UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2001
Commission File Number: 0-26876
OAK HILL FINANCIAL, INC.
(Exact name of Registrant as specified in its charter)
Ohio 31-1010517
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14621 State Route 93
Jackson, Ohio 45640
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (740) 286-3283
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ____
As of August 2, 2001, the latest practicable date, 5,044,294 shares of
the Registrant's common stock, $.50 stated value, were issued and outstanding.
Oak Hill Financial, Inc.
TABLE OF CONTENTS
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 10
Item 3: Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities and Use of Proceeds 16
Item 3: Default Upon Senior Securities 16
Item 4: Submission of Matters to a Vote Of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Form 8-K 17
Signatures 18
2
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, December 31,
ASSETS 2001 2000
Cash and due from banks $ 16,350 $ 13,224
Federal funds sold 3,728 77
Investment securities designated as available for sale - at market 66,525 56,323
Investment securities designated as held-to-maturity - at cost (approximate
market value of $4,933 and $4,598 at June 30, 2001 and December 31, 2000,
respectively) 4,947 4,947
Loans receivable - net 610,742 598,903
Loans held for sale - at lower of cost or market 1,592 183
Office premises and equipment - net 9,403 9,296
Federal Home Loan Bank stock - at cost 5,162 4,981
Accrued interest receivable 4,159 4,213
Goodwill - net 233 249
Prepaid expenses and other assets 1,116 715
Prepaid federal income taxes 117 625
Deferred federal income taxes 516 901
------- -------
Total assets $724,590 $694,637
======= =======
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits $584,431 $562,617
Securities sold under agreements to repurchase 1,104 143
Advances from the Federal Home Loan Bank 74,600 70,152
Notes payable 2,700 2,300
Guaranteed preferred beneficial interests in the Corporation's
junior subordinated debentures 5,000 5,000
Accrued interest payable and other liabilities 4,855 4,529
------- -------
Total liabilities 672,690 644,741
Stockholders' equity
Common stock - $.50 stated value; authorized 15,000,000 shares, 5,421,814 and
5,414,576 shares issued at June 30, 2001 and
December 31, 2000, respectively 2,711 2,707
Additional paid-in capital 5,102 5,040
Retained earnings 49,524 46,913
Treasury stock (377,520 and 304,470 shares at cost at June 30, 2001
and December 31, 2000, respectively) (5,710) (4,680)
Accumulated comprehensive income (loss):
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects 273 (84)
------- -------
Total stockholders' equity 51,900 49,896
------- -------
Total liabilities and stockholders' equity $724,590 $694,637
======= =======
3
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
INTEREST INCOME
Loans $27,776 $23,511 $13,795 $12,105
Investment securities 2,080 1,816 1,075 948
Interest-bearing deposits and other 368 221 219 93
------ ------ ------ ------
Total interest income 30,224 25,548 15,089 13,146
INTEREST EXPENSE
Deposits 14,055 11,092 6,862 5,732
Borrowings 2,449 2,060 1,220 1,178
------ ------ ------ ------
Total interest expense 16,504 13,152 8,082 6,910
------ ------ ------ -------
Net interest income 13,720 12,396 7,007 6,236
Provision for losses on loans 1,072 858 505 498
------ ------ ------ ------
Net interest income after provision for losses on loans 12,648 11,538 6,502 5,738
OTHER INCOME
Gain on sale of loans 475 66 258 5
Gain on investment securities transactions 32 -- 36 --
Service fees, charges and other operating 1,495 1,202 835 642
------ ------ ------ ------
Total other income 2,002 1,268 1,129 647
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE
Employee compensation and benefits 5,586 4,225 2,861 2,029
Occupancy and equipment 987 922 475 457
Federal deposit insurance premiums 78 49 39 25
Franchise taxes 326 266 167 123
Other operating 2,118 1,977 1,170 1,034
------ ------ ------ ------
Total general, administrative and other expense 9,095 7,439 4,712 3,668
------ ------ ------ ------
Earnings before federal income taxes 5,555 5,367 2,919 2,717
FEDERAL INCOME TAXES
Current 1,632 2,288 786 461
Deferred 200 (492) 177 450
------ ------ ------ ------
Total federal income taxes 1,832 1,796 963 911
------ ------ ------ ------
NET EARNINGS $ 3,723 $ 3,571 $ 1,956 $ 1,806
====== ====== ====== ======
EARNINGS PER SHARE
Basic $.73 $.67 $.39 $.34
=== === === ===
Diluted $.73 $.67 $.38 $.34
=== === === ===
4
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
Net earnings $ 3,723 $ 3,571 $ 1,956 $ 1,806
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities designated as available for sale,
