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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K







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

For the fiscal year ended December 31, 2008

Commission file number 0-23134





LOGO

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

Securities registered pursuant to
Section 12(b) of the Act:



|                                 |  |                                                    
|-------------------------------- |  | ---------------------------------------------------
|Title of each class              |  | Name of each exchange on which registered          
|Common Shares, without par value |  | The NASDAQ Stock Market LLC (NASDAQ Capital Market)

Securities registered pursuant to 12(g) of the Act:

None





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 of the
Act.    Yes   ̈    No  x

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 if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈

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 definitions 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   |  |  ̈ |  |  |  | Smaller reporting company |  | x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)    Yes   ̈    No  x

Based on the closing sales price
of $15.06 per share on June 30, 2008, the aggregate market value of the issuers shares held by nonaffiliates on such date was $33,073,341. For this purpose, shares held by nonaffiliates are all outstanding shares except those held by the
directors and executive officers of the registrant and those held by The National Bank and Trust Company (the Bank) as trustee with respect to which the Bank has sole or shared voting or dispositive power. As of March 2, 2009,
3,173,082 common shares were issued and outstanding.









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DOCUMENTS INCORPORATED BY REFERENCE

The following sections of the definitive Proxy Statement for the 2009 Annual Meeting of Shareholders of NB&T Financial Group, Inc. (the Proxy
Statement), are incorporated by reference into Part III of this Form 10-K:

1. Election of Directors;

2. Executive Officers;

3. Section 16(a) Beneficial Ownership Reporting Compliance;

4. Compensation of
Executive Officers and Directors;

5. Voting Securities and Ownership of Certain Beneficial Owners and Management;

6. Certain Relationships and Related Transactions; and

7. Auditors.



|                  |  |                                                                                                                   |  |     
|----------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ----
|                  |  | NB&T FINANCIAL GROUP, INC. 
For the Year Ended December 31, 2008  Table of Contents                               |  |     
|                  |  |                                                                                                                  
|                  |  | PART I                                                                                                            |  |     
|Item 1:           |  | Business                                                                                                          |  | 3   
|Item 1A:          |  | Risk Factors                                                                                                      |  | 9   
|Item 1B:          |  | Unresolved Staff Comments                                                                                         |  | 12  
|Item 2:           |  | Properties                                                                                                        |  | 12  
|Item 3:           |  | Legal Proceedings                                                                                                 |  | 12  
|Item 4:           |  | Submission of Matters to a Vote of Security Holders                                                               |  | 12  
|                  |  |                                                                                                                  
|                  |  | PART II                                                                                                           |  |     
|Item 5:           |  | Market for Registrants Common Equity and Related Stockholder Matters and Issuer Repurchases of Equity
Securities |  | 13  
|Item 6:           |  | Selected Financial Data                                                                                           |  | 15  
|Item 7:           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 16  
|Item 7A:          |  | Quantitative and Qualitative Disclosures About Market Risk                                                        |  | 32  
|Item 8:           |  | Financial Statements and Supplementary Data                                                                       |  | 33  
|Item 9:           |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                              |  | 38  
|Item 9A: Item 9B: |  | Controls and Procedures Other
 Information                                                                        |  | 5859
|                  |  |                                                                                                                  
|                  |  | PART III                                                                                                          |  |     
|Item 10:          |  | Directors and Executive Officers of the Registrant                                                                |  | 59  
|Item 11:          |  | Executive Compensation                                                                                            |  | 59  
|Item 12:          |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                    |  | 59  
|Item 13:          |  | Certain Relationships and Related Transactions                                                                    |  | 59  
|Item 14:          |  | Principal Accountant Fees and Services                                                                            |  | 59  
|                  |  |                                                                                                                  
|                  |  | PART IV                                                                                                           |  |     
|Item 15:          |  | Exhibits and Financial Statement Schedules                                                                        |  | 60  
|Signatures        |  | 61                                                                                                               
|Exhibit Index     |  | 62                                                                                                               



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PART I

Item 1. Description of Business

GENERAL

NB&T Financial Group, Inc. (NB&T Financial or the Company), an Ohio corporation, is a financial holding company which
owns all of the issued and outstanding common shares of The National Bank and Trust Company, chartered under the laws of the United States (the Bank). The Bank is engaged in the commercial banking business in southwestern Ohio, providing
a variety of consumer and commercial financial services. The primary business of the Bank consists of accepting deposits, through various consumer and commercial deposit products, and using such deposits to fund loans secured by residential and
non-residential real estate, commercial and agricultural loans and consumer loans, including automobile loans. All of the foregoing deposit and lending services are available at each of the Banks full-service offices. The Bank also has a trust
department with assets under management of approximately $164.2 million. As of December 31, 2008, the Bank had 214 employees.

The
Bank also operates its wholly-owned subsidiary, NB&T Insurance Agency, Inc. (NB&T Insurance). NB&T Insurance has three locations, with its principal office in Wilmington, Ohio. NB&T Insurance sells a full line of
insurance products, including property and casualty, life, health, and annuities.

As a registered bank holding company and financial
holding company under the Bank Holding Company Act, NB&T Financial is subject to regulation, examination and oversight by the Board of Governors of the Federal Reserve System (the FRB). The Bank, as a national bank, is subject to
regulation, examination and oversight by the Office of the Comptroller of the Currency (the OCC) and special examination by the FRB. The Bank is a member of the Federal Reserve Bank of Cleveland. In addition, since its deposits are
insured by the Federal Deposit Insurance Corporation (the FDIC), the Bank is also subject to some regulation, oversight and special examination by the FDIC. The Bank must file periodic financial reports with the FDIC, the OCC and the
Federal Reserve Bank of Cleveland. Examinations are conducted periodically by these federal regulators to determine whether the Bank and NB&T Financial are in compliance with various regulatory requirements and are operating in a safe and sound
manner.

Since its incorporation in 1980, NB&T Financials activities have been limited primarily to holding the common shares of
the Bank. Consequently, the following discussion focuses primarily on the business of the Bank.

Lending Activities

General. The Banks income consists primarily of interest income generated by lending activities, including the origination of loans
secured by residential and nonresidential real estate, commercial and agricultural loans, and consumer loans. Please refer to Table 7 on page 19, which summarizes the loan portfolio mix.

Commercial and Industrial Lending. The Bank originates loans to businesses in its market area, including floor plan loans to
automobile and agricultural equipment dealers and loans guaranteed by the Small Business Administration. The typical commercial borrower is a small to mid-sized company with annual sales under $5,000,000. The majority of commercial loans are made at
adjustable rates of interest tied to the prime rate. Commercial loans typically have terms of up to five years. Commercial and industrial lending entails significant risks. Such loans are subject to greater risk of default during periods of adverse
economic conditions. Because such loans are secured by equipment, inventory, accounts receivable and other non-real estate assets, the collateral may not be sufficient to ensure full payment of the loan in the event of a default.

Commercial Real Estate. The Bank makes loans secured by commercial real estate located in its market area. Such loans generally are
adjustable-rate loans for terms of up to 20 years. The types of properties securing



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loans in the Banks portfolio include warehouses, retail outlets and general industrial use properties. Commercial real estate lending generally entails
greater risks than residential real estate lending. Such loans typically involve larger balances and depend on the income of the property to service the debt. Consequently, the risk of default on such loans may be more sensitive to adverse economic
conditions. The Bank attempts to minimize such risks through prudent underwriting practices.

Real Estate Construction. The
Bank originates loans for the purpose of constructing both commercial and residential buildings. The Company offers both construction-phase-only and permanent financing.

Agricultural Loans. The Bank makes agricultural loans, which include loans to finance farm operations, equipment purchases, and land acquisition. The repayment of such loans is significantly dependent
upon income from farm operations, which can be adversely affected by weather and other physical conditions, government policies and general economic conditions.

Residential Real Estate. The Bank makes loans secured by one- to four-family residential real estate and multi-family (over four units) real estate located in its market area. The Bank originates both
fixed-rate mortgage loans and adjustable-rate mortgage loans (ARMs) to meet the needs of its customers. The Bank will sell loans in the secondary market it does not intend to hold for the foreseeable future.

Installment Loans. The Bank makes a variety of consumer installment loans, including home equity loans, automobile loans, recreational
vehicle loans, and overdraft protection. Beginning in the third quarter of 2006, the Company significantly reduced its indirect lending activities through automobile dealers. Consumer loans involve a higher risk of default than loans secured by one-
to four-family residential real estate, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciating assets, such as automobiles. Various federal and state laws, including federal and state bankruptcy and
insolvency laws, may also limit the amount that can be recovered on such loans.

Credit Card Service. The Bank offers credit
card services through a correspondent bank.

Loan Processing. Loan officers are authorized by the Board of Directors to
approve loans up to specified limits. Loans exceeding the loan officers approval authority are referred to the Banks Senior Loan Committee. Any loans made by the Bank in excess of the limits established for the Senior Loan Committee must
be approved by the Chairman of the Board and the President of the Bank as representatives of the Board of Directors. All loans in excess of $50,000 are reported to the Board on a monthly basis.

Loan Originations, Purchases and Sales. Although the Bank generally does not purchase loans, purchases could occur in the future.
Residential real estate loans are originated for sale in the secondary market. From time to time, the Bank sells participation interests in loans it originates.

Allowance for Loan Losses. Federal regulations require that the Bank establish prudent general allowances for loan losses. Senior management, with oversight responsibility provided by the Board of
Directors, reviews on a monthly basis the allowance for loan losses as it relates to a number of relevant factors, including but not limited to, historical trends in the level of non-performing assets and classified loans, current charge-offs and
the amount of the allowance as a percent of the total loan portfolio. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments, and net
earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination.

Investment
Activities

Funds not used in the Banks lending or banking function are dedicated to the investment portfolio. Those funds will be
placed in investment programs approved by the Asset/Liability Management Committee (ALCO).



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The deployment of these funds will be consistent with the overall strategy and risk profile of the Bank. The Bank primarily invests in high-quality
securities to provide sufficient liquidity, secure pledged deposits, minimize current tax liability, and increase earnings.

Trust Services

The Bank received trust powers in 1922 and had approximately $164.2 million in assets under management at December 31, 2008 in the
Trust Department. These assets are not included in the Banks balance sheet because, under federal law, neither the Bank nor its creditors can assert any claim against funds held by the Bank in its fiduciary capacity. In addition to
administering trusts, the services offered by the Trust Department include investment purchase and management, estate planning and administration, tax and financial planning and employee benefit plan administration.

Deposits and Borrowings

General
Deposits have traditionally been the primary source of the Banks funds for use in lending and other investment activities. In addition to deposits, the Bank derives funds from interest payments and principal repayments on loans and income on
earning assets. Loan payments are a relatively stable source of funds, while deposit inflows and outflows fluctuate more in response to general interest rates and money market conditions.

Deposits Deposits are attracted principally from within the Banks market area through the offering of numerous deposit instruments,
including checking accounts, savings accounts, money market deposit accounts, and term certificate accounts. Interest rates paid, maturity terms, service fees and withdrawal penalties for the various types of accounts are established periodically by
the Banks Asset/Liability Committee and the Executive Committee based on the Banks liquidity requirements, growth goals and market trends. The Company has also used brokers, on a limited basis, to obtain deposits. Currently the amount of
deposits from outside the Banks market area is not significant.

Borrowings The Federal Reserve System functions as a
central reserve bank providing credit for its member banks and certain other financial institutions. As a member in good standing of the Federal Reserve Bank of Cleveland, the Bank is authorized to apply for advances, provided certain standards of
credit-worthiness have been met. The Bank is also a member of the Federal Home Loan Bank system. Short-term borrowings include federal funds purchased and U.S Treasury demand notes.

Competition

The Bank competes for deposits with other commercial banks, savings associations and
credit unions and with the issuers of commercial paper and other securities, such as shares in money market mutual funds. The primary factors in competing for deposits are interest rates and convenience of office location. In making loans, the Bank
competes with other commercial banks, savings associations, mortgage bankers, consumer finance companies, credit unions, leasing companies, insurance companies and other lenders. The Bank competes for loan originations primarily through the interest
rates and loan fees it charges and through the efficiency and quality of services it provides to borrowers. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current
interest rate levels and other factors which are not readily predictable. For years the Bank has competed within its market area with several regional bank holding companies, each with assets far exceeding those of the Bank.



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REGULATION

General

Because of its ownership of all the outstanding stock of the Bank, NB&T Financial is subject to regulation,
examination and oversight by the FRB as a bank holding company and financial holding company under the Bank Holding Company Act. The Bank, as a national bank, is subject to regulation, examination and oversight by the OCC and special examination by
the FRB. The Bank is a member of the Federal Reserve Bank of Cleveland and a member of the Federal Home Loan Bank of Cincinnati. In addition, since its deposits are insured by the FDIC, the Bank is also subject to some regulation, oversight and
special examination by the FDIC. The Bank must file periodic financial reports with the FDIC, the OCC and the Federal Reserve Bank of Cleveland. Examinations are conducted periodically by these federal regulators to determine whether the Bank and
NB&T Financial are in compliance with various regulatory requirements and are operating in a safe and sound manner. In general, the FRB may initiate enforcement actions for violations of law and regulations.

Bank Holding Company Regulation

The FRB has adopted
capital adequacy guidelines for bank holding companies, pursuant to which, on a consolidated basis, NB&T Financial must maintain total capital of at least 8% of risk-weighted assets. Risk-weighted assets consist of all assets, plus credit
equivalent amounts of certain off- balance sheet items, which are weighted at percentage levels ranging from 0% to 100%, based on the relative credit risk of the asset. At least half of the total capital to meet this risk-based requirement must
consist of core or Tier 1 capital, which includes common stockholders equity, qualifying perpetual preferred stock (up to 25% of Tier 1 capital) and minority interests in the equity accounts of consolidated subsidiaries, less
goodwill, certain other intangibles, and portions of certain non-financial equity investments. The remainder of total capital may consist of supplementary or Tier 2 capital. In addition to this risk-based capital requirement, the FRB
requires bank holding companies to meet a leverage ratio of a minimum level of Tier 1 capital to average total consolidated assets of 3%, if they have the highest regulatory examination rating, well-diversified risk and minimal anticipated growth or
expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 4% of average total consolidated assets. NB&T Financial was in compliance with these capital requirements at December 31, 2008. For NB&T
Financials capital ratios, see Note 15 to the Consolidated Financial Statements in Item 8.

A bank holding company is required
by law to guarantee the compliance of any insured depository institution subsidiary that may become undercapitalized (defined in the regulations as not meeting minimum capital requirements) with the terms of the capital restoration plan
filed by such subsidiary with its appropriate federal banking agency.

The Bank Holding Company Act restricts NB&T Financials
ownership or control of the outstanding shares of any class of voting stock of any company engaged in a nonbanking business, other than companies engaged in certain activities determined by the FRB to be closely related to banking. In addition, the
FRB has the authority to require a bank holding company to terminate any activity or relinquish control of any nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the determination by the FRB that such activity or control constitutes
a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. NB&T Financial currently has no nonbank subsidiaries, except subsidiaries of the Bank. The ownership of subsidiaries of the Bank is
regulated by the OCC, rather than the FRB.

The Financial Services Modernization Act of 1999 permits bank holding companies to become
financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary
banks is well capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act, by filing a declaration that the
bank holding company wishes to become a financial holding



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company. In October 2006, NB&T Financial Group, Inc. became a financial holding company. No regulatory approval is required for a financial holding
company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.

The Financial Services Modernization Act defines financial in nature to include:



| |  |  | securities underwriting, dealing and market making;
| | - |  | ---------------------------------------------------



| |  |  | sponsoring mutual funds and investment companies;
| | - |  | -------------------------------------------------



| |  |  | insurance underwriting and agency;
| | - |  | ----------------------------------



| |  |  | merchant banking; and
| | - |  | ---------------------



| |  |  | activities that the Federal Reserve Board has determined to be closely related to banking.
| | - |  | ------------------------------------------------------------------------------------------

A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting,
insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory Community Reinvestment Act rating.
Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions
or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless
each of the subsidiary banks of the financial holding company or the bank has a Community Reinvestment Act rating of satisfactory or better. NB&T Insurance is a financial subsidiary.

Transactions between NB&T Financial and the Bank are subject to statutory limits in Sections 23A and 23B of the Federal Reserve Act, which limit the
amounts of such transactions and require that the terms of the transactions be at least as favorable to the Bank as the terms would be of a similar transaction between the Bank and an unrelated party. NB&T Financial and the Bank were in
compliance with these requirements and restrictions at December 31, 2008.

The FRB must approve the application of a bank holding
company to acquire any bank or savings association.

National Bank Regulation

Office of the Comptroller of the Currency. The OCC is an office in the Department of the Treasury and is subject to the general oversight of
the Secretary of the Treasury. The OCC is responsible for the regulation and supervision of all national banks, including the Bank. The OCC issues regulations governing the operation of national banks and, in accordance with federal law, prescribes
the permissible investments and activities of national banks. The Bank is authorized to exercise trust powers in accordance with OCC guidelines. National banks are subject to regulatory oversight under various consumer protection and fair lending
laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, fair credit reporting and community reinvestment.

The Bank is required to meet certain minimum capital requirements set by the OCC. These requirements consist of risk-based capital guidelines and a leverage ratio, which are substantially the same as the capital
requirements imposed on NB&T Financial. The Bank was in compliance with those capital requirements at December 31, 2008. For the Bank capital ratios, see Note 15 to the Consolidated Financial Statements in Item 8. The OCC may adjust
the risk-based capital requirement of a national bank on an individualized basis to take into account risks due to concentrations of credit or nontraditional activities.



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The OCC has adopted regulations governing prompt corrective action to resolve the problems of capital
deficient and otherwise troubled national banks. At each successively lower defined capital category, a national bank is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the OCC has less
flexibility in determining how to resolve the problems of the institution. In addition, the OCC generally can downgrade a national banks capital category, notwithstanding its capital level, if, after notice and opportunity for hearing, the
national bank is deemed to be engaging in an unsafe or unsound practice, because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. The Banks capital at December 31, 2008, met the standards for the highest capital category, a well-capitalized bank.

A national bank is subject to restrictions on the payment of dividends, including dividends to a holding company. The Bank may not pay a dividend if it would cause the Bank not to meet its capital requirements. In
addition, the dividends that a Bank subsidiary can pay to its holding company without prior approval of regulatory agencies is limited to net income plus its retained net income for the preceding two years. Based on the current financial condition
of the Bank, the Bank does not expect these provisions to affect the current ability of the Bank to pay dividends to NB&T Financial in an amount customary for the Bank.

OCC regulations generally limit the aggregate amount that a national bank can lend to one borrower or aggregated groups of related borrowers to an amount
equal to 15% of the banks unimpaired capital and surplus. A national bank may loan to one borrower an additional amount not to exceed 10% of the associations unimpaired capital and surplus, if the additional amount is fully secured by
certain forms of readily marketable collateral. Loans to executive officers, directors and principal shareholders and their related interests must conform to the OCC lending limits. All transactions between national banks and their
affiliates, including NB&T Financial, must comply with Sections 23A and 23B of the Federal Reserve Act.

Federal Deposit Insurance
Corporation. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The
FDIC is authorized to establish annual assessment rates for deposit insurance. The FDIC has established a risk-based assessment system for members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance
fund. The risk level is determined based on the institutions capital level and the FDICs level of supervisory concern about the institution. Insurance of deposits may be terminated by the FDIC if it finds that the institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition enacted or imposed by the institutions regulatory agency.

Federal Reserve Board. The Federal Reserve Act requires national banks to maintain reserves against their net transaction accounts
(primarily checking and NOW accounts). The amounts are subject to adjustment by the FRB. At December 31, 2008, the Bank was in compliance with its reserve requirements.

Federal Home Loan Banks. The Federal Home Loan Banks (the FHLBs) provide credit to their members in the form of advances. As a member, the
Bank must maintain an investment in the capital stock of the FHLB of Cincinnati in an amount equal to the greater of 1% of the aggregate outstanding principal amount of the Banks residential real estate loans, home purchase contracts and
similar obligations at the beginning of each year, or 5% of its advances from the FHLB. The Bank is in compliance with this requirement with an investment in FHLB of Cincinnati stock having a book value of $8.6 million at December 31, 2008. The
FHLB advances are secured by collateral in one or more specified categories. The amount a member may borrow from the FHLB is limited based upon the amounts of various assets held by the member.

Ohio Department of Insurance. The Banks insurance agency operating subsidiary is subject to the insurance laws and regulations of the
State of Ohio and the Ohio Department of Insurance. The insurance laws and regulations require education and licensing of agencies and individual agents, require reports and impose business conduct rules.



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Item 1A. Risk Factors

Like all financial companies, NB&T Financials business and results of operations are subject to a number of risks, many of which are outside of
our control. In addition to the other information in this report, readers should carefully consider that the following important factors, among others, could materially impact our business and future results of operations.

Changes in interest rates could adversely affect our financial condition and results of operations.

Our results of operations depend substantially on our net interest income, which is the difference between (i) the interest earned on loans,
securities and other interest-earning assets and (ii) the interest paid on deposits and borrowings. These rates are highly sensitive to many factors beyond our control, including general economic conditions, inflation, recession, unemployment,
money supply and the policies of various governmental and regulatory authorities. If the interest we pay on deposits and other borrowings increases at a faster rate than the interest we receive on loans and other investments, our net interest income
and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and borrowings. While we have taken
measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that these measures will be effective in avoiding undue interest rate risk.

Increases in interest rates also can affect the value of loans and other assets, including our ability to realize gains on the sale of assets. We
originate loans for sale and for our portfolio. Increasing interest rates may reduce the origination of loans for sale and consequently the fee income we earn on such sales. Further, increasing interest rates may adversely affect the ability of
borrowers to pay the principal or interest on loans and leases, resulting in an increase in non-performing assets and a reduction of income recognized.

Changes in national and local economic and political conditions could adversely affect our earnings, as our borrowers ability to repay loans and the value of the collateral securing our loans decline and as loans and deposits
decline.

There are inherent risks associated with our lending activities, including credit risk, which is the risk that borrowers
may not repay outstanding loans or the value of the collateral securing loans will decrease. Conditions such as inflation, recession, unemployment, changes in interest rates and money supply and other factors beyond our control may adversely affect
the ability of our borrowers to repay their loans and the value of collateral securing the loans, which could adversely affect our earnings. Because we have a significant amount of real estate loans, a decline in the value of real estate could have
a material adverse affect on us. As of December 31, 2007, 65% of our loan portfolio consisted of commercial and industrial, commercial real estate, real estate construction, installment and agricultural loans, all of which are generally viewed
as having more risk of default than residential real estate loans and all of which, with the exception of installment loans, are typically larger than residential real estate loans. Residential real estate loans held in the portfolio are typically
originated using conservative underwriting standards that does not include sub-prime lending. We attempt to manage credit risk through a program of underwriting standards, the review of certain credit decisions and an on-going process of assessment
of the quality of the credit already extended. Economic and political changes could also adversely affect our deposits and loan demand, which could adversely affect our earnings and financial condition. Since substantially all of our loans are to
individuals and businesses in Ohio, any decline in the economy of this market area could have a materially adverse effect on our credit risk and on our deposit and loan levels.

Changes in our local economy resulting from the departure of a large employer.

DHL Express
(USA), Inc. and DHL Network Operations (USA), Inc. (collectively, DHL) and ABX Air, Inc. (ABX Air) employ more people in Clinton County than any other employer. DHL has decided to outsource its United States transportation
and sorting services to another company. As a result, DHL and ABX Air are significantly reducing their operations in Wilmington and Clinton County, Ohio. Thousands of local jobs



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are expected to be eliminated. We expect the loss of jobs to have a negative short-term and potentially negative long-term impact on the local economy. Its
impact on property values and other businesses in the community is unknown at this time. This reduction could impact the available opportunities to lend and to raise deposits. In addition, it could result in increased delinquencies, defaults and
losses on existing loans and result in a decrease in deposits as customers use savings to pay bills or move to find different jobs. The Trust Department could also lose accounts as residents leave the area, reducing the Banks income from the
Trust Department.

Recent developments in the residential mortgage and related markets and the economy may adversely affect our business.

