<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
-----------------------
(Mark One)
<TABLE>
<S> <C>
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
Commission File Number 0-26876
OAK HILL FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
</TABLE>
Ohio 31-1010517
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14621 State Route 93
Jackson, Ohio 45640
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (614) 286-3283
-------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common stock, $.50 Stated Value
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The Registrant's revenues for its most recent fiscal year are
$20,401,000.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the sales price of the last trade of
such stock as of March 24, 1997, was $14,585,455. (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed
an admission by the Registrant that such person is an affiliate of the
Registrant.)
As of March 1, 1997, there were issued and outstanding 2,873,500 shares
of Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the year
ended December 31, 1996 are incorporated by reference into Parts I and II.
Portions of the proxy statement dated March 31, 1997 for the annual
meeting of stockholders to be held April 29, 1997 are incorporated by reference
into Part III.
Transitional Small Business Disclosure Format(check one) Yes No X
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<PAGE> 2
PART I
ITEM 1. BUSINESS.
Oak Hill Financial, Inc.
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Oak Hill Financial, Inc., an Ohio corporation ("OAKF" or the
"Company"), is a bank holding company that engages indirectly in the business of
commercial banking, and other permissible activities closely related to banking,
through a wholly owned subsidiary, Oak Hill Banks. OAKF provides management and
similar services for its subsidiary financial institution. Since it does not
itself conduct any operating businesses, OAKF must depend largely upon its
subsidiary for funds with which to pay the expenses of its operation and, to the
extent applicable, any dividends on its outstanding shares of stock. For further
information see Note A of the Notes to Consolidated Financial Statements
appearing in OAKF's Annual Report to Stockholders, which is incorporated by
reference in response to this item.
OAKF was formed in 1981 for the purpose of becoming the parent holding
company of Oak Hill Banks. OAKF is registered as a bank holding company under
the Bank Holding Company Act of 1956, as amended. As such, OAKF is subject to
strict regulation regarding the acquisition of additional financial institutions
and the conduct, through subsidiaries, of non-banking activities (see
"Regulation").
OAKF faces strong competition from both banking and non-banking
institutions. Its banking competitors include local and regional banks and bank
holding companies, as well as some of the largest banking organizations in the
United States. In addition, other types of financial institutions, such as
savings and loan associations and credit unions, also offer a wide range of loan
and deposit services that are directly competitive with those offered by OAKF's
subsidiary. The consumer is also served by brokerage firms and mutual funds that
provide checking services, credit cards, and other services similar to those
offered by OAKF's subsidiary. Major stores compete for loans by offering credit
cards and retail installment contracts. It is anticipated that competition from
non-bank and non-savings and loan organizations will continue to grow.
The range of banking services provided by OAKF's subsidiary to their
customers includes commercial lending, real estate lending, consumer credit,
credit card, and other personal loan financing. OAKF's subsidiary operates under
the direction of its own board of directors and officers.
Lending Activities
- ------------------
GENERAL. The Company generally makes loans in the four counties in
which its branches are located. The Company's principal lending activities are
the origination of (i) conventional one- to four-family residential loans, and
(ii) commercial loans, most of which are secured by real estate located in the
Company's primary market area. These loan categories accounted for approximately
83% of the Company's loan portfolio at December 31, 1996. The Company also makes
consumer loans, including installment loans and second mortgages, and offers
credit cards.
LOAN PORTFOLIO COMPOSITION AND ACTIVITY. The following table sets forth
the composition of the Company's loan portfolio, including loans held for sale,
in dollar amounts and in percentages for each of the last three years, along
with a reconciliation to loans receivable, net.
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<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ -------------------- ------------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of loan:
1-4 family residential loans $ 61,573 32.3% $ 49,870 31.6% $ 39,778 28.9% $ 41,260 33.6% $ 41,009 39.1%
Commercial and other
loans................... 96,214 50.5 72,863 46.2 70,684 51.4 59,862 48.6 48,669 46.4
Consumer loans............. 34,274 18.0 36,052 22.9 28,295 20.5 22,980 18.7 15,971 15.2
Credit cards............... 1,111 0.6 958 0.6 788 0.6 654 0.5 717 0.7
--------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------
Total loans.................. 193,172 101.4 159,743 101.3 139,545 101.4 124,756 101.4 106,366 101.3
LESS:
Allowance for loan losses.. (2,636) (1.4) (2,128) (1.3) (1,897) (1.4) (1,671) (1.4) (1,409) (1.3)
---------- ------- ---------- ------- ----------- ------- ----------- ------- --------- -------
TOTAL LOANS RECEIVABLE, NET.. $190,536 100% $157,615 100% $137,648 100% $123,085 100% $104,957 100%
======== ==== -------- ==== ======== ==== ======== ==== ======== ====
</TABLE>
The following is maturity information with respect to commercial
loans at December 31, 1996.
<TABLE>
<CAPTION>
After one year After five years
Less than one year through five years through ten years After ten years
- -------------------------- ------------------------ ---------------------- ------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Total
- ------------ ---------- ---------- ---------- ---------- ---------- ---------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$38,956 9.18% $27,094 9.05% $26,852 9.22% $3,312 9.52% $96,214
</TABLE>
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. A significant portion
of the Company's lending activity is the origination of permanent conventional
loans secured by one- to four-family residences located within the Company's
primary market area. The Company typically makes adjustable rate mortgage loans
and holds the loans in portfolio. More than 73% the Company's portfolio of
permanent conventional mortgage loans secured by one- to four-family residences
are adjustable rate. The Company also underwrites fixed rate, residential
mortgage loans, but then sells those loans in the secondary market to the FHLMC
or on a servicing-released basis to another financial institution.
The Company makes fixed rate loans on one- to four-family residences up
to 95% of the value of the real estate and improvements (the "loan-to-value" or
"LTV") substantially all of which are sold in the secondary market. Residential
real estate loans are offered by the Company for terms of up to 30 years. The
Company requires private mortgage insurance for the amount of such loans in
excess of 80% the value of the real estate securing such loans.
The aggregate amount of the Company's one- to four-family residential
real estate loans equaled approximately $61.6 million at December 31, 1996 and
represented 32.3% of loans at such date. At such date, loans secured by
residential real estate with outstanding balances of approximately $327,000, or
.5%, of its total one- to four-family residential real estate loan balance,
were more than 90 days delinquent or nonaccruing.
COMMERCIAL LOANS. The Company is also active in commercial lending,
primarily to smaller businesses in the Company's primary market area. These
loans are typically secured by commercial real estate and priced in relation to
the prime rate. Such loans generally have terms of up to 15 years and
loan-to-value ratios of up to 75%. To a much
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lesser degree, the Company will also make unsecured commercial loans, which are
also typically priced at spreads to prime and have maturities of up to one year.
Loan officers review the financial statements, appraisals of the
collateral, and other related documents before recommending funding of a
commercial loan. The loan officer and the approving officer or committee then
determines that there is sufficient income to cover this and other loan
payments, that the collateral is of adequate liquidation value, that the
applicant has a good payment history and is capable of performing the
requirements of the loan. Other reviews and analysis are done as appropriate,
depending upon the complexity of the credit request.
Although a risk of nonpayment exists with respect to all loans, certain
specific types of risks are associated with different types of loans. The
primary risks associated with commercial loans are the quality of the borrower's
management and the impact of national and regional economic factors. The Company
mitigates these risks by maintaining a close working relationship with its
borrowers, by obtaining cross-collateralization and personal guarantees of its
loans, and by diversification within its loan portfolio.
Due to the nature of the Company's customer base, real estate is
frequently a material component of the collateral for its loans. The expected
source of repayment of these loans is generally the operations of the borrower's
business, but the real estate provides an additional measure of security. These
risks, however, are generally mitigated by the fact that real estate is
considered additional collateral on most of the Company's commercial loans and
such properties are typically owner-occupied.
Risks associated with real estate loans include fluctuating land
values, changes in tax policies, and concentration of loans within the Company's
market area. The Company mitigates these risks by generally providing loans to
experienced commercial real estate owners and developers. The risk is further
mitigated by the number of commercial real estate loans made to the user of the
property.
The aggregate amount of the Company's commercial loans without real
estate as primary or secondary collateral equaled approximately $20.0 million at
December 31, 1996, and represented 10.3% of loans at such date. At such date,
commercial loans that were more than 90 days delinquent or nonaccruing totaled
approximately $246,000 aggregate outstanding balances, or .01% of its commercial
loan portfolio. The aggregate amount of the Company's commercial loans with real
estate as primary or secondary collateral was approximately $60.5 million at
December 31, 1996, and at such date, approximately $14,000 in outstanding
balances, or .02% of such loans were delinquent or nonaccruing.
CONSUMER LOANS. The Company offers several consumer loan products:
installment loans, home equity loans and credit cards.
The Company has a good relationship with several car dealerships in its
market area, and as a result is able to do some financing of new and used cars
through these relationships. The Company only finances cars up to six years old
and requires a down payment of 10.0%. These loans generally have fixed rates and
maturities of three to four years.
To a lesser degree, the Company makes small unsecured loans to
creditworthy individuals. These loans are typically between $2,000 and $5,000 at
fixed rates with maturities of less than five years. The Company also offers a
home equity loan product and, as a result of consumer demand, a credit card
product to its customers. Both products are underwritten to the same standards
as any of the Company's other consumer loan products.
Loan officers underwrite installment loan and other consumer loan
requests in such a manner to assure compliance with the various regulations and
the Company's underwriting standards. Payment history on applicants is very
important on these smaller loans, and is checked through in-house records as
well as credit bureaus. Normally collateral, such as an automobile, is taken as
security and the value is checked through the N.A.D.A. book or another valuation
service. Income must be adequate to cover all monthly payments including the
proposed loan.
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At December 31, 1996, the Company had approximately $35.4 million in
its consumer loan portfolio, which was 18.6% of the Company's total loans.
Approximately $235,000 of consumer loans were over 90 days delinquent or
nonaccruing on that date, which represented .09% of the consumer loan portfolio.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by the Company's lending
staff and walk-in customers.
Underwriting guidelines for all branches and loan types are set by
senior management at the home office. Loan processing and underwriting, however,
are decentralized. Loan applications are generally processed and underwritten at
the branch level. Loan officers and branch managers review the applications, as
well as credit bureau reports, appraisals, financial information, verifications
of income, and other documentation concerning the credit-worthiness of the
borrower, as applicable to each loan type.
Commercial loans are underwritten at the branch level with oversight by
area managers for each county. This decentralization of the loan underwriting
process allows loan officers and branch managers to respond more quickly to
applicants, and better serve its customers. The Company also benefits from this
decentralization in that every branch manager is well trained to originate all
types of loans, again allowing the branches to better serve their customers and
cross-sell the Company's loan products.
Branch managers have the authority to approve loans which meet the
underwriting criteria set by management up to $120,000, and area managers have
authority for amounts up to $300,000. Any loan over $300,000 must be submitted
for approval by senior management.
INCOME FROM LENDING ACTIVITIES. The Company earns interest and fee
income from its lending activities. The Company earns income from fees for
originating loans and for making commitments to originate loans and loan
participations. Certain of these fees net of origination costs are amortized
over the life of the respective loan. The Company also receives loan fees
related to existing loans, which include late charges. Income from loan
origination and commitment fees and discounts varies with the volume and type of
loans and commitments made and with competitive and economic conditions. Note
A-4 to the Consolidated Financial Statements contains a discussion of the manner
in which fees and income are recognized for financial reporting purposes.
Nonperforming Loans
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GENERAL. Late charges on residential mortgages are assessed by the
Company if a payment is not received either by the 10th day following its due
date or 15th day if the loan has been sold in the secondary market and is being
serviced by the Company. Late charges on installment loans and commercial loans
are assessed by the Company if a payment is not received by the 10th day
following its due date. Any borrower whose payment was not received by this time
is mailed a past due notice. If the loan is still delinquent after a second past
due notice is mailed (generally around the 20th day of delinquency), a branch
employee will attempt to contact the customer to resolve any problem that might
exist.
When an advanced stage of delinquency appears (generally around the
60th day of delinquency) and if repayment cannot be expected within a reasonable
amount of time or a repayment agreement has not been entered into, the Bank will
contact an attorney and request that the required 30-day prior notice of
foreclosure or repossession proceedings be prepared and delivered to the
borrower so that, if necessary, foreclosure proceedings may be initiated shortly
after the loan is 90 days delinquent. This procedure has historically aided in
achieving a low level of nonperforming loans and, as of December 31, 1996, only
$808,000 or .42% of the Bank's total loan portfolio was 90 days or more
past due. As of December 31, 1996, the Company's level of nonperforming assets
to total assets was .33%.
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If a credit card account becomes 10 days delinquent, a notice is sent to
the account holder demanding that the payment be made so that the card is
current. Another notice is sent to the cardholder if the account becomes 20 days
delinquent. If payment is not received within 30 days, authorization requests
are denied, a message appears on the cardholder's account statement and a
follow-up telephone call is made. These telephone collection efforts and
statement messages continue until the account is deemed uncollectible. Legal
action is considered during this time. As of December 31, 1996, approximately
$15,000 in outstanding balances, or 1.4% of credit card loans were
nonperforming.
On December 31, 1996, the Bank held no real estate and other repossessed
collateral acquired as a result of foreclosure, voluntary deed, or other means.
When the Bank has such real estate, it is classified as "other real estate
owned" until it is sold. When property is so acquired, it is recorded at the
lower of cost (the unpaid principal balance at the date of acquisition plus
foreclosure and other related costs) or fair value less estimated selling
expense. Any subsequent write-down resulting therefrom is charged to expense.
