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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



(Mark One)

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



| | For the quarterly period ended September 30, 2003
| | -------------------------------------------------



OR



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



| | For the transition period from/to
| | ---------------------------------



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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: (513) 382-1441



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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x  No ̈



Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes ̈No  x



Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the last practicable date: As of November 3, 2003, 3,222,283 common shares were issued and outstanding.



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1



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NB&T FINANCIAL GROUP, INC.

September 30, 2003 Form 10-Q

Table of Contents



|               |  |                                                                                       |  | Page
|-------------- |  | ------------------------------------------------------------------------------------- |  | ----
|               |  |                                                                                      
|               |  | PART I                                                                                |  |     
|Item 1:        |  | Financial Statements                                                                  |  | 3   
|               |  | Condensed Consolidated Balance Sheets                                                 |  |     
|               |  | Condensed Consolidated Statements of Income                                           |  |     
|               |  | Condensed Consolidated Statements of Cash Flows                                       |  |     
|               |  | Notes to Condensed Consolidated Financial Statements                                  |  |     
|               |  | Independent Accountants Report                                                       |  |     
|               |  |                                                                                      
|Item 2:        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11  
|Item 3:        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 17  
|Item 4:        |  | Controls and Procedures                                                               |  | 17  
|               |  |                                                                                      
|               |  | PART II                                                                               |  |     
|Item 1:        |  | Legal Proceedings                                                                     |  | 18  
|Item 2:        |  | Changes in Securities and Use of Proceeds                                             |  | 18  
|Item 3:        |  | Defaults Upon Senior Securities                                                       |  | 18  
|Item 4:        |  | Submission of Matters to a Vote of Security Holders                                   |  | 18  
|Item 5:        |  | Other Information                                                                     |  | 18  
|Item 6:        |  | Exhibits and Reports on Form 8-K                                                      |  | 18  
|               | 
|Signatures     |  | 19                                                                                   
|               | 
|Certifications |  | 21                                                                                   



2



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NB&T Financial Group, Inc.

Condensed Consolidated Balance Sheets



|(Dollars in thousands)                                                             |  | September 30, 2003 |         |   | December 31, 2002 |  
|---------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | -
|                                                                                   |  | (Unaudited)        |         |   |                   |  
|Assets                                                                             |  |                    |         |   |                   |  
|Cash and due from banks                                                            |  | $                  | 17,093  |   |                   | $
|Interest-bearing demand deposits                                                   |  |                    | 12      |   |                   |  
|Federal funds sold                                                                 |  |                    | 8,973   |   |                   |  
|                                                                                   |  |                    |         |   |                   |  
|Cash and cash equivalents                                                          |  |                    | 26,078  |   |                   |  
|                                                                                   |  |                    |         |   |                   |  
|Securities - available-for-sale                                                    |  |                    | 168,433 |   |                   |  
|Securities - held-to-maturity                                                      |  |                    | 38,687  |   |                   |  
|Loans, net of allowance for loan losses of $4,545 and $4,010                       |  |                    | 403,212 |   |                   |  
|Premises and equipment                                                             |  |                    | 14,172  |   |                   |  
|Federal Reserve and Federal Home Loan Bank stock                                   |  |                    | 7,806   |   |                   |  
|Goodwill and other intangibles                                                     |  |                    | 7,219   |   |                   |  
|Interest receivable and other assets                                               |  |                    | 16,248  |   |                   |  
|                                                                                   |  |                    |         |   |                   |  
|Total assets                                                                       |  | $                  | 681,855 |   |                   | $
|                                                                                   |  |                    |         |   |                   |  
|                                                                                   |  |                   
|Liabilities and Stockholders Equity                                               |  |                    |         |   |                   |  
|                                                                                   |  |                   
|Liabilities                                                                        |  |                    |         |   |                   |  
|Deposits                                                                           |  |                    |         |   |                   |  
|Demand                                                                             |  | $                  | 50,991  |   |                   | $
|Savings, NOW and Money Market                                                      |  |                    | 218,451 |   |                   |  
|Time                                                                               |  |                    | 188,891 |   |                   |  
|                                                                                   |  |                    |         |   |                   |  
|Total deposits                                                                     |  |                    | 458,333 |   |                   |  
|                                                                                   |  |                    |         |   |                   |  
|Short-term borrowings                                                              |  |                    | 29,753  |   |                   |  
|Long-term debt                                                                     |  |                    | 133,714 |   |                   |  
|Interest payable and other liabilities                                             |  |                    | 2,791   |   |                   |  
|                                                                                   |  |                    |         |   |                   |  
|                                                                                   |  |                   
|Total liabilities                                                                  |  |                    | 624,591 |   |                   |  
|                                                                                   |  |                    |         |   |                   |  
|                                                                                   |  |                   
|Commitments and Contingencies                                                      |  |                    |         |   |                   |  
|                                                                                   |  |                   
|Stockholders Equity                                                               |  |                    |         |   |                   |  
|Preferred stock, no par value, authorized 100,000 shares; none issued              |  |                    |         |   |                   |  
|Common stock, no par value; authorized 6,000,000 shares; issued  3,818,950 shares |  |                    | 1,000   |   |                   |  
|Additional paid-in capital                                                         |  |                    | 9,630   |   |                   |  
|Retained earnings                                                                  |  |                    | 53,572  |   |                   |  
|Unearned employee stock ownership plan (ESOP) shares                               |  |                    | (1,623  | ) |                   |  
|Accumulated other comprehensive income                                             |  |                    | 480     |   |                   |  
|Treasury stock; 596,667 and 596,418 shares at cost in 2003 and 2002                |  |                    | (5,795  | ) |                   |  
|                                                                                   |  |                    |         |   |                   |  
|                                                                                   |  |                   
|Total stockholders equity                                                         |  |                    | 57,264  |   |                   |  
|                                                                                   |  |                    |         |   |                   |  
|                                                                                   |  |                   
|Total liabilities and stockholders equity                                         |  | $                  | 681,855 |   |                   | $
|                                                                                   |  |                    |         |   |                   |  



See Notes to Condensed Consolidated
Financial Statements



3



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NB&T Financial Group, Inc.

