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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 September 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 November 12, 2002, the latest practicable date, 5,358,143 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
Item 4: Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities and Use of Proceeds 16
Item 3: Default Upon Senior Securities 16
Item 4: Submission of Matters to a Vote Of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Form 8-K 16
Signatures 17
2
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
ASSETS 2002 2001
Cash and due from banks $ 27,991 $ 18,915
Federal funds sold 6,987 11,651
Investment securities designated as available for sale - at market 88,631 75,574
Investment securities designated as held-to-maturity - at cost (approximate
market value of $2,490 and $3,386 at September 30, 2002 and December 31, 2001,
respectively) 2,575 3,407
Loans receivable - net 693,017 644,444
Loans held for sale - at lower of cost or market 2,056 1,637
Office premises and equipment - net 9,953 9,502
Federal Home Loan Bank stock - at cost 5,700 5,356
Accrued interest receivable 3,767 3,821
Real estate acquired through foreclosure 19 1,587
Goodwill - net 413 216
Prepaid expenses and other assets 2,260 1,257
Prepaid federal income taxes 359 --
Deferred federal income taxes 323 965
------- -------
Total assets $844,051 $778,332
======= =======
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits $662,613 $612,204
Securities sold under agreements to repurchase 5,193 3,218
Advances from the Federal Home Loan Bank 99,346 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 3,836 3,858
------- -------
Total liabilities 778,788 721,983
Stockholders' equity
Common stock - $.50 stated value; authorized 15,000,000 shares, 5,594,228
shares issued at September 30, 2002 and
December 31, 2001 2,797 2,797
Additional paid-in capital 5,061 5,114
Retained earnings 59,432 53,506
Treasury stock (241,585 and 326,933 shares at cost at September 30, 2002
and December 31, 2001, respectively) (3,724) (5,007)
Accumulated comprehensive income (loss):
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects 1,697 (61)
------- -------
Total stockholders' equity 65,263 56,349
------- -------
Total liabilities and stockholders' equity $844,051 $778,332
======= =======
3
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Nine Months Ended Three Months Ended
September 30, September 30,
2002 2001 2002 2001
INTEREST INCOME
Loans $39,449 $41,408 $13,085 $13,629
Investment securities 3,217 3,096 1,081 1,016
Interest-bearing deposits and other 269 487 81 119
------ ------ ------ ------
Total interest income 42,935 44,991 14,247 14,764
INTEREST EXPENSE
Deposits 15,016 20,213 4,802 6,158
Borrowings 3,796 3,751 1,314 1,302
------ ------ ------ ------
Total interest expense 18,812 23,964 6,116 7,460
------ ------ ------ ------
Net interest income 24,123 21,027 8,131 7,304
Provision for losses on loans 1,652 1,619 605 547
------ ------ ------ ------
Net interest income after provision for losses on loans 22,471 19,408 7,526 6,757
OTHER INCOME
Gain on sale of loans 1,405 896 697 421
Gain on investment securities transactions 301 42 224 10
Gain on sale of other assets 437 883 -- 883
Insurance commissions 1,788 1,659 650 460
Service fees, charges and other operating 1,809 2,104 400 627
------ ------ ------ ------
Total other income 5,740 5,584 1,971 2,401
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE
Employee compensation and benefits 9,793 9,134 3,205 2,870
Occupancy and equipment 1,789 1,555 598 536
Federal deposit insurance premiums 81 105 27 27
Franchise taxes 529 495 176 169
Other operating 4,513 4,228 1,533 1,640
------ ------ ------ ------
Total general, administrative and other expense 16,705 15,517 5,539 5,242
------ ------ ------ ------
Earnings before federal income taxes 11,506 9,475 3,958 3,916
FEDERAL INCOME TAXES
Current 3,932 3,293 1,248 1,655
Deferred (264) (167) 19 (367)
------ ------ ------ ------
Total federal income taxes 3,668 3,126 1,267 1,288
------ ------ ------ ------
NET EARNINGS $ 7,838 $ 6,349 $ 2,691 $ 2,628
====== ====== ====== ======
EARNINGS PER SHARE
Basic $1.48 $1.21 $.50 $.50
==== ==== === ===
Diluted $1.44 $1.20 $.49 $.50
==== ==== === ===
4
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Nine Months Ended Three Months Ended
September 30, September 30,