Recently, the residential mortgage market in the United States, including Ohio, has been negatively impacted by several economic factors.
Included among those factors are increasing rates and payments on adjustable-rate mortgages, decreasing housing values and increased credit standards for borrowers. As a result, across Ohio and the United States, delinquencies, foreclosures and
losses with respect to residential construction and mortgage loans have increased and may continue to increase. Additionally, the lower housing prices and appraisal values may result in additional delinquencies and loan losses. While the residential
real estate loans held in our portfolio are typically originated using conservative underwriting standards and do not include sub-prime loans, we do originate and hold fixed- and adjustable-rate loans and residential construction loans. If the
residential loan market continues to deteriorate, especially in Ohio and our local markets, our financial condition and results of operation could be adversely affected.

Difficult conditions in the financial markets may adversely affect our business and results of operations.

Our financial performance depends on the quality of loans in our portfolio. That quality may be adversely affected by several factors, including underwriting procedures, collateral quality or geographic or industry
conditions, as well as the recent deterioration in the financial markets. Many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers, including other financial institutions. This market turmoil
and tightening of credit have led to an increased level of commercial and consumer delinquencies and defaults, lack of consumer confidence, increased market volatility and widespread reduction of business activity. In addition, our credit risk may
be increased when our collateral cannot be sold or is sold at prices not sufficient to recover the full amount of the loan balance. Deterioration in our ability to collect our loans receivable may adversely affect our profitability and financial
condition.

Federal and state governments could adopt laws responsive to the current credit conditions that would adversely affect our ability to
collect on loans.

Federal or state governments might adopt legislation or regulations reducing the amount that our customers are
required to pay under existing loan contracts or limit our ability to foreclose on collateral. Additionally, legislation has been proposed to give judges the ability to adjust the principal and interest payments on a mortgage to allow homeowners to
avoid foreclosure.

FDIC insurance premiums may increase materially.

The FDIC insures deposits at FDIC insured financial institutions, including the Bank. The FDIC charges the insured financial institutions premiums to
maintain the Deposit Insurance Fund at a certain level. Current economic conditions have increased bank failures and expectations for further failures, in which case the FDIC insures payments of deposits up to insured limits from the Deposit
Insurance Fund. During 2008, the Company fully utilized its one-time FDIC insurance credits and recognized approximately $99,000 in FDIC insurance expense. In late 2008, the FDIC announced an increase in insurance premium rates of seven basis points
for the first quarter of 2009. On February 27, 2009, the FDIC announced adoption of an interim final rule imposing a one-time special assessment of 20 basis points and a final rule adjusting the risk-based calculation used to determine the
premiums due by each insured institution. Management of the Company expects that the special assessment and the changes to the premium calculation could increase the Companys FDIC insurance expense for 2009 by $1.3 million to $1.8 million.



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##### Table of Contents

In addition, the FDIC has adopted the Temporary Liquidity Guarantee Program, pursuant to which it
provides unlimited insurance on deposits in noninterest-bearing transaction accounts not otherwise covered by the existing deposit insurance limit of $250,000. Any institution wishing to participate will pay a 10 basis point surcharge on the insured
deposits. The Company has chosen to participate. Such participation will increase our expenses and decrease net income.

Concern of customers over
deposit insurance may cause a decrease in deposits at the Bank.

With recent increased concerns about bank failures, customers
increasingly are concerned about the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits from the Bank in an effort to ensure that the amount they have on deposit at the Bank is fully insured. Decreases in
deposits may adversely affect our funding costs and net income.

We operate in an extremely competitive market, and our business will suffer if we
are unable to compete effectively.

In our market area, we encounter significant competition from other banks, savings and loan
associations, credit unions, mortgage banking firms, securities brokerage firms, asset management firms and insurance companies. The increasingly competitive environment is a result primarily of changes in regulation and the accelerating pace of
consolidation among financial service providers. NB&T Financial is smaller than many of our competitors. Many of our competitors have substantially greater resources and lending limits than we do and may offer services that we do not or cannot
provide.

Legislative or regulatory changes or actions could adversely impact the financial services industry.

The financial services industry is extensively regulated. Banking laws and regulations are primarily intended for the protection of consumers, depositors
and the deposit insurance fund, not to benefit our shareholders. Changes to laws and regulations or other actions by regulatory agencies may negatively impact us, possibly limiting the services we provide, increasing the ability of non-banks to
compete with us or requiring us to change the way we operate. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on the operation of an
institution and the ability to determine the adequacy of an institutions allowance for loan losses. Failure to comply with applicable laws, regulations and policies could result in sanctions being imposed by the regulatory agencies, including
the imposition of civil money penalties, which could have a material adverse effect on our operations and financial condition. The significant federal and state banking regulations that affect us are described in this annual report under the heading
Regulation.

Our ability to pay cash dividends is limited.

We are dependent primarily upon the earnings of our operating subsidiaries for funds to pay dividends on our common shares. The payment of dividends by
us and our subsidiaries is subject to certain regulatory restrictions. As a result, any payment of dividends in the future will be dependent, in large part, on our ability to satisfy these regulatory restrictions and our subsidiaries earnings,
capital requirements, financial condition and other factors. Although our financial earnings and financial condition have allowed us to declare and pay periodic cash dividends to our shareholders, there can be no assurance that our dividend policy
or size of dividend distribution will continue in the future.

The preparation of financial statements requires management to make estimates about
matters that are inherently uncertain.

Managements accounting policies and methods are fundamental to how we record and
report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of



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these accounting policies and methods in order to ensure that they comply with generally accepted accounting principles and reflect managements
judgment as to the most appropriate manner in which to record and report our financial condition and results of operations. One of the most critical estimates is the level of the allowance of loan losses. Due to the inherent nature of these
estimates, we cannot provide absolute assurance that we will not significantly increase the allowance for loan losses or sustain loan losses that are significantly higher than the provided allowance.

Trading in our common shares is very limited, which may adversely affect the time and the price at which you can sell your NB&T Financial common shares.

Although the common shares of NB&T Financial are quoted on The NASDAQ Capital Market, trading in NB&T Financials
common shares is not active, and the spread between the bid and the asked price is often wide. As a result, you may not be able to sell your shares on short notice, and the sale of a large number of shares at one time could temporarily depress the
market price. The price at which you may be able to sell your common shares may be significantly lower than the price at which you could buy NB&T Financial common shares at that time.

Our organizational documents and the large percentage of shares controlled by management and family members of management may have the effect of discouraging a
third party from acquiring us.

Our articles of incorporation and code of regulations contain provisions that make it more
difficult for a third party to gain control or acquire us without the consent of the board of directors. These provisions could also discourage proxy contests and may make it more difficult for dissident shareholders to elect representatives as
directors and take other corporate actions. Moreover, as of March 2, 2009, directors and executive officers controlled the vote of 19.9% of the outstanding common shares of NB&T Financial in addition to the 4.7% of the outstanding shares
with respect to which the Bank controls the vote as trustee and an additional 29.9% owned by relatives of a director. The provisions in our articles and code of regulations and the percentage of voting control by NB&T Financial affiliates and
relatives could have the effect of delaying or preventing a transaction or a change in control that a shareholder might deem to be in the best interests of that shareholder.

Item 1B. Unresolved Staff Comments

Not applicable

Item 2. Properties

NB&T Financial and the Bank own and occupy their main offices located at 48 North South Street, Wilmington, Ohio. The Bank also owns or leases 20 full-service branch offices and one remote drive-through ATM facility, all of which are
located in Brown, Clermont, Clinton, Highland, and Warren Counties in Ohio. The Bank owns a building at 1600 West Main Street, Wilmington, Ohio, which serves as an operation center for the Bank and houses the Banks insurance agency.

Item 3. Legal Proceedings

Neither NB&T Financial nor the Bank is presently involved in any legal proceedings of a material nature. From time to time, the Bank is a party to legal proceedings incidental to its business to enforce its
security interest in collateral pledged to secure loans made by the Bank.

Item 4. Submission of Matters to a Vote of
Security Holders

None



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##### Table of Contents

PART II

Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

There were 3,174,747 common shares of the Company outstanding on December 31, 2008 held of record by approximately 383 shareholders of record, and approximately an additional 435 beneficial owners holding their
shares in the names of brokers, banks and depositories. Dividends per share declared were $0.29 per share in each quarter in 2008 and were $0.28 per share in each quarter in 2007.

The Companys shares trade on the NASDAQ Capital Market under the symbol NBTF. The following table summarizes the quarterly common stock prices and
dividends declared for the last two years.



|               |  |      |       |      |   |          |  |      |      |     |   |          |  |   |       |  |   |     
|-------------- |  | ---- | ----- | ---- | - | -------- |  | ---- | ---- | --- | - | -------- |  | - | ----- |  | - | ----
|               |  | 2008 |       | 2007
|               |  | High |       | Low  |   | Dividend |  | High |      | Low |   | Dividend
|Fourth Quarter |  | $    | 19.99 |      | $ | 12.97    |  | $    | 0.29 |     | $ | 20.52    |  | $ | 19.39 |  | $ | 0.28
|Third Quarter  |  |      | 18.81 |      |   | 12.25    |  |      | 0.29 |     |   | 21.15    |  |   | 19.51 |  |   | 0.28
|Second Quarter |  |      | 19.25 |      |   | 15.04    |  |      | 0.29 |     |   | 21.85    |  |   | 20.75 |  |   | 0.28
|First Quarter  |  |      | 21.00 |      |   | 18.67    |  |      | 0.29 |     |   | 21.48    |  |   | 19.72 |  |   | 0.28

As a national bank, the Bank is subject to restrictions on the payment of dividends to the
Company, which could restrict the ability of the Company to pay dividends. The Bank may not pay a dividend if it would cause the Bank not to meet its capital requirements. In addition, without regulatory approval, the Bank is limited to paying
dividends equal to net income to date in the fiscal year plus its retained net income for the preceding two years.

The Company has an
equity plan under which the Company may grant options, restricted stock and stock appreciation rights to selected directors and employees for up to 270,000 common shares of the Company. The Company also has a stock option plan that has been
terminated but under which options to purchase shares remain exercisable. Finally, an option to purchase 30,000 shares was awarded to Mr. Limbert upon his employment. These options may be exercised at $20.88, vest over five years and expire in
2016. The following table summarizes the securities authorized for issuance at December 31, 2008 under all equity compensation plans in existence at that date:



|                                                           |  |                                                                                             |  |                                                                            |       |                                                                                                                                          |        
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------- | ----- | ---------------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan Category                                              |  | Number of securities to beissued upon exercise ofoutstanding options,warrants and
rights(a) |  | Weighted-averageexercise price ofoutstandingoptions, warrantsand rights(b) |       | Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding
securitiesreflected in column(a)) (c)
|Equity compensation plans approved by security holders:    |  |                                                                                             |  |                                                                            |       |                                                                                                                                          |        
|2007 Equity Plan                                           |  | 105,500                                                                                     |  | $                                                                          | 19.93 |                                                                                                                                          | 164,500
|1992 Nonqualified Stock Option Plan (Terminated 2007)      |  | 89,000                                                                                      |  |                                                                            | 24.35 |                                                                                                                                          | 0      
|Equity compensation plans not approved by security holders |  | 30,000                                                                                      |  |                                                                            | 20.88 |                                                                                                                                          | 0      
|                                                           |  |                                                                                             |  |                                                                            |       |                                                                                                                                          |        
|Total                                                      |  | 224,500                                                                                     |  | $                                                                          | 21.81 |                                                                                                                                          | 164,500
|                                                           |  |                                                                                             |  |                                                                            |       |                                                                                                                                          |        

Unregistered Sales of Equity Securities and Use of Proceeds

The Company sold 5,871 shares of treasury stock to NB&T Financial Group, Inc. ESOP plan on December 31, 2008 for $66,871. The shares were needed
to meet dividend reinvestment requirements of the plan. The sale was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 as they were sold to the ESOP Trust, of which the Bank is the Trustee. The proceeds of the sale
have been used for general corporate purposes.



13



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##### Table of Contents

Issuer Purchases of Equity Securities

The Company has one publicly announced stock repurchase plan. No shares were repurchased under the plan during the fourth quarter of 2008. The repurchase
plan was announced April 24, 2007 and authorized the repurchase of up to 170,000 shares of common stock. Through December 31, 2008, 66,556 shares have been repurchased under the plan, which expires April 2009.

Performance Graph

The following line graph compares
the yearly percentage change in NBTFs cumulative total shareholder return against the cumulative return of The NASDAQ Composite Index, which includes all Nasdaq domestic and international based common type stocks listed on The NASDAQ Stock
Market, and an index of banks with total assets of $500 million to $1 billion. The graph assumes the investment of $100 on December 31, 2003. Cumulative total shareholder return is measured by dividing (i) the sum of (A) the
cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between the price of NBTFs common shares at the end and at the beginning of the measurement period; by (ii) the price
of NBTFs common shares at the beginning of the measurement period.

NB&T Financial Group, Inc.

LOGO



|                           |  |               |  |          |  |          |  |          |  |          |  |         
|-------------------------- |  | ------------- |  | -------- |  | -------- |  | -------- |  | -------- |  | --------
|                           |  | Period Ending
|Index                      |  | 12/31/03      |  | 12/31/04 |  | 12/31/05 |  | 12/31/06 |  | 12/31/07 |  | 12/31/08
|NB&T Financial Group, Inc. |  | 100.00        |  | 92.88    |  | 71.63    |  | 73.26    |  | 75.13    |  | 59.38   
|NASDAQ Composite           |  | 100.00        |  | 108.59   |  | 110.08   |  | 120.56   |  | 132.39   |  | 78.72   
|SNL Bank $500M-$1B         |  | 100.00        |  | 113.32   |  | 118.18   |  | 134.41   |  | 107.71   |  | 69.02   



14



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##### Table of Contents

Item 6. Selected Financial Data

(Dollars and shares in thousands, except per share data)



|                                                     |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|---------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                     |  | 2008 |         |   | 2007 |   |         | 2006 |  |   | 2005    |   |  | 2004 |        
|Consolidated Statements of Income                    |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest income                                      |  | $    | 28,828  |   |      | $ | 32,947  |      |  | $ | 34,096  |   |  | $    | 32,886  |   |  | $ | 32,135  |  
|Interest expense                                     |  |      | 10,353  |   |      |   | 14,276  |      |  |   | 15,795  |   |  |      | 13,768  |   |  |   | 11,904  |  
|                                                     |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income                                  |  |      | 18,475  |   |      |   | 18,671  |      |  |   | 18,301  |   |  |      | 19,118  |   |  |   | 20,231  |  
|Provision for loan losses                            |  |      | 400     |   |      |   | 135     |      |  |   | 1,330   |   |  |      | 775     |   |  |   | 1,900   |  
|Non-interest income                                  |  |      | 8,236   |   |      |   | 8,240   |      |  |   | 7,852   |   |  |      | 8,367   |   |  |   | 9,239   |  
|Non-interest expense                                 |  |      | 21,679  |   |      |   | 21,316  |      |  |   | 23,312  |   |  |      | 21,868  |   |  |   | 21,552  |  
|                                                     |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income before income taxes                           |  |      | 4,632   |   |      |   | 5,460   |      |  |   | 1,511   |   |  |      | 4,842   |   |  |   | 6,018   |  
|Income taxes                                         |  |      | 801     |   |      |   | 1,028   |      |  |   | (345    | ) |  |      | 737     |   |  |   | 1,064   |  
|                                                     |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income                                           |  | $    | 3,831   |   |      | $ | 4,432   |      |  | $ | 1,856   |   |  | $    | 4,105   |   |  | $ | 4,954   |  
|                                                     |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Per Share Data                                       |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic earnings per share                             |  | $    | 1.22    |   |      | $ | 1.39    |      |  | $ | 0.58    |   |  | $    | 1.30    |   |  | $ | 1.57    |  
|Diluted earnings per share                           |  |      | 1.22    |   |      |   | 1.39    |      |  |   | 0.58    |   |  |      | 1.30    |   |  |   | 1.56    |  
|Dividends per share                                  |  |      | 1.16    |   |      |   | 1.12    |      |  |   | 1.08    |   |  |      | 1.04    |   |  |   | 1.00    |  
|Book value at year end                               |  |      | 18.52   |   |      |   | 18.52   |      |  |   | 18.01   |   |  |      | 18.10   |   |  |   | 18.16   |  
|Weighted average shares outstandingbasic            |  |      | 3,143   |   |      |   | 3,188   |      |  |   | 3,175   |   |  |      | 3,162   |   |  |   | 3,148   |  
|Weighted average shares outstandingdiluted          |  |      | 3,143   |   |      |   | 3,190   |      |  |   | 3,176   |   |  |      | 3,168   |   |  |   | 3,166   |  
|                                                     |  |      |         |   |     
|Consolidated Balance Sheets (Year End)               |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total assets                                         |  | $    | 524,841 |   |      | $ | 518,922 |      |  | $ | 555,182 |   |  | $    | 650,248 |   |  | $ | 645,323 |  
|Securities                                           |  |      | 87,908  |   |      |   | 89,285  |      |  |   | 82,896  |   |  |      | 171,567 |   |  |   | 169,745 |  
|Loans                                                |  |      | 336,184 |   |      |   | 357,763 |      |  |   | 410,221 |   |  |      | 417,623 |   |  |   | 402,839 |  
|Allowance for loan losses                            |  |      | 3,411   |   |      |   | 3,594   |      |  |   | 4,762   |   |  |      | 4,058   |   |  |   | 4,212   |  
|Deposits                                             |  |      | 420,728 |   |      |   | 420,254 |      |  |   | 453,268 |   |  |      | 447,626 |   |  |   | 452,593 |  
|Long-term debt                                       |  |      | 39,810  |   |      |   | 34,810  |      |  |   | 36,748  |   |  |      | 109,039 |   |  |   | 111,673 |  
|Total shareholders equity                           |  |      | 58,791  |   |      |   | 58,883  |      |  |   | 58,223  |   |  |      | 58,498  |   |  |   | 58,601  |  
|                                                     |  |      |         |   |     
|Selected Financial Ratios                            |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on average assets                             |  |      | 0.73    | % |      |   | 0.82    | %    |  |   | 0.30    | % |  |      | 0.63    | % |  |   | 0.75    | %
|Return on average equity                             |  |      | 6.49    |   |      |   | 7.53    |      |  |   | 3.21    |   |  |      | 6.98    |   |  |   | 8.57    |  
|Dividend payout ratio                                |  |      | 95.08   |   |      |   | 80.58   |      |  |   | 186.21  |   |  |      | 80.00   |   |  |   | 63.69   |  
|Net interest margin                                  |  |      | 3.84    |   |      |   | 3.78    |      |  |   | 3.26    |   |  |      | 3.16    |   |  |   | 3.31    |  
|Non-interest expense to total revenue                |  |      | 81.16   |   |      |   | 79.21   |      |  |   | 89.14   |   |  |      | 79.56   |   |  |   | 78.17   |  
|Average loans to average total assets                |  |      | 65.19   |   |      |   | 71.62   |      |  |   | 69.34   |   |  |      | 62.26   |   |  |   | 61.80   |  
|Average equity to average total assets               |  |      | 11.21   |   |      |   | 10.94   |      |  |   | 9.48    |   |  |      | 8.99    |   |  |   | 8.74    |  
|Total risk-based capital ratio (at year end)         |  |      | 18.80   |   |      |   | 17.69   |      |  |   | 15.69   |   |  |      | 14.96   |   |  |   | 15.06   |  
|Ratio of non-performing loans to total loans         |  |      | 0.95    |   |      |   | 0.55    |      |  |   | 2.04    |   |  |      | 1.96    |   |  |   | 0.71    |  
|Ratio of loan loss allowance to total loans          |  |      | 1.01    |   |      |   | 1.00    |      |  |   | 1.16    |   |  |      | 0.97    |   |  |   | 1.05    |  
|Ratio of loan loss allowance to non-performing loans |  |      | 107     |   |      |   | 181     |      |  |   | 57      |   |  |      | 50      |   |  |   | 147     |  
|Net charge-offs to average loans                     |  |      | 0.17    |   |      |   | 0.34    |      |  |   | 0.15    |   |  |      | 0.23    |   |  |   | 0.62    |  



15



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##### Table of Contents

Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations

The following discussion and analysis comparing 2008 to prior years should be read in conjunction with the audited
consolidated financial statements at December 31, 2008 and 2007 and for the three years ended December 31, 2008.

FORWARD-LOOKING STATEMENTS

Statements preceded by, followed by or that otherwise include the words believes, expects,
anticipates, intends, estimates, plans, may increase, may fluctuate, will likely result, and similar expressions or future or conditional verbs such as
will, should, would, and could are generally forward-looking in nature and not historical facts. Results could differ materially from those expressed in such forward-looking statements due to a number
of factors, including (1) changes in interest rates; (2) changes in national and local economic and political conditions; (3) competitive pressures in the retail banking, financial services, insurance and other industries;
(4) changes in laws and regulations, including changes in accounting standards; (5) changes in policy by regulatory agencies; and (6) changes in the securities markets. Any forward-looking statements are not guarantees of future
performance. They involve risks, uncertainties and assumptions, and actual results could differ materially from those contemplated by those forward-looking statements. Many of the factors that will determine these results are beyond the
Companys ability to control or predict. The Company disclaims any duty to update any forward-looking statements, all of which are qualified by the statements in this section. See Item 1.A. Risk Factors in this annual report
for further discussion of the risks affecting the business of the Company and the value of an investment in its shares.

RESULTS OF OPERATIONS

EXECUTIVE SUMMARY

Net income for
2008 was $3.8 million, or $1.22 per diluted share, compared to $4.4 million, or $1.39 per diluted share, for 2007. In 2008, the Bank opened three new branches, increasing expenses approximately $750,000 over last year. The Bank also took advantage
of its well-capitalized position to expand into contiguous markets. In addition, the provision for loan losses increased $265,000 in 2008 due to a higher level of nonperforming loans and increased credit risk inherent in the current economic
climate.

Net income for 2007 was $4.4 million, or $1.39 per diluted share, compared to net income of $1.9 million, or $.58 per diluted
share, for 2006. The earnings improvement was across the board with increases in net interest income and non-interest income, and decreases in the loan loss provision and non-interest expenses.

NET INTEREST INCOME

Net interest income, the
difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the most significant component of the Companys earnings. Net interest income is affected by changes in the
volumes, rates and composition of interest-earning assets and interest-bearing liabilities. Table 1 reflects the components of the Companys net interest income for each of the three years ended December 31, 2008, setting forth:
(i) average assets, liabilities and shareholders equity, (ii) interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, (iii) average yields earned on interest-earning
assets and interest expense incurred on interest-bearing liabilities, and (iv) the net interest margin (i.e., net interest income divided by average interest-earning assets). Non-accrual loans have been included in the average loan balances.