Condensed Consolidated Statements of Income



|                                                              |  | Three Months Ended September 30, |       | Nine Months Ended September 30,
|------------------------------------------------------------- |  | -------------------------------- | ----- | -------------------------------
|(Dollars in thousands, except per share amounts)              |  | 2003                             |       | 2002                           
|                                                              |  | (Unaudited)                      |       | (Unaudited)                    
|Interest and Dividend Income                                  |  |                                  |       |                                
|Loans                                                         |  | $                                | 6,558 |                                
|Securities-Taxable                                            |  |                                  | 778   |                                
|Securities-Tax-exempt                                         |  |                                  | 831   |                                
|Federal funds sold and other                                  |  |                                  | 33    |                                
|Dividends on Federal Home Loan and Federal Reserve Bank stock |  |                                  | 82    |                                
|                                                              |  |                                  |       |                                
|Total interest and dividend income                            |  |                                  | 8,282 |                                
|                                                              |  |                                  |       |                                
|Interest Expense                                              |  |                                  |       |                                
|Deposits                                                      |  |                                  | 1,521 |                                
|Short-term borrowings                                         |  |                                  | 55    |                                
|Long-term debt                                                |  |                                  | 1,597 |                                
|                                                              |  |                                  |       |                                
|Total interest expense                                        |  |                                  | 3,173 |                                
|                                                              |  |                                  |       |                                
|Net Interest Income                                           |  |                                  | 5,109 |                                
|Provision for Loan Losses                                     |  |                                  | 1,289 |                                
|                                                              |  |                                  |       |                                
|Net Interest Income After Provision for Loan Losses           |  |                                  | 3,820 |                                
|                                                              |  |                                  |       |                                
|Non-interest Income                                           |  |                                  |       |                                
|Trust income                                                  |  |                                  | 218   |                                
|Service charges and fees                                      |  |                                  | 878   |                                
|ATM network fees                                              |  |                                  | 111   |                                
|Insurance agency commissions                                  |  |                                  | 578   |                                
|Net gains on sales of securities available-for-sale           |  |                                  |      |                                
|Other                                                         |  |                                  | 339   |                                
|                                                              |  |                                  |       |                                
|Total non-interest income                                     |  |                                  | 2,124 |                                
|                                                              |  |                                  |       |                                
|Non-interest Expense                                          |  |                                  |       |                                
|Salaries and employee benefits                                |  |                                  | 2,560 |                                
|Net occupancy expense                                         |  |                                  | 305   |                                
|Equipment and data processing expense                         |  |                                  | 674   |                                
|Professional fees                                             |  |                                  | 441   |                                
|Marketing expense                                             |  |                                  | 138   |                                
|State franchise tax                                           |  |                                  | 170   |                                
|Amortization of intangibles                                   |  |                                  | 180   |                                
|Other                                                         |  |                                  | 664   |                                
|                                                              |  |                                  |       |                                
|Total non-interest expense                                    |  |                                  | 5,132 |                                
|                                                              |  |                                  |       |                                
|Income Before Income Tax                                      |  |                                  | 812   |                                
|Provision for Income Taxes                                    |  |                                  | 2     |                                
|                                                              |  |                                  |       |                                
|Net Income                                                    |  | $                                | 810   |                                
|                                                              |  |                                  |       |                                
|Basic Earnings Per Share                                      |  | $                                | .26   |                                
|                                                              |  |                                  |       |                                
|Diluted Earnings Per Share                                    |  | $                                | .26   |                                
|                                                              |  |                                  |       |                                
|Dividends Declared Per Share                                  |  | $                                | .24   |                                
|                                                              |  |                                  |       |                                



See Notes to Condensed Consolidated
Financial Statements



4



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NB&T Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows



|                                                             |  | Nine Months Ended, September 30 |         
|------------------------------------------------------------ |  | ------------------------------- | --------
|(Dollars in thousands)                                       |  | 2003                            |         
|                                                             |  | (Unaudited)                     |         
|Operating Activities                                         |  |                                 |         
|Net income                                                   |  | $                               | 4,038   
|Items not requiring (providing) cash                         |  |                                 |         
|Depreciation and amortization                                |  |                                 | 1,851   
|Provision for loan losses                                    |  |                                 | 2,316   
|Amortization of premiums and discounts on securities         |  |                                 | 1,604   
|Net realized (gains) losses on available-for-sale securities |  |                                 | (907    
|FHLB stock dividends                                         |  |                                 | (208    
|Net change in:                                               |  |                                 |         
|Loans held for sale                                          |  |                                 | (328    
|Other assets and liabilities                                 |  |                                 | (936    
|                                                             |  |                                 |         
|Net cash provided by operating activities                    |  |                                 | 7,430   
|                                                             |  |                                 |         
|Investing Activities                                         |  |                                 |         
|Purchases of available-for-sale securities                   |  |                                 | (146,705
|Purchase of Federal Reserve Bank stock                       |  |                                 | -0-     
|Proceeds from sales of available-for-sale securities         |  |                                 | 34,550  
|Proceeds from maturities of available-for-sale securities    |  |                                 | 109,221 
|Proceeds from maturities of held-to-maturity securities      |  |                                 | 5,805   
|Net change in loans                                          |  |                                 | (24,539 
|Purchase of premises and equipment                           |  |                                 | (720    
|Proceeds from sales of premises and equipment                |  |                                 | 57      
|                                                             |  |                                 |         
|Net cash (used) in investing activities                      |  |                                 | (22,331 
|                                                             |  |                                 |         
|Financing Activities                                         |  |                                 |         
|Net change in:                                               |  |                                 |         
|Deposits                                                     |  |                                 | (9,756  
|Short-term borrowings                                        |  |                                 | 10,513  
|Proceeds from trust preferred securities                     |  |                                 | -0-     
|Proceeds from FHLB advances                                  |  |                                 | 20,000  
|Repayment of FHLB advances                                   |  |                                 | (2,732  
|Cash dividends                                               |  |                                 | (2,329  
|Purchase of treasury shares                                  |  |                                 | (1,050  
|Proceeds from exercise of stock options                      |  |                                 | 523     
|                                                             |  |                                 |         
|Net cash provided by financing activities                    |  |                                 | 15,169  
|                                                             |  |                                 |         
|Increase in Cash and Cash Equivalents                        |  |                                 | 268     
|Cash and Cash Equivalents, Beginning of Year                 |  |                                 | 25,810  
|                                                             |  |                                 |         
|Cash and Cash Equivalents, End of Period                     |  | $                               | 26,078  
|                                                             |  |                                 |         



See Notes to Condensed Consolidated
Financial Statements



5



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NB&T Financial Group, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2003

(Unaudited)



Note 1: Basis of Presentation



The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America for interim financial information and the instructions to Form 10-Q. The Form 10-Q does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial
statements. Only material changes in financial condition and results of operations are discussed in Managements Discussion and Analysis of Financial Condition and Results of Operations.



The consolidated balance sheet as of December 31, 2002 has been derived from the audited
consolidated balance sheet of that date.



In the opinion of management, the
condensed consolidated financial statements contain all adjustments necessary to present fairly the financial condition of NB&T Financial Group, Inc. as of September 30, 2003, and December 31, 2002, and the results of its operations for the
three- and nine-month periods and cash flows for the nine months ended September 30, 2003 and 2002. The results of operations for the interim periods reported herein are not necessarily indicative of results of operation to be expected for the
entire year. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Companys Annual Report and Form
10-K for the year ended December 31, 2002 filed with the Commission.



Stock
Options



The Company accounts for its stock option plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (thousands, except per share amounts):



|                                                                                                                |  | Three MonthsEnded September 30, |     |   | Nine MonthsEnded September 30, |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | --- | - | ------------------------------ | -
|                                                                                                                |  | 2003                            |     |   | 2002                           |  
|Net income, as reported                                                                                         |  | $                               | 810 |   |                                | $
|Less: Total stock-based employee compensation determined under the fair value based method, net of income taxes |  |                                 | (18 | ) |                                |  
|                                                                                                                |  |                                 |     |   |                                |  
|Pro forma net income                                                                                            |  | $                               | 792 |   |                                | $
|                                                                                                                |  |                                 |     |   |                                |  
|Earnings per share:                                                                                             |  |                                 |     |   |                                |  
|Basic  as reported                                                                                             |  | $                               | .26 |   |                                | $
|                                                                                                                |  |                                 |     |   |                                |  
|Basic  pro forma                                                                                               |  | $                               | .25 |   |                                | $
|                                                                                                                |  |                                 |     |   |                                |  
|Diluted  as reported                                                                                           |  | $                               | .26 |   |                                | $
|                                                                                                                |  |                                 |     |   |                                |  
|Diluted  pro forma                                                                                             |  | $                               | .25 |   |                                | $
|                                                                                                                |  |                                 |     |   |                                |  



6



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NB&T Financial Group, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2003

(Unaudited)



Note 2: Securities



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



|                                 |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Approximate Fair Value
|-------------------------------- |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | ----------------------
|September 30, 2003:              |  |                |         |                        |   |                         |  |                       
|Available-for-Sale Securities:   |  |                |         |                        |   |                         |  |                       
|U.S. government agencies         |  | $              | 60,569  |                        | $ | 367                     |  | $                     
|Mortgage-backed securities       |  |                | 91,355  |                        |   | 896                     |  |                       
|State and political subdivisions |  |                | 7,809   |                        |   | 279                     |  |                       
|Other securities                 |  |                | 7,974   |                        |   | 25                      |  |                       
|                                 |  |                |         |                        |   |                         |  |                       
|                                 |  |                |         |                       
|                                 |  | $              | 167,707 |                        | $ | 1,567                   |  | $                     
|                                 |  |                |         |                        |   |                         |  |                       
|Held-to-Maturity Securities:     |  |                |         |                        |   |                         |  |                       
|State and political subdivisions |  | $              | 38,687  |                        | $ | 1,198                   |  | $                     
|                                 |  |                |         |                        |   |                         |  |                       
|December 31, 2002:               |  |                |         |                        |   |                         |  |                       
|Available-for-Sale Securities:   |  |                |         |                        |   |                         |  |                       
|U.S. government agencies         |  | $              | 44,315  |                        | $ | 339                     |  | $                     
|Mortgage-backed securities       |  |                | 104,572 |                        |   | 2,531                   |  |                       
|State and political subdivisions |  |                | 8,576   |                        |   | 265                     |  |                       
|Other securities                 |  |                | 8,010   |                        |   | 8                       |  |                       
|                                 |  |                |         |                        |   |                         |  |                       
|                                 |  |                |         |                       
|                                 |  | $              | 165,473 |                        | $ | 3,143                   |  | $                     
|                                 |  |                |         |                        |   |                         |  |                       
|Held-to-Maturity Securities:     |  |                |         |                        |   |                         |  |                       
|State and political subdivisions |  | $              | 44,490  |                        | $ | 1,216                   |  | $                     
|                                 |  |                |         |                        |   |                         |  |                       



