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, 2005
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 S. R. 93
Jackson, Ohio 45640
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (740) 286-3283
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of November 3, 2005, the latest practicable date, 5,605,951
shares of the Registrant's common stock, $.50 stated value, were outstanding.
Oak Hill Financial, Inc.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition
And Results of Operations 15
Item 3: Quantitative and Qualitative Disclosures About Market Risk 19
Item 4: Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 21
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3: Default Upon Senior Securities 21
Item 4: Submission of Matters to a Vote of Security Holders 21
Item 5: Other Information 21
Item 6: Exhibits 21
Signatures 22
Certifications 23
-2-
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
(In thousands, except share data) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and due from banks $ 23,620 $ 31,009
Federal funds sold 3,269 988
Investment securities designated as available for sale - at market 127,442 88,383
Investment securities designated as held to maturity - at cost (approximate market
value of $3,881 and $3,853 at September 30, 2005 and December 31, 2004, respectively) 3,624 3,640
Loans receivable - net 995,557 912,282
Loans held for sale - at lower of cost or market 75 256
Office premises and equipment - net 22,118 15,489
Federal Home Loan Bank stock - at cost 7,517 6,590
Real estate acquired through foreclosure 498 1,614
Accrued interest receivable on loans 3,875 3,407
Accrued interest receivable on investment securities 1,144 527
Goodwill 7,441 1,674
Core deposit intangible 4,351 1,270
Bank owned life insurance 12,836 10,118
Prepaid expenses and other assets 12,195 2,505
Prepaid federal income taxes 3,666 2,929
Deferred federal income taxes -- 359
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,229,228 $ 1,083,040
================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand $ 100,872 $ 88,712
Savings and time deposits 879,374 773,384
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 980,246 862,096
Securities sold under agreements to repurchase 19,660 5,359
Advances from the Federal Home Loan Bank 107,261 105,601
Notes payable -- 2,700
Subordinated debentures 23,000 18,000
Deferred federal income taxes payable 1,113 --
Accrued interest payable and other liabilities 4,088 4,241
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,135,368 997,997
Stockholders' equity
Common stock - $.50 stated value; authorized 15,000,000 shares
5,874,634 and 5,653,583 shares issued at September 30, 2005
and December 31, 2004 2,938 2,827
Additional paid-in capital 14,746 6,658
Retained earnings 82,991 78,071
Treasury stock (226,874 and 96,302 shares at September 30, 2005 and
December 31, 2004, respectively - at cost) (6,598) (3,118)
Accumulated comprehensive income (loss):
Unrealized gain (loss) on securities designated as available for sale, net
of related tax effects (217) 605
- --------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 93,860 85,043
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,229,228 $ 1,083,040
================================================================================================================================
-3-
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the For the
Nine Months Ended Three Months Ended
September 30, September 30,
(In thousands, except share data) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
INTEREST INCOME
Loans $ 47,182 $ 40,815 $ 16,757 $ 13,976
Investment securities 3,542 2,478 1,307 884
Interest-bearing deposits and other 322 202 115 73
- -------------------------------------------------------------------------------------------------------------------------
Total interest income 51,046 43,495 18,179 14,933
INTEREST EXPENSE
Deposits 16,261 11,531 6,012 3,998
Borrowings 4,694 3,575 1,748 1,232
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 20,955 15,106 7,760 5,230
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 30,091 28,389 10,419 9,703
Provision for losses on loans 5,671 2,285 212 1,002
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 24,420 26,104 10,207 8,701
OTHER INCOME
Service fees, charges and other operating 5,108 3,676 1,838 1,174
Insurance commissions 2,071 2,224 710 712
Gain on sale of loans 869 1,354 327 454
Gain on sale of securities 508 276 138 74
- -------------------------------------------------------------------------------------------------------------------------
Total other income 8,556 7,530 3,013 2,414
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE
Employee compensation and benefits 12,012 10,743 4,436 3,665
Occupancy and equipment 3,090 2,446 1,037 826
Federal deposit insurance premiums 92 81 32 28
Franchise taxes 148 733 45 244
Other operating 6,424 5,523 2,246 1,839
Amortization of core deposit intangible 670 -- 299 --
Merger-related expenses 502 143 49 143
- -------------------------------------------------------------------------------------------------------------------------
Total general, administrative and other expense 22,938 19,669 8,144 6,745
- -------------------------------------------------------------------------------------------------------------------------
Earnings before federal income taxes 10,038 13,965 5,076 4,370
FEDERAL INCOME TAXES
Current 1,256 4,183 1,119 1,182
Deferred 982 173 18 (26)
- -------------------------------------------------------------------------------------------------------------------------
Total federal income taxes 2,238 4,356 1,137 1,156
- -------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 7,800 $ 9,609 $ 3,939 $ 3,214
=========================================================================================================================
EARNINGS PER SHARE
Basic $ 1.37 $ 1.73 $ 0.69 $ 0.58
=========================================================================================================================
Diluted $ 1.34 $ 1.69 $ 0.68 $ 0.57
=========================================================================================================================
-4-
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the For the
Nine Months Ended Three Months Ended
September 30, September 30,
(In thousands, except share data) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Net earnings $ 7,800 $ 9,609 $ 3,939 $ 3,214
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities designated as available for sale,
net of taxes (benefits) of $(265), $88, $(457) and $645, respectively (492) 164 (849) 1,198
Reclassification adjustment for realized gains included in net earnings,
net of taxes of $178, $97, $47 and $26, respectively (330) (179) (91) (48)
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 6,978 $ 9,594 $ 2,999 $ 4,364
==================================================================================================================================
Accumulated comprehensive income (loss) $ (217) $ 901 $ (217) $ 901
==================================================================================================================================
-5-
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
(In thousands) 2005 2004
- --------------------------------------------------------------------------------------------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings for the period $ 7,800 $ 9,609
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 1,305 772
Amortization of core deposit intangible 670 --
Gain on sale of securities (508) (276)
Amortization of premiums and discounts on investment
securities - net 608 679
Amortization of mortgage servicing rights 395 498
Proceeds from sale of loans in secondary market 27,907 41,906
Loans disbursed for sale in secondary market (27,139) (38,469)
Gain on sale of loans (512) (767)
Gain on disposition of assets (109) --
Amortization of deferred loan origination fees - net (397) (133)
Proceeds from sale of other real estate owned 1,175 838
Loss on sale of other real estate owned 274 273
Federal Home Loan Bank stock dividends (254) (185)
Provision for losses on loans 5,671 2,285
Tax benefit of stock options exercised 415 607
Purchase of bank owned life insurance -- (10,000)
Net increase in bank owned life insurance (324) --