16



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##### Table of Contents

TABLE 1NET INTEREST INCOME AND NET INTEREST MARGIN

(Dollars in thousands)



|                                     |  |                           |         |            |      |      |                     |   |                           |  |            |         |  |                     |   |                           |   |            |  |   |                     |  |      |   |  |   |       
|------------------------------------ |  | ------------------------- | ------- | ---------- | ---- | ---- | ------------------- | - | ------------------------- |  | ---------- | ------- |  | ------------------- | - | ------------------------- | - | ---------- |  | - | ------------------- |  | ---- | - |  | - | ------
|                                     |  | 2008                      |         | 2007       |      | 2006
|                                     |  | AverageOutstandingBalance |         | Yield/Rate |      |      | InterestEarned/Paid |   | AverageOutstandingBalance |  | Yield/Rate |         |  | InterestEarned/Paid |   | AverageOutstandingBalance |   | Yield/Rate |  |   | InterestEarned/Paid
|Loans (1)                            |  | $                         | 343,453 |            | 6.67 | %    |                     | $ | 22,894                    |  | $          | 385,857 |  | 7.18                | % |                           | $ | 27,699     |  | $ | 422,452             |  | 6.74 | % |  | $ | 28,460
|Securities                           |  |                           | 99,588  |            | 5.01 |      |                     |   | 5,001                     |  |            | 91,504  |  | 4.87                |   |                           |   | 4,453      |  |   | 135,119             |  | 4.03 |   |  |   | 5,441 
|Deposits in banks                    |  |                           | 26,808  |            | 2.60 |      |                     |   | 700                       |  |            | 1,160   |  | 4.43                |   |                           |   | 51         |  |   | 266                 |  | 5.57 |   |  |   | 15    
|Federal funds sold                   |  |                           | 11,672  |            | 1.99 |      |                     |   | 233                       |  |            | 15,146  |  | 4.91                |   |                           |   | 744        |  |   | 3,658               |  | 4.91 |   |  |   | 180   
|                                     |  |                           |         |            |      |      |                     |   |                           |  |            |         |  |                     |   |                           |   |            |  |   |                     |  |      |   |  |   |       
|Total interest-earning assets        |  |                           | 481,521 |            | 5.99 |      |                     |   | 28,828                    |  |            | 493,667 |  | 6.67                |   |                           |   | 32,947     |  |   | 561,495             |  | 6.07 |   |  |   | 34,096
|Non-earning assets                   |  |                           | 45,340  |            |      |      |                     |   |                           |  |            | 44,382  |  |                     |   |                           |   |            |  |   | 47,794              |  |      |   |  |   |       
|                                     |  |                           |         |            |      |      |                     |   |                           |  |            |         |  |                     |   |                           |   |            |  |   |                     |  |      |   |  |   |       
|Total assets                         |  | $                         | 526,861 |            |      |      |                     |   |                           |  | $          | 538,049 |  |                     |   |                           |   |            |  | $ | 609,289             |  |      |   |  |   |       
|                                     |  |                           |         |            |      |      |                     |   |                           |  |            |         |  |                     |   |                           |   |            |  |   |                     |  |      |   |  |   |       
|Non-interest-bearing demand deposits |  | $                         | 60,238  |            |     |      |                     |   |                          |  | $          | 56,571  |  |                    |   |                           |   |           |  | $ | 62,059              |  |     |   |  |   |      
|Interest-bearing demand deposits     |  |                           | 79,237  |            | .46  |      |                     |   | 362                       |  |            | 83,572  |  | .93                 |   |                           |   | 781        |  |   | 97,417              |  | .87  |   |  |   | 848   
|Savings deposits                     |  |                           | 112,195 |            | 1.43 |      |                     |   | 1,601                     |  |            | 119,484 |  | 2.73                |   |                           |   | 3,267      |  |   | 108,077             |  | 2.17 |   |  |   | 2,348 
|Time deposits                        |  |                           | 172,696 |            | 3.66 |      |                     |   | 6,316                     |  |            | 180,373 |  | 4.53                |   |                           |   | 8,175      |  |   | 199,753             |  | 4.02 |   |  |   | 8,022 
|Short-term borrowings                |  |                           | 726     |            | 1.31 |      |                     |   | 10                        |  |            | 870     |  | 4.72                |   |                           |   | 41         |  |   | 34,641              |  | 4.75 |   |  |   | 1,645 
|Junior subordinated debentures       |  |                           | 10,310  |            | 7.07 |      |                     |   | 729                       |  |            | 9,344   |  | 7.96                |   |                           |   | 744        |  |   | 8,248               |  | 8.65 |   |  |   | 713   
|FHLB advances                        |  |                           | 29,322  |            | 4.56 |      |                     |   | 1,335                     |  |            | 25,738  |  | 4.93                |   |                           |   | 1,268      |  |   | 44,263              |  | 5.01 |   |  |   | 2,219 
|                                     |  |                           |         |            |      |      |                     |   |                           |  |            |         |  |                     |   |                           |   |            |  |   |                     |  |      |   |  |   |       
|Total interest-bearing liabilities   |  |                           | 404,486 |            | 2.56 |      |                     |   | 10,353                    |  |            | 419,381 |  | 3.40                |   |                           |   | 14,276     |  |   | 492,399             |  | 3.21 |   |  |   | 15,795
|                                     |  |                           |         |            |      |      |                     |   |                           |  |            |         |  |                     |   |                           |   |            |  |   |                     |  |      |   |  |   |       
|Non-interest bearing liabilities     |  |                           | 63,327  |            |      |      |                     |   |                           |  |            | 59,387  |  |                     |   |                           |   |            |  |   | 59,112              |  |      |   |  |   |       
|Capital                              |  |                           | 59,048  |            |      |      |                     |   |                           |  |            | 59,281  |  |                     |   |                           |   |            |  |   | 57,778              |  |      |   |  |   |       
|                                     |  |                           |         |            |      |      |                     |   |                           |  |            |         |  |                     |   |                           |   |            |  |   |                     |  |      |   |  |   |       
|Total liabilities and capital        |  | $                         | 526,861 |            |      |      |                     |   |                           |  | $          | 538,049 |  |                     |   |                           |   |            |  | $ | 609,289             |  |      |   |  |   |       
|                                     |  |                           |         |            |      |      |                     |   |                           |  |            |         |  |                     |   |                           |   |            |  |   |                     |  |      |   |  |   |       
|Net interest income                  |  |                           |         |            |      |      |                     | $ | 18,475                    |  |            |         |  |                     |   |                           | $ | 18,671     |  |   |                     |  |      |   |  | $ | 18,301
|                                     |  |                           |         |            |      |      |                     |   |                           |  |            |         |  |                     |   |                           |   |            |  |   |                     |  |      |   |  |   |       
|Net interest margin                  |  |                           |         |            | 3.84 | %    |                     |   |                           |  |            |         |  | 3.78                | % |                           |   |            |  |   |                     |  | 3.26 | % |  |   |       



|(1) | Includes nonaccrual loans and loan fees.
|--- | ----------------------------------------

Net interest
income was $18.5 million for 2008, a decrease of $196,000 compared to $18.7 million for 2007. Net interest margin increased to 3.84% for 2008 from 3.78% last year. Average interest-earning assets decreased approximately 2.5% to $481.5 million during
2008 compared to 2007 and interest income decreased $4.1 million. Also, the average yield on earning assets decreased from 6.67% for 2007 to 5.99% for 2008 due to lower loan volumes, reinvestment in lower-yielding interest bearing deposits and
declining market rates. Offsetting the



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decrease in interest income, interest expense decreased $3.9 million to $10.4 million during 2008 from $14.3 million last year. Average interest-bearing
liabilities decreased 3.6% from last year to $404.5 million, and their cost decreased to 2.56% during 2008 from 3.40% last year.

Net
interest income increased to $18.7 million in 2007 from $18.3 million in 2006 with an increase in the Companys net interest margin from 3.26% in 2006 to 3.78% in 2007. Interest income was $32.9 million for 2007 compared to $34.1 million in
2006, which is the result of lower loan volumes. Total interest expense decreased $1.5 million to $14.3 million in 2007 from $15.8 million last year. The decrease is primarily the result of the reduction in Federal Home Loan Bank advances,
short-term borrowings and time deposits. These liability decreases, along with reductions in the investment and indirect loan portfolios, were part of the balance sheet restructuring in 2006 to improve the Companys net interest margin.

Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. Table 2
presents an analysis of increases and decreases in interest income and expense in terms of changes in volume and interest rates during the three years ended December 31, 2008. Changes attributable to rate and volume are allocated to both rate
and volume on an equal basis.

TABLE 2NET INTEREST INCOMERATE/VOLUME ANALYSIS

(Dollars in thousands)



|                                   |  |                                                               |        |   |      |   |        |                                                               |  |   |        |   |  |      |        |   |       |   |       |   |  |   |        |  
|---------------------------------- |  | ------------------------------------------------------------- | ------ | - | ---- | - | ------ | ------------------------------------------------------------- |  | - | ------ | - |  | ---- | ------ | - | ----- | - | ----- | - |  | - | ------ | -
|                                   |  | Years endedDecember 31,2008 vs. 2007Increase
(decrease)due to |        |   |      |   |        | Years endedDecember 31,2007 vs. 2006Increase
(decrease)due to |  |   |        |  
|                                   |  | Volume                                                        |        |   | Rate |   |        | Total                                                         |  |   | Volume |   |  | Rate |        |   | Total |  
|Interest income attributable to:   |  |                                                               |        |   |      |   |        |                                                               |  |   |        |   |  |      |        |   |       |   |       |   |  |   |        |  
|Loans                              |  | $                                                             | (3,097 | ) |      | $ | (1,708 | )                                                             |  | $ | (4,805 | ) |  | $    | (2,527 | ) |       | $ | 1,766 |   |  | $ | (761   | )
|Securities                         |  |                                                               | 406    |   |      |   | 143    |                                                               |  |   | 549    |   |  |      | (1,939 | ) |       |   | 951   |   |  |   | (988   | )
|Deposits in banks                  |  |                                                               | 903    |   |      |   | (255   | )                                                             |  |   | 648    |   |  |      | 45     |   |       |   | (8    | ) |  |   | 37     |  
|Federal funds sold                 |  |                                                               | (120   | ) |      |   | (391   | )                                                             |  |   | (511   | ) |  |      | 564    |   |       |   |      |   |  |   | 564    |  
|                                   |  |                                                               |        |   |      |   |        |                                                               |  |   |        |   |  |      |        |   |       |   |       |   |  |   |        |  
|Total interest-earning assets      |  |                                                               | (1,908 | ) |      |   | (2,211 | )                                                             |  |   | (4,119 | ) |  |      | (3,857 | ) |       |   | 2,709 |   |  |   | (1,148 | )
|                                   |  |                                                               |        |   |      |   |        |                                                               |  |   |        |   |  |      |        |   |       |   |       |   |  |   |        |  
|Interest expense attributable to:  |  |                                                               |        |   |      |   |        |                                                               |  |   |        |   |  |      |        |   |       |   |       |   |  |   |        |  
|Interest-bearing deposits          |  |                                                               | (511   | ) |      |   | (3,433 | )                                                             |  |   | (3,944 | ) |  |      | (650   | ) |       |   | 1,655 |   |  |   | 1,005  |  
|Short-term borrowings              |  |                                                               | (5     | ) |      |   | (27    | )                                                             |  |   | (32    | ) |  |      | (1,600 | ) |       |   | (4    | ) |  |   | (1,604 | )
|Junior subordinated debentures     |  |                                                               | 73     |   |      |   | (88    | )                                                             |  |   | (15    | ) |  |      | 91     |   |       |   | (60   | ) |  |   | 31     |  
|FHLB advances                      |  |                                                               | 170    |   |      |   | (102   | )                                                             |  |   | 68     |   |  |      | (921   | ) |       |   | (30   | ) |  |   | (951   | )
|                                   |  |                                                               |        |   |      |   |        |                                                               |  |   |        |   |  |      |        |   |       |   |       |   |  |   |        |  
|Total interest-bearing liabilities |  |                                                               | (273   | ) |      |   | (3,650 | )                                                             |  |   | (3,923 | ) |  |      | (3,080 | ) |       |   | 1,561 |   |  |   | (1,519 | )
|                                   |  |                                                               |        |   |      |   |        |                                                               |  |   |        |   |  |      |        |   |       |   |       |   |  |   |        |  
|Net interest income                |  | $                                                             | (1,635 | ) |      | $ | 1,439  |                                                               |  | $ | (196   | ) |  | $    | (724   | ) |       | $ | 1,095 |   |  | $ | 371    |  
|                                   |  |                                                               |        |   |      |   |        |                                                               |  |   |        |   |  |      |        |   |       |   |       |   |  |   |        |  

NON-INTEREST INCOME

Table 3 details the components of non-interest income, excluding securities gains and losses, and the percentage change from the two previous years. Total non-interest income was $8.2 million in 2008 and 2007, and $
9.2 million in 2006. The non-interest income in 2006 included a $1.1 million gain on sale of a branch. Service charges on deposits increased slightly in 2008 due to increased business checking accounts and a lower average earnings credit on
such balances. Service charges on deposits decreased 3.6% in 2007 largely due to decreased fees on overdrawn accounts and an increase of $6.6 million in average free checking account balances. Other service charges and fees increased in 2008 and
2007 due to additional fee income on debit card transactions. Insurance agency commissions declined to $2.3 million in 2008 due to a decline in insurance



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policies and decreased commissions on sales of non-deposit investment products. Bank owned life insurance (BOLI) income decreased to $492,000 in
2008 compared to $511,000 in 2007, due to a decrease in the yield on the underlying investments. Other income increased to $1,125,000 in 2008 due to a gain of approximately $116,000 on the mandatory redemption of Visa shares as a result of the Visa
initial public offering as well as a gain of $135,000 on the liquidation of a long-term investment held by the Banks insurance agency subsidiary. These gains were partially offset by decreased gains on loan sales. Other income increased to
$1,067,000 in 2007 due to increased gains on loan sales and fee income on cash management sweep services.

TABLE 3NON-INTEREST
INCOME

(Dollars in thousands)



|                             |  |      |       |      |   |       |  |                |       |  |               |    |  |        |   
|---------------------------- |  | ---- | ----- | ---- | - | ----- |  | -------------- | ----- |  | ------------- | -- |  | ------ | --
|                             |  |      |       |      |   |       |  | Percent Change |      
|                             |  | 2008 |       | 2007 |   | 2006  |  | 2008 vs. 2007  |       |  | 2007 vs. 2006 |   
|Trust                        |  | $    | 937   |      | $ | 939   |  | $              | 944   |  | (.21          | )% |  | (.53   | )%
|Service charges on deposits  |  |      | 2,352 |      |   | 2,347 |  |                | 2,435 |  | .21           |    |  | (3.61  | ) 
|Other service charges        |  |      | 1,063 |      |   | 976   |  |                | 926   |  | 8.91          |    |  | 5.40   |   
|Insurance agency commissions |  |      | 2,252 |      |   | 2,400 |  |                | 2,436 |  | (6.17         | )  |  | (1.48  | ) 
|Income from BOLI             |  |      | 492   |      |   | 511   |  |                | 465   |  | (3.72         | )  |  | 9.89   |   
|Gain on sale of branch       |  |      |      |      |   |      |  |                | 1,099 |  | NM            |    |  | NM     |   
|Other                        |  |      | 1,125 |      |   | 1,067 |  |                | 889   |  | 5.44          |    |  | 20.02  |   
|                             |  |      |       |      |   |       |  |                |       |  |               |    |  |        |   
|Total                        |  | $    | 8,221 |      | $ | 8,240 |  | $              | 9,194 |  | (.23          | )% |  | (10.38 | )%
|                             |  |      |       |      |   |       |  |                |       |  |               |    |  |        |   

Gross gains of $15,000 were realized on premium calls of approximately $1,600,000 in municipal
bonds in 2008. There were no security sales in 2007. In 2006, securities of $66.3 million were sold at a net loss of $1.3 million in order to reduce long-term borrowings and fund the sale of a branch.

NON-INTEREST EXPENSE

Table 4 details the components
of non-interest expense and the percentage change from the two previous years.

TABLE 4NON-INTEREST EXPENSE

(Dollars in thousands)



|                                |  |      |        |      |   |        |  |                |        |  |               |   |  |        |   
|------------------------------- |  | ---- | ------ | ---- | - | ------ |  | -------------- | ------ |  | ------------- | - |  | ------ | --
|                                |  |      |        |      |   |        |  | Percent Change |       
|                                |  | 2008 |        | 2007 |   | 2006   |  | 2008 vs. 2007  |        |  | 2007 vs. 2006 |  
|Salaries & employee benefits    |  | $    | 11,847 |      | $ | 11,584 |  | $              | 11,572 |  | 2.27          | % |  | .10    | % 
|Occupancy                       |  |      | 1,992  |      |   | 1,687  |  |                | 1,699  |  | 18.08         |   |  | (.71   | ) 
|Equipment                       |  |      | 1,639  |      |   | 1,541  |  |                | 1,689  |  | 6.36          |   |  | (8.76  | ) 
|Data processing                 |  |      | 1,207  |      |   | 1,009  |  |                | 910    |  | 19.62         |   |  | 10.88  |   
|Professional fees               |  |      | 1,336  |      |   | 1,514  |  |                | 1,588  |  | (11.76        | ) |  | (4.66  | ) 
|Marketing                       |  |      | 511    |      |   | 546    |  |                | 941    |  | (6.41         | ) |  | (41.98 | ) 
|Printing, postage and supplies  |  |      | 803    |      |   | 787    |  |                | 872    |  | 2.03          |   |  | (9.75  | ) 
|State franchise tax             |  |      | 786    |      |   | 751    |  |                | 746    |  | 4.66          |   |  | .67    |   
|Prepayment penalty on FHLB debt |  |      |       |      |   |       |  |                | 1,363  |  | NM            |   |  | NM     |   
|Amortization of intangibles     |  |      | 225    |      |   | 474    |  |                | 665    |  | (52.53        | ) |  | (28.72 | ) 
|Other                           |  |      | 1,333  |      |   | 1,423  |  |                | 1,267  |  | (6.32         | ) |  | 12.31  |   
|                                |  |      |        |      |   |        |  |                |        |  |               |   |  |        |   
|Total                           |  | $    | 21,679 |      | $ | 21,316 |  | $              | 23,312 |  | 1.70          | % |  | (8.56  | )%
|                                |  |      |        |      |   |        |  |                |        |  |               |   |  |        |   



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Total non-interest expense in 2006 included prepayment penalties of $1.4 million on the payoff of $47.2
million in long-term FHLB advances. Salaries and benefits expense, which is the largest component of non-interest expense, remained relatively unchanged in 2006 and 2007. The expense increased to $11.8 million in 2008 due to increased personnel at
three branch locations opened in 2008. Occupancy expense also increased in 2008 due to the opening of the three new branches. Data processing fees have increased over the last two years due to increased debit card processing fees. Professional fees,
marketing and printing, postage and supplies expenses were $554,000 higher in 2006, compared to 2007, due to the launch of the Companys new corporate brand. Professional fees were lower in 2008, compared to 2007, due to recovery of
approximately $68,000 in legal fees related to problem loans and approximately $82,000 in recruiting fees incurred in 2007. Amortization expense declined in 2007 and 2006 due to sale of a previously acquired branch in 2006. In addition, the expense
continued to decline in 2008 due to the full amortization of an intangible related to a 2001 insurance agency acquisition. Other expenses were higher in the last two years due to net losses on other real estate owned sales of $87,000 and $205,000 in
2008 and 2007, respectively.

During 2008, the Company fully utilized its one-time FDIC insurance credits and recognized approximately
$99,000 in FDIC insurance expense. In late 2008, the FDIC announced an increase in insurance premium rates of seven basis points for the first quarter of 2009. On February 27, 2009, the FDIC announced adoption of an interim final rule imposing
a one-time special assessment of 20 basis points and a final rule adjusting the risk-based calculation used to determine the premiums due by each insured institution. Management of the Company expects that the special assessment and the changes to
the premium calculation could increase the Companys FDIC insurance expense for 2009 by $1.3 million to $1.8 million.

INCOME TAXES

In 2008, the effective tax rate was 17.3%, compared to 18.8% in 2007. Due to the security losses and prepayment penalty on FHLB advances with
relatively the same level of tax-exempt income and tax-deductible expenses, the Company had a tax benefit for 2006.

FINANCIAL CONDITION

ASSETS

Total assets increased
from $518.9 million at December 31, 2007 to $524.8 million at December 31, 2008. Loan volume continued to decline in 2008 with total loans decreasing from $357.8 million at December 31, 2007 to $336.0 million at December 31,
2008. The excess funds from the decline in loan volume were reinvested in short-term interest-bearing deposits, which increased to $43.4 million at December 31, 2008 from $10.7 million at December 31, 2007.

SECURITIES

The following table sets forth the
composition of the Banks securities portfolio, based on amortized cost, at the dates indicated:

TABLE 5SECURITIES PORTFOLIO

(Dollars in thousands)



|                                                                       |  |                 |        |      |   |        |  |   |       
|---------------------------------------------------------------------- |  | --------------- | ------ | ---- | - | ------ |  | - | ------
|                                                                       |  | At December 31,
|                                                                       |  | 2008            |        | 2007 |   | 2006  
|Securities available for sale:                                         |  |                 |        |      |   |        |  |   |       
|U.S. Government sponsored entities                                     |  | $               | 10,576 |      | $ | 14,581 |  | $ | 28,796
|U.S. Government agency and sponsored entity mortgage-backed securities |  |                 | 2,676  |      |   | 2,400  |  |   | 3,185 
|Other mortgage-backed securities                                       |  |                 | 50,254 |      |   | 38,570 |  |   | 17,155
|Municipals                                                             |  |                 | 24,156 |      |   | 32,725 |  |   | 33,623
|                                                                       |  |                 |        |      |   |        |  |   |       
|Total securities available for sale                                    |  | $               | 87,662 |      | $ | 88,286 |  | $ | 82,769
|                                                                       |  |                 |        |      |   |        |  |   |       



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At December 31, 2008, the securities portfolio was down only slightly to $87.7 million from $88.3
million at December 31, 2007. The Company experienced increased calls of municipal securities in 2008 with approximately $8.6 million in bonds called with the proceeds reinvested in mortgage-backed securities. The Company increased its
securities portfolio from $82.8 million at December 31, 2006 to $88.3 million at December 31, 2007 as loan demand declined. Excess liquid funds were invested in mortgage-backed securities.

The following table sets forth the amortized cost of the Banks securities portfolio at December 31, 2008. Expected maturities of individual
securities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are presented in the table based on current prepayment
assumptions. U.S. Government agency and sponsored entity notes, as well as municipal securities, are categorized based on contractual maturity. Yields do not include the effect of income taxes.

TABLE 6SECURITIES PORTFOLIO REPRICING

(Dollars in thousands)



|                                                                       |  |                  |        |                      |                            |   |               |                              |                      |  |               |               |  |                      |       |  |               |   |                      |   |        |               |      |                      |  |   |        |  |      |  
|---------------------------------------------------------------------- |  | ---------------- | ------ | -------------------- | -------------------------- | - | ------------- | ---------------------------- | -------------------- |  | ------------- | ------------- |  | -------------------- | ----- |  | ------------- | - | -------------------- | - | ------ | ------------- | ---- | -------------------- |  | - | ------ |  | ---- | -
|                                                                       |  | One Year or Less |        |                      | Over 1 YearThrough 5 Years |   |               | Over 5 YearsThrough 10 Years |                      |  | Over 10 Years |               |  | Total                |      
|                                                                       |  | AmortizedCost    |        | WeightedAverageYield |                            |   | AmortizedCost |                              | WeightedAverageYield |  |               | AmortizedCost |  | WeightedAverageYield |       |  | AmortizedCost |   | WeightedAverageYield |   |        | AmortizedCost |      | WeightedAverageYield | 
|Securities available for sale:                                         |  |                  |        |                      |                            |   |               |                              |                      |  |               |               |  |                      |       |  |               |   |                      |   |        |               |      |                      |  |   |        |  |      |  
|U.S. Government sponsored entity notes                                 |  | $                | 10,576 |                      | 2.92                       | % |               | $                            |                     |  |              | %             |  | $                    |      |  |              | % |                      | $ |       |               |     | %                    |  | $ | 10,576 |  | 2.92 | %
|U.S. Government agency and sponsored entity mortgage-backed securities |  |                  | 198    |                      | 4.46                       |   |               |                              | 2,478                |  | 5.05          |               |  |                      |      |  |              |   |                      |   |       |               |     |                      |  |   | 2,676  |  | 5.00 |  
|Other mortgage-backed securities                                       |  |                  | 23,663 |                      | 5.71                       |   |               |                              | 24,217               |  | 5.45          |               |  |                      |       |  |               |   |                      |   | 2,374  |               | 4.99 |                      |  |   | 50,254 |  | 5.55 |  
|Municipals                                                             |  |                  | 5,724  |                      | 5.92                       |   |               |                              | 3,632                |  | 4.06          |               |  |                      | 5,963 |  | 4.81          |   |                      |   | 8,837  |               | 5.00 |                      |  |   | 24,156 |  | 5.03 |  
|                                                                       |  |                  |        |                      |                            |   |               |                              |                      |  |               |               |  |                      |       |  |               |   |                      |   |        |               |      |                      |  |   |        |  |      |  
|Total securities available for sale                                    |  | $                | 40,161 |                      | 5.00                       |   |               | $                            | 30,327               |  | 5.25          |               |  | $                    | 5,963 |  | 4.81          |   |                      | $ | 11,211 |               | 5.00 |                      |  | $ | 87,662 |  | 5.07 |  
|                                                                       |  |                  |        |                      |                            |   |               |                              |                      |  |               |               |  |                      |       |  |               |   |                      |   |        |               |      |                      |  |   |        |  |      |  

LOANS

Table 7 shows loans outstanding at period end by type of loan. Commercial and industrial loans declined from $90.1 million in 2004 to $52.5 million in 2008. The decline in the commercial and industrial loan portfolio has been largely offset
by an increase in commercial real estate loans, which increased from $55.6 million in 2004 to $96.8 million in 2008. At December 31, 2008, total commercial and industrial and commercial real estate loans were down $9.0 million from
December 31, 2007 due to loan payoffs and decreased loan demand. Loan demand was lower in 2008 due to a slowing economy and commercial borrowers trying to reduce their debt obligations. Commercial construction loans also decreased in 2008 by
approximately $3.2 million. There was an increase in agricultural loan balances in 2008 of approximately $1.4 million. One of the Banks primary target markets continues to be commercial lending to small- to medium-sized companies with
established track records in the Companys market area.

