ANNUAL REPORT
2006
OAK HILL FINANCIAL, INC.
TABLE OF CONTENTS
Shareholders’ Letter | 2 |
Selected Consolidated Financial Information | 4 |
Management’s Discussion and Analysis | 6 |
Reports of Independent Registered Public Accounting Firm | 16 |
Consolidated Financial Statements | 20 |
Officers | 49 |
Locations | 51 |
Stockholder Information | 52 |
Directors | Inside Back Cover |
About Oak Hill Financial, Inc.
Oak Hill Financial, Inc. is a financial holding company incorporated under the laws of the State of Ohio and regulated by the Board of Governors of the Federal Reserve System. We operate three subsidiaries: Oak Hill Banks, Oak Hill Financial Insurance Agency, Inc., and Oak Hill Title Agency. In turn, Oak Hill Banks has two subsidiaries, Oak Hill Banks Community Development Corp. and Oak Hill Financial Services, Inc.
Oak Hill Banks is a state-chartered commercial bank regulated by the State of Ohio and insured by the Federal Deposit Insurance Corporation (FDIC) that provides depository, lending, and other financial services to individuals and businesses. Oak Hill Banks operates 37 banking offices and one loan production office in 16 counties across southern and central Ohio.
Oak Hill Financial Insurance Agency offers group health insurance, other employee benefits, benefits administration, and property and casualty insurance. Oak Hill Title Agency is a limited liability company that provides title services for commercial and residential real estate transactions. Oak Hill Banks Community Development Corp. provides special financing and financial counseling targeted to stimulating economic development and job creation in 12 low-income counties in southern Ohio. Oak Hill Financial Services, Inc. offers financial planning and brokerage services to individuals and businesses.
 | TO OUR FELLOW SHAREHOLDERS | |
On behalf of the employees and staff of Oak Hill Financial, Inc., and its affiliates, we are pleased to present our Annual Report to Shareholders for 2006. We believe 2006 will stand ultimately as a year of transition, measured by the results of our efforts to position Oak Hill Financial for long-term growth and profitability.
Several major initiatives were undertaken in 2006 to push Oak Hill Financial to higher levels of sustainable performance. Our goal is to create a robust organization with the stamina and flexibility to compete in an ever-changing environment and under a variety of market conditions. All of the key factors that affect overall performance - net interest margin, growth, asset quality, non-interest income, and operating expenses - are targets for improvement.
Net interest margins across the banking industry remained under pressure in 2006, and we were no exception. While we remained conservative in our loan and deposit pricing, the unfavorable yield curve and aggressive price competition on both sides of the balance sheet had a detrimental effect on the margin.
To support the net interest margin, we implemented sophisticated loan and deposit pricing models utilizing targeted levels of return on equity and overall customer profitability. As part of this effort, we also restructured several of our deposit offerings to enhance the return on these products.
Implemented in the second half of 2006, we are seeing the results of the new program. Going forward, we will continue to refine our pricing and product mix. We expect continued margin pressure in 2007; however, we believe that the enhancements to our pricing and product lines will serve to mitigate the impact of external forces on the margin.
The competitive environment affected growth as well. Our loan totals were essentially unchanged in 2006 as we maintained conservative underwriting standards and disciplined pricing in the face of an extremely competitive marketplace. Loan growth was impacted also by soft economic conditions in our Ohio market areas.
To facilitate long-term growth in loans - and in core deposits and customer relationships - we are upgrading and refining our sales efforts. In 2006, we implemented a comprehensive and ongoing sales training and administration program that reaches all levels of the organization. Through this program, we are transitioning to a truly sales-driven culture.
Asset quality remains a major focus. Following a course charted in 2005, our credit administration and special assets teams worked diligently to resolve our remaining credit issues. While our 2006 earnings were impacted by an increase in the provision for loan loss expense, which resulted from the sale or charge-off of various non-performing and adversely classified loans, we made significant progress in strengthening our loan portfolio.
The improvement in asset quality during 2006 is reflected in our nonperforming loans/total loans and nonperforming assets/total assets ratios, which were 1.31% and 1.48%, respectively at year-end, a significant improvement from their peak reported levels of 2.35% and 2.01%, at end of the first quarter.
Although our resolution process continues, as we hear reports of deteriorating credit quality throughout the banking industry, we believe that the bulk of our issues are behind us. The actions we took during 2006 to bolster our loan portfolio should set the stage long-term for further improvement in asset quality and stronger overall performance.
PAGE 2 OAK HILL FINANCIAL, INC.
Our goal in 2007 is to reduce the non-performing assets/total assets and nonperforming loans/total loans ratios to below 1.00% by year-end. To reach this goal, we have developed a comprehensive plan for workout of the remaining nonperforming loans and for the sale of our other nonperforming assets.
Non-interest income growth and diversification of non-interest revenues are also key elements in our strategy. Cross-selling additional services to the company’s diverse customer base and expanding the range and penetration of fee-generating services are central to the company’s pursuit of non-interest income.
Our efforts in this arena bore fruit in 2006 as noninterest income increased 13% over 2005. We are excited about the potential for continued growth in non-interest income, particularly in the insurance and financial services areas, and we have several initiatives underway to further develop these revenue lines.
The final target of our performance improvement effort is operating expenses. Historically, we have maintained operating expenses as a percentage of assets within a narrow - and desirable - range. In the second half of 2006, however, operating expenses increased. Coupled with a tighter net interest margin, the increased expense load would be a significant constraint on future earnings growth if allowed to continue.
In response, our executive team has completed a comprehensive analysis of our operating expenses and overall operations. From this analysis, we have identified areas for substantial savings throughout our organization and have implemented tighter expense controls.
In summary, our recent earnings performance has been impacted primarily by pressure on the net interest margin and asset quality issues. Slow loan growth and higher operating expenses were also contributors. While non-interest income has increased, it must continue to grow.
We believe we now have the plans, programs, and processes in place to address each of these areas.
Although there are still hurdles to overcome, we look to the future with enthusiasm and anticipation. We know our business will never be without its challenges, and we understand the task ahead of us. We are also very fortunate to have a talented and dedicated group of officers and staff with the desire and the commitment to meet these challenges.
It is appropriate, therefore, that in closing we express our deep and sincere gratitude to our more than 450 employees for their hard work and dedication. The focus and resolve at all levels of our organization has been exceptional, and we are confident that we have the team in place to drive us to renewed success over the long-term.
Thank you for your investment in Oak Hill Financial.
/s/ John D. Kidd
John D. Kidd
Chairman
/s/ R. E. Coffman, Jr.
R. E. Coffman, Jr.
President and CEO
PAGE 3 OAK HILL FINANCIAL, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
| | At or For the Year Ended December 31, | |
(In thousands) | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
SUMMARY OF FINANCIAL CONDITION | | | | | | | | | | | |
| | | | | | | | | | | |
Total assets | | $ | 1,275,635 | | $ | 1,241,058 | | $ | 1,083,040 | | $ | 938,281 | | $ | 833,629 | |
Interest-bearing deposits and federal funds sold | | | 2,292 | | | 2,983 | | | 2,705 | | | 1,285 | | | 5,699 | |
Investment securities | | | 155,569 | | | 134,812 | | | 92,023 | | | 79,545 | | | 83,789 | |
Loans receivable - net (1) | | | 1,021,361 | | | 1,015,083 | | | 912,538 | | | 811,021 | | | 701,944 | |
Deposits | | | 942,960 | | | 978,396 | | | 862,096 | | | 717,821 | | | 663,813 | |
Subordinated debentures | | | 23,000 | | | 23,000 | | | 18,000 | | | 5,000 | | | 5,000 | |
Federal Home Loan Bank (FHLB) advances and other borrowings | | | 213,925 | | | 141,382 | | | 113,660 | | | 130,352 | | | 94,358 | |
Stockholders’ equity - net | | | 90,757 | | | 94,081 | | | 85,043 | | | 79,928 | | | 66,881 | |
| | | | | | | | | | | | | | | | |
SUMMARY OF OPERATIONS | | | | | | | | | | | | | | | | |
Interest income | | $ | 79,743 | | $ | 69,720 | | $ | 59,251 | | $ | 55,170 | | $ | 57,222 | |
Interest expense | | | 41,411 | | | 29,436 | | | 20,838 | | | 20,468 | | | 24,724 | |
Net interest income | | | 38,332 | | | 40,284 | | | 38,413 | | | 34,702 | | | 32,498 | |
Provision for losses on loans | | | 5,691 | | | 6,341 | | | 3,136 | | | 3,347 | | | 2,757 | |
Net interest income after provision for losses on loans | | | 32,641 | | | 33,943 | | | 35,277 | | | 31,355 | | | 29,741 | |
Gain on sale of loans | | | 849 | | | 1,085 | | | 1,882 | | | 4,489 | | | 2,358 | |
Gain on sale of branch premises and equipment | | | (40 | ) | | 204 | | | — | | | — | | | 122 | |
Gain (loss) on sale of assets | | | 22 | | | 182 | | | (47 | ) | | 333 | | | 331 | |
Commission income | | | 3,331 | | | 2,781 | | | 3,050 | | | 2,827 | | | 2,457 | |
Loss on sale of consumer finance loan portfolio | | | — | | | — | | | (3,585 | ) | | — | | | — | |
Other income | | | 8,969 | | | 7,386 | | | 5,370 | | | 3,889 | | | 2,845 | |
General, administrative and other expense | | | 34,206 | | | 31,045 | | | 26,944 | | | 24,049 | | | 22,663 | |
Earnings before federal income tax | | | 11,566 | | | 14,536 | | | 15,003 | | | 18,844 | | | 15,191 | |
Federal income taxes | | | 1,984 | | | 3,157 | | | 4,341 | | | 6,266 | | | 4,851 | |
Net earnings | | $ | 9,582 | | $ | 11,379 | | $ | 10,662 | | $ | 12,578 | | $ | 10,340 | |
| | | | | | | | | | | | | | | | |
PER SHARE INFORMATION | | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 1.76 | | $ | 2.01 | | $ | 1.92 | | $ | 2.29 | | $ | 1.94 | |
Book value per share | | $ | 17.16 | | $ | 16.79 | | $ | 15.30 | | $ | 14.34 | | $ | 12.46 | |
Footnote explanations on the following page.
PAGE 4 OAK HILL FINANCIAL, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION (continued)
| | At or For the Year Ended December 31, | |
(In thousands) | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
OTHER STATISTICAL AND OPERATING DATA | | | | | | | | | | | |
| | | | | | | | | | | |
Return on average assets | | | 0.76 | % | | 0.96 | % | | 1.07 | % | | 1.45 | % | | 1.26 | % |
Return on average equity | | | 10.28 | | | 12.39 | | | 12.89 | | | 17.08 | | | 16.76 | |
Net interest margin (fully-taxable equivalent) | | | 3.36 | | | 3.70 | | | 4.05 | | | 4.19 | | | 4.18 | |
Interest rate spread during period | | | 2.96 | | | 3.37 | | | 3.74 | | | 3.81 | | | 3.75 | |
General, administrative and other expense to average assets | | | 2.73 | | | 2.62 | | | 2.70 | | | 2.77 | | | 2.77 | |
Allowance for loan losses to nonperforming loans | | | 95.16 | | | 77.25 | | | 186.83 | | | 133.46 | | | 125.29 | |
Allowance for loan losses to total loans | | | 1.25 | | | 1.33 | | | 1.28 | | | 1.32 | | | 1.29 | |
Nonperforming loans to total loans | | | 1.31 | | | 1.72 | | | 0.69 | | | 0.99 | | | 1.03 | |
Nonperforming assets to total assets | | | 1.48 | | | 1.45 | | | 0.73 | | | 0.93 | | | 0.88 | |
Net charge-offs to average loans | | | 0.62 | | | 0.50 | | | 0.26 | | | 0.22 | | | 0.28 | |
Equity to assets at period end | | | 7.11 | | | 7.58 | | | 7.85 | | | 8.52 | | | 8.02 | |
Dividend payout ratio | | | 44.97 | | | 35.06 | | | 32.19 | | | 23.67 | | | 25.31 | |
(1) | Includes loans held for sale. |
PAGE 5 OAK HILL FINANCIAL, INC.
MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Oak Hill Financial, Inc. (the “Company”) is a financial holding company, the principal assets of which are the Company’s ownership of Oak Hill Banks (“Oak Hill”) and Oak Hill Financial Insurance (“OHFI”). In addition, the Company owns 49% of Oak Hill Title Agency, LLC (“Oak Hill Title”). The Company’s results of operations are primarily dependent upon its financial service subsidiary which is collectively viewed herein as a single operating segment for financial statement purposes.
Oak Hill conducts a general commercial banking business that consists of attracting deposits from the general public and using those funds to originate loans for commercial, consumer, and residential purposes. OHFI is an insurance agency specializing in group health insurance and other employee benefits. Oak Hill Title provides title services for commercial and residential real estate transactions.
Oak Hill’s profitability depends primarily on its net interest income, which is the difference between interest income generated from interest-earning assets (i.e., loans and investments) less the interest expense incurred on interest-bearing liabilities (i.e., deposits and borrowed funds). Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities, and the interest rates paid on these balances. Additionally, and to a lesser extent, profitability is affected by such factors as the level of noninterest income and expenses, the provision for losses on loans, and the effective tax rate. Other income consists primarily of service charges and other fees and income from the sale of loans. General, administrative and other expenses consist of compensation and benefits, occupancy- related expenses, franchise taxes, and other operating expenses.
In 2005, the Company acquired Lawrence Financial Holdings, Inc. (“Lawrence Financial”) and its subsidiary Lawrence Federal Savings Bank (“Lawrence”) headquartered in Ironton, Ohio for $15.2 million, of which $7.7 million was paid in cash. In addition, the Company issued 221,051 shares of common stock to Lawrence Financial shareholders. As part of the transaction, the Company acquired a net three full-service offices in southern Ohio, involving total loans of $76.5 million, $104.2 million in deposits and $116.9 million in assets.
In 2004, the Company acquired Ripley National Bank (“Ripley”) for $5.3 million in cash. As part of the transaction, the Company acquired full-service offices in Ripley and Georgetown, Ohio, involving total loans of $39.1 million, $51.6 million in deposits and $58.6 million in total assets.
Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented herein to assist investors in understanding the consolidated financial condition and results of operations of the Company as of and for the years ended December 31, 2006, 2005 and 2004. This discussion should be read in conjunction with the Consolidated Financial Statements and related footnotes presented elsewhere in this report.
FORWARD LOOKING STATEMENTS
In the following pages, management presents an analysis of the Company’s consolidated financial condition as of December 31, 2006, and the consolidated results of operations for the year ended December 31, 2006 as compared to prior periods. In addition to this historical information, the following discussion and other sections of this Annual Report contain forward-looking statements that involve risks and uncertainties. Economic circumstances, the Company’s operations and the Company’s actual results could differ significantly from those discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences are discussed herein but also include changes in the economy and interest rates in the nation and the Company’s general market area. Without limiting the foregoing, some of the forward-looking statements include management’s establishment of an allowance for loan losses, and its statements regarding the adequacy of such allowance for loan losses, and management’s belief that the allowance for loan losses is adequate.
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 this account is an accounting estimate of probable but unconfirmed asset impairment that has occurred in the Company’s loan portfolio as of the date of the consolidated financial statements before loss es have been confirmed resulting in a subsequent charge-off or write-down. 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:
PAGE 6 OAK HILL FINANCIAL, INC.
MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
• | 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; |
• | 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. 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 Statement of Financial Accounting Standards (“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.
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 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 are 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 or 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 is considered impaired. The 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.
PAGE 7 OAK HILL FINANCIAL, INC.
MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL CONDITION
The Company’s total assets amounted to $1.3 billion as of December 31, 2006, an increase of $34.6 million, or 2.8%, over the $1.2 billion total at December 31, 2005. The asset growth was funded primarily through an increase of $34.5 million in Federal Home Loan Bank advances and a $38.1 million increase in repurchase agreements, which were partially offset by a $35.4 million reduction in deposits.
Cash and due from banks, federal funds sold, and investment securities, including mortgage-backed securities, increased by $17.6 million, or 10.9%, to a total of $178.8 million at December 31, 2006, compared to $161.2 million at December 31, 2005. Investment securities increased by $20.8 million during 2006, as purchases of $67.6 million exceeded maturities and repayments of $20.1 million and sales of $26.8 million. Federal funds sold decreased by $796,000 during 2006.
Loans receivable, including loans held for sale, totaled $1.0 billion at December 31, 2006, an increase of $6.3 million, or 0.6%, over total loans at December 31, 2005. Loan disbursements and purchases totaled $363.3 million during 2006, which were partially offset by loan sales of $26.6 million and principal repayments of $318.0 million during 2006. Loan disbursements and purchases decreased by $17.1 million when compared to the same period in 2005. Growth in the loan portfolio during 2006 was comprised of a $12.1 million, or 1.7%, increase in commercial and residential real estate loans, a $990,000 or 0.9%, increase in installment loans, a $881,000, or 1.7% increase in construction and land development loans and a $167,000, or 7.7%, increase in credit card loans, which were partially offset by a $8.6 million, or 5.2%, decrease in commercial and other loans over the total at December 31, 2005. The allowance for loan losses represented 1.25% and 1.33% of the total loan portfolio at December 31, 2006 and 2005, respectively. The year over year reduction in the percentage of the allowance to total loans is reflective of the Board and management’s perceived reduction in portfolio risk during the year. The Company’s allowance represented 95.2% and 77.3% of the $13.6 million and $17.7 million of nonperforming loans at December 31, 2006 and 2005, respectively. The $3.6 million, or 23.2% reduction in nonperforming loans resulted from aggressive collection and sale activity with respect to such loans and resulted in an increase in charge-offs from $5.0 million in 2005 to $6.4 million in 2006. At December 31, 2006, nonperforming loans were comprised of $9.3 million of loans secured primarily by commercial real estate, $1.4 million in commercial and other loans, $2.3 million secured by one-to-four family residential real estate, and $571,000 in installment and credit card loans. In management’s opinion, all nonperforming loans were adequately collateralized or reserved for at December 31, 2006. In addition, the Company acquired two parcels of commercial real estate that accounted for $4.5 million of the $4.9 million increase in real estate acquired through foreclosure. Approximately $3.0 million of this amount was sold subsequent to December 31, 2006 without additional material loss.
Deposits totaled $943.0 million at December 31, 2006, a decrease of $35.4 million, or 3.6%, from the $978.4 million total at December 31, 2005. Brokered deposits were a lessening part of the Company’s overall funding strategy during 2006. Brokered deposits totaled $39.5 million with a weighted-average cost of 3.87% at December 31, 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 $157.6 million at December 31, 2006, an increase of $34.5 million, or 28.0%, from the December 31, 2005 total. Securities sold under agreements to repurchase totaled $56.3 million at December 31, 2006, an increase of $38.1 million, over the total at December 31, 2005. The increase resulted primarily from $42.0 million in reverse repurchase agreements incepted in 2006, which were partially offset by the repayment of $10.0 million in reverse repurchase agreements originally incepted in 2005.
