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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission File Number 0-26876
OAK HILL FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-1010517
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14621 STATE ROUTE 93
JACKSON, OHIO 45640
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 286-3283
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common stock, without par value
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the sales price of the last trade of
such stock was $49,455,020.88 on March 14, 2000.
There were 5,337,101 shares of Registrant's Common Stock outstanding on
March 14, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the year
ended December 31, 1999, are incorporated by reference into Part II and Part IV.
Portions of the proxy statement dated March 31, 2000, for the Annual
Meeting of Stockholders to be held April 25, 2000, are incorporated by reference
into Part III.
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TABLE OF CONTENTS
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Page
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PART I
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 26
Signatures 29
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PART I
ITEM 1. BUSINESS.
Oak Hill Financial, Inc.
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Oak Hill Financial, Inc., an Ohio corporation (the "Company"), is a
bank holding company that engages indirectly in the business of commercial
banking, and other permissible activities closely related to banking and
consumer finance lending, through three wholly owned subsidiaries, Oak Hill
Banks ("Oak Hill"), Towne Bank ("Towne"), (collectively, hereinafter the
"Banks"), and Action Finance Company ("Action"). The Company provides management
and similar services for the Banks and Action. Since it does not itself conduct
any operating businesses, the Company must depend largely upon its subsidiaries
for funds with which to pay the expenses of its operation and, to the extent
applicable, any dividends on its outstanding shares of stock. For further
information see Note A of the Notes to Consolidated Financial Statements
appearing in the Company's Annual Report to Stockholders, which is incorporated
by reference in response to this item.
The Company was formed in 1981 for the purpose of becoming the parent
holding company of the Bank. The Company is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended. As such, the Company is
subject to strict regulation regarding the acquisition of additional financial
institutions and the conduct, through subsidiaries, of non-banking activities
(see "Regulation").
The Company faces strong competition from both banking and non-banking
institutions. Its banking competitors include local and regional banks and bank
holding companies, as well as some of the largest banking organizations in the
United States. In addition, other types of financial institutions, such as
savings and loan associations and credit unions, also offer a wide range of loan
and deposit services that are directly competitive with those offered by the
Banks. The consumer is also served by brokerage firms and mutual funds that
provide checking services, credit cards, and other services similar to those
offered by the Banks. Major stores compete for loans by offering credit cards
and retail installment contracts. It is anticipated that competition from
non-bank and non-savings and loan organizations will continue to grow.
The range of banking services provided by the Company's subsidiary to
their customers includes commercial lending, real estate lending, consumer
credit, credit card, and other personal loan financing. The Banks operates under
the direction of boards of directors and officers that are separate from the
Company.
On October 1, 1999, the Company combined with Towne Financial
Corporation ("Towne Financial") and its wholly-owned subsidiary Blue Ash
Building and Loan Company ("Blue Ash") in a transaction whereby Towne Financial
merged with and into the Company and Blue Ash, renamed Towne Bank, became a
wholly-owned subsidiary of the Company. The total consideration paid by the
Company for all of the outstanding stock of Towne Financial was approximately
$16.2 million, based upon the issuance of 917,361 shares of the Company's common
stock. The transaction was accounted for as a pooling-of-interests.
Lending Activities
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GENERAL. The Company generally makes loans in southern and central Ohio
where its branches are located. The Company's principal lending activities are
the origination of (I) conventional one-to-four family residential loans, and
(ii) commercial loans, most of which are secured by real estate located in the
Company's primary market area. These loan categories accounted for approximately
86% of the Company's loan portfolio at December 31, 1999. The Company also makes
consumer loans, including installment loans and second mortgages, and offers
credit cards.
LOAN PORTFOLIO COMPOSITION AND ACTIVITY. The following table sets forth
the composition of the Company's loan portfolio in dollar amounts and in
percentages for each of the last three years, along with a reconciliation to
loans receivable, net of the allowance for loan losses.
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At December 31,
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1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of loan:
1-4 family residential loans $223,365 44.0% $179,972 43.8% $172,214 47.7% $144,185 48.4% $122,970 48.6%
Commercial and other loans 215,205 42.3 170,579 41.5 143,027 39.6 112,543 37.8 87,569 34.6
Consumer loans 74,045 14.6 63,873 15.5 48,196 13.4 43,216 14.5 44,069 17.4
Credit cards 1,486 0.3 1,405 0.3 1,360 0.4 1,111 0.4 958 0.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans 514,101 101.2 415,829 101.1 364,797 101.1 301,055 101.1 255,566 101.0
LESS:
Allowance for loan losses (6,132) (1.2) (4,583) (1.1) (4,000) (1.1) (3,169) (1.1) (2,587) (1.0)
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
TOTAL LOANS RECEIVABLE, NET $507,969 100.0% $411,246 100.0% $360,797 100.0% $297,886 100.0% $252,979 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
The following is maturity information with respect to commercial loans
at December 31, 1999
After one year After five years
Less than one year through five years through ten years After ten years
- --------------------- --------------------- --------------------- ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Total
------ -------- ------ -------- ------ -------- ------ -------- -----
(Dollars in thousands)
$45,209 11.13% $47,074 11.28% $37,847 12.47% $85,075 11.65% $215,205
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. A significant portion
of the Company's lending activity is the origination of permanent conventional
loans secured by one- to four-family residences located within the Company's
primary market area. The Company typically makes adjustable rate mortgage loans
and holds the loans in portfolio. More than 49% of the Company's portfolio of
permanent conventional mortgage loans secured by one- to four-family residences
are adjustable rate. The Company also underwrites fixed rate, residential
mortgage loans, and may sell those loans in the secondary market to the Federal
Home Loan Mortgage Corporation ("FHLMC") or on a servicing-released basis to
another financial institution.
The Company makes fixed rate loans on one- to four-family residences up
to 95% of the value of the real estate and improvements (the "loan-to-value" or
"LTV") substantially all of which are sold in the secondary market. Residential
real estate loans are offered by the Company for terms of up to 30 years. The
Company requires private mortgage insurance for the amount of such loans in
excess of 80% of the value of the real estate securing such loans.
The aggregate amount of the Company's one-to-four-family residential
real estate loans totaled approximately $223.4 million at December 31, 1999 and
represented 44.0 % of loans at such date. At such date, loans secured by
residential real estate with outstanding balances of approximately $1.5 million,
or 0.7%, of its total one- to four-family residential real estate loan balance,
were more than 90 days delinquent or nonaccruing.
COMMERCIAL LOANS. The Company is also active in commercial lending,
primarily to smaller businesses in the Company's primary market area. These
loans are typically secured by commercial real estate and priced in relation to
the prime rate. Such loans generally have terms of up to 15 years and
loan-to-value ratios of up to 75%. To a much lesser degree, the Company will
also make unsecured commercial loans, which are also typically priced
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at spreads to prime and have maturities of up to one year.
Loan officers review the borrower's financial statements, appraisals of
the collateral, and other related documents before recommending funding of a
commercial loan. The loan officer and the approving officer or committee then
determines that there is sufficient income to cover this and other loan
payments, that the collateral is of adequate liquidation value, that the
applicant has a good payment history and is capable of performing the
requirements of the loan. Other reviews and analysis are done as appropriate,
depending upon the complexity of the credit request.
Although a risk of nonpayment exists with respect to all loans, certain
specific types of risks are associated with different types of loans. The
primary risks associated with commercial loans are the quality of the borrower's
management and the impact of national and regional economic factors. The Company
mitigates these risks by maintaining a close working relationship with its
borrowers, by obtaining cross-collateralization and personal guarantees of its
loans, and by diversification within its loan portfolio.
Real estate is frequently a material component of the collateral for
the Company's loans. The expected source of repayment of these loans is
generally the operations of the borrower's business, but the real estate
provides an additional measure of security, particularly when the property is
owner-occupied.. For this reason, real estate is considered additional
collateral on many of the Company's commercial loans.
Risks associated with real estate loans include fluctuating land
values, changes in tax policies, and concentration of loans within the Company's
market area. The Company mitigates these risks by generally providing loans to
experienced commercial real estate owners and developers. The risk is further
mitigated by the number of commercial real estate loans made to the user of the
property.
The aggregate amount of the Company's commercial loans without real
estate as primary or secondary collateral totaled approximately $125.5 million
at December 31, 1999, and represented 58.3% of commercial loans at that date. At
such date, commercial loans that were more than 90 days delinquent or
nonaccruing totaled approximately $1.0 million, or 0.8% of its commercial loan
portfolio. The aggregate amount of the Company's commercial loans with real
estate as primary or secondary collateral was approximately $89.7 million at
December 31, 1999, and at such date, approximately $150,000 in outstanding
balances, or .1% of such loans were delinquent or nonaccruing.
CONSUMER LOANS. The Company offers several consumer loan products,
including installment loans and credit cards.
The Company has a developed working relationships with several car
dealerships in its market area, and is able to do some financing of new and used
cars through these relationships. The Company only finances cars that are six
years old or newer, and requires a down payment of 10.0%. These loans generally
have fixed rates and maturities of three to five years.
To a lesser degree, the Company makes small unsecured loans to
creditworthy individuals. These loans are typically between $2,000 and $5,000,
at fixed rates, with maturities of less than five years. The Company also offers
a home equity loan product and, as a result of consumer demand, a credit card
product to its customers. Both products are underwritten to the same standards
as any of the Company's other consumer loan products.
Loan officers underwrite installment loan and other consumer loan
requests in such a manner to assure compliance with the various regulations and
the Company's underwriting standards. The payment history of applicants is very
important on these smaller loans, and is checked through in-house records as
well as credit bureaus. Normally, collateral, such as an automobile, is taken as
security and the value is checked through the N.A.D.A. book or another valuation
service. Income must be adequate to cover all monthly payments including the
proposed loan.
At December 31, 1999, the Company had approximately $75.5 million in
its consumer loan and credit card portfolio, which was 14.9% of the Company's
total loans. Approximately $496,000 of these loans were over 90 days delinquent
or nonaccruing on that date, which represented 0.7% of the portfolio.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by the Company's lending
staff, and walk-in customers.
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Underwriting guidelines for all branches and loan types are set by
senior management at the home office. Loan processing and underwriting, however,
are decentralized. Loan applications generally are processed and underwritten at
the branch level. Loan officers and branch managers review the applications, as
well as credit bureau reports, appraisals, financial information, verifications
of income, and other documentation concerning the credit-worthiness of the
borrower, as applicable to each loan type.
Commercial loans are underwritten at the branch level with oversight by
area managers for each county. This decentralization of the loan underwriting
process allows loan officers and branch managers to respond more quickly to
applicants, and better serve customers. The Company benefits by having every
branch manager well trained to originate all types of loans and branches
equipped to better serve their customers and cross-sell the Company's loan
products.
Branch managers have the authority to approve loans up to $120,000
which meet the underwriting criteria set by management, and area managers have
authority for amounts up to $300,000. Any loan greater than $300,000 must be
approved by senior management.
INCOME FROM LENDING ACTIVITIES. The Company earns interest and fee
income from its lending activities. The Company earns fees for originating loans
and for making commitments to originate loans and loan participations. Certain
fees, net of origination costs, are deferred and amortized over the life of the
loan. The Company also receives fees related to existing loans, such as late
charges. Income from loan origination and commitment fees and discounts varies
with the volume and type of loans and commitments made and with competitive and
economic conditions. Note A-4 to the Consolidated Financial Statements contains
a discussion of the manner in which fees and income are recognized for financial
reporting purposes.
Nonperforming Loans
- -------------------
GENERAL. Late charges on residential mortgages are assessed by the
Company if a payment is not received either by the 10th day following its due
date or 15th day if the loan has been sold in the secondary market and is being
serviced by the Company. Late charges on installment loans and commercial loans
are assessed by the Company if a payment is not received by the 10th day
following its due date. Any borrower whose payment was not received by this time
is mailed a past due notice. If the loan is still delinquent after a second past
due notice is mailed (generally around the 20th day of delinquency), a branch
employee will attempt to contact the customer to resolve any problem that might
exist.
When an advanced stage of delinquency appears (generally around the
60th day of delinquency) and if repayment cannot be expected within a reasonable
amount of time or a repayment agreement has not been reached, the Banks will
contact an attorney and request that the required 30-day prior notice of
foreclosure or repossession proceedings be prepared and delivered to the
borrower so that, if necessary, foreclosure proceedings may be initiated shortly
after the loan is 90 days delinquent. Historically, this procedure has aided in
achieving a low level of nonperforming loans and, as of December 31, 1999, only
$3.2 million or 0.6% of the Company's total loan portfolio was over 90 days
delinquent or nonaccruing. As of December 31, 1999, the Company's level of
nonperforming assets to total assets was 0.56%.
If a credit card account becomes 10 days delinquent, a notice is sent to
the account holder demanding that the payment be made to bring the account
current. Another notice is sent to the cardholder if the account becomes 20 days
delinquent. If payment is not received within 30 days, authorization requests
are denied, a message about the delinquency appears on the cardholder's account
statement, and a follow-up telephone call is made. These telephone collection
efforts and account statement messages continue until the account is deemed
uncollectible. Legal action is considered during this time. As of December 31,
1999, approximately $21,000 in outstanding balances, or 1.4% of credit card
loans were nonperforming.
On December 31, 1999, the Company held $169,000 in real estate and other
repossessed collateral acquired as a result of foreclosure, voluntary deed, or
other means. Such real estate is classified as "other real estate owned" until
it is sold and is recorded at the lower of cost (the unpaid principal balance at
the date of acquisition plus foreclosure and other related costs) or fair value
less estimated selling expenses. Any subsequent write-down is charged to
expense. Generally, unless the property is a one-to-four family residential
dwelling and well-collateralized, interest accrual ceases in 90 days, but no
later than the date of acquisition. From that date, all costs incurred in
maintaining the property are expensed. "Other real estate owned" is appraised
during the foreclosure process, prior to the time of acquisition, and losses are
recognized for the amount by which the book
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value of the related mortgage loan exceeds the estimated net realizable value of
the property.
At December 31, 1999, the Company's investment in impaired loans, as
defined under SFAS No. 114, totaled approximately $65,000, for which an
allowance of $20,000 for actual losses was maintained within the Company's
general allowance.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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The following is a summary of the Company's loan loss experience and
selected ratios for the periods presented.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Allowance for loan losses
(beginning of period) ..................... $ 4,583 $ 4,000 $ 3,169 $ 2,587 $ 2,406
Loans charged off:
1-4 family residential real estate ........ 80 139 22 51 --
Multi-family and commercial
real estate ............................. 9 -- -- -- 5
Commercial and industrial loans ........... 186 180 68 79 225
Consumer loans ........................... 840 510 402 323 352
-------- -------- -------- -------- --------
Total loans charged off ................. 1,115 829 492 453 582
-------- -------- -------- -------- --------
Recoveries of loans previously charged off:
1-4 family residential real estate ...... 21 1 45 20 --
Multi-family and commercial
real estate ............................. -- -- -- -- 33
Commercial and industrial loans ........... 6 15 5 -- 1
Consumer loans ........................... 205 130 102 136 148
-------- -------- -------- -------- --------
Total recoveries ........................ 232 146 152 156 182
-------- -------- -------- -------- --------
Net loans charged off ......................... 883 683 340 297 400
Provision for loan losses ..................... 2,432 1,266 1,171 879 581
-------- -------- -------- -------- --------
Allowance for loan losses
(end of period) ........................... $ 6,132 $ 4,583 $ 4,000 $ 3,169 $ 2,587
======== ======== ======== ======== ========
Loans outstanding:
Average, net .............................. $449,873 $387,057 $322,807 $268,861 $237,919
End of period ............................. $514,101 $415,829 $364,797 $301,055 $255,566
Ratio of allowance for loan losses to loans
outstanding at end of period .............. 1.19% 1.10% 1.10% 1.05% 1.01%
Ratio of net charge-offs to average
loans outstanding ........................... 0.20% 0.18% 0.11% 0.11% 0.17%
At December 31, 1999, 1998, and 1997 the Company had nonperforming
loans totaling $3.2 million, $2.4 million, and $1.7 million, respectively.
