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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002
Commission File Number: 0-26876
OAK HILL FINANCIAL, INC.
(Exact name of Registrant as specified in its charter)
Ohio 31-1010517
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14621 State Route 93
Jackson, Ohio 45640
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (740) 286-3283
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ____
As of August 8, 2002, the latest practicable date, 5,333,083 shares of
the Registrant's common stock, $.50 stated value, were issued and outstanding.
Oak Hill Financial, Inc.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities and Use of Proceeds 16
Item 3: Default Upon Senior Securities 16
Item 4: Submission of Matters to a Vote Of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Form 8-K 16
Signatures 17
2
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, December 31,
ASSETS 2002 2001
Cash and due from banks $ 18,629 $ 18,915
Federal funds sold 4,359 11,651
Investment securities designated as available for sale - at market 88,993 75,574
Investment securities designated as held-to-maturity - at cost (approximate
market value of $3,233 and $3,386 at June 30, 2002 and December 31, 2001,
respectively) 3,407 3,407
Loans receivable - net 686,350 644,444
Loans held for sale - at lower of cost or market 589 1,637
Office premises and equipment - net 9,561 9,502
Federal Home Loan Bank stock - at cost 5,633 5,356
Accrued interest receivable 4,009 3,821
Real estate acquired through foreclosure 44 1,587
Goodwill - net 413 216
Prepaid expenses and other assets 2,340 1,257
Prepaid federal income taxes 154 -
Deferred federal income taxes 720 965
------- -------
Total assets $825,201 $778,332
======= =======
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits $655,694 $612,204
Securities sold under agreements to repurchase 3,750 3,218
Advances from the Federal Home Loan Bank 91,991 93,942
Notes payable 2,800 2,700
Guaranteed preferred beneficial interests in the Corporation's
junior subordinated debentures 5,000 5,000
Accrued federal income taxes - 1,061
Accrued interest payable and other liabilities 4,196 3,858
------- -------
Total liabilities 763,431 721,983
Stockholders' equity
Common stock - $.50 stated value; authorized 15,000,000 shares,
5,593,928 and 5,594,228 shares issued at June 30, 2002 and
December 31, 2001, respectively 2,797 2,797
Additional paid-in capital 5,075 5,114
Retained earnings 57,383 53,506
Treasury stock (283,670 and 326,933 shares at cost at June 30, 2002
and December 31, 2001, respectively) (4,376) (5,007)
Accumulated comprehensive income (loss):
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects 891 (61)
------- -------
Total stockholders' equity 61,770 56,349
------- -------
Total liabilities and stockholders' equity $825,201 $778,332
======= =======
3
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Six Months Ended Three Months Ended
June 30, June 30,
2002 2001 2002 2001
(Restated) (Restated)
INTEREST INCOME
Loans $26,364 $27,776 $13,249 $13,795
Investment securities 2,136 2,080 1,123 1,075
Interest-bearing deposits and other 188 368 79 219
------ ------ ------ ------
Total interest income 28,688 30,224 14,451 15,089
INTEREST EXPENSE
Deposits 10,214 14,052 4,994 6,861
Borrowings 2,482 2,449 1,256 1,220
------ ------ ------ ------
Total interest expense 12,696 16,501 6,250 8,081
------ ------ ------ ------
Net interest income 15,992 13,723 8,201 7,008
Provision for losses on loans 1,047 1,072 587 505
------ ------ ------ ------
Net interest income after provision for losses on loans 14,945 12,651 7,614 6,503
OTHER INCOME
Gain on sale of loans 708 475 313 258
Gain on investment securities transactions 77 44 28 48
Gain on sale of real estate and other 122 - - -
Insurance commissions 1,138 1,201 600 655
Service fees, charges and other operating 1,531 1,465 840 820
------ ------ ------ ------
Total other income 3,576 3,185 1,781 1,781
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE
Employee compensation and benefits 6,395 6,264 3,175 3,187
Occupancy and equipment 1,191 1,019 590 492
Federal deposit insurance premiums 54 78 28 39
Franchise taxes 353 334 177 173
Other operating 2,980 2,581 1,592 1,422
------ ------ ------ ------
Total general, administrative and other expense 10,973 10,276 5,562 5,313
------ ------ ------ ------
Earnings before federal income taxes 7,548 5,560 3,833 2,971