Note 3: Loans



Categories of loans include (thousands):



|                                               |  | September 30, 2003 |         |   | December 31,2002 |  
|---------------------------------------------- |  | ------------------ | ------- | - | ---------------- | -
|Commercial and industrial                      |  | $                  | 91,115  |   |                  | $
|Agricultural                                   |  |                    | 24,208  |   |                  |  
|Real estate construction                       |  |                    | 10,973  |   |                  |  
|Commercial real estate                         |  |                    | 34,870  |   |                  |  
|Residential real estate                        |  |                    | 155,602 |   |                  |  
|Consumer                                       |  |                    | 87,239  |   |                  |  
|Other                                          |  |                    | 4,124   |   |                  |  
|                                               |  |                    |         |   |                  |  
|Total loans                                    |  |                    | 408,131 |   |                  |  
|                                               |  |                   
|Less                                           |  |                    |         |   |                  |  
|Net deferred loan fees, premiums and discounts |  |                    | (374    | ) |                  |  
|Allowance for loan losses                      |  |                    | (4,545  | ) |                  |  
|                                               |  |                    |         |   |                  |  
|Net loans                                      |  | $                  | 403,212 |   |                  | $
|                                               |  |                    |         |   |                  |  



7



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NB&T Financial Group, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2003

(Unaudited)



Note 3: Loans (continued)



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



|                           |  | Nine Months EndedSeptember 30, |       
|-------------------------- |  | ------------------------------ | ------
|                           |  | 2003                           |       
|Balance, beginning of year |  | $                              | 4,010 
|Provision for loan losses  |  |                                | 2,316 
|Recoveries                 |  |                                | 403   
|Charge-offs                |  |                                | (2,184
|                           |  |                                |       
|                           |  |                               
|Balance, end of period     |  | $                              | 4,545 
|                           |  |                                |       



Impaired loans totaled $3,878,000 and
$4,214,000 at September 30, 2003 and December 31, 2002, respectively. An allowance for loan losses of $1,163,000 and $1,542,000 relates to impaired loans of $3,072,000 and $4,196,000 at September 30, 2003 and December 31, 2002, respectively. At
September 30, 2003 and December 31, 2002, impaired loans of $806,000 and $18,000 had no related allowance for loan losses.



At September 30, 2003 and December 31, 2002, accruing loans delinquent 90 days or more totaled $266,000 and $1,391,000, respectively. Non-accruing loans at September 30,
2003 and December 31, 2002 were $5,761,000 and $4,734,000, respectively.



Note 4: Commitments



Outstanding commitments to extend credit
as of September 30, 2003 totaled $46,861,000. Standby letters of credit as of September 30, 2003 totaled $840,000.



Note 5: Income Taxes



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



|                                     |  | Three Months Ended September 30, |      |   | Nine Months Ended September 30, |  
|------------------------------------ |  | -------------------------------- | ---- | - | ------------------------------- | -
|                                     |  | 2003                             |      |   | 2002                            |  
|Computed at the statutory rate (34%) |  | $                                | 276  |   |                                 | $
|Increase (decrease) resulting from:  |  |                                  |      |   |                                 |  
|Tax exempt interest                  |  |                                  | (194 | ) |                                 |  
|ESOP dividend                        |  |                                  | (41  | ) |                                 |  
|Bank owned life insurance            |  |                                  | (45  | ) |                                 |  
|Other                                |  |                                  | 6    |   |                                 |  
|                                     |  |                                  |      |   |                                 |  
|Actual tax expense                   |  | $                                | 2    |   |                                 | $
|                                     |  |                                  |      |   |                                 |  



8



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NB&T Financial Group, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2003

(Unaudited)



Note 6: Earnings Per Share



The factors used in the earnings per share computation were as follows (thousands, except share and per share amounts):



|                                                     |  | Three Months Ended September 30, |           | Nine Months Ended September 30,
|---------------------------------------------------- |  | -------------------------------- | --------- | -------------------------------
|                                                     |  | 2003                             |           | 2002                           
|Numerator:                                           |  |                                  |           |                                
|Net income                                           |  | $                                | 810       |                                
|                                                     |  |                                  |           |                                
|                                                     |  |                                  |           |                                
|Denominator:                                         |  |                                  |           |                                
|Weighted-average common shares outstanding (basic)   |  |                                  | 3,132,344 |                                
|Effect of stock options                              |  |                                  | 30,391    |                                
|                                                     |  |                                  |           |                                
|Weighted-average common shares outstanding (diluted) |  |                                  | 3,162,735 |                                
|                                                     |  |                                  |           |                                
|                                                     |  |                                  |           |                                
|Earnings per share:                                  |  |                                  |           |                                
|Basic                                                |  | $                                | .26       |                                
|                                                     |  |                                  |           |                                
|Diluted                                              |  | $                                | .26       |                                
|                                                     |  |                                  |           |                                



For the three months ended September
30, 2003 and 2002, stock options covering 11,000 and 73,600 shares of common stock were not considered in computing earnings per share, as the exercise prices exceeded fair market value and, thus, were not dilutive. For the nine months ended
September 30, 2003 and 2002, stock options covering 49,200 and 73,600 shares of common stock were not considered in computing earnings per share, as they were not dilutive.



