##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended June 30, 2004



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)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|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 August 4, 2004, 3,227,893 common shares were issued and outstanding.



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##### Table of Contents

NB&T FINANCIAL GROUP, INC.

June 30, 2004 Form 10-Q

Table of Contents



|               |  |         |  |                                                                                       |  |     
|-------------- |  | ------- |  | ------------------------------------------------------------------------------------- |  | ----
|               |  |         |  |                                                                                       |  | Page
|               |  |         |  | PART I                                                                                |  |     
|               |  | Item 1: |  | Financial Statements                                                                  |  | 3   
|               |  |         |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|               |  |         |  | Condensed Consolidated Statements of Income                                           |  | 4   
|               |  |         |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5   
|               |  |         |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6   
|               |  |         |  | Report of Independent Registered Accounting Firm                                      |  | 11  
|               |  |         | 
|               |  | Item 2: |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|               |  | Item 3: |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 16  
|               |  | Item 4: |  | Controls and Procedures                                                               |  | 16  
|               |  |         | 
|               |  |         |  | 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 |  | 47     



2



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##### Table of Contents

NB&T Financial Group, Inc.



Condensed Consolidated Balance Sheets



|                                                                                   |  |               |         |   |                   |   |         |  
|---------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|(Dollars in thousands)                                                             |  | June 30, 2004 |         |   | December 31, 2003 |  
|                                                                                   |  | (Unaudited)   |         |   |                   |  
|Assets                                                                             |  |               |         |   |                   |   |         |  
|Cash and due from banks                                                            |  | $             | 13,427  |   |                   | $ | 19,789  |  
|Interest-bearing demand deposits                                                   |  |               | 1,109   |   |                   |   | 65      |  
|Federal funds sold                                                                 |  |               | 519     |   |                   |   | 2,364   |  
|                                                                                   |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                          |  |               | 15,055  |   |                   |   | 22,218  |  
|                                                                                   |  |               |         |   |                   |   |         |  
|Securities - available-for-sale                                                    |  |               | 141,850 |   |                   |   | 153,121 |  
|Securities - held-to-maturity                                                      |  |               | 38,160  |   |                   |   | 38,681  |  
|Loans held for sale                                                                |  |               |         |   |                   |   | 86      |  
|Loans, net of allowance for loan losses of $ 4,681 and $4,830                      |  |               | 406,607 |   |                   |   | 404,905 |  
|Premises and equipment                                                             |  |               | 14,662  |   |                   |   | 14,057  |  
|Federal Reserve and Federal Home Loan Bank stock                                   |  |               | 8,019   |   |                   |   | 7,877   |  
|Goodwill and other intangibles                                                     |  |               | 6,706   |   |                   |   | 7,039   |  
|Interest receivable and other assets                                               |  |               | 18,201  |   |                   |   | 16,944  |  
|                                                                                   |  |               |         |   |                   |   |         |  
|Total assets                                                                       |  | $             | 649,260 |   |                   | $ | 664,928 |  
|                                                                                   |  |               |         |   |                   |   |         |  
|Liabilities and Stockholders Equity                                               |  |               |         |   |                   |   |         |  
|                                                                                   |  |              
|Liabilities                                                                        |  |               |         |   |                   |   |         |  
|Deposits                                                                           |  |               |         |   |                   |   |         |  
|Demand                                                                             |  | $             | 50,091  |   |                   | $ | 56,781  |  
|Savings, NOW and Money Market                                                      |  |               | 216,430 |   |                   |   | 217,297 |  
|Time                                                                               |  |               | 167,835 |   |                   |   | 176,422 |  
|                                                                                   |  |               |         |   |                   |   |         |  
|Total deposits                                                                     |  |               | 434,356 |   |                   |   | 450,500 |  
|                                                                                   |  |               |         |   |                   |   |         |  
|Short-term borrowings                                                              |  |               | 24,747  |   |                   |   | 21,909  |  
|Long-term debt                                                                     |  |               | 130,934 |   |                   |   | 132,519 |  
|Interest payable and other liabilities                                             |  |               | 3,020   |   |                   |   | 3,304   |  
|                                                                                   |  |               |         |   |                   |   |         |  
|Total liabilities                                                                  |  |               | 593,057 |   |                   |   | 608,232 |  
|                                                                                   |  |               |         |   |                   |   |         |  
|Commitments and Contingencies                                                      |  |               |         |   |                   |   |         |  
|                                                                                   |  |              
|Stockholders Equity                                                               |  |               |         |   |                   |   |         |  
|Preferred stock, no par value, authorized 100,000 shares; none issued              |  |               |         |   |                   |   |         |  
|Common stock, no par value; authorized 6,000,000 shares; issued  3,818,950 shares |  |               | 1,000   |   |                   |   | 1,000   |  
|Additional paid-in capital                                                         |  |               | 9,760   |   |                   |   | 9,692   |  
|Retained earnings                                                                  |  |               | 54,001  |   |                   |   | 52,883  |  
|Unearned employee stock ownership plan (ESOP) shares                               |  |               | (1,421  | ) |                   |   | (1,506  | )
|Accumulated other comprehensive income                                             |  |               | (1,299  | ) |                   |   | 477     |  
|Treasury stock; 575,518 and 596,418 shares at cost in 2003 and 2002                |  |               | (5,838  | ) |                   |   | (5,850  | )
|                                                                                   |  |               |         |   |                   |   |         |  
|Total stockholders equity                                                         |  |               | 56,203  |   |                   |   | 56,696  |  
|                                                                                   |  |               |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                         |  | $             | 649,260 |   |                   | $ | 664,928 |  
|                                                                                   |  |               |         |   |                   |   |         |  



|                                                         |  |  
|-------------------------------------------------------- |  | -
|See Notes to Condensed Consolidated Financial Statements |  | 3



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##### Table of Contents

NB&T Financial Group, Inc.

