Exhibit
      13


CONSOLIDATED
      FINANCIAL STATEMENTS














**Table
      of Contents**





Report
                of Independent Registered Public Accounting Firm on Consolidated
                Financial
                Statements
            42Consolidated
                Statements of Financial Condition
            43Consolidated
                Statements of Earnings
            44Consolidated
                Statements of Stockholders’ Equity
            45Consolidated
                Statements of Comprehensive Income
            45Consolidated
                Statements of Cash Flows
            46Notes
                to Consolidated Financial Statements
            48


41
 *Table
          of Contents*


Report
        of Independent Registered Public Accounting
        Firm on
 Consolidated
        Financial Statements







Board
      of
      Directors and Shareholders of Oak Hill Financial, Inc.





We
      have
      audited the accompanying consolidated statements of financial condition of
      Oak
      Hill Financial, Inc. as of December 31, 2006 and 2005, and the related
      consolidated statements of earnings, stockholders’ equity, comprehensive income
      and cash flows for each of the three years in the period ended December 31,
      2006. These consolidated financial statements are the responsibility of the
      Company’s management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audits.





We
      conducted our audits in accordance with the auditing standards of the Public
      Company Accounting Oversight Board (United States). Those standards require
      that
      we plan and perform the audit to obtain reasonable assurance about whether
      the
      financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Oak Hill Financial,
      Inc. as of December 31, 2006 and 2005, and the consolidated results of its
      operations and its cash flows for each of the three years in the period ended
      December 31, 2006, in conformity with accounting principles generally accepted
      in the United States of America.





As
      more
      fully described in Note A-14, the Company changed its method of accounting
      for
      stock-based compensation in accordance with Statement of Financial Accounting
      Standard No. 123(R) as of January 1, 2006.





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Oak Hill Financial, Inc.’s
      internal control over financial reporting as of December 31, 2006, based on
      the
      criteria established in *Internal Control – Integrated
      Framework***issued by the Committee of Sponsoring
      Organizations of the Treadway Commission and our report dated March 15, 2007
      expressed an unqualified opinion on management’s assessment of the effectiveness
      of Oak Hill Financial, Inc.’s internal control over financial reporting and an
      unqualified opinion on the effectiveness of Oak Hill Financial’ Inc.’s internal
      control over financial reporting.







GRANT
      THORNTON LLP





*/s/
      Grant Thornton LLP*





Cincinnati,
      Ohio


March
      15,
      2007


42
 *Table
          of Contents*







Consolidated
      Statements of Financial
      Condition





December
                31,*(In
                thousands, except share data)*
            
            2006
            
            
            2005**ASSETS**Cash
                and cash equivalents:Cash
                and due from banks
            
            $
            20,955
            
            
            $
            23,417Interest-bearing
                deposits in other banks
            
            
            1,474
            
            
            
            1,369Federal
                funds sold
            
            
            818
            
            
            
            1,614Total
                cash and cash equivalents
            
            
            23,247
            
            
            
            26,400Investment
                securities designated as available for sale – at market
            
            
            153,010
            
            
            
            131,193Investment
                securities held to maturity – at cost (approximate market value of $2,712
                and $3,851 at December 31, 2006 and 2005, respectively)
            
            
            2,559
            
            
            
            3,619Loans
                receivable – net
            
            
            1,021,271
            
            
            
            1,014,673Loans
                held for sale – at lower of cost or market
            
            
            90
            
            
            
            410Office
                premises and equipment – net
            
            
            27,765
            
            
            
            22,736Federal
                Home Loan Bank stock – at cost
            
            
            8,078
            
            
            
            7,626Real
                estate acquired through foreclosure
            
            
            5,258
            
            
            
            376Accrued
                interest receivable on loans
            
            
            4,765
            
            
            
            4,156Accrued
                interest receivable on investment securities
            
            
            1,023
            
            
            
            875Goodwill
            
            
            7,935
            
            
            
            7,935Core
                deposit intangible – net
            
            
            3,111
            
            
            
            4,068Bank
                owned life insurance
            
            
            13,454
            
            
            
            12,948Prepaid
                expenses and other assets
            
            
            1,938
            
            
            
            1,740Prepaid
                federal income taxes
            
            
            1,086
            
            
            
            1,178Deferred
                federal income taxes
            
            
            1,045
            
            
            
            1,125TOTAL
                ASSETS
            
            $
            1,275,635
            
            
            $
            1,241,058**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**DepositsDemand
            
            $
            94,256
            
            
            $
            97,575Savings
                and time deposits
            
            
            848,704
            
            
            
            880,821Total
                deposits
            
            
            942,960
            
            
            
            978,396Securities
                sold under agreement to repurchase
            
            
            56,341
            
            
            
            18,263Advances
                from the Federal Home Loan Bank
            
            
            157,584
            
            
            
            123,119Subordinated
                debentures
            
            
            23,000
            
            
            
            23,000Accrued
                interest payable and other liabilities
            
            
            4,993
            
            
            
            4,199Total
                liabilities
            
            
            1,184,878
            
            
            
            1,146,977Stockholders’
                equityCommon
                stock – $.50 stated value; authorized 15,000,000 shares, 5,874,634 shares
                issued at December 31, 2006 and 2005
            
            
            2,937
            
            
            
            2,937Additional
                paid-in capital
            
            
            13,611
            
            
            
            13,952Retained
                earnings
            
            
            90,877
            
            
            
            85,505Treasury
                stock (565,659 and 270,420 shares at December 31, 2006 and 2005,
                respectively – at cost)
            
            
            (16,368
            )
            
            
            (7,972
            )Accumulated
                comprehensive loss:Unrealized
                loss on securities designated as available for sale, net of related
                tax
                benefits
            
            
            (300
            )
            
            
            (341
            )Total
                stockholders’ equity
            
            
            90,757
            
            
            
            94,081TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            1,275,635
            
            
            $
            1,241,058





*The
      accompanying notes are an integral part of these
      statements.*


43
 *Table
          of Contents*




Consolidated
      Statements of Earnings





Year
                Ended December 31,*(In
                thousands, except per share data)*
            
            2006
            
            
            2005
            
            
            2004**INTEREST
                INCOME**Loans
            
            $
            72,715
            
            
            $
            64,327
            
            
            $
            55,540InvestmentsU.S.
                Government and agency securities
            
            
            3,874
            
            
            
            2,678
            
            
            
            2,295Obligations
                of state and political subdivisions
            
            
            2,252
            
            
            
            1,979
            
            
            
            838Other
                securities
            
            
            727
            
            
            
            642
            
            
            
            535Federal
                funds sold
            
            
            80
            
            
            
            20
            
            
            
            15Interest-bearing
                deposits
            
            
            95
            
            
            
            74
            
            
            
            28Total
                interest income
            
            
            79,743
            
            
            
            69,720
            
            
            
            59,251**INTEREST
                EXPENSE**Deposits
            
            
            31,773
            
            
            
            22,944
            
            
            
            15,923Borrowings
            
            
            9,638
            
            
            
            6,492
            
            
            
            4,915Total
                interest expense
            
            
            41,411
            
            
            
            29,436
            
            
            
            20,838Net
                interest income
            
            
            38,332
            
            
            
            40,284
            
            
            
            38,413Provision
                for losses on loans
            
            
            5,691
            
            
            
            6,341
            
            
            
            3,136Net
                interest income after provision for losses on loans
            
            
            32,641
            
            
            
            33,943
            
            
            
            35,277**OTHER
                INCOME**Service
                fees, charges and other operating
            
            
            8,463
            
            
            
            6,950
            
            
            
            5,252Insurance
                commissions
            
            
            3,331
            
            
            
            2,781
            
            
            
            3,050Bank
                owned life insurance
            
            
            506
            
            
            
            436
            
            
            
            118Gain
                on sale of loans
            
            
            849
            
            
            
            1,085
            
            
            
            1,882Gain
                on sale of securities
            
            
            187
            
            
            
            498
            
            
            
            276Gain
                (loss) on disposition of branch premises and equipment
            
            
            (40
            )
            
            
            204
            
            
            
            -Loss
                on sale of other real estate owned
            
            
            (165
            )
            
            
            (316
            )
            
            
            (323
            )Loss
                on sale of consumer finance loan portfolio
            
            
            -
            
            
            
            -
            
            
            
            (3,585
            )Total
                other income
            
            
            13,131
            
            
            
            11,638
            
            
            
            6,670**GENERAL,
                ADMINISTRATIVE AND OTHER EXPENSE**Employee
                compensation and benefits
            
            
            17,518
            
            
            
            16,107
            
            
            
            14,519Occupancy
                and equipment
            
            
            4,147
            
            
            
            4,067
            
            
            
            3,400Federal
                deposit insurance premiums
            
            
            123
            
            
            
            124
            
            
            
            132Franchise
                taxes
            
            
            1,414
            
            
            
            189
            
            
            
            988Other
                operating
            
            
            10,047
            
            
            
            9,059
            
            
            
            7,673Amortization
                of core deposit intangible
            
            
            957
            
            
            
            953
            
            
            
            72Merger-related
                expenses
            
            
            -
            
            
            
            546
            
            
            
            160Total
                general, administrative and other expense
            
            
            34,206
            
            
            
            31,045
            
            
            
            26,944Earnings
                before federal income taxes
            
            
            11,566
            
            
            
            14,536
            
            
            
            15,003**FEDERAL
                INCOME TAXES**Current
            
            
            2,439
            
            
            
            4,346
            
            
            
            4,486Deferred
            
            
            (455
            )
            
            
            (1,189
            )
            
            
            (145
            )Total
                federal income taxes
            
            
            1,984
            
            
            
            3,157
            
            
            
            4,341NET
                EARNINGS
            
            $
            9,582
            
            
            $
            11,379
            
            
            $
            10,662**EARNINGS
                PER SHARE**Basic
            
            $
            1.76
            
            
            $
            2.01
            
            
            $
            1.92Diluted
            
            $
            1.74
            
            
            $
            1.97
            
            
            $
            1.87





*The
      accompanying notes are an integral part of these
      statements.*


44
 *Table
          of Contents*







Consolidated
      Statements of Stockholders’ Equity





For
                the Years Ended December 31, 2006, 2005 and 2004***(In
                thousands, except share and  per share
                data)***
            
            Common
              stock
            
            
            Additional
              paid-in
              capital
            
            
            Retained
              earnings
            
            
            Treasury
              stock
            
            
            Unrealized
              gains
                (losses)
              on
                securities
              Designated
              as
                available
              for
                sale
            
            
            Total**BALANCE
                AT JANUARY 1, 2004**
            
            **$**
            2,797
            
            
            $
            5,704
            
            
            $
            70,844
            
            
            $
            (332
            )
            
            $
            915
            
            
            $
            79,928Issuance
                of 118,131 shares under stock option plan, including related tax
                benefits
            
            
            30
            
            
            
            954
            
            
            
            -
            
            
            
            1,583
            
            
            
            -
            
            
            
            2,567Purchase
                of 134,936 treasury shares - net
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,369
            )
            
            
            -
            
            
            
            (4,369
            )Dividends
                declared of $.618 per share
            
            
            -
            
            
            
            -
            
            
            
            (3,435
            )
            
            
            -
            
            
            
            -
            
            
            
            (3,435
            )Unrealized
                losses on securities designated as available for sale, net of related
                tax
                benefits
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (310
            )
            
            
            (310
            )Net
                earnings for the year
            
            
            -
            
            
            
            -
            
            
            
            10,662
            
            
            
            -
            
            
            
            -
            
            
            
            10,662**BALANCE
                AT DECEMBER 31, 2004**
            
            
            2,827
            
            
            
            6,658
            
            
            
            78,071
            
            
            
            (3,118
            )
            
            
            605
            
            
            $
            85,043Lawrence
                Financial acquisition
            
            
            110
            
            
            
            8,146
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8,256Issuance
                of 92,800 shares under stock option plan, including related tax
                benefits
            
            
            -
            
            
            
            (852
            )
            
            
            -
            
            
            
            2,963
            
            
            
            -
            
            
            
            2,111Purchase
                of 269,945 treasury shares - net
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,817
            )
            
            
            -
            
            
            
            (7,817
            )Dividends
                declared of $.704 per share
            
            
            -
            
            
            
            -
            
            
            
            (3,945
            )
            
            
            -
            
            
            
            
            
            
            
            (3,945
            )Unrealized
                losses on securities designated as available for sale, net of related
                tax
                benefits
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (946
            )
            
            
            (946
            )Net
                earnings for the year
            
            
            -
            
            
            
            -
            
            
            
            11,379
            
            
            
            -
            
            
            
            -
            
            
            
            11,379**BALANCE
                AT DECEMBER 31, 2005**
            
            
            2,937
            
            
            
            13,952
            
            
            
            85,505
            
            
            
            (7,972
            )
            
            
            (341
            )
            
            $
            94,081Issuance
                of 33,300 shares under stock option plan, including related tax
                benefits
            
            
            -
            
            
            
            (341
            )
            
            
            -
            
            
            
            1,042
            
            
            
            -
            
            
            
            701Purchase
                of 330,055 treasury shares - net
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (9,438
            )
            
            
            -
            
            
            
            (9,438
            )Dividends
                declared of $.793 per share
            
            
            
            
            
            
            -
            
            
            
            (4,210
            )
            
            
            -
            
            
            
            -
            
            
            
            (4,210
            )Unrealized
                gains on securities designated as available for sale, net of related
                tax
                effects
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            41
            
            
            
            41Net
                earnings for the year
            
            
            -
            
            
            
            -
            
            
            
            9,582
            
            
            
            -
            
            
            
            -
            
            
            
            9,582**BALANCE
                AT DECEMBER 31, 2006**
            
            **$**
            **2,937**
            
            
            **$**
            **13,611**
            
            
            **$**
            **90,877**
            
            
            **$**
            **(16,368**
            **)**
            
            **$**
            **(300**
            **)**
            
            **$**
            **90,757**





*The
      accompanying notes are an integral part of these statements.*








Consolidated
      Statements of Comprehensive Income





Year
                Ended December 31,*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004Net
                earnings
            
            $
            9,582
            
            
            $
            11,379
            
            
            $
            10,662Other
                comprehensive income, net of tax:Unrealized
                gains (losses) on securities designated as available for sale, net
                of
                taxes (benefits) of $88, $(335) and $(71) in 2006, 2005 and 2004,
                respectively
            
            
            163
            
            
            
            (623
            )
            