The Company’s stockholders’ equity amounted to $90.8 million at December 31, 2006, a decrease of $3.3 million, or 3.5%, from the balance at December 31, 2005. The decrease resulted primarily from $4.2 million in dividends paid to shareholders and the Company’s repurchase of 330,055 outstanding shares of common stock at an aggregate price of $9.4 million ($28.59 per share) during 2006, which were partially offset by net earnings of $9.6 million, proceeds from stock options exercised totaling $678,000 and a $41,000 increase in unrealized gain on securities available for sale, net of tax.
PAGE 8 OAK HILL FINANCIAL, INC.
MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
SUMMARY OF EARNINGS
Changes in net interest income are attributable to either changes in average balances (volume change) or changes in average rates (rate change) for interest-earning assets and interest-bearing liabilities. Volume change is calculated as change in volume times the old rate, while rate change is calculated as change in rate times the old volume. The table below indicates the dollar amount of the change attributable to each factor. The rate/volume change, the change in rate times the change in volume, is allocated between the volume change and the rate change at the ratio each component bears to the absolute value of their total.
RATE/VOLUME TABLE
| | Year Ended December 31, | |
| | 2006 vs. 2005 | | 2005 vs. 2004 | |
| | Increase (decrease) due to | | Increase (decrease) due to | |
(In thousands) | | Volume | | Rate | | Total | | Volume | | Rate | | Total | |
Interest income attributable to: (1) | | | | | | | | | | | | | |
Loans receivable | | $ | 2,294 | | $ | 6,153 | | $ | 8,447 | | $ | 8,115 | | $ | 686 | | $ | 8,801 | |
Investment securities | | | 1,316 | | | 386 | | | 1,702 | | | 1,929 | | | 316 | | | 2,245 | |
Federal funds sold | | | 42 | | | 18 | | | 60 | | | (2 | ) | | 7 | | | 5 | |
Interest-earning deposits with banks | | | 12 | | | 9 | | | 21 | | | (6 | ) | | 52 | | | 46 | |
Total interest income | | $ | 3,664 | | $ | 6,566 | | $ | 10,230 | | $ | 10,036 | | $ | 1,061 | | $ | 11,097 | |
Interest expense attributable to: | | | | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | | | | |
Savings accounts | | $ | (72 | ) | $ | (7 | ) | $ | (79 | ) | $ | (114 | ) | $ | 284 | | $ | 170 | |
NOW accounts | | | (5 | ) | | 298 | | | 293 | | | 50 | | | 163 | | | 213 | |
Money market deposit accounts | | | (14 | ) | | 2 | | | (12 | ) | | 4 | | | 1 | | | 5 | |
Premium and select investment accounts | | | 5,520 | | | (509 | ) | | 5,011 | | | 109 | | | 2,316 | | | 2,425 | |
Certificates of deposit | | | (1,113 | ) | | 4,729 | | | 3,616 | | | 5,194 | | | (986 | ) | | 4,208 | |
Borrowings | | | 2,473 | | | 673 | | | 3,146 | | | 1,534 | | | 43 | | | 1,577 | |
Total interest expense | | $ | 6,789 | | $ | 5,186 | | $ | 11,975 | | $ | 6,777 | | $ | 1,821 | | $ | 8,598 | |
Increase in net interest income | | | | | | | | $ | (1,745 | ) | | | | | | | $ | 2,499 | |
(1) | Presented on a tax-equivalent basis. |
PAGE 9 OAK HILL FINANCIAL, INC.
MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The table below shows for each category of interest-earning assets and interest-bearing liabilities, the average amount outstanding, the interest earned or paid on such amount, and the average rate earned or paid for the years ended December 31, 2006, 2005 and 2004. The table also shows the average rate earned on all interest-earning assets, the average rate paid on all interest-bearing liabilities, the interest rate spread, and the net interest margin for the same periods.
AVERAGE BALANCE AND INTEREST RATES
| | Year Ended December 31, | |
| | | | 2006 | | | | | | 2005 | | | | | | 2004 | | | |
| | | | Interest | | | | | | Interest | | | | | | Interest | | | |
| | Average | | Income/ | | Average | | Average | | Income/ | | Average | | Average | | Income/ | | Average | |
(Dollars in thousands | | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | |
Interest earnings assets: | | | | | | | | | | | | | | | | | | | |
Loans receivable(1) | | | 1,032,104 | | | 72,982 | | | 7.07 | % | $ | 993,976 | | $ | 64,535 | | | 6.49 | % | $ | 869,849 | | $ | 55,734 | | | 6.41 | % |
Investment securities(1) | | | 150,662 | | | 8,066 | | | 5.35 | | | 126,958 | | | 6,364 | | | 5.01 | | | 90,415 | | | 4,119 | | | 4.56 | |
Federal funds sold | | | 1,426 | | | 80 | | | 5.61 | | | 584 | | | 20 | | | 3.42 | | | 929 | | | 15 | | | 1.61 | |
Interest-earning deposits | | | 2,028 | | | 95 | | | 4.68 | | | 1,767 | | | 74 | | | 4.19 | | | 2,472 | | | 28 | | | 1.13 | |
Total interest-earning assets | | | 1,186,220 | | | 81,223 | | | 6.85 | | | 1,123,285 | | | 70,993 | | | 6.32 | | | 963,665 | | | 59,896 | | | 6.22 | |
Non-interest earning assets | | | 68,370 | | | | | | | | | 62,951 | | | | | | | | | 33,361 | | | | | | | |
Total assets | | $ | 1,254,590 | | | | | | | | $ | 1,186,236 | | | | | | | | $ | 997,026 | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Savings accounts | | $ | 55,959 | | | 286 | | | 0.51 | | $ | 70,651 | | | 365 | | | 0.52 | | $ | 52,292 | | | 195 | | | 0.37 | |
NOW accounts | | | 76,309 | | | 1,310 | | | 1.72 | | | 76,679 | | | 1,017 | | | 1.33 | | | 70,990 | | | 804 | | | 1.13 | |
Money market deposit accounts | | | 5,740 | | | 24 | | | 0.42 | | | 8,993 | | | 36 | | | 0.40 | | | 7,930 | | | 31 | | | 0.39 | |
Premium & select investments | | | 189,032 | | | 8,403 | | | 4.45 | | | 111,081 | | | 3,392 | | | 3.05 | | | 74,364 | | | 967 | | | 1.30 | |
Certificates of deposit | | | 550,096 | | | 21,750 | | | 3.95 | | | 585,114 | | | 18,134 | | | 3.10 | | | 509,340 | | | 13,926 | | | 2.73 | |
Borrowings | | | 187,757 | | | 9,638 | | | 5.13 | | | 144,445 | | | 6,492 | | | 4.49 | | | 124,514 | | | 4,915 | | | 3.95 | |
Total interest-bearing liabilities | | | 1,064,893 | | | 41,411 | | | 3.89 | | | 996,963 | | | 29,436 | | | 2.95 | | | 839,430 | | | 20,838 | | | 2.48 | |
Non interest-bearing liabilities | | | 96,462 | | | | | | | | | 97,420 | | | | | | | | | 74,888 | | | | | | | |
Stockholders’ equity | | | 93,235 | | | | | | | | | 91,853 | | | | | | | | | 82,708 | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,254,590 | | | | | | | | $ | 1,186,236 | | | | | | | | $ | 997,026 | | | | | | | |
Net interest income and interest rate spread | | | | | $ | 39,812 | | | 2.96 | % | | | | $ | 41,557 | | | 3.37 | % | | | | $ | 39,058 | | | 3.74 | % |
Net interest margin (2) | | | | | | | | | 3.36 | % | | | | | | | | 3.70 | % | | | | | | | | 4.05 | % |
Average interest-earning assets to average interest-bearing liabilities | | | | | | | | | 111.39 | % | | | | | | | | 112.67 | % | | | | | | | | 114.80 | % |
Adjustment of interest income to a tax-equivalent basis on tax-exempt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans and investment securities | | | | | $ | 1,480 | | | | | | | | $ | 1,273 | | | | | | | | $ | 645 | | | | |
(1) | Presented on a tax-equivalent basis. |
(2) | The net interest margin is net interest income divided by average interest-earning assets. |
PAGE 10 OAK HILL FINANCIAL, INC.
MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
General. Net earnings for the year ended December 31, 2006 totaled $9.6 million, a $1.8 million, or 15.8%, decrease from 2005 net earnings. The decrease in earnings resulted primarily from a $2.0 million decrease in net interest income and a $3.2 million increase in general, administrative and other operating expenses, which were partially offset by a $1.5 million increase in other income, a $650,000 decrease in the provision for losses on loans and a $1.2 million decrease in the provision for federal income taxes.
Net Interest Income. Total interest income for the year ended December 31, 2006, amounted to $79.7 million, an increase of $10.0 million, or 14.4%, over the total recorded for 2005. Interest income on loans totaled $72.7 million, an increase of $8.4 million, or 13.0%, over 2005. This increase resulted primarily from a $38.1 million, or 3.8%, increase in the weighted-average (“average”) portfolio balance, to a total of $1.0 billion in 2006, coupled with a 58 basis point increase in the average fully-taxable equivalent yield, to 7.07% in 2006 from 6.49% in 2005. Interest income on investment securities and other interestearning assets increased by $1.6 million, or 30.3%. The increase resulted primarily from a 36 basis point increase in the average fully-taxable equivalent yield, to 5.35% in 2006, coupled with a $24.8 million, or 19.2%, increase in the average portfolio balance, to a total of $154.1 million in 2006.
Total interest expense amounted to $41.4 million for the year ended December 31, 2006, an increase of $12.0 million, or 40.7%, over the total recorded in 2005. Interest expense on deposits increased by $8.8 million, or 38.5%, to a total of $31.8 million in 2006. The increase resulted primarily from a $24.6 million, or 2.9%, increase in the average portfolio balance, to a total of $877.1 million in 2006, coupled with a 93 basis point increase in the average cost of deposits, to 3.62% in 2006. Interest expense on borrowings increased by $3.1 million, or 48.5%, during 2006. This increase was due to a $43.3 million, or 30.0%, increase in average borrowings outstanding, coupled with a 64 basis point increase in the average cost of borrowings, to 5.13% in 2006.
As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $2.0 million, or 4.8%, for the year ended December 31, 2006, as compared to 2005. The interest rate spread decreased by 41 basis points, to 2.96% in 2006 compared to 3.37% in 2005. The fully- taxable equivalent net interest margin decreased by 34 basis points from, 3.70% in 2005 to 3.36% in 2006. Management believes that future movements in short-term interest rates in the economy will continue to place pressure on the Company’s net interest margin.
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 $5.7 million provision for losses on loans for the year ended December 31, 2006, a decrease of $650,000, compared to 2005. The provision for losses on loans recorded in 2006 was primarily predicated upon the $6.3 million of growth in the net loan portfolio, integrated with net charge-offs of $6.4 million and a $3.6 million reduction in non-performing loans in 2006.
Although management believes that it uses the best information available in providing for possible loan losses and believes that the allowance is adequate at December 31, 2006, future adjustments to the allowance could be necessary and net earnings could be affected if circumstances and/or economic conditions differ substantially from the assumptions used in making the initial determinations.
PAGE 11 OAK HILL FINANCIAL, INC.
MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Other Income. Other income totaled $13.1 million for the year ended December 31, 2006, an increase of $1.5 million, or 12.8%, compared to the 2005 amount. This increase resulted primarily from a $1.5 million increase in service fees, charges and other operating income, a $70,000 increase in the cash surrender value of bank owned life insurance and a $550,000, or 19.8%, increase in commissions income, which were partially offset by a $236,000, or 21.8%, decrease in gain on sale of loans, a $93,000 increase in the loss on sale of assets and other real estate owned, and a $311,000, or 62.4% decrease in gain on sale of investment securities. The increase in service fees, charges and other income resulted from an increase in service charges on deposits totaling $884,000 and an increase in ATM fees of $286,000 in 2006. The gain on sale of loans decrease is generally attributable to a reduction in secondary market volume year over year.
General, Administrative and Other Expense.
General, administrative and other expense totaled $34.2 million for the year ended December 31, 2006, an increase of $3.2 million, or 10.2%, over the 2005 total. The increase resulted primarily from a $1.4 million, or 8.8%, increase in employee compensation and benefits, a $988,000, or 10.9%, increase in other operating expenses, a $1.2 million increase in franchise taxes, and an increase of $80,000, or 2.0%, in occupancy and equipment. The increase in employee compensation and benefits resulted primarily from increased staffing levels required in connection with the establishment of new branch locations, the acquisition of Lawrence Financial, additional management staffing and normal merit increases. The increase in other operating expense resulted primarily from a $463,000 increase in credit and collection expense, a $104,000 increase in ATM expense, and a $109,000 increase in professional fees. The remaining increase was due to pro-rata increases in other operating expenses attendant to the Company’s overall growth year-to-year. The increase in occupancy and equipment expense was due primarily to a $150,000, or 9.9%, increase in depreciation expense and a $163,000, or 27.7% increase in utilities, property taxes and insurance expenses year-to-year, which was partially offset by a $129,000, or 19.1% decrease in maintenance contracts and repairs, coupled with decreases in other expenses year-to-year. The increase in depreciation expense is primarily attributable to new office locations and the administrative office addition completed in 2006. The increase in franchise tax is attributable to the absence of a tax savings in 2005 resulting from the Oak Hill-Ripley merger.
Federal Income Taxes. The provision for federal income taxes amounted to $2.0 million for the year ended December 31, 2006, a decrease of $1.2 million, or 37.2%, compared to the $3.2 million recorded in 2005. The decrease resulted primarily from a $3.0 million or 20.4% decrease in earnings before taxes, coupled with a decrease in the effective tax rate from 21.7% for the year ended December 31, 2005 to 17.2% for the year ended December 31, 2006. The difference between the 34% statutory rate and the Company’s effective tax rate in 2006 and 2005 is attributable to the New Markets Tax Credit.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
General. Net earnings for the year ended December 31, 2005 totaled $11.4 million, a $717,000, or 6.7%, increase from 2004 net earnings. The increase in earnings resulted primarily from a $1.9 million increase in net interest income, a $5.0 million increase in total other income and a $1.2 million decrease in the provision for federal income taxes, all of which were partially offset by a $3.2 million increase in the provision for losses on loans and a $4.1 million increase in general, administrative and other operating expenses.
Net Interest Income. Total interest income for the year ended December 31, 2005, amounted to $69.7 million, an increase of $10.5 million, or 17.7%, from the total recorded for 2004. Interest income on loans totaled $64.3 million, an increase of $8.8 million, or 15.8%, from the 2004 period. This increase resulted primarily from a $124.1 million, or 14.3%, increase in the weighted-average (“average”) portfolio balance, to a total of $994.0 million in 2005, coupled with an 8 basis point increase in the average fully-taxable equivalent yield, to 6.49% in 2005 from 6.41% in 2004. As stated previously, the growth in the loan portfolio was heavily influenced by the Lawrence Financial purchase. Interest income on investment securities and other interest-earning assets increased by $1.7 million, or 45.3%. The increase resulted primarily from a 55 basis point increase in the average fully-taxable equivalent yield, to 4.99% in 2005, coupled with a $35.5 million, or 37.8%, increase in the average portfolio balance, to a total of $129.3 million in 2005. The increase in average yield is generally reflective of eight rate increases by the Federal Reserve Board during the year.
PAGE 12 OAK HILL FINANCIAL, INC.
MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Total interest expense amounted to $29.4 million for the year ended December 31, 2005, an increase of $8.6 million, or 41.3%, from the total recorded in 2004. Interest expense on deposits increased by $7.0 million, or 44.1%, to a total of $22.9 million in 2005. The increase resulted primarily from a $137.6 million, or 19.2%, increase in the average portfolio balance, to a total of $852.5 million in 2005, coupled with a 46 basis point increase in the average cost of deposits, to 2.69% in 2005. Interest expense on borrowings increased by $1.6 million, or 32.1%, during 2005. This increase was due to a $19.9 million, or 16.0%, increase in average borrowings outstanding, coupled with a 54 basis point increase in the average cost of borrowings, to 4.49% in 2005. The increased cost of interest-bearing liabilities was also primarily due to the overall increase in interest rates in the economy throughout 2005.
As a result of the foregoing changes in interest income and interest expense, net interest income increased by $1.9 million, or 4.9%, for the year ended December 31, 2005, as compared to 2004. The interest rate spread decreased by 37 basis points, to 3.37% in 2005 compared to 3.74% in 2004. The fully- taxable equivalent net interest margin decreased by 35 basis point from, 4.05% in 2004 to 3.70% in 2005.
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 $6.3 million provision for losses on loans for the year ended December 31, 2005, an increase of $3.2 million compared to 2004. The provision for losses on loans in 2005 was primarily influenced by an increase of $11.4 million in nonperforming loans from $6.3 million in 2004 to $17.7 million at December 31, 2005, and growth of $102.5 million in the loan portfolio during the year.
Although management believes that it uses the best information available in providing for possible loan losses and believes that the allowance is adequate at December 31, 2005, future adjustments to the allowance could be necessary and net earnings could be affected if circumstances and/or economic conditions differ substantially from the assumptions used in making the initial determinations.
Other Income. Other income totaled $11.6 million for the year ended December 31, 2005, an increase of $5.0 million, or 74.5%, compared to the 2004 amount. This increase resulted primarily from a $1.7 million increase in service fees, charges and other operating income, a $318,000 increase in the cash surrender value of bank owned life insurance, and the absence of the $3.6 million loss on the sale of the Action loan portfolio, which were partially offset by a $797,000, or 42.3%, decrease in gain on sale of loans and a $269,000, or 8.8%, decrease in insurance commissions. The increase in service fees, charges and other income resulted from an increase in service charges on deposits totaling $946,000 and an increase in ATM fees of $434,000 in 2005. The gain on sale of loans decrease is generally attributable to a reduction in secondary market volume year over year.
PAGE 13 OAK HILL FINANCIAL, INC.
MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
General, Administrative and Other Expense. General, administrative and other expense totaled $31.0 million for the year ended December 31, 2005, an increase of $4.1 million, or 15.2%, over the 2004 total. The increase resulted primarily from a $1.6 million, or 10.9%, increase in employee compensation and benefits, a $2.7 million, or 33.6%, increase in other operating expenses, an increase of $667,000, or 19.6%, in occupancy and equipment, which were partially offset by a $799,000 decrease in franchise taxes. The increase in employee compensation and benefits resulted primarily from increased staffing levels required in connection with the establishment of new branch locations, the acquisition of Lawrence Financial, additional management staffing and normal merit increases. The increase in other operating expenses resulted from a $478,000 increase in professional fees, $386,000 in merger-related expenses in connection with the previously mentioned Lawrence merger, an $881,000 increase in amortization of intangibles and a $316,000 increase in marketing fees. The remaining increase was due to pro-rata increases in other operating expenses attendant to the Company’s overall growth year-to-year. The increase in occupancy and equipment expense was due primarily to a $339,000, or 36.8%, increase in maintenance contracts and a $376,000, or 32.8%, increase in depreciation expense year-to-year. The increases in depreciation expense is primarily attributable to new office locations. The decrease in franchise taxes was attributable to a tax savings for 2005 resulting from the previously mentioned Oak Hill-Ripley merger in 2004.
Federal Income Taxes. The provision for federal income taxes amounted to $3.2 million for the year ended December 31, 2005, a decrease of $1.2 million, or 27.3%, compared to the $4.3 million recorded in 2004. The decrease resulted primarily from a $467,000, or 3.1%, decrease in earnings before taxes, coupled with $1.0 million in New Markets Tax Credits pursuant to Oak Hill’s qualified investment in Oak Hill Banks Community Development Corp. The effective tax rates were 21.7% and 28.9% for the years ended December 31, 2005 and 2004, respectively.
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 December 31, 2006, the Company had $336.1 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 the Oak Hill at market rates of interest without a material adverse effect on the results of operations.
In the event that certificates of deposit cannot be renewed at prevalent market rates, the Company can obtain up to $266.5 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 December 31, 2006, the Company had $157.6 million of outstanding FHLB advances with a weighted-average interest rate of 4.96%.
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 December 31, 2006, the Company had total off-balance sheet contractual commitments totaling $34.1 million to originate residential and commercial loans, and other consumer loans, $137.8 million in unused lines of credit and letters of credit totaling $13.3 million. Funding for these amounts is expected to be provided by the liquidity sources described above. Management believes the Company has adequate resources to meet its normal funding requirements.
PAGE 14 OAK HILL FINANCIAL, INC.
MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The table below details the amount of loan commitments, unused lines of credit and letters of credit outstanding at December 31, 2006, by expiration period:
| | One year | | Two to | | After | | | |
(In thousands) | | or less | | three years | | three years | | Total | |
Loan commitments | | $ | 34,125 | | $ | — | | $ | — | | $ | 34,125 | |
Unused lines of credit | | | 53,808 | | | 38,184 | | | 45,858 | | | 137,850 | |
Letters of credit | | | 3,040 | | | 10,277 | | | — | | | 13,317 | |
| | $ | 90,973 | | $ | 48,461 | | $ | 45,858 | | $ | 185,292 | |
The table below details the amount of contractual obligations outstanding at December 31, 2006, by expiration period:
| | One year | | Two to | | After | | | |
(In thousands) | | or less | | three years | | three years | | Total | |
Advances from the Federal Home Loan Bank | | $ | 58,301 | | $ | 49,736 | | $ | 49,547 | | $ | 157,584 | |
Securities sold under agreement to repurchase | | | 14,341 | | | — | | | 42,000 | | | 56,341 | |
Subordinated debentures | | | — | | | — | | | 23,000 | | | 23,000 | |
Lease obligations | | | 610 | | | 708 | | | 755 | | | 2,073 | |
| | $ | 73,252 | | $ | 50,444 | | $ | 115,302 | | $ | 238,998 | |
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to provide reasonable assurance of the reliability of financial reporting and the preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles. Management assessed the effectiveness of its internal control over financial reporting as of December 31, 2006, in relation to criteria for effective internal control over financial reporting as described in “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO criteria). Management’s assessment reflects no exceptions to the operating effectiveness of the system of internal controls over financial reporting.
Grant Thornton LLP, independent registered public accounting firm, has audited management’s assessment included in Management’s Assessment of Internal Control Over Financial Reporting as of December 31, 2006, based on COSO criteria. Management’s assessment of the effectiveness of internal control over financial reporting and Grant Thornton’s attestation report on internal controls over financial reporting follow herein.
The Annual Report on Form 10-K is available without charge at www.sec.gov or by written request to Oak Hill Financial, Inc., Attention: David G. Ratz, Executive Vice President, 14621 S.R. 93, P. O. Box 688, Jackson, Ohio 45640.
PAGE 15 OAK HILL FINANCIAL, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors and Shareholders of Oak Hill Financial, Inc.
We have audited the accompanying consolidated statements of financial condition of Oak Hill Financial, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of earnings, stockholders’ equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Oak Hill Financial, Inc. as of December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
As more fully described in Note A-14, the Company changed its method of accounting for stock-based compensation in accordance with Statement of Financial Accounting Standard No. 123(R) as of January 1, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Oak Hill Financial, Inc.’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of Oak Hill Financial, Inc.’s internal control over financial reporting and an unqualified opinion on the effectiveness of Oak Hill Financial Inc.’s internal control over financial reporting.
Cincinnati, Ohio
February 27, 2007
Suite 500
4000 Smith Road
Cincinnati, OH 45209
Grant Thornton LLP
US Member of Grant Thornton International
PAGE 16 OAK HILL FINANCIAL, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of Oak Hill Financial, Inc.
We have audited management’s assessment, included in the accompanying Management Report on Internal Control over Financial Reporting, that Oak Hill Financial, Inc. (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Oak Hill Financial, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
In our opinion, management’s assessment that Oak Hill Financial, Inc. maintained effective internal control over financial reporting as of December 31, 2006 is fairly stated, in all material respects, based on the control criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, Oak Hill Financial, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Oak Hill Financial, Inc.’s consolidated statements of financial condition as of December 31, 2006 and 2005, and the related statements of earnings, stockholders’ equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2006, and our report dated February 27, 2007, expressed an unqualified opinion on those financial statements.
Cincinnati, Ohio
February 27, 2007
Suite 500
4000 Smith Road
Cincinnati, OH 45209
Grant Thornton LLP
US Member of Grant Thornton International
PAGE 17 OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
| | December 31, | |
(In thousands, except share data) | | 2006 | | 2005 | |
ASSETS | | | | | |
Cash and due from banks | | $ | 22,429 | | $ | 24,786 | |
Federal funds sold | | | 818 | | | 1,614 | |
Cash and cash equivalents | | | 23,247 | | | 26,400 | |
Investment securities designated as available for sale - at market | | | 153,010 | | | 131,193 | |
Investment securities held to maturity - at cost (approximate market value of $2,712 and $3,851 at December 31, 2006 and 2005, respectively) | | | 2,559 | | | 3,619 | |
Loans receivable - net | | | 1,021,271 | | | 1,014,673 | |
Loans held for sale - at lower of cost or market | | | 90 | | | 410 | |
Office premises and equipment - net | | | 27,765 | | | 22,736 | |
Federal Home Loan Bank stock - at cost | | | 8,078 | | | 7,626 | |
Real estate acquired through foreclosure | | | 5,258 | | | 376 | |
Accrued interest receivable on loans | | | 4,765 | | | 4,156 | |
Accrued interest receivable on investment securities | | | 1,023 | | | 875 | |
Goodwill - net | | | 7,935 | | | 7,935 | |
Core deposit intangible - net | | | 3,111 | | | 4,068 | |
Bank owned life insurance | | | 13,454 | | | 12,948 | |
Prepaid expenses and other assets | | | 1,938 | | | 1,740 | |
Prepaid federal income taxes | | | 1,086 | | | 1,178 | |
Deferred federal income taxes | | | 1,045 | | | 1,125 | |
TOTAL ASSETS | | $ | 1,275,635 | | $ | 1,241,058 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
Deposits | | | | | | | |
Demand | | $ | 94,256 | | $ | 97,575 | |
Savings and time deposits | | | 848,704 | | | 880,821 | |
Total deposits | | | 942,960 | | | 978,396 | |
Securities sold under agreement to repurchase | | | 56,341 | | | 18,263 | |
Advances from the Federal Home Loan Bank | | | 157,584 | | | 123,119 | |
Subordinated debentures | | | 23,000 | | | 23,000 | |
Accrued interest payable and other liabilities | | | 4,993 | | | 4,199 | |
Total liabilities | | | 1,184,878 | | | 1,146,977 | |
Stockholders’ equity | | | | | | | |
Common stock - $.50 stated value; authorized 15,000,000 shares, 5,874,634 shares issued at December 31, 2006 and 2005 | | | 2,937 | | | 2,937 | |
Additional paid-in capital | | | 13,611 | | | 13,952 | |
Retained earnings | | | 90,877 | | | 85,505 | |
Treasury stock (565,659 and 270,420 shares at December 31, 2006 and 2005, respectively - at cost) | | | (16,368 | ) | | (7,972 | ) |
Accumulated comprehensive loss: | | | | | | | |
Unrealized loss on securities designated as available for sale, net of related tax benefits | | | (300 | ) | | (341 | ) |
Total stockholders’ equity | | | 90,757 | | | 94,081 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 1,275,635 | | $ | 1,241,058 | |
The accompanying notes are an integral part of these statements.
PAGE 18 OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL EARNINGS
| | Year Ended December 31, | |
(In thousands, except per share data) | | 2006 | | 2005 | | 2004 | |
INTEREST INCOME | | | | | | | |
Loans | | $ | 72,715 | | $ | 64,327 | | $ | 55,540 | |
Investments | | | | | | | | | | |
U.S. Government and agency securities | | | 3,874 | | | 2,678 | | | 2,295 | |
Obligations of state and political subdivisions | | | 2,252 | | | 1,979 | | | 838 | |
Other securities | | | 727 | | | 642 | | | 535 | |
Federal funds sold | | | 80 | | | 20 | | | 15 | |
Interest-bearing deposits | | | 95 | | | 74 | | | 28 | |
Total interest income | | | 79,743 | | | 69,720 | | | 59,251 | |
INTEREST EXPENSE | | | | | | | | | | |
Deposits | | | 31,773 | | | 22,944 | | | 15,923 | |
Borrowings | | | 9,638 | | | 6,492 | | | 4,915 | |
Total interest expense | | | 41,411 | | | 29,436 | | | 20,838 | |
Net interest income | | | 38,332 | | | 40,284 | | | 38,413 | |
Provision for losses on loans | | | 5,691 | | | 6,341 | | | 3,136 | |
Net interest income after provision for losses on loans | | | 32,641 | | | 33,943 | | | 35,277 | |
OTHER INCOME | | | | | | | | | | |
Service fees, charges and other operating | | | 8,463 | | | 6,950 | | | 5,252 | |
Insurance commissions | | | 3,331 | | | 2,781 | | | 3,050 | |
Bank owned life insurance | | | 506 | | | 436 | | | 118 | |
Gain on sale of loans | | | 849 | | | 1,085 | | | 1,882 | |
Gain on sale of securities | | | 187 | | | 498 | | | 276 | |
Gain (loss) on disposition of branch premises and equipment | | | (40 | ) | | 204 | | | — | |
Loss on sale of other real estate owned | | | (165 | ) | | (316 | ) | | (323 | ) |
Loss on sale of consumer finance loan portfolio | | | — | | | — | | | (3,585 | ) |
Total other income | | | 13,131 | | | 11,638 | | | 6,670 | |
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE | | | | | | | | | | |
Employee compensation and benefits | | | 17,518 | | | 16,107 | | | 14,519 | |
Occupancy and equipment | | | 4,147 | | | 4,067 | | | 3,400 | |
Federal deposit insurance premiums | | | 123 | | | 124 | | | 132 | |
Franchise taxes | | | 1,414 | | | 189 | | | 988 | |
Other operating | | | 10,047 | | | 9,059 | | | 7,673 | |
Amortization of core deposit intangible | | | 957 | | | 953 | | | 72 | |
Merger-related expenses | | | — | | | 546 | | | 160 | |
Total general, administrative and other expense | | | 34,206 | | | 31,045 | | | 26,944 | |
Earnings before federal income taxes | | | 11,566 | | | 14,536 | | | 15,003 | |
FEDERAL INCOME TAXES | | | | | | | | | | |
Current | | | 2,439 | | | 4,346 | | | 4,486 | |
Deferred | | | (455 | ) | | (1,189 | ) | | (145 | ) |
Total federal income taxes | | | 1,984 | | | 3,157 | | | 4,341 | |
NET EARNINGS | | $ | 9,582 | | $ | 11,379 | | $ | 10,662 | |
EARNINGS PER SHARE | | | | | | | | | | |
Basic | | $ | 1.76 | | $ | 2.01 | | $ | 1.92 | |
Diluted | | $ | 1.74 | | $ | 1.97 | | $ | 1.87 | |
The accompanying notes are an integral part of these statements.
PAGE 19 OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | For the Years Ended December 31, 2006, 2005 and 2004 | |
(In thousands, except per share data | | Common stock | | Additional paid-in capital | | Retained earnings | | Treasury stock | | Unrealized gains (losses) on securities designated as available for sale | | Total | |
BALANCE AT JANUARY1, 2004 | | $ | 2,797 | | $ | 5,704 | | $ | 70,844 | | $ | (332 | ) | $ | 915 | | $ | 79,928 | |
Issuance of 118,131 shares under stock option plan, including related tax benefits | | | 30 954 | | | — | | | 1,583 | | | — | | | 2,567 | | | | |
Purchase of 134,936 treasury shares, net | | | — | | | — | | | — | | | (4,369 | ) | | — | | | (4,369 | ) |
Dividends declared of $.618 per share | | | — | | | — | | | (3,435 | ) | | — | | | — | | | (3,435 | ) |
Unrealized losses on securities designated as available for sale, net of related tax benefits | | | — | | | — | | | — | | | — | | | (310 | ) | | (310 | ) |
Net earnings for the year | | | — | | | — | | | 10,662 | | | — | | | — | | | 10,662 | |
BALANCE AT DECEMBER 31, 2004 | | | 2,827 | | | 6,658 | | | 78,071 | | | (3,118 | ) | | 605 | | $ | 85,043 | |
Lawrence Financial acquisition | | | 110 | | | 8,146 | | | — | | | — | | | — | | | 8,256 | |
Issuance of 92,800 shares under stock option plan, including related tax benefits | | | — | | | (852 | ) | | — | | | 2,963 | | | — | | | 2,111 | |
Purchase of 269,945 treasury shares, net | | | — | | | — | | | — | | | (7,817 | ) | | — | | | (7,817 | ) |
Dividends declared of $.704 per share | | | — | | | — | | | (3,945 | ) | | — | | | — | | | (3,945 | ) |
Unrealized losses on securities designated as available for sale, net of related tax benefits | | | — | | | — | | | — | | | — | | | (946 | ) | | (946 | ) |
Net earnings for the year | | | — | | | — | | | 11,379 | | | — | | | — | | | 11,379 | |
BALANCE AT DECEMBER 31, 2005 | | | 2,937 | | | 13,952 | | | 85,505 | | | (7,972 | ) | | (341 | ) | $ | 94,081 | |
Issuance of 33,300 shares under stock option plan, including related tax benefits | | | — | | | (341 | ) | | — | | | 1,042 | | | — | | | 701 | |
Purchase of 330,055 treasury shares, net | | | — | | | — | | | — | | | (9,438 | ) | | — | | | (9,438 | ) |
Dividends declared of $.793 per share | | | — | | | — | | | (4,210 | ) | | — | | | — | | | (4,210 | ) |
Unrealized gains on securities designated as available for sale, net of related tax effects | | | — | | | — | | | — | | | — | | | 41 | | | 41 | |
Net earnings for the year | | | — | | | — | | | 9,582 | | | — | | | — | | | 9,582 | |
BALANCE AT DECEMBER 31, 2006 | | $ | 2,937 | | $ | 13,611 | | $ | 90,877 | | $ | (16,368 | ) | $ | (300 | ) | $ | 90,757 | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | Year Ended December 31, | |
(In thousands) | | 2006 | | 2005 | | 2004 | |
Net earnings | | $ | 9,582 | | $ | 11,379 | | $ | 10,662 | |
Other comprehensive income, net of tax: | | | | | | | | | | |
Unrealized gains (losses) on securities designated as available for sale, net of taxes (benefits) of $88, $(335) and $(71) in 2006, 2005 and 2004, respectively | | | 163 | | | (623 | ) | | (131 | ) |
Reclassification adjustment for realized gains included in net earnings, net of taxes of $65, $175 and $97 in 2006, 2005 and 2004, respectively | | | (122 | ) | | (323 | ) | | (179 | ) |
Comprehensive income | | $ | 9,623 | | $ | 10,433 | | $ | 10,352 | |
Accumulated comprehensive income (loss) | | $ | (300 | ) | $ | (341 | ) | $ | 605 | |
The accompanying notes are an integral part of these statements.
