<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
---------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Commission File Number 0-26876
OAK HILL FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
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: (740) 286-3283
-------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common stock, without par value
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
$29,667,000.
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 20, 1998, was $39,671,623. (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 20, 1998, there were issued and outstanding 3,519,190
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, 1997, are incorporated by reference into Part II.
Portions of the proxy statement dated March 27, 1998, for the annual
meeting of stockholders to be held April 28, 1998 are incorporated by reference
into Part III.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
<PAGE> 2
PART I
ITEM 1. BUSINESS.
Oak Hill Financial, Inc.
Oak Hill Financial, Inc., an Ohio corporation (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 (the "Bank"). The Company provides
management and similar services for the Bank. Since it does not itself conduct
any operating businesses, the Company 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 the Company's Annual Report to Stockholders, which is incorporated
by reference in response to this item.
The Company was formed in 1981 for the purpose of becoming the parent
holding company of the Bank. The Company is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended. As such, the Company is
subject to strict regulation regarding the acquisition of additional financial
institutions and the conduct, through subsidiaries, of non-banking activities
(see "Regulation").
The Company 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 the
Bank. 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 the Bank. 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 the Company's subsidiary to
their customers includes commercial lending, real estate lending, consumer
credit, credit card, and other personal loan financing. The Bank operates under
the direction of a board of directors and officers that is separate from the
Company.
The Company acquired Unity Savings Bank, a savings bank chartered under
the law of Ohio and headquartered in McArthur, Ohio, ("Unity"), on October 2,
1997. The total consideration paid by the Company for all the outstanding common
stock of Unity was approximately $12.7 million based upon the issuance of
643,690 shares of the Company common stock. The acquisition of Unity by the
Company was completed through the merger of Unity with and into the Bank with
the Bank being the surviving corporation. The acquisition of Unity was accounted
for as a pooling of interests.
Lending Activities
GENERAL. The Company generally makes loans in the 9 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
84% of the Company's loan portfolio at December 31, 1997. 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 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,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
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 $115,647 40.5% $100,433 42.3% $84,784 42.4% $69,993 39.3% $68,887 43.1%
Commercial and other loans 123,978 43.5 96,214 40.5 72,863 36.4 76,024 42.7 64,301 40.2
Consumer loans 48,008 16.8 42,845 18.0 43,968 21.9 33,426 18.8 28,024 17.5
Credit cards 1,360 0.5 1,111 0.5 958 0.5 788 0.4 654 0.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- ------
Total loans 288,993 101.3 240,603 101.3 202,573 101.2 180,231 101.2 161,866 101.2
LESS:
Allowance for loan losses (3,744) (1.3) (2,934) (1.3) (2,367) (1.2) (2,186) (1.2) (1,922) (1.2)
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
TOTAL LOANS RECEIVABLE, NET $285,249 100.0% $237,669 100.0% $200,206 100.0% $178,045 100.0% $159,944 100.0%
======== ===== ======== ===== ======== ====== ======== ===== ======== =====
</TABLE>
The following is maturity information with respect to commercial loans
at December 31, 1997.
<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>
$31,198 9.15% $40,902 9.33% $21,932 8.32% $29,946 9.38% $123,978
</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, and may sell 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% of 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 $115.6 million at December 31, 1997 and
represented 40.5% of loans at such date. At such date, loans secured by
residential real estate with outstanding balances of approximately $614,000, or
.5%, of its total one- to four-family residential real estate loan balance, were
more than 90 days delinquent or nonaccruing.
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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 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 many 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 $66.3 million at
December 31, 1997, and represented 53.5% of such loans at that date. At such
date, commercial loans that were more than 90 days delinquent or nonaccruing
totaled approximately $143,000 or .1% of its commercial loan portfolio. The
aggregate amount of the Company's commercial loans with real estate as primary
or secondary collateral was approximately $57.7 million at December 31, 1997,
and at such date, approximately $47,000 in outstanding balances, or .08% 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 five 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
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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.
At December 31, 1997, the Company had approximately $49.4 million in
its consumer loan portfolio, which was 17.3% of the Company's total loans.
Approximately $282,000 of consumer loans were over 90 days delinquent or
nonaccruing on that date, which represented .6% 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 deferred
and 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
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, 1997, only
$1.0 million or .36% of the Bank's total loan portfolio was
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<PAGE> 6
90 days or more past due. As of December 31, 1997, the Company's level of
nonperforming assets to total assets was .29%.
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, 1997, approximately
$6,500 in outstanding balances, or .5% of credit card loans were nonperforming.
On December 31, 1997, 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
expenses. 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, 1997, there were no such potential problem loans.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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The following is a summary of the Company's loan loss experience and
selected ratios for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
(beginning of period)................. $ 2,934 $ 2,367 $ 2,186 $ 1,922 $ 1,614
Loans charged off:
1-4 family residential real estate.... 22 46 - - -
Multi-family and commercial
real estate......................... - - 5 - 22
Commercial and industrial loans....... 68 79 225 60 154
Consumer loans ...................... 402 323 352 178 181
-------- -------- -------- -------- --------
Total loans charged off............. 492 448 582 238 357
-------- -------- -------- -------- --------
Recoveries of loans previously
charged off:
1-4 family residential real estate.... 45 20 - 2 6
Multi-family and commercial
real estate......................... - - 33 1 18
Commercial and industrial loans....... 5 - 1 2 34
Consumer loans ...................... 102 136 148 134 135
-------- -------- -------- -------- --------
Total recoveries.................... 152 156 182 139 193
-------- -------- -------- -------- --------
Net loans charged off..................... 340 292 400 99 164
Provision for loan losses................. 1,150 859 581 363 472
-------- -------- -------- -------- --------
Allowance for loan losses
(end of period)....................... $ 3,744 $ 2,934 $ 2,367 $ 2,186 $ 1,922
======== ======== ======== ======== ========
Loans outstanding:
Average, net.......................... $255,294 $213,031 $190,868 $169,800 $149,980
End of period......................... $288,993 $240,603 $202,573 $180,231 $162,093
Ratio of allowance for loan losses to loans
outstanding at end of period ........... 1.30% 1.22% 1.17% 1.21% 1.19%
Ratio of net charge-offs to average
loans outstanding ...................... 0.12% 0.14% 0.21% 0.06% 0.11%
</TABLE>
At December 31, 1997, 1996, and 1995 the Company had nonaccrual loans
totaling $795,000, $808,000, and $355,000, respectively. Interest income that
would have been recognized if such loans had performed in accordance with
contractual terms totaled approximately $71,000, $15,000, and $14,000, for the
years ended December 31, 1997, 1996, and 1995. 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.
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, 1997, 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
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the recognition of additions to the allowance based on their judgment of
information available to them at the time of their examination.
The following table summarizes nonperforming assets by category.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate:
Nonaccrual.................................. $ 505 $ 320 $ 115 $ 209 $ 429
Past due 90 days or more(1)................. 109 142 295 208 146
Commercial and industrial:
Nonaccrual.................................. 143 267 -- 150 197
Past due 90 days or more(1)................. -- -- 681 -- --
Consumer and other:
Nonaccrual.................................. 147 221 70 37 25
Past due 90 days or more(1)................. 135 52 159 19 92
-------- -------- -------- -------- --------
Total nonperforming loans................ 1,039 1,002 1,320 623 889
Other real estate owned......................... -- -- 64 147 30
-------- -------- -------- -------- --------
Total nonperforming assets............... $ 1,039 $ 1,002 $ 1,384 $ 770 $ 919
======== ======== ======== ======== ========
Loans outstanding............................... $288,993 $240,603 $202,573 $180,231 $162,093
Allowance for possible loan losses
to total loans................................ 1.30% 1.22% 1.17% 1.21% 1.19%
Nonperforming loans to total
loans......................................... 0.36 0.42 0.81 0.22 0.55
Nonperforming assets to total assets............ 0.29 0.32 0.63 0.26 0.41
Allowance for possible loan losses to
nonperforming loans........................... 360.4% 292.8% 144.8% 350.9% 216.2%
</TABLE>
- ----------------------
(1) Represents accruing loans delinquent greater than 90 days which are
considered by management to be well secured and in the process of
collection.
As of December 31, 1997 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 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.
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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
---------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations..................... $ -- $ -- $ -- $ 11,014
State and local government obligations...................... -- -- -- 1,927
-------- -------- -------- --------
Total investment securities held to maturity......... -- -- -- 12,941
Investment securities designated as available for sale..... 47,839 41,419 29,754 17,388
-------- -------- -------- --------
Total investment securities.......................... $ 47,839 $ 41,419 $ 29,754 $ 30,329
======== ======== ======== ========
</TABLE>
The following table reflects the maturities of the Company's investment
securities at December 31, 1997.
<TABLE>
<CAPTION>
Due After Five
Due in One Year Due After One Year Years Through Due After
or Less Through Five Years Ten Years 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.... $10,496 5.68% $19,655 6.53% $11,533 6.82% $3,788 7.60% $45,448
Municipal obligations... 466 4.49 962 4.59 939 5.06 -- -- 2,391
-------- ----- ------- ----- ------- ----- ------ ----- -------
Total investment securities $10,962 5.63% $20,617 6.44% $12,472 6.69% $3,788 7.60% $47,839
======= ===== ======= ===== ======= ===== ====== ===== =======
</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>
<CAPTION>
At December 31
---------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(Dollars In thousands)
<S> <C> <C> <C> <C>
Federal National Mortgage
Association (FNMA)........................ $1,292 $3,418 $ 4,082 $ 4,139
Federal Home Loan Mortgage
Corporation (FHLMC)....................... 1,731 4,937 5,355 3,772
Government National Mortgage Association (GNMA)... 1,127 1,397 1,706 1,914
Collateralized mortgage obligations............... -- -- -- 3,554
------ ------ ------- -------
Total mortgage-backed securities.................. $4,150 $9,752 $11,143 $13,379
====== ====== ======= =======
</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:
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<PAGE> 10
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1997 1996 1995 1994
----------------- ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate.......................... $1,954 47.1% $3,268 33.5% $ 3,309 29.7% $ 6,925 51.8%
Adjustable rate..................... 2,196 52.9 6,484 66.5 7,834 70.3 6,454 48.2
------ ----- ------ ----- ------- ----- ------- -----
Total mortgage-backed
securities...................... $4,150 100.0% $9,752 100.0% $11,143 100.0% $13,379 100.0%
====== ===== ====== ===== ======= ===== ======= =====
</TABLE>
The following table reflects the estimated principal repayments or
repricing of the Company's mortgage-backed securities at December 31, 1997.