Generally, unless the property is a one- to four-family residential dwelling and
well-collateralized, interest accrual ceases in 90 days but no later than the
date of acquisition. All costs incurred from that date in maintaining the
property are expensed. Other real estate owned is appraised during the
foreclosure process prior to the time of acquisition, and losses are recognized
for the amount by which the book value of the related mortgage loan exceeds the
estimated net realizable value of the property.
Not categorized as nonperforming loans are certain potential problem
loans that management believes are adequately secured and for which no material
loss is expected, but as to which certain circumstances may cause the borrowers
to be unable to comply with the present loan repayment terms at some future
date. At December 31, 1996 there were no such potential problem loans.
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<TABLE>
<CAPTION>
The following is a summary of the Company's loan loss experience and selected ratios for the periods presented.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------ ------------ ------------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
(beginning of period)................. $ 2,128 $ 1,897 $ 1,671 $ 1,409 $ 1,095
Loans charged off:
1-4 family residential real estate.... 1 29
Multi-family and commercial
real estate......................... - 5 - 22 -
Commercial and industrial loans....... 63 72 3 154 72
Consumer loans ...................... 282 239 131 121 167
----------- ----------- ---------- -------- -----------
Total loans charged off............. 346 316 134 297 268
----------- ----------- ---------- -------- -----------
Recoveries of loans previously
charged off:
1-4 family residential real estate... 9 1
Multi-family and commercial
real estate......................... - 33 1 18 -
Commercial and industrial loans....... - 1 2 34 1
Consumer loans ...................... 85 85 88 81 89
----------- ------------- ---------- ---------- -----------
Total recoveries.................... 94 119 91 133 91
----------- ------------ ---------- --------- -----------
Net loans charged off..................... 252 197 43 164 177
Provision for loan losses................. 760 428 269 426 491
---------- ------------ ---------- --------- ------------
Allowance for loan losses
(end of period)......................... $ 2,636 $ 2,128 $ 1,897 $ 1,671 $ 1,409
========= ---------- ---------- ---------- =========
Loans outstanding:
Average, net.......................... $168,370 $149,237 $129,524 $113,762 $ 93,165
End of period......................... $193,171 $159,743 $139,545 $124,756 $106,366
Ratio of allowance for loan losses to loans
outstanding at end of period 1.36% 1.33% 1.36% 1.34% 1.32%
Ratio of net charge-offs to average 0.15% 0.13% 0.03% 0.14% 0.19%
loans outstanding ......................
</TABLE>
At December 31, 1996, 1995 and 1994 the Company had nonaccrual loans
totaling $698,000, $39,000, and $174,000, respectively. Interest income that
would have been recognized if such loans had performed in accordance with
contractual terms totaled approximately $62,000, $1,000, and $15,000 for the
years ended December 31, 1996, 1995 and 1994. There was no interest income
recognized on such loans during any of the periods.
ALLOWANCE FOR LOAN LOSSES. The amount of the allowance for loan losses
is based on management's analysis of risks inherent in the various segments of
the loan portfolio, management's assessment of known or potential problem
credits which have come to management's attention during the ongoing analysis of
credit quality, historical loss experience, current and anticipated economic
conditions and other factors. If actual circumstances and losses differ
substantially from management's assumptions and estimates, such allowance for
loan losses may not be sufficient to absorb all future losses, and net earnings
could be adversely affected. Loan loss estimates are reviewed periodically, and
adjustments, if any, are reported in earnings in the period in which they become
known. In addition, the Company maintains a portion of the allowance to cover
potential losses inherent in the portfolio which have not been specifically
identified.
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Although management believes that it uses the best information available
to make such determinations and that the allowance for loan losses is adequate
at December 31, 1996, future adjustments to the allowance may 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. A downturn in the Southeastern Ohio economy and employment
levels could result in the Company experiencing increased levels of
nonperforming assets and charge-offs, increased provisions for loan losses and
reductions in income. Additionally, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the recognition of additions to the
allowance based on their judgment of information available to them at the time
of their examination.
<TABLE>
<CAPTION>
The following table summarizes nonperforming assets by category.
1996 1995 1994 1993 1992
------ ---------- --------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate:
Nonaccrual.................................. $ 235 $ 15 $ - $ 197 $ 76
Past due 90 days or more (1)................ 92 275 76 35 236
Commercial and industrial:
Nonaccrual.................................. 246 0 150 197 284
Past due 90 days or more (1)................ - 680 - - -
Consumer and other:
Nonaccrual.................................. 217 24 24 25 20
Past due 90 days or more(1)................. 18 130 11 37 12
----------- ---------- ----------- ----------- -----------
Total nonperforming loans................ $ 808 $ 1,124 261 491 $ 628
Other real estate owned......................... - - - - -
------------- ------------- ------------- ------------- -----------
Total nonperforming assets............... $ 808 $ 1,124 $ 261 $ 491 $ 628
=========== ========== ----------- ----------- ===========
Loans outstanding............................... $193,171 $159,743 $139,545 $124,756 $106,366
Allowance for possible loan losses
to total loans................................ 1.36% 1.33% 1.36% 1.34% 1.32%
Nonperforming loans to total
loans......................................... 0.41 0.7 0.19 0 0.59
Nonperforming assets to total assets............ 0.32 0.53 0.14 0 0.41
Allowance for possible loan losses to 326.2% 189.3% 726.8% 340.3% 224.4%
nonperforming loans...........................
- ----------------------
<FN>
(1) Represents accruing loans delinquent greater than 90 days which are
considered by management to be well secured and in the process of collection.
</TABLE>
As of December 31, 1996 the Company had no loans that were not included
in the nonaccrual, past due 90 days or more or restructured categories where the
borrowers were experiencing potential credit problems that raised doubts as to
the ability of the borrowers to comply with the present loan repayment terms.
CLASSIFIED ASSETS. The FDIC regulations on classification of assets
require commercial banks to classify their own assets and to establish
appropriate general and specific allowances for losses, subject to FDIC review.
These regulations are designed to encourage management to evaluate assets on a
case-by-case basis and to discourage automatic classifications. Assets
classified as substandard or doubtful must be evaluated by management to
determine a reasonable general loss reserve which is included in total capital
for purposes of the bank's risk-based capital requirement, but which is not
included in core capital or tangible capital or in capital under generally
accepted
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accounting principles. Assets classified as loss must either be written off or
reserved for by a specific allowance which is not counted toward capital for
purposes of any of the regulatory capital requirements.
INVESTMENTS. Investment securities primarily satisfy the Company's
liquidity needs and provide a return on residual funds after lending activities.
Pursuant to the Company's written investment policy, investments may be in
interest-bearing deposits, U.S. Government and agency obligations, state and
local government obligations and government-guaranteed mortgage-backed
securities. The Company does not make any investments in securities which are
rated less than investment grade by a nationally recognized statistical rating
organization. A goal of the Company's investment policy is to limit interest
rate risk wherever possible.
All securities-related activity is reported to the Board. General changes
in investment strategy are required to be reviewed and approved by the Board.
The Company's senior management can purchase and sell securities on behalf of
the Company in accordance with the Company's stated investment policy.
The following table sets forth the carrying value of the Company's
investment portfolio at the dates indicated and includes investments designated
as available for sale.
<TABLE>
<CAPTION>
At December 31
---------------------------------------------------------
1996 1995 1994
---------------- ------------- ----------------
(Dollars In thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations..................... $ -- $ -- $ 11,014 $ 17,226
State and local government obligations...................... -- -- 1,927 821
--------- --------- -------- ---------
Total investment securities held to maturity......... -- -- 12,941 18,047
Investment securities designated as available for sale..... 33,617 25,755 13,163 --
------- ------- --------- -------
Total investment securities.......................... $33,617 $25,755 $26,104 $18,047
======= ======= ======= =======
</TABLE>
The following table reflects the maturities of the Company's investment
securities at December 31, 1996.
<TABLE>
<CAPTION>
Due After Five
Due in One Year Due After One Year Years Through
or Less Through Five Years Ten Years Due After Ten Years
---------------- ------------------ --------------- --------------------
Investment Securities Amount Rate Amount Rate Amount Rate Amount Rate Total
--------------------- ------ ---- ------ ---- ------ ---- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
U.S. Government and
agency obligations.... $13,019 5.63% $17,526 6.16% -- -- $25 -- $30,570
Municipal obligations... 1,094 4.22 1,266 4.59 687 5.24% 3,047
------- ---- ------- ---- ------ ---- --- -- -------
Total investment securities $14,113 5.52% $18,792 6.05% $ 687 5.24% $25 -- $33,617
======= ==== ======= ==== ====== ==== === =======
</TABLE>
The following table sets forth the carrying value of the Company's
mortgage-backed securities portfolio, including securities designated as
available for sale, at the dates indicated:
<TABLE>
At December 31
------------------------------------------------------------------------
1996 1995 1994 1993
---------------- ------------- ---------------- ----------
(Dollars In thousands)
<S> <C> <C> <C> <C>
Federal National Mortgage
Association (FNMA)........................ $ 473 $ 628 $1,972 $ 2,564
</TABLE>
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<PAGE> 10
<TABLE>
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation (FHLMC)....................... 2,583 2,493 3,128 4,281
Government National Mortgage Association (GNMA)... 828 1,025 1,156 1,335
Collateralized mortgage obligations............... - - 1,653 4,228
--------- --------- ------- --------
Total mortgage-backed securities.................. $ 3,884 $ 4,146 $ 7,909 $12,408
======= ======= ======= =======
</TABLE>
The following table sets forth the amount of the Company's
mortgage-backed securities portfolio having fixed rates and the amount having
adjustable rates at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993
----------------- ----------------- -------------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate....................... $ 2,583 66.5% $ 2,493 60.1% $ 5,633 71.2% $ 8,771 70.7%
Adjustable rate.................. 1,301 33.5 1,653 39.9 2,276 28.8 3,637 29.3
------ ---- ------ ----- ------- ----- ------- ----
Total mortgage-backed
securities..................... $3.884 100.0 $ 4,146 100.0% $ 7,909 100.0% $12,408 100.0%
====== ===== ======= ====== ======= ===== ======= =====
</TABLE>
The following table reflects the estimated principal repayments or
repricing of the Company's mortgage-backed securities at December 31, 1996.
<TABLE>
<CAPTION>
Due After Five
Due in One Year Due After One Year Years Through
or Less Through Five Years Ten Years Due After Ten Years
--------------------- ------------------ --------------------- ----------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Investment Securities Amount Rate Amount Rate Amount Rate Amount Rate Total
- --------------------- -------- ---------- --------- -------- -------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
Fixed rate................ $461 7.50% $1,622 7.49% - - % $ 500 8.00% $2,583
Variable rate........... - - - - - - 1,301 7.59 1,301
---------- --------- --------- -------- ----- --- ------- ---- --------
Total mortgage-backed
securities.............. $461 7.50% $1,622 7.49% $ - - % $ 1,801 7.71% $3,884
===== ===== ====== ====== ==== === ======= ==== =======
</TABLE>
Source of Funds
- ---------------
DEPOSIT ACCOUNTS. Savings deposits are a major source of the Company's
funds. The Company offers a number of alternatives for depositors designed to
attract both commercial and regular consumer checking and savings including
regular and money market savings accounts, NOW accounts, and a variety of
fixed-maturity, fixed-rate certificates with maturities ranging from seven days
to 120 months. The Company also provides travelers' checks, official checks,
money orders, ATM services and IRA accounts.
- 10 -
<PAGE> 11
Effective January 16, 1995, the Company began offering a large balance
deposit account product known as the Premium Investment Account. The account is
a money market deposit account under applicable FDIC insurance regulations; it
pays an adjustable (quarterly) interest rate equal to a 13-week treasury bill
rate; there is no minimum or maximum interest rate. A minimum balance of $10,000
is required to open the account. Interest is earned on the account only so long
as the balance is greater than $5,000.
<TABLE>
<CAPTION>
The distribution of the Company's deposit accounts by type and rate is set forth in the following table.
December 31,
Type of Account -----------------------------------------------------------------------------------
and 1996 1995 1994 1993
------------------- ----------------- --------------------- ----------------
Interest Rate Amount Percent Amount Percent Amount Percent Amount Percent
--------------- ------ ------- ------ ------- ------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposit accounts.............. $ 22,532 10.8% $ 19,220 10.6% $ 17,149 10.5% $16,782 10.5%
Savings accounts..................... 34,169 16.3 34,335 18.9 3 8,042 23.2 39,289 24.7
NOW accounts......................... 20,464 9.8 18,912 10.4 20,012 12.2 22,906 14.4
Money market deposit accounts........ 4,127 2.0 4,407 2.4 6,076 3.7 4,444 2.8
Premium investment accounts.......... 22,696 10.8 14,198 7.8 - - - -
Select investment accounts........... 1,267 .05 - - - - - -
-------- -------- -------- ----- -------- ----- ------- -------
Total transaction accounts........... 105,255 50.2 91,072 50.1 81,279 49.6 83,421 52.4
CERTIFICATES:
2.00 - 4.99%...................... 19,020 9.1 15,939 8.7 57,005 34.8 65,760 41.3
5.00 - 6.99%...................... 81,104 38.7 67,989 37.4 24,930 15.3 9,093 5.7
7.00 - 9.00%...................... 4,214 2.0 6,889 3.8 506 0.3 950 0.6
-------- ------ -------- ------ -------- ------ ------- -----
Total certificates of deposit........ 104,338 49.8 90,817 49.9 82,441 50.4 75,803 47.6
-------- ------ -------- ------ -------- ----- -------- -----
Total deposits....................... $209,593 100.0% $181,889 100.0% $163,720 100.0% $159,224 100.0%
======== ======= ======== ======= ======== ===== ======== =====
</TABLE>
The following table presents, by various interest rate categories,
certain information concerning maturities of the Company's certificates of
deposit as of December 31, 1996.
