President's Letter

In my 2010 Annual Report letter I said, “It is highly unlikely that we will attain the 2010 profit levels in 2011.” Unfortunately, I was correct! Our 2011 financial results of $3.8 million were $5 million lower than our $8.8 million 2010 results.

And while our 2011 financial performance was impacted by different “moving parts” that I will later review, the income variance from last year is mostly the result of the one time $7.6 million pre-tax gain we recognized in 2010 from the bargain purchase of American National Bank.

As the President & Chief Executive Officer of NB&T Financial Group, I will candidly admit that our performance was less than what we had targeted. Our activities over the last four years of building new branches, buying two banks and selling our insurance agency subsidiary were designed to facilitate core client growth and provide higher earnings that translate into increased value for you, the shareholder. While shareholder value, as measured on a per share book value amount, has increased 11.7% since 2007, we did fall short of our 2011 goal.

The shortfall was driven by higher charge-offs and increased provision for loan losses. Southwestern Ohio, mirroring the national economy, is still struggling with high unemployment and declining real property values. And the property value decline touches all real estate sectors from single family homes, to small apartments, to condominiums, to retail strip centers and to commercial owner-occupied and commercial non-owner-occupied units.

We currently own three different residential developments acquired through foreclosure. These were mature credits that were not the result of our bank acquisitions. They had performed well until the 2008 downturn and the accompanying DHL announcement to close its Wilmington operations, ultimately impacting over 7,000 jobs. We are slowly working out of these credits.

We have a golf course loan that has been on non-accrual status and is being managed by a court appointed receiver. It, too, had been on our books for a number of years. Out-of­-work consumers don’t play golf. This not only causes a business to fail, but simultaneously lowers the value of the land as other area facilities also experience volume and profit declines.

We have more owner-occupied home loans in default and on non-accrual status than we have ever experienced in our 140 year history. We are working with some of these borrowers to keep them in their homes. Others have simply walked away.

And we did have one fourth quarter commercial credit surprise. We had worked with this customer for several months and believed the business would continue to operate. Unfortunately they decided to close their doors. We immediately put the full balance on non-accrual, allocated a specific amount to our loan loss allowance and assigned that amount to the full balance of the loan. We have collateral and believe there is a chance for recovery of at least some of the loan amount, but we have opted on
the side of conservatism.

I do not share this with you to seek sympathy or to create an excuse. Rather, I want you to be aware that we are experiencing the fallout of a distressed economy and are assigning the right personnel, time and talent to minimize the impact on our company. We believe we have allocated sufficient financial resources to offset potential losses and remain focused on reducing the level of troubled assets on our books.

One of the “moving parts” I mentioned earlier was the sale of portions of investment securities that had appreciated in value. The resulting gain was used to offset part of the loan loss funding. These gains are often thought of as accelerating the recognition of income and corresponding taxes and may be hard to replace. We decided that rather than risk the chance these gains could disappear, we could take the gains and reinvest the funds. These gains totaled over $1.8 million in 2011 and were used to offset loan losses.

A second “moving part” was the elimination of the annual bank portion of the employee incentive compensation that would be paid upon certain corporate performance levels being achieved. While all employees were eligible for this incentive, the bulk of the accrued expenses would have been allocated to officers. As we realized
that defaulted loan properties we owned had further depreciated in value from when we took ownership, we took additional write downs
in their value. As a result, corporate performance targets were not achieved, and incentive compensation was not paid. We feel that this is the appropriate action that shareholder focused management
should do.

We continue to work hard in all of the communities we serve to grow our business, establish strong relationships and give of our time and talents. You may be surprised to learn that in 2011 our employees contributed more than 7,000 service hours. While we are unable to control the economy, we remain prudent but aggressive lenders, and we are able to ensure that all our associates are working to improve our company and the financial success of our clients.

As we move into 2012, you have my assurance that our efforts are not diminishing. We have many challenges, but have talented associates to address them. I look forward to seeing you at our annual meeting and other events throughout 2012.

Sincerely,

John J. Limbert
President & Chief Executive Officer
NB&T Financial Group, Inc.
The National Bank and Trust Company