PAGE 20 OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENST OF CASH FLOWS
| | Year Ended December 31, | |
(In thousands) | | 2006 | | 2005 | | 2004 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | |
Net earnings | | $ | 9,582 | | $ | 11,379 | | $ | 10,662 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | | | 1,672 | | | 1,822 | | | 1,165 | |
Amortization of core deposit intangible | | | 957 | | | 953 | | | 72 | |
Gain on sale of securities | | | (187 | ) | | (498 | ) | | (276 | ) |
Amortization of premiums, discounts and mortgage servicing rights - net | | | 924 | | | 1,099 | | | 1,460 | |
Proceeds from sale of loans in secondary market | | | 27,048 | | | 35,996 | | | 59,428 | |
Loans disbursed for sale in secondary market | | | (26,246 | ) | | (35,540 | ) | | (55,614 | ) |
Gain on sale of loans | | | (482 | ) | | (610 | ) | | (1,132 | ) |
(Gain) loss on disposition of branch premises and equipment | | | 40 | | | (204 | ) | | — | |
Loss on sale of consumer finance loan portfolio | | | — | | | — | | | 3,585 | |
Amortization (accretion) of deferred loan origination (fees) costs | | | 497 | | | (483 | ) | | (155 | ) |
Loss on sale of other real estate owned | | | 165 | | | 316 | | | 323 | |
Purchase of loans | | | — | | | — | | | (282 | ) |
Federal Home Loan Bank stock dividends | | | (452 | ) | | (363 | ) | | (255 | ) |
Provision for losses on loans | | | 5,691 | | | 6,341 | | | 3,136 | |
Compensation expense related to stock incentive plan | | | 23 | | | — | | | — | |
Tax benefits of stock options exercised | | | — | | | 447 | | | 693 | |
Bank owned life insurance income | | | (506 | ) | | (436 | ) | | (118 | ) |
Increase (decrease) in cash due to changes in: | | | | | | | | | | |
Prepaid expenses and other assets | | | (188 | ) | | 1,768 | | | 41 | |
Accrued interest receivable | | | (757 | ) | | (614 | ) | | (121 | ) |
Accrued interest payable and other liabilities | | | 794 | | | (353 | ) | | (1,371 | ) |
Federal income taxes | | | | | | | | | | |
Current | | | 92 | | | 1,751 | | | (1,116 | ) |
Deferred | | | (455 | ) | | (1,189 | ) | | (145 | ) |
Net cash provided by operating activities | | | 18,212 | | | 21,582 | | | 19,980 | |
CASH FLOWS USED IN INVESTING ACTIVITIES: | | | | | | | | | | |
Loan disbursements | | | (337,078 | ) | | (344,834 | ) | | (409,234 | ) |
Principal repayments on loans | | | 317,977 | | | 311,778 | | | 338,646 | |
Principal repayments on mortgage-backed securities designated as available for sale | | | 17,400 | | | 16,905 | | | 19,095 | |
Proceeds from sale of investment securities designated as available for sale | | | 26,989 | | | 35,234 | | | 14,192 | |
Proceeds from maturity of investment securities | | | 2,660 | | | 1,405 | | | 4,342 | |
Proceeds from disposition of assets | | | 1 | | | 895 | | | — | |
Proceeds from sale of consumer finance loan portfolio | | | — | | | — | | | 5,143 | |
Proceeds from sale of other real estate owned | | | 673 | | | 1,294 | | | 1,163 | |
Loans sold from consumer finance loan portfolio | | | — | | | — | | | (8,728 | ) |
Purchase of investment securities designated as available for sale | | | (67,590 | ) | | (82,635 | ) | | (45,713 | ) |
Purchase of insurance agency | | | — | | | (12 | ) | | — | |
Purchase of bank owned life insurance | | | — | | | — | | | (10,000 | ) |
Purchase of office premises and equipment | | | (6,742 | ) | | (5,939 | ) | | (2,583 | ) |
Ripley acquisition - net of cash received | | | — | | | — | | | 3,179 | |
Lawrence acquisition - net of cash received | | | — | | | 8,228 | | | — | |
Net cash used in investing activities | | | (45,710 | ) | | (57,681 | ) | | (90,498 | ) |
Net cash used in operating and investing activities (balance carried forward) | | | (27,498 | ) | | (36,099 | ) | | (70,518 | ) |
PAGE 21 OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
| | Year Ended December 31, | |
(In thousands) | | 2006 | | 2005 | | 2004 | |
Net cash used in operating and investing activities (balance brought forward) | | $ | (27,498 | ) | $ | (36,099 | ) | $ | (70,518 | ) |
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: | | | | | | | | | | |
Net proceeds from securities sold under agreement to repurchase | | | 38,078 | | | 12,904 | | | 994 | |
Net increase (decrease) in deposit accounts | | | (35,228 | ) | | 10,378 | | | 92,706 | |
Proceeds from Federal Home Loan Bank advances | | | 79,216 | | | 28,200 | | | — | |
Repayment of Federal Home Loan Bank advances | | | (44,751 | ) | | (13,182 | ) | | (18,368 | ) |
Repayment of notes payable | | | — | | | (2,700 | ) | | (400 | ) |
Proceeds from issuance of subordinated debentures | | | — | | | 5,000 | | | 13,000 | |
Dividends on common shares | | | (4,210 | ) | | (3,945 | ) | | (3,435 | ) |
Purchase of treasury shares | | | (9,438 | ) | | (7,820 | ) | | (4,369 | ) |
Proceeds from issuance of shares under stock option plan | | | 521 | | | 1,667 | | | 1,874 | |
Tax benefit of stock options exercised | | | 157 | | | — | | | — | |
Net cash provided by financing activities | | | 24,345 | | | 30,502 | | | 82,002 | |
Net increase (decrease) in cash and cash equivalents | | | (3,153 | ) | | (5,597 | ) | | 11,484 | |
Cash and cash equivalents at beginning of year | | | 26,400 | | | 31,997 | | | 20,513 | |
Cash and cash equivalents at end of year | | $ | 23,247 | | $ | 26,400 | | $ | 31,997 | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | | |
Federal income taxes, net of refunds | | $ | 2,063 | | $ | 3,124 | | $ | 5,417 | |
Interest on deposits and borrowings | | $ | 41,316 | | $ | 29,129 | | $ | 20,552 | |
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: | | | | | | | | | | |
Unrealized gains (losses) on securities designated as available for sale, net of related tax effects | | $ | 41 | | $ | (946 | ) | $ | (310 | ) |
Recognition of mortgage servicing rights in accordance with SFAS No. 140 | | $ | 367 | | $ | 475 | | $ | 750 | |
Transfer from loans to real estate acquired through foreclosure | | $ | 5,930 | | $ | 107 | | $ | 2,564 | |
Issuance of loans upon sale of real estate acquired through foreclosure | | $ | 200 | | $ | — | | $ | 738 | |
Fair value of assets acquired in acquisition of Ripley National Bank | | $ | — | | $ | — | | $ | 58,611 | |
Fair value of assets acquired in acquisition of Lawrence Financial | | $ | — | | $ | 125,121 | | $ | — | |
Common stock issued in acquisition of Lawrence Financial | | $ | — | | $ | 8,256 | | $ | — | |
Goodwill and other intangible assets arising from acquisitions-net | | $ | — | | $ | 6,741 | | $ | 2,531 | |
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: | | | | | | | | | | |
Issuance of treasury stock in exchange for exercise of stock options | | $ | 84 | | $ | — | | $ | — | |
The accompanying notes are an integral part of these statements.
PAGE 22 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004
NOTE A — SUMMARY OF ACCOUNTING POLICIES Oak Hill Financial, Inc. (the “Company”) is a financial holding company, the principal assets of which are the Company’s ownership of Oak Hill Banks (“Oak Hill”) and Oak Hill Financial Insurance (“OHFI”). The Company also owns 49% of Oak Hill Title Agency, LLC (“Oak Hill Title”), which is accounted for using the equity method. The Company’s operations are primarily dependent upon its financial services subsidiary which is collectively viewed herein as a single operating segment for financial statement purposes.
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. 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.
In 2004, the Company acquired Ripley National Bank (“Ripley”) for $5.3 million in cash. As part of the transaction, the Company acquired full-service offices in Ripley and Georgetown, Ohio, involving total loans of $39.1 million, $51.6 million in deposits and $58.6 million in total assets.
Prior to 2005, the Company operated Action Finance Company (“Action Finance”), a consumer finance subsidiary. In 2004, the Company sold the consumer loan portfolio of Action Finance. The portfolio, which was comprised of small consumer and second mortgage loans, totaled $8.7 million. Concurrent with the sale, the Company closed five retail lending offices in southern Ohio. Action Finance was dissolved in 2006.
In 2005, the Company acquired Lawrence Financial Holdings, Inc. (“Lawrence Financial”) and its subsidiary, Lawrence Federal Savings Bank (“Lawrence”) headquartered in Ironton, Ohio for $15.2 million, of which $7.7 million was paid in cash. In addition, the Company issued 221,051 shares of common stock to Lawrence Financial shareholders. As part of the transaction, the Company acquired a net three full-service offices in southern Ohio, involving total loans of $76.5 million, $104.2 million in deposits and $116.9 million in assets.
The consolidated financial information presented herein has been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general accounting practices within the financial services industry. In preparing consolidated financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates.
The following is a summary of the Company’s significant accounting policies which, with the exception of the policy disclosed in Note A.14, have been consistently applied in the preparation of the accompanying consolidated financial statements.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Oak Hill and its wholly-owned subsidiaries Oak Hill Banks Community Development Corp. and Oak Hill Financial Services Company, OHFI and Oak Hill Title. All intercompany balances and transactions have been eliminated.
2. Investment Securities
The Company accounts for investment securities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” SFAS No. 115 requires that investments be categorized as held to maturity, trading, or available for sale. Securities classified as held to maturity are carried at cost only if the Company has the positive intent and ability to hold these securities to maturity. Securities available for sale are carried at fair value with resulting unrealized gains or losses recorded to stockholders’ equity.
Realized gains and losses on sales of securities are recognized using the specific identification method.
PAGE 23 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
3. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding, adjusted for premiums and discounts and the allowance for loan losses. Premiums and discounts on loans purchased and sold are amortized and accreted to operations using the interest method over the average life of the underlying loans.
Interest is accrued as earned unless the collectibility of the loan is in doubt. Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management’s periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management’s judgment, the borrower’s ability to make periodic interest and principal payments has returned to normal, in which case the loan is returned to accrual status.
Loans held for sale are carried at the lower of cost or market, determined in the aggregate. Loans held for sale are identified at the point of origination. In computing lower of cost or market, deferred loan origination fees are deducted from the principal balance of the related loan. All loan sales are made without further recourse to Oak Hill. At December 31, 2006 and 2005, loans held for sale were carried at cost.
Oak Hill generally retains servicing on loans sold and agrees to remit to the investor loan principal and interest at agreed-upon rates. Mortgage servicing rights are accounted for pursuant to the provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” which requires that Oak Hill recognize as separate assets, rights to service mortgage loans for others, regardless of how those servicing rights are acquired. An institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained must allocate some of the cost of the loans to the mortgage servicing rights.
The mortgage servicing rights recorded by Oak Hill, calculated in accordance with the provisions of SFAS No. 140, were segregated into pools for valuation purposes, using as pooling criteria the loan term and coupon rate. Once pooled, each grouping of loans was evaluated on a discounted earnings basis to determine the present value of future earnings that a purchaser could expect to realize from each portfolio. Earnings were projected from a variety of sources including loan servicing fees, interest earned on float, net interest earned on escrows, miscellaneous income, and costs to service the loans. The present value of future earnings is the “economic” value of the pool, i.e., the net realizable present value to an acquirer of the servicing rights.
SFAS No. 140 requires that capitalized mortgage servicing rights and capitalized excess servicing receivables be amortized in proportion to and over the period of estimated net servicing income and assessed for impairment. Impairment is measured based on fair value. The valuation of mortgage servicing rights is influenced by market factors, including servicing volumes and market prices, as well as management’s assumptions regarding mortgage prepayment speeds and interest rates. Management utilizes periodic third-party valuations by qualified market professionals to evaluate the fair value of its capitalized mortgage servicing assets.
A summary of Oak Hill’s mortgage servicing rights is as follows:
| | For the Year Ended December 31, | |
(In thousands) | | 2006 | | 2005 | |
Beginning balance | | $ | 3,458 | | $ | 3,446 | |
Recognition of mortgage servicing rights on sale of loans | | | 367 | | | 475 | |
Amortization | | | (385 | ) | | (463 | ) |
Ending balance | | | 3,440 | | | 3,458 | |
| | | | | | | |
Beginning valuation allowance | | | (130 | ) | | (299 | ) |
Valuation allowance recorded | | | (22 | ) | | — | |
Valuation allowance recaptured | | | — | | | 169 | |
Ending valuation allowance | | | (152 | ) | | (130 | ) |
Net carrying value | | $ | 3,288 | | $ | 3,328 | |
PAGE 24 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
4. Loan Origination and Commitment Fees
The Company accounts for loan origination fees and costs in accordance with SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” Pursuant to the provisions of SFAS No. 91, all loan origination fees received, net of certain direct origination costs, are deferred on a loan-by-loan basis and amortized to interest income using the interest method, giving effect to actual loan prepayments. Additionally, SFAS No. 91 generally limits the definition of loan origination costs to the direct costs attributable to originating a loan, i.e., principally actual personnel costs.
Fees received for loan commitments are deferred and amortized over the life of the related loan using the interest method.
5. Allowance for Loan Losses
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 in certain items including, but not limited to, the level of delinquent and specific problem loans, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions in Oak Hill’s primary market areas. 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 less estimated selling costs. 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 maintains its allowance for loan losses 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 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.
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 on a collective basis under SFAS No. 5. With respect to the Company’s 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 of the collateral.
It is the Company’s policy to charge off unsecured credits that are more than ninety days delinquent. Similarly, collateral dependent loans which are 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.
6. Office Premises and Equipment
Depreciation and amortization are provided on the straight-line and accelerated methods over the estimated useful lives of the assets, estimated to be ten to fifty years for buildings and improvements and three to twenty-five years for furniture, fixtures and equipment. Amortization of leasehold improvements is provided over the shorter of the lease term or the estimated useful life of the related asset. Accelerated methods of depreciation are used for income tax purposes.
7. Investment in Federal Home Loan Bank Stock
The Company is required as a condition of membership in the Federal Home Loan Bank of Cincinnati (“FHLB”) to maintain an investment in FHLB common stock. The stock is redeemable at par and, therefore, its cost is equivalent to its redemption value. The Company’s ability to redeem FHLB shares is dependent on the redemption practices of the FHLB of Cincinnati. At December 31, 2006, the FHLB of Cincinnati placed no restrictions on redemption of shares in excess of a member’s required investment in the stock.
PAGE 25 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
8. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the loan’s unpaid principal balance (cost) or fair value less estimated selling expenses at the date of acquisition. The loan loss allowance is charged for any write down in the loan’s carrying value to fair value at the date of acquisition. Real estate loss provisions are recorded if the properties’ fair value subsequently declines below the value determined at the recording date. In determining the lower of cost or fair value at acquisition, costs relating to development and improvement of property are considered. Costs relating to holding real estate acquired through foreclosure, net of rental income, are charged against earnings as incurred.
9. Federal Income Taxes
The Company accounts for federal income taxes pursuant to SFAS No. 109, “Accounting for Income Taxes.” Pursuant to the provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will result in taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years’ earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management’s estimate of future taxable income. A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management’s estimates of taxes payable on future taxable income. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future.
The Company’s principal temporary differences between pretax financial income and taxable income result primarily from the different methods of accounting for deferred loan origination fees and costs, Federal Home Loan Bank stock dividends, capitalized mortgage servicing rights, certain components of retirement expense and the allowance for loan losses. A temporary difference is also recognized for depreciation expense computed using accelerated methods for federal income tax purposes.
10. Goodwill and Core Deposit Intangible
In 2005, the Company acquired Lawrence Financial and its subsidiary for $15.2 million, of which $7.7 million was paid in cash. In addition, the Company issued 221,051 shares of common stock to Lawrence Financial shareholders. The acquisition resulted in a $6.2 million increase in goodwill. Also, as a result of the acquisition, a $3.8 million core deposit intangible was recorded.
In 2004, the Company acquired Ripley for $5.3 million in cash. The acquisition resulted in a $1.3 million increase in goodwill. Also, as a result of the acquisition, a $1.3 million core deposit intangible was recorded.
In 2002, OHFI purchased McNelly Insurance Agency, a local property and casualty insurance agency, for consideration of $100,000 in cash and a $100,000 note payable. This purchase resulted in goodwill totaling $197,000.
Pursuant to SFAS No. 142 “Goodwill and Intangible Assets,” which prescribes accounting for all purchased goodwill and intangible assets, acquired goodwill is not amortized, but is tested for impairment at the reporting unit level annually or whenever an impairment indicator arises. Goodwill has been primarily assigned to Oak Hill as the reporting unit that is expected to benefit from the goodwill.
Based on the Company’s periodic test of goodwill, there were no impairment charges required for the years ended December 31, 2006, 2005 and 2004.
The core deposit intangibles recorded as part of the Ripley and Lawrence Financial acquisitions are being amortized over their estimated useful lives of 9.3 and 8.3 years, respectively.
PAGE 26 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
The following table depicts the activity for the core deposit intangible asset:
(In thousands) | | 2006 | | 2005 | | 2004 | |
Balance at beginning of year | | $ | 4,068 | | $ | 1,270 | | | — | |
Additions due to acquisitions | | | — | | | 3,751 | | | 1,342 | |
Amortization expense | | | 957 | | | 953 | | | 72 | |
Balance at end of year | | $ | 3,111 | | $ | 4,068 | | $ | 1,270 | |
Accumulated amortization | | $ | 1,982 | | $ | 1,025 | | $ | 72 | |
The following table summarizes estimated amortization expense by year:
Year ending December 31, | | (Dollars in thousands) | |
2007 | | $ | 730 | |
2008 | | | 559 | |
2009 | | | 429 | |
2010 | | | 384 | |
2011 - 2014 | | | 1,009 | |
| | $ | 3,111 | |
11. Interest Rate Swaps
The Company has entered into interest rate swap agreements in order to more effectively manage its interest-rate risk position. These derivatives involve the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which interest rate payments are calculated. At December 31, 2006 and 2005 these derivatives had notional amounts totaling $15.0 million and $5.0 million, respectively. Of such notional amounts at December 31, 2006, $5.0 million represents a non-qualifying hedge of the Company’s subordinated debentures, while the remaining $10.0 million relates to a non-qualifying hedge of the deposit base. Non-qualifying hedge costs of $416,000 during 2006 were influenced by an approximate $162,000 charge related to a change from short-cut method of accounting based on a clarification of existing guidance.
12. Fair Value of Financial Instruments
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value of financial instruments, both assets and liabilities whether or not recognized in the consolidated statement of financial condition, for which it is practicable to estimate that value. For financial instruments where quoted market prices are not available, fair values are based on estimates using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in an exchange for certain financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments at December 31, 2006 and 2005.
Cash and due from banks. The carrying amounts presented in the consolidated statements of financial condition for cash and due from banks are deemed to approximate fair value.
Federal funds sold. The carrying amounts presented in the consolidated statements of financial condition for federal funds sold are deemed to approximate fair value due to daily repricing.
Investment securities. For investment securities, fair value is deemed to equal quoted market price.
Loans receivable. The loan portfolio has been segregated into categories with similar characteristics, such as one-to-four family residential real estate, multi-family residential real estate, commercial, installment and other. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality.
Federal Home Loan Bank stock. The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value.
Deposits. The fair value of NOW accounts, savings accounts, demand deposits, money market deposits and other transaction accounts is deemed to approximate the amount payable on demand at December 31, 2006 and 2005. Fair values for fixed-rate certificates of deposit have been estimated using a discounted cash flow calculation using the interest rates currently offered for deposits of similar remaining maturities.
PAGE 27 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
Advances from the Federal Home Loan Bank. The fair value of advances from the Federal Home Loan Bank has been estimated using discounted cash flow analysis, based on the interest rates currently offered for advances of similar remaining maturities.
Securities sold under agreement to repurchase. The carrying amounts of securities sold under agreements to repurchase are deemed to approximate fair value.
Subordinated debentures. The fair value of the Corporation’s subordinated debentures has been estimated using discounted cash flow analysis, based on the interest rates currently offered for instruments of similar remaining maturities.