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (8,866) (227)
Accrued interest receivable (602) (496)
Accrued interest payable and other liabilities (464) (1,605)
Federal income taxes
Current 1,297 28
Deferred 982 173
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,324 5,510
CASH FLOWS USED IN INVESTING ACTIVITIES:
Loan disbursements (227,692) (319,517)
Principal repayments on loans 214,276 249,166
Principal repayments on mortgage-backed securities designated
as available for sale 12,691 14,644
Proceeds from sale of investment securities designated
as available for sale 31,529 14,192
Proceeds from maturity of investment securities 1,173 3,511
Proceeds from disposition of assets 795 --
Purchase of investment securities designated
as available-for-sale (69,829) (35,484)
Purchase of insurance agency (12) --
Improvements of other real estate owned -- (282)
Increase in federal funds sold - net (2,281) (26)
Purchase of office premises and equipment (4,876) (1,567)
Lawrence Financial acquisition - net of cash paid 6,689 --
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (37,537) (75,363)
- --------------------------------------------------------------------------------------------------------
Net cash used in operating and investing activities
(balance carried forward) (28,213) (69,853)
- --------------------------------------------------------------------------------------------------------
-6-
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Nine Months Ended
September 30,
(In thousands) 2005 2004
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
Net cash used in operating and investing activities
(balance brought forward) $ (28,213) $ (69,853)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from securities sold under agreement to repurchase 14,301 1,862
Net increase in deposit accounts 12,228 72,835
Proceeds from Federal Home Loan Bank advances 23,500 9,300
Repayments of Federal Home Loan Bank advances (24,340) (12,667)
Repayments of notes payable (2,700) (50)
Proceeds from issuance of subordinated debentures 5,000 5,000
Dividends on common shares (2,880) (2,490)
Purchase of treasury shares (6,188) (4,369)
Proceeds from issuance of shares under stock option plan 1,903 1,618
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 20,824 71,039
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (7,389) 1,186
Cash and cash equivalents at beginning of period 31,009 20,390
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 23,620 $ 21,576
=============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Federal income taxes $ 2,137 $ 4,026
=============================================================================================================
Interest on deposits and borrowings $ 21,037 $ 15,172
=============================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Unrealized losses on securities designated as available for sale,
net of related tax benefits $ (490) $ (14)
=============================================================================================================
Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 357 $ 587
=============================================================================================================
Transfer from loans to real estate acquired through foreclosure $ 63 $ 1,655
=============================================================================================================
Loans identified as held-for-sale $ 75 $ 268
=============================================================================================================
Fair value of assets acquired in acquisition of Lawrence Federal $ 125,121 $ --
=============================================================================================================
Common stock issued in acquisition of Lawrence Federal $ 8,589 $ --
=============================================================================================================
Goodwill and other intangible assets arising from acquisitions - net $ 9,162 $ --
=============================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Treasury shares issued for options exercised $ 2,708 $ 1,169
=============================================================================================================
-7-
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended September 30, 2005 and 2004
1. Basis of Presentation
---------------------
Oak Hill Financial, Inc. (the "Company") is a financial holding
company the principal assets of which have been its ownership of Oak Hill
Banks ("Oak Hill") and Oak Hill Financial Insurance ("OHFI"). The Company
also owns forty-nine percent of Oak Hill Title Agency, LLC ("Oak Hill
Title") which provides title services for commercial and residential real
estate transactions. Accordingly, the Company's results of operations are
primarily dependent upon the results of operations of its subsidiaries.
On October 9, 2004, the Company acquired Ripley National Bank
("Ripley") for $5.3 million in cash. As part of the transaction, the
Company acquired full-service offices in Ripley and Georgetown, Ohio,
involving total loans of $39.1 million, $51.6 million in deposits and
$58.6 million in total assets.
On December 31, 2004, the Company sold the consumer loan portfolio
of Action Finance Company. The portfolio, which was comprised of small
consumer and second mortgage loans, totaled $8.7 million. Concurrent with
the sale, the Company closed its five retail lending offices in southern
Ohio.
On April 1, 2005, the Company acquired Lawrence Financial Holdings,
Inc. ("Lawrence Financial") for a purchase price of approximately $15.2
million, of which $7.7 million was paid in cash. In addition, the Company
issued 221,051 shares of common stock to Lawrence Financial shareholders.
The transaction added $125.1 million in assets, $76.5 million in loans,
$104.2 million in deposits and $8.6 million in equity to the Company.
Oak Hill conducts a general commercial banking business in southern
and central Ohio which consists of attracting deposits from the general
public and applying those funds to the origination of loans for
commercial, consumer and residential purposes. OHFI is an insurance agency
specializing in group health insurance and other employee benefits.
Oak Hill'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 Oak Hill can be significantly influenced by a number of
competitive factors, such as governmental monetary policy, that are
outside of management's control.
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, 2004. However, all adjustments (consisting of normal
recurring accruals), which, in the opinion of management, are necessary
for a fair presentation of the consolidated financial statements, have
been included. The results of operations for the nine and three months
ended September 30, 2005 are not necessarily indicative of the results
that may be expected for the entire year.
2. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Oak Hill and OHFI. The Company
effectively controls Oak Hill Title; therefore, their accounts are also
included in the financial statements of the Company with the remaining
ownership being accounted for as minority interest. All intercompany
balances and transactions have been eliminated.
3. Liquidity and Capital Resources
-------------------------------
Like other financial institutions, the Company must ensure that
sufficient funds are available to meet deposit withdrawals, loan
commitments, and expenses. Control of the Company's cash flow requires the
anticipation of deposit flows and loan payments. The Company's primary
sources of funds are deposits, borrowings and principal and interest
payments on loans. The Company uses funds from deposit inflows, proceeds
from borrowings and principal and interest payments on loans primarily to
originate loans, and to purchase short-term investment securities and
interest-bearing deposits.
-8-
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended September 30, 2005 and 2004
3. Liquidity and Capital Resources (continued)
-------------------------------------------
At September 30, 2005, the Company had $231.7 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 with Oak Hill at market rates of interest. It is management's
belief that maturing certificates of deposit over the next year will
similarly be renewed with Oak Hill at market rates of interest.