2002 2001 2002 2001
Net earnings $7,838 $6,349 $2,691 $2,628
Other comprehensive income, net of tax:
Unrealized gains on securities designated as available for sale,
net of taxes of $1,008, $368, $492, and $200 for the
respective periods 1,957 713 954 350
Reclassification adjustment for realized gains included in net earnings,
net of taxes of $102, $15, $76, and $3 for the respective periods (199) (27) (148) (7)
----- ----- ----- -----
Comprehensive income $9,596 $7,035 $3,497 $2,971
===== ===== ===== =====
Accumulated comprehensive income $1,697 $ 631 $1,697 $ 631
===== ===== ===== =====
5
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands)
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings for the period $ 7,838 $ 6,349
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 429 598
Gain on investment securities transactions (301) (42)
Gain on sale of other assets (314) (883)
Amortization of premiums and discounts on investment
securities - net 649 281
Proceeds from sale of loans in secondary market 66,454 47,444
Loans disbursed for sale in secondary market (66,168) (47,267)
Gain on sale of loans (705) (451)
Amortization of deferred loan origination costs 190 256
Federal Home Loan Bank stock dividends (192) (301)
Provision for losses on loans 1,652 1,619
Amortization of goodwill -- 25
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (885) (1,038)
Accrued interest receivable 54 (103)
Accrued interest payable and other liabilities (22) (550)
Federal income taxes
Current (1,420) 2,431
Deferred (264) (167)
------- -------
Net cash provided by operating activities 6,995 8,201
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Loan disbursements (299,575) (196,436)
Principal repayments on loans 250,920 167,111
Principal repayments on mortgage-backed securities 10,170 7,650
Proceeds from sale of investment securities 26,142 32,418
Proceeds from maturity of investment securities 5,150 7,197
Proceeds from disposition of assets 352 1,462
Purchase of investment securities designated as available for sale (50,328) (47,447)
Purchase of investment securities designated as held to maturity (1,050) --
Purchase of office premises and equipment (1,221) (598)
Purchase of McNelly Insurance Agency (97) --
Purchase of Federal Home Loan Bank stock (152) --
(Increase) decrease in federal funds sold 4,664 (6,994)
------- -------
Net cash used in investing activities (55,025) (35,637)
------- -------
Net cash used in operating and investing activities
(balance carried forward) (48,030) (27,436)
------- -------
6
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30,
(In thousands)
2002 2001
Net cash used in operating and investing activities
(balance brought forward) $(48,030) $(27,436)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from securities sold under agreement to repurchase 1,975 1,834
Net increase in deposit accounts 50,409 14,536
Proceeds from Federal Home Loan Bank advances 145,295 582,750
Repayments of Federal Home Loan Bank advances (139,891) (568,391)
Proceeds from notes payable -- 400
Dividends on common shares (1,912) (1,686)
Purchase of treasury stock -- (1,030)
Proceeds from issuance of shares under stock option plan 1,230 693
------- -------
Net cash provided by financing activities 57,106 29,106
------- -------
Net increase in cash and cash equivalents 9,076 1,670
Cash and cash equivalents at beginning of period 18,915 13,227
------- -------
Cash and cash equivalents at end of period $ 27,991 $ 14,897
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Federal income taxes $ 5,218 $ 1,089
======= =======
Interest on deposits and borrowings $ 19,511 $ 24,734
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Unrealized gains on securities designated as available for sale, net of
related tax effects $ 1,758 $ 686
======= =======
Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 700 $ 445
======= =======
Issuance of loans upon sale of real estate acquired through foreclosure $ 1,760 $ --
======= =======
Transfers from loans to real estate acquired through foreclosure $ 1,538 $ 86
======= =======
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 nine and three month periods ended September 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
for the period ended September 30, 2001 have previously 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 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.
