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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

OR

For the transition period from             to             

Commission file number 0-23134

NB&T FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

48 N. South Street, Wilmington, Ohio 45177

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number: (513) 382-1441

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Shares, without par value

(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

Based on the closing sales price on March 7, 2005 of $25.15 per, the aggregate market value of the issuer’s shares held by nonaffiliates was $48,788,963.

As of March 7, 2005, 3,227,063 common shares were issued and outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

The following sections of the definitive Proxy Statement for the 2005 Annual Meeting of Shareholders of NB&T Financial Group, Inc. (the “Proxy Statement”), are incorporated by reference into Part III of this Form 10-K:

1. Board of Directors;

2. Executive Officers;

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

4. Compensation of Executive Officers and Directors;

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

6. Certain Relationships and Related Transactions; and

7. Auditors.

NB&T FINANCIAL GROUP, INC.

For the Year Ended December 31, 2004

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PART I

Item 1. Description of Business

GENERAL

NB&T Financial Group, Inc. (“NB&T Financial”), an Ohio corporation, is a bank holding company which owns all of the issued and outstanding common shares of The National Bank and Trust Company, chartered under the laws of the United States (the “Bank”). The Bank is engaged in the commercial banking business in southwestern Ohio, providing a variety of consumer and commercial financial services. The primary business of the Bank consists of accepting deposits, through various consumer and commercial deposit products, and using such deposits to fund consumer loans, including automobile loans, loans secured by residential and non-residential real estate, and commercial and agricultural loans. All of the foregoing deposit and lending services are available at each of the Bank’s full-service offices. The Bank has also installed cash dispensers in convenience stores in three states as of the end of 2004. The Bank also has a trust department with assets under management of approximately $194.2 million.

The Bank also operates its wholly-owned subsidiary NB&T Insurance Agency, Inc. (“NB&T Insurance”). NB&T Insurance has four locations, with its principal office in Wilmington, Ohio. During 2004, NB&T Insurance acquired one agency located in Milford, Ohio for approximately $635,000 cash. This agency was merged into NB&T Insurance. NB&T Insurance sells a full line of insurance products, including: property and casualty, life, health, and annuities.

Because of its ownership of all the outstanding stock of the Bank, NB&T Financial is subject to regulation, examination and oversight by the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Bank, as a national bank, is subject to regulation, examination and oversight by the Office of the Comptroller of the Currency (the “OCC”) and special examination by the FRB. The Bank is a member of the Federal Reserve Bank of Cleveland. In addition, since its deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”), the Bank is also subject to some regulation, oversight and special examination by the FDIC. The Bank must file periodic financial reports with the FDIC, the OCC and the Federal Reserve Bank of Cleveland. Examinations are conducted periodically by these federal regulators to determine whether the Bank and NB&T Financial are in compliance with various regulatory requirements and are operating in a safe and sound manner.

Since its incorporation in 1980, NB&T Financial’s activities have been limited primarily to holding the common shares of the Bank. Consequently, the following discussion focuses primarily on the business of the Bank.

Lending Activities

General. The Bank’s income consists primarily of interest income generated by lending activities, including the origination of loans secured by residential and nonresidential real estate, commercial and agricultural loans, and consumer loans. Please refer to Table 7 on page 16, which summarizes the loan portfolio mix.

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

Commercial Real Estate. The Bank makes loans secured by commercial real estate located in its market area. Such loans generally are adjustable-rate loans for terms of up to 20 years. The types of properties securing loans in the Bank’s portfolio include warehouses, retail outlets and general industrial use properties. Commercial real estate lending generally entails greater risks than residential real estate lending. Such loans typically involve larger balances and depend on the income of the property to service the debt. Consequently, the risk of default on such loans may be more sensitive to adverse economic conditions. The Bank attempts to minimize such risks through prudent underwriting practices.

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

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

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Residential Real Estate. The Bank makes loans secured by one- to four-family residential real estate and multi-family (over four units) real estate located in its market area. The Bank originates both fixed-rate mortgage loans and adjustable-rate mortgage loans (“ARMs”). Fixed-rate loans with terms of 20 to 30 years are typically originated for sale in the secondary market.