In the event that certificates of deposit cannot be renewed at
prevalent market rates, the Company can obtain up to $216.6 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, 2005, the
Company had $107.3 million of outstanding FHLB advances.
The Company engages in off-balance sheet credit-related activities
that could require the Company to make cash payments in the event that
specified future events occur. The contractual amounts of these activities
represent the maximum exposure to the Company. However, certain
off-balance sheet commitments are expected to expire or be only partially
used; therefore, the total amount of commitments does not necessarily
represent future cash requirements. These off-balance sheet activities are
necessary to meet the financing needs of the Company's customers. At
September 30, 2005, the Company had total off-balance sheet contractual
commitments consisting of $29.1 million to originate loans, $110.3 million
in unused lines of credit and letters of credit totaling $15.5 million.
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.
The table below details the amount of loan commitments, unused lines
of credit and letters of credit outstanding at September 30, 2005 by
expiration period:
One year One to After
(In thousands) or less three years three years Total
- -----------------------------------------------------------------------------------------------------
Loan commitments $ 29,090 $ -- $ -- $ 29,090
Unused lines of credit 53,952 12,869 43,486 110,307
Letters of credit 1,390 4,083 10,000 15,473
- -----------------------------------------------------------------------------------------------------
$ 84,432 $ 16,952 $ 53,486 $154,870
=====================================================================================================
The table below details the amount of contractual obligations
outstanding at September 30, 2005, by expiration date:
One year One to After
(In thousands) or less three years three years Total
- -----------------------------------------------------------------------------------------------------
Office premises and equipment $ 709 $ 4,151 $ -- $ 4,860
Advances from the Federal Home Loan Bank 22,281 31,501 53,479 107,261
Securities sold under agreement to repurchase 9,660 -- 10,000 19,660
Subordinated debentures -- -- 23,000 23,000
Lease obligations 609 1,038 670 2,317
- -----------------------------------------------------------------------------------------------------
$ 33,259 $ 36,690 $ 87,149 $157,098
=====================================================================================================
-9-
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended September 30, 2005 and 2004
4. Earnings Per Share
------------------
Basic earnings per common share is computed based upon the
weighted-average number of common shares outstanding during the period.
Diluted earnings per common share is computed including the dilutive
effect of additional potential common shares issuable under stock options.
The computations were as follows for the nine and three-month periods
ended September 30:
For the For the
Nine Months Ended Three Months Ended
September 30, September 30,
2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding (basic) 5,684,826 5,550,921 5,688,601 5,543,405
Dilutive effect of assumed exercise of stock options 128,108 143,956 108,452 136,450
----------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding (diluted) 5,812,934 5,694,877 5,797,053 5,679,855
================================================================================================================
Options to purchase 125,250 shares of common stock with a weighted-average
exercise price of $37.12 were outstanding at September 30, 2005, but were
excluded from the computation of common share equivalents for the nine and three
month periods ended September 30, 2005 because the exercise prices were greater
than the average market price of the common shares.
5. Critical Accounting Policies
----------------------------
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to use judgments in making estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. The following critical accounting policies are
based upon judgments and assumptions by management that include inherent
risks and uncertainties.
Allowance for Losses on Loans: The balance in the allowance is an
accounting estimate of probable but unconfirmed and unrecorded asset
impairment that has occurred in the Company's loan portfolio as of the
date of the consolidated financial statements. It is the Company's policy
to provide valuation allowances for estimated losses on loans based upon
past loss experience, adjusted for changes in trends and conditions of the
certain items, including:
o Local market areas and national economic developments;
o Levels of and trends in delinquencies and impaired loans;
o Levels of and trends in recoveries of prior charge-offs;
o Adverse situations that may affect specific borrowers' ability to
repay;
o Effects of any changes in lending policies and procedures;
o Credit concentrations;
o Experience, ability, and depth of lending management and credit
administration staff;
o Volume and terms of loans; and
o Current collateral values, where appropriate.
When the collection of a loan becomes doubtful, or otherwise
troubled, the Company records a loan loss provision equal to the
difference between the fair value of the property securing the loan and
the loan's carrying value. Unsecured credits are charged- off upon
becoming contractually delinquent for greater than 90 days. Major loans
and major lending areas are reviewed periodically to determine potential
problems at an early date. The allowance for loan losses is increased by
charges to earnings and decreased by charge-offs (net of recoveries).
-10-
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended September 30, 2005 and 2004
5. Critical Accounting Policies (continued)
----------------------------------------
The Company accounts for its allowance for losses on loans in
accordance with SFAS No. 5, "Accounting for Contingencies," and SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." Both Statements
require the Company to evaluate the collectibility of both contractual
interest and principal loan payments. SFAS No. 5 requires the accrual of a
loss when it is probable that a loan has been impaired and the amount of
the loss can be reasonably estimated. SFAS No. 114 requires that impaired
loans be measured based upon the present value of expected future cash
flows discounted at the loan's effective interest rate or, as an
alternative, at the loans' observable market price or fair value of the
collateral if the loan is collateral dependent.
A loan is defined under SFAS No. 114 as impaired when, based on
current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of
the loan agreement. In applying the provisions of SFAS No. 114, the
Company considers its investment in one-to-four family residential loans,
consumer installment loans and credit card loans to be homogeneous and
therefore excluded from separate identification for evaluation of
impairment. These homogeneous loan groups are evaluated for impairment in
accordance with SFAS No. 5. With respect to the Company's investment in
commercial and other loans, and its evaluation of impairment thereof,
management believes such loans are adequately collateralized and as a
result impaired loans are carried as a practical expedient at the lower of
cost or fair value.
It is the Company's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral- dependent loans
which become more than ninety days delinquent are considered to constitute
more than a minimum delay in repayment and are evaluated for impairment
under SFAS No. 114 at that time.
Mortgage Servicing Rights: Mortgage servicing rights are accounted
for pursuant to the provisions of SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,"
which requires that the Company recognize as separate assets, rights to
service mortgage loans for others, regardless of how those servicing
rights are acquired. An institution that acquires mortgage servicing
rights through either the purchase or origination of mortgage loans and
sells those loans with servicing rights retained must allocate some of the
cost of the loans to the mortgage servicing rights.