net of taxes (benefits) of $195, $(37), $(42), and $38, respectively 378 (69) (83) 74
Reclassification adjustment for realized gains included in net earnings,
net of taxes of $11 and $12 for the six and three months
ended June 30, 2001, respectively (21) -- (24) --
------ ------- ------- ------
Comprehensive income $ 4,080 $ 3,502 $ 1,849 $ 1,880
====== ====== ====== ======
Accumulated comprehensive income (loss) $ 273 $(1,647) $ 273 $(1,647)
====== ====== ====== ======
5
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
(In thousands)
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings for the period $ 3,723 $ 3,571
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 387 389
Gain on securities transactions (32) --
Amortization of premiums and discounts on investment
securities - net 131 28
Proceeds from sale of loans in secondary market 23,042 4,399
Loans disbursed for sale in secondary market (24,221) (4,143)
Gain on sale of loans (230) (13)
(Gain) loss on sale of assets (3) 19
Amortization of deferred loan origination costs 163 75
Federal Home Loan Bank stock dividends (181) (135)
Provision for losses on loans 1,072 858
Amortization of goodwill 16 8
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (572) (988)
Accrued interest receivable 54 (331)
Accrued interest payable and other liabilities 326 680
Federal income taxes
Current 508 1,322
Deferred 200 (492)
------- -------
Net cash provided by operating activities 4,383 5,247
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Loan disbursements (127,017) (152,844)
Principal repayments on loans 113,943 111,408
Principal repayments on mortgage-backed securities 4,418 766
Proceeds from sale of investment securities 17,971 --
Proceeds from maturity of investment securities 7,197 330
Proceeds from disposition of assets 175 290
Purchase of investment securities designated as available for sale (39,346) (1,946)
Purchase of investment securities designated as held to maturity -- (4,947)
Purchase of office premises and equipment (494) (516)
(Increase) decrease in federal funds sold (3,651) 3,663
Purchase of Federal Home Loan Bank stock -- (360)
------- -------
Net cash used in investing activities (26,804) (44,156)
------- -------
Net cash used in operating and investing activities
(balance carried forward) (22,421) (38,909)
------- -------
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended June 30,
(In thousands)
2001 2000
Net cash used in operating and investing activities
(balance brought forward) $(22,421) $(38,909)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds (repayments) from securities sold under agreement to repurchase 961 (795)
Net increase in deposit accounts 21,814 12,233
Proceeds from Federal Home Loan Bank advances 535,525 556,405
Repayments of Federal Home Loan Bank advances (531,077) (533,714)
Proceeds from notes payable 400 --
Proceeds from issuance of debt securities -- 5,000
Dividends on common shares (1,112) (1,052)
Purchase of treasury stock (1,030) (1,906)
Proceeds from issuance of shares under stock option plan 66 293
------- -------
Net cash provided by financing activities 25,547 36,464
------- -------
Net increase (decrease) in cash and cash equivalents 3,126 (2,445)
Cash and cash equivalents at beginning of period 13,224 14,675
------- -------
Cash and cash equivalents at end of period $ 16,350 $ 12,230
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Federal income taxes $ 1,089 $ 1,285
======= =======
Interest on deposits and borrowings $ 16,264 $ 12,694
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects $ 357 $ (69)
======= =======
Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 245 $ 53
======= =======
Transfers from loans to real estate acquired through foreclosure $ -- $ 873
======= =======
Transfer of loans from held for investment to held for sale $ 5,169 $ --
======= =======
7
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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"). Accordingly, the Company's results of operations are
dependent upon the results of the Banks' operations. The Banks conduct a
general commercial banking business in southern and central Ohio which
consists of attracting deposits from the general public and applying those
funds to the origination of loans for commercial, consumer and residential
purposes. The Banks' profitability is significantly dependent on net
interest income, which is the difference between interest income generated
from interest-earning assets (i.e., loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e., customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Banks' can be significantly influenced by a number of
competitive factors, such as governmental monetary policy, that are outside
of management's control.