<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
- --------------------- ------ ---- ------ ---- ------ ---- ------ ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
Fixed rate................ $529 8.00% $594 7.00% $426 8.25% $ 405 8.00% $1,954
Variable rate........... -- -- -- -- -- -- 2,196 7.50 2,196
---- ----- ---- ----- ---- ----- ------ ---- ------
Total mortgage-backed
securities.............. $529 8.00% $594 7.00% $426 8.25% $2,601 7.58% $4,150
==== ===== ==== ===== ==== ===== ====== ===== ======
</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
The distribution of the Company's deposit accounts by type and rate is
set forth in the following table.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
Type of Account 1997 1996 1995 1994
and ------------------ ---------------- ----------------- ---------------
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.............. $ 30,369 10.1% $ 22,673 8.7% $ 19,392 8.4% $ 17,293 8.2%
Savings accounts..................... 41,259 13.7 40,618 15.7 40,823 17.7 45,363 21.6
NOW accounts......................... 24,143 8.0 22,725 8.8 20,753 9.0 21,729 10.4
Money market deposit accounts........ 6,911 2.3 6,690 2.6 7,281 3.1 9,098 4.4
Premium investment accounts.......... 19,161 6.3 22,696 8.8 14,198 6.2 -- --
Select investment accounts........... 7,234 2.4 1,267 0.5 -- -- -- --
-------- ----- -------- ----- -------- ----- -------- -----
Total transaction accounts........... 129,077 42.8 116,669 45.1 102,447 44.4 93,483 44.6
CERTIFICATES:
2.00 - 4.99%...................... 14,606 4.8 20,853 8.1 21,081 9.1 67,482 32.2
5.00 - 6.99%...................... 157,835 52.3 113,267 43.8 89,260 38.7 43,138 20.5
7.00 - 9.00%...................... 447 0.1 7,833 3.0 17,890 7.8 5,702 2.7
-------- ----- -------- ----- -------- ----- -------- -----
Total certificates of deposit........ 172,888 57.2 141,953 54.9 128,231 55.6 116,322 55.4
-------- ----- -------- ----- -------- ----- -------- -----
Total deposits....................... $301,965 100.0% $258,622 100.0% $230,678 100.0% $209,805 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</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, 1997.
<TABLE>
<CAPTION>
Within One to Over
Certificate of Deposit Accounts One Year Three Three Total
- ------------------------------- -------- Years Years -----
----- -----
(In thousands)
<S> <C> <C> <C> <C>
4.00% and less.............................. $ 2,465 $ 6 $ -- $ 2,471
4.01% to 5.00%.............................. 11,804 850 51 12,705
5.01% to 6.00%.............................. 92,173 38,319 4,027 134,519
6.01% to 7.00%.............................. 12,382 10,253 354 22,989
7.01% to 8.00%.............................. - 154 50 204
-------- ------- ------ --------
Total $118,824 $49,582 $4,482 $172,888
======== ======= ====== ========
</TABLE>
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, 1997.
-11-
<PAGE> 12
Amount
------
Maturity Period (In thousands)
- ---------------
Three months or less $18,805
Over three through six months 11,044
Over six through 12 months 11,267
Over 12 months 8,848
-------
Total $49,964
=======
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 utilizes FHLB advances to fund long-term
fixed rate commercial loans and to meet short-term liquidity needs. As of
December 31, 1997, the Bank had outstanding FHLB advances totaling $24.7
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,
---------------------------
1997 1996 1995
---- ---- ----
Maximum amount outstanding: (Dollars in thousands)
<S> <C> <C> <C>
FHLB advances $28,868 $21,447 $9,608
Average amount of FHLB advances and
other borrowings outstanding 25,820 15,006 8,174
Weighted average interest rate of total
borrowings based on quarter end balances 6.39% 6.57% 7.33%
</TABLE>
The following table sets forth certain information as to the Company's
FHLB advances and other borrowings at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances $24,705 $21,437 $8,905
Other borrowings -- -- --
Total borrowings $24,705 $21,437 $8,905
======= ======= ======
</TABLE>
-12-
<PAGE> 13
Personnel
At December 31, 1997 the Company and its subsidiary employed 140 persons
on a full-time basis and 33 persons on a part-time basis.
Executive Offices
The Company's executive office is located at 14621 State Route 93,
Jackson, Ohio 45640 and its telephone number is (740) 286-3283.
Subsidiary
The Company 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.
The Company 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, the
Company 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, the Company 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.
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
-13-
<PAGE> 14
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 the Company (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 the Company
cannot accurately be predicted. The Company 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
Except for the historical information contained herein, the matters
discussed in this Form 10-KSB include certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, all statements regarding the intent, belief
and expectations of the Company and its management, such as statements
concerning the Company's future profitability. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, factors detailed from time to time in the Company's filings with the
Securities and Exchange Commission. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate. Therefore, there can be
no assurance that the forward-looking statements contained herein are
reasonable, and any of the assumptions could be inaccurate. Therefore, there can
be no assurance that the forward-looking statements included in this Form 10-KSB
will prove to be accurate, and in light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a presentation by the Company or any
other person that the objectives and plans of the Company will be achieved.
Growth Strategy. The Company has pursued and continues to pursue a strategy of
growth. The success of the Company's growth strategy will depend largely upon
its ability to manage its credit risk and control its costs while providing
competitive products and services. This growth strategy may present special
risks, such as the risk that the Company 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 the Company 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. The Company'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
-14-
<PAGE> 15
percentage of total assets. At December 31, 1997, the Company had a cumulative
interest rate gap of negative 8.19% for one year. As a result of this negative
interest rate gap position, the rate of increase in the costs associated with
the Company's deposits could be expected to increase more rapidly than the rate
of increase in the Company'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, John D. Kidd and
D. Bruce Knox (the "Principal Stockholders") own in the aggregate approximately
56.2% of the outstanding shares of Common Stock of the Company. Accordingly, the
Principal Stockholders will retain the power to elect the entire Board of
Directors of the Company and to determine the outcome of any other matters
submitted to the Company's stockholders for approval. In addition to Ohio and
federal laws and regulations governing changes in control of insured depository
institutions, the Company's Articles of Incorporation and Code of Regulations
contain certain provisions which may delay or make more difficult an acquisition
of control of the Company. For example, the Company's Articles of Incorporation
do not exempt the Company 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 the Company, such ownership position could be expected to deter any
prospective acquiror from seeking to acquire ownership or control of the
Company, and the Principal Stockholders would be able to defeat any acquisition
proposal that requires approval of the Company'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 the Company which they own, including
to a person seeking to acquire ownership or control of the Company. The Company
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 the Company. In
December 1997, the Board of Directors of the Company approved and adopted a
stockholder rights plan that contemplates the issuance of rights to purchase
preferred stock of the Company to the Company's common stockholders of record as
of February 17, 1998, as set forth in the Rights Agreement entered into between
the Company and Fifth Third Bank on January 23, 1998.
Credit Risk; Exposure To Economic Conditions in Jackson, Gallia, Ross, Scioto
and Vinton 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, Gallia, Ross, Scioto, and Vinton Counties,
Ohio, exposes it to risks resulting from changes in the local economies. Per
capita income in Jackson, Gallia, Ross, Scioto and Vinton Counties in 1993 was
less than the statewide average, while unemployment in the same five 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 Butler and Warren Counties, Ohio, its lending operations are
concentrated in Jackson, Gallia, Ross, Scioto, and Vinton Counties, Ohio.
Competition. Banking institutions operate in a highly competitive environment.
The Company 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 the Company. Certain of these competitors offer products and
services that are not offered by the Company and certain competitors are not
subject to the same extensive laws and regulations as the Company. 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 the Company's market
area.
Absence of Trading Market; Determination of Offering Price; Dilution. Prior to
the initial public offering of the common stock of the Company, there had been
no market for the Common Stock and there can be no assurance that an active
trading market will 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 the Company. The market
price of the Common Stock could be subject to significant fluctuations in
response to variations in operating results and other factors.
-15-
<PAGE> 16
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 the
Company'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. The Company'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 Secretary/Treasurer, H.
Tim Bichsel. The loss of their individual services could have a material adverse
impact on the Company's financial stability and its operations. In addition, the
Company's future performance depends on its ability to attract and retain key
personnel and skilled employees, particularly at the senior management level.
The Company'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
the Company's management. The Company 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 15 full-service offices
and a loan production office in Ohio, plus the Company'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 the
Company. 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; one in Vinton County, Ohio; one in Gallia County, Ohio; and one in
Athens County, Ohio. Five of the offices (located in Ross County, Butler County,
Scioto County, and Athens 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 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
SHAREHOLDER INFORMATION
The common stock of the Company is traded on the Nasdaq National Market
System under the symbol "OAKF."
The high and low sales prices for the Company common stock during each
quarter of 1997 and 1996 are as follows:
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<PAGE> 17
Quarter
Ended High Low
3/31/96 10.00 9.25
6/30/96 12.25 9.50
9/30/96 12.25 11.00
12/31/96 13.00 11.50
3/31/97 14.25 12.25
6/30/97 21.00 13.50
9/30/97 21.00 19.25
12/31/97 23.50 19.25
At March 20, 1998, the Company had 351 stockholders of record and
3,519,190 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.
The State of Ohio places certain limitations on the payment of dividends by Ohio
state-chartered banks.
The Company declared the following quarterly cash dividends in 1996 and
1997:
Quarter Dividend
Ended Declared
3/31/96 0.05
6/30/96 0.05
9/30/96 0.05
12/31/96 0.06
3/31/97 0.06
6/30/97 0.06
9/30/97 0.06
12/31/97 0.08
Future cash and stock dividends will be subject to determination and declaration
by the Board of Directors and will consider, among other factors, the Company's
financial condition and results of operations, investment opportunities, capital
requirements, and regulatory limitations.
Stock Transfer Agent. Inquiries regarding stock transfer, registration,
lost certificates, or changes in name and address should be directed in writing
to the Company's stock transfer agent:
Fifth Third Bank
Stock Transfer Department
38 Fountain Square Plaza, MD 1090F5
Cincinnati, OH 45263
(513) 579-5320
(800) 837-2755
Annual Meeting of Shareholders. The Annual Meeting of Shareholders of
Oak Hill Financial, Inc. will be held on April 28, 1998, 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).
-17-
<PAGE> 18
ITEM 6. MANAGEMENT'S 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, 1997 and 1996. This discussion should be read in
conjunction with the consolidated financial statements and related footnotes
presented elsewhere in this report.
On October 2, 1997, the Company acquired Unity Savings Bank ("Unity")
by means of a merger of Unity, with assets of approximately $63.1 million, into
Oak Hill Banks (the "Merger"). On the effective date of the Merger, all
outstanding shares of Unity were cancelled and extinguished in consideration for
643,690 Oak Hill Financial shares.
FORWARD-LOOKING STATEMENTS
In the following pages, management presents an analysis of the
Company's financial condition as of December 31, 1997, and the results of
operations for the year ended December 31, 1997 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 $361.9 million as of December
31, 1997, an increase of $50.1 million, or 16.1%, over the $311.9 million total
at December 31, 1996. The increase was funded primarily through growth in
deposits of $43.3 million, an increase in borrowings of $3.3 million, and an
increase in stockholders' equity of approximately $3.0 million.
-18-
<PAGE> 19
Cash and due from banks, federal funds sold, and investment securities
increased by $1.7 million, or 2.6%, to a total of $65.6 million at December 31,
1997, compared to $63.9 million at December 31, 1996. Investment securities
increased by $818,000, as purchases of $33.6 million exceeded maturities of
$27.9 million and sales of $5.1 million, while Federal funds sold decreased by
$362,000 during 1997.
Loans receivable totaled $285.2 million at December 31, 1997, an
increase of $47.6 million, or 20.0%, over the $237.7 million total at December
31, 1996. Loan disbursements totaled $184.2 million during 1997, which were
partially offset by loans sales of $9.8 million and principal repayments of
$125.8 million. Loan origination volume during 1997 exceeded that of 1996 by
$75.5 million and sales volume increased by $1.9 million. The Company's
allowance for loan losses amounted to $3.7 million at December 31, 1997, an
increase of $810,000, or 27.6%, over the total at December 31, 1996. The
allowance for loan losses represented 1.3% of the total loan portfolio at
December 31, 1997, as compared to 1.22% at December 31, 1996. The Company's
allowance represented 360.4% and 292.8% of nonperforming loans, which totaled
$1.0 million and $1.0 million at December 31, 1997 and 1996, respectively.
