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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 September 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 November 4, 2004, 3,226,283 common shares were issued and outstanding.



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##### Table of Contents

NB&T FINANCIAL GROUP, INC.

September 30, 2004 Form 10-Q

Table of Contents



|                  |  |                                                                                       |  |     
|----------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                  |  |                                                                                       |  | Page
|                  |  | PART I                                                                                |  |     
|                  |  |                                                                                      
|Item 1:           |  | Financial Statements                                                                  |  |     
|                  |  |                                                                                      
|                  |  | 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                                      |  | 10  
|                  |  |                                                                                      
|Item 2:           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11  
|                  |  |                                                                                      
|Item 3:           |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 15  
|                  |  |                                                                                      
|Item 4:           |  | Controls and Procedures                                                               |  | 16  
|                  |  |                                                                                      
|                  |  | Part II                                                                               |  |     
|                  |  |                                                                                      
|Item 1:           |  | Legal Proceedings                                                                     |  | 17  
|                  |  |                                                                                      
|Item 2:           |  | Changes in Securities and Use of Proceeds                                             |  | 17  
|                  |  |                                                                                      
|Item 3:           |  | Defaults Upon Senior Securities                                                       |  | 17  
|                  |  |                                                                                      
|Item 4:           |  | Submission of Matters to a Vote of Security Holders                                   |  | 17  
|                  |  |                                                                                      
|Item 5:           |  | Other Information                                                                     |  | 17  
|                  |  |                                                                                      
|Item 6:           |  | Exhibits and Reports on Form 8-K                                                      |  | 17  
|                  | 
|Signatures        |  | 18                                                                                   
|                  | 
|Index to Exhibits |  | 19                                                                                   



2



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##### Table of Contents

NB&T Financial Group, Inc.