FEDERAL INCOME TAXES
Current 2,646 1,683 1,110 783
Deferred (245) 151 107 204
------ ------ ------ ------
Total federal income taxes 2,401 1,834 1,217 987
------ ------ ------ ------
NET EARNINGS $ 5,147 $ 3,726 $ 2,616 $ 1,984
====== ====== ====== ======
EARNINGS PER SHARE
Basic $.97 $.71 $.49 $.38
=== === === ===
Diluted $.95 $.71 $.48 $.38
=== === === ===
4
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Six Months Ended Three Months Ended
June 30, June 30,
2002 2001 2002 2001
(Restated) (Restated)
Net earnings $5,147 $3,726 $2,616 $1,984
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities designated as available for sale,
net of taxes (benefits) of $517, $192, $624, and $(34) for the
respective periods 1,003 372 1,212 (66)
Reclassification adjustment for realized gains included in net earnings,
net of taxes of $26, $15, $9, and $16 for the respective periods (51) (29) (19) (32)
----- ----- ----- -----
Comprehensive income $6,099 $4,069 $3,809 $1,886
===== ===== ===== =====
Accumulated comprehensive income $ 891 $ 308 $ 891 $ 308
===== ===== ===== =====
5
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
(In thousands)
2002 2001
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings for the period $ 5,147 $ 3,726
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 311 392
Gain on investment securities transactions (77) (44)
Gain on sale of other assets (122) (3)
Amortization of premiums and discounts on investment
securities - net 437 131
Proceeds from sale of loans in secondary market 36,091 23,042
Loans disbursed for sale in secondary market (33,697) (24,221)
Gain on sale of loans (346) (230)
Amortization of deferred loan origination costs 144 163
Federal Home Loan Bank stock dividends (277) (181)
Provision for losses on loans 1,047 1,072
Amortization of goodwill - 16
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (972) (604)
Accrued interest receivable (188) 54
Accrued interest payable and other liabilities 338 294
Federal income taxes
Current (1,215) 706
Deferred (245) 151
------- -------
Net cash provided by operating activities 6,376 4,464
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Loan disbursements (199,522) (127,017)
Principal repayments on loans 157,161 113,943
Principal repayments on mortgage-backed securities 6,375 4,418
Proceeds from sale of investment securities 15,278 17,973
Proceeds from maturity of investment securities 5,130 7,197
Proceeds from disposition of assets 163 175
Purchase of investment securities designated as available for sale (39,120) (39,346)
Purchase of office premises and equipment (715) (498)
Purchase of McNelly Insurance Agency (97) -
(Increase) decrease in federal funds sold 7,292 (3,651)
------- -------
Net cash used in investing activities (48,055) (26,806)
------- -------
Net cash used in operating and investing activities
(balance carried forward) (41,679) (22,342)
------- -------
6
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended June 30,
(In thousands)
2002 2001
(Restated)
Net cash used in operating and investing activities
(balance brought forward) $(41,679) $(22,342)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from securities sold under agreement to repurchase 532 961
Net increase in deposit accounts 43,490 21,735
Proceeds from Federal Home Loan Bank advances 78,120 535,525
Repayments of Federal Home Loan Bank advances (80,071) (531,077)
Proceeds from notes payable - 400
Dividends on common shares (1,270) (1,112)
Purchase of treasury stock - (1,030)
Proceeds from issuance of shares under stock option plan 592 66
------- -------
Net cash provided by financing activities 41,393 25,468
------- -------
Net increase (decrease) in cash and cash equivalents (286) 3,126
Cash and cash equivalents at beginning of period 18,915 13,227
------- -------
Cash and cash equivalents at end of period $ 18,629 $ 16,353
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Federal income taxes $ 3,737 $ 1,089
======= =======
Interest on deposits and borrowings $ 12,754 $ 16,264
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Unrealized gains on securities designated as available for sale, net of
related tax effects $ 952 $ 343
======= =======
Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 362 $ 245
======= =======
Transfer of loans from held for investment to held for sale $ 1,000 $ 5,169
======= =======
Issuance of loans upon sale of real estate acquired through foreclosure $ 1,731 $ -