The mortgage servicing rights recorded by the Company, calculated in
accordance with the provisions of SFAS No. 140, were segregated into pools
for valuation purposes, using as pooling criteria the loan term and coupon
rate. Once pooled, each grouping of loans was evaluated on a discounted
earnings basis to determine the present value of future earnings that a
purchaser could expect to realize from each portfolio. Earnings were
projected from a variety of sources including loan servicing fees,
interest earned on float, net interest earned on escrows, miscellaneous
income, and costs to service the loans. The present value of future
earnings is the "economic" value of the pool, i.e., the net realizable
present value to an acquirer of the acquired servicing.
SFAS No. 140 requires that capitalized mortgage servicing rights and
capitalized excess servicing receivables be amortized in proportion to and
over the period of estimated net servicing income and assessed for
impairment. Impairment is measured based on fair value. The valuation of
mortgage servicing rights is influenced by market factors, including
servicing volumes and market prices, as well as management's assumptions
regarding mortgage prepayment speeds and interest rates. Management
utilizes periodic third-party valuations by qualified market professionals
to evaluate the fair value of its capitalized mortgage servicing assets.
Goodwill and Other Intangible Assets. The Company has recorded
goodwill and core deposit intangibles as a result of merger and
acquisition activity.
Goodwill represents the excess purchase price paid over the net book
value of the assets acquired in a merger or acquisition. Pursuant to SFAS
No. 142, "Goodwill and Intangible Assets," goodwill is not amortized, but
is tested for impairment at the reporting unit annually and whenever an
impairment indicator arises. The evaluation involves assigning assets and
liabilities to reporting units and comparing the fair value of each
reporting unit to its carrying value including goodwill. If the fair value
of a reporting unit exceeds its carrying amount, goodwill is not
considered impaired. However, if the carrying amount of the reporting unit
exceeds the fair value, goodwill is considered impaired. The impairment
loss equals the excess of carrying value over fair value.
Core deposit intangibles represent the value of long-term deposit
relationships and are amortized over their estimated useful lives. The
Company annually evaluates these estimated useful lives. If the Company
determines that events or circumstances warrant a change in these
estimated useful lives, the Company will adjust the amortization of the
core deposit intangibles, which could affect future amortization expense.
-11-
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended September 30, 2005 and 2004
6. Stock Incentive Plan
--------------------
The Company has a stock incentive plan that provides for grants of
options of up to 1,200,000 authorized, but unissued shares of its common
stock, restricted stock, stock appreciation rights, and other equity-based
compensation. The Company accounts for its stock incentive plan in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
which contains a fair value-based method for valuing equity-based
compensation that entities may use, which measures compensation cost at
the grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, SFAS No. 123 permits entities to continue to account for
stock options and similar equity instruments under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB Opinion No.
25 are required to make pro forma disclosures of net earnings and earnings
per share, as if the fair value-based method of accounting defined in SFAS
No. 123 had been applied.
The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its stock incentive plan. Accordingly, no compensation
cost has been recognized for the plan. Had compensation cost for the
Company's stock incentive plan been determined based on the fair value at
the grant dates for awards under the plan consistent with the accounting
method utilized in SFAS No. 123, the Company's net earnings and earnings
per share would have been reduced to the pro-forma amounts indicated below
for the nine and three months ended September 30:
For the For the
Nine Months Ended Three Months Ended
September 30, September 30,
(In thousands, except share data) 2005 2004 2005 2004
--------------------------------------------------------------------------------------------
Net earnings:
As reported $7,800 $9,609 $3,939 $3,214
Stock-based compensation, net of tax (758) (306) (252) (102)
--------------------------------------------------------------------------------------------
Pro-forma net earnings $7,042 $9,303 $3,687 $3,112
============================================================================================
Basic earnings per share:
As reported $ 1.37 $ 1.73 $ .69 $ .58
Stock-based compensation, net of tax (.13) (.05) (.04) (.02)
--------------------------------------------------------------------------------------------
Pro-forma $ 1.24 $ 1.68 $ .65 $ .56
============================================================================================
Diluted earnings per share:
As reported $ 1.34 $ 1.69 $ .68 $ .57
Stock-based compensation, net of tax (.13) (.06) (.04) (.02)
--------------------------------------------------------------------------------------------
Pro-forma $ 1.21 $ 1.63 $ .64 $ .55
============================================================================================
The fair value of each option granted is estimated on the date of
grant using the modified Black-Scholes options-pricing model with the
following weighted-average assumptions used for grants in 2005, 2004 and
2003: dividend yield of 1.6% for 2005 and 2004 and 2.3% for 2003; expected
volatility of 39.8% for 2005 and 2004 and 41.5% for 2003; risk-free
interest rates of 3.65% for 2005 and 2004 and 3.38% for 2003; and expected
lives of 4 years for 2005, 2004 and 2003.
-12-
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended September 30, 2005 and 2004
6. Stock Incentive Plan (continued)
--------------------------------
A summary of the status of the Company's stock options as of
September 30, 2005 and December 31, 2004 and 2003 and changes during the
periods ended on those dates is presented below:
Nine months ended Year Ended
September 30, December 31,
2005 2004 2003
---------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
---------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of period 582,446 $22.21 572,397 $17.36 718,717 $15.35
Granted 8,000 32.76 130,500 37.19 68,000 30.46
Exercised (81,500) 16.69 (118,131) 15.87 (210,820) 14.77
Forfeited (10,183) 36.64 (2,300) 28.45 (3,500) 15.05
---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 498,783 $22.99 582,466 $22.21 572,397 $17.36
===========================================================================================================================
Options exercisable at period end 490,533 451,633 503,730
===========================================================================================================================
Weighted-average fair value of options granted
during the period $13.14 $12.91 $ 9.31
===========================================================================================================================
The following information applies to options outstanding at September 30,
2005:
Range of exercise prices Number outstanding
--------------------------------------------------------------------------
$6.67 - $10.01 14,400
$10.02 - $15.03 37,100
$15.04 - $22.56 260,433
$22.57 - $33.86 64,600
$33.87 - $37.72 122,250
--------------------------------------------------------------------------
Total 498,783
==========================================================================
Weighted-average exercise price $ 22.99
Weighted-average remaining contractual life 7.6 years
7. Effects of Recent Accounting Pronouncements
-------------------------------------------
In December 2004, the Financial Accounting Standards Board (the
"FASB") issued a revised Statement of Financial Accounting Standard
("SFAS") No. 123(R), "Share-Based Payment," which establishes standards
for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services, primarily on accounting for
transactions in which an entity obtains employee services in share-based
transactions. This Statement requires a public entity to measure the cost
of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award, with limited
exceptions. That cost will be recognized over the period during which an
employee is required to provide services in exchange for the award, the
requisite service period. No compensation cost is recognized for equity
instruments for which employees do not render the requisite service.