            
            (131
            )Reclassification
                adjustment for realized gains included in net earnings, net of taxes
                of
                $65, $175 and $97 in 2006, 2005 and 2004, respectively
            
            
            (122
            )
            
            
            (323
            )
            
            
            (179
            )Comprehensive
                income
            
            $
            9,623
            
            
            $
            10,433
            
            
            $
            10,352Accumulated
                comprehensive income (loss)
            
            $
            (300
            )
            
            $
            (341
            )
            
            $
            605





*The
      accompanying notes are an integral part of these statements.*





45
 *Table
            of Contents*







Consolidated
      Statements of Cash Flows





Year
                Ended December 31,*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004**CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                earnings
            
            $
            9,582
            
            
            $
            11,379
            
            
            $
            10,662Adjustments
                to reconcile net earnings to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            1,672
            
            
            
            1,822
            
            
            
            1,165Amortization
                of core deposit intangible
            
            
            957
            
            
            
            953
            
            
            
            72Gain
                on sale of securities
            
            
            (187
            )
            
            
            (498
            )
            
            
            (276
            )Amortization
                of premiums, discounts and mortgage servicing rights – net
            
            
            924
            
            
            
            1,099
            
            
            
            1,460Proceeds
                from sale of loans in secondary market
            
            
            27,048
            
            
            
            35,996
            
            
            
            59,428Loans
                disbursed for sale in secondary market
            
            
            (26,246
            )
            
            
            (35,540
            )
            
            
            (55,614
            )Gain
                on sale of loans
            
            
            (482
            )
            
            
            (610
            )
            
            
            (1,132
            )(Gain)
                loss on disposition of branch premises and equipment
            
            
            40
            
            
            
            (204
            )
            
            
            -Loss
                on sale of consumer finance loan portfolio
            
            
            -
            
            
            
            -
            
            
            
            3,585Amortization
                (accretion) of deferred loan origination (fees) costs
            
            
            497
            
            
            
            (483
            )
            
            
            (155
            )Loss
                on sale of other real estate owned
            
            
            165
            
            
            
            316
            
            
            
            323Purchase
                of loans
            
            
            -
            
            
            
            -
            
            
            
            (282
            )Federal
                Home Loan Bank stock dividends
            
            
            (452
            )
            
            
            (363
            )
            
            
            (255
            )Provision
                for losses on loans
            
            
            5,691
            
            
            
            6,341
            
            
            
            3,136Compensation
                expense related to stock incentive plan
            
            
            23
            
            
            
            -
            
            
            
            -Tax
                benefits of stock options exercised
            
            
            -
            
            
            
            447
            
            
            
            693Bank
                owned life insurance income
            
            
            (506
            )
            
            
            (436
            )
            
            
            (118
            )Increase
                (decrease) in cash due to changes in:Prepaid
                expenses and other assets
            
            
            (188
            )
            
            
            1,768
            
            
            
            41Accrued
                interest receivable
            
            
            (757
            )
            
            
            (614
            )
            
            
            (121
            )Accrued
                interest payable and other liabilities
            
            
            794
            
            
            
            (353
            )
            
            
            (1,371
            )Federal
                income taxesCurrent
            
            
            92
            
            
            
            1,751
            
            
            
            (1,116
            )Deferred
            
            
            (455
            )
            
            
            (1,189
            )
            
            
            (145
            )Net
                cash provided by operating activities
            
            
            18,212
            
            
            
            21,582
            
            
            
            19,980**CASH
                FLOWS USED IN INVESTING ACTIVITIES:**Loan
                disbursements
            
            
            (337,078
            )
            
            
            (344,834
            )
            
            
            (409,234
            )Principal
                repayments on loans
            
            
            317,977
            
            
            
            311,778
            
            
            
            338,646Principal
                repayments on mortgage-backed securities designated as available
                for
                sale
            
            
            17,400
            
            
            
            16,905
            
            
            
            19,095Proceeds
                from sale of investment securities designated as available for
                sale
            
            
            26,989
            
            
            
            35,234
            
            
            
            14,192Proceeds
                from maturity of investment securities
            
            
            2,660
            
            
            
            1,405
            
            
            
            4,342Proceeds
                from disposition of assets
            
            
            1
            
            
            
            895
            
            
            
            -Proceeds
                from sale of consumer finance loan portfolio
            
            
            -
            
            
            
            -
            
            
            
            5,143Proceeds
                from sale of other real estate owned
            
            
            673
            
            
            
            1,294
            
            
            
            1,163Loans
                sold from consumer finance loan portfolio
            
            
            -
            
            
            
            -
            
            
            
            (8,728
            )Purchase
                of investment securities designated as available for sale
            
            
            (67,590
            )
            
            
            (82,635
            )
            
            
            (45,713
            )Purchase
                of insurance agency
            
            
            -
            
            
            
            (12
            )
            
            
            -Purchase
                of bank owned life insurance
            
            
            -
            
            
            
            -
            
            
            
            (10,000
            )Purchase
                of office premises and equipment
            
            
            (6,742
            )
            
            
            (5,939
            )
            
            
            (2,583
            )Ripley
                acquisition – net of cash paid
            
            
            -
            
            
            
            -
            
            
            
            3,179Lawrence
                acquisition – net of cash paid
            
            
            -
            
            
            
            8,228
            
            
            
            -Net
                cash used in investing activities
            
            
            (45,710
            )
            
            
            (57,681
            )
            
            
            (90,498
            )Net
                cash used in operating and investing activities (balance carried
                 forward)
            
            
            (27,498
            )
            
            
            (36,099
            )
            
            
            (70,518
            )


46
 *Table
            of Contents*




Consolidated
      Statements of Cash Flows (continued)





Year
                Ended December 31,*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004Net
                cash used in operating and investing activities (balance brought
                forward)
            
            $
            (27,498
            )
            
            $
            (36,099
            )
            
            $
            (70,518
            )**CASH
                FLOWS PROVIDED BY FINANCING ACTIVITIES:**Net
                proceeds from securities sold under agreement to
                repurchase
            
            
            38,078
            
            
            
            12,904
            
            
            
            994Net
                increase (decrease) in deposit accounts
            
            
            (35,228
            )
            
            
            10,378
            
            
            
            92,706Proceeds
                from Federal Home Loan Bank advances
            
            
            79,216
            
            
            
            28,200
            
            
            
            -Repayment
                of Federal Home Loan Bank advances
            
            
            (44,751
            )
            
            
            (13,182
            )
            
            
            (18,368
            )Repayment
                of notes payable
            
            
            -
            
            
            
            (2,700
            )
            
            
            (400
            )Proceeds
                from issuance of subordinated debentures
            
            
            -
            
            
            
            5,000
            
            
            
            13,000Dividends
                on common shares
            
            
            (4,210
            )
            
            
            (3,945
            )
            
            
            (3,435
            )Purchase
                of treasury shares
            
            
            (9,438
            )
            
            
            (7,820
            )
            
            
            (4,369
            )Proceeds
                from issuance of shares under stock option plan
            
            
            521
            
            
            
            1,667
            
            
            
            1,874Tax
                benefit of stock options exercised
            
            
            157
            
            
            
            -
            
            
            
            -Net
                cash provided by financing activities
            
            
            24,345
            
            
            
            30,502
            
            
            
            82,002Net
                increase (decrease) in cash and cash equivalents
            
            
            (3,153
            )
            
            
            (5,597
            )
            
            
            11,484Cash
                and cash equivalents at beginning of year
            
            
            26,400
            
            
            
            31,997
            
            
            
            20,513Cash
                and cash equivalents at end of year
            
            $
            23,247
            
            
            $
            26,400
            
            
            $
            31,997**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                paid during the year for:Federal
                income taxes, net of refunds
            
            $
            2,063
            
            
            $
            3,124
            
            
            $
            5,417Interest
                on deposits and borrowings
            
            $
            41,316
            
            
            $
            29,129
            
            
            $
            20,552**SUPPLEMENTAL
                DISCLOSURE OF NONCASH INVESTING ACTIVITIES:**Unrealized
                gains (losses) on securities designated as available for sale, net
                of
                related tax effects
            
            $
            41
            
            
            $
            (946
            )
            
            $
            (310
            )Recognition
                of mortgage servicing rights in accordance with SFAS No.
                140
            
            $
            367
            
            
            $
            475
            
            
            $
            750Transfer
                from loans to real estate acquired through foreclosure
            
            $
            5,930
            
            
            $
            107
            
            
            $
            2,564Issuance
                of loans upon sale of real estate acquired through
                foreclosure
            
            $
            200
            
            
            $
            -
            
            
            $
            738Fair
                value of assets acquired in acquisition of Ripley National
                Bank
            
            $
            -
            
            
            $
            -
            
            
            $
            58,611Fair
                value of assets acquired in acquisition of Lawrence
                Financial
            
            $
            -
            
            
            $
            125,121
            
            
            $
            -Common
                stock issued in acquisition of Lawrence Financial
            
            $
            -
            
            
            $
            8,256
            
            
            $
            -Goodwill
                and other intangible assets arising from acquisitions-net
            
            $
            -
            
            
            $
            6,741
            
            
            $
            2,531**SUPPLEMENTAL
                DISCLOSURE OF NONCASH FINANCING ACTIVITIES:**Issuance of treasury stock in exchange for exercise of stock
                options
            
            $
            84
            
            
            $
            -
            
            
            $
            -





*The
      accompanying notes are an integral part of these statements.*





47
 *Table
            of Contents*




Notes
      to
      Consolidated Financial Statements


For
      Years
      Ended December 31, 2005, 2004 and 2003








NOTE
      A —
SUMMARY OF ACCOUNTING POLICIES


Oak
      Hill
      Financial, Inc. (the “Company”) is a financial holding company, the principal
      assets of which are the Company’s ownership of Oak Hill Banks (“Oak Hill”) and
      Oak Hill Financial Insurance (“OHFI”). The Company also owns 49% of Oak Hill
      Title Agency, LLC (“Oak Hill Title”), which is accounted for using the equity
      method. The Company’s operations are primarily dependent upon its financial
      services subsidiary which is collectively viewed herein as a single operating
      segment for financial statement purposes.





Oak
      Hill
      conducts a general commercial banking business in southern and central Ohio
      which consists of attracting deposits from the general public and applying
      those
      funds to the origination of loans for commercial, consumer and residential
      purposes. Oak Hill’s profitability is significantly dependent on net interest
      income, which is the difference between interest income generated from
      interest-earning assets (i.e., loans and investments) and the interest expense
      paid on interest-bearing liabilities (i.e., customer deposits and borrowed
      funds). Net interest income is affected by the relative amount of
      interest-earning assets and interest-bearing liabilities and the interest
      received or paid on these balances. The level of interest rates paid or received
      by Oak Hill can be significantly influenced by a number of competitive factors,
      such as governmental monetary policy, that are outside of management’s
      control.





In
      2004,
      the Company acquired Ripley National Bank (“Ripley”) for $5.3 million in cash.
      As part of the transaction, the Company acquired full-service offices in Ripley
      and Georgetown, Ohio, involving total loans of $39.1 million, $51.6 million
      in
      deposits and $58.6 million in total assets.





Prior
      to
      2005, the Company operated Action Finance Company (“Action Finance”), a consumer
      finance subsidiary. In 2004, the Company sold the consumer loan portfolio of
      Action Finance. The portfolio, which was comprised of small consumer and second
      mortgage loans, totaled $8.7 million. Concurrent with the sale, the Company
      closed five retail lending offices in southern Ohio. Action Finance was
      dissolved in 2006.





In
      2005,
      the Company acquired Lawrence Financial Holdings, Inc. (“Lawrence Financial”)
      and its subsidiary, Lawrence Federal Savings Bank (“Lawrence”) headquartered in
      Ironton, Ohio for $15.2 million, of which $7.7 million was paid in cash. In
      addition, the Company issued 221,051 shares of common stock to Lawrence
      Financial shareholders. As part of the transaction, the Company acquired a
      net
      three full-service offices in southern Ohio, involving total loans of $76.5
      million, $104.2 million in deposits and $116.9 million in assets.





The
      consolidated financial information presented herein has been prepared in
      accordance with accounting principles generally accepted in the United States
      of
      America (“U.S. GAAP”) and general accounting practices within the financial
      services industry. In preparing consolidated financial statements in accordance
      with U.S. GAAP, management is required to make estimates and assumptions that
      affect the reported amounts of assets and liabilities and the disclosure of
      contingent assets and liabilities at the date of the financial statements and
      revenues and expenses during the reporting period. Actual results could differ
      from such estimates.





The
      following is a summary of the Company’s significant accounting policies which,
      with the exception of the policy disclosed in Note A.14, have been consistently
      applied in the preparation of the accompanying consolidated financial
      statements.





**1.   Principles
      of Consolidation**


The
      consolidated financial statements include the accounts of the Company and its
      wholly-owned subsidiaries, Oak Hill and its wholly-owned subsidiaries Oak Hill
      Banks Community Development Corp. and Oak Hill Financial Services Company,
      OHFI
      and Oak Hill Title. All intercompany balances and transactions have been
      eliminated.





**2.   Investment
      Securities**


The
      Company accounts for investment securities in accordance with Statement of
      Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain
      Investments in Debt and Equity Securities.” SFAS No. 115 requires that
      investments be categorized as held to maturity, trading, or available for sale.
      Securities classified as held to maturity are carried at cost only if the
      Company has the positive intent and ability to hold these securities to
      maturity. Securities available for sale are carried at fair value with resulting
      unrealized gains or losses recorded to stockholders’ equity.





Realized
      gains and losses on sales of securities are recognized using the specific
      identification method.





48
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**3.   Loans
      Receivable**


Loans
      held in portfolio are stated at the principal amount outstanding, adjusted
      for
      premiums and discounts and the allowance for loan losses. Premiums and discounts
      on loans purchased and sold are amortized and accreted to operations using
      the
      interest method over the average life of the underlying loans.




Interest
      is accrued as earned unless the collectibility of the loan is in doubt.
      Uncollectible interest on loans that are contractually past due is charged
      off,
      or an allowance is established based on management’s periodic evaluation. The
      allowance is established by a charge to interest income equal to all interest
      previously accrued, and income is subsequently recognized only to the extent
      that cash payments are received until, in management’s judgment, the borrower’s
      ability to make periodic interest and principal payments has returned to normal,
      in which case the loan is returned to accrual status.