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

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

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

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

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

Investment Activities

Funds not used in the Bank’s lending or banking function are dedicated to the investment portfolio. Those funds will be placed in Investment programs approved by the Asset/Liability Management Committee (ALCO). The deployment of these funds will be consistent with the overall strategy and risk profile of the Bank. The Bank primarily invests in high-quality securities to provide sufficient liquidity, secure pledged deposits, minimize current tax liability, and increase earnings.

Trust Services

The Bank received trust powers in 1922, and had approximately $194.2 million in assets under management at December 31, 2004 in the Trust Department. These assets are not included in the Bank’s balance sheet because, under federal law, neither the Bank nor its creditors can assert any claim against funds held by the Bank in its fiduciary capacity. In addition to administering trusts, the services offered by the Trust Department include investment purchase and management, estate planning and administration, tax and financial planning and employee benefit plan administration.

Deposits and Borrowings

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

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

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

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Competition

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

REGULATION

General

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

Bank Holding Company Regulation

The FRB has also adopted capital adequacy guidelines for bank holding companies, pursuant to which, on a consolidated basis, NB&T Financial must maintain total capital of at least 8% of risk-weighted assets. Risk-weighted assets consist of all assets, plus credit equivalent amounts of certain off- balance sheet items, which are weighted at percentage levels ranging from 0% to 100%, based on the relative credit risk of the asset. At least half of the total capital to meet this risk-based requirement must consist of core or “Tier 1” capital, which includes common stockholders’ equity, qualifying perpetual preferred stock (up to 25% of Tier 1 capital) and minority interests in the equity accounts of consolidated subsidiaries, less goodwill, certain other intangibles, and portions of certain nonfinancial equity investments. The remainder of total capital may consist of supplementary or “Tier 2 capital.” In addition to this risk-based capital requirement, the FRB requires bank holding companies to meet a leverage ratio of a minimum level of Tier 1 capital to average total consolidated assets of 3%, if they have the highest regulatory examination rating, well-diversified risk and minimal anticipated growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 4% of average total consolidated assets. NB&T Financial was in compliance with these capital requirements at December 31, 2004. For NB&T Financial’s capital ratios, see Note 14 to the Consolidated Financial Statements in Item 8.

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

The BHCA restricts NB&T Financial’s ownership or control of the outstanding shares of any class of voting stock of any company engaged in a nonbanking business, other than companies engaged in certain activities determined by the FRB to be closely related to banking. In addition, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of any nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the determination by the FRB that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. NB&T Financial currently has no nonbank subsidiaries, except subsidiaries of the Bank. The ownership of subsidiaries of the Bank is regulated by the OCC, rather than the FRB.

On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act of 1999). The Financial Services Modernization Act permits, effective March 11, 2000, bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act, by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.

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The Financial Services Modernization Act defines “financial in nature” to include:

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

Transactions between NB&T Financial and the Bank are subject to statutory limits in Sections 23A and 23B of the Federal Reserve Act (the “FRA”), which limit the amounts of such transactions and require that the terms of the transactions be at least as favorable to the Bank as the terms would be of a similar transaction between the Bank and an unrelated party. NB&T Financial and the Bank were in compliance with these requirements and restrictions at December 31, 2004.

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

National Bank Regulation

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

The Bank is required to meet certain minimum capital requirements set by the OCC. These requirements consist of risk-based capital guidelines and a leverage ratio, which are substantially the same as the capital requirements imposed on NB&T Financial. The Bank was in compliance with those capital requirements at December 31, 2004. For the Bank capital ratios, see Note 14 to the Consolidated Financial Statements in Item 8. The OCC may adjust the risk-based capital requirement of a national bank on an individualized basis to take into account risks due to concentrations of credit or nontraditional activities.

The OCC has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled national banks. At each successively lower defined capital category, a national bank is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the OCC has less flexibility in determining how to resolve the problems of the institution. In addition, the OCC generally can downgrade a national bank’s capital category, notwithstanding its capital level, if, after notice and opportunity for hearing, the national bank is deemed to be engaging in an unsafe or unsound practice, because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. The Bank’s capital at December 31, 2004, met the standards for the highest capital category, a well-capitalized bank.

