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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHNAGE ACT OF 1934
For the Quarter Ended March 31, 2003
Commission File Number: 0-26876
OAK HILL FINANCIAL, INC.
(Exact name of Registrant as specified in its charter)
Ohio
(State or other jurisdiction of
incorporation or organization)
14621 S. R. 93
Jackson, Ohio
(Address of principal executive office)
31-1010517
(I.R.S. Employer
Identification Number)
45640
(Zip Code)
Registrant's telephone number, including area code: (740) 286-3283
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act)
Yes No X
----- -----
As of May 5, 2003, the latest practicable date, 5,457,041 shares of the
Registrant's common stock, $.50 stated value, were outstanding.
Oak Hill Financial, Inc.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition
And Results of Operations 13
Item 3: Quantitative and Qualitative Disclosures About Market Risk 15
Item 4: Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities and Use of Proceeds 16
Item 3: Default Upon Senior Securities 16
Item 4: Submission of Matters to a Vote of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 18
Certifications 19
-2-
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
(In thousands, except share data) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 20,986 $ 19,118
Federal funds sold 80 5,540
Investment securities designated as available for sale - at market 77,903 81,214
Investment securities designated as held to maturity - at cost (approximate market
value of $3,572 and $2,522 at March 31, 2003 and December 31, 2002, respectively) 3,672 2,575
Loans receivable - net 709,032 700,699
Loans held for sale - at lower of cost or market 3,061 1,245
Office premises and equipment - net 10,611 10,266
Other real estate owned 278
Federal Home Loan Bank stock - at cost 5,821 5,764
Accrued interest receivable on loans 3,055 3,026
Accrued interest receivable on securities 667 600
Goodwill - net 413 413
Prepaid expenses and other assets 1,963 2,249
Prepaid federal income taxes 50381
Deferred federal income taxes 272 539
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $837,864 $833,629
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand $62,641 $ 61,847
Savings and time deposits 599,911 601,966
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 662,552 663,813
Securities sold under agreements to repurchase 4,332 5,553
Advances from the Federal Home Loan Bank 89,748 86,055
Notes payable 2,750 2,750
Guaranteed preferred beneficial interests in the Corporation's
junior subordinated debentures 5,000 5,000
Accrued interest payable and other liabilities 2,953 3,577
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 767,335 766,748
Stockholders' equity
Common stock - $.50 stated value; authorized 15,000,000 shares
5,594,228 shares issued 2,797 2,797
Additional paid-in capital 5,183 5,113
Retained earnings 63,511 61,236
Treasury stock (142,387 and 225,020 shares at March 31, 2003 and
December 31, 2002, respectively - at cost) (2,197) (3,471)
Accumulated comprehensive income:
Unrealized gain on securities designated as available for sale, net
of related tax effects 1,235 1,206
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 70,529 66,881
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $837,864 $833,629
===========================================================================================================================
-3-
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended
--------------------------
March 31,
(In thousands, except share data) 2003 2002
- -------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $12,799 $13,115
Investment securities 874 1,013
Interest-bearing deposits and other 67 109
- -------------------------------------------------------------------------------------------------
Total interest income 13,740 14,237
INTEREST EXPENSE
Deposits 4,114 5,220
Borrowings 1,206 1,226
- -------------------------------------------------------------------------------------------------
Total interest expense 5,320 6,446
- -------------------------------------------------------------------------------------------------
Net interest income 8,420 7,791
Provision for losses on loans 509 460
- -------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 7,911 7,331
OTHER INCOME
Service fees, charges and other operating 680 691
Insurance commissions 676 538
Gain on sale of loans 926 395
Gain on sale of securities 122 49
Gain on sale of branch 122
- -------------------------------------------------------------------------------------------------
Total other income 2,404 1,795
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE
Employee compensation and benefits 3,555 3,220
Occupancy and equipment 761 601
Federal deposit insurance premiums 27 26
Franchise taxes 20 176
Other operating 1,525 1,388
Merger-related expenses 16
- -------------------------------------------------------------------------------------------------
Total general, administrative and other expense 5,904 5,411
- -------------------------------------------------------------------------------------------------
Earnings before federal income taxes 4,411 3,715
FEDERAL INCOME TAXES
Current 1,179 1,290
Deferred 253 (106)
- -------------------------------------------------------------------------------------------------
Total federal income taxes 1,432 1,184
- -------------------------------------------------------------------------------------------------
NET EARNINGS $ 2,979 $ 2,531
=================================================================================================
EARNINGS PER SHARE
Basic $ .55 $ .48
=================================================================================================
Diluted $ .54 $ .47
=================================================================================================
