Oak Hill Financial 10-Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended September 30, 2006

Commission File Number: 0-26876

OAK HILL FINANCIAL, INC.

(Exact name of Registrant as specified in its charter)

Ohio (State or other jurisdiction of incorporation or organization)   14621 S. R. 93 Jackson, Ohio (Address of principal executive office) 31-1010517 (I.R.S. Employer Identification Number)     45640 (Zip Code)

Registrant’s telephone number, including area code: (740) 286-3283

Indicate by check mark whether the issuer (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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

As of November 8, 2006, the latest practicable date, 5,340,823 shares of the Registrant’s common stock, $.50 stated value, were outstanding.

Oak Hill Financial, Inc.

TABLE OF CONTENTS

			Page
PART I - FINANCIAL INFORMATION
Item 1:	Financial Statements
		Consolidated Statements of Financial Condition	3
		Consolidated Statements of Earnings	4
		Consolidated Statements of Comprehensive Income	5
		Consolidated Statements of Cash Flows	6
		Notes to Consolidated Financial Statements	8
Item 2:	Management’s Discussion and Analysis of Financial Condition
		And Results of Operations	15
Item 3:	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4:	Controls and Procedures		19
PART II - OTHER INFORMATION
Item 1:	Legal Proceedings		20
Item 1A:	Risk Factors		20
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds		20
Item 3:	Default Upon Senior Securities		20
Item 4:	Submission of Matters to a Vote of Security Holders		20
Item 5:	Other Information		20
Item 6:	Exhibits		20
Signatures			22
Certifications			23

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PART I - FINANCIAL INFORMATION

Item 1: Financial Statements

Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
	September 30,			December 31,
(In thousands, except share data)	2006			2005
	(Unaudited)
ASSETS
Cash and due from banks	$	20,797		$	24,786
Federal funds sold		446			1,614
Investment securities designated as available for sale - at market		140,972			131,193
Investment securities designated as held to maturity - at cost (approximate market
value of $3,884 and $3,851 at September 30, 2006 and December 31, 2005, respectively)		3,602			3,619
Loans receivable - net		1,015,909			1,014,673
Loans held for sale - at lower of cost or market		1,004			410
Office premises and equipment - net		26,994			22,736
Federal Home Loan Bank stock - at cost		7,958			7,626
Real estate acquired through foreclosure		2,682			376
Accrued interest receivable on loans		4,589			4,156
Accrued interest receivable on investment securities		1,308			875
Goodwill - net		7,935			7,935
Core deposit intangible - net		3,327			4,068
Bank owned life insurance	��	13,343			12,948
Prepaid expenses and other assets		3,460			1,561
Prepaid federal income taxes		575			1,178
Deferred federal income taxes		619			1,304
TOTAL ASSETS	$	1,255,520		$	1,241,058
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand	$	89,970		$	97,575
Savings and time deposits		873,552			880,821
Total deposits		963,522			978,396
Securities sold under agreements to repurchase		41,101			18,263
Advances from the Federal Home Loan Bank		129,321			123,119
Subordinated debentures		23,000			23,000
Accrued interest payable and other liabilities		4,404			4,199
Total liabilities		1,161,348			1,146,977
Stockholders’ equity
Common stock - $.50 stated value; authorized 15,000,000 shares
5,874,634 shares issued at September 30, 2006 and December 31, 2005		2,937			2,937
Additional paid-in capital		13,668			13,952
Retained earnings		92,077			85,505
Treasury stock (508,660 and 270,420 shares at September 30, 2006 and
December 31, 2005, respectively - at cost)		(14,815	)		(7,972	)
Accumulated comprehensive income (loss):
Unrealized gain (loss) on securities designated as available for sale, net
of related tax effects		305			(341	)
Total stockholders’ equity		94,172			94,081
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,255,520		$	1,241,058

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Oak Hill Financial, Inc.

CONSOLIDATED STATEMENTS OF EARNINGS

	For the				For the
	Nine Months Ended				Three Months Ended
	September 30,				September 30,
(In thousands, except share data)	2006		2005		2006			2005
	(Unaudited)
INTEREST INCOME
Loans	$	53,957	$	47,182	$	18,685		$	16,757
Investment securities		4,677		3,542		1,651			1,307
Interest-bearing deposits and other		466		322		146			115
Total interest income		59,100		51,046		20,482			18,179
INTEREST EXPENSE
Deposits		23,350		16,261		8,252			6,012
Borrowings		6,903		4,694		2,594			1,748
Total interest expense		30,253		20,955		10,846			7,760
Net interest income		28,847		30,091		9,636			10,419
Provision for losses on loans		1,729		5,671		456			212
Net interest income after provision for losses on loans		27,118		24,420		9,180			10,207
OTHER INCOME
Service fees, charges and other operating		6,244		4,784		2,058			1,703
Commissions income		2,584		2,071		891			710
Bank owned life insurance		395		324		126			135
Gain on sale of loans		742		869		200			327
Gain on sale of securities		145		508		41			138
Total other income		10,110		8,556		3,316			3,013
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE
Employee compensation and benefits		12,751		12,012		4,347			4,436
Occupancy and equipment		3,043		3,090		1,063			1,037
Federal deposit insurance premiums		93		92		30			32
Franchise taxes		1,072		148		276			45
Other operating		7,272		6,424		2,511			2,246
Amortization of core deposit intangible		740		670		228			299
Merger-related expenses				502					49
Total general, administrative and other expense		24,971		22,938		8,455			8,144
Earnings before federal income taxes		12,257		10,038		4,041			5,076
FEDERAL INCOME TAXES
Current		2,252		1,256		863			1,119
Deferred		337		982		(2	)		18
Total federal income tax		2,589		2,238		861			1,137
NET EARNINGS	$	9,668	$	7,800	$	3,180		$	3,939
EARNINGS PER SHARE
Basic	$	1.77	$	1.37	$	0.59		$	0.69
Diluted	$	1.74	$	1.34	$	0.58		$	0.68
DIVIDENDS PER SHARE	$	0.57	$	0.51	$	0.19		$	0.17