Condensed Consolidated Balance Sheets



|                                                                                   |  |                    |         |   |                   |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|(Dollars in thousands)                                                             |  | September 30, 2004 |         |   | December 31, 2003 |  
|                                                                                   |  | (Unaudited)        |         |   |                   |  
|Assets                                                                             |  |                    |         |   |                   |   |         |  
|Cash and due from banks                                                            |  | $                  | 15,990  |   |                   | $ | 19,789  |  
|Interest-bearing demand deposits                                                   |  |                    | 322     |   |                   |   | 65      |  
|Federal funds sold                                                                 |  |                    | 4,463   |   |                   |   | 2,364   |  
|                                                                                   |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents                                                          |  |                    | 20,775  |   |                   |   | 22,218  |  
|                                                                                   |  |                    |         |   |                   |   |         |  
|Securities - available-for-sale                                                    |  |                    | 173,592 |   |                   |   | 153,121 |  
|Securities - held-to-maturity                                                      |  |                    |        |   |                   |   | 38,681  |  
|Loans held for sale                                                                |  |                    |        |   |                   |   | 86      |  
|Loans, net of allowance for loan losses of $ 4,544 and $4,830                      |  |                    | 403,716 |   |                   |   | 404,905 |  
|Premises and equipment                                                             |  |                    | 14,387  |   |                   |   | 14,057  |  
|Federal Reserve and Federal Home Loan Bank stock                                   |  |                    | 8,097   |   |                   |   | 7,877   |  
|Goodwill and other intangibles                                                     |  |                    | 7,158   |   |                   |   | 7,039   |  
|Interest receivable and other assets                                               |  |                    | 18,035  |   |                   |   | 16,944  |  
|                                                                                   |  |                    |         |   |                   |   |         |  
|Total assets                                                                       |  | $                  | 645,760 |   |                   | $ | 664,928 |  
|                                                                                   |  |                    |         |   |                   |   |         |  
|Liabilities and Stockholders Equity                                               |  |                    |         |   |                   |   |         |  
|Liabilities                                                                        |  |                    |         |   |                   |   |         |  
|Deposits                                                                           |  |                    |         |   |                   |   |         |  
|Demand                                                                             |  | $                  | 51,802  |   |                   | $ | 56,781  |  
|Savings, NOW and Money Market                                                      |  |                    | 208,682 |   |                   |   | 217,297 |  
|Time                                                                               |  |                    | 180,202 |   |                   |   | 176,422 |  
|                                                                                   |  |                    |         |   |                   |   |         |  
|Total deposits                                                                     |  |                    | 440,686 |   |                   |   | 450,500 |  
|                                                                                   |  |                    |         |   |                   |   |         |  
|Short-term borrowings                                                              |  |                    | 29,058  |   |                   |   | 21,909  |  
|Long-term debt                                                                     |  |                    | 112,312 |   |                   |   | 132,519 |  
|Interest payable and other liabilities                                             |  |                    | 4,716   |   |                   |   | 3,304   |  
|                                                                                   |  |                    |         |   |                   |   |         |  
|Total liabilities                                                                  |  |                    | 586,772 |   |                   |   | 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                                                         |  |                    | 9,797   |   |                   |   | 9,692   |  
|Retained earnings                                                                  |  |                    | 54,389  |   |                   |   | 52,883  |  
|Unearned employee stock ownership plan (ESOP) shares                               |  |                    | (1,379  | ) |                   |   | (1,506  | )
|Accumulated other comprehensive income                                             |  |                    | 992     |   |                   |   | 477     |  
|Treasury stock; 592,667 and 596,667 shares at cost in 2004 and 2003                |  |                    | (5,811  | ) |                   |   | (5,850  | )
|                                                                                   |  |                    |         |   |                   |   |         |  
|Total stockholders equity                                                         |  |                    | 58,988  |   |                   |   | 56,696  |  
|                                                                                   |  |                    |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                         |  | $                  | 645,760 |   |                   | $ | 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 MonthsEnded September30, |       | Nine Months EndedSeptember 30,
|(Dollars in thousands, except per share amounts)              |  | 2004                           |       | 2003                           |   | 2004  |  | 2003
|                                                              |  | (Unaudited)                    |       | (Unaudited)                   
|Interest and Dividend Income                                  |  |                                |       |                                |   |       |  |      |        |  |   |       
|Loans                                                         |  | $                              | 6,133 |                                | $ | 6,588 |  | $    | 18,596 |  | $ | 20,050
|Securities-Taxable                                            |  |                                | 1,178 |                                |   | 994   |  |      | 3,536  |  |   | 4,237 
|Securities-Tax-exempt                                         |  |                                | 495   |                                |   | 614   |  |      | 1,573  |  |   | 1,900 
|Federal funds sold and other                                  |  |                                | 34    |                                |   | 33    |  |      | 87     |  |   | 97    
|Dividends on Federal Home Loan and Federal Reserve Bank stock |  |                                | 85    |                                |   | 82    |  |      | 250    |  |   | 241   
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Total interest and dividend income                            |  |                                | 7,925 |                                |   | 8,311 |  |      | 24,042 |  |   | 26,526
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Interest Expense                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Deposits                                                      |  |                                | 1,377 |                                |   | 1,520 |  |      | 4,062  |  |   | 5,475 
|Short-term borrowings                                         |  |                                | 84    |                                |   | 55    |  |      | 179    |  |   | 158   
|Long-term debt                                                |  |                                | 1,517 |                                |   | 1,598 |  |      | 4,621  |  |   | 4,723 
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Total interest expense                                        |  |                                | 2,978 |                                |   | 3,173 |  |      | 8,862  |  |   | 10,356
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Net Interest Income                                           |  |                                | 4,947 |                                |   | 5,138 |  |      | 15,180 |  |   | 16,170
|Provision for Loan Losses                                     |  |                                | 450   |                                |   | 1,288 |  |      | 1,350  |  |   | 2,316 
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Net Interest Income After Provision for Loan Losses           |  |                                | 4,497 |                                |   | 3,850 |  |      | 13,830 |  |   | 13,854
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Non-interest Income                                           |  |                                |       |                                |   |       |  |      |        |  |   |       
|Trust income                                                  |  |                                | 238   |                                |   | 219   |  |      | 748    |  |   | 635   
|Service charges and fees                                      |  |                                | 918   |                                |   | 871   |  |      | 2,601  |  |   | 2,490 
|ATM network fees                                              |  |                                | 83    |                                |   | 111   |  |      | 251    |  |   | 338   
|Insurance agency commissions                                  |  |                                | 583   |                                |   | 577   |  |      | 1,896  |  |   | 1,936 
|Net gains on sales of securities available-for-sale           |  |                                | 62    |                                |   |      |  |      | 589    |  |   | 907   
|Other                                                         |  |                                | 391   |                                |   | 340   |  |      | 1,035  |  |   | 1,080 
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Total non-interest income                                     |  |                                | 2,275 |                                |   | 2,118 |  |      | 7,120  |  |   | 7,386 
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Non-interest Expense                                          |  |                                |       |                                |   |       |  |      |        |  |   |       
|Salaries and employee benefits                                |  |                                | 2,724 |                                |   | 2,561 |  |      | 8,386  |  |   | 8,403 
|Net occupancy expense                                         |  |                                | 429   |                                |   | 430   |  |      | 1,300  |  |   | 1,358 
|Equipment and data processing expense                         |  |                                | 564   |                                |   | 607   |  |      | 1,765  |  |   | 1,930 
|Professional fees                                             |  |                                | 442   |                                |   | 347   |  |      | 1,123  |  |   | 1,000 
|Marketing expense                                             |  |                                | 180   |                                |   | 139   |  |      | 395    |  |   | 469   
|State franchise tax                                           |  |                                | 177   |                                |   | 166   |  |      | 519    |  |   | 517   
|Amortization of intangibles                                   |  |                                | 183   |                                |   | 180   |  |      | 516    |  |   | 532   
|Other                                                         |  |                                | 679   |                                |   | 727   |  |      | 2,202  |  |   | 2,185 
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Total non-interest expense                                    |  |                                | 5,378 |                                |   | 5,157 |  |      | 16,206 |  |   | 16,394
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Income Before Income Tax                                      |  |                                | 1,394 |                                |   | 811   |  |      | 4,744  |  |   | 4,846 
|Provision for Income Taxes                                    |  |                                | 219   |                                |   | 1     |  |      | 877    |  |   | 808   
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Net Income                                                    |  | $                              | 1,175 |                                | $ | 810   |  | $    | 3,867  |  | $ | 4,038 
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Basic Earnings Per Share                                      |  | $                              | .37   |                                | $ | .26   |  | $    | 1.23   |  | $ | 1.29  
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Diluted Earnings Per Share                                    |  | $                              | .37   |                                | $ | .26   |  | $    | 1.22   |  | $ | 1.27  
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       
|Dividends Declared Per Share                                  |  | $                              | .25   |                                | $ | .24   |  | $    | .75    |  | $ | .72   
|                                                              |  |                                |       |                                |   |       |  |      |        |  |   |       