-4-
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended
--------------------------
March 31,
(In thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------
Net earnings $2,979 $2,531
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities designated as available for sale,
net of taxes (benefits) of $57 and $(108), respectively 109 (209)
Reclassification adjustment for realized gains included in net earnings,
net of taxes of $42 and $17, respectively (80) (32)
- ----------------------------------------------------------------------------------------------------------
Comprehensive income $3,008 $2,290
==========================================================================================================
Accumulated comprehensive income (loss) $1,235 $ (302)
==========================================================================================================
-5-
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
--------------------------
March 31,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings for the period $ 2,979 $ 2,531
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 223 182
Gain on sale of securities (122) (49)
Amortization of premiums and discounts on investment
securities - net 262 223
Proceeds from sale of loans in secondary market 45,304 21,467
Loans disbursed for sale in secondary market (46,702) (19,965)
Gain on sale of loans (418) (171)
Gain on disposition of assets (8) (122)
Amortization of deferred loan origination costs and fees - net (10) 46
Federal Home Loan Bank stock dividends (57) (59)
Provision for losses on loans 509 460
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 285 (775)
Accrued interest receivable (96) (295)
Accrued interest payable and other liabilities (624) (541)
Federal income taxes
Current 331 (244)
Deferred 253 (106)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,109 2,582
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Loan disbursements (89,981) (81,741)
Principal repayments on loans 80,871 56,294
Principal repayments on mortgage-backed securities designated
as available for sale 4,874 3,465
Proceeds from sale of investment securities designated
as available for sale 2,636 7,240
Proceeds from maturity of investment securities 20 5,000
Proceeds from disposition of assets 32 345
Purchase of investment securities designated
as available-for-sale (4,314) (24,463)
Purchase of investment securities designated
as held-to-maturity (1,098)
Decrease in federal funds sold - net 5,460 565
Purchase of McNelly Insurance Agency (97)
Purchase of office premises and equipment (592) (461)
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,092) (33,853)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating and investing activities
(balance carried forward) 17 (31,271)
- --------------------------------------------------------------------------------------------------------------
-6-
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Three Months Ended
--------------------------
March 31,
(In thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating and investing activities
(balance brought forward) $ 17 $ (31,271)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds (repayments) from securities sold under agreement to repurchase (1,221) 466
Net increase (decrease) in deposit accounts (1,261) 41,526
Proceeds from Federal Home Loan Bank advances 88,674 15,145
Repayments of Federal Home Loan Bank advances (84,981) (30,017)
Dividends on common shares (704) (633)
Proceeds from issuance of shares under stock option plan 1,344 147
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,851 26,634
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,868 (4,637)
Cash and cash equivalents at beginning of period 19,118 18,915
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalent at end of period $ 20,986 $ 14,278
=========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Federal income taxes $ 500 $ 1,469
=========================================================================================================================
Interest on deposits and borrowings $ 5,614 $ 6,678
=========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects $ 29 $ (241)
=========================================================================================================================
Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 508 $ 224
=========================================================================================================================
Transfer from loans to real estate acquired through foreclosure $ 278 $ --
=========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of note payable in connection with purchase of McNelly Insurance Agency $ -- $ 100
=========================================================================================================================
Acquisition of treasury stock in exchange for exercise of stock options $ 165 $ 23
=========================================================================================================================
-7-
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the three month periods ended
March 31, 2003 and 2002
1. Basis of Presentation
----------------------
Oak Hill Financial, Inc. (the "Company") is a financial holding company the
principal assets of which have been its ownership of Oak Hill Banks ("Oak
Hill"), Towne Bank ("Towne"), (collectively "Banks"), Action Finance Company
("Action") and McNelly, Patrick and Associates ("MPA"). Accordingly, the
Company's results of operations are primarily dependent upon the results of
operations of its subsidiaries. During 2002, the Board of Directors of the
Company, Oak Hill and Towne approved a business plan whereby the Banks merged on
November 30, 2002 into a single bank charter under the name Oak Hill Banks.