Interest income that would have been recognized if such loans had performed in
accordance with contractual terms totaled approximately $287,000, $162,000, and
$121,000, for the years ended December 31, 1999, 1998, and 1997. There was no
interest income recognized on such loans during any of the periods.
ALLOWANCE FOR LOAN LOSSES. The amount of the allowance for loan losses
is based on management's analysis of risks inherent in the various segments of
the loan portfolio, management's assessment of known or potential problem
credits which have come to management's attention during the ongoing analysis of
credit quality, historical loss experience, current and anticipated economic
conditions and other factors. If actual circumstances and losses differ
substantially from management's assumptions and estimates, such allowance for
loan losses may not be sufficient to absorb all future losses, and net earnings
could be adversely affected. Loan loss estimates are reviewed periodically, and
adjustments, if any, are reported in earnings in the period in which they become
known. In addition, the Company maintains a portion of the allowance to cover
potential losses inherent in the portfolio which have not been specifically
identified.
Although management believes that it uses the best information
available to make such determinations and that the allowance for loan losses is
adequate at December 31, 1999, future adjustments to the allowance may be
necessary, and net earnings could be affected, if circumstances and/or economic
conditions differ substantially from the assumptions used in making the initial
determinations. A downturn in the Southeastern Ohio economy and employment
levels could result in the Company experiencing increased levels of
nonperforming assets and charge-offs, increased provisions for loan losses and
reductions in income. Additionally, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for loan
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losses. Such agencies may require the recognition of additions to the allowance
based on their judgment of information available to them at the time of their
examination.
The following table summarizes nonperforming assets by category.
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
Real estate:
Nonaccrual ......................... $ 1,092 $ 371 $ 606 $ 347 $ 454
Past due 90 days or more (1) ....... 411 843 608 281 948
Commercial and industrial:
Nonaccrual ......................... 444 251 143 267 --
Past due 90 days or more (1) ....... 744 596 82 82 766
Consumer and other:
Nonaccrual ......................... 320 65 147 221 70
Past due 90 days or more(1) ........ 176 295 135 52 159
-------- -------- -------- -------- --------
Total nonperforming loans ....... 3,187 2,421 1,721 1,250 2,397
Other real estate owned ................ 169 18 -- -- 64
-------- -------- -------- -------- --------
Total nonperforming assets ...... $ 3,356 $ 2,439 $ 1,721 $ 1,250 $ 2,461
======== ======== ======== ======== ========
Loans outstanding ...................... $514,101 $415,829 $364,797 $301,055 $255,566
Allowance for possible loan losses
To total loans ....................... 1.19% 1.10% 1.10% 1.05% 1.01%
Nonperforming loans to total
Loans ................................ 0.62 0.58 0.47 0.42 0.94
Nonperforming assets to total assets ... 0.56 0.44 0.36 0.31 0.69
Allowance for possible loan losses to
Nonperforming loans .................. 192.4% 189.3% 232.4% 253.5% 107.9%
===========================================================================================================
6 Represents accruing loans delinquent greater than 90 days which are
considered by management to be well secured and in the process of
collection.
As of December 31, 1999, the Company had no loans that were included in
the nonaccrual, past due 90 days or more or restructured categories, where the
borrowers were experiencing potential credit problems that raised doubts as to
the ability of those borrowers to comply with the present loan repayment terms.
CLASSIFIED ASSETS. The FDIC regulations on classification of assets
require commercial banks to classify their own assets and to establish
appropriate general and specific allowances for losses, subject to FDIC review.
These regulations are designed to encourage management to evaluate assets on a
case-by-case basis and to discourage automatic classifications. Assets
classified as substandard or doubtful must be evaluated by management to
determine a reasonable general loss reserve to be included in total capital for
purposes of the Banks' risk-based capital requirement, but excluded from core
capital or tangible capital or in capital under generally accepted accounting
principles. Assets classified as loss must be either written off or reserved for
by a specific allowance which is not counted toward capital for purposes of any
of the regulatory capital requirements.
INVESTMENTS. Investment securities primarily satisfy the Company's
liquidity needs and provide a return on residual funds after lending activities.
Pursuant to the Company's written investment policy, investments may be in
interest-bearing deposits, U.S. Government and agency obligations, state and
local government obligations and government-guaranteed mortgage-backed
securities. The Company does not invest in securities which are rated less than
investment grade by a nationally recognized statistical rating organization. A
goal of the Company's investment policy is to limit interest rate risk wherever
possible.
All securities-related activity is reported to the Board. General
changes in investment strategy must be reviewed and approved by the Board. The
Company's senior management can purchase and sell securities on behalf of the
Company in accordance with the Company's stated investment policy.
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The following table sets forth the carrying value of the Company's
investment portfolio as indicated and includes both investments designated as
available for sale and those designated as held to maturity.
At December 31,
-------------------------------------------
1999 1998 1997 1996
------- ------- ------- -------
(Dollars in thousands)
Held to maturity:
U.S. Government and agency obligations ................. $ -- $14,704 $14,835 $12,604
Available for sale:
U.S. Government and agency obligations ................. $49,936 $75,266 $63,726 $63,849
State and local government obligations ................. 3,402 9,766 2,367 3,204
------- ------- ------- -------
Total investment securities available for sale .. 53,338 85,032 66,093 67,053
------- ------- ------- -------
Total investment securities ..................... $53,338 $99,736 $80,928 $79,657
======= ======= ======= =======
The following table reflects the maturities of the Company's investment
securities at December 31, 1999.
Due After Five
Due in One Year Due After One Year Years Through
or Less Through Five Years Ten Years Due After Ten Years
-------------- ------------------ ---------------- -------------------
Amount Rate Amount Rate Amount Rate Amount Rate Total
------ ---- ------- ---- ------- ---- ------ ---- -------
Available for Sale:
U.S. Government and
agency obligations ....... $ -- -- $ 8,769 6.20% $32,199 6.39% $8,968 6.10% $49,936
Municipal obligations ...... 776 4.76% 1,932 4.58% 694 5.41% -- -- 3,402
---- ---- ------- ---- ------- ---- ------ ---- -------
Total investment securities .. $776 4.76% $10,701 5.91% $32,893 6.37% $8,968 6.10% $53,338
==== ==== ======= ==== ======= ==== ====== ==== =======
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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Source of Funds
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DEPOSIT ACCOUNTS. Savings deposits are a major source of the Company's
funds. The Company offers a number of alternatives for depositors designed to
attract both commercial and regular consumer checking and savings including
regular and money market savings accounts, NOW accounts, and a variety of
fixed-maturity, fixed-rate certificates with maturities ranging from seven days
to 120 months. The Company also provides travelers' checks, official checks,
money orders, ATM services and IRA accounts.
The distribution of the Company's deposit accounts by type and rate is
set forth in the following table.
December 31,
-------------------------------------------------------------------------------------------
Type of Account 1999 1998 1997 1996
And ------------------- ------------------- ------------------- -------------------
Interest Rate Amount Percent Amount Percent Amount Percent Amount Percent
- -------------------------------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
Demand deposit accounts ........ $ 42,598 8.7% $ 39,655 8.5% $ 31,064 7.9% $ 23,012 6.9%
Savings accounts ............... 45,901 9.4 50,842 10.9 49,122 12.5 48,954 14.7
NOW accounts ................... 31,824 6.5 29,622 6.4 27,101 6.9 26,151 7.8
Money market deposit accounts .. 13,039 2.7 13,570 2.9 13,962 3.6 14,089 4.2
Premium investment accounts .... 30,150 6.2 21,012 4.5 19,161 4.9 22,696 6.8
Select investment accounts ..... 12,728 2.6 16,456 3.5 7,234 1.9 1,267 0.4
-------- ----- -------- ----- -------- ----- -------- -----
Total transaction accounts ..... 176,240 36.1 171,157 36.7 147,644 37.7 136,169 40.8
CERTIFICATES:
2.00 - 4.99% ................ 86,208 17.6 37,670 8.1 15,560 4.0 21,801 6.5
5.00 - 6.99% ................ 225,869 46.2 255,997 55.0 226,734 57.9 166,050 49.7
7.00 - 9.00% ................ 563 0.1 850 0.2 1,327 0.4 10,118 3.0
-------- ----- -------- ----- -------- ----- -------- -----
Total certificates of deposit .. 312,640 63.9 294,517 63.3 243,621 62.3 197,969 59.2
-------- ----- -------- ----- -------- ----- -------- -----
Total deposits ................. $488,880 100.0% $465,674 100.0% $391,265 100.0% $334,138 100.0%
======== ===== ======== ===== ======== ===== ======== =====
The following table presents, by various interest rate categories,
certain information concerning maturities of the Company's certificates of
deposit as of December 31, 1999.
One to Over
Within Three Three
Certificate of Deposit Accounts One Year Years Years Total
------------------------------- -------- ----- ----- -----
(In thousands)
4.00% and less ..................... $ 2,582 $ 16 $ 1 $ 2,599
4.01% to 5.00% ..................... 75,080 9,400 679 85,159
5.01% to 6.00% ..................... 142,619 33,811 5,493 181,923
6.01% to 7.00% ..................... 11,781 30,993 134 42,908
7.01% to 8.00% ..................... 1 -- 50 51
-------- ------- ------ --------
Total ........................... $232,063 $74,220 $6,357 $312,640
======== ======= ====== ========
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The following table sets forth the amount of the Company's certificates
of deposit that are $100,000 or greater, by time remaining until maturity, as of
December 31, 1999.
Amount
Maturity Period ------
--------------- (In thousands)
Three months or less $26,872
Over three through six months 16,772
Over six through 12 months 28,726
Over 12 months 14,364
-------
Total $86,734
=======
BORROWINGS. Deposits and repayment of loan principal are the primary
source of funds for the Company's lending activities and other general business
purposes. However, during periods when the supply of lendable funds cannot meet
the demand for loans, the Company can obtain funds necessary through loans
(advances) from the Federal Home Loan Bank ("FHLB") of Cincinnati. Advances from
the FHLB may be on a secured or unsecured basis depending upon a number of
factors, including the purpose for which the funds are being borrowed and the
total of outstanding advances. The Company typically utilizes FHLB advances to
fund long-term fixed rate commercial loans and to meet short-term liquidity
needs. As of December 31, 1999, the Banks had outstanding FHLB advances totaling
$59.7 million. See Note F to the consolidated financial statements for
additional information regarding FHLB advances. The Company also has
arrangements to borrow funds from commercial banks.
The following table sets forth the maximum amount of the Company's FHLB
advances and other borrowings outstanding at any month end during the periods
shown and the average aggregate balances of FHLB advances and other borrowings
for such periods:
Year ended December 31,
---------------------------
1999 1998 1997
------- ------- -------
(Dollars in thousands)
Maximum amount outstanding:
FHLB advances $71,147 $36,707 $41,568
Average amount of FHLB advances and
other borrowings outstanding 54,192 31,661 37,890
Weighted average interest rate of total
borrowings based on quarter end balances 6.14% 5.88% 6.29%
The following table sets forth certain information as to the Company's
FHLB advances and other borrowings at the dates indicated:
December 31,
-------------------------------
1999 1998 1997
------- ------- -------
(Dollars in thousands)
FHLB advances $59,680 $36,458 $37,405
Other borrowings 1,172 955 303
------- ------- -------
Total borrowings $60,852 $37,413 $37,708
======= ======= =======
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Personnel
- ---------
At December 31, 1999, the Company and its subsidiaries employed 281
persons on a full-time basis and 25 persons on a part-time basis.
Executive Offices
- -----------------
The Company's executive office is located at 14621 State Route 93,
Jackson, Ohio 45640 and its telephone number is (740) 286-3283.
Subsidiaries
- ------------
The Company owns all of the outstanding stock of Oak Hill Banks, an
Ohio state-chartered bank, which was founded in 1902. The Company owns all of
the outstanding stock of Action Finance Company, a consumer finance company
which was formed in 1998. The Company owns all of the outstanding stock of Towne
Bank, an Ohio state-chartered bank.
Regulation
- ----------
Oak Hill Banks and Towne Bank, as Ohio state-chartered banks, are
subject to supervision and regular examination by the Superintendent of
Financial Institutions of the State of Ohio. The Banks are insured by the
Federal Deposit Insurance Corporation and are subject to the provisions of the
Federal Deposit Insurance Act. To the extent that the information below consists
of summaries of certain statutes or regulations, it is qualified in its entirety
by reference to the statutory or regulatory provisions described.
The Company is subject to the provisions of the Bank Holding Company
Act of 1956, as amended (the "Act"), which requires a bank holding company to
register under the Act and to be subject to supervision and examination by the
Board of Governors of the Federal Reserve System. As a bank holding company, the
Company is required to file with the Board of Governors an annual report and
such additional information as the Board of Governors may require pursuant to
the Act. The Act requires prior approval by the Board of Governors of the
acquisition by a bank holding company, or any subsidiary thereof, of 5% or more
of the voting stock or substantially all the assets of any bank within the
United States.
As a bank holding company located in the State of Ohio, the Company is
not permitted to acquire a bank or other financial institution located in
another state unless such acquisition is specifically authorized by the statutes
of such state. The Act further provides that the Board of Governors shall not
approve any such acquisition that would result in a monopoly or would be in
furtherance of any combination or conspiracy to monopolize or attempt to
monopolize the business of banking in any part of the United States, or the
effect of which may be to substantially lessen competition or to create a
monopoly in any section of the country, or that in any other manner would be in
restraint of trade, unless the anti-competitive effects of the proposed
transaction are clearly outweighed in the public interest by the probable effect
of the transaction in meeting the convenience and needs of the community to be
served.
The Act also prohibits a bank holding company, with certain exceptions,
from acquiring 5% or more of the voting stock of any company that is not a bank
and from engaging in any business other than banking or performing services for
its banking subsidiary without the approval of the Board of Governors. In
addition, the acquisition of a thrift institution must be approved by the Office
of Thrift Supervision pursuant to the savings and loan holding company
provisions of the Home Owners' Loan Act of 1933.