Condensed Consolidated Statements of Income



|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|------------------------------------------------------------- |  | --------------------------- | ----- | ------------------------- | - | ----- |  | ---- | ------ |  | - | ------
|                                                              |  | Three Months Ended June 30, |       | Six Months Ended June 30,
|(Dollars in thousands, except per share amounts)              |  | 2004                        |       | 2003                      |   | 2004  |  | 2003
|                                                              |  | (Unaudited)                 |       | (Unaudited)              
|Interest and Dividend Income                                  |  |                             |       |                           |   |       |  |      |        |  |   |       
|Loans                                                         |  | $                           | 6,182 |                           | $ | 6,685 |  | $    | 12,463 |  | $ | 13,462
|Securities-Taxable                                            |  |                             | 1,203 |                           |   | 1,542 |  |      | 2,359  |  |   | 3,243 
|Securities-Tax-exempt                                         |  |                             | 483   |                           |   | 618   |  |      | 1,077  |  |   | 1,286 
|Federal funds sold and other                                  |  |                             | 23    |                           |   | 33    |  |      | 53     |  |   | 64    
|Dividends on Federal Home Loan and Federal Reserve Bank stock |  |                             | 83    |                           |   | 81    |  |      | 165    |  |   | 160   
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Total interest and dividend income                            |  |                             | 7,974 |                           |   | 8,959 |  |      | 16,117 |  |   | 18,215
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Interest Expense                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Deposits                                                      |  |                             | 1,342 |                           |   | 1,887 |  |      | 2,684  |  |   | 3,955 
|Short-term borrowings                                         |  |                             | 47    |                           |   | 50    |  |      | 95     |  |   | 103   
|Long-term debt                                                |  |                             | 1,545 |                           |   | 1,596 |  |      | 3,104  |  |   | 3,121 
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Total interest expense                                        |  |                             | 2,934 |                           |   | 3,533 |  |      | 5,883  |  |   | 7,179 
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Net Interest Income                                           |  |                             | 5,040 |                           |   | 5,426 |  |      | 10,234 |  |   | 11,036
|                                                              |  |                             |       |                          
|Provision for Loan Losses                                     |  |                             | 450   |                           |   | 487   |  |      | 900    |  |   | 1,027 
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Net Interest Income After Provision for Loan Losses           |  |                             | 4,590 |                           |   | 4,939 |  |      | 9,334  |  |   | 10,009
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Non-interest Income                                           |  |                             |       |                           |   |       |  |      |        |  |   |       
|Trust income                                                  |  |                             | 257   |                           |   | 223   |  |      | 510    |  |   | 417   
|Service charges and fees                                      |  |                             | 887   |                           |   | 872   |  |      | 1,683  |  |   | 1,619 
|ATM network fees                                              |  |                             | 87    |                           |   | 114   |  |      | 168    |  |   | 227   
|Insurance agency commissions                                  |  |                             | 649   |                           |   | 707   |  |      | 1,313  |  |   | 1,358 
|Net gains on sales of securities available-for-sale           |  |                             | 0     |                           |   | 361   |  |      | 527    |  |   | 907   
|Other                                                         |  |                             | 331   |                           |   | 360   |  |      | 641    |  |   | 702   
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Total non-interest income                                     |  |                             | 2,211 |                           |   | 2,637 |  |      | 4,842  |  |   | 5,230 
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Non-interest Expense                                          |  |                             |       |                           |   |       |  |      |        |  |   |       
|Salaries and employee benefits                                |  |                             | 2,832 |                           |   | 2,812 |  |      | 5,676  |  |   | 5,869 
|Net occupancy expense                                         |  |                             | 412   |                           |   | 446   |  |      | 868    |  |   | 893   
|Equipment and data processing expense                         |  |                             | 719   |                           |   | 830   |  |      | 1,516  |  |   | 1,606 
|Professional fees                                             |  |                             | 346   |                           |   | 320   |  |      | 681    |  |   | 656   
|Marketing expense                                             |  |                             | 95    |                           |   | 171   |  |      | 217    |  |   | 331   
|State franchise tax                                           |  |                             | 167   |                           |   | 172   |  |      | 342    |  |   | 350   
|Amortization of intangibles                                   |  |                             | 166   |                           |   | 178   |  |      | 333    |  |   | 352   
|Other                                                         |  |                             | 466   |                           |   | 597   |  |      | 1,193  |  |   | 1,146 
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Total non-interest expense                                    |  |                             | 5,203 |                           |   | 5,526 |  |      | 10,826 |  |   | 11,203
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Income Before Income Tax                                      |  |                             | 1,598 |                           |   | 2,050 |  |      | 3,350  |  |   | 4,036 
|                                                              |  |                             |       |                          
|Provision for Income Taxes                                    |  |                             | 328   |                           |   | 459   |  |      | 658    |  |   | 808   
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Net Income                                                    |  | $                           | 1,270 |                           | $ | 1,591 |  | $    | 2,692  |  | $ | 3,228 
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Basic Earnings Per Share                                      |  | $                           | .40   |                           | $ | .51   |  | $    | .86    |  | $ | 1.03  
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Diluted Earnings Per Share                                    |  | $                           | .40   |                           | $ | .50   |  | $    | .85    |  | $ | 1.02  
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       
|Dividends Declared Per Share                                  |  | $                           | .25   |                           | $ | .24   |  | $    | .50    |  | $ | .48   
|                                                              |  |                             |       |                           |   |       |  |      |        |  |   |       



|                                                         |  |  
|-------------------------------------------------------- |  | -
|See Notes to Condensed Consolidated Financial Statements |  | 4



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##### Table of Contents

NB&T Financial Group, Inc.



