NB&T Financial (NBTF) 10-Q 2014 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, 2014

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 3, 2014, 3,433,496 common shares were issued and outstanding.

NB&T FINANCIAL GROUP, INC.

September  30, 2014 Form 10-Q

Table of Contents

		Page
	PART I
Item 1:	Financial Statements
	Condensed Consolidated Balance Sheets		3
	Condensed Consolidated Statements of Income		4
	Condensed Consolidated Statements of Comprehensive Income (Loss)		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		36
Item 1A:	Risk Factors		36
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		38
Signatures			39
Index to Exhibits			40

NB&T Financial Group, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands)

	September 30, 2014			December 31, 2013
	(Unaudited)
Assets
Cash and due from banks	$	11,159		$	9,155
Interest-bearing deposits		33,016			41,901
Federal funds sold		457			443
Cash and cash equivalents		44,632			51,499
Available-for-sale securities		157,874			138,098
Loans held for sale		120			0
Loans, net of allowance for loan losses of $3,911 and $4,053 at September 30, 2014 and December 31, 2013, respectively		397,258			395,443
Premises and equipment		16,275			16,895
Federal Reserve and Federal Home Loan Bank stock		7,392			10,035
Earned income receivable		2,962			2,546
Goodwill		3,625			3,625
Core deposits and other intangibles		168			312
Bank-owned life insurance		16,462			16,111
Other real estate owned		1,353			1,224
FDIC loss share receivable		125			525
Other		1,736			1,999
Total assets	$	649,982		$	638,312
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	118,621		$	115,206
Savings, NOW and money market		352,012			339,260
Time		86,595			96,334
Total deposits		557,228			550,800
Long-term debt		14,310			14,310
Interest payable and other liabilities		7,179			5,167
Total liabilities		578,717			570,277
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		12,984			12,733
Retained earnings		60,298			59,820
Accumulated other comprehensive income (loss)		1,836			(900	)
Treasury stock, at cost
Common; 2014 – 387,063 shares, 2013 – 389,390 shares		(4,853	)		(4,618	)
Total stockholders’ equity		71,265			68,035
Total liabilities and stockholders’ equity	$	649,982		$	638,312

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,
	2014		2013		2014		2013
Interest and Dividend Income
Loans	$	4,873	$	4,802	$	14,225	$	14,888
Securities
Taxable		462		193		1,237		692
Tax-exempt		505		372		1,409		971
Dividends on Federal Home Loan and Federal Reserve Bank stock		78		110		279		331
Deposits with financial institutions		28		32		103		110
Total interest and dividend income		5,946		5,509		17,253		16,992
Interest Expense
Deposits		278		358		860		1,186
Long-term debt		77		80		228		244
Total interest expense		355		438		1,088		1,430
Net Interest Income		5,591		5,071		16,165		15,562
Provision for Loan Losses		100		400		510		1,840
Net Interest Income After Provision for Loan Losses		5,491		4,671		15,655		13,722
Noninterest Income
Trust income		373		308		1,093		915
Service charges on deposits		700		761		1,981		2,244
Other service charges and fees		567		545		1,657		1,608
Investment services commissions		117		108		312		337
Net realized gains on sales of available-for-sale securities		0		0		0		781
Income from bank owned life insurance		119		118		351		351
Gain on extinguishment of long-term debt		0		0		0		300
Other		283		307		804		828
Total noninterest income		2,159		2,147		6,198		7,364

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,
	2014		2013		2014		2013
Noninterest Expense
Salaries and employee benefits	$	2,903	$	2,704	$	8,600	$	8,304
Net occupancy expense		516		523		1,578		1,619
Equipment expense		293		320		894		1,018
Data processing fees		562		477		1,751		1,398
Professional fees		715		427		1,520		1,271
Marketing expense		74		56		215		191
Printing, postage and supplies		143		161		446		493
State franchise tax		134		229		410		676
FDIC insurance		99		106		300		342
Amortization of intangibles		41		62		144		182
Net costs of operation of other real estate		167		61		364		420
Other		583		397		1,201		1,100
Total non-interest expense		6,230		5,523		17,423		17,014
Income Before Income Tax		1,420		1,295		4,430		4,072
Provision for Income Taxes		277		227		865		846
Net Income	$	1,143	$	1,068	$	3,565	$	3,226
Basic Earnings Per Share	$	.33	$	.31	$	1.04	$	.94
Diluted Earnings Per Share	$	.33	$	.31	$	1.03	$	.94
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,
	2014		2013		2014		2013
Net income	$	1,143	$	1,068	$	3,565	$	3,226
Other comprehensive income (loss), before tax effect:
Unrealized gains (losses) on securities available for sale		453		205		4,145		(5,381	)
Reclassification of gains realized in income		0		0		0		781
Other comprehensive income (loss), before tax effect		453		205		4,145		(4,600	)
Tax expense (credit)		154		70		1,409		(1,564	)
Other comprehensive income (loss)		299		135		2,736		(3,036	)
Comprehensive Income	$	1,442	$	1,203	$	6,301	$	190