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



|                                                          |  |                                 |         |   |      |   |          |  
|--------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | -------- | -
|                                                          |  | Nine Months Ended, September 30 |        
|(Dollars in thousands)                                    |  | 2004                            |         |   | 2003 |  
|                                                          |  | (Unaudited)                     |        
|Operating Activities                                      |  |                                 |         |   |      |   |          |  
|Net income                                                |  | $                               | 3,867   |   |      | $ | 4,038    |  
|Items not requiring (providing) cash                      |  |                                 |         |   |      |   |          |  
|Depreciation and amortization                             |  |                                 | 1,834   |   |      |   | 1,851    |  
|Provision for loan losses                                 |  |                                 | 1,350   |   |      |   | 2,316    |  
|Amortization of premiums and discounts on securities      |  |                                 | 955     |   |      |   | 1,604    |  
|Net realized gains on available-for-sale securities       |  |                                 | (589    | ) |      |   | (907     | )
|FHLB stock dividends                                      |  |                                 | (220    | ) |      |   | (208     | )
|Net change in:                                            |  |                                 |         |   |      |   |          |  
|Loans held for sale                                       |  |                                 | 86      |   |      |   | (328     | )
|Other assets and liabilities                              |  |                                 | 588     |   |      |   | (936     | )
|                                                          |  |                                 |         |   |      |   |          |  
|Net cash provided by operating activities                 |  |                                 | 7,871   |   |      |   | 7,430    |  
|                                                          |  |                                 |         |   |      |   |          |  
|Investing Activities                                      |  |                                 |         |   |      |   |          |  
|Purchases of available-for-sale securities                |  |                                 | (62,695 | ) |      |   | (146,705 | )
|Proceeds from sales of available-for-sale securities      |  |                                 | 35,245  |   |      |   | 34,550   |  
|Proceeds from maturities of available-for-sale securities |  |                                 | 45,575  |   |      |   | 109,221  |  
|Proceeds from maturities of held-to-maturity securities   |  |                                 | 499     |   |      |   | 5,805    |  
|Net change in loans                                       |  |                                 | (161    | ) |      |   | (24,539  | )
|Purchase of premises and equipment                        |  |                                 | (1,968  | ) |      |   | (720     | )
|Proceeds from sales of premises and equipment             |  |                                 |        |   |      |   | 57       |  
|Acquisition of insurance agency                           |  |                                 | (654    | ) |      |   |         |  
|                                                          |  |                                 |         |   |      |   |          |  
|Net cash provided (used) in investing activities          |  |                                 | 15,841  |   |      |   | (22,331  | )
|                                                          |  |                                 |         |   |      |   |          |  
|Financing Activities                                      |  |                                 |         |   |      |   |          |  
|Net change in:                                            |  |                                 |         |   |      |   |          |  
|Deposits                                                  |  |                                 | (9,814  | ) |      |   | (9,756   | )
|Short-term borrowings                                     |  |                                 | 7,149   |   |      |   | 10,513   |  
|Proceeds from FHLB advances                               |  |                                 |        |   |      |   | 20,000   |  
|Repayment of FHLB advances                                |  |                                 | (20,207 | ) |      |   | (2,732   | )
|Cash dividends                                            |  |                                 | (2,361  | ) |      |   | (2,329   | )
|Purchase of treasury shares                               |  |                                 |        |   |      |   | (1,050   | )
|Proceeds from exercise of stock options                   |  |                                 | 78      |   |      |   | 523      |  
|                                                          |  |                                 |         |   |      |   |          |  
|Net cash provided by (used) in financing activities       |  |                                 | (25,155 | ) |      |   | 15,169   |  
|                                                          |  |                                 |         |   |      |   |          |  
|Increase (Decrease) in Cash and Cash Equivalents          |  |                                 | (1,443  | ) |      |   | 268      |  
|                                                          |  |                                
|Cash and Cash Equivalents, Beginning of Year              |  |                                 | 22,218  |   |      |   | 25,810   |  
|                                                          |  |                                 |         |   |      |   |          |  
|Cash and Cash Equivalents, End of Period                  |  | $                               | 20,775  |   |      | $ | 26,078   |  
|                                                          |  |                                 |         |   |      |   |          |  