Hereinafter, the consolidated financial statements use the term "Oak Hill" to
describe the preexisting individual banks owned by the Company.
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. Action is a consumer finance company that originates
installment and home equity loans. Oak Hill's and Action's profitability are
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 and Action can be significantly influenced by a
number of competitive factors, such as governmental monetary policy, that are
outside of management's control.
The Company also owns forty-nine percent of Oak Hill Title Agency, LLC
("Oak Hill Title") which provides title services for commercial and residential
real estate transactions. Oak Hill Title commenced operations in January 2002.
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-Q and, therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America. Accordingly,
these financial statements should be read in conjunction with the consolidated
financial statements and notes thereto of the Company included in the Annual
Report on Form 10-K for the year ended December 31, 2002. However, all
adjustments (consisting of normal recurring accruals), which, in the opinion of
management, are necessary for a fair presentation of the consolidated financial
statements, have been included. The results of operations for the three months
ended March 31, 2003 are not necessarily indicative of the results that may be
expected for the entire year.
2. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Oak Hill, Action, Oak Hill Capital Trust I
and MPA. The Company effectively controls Oak Hill Title; therefore, their
accounts are also included in the financial statements of the Company with the
remaining ownership being accounted for as minority interest. All intercompany
balances and transactions have been eliminated.
3. Liquidity and Capital Resources
-------------------------------
Like other financial institutions, the Company must ensure that sufficient
funds are available to meet deposit withdrawals, loan commitments, and expenses.
Control of the Company's cash flow requires the anticipation of deposit flows
and loan payments. The Company's primary sources of funds are deposits,
borrowings and principal and interest payments on loans. The Company uses funds
from deposit inflows, proceeds from borrowings and principal and interest
payments on loans primarily to originate loans, and to purchase short-term
investment securities and interest-bearing deposits.
At March 31, 2003, the Company had $247.6 million of certificates of
deposit maturing within one year. It has been the Company's historic experience
that such certificates of deposit will be renewed with Oak Hill at market rates
of interest. It is management's belief that maturing certificates of deposit
over the next year will similarly be renewed with Oak Hill at market rates of
interest without a material adverse effect on the results of operations.
In the event that certificates of deposit cannot be renewed at prevalent
market rates, the Company can obtain up to $160.7 million in advances from the
Federal Home Loan Bank of Cincinnati (FHLB). Also, as an operational philosophy,
the Company seeks to obtain advances to help with asset/liability management and
liquidity. At March 31, 2002, the Company had $89.7 million of outstanding FHLB
advances.
-8-
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended March 31, 2003 and 2002
3. Liquidity and Capital Resources (continued)
-------------------------------------------
At March 31, 2003, loan commitments, or loans committed but not closed,
totaled $44.9 million. Additionally, the Company had unused lines of credit and
letters of credit totaling $95.0 million and $1.1 million, respectively. Funding
for these amounts is expected to be provided by the sources described above.
Management believes the Company has adequate resources to meet its normal
funding requirements.
4. Earnings Per Share
------------------
Basic earnings per common share is computed based upon the weighted-average
number of common shares outstanding during the period. Diluted earnings per
common share is computed including the dilutive effect of additional potential
common shares issuable under stock option. The computations were as follows for
the three-month periods ended March 31:
2003 2002
- ------------------------------------------------------------------------------------
Weighted-average common shares outstanding (basic) 5,421,597 5,274,240
Dilutive effect of assumed exercise of stock options 142,965 64,294
- ------------------------------------------------------------------------------------
Weighted-average common shares outstanding (diluted) 5,564,562 5,338,534
====================================================================================
Options to purchase 283,591 shares of common stock with a weighted-average
exercise price of $16.36 were outstanding at March 31, 2002, but were excluded
from the computation of common share equivalents because their exercise prices
were greater than the average market price of the common shares.