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,
	2014			2013
Operating Activities
Net income	$	3,565		$	3,226
Items not requiring (providing) cash:
Depreciation and amortization		1,092			1,178
Provision for loan losses		510			1,840
Amortization of premiums and discounts on securities		2,183			2,809
Increase in cash surrender value on bank owned life insurance		(351	)		(351	)
Proceeds from FDIC loss share receivable		400			517
Stock options expense		107			140
Net realized gains on sales of available-for-sale securities		0			(781	)
Gain on extinguishment of long-term debt		0			(300	)
Net changes in:
Loans held for sale		(120	)		10
Other assets and liabilities		163			2,033
Net cash provided by operating activities		7,549			10,321
Investing Activities
Purchases of available-for-sale securities		(35,490	)		(72,519	)
Proceeds from sales of available-for-sale securities		0			21,436
Proceeds from redemption of Federal Home Loan Bank Stock		2,649			0
Proceeds from maturities of available-for-sale securities		17,653			38,657
Purchase of Federal Reserve Bank stock		(6	)		(5	)
Net change in loans		(3,152	)		(3,927	)
Purchases of premises and equipment		(328	)		(273	)
Net cash used in investing activities		(18,674	)		(16,631	)
Financing Activities
Net change in:
Deposits		6,428			(1,493	)
Extinguishment of long-term debt		0			(700	)
Proceeds from stock options exercised		197			252
Purchase of treasury shares		(432	)		(198	)
Proceeds from sale of treasury stock		123			0
Dividends paid		(2,058	)		(2,049	)
Net cash provided by (used in) financing activities		4,258			(4,188	)
Decrease in Cash and Cash Equivalents		(6,867	)		(10,498	)
Cash and Cash Equivalents, Beginning of Period		51,499			64,509
Cash and Cash Equivalents, End of Period	$	44,632		$	54,011
Supplemental Cash Flows Information
Interest paid	$	866		$	1,457
Income taxes paid		210			1,398
Transfers of loans into other real estate owned		857			873

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, 2013 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, 2014 and December 31, 2013, and the results of its operations and cash flows for the three- and nine-month periods ended September 30, 2014 and 2013. 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, 2013 filed with the Securities and Exchange Commission.

Note 2: Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-Sale Securities:
September 30, 2014:
U.S. Government sponsored entities	$	27,535	$	151	$	(29	)	$	27,657
Mortgage-backed securities:
U.S. Government sponsored entities-residential		58,539		1,061		(115	)		59,485
Private label-residential		1,267		27		0			1,294
State and political subdivisions		67,751		1,972		(285	)		69,438
	$	155,092	$	3,211	$	(429	)	$	157,874
December 31, 2013:
U.S. Government sponsored entities	$	23,594	$	45	$	(100	)	$	23,539
Mortgage-backed securities:
U.S. Government sponsored entities-residential		59,565		793		(205	)		60,153
Private label-residential		1,895		56		0			1,951
State and political subdivisions		54,408		326		(2,279	)		52,455
	$	139,462	$	1,220	$	(2,584	)	$	138,098

8

The amortized cost and fair value of securities available for sale at September 30, 2014, 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	$	2,851	$	2,858
One to five years		20,301		20,342
Five to ten years		13,681		13,970
After ten years		58,453		59,925
		95,286		97,095
Mortgage-backed securities		59,806		60,779
Totals	$	155,092	$	157,874

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $78,252,000 at September 30, 2014, and $66,965,000 at December 31, 2013.

There were no sales of securities in the third quarter or first nine months of 2014. 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 2013 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 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, 2014 and December 31, 2013 (thousands):

	Less than 12 months						12 months or more					Total
	Fair Value			Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
September 30, 2014
U.S. Government sponsored entities	$	0		$	0		$	4,745	$	(29	)	$	4,745	$	(29	)
Mortgage-backed securities:
U.S. Government sponsored entities-residential		18,437			(115	)		0		0			18,437		(115	)
State and political subdivisions		1,505			(4	)		11,318		(281	)		12,823		(285	)
Total Securities	$	19,942		$	(119	)	$	16,063	$	(310	)	$	36,005	$	(429	)
December 31, 2013
U.S. Government sponsored entities	$	4,727		$	(100	)	$	0	$	0		$	4,727	$	(100	)
Mortgage-backed securities:
U.S. Government-sponsored entities-residential		17,547	��		(205	)		0		0			17,547		(205	)
State and political subdivisions		31,351			(1,800	)		3,726		(479	)		35,077		(2,279	)
Total Securities	$	53,625		$	(2,105	)	$	3,726	$	(479	)	$	57,351	$	(2,584	)

The unrealized losses on the Company’s investments at September 30, 2014 were primarily due to changes in interest rates. For the U.S. government sponsored entities and municipal securities, the contractual terms do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. For the mortgage-backed securities, the Company expects to recover the amortized cost basis over the remaining term. All securities are regularly reviewed for other than temporary credit impairment. The review consists of many factors, including but not limited to, the nature of the investment, credit ratings and financial condition of the issuer, the existence of any government or agency guarantees, cash flows of the underlying collateral and market conditions. Because the decline in market value is primarily attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be to be other-than-temporarily impaired at September 30, 2014.

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, 2014		September 30, 2013
Balance, beginning of period	$	0	$	(119	)
Additions related to other-than-temporary losses not previously recognized		0		0
Reductions related to losses realized which were previously recognized		0		119
Balance, end of period	$	0	$	0

The September 30, 2013 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, 2014			December 31, 2013
Net unrealized gain (loss) on available-for-sale securities	$	2781		$	(1,364	)
Tax effect		(945	)		464
Net-of-tax amount	$	1,836		$	(900	)

Note 4: Loans and Allowance for Loan Losses

	September 30, 2014			December 31, 2013
Categories of loans include (thousands):
Commercial and industrial	$	39,355		$	36,792
Commercial real estate		188,477			189,660
Agricultural		32,771			35,160
Residential real estate		133,764			131,032
Consumer		6,765			6,766
Total loans		401,132			399,410
Less: Net deferred loan costs, premiums and discounts		37			86
Allowance for loan losses		(3,911	)		(4,053	)
Net loans	$	397,258		$	395,443

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.