Loans
      held for sale are carried at the lower of cost or market, determined in the
      aggregate. Loans held for sale are identified at the point of origination.
      In
      computing lower of cost or market, deferred loan origination fees are deducted
      from the principal balance of the related loan. All loan sales are made without
      further recourse to Oak Hill.  At December 31, 2006 and 2005, loans
      held for sale were carried at cost.





Oak
      Hill
      generally retains servicing on loans sold and agrees to remit to the investor
      loan principal and interest at agreed-upon rates. Mortgage servicing rights
      are
      accounted for pursuant to the provisions of SFAS No. 140, “Accounting for
      Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”
which requires that Oak Hill recognize as separate assets, rights to service
      mortgage loans for others, regardless of how those servicing rights are
      acquired. An institution that acquires mortgage servicing rights through either
      the purchase or origination of mortgage loans and sells those loans with
      servicing rights retained must allocate some of the cost of the loans to the
      mortgage servicing rights.





The
      mortgage servicing rights recorded by Oak Hill, calculated in accordance with
      the provisions of SFAS No. 140, were segregated into pools for valuation
      purposes, using as pooling criteria the loan term and coupon rate. Once pooled,
      each grouping of loans was evaluated on a discounted earnings basis to determine
      the present value of future earnings that a purchaser could expect to realize
      from each portfolio. Earnings were projected from a variety of sources including
      loan servicing fees, interest earned on float, net interest earned on escrows,
      miscellaneous income, and costs to service the loans. The present value of
      future earnings is the “economic” value of the pool, i.e., the net realizable
      present value to an acquirer of the servicing rights.





SFAS
      No.
      140 requires that capitalized mortgage servicing rights and capitalized excess
      servicing receivables be amortized in proportion to and over the period of
      estimated net servicing income and assessed for impairment. Impairment is
      measured based on fair value.  The valuation of mortgage servicing
      rights is influenced by market factors, including servicing volumes and market
      prices, as well as management’s assumptions regarding mortgage prepayment speeds
      and interest rates.  Management utilizes periodic third-party
      valuations by qualified market professionals to evaluate the fair value of
      its
      capitalized mortgage servicing assets.





A
      summary
      of Oak Hill’s mortgage servicing rights is as follows:





For
                the Year Ended December 31,*(In
                thousands)*
            
            2006
            
            
            2005Beginning
                balance
            
            $
            3,458
            
            
            $
            3,446Recognition
                of mortgage servicing rights on sale of loans
            
            
            367
            
            
            
            475Amortization
            
            
            (385
            )
            
            
            (463
            )Ending
                balance
            
            
            3,440
            
            
            
            3,458Beginning
                valuation allowance
            
            
            (130
            )
            
            
            (299
            )Valuation
                allowance recorded
            
            
            (22
            )
            
            
            -Valuation
                allowance recaptured
            
            
            -
            
            
            
            169Ending
                valuation allowance
            
            
            (152
            )
            
            
            (130
            )Net
                carrying value
            
            $
            3,288
            
            
            $
            3,328





**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.





49
 *Table
            of Contents*




**5.   Allowance
      for Loan Losses**


It
      is the
      Company’s policy to provide valuation allowances for estimated losses on loans
      based upon past loss experience, adjusted for changes in trends and conditions
      in certain items including, but not limited to, the level of delinquent and
      specific problem loans, adverse situations that may affect the borrower’s
      ability to repay, the estimated value of any underlying collateral and
      current economic conditions in Oak Hill’s primary market areas. When the
      collection of a loan becomes doubtful, or otherwise troubled, the Company
      records a loan loss provision equal to the difference between the fair value
      of
      the property securing the loan and the loan’s carrying value less estimated
      selling costs. Major loans and major lending areas are reviewed periodically
      to
      determine potential problems at an early date. The allowance for loan losses
      is
      increased by charges to earnings and decreased by charge-offs (net of
      recoveries).





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





A
      loan is
      defined under SFAS No. 114 as impaired when, based on current information and
      events, it is probable that a creditor will be unable to collect all amounts
      due
      according to the contractual terms of the loan agreement. In applying the
      provisions of SFAS No. 114, the Company considers its investment in one-to-four
      family residential loans, consumer installment loans and credit card loans
      to be
      homogeneous and therefore excluded from separate identification for evaluation
      of impairment. These homogeneous loan groups are evaluated for impairment on
      a
      collective basis under SFAS No. 5. With respect to the Company’s investment in
      commercial and other loans, and its evaluation of impairment thereof, management
      believes such loans are adequately collateralized and as a result impaired
      loans
      are carried as a practical expedient at the lower of cost or fair value of
      the
      collateral.





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




**6.   Office
      Premises and Equipment**


Depreciation
      and amortization are provided on the straight-line and accelerated methods
      over
      the estimated useful lives of the assets, estimated to be ten to fifty years
      for
      buildings and improvements and three to twenty-five years for furniture,
      fixtures and equipment. Amortization of leasehold improvements is provided
      over
      the shorter of the lease term or the estimated useful life of the related asset.
      Accelerated methods of depreciation are used for income tax
      purposes.





**7.   Investment
      in Federal Home Loan Bank Stock**


The
      Company is required as a condition of membership in the Federal Home Loan Bank
      of Cincinnati (“FHLB”) to maintain an investment in FHLB common stock. The stock
      is redeemable at par and, therefore, its cost is equivalent to its redemption
      value. The Company’s ability to redeem FHLB shares is dependent on the
      redemption practices of the FHLB of Cincinnati. At December 31, 2006, the FHLB
      of Cincinnati placed no restrictions on redemption of shares in excess of a
      member’s required investment in the stock.





**8.   Real
      Estate Acquired Through Foreclosure**


Real
      estate acquired through foreclosure is carried at the lower of the loan’s unpaid
      principal balance (cost) or fair value less estimated selling expenses at the
      date of acquisition. The loan loss allowance is charged for any write down
      in
      the loan’s carrying value to fair value at the date of acquisition. Real estate
      loss provisions are recorded if the properties’ fair value subsequently declines
      below the value determined at the recording date. In determining the lower
      of
      cost or fair value at acquisition, costs relating to development and improvement
      of property are considered. Costs relating to holding real estate acquired
      through foreclosure, net of rental income, are charged against earnings as
      incurred.





**9.   Federal
      Income Taxes**


The
      Company accounts for federal income taxes pursuant to SFAS No. 109, “Accounting
      for Income Taxes.” Pursuant to the provisions of SFAS No. 109, a deferred tax
      liability or deferred tax asset is computed by applying the current statutory
      tax rates to net taxable or deductible temporary differences between the tax
      basis of an asset or liability and its reported amount in the consolidated
      financial statements that will result in taxable or deductible amounts in future
      periods. Deferred tax assets are recorded only to the extent that the amount
      of
      net deductible temporary differences or carryforward attributes may be utilized
      against current period earnings, carried back against prior years’ earnings,
      offset against taxable temporary differences reversing in future periods, or
      utilized to the extent of management’s estimate of future taxable income. A
      valuation allowance is provided for deferred tax assets to the extent that
      the
      value of net deductible temporary differences and carryforward attributes
      exceeds management’s estimates of taxes


50
 *Table
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payable
      on future taxable income. Deferred tax liabilities are provided on the total
      amount of net temporary differences taxable in the future.




The
      Company’s principal temporary differences between pretax financial income and
      taxable income result primarily from the different methods of accounting for
      deferred loan origination fees and costs, Federal Home Loan Bank stock
      dividends, capitalized mortgage servicing rights, certain components of
      retirement expense and the allowance for loan losses. A temporary difference
      is
      also recognized for depreciation expense computed using accelerated methods
      for
      federal income tax purposes.





**10.  Goodwill
      and Core Deposit Intangible**


In
      2005,
      the Company acquired Lawrence Financial and its subsidiary for $15.2 million,
      of
      which $7.7 million was paid in cash. In addition, the Company issued 221,051
      shares of common stock to Lawrence Financial shareholders. The acquisition
      resulted in a $6.2 million increase in goodwill. Also, as a result of the
      acquisition, a $3.8 million core deposit intangible was recorded.





In
      2004,
      the Company acquired Ripley for $5.3 million in cash. The acquisition resulted
      in a $1.3 million increase in goodwill. Also, as a result of the acquisition,
      a
      $1.3 million core deposit intangible was recorded.





In
      2002,
      OHFI purchased McNelly Insurance Agency, a local property and casualty insurance
      agency, for consideration of $100,000 in cash and a $100,000 note payable.
      This
      purchase resulted in goodwill totaling $197,000.





Pursuant
      to SFAS No. 142 “Goodwill and Intangible Assets,” which prescribes accounting
      for all purchased goodwill and intangible assets, acquired goodwill is not
      amortized, but is tested for impairment at the reporting unit level annually
      or
      whenever an impairment indicator arises. Goodwill has been primarily assigned
      to
      Oak Hill as the reporting unit that is expected to benefit from the
      goodwill.





Based
      on
      the Company’s periodic test of goodwill, there were no impairment charges
      required for the years ended December 31, 2006, 2005 and 2004.





The
      core
      deposit intangibles recorded as part of the Ripley and Lawrence Financial
      acquisitions are being amortized over their estimated useful lives of 9.3 and
      8.3 years, respectively.





The
      following table depicts the activity for the core deposit intangible
      asset:





*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004Balance
                at beginning of year
            
            $
            4,068
            
            
            $
            1,270
            
            
            
            -Additions
                due to acquisitions
            
            
            
            
            
            
            3,751
            
            
            
            1,342Amortization
                expense
            
            
            957
            
            
            
            953
            
            
            
            72Balance
                at end of year
            
            $
            3,111
            
            
            $
            4,068
            
            
            $
            1,270Accumulated
                amortization
            
            $
            1,982
            
            
            $
            1,025
            
            
            $
            72





The
      following table summarizes estimated amortization expense by year:





Year
                endingDecember
                31,
            
            (Dollars
                in thousands)2007
            
            $
            7302008
            
            
            5592009
            
            
            4292010
            
            
            3842011
                - 2014
            
            
            1,009$
            3,111




**11.   Interest
        Rate Swaps**
 The
        Company has entered into interest rate swap agreements in order to more
        effectively manage its interest-rate risk position. These derivatives involve
        the exchange of fixed-rate and variable-rate payments without the exchange
        of
        the underlying


51
 *Table
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notional
      amount on which interest rate payments are calculated. At December 31, 2006
      and
      2005 these derivatives had notional amounts totaling $15.0 million and $5.0
      million, respectively. Of such notional amounts at December 31, 2006, $5.0
      million represents a non-qualifying hedge of the Company’s subordinated
      debentures, while the remaining $10.0 million relates to a non-qualifying hedge
      of the deposit base.  Non-qualifying hedge costs of $416,000 during
      2006 were influenced by an approximate $162,000 charge related to a change
      from
      short-cut method of accounting based on clarification of existing
      guidance.




**12.   Fair
      Value of Financial Instruments**


SFAS
      No.
      107, “Disclosures about Fair Value of Financial Instruments,” requires
      disclosure of fair value of financial instruments, both assets and liabilities
      whether or not recognized in the consolidated statement of financial condition,
      for which it is practicable to estimate that value. For financial instruments
      where quoted market prices are not available, fair values are based on estimates
      using present value and other valuation methods.





The
      methods used are greatly affected by the assumptions applied, including the
      discount rate and estimates of future cash flows. Therefore, the fair values
      presented may not represent amounts that could be realized in an exchange for
      certain financial instruments. The following methods and assumptions were used
      by the Company in estimating its fair value disclosures for financial
      instruments at December 31, 2006 and 2005.





**Cash
      and due from banks**. The carrying amounts presented in the consolidated
      statements of financial condition for cash and due from banks are deemed to
      approximate fair value.





**Federal
      funds sold.**The carrying amounts presented in the consolidated
      statements of financial condition for federal funds sold are deemed to
      approximate fair value due to daily repricing.





**Investment
      securities.**For investment securities, fair value is deemed to equal
      quoted market price.





**Loans
      receivable.**The loan portfolio has been segregated into categories with
      similar characteristics, such as one-to-four family residential real estate,
      multi-family residential real estate, commercial, installment and other. These
      loan categories were further delineated into fixed-rate and adjustable-rate
      loans. The fair values for the resultant loan categories were computed via
      discounted cash flow analysis, using current interest rates offered for loans
      with similar terms to borrowers of similar credit quality.





**Federal
      Home Loan Bank stock.**The carrying amount presented in the consolidated
      statements of financial condition is deemed to approximate fair
      value.





**Deposits.**The fair value of NOW accounts, savings accounts, demand deposits,
      money market deposits and other transaction accounts is deemed to approximate
      the amount payable on demand at December 31, 2006 and 2005. Fair values for
      fixed-rate certificates of deposit have been estimated using a discounted cash
      flow calculation using the interest rates currently offered for deposits of
      similar remaining maturities.





**Advances
      from the Federal Home Loan Bank.**The fair value of advances from the
      Federal Home Loan Bank has been estimated using discounted cash flow analysis,
      based on the interest rates currently offered for advances of similar remaining
      maturities.





**Securities
      sold under agreement to repurchase.**The carrying amounts of securities
      sold under agreements to repurchase are deemed to approximate fair
      value.





**Subordinated
      debentures.**The fair value of the Corporation’s subordinated debentures
      has been estimated using discounted cash flow analysis, based on the interest
      rates currently offered for instruments of similar remaining
      maturities.





**Commitments
      to extend credit.**For fixed-rate and adjustable-rate loan commitments,
      the fair value estimate considers the difference between current levels of
      interest rates and committed rates. The difference between the fair value of
      outstanding loan commitments at December 31, 2006 and 2005 was not
      material.