Employee share purchase plans will not result in recognition of
compensation cost if certain conditions are met.
Initially, the cost of employee services received in exchange for an
award of liability instruments will be measured based on current fair
value; the fair value of that award will be remeasured subsequently at
each reporting date through the settlement date.
-13-
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended September 30, 2005 and 2004
7. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------------------
Changes in fair value during the requisite service period will be
recognized as compensation cost over that period. The grant-date fair
value of employee share options and similar instruments will be estimated
using option-pricing models adjusted for the unique characteristics of
those instruments (unless observable market prices for the same or similar
instruments are available). If an equity award is modified after the grant
date, incremental compensation cost will be recognized in an amount equal
to the excess of the fair value of the modified award over the fair value
of the original award immediately before the modification.
Excess tax benefits, as defined by SFAS 123R, will be recognized as
an addition to additional paid in capital. Cash retained as a result of
those excess tax benefits will be presented in the statement of cash flows
as financing cash inflows. The write-off of deferred tax assets relating
to unrealized tax benefits associated with recognized compensation cost
will be recognized as income tax expense unless there are excess tax
benefits from previous awards remaining in additional paid in capital to
which it can be offset.
Effective April 2005, compensation cost is required to be recognized
beginning as of the first annual period of the fiscal year that begins on
or after June 15, 2005, or January 1, 2006 as to the Company. Management
believes the quarterly and nine month compensation costs, net of tax, will
approximate the interim pro forma amounts disclosed above.
Forward-Looking Statements
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements about
the Company. These forward-looking statements include statements regarding
financial condition, results of operations, plans, objectives, and the future
performance and business of the Company, including management's establishment of
an allowance for loan losses, its statements regarding the adequacy of such
allowance for loan losses, and management's belief that the allowance for loan
losses is adequate. Forward-looking statements can be identified by the fact
that they do not relate strictly to historical or current facts.
By their nature, forward-looking statements are subject to numerous assumptions,
risks, and uncertainties. A number of factors could cause actual conditions,
events, or results to differ significantly and materially from those described
in the forward-looking statements. These factors include, but are not limited
to, those set forth below and under the heading "Business Risks" included in
Item 1 of the Company's Annual Report on Form 10-K for the year ended December
31, 2004 (2004 Form 10-K), and other factors described in the 2004 Form 10-K,
and from time-to-time in other filings with the Securities and Exchange
Commission.
Forward-looking statements speak only as of the date they are made. The Company
assumes no obligation to update forward-looking statements to reflect
circumstances or events that occur after the date the forward-looking statements
were made or to reflect the occurrence of unanticipated events.
Risk Factors
Oak Hill Financial, like other financial companies, is subject to a number of
risks, many of which are outside of management's control. Management strives to
mitigate those risks while optimizing returns. Among the risks assumed are: (1)
credit risk, which is the risk that loan customers or other counter parties will
be unable to perform their contractual obligations, (2) market risk, which is
the risk that changes in market rates and prices will adversely affect the
Company's financial condition or results of operations, (3) liquidity risk,
which is the risk that the Company will have insufficient cash or access to cash
to meet operating needs, and (4) operational risk, which is the risk of loss
resulting from inadequate or failed internal processes, people, or systems, or
external events, and (5) legal risk, which is the risk of legal proceedings
against the Company as well as regulatory and governmental reviews or
investigations that arise in the course of the Company's business. The
description of the Company's business contained in Item 1 of its 2004 Form 10-K,
while not all inclusive, discusses a number of business risks that, in addition
to the other information in this report, readers should carefully consider.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
-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, 2005 and 2004
Discussion of Financial Condition Changes from December 31, 2004 to September
- --------------------------------------------------------------------------------
30, 2005
- --------
The Company's total assets amounted to $1.2 billion at September 30, 2005,
an increase of $146.2 million, or 13.5%, over the total at December 31, 2004.
The increase in assets was funded primarily through the assumption of $104.2
million of deposits in the Lawrence Financial transaction, a $14.3 million
increase in repurchase agreements, an increase in FHLB advances of $1.7 million
and a $5.0 million increase in subordinated debentures, which were partially
offset by a $2.7 million decrease in notes payable.
Cash and due from banks, federal funds sold, and investment securities,
including mortgage-backed securities, increased by $33.9 million, or 27.4%, to a
total of $158.0 million at September 30, 2005, compared to December 31, 2004.
Investment securities increased by $39.0 million, as purchases of $69.8 million
exceeded maturities and repayments of $13.9 million and sales of $31.0 million.
Federal funds sold increased by $2.3 million during the nine-month period ended
September 30, 2005.
Loans receivable, including loans held for sale, totaled $995.6 million at
September 30, 2005, an increase of $83.1 million, or 9.1%, over the comparable
totals at December 31, 2004. Loan disbursements totaled $254.8 million during
the nine-month period ended September 30, 2005, which were partially offset by
loan sales of $27.4 million and principal repayments of $214.3 million. Loan
disbursements and sales volume decreased by $103.2 million and $13.7 million,
respectively, when compared to the same period in 2004. Loan originations and
sales volume declined primarily due to the decrease in origination and sales of
residential real estate loans in the secondary market. Growth in the loan
portfolio during the nine months ended September 30, 2005 was comprised of a
$72.4 million, or 11.8%, increase in commercial and residential real estate
loans and a $34.3 million, or 50.4%, increase in installment loans, which were
partially offset by a $22.1 million, or 9.3%, decrease in commercial and other
loans and a $29,000, or 1.4%, decrease in credit card loans. The allowance for
loan losses totaled $13.3 million at September 30, 2005, an increase of $1.5
million, or 12.7%, over the total at December 31, 2004. The allowance for loan
losses represented 1.32% and 1.28% of the total loan portfolio at September 30,
2005 and December 31, 2004, respectively.
