1
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 March 31, 2002
Commission File Number: 0-26876
OAK HILL FINANCIAL, INC.
(Exact name of Registrant as specified in its charter)
Ohio 31-1010517
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14621 State Route 93 45640
Jackson, Ohio (Zip Code)
(Address of principal executive office)
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 May 3, 2002, the latest practicable date, 5,294,958 shares of the
Registrant's common stock, $.50 stated value, were issued and outstanding.
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Oak Hill Financial, Inc.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 14
Item 2: Changes in Securities and Use of Proceeds 14
Item 3: Default Upon Senior Securities 14
Item 4: Submission of Matters to a Vote Of Security Holders 14
Item 5: Other Information 14
Item 6: Exhibits and Form 8-K 14
Signatures 15
2
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
March 31, December 31,
ASSETS 2002 2001
Cash and due from banks $ 14,278 $ 18,915
Federal funds sold 11,086 11,651
Investment securities designated as available for sale - at market 83,794 75,574
Investment securities designated as held-to-maturity - at cost (approximate
market value of $3,155 and $3,386 at March 31, 2002 and December 31, 2001,
respectively) 3,407 3,407
Loans receivable - net 669,385 644,444
Loans held for sale - at lower of cost or market 306 1,637
Office premises and equipment - net 9,561 9,502
Federal Home Loan Bank stock - at cost 5,415 5,356
Real estate acquired through foreclosure 1,583 1,587
Accrued interest receivable 4,116 3,821
Goodwill - net 413 216
Prepaid expenses and other assets 2,032 1,257
Deferred federal income taxes 1,195 965
------- -------
Total assets $806,571 $778,332
======= =======
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits $653,730 $612,204
Securities sold under agreements to repurchase 3,684 3,218
Advances from the Federal Home Loan Bank 79,070 93,942
Notes payable 2,800 2,700
Guaranteed preferred beneficial interests in the Corporation's
junior subordinated debentures 5,000 5,000
Accrued federal income taxes 817 1,061
Accrued interest payable and other liabilities 3,317 3,858
------- -------
Total liabilities 748,418 721,983
Stockholders' equity
Common stock - $.50 stated value; authorized 15,000,000 shares, 5,594,228
shares issued at March 31, 2002 and
December 31, 2001 2,797 2,797
Additional paid-in capital 5,128 5,114
Retained earnings 55,404 53,506
Treasury stock (310,850 and 326,933 shares at cost at March 31, 2002
and December 31, 2001, respectively) (4,874) (5,007)
Accumulated comprehensive loss:
Unrealized loss on securities designated as available for sale,
net of related tax effects (302) (61)
------- -------
Total stockholders' equity 58,153 56,349
------- -------
Total liabilities and stockholders' equity $806,571 $778,332
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3
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31,
(In thousands, except share data)
2002 2001
(Restated)
INTEREST INCOME
Loans $13,115 $13,981
Investment securities 1,013 1,005
Interest-bearing deposits and other 109 149
------ ------
Total interest income 14,237 15,135
INTEREST EXPENSE
Deposits 5,220 7,192
Borrowings 1,226 1,229
------ ------
Total interest expense 6,446 8,421
------ ------
Net interest income 7,791 6,714
Provision for losses on loans 460 567
------ ------
Net interest income after provision for losses on loans 7,331 6,147
OTHER INCOME
Gain on sale of loans 395 217
Gain (loss) on investment securities transactions 49 (4)
Gain on sale of real estate 122 --
Insurance commissions 538 546
Service fees, charges and other operating 691 645
------ ------
Total other income 1,795 1,404
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE
Employee compensation and benefits 3,220 3,078
Occupancy and equipment 601 527
Federal deposit insurance premiums 26 39
Franchise taxes 176 161
Other operating 1,388 1,157
------ ------
Total general, administrative and other expense 5,411 4,962
------ ------
Earnings before federal income taxes 3,715 2,589
FEDERAL INCOME TAXES
Current 1,290 314
Deferred (106) 533
------ ------
Total federal income taxes 1,184 847
------ ------
NET EARNINGS $ 2,531 $ 1,742
====== ======
EARNINGS PER SHARE
Basic $.48 $.33
=== ===
Diluted $.47 $.33
=== ===
4
Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31,
(In thousands)
2002 2001
(Restated)
Net earnings $2,531 $1,742
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities designated as available for sale,