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Oak Hill Financial, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	For the						For the
	Nine Months Ended						Three Months Ended
	September 30,						September 30,
(In thousands, except share data)	2006			2005			2006			2005
	(Unaudited)
Net earnings	$	9,668		$	7,800		$	3,180		$	3,939
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities designated as available for sale,
net of taxes (benefits) of $399, $(265), $1,157 and $(457), respectively		740			(492	)		2,148			(849	)
Reclassification adjustment for realized gains included in net earnings,
net of taxes of $51, $178, $15, and $47, respectively		(94	)		(330	)		(26	)		(91	)
Comprehensive income	$	10,314		$	6,978		$	5,302		$	2,999
Accumulated comprehensive income (loss)	$	305		$	(217	)	$	305		$	(217	)

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Oak Hill Financial, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Nine Months Ended
	September 30,
(In thousands)	2006			2005
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings for the period	$	9,668		$	7,800
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization		1,135			1,305
Amortization of core deposit intangible		741			670
Gain on sale of securities		(145	)		(508	)
Amortization of premiums, discounts and mortgage servicing rights - net		672			1,003
Proceeds from sale of loans in secondary market		23,319			27,907
Loans disbursed for sale in secondary market		(23,483	)		(27,139	)
Gain on sale of loans		(430	)		(512	)
Gain on disposition of assets		–			(109	)
Accretion of deferred loan origination fee		(367	)		(397	)
Loss on sale of other real estate owned		57			274
Purchase of loans		(451	)		–
Federal Home Loan Bank stock dividends		(332	)		(254	)
Provision for losses on loans		1,729			5,671
Compensation expense related to stock incentive plan		23			–
Bank owned life insurance income		(395	)		(324	)
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets		(1,899	)		(8,866	)
Accrued interest receivable		(866	)		(602	)
Accrued interest payable and other liabilities		205			(464	)
Federal income taxes
Current		603			1,297
Deferred		337			982
Net cash provided by operating activities		10,121			7,734
CASH FLOWS USED IN INVESTING ACTIVITIES:
Loan disbursements		(252,247	)		(227,692	)
Principal repayments on loans		246,800			214,276
Principal repayments on mortgage-backed securities designated
as available for sale		12,232			12,691
Proceeds from sale of investment securities designated
as available for sale		23,528			31,529
Proceeds from maturity of investment securities		1,211			1,173
Proceeds from disposition of assets		–			795
Proceeds from sale of other real estate owned		567			1,175
Purchase of investment securities designated
as available-for-sale		(46,031	)		(69,829	)
Purchase of insurance agency		–			(12	)
(Increase) decrease in federal funds sold - net		1,168			(2,281	)
Purchase of office premises and equipment		(5,441	)		(4,876	)
Lawrence Financial acquisition - net of cash paid		–			6,689
Net cash used in investing activities		(18,213	)		(36,362	)
Net cash used in operating and investing activities
(balance carried forward)		(8,092	)		(28,628	)

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Oak Hill Financial, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

	For the Nine Months Ended
	September 30,
(In thousands)	2006			2005
	(Unaudited)
Net cash used in operating and investing activities
(balance brought forward)	$	(8,092	)	$	(28,628	)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from securities sold under agreement to repurchase		22,838			14,301
Net increase (decrease) in deposit accounts		(14,691	)		12,228
Proceeds from Federal Home Loan Bank advances		57,000			23,500
Repayments of Federal Home Loan Bank advances		(50,798	)		(24,340	)
Repayments of notes payable		–			(2,700	)
Proceeds from issuance of subordinated debentures		–			5,000
Dividends on common shares		(3,096	)		(2,880	)
Purchase of treasury shares		(7,778	)		(6,188	)
Proceeds from issuance of shares under stock option plan		496			1,903
Tax benefit of stock options exercised		132			415
Net cash provided by financing activities		4,103			21,239
Net decrease in cash and cash equivalents		(3,989	)		(7,389	)
Cash and cash equivalents at beginning of period		24,786			31,009
Cash and cash equivalents at end of period	$	20,797		$	23,620
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Federal income taxes	$	1,549		$	2,137
Interest on deposits and borrowings	$	30,367		$	21,037
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Unrealized gain (loss) on securities designated as available for sale,
net of related tax effects	$	740		$	(492	)
Recognition of mortgage servicing rights in accordance with SFAS No. 140	$	312		$	357
Transfer from loans to real estate acquired through foreclosure	$	2,479		$	63
Loans identified as held-for-sale	$	1,004		$	75
Fair value of assets acquired in acquisition of Lawrence Federal	$	–		$	125,121
Common stock issued in acquisition of Lawrence Federal	$	–		$	8,589
Goodwill and other intangible assets arising from acquisitions - net	$	–		$	9,162
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Acquisition of treasury stock in exchange for stock options	$	84		$	–

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Oak Hill Financial, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the nine and three month periods ended September 30, 2006 and 2005

1. Basis of Presentation

Oak Hill Financial, Inc. (the “Company”) is a financial holding company the principal assets of which have been its ownership of Oak Hill Banks (“Oak Hill”) and Oak Hill Financial Insurance (“OHFI”). The Company also owns forty-nine percent of Oak Hill Title Agency, LLC (“Oak Hill Title”) which provides title services for commercial and residential real estate transactions. Accordingly, the Company’s results of operations are primarily dependent upon the results of operations of its subsidiaries. 

Oak Hill conducts a general commercial banking business in southern and central Ohio which consists of attracting deposits from the general public and applying those funds to the origination of loans for commercial, consumer and residential purposes. OHFI is an insurance agency specializing in group health insurance and other employee benefits.

Oak Hill’s profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e., loans and investments) and the interest expense paid on interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by Oak Hill can be significantly influenced by a number of competitive factors, such as governmental monetary policy, that are outside of management’s control.