Note 7: Subsequent Events



On October 3, 2003, NB&T Financial Group, Inc. announced that it is undertaking several initiatives designed to lower the Companys non-interest expense by
closing three of its banking offices and reducing its workforce. The Banks Waynesfield office in Auglaize County will be closed and its customers will be served by the Banks Ada, Ohio office. The Washington Court House office, which is
an in-store branch in Wal-Mart, will be closed and its customers will be served by the Banks Sabina office. The third location is the Georgetown Courthouse Square office, which will be served by the Banks other Georgetown location. The
office closings are subject to regulatory approval.



9



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Independent Accountants Report



Board of Directors

NB&T Financial Group,
Inc.

Wilmington, Ohio



We have reviewed the accompanying condensed consolidated balance sheet of NB&T Financial Group, Inc. as of September 30, 2003 and the related condensed consolidated
statements of income for the three and nine month periods and cash flows for the nine-month periods ended September 30, 2003 and 2002. These financial statements are the responsibility of the Companys management.



We conducted our reviews in accordance with standards established by the American Institute
of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.



Based on our reviews, we are not aware of
any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.



We have previously audited, in accordance with auditing standards generally accepted in the
United States of America, the consolidated balance sheet as of December 31, 2002 and the related consolidated statements of income, retained earnings and cash flows for the year then ended (not presented herein), and in our report dated February 5,
2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been derived.



BKD, LLP



Cincinnati, Ohio

October 14, 2003



10



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Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations



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) the effect of economic
conditions and interest rates on a national, regional or international basis; (2) competitive pressures in the retail banking, financial services, insurance and other industries; (3) the financial resources of, and products available to,
competitors; (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.



Results of Operations



Net income for the third quarter of 2003 was $810,000, a decrease of $917,000, or 53.1%, from the third quarter of 2002 net income of $1.73 million. Net income per
share-basic was $.26 for the third quarter of 2003, compared to $.56 per share for the third quarter of 2002, a decrease of 53.6%. Return on average equity and return on average assets for the third quarter of 2003 were 5.46% and 0.47%,
respectively, compared to 12.42% and 1.01% for the same period in 2002. Net income for the first nine months of 2003 was $4.04 million, a decrease of $1.13 million, or 21.8%, from the net income of $5.17 million for the first nine months of 2002.
Net income per share-basic was $1.29 for the first nine months of 2003, compared to $1.67 per share for the first nine months of 2002, a decrease of 22.8%. Return on average equity and return on average assets for the first nine months of 2003 were
9.25% and 0.78%, respectively, compared to 13.12% and 1.02% for the same period in 2002.



Net Interest Income



Net interest
income was $5.11 million for the third quarter of 2003 and $16.11 million for the first nine months of 2003, a decrease of $852,000 and $1.51 million respectively, compared to the same periods last year. Interest income totaled $8.28 million for the
third quarter of 2003, a decrease of 19.00% from $10.23 million during the same period last year. Interest income for the first nine months of 2003 totaled $26.46 million, a decrease of 14.7% from $31 million during the same period last year.
Although average loans outstanding for the third quarter and the first nine months increased 3.51% and 2.55%, compared to the prior year, the effect of the decline in their average yields exceeded the effect of those gains. The yield on average
loans decreased from 7.46% in the third quarter of 2002 to 6.46% in the third quarter of 2003 while the yield on average loans decreased from 7.62% for the first nine months of 2002 to 6.74% for the same period in 2003. The tax-equivalent yield on
average securities decreased from 5.33% for the third quarter last year to 3.38% for the third quarter of this year, and the tax-equivalent yield on average securities decreased from 5.58% for the first nine months of 2002 to 4.04% for the same
period this year. The decline in the securities yield is due to increased prepayments on mortgage backed securities and reinvestment of called and matured bonds at lower rates. A decrease in interest expense of 25.6% to $3.17 million during the
third quarter of 2003 from $4.27 million during the same period last year offset most of the decrease in the third quarters interest income. Similarly, a decrease in interest expense of 22.7% to $10.35 million during the first nine months of
2003 from $13.40 million during the same period last year offset most of the decrease in year-to-date interest income. Average interest-bearing liabilities for the third quarter increased 0.57% from last year to $575.2 million, and their cost
decreased from 2.96% during the third quarter of last year to 2.19% in the third quarter of this year. Average interest-bearing liabilities for the first nine months of 2003 increased 0.80% from last year to $577.3 million, and their cost decreased
from 3.13% to 2.40%. Tax-equivalent net interest margin decreased to 3.30% for the third quarter of this year from 3.91% for the third quarter of last year while the tax-equivalent net interest margin decreased to 3.50% for the first nine months of
2003 from 3.92% for the same period last year.