Condensed Consolidated Statements of Cash Flows



|                                                          |  |                           |         |   |      |   |          |  
|--------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | -------- | -
|                                                          |  | Six Months Ended June 30, |        
|(Dollars in thousands)                                    |  | 2004                      |         |   | 2003 |  
|                                                          |  | (Unaudited)               |         |   |      |  
|Operating Activities                                      |  |                           |         |   |      |   |          |  
|Net income                                                |  | $                         | 2,692   |   |      | $ | 3,228    |  
|Items not requiring (providing) cash                      |  |                           |         |   |      |   |          |  
|Depreciation and amortization                             |  |                           | 1,218   |   |      |   | 1,233    |  
|Provision for loan losses                                 |  |                           | 900     |   |      |   | 1,027    |  
|Amortization of premiums and discounts on securities      |  |                           | 684     |   |      |   | 864      |  
|Net realized gains on available-for-sale securities       |  |                           | (527    | ) |      |   | (907     | )
|FHLB stock dividends                                      |  |                           | (142    | ) |      |   | (138     | )
|Net change in:                                            |  |                           |         |   |      |   |          |  
|Loans held for sale                                       |  |                           | 86      |   |      |   | (322     | )
|Other assets and liabilities                              |  |                           | (237    | ) |      |   | (399     | )
|                                                          |  |                           |         |   |      |   |          |  
|Net cash provided by operating activities                 |  |                           | 4,674   |   |      |   | 4,586    |  
|                                                          |  |                           |         |   |      |   |          |  
|Investing Activities                                      |  |                           |         |   |      |   |          |  
|Purchases of available-for-sale securities                |  |                           | (35,723 | ) |      |   | (121,275 | )
|Proceeds from sales of available-for-sale securities      |  |                           | 20,814  |   |      |   | 34,550   |  
|Proceeds from maturities of available-for-sale securities |  |                           | 23,354  |   |      |   | 76,619   |  
|Proceeds from maturities of held-to-maturity securities   |  |                           | 499     |   |      |   | 4,380    |  
|Net change in loans                                       |  |                           | (2,602  | ) |      |   | (19,115  | )
|Purchase of premises and equipment                        |  |                           | (1,748  | ) |      |   | (577     | )
|Proceeds from sales of premises and equipment             |  |                           |        |   |      |   | 57       |  
|                                                          |  |                           |         |   |      |   |          |  
|Net cash provided (used) in investing activities          |  |                           | 4,594   |   |      |   | (25,361  | )
|                                                          |  |                           |         |   |      |   |          |  
|Financing Activities                                      |  |                           |         |   |      |   |          |  
|Net change in:                                            |  |                           |         |   |      |   |          |  
|Deposits                                                  |  |                           | (16,144 | ) |      |   | 2,530    |  
|Short-term borrowings                                     |  |                           | 2,838   |   |      |   | 4,407    |  
|Proceeds from FHLB advances                               |  |                           |        |   |      |   | 20,000   |  
|Repayment of FHLB advances                                |  |                           | (1,585  | ) |      |   | (1,656   | )
|Cash dividends                                            |  |                           | (1,574  | ) |      |   | (1,556   | )
|Proceeds from exercise of stock options                   |  |                           | 34      |   |      |   | 282      |  
|                                                          |  |                           |         |   |      |   |          |  
|Net cash provided by (used in) financing activities       |  |                           | (16,431 | ) |      |   | 24,007   |  
|                                                          |  |                           |         |   |      |   |          |  
|Increase (Decrease) in Cash and Cash Equivalents          |  |                           | (7,163  | ) |      |   | 3,232    |  
|                                                          |  |                          
|Cash and Cash Equivalents, Beginning of Year              |  |                           | 22,218  |   |      |   | 25,810   |  
|                                                          |  |                           |         |   |      |   |          |  
|Cash and Cash Equivalents, End of Period                  |  | $                         | 15,055  |   |      | $ | 29,042   |  
|                                                          |  |                           |         |   |      |   |          |  



|                                                         |  |  
|-------------------------------------------------------- |  | -
|See Notes to Condensed Consolidated Financial Statements |  | 5



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##### Table of Contents

Note 1: Basis of Presentation



The accompanying
unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q. The Form 10-Q
does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. 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, 2003 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 June 30, 2004, and December 31, 2003, and the results of its operations for the three and six month periods and cash flows for the six months ended June 30, 2004 and 2003. Those adjustments
consist of only normal recurring adjustments. The results of operations for the interim periods reported herein are not necessarily indicative of results of 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, 2003 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 Months Ended June 30, |       |   |      |   |       |   | Six Months Ended June 30, | 
|                                                                                                               |  | 2004                        |       |   | 2003 |   |       |   |                           |  |  | 2004 |  |   | 2003  |  
|Net income, as reported                                                                                        |  | $                           | 1,270 |   |      | $ | 1,591 |   |                           |  |  |      |  | $ | 2,692 |   |  | $ | 3,228 |  
|Less: Total stock-based employee compensation cost determined under the fair value method, net of income taxes |  |                             | (17   | ) |      |   | (19   | ) |                           |  |  |      |  |   | (37   | ) |  |   | (38   | )
|                                                                                                               |  |                             |       |   |      |   |       |   |                           |  |  |      |  |   |       |   |  |   |       |  
|Pro forma net income                                                                                           |  | $                           | 1,253 |   |      | $ | 1,572 |   |                           |  |  |      |  | $ | 2,655 |   |  | $ | 3,190 |  
|                                                                                                               |  |                             |       |   |      |   |       |   |                           |  |  |      |  |   |       |   |  |   |       |  
|Earnings per share:                                                                                            |  |                             |       |   |      |   |       |   |                           |  |  |      |  |   |       |   |  |   |       |  
|Basic  as reported                                                                                            |  | $                           | .40   |   |      | $ | .51   |   |                           |  |  |      |  | $ | .86   |   |  | $ | 1.03  |  
|                                                                                                               |  |                             |       |   |      |   |       |   |                           |  |  |      |  |   |       |   |  |   |       |  
|Basic  pro forma                                                                                              |  | $                           | .40   |   |      | $ | .50   |   |                           |  |  |      |  | $ | .84   |   |  | $ | 1.02  |  
|                                                                                                               |  |                             |       |   |      |   |       |   |                           |  |  |      |  |   |       |   |  |   |       |  
|Diluted  as reported                                                                                          |  | $                           | .40   |   |      | $ | .50   |   |                           |  |  |      |  | $ | .85   |   |  | $ | 1.02  |  
|                                                                                                               |  |                             |       |   |      |   |       |   |                           |  |  |      |  |   |       |   |  |   |       |  
|Diluted  pro forma                                                                                            |  | $                           | .40   |   |      | $ | .50   |   |                           |  |  |      |  | $ | .84   |   |  | $ | 1.01  |  
|                                                                                                               |  |                             |       |   |      |   |       |   |                           |  |  |      |  |   |       |   |  |   |       |  