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)

11

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. The current methodology involves the 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 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.

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.

12

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 and nine month periods ended September 30, 2014 and 2013 (thousands):

Three Months Ended September 30, 2014

	Commercial		Commercial Real Estate			Agricultural		Residential 1-4 Family			Residential Home Equity			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,417	$	1,709		$	68	$	404		$	101		$	16		$	3,715
Charge-offs		0		(35	)		0		(12	)		(1	)		(4	)		(52	)
Recoveries		111		8			0		3			0			26			148
Provision		41		115			9		(24	)		(10	)		(31	)		100
Ending Balance	$	1,569	$	1,797		$	77	$	371		$	90		$	7		$	3,911

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

14

Nine Months Ended September 30, 2014

	Commercial			Commercial Real Estate			Agricultural		Residential 1-4 Family			Residential Home Equity			Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,457		$	1,962		$	69	$	357		$	205		$	3		$	4,053
Charge-offs		(73	)		(682	)		0		(72	)		(39	)		(40	)		(906	)
Recoveries		150			53			0		5			5			41			254
Provision		35			464			8		81			(81	)		3			510
Ending Balance	$	1,569		$	1,797		$	77	$	371		$	90		$	7		$	3,911

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

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, 2014 and December 31, 2013 (thousands):

	Evaluated for Impairment
	Individually		Collectively		Total
September 30, 2014
Allowance for loan losses:
Commercial	$	170	$	1,399	$	1,569
Commercial Real Estate		366		1,431		1,797
Agricultural		0		77		77
Residential-1-4 Family		0		371		371
Residential -Home equity		0		90		90
Consumer		0		7		7
Total	$	536	$	3,375	$	3,911
Loans:
Commercial	$	623	$	38,732	$	39,355
Commercial Real Estate		6,786		181,691		188,477
Agricultural		0		32,771		32,771
Residential-1-4 Family		915		105,173		106,088
Residential -Home equity		40		27,636		27,676
Consumer		2		6,763		6,765
Total	$	8,366	$	392,766	$	401,132
December 31, 2013
Allowance for loan losses:
Commercial	$	108	$	1,349	$	1,457
Commercial Real Estate		418		1,544		1,962
Agricultural		0		69		69
Residential-1-4 Family		0		357		357
Residential -Home equity		0		205		205
Consumer		0		3		3
Total	$	526	$	3,527	$	4,053
Loans:
Commercial	$	902	$	35,890	$	36,792
Commercial Real Estate		5,364		184,296		189,660
Agricultural		38		35,122		35,160
Residential-1-4 Family		952		101,829		102,781
Residential -Home equity		44		28,207		28,251
Consumer		9		6,757		6,766
Total	$	7,309	$	392,101	$	399,410

16

The following table presents the Company’s corporate and consumer credit exposure by category and standard regulatory classification as of September 30, 2014 and December 31, 2013 (thousands):

Corporate Credit Exposure

Credit Risk Profile by Creditworthiness Category:

	Commercial				Commercial Real Estate				Agricultural
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Pass	$	36,703	$	32,436	$	176,652	$	173,630	$	32,771	$	35,122
Other Assets Especially Mentioned		500		1,800		858		3,377		0		0
Substandard		2,006		2,410		10,967		12,653		0		38
Doubtful		146		146		0		0		0		0
Loss		0		0		0		0		0		0
Non-rated		0		0		0		0		0		0
Total	$	39,355	$	36,792	$	188,477	$	189,660	$	32,771	$	35,160

Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

	Residential-1 to 4 Family				Residential Home Equity				Consumer
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Pass	$	104,366	$	100,362	$	27,604	$	28,072	$	6,734	$	6,696
Substandard		1,722		2,419		72		179		31		70
Total	$	106,088	$	102,781	$	27,676	$	28,251	$	6,765	$	6,766

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.

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.

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.

17

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, 2014 and December 31, 2013 (thousands):

September 30, 2014:

	Past Due Days										Total Financing Receivables		90+ Days & Accruing
	30-59		60-89		90+		Total		Current						Non- accrual
Commercial	$	—		0	$	262	$	262	$	39,093	$	39,355	$	15	$	457
Commercial Real Estate		110		299		1,421		1,830		186,647		188,477		0		2,189
Agricultural		0		0		0		0		32,771		32,771		0		0
Residential 1-4 Family		253		0		560		813		105,275		106,088		0		898
Residential Home Equity		46		4		33		83		27,593		27,676		0		59
Consumer		11		0		0		11		6,754		6,765		0		2
Total	$	420	$	303	$	2,276	$	2,999	$	398,133	$	401,132	$	15	$	3,605

December 31, 2013:

	Past Due Days										Total Financing Receivables		90+ Days & Accruing
	30-59		60-89		90+		Total		Current						Non- accrual
Commercial	$	309	$	22	$	432	$	763	$	36,029	$	36,792	$	32	$	890
Commercial Real Estate		212		0		2,789		3,001		186,659		189,660		0		3,402
Agricultural		0		25		28		53		35,107		35,160		0		38
Residential 1-4 Family		0		150		502		652		102,129		102,781		0		1,175
Residential Home Equity		40		32		100		172		28,079		28,251		0		164
Consumer		10		1		24		35		6,731		6,766		0		65
Total	$	571	$	230	$	3,875	$	4,676	$	394,734	$	399,410	$	32	$	5,734

18

The following tables present impaired loan information at September 30, 2014 and December 31, 2013 and for the periods ended September 30, 2014 and September 30, 2013 and the related allowance for loan losses (thousands).