Residential real estate loans increased $5.2 million to $130.1 million in
2008. One- to-four-family real estate loans increased due to increased originations of adjustable-rate mortgages retained in the Companys portfolio, while home equity loans remained relatively unchanged at December 31, 2008 and
December 31, 2007.



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Currently, the Company has approximately $13.9 million in residential real estate loans with a loan-to-value ratio greater than 80% for which private
mortgage insurance has not been required. The Company does not offer residential real estate loan products with negative amortization.

Installment loans decreased $16.2 million to $24.4 million in 2008 from $40.6 million at December 31, 2007. Most of this decline is the result of the Company discontinuing its indirect lending activity in the third quarter of 2006 due
to profit margins not meeting expectations. Installment loans have declined from 18.1% of the total loan portfolio at the end of 2004 to 7.3% of the total portfolio at the end of 2008.

The Company has avoided concentration of commercial lending in any one industry. As of December 31, 2008, the highest commercial lending
concentration was in commercial rental real estate properties at 10.1% of the total commercial loan portfolio.

TABLE 7LOAN
PORTFOLIO

(Dollars in thousands)



|                               |  |                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------ |  | --------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                               |  | At December 31, |        
|                               |  | 2008            |         |   | 2007 |   |         | 2006 |  |   | 2005    |   |  | 2004 |        
|Commercial & industrial        |  | $               | 52,490  |   |      | $ | 62,455  |      |  | $ | 76,182  |   |  | $    | 82,898  |   |  | $ | 90,136  |  
|Commercial real estate         |  |                 | 96,755  |   |      |   | 95,801  |      |  |   | 87,018  |   |  |      | 82,616  |   |  |   | 55,565  |  
|Real estate construction       |  |                 | 6,064   |   |      |   | 9,203   |      |  |   | 19,958  |   |  |      | 9,743   |   |  |   | 13,114  |  
|Agricultural                   |  |                 | 26,265  |   |      |   | 24,910  |      |  |   | 22,916  |   |  |      | 23,468  |   |  |   | 22,210  |  
|Residential real estate        |  |                 | 130,091 |   |      |   | 124,849 |      |  |   | 140,083 |   |  |      | 148,358 |   |  |   | 149,120 |  
|Installment                    |  |                 | 24,440  |   |      |   | 40,552  |      |  |   | 64,204  |   |  |      | 70,696  |   |  |   | 72,926  |  
|Other                          |  |                 |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Deferred net origination costs |  |                 | (89     | ) |      |   | (7      | )    |  |   | (140    | ) |  |      | (156    | ) |  |   | (232    | )
|                               |  |                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total                          |  | $               | 336,016 |   |      | $ | 357,763 |      |  | $ | 410,221 |   |  | $    | 417,623 |   |  | $ | 402,839 |  
|                               |  |                 |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  

Table 8 shows the amount of commercial, construction and agricultural loans outstanding as of
December 31, 2008, which, based on contractual maturities, are due in the periods indicated. The table also sets forth the amounts of loans due after one year from December 31, 2008, which have predetermined rates and which have floating
or adjustable rates.

TABLE 8LOAN MATURITIES AND PRICE SENSITIVITY

(Dollars in thousands)



|                          |  |                      |        |                             |   |                  |  |       |         |  |   |        
|------------------------- |  | -------------------- | ------ | --------------------------- | - | ---------------- |  | ----- | ------- |  | - | -------
|                          |  | Due in 1 Yearor Less |        | Due After 1 Yearto 5 Years  |   | Due after5 Years |  | Total
|Commercial and industrial |  | $                    | 14,802 |                             | $ | 14,098           |  | $     | 23,590  |  | $ | 52,490 
|Commercial real estate    |  |                      | 14,176 |                             |   | 2,667            |  |       | 79,912  |  |   | 96,755 
|Real estate construction  |  |                      | 948    |                             |   | 903              |  |       | 4,213   |  |   | 6,064  
|Agricultural              |  |                      | 11,133 |                             |   | 3,241            |  |       | 11,891  |  |   | 26,265 
|                          |  |                      |        |                             |   |                  |  |       |         |  |   |        
|Total                     |  | $                    | 41,059 |                             | $ | 20,909           |  | $     | 119,606 |  | $ | 181,574
|                          |  |                      |        |                             |   |                  |  |       |         |  |   |        
|                          |  |                      |        |                            
|                          |  | PredeterminedRates   |        | Floating orAdjustable Rates |   | Total            |  |      
|Commercial and industrial |  | $                    | 12,212 |                             | $ | 40,278           |  | $     | 52,490  |  |   |        
|Commercial real estate    |  |                      | 4,477  |                             |   | 92,278           |  |       | 96,755  |  |   |        
|Real estate construction  |  |                      | 1,123  |                             |   | 4,941            |  |       | 6,064   |  |   |        
|Agricultural              |  |                      | 6,531  |                             |   | 19,734           |  |       | 26,265  |  |   |        
|                          |  |                      |        |                             |   |                  |  |       |         |  |   |        
|Total                     |  | $                    | 24,343 |                             | $ | 157,231          |  | $     | 181,574 |  |   |        
|                          |  |                      |        |                             |   |                  |  |       |         |  |   |        



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NON-PERFORMING ASSETS

Table 9 shows the amount of non-performing assets outstanding as of December 31 for each of the last five years:

TABLE 9NON-PERFORMING ASSETS

(Dollars in thousands)



|                                                                 |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|---------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                                 |  | 2008 |       |   | 2007 |   |       | 2006 |  |   | 2005  |   |  | 2004 |      
|Non-accrual loans                                                |  | $    | 2,982 |   |      | $ | 1,729 |      |  | $ | 8,365 |   |  | $    | 8,178 |   |  | $ | 2,874 |  
|Accruing loans 90 days or more past due                          |  |      | 200   |   |      |   | 253   |      |  |   | 0     |   |  |      | 0     |   |  |   | 0     |  
|Renegotiated loans                                               |  |      | 0     |   |      |   | 0     |      |  |   | 0     |   |  |      | 0     |   |  |   | 0     |  
|Other real estate owned                                          |  |      | 321   |   |      |   | 176   |      |  |   | 1,154 |   |  |      | 334   |   |  |   | 389   |  
|                                                                 |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total non-performing assets                                      |  | $    | 3,503 |   |      | $ | 2,158 |      |  | $ | 9,519 |   |  | $    | 8,512 |   |  | $ | 3,263 |  
|                                                                 |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|RATIOS                                                           |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Non-performing assets to total loans and other real estate owned |  |      | 1.04  | % |      |   | .60   | %    |  |   | 2.31  | % |  |      | 2.04  | % |  |   | .81   | %
|Ratio of loan loss allowance to non-performing loans             |  |      | 107   | % |      |   | 181   | %    |  |   | 57    | % |  |      | 50    | % |  |   | 147   | %

The Companys policy is to place a commercial loan on non-accrual status when it reaches 90
days past due and any of the following conditions exist: 1) the borrower cannot meet the payment obligations under the loan; 2) full payment of principal and interest is not expected; 3) the borrower has filed for bankruptcy and a plan of
reorganization or liquidation is not imminent; or 4) foreclosure action has been initiated. All other loans are typically placed on non-accrual status when legal action or charge-off is anticipated but no later than 120 days past due. The amount of
non-accrual loans was $3.0 million at year-end 2008, compared to $1.7 million at year-end 2007. The increase is primarily due to one large commercial loan relationship of $1.1 million secured by a gas station/convenience store. The decrease of $6.6
million between December 31, 2006 and December 31, 2007 is primarily due to the return to accrual status of one $4.6 million relationship and the charge-off of $680,000 on one commercial real estate relationship.

At December 31, 2008, other real estate owned consisted of four residential properties. Other real estate owned decreased in 2007 primarily due to
selling one residential property acquired in 2006 for $745,000 associated with the relocation of the Companys new Chief Executive Officer.

No interest income was recognized in 2008 on non-accrual loans outstanding at December 31, 2008. Had the non-accrual loans been accruing, the interest income recognized would have been approximately $195,000.

ALLOWANCE FOR LOAN LOSSES

The provision for loan
losses was increased to $400,000 in 2008 from $135,000 in 2007 due to a higher level of nonperforming loans and increased credit risk inherent in the current economic climate. Non-performing loans totaled $3.2 million at December 31, 2008,
compared to $2.0 million at December 31, 2007. In addition, other real estate owned increased to $321,000 at December 31, 2008, from $176,000 at December 31, 2007. The allowance for loan losses to total loans was 1.01% at
December 31, 2008, compared to 1.00% at December 31, 2007.

The provision for loan losses was decreased to $135,000 in 2007 from
$1.3 million in 2006. The lower provision for loan losses in 2007 is a result of two factors. First, non-performing loans were down approximately $6.4 million at December 31, 2007 compared to December 31, 2006. As a result, the ratio of
non-performing loans to total loans dropped to 0.55% at December 31, 2007 from 2.04% last year. Secondly, actual loan balances at December 31, 2007 were down $52.5 million from December 31, 2006 with the largest decrease in consumer
loans, which had the highest historical loss experience. The percentage of the allowance for loan losses to total loans was 1.00% at December 31, 2007.



23



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Table 10 shows selected information relating to the Companys allowance for loan losses. The
allowance is maintained to absorb potential losses in the portfolio. If, as a result of charge-offs or increases in risk characteristics of the loan portfolio, the reserve is below the level considered by management to be adequate to absorb possible
future loan losses, the provision for loan losses is increased. Loans deemed not collectible are charged off and deducted from the reserve. Recoveries on loans previously charged off are added to the reserve.

TABLE 10ALLOWANCE FOR LOAN LOSSES

(Dollars in thousands)



|                                                                        |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                        |  | December 31, |        
|                                                                        |  | 2008         |         |   | 2007 |   |         | 2006 |  |   | 2005    |   |  | 2004 |        
|Balance at beginning of period                                          |  | $            | 3,594   |   |      | $ | 4,762   |      |  | $ | 4,058   |   |  | $    | 4,212   |   |  | $ | 4,830   |  
|                                                                        |  |              |         |   |     
|Charge-offs:                                                            |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial and industrial                                               |  |              | (69     | ) |      |   | (140    | )    |  |   | (39     | ) |  |      | (93     | ) |  |   | (514    | )
|Commercial real estate                                                  |  |              | (155    | ) |      |   | (826    | )    |  |   | (195    | ) |  |      | (27     | ) |  |   | (501    | )
|Real estate construction                                                |  |              |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Agricultural                                                            |  |              |        |   |      |   | (17     | )    |  |   | (29     | ) |  |      | (77     | ) |  |   | (173    | )
|Residential real estate                                                 |  |              | (124    | ) |      |   | (123    | )    |  |   | (148    | ) |  |      | (178    | ) |  |   | (625    | )
|Installment                                                             |  |              | (530    | ) |      |   | (658    | )    |  |   | (806    | ) |  |      | (1,133  | ) |  |   | (1,385  | )
|Other                                                                   |  |              |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                                        |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total charge-offs                                                       |  |              | (878    | ) |      |   | (1,764  | )    |  |   | (1,217  | ) |  |      | (1,508  | ) |  |   | (3,198  | )
|                                                                        |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Recoveries:                                                             |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial and industrial                                               |  |              | 22      |   |      |   | 39      |      |  |   | 55      |   |  |      | 39      |   |  |   | 119     |  
|Commercial real estate                                                  |  |              | 50      |   |      |   | 118     |      |  |   | 94      |   |  |      | 89      |   |  |   | 51      |  
|Real estate construction                                                |  |              |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Agricultural                                                            |  |              | 34      |   |      |   | 13      |      |  |   | 22      |   |  |      | 11      |   |  |   | 41      |  
|Residential real estate                                                 |  |              | 32      |   |      |   | 76      |      |  |   | 37      |   |  |      | 40      |   |  |   | 88      |  
|Installment                                                             |  |              | 157     |   |      |   | 215     |      |  |   | 383     |   |  |      | 400     |   |  |   | 271     |  
|Other                                                                   |  |              |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   | 110     |  
|                                                                        |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total recoveries                                                        |  |              | 295     |   |      |   | 461     |      |  |   | 591     |   |  |      | 579     |   |  |   | 680     |  
|                                                                        |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net charge-offs                                                         |  |              | (583    | ) |      |   | (1,303  | )    |  |   | (626    | ) |  |      | (929    | ) |  |   | (2,518  | )
|Provision for possible loan losses                                      |  |              | 400     |   |      |   | 135     |      |  |   | 1,330   |   |  |      | 775     |   |  |   | 1,900   |  
|                                                                        |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance at end of period                                                |  | $            | 3,411   |   |      | $ | 3,594   |      |  | $ | 4,762   |   |  | $    | 4,058   |   |  | $ | 4,212   |  
|                                                                        |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Ratio of net charge-offs to average loans outstanding during the period |  |              | 0.17    | % |      |   | 0.34    | %    |  |   | 0.15    | % |  |      | 0.23    | % |  |   | 0.62    | %
|                                                                        |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Average loans outstanding                                               |  | $            | 343,453 |   |      | $ | 385,370 |      |  | $ | 422,452 |   |  | $    | 407,766 |   |  | $ | 408,779 |  
|                                                                        |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  

In 2006, the loan loss provision was increased $1.3 million for two large commercial loan
relationships. One relationship was subsequently charged off in 2007 for approximately $680,000, and the other relationship was subsequently resolved with no loss to the Company. The allowance for loan losses as a percent of total loans at
December 31 was 1.01% in 2008, 1.00% in 2007, and 1.16% in 2006.

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



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The Company allocates the allowance for loan losses to specifically classified loans and non-classified
loans generally based on the one- and three-year net charge-off history. In assessing the adequacy of the allowance for loan losses, the Company considers three principal factors: (1) the one- and three-year rolling average charge-off
percentage applied to the current outstanding balance by portfolio type; (2) specific percentages applied to individual loans estimated by management to have a potential loss; and (3) estimated losses attributable to economic conditions.
Economic conditions considered include estimated changes in real estate values, unemployment levels, the condition of the agricultural business, and other local economic factors. Specifically, the Company also considered during the year the impact
of DHL and ABX Air significantly reducing their operations in Wilmington and Clinton County, Ohio. DHL and ABX Air combined employed more people than any other employer in Clinton County. DHL has decided to outsource its United States transportation
and sorting services to another company. ABX Air has announced that thousands of local jobs will be eliminated. Not all the individuals with these jobs live in Clinton County. We do, however, expect this job reduction to have a negative short-term
and potentially negative long-term impact on the local economy. While the Company has no direct relationship with either DHL or ABX Air, the Company did estimate its direct exposure, both loans and deposits, from employees of DHL and ABX Air and
considered this in evaluating the allowance.

Table 11 shows the allocation of the allowance for loan losses as of December 31, 2008.
In 2008, more of the allowance was specifically allocated to the residential real estate portfolio due to declining real estate values and increased uncertainties around the ability of certain borrowers to repay their mortgage loans, resulting in no
unallocated balances at December 31, 2008.

TABLE 11ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

(Dollars in thousands)



|                                                 |  |              |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|------------------------------------------------ |  | ------------ | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                 |  | December 31, |      
|                                                 |  | 2008         |       |   | 2007 |   |       | 2006 |  |   | 2005  |   |  | 2004 |      
|Commercial and industrial                        |  | $            | 194   |   |      | $ | 221   |      |  | $ | 989   |   |  | $    | 854   |   |  | $ | 679   |  
|Commercial real estate                           |  |              | 1,688 |   |      |   | 2,064 |      |  |   | 2,265 |   |  |      | 1,094 |   |  |   | 1,064 |  
|Real estate construction                         |  |              | 4     |   |      |   | 3     |      |  |   | 36    |   |  |      | 59    |   |  |   | 73    |  
|Agricultural                                     |  |              | 39    |   |      |   | 20    |      |  |   | 44    |   |  |      | 20    |   |  |   | 105   |  
|Residential real estate                          |  |              | 1,210 |   |      |   | 621   |      |  |   | 369   |   |  |      | 547   |   |  |   | 556   |  
|Installment                                      |  |              | 276   |   |      |   | 362   |      |  |   | 721   |   |  |      | 1,062 |   |  |   | 1,201 |  
|Unallocated                                      |  |              |      |   |      |   | 303   |      |  |   | 338   |   |  |      | 422   |   |  |   | 534   |  
|                                                 |  |              |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total                                            |  | $            | 3,411 |   |      | $ | 3,594 |      |  | $ | 4,762 |   |  | $    | 4,058 |   |  | $ | 4,212 |  
|                                                 |  |              |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|                                                 |  |              |       |   |     
|Percent of loans in each category to total loans |  |              |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial and industrial                        |  |              | 15.0  | % |      |   | 17.0  | %    |  |   | 19.0  | % |  |      | 20.0  | % |  |   | 22.0  | %
|Commercial real estate                           |  |              | 29.0  |   |      |   | 27.0  |      |  |   | 21.0  |   |  |      | 20.0  |   |  |   | 14.0  |  
|Real estate construction                         |  |              | 2.0   |   |      |   | 3.0   |      |  |   | 5.0   |   |  |      | 2.0   |   |  |   | 3.0   |  
|Agricultural                                     |  |              | 8.0   |   |      |   | 7.0   |      |  |   | 5.0   |   |  |      | 5.0   |   |  |   | 6.0   |  
|Residential real estate                          |  |              | 39.0  |   |      |   | 35.0  |      |  |   | 34.0  |   |  |      | 36.0  |   |  |   | 37.0  |  
|Installment                                      |  |              | 7.0   |   |      |   | 11.0  |      |  |   | 16.0  |   |  |      | 17.0  |   |  |   | 18.0  |  
|Other                                            |  |              | 0.0   |   |      |   | 0.0   |      |  |   | 0.0   |   |  |      | 0.0   |   |  |   | 0.0   |  
|                                                 |  |              |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total                                            |  |              | 100.0 | % |      |   | 100.0 | %    |  |   | 100.0 | % |  |      | 100.0 | % |  |   | 100.0 | %
|                                                 |  |              |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  

OTHER ASSETS

In September 2000, $10 million was used to purchase bank owned life insurance with a cash surrender value that increases tax-free at an adjustable rate. At December 31, 2008, the cash surrender value was $14.1
million. The intangible assets consisted of core deposit intangibles of $880,000, which is amortized over the expected life of the



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related core deposits, and goodwill of $3.8 million, which is tested annually for impairment in accordance with SFAS No. 141. The Ada branch, which was
acquired in 2001 as part of the Sabina Bank acquisition, was sold in the fourth quarter of 2006, and approximately $419,000 in associated core deposit intangibles was expensed.

In 2008 and 2007, no goodwill was expensed due to impairment of value. In 2008, most publicly-traded financial institutions experienced a significant
decline in the market value of their stock due to the global financial crisis, including the Company. Management considered the market value of the stock in evaluating goodwill impairment, but also evaluated the economic value of equity using
discounted cash flows and recent acquisition prices for community-oriented banks. Both the economic value calculation and comparison with acquisition prices exceeded the book value of the Company, including the goodwill. As a result, management
concluded no goodwill needed to be expensed due to impairment of value.

DEPOSITS

Table 12 presents a summary of period end deposit balances. Total deposits increased to $420.7 million in 2008 from $420.3 million in 2007. Non-interest
bearing checking accounts have remained relatively stable at 14% to 16% of total deposits over the past three years. NOW accounts have declined in average over the last three years. Year-to-date average NOW account balances were $79.2 million in
2008, $83.6 million in 2007 and $97.4 million in 2006. Much of the decrease is due to several public fund customers using the Companys cash management sweep product, introduced in late 2006. Savings accounts have remained relatively stable at
8% of total deposits at December 31, 2008. Money market balances declined in 2008 as customers reacted to the decreases in money market account yields. Certificates of deposit less than $100,000 increased $4.8 million in 2008 and represented
34% of deposits at the end of 2008. Certificates of $100,000 and over are primarily short-term public funds and brokered deposits. Balances of such large certificates fluctuate depending on the Companys pricing strategy and funding needs at
any particular time and remained at 7% of total deposits in 2008.

During 2008, the Federal Reserve Board promoted a significant decline in
interest rates throughout the country. The accounts immediately affected by lower rates were NOW and money market accounts. For certificates of deposit, the decline in rates did not occur as quickly due to the timing of maturities. Additionally,
other banks in some of our markets maintained higher rates to meet their liquidity needs. Although we experienced some loss in accounts due to higher competitive rates, the impact on our core deposits was minimal. Core deposits remained at 92.8% of
total deposits at December 31, 2008 and 2007. Deposits are attracted principally from within the Companys market area through the offering of numerous deposit instruments. Interest rates, maturity terms, service fees, and withdrawal
penalties for the various types of accounts are established periodically by management based on the Companys liquidity requirements, growth goals and market trends. The Company had approximately $13.7 million of brokered deposits at
December 31, 2008 through the Certificate of Deposit Account Registry Service (CDARS). CDARS allows the Bank to offer FDIC insurance to local certificate customers in excess of the $250,000 limit through a national relationship with
other banks. The amount of deposits currently from outside the Companys market area is not significant.

TABLE 12DEPOSITS



|                        |  |        |         |                 |      |   |        |      |                 |  |     |        |  |                 |         |  |     |  
|----------------------- |  | ------ | ------- | --------------- | ---- | - | ------ | ---- | --------------- |  | --- | ------ |  | --------------- | ------- |  | --- | -
|                        |  | 2008   |         |                 | 2007 |   |        | 2006 |                
|                        |  | Amount |         | Percent ofTotal |      |   | Amount |      | Percent ofTotal |  |     | Amount |  | Percent ofTotal |        
|Demand                  |  | $      | 65,969  |                 | 16   | % |        | $    | 59,804          |  | 14  | %      |  | $               | 66,479  |  | 15  | %
|NOW                     |  |        | 81,516  |                 | 19   |   |        |      | 75,924          |  | 18  |        |  |                 | 88,464  |  | 19  |  
|Savings                 |  |        | 32,535  |                 | 8    |   |        |      | 30,534          |  | 7   |        |  |                 | 32,512  |  | 7   |  
|Money market            |  |        | 66,038  |                 | 16   |   |        |      | 85,837          |  | 21  |        |  |                 | 75,953  |  | 17  |  
|CDs less than $100,000 |  |        | 142,730 |                 | 34   |   |        |      | 137,964         |  | 33  |        |  |                 | 144,370 |  | 32  |  
|CDs $100,000 and over  |  |        | 31,940  |                 | 7    |   |        |      | 30,191          |  | 7   |        |  |                 | 45,490  |  | 10  |  
|                        |  |        |         |                 |      |   |        |      |                 |  |     |        |  |                 |         |  |     |  
|Total                   |  | $      | 420,728 |                 | 100  | % |        | $    | 420,254         |  | 100 | %      |  | $               | 453,268 |  | 100 | %
|                        |  |        |         |                 |      |   |        |      |                 |  |     |        |  |                 |         |  |     |  



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The following table sets forth the dollar amount of time deposits maturing in the periods indicated:

TABLE 13MATURITY OF TIME DEPOSITS

(Dollars in thousands)



|                           |  |                 |        |                   |   |         |  |   |        
|-------------------------- |  | --------------- | ------ | ----------------- | - | ------- |  | - | -------
|                           |  | $100,000or More |        | Less than$100,000 |   | Total  
|Three months or less       |  | $               | 5,693  |                   | $ | 26,971  |  | $ | 32,664 
|Over 3 months to 6 months  |  |                 | 7,763  |                   |   | 29,982  |  |   | 37,745 
|Over 6 months to 12 months |  |                 | 5,776  |                   |   | 22,785  |  |   | 28,561 
|Over twelve months         |  |                 | 12,708 |                   |   | 62,992  |  |   | 75,700 
|                           |  |                 |        |                   |   |         |  |   |        
|Total                      |  | $               | 31,940 |                   | $ | 142,730 |  | $ | 174,670
|                           |  |                 |        |                   |   |         |  |   |        

OTHER BORROWINGS

At December 31, 2008, the Bank had outstanding $29.5 million of total borrowings from the FHLB. Advances of $24.5 million have interest rates from 4.81% to 4.99% and are subject to restrictions or prepayment
penalties. In addition, the FHLB has at its option the ability to convert $24.5 million of advances to variable rate three-month Libor advances. If the FHLB exercises this option, the Bank may repay the advances at interest rate reset dates with no
penalty. In addition, the Bank has a $5.0 million advance at a fixed rate of interest of 2.82%, which matures on January 14, 2015. Until maturity, the Federal Home Loan Bank has the option quarterly to terminate the advance and require full
payment. During 2006, the Company paid off approximately $72.3 million in FHLB advances with a prepayment penalty of $1.4 million.