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Issuance of note payable in connection with the purchase of McNelly
Insurance Agency $ 100 $ -
======= =======
Acquisition of treasury stock in exchange for exercise of stock options $ 23 $ -
======= =======
7
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six and three month periods ended June 30, 2002 and 2001
1. Basis of Presentation
The business activities of Oak Hill Financial, Inc. (the
"Company") have been limited primarily to holding the common shares of Oak
Hill Banks ("Oak Hill") and Towne Bank ("Towne"), (collectively hereinafter
the "Banks"), Action Finance Company ("Action") and McNelly, Patrick &
Associates. Accordingly, the Company's results of operations are dependent
upon the results of operations of its subsidiaries. The Banks conduct a
general commercial banking business in southern and central Ohio which
consists of attracting deposits from the general public and applying those
funds to the origination of loans for commercial, consumer and residential
purposes. Action is a consumer finance company that originates installment
and home equity loans. The Banks' and Action's profitability is
significantly dependent on net interest income, which is the difference
between interest income generated from interest-earning assets (i.e., loans
and investments) and the interest expense paid on interest-bearing
liabilities (i.e., customer deposits and borrowed funds). Net interest
income is affected by the relative amount of interest-earning assets and
interest-bearing liabilities and the interest received or paid on these
balances. The level of interest rates paid or received by the Banks' and
Action can be significantly influenced by a number of competitive factors,
such as governmental monetary policy, that are outside of management's
control.
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 was renamed Oak Hill Financial
Insurance Agency, Inc. and conducts business as McNelly, Patrick &
Associates ("MPA"). MPA is an insurance agency specializing in group health
insurance and other employee benefits in southern and central Ohio. 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, 2001. Pursuant to the merger agreement, the Company issued
172,414 shares of common stock in exchange for the shares of MPA.
On September 30, 2001, the Company, in conjunction with a law
firm, formed Oak Hill Title Agency, LLC ("Oak Hill Title") to provide title
services for commercial and residential real estate transactions. Oak Hill
Title commenced operations in January 2002.
In January 2002, MPA purchased McNelly Insurance Agency, a local
property and casualty insurance agency, for consideration of $100,000 in
cash and a $100,000 note payable within one year. This purchase resulted in
an increase in goodwill of $197,000.
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore, do
not include information or footnotes necessary for a complete presentation
of financial position, results of operations and cash flows in conformity
with accounting principles generally accepted in the United States of
America. Accordingly, these financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
the Company included in the Annual Report on Form 10-K for the year ended
December 31, 2001. However, all adjustments (consisting only of normal
recurring accruals), which, in the opinion of management, are necessary for
a fair presentation of the consolidated financial statements, have been
included. The results of operations for the three and six months ended June
30, 2002 are not necessarily indicative of the results that may be expected
for the entire year.
2. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, the Banks, Action, Oak Hill
Capital Trust I (the "Trust"), MPA and Oak Hill Title. All intercompany
balances have been eliminated.
3. Liquidity and Capital Resources
Like other financial institutions, the Company must ensure that
sufficient funds are available to meet deposit withdrawals, loan
commitments and expenses. Control of the Company's cash flow requires the
anticipation of deposit flows and loan payments. The Company's primary
sources of funds are deposits, borrowings and principal and interest
payments on loans. The Company uses funds from deposit inflows, proceeds
from borrowings and principal and interest payments on loans primarily to
originate loans, and to purchase short-term investment securities and
interest-bearing deposits.