-15-
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, 2005 and 2004
Net charge-offs totaled approximately $4.7 million and $1.5 million for the nine
months ended September 30, 2005 and 2004, respectively. The Company's allowance
represented 79.3% and 186.8% of nonperforming loans, which totaled $16.8 million
and $6.3 million at September 30, 2005 and December 31, 2004, respectively. At
September 30, 2005, nonperforming loans were comprised of $424,000 in
installment loans, $5.9 million of loans secured primarily by commercial real
estate, $4.6 million in commercial and other loans and $5.9 million of loans
secured by one-to-four family residential real estate. In management's opinion,
all nonperforming loans were adequately collateralized or reserved at September
30, 2005.
Deposits totaled $980.2 million at September 30, 2005, an increase of
$118.2 million, or 13.7%, over the total at December 31, 2004. Such income was
primarily attributable to the assumption of $104.2 million in deposits in the
Lawrence Financial transaction. Brokered deposits continued to be an integral
part of the Company's overall funding strategy due to competitive rates and
lower operational costs compared with retail deposits. Brokered deposits totaled
$90.5 million with a weighted-average cost of 3.12% at September 30, 2005, as
compared to the $113.1 million in brokered deposits with a 2.70%
weighted-average cost at December 31, 2004. Proceeds from deposit growth were
used primarily to fund loan originations.
Advances from the Federal Home Loan Bank totaled $107.3 million at
September 30, 2005, an increase of $1.7 million, or 1.6%, over the total at
December 31, 2004. Securities sold under agreements to repurchase totaled $19.7
million at September 30, 2005, an increase of $14.3 million, over the total at
December 31, 2004. The increase resulted primarily from $10.0 million in reverse
repurchase agreements incepted in March 2005. Notes payable decreased $2.7
million during 2005 as the Company repaid a borrowing from another financial
institution.
In June 2005, a Delaware statutory business trust owned by the Company,
Oak Hill Capital Trust 4 ("Trust 4"), issued $5.0 million of mandatorily
redeemable debt securities. The amount of the debt securities issued by Trust 4,
which mature in 2035, are included in the Company's regulatory capital,
specifically as a component of Tier 1 capital. Interest payments on the debt
securities are to be made quarterly at an annual fixed rate of interest of 5.96%
through June 30, 2015 and at a floating rate of interest, reset quarterly, equal
to 3-month LIBOR plus 1.60% thereafter. Interest payments are reported as a
component of interest expense on borrowings. The net proceeds received by the
Company were contributed to the capital of Oak Hill during the quarter ended
June 30, 2005.
The Company's stockholders' equity amounted to $93.9 million at September
30, 2005, an increase of $8.8 million, or 10.4%, over the balance at December
31, 2004. The increase resulted primarily from net earnings of $7.8 million,
proceeds from options exercised of $2.3 million and $8.3 million in
stockholders' equity through issuance of shares in the Lawrence Financial
transaction, which were partially offset by $2.9 million in dividends and the
Company's repurchase of 216,295 outstanding shares of common stock totaling $6.2
million.
Comparison of Results of Operations for the Nine-Month Periods Ended September
- --------------------------------------------------------------------------------
30, 2005 and 2004
- -----------------
General
- -------
Net earnings for the nine months ended September 30, 2005 totaled $7.8
million, a $1.8 million decrease from the net earnings reported in the
comparable 2004 period. The decrease in earnings resulted primarily from a $3.4
million increase in the provision for losses on loans and a $3.3 million
increase in general, administrative and other expense, which were partially
offset by a $1.7 million increase in net interest income, a $1.0 million
increase in other income, and a $2.1 million decrease in the provision for
federal income taxes.
Net Interest Income
- -------------------
Total interest income for the nine months ended September 30, 2005,
amounted to $51.0 million, an increase of $7.6 million, or 17.4%, over the
comparable 2004. Interest income on loans totaled $47.2 million, an increase of
$6.4 million, or 15.6%, over the 2004 period. This increase resulted primarily
from a $132.9 million, or 15.6%, increase in the weighted-average ("average")
portfolio balance to a total of $984.5 million for the nine months ended
September 30, 2005. Interest income on investment securities and other
interest-earning assets increased by $1.2 million, or 44.2%. The increase
resulted primarily from a $33.9 million, or 37.1%, increase in the average
portfolio balance, to a total of $125.2 million for the nine months ended
September 30, 2005, coupled with a 56 basis point increase in the average
fully-taxable equivalent yield, to 4.93% for the nine months ended September 30,
2005.
-16-
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, 2005 and 2004
Total interest expense amounted to $21.0 million for the nine months ended
September 30, 2005, an increase of $5.8 million, or 38.7%, from the comparable
2004 period. Interest expense on deposits increased by $4.7 million, or 41.0%,
to a total of $16.3 million for the nine months ended September 30, 2005. The
increase resulted primarily from a 33 basis point increase in the average cost
of deposits, to 2.34% for the nine months ended September 30, 2005, coupled with
a $161.1 million, or 21.0%, increase in the average portfolio balance, to a
total of $928.6 million for the nine months ended September 30, 2005. Interest
expense on borrowings increased by $1.1 million, or 31.3%, for the nine months
ended September 30, 2005. The increase was due to a 30 basis point increase in
the average cost of borrowings, to 4.36%, coupled with a $26.3 million, or
22.4%, increase in the average borrowings outstanding for the nine months ended
September 30, 2005. Specifically, the Federal Reserve Board has increased its
interbank borrowing rates eleven times over the year and has again recently
indicated its continuing bias towards future rate increases. While management
believes its asset/liability management strategy serves to mitigate the negative
effects of rising interest rates, current and projected increases in short-term
interest rates will continue to pressure the Company's net interest margin
through the remainder of 2005.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $1.7 million, or 6.0%, for the nine
months ended September 30, 2005, as compared to the same period in 2004. The
interest rate spread decreased by 30 basis points, to 3.65% for the nine months
ended September 30, 2005, compared to 3.95% for the nine months ended September
30, 2004. The fully-taxable equivalent net interest margin decreased by 36 basis
points, from 4.09% to 3.73% for the nine months ended September 30, 2004 and
2005, respectively.
Provision for Losses on Loans
- -----------------------------
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Company, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Company's
market area and other factors related to the collectibility of the Company's
loan portfolio. As a result of such analysis, which was discussed in detail
above, management recorded a $5.7 million provision for losses on loans for the
nine months ended September 30, 2005, an increase of $3.4 million compared to
the same period in 2004. The provision for losses on loans for the nine months
ended September 30, 2005 was predicated primarily upon the $84.6 million of
growth in the gross loan portfolio, the $4.7 million of net loans charged-off
during the current nine month period, and the increase in nonperforming loans
from $6.3 million at December 31, 2004 to $16.8 million at September 30, 2005.