52
 *Table
            of Contents*




Based
      on
      the foregoing methods and assumptions, the carrying value and fair value of
      the
      Company’s financial instruments are as follows:





December
                31,2006
            
            
            2005*(In
                thousands)*
            
            Carrying
              value
            
            
            Fair
              value
            
            
            Carrying
              value
            
            
            Fair
              valueFinancial
                assetsCash
                and cash equivalents
            
            $
            23,247
            
            
            $
            23,247
            
            
            $
            26,400
            
            
            $
            26,400Investment
                securities
            
            
            155,569
            
            
            
            155,722
            
            
            
            134,812
            
            
            
            135,044Loans
                receivable – net
            
            
            1,021,361
            
            
            
            1,011,519
            
            
            
            1,015,083
            
            
            
            1,011,480Federal
                Home Loan Bank stock
            
            
            8,078
            
            
            
            8,078
            
            
            
            7,626
            
            
            
            7,626$
            1,208,255
            
            
            $
            1,198,566
            
            
            $
            1,183,921
            
            
            $
            1,180,550Financial
                liabilitiesDeposits
            
            $
            942,960
            
            
            $
            912,041
            
            
            $
            978,396
            
            
            $
            970,278Advances
                from the Federal Home Loan Bank
            
            
            157,584
            
            
            
            157,640
            
            
            
            123,119
            
            
            
            124,047Securities
                sold under agreement to repurchase
            
            
            56,341
            
            
            
            56,253
            
            
            
            18,263
            
            
            
            18,318Subordinated
                debentures
            
            
            23,000
            
            
            
            22,323
            
            
            
            23,000
            
            
            
            23,187$
            1,179,885
            
            
            $
            1,148,257
            
            
            $
            1,142,778
            
            
            $
            1,135,830








**13.   Earnings
      per Share**


Basic
      earnings per common share is computed based upon the weighted-average number
      of
      common shares outstanding during the year.  Diluted earnings per
      common share is computed including the dilutive effect of additional potential
      common shares issuable under stock options.





The
      computations were as follows for the years ended December 31:





2006
            
            
            2005
            
            
            2004Weighted-average
                common shares outstanding (basic)
            
            
            5,434,221
            
            
            
            5,667,522
            
            
            
            5,549,855Dilutive
                effect of assumed exercise of stock options
            
            
            86,202
            
            
            
            121,817
            
            
            
            142,613Weighted-average
                common shares outstanding (diluted)
            
            
            5,520,423
            
            
            
            5,789,339
            
            
            
            5,692,468





Options
      to purchase 169,100 and 123,550 shares of common stock with a respective
      weighted-average exercise price of $34.87 and $37.12 were outstanding at
      December 31, 2006 and 2005, respectively, but were excluded from the computation
      of common share equivalents for those respective years because their exercise
      prices were greater than the average market price of the common shares. All
      granted options were included in the computation of common share equivalents
      at
      December 31, 2004.





**14.   Stock
      Incentive Plan**


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





The
      Company adopted the provisions of SFAS No. 123(R) effective January 1, 2006,
      using the modified prospective transition method, as permitted, and therefore
      has not restated its financial statements for prior periods. Under this method,
      the Company has applied the provisions of SFAS No. 123(R) to new equity-based
      awards and to equity-based awards modified, repurchased, or cancelled after
      January 1, 2006. In addition, the Company has recognized compensation cost
      for
      the portion of equity-based awards for which the requisite service period has
      not been rendered (“unvested equity-based awards”) that were outstanding as of
      January 1, 2006. The compensation cost recorded for unvested equity-based awards
      has been based on the grant-date fair value. For the year ended December 31,
      2006, the Company recorded $23,000 in compensation cost for equity-based awards
      that vested during the year ended December 31, 2006. The Company has $60,000
      of
      total unrecognized compensation cost related to non-vested equity-based awards
      granted under its stock incentive plan as of December 31, 2006, which is
      expected to be recognized over a weighted-average period of 1.2
      years.  At December 31, 2006, the intrinsic value of outstanding
      options totaled approximately $2.1 million.





53
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Prior
      to
      the adoption of SFAS No. 123(R), the Company presented tax benefits resulting
      from the exercise of stock options as operating cash flows in the Consolidated
      Statement of Cash Flows. SFAS No. 123(R) requires that cash flows from the
      exercise of stock options resulting from tax benefits in excess of recognized
      cumulative compensation cost (“excess tax benefits”) be classified as financing
      cash flows. The Company has reflected $157,000 of tax benefits classified as
      financing cash flows for the year ended December 31, 2006.





The
      Company has a stock incentive plan that provides for grants of options,
      restricted stock, stock appreciation rights, and other equity-based
      compensation, of up to 1,200,000 authorized, but unissued shares of its common
      stock.





The
      Company accounted for its equity-based compensation awards prior to the adoption
      of SFAS No. 123(R) by applying APB Opinion No. 25 and related Interpretations,
      as permitted by SFAS No. 123. Accordingly, the Company did not recognize any
      compensation cost in its financial statements. Had compensation cost been
      recognized in accordance with the fair value recognition provisions of SFAS
      No.
      123, the Company’s net earnings and earnings per share would have been reduced
      to the pro forma amounts indicated below for the twelve months ended December
      31:





*(In
                thousands)*
            
            2005
            
            
            2004Net
                earningsAs
                reported
            
            $
            11,379
            
            
            $
            10,662Stock-based
                compensation, net of tax
            
            
            (997
            )
            
            
            (399
            )Pro
                forma
            
            $
            10,382
            
            
            $
            10,263Basic
                earnings per shareAs
                reported
            
            $
            2.01
            
            
            $
            1.92Stock-based
                compensation, net of tax
            
            
            (0.18
            )
            
            
            (0.07
            )Pro
                forma
            
            $
            1.83
            
            
            $
            1.85Diluted
                earnings per shareAs
                reported
            
            $
            1.97
            
            
            $
            1.87Stock-based
                compensation, net of tax
            
            
            (0.18
            )
            
            
            (0.07
            )Pro
                forma
            
            $
            1.79
            
            
            $
            1.80





There
      were no options granted during the year ended December 31, 2006. The fair value
      of each option granted in 2005 and 2004 was estimated on the date of grant
      using
      the Black-Scholes option-pricing model with the following weighted-average
      assumptions.





2005
            
            2004Dividend
                yield
            2.4%
            
            1.6%Expected
                life
            4
                years
            
            4
                yearsExpected
                volatility
            38.4%
            
            39.8%Risk-free
                interest rate
            4.25%
            
            3.65%





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





54
 *Table
            of Contents*




The
      following is a summary of the changes in outstanding options for the years
      ended
      December 31, 2006, 2005 and 2004:





2006
            
            
            2005
            
            
            2004Shares
            
            
            Weighted-
              average
              exercise
              price
            
            
            Shares
            
            
            Weighted-
              average
              exercise
              price
            
            
            Shares
            
            
            Weighted-
              average
              exercise
              priceOutstanding
                at beginning of year
            
            
            484,233
            
            
            $
            23.14
            
            
            
            582,466
            
            
            $
            22.21
            
            
            
            572,397
            
            
            $
            17.36Granted
            
            
            -
            
            
            
            -
            
            
            
            8,000
            
            
            $
            32.76
            
            
            
            130,500
            
            
            
            37.19Exercised
            
            
            (33,300
            )
            
            
            15.89
            
            
            
            (92,800
            )
            
            $
            16.60
            
            
            
            (118,131
            )
            
            
            15.87Forfeited
            
            
            (16,550
            )
            
            
            34.14
            
            
            
            (13,433
            )
            
            $
            33.89
            
            
            
            (2,300
            )
            
            
            28.45Outstanding
                at end of year
            
            
            434,383
            
            
            $
            23.27
            
            
            
            484,233
            
            
            $
            23.14
            
            
            
            582,466
            
            
            $
            22.21Options
                exercisable at year-end
            
            
            429,383
            
            
            
            
            
            
            
            475,983
            
            
            
            
            
            
            
            451,633Weighted-average
                fair value of options granted during the year
            
            
            
            
            
            $
            -
            
            
            
            
            
            
            $
            10.04
            
            
            
            
            
            
            $
            12.91





The
      following information applies to options outstanding at December 31,
      2006:





Range
                of
            Numberexercise
                prices
            outstanding$  6.67
                – $10.01
            9,725$10.02
                – $15.05
            95,050$15.06
                – $22.56
            160,508$22.57
                – $33.86
            59,400$33.87
                – $37.72
            109,700Total
            434,383Weighted-average
                exercise price
            $23.27Weighted-average
                remaining contractual life
            6.3
                years





The
      following is a summary of the
      changes in restricted stock for the years ended December 31, 2006, 2005 and
      2004:





2006
            
            
            2005
            
            
            2004Fair
                value
            
            
            
            
            
            Fair
                value
            
            
            
            
            
            Fair
                valueShares
            
            
            at
                grant
            
            
            Shares
            
            
            at
                grant
            
            
            Shares
            
            
            at
                grantOutstanding
                at beginning of year
            
            
            3,594
            
            
            $
            31.72
            
            
            
            6,660
            
            
            $
            26.90
            
            
            
            5,260
            
            
            $
            24.16Granted
            
            
            -
            
            
            
            -
            
            
            
            1,000
            
            
            $
            28.68
            
            
            
            1,400
            
            
            
            37.21Vested
            
            
            (1,893
            )
            
            
            31.29
            
            
            
            (4,066
            )
            
            $
            23.08Cancelled
            
            
            (467
            )
            
            
            37.21
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Outstanding
                at end of year
            
            
            1,234
            
            
            $
            30.30
            
            
            
            3,594
            
            
            $
            31.72
            
            
            
            6,660
            
            
            $
            26.90






**15.   Capitalization**


The
      Company’s authorized capital stock includes 1,500,000 shares of $.01 per share
      par value voting preferred stock and 1,500,000 shares of $.01 per share par
      value non-voting preferred stock. No preferred shares have been issued at
      December 31, 2006 and 2005.





**16.   Advertising**


Advertising
      costs are expensed when
      incurred. The Company’s advertising expense totaled $712,000, $737,000, and
      $421,000 for the years ended December 31, 2006, 2005 and 2004,
      respectively.





**17.   Cash
      and Cash Equivalents**


For
      purposes of reporting cash flows, cash and cash equivalents are comprised of
      cash and due from banks and interest-bearing deposits in other financial
      institutions with original terms to maturity of less than ninety days. At
      December 31, 2006 and




55
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2005,
      compensating balance restrictions related to cash and cash equivalents totaled
      approximately $1.3 million and $454,000, respectively.




**18.   Reclassifications**


Certain
      prior year amounts have been reclassified to conform to the 2006 consolidated
      financial statement presentation.





**19.   Effects
      of Recent Accounting Pronouncements**


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





SFAS
      No. 155 is effective for all
      financial instruments acquired or issued after the beginning of an entity’s
      first fiscal year that begins after September 15, 2006, or January 1, 2007
      as to
      the Company, with earlier application allowed. The Company adopted SFAS No.
      155
      on January 1, 2007, as required, without material effect on the Company’s
      financial position or results of operations.





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





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


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


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





Additionally,
      SFAS No. 156 permits, but
      does not require, an entity to choose either the amortization method or the
      fair
      value measurement method for measuring each class of separately recognized
      servicing assets and servicing liabilities. SFAS No. 156 also permits a servicer
      that uses derivative financial instruments to offset risks on servicing to
      use
      fair value measurement when reporting both the derivative financial instrument
      and related servicing asset or liability.





SFAS
      No. 156 applies to all separately
      recognized servicing assets and liabilities acquired or issued after the
      beginning of an entity’s fiscal year that begins after September 15, 2006, or
      January 1, 2007 as to the Company, with earlier application permitted. The
      Company adopted SFAS No. 156 on January 1, 2007, as required, without a material
      adverse effect on the Company’s financial position or results of
      operations.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
This Statement defines fair value, establishes a framework for measuring fair
      value and expands disclosures about fair value measurements. This Statement
      emphasizes that fair value is a market-based measurement and should be
      determined based on assumptions that a market participant would use when pricing
      an asset or liability. This Statement clarifies that market participant
      assumptions should include assumptions about risk as well as the effect of
      a
      restriction on the sale or use of an asset. Additionally, this Statement
      establishes a fair value hierarchy that provides the highest priority to quoted
      prices in active markets and the lowest priority to unobservable data. This
      Statement is effective for fiscal years beginning after November 15, 2007,
      or January 1, 2008 as to the Company, and interim periods within those fiscal
      years. The adoption of this Statement is not expected to have a material adverse
      effect on the Company’s financial position or results of
      operations.





In
      July
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
      Uncertainty in Income Taxes.” The interpretation clarifies the accounting for
      uncertainty in income taxes recognized in a company’s financial statements in
      accordance with SFAS No. 109, “Accounting for Income Taxes.” Specifically, FIN
      48 prescribes a recognition threshold and a measurement attribute for the
      financial statement recognition and measurement of a tax provision taken or
      expected to be taken on a tax return. FIN 48 also provides guidance on the
      related derecognition, classification, interest and penalties, accounting for
      interim periods, disclosure, and transition of uncertain tax positions. FIN
      48
      is effective for fiscal years beginning after December 15, 2006, or January
      1,
      2007 as to the Company. The Company adopted FIN 48 on January 1, 2007, as
      required, without a material adverse effect on the Company’s financial position
      or results of operations.





56
 *Table
            of Contents*




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





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





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





SAB
      108
      allows registrants to initially apply the dual approach either by (1)
      retroactively adjusting prior financial statements as if the dual approach
      had
      always been used or by (2) recording the cumulative effect of initially applying
      the dual approach as adjustments to the carrying values of assets and
      liabilities as of January 1, 2006 with an offsetting adjustment recorded to
      the
      opening balance of retained earnings. Use of this “cumulative effect”
transition method requires detailed disclosure of the nature and amount of
      each
      individual error being corrected through the cumulative adjustment and how
      and
      when it arose. SAB 108 is effective for fiscal years ending after November
      15,
      2006, or December 31, 2006. The Company’s consolidated financial statements were
      not affected by SAB 108.




In
      September 2006, the FASB ratified the Emerging Issues Task Force’s (EITF) Issue
      06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects
      of Endorsement Split-Dollar Life Insurance Arrangements,” which requires
      companies to recognize a liability and related compensation costs for
      endorsement split-dollar life insurance policies that provide a benefit to
      an
      employee extending to postretirement periods.  The liability should be
      recognized based on the substantive agreement with the employee.  This
      Issue is effective beginning January 1, 2008.  The Issue can be applied as
      either a change in accounting principle through a cumulative-effect adjustment
      to retained earnings as of the beginning of the year of adoption, or a change
      in
      accounting principle through retrospective application to all periods.  The
      Company is in the process of evaluating the impact the adoption of Issue 06-4
      will have on the financial statements.




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.





