UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
-------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
Commission File Number 0-26876
OAK HILL FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1010517
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14621 S.R. 93
Jackson, OH 45640
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 286-3283
-------------------------
Securities 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 the 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 $63,283,968.00 on February 21, 2002.
There were 5,276,508 shares of the registrant's common stock
outstanding at February 21, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the
year ended December 31, 2001 are incorporated by reference into Part II and IV.
Portions of the proxy statement dated February 21, 2002 for the
Annual Meeting of Stockholders to be held April 9, 2002 are incorporated by
reference in to Part III.
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TABLE OF CONTENTS
Page
Part I
Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 28
Part III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and Management 28
Item 13. Certain Relationships and Related Transactions 28
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28
Signatures 31
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PART I
Item 1. Business.
Oak Hill Financial, Inc.
Oak Hill Financial, Inc., an Ohio corporation (the "Company") formed in
1981, is a financial holding company registered under the Bank Holding Company
Act of 1956, as amended (the "Act"), and is subject to regulation by the Federal
Reserve Board. The Company engages indirectly in the business of commercial
banking and other permissible activities closely related to banking and consumer
finance lending through five wholly owned subsidiaries, Oak Hill Banks ("Oak
Hill"), Towne Bank ("Towne"), (collectively, hereinafter the "Banks"), Action
Finance Company ("Action"), McNelly, Patrick & Associates ("MPA") and Oak Hill
Title Agency, LLC ("Oak Hill Title"). The Company provides management and
similar services for its subsidiaries. Since it does not conduct any operating
businesses itself, 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 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 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 services provided by the Company's subsidiaries to their
customers includes commercial lending, real estate lending, consumer credit,
credit card, other personal loan financing, group health insurance and other
employee benefits, and title services for commercial and residential real estate
transactions. Each of the subsidiaries operates under the direction of a Board
of Directors and officers that are separate from the Company.
Lending Activities
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
89% of the Company's loan portfolio at December 31, 2001. 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 five years, along with a reconciliation to
loans receivable, net of the allowance for loan losses.
At December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of loan:
1-4 family residential
loans $238,832 37.0% $240,593 40.1% $223,365 44.0% $179,972 43.8% $172,214 47.7%
Commercial and other
loans 337,308 52.2 275,500 46.0 215,205 42.3 170,579 41.5 143,027 39.6
Consumer loans 76,623 11.8 88,585 14.8 74,045 14.6 63,873 15.5 48,196 13.4
Credit cards 1,663 0.3 1,605 0.3 1,486 0.3 1,405 0.3 1,360 0.4
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 654,426 101.3 606,283 101.2 514,101 101.2 415,829 101.1 364,797 101.1
Less:
Allowance for loan
losses (8,345) (1.3) (7,197) (1.2) (6,132) (1.2) (4,583) (1.1) (4,000) (1.1)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans receivable,
net $646,081 100.0% $599,086 100.0% $507,969 100.0% $411,246 100.0% $360,797 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
-3-
The following is maturity information with respect to commercial loans
at December 31, 2001.
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)
$ 95,601 6.42% $ 55,598 6.99% $ 45,858 7.48% $140,251 8.18% $337,308
======= ==== ======= ==== ======= ==== ======= ==== =======
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 43% 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 to the Federal National Mortgage
Association ("FNMA") or on a servicing-released basis to another financial
institution.
The Company makes fixed rate loans on one- to four-family residences up
to 97% 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 $238.8 million at December 31, 2001, and
represented 37.0% of loans at such date. At such date, loans secured by
residential real estate with outstanding balances of approximately $426,000, or
0.2%, 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 25 years and
loan-to-value ratios of up to 80%. To a much lesser degree, the Company will
also make unsecured commercial loans, which are also typically priced at spreads
to prime and have maturities of up to one year.
Loan officers review the 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 $119.7 million
at December 31, 2001, and represented 35.5% of commercial loans at that date. At
-4-
such date, commercial loans that were more than 90 days delinquent or
nonaccruing totaled approximately $506,000, or 0.4% of its commercial loan
portfolio. The aggregate amount of the Company's commercial loans with real
estate as primary or secondary collateral was approximately $217.6 million at
December 31, 2001, and at such date, approximately $3.3 million in outstanding
balances, or 1.5% of such loans, were more than 90 days delinquent or
nonaccruing.
Consumer Loans. The Company offers several consumer loan products,
including installment loans and credit cards.
The Company has 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 generally finances cars that are
seven years old or newer. These loans generally have fixed rates and maturities
of 36 to 66 months.
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, 2001, the Company had approximately $78.3 million in
its consumer loan and credit card portfolio, which was 12.1% of the Company's
total loans. Approximately $984,000 of these loans were over 90 days delinquent
or nonaccruing on that date, which represented 1.3% 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.
Underwriting guidelines for all branches and loan types are set by
senior management at the home office. Consumer loan processing and underwriting
are decentralized; however, all other loans, including real estate and
commercial loans, are generally processed and underwritten centrally at the home
office. 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.
Branch managers have the authority to approve loans up to $120,000 that
meet the underwriting criteria set by management, and area managers have
authority for amounts up to $350,000. Any loan greater than $350,000 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
-5-
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, 2001, only
$5.2 million or 0.80% of the Company's total loan portfolio was over 90 days
delinquent or nonaccruing. As of December 31, 2001, the Company's level of
nonperforming assets to total assets was 0.87%.
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,
2001, approximately $13,000 in outstanding balances, or 0.8% of credit card
loans were nonperforming.
On December 31, 2001, the Company held $1.6 million 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 value of the related
mortgage loan exceeds the estimated net realizable value of the property.
At December 31, 2001, the Company had no impaired loans, as defined
under SFAS No. 114. At December 31, 2000, the Company had investment in impaired
loans, as defined under SFAS No. 114, totaling approximately $695,000. The
Company maintained an allowance for credit losses related to such impaired loans
of $460,000 at December 31, 2000.
The following is a summary of the Company's loan loss experience and
selected ratios for the periods presented.
Year Ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance for loan losses
(beginning of period).................. $ 7,197 $ 6,132 $ 4,583 $ 4,000 $ 3,169
Loans charged off:
1-4 family residential real estate...... 172 219 80 139 22
Multi-family and commercial real estate 50 37 9 - -
Commercial and industrial loans...... 239 2 186 180 68
Consumer loans........................ 1,365 1,155 840 510 402
------- ------- ------- ------- -------
Total loans charged off............ 1,826 1,413 1,115 829 492
------- ------- ------- ------- -------
Recoveries of loans previously charged off:
1-4 family residential real estate...... 20 20 21 1 45
Multi-family and commercial real estate 28 3 - - -
Commercial and industrial loans...... 8 1 6 15 5
Consumer loans........................ 327 191 205 130 102
------- ------- ------- ------- -------
Total recoveries.................... 383 215 232 146 152
------- ------- ------- ------- -------
Net loans charged off..................... 1,443 1,198 883 683 340
Provision for losses on loans.................. 2,591 2,263 2,432 1,266 1,171
------- ------- ------- ------- -------
Allowance for loan losses
(end of period)........................... $ 8,345 $ 7,197 $ 6,132 $ 4,583 $ 4,000
======= ======= ======= ======= =======
Loans outstanding:
Average, net.............................. $623,486 $557,038 $449,873 $387,057 $322,807
End of period........................... $654,426 $606,283 $514,101 $415,829 $364,797
Ratio of allowance for loan losses to
loans outstanding at end of period...... 1.28% 1.19% 1.19% 1.10% 1.10%
Ratio of net charge-offs to average
loans outstanding........................ 0.23% 0.22% 0.20% 0.18% 0.11%
At December 31, 2001, 2000 and 1999, the Company had nonperforming
loans totaling $5.2 million, $2.9 million, and $3.2 million, respectively.
Interest income that would have been recognized if such loans had performed in
accordance with contractual terms totaled approximately $416,000, $262,000, and
$287,000, for the years ended December 31, 2001, 2000 and 1999, respectively.
There was no interest income recognized on such loans during any of the periods.