Deposits totaled $302.0 million at December 31, 1997, an increase of
$43.3 million, or 16.8%, over the $258.6 million total at December 31, 1996. 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 $33.3 million at
December 31, 1997, an increase of $3.0 million, or 9.9%, over the balance at
December 31, 1996. The increase resulted primarily from net earnings of $3.7
million which were partially offset by dividends to stockholders of $940,000.
SUMMARY OF EARNINGS
The table on page 25 shows for each category of interest-earning assets
and interest-bearing liabilities, the average amount outstanding, the interest
earned or paid on such amount, and the average rate earned or paid for the years
ended December 31, 1997, 1996, and 1995. 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 26 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 1997 AND 1996 FISCAL YEARS
General. Net earnings for the year ended December 31, 1997 totaled $3.7
million, a decrease of $4,000, or .1%, over the net earnings recorded in 1996.
The decrease in earnings resulted primarily from a $1.4 million increase in
general, administrative, and other expenses, a $291,000 increase in the
provision for loan losses, and a $278,000 increase in the provision for Federal
income taxes, which were partially offset by a $2.0 million increase in net
interest income and a $12,000 increase in other income.
Net Interest Income. Total interest income for the year ended December
31, 1997, amounted to $28.3 million, an increase of $4.1 million, or 16.9%, over
the $24.2 million recorded for 1996. Interest income on loans totaled $24.1
million, an increase of $3.7 million, or 18.2%, over the 1996 period. This
increase resulted primarily from a $42.3 million, or 19.8%, increase in the
average portfolio balance outstanding year-to-year, which was partially offset
by a 13 basis point decrease in the average yield, from 9.59% in 1996 to 9.46%
in 1997. Interest
-19-
<PAGE> 20
income on investment securities and other interest-earning assets increased by
$362,000, or 9.7%, to a total of $4.1 million in 1997, as compared to $3.7
million in 1996. This increase resulted primarily from a $2.8 million increase
in the average portfolio balance year-to-year, combined with a 29 basis point
increase in the average yield, from 6.03% in 1996 to 6.32% in 1997.
Total interest expense amounted to $13.7 million for the year ended
December 31, 1997, an increase of $2.1 million, or 18.0%, over the $11.6 million
recorded in 1996. Interest expense on deposits increased by $1.5 million, or
14.0%, to a total of $12.1 million in 1997. The increase resulted primarily from
a $32.1 million, or 14.4%, increase in the average deposit portfolio balance
outstanding year-to-year, which was partially offset by a 2 basis point decrease
in the average cost of deposits, from 4.75% in 1996 to 4.73% in 1997. Interest
expense on borrowings increased by $601,000, or 59.9% during 1997. This increase
was due to a $10.8 million increase in average borrowings outstanding, which was
partially offset by a 47 basis point decrease in the average cost of borrowings,
from 6.68% in 1996 to 6.21% in 1997.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $2.0 million, or 15.9%, for the year
ended December 31, 1997, as compared to 1996. The interest rate spread increased
by 4 basis points to 3.95% in 1997 from 3.91% in 1996, while the net interest
margin decreased by 2 basis points to 4.54% in 1997 from 4.56% in 1996.
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 $1.2 million for the year ended December 31, 1997, as
compared to $859,000 for the same period in 1996, an increase of $291,000, or
33.9%. The provision for loan losses in 1997 was increased primarily as a result
of the $47.6 million of growth in the loan portfolio over the year. Net loan
charge-offs amounted to $340,000 in 1997, as compared to $292,000 in 1996.
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, 1997, 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 $1.4 million for the year ended
December 31, 1997, an increase of $12,000, or .9%, over the amount recorded in
1996. The increase resulted primarily from a $19,000, or 1.5%, increase in
service fees, charges, and other operating income, coupled with a $78,000
increase in gain on sale of loans, which were partially offset by net losses on
sale of investments and other assets of $60,000, as compared to the $25,000 net
gain recorded on such sales during the 1996 period.
Other Expense. General, administrative, and other expense totaled $9.1
million for the year ended December 31, 1997, an increase of $1.4 million, or
19.0%, over the $7.6 million recorded in 1996. The increase resulted primarily
from merger related expenses of $920,000 incurred in connection with the
previously described Unity merger, a $364,000, or 9.2%, increase in employee
compensation and benefits, and a $153,000, or 14.8%, increase in occupancy and
equipment, and a $394,000, or 21.6% increase in other operating expense, which
were partially offset by a $337,000, or 85.3% 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 establishment of new
branch locations in 1997 and late 1996 combined with normal merit increases.
Additionally, the opening of such branch facilities as described above was
primarily responsible for the increase in occupancy and equipment expense. The
decline in federal deposit insurance premiums was due to the absence of the
one-time SAIF recapitalization assessment in 1997. 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.
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<PAGE> 21
Federal Income Taxes. The provision for federal income taxes amounted
to $2.1 million for the year ended December 31, 1997, an increase of $278,000,
or 15.7%, over the $1.8 million recorded in 1996. The effective tax rates were
35.1% and 32.3% for the years ended December 31, 1997 and 1996, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR 1996 AND 1995 FISCAL YEARS
General. Net earnings for the year ended December 31, 1996 totaled $3.7
million, an increase of $933,000, or 33.6%, over the $2.8 million in net
earnings recorded in 1995. The increase in earnings resulted primarily from a
$2.3 million increase in net interest income and a $302,000 increase in other
income, which were partially offset by a $278,000 increase in the provision for
losses on loans, a $1.0 million increase in general, administrative and other
expense and a $349,000 increase in the provision for federal income taxes.
Net Interest Income. Total interest income for the year ended December
31, 1996, amounted to $24.2 million, an increase of $3.1 million, or 14.6%, over
the $21.1 million recorded for 1995. Interest income on loans totaled $20.4
million, an increase of $2.8 million, or 15.7%, over the 1995 period. This
increase resulted primarily from a $22.2 million, or 11.6%, increase in the
average portfolio balance outstanding year-to-year, coupled with a 34 basis
point increase in the average yield, from 9.25% in 1995 to 9.59% in 1996.
Interest income on investment securities and other interest-earning assets
increased by $297,000, or 8.6%, to a total of $3.7 million in 1996, as compared
to $3.5 million in 1995. This increase resulted primarily from a $4.0 million
increase in the average portfolio balance year-to-year, combined with a 10 basis
point increase in the average yield, from 5.93% in 1995 to 6.03% in 1996.
Total interest expense amounted to $11.6 million for the year ended
December 31, 1996, an increase of $775,000, or 7.1%, over the $10.8 million
recorded in 1995. Interest expense on deposits increased by $478,000, or 4.7%,
to a total of $10.6 million in 1996. The increase resulted primarily from a
$16.8 million, or 8.1%, 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 4.90% in 1995 to 4.75% in 1996.
Interest expense on borrowings increased by $297,000, or 42.1% during 1996. This
increase was due to a $6.8 million increase in average borrowings outstanding,
which was partially offset by a 196 basis point decrease in the average cost of
borrowings, from 8.64% in 1995 to 6.68% in 1996.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $2.3 million, or 22.4%, for the year
ended December 31, 1996, as compared to 1995. The interest rate spread increased
by 48 basis points to 3.91% in 1996 from 3.43% in 1995, while the net interest
margin increased by 44 basis points to 4.56% in 1996 from 4.12% 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 $859,000 for the year ended December 31, 1996, as
compared to $581,000 for the same period in 1995, an increase of $278,000, or
47.9%. The provision for loan losses in 1996 was increased primarily as a result
of the $37.5 million of growth in the loan portfolio over the year. Net loan
charge-offs amounted to $292,000 in 1996, as compared to $400,000 in 1995.
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 $1.4 million for the year ended
December 31, 1996, an increase of $302,000, or 27.5%, over the $1.1 million in
other income recorded in 1995. The increase resulted primarily from a $172,000,
or 15.4%, 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 $102,000 increase
in net gains on securities transactions, to $25,000 during
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<PAGE> 22
1996 as compared to the $77,000 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 $7.6
million for the year ended December 31, 1996, an increase of $1.0 million, or
15.8%, over the $6.6 million recorded in 1995. The increase resulted primarily
from a $402,000, or 11.2%, increase in employee compensation and benefits, a
$108,000, or 11.6%, increase in occupancy and equipment, a $97,000 increase in
federal deposit insurance premiums, and a $383,000, or 26.7% increase in other
operating expense.
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 federal deposit insurance premiums was a
result of the one-time SAIF recapitalization assessment paid by Unity as a
thrift institution. 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 $1.8 million for the year ended December 31, 1996, an increase of $349,000,
or 24.5%, over the $1.4 million recorded in 1995. The increase resulted
primarily from a $1.3 million, or 30.5%, increase in earnings before taxes. The
effective tax rates were 32.3% and 33.9% for the years ended December 31, 1996
and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Like other financial institutions, the Company must ensure that
sufficient funds are available to meet deposit withdrawals, loan commitments,
and expenses. Control of the Company's cash flow requires the anticipation of
deposit flows and loan payments. The Company's primary sources of funds are
deposits 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, 1997, the Company had $118.8 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, 1997, the Company had $24.7 million of
outstanding FHLB advances.
As of December 31, 1997, loan commitments, or loans committed but not
closed, totaled $5.4 million. Additionally, the Bank had unused lines of credit
and letters of credit totaling $24.9 and $974,000, 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 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,
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<PAGE> 23
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 adopted SFAS No. 125 effective January 1, 1998, as
required, without material effect on the Company's consolidated financial
position or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes in required. SFAS No. 130 is not expected to
have a material impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 significantly changes
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about reportable segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 uses a "management approach" to disclose financial and descriptive
information about the way that management organizes the segments within the
enterprise for making operating decisions and assessing performance. For many
enterprises, the management approach will likely result in more segments being
reported. In addition, SFAS No. 131 requires significantly more information to
be disclosed for each reportable segment than is presently being reported in
annual financial statements and also requires that selected information be
reported in interim financial statements. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. SFAS No. 131 is not expected to have a
material impact on the Company's financial statements.
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<PAGE> 24
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.
OTHER MATTERS/YEAR 2000 ISSUES
As with all providers of financial services, the Company's operations
are heavily dependent on information technology systems. The Company is
addressing the potential problems associated with the possibility that the
computers that control or operate the Company's information technology system
and infrastructure may not be programmed to read four-digit date codes and, upon
arrival of the year 2000, may recognize the two-digit code "00" as the year
1900, causing systems to fail to function or to generate erroneous data. The
Company is working with the companies that supply or service its information
technology systems to identify and remedy any year 2000 related problems.
As of the date of this Report on Form 10-KSB, the Company has not
identified any specific expenses that are reasonably likely to be incurred by
the Company in connection with this issue and does not expect to incur
significant expenses to implement the necessary corrective measures. No
assurance can be given, however, that significant expense will not be incurred
in future periods. In the event that the Company is ultimately required to
purchase replacement computer systems, programs and equipment, or incur
substantial expense to make the Company's systems, programs and equipment year
2000 compliant, the Company's net earnings and financial condition could be
adversely affected.