At
December 31, 2008, the Companys short-term borrowings consisted of $1.7 million in treasury demand notes. Securities sold under repurchase agreements are no longer issued by the Company due to the introduction of a third-party cash
management sweep. Table 14 sets forth certain information regarding the Companys outstanding short-term borrowings at the dates and for the periods indicated:

TABLE 14SHORT-TERM BORROWINGS

(Dollars in thousands)



|                                                                                   |  |              |       |   |      |   |       |      |  |   |        |  
|---------------------------------------------------------------------------------- |  | ------------ | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                                                   |  | December 31, |      
|                                                                                   |  | 2008         |       |   | 2007 |   |       | 2006 | 
|Amount of short-term borrowings outstanding at end of period                       |  | $            | 1,693 |   |      | $ | 722   |      |  | $ | 2,864  |  
|Maximum amount of short-term borrowings outstanding at any month end during period |  | $            | 1,777 |   |      | $ | 2,014 |      |  | $ | 77,869 |  
|Average amount of short-term borrowings outstanding during period                  |  | $            | 675   |   |      | $ | 870   |      |  | $ | 34,641 |  
|Weighted average interest rate of short-term borrowings during period              |  |              | 1.31  | % |      |   | 4.72  | %    |  |   | 4.75   | %
|Weighted average interest rate of short-term borrowings at end of period           |  |              | .12   | % |      |   | 3.69  | %    |  |   | 4.37   | %

In 2002, the Company participated in a securities sale commonly referred to as a pooled
trust preferred securities offering. In that offering, the Company issued to a trust controlled by the Company $8.2 million in thirty-year debt securities. These securities had a quarterly adjustable interest rate equal to the three-month
LIBOR rate plus 3.45% (currently 7.97%), and the trust issued capital securities of $8.0 million to an unrelated party.

On June 25,
2007, the Company refinanced the above long-term debt with another pooled trust preferred securities offering of $10.3 million in thirty-year debt securities. These securities have a fixed rate of 7.071% through September 6, 2012
and thereafter at the rate of 1.50% over the three-month LIBOR rate. The securities issued by the Company are classified as Tier I capital for regulatory purposes, and the interest is deductible for federal income tax purposes.



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OFF-BALANCE SHEET ARRANGEMENTS

The Company has not entered into off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Companys financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

CAPITAL

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). Bank holding companies must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios of 8%, 4% and 3%, respectively. At December 31, 2008, NB&T Financial met all
of its capital requirements with a total risk-based capital ratio of 18.80%, a Tier 1 risk-based capital ratio of 17.85%, and a Tier 1 leverage ratio of 12.21%. For further information regarding NB&T Financials capital, see Note 15 to the
Financial Statements in Item 8 of this annual report.

In October 2008, President Bush signed into law The Emergency Economic
Stabilization Act of 2008 (EESA) in response to the global financial crisis of 2008, authorizing the United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, and make
capital injections into banks. The Troubled Assets Relief Program (TARP) is a program within EESA by which the Treasury Department of the United States purchases assets and equity from financial institutions in order to strengthen the financial
sector. Under the Capital Purchase Program of TARP (CPP), the Treasury has been purchasing preferred stock and warrants in American banks of all sizes. The equity investment by the Treasury qualifies as Tier 1 Capital.

The Company decided not to participate in the CPP for the following reasons:



| |  |  | The Company and the Bank currently exceed all well-capitalized regulatory guidelines and will still exceed the capital ratios for many of the other institutions
receiving the Treasury investment.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Bank currently has sufficient liquidity to meet the loan demands of creditworthy borrowers in the markets the Bank serves. The Bank continues to actively pursue
good loans.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Participation in the program could restrict future dividend payments to Company shareholders.
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Participation in the program could eliminate or restrict the Companys current stock repurchase program.
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | The issuance of warrants to the Treasury could result in dilution of current shareholder interest in the Company without sufficient long-term return at this time.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Securities Purchase Agreement Standard Terms provides the Treasury may unilaterally amend any provision of the agreement after signing to comply
with any changes in federal statutes. Management was unwilling to risk potential future changes.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

LIQUIDITY

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. As part of the process, daily management reports are produced to monitor fluctuations in the balance sheet and liquidity ratios. As part of its monthly Asset/Liability
Committee reporting, the Bank updates cash flow projections for investments, loans, deposits and significant borrowings. Additionally, the Asset/Liability Committee reviews the Banks liquidity position relative to available sources of funds,
both on the balance sheet and from third parties, and deposits and short-term liabilities.

The loan to deposit ratio at December 31,
2008, was 79.9%, compared to 85.1% at December 31, 2007. Loans to total assets were 64.1% at the end of 2008, compared to 68.9% at the same time last year. At



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December 31, 2008, the Company had $43.4 million in interest-bearing deposits, of which $26.0 million was held in fully-insured certificates of deposit
with maturities laddered over ninety days to meet short-term funding needs. The securities portfolio is 100% available-for-sale securities that are readily marketable. Approximately 60.4% of the investment portfolio consists of mortgage-backed
securities which provide monthly principal and interest cash flow. Approximately 35.1% 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 over 92.8% core deposits, makes the Company less susceptible to large fluctuations in funding needs. The
Company has short-term borrowing lines of credit with several correspondent banks. The Company also has both short- and long-term borrowing available through the FHLB. The Company has the ability to obtain deposits in the brokered certificate of
deposit market to help provide liquidity to fund loan growth.

INTEREST RATE RISK MANAGEMENT

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
used 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 one-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 also performed for ramped 100, 200 and 300 basis point increases or decreases in interest rates over one year. 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. At December 31, 2008, simulation models were not performed for 100, 200 and 300 basis point decreases. Due to the current rate environment
where the federal funds target rate is between 0% and .25%, the simulated rate decreases would not provide meaningful results. ALCO guidelines that measure interest rate risk by the percent of change from stable rates, and capital adequacy, have
been established, and as Table 16 indicates at December 31, 2008, the results of these simulations are within those 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



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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.



|          |  |                                    |   |  |                                |    |   |              |      |   |               |   |    |  
|--------- |  | ---------------------------------- | - |  | ------------------------------ | -- | - | ------------ | ---- | - | ------------- | - | -- | -
|          |  | One Year Net InterestIncome Change |   |  | Economic Value ofEquity Change |   
|Rate Ramp |  | Year End2008                       |   |  | ALCOGuideline                  |    |   | Year End2008 |      |   | ALCOGuideline |  
|+ 300     |  | -.55                               | % |  | ±                              | 10 | % |              | 11.5 | % |               | ± | 50 | %
|+ 200     |  | -.27                               |   |  | ±                              | 10 |   |              | 8.8  |   |               | ± | 30 |  
|+ 100     |  | .07                                |   |  | ±                              | 10 |   |              | 5.2  |   |               | ± | 15 |  
|- 100     |  | NA                                 |   |  | ±                              | 10 |   |              | NA   |   |               | ± | 15 |  
|- 200     |  | NA                                 |   |  | ±                              | 10 |   |              | NA   |   |               | ± | 30 |  
|- 300     |  | NA                                 |   |  | ±                              | 10 |   |              | NA   |   |               | ± | 50 |  

IMPACT OF INFLATION AND CHANGING PRICES

The majority of a financial institutions assets and liabilities are monetary in nature. Changes in interest rates affect the financial condition of
a financial institution to a greater degree than inflation. Although interest rates are determined in large measure by changes in the general level of inflation, they do not change at the same rate or in the same magnitude, but rather react in
correlation to changes in expected rate of inflation and to changes in monetary and fiscal policy. The Companys ability to react to changes in interest rates has a significant impact on financial results. As discussed previously, management
attempts to control interest rate sensitivity in order to protect against wide interest rate fluctuations.

RECENT LEGISLATION

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA). ARRA was passed with the intent
to stimulate the economy, and includes significant legislation that applies to the financial services industry. At this time, the impact of ARRA on the financial services industry and specifically the Bank is unpredictable.

The United States and Ohio House of Representatives are also considering legislation allowing judges to reduce borrowers mortgage loan principal
repayment requirements. If such legislation is passed, the value of mortgage loans could decrease and interest rates on new mortgage loan originations could increase to compensate for future potential principal risk. Both these factors would reduce
mortgage loan volume and potentially impact the value of mortgage loans and mortgage-backed securities held by the Bank.

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,
2008. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and
assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Companys financial condition and results, and they
require management to make estimates that are difficult, subjective, or complex.



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

The Company determines the amount of the allowance based on
relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and historical loss experience. The allowance recorded for homogeneous consumer loans is based on
an analysis of loan mix, risk characteristics of the portfolio, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for loan losses relating to impaired loans is based on the loans
observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loans effective interest rate.

Regardless of the extent of the Companys analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is
due to several factors, including inherent delays in obtaining information regarding a customers financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments
and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish
allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Companys evaluation of risk associated with the
commercial and consumer allowance levels and the estimated impact of the current economic environment.

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 SFAS 141. Goodwill is subject, at a minimum, to annual tests for
impairment. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount.
The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may
significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition. In 2008, most publicly-traded financial institutions experienced a significant
decline in the market value of their stock due to the global financial crisis, including the Company. Management considered the market value of the stock in evaluating goodwill impairment, but also evaluated the economic value of equity using
discounted cash flows and recent acquisition prices for community-oriented banks. Both the economic value calculation and comparison with acquisition prices exceeded the book value of the Company, including the goodwill. As a result, management
concluded no goodwill needed to be expensed due to impairment of value.

EFFECT OF RECENT ACCOUNTING STANDARDS

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilitiesincluding an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits us to choose to measure certain financial assets and liabilities at fair value that are not
currently required to be measured at fair value (i.e. the Fair Value Option). Election of the Fair Value Option is made on an instrument-by-instrument basis and is



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irrevocable. At the adoption date, unrealized gains and losses on financial assets and liabilities for which the Fair Value Option has been elected would be
reported as a cumulative adjustment to beginning retained earnings. If we elect the Fair Value Option for certain financial assets and liabilities, we will report unrealized gains and losses due to changes in their fair value in earnings at each
subsequent reporting date. SFAS No. 159 is effective as of January 1, 2008. The Company has not elected the fair value option for any financial assets or liabilities at December 31, 2008.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 enhances existing
guidance for measuring assets and liabilities using fair value. Prior to the issuance of FAS 157, guidance for applying fair value was incorporated in several accounting pronouncements. FAS 157 provides a single definition of fair value, together
with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. FAS 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets
out a fair value hierarchy with the highest priority being quoted prices in active markets. Under FAS 157, fair value measurements are disclosed by level within that hierarchy. While FAS 157 does not add any new fair value measurements, it does
change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition
on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses
within one year. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

Effective October 10, 2008, and for prior periods, the FASB issued FASB Staff Position (FSP) FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for that Asset Is Not Active. The FSP clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active. As of December 31, 2008, the Company was able to obtain all market
values using the Level II hierarchy measurements adopted under FAS 157.

In December 2007, the FASB issued Statement of Financial
Accounting Standards 141 (revised 2007), Business Combinations, (FAS 141R), which changes accounting and reporting requirements for business acquisitions in fiscal years beginning on or after Dec. 15, 2008. FAS 141R replaces the original FAS 141 in
its entirety. In general, FAS 141R will require measuring and recognizing the business acquired at full acquisition-date fair value. This replaces Statement 141s cost-allocation process, which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. FAS 141R also requires the direct costs of a business combination be recognized as expenses of the period in which they are incurred and no
longer included in the measurement of the business acquired. In addition, in accordance with Statement 141, restructuring costs that the acquirer expected but was not obligated to incur were recognized as if they were a liability assumed at the
acquisition date. FAS 141R requires the acquirer to recognize those costs separately from the business combination.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.



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Item 8. Financial Statements and Supplementary Data

- I N D E X -



|                                                        |  |      
|------------------------------------------------------- |  | -----
|                                                        |  | PAGE 
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |  | 34   
|                                                        | 
|FINANCIAL STATEMENTS                                    |  |      
|                                                        | 
|Consolidated Balance Sheets                             |  | 35   
|Consolidated Statements of Income                       |  | 36   
|Consolidated Statements of Shareholders Equity         |  | 37   
|Consolidated Statements of Cash Flows                   |  | 38   
|Notes to Consolidated Financial Statements              |  | 39-57



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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 audited
the accompanying consolidated balance sheets of NB&T Financial Group, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders equity and cash flows for each of the years in the three-year
period ended December 31, 2008. The Companys management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NB&T
Financial Group, Inc. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 22 to the financial statements, effective January 1, 2008, the Company
adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements.

/s/ BKD, LLP

Cincinnati, Ohio

February 23, 2009



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##### Table of Contents

NB&T Financial Group, Inc.

Consolidated Balance Sheets

December 31, 2008 and 2007

(Dollars in Thousands)



|                                                                                                                                                     |  |      |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                     |  | 2008 |         |   | 2007 |  
|Assets                                                                                                                                               |  |      |         |   |      |   |         |  
|Cash and due from banks                                                                                                                              |  | $    | 10,705  |   |      | $ | 12,707  |  
|Interest-bearing deposits                                                                                                                            |  |      | 43,393  |   |      |   | 10,699  |  
|Federal funds sold                                                                                                                                   |  |      | 541     |   |      |   | 2,749   |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                            |  |      | 54,639  |   |      |   | 26,155  |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Available-for-sale securities                                                                                                                        |  |      | 87,908  |   |      |   | 89,275  |  
|Loans held for sale                                                                                                                                  |  |      | 169     |   |      |   | 1,503   |  
|Loans, net of allowance for loan losses of $3,411 and $3,594 at December 31, 2008 and 2007                                                           |  |      | 332,605 |   |      |   | 354,169 |  
|Premises and equipment                                                                                                                               |  |      | 16,452  |   |      |   | 15,453  |  
|Federal Reserve and Federal Home Loan Bank stock                                                                                                     |  |      | 9,362   |   |      |   | 9,023   |  
|Earned income receivable                                                                                                                             |  |      | 3,042   |   |      |   | 3,288   |  
|Goodwill                                                                                                                                             |  |      | 3,825   |   |      |   | 3,825   |  
|Core deposits and other intangibles                                                                                                                  |  |      | 880     |   |      |   | 1,105   |  
|Bank-owned life insurance                                                                                                                            |  |      | 14,056  |   |      |   | 13,564  |  
|Other                                                                                                                                                |  |      | 1,903   |   |      |   | 1,562   |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Total assets                                                                                                                                         |  | $    | 524,841 |   |      | $ | 518,922 |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Liabilities and Stockholders Equity                                                                                                                 |  |      |         |   |      |   |         |  
|Liabilities                                                                                                                                          |  |      |         |   |      |   |         |  
|Deposits                                                                                                                                             |  |      |         |   |      |   |         |  
|Demand                                                                                                                                               |  | $    | 65,969  |   |      | $ | 59,804  |  
|Savings, NOW and money market                                                                                                                        |  |      | 180,089 |   |      |   | 192,295 |  
|Time                                                                                                                                                 |  |      | 174,670 |   |      |   | 168,155 |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Total deposits                                                                                                                                       |  |      | 420,728 |   |      |   | 420,254 |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Short-term borrowings                                                                                                                                |  |      | 1,693   |   |      |   | 722     |  
|Long-term debt                                                                                                                                       |  |      | 39,810  |   |      |   | 34,810  |  
|Interest payable and other liabilities                                                                                                               |  |      | 3,819   |   |      |   | 4,253   |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Total liabilities                                                                                                                                    |  |      | 466,050 |   |      |   | 460,039 |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Commitments and Contingencies                                                                                                                        |  |      |         |   |      |   |         |  
|Stockholders Equity                                                                                                                                 |  |      |         |   |      |   |         |  
|Preferred stock, no par value, authorized 100,000 shares; none issuedCommon stock, no par value; authorized 6,000,000
shares;issued3,818,950 shares |  |      | 1,000   |   |      |   | 1,000   |  
|Additional paid-in capital                                                                                                                           |  |      | 10,513  |   |      |   | 10,380  |  
|Retained earnings                                                                                                                                    |  |      | 55,004  |   |      |   | 54,810  |  
|Unearned employee stock ownership plan (ESOP) shares                                                                                                 |  |      | (551    | ) |      |   | (749    | )
|Accumulated other comprehensive income                                                                                                               |  |      | 162     |   |      |   | 658     |  
|Treasury stock, at cost Common; 2008644,203 shares, 2007640,638 shares                                                                             |  |      | (7,337  | ) |      |   | (7,216  | )
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Total stockholders equity                                                                                                                           |  |      | 58,791  |   |      |   | 58,883  |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                           |  | $    | 524,841 |   |      | $ | 518,922 |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  

See Notes to Consolidated Financial Statements.



35



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##### Table of Contents

NB&T Financial Group, Inc.

Consolidated Statements of Income

Years Ended December 31, 2008, 2007 and 2006

(Dollars in Thousands, except per share amounts)



|                                                                      |  |      |        |      |   |        |  |   |        |  
|--------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | -
|                                                                      |  | 2008 |        | 2007 |   | 2006   | 
|Interest and Dividend Income                                          |  |      |        |      |   |        |  |   |        |  
|Loans                                                                 |  | $    | 22,894 |      | $ | 27,699 |  | $ | 28,460 |  
|Securities                                                            |  |      |        |      |   |        |  |   |        |  
|Taxable                                                               |  |      | 3,089  |      |   | 2,209  |  |   | 3,189  |  
|Tax-exempt                                                            |  |      | 1,425  |      |   | 1,653  |  |   | 1,743  |  
|Federal funds sold                                                    |  |      | 249    |      |   | 744    |  |   | 180    |  
|Dividends on Federal Home Loan and Federal Reserve Bank stock         |  |      | 488    |      |   | 591    |  |   | 509    |  
|Deposits with financial institutions                                  |  |      | 683    |      |   | 51     |  |   | 15     |  
|                                                                      |  |      |        |      |   |        |  |   |        |  
|Total interest and dividend income                                    |  |      | 28,828 |      |   | 32,947 |  |   | 34,096 |  
|                                                                      |  |      |        |      |   |        |  |   |        |  
|Interest Expense                                                      |  |      |        |      |   |        |  |   |        |  
|Deposits                                                              |  |      | 8,279  |      |   | 12,223 |  |   | 11,218 |  
|Short-term borrowings                                                 |  |      | 10     |      |   | 41     |  |   | 1,645  |  
|Long-term debt                                                        |  |      | 2,064  |      |   | 2,012  |  |   | 2,932  |  
|                                                                      |  |      |        |      |   |        |  |   |        |  
|Total interest expense                                                |  |      | 10,353 |      |   | 14,276 |  |   | 15,795 |  
|                                                                      |  |      |        |      |   |        |  |   |        |  
|Net Interest Income                                                   |  |      | 18,475 |      |   | 18,671 |  |   | 18,301 |  
|Provision for Loan Losses                                             |  |      | 400    |      |   | 135    |  |   | 1,330  |  
|                                                                      |  |      |        |      |   |        |  |   |        |  
|Net Interest Income After Provision for Loan Losses                   |  |      | 18,075 |      |   | 18,536 |  |   | 16,971 |  
|                                                                      |  |      |        |      |   |        |  |   |        |  
|Noninterest Income                                                    |  |      |        |      |   |        |  |   |        |  
|Trust income                                                          |  |      | 937    |      |   | 939    |  |   | 944    |  
|Service charges on deposits                                           |  |      | 2,352  |      |   | 2,347  |  |   | 2,435  |  
|Other service charges and fees                                        |  |      | 1,063  |      |   | 976    |  |   | 926    |  
|Insurance agency commissions                                          |  |      | 2,252  |      |   | 2,400  |  |   | 2,436  |  
|Net realized gains (losses) on sales of available-for-sale securities |  |      | 15     |      |   |       |  |   | (1,342 | )
|Income from bank owned life insurance                                 |  |      | 492    |      |   | 511    |  |   | 465    |  
|Gain on sale of branch                                                |  |      |       |      |   |       |  |   | 1,099  |  
|Other                                                                 |  |      | 1,125  |      |   | 1,067  |  |   | 889    |  
|                                                                      |  |      |        |      |   |        |  |   |        |  
|Total noninterest income                                              |  |      | 8,236  |      |   | 8,240  |  |   | 7,852  |  
|                                                                      |  |      |        |      |   |        |  |   |        |  
|Noninterest Expense                                                   |  |      |        |      |   |        |  |   |        |  
|Salaries and employee benefits                                        |  | $    | 11,847 |      | $ | 11,584 |  | $ | 11,572 |  
|Net occupancy expense                                                 |  |      | 1,992  |      |   | 1,687  |  |   | 1,699  |  
|Equipment expense                                                     |  |      | 1,639  |      |   | 1,541  |  |   | 1,689  |  
|Data processing fees                                                  |  |      | 1,207  |      |   | 1,009  |  |   | 910    |  
|Professional fees                                                     |  |      | 1,336  |      |   | 1,514  |  |   | 1,588  |  
|Marketing expense                                                     |  |      | 511    |      |   | 546    |  |   | 941    |  
|Printing, postage and supplies                                        |  |      | 803    |      |   | 787    |  |   | 872    |  
|State franchise tax                                                   |  |      | 786    |      |   | 751    |  |   | 746    |  
|Prepayment penalty of FHLB debt                                       |  |      |       |      |   |       |  |   | 1,363  |  
|Amortization of intangibles                                           |  |      | 225    |      |   | 474    |  |   | 665    |  
|Other                                                                 |  |      | 1,333  |      |   | 1,423  |  |   | 1,267  |  
|                                                                      |  |      |        |      |   |        |  |   |        |  
|Total non-interest expense                                            |  |      | 21,679 |      |   | 21,316 |  |   | 23,312 |  
|                                                                      |  |      |        |      |   |        |  |   |        |  
|Income Before Income Tax                                              |  |      | 4,632  |      |   | 5,460  |  |   | 1,511  |  
|                                                                      |  |      |       
|Provision (Benefit) for Income Taxes                                  |  |      | 801    |      |   | 1,028  |  |   | (345   | )
|                                                                      |  |      |        |      |   |        |  |   |        |  
|Net Income                                                            |  | $    | 3,831  |      | $ | 4,432  |  | $ | 1,856  |  
|                                                                      |  |      |        |      |   |        |  |   |        |  
|Basic Earnings Per Share                                              |  | $    | 1.22   |      | $ | 1.39   |  | $ | .58    |  
|                                                                      |  |      |        |      |   |        |  |   |        |  
|Diluted Earnings Per Share                                            |  | $    | 1.22   |      | $ | 1.39   |  | $ | .58    |  
|                                                                      |  |      |        |      |   |        |  |   |        |  

See Notes to Consolidated Financial Statements.



36



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##### Table of Contents

NB&T Financial Group, Inc.