5. Effects of Recent Accounting Pronouncements
-------------------------------------------
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 provides
financial accounting and reporting guidance for costs associated with exit or
disposal activities, including one-time termination benefits, contract
termination costs other than for a capital lease, and costs to consolidate
facilities or relocate employees. SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002. The Company adopted SFAS No. 146
effective January 1, 2003, as required, without material effect on the Company's
financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The Company adopted SFAS No. 148 effective January 1, 2003, as required,
without material effect on the Company's financial condition or results of
operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns, or both. FIN 46
also requires disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable interest.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was
-9-
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the three month periods ended
March 31, 2003 and 2002
5. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------------------
established. The Company adopted FIN 46 without material effect on its financial
condition or results of operations.
6. Critical Accounting Policies
----------------------------
Allowance for Losses on Loans: It is the Company's policy to provide
valuation allowances for estimated losses on loans based upon past loss
experience, trends in the level of delinquent and specific problem loans,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current economic conditions in
the Company'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. Major loans and major lending areas are reviewed
periodically to determine potential problems at an early date. The allowance for
loan losses is increased by charges to earnings and decreased by charge-offs
(net of recoveries).
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." This Statement requires that
impaired loans be measured based upon the present value of expected future cash
flows discounted at the loan's effective interest rate or, as an alternative, at
the loans' observable market price or fair value of the collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Company considers its investment in
one-to-four family residential loans, consumer installment loans and credit card
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. With respect to the Company's investment in commercial
and other loans, and its evaluation of impairment thereof, such loans are
collateral dependent and as a result are carried as a practical expedient at the
lower of cost or fair value.
It is the Company's policy to charge off unsecured credits that are more
than ninety days delinquent. Similarly, collateral dependent loans which are
more than ninety days delinquent are considered to constitute more than a
minimum delay in repayment and are evaluated for impairment under SFAS No. 114
at that time.
Mortgage Servicing Rights: 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 the Company recognize as separate assets, rights to service
mortgage loans for others, regardless of how those servicing rights are
acquired. An institution that acquires mortgage servicing rights through either
the purchase or origination of mortgage loans and sells those loans with
servicing rights retained must allocate some of the cost of the loans to the
mortgage servicing rights.
SFAS No. 140 requires that capitalized mortgage servicing rights and
capitalized excess servicing receivables be assessed for impairment. Impairment
is measured based on fair value. The mortgage servicing rights recorded by the
Company, 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
acquired servicing.
7. Stock Option Plan
------------------
The Company has a stock option plan that provides for grants of options of
up to 1,200,000 authorized, but unissued shares of its common stock. The Company
accounts for its stock option plan in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually the
vesting period. Alternatively, SFAS No. 123 permits entities to continue to
account for
-10-
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the three month periods ended
March 31, 2003 and 2002
7. Stock Option Plan (continued)
-----------------------------
stock options and similar equity instruments under Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
that continue to account for stock options using APB Opinion No. 25 are required
to make pro forma disclosures of net earnings and earnings per share, as if the
fair value-based method of accounting defined in SFAS No. 123 had been applied.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has been
recognized for the plan. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant dates for awards under
the plan consistent with the accounting method utilized in SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the
pro-forma amounts indicated below for the three months ended March 31:
(In thousands, except share data) 2003 2002
--------------------------------------------------------------------
Net earnings:
As reported $ 2,979 $ 2,531
Stock-based compensation, net of tax (29) (33)
Pro-forma net earnings $ 2,950 $ 2,498
Basic earnings per share:
As reported $ .55 $ .48
Stock-based compensation, net of tax (.01) (.01)
Pro-forma $ .54 $ .47
Diluted earnings per share:
As reported $ .54 $ .47
Stock-based compensation, net of tax (.01) (.01)
Pro-forma $ .53 $ .46
The fair value of each option granted is estimated on the date of grant
using the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 2002 and 2001, respectively:
dividend yield of 2.3% and 2.8% for 2002 and 2001, respectively; expected
volatility of 30.0% for 2002 and 10.0% for 2001; risk-free interest rates of
4.00% and 4.50% for 2002 and 2001, respectively and expected lives of 10 years.