-6-
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 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 that 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, 2001, 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 southern and central Ohio economy and
employment levels could result in the Company experiencing increased levels of
nonperforming assets and charge-offs, increased provisions for loan losses and
reductions in income. Additionally, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the recognition of additions to the
allowance based on their judgment of information available to them at the time
of their examination.
The following table summarizes nonperforming assets by category.
Year Ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Real estate:
Nonaccrual................................... $ 386 $ 436 $ 1,092 $ 371 $ 606
Past due 90 days or more (1)................. 40 158 411 843 608
Commercial and industrial loans:
Nonaccrual................................... 2,813 205 444 251 143
Past due 90 days or more (1)................. 993 1,487 744 596 82
Consumer and other:
Nonaccrual................................... 492 422 320 65 147
Past due 90 days or more (1)................. 492 161 176 295 135
------- ------- ------- ------- -------
Total nonperforming loans............... 5,216 2,869 3,187 2,421 1,721
Other real estate owned........................... 1,587 232 169 18 -
------- ------- ------- ------- -------
Total nonperforming assets.............. $ 6,803 $ 3,101 $ 3,356 $ 2,439 $ 1,721
======= ======= ======= ======= =======
Loans outstanding................................. $654,426 $606,283 $514,101 $415,829 $364,797
Allowance for loan losses to
total loans.................................. 1.28% 1.19% 1.19% 1.10% 1.10%
Nonperforming loans to total loans................ 0.80 0.47 0.62 0.58 0.47
Nonperforming assets to total assets.............. 0.87 0.45 0.56 0.43 0.36
Allowance for loan losses to
nonperforming loans.......................... 160.0% 250.9% 192.4% 189.3% 232.4%
(1) Represents accruing loans 90 days or more delinquent that are considered by
management to be well secured and in the process of collection.
As of December 31, 2001, 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.
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Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of the Company's allowance for loan losses at the
dates indicated:
At December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans(1) Amount loans(1) Amount loans(1) Amount loans(1) Amount loans(1)
(Dollars in thousands)
Balance at end of period
applicable to:
1-4 family residential real
estate..................... $2,849 36.5% $2,506 39.7% $2,278 43.4% $1,644 43.3% $1,436 47.2%
Commercial and other loans... 1,715 51.5 1,508 45.4 1,280 41.9 1,048 41.0 809 39.2
Consumer loans............... 2,164 11.7 1,903 14.6 1,263 14.4 906 15.4 721 13.2
Credit cards................. 60 0.3 53 0.3 59 0.3 56 0.3 54 0.4
Unallocated.................. 1,557 - 1,227 - 1,252 - 929 - 980 -
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total $8,345 100.0% $7,197 100.0% $6,132 100.0% $4,583 100.0% $4,000 100.0%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
(1) Percentages are based upon loans gross of the allowance for loan losses.
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 accounting principles generally
accepted in the United States of America. Assets classified as loss must be
either written off or reserved for by a specific allowance that 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, trust
preferred securities, state and local government obligations and
government-guaranteed mortgage-backed securities. The Company does not invest in
securities that 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.
All securities-related activity is reported to the Board of Directors of
the Company. General changes in investment strategy must be reviewed and
approved by the Company's Board of Directors. The Company's senior management
can purchase and sell securities on behalf of the Company in accordance with the
Company's stated investment policy.
-8-
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,
---------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Held-to-maturity:
Trust preferred securities............................... $ 3,407 $ 4,947 $ -
Available-for-sale:
U.S. Government and agency obligations................... 57,411 49,277 49,936
State and local government obligations................... 18,003 7,046 3,402
Other securities......................................... 160 157 147
------ ------ ------
Total investment securities available-for-sale...... 75,574 56,480 53,485
------ ------ ------
Total investment securities......................... $78,981 $61,427 $53,485
====== ====== ======
The following table reflects the maturities of the Company's investment
securities at December 31, 2001.
Due in Due after one year Due after five years
one year or less through five years through ten years Due after ten years
---------------- ------------------ ----------------- ------------------
Amount Rate Amount Rate Amount Rate Amount Rate Total
------ ---- ------ ---- ------ ---- ------ ---- -----
Held-to-maturity:
Trust preferred securities.. $ - - $ - - $ - - $ 3,407 9.14% $ 3,407
Available-for-sale:
U.S. Government and
agency obligations........ 514 6.38% 513 4.88% 12,850 6.53% 43,534 7.12% 57,411
Municipal obligations...... 132 5.00% 230 6.09% 1,528 5.61% 16,113 5.14% 18,003
Other securities............. - - - - - - 160 1.20% 160
--- ---- --- ---- ------ ---- ------ ---- ------
Total available-for-sale...... 646 6.09% 743 5.25% 14,378 6.44% 59,807 6.57% 75,574
--- ---- --- ---- ------ ---- ------ ---- ------
Total investment securities.. $646 6.09% $743 5.25% $14,378 6.44% $63,214 6.71% $78,981
=== ==== === ==== ====== ==== ====== ==== ======
Source of Funds
Deposit Accounts. Savings deposits are a major source of the Company's
funds. The Company offers a number of alternatives for depositors designed to
attract both commercial and regular consumer checking and savings including
regular and money market savings accounts, NOW accounts, and a variety of
fixed-maturity, fixed-rate certificates with maturities ranging from 3 to 60
months. The Company has also utilized brokered deposits as a supplement to its
local deposits when such funds are attractively priced in relation to the local
market.
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The distribution of the Company's deposit accounts by type and rate is
set forth in the following table.
At December 31,
---------------
2001 2000 1999
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Demand deposit accounts............. $ 60,840 10.0% $ 45,762 8.1% $ 42,574 8.7%
Savings accounts.................... 39,324 6.4 40,451 7.2 45,901 9.4
NOW accounts........................ 44,711 7.3 33,996 6.0 31,824 6.5
Money market deposit accounts....... 9,176 1.5 11,041 2.0 13,039 2.7
Premium investment accounts......... 60,652 9.9 47,339 8.5 30,037 6.1
Select investment accounts.......... 13,008 2.1 14,609 2.6 12,728 2.6
------- ----- ------- ----- ------- -----
Total transaction accounts.......... 227,711 37.2 193,198 34.4 176,103 36.0
Certificates of deposit:
2.00 - 4.99%................... 252,864 41.3 11,838 2.1 86,208 17.7
5.00 - 6.99%................... 130,574 21.3 353,726 62.9 225,869 46.2
7.00 - 8.00%................... 1,055 0.2 3,652 0.6 563 0.1
------- ----- ------- ----- ------- -----
Total certificates of deposit....... 384,493 62.8 369,216 65.6 312,640 64.0
------- ----- ------- ----- ------- -----
Total deposits...................... $612,204 100.0% $562,414 100.0% $488,743 100.0%
======= ===== ======= ===== ======= =====
The following table presents various interest rate categories and certain
information concerning maturities of the Company's certificates of deposit at
December 31, 2001.
One to Over
Within three three
Certificates of Deposit Accounts one year years years Total
-------------------------------- -------- ----- ----- -----
(In thousands)
4.00% and less...................................... $ 52,956 $ 23,659 $ 6 $ 76,621
4.01% to 5.00%...................................... 123,336 48,505 6,858 178,699
5.01% to 6.00%...................................... 52,600 19,082 3,503 75,185
6.01% to 7.00%...................................... 51,286 859 1,212 53,357
7.01% to 8.00%...................................... 581 50 - 631
------- ------ ------ -------
Total............................................... $280,759 $92,155 $11,579 $384,493
======= ====== ====== =======
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, 2001.
Maturity Period Amount
--------------- ------
(In thousands)
Three months or less $ 30,634
Over three months through six months 17,283
Over six through 12 months 38,415
Over 12 months 34,668
-------
Total $121,000
=======
Borrowings. In addition to deposits and repayment of loan principal, the
Company obtains funds necessary for its lending activities and other general
business purposes through loans (advances) from the Federal Home Loan Bank
("FHLB") of Cincinnati. Advances from the FHLB may be on a secured or unsecured
-10-
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 loans and to meet short-term liquidity
needs. As of December 31, 2001, the Banks had outstanding FHLB advances totaling
$93.9 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.