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in the Annual Report on Form 10-K for the year ended December 31, 2005. However, all adjustments (consisting of normal recurring accruals), which, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the nine and three months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the entire year.

2. Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Oak Hill and OHFI. The Company effectively controls Oak Hill Title; therefore, their accounts are also included in the financial statements of the Company with the remaining ownership being accounted for as minority interest. All intercompany balances and transactions have been eliminated.

3. Liquidity and Capital Resources

Like other financial institutions, the Company must ensure that sufficient funds are available to meet deposit withdrawals, loan commitments, and expenses. Control of the Company’s cash flow requires the anticipation of deposit flows and loan payments. The Company’s primary sources of funds are deposits, borrowings and principal and interest payments on loans. The Company uses funds from deposit inflows, proceeds from borrowings and principal and interest payments on loans primarily to originate loans, and to purchase short-term investment securities and interest-bearing deposits.

At September 30, 2006, the Company had $387.4 million of certificates of deposit maturing within one year. It has been the Company’s historic experience that such certificates of deposit will be renewed with Oak Hill at market rates of interest. It is management’s belief that maturing certificates of deposit over the next year will similarly be renewed with Oak Hill at market rates of interest.

In the event that certificates of deposit cannot be renewed at prevalent market rates, the Company can obtain up to $245.1 million in advances from the Federal Home Loan Bank of Cincinnati (“FHLB”). Also, as an operational philosophy, the Company seeks to obtain advances to help with asset/liability management and liquidity. At September 30, 2006, the Company had $129.3 million of outstanding FHLB advances.

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Oak Hill Financial, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the nine and three month periods ended September 30, 2006 and 2005

3. Liquidity and Capital Resources (continued)

The Company engages in off-balance sheet credit-related activities that could require the Company to make cash payments in the event that specified future events occur. The contractual amounts of these activities represent the maximum exposure to the Company. However, certain off-balance sheet commitments are expected to expire or be only partially used; therefore, the total amount of commitments does not necessarily represent future cash requirements. These off-balance sheet activities are necessary to meet the financing needs of the Company’s customers. At September 30, 2006, the Company had total off-balance sheet contractual commitments consisting of $29.2 million to originate loans, $129.4 million in unused lines of credit and letters of credit totaling $17.1 million. Funding for these amounts is expected to be provided by the sources described above. Management believes the Company has adequate resources to meet its normal funding requirements.

The table below details the amount of loan commitments, unused lines of credit and letters of credit outstanding at September 30, 2006 by expiration period:

	One year		One to		After
(In thousands)	or less		three years		three years		Total
Loan commitments	$	29,165	$	–	$	–	$	29,165
Unused lines of credit		60,504		15,287		53,559		129,350
Letters of credit		6,888		10,179				17,067
	$	96,557	$	25,466	$	53,559	$	175,582

The table below details the amount of contractual obligations outstanding at September 30, 2006, by expiration date:

	One year		One to		After
(In thousands)	or less		three years		three years		Total
Office premises and equipment	$	208	$	–	$	–	$	208
Advances from the Federal Home Loan Bank		44,501		34,245		50,575		129,321
Securities sold under agreement to repurchase		11,101				30,000		41,101
Subordinated debentures						23,000		23,000
Lease obligations		596		723		420		1,739
	$	56,406	$	34,968	$	103,995	$	195,369

4. Earnings Per Share

Basic earnings per common share is computed based upon the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed including the dilutive effect of additional potential common shares issuable under stock options. The computations were as follows for the nine and three-month periods ended September 30:

	For the				For the
	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Weighted-average common shares outstanding (basic)		5,467,480		5,684,826		5,379,089		5,688,601
Dilutive effect of assumed exercise of stock options		89,423		128,108		80,672		108,452
Weighted-average common shares outstanding (diluted)		5,556,903		5,812,934		5,459,761		5,797,053

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Oak Hill Financial, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the nine and three month periods ended September 30, 2006 and 2005

4. Earnings Per Share (continued)

Options to purchase 172,550 and 125,250 shares of common stock with a weighted-average exercise price of $34.87 and $37.12 were outstanding at September 30, 2006 and 2005, but were excluded from the computation of common share equivalents for the nine and three month periods ended September 30, 2006 and 2005 because the exercise prices were greater than the average market price of the common shares.

5. Critical Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to use judgments in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The following critical accounting policies are based upon judgments and assumptions by management that include inherent risks and uncertainties.

Allowance for Losses on Loans: The balance in the allowance is an accounting estimate of probable but unconfirmed and unrecorded asset impairment that has occurred in the Company’s loan portfolio as of the date of the consolidated financial statements. It is the Company’s policy to provide valuation allowances for estimated losses on loans based upon past loss experience, adjusted for changes in trends and conditions of the certain items, including:

· Local market areas and national economic developments;

· Levels of and trends in delinquencies and impaired loans;

· Levels of and trends in recoveries of prior charge-offs;

· Adverse situations that may affect specific borrowers’ ability to repay;

· Effects of any changes in lending policies and procedures;

· Credit concentrations;

· Experience, ability, and depth of lending management and credit administration staff;

· Volume and terms of loans; and

· Current collateral values, where appropriate.

When the collection of a loan becomes doubtful, or otherwise troubled, the Company records a loan loss provision equal to the difference between the fair value of the property securing the loan and the loan’s carrying value. Unsecured credits are charged- off upon becoming contractually delinquent for greater than 90 days. Major loans and major lending areas are reviewed periodically to determine potential problems at an early date. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs (net of recoveries).

The Company accounts for its allowance for losses on loans in accordance with SFAS No. 5, “Accounting for Contingencies,” and SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” Both Statements require the Company to evaluate the collectibility of both contractual interest and principal loan payments. SFAS No. 5 requires the accrual of a loss when it is probable that a loan has been impaired and the amount of the loss can be reasonably estimated. SFAS No. 114 requires that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an alternative, at the loans’ observable market price or fair value of the collateral if the loan is collateral dependent.