-11-
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the three month periods ended
March 31, 2003 and 2002
7. Stock Option Plan (continued)
-----------------------------
A summary of the status of the Company's Stock Option Plan as of March 31,
2003 and December 31, 2002 and 2001 and changes during the periods ended on
those dates is presented below:
Three months ended Year Ended
March 31, December 31,
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
- ------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of period 722,842 $15.28 825,526 $14.96 713,301 $14.75
Granted -- -- 1,000 21.85 157,550 15.05
Exercised (89,975) 13.40 (101,284) 12.73 (27,825) 8.67
Forfeited (1,500) 15.05 (2,400) 14.96 (17,500) 16.98
- ------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 631,367 $15.55 722,842 $15.28 825,526 $14.96
==================================================================================================================
Options exercisable at period end 554,992 644,967 657,144
==================================================================================================================
Weighted-average fair value of options granted
during the period -- $ 7.25 $ 2.34
==================================================================================================================
The following information applies to options outstanding at March 31, 2003:
Range of exercise prices Number outstanding
- --------------------------------------------------------------------------------
$ 2.79 - $ 4.19 7,102
$ 4.20 - $ 6.30 --
$ 6.31 - $ 9.47 21,900
$ 9.48 - $ 14.22 18,750
$ 14.23 - $ 21.35 582,615
$ 21.36 - $ 21.85 1,000
- --------------------------------------------------------------------------------
Total 631,367
================================================================================
Weighted-average exercise price $15.55
Weighted-average remaining contractual life 7.2 years
-12-
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS For the three month periods ended March 31, 2003 and 2002
Discussion of Financial Condition Changes from December 31, 2002 to March 31,
- -----------------------------------------------------------------------------
2003
- ----
The Company's total assets amounted to $837.9 million as of March 31, 2003,
an increase of $4.2 million, or 0.5%, over the total at December 31, 2002. The
increase in assets was funded primarily through an increase in FHLB advances of
$3.7 million and an increase in stockholders' equity of $3.6 million, which were
partially offset by a $1.3 million decrease in deposits and a $1.2 million
decrease in securities sold under agreements to repurchase.
Cash and due from banks, federal funds sold, and investment securities,
including mortgage-backed securities, decreased by $5.8 million, or 5.4%, to a
total of $102.6 million at March 31, 2003, compared to $108.4 million at
December 31, 2002. Investment securities decreased by $2.2 million, as
maturities and repayments of $4.9 million and sales of $2.6 million exceeded
purchases of $5.4 million. Federal funds sold decreased by $5.4 million during
the three-month period ended March 31, 2003.
Loans receivable totaled $712.1 million at March 31, 2003, an increase of
$10.1 million, or 1.4%, over total loans at December 31, 2002. Loan
disbursements totaled $136.7 million during the three-month period ended March
31, 2003, which were partially offset by loan sales of $44.9 million and
principal repayments of $80.9 million. Loan disbursements and sales volume
increased by $35.0 million and $23.6 million, respectively, as compared to the
same period in 2002. The continued low interest rate environment during the
three-month period ended March 31, 2003 contributed to the overall increases in
loan origination and sales volume, as borrowers refinanced loans to lower
interest rates and Oak Hill generally sold such lower interest rate loans in the
secondary market. Growth in the loan portfolio during the three months ended
March 31, 2003 was comprised of a $3.3 million, or 2.5%, increase in commercial
and other loans and a $9.5 million, or 1.9%, increase in commercial and
residential real estate loans, which were partially offset by a $2.3 million, or
3.1%, decrease in installment loans and a $323,000, or 19.1%, decrease in credit
card loans. The Company's allowance for loan losses totaled $9.4 million at
March 31, 2003, an increase of $267,000, or 2.9%, over the total at December 31,
2002. The allowance for loan losses represented 1.30% and 1.29% of the total
loan portfolio at March 31, 2003 and December 31, 2002, respectively. Net
charge-offs totaled approximately $242,000 and $169,000 for the three months
ended March 31, 2003 and 2002, respectively. The Company's allowance represented
124.5% and 125.3% of nonperforming loans, which totaled $7.8 million and $7.3
million at March 31, 2003 and December 31, 2002, respectively. At March 31,
2003, nonperforming loans were comprised of $958,000 in installment loans, $3.7
million of loans secured primarily by commercial real estate and $3.1 million of
loans secured by one-to-four family residential real estate. In management's
opinion, all nonperforming loans were adequately collateralized or reserved for
at March 31, 2003.