Consolidated Statements of Stockholders Equity

Years Ended December 31, 2008, 2007 and 2006

(Dollars in Thousands)



|                                                                                                              |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----- | ------------------------ | - | ------ | ---------------- |  | - | ------------------ | - |  | ------------------------------------------ | ------ | - | ------------- | - | ----- | ----- |  | - | ------ | - |  | - | ------ | -
|                                                                                                              |  | CommonStockAmount |       | AdditionalPaid-inCapital |   |        | RetainedEarnings |  |   | UnearnedESOPShares |   |  | AccumulatedOtherComprehensiveIncome (Loss) |        |   | TreasuryStock |   |       | Total | 
|Balance, January 1, 2006                                                                                      |  | $                 | 1,000 |                          | $ | 10,134 |                  |  | $ | 55,501             |   |  | $                                          | (1,152 | ) |               | $ | (951  | )     |  | $ | (6,034 | ) |  | $ | 58,498 |  
|Comprehensive income                                                                                          |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  
|Net income                                                                                                    |  |                   |       |                          |   |        |                  |  |   | 1,856              |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | 1,856  |  
|Change in unrealized gain on securities available for sale, net of reclassification adjustment and tax effect |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   | 1,036 |       |  |   |        |   |  |   | 1,036  |  
|                                                                                                              |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  
|Total comprehensive income                                                                                    |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | 2,892  |  
|                                                                                                              |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  
|Dividends on common stock, $1.08 per share                                                                    |  |                   |       |                          |   |        |                  |  |   | (3,431             | ) |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | (3,431 | )
|Purchase of stock (3,681 shares)                                                                              |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   | (75    | ) |  |   | (75    | )
|Tax benefit on stock options exercised                                                                        |  |                   |       |                          |   | 3      |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | 3      |  
|Stock options exercised                                                                                       |  |                   |       |                          |   | 29     |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   | 37     |   |  |   | 66     |  
|Stock options expense                                                                                         |  |                   |       |                          |   | 63     |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | 63     |  
|ESOP shares earned                                                                                            |  |                   |      |                          |   | 7      |                  |  |   |                   |   |  |                                            | 200    |   |               |   |      |       |  |   |       |   |  |   | 207    |  
|                                                                                                              |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  
|Balance, December 31, 2006                                                                                    |  |                   | 1,000 |                          |   | 10,236 |                  |  |   | 53,926             |   |  |                                            | (952   | ) |               |   | 85    |       |  |   | (6,072 | ) |  |   | 58,223 |  
|Comprehensive income                                                                                          |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  
|Net income                                                                                                    |  |                   |       |                          |   |        |                  |  |   | 4,432              |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | 4,432  |  
|Change in unrealized gain on securities available for sale, net of reclassification adjustment and tax effect |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   | 573   |       |  |   |        |   |  |   | 573    |  
|                                                                                                              |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  
|Total comprehensive income                                                                                    |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | 5,005  |  
|                                                                                                              |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  
|Dividends on common stock, $1.12 per share                                                                    |  |                   |       |                          |   |        |                  |  |   | (3,548             | ) |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | (3,548 | )
|Purchase of stock (57,120 shares)                                                                             |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   | (1,176 | ) |  |   | (1,176 | )
|Tax benefit on stock options exercised                                                                        |  |                   |       |                          |   | (2     | )                |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | (2     | )
|Stock options exercised                                                                                       |  |                   |       |                          |   | 20     |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   | 32     |   |  |   | 52     |  
|Stock options expense                                                                                         |  |                   |       |                          |   | 119    |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | 119    |  
|ESOP shares earned                                                                                            |  |                   |      |                          |   | 7      |                  |  |   |                   |   |  |                                            | 203    |   |               |   |      |       |  |   |       |   |  |   | 210    |  
|                                                                                                              |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  
|Balance, December 31, 2007                                                                                    |  |                   | 1,000 |                          |   | 10,380 |                  |  |   | 54,810             |   |  |                                            | (749   | ) |               |   | 658   |       |  |   | (7,216 | ) |  |   | 58,883 |  
|Comprehensive income                                                                                          |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  
|Net income                                                                                                    |  |                   |       |                          |   |        |                  |  |   | 3,831              |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | 3,831  |  
|Change in unrealized gain on securities available for sale, net of reclassification adjustment and tax effect |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   | (496  | )     |  |   |        |   |  |   | (496   | )
|                                                                                                              |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  
|Total comprehensive income                                                                                    |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | 3,335  |  
|                                                                                                              |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  
|Dividends on common stock, $1.16 per share                                                                    |  |                   |       |                          |   |        |                  |  |   | (3,637             | ) |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | (3,637 | )
|Purchase of stock (9,436 shares)                                                                              |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   | (188   | ) |  |   | (188   | )
|Sale of treasury stock (5,871 shares)                                                                         |  |                   |       |                          |   | 13     |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   | 67     |   |  |   | 80     |  
|Stock options exercised                                                                                       |  |                   |       |                          |   |       |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |       |   |  |   |       |  
|Stock options expense                                                                                         |  |                   |       |                          |   | 138    |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   | 138    |  
|ESOP shares earned                                                                                            |  |                   |      |                          |   | (18    | )                |  |   |                   |   |  |                                            | 198    |   |               |   |      |       |  |   |       |   |  |   | 180    |  
|                                                                                                              |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  
|Balance, December 31, 2008                                                                                    |  | $                 | 1,000 |                          | $ | 10,513 |                  |  | $ | 55,004             |   |  | $                                          | (551   | ) |               | $ | 162   |       |  | $ | (7,337 | ) |  | $ | 58,791 |  
|                                                                                                              |  |                   |       |                          |   |        |                  |  |   |                    |   |  |                                            |        |   |               |   |       |       |  |   |        |   |  |   |        |  

See Notes to Consolidated Financial Statements.



37



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##### Table of Contents

NB&T Financial Group, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2008, 2007 and 2006

(Dollars in Thousands)



|                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                   |  | 2008 |         |   | 2007 |   |         | 2006 | 
|Operating Activities                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                         |  | $    | 3,831   |   |      | $ | 4,432   |      |  | $ | 1,856   |  
|Items not requiring (providing) cash:                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                      |  |      | 1,762   |   |      |   | 1,843   |      |  |   | 2,522   |  
|Provision for loan losses                                                          |  |      | 400     |   |      |   | 135     |      |  |   | 1,330   |  
|Amortization (accretion) of premiums and discounts on securities                   |  |      | (291    | ) |      |   | (7      | )    |  |   | 591     |  
|ESOP shares earned                                                                 |  |      | 198     |   |      |   | 203     |      |  |   | 207     |  
|Stock options expense                                                              |  |      | 138     |   |      |   | 119     |      |  |   | 63      |  
|Deferred income taxes                                                              |  |      | 190     |   |      |   | 345     |      |  |   | (778    | )
|Proceeds from sale of loans held for sale                                          |  |      | 5,093   |   |      |   | 12,568  |      |  |   | 3,009   |  
|Originations of loans held for sale                                                |  |      | (3,617  | ) |      |   | (13,676 | )    |  |   | (3,094  | )
|Gain from sale of loans                                                            |  |      | (142    | ) |      |   | (251    | )    |  |   | (59     | )
|Gain on sale of fixed assets                                                       |  |      | (9      | ) |      |   |         |      |  |   |         |  
|Net realized (gains) losses on available-for-sale securities                       |  |      | (15     | ) |      |   |        |      |  |   | 1,342   |  
|FHLB stock dividends                                                               |  |      | (339    | ) |      |   |        |      |  |   | (465    | )
|Changes in:                                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Interest receivable                                                                |  |      | 246     |   |      |   | 387     |      |  |   | 372     |  
|Other assets                                                                       |  |      | (768    | ) |      |   | 784     |      |  |   | (881    | )
|Interest payable and other liabilities                                             |  |      | (452    | ) |      |   | (118    | )    |  |   | (976    | )
|                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                          |  |      | 6,225   |   |      |   | 6,764   |      |  |   | 5,039   |  
|                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Investing Activities                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Purchases of available-for-sale securities                                         |  |      | (32,467 | ) |      |   | (35,505 | )    |  |   | (71,601 | )
|Proceeds from maturities of available-for-sale securities                          |  |      | 33,389  |   |      |   | 29,991  |      |  |   | 93,651  |  
|Proceeds from the sales of available-for-sale securities                           |  |      |        |   |      |   |        |      |  |   | 66,258  |  
|Net change in loans                                                                |  |      | 21,164  |   |      |   | 51,155  |      |  |   | 6,776   |  
|Purchases of premises and equipment                                                |  |      | (2,536  | ) |      |   | (3,398  | )    |  |   | (1,683  | )
|Proceeds on sales of premises and equipment                                        |  |      | 9       |   |      |   | 3       |      |  |   | 386     |  
|                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by investing activities                                          |  |      | 19,559  |   |      |   | 42,246  |      |  |   | 93,787  |  
|                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Financing Activities                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in demand deposits, money market, now and savings accounts |  | $    | (6,041  | ) |      | $ | (11,309 | )    |  | $ | 4,764   |  
|Net increase (decrease) in certificates of deposit                                 |  |      | 6,515   |   |      |   | (21,705 | )    |  |   | 878     |  
|Net increase (decrease) in short-term borrowings                                   |  |      | 971     |   |      |   | (2,142  | )    |  |   | (27,163 | )
|Issuance of long-term debt                                                         |  |      | 5,000   |   |      |   | 10,000  |      |  |   |        |  
|Repayment of long-term debt                                                        |  |      |        |   |      |   | (12,000 | )    |  |   | (72,291 | )
|Proceeds from stock options exercised                                              |  |      |        |   |      |   | 52      |      |  |   | 66      |  
|Purchase of treasury stock                                                         |  |      | (188    | ) |      |   | (1,176  | )    |  |   | (75     | )
|Sales of treasury stock                                                            |  |      | 80      |   |      |   |         |      |  |   |         |  
|Dividends paid                                                                     |  |      | (3,637  | ) |      |   | (3,548  | )    |  |   | (3,431  | )
|                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided (used) in financing activities                                   |  |      | 2,700   |   |      |   | (41,828 | )    |  |   | (97,252 | )
|                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Increase in Cash and Cash Equivalents                                              |  |      | 28,484  |   |      |   | 7,182   |      |  |   | 1,574   |  
|Cash and Cash Equivalents, Beginning of Year                                       |  |      | 26,155  |   |      |   | 18,973  |      |  |   | 17,399  |  
|                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Cash and Cash Equivalents, End of Year                                             |  | $    | 54,639  |   |      | $ | 26,155  |      |  | $ | 18,973  |  
|                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Supplemental Cash Flows Information                                                |  |      |         |   |      |   |         |      |  |   |         |  
|Interest paid                                                                      |  | $    | 10,525  |   |      | $ | 14,326  |      |  | $ | 15,921  |  
|Income taxes paid (net of refunds)                                                 |  |      | 714     |   |      |   | 768     |      |  |   | 347     |  

See Notes to Consolidated Financial Statements.



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2008, 2007 and 2006

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

NB&T Financial Group, Inc. (Company) is a financial holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, The National Bank and Trust Company (the Bank) and
NB&T Statutory Trust I (Trust I) and NB&T Statutory Trust III (Trust III). In accordance with FIN 46R, Trust I and Trust III are not consolidated into these financial statements. The Bank is primarily engaged in
providing a full range of banking and financial services to individual and corporate customers in Brown, Clermont, Clinton, Highland, and Warren counties in Ohio. The Bank offers insurance products including property, casualty and life through its
wholly-owned subsidiary, NB&T Insurance Agency, Inc. (Agency). The Bank is subject to competition from other financial institutions. The Bank is subject to the regulation of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Bank and the Agency. All significant intercompany accounts and transactions
have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for
loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.

Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less to be
cash equivalents.

Securities

The Company classifies all securities as available-for-sale securities, which are carried at fair value. The Company has no immediate plan to sell but may sell securities in the future. Unrealized gains and losses are recorded, net of
related income tax effects, in other comprehensive income.

Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method.

The Company evaluates its securities portfolio for impairment throughout the year. An impairment is recorded against individual equity securities if
their cost significantly exceeds their fair value for a substantial amount of time. An impairment is also recorded for investments in debt securities, unless the decrease in fair value is attributed to interest rates and management has the intent
and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by
charges to income.

Loans

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 any charge-offs, the allowance for loan losses, any deferred fees or costs on
originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, loans are placed on
non-accrual status at ninety days past due and interest is considered a loss, unless the loan is well-secured and in the process of collection.

Allowance for Loan Losses

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 uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

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

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

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

Premises and Equipment

Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line
method over the estimated useful lives of the assets.

Federal Reserve and Federal Home Loan Bank Stock

Federal Reserve and Federal Home Loan Bank stock are required investments for institutions that are members of the Federal Reserve and Federal Home Loan
Bank systems. The required investment in the common stock is based on a predetermined formula.



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



Foreclosed Assets Held for Sale

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in net income or expense from foreclosed assets.

Goodwill

Goodwill is annually tested for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated
and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements.

Intangible Assets

Intangible assets are being amortized on an accelerated basis over periods ranging from seven to
eleven years. Such assets are periodically evaluated as to the recoverability of their carrying value.

Treasury Stock

Treasury stock is stated at cost. Cost is determined based on the average cost of all shares.

Income Taxes

Deferred tax assets and
liabilities are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred
tax asset will not be realized. The Company files consolidated income tax returns with its subsidiaries.

Earnings Per Share

Earnings per share have been computed based upon the weighted-average common shares outstanding during each year. Unearned ESOP shares have been excluded
from the computation of average shares outstanding.

Reclassifications

Certain reclassifications have been made to the 2007 and 2006 financial statements to conform to the 2008 financial statement presentation. These
reclassifications had no effect on net income.

Current Economic Conditions

The current economic environment presents financial institutions with unprecedented circumstances and challenges which in some cases have resulted in
large declines in the fair values of investments and other assets, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial
statements have been prepared using values and information currently available to the Company.

Given the volatility of current economic
conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses, and capital that could negatively impact the
Companys ability to meet regulatory capital requirements and maintain sufficient liquidity.



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



Note 2: Restriction on Cash and Due From Banks

The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2008 was
$500,000.

Note 3: Securities

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



|                                   |  |               |        |                      |   |                       |  |   |                       |   |  |   |       
|---------------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | - | --------------------- | - |  | - | ------
|                                   |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | ApproximateFair Value
|Available-for-Sale Securities:     |  |               |        |                      |   |                       |  |   |                       |   |  |   |       
|December 31, 2008:                 |  |               |        |                      |   |                       |  |   |                       |   |  |   |       
|U.S. government sponsored entities |  | $             | 10,576 |                      | $ | 137                   |  | $ |                      |   |  | $ | 10,713
|Mortgage-backed securities         |  |               | 52,930 |                      |   | 717                   |  |   | (1,050                | ) |  |   | 52,597
|State and political subdivisions   |  |               | 24,156 |                      |   | 476                   |  |   | (34                   | ) |  |   | 24,598
|                                   |  |               |        |                      |   |                       |  |   |                       |   |  |   |       
|                                   |  | $             | 87,662 |                      | $ | 1,330                 |  | $ | (1,084                | ) |  | $ | 87,908
|                                   |  |               |        |                      |   |                       |  |   |                       |   |  |   |       
|December 31, 2007:                 |  |               |        |                      |   |                       |  |   |                       |   |  |   |       
|U.S. government sponsored entities |  | $             | 14,581 |                      | $ | 36                    |  | $ | (42                   | ) |  | $ | 14,575
|Mortgage-backed securities         |  |               | 40,970 |                      |   | 401                   |  |   | (78                   | ) |  |   | 41,293
|State and political subdivisions   |  |               | 32,725 |                      |   | 691                   |  |   | (9                    | ) |  |   | 33,407
|                                   |  |               |        |                      |   |                       |  |   |                       |   |  |   |       
|                                   |  | $             | 88,276 |                      | $ | 1,128                 |  | $ | (129                  | ) |  | $ | 89,275
|                                   |  |               |        |                      |   |                       |  |   |                       |   |  |   |       

The amortized cost and fair value of securities available for sale at December 31, 2008, 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.



|                           |  |               |        |           |   |       
|-------------------------- |  | ------------- | ------ | --------- | - | ------
|                           |  | AmortizedCost |        | FairValue
|Within one year            |  | $             | 10,576 |           | $ | 10,713
|One to five years          |  |               | 3,632  |           |   | 3,787 
|Five to ten years          |  |               | 5,963  |           |   | 6,064 
|After ten years            |  |               | 14,561 |           |   | 14,747
|                           |  |               |        |           |   |       
|                           |  |               | 34,732 |           |   | 35,311
|Mortgage-backed securities |  |               | 52,930 |           |   | 52,597
|                           |  |               |        |           |   |       
|Totals                     |  | $             | 87,662 |           | $ | 87,908
|                           |  |               |        |           |   |       

The carrying value of securities pledged as collateral, to secure public deposits and for other
purposes, was $30,866,000 at December 31, 2008, and $29,264,000 at December 31, 2007.

Gross gains of $15,000 were realized on
premium calls of approximately $1,600,000 in municipal bonds in 2008. There were no gains or losses from the sales of securities in 2007. In 2006, gross gains of $11,000 and gross losses of $1,353,000 were realized from the sales of
available-for-sale securities. The tax expense for net gains on securities transactions for 2008 was $5,100. In 2006, the tax benefit for net losses on securities transactions for 2006 was $456,000.



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



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 December 31, 2008 and 2007. (Thousands)



|                                       |           |                     |                |  |                   |           |   |                |   |        |           |   |                |   |  |   |        |  |   |        |  
|-------------------------------------- | --------- | ------------------- | -------------- |  | ----------------- | --------- | - | -------------- | - | ------ | --------- | - | -------------- | - |  | - | ------ |  | - | ------ | -
|                                       |           | Less than 12 months |                |  | 12 months or more |           |   | Total          |  
|                                       | FairValue |                     | UnrealizedLoss |  |                   | FairValue |   | UnrealizedLoss |   |        | FairValue |   | UnrealizedLoss |  
|December 31, 2008                      |           |                     |                |  |                   |           |   |                |   |        |           |   |                |   |  |   |        |  |   |        |  
|U.S. Government sponsored entity notes |           | $                   |               |  | $                 |          |   |                | $ |       |           | $ |               |   |  | $ |       |  | $ |       |  
|Mortgage-backed securities             |           |                     | 13,746         |  |                   | (1,045    | ) |                |   | 1,685  |           |   | (5             | ) |  |   | 15,431 |  |   | (1,050 | )
|Municipals                             |           |                     | 3,215          |  |                   | (34       | ) |                |   |       |           |   |               |   |  |   | 3,215  |  |   | (34    | )
|Other securities                       |           |                     |               |  |                   |          |   |                |   |       |           |   |               |   |  |   |       |  |   |       |  
|                                       |           |                     |                |  |                   |           |   |                |   |        |           |   |                |   |  |   |        |  |   |        |  
|Total Securities                       |           | $                   | 16,961         |  | $                 | (1,079    | ) |                | $ | 1,685  |           | $ | (5             | ) |  | $ | 18,646 |  | $ | (1,084 | )
|                                       |           |                     |                |  |                   |           |   |                |   |        |           |   |                |   |  |   |        |  |   |        |  
|December 31, 2007                      |           |                     |                |  |                   |           |   |                |   |        |           |   |                |   |  |   |        |  |   |        |  
|U.S. Government sponsored entity notes |           | $                   |               |  | $                 |          |   |                | $ | 5,960  |           | $ | (42            | ) |  | $ | 5,960  |  | $ | (42    | )
|Mortgage-backed securities             |           |                     | 3              |  |                   |          |   |                |   | 12,616 |           |   | (77            | ) |  |   | 12,619 |  |   | (77    | )
|Municipals                             |           |                     |               |  |                   |          |   |                |   | 1,740  |           |   | (9             | ) |  |   | 1,740  |  |   | (9     | )
|Other securities                       |           |                     | 1,936          |  |                   | (1        | ) |                |   | 0      |           |   | 0              |   |  |   | 1,936  |  |   | (1     | )
|                                       |           |                     |                |  |                   |           |   |                |   |        |           |   |                |   |  |   |        |  |   |        |  
|Total Securities                       |           | $                   | 1,939          |  | $                 | (1        | ) |                | $ | 20,316 |           | $ | (128           | ) |  | $ | 22,255 |  | $ | (128   | )
|                                       |           |                     |                |  |                   |           |   |                |   |        |           |   |                |   |  |   |        |  |   |        |  

Management evaluates securities for other-than-temporary impairment on a periodic basis.
Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition of the issuer; and (3) the intent and ability of the company to retain its investment in the
issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The $5,000 unrealized loss, which is greater than twelve months old at December 31, 2008, is related to a FHLMC mortgage-backed security, which is now
fully guaranteed by the U.S. Government, therefore, no realizable loss is expected. The other unrealized losses of $1.1 million includes an unrealized loss of $503,000 on one private-label collateralized mortgage obligation, which was downgraded by
two of the three major bond rating agencies in the fourth quarter of 2008. The security continues to pay as expected, and the unrealized loss is not deemed by management to be other-than-temporary.

Note 4: Loans and Allowance for Loan Losses

Categories of loans at December 31, include (thousands):



|                                                     |  |      |         |   |      |   |         |  
|---------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                     |  | 2008 |         |   | 2007 |  
|Commercial and industrial                            |  | $    | 52,490  |   |      | $ | 62,455  |  
|Agricultural                                         |  |      | 26,265  |   |      |   | 24,910  |  
|Real estate construction                             |  |      | 6,064   |   |      |   | 9,203   |  
|Commercial real estate                               |  |      | 96,755  |   |      |   | 95,801  |  
|Residential real estate                              |  |      | 130,091 |   |      |   | 124,849 |  
|Consumer                                             |  |      | 24,440  |   |      |   | 40,552  |  
|                                                     |  |      |         |   |      |   |         |  
|Total loans                                          |  |      | 336,105 |   |      |   | 357,770 |  
|Less: Net deferred loan fees, premiums and discounts |  |      | (89     | ) |      |   | (7      | )
|Allowance for loan losses                            |  |      | (3,411  | ) |      |   | (3,594  | )
|                                                     |  |      |         |   |      |   |         |  
|Net loans                                            |  | $    | 332,605 |   |      | $ | 354,169 |  
|                                                     |  |      |         |   |      |   |         |  



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



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



|                                   |  |      |       |   |      |   |        |      |  |   |        |  
|---------------------------------- |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                   |  | 2008 |       |   | 2007 |   |        | 2006 | 
|Balance, beginning of year         |  | $    | 3,594 |   |      | $ | 4,762  |      |  | $ | 4,058  |  
|Provision charged to expense       |  |      | 400   |   |      |   | 135    |      |  |   | 1,330  |  
|Recoveries of previous charge-offs |  |      | 295   |   |      |   | 461    |      |  |   | 591    |  
|Losses charged off                 |  |      | (878  | ) |      |   | (1,764 | )    |  |   | (1,217 | )
|                                   |  |      |       |   |      |   |        |      |  |   |        |  
|Balance, end of year               |  | $    | 3,411 |   |      | $ | 3,594  |      |  | $ | 4,762  |  
|                                   |  |      |       |   |      |   |        |      |  |   |        |  

Impaired loans totaled $2,190,000 and $2,046,000 at December 31, 2008 and 2007, respectively.
An allowance for loan losses of $474,000 and $65,000 relates to impaired loans of $1,688,000 and $389,000, at December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, impaired loans of $502,000 and $1,657,000 had no related
allowance for loan losses. Interest of $18,000 and $80,000 was earned on average impaired loans during 2008 and 2007, respectively. Interest of $135,000 and $382,000 was recognized, on a cash basis only, on average impaired loans of $2,177,000 and
$4,198,000 for 2008 and 2007. At December 31, 2008 and 2007, respectively, there were $200,000 and $253,000 of accruing loans delinquent 90 days or more. Non-accruing loans at December 31, 2008 and 2007 were $2,982,000 and $1,729,000,
respectively.

Note 5: Premises and Equipment

Major classifications of premises and equipment, stated at cost, were as follows (thousands):



|                                               |  |      |         |   |      |   |         |  
|---------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                               |  | 2008 |         |   | 2007 |  
|Land                                           |  | $    | 3,383   |   |      | $ | 3,383   |  
|Buildings and improvements                     |  |      | 16,389  |   |      |   | 13,264  |  
|Leasehold improvements                         |  |      | 420     |   |      |   | 420     |  
|Construction in progress                       |  |      |        |   |      |   | 1,404   |  
|Equipment                                      |  |      | 14,122  |   |      |   | 13,326  |  
|                                               |  |      |         |   |      |   |         |  
|                                               |  | $    | 34,314  |   |      | $ | 31,797  |  
|Less accumulated depreciation and amortization |  |      | (17,862 | ) |      |   | (16,344 | )
|                                               |  |      |         |   |      |   |         |  
|Net premises and equipment                     |  | $    | 16,452  |   |      | $ | 15,453  |  
|                                               |  |      |         |   |      |   |         |  

Note 6: Operating Leases

The Bank has entered into certain operating leases for some of its branch locations. Operating lease expense was $85,000, $85,000, and $79,000 for years 2008, 2007, and 2006, respectively. The minimum future lease
payments for each of the next five years are as follows: (Thousands)



|     |  |   |   
|---- |  | - | --
|2009 |  | $ | 80
|2010 |  |   | 78
|2011 |  |   | 83
|2012 |  |   | 82
|2013 |  |   | 45

Note 7: Goodwill

All goodwill is allocated to the banking segment of the business and totaled $3,825,000 at December 31, 2008 and 2007.