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 September 30, 2004, and December 31, 2003, and the results of its operations for the three and nine month periods and cash flows for the nine months ended September 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 EndedSeptember 30, |       |   | Nine Months Ended September 30, |  
|                                                                                                               |  | 2004                            |       |   | 2003                            |   |     | 2004 |  |   | 2003  |  
|Net income, as reported                                                                                        |  | $                               | 1,175 |   |                                 | $ | 810 |      |  | $ | 3,867 |   |  | $ | 4,038 |  
|Less: Total stock-based employee compensation cost determined under the fair value method, net of income taxes |  |                                 | (17   | ) |                                 |   | (18 | )    |  |   | (54   | ) |  |   | (56   | )
|                                                                                                               |  |                                 |       |   |                                 |   |     |      |  |   |       |   |  |   |       |  
|Pro forma net income                                                                                           |  | $                               | 1,158 |   |                                 | $ | 792 |      |  | $ | 3,813 |   |  | $ | 3,982 |  
|                                                                                                               |  |                                 |       |   |                                 |   |     |      |  |   |       |   |  |   |       |  
|Earnings per share:                                                                                            |  |                                 |       |   |                                 |   |     |      |  |   |       |   |  |   |       |  
|Basic  as reported                                                                                            |  | $                               | .37   |   |                                 | $ | .26 |      |  | $ | 1.23  |   |  | $ | 1.29  |  
|                                                                                                               |  |                                 |       |   |                                 |   |     |      |  |   |       |   |  |   |       |  
|Basic  pro forma                                                                                              |  | $                               | .37   |   |                                 | $ | .25 |      |  | $ | 1.21  |   |  | $ | 1.27  |  
|                                                                                                               |  |                                 |       |   |                                 |   |     |      |  |   |       |   |  |   |       |  
|Diluted  as reported                                                                                          |  | $                               | .37   |   |                                 | $ | .26 |      |  | $ | 1.22  |   |  | $ | 1.27  |  
|                                                                                                               |  |                                 |       |   |                                 |   |     |      |  |   |       |   |  |   |       |  
|Diluted  pro forma                                                                                            |  | $                               | .37   |   |                                 | $ | .25 |      |  | $ | 1.20  |   |  | $ | 1.26  |  
|                                                                                                               |  |                                 |       |   |                                 |   |     |      |  |   |       |   |  |   |       |  



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
|September 30, 2004:              |  |               |         |                      |   |                       |  |                       |     |  |   |        
|Available-for-Sale Securities:   |  |               |         |                      |   |                       |  |                       |     |  |   |        
|U.S. government agencies         |  | $             | 70,247  |                      | $ | 57                    |  | $                     | 568 |  | $ | 69,736 
|Mortgage-backed securities       |  |               | 62,483  |                      |   | 817                   |  |                       | 218 |  |   | 63,082 
|State and political subdivisions |  |               | 39,349  |                      |   | 1,415                 |  |                       |    |  |   | 40,764 
|Other securities                 |  |               | 10      |                      |   |                      |  |                       |    |  |   | 10     
|                                 |  |               |         |                      |   |                       |  |                       |     |  |   |        
|                                 |  | $             | 172,089 |                      | $ | 2,289                 |  | $                     | 786 |  | $ | 173,592
|                                 |  |               |         |                      |   |                       |  |                       |     |  |   |        
|Held-to-Maturity Securities:     |  |               |         |                      |   |                       |  |                       |     |  |   |        
|State and political subdivisions |  | $             |        |                      | $ |                      |  | $                     |    |  | $ |       
|                                 |  |               |         |                      |   |                       |  |                       |     |  |   |        
|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 
|                                 |  |               |         |                      |   |                       |  |                       |     |  |   |        



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.



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##### Table of Contents

Note 3: Loans



Categories of loans include (thousands):



|                                               |  |                    |         |   |                  |   |         |  
|---------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | -
|                                               |  | September 30, 2004 |         |   | December 31,2003 |  
|Commercial and industrial                      |  | $                  | 89,089  |   |                  | $ | 89,621  |  
|Agricultural                                   |  |                    | 24,557  |   |                  |   | 22,841  |  
|Real estate construction                       |  |                    | 12,094  |   |                  |   | 11,296  |  
|Commercial real estate                         |  |                    | 44,271  |   |                  |   | 35,399  |  
|Residential real estate                        |  |                    | 153,707 |   |                  |   | 158,880 |  
|Consumer                                       |  |                    | 84,661  |   |                  |   | 88,009  |  
|Other                                          |  |                    | 141     |   |                  |   | 4,011   |  
|                                               |  |                    |         |   |                  |   |         |  
|Total loans                                    |  |                    | 408,520 |   |                  |   | 410,057 |  
|                                               |  |                   
|Less                                           |  |                    |         |   |                  |   |         |  
|Net deferred loan fees, premiums and discounts |  |                    | (260    | ) |                  |   | (322    | )
|Allowance for loan losses                      |  |                    | (4,544  | ) |                  |   | (4,830  | )
|                                               |  |                    |         |   |                  |   |         |  
|Net loans                                      |  | $                  | 403,716 |   |                  | $ | 404,905 |  
|                                               |  |                    |         |   |                  |   |         |  



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



|                           |  |                                |        |   |      |   |        |  
|-------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                           |  | Nine Months EndedSeptember 30, |       
|                           |  | 2004                           |        |   | 2003 |  
|Balance, beginning of year |  | $                              | 4,830  |   |      | $ | 4,010  |  
|Provision for loan losses  |  |                                | 1,350  |   |      |   | 2,316  |  
|Recoveries                 |  |                                | 444    |   |      |   | 403    |  
|Charge-offs                |  |                                | (2,080 | ) |      |   | (2,184 | )
|                           |  |                                |        |   |      |   |        |  
|Balance, end of period     |  | $                              | 4,544  |   |      | $ | 4,545  |  
|                           |  |                                |        |   |      |   |        |  



Impaired loans totaled $4,210,000 and
$3,827,000 at September 30, 2004 and December 31, 2003, respectively. An allowance for loan losses of $722,000 and $1,537,000 relates to impaired loans of $1,588,000 and $3,182,000 at September 30, 2004 and December 31, 2003, respectively. At
September 30, 2004 and December 31, 2003, impaired loans of $2,622,000 and $645,000 had no related allowance for loan losses.