A loan is defined under SFAS No. 114 as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In applying the provisions of SFAS No. 114, the Company considers its investment in one-to-four family residential loans, consumer installment loans and credit card loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. These homogeneous loan groups are evaluated for impairment in accordance with SFAS No. 5. With respect to the Company’s

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Oak Hill Financial, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the nine and three month periods ended September 30, 2006 and 2005

5. Critical Accounting Policies (continued)

investment in commercial and other loans, and its evaluation of impairment thereof, management believes such loans are adequately collateralized and as a result impaired loans are carried as a practical expedient at the lower of cost or fair value.

It is the Company’s policy to charge off unsecured credits that are more than ninety days delinquent. Similarly, collateral- dependent loans which become more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under SFAS No. 114 at that time.

Goodwill and Other Intangible Assets. The Company has recorded goodwill and core deposit intangibles as a result of merger and acquisition activity.

Goodwill represents the excess purchase price paid over the net book value of the assets acquired in a merger or acquisition. Pursuant to SFAS No. 142, “Goodwill and Intangible Assets,” goodwill is not amortized, but is tested for impairment at the reporting unit annually and whenever an impairment indicator arises. The evaluation involves assigning assets and liabilities to reporting units and comparing the fair value of each reporting unit to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered impaired. However, if the carrying amount of the reporting unit exceeds the fair value, goodwill can be considered impaired. The potential impairment loss equals the excess of carrying value over fair value.

Core deposit intangibles represent the value of long-term deposit relationships and are amortized over their estimated useful lives. The Company annually evaluates these estimated useful lives. If the Company determines that events or circumstances warrant a change in these estimated useful lives, the Company will adjust the amortization of the core deposit intangibles, which could affect future amortization expense.

6.Stock Incentive Plan

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment,” which revises SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion No.25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires that cost related to the fair value of all equity-based awards to employees, including grants of employee stock options, be recognized in the financial statements.

The Company adopted the provisions of SFAS No. 123(R) effective January 1, 2006, using the modified prospective transition method, as permitted, and therefore has not restated its financial statements for prior periods. Under this method, the Company has applied the provisions of SFAS No. 123(R) to new equity-based awards and to equity-based awards modified, repurchased, or cancelled after January 1, 2006. In addition, the Company has recognized compensation cost for the portion of equity-based awards for which the requisite service period has not been rendered (“unvested equity-based awards”) that were outstanding as of January 1, 2006. The compensation cost recorded for unvested equity-based awards will be based on their grant-date fair value. For the nine month period ended September 30, 2006, the Company recorded $23,000 in compensation cost for equity-based awards that vested during the nine months ended September 30, 2006. The Company has $60,000 of total unrecognized compensation cost related to non-vested equity-based awards granted under its stock incentive plan as of September 30, 2006, which is expected to be recognized over a weighted-average period of 1.2 years.

Prior to the adoption of SFAS No. 123(R), the Company presented tax benefits resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS No. 123(R) requires that cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation cost (“excess tax benefits”) be classified as financing cash flows. The Company had $132,000 of tax benefits classified as financing cash flows for the nine months ended September 30, 2006.

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Oak Hill Financial, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the nine and three month periods ended September 30, 2006 and 2005

6. Stock Incentive Plan (continued)

The Company accounted for its equity-based compensation awards prior to the adoption of SFAS No. 123(R) by applying APB Opinion No. 25 and related Interpretations, as permitted by SFAS No. 123. Accordingly, the Company did not recognize any compensation cost in its financial statements. Had compensation cost been recognized in accordance with the fair value recognition provisions of SFAS No. 123, the Company’s net earnings and earnings per share would have been reduced to the pro forma amounts indicated below for the nine and three months ended September 30, 2005:

	For the Nine Months Ended			For the Three Months Ended
(In thousands, except share data)	September 30, 2005			September 30, 2005
Net earnings:
As reported	$	7,800		$	3,939
Stock-based compensation, net of tax		(758	)		(252	)
Pro-forma net earnings	$	7,042		$	3,687
Basic earnings per share:
As reported	$	1.37		$	.69
Stock-based compensation, net of tax		(.13	)		(.04	)
Pro-forma	$	1.24		$	.65
Diluted earnings per share:
As reported	$	1.34		$	.68
Stock-based compensation, net of tax		(.13	)		(.04	)
Pro-forma	$	1.21		$	.64

There were no options granted during the nine months ended September 30, 2006. The fair value of each option granted in 2005 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions.

	2005
Dividend yield	2.4%
Expected life	4 years
Expected volatility	38.4%
Risk-free interest rate	4.25%

The expected life of the options was based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate was based on the United States Treasury’s rates at the dates of grant with maturity dates approximately equal to the expected life at the grant date. The expected volatility was based on the historical volatility of the Company’s stock. The dividend yield was based on the Company’s expectation of future dividend payouts.

-12-

Oak Hill Financial, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the nine and three month periods ended September 30, 2006 and 2005

6. Stock Incentive Plan (continued)

The Company has a stock incentive plan that provides for grants of options of up to 1,200,000 authorized, but unissued shares of its common stock, restricted stock, stock appreciation rights, and other equity-based compensation. The following is a summary of the changes in outstanding options for the nine months ended September 30, 2006 and the year ended December 31, 2005:

	Nine Months Ended September 30, 2006					Year Ended December 31, 2005
				Weighted-		Weighted-
				Average		Average
				Exercise		Exercise
	Shares			Price		Shares			Price
Outstanding at beginning of period		484,233		$	23.14		582,466		$	22.21
Granted		−			−		8,000			32.76
Exercised		(26,550	)		15.59		(92,800	)		16.60
Forfeited		(13,100	)		34.00		(13,433	)		33.89
Outstanding at end of period		444,583		$	23.27		484,233		$	23.14
Exercisable at period end		439,583					475,983
Weighted-average remaining contractual term		6.6 years					7.3 years

7. Effects of Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 155, “Accounting for Certain Hybrid Instruments - an amendment of FASB Statements No. 133 and 140,” to simplify and make more consistent the accounting for certain financial instruments. Specifically, SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to permit fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” to allow a qualifying special purpose entity to hold a derivative instrument that pertains to a beneficial interest other than another derivative financial instrument.

SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, or January 1, 2007 as to the Company, with earlier application allowed. The Company is currently evaluating SFAS No. 155, but does not expect it to have a material effect on the Company’s financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets - an amendment of SFAS No. 140,” to simplify the accounting for separately recognized servicing assets and servicing liabilities. Specifically, SFAS No. 156 amends SFAS No. 140 to require an entity to take the following steps:

· Separately recognize financial assets as servicing assets or servicing entities, each time it undertakes an obligation to service a financial asset by entering into certain kinds of servicing contracts;

· Initially measure all separately recognized servicing assets and liabilities at fair value, if practicable, and;

· Separately present servicing assets and liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.

Additionally, SFAS No. 156 permits, but does not require, an entity to choose either the amortization method or the fair value measurement method for measuring each class of separately recognized servicing assets and servicing liabilities. SFAS No. 156 also

-13-

Oak Hill Financial, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the nine and three month periods ended September 30, 2006 and 2005

7.Effects of Recent Accounting Pronouncements (continued)

permits a servicer that uses derivative financial instruments to offset risks on servicing to use fair value measurement when reporting both the derivative financial instrument and related servicing asset or liability.

SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, or January 1, 2007 as to the Company, with earlier application permitted. The Company is currently evaluating SFAS No. 156, but does not expect it to have a material adverse effect on the Company’s financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” Specifically, FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax provision taken or expected to be taken on a tax return. FIN 48 also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure, and transition of uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006, or January 1, 2007 as to the Company. The Company is currently evaluating FIN 48, but does not expect it to have a material adverse effect on the Company’s financial position or results of operations.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”  SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements.

Historically, there have been two widely-used methods for quantifying the effects of financial statement misstatements.  These methods are referred to as the “roll-over” and “iron curtain” method.  The roll-over method quantifies the amount by which the current year income statement is misstated.  Exclusive reliance on an income statement approach can result in the accumulation of errors on the balance sheet that may not have been material to any individual income statement, but which may misstate one or more balance sheet accounts.  The iron curtain method quantifies the error as the cumulative amount by which the current year balance sheet is misstated.   Exclusive reliance on a balance sheet approach can result in disregarding the effects of errors in the current year income statement that results from the correction of an error existing in previously issued financial statements.  The Company currently uses the roll-over method for quantifying identified financial statement misstatements.

SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the company’s financial statements and the related financial statement disclosures.  This approach is commonly referred to as the “dual approach” because it requires quantification of errors under both the roll-over and iron curtain methods. 

SAB 108 allows registrants to initially apply the dual approach either by (1) retroactively adjusting prior financial statements as if the dual approach had always been used or by (2) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings.    Use of this “cumulative effect” transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.

Management is currently evaluating the requirements of SAB 108 but does not expect it to have a material adverse effect on the Company’s financial position or results of operations.

-14-

Forward-Looking Statements

This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements about the Company. These forward-looking statements include statements regarding financial condition, results of operations, plans, objectives, and the future performance and business of the Company, including management’s establishment of an allowance for loan losses, its statements regarding the adequacy of such allowance for loan losses, and management’s belief that the allowance for loan losses is adequate. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts.

By their nature, forward-looking statements are subject to numerous assumptions, risks, and uncertainties. A number of factors could cause actual conditions, events, or results to differ significantly and materially from those described in the forward-looking statements. These factors include, but are not limited to, those set forth below and under the heading “Business Risks” included in Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (2005 Form 10-K), and other factors described in the 2005 Form 10-K, and from time-to-time in other filings with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date they are made. The Company assumes no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events.

Risk Factors

Oak Hill Financial, like other financial companies, is subject to a number of risks, many of which are outside of management’s control. Management strives to mitigate those risks while optimizing returns. Among the risks assumed are: (1) credit risk, which is the risk that loan customers or other counter parties will be unable to perform their contractual obligations, (2) market risk, which is the risk that changes in market rates and prices will adversely affect the Company’s financial condition or results of operations, (3) liquidity risk, which is the risk that the Company will have insufficient cash or access to cash to meet operating needs, and (4) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people, or systems, or external events, and (5) legal risk, which is the risk of legal proceedings against the Company as well as regulatory and governmental reviews or investigations that arise in the course of the Company’s business. The description of the Company’s business contained in Item 1 of its 2005 Form 10-K, while not all inclusive, discusses a number of business risks that, in addition to the other information in this report, readers should carefully consider.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Oak Hill Financial, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the nine and three month periods ended September 30, 2006 and 2005

Discussion of Financial Condition Changes from December 31, 2005 to September 30, 2006

The Company’s total assets amounted to $1.3 billion at September 30, 2006, an increase of $14.5 million, or 1.2%, over the total at December 31, 2005. The increase in assets was funded primarily through an increase of $6.2 million, or 5.0%, increase in FHLB advances and a $22.8 million increase in repurchase agreements, which were partially offset by a decrease in deposits of $14.9 million.

Cash and due from banks, federal funds sold, and investment securities, including mortgage-backed securities, increased by $4.6 million, or 2.9%, to a total of $165.8 million at September 30, 2006, compared to December 31, 2005. Investment securities increased by $9.8 million, as purchases of $46.0 million exceeded maturities and repayments of $13.4 million and sales of $23.4 million. Federal funds sold decreased by $1.2 million during the nine-month period ended September 30, 2006.

