President's Letter

As I review 2009 I am reminded of the curse disguised as a blessing that you are probably familiar with: "May you live in interesting times."

By any measurement 2009 was certainly an interesting time.

We saw an economic environment that produced the most severe results in 30 years.
Both consumer and commercial real estate values fell as this historic basis of wealth accumulation became a distressed asset.
Unemployment climbed to 10%.
The FDIC seized and closed 140 banks, the most since 1992 when the savings & loan crisis led to 181 institutions being closed.
Interest rates plunged with the prime rate falling to 3.25%, the lowest since 1955.
The FDIC assessed additional insurance premiums on its member banks.

And in the face of all these events NB&T Financial grew its balance sheet, saw new loan originations increase by 33%, expanded its market presence, increased earnings and sustained its dividend! We are pleased with these results.

I will use the remainder of this letter to share with you our thoughts and strategies for moving forward, from 2010 and beyond.

We anticipate 2010 to closely mirror 2009. Bank failures will continue as those institutions with lower capital levels will be unable to raise the capital required to meet required minimums while simultaneously absorbing continued credit losses. These credit losses will be mostly in the commercial real estate sector and generally fall into two categories: non-owner occupied commercial real estate (think strip malls and industrial use buildings), and residential real estate developments. We, like most bankers, do not want to see others in our industry fail. However, these failures do provide unique opportunities for stronger institutions. We will evaluate such opportunities and will review those situations where we believe the return to our shareholders is worth an acceptable risk.

We think the economy in 2010 will continue to be sluggish as small to mid-size businesses, our prime customer base and prospect list, will be reluctant to rehire workers and expand production until they are confident that any economic upturn has staying power versus being a blip in an otherwise dismal chart. We are seeing these companies put existing workers on overtime. Hiring new employees, which is a positive sign that perhaps the bottom has been reached, may not occur until the fourth quarter.

We stand ready to assist this sector. We are increasing our participation in stimulus backed small business lending that enables us to increase our loan portfolio while minimizing risk. And while the national media is constantly reporting that banks are not lending money, I want to go on record that we did more than our share in this arena. Our actual new loan origination levels in 2009 were $13.7 million higher than in 2008. The reason that balances did not increase is not due to non-lending; rather it is due to prudent commercial borrowers reducing or paying off existing loans due to decline in business coupled with the normal monthly payment streams that are embedded in existing term loans. We will pursue any reasonable request from a viable applicant or client. We recognize that we are sources of economic growth tempered by a sound, conservative lending policy.

I believe this is a good transition to update you on the quality of our own loan portfolio. Our nonaccrual loans increased $3.9 million over a year ago. This is a 126% increase. Additionally, our OREO - Other Real Estate Owned (properties we take ownership of as a result of a borrowers default) - also significantly increased by $3.1 million to end the year at $3.4 million. These two measures of asset quality were impacted by two different reasons. In the case of the nonaccrual loans, the increase was the result of deterioration in our own portfolio. In December we recognized that three separate credits were not able to meet the conditions we had imposed for their specific problems. We anticipate one of the credits being resolved by mid 2010; the other two will require a longer workout structure. We believe that possible loan losses arising from these credits are manageable. The increase in the OREO balances is solely the result of the Community National acquisition and we priced the impact of these credits into the offering price for the company. These too will take some time to resolve but we are confident that we have valued them at conservative amounts.

The addition of the five Community National offices bring our total banking centers to twenty four, spread across the counties of Clinton, Brown, Highland, Clermont, Warren, Butler and Montgomery. These seven counties have significantly different demographics. The eastern counties, Clinton, Brown and Highland are predominantly rural. We have the largest deposit penetration in Clinton and Brown counties which is the result of our long time presence in those counties. These markets are mature, relatively stable and provide a strong foundation for our company. The western counties of Clermont, Butler and Warren have a blend of rural and suburban. Our deposit penetration into these three markets has been modest. The two markets of Clermont and Warren, however, have the highest future growth potential. Montgomery County is a very competitive market and represents good opportunity for growth. But it will be hard earned. Through an FDIC transaction, we have also added a new office in Parma Ohio (Cuyahoga County) that officially joined NB&T on Monday March 22. This marks the eighth county we service.

Our strategy in 2010, and beyond, is to maintain the market share presence in Clinton, Brown and Highland counties. A different set of initiatives for Clermont, Warren, Butler and Montgomery counties will be developing programs to deepen our existing customersâ€™ service usage and simultaneously expand our overall household penetration. Our strategy is to add households that use multiple products in support of their financial goals.

An ongoing initiative is to lower the operating costs of our company. Our non-interest expenses as a percentage of revenue are higher than most of our peers. We will focus on finding more productive uses of our expense dollars to improve this ratio.

Finally, our marketplaces are experiencing difficult economic times that often translate into increased personal and family suffering. To date we believe that we have been very good corporate citizens. Our employees have given generously of their free time in support of numerous philanthropic activities. Corporately we have increased the financial support of agencies that serve the needy, hungry and homeless. We expect the requests for these activities to increase and, to the extent we are able, will continue to make prudent decisions in our communities.

Sincerely,

John J. Limbert
President & C.E.O.