<TABLE>
<CAPTION>
Within One to Over
Certificate of Deposit Accounts One Year Three Years Three Years Total
- ------------------------------- -------- ----------- ----------- -----
(In thousands)
<S> <C> <C> <C> <C>
4.00% and less.............................. $ 1,144 $ 12 $ -0- $ 1,156
4.01% to 5.00%.............................. 15,860 2,645 59 18,564
5.01% to 6.00%.............................. 28,097 29,701 1,648 59,446
6.01% to 7.00%.............................. 9,092 11,505 361 20,958
7.01% to 8.00%.............................. 4,058 -0- 141 4,199
8.01% to 9.00%.............................. 15 -0- -0- 15
-------- -------- ------ --------
Total $58,266 $43,863 $2,209 $104,338
======= ======= ====== ========
</TABLE>
-11-
<PAGE> 12
The following table sets forth the amount of the Company's certificates
of deposit that are $100,000 or greater by time remaining until maturity as of
December 31, 1996.
<TABLE>
<CAPTION>
Amount
------
Maturity Period (In thousands)
---------------
<S> <C>
Three months or less $ 8,162
Over three through six months 4,200
Over six through 12 months 5,775
Over 12 months 12,929
-------
Total $31,066
=======
</TABLE>
BORROWINGS. Deposits and repayment of loan principal are the primary
source of funds for the Company's lending activities and other general business
purposes. However, during periods when the supply of lendable funds cannot meet
the demand for loans, the Company can obtain funds necessary through loans
(advances) from the FHLB of Cincinnati. Advances from the FHLB may be on a
secured or unsecured basis depending upon a number of factors, including the
purpose for which the funds are being borrowed and existing advances
outstanding. The Company typically only utilizes FHLB advances to fund long-term
fixed rate commercial loans. As of December 31, 1996, the Bank had outstanding
FHLB advances totaling $13.6 million. See Note F to the consolidated financial
statements for additional information regarding FHLB advances. The Company also
has arrangements to borrow funds from commercial banks. The Company does not
solicit brokered deposits.
The following table sets forth the maximum amount of the Company's FHLB
advances and other borrowings outstanding at any month end during the periods
shown and the average aggregate balances of FHLB advances and other borrowings
for such periods:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Maximum amount outstanding:
FHLB advances $13,604 $7,529 $5,000 $ --
Other borrowings -- -- 2,100 2,100
Average amount of FHLB advances and
other borrowings outstanding 11,464 7,240 3,138 2,100
Weighted average interest rate of total 6.71% 7.30% 10.55% 11.71%
borrowings based on quarter end balances
</TABLE>
The following table sets forth certain information as to the Company's
FHLB advances and other borrowings at the dates indicated:
- 12 -
<PAGE> 13
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
FHLB advances $13,604 $7,529 $4,956 $ --
Other borrowings -- -- 2100 2100
------ ------ ------ ------
Total borrowings $13,604 $7,529 $7,056 $2,100
======= ====== ====== ======
</TABLE>
Personnel
- ---------
At December 31, 1996, OAKF and its subsidiary employed 90 persons on a
full-time basis and 26 persons on a part-time basis.
Executive Offices
- -----------------
OAKF's executive office is located at 14621 State Route 93, Jackson, Ohio
45640 and its telephone number is (614) 286-3283.
Subsidiary
- ----------
OAKF owns all of the outstanding stock of Oak Hill Banks, an Ohio
state-chartered bank, which was founded in 1902.
Regulation
- ----------
Oak Hill Banks, as an Ohio state-chartered bank, is subject to
supervision and regular examination by the Superintendent of Financial
Institutions of the State of Ohio. It is insured by the Federal Deposit
Insurance Corporation and is subject to the provisions of the Federal Deposit
Insurance Act. To the extent that the information below consists of summaries of
certain statutes or regulations it is qualified in its entirety by reference to
the statutory or regulatory provisions described.
OAKF is subject to the provisions of the Bank Holding Company Act of
1956, as amended (the "Act"), which requires a bank holding company to register
under the Act and to be subject to supervision and examination by the Board of
Governors of the Federal Reserve System. As a bank holding company, OAKF is
required to file with the Board of Governors an annual report and such
additional information as the Board of Governors may require pursuant to the
Act. The Act requires prior approval by the Board of Governors of the
acquisition by a bank holding company, or any subsidiary thereof, of 5% or more
of the voting stock or substantially all the assets of any bank within the
United States.
As a bank holding company located in the State of Ohio, OAKF is not
permitted to acquire a bank or other financial institution located in another
state unless such acquisition is specifically authorized by the statutes of such
state. The Act further provides that the Board of Governors shall not approve
any such acquisition that would result in a monopoly or would be in furtherance
of any combination or conspiracy to monopolize or attempt to monopolize the
business of banking in any part of the United States, or the effect of which may
be to substantially lessen competition or to create a monopoly in any section of
the country, or that in any other manner would be in restraint of trade, unless
the anti-competitive effects of the proposed transaction are clearly outweighed
in the public interest by the probable effect of the transaction in meeting the
convenience and needs of the community to be served.
- 13 -
<PAGE> 14
The Act also prohibits a bank holding company, with certain exceptions,
from acquiring 5% or more of the voting stock of any company that is not a bank
and from engaging in any business other than banking or performing services for
its banking subsidiary without the approval of the Board of Governors. In
addition, the acquisition of a thrift institution must be approved by the Office
of Thrift Supervision pursuant to the savings and loan holding company
provisions of the Home Owners' Loan Act of 1933, as amended by FIRREA. The Board
of Governors is also authorized to approve, among other things, the ownership of
shares by a bank holding company in any company the activities of which the
Board of Governors has determined to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. The Board of
Governors has, by regulation, determined that certain activities, including
mortgage banking, operating small loan companies, factoring, furnishing certain
data processing operations, holding or operating properties used by banking
subsidiaries or acquired for such future use, providing certain investment and
financial advice, leasing (subject to certain conditions) real or personal
property, providing management consulting advice to certain depository
institutions, providing securities brokerage services, arranging commercial real
estate equity financing, underwriting and dealing in government obligations and
money market instruments, providing consumer financial counseling, operating a
collection agency, owning and operating a savings association, operating a
credit bureau and conducting certain real estate investment activities and
acting as insurance agent for certain types of insurance, are closely related to
banking within the meaning of the Act. It also has determined that certain other
activities, including real estate brokerage and syndication, land development,
and property management are not related to credit transactions and are not
permissible. The Act and the regulations of the Board of Governors prohibit a
bank holding company and its subsidiaries from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services. The Act also imposes certain restrictions
upon dealing by affiliated banks with the holding company and among themselves
including restrictions on interbank borrowing and upon dealings in respect to
the securities or obligations of the holding company or other affiliates.
The earnings of banks, and therefore the earnings of OAKF (and its
subsidiary), are affected by the policies of regulatory authorities, including
the Board of Governors of the Federal Reserve System. An important function of
the Federal Reserve Board is to regulate the national supply of bank credit in
an effort to prevent recession and to restrain inflation. Among the procedures
used to implement these objectives are open market operations in U.S. Government
securities, changes in the discount rate on member bank borrowings, and changes
in reserve requirements against member bank deposits. These procedures are used
in varying combinations to influence overall growth and distribution of bank
loans, investments and deposits, and their use also may affect interest rates
charged on loans or paid for deposits. Monetary policies of the Federal Reserve
Board have had a significant effect on the operating results of commercial banks
in the past and are expected to continue to do so in the future. The effect, if
any, of such policies upon the future business and earnings of OAKF cannot
accurately be predicted. OAKF makes no attempt to predict the effect on its
revenues and earnings of changes in general economic, industrial, and
international conditions or in legislation and governmental regulations.
Business Risks
- --------------
OAKF desires to take advantage of the new "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. The statements contained in
this report which are not historical facts are "forward looking statements" that
involve various important risks, uncertainties, and other factors which could
cause OAKF's actual results for 1997 and beyond to differ materially from those
expressed in such forward looking statements. These important factors include,
without limitation, the risks and factors set forth below, as well as other
risks previously disclosed in OAKF's filings with the Securities and Exchange
Commission.
Growth Strategy. OAKF has pursued and continues to pursue a strategy of
growth. The success of OAKF's growth strategy will depend largely upon its
ability to manage its credit risk and control its costs while providing
competitive
- 14 -
<PAGE> 15
products and services. This growth strategy may present special risks, such as
the risk that OAKF will not efficiently handle growth with its present
operations, the risk of dilution of book value and earnings per share as a
result of an acquisition, the risk that earnings will be adversely affected by
the start-up costs associated with establishing new products and services, the
risk that OAKF will not be able to attract and retain qualified personnel needed
for expanded operations, and the risk that its internal monitoring and control
systems may prove inadequate.
Potential Impact of Changes In Interest Rates. OAKF's results of operations are
dependent to a large degree on net interest income, the difference between
interest income from loans and investments and interest expense on deposits and
borrowings. One common measurement of interest rate risk, known as the interest
rate gap, is the difference between interest-earning assets and interest-bearing
liabilities repricing or maturing within various time frames, expressed as a
percentage of total assets. At December 31, 1996, OAKF had a cumulative interest
rate gap of negative 1.56% for one year. As a result of this negative interest
rate gap position, the rate of increase in the costs associated with OAKF's
deposits could be expected to increase more rapidly than the rate of increase in
OAKF's income from loans and investments in a period of rising interest rates.
Consequently, a significant increase in market rates of interest could adversely
affect net interest income. Conversely, a significant decrease in market rates
of interest could result in increased net interest income.
Control by Management; Anti-Takeover Provisions. Evan E. Davis and John D. Kidd
(the "Principal Stockholders") own in the aggregate approximately 60% of the
outstanding shares of Common Stock of OAKF. Accordingly, the Principal
Stockholders will retain the power to elect the entire Board of Directors of
OAKF and to determine the outcome of any other matters submitted to OAKF's
stockholders for approval. In addition to Ohio and federal laws and regulations
governing changes in control of insured depository institutions, OAKF's Articles
of Incorporation and Code of Regulations contain certain provisions which may
delay or make more difficult an acquisition of control of OAKF. For example,
OAKF's Articles of Incorporation do not exempt OAKF from the provisions of
Ohio's "control share acquisition" and "merger moratorium" statutes. Assuming
that the Principal Stockholders continue to retain at least a majority of the
outstanding voting shares of OAKF, such ownership position could be expected to
deter any prospective acquiror from seeking to acquire ownership or control of
OAKF, and the Principal Stockholders would be able to defeat any acquisition
proposal that requires approval of OAKF's stockholders, if the Principal
Stockholders chose to do so. In addition, the Principal Stockholders may make a
private sale of shares of common stock of OAKF which they own, including to a
person seeking to acquire ownership or control of OAKF. OAKF has 3,000,000
shares of authorized but unissued preferred stock, par value $ .01 per share,
which may be issued in the future with such rights, privileges and preferences
as are determined by the Board of Directors of OAKF These shares may have the
effect of making more difficult or discouraging any acquisition of OAKF which is
determined to be undesirable by the Board of Directors.
Credit Risk; Exposure To Economic Conditions in Jackson, Scioto and Ross
Counties, OhiO. A significant risk facing lenders generally is credit risk, that
is, the risk of losing principal and accrued interest if borrowers fail to
perform according to the terms of the loan agreements. The Bank's concentration
of loans in Jackson, Scioto, and Ross Counties, Ohio, exposes it to risks
resulting from changes in the local economies. Per capita income in Jackson,
Scioto and Ross Counties in 1993 was less than the statewide average, while
unemployment in the same three counties was higher than the statewide
unemployment level, according to recent estimates. While the Bank's market area
for loans extends throughout most of southeastern Ohio and Warren County, Ohio,
its lending operations are concentrated in Jackson, Scioto, and Ross Counties,
Ohio.
Competition. Banking institutions operate in a highly competitive environment.
OAKF competes with other commercial banks, credit unions, savings institutions,
finance companies, mortgage companies, mutual funds, and other financial
institutions, many of which have substantially greater financial resources than
OAKF. Certain of these competitors offer products and services that are not
offered by OAKF and certain competitors are not subject to the same extensive
laws
- 15 -
<PAGE> 16
and regulations as OAKF. Additionally, consolidation of the financial services
industry in Ohio and in the Midwest in recent years has increased the level of
competition. Recent and proposed regulatory changes may further intensify
competition in OAKF's market area.
Absence of Trading Market; Determination of Offering Price; Dilution. Prior to
the initial public offering of the common stock of OAKF, there has been no
market for the Common Stock and there can be no assurance that an active trading
market will develop or be sustained. Accordingly, no assurance can be given as
to the liquidity of the market for the Common Stock or the price at which any
sales may occur, which price will depend upon, among other things, the number of
holders thereof, the interest of securities dealers in maintaining a market in
the Common Stock and other factors beyond the control of OAKF. The market price
of the Common Stock could be subject to significant fluctuations in response to
variations in operating results and other factors.
Shares Eligible for Future Sale. The market price of the Common Stock could be
adversely affected by the sale of additional shares of Common Stock owned by
OAKF's current stockholders. The Principal Stockholders are permitted to sell
certain limited amounts of Common Stock without registration, pursuant to Rule
144 under the Securities Act of 1933, as amended (the "Securities Act").
Dependence on Management. OAKF's success depends to a great extent on its senior
management, including its Chairman, Evan E. Davis; President, John D. Kidd;
Executive Vice President, Richard P. LeGrand; and Executive Vice President, H.
Tim Bichsel. The loss of their individual services could have a material adverse
impact on OAKF's financial stability and its operations. In addition, OAKF's
future performance depends on its ability to attract and retain key personnel
and skilled employees, particularly at the senior management level. OAKF's
financial stability and its operations could be adversely affected if, for any
reason, one or more key executive officers ceased to be active in OAKF's
management. OAKF does not own or currently plan to acquire "key man" life
insurance on the lives of any of its key employees.
