ALCO Guideline			9/30/13			ALCO Guideline
+400		13.0	%		20	%		-3.9	%		30	%
+300		9.6			15	%		-2.8			20
+200		6.8			10			-1.2			15
+100		3.5			5			-0.03			10

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Item 4 – Controls and Procedures

(a) The Company’s principal executive officer and principal financial officer have concluded, based upon their evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15e under the Securities Exchange Act of 1934) as of September 30, 2013, 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 September 30, 2013, 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’s 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, 2012, as filed with the SEC on March 19, 2013, 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

Unregistered Sales of Equity Securities

None

Issuer Purchases of Equity Securities

None

Item 3 – Defaults Upon Senior Securities

Not applicable

Item 4 – Mine Safety Disclosures

Not applicable

Item 5 – Other Information

Not applicable

Item 6 – Exhibits

Index to Exhibits

Exhibit Number
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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101* The following materials from NB&T Financial Group, Inc.’s, Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012; (ii) the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2013 and 2012 (unaudited); (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2013 and 2012 (unaudited); (iv) the Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2013 and 2012 (unaudited); and (iv) the Notes to Condensed Consolidated Financial Statements (furnished herewith).

* As provided in Rule 406T of SEC Regulation S-T, the Interactive Data Files are furnished and not deemed filed or part of a Registration Statement or prospectus for purposes of Sections 11 and 12 of the Securities Exchange Act of 1933, as amended, and are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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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: November 14, 2013	/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
101*	The following materials from NB&T Financial Group, Inc.’s, Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012; (ii) the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2013 and 2012 (unaudited); (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2013 and 2012 (unaudited); (iv) the Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2013 and 2012 (unaudited); and (iv) the Notes to Condensed Consolidated Financial Statements (furnished herewith). *As provided in Rule 406T of SEC Regulation S-T, the Interactive Data Files are furnished and not deemed filed or part of a Registration Statement or prospectus for purposes of Sections 11 and 12 of the Securities Exchange Act of 1933, as amended, and are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.	Included herewith

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