Loans receivable, including loans held for sale, totaled $1.0 billion at September 30, 2006, an increase of $1.8 million, or 0.2%, over the comparable totals at December 31, 2005. Loan disbursements and purchases totaled $276.2 million during the nine-month period ended September 30, 2006, which were partially offset by loan sales of $22.9 million and principal repayments of $246.8 million. Loan disbursements and purchases increased by $21.4 million when compared to the same period in 2005. Loan originations increased primarily due to the increase in originations of commercial and residential real estate loans. Growth in the loan portfolio during the nine months ended September 30, 2006 was comprised of an $18.3 million, or 2.6%, increase in commercial and residential real estate loans and a $2.4 million, or 2.2%, increase in installment loans, which were partially offset by an $18.1 million, or 11.0%, decrease in commercial and other loans, a $782,000, or 1.5%, decrease in construction and land development loans, and a $40,000, or 1.8%, decrease in credit card loans. The allowance for loan losses represented 1.32% and 1.33% of the total loan portfolio at September 30, 2006 and December 31, 2005, respectively.

-15-

Oak Hill Financial, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the nine and three month periods ended September 30, 2006 and 2005

Net charge-offs totaled approximately $1.8 million and $4.7 million for the nine months ended September 30, 2006 and 2005, respectively. The Company’s allowance represented 99.3% and 77.3% of nonperforming loans, which totaled $13.7 million and $17.7 million at September 30, 2006 and December 31, 2005, respectively. At September 30, 2006, nonperforming loans were comprised of $6.3 million of loans secured primarily by commercial real estate, $1.6 million in commercial and other loans, $5.4 million secured by one-to-four family residential real estate, and $392,000 in installment and credit card loans. In management’s opinion, based upon its ongoing review, knowledge, and current information, the carrying value of commercial and non-residential credits are appropriate and all nonperforming loans were adequately collateralized or reserved at September 30, 2006.

Deposits totaled $963.5 million at September 30, 2006, a decrease of $14.9 million, or 1.5%, from the total at December 31, 2005. Brokered deposits remained part of the Company’s overall funding strategy, although to a lesser extent, due to competitive rates and lower operational costs compared with retail deposits. Brokered deposits totaled $45.5 million with a weighted-average cost of 3.84% at September 30, 2006, as compared to the $80.5 million in brokered deposits with a 3.20% weighted-average cost at December 31, 2005.

Advances from the Federal Home Loan Bank totaled $129.3 million at September 30, 2006, an increase of $6.2 million, or 5.0%, over the total at December 31, 2005. Securities sold under agreements to repurchase totaled $41.1 million at September 30, 2006, an increase of $22.8 million, over the total at December 31, 2005. The increase resulted primarily from $20.0 million in reverse repurchase agreements incepted in March 2006 and $10.0 million incepted in April 2006, which were partially offset by the repayment of $10.0 million in reverse repurchase agreements originally incepted in March 2005.

The Company’s stockholders’ equity amounted to $94.2 million at September 30, 2006, an increase of $91,000, or 0.1%, over the balance at December 31, 2005. The increase resulted primarily from net earnings of $9.7 million, proceeds from options exercised of a $628,000 and a $646,000 decrease in the unrealized loss on securities available for sale, net of tax, which were partially offset by $3.1 million in dividends, the Company’s repurchase of 266,355 outstanding shares of common stock at an aggregate price of $7.7 million ($28.89 per share), and the acquisition of treasury stock in exchange for stock options totaling $84,000.

Comparison of Results of Operations for the Nine-Month Periods Ended September 30, 2006 and 2005

General

Net earnings for the nine months ended September 30, 2006 totaled $9.7 million, a $1.9 million increase from the net earnings reported in the comparable 2005 period. The increase in earnings resulted primarily from a $3.9 million decrease in the provision for losses on loans and a $1.6 million increase in total other income, which were partially offset by a $2.0 million increase in general, administrative and other expenses, a $351,000 increase in the provision for federal income tax expense, and a $1.2 million decrease in net interest income.

Net Interest Income

Total interest income for the nine months ended September 30, 2006, totaled $59.1 million, an increase of $8.1 million, or 15.8%, over the comparable 2005 period. Interest income on loans totaled $54.0 million, an increase of $6.8 million, or 14.4%, over the 2005 period. This increase resulted primarily from a $47.3 million, or 4.8%, increase in the average portfolio balance to a total of $1.0 billion for the nine months ended September 30, 2006, coupled with a 59 basis point increase in the average fully-taxable equivalent yield, to 7.02% for the nine month period ended September 30, 2006. Interest income on investment securities and other interest-earning assets increased by $1.3 million, or 33.1%. The increase resulted primarily from a $26.4 million, or 21.1%, increase in the average portfolio balance, to a total of $151.5 million for the nine months ended September 30, 2006, coupled with a 42 basis point increase in the average fully-taxable equivalent yield, to 5.35% for the nine months ended September 30, 2006.

Total interest expense amounted to $30.3 million for the nine months ended September 30, 2006, an increase of $9.3 million, or 44.4%, over the comparable 2005 period. Interest expense on deposits increased by $7.1 million, or 43.6%, to a total of $23.4 million for the nine months ended September 30, 2006. The increase resulted primarily from an 87 basis point increase in the average cost of deposits, to 3.21% for the nine months ended September 30, 2006, coupled with a $45.0 million, or 4.8%, increase in the average portfolio balance, to a total of $973.6 million for the nine months ended September 30, 2006. Interest expense on borrowings increased by $2.2 million, or 47.1%, for the nine months ended September 30, 2006. The increase was due to a 77 basis point increase in the average cost of borrowings, to 5.13%, coupled with a $36.0 million, or 25.0%, increase in the average borrowings outstanding for the nine months ended September 30, 2006. 

-16-

Oak Hill Financial, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the nine and three month periods ended September 30, 2006 and 2005

As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $1.2 million, or 4.1%, for the nine months ended September 30, 2006, as compared to the same period in 2005. The interest rate spread decreased by 35 basis points, to 3.30% for the nine months ended September 30, 2006, compared to 3.65% for the nine months ended September 30, 2005. The fully-taxable equivalent net interest margin decreased by 34 basis points, from 3.73% to 3.39% for the nine months ended September 30, 2005 and 2006, respectively.