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 nine months ended
September 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 nine and three month periods ended September 30, 2002 and 2001
3. Liquidity and Capital Resources (continued)
At September 30, 2002, the Company had $234.7 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 $152.4 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 September 30, 2002, the
Company had $99.3 million of outstanding FHLB advances.
At September 30, 2002, loan commitments, or loans committed
but not closed, totaled $29.4 million. Additionally, the Company had unused
lines of credit and letters of credit totaling $80.2 million and $841,000,
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 5,334,226, 5,303,656, 5,233,713, and
5,237,620 for the three and nine months ended September 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 5,481,908, 5,424,228, 5,286,066, and 5,280,365
for the three and nine months ended September 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
147,682, 120,572, 52,353, and 42,745 for three and nine months ended
September 30, 2002 and 2001, respectively. Options to purchase 420,875
shares of common stock, with a weighted-average exercise price of $17.11,
were outstanding at September 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.
9
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three month periods ended September 30, 2002 and 2001
5. Effects of Recent Accounting Pronouncements - continued
SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. The Company adopted SFAS No. 142 effective January 1,
2002, as required, without 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.
In June 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 provides financial accounting and reporting guidance for costs
associated with exit or disposal activities, including one-time termination
benefits, contract termination costs other than for a capital lease, and
costs to consolidate facilities or relocate employees. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31,
2002. SFAS No. 146 is not expected to have a material effect on the
Company's financial condition or results of operations.
In October 2002, the FASB issued SFAS No. 147, "Accounting for
Certain Financial Institutions: An Amendment of FASB Statements No. 72
and 144 and FASB Interpretation No. 9," which removes acquisitions of
financial institutions from the scope of SFAS No. 72, "Accounting for
Certain Acquisitions of Banking and Thrift Institutions," except for
transactions between mutual enterprises. Accordingly, the excess of the
fair value of liabilities assumed over the fair value of tangible and
intangible assets acquired in a business combination should be recognized
and accounted for as goodwill in accordance with SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 147 also requires that the acquisition of a
less-than-whole financial institution, such as a branch, be accounted for
as a business combination if the transferred assets and activities
constitute a business. Otherwise, the acquisition should be accounted for
as the acquisition of net assets.
SFAS No. 147 also amends the scope of SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," to include long-term
customer relationship assets of financial institutions (including mutual
enterprises) such as depositor- and borrower-relationship intangible assets
and credit cardholder intangible assets.
The provisions of SFAS No. 147 related to unidentifiable
intangible assets and the acquisition of a less-than-whole financial
institution are effective for acquisitions for which the date of
acquisition is on or after October 1, 2002. The provisions related to
impairment of long-term customer relationship assets are effective October
1, 2002. Transition provisions for previously recognized unidentifiable
intangible assets are effective on October 1, 2002, with earlier
application permitted.
SFAS No. 147 is not expected to have a 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 nine and three month periods ended September 30, 2002 and 2001
Discussion of Financial Condition Changes from December 31, 2001 to September
30, 2002
The Company's total assets amounted to $844.1 million at September 30,
2002, an increase of $65.7 million, or 8.4%, over December 31, 2001. The
increase was funded primarily through growth in deposits of $50.4 million, an
increase in stockholders' equity of $8.9 million, an increase in FHLB advances
of $5.4 million.
Cash and due from banks, federal funds sold, and investment securities,
including mortgage-backed securities, increased by $16.6 million, or 15.2%, to a
total of $126.2 million at September 30, 2002, compared to December 31, 2001.
Investment securities increased by $12.2 million, as purchases of $51.4 million
exceeded maturities and repayments of $15.3 million and sales of $26.1 million.
Purchases during the nine months ended September 30, 2002 were comprised of $8.7
million of U.S. Government agency securities, $5.0 million of U.S. Treasury
Securities, $34.2 million of fixed rate mortgage-backed securities, $2.5 million
of municipal securities and $1.0 million of trust preferred securities. Federal
funds sold decreased by $4.7 million during the nine-month period ended
September 30, 2002.