8
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three month periods ended June 30, 2002 and 2001
3. Liquidity and Capital Resources (continued)
At June 30, 2002, the Company had $278.5 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
the Banks' 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 $154.7 million in
advances from the Federal Home Loan Bank of Cincinnati ("FHLB"). Also, as
an operational philosophy, the Company seeks to obtain advances to help
with asset/liability management and liquidity. At June 30, 2002, the
Company had $92.0 million of outstanding FHLB advances.
At June 30, 2002, loan commitments, or loans committed but not
closed, totaled $20.4 million. Additionally, the Company had unused lines
of credit and letters of credit totaling $92.2 million and $767,000,
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.
4. Earnings Per Share
Basic earnings per share is computed based upon the
weighted-average shares outstanding during the period. Weighted-average
common shares outstanding totaled 5,301,709, 5,288,051, 5,216,296, and
5,239,606 for the three and six months ended June 30, 2002 and 2001,
respectively. Diluted earnings per share is computed taking into
consideration common shares outstanding and dilutive potential common
shares to be issued under the Company's stock option plan. Weighted-average
common shares deemed to be outstanding for purposes of computing diluted
earnings per share totaled 5,441,731, 5,399,159, 5,261,182, and 5,284,477
for the three and six months ended June 30, 2002 and 2001, respectively.
Incremental shares related to the assumed exercise of stock
options included in the computation of diluted earnings per share totaled
140,022, 111,108, 44,886, and 44,871 for three and six months ended June
30, 2002 and 2001, respectively. Options to purchase 562,125 shares of
common stock, with a weighted-average exercise price of $16.55, were
outstanding at June 30, 2001, but were excluded from the computation of
common share equivalents because their exercise prices were greater than
the average market price of the common shares.
5. Effects of Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 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.
9
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three month periods ended June 30, 2002 and 2001
5. Effects of Recent Accounting Pronouncements - continued
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
continued to be amortized and tested for impairment under previously
existing standards. As of the date SFAS No. 142 was adopted and based on
the company's current reporting structure, reporting units were
established; net assets were assigned to reporting units, unless they did
not relate to a reporting unit; and goodwill was assigned to one or more
reporting units.
Within nine 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 flows 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.
10
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the six and three month periods ended June 30, 2002 and 2001
Discussion of Financial Condition Changes from December 31, 2001 to June 30,
2002
The Company's total assets amounted to $825.2 million at June 30, 2002,
an increase of $46.9 million, or 6.0%, over December 31, 2001. The increase was
funded primarily through growth in deposits of $43.5 million and an increase in
stockholders' equity of $5.4 million, which were partially offset by a decrease
in FHLB advances of $2.0 million.
Cash and due from banks, federal funds sold, and investment securities,
including mortgage-backed securities, increased by $5.8 million, or 5.3%, to a
total of $115.4 million at June 30, 2002, compared to December 31, 2001.
Investment securities increased by $13.4 million, as purchases of $39.1 million
exceeded maturities and repayments of $11.5 million and sales of $15.2 million.
The new purchases included $8.7 million of U.S. Government Agencies, $5.0
million of U.S. Treasuries, $23.9 million of fixed rate mortgage-backed
securities and $1.5 million of municipal securities. Federal funds sold
decreased by $7.3 million during the six-month period ended June 30, 2002.