In addition to possible expense related to its own systems, the Company
could incur losses if loan payments are delayed due to year 2000 problems
affecting any major borrowers in the Company's primary market area. Because the
Company's loan portfolio is highly diversified with regard to individual
borrowers and types of businesses and the Company's primary market area is not
significantly dependent upon one employer or industry, the Company does not
expect any significant or prolonged difficulties that will affect net earnings
or cash flow.
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<PAGE> 25
<TABLE>
<CAPTION>
AVERAGE BALANCES AND INTEREST RATES
Year Ended December 31,
1997 1996 1995
--------------------------- -------------------------- --------------------------
Average Interest Average Average Interest Average Average Interest Average
Balance Income/ Rate Balance Income/ Rate Balance Income/ Rate
------- Expense ---- ------- Expense ---- ------- Expense ----
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate mortgage $102,882 $ 9,038 8.78% 91,249 $ 8,243 9.03% $ 84,607 $ 7,189 8.50%
Commercial and other 108,125 10,499 9.71 84,840 8,157 9.61 70,502 6.697 9.50
Installment loans 43,159 4,465 10.35 36,012 3,882 10.78 34,933 3,639 10.42
Credit card 1,128 141 12.50 930 138 14.84 826 120 14.53
Investment securities 56,682 3,666 6.47 50,862 3,180 6.25 44,470 2,691 6.05
Federal funds sold 7,998 428 5.35 7,950 428 5.38 10,919 662 6.06
Interest-earning deposits 334 17 5.09 3,368 141 4.19 2,826 99 3.50
-------- ------- ----- ------- ------- ----- -------- ------- -----
Total interest-earning assets 320,308 28,254 8.82 275,211 24,169 8.78 249,083 21,097 8.47
Non-interest-earning assets 19,064 13,129 8,774
-------- ------- --------
Total assets $339,372 $288,340 $257,857
======== ======== ========
Interest-bearing liabilities:
Deposits:
Savings accounts $ 40,863 1,271 3.11 $ 41,195 1,381 3.35 $ 41,767 1,471 3.52
NOW accounts 25,110 529 2.11 25,622 492 1.92 24,101 600 2.49
Money market deposits 6,582 196 2.98 4,267 134 3.14 4,261 170 3.99
Premium investment accounts 26,390 1,275 4.83 23,034 1,131 4.91 9,765 486 4.98
Certificates of deposit 156,870 8,832 5.63 129,574 7,478 5.77 127,049 7,411 5.83
Borrowings 25,820 1,604 6.21 15,006 1,003 6.68 8,174 706 8.64
Total interest-bearing liabilities 281,635 13,707 4.87 238,698 11,619 4.87 215,117 10,844 5.04
------- ----- ------ ------ ------- ------
Non-interest-bearing liabilities 26,030 20,811 18,861
Stockholders' equity 31,707 28,831 23,879
-------- ------- -------
Total liabilities and
stockholders' equity $339,372 $288,340 $257,857
======== ======== ========
Net interest income and interest
rate spread $14,547 3.95% $12,550 3.91% $10,253 3.43%
======= ======= ======= ======= ======= =======
Net interest margin(1) 4.54% 4.56% 4.12%
======= ======= =======
Average interest-earning assets to average
interest-bearing liabilities 113.73% 115.30% 115.79%
======= ======= =======
</TABLE>
(1) The net interest margin is the net interest income divided by average
interest-earning assets.
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<PAGE> 26
<TABLE>
<CAPTION>
1997 vs 1996 1996 vs 1995
------------ ------------
Increase (decrease) due to Increase (decrease) due to
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Change in interest income attributable to:
Loans receivable $3,947 $(224) $3,723 $2,050 $ 725 $2,775
Investment securities 374 112 486 397 92 489
Federal funds sold 3 (3) - (167) (67) (234)
Interest earning deposits with banks (180) 56 (124) 21 21 42
------ ------ ------ ------ ------- ------
Total interest income $4,144 $ (59) $4,085 $2,301 $ 771 $3,072
====== ====== ====== ====== ======= ======
Change in interest expense attributable to:
Deposits $1,515 $ (28) $1,487 $ 770 $ (292) $ 478
Borrowings 670 (69) 601 447 (150) 297
------ ------ ------ ------ ------- ------
Total interest expense $2,185 $ (97) $2,088 $1,217 $ (442) $ 775
====== ====== ====== ====== ======= ======
Increase in net interest income $1,997 $2,297
====== ======
</TABLE>
ITEM 7. FINANCIAL STATEMENTS.
The information contained in Exhibit 13 hereto from the Company's
Annual Report to Shareholders for the year ended December 31, 1997, 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.
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 Shareholders" and "Ownership of Common Stock by Management" in the
Company's Proxy Statement dated March 27, 1998 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 the Company's Proxy Statement dated March 27, 1998
is incorporated herein by reference in response to this item.
ITEM 10. EXECUTIVE COMPENSATION.
The information appearing under "Executive Compensation" in the
Company's Proxy Statement dated March 27, 1998 is incorporated herein by
reference in response to this item.
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<PAGE> 27
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 the Company's
Proxy Statement dated March 27, 1998 is incorporated herein by reference in
response to this item.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under "Certain Transactions" in the Company's
Proxy Statement dated March 27, 1998 is incorporated herein by reference in
response to this item.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) Documents filed as a part of the Report:
<S> <C>
(1) Report of Grant Thornton LLP, Independent Auditors
Consolidated Statements of Financial Condition as of December 31,
1997 and 1996
Consolidated Statements of Earnings for years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholder's Equity for years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements for years ended
December 31, 1997, 1996 and 1995
(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.
</TABLE>
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<PAGE> 28
(3) Exhibits:
Exhibit
Number
------
* 3(a) Second Amended and Restated Articles of
Incorporation (reference is made to Form
SB-2, Exhibit 3(i), File No. 33-096216 and
incorporated herein by reference).
* 3(b) Restated Code of Regulations (reference is
made to Form SB-2, Exhibit 3(ii), File
No. 33-96216 and incorporated herein by
reference).
*4(a) Reference is made to Articles FOURTH, FIFTH,
SEVENTH, EIGHTH, TENTH AND ELEVENTH of the
Registrant's Restated Articles of
Incorporation (contained in the Registrant's
Restated Articles of Incorporation filed as
Exhibit 3(a) hereto) and Articles II, III,
IV, VI and VIII of the Registrant's Amended
and Restated Code of Regulations (contained
in the Registrant's Amended and Restated
Code of Regulations filed as Exhibit 3(b)
hereto).
*4(b) Rights Plan, dated January 23, 1998, between
Oak Hill Financial, Inc., and Fifth Third
Bank, (reference is made to Exhibit 4.1 to
the Form 8-A, filed with the Securities and
Exchange Commission on January 23, 1998 and
incorporated herein by reference).
*10(a) Oak Hill Financial, Inc. Amended and
Restated 1995 Stock Option Plan (reference
is made to Form SB-2, Exhibit 10(a), File
No. 33-96216 and incorporated herein by
reference).
*10(b) Employment Agreement between D. Bruce Knox
and the Registrant, dated April 28, 1997,
(reference is made to Form S-4, Exhibit
10(b), file No. 333-30349, and incorporated
herein by reference).
*10(c) Executive Salary Continuation Agreement
between D. Bruce Knox and Unity Savings
Bank, dated December 7, 1994, (reference is
made to Form S-4, Exhibit 10(c), file No.
333-30349, and incorporated herein by
reference).
*10(d) Executive Salary Continuation Agreement
between George Knox and Unity Savings Bank,
dated December 7, 1994, (reference is made
to Form S-4, Exhibit 10(d), file No.
333-30349, and incorporated herein by
reference).
*10(e) Amendment, dated September 18, 1995 to the
Executive Salary Continuation Agreement
between George Knox and Unity Savings Bank,
(reference is made to Form S-4, Exhibit
10(e), file No. 333-30349, and incorporated
herein by reference).
13 1997 Annual Report (Selected portions).
*21 Subsidiaries of the Registrant (reference is
made to Form SB-2, Exhibit 21, File No.
33-96216 and incorporated herein by
reference).
23 Consent of Grant Thornton LLP.
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<PAGE> 29
24 Powers of Attorney.
27 Financial Data Schedule
*Incorporated by reference as indicated.
(b) Form 8-K's Filed in the Fourth Quarter
1. Form 8-K, dated October 1, 1997, filed with the Securities and
Exchange Commission on October 14, 1997.
2. Form 8-K/A No. 1, dated October 1, 1997, filed with the Securities
and Exchange Commission on December 15, 1997.
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<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
and Chief Executive Officer
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>
* EVAN E. DAVIS Chairman of the Board ) March 27, 1998
- -------------------------------- )
Evan E. Davis )
)
)
/s/ JOHN D. KIDD President, Chief Executive Officer, and Director ) March 27, 1998
- --------------------------------- (Principal Executive Officer) )
John D. Kidd )
)
* RICHARD P. LeGRAND Executive Vice President and Director ) March 27, 1998
- ---------------------------- )
Richard P. LeGrand )
)
)
* H. TIM BICHSEL Secretary and Treasurer ) March 27, 1998
- ------------------------------- (Principal Financial and Accounting Officer) )
H. Tim Bichsel )
)
* BARRY M. DORSEY Director ) March 27, 1998
- ------------------------------ )
Barry M. Dorsey )
)
* C. CLAYTON JOHNSON Director ) March 27, 1998
- ----------------------------- )
C. Clayton Johnson )
)
)
* RICK A. McNELLY Director ) March 27, 1998
- ----------------------------- )
Rick A. McNelly )
)
)
* DONALD R. SEIGNEUR Director ) March 27, 1998
- ---------------------------- )
Donald R. Seigneur )
)
)
/s/ H. GRANT STEPHENSON Director ) March 27, 1998
- ---------------------------- )
H. Grant Stephenson )
</TABLE>
-30-
<PAGE> 31
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C> <C>
* D. BRUCE KNOX Director ) March 27, 1998
- ---------------------------- )
D. Bruce Knox )
)
)
)
By: /s/ H. GRANT STEPHENSON ) March 27, 1998
------------------------------------- )
H. Grant Stephenson, attorney-in-fact )
for each of the persons indicated )
</TABLE>
-31-
<PAGE> 32
OAK HILL FINANCIAL, INC.
FORM 10-KSB FOR THE
YEAR ENDED
DECEMBER 31, 1997
EXHIBIT INDEX
<PAGE> 33
Exhibit
Number Description
------ -----------
*3(a) Second Amended and Restated Articles of Incorporation
(reference is made to Form SB-2, Exhibit 3(i), File No.
33-096216 and incorporated herein by reference).
*3(b) Restated Code of Regulations (reference is made to
Form SB-2, Exhibit 3(ii), File No. 33-96216 and
incorporated herein by reference).
*4(a) Reference is made to Articles FOURTH, FIFTH, SEVENTH,
EIGHTH, TENTH AND ELEVENTH of the Registrant's Restated
Articles of Incorporation (contained in the Registrant's
Restated Articles of Incorporation filed as Exhibit 3(a)
hereto) and Articles II, III, IV, VI and VIII of the
Registrant's Amended and Restated Code of Regulations
(contained in the Registrant's Amended and Restated Code
of Regulations filed as Exhibit 3(b) hereto).
*4(b) Rights Plan, dated January 23, 1998, between Oak Hill
Financial, Inc., and Fifth Third Bank, (reference is
made to Exhibit 4.1 to the Form 8-A, filed with the
Securities and Exchange Commission on January 23, 1998
and incorporated herein by reference).