Loans receivable totaled $695.1 million at September 30, 2002, an
increase of $49.0 million, or 7.6%, over total loans at December 31, 2001. Loan
disbursements totaled $365.7 million during the nine-month period ended
September 30, 2002, which were partially offset by loan sales of $65.7 million
and principal repayments of $250.9 million. Loan origination volume and sales
volume increased by $122.0 million and $18.8 million, respectively, during the
nine-month period ended September 30, 2002, compared to the same period in 2001.
The Company's loan growth for the period was comprised primarily of an $8.5
million, or 7.2%, increase in commercial and other loans, and a $43.8 million,
or 9.6%, increase in loans secured by real estate, which were partially offset
by a $3.2 million, or 4.0%, decrease in installment loans and a $124,000, or
7.4%, decrease in credit card loans. The Company's allowance for loan losses
amounted to $8.9 million at September 30, 2002, an increase of $574,000, or
6.9%, over the total at December 31, 2001. The allowance for loan losses
represented 1.27% and 1.28% of the total loan portfolio at September 30, 2002
and December 31, 2001, respectively. Net charge-offs totaled approximately $1.1
million and $850,000 for the nine months ended September 30, 2002 and 2001,
respectively. The Company's allowance represented 89.2% and 160.0% of
nonperforming loans, which totaled $10.0 million and $5.2 million at September
30, 2002 and December 31, 2001, respectively. At September 30, 2002,
nonperforming loans were comprised of $715,000 in installment loans, $150,000 in
commercial loans, $7.1 million of loans secured primarily by commercial real
estate and $2.1 million of loans secured by one-to-four family residential real
estate. In management's opinion, all nonperforming loans were adequately
collateralized at September 30, 2002.
Deposits totaled $662.6 million at September 30, 2002, an increase of
$50.4 million, or 8.2%, 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 $99.3 million at
September 30, 2002, an increase of $5.4 million, or 5.8%, over the December 31,
2001 total. Securities sold under agreements to repurchase and notes payable
increased by $2.0 million, or 61.4%, and $100,000, or 3.7%, respectively.
The Company's stockholders' equity amounted to $65.3 million at
September 30, 2002, an increase of $8.9 million, or 15.8%, over the balance at
December 31, 2001. The increase resulted primarily from net earnings of $7.8
million, $1.2 million in proceeds from exercise of stock options and an increase
of $1.8 million in the unrealized gains on securities available for sale, which
were partially offset by $1.9 million in dividends declared on common stock.
The Banks are required to maintain minimum regulatory capital pursuant
to federal regulations. At September 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 nine and three month periods ended September 30, 2002 and 2001
Comparison of Results of Operations for the Nine-Month Periods Ended September
30, 2002 and 2001
General
Net earnings for the nine months ended September 30, 2002, totaled
$7.8 million, an increase of $1.5 million, or 23.5%, over the amount reported in
the comparable 2001 period. The increase in earnings resulted primarily from a
$3.1 million increase in net interest income and a $156,000 increase in other
income, which were partially offset by a $33,000 increase in provision for
losses on loans, a $1.2 million increase in general, administrative and other
expense and a $542,000 increase in the provision for federal income taxes.
Net Interest Income
Total interest income for the nine months ended September 30,
2002, amounted to $42.9 million, a decrease of $2.1 million, or 4.6%, from the
$45.0 million reported in the comparable 2001 period. Interest income on loans
totaled $39.4 million, a decrease of $2.0 million, or 4.7%, from the comparable
2001 period. This decrease resulted primarily from a 122 basis point decrease in
the average fully-taxable equivalent yield, to 7.72% for the nine months ended
September 30, 2002, which was partially offset by a $65.6 million increase in
the weighted-average ("average") portfolio balance, from $619.2 million to
$684.8 million for the nine months ended September 30, 2001 and 2002,
respectively. Interest income on investment securities and other
interest-earning assets decreased by $97,000, or 2.7%. The decrease resulted
primarily from a 126 basis point decrease in the average fully-taxable
equivalent yield, to 5.22% for the nine months ended September 30, 2002, which
was partially offset by a $19.4 million increase in the average portfolio
balance, to $97.5 million from $78.1 million for the nine months ended September
30, 2002 and 2001, respectively.