							For the three months ended September 30, 2014				For the nine months ended September 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
September 30, 2014
With no related allowance recorded:
Commercial	$	278	$	305	$	0	$	233	$	13	$	250	$	16
Commercial real estate		3,228		3,448		0		3,026		43		3,086		350
Agricultural		0		0		0		27		3		39		3
Residential-1 to 4 Family		915		0		0		922		7		934		25
Residential-Home equity		26		38		0		33		2		31		6
Consumer		2		2		0		3		0		5		0
With an allowance recorded:
Commercial	$	345	$	408	$	170	$	416	$	0	$	467	$	0
Commercial real estate		3,558		3,624		366		3,516		0		2,750		0
Agricultural		0		0		0		0		0		0		0
Residential-1 to 4 Family		0		1,060		0		0		0		250		0
Residential-Home equity		14		13		0		7		0		11		0
Consumer		0		0		0		0		0		0		0
Total:
Commercial	$	623	$	713	$	170	$	649	$	13	$	717	$	16
Commercial real estate		6,786		7,072		366		6,542		43		5,836		350
Agricultural		0		0		0		27		3		39		3
Residential-1 to 4 Family		915		1,060		0		922		7		1,184		25
Residential- Home equity		40		51		0		40		2		42		6
Consumer		2		2		0		3		0		5		0
	$	8,366	$	8,898	$	536	$	8,183	$	68	$	7,823	$	400

19

	As of December 31, 2013						For the three months ended September 30, 2013				For the nine months ended 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	$	342	$	497	$	0	$	543	$	0	$	782	$	36
Commercial real estate		3,275		3,727		0		2,803		72		3,101		170
Agricultural		38		52		0		38		0		47		3
Residential-1 to 4 Family		952		1,086		0		931		7		966		22
Residential-Home equity		29		39		0		39		0		37		1
Consumer		9		10		0		11		0		13		1
With an allowance recorded:
Commercial	$	560	$	569	$	108	$	3,209	$	0	$	3,247	$	0
Commercial real estate		2,089		2,174		418		2,800		0		2,444		0
Agricultural		0		0		0		0		0		0		0
Residential-1 to 4 Family		0		0		0		43		0		22		0
Residential-Home equity		15		14		0		8		0		4		0
Consumer		0		0		0		0		0		0		0
Total:
Commercial	$	902	$	1,066	$	108	$	3,752	$	0	$	4,029	$	36
Commercial real estate		5,364		5,901		418		5,603		72		5,545		170
Agricultural		38		52		0		38		0		47		3
Residential-1 to 4 Family		952		1,086		0		974		7		988		22
Residential - Home equity		44		53		0		47		0		41		1
Consumer		9		10		0		11		0		13		1
	$	7,309	$	8,168	$	526	$	10,425	$	79	$	10,663	$	233

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

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

Newly classified troubled debt restructurings:

	Three Months Ended September 30, 2014						Three Months Ended September 30, 2013
	Outstanding Recorded Investment						Outstanding Recorded Investment
	Number of Contracts		Pre- Modification		Post- Modification		Number of Contracts		Pre-Modification		Post- Modification
Commercial		1	$	14	$	12		1	$	24	$	22
Commercial real estate		1		47		46		0		0		0
Agriculture		0		0		0		0		0		0
Residential		0		0		0		0		0		0
Consumer		0		0		0		0		0		0

20

	Nine Months Ended September 30, 2014						Nine Months Ended September 30, 2013
	Outstanding Recorded Investment						Outstanding Recorded Investment
	Number of Contracts		Pre- Modification		Post- Modification		Number of Contracts		Pre-Modification		Post- Modification
Commercial		3	$	115	$	107		1	$	24	$	22
Commercial real estate		3		2,756		2,754		1		447		435
Agriculture		0		0		0		1		15		15
Residential		0		0		0		0		0		0
Consumer		0		0		0		0		0		0

The following table provides information on how restructured loans were modified during the three- and nine-month periods ended September 30, 2014 and 2013 (thousands):

	September 30, 2014
	Three Months Ended						Nine Months Ended
	Recorded Investment		Amount charged off		Allowance Increased		Recorded Investment		Amount charged off		Allowance Increased
Extended Maturities	$	58	$	0	$	0	$	2,766	$	0	$	85
Lowered interest rate		0		0		0		95		0		1
	September 30, 2013
	Three Months Ended						Nine Months Ended
	Recorded Investment		Amount charged off		Allowance Increased		Recorded Investment		Amount charged off		Allowance Increased
Extended Maturities	$	22	$	0	$	0	$	37	$	0	$	0
Lowered interest rate and extended term		0		0		0		435		0		0

The allowance for loan loss on the above restructured loan is based on present value of future expected cash flows and takes into account the past due payments.