*10(a) Oak Hill Financial, Inc. Amended and Restated 1995 Stock
Option Plan (reference is made to Form SB-2, Exhibit
10(a), File No. 33-96216 and incorporated herein by
reference).
*10(b) Employment Agreement between D. Bruce Knox and the
Registrant, dated April 28, 1997, (reference is made to
Form S-4, Exhibit 10(b), file No. 333-30349, and
incorporated herein by reference).
*10(c) Executive Salary Continuation Agreement between D. Bruce
Knox and Unity Savings Bank, dated December 7, 1994,
(reference is made to Form S-4, Exhibit 10(c), file No.
333-30349, and incorporated herein by reference).
*10(d) Executive Salary Continuation Agreement between George
Knox and Unity Savings Bank, dated December 7, 1994,
(reference is made to Form S-4, Exhibit 10(d), file No.
333-30349, and incorporated herein by reference).
*10(e) Amendment, dated September 18, 1995 to the Executive
Salary Continuation Agreement between George Knox and
Unity Savings Bank, (reference is made to Form S-4,
Exhibit 10(e), file No. 333-30349, and incorporated
herein by reference).
13 1997 Annual Report (Selected portions).
*21 Subsidiaries of the Registrant (reference is made to
Form SB-2, Exhibit 21, File No. 33-96216 and
incorporated herein by reference).
23 Consent of Grant Thornton LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
*Incorporated by reference as indicated.
<PAGE> 1
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENT
Exhibit 13
TABLE OF CONTENTS
Financial Condition.....................16
Earnings................................17
Stockholders' Equity....................18
Cash Flows..............................19
Notes...................................21
1997 Annual Report 15
<PAGE> 2
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
(RESTATED)
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,840 $ 8,635
Federal funds sold 3,773 4,135
Investment securities designated
as available for sale-- at market 51,989 51,171
Loans receivable-- net 285,249 237,669
Loans held for sale-- at lower of cost or market -- 140
Office premises and equipment-- net 4,608 4,561
Federal Home Loan Bank stock-- at cost 2,659 2,073
Accrued interest receivable on loans 1,491 1,238
Accrued interest receivable on investment securities 855 707
Prepaid expenses and other assets 180 576
Cash surrender value of life insurance 591 210
Deferred federal income tax asset 682 739
-------- --------
TOTAL ASSETS $361,917 $311,854
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand $ 30,369 $ 22,673
Savings and time deposits 271,596 235,949
-------- --------
Total deposits 301,965 258,622
Securities sold under agreements to repurchase 258 130
Advances from the Federal Home Loan Bank 24,705 21,437
Accrued interest payable and other liabilities 1,530 1,226
Accrued federal income taxes 110 90
-------- --------
Total liabilities 328,568 281,505
Stockholders' equity
Common stock -- $.50 stated value; authorized
5,000,000 shares, 3,529,390 and 2,884,700
shares issued at December 31, 1997 and 1996 1,765 1,764
Additional paid-in capital 4,012 3,998
Retained earnings 27,410 24,642
Treasury stock (11,200 shares at cost at
December 31, 1997 and 1996) (28) (28)
Unrealized gains (losses) on securities designated
as available for sale, net of related tax effects 190 (27)
-------- --------
Total stockholders' equity 33,349 30,349
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $361,917 $311,854
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
16 Oak Hill Financial, Inc.
<PAGE> 3
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
(RESTATED) (RESTATED)
<S> <C> <C> <C>
INTEREST INCOME
Loans $24,143 $20,420 $17,645
Investments
U. S. Government and agency securities 3,530 3,078 2,585
Obligations of state and political subdivisions 136 102 106
Federal funds sold 428 428 662
Interest-bearing deposits 17 141 99
------- ------ -------
Total interest income 28,254 24,169 21,097
INTEREST EXPENSE
Deposits 12,103 10,616 10,138
Borrowings 1,604 1,003 706
------- ------- -------
Total interest expense 13,707 11,619 10,844
------ ------ -------
Net interest income 14,547 12,550 10,253
Less provision for losses on loans 1,150 859 581
------- ------- -------
Net interest income after provision for losses on loans 13,397 11,691 9,672
OTHER INCOME (EXPENSE)
Service fees, charges and other operating 1,310 1,291 1,119
Gain on sale of loans 163 85 57
Gain (loss) on sale of assets (60) 25 (77)
------- ------- -------
Total other income 1,413 1,401 1,099
GENERAL, ADMINISTRATIVE, AND OTHER EXPENSE
Employee compensation and benefits 4,342 3,978 3,576
Occupancy and equipment 1,189 1,036 928
Federal deposit insurance premiums 58 395 298
Franchise taxes 327 377 328
Other operating expenses 2,214 1,820 1,437
Merger-related expenses 920 -- --
------- -------- -------
Total general, administrative, and other expense 9,050 7,606 6,567
------- -------- -------
Earnings before federal income taxes 5,760 5,486 4,204
FEDERAL INCOME TAXES
Current 2,104 1,901 1,433
Deferred (52) (127) (8)
------- ------- -------
Total federal income taxes 2,052 1,774 1,425
------- ------- -------
NET EARNINGS $ 3,708 $ 3,712 $ 2,779
======= ======= =======
EARNINGS PER SHARE
Basic $1.05 $1.06 $.90
===== ===== ====
Diluted $1.04 $1.05 $.90
===== ===== ====
</TABLE>
The accompanying notes are an integral part of these statements.
1997 Annual Report 17
<PAGE> 4
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
ON SECURITIES
ADDITIONAL DESIGNATED AS
COMMON PAID-IN RETAINED TREASURY AVAILABLE
STOCK CAPITAL EARNINGS STOCK FOR SALE TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995
(AS RESTATED FOR BUSINESS COMBINATION) $ 421 $ 724 $19,312 $ (35) $(688) $19,734
Sale of 9,100 shares of treasury stock -- 55 -- 7 -- 62
Issuance of 107,100 shares under stock option plan 5 684 -- -- -- 689
Net proceeds from issuance of common shares 1,338 2,525 -- -- -- 3,863
Dividends on common shares -- -- (371) -- -- (371)
Unrealized gains on securities designated as
available for sale, net of related tax effects -- -- -- -- 746 746
Net earnings for the year -- -- 2,779 -- -- 2,779
------ ------ ------- ------ ----- -------
BALANCE AT DECEMBER 31, 1995 1,764 3,988 21,720 (28) 58 27,502
Issuance of 1,000 shares under stock option plan -- 10 -- -- -- 10
Dividends on common shares -- -- (790) -- -- (790)
Unrealized losses on securities designated as
available for sale, net of related tax effects -- -- -- -- (85) (85)
Net earnings for the year -- -- 3,712 -- -- 3,712
------ ------ ------- ------ ------ -------
BALANCE AT DECEMBER 31, 1996 1,764 3,998 24,642 (28) (27) 30,349
Issuance of 1,000 shares under stock option plan 1 14 -- -- -- 15
Dividends on common shares -- -- (940) -- -- (940)
Unrealized gains on securities designated as
available for sale, net of related tax effects -- -- -- -- 217 217
Net earnings for the year -- -- 3,708 -- -- 3,708
------ ------ ------- ------ ----- -------
BALANCE AT DECEMBER 31, 1997 $1,765 $4,012 $27,410 $ (28) $ 190 $33,349
====== ====== ======= ====== ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
18 Oak Hill Financial, Inc.
<PAGE> 5
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
(Restated) (Restated)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings for the year $ 3,708 $ 3,712 $ 2,779
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 600 508 615
(Gain) loss on sale of securities 97 (27) 109
Amortization (accretion) of premiums and discounts on
investment securities-- net (10) (72) (9)
Proceeds from sale of loans in secondary market 9,835 7,970 6,472
Loans disbursed for sale in secondary market (9,610) (7,848) (6,562)
Gain on sale of loans (85) (85) (57)
Gain on sale of other assets (22) (7) (32)
Amortization of deferred loan origination costs 266 177 94
Federal Home Loan Bank stock dividends (160) (124) (85)
Provision for losses on loans 1,150 859 581
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 15 77 14
Accrued interest receivable (401) (313) (313)
Accrued interest payable and other liabilities 304 73 44
Federal income taxes
Current 20 37 255
Deferred (52) (127) (8)
--------- -------- --------
Net cash provided by operating activities 5,655 4,810 3,897
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Loan disbursements (174,756) (100,983) (79,991)
Principal repayments on loans 125,760 62,467 57,157
Principal repayments on mortgage-backed securities 2,083 2,438 2,553
Proceeds from sale of investment securities designated
as available for sale 5,120 4,599 7,739
Proceeds from maturity of investment securities 25,820 15,261 9,150
Proceeds from sale of other assets 50 69 --
Purchase of investment securities designated as
available for sale (33,602) (32,601) (16,107)
(Increase) decrease in federal funds sold-- net 362 6,422 (9,310)
Purchase of Federal Home Loan Bank stock (426) (580) (372)
Purchase of office premises and equipment (675) (1,090) (718)
-------- -------- --------
Net cash used in investing activities (50,264) (43,998) (29,899)
-------- -------- --------
Net cash used in operating and investing
activities (balance carried forward) (44,609) (39,188) (26,002)
-------- -------- --------
</TABLE>
Continued
1997 Annual Report 19
<PAGE> 6
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
(Restated) (Restated)
<S> <C> <C> <C>
Net cash used in operating and investing
activities (balance brought forward) $ (44,609) $ (39,188) $ (26,002)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from securities sold under agreement to repurchase 128 130 --
Net increase in deposit accounts 43,343 27,977 20,866
Proceeds from Federal Home Loan Bank advances 36,850 21,975 11,107
Repayment of Federal Home Loan Bank advances (33,582) (9,443) (8,263)
Repayment of notes payable -- -- (2,100)
Net increase (decrease) in mortgage escrow funds -- (4) 6
Dividends on common shares (940) (790) (371)
Proceeds from sale of treasury stock -- -- 62
Proceeds from issuance of common stock -- -- 3,863
Proceeds from issuance of shares under stock option plan 15 10 689
------ --------- ---------
Net cash provided by financing activities 45,814 39,855 25,859
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents 1,205 667 (143)
Cash and cash equivalents at beginning of year 8,635 7,968 8,111
--------- --------- ---------
Cash and cash equivalents at end of year $ 9,840 $ 8,635 $ 7,968
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Federal income taxes $ 1,946 $ 1,863 $ 1,100
========== ========= =========
Interest on deposits and borrowings $ 13,593 $ 11,344 $ 10,615
========== ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Transfer of securities to an available for sale
classification in accordance with SFAS No. 115 $ -- $ -- $ 12,539
========== ========= =========
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ 217 $ (85) $ 746
========== ========= =========
Recognition of mortgage servicing rights in
accordance with SFAS No. 122 $ 78 $ -- $ --
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
20 Oak Hill Financial, Inc.
<PAGE> 7
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
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.
On October 2, 1997, the Company merged Unity Savings Bank with and into
its subsidiary, the Bank, in a transaction that was accounted for as a
pooling-of-interests. Accordingly, the consolidated financial statements have
been restated to reflect the effects of the business combination as of January
1, 1995. Pursuant to the merger agreement, the Company issued 643,690 shares of
common stock.
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 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
1997 Annual Report 21
<PAGE> 8
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
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, 1997 and 1996, the Company's stockholders' equity reflected unrealized gains
and unrealized losses on securities designated as available for sale, net of
applicable tax effects, totaling $190,000 and $27,000, respectively.