Commitments to extend credit. For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. The difference between the fair value of outstanding loan commitments at December 31, 2006 and 2005 was not material.
Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments are as follows:
| | December 31, | |
| | 2006 | | 2005 | |
| | Carrying | | Fair | | Carrying | | Fair | |
(In thousands) | | value | | value | | value | | value | |
Financial assets | | | | | | | | | |
Cash and cash equivalents | | $ | 23,247 | | $ | 23,247 | | $ | 26,400 | | $ | 26,400 | |
Investment securities | | | 155,569 | | | 155,722 | | | 134,812 | | | 135,044 | |
Loans receivable - net | | | 1,021,361 | | | 1,011,519 | | | 1,015,083 | | | 1,011,480 | |
Federal Home Loan Bank stock | | | 8,078 | | | 8,078 | | | 7,626 | | | 7,626 | |
| | $ | 1,208,255 | | $ | 1,198,566 | | $ | 1,183,921 | | $ | 1,180,550 | |
Financial liabilities | | | | | | | | | | | | | |
Deposits | | $ | 942,960 | | $ | 912,041 | | $ | 978,396 | | $ | 970,278 | |
Advances from the Federal Home Loan Bank | | | 157,584 | | | 157,640 | | | 123,119 | | | 124,047 | |
Securities sold under agreement to repurchase | | | 56,341 | | | 56,341 | | | 18,263 | | | 18,318 | |
Subordinated debentures | | | 23,000 | | | 22,323 | | | 23,000 | | | 23,187 | |
| | $ | 1,179,885 | | $ | 1,148,257 | | $ | 1,142,778 | | $ | 1,135,830 | |
13. Earnings per Share
Basic earnings per common share is computed based upon the weighted-average number of common shares outstanding during the year. 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 years ended December 31:
| | 2006 | | 2005 | | 2004 | |
Weighted-average common shares outstanding (basic) | | | 5,434,221 | | | 5,667,522 | | | 5,549,855 | |
Dilutive effect of assumed exercise of stock options | | | 86,236 | | | 121,817 | | | 142,613 | |
Weighted-average common shares outstanding (diluted) | | | 5,520,457 | | | 5,789,339 | | | 5,692,468 | |
Options to purchase171,600 and 123,550 shares of common stock with a respective weighted-average exercise price of $34.81 and $37.12 were outstanding at December 31, 2006 and 2005, respectively, but were excluded from the computation of common share equivalents for those respective years because their exercise prices were greater than the average market price of the common shares. All granted options were included in the computation of common share equivalents at December 31, 2004.
PAGE 28 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
14. 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 has been based on the grant-date fair value. For the year ended December 31, 2006, the Company recorded $23,000 in compensation cost for equity-based awards that vested during the year ended December 31, 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 December 31, 2006, which is expected to be recognized over a weighted-average period of 1.2 years. At December 31, 2006, the intrinsic value of outstanding options totaled approximately $2.1 million.
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 has reflected $157,000 of tax benefits classified as financing cash flows for the year ended December 31, 2006.
The Company has a stock incentive plan that provides for grants of options, restricted stock, stock appreciation rights, and other equity-based compensation, of up to 1,200,000 authorized, but unissued shares of its common stock.
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 twelve months ended December 31:
(In thousands) | | 2005 | | 2004 | |
Net earnings | | | | | |
As reported | | $ | 11,379 | | $ | 10,662 | |
Stock-based compensation, net of tax | | | (997 | ) | | (399 | ) |
Pro forma | | $ | 10,382 | | $ | 10,263 | |
Basic earnings per share | | | | | | | |
As reported | | $ | 2.01 | | $ | 1.92 | |
Stock-based compensation, net of tax | | | (0.18 | ) | | (0.07 | ) |
Pro forma | | $ | 1.83 | | $ | 1.85 | |
There were no options granted during the year ended December 31, 2006. The fair value of each option granted in 2005 and 2004 was estimated on the date of grant using the Black-Scholes optionpricing model with the following weighted-average assumptions.
| | 2005 | | 2004 | |
Dividend yield | | | 2.4 | % | | 1.6 | % |
Expected life | | | 4 years | | | 4 years | |
Expected volatility | | | 38.4 | % | | 39.8 | % |
Risk-free interest rate | | | 4.25 | % | | 3.65 | % |
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.
PAGE 29 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
The following is a summary of the changes in outstanding options for the years ended December 31, 2006, 2005 and 2004:
| | 2006 | | 2005 | | 2004 | |
| | | | Weighted- | | | | Weighted- | | | | Weighted | |
| | | | average | | | | average | | | | average | |
| | | | exercise | | | | exercise | | | | exercise | |
| | Shares | | price | | Shares | | price | | Shares | | price | |
Outstanding at beginning of year | | | 484,233 | | $ | 23.14 | | | 582,466 | | $ | 22.21 | | | 572,397 | | $ | 17.36 | |
Granted | | | — | | | — | | | 8,000 | | $ | 32.76 | | | 130,500 | | | 37.19 | |
Exercised | | | (33,300 | ) | | 15.89 | | | (92,800 | ) | $ | 16.60 | | | (118,131 | ) | | 15.87 | |
Forfeited | | | (16,550 | ) | | 34.14 | | | (13,433 | ) | $ | 33.89 | | | (2,300 | ) | | 28.45 | |
Outstanding at end of year | | | 434,383 | | $ | 23.27 | | | 484,233 | | $ | 23.14 | | | 582,466 | | $ | 22.21 | |
Options exercisable at year-end | | | 429,383 | | | | | | 475,983 | | | | | | 451,633 | | | | |
Weighted-average fair value of options granted during the year | | | | | $ | — | | | | | $ | 10.04 | | | | | $ | 12.91 | |
The following information applies to options outstanding at December 31, 2006:
Range of | | Number | |
exercise prices | | outstanding | |
$ 6.67 - $10.01 | | | 9,725 | |
$10.02 - $15.05 | | | 95,050 | |
$15.06 - $22.56 | | | 160,508 | |
$22.57 - $33.86 | | | 59,400 | |
$33.87 - $37.72 | | | 109,700 | |
Total | | | 434,383 | |
Weighted-average exercise price | | $ | 23.27 | |
Weighted-average remaining contractual life | | | 6.3 years | |
The following is a summary of the changes in restricted stock for the years ended December 31, 2006, 2005 and 2004:
| | 2006 | | 2005 | | 2004 | |
| | | | Fair value | | | | Fair value | | | | Fair value | |
| | Shares | | at grant | | Shares | | at grant | | Shares | | at grant | |
Outstanding at beginning of year | | | 3,594 | | $ | 31.72 | | | 6,660 | | $ | 26.90 | | | 5,260 | | $ | 24.16 | |
Granted | | | — | | | — | | | 1,000 | | $ | 28.68 | | | 1,400 | | | 37.21 | |
Vested | | | (1,893 | ) | | 31.29 | | | (4,066 | ) | $ | 23.08 | | | — | | | — | |
Cancelled | | | (467 | ) | | 37.21 | | | — | | | — | | | — | | | — | |
Outstanding at end of year | | | 1,234 | | $ | 30.30 | | | 3,594 | | $ | 31.72 | | | 6,660 | | $ | 26.90 | |
PAGE 30 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
15. Capitalization
The Company’s authorized capital stock includes 1,500,000 shares of $.01 per share par value voting preferred stock and 1,500,000 shares of $.01 per share par value non-voting preferred stock. No preferred shares have been issued at December 31, 2006 and 2005.
16. Advertising
Advertising costs are expensed when incurred. The Company’s advertising expense totaled $712,000, $737,000, and $421,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
17. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents are comprised of cash and due from banks and interest-bearing deposits in other financial institutions with original terms to maturity of less than ninety days. At December 31, 2006 and 2005, compensating balance restrictions related to cash and cash equivalents totaled approximately $1.3 million and $454,000, respectively.
18. Reclassifications
Certain prior year amounts have been reclassified to conform to the 2006 consolidated financial statement presentation.
19. 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 adopted SFAS No. 155 on January 1, 2007, as required, without 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 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 adopted SFAS No. 156 on January 1, 2007, as required, without a material adverse effect on the Company’s financial position or results of operations.
PAGE 31 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement emphasizes that fair value is a market-based measurement and should be determined based on assumptions that a market participant would use when pricing an asset or liability. This Statement clarifies that market participant assumptions should include assumptions about risk as well as the effect of a restriction on the sale or use of an asset. Additionally, this Statement establishes a fair value hierarchy that provides the highest priority to quoted prices in active markets and the lowest priority to unobservable data. This Statement is effective for fiscal years beginning after November 15, 2007, or January 1, 2008 as to the Company, and interim periods within those fiscal years. The adoption of this Statement is not expected 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 adopted FIN 48 on January 1, 2007, as required, without 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 has historically used 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. SAB 108 is effective for fiscal years ending after November 15, 2006, or December 31, 2006. The Company’s consolidated financial statements were not affected by SAB 108.
In September 2006, the FASB ratified the Emerging Issues Task Force’s (EITF) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” which requires companies to recognize a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee extending to postretirement periods. The liability should be recognized based on the substantive agreement with the employee. This Issue is effective beginning January 1, 2008. The Issue can be applied as either a change in accounting principle through a cumulative- effect adjustment to retained earnings as of the beginning of the year of adoption, or a change in accounting principle through retrospective application to all periods. The Company is in the process of evaluating the impact the adoption of Issue 06-4 will have on financial statements.
PAGE 32 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
NOTE B - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investment securities at December 31 are shown below.
| | 2006 | |
| | | | Gross | | Gross | | Estimated | |
| | Amortized | | unrealized | | unrealized | | fair | |
(In thousands) | | cost | | gains | | losses | | value | |
Held to maturity: | | | | | | | | | |
Trust preferred securities due after ten years | | $ | 2,559 | | $ | 153 | | $ | — | | $ | 2,712 | |
Available for sale: | | | | | | | | | | | | | |
U.S. Government and agency obligations | | $ | 98,488 | | $ | 70 | | $ | 1,215 | | $ | 97,343 | |
Obligations of state and political subdivisions | | | 54,865 | | | 761 | | | 206 | | | 55,420 | |
Other securities | | | 147 | | | 119 | | | 19 | | | 247 | |
Total securities available for sale | | $ | 153,500 | | $ | 950 | | $ | 1,440 | | $ | 153,010 | |
| | 2005 | |
| | | | Gross | | Gross | | Estimated | |
| | Amortized | | unrealized | | unrealized | | fair | |
(In thousands) | | cost | | gains | | losses | | value | |
Held to maturity: | | | | | | | | | |
Trust preferred securities due after ten years | | $ | 3,619 | | $ | 232 | | $ | — | | $ | 3,851 | |
Available for sale: | | | | | | | | | | | | | |
U.S. Government and agency obligations | | $ | 73,599 | | $ | 43 | | $ | 1,037 | | $ | 72,605 | |
Obligations of state and political subdivisions | | | 58,196 | | | 673 | | | 529 | | | 58,340 | |
Other securities | | | 144 | | | 124 | | | 20 | | | 248 | |
Total securities available for sale | | $ | 131,939 | | $ | 840 | | $ | 1,586 | | $ | 131,193 | |
The amortized cost and estimated fair value of investment securities designated as available for sale, by term to maturity at December 31 are shown below.
| | 2006 | | 2005 | |
| | | | Estimated | | | | Estimated | |
| | Amortized | | fair | | Amortized | | fair | |
(In thousands) | | cost | | value | | cost | | value | |
Due in three years or less | | $ | 22,645 | | $ | 22,417 | | $ | 11,141 | | $ | 10,870 | |
Due after three years through five years | | | 5,777 | | | 5,742 | | | 4,250 | | | 4,197 | |
Due after five years through ten years | | | 31,357 | | | 31,237 | | | 23,646 | | | 23,362 | |
Due after ten years | | | 93,574 | | | 93,367 | | | 92,758 | | | 92,516 | |
| | $ | 153,353 | | $ | 152,763 | | $ | 131,795 | | $ | 130,945 | |
PAGE 33 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
The table below indicates the length of time individual securities were in a continuous unrealized loss position at December 31, 2006.
| | Less than | | More than | |
| | twelve months | | twelve months | |
| | Estimated | | | | Estimated | | | |
| | fair | | Unrealized | | fair | | Unrealized | |
(In thousands) | | value | | loss | | value | | loss | |
Available for sale: | | | | | | | | | |
U.S. Government and agency obligations | | $ | 36,600 | | $ | 351 | | $ | 46,630 | | $ | 864 | |
Obligations of state and political subdivisions | | | 8,677 | | | 73 | | | 11,248 | | | 133 | |
Other securities | | | — | | | — | | | 51 | | | 19 | |
Total temporarily impaired securities | | $ | 45,277 | | $ | 424 | | $ | 57,929 | | $ | 1,016 | |
The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2005.
| | Less than | | More than | |
| | twelve months | | twelve months | |
| | Estimated | | | | Estimated | | | |
| | fair | | Unrealized | | fair | | Unrealized | |
(In thousands) | | value | | loss | | value | | loss | |
Available for sale: | | | | | | | | | |
U.S. Government and agency obligations | | $ | 39,926 | | $ | 517 | | $ | 19,740 | | $ | 520 | |
Obligations of state and political subdivisions | | | 27,246 | | | 430 | | | 5,253 | | | 99 | |
Other securities | | | — | | | — | | | 49 | | | 20 | |
Total temporarily impaired securities | | $ | 67,172 | | $ | 947 | | $ | 25,042 | | $ | 639 | |
Management has the ability to hold these temporarily impaired securities for the foreseeable future. The decline in the fair value is primarily due to differences in market interest rates. The fair values are expected to recover as the securities approach maturity dates and/or interest rates decline.
Proceeds from sales of investment securities designated as available for sale during the years ended December 31, 2006, 2005 and 2004, totaled $27.0 million, $35.2 million and $14.2 million, resulting in net realized gains of $187,000, $498,000 and $276,000, respectively, on such sales.
At December 31, 2006 and 2005, investment securities with an aggregate carrying value of $78.1 million and $86.5 million, respectively, were pledged as collateral for public deposits.
The Company enters into purchases of mortgage- backed securities under agreements to resell substantially identical securities on behalf of its deposit customers. Securities purchased under agreements to resell totaled $56.3 million and $18.3 million at December 31, 2006 and 2005, respectively. At December 31, 2006 and 2005, the agreements were generally scheduled to mature within 90 days with the exception of a $42.0 million in reverse repurchase agreement incepted in 2006, of which $20.0 million will mature in 2011 and $22.0 million in 2016. Securities purchased under agreement to resell averaged approximately $37.9 million during 2006 and the maximum amount outstanding at any month-end during 2006 was $56.3 million.
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio, including loans held for sale, is as follows at December 31:
(In thousands) | | 2006 | | 2005 | |
Real estate mortgage (primarily residential) | | $ | 308,922 | | $ | 320,674 | |
Installment, net of unearned interest | | | 107,765 | | | 106,774 | |
Commercial and other | | | 615,248 | | | 599,105 | |
Credit card | | | 2,350 | | | 2,183 | |
Gross loans | | | 1,034,285 | | | 1,028,736 | |
Less: | | | | | | | |
Allowance for loan losses | | | 12,924 | | | 13,653 | |
Loans receivable - net | | $ | 1,021,361 | | $ | 1,015,083 | |
PAGE 34 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
The Company’s lending efforts have historically focused on real estate mortgages and consumer installment loans, which comprised approximately $416.7 million, or 41%, of the total loan portfolio at December 31, 2006, and approximately $427.4 million, or 42%, of the total loan portfolio at December 31, 2005. In recent years, lending efforts have increasingly focused on commercial loans, generally secured by commercial real estate and equipment, which comprise approximately $615.2 million, or 59%, of the total loan portfolio at December 31, 2006, and approximately $599.1 million, or 58%, of the total loan portfolio at December 31, 2005. Generally, such loans have been underwritten with sufficient collateral or cash down payments to provide the Company with adequate collateral coverage in the event of default. Nevertheless, the Company, as with any lending institution, is subject to the risk that real estate values or economic conditions could deteriorate in its primary lending areas within Ohio, thereby impairing collateral values. However, management is of the belief that real estate values and economic conditions in the Company’s primary lending areas are presently stable.
As stated previously, the Company has sold whole loans and participating interests in loans in the secondary market, retaining servicing on the loans sold. Loans sold and serviced for others totaled approximately $241.8 million, $256.5 million and $275.9 million at December 31, 2006, 2005 and 2004, respectively.
At December 31, 2006, 2005 and 2004, the Company had nonaccrual and nonperforming loans totaling approximately $13.6 million, $17.7 million and $6.3 million, respectively. Interest income that would have been recognized had nonaccrual loans performed pursuant to contractual terms totaled approximately $543,000, $1.1 million and $406,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
The activity in the allowance for loan losses is summarized as follows for the years ended December 31:
(In thousands) | | 2006 | | 2005 | | 2004 | |
Balance at beginning of year | | $ | 13,653 | | $ | 11,847 | | $ | 10,836 | |
Provision charged to operations | | | 5,691 | | | 6,341 | | | 3,136 | |
Charge-offs | | | (8,720 | ) | | (7,747 | ) | | (3,545 | ) |
Recoveries | | | 2,300 | | | 2,755 | | | 1,291 | |
Allowance of acquired institutions | | | — | | | 457 | | | 129 | |
Balance at end of year | | $ | 12,924 | | $ | 13,653 | | $ | 11,847 | |
Impaired loans and the allowance for loan losses on impaired loans are summarized at December 31 below:
(In thousands) | | 2006 | | 2005 | | 2004 | |
Impaired loans: | | $ | 10,153 | | $ | 13,100 | | $ | 3,826 | |
Average balance of impaired loans | | $ | 11,627 | | $ | 8,463 | | $ | 3,905 | |
Allowance for loan loss experience factor assigned to impaired loans | | $ | 1,025 | | $ | 1,625 | | $ | 1,328 | |
A loan is impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are included in nonperforming assets. Interest recognized on impaired loans while they were considered impaired totaled $28,000 and $71,000 for the years ended December 31, 2006 and 2005. There was no interest recognized for the year ended December 31, 2004 on impaired loans while they were considered impaired.
PAGE 35 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
NOTE D - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are summarized at December 31 as follows:
(In thousands) | | 2006 | | 2005 | |
Land and buildings | | $ | 30,776 | | $ | 25,289 | |
Furniture and equipment | | | 12,127 | | | 11,095 | |
Leasehold improvements | | | 1,355 | | | 1,240 | |
| | | 44,258 | | | 37,624 | |
Less accumulated depreciation and amortization | | | (16,493 | ) | | (14,888 | ) |
| | $ | 27,765 | | $ | 22,736 | |
During 2006, the Company substantially completed the construction of an administrative headquarters building at a cost of approximately $4.9 million. Interest capitalized in connection with construction totaled approximately $130,000.