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

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

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Federal Deposit Insurance Corporation. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the BIF for commercial banks and state savings banks and the SAIF for savings associations and for banks that have acquired SAIF deposits. The FDIC is required to maintain designated levels of reserves in each fund.

The Bank is a member of the BIF, and, at December 31, 2004, it had $414.5 million in deposits insured in the BIF, as well as $18.9 million, acquired in a merger, insured in the SAIF.

The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of each of the BIF and the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund’s ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution’s capital level and the FDIC’s level of supervisory concern about the institution. Insurance of deposits may be terminated by the FDIC if it finds that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition enacted or imposed by the institution’s regulatory agency.

Federal Reserve Board. The FRA requires national banks to maintain reserves against their net transaction accounts (primarily checking and NOW accounts). The amounts are subject to adjustment by the FRB. At December 31, 2004, the Bank was in compliance with its reserve requirements.

Federal Home Loan Banks. The Federal Home Loan Banks (the FHLBs) provide credit to their members in the form of advances. As a member, the Bank must maintain an investment in the capital stock of the FHLB of Cincinnati in an amount equal to the greater of 1% of the aggregate outstanding principal amount of the Bank’s residential real estate loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances from the FHLB. The Bank is in compliance with this requirement with an investment in FHLB of Cincinnati stock having a book value of $7.4 million at December 31, 2004. The FHLB advances are secured by collateral in one or more specified categories. The amount a member may borrow from the FHLB is limited based upon the amounts of various assets held by the member.

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

Item 2. Properties

NB&T Financial Group, Inc. and The National Bank and Trust Company own and occupy their main offices located at 48 North South Street, Wilmington, Ohio. The National Bank and Trust Company also owns or leases 19 full-service branch offices and one remote drive-through ATM facility, all of which are located in Adams, Brown, Clermont, Clinton, Fayette, Hardin, Highland, and Warren Counties in Ohio. The Bank owns a building at 1600 West Main Street, Wilmington, Ohio which serves as an operation center for the Bank and houses the Bank’s insurance agency. Additionally, the Bank also owns a building at 52 E. Main Street, Wilmington, Ohio, currently used as a storage facility.

Item 3. Legal Proceedings

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

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

Not applicable.

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PART II

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

There were 3,227,063 common shares of the Company outstanding on December 31, 2004 held of record by approximately 421 shareholders of record other than brokers, banks and depositories, and approximately an additional 322 beneficial owners holding their shares in the names of brokers, banks and depositories. Dividends per share declared were $0.25 per share in each quarter in 2004 and were $0.24 per share in each quarter in 2003.

The Company’s shares started trading on the Nasdaq SmallCap Market under the symbol NBTF in June 2003. The following table summarizes the quarterly common stock prices and dividends declared since June 2003.

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

The Company has a stock option plan under which the Company may grant options that vest over five years to selected employees for up to 7% of the authorized and issued shares of the Company, currently 3,818,950 shares. The following table summarizes the securities authorized for issuance at December 31, 2004 under all equity compensation plans still in existence.

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Item 6. Selected Financial Highlights

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

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

The following discussion and analysis comparing 2004 to prior years should be read in conjunction with the audited consolidated financial statements at December 31, 2004 and 2003 and for the three years ended December 31, 2004.

FORWARD-LOOKING STATEMENTS

Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “may increase,” “may fluctuate,” “will likely result,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” and “could” are generally forward-looking in nature and not historical facts. Results could differ materially from those expressed in such forward-looking statements due to a number of factors, including (1) the effect of economic conditions and interest rates on a national, regional or international basis; (2) competitive pressures in the retail banking, financial services, insurance and other industries; (3) the financial resources of, and products available to, competitors; (4) changes in laws and regulations, including changes in accounting standards; (5) changes in policy by regulatory agencies; and (6) changes in the securities markets. Any forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions, and actual results could differ materially from those contemplated by those forward-looking statements. Many of the factors that will determine these results are beyond the Company’s ability to control or predict. The Company disclaims any duty to update any forward-looking statements, all of which are qualified by the statements in this section.