Provision for Losses on Loans

A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, the volume and type of lending conducted by the Company, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Company’s market area and other factors related to the collectibility of the Company’s loan portfolio. As a result of such analysis, management recorded a $1.7 million provision for losses on loans for the nine months ended September 30, 2006, a decrease of $3.9 million compared to the same period in 2005. The provision for losses on loans for the nine months ended September 30, 2006 generally gives effect to the $1.8 million of growth in the loan portfolio, as well as considering the impact of net charge-offs of $1.8 million during the nine months ended September 30, 2006.

Other Income

Other income totaled $10.1 million for the nine months ended September 30, 2006, an increase of $1.6 million, or 18.2%, over the amount reported in the comparable 2005 period. This increase resulted primarily from a $2.0 million, or 28.5%, increase in service fees and charges and other income, which were partially offset by a $127,000, or 14.6%, decrease in gain on sale of loans and a $363,000, or 71.5%, decrease in gain on sale of securities. The increase in service fees, charges and other income was due primarily to an increase in service charges on deposits, primarily due to increased overdraft fees, totaling $821,000, an increase in commission income of $513,000, an increase in ATM fees totaling $207,000, and an increase in bank owned life insurance income of $71,000.

General, Administrative and Other Expense

General, administrative and other expense totaled $25.0 million for the nine months ended September 30, 2006, an increase of $2.0 million, or 8.9%, over the amount reported in the 2005 period. The increase resulted primarily from a $739,000, or 6.2%, increase in employee compensation and benefits and a $1.3 million, or 17.1%, increase in other operating expenses, including merger-related expenses in 2005, amortization of core deposit intangible, and franchise taxes, which were partially offset by a $47,000, or 1.5%, decrease in occupancy and equipment expense.

The decrease in occupancy and equipment expense was due primarily to a $139,000, or 14.1%, decrease in maintenance contracts, a $91,000, or 15.2%, decrease in rent expense, and a $59,000 decrease in other occupancy and equipment expenses, which were partially offset by a $106,000, or 9.8%, increase in depreciation expense and a $136,000, or 31.2%, increase in utilities, property taxes and insurance. The increase in other expenses resulted primarily from a $70,000 increase in amortization of core deposit intangibles, an $83,000 increase in ATM expense, a $924,000 increase in franchise tax expense, a $370,000 increase in credit and collection expense, and a $73,000 increase in professional fees, coupled with incremental increases in other operating expenses year-to-year, all of which were partially offset by a $502,000 decrease in merger-related expenses incurred in the acquisition of Lawrence Financial. The increase in compensation and benefits resulted primarily from a $1.3 million, or 11.6%, increase in salaries and wages partially attributable to yearly salary increases and the addition of staff in the Lawrence merger and an $82,000, or 11.5%, increase in group insurance, which were partially offset by a $334,000, or 56.9%, decrease in retirement expense and a $17,000, or 1.7%, decrease in payroll tax expense.

Federal Income Taxes

The provision for federal income taxes amounted to $2.6 million for the nine months ended September 30, 2006, an increase of $351,000, or 15.7%, over the comparable 2005 period. The increase resulted primarily from a $2.2 million, or 22.1%, increase in earnings before taxes, which was partially offset by a $125,000 increase in New Markets Tax Credits pursuant to the Bank’s investment in Oak Hill Community Development Corp. The effective tax rates were 21.1% and 22.3% for the nine months ended September 30, 2006 and 2005, respectively.

-17-

Oak Hill Financial, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the nine and three month periods ended September 30, 2006 and 2005

Comparison of Results of Operations for the Three-Month Periods Ended September 30, 2006 and 2005

General

Net earnings for the three months ended September 30, 2006 totaled $3.2 million, a $759,000, or 19.3%, decrease from net earnings reported in the comparable 2005 period. The decrease in earnings resulted primarily from a $244,000 increase in the provision for losses on loans, a $311,000 increase in total general, administrative and other expenses, and a $783,000 decrease in net interest income, which were partially offset by a $303,000 increase in other income and a $276,000 decrease in the provision for federal income tax.

Net Interest Income

Total interest income for the three months ended September 30, 2006, amounted to $20.5 million, an increase of $2.3 million, or 12.7%, over the comparable 2005 period. Interest income on loans totaled $18.7 million, an increase of $1.9 million, or 11.5%, over the 2005 period. This increase resulted primarily from a $18.2 million, or 1.8%, increase in the average portfolio balance, to a total of $1.0 billion for the three months ended September 30, 2006, coupled with a 64 basis point increase in the average fully-taxable equivalent yield, to 7.22% for the three month period ended September 30, 2006. Interest income on investment securities and other interest-earning assets increased by $375,000, or 26.4%. This increase resulted primarily from a $22.0 million, or 16.1%, increase in the average portfolio balance, to a total of $158.1 million for the three months ended September 30, 2006, coupled with a 25 basis point increase in the average fully-taxable equivalent yield, to 5.27% for the three months ended September 30, 2006.

Total interest expense amounted to $10.8 million for the three months ended September 30, 2006, an increase of $3.1 million, or 39.8%, over the comparable 2005 period. Interest expense on deposits increased by $2.2 million, or 37.3%, to a total of $8.3 million for the three months ended September 30, 2006. The increase resulted primarily from an $87.7 million, or 10.0%, increase in the average portfolio balance, to a total of $963.3 million for the three months ended September 30, 2006, coupled with a 68 basis point increase in the average cost of deposits, to 3.40% for the three months ended September 30, 2006. Interest expense on borrowings increased by $846,000, or 48.4%, for the three months ended September 30, 2006. The increase was due to a $50.3 million, or 33.8%, increase in the average borrowings outstanding for the three months ended September 30, 2006, coupled with a 51 basis point increase in the average cost of borrowings, to 5.17% for the three months ended September 30, 2006.