On March 13, 2000, the Financial Services Act of 1999, also known as
the Gramm-Leach-Bliley Act, became effective. This legislation repealed certain
cross-industry affiliation prohibitions and made certain other changes to the
Act. It authorized a new form of holding company, a financial holding company,
which with certain exceptions is authorized to undertake activities which are
"financial in nature" and which include banking, insurance and securities
activities. Generally, the scope of activities premitted to a financial holding
company are broader than those previously permitted to a bank holding company. A
bank holding company may elect to become a financial holding company. The
Company has not filed such a request. Under the Act, as amended by the
Gramm-Leach-Bliley Act, the Company continues to be permitted to engage in
certain activities, including mortgage banking, operating small loan companies,
factoring, furnishing certain data processing operations, holding or operating
properties used by banking subsidiaries or acquired for such future use,
providing certain investment and financial advice, leasing (subject to certain
conditions) real or personal property, providing management consulting advice to
certain depository institutions, providing securities brokerage services,
arranging commercial real estate equity financing, underwriting and dealing in
government obligations and money market instruments, providing consumer
financial counseling, operating a collection agency, owning and operating a
savings association, operating a credit bureau and conducting certain real
estate investment activities and acting as insurance agent for certain types of
insurance. Certain other activities, including real estate brokerage and
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14
syndication, land development, and property management not related to credit
transactions, are not permissible.
The Act and the regulations of the Board of Governors prohibit a bank
holding company and its subsidiaries from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services.
The Act also imposes certain restrictions upon dealing by affiliated
banks with the holding company and among themselves including restrictions on
interbank borrowing and upon dealings in respect to the securities or
obligations of the holding company or other affiliates.
The earnings of banks and consumer finance companies, and therefore the
earnings of the Company (and its subsidiaries), are affected by the policies of
regulatory authorities, including the Board of Governors of the Federal Reserve
System. An important function of the Federal Reserve Board is to regulate the
national supply of bank credit in an effort to prevent recession and to restrain
inflation. Among the procedures used to implement these objectives are open
market operations in U.S. Government securities, changes in the discount rate on
member bank borrowings, and changes in reserve requirements against member bank
deposits. These procedures are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, and their use
also may affect interest rates charged on loans or paid for deposits. Monetary
policies of the Federal Reserve Board have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The effect, if any, of such policies upon the future
business and earnings of the Company cannot accurately be predicted. The Company
makes no attempt to predict the effect on its revenues and earnings of changes
in general economic, industrial, and international conditions or in legislation
and governmental regulations.
Business Risks
- --------------
Except for the historical information contained herein, the matters
discussed in this Form 10-K include certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, all statements regarding the intent, belief
and expectations of the Company and its management, such as statements
concerning the Company's future profitability. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, factors detailed from time to time in the Company's filings with the
Securities and Exchange Commission. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate. Therefore, there can be
no assurance that the forward-looking statements contained herein are
reasonable, and any of the assumptions could be inaccurate. Therefore, there can
be no assurance that the forward-looking statements included in this Form 10-K
will prove to be accurate, and in light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a presentation by the Company or any
other person that the objectives and plans of the Company will be achieved.
Growth Strategy. The Company has pursued and continues to pursue a
strategy of growth. The success of the Company's growth strategy will depend
largely upon its ability to manage its credit risk and control its costs while
providing competitive products and services. This growth strategy may present
special risks, such as the risk that the Company will not efficiently handle
growth with its present operations, the risk of dilution of book value and
earnings per share as a result of an acquisition, the risk that earnings will be
adversely affected by the start-up costs associated with establishing new
products and services, the risk that the Company will not be able to attract and
retain qualified personnel needed for expanded operations, and the risk that its
internal monitoring and control systems may prove inadequate.
Control by Management; Anti-Takeover Provisions. Evan E. Davis, John D.
Kidd and D. Bruce Knox (the "Principal Stockholders") own in the aggregate
approximately 31.9% of the outstanding shares of Common Stock of the Company. In
addition to Ohio and federal laws and regulations governing changes in control
of insured depository institutions, the Company's Articles of Incorporation and
Code of Regulations contain certain provisions which may delay or make more
difficult an acquisition of control of the Company. For example, the Company's
Articles of Incorporation do not exempt the Company from the provisions of
Ohio's "control share acquisition" and "merger moratorium" statutes. Assuming
that the Principal Stockholders continue to retain at least a majority of the
outstanding voting shares of the Company, such ownership position could be
expected to deter any prospective
-14-
15
acquiror from seeking to acquire ownership or control of the Company, and the
Principal Stockholders would be able to defeat any acquisition proposal that
requires approval of the Company's stockholders, if the Principal Stockholders
chose to do so. In addition, the Principal Stockholders may make a private sale
of shares of common stock of the Company which they own, including to a person
seeking to acquire ownership or control of the Company. The Company has
3,000,000 shares of authorized but unissued preferred stock, par value $ .01 per
share, which may be issued in the future with such rights, privileges and
preferences as are determined by the Board of Directors of the Company. In
December 1997, the Board of Directors of the Company approved and adopted a
stockholder rights plan that contemplates the issuance of rights to purchase
preferred stock of the Company to the Company's common stockholders of record as
of February 17, 1998, as set forth in the Rights Agreement entered into between
the Company and Fifth Third Bank on January 23, 1998.
Limited Trading Market; Shares Eligible for Future Sale; Possible
Volatility of Stock Price. The Common Stock is traded on the Nasdaq National
Market under the symbol "OAKF." During the 12 months ending March 10, 1999, the
average weekly trading volume in the Common Stock has been less than 25,500
shares per week. There can be no assurance given as to the liquidity of the
market for the Common Stock or the price at which any sales may occur, which
price will depend upon, among other things, the number of holders thereof, the
interest of securities dealers in maintaining a market in the Common Stock and
other factors beyond the control of the Company. The market price of the Common
Stock could be adversely affected by the sale of additional shares of Common
Stock owned by the Company's current shareholders. The Principal Shareholders
are permitted to sell certain limited amounts of Common Stock without
registration, pursuant to Rule 144 under the Securities Act. The market price
for the Common Stock could be subject to significant fluctuations in response to
variations in quarterly and yearly operating results, general trends in the
banking industry and other factors. In addition, the stock market can experience
price and volume fluctuations that may be unrelated or disproportionate to the
operating performance of affected companies. These broad fluctuations may
adversely affect the market price of the Common Stock.
Dependence on Management. The Company's success depends to a great
extent on its senior management, including its Chairman, Evan E. Davis;
President, John D. Kidd; Executive Vice President, Richard P. LeGrand; and
Secretary/Treasurer and Chief Operations Officer, H. Tim Bichsel; Chief
Information Officer, D. Bruce Knox; Chief Administrative Officer, David G. Ratz;
Chief Financial Officer, Ronald J. Copher; and Vice President, Ralph E. Coffman,
Jr. The loss of their individual services could have a material adverse impact
on the Company's financial stability and its operations. In addition, the
Company's future performance depends on its ability to attract and retain key
personnel and skilled employees, particularly at the senior management level.
The Company's financial stability and its operations could be adversely affected
if, for any reason, one or more key executive officers ceased to be active in
the Company's management. The Company does not own or currently plan to acquire
"key man" life insurance on the lives of any of its key employees.
Competition. Banking institutions operate in a highly competitive
environment. The Company competes with other commercial banks, credit unions,
savings institutions, finance companies, mortgage companies, mutual funds, and
other financial institutions, many of which have substantially greater financial
resources than the Company. Certain of these competitors offer products and
services that are not offered by the Company and certain competitors are not
subject to the same extensive laws and regulations as the Company. Additionally,
consolidation of the financial services industry in Ohio and in the Midwest in
recent years has increased the level of competition. Recent and proposed
regulatory changes may further intensify competition in the Company's market
area.
Holding Company Structure; Government Regulations and Policies. The
Company is a multi-bank holding company, the profitability of which is entirely
dependent on the profitability of the Banks and the upstream payment of
dividends from the Banks to the Company. Under state and federal banking law,
the payment of dividends by the Company and the Banks are subject to capital
adequacy requirements. The inability of the Banks to generate profits and pay
such dividends to the Company, or regulator restrictions on the payment of such
dividends to the Company even if earned, would have an adverse effect on the
financial condition and results of operations of the Company and the Company's
ability to pay dividends to the shareholders.
ITEM 2. PROPERTIES.
The registrant and its subsidiaries operate from 22 full-service
banking offices, 4 full-service consumer
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16
financing offices, and 4 loan production offices in Ohio. In addition, the
Company operates two executive offices in Jackson, Ohio and an operations center
in Blue Ash, Ohio. The offices are located in the following counties:
Jackson - Oak Hill , Jackson, Ironmakers, Jackson Walmart, Wellston,
both executive offices, Action Finance Jackson, and Action Finance
Wellston
Ross - Richmond Dale, Chillicothe, and Chillicothe K-Mart
Scioto - Wheelersburg, Portsmouth and loan production office, West
Portsmouth, and Action Finance Portsmouth
Gallia - Gallipolis
Pickaway - Circleville
Warren - Franklin and Mason
Butler - Trenton and Middletown
Vinton - McArthur
Athens - Athens
Hamilton - Blue Ash, operations center, and Cherry Grove
Miami - Tipp City loan production office
Fairfield - Lancaster loan production office
Franklin - Groveport loan production office
Adams - Action Finance West Union
Hocking - Logan loan production office
Clermont - Amelia
The following table indicates which properties are leased by the
Company, the term of the lease, and end of lease options. All leases are
comparable to other leases in the respective market areas and do not contain
provisions detrimental to the registrant or its subsidiaries.
BEGINNING & LENGTH END OF LEASE FIVE YEAR RENEWAL
BRANCH OF TERM ONE TWO THREE
Chillicothe 11/1/98 5 years X
Chillicothe K-Mart 6/28/94 5 years X
West Portsmouth 2/18/97 8 years X
Jackson Walmart 10/28/98 5 years X
Administrative Offices II 10/1/98 5 years X
Action Finance Jackson 1/14/98 5 years X
Action Finance Wellston 1/3/98 5 years X
Action Finance West Union 10/1/99 5 years X
Action Finance Portsmouth 11/1/99 5 years X
Groveport loan production 6/1/99 1 month Renewable on a monthly basis
Lancaster loan production 12/1/99 3 years Renegotiable at the end of the lease
Logan loan production 12/1/99 1 year Two - one year renewal options
Middletown 8/19/99 7 years Two - three year renewal options
Blue Ash operations center 10/20/99 3 years Two - three year renewal options
Tipp City loan production 5/1/99 1 year One - one year renewal options
ITEM 3. LEGAL PROCEEDINGS.
Except for routine litigation incident to their business, the
registrant and its subsidiaries are not a party to any material pending legal
proceedings and none of their property is the subject of any such proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the shareholders during the fourth quarter
of 1999.
-16-
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
SHAREHOLDER INFORMATION
The common stock of the Company is traded on the Nasdaq National Market
System under the symbol "OAKF."
The high and low sales prices for the Company common stock during each
quarter of 1998 and 1999 are as follows:
Quarter
Ended High Low
- ----- ---- ---
3/31/98 $23.20 $17.76
6/30/98 24.00 17.76
9/30/98 27.00 16.00
12/31/98 20.69 15.38
3/31/99 19.75 16.75
6/30/99 19.25 16.88
9/30/99 18.75 16.50
12/31/99 17.63 14.63
At March 14, 2000, the Company had approximately 2,400 stockholders of
record and 5,337,101 shares of common stock outstanding.
Dividends. The ability of the Company to pay cash dividends to
stockholders is limited by its ability to receive dividends from its subsidiary.
The State of Ohio places certain limitations on the payment of dividends by Ohio
state-chartered banks.
The Company declared the following dividends per share in 1998 and
1999:
Quarter Dividend
Ended Declared
- ----- --------
3/31/98 $0.06
6/30/98 0.06
9/30/98 0.06
12/31/98 0.08
3/31/99 0.08
6/30/99 0.08
9/30/99 0.08
12/31/99 0.10
Future cash and stock dividends will be subject to determination and
declaration by the Board of Directors, taking into consideration, among other
factors, the Company's financial condition and results of operations, investment
opportunities, capital requirements, and regulatory limitations.
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18
Stock Transfer Agent. Inquiries regarding stock transfer, registration,
lost certificates, or changes in name and address should be directed in writing
to the Company's stock transfer agent:
Fifth Third Bank
Stock Transfer Department
38 Fountain Square Plaza, MD 1090F5
Cincinnati, OH 45263
(513) 579-5320
(800) 837-2755
Annual Meeting of Shareholders. The Annual Meeting of Shareholders of
Oak Hill Financial, Inc. will be held on April 25, 2000, at 1:00 p.m. at the
Ohio State University Extension South District Office, 17 Standpipe Road,
Jackson, Ohio (the Extension Office is located just off State Route 93, 1.7
miles south of Jackson).
ITEM 6. SELECTED FINANCIAL DATA
AT OR FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
(In thousands, except share data)
SUMMARY OF FINANCIAL CONDITION (1) (2)
Total assets $600,100 $552,649 $473,341 $407,461 $356,622
Interest-bearing deposits
and federal funds sold 4,516 12,197 4,031 5,415 11,987
Investment securities 53,338 100,027 81,396 79,748 69,391
Loans receivable--net (3) 507,969 411,246 360,797 297,886 252,979
Deposits 488,880 465,674 391,265 334,138 299,468
Federal Home Loan Bank (FHLB)
advances and other borrowings 60,852 37,413 37,708 33,086 19,933
Stockholders' equity 47,724 46,574 41,349 37,620 34,759
SUMMARY OF OPERATIONS (1) (2)
Interest income $ 45,250 $ 41,599 $ 36,089 $ 30,954 $ 26,931
Interest expense 22,419 21,339 18,626 15,891 14,397
-------- -------- -------- -------- --------
Net interest income 22,831 20,260 17,463 15,063 12,534
Provision for loan losses 2,432 1,266 1,171 879 581
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 20,399 18,994 16,292 14,184 11,953
Gain on sale of loans 477 1,418 250 229 181
Gain (loss) on sale of assets (2,141) 281 (33) 99 42
Other non-interest income 2,072 1,550 1,427 1,442 1,276
General, administrative and other expense (4) (5) 14,642 11,788 11,058 10,012 8,499
-------- -------- -------- -------- --------
Earnings before federal income
taxes 6,165 10,455 6,878 5,942 4,953
Federal income taxes 2,083 3,415 2,441 1,938 1,700
-------- -------- -------- -------- --------
Net earnings $ 4,082 $ 7,040 $ 4,437 $ 4,004 $ 3,253
======== ======== ======== ======== ========
PER SHARE INFORMATION (6)
Basic earnings per share $ .77 $ 1.34 $ .84 $ .76 $ .62
Book value 8.97 8.90 7.86 7.16 6.62
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19
AT OR FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
OTHER STATISTICAL AND
OPERATING DATA
Return on average assets 0.69% 1.37% 1.00% 1.05% 0.96%
Return on average equity 8.48 15.86 11.28 11.10 10.60
Net interest margin 4.16 4.10 4.17 4.15 3.88
Interest rate spread during period 3.41 3.47 3.68 3.59 3.31
Non-interest expense to average assets 2.49 2.30 2.50 2.63 2.52
Total allowance for loan losses
to nonperforming loans 192.4 189.3 232.4 253.5 107.9
Total allowance for loan losses
to total loans 1.19 1.10 1.10 1.05 1.01
Nonperforming loans to total loans 0.62 0.58 0.47 0.42 0.94
Nonperforming assets to total assets 0.56 0.44 0.36 0.31 0.69
Net charge-offs to average loans 0.20 0.18 0.11 0.11 0.17
Equity to assets at period end 7.95 8.43 8.74 9.23 9.75
Dividend payout ratio 44.03 19.63 22.26 23.68 10.79
=====================================================================================================
(1) The Company merged Unity Savings Bank with and into its Oak Hill Banks
subsidiary on October 2, 1997. The merger was accounted for as a
pooling-of-interests. Accordingly, the consolidated financial
statements as of and for the years ended December 31, 1995 and 1996,
have previously been restated as if the merger had occurred on January
1, 1995.