In March 2000, a Delaware trust owned by the Company (the "Trust"),
issued $5.0 million of mandatorily redeemable debt securities. The debt
securities issued by the Trust are included in the Company's regulatory capital,
specifically as a component of Tier I capital. The subordinated debentures are
the sole assets of the Trust, and the Company owns all of the common securities
of the Trust. Interest payments on the debt securities are made semi-annually at
an annual fixed interest rate of 10.875% and are reported as a component of
interest expense on borrowings. The net proceeds received by the Company from
the sale of the debt securities were used for general corporate purposes,
including repurchasing the Company's common stock and providing general working
capital.
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,
-----------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Maximum amount outstanding:
FHLB advances $ 93,942 $86,319 $71,147
Junior subordinated debentures 5,000 5,000 -
Other borrowings 5,918 2,443 1,172
------- ------ ------
$104,860 $93,762 $72,319
======= ====== ======
Average amount of FHLB advances and other borrowings
outstanding $ 87,151 $72,029 $54,192
======= ====== ======
Weighted-average interest rate of total borrowings 5.81% 6.73% 6.14%
The following table sets forth certain information as to the Company's
FHLB advances and other borrowings at the dates indicated.
December 31,
------------
2001 2000 1999
---- ---- ----
(In thousands)
FHLB advances $ 93,942 $70,152 $59,680
Junior subordinated debentures 5,000 5,000 -
Other borrowings 5,918 2,443 1,172
-------- ------ ------
Total borrowings $104,860 $77,595 $60,852
======= ====== ======
Asset and Liability Management. Net interest income, the difference
between the yield on interest-earning assets and the cost of interest-bearing
liabilities, is the principal component of the Company's net earnings. The
ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rate levels. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap", provides
an indication of the extent to which a financial institution's interest rate
spread will be affected by changes interest rates. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities and is considered negative when the amount
of interest-sensitive liabilities exceeds the amount of interest-sensitive
assets. Generally, during a period of rising interest rates, a negative gap
within shorter maturities would adversely affect net interest income, while a
positive gap within shorter maturities would result in an increase in net
interest income. Conversely, during a period of falling interest rates, a
negative gap within shorter maturities would result in an increase in net
interest income, while a positive gap within shorter maturities would have the
opposite effect.
In recognition of the foregoing factors, the Board of Directors of each
of the Banks and Action have implemented an asset and liability management
strategy directed toward improving each entity's interest rate sensitivity. The
-11-
principal common elements of such strategies include (1) meeting the consumer
preference for fixed-rate loans by selling such loans in the secondary market,
(2) originating adjustable-rate mortgage loans ("ARMs") as demand increases
coincident with an overall rise in interest rates in the economy, (3)
maintaining higher levels of liquid assets, such as cash, short-term
interest-earning deposits and short-term investment securities as a hedge
against rising interest rates in a lower interest rate environment, and (4)
utilizing FHLB advances and longer term certificates of deposit as funding
sources when available.
The following table contains information regarding the amounts of
various categories of assets and liabilities contractually repricing within the
periods indicated without consideration of loan prepayment assumptions or
deposit decaying assumptions:
December 31, 2001
Year Ending December 31,
2006 and
2002 2003 2004 2005 after Total
---- ---- ---- ---- ----- -----
Interest-earning assets:
Federal funds sold $ 11,651 $ - $ - $ - $ - $ 11,651
Interest-bearing deposits 278 - - - - 278
Investment securities 646 230 513 - 77,592 78,981
Loans receivable 159,711 64,628 43,538 29,013 349,191 646,081
Other interest-earnings assets - - - - 5,356 5,356
------- -------- -------- ------- ------- -------
Total 172,286 64,858 44,051 29,013 432,139 742,347
Interest-bearing liabilities:
Deposits 507,724 72,206 19,949 7,670 4,655 612,204
Borrowings 21,988 10,700 1,485 4,006 66,681 104,860
------- -------- -------- ------- ------- -------
Total 529,712 82,906 21,434 11,676 71,336 717,064
------- -------- -------- ------- ------- -------
Excess (deficiency) of interest rate sensitive assets
over interest sensitive liabilities $(357,426) $ (18,048) $ 22,617 $ 17,337 $360,803 $ 25,283
======== ======== ======== ======== ======= =======
Cumulative excess (deficiency) of interest sensitive
assets assets over interest sensitive liabilities $(357,426) $(375,474) $(352,857) $(335,520) $ 25,283 $ 25,283
======== ======== ======== ======== ======= =======
Cumulative interest rate sensitivity gap to total
assets (45.92)% (48.24)% (45.34)% (43.11)% 3.25% 3.25%
====== ====== ====== ====== ==== ====
December 31, 2000
Year Ending December 31,
2005 and
2001 2002 2003 2004 after Total
---- ---- ---- ---- ----- -----
Interest-earning assets:
Federal funds sold $ 77 $ - $ - $ - $ - $ 77
Interest-bearing deposits 365 - - - - 365
Investment securities 5,131 2,914 1,374 901 51,107 61,427
Loans receivable 129,827 57,740 47,971 26,634 336,914 599,086
Other interest-earnings assets - - - - 4,981 4,981
------- -------- -------- ------- ------- -------
Total 135,400 60,654 49,345 27,535 393,002 665,936
Interest-bearing liabilities:
Deposits 358,489 94,827 59,717 13,885 35,496 562,414
Borrowings 46,657 4,026 6,642 1,543 18,727 77,595
------- -------- -------- ------- ------- -------
Total 405,146 98,853 66,359 15,428 54,223 640,009
------- -------- -------- ------- ------- -------
Excess (deficiency) of interest rate sensitive assets
over interest sensitive liabilities $(269,746) $ (38,199) $ (17,014) $ 12,107 $338,779 $ 25,927
======== ======== ======== ======== ======= =======
Cumulative excess (deficiency) of interest sensitive
assets assets over interest sensitive liabilities $(269,746) $(307,945) $(324,959) $(312,852) $ 25,927 $ 25,927
======== ======== ======== ======== ======= =======
Cumulative interest rate sensitivity gap to total
assets (38.82)% (44.31)% (46.76)% (45.02)% 3.73% 3.73%
====== ====== ====== ====== ==== ====
-12-
Personnel
At December 31, 2001, the Company and its subsidiaries employed 257
persons on a full-time basis and 22 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 that was
formed in 1998. The Company owns all of the outstanding stock of Towne Bank, an
Ohio state-chartered bank. The Company owns all of the outstanding stock of Oak
Hill Capital Trust I, a Delaware statutory trust that was formed in 2000. The
Company owns all of the outstanding stock of Oak Hill Insurance Agency, Inc.,
which conducts business as McNelly, Patrick & Associates, a group health
insurance and employee benefits agency acquired in August 2001. In addition, the
Company has a 49% ownership interest in Oak Hill Title Agency, LLC, a limited
liability company that was formed in 2001 and commenced operations in January
2002 to provide title services for commercial and residential real estate
transactions.
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. A bank holding 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.
A bank holding company located in the State of Ohio 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 permitted 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 made this election and was
notified on July 11, 2001 by the Federal Reserve Bank that its election had been
approved. Under the Act, as amended by the Gramm-Leach-Bliley Act, the Company
is 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
-13-
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 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
financial 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.
On October 26, 2001 President Bush signed the USA Patriot Act of 2001
(the "Patriot Act"). Enacted in response to the September 11, 2001 terrorist
attacks, the Patriot Act is intended to strengthen the ability of various
agencies of the United States to work cohesively to combat terrorism on a
variety of fronts. The potential impact of the Patriot Act on financial
institutions of all kinds is significant and wide ranging. The Patriot Act
contains sweeping anti-money laundering and financial transparency laws and
requires various regulations, including:
o Due diligence requirements for financial institutions that administer,
maintain, or manage private bank accounts or correspondent accounts for
non-U.S. persons;
o Standards for verifying customer identification at account opening;
o Rules to promote cooperation among financial institutions, regulators, and
law enforcement entities in identifying parties that may be involved in
terrorism or money laundering;
o Reports by non-financial trades and business filed with the Treasury
Department's Financial Crimes Enforcement Network for transactions
exceeding $10,000 and;
o Filing of suspicious activities reports securities by brokers and dealers
if they believe a customer may be violating U.S. laws and regulations.