Loans receivable totaled $686.9 million at June 30, 2002, an increase
of $40.9 million, or 6.3%, over total loans at December 31, 2001. Loan
disbursements totaled $233.2 million during the six-month period ended June 30,
2002, which were partially offset by loan sales of $35.7 million and principal
repayments of $157.2 million. Loan origination volume and sales volume increased
by $82.0 million and $12.9 million, respectively, during the six-month period
ended June 30, 2002, compared to the same period in 2001. The Company's loan
growth for the period was comprised primarily of a $24.0 million, or 20.5%,
increase in commercial and other loans, and a $20.8 million, or 4.5%, increase
in loans secured by real estate, which were partially offset by a $3.6 million,
or 4.6%, decrease in installment loans and a $156,000, or 9.4%, decrease in
credit card loans. The Company's allowance for loan losses amounted to $9.0
million at June 30, 2002, an increase of $621,000, or 7.4%, over the total at
December 31, 2001. The allowance for loan losses represented 1.29% and 1.28% of
the total loan portfolio at June 30, 2002 and December 31, 2001, respectively.
Net charge-offs totaled approximately $426,000 for both the six months ended
June 30, 2002 and 2001. The Company's allowance represented 187.2% and 160.0% of
nonperforming loans, which totaled $4.8 million and $5.2 million at June 30,
2002 and December 31, 2001, respectively. At June 30, 2002, nonperforming loans
were comprised of $727,000 in installment loans, $781,000 in commercial loans
and $3.3 million of loans secured primarily by commercial real estate and
one-to-four family residential real estate. In management's opinion, all
nonperforming loans were adequately collateralized at June 30, 2002.
Deposits totaled $655.7 million at June 30, 2002, an increase of $43.5
million, or 7.1%, over the $612.2 million total at December 31, 2001. 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 and purchases of investment securities during the period.
Advances from the Federal Home Loan Bank totaled $92.0 million at June
30, 2002, a decrease of $2.0 million, or 2.1%, from the December 31, 2001 total.
Securities sold under agreements to repurchase and notes payable increased by
$532,000, or 16.5%, and $100,000, or 3.7%, respectively.
The Company's stockholders' equity amounted to $61.8 million at June
30, 2002, an increase of $5.4 million, or 9.6%, over the balance at December 31,
2001. The increase resulted primarily from net earnings of $5.1 million,
$592,000 in proceeds from exercise of stock options and an increase of $952,000
in the unrealized gains on securities available for sale, which were partially
offset by $1.3 million in dividends declared on common stock.
The Banks are required to maintain minimum regulatory capital pursuant to
federal regulations. At June 30, 2002, the Banks' regulatory capital exceeded
all regulatory capital requirements.
11
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the six and three month periods ended June 30, 2002 and 2001
Comparison of Results of Operations for the Six-Month Periods Ended June 30,
2002 and 2001
General
Net earnings for the six months ended June 30, 2002, totaled $5.1
million, a $1.4 million, or 38.1%, increase over the amount reported in the
comparable 2001 period. The increase in earnings resulted primarily from a $2.3
million increase in net interest income, a $391,000 increase in other income and
a $25,000 decrease in the provision for losses on loans, which were partially
offset by a $697,000 increase in general, administrative and other expense and a
$567,000 increase in the provision for federal income taxes.
Net Interest Income
Total interest income for the six months ended June 30, 2002,
amounted to $28.7 million, a decrease of $1.5 million, or 5.1%, from the $30.2
million reported in the comparable 2001 period. Interest income on loans totaled
$26.4 million, a decrease of $1.4 million, or 5.1%, from the comparable 2001
period. This decrease resulted primarily from a 122 basis point decrease in the
average fully-taxable equivalent yield, to 7.88% for the six months ended June
30, 2002, which was partially offset by a $61.0 million increase in the
weighted-average ("average") portfolio balance, from $615.5 million to $676.5
million for the six months ended June 30, 2001 and 2002, respectively. Interest
income on investment securities and other interest-earning assets decreased by
$124,000, or 5.1%. The decrease resulted primarily from a 130 basis point
decrease in the average fully-taxable equivalent yield, to 5.28% for the six
months ended June 30, 2002, which was partially offset by a $19.0 million, or
24.1%, increase in the average portfolio balance, from $78.6 million to $97.6
million for the six months ended June 30, 2001 and 2002, respectively.