net of taxes (benefits) of $(108) and $227, respectively (209) 440
Reclassification adjustment for realized (gains) losses included in net earnings,
net of taxes (benefits) of $17 and $(1), respectively (32) 3
----- -----
Comprehensive income $2,290 $2,185
===== =====
Accumulated comprehensive income (loss) $ (302) $ 406
===== =====
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Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
(In thousands)
2002 2001
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings for the period $ 2,531 $ 1,742
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 182 219
Gain on sale of real estate (122) --
(Gain) loss on investment securities transactions (49) 4
Amortization of premiums and discounts on investment
securities - net 223 7
Proceeds from sale of loans in secondary market 21,467 11,116
Loans disbursed for sale in secondary market (19,965) (12,312)
Gain on sale of loans (171) (110)
Amortization of deferred loan origination costs 46 73
Federal Home Loan Bank stock dividends (59) (89)
Provision for losses on loans 460 567
Amortization of goodwill -- 8
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (775) (672)
Accrued interest receivable (295) (162)
Accrued interest payable and other liabilities (541) (146)
Federal income taxes
Current (244) 307
Deferred (106) 533
------ ------
Net cash provided by operating activities 2,582 1,085
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Loan disbursements (81,741) (62,185)
Principal repayments on loans 56,294 47,523
Principal repayments on mortgage-backed securities 3,465 1,270
Proceeds from sale of investment securities 7,240 11,551
Proceeds from maturity of investment securities 5,000 --
Proceeds from disposition of assets 345 131
Purchase of investment securities (24,463) (20,487)
Purchase of office premises and equipment (461) (234)
Purchase of McNelly Insurance Agency (97) --
(Increase) decrease in federal funds sold 565 (4,509)
------ ------
Net cash used in investing activities (33,853) (26,940)
------ ------
Net cash used in operating and investing activities
(balance carried forward) (31,271) (25,855)
------ ------
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Oak Hill Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended March 31,
(In thousands)
2002 2001
(Restated)
Net cash used in operating and investing activities
(balance brought forward) $(31,271) $(25,855)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from securities sold under agreement to repurchase 466 246
Net increase in deposit accounts 41,526 19,321
Proceeds from Federal Home Loan Bank advances 15,145 531,425
Repayments of Federal Home Loan Bank advances (30,017) (523,166)
Dividends on common shares (633) (556)
Purchase of treasury stock -- (1,030)
Proceeds from issuance of shares under stock option plan 147 56
------- -------
Net cash provided by financing activities 26,634 26,396
------- -------
Net increase (decrease) in cash and cash equivalents (4,637) 541
Cash and cash equivalents at beginning of period 18,915 13,227
------- -------
Cash and cash equivalents at end of period $ 14,278 $ 13,768
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Federal income taxes $ 1,469 $ --
======= =======
Interest on deposits and borrowings $ 6,678 $ 8,407
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects $ (241) $ 443
======= =======
Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 224 $ 107
======= =======
Transfer of loans from held for investment to held for sale $ -- $ 3,036
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Issuance of note payable in connection with purchase of
McNelly Insurance Agency $ 100 $ --
======= =======
Acquisition of treasury stock in exchange for exercise of stock options $ 23 $ --
======= =======
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Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended March 31, 2002 and 2001
1. Basis of Presentation
The business activities of Oak Hill Financial, Inc. (the
"Company") have been limited primarily to holding the common shares of Oak
Hill Banks ("Oak Hill") and Towne Bank ("Towne"), (collectively hereinafter
the "Banks"), Action Finance Company ("Action") and McNelly, Patrick &
Associates. Accordingly, the Company's results of operations are dependent
upon the results of operations of its subsidiaries. The Banks conduct a
general commercial banking business in southern and central Ohio which
consists of attracting deposits from the general public and applying those
funds to the origination