At September 30, 2004 and December 31, 2003, accruing loans delinquent 90 days or more totaled $38,000 and $248,000, respectively. Non-accruing loans at September 30,
2004 and December 31, 2003 were $6,012,000 and $5,599,000, respectively.



Note 4: Commitments



Outstanding commitments to extend credit
as of September 30, 2004 total $45,107,000. Standby letters of credit as of September 30, 2004 total $1,024,000.



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##### Table of Contents

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 EndedSeptember 30, |           | Nine Months EndedSeptember 30,
|                                                     |  | 2004                            |           | 2003                           |   | 2004      |  | 2003
|Numerator:                                           |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Net income                                           |  | $                               | 1,175     |                                | $ | 810       |  | $    | 3,867     |  | $ | 4,038    
|                                                     |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Denominator:                                         |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Weighted-average common shares outstanding (basic)   |  |                                 | 3,148,651 |                                |   | 3,132,344 |  |      | 3,147,526 |  |   | 3,135,985
|Effect of stock options                              |  |                                 | 17,772    |                                |   | 30,391    |  |      | 23,122    |  |   | 31,449   
|                                                     |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Weighted-average common shares outstanding (diluted) |  |                                 | 3,166,423 |                                |   | 3,162,735 |  |      | 3,170,648 |  |   | 3,167,434
|                                                     |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Earnings per share:                                  |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Basic                                                |  | $                               | .37       |                                | $ | .26       |  | $    | 1.23      |  | $ | 1.29     
|                                                     |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Diluted                                              |  | $                               | .37       |                                | $ | .26       |  | $    | 1.22      |  | $ | 1.27     
|                                                     |  |                                 |           |                                |   |           |  |      |           |  |   |          



For the three and nine months ended
September 30, 2004 and 2003, stock options covering 30,000 and 11,000 shares of common stock, respectively, were not considered in computing earnings per share as their exercise prices exceeded the fair marker value of the Companys common
shares.



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, the Capital Securities are redeemable at par. Upon occurrence of specific events defined within the trust indenture, the Capital Securities may also be redeemed prior to 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 September 30, 2004, December 31, 2003 and September 30, 2003, the outstanding principal balance of the Capital Securities was
$8,000,000.. 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.



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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 September 30, 2004 and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2004 and 2003 and cash flows for the nine-month periods ended
September 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

October 27, 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 third quarter of 2004 was $1.18 million, an increase of $365,000, or 45.1%, from the third quarter of 2003 net income of $810,000. Net income per share-basic was $.37 for the third quarter of 2004,
compared to $.26 per share for the third quarter of 2003, an increase of 42.3%. Return on average equity and return on average assets for the third quarter of 2004 were 8.18% and 0.71%, respectively, compared to 5.46% and .47% for the same period in
2003. Net income for the first nine months of 2004 was $3.87 million, a decrease of $171,000, or 4.2%, from the first nine months of 2003 net income of $4.04 million. Net income per share-basic was $1.23 for the first nine months of 2004, compared
to $1.29 per share for the first nine months of 2003, a decrease of 4.7%. Return on average equity and return on average assets for the first nine months of 2004 were 9.01% and 0.78%, respectively, compared to 9.25% and .78% for the same period in
2003.



Net Interest Income



Net interest income was $4.95 million for the third quarter of 2004 and $15.18 million for
the first nine months of 2004, a decrease of $191,000 and $990,000, respectively, compared to the same periods last year. Interest income totaled $7.93 million for the third quarter of 2004, a decrease of 4.6% from $8.31 million during the same
period last year. Interest income for the first nine months of 2004 totaled $24.04 million, a decrease of 9.4% from $26.53 million during the same period last year. Although average loans outstanding for the third quarter and the first nine months
increased 1.82% and 3.66%, 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 6.47% in the third quarter of 2003 to 5.92% in the third quarter
of 2004, while the yield on average loans decreased from 6.76% for the first nine months of 2003 to 6.05% for the same period in 2004. Average securities outstanding for the third quarter and the first nine months of 2004 decreased 16.2% and 16.9%
compared to the same periods of the prior year. The yield on average securities increased from 3.01% for the third quarter of 2003 to 3.74% for the third quarter of 2004. The yield on average securities increased from 3.67% for the first nine months
of last year to 3.70% for the first nine months of 2004. A decrease in interest expense of 6.1% to $2.98 million during the third quarter of 2004 from $3.17 million during the same period last year offset part of the decrease in the third
quarters interest income. Similarly, a decrease in interest expense of 14.4% to $8.86 million during the first nine months of 2004 from $10.36 million during the same period last year offset part of the decrease in year-to-date interest
income. Average interest-bearing liabilities for the third quarter decreased 5.56% from last year to $543.2 million, and their cost decreased from 2.19% during the third quarter of last year to 2.18% in the third quarter of this year. Average
interest-bearing liabilities for the first nine months of 2004 decreased 4.89% from last year to $549.1 million, and their cost decreased from 2.40% to 2.16%. Net interest margin increased to 3.23% for the third quarter of this year from 3.18% for
the third quarter of last year while the net interest margin decreased to 3.30% for the first nine months of 2004 from 3.37% for the same period last year.