11



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Provision for Loan Losses



The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents
managements assessment of the estimated probable losses inherent in the Banks loan portfolio at each balance sheet date. The provision for loan losses increased 134.4% to $1.29 million during the third quarter of 2003 from $550,000
during the third quarter of last year. For the first nine months of 2003, the provision increased 65.4% to $2.32 million from $1.40 million for the same period last year. The higher provision for loan losses for the three and nine months ended
September 30, 2003 was attributable to two factors. First, net charge-offs were $802,000, or 0.79% (annualized), and $1.78 million, or 0.60% (annualized), for the three and nine months ended September 30, 2003, compared to $552,000, or 0.56%
(annualized), and $1.40 million, or 0.49% (annualized), for the same periods in 2002. Secondly, management increased the specific reserve against a relationship based on reappraisal of collateral securing the loans. Weakness in the local economy has
had a negative impact on the value of income-producing collateral securing certain loans.



Non-interest Income



Non-interest
income, excluding gains on sales of securities, was $2.12 million for the third quarter of 2003, a decrease of 1.5% over the $2.16 million earned in the third quarter of 2002. Non-interest income, excluding gains on sales of securities, was $6.49
million for the first nine months of 2003, an increase of 1.6% over the $6.39 million in the same period in 2002. Service charges and fees increased 17.1% from the third quarter last year and 23.7% from the first nine months of last year due to
increases in overdraft fees and debit card revenue. In August 2002, the Company introduced the Overdraft Honor program that aids customers by paying more and returning fewer overdraft checks. Insurance agency commissions decreased 12.7% in the third
quarter of 2003 but increased 9% in the first nine months of 2003, compared to the same periods last year, due to increased sales of annuity products. These revenue increases were partially offset by decreases in Trust and ATM network fees and
income from bank-owned life insurance. Trust income decreased 10.2% from the third quarter of last year and 10.5% from the first nine months of last year as a result of market value decreases in the accounts managed. ATM network fees decreased 21.5%
from the third quarter of last year and 26.2% from the first nine months of last year as a result of fewer units in operation during 2003 compared to the same periods in 2002. Other income decreased primarily due to a decrease in BOLI income of
$254,000 from 2002 to 2003 as a result of a death benefit claim made in May 2002.



Security gains for the first nine months of 2003 totaled $907,000, resulting from the sale of $34.5 million in mortgage-backed securities and U.S. agency notes.



Non-interest Expense



Non-interest expense was $5.13 million for the third quarter of 2003, compared to $5.36 million for the third quarter of 2002. Salaries and employee benefits expense
declined $373,000 in the third quarter from the same quarter last year due to reductions in employee bonus incentive plans for the current year. For the first nine months of 2003, non-interest expense was $16.3 million, compared to $16.1 million for
the same period in 2002. The increase occurred primarily due to increases in salaries and benefits expense. The average number of full-time equivalent employees has increased to 272 for the nine months ended September 30, 2003, from 269 for the same
period in 2002. In addition, health care and retirement benefit expenses, including the 401(k) and employee stock ownership plans, were higher for the nine months ended September 30, 2003, compared to the same period last year.



Income Taxes



The provision for income taxes for the third quarter of 2003 was $2,000, compared to $483,000 for the same period in 2002. The provision for
income taxes for the first nine months of 2003 was $811,000, compared to $1.34 million for the same period last year. The effective tax rate for the three months ended and nine months ended September 30, 2003 was .25% and 16.7%, respectively,
compared to 21.9% and 20.6% for the same periods in 2002. The decrease in the effective tax rate in the third quarter is due to tax-exempt income and the ESOP dividends paid tax deduction exceeding taxable income for the quarter. The decrease in the
effective tax rate for the first nine months of 2003, compared to the prior year, is due to certain tax exemptions and deductions not being fully recognized until the fourth quarter of 2002.



12



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Financial Condition



The changes that have occurred in NB&T Financial Group, Inc.s financial condition during 2003 are as follows (in thousands):



|                            |  | September 30 2003 |         | December 31 2002 |   | Amount  |  |   | Percent |  
|--------------------------- |  | ----------------- | ------- | ---------------- | - | ------- |  | - | ------- | -
|Total Assets                |  | $                 | 681,855 |                  | $ | 664,803 |  | $ | 17,052  |  
|Federal Funds Sold          |  |                   | 8,973   |                  |   | 6,988   |  |   | 1,985   |  
|Loans                       |  |                   | 407,757 |                  |   | 384,671 |  |   | 23,086  |  
|Securities                  |  |                   | 207,120 |                  |   | 213,090 |  |   | (5,970  | )
|Demand deposits             |  |                   | 50,991  |                  |   | 52,273  |  |   | (1,282  | )
|Savings, NOW, MMDA deposits |  |                   | 218,451 |                  |   | 208,221 |  |   | 10,230  |  
|CDs $100,000 and over      |  |                   | 39,517  |                  |   | 42,633  |  |   | (3,116  | )
|Other time deposits         |  |                   | 149,374 |                  |   | 164,962 |  |   | (15,588 | )
|Total deposits              |  |                   | 458,333 |                  |   | 468,089 |  |   | (9,756  | )
|Short-term borrowing        |  |                   | 29,753  |                  |   | 19,240  |  |   | 10,513  |  
|Long-term borrowing         |  |                   | 133,714 |                  |   | 116,446 |  |   | 17,268  |  
|Stockholders Equity         |  |                   | 57,264  |                  |   | 57,304  |  |   | (40     | )



At September 30, 2003, total assets
were $681.9 million, an increase of $17.1 million from December 31, 2002. The increase is primarily attributable to an increase in the loan portfolio of $23.1 million. The loan growth was funded by increases in repurchase agreements and Federal Home
Loan Bank advances and runoff in the securities portfolio. Deposits decreased $9.8 million during the year primarily in time deposits less than $100,000. Stockholders equity decreased $40,000 during the year to $57.3 million due to reduced
earnings and a decrease in other comprehensive income of $1.6 million due to a change in market value of securities available for sale.