6



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##### Table of Contents

Note 2: Securities



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



|                                 |  |               |         |                      |   |                       |  |                       |       |  |   |        
|-------------------------------- |  | ------------- | ------- | -------------------- | - | --------------------- |  | --------------------- | ----- |  | - | -------
|                                 |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | ApproximateFair Value
|June 30, 2004:                   |  |               |         |                      |   |                       |  |                       |       |  |   |        
|Available-for-Sale Securities:   |  |               |         |                      |   |                       |  |                       |       |  |   |        
|U.S. government agencies         |  | $             | 71,435  |                      | $ | 30                    |  | $                     | 1,543 |  | $ | 69,922 
|Mortgage-backed securities       |  |               | 71,288  |                      |   | 501                   |  |                       | 932   |  |   | 70,857 
|State and political subdivisions |  |               | 1,087   |                      |   | 13                    |  |                       | 39    |  |   | 1,061  
|Other securities                 |  |               | 10      |                      |   |                      |  |                       |      |  |   | 10     
|                                 |  |               |         |                      |   |                       |  |                       |       |  |   |        
|                                 |  | $             | 143,820 |                      | $ | 544                   |  | $                     | 2,514 |  | $ | 141,850
|                                 |  |               |         |                      |   |                       |  |                       |       |  |   |        
|Held-to-Maturity Securities:     |  |               |         |                      |   |                       |  |                       |       |  |   |        
|State and political subdivisions |  | $             | 38,160  |                      | $ | 667                   |  | $                     | 96    |  | $ | 38,731 
|                                 |  |               |         |                      |   |                       |  |                       |       |  |   |        
|December 31, 2003:               |  |               |         |                      |   |                       |  |                       |       |  |   |        
|Available-for-Sale Securities:   |  |               |         |                      |   |                       |  |                       |       |  |   |        
|U.S. government agencies         |  | $             | 60,502  |                      | $ | 239                   |  | $                     | 308   |  | $ | 60,433 
|Mortgage-backed securities       |  |               | 84,076  |                      |   | 1,022                 |  |                       | 537   |  |   | 84,561 
|State and political subdivisions |  |               | 7,810   |                      |   | 307                   |  |                       |      |  |   | 8,117  
|Other securities                 |  |               | 10      |                      |   |                      |  |                       |      |  |   | 10     
|                                 |  |               |         |                      |   |                       |  |                       |       |  |   |        
|                                 |  | $             | 152,398 |                      | $ | 1,568                 |  | $                     | 845   |  | $ | 153,121
|                                 |  |               |         |                      |   |                       |  |                       |       |  |   |        
|Held-to-Maturity Securities:     |  |               |         |                      |   |                       |  |                       |       |  |   |        
|State and political subdivisions |  | $             | 38,681  |                      | $ | 1,398                 |  | $                     | 20    |  | $ | 40,059 
|                                 |  |               |         |                      |   |                       |  |                       |       |  |   |        



Note 3: Loans



Categories of loans include (thousands):



|                                               |  |               |         |   |                  |   |         |  
|---------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                               |  | June 30, 2004 |         |   | December 31,2003 |  
|Commercial and industrial                      |  | $             | 91,211  |   |                  | $ | 89,621  |  
|Agricultural                                   |  |               | 24,346  |   |                  |   | 22,841  |  
|Real estate construction                       |  |               | 12,342  |   |                  |   | 11,296  |  
|Commercial real estate                         |  |               | 41,791  |   |                  |   | 35,399  |  
|Residential real estate                        |  |               | 155,746 |   |                  |   | 158,880 |  
|Consumer                                       |  |               | 83,856  |   |                  |   | 88,009  |  
|Other                                          |  |               | 2,183   |   |                  |   | 4,011   |  
|                                               |  |               |         |   |                  |   |         |  
|Total loans                                    |  |               | 411,475 |   |                  |   | 410,057 |  
|Less                                           |  |               |         |   |                  |   |         |  
|Net deferred loan fees, premiums and discounts |  |               | (187    | ) |                  |   | (322    | )
|Allowance for loan losses                      |  |               | (4,681  | ) |                  |   | (4,830  | )
|                                               |  |               |         |   |                  |   |         |  
|Net loans                                      |  | $             | 406,607 |   |                  | $ | 404,905 |  
|                                               |  |               |         |   |                  |   |         |  



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##### Table of Contents

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



|                           |  |                           |        |   |      |   |        |  
|-------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                           |  | Six Months Ended June 30, |       
|                           |  | 2004                      |        |   | 2003 |  
|Balance, beginning of year |  | $                         | 4,830  |   |      | $ | 4,010  |  
|Provision for loan losses  |  |                           | 900    |   |      |   | 1,027  |  
|Recoveries                 |  |                           | 307    |   |      |   | 302    |  
|Charge-offs                |  |                           | (1,356 | ) |      |   | (1,281 | )
|                           |  |                           |        |   |      |   |        |  
|Balance, end of period     |  | $                         | 4,681  |   |      | $ | 4,058  |  
|                           |  |                           |        |   |      |   |        |  



Impaired loans totaled $4,890,000 and
$3,827,000 at June 30, 2004 and December 31, 2003, respectively. An allowance for loan losses of $911,000 and $1,537,000 relates to impaired loans of $2,388,000 and $3,182,000 at June 30, 2004 and December 31, 2003, respectively. At June 30, 2004
and December 31, 2002, impaired loans of $2,502,000 and $645,000 had no related allowance for loan losses.



At June 30, 2004 and December 31, 2003, accruing loans delinquent 90 days or more totaled $0 and $248,000, respectively. Non-accruing loans at June 30, 2004 and December 31, 2003 were $6,690,000 and $5,599,000,
respectively.



Note 4: Commitments



Outstanding commitments to extend credit as of June 30, 2004 total $51,778,000. Standby
letters of credit as of June 30, 2003 total $696,000.