(2) The Company completed a merger with Towne Financial Corporation and its
subsidiary The Blue Ash Building and Loan Company on October 1, 1999.
The merger was accounted for as a pooling-of-interests. Accordingly,
the consolidated financial statements as of and for the years ended
December 31, 1995 through 1998, inclusive, have been restated as if the
merger had occurred on January 1, 1995.
(3) Includes loans held for sale.
(4) Non-interest expense for 1997 includes $920,000 in pre-tax expenses
incurred pursuant to the merger with Unity Savings Bank.
(5) Non-interest expense for 1999 includes $1.4 million in pre-tax
expenses, of which $250,000 is included in "other operating expenses",
incurred pursuant to the merger with Towne Financial Corporation.
(6) Per share information gives retroactive effect to the issuance of
643,690 shares in the Unity transaction, the 5-for-4 stock split
effected June 1, 1998, and the issuance of 917,361 shares in the Towne
transaction.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The principal asset of Oak Hill Financial, Inc. ("Company") is its
ownership of Oak Hill Banks ("Oak Hill") and Towne Bank ("Towne"), (collectively
hereinafter "Banks"). Accordingly, the Company's results of operations are
primarily dependent upon the results of operations of the Banks. The Oak Hill
and Towne conduct general commercial banking businesses that consist of
attracting deposits from the general public and using those funds to originate
loans for commercial, consumer, and residential purposes.
The Banks' profitability depend primarily on their net interest income,
which is the difference between interest income generated from interest-earning
assets (i.e., loans and investments) less the interest expense incurred on
interest-bearing liabilities (i.e., deposits and borrowed funds). Net interest
income is affected by the relative amounts of interest-earning assets and
interest-bearing liabilities, and the interest rates paid on these balances.
Additionally, and to a lesser extent, profitability is affected by such factors
as the level of non-interest income and expenses, the provision for loan losses,
and the effective tax rate. Non-interest income consists primarily of service
charges and other fees and income from the sale of loans. Non-interest expenses
consist of compensation and benefits, occupancy-related expenses, FDIC deposit
insurance premiums, and other operating expenses.
Management's discussion and analysis of earnings and related financial
data are presented herein to assist investors in understanding the consolidated
financial condition and results of operations of the Company as of and for the
years ended December 31, 1999 and 1998. This discussion should be read in
conjunction with the consolidated financial statements and related footnotes
presented elsewhere in this report.
FORWARD-LOOKING STATEMENTS
In the following pages, management presents an analysis of the
Company's financial condition as of December 31, 1999, and the results of
operations for the year ended December 31, 1999, as compared to prior periods.
In addition to this historical information, the following discussion and other
sections of this Annual Report contain forward-looking statements that involve
risks and uncertainties. Economic circumstances, the Company's operations and
the Company's actual results could differ significantly from those discussed in
the forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein but also include changes in
the economy and interest rates in the nation and the Company's general market
area. Without limiting the foregoing, some of the forward-looking statements
include management's establishment of an allowance for loan losses, and its
statements regarding the adequacy of such allowance for loan losses; and
management's belief that the allowance for loan losses is adequate.
FINANCIAL CONDITION
The Company's total assets amounted to $600.1 million as of December
31, 1999, an increase of $47.5 million, or 8.6%, over the $552.6 million total
at December 31, 1998. The increase was funded primarily through growth in
deposits of $23.2 million, an increase in FHLB advances of $23.2 million and an
increase in stockholders' equity of $1.2 million.
Cash and due from banks, federal funds sold, and investment securities
decreased by $52.9 million, or 42.4%, to a total of $71.9 million at December
31, 1999, compared to $124.8 million at December 31, 1998. Investment securities
decreased by $46.4 million, as maturities and repayments of $22.4 million and
sales of $41.0 million exceeded purchases of $22.1 million. Federal funds sold
also decreased by $7.5 million during 1999.
Loans receivable totaled $508.0 million at December 31, 1999, an
increase of $96.7 million, or 23.5%, over total loans at December 31, 1998. Loan
disbursements totaled $324.8 million during 1999, which were partially offset by
loan sales of $30.6 million and principal repayments of $194.9 million. Loan
origination and sales volume decreased by $5.3 million and $47.2 million,
respectively as compared to the same period in 1998. The Company's allowance for
loan losses amounted to $6.1 million at December 31, 1999, an increase of $1.5
million, or 33.8%, over the total at December 31, 1998. The allowance for loan
losses represented 1.19% of the total loan portfolio at December 31, 1999, as
compared to 1.10% at December 31, 1998. The Company's allowance represented
192.40% and 191.92% of nonperforming loans, which totaled $3.2 million and $2.4
million at December 31, 1999 and 1998, respectively.
Deposits totaled $488.9 million at December 31, 1999, an increase of
$23.2 million, or 5.0%, over the $465.7 million total at December 31, 1998. The
increase resulted primarily from an increase due to the Towne
-20-
21
merger, combined with management's continuing marketing efforts and competitive
pricing with respect to mid-term certificate of deposit products throughout the
Banks' branch network.
Advances from the Federal Home Loan Bank totaled $59.7 million at
December 31, 1999, an increase of $23.2 million, or 63.7%, over the December 31,
1998 total. The proceeds from advances and from growth in deposits were used to
fund the growth in loans.
The Company's stockholders' equity amounted to $47.7 million at
December 31, 1999, an increase of $1.2 million, or 2.5%, over the balance at
December 31, 1998. The increase resulted primarily from net earnings of $4.1
million, which were partially offset by dividends to stockholders of $1.8
million.
SUMMARY OF EARNINGS
The table on page 24 shows for each category of interest-earning assets
and interest-bearing liabilities, the average amount outstanding, the interest
earned or paid on such amount, and the average rate earned or paid for the years
ended December 31, 1999, 1998, and 1997. The table also shows the average rate
earned on all interest-earning assets, the average rate paid on all
interest-bearing liabilities, the interest rate spread, and the net interest
margin for the same periods.
Changes in net interest income are attributable to either changes in
average balances (volume change) or changes in average rates (rate change) for
interest-earning assets and interest-bearing liabilities. Volume change is
calculated as change in volume times the old rate, while rate change is
calculated as change in rate times the old volume. The table below indicates the
dollar amount of the change attributable to each factor. The rate/volume change,
the change in rate times the change in volume, is allocated between the volume
change and the rate change at the ratio each component bears to the absolute
value of their total.
COMPARISON OF RESULTS OF OPERATIONS FOR 1999 AND 1998 FISCAL YEARS
General. Net earnings for the year ended December 31, 1999, totaled
$4.1 million, a $3.0 million, or 42.0%, decrease from the amount reported in
1998. The decrease in earnings resulted primarily from a $2.9 million increase
in general, administrative and other expense, a $1.2 million increase in the
provision for losses on loans, and a $2.8 million decrease in other income,
which were partially offset by a $2.6 million increase in net interest income
and a $1.3 million decrease in the provision for federal income taxes.
Net Interest Income. Total interest income for the year ended December
31, 1999, amounted to $45.3 million, an increase of $3.7 million, or 8.8%, over
the $41.6 million recorded for 1998. Interest income on loans totaled $39.4
million, an increase of $2.4 million, or 6.4%, over the 1998 period. This
increase resulted primarily from a $62.8 million, or 16.2%, increase in the
average portfolio balance outstanding year-to-year, which was partially offset
by an 81 basis point decrease in the average yield, to 8.76% in 1999 from 9.57%
in 1998. Interest income on investment securities and other interest-earning
assets increased by $1.3 million, or 27.9%. The increase resulted primarily from
a 159 basis point increase in the average yield, from 4.25% in 1998 to 5.84% in
1999, which was partially offset by a $7.4 million, or 6.9%, decrease in the
average portfolio balance outstanding year-to-year.
Total interest expense amounted to $22.4 million for the year ended
December 31, 1999, an increase of $1.1 million, or 5.1%, over the $21.3 million
recorded in 1998. Interest expense on deposits increased by $31,000, or 0.2%, to
a total of $19.4 million in 1999. The increase resulted primarily from a $70.5
million, or 17.7%, increase in the average portfolio balance outstanding
year-to-year, which was partially offset by a 72 basis point decrease in the
average cost of deposits, to 4.14% in 1999 from 4.86% in 1998. Interest expense
on borrowings increased by $1.0 million, or 54.0%, during 1999. This increase
was due to a $22.5 million increase in average borrowings outstanding, which was
partially offset by a 62 basis point decrease in the average cost of borrowings,
to 5.52% in 1999 compared to 6.14% in 1998.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $2.6 million, or 12.7%, for the year
ended December 31, 1999, as compared to 1998. The interest rate spread decreased
by 6 basis points to 3.41% in 1999 compared to 3.47% in 1998, while the net
interest margin increased by 6 basis points from 4.10% in 1998 to 4.16% in 1999.
-21-
22
Provision for Losses on Loans. The provision for losses on loans
represents a charge to earnings to maintain the allowance at a level management
believes is adequate to absorb losses in the loan portfolio. The Company's
provision for losses on loans amounted to $2.4 million for the year ended
December 31, 1999, an increase of $1.2 million, or 92.1%, compared to the same
period in 1998. The provision for losses on loans in 1999 generally reflects the
$96.7 million of growth in the loan portfolio over the year. The Company's loan
growth in 1999 was comprised primarily of a $56.5 million, or 21.5%, increase in
loans secured by residential real estate and a $34.7 million, or 37.9%, increase
in commercial and other loans. Gross loan charge-offs amounted to $1.1 million
in 1999, as compared to $829,000 in 1998.
Although management believes that it uses the best information
available in providing for possible loan losses and believes that the allowance
is adequate at December 31, 1999, future adjustments to the allowance could be
necessary and net earnings could be affected if circumstances and/or economic
conditions differ substantially from the assumptions used in making the initial
determinations.
Other Income. Other income totaled $408,000 for the year ended December
31, 1999, a decrease of $2.8 million, from the amount recorded in 1998. This
decrease resulted primarily from a $2.1 million loss on sale of securities as
compared to a $281,000 gain on sale of securities in the 1998 period and a
$941,000 decrease in gain on sale of loans, which were partially offset by a
$522,000, or 33.7%, increase in service fees, charges, and other operating
income.
General, Administrative and Other Expense. General, administrative, and
other expenses totaled $14.6 million for the year ended December 31, 1999, an
increase of $2.9 million, or 24.2%, over the 1998 total. The increase resulted
primarily from expenses of $1.1 million incurred in connection with the
previously mentioned Towne merger, including $623,000 for the cost of employee
severance pay related thereto. In addition there was a $1.2 million, or 18.4%,
increase in employee compensation and benefits, a $557,000, or 18.7%, increase
in other operating expenses, and an increase of $9,000 in Federal deposit
insurance premiums, which were partially offset by decreases of $8,000 and
$28,000 in occupancy and equipment and franchise taxes, respectively.
The increase in employee compensation and benefits resulted primarily
from increased staffing levels required in connection with the establishment of
new branch locations and additional management staffing, combined with normal
merit increases. The increase in other operating expense resulted primarily from
increases in professional fees and costs attendant to the continued reporting
requirements of a public company, as well as, increases in expenses related to
the Company's overall growth and continuing marketing efforts year-to-year.
Federal Income Taxes. The provision for federal income taxes amounted
to $2.1 million for the year ended December 31, 1999, a decrease of $1.3
million, or 39.0%, from the $3.4 million recorded in 1998. The decrease resulted
primarily from a $4.3 million, or 41.0%, decrease in earnings before taxes. The
effective tax rates were 33.8% and 32.7% for the year ended December 31, 1999
and 1998, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR 1998 AND 1997 FISCAL YEARS
General. Net earnings for the year ended December 31, 1998 totaled $7.0
million, an increase of $2.6 million, or 58.7%, over the amount reported in
1997. The increase in earnings resulted primarily from a $2.8 million increase
in net interest income and a $1.6 million increase in other income, which were
partially offset by a $974,000 increase in provision for federal income taxes, a
$730,000 increase in general, administrative, and other expenses, and a $95,000
increase in provision for losses on loans.
Net Interest Income. Total interest income for the year ended December
31, 1998, amounted to $41.6 million, an increase of $5.5 million, or 15.3%, over
the $36.1 million recorded for 1997. Interest income on loans totaled $37.0
million, an increase of $5.3 million, or 16.8%, over the 1997 period. This
increase resulted primarily from a $64.3 million, or 19.9%, increase in the
average portfolio balance outstanding year-to-year, which was partially offset
by a 26 basis point decrease in the average yield, to 9.57% in 1998 from 9.83%
in 1997. Interest income on investment securities and other interest-earning
assets increased by $191,000, or 4.4%, to a total of $4.6 million in 1998, as
compared to $4.4 million in 1997. The increase resulted primarily from an $11.4
million increase in the average portfolio balance outstanding year-to-year,
which was partially offset by a 31 basis point decrease in the average yield, to
4.25% in 1998 from 4.56% in 1997.
-22-
23
Total interest expense amounted to $21.3 million for the year ended
December 31, 1998, an increase of $2.7 million, or 14.6%, over the $18.6 million
recorded in 1997. Interest expense on deposits increased by $3.1 million, or
19.1%, to a total of $19.4 million in 1998. The increase resulted primarily from
a $61.2 million, or 18.1%, increase in the average portfolio balance outstanding
year-to-year, coupled with a 4 basis point increase in the average costs of
deposits, from 4.82% in 1997 to 4.86% in 1998. Interest expense on borrowings
decreased by $391,000, or 16.7% during 1998. This decrease was due to a $6.2
million decrease in average borrowings outstanding, coupled with a 2 basis point
decrease in the average cost of borrowings, to 6.14% in 1998 from 6.16% in 1997.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $2.8 million, or 16.0%, for the year
ended December 31, 1998, as compared to 1997. The interest rate spread decreased
by 21 basis points to 3.47% in 1998 from 3.68% in 1997, while the net interest
margin decreased by 7 basis points to 4.10% in 1998 from 4.17% in 1997.
Provision for Losses on Loans. The provision for losses on loans
represents a charge to earnings to maintain the allowance at a level management
believes is adequate to absorb losses in the loan portfolio. The Company's
provision for losses on loans amounted to $1.3 million for the year ended
December 31, 1998, as compared to $1.2 million for the same period in 1997, an
increase of $95,000, or 8.1%. The provision for losses on loans in 1998
increased primarily as a result of the $50.4 million of growth in the loan
portfolio over the year. Gross loan charge-offs amounted to $829,000 in 1998, as
compared to $492,000 in 1997.
Other Income. Other income totaled $3.2 million for the year ended
December 31, 1998, an increase of $1.6 million, or 97.6%, over the amount
recorded in 1997. This increase resulted primarily from a $1.2 million increase
in gain on sale of loans, a $314,000 increase in gain on sale of investments and
other assets, and a $123,000 increase in service fees, charges and other
operating income.