ITEM 2. PROPERTIES.
The registrant and its subsidiary operate from 13 full-service offices
in Ohio, including OAKF's executive office in Jackson, Ohio. Four of the offices
are located in Jackson County, Ohio; there is one ATM branch located in a
shopping center pursuant to lease. The remaining properties in Jackson County
are located on real estate which is owned by OAKF. Three offices are located in
Ross County, Ohio; one in Warren County, Ohio; three in Scioto County, Ohio; one
in Pickaway County, Ohio; one in Butler County, Ohio. Four of the offices
(located in Ross County, Butler County and Scioto County) are on leased
locations. All leases are comparable to other leases in the respective market
areas and do not contain provisions detrimental to the registrant or its
subsidiary.
ITEM 3. LEGAL PROCEEDINGS.
Except for routine litigation incident to their business, the
registrant and its subsidiary are not a party to any material pending legal
proceedings and none of their property is the subject of any such proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the shareholders during the fourth quarter
of 1996.
- 16 -
<PAGE> 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
SHAREHOLDER INFORMATION
The common stock of Oak Hill Financial, Inc. (the "Company") is traded on the
Nasdaq National Market System under the symbol "OAKF."
Public trading of Oak Hill Financial, Inc. stock began on October 12, 1995. The
high and low sales price for the five quarters during which the stock has been
publicly traded are as follows:
<TABLE>
<CAPTION>
Quarter
Ended High Low
<S> <C> <C>
12/31/95 $11.00 $9.25
3/31/96 10.00 9.25
6/30/96 12.25 9.25
9/30/96 12.25 11.00
12/31/96 13.00 11.50
</TABLE>
These prices reflect inter-dealer prices that may not represent actual
transactions and do not include retail mark-ups, mark-downs, or commissions.
At March 12, 1997, the Company had approximately 1,250 stockholders and
2,873,500 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 subsidiary. As discussed in Note K to
the consolidated financial statements, the State of Ohio places certain
limitations on the payment of dividends by Ohio state-chartered banks.
The Company paid a split-adjusted cash dividend of $.064 per share during the
six-month period ended June 30, 1995. Commencing with the fourth quarter of
1995, the Company has declared the following quarterly cash dividends:
<TABLE>
Quarter Dividend
Ended Declared
<S> <C>
12/31/95 $0.04
3/31/96 0.05
6/30/96 0.05
9/30/96 0.05
12/31/96 0.06
</TABLE>
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.
- 17 -
<PAGE> 18
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:
Fifth Third Bank
Stock Transfer Department
38 Fountain Square Plaza, MD 1090F5
Cincinnati, OH 45263
(513) 579-5320
(800) 837-2755
Annual Meeting of Stockholders
The Annual Meeting of Stockholders of Oak Hill Financial, Inc. will be held
on April 29, 1997, 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).
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The principal asset of Oak Hill Financial, Inc. (the "Company") is its
ownership of Oak Hill Banks (the "Bank"). Accordingly, the Company's results of
operations are primarily dependent upon the results of operations of the Bank.
The Bank 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.
The Bank'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, the Bank's profitability is
affected by such factors as the level of non-interest income and expenses, the
provision for loan losses, and the effective tax rate. Non-interest income
consists primarily of service charges and other fees and income from the sale of
loans. Non-interest expenses consist of compensation and benefits,
occupancy-related expenses, FDIC deposit insurance premiums, and other operating
expenses.
Management's discussion and analysis of earnings and related financial
data 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, 1996 and 1995. This discussion should be read in
conjunction with the consolidated financial statements and related footnotes
presented elsewhere in this report.
- 18 -
<PAGE> 19
FORWARD-LOOKING STATEMENTS
In the following pages, management presents an analysis of the
Company's financial condition as of December 31, 1996, and the results of
operations for the year ended December 31, 1996 as compared to prior periods. In
addition to this historical information, the following discussion contains
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 in the Company's general market area.
Without limiting the foregoing, some of the forward-looking statements
include the following:
Management's establishment of an allowance for loan losses, and its
statements regarding the adequacy of such allowance for loan losses.
Management's belief that the allowance for loan losses is adequate.
FINANCIAL CONDITION
The Company's total assets amounted to $246.9 million as of December
31, 1996, an increase of $36.6 million, or 17.4%, over the $210.3 million total
at December 31, 1995. The increase was funded primarily through growth in
deposits of $27.7 million, an increase in borrowings of $6.2 million, and an
increase in stockholders' equity of approximately $2.5 million.
Cash and due from banks, federal funds sold, and investment securities
increased by $2.3 million, or 4.9%, to a total of $49.0 million at December 31,
1996, compared to $46.7 million at December 31, 1995. Investment securities
increased by $7.6 million, as purchases of $26.6 million exceeded maturities of
$14.6 million and sales of $3.1 million, while Federal funds sold decreased by
$6.4 million during 1996.
Loans receivable totaled $190.5 million at December 31, 1996, an
increase of $32.7 million, or 20.8%, over the $157.8 million total at December
31, 1995. Loan disbursements totaled $89.8 million during 1996, which were
partially offset by loans sales of $7.8 million and principal repayments of
$48.3 million. Loan origination volume during 1996 exceeded that of 1995 by
$17.7 million and sales volume increased by $1.5 million. The Company's
allowance for loan losses amounted to $2.6 million at December 31, 1996, an
increase of $508,000, or 23.9%, over the total at December 31, 1995. The
allowance for loan losses represented 1.36% of the total loan portfolio at
December 31, 1996, as compared to 1.33% at December 31, 1995. The Company's
allowance represented 326.2% and 189.3% of nonperforming loans, which totaled
$808,000 and $1.1 million at December 31, 1996 and 1995, respectively.
Deposits totaled $209.6 million at December 31, 1996, an increase of
$27.7 million, or 15.2%, over the $181.9 million total at December 31, 1995. The
increase resulted from management's continuing marketing efforts, increased
customer acceptance of the Bank's "premium investment" account, and continued
growth at newer branch facilities.
The Company's stockholders' equity amounted to $23.0 million at
December 31, 1996, an increase of $2.5 million, or 12.4%, over the balance at
December 31, 1995. The increase resulted primarily from net earnings of $3.2
million which were partially offset by dividends to stockholders of $604,000.
SUMMARY OF EARNINGS
The table on page 26 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
- 19 -
<PAGE> 20
paid for the years ended December 31, 1996, 1995, and 1994. 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.
Changes in net interest income are attributed 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 the
change in rate times the old volume. The table on page 27 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 rate change at the ratio each of the components bears to the absolute
value of their total.
COMPARISON OF RESULTS OF OPERATIONS FOR 1996 AND 1995 FISCAL YEARS
General. Net earnings for the year ended December 31, 1996 totaled $3.2
million, an increase of $959,000, or 42.6%, over the $2.3 million in net
earnings recorded in 1995. The increase in earnings resulted primarily from a
$2.1 million increase in net interest income and a $288,000 increase in other
income, which were partially offset by a $332,000 increase in the provision for
losses on loans, a $694,000 increase in general, administrative and other
expense and a $385,000 increase in the provision for federal income taxes.
Net Interest Income. Total interest income for the year ended December
31, 1996, amounted to $19.2 million, an increase of $2.7 million, or 16.2%, over
the $16.5 million recorded for 1995. Interest income on loans totaled $16.3
million, an increase of $2.5 million, or 18.3%, over the 1995 period. This
increase resulted primarily from a $19.1 million, or 12.8%, increase in the
average portfolio balance outstanding year-to-year, coupled with a 45 basis
point increase in the average yield, from 9.26% in 1995 to 9.71% in 1996.
Interest income on investment securities and other interest-earning assets
increased by $147,000, or 5.4%, to a total of $2.9 million in 1996, as compared
to $2.7 million in 1995. This increase resulted primarily from a $2.3 million
increase in the average portfolio balance year-to-year, combined with a 3 basis
point increase in the average yield, from 5.72% in 1995 to 5.75% in 1996.
Total interest expense amounted to $8.9 million for the year ended
December 31, 1996, an increase of $595,000, or 7.2%, over the $8.3 million
recorded in 1995. Interest expense on deposits increased by $463,000, or 6.1%,
to a total of $8.1 million in 1996. The increase resulted primarily from a $15.5
million, or 9.8%, increase in the average deposit portfolio balance outstanding
year-to-year, which was partially offset by a 15 basis point decrease in the
average cost of deposits, from 4.79% in 1995 to 4.64% in 1996. Interest expense
on borrowings increased by $132,000, or 20.2% during 1996. This increase was due
to a $4.0 million increase in average borrowings outstanding, which was
partially offset by a 194 basis point decrease in the average cost of
borrowings, from 8.79% in 1995 to 6.85% in 1996.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $2.1 million, or 25.3%, for the year
ended December 31, 1996, as compared to 1995. The interest rate spread increased
by 61 basis points to 4.04% in 1996 from 3.43% in 1995, while the net interest
margin increased by 55 basis points to 4.74% in 1996 from 4.19% in 1995.
Provisions for Loan Losses. The provision for loan losses represents a
charge to earnings to maintain the allowance at a level management believes is
adequate to absorb losses in the loan portfolio. The Company's provision for
loan losses amounted to $760,000 for the year ended December 31, 1996, as
compared to $428,000 for the same period in 1995, an increase of $332,000, or
77.6%. The provision for loan losses in 1996 was increased primarily as a result
of the $32.7 million of growth in the loan portfolio over the year. Net loan
charge-offs amounted to $252,000 in 1996, as compared to $197,000 in 1995.
- 20 -
<PAGE> 21
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, 1996, 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 $1.2 million for the year ended
December 31, 1996, an increase of $288,000, or 31.5%, over the $915,000 in other
income recorded in 1995. The increase resulted primarily from a $134,000, or
13.9%, increase in service fees, charges, and other operating income, coupled
with a $28,000 increase in gain on sale of loans, as well as a $126,000 increase
in net gains on securities transactions, to $17,000 during 1996 as compared to
the $109,000 net loss on such sales recorded during the 1995 period. The
increase in service fees, charges, and other operating income resulted primarily
from growth in the deposit portfolio, coupled with an increase in service fee
rates and management's continued focus on collecting fees assessed on deposit
accounts.
Other Expense. General, administrative, and other expense totaled $6.0
million for the year ended December 31, 1996, an increase of $694,000, or 13.1%,
over the $5.3 million recorded in 1995. The increase resulted primarily from a
$365,000, or 12.4%, increase in employee compensation and benefits, a $110,000,
or 14.5%, increase in occupancy and equipment, a $40,000, or 17.0% increase in
franchise taxes, and a $368,000, or 31.1% increase in other operating expense,
which were partially offset by a $189,000, or 99.0% decrease in federal deposit
insurance premiums.
The increase in employee compensation and benefits resulted primarily
from increased staffing levels required as a result of the opening of a new
branch office in Portsmouth, Ohio late in fiscal 1995 and an additional branch
facility in Circleville, Ohio which opened for business during 1996.
Additionally, the opening of such branch facilities as described above was
primarily responsible for the increase in occupancy and equipment expense. The
increase in franchise taxes resulted from the Company's continued growth in
equity during 1996. The increase in other operating expense resulted primarily
from costs attendant to the reporting requirements of a public stock company,
coupled with an increase in expense related to administration of the Bank's
credit card loan portfolio, computer software expenses associated with updating
the Bank's processing systems, as well as increases in expenses related to the
Company's overall growth year-to-year.
Federal Income Taxes. The provision for federal income taxes amounted
to $1.5 million for the year ended December 31, 1996, an increase of $385,000,
or 33.1%, over the $1.2 million recorded in 1995. The increase resulted
primarily from a $1.3 million, or 39.4%, increase in earnings before taxes. The
effective tax rates were 32.5% and 34.1% for the years ended December 31, 1996
and 1995, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR 1995 AND 1994 FISCAL YEARS
General. Net earnings for the year ended December 31, 1995, totaled
$2.3 million, an increase of $386,000, or 20.7%, over the $1.9 million in net
earnings recorded in 1994. The increase in earnings resulted primarily from a
$647,000 increase in net interest income and a $211,000 increase in other
income, which were partially offset by a $159,000 increase in the provision for
losses on loans, a $70,000 increase in general, administrative, and other
expense and a $243,000 increase in the provision for federal income taxes.
Net Interest Income. Total interest income for the year ended December
31, 1995, amounted to $16.5 million, an increase of $3.2 million, or 24.4%, over
the $13.3 million recorded for 1994. Interest income on loans totaled $13.8
million, an increase of $2.7 million, or 24.4%, over the 1995 period. This
increase resulted primarily from a $19.7 million, or 15.2%, increase in the
average portfolio balance outstanding year-to-year, coupled with a 69 basis
point increase in the average yield, from 8.56% in 1994 to 9.25% in 1995.
Interest income on investment securities and other interest-earning assets
increased by
- 21 -
<PAGE> 22
$533,000, or 24.5%, to a total of $2.7 million in 1995, as compared to $2.2
million in 1994. This increase resulted primarily from a $7.1 million increase
in the average portfolio balance outstanding year-to-year.
Total interest expense amounted to $8.3 million for the year ended
December 31, 1995, an increase of $2.6 million, or 45.7%, over the $5.7 million
recorded in 1994. Interest expense on deposits increased by $2.3 million, or
42.5%, to a total of $7.6 million in 1995. The increase resulted primarily from
a $15.1 million, or 10.5%, increase in the average deposit portfolio balance
outstanding year-to-year, coupled with a 108 basis point increase in the average
cost of deposits, from 3.71% in 1994 to 4.79% in 1995. Interest expense on
borrowings increased by $322,000, or 97.3%, during 1995. This increase was due
primarily to a $4.3 million increase in average borrowings outstanding.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $647,000, or 8.5%, for the year ended
December 31, 1995, as compared to 1994. The interest rate spread decreased by 53
basis points to 3.43% in 1995 from 3.96% in 1994, while the net interest margin
decreased by 28 basis points to 4.19% in 1995 from 4.47% in 1994.