The 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, 2000. However, all adjustments (consisting only of normal
recurring accruals), which, in the opinion of management, are necessary for
a fair presentation of the consolidated financial statements, have been
included. The results of operations for the three and six months ended June
30, 2001 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 Finance
Company ("Action"), and Oak Hill Capital Trust I (the "Trust"). All
significant 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.
At June 30, 2001, the Company had $300.8 million of certificates
of deposit maturing within one year. It has been the Company's historic
experience that such certificates of deposit will be renewed at market
rates of interest. It is management's belief that maturing certificates of
deposit over the next year will similarly be renewed at market rates of
interest without a material adverse effect on the results of operations.
In the event that certificates of deposit cannot be renewed at
prevalent market rates, the Company can obtain up to $145.1 million in
advances from the Federal Home Loan Bank of Cincinnati ("FHLB"). Also, as
an operational philosophy, the Company seeks to obtain advances to help
with asset/liability management and liquidity. At June 30, 2001, the
Company had $74.6 million of outstanding FHLB advances.
At June 30, 2001, loan commitments, or loans committed but not
closed, totaled $24.8 million. Additionally, the Company had unused lines
of credit and letters of credit totaling $72.5 million and $1.4 million,
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.
8
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 5,043,882, 5,067,192, 5,285,992, and
5,308,940 for the three and six months ended June 30, 2001 and 2000,
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 5,108,165, 5,131,453, 5,353,806, and 5,376,242
for the three and six months ended June 30, 2001 and 2000, respectively.
Incremental shares related to the assumed exercise of stock
options included in the computation of diluted earnings per share totaled
64,283, 64,261, 70,814 and 67,302 for three and six months ended June 30,
2001 and 2000, respectively. Options to purchase 562,125 and 452,013 shares
of common stock, with a respective weighted-average exercise price of
$16.55 and $16.88, were outstanding at June 30, 2001 and 2000,
respectively, but were excluded from the computation of common share
equivalents because their exercise prices were greater than the average
market price of the common shares.
5. Effects of Recent Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which revises the standards for accounting
for securitizations and other transfers of financial assets and collateral
and requires certain disclosures, but carries over most of the provisions
of SFAS No. 125 without reconsideration. SFAS No. 140 is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The Statement is effective for
recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. Management adopted SFAS No. 140 effective April 1, 2001,
as required, without material effect on the Company's financial position or
results of operations.
In June 2001, the FASB issued SFAS No. 141 "Business
Combinations," which requires that all business combinations initiated
after June 30, 2001 be accounted for using the purchase method. The pooling
method of accounting is prohibited except for combinations initiated before
July 1, 2001. The remaining provisions of SFAS No. 141 relating to business
combinations accounted for by the purchase method, including identification
of intangible assets, accounting for negative goodwill, financial statement
presentation and disclosure, are effective for combinations initiated after
June 30, 2001. Management adopted SFAS No. 141 effective July 1, 2001, as
required, without material effect on the Company's financial position or
results of operations.
In June 2001, the FASB issued SFAS No. 142 "Goodwill and
Intangible Assets," which prescribes accounting for all purchased goodwill
and intangible assets. Pursuant to SFAS No. 142, acquired goodwill is not
amortized, but is tested for impairment at the reporting unit level
annually and whenever an impairment indicator arises. All goodwill should
be assigned to reporting units that are expected to benefit from the
goodwill. When an entity reorganizes its reporting structure, goodwill
should be reallocated to reporting units based on the relative fair values
of the units. Goodwill impairment should be tested with a two-step
approach. First, the fair value of the reporting unit should be compared to
its carrying value, including goodwill. If the reporting unit's carrying
value exceeds its fair value, then any goodwill impairment should be
measured as the excess of goodwill's carrying value over its implied fair
value. The implied fair value of goodwill should be calculated in the same
manner as goodwill is calculated for a business combination, using the
reporting unit's fair value as the "purchase price." Therefore, goodwill's
implied fair value will be the excess of the "purchase price" over the
amounts allocated to assets, including unrecognized intangible assets, and
liabilities of the reporting unit. Goodwill impairment losses should be
reported in the income statement as a separate line item within operations,
except for such losses included in the calculation of a gain or loss from
discontinued operations.
9
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Effects of Recent Accounting Pronouncements - continued
An acquired intangible asset, other than goodwill, should be
amortized over its useful economic life. The useful life of an intangible
asset is indefinite if it extends beyond the foreseeable horizon. If an
asset's life is indefinite, the asset should not be amortized until the
life is determined to be finite. Intangible assets being amortized should
be tested for impairment in accordance with SFAS 121. Intangible assets not
being amortized should be tested for impairment, annually and whenever
there are indicators of impairment, by comparing the asset's fair value to
its carrying amount.
SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Early adoption is permitted for companies with fiscal
years beginning after March 15, 2001, but only if the first quarter
financial statements have not previously been issued. Calendar year end
companies may not adopt early. Until adoption of SFAS No. 142, existing
goodwill continues to be amortized and tested for impairment under
previously existing standards. As of the date SFAS No. 142 is adopted and
based on the company's current reporting structure, reporting units should
be established; net assets should be assigned to reporting units, unless
they do not relate to a reporting unit; and goodwill should be assigned to
one or more reporting units.
Within six months of adopting SFAS No. 142, a company must have
completed the first step of the goodwill transitional impairment test: a
comparison, as of the beginning of the fiscal year, of each reporting
unit's fair value with its carrying value. If the carrying value exceeds
fair value, the second step - calculating the amount of goodwill impairment
as of the beginning of the fiscal year - would be required as soon as
possible, but no later than the end of the fiscal year. Any transitional
impairment loss would be reported as a change in accounting principle in
the first interim period financial statements of the implementation year,
regardless of when the loss measurement is completed. After completion of
the first step of the transitional test, a company should disclose which
segments might have to recognize an impairment loss and when the potential
loss would be measured.
If an impairment indicator arises before the completion of the
transition testing, a full impairment test would be required as soon as
possible. Any goodwill impairment resulting from this test should be
reported as an impairment loss, not as a change in accounting principle.
SFAS No. 142 is not expected to have a material effect on the Company's
financial position or results of operations.
10
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from December 31, 2000 to June 30,
2001
The Company's total assets amounted to $724.6 million at June 30, 2001,
an increase of $30.0 million, or 4.3%, over the $694.6 million total at December
31, 2000. The increase was funded primarily through growth in deposits of $21.8
million, an increase in FHLB advances of $4.4 million and an increase in
stockholders' equity of $2.0 million.
Cash and due from banks, federal funds sold, and investment securities,
including mortgage-backed securities, increased by $17.0 million, or 22.8%, to a
total of $91.6 million at June 30, 2001, compared to $74.6 million at December
31, 2000. Investment securities increased by $10.2 million, as purchases of
$39.3 million exceeded maturities and repayments of $11.6 million and sales of
$18.0 million. Federal funds sold increased by $3.7 million during the six-month
period ended June 30, 2001.
Loans receivable totaled $612.3 million at June 30, 2001, an increase
of $13.2 million, or 2.2%, over total loans at December 31, 2000. Loan
disbursements totaled $151.2 million during the six-month period ended June 30,
2001, which were partially offset by loan sales of $22.8 million and principal
repayments of $113.9 million. Loan origination volume decreased by $5.7 million
and sales volume increased by $18.4 million during the six-month period ended
June 30, 2001, compared to the same period in 2000. The Company's loan growth
for the period was comprised primarily of a $28.1 million, or 18.4%, increase in
commercial and other loans, which was partially offset by a $9.9 million, or
2.6%, decrease in loans secured by real estate, a $4.2 million, or 6.0%,
decrease in installment loans and an $86,000, or 5.4%, decrease in credit card
loans. The Company's allowance for loan losses amounted to $7.8 million at June
30, 2001, an increase of $646,000, or 9.0%, over the total at December 31, 2000.
The allowance for loan losses represented 1.26% and 1.19% of the total loan
portfolio at June 30, 2001 and December 31, 2000, respectively. Net charge-offs
totaled approximately $426,000 and $521,000 for the six months ended June 30,
2001 and 2000, respectively. The Company's allowance represented 142.05% and
250.81% of nonperforming loans, which totaled $5.5 million and $2.9 million at
June 30, 2001 and December 31, 2000, respectively. At June 30, 2001,
nonperforming loans were comprised of $727,000 in installment loans, $507,000 in
commercial loans and $4.3 million of loans secured primarily by commercial real
estate and one-to-four family residential real estate. In management's opinion,
all nonperforming loans were adequately collateralized at June 30, 2001.
Deposits totaled $584.4 million at June 30, 2001, an increase of $21.8
million, or 3.9%, over the $562.6 million total at December 31, 2000. The
increase resulted primarily from management's continuing marketing efforts and
competitive pricing with respect to mid-term 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 $74.6 million at June
30, 2001, an increase of $4.4 million, or 6.3%, over the December 31, 2000
total. Notes payable increased by $400,000, or 17.4%. Proceeds from advances and
notes payable were primarily used to fund loan originations during the period.