Total interest expense amounted to $18.8 million for the nine
months ended September 30, 2002, a decrease of $5.2 million, or 21.5%, from the
comparable 2001 period. Interest expense on deposits decreased by $5.2 million,
or 25.7%, to a total of $15.0 million for the nine months ended September 30,
2002. The decrease resulted primarily from a 169 basis point decrease in the
average cost of deposits, to 3.42% from 5.11% for the nine months ended
September 30, 2002 and 2001, respectively, which was partially offset by a $58.6
million, or 11.1%, increase in the average portfolio balance, from $529.2
million to $587.8 million for the nine months ended September 30, 2001 and 2002,
respectively. Interest expense on borrowings increased by $45,000, or 1.2%, for
the nine-month period ended September 30, 2002. This increase was due to a $15.7
million, or 18.5%, increase in average borrowings outstanding, from $84.8
million to $100.5 million for the nine months ended September 30, 2001 and 2002,
respectively, which was partially offset by an 86 basis point decrease in the
average cost of borrowings, to 5.05% from 5.91% for the nine months ended
September 30, 2002 and 2001, respectively.
As a result of the foregoing changes in interest income and
interest expense, net interest income increased by $3.1 million, or 14.7%, for
the nine month period ended September 30, 2002, as compared to the nine month
period ended September 30, 2001. The interest rate spread increased by 31 basis
points, from 3.44% to 3.75% for the nine month periods ended September 30, 2001
and 2002, respectively. The fully-taxable equivalent net interest margin
increased by 13 basis points, from 4.07% to 4.20% for the nine months ended
September 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 $1.7 million provision for losses on loans for the nine months ended September
30, 2002, an increase of $33,000, or 2.0%, compared to the same period in 2001.
The provision for losses on loans for the nine-month period ended September 30,
2002, generally reflects the $49.0 million of growth in the loan portfolio
during the period and the increase in nonperforming loans.
12
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the nine and three month periods ended September 30, 2002 and 2001
Comparison of Results of Operations for the Nine-Month Periods Ended September
30, 2002 and 2001 (continued)
Provision for Losses on Loans (continued)
Although management believes that it uses the best information
available in providing for possible loan losses and believes that the allowance
is adequate at September 30, 2002, 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 $5.7 million for the nine months ended
September 30, 2002, an increase of $156,000, or 2.8%, over the amount reported
in the comparable 2001 period. This increase resulted primarily from a $509,000,
or 56.8%, increase in gain on sale of loans, a $259,000 increase in gain on sale
of investments, a $122,000 gain on sale of real estate and a $129,000, or 7.8%,
increase in insurance commissions, which were partially offset by the $883.000
gain on sale of branch office realized in the 2001 period. The increase in gain
on sale of loans was due to an $18.8 million, or 39.9%, increase in sales volume
year-to-year.
General, Administrative and Other Expense
General, administrative and other expense totaled $16.7 million
for the nine months ended September 30, 2002, an increase of $1.2 million, or
7.7%, over the amount reported in the comparable 2001 period. The increase
resulted primarily from a $659,000, or 7.2%, increase in employee compensation
and benefits, an increase of $234,000, or 15.0%, in occupancy and equipment and
a $285,000, or 6.7%, 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 and additional management staffing. In
addition, normal merit increases and incentive based compensation, as well as,
additional retirement expenses contributed to the increase. The increase in
occupancy and equipment expense was due primarily to a $139,000 increase in
maintenance contract costs and a $113,000 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 $164,000 increase in costs
associated with a new computer system upgrade, a $119,000 increase in charitable
contributions, a $72,000 increase in employee training costs and a $41,000
increase in costs associated with ATM transaction charges and data processing,
coupled with incremental increases in other operating costs year-to-year, which
were partially offset by decreases of $27,000 and $202,000 in professional fees
and merger-related expenses, respectively.