Provision for Loan Losses



The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents managements assessment
of the estimated probable credit losses inherent in the Banks loan portfolio at each balance sheet date. The provision for loan losses decreased 65.1% to $450,000 during the third quarter of 2004 from $1.29 million during the third quarter of
last year. For the first nine months of 2004, the provision decreased 41.7% to $1.35 million from $2.32 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. During 2003, management increased the provision due to charge-offs and reappraisals of collateral. The percentage of the allowance for loan losses to
total loans increased to 1.11% at September 30, 2003 and remained at 1.11% at September 30, 2004. The percentage of non-performing assets to total loans and other real estate owned decreased to 1.53% at September 30, 2004 from 1.55% at September 30,
2003. For the year to date, net charge-offs through September 30, 2004 decreased to $1.64 million, or 0.53% (annualized), from $1.78 million, or 0.60% (annualized), for the same period in 2003.



Non-interest Income



Non-interest income was $2.28 million for the third quarter of 2004, an increase of 7.4% from the $2.12 million earned in the third quarter
of 2003 primarily due to increases in trust income,service charges on deposits and gains



11



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##### Table of Contents

on sales of securities Non-interest income was $7.12 million for the first nine months of 2004, compared to $7.39 million
for the first nine months of 2003The Company realized $589,000 in securities gains in the first nine months of 2004, compared to $907,000 for the same period in 2003. Securities gains of $62,000 were realized in the third quarter of 2004 with none
realized in the third quarter of 2003.



Non-interest Expense



Non-interest expense was $5.38 million for the third quarter of 2004, compared to $5.16
million for the third quarter of 2003 primarily due to increases in salaries and benefits and professional fees. Salaries and benefits increased in the third quarter of 2004, compared to the third quarter of 2003, primarily due to reversals of bonus
accruals in the third quarter of 2003. For the first nine months of 2004, non-interest expense was $16.21 million, compared to $16.39 million for the same period in 2003.



Income Taxes



The provision for income taxes for the third quarter of 2004 was $219,000, compared to $1,000 for the same period in 2003. The provision for income taxes for the first
nine months of 2004 was $877,000, compared to $808,000 for the same period last year. The effective tax rate for the three months ended and nine months ended September 30, 2004 was 15.7% and 18.5%, respectively, compared to .12% and 16.7% for the
same periods in 2003. The lower effective tax rate in the third quarter of 2003 was due to tax-exempt income and the ESOP dividends paid tax deduction exceeding taxable income for the quarter.



Financial Condition



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



|                            |  |                |         |                  |   |         |  |   |         |   |  |       |  
|--------------------------- |  | -------------- | ------- | ---------------- | - | ------- |  | - | ------- | - |  | ----- | -
|                            |  | September 2004 |         | December 31 2003 |   | Amount  |  |   | Percent |  
|Total Assets                |  | $              | 645,760 |                  | $ | 664,928 |  | $ | (19,168 | ) |  | (2.9  | )
|Federal Funds Sold          |  |                | 4,463   |                  |   | 2,364   |  |   | 2,099   |   |  | 88.8  |  
|Loans (a)                   |  |                | 403,716 |                  |   | 404,991 |  |   | (1,275  | ) |  | (.3   | )
|Securities                  |  |                | 173,592 |                  |   | 191,802 |  |   | (18,210 | ) |  | (9.5  | )
|Demand deposits             |  |                | 51,802  |                  |   | 56,781  |  |   | (4,979  | ) |  | (8.8  | )
|Savings, NOW, MMDA deposits |  |                | 208,682 |                  |   | 217,297 |  |   | (8,615  | ) |  | (4.0  | )
|CDs $100,000 and over      |  |                | 40,412  |                  |   | 35,332  |  |   | 5,080   |   |  | 14.4  |  
|Other time deposits         |  |                | 139,790 |                  |   | 141,090 |  |   | (1,300  | ) |  | (.9   | )
|Total deposits              |  |                | 440,686 |                  |   | 450,500 |  |   | (9,814  | ) |  | (2.2  | )
|Short-term borrowing        |  |                | 29,058  |                  |   | 21,909  |  |   | 7,149   |   |  | 32.6  |  
|Long-term borrowing         |  |                | 112,312 |                  |   | 132,519 |  |   | (20,207 | ) |  | (15.2 | )
|Stockholders Equity         |  |                | 58,988  |                  |   | 56,696  |  |   | 2,292   |   |  | 4.0   |  

---

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



At September 30, 2004, total assets were $645.8 million, a decrease of $19.2 million from December 31, 2003. The decrease is primarily attributable to a decrease in the securities portfolio of $18.2 million. Loans
increased $3.3 million during 2004. Deposits decreased $9.8 million primarily in the public fund demand and NOW accounts. Stockholders equity increased $2.3 million during the year to $60.0 million due to year-to-date earnings, less dividends
paid, and an increase in other comprehensive income of $515,000 resulting from a change in market value of securities available for sale.