The Company is not able to predict the impact of such laws on its
financial condition or results of operations at this time.
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
-14-
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 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") beneficially own in the
aggregate approximately 33.9% 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 that 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 the number
of the outstanding voting shares of the Company that they presently own and the
law of Ohio requires, as it presently does, at least two-thirds majority vote of
the outstanding shares to approve a merger or other consolidation, unless the
articles of incorporation of the constituent companies provide for a lower
approval percentage for the transaction, which the Company's articles do not
provide, such ownership position could be expected to deter any prospective
acquirer 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 that 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. On December 26, 2000, the
Company amended the Rights Agreement to appoint Registrar and Transfer Company
as successor Rights Agent under the Rights Agreement due to the resignation of
Fifth Third Bank as Rights Agent. The Board of Directors of the Company approved
the appointment of Registrar and Transfer Company pursuant to a resolution dated
November 14, 2000. John D. Kidd and Evan E. Davis also have entered into a
Buy-Sell Agreement dated April 11, 2001 (the "Agreement"), whereby in the event
of either one's death, the survivor shall have the right to purchase some or all
of the shares of the Company held by the deceased's estate. In connection with
the Agreement, Mr. Kidd and Mr. Davis each have executed a Limited Power of
Attorney giving the other sole right, power and authority to vote all of the
shares of the Company that he holds in the event of his incapacity.
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 8, 2002, the
average weekly trading volume in the Common Stock has been less than 15,000
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; Executive
Vice President and Chief Operating Officer, David G. Ratz; and Secretary, H. Tim
Bichsel; Vice President, Ralph E. Coffman, Jr.; Treasurer and Chief Financial
-15-
Officer, Ronald J. Copher; and Chief Information Officer, D. Bruce Knox. 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 financial holding company, which is substantially dependent on the
profitability of its subsidiaries 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 24 full-service
banking offices, six full-service consumer finance offices, and two loan
production offices in Ohio. In addition, the Company operates two executive
offices in Jackson, Ohio and executive offices and an operations center in Blue
Ash, Ohio. The offices are located in the following counties:
Subsidiaries
Oak Hill Oak Hill Action Towne McNelly Oak Hill
County Financial Banks Finance Bank Patrick Title
------ --------- ----- ------- ---- ------- -----
Adams - - 1 - - -
Athens - 1 - - - -
Butler - - - 2 - -
Franklin - 1 - - - -
Gallia - 1 1 - - -
Hamilton(1) - - - 5 - -
Hocking - 1 - - - -
Jackson(2) 1 6 2 - 1 -
Lawrence - 1 - - - -
Pickaway - 1 1 - - -
Ross - 3 - - - -
Scioto - 3 1 - - 1
Vinton - 1 - - - -
Warren - - - 2 - -
(1) Includes executive offices and operations center of Towne
Bank.
(2) Includes executive offices of Oak Hill Financial and Oak
Hill Banks.
The following table indicates which properties the Company leases, 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 Company or its subsidiaries.
-16-
Beginning End of Lease Five Year Renewal Options
Property and Length 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
Oak Hill Banks
Administrative Offices 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
Action Finance Circleville 11/1/00 5 years X
Action Finance Gallipolis 2/1/01 3 years One - three year renewal option
Columbus 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 12/1/99 1 year Two - one year renewal options
Delhi 3/1/00 7 years Two - five year renewal options
Middletown 8/19/99 10 years Two - five year renewal options
Towne Bank operations 9/24/99 3 years Two - three year renewal options
Oak Hill Title Agency, LLC 10/1/01 5 years No 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 2001.
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 2001 and 2000 are as follows:
Quarter
Ended High Low
12/31/01 $16.40 $14.80
9/30/01 17.25 14.00
6/30/01 16.00 12.75
3/31/01 15.19 12.50
12/31/00 15.94 13.88
9/30/00 16.50 13.56
6/30/00 16.38 12.25
3/31/00 15.44 12.75
At February 8, 2002, the Company had approximately 2,200 stockholders
and 5,274,445 shares of common stock outstanding.
-17-
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 2001 and
2000:
Quarter Dividend
Ended Declared
12/31/01 $0.12
9/30/01 0.11
6/30/01 0.11
3/31/01 0.11
12/31/00 0.11
9/30/00 0.10
6/30/00 0.10
3/31/00 0.10
Future cash and stock dividends will be subject to determination and
declaration by the Board of Directors of the Company, taking into consideration,
among other factors, the Company's financial condition and results of
operations, investment opportunities, capital requirements, and regulatory
limitations.
Stock Transfer Agent. Inquiries regarding stock transfer, registration,
lost certificates, or changes in name and address should be directed in writing
to the Company's stock transfer agent:
The Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 456-0596
Annual Meeting of Shareholders. The Annual Meeting of Shareholders
of Oak Hill Financial, Inc. will be held on April 9, 2002 at 1:00 p.m. at the
Ohio State University Extension South District Office, 17 Standpipe Road,
Jackson, Ohio.
-18-
Item 6. Selected Financial Data
At or For the Year Ended December 31,
2001 2000 1999 1998 1997
(In thousands, except share data)
SUMMARY OF FINANCIAL CONDITION (1) (2)
Total assets $778,332 $694,905 $600,330 $552,846 $473,500
Interest-bearing deposits
and federal funds sold 11,929 442 4,516 12,197 4,031
Investment securities 78,981 61,427 53,485 100,143 81,463
Loans receivable-- net (3) 646,081 599,086 507,969 411,246 360,797
Deposits 612,204 562,414 488,743 465,510 391,215
Federal Home Loan Bank (FHLB)
advances and other borrowings 104,860 77,595 60,852 37,413 37,708
Stockholders' equity 56,349 50,224 48,025 46,858 41,521
SUMMARY OF OPERATIONS (1) (2)
Interest income $ 59,704 $ 54,579 $ 45,251 $ 41,599 $ 36,089
Interest expense 30,777 29,505 22,416 21,335 18,622
------- ------- ------- ------- -------
Net interest income 28,927 25,074 22,835 20,264 17,467
Provision for losses on loans 2,591 2,263 2,432 1,266 1,171
------- ------- ------- ------- -------
Net interest income after
provision for losses on loans 26,336 22,811 20,403 18,998 16,296
Gain on sale of loans 1,385 174 477 1,418 250
Gain on sale of branch 900 -- -- -- --
Gain (loss) on sale of assets 27 (328) (2,141) 281 (33)
Insurance commissions 2,203 2,090 1,720 1,506 1,370
Other income 2,676 2,498 2,068 1,563 1,429
General, administrative and other expense (4) (5)(6) 20,672 17,734 16,335 13,189 12,403
------- ------- ------- ------- -------
Earnings before federal income
taxes 12,855 9,511 6,192 10,577 6,909
Federal income taxes 4,133 3,174 2,098 3,445 2,449
------- ------- ------- ------- -------
Net earnings $ 8,722 $ 6,337 $ 4,094 $ 7,132 $ 4,460
======= ======= ======= ======= =======
PER SHARE INFORMATION (7)
Basic earnings per share $ 1.66 $1.17 $ .75 $1.31 $ .82
Book value 10.70 9.51 8.74 8.67 7.64
-19-
At or For the Year Ended December 31,
2001 2000 1999 1998 1997
OTHER STATISTICAL AND
OPERATING DATA
Return on average assets 1.20% 0.99% 0.72% 1.39% 1.00%
Return on average equity 16.45 12.98 8.51 15.98 11.28
Net interest margin (fully-taxable equivalent) 4.17 4.06 4.20 4.12 4.17
Interest rate spread during period 3.56 3.40 3.64 3.47 3.68
General, administrative and other expense
to average assets 2.85 2.76 2.85 2.57 2.79
Allowance for loan losses
to nonperforming loans 160.00 250.90 192.40 191.90 232.40
Allowance for loan losses
to total loans 1.28 1.19 1.19 1.10 1.10
Nonperforming loans to total loans 0.80 0.47 0.62 0.57 0.47
Nonperforming assets to total assets 0.87 0.45 0.56 0.43 0.36
Net charge-offs to average loans 0.23 0.22 0.20 0.18 0.11
Equity to assets at period end 7.24 7.23 8.00 8.48 8.77
Dividend payout ratio 27.11 35.04 43.74 19.42 22.02
- -------------------------------------
(1) 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, 1997 and 1998 have previously been restated as if the merger had
occurred on January 1, 1997.