Federal Income Taxes
The provision for federal income taxes amounted to $3.7 million
for the nine months ended September 30, 2002, an increase of $542,000, or 17.3%,
over the amount recorded for the comparable 2001 period. The increase resulted
primarily from a $2.0 million, or 21.4%, increase in earnings before taxes. The
Company's effective tax rates were 31.9% and 33.0% for the nine months ended
September 30, 2002 and 2001, respectively.
Comparison of Results of Operations for the Three-Month Periods Ended September
30, 2002 and 2001
General
Net earnings for the three months ended September 30, 2002 totaled
$2.7 million, a $63,000, or 2.4%, increase over the amount reported in the
comparable 2001 period. The increase in earnings resulted primarily from an
$827,000 increase in net interest income and a $21,000 decrease in the provision
for federal income taxes, which were partially offset by a $58,000 increase in
the provision for losses on loans, a $430,000 decrease in other income, and a
$297,000 increase in general, administrative and other expense.
13
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the nine and three month periods ended September 30, 2002 and 2001
Comparison of Results of Operations for the Three-Month Periods Ended September
30, 2002 and 2001 (continued)
Net Interest Income
Total interest income for the three months ended September 30,
2002, amounted to $14.2 million, a decrease of $517,000, or 3.5%, from the
comparable 2001 period. Interest income on loans totaled $13.1 million, a
decrease of $544,000, or 4.0%, from the comparable 2001 period. This decrease
resulted primarily from a 121 basis point decrease in the average fully-taxable
equivalent yield, to 7.42% for the three months ended September 30, 2002, which
was partially offset by a $74.7 million, or 11.9%, increase in the average
portfolio balance, from $626.5 million to $701.2 million for the three months
ended September 30, 2001 and 2002, respectively. Interest income on investment
securities and other interest-earning assets increased by $27,000, or 2.4%. The
increase resulted primarily from a $19.9 million, or 25.7%, increase in the
average portfolio balance, from $77.6 million to $97.5 million for the three
months ended September 31, 2001 and 2002, respectively, which was partially
offset by a 116 basis point decrease in the average fully-taxable equivalent
yield, to 5.10% for the three months ended September 30, 2002.
Total interest expense amounted to $6.1 million for the three
months ended September 30, 2002, a decrease of $1.3 million, or 18.0%, from the
comparable 2001 period. Interest expense on deposits decreased by $1.4 million,
or 22.0%, to a total of $4.8 million for the three months ended September 30,
2002. The decrease resulted primarily from a 145 basis point decrease in the
average cost of deposits, to 3.21% for the three months ended September 30,
2002, which was partially offset by a $69.3 million, or 13.2%, increase in the
average portfolio balance, from $524.9 million to $594.2 million for the three
months ended September 30, 2001 and 2002, respectively. Interest expense on
borrowings increased by $12,000, or 0.9%, for the three-month period ended
September 30, 2002. This increase was due to a $16.6 million, or 18.2%, increase
in average borrowings outstanding, from $91.1 million to $107.7 million for the
three months ended September 30, 2001 and 2002, respectively, which was
partially offset by an 83 basis point decrease in the average cost of
borrowings, to 4.84% the three months ended September 30, 2002.
As a result of the foregoing changes in interest income and
interest expense, net interest income increased by $827,000, or 11.3%, for the
three months ended September 30, 2002, as compared to the three months ended
September 30, 2001. The interest rate spread increased by 12 basis points, to
3.68% from 3.56% for the three month periods ended September 30, 2002 and 2001,
respectively. The fully-taxable equivalent net interest margin decreased by 7
basis points, from 4.17% to 4.10% for the three month periods ended September
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 area and other factors related to the collectibility of the
Company's loan portfolio. As a result of such analysis, management recorded a
$605,000 provision for losses on loans for the three months ended September 30,
2002, an increase of $58,000, or 10.6%, compared to the same period in 2001. The
provision for losses on loans in the three-month period ended September 30,
2002, generally reflects the $8.1 million of growth in the loan portfolio during
the period and the increase in the level of nonperforming loans.