In March 2000, a Delaware statutory business trust owned by the Company
(the "Trust"), issued $5.0 million of mandatorily redeemable debt securities.
The debt securities issued by the trust are included in the Company's regulatory
capital, specifically as a component of Tier I capital. The proceeds from the
issuance of the subordinated debentures and common securities were used by the
Trust to purchase from the Company $5.0 million of subordinated debentures
maturing on March 8, 2030. The subordinated debentures are the sole asset of the
Trust, and the Company owns all of the common securities of the Trust. Interest
payments on the debt securities are to be made semi-annually at an annual fixed
rate of interest of 10.875% and are reported as a component of interest expense
on borrowings. The net proceeds received by the Company were used for general
corporate purposes, including repurchasing the Company's stock, and providing
general working capital.
The Company's stockholders' equity amounted to $51.9 million at June
30, 2001, an increase of $2.0 million, or 4.0%, over the balance at December 31,
2000. The increase resulted primarily from net earnings of $3.7 million and an
increase of $357,000 in the unrealized gains on securities available for sale,
which were partially offset by $1.1 million in dividends declared on common
stock and purchases of treasury shares totaling $1.0 million. The Banks are
required to maintain minimum regulatory capital pursuant to federal regulations.
At June 30, 2001, 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 three and six month periods ended June 30, 2001 and 2000
Comparison of Results of Operations for the Six-Month Periods Ended June 30,
2001 and 2000
General
Net earnings for the six months ended June 30, 2001, totaled $3.7
million, a $152,000, or 4.3%, increase over the amount reported in the
comparable 2000 period. The increase in earnings resulted primarily from a $1.3
million increase in net interest income and a $734,000 increase in other income,
which were partially offset by a $214,000 increase in the provision for losses
on loans, a $1.7 million increase in general, administrative and other expense,
and a $36,000 increase in the provision for federal income taxes.
Net Interest Income
Total interest income for the six months ended June 30, 2001,
amounted to $30.2 million, an increase of $4.7 million, or 18.3%, over the $25.5
million reported in the comparable 2000 period. Interest income on loans totaled
$27.8 million, an increase of $4.3 million, or 18.1%, over the comparable 2000
period. This increase resulted primarily from an $86.2 million, or 16.3%,
increase in the weighted-average ("average") portfolio balance, from $529.3
million to $615.5 million for the six months ended June 30, 2000 and 2001,
respectively, coupled with a 17 basis point increase in the average yield, from
8.93% to 9.10% for the six months ended June 30, 2000 and 2001, respectively.
Interest income on investment securities and other interest-earning assets
increased by $411,000, or 20.2%. The increase resulted primarily from a $16.0
million, or 25.6%, increase in the average portfolio balance, from $62.5 million
to $78.5 million for the six months ended June 30, 2000 and 2001, respectively,
which was partially offset by a 27 basis point decrease in the average yield, to
6.29% from 6.56% for the six months ended June 30, 2001 and 2000, respectively.
Total interest expense amounted to $16.5 million for the six
months ended June 30, 2001, an increase of $3.4 million, or 25.5%, over the
comparable 2000 period. Interest expense on deposits increased by $3.0 million,
or 26.7%, to a total of $14.1 million for the six months ended June 30, 2001.
The increase resulted primarily from a $79.4 million, or 17.6%, increase in the
average portfolio balance, from $452.0 million to $531.4 million for the six
months ended June 30, 2000 and 2001, respectively, coupled with a 39 basis point
increase in the average cost of deposits from 4.94% to 5.33% for the six months
ended June 30, 2000 and 2001, respectively. Interest expense on borrowings
increased by $389,000, or 18.9%, for the six-month period ended June 30, 2001.
This increase was due to a $16.3 million, or 25.0%, increase in average
borrowings outstanding, from $65.3 million to $81.6 million for the six months
ended June 30, 2000 and 2001, respectively, which was partially offset by a 30
basis point decrease in the average cost of borrowings to 6.05% from 6.35% for
the six months ended June 30, 2001 and 2000, respectively.