Total interest expense amounted to $12.7 million for the six
months ended June 30, 2002, a decrease of $3.8 million, or 23.1%, from the
comparable 2001 period. Interest expense on deposits decreased by $3.8 million,
or 27.3%, to a total of $10.2 million for the six months ended June 30, 2002.
The decrease resulted primarily from a 181 basis point decrease in the average
cost of deposits, to 3.52% from 5.33% for the six months ended June 30, 2002 and
2001, respectively, which was partially offset by a $53.2 million, or 10.0%,
increase in the average portfolio balance, from $531.4 million to $584.6 million
for the six months ended June 30, 2001 and 2002, respectively. Interest expense
on borrowings increased by $33,000, or 1.3%, for the six-month period ended June
30, 2002. This increase was due to a $15.2 million, or 18.7%, increase in
average borrowings outstanding, from $81.6 million to $96.8 million for the six
months ended June 30, 2001 and 2002, respectively, which was partially offset by
an 88 basis point decrease in the average cost of borrowings, to 5.17% from
6.05% for the six months ended June 30, 2002 and 2001, respectively.
As a result of the foregoing changes in interest income and
interest expense, net interest income increased by $2.3 million, or 16.5%, for
the six months ended June 30, 2002, as compared to the six months ended June 30,
2001. The interest rate spread increased by 41 basis points, from 3.39% to 3.80%
for the six months ended June 30, 2001 and 2002, respectively. The fully-taxable
equivalent net interest margin increased by 22 basis points, from 4.02% to 4.24%
for the six-months ended June 30, 2001 and 2002, respectively.
Provision for Losses on Loans
The 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 areas and other factors related to the collectibility of
the Company's loan portfolio. As a result of such analysis, management recorded
a $1.0 million provision for losses on loans for the six months ended June 30,
2002, a decrease of $25,000, or 2.3%, compared to the same period in 2001. The
provision for losses on loans for the six-month period ended June 30, 2002,
generally reflects the $40.9 million of growth in the loan portfolio during the
period.
Although management believes that it uses the best information
available in providing for possible loan losses and believes that the allowance
is adequate at June 30, 2002, future adjustments to the allowance could be
necessary and net earnings
12
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the six and three month periods ended June 30, 2002 and 2001
Comparison of Results of Operations for the Six-Month Periods Ended June 30,
2002 and 2001 (continued)
Provision for Losses on Loans (continued)
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 $3.6 million for the six months ended June
30, 2002, an increase of $391,000, or 12.3%, over the amount reported in the
comparable 2001 period. This increase resulted primarily from a $233,000, or
49.1%, increase in gain on sale of loans, a $33,000 increase in gain on sale of
investments and a $122,000 gain on the sale of a former branch location. The
increase in gain on sale of loans was due to a $12.9 million, or 56.7%, increase
in sales volume year-to-year.
General, Administrative and Other Expense
General, administrative and other expense totaled $11.0 million
for the six months ended June 30, 2002, an increase of $697,000, or 6.8%, over
the amount reported in the comparable 2001 period. The increase resulted
primarily from a $131,000, or 2.1%, increase in employee compensation and
benefits, an increase of $172,000, or 16.9%, in occupancy and equipment and a
$399,000, or 15.5%, increase in other operating expense.
The increase in employee compensation and benefits resulted
primarily from increased staffing levels required in connection with the
establishment of new branch locations, additional management staffing and normal
merit increases. The increase in occupancy and equipment expense was due
primarily to a $99,000 increase in maintenance contract costs and a $71,000
increase in rent expense related to the leasing costs associated with the new
data processing hardware. The increase in other operating expense resulted
primarily from a $110,000 increase in costs associated with a new computer
system upgrade, a $78,000 increase in charitable contributions, $57,000 increase
in employee training costs and a $28,000 increase in costs associated with ATM
transaction charges and data processing, coupled with incremental increases in
other operating costs year-to-year.