Provision for Loan Losses. The Company's provision for loan losses in
1995 and 1994 was heavily influenced by the $20.2 million of growth in loans
over that period. The provision for loan losses totaled $428,000 in 1995,
compared to $269,000 in 1994. Net charge-offs totaled less than 0.2% of the
portfolio in each year.
Other Income. Other income totaled $915,000 for the year ended December
31, 1995, an increase of $211,000, or 30.0%, over the $704,000 in other income
recorded in 1994. The increase resulted primarily from a $211,000, or 27.9%,
increase in service fees, charges, and other operating income, coupled with a
$29,000 increase in gain on sale of loans, which were partially offset by a
$29,000 increase in loss on sale of securities. The increase in service fees,
charges, and other operating income resulted primarily from growth in the
deposit portfolio, coupled with an increase in service fee rates and
management's focus on collecting fees assessed on deposit accounts.
Other Expense. General, administrative, and other expense totaled $5.3
million for the year ended December 31, 1995, an increase of $70,000, or 1.3%,
over the $5.2 million recorded in 1994. The increase resulted primarily from a
$181,000, or 6.5%, increase in employee compensation and benefits and a $73,000,
or 10.7%, increase in occupancy and equipment, which were partially offset by a
$166,000, or 46.5%, decline in federal deposit insurance premiums and a $46,000,
or 3.7% decrease in other operating expense.
The increase in employee compensation and benefits resulted primarily
from the cost attendant to the Company's stock option plan, which was partially
offset by an increase in deferred loan origination cost resulting from the
increase in loan volume. The increase in occupancy and equipment resulted
primarily from the addition of a new branch location during the year. The
decline in federal deposit insurance premiums resulted from a decline in federal
insurance rates as the Bank Insurance Fund reached its required reserve level
during 1995. The decline in other operating expense resulted primarily from a
decline in charitable contributions expense, which was partially offset by
increases in expenses related to the opening of a new branch facility.
Federal Income Taxes. The provision for federal income taxes amounted
to $1.2 million for the year ended December 31, 1995, an increase of $243,000,
or 26.4%, over the $920,000 total recorded in 1994. The increase resulted
primarily from a $629,000, or 22.6%, increase in earnings before taxes. The
effective tax rates were 34.1% and 33.0% for the years ended December 31, 1995
and 1994, respectively.
- 22 -
<PAGE> 23
LIQUIDITY
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 and principal and interest payments on loans. The Company
uses funds from deposit inflows 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, 1996, the Company had $58.3 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 at market
rates of interest. It is management's belief that maturing certificates of
deposit over the next year will similarly be renewed at market rates of interest
without a material adverse effect on results of operations.
In the event that certificates of deposit cannot be renewed at
prevalent market rates, the Company can obtain up to $40.0 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, 1996, the Company had $13.6 million of
outstanding FHLB advances.
As of December 31, 1996, loan commitments, or loans committed
but not closed, totaled $3.9 million. Additionally, the Bank had unused lines of
credit and letters of credit totaling $4.8 and $1.1 million, respectively.
Funding for these amounts is expected to be provided by the sources described
above. Management believes the Company has adequate resources to meet its normal
funding requirements.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In October 1994, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards (" SFAS") No. 119,
"Disclosure About Derivative Financial Instruments and Fair Value of Financial
Instruments." SFAS No. 119 requires financial statement disclosure of certain
derivative financial instruments, defined as futures, forwards, swaps, option
contracts, or other financial instruments with similar characteristics. In the
opinion of management, SFAS No. 119 will have no material effect on the
Company's consolidated financial condition or results of operations, as the
Company does not invest in derivative financial instruments, as defined. As a
result, the applicability of SFAS No. 119 relates solely to disclosure
requirements pertaining to fixed-rate and adjustable-rate loan commitments.
In June 1994, the FASB issued SFAS No, 122, "Accounting for Mortgage
Servicing Rights," which requires that the Company 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 would allocate some of the cost of the
loans to the mortgage servicing rights.
SFAS No. 122 requires that securitizations of mortgage loans be
accounted for as sales of mortgage loans and acquisitions of mortgage-backed
securities. Additionally, SFAS No. 122 requires that capitalized mortgage
servicing rights and capitalized excess servicing receivables be assessed for
impairment. Impairment is based on fair value.
SFAS No. 122 would be applied prospectively to fiscal years beginning
after December 15, 1995 (January 1, 1996, as to the Company) to transactions in
which an entity acquires mortgage servicing rights and to impairment evaluations
of all capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Retroactive application is prohibited. Management
adopted SFAS No. 122
- 23 -
<PAGE> 24
effective January 1, 1996 without material effect on the Company's consolidated
financial position or results of operations.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages all entities to
adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
earnings and, if presented, earnings per share, as if SFAS No. 123 has been
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 31, 1994. Management has
determined that the Company will continue to account for stock-based
compensation pursuant to Accounting Principles Board Opinion No. 25, and
therefore SFAS No. 123 will have no effect on its consolidated financial
condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
of Financial Assets, Servicing Rights, and Extinguishment of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
as the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements and transfers of receivables
with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance
sheet only if the debtor either pays the creditor and is relieved of its
obligation for the liability or is legally released from being the primary
obligor.
SFAS No.125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1997, and
is to be applied prospectively. Earlier or retroactive application is not
permitted. Management does not believe that adoption of SFAS No. 125 will have a
material adverse effect on the Company's consolidated financial position or
results of operations.
- 24 -
<PAGE> 25
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data herein have been
prepared in accordance with generally accepted accounting principles, which
require measurement of financial condition and results of operations in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Since the primary assets and liabilities of the Company are monetary in
nature, changes in the general level of prices for goods and services have a
relatively minor impact on the Company's total expenses. Increases in operating
expenses such as salaries and maintenance are in part attributable to inflation.
However, interest rates have a far more significant effect than inflation on the
performance of financial institutions, including the Company.
- 25 -
<PAGE> 26
<TABLE>
<CAPTION>
Oak Hill Banks Average Balance Table
Year ended December 31, 1996 Year Ended December 31, 1995
-----------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate mortgage $54,894 $5,218 9.51% $50,906 $4,358 8.56%
Commercial and other 83,426 7,978 9.56% 69,191 6,529 9.44%
Installment loans 29,120 3,007 10.33% 28,314 2,804 9.90%
Credit card 930 138 14.84% 826 120 14.53%
Investment securities 38,305 2,288 5.97% 33,591 1,949 5.80%
Federal funds sold 7,950 428 5.38% 10,919 662 6.06%
Interest-earning deposits 3,368 141 4.19% 2,826 99 3.50%
-------- ------- ------- ------- ------- -------
Total interest-earning 217,993 19,198 8.81% 196,573 16,521 8.40%
assets
Non-interest-earning assets 9,781 5,246
---------- --------
Total assets $227,774 $201,819
======== ========
Interest-bearing liabilities:
Deposits:
Savings accounts $34,488 1,168 3.39% $34,976 1,257 3.59%
NOW accounts 20,591 351 1.70% 19,404 456 2.35%
Money market deposits 4,267 134 3.14% 4,261 170 3.99%
Premium investment 23,034 1,131 4.91% 9,765 486 4.98%
accounts
Certificates of deposit 92,380 5,306 5.74% 90,809 5,258 5.79%
Borrowings 11,464 785 6.85% 7,431 653 8.79%
------ ----- ----- ------- ------ -------
Total interest-bearing
liabilities 86,224 8,875 4.77% 166,646 8,280 4.97%
Non-interest-bearing
liabilities 19,996 18,226
Stockholders' equity 21,554 16,947
------ ------
Total liabilities and
stockholders' equity $227,774 $201,819
========= ========
Net interest income $10,323 $8,241
========== ==========
Interest rate spread 4.04% 3.43%
========= ========
Net interest margin (net 4.74% 4.19%
========= ========
as a percent of average
Average interest-earning
assets to average
interest-bearing liabilities 117.06% 117.96%
========= ========
</TABLE>
<TABLE>
Year Ended December 31, 1994 Year Ended December 31, 1993
------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate mortgage $45,633 $4,025 8.82% $41,482 $3,706 8.93%
Commercial and other 59,958 4,838 8.07% 53,566 4,252 7.94%
Installment loans 23,261 2,156 9.27% 18,076 1,962 10.85%
Credit card 672 80 11.90% 638 76 11.91%
Investment securities 33,797 1,897 5.61% 34,740 2,055 5.92%
Federal funds sold 5,729 233 4.07% 9,786 292 2.98%
Interest-earning deposits 746 47 6.30% - - 0.00%
-------- ------- ----- ------- ------ -----
Total interest-earning 169,796 13,276 7.82% 158,288 12,343 7.80%
assets
Non-interest-earning assets 8,388 9,837
-------- --------
Total assets $178,184 $168,125
======== ========
Interest-bearing liabilities:
Deposits:
Savings accounts $39,056 1,289 3.30% $36,627 1,216 3.32%
NOW accounts 22,208 576 2.59% 21,973 570 2.59%
Money market deposits 6,083 227 3.73% 3,645 124 3.40%
Premium investment - - 0.00% - - 0.00%
accounts
Certificates of deposit 76,796 3,259 4.24% 77,471 3,411 4.40%
Borrowings 3,138 331 10.55% 2,100 246 11.71%
------- ------- ------- ------ ------- ------
Total interest-bearing
liabilities 147,281 5,682 3.86% 141,816 5,567 3.93%
Non-interest-bearing
liabilities 18,186 14,653
Stockholders' equity 12,717 11,656
----------- ------
Total liabilities and
stockholders' equity $178,184 $168,125
======== ========
Net interest income $7,594 $6,776
========== =========
Interest rate spread 3.96% 3.87%
======= ========
Net interest margin (net 4.47% 4.28%
======= ========
as a percent of average
Average interest-earning
assets to average
interest-bearing liabilities 115.29% 111.62%
========= ========
</TABLE>
(1) The net interest margin is the net interest income divided by average
interest-earning assets.
- 26 -
<PAGE> 27
<TABLE>
<CAPTION>
Net Interest Income
1996 vs 1995 1995 vs 1994
Increase Total Increase Total
(Decrease) Increase (Decrease) Increase
Due To (Decrease) Due To (Decrease)
Rate Volume Rate Volume
----------- --------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable $ 698 $1,832 $2,530 $ 937 $1,775 $2,712
Investment securities 59 280 339 65 (13) 52
Federal funds sold (67) (167) (234) 165 264 429
Interest earning deposits 21 21 42 (39) 91 52
------ ------ ------ ------ ------ ------
Total interest earning assets $ 711 $1,966 $2,677 $1,128 $2,117 $3,245
====== ====== ------ ====== ====== ------
Interest expense attributable to:
Deposits $ (265) $ 728 $ 463 $1,470 $ 806 $2,276
Borrowings (169) 301 132 (61) 383 322
------ ------ ------ ------ ------ ------
Total interest bearing liabilities $ (434) $1,029 $ 595 $1,409 $1,189 $2,598
====== ====== ------ ====== ====== ------
Increase (decrease) in net
interest income $2,082 $ 647
====== ======
</TABLE>
Item 7. Financial Statements.
The information contained in Exhibit 13 hereto from OAKF's Annual
Report to Shareholders for the year ended December 31, 1996 is incorporated
herein by reference in response to this item.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
- 27 -
<PAGE> 28
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information is contained under "Ownership of Common Stock by
Principal Stockholders" and "Ownership of Common Stock by Management" in OAKF's
Proxy Statement dated March 31, 1997 is incorporated herein by reference in
response to this item.
The information contained under "Compliance With Section 16(a) of the
Securities Exchange Act" in OAKF's Proxy Statement dated March 31, 1997 is
incorporated herein by reference in response to this item.
ITEM 10. EXECUTIVE COMPENSATION.
The information appearing under "Executive Compensation" in OAKF's
Proxy Statement dated March 31, 1997 is incorporated herein by reference in
response to this item.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under "Ownership of Common Stock by Principal
Shareholders" and "Ownership of Common Stock By Management" in OAKF's Proxy
Statement dated March 31, 1997 is incorporated herein by reference in response
to this item.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under "Certain Transactions" in OAKF's Proxy
Statement dated March 31, 1997 is incorporated herein by reference in response
to this item.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Page*
-----
<S> <C>
(a) Documents filed as a part of the Report:
(1) Report of Grant Thornton LLP, Independent Auditors
Consolidated Statements of Financial Condition as of December 31,
1996 and 1995 4
Consolidated Statements of Earnings for years ended
December 31, 1996, 1995 and 1994 5
</TABLE>
- 28 -
<PAGE> 29
<TABLE>
<S> <C>
Consolidated Statements of Stockholder's Equity for years ended
December 31, 1996, 1995, and 1994 6
Consolidated Statements of Cash Flows for years ended
December 31, 1996, 1995 and 1994 7-8
Notes to Consolidated Financial Statements for years ended
December 31, 1996, 1995 and 1994 9-28
</TABLE>
(2) Financial Statement Schedules:
Schedules to the consolidated financial statements required by
Regulation S-X are not required under the related instructions,
or are inapplicable, and therefore have been omitted
*The page numbers indicated refer to pages of Exhibit 13 hereto from the
registrant's Annual Report to Shareholders for the fiscal year ended December
31, 1996 which are incorporated herein by reference.
(3) Exhibits:
Exhibit
Number
-------
* 3(i) Second Amended and Restated Articles of Incorporation
(Form SB-2, Exhibit 3(i), File No. 33-096216).