2006Gross
            
            
            Gross
            
            
            EstimatedAmortized
            
            
            unrealized
            
            
            unrealized
            
            
            fair*(In
                thousands)*
            
            cost
            
            
            gains
            
            
            losses
            
            
            valueHeld
                to maturity:Trust
                preferred securities due after ten years
            
            $
            2,559
            
            
            $
            153
            
            
            $
            -
            
            
            $
            2,712Available
                for sale:U.S.
                Government and agency obligations
            
            $
            98,488
            
            
            $
            70
            
            
            $
            1,215
            
            
            $
            97,343Obligations
                of state and political subdivisions
            
            
            54,865
            
            
            
            761
            
            
            
            206
            
            
            
            55,420Other
                securities
            
            
            147
            
            
            
            119
            
            
            
            19
            
            
            
            247Total
                securities available for sale
            
            $
            153,500
            
            
            $
            950
            
            
            $
            1,440
            
            
            $
            153,010





57
 *Table
            of Contents*




2005Gross
            
            
            Gross
            
            
            EstimatedAmortized
            
            
            unrealized
            
            
            unrealized
            
            
            fair*(In
                thousands)*
            
            cost
            
            
            gains
            
            
            losses
            
            
            valueHeld
                to maturity:Trust
                preferred securities due after ten years
            
            $
            3,619
            
            
            $
            232
            
            
            $
            -
            
            
            $
            3,851Available
                for sale:U.S.
                Government and agency obligations
            
            $
            73,599
            
            
            $
            43
            
            
            $
            1,037
            
            
            $
            72,605Obligations
                of state and political subdivisions
            
            
            58,196
            
            
            
            673
            
            
            
            529
            
            
            
            58,340Other
                securities
            
            
            144
            
            
            
            124
            
            
            
            20
            
            
            
            248Total
                securities available for sale
            
            $
            131,939
            
            
            $
            840
            
            
            $
            1,586
            
            
            $
            131,193





The
      amortized cost and estimated fair value of investment securities designated
      as
      available for sale, by term to maturity at December 31 are shown
      below.





2006
            
            
            2005Estimated
            
            
            
            
            
            EstimatedAmortized
            
            
            fair
            
            
            Amortized
            
            
            fair*(In
                thousands)*
            
            cost
            
            
            value
            
            
            cost
            
            
            valueDue
                in one year or less
            
            $
            13,989
            
            
            $
            13,944
            
            
            $
            371
            
            
            $
            371Due
                after one year through five years
            
            
            14,433
            
            
            
            14,215
            
            
            
            15,020
            
            
            
            14,696Due
                after five years through ten years
            
            
            31,357
            
            
            
            31,237
            
            
            
            23,646
            
            
            
            23,362Due
                after ten years
            
            
            93,574
            
            
            
            93,367
            
            
            
            92,758
            
            
            
            92,516$
            153,353
            
            
            $
            152,763
            
            
            $
            131,795
            
            
            $
            130,945





The
      table
      below indicates the length of time individual securities were in a continuous
      unrealized loss position at December 31, 2006.


Less
                than
            
            
            More
                thantwelve
                months
            
            
            twelve
                monthsEstimated
            
            
            
            
            
            Estimated
            
            
            Unrealizedfair
            
            
            Unrealized
            
            
            fair
            
            
            loss*(In
              thousands)*
            
            value
            
            
            loss
            
            
            valueAvailable
                for sale:U.S.
                Government and agency obligations
            
            $
            36,600
            
            
            $
            351
            
            
            $
            46,630
            
            
            $
            864Obligations
                of state and political subdivisions
            
            
            8,677
            
            
            
            73
            
            
            
            11,248
            
            
            
            133Other
                securities
            
            
            -
            
            
            
            -
            
            
            
            51
            
            
            
            19Total
                temporarily impaired securities
            
            $
            45,277
            
            
            $
            424
            
            
            $
            57,929
            
            
            $
            1,016




The
      table
      below indicates the length of time individual securities have been in a
      continuous unrealized loss position at December 31, 2005.


Less
                than
            
            
            More
                thantwelve
                months
            
            
            twelve
                monthsEstimated
            
            
            
            
            
            Estimatedfair
            
            
            Unrealized
            
            
            fair
            
            
            Unrealized*(In
                thousands)*
            
            value
            
            
            loss
            
            
            value
            
            
            lossAvailable
                for sale:U.S.
                Government and agency obligations
            
            $
            39,926
            
            
            $
            517
            
            
            $
            19,740
            
            
            $
            520Obligations
                of state and political subdivisions
            
            
            27,246
            
            
            
            430
            
            
            
            5,253
            
            
            
            99Other
                securities
            
            
            -
            
            
            
            -
            
            
            
            49
            
            
            
            20Total
                temporarily impaired securities
            
            $
            67,172
            
            
            $
            947
            
            
            $
            25,042
            
            
            $
            639





58
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Management
      has the ability to hold these temporarily impaired securities for the
      foreseeable future. The decline in the fair value is primarily due to
      differences in market interest rates. The fair values are expected to recover
      as
      the securities approach maturity dates and/or interest rates
      decline.





Proceeds
      from sales of investment securities designated as available for sale during
      the
      years ended December 31, 2006, 2005 and 2004, totaled $27.0 million, $35.2
      million and $14.2 million, resulting in gross realized gains of $270,000,
      $702,000 and $278,000, respectively, and gross unrealized losses of $83,000,
      $204,000 and $2,000, respectively, on such sales.





At
      December 31, 2006 and 2005,
      investment securities with an aggregate carrying value of $78.1 million and
      $86.5 million, respectively, were pledged as collateral for public
      deposits.





The
      Company enters into purchases of
      mortgage-backed securities under agreements to resell substantially identical
      securities on behalf of its deposit customers. Securities purchased under
      agreements to resell totaled $56.3 million and $18.3 million at December 31,
      2006 and 2005, respectively. At December 31, 2006 and 2005, the agreements
      were
      generally scheduled to mature within 90 days with the exception of a $42.0
      million in reverse repurchase agreement incepted in 2006, of which $20.0 million
      will mature in 2011 and $22.0 million in 2016. Securities purchased under
      agreement to resell averaged approximately $37.9 million during 2006 and the
      maximum amount outstanding at any month-end during 2006 was $56.3
      million.





NOTE
      C –
LOANS RECEIVABLE


The
      composition of the loan portfolio, including loans held for sale, is as follows
      at December 31:





*(In
                thousands)*
            
            2006
            
            
            2005Real
                estate mortgage (primarily residential)
            
            $
            308,922
            
            
            $
            320,674Installment,
                net of unearned interest
            
            
            107,765
            
            
            
            106,774Commercial
                and other
            
            
            561,755
            
            
            
            546,493Construction
                loans
            
            
            53,493
            
            
            
            52,612Credit
                card
            
            
            2,350
            
            
            
            2,183Gross
                loans
            
            
            1,034,285
            
            
            
            1,028,736Less:Allowance
                for loan losses
            
            
            12,924
            
            
            
            13,653Loans
                receivable – net
            
            $
            1,021,361
            
            
            $
            1,015,083





The
      Company’s lending efforts have historically focused on real estate mortgages and
      consumer installment loans, which comprised approximately $416.7 million, or
      41%, of the total loan portfolio at December 31, 2006, and approximately $427.4
      million, or 42%, of the total loan portfolio at December 31, 2005. In recent
      years, lending efforts have increasingly focused on commercial and construction
      loans, generally secured by commercial real estate and equipment, which comprise
      approximately $615.2 million, or 59%, of the total loan portfolio at December
      31, 2006, and approximately $599.1 million, or 58%, of the total loan portfolio
      at December 31, 2005. Generally, such loans have been underwritten with
      sufficient collateral or cash down payments to provide the Company with adequate
      collateral coverage in the event of default. Nevertheless, the Company, as
      with
      any lending institution, is subject to the risk that real estate values or
      economic conditions could deteriorate in its primary lending areas within Ohio,
      thereby impairing collateral values. However, management is of the belief that
      real estate values and economic conditions in the Company’s primary lending
      areas are presently stable.





As
      stated previously, the Company has
      sold whole loans and participating interests in loans in the secondary market,
      retaining servicing on the loans sold. Loans sold and serviced for others
      totaled approximately $241.8 million, $256.5 million and $275.9 million at
      December 31, 2006, 2005 and 2004, respectively.





The
      Company had $685,000 and $516,000
      of deposit overdrafts that were reclassified as loans at December 31, 2006
      and
      2005, respectively.





At
      December 31, 2006, 2005 and 2004, the Company had nonaccrual and nonperforming
      loans totaling approximately $13.6 million, $17.7 million and $6.3 million,
      respectively. Interest income that would have been recognized had nonaccrual
      loans performed pursuant to contractual terms totaled approximately $543,000,
      $1.1 million and $406,000 for the years ended December 31, 2006, 2005 and 2004,
      respectively.




59
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The
      activity in the allowance for loan losses is summarized as follows for the
      years
      ended December 31:





*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004Balance
                at beginning of year
            
            $
            13,653
            
            
            $
            11,847
            
            
            $
            10,836Provision
                charged to operations
            
            
            5,691
            
            
            
            6,341
            
            
            
            3,136Charge-offs
            
            
            (8,720
            )
            
            
            (7,747
            )
            
            
            (3,545
            )Recoveries
            
            
            2,300
            
            
            
            2,755
            
            
            
            1,291Allowance
                of acquired institutions
            
            
            -
            
            
            
            457
            
            
            
            129Balance
                at end of year
            
            $
            12,924
            
            
            $
            13,653
            
            
            $
            11,847








Impaired
      loans and the allowance for
      loan losses on impaired loans are summarized at December 31 below:





*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004Impaired
                loans:
            
            
            10,153
            
            
            $
            13,100
            
            
            $
            3,826Average
                balance of impaired loans
            
            $
            11,627
            
            
            $
            8,463
            
            
            $
            3,905Allowance
                for loan loss experience factor assigned to impaired loans
            
            $
            1,025
            
            
            $
            1,625
            
            
            $
            1,328





A
      loan is impaired when it is probable
      that the Company will be unable to collect all amounts due according to the
      contractual terms of the loan agreement. Impaired loans are included in
      nonperforming assets. Interest recognized on impaired loans while they were
      considered impaired totaled $28,000 and $71,000 for the years ended December
      31,
      2006 and 2005. There was no interest recognized for the year ended December
      31,
      2004 on impaired loans while they were considered impaired.





NOTE
      D –
OFFICE PREMISES AND EQUIPMENT


Office
      premises and equipment are summarized at December 31 as follows:





*(In
                thousands)*
            
            2006
            
            
            2005Land
                and buildings
            
            $
            30,776
            
            
            $
            25,289Furniture
                and equipment
            
            
            12,127
            
            
            
            11,095Leasehold
                improvements
            
            
            1,355
            
            
            
            1,24044,258
            
            
            
            37,624Less
                accumulated depreciation and amortization
            
            
            (16,493
            )
            
            
            (14,888
            )$
            27,765
            
            
            $
            22,736





During
      2006, the Company substantially
      completed the construction of an administrative headquarters building at a
      cost
      of approximately $4.9 million. Interest capitalized in connection with
      construction totaled approximately $130,000.





60
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NOTE
      E –
DEPOSITS


Deposit
      balances at December 31 are summarized as follows:





2006
            
            
            2005*(Dollars
                in thousands)*
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate**Deposit
                type and interest rate range**Demand
                deposit accounts
            
            $
            94,256
            
            
            
            -
            
            
            $
            97,575
            
            
            
            -Savings
                accounts
            
            
            48,858
            
            
            
            0.49
            %
            
            
            64,128
            
            
            
            0.53
            %NOW
                accounts
            
            
            70,369
            
            
            
            1.56
            %
            
            
            79,329
            
            
            
            1.43
            %Money
                market deposit accounts
            
            
            3,689
            
            
            
            0.37
            %
            
            
            8,191
            
            
            
            0.40
            %Premium
                investment accounts
            
            
            189,281
            
            
            
            4.47
            %
            
            
            131,014
            
            
            
            3.80
            %Select
                investment accounts
            
            
            20,372
            
            
            
            4.59
            %
            
            
            19,856
            
            
            
            3.31
            %Total
                transaction accounts
            
            
            426,825
            
            
            
            
            
            
            
            400,093Certificates
                of deposit1.00
                – 2.99%
            
            
            7,495
            
            
            
            
            
            
            
            93,7543.00
                – 4.99%
            
            
            381,892
            
            
            
            
            
            
            
            475,9875.00
                – 6.99%
            
            
            126,707
            
            
            
            
            
            
            
            8,5067.00
                – 10.00%
            
            
            41
            
            
            
            
            
            
            
            56Total
                certificates of deposit
            
            
            516,135
            
            
            
            4.43
            %
            
            
            578,303
            
            
            
            3.54
            %Total
                deposits
            
            $
            942,960
            
            
            
            3.56
            %
            
            $
            978,396
            
            
            
            3.43
            %





The
      Company had deposit accounts with balances in excess of $100,000 totaling $317.2
      million and $367.4 million at December 31, 2006 and 2005,
      respectively.