Federal Income Taxes
The provision for federal income taxes amounted to $2.4 million
for the six months ended June 30, 2002, an increase of $567,000, or 30.9%, over
the amount recorded for the comparable 2001 period. The increase resulted
primarily from a $2.0 million, or 35.8%, increase in earnings before taxes. The
Company's effective tax rates were 31.8% and 33.0% for the six months ended June
30, 2002 and 2001, respectively.
Comparison of Results of Operations for the Three-Month Periods Ended June 30,
2002 and 2001
General
Net earnings for the three months ended June 30, 2002 totaled $2.6
million, a $632,000, or 31.9%, increase over the amount reported in the
comparable 2001 period. The increase in earnings resulted primarily from a $1.2
million increase in net interest income, which was partially offset by an
$82,000 increase in the provision for losses on loans, a $249,000 increase in
general, administrative and other expense, and a $230,000 increase in the
provision for federal income taxes.
13
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the six and three month periods ended June 30, 2002 and 2001
Comparison of Results of Operations for the Three-Month Periods Ended June 30,
2002 and 2001 (continued)
Net Interest Income
Total interest income for the three months ended June 30, 2002,
amounted to $14.5 million, a decrease of $638,000, or 4.2%, from the comparable
2001 period. Interest income on loans totaled $13.2 million, a decrease of
$546,000, or 4.0%, from the comparable 2001 period. This decrease resulted
primarily from a 123 basis point decrease in the average fully-taxable
equivalent yield, to 7.73% for the three months ended June 30, 2002, which was
partially offset by a $71.7 million, or 11.6%, increase in the average portfolio
balance, from $617.7 million to $689.4 million for the three months ended June
30, 2001 and 2002, respectively. Interest income on investment securities and
other interest-earning assets decreased by $92,000, or 7.1%. The decrease
resulted primarily from an 86 basis point decrease in the average fully-taxable
equivalent yield, to 5.40% for the three months ended June 30, 2002, which was
partially offset by a $10.9 million, or 12.5%, increase in the average portfolio
balance, from $87.0 million to $97.9 million for the three months ended June 30,
2001 and 2002, respectively.
Total interest expense amounted to $6.3 million for the three
months ended June 30, 2002, a decrease of $1.8 million, or 22.7%, from the $8.1
million reported in the comparable 2001 period. Interest expense on deposits
decreased by $1.9 million, or 27.2%, to a total of $5.0 million for the three
months ended June 30, 2002. The decrease resulted primarily from a 174 basis
point decrease in the average cost of deposits, to 3.36% for the three months
ended June 30, 2002, which was partially offset by a $56.2 million, or 10.4%,
increase in the average portfolio balance, from $539.5 million to $595.7 million
for the three months ended June 30, 2001 and 2002, respectively. Interest
expense on borrowings increased by $36,000, or 3.0%, for the three-month period
ended June 30, 2002. This increase was due to an $18.3 million, or 22.3%,
increase in average borrowings outstanding, from $82.4 million to $100.7 million
for the three months ended June 30, 2001 and 2002, respectively, which was
partially offset by a 94 basis point decrease in the average cost of borrowings,
to 5.00% the three months ended June 30, 2002.
As a result of the foregoing changes in interest income and
interest expense, net interest income increased by $1.2 million, or 17.0%, for
the three months ended June 30, 2002, as compared to the three months ended June
30, 2001. The interest rate spread increased by 42 basis points, to 3.84% from
3.42% for the three months ended June 30, 2002 and 2001, respectively. The
fully-taxable equivalent net interest margin increased by 22 basis points, to
4.25% from 4.03% for the three-months ended June 30, 2002 and 2001,
respectively.
Provision for Losses on Loans
The 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
$587,000 provision for losses on loans for the three months ended June 30, 2002,
an increase of $82,000, or 16.2%, compared to the same period in 2001. The
provision for losses on loans in the three-month period ended June 30, 2002,
generally reflects the $18.9 million of growth in the loan portfolio during the
period.