(2) The Company completed a merger with Innovative Financial Services Agency,
Inc. on August 31, 2001. The merger was initiated prior to July 1, 2001 and
was accounted for as a pooling-of-interests. Accordingly, the consolidated
financial statements as of and for the years ended December 31, 1997
through 2000, inclusive, have been restated as if the merger had occurred
on January 1, 1997.
(3) Includes loans held for sale.
(4) General, administrative and other expense for 1997 includes $920,000 in
pre-tax expenses incurred pursuant to the merger with Unity Savings Bank.
(5) General, administrative and other expense for 1999 includes $1.1 million in
pre-tax expenses incurred pursuant to the merger with Towne Financial
Corporation.
(6) General, administrative and other expense for 2001 includes $259,000 in
pre-tax expenses incurred pursuant to the merger with Innovative Financial
Services Agency, Inc.
(7) Per share information gives retroactive effect to the 5-for-4 stock split
effected June 1, 1998, the issuance of 917,361 shares in the Towne
transaction, and the issuance of 172,414 shares in the Innovative Financial
Services Agency, Inc. transaction.
-20-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
OVERVIEW
Oak Hill Financial, Inc. is a financial holding company the principal
assets of which are its ownership of Oak Hill Banks ("Oak Hill"), Towne Bank
("Towne"), (collectively, hereinafter "Banks"), Action Finance Company
("Action") and McNelly, Patrick & Associates. Accordingly, the Company's results
of operations are primarily dependent upon the results of operations of its
subsidiaries.
The Banks 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. Action is a
consumer finance company that originates installment and home equity loans.
The Banks' and Action's 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
losses on loans, and the effective tax rate. Other income consists primarily of
service charges and other fees and income from the sale of loans. General,
administrative and other expenses consist of compensation and benefits,
occupancy-related expenses, FDIC deposit insurance premiums, and other operating
expenses.
On August 31, 2001, the Company combined with Innovative Financial
Services Agency, Inc. ("IFS") in a transaction whereby IFS became a wholly-owned
subsidiary of the Company. IFS is an insurance agency specializing in group
health insurance and other employee benefits in southern and central Ohio. IFS0
was renamed Oak Hill Financial Insurance Agency, Inc. and conducts business as
McNelly, Patrick & Associates ("MPA"). The transaction was initiated prior to
July 1, 2001 and 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, 1999. Pursuant to the merger
agreement, the Company issued 172,414 shares of common stock in exchange for the
shares of IFS.
On September 30, 2001, the Company formed Oak Hill Title Agency, LLC
("Oak Hill Title") in conjunction with a law firm to provide title services for
commercial and residential real estate transactions. Oak Hill Title commenced
operations in January 2002.
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, 2001 and 2000. 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, 2001, and the results of
operations for the year ended December 31, 2001, 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 $778.3 million as of December
31, 2001, an increase of $83.4 million, or 12.0%, over the $694.9 million total
at December 31, 2000. The increase was funded primarily through growth in
deposits of $49.8 million, an increase in FHLB advances of $23.8 million,
respective increases of $400,000 and $3.1 million in notes payable and
securities sold under agreements to repurchase, and an increase in stockholders'
equity of $6.1 million.
Cash and due from banks, federal funds sold, and investment securities,
including mortgage-backed securities, increased by $34.8 million, or 46.6%, to a
total of $109.5 million at December 31, 2001, compared to $74.7 million at
-21-
December 31, 2000. Investment securities increased by $17.6 million, as
purchases of $72.2 million exceeded maturities and repayments of $20.2 million
and sales of $34.0 million. Federal funds sold increased by $11.6 million during
2001.
Loans receivable totaled $646.1 million at December 31, 2001, an
increase of $47.0 million, or 7.8%, over total loans at December 31, 2000. Loan
disbursements totaled $377.8 million during 2001, which were partially offset by
loan sales of $75.1 million and principal repayments of $251.1 million. Also
during 2001, loan disbursements and sales volume increased by $74.1 million and
$64.5 million, respectively, as compared to 2000 volume. The declining interest
rate environment during 2001 contributed to the overall increases in loan
origination and sales volume, as borrowers refinanced loans to lower interest
rates and the Banks generally sold such lower interest rate loans in the
secondary market. Growth in the loan portfolio during 2001 was comprised of a
$64.2 million, or 42.1%, increase in commercial and other loans, which was
partially offset by an $8.1 million, or 2.1%, decrease in real estate mortgage
loans and an $8.0 million, or 11.3%, decrease in installment loans. The
Company's allowance for loan losses totaled $8.3 million at December 31, 2001,
an increase of $1.1 million, or 16.0%, over the total at December 31, 2000. The
allowance for loan losses represented 1.28% and 1.19% of the total loan
portfolio at December 31, 2001 and 2000, respectively. Net charge-offs totaled
$1.4 million and $1.2 million for the years ended December 31, 2001 and 2000,
respectively. The Company's allowance represented 160.0% and 250.9% of
nonperforming loans, which totaled $5.2 million and $2.9 million at December 31,
2001 and 2000, respectively. At December 31, 2001, nonperforming loans were
comprised of $984,000 in installment loans, $3.8 million of loans secured
primarily by commercial real estate and $426,000 of loans secured by one-to-four
family residential real estate. In management's opinion, all nonperforming loans
were adequately collateralized at December 31, 2001.
Deposits totaled $612.2 million at December 31, 2001, an increase of
$49.8 million, or 8.9%, over the $562.4 million total at December 31, 2000. The
increase resulted primarily from management's continuing marketing efforts to
attract demand deposits and low-cost core deposits as well as competitive
pricing with respect to certificate of deposit products throughout the Banks'
branch network. Proceeds from deposit growth were used primarily to fund loan
originations.
Advances from the Federal Home Loan Bank totaled $93.9 million at
December 31, 2001, an increase of $23.8 million, or 33.9%, over the December 31,
2000 total. In recognition of the declining interest rate environment during
2001, management obtained generally longer term and lower cost advances in 2001
compared to the maturities and cost of advances obtained from the Federal Home
Loan Bank during 2000. Notes payable and securities sold under agreements to
repurchase increased by $400,000 and $3.1 million, respectively. Proceeds from
advances, repurchase agreements, and notes payable were primarily used to fund
loan originations and securities purchases during the period.
In March 2000, a Delaware statutory business trust owned by the Company
(the "Trust"), issued $5.0 million of mandatorily redeemable debt securities.
The debt securities issued by the Trust are included in the Company's regulatory
capital, specifically as a component of Tier I capital. The proceeds from the
issuance of the subordinated debentures and common securities were used by the
Trust to purchase from the Company $5.0 million of subordinated debentures
maturing on March 8, 2030. The subordinated debentures are the sole asset of the
Trust, and the Company owns all of the common securities of the Trust. Interest
payments on the debt securities are to be made semi-annually at an annual fixed
rate of interest of 10.875% and are reported as a component of interest expense
on borrowings. The net proceeds received by the Company were used for general
corporate purposes, including repurchasing the Company's stock, and providing
general working capital.
The Company's stockholders' equity amounted to $56.3 million at
December 31, 2001, an increase of $6.1 million, or 12.2%, over the balance at
December 31, 2000. The increase resulted primarily from net earnings of $8.7
million and proceeds from options exercised of $408,000, which were partially
offset by $2.3 million in dividends declared on common stock, and net purchases
of treasury shares totaling $807,000.