General, Administrative and Other Expense. General, administrative, and
other expenses totaled $11.8 million for the year ended December 31, 1998, an
increase of $730,000, or 6.6%, over the $11.1 million recorded in 1997. The
increase resulted primarily from an increase of $1.1 million, or 19.6%, in
employee compensation and benefits, a $317,000, or 11.9%, increase in other
operating expenses, and a $118,000, or 7.6%, increase in occupancy and
equipment, which were partially offset by a decrease of $920,000 in
merger-related expenses. Federal deposit insurance premiums and franchise taxes
also increased $9,000 and $151,000, respectively for the year ended December 31,
1998.
The increase in employee compensation and benefits resulted primarily
from increased staffing levels required in connection with the establishment of
new branch locations in 1998 combined with normal merit increases. Additionally,
the opening of new branch facilities was responsible for the increase in
occupancy and equipment expense. The increase in other operating expense
resulted primarily from costs attendant to the continued reporting requirements
of a public company, as well as increases in expenses related to the Company's
growth year-to-year.
Federal Income Taxes. The provision for federal income taxes amounted
to $3.4 million for the year ended December 31, 1998, an increase of $974,000,
or 39.9%, over the $2.4 million recorded in 1997. The increase resulted
primarily from a $3.6 million, or 52.0%, increase in earnings before taxes. The
effective tax rates were 32.7% and 35.5% for December 31, 1998 and 1997,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Like other financial institutions, the Company must ensure that
sufficient funds are available to meet deposit withdrawals, loan commitments,
and expenses. Control of the Company's cash flow requires the anticipation of
deposit flows and loan payments. The Company's primary sources of funds are
deposits, borrowings and principal and interest payments on loans. The Company
uses funds from deposit inflows, proceeds from borrowings and principal and
interest payments on loans primarily to originate loans, and to purchase
short-term investment securities and interest-bearing deposits.
At December 31, 1999, the Company had $232.1 million of certificates of
deposit maturing within one year. It has been the Company's historic experience
that such certificates of deposit will be renewed at market rates of interest.
It is management's belief that maturing certificates of deposit over the next
year will similarly be renewed at market rates of interest without a material
adverse effect on the results of operations.
-23-
24
In the event that certificates of deposit cannot be renewed at
prevalent market rates, the Company can obtain up to $163.3 million in advances
from the Federal Home Loan Bank of Cincinnati (FHLB). Also, as an operational
philosophy, the Company seeks to obtain advances to help with asset/liability
management and liquidity. At December 31, 1999, the Company had $59.7 million of
outstanding FHLB advances.
At December 31, 1999, loan commitments, or loans committed but not
closed, totaled $29.6 million. Additionally, the Company had unused lines of
credit and letters of credit totaling $75.3 million and $731,000, respectively.
Funding for these amounts is expected to be provided by the sources described
above. Management believes the Company has adequate resources to meet its normal
funding requirements.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires entities to
recognize all derivatives in their financial statements as either assets or
liabilities measured at fair value.
SFAS No. 133 specifies new methods of accounting for hedging
activities, prescribes the items and transactions that may be hedged, and
specifies detailed criteria to be met to qualify for hedging accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an interest
rate or foreign exchange rate, that is applied to a notional amount, such as an
amount of currency, to determine the settlement amount(s). It generally requires
no significant initial investment and can be settled net or by delivery of an
asset that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract. SFAS No. 133, as amended by
SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. On
adoption, entities are permitted to transfer held-to-maturity debt securities to
an available-for-sale or trading category without calling into question their
intent to hold other debt securities to maturity in the future. SFAS No. 133 is
not expected to have a material effect on the Company's consolidated financial
position or results of operations.
OTHER MATTERS/YEAR 2000 ISSUES
As with all providers of financial services, the Company's operations
are heavily dependent on information technology systems. During the three year
period leading up to January 1, 2000, the Company addressed the potential
problems associated with the possibility that the computers that control or
operate their information technology system and infrastructure may not have been
programmed to read four-digit dates codes and upon arrival of the year 2000, may
have recognized the two-digit code "00" as the year 1900, causing systems to
fail to function or to generate erroneous data.
The Company incurred approximately $120,000 in costs, most of which
were capitalized, to ensure year 2000 readiness. The Company did not experience
any technology-related problems upon arrival of January 1, 2000, nor was there
any interruption of services to its customers.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-24-
25
AVERAGE BALANCES AND INTEREST RATES
Year Ended December 31,
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(Dollars in thousands)
Interest-earning assets:
Loans receivable $449,873 $39,431 8.76% $387,057 $37,049 9.57% $322,807 $31,730 9.83%
Investment securities 86,329 5,208 6.03 93,476 3,829 4.10 85,092 3,823 4.49
Federal funds sold 12,567 587 4.67 11,794 661 5.60 8,790 478 5.44
Interest-earning deposits 685 24 3.50 1,707 60 3.51 1,693 58 3.43
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets 549,454 45,250 7.69 494,034 41,599 8.42 418,382 36,089 8.63
Non-interest-earning assets 39,159 18,383 24,303
-------- -------- --------
Total assets $588,613 $512,417 $442,685
======== ======== ========
Interest-bearing liabilities:
Deposits $469,729 19,426 4.14 $399,249 19,395 4.86 $338,034 16,291 4.82
Borrowings 54,192 2,993 5.52 31,661 1,944 6.14 37,890 2,335 6.16
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 523,921 22,419 4.28 430,910 21,339 4.95 375,924 18,626 4.95
------- ---- ------- ---- ------- ----
Non-interest-bearing liabilities 16,565 37,125 27,429
Stockholders' equity 48,127 44,382 39,332
-------- -------- --------
Total liabilities and
Stockholders' equity $588,613 $512,417 $442,685
======== ======== ========
Net interest income and interest
rate spread $22,831 3.41% $20,260 3.47% $17,463 3.68%
======= ==== ======= ==== ======= ====
Net interest margin(1) 4.16% 4.10% 4.17%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 104.87% 114.65% 111.29%
====== ====== ======
(1) The net interest margin is the net interest income divided by average
interest-earning assets.
1999 vs 1998 1998 vs 1997
------------ ------------
Increase (decrease) due to Increase (decrease) due to
Volume Rate Total Volume Rate Total
Change in interest income attributable to:
Loans receivable $5,761 $(3,379) $2,382 $6,178 $ (859) $5,319
Investment securities (301) 1,680 1,379 351 (345) 6
Federal funds sold 40 (114) (74) 167 16 183
Interest earning deposits with banks (35) (1) (36) 1 1 2
------ ------- ------ ------ ------- ------
Total interest income $5,465 $(1,814) $3,651 $6,697 $(1,187) $5,510
====== ======= ====== ====== ======= ======
Change in interest expense attributable to:
Deposits $3,138 $(3,107) $ 31 $2,964 $ 140 $3,104
Borrowings 2,833 (1,784) 1,049 (398) 7 (391)
------ ------- ------ ------ ------- ------
Total interest expense $5,971 $(4,891) $1,080 $2,566 $ 147 $2,713
====== ======= ====== ====== ======= ======
Increase in net interest income $2,571 $2,797
====== ======
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26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS
Consolidated Financial Statements of the Company, together with the
reports thereon of Grant Thornton LLP (dated February 11, 2000) are set forth on
pages F-1 hereof (see Item 14 of this Annual Report for Index).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information is contained under "Ownership of Common Stock by
Management" and "Election of Directors" in the Company's Proxy Statement dated
March 31, 2000, is incorporated herein by reference in response to this item.
The information contained under "Compliance With Section 16(a) of the
Securities Exchange Act" in the Company's Proxy Statement dated March 31, 2000,
is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under "Executive Compensation" in the
Company's Proxy Statement dated March 31, 2000, is incorporated herein by
reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under "Ownership of Common Stock by Principal
Shareholders" and "Ownership of Common Stock By Management" in the Company's
Proxy Statement dated March 31, 2000, is incorporated herein by reference in
response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under "Certain Transactions" in the Company's
Proxy Statement dated March 31, 2000, is incorporated herein by reference in
response to this item.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the Report:
(1) Report of Grant Thornton LLP, Independent Auditors
Consolidated Statements of Financial Condition as of December
31, 1999 and 1998
Consolidated Statements of Earnings for years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income for years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholder's Equity for years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements for years ended
December 31, 1999, 1998 and 1997
(2) Financial Statement Schedules:
The information is contained in the Company's Annual Report to
Stockholders for the year ended December 31, 1999, is
incorporated herein by reference in response to this item.
-26-
27
(3) The following are filed as exhibits to this Annual Report on
Form 10-K:
Exhibit
Number
------
* 3(a).....................Second Amended and Restated Articles of
Incorporation (reference is made to Form
SB-2, Exhibit 3(i), File No. 33-096216 and
incorporated herein by reference).
* 3(b).....................Restated Code of Regulations (reference is
made to Form SB-2, Exhibit 3(ii), File No.
33-96216 and incorporated herein by
reference).
*4(a)......................Reference is made to Articles FOURTH, FIFTH,
SEVENTH, EIGHTH, TENTH AND ELEVENTH of the
Registrant's Restated Articles of
Incorporation (contained in the Registrant's
Restated Articles of Incorporation filed as
Exhibit 3(a) hereto) and Articles II, III,
IV, VI and VIII of the Registrant's Amended
and Restated Code of Regulations (contained
in the Registrant's Amended and Restated
Code of Regulations filed as Exhibit 3(b)
hereto).
*4(b)......................Rights Plan, dated January 23, 1998, between
Oak Hill Financial, Inc., and Fifth Third
Bank, (reference is made to Exhibit 4.1 to
the Form 8-A, filed with the Securities and
Exchange Commission on January 23, 1998 and
incorporated herein by reference).
*10(a).....................Oak Hill Financial, Inc. Amended and
Restated 1995 Stock Option Plan (reference
is made to Form SB-2, Exhibit 10(a), File
No. 33-96216 and incorporated herein by
reference).
*10(b).....................Employment Agreement between D. Bruce Knox
and the Registrant, dated April 28, 1997,
(reference is made to Form S-4, Exhibit
10(b), file No. 333-30349, and incorporated
herein by reference).
*10(c).....................Executive Salary Continuation Agreement
between D. Bruce Knox and Unity Savings
Bank, dated December 7, 1994, (reference is
made to Form S-4, Exhibit 10(c), file No.
333-30349, and incorporated herein by
reference).
*10(d).....................Executive Salary Continuation Agreement
between George Knox and Unity Savings Bank,
dated December 7, 1994, (reference is made
to Form S-4, Exhibit 10(d), file No.
333-30349, and incorporated herein by
reference).
*10(e).....................Amendment, dated September 18, 1995 to the
Executive Salary Continuation Agreement
between George Knox and Unity Savings Bank,
(reference is made to Form S-4, Exhibit
10(e), file No. 333-30349, and incorporated
herein by reference).
10(f)......................Employment Agreement between Ron J. Copher
and The Registrant, dated July 5, 1999.
*21........................Subsidiaries of the Registrant (reference
is made to Form SB-2, Exhibit 21, File No.
33-96216 and incorporated herein by
reference).
23.........................Consent of Grant Thornton LLP.
24.........................Powers of Attorney.
27.........................Financial Data Schedule
*Incorporated by reference as indicated.
-27-
28
(b) Form 8-K's Filed in the Fourth Quarter
1. Form 8-K, dated October 1, 1999, filed with the Securities and
Exchange Commission on October 5, 1999.
2. Form 8-K, dated October 6, 1999, filed with the Securities and
Exchange Commission on October 8, 1999.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-28-
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
OAK HILL FINANCIAL, INC. DATE
By: /s/ John D. Kidd March 28, 2000
----------------------------
John D. Kidd, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
the report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
* Evan E. Davis Chairman of the Board ) March 28, 2000
- -------------------------------- )
Evan E. Davis )
)
)
/s/ John D. Kidd President, Chief Executive Officer, )
- -------------------------------- and Director ) March 28, 2000
John D. Kidd (Principal Executive Officer) )
)
)
* Richard P. LeGrand Executive Vice President )
- -------------------------------- and Director ) March 28, 2000
Richard P. LeGrand )
)
)
* H. Tim Bichsel Secretary/Treasurer and )
- -------------------------------- Chief Operations Officer ) March 28, 2000
H. Tim Bichsel (Principal Financial and Accounting )
Officer) )
)
)
* Ron J. Copher Chief Financial Officer ) March 28, 2000
- -------------------------------- )
Ron J. Copher )
)
)
* Barry M. Dorsey Director ) March 28, 2000
- -------------------------------- )
Barry M. Dorsey )
)
)
* C. Clayton Johnson Director ) March 28, 2000
- -------------------------------- )
C. Clayton Johnson )
)
)
* Rick A. McNelly Director ) March 28, 2000
- -------------------------------- )
Rick A. McNelly )
)
)
* Donald R. Seigneur Director ) March 28, 2000
- -------------------------------- )
Donald R. Seigneur )
)
)
/s/ H. Grant Stephenson Director ) March 28, 2000
- -------------------------------- )
H. Grant Stephenson )
-29-
30
SIGNATURE TITLE DATE
* D. Bruce Knox Chief Information Officer
- -------------------------------- and Director ) March 28, 2000
D. Bruce Knox )
)
)
* Ralph E. Coffman, Jr. Vice President ) March 28, 2000
- -------------------------------- )
Ralph E. Coffman, Jr. )
)
)
* David G. Ratz Chief Administrative Officer ) March 28, 2000
- -------------------------------- )
David G. Ratz )
)
)
By: /s/ H. Grant Stephenson ) March 28, 2000
------------------------------------- )
H. Grant Stephenson, attorney-in-fact )
for each of the persons indicated )
-30-
31
CONSOLIDATED FINANCIAL STATEMENTS
Exhibit 13
TABLE OF CONTENTS
Financial Condition .............32
Earnings ........................33
Stockholders' Equity ............34
Comprehensive Income ............35
Cash Flows ......................36
Notes ...........................38
-31-
32
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
1999 1998
(RESTATED)
ASSETS
- ------
Cash and due from banks $ 14,675 $ 13,650
Federal funds sold 3,854 11,387
Investment securities designated as available for sale -- at market 53,338 85,032
Investment securities held to maturity -- at cost (approximate market
value of $14,692 at December 31, 1998) -- 14,704
Loans receivable -- net 507,726 408,539
Loans held for sale -- at lower of cost or market 243 2,707
Office premises and equipment -- net 9,256 7,952
Federal Home Loan Bank stock -- at cost 4,079 3,681
Accrued interest receivable on loans 2,764 2,448
Accrued interest receivable on investment securities 829 1,135
Goodwill -- net 283 317
Prepaid expenses and other assets 312 687
Prepaid federal income tax 1,220 156
Deferred federal income tax asset 1,521 254
-------- --------
TOTAL ASSETS $600,100 $552,649
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits
Demand $ 42,598 $ 39,655
Savings and time deposits 446,282 426,019
-------- --------
Total deposits 488,880 465,674
Securities sold under agreement to repurchase 1,172 940
Advances from the Federal Home Loan Bank 59,680 36,458
Loan of Employee Stock Ownership Plan -- 15
Accrued interest payable and other liabilities 2,644 2,988
-------- --------
Total liabilities 552,376 506,075
Stockholders' equity
Common stock -- $.50 stated value; authorized 15,000,000 shares,
5,369,576 and 4,418,665 shares issued at
December 31, 1999 and 1998 2,683 2,641
Additional paid-in capital 4,650 4,125
Retained earnings 42,724 40,434
Treasury stock (50,900 shares at cost) (755) (755)
Required contributions for shares acquired by
Employee Stock Ownership Plan -- (15)
Accumulated comprehensive income (loss):
Unrealized gain (loss) on securities designated as available
for sale, net of related tax effects (1,578) 144
-------- --------
Total stockholders' equity 47,724 46,574
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $600,100 $552,649
======== ========
The accompanying notes are an integral part of these statements.