As a result of the foregoing changes in interest income and
interest expense, net interest income increased by $1.3 million, or 10.7%, for
the six months ended June 30, 2001, as compared to the six months ended June 30,
2000. The interest rate spread decreased by 22 basis points to 3.35% from 3.57%
for the six months ended June 30, 2001 and 2000, respectively. The net interest
margin decreased by 22 basis points to 3.99% from 4.21% for the six-months ended
June 30, 2001 and 2000, respectively.
Provision for Losses on Loans
The provision for losses on loans represents a charge to
earnings to maintain the allowance at a level management believes is adequate to
absorb losses in the loan portfolio. The Company's provision for losses on loans
amounted to $1.1 million for the six months ended June 30, 2001, an increase of
$214,000, or 24.9%, compared to the same period in 2000. The provision for
losses on loans in the six-month period ended June 30, 2001, generally reflects
the $13.2 million of growth in the loan portfolio during the period coupled with
an increase in the level of nonperforming loans year to year. Net loan
charge-offs amounted to $426,000 for the six months ended June 30, 2001, as
compared to $521,000 for the six months ended June 30, 2000.
12
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three and six month periods ended June 30, 2001 and 2000
Comparison of Results of Operations for the Six-Month Periods Ended June 30,
2001 and 2000 (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 June 30, 2001, future adjustments to the allowance could be
necessary and net earnings could be affected if circumstances and/or economic
conditions differ substantially from the assumptions used in making the initial
determinations.
Other Income
Other income totaled $2.0 million for the six months ended June
30, 2001, an increase of $734,000, or 57.9%, over the amount reported in the
comparable 2000 period. This increase resulted primarily from a $293,000, or
24.4%, increase in service fees, charges, and other operating income, an
increase of $409,000 in gain on sale of loans and a $32,000 gain on investment
securities transactions.
General, Administrative and Other Expense
General, administrative and other expense totaled $9.1 million for
the six months ended June 30, 2001, an increase of $1.7 million, or 22.3%, over
the amount reported in the comparable 2000 period. The increase resulted
primarily from a $1.4 million, or 32.2%, increase in employee compensation and
benefits, an increase of $65,000, or 7.0%, in occupancy and equipment, a
$60,000, or 22.6%, increase in franchise taxes and a $141,000, or 7.1%, increase
in other operating expense.
The increase in employee compensation and benefits resulted
primarily from increased staffing levels required in connection with the
establishment of new branch locations, additional management staffing, and
normal merit increases, and an increase in benefit plan expense year to year.
The increase in occupancy and equipment expense was due primarily to a $7,000,
or 1.8%, increase in depreciation expense, a $35,000 or 12.4%, increase in
maintenance and utilities, and a $23,000, or 13.5%, increase in rent expense.
The increase in other operating expense resulted primarily from a $29,000
increase in professional fees, a $27,000 increase in costs associated with ATM
transaction charges and data processing, a $28,000 increase in computer and PC
equipment expense, and incremental increases in various other operating
expenses, which were partially offset by the recovery of a credit card
processing write-off during the fourth quarter of 2000 which totaled $43,000.
Federal Income Taxes
The provision for federal income taxes amounted to $1.8 million
for the six months ended June 30, 2001, an increase of $36,000, or 2.0%, over
the amount recorded for the comparable 2000 period. The increase resulted
primarily from a $188,000, or 3.5%, increase in earnings before taxes. The
effective tax rates were 33.0% and 33.5% for the six months ended June 30, 2001
and 2000, respectively.
Comparison of Results of Operations for the Three-Month Periods Ended June 30,
2001 and 2000
General
Net earnings for the three months ended June 30, 2001 totaled $2.0
million, a $150,000, or 8.3%, increase over the amount reported in the
comparable 2000 period. The increase in earnings resulted primarily from a
$771,000 increase in net interest income and a $482,000 increase in other
income, which were partially offset by an $7,000 increase in the provision for
losses on loans, a $1.0 million increase in general, administrative and other
expense, and a $52,000 increase in the provision for federal income taxes.
13
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three and six month periods ended June 30, 2001 and 2000
Comparison of Results of Operations for the Three-Month Periods Ended June 30,
2001 and 2000 (continued)
Net Interest Income
Total interest income for the three months ended June 30, 2001,
amounted to $15.1 million, an increase of $1.9 million, or 14.8%, over the
comparable 2000 period. Interest income on loans totaled $13.8 million, an
increase of $1.7 million, or 14.0%, over the comparable 2000 period. This
increase resulted primarily from a $77.3 million, or 14.3%, increase in the
average portfolio balance, from $540.4 million to $617.7 million for the three
months ended June 30, 2000 and 2001, respectively, which was partially offset by
a 5 basis point decrease in the average yield, to 8.96% from 9.01% for the three
months ended June 30, 2000 and 2001, respectively. Interest income on investment
securities and other interest-earning assets increased by $253,000, or 24.3%.