SUMMARY OF EARNINGS
The table on page 26 shows for each category of interest-earning assets
and interest-bearing liabilities, the average amount outstanding, the interest
earned or paid on such amount, and the average rate earned or paid for the years
ended December 31, 2001, 2000 and 1999. 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,
-22-
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 THE YEARS ENDED DECEMBER 31, 2001 AND
2000
GENERAL. Net earnings for the year ended December 31, 2001 totaled $8.7
million, a $2.4 million, or 37.6%, increase over 2000 net earnings. The increase
in earnings resulted primarily from a $3.9 million increase in net interest
income and a $2.8 million increase in other income, which were partially offset
by a $328,000 increase in the provision for losses on loans, a $2.9 million
increase in general, administrative and other expense, and a $959,000 increase
in the provision for federal income taxes.
NET INTEREST INCOME. Total interest income for the year ended December
31, 2001, amounted to $59.7 million, an increase of $5.1 million, or 9.4%, over
the $54.6 million recorded for 2000. Interest income on loans totaled $55.0
million, an increase of $4.7 million, or 9.2%, over the 2000 period. This
increase resulted primarily from a $66.4 million, or 11.9%, increase in the
weighted-average ("average") portfolio balance, to a total of $623.5 million in
2001, which was partially offset by a 20 basis point decrease in the average
fully-taxable equivalent yield, to 8.85% in 2001 from 9.05% in 2000. Interest
income on investment securities and other interest-earning assets increased by
$471,000, or 11.2%. The increase resulted primarily from an $18.1 million, or
28.6%, increase in the average portfolio balance, to a total of $81.6 million in
2001, which was partially offset by a 65 basis point decrease in the average
fully-taxable equivalent yield, to 6.12% in 2001.
Total interest expense amounted to $30.8 million for the year ended
December 31, 2001, an increase of $1.3 million, or 4.3%, over the $29.5 million
recorded in 2000. Interest expense on deposits increased by $957,000, or 3.9%,
to a total of $25.7 million in 2001. The increase resulted primarily from a
$59.1 million, or 12.5%, increase in the average portfolio balance, to a total
of $532.2 million in 2001, which was partially offset by a 40 basis point
decrease in the average cost of deposits, to 4.83% in 2001. Interest expense on
borrowings increased by $315,000, or 6.6%, during 2001. This increase was due to
a $15.1 million, or 21.0%, increase in average borrowings outstanding, which was
partially offset by a 78 basis point decrease in the average cost of borrowings,
to 5.81% in 2001. The decrease in the level of yields on interest-earning assets
and the cost of interest-bearing liabilities was primarily due to the overall
decrease in interest rates in the economy during 2001.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $3.9 million, or 15.4%, for the year
ended December 31, 2001, as compared to 2000. The interest rate spread increased
by 16 basis points to 3.56% in 2001, compared to 3.40% in 2000. The
fully-taxable equivalent net interest margin increased by 11 basis points from,
4.06% in 2000 to 4.17% in 2001.
PROVISION FOR LOSSES ON LOANS. A provision for losses on loans is
charged to earnings to bring the total allowance for loan losses to a level
considered appropriate by management based on historical experience, the volume
and type of lending conducted by the Company, the status of past due principal
and interest payments, general economic conditions, particularly as such
conditions relate to the Company's market area and other factors related to the
collectibility of the Company's loan portfolio. As a result of such analysis,
management recorded a $2.6 million provision for losses on loans for the year
ended December 31, 2001, an increase of $328,000, or 14.5%, compared to 2000.
The provision for losses on loans in 2001 was predicated upon the $47.0 million
of growth in the loan portfolio and the increase in nonperforming loans
year-to-year.
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, 2001, 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 $7.2 million for the year ended
December 31, 2001, an increase of $2.8 million, or 62.2%, over the 2000 amount.
This increase resulted primarily from a $1.2 million increase in gain on sale of
loans, a $178,000, or 7.1%, increase in service fees, charges, and other
operating income, and a $113,000, or 5.4%, increase in insurance commissions.
Additionally the Company realized a gain on sales of securities during 2001
totaling $43,000, compared to a loss recorded in 2000 of $319,000. Also during
2001, Towne recorded a gain on the sale of a branch totaling $900,000.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense totaled $20.7 million for the year ended December 31, 2001, an
increase of $2.9 million, or 16.6%, over the 2000 total. The increase resulted
primarily from a $1.7 million, or 16.8%, increase in employee compensation and
benefits, a $720,000, or 14.2%, increase in other operating expenses, an
increase of $108,000, or 5.5%, in occupancy and equipment, $259,000 was incurred
in connection with the previously mentioned MPA merger, and increases of $31,000
and $134,000 in federal deposit insurance premiums and franchise taxes,
respectively.
-23-
The increase in employee compensation and benefits resulted primarily
from increased staffing levels required in connection with the establishment of
new branch locations, additional management staffing and normal merit increases.
The increase in other operating expense resulted primarily from an increase in
professional fees totaling $192,000 and an increase in costs associated with ATM
transaction charges and data processing totaling $94,000. Charitable
contributions expense increased in 2001 due primarily to a $216,000 provision
recorded in connection with the Company's resolution to establish a charitable
foundation for support of activities in the communities served by the Company
and its subsidiaries. Future contributions to the charitable fund may be made at
the discretion of the Board of Directors of the Company and its subsidiaries.
The remaining increase of $218,000, or 4.3%, was due to pro-rata increases in
other operating expenses attendant to the Company's overall growth year-to-year.
The increase in occupancy and equipment expense was due primarily to a $129,000,
or 43.6%, increase in rent expense, which was partially offset by a $30,000, or
3.5%, decrease in depreciation expense year-to-year.
FEDERAL INCOME TAXES. The provision for federal income taxes amounted
to $4.1 million for the year ended December 31, 2001, an increase of $959,000,
or 30.2%, over the $3.2 million recorded in 2000. The increase resulted
primarily from a $3.3 million, or 35.2%, increase in earnings before taxes. The
effective tax rates were 32.2% and 33.4% for the years ended December 31, 2001
and 2000, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND
1999
GENERAL. Net earnings for the year ended December 31, 2000 totaled $6.3
million, a $2.2 million, or 54.8%, increase over 1999. The increase in earnings
resulted primarily from a $2.2 million increase in net interest income, a $2.3
million increase in other income and a $169,000 decrease in the provision for
losses on loans, which were partially offset by a $1.4 million increase in
general, administrative and other expense and a $1.1 million increase in the
provision for federal income taxes.
NET INTEREST INCOME. Total interest income for the year ended December
31, 2000, amounted to $54.6 million, an increase of $9.3 million, or 20.6%, over
the $45.3 million recorded for 1999. Interest income on loans totaled $50.4
million, an increase of $10.9 million, or 27.7%, over the 1999 period. This
increase resulted primarily from a $107.2 million, or 23.8%, increase in the
weighted-average ("average") portfolio balance, to $557.0 million in 2000,
coupled with a 28 basis point increase in the average fully-taxable equivalent
yield, to 9.05% in 2000. Interest income on investment securities and other
interest-earning assets decreased by $1.6 million, or 27.5%. The decrease
resulted primarily from a $36.1 million, or 36.2%, decrease in the average
portfolio balance to $63.5 million in 2000, which was partially offset by a 71
basis point increase in the average fully-taxable equivalent yield, to 6.77% in
2000.
Total interest expense amounted to $29.5 million for the year ended
December 31, 2000, an increase of $7.1 million, or 31.6%, over the $22.4 million
recorded in 1999. Interest expense on deposits increased by $5.3 million, or
27.5%, to a total of $24.8 million in 2000. The increase resulted primarily from
a $44.2 million, or 10.3%, increase in the average portfolio balance, to $473.1
million in 2000, coupled with a 70 basis point increase in the average cost of
deposits, to 5.23% in 2000. Interest expense on borrowings increased by $1.8
million, or 58.6%, during 2000. This increase was due to a $17.8 million, or
32.9%, increase in average borrowings outstanding coupled with a 107 basis point
increase in the average cost of borrowings, to 6.59% in 2000.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $2.2 million, or 9.8%, for the year
ended December 31, 2000, as compared to 1999. The interest rate spread decreased
by 24 basis points to 3.40% in 2000, compared to 3.64% in 1999. The
fully-taxable equivalent net interest margin decreased by 14 basis points to
4.06% in 2000 from 4.20% in 1999.