Realized gains and losses on sales of 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, loans
held for sale were carried at cost. The Company had not identified any loans
held for sale at December 31, 1997.
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
22 Oak Hill Financial, Inc.
<PAGE> 9
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
effect on the Company's consolidated financial condition and results of
operations. The company recorded $78,000 of mortgage servicing rights during the
year ended December 31, 1997.
4. LOAN ORIGINATION AND COMMITMENT FEES
The Company accounts for loan origination fees and costs in accordance
with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases". Pursuant to
the provisions of SFAS No. 91, all loan origination fees received, net of
certain direct origination costs, are deferred on a loan-by-loan basis and
amortized to interest income using the interest method, giving effect to actual
loan prepayments. Additionally, SFAS No. 91 generally limits the definition of
loan origination costs to the direct costs attributable to originating a loan,
i.e., principally actual personnel costs.
Fees received for loan commitments are deferred and amortized over the
life of the related loan using the interest method.
5. ALLOWANCE FOR LOAN LOSSES
It is the Company's policy to provide valuation allowances for
estimated losses on loans based upon past loss experience, 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).
The Company accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of aLoan". This Statement requires
that impaired loans be measured based upon the present value of expected future
cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loans observable market price or fair value of the
collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Company considers its investment in
one-to-four family residential loans, consumer installment loans and credit card
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. With respect to the Company's investment in commercial
loans and its evaluation of impairment thereof, 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, 1997 and 1996, the Company had no loans that would be
defined as impaired under SFAS No. 114.
1997 Annual Report 23
<PAGE> 10
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
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.
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.
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
24, Oak Hill Financial, Inc.
<PAGE> 11
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
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,
1997 and 1996.
CASH AND CASH EQUIVALENTS. The carrying amounts presented in the
consolidated statements of financial condition for cash and cash equivalents are
deemed to approximate fair value.
FEDERAL FUNDS SOLD. The carrying amounts presented in the consolidated
statements of financial condition for federal funds sold are deemed to
approximate fair value.
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 statements of financial condition is deemed to approximate fair
value.
DEPOSITS. The fair value of NOW accounts, savings accounts, demand
deposits, money market deposits and other transaction accounts is deemed to
approximate the amount payable on demand at December 31, 1997 and 1996. 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.
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.
Based on the foregoing methods and assumptions, the carrying value and
fair value of the Company's financial instruments are as follows:
1997 Annual Report 25
<PAGE> 12
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 9,840 $ 9,840 $ 8,635 $ 8,635
Federal funds sold 3,773 3,773 4,135 4,135
Investment securities 51,989 51,989 51,171 51,171
Loans receivable 285,249 289,826 237,809 242,263
Federal Home Loan Bank stock 2,659 2,659 2,073 2,073
-------- -------- -------- --------
$353,510 $358,087 $303,823 $308,277
======== ======== ======== ========
Financial liabilities
Deposits $301,965 $301,329 $258,622 $259,843
Advances from the Federal
Home Loan Bank 24,705 24,781 21,437 21,490
Securities sold under agreement to
repurchase 258 258 130 130
-------- -------- -------- --------
$326,928 $326,368 $280,189 $281,463
======== ======== ======== ========
Unrecognized financial instruments
Commitments to extend credit $ -- $ 40 $ -- $ 60
======== ======== ======== ========
</TABLE>
10. EARNINGS PER SHARE
Basic earnings per share is computed based upon the weighted-average
shares outstanding during the year. Weighted-average common shares outstanding
totaled 3,517,215, 3,516,693, and 3,088,090 for the years ended December 31,
1997, 1996, and 1995, respectively. Diluted earnings per share is computed
taking into consideration common shares outstanding and dilutive potential
common shares to be issued under the Company's stock option plan.
Weighted-average common shares deemed outstanding for purposes of computing
diluted earnings per share totaled 3,559,085, 3,523,606, and 3,090,458 for the
years ended December 31, 1997, 1996, and 1995, respectively.
There were 41,870, 6,913, and 2,368 incremental shares related to the
assumed exercise of stock options in the computation of diluted earnings per
share for the years ended December 31, 1997, 1996, and 1995, respectively.
Options to purchase 88,500 and 54,000 shares of common stock with a weighted
average exercise price of $22.50 and $12.50 were outstanding at December 31,
1997 and 1996, respectively, but were excluded from the computation of common
share equivalents because their exercise prices were greater than the average
market price of the common shares.
Effective December 31, 1997, the Company began presenting earnings per
share pursuant to the provisions of SFAS No. 128. Accordingly, the 1996 and 1995
earnings per share presentation has been revised to conform to SFAS No. 128.
Additionally, in computing earnings per share for the years ended December 31,
1996 and 1995, the 643,690 shares issued to Unity Savings Bank's shareholders
were added to the Company's historic weighted-average shares outstanding.
11. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents are
comprised of cash and due from banks.
26 Oak Hill Financial, Inc.
<PAGE> 13
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
12. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1997 consolidated financial statement presentation.
NOTE B -- INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of investment securities at December 31 are shown below.
<TABLE>
<CAPTION>
1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations $49,338 $316 $ 32 $49,622
Obligations of state and political
subdivisions 2,364 20 17 2,367
------- ---- ---- -------
Total investment securities $51,702 $336 $ 49 $51,989
======= ==== ===== =======
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
U.S. Government and agency obligations $47,969 $223 $225 $47,967
Obligations of state and political
subdivisions 3,241 25 62 3,204
------- ---- ---- -------
Total investment securities $51,210 $248 $287 $51,171
======= ==== ==== =======
</TABLE>
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 at December 31 are shown below.
<TABLE>
<CAPTION>
1997 1996
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
Due in three years or less $17,326 $17,332 $29,800 $29,764
Due after three years through five years 15,249 15,371 9,016 9,039
Due after five years through ten years 12,792 12,897 1,675 1,687
Due after ten years 6,335 6,389 10,719 10,681
------- ------- ------- -------
$51,702 $51,989 $51,210 $51,171
======= ======= ======= =======
</TABLE>
Proceeds from sales of investment securities designated as available
for sale during the year ended December 31, 1997, totaled $5.1 million,
resulting in a realized loss of $97,000 on such sales.
1997 Annual Report 27
<PAGE> 14
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Proceeds from sales of investment securities designated as available
for sale during the year ended December 31, 1996, totaled $4.6 million,
resulting in a realized gain of $27,000 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.
At December 31, 1997 and 1996, investment securities with an aggregate
book value of $41.6 million and $30.7 million, respectively, were pledged as
collateral for public deposits.
NOTE C -- LOANS RECEIVABLE
The composition of the loan portfolio is as follows at December 31:
1997 1996
(In thousands)
Real estate mortgage (primarily residential) $169,316 $145,668
Installment, net of unearned interest of
$3,243 and $3,387 47,771 39,069
Commercial and other 70,546 54,755
Credit card 1,360 1,111
-------- --------
288,993 240,603
Less:
Allowance for loan losses 3,744 2,934
-------- --------
$285,249 $237,669
======== ========
The Company's lending efforts have historically focused on real estate
mortgages and consumer installment loans, which comprised approximately $217.1
million, or 75%, of the total loan portfolio at December 31, 1997, and
approximately $184.7 million, or 77%, of the total loan portfolio at December
31, 1996. 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 approxi-mately $33.3
million, $28.8 million, and $25.3 million at December 31, 1997, 1996, and 1995,
respectively.
The activity in the allowance for loan losses is summarized as follows
for the years ended December 31:
1997 1996 1995
(In thousands)
Balance at beginning of period $2,934 $2,367 $2,186
Provision charged to operations 1,150 859 581
Charge-offs (492) (448) (582)
Recoveries 152 156 182
------ ------ ------
Balance at end of period $3,744 $2,934 $2,367
====== ====== ======
28 Oak Hill Financial, Inc.
<PAGE> 15
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
At December 31, 1997, 1996, and 1995, the Company had nonaccrual and
nonperforming loans totaling approximately $1.0 million, $1.0 million and $1.3
million, respectively. Interest that would have been recognized had nonaccrual
loans performed pursuant to contractual terms totaled approximately $71,000,
$15,000 and $14,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
NOTE D -- OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are summarized at December 31 as follows:
1997 1996
(In thousands)
Land and buildings $ 5,442 $ 5,404
Furniture and equipment 3,184 2,881
------- -------
8,626 8,285
Less accumulated depreciation and amortization (4,018) (3,724)
------- -------
$ 4,608 $ 4,561
======= =======
NOTE E -- DEPOSITS
Deposit balances by weighted-average interest rate at December 31 are
summarized as follows:
DEPOSIT TYPE AND 1997 1996
INTEREST RATE RANGE AMOUNT RATE AMOUNT RATE
(Dollars in thousands)
Demand deposit accounts $ 30,369 -- $ 22,673 --
Savings accounts 41,259 3.06% 40,618 3.36%
NOW accounts 24,143 1.78% 22,725 2.24%
Money market deposit accounts 6,911 3.14% 6,690 3.00%
Premium investment accounts 19,161 4.82% 22,696 4.92%
Select investment accounts 7,234 4.82% 1,267 4.47%
-------- --------
Total transaction accounts 129,077 116,669
Certificates of deposit
3.00--4.99% 14,606 20,853
5.00--6.99% 157,835 113,267
7.00--9.00% 447 7,833
-------- --------
Total certificates of deposit 172,888 5.63% 141,953 5.77%
-------- --------
Total deposits $301,965 4.28% $258,622 4.42%
======== ==== ======== ====
The Bank had deposit accounts with balances in excess of $100,000
totaling $87.5 million and $77.2 million at December 31, 1997 and 1996,
respectively.
1997 Annual Report 29
<PAGE> 16
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Interest expense on deposits is summarized as follows for the years
ended December 31:
1997 1996 1995
(In thousands)
NOW accounts $ 529 $ 492 $ 600
Savings accounts 1,271 1,381 1,471
Money market deposit accounts 196 120 170
Premium investment accounts 1,027 1,131 486
Select investment accounts 247 14 --
Certificates of deposit 8,833 7,478 7,411
------- ------- -------
$12,103 $10,616 $10,138
======= ======= =======
The contractual maturities of outstanding certificates of deposit are
summarized as follows at December 31:
1997 1996
(In thousands)
Less than one year $118,824 $ 82,742
One year to three years 49,582 55,011
More than three years 4,482 4,200
-------- --------
$172,888 $141,953
======== ========
NOTE F -- ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31, 1997
and 1996 by pledges of certain residential mortgage loans totaling $37.1 million
and $32.2 million, respectively, and the Bank's investment in Federal Home Loan
Bank stock, are summarized as follows:
MATURING IN
YEAR ENDED DECEMBER 31,
INTEREST RATE DECEMBER 31 1997 1996
(In thousands)
5.45% to 6.70% 1997 $ -- $ 6,306
5.78% to 6.20% 1998 9,825 500
6.25% to 7.25% 1999 2,598 2,253
6.00% to 6.50% 2000 1,429 4,467
5.75% to 6.35% 2001 3,195 236
6.50% 2002 1,000 1,000
8.20% 2004 1,629 2,119
6.50% 2006 758 791
7.40% 2010 1,542 1,778
6.95% 2011 1,717 1,987
6.70% 2017 1,012 --
------- -------
$24,705 $21,437
Weighted-average interest rate 6.39% 6.45%
======= =======
30 Oak Hill Financial, Inc.
<PAGE> 17
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
NOTE G -- FEDERAL INCOME TAXES
The provision for federal income taxes differs from that computed at
the statutory corporate tax rate for the year ended December 31 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at the statutory rate $1,958 $1,865 $1,429
Increase (decrease) in taxes resulting from:
Interest income on municipal loans and obligations
of state and political subdivisions (83) (70) (65)
Nondeductible merger expenses 159 -- --
Other 18 (21) 61
------ ------ ------
Federal income tax provision per consolidated
financial statements $2,052 $1,774 $1,425
====== ====== ======
</TABLE>
The composition of the Company's net deferred tax asset at December 31
is as follows:
Taxes (payable) refundable on temporary 1997 1996
differences at statutory rate: (In thousands)
Deferred tax assets:
Book/tax difference of loan loss allowance $1,273 $ 997
Unrealized losses on securities designated
as available for sale -- 12
Other -- 76
------ ------
Total deferred tax assets 1,273 1,085
Deferred tax liabilities:
Deferred loan origination costs (242) (101)
Federal Home Loan Bank stock dividends (225) (50)
Unrealized gains on securities designated
as available for sale (97) --
Other (27) (195)
Total deferred tax liabilities (591) (346)
------ ------
Net deferred tax asset $ 682 $ 739
====== ======
The Company had not recorded a valuation allowance for any portion of
the net deferred tax asset at December 31, 1997 and 1996. Such estimate was
based, in part, on the amount of income taxes subject to recovery in carryback
years.