-32-
33
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands, except share data)
1999 1998 1997
(RESTATED) (RESTATED)
INTEREST INCOME
Loans $39,431 $37,049 $31,730
Investments
U.S. Government and agency securities 4,792 3,635 3,687
Obligations of state and political subdivisions 416 194 136
Federal funds sold 587 661 478
Interest-bearing deposits 24 60 58
------- ------- -------
Total interest income 45,250 41,599 36,089
INTEREST EXPENSE
Deposits 19,426 19,395 16,291
Borrowings 2,993 1,944 2,335
------- ------- -------
Total interest expense 22,419 21,339 18,626
------- ------- -------
Net interest income 22,831 20,260 17,463
Less provision for losses on loans 2,432 1,266 1,171
------- ------- -------
Net interest income after provision for losses on loans 20,399 18,994 16,292
OTHER INCOME
Service fees, charges and other operating 2,072 1,550 1,427
Gain on sale of loans 477 1,418 250
Gain (loss) on sale of assets (2,141) 281 (33)
------- ------- -------
Total other income 408 3,249 1,644
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE
Employee compensation and benefits 7,635 6,448 5,393
Occupancy and equipment 1,665 1,673 1,555
Federal deposit insurance premiums 126 117 108
Franchise taxes 544 572 421
Other operating 3,535 2,978 2,661
Merger-related expenses 1,137 -- 920
------- ------- -------
Total general, administrative and other expense 14,642 11,788 11,058
------- ------- -------
Earnings before federal income taxes 6,165 10,455 6,878
FEDERAL INCOME TAXES
Current 2,465 3,370 2,443
Deferred (382) 45 (2)
------- ------- -------
Total federal income taxes 2,083 3,415 2,441
------- ------- -------
NET EARNINGS $ 4,082 $ 7,040 $ 4,437
======= ======= =======
EARNINGS PER SHARE
BASIC $ .77 $ 1.34 $ .84
======= ======= =======
DILUTED $ .76 $ 1.30 $ .83
======= ======= =======
The accompanying notes are an integral part of these statements.
-33-
34
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998, and 1997
(In thousands, except share data)
UNREALIZED
GAINS (LOSSES)
EMPLOYEE ON SECURITIES
ADDITIONAL STOCK DESIGNATED AS
COMMON PAID-IN RETAINED TREASURY OWNERSHIP AVAILABLE
STOCK CAPITAL EARNINGS STOCK PLAN FOR SALE TOTAL
BALANCE AT JANUARY 1, 1997 $2,193 $3,998 $31,764 $ (28) $(74) $ (233) $37,620
(AS RESTATED FOR BUSINESS COMBINATION)
Issuance of 3,312 shares under stock
option plan 2 19 -- -- -- -- 21
Dividends declared of $.187 per share -- -- (982) -- -- (982)
Principal repayments on loan of ESOP -- -- -- -- 29 -- 29
Unrealized gains on securities designated as
available for sale, net of related tax effects -- -- -- -- -- 224 224
Net earnings for the year -- -- 4,437 -- -- -- 4,437
------ ------ ------- ----- ---- ------- -------
BALANCE AT DECEMBER 31, 1997 2,195 4,017 35,219 (28) (45) (9) 41,349
Stock dividend effected in the form
of a 5-for-4 stock split 440 -- (440) -- -- -- --
Issuance of 12,287 shares under stock
option plan 6 108 -- -- -- -- 114
Dividends declared of $.263 per share -- -- (1,385) -- -- -- (1,385)
Repurchase of 36,900 shares -- -- -- (727) -- -- (727)
Principal repayments on loan of ESOP -- -- -- -- 30 -- 30
Unrealized gains on securities designated as
available for sale, net of related tax effects -- -- -- -- -- 153 153
Net earnings for the year -- -- 7,040 -- -- -- 7,040
------ ------ ------- ----- ---- ------- -------
BALANCE AT DECEMBER 31, 1998 2,641 4,125 40,434 (755) (15) 144 46,574
Issuance of 84,700 shares under stock
option plan 42 525 -- -- -- -- 567
Dividends declared of $.339 per share -- -- (1,792) -- -- -- (1,792)
Principal repayments on loan of ESOP -- -- -- -- 15 -- 15
Unrealized losses on securities designated as
available for sale, net of related tax effects -- -- -- -- -- (1,722) (1,722)
Net earnings for the year -- -- 4,082 -- -- -- 4,082
------ ------ ------- ----- ---- ------- -------
BALANCE AT DECEMBER 31, 1999 $2,683 $4,650 $42,724 $(755) $ -- $(1,578) $47,724
====== ====== ======= ===== ==== ======= =======
The accompanying notes are an integral part of these statements.
-34-
35
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 1999, 1998, and 1997
(In thousands)
1999 1998 1997
(RESTATED) (RESTATED)
Net earnings $ 4,082 $7,040 $4,437
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
designated as available for sale, net of tax
of $1,615, $173 and $92 in 1999, 1998
and 1997, respectively (3,135) 338 202
Reclassification adjustment for realized
(gains) losses included in net earnings, net of
tax effects (benefits) of $728, $(96) and $11
in 1999, 1998 and 1997, respectively 1,413 (185) 22
------- ------ ------
Comprehensive income $ 2,360 $7,193 $4,661
======= ====== ======
Accumulated comprehensive income (loss) $(1,578) $ 144 $ (9)
======= ====== ======
The accompanying notes are an integral part of these statements.
-35-
36
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)
1999 1998 1997
(RESTATED) (RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings for the year $ 4,082 $ 7,040 $ 4,437
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 769 835 754
(Gain) loss on sale of securities 2,167 (277) 55
Amortization (accretion) of premiums and
discounts on investment securities -- net 187 158 13
Proceeds from sale of loans in secondary market 30,638 78,727 14,851
Loans disbursed for sale in secondary market (27,922) (79,192) (15,189)
Gain on sale of loans (252) (684) (97)
Gain on sale of other assets (26) (4) (22)
Amortization of deferred loan origination costs 333 320 229
Federal Home Loan Bank stock dividends (398) (253) (212)
Provision for losses on loans 2,432 1,266 1,171
Amortization of goodwill 34 33 36
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 401 (187) (47)
Accrued interest receivable (10) (503) (526)
Accrued interest payable and other liabilities (359) 241 348
Federal income taxes
Current (1,050) (291) 134
Deferred (382) 45 (2)
--------- --------- ---------
Net cash provided by operating activities 10,644 7,274 5,933
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Loan disbursements (296,845) (250,914) (206,855)
Principal repayments on loans 194,937 200,035 143,121
Principal repayments on mortgage-backed securities
designated as available for sale 3,929 4,509 2,995
Principal repayments on mortgage-backed securities
designated as held-to-maturity 3,615 2,844 866
Proceeds from sale of investment securities designated
as available for sale 41,014 12,784 8,404
Proceeds from maturity of investment securities 14,885 36,881 26,920
Proceeds from sale of other assets -- 4 50
Purchase of investment securities designated as
available for sale (21,011) (70,735) (35,972)
Purchase of investment securities designated as
held-to-maturity (1,039) (4,739) (4,215)
(Increase) decrease in federal funds sold -- net 7,533 (5,914) 362
Purchase of Federal Home Loan Bank stock -- -- (426)
Purchase of office premises and equipment (2,073) (1,932) (737)
(Increase) decrease in certificates of deposit in
other institutions 1 177 (377)
Redemption of cash surrender value of life insurance -- net -- 591 --
--------- --------- ---------
Net cash used in investing activities (55,054) (76,409) (65,864)
--------- --------- ---------
Net cash used in operating and investing
activities (balance carried forward) (44,410) (69,135) (59,931)
--------- --------- ---------
Net cash used in operating and investing
activities (balance brought forward) $ (44,410) $ (69,135) $ (59,931)
-36-
37
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended December 31,
(In thousands)
1999 1998 1997
(RESTATED) (RESTATED)
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Proceeds from securities sold under agreement to repurchase 232 682 128
Net increase in deposit accounts 23,206 74,409 57,127
Proceeds from Federal Home Loan Bank advances 1,518,512 25,500 38,975
Repayment of Federal Home Loan Bank advances (1,495,290) (26,447) (34,582)
Advances by borrowers for taxes and insurance -- 45 89
Account payable on mortgage loans serviced -- 122 (4)
Dividends on common shares (1,792) (1,385) (982)
Purchase of treasury stock -- (727) --
Proceeds from issuance of shares under stock option plan 567 114 21
----------- -------- --------
Net cash provided by financing activities 45,435 72,313 60,772
----------- -------- --------
Net increase in cash and cash equivalents 1,025 3,178 841
Cash and cash equivalents at beginning of year 13,650 10,472 9,631
----------- -------- --------
Cash and cash equivalents at end of year $ 14,675 $ 13,650 $ 10,472
=========== ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Federal income taxes $ 3,417 $ 3,491 $ 2,171
=========== ======== ========
Interest on deposits and borrowings $ 22,326 $ 21,271 $ 18,496
=========== ======== ========
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING ACTIVITIES:
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ (1,722) $ 153 $ 224
=========== ======== ========
Recognition of mortgage servicing rights in
accordance with SFAS No. 125 $ 225 $ 734 $ 153
=========== ======== ========
Transfers from loans to real estate acquired
through foreclosure $ 278 $ 51 $ --
=========== ======== ========
Transfer of loans from held for investment to
held for sale $ -- $ 820 $ 304
=========== ======== ========
Transfer of loans from held for sale to held
for investment $ -- $ -- $ 1,755
=========== ======== ========
The accompanying notes are an integral part of these statements
-37-
38
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1999, 1998, and 1997
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
- ----------------------------------------
On October 1, 1999, the Company combined with Towne Financial
Corporation ("Towne Financial") and its wholly-owned subsidiary Blue Ash
Building and Loan Company ("Blue Ash") in a transaction whereby Towne Financial
merged with and into the Company and Blue Ash, renamed Towne Bank, became a
wholly-owned subsidiary of the Company. The transaction was accounted for as a
pooling-of-interests. Accordingly, the consolidated financial statements have
been restated to reflect the effects of the business combination as of January
1, 1997. Pursuant to the merger agreement, the Company issued 917,361 shares of
common stock in exchange for the shares of Towne.
The business activities of Oak Hill Financial, Inc. ("Company") have
been limited primarily to holding the common shares of Oak Hill Banks ("Oak
Hill") and Towne Bank ("Towne"), (collectively hereinafter "Banks").
Accordingly, the Company's results of operations are dependent upon the results
of the Banks' operations. The Banks conduct 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. The Banks' profitability is
significantly dependent on net interest income, which is the difference between
interest income generated from interest-earning assets (i.e., loans and
investments) and the interest expense paid on interest-bearing liabilities
(i.e., customer deposits and borrowed funds). Net interest income is affected by
the relative amount of interest-earning assets and interest-bearing liabilities
and the interest received or paid on these balances. The level of interest rates
paid or received by the Banks' can be significantly influenced by a number of
competitive factors, such as governmental monetary policy, that are outside of
management's control.
The consolidated financial information presented herein has been
prepared in accordance with generally accepted accounting principles ("GAAP")
and general accounting practices within the financial services industry. In
preparing financial statements in accordance with GAAP, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from such estimates.
The following is a summary of the Company's significant accounting
policies which 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, Towne and Action Finance
Company ("Action"). Action was incorporated for the purpose of conducting
consumer finance lending operations. Action began such operations during 1998
using two separate office locations. All significant intercompany balances and
transactions have been eliminated.
2. INVESTMENT SECURITIES
The Company accounts for investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that
investments be categorized as held to maturity, trading, or available for sale.
Securities classified as held to maturity are carried at cost only if the
Company has the positive intent and ability to hold these securities to
maturity. Trading securities and securities available for sale are carried at
fair value with resulting unrealized gains or losses recorded to operations or
stockholders' equity, respectively. At December 31, 1999 and 1998, the Company's
stockholders' equity reflected a net unrealized loss on securities designated as
available for sale, net of applicable tax effects, totaling $1.6 million and a
net unrealized gain on securities designated as available for sale, net of
applicable tax effects, totaling $144,000, respectively.
Realized gains and losses on sales of securities are recognized using
the specific identification method.
-38-
39
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
3. LOANS RECEIVABLE
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for premiums and discounts on loans purchased and sold and the
allowance for loan losses. Premiums and discounts on loans purchased and sold
are amortized and accreted to operations using the interest method over the
average life of the underlying loans.
Interest is accrued as earned unless the collectibility of the loan is
in doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments has returned
to normal, in which case the loan is returned to accrual status.
Loans held for sale are carried at the lower of cost or market,
determined in the aggregate. Loans held for sale are identified at the point of
origination. In computing lower of cost or market, deferred loan origination
fees are deducted from the principal balance of the related loan. All loan sales
are made without further recourse to the Company. At December 31, 1999 and 1998,
loans held for sale were carried at cost.
The Banks generally retain servicing on loans sold and agree 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. 125,
"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. 125 requires that capitalized mortgage servicing rights and
capitalized excess servicing receivables be assessed for impairment. Impairment
is based on fair value. The mortgage servicing rights recorded by the Company,
calculated in accordance with the provisions of SFAS No. 125, 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.
The Company recorded amortization related to mortgage servicing rights
totaling approximately $174,000, $112,000 and $14,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. At December 31, 1999 and 1998,
the carrying value and fair value of the Banks' mortgage servicing rights
totaled approximately $1.0 million and $841,000, respectively.
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.
-39-
40
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
5. ALLOWANCE FOR LOAN LOSSES
It is the Company's policy to provide valuation allowances for
estimated losses on loans based upon past loss experience, trends in the level
of delinquent and specific problem loans, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral
and current and anticipated economic conditions in the Banks' 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.
At December 31, 1999, the Company had investment in impaired loans, as
defined under SFAS No. 114, totaling approximately $65,000, for which an
allowance for actual losses was maintained within the Company's general
allowance for loan losses totaling $20,000. At December 31, 1998, the Company
had no loans that would be defined as impaired under SFAS No. 114.
6. OFFICE PREMISES AND EQUIPMENT
Depreciation and amortization are provided on the straight-line and
accelerated methods over the estimated useful lives of the assets, estimated to
be ten to fifty years for buildings and improvements and three to twenty-five
years for furniture, fixtures and equipment.
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. The loan loss allowance is charged for any
write down in the loan's carrying value to fair value at the date of
acquisition. Real estate loss provisions are recorded if the properties' fair
value subsequently declines below the value determined at the recording date. In
determining the lower of cost or fair value at acquisition, costs relating to
development and improvement of property are considered. Costs relating to
holding real estate acquired through foreclosure, net of rental income, are
charged against earnings as incurred.