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



Note 8: Other Intangible Assets

The carrying basis and accumulated amortization of recognized intangible assets at December 31, 2008 and 2007, were (thousands):



|              |  |                      |       |                         |      |        |                      |  |                         |       |  |   |        |  
|------------- |  | -------------------- | ----- | ----------------------- | ---- | ------ | -------------------- |  | ----------------------- | ----- |  | - | ------ | -
|              |  | 2008                 |       |                         | 2007 |       
|              |  | Gross CarryingAmount |       | AccumulatedAmortization |      |        | Gross CarryingAmount |  | AccumulatedAmortization |      
|Core deposits |  | $                    | 2,992 |                         | $    | (2,886 | )                    |  | $                       | 2,992 |  | $ | (2,809 | )
|Other         |  |                      | 2,061 |                         |      | (1,287 | )                    |  |                         | 2,061 |  |   | (1,139 | )
|              |  |                      |       |                         |      |        |                      |  |                         |       |  |   |        |  
|              |  | $                    | 5,053 |                         | $    | (4,173 | )                    |  | $                       | 5,053 |  | $ | (3,948 | )
|              |  |                      |       |                         |      |        |                      |  |                         |       |  |   |        |  

Certain organization costs related to the issuance of trust preferred debt were fully amortized in
2007.

Amortization expense for the years ended December 31, 2008 and 2007, was $225,000 and $474,000, respectively. Estimated
amortization expense for each of the following five years is (thousands):



|     |  |   |    
|---- |  | - | ---
|2009 |  | $ | 172
|2010 |  |   | 127
|2011 |  |   | 67 
|2012 |  |   | 9  
|2013 |  |   |   

Note 9: Interest-Bearing Deposits

Interest-bearing deposits in denominations of $100,000 or more were $31,940,000 on December 31, 2008, and $30,191,000 on December 31, 2007. At
December 31, 2008, the scheduled maturities of time deposits were as follows (thousands):



|           |  |   |        
|---------- |  | - | -------
|2009       |  | $ | 98,970 
|2010       |  |   | 31,211 
|2011       |  |   | 25,548 
|2012       |  |   | 10,535 
|2013       |  |   | 7,668  
|Thereafter |  |   | 738    
|           |  |   |        
|           |  | $ | 174,670
|           |  |   |        

Note 10: Short-Term Borrowings

Short-term borrowings included the following (thousands):



|                                            |  |      |       |      |   |    
|------------------------------------------- |  | ---- | ----- | ---- | - | ---
|                                            |  | 2008 |       | 2007
|Securities sold under repurchase agreements |  | $    |      |      | $ |   
|U. S. Treasury demand notes                 |  |      | 1,693 |      |   | 722
|                                            |  |      |       |      |   |    
|Total short-term borrowings                 |  | $    | 1,693 |      | $ | 722
|                                            |  |      |       |      |   |    



45



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



Securities sold under agreements to repurchase consist of obligations of the Company to other
parties. The obligations are secured by U.S. agency notes, and such collateral is held by the Federal Reserve Bank. The maximum amount of outstanding agreements at any month end during 2008 and 2007 totaled $0 and $1,179,000 and the daily average of
such agreements totaled $136,000 for 2007. The Company discontinued securities sold under repurchase agreements in 2007.

Note 11: Long-Term Debt

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



|                                |  |      |        |      |   |       
|------------------------------- |  | ---- | ------ | ---- | - | ------
|                                |  | 2008 |        | 2007
|Federal Home Loan Bank Advances |  | $    | 29,500 |      | $ | 24,500
|Junior subordinated debentures  |  |      | 10,310 |      |   | 10,310
|                                |  |      |        |      |   |       
|Total                           |  | $    | 39,810 |      | $ | 34,810
|                                |  |      |        |      |   |       

The Federal Home Loan Bank advances are secured by mortgage loans totaling $98,321,000 at
December 31, 2008. Advances totaling $24.5 million, at interest rates from 4.81 to 4.99 percent, are subject to restrictions or penalties in the event of prepayment. In addition, the Federal Home Loan Bank has at its option the ability to
convert these advances to variable rate three-month Libor advances. If the Federal Home Loan Bank exercises this option, the Bank may repay the advance at interest rate reset dates with no penalty. These outstanding Federal Home Loan Bank advances
mature in 2011. In addition, the Bank has a $5.0 million advance at a fixed rate of interest of 2.82%, which matures on January 14, 2015. Until maturity, the Federal Home Loan Bank has the option quarterly to terminate the advance and require
full payment.

On June 26, 2002, NB&T Statutory Trust I (Trust I), a wholly owned subsidiary of the Corporation,
closed a pooled private offering of 8,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Corporation in exchange for junior subordinated debentures with terms similar to the
Capital Securities. The sole assets of Trust I were the junior subordinated debentures of the Corporation and payments thereunder. The junior subordinated debentures and the back-up obligations, in the aggregate, constituted a full and unconditional
guarantee by the Corporation of the obligations of Trust I under the Capital Securities. Distributions on the Capital Securities were payable quarterly at the annual rate of 3.45% over the 3 month LIBOR and are included in interest expense in the
consolidated financial statements. These securities were considered Tier I capital (with certain limitations applicable) under current regulatory guidelines. The junior subordinated debentures were 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. On June 26, 2007, the Capital Securities were redeemed at par.

On June 25, 2007, NB&T Statutory Trust III (Trust III), a wholly owned subsidiary of the Corporation, 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 Corporation in exchange for junior subordinated debentures with terms similar to the Capital Securities. The sole
assets of Trust III are the junior subordinated debentures of the Corporation and payments thereunder. The junior subordinated debentures and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Corporation
of the obligations of Trust III under the Capital Securities. Distributions on the Capital Securities are payable quarterly at a fixed interest rate of 7.071% through September 6, 2012 and thereafter at the annual rate of 1.50% over the 3 month
LIBOR. Distributions on the Capital Securities are included in interest expense in the consolidated financial statements. These securities are considered Tier I capital (with certain limitations applicable) under current regulatory guidelines.



46



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



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 Corporation 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 Corporation. On or after September 6, 2012, the Capital Securities are redeemable at par. Upon occurrence of specific events defined within the trust indenture, the Capital
Securities may also be redeemed prior to September 6, 2012 at a premium. The Corporation 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 December 31, 2008 and December 31, 2007, the outstanding principal balance of the Capital Securities was $10,000,000. In
accordance with the provisions in FIN 46, 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 12: Income Taxes

The provision for income taxes
includes these components (thousands):



|                             |  |      |     |      |   |       |  |   |      |  
|---------------------------- |  | ---- | --- | ---- | - | ----- |  | - | ---- | -
|                             |  | 2008 |     | 2007 |   | 2006  | 
|Taxes currently payable      |  | $    | 611 |      | $ | 683   |  | $ | 433  |  
|Deferred income taxes        |  |      | 190 |      |   | 345   |  |   | (778 | )
|                             |  |      |     |      |   |       |  |   |      |  
|Income tax (benefit) expense |  | $    | 801 |      | $ | 1,028 |  | $ | (345 | )
|                             |  |      |     |      |   |       |  |   |      |  

A reconciliation of income tax expense at the statutory rate to the Companys actual income
tax expense is shown below (thousands):



|                                     |  |      |       |   |      |   |       |      |  |   |      |  
|------------------------------------ |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ---- | -
|                                     |  | 2008 |       |   | 2007 |   |       | 2006 | 
|Computed at the statutory rate (34%) |  | $    | 1,575 |   |      | $ | 1,857 |      |  | $ | 514  |  
|Increase (decrease) resulting from   |  |      |       |   |      |   |       |      |  |   |      |  
|Tax exempt interest                  |  |      | (439  | ) |      |   | (499  | )    |  |   | (536 | )
|ESOP dividend                        |  |      | (190  | ) |      |   | (184  | )    |  |   | (181 | )
|Bank owned life insurance            |  |      | (167  | ) |      |   | (174  | )    |  |   | (158 | )
|Other                                |  |      | 22    |   |      |   | 28    |      |  |   | 16   |  
|                                     |  |      |       |   |      |   |       |      |  |   |      |  
|Actual tax (benefit) expense         |  | $    | 801   |   |      | $ | 1,028 |      |  | $ | (345 | )
|                                     |  |      |       |   |      |   |       |      |  |   |      |  



47



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



The tax effects of temporary differences related to deferred taxes shown on the balance sheets were
(thousands):



|                                                  |  |      |        |   |      |   |        |  
|------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                  |  | 2008 |        |   | 2007 |  
|Deferred tax assets                               |  |      |        |   |      |   |        |  
|Allowance for loan losses                         |  |      | 1,050  |   |      |   | 1,098  |  
|Accruals not currently deductible                 |  |      | 328    |   |      |   | 341    |  
|AMT credit carry forward                          |  |      | 1,003  |   |      |   | 867    |  
|Nonaccrual loan interest collected                |  |      | 60     |   |      |   | 91     |  
|Stock options not currently deductible            |  |      | 53     |   |      |   | 30     |  
|Intangible asset amortization                     |  |      |       |   |      |   | 7      |  
|Other                                             |  |      | 1      |   |      |   | 21     |  
|                                                  |  |      |        |   |      |   |        |  
|                                                  |  | $    | 2,495  |   |      | $ | 2,455  |  
|                                                  |  |      |        |   |      |   |        |  
|Deferred tax liabilities                          |  |      |        |   |      |   |        |  
|Deferred loan costs                               |  |      | (107   | ) |      |   | (85    | )
|Depreciation                                      |  |      | (303   | ) |      |   | (301   | )
|FHLB stock dividends                              |  |      | (1,423 | ) |      |   | (1,308 | )
|Prepaid assets currently deductible               |  |      | (92    | ) |      |   | (99    | )
|Unrealized gains on available-for-sale securities |  |      | (83    | ) |      |   | (339   | )
|Intangible asset amortization                     |  |      | (98    | ) |      |   |       |  
|                                                  |  |      |        |   |      |   |        |  
|                                                  |  |      | (2,106 | ) |      |   | (2,132 | )
|                                                  |  |      |        |   |      |   |        |  
|Net deferred tax asset                            |  | $    | 389    |   |      | $ | 323    |  
|                                                  |  |      |        |   |      |   |        |  

Note 13: 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 2005.

The Company adopted the provisions of the
Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 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. FIN 48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. As a result of the implementation of FIN 48, the Company did not identify any uncertain tax positions that it believes should be recognized in the financial statements.

Note 14: Other Comprehensive Income (Loss)

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



|                                                           |  |      |      |   |      |   |      |  |   |        |  
|---------------------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- |  | - | ------ | -
|                                                           |  | 2008 |      |   | 2007 |   | 2006 | 
|Unrealized gains (losses) on securities available for sale |  | $    | (736 | ) |      | $ | 870  |  | $ | 228    |  
|Reclassification for realized amount included in income    |  |      | 15   |   |      |   |     |  |   | (1,342 | )
|                                                           |  |      |      |   |      |   |      |  |   |        |  
|Other comprehensive income (loss), before tax effect       |  |      | (751 | ) |      |   | 870  |  |   | 1,570  |  
|Tax expense (benefit)                                      |  |      | (255 | ) |      |   | 297  |  |   | 534    |  
|                                                           |  |      |      |   |      |   |      |  |   |        |  
|Other comprehensive income (loss)                          |  | $    | (496 | ) |      | $ | 573  |  | $ | 1,036  |  
|                                                           |  |      |      |   |      |   |      |  |   |        |  



48



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



Note 15: Regulatory Matters

The Company and the subsidiary bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the subsidiary bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2008, that the Company and the subsidiary bank meet all capital adequacy requirements
to which they are subject.

As of December 31, 2008, the Company met the capital requirements to be deemed well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain capital ratios as set forth in the table.

The Company and subsidiary banks actual capital amounts and ratios are also presented in the following table (thousands):



|                                                  |  |        |        |       |                              |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|------------------------------------------------- |  | ------ | ------ | ----- | ---------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                                                  |  | Actual |        |       | For Capital AdequacyPurposes |   |        | To Be Well CapitalizedUnder PromptCorrective ActionProvisions |       
|                                                  |  | Amount |        | Ratio |                              |   | Amount |                                                               | Ratio  |  |     | Amount |  | Ratio |       
|As of December 31, 2008                           |  |        |        |       |                              |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|Total Risk-Based Capital to Risk-Weighted Assets: |  |        |        |       |                              |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|Consolidated                                      |  | $      | 67,338 |       | 18.80                        | % |        | $                                                             | 28,649 |  | 8.0 | %      |  |       | N/A    |  | N/A  |  
|Bank                                              |  |        | 59,489 |       | 16.66                        |   |        |                                                               | 28,568 |  | 8.0 |        |  | $     | 35,710 |  | 10.0 | %
|Tier I Capital to Risk-Weighted Assets:           |  |        |        |       |                              |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|Consolidated                                      |  |        | 63,927 |       | 17.85                        |   |        |                                                               | 14,324 |  | 4.0 |        |  |       | N/A    |  | N/A  |  
|Bank                                              |  |        | 56,078 |       | 15.70                        |   |        |                                                               | 14,284 |  | 4.0 |        |  |       | 21,426 |  | 6.0  |  
|Tier I Capital to Average Assets:                 |  |        |        |       |                              |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|Consolidated                                      |  |        | 63,927 |       | 12.21                        |   |        |                                                               | 20,935 |  | 4.0 |        |  |       | N/A    |  | N/A  |  
|Bank                                              |  |        | 56,078 |       | 10.72                        |   |        |                                                               | 20,931 |  | 4.0 |        |  |       | 26,164 |  | 5.0  |  
|As of December 31, 2007                           |  |        |        |       |                              |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|Total Risk-Based Capital to Risk-Weighted Assets: |  |        |        |       |                              |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|Consolidated                                      |  | $      | 66,230 |       | 17.69                        | % |        | $                                                             | 29,953 |  | 8.0 | %      |  |       | N/A    |  | N/A  |  
|Bank                                              |  |        | 58,738 |       | 15.73                        |   |        |                                                               | 29,870 |  | 8.0 |        |  | $     | 37,337 |  | 10.0 | %
|Tier I Capital to Risk-Weighted Assets:           |  |        |        |       |                              |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|Consolidated                                      |  |        | 62,636 |       | 16.73                        |   |        |                                                               | 14,977 |  | 4.0 |        |  |       | N/A    |  | N/A  |  
|Bank                                              |  |        | 55,144 |       | 14.77                        |   |        |                                                               | 14,935 |  | 4.0 |        |  |       | 22,402 |  | 6.0  |  
|Tier I Capital to Average Assets:                 |  |        |        |       |                              |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|Consolidated                                      |  |        | 62,636 |       | 11.96                        |   |        |                                                               | 20,945 |  | 4.0 |        |  |       | N/A    |  | N/A  |  
|Bank                                              |  |        | 55,144 |       | 10.54                        |   |        |                                                               | 20,923 |  | 4.0 |        |  |       | 26,154 |  | 5.0  |  



49



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



The Bank is subject to certain restrictions on the amount of dividends that it may declare without
prior regulatory approval. At December 31, 2008, approximately $1.1 million in retained earnings were available for dividend declaration without prior regulatory approval.

Note 16: Related Party Transactions

The Bank had loans outstanding to executive officers, directors,
significant shareholders and their affiliates (related parties). A summary of the related party loan activity follows (thousands):



|                     |  |      |        |   |      |   |        |  
|-------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                     |  | 2008 |        |   | 2007 |  
|Balance, January 1   |  | $    | 4,601  |   |      | $ | 5,568  |  
|New loans            |  |      | 871    |   |      |   | 844    |  
|Payments             |  |      | (2,787 | ) |      |   | (1,811 | )
|                     |  |      |        |   |      |   |        |  
|Balance, December 31 |  | $    | 2,685  |   |      | $ | 4,601  |  
|                     |  |      |        |   |      |   |        |  

In managements opinion, such loans and other extensions of credit and deposits were made in
the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in managements opinion, these
loans did not involve more than normal risk of collectability or present other unfavorable features.

Deposits from related parties held by
the Bank at December 31, 2008 and 2007 totaled $695,000 and $719,000 respectively.

Note 17: Employee Benefits

The Company has a retirement savings 401(k) plan covering substantially all employees. Employees may contribute up to 50% of their compensation. The Bank
will match up to 3% of an employees compensation for the first 8% of their compensation contributed to the plan. Employer contributions charged to expense for 2008, 2007 and 2006 were $174,000, $192,000 and $211,000, respectively.

Also, the Bank has a deferred compensation agreement with one retired officer. The agreement provides level monthly or annual payments ranging for
twenty years after retirement. The charge to expense for the agreement was $52,000, $53,000 and $6,000 for 2008, 2007 and 2006, respectively. Such charges reflect the straight-line accrual over the period until full eligibility of the present value
of benefits due each participant on the full eligibility date, using a 6.5% discount factor.

The Company sponsors a leveraged employee
stock ownership plan (ESOP) that covers substantially all employees who meet minimum age and length of service requirements. Shares of the Companys common stock held by the ESOP were purchased with the proceeds of borrowings from the Company.
The Company makes annual contributions to the ESOP equal to the ESOPs debt service less dividends on unallocated shares received by the ESOP. All dividends on unallocated shares received by the ESOP are used to pay debt service. The ESOP
shares initially were pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to plan participants, based on the proportion of debt service paid in the year to total expected debt service. The
Bank accounts for its ESOP in accordance with Statement of Position 93-6. As shares are released from collateral, the Company reports compensation expense equal to the current fair value of the shares. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.



50



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



ESOP compensation expense was $180,000, $210,000 and $206,000 for years 2008, 2007 and 2006,
respectively. The ESOP shares as of December 31 were as follows:



|                                             |  |             |         |             |   |        
|-------------------------------------------- |  | ----------- | ------- | ----------- | - | -------
|                                             |  | 2008        |         | 2007       
|                                             |  | TotalShares |         | TotalShares
|Allocated shares                             |  |             | 482,880 |             |   | 489,981
|Committed to be released                     |  |             |        |             |   |       
|Unearned shares                              |  |             | 28,717  |             |   | 38,636 
|                                             |  |             |         |             |   |        
|Total ESOP shares                            |  |             | 511,597 |             |   | 528,617
|                                             |  |             |         |             |   |        
|Fair value of unearned shares at December 31 |  | $           | 416,000 |             | $ | 769,000
|                                             |  |             |         |             |   |        

Note 18: Stock Option Plan

The Company adopted a new Equity Plan in 2006, which is shareholder approved, and permits the Company to grant options, restricted stock or stock appreciation rights of up to 270,000 shares of common stock. The
Company believes that such awards better align the interests of its directors and employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of the Companys stock at the date
of grant; those option awards generally vest based on three years of continuous service and have a ten-year contractual term. The previous plan, which was terminated in 2006, still has options to purchase 89,000 shares outstanding at
December 31, 2008. These options vest over five years. Certain option and share awards provide for an exchange of unvested options for a cash payment or shares of stock if there is a change in control (as defined in the Plan). The compensation
cost for the stock option expense recognized in 2008, 2007 and 2006 was calculated for all grants based on the grant dates fair value and totaled $138,000, $119,000 and $63,000, respectively. The related tax benefit for 2008, 2007 and 2006 was
$47,000, $40,000 and $21,000.

The fair value of each option award is estimated on the date of grant using a binomial option valuation
model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Companys stock and other factors. The Company uses historical data to estimate option exercise and participant
termination within the valuation model; separate groups of participants that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the option
valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.



|                                                               |  |      |               |      |   |               |  |   |              
|-------------------------------------------------------------- |  | ---- | ------------- | ---- | - | ------------- |  | - | -------------
|                                                               |  | 2008 |               | 2007 |   | 2006         
|Expected volatility                                            |  |      | 27.7%  27.8% |      |   | 24.7%  25.1% |  |   | 26.2%  26.8%
|Weighted-average volatility                                    |  |      | 27.74%        |      |   | 24.94%        |  |   | 26.44%       
|Expected dividends                                             |  |      | 6.06%  6.23% |      |   | 5.21%  5.46% |  |   | 4.93%  5.27%
|Expected term (in years)                                       |  |      | 6.0           |      |   | 6.0           |  |   | 6.0          
|Risk-free Rate                                                 |  |      | 3.13%  3.30% |      |   | 4.53%  4.64% |  |   | 4.72%        
|Weighted-average fair value of options granted during the year |  | $    | 2.69          |      | $ | 3.43          |  | $ | 3.72         



51



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



A summary of option activity under the Plan as of December 31, 2008, and changes during the year
then ended, is presented below.



|                               |  |         |   |  |                                |       |                                          |      |                         |   |  
|------------------------------ |  | ------- | - |  | ------------------------------ | ----- | ---------------------------------------- | ---- | ----------------------- | - | -
|                               |  | Shares  |   |  | Weighted-AverageExercise Price |       | Weighted-AverageRemainingContractualTerm |      | AggregateIntrinsicValue
|Outstanding, beginning of year |  | 187,000 |   |  | $                              | 22.56 |                                          |      |                         |   |  
|Granted                        |  | 47,500  |   |  |                                | 18.94 |                                          |      |                         |   |  
|Exercised                      |  |        |   |  |                                |      |                                          |      |                         |   |  
|Forfeited or expired           |  | (10,000 | ) |  |                                | 22.15 |                                          |      |                         |   |  
|                               |  |         |   |  |                                |       |                                          |      |                         |   |  
|Outstanding, end of year       |  | 224,500 |   |  | $                              | 21.81 |                                          | 6.67 |                         | $ | 
|                               |  |         |   |  |                                |       |                                          |      |                         |   |  
|Exercisable, end of year       |  | 130,800 |   |  | $                              | 22.92 |                                          | 5.44 |                         | $ | 
|                               |  |         |   |  |                                |       |                                          |      |                         |   |  

There were no options exercised in 2008. The total intrinsic value of options exercised during the
years ended December 31, 2007 and 2006 was $10,000 and $9,000, respectively.

As of December 31, 2008, there was $197,000 of
total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.1 years.

Note 19: Earnings Per Share

Earnings per share (EPS)
were computed as follows (thousands, except per share amounts):



|                                                    |  |      |           |      |   |           |  |   |          
|--------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                    |  | 2008 |           | 2007 |   | 2006     
|Basic earnings per share:                           |  |      |           |      |   |           |  |   |          
|Net income                                          |  | $    | 3,831     |      | $ | 4,432     |  | $ | 1,856    
|                                                    |  |      |           |      |   |           |  |   |          
|Weighted average common shares outstanding          |  |      | 3,143,055 |      |   | 3,188,298 |  |   | 3,174,582
|Basic earnings per share                            |  | $    | 1.22      |      | $ | 1.39      |  | $ | .58      
|                                                    |  |      |           |      |   |           |  |   |          
|Diluted earnings per share:                         |  |      |           |      |   |           |  |   |          
|Net income                                          |  | $    | 3,831     |      | $ | 4,432     |  | $ | 1,856    
|                                                    |  |      |           |      |   |           |  |   |          
|Weighted average common shares outstanding          |  |      | 3,143,055 |      |   | 3,188,298 |  |   | 3,174,582
|Effect of dilutive securities  stock options       |  |      | 310       |      |   | 1,364     |  |   | 1,177    
|                                                    |  |      |           |      |   |           |  |   |          
|Average shares and dilutive potential common shares |  |      | 3,143,365 |      |   | 3,189,662 |  |   | 3,175,759
|                                                    |  |      |           |      |   |           |  |   |          
|Diluted earnings per share                          |  | $    | 1.22      |      | $ | 1.39      |  | $ | .58      
|                                                    |  |      |           |      |   |           |  |   |          

As of December 31, 2008, 224,500 shares of common stock at $17.25 to $30.50 per share were
outstanding, but not included in the computation of diluted EPS because the options exercise prices were greater than the average market price of the common share.

Options to purchase 181,000 shares of common stock at $20.50 to $30.50 per share were outstanding at December 31, 2007, but not included in the computation of diluted EPS because the options exercise prices
were greater than the average market price of the common shares.



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NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



Options to purchase 187,000 shares of common stock at $20.50 to $30.50 per share were outstanding at
December 31, 2006, but not included in the computation of diluted EPS because the options exercise prices were greater than the average market price of the common shares.