NOTE E - DEPOSITS
Deposit balances at December 31 are summarized as follows:
| | 2006 | | 2005 | |
(Dollars in thousands) | | Amount | | Rate | | Amount | | Rate | |
DEPOSIT TYPE AND INTEREST RATE RANGE | | | | | | | | | |
Demand deposit accounts | | $ | 94,256 | | | — | | $ | 97,575 | | | — | |
Savings accounts | | | 48,858 | | | 0.49 | % | | 64,128 | | | 0.53 | % |
NOW accounts | | | 70,369 | | | 1.56 | % | | 79,329 | | | 1.43 | % |
Money market deposit accounts | | | 3,689 | | | 0.37 | % | | 8,191 | | | 0.40 | % |
Premium investment accounts | | | 189,281 | | | 4.47 | % | | 131,014 | | | 3.80 | % |
Select investment accounts | | | 20,372 | | | 4.59 | % | | 19,856 | | | 3.31 | % |
Total transaction accounts | | | 426,825 | | | | | | 400,093 | | | | |
Certificates of deposit | | | | | | | | | | | | | |
1.00 - 2.99% | | | 7,495 | | | | | | 93,754 | | | | |
3.00 - 4.99% | | | 381,892 | | | | | | 475,987 | | | | |
5.00 - 6.99% | | | 126,707 | | | | | | 8,506 | | | | |
7.00 - 10.00% | | | 41 | | | | | | 56 | | | | |
Total certificates of deposit | | | 516,135 | | | 4.43 | % | | 578,303 | | | 3.54 | % |
Total deposits | | $ | 942,960 | | | 3.56 | % | $ | 978,396 | | | 3.43 | % |
The Company had deposit accounts with balances in excess of $100,000 totaling $317.2 million and $367.4 million at December 31, 2006 and 2005, respectively.
PAGE 36 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
Interest expense on deposits is summarized as follows for the years ended December 31:
(In thousands) | | 2006 | | 2005 | | 2004 | |
NOW accounts | | $ | 1,310 | | $ | 1,017 | | $ | 804 | |
Savings accounts | | | 286 | | | 365 | | | 195 | |
Money market deposit accounts | | | 24 | | | 36 | | | 31 | |
Premium investment accounts | | | 7,553 | | | 2,853 | | | 548 | |
Select investment accounts | | | 850 | | | 539 | | | 419 | |
Certificates of deposit | | | 21,750 | | | 18,134 | | | 13,926 | |
| | $ | 31,773 | | $ | 22,944 | | $ | 15,923 | |
The contractual maturities of outstanding certificates of deposit are summarized as follows at December 31:
(In thousands) | | 2006 | | 2005 | |
Less than one year | | $ | 336,067 | | $ | 298,420 | |
One year through three years | | | 167,927 | | | 258,282 | |
More than three years | | | 12,141 | | | 21,601 | |
| | $ | 516,135 | | $ | 578,303 | |
NOTE F - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31, 2006 and 2005 by pledges of certain residential mortgage loans totaling $266.5 million and $209.3 million, respectively, are summarized as follows:
| | Maturing | | | | | |
Interest | | in year ended | | December 31, | |
rate range | | December 31, | | 2006 | | 2005 | |
| | | | | | (Dollars in thousands) | |
3.77% to 6.50% | | | 2006 | | | — | | $ | 39,070 | |
4.12% to 7.30% | | | 2007 | | | 58,301 | | | 31,501 | |
4.88% to 5.40% | | | 2008 | | | 33,000 | | | — | |
4.29% to 5.32% | | | 2009 | | | 16,736 | | | 281 | |
4.92% to 8.02% | | | 2010 | | | 13,603 | | | 6,140 | |
3.94% to 6.95% | | | 2011 | | | 30,231 | | | 39,619 | |
3.09% | | | 2013 | | | 2,199 | | | 2,922 | |
7.62% | | | 2015 | | | 850 | | | 850 | |
6.25% | | | 2016 | | | 246 | | | 265 | |
6.70% | | | 2017 | | | 705 | | | 749 | |
5.15% | | | 2018 | | | 1,228 | | | 1,445 | |
5.19% | | | 2021 | | | 216 | | | — | |
3.50% | | | 2025 | | | 43 | | | 45 | |
3.50% | | | 2029 | | | 158 | | | 162 | |
3.50% | | | 2030 | | | 68 | | | 70 | |
| | | | | $ | 157,584 | | $ | 123,119 | |
Weighted-average interest rate | | | | | | 4.96 | % | | 4.43 | % |
NOTE G - SUBORDINATED DEBENTURES
In 2000, a Delaware trust owned by the Company (“Trust 1”), issued $5.0 million of mandatorily redeemable debt securities. The amount of the debt securities issued by Trust 1 are included in the Company’s regulatory capital, specifically as a component of Tier 1 capital. The subordinated debentures are the sole assets of Trust 1, and the Company owns all of the common securities of Trust 1. Interest payments on the debt securities are made semi-annually at an annual fixed interest rate of 10.875% and are reported as a component of interest expense on borrowings.
During 2004, a Delaware statutory business trust owned by the Company, Oak Hill Capital Trust 2 (“Trust 2”), issued $5.0 million of mandatorily redeemable debt securities. The amount of the debt securities issued by Trust 2 are included in the Company’s regulatory capital, specifically as a component of Tier 1 capital. The proceeds from the issuance of the subordinated debentures and common securities were used by Trust 2 to purchase from the Company $5.0 million of subordinated debentures maturing on October 18, 2034. The subordinated debentures are the sole asset of Trust 2, and the Company owns all of the common securities of Trust 2. Interest payments on the debt securities are to be made quarterly at an annual fixed rate of interest of 6.24% through October 18, 2009 and at a floating rate of interest, reset quarterly, equal to 3-month LIBOR plus 2.40% thereafter. Interest payments are reported as a component of interest expense on borrowings. The net proceeds received by the Company were contributed to the capital of Oak Hill during 2004.
Also during 2004, a Delaware statutory business trust owned by the Company, Oak Hill Capital Trust 3 (“Trust 3”), issued $8.0 million of mandatorily redeemable debt securities. The amount of the debt securities issued by Trust 3 are included in the Company’s regulatory capital, specifically as a component of Tier 1 capital. The proceeds from the issuance of the subordinated debentures and common securities were used by Trust 3 to purchase from the Company $8.0 million of subordinated debentures maturing on October 18, 2034. The subordinated debentures are the sole asset of Trust 3, and the Company owns all of the common securities of Trust 3. Interest payments on the debt securities are to be made quarterly at a floating rate of interest, reset quarterly, equal to 3-month LIBOR plus 2.30%. Interest payments are reported as a component of interest expense on borrowings. The net proceeds received by the Company were used to partially fund the acquisition of Lawrence Financial.
PAGE 37 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
During 2005, a Delaware statutory business trust owned by the Company, Oak Hill Capital Trust 4 (“Trust 4”), issued $5.0 million of mandatorily redeemable debt securities. The amount of the debt securities issued by Trust 4 are included in the Company’s regulatory capital, specifically as a component of Tier 1 capital. The proceeds from the issuance of the subordinated debentures and common securities were used by Trust 4 to purchase from the Company $5.0 million of subordinated debentures maturing on June 30, 2035. The subordinated debentures are the sole asset of Trust 4, and the Company owns all of the common securities of Trust 4. Interest payments on the debt securities are to be made quarterly at an annual fixed rate of interest of 5.96% through June 30, 2015 and at a floating rate of interest, reset quarterly, equal to 3-month LIBOR plus 1.60% thereafter. Interest payments are reported as a component of interest expense on borrowings. The net proceeds received by the Company were contributed to the capital of Oak Hill during 2005.
Trusts 1 through 4 are not consolidated herein pursuant to the provisions of FIN 46(R), Consolidation of Variable Interest Entities.
NOTE H - FEDERAL INCOME TAXES
The provision for federal income taxes differs from that computed at the statutory corporate tax rate for the years ended December 31 as follows:
(In thousands) | | 2006 | | 2005 | | 2004 | |
Federal income taxes computed at the statutory rate | | $ | 3,948 | | $ | 4,988 | | $ | 5,251 | |
Increase (decrease) in taxes resulting from: | | | | | | | | | | |
Interest income on municipal loans and obligations of state and political subdivisions | | | (940 | ) | | (807 | ) | | (419 | ) |
New Markets Tax Credits | | | (1,000 | ) | | (1,000 | ) | | (500 | ) |
Other | | | (24 | ) | | (24 | ) | | 9 | |
Federal income tax provision per consolidated financial statements | | $ | 1,984 | | $ | 3,157 | | $ | 4,341 | |
The computation of the Company’s net deferred tax asset at December 31 is as follows:
(In thousands) | | 2006 | | 2005 | |
Taxes (payable) refundable on temporary differences at statutory rate: | | | | | |
Deferred tax assets: | | | | | |
Book/tax difference of allowance for loan losses | | $ | 4,394 | | $ | 4,778 | |
Deferred compensation benefits | | | 106 | | | 105 | |
Net operating loss and credit carryforwards | | | 2,300 | | | 2,213 | |
Unrealized losses on securities designated as available for sale | | | 161 | | | 166 | |
Non-accrual interest | | | 287 | | | 51 | |
Total deferred tax assets | | | 7,248 | | | 7,313 | |
Deferred tax liabilities: | | | | | | | |
Deferred loan origination costs | | | (1,932 | ) | | (1,635 | ) |
Federal Home Loan Bank stock dividends | | | (1,359 | ) | | (1,240 | ) |
Book/tax depreciation | | | (385 | ) | | (484 | ) |
Mortgage servicing rights | | | (1,118 | ) | | (1,165 | ) |
Purchase price adjustments | | | (1,278 | ) | | (1,649 | ) |
Interest rate swaps mark-to-market | | | (56 | ) | | — | |
Other | | | (75 | ) | | (15 | ) |
Total deferred tax liabilities | | | (6,203 | ) | | (6,188 | ) |
Net deferred tax asset | | $ | 1,045 | | $ | 1,125 | |
PAGE 38 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
The Company’s ability to utilize the net operating loss carryforward amounts is subject to statutory limitation over a carryforward period which the Company expects will not exceed eight years. The Company’s new Market’s Tax Credit carryforwards expire over a 20 year period.
The Company has not recorded a valuation allowance for any portion of the net deferred tax asset at December 31, 2006, based on the amount of income taxes subject to recovery in 2006 and carryback years.
Retained earnings at December 31, 2006 include $1.5 million in allocation of earnings for bad debt deductions of acquired savings associations for which no income tax has been provided. If these bad debt reserves are used for purposes other than to absorb bad debt losses, the amount used will be subject to Federal income tax at the current corporate tax rate.
Subsequent to December 31, 2006, the Company was notified that the 2004 return was under audit by the IRS. Management does not expect any additional taxes as a result of this audit.
NOTE I — RELATED PARTY TRANSACTIONS
In the normal course of business, the Company has made loans to its directors, officers, and their related business interests. In the opinion of management, such loans are consistent with sound banking practices and are within applicable regulatory lending limitations. The balance of such loans outstanding at December 31, 2006, 2005 and 2004 totaled approximately $10.9 million, $12.7 million and $7.3 million, respectively.
The Company had also received demand and time deposits from directors, officers and their related business interests of approximately $13.4 million, $15.6 million and $14.7 million at December 31, 2006, 2005 and 2004, respectively.
In addition, the Company paid $204,000, $435,000 and $512,000 for the years ended December 31, 2006, 2005 and 2004, respectively, to a law firm in which a director of the Company is a partner. The director has been determined to be independent based upon an annual review by the Company’s Board of Directors.
NOTE J — EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing and 401(k) plan covering all employees who have attained the age of twenty-one and completed three months of continuous service. The profit-sharing plan is non-contributory by employees and contributions to the plan are made at the discretion of the Board of Directors. The Company contributed $225,000 to the plan for the year ended December 31, 2004. The Company did not contribute to the plan for the years ended December 31, 2006 and 2005.
The 401(k) plan allows employees to make voluntary, tax-deferred contributions of up to 15% of their base annual compensation. The Company provides, at its discretion, a 50% matching of funds for each participant’s contribution, subject to a maximum of 6% of base compensation. The Company’s matching contributions under the 401(k) plan totaled $334,000, $257,000 and $327,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
NOTE K — COMMITMENTS
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers, including commitments to extend credit and letters of credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the statements of financial condition. The contract or notional amounts of the commitments reflect the extent of the Company’s involvement in such financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as those utilized for on-balance sheet instruments. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.
The Company grants retail, commercial and commercial real estate loans in southern and central Ohio. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based upon management’s credit evaluation of each customer. Collateral held varies but may include accounts receivable, inventory, property, plan and equipment, and income-producing commercial properties.
PAGE 39 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
At December 31, 2006, the Company had outstanding commitments of approximately $34.1 million to originate residential and commercial loans. Also, as of December 31, 2006, the Company had unused lines of credit and letters of credit totaling approximately $137.8 million and $13.3 million, respectively. In the opinion of management, outstanding loan commitments equaled or exceeded prevalent market interest rates as of December 31, 2006, such commitments were underwritten in accordance with normal loan underwriting policies, and all disbursements will be funded via normal cash flow from operations and existing excess liquidity.
The Company has also entered into non-cancelable lease agreements for office premises and equipment under operating leases which expire at various dates through 2013. The following table summarizes minimum payments due under lease agreements by year:
Year ending December 31, | | (Dollars in thousands) | |
2007 | | $ | 610 | |
2008 | | | 428 | |
2009 | | | 280 | |
2010 | | | 184 | |
2011 | | | 118 | |
2012 - 2013 | | | 453 | |
| | $ | 2,073 | |
Total rent expense under operating leases was $673,000, $747,000 and $850,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
NOTE L — REGULATORY CAPITAL
As a registered bank holding company, the Company is subject to capital requirements imposed by the Board of Governor of the Federal Reserve System (“FRB”). Oak Hill is subject to the regulatory capital requirements of the Federal Deposit Insurance Corporation (the “FDIC”). Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on Oak Hill’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Oak Hill must meet specific capital guidelines that involve quantitative measures of Oak Hill’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Oak Hill’s capital accounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The FRB and the FDIC have adopted risk-based capital guidelines to which the Company and Oak Hill are subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance-sheet commitments to four risk-weighting categories, with higher levels of capital being required for the categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier (“Tier 1”) includes common equity, certain non-cumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (except mortgage servicing rights and purchased credit card relationships, subject to certain limitations). Supplementary (“Tier 2”) capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt, and the allowance for loan losses, subject to certain limitations, less required deductions. Banks are required to maintain a total risk-based capital (the sum of Tier 1 and Tier 2 capital) ratio of 8%, of which 4% must be Tier 1 capital. The FDIC may, however, set higher capital requirements when particular circumstances warrant. Banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above minimum required levels.
During the year ended December 31, 2006, Oak Hill was notified by its primary federal regulator that it was categorized as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized” Oak Hill must maintain minimum Tier 1 capital, total risk-based capital, and Tier 1 leverage ratios of 6%, 10%, and 5%, respectively. At December 31, 2006, Oak Hill was well-capitalized.
PAGE 40 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
As of December 31, 2006 and 2005, management believes that the Company and Oak Hill have met all of the capital adequacy requirements to which the entities are subject. The Company’s and Oak Hill’s Tier 1 capital, total risk-based capital, and Tier 1 leverage ratios are set forth in the following tables:
COMPANY CONSOLIDATED: | | As of December 31, 2006 | |
| | Actual | | For capital adequacy purposes | | To be “well capitalized” under prompt corrective action provisions | |
(Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
Total capital | | $ | 117,009 | | | 11.2 | % | $ | 83,918 | | | >8.0 | % | | N/A | | | N/A | |
(to risk-weighted assets) | | | | | | | | | | | | | | | | | | | |
Tier 1 capital | | $ | 104,040 | | | 9.9 | % | $ | 41,959 | | | >4.0 | % | | N/A | | | N/A | |
(to risk-weighted assets) | | | | | | | | | | | | | | | | | | | |
Tier 1 leverage ratio | | $ | 104,040 | | | 8.3 | % | $ | 50,218 | | | >4.0 | % | | N/A | | | N/A | |
| | As of December 31, 2005 | |
| | Actual | | For capital adequacy purposes | | To be “well capitalized” under prompt corrective action provisions | |
(Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
Total capital | | $ | 119,933 | | | 11.7 | % | $ | 81,722 | | | >8.0 | % | | N/A | | | N/A | |
(to risk-weighted assets) | | | | | | | | | | | | | | | | | | | |
Tier 1 capital | | $ | 107,106 | | | 10.5 | % | $ | 40,861 | | | >4.0 | % | | N/A | | | N/A | |
(to risk-weighted assets) | | | | | | | | | | | | | | | | | | | |
Tier 1 leverage ratio | | $ | 107,106 | | | 8.7 | % | $ | 49,002 | | | >4.0 | % | | N/A | | | N/A | |
OAK HILL: | | As of December 31, 2006 | |
| | Actual | | For capital adequacy purposes | | To be “well capitalized” under prompt corrective action provisions | |
(Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
Total capital | | $ | 113,362 | | | 10.8 | % | $ | 83,886 | | | >8.0 | % | $ | 104,857 | | | >10.0 | % |
(to risk-weighted assets) | | | | | | | | | | | | | | | | | | | |
Tier 1 capital | | $ | 95,438 | | | 9.1 | % | $ | 41,943 | | | >4.0 | % | $ | 62,914 | | | > 6.0 | % |
(to risk-weighted assets) | | | | | | | | | | | | | | | | | | | |
Tier 1 leverage ratio | | $ | 95,438 | | | 7.6 | % | $ | 50,125 | | | >4.0 | % | $ | 62,656 | | | > 5.0 | % |
| | As of December 31, 2005 | |
| | Actual | | For capital adequacy purposes | | To be “well capitalized” under prompt corrective action provisions | |
(Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
Total capital | | $ | 111,980 | | | 11.0 | % | $ | 81,633 | | | >8.0 | % | $ | 102,041 | | | >10.0 | % |
(to risk-weighted assets) | | | | | | | | | | | | | | | | | | | |
Tier 1 capital | | $ | 99,214 | | | 9.7 | % | $ | 40,816 | | | >4.0 | % | $ | 61,225 | | | > 6.0 | % |
(to risk-weighted assets) | | | | | | | | | | | | | | | | | | | |
Tier 1 leverage ratio | | $ | 99,214 | | | 8.1 | % | $ | 48,838 | | | >4.0 | % | $ | 61,047 | | | > 5.0 | % |
PAGE 41 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
The Company’s management believes that under the current regulatory capital regulations, the Company and Oak Hill will continue to meet the minimum capital requirements in the foreseeable future. However, events beyond the control of the Company, such as increased interest rates or a downturn in the economy in Oak Hill’s primary market areas, could adversely affect future earnings and consequently, the ability to meet future minimum regulatory capital requirements.