Interest
      expense on deposits is summarized as follows for the years ended December
      31:





*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004NOW
                accounts
            
            $
            1,310
            
            
            $
            1,017
            
            
            $
            804Savings
                accounts
            
            
            286
            
            
            
            365
            
            
            
            195Money
                market deposit accounts
            
            
            24
            
            
            
            36
            
            
            
            31Premium
                investment accounts
            
            
            7,553
            
            
            
            2,853
            
            
            
            548Select
                investment accounts
            
            
            850
            
            
            
            539
            
            
            
            419Certificates
                of deposit
            
            
            21,750
            
            
            
            18,134
            
            
            
            13,926$
            31,773
            
            
            $
            22,944
            
            
            $
            15,923


The contractual maturities of outstanding certificates of deposit are summarized
        by year as follows at December 31, 2006:




Year
                ending December 31,
            
            2006
            
            
            2005*(In
                thousands)*2007
            
            $
            336,067
            
            
            $
            298,4202008
            
            
            135,026
            
            
            
            190,0562009
            
            
            32,901
            
            
            
            68,2262010
            
            
            6,445
            
            
            
            12,9192011
                and later
            
            
            5,696
            
            
            
            8,682$
            516,135
            
            
            $
            578,303





61
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NOTE
      F –
ADVANCES FROM THE FEDERAL HOME LOAN BANK


Advances
      from the Federal Home Loan Bank, collateralized at December 31, 2006 and 2005
      by
      pledges of certain residential mortgage loans totaling $266.5 million and $209.3
      million, respectively, are summarized as follows:




Maturingin
                  year ended
              
              December
                  31,Interest
                  rate range
              
              December
                  31,
              
              2006
              
              
              2005(Dollars
                  in thousands)3.77%
                  to 6.50%
              
              2006
              
              $
              -
              
              
              
              39,0704.12%
                  to 7.30%
              
              2007
              
              
              58,301
              
              
              
              31,5014.88%
                  to 5.40%
              
              2008
              
              
              33,0004.29%
                  to 5.32%
              
              2009
              
              
              16,736
              
              
              
              2814.92%
                  to 8.02%
              
              2010
              
              
              13,603
              
              
              
              6,1403.94%
                  to 6.95%
              
              2011
              
              
              30,231
              
              
              
              39,6193.09
              %
              2013
              
              
              2,199
              
              
              
              2,9227.62
              %
              2015
              
              
              850
              
              
              
              8506.25
              %
              2016
              
              
              246
              
              
              
              2656.70
              %
              2017
              
              
              705
              
              
              
              7495.15
              %
              2018
              
              
              1,228
              
              
              
              1,4455.19
              %
              2021
              
              
              216
              
              
              
              -3.50
              %
              2025
              
              
              43
              
              
              
              453.50
              %
              2029
              
              
              158
              
              
              
              1623.50
              %
              2030
              
              
              68
              
              
              
              70$
              157,584
              
              
              $
              123,119Weighted-average
                  interest rate
              
              
              
              
              4.96
              %
              
              
              4.43
              %





NOTE
      G –
SUBORDINATED DEBENTURES


In
      2000,
      a Delaware trust owned by the Company (“Trust 1”), issued $5.0 million of
      mandatorily redeemable debt securities. The amount of the debt securities issued
      by Trust 1 are included in the Company’s regulatory capital, specifically as a
      component of Tier 1 capital. The subordinated debentures are the sole assets
      of
      Trust 1, and the Company owns all of the common securities of Trust 1. Interest
      payments on the debt securities are made semi-annually at an annual fixed
      interest rate of 10.875% and are reported as a component of interest expense
      on
      borrowings.





During
      2004, a Delaware statutory business trust owned by the Company, Oak Hill Capital
      Trust 2 (“Trust 2”), issued $5.0 million of mandatorily redeemable debt
      securities. The amount of the debt securities issued by Trust 2 are included
      in
      the Company’s regulatory capital, specifically as a component of Tier 1 capital.
      The proceeds from the issuance of the subordinated debentures and common
      securities were used by Trust 2 to purchase from the Company $5.0 million of
      subordinated debentures maturing on October 18, 2034. The subordinated
      debentures are the sole asset of Trust 2, and the Company owns all of the common
      securities of Trust 2. Interest payments on the debt securities are to be made
      quarterly at an annual fixed rate of interest of 6.24% through October 18,
      2009
      and at a floating rate of interest, reset quarterly, equal to 3-month LIBOR
      plus
      2.40% thereafter. Interest payments are reported as a component of interest
      expense on borrowings. The net proceeds received by the Company were contributed
      to the capital of Oak Hill during 2004.





Also
      during 2004, a Delaware statutory business trust owned by the Company, Oak
      Hill
      Capital Trust 3 (“Trust 3”), issued $8.0 million of mandatorily redeemable debt
      securities. The amount of the debt securities issued by Trust 3 are included
      in
      the Company’s regulatory capital, specifically as a component of Tier 1 capital.
      The proceeds from the issuance of the subordinated debentures and common
      securities were used by Trust 3 to purchase from the Company $8.0 million of
      subordinated debentures maturing on October 18, 2034. The subordinated
      debentures are the sole asset of Trust 3, and the Company owns all of the common
      securities of Trust 3. Interest payments on the debt securities are to be made
      quarterly at a floating rate of interest, reset quarterly, equal to 3-month
      LIBOR plus 2.30%. Interest payments are reported as a component of interest
      expense on borrowings. The net proceeds received by the Company were used to
      partially fund the acquisition of Lawrence Financial.





During
      2005, a Delaware statutory business trust owned by the Company, Oak Hill Capital
      Trust 4 (“Trust 4”), issued $5.0 million of mandatorily redeemable debt
      securities. The amount of the debt securities issued by Trust 4 are included
      in
      the Company’s regulatory capital, specifically as a component of Tier 1 capital.
      The proceeds from the issuance of the subordinated debentures and common
      securities were used by Trust 4 to purchase from the Company $5.0 million of
      subordinated debentures maturing on June 30, 2035. The subordinated debentures
      are the sole asset of Trust 4, and the Company owns all of the common securities
      of Trust 4. Interest payments on the debt securities are to be made quarterly
      at
      an annual fixed rate of interest of 5.96% through June 30, 2015 and at a
      floating rate of interest, reset quarterly, equal to 3-month LIBOR plus 1.60%
      thereafter. Interest payments are reported as a




62
 *Table
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component of interest expense on borrowings. The net
        proceeds
        received by the Company were contributed to the capital of Oak Hill during
        2005.


Trusts
      1
      through 4 are not consolidated herein pursuant to the provisions of FIN 46(R),
      “Consolidation of Variable Interest Entities.”





NOTE
      H –
FEDERAL INCOME TAXES


The
      provision for federal income taxes differs from that computed at the statutory
      corporate tax rate for the years ended December 31 as follows:





*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004Federal
                income taxes computed at the statutory rate
            
            $
            3,948
            
            
            $
            4,988
            
            
            $
            5,251Increase
                (decrease) in taxes resulting from:Interest
                income on municipal loans and obligations of state and political
                subdivisions
            
            
            (940
            )
            
            
            (807
            )
            
            
            (419
            )New
                Markets Tax Credits
            
            
            (1,000
            )
            
            
            (1,000
            )
            
            
            (500
            )Other
            
            
            (24
            )
            
            
            (24
            )
            
            
            9Federal
                income tax provision per consolidated financial statements
            
            $
            1,984
            
            
            $
            3,157
            
            
            $
            4,341





The
      computation of the Company’s net deferred tax asset at December 31 is as
      follows:





*(In
                thousands)*
            
            2006
            
            
            2005Taxes
                (payable) refundable on temporary differences at statutory
                rate:Deferred
                tax assets:Book/tax
                difference of allowance for loan losses
            
            $
            4,394
            
            
            $
            4,778Deferred
                compensation benefits
            
            
            106
            
            
            
            105Net
                operating loss and credit carryforwards
            
            
            2,300
            
            
            
            2,213Unrealized
                losses on securities designated as available for sale
            
            
            161
            
            
            
            166Non-accrual
                interest
            
            
            287
            
            
            
            51Total
                deferred tax assets
            
            
            7,248
            
            
            
            7,313Deferred
                tax liabilities:Deferred
                loan origination costs
            
            
            (1,932
            )
            
            
            (1,635
            )Federal
                Home Loan Bank stock dividends
            
            
            (1,359
            )
            
            
            (1,240
            )Book/tax
                depreciation
            
            
            (385
            )
            
            
            (484
            )Mortgage
                servicing rights
            
            
            (1,118
            )
            
            
            (1,165
            )Purchase
                price adjustments
            
            
            (1,278
            )
            
            
            (1,649
            )Interest
                rate swaps mark-to-market
            
            
            (56
            )Other
            
            
            (75
            )
            
            
            (15
            )Total
                deferred tax liabilities
            
            
            (6,203
            )
            
            
            (6,188
            )Net
                deferred tax asset
            
            $
            1,045
            
            
            $
            1,125





The
      Company’s ability to utilize the net operating loss carryforward amounts is
      subject to statutory limitation over a carryforward period not to exceed 20
      years. The Company expects its $3.7 million and $1.6 million net operating
      loss
      carryforwards to be utilized by 2011 and 2012, respectively. The Company’s new
      Market’s Tax Credit carryforwards expire over a 20 year period.  The
      Company has not recorded a valuation allowance for any portion of the net
      deferred tax asset at December 31, 2006, based on the amount of income taxes
      subject to recovery in 2006 and carryback years.





Retained
      earnings at December 31, 2006 include $1.5 million in allocation of earnings
      for
      bad debt deductions of acquired savings associations for which no income tax
      has
      been provided. If these bad debt reserves are used for purposes other than
      to
      absorb bad debt losses, the amount used will be subject to Federal income tax
      at
      the current corporate tax rate.





NOTE
      I —
RELATED PARTY TRANSACTIONS


In
      the
      normal course of business, the Company has made loans to its directors,
      officers, and their related business interests. In the opinion of management,
      such loans are consistent with sound banking practices and are within applicable
      regulatory lending limitations. The balance of such loans outstanding at
      December 31, 2006, 2005 and 2004 totaled approximately $10.9 million, $12.7
      million and $7.3 million, respectively.





The
      Company had also received demand
      and time deposits from directors, officers and their related business interests
      of approximately $13.4 million, $15.6 million and $14.7 million at December
      31,
      2006, 2005 and 2004, respectively.





63
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In
      addition, the Company paid $204,000, $435,000 and $512,000 for the years ended
      December 31, 2006, 2005 and 2004, respectively, to a law firm in which a
      director of the Company is a partner. The director has been determined to be
      independent based upon an annual review by the Company’s Board of
      Directors.





NOTE
      J —
EMPLOYEE BENEFIT PLANS


The
      Company has a profit-sharing and 401(k) plan covering all employees who have
      attained the age of twenty-one and completed three months of continuous service.
      The profit-sharing plan is non-contributory by employees and contributions
      to
      the plan are made at the discretion of the Board of Directors. The Company
      contributed $225,000 to the plan for the year ended December 31, 2004. The
      Company did not contribute to the plan for the years ended December 31, 2006
      and
      2005.





The
      401(k) plan allows employees to make voluntary, tax-deferred contributions
      of up
      to 15% of their base annual compensation. The Company provides, at its
      discretion, a 50% matching of funds for each participant’s contribution, subject
      to a maximum of 6% of base compensation. The Company’s matching contributions
      under the 401(k) plan totaled $334,000, $257,000 and $327,000 for the years
      ended December 31, 2006, 2005 and 2004, respectively.





NOTE
      K —
COMMITMENTS


The
      Company is a party to financial instruments with off-balance sheet risk in
      the
      normal course of business to meet the financing needs of its customers,
      including commitments to extend credit and letters of credit. Such commitments
      involve, to varying degrees, elements of credit and interest-rate risk in excess
      of the amount recognized in the statements of financial condition. The contract
      or notional amounts of the commitments reflect the extent of the Company’s
      involvement in such financial instruments.





The
      Company’s exposure to credit loss
      in the event of nonperformance by the other party to the financial instrument
      for commitments to extend credit and letters of credit is represented by the
      contractual notional amount of those instruments. The Company uses the same
      credit policies in making commitments and conditional obligations as those
      utilized for on-balance sheet instruments.  Since many of the loan
      commitments may expire without being drawn upon, the total commitment amount
      does not necessarily represent future cash requirements. The credit risk
      involved in issuing letters of credit is essentially the same as that involved
      in extending loan commitments to customers.





The
      Company grants retail, commercial
      and commercial real estate loans in southern and central Ohio. The Company
      evaluates each customer’s creditworthiness on a case-by-case basis. The amount
      of collateral obtained, if deemed necessary by the Company upon extension of
      credit, is based upon management’s credit evaluation of each customer.
      Collateral held varies but may include accounts receivable, inventory, property,
      plan and equipment, and income-producing commercial properties.





At
      December 31, 2006, the Company had outstanding commitments of approximately
      $34.1 million to originate residential and commercial loans. Also, as of
      December 31, 2006, the Company had unused lines of credit and letters of credit
      totaling approximately $137.8 million and $13.3 million, respectively. In the
      opinion of management, outstanding loan commitments equaled or exceeded
      prevalent market interest rates as of December 31, 2006, such commitments were
      underwritten in accordance with normal loan underwriting policies, and all
      disbursements will be funded via normal cash flow from operations and existing
      excess liquidity.





The
      Company has also entered into non-cancelable lease agreements for office
      premises and equipment under operating leases which expire at various dates
      through 2013. The following table summarizes minimum payments due under lease
      agreements by year:





Year
                      ending December 31,
            
            *(Dollars
                in thousands)*2007
            
            $
            6102008
            
            
            4282009
            
            
            2802010
            
            
            1842011
            
            
            1182012
                - 2013
            
            
            453$
            2,073




Total
      rent expense under operating leases was $673,000, $747,000 and $850,000 for
      the
      years ended December 31, 2006, 2005 and 2004, respectively.





NOTE
      L —
REGULATORY CAPITAL


As
      a
      registered bank holding company, the Company is subject to capital requirements
      imposed by the Board of Governor of the Federal Reserve System (“FRB”). Oak Hill
      is subject to the regulatory capital requirements of the Federal Deposit
      Insurance Corporation (the “FDIC”). Failure to meet minimum capital requirements
      can initiate certain mandatory — and possibly additional discretionary — actions
      by regulators that, if undertaken, could have a direct material effect on Oak
      Hill’s financial statements. Under capital adequacy guidelines and the
      regulatory framework for prompt corrective action, Oak Hill must meet specific
      capital guidelines




64
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            of Contents*




that
      involve quantitative measures of Oak Hill’s assets, liabilities, and certain
      off-balance-sheet items as calculated under regulatory accounting practices.
      Oak
      Hill’s capital accounts and classifications are also subject to qualitative
      judgments by the regulators about components, risk weightings, and other
      factors.




The
      FRB
      and the FDIC have adopted risk-based capital guidelines to which the Company
      and
      Oak Hill are subject. The guidelines establish a systematic analytical framework
      that makes regulatory capital requirements more sensitive to differences in
      risk
      profiles among banking organizations. Risk-based capital ratios are determined
      by allocating assets and specified off-balance-sheet commitments to four
      risk-weighting categories, with higher levels of capital being required for
      the
      categories perceived as representing greater risk.





These
      guidelines divide the capital into two tiers. The first tier (“Tier 1”) includes
      common equity, certain non-cumulative perpetual preferred stock (excluding
      auction rate issues) and minority interests in equity accounts of consolidated
      subsidiaries, less goodwill and certain other intangible assets (except mortgage
      servicing rights and purchased credit card relationships, subject to certain
      limitations). Supplementary (“Tier 2”) capital includes, among other items,
      cumulative perpetual and long-term limited-life preferred stock, mandatory
      convertible securities, certain hybrid capital instruments, term subordinated
      debt, and the allowance for loan losses, subject to certain limitations, less
      required deductions. Banks are required to maintain a total risk-based capital
      (the sum of Tier 1 and Tier 2 capital) ratio of 8%, of which 4% must be Tier
      1
      capital. The FDIC may, however, set higher capital requirements when particular
      circumstances warrant. Banks experiencing or anticipating significant growth
      are
      expected to maintain capital ratios, including tangible capital positions,
      well
      above minimum required levels.