Note 5: 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 June 30, |           | Six Months Ended June 30,
|                                                     |  | 2004                        |           | 2003                      |   | 2004      |  | 2003
|Numerator:                                           |  |                             |           |                           |   |           |  |      |           |  |   |          
|Net income                                           |  | $                           | 1,270     |                           | $ | 1,591     |  | $    | 2,692     |  | $ | 3,228    
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Denominator:                                         |  |                             |           |                           |   |           |  |      |           |  |   |          
|Weighted-average common shares outstanding (basic)   |  |                             | 3,147,129 |                           |   | 3,144,462 |  |      | 3,146,958 |  |   | 3,137,835
|Effect of stock options                              |  |                             | 26,015    |                           |   | 28,568    |  |      | 25,809    |  |   | 31,238   
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Weighted-average common shares outstanding (diluted) |  |                             | 3,173,144 |                           |   | 3,173,030 |  |      | 3,172,767 |  |   | 3,169,073
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Earningsper share:                                   |  |                             |           |                           |   |           |  |      |           |  |   |          
|Basic                                                |  | $                           | .40       |                           | $ | .51       |  | $    | .86       |  | $ | 1.03     
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Diluted                                              |  | $                           | .40       |                           | $ | .50       |  | $    | .85       |  | $ | 1.02     
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          



For the three and six months ended
June 30, 2004, all stock options were considered in computing earnings per share. For the three and six months ended June 30, 2003, stock options covering 49,200 shares of common stock were not considered in computing earnings per share as their
exercise prices exceeded the fair marker value of the Companys common shares.



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##### Table of Contents

Note 6: Trust Preferred Securities



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 similiar to the Capital Securities. The sole
assets of Trust I 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 I under the Capital Securities. Distributions on the Capital Securities are 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 are considered Tier I capital (with certain limitations applicable) under current regulatory guidelines.



The junior subordinated debentures are subject to mandatory redemption, in whole or in part, upon repayment of the Capital Securities at maturity or their earlier
redemption at the liquidation amount. Subject to the Corporation having received prior approval of the Federal Reserve, if then required, the Capital Securities are redeemable prior to the maturity date of June 26, 2032, at the option of the
Corporation; on or after June 26, 2007 at par. Upon occurrence of specific events defined within the trust indenture, the Capital Securities may also be redeemed prior to June 26, 2007 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 June 30, 2004, the outstanding principal balance of the Capital Securities was $8,000,000, and as of December 31, 2003 and June 30, 2003. In December 2003, FASB
issued a revision to FIN 46 to clarify certain provisions which affected the accounting for trust preferred securities. As a result of the provisions in FIN 46, the trust was deconsolidated as of March 31, 2004, with the Company accounting for its
investment in the trust as assets, its subordinated debentures as debt, and the interest paid thereon as interest expense. The Company had always classified the trust preferred securities as debt but eliminated its common stock investment.



Note 7: Subsequent Events



Effective July 30, 2004, the Company reclassified its Held-to-Maturity Securities as
Available-for-Sale. Historically, the Held-to-Maturity portfolio contained both out-of-state and Ohio municipal securities which were used to meet State of Ohio public fund pledging requirements and provide non-taxable income for the Company. As a
result of a change in the Ohio Revised Code, the State of Ohio public fund pledging requirements eliminated out-of-state municipals as eligible collateral. Because of this change, approximately 77% of the Held-to-Maturity portfolio could not be used
as originally intended. Management reclassified the portfolio to provide more flexibility for public fund pledging requirements, interest rate risk management and potential tax savings opportunities.



The following table discloses the pro forma impact on the June 30, 2004, financial statements
had the reclassification been made at June 30, 2004:



|                                                                |  |                           |         |   |                      |   |         |                         |  |   |         |  
|--------------------------------------------------------------- |  | ------------------------- | ------- | - | -------------------- | - | ------- | ----------------------- |  | - | ------- | -
|Balance Sheet Description                                       |  | As Reported June 30, 2004 |         |   | Pro-formaadjustments |   |         | Pro-forma June 30, 2004 | 
|Securities  Available for sale                                 |  | $                         | 141,850 |   |                      | $ | 38,731  |                         |  | $ | 180,581 |  
|Securities  held-to- maturity                                  |  |                           | 38,160  |   |                      | $ | (38,160 | )                       |  |   |        |  
|Total Assets                                                    |  | $                         | 649,260 |   |                      | $ | 571     |                         |  | $ | 649,831 |  
|                                                                |  |                           |         |   |                      |   |         |                         |  |   |         |  
|Interest payable and other liabilities (Deferred tax liability) |  |                           | 3,020   |   |                      |   | 194     |                         |  |   | 3,214   |  
|Total liabilities                                               |  |                           | 593,057 |   |                      |   | 194     |                         |  |   | 593,251 |  
|Accumulated and other comprehensive income                      |  |                           | (1,299  | ) |                      |   | 377     |                         |  |   | (922    | )
|Total stockholdersequity                                       |  |                           | 56,203  |   |                      | $ | 377     |                         |  |   | 56,580  |  
|Total Liabilities and Stockholders Equity                      |  | $                         | 649,260 |   |                      | $ | 571     |                         |  | $ | 649,831 |  
|                                                                |  |                           |         |   |                      |   |         |                         |  |   |         |  



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##### Table of Contents

Note 7: Subsequent Events (continued)



On August 10, 2004, the Company acquired Goolsby Insurance Agency, Inc. of Milford, Ohio, through a merger of Goolsby Insurance Agency, Inc.
into NB&T Insurance Agency, Inc. The purchase price was $654,000.



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##### Table of Contents

Report of Independent Registered Accounting Firm



Audit Committee

NB&T Financial Group, Inc.

Wilmington, Ohio



We have reviewed the accompanying condensed
consolidated balance sheet of NB&T Financial Group, Inc. as of June 30, 2004 and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2004 and 2003 and cash flows for the six-month
periods ended June 30, 2004 and 2003. These interim financial statements are the responsibility of the Companys management.



We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information
consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of
the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.



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



We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet as of December 31, 2003 and the related consolidated statements of income, stockholders equity and cash flows for the year then ended (not presented herein); and in our report dated February 5, 2004, 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, 2003 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.