* 3(ii) Restated code of Regulations (Form SB-2, Exhibit
3(ii), File No. 33-96216).
*10(a) Oak Hill Financial, Inc. 1995 Stock Option Plan
(Form SB-2, Exhibit 10(a), File No. 33-96216).
*10(b) Form of Indemnification Agreement (Form SB-2, Exhibit
10(b), File No. 33-096216).
13 1996 Annual Report (Selected portions).
*21 Subsidiaries of the Registrant (Form SB-2, Exhibit
21, File No. 33-96216).
23 Consent of Grant Thornton LLP.
24 Powers of Attorney.
*Incorporated by reference as indicated.
- 29 -
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
OAK HILL FINANCIAL, INC.
By: */s/ John D. Kidd
--------------------------------
John D. Kidd, President
Pursuant to the requirements of the Securities Exchange Act of 1934, the
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C> <C>
* /s/ Evan E. Davis Chairman of the Board )
- ---------------------------- )
Evan E. Davis )
)
)
* /s/ John D. Kidd President and Director )
- ---------------------------- (Principal Executive Officer) )
John D. Kidd )
)
)
* /s/ Richard P. LeGrand Executive Vice President and Director )
- ------------------------ )
Richard P. LeGrand )
)
)
* /s/ Barry M. Dorsey Director )
- ------------------------ )
Barry M. Dorsey ) March 27, 1997
)
*/s/ C. Clayton Johnson Director )
- ------------------------ )
C. Clayton Johnson )
)
)
* /s/ Rick A. McNelly Director )
- ------------------------ )
Rick A. McNelly )
)
)
* /s/ Donald R. Seigneur Director )
- ------------------------ )
Donald R. Seigneur )
)
)
/s/ H. Grant Stephenon Director )
- ------------------------- )
H. Grant Stephenson )
)
)
* /s/ H. Tim Bichsel Secretary and Treasurer )
- -------------------------------- (Principal Financial and Accounting Officer)
H. Tim Bichsel )
</TABLE>
- 30 -
<PAGE> 31
*
By: /s/ H. Grant Stephenson
----------------------------
H. Grant Stephenson, attorney-in-fact
for each of the persons indicated
- 31 -
<PAGE> 1
Exhibit 13
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
OAK HILL FINANCIAL, INC.
December 31, 1996, 1995 and 1994
<PAGE> 2
Board of Directors
Oak Hill Financial, Inc.
We have audited the accompanying consolidated financial statements of Oak Hill
Financial, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years ended December 31, 1996, 1995 and 1994. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years ended December
31, 1996, 1995 and 1994, in conformity with generally accepted accounting
principles.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
February 12, 1997
<PAGE> 3
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
<TABLE>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 7,378 $ 6,250
Federal funds sold 4,135 10,557
Investment securities designated as available for sale - at
market 37,501 29,901
Loans receivable - net 190,396 157,615
Loans held for sale - at lower of cost or market 140 177
Office premises and equipment - net 3,403 2,788
Federal Home Loan Bank stock - at cost 1,585 914
Accrued interest receivable on loans 937 862
Accrued interest receivable on investment securities 498 404
Prepaid expenses and other assets 156 232
Deferred federal income tax asset 772 629
--------- ---------
Total assets $ 246,901 $ 210,329
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand $ 22,531 $ 19,220
Savings and time deposits 187,062 162,669
--------- ---------
Total deposits 209,593 181,889
Securities sold under agreements to repurchase 130 -
Advances from the Federal Home Loan Bank 13,604 7,529
Accrued interest payable and other liabilities 545 456
Federal income taxes payable 66 29
--------- ---------
Total liabilities 223,938 189,903
Commitments - -
Stockholders' equity
Common stock - $.50 stated value; authorized 5,000,000 shares,
2,884,700 and 2,883,700 shares issued at December 31, 1996 and 1995 1,442 1,442
Additional paid-in capital 4,227 4,217
Retained earnings 17,290 14,685
Treasury stock (11,200 shares at cost at
December 31, 1996 and 1995) (28) (28)
Unrealized gains on securities designated as available
for sale, net of related tax effects 32 110
--------- ---------
Total stockholders' equity 22,963 20,426
--------- ---------
Total liabilities and stockholders' equity $ 246,901 $ 210,329
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 4
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Interest income
Loans $16,341 $13,811 $11,099
Investments
U. S. Government and agency securities 2,192 1,861 1,812
Obligations of state and political subdivisions 96 88 85
Federal funds sold 428 662 233
Interest-bearing deposits and other 141 99 47
-------- --------- ---------
Total interest income 19,198 16,521 13,276
Interest expense
Deposits 8,090 7,627 5,351
Borrowings 785 653 331
-------- -------- --------
Total interest expense 8,875 8,280 5,682
------- ------- -------
Net interest income 10,323 8,241 7,594
Provision for losses on loans 760 428 269
-------- -------- --------
Net interest income after provision for losses on loans 9,563 7,813 7,325
Other income (expense)
Service fees, charges and other operating 1,101 967 756
Gain on sale of loans 85 57 28
Gain (loss) on sale of securities 17 (109) (80)
--------- -------- ---------
Total other income 1,203 915 704
General, administrative and other expense
Employee compensation and benefits 3,314 2,949 2,768
Occupancy and equipment 867 757 684
Federal deposit insurance premiums 2 191 357
Franchise taxes 275 235 207
Other operating 1,551 1,183 1,229
------- ------- -------
Total general, administrative and other expense 6,009 5,315 5,245
------- ------- -------
Earnings before federal income taxes 4,757 3,413 2,784
Federal income taxes
Current 1,650 1,189
1,025
Deferred (102) (26) (105)
-------- --------- --------
Total federal income taxes 1,548 1,163 920
------- ------- --------
NET EARNINGS $ 3,209 $ 2,250 $ 1,864
======= ======= =======
EARNINGS PER SHARE $1.12 $.92 $.81
==== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the years ended December 31, 1996, 1995 and 1994
(In thousands, except share data)
Additional
Preferred Common Paid-in Retained
Stock Stock Capital Earnings
<S> <C> <C> <C> <C>
Balance at January 1, 1994 $ 2 $ 99 $ 923 $10,961
Designation of securities as available for sale
upon adoption of SFAS No. 115 - - - -
Redemption of preferred stock (2) - - -
Dividends on common and preferred shares - - - (131)
Sale of 4,900 shares of treasury stock - - 26 -
Purchase of 3,500 shares of treasury stock - - - -
Issuance of 1,400 shares under stock option plan - - 4 -
Unrealized losses on securities designated as available
for sale, net of related tax effects - - - -
Net earnings for the year - - - 1,864
-- ----- ----- -------
Balance at December 31, 1994 - 99 953 12,694
Sale of 9,100 shares of treasury stock - - 55 -
Issuance of 107,100 shares under stock option plan - 5 684 -
Net proceeds from issuance of common shares - 1,338 2,525 -
Dividends on common shares - - - (259)
Unrealized gains on securities designated as available for sale,
net of related tax effects - - - -
Net earnings for the year - - - 2,250
-- ----- ----- -------
Balance at December 31, 1995 - 1,442 4,217 14,685
Issuance of 1,000 shares under stock option plan - - 10 -
Dividends on common shares - - - (604)
Unrealized losses on securities designated as available for sale,
net of related tax effects - - - -
Net earnings for the year - - - 3,209
-- ----- ----- -------
Balance at December 31, 1996 $- $1,442 $4,227 $17,290
== ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Unrealized
gains (losses)
on securities
designated as
Treasury available
Stock for sale Total
<S> <C> <C> <C>
Balance at January 1, 1994 $ (18) $- $11,967
Designation of securities as available for sale
upon adoption of SFAS No. 115 - 203 203
Redemption of preferred stock - - (2)
Dividends on common and preferred shares - - (131)
Sale of 4,900 shares of treasury stock 4 - 30
Purchase of 3,500 shares of treasury stock (21) - (21)
Issuance of 1,400 shares under stock option plan - - 4
Unrealized losses on securities designated as available
for sale, net of related tax effects - (447) (447)
Net earnings for the year - - 1,864
-- -- -------
Balance at December 31, 1994 (35) (244) 13,467
Sale of 9,100 shares of treasury stock 7 - 62
Issuance of 107,100 shares under stock option plan - - 689
Net proceeds from issuance of common shares - - 3,863
Dividends on common shares - - (259)
Unrealized gains on securities designated as available for sale,
net of related tax effects - 354 354
Net earnings for the year - - 2,250
-- -- -------
Balance at December 31, 1995 (28) 110 20,426
Issuance of 1,000 shares under stock option plan - - 10
Dividends on common shares - - (604)
Unrealized losses on securities designated as available for sale,
net of related tax effects - (78) (78)
Net earnings for the year - - 3,209
-- -- -------
</TABLE>
<PAGE> 6
<TABLE>
<S> <C> <C> <C>
Balance at December 31, 1996 $ (28) $ 32 $22,963
===== ==== ======
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 3,209 $ 2,250 $ 1,864
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 432 540 361
(Gain) loss on sale of securities (17) 109 80
Amortization of premium on loans sold - - 24
Amortization (accretion) of premiums and discounts on
investment securities - net (98) (14) 118
Proceeds from sale of loans in secondary market 7,970 6,472 2,214
Loans disbursed for sale in secondary market (7,848) (6,562) (1,959)
Gain on sale of loans (85) (57) (28)
Gain on sale of office equipment (7) - -
Amortization of deferred loan origination costs 64 - 38
Federal Home Loan Bank stock dividends (91) (56) (8)
Provision for losses on loans 760 428 269
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 76 33 111
Accrued interest receivable (169) (268) (192)
Accrued interest payable and other liabilities 89 (113) 51
Federal income taxes
Current 37 255 (149)
Deferred (102) (26) (105)
--------- --------- --------
Net cash provided by operating activities 4,220 2,991 2,689
Cash flows provided by (used in) investing activities:
Loan disbursements (81,924) (65,531) (57,071)
Principal repayments on loans 48,319 44,949 42,145
Principal repayments on mortgage-backed securities 1,233 1,636 4,970
Proceeds from sale of investment securities
designated as available for sale 3,101 7,739 9,262
Proceeds from maturity of investment securities 14,649 8,450 7,164
Proceeds from sale of office equipment 32 - -
Purchase of investment securities
designated as held to maturity - - (14,536)
Purchase of investment securities designated as
available for sale (26,587) (13,270) (10,986)
(Increase) decrease in federal funds sold - net 6,422 (9,310) 10,288
Purchase of Federal Home Loan Bank stock (580) (372) (478)
Purchase of office premises and equipment (1,072) (701) (621)
------ -------- --------
Net cash used in investing activities (36,407) (26,410) (9,863)
------ ------ -------
Net cash used in operating and investing
activities (balance carried forward) (32,187) (23,419) (7,174)
------ ------ -------
</TABLE>
7
<PAGE> 8
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net cash used in operating and investing
activities (balance brought forward) $(32,187) $(23,419) $(7,174)
Cash flows provided by (used in) financing activities:
Proceeds from securities sold under
agreement to repurchase 130 - -
Net increase in deposit accounts 27,704 18,169 4,496
Proceeds from Federal Home Loan Bank advances 12,000 7,000 5,000
Repayment of Federal Home Loan Bank advances (5,925) (4,427) (44)
Repayment of notes payable - (2,100) -
Dividends on common and preferred shares (604) (259) (131)
Proceeds from sale of treasury stock - 62 30
Redemption of preferred stock - - (2)
Proceeds from issuance of common stock - 3,863 -
Purchase of treasury stock - - (21)
Proceeds from issuance of shares under stock option plan 10 689 4
---------- --------- ---------
Net cash provided by financing activities 33,315 22,997 9,332
------- ------- ------
Net increase (decrease) in cash and cash equivalents 1,128 (422) 2,158
Cash and cash equivalents at beginning of year 6,250 6,672 4,514
-------- -------- ------
Cash and cash equivalents at end of year $ 7,378 $ 6,250 $ 6,672
======== ======== ======
Supplemental disclosure of cash flow information:
Cash paid during the period
for:
Federal income taxes $ 1,613 $ 858 $ 1,174
======== ========= ======
Interest on deposits and borrowings $ 8,926 $ 8,197 $ 5,383
======== ======== ======
Supplemental disclosure of noncash investing activities:
Transfer of securities to an available for sale
classification in accordance with SFAS No. 115 $ - $ 12,539 $18,330
======== ======= ======
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ (78) $ 354 $ (244)
=========== ========= =======
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE> 9
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES
The business activities of Oak Hill Financial, Inc. (the "Company") have
been limited primarily to holding the common shares of Oak Hill Banks (the
"Bank"). Accordingly, the Company's results of operations are dependent upon
the results of the Bank's operations. The Bank conducts a general commercial
banking business in southeastern and south 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. The
Bank'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 the Bank can be significantly influenced by a number of
competitive factors, such as governmental monetary policy, that are outside
of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing financial statements in accordance with 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 described in Note A-3, 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 subsidiary, the Bank. All significant 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. Trading securities and securities available for sale are carried
at fair value with
9
<PAGE> 10
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
2. Investment Securities (continued)
---------------------
resulting unrealized gains or losses charged to operations or stockholders'
equity, respectively. In December 1995, pursuant to the FASB's
Implementation Guide on SFAS No. 115, the Company elected to transfer all
investment securities previously identified as held to maturity, to an
available for sale classification. Accordingly, the Company transferred
securities totaling approximately $12.5 million to an available for sale
classification, and recorded an increase of $23,000 to stockholders' equity,
which represented the unrealized gain on such securities, net of applicable
tax effects. At December 31, 1996 and 1995, the Company's stockholders'
equity reflected unrealized gains on securities designated as available for
sale, net of applicable tax effects, totaling $32,000 and $110,000,
respectively.