During
      the year ended December 31, 2006, Oak Hill was notified by its primary federal
      regulator that it was categorized as “well-capitalized” under the regulatory
      framework for prompt corrective action. To be categorized as “well-capitalized”
Oak Hill must maintain minimum Tier 1 capital, total risk-based capital, and
      Tier 1 leverage ratios of 6%, 10%, and 5%, respectively. At December 31, 2006,
      Oak Hill was well-capitalized.





As
      of
      December 31, 2006 and 2005, management believes that the Company and Oak Hill
      have met all of the capital adequacy requirements to which the entities are
      subject. The Company’s and Oak Hill’s Tier 1 capital, total risk-based capital,
      and Tier 1 leverage ratios are set forth in the following tables:





Company
      consolidated:


As
                of December 31, 2006To
                be “wellcapitalized”
                underFor
                capital
            prompt
                correctiveActual
            
            
            adequacy
                purposes
            action
                provisions*(Dollars
                in thousands)*
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            Ratio
            Amount
            RatioTotal
                capital
            
            $
            117,009
            
            
            
            11.2
            %
            
            $
            83,918
            
            >8.0%
            N/A
            N/A(to
                risk-weighted assets)Tier
                1 capital
            
            $
            104,040
            
            
            
            9.9
            %
            
            $
            41,959
            
            >4.0%
            N/A
            N/A(to
                risk-weighted assets)Tier
                1 leverage ratio
            
            $
            104,040
            
            
            
            8.3
            %
            
            $
            50,218
            
            >4.0%
            N/A
            N/A





As
                of December 31, 2005To
                be “wellcapitalized”
                underFor
                capital
            prompt
                correctiveActual
            
            
            adequacy
                purposes
            action
                provisions*(Dollars
                in thousands)*
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            Ratio
            Amount
            RatioTotal
                capital
            
            $
            119,933
            
            
            
            11.7
            %
            
            $
            81,722
            
            >8.0%
            N/A
            N/A(to
                risk-weighted assets)Tier
                1 capital
            
            $
            107,106
            
            
            
            10.5
            %
            
            $
            40,861
            
            >4.0%
            N/A
            N/A(to
                risk-weighted assets)Tier
                1 leverage ratio
            
            $
            107,106
            
            
            
            8.7
            %
            
            $
            49,002
            
            >4.0%
            N/A
            N/A





65
 *Table
            of Contents*





Oak
      Hill:


As
                of December 31, 2006To
                be “wellcapitalized”
                underFor
                capital
            
            prompt
                correctiveActual
            
            
            adequacy
                purposes
            
            action
                provisions*(Dollars
                in thousands)*
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            Ratio
            
            Amount
            
            RatioTotal
                capital
            
            $
            113,362
            
            
            
            10.8
            %
            
            $
            83,886
            
            >8.0%
            
            $
            104,857
            
            >10.0%(to
                risk-weighted assets)Tier
                1 capital
            
            $
            95,438
            
            
            
            9.1
            %
            
            $
            41,943
            
            >4.0%
            
            $
            62,914
            
            >
                6.0%(to
                risk-weighted assets)Tier
                1 leverage ratio
            
            $
            95,438
            
            
            
            7.6
            %
            
            $
            50,125
            
            >4.0%
            
            $
            62,656
            
            >
                5.0%





As
                of December 31, 2005To
                be “wellcapitalized”
                underFor
                capital
            
            prompt
                correctiveActual
            
            
            
            
            
            adequacy
                purposes
            
            action
                provisions*(Dollars
                in thousands)*
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            Ratio
            
            Amount
            
            RatioTotal
                capital
            
            $
            111,980
            
            
            
            11.0
            %
            
            $
            81,633
            
            >8.0%
            
            $
            102,041
            
            >10.0%(to
                risk-weighted assets)Tier
                1 capital
            
            $
            99,214
            
            
            
            9.7
            %
            
            $
            40,816
            
            >4.0%
            
            $
            61,225
            
            >
                6.0%(to
                risk-weighted assets)Tier
                1 leverage ratio
            
            $
            99,214
            
            
            
            8.1
            %
            
            $
            48,838
            
            >4.0%
            
            $
            61,047
            
            >
                5.0%




The
      Company’s management believes that under the current regulatory capital
      regulations, the Company and Oak Hill will continue to meet the minimum capital
      requirements in the foreseeable future. However, events beyond the control
      of
      the Company, such as increased interest rates or a downturn in the economy
      in
      Oak Hill’s primary market areas, could adversely affect future earnings and
      consequently, the ability to meet future minimum regulatory capital
      requirements.





66
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            of Contents*




NOTE
      M —
OAK HILL FINANCIAL, INC. CONDENSED FINANCIAL INFORMATION


The
      following condensed financial statements summarize the financial position of
      Oak
      Hill Financial, Inc. as of December 31, 2006 and 2005, and the results of its
      operations and its cash flows for each of the years ended December 31, 2006,
      2005 and 2004.





**Oak
      Hill Financial, Inc.**


**CONDENSED
      STATEMENTS OF**


**FINANCIAL
      CONDITION**





December
                31,*(In
                thousands)*
            
            2006
            
            
            2005**ASSETS**Cash
                and due from banks
            
            $
            488
            
            
            $
            451Notes
                receivable
            
            
            5,000
            
            
            
            -Interest-bearing
                deposits in Oak Hill Banks
            
            
            3,682
            
            
            
            6,243Investment
                securities
            
            
            1,024
            
            
            
            537Investment
                in Oak Hill Banks
            
            
            104,888
            
            
            
            108,921Investment
                in Oak Hill Capital Trusts
            
            
            713
            
            
            
            713Investment
                in OHFI
            
            
            933
            
            
            
            996Investment
                in Oak Hill Title LLC
            
            
            15
            
            
            
            15Office
                premises and equipment – net
            
            
            167
            
            
            
            275Prepaid
                expenses and other assets
            
            
            214
            
            
            
            2,588Total
                assets
            
            $
            117,124
            
            
            $
            120,739**LIABILITIES
                AND STOCKHOLDER’S EQUITY**Accrued
                expenses and other liabilities
            
            $
            2,654
            
            
            $
            2,945Subordinated
                debentures
            
            
            23,713
            
            
            
            23,713Total
                liabilities
            
            
            26,367
            
            
            
            26,658Stockholders’
                equity Common stock
            
            
            2,937
            
            
            
            2,937Additional
                paid-in capital
            
            
            13,611
            
            
            
            13,952Retained
                earnings
            
            
            90,877
            
            
            
            85,505Less
                cost of treasury stock
            
            
            (16,368
            )
            
            
            (7,972
            )Unrealized
                losses on securities designated as available for sale, net of related
                tax benefits
            
            
            (300
            )
            
            
            (341
            )Total
                stockholders’ equity
            
            
            90,757
            
            
            
            94,081Total
                liabilities and stockholders’ equity
            
            $
            117,124
            
            
            $
            120,739





67
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            of Contents*


**Oak
        Hill Financial, Inc.**


**CONDENSED
      STATEMENTS OF EARNINGS**





Year
                ended****December 31,*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004**REVENUE**Interest
                income
            
            $
            156
            
            
            $
            151
            
            
            $
            58Other
                income
            
            
            1
            
            
            
            4
            
            
            
            6Equity
                in earnings of Subsidiaries
            
            
            11,584
            
            
            
            12,813
            
            
            
            11,548Total
                revenue
            
            
            11,741
            
            
            
            12,968
            
            
            
            11,612**EXPENSES**Interest
                expense
            
            
            1,814
            
            
            
            1,425
            
            
            
            683General
                and administrative
            
            
            1,287
            
            
            
            830
            
            
            
            686Total
                expenses
            
            
            3,101
            
            
            
            2,255
            
            
            
            1,369Earnings
                before federal income tax credits
            
            
            8,640
            
            
            
            10,713
            
            
            
            10,243Federal
                income tax credits
            
            
            (942
            )
            
            
            (666
            )
            
            
            (419
            )**NET
                EARNINGS**
            
            $
            9,582
            
            
            $
            11,379
            
            
            $
            10,662





**Oak
      Hill Financial, Inc.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**





Year
                Ended December 31,*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004**CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                earnings for the year
            
            $
            9,582
            
            
            $
            11,379
            
            
            $
            10,662Adjustments
                to reconcile net earnings to net cash provided byoperating
                activities:Distributed
                (undistributed) earnings of consolidated subsidiaries
            
            
            4,860
            
            
            
            (542
            )
            
            
            (4,316
            )Depreciation
                and amortization
            
            
            108
            
            
            
            168
            
            
            
            243Amortization of premium on investment securities
            
            
            5
            
            
            
            11
            
            
            
            -Compensation
                expense related to stock incentive plan
            
            
            23
            
            
            
            -
            
            
            
            -Tax
                benefits of stock options exercised
            
            
            -
            
            
            
            447
            
            
            
            693Increase
                (decrease) in cash due to changes in:Prepaid
                expenses and other assets
            
            
            289
            
            
            
            124
            
            
            
            522Other
                liabilities
            
            
            (359
            )
            
            
            1,430
            
            
            
            (257
            )Federal income taxesDeferred
            
            
            66
            
            
            
            (31
            )
            
            
            73Net
                cash provided by operating activities
            
            
            14,574
            
            
            
            12,986
            
            
            
            7,620**CASH
                FLOWS USED IN INVESTING ACTIVITIES:**Investment
                in Oak Hill Banks
            
            
            -
            
            
            
            (5,000
            )
            
            
            (10,250
            )Investment
                in Action Finance Company
            
            
            -
            
            
            
            -
            
            
            
            (1,750
            )Investment
                in Oak Hill Capital Trusts
            
            
            -
            
            
            
            (155
            )
            
            
            (403
            )Action
                Finance Company liquidation
            
            
            1,359
            
            
            
            -
            
            
            
            -Note
                receivable from Oak Hill Banks
            
            
            (5,000
            )
            
            
            -
            
            
            
            -Investment
                in U.S. Government Agencies
            
            
            (487
            )
            
            
            -
            
            
            
            (561
            )Purchase
                of office premises and equipment
            
            
            -
            
            
            
            (121
            )
            
            
            (248
            )Proceeds from disposition of assets
            
            
            -
            
            
            
            1,985
            
            
            
            -(Increase)
                decrease in interest-bearing deposits
            
            
            2,561
            
            
            
            478
            
            
            
            (458
            )Lawrence
                Financial acquisition
            
            
            -
            
            
            
            (6,868
            )
            
            
            -Net
                cash used in investing activities
            
            
            (1,567
            )
            
            
            (9,681
            )
            
            
            (13,670
            )Net
                cash provided by (used in) operating and investing
                activities
            
            
            13,007
            
            
            
            3,305
            
            
            
            (6,050
            )(balance
                carried forward)




68
 *Table
            of Contents*


**Oak
        Hill Financial, Inc.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**





Year
                Ended December 31,*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004Net
                cash provided by (used in) operating and investing
                activities
            
            $
            13,007
            
            
            $
            3,305
            
            
            $
            (6,050
            )(balance
                carried forward)**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                from exercise of stock options
            
            
            521
            
            
            
            1,667
            
            
            
            1,874Tax
                benefit of stock options exercised
            
            
            157
            
            
            
            -
            
            
            
            -Proceeds
                from issuance of subordinated debentures
            
            
            -
            
            
            
            5,155
            
            
            
            13,403Purchase
                of treasury stock
            
            
            (9,438
            )
            
            
            (7,820
            )
            
            
            (4,369
            )Dividends
                on common shares
            
            
            (4,210
            )
            
            
            (3,945
            )
            
            
            (3,435
            )Net
                cash provided by (used in) financing activities
            
            
            (12,970
            )
            
            
            (4,943
            )
            
            
            7,473Net
                increase (decrease) in cash and cash equivalents
            
            
            37
            
            
            
            (1,638
            )
            
            
            1,423Cash
                and cash equivalents at beginning of year
            
            
            451
            
            
            
            2,089
            
            
            
            666Cash
                and cash equivalents at end of year
            
            $
            488
            
            
            $
            451
            
            
            $
            2,089





NOTE
      N —
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE


Obligations
      for securities sold under
      agreements to repurchase were collateralized at December 31, 2006 and 2005
      by
      investment securities with a book value including accrued interest of
      approximately $59.4 million and $25.8 million and a market value of
      approximately $58.6 million and $25.4 million, respectively. The maximum balance
      of repurchase agreements outstanding at any month-end during the years ended
      December 31, 2006 and 2005 was $56.3 million and $20.5 million, respectively,
      and the average month-end balance outstanding for 2006 and 2005 was
      approximately $37.9 million and $16.5 million, respectively.





NOTE
      O —
ACQUISITIONS


In
      2005,
      the Company acquired Lawrence Financial and its subsidiary for $15.2 million,
      of
      which $7.7 million was paid in cash. In addition, the Company issued 221,051
      shares of common stock to Lawrence Financial shareholders. As part of the
      transaction, the Company acquired five full-service offices in southern Ohio,
      involving total loans of $76.5 million, $104.2 million in deposits and $116.9
      million in total assets. Of the five full-service offices acquired, one was
      combined with an existing Oak Hill branch and one was sold. The acquisition
      was
      accounted for as a purchase.





The
      following unaudited, pro-forma condensed financial information gives retroactive
      effect as if the merger had occurred on January 1, 2005.





**Oak
                Hill**
            
            
            **Lawrence**
            
            
            **Pro-forma****Financial**
            
            
            **Financial**
            
            
            **combined**(unaudited)
            
            
            (unaudited)(In
                thousands, except per share data)Total
                revenue
            
            $
            81,358
            
            
            $
            1,562
            
            
            $
            82,920Total
                expenses
            
            
            69,979
            
            
            
            2,354
            
            
            
            72,333Net
                earnings (loss)
            
            $
            11,379
            
            
            $
            (792
            )
            
            $
            10,587Basic
                earnings (loss) per share
            
            $
            2.01
            
            
            $
            (0.14
            )
            
            $
            1.87Diluted
                earnings per share
            
            $
            1.97
            
            
            N/A
            
            
            $
            1.83




In
      2004, the Company acquired Ripley
      National Bank (“Ripley”) for $5.3 million in cash. As part of the merger
      transaction, the Company acquired full-service offices in Ripley and Georgetown,
      Ohio, involving total loans of $39.1 million, $51.6 million in deposits and
      $58.6 million in total assets. The acquisition was accounted for as a
      purchase.