NOTE M — OAK HILL FINANCIAL, INC. CONDENSED FINANCIAL INFORMATION
The following condensed financial statements summarize the financial position of Oak Hill Financial, Inc. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the years ended December 31, 2006, 2005 and 2004.
OAK HILL FINANCIAL, INC.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
| | December 31, | |
(In thousands) | | 2006 | | 2005 | |
ASSETS | | | | | |
Cash and due from banks | | $ | 488 | | $ | 451 | |
Notes receivable | | | 5,000 | | | — | |
Interest-bearing deposits in Oak Hill Banks | | | 3,682 | | | 6,243 | |
Investment securities | | | 1,024 | | | 537 | |
Investment in Oak Hill Banks | | | 104,888 | | | 108,921 | |
Investment in Oak Hill Capital Trusts | | | 713 | | | 713 | |
Investment in OHFI | | | 933 | | | 996 | |
Investment in Oak Hill Title LLC | | | 15 | | | 15 | |
Office premises and equipment - net | | | 167 | | | 275 | |
Prepaid expenses and other assets | | | 214 | | | 2,588 | |
Total assets | | $ | 117,124 | | $ | 120,739 | |
LIABILITIES AND STOCKHOLDER’S EQUITY | | | | | | | |
Accrued expenses and other liabilities | | $ | 2,654 | | $ | 2,945 | |
Subordinated debentures | | | 23,713 | | | 23,713 | |
Total liabilities | | | 26,367 | | | 26,658 | |
Stockholders’ equity | | | | | | | |
Common stock | | | 2,937 | | | 2,937 | |
Additional paid-in capital | | | 13,611 | | | 13,952 | |
Retained earnings | | | 90,877 | | | 85,505 | |
Less cost of treasury stock | | | (16,368 | ) | | (7,972 | ) |
Unrealized losses on securities designated as available for sale, net of related tax benefits | | | (300 | ) | | (341 | ) |
Total stockholders’ equity | | | 90,757 | | | 94,081 | |
Total liabilities and stockholders’ equity | | $ | 117,124 | | $ | 120,739 | |
PAGE 42 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
CONDENSED STATEMENTS OF EARNINGS
| | Year ended December 31, | |
(In thousands) | | 2006 | | 2005 | | 2004 | |
REVENUE | | | | | | | |
Interest income | | $ | 156 | | $ | 151 | | $ | 58 | |
Other income | | | 1 | | | 4 | | | 6 | |
Equity in earnings of subsidiaries | | | 11,584 | | | 12,813 | | | 11,548 | |
Total revenue | | | 11,741 | | | 12,968 | | | 11,612 | |
EXPENSES | | | | | | | | | | |
Interest expense | | | 1,814 | | | 1,425 | | | 683 | |
General and administrative | | | 1,287 | | | 830 | | | 686 | |
Total expenses | | | 3,101 | | | 2,255 | | | 1,369 | |
Earnings before federal income tax credits | | | 8,640 | | | 10,713 | | | 10,243 | |
Federal income tax credits | | | (942 | ) | | (666 | ) | | (419 | ) |
NET EARNINGS | | $ | 9,582 | | $ | 11,379 | | $ | 10,662 | |
OAK HILL FINANCIAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
| | Year ended December 31, | |
(In thousands) | | 2006 | | 2005 | | 2004 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | |
Net earnings for the year | | $ | 9,582 | | $ | 11,379 | | $ | 10,662 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | |
Distributed (undistributed) earnings of consolidated subsidiaries | | | 4,860 | | | (542 | ) | | (4,316 | ) |
Depreciation and amortization | | | 108 | | | 168 | | | 243 | |
Amortization of premium on investment securities | | | 5 | | | 11 | | | — | |
Compensation expense related to stock incentive plan | | | 23 | | | — | | | — | |
Tax benefits of stock options exercised | | | — | | | 447 | | | 693 | |
Increase (decrease) in cash due to changes in: | | | | | | | | | | |
Prepaid expenses and other assets | | | 289 | | | 124 | | | 522 | |
Other liabilities | | | (359 | ) | | 1,430 | | | (257 | ) |
Federal income taxes | | | | | | | | | | |
Deferred | | | 66 | | | (31 | ) | | 73 | |
Net cash provided by operating activities | | | 14,574 | | | 12,986 | | | 7,620 | |
CASH FLOWS USED IN INVESTING ACTIVITIES: | | | | | | | | | | |
Investment in Oak Hill Banks | | | — | | | (5,000 | ) | | (10,250 | ) |
Investment in Action Finance Company | | | — | | | — | | | (1,750 | ) |
Investment in Oak Hill Capital Trusts | | | — | | | (155 | ) | | (403 | ) |
Action Finance Company liquidation | | | 1,359 | | | — | | | — | |
Note receivable from Oak Hill Banks | | | (5,000 | ) | | — | | | — | |
Investment in U.S. Government Agencies | | | (487 | ) | | — | | | (561 | ) |
Purchase of office premises and equipment | | | — | | | (121 | ) | | (248 | ) |
Proceeds from disposition of assets | | | — | | | 1,985 | | | — | |
(Increase) decrease in interest-bearing deposits | | | 2,561 | | | 478 | | | (458 | ) |
Lawrence Financial acquisition | | | — | | | (6,868 | ) | | — | |
Net cash used in investing activities | | | (1,567 | ) | | (9,681 | ) | | (13,670 | ) |
Net cash provided by (used in) operating and investing activities | | | 13,007 | | | 3,305 | | | (6,050 | ) |
PAGE 43 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
OAK HILL FINANCIAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
| | Year ended December 31, | |
(In thousands) | | 2006 | | 2005 | | 2004 | |
Net cash provided by (used in) operating and investing activities (balance carried forward) | | $ | 13,007 | | $ | 3,305 | | $ | (6,050 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | |
Proceeds from exercise of stock options | | | 521 | | | 1,667 | | | 1,874 | |
Tax benefit of stock options exercised | | | 157 | | | — | | | — | |
Proceeds from issuance of subordinated debentures | | | — | | | 5,155 | | | 13,403 | |
Purchase of treasury stock | | | (9,438 | ) | | (7,820 | ) | | (4,369 | ) |
Dividends on common shares | | | (4,210 | ) | | (3,945 | ) | | (3,435 | ) |
Net cash provided by (used in) financing activities | | | (12,970 | ) | | (4,943 | ) | | 7,473 | |
Net increase (decrease) in cash and cash equivalents | | | 37 | | | (1,638 | ) | | 1,423 | |
Cash and cash equivalents at beginning of year | | | 451 | | | 2,089 | | | 666 | |
Cash and cash equivalents at end of year | | $ | 488 | | $ | 451 | | $ | 2,089 | |
NOTE N — SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
Obligations for securities sold under agreements to repurchase were collateralized at December 31, 2006 and 2005 by investment securities with a book value including accrued interest of approximately $59.4 million and $25.8 million and a market value of approximately $58.6 million and $25.4 million, respectively. The maximum balance of repurchase agreements outstanding at any month-end during the years ended December 31, 2006 and 2005 was $56.3 million and $20.5 million, respectively, and the average month-end balance outstanding for 2006 and 2005 was approximately $37.9 million and $16.5 million, respectively.
NOTE O — ACQUISITIONS
In 2005, the Company acquired Lawrence Financial and its subsidiary for $15.2 million, of which $7.7 million was paid in cash. In addition, the Company issued 221,051 shares of common stock to Lawrence Financial shareholders. As part of the transaction, the Company acquired five full-service offices in southern Ohio, involving total loans of $76.5 million, $104.2 million in deposits and $116.9 million in total assets. Of the five full-service offices acquired, one was combined with an existing Oak Hill branch and one was sold. The acquisition was accounted for as a purchase.
The following unaudited, pro-forma condensed financial information gives retroactive effect as if the merger had occurred on January 1, 2005.
| | Oak Hill | | Lawrence | | Pro-forma | |
| | Financial | | Financial | | combined | |
In thousands, except per share data) | | | | (unaudited) | | (unaudited) | |
Total revenue | | $ | 81,358 | | $ | 1,562 | | $ | 82,920 | |
Total expenses | | | 69,979 | | | 2,354 | | | 72,333 | |
Net earnings (loss) | | $ | 11,379 | | $ | (792 | ) | $ | 10,587 | |
Basic earnings (loss) per share | | $ | 2.01 | | $ | (0.14 | ) | $ | 1.87 | |
Diluted earnings per share | | $ | 1.97 | | | N/A | | $ | 1.83 | |
In 2004, the Company acquired Ripley National Bank (“Ripley”) for $5.3 million in cash. As part of the merger transaction, the Company acquired fullservice offices in Ripley and Georgetown, Ohio, involving total loans of $39.1 million, $51.6 million in deposits and $58.6 million in total assets. The acquisition was accounted for as a purchase.
PAGE 44 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
The following unaudited, pro-forma condensed financial information gives retroactive effect as if the merger had occurred on January 1, 2004.
| | Oak Hill | | | | Pro-forma | |
| | Financial | | Ripley | | combined | |
(In thousands, except per share data) | | | | (unaudited) | | (unaudited) | |
Total revenue | | $ | 65,921 | | $ | 2,686 | | $ | 68,607 | |
Total expenses | | | 55,259 | | | 4,069 | | | 59,328 | |
Net earnings (loss) | | $ | 10,662 | | $ | (1,383 | ) | $ | 9,279 | |
Basic earnings (loss) per share | | $ | 1.92 | | $ | (0.25 | ) | $ | 1.67 | |
Diluted earnings per share | | $ | 1.87 | | | N/A | | $ | 1.63 | |
NOTE P — OAK HILL BANKS COMMUNITY DEVELOPMENT CORP.
During 2004, the Company announced that Oak Hill Banks Community Development Corp. (“OHBCDC”), a wholly owned subsidiary and Certified Development Entity (“CDE”), had been selected to receive a $20.0 million allocation of new markets tax credits (“NMTC”) authority. Administered by the Community Development Financial Institutions Fund of the U.S. Department of the Treasury, the NMTC program is aimed at stimulating economic and community development and job creation in low-income communities. The program provides federal tax credits to investors who make qualified equity investments (“QEIs”) in a CDE. The CDE is required to invest the proceeds of each QEI in low-income communities, which are generally defined as those census tracts with poverty rates of greater than 20 percent and/or median family incomes that are less than or equal to 80 percent of the area median family income.
The credit provided to the investor totals 39 percent of each QEI in a CDE and is claimed over a seven-year credit allowance period. In each of the first three years, the investor receives a credit equal to five percent of the total amount the investor paid to the CDE for each QEI. For each of the remaining four years, the investor receives a credit equal to six percent of the total amount the investor paid to the CDE for each QEI. The Company’s primary subsidiary, Oak Hill, has paid to OHBCDC $20 million for its QEIs. Oak Hill paid $10.0 million to OHBCDC during 2005 and 2004, i.e., the maximum total of $20.0 million permitted for its QEIs in OHBCDC.
OHBCDC is utilizing its $20.0 million of QEI proceeds to provide “New Markets” loans to qualifying businesses located in twelve Appalachian counties in rural southern Ohio. It also provides financial counseling services through a formal program of community business workshops. Under its New Markets loan program, OHBCDC provides short-term and long-term loans to a variety of qualifying businesses with non-conventional, non-conforming terms and conditions, including reduced fees, extended repayment terms, and below-market interest rates.
At December 31, 2006, Oak Hill had paid to OHBCDC $20.0 million for QEIs in OHBCDC. Oak Hill recognized $1.0 million in new markets tax credits in its federal income tax returns for the each of the years ended December 31, 2006 and 2005. The following table sets forth the new markets tax credits expected to be claimed by Oak Hill for years 2007 through 2011 with respect to the aggregate QEI amounts paid by Oak Hill
| | | | New Markets Tax Credit | |
| | Aggregate | | | | | | | | | | | |
Year | | QEI Amount | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | |
2004 | | $ | 10,000 | | $ | 600 | | $ | 600 | | $ | 600 | | $ | 600 | | $ | — | |
2005 | | | 10,000 | | | 500 | | | 600 | | | 600 | | | 600 | | | 600 | |
Total | | $ | 20,000 | | $ | 1,100 | | $ | 1,200 | | $ | 1,200 | | $ | 1,200 | | $ | 600 | |
PAGE 45 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
The new markets tax credits claimed by Oak Hill with respect to each QEI remain subject to recapture over each QEI’s credit allowance period upon the occurrence of any of the following:
• | if less than substantially all (generally defined as 85%) of the QEI proceeds are not used by OHBCDC to make qualified low income community investments; |
• | OHBCDC ceases to be a CDE; or |
• | OHBCDC redeems its QEI investments prior to the end of the credit allowance periods. |
At December 31, 2006 and 2005, none of the above recapture events had occurred, nor in the opinion of management are such events likely to occur in the foreseeable future.
The following condensed financial statements summarize the financial position of OHBCDC as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years ended December 31, 2006, 2005 and 2004.
OHBCDC
CONDENSED STATEMENTS OF FINANCIAL CONDITION
| | December 31, | |
(In thousands) | | 2006 | | 2005 | |
ASSETS | | | | | |
Cash and due from banks | | $ | 3,828 | | $ | 6,786 | |
Loans receivable-net | | | 19,587 | | | 13,166 | |
Interest receivable | | | 54 | | | 48 | |
Total assets | | $ | 23,469 | | $ | 20,000 | |
LIABILITIES AND STOCKHOLDER’S EQUITY | | | | | | | |
Total liabilities | | $ | — | | $ | — | |
Stockholders equity | | | | | | | |
Common stock | | | 1 | | | 1 | |
Additional paid-in capital | | | 23,013 | | | 20,013 | |
Retained earnings (deficit) | | | 455 | | | (14 | ) |
Total stockholder’s equity | | | 23,469 | | | 20,000 | |
Total liabilities and stockholder’s equity | | $ | 23,469 | | $ | 20,000 | |
OHBCDC
CONDENSED STATEMENTS OF OPERATIONS
| | Year ended December 31, | |
(In thousands) | | 2006 | | 2005 | | 2004 | |
REVENUE | | | | | | | |
Interest income | | $ | 786 | | $ | 287 | | $ | 3 | |
Other income | | | 2 | | | 1 | | | — | |
EXPENSES | | | | | | | | | | |
Provision for loan losses | | | 75 | | | 166 | | | 7 | |
General and administrative | | | 244 | | | 129 | | | 5 | |
Income (loss) before federal income tax benefit | | | 469 | | | (7 | ) | | (9 | ) |
Federal income tax benefit | | | — | | | 2 | | | — | |
NET EARNINGS (LOSS) | | $ | 469 | | $ | (5 | ) | $ | (9 | ) |
OHBCDC
CONDENSED STATEMENTS OF CASH FLOWS
| | Year ended December 31, | |
(In thousands) | | 2006 | | 2005 | | 2004 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | |
Net earnings (loss) | | $ | 469 | | $ | (5 | ) | $ | (9 | ) |
Provision for losses on loans | | | 75 | | | 166 | | | 7 | |
Increase in interest receivable | | | (6 | ) | | (47 | ) | | (1 | ) |
Net cash provided by (used in) operating activities | | | 538 | | | 114 | | | (3 | ) |
CASH FLOWS USED IN INVESTING ACTIVITIES: | | | | | | | | | | |
Loan disbursements | | | (7,047 | ) | | (12,329 | ) | | (1,214 | ) |
Principal repayments on loans | | | 551 | | | 204 | | | — | |
Net cash used in investing activities | | | (6,496 | ) | | (12,125 | ) | | (1,214 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | |
Investment by Oak Hill Banks | | | 3,000 | | | 13 | | | 1 | |
Qualified equity investment by Oak Hill Banks | | | — | | | 10,000 | | | 10,000 | |
Net cash provided by financing activities | | | 3,000 | | | 10,013 | | | 10,001 | |
Net increase (decrease) in cash and cash equivalents | | | (2,958 | ) | | (1,998 | ) | | 8,784 | |
Cash and cash equivalents at beginning of year | | | 6,786 | | | 8,784 | | | — | |
Cash and cash equivalents at end of year | | $ | 3,828 | | $ | 6,786 | | $ | 8,784 | |
PAGE 46 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
NOTE Q - DETAILS OF OPERATING EXPENSES
The following table details the composition of occupancy and equipment expenses for the years ended December 31, 2006, 2005 and 2004.
| | Year Ended December 31, | |
(In thousands) | | 2006 | | 2005 | | 2004 | |
Depreciation and amortization | | $ | 1,672 | | $ | 1,522 | | $ | 1,146 | |
Rent expense, net of rent income | | | 530 | | | 674 | | | 820 | |
Maintenance contracts and repairs | | | 1,131 | | | 1,260 | | | 921 | |
Other | | | 814 | | | 611 | | | 513 | |
Total | | $ | 4,147 | | $ | 4,067 | | $ | 3,400 | |
The following table details the composition of other operating expenses for the years ended December 31, 2006, 2005 and 2004.
| | Year Ended December 31, | |
(In thousands) | | 2006 | | 2005 | | 2004 | |
ATM processing | | $ | 684 | | $ | 580 | | $ | 498 | |
Supplies | | | 667 | | | 794 | | | 644 | |
Insurance commissions paid | | | 202 | | | 465 | | | 533 | |
Credit and collection expenses | | | 1,094 | | | 631 | | | 772 | |
Dealer participation | | | 613 | | | 571 | | | 315 | |
Marketing | | | 712 | | | 737 | | | 421 | |
Postage | | | 502 | | | 507 | | | 388 | |
Telephone | | | 732 | | | 659 | | | 567 | |
Professional fees | | | 1,383 | | | 1,274 | | | 796 | |
Other | | | 3,458 | | | 2,841 | | | 2,739 | |
Total | | $ | 10,047 | | $ | 9,059 | | $ | 7,673 | |
NOTE R - DETAILS OF OTHER INCOME
The following table details the composition of service charges, fees and other operating income for the years ended December 31, 2006, 2005 and 2004.
| | Year Ended December 31, | |
(In thousands) | | 2006 | | 2005 | | 2004 | |
Service charges on deposits | | $ | 5,392 | | $ | 4,508 | | $ | 3,562 | |
ATM fee income | | | 1,073 | | | 787 | | | 354 | |
Loan servicing fees | | | 932 | | | 955 | | | 918 | |
Miscellaneous customer charges and fees | | | 476 | | | 386 | | | 366 | |
Other | | | 590 | | | 314 | | | 52 | |
Total | | $ | 8,463 | | $ | 6,950 | | $ | 5,252 | |
PAGE 47 OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended December 31, 2006, 2005 and 2004 (continued)
NOTE S - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Company’s quarterly results for the years ended December 31, 2006 and 2005.