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.

21

Note 5: Long-Term Debt

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

	September 30, 2014		December 31, 2013
Federal Home Loan Bank advances	$	5,000	$	5,000
Junior subordinated debentures		9,310		9,310
Total	$	14,310	$	14,310

On September 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 1.73% at September 30, 2014. 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, 2014 and December 31, 2013, the outstanding principal balance of the Capital Securities was $9,000,000. In September 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, 2014 totaled $80,834,000, compared to $78,917,000 at December 31, 2013. Standby letters of credit as of September 30, 2014 totaled $2,130,000, compared to $747,000 at December 31, 2013.

22

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,
	2014		2013			2014		2013
Numerator: Net income	$	1,143	$	1,068	��	$	3,565	$	3,226
Denominator:
Weighted-average common shares outstanding (basic)		3,430,055		3,415,732			3,429,892		3,416,915
Effect of stock options		52,359		22,458			20,900		11,588
Weighted-average common shares outstanding (diluted)		3,482,414		3,438,190			3,450,792		3,428,503
Earnings per share:
Basic	$	.33	$	.31		$	1.04	$	.94
Diluted	$	.33	$	.31		$	1.03	$	.94

For the three months ended September 30, 2014, all stock options were considered in computing earnings per share as their exercise prices were below the three month average fair market value of the Company’s common shares. For the nine months ended September 30, 2014, stock options covering 65,500 were not considered in computing earnings per share as their exercise prices exceeded the nine month average fair market value of the Company’s common shares. For the three and nine months ended September 30, 2013, stock options covering 116,100 and 198,100 shares of common stock were not considered in computing earnings per share as their exercise prices exceeded the three and nine month average 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 2011.

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, 2014 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

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Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

The following is a description of the valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying balance 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, 2014 and December 31, 2013. (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, 2014:
Available-for-sale securities	$	157,874	$	0	$	157,874	$	0
December 31, 2013:
Available-for-sale securities	$	138,098	$	0	$	138,098	$	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, 2014 and December 31, 2013, 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, 2014 and December 31, 2013. 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, 2014:
Impaired loans	$	1,865	$	0	$	0	$	1,865
Other real estate owned		230		0		0		230
December 31, 2013:
Impaired loans Other real estate owned	$	2,907 140	$	0 0	$	0 0	$	2,907 140

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, 2014:
Impaired loans	$	1,865	Market comparable properties	Estimated costs to sell		10	%
Other real estate owned	$	230	Market comparable properties	Comparability adjustments		10	%
December 31, 2013:
Impaired loans	$	2,907	Market comparable properties	Estimated costs to sell		10	%
Other real estate owned	$	140	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, 2014:
Financial assets
Cash and cash equivalents	$	44,632	$	44,632	$	0	$	0
Loans including loans held for sale, net		397,378		0		0		402,860
Stock in FRB and FHLB		7,392		0		7,392		0
Earned income receivable		2,962		0		2,962		0
FDIC loss share receivable		125		0		0		125
Financial liabilities
Deposits		557,228		0		558,579		0
Long-term debt		14,310		0		8,615		0
Interest payable		68		0		68		0
December 31, 2013:
Financial assets
Cash and cash equivalents	$	51,499	$	51,499	$	0	$	0
Loans including loans held for sale, net		395,443		0		0		398,491
Stock in FRB and FHLB		10,035		0		10,035		0
Earned income receivable		2,546		0		2,546		0
FDIC loss share receivable		525		0		0		525
Financial liabilities
Deposits		550,800		0		552,467		0
Long-term debt		14,310		0		8,250		0
Interest payable		74		0		74		0

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.

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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, 2014 and December 31, 2013, the fair value of commitments was not material.

Note 10: Effect of Recent Accounting Standards

In January 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-04, regarding the reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure. The objective of the amendment in this update is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. This Update clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirement of the applicable jurisdiction. The amendments are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.

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Note 11: Pending Sale

On August 4, 2014, Peoples Bancorp Inc. (“Peoples”) and NB&T announced the signing of an agreement and plan of merger under which NB&T will be merged into Peoples (the “Merger Agreement”). Under the terms of the Merger Agreement, shareholders of NB&T will receive 0.9319 shares of Peoples common stock and $7.75 in cash in exchange for each share of NB&T common stock. NB&T expects the merger to be completed in the first quarter of 2015, subject to the satisfaction of customary closing conditions, including regulatory approvals and the approval of the shareholders of Peoples and NB&T. At that time, NB&T’s offices will become branches of Peoples.

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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, 2014 and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2014 and 2013 and cash flows for the nine-month periods ended September 30, 2014 and 2013. 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, 2013 and the related consolidated statements of income, comprehensive income (loss), stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 18, 2014, 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, 2013 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 12, 2014

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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 2014 was $1.1 million, or $.33 per share, compared to net income of $1.1 million, or $.31 per share, for the third quarter of 2013. Net interest income increased $520,000 when compared to the same period last year, primarily due to increased investment in long term tax-exempt municipal securities and slower prepayments on mortgage-related securities. In addition, a lower loan loss provision of $300,000 was offset by $392,000 in merger-related expenses and a $225,000 true-up provision on a loan loss sharing agreement with the FDIC. Net income for the first nine months of 2014 was $3.6 million, or $1.04 per share, compared to $3.2 million, or $.94 per share, for the same period in 2013. Net income was up primarily due to an increase in net interest income of $603,000 and a decrease in the loan provision of $1.3 million. These improvements were offset by the above mentioned expenses and a $1.2 million decrease of non-interest income for the first nine months of 2014 as compared to the same period in 2013. The decrease in non-interest income is primarily due to no securities sales net gains in 2014 compared to $781,000 in 2013 and no debt extinguishment gain in 2014 compared to $300,000 in 2013.