/s/BKD, LLP



Cincinnati, Ohio

July 20, 2004



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##### Table of Contents

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



Results of Operations



Net income for the second quarter of 2004 was $1.27 million, a decrease of $321,000, or 20.2%, from the second quarter of 2003 net income of $1.59 million. Net income per share-basic was $.40 for the second quarter of
2004, compared to $.51 per share for the second quarter of 2003, a decrease of 21.6%. Return on average equity and return on average assets for the second quarter of 2004 were 8.82% and 0.77%, respectively, compared to 10.94% and .92% for the same
period in 2003. Net income for the first six months of 2004 was $2.69 million, a decrease of $536,000, or 16.6%, from the first six months of 2003 net income of $3.23 million. Net income per share-basic was $.86 for the first six months of 2004,
compared to $1.03 per share for the first six months of 2003, a decrease of 16.5%. Return on average equity and return on average assets for the first six months of 2004 were 9.42% and 0.81%, respectively, compared to 11.21% and .94% for the same
period in 2003.



Net Interest Income



Net interest income was $5.04 million for the second quarter of 2004 and $10.2 million for
the first six months of 2004, a decrease of $386,000 and $802,000 respectively, compared to the same periods last year. Interest income totaled $7.97 million for the second quarter of 2004, a decrease of 11.0% from $8.96 million during the same
period last year. Interest income for the first six months of 2004 totaled $16.12 million, a decrease of 11.5% from $18.22 million during the same period last year. Although average loans outstanding for the second quarter and the first six months
increased 3.19% and 4.62%, 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 6.74% in the second quarter of 2003 to 6.05% in the second quarter
of 2004 while the yield on average loans decreased from 6.91% for the first six months of 2003 to 6.10% for the same period in 2004. Average securities outstanding for the second quarter and the first six months of 2004 decreased 17.5% and 17.2%,
compared to the prior year. The yield on average securities decreased from 3.77% for the second quarter of 2003 to 3.62% for the second quarter of 2004. The yield on average securities decreased from 3.98% for the first six months of last year to
3.68% for the first six months of 2004. A decrease in interest expense of 17.0% to $2.93 million during the second quarter of 2004 from $3.53 million during the same period last year offset part of the decrease in the second quarters interest
income. Similarly, a decrease in interest expense of 18.1% to $5.88 million during the first six months of 2004 from $7.18 million during the same period last year offset part of the decrease in year-to-date interest income. Average interest-bearing
liabilities for the second quarter decreased 5.71% from last year to $550.7 million, and their cost decreased from 2.43% during the second quarter of last year to 2.14% in the second quarter of this year. Average interest-bearing liabilities for the
first six months of 2004 decreased 4.53% from last year to $552.2 million, and their cost decreased from 2.50% to 2.14%. Net interest margin decreased to 3.28% for the second quarter of this year from 3.36% for the second quarter of last year while
the net interest margin decreased to 3.33% for the first six months of 2004 from 3.47% for the same period last year.



Provision for Loan Losses



The provision for credit 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 credit losses inherent in the Banks loan portfolio at each balance sheet date. The provision for loan losses decreased 7.6% to $450,000 during the second quarter of 2004 from $487,000 during the second
quarter of last year. For the first six months of 2004, the provision decreased 12.4% to $900,000 from $1.03 million for the same period last year. The lower provision for loan losses is reflective of managements evaluation of the loan
portfolio and potential weaknesses of specific loans and recognition of potential losses in the prior year. The percentage of the allowance for loan losses to total loans increased to 1.14% at June 30, 2004, compared to 1.01% at June 30, 2003. Year
to date net charge-offs were $1.05 million, or 0.51% (annualized), compared to $979,000, or 0.50% (annualized), for the same period in 2003.



Non-interest Income



Non-interest income, excluding gains on sales of securities, was $2.21 million for the second quarter of 2004, a decrease of 2.9% from the $2.28 million earned in the second quarter of 2003. Trust income increased
15.3% from the second quarter of last year due to increases in the market values of managed assets. ATM network fees decreased 23.7% from the second quarter of last year as a result of fewer units in operation. Non-interest income, excluding gains
on sales of securities, was $4.32 million for the first six months of 2004, relatively unchanged from 2003.



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##### Table of Contents

The Company realized $527,000 in securities gains in the first half of 2004, compared to $907,000 for the same period in
2003. No securities gains were realized in the second quarter of 2004, compared to $361,000 in the second quarter of 2003.



Non-interest Expense



Non-interest expense was $5.20 million for the second quarter of 2004, compared to $5.53 million for the second quarter of 2003. Marketing expense declined $76,000 in the second quarter from the same quarter last
year. In addition, other expenses declined $131,000 in the second quarter from the same quarter last year largely due to decreases in loan processing costs. For the first six months of 2004, non-interest expense was $10.83 million, compared to
$11.20 million for the same period in 2003, with the decrease in expense primarily due to decreases in salaries and benefits and marketing expenses.



Income Taxes



The provision for income taxes for the second quarter of 2004 was $328,000, compared to $459,000 for the same period in 2003. The provision for income taxes for the first six months of 2004 was $658,000, compared to
$808,000 for the same period last year. The effective tax rate for the three months ended and six months ended June 30, 2004 was 20.5% and 19.6%, respectively, compared to 22.4% and 20% for the same periods in 2003.



Financial Condition



The changes that have occurred in NB&T Financial Group, Inc.s financial condition during 2004 are as follows (in thousands):



|                            |  |              |         |                  |   |         |  |   |         |   |  |       |  
|--------------------------- |  | ------------ | ------- | ---------------- | - | ------- |  | - | ------- | - |  | ----- | -
|                            |  | June 30 2004 |         | December 31 2003 |   | Amount  |  |   | Percent |  
|Total Assets                |  | $            | 649,260 |                  | $ | 664,928 |  | $ | (15,668 | ) |  | (2.4  | )
|Federal Funds Sold          |  |              | 519     |                  |   | 2,364   |  |   | (1,845  | ) |  | (78.1 | )
|Loans (a)                   |  |              | 406,607 |                  |   | 404,991 |  |   | 1,616   |   |  | .4    |  
|Securities                  |  |              | 180,010 |                  |   | 191,802 |  |   | (11,792 | ) |  | (6.2  | )
|Demand deposits             |  |              | 50,091  |                  |   | 56,781  |  |   | (6,690  | ) |  | (11.8 | )
|Savings, NOW, MMDA deposits |  |              | 216,430 |                  |   | 217,297 |  |   | (867    | ) |  | (.4   | )
|CDs $100,000 and over      |  |              | 30,725  |                  |   | 35,332  |  |   | (4,607  | ) |  | (13.0 | )
|Other time deposits         |  |              | 137,110 |                  |   | 141,090 |  |   | (3,980  | ) |  | (2.8  | )
|Total deposits              |  |              | 434,356 |                  |   | 450,500 |  |   | (16,144 | ) |  | (3.6  | )
|Short-term borrowing        |  |              | 24,747  |                  |   | 21,909  |  |   | 2,838   |   |  | (13.0 | )
|Long-term borrowing         |  |              | 130,934 |                  |   | 132,519 |  |   | (1,585  | ) |  | (1.2  | )
|Stockholders Equity         |  |              | 56,203  |                  |   | 56,696  |  |   | (493    | ) |  | (.9   | )