Average total assets for the third quarter of 2003 increased 1.1% to $687.5 million from the third quarter of 2002. Average total loans increased to $403.7 million, an
increase of 3.5% from the same quarter of last year. The commercial loan average grew $5.8 million, an increase of 3.3%, and the personal loan average grew $7.8 million, an increase of 10.6%. Commercial and industrial lending to small to mid-sized
companies continues to be an area of growth for the Company, and the Bank has increased its efforts to originate automobile loans through its dealer network. Real estate loans remained relatively unchanged at $110.9 million for the third quarter of
2003. The securities portfolio average has decreased $8.6 million from the third quarter of 2002 to $222.6 million. During the first nine months of 2003, the Company has purchased $146.7 million in agency notes and mortgage-backed securities, $30.0
million of which was leveraged with $20 million in Federal Home Loan Bank advances. In that same time period, $34.5 million in securities were sold at a gain of $907,000, $67.6 million in bonds were called and approximately $47.4 million in payments
on mortgage-backed securities were received.



Average total deposits decreased
$11.2 million from the third quarter of 2002 to $411.7 million. Average small certificates of deposit decreased $19.4 million, or 11.3%, as the Company reduced its cost of funds and customers continued to seek out higher rates of return. Average
large-dollar certificates increased $5.2 million, or 13.8%, and average short-term borrowings increased $1.9 million, or 6.9%, from the third quarter of last year due to increased public fund balances. Average Federal Home Loan Bank borrowings
increased $12.9 million, or 11.4%, due to the Company leveraging security purchases in the first quarter with an additional $20 million in fixed-rate advances.



13



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Allowance for Loan Losses



The following table is a summary of the Companys loan loss experience for the periods ended September 30, 2003 and 2002:



|                               |  | Three Months Ended September 30 |       |   | Nine Months Ended September 30 |  
|------------------------------ |  | ------------------------------- | ----- | - | ------------------------------ | -
|                               |  | 2003                            |       |   | 2002                           |  
|Balance at beginning of period |  | $                               | 4,058 |   |                                | $
|                               |  |                                 |       |  
|Charge-offs:                   |  |                                 |       |   |                                |  
|Commercial and industrial      |  |                                 | (236  | ) |                                |  
|Commercial real estate         |  |                                 | (21   | ) |                                |  
|Agricultural                   |  |                                 | (129  | ) |                                |  
|Residential real estate        |  |                                 | (273  | ) |                                |  
|Consumer                       |  |                                 | (244  | ) |                                |  
|Other                          |  |                                 |      |   |                                |  
|                               |  |                                 |       |   |                                |  
|Total charge-offs              |  |                                 | (903  | ) |                                |  
|                               |  |                                 |       |   |                                |  
|                               |  |                                 |       |  
|Recoveries:                    |  |                                 |       |   |                                |  
|Commercial and industrial      |  |                                 | 42    |   |                                |  
|Commercial real estate         |  |                                 | 1     |   |                                |  
|Agricultural                   |  |                                 | 1     |   |                                |  
|Residential real estate        |  |                                 | 4     |   |                                |  
|Consumer                       |  |                                 | 53    |   |                                |  
|Other                          |  |                                 |      |   |                                |  
|                               |  |                                 |       |   |                                |  
|Total recoveries               |  |                                 | 101   |   |                                |  
|                               |  |                                 |       |   |                                |  
|                               |  |                                 |       |  
|Net charge-offs                |  |                                 | (802  | ) |                                |  
|Provision for loan losses      |  |                                 | 1,289 |   |                                |  
|                               |  |                                 |       |   |                                |  
|Balance at end of period       |  | $                               | 4,545 |   |                                | $
|                               |  |                                 |       |   |                                |  



The following table sets forth
selected information regarding the Companys loan quality at the dates indicated (in thousands):



|                                                                 |  | September 30 2003 |       |   | December 31 2002 |   |       | September 30 2002 | 
|---------------------------------------------------------------- |  | ----------------- | ----- | - | ---------------- | - | ----- | ----------------- | 
|Loans accounted for on non-accrual basis                         |  | $                 | 5,761 |   |                  | $ | 4,734 |                   | 
|Accruing loans which are past due 90 days                        |  |                   | 266   |   |                  |   | 1,391 |                   | 
|Renegotiated loans                                               |  |                   | 0     |   |                  |   | 0     |                   | 
|Other real estate owned                                          |  |                   | 312   |   |                  |   | 226   |                   | 
|                                                                 |  |                   |       |   |                  |   |       |                   | 
|Total non-performing assets                                      |  | $                 | 6,339 |   |                  | $ | 6,351 |                   | 
|                                                                 |  |                   |       |   |                  |   |       |                   | 
|Ratios:                                                          |  |                   |       |   |                  |   |       |                   | 
|Allowance to total loans                                         |  |                   | 1.11  | % |                  |   | 1.04  | %                 | 
|Net charge-offs to average loans (annualized)                    |  |                   | .60   | % |                  |   | 0.49  | %                 | 
|Non-performing assets to total loans and other real estate owned |  |                   | 1.55  | % |                  |   | 1.65  | %                 | 



The allowance is maintained to absorb
potential 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 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.