As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $783,000, or 7.5%, for the three months ended September 30, 2006, as compared to the same period in 2005. The interest rate spread decreased by 13 basis points, to 3.26% for the nine months ended September 30, 2006, compared to 3.39% for the three months ended September 30, 2005. The fully-taxable equivalent net interest margin decreased by 38 basis points, from 3.72% to 3.34% for the three months ended September 30, 2005 and 2006, respectively.

Provision for Losses on Loans

A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, the volume and type of lending conducted by the Company, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Company’s market area, and other factors related to the collectibility of the Company’s loan portfolio. As a result of such analysis, management recorded a $456,000 provision for losses on loans for the three months ended September 30, 2006, a increase of $244,000 compared to same period in 2005. The provision for losses on loans for the three months ended September 30, 2006 was predicated primarily upon net charge-offs of $503,000 during the quarter.

Other Income

Other income totaled $3.3 million for the three months ended September 30, 2006, an increase of $303,000, or 10.1%, over the amount reported in the comparable 2005 period. This increase resulted primarily from a $527,000, or 20.7%, increase in service fees, charges and other income, including commission income, earnings from bank owned life insurance, which were partially offset by a $127,000, or 38.8%, decrease in gain on sales of loans and a $97,000, or 70.3%, decrease in gain on sale of securities. The increase in the components of other income was due primarily to an increase in service charges on deposits totaling $216,000, an increase in commission income of $181,000, an increase in ATM fees totaling $55,000, which were partially offset by a decrease in bank owned life insurance income of $9,000 in the 2006 period.

-18-

Oak Hill Financial, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the nine and three month periods ended September 30, 2006 and 2005

General, Administrative and Other Expense

General, administrative and other expense totaled $8.5 million for the three months ended September 30, 2006, an increase of $311,000, or 3.8%, over the amount reported in the 2005 period. The increase resulted primarily from a $26,000, or 2.5%, increase in occupancy and equipment and a $374,000, or 14.0%, net increase in the operating expense category of merger-related expenses, deposit insurance, amortization of core deposit intangible, and franchise taxes, which were partially offset by a $88,000, or 2.0%, decrease in employee compensation and benefits.

The increase in occupancy and equipment expense was due primarily to a $23,000, or 5.8%, increase in depreciation expense and a $34,000, or 21.3%, increase in utilities, property taxes and insurance, which were partially offset by a $18,000, or 6.1%, decrease in maintenance contracts, and a $26,000, or 13.9%, decrease in rent expense. The increase in other expenses resulted primarily from a $231,000 increase in franchise tax expense, coupled with incremental increases in other expenses year-to-year, which were partially offset by a $71,000 decrease in the amortization of core deposit intangible. The decrease in compensation and benefits resulted primarily from a $251,000, or 74.8%, decrease in retirement plans, a $9,000, or 11.3%, decrease in director’s fees, and a $6,000, or 1.9%, decrease in payroll tax expense, which were partially offset by a $96,000, or 2.4%, increase in salaries and wages partially attributable to yearly salary increases and the addition of staff and an $8,000, or 3.0%, increase in group insurance.

Federal Income Taxes

The provision for federal income taxes amounted to $861,000 for the three months ended September 30, 2006, a decrease of $276,000, or 24.3%, from the total recorded in the comparable 2005 period. The decrease resulted primarily from a $1.0 million decrease in earnings before taxes, which was partially offset by a $125,000 decrease in New Markets Tax Credits pursuant to the Bank’s qualified investment in Oak Hill Community Development Corp. The effective tax rates were 21.3% and 22.4% for the three months ended September 30, 2006 and 2005, respectively.

Item 3:                Quantitative and Qualitative Disclosure About Market Risk

There has been no significant change from disclosures included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Item 4:                Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding required disclosure.

At the end of the period covered by this report, the Company’s management, with the participation of its chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Exchange Act. Based upon this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective at September 30, 2006.

The Company’s management also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the quarter ended September 30, 2006. Based on this evaluation, there were no changes in the Company’s internal control over financial reporting made during the quarter ended September 30, 2006, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

-19-

Oak Hill Financial, Inc.

PART II - OTHER INFORMATION

Item1:                 Legal Proceedings

Not applicable.

Item 1A:           Risk Factors

There have been no material changes from risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

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

					Total Number of		Maximum Number
					Shares Purchased		of Shares that May
					As Part of Publicly		Yet Be Purchased
	Total Number of		Average Price		Announce Plans		Under the Plans
	Shares Purchased		Paid Per Share		or Programs		or Programs(1)
July 1, 2006 -
July 31, 2006		–		–				80,400
August 1, 2006 -
August 31, 2006		–		–				80,400
September 1, 2006 -
September 30, 2006		16,700	$	24.82		16,700		63,700

⁽¹⁾ During January 2006, the Company completed the share repurchase plan announced on May 26, 2005. On February 21, 2006, the Company announced that its Board of Directors had authorized management to repurchase up to 278,000 shares of the Company’s common stock through open market or privately negotiated transactions. The authorization does not have an expiration date.

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

Exhibits:

Exhibit Number	Description
31(a)	Certification of Chief Executive Officer, R. E. Coffman, Jr., dated November 9, 2006, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (“SOX”).
31(b)	Certification of Chief Financial Officer, Ron J. Copher, dated November 9, 2006, pursuant to Section 302 of SOX.

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32(a)	Certification of Chief Executive Officer, R. E. Coffman, Jr., dated November 9, 2006, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of SOX.
32(b)	Certification of Chief Financial Officer, Ron J. Copher, dated November 9, 2006, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of SOX.

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SIGNATURES

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

	Oak Hill Financial, Inc.
Date: November 9, 2006	By:	/s/ R. E. Coffman, Jr.
		R. E. Coffman, Jr.
		President & Chief Executive Officer
Date: November 9, 2006	By:	/s/ Ron J. Copher
		Ron J. Copher
		Chief Financial Officer

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