RESULTS OF OPERATIONS

OVERVIEW

Net income for 2004 was $4.9 million, or $1.57 per share, compared to $4.1 million, or $1.31 per share, for the year of 2003. The increase in net income in 2004 is primarily due to a lower loan loss provision, as a result of decreasing non-performing loans. The provision for loan losses decreased $2.0 million, or 51.5%, to $1.9 million from $3.9 million during 2003. Non-performing loans decreased 50.8% to $2.9 million from $5.8 million at December 31, 2003. Net interest income decreased $1.3 million from $21.5 million in 2003 to $20.2 million in 2004, partially offsetting the lower loan loss provision. Total non-interest income of $8.5 million for 2004, excluding securities gains, was relatively unchanged from 2003. Non-interest expense decreased from $22.5 million in 2003 to $21.6 million in 2004 due to reorganization costs of $709,000 in 2003. Performance ratios for 2004 included a return on assets of 0.75% and a return on equity of 8.57 %, compared to 0.60% and 7.06%, respectively, in 2003.

Net income for 2003 was $4.1 million, or $1.31 per share, compared to $6.5 million, or $2.11 per share, for the year of 2002. The decrease in net income from 2002 to 2003 is due to primarily two factors. First, net interest income was $21.5 million for 2003, compared to $23.1 million for 2002. Second, the provision for loan losses was increased $1.8 million to $3.8 million in 2003 from $2.1 million in 2002. Performance ratios for 2003 included a return on assets of .60% and a return on equity of 7.06% compared to .96% and 12.08%, respectively, in 2002.

NET INTEREST INCOME

Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the most significant component of the Company’s earnings. Net interest income is affected by changes in the volumes, rates and composition of interest-earning assets and interest-bearing liabilities. Table 1 reflects the components of the Company’s net interest income for each of the three years ended December 31, 2004, setting forth: (i) Average assets, liabilities and shareholders’ equity, (ii) interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, (iii) average yields earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, and (iv) the net interest margin (i.e., net interest income divided by average interest-earning assets). Non-accrual loans have been included in the average loan balances.

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TABLE 1 – NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income decreased $1.3 million, or 6.0%, from $21.5 million in 2003 to $20.2 million in 2004. Net interest margin decreased from 3.38% in 2003 to 3.31% in 2004. Interest income on loans decreased $1.6 million, or 6.0%, from 2003, and the yield on average loans decreased from 6.62% in 2003 to 6.09% in 2004, despite an increase in average loans of $8.8 million. Although the prime rate increased approximately 125 basis points from June 2004 to December 2004, approximately 60% of the Company’s adjustable-rate loan portfolio reprices off the three- and five-year treasury rates. These treasury rates remained lower in 2004 than the previous repricing rates, resulting in a decrease in the yield earned on adjusting loans. In addition, interest income on securities decreased $1.2 million from $8.3 million in 2003 to $7.1 million in 2004. The average securities balance declined $36.3 million in 2004, primarily due to the use of proceeds from the sale and maturity of securities to pay down approximately $21.0 million in FHLB debt. The interest expense on interest-bearing liabilities only decreased $1.5 million from $13.4 million in 2003 to $11.9 million in 2004. The yield on interest-bearing deposits declined 24 basis points from 1.65% in 2003 to 1.41% in 2004 as certificate of deposits matured and repriced at lower rates. Rates on short-term borrowings, are directly tied to the prime rate. As a result, short-term borrowing costs increased during the last six months of 2004. The yields on FHLB borrowings increased from 4.78% in 2003 to 4.86% in 2004, as lower rate advances were paid off, and higher-rate advances remained outstanding. Based on the current rate environment, management expects these advances to have a negative impact on earnings for several years.

Net interest income decreased $1.6 million, or 7.0%, from $23.1 million in 2002 to $21.5 million in 2003. Net interest margin decreased from 3.70% in 2002 to 3.38% in 2003. As interest rates remained at historical lows during 2003, the interest income on interest-earning assets decreased $5.5 million from $40.4 million in 2002 to $34.9 million in 2003. The interest expense on interest-bearing liabilities, however, decreased only $3.9 million from $17.3 million in 2002 to $13.4 million in 2003. This decrease is primarily the result of a mismatch in interest rate risk between investments and FHLB borrowings.