8. FEDERAL INCOME TAXES
The Company accounts for federal income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes."
-40-
41
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
Pursuant to the provisions of SFAS No. 109, a deferred tax liability or
deferred tax asset is computed by applying the current statutory tax rates to
net taxable or deductible temporary differences between the tax basis of an
asset or liability and its reported amount in the consolidated financial
statements that will result in taxable or deductible amounts in future periods.
Deferred tax assets are recorded only to the extent that the amount of net
deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years earnings,
offset against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that the
value of net deductible temporary differences and carryforward attributes
exceeds management's estimates of taxes payable on future taxable income.
Deferred tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
The Company's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred loan origination fees and costs, Federal Home Loan Bank
stock dividends, capitalized mortgage servicing rights, certain components of
retirement expense and the allowance for loan losses. A temporary difference is
also recognized for depreciation expense computed using accelerated methods for
federal income tax purposes.
9. AMORTIZATION OF GOODWILL
Goodwill arising from an acquisition is being amortized to operations
using the straight-line method over a fifteen year period. Management
periodically evaluates the carrying value of goodwill in relation to the
continuing earnings capacity of the acquired assets and assumed liabilities.
10. 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,
1999 and 1998.
CASH AND CASH EQUIVALENTS. The carrying amounts presented in the
consolidated statements of financial condition for cash and cash equivalents are
deemed to approximate fair value.
FEDERAL FUNDS SOLD. The carrying amounts presented in the consolidated
statements of financial condition for federal funds sold are deemed to
approximate fair value.
INVESTMENT SECURITIES. For investment securities, fair value is deemed
to equal the quoted market price.
LOANS RECEIVABLE. The loan portfolio has been segregated into
categories with similar characteristics, such as one-to-four family residential
real estate, multi-family residential real estate, commercial and installment
and other. These loan categories were further delineated into fixed-rate and
adjustable-rate loans. The fair values for the resultant loan categories were
computed via discounted cash flow analysis, using current interest rates offered
for loans with similar terms to borrowers of similar credit quality. The
historical carrying amount of accrued interest on loans is deemed to approximate
fair value.
FEDERAL HOME LOAN BANK STOCK. The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate fair
value.
-41-
42
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
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, 1999 and 1998. Fair
values for fixed-rate certificates of deposit have been estimated using a
discounted cash flow calculation using the interest rates currently offered for
deposits of similar remaining maturities.
ADVANCES FROM THE FEDERAL HOME LOAN BANK. The fair value of advances
from the Federal Home Loan Bank has been estimated using discounted cash flow
analysis, based on the interest rates currently offered for advances of similar
remaining maturities.
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE. The fair value of
securities sold under agreements to repurchase is deemed to approximate fair
value.
COMMITMENTS TO EXTEND CREDIT. For 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 and notional amount of outstanding loan commitments at December 31, 1999
and 1998, was not material.
Based on the foregoing methods and assumptions, the carrying value and
fair value of the Company's financial instruments are as follows:
DECEMBER 31,
1999 1998
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
Financial assets
Cash and due from banks $ 14,675 $ 14,675 $ 13,650 $ 13,650
Federal funds sold 3,854 3,854 11,387 11,387
Investment securities 53,338 53,338 99,736 99,724
Loans receivable 507,969 507,377 411,246 411,863
Federal Home Loan Bank stock 4,079 4,079 3,681 3,681
-------- -------- -------- --------
$583,915 $583,323 $539,700 $540,305
======== ======== ======== ========
Financial liabilities
Deposits $488,880 $488,936 $465,674 $465,845
Advances from the Federal
Home Loan Bank 59,680 59,474 36,458 36,472
Securities sold under agreement to repurchase 1,172 1,172 940 940
-------- -------- -------- --------
$549,732 $549,582 $503,072 $503,257
======== ======== ======== ========
11. EARNINGS PER SHARE
Basic earnings per share is computed based upon the weighted-average
shares outstanding during the year. Weighted-average common shares outstanding
totaled 5,290,140, 5,258,180, and 5,256,408 for the years ended December 31,
1999, 1998, and 1997, respectively. Diluted earnings per share is computed
taking into consideration common shares outstanding and dilutive potential
common shares to be issued under the Company's stock option plan.
Weighted-average common shares deemed to be outstanding for purposes of
computing diluted earnings per share totaled 5,403,130, 5,404,684, and 5,338,993
for the years ended December 31, 1999, 1998, and 1997, respectively.
-42-
43
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
There were 112,990, 146,504, and 82,585 incremental shares related to
the assumed exercise of stock options included in the computation of diluted
earnings per share for the years ended December 31, 1999, 1998 and 1997,
respectively. Options to purchase 152,875 and 110,625 shares of common stock
with a weighted-average exercise price of $16.62 and $18.00 were outstanding at
December 31, 1999 and 1997, respectively, but were excluded from the computation
of common share equivalents because their exercise prices were greater than the
average market price of the common shares.
12. 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, 1999 and 1998.
13. ADVERTISING
Advertising costs are expensed when incurred.
14. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents are
comprised of cash and due from banks.
15. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1999 consolidated financial statement presentation.
NOTE B -- INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of investment securities at December 31 are shown below.
1999
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
Available for sale:
U.S Government and agency obligations $52,314 $ 6 $2,384 $49,936
Obligations of state and political subdivisions 3,414 14 26 3,402
------- ---- ------ -------
Total investment securities $55,728 $ 20 $2,410 $53,338
======= ==== ====== =======
1998
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
Held to maturity:
U.S Government and agency obligations $14,704 $ 28 $ 40 $14,692
======= ==== ====== =======
Available for sale:
U.S Government and agency obligations $75,120 $397 $ 251 $75,266
Obligations of state and political subdivisions 9,695 82 11 9,766
------- ---- ------ -------
Total securities available for sale $84,815 $479 $ 262 $85,032
======= ==== ====== =======
-43-
44
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
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.
1999 1998
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
Due in three years or less $ 6,796 $ 6,767 $ 9,481 $ 9,604
Due after three years through five years 4,825 4,710 5,746 5,767
Due after five years through ten years 34,777 32,893 36,540 36,673
Due after ten years 9,330 8,968 33,048 32,988
------- ------- ------- -------
$55,728 $53,338 $84,815 $85,032
======= ======= ======= =======
The amortized cost and estimated fair value of investment securities
designated as held to maturity by term to maturity at December 31, 1998, are
shown below.
ESTIMATED
AMORTIZED FAIR
COST VALUE
(In thousands)
Due in three years or less $ 807 $ 806
Due after three years through five years 15 15
Due after five years through ten years 376 378
Due after ten years 13,506 13,493
------- -------
$14,704 $14,692
======= =======
Proceeds from sale of investment securities designated as available for
sale during the year ended December 31, 1999, totaled $41.0 million, resulting
in a realized loss of $2.1 million on such sales.
Proceeds from sales of investment securities designated as available
for sale during the year ended December 31, 1998, totaled $12.8 million,
resulting in a realized gain of $277,000 on such sales.
Proceeds from sales of investment securities designated as available
for sale during the year ended December 31, 1997, totaled $8.4 million,
resulting in a realized loss of $70,000 on such sales.
At December 31, 1999 and 1998, investment securities with an aggregate
book value of $48.8 million and $46.3 million, respectively, were pledged as
collateral for public deposits.
-44-
45
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
NOTE C -- LOANS RECEIVABLE
- --------------------------
The composition of the loan portfolio, including loans held for sale,
is as follows at December 31:
1999 1998
(In thousands)
Real estate mortgage (primarily residential) $320,033 $263,508
Installment, net of unearned interest of $2,214 and $2,729 66,391 59,397
Commercial and other 126,191 91,519
Credit card 1,486 1,405
-------- --------
514,101 415,829
Less:
Allowance for loan losses 6,132 4,583
-------- --------
$507,969 $411,246
======== ========
The Company's lending efforts have historically focused on real estate
mortgages and consumer installment loans, which comprised approximately $386.4
million, or 76%, of the total loan portfolio at December 31, 1999, and
approximately $322.9 million, or 79%, of the total loan portfolio at December
31, 1998. Historically, such loans have been conservatively underwritten with
sufficient collateral or cash down payments to provide the Company with adequate
collateral coverage in the event of default. Nevertheless, the Company, as with
any lending institution, is subject to the risk that real estate values or
economic conditions could deteriorate in its primary lending areas within Ohio,
thereby impairing collateral values. However, management is of the belief that
real estate values and economic conditions in the Company's primary lending
areas are presently stable.
As stated previously, the Company has sold whole loans and
participating interests in loans in the secondary market, retaining servicing on
the loans sold. Loans sold and serviced for others totaled approximately $118.1
million, $112.2 million, and $75.0 million at December 31, 1999, 1998, and 1997,
respectively.
The activity in the allowance for loan losses is summarized as follows
for the years ended December 31:
1999 1998 1997
(In thousands)
Balance at beginning of period $ 4,583 $4,000 $3,169
Provision charged to operations 2,432 1,266 1,171
Charge-offs (1,115) (829) (492)
Recoveries 232 146 152
------- ------ ------
Balance at end of period $ 6,132 $4,583 $4,000
======= ====== ======
At December 31, 1999, 1998, and 1997, the Company had nonaccrual and
nonperforming loans totaling approximately $3.2 million, $2.4 million, and $1.7
million, respectively. Interest that would have been recognized had nonaccrual
loans performed pursuant to contractual terms totaled approximately $287,000,
$162,000, and $121,000 for the years ended December 31, 1999, 1998, and 1997,
respectively.
-45-
46
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
NOTE D -- OFFICE PREMISES AND EQUIPMENT
- ---------------------------------------
Office premises and equipment are summarized at December 31 as follows:
1999 1998
(In thousands)
Land and buildings $10,163 $ 8,929
Furniture and equipment 4,524 4,697
Leasehold improvements 251 194
------- -------
14,938 13,820
Less accumulated depreciation and amortization (5,682) (5,868)
------- -------
$ 9,256 $ 7,952
======= =======
-46-
47
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
NOTE E -- DEPOSITS
- ------------------
Deposit balances at December 31 are summarized as follows:
DEPOSIT TYPE AND 1999 1998
INTEREST RATE RANGE AMOUNT RATE AMOUNT RATE
(Dollars in thousands)
Demand deposit accounts $ 42,598 -- $ 39,655 --
Savings accounts 45,901 2.66% 50,842 2.67%
NOW accounts 31,824 2.04% 29,622 1.91%
Money market deposit accounts 13,039 3.13% 13,570 3.15%
Premium investment accounts 30,150 5.18% 21,012 4.34%
Select investment accounts 12,728 4.10% 16,456 4.19%
-------- --------
Total transaction accounts 176,240 171,157
Certificates of deposit
3.00 -- 4.99% 86,208 37,670
5.00 -- 6.99% 225,869 255,997
7.00 -- 9.00% 563 850
-------- --------
Total certificates of deposit 312,640 5.35% 294,517 5.49%
-------- --------
Total deposits $488,880 4.31% $465,674 4.32%
======== ==== ======== ====
The Company had deposit accounts with balances in excess of $100,000
totaling $139.3 million and $125.8 million at December 31, 1999 and 1998,
respectively.
Interest expense on deposits is summarized as follows for the years
ended December 31:
1999 1998 1997
(In thousands)
NOW accounts $ 635 $ 584 $ 588
Savings accounts 1,406 1,457 1,494
Money market deposit accounts 424 409 418
Premium investment accounts 994 993 1,027
Select investment accounts 707 625 247
Certificates of deposit 15,260 15,327 12,517
------- ------- -------
$19,426 $19,395 $16,291
======= ======= =======
The contractual maturities of outstanding certificates of deposit are
summarized as follows at December 31:
1999 1998
(In thousands)
Less than one year $232,063 $215,539
One year through three years 74,220 72,495
More than three years 6,357 6,483
-------- --------
$312,640 $294,517
======== ========
-47-
48
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
NOTE F -- ADVANCES FROM THE FEDERAL HOME LOAN BANK
- --------------------------------------------------
Advances from the Federal Home Loan Bank, collateralized at December
31, 1999 and 1998 by pledges of certain residential mortgage loans totaling
$89.5 million and $54.7 million, respectively, and the Banks' investment in
Federal Home Loan Bank stock, are summarized as follows:
MATURING IN
YEAR ENDED DECEMBER 31,
INTEREST RATE DECEMBER 31, 1999 1998
5.90% to 7.25% 1999 $ -- $ 2,168
5.80% to 6.50% 2000 24,159 3,463
4.87% to 8.05% 2001 13,925 6,975
6.43% to 6.50% 2002 4,000 1,000
6.50% 2003 2,500 2,500
7.85% to 8.30% 2004 1,485 1,963
5.14% to 8.10% 2005 4,006 4,006
6.50% 2006 418 621
5.24% 2008 -- 6,000
5.21% to 5.30% 2009 2,505 --
7.40% 2010 976 1,310
6.95% 2011 1,262 1,476
6.70% 2017 959 986
4.87% 2018 3,485 3,990
------- -------
$59,680 $36,458
======= =======
Weighted-average interest rate 6.14% 5.88%
======= =======
NOTE G -- FEDERAL INCOME TAXES
- ------------------------------
The provision for federal income taxes differs from that computed at
the statutory corporate tax rate for the year ended December 31 as follows:
1999 1998 1997
(In thousands)
Federal income taxes computed at the statutory rate $2,096 $3,555 $2,338
Increase (decrease) in taxes resulting from:
Interest income on municipal loans and obligations
of state and political subdivisions (144) (90) (83)
Amortization of goodwill 11 11 11
Nondeductible merger-related expenses 102 -- 159
Other 18 (61) 16
------ ------ ------
Federal income tax provision per consolidated
financial statements $2,083 $3,415 $2,441
====== ====== ======
-48-
49
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
The composition of the Company's net deferred tax asset at December 31
is as follows:
1999 1998
(In thousands)
Taxes (payable) refundable on temporary
differences at statutory rate:
Deferred tax assets:
Book/tax difference of loan loss allowance $ 1,799 $ 1,553
Unrealized losses on securities designated as available for sale 812 --
Recapture of federal income taxes resulting from loss carrybacks 277 --
Unrealized gains on loans held for sale -- 4
Retirement expense -- 97
Other 5 --
------- -------
Total deferred tax assets 2,893 1,654
Deferred tax liabilities:
Deferred loan origination costs (281) (337)
Federal Home Loan Bank stock dividends (533) (442)
Book/tax difference of depreciation (110) (119)
Unrealized gains on securities designated as available for sale -- (74)
Mortgage servicing rights (323) (274)
Book/tax difference on bad debt reserves (124) (152)
Other (1) (2)
------- -------
Total deferred tax liabilities (1,372) (1,400)
------- -------
Net deferred tax asset $ 1,521 $ 254
======= =======
The Company has not recorded a valuation allowance for any portion of
the net deferred tax asset at December 31, 1999 and 1998. Such estimate was
based on the amount of income taxes subject to recovery in carryback years.
NOTE H -- RELATED PARTY TRANSACTIONS
- ------------------------------------
In the normal course of business, the Company has made loans to its
directors, officers, and 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, 1999, 1998, and 1997 totaled approximately $2.7
million, $2.2 million and $1.7 million, respectively.