---

|(a) | Includes loans held for sale
|--- | ----------------------------



At June 30, 2004, total assets were $649.3 million, a decrease of $15.7 million from December 31, 2003. The decrease is primarily attributable to a decrease in the securities portfolio of $11.8 million. In addition,
cash and cash equivalents decreased $7.2 million. Loans increased $1.6 million during 2004. Deposits decreased $16.1 million primarily in the public fund demand deposits and time deposits. Stockholders equity decreased $493,000 during the year
to $56.2 million due to a decrease in other comprehensive income of $1.8 million resulting from a change in market value of securities available for sale, offset by an increase in retained earnings for the quarter.



Average total assets decreased 3.1% to $668.5 million from the second quarter of 2003.
Average total loans increased to $410.8 million, an increase of 4.6% from the same quarter of last year. The real estate loan average grew $14.7 million, an increase of 11.0%, and the personal loan average grew $2.7 million, an increase of 3.3%. The
real estate portfolio increased due to the Companys decision to retain shorter- term fixed-rate mortgages in its portfolio and increased home equity line production. The securities portfolio average has decreased $41.8 million from the second
quarter of 2003 to $196.6 million due to accelerated prepayments and reinvestment of cash flows into loans rather than securities.



13



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##### Table of Contents

Average total deposits declined $27.3 million for the second quarter of 2004 to $449.4 million, compared to an average of
$476.8 million for the same quarter last year. Average small certificates of deposit decreased $19.6 million, or 12.3%, as the Company reduced its cost of funds and customers continued to seek out higher rates of return. Average short-term
borrowings increased $1.7 million, or 7.5%, from the second quarter of 2003 due to increased balances in repurchase agreements. Average Federal Home Loan Bank borrowings decreased $3.5 million, or 2.7%, due to regular monthly payments on amortizing
advances.



Allowance for Loan Losses



The following table is a summary of the Companys loan loss experience for the periods
ended June 30, 2004 and 2003:



|                                   |  |                            |       |   |      |   |       |   |                          |  |  |      |  |   |        |   |  |   |        |  
|---------------------------------- |  | -------------------------- | ----- | - | ---- | - | ----- | - | ------------------------ |  |  | ---- |  | - | ------ | - |  | - | ------ | -
|                                   |  | Three Months Ended June 30 |       |   |      |   |       |   | Six Months Ended June 30 | 
|                                   |  | 2004                       |       |   | 2003 |   |       |   |                          |  |  | 2004 |  |   | 2003   |  
|Balance at beginning of period     |  | $                          | 4,740 |   |      | $ | 4,123 |   |                          |  |  |      |  | $ | 4,830  |   |  | $ | 4,010  |  
|                                   |  |                            |       |   |      |  
|Charge-offs:                       |  |                            |       |   |      |   |       |   |                          |  |  |      |  |   |        |   |  |   |        |  
|Commercial and industrial          |  |                            | (324  | ) |      |   | (114  | ) |                          |  |  |      |  |   | (417   | ) |  |   | (329   | )
|Commercial real estate             |  |                            |      |   |      |   | (1    | ) |                          |  |  |      |  |   | (42    | ) |  |   | (47    | )
|Agricultural                       |  |                            | (76   | ) |      |   | (75   | ) |                          |  |  |      |  |   | (92    | ) |  |   | (75    | )
|Residential real estate            |  |                            | (51   | ) |      |   | (54   | ) |                          |  |  |      |  |   | (261   | ) |  |   | (99    | )
|Consumer                           |  |                            | (185  | ) |      |   | (489  | ) |                          |  |  |      |  |   | (544   | ) |  |   | (730   | )
|Other                              |  |                            |      |   |      |   |      |   |                          |  |  |      |  |   |       |   |  |   | (1     | )
|                                   |  |                            |       |   |      |   |       |   |                          |  |  |      |  |   |        |   |  |   |        |  
|Total charge-offs                  |  |                            | (636  | ) |      |   | (733  | ) |                          |  |  |      |  |   | (1,356 | ) |  |   | (1,281 | )
|                                   |  |                            |       |   |      |   |       |   |                          |  |  |      |  |   |        |   |  |   |        |  
|Recoveries:                        |  |                            |       |   |      |   |       |   |                          |  |  |      |  |   |        |   |  |   |        |  
|Commercial and industrial          |  |                            |      |   |      |   | 93    |   |                          |  |  |      |  |   | 6      |   |  |   | 148    |  
|Commercial real estate             |  |                            |      |   |      |   | 2     |   |                          |  |  |      |  |   | 2      |   |  |   | 2      |  
|Agricultural                       |  |                            | 37    |   |      |   | 14    |   |                          |  |  |      |  |   | 88     |   |  |   | 13     |  
|Residential real estate            |  |                            | 10    |   |      |   | 5     |   |                          |  |  |      |  |   | 48     |   |  |   | 8      |  
|Consumer                           |  |                            | 80    |   |      |   | 67    |   |                          |  |  |      |  |   | 163    |   |  |   | 131    |  
|Other                              |  |                            |      |   |      |   |      |   |                          |  |  |      |  |   |       |   |  |   |       |  
|                                   |  |                            |       |   |      |   |       |   |                          |  |  |      |  |   |        |   |  |   |        |  
|Total recoveries                   |  |                            | 127   |   |      |   | 181   |   |                          |  |  |      |  |   | 307    |   |  |   | 302    |  
|                                   |  |                            |       |   |      |   |       |   |                          |  |  |      |  |   |        |   |  |   |        |  
|Net charge-offs                    |  |                            | (509  | ) |      |   | (552  | ) |                          |  |  |      |  |   | (1,049 | ) |  |   | (979   | )
|Provision for possible loan losses |  |                            | 450   |   |      |   | 487   |   |                          |  |  |      |  |   | 900    |   |  |   | 1,027  |  
|                                   |  |                            |       |   |      |   |       |   |                          |  |  |      |  |   |        |   |  |   |        |  
|Balance at end of period           |  | $                          | 4,681 |   |      | $ | 4,058 |   |                          |  |  |      |  | $ | 4,681  |   |  | $ | 4,058  |  
|                                   |  |                            |       |   |      |   |       |   |                          |  |  |      |  |   |        |   |  |   |        |  