1997 Annaul Report 31
<PAGE> 18
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
NOTE H -- RELATED PARTY TRANSACTIONS
In the normal course of business, the Company has made loans to its
directors, officers, and their related business interests. In the opinion of
management, such loans are consistent with sound banking practices and are
within applicable regulatory lending limitations. The balance of such loans
outstanding at December 31, 1997, 1996, and 1995 totaled approximately $1.7
million, $2.0 million, and $2.9 million, respectively.
The Company had also received demand and time deposits of approximately
$3.7 million, $5.8 million, and $4.1 million at December 31, 1997, 1996, and
1995 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
$123,000, $125,000, and $69,000 to the plan for the years ended December 31,
1997, 1996, and 1995, 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 25% (50% for 1995) matching of funds for each participant's
contribution, subject to a maximum of 6% of base compensation. For 1997 and
1996, if the participant elected to invest their contributions in the common
stock of Oak Hill Financial, Inc., the Company provided a 100% matching of each
participant's contribution. The Company's matching contributions under the
401(k) plan totaled $122,000, $100,000, and $46,000 for the years ended December
31, 1997, 1996, and 1995, 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, 1997, the Company had outstanding commitments of
approximately $5.4 million to originate variable rate residential and commercial
loans. Also, the Company had unused lines of credit and letters of credit
totaling approximately $24.9 million and $1.0 million, respectively, as of
December 31, 1997. In the opinion of management, outstanding loan commitments
equaled or exceeded prevalent market interest rates as of December 31, 1997,
such commitments were underwritten
32 Oak Hill Financial, inc.
<PAGE> 19
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
in accordance with normal loan underwriting policies, and all disbursements will
be funded via cash flow from operations and existing excess liquidity.
NOTE K -- REGULATORY CAPITAL
The Bank is subject to the regulatory capital requirements of the
Federal Deposit Insurance Corporation (the "FDIC"). Failure to meet minimum
capital requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital accounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
The FDIC has adopted risk-based capital guidelines to which the Bank is
subject. The guidelines establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations. Risk-based capital ratios are determined by
allocating assets and specified off-balance-sheet commitments to four
risk-weighting categories, with higher levels of capital being required for the
categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier
("Tier 1") includes common equity, certain non-cumulative perpetual preferred
stock (excluding auction rate issues) and minority interests in equity accounts
of consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier 2") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt, and the allowance for loan losses, subject to certain
limitations, less required deductions. Banks are required to maintain a total
risk-based capital (the sum of Tier 1 and Tier 2 capital) ratio of 8%, of which
4% must be Tier 1 capital. The FDIC may, however, set higher capital
requirements when particular circumstances warrant. Banks experiencing or
anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above minimum required levels.
In addition, the FDIC established guidelines prescribing a minimum Tier
1 leverage ratio (Tier 1 capital adjusted to total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier 1 leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
During the years ended December 31, 1997 and 1996, the Bank was
notified by its primary federal regulator that it was categorized as
"well-capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well-capitalized" the Bank must maintain minimum Tier 1
capital, total risk-based capital, and Tier 1 leverage ratios of 6%, 10%, and
5%, respectively.
As of December 31, 1997 and 1996, management believes that the Bank has
met all of the capital adequacy requirements to which it is subject. The Bank's
Tier 1 capital, total risk-based capital, and Tier 1 leverage ratios at December
31, 1997 and 1996 are set forth in the following table.
1997 Annual Report 33
<PAGE> 20
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997:
AMOUNT RATIO
(Dollars in thousands)
Total capital (to risk-weighted assets) $36,297 14.5%
Tier 1 capital (to risk-weighted assets) $33,159 13.2%
Tier 1 leverage $33,159 9.2%
1996:
AMOUNT RATIO
(Dollars in thousands)
Total capital (to risk-weighted assets) $33,021 15.6%
Tier 1 capital (to risk-weighted assets) $30,376 14.4%
Tier 1 leverage $30,376 9.7%
The Bank's management believes that, under the current regulatory
capital regulations, the Bank will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the control of
the Bank, such as increased interest rates or a downturn in the economy in the
primary market areas, could adversely affect future earnings and consequently,
the ability to meet future minimum regulatory capital requirements.
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 was recognized for the year ended December 31, 1995. In contemplation
of the Company's common stock offering in August 1995, the 1993 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 400,000 shares of authorized, but
unissued shares of common stock. In 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which contains a fair value-based
method for valuing stock-based compensation that entities may use, which
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, SFAS No. 123 permits entities to continue to
account for stock options and similar equity instruments under Accounting
Principals Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net earnings and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied.
The Company applies APB 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
34 Oak Hill Financial, Inc.
<PAGE> 21
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
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:
1997 1996 1995
Net earnings As reported $3,708 $3,712 $2,779
====== ====== ======
Pro-forma $3,429 $3,681 $2,727
====== ====== ======
Basic earnings per share As reported $ 1.05 $ 1.06 $ .90
====== ====== ======
Pro-forma $ .97 $ 1.05 $ .89
====== ====== ======
Diluted earnings per share As reported $ 1.04 $ 1.05 $ .90
====== ====== ======
Pro-forma $ .96 $ 1.04 $ .89
====== ====== ======
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 1997, 1996, and 1995,
respectively: dividend yield of 4.0% and expected volatility of 10.0% for all
years, risk-free interest rates of 5.50%, 6.15% and 6.05%, and expected lives of
six years.
A summary of the status of the Company's 1995 Plan as of December 31,
1997, 1996, and 1995 and changes during the periods ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 104,900 $11.23 40,400 $ 9.52 -- $ --
Granted 121,000 $21.85 65,500 $12.26 40,400 $9.52
Exercised (1,000) $ 9.75 (1,000) $ 9.75 -- $ --
Forfeited (1,000) $ 9.75 -- $ -- -- $ --
------- ------- ------
Outstanding at end of year 223,900 $16.98 104,900 $11.23 40,400 $9.52
======= ======= ======
Options exercisable at year-end 198,900 93,400 20,400
Weighted-average fair value of
options granted during the year $ 2.08 $ 1.44 $1.15
</TABLE>
The following information applies to options outstanding at December
31, 1997:
Number outstanding 223,900
Range of exercise prices $9.25-$22.56
Weighted-average exercise price $16.98
Weighted-average remaining contractual life 9.3 years
1997 Annual Report 35
<PAGE> 22
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
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, 1997 and 1996, and the
results of its operations and its cash flows for each of the years ended
December 31, 1997, 1996, and 1995.
OAK HILL FINANCIAL, INC.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
(IN THOUSANDS)
1997 1996
ASSETS
Cash and due from banks $ 966 $ 10
Interest-bearing deposits in Oak Hill Banks 1,004 2,044
Investment in Oak Hill Banks 31,536 28,430
Prepaid expenses and other assets 124 37
------- -------
Total assets $33,630 $30,521
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 281 $ 172
Stockholders' equity
Common stock 1,765 1,764
Additional paid-in capital 4,012 3,998
Retained earnings 27,410 24,642
Less cost of treasury stock (28) (28)
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects 190 (27)
Total stockholders' equity 33,349 30,349
Total liabilities and stockholders' equity $33,630 $30,521
======= =======
36 Oak Hill Financial, Inc.
<PAGE> 23
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
OAK HILL FINANCIAL, INC.
CONDENSED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
1997 1996 1995
REVENUE
Interest income $ 71 $ 103 $ 14
Equity in earnings of subsidiary 4,030 3,704 3,035
------ ------ ------
Total income 4,101 3,807 3,049
EXPENSES
Interest on notes payable -- -- 89
General and administrative 448 133 273
Federal income tax credits (55) (38) (92)
------ ------ ------
Total expenses 393 95 270
------ ------ ------
NET EARNINGS $3,708 $3,712 $2,779
====== ====== ======
1997 Annual Report 37
<PAGE> 24
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
OAK HILL FINANCIAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net earnings for the year $ 3,708 $ 3,712 $ 2,779
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Undistributed earnings of consolidated subsidiary (3,030) (3,704) (786)
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (87) 334 (254)
Other liabilities 109 58 114
------- ------- -------
Net cash provided by operating activities 700 400 1,853
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of investment securities -- -- (1,001)
Proceeds from maturity of investment securities -- 1,001 --
Increase (decrease) in interest-bearing deposits 1,040 (1,041) (1,003)
Capital contributed to Oak Hill Banks -- -- (2,000)
------- ------- -------
Net cash provided by (used in) investing activities 1,040 (40) (4,004)
------- ------- -------
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 15 10 689
Proceeds from sale of treasury stock -- -- 62
Dividends on common stock (799) (604) (259)
------- ------- -------
Net cash provided by (used in) financing activities (784) (594) 2,255
------- ------- -------
Net increase (decrease) in cash and cash equivalents 956 (234) 104
Cash and cash equivalents at beginning of year 10 244 140
------- ------- -------
Cash and cash equivalents at end of year $ 966 $ 10 $ 244
======= ======= =======
</TABLE>
38 Oak Hill Financial, Inc.
<PAGE> 25
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
NOTE N -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Company's quarterly results for the
years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997: (In thousands, except per share data)
<S> <C> <C> <C> <C>
Total interest income $6,575 $6,849 $7,270 $7,560
Total interest expense 3,245 3,308 3,556 3,598
------ ------ ------ ------
Net interest income 3,330 3,541 3,714 3,962
Provision for losses on loans 106 236 455 353
Other income 342 361 296 414
General, administrative, and other expense 1,920 2,091 3,037 2,002
------ ------ ------ ------
Earnings before income taxes 1,646 1,575 518 2,021
Federal income taxes 548 516 472 516
------ ------ ------ ------
Net earnings $1,098 $1,059 $ 46 $1,505
====== ====== ====== ======
Basic earnings per share $ .31 $ .30 $ .01 $ .43
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996: (In thousands, except per share data)
<S> <C> <C> <C> <C>
Total interest income $5,738 $5,918 $6,161 $6,352
Total interest expense 2,841 2,835 2,920 3,023
------ ------ ------ ------
Net interest income 2,897 3,083 3,241 3,329
Provision for losses on loans 159 183 256 261
Other income 351 341 356 353
General, administrative, and other expense 1,771 1,781 2,109 1,945
------ ------ ------ ------
Earnings before income taxes 1,318 1,460 1,232 1,476
Federal income taxes 412 484 420 458
------ ------ ------ ------
Net earnings $ 906 $ 976 $ 812 $1,018
====== ====== ====== ======
Basic earnings per share $ .26 $ .28 $ .23 $ .29
====== ====== ====== ======
</TABLE>
1997 Annual Report 39
<PAGE> 26
- --------------------------------------------------------------------------------
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
NOTE O -- SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
Obligations for securities sold under agreements to repurchase were
collateralized at December 31, 1997, by investment securities with a book value
including accrued interest of approximately $4.0 million and a market value of
approximately $4.1 million. All outstanding repurchase agreements at December
31, 1997 matured in January 1998. Interest at a rate ranging from 3.50% to 5.12%
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, 1997 was $2.8 million and the average month-end balance
outstanding for the year was approximately $622,000.