On August 4, 2014, Peoples Bancorp Inc. (“Peoples”) and NB&T announced the signing of an agreement and plan of merger under which NB&T will be merged into Peoples (the “Merger Agreement”). Under the terms of the Merger Agreement, shareholders of NB&T will receive 0.9319 shares of Peoples common stock and $7.75 in cash in exchange for each share of NB&T common stock. NB&T expects the merger to be completed in the first quarter of 2015, subject to the satisfaction of customary closing conditions, including regulatory approvals and the approval of the shareholders of Peoples and NB&T. At that time, NB&T’s offices will become branches of Peoples.

Net Interest Income

Net interest income was $5.6 million for the third quarter of 2014, compared to $5.1 million for the third quarter of 2013. Net interest margin increased to 3.66% for the third quarter of 2014, compared to 3.33% for the same quarter last year. Net interest income for the first nine months of 2014 was $16.2 million, compared to $15.6 million for the first nine months of 2013. Net interest income has increased primarily due to increased investment in long term tax-exempt municipal securities and slower prepayments on mortgage-related securities. As a result, investment interest income increased $924,000 for the first nine months of 2014, compared to the same period last year. The increase in investment interest income was partially offset by a decrease in loan interest income of $663,000, primarily due to lower average loan balances of $13.1 million. In addition, lower interest expense contributed to the increase in net interest income. Due to continued runoff of higher priced time deposits, interest expense decreased by $342,000 for the first nine months of 2014 compared to the same period in 2013.

Provision for Loan Losses

The provision for loan losses for the third quarter and first nine months of 2014 was $100,000 and $510,000, compared to $400,000 and $1.8 million for the same periods last year. During the first nine months of 2013, the provision for loan losses increased approximately $1.2 million to add specific loan reserves for one commercial loan that was subsequently charged off. Net recoveries were $97,000 in the third quarter of 2014, compared to net charges-offs of $319,000 in the third quarter of 2013. Year-to-date net charge-offs for 2014 were $652,000, compared to $716,000 for the first nine months of 2013. Non-performing loans of $3.6 million at September 30, 2014, were down $4.7 million compared to $8.3 million at September 30, 2013.

Non-interest Income

Total non-interest income was $2.2 million for the third quarter of 2014, compared to $2.1 million for the third quarter of 2013. Non-interest income for the first nine months of 2014 was $6.2 million, compared to $7.4 million for the same period last year. The decrease for the nine-month period is primarily due to a gain of $300,000 on the extinguishment of $1.0 million in trust preferred debt and approximately $781,000 in securities sale net gains during the first nine months of 2013. There were no such gains during the third quarter or first nine months of 2014. In addition, due to fewer non-sufficient funds (NSF) items, total NSF fees were down $187,000, or 11%, for the first nine months of 2014 compared to the first nine months of 2013.

Non-interest Expense

Total non-interest expense was $6.2 million for the third quarter of 2014, compared to $5.5 million for the third quarter of 2013. The increase is primarily due to merger-related expenses of $392,000 and a bonus accrual of $155,000. In addition, a true-up provision of

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$225,000 was made during the third quarter under NB&T’s March 2010 Purchase and Assumption Agreement with the FDIC. That agreement requires NB&T to reimburse the FDIC for a portion of the loss share funds previously paid by the FDIC to NB&T in the event losses fail to reach the expected loss level. Non-interest expense for the first nine months of 2014 was $17.4 million, compared to $17.0 million for the same period last year. The expense increase is primarily due to merger-related expenses of approximately $424,000, a bonus accrual of $330,000, and the FDIC true-up provision. These expenses were offset by a decrease of approximately $266,000 in state taxes due to Ohio’s new financial institution tax replacing Ohio’s bank franchise tax. Also, due to a decrease in collection and problem loan related legal fees, professional fees decreased approximately $173,000, excluding merger-related expenses.

Income Taxes

The provision for income taxes for the third quarter of 2014 was $277,000, or 19.5% effective rate, compared to $227,000, or 17.5% effective rate, for the third quarter of 2013. The provision for income taxes for the first nine months of 2014 was $865,000, or 19.5% effective rate, compared to $846,000, or 20.8% effective rate, for the same period in 2013. The decrease in the effective tax rate compared to the first nine months of 2013 is primarily due to an increase in tax-exempt securities interest during the first nine months of 2014.