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Historically at various times, the Bank has utilized FHLB borrowings to purchase securities, leverage its capital position and improve earnings. With the decrease in rates during 2003, however, higher yielding mortgage-related and callable securities prepaid and were reinvested at lower yields. As a result, interest on securities decreased 25.9%, or $2.9 million in 2003 from 2002, and the yield decreased 125 basis points from 4.93% to 3.68%. The average balance of the securities portfolio decreased $1.2 million, or .55%, from 2002, due to the prepayments and a shifting of balances from mortgage-related securities to mortgage loans. Unfortunately, interest expense on FHLB borrowings did not decrease. These borrowings have fixed rates and are subject to significant prepayment penalties. Interest expense on FHLB borrowings increased to $5.9 million in 2003 from $5.7 million in 2002 and the average cost decreased to 4.78% in 2003 from 5.05% in 2002 due to additional average borrowings of $10.6 million during 2003 and no repricing of prior years outstanding FHLB borrowings.

Interest income on loans decreased $2.5 million from $29.0 million in 2002 to $26.5 million in 2003. While the yield decreased to 6.62% in 2003 from 7.53%, an increase in average loans of $14.7 million partially offset the decrease in yield. Interest expense on deposits and short-term borrowings decreased $4.3 million, or 37.9%, in 2003 compared to 2002. This decrease was due to a combination of lower average costs, average balances and mix of deposits. Average interest-bearing deposits and short-term borrowings decreased $11.0 million, or 2.4%, during 2003, while the cost decreased from 2.52% in 2002 to 1.60% in 2003. The volume growth in average deposits and short-term interest-bearing liabilities was due to a $2.1 million, or 1.2%, increase in NOW and money market accounts, and a $3.3 million, or 8.2%, increase in savings deposits, offset by a decrease in average certificates of deposits of $15.5 million.

Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. Table 2 presents an analysis of increases and decreases in interest income and expense in terms of changes in volume and interest rates during the three years ended December 31, 2004. Changes attributable to rate and volume are allocated to both rate and volume on an equal basis.

TABLE 2 – NET INTEREST INCOME – RATE/VOLUME ANALYSIS

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NON-INTEREST INCOME

Table 3 details the components of non-interest income, excluding securities gains and losses, and the percentage change from the two previous years. Total non-interest income was $8.5 million in 2004, $ 8.5 million in 2003, and $8.5 million in 2002. Trust income increased 14.8% in 2004 and decreased 6.8 % in 2003, which was a function of the decline and subsequent increase in the average market value of funds under management. Service charges and fees have increased over the last three years due to increased charges and growth in the number of accounts. In 2002, the Company also introduced the Overdraft Protector program that aids customers by paying more and returning fewer overdraft checks. ATM network fees generated were $315,000 in 2004, $435,000 in 2003, and $578,000 in 2002. At the end of 2004, there were thirty-two machines installed in three states compared to forty-seven machines installed at the end of 2003 and sixty-five at the end of 2002. The decrease in machines installed and fees generated is a result of increased competition in the ATM network business and the Company’s decision not to expand this line of business due to lower profit margins and higher machine upgrade expenses. Insurance agency commission income increased from $2,355,000 in 2002 to $2,519,000 in 2003 due to increased commissions from acquired agencies and remained relatively unchanged at $2,494,000 in 2004, mainly due to a decline in annuity sales. Bank owned life insurance (“BOLI”) income decreased to $531,000 in 2003 compared to $787,000 in 2002 due to a death benefit claim in 2002. In 2004, other income decreased to $716,000 from $848,000 in 2003 due to decreased loan originations and loan fees. During 2003, other income decreased to $848,000 from $1,127,000 in 2002 primarily due to reimbursement of self-insured insurance claims in 2002.

TABLE 3 - NON-INTEREST INCOME

(in thousands)

Gain on sales of securities totaled $787,000 in 2004, compared to $915,000 in 2003. Proceeds from the sale of securities totaled $42.1 million in 2004, compared to $42.5 million in 2003.

NON-INTEREST EXPENSE

Table 4 details the components of non-interest expense and the percentage change from the two previous years. Total non-interest expense decreased from $22.4 million in 2003, to $21.6 million in 2004. From 2002 to 2003, non-interest expense was up $379,000.