PROVISION FOR LOSSES ON LOANS. The Company's provision for losses on
loans amounted to $2.3 million for the year ended December 31, 2000, a decrease
of $169,000, or 6.9%, compared to 1999. The provision for losses on loans in
2000 generally reflects the $91.2 million of growth in the loan portfolio during
the year. The Company's loan growth in 2000 was comprised primarily of a $61.4
million, or 19.2%, increase in loans secured by residential real estate and a
$26.2 million, or 20.8%, increase in commercial and other loans. Net loan
charge-offs amounted to $1.2 million in 2000, as compared to $883,000 in 1999.
OTHER INCOME. Other income totaled $4.4 million for the year ended
December 31, 2000, an increase of $2.3 million, or 108.8%, over 1999. This
increase resulted primarily from a $1.8 million decline in the loss on sale of
securities year-to-year, a $430,000, or 20.8%, increase in service fees,
charges, and other operating income, and a $370,000, or 21.5%, increase in
insurance commissions, which were partially offset by a $303,000 decrease in
gain on sale of loans. During the third and fourth quarters of 2000, the Company
restructured the Banks' investment securities into higher-yielding obligations
of state and political subdivisions and U.S. Government and agency securities at
a loss of $381,000.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense totaled $17.7 million for the year ended December 31, 2000, an
-24-
increase of $1.4 million, or 8.6%, over the 1999 total. The increase resulted
primarily from a $1.5 million, or 17.0%, increase in employee compensation and
benefits, an $855,000, or 20.3%, increase in other operating expenses, and an
increase of $254,000, or 14.7%, in occupancy and equipment, which were offset by
the absence of $1.1 million in merger-related expenses incurred in connection
with the October 1, 1999 merger of Towne Financial Corporation with and into the
Company and decreases of $26,000 and $12,000 in federal deposit insurance
premiums 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, additional management staffing and normal merit increases.
The increase in other operating expense resulted primarily from an increase in
professional fees associated with the co-sourcing of the internal audit function
totaling $102,000, an increase in costs associated with ATM transaction charges
and data processing totaling $165,000, and a recognition of an impairment loss
totaling $185,000 relating to a former branch location. The remaining increase
of $403,000 was due to pro-rata increases in other operating expenses attendant
to the Company's overall growth year-to-year. The increase in occupancy and
equipment expense was due primarily to a $151,000, or 60.9%, increase in rent
expense, coupled with increases in other occupancy-related costs, in connection
with new branch locations opened in 2000.
FEDERAL INCOME TAXES. The provision for federal income taxes amounted
to $3.2 million for the year ended December 31, 2000, an increase of $1.1
million, or 51.3%, over the $2.1 million recorded in 1999. The increase resulted
primarily from a $3.3 million, or 53.6%, increase in earnings before taxes. The
effective tax rates were 33.4% and 33.9% for the years ended December 31, 2000
and 1999, 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, 2001, the Company had $280.8 million of certificates of
deposit maturing within one year. It has been the Company's historic experience
that such certificates of deposit will be renewed at market rates of interest.
It is management's belief that maturing certificates of deposit over the next
year will similarly be renewed at market rates of interest without a material
adverse effect on the results of operations.
In the event that certificates of deposit cannot be renewed at
prevalent market rates, the Company can obtain up to $130.1 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, 2001, the Company had $93.9 million of
outstanding FHLB advances.
At December 31, 2001, loan commitments, or loans committed but not
closed, totaled $27.0 million. Additionally, the Company had unused lines of
credit and letters of credit totaling $91.9 million and $707,000, 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 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," which requires that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method. The
pooling-of-interests method of accounting is prohibited except for combinations
initiated before July 1, 2001. The remaining provisions of SFAS No. 141 relating
to business combinations accounted for by the purchase method, including
identification of intangible assets, accounting for negative goodwill, financial
statement presentation and disclosure, are effective for combinations initiated
after June 30, 2001. Management adopted SFAS No. 141 effective July 1, 2001, as
required, without material effect on the Company's financial position or results
of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible
Assets," which prescribes accounting for all purchased goodwill and intangible
assets. Pursuant to SFAS No. 142, acquired goodwill is not amortized, but is
tested for impairment at the reporting unit level annually and whenever an
impairment indicator arises. All goodwill should be assigned to reporting units
that are expected to benefit from the goodwill. When an entity reorganizes its
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reporting structure, goodwill should be reallocated to reporting units based on
the relative fair values of the units. Goodwill impairment should be tested with
a two-step approach. First, the fair value of the reporting unit should be
compared to its carrying value, including goodwill. If the reporting unit's
carrying value exceeds its fair value, then any goodwill impairment should be
measured as the excess of goodwill's carrying value over its implied fair value.
The implied fair value of goodwill should be calculated in the same manner as
goodwill is calculated for a business combination, using the reporting unit's
fair value as the "purchase price." Therefore, goodwill's implied fair value
will be the excess of the "purchase price" over the amounts allocated to assets,
including unrecognized intangible assets, and liabilities of the reporting unit.
Goodwill impairment losses should be reported in the income statement as a
separate line item within operations, except for such losses included in the
calculation of a gain or loss from discontinued operations.
An acquired intangible asset, other than goodwill, should be
amortized over its useful economic life. The useful life of an intangible asset
is indefinite if it extends beyond the foreseeable horizon. If an asset's life
is indefinite, the asset should not be amortized until the life is determined to
be finite. Intangible assets being amortized should be tested for impairment in
accordance with SFAS No. 144. Intangible assets not being amortized should be
tested for impairment, annually and whenever there are indicators of impairment,
by comparing the asset's fair value to its carrying amount.
SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Until adoption of SFAS No. 142, existing goodwill continues
to be amortized and tested for impairment under previously existing standards.
As of the date SFAS No. 142 is adopted and based on the company's current
reporting structure, reporting units should be established; net assets should be
assigned to reporting units, unless they do not relate to a reporting unit; and
goodwill should be assigned to one or more reporting units.
Within six months of adopting SFAS No. 142, a company must have
completed the first step of the goodwill transitional impairment test: a
comparison, as of the beginning of the fiscal year, of each reporting unit's
fair value with its carrying value. If the carrying value exceeds fair value,
the second step - calculating the amount of goodwill impairment as of the
beginning of the fiscal year - would be required as soon as possible, but no
later than the end of the fiscal year. Any transitional impairment loss would be
reported as a change in accounting principle in the first interim period
financial statements of the implementation year, regardless of when the loss
measurement is completed. After completion of the first step of the transitional
test, a company should disclose which segments might have to recognize an
impairment loss and when the potential loss would be measured.
If an impairment indicator arises before the completion of the
transition testing, a full impairment test would be required as soon as
possible. Any goodwill impairment resulting from this test should be reported as
an impairment loss, not as a change in accounting principle. SFAS No. 142 is not
expected to have a material effect on the Company's financial position or
results of operations, as the elimination of annual goodwill amortization will
increase 2002 earnings by approximately $34,000.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 carries over the
recognition and measurement provisions in SFAS No. 121. Accordingly, an entity
should recognize an impairment loss if the carrying value of a long-lived asset
or asset group (a) is not recoverable and (b) exceeds its fair value. Similar to
SFAS No. 121, SFAS No. 144 requires an entity to test an asset or asset group
for impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. SFAS No. 144 differs from SFAS No. 121
in that it provides guidance on estimating future cash flows to test
recoverability. An entity may use either a probability-weighted approach or
best-estimate approach in developing estimates of cash flow to test
recoverability. SFAS No. 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. Management adopted SFAS No. 144 effective January 1, 2002, as
required, without material effect on the Company's financial condition or
results of operations.