Other Income
Other income totaled $2.0 million for the three months ended
September 30, 2002, a decrease of $430,000, or 17.9% from the comparable 2001
period. The decrease was due primarily to the $883,000 gain on sale of branch
office in the 2001 period and a $227,000, or 36.2%, decrease in service fees,
charges, and other operating income, which were partially offset by an increase
of $276,000, or 65.6%, in gain on sale of loans, a $214,000 increase in gain on
investment securities transactions, and a $190,000, or 41.3%, increase in
insurance commissions. Service fees, charges, and other operating income
decreased primarily due to a $36,000, or 7.4%, decrease in service charges and
NSF fees on deposit accounts and an increase in mortgage servicing rights
amortization. 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 nine and three month periods ended September 30, 2002 and 2001
Comparison of Results of Operations for the Three-Month Periods Ended September
30, 2002 and 2001 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $5.5 million for
the three months ended September 30, 2002, an increase of $297,000, or 5.7%,
over the amount reported in the comparable 2001 period. The increase resulted
primarily from a $335,000, or 11.7%, increase in employee compensation and
benefits and an increase of $62,000, or 11.6%, in occupancy and equipment, which
were partially offset by a $107,000, or 6.5%, decrease in other operating
expense.
The increase in employee compensation and benefits was due
primarily from increased staffing levels required in connection with the
establishment of new branch locations and additional management staffing. In
addition, normal merit increases and incentive based compensation, as well as,
additional retirement expenses contributed to the increase. The increase in
occupancy and equipment expense was due primarily to a $40,000, or 34.4%,
increase in maintenance and utilities and a $22,000, or 18.4%, increase in rent
expense associated with leasing costs for data processing hardware. The decrease
in other operating expense resulted primarily from a $177,000 decrease in
merger-related expenses, a $161,000 decrease in computer and PC software and a
$62,000 decrease in professional fees, which were partially offset by a $55,000
increase in costs associated with a new computer system upgrade, a $39,000
increase in charitable contributions coupled with incremental increases in other
operating costs year-to-year.
Federal Income Taxes
The provision for federal income taxes amounted to $1.3 million
for the three months ended September 30, 2002, a decrease of $21,000, or 1.6%,
from the amount recorded for the comparable 2001 period. The decrease resulted
primarily from interest on non-taxable investments. As a result, the effective
tax rate decreased from 32.9% to 32.0% for the three months ended September 31,
2001 and 2002, respectively, which was partially offset by a $42,000 or 1.1%,
increase in earnings before taxes.
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.
Item 4: Controls and Procedures
(a) Within the 90 days prior to the date of this report, we carried
out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer along with our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14.
Based upon that evaluation, our Chief Executive Officer along
with our Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC
filings.
(b) There have been no significant changes in our internal controls
or in other factors that could significantly affect internal
controls subsequent to the date we carried out this evaluation.
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 November 30, 2002. Merger-related
expenses are not expected to exceed $375,000, 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 November 12, 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 November 12, 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 October 11, 2002, filed with the Securities
and Exchange Commission on October 11, 2002.
o Press Release of Oak Hill Financial, Inc., dated
October 10, 2002, announcing the Company's earnings for
the three and nine months ended September 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: November 12, 2002 By: /s/ John D. Kidd
--------------------------------------
John D. Kidd
President and Chief Executive Officer
Date: November 12, 2002 By: /s/ Ron J. Copher
--------------------------------------
Ron J. Copher
Chief Financial Officer
17
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John D. Kidd, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Oak Hill Financial,
Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ John D. Kidd
----------------------------------
John D. Kidd
Chief Executive Officer
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ron J. Copher, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Oak Hill Financial,
Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Ron J. Copher
----------------------------------
Ron J. Copher
Chief Financial Officer