The Company had also received demand and time deposits of approximately
$10.5 million, $18.4 million, and $5.3 million at December 31, 1999, 1998, and
1997 from directors, officers and their related business interests.
NOTE I -- EMPLOYEE BENEFIT PLANS
- --------------------------------
The Company has a profit-sharing and 401(k) plan covering all employees
who have attained the age of twenty-one and completed one full year of service.
The profit-sharing plan is non-contributory and contributions to the plan are at
the discretion of the Board of Directors. The Company contributed $165,000 and
$123,000 to the plan for the years ended December 31, 1998 and 1997,
respectively. The Company did not contribute to the plan for the year ended
December 31, 1999.
-49-
50
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
The 401(k) plan allows employees to make voluntary, tax-deferred
contributions up to 15% of their base annual compensation. The Company provides,
at its discretion, a 50% matching of funds for each participant's contribution,
subject to a maximum of 6% of base compensation. For 1998 and 1997, if the
participant elected to invest their contributions in the common stock of Oak
Hill Financial, Inc., the Company provided a 100% matching of each participant's
contribution. The Company's matching contributions under the 401(k) plan totaled
$99,000, $175,000 and $122,000 for the years ended December 31, 1999, 1998, and
1997, respectively.
Towne Bank had established an Employee Stock Ownership Plan ("ESOP")
which was to provide retirement benefits for substantially all employees who had
completed six months of service and had attained the age of twenty-one. The ESOP
originally borrowed $207,000 from an independent third-party lender, payable
over a seven year period, to purchase stock. The sole security of the loan was
the acquired stock and, while Towne had not guaranteed the loan, future
contributions to retire the loan were paid to the ESOP from retained earnings.
During 1999, the loan was repaid in full. Towne recognized expenses totaling
$15,000, $30,000 and $29,000 related to the ESOP for the years ended December
31, 1999, 1998 and 1997, respectively. Management anticipates termination of
Towne's ESOP during 2000.
NOTE J -- COMMITMENTS
- ---------------------
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers, including commitments to extend credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the statement of financial condition. The contract or
notional amounts of the commitments reflect the extent of the Company's
involvement in such financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as those utilized for on-balance-sheet instruments.
At December 31, 1999, the Company had outstanding commitments of
approximately $29.6 million to originate variable rate residential and
commercial loans. Also, the Company had unused lines of credit and letters of
credit totaling approximately $75.3 million and $731,000, respectively, as of
December 31, 1999. In the opinion of management, outstanding loan commitments
equaled or exceeded prevalent market interest rates as of December 31, 1999,
such commitments were underwritten in accordance with normal loan underwriting
policies, and all disbursements will be funded via cash flow from operations and
existing excess liquidity.
The Company has also entered into lease agreements for office premises
and equipment under operating leases which expire at various dates through 2009.
The following table summarizes minimum payments due under lease agreements by
year:
YEAR ENDING
DECEMBER 31, (Dollars in thousands)
2000 $ 319
2001 264
2002 246
2003 157
2004 and thereafter 264
------
$1,250
======
Total rental expense under operating leases was $304,000, $250,000 and
$226,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
-50-
51
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
NOTE K -- REGULATORY CAPITAL
- ----------------------------
Oak Hill and Towne are subject to the regulatory capital requirements
of the Federal Deposit Insurance Corporation (the "FDIC"). Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have direct material effect on the Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Banks must meet specific capital guidelines that involve quantitative
measures of the Banks' assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Banks' capital accounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
The FDIC has adopted risk-based capital guidelines to which the Banks
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 years ended December 31, 1999 and 1998, each of the Banks
was notified by its primary federal regulator that it was categorized as
"well-capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well-capitalized" the Banks must maintain minimum Tier 1
capital, total risk-based capital, and Tier 1 leverage ratios of 6%, 10%, and
5%, respectively.
As of December 31, 1999 and 1998, management believes that Oak Hill and
Towne have met all of the capital adequacy requirements to which they are
subject. The Banks' Tier 1 capital, total risk-based capital, and Tier 1
leverage ratios at December 31, 1999 and 1998 are set forth in the following
table.
-51-
52
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
OAK HILL BANKS
AS OF DECEMBER 31, 1999
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
Total capital
(to risk-weighted assets) $35,855 11.5% $24,861 greater than or equal to 8.0% $31,076 greater than or equal to 10.0%
Tier 1 capital
(to risk-weighted assets) $31,966 10.3% $12,430 greater than or equal to 4.0% $18,645 greater than or equal to 6.0%
Tier 1 leverage $31,966 7.5% $16,976 greater than or equal to 4.0% $21,221 greater than or equal to 5.0%
AS OF DECEMBER 31, 1998
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
Total capital
(to risk-weighted assets) $41,074 13.4% $24,562 greater than or equal to 8.0% $30,702 greater than or equal to 10.0%
Tier 1 capital
(to risk-weighted assets) $37,234 12.1% $12,281 greater than or equal to 4.0% $18,421 greater than or equal to 6.0%
Tier 1 leverage $37,234 8.7% $17,125 greater than or equal to 4.0% $21,406 greater than or equal to 5.0%
TOWNE BANK
AS OF DECEMBER 31, 1999
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
Total capital
(to risk-weighted assets) $13,630 10.3% $10,588 greater than or equal to 8.0% $13,235 greater than or equal to 10.0%
Tier 1 capital
(to risk-weighted assets) $11,793 8.9% $ 5,294 greater than or equal to 4.0% $ 7,941 greater than or equal to 6.0%
Tier 1 leverage $11,793 6.8% $ 6,927 greater than or equal to 4.0% $ 8,658 greater than or equal to 5.0%
AS OF DECEMBER 31, 1998
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
Total capital
(to risk-weighted assets) $ 9,016 15.6% $ 4,624 greater than or equal to 8.0% $ 5,780 greater than or equal to 10.0%
Tier 1 capital
(to risk-weighted assets) $ 8,749 15.1% $ 2,312 greater than or equal to 4.0% $ 3,468 greater than or equal to 6.0%
Tier 1 leverage $ 8,749 7.1% $ 4,915 greater than or equal to 4.0% $ 8,144 greater than or equal to 5.0%
-52-
53
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
The Company's management believes, that under the current regulatory
capital regulations, the Banks will continue to meet their 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
the primary market areas, could adversely affect future earnings and
consequently, the ability to meet future minimum regulatory capital
requirements.
NOTE L -- STOCK OPTION PLAN
- ---------------------------
The Company initiated a Stock Option Plan in August 1995 (the "1995
Plan") that provided for the issuance of 500,000 shares of authorized, but
unissued shares of common stock. In 1999, the Company amended and restated the
1995 Plan to provide for an additional 300,000 shares of authorized, but
unissued shares of common stock, which now totals 800,000 shares. 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 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:
1999 1998 1997
Net earnings (In thousands) As reported $4,082 $7,040 $4,437
====== ====== ======
Pro forma $3,613 $6,758 $4,158
====== ====== ======
Basic earnings per share As reported $ .77 $1.34 $ .84
====== ====== ======
Pro forma $ .68 $1.29 $ .79
====== ====== ======
Diluted earnings per share As reported $ .76 $1.30 $ .83
====== ====== ======
Pro forma $ .67 $1.25 $ .78
====== ====== ======
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 1999, 1998, and 1997,
respectively: dividend yield of 2.5% for 1999 and 4.0% for 1998 and 1997 and
expected volatility of 10.0% for all years, risk-free interest rates of 6.00%,
5.50% and 5.50%, and expected lives of six years.
-53-
54
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
A summary of the status of the Company's Stock Option Plan as of
December 31, 1999, 1998, and 1997 and changes during the periods ended on those
dates is presented below:
1999 1998 1997
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 542,126 $12.13 438,689 $10.41 209,502 $ 6.67
Granted 172,875 16.75 120,750 17.25 233,750 13.66
Exercised (83,875) 5.40 (13,188) 6.23 (3,313) 4.68
Forfeited (5,825) 15.97 (4,125) 2.79 (1,250) 7.80
------- ------- -------
Outstanding at end of year 625,301 $14.23 542,126 $12.13 438,689 $10.41
======= ====== ======= ====== ======= ======
Options exercisable at year-end 609,674 396,025 273,375
======= ======= =======
Weighted-average fair value of
options granted during the year $ 4.11 $ 2.27 $ 1.66
====== ====== ======
The following information applies to options outstanding at December
31, 1999:
Number outstanding 625,301
Range of exercise prices $2.79 - $18.05
Weighted-average exercise price $14.23
Weighted-average remaining contractual life 8.4 years
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55
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
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, 1999 and 1998, and the
results of its operations and its cash flows for each of the years ended
December 31, 1999, 1998, and 1997.
OAK HILL FINANCIAL, INC.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
1999 1998
ASSETS
Cash and due from banks $ 65 $ 28
Interest-bearing deposits in Oak Hill Banks 2,161 1,572
Investment in Oak Hill Banks 30,467 34,217
Investment in Action Finance Co. 1,975 1,929
Investment in Towne Bank 12,277 9,104
Office premises and equipment -- net 1,105 --
Prepaid expenses and other assets 222 117
------- -------
Total assets $48,272 $46,967
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 548 $ 393
Stockholders' equity
Common stock 2,683 2,641
Additional paid-in capital 4,650 4,125
Retained earnings 42,724 40,434
Less cost of treasury stock (755) (755)
Required contributions for shares acquired by
Employee Stock Ownership Plan -- (15)
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects (1,578) 144
------- -------
Total stockholders' equity 47,724 46,574
------- -------
Total liabilities and stockholders' equity $48,272 $46,967
======= =======
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56
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
OAK HILL FINANCIAL, INC.
CONDENSED STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands)
1999 1998 1997
REVENUE
Interest income $ 61 $ 41 $ 71
Equity in earnings of subsidiaries 4,498 7,205 4,759
------ ------ ------
Total revenue 4,559 7,246 4,830
EXPENSES
General and administrative 574 292 448
------ ------ ------
Earnings before federal income
tax credits 3,985 6,954 4,382
Federal income tax credits (97) (86) (55)
------ ------ ------
NET EARNINGS $4,082 $7,040 $4,437
====== ====== ======
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57
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
OAK HILL FINANCIAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings for the year $ 4,082 $ 7,040 $ 4,437
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Undistributed earnings of consolidated subsidiaries (1,176) (3,531) (3,582)
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (1,210) 7 (87)
Other liabilities 155 112 109
------- ------- -------
Net cash provided by operating activities 1,851 3,628 877
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Action Finance Company -- (2,000) --
(Increase) decrease in interest-bearing deposits (589) (568) 1,040
------- ------- -------
Net cash provided by (used in) investing activities (589) (2,568) 1,040
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 567 114 21
Purchase of treasury stock -- (727) --
Dividends on common shares (1,792) (1,385) (982)
------- ------- -------
Net cash used in financing activities (1,225) (1,998) (961)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 37 (938) 956
Cash and cash equivalents at beginning of year 28 966 10
------- ------- -------
Cash and cash equivalents at end of year $ 65 $ 28 $ 966
======= ======= =======
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58
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
NOTE N -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- -----------------------------------------------------
The following table summarizes the Company's quarterly results for the
years ended December 31, 1999 and 1998.
THREE MONTHS ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999: (In thousands, except per share data)
Total interest income $10,818 $10,855 $ 11,742 $11,835
Total interest expense 5,425 5,264 5,672 6,058
------- ------- -------- -------
Net interest income 5,393 5,591 6,070 5,777
Provision for losses on loans 310 409 1,175 538
Other income (loss) 768 686 (1,589) 543
General, administrative and other expense 3,150 3,186 4,219 4,087
------- ------- -------- -------
Earnings (loss) before income taxes (credits) 2,701 2,682 (913) 1,695
Federal income taxes (credits) 886 878 (320) 639
------- ------- -------- -------
Net earnings (loss) $ 1,815 $ 1,804 $ (593) $ 1,056
======= ======= ======== =======
Basic earnings (loss) per share $ .34 $ .34 $ (.11) $ .20
======= ======= ======== =======
Diluted earnings (loss) per share $ .34 $ .33 $ (.11) $ .20
======= ======= ======== =======
THREE MONTHS ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998: (In thousands, except per share data)
Total interest income $ 9,796 $10,143 $ 10,751 $10,909
Total interest expense 5,017 5,191 5,485 5,646
------- ------- -------- -------
Net interest income 4,779 4,952 5,266 5,263
Provision for losses on loans 283 318 338 327
Other income 731 809 816 893
General, administrative and other expense 2,837 2,805 3,011 3,135
------- ------- -------- -------
Earnings before income taxes 2,390 2,638 2,733 2,694
Federal income taxes 777 867 898 873
------- ------- -------- -------
Net earnings $ 1,613 $ 1,771 $ 1,835 $ 1,821
======= ======= ======== =======
Basic earnings per share $ .31 $ .33 $ .35 $ .35
======= ======= ======== =======
Diluted earnings per share $ .30 $ .32 $ .34 $ .34
======= ======= ======== =======
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59
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
NOTE O -- SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
- -------------------------------------------------------
Obligations for securities sold under agreements to repurchase were
collateralized at December 31, 1999 and 1998 by investment securities with a
book value including accrued interest of approximately $3.1 million and $3.0
million and a market value of approximately $3.1 million and $3.1 million,
respectively. The maximum balance of repurchase agreements outstanding at any
month-end during the years ended December 31, 1999 and 1998 was $1.9 million and
$3.1 million, and the average month-end balance outstanding for the years was
approximately $934,000 and $1.1 million, respectively.
NOTE P -- BUSINESS COMBINATION
- ------------------------------
On October 1, 1999, the Company completed a business combination
whereby Towne Financial merged with and into the Company and The Blue Ash
Building and Loan, renamed Towne Bank, became a wholly-owned subsidiary of the
Company. The business combination was accounted for as a pooling-of-interests
and, accordingly, the assets, liabilities and capital of the respectively
combined companies was added together at historic carrying value. Unaudited
pro-forma condensed, combined financial information of the Company and Towne as
of and for the year ended December 31, 1998, is as follows:
OAK HILL TOWNE PRO-FORMA
FINANCIAL FINANCIAL COMBINED
(unaudited) (unaudited)
(In thousands, except share data)
Total assets $429,979 $122,670 $552,649
======== ======== ========
Total liabilities $392,509 $113,566 $506,075
======== ======== ========
Shareholders' equity $ 37,470 $ 9,104 $ 46,574
======== ======== ========
Total revenue $ 35,531 $ 9,317 $ 44,848
Total expense 26,572 7,821 34,393
-------- -------- --------
Net earnings $ 6,041 $ 999 $ 7,040
======== ======== ========
Basic earnings per share $ 1.37 $ 4.77 $ 1.34
======== ======== ========
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Oak Hill Financial, Inc.
We have audited the accompanying consolidated statements of financial
condition of Oak Hill Financial, Inc. as of December 31, 1999, 1998 and 1997 and
the related consolidated statements of earnings, stockholders' equity,
comprehensive income, and cash flows for the years ended December 31, 1999 and
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Oak
Hill Financial, Inc. as of December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the years ended
December 31, 1999, 1998 and 1997, in conformity with generally accepted
accounting principles.
Cincinnati, Ohio
February 11, 2000
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