Realized gains and losses on securities are recognized using the specific
identification method.
3. Loans Receivable
----------------
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for premiums and discounts on loans purchased and sold 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 the Company. At December 31, 1996
and 1995, loans held for sale were carried at cost.
10
<PAGE> 11
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
----------------
The Company generally retains the servicing on loans sold and agrees to
remit to the investor loan principal and interest at agreed-upon rates. In
May 1995, Financial Accounting Standards Board (the "FASB") issued SFAS No.
122 "Accounting for Mortgage Servicing Rights," which requires that the
Company 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 would allocate some of the cost of the loans to
the mortgage servicing rights.
SFAS No. 122 requires that securitization of mortgage loans be accounted for
as sales of mortgage loans and acquisitions of mortgage-backed securities.
Additionally, SFAS No. 122 requires that capitalized mortgage servicing
rights and capitalized excess servicing receivables be assessed for
impairment. Impairment is measured based on fair value.
SFAS No. 122 is applicable to fiscal years beginning after December 15,
1995, (January 1, 1996, as to the Company) to transactions in which an
entity acquires mortgage servicing rights and to impairment evaluations of
all capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Retroactive application was prohibited, and
earlier adoption was encouraged. Management adopted SFAS No. 122 as of
January 1, 1996, as required, without material effect on the Company's
consolidated financial condition and results of operations.
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.
11
<PAGE> 12
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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, trends in 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 and anticipated economic conditions in the primary
market area. 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).
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". This Statement, which was amended by SFAS No. 118
as to certain income recognition and financial statement disclosure
provisions, 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. The Company adopted SFAS No. 114 effective
January 1, 1995, without material effect on consolidated financial
condition or results of operations.
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. With respect to the
Company's investment in impaired commercial loans, such loans are collateral
dependent and as a result 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.
At December 31, 1996 and 1995, the Company had no loans that would be
defined as impaired under SFAS No. 114.
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.
12
<PAGE> 13
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
7. 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.
8. Federal Income Taxes
--------------------
The Company accounts for federal income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 established financial accounting
and reporting standards for the effects of income taxes that result from the
Company's activities within the current and previous years. It requires an
asset and liability approach for financial accounting and reporting 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 and the allowance for loan losses. A temporary
difference is also recognized for depreciation expense computed using
accelerated methods for federal income tax purposes.
13
<PAGE> 14
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
9. 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, 1996
and 1995:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in
the consolidated statement of financial condition for cash and
cash equivalents are deemed to approximate fair value.
FEDERAL FUNDS SOLD: The carrying amounts presented in the
consolidated statement of financial condition for federal
funds sold are deemed to approximate fair value.
INVESTMENT SECURITIES: For investment securities, fair value
is deemed to equal the 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 and 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. The historical
carrying amount of accrued interest on loans is deemed to
approximate fair value.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in
the consolidated statement 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, 1996 and 1995. 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.
14
<PAGE> 15
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
9. Fair Value of Financial Instruments (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 fair value
of securities sold under agreements to repurchase is deemed to
approximate fair value.
COMMITMENTS TO EXTEND CREDIT: For adjustable-rate loan
commitments, the fair value estimate considers the difference
between current levels of interest rates and committed rates.
<TABLE>
<CAPTION>
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Company's financial instruments are as follows:
DECEMBER 31,
1996 1995
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 7,378 $ 7,378 $ 6,250 $ 6,250
Federal funds sold 4,135 4,135 10,557 10,557
Investment securities 37,501 37,501 29,901 29,901
Loans receivable 190,536 194,105 157,792 162,707
Federal Home Loan Bank stock 1,585 1,585 914 914
--------- --------- ----------- ----------
$241,135 $244,704 $205,414 $210,329
======= ======= ======= =======
Financial liabilities
Deposits $209,593 $210,587 $181,889 $182,620
Advances from the Federal
Home Loan Bank 13,604 13,637 7,529 7,893
Securities sold under agreement to repurchase 130 130 - -
---------- ---------- --------- --------
$223,327 $224,354 $189,418 $190,513
======= ======= ======= =======
Unrecognized financial instruments
Commitments to extend credit $ - $ 60 $ - $ 43
========= =========== ========= ===========
</TABLE>
15
<PAGE> 16
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Earnings Per Share
------------------
Earnings per share for the years ended December 31, 1996, 1995 and 1994 is
computed based upon 2,873,003, 2,444,400 and 2,300,200 weighted-average
common shares outstanding, respectively. Weighted-average common shares
outstanding for 1994 were adjusted to reflect a 700 for 1 split in the form
of a dividend which was approved in August, 1995.
Fully diluted earnings per share is not presented as there is no material
dilutive effect attendant to the Company's stock option plan.
11. Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents are
comprised of cash and due from banks.
12. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 1996
consolidated financial statement presentation.
NOTE B - INVESTMENT SECURITIES
<TABLE>
<CAPTION>
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of investment securities at December 31 are shown
below.
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations $34,391 $135 $ 72 $34,454
Obligations of state and political
subdivisions 3,061 25 39 3,047
------- ---- ---- -------
Total investment securities $37,452 $160 $111 $37,501
====== === === ======
1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
U.S. Government and agency obligations $28,773 $188 $36 $28,925
Obligations of state and political
subdivisions 960 23 7 976
-------- ---- --- --------
Total investment securities $29,733 $211 $43 $29,901
====== === == ======
</TABLE>
16
<PAGE> 17
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE B - INVESTMENT SECURITIES (continued)
<TABLE>
<CAPTION>
The amortized cost and estimated fair value of U.S. Government and agency
securities and state and political obligations designated as available for
sale by term to maturity are shown below at December 31:
1996 1995
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
Due in three years or less $26,422 $26,448 $26,196 $26,352
Due after three years through five years 8,514 8,540 1,103 1,115
Due after five years through ten years 675 687 120 137
Due after ten years 1,841 1,826 2,314 2,297
------- ------- ------- -------
$37,452 $37,501 $29,733 $29,901
====== ====== ====== ======
</TABLE>
Proceeds from sales of investment securities designated as available for
sale during the year ended December 31, 1996, totaled $3.1 million,
resulting in a realized gain of $17,000 on such sales.
Proceeds from sales of investment securities designated as available for
sale during the year ended December 31, 1995, totaled $7.7 million,
resulting in a realized loss of $109,000 on such sales.
Proceeds from sales of investment securities designated as available for
sale during the year ended December 31, 1994, totaled $9.3 million, with
losses of $80,000 realized on such sales.
At December 31, 1996 and 1995, investment securities with an aggregate book
value of $30.1 million and $23.1 million, respectively, were pledged as
collateral for public deposits.
NOTE C - LOANS RECEIVABLE
<TABLE>
<CAPTION>
The composition of the loan portfolio is as follows at December 31:
1996 1995
(In thousands)
<S> <C> <C>
Real estate mortgage (primarily residential) $106,668 $ 80,203
Installment, net of unearned
interest of $3,317 and $3,483 30,442 29,276
Commercial and other 54,811 49,306
Credit card 1,111 958
--------- ----------
193,032 159,743
Less:
Allowance for loan losses 2,636 2,128
--------- ---------
$190,396 $157,615
======= =======
</TABLE>
17
<PAGE> 18
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE C - LOANS RECEIVABLE (continued)
The Company's lending efforts have historically focused on real estate
mortgages and consumer installment loans which comprise approximately $137.1
million, or 72%, of the total loan portfolio at December 31, 1996, and
approximately $109.5 million, or 69%, of the total loan portfolio at
December 31, 1995. Historically, such loans have been conservatively
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 $28.8
million, $25.3 million and $22.9 million at December 31, 1996, 1995 and
1994, respectively.
<TABLE>
<CAPTION>
The activity in the allowance for loan losses is summarized as follows for
the years ended December 31:
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period $2,128 $1,897 $1,671
Provision charged to operations 760 428 269
Charge-offs (346) (316) (134)
Recoveries 94 119 91
------- ------ -------
Balance at end of period $2,636 $2,128 $1,897
===== ===== =====
</TABLE>
At December 31, 1996, 1995 and 1994, the Company had nonaccrual and
nonperforming loans totaling approximately $808,000, $1.1 million and
$261,000, respectively. Interest that would have been recognized had
nonaccrual loans performed pursuant to contractual terms totaled
approximately $11,000, $1,000 and $15,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
18
<PAGE> 19
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE D - OFFICE PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
Office premises and equipment are summarized as follows at December 31:
1996 1995
(In thousands)
<S> <C> <C>
Land and buildings $3,968 $3,526
Furniture and equipment 2,458 2,163
----- -----
6,426 5,689
Less accumulated depreciation and amortization (3,023) (2,901)
----- ------
$3,403 $2,788
===== =====
</TABLE>
During 1996, the Company completed construction of a new branch office
facility at a total cost of $465,000.
NOTE E - DEPOSITS
<TABLE>
<CAPTION>
Deposit balances by weighted-average interest rate at December 31, are
summarized as follows:
DEPOSIT TYPE AND 1996 1995
INTEREST RATE RANGE AMOUNT RATE AMOUNT RATE
(In thousands)
<S> <C> <C> <C> <C>
Demand deposit accounts $ 22,531 - $ 19,220 -
Savings accounts 34,169 3.39% 34,335 3.59%
NOW accounts 20,464 2.10% 18,912 2.35%
Money market deposit accounts 4,128 3.00% 4,407 3.63%
Premium investment account 22,696 4.92% 14,198 5.21%
Select investment 1,267 4.47% - -
------- ---------
Total transaction accounts 105,255 91,072
Certificates of deposit
3.00 - 4.99% 19,020 15,939
5.00 - 6.99% 81,104 67,989
7.00 - 9.00% 4,214 6,889
------- ---------
Total certificates of deposit 104,338 5.74% 90,817 5.79%
------- --------
Total deposits $209,593 4.23% $181,889 4.31%
======= ==== ======= ====
</TABLE>
The Bank had deposit accounts with balances in excess of $100,000 totaling $62.5
million and $51.0 million at December 31, 1996 and 1995, respectively.
19
<PAGE> 20
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE E - DEPOSITS (continued)
<TABLE>
<CAPTION>
Interest expense on deposits is summarized as follows for the years ended
December 31:
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
NOW accounts $ 351 $ 456 $ 524
Savings accounts 1,168 1,257 1,299
Money market deposit accounts 134 170 215
Premium investment accounts 1,131 486 -
Certificates of deposit 5,306 5,258 3,313
----- ----- -----
$8,090 $7,627 $5,351
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
The contractual maturities of outstanding certificates of deposit are
summarized as follows at December 31:
1996 1995
(In thousands)
<S> <C> <C>
Less than one year $ 58,266 $68,761
One year to three years 43,863 21,030
More than three years 2,209 1,026
--------- -------
$104,338 $90,817
======= ======
</TABLE>
NOTE F - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
1996 and 1995 by pledges of certain residential mortgage loans totaling
$20.4 million and $11.3 million, respectively, and the Bank's investment in
Federal Home Loan Bank stock, are summarized as follows:
<TABLE>
MATURING IN
YEAR ENDED DECEMBER 31,
INTEREST RATE DECEMBER 31, 1996 1995
(In thousands)
<S> <C> <C> <C>
5.55% 1997 $ 2,000 $ -
7.25% 1999 1,253 1,596
6.00% 2000 4,467 1,799
8.20% 2004 2,119 2,288
7.40% 2010 1,778 1,846
6.95% 2011 1,987 -
------- ----
$13,604 $7,529
====== =====
Weighted-average interest rate 6.71% 7.30%
==== ====
</TABLE>
20
<PAGE> 21
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE G - FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate for the year ended December 31 as follows:
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at the statutory rate $1,617 $1,160 $947
Increase (decrease) in taxes resulting from:
Interest income on municipal loans and obligations
of state and political subdivisions (50) (41) (29)
Other (19) 44 2
------- ------- -----
Federal income tax provision per consolidated
financial statements $1,548 $1,163 $920
===== ===== ===
</TABLE>
<TABLE>
<CAPTION>
The composition of the Company's net deferred tax asset at December 31 is as
follows:
Taxes (payable) refundable on temporary 1996 1995
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax asset:
Book/tax difference of loan loss allowance $896 $723
Deferred tax liabilities:
Deferred loan origination costs (57) (17)
Federal Home Loan Bank stock dividends (50) (19)
Unrealized gains on securities designated as available for sale (17) (58)
---- ----
Total deferred tax liabilities (124) (94)
--- ----
Net deferred tax asset $772 $629
=== ===
</TABLE>
The Company had not recorded a valuation allowance for any portion of the
net deferred tax asset at December 31, 1996 and 1995. Such estimate was
based, in part, on the amount of income taxes subject to recovery in
carryback years.
NOTE H - RELATED PARTY TRANSACTIONS
In the normal course of business, the Company has made loans to its
directors, officers and key employees, 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, 1996, 1995 and 1994
totaled approximately $1.6 million, $2.5 million and $462,000, respectively.
21
<PAGE> 22
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE H - RELATED PARTY TRANSACTIONS (continued)
The Company had also received demand and time deposits of approximately $5.4
million, $3.7 million and $3.7 million at December 31, 1996, 1995 and 1994
from directors, officers and their related business interests.
NOTE I - 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 one full year of service.
The profit-sharing plan is non-contributory and contributions to the plan
are at the discretion of the Board of Directors. The Company contributed
$125,000, $69,000 and $125,000 to the Plan for the years ended December 31,
1996, 1995 and 1994, respectively.
The 401(k) plan allows employees to make voluntary, tax deferred
contributions up to 15% of their base annual compensation. The Company
provides, at its discretion, a 50% (25% for 1994) matching of funds for each
participant's contribution, subject to a maximum of 6% of base compensation.