Financial Condition

The changes that have occurred in the Company’s financial condition during 2014 are as follows (in thousands):

	September 30, 2014		December 31, 2013		2014 Change
					Amount			Percent
Total assets	$	649,982	$	638,312	$	11,670			1.8
Interest-bearing deposits		33,016		41,901		(8,885	)		(21.2	)
Federal funds sold		457		443		14			3.2
Loans, net *		397,258		395,443		1,815			.5
Securities		157,874		138,098		19,776			14.3
Demand deposits		118,621		115,206		3,415			3.0
Savings, NOW, MMDA deposits		352,012		339,260		12,752			3.8
CD’s $100 and over		16,166		18,328		(2,162	)		(11.8	)
Other time deposits		70,429		78,006		(7,577	)		(9.7	)
Total deposits		557,228		550,800		6,428			1.2
Long-term borrowings		14,310		14,310		0			0
Stockholders’ equity		71,265		68,035		3,230			4.7

* Excludes loans held for sale

At September 30, 2014, total assets were $650.0 million, an increase of $11.7 million from December 31, 2013 with an increase in both loans and securities. Loans have increased $1.8 million from December 31, 2013. Securities increased $19.8 million in the first nine months of 2014 with purchases of $14.9 million in long-term tax-exempt municipal securities and the remaining growth in short-term mortgage-related securities. These asset increases were funded by available interest-bearing deposits and an increase in total deposits.

Total deposit liabilities increased $6.4 million from December 31, 2013. The Company has experienced an increase in transaction, savings and money market accounts of approximately $16.2 million during the first nine months of 2014 primarily due to the decision by depositors to keep their funds in more liquid deposits that offer comparable rates to shorter-term certificates of deposit. As a result, the increase in transaction accounts was partially offset by a decline in time deposits of approximately $9.7 million. The Company continues to allow higher-priced deposits to leave based on its liquidity position and lower-rate reinvestment alternatives.

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Allowance for Loan Losses

The Company’s loan loss experience for the periods ended September 30, 2014 and 2013 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, 2014			December 31, 2013			September 30, 2013
Loans accounted for on non-accrual basis	$	3,605		$	5,734		$	8,273
Accruing loans which are past due 90 days		15			32			30
Other real estate owned		1,353			1,224			1,426
Total non-performing assets	$	4,973		$	$6,990		$	9,729
Troubled debt restructurings, accruing	$	2,861		$	2,694		$	2,726
Ratios:
Allowance to total loans		.97	%		1.01	%		1.46	%
Net charge-offs to average loans (annualized)		.22	%		.82	%		.24	%
Non-performing assets to total loans and other real estate owned		1.24	%		1.74	%		2.40	%

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.

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 $536,000 at September 30, 2014, compared to $526,000 at December 31, 2013. General reserves decreased to $3.4 million at September 30, 2014, compared to $3.5 million at December 31, 2013. This decrease is due to a decline in the thirty-six month historical loan loss rate and the lower Ohio unemployment rate.

As of September 30, 2014, there was $2.6 million in small business relationships on non-accrual. In addition, approximately $1,315,000 of nonaccrual loans were acquired from American National Bank and are covered under the FDIC loss share agreement. Nonaccrual residential real estate loans totaled $898,000, with the largest balance being $150,000. Non-accrual consumer loans totaled $2,000, and home equity credit loans totaled $59,000. There were no agricultural loans on non-accrual at September 30, 2014.

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, 2014 was 72.0%, compared to 72.5% at December 31, 2013 and 72.5% at September 30, 2013. Loans to total assets were 61.7% at September 30, 2014, compared to 62.6% at December 31, 2013 and 62.7% at September 30, 2013. At September 30, 2014, the Company had $33.0 million in interest-earning deposits. The Company has $157.9 million in available-for-sale securities that are readily marketable. Approximately 49.6% 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 97.1% core deposits, makes the Company less susceptible to

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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.

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, 2014 and December 31, 2013, the Company had the following risk-based capital ratios, which are well above the regulatory minimum requirements (dollar amounts in thousands):

	Actual					Required For Capital Adequacy Purposes					Required To Be Well Capitalized (1)
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2014
Total Risk-Based Capital (to Risk-Weighted Assets)
Consolidated	$	79,538		18.88	%	$	33,694		8.0	%	$	42,118		10.0	%
Bank		75,769		18.00			33,669		8.0			42,087		10.0
Tier I Capital (to Risk-Weighted Assets)
Consolidated		75,627		17.96			16,847		4.0			25,271		6.0
Bank		71,858		17.07			16,835		4.0			25,252		6.0
Tier I Capital (to Average Assets)
Consolidated		75,627		11.60			26,072		4.0			N/A		N/A
Bank		71,858		11.07			26,082		4.0			32,602		5.0
As of December 31, 2013
Total Risk-Based Capital (to Risk-Weighted Assets)
Consolidated	$	79,041		19.10	%	$	33,107		8.0	%		41,384		10.0	%
Bank		71,729		17.35			33,080		8.0		$	41,349		10.0
Tier I Capital (to Risk-Weighted Assets)
Consolidated		74,988		18.12			16,553		4.0			24,830		6.0
Bank		67,676		16.37			16,540		4.0			24,810		6.0
Tier I Capital (to Average Assets)
Consolidated		74,988		11.56			25,952		4.0			N/A		N/A
Bank		67,676		10.41			25,992		4.0			32,490		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, 2013. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and

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assumptions. The financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.

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

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 assetwill perform in the future. Events and factors that may significantly affect the estimates include, amongothers, 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. Historically, simulation models would also be performed for similar basis point decreases. However, 200, 300, and 400 basis point decreases are not calculated because the rates would be less than zero for most of the Bank’s liabilities in today’s current low interest rate environment. 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, 2014, the Bank was within the guidelines established by the Board for net interest income changes for decreasing rate changes of 100 and 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	9/30/2014			ALCO Guideline			9/30/2014			ALCO Guideline
+400		11.1	%	±	20	%		-5.9	%	±	30	%
+300		9.2		±	15	%		-3.5		±	20
+200		6.8		±	10			-1.3		±	15
+100		3.5		±	5			-.1		±	10
-100		-4.1		±	5			-2.1		±	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, 2014, 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, 2014, 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.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Not applicable

Item 1A – Risk Factors

The pendency of the proposed merger with Peoples, including the loss of employees, additional expenses and the related diversion of our management’s attention from the operation of our business, may adversely affect our business and results of operations.