69
 *Table
            of Contents*




The
      following unaudited, pro-forma condensed financial information gives retroactive
      effect as if the merger had occurred on January 1, 2004.





**Oak
                Hill**
            
            
            
            
            
            **Pro-forma****Financial**
            
            
            **Ripley**
            
            
            **combined**(unaudited)
            
            
            (unaudited)(In
                thousands, except per share data)Total
                revenue
            
            $
            65,921
            
            
            $
            2,686
            
            
            $
            68,607Total
                expenses
            
            
            55,259
            
            
            
            4,069
            
            
            
            59,328Net
                earnings (loss)
            
            $
            10,662
            
            
            $
            (1,383
            )
            
            $
            9,279Basic
                earnings (loss) per share
            
            $
            1.92
            
            
            $
            (0.25
            )
            
            $
            1.67Diluted
                earnings per share
            
            $
            1.87
            
            
            N/A
            
            
            $
            1.63





NOTE
      P —
OAK HILL BANKS COMMUNITY DEVELOPMENT CORP.


During
      2004, the Company announced that Oak Hill Banks Community Development Corp.
      (“OHBCDC”), a wholly owned subsidiary and Certified Development Entity (“CDE”),
      had been selected to receive a $20.0 million allocation of new markets tax
      credits (“NMTC”) authority. Administered by the Community Development Financial
      Institutions Fund of the U.S. Department of the Treasury, the NMTC program
      is
      aimed at stimulating economic and community development and job creation in
      low-income communities.**The program provides federal tax credits
      to investors who make qualified equity investments (“QEIs”) in a CDE. The CDE is
      required to invest the proceeds of each QEI in low-income communities, which
      are
      generally defined as those census tracts with poverty rates of greater than
      20
      percent and/or median family incomes that are less than or equal to 80 percent
      of the area median family income.





The
      credit provided to the investor totals 39 percent of each QEI in a CDE and
      is
      claimed over a seven-year credit allowance period. In each of the first three
      years, the investor receives a credit equal to five percent of the total amount
      the investor paid to the CDE for each QEI. For each of the remaining four years,
      the investor receives a credit equal to six percent of the total amount the
      investor paid to the CDE for each QEI. The Company’s primary subsidiary, Oak
      Hill, has paid to OHBCDC $20 million for its QEIs. Oak Hill paid $10.0 million
      to OHBCDC during 2005 and 2004, i.e., the maximum total of $20.0 million
      permitted for its QEIs in OHBCDC.





OHBCDC
      is
      utilizing its $20.0 million of QEI proceeds  to provide “New Markets”
loans to qualifying businesses located in twelve Appalachian counties in rural
      southern Ohio. It also provides financial counseling services through a formal
      program of community business workshops. Under its New Markets loan program,
      OHBCDC provides short-term and long-term loans to a variety of qualifying
      businesses with non-conventional, non-conforming terms and conditions, including
      reduced fees, extended repayment terms, and below-market interest
      rates.





At
      December 31, 2006, Oak Hill had paid to OHBCDC $20.0 million for QEIs in OHBCDC.
      Oak Hill recognized $1.0 million in new markets tax credits in its federal
      income tax returns for the each of the years ended December 31, 2006 and 2005.
      The following table sets forth the new markets tax credits expected to be
      claimed by Oak Hill for years 2007 through 2011 with respect to the aggregate
      QEI amounts paid by Oak Hill during 2005 and 2004.








Aggregate
            
            
            New
                Markets Tax CreditYear
            
            QEI
                Amount
            
            
            2007
            
            
            2008
            
            
            2009
            
            
            2010
            
            
            20112004
            
            $
            10,000
            
            
            $
            600
            
            
            $
            600
            
            
            $
            600
            
            
            $
            600
            
            
            $
            -2005
            
            
            10,000
            
            
            
            500
            
            
            
            600
            
            
            
            600
            
            
            
            600
            
            
            
            600Total
            
            $
            20,000
            
            
            $
            1,100
            
            
            $
            1,200
            
            
            $
            1,200
            
            
            $
            1,200
            
            
            $
            600








70
 *Table
            of Contents*




The
      new
      markets tax credits claimed by Oak Hill with respect to each QEI remain subject
      to recapture over each QEI’s credit allowance period upon the occurrence of any
      of the following:





●
            if
                less than substantially all (generally defined as 85%) of the QEI
                proceeds
                are not used by OHBCDC to make qualified low income community
                investments;




●
            OHBCDC
                ceases to be a CDE; or




●
            OHBCDC
                redeems its QEI investments prior to the end of the credit allowance
                periods.





At
      December 31, 2006 and 2005, none of the above recapture events had occurred,
      nor
      in the opinion of management are such events likely to occur in the foreseeable
      future.





The
      following condensed financial
      statements summarize the financial position of OHBCDC as of December 31, 2006
      and 2005, and the results of its operations and its cash flows for each of
      the
      three years ended December 31, 2006, 2005 and 2004.





**OHBCDC
                CONDENSED STATEMENTS OF FINANCIAL CONDITION**December
                31,*(In
                thousands)*
            
            2006
            
            
            2005**ASSETS**Cash
                and due from banks
            
            $
            3,828
            
            
            $
            6,786Loans
                receivable-net
            
            
            19,587
            
            
            
            13,166Interest
                receivable
            
            
            54
            
            
            
            48Total
                assets
            
            $
            23,469
            
            
            $
            20,000**LIABILITIES
                AND STOCKHOLDER’S EQUITY**Total
                liabilities
            
            $
            -
            
            
            $
            -Stockholders
                equityCommon
                stock
            
            
            1
            
            
            
            1Additional
                paid-in capital
            
            
            23,013
            
            
            
            20,013Retained
                earnings (deficit)
            
            
            455
            
            
            
            (14
            )Total
                stockholder’s equity
            
            
            23,469
            
            
            
            20,000Total
                liabilities and stockholder’s equity
            
            $
            23,469
            
            
            $
            20,000





**OHBCDC
                CONDENSED STATEMENTS OF OPERATIONS**Year
                ended December 31,*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004**REVENUE**Interest
                income
            
            $
            786
            
            
            $
            287
            
            
            $
            3Other
                income
            
            
            2
            
            
            
            1
            
            
            
            -**EXPENSES**Provision
                for loan losses
            
            
            75
            
            
            
            166
            
            
            
            7General
                and administrative
            
            
            244
            
            
            
            129
            
            
            
            5Income
                (loss) before federal income tax benefit
            
            
            469
            
            
            
            (7
            )
            
            
            (9
            )Federal
                income tax benefit
            
            
            -
            
            
            
            2
            
            
            
            -**NET
                EARNINGS (LOSS)**
            
            $
            469
            
            
            $
            (5
            )
            
            $
            (9
            )





71
 *Table
            of Contents*




**OHBCDC
                CONDENSED STATEMENTS OF CASH FLOWS**Year
                ended December 31,*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004**CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                earnings (loss)
            
            $
            469
            
            
            $
            (5
            )
            
            $
            (9
            )Provision
                for losses on loans
            
            
            75
            
            
            
            166
            
            
            
            7Increase
                in interest receivable
            
            
            (6
            )
            
            
            (47
            )
            
            
            (1
            )Net
                cash provided by (used in) operating activities
            
            
            538
            
            
            
            114
            
            
            
            (3
            )**CASH
                FLOWS USED IN INVESTING ACTIVITIES:**Loan
                disbursements
            
            
            (7,047
            )
            
            
            (12,329
            )
            
            
            (1,214
            )Principal
                repayments on loans
            
            
            551
            
            
            
            204Net
                cash used in investing activities
            
            
            (6,496
            )
            
            
            (12,125
            )
            
            
            (1,214
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Investment
                by Oak Hill Banks
            
            
            3,000
            
            
            
            13
            
            
            
            1Qualified
                equity investment by Oak Hill Banks
            
            
            -
            
            
            
            10,000
            
            
            
            10,000Net
                cash provided by financing activities
            
            
            3,000
            
            
            
            10,013
            
            
            
            10,001Net
                increase (decrease) in cash and cash equivalents
            
            
            (2,958
            )
            
            
            (1,998
            )
            
            
            8,784Cash
                and cash equivalents at beginning of year
            
            
            6,786
            
            
            
            8,784
            
            
            
            -Cash
                and cash equivalents at end of year
            
            $
            3,828
            
            
            $
            6,786
            
            
            $
            8,784





NOTE
      Q –
DETAILS OF OPERATING EXPENSES


The
      following table details the
      composition of occupancy and equipment expenses for the years ended December
      31,
      2006,


2005
      and
      2004.





Year
                Ended December 31,*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004Depreciation
                and amortization
            
            $
            1,672
            
            
            $
            1,522
            
            
            $
            1,146Rent
                expense, net of rent income
            
            
            530
            
            
            
            674
            
            
            
            820Maintenance
                contracts and repairs
            
            
            1,131
            
            
            
            1,260
            
            
            
            921Other
            
            
            814
            
            
            
            611
            
            
            
            513Total
            
            $
            4,147
            
            
            $
            4,067
            
            
            $
            3,400





72
 *Table
            of Contents*




The
      following table details the
      composition of other operating expenses for the years ended December 31, 2006,
      2005 and 2004.





Year
                Ended December 31,*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004ATM
                processing
            
            $
            684
            
            
            $
            580
            
            
            $
            498Supplies
            
            
            667
            
            
            
            794
            
            
            
            644Insurance
                commissions paid
            
            
            202
            
            
            
            465
            
            
            
            533Credit
                and collection expenses
            
            
            1,094
            
            
            
            631
            
            
            
            772Dealer
                participation
            
            
            613
            
            
            
            571
            
            
            
            315Marketing
            
            
            712
            
            
            
            737
            
            
            
            421Postage
            
            
            502
            
            
            
            507
            
            
            
            388Telephone
            
            
            732
            
            
            
            659
            
            
            
            567Professional
                fees
            
            
            1,383
            
            
            
            1,274
            
            
            
            796Other
            
            
            3,458
            
            
            
            2,841
            
            
            
            2,739Total
            
            $
            10,047
            
            
            $
            9,059
            
            
            $
            7,673





NOTE
      R –
DETAILS OF OTHER INCOME





The
      following table details the
      composition of service charges, fees and other operating income for the years
      ended December 31,


2006,
      2005 and 2004.


Year
                Ended December 31,*(In
                thousands)*
            
            2006
            
            
            2005
            
            
            2004Service
                charges on deposits
            
            $
            5,392
            
            
            $
            4,508
            
            
            $
            3,562ATM
                fee income
            
            
            1,073
            
            
            
            787
            
            
            
            354Loan
                servicing fees
            
            
            932
            
            
            
            955
            
            
            
            918Miscellaneous
                customer charges and fees
            
            
            476
            
            
            
            386
            
            
            
            366Other
            
            
            590
            
            
            
            314
            
            
            
            52Total
            
            $
            8,463
            
            
            $
            6,950
            
            
            $
            5,252





73
 *Table
            of Contents*




NOTE
      S –
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)


The
      following table summarizes the Company’s quarterly results for the years ended
      December 31, 2006 and 2005.





2006Three
                Months Ended*(In
                thousands, except per share data)*
            
            March
                31,
            
            
            June
                30,
            
            
            September
                30,
            
            
            December
                31,Total
                interest income
            
            $
            18,971
            
            
            $
            19,647
            
            
            $
            20,482
            
            
            $
            20,643Total
                interest expense
            
            
            9,280
            
            
            
            10,127
            
            
            
            10,846
            
            
            
            11,158Net
                interest income
            
            
            9,691
            
            
            
            9,520
            
            
            
            9,636
            
            
            
            9,485Provision
                for losses on loans
            
            
            200
            
            
            
            1,073
            
            
            
            456
            
            
            
            3,962Other
                income
            
            
            3,287
            
            
            
            3,507
            
            
            
            3,316
            
            
            
            3,021General,
                administrative and other expense
            
            
            8,249
            
            
            
            8,267
            
            
            
            8,455
            
            
            
            9,235Earnings
                (loss) before income tax (credits)
            
            
            4,529
            
            
            
            3,687
            
            
            
            4,041
            
            
            
            (691
            )Federal
                income taxes (credits)
            
            
            1,035
            
            
            
            693
            
            
            
            861
            
            
            
            (605
            )Net
                earnings (loss)
            
            $
            3,494
            
            
            $
            2,994
            
            
            $
            3,180
            
            
            $
            (86
            )Basic
                earnings (loss) per share
            
            $
            0.63
            
            
            $
            0.55
            
            
            $
            0.59
            
            
            $
            (0.01
            )Diluted
                earnings per share
            
            $
            0.62
            
            
            $
            0.54
            
            
            $
            0.58
            
            
            N/A





2005Three
                Months Ended*(In
                thousands, except per share data)*
            
            March
                31,
            
            
            June
                30,
            
            
            September
                30,
            
            
            December
                31,Total
                interest income
            
            $
            15,777
            
            
            $
            17,090
            
            
            $
            18,179
            
            
            $
            18,674Total
                interest expense
            
            
            6,091
            
            
            
            7,104
            
            
            
            7,760
            
            
            
            8,481Net
                interest income
            
            
            9,686
            
            
            
            9,986
            
            
            
            10,419
            
            
            
            10,193Provision
                for losses on loans
            
            
            750
            
            
            
            4,709
            
            
            
            212
            
            
            
            670Other
                income
            
            
            2,539
            
            
            
            3,004
            
            
            
            3,013
            
            
            
            3,082General,
                administrative and other expense
            
            
            6,895
            
            
            
            7,899
            
            
            
            8,144
            
            
            
            8,107Earnings
                before income taxes
            
            
            4,580
            
            
            
            382
            
            
            
            5,076
            
            
            
            4,498Federal
                income taxes (credits)
            
            
            1,320
            
            
            
            (219
            )
            
            
            1,137
            
            
            
            919Net
                earnings
            
            $
            3,260
            
            
            $
            601
            
            
            $
            3,939
            
            
            $
            3,579Basic
                earnings per share
            
            $
            0.59
            
            
            $
            0.10
            
            
            $
            0.69
            
            
            $
            0.64Diluted
                earnings per share
            
            $
            0.57
            
            
            $
            0.10
            
            
            $
            0.68
            
            
            $
            0.63







74