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



|                                                                 |  |              |       |   |                  |   |       |              |  |   |       |  
|---------------------------------------------------------------- |  | ------------ | ----- | - | ---------------- | - | ----- | ------------ |  | - | ----- | -
|                                                                 |  | June 30 2004 |       |   | December 31 2003 |   |       | June 30 2003 | 
|Loans accounted for on non-accrual basis                         |  | $            | 6,692 |   |                  | $ | 5,599 |              |  | $ | 6,287 |  
|Accruing loans which are past due 90 days                        |  |              |      |   |                  |   | 248   |              |  |   | 955   |  
|Renegotiated loans                                               |  |              | 0     |   |                  |   | 0     |              |  |   | 0     |  
|Other real estate owned                                          |  |              | 873   |   |                  |   | 637   |              |  |   | 175   |  
|                                                                 |  |              |       |   |                  |   |       |              |  |   |       |  
|Total non-performing assets                                      |  | $            | 7,565 |   |                  | $ | 6,484 |              |  | $ | 7,417 |  
|                                                                 |  |              |       |   |                  |   |       |              |  |   |       |  
|Ratios:                                                          |  |              |       |   |                  |   |       |              |  |   |       |  
|Allowance to total loans                                         |  |              | 1.14  | % |                  |   | 1.18  | %            |  |   | 1.01  | %
|Net charge-offs to average loans (annualized)                    |  |              | .51   | % |                  |   | 0.77  | %            |  |   | .50   | %
|Non-performing assets to total loans and other real estate owned |  |              | 1.84  | % |                  |   | 1.58  | %            |  |   | 1.84  | %



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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.



The Company allocates the allowance for loan losses
to specifically classified loans and non-classified loans generally based on 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 rolling
average charge-off percentage applied to the current outstanding balance by portfolio type; (2) 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 June 30, 2004, there were $4.9 million in twenty-eight non-accrual small business relationships. The majority of this amount consisted of two relationships, one of
which is a $1.4 million loan secured by commercial real estate. The second relationship amounts to $1.8 million in the equestrian and bed and breakfast business.



Nonaccrual residential real estate loans consisted of twenty-five loans that total $1.3 million with the largest balance being
$156,000. Non-accrual personal loans consisted of forty-two loans that total $298,000, and home equity credit lines consisted of 10 loans totaling $230,000.



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 June 30, 2004, was 94.7%, compared to 85.7% at the same date in 2003. Loans to total assets were 63.3% at the end of the second quarter of 2004, compared to
58.3% at the same time last year. Management strives to keep this ratio below 70%. After the reclassification of the securities portfolio disclosed in Note 7, the Company has $180.6 in available-for-sale securities that are readily marketable.
Approximately 83.9% 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 93.5% 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 June 30, 2004, NB&T Financial Group, Inc. had a total risk-based capital ratio of 14.65%, a Tier 1 risk-based capital ratio of 13.57%, and a Tier 1 leverage ratio of 8.91%.



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, 2003. 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



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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.



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 March 31, 2004, the Companys simulation model indicated the twelve-month
cumulative gap as a percent of total assets was a positive 6.6%, compared to a positive 15.6% at December 31, 2003. Also, similar to the results at year- end, March 31, 2004 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 June 30,
2004.



Item 4  Controls and Procedures



(a) The
Companys principal executive officer and principal financial officer have concluded, based upon their evaluation of the Companys disclosure controls and procedures as of June 30, 2004, that the Companys disclosure controls and
procedures were effective.



(b) During the quarter ended June 30, 2004, the
Company converted its core data processing system including its core financial reporting system. This change was implemented to improve both long-term operating and financial reporting efficiencies. Management has been actively involved in the
system conversion and continues to



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implement additional controls and procedures. At this time, the changes in the Companys internal controls over
financial reporting are not believed to have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

PART II  OTHER INFORMATION



Item 1  Legal Proceedings



Not applicable



Item 2  Changes in Securities and Use of Proceeds, and Issuer Purchases of Equity Securities



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:



|     |  |                                                                        
|---- |  | -----------------------------------------------------------------------
|     |  | Index to Exhibits                                                      
|10.1 |  | Severance agreement for Andrew J. McCreanor                            
|10.2 |  | Severance agreement for Craig F. Fortin                                
|10.3 |  | Severance agreement for Stephen G. Klumb                               
|10.4 |  | Severance agreement for Walter H. Rowsey                               
|10.5 |  | Severance agreement for Howard T. Witherby                             
|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 April 27,
2004 regarding a press release announcing the results of operations for the first quarter of 2004.



The Company filed a Form 8-K with the Securities and Exchange Commission on June 15, 2004 regarding a press release announcing declaration of its second 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.                                                     
|                      | 
|Date: August 12, 2004 |  | /s/ Craig F. Fortin                                                            
|                      |  | Craig F. Fortin                                                                
|                      |  | Senior Vice President and Chief Financial Officer (Principal Financial Officer)



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Index to Exhibits



|     |  |                                                                        
|---- |  | -----------------------------------------------------------------------
|10.1 |  | Severance agreement for Andrew J. McCreanor                            
|10.2 |  | Severance agreement for Craig F. Fortin                                
|10.3 |  | Severance agreement for Stephen G. Klumb                               
|10.4 |  | Severance agreement for Walter H. Rowsey                               
|10.5 |  | Severance agreement for Howard T. Witherby                             
|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.



20