40 Oak Hill Financial, Inc.
<PAGE> 27
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
GRANT THORNTON
Grant Thornton LLP Accountants and
Management Consultants
The U.S. Member Firm of
Grant Thornton International
Board of Directors
Oak Hill Financial, Inc.
We have audited the accompanying consolidated statement of financial
condition of Oak Hill Financial, Inc. as of December 31, 1997, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
the year ended December 31, 1997. 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Oak
Hill Financial, Inc., as of December 31, 1997, and the consolidated results of
its operations and its cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated statement of
financial condition of Oak Hill Financial, Inc., as of December 31, 1996, and
the related consolidated statements of earnings, stockholders' equity, and
cash flows for the year ended December 31, 1996 and 1995, prior to the
Company's restatement of the 1996 and 1995 consolidated financial statements
for the 1997 pooling-of-interests with Unity Savings Bank. The contribution of
Unity Savings Bank to total assets, revenues, and net earnings represented
26.3%, 25.3%, and 15.7% of the respective restated 1996 totals. Separate
financial statements of Unity Savings Bank included in the 1996 and 1995
consolidated financial statements were audited and reported on separately by
other auditors.
We also have audited the combination of the accompanying statements of
financial condition and the related statements of earnings, stockholders'
equity, and cash flows for each of the years ended December 31, 1996 and 1995,
after restatement for the pooling-of-interests; in our opinion, such
consolidated statements have been properly combined on the basis described in
Note A of the notes to the consolidated financial statements.
/S/ GRANT THORNTON LLP
------------------------------
Cincinnati, Ohio
February 26, 1998
1997 Annual Report 41
<PAGE> 28
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
SUMMARY OF FINANCIAL CONDITION (1)
Total assets $361,917 $311,854 $268,322 $238,806 $226,447
Interest-bearing deposits
and federal funds sold 3,773 4,135 10,956 1,514 13,176
Investment securities (2) 51,989 51,171 40,987 43,708 41,211
Loans receivable-- net (3) 285,249 237,669 200,206 178,045 160,171
Deposits 301,965 258,622 230,678 209,805 205,181
Federal Home Loan Bank (FHLB)
advances and other borrowings (4) 24,705 21,437 8,905 8,161 2,100
Stockholders' equity 33,349 30,349 27,502 19,734 18,118
SUMMARY OF OPERATIONS (1)
Interest income $ 28,254 $ 24,169 $ 21,097 $ 17,529 $ 16,668
Interest expense 13,707 11,619 10,844 7,817 7,692
-------- -------- -------- -------- --------
Net interest income 14,547 12,550 10,253 9,712 8,976
Provision for loan losses 1,150 859 581 363 472
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 13,397 11,691 9,672 9,349 8,504
Gain on sale of loans 163 85 57 28 219
Gain (loss) on sale of assets (60) 25 (77) (67) 88
Other non-interest income 1,310 1,291 1,119 858 827
Non-interest expense (5) 9,050 7,606 6,567 6,504 5,770
-------- -------- -------- -------- --------
Earnings before federal income
taxes and cumulative effect of
change in accounting method 5,760 5,486 4,204 3,664 3,868
Federal income taxes 2,052 1,774 1,425 1,229 1,366
-------- ------- ------- ------- -------
Earnings before cumulative effect
of change in accounting method 3,708 3,712 2,779 2,435 2,502
Cumulative effect of change in method
of accounting for income taxes (6) -- -- -- -- 446
-------- -------- -------- -------- --------
Net earnings $ 3,708 $ 3,712 $ 2,779 $ 2,435 $ 2,948
======== ======== ======== ======== ========
PER SHARE INFORMATION (7)
Earnings per share $ 1.05 $ 1.06 $ .90 $ .83 $ 1.03
Book value 9.48 8.63 7.82 6.71 6.14
</TABLE>
4 Oak Hill Financial, Inc.
<PAGE> 29
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
OTHER STATISTICAL AND OPERATING DATA
<S> <C> <C> <C> <C> <C>
Return on average assets 1.09% 1.29% 1.08% 1.05% 1.33%
Return on average equity 11.70 12.88 11.64 12.84 17.02
Net interest margin 4.54 4.56 4.12 4.40 4.32
Interest rate spread during period 3.95 3.91 3.43 3.88 3.93
Non-interest expense to average assets 2.67 2.64 2.55 2.80 2.61
Total allowance for loan losses
to nonperforming loans 360.4 292.8 144.8 350.9 216.2
Total allowance for loan losses
to total loans 1.30 1.22 1.17 1.21 1.19
Nonperforming loans to total loans 0.36 0.42 0.81 0.35 0.55
Nonperforming assets to total assets 0.29 0.32 0.63 0.32 0.41
Net charge-offs to average loans 0.12 0.14 0.21 0.06 0.11
Equity to assets at period end 9.22 9.73 10.25 8.26 8.00
Number of full-service offices 15 14 13 12 11
</TABLE>
(1) The Company merged Unity Savings Bank with and into its Oak Hill Banks
subsidiary on October 2, 1997. The merger was accounted for as a
pooling-of-interests. Accordingly, the consolidated financial statements as
of and for the years ended December 31, 1993 through 1996, inclusive, have
been restated as if the merger had occurred on January 1, 1993.
(2) Includes investment securities designated as held to maturity and available
for sale. The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" as of January 1, 1994. See Notes A-2 and B of Notes to
Consolidated Financial Statements for additional information regarding the
composition and classification of investment securities pursuant to this
Statement.
(3) Includes loans held for sale.
(4) FHLB advances and other borrowings at December 31, 1993 and 1994 included
$2.1 million of notes payable to principal stockholders.
(5) Non-interest expense for 1997 includes $920,000 in pre-tax expenses incurred
pursuant to the merger with Unity Savings Bank.
(6) Reflects the Company's adoption of SFAS No. 109, "Accounting for Income
Taxes" in 1993. See Notes A-8 and G of Notes to Consolidated Financial
Statements for additional information.
(7) Per share information gives retroactive effect to the 700-for-1 stock split
effected October 11, 1995 and the issuance of 643,690 shares in the Unity
transaction.
1997 Annual Report 5
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration
Statements on Form S-8, File No. 333-27401, of our report dated February 26,
1998 contained in the 1997 Annual Report to Stockholders of Oak Hill Financial,
Inc., which is incorporated by reference in this Form 10-K.
/s/ Grant Thornton LLP
Cincinnati, Ohio
March 26, 1998
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
Each of the undersigned directors and officers of Oak Hill Financial,
Inc. (the "Corporation") whose signature appears below hereby appoints John D.
Kidd or H. Grant Stephenson, or either of them, as his attorney-in-fact to sign,
in his name and behalf and in any and all capacities stated below, and to cause
to be filed with the Securities and Exchange Commission, the Corporation's
Annual Report on Form 10-KSB (the "Annual Report") for the fiscal year ended
December 31, 1997, and likewise to sign and file any amendments, including
post-effective amendments, to the Annual Report, hereby granting unto such
attorneys and each of them full power and authority to do and perform in the
name and on behalf off the undersigned, and 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 such
attorney-in-fact full power of substitution and revocation, and hereby ratifying
all that such attorney-in-fact or his substitute may do by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of
Attorney in counterparts if necessary, effective as of March 19, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ JOHN D. KIDD President, Chief Executive Officer, Director
------------------------------ (Principal Executive Officer)
John D. Kidd
/s/ EVAN E. DAVIS
------------------------------
Evan E. Davis Chairman of the Board
/s/ RICHARD P. LEGRAND
------------------------------
Richard P. LeGrand Executive Vice President and Director
/s/ H. TIM BICHSEL Secretary and Treasurer
------------------------------ (Principal Accounting Officer)
H. Tim Bichsel
/s/ BARRY M. DORSEY
------------------------------
Barry M. Dorsey Director
/s/ RICK A. MCNELLY
------------------------------
Rick A. McNelly Director
/s/ DONALD R. SEIGNEUR
------------------------------
Donald R. Seigneur Director
/s/ H. GRANT STEPHENSON
------------------------------
H. Grant Stephenson Director
/s/ C. CLAYTON JOHNSON
------------------------------
C. Clayton Johnson Director
/s/ D. BRUCE KNOX
------------------------------
D. Bruce Knox Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 9,840 8,635 7,968
<INT-BEARING-DEPOSITS> 0 0 0
<FED-FUNDS-SOLD> 3,773 4,135 0
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 51,898 51,171 40,987
<INVESTMENTS-CARRYING> 0 0 0
<INVESTMENTS-MARKET> 0 0 0
<LOANS> 285,249 237,669 200,206
<ALLOWANCE> 3,744 2,934 2,367
<TOTAL-ASSETS> 361,917 311,854 268,322
<DEPOSITS> 301,965 258,622 230,678
<SHORT-TERM> 0 0 0
<LIABILITIES-OTHER> 1,898 1,446 1,237
<LONG-TERM> 24,705 21,437 8,905
0 0 0
0 0 0
<COMMON> 1,765 1,764 1,764
<OTHER-SE> 31,584 28,585 25,738
<TOTAL-LIABILITIES-AND-EQUITY> 361,917 311,854 268,322
<INTEREST-LOAN> 24,143 20,420 17,645
<INTEREST-INVEST> 3,666 3,180 2,691
<INTEREST-OTHER> 445 569 761
<INTEREST-TOTAL> 28,254 24,169 21,097
<INTEREST-DEPOSIT> 12,103 10,616 10,138
<INTEREST-EXPENSE> 13,707 11,619 10,844
<INTEREST-INCOME-NET> 14,547 12,550 10,253
<LOAN-LOSSES> 1,150 859 581
<SECURITIES-GAINS> (60) 25 (77)
<EXPENSE-OTHER> 9,050 7,606 6,567
<INCOME-PRETAX> 5,760 5,486 4,204
<INCOME-PRE-EXTRAORDINARY> 5,760 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,708 3,712 2,779
<EPS-PRIMARY> 1.05 1.06 .90
<EPS-DILUTED> 1.04 1.05 .90
<YIELD-ACTUAL> 3.95 3.91 3.43
<LOANS-NON> 795 808 355
<LOANS-PAST> 244 194 1,280
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 2,934 2,367 2,186
<CHARGE-OFFS> 492 448 582
<RECOVERIES> 152 156 182
<ALLOWANCE-CLOSE> 3,744 2,934 2,367
<ALLOWANCE-DOMESTIC> 3,744 2,934 2,367
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