Deposits totaled $662.6 million at March 31, 2003, a decrease of $1.3
million, or 0.2%, from the $663.8 million total at December 31, 2002. The
decrease resulted primarily from a brokered deposit maturing during the quarter.
Advances from the Federal Home Loan Bank totaled $89.7 million at March 31,
2003, an increase of $3.7 million, or 4.3%, over the December 31, 2002 total. In
recognition of the continued low interest rate environment during the three
months ended March 31, 2003, management obtained generally longer term and lower
cost advances, compared to the maturities and cost of advances obtained from the
Federal Home Loan Bank during the same period in 2002. Proceeds from Federal
Home Loan Bank advances were primarily used to fund loan originations during the
period. Securities sold under agreements to repurchase decreased by $1.2
million.
The Company's stockholders' equity amounted to $70.5 million at March 31,
2003, an increase of $3.6 million, or 5.5%, over the balance at December 31,
2002. The increase resulted primarily from net earnings of $3.0 million and
proceeds from options exercised of $1.3 million, which were partially offset by
$704,000 in dividends declared on common stock.
-13-
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS For the three month periods ended March 31, 2003 and 2002
Comparison of Results of Operations for the Three-Month Periods Ended March 31,
- ------------------------------------------------------- -----------------------
2003 and 2002
- -------------
General
- -------
Net earnings for the three months ended March 31, 2003 totaled $3.0
million, a $448,000, or 17.7%, increase over the net earnings reported in the
comparable 2002 period. The increase in earnings resulted primarily from a
$629,000 increase in net interest income and a $609,000 increase in other
income, which were partially offset by a $49,000 increase in the provision for
losses on loans, a $493,000 increase in general, administrative and other
expense, and a $248,000 increase in the provision for federal income taxes.
Net Interest Income
- -------------------
Total interest income for the three months ended March 31, 2003, amounted
to $13.7 million, a decrease of $497,000 or 3.5%, from the $14.2 million
recorded in the comparable 2002 period. Interest income on loans totaled $12.8
million, a decrease of $316,000, or 2.4%, from the 2002 period. This decrease
resulted primarily from a 76 basis point decrease in the average fully-taxable
equivalent yield, to 7.28% for the three month period ended March 31, 2003,
which was partially offset by a $51.8 million, or 7.8%, increase in the
weighted-average ("average") portfolio balance, to a total of $715.1 million for
the three months ended March 31, 2003. Interest income on investment securities
and other interest-earning assets decreased by $181,000, or 16.1%. The decrease
resulted primarily from a 59 basis point decrease in the average fully-taxable
equivalent yield, to 4.58% for the three months ended March 31, 2003, coupled
with a $4.8 million, or 5.0%, decrease in the average portfolio balance, to a
total of $92.3 million for the three months ended March 31, 2003.