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AVERAGE BALANCES AND INTEREST RATES
Year Ended December 31,
2001 2000 1999
---- ---- ----
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 $623,486 $55,165 8.85% $557,038 $50,391 9.05% $449,873 $39,464 8.77%
Investment securities 72,687 4,683 6.44 62,049 4,206 6.78 86,329 5,423 6.29
Federal funds sold 8,472 277 3.27 803 62 7.72 12,567 587 4.67
Interest-earning deposits 476 33 6.93 647 34 5.26 685 24 3.50
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-earning assets 705,121 60,158 8.53 620,537 54,693 8.81 549,454 45,498 8.28
Non-interest-earning assets 20,524 20,991 22,856
------- ------- -------
Total assets $725,645 $641,528 $572,310
======= ======= =======
Interest-bearing liabilities:
Deposits $532,239 25,716 4.83 $473,149 24,759 5.23 $428,915 19,423 4.53
Borrowings 87,151 5,061 5.81 72,029 4,746 6.59 54,192 2,993 5.52
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities 619,390 30,777 4.97 545,178 29,505 5.41 483,107 22,416 4.64
------ ---- ------ ---- ------ ----
Non-interest-bearing liabilities 53,222 47,516 41,076
Stockholders' equity 53,033 48,834 48,127
------- ------- -------
Total liabilities and
stockholders' equity $725,645 $641,528 $572,310
======= ======= =======
Net interest income and interest
rate spread $29,381 3.56% $25,188 3.40% $23,082 3.64%
====== ==== ====== ==== ====== ====
Net interest margin (1) 4.17% 4.06% 4.20%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 113.84% 113.82% 113.73%
====== ====== ======
Adjustment of interest income to a tax
equivalent basis on tax-exempt:
Loans and investment securities $ 454 $ 114 $ 247
====== ====== ======
(1) The net interest margin is the net interest income divided by the average
interest-earning assets.
RATE/VOLUME TABLE
Year Ended December 31,
-----------------------
2001vs. 2000 2000 vs. 1999
------------ -------------
Increase (decrease) due to Increase (decrease) due to
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in thousands)
Changes in interest income attributable to:
Loan receivable $5,988 $(1,214) $4,774 $9,663 $1,264 $10,927
Investment securities 719 (242) 477 (1,614) 397 (1,217)
Federal funds sold 271 (56) 215 (761) 236 (525)
Interest-earning deposits with banks
(9) 8 (1) (1) 11 10
----- ------ ----- ----- ----- ------
Total interest income $6,969 $(1,504) $5,465 $7,287 $1,908 $ 9,195
===== ====== ===== ===== ===== ======
Changes in interest expense attributable to:
Deposits $2,944 $(1,987) $ 957 $2,209 $3,127 $ 5,336
Borrowings 921 (606) 315 1,104 649 1,753
----- ------ ----- ----- ----- ------
Total interest expense $3,865 $(2,593) $1,272 $3,313 $3,776 $ 7,089
===== ====== ===== ===== ===== ======
Increase in net interest income $4,193 $ 2,106
===== ======
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Item 7A. Quantitative and Qualitative Disclosure About Market Risk
This information is presented in "Asset and Liability Management" on
pages 11 and 12 of this report.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements of the Company, together with the
reports thereon of Grant Thornton LLP (dated January 24, 2002) which are
included in Exhibit 13 are incorporated herein by reference (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
February 21, 2002, 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 February 21,
2002, 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 February 21, 2002, 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 February 21, 2002, 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 February 21, 2002, 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,
2001 and 2000
Consolidated Statements of Earnings for years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Comprehensive Income for years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholder's Equity for years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for years ended
December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements for years ended
December 31, 2001, 2000 and 1999
(2) Financial Statement Schedules:
The information is contained in the Company's Annual
Report to Stockholders for the year ended December 31, 2001, is
incorporated herein by reference in response to this item.
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(3) The following are filed as exhibits to this Annual Report
on Form 10-K:
Exhibit
Number
*2(a)......................Agreement and Plan of Merger, dated March 31, 1999, between Oak Hill
Financial, Inc. and Towne Financial Corporation (reference is made to Exhibit
2.1 of the Prospectus/Proxy Statement filed by the Company on Form S-4A with
the Securities and Exchange Commission on August 3, 1999).
*2(b)......................Supplemental Agreement, dated as of March 31, 1999, between Oak Hill Financial,
Inc. and Towne Financial Corporation (reference is made to Exhibit 2.2 of the
Prospectus/Proxy Statement filed by the Company on Form S-4A with the Securities and
Exchange Commission on August 3, 1999).
*3(a)......................Fourth Amended and Restated Articles of Incorporation (reference is made to Form
S-4, Exhibit 3.1, Registration No. 333-81645, filed with the Securities and
Exchange Commission on June 25, 1999 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).
*4(c)......................Amended Rights Plan, dated December 26, 2000, between Oak Hill Financial, Inc.,
and Registrar and Transfer Company, (reference is made to Exhibit 2 to the
Form 8-A 12B/A, filed with the Securities and Exchange Commission on
February 21, 2001 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 Ron J. Copher and The Registrant, dated July 5, 1999.
*10(c).....................Oak Hill Financial, Inc. Second Amended and Restated 1995 Stock Option Plan (reference is
made to Form S-8, Exhibit 4(a), Registration No. 333-81167, filed with the
Securities and Exchange Commission on June 21, 1999 and incorporated herein by
reference).
*10(d).....................Oak Hill Financial, Inc. Third Amended and Restated 1995 Stock Option Plan (reference is
made to Post-Effective Amendment No. 1 to Form S-8, Exhibit 4(a), Registration
No. 333-81167, filed with the Securities and Exchange Commission on January
21, 2000 and incorporated herein by reference).
*10(e).....................Oak Hill Financial, Inc. Fourth Amended and Restated 1995 Stock Option Plan
(reference is made to Form S-8, Exhibit 4(a), Registration No. 333-45690,filed
with the Securities and Exchange Commission on September 12, 2000 and
incorporated herein by reference).
13........................2001 Annual Report (Selected portions)
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*21........................Subsidiaries of the Registrant (reference is made to Form SB-2, Exhibit 21,
File No. 333-96216 and incorporated herein by reference).
23........................Consent of Grant Thornton LLP.
24........................Powers of Attorney.
*Incorporated by reference as indicated.
(b) Form 8-K's Filed in the Fourth Quarter
1. Form 8-K, dated October 23, 2001, filed with the Securities and
Exchange Commission on October 23, 2001.
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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 February 21, 2002
----------------------------
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 ) February 21, 2002
)
)
/s/ John D. Kidd )
- --------------------------- President, Chief Executive Officer and Director ) February 21, 2002
(Principal Executive Officer) )
)
)
* Richard P. LeGrand )
- --------------------------- Executive Vice President and Director ) February 21, 2002
)
)
* H. Tim Bichsel )
- --------------------------- Secretary ) February 21, 2002
)
)
* Ron J. Copher )
- --------------------------- Chief Financial Officer and Treasurer ) February 21, 2002
(Principal Financial and Accounting Officer) )
)
)
* Barry M. Dorsey )
- --------------------------- Director ) February 21, 2002
)
)
* C. Clayton Johnson )
- --------------------------- Director ) February 21, 2002
)
)
* Donald R. Seigneur )
- --------------------------- Director ) February 21, 2002
)
)
* William S. Siders )
- --------------------------- Director ) February 21, 2002
)
)
/s/ H. Grant Stephenson )
- --------------------------- Director ) February 21, 2002
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Signature Title Date
* D. Bruce Knox
- --------------------------- Chief Information Officer and Director ) February 21, 2002
)
)
* Ralph E. Coffman, Jr. )
- --------------------------- Vice President ) February 21, 2002
)
)
* David G. Ratz )
- --------------------------- Executive Vice President and Chief ) February 21, 2002
Operating Officer )
)
)
By: /s/ H. Grant Stephenson )
----------------------------- ) February 21, 2002
H. Grant Stephenson, )
attorney-in-fact for each of )
the persons indicated )
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