2006
| | Three Months Ended | |
(In thousands, except per share data) | | March 31, | | June 30, | | September 30, | | December 31, | |
Total interest income | | $ | 18,971 | | $ | 19,647 | | $ | 20,482 | | $ | 20,643 | |
Total interest expense | | | 9,280 | | | 10,127 | | | 10,846 | | | 11,158 | |
Net interest income | | | 9,691 | | | 9,520 | | | 9,636 | | | 9,485 | |
Provision for losses on loans | | | 200 | | | 1,073 | | | 456 | | | 3,962 | |
Other income | | | 3,287 | | | 3,507 | | | 3,316 | | | 3,021 | |
General, administrative and other expense | | | 8,249 | | | 8,267 | | | 8,455 | | | 9,235 | |
Earnings (loss) before income tax (credits) | | | 4,529 | | | 3,687 | | | 4,041 | | | (691 | ) |
Federal income taxes (credits) | | | 1,035 | | | 693 | | | 861 | | | (605 | ) |
Net earnings (loss) | | $ | 3,494 | | $ | 2,994 | | $ | 3,180 | | $ | (86 | ) |
Basic earnings (loss) per share | | $ | 0.63 | | $ | 0.55 | | $ | 0.59 | | $ | (0.01 | ) |
Diluted earnings per share | | $ | 0.62 | | $ | 0.54 | | $ | 0.58 | | | N/A | |
2005
| | Three Months Ended | |
(In thousands, except per share data) | | March 31, | | June 30, | | September 30, | | December 31, | |
Total interest income | | $ | 15,777 | | $ | 17,090 | | $ | 18,179 | | $ | 18,674 | |
Total interest expense | | | 6,091 | | | 7,104 | | | 7,760 | | | 8,481 | |
Net interest income | | | 9,686 | | | 9,986 | | | 10,419 | | | 10,193 | |
Provision for losses on loans | | | 750 | | | 4,709 | | | 212 | | | 670 | |
Other income | | | 2,539 | | | 3,004 | | | 3,013 | | | 3,082 | |
General, administrative and other expense | | | 6,895 | | | 7,899 | | | 8,144 | | | 8,107 | |
Earnings before income taxes | | | 4,580 | | | 382 | | | 5,076 | | | 4,498 | |
Federal income taxes (credits) | | | 1,320 | | | (219 | ) | | 1,137 | | | 919 | |
Net earnings | | $ | 3,260 | | $ | 601 | | $ | 3,939 | | $ | 3,579 | |
Basic earnings per share | | $ | 0.59 | | $ | 0.10 | | $ | 0.69 | | $ | 0.64 | |
Diluted earnings per share | | $ | 0.57 | | $ | 0.10 | | $ | 0.68 | | $ | 0.63 | |
PAGE 48 OAK HILL FINANCIAL, INC.
OFFICERS
OAK HILL FINANCIAL, INC.
John D. Kidd | | Scott J. Hinsch, Jr. | | David G. Ratz |
Chairman | | Executive Vice President and Chief Retail Banking Officer | | Executive Vice President and Chief Administrative Officer |
| | | | |
R. E. Coffman, Jr. | | D. Bruce Knox | | Dale B. Shafer |
President and CEO | | Executive Vice President and Chief Information Officer | | Interim Chief Financial Officer, Secretary and Treasurer |
| | | | |
Miles R. Armentrout | | | | Gail S. Wilson |
Executive Vice President and Chief Lending Officer | | | | Assistant Secretary |
OAK HILL BANKS
John D. Kidd | | Joseph L. Michel | | Pamela G. Jones |
Chairman | | Senior Vice President | | Vice President |
| | | | |
R.E. Coffman Jr. | | Mikeal V. Mullins | | David T. Kent |
President and CEO | | Senior Vice President | | Vice President |
| | | | |
Miles R. Armentrout | | Dale B. Shafer | | Connie L. King |
Executive Vice President | | Senior Vice President | | Vice President |
| | | | |
Scott J. Hinsch Jr. | | Paul G. Wreede | | Robert L. Lawson |
Executive Vice President | | Senior Vice President | | Vice President |
| | | | |
D. Bruce Knox | | Jeffrey M. Doles | | Marilyn K. Miller |
Executive Vice President | | Regional Vice President | | Vice President |
| | | | |
David G. Ratz | | Connie S. Freeman | | Brian T. Moore |
Executive Vice President | | Regional Vice President | | Vice President |
| | | | |
Timothy W. Brown | | Deborah M. Meyer | | Laura E. Neale |
Senior Vice President | | Regional Vice President | | Vice President |
| | | | |
John L. Cornett | | Daniel E. Mooney | | Clara G. Ridgeway |
Senior Vice President | | Regional Vice President | | Vice President |
| | | | |
Daniel L. Dobbins | | Richard L. Stage | | Terri J. Turner |
Senior Vice President | | Regional Vice President | | Vice President |
| | | | |
Terry L. Franklin | | David E. Barney | | Christopher A. Vaughan |
Senior Vice President | | Vice President | | Vice President |
| | | | |
C. Dale Gahm | | Denise L. Brown | | Wanda L. Walker-Smith |
Senior Vice President | | Vice President | | Vice President |
| | | | |
Ronald G. Hayes | | Sandra L. Crall | | Robert O. Ward |
Senior Vice President | | Vice President | | Vice President |
| | | | |
Micheal W. Lander | | Mary Y. Cronacher | | Gail S. Wilson |
Senior Vice President | | Vice President | | Vice President |
| | | | |
Wayne B. Lindstedt | | Marsha D. Dyer | | Susan E. Adkins |
Senior Vice President | | Vice President | | Assistant Vice President |
| | | | |
Joseph W. Martin | | Joseph R. Givens | | Linda F. Bachtel |
Senior Vice President | | Vice President | | Assistant Vice President |
| | | | |
Fred K. Mavis | | Connie S. Hendren | | David A. Cisco, Jr. |
Senior Vice President | | Vice President | | Assistant Vice President |
| | | | |
Lori A. Michael | | Jason T. Henry | | Rebecca J. Coleman |
Senior Vice President | | Vice President | | Assistant Vice President |
| | | | |
| | Robert H. Huchison | | |
| | Vice President | | |
PAGE 49 OAK HILL FINANCIAL, INC.
OAK HILL BANKS (continued)
Heather A. Cooper | | Lycia D. Maurits | | Ercel B. Sias |
Assistant Vice President | | Assistant Vice President | | Assistant Vice President |
| | | | |
Michael R. Dalton | | Deborah L. Montavon | | Sheila R. Smith |
Assistant Vice President | | Assistant Vice President | | Assistant Vice President |
| | | | |
Ann R. Dennison | | Terry R. Moore | | Bobette B. Stepp |
Assistant Vice President | | Assistant Vice President | | Assistant Vice President |
| | | | |
Callie E. Duhl | | Shirley R. Moran | | Ron C. Stillings |
Assistant Vice President | | Assistant Vice President | | Assistant Vice President |
| | | | |
Carey B. Dunfee | | Steven W. Newberry | | J. Mark Swartz |
Assistant Vice President | | Assistant Vice President | | Assistant Vice President |
| | | | |
Lori A. Edwards | | Michele L. Phillips | | Margo V. Swisher |
Assistant Vice President | | Assistant Vice President | | Assistant Vice President |
| | | | |
Melissa R. Gilliland | | Elaine R. Prater | | Rhonda S. Welch |
Assistant Vice President | | Assistant Vice President | | Assistant Vice President |
| | | | |
Greta J. Hale | | Denise E. Pressler | | Dan R. Wilson |
Assistant Vice President | | Assistant Vice President | | Assistant Vice President |
| | | | |
Ryan J. Hall | | Scott A. Reed | | Thomas C. Wiggershaus |
Assistant Vice President | | Assistant Vice President | | Assistant Vice President |
| | | | |
Denise Hamlin-Miller | | Paula S. Reynolds | | Lisa E. Wyant |
Assistant Vice President | | Assistant Vice President | | Assistant Vice President |
| | | | |
Margaret L. Hartley | | Deborah L. Rhodes | | Kevin R. Christopher |
Assistant Vice President | | Assistant Vice President | | Lending Officer |
| | | | |
Robert W. Hater | | Daniel L. Rice | | Brenda J. Doles |
Assistant Vice President | | Assistant Vice President | | Banking Officer |
| | | | |
Paula L. Henderson | | Paula I. Ruble | | Alan K. Grauvogel |
Assistant Vice President | | Assistant Vice President | | Security Officer |
| | | | |
Terri J. Huber | | Mark J. Sarver | | Karen S. Hencye |
Assistant Vice President | | Assistant Vice President | | Operations Officer |
| | | | |
Kimberly A. Hurd | | David R. Sassenger | | Charlene V. Jacobs |
Assistant Vice President | | Assistant Vice President | | Banking Officer |
| | | | |
Rebecca A. Hughes | | Gerard L. Schumacher | | Mindy J. Jackson |
Assistant Vice President | | Assistant Vice President | | Accounting Officer |
| | | | |
S. Ryan Mapes | | Pamela K. Shaw | | Aaron S. Rykowski |
Assistant Vice President | | Assistant Vice President | | Compliance Officer |
| | | | |
| | | | Matthew S. Walburn |
OAK HILL FINANCIAL | | OAK HILL TITLE | | Banking Officer |
INSURANCE AGENCY, INC. | | AGENCY, LLC | | |
| | | | |
| | | | OAK HILL BANKS |
| | | | COMMUNITY |
| | | | DEVELOPMENT CORP. |
| | | | |
| | | | Scott J. Hinsch, Jr. |
| | | | President and CEO |
| | | | |
| | | | Connie S. Freeman |
| | FINANCIAL SERVICES, INC. | | Executive Director and Secretary |
| | (subsidiary of Oak Hill Banks) | | |
| | | | Miles R. Armentrout |
| | | | Chief Lending Officer |
| | President and CEO | | |
PAGE 50 OAK HILL FINANCIAL, INC.
LOCATIONS (all locations in Ohio)
OAK HILL FINANCIAL, INC. | | 975 E. Main St., Jackson | | OAK HILL FINANCIAL |
| | | | INSURANCE AGENCY, INC. |
14621 State Route 93, Jackson (1) | | 100 Wal-Mart Dr., Jackson | | |
| | | | 135 E. Huron St., Jackson (1) |
| | 2202 S. Smithville Rd., Kettering | | |
| | | | |
OAK HILL BANKS | | 305 W. Sixth Ave., Lancaster | | OAK HILL TITLE AGENCY |
| | | | |
505 Richland Ave., Athens | | 399 W. Front St., Logan | | 14621 State Route 93, Jackson (1) |
| | | | |
4811 Cooper Rd., Blue Ash | | 6501 Mason-Montgomery Rd., Mason | | |
| | | | OAK HILL |
1033 S. Main St., Centerville | | 717 Reading Rd., Mason (1) | | FINANCIAL SERVICES, INC. |
| | | | |
401 Second Ave., Chesapeake | | 115 W. Main St., McArthur | | 717 Reading Rd., Mason (1) |
| | | | |
49 E. Water St., Chillicothe | | 4421 Roosevelt Blvd., Middletown | | |
| | | | OAK HILL BANKS |
1470 North Bridge St., Chillicothe | | 501 W. Main St., Mt. Orab | | |
| | | | DEVELOPMENT CORP. |
27 Stoneridge Dr., Chillicothe | | 201 S. Front St., Oak Hill | | |
| | | | 14621 State Route 93, Jackson (1) |
28 N. Mulberry St., Chillicothe (1) | | 410 N. Front St., Oak Hill (3) | | |
| | | | |
8620 Beechmont Ave., Cincinnati | | 924 Gallia St., Portsmouth | | |
| | | | (1) Administrative office |
5681 Rapid Run Rd., Cincinnati | | 307 State St., Proctorville | | |
| | | | (3) Drive-thru only |
1210 N. Court St., Circleville | | 206 Church St., Richmond Dale | | |
| | | | |
1470 S. Court St., Circleville | | 101 Main St., Ripley | | |
| | | | |
2211 Lake Club Dr., Columbus (2) | | 404 Solida Rd., South Point | | |
| | | | |
310 S. Main St., Franklin | | 715 W. State St., Trenton | | |
| | | | |
500 3rd Ave., Gallipolis | | 109 N. Ohio Ave., Wellston | | |
| | | | |
4928 State Route 125, Georgetown | | 2331 Galena Pike, West Portsmouth | | |
| | | | |
5901 Hoover Rd., Grove City | | 9000 Ohio River Rd., Wheelersburg | | |
| | | | |
311 S. Fifth St., Ironton | | | | |
| | | | |
120 Twin Oaks Dr., Jackson (1) | | | | |
| | | | |
14621 State Route 93, Jackson (1) | | | | |
| | | | |
300 E. Main Street, Jackson | | | | |
PAGE 51 OAK HILL FINANCIAL, INC.
STOCKHOLDER INFORMATION
The common stock of Oak Hill Financial, Inc. (the “Company”) is traded on the Nasdaq Global Select Market under the symbol “OAKF”.
The high and low sales price for the Company’s common stock during each quarter of 2006 and 2005 is as follows:
Quarter Ended | | High | | Low | |
12/31/06 | | $ | 30.05 | | $ | 24.50 | |
9/30/06 | | | 25.90 | | | 24.23 | |
6/30/06 | | | 30.97 | | | 25.00 | |
3/31/06 | | | 33.25 | | | 30.23 | |
12/31/05 | | | 33.59 | | | 28.78 | |
9/30/05 | | | 32.46 | | | 28.68 | |
6/30/05 | | | 34.00 | | | 25.00 | |
3/31/05 | | | 39.11 | | | 33.28 | |
At February 28, 2007, the Company had approximately 2,300 stockholders and 5,329,699 shares of common stock outstanding.
DIVIDENDS
The ability of the Company to pay cash dividends to stockholders is limited by its ability to receive dividends from its subsidiaries. The State of Ohio places certain limitations on the payment of dividends by Ohio state-chartered banks.
The Company declared the following quarterly cash dividends in 2006 and 2005:
Quarter Ended | | Dividend Per Share | |
12/31/06 | | $ | 0.21 | |
9/30/06 | | | 0.19 | |
6/30/06 | | | 0.19 | |
3/31/06 | | | 0.19 | |
12/31/05 | | | 0.19 | |
9/30/05 | | | 0.17 | |
6/30/05 | | | 0.17 | |
3/31/05 | | | 0.17 | |
Future cash and stock dividends will be subject to determination and declaration by the Board of Directors and will consider, among other factors, the Company’s financial condition and results of operations, investment opportunities, capital requirements and regulatory limitations.
STOCK TRANSFER AGENT
Inquiries regarding stock transfer, registration, lost certificates, or changes in name and address should be directed in writing to the Company’s stock transfer agent:
The Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 456-0596
ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Stockholders of Oak Hill Financial, Inc. will be held on April 17, 2007, at 1:00 p.m. at the Ohio State University Extension South District Office, 17 Standpipe Road, Jackson, Ohio (the Extension Office is located just off State Route 93, 1.7 miles south of Jackson).
ANNUAL REPORT ON FORM 10-K
Oak Hill Financial, Inc.’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission is available without charge at www.sec.gov or by written request directed to:
David G. Ratz
Executive Vice President
Oak Hill Financial, Inc.
14621 State Route 93
P. O. Box 688
Jackson, OH 45640
PERFORMANCE GRAPH
See the insert titled “Performance Graph” for the presentation of the Company’s common stock five-year performance as compared to the NASDAQ Composite Index and the SNL $1B - $5B Bank Asset-Size Index.
PAGE 52 OAK HILL FINANCIAL, INC.
BOARD OF DIRECTORS
(seated) Neil S. Strawser, William S. Siders, Donald P. Wood,
Evan E. Davis (Emeritus), Candice D. Peace, H. Grant Stephenson,
Barry M. Dorsey, Ed.D., (standing) Donald R. Seigneur, John D. Kidd,
R. E. Coffman, Jr., Scott J. Hinsch, Jr., D. Bruce Knox.
OAK HILL FINANCIAL AND | D. Bruce Knox (1) | Neil S. Strawser |
OAK HILL BANKS DIRECTORS | Executive Vice President, | President, |
| Oak Hill Financial, Inc. | Parrott and Strawser |
R. E. Coffman, Jr. | and Oak Hill Banks | Properties, Inc. |
President and CEO, | | |
Oak Hill Financial, Inc. | Candice DeClark Peace | Donald P. Wood |
and Oak Hill Banks | Partner, | President, |
| Clark, Schaefer, Hackett & Co. | Don Wood Automotive, Inc. |
Barry M. Dorsey, Ed.D. (1) | | |
Executive Director, | Donald R. Seigneur | (1) Indicates Director of |
New College Institute | Partner, | Oak Hill Financial only. |
| Whited Seigneur Sams and Rahe, CPAs | (2) Indicates Director of |
Scott J. Hinsch, Jr. (2) | | |
Executive Vice President, | William S. Siders | |
Oak Hill Financial, Inc. | | |
and Oak Hill Banks | | DIRECTOR EMERITUS |
| | |
John D. Kidd | H. Grant Stephenson | Evan E. Davis |
Chairman, | | Retired Chairman, |
Oak Hill Financial, Inc. | Porter, Wright, Morris and Arthur | Oak Hill Financial, Inc. |
and Oak Hill Banks | | and Oak Hill Banks |
OAK HILL FINANCIAL, INC.
Corporate Office
14621 State Route 93, P.O. Box 688
Jackson, Ohio 45640
740.286.3283
www.oakf.com
The following Performance Graph compares the performance of the Company with that of the NASDAQ Composite Index and the SNL $1B-$5B Bank Asset-Size Index, each of which is a published industry index. The comparison of the cumulative total return to shareholders for each of the periods assumes that $100 was invested on December 31, 2001 in the common stock of the Company and in the NASDAQ Composite Index and the SNL $1B-$5B Bank Asset-Size Index and that all dividends were reinvested.
| | Period Ending |
Index | | 12/31/01 | | 12/31/02 | | 12/31/03 | | 12/31/04 | | 12/30/05 | | 12/31/06 | |
Oak Hill Financial, Inc. | | | 100.00 | | | 138.76 | | | 199.42 | | | 261.54 | | | 229.02 | | | 198.82 | |
NASDAQ Composite | | | 100.00 | | | 68.76 | | | 103.67 | | | 113.16 | | | 115.57 | | | 127.58 | |
SNL $1B-$5B Bank Index | | | 100.00 | | | 115.44 | | | 156.98 | | | 193.74 | | | 190.43 | | | 220.36 | |