Average total assets decreased 4.5% to $656.3 million from the third quarter of 2003. Average total loans increased to $411.0 million, an increase of 1.8% from the same
quarter of last year. The real estate and personal loan average grew $5.2 million, an increase of 2.3%. These portfolios 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 $36.1 million from the third quarter of 2003 to $186.5 million due to security sales, accelerated prepayments and reinvestment of cash flows into loans rather than securities.



Average total deposits declined $19.4 million for the third quarter of 2004 to
$443.5 million, compared to an average of $462.9 million for the same quarter last year. Average small certificates of deposit decreased $11.6



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##### Table of Contents

million, or 7.7%, as the Company reduced its cost of funds and customers continued to seek out higher rates of return. In
addition, average large certificates of deposit declined $6.6 million. Average Federal Home Loan Bank borrowings decreased $11.0 million, or 8.7%, due to the early payoff of $17.0 million in advances in the third quarter of 2004 as well as 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 September 30, 2004 and 2003:



|                                   |  |                                |       |   |                               |   |       |      |  |   |        |   |  |   |        |  
|---------------------------------- |  | ------------------------------ | ----- | - | ----------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                   |  | Three Months EndedSeptember 30 |       |   | Nine Months EndedSeptember 30 |  
|                                   |  | 2004                           |       |   | 2003                          |   |       | 2004 |  |   | 2003   |  
|Balance at beginning of period     |  | $                              | 4,681 |   |                               | $ | 4,058 |      |  | $ | 4,830  |   |  | $ | 4,010  |  
|                                   |  |                                |       |  
|Charge-offs:                       |  |                                |       |   |                               |   |       |      |  |   |        |   |  |   |        |  
|Commercial and industrial          |  |                                | (42   | ) |                               |   | (236  | )    |  |   | (459   | ) |  |   | (565   | )
|Commercial real estate             |  |                                | (10   | ) |                               |   | (21   | )    |  |   | (52    | ) |  |   | (68    | )
|Agricultural                       |  |                                | (76   | ) |                               |   | (129  | )    |  |   | (168   | ) |  |   | (204   | )
|Residential real estate            |  |                                | (187  | ) |                               |   | (273  | )    |  |   | (448   | ) |  |   | (372   | )
|Consumer                           |  |                                | (409  | ) |                               |   | (244  | )    |  |   | (953   | ) |  |   | (974   | )
|Other                              |  |                                |      |   |                               |   |      |      |  |   |       |   |  |   | (1     | )
|                                   |  |                                |       |   |                               |   |       |      |  |   |        |   |  |   |        |  
|Total charge-offs                  |  |                                | (724  | ) |                               |   | (903  | )    |  |   | (2,080 | ) |  |   | (2,184 | )
|                                   |  |                                |       |   |                               |   |       |      |  |   |        |   |  |   |        |  
|Recoveries:                        |  |                                |       |   |                               |   |       |      |  |   |        |   |  |   |        |  
|Commercial and industrial          |  |                                | 12    |   |                               |   | 42    |      |  |   | 18     |   |  |   | 190    |  
|Commercial real estate             |  |                                | 13    |   |                               |   | 1     |      |  |   | 15     |   |  |   | 3      |  
|Agricultural                       |  |                                | 36    |   |                               |   | 1     |      |  |   | 38     |   |  |   | 14     |  
|Residential real estate            |  |                                | 15    |   |                               |   | 4     |      |  |   | 63     |   |  |   | 12     |  
|Consumer                           |  |                                | 61    |   |                               |   | 53    |      |  |   | 224    |   |  |   | 184    |  
|Other                              |  |                                |      |   |                               |   |      |      |  |   | 86     |   |  |   |       |  
|                                   |  |                                |       |   |                               |   |       |      |  |   |        |   |  |   |        |  
|Total recoveries                   |  |                                | 137   |   |                               |   | 101   |      |  |   | 444    |   |  |   | 403    |  
|                                   |  |                                |       |   |                               |   |       |      |  |   |        |   |  |   |        |  
|Net charge-offs                    |  |                                | (587  | ) |                               |   | (802  | )    |  |   | (1,636 | ) |  |   | (1,781 | )
|Provision for possible loan losses |  |                                | 450   |   |                               |   | 1,289 |      |  |   | 1,350  |   |  |   | 2,316  |  
|                                   |  |                                |       |   |                               |   |       |      |  |   |        |   |  |   |        |  
|Balance at end of period           |  | $                              | 4,544 |   |                               | $ | 4,545 |      |  | $ | 4,544  |   |  | $ | 4,545  |  
|                                   |  |                                |       |   |                               |   |       |      |  |   |        |   |  |   |        |  