Consistent with the Company's policy for determining the adequacy of its
allowance for loan losses, management continues to closely monitor criticized
loans for, among other factors previously discussed, adverse situations
affecting borrowers' abilities to repay and an assessment of current collateral
value. Although management believes that it uses the best information available
in providing for possible loan losses, future adjustments to the allowance could
be necessary and net earnings could be adversely affected.
Other Income
- ------------
Other income totaled $8.6 million for the nine months ended September 30,
2005, an increase of $1.0 million, or 13.6%, over the amount reported in the
comparable 2004 period. This increase resulted primarily from a $1.4 million, or
39.0%, increase in service fees and charges and a $232,000 increase in gain on
sale of securities, which were partially offset by a $153,000, or 6.9%, decrease
in insurance commissions and a $485,000, or 35.8%, decrease in gain on sale of
loans. The increase in service fees, charges and other income was due primarily
to an increase in ATM fees totaling $332,000 and an increase in bank owned life
insurance income of $324,000 for the nine months ended September 30, 2005. The
gain on sale of loans decrease is attributable to a $216,000 decrease in gains
from the sale of Small Business Administration loans, couple with a $269,000
decrease in gains from the sale of residential real estate loans.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $22.9 million for the
nine months ended September 30, 2005, an increase of $3.3 million, or 16.6%,
over the amount reported in the 2004 period. The increase resulted primarily
from a $1.9 million, or 34.1% increase in other operating expenses including
merger-related expenses and amortization of core deposit intangible, a $644,000,
or 26.3% increase in occupancy and equipment and a $1.3 million, or 11.8%,
increase in compensation and benefits, which were partially offset by a
$585,000, or 79.8%, decrease in franchise tax expense.
-17-
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, 2005 and 2004
The increase in occupancy and equipment expense was due primarily to a
$340,000, or 52.4%, increase in maintenance and maintenance contracts and a
$306,000, or 39.6%, increase in depreciation expense. The increase in other
expenses resulted primarily from a $670,000 increase in amortization of core
deposit intangibles, a $274,000, or 48.8%, increase in professional fees, a
$202,000, or 66.9%, increase in marketing expense, a $359,000 increase in
merger-related expenses, a $133,000, or 45.2%, increase in ATM expense and a
$116,000, or 26.0%, increase in supplies, coupled with incremental increases in
other operating expenses year-to-year. The increase in compensation and benefits
resulted primarily from a $758,000, or 7.5%, increase in salaries and wages
partially attributable to yearly salary increases, a $168,000, or 40.0%,
increase in retirement expense, a $158,000, or 28.6%, increase in group
insurance, a $127,000, or 14.8% increase in payroll taxes and a $67,000, or
68.0%, increase in directors' fees. The decrease in franchise tax expense
generally reflects tax savings as a result of the Ripley acquisition.
Federal Income Taxes
- --------------------
The provision for federal income taxes amounted to $2.2 million for the
nine months ended September 30, 2005, a decrease of $2.1 million, or 48.6%, from
the comparable 2004 period. The decrease resulted primarily from a $3.9 million,
or 28.1%, decrease in earnings before taxes, coupled with a $375,000 increase in
new markets tax credits related to the Bank's investment in Oak Hill Community
Development Corp. The effective tax rates were 22.3% and 31.2% for the nine
months ended September 30, 2005 and 2004, respectively.
Comparison of Results of Operations for the Three-Month Periods Ended September
- --------------------------------------------------------------------------------
30, 2005 and 2004
- -----------------
General
- -------
Net earnings for the three months ended September 30, 2005 totaled $3.9
million, a $725,000, or 22.6%, increase over net earnings reported in the
comparable 2004 period. The increase in earnings resulted primarily from an
$716,000 increase in net interest income, a $599,000 increase in other income
and a $790,000 decrease in the provision for losses on loans, which were
partially offset by a $1.4 million increase in general, administrative and other
expenses.
Net Interest Income
- -------------------
Total interest income for the three months ended September 30, 2005,
amounted to $18.2 million, an increase of $3.2 million, or 21.7%, from the
comparable 2004 period. Interest income on loans totaled $16.8 million, an
increase of $2.8 million, or 19.9%, over the 2004 period. This increase resulted
primarily from a $140.6 million, or 16.1% increase in the weighted-average
("average") portfolio balance, to a total of $1.0 billion for the three months
ended September 30, 2005, coupled with a 17 basis point increase in the average
fully-taxable equivalent yield, to 6.58% for the three month period ended
September 30, 2005. Interest income on investment securities and other
interest-earning assets increased by $465,000, or 48.6%. This increase resulted
primarily from a $43.6 million, or 47.2%, increase in the average portfolio
balance, to a total of $136.2 million for the three months ended September 30,
2005, coupled with a 44 basis point increase in the average fully-taxable
equivalent yield, to 5.02% for the three months ended September 30, 2005.
Total interest expense amounted to $7.8 million for the three months ended
September 30, 2005, an increase of $2.5 million, or 48.4%, over the comparable
2004 period. Interest expense on deposits increased by $2.0 million, or 50.4%,
to a total of $6.0 million for the three months ended September 30, 2005. The
increase resulted primarily from an $89.7 million, or 11.4%, increase in the
average portfolio balance, to a total of $875.6 million for the three months
ended September 30, 2005, coupled with a 70 basis point increase in the average
cost of deposits, to 2.72% for the three months ended September 30, 2005.
Interest expense on borrowings increased by $516,000, or 41.9%, for the three
months ended September 30, 2005. The increase was due to a $24.4 million, or
19.6%, increase in the average borrowings outstanding for the three months ended
September 30, 2005, coupled with a 72 basis point increase in the average cost
of borrowings, to 4.66%.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $716,000 million, or 7.4%, for the
three months ended September 30, 2005, as compared to the same period in 2004.
The interest rate spread decreased by 56 basis points, to 3.39% for the three
months ended September 30, 2005, compared to 3.95% for the three months ended
September 30, 2004. The fully-taxable equivalent net interest margin decreased
by 36 basis points, from 4.08% to 3.72% for the three months ended September 30,
2004 and 2005, respectively.