Total interest expense amounted to $5.3 million for the three months ended
March 31, 2003, a decrease of $1.1 million, or 17.5%, from the $6.4 million
recorded in the comparable 2002 period. Interest expense on deposits decreased
by $1.1 million, or 21.2%, to a total of $4.1 million for the three months ended
March 31, 2003. The decrease resulted primarily from a 91 basis point decrease
in the average cost of deposits, to 2.79% for the three months ended March 31,
2003, which was partially offset by a $25.5 million, or 4.4%, increase in the
average portfolio balance, to a total of $599.0 million for the three months
ended March 31, 2003. Interest expense on borrowings decreased by $20,000, or
1.6%, for the three months ended March 31, 2003. The decrease was due to a 65
basis point decrease in the average cost of borrowings, to 4.71%, which was
partially offset by an $11.1 million, or 12.0%, increase in the average
borrowings outstanding for the three months ended March 31, 2003. The decrease
in the level of yields on interest-earning assets and the cost of
interest-bearing liabilities was primarily due to the continued lower interest
rate environment for the three month periods ended March 31, 2003 and 2002,
respectively.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $629,000, or 8.1%, for the three
months ended March 31, 2003, as compared to the same period in 2002. The
interest rate spread increased by 15 basis points to 3.90% for the three months
ended March 31, 2003, compared to 3.75% for the three months ended March 31,
2002. The fully-taxable equivalent net interest margin increased by 6 basis
points from 4.24% to 4.30% for the three months ended March 31, 2002 and 2003,
respectively.
Provision for Losses on Loans
- -----------------------------
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Company, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Company's
market area and other factors related to the collectibility of the Company's
loan portfolio. As a result of such analysis, management recorded a $509,000
provision for losses on loans for the three months ended March 31, 2003, an
increase of $49,000, or 10.7%, compared to same period in 2002. The provision
for losses on loans for the three months ended March 31, 2003 was predicated
primarily upon the $10.1 million of growth in the gross loan portfolio, the
increase in nonperforming loans from $7.3 million at December 31, 2002 to $7.8
million at March 31, 2003 and the $242,000 of loans charged-off during the
current quarter.
Although management believes that it uses the best information available in
providing for possible loan losses and believes that the allowance is adequate
at March 31, 2003, future adjustments to the allowance could be necessary and
net earnings could be affected if circumstances and/or economic conditions
differ substantially from the assumptions used in making the initial
determinations.
-14-
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS For the three month periods ended March 31, 2003 and 2002
Other Income
- ------------
Other income totaled $2.4 million for the three months ended March 31,
2003, an increase of $609,000, or 33.9%, over the amount reported in the
comparable 2002 period. This increase resulted primarily from a $531,000, or
134.4%, increase in gain on sale of loans, a $138,000, or 25.7%, increase in
insurance commissions, and a $73,000 increase in gain on sale of investment
securities, which were partially offset by a $122,000 non-recurring gain on sale
of branch in the 2002 period.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $5.9 million for the
three months ended March 31, 2003, an increase of $493,000, or 9.1%, over the
amount reported in the 2002 period. The increase resulted primarily from a
$335,000, or 10.4%, increase in employee compensation and benefits, a $160,000,
or 26.6%, increase in occupancy and equipment and a $153,000, or 11.0%, increase
in other expenses, which were partially offset by a $156,000, decrease in
franchise taxes.
The increase in employee compensation and benefits resulted primarily from
increased staffing levels required in connection with the establishment of new
branch locations, additional management staffing and normal merit increases. The
increase in occupancy and equipment expense was due primarily to a $37,000, or
26.9%, increase in rent expense, a $41,000, or 45.9%, increase in maintenance
contracts, a $15,000, or 23.1%, increase in maintenance and repairs to buildings
and equipment and a $41,000, or 22.5%, increase in depreciation expense. The
increase in other expenses resulted primarily from a $24,000, or 19.1%, increase
in insurance commissions paid, a $22,000, or 53.9%, increase in computer and PC
software expenses, an $8,000, or 21.5% increase in charitable contributions and
a $35,000, or 27.6%, increase in credit and collection costs, coupled with
incremental increases in other operating expenses year-to-year. The decrease in
franchise taxes is attributable to a one time tax savings for 2003 resulting
from the previously mentioned Oak Hill-Towne merger.