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



|                                                                 |  |                   |       |   |                  |   |       |                   |  |   |       |  
|---------------------------------------------------------------- |  | ----------------- | ----- | - | ---------------- | - | ----- | ----------------- |  | - | ----- | -
|                                                                 |  | September 30 2004 |       |   | December 31 2003 |   |       | September 30 2003 | 
|Loans accounted for on non-accrual basis                         |  | $                 | 6,012 |   |                  | $ | 5,599 |                   |  | $ | 5,761 |  
|Accruing loans which are past due 90 days                        |  |                   | 38    |   |                  |   | 248   |                   |  |   | 266   |  
|Renegotiated loans                                               |  |                   | 0     |   |                  |   | 0     |                   |  |   | 0     |  
|Other real estate owned                                          |  |                   | 187   |   |                  |   | 637   |                   |  |   | 312   |  
|                                                                 |  |                   |       |   |                  |   |       |                   |  |   |       |  
|Total non-performing assets                                      |  | $                 | 6,237 |   |                  | $ | 6,484 |                   |  | $ | 6,339 |  
|                                                                 |  |                   |       |   |                  |   |       |                   |  |   |       |  
|Ratios:                                                          |  |                   |       |   |                  |   |       |                   |  |   |       |  
|Allowance to total loans                                         |  |                   | 1.11  | % |                  |   | 1.18  | %                 |  |   | 1.11  | %
|Net charge-offs to average loans (annualized)                    |  |                   | .53   | % |                  |   | 0.77  | %                 |  |   | .60   | %
|Non-performing assets to total loans and other real estate owned |  |                   | 1.53  | % |                  |   | 1.58  | %                 |  |   | 1.55  | %



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



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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 percentages applied to individual loans estimated by management to have a potential loss; and (3) estimated losses attributable to
economic conditions. Economic conditions considered include unemployment levels, the condition of the agricultural business, and other local economic factors.



As of September 30, 2004, there were $4.2 million in twenty-one 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-six loans that total $1.2 million with the largest balance being
$112,000. Non-accrual personal loans consisted of thirty-four loans that total $315,000 and home equity credit lines consisted of 12 loans totaling $289,000.



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 September 30, 2004, was 92.6%, compared to 89.0% at the same date in 2003. Loans to total assets were 63.2% at the end of the third quarter of 2004, compared to
59.8% at the same time last year. Management strives to keep this ratio below 70%. The Company has $173.6 in available-for-sale securities that are readily marketable. Approximately 80.2% of the available-for-sale portfolio is pledged to secure
public deposits, short-term and long-term borrowings and for other purposes as required by law. The balance of the available-for-sale securities could be sold if necessary for liquidity purposes. Also, a stable deposit base, consisting of 90.8% core
deposits, makes the Company less susceptible to large fluctuations in funding needs. The Company has short-term borrowing lines of credit with several correspondent banks. The Company also has both short- and long-term borrowing available through
the Federal Home Loan Bank (FHLB). The Company has the ability to obtain deposits in the brokered certificate of deposit market to help provide liquidity to fund loan growth.



The Federal Reserve Board has adopted risk-based capital guidelines that assign risk weightings to assets and off-balance sheet items and
also define and set minimum capital requirements (risk-based capital ratios). Bank holding companies must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios of 8%, 4% and 3%, respectively. At September 30, 2004, NB&T
Financial Group, Inc. had a total risk-based capital ratio of 14.78%, a Tier 1 risk-based capital ratio of 13.72%, and a Tier 1 leverage ratio of 9.05%.



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 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



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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.



Impairment of Securities  The Financial Accounting Standards Board issued EITF Issue 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments in 2004 but
has delayed its effective date until further guidance as to its application is approved. As a result, two proposed FASB Staff Positions have been issued: Proposed FSP EITF Issue 03-1-a, which provides guidance for the recognition of impairment due
to interest rate and/or sector spread increases, and Proposed FSP Issue 03-1-b, which delays the effective date of EITF Issue 03-1. The Company is currently uncertain as to the impact these issuances will have on its financial statements.



Item 3  Quantitative and Qualitative Disclosures about Market Risk



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



Techniques used to measure interest rate risk include both interest rate
gap management and simulation modeling that measures the effect of rate changes on net interest income and market value of equity under different rate scenarios. At September 30, 2004, the Companys simulation model indicated the twelve-month
cumulative static gap as a percent of total assets was a negative 2.7%, compared to a positive 3.0% at December 31, 2003. This change is primarily the result of a decrease in agency securities and commercial loans repricing within one year and an
increase in agency securities and commercial loans repricing or maturing in two to three years. As a result, the September 30, 2004 net interest income projections indicate a decreasing net interest margin as the yields on earning assets are
projected to be flat, while the cost of interest-bearing liabilities is projected to increase. This position could have a negative effect on projected net interest income over the next twelve months.



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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 September 30, 2004, that the Companys disclosure controls and
procedures were effective.



(b) During the quarter ended June 30, 2004, the
Company changed 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 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, nor to be reasonably likely to
materially affect, the Companys internal control over financial reporting.



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PART II  OTHER INFORMATION



Item 1  Legal Proceedings



Not applicable



Item 2  Unregistered Sales of Equity Securities and Use of Proceeds



Not applicable



Item 3  Defaults Upon Senior Securities



Not applicable



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



Not applicable



Item 5 - Other Information



Not applicable



Item 6  Exhibits



|     |  |                                                                        
|---- |  | -----------------------------------------------------------------------
|     |  | Index to Exhibits                                                      
|15   |  | Accountants acknowledgement.                                          
|     | 
|31.1 |  | Certification by CEO.                                                  
|     | 
|31.2 |  | Certification by CFO.                                                  
|     | 
|32.1 |  | Financial statements certification by CEO.                             
|     | 
|32.2 |  | Financial statements certification by CFO.                             
|     | 
|99   |  | Safe harbor under the Private Securities Litigation Reform Act of 1995.



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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: November 9, 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



|     |  |                                                                        
|---- |  | -----------------------------------------------------------------------
|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.



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