If the participant elects to invest their contributions in the common stock
of Oak Hill Financial, Inc., the Company will provide a 100% matching of
each participants contribution. The Company's matching contributions under
the 401(k) plan totaled $100,000, $46,000 and $20,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
NOTE J - LOAN 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. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the statement 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 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.
At December 31, 1996, the Company had outstanding commitments of
approximately $3.9 million to originate variable rate residential and
commercial loans. Also, the Company has unused lines of credit and letters
of credit totaling approximately $4.8 million and $1.1 million,
respectively, as of December 31, 1996. In the opinion of management,
outstanding loan commitments equaled or exceeded prevalent market interest
rates as of December 31, 1996, such commitments were underwritten in
accordance with normal loan underwriting policies, and all disbursements
will be funded via cash flow from operations and existing excess liquidity.
22
<PAGE> 23
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE K - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
The Bank is required to maintain minimum amounts of risk-weighted capital
and leverage capital, as defined by banking regulations. At December 31,
1996, the Bank was required to have minimum leverage capital and total
risk-weighted capital ratios of 4.0% and 8.0%, respectively. The Bank's
actual leverage and risk-weighted capital ratios at December 31, 1996 were
9.4% and 13.1%, and at December 31, 1995 were 13.7% and 14.9%, respectively.
As a result, the Bank met the definition of a well-capitalized financial
institution under federal regulations.
The principal source of the Company's revenues are cash dividends received
from the Bank. The Ohio banking laws impose certain limitations on the
payment of dividends by Ohio state chartered banks, as follows: (1) no
dividends may be paid which would reduce the surplus to less than 20% of
capital; (2) the Ohio Superintendent of Financial Institutions (the
Superintendent) must approve any dividend the total of which exceeds the
total of net profits of that fiscal year combined with net profits of the
preceding two years less any required transfers to surplus or a fund for the
retirement of any preferred stock or capital securities. Pursuant to the
foregoing, at December 31, 1996, the Bank had the capability of paying $4.5
million of dividends to the Company without the Superintendent's approval.
NOTE L - STOCK OPTION PLAN
The Board of Directors of the Company had approved a Stock Option Plan in
1993 (the "1993 Plan"). Pursuant to the 1993 Plan, options to purchase
108,500 shares of common stock were granted to officers at an exercise price
of $2.86 per share, subject to a five year vesting period. Compensation
expense of $211,000 and $62,000 was recognized for the years ended December
31, 1995 and 1994. In contemplation of the Company's common stock offering
in August 1995, the Plan's vesting period was waived. As a result, the
Company's officers exercised all outstanding options during 1995 at a
pre-tax cost of approximately $180,000 to the Company. The 1993 Plan was
terminated in August 1995.
The Company initiated a Stock Option Plan in August 1995 (the "1995 Plan")
that provides for the issuance of 200,000 shares of authorized, but unissued
shares of common stock. The Board of Directors granted stock options to
purchase 22,000 shares of stock at an exercise price of $9.75 per share at
the completion of the Company's common stock offering. During the years
ended December 31, 1996 and 1995, respectively, an additional 65,500 and
18,400 options were granted at exercise prices ranging from $9.25 to $12.50
on the date of grant. During 1996, 1,000 stock options granted were
exercised. At December 31, 1996, unexercised shares under option in the 1995
Plan totaled 104,900, at exercise prices ranging from $9.25 to $12.50.
23
<PAGE> 24
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE L - STOCK OPTION PLAN (continued)
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for the plan. Had compensation cost
for the Company's stock option plan been determined based on the fair value
at the grant dates for awards under the plan consistent with the accounting
method utilized in SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
1996 1995
<S> <C> <C> <C>
Net earnings As reported $3,209 $2,250
===== =====
Pro-forma $3,165 $2,238
===== =====
Earnings per share As reported $1.12 $.92
==== ===
Pro-forma $1.10 $.91
==== ===
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the modified Black- Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995, respectively;
dividend yield of 7.5% and expected volatility of 30.0% for all years;
risk-free interest rates of 6.15% and 6.05% and expected lives of eight
years.
A summary of the status of the Company's fixed stock option plans as of
December 31, 1996 and 1995, and changes during the periods ending on those
dates is presented below:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
PRICE SHARES PRICE
<S> <C> <C> <C>
Outstanding at beginning of year $ 9.52 40,400 $ -
Granted $12.26 66,500 $9.52
Exercised $ 9.75 (1,000) $ -
Forfeited $ - - $ -
Outstanding at end of year $11.23 104,900 $9.52
=======
Options exercisable at year-end 23,400 20,400
Weighted-average fair value of
options granted during the year $ 1.98 $1.53
</TABLE>
<TABLE>
<CAPTION>
The following information applies to options outstanding at December 31, 1996:
<S> <C>
Number outstanding 104,900
Range of exercise prices $9.75-$12.50
Weighted-average exercise price $11.23
Weighted-average remaining contractual life 8 years
</TABLE>
24
<PAGE> 25
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
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, 1996 and 1995, and
the results of its operations and its cash flows for each of the years
ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Oak Hill Financial, Inc.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 10 $ 244
Interest-bearing deposits in Oak Hill Banks 2,044 1,003
Investment securities designated as available for sale - 1,001
Investment in Oak Hill Banks 21,044 17,921
Prepaid expenses and other assets 37 371
--------- --------
Total assets $23,135 $20,540
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 172 $ 114
Stockholders' equity
Common stock 1,442 1,442
Additional paid-in capital 4,227 4,217
Retained earnings 17,290 14,685
Less cost of treasury stock (28) (28)
Unrealized gains on securities designated as
available for sale, net of related tax effects 32 110
--------- --------
Total stockholders' equity 22,963 20,426
------ ------
Total liabilities and stockholders' equity $23,135 $20,540
====== ======
</TABLE>
<TABLE>
<CAPTION>
Oak Hill Financial, Inc.
CONDENSED STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands)
1996 1995 1994
Revenue
<S> <C> <C> <C>
Interest income $ 103 $ 14 $ -
Equity in earnings of subsidiary 3,201 2,506 2,098
----- ----- -----
Total income 3,304 2,520 2,098
Expenses
Interest on notes payable - 89 247
General and administrative 133 273 107
Federal income tax credits (38) (92) (120)
------- ------- ------
Total expenses 95 270 234
------- ------ ------
NET EARNINGS $3,209 $2,250 $1,864
===== ===== =====
</TABLE>
25
<PAGE> 26
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE M - OAK HILL FINANCIAL, INC. CONDENSED FINANCIAL INFORMATION
(continued)
<TABLE>
<CAPTION>
Oak Hill Financial, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)
1996 1995 1994
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the year $3,209 $2,250 $1,864
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Undistributed earnings of consolidated subsidiary (3,201) (257) (1,740)
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 334 (254) 8
Other liabilities 58 114 (20)
------- ------ -------
Net cash provided by operating activities 400 1,853 112
Cash flows provided by (used in) investing activities:
Purchase of investment securities - (1,001) -
Proceeds from maturity of investment securities 1,001 - -
Increase in interest-bearing deposits (1,041) (1,003) -
Proceeds from repayment of loans - - 2
Capital contributed to Oak Hill Banks - (2,000) -
----- ----- -
Net cash provided by (used in) investing activities (40) (4,004) 2
Cash flows provided by (used in) financing activities:
Repayment of notes payable - (2,100) -
Proceeds from issuance of common stock - 3,863 -
Proceeds from exercise of stock options 10 689 4
Proceeds from sale of treasury stock - 62 30
Purchase of treasury stock - - (21)
Redemption of preferred stock - - (2)
Dividends on common and preferred stock (604) (259) (131)
------- ------ ------
Net cash provided by (used in) financing activities (594) 2,255 (120)
------- ----- ------
Net increase (decrease) in cash and cash equivalents (234) 104 (6)
Cash and cash equivalents at beginning of year 244 140 146
------ ------ ------
Cash and cash equivalents at end of year $ 10 $ 244 $ 140
======= ====== ======
</TABLE>
26
<PAGE> 27
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
The following table summarizes the Company's quarterly results for the years ended December 31, 1996 and 1995.
THREE MONTHS ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996: (In thousands, except per share data)
<S> <C> <C> <C> <C>
Total interest income $4,551 $4,691 $4,899 $5,057
Total interest expense 2,175 2,170 2,246 2,284
----- ----- ----- -----
Net interest income 2,376 2,521 2,653 2,773
Provision for losses on loans 138 154 243 225
Other income 311 301 297 294
General, administrative and other expense 1,429 1,478 1,486 1,616
----- ----- ----- -----
Earnings before income taxes 1,120 1,190 1,221 1,226
Federal income taxes 347 394 412 395
------ ------ ------ ------
Net earnings $ 773 $ 796 $ 809 $ 831
====== ====== ====== ======
Earnings per share $.27 $.28 $.28 $.29
=== === == ==
THREE MONTHS ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995: (In thousands, except per share data)
Total interest income $3,728 $4,060 $4,194 $4,539
Total interest expense 1,861 2,143 2,140 2,136
----- ----- ----- -----
Net interest income 1,867 1,917 2,054 2,403
Provision for losses on loans - - 200 228
Other income 103 253 275 284
General, administrative and other expense 1,324 1,133 1,344 1,514
----- ----- ----- -----
Earnings before income taxes 646 1,037 785 945
Federal income taxes 260 303 265 335
------ ------ ------ ------
Net earnings $ 386 $ 734 $ 520 $ 610
====== ====== ====== ======
Earnings per share $.17 $.32 $.22 $.21
=== === === ===
</TABLE>
27
<PAGE> 28
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994
NOTE O - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Obligations for securities sold under agreements to repurchase were
collateralized at December 31, 1996, by investment securities with a book
value including accrued interest of approximately $200,000 and a market
value of approximately $200,000. All outstanding repurchase agreements at
December 31, 1996 matured in January 1997. Interest at a rate of 3.50% was
payable at maturity and has been included in interest on borrowings. The
maximum balance of repurchase agreements outstanding at any month-end
during the year ended December 31, 1996 was $130,000 and the average
month-end balance outstanding for the year was $29,000.
28
<PAGE> 1
EXHIBIT 23
----------
ACCOUNTANTS' CONSENT
We consent to the incorporation by reference in Form S-8 (File No. 81049), our
report dated February 12, 1997, appearing in form 10-K of Oak Hill Financial,
Inc. which was filed pursuant to the Securities Act of 1933.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
March 27, 1997
<PAGE> 1
POWER OF ATTORNEY
Each of the undersigned officers and directors of Oak Hill Financial,
Inc., an Ohio corporation (the "Company"), hereby appoints John D. Kidd and H.
Grant Stephenson, as his true and lawful attorneys-in-fact, or either of them,
with power to act without the other, as his true and lawful attorney-in-fact, in
his name and on his behalf, and in any and all capacities stated below, to sign
and to cause to be filed with the Securities and Exchange Commission the
Company's Annual Report for the fiscal year ended December 31, 1996 on Form
10-KSB (the "Annual Report") hereby granting unto such attorneys-in-fact, and to
each of them, full power and authority to do and perform in the name and on
behalf of the undersigned, in any and all such capacities, every act and thing
whatsoever necessary to be done in and about the premises as fully as the
undersigned could or might do in person, hereby granting to each such
attorney-in-fact full power of substitution and revocation, and hereby ratifying
all that any such attorney-in-fact or his substitute may do by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of March,
1997.
<TABLE>
<CAPTION>
Signature: Title:
<S> <C>
/s/ Evan E. Davis Chairman of the Board of Directors
-----------------------------
Evan E. Davis
/s/ John D. Kidd President and Director
----------------------------- (Principal Executive Officer)
John D. Kidd
/s/ Richard P. LeGrand Executive Vice President and Director
-----------------------------
Richard P. LeGrand
/s/ H. Tim Bichsel Secretary and Treasurer
----------------------------- (Principal Financial and Accounting Officer)
H. Tim Bichsel
/s/ Barry M. Dorsey, Ed.D. Director
-----------------------------
Barry M. Dorsey, Ed.D.
/s/ C. Clayton Johnson Director
-----------------------------
C. Clayton Johnson
/s/ Rick A. McNelly Director
-----------------------------
Rick A. McNelly
/s/ Donald R. Seigneur Director
-----------------------------
Donald R. Seigneur
/s/ H. Grant Stephenson Director
-----------------------------
H. Grant Stephenson
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,378
<INT-BEARING-DEPOSITS> 114
<FED-FUNDS-SOLD> 4,135
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,501
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 190,396
<ALLOWANCE> 2,636
<TOTAL-ASSETS> 246,901
<DEPOSITS> 209,593
<SHORT-TERM> 0
<LIABILITIES-OTHER> 741
<LONG-TERM> 13,604
<COMMON> 1,442
0
0
<OTHER-SE> 21,521
<TOTAL-LIABILITIES-AND-EQUITY> 246,901
<INTEREST-LOAN> 16,341
<INTEREST-INVEST> 2,716
<INTEREST-OTHER> 141
<INTEREST-TOTAL> 19,198
<INTEREST-DEPOSIT> 8,090
<INTEREST-EXPENSE> 8,875
<INTEREST-INCOME-NET> 10,323
<LOAN-LOSSES> 760
<SECURITIES-GAINS> 17
<EXPENSE-OTHER> 6,009
<INCOME-PRETAX> 4,757
<INCOME-PRE-EXTRAORDINARY> 4,757
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,209
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 8.74
<LOANS-NON> 698
<LOANS-PAST> 110
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 808
<ALLOWANCE-OPEN> 2,128
<CHARGE-OFFS> 345
<RECOVERIES> 94
<ALLOWANCE-CLOSE> 2,636
<ALLOWANCE-DOMESTIC> 2,636
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