-18-
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, 2005 and 2004
Provision for Losses on Loans
- -----------------------------
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Company, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Company's
market area, and other factors related to the collectibility of the Company's
loan portfolio. As a result of such analysis, management recorded a $212,000
provision for losses on loans for the three months ended September 30, 2005, a
decrease of $790,000, or 78.8%, compared to same period in 2004. The provision
for losses on loans for the three months ended September 30, 2005 was predicated
primarily upon the $252,000 of net loans charged-off during the current quarter.
Other Income
- ------------
Other income totaled $3.0 million for the three months ended September 30,
2005, an increase of $599,000, or 24.8%, over the amount reported in the
comparable 2004 period. This increase resulted primarily from a $64,000 increase
in gain on sale of securities and a $664,000, or 56.6%, increase in service
fees, charges and other income, which were partially offset by a $127,000, or
28.0%, decrease in gain on sale of loans. The decrease in gain on sale of loans
is attributable to the previously mentioned decrease in residential loan
originations for sale in the secondary market. The increase in service fees,
charges and other income was due primarily to an increase in ATM fees totaling
$128,000 and an increase in bank owned life insurance income of $135,000 in the
2005 quarter. The reduction of gain on sale of loans is attributable to a
$120,000 decrease in gains from the sale of Small Business Administration loans,
coupled with a $8,000 decrease in gains from the sale of residential real estate
loans.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $8.1 million for the
three months ended September 30, 2005, an increase of $1.4 million, or 20.7%,
over the amount reported in the 2004 period. The increase resulted primarily
from a $771,000, or 21.0%, increase in employee compensation and benefits, a
$211,000, or 25.6% increase in occupancy and equipment, a $612,000, or 30.9%,
increase in other operating expenses including merger-related and amortization
of core deposit intangible, which were partially offset by a $199,000, or 81.6%,
decrease in franchise tax expense.
The increase in occupancy and equipment expense was due primarily to a
$138,000, or 52.5%, increase in depreciation expense, a $77,000, or 34.1%,
increase in maintenance contracts and a $44,000, or 38.9%, increase in
utilities, property taxes and insurance. The increase in other expenses resulted
primarily from a $299,000 increase in amortization of core deposit intangible, a
$163,000 increase in professional fees, a $108,000 increase in marketing
expenses and a $39,000, or 36.8% increase in ATM expense, coupled with
incremental increases in other operating expenses year-to-year. The increase in
compensation and benefits resulted primarily from a $535,000, or 15.6%, increase
in salaries and wages partially attributable to yearly salary increases, an
$82,000, or 32.1%, increase in retirement expense, a $73,000, or 39.7%, increase
in group insurance and a $65,000, or 28.4% increase in payroll tax expense. The
decrease in franchise tax expense generally reflects a tax savings resulting
from the Ripley acquisition.
Federal Income Taxes
- --------------------
The provision for federal income taxes amounted to $1.1 million for the
three months ended September 30, 2005, a decrease of $19,000, or 1.6%, from the
amount recorded in the comparable 2004 period. The decrease resulted primarily
from a $125,000 increase in new markets tax credits pursuant to the Bank's
investment in Oak Hill Community Development Corp., which was offset by a
$706,000, or 16.2%, 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 year ended December
31, 2004.
-19-
Item 4: Controls and Procedures
-----------------------
Disclosure Controls and Procedures
----------------------------------
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits
under the Securities Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the Company's management as
appropriate to allow timely decisions regarding required disclosure.
At the end of the period covered by this report, the Company's
management, with the participation of its chief executive officer
and chief financial officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures pursuant to
Rule 13a-15 promulgated under the Exchange Act. Based upon this
evaluation, the Company's chief executive officer and chief
financial officer concluded that the Company's disclosure controls
and procedures were effective at September 30, 2005.
Internal Control Over Financial Reporting.
------------------------------------------
In connection with the preparation of the Company's Annual Report on
Form 10-K, as of December 31, 2004, the Company's management
assessed the effectiveness of the Company's internal control over
financial reporting. In performing that evaluation, management
identified two material weaknesses: (i) incomplete documentation on
loan approvals and (ii) incomplete documentation on wire transfer
approvals. During the three months ended September 30, 2005, the
Company improved the effectiveness of controls with respect to
documentation on loan approvals and documentation on wire transfer
approvals. As a result of such improvements and management's testing
thereof, the Company believes that these two material weaknesses
have been remediated.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
Other than remediation with respect to documentation on loan
approvals and documentation on wire transfer approvals, there were
no changes in the Company's internal control over financial
reporting made during the quarter ended September 30, 2005, that
have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
-20-
Oak Hill Financial, Inc.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
-----------------
Not applicable.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
Total Number of Maximum Number
Shares Purchased of Shares that May
As Part of Publicly Yet Be Purchased
Total Number of Average Price Announce Plans Under the Plans
Shares Purchased Paid Per Share or Programs or Programs(1)
- -----------------------------------------------------------------------------------------------------------------
July 1, 2005 -
July 31, 2005 30,000 $ 28.85 30,000 155,349
- -----------------------------------------------------------------------------------------------------------------
August 1, 2005 -
August 31, 2005 10,000 $ 30.76 10,000 145,349
- -----------------------------------------------------------------------------------------------------------------
September 1, 2005 -
September 30, 2005 37,894 $ 30.61 37,894 107,455
=================================================================================================================
(1) On May 26, 2005, the Company announced that its Board of Directors had
authorized management to repurchase up to 290,000 shares of the Company's
common stock through open market or privately negotiated transactions. The
authorization does not have an expiration date.
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
-----------------
Not applicable.
Item 6: Exhibits
--------
Exhibits:
Exhibit Number Description
-------------- -----------
31.1 Certification of Chief Executive Officer, R. E.
Coffman, Jr., dated November 4, 2005, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
("SOX").
31.2 Certification of Chief Financial Officer, Ron J.
Copher, dated November 4, 2005, pursuant to
Section 302 of SOX.
32.1 Certification of Chief Executive Officer, R. E.
Coffman, Jr., dated November 4, 2005, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of SOX.
32.2 Certification of Chief Financial Officer, Ron J.
Copher, dated November 4, 2005, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of SOX.
-21-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Oak Hill Financial, Inc.
Date: November 4, 2005 By: /s/ R. E. Coffman, Jr.
------------------------------------
R. E. Coffman, Jr.
President & Chief Executive
Officer
Date: November 4, 2005 By: /s/ Ron J. Copher
------------------------------------
Ron J. Copher
Chief Financial Officer
-22-