As described in our Current Report on Form 8-K filed with the SEC on August 4, 2014, and the registration statement on Form S-4, filed by Peoples with the SEC on October 3, 2014, we entered into the Merger Agreement which, subject to shareholder approval and various other conditions, would result in our being acquired by Peoples. As a result of the pendency of the merger, some of our employees have left to pursue other jobs and other employees may do so, as well. In addition, in connection with the proposed merger, we have incurred and will continue to incur expenses, which could prove to be significant. Our management and Board of Directors have devoted and will continue to devote a significant amount of time and attention to the proposed merger. Our business and our operating and financial results may be materially adversely affected by the loss of employees, the expenses incurred, and the diversion of management’s time and attention.

If the proposed merger is not completed and we are not otherwise acquired, we may consider other strategic alternatives which are subject to risks and uncertainties.

If the proposed merger is not completed, our Board of Directors will review and consider various alternatives available to us, including, among others, continuing as a public company with no material changes to our business or capital structure. These alternative transactions or initiatives may involve various additional risks to our business, including, among others, distraction of our management team and associated expenses as described above in connection with the proposed merger. In addition, our ability to consummate any alternative transaction or execute any alternative initiative could be subject to various uncertainties. All of the foregoing could adversely affect our operations or financial condition

The failure to complete the merger with Peoples could negatively impact our business.

There is no assurance that the merger with Peoples or any other transaction will occur or that the conditions to the merger will be satisfied in a timely manner or at all. Further, there is no assurance that any event, change or other circumstances that could give rise to the termination of the Merger Agreement will not occur. If the proposed merger or a similar transaction is not completed, the share price of our common stock may drop significantly. In addition, under circumstances defined in the Merger Agreement, we may be required to pay a termination fee of up to approximately $4.368 million. Certain costs associated with the merger have already been incurred or may be payable even if the merger is not completed. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community. There can be no assurance that our business, these relationships or our financial condition will not be negatively impacted, as compared to the condition prior to the announcement of the merger, if the merger is not consummated.

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For a discussion of additional 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, 2013, as filed with the SEC on March 18, 2014, 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 above and 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 and Use of Proceeds

On September 19, 2014, the Company sold 6,238 shares of its common stock, no par value, to the NB&T Financial Group, Inc. Employee Stock Ownership Plan (the “ESOP”) for an aggregate of $73,982.68. The shares were needed to meet dividend reinvestment requirements of the ESOP. No underwriter was involved, and no underwriting discount or commission was paid. The sale was exempt from registration under Section 4(2) of the Securities Act of 1933 as a transaction by the issuer not involving any public offering, made only to the ESOP, with respect to which The National Bank and Trust Company serves as trustee.

Issuer Purchases of Equity Securities

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
07/01/14 to 07/31/14		0	$	0		0		0
08/01/14 to 08/31/14		0		0		0		0
09/01/14 to 09/30/14		14,316		30.20		0		0
Total		14,316	$	30.20		0		0

On September 19, 2014, the ESOP purchased 14,316 shares of its common stock, no par value, in connection with cash distributions from the ESOP to participants in accordance with the terms of the ESOP.

Item 3 – Defaults Upon Senior Securities

Not applicable

Item 4 – Mine Safety Disclosures

Not applicable

Item 5 – Other Information

Not applicable

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Item 6 – Exhibits

Index to Exhibits

Exhibit Number
2	Agreement and Plan of Merger
3.1	Third Amended and Restated Articles of Incorporation of NB&T Financial Group, Inc.
3.2	Amended and Restated Code of Regulations of NB&T Financial Group, Inc.
4	Agreement to furnish instruments and agreements defining rights of holders of long-term debt
10.1*	National Bank & Trust Incentive Plan, Amended and Restated September 16, 2014
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.
101	The following materials from NB&T Financial Group, Inc.’s, Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014 formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013; (ii) the Condensed Consolidated Statements of Income for the three months ended September 30, 2014 and 2013 (unaudited); (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended September 30, 2014 and 2013 (unaudited); (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2014 and 2013 (unaudited); and (iv) the Notes to Condensed Consolidated Financial Statements (furnished herewith).

* Compensation Plan

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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 12, 2014	/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
2	Agreement and Plan of Merger	Incorporated by reference to registrant’s Current Report on Form 8-K filed on August 4, 2014, Exhibit 2
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
10.1*	National Bank & Trust Incentive Plan, Amended and Restated September 16, 2014	Incorporated by reference to registrant’s Current Report on Form 8-K filed on September 19, 2014, Exhibit 10.1
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, 2014 formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013; (ii) the Condensed Consolidated Statements of Income for the three months ended September 30, 2014 and 2013 (unaudited); (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended September 30, 2014 and 2013 (unaudited); (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2014 and 2013 (unaudited); and (iv) the Notes to Condensed Consolidated Financial Statements (furnished herewith).	Included herewith

* Compensation Plan

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