Salaries and benefits expense, which is the largest component of non-interest expense, increased to $11.1 million in 2004 from $11.0 million in 2003. Salaries and benefits expense in 2002 was $11.5 million. In 2004, salary expense was down approximately $370,000, largely due to a reduction in staffing in the fourth quarter of 2003 and the closing of three offices in January 2004. This decrease was offset by payment of bonuses in 2004. The decrease in expense in 2003 is primarily due to elimination of officer bonuses, offset by an increase in health care costs and other retirement expenses. The average number of full-time equivalent employees was 249 in 2004, 269 in 2003 and 269 in 2002.

The operations center which opened in April 2003 contributed to the 14.2% increase in occupancy from 2002 to 2003. Equipment expense declined from $2.6 million in 2003 to $2.2 million in 2004, primarily due to the Bank’s conversion to a new processing system in April 2004 where the annual maintenance fees were waived for the first year. Data processing expenses increased from $526,000 in 2002 to $601,000 in 2003 and $684,000 in 2004, largely a result of increasing debit card processing expense. Professional fees increased 7.3% from 2003 to 2004, primarily due to legal fees associated with loan collection efforts and third-party loan review.

Other noninterest expenses increased 58.9% to $2.3 million in 2003 primarily due to $704,000 in reorganization expenses. On October 3, 2003, the Company announced it was undertaking several initiatives designed to lower the Company’s non-interest expense by closing three of its banking offices and reducing its workforce. As of January 31, 2004, the three branch facilities were closed.

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TABLE 4 - NON-INTEREST EXPENSE

(in thousands)

INCOME TAXES

The effective tax rates were 17.7% for 2004, 10.0% for 2003 and 17.6% for 2002. The effective tax rate being lower than the statutory rate was primarily due to tax-exempt municipal bond interest income and BOLI income.

FINANCIAL CONDITION

ASSETS

Average total assets increased 3.4% during 2004 to $661.4 million. Average interest-earning assets decreased 3.8%, and were 93% of total average assets, equivalent to 2003 and 2002.

SECURITIES

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

TABLE 5 – SECURITIES PORTFOLIO

The majority of the decreases in the securities portfolio from 2003 to 2004 were the result of sales of U.S. agency mortgage-backed securities and other mortgage-backed securities, as well as some out-of-state municipal bonds. Part of the proceeds of these sales, along with the proceeds from matured securities, were used to payoff approximately $21.0 million in Federal Home Loan Bank debt.

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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The following table sets forth the amortized cost of the Bank’s securities portfolio at December 31, 2004. U.S. agency mortgage-backed securities and other mortgage-backed securities are categorized according to their expected prepayment speeds. All other securities are categorized based on contractual maturity. Actual maturities may differ from contractual maturities when borrowers have the right to call or prepay obligations. Yields do not include the effect of income taxes (dollars in thousands).

TABLE 6 – SECURITIES PORTFOLIO REPRICING

LOANS

Table 7 shows loans outstanding at period end by type of loan. Commercial and industrial loans declined from $108.5 million in 2002 to $89.6 million in 2003 and $85.7 million in 2004. The decline in the commercial and industrial loan portfolio has been largely offset by an increase in commercial real estate and real estate construction loans. The Company has experienced an increase in its commercial real estate and construction lending over the past five years, because of the Company’s sales activities in the higher-growth Clermont and Warren Counties. The Company continues to focus its commercial lending on small- to medium-sized companies with established track records in its market area.

Residential real estate loans increased $11.3 million in 2003 and declined $10.2 million in 2004. In 2003 and continuing in 2004, the Company maintained shorter-term fixed-rate real estate loans for its portfolio and sold the majority of the long-term fixed-rate residential real estate loans originated. While mortgage loan rates remained at historical lows, the Company sold more than it retained resulting in a declining balance.

Installment loans outstanding decreased $7.0 million to $81.0 million in 2004 from $88.0 million at December 31, 2003. This decrease occurred primarily in direct personal loans. Installment loans decreased to 20% of the portfolio at December 31, 2004 from 21% at December 31, 2003.

The Company has avoided concentration of commercial lending in any one industry. As of December 31, 2004, the highest commercial lending concentration was 13% for rental real estate properties.

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TABLE 7 - LOAN PORTFOLIO

(in thousands)

At December 31,