The increase resulted primarily from a $24.0 million, or 38.2%, increase in the
average portfolio balance, from $62.9 million to $86.9 million for the three
months ended June 30, 2000 and 2001, respectively, which was partially offset by
a 70 basis point decrease in the average yield, to 5.96% from 6.66% for the
three months ended June 30, 2001 and 2000, respectively.
Total interest expense amounted to $8.1 million for the three
months ended June 30, 2001, an increase of $1.2 million, or 16.9%, over the $6.9
million reported in the comparable 2000 period. Interest expense on deposits
increased by $1.1 million, or 19.7%, to a total of $6.9 million for the three
months ended June 30, 2001. The increase resulted primarily from an $83.2
million, or 18.2%, increase in the average portfolio balance, from $456.3
million to $539.5 million for the three months ended June 30, 2000 and 2001,
respectively, coupled with a 5 basis point increase in the average cost of
deposits from 5.05% to 5.10% for the three months ended June 30, 2000 and 2001,
respectively. Interest expense on borrowings increased by $42,000, or 3.6%, for
the three-month period ended June 30, 2001. This increase was due to a $10.8
million, or 15.1%, increase in average borrowings outstanding, from $71.6
million to $82.4 million for the three months ended June 30, 2000 and 2001,
respectively, which was partially offset by a 68 basis point decrease in the
average cost of borrowings to 5.94% from 6.62% for the three months ended June
30, 2001 and 2000, respectively.
As a result of the foregoing changes in interest income and
interest expense, net interest income increased by $771,000, or 12.4%, for the
three months ended June 30, 2001, as compared to the three months ended June 30,
2000. The interest rate spread decreased by 12 basis points to 3.38% from 3.50%
for the three months ended June 30, 2001 and 2000, respectively. The net
interest margin decreased by 17 basis points to 3.99% from 4.16% for the
three-months ended June 30, 2001 and 2000, respectively.
Provision for Losses on Loans
The provision for losses on loans represents a charge to
earnings to maintain the allowance at a level management believes is adequate to
absorb losses in the loan portfolio. The Company's provision for losses on loans
amounted to $505,000 for the three months ended June 30, 2001, an increase of
$7,000, or 1.4%, compared to the same period in 2000. The provision for losses
on loans in the three-month period ended June 30, 2001, generally reflects the
increase in the level of nonperforming loans year-to- year. Net loan charge-offs
amounted to $281,000 for the three months ended June 30, 2001, as compared to
$171,000 for the three months ended June 30, 2000.
Although management believes that it uses the best information
available in providing for possible loan losses and believes that the allowance
is adequate at June 30, 2001, future adjustments to the allowance could be
necessary and net earnings could be affected if circumstances and/or economic
conditions differ substantially from the assumptions used in making the initial
determinations.
Other Income
Other income totaled $1.1 million for the three months ended June
30, 2001, an increase of $482,000, or 74.5%, over the amount reported in the
comparable 2000 period. This increase resulted primarily from a $193,000, or
30.1%, increase in service fees, charges, and other operating income, an
increase of $253,000 in gain on sale of loans and a $36,000 gain on investment
securities transactions.
14
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three and six month periods ended June 30, 2001 and 2000
Comparison of Results of Operations for the Three-Month Periods Ended June 30,
2001 and 2000 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $4.7 million for
the three months ended June 30, 2001, an increase of $1.0 million, or 28.5%,
over the amount reported in the comparable 2000 period. The increase resulted
primarily from an $832,000, or 41.0%, increase in employee compensation and
benefits, an increase of $18,000, or 3.9%, in occupancy and equipment, a
$44,000, or 35.8%, increase in franchise taxes and a $136,000, or 13.2%,
increase in other operating expense.
The increase in employee compensation and benefits resulted
primarily from increased staffing levels required in connection with the
establishment of new branch locations, additional management staffing, and
normal merit increases, and an increase in benefit plan expense year to year.