14



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The Company allocates the allowance for loan losses to specifically classified loans and non-classified loans generally
based on the three-year net charge-off history. In assessing the adequacy of the allowance for loan losses, the Company considers three principal factors: (1) the three-year average charge-off percentage applied to the current outstanding balance by
portfolio type; (2) a specific percentage applied to individual loans estimated by management to have a potential loss; and (3) estimated losses attributable to economic conditions. Economic conditions considered include unemployment levels, the
condition of the agricultural business, and other local economic factors.



As
of September 30, 2003, there were $3.7 million in thirty non-accrual small business relationships. The majority of this amount consisted of two relationships, one of which is $1.2 million in a nursing home business which has been making monthly
payments since January 2002 following the signing of a forbearance agreement. The second relationship amounts to $1.1 million and is in the hotel business, which is in the process of liquidation.



Nonaccrual residential real estate loans consisted of twenty-three loans that total
$1.5 million, with the largest balance being $185,300. Non-accrual personal loans consisted of eleven loans that totaled $189,900, and home equity credit lines consisted of 8 loans totaling $316,300.



Liquidity and Capital Resources



Effective liquidity management ensures that the cash flow requirements of depositors and
borrowers, as well as Company cash needs, are met. The Company manages liquidity on both the asset and liability sides of the balance sheet. The loan to deposit ratio at September 30, 2003, was 89%, compared to 82.3% at the same date in 2002. Loans
to total assets were 59.8% at the end of the third quarter of 2003, compared to 57% at the same time last year. Management strives to keep this ratio below 70%. Of the total securities portfolio, 81.3% consists of available-for-sale securities that
are readily marketable. Approximately 88.2% 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 91.4% 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 Federal Home Loan Bank (FHLB). The Company has the ability to obtain deposits in the brokered certificate of deposit market to help provide
liquidity to fund loan growth.



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 September 30, 2003, NB&T Financial Group, Inc. had a total risk-based capital ratio of 14.45%, a Tier 1 risk-based capital ratio of 13.40%, and a Tier 1 leverage ratio of
8.37%.



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, 2002. 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.



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.



15



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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.



EFFECT OF RECENT ACCOUNTING STANDARDS



Accounting for Stock-Based Compensation



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation. This statement provides the alternative methods of transition for a voluntary change to a fair-value method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The expanded annual disclosure requirements and the transition provisions are effective for
fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. SFAS No. 148 is not expected to have a material
effect on the Companys consolidated financial position or results of operations.



Accounting Guarantees of Indebtedness of Others



In November
2002, the FASB issued Financial Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing a guarantee, and also expands the related disclosures. The provisions of initial
recognition are effective for guarantees issued or modified after December 31, 2002. Management believes that the adoption of FIN 45 will not have a significant impact on the Companys consolidated financial statements.



Consolidation of Variable Interest Entities



In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the



16



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variable interest entitys activities or entitled to receive a majority of the entitys residual returns, or both. FIN 46 also requires disclosures
about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. FIN 46 is not expected to have a material effect on the Companys consolidated financial statements.



Derivative Instruments and Hedging Activities



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This
Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain embedded derivative, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement amends SFAS No. 133 to reflect the decisions made as part of the Derivatives Implementation Group (DIG) and in other FASB projects or deliberations. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30, 2003. Adoption of this standard is not expected to have a material effect on the Companys consolidated financial statements.



Financial Instruments with Characteristics of Both Liabilities and Equity



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This Statement establishes standards for how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement
is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of this standard did not have a material effect on
the Companys consolidated financial statements.



Item 3  Quantitative and Qualitative Disclosures about Market Risk



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



Techniques used to measure interest rate risk include both interest rate
gap management and simulation modeling that measures the effect of rate changes on net interest income and market value of equity under different rate scenarios. At June 30, 2003, the Companys simulation model indicated the twelve-month
cumulative gap as a percent of total assets was a positive 8.2%, compared to a positive 15.6% at December 31, 2002. Also, similar to the results at year- end, June 30, 2003 results indicate a decreasing yield on interest-earning assets, the cost of
interest-bearing liabilities, and net interest margin. This position could have a negative effect on projected net interest income over the next twelve months. Currently, the Company is in the process of updating its simulation model as of September
30, 2003. Based on preliminary information, however, the Company does not believe that its market risk changed significantly between June 30, 2003 and September 30, 2003.



Item 4  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, that the Companys disclosure controls and procedures were
effective as of September 30, 2003. There were no changes in the Companys internal controls over financial reporting during the quarter ended September 30, 2003, that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.



17



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PART II  OTHER INFORMATION



Item 1 
Legal Proceedings



Not applicable



Item 2  Changes in Securities and Use of Proceeds



Not applicable



Item 3  Defaults Upon Senior Securities



Not
applicable



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



Not applicable



Item 5  Other Information



Not applicable



Item 6  Exhibits and Reports on Form 8-K



(a) Exhibits:



15

Accountants acknowledgement.31.1

Certification by CEO.31.2

Certification by CFO.32.1

Financial statements certification by CEO.32.2

Financial statements certification by CFO.99

Safe harbor under the Private Securities Litigation Reform Act of 1995.




(b) Filings on Form 8-K:



The Company filed a Form 8-K with the Securities and Exchange Commission on
July 17, 2003 regarding a press release announcing the results of operations for the second quarter of 2003.



The Company filed a Form 8-K with the Securities and Exchange Commission on September 16, 2003 regarding a press release announcing declaration of its third quarter dividend.



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SIGNATURES



Pursuant to the requirements of
the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



NB&T FINANCIAL GROUP, INC.



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|---------------------- |  | 
|Date: November 5, 2003 |  | 
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