Note 20: Disclosures about Fair Value of Financial Instruments

The following table presents
estimated fair values of the Companys financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value
is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and
because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate
(thousands):



|                                         |  |                   |         |                   |   |                |  |           |         |  |   |        
|---------------------------------------- |  | ----------------- | ------- | ----------------- | - | -------------- |  | --------- | ------- |  | - | -------
|                                         |  | December 31, 2008 |         | December 31, 2007
|                                         |  | CarryingAmount    |         | FairValue         |   | CarryingAmount |  | FairValue
|Financial assets                         |  |                   |         |                   |   |                |  |           |         |  |   |        
|Cash and cash equivalents                |  | $                 | 54,639  |                   | $ | 54,639         |  | $         | 26,155  |  | $ | 26,155 
|Available-for-sale securities            |  |                   | 87,908  |                   |   | 87,908         |  |           | 89,275  |  |   | 89,275 
|Loans including loans held for sale, net |  |                   | 332,774 |                   |   | 339,502        |  |           | 355,672 |  |   | 358,291
|Stock in FRB and FHLB                    |  |                   | 9,362   |                   |   | 9,362          |  |           | 9,023   |  |   | 9,023  
|Interest receivable                      |  |                   | 3,042   |                   |   | 3,042          |  |           | 3,288   |  |   | 3,288  
|Financial liabilities                    |  |                   |         |                   |   |                |  |           |         |  |   |        
|Deposits                                 |  |                   | 420,728 |                   |   | 423,452        |  |           | 420,254 |  |   | 420,395
|Short-term borrowings                    |  |                   | 1,693   |                   |   | 1,693          |  |           | 722     |  |   | 722    
|Long-term debt                           |  |                   | 39,810  |                   |   | 41,381         |  |           | 34,810  |  |   | 35,492 
|Interest payable                         |  |                   | 469     |                   |   | 469            |  |           | 641     |  |   | 641    

For purposes of the above disclosures of estimated fair value, the following assumptions were used
as of December 31, 2008 and 2007. The estimated fair value for cash and cash equivalents, interest-bearing deposits, FRB and FHLB stock, accrued interest receivable, demand deposits, savings accounts, NOW accounts, certain money market
deposits, short-term borrowings, and interest payable is considered to approximate cost. The estimated fair value for securities is based on quoted market values for the individual securities or for equivalent securities. The estimated fair value
for loans receivable, including loans held for sale, net, is based on estimates of the rate the Bank would charge for similar loans at December 31, 2008 and 2007 applied for the time period until the loans are assumed to reprice or be paid. The
estimated fair value for fixed-maturity time deposits as well as borrowings is based on estimates of the rate the Bank would pay on such liabilities at December 31, 2008 and 2007, applied for the time period until maturity. The fair value of
commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value
also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit and lines of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate
or otherwise settle the obligations with the counterparties at the reporting date.



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NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



Note 21: Commitments and Credit Risk

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Each customers creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on managements credit evaluation of the counterparty. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

At
December 31, 2008 and 2007, the Bank had outstanding commitments to originate business loans aggregating approximately $500,000 and $3,736,000, respectively. The commitments extended over varying periods of time with the majority being
disbursed within a one-year period. Loan commitments at fixed rates of interest amounted to $0 and $151,000 at December 31, 2008 and 2007 respectively, with the remainder at floating market rates.

Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending
loans to customers.

The Bank had total outstanding letters of credit amounting to $4,075,000 and $2,758,000, at December 31, 2008 and
2007, respectively, with terms ranging from 30 days to 3 years.

Mortgage loans in the process of origination represent amounts that the
Bank plans to fund within a normal period of 60 to 90 days, some of which are intended for sale to investors in the secondary market. Forward commitments to sell mortgage loans are obligations to deliver loans at a specified price on or before a
specified future date. The Bank acquires such commitments to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale.

Total mortgage loans in the process of origination amounted to $488,000 and $349,000 with commitments to originate loans at fixed rates of interest or $488,000 and $349,000 at December 31, 2008 and 2007. There
were $169,000 and $1,503,000 mortgage loans held for sale at December 31, 2008 and 2007.

Lines of credit are agreements to lend to a
customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily
represent future cash requirements. Each customers creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on managements credit evaluation of the counterparty. Collateral
held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet
instruments.

At December 31, 2008, the Bank had granted unused lines of credit to borrowers aggregating approximately $24,456,000 and
$21,310,000 for commercial lines and open-end consumer lines, respectively. At December 31, 2007, the Bank had granted unused lines of credit to borrowers aggregating approximately $17,755,000 and $21,412,000 for commercial lines and open-end
consumers lines, respectively.

The Bank had $541,000 in Federal Funds sold invested at US Bank. From time to time, certain due from bank
accounts may exceed federally insured deposit limits.



54



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



Note 22: Change in Accounting Principle

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157).
FAS 157 define fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the period.

FAS 157 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. FAS 157 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 active 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                                                                                                                                                              

Available-for-Sale Securities

The fair value of available-for-sale securities are determined by various valuation methodologies. Level 2 securities include U.S. government agencies, mortgage-backed securities, and obligations of political and
state subdivisions. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable
inputs include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation
or other means.

The following table presents the fair value measurements of assets and liabilities measured at fair value on a recurring
basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fall at December 31, 2008:



|                              |  |           |        |                                                             |   |                                             |  |                                         |        |  |   |  
|----------------------------- |  | --------- | ------ | ----------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | ------ |  | - | -
|                              |  |           |        | Fair Value Measurements at Reporting Date Using            
|Description                   |  | FairValue |        | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservable Inputs(Level 3)
|Available-for-sale securities |  | $         | 87,908 |                                                             | $ |                                            |  | $                                       | 87,908 |  | $ | 

The following table presents the fair value measurements of assets and liabilities measured at
fair value on a nonrecurring basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fall at December 31, 2008:



|               |  |           |       |                                                             |   |                                             |  |                                         |   |  |   |      
|-------------- |  | --------- | ----- | ----------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | - |  | - | -----
|               |  |           |       | Fair Value Measurements at Reporting Date Using            
|Description    |  | FairValue |       | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservableInputs (Level 2) |  | SignificantUnobservable Inputs(Level 3)
|Impaired loans |  | $         | 1,214 |                                                             | $ |                                            |  | $                                       |  |  | $ | 1,214



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



Note 23: Condensed Financial Information (Parent Company Only)

Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company (thousands):

Condensed Balance Sheets



|                                                 |  |      |        |      |   |       
|------------------------------------------------ |  | ---- | ------ | ---- | - | ------
|                                                 |  | 2008 |        | 2007
|Assets                                           |  |      |        |      |   |       
|Cash and due from banks                          |  | $    | 7,285  |      | $ | 6,385 
|Investment in common stock of banking subsidiary |  |      | 60,365 |      |   | 60,734
|Investment in nonbanking subsidiary              |  |      | 407    |      |   | 385   
|Due from bank subsidiary                         |  |      |       |      |   | 885   
|Other assets                                     |  |      | 2,015  |      |   | 1,745 
|                                                 |  |      |        |      |   |       
|Total assets                                     |  | $    | 70,072 |      | $ | 70,134
|                                                 |  |      |        |      |   |       
|Liabilities                                      |  |      |        |      |   |       
|Long-term debt                                   |  | $    | 10,310 |      | $ | 10,310
|Other liabilities                                |  |      | 971    |      |   | 941   
|                                                 |  |      |        |      |   |       
|Total liabilities                                |  |      | 11,281 |      |   | 11,251
|Stockholders Equity                             |  |      | 58,791 |      |   | 58,883
|                                                 |  |      |        |      |   |       
|Total liabilities and stockholders equity       |  | $    | 70,072 |      | $ | 70,134
|                                                 |  |      |        |      |   |       

Condensed Statements of Income



|                                                                                  |  |      |       |   |      |   |       |      |  |   |       |  
|--------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                                  |  | 2008 |       |   | 2007 |   |       | 2006 | 
|Income                                                                            |  |      |       |   |      |   |       |      |  |   |       |  
|Dividends from banking subsidiary                                                 |  | $    | 4,200 |   |      | $ | 3,300 |      |  | $ | 3,000 |  
|                                                                                  |  |      |       |   |      |   |       |      |  |   |       |  
|Total income                                                                      |  |      | 4,200 |   |      |   | 3,300 |      |  |   | 3,000 |  
|                                                                                  |  |      |       |   |      |   |       |      |  |   |       |  
|Expenses                                                                          |  |      |       |   |      |   |       |      |  |   |       |  
|Interest expense                                                                  |  |      | 729   |   |      |   | 744   |      |  |   | 713   |  
|Directors fees                                                                    |  |      | 62    |   |      |   | 62    |      |  |   | 63    |  
|Amortization of loan costs                                                        |  |      |      |   |      |   | 115   |      |  |   | 119   |  
|Other expenses                                                                    |  |      | 54    |   |      |   | 51    |      |  |   | 43    |  
|                                                                                  |  |      |       |   |      |   |       |      |  |   |       |  
|Total expenses                                                                    |  |      | 845   |   |      |   | 972   |      |  |   | 938   |  
|                                                                                  |  |      |       |   |      |   |       |      |  |   |       |  
|Income Before Income Tax and Equity in Undistributed Income of Banking Subsidiary |  |      | 3,355 |   |      |   | 2,328 |      |  |   | 2,062 |  
|Income Tax Benefit                                                                |  |      | (463  | ) |      |   | (509  | )    |  |   | (495  | )
|                                                                                  |  |      |       |   |      |   |       |      |  |   |       |  
|Income Before Equity in Undistributed Income of Banking Subsidiary                |  |      | 3,818 |   |      |   | 2,837 |      |  |   | 2,557 |  
|Equity in Undistributed Income of Banking Subsidiary                              |  |      | (9    | ) |      |   | 1,574 |      |  |   | (722  | )
|Equity in Undistributed Income of Nonbanking Subsidiary                           |  |      | 22    |   |      |   | 21    |      |  |   | 21    |  
|                                                                                  |  |      |       |   |      |   |       |      |  |   |       |  
|Net Income                                                                        |  | $    | 3,831 |   |      | $ | 4,432 |      |  | $ | 1,856 |  
|                                                                                  |  |      |       |   |      |   |       |      |  |   |       |  



56



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##### Table of Contents

NB&T Financial Group, Inc.

Notes to Consolidated Financial Statements(Continued)

Years Ended
December 31, 2008, 2007 and 2006



Condensed Statements of Cash Flows



|                                               |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                               |  | 2008 |        |   | 2007 |   |        | 2006 | 
|Operating Activities                           |  |      |        |   |      |   |        |      |  |   |        |  
|Net income                                     |  | $    | 3,831  |   |      | $ | 4,432  |      |  | $ | 1,856  |  
|Items not requiring (providing) cash           |  |      | 814    |   |      |   | (1,782 | )    |  |   | 525    |  
|                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash provided by operating activities      |  |      | 4,645  |   |      |   | 2,650  |      |  |   | 2,381  |  
|                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Financing Activities                           |  |      |        |   |      |   |        |      |  |   |        |  
|Cash dividends paid                            |  |      | (3,637 | ) |      |   | (3,548 | )    |  |   | (3,431 | )
|Proceeds from stock options exercised          |  |      |       |   |      |   | 52     |      |  |   | 66     |  
|Purchase of treasury stock                     |  |      | (188   | ) |      |   | (1,176 | )    |  |   | (75    | )
|Sale of treasury stock                         |  |      | 80     |   |      |   |       |      |  |   |       |  
|Issuance of long-term debt                     |  |      |       |   |      |   | 10,000 |      |  |   |       |  
|Repayment of long-term debt                    |  |      |       |   |      |   | (8,000 | )    |  |   |       |  
|                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash used in financing activities          |  |      | (3,745 | ) |      |   | (2,672 | )    |  |   | (3,440 | )
|                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Net Change in Cash and Cash Equivalents        |  |      | 900    |   |      |   | (22    | )    |  |   | (1,059 | )
|Cash and Cash Equivalents at Beginning of Year |  |      | 6,385  |   |      |   | 6,407  |      |  |   | 7,466  |  
|                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Cash and Cash Equivalents at End of Year       |  | $    | 7,285  |   |      | $ | 6,385  |      |  | $ | 6,407  |  
|                                               |  |      |        |   |      |   |        |      |  |   |        |  



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##### Table of Contents

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure

None.

Item 9A(T). Controls and Procedures

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 of December 31, 2008, that the Companys disclosure controls and procedures were effective. During the quarter ended December 31, 2008,
no changes have occurred in the Companys internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Companys internal control over financial reporting.

NB&T Financial Group, Inc.

Managements Report on Internal Control Over Financial Reporting

Management of NB&T Financial Group, Inc. and
subsidiaries (the Company) is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control
over financial reporting based on the framework in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management of the Company has concluded the
Company maintained effective internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2008.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be
circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. These inherent
limitations, however, are known features of the financial reporting process. It is possible, therefore, to design into the process safeguards to reduce, though not eliminate, this risk.

This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.



|                                                   |  |                                       
|-------------------------------------------------- |  | --------------------------------------
|/s/
John J. Limbert                                |  | /s/ Craig F. Fortin                   
|President & Chief Executive Officer March 17, 2009 |  | Chief Financial Officer March 17,
2009



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##### Table of Contents

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information contained in the Proxy Statement under the captions ELECTION OF DIRECTORS, EXECUTIVE OFFICERS and SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE is incorporated herein by reference.

The Board of Directors has determined that
Audit Committee Member, Charles L. Dehner, is an audit committee financial expert, as defined in 17 C.F.R. Section 229.407(d)(5), and that he is independent under the applicable rules of The NASDAQ Stock Market LLC.

The NB&T Financial Group, Inc. Code of Ethics is posted on the registrants web site at www.nbtdirect.com. Amendments to the Code
of Ethics and waivers of the provisions of the Code of Ethics will also be posted on the registrants web site.

Item 11. Executive Compensation

The information contained in the Proxy Statement under the
caption COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS is incorporated herein by reference.

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

The information contained in the Proxy
Statement under the caption VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT is incorporated herein by reference. The information in Item 5 of this Form 10-K regarding shares to be issued upon the exercise
of options and restricted stock awards is incorporated herein by reference.

Item 13. Certain Relationships and Related
Transactions and Director Independence

The information contained in the Proxy Statement under the caption CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS is incorporated herein by reference. The Board of Directors of NBTF has determined that all of the directors except Messrs. Limbert and Smith are independent under the listing standards of The NASDAQ Stock
Market, LLC (Nasdaq). In determining independence, the Board of Directors considered loan and deposit relationships with each director. The rules of Nasdaq do not deem such relationships to disqualify a director from being deemed
independent. In addition, all loans and other extensions of credit were made and deposits accepted in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the
time for comparable transactions with other persons. Further, in managements opinion, the loans did not involve more than normal risk of collectibility or present other unfavorable features. The Board of Directors does not believe such
relationships interfere with the directors exercise of independent judgment in carrying out their responsibilities as directors.

Item 14. Principal Accountant Fees and Services

The information contained in the Proxy Statement under the caption
AUDITORS is incorporated herein by reference.



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##### Table of Contents

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)

(1) Financial StatementsSee Index to Consolidated Financial Statements in Item 8 of this Form 10-K.

(2) Financial Statement SchedulesNone

(b)Exhibits



|              |  |                                                                                                           
|------------- |  | ----------------------------------------------------------------------------------------------------------
|EXHIBITNUMBER |  | DESCRIPTION                                                                                               
|              | 
|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.                                    
|              | 
|4.0           |  | Agreement to furnish instruments and agreements defining rights of holders of long-term debt              
|              | 
|10.1*         |  | InterCounty Bancshares, Inc. Non-qualified Stock Option Plan                                              
|              | 
|10.2*         |  | NB&T Financial Group, Inc. Supplemental Executive Retirement Plan                                         
|              | 
|10.3*         |  | NB&T Financial Group, Inc. Supplemental Executive Retirement Plan Participation AgreementTimothy L. Smith
|              | 
|10.4*         |  | National Bank & Trust Incentive Plan                                                                      
|              | 
|10.5*         |  | Stock Option Award Agreement for John J. Limbert                                                          
|              | 
|10.6*         |  | Severance Agreement for Craig F. Fortin                                                                   
|              | 
|10.7*         |  | Severance Agreement for Stephen G. Klumb                                                                  
|              | 
|10.8*         |  | Employment Agreement with John J. Limbert                                                                 
|              | 
|10.9*         |  | NB&T Financial Group, Inc. Amended and Restated 2006 Equity Plan                                          
|              | 
|10.10*        |  | First Amendment to Stock Option Award Agreement for John J. Limbert                                       
|              | 
|10.11*        |  | First Amendment to Employment Agreement with John J. Limbert                                              
|              | 
|10.12*        |  | First Amendment to the Severance Agreement with Craig F. Fortin and Stephen G. Klumb                      
|              | 
|10.13*        |  | Form of Amended and Restated 2006 Equity Plan Award Agreement (Employee Award)                            
|              | 
|10.14*        |  | Form of Amended and Restated 2006 Equity Plan Award Agreement (Directors Nonqualified Stock Option)      
|              | 
|21            |  | Subsidiaries of NB&T Financial Group, Inc.                                                                
|              | 
|23            |  | Consent of Independent AccountantsBKD, LLP                                                               
|              | 
|31.1          |  | Rule 13a-14(a)/Section 302 Certification of Chief Executive Officer                                       
|              | 
|31.2          |  | Rule 13a-14(b)/Section 302 Certification of Chief Financial Officer                                       
|              | 
|32.1          |  | Rule 13a-14(b)/Section 906 Certification of Chief Executive Officer                                       
|              | 
|32.2          |  | Rule 13a-14(b)/Section 906 Certification of Chief Financial Officer                                       
|              | 
|99.2          |  | Proxy Statement for 2009 annual meeting of shareholders                                                   



|* | Indicates a management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
|               |  |  | 
|               |  |  |  | By                         |  | /s/    JOHN J. LIMBERT       
|               |  |  |  |                            |  |                               |  | John J. Limbert                      
|               |  |  |  |                            |  |                               |  | President and Chief Executive Officer
|March 17, 2009 |  |  |  |                            |  | (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                     |  |                                                                                                  |  |                      |  |    |  |                                                                  
|-------------------- |  | ------------------------------------------------------------------------------------------------ |  | -------------------- |  | -- |  | -----------------------------------------------------------------
|                     |  |                                                                                                  |  |                     
|By                   |  | /s/    CRAIG F. FORTIN                                                                           |  |                      |  | By |  | /s/    JOHN J. LIMBERT                                           
|                     |  | Craig F. Fortin Senior Vice President and Chief Financial Officer (Principal Accounting Officer) |  |                      |  |    |  | John J. Limbert President, Chief Executive Officer and a Director
|Date: March 17, 2009 |  |                                                                                                  |  | Date: March 17, 2009
|                     |  |                                                                                                  |  |                     
|By                   |  | /s/    TIMOTHY L. SMITH                                                                          |  |                      |  | By |  | /s/    G. DAVID HAWLEY                                           
|                     |  | Timothy L. Smith Director                                                                        |  |                      |  |    |  | G. David Hawley Director                                         
|Date: March 17, 2009 |  |                                                                                                  |  | Date: March 17, 2009
|                     |  |                                                                                                  |  |                     
|By                   |  | /s/    S. CRAIG BEAM                                                                             |  |                      |  | By |  | /s/    BROOKE WILLIAMS
JAMES                                     
|                     |  | S. Craig Beam Director                                                                           |  |                      |  |    |  | Brooke Williams James Director                                   
|Date: March 17, 2009 |  |                                                                                                  |  | Date: March 17, 2009
|                     |  |                                                                                                  |  |                     
|By                   |  | /s/    ROBERT A. RAIZK                                                                           |  |                      |  | By |  | /s/    CHARLES L. DEHNER                                         
|                     |  | Robert A. Raizk Director                                                                         |  |                      |  |    |  | Charles L. Dehner Director                                       
|Date: March 17, 2009 |  |                                                                                                  |  | Date: March 17, 2009
|                     |  |                                                                                                  |  |                     
|By                   |  | /s/    DANIEL A. DIBIASIO                                                                        |  |                      |  | By |  | /s/    D. JEFFERY LYKINS                                         
|                     |  | Daniel A. DiBiasio Director                                                                      |  |                      |  |    |  | D. Jeffery Lykins Director                                       
|Date: March 17, 2009 |  |                                                                                                  |  | Date: March 17, 2009



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##### Table of Contents

INDEX TO EXHIBITS



|              |  |                                                                                                            |  |                                                                                                                                                    
|------------- |  | ---------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBITNUMBER |  | DESCRIPTION                                                                                                |  | PAGE REFERENCE                                                                                                                                     
|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 31, 2003, Exhibit A (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 31, 2003 (File No. 000-23134)                                  
|              |  |                                                                                                           
|4.0           |  | Agreement to furnish instruments and agreements defining rights of holders of long-term debt               |  | Included herewith                                                                                                                                  
|              |  |                                                                                                           
|10.1*         |  | InterCounty Bancshares, Inc. Non-qualified Stock Option Plan                                               |  | Incorporated by reference to the Registration Statement on Form S-1 filed by registrant on July 2, 1993 (Registration No. 33-65608), Exhibit 10.1  
|              |  |                                                                                                           
|10.2*         |  | NB&T Financial Group, Inc. Supplemental Executive Retirement Plan                                          |  | Incorporated by reference to registrants Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2002, Exhibit 10.1 (File No. 000-23134)
|              |  |                                                                                                           
|10.3*         |  | NB&T Financial Group, Inc. Supplemental Executive Retirement Plan Participation AgreementTimothy L. Smith |  | Incorporated by reference to registrants Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2002, Exhibit 10.2 (File No. 000-23134)
|              |  |                                                                                                           
|10.4*         |  | National Bank & Trust Incentive Plan                                                                       |  | Incorporated by reference to registrants Current Report on Form 8-K filed on February 27, 2006, Exhibit 99.1 (File No. 000-23134)                 
|              |  |                                                                                                           
|10.5*         |  | Stock Option Award Agreement for John J. Limbert                                                           |  | Incorporated by reference to registrants Form 10-Q filed on May 11, 2006, Exhibit 10.4 (File No. 000-23134)                                       
|              |  |                                                                                                           
|10.6*         |  | Severance Agreement for Craig F. Fortin                                                                    |  | Incorporated by reference to registrants Form 10-Q filed on November 9, 2007, Exhibit 10.2 (File No. 000-23134)                                   
|              |  |                                                                                                           
|10.7*         |  | Severance Agreement for Stephen G. Klumb                                                                   |  | Incorporated by reference to registrants Form 10-Q filed on November 9, 2007, Exhibit 10.3 (File No. 000-23134)                                   
|              |  |                                                                                                           
|10.8*         |  | Employment Agreement with John J. Limbert                                                                  |  | Incorporated by reference to registrants Form 8-K filed on November 23, 2007, Exhibit 1 (File No. 000-23134)                                      
|              |  |                                                                                                           
|10.9*         |  | NB&T Financial Group, Inc. Amended and Restated 2006 Equity Plan                                           |  | Included herewith                                                                                                                                  
|              |  |                                                                                                           
|10.10*        |  | First Amendment to Stock Option Award Agreement for John J. Limbert                                        |  | Included herewith                                                                                                                                  
|              |  |                                                                                                           
|10.11*        |  | First Amendment to Employment Agreement with John J. Limbert                                               |  | Included herewith                                                                                                                                  
|              |  |                                                                                                           
|10.12*        |  | First Amendment to the Severance Agreement with Craig F. Fortin and Stephen G. Klumb                       |  | Included herewith                                                                                                                                  



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|              |  |                                                                                                      |  |                                                                                                                  
|------------- |  | ---------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------
|EXHIBITNUMBER |  | DESCRIPTION                                                                                          |  | PAGE REFERENCE                                                                                                   
|10.13*        |  | Form of Amended and Restated 2006 Equity Plan Award Agreement (Employee Award)                       |  | Included herewith                                                                                                
|              |  |                                                                                                     
|10.14*        |  | Form of Amended and Restated 2006 Equity Plan Award Agreement (Directors Nonqualified Stock Option) |  | Included herewith                                                                                                
|              |  |                                                                                                     
|21            |  | Subsidiaries of NB&T Financial Group, Inc.                                                           |  | Included herewith                                                                                                
|              |  |                                                                                                     
|23            |  | Consent of Independent AccountantsBKD, LLP                                                          |  | Included herewith                                                                                                
|              |  |                                                                                                     
|31.1          |  | Rule 13a-14(a)/Section 302 Certification of Chief Executive Officer                                  |  | Included herewith                                                                                                
|              |  |                                                                                                     
|31.2          |  | Rule 13a-14(b)/Section 302 Certification of Chief Financial Officer                                  |  | Included herewith                                                                                                
|              |  |                                                                                                     
|32.1          |  | Rule 13a-14(b)/Section 906 Certification of Chief Executive Officer                                  |  | Included herewith                                                                                                
|              |  |                                                                                                     
|32.2          |  | Rule 13a-14(b)/Section 906 Certification of Chief Financial Officer                                  |  | Included herewith                                                                                                
|              |  |                                                                                                     
|99.2          |  | Proxy Statement for 2009 annual meeting of shareholders                                              |  | Incorporated by reference to the registrants definitive proxy statement to be filed on or before March 30, 2009.



|* | Indicates a management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------------------



63