Other Income
Other income totaled $1.8 million for the three months ended June
30, 2002, which equaled the amount reported in the comparable 2001 period. Other
income reflected an increase of $55,000, or 21.3%, in gain on sale of loans and
a $20,000, or 2.4%, increase in service fees, charges, and other operating
income, which were partially offset by a $55,000, or 8.4% decrease in insurance
commissions and a $20,000, or 41.7%, decrease in gain on investment securities
transactions. The increase in gain on sale of loans was due to the increase in
sales volume year-to-year.
14
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the six and three month periods ended June 30, 2002 and 2001
Comparison of Results of Operations for the Three-Month Periods Ended June 30,
2002 and 2001 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $5.6 million for
the three months ended June 30, 2002, an increase of $249,000, or 4.7%, over the
amount reported in the comparable 2001 period. The increase resulted primarily
from an increase of $98,000, or 19.9%, in occupancy and equipment and a
$170,000, or 12.0%, increase in other operating expense.
The increase in occupancy and equipment expense was due primarily
to a $42,000, or 39.6%, increase in maintenance and utilities, a $39,000, or
37.3%, increase in rent expense associated with leasing costs for data
processing hardware and a $37,000 increase in depreciation, which were partially
offset by a $25,000 decrease in real estate taxes. The increase in other
operating expense resulted primarily from a $55,000 increase in costs associated
with a new computer system upgrade, a $44,000 increase in charitable
contributions, $34,000 increase in employee training costs and a $9,000 increase
in costs associated with ATM transaction charges and data processing, coupled
with incremental increases in other operating costs year-to-year.
Federal Income Taxes
The provision for federal income taxes amounted to $1.2 million
for the three months ended June 30, 2002, an increase of $230,000, or 23.3%,
over the $987,000 recorded for the comparable 2001 period. The increase resulted
primarily from an $862,000, or 29.0%, increase in earnings before taxes. The
Company's effective tax rates were 31.8% and 33.2% for the three months ended
June 30, 2002 and 2001, respectively.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
There has been no significant change from disclosures included
in the Company's Annual Report on Form 10-K for the period
ended December 31, 2001.
15
Oak Hill Financial, Inc.
PART II
Item 1: Legal Proceedings
Not applicable
Item 2: Changes in Securities
Not applicable
Item 3: Defaults Upon Senior Securities
Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable
Item 5: Other Information
The Company announced in July 2002 its intention to file
regulatory applications to merge its two banking subsidiaries,
Oak Hill Banks and Towne Bank, into a single bank. Subject to
regulatory approval, the target date for completion of the
subsidiary merger is December 31, 2002. Merger-related
expenses are not expected to exceed $250,000, and management
projects that operating expenses can be reduced by at least
$300,000 in 2003 and $450,000 annually thereafter with the
consolidation of redundant data processing activities, various
back-office functions, and third-party expenses. The Company
does not anticipate any reduction in workforce as a result of
the merger.
Item 6: Exhibits and Reports on Form 8-K
Exhibits:
Exhibit No. Description
99.1 Certification by Chief Executive Officer,
John D. Kidd, dated August 9, 2002, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer,
Ron J. Copher, dated August 9, 2002, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
The Company has filed the following current reports on Form
8-K with the Securities and Exchange Commission:
Form 8-K, dated July 12, 2002, filed with the Securities and
Exchange Commission on July 17, 2002.
o Press Release of Oak Hill Financial, Inc., dated July 11,
2002, announcing the Company's earnings for the three and
six months ended June 30, 2002.
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: August 9, 2002 By: /s/ John D. Kidd
-------------------------------------
John D. Kidd
President and Chief Executive Officer
Date: August 9, 2002 By: /s/ Ron J. Copher
-------------------------------------
Ron J. Copher
Chief Financial Officer
17