The increase in occupancy and equipment expense was due primarily to a $46,000,
or 33.5%, increase in maintenance and utilities, which was partially offset by a
$30,000, or 14.9%, decrease in depreciation expense. The increase in other
operating expense resulted primarily from a $28,000 increase in computer and PC
equipment expense, an increase in costs associated with ATM transaction charges
and data processing totaling $14,000, coupled with incremental increases in
various other operating expenses.
Federal Income Taxes
The provision for federal income taxes amounted to $963,000 for
the three months ended June 30, 2001, an increase of $52,000, or 5.7%, over the
$911,000 recorded for the comparable 2000 period. The increase resulted
primarily from a $201,000, or 7.4%, increase in earnings before taxes. The
effective tax rates were 33.0% and 33.5% for the three months ended June 30,
2001 and 2000, respectively.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
There has been no significant change from disclosures included
in the Company's Annual Report on Form 10-K for the period
ended December 31, 2000.
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
None
Item 5: Other Information
Share Repurchase Plan
On April 11, 2000, the Company announced its intention to
repurchase up to 320,000 shares, or approximately 6% of its
outstanding common stock. The repurchase program, which was
originally to run through December 31, 2000, was extended
until June 30, 2001 or until the entire amount of shares
authorized was repurchased, whichever was earlier. The
Company's Board of Directors approved the buyback program in
light of the existing market conditions and the capital
position of the Company.
The buyback was completed in the first quarter, with a total
of 326,620 shares repurchased over the course of the program.
The repurchased shares have become treasury shares that will
be used for general corporate purposes, including mitigating
the potential dilutive effect of the Company's stock option
plan.
Branch Sale Agreement
In April 2001, the Company entered into an agreement to sell a
branch location with approximately $10.7 million in deposits
to another financial institution. The sale has received the
necessary regulatory approvals and is expected to close on or
before September 30, 2001.
Buy-Sell Agreement
John D. Kidd, President, CEO and director of the Company and
Evan E. Davis, Chairman of the Board of Directors of the
Company, have entered into a Buy-Sell Agreement dated April
11, 2001 (the "Agreement"), whereby in the event of either
one's death, the survivor shall have the right to purchase
some or all of the shares of the Company held by the
deceased's estate. In connection with the Agreement, Mr. Kidd
and Mr. Davis each have executed a Limited Power of Attorney
giving the other sole right, power and authority to vote all
of the shares of the Company that he holds in the event of his
incapacity. According to their Schedule 13G reports as updated
for the year ended December 31, 2000, Mr. Kidd beneficially
owns approximately 10.77% and Mr. Davis beneficially owns
approximately 18.00% of the Company's outstanding common
stock.
Business Combination
On August 1, 2001, the Company announced that it had signed a
definitive agreement to acquire privately held insurance
agency Innovative Financial Services Agency, Inc. (IFS). IFS
shareholders will receive 172,414 shares of unregistered Oak
Hill Financial common stock, which represents an exchange
ratio of 689.656 shares of OAKF stock for every one share of
IFS stock, or a total acquisition price of approximately $2.7
million.
16
Oak Hill Financial, Inc.
PART II (continued)
Item 5: Other Information (continued)
Financial Holding Company
On July 11, 2001, the Company received notification from the
Federal Reserve Bank that its election to become a financial
holding company, under the Gramm-Leach-Bliley Act, had been
approved.
The Gramm-Leach-Bliley Act, effective November 12, 1999,
permits a bank holding company that elects and qualifies to be
treated as a financial holding company to engage in a full
range of financial activities which include banking,
insurance, and securities activities, merchant banking and any
additional activities that the Federal Reserve Bank, in
consultation with the Secretary of the Treasury, determines to
be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a
substantial risk to the safety and soundness of depository
institutions or the financial system in general.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
2 Agreement and Plan of Merger between the
Company and IFS
10 Buy-Sell Agreement between John D. Kidd
and Evan E. Davis and related powers-
of-attorney
99 Press release dated August 1, 2001 related
to the business combination between the
Company and IFS
(b) Reports on Form 8-K
The Company has filed the following current reports
on Form 8-K with the Securities and Exchange
Commission:
(a) Form 8-K, dated July 23, 2001, filed with the Securities and Exchange
Commission on July 23, 2001.
17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: August 2, 2001 By: /s/ John D. Kidd
-------------------------------------
John D. Kidd
President and Chief Executive Officer
Date: August 2, 2001 By: /s/ Ron J. Copher
-------------------------------------
Ron J. Copher
Chief Financial Officer
18