Federal Income Taxes
- --------------------
The provision for federal income taxes amounted to $1.4 million for the
three months ended March 31, 2003, an increase of $248,000, or 20.9%, over the
$1.2 million recorded in comparable 2002 period. The increase resulted primarily
from a $696,000, or 18.7%, increase in earnings before taxes. The effective tax
rates were 32.5% and 31.9% for the three months ended March 31, 2003 and 2002,
respectively.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
Therehas been no significant change from disclosures included in the
Company's Annual Report on Form 10-K for the year ended December 31,
2002.
Item 4: Controls and Procedures
The Company's principal executive officer and principal financial
officer, based on their evaluation as of a date within 90 days of the
filing of this report, have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934) are effective to ensure
that information required to be disclosed by the Company in reports
that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation. There were no significant
deficiencies or material weaknesses, and therefore there were no
corrective actions taken.
-15
Oak Hill Financial, Inc.
PART II
Item1: Legal Proceedings
------------------
Not applicable.
Item 2: Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
Item 3: Defaults Upon Senior Securities
--------------------------------
Not applicable.
Item 4: Submission of Matters to a Vote of Security Holders
----------------------------------------------------
(a) The Company held its 2003 Annual Meeting of Stockholders ("Annual
Meeting") on April 8, 2003. Holders of 5,126,246 common shares of
the Company were present, representing 94.4% of the Company's
5,431,541 common shares outstanding.
(b) and The following persons were elected Class I members of the
(c) Company's Board of Directors to serve until the 2005 Annual
Meeting or until their successors are duly elected and qualified.
Each person received the number of votes for or the number of
votes with authority withheld, indicated below:
Name Votes For Votes Withheld
---- --------- --------------
Ralph E. Coffman, Jr. 5,116,642 9,604
Evan E. Davis 5,045,396 80,850
John D. Kidd 5,017,572 108,764
D. Bruce Knox 5,045,334 80,912
Richard P. LeGrand 5,045,496 80,750
Neil S. Strawser 5,032,547 93,699
The continuing Class I Directors, whose terms expire at the 2004
Annual Meeting, are Candice R. DeClark-Peace, Barry M. Dorsey,
Ed.D., Donald R. Seigneur, Willam S. Siders, H. Grant Stephenson,
and Donald P. Wood.
The proposal for ratification of the appointment of Grant
Thornton LLP as independent auditor for the Company for the year
ending December 31, 2003, was approved with 5,111,455 votes FOR,
7,075 votes AGAINST, and 7,716 votes ABSTAIN.
Item 5: Other Information
------------------
Not applicable.
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
Exhibits:
Exhibit Number Description
-------------- -----------
99.1 Certification by Chief Executive
Officer, John D. Kidd, dated April 29,
2003, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. -
99.2
Certification by Chief Financial
Officer, Ron J. Copher, dated April 29,
2003, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
-16-
Oak Hill Financial, Inc.
PART II (continued)
Item 6: Exhibits and Reports on Form 8-K (continued)
--------------------------------------------
The Company has filed the following current reports on Form 8-K with
the Securities and Exchange Commission:
Form 8-K, dated April 11, 2003, filed with the Securities and
Exchange Commission on April 11, 2003.
o Press Release of Oak Hill Financial, Inc., dated April 10,
2003, announcing the Company's earnings for the three months
("first quarter") ended March 31, 2003.
-17-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Oak Hill Financial, Inc.
Date: May 5, 2003 By: /s/ John D. Kidd
-------------------------------------
John D. Kidd
Chairman & Chief Executive Officer
Date: May 5, 2003 By:/s/ Ron J. Copher
---------------------------------------
Ron J. Copher
Chief Financial Officer
-18-
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John D. Kidd, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Oak Hill Financial,
Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date:May 5, 2003 By:/s/ Ron J. Copher
---------------------------------------
Ron J. Copher
Chief Financial Officer
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ron J. Copher, certify that:
7) I have reviewed this quarterly report on Form 10-Q of Oak Hill Financial,
Inc.;
8) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
9) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
10) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
11) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
12) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 5, 2003 /s/ John D. Kidd
-----------------------------------
John D. Kidd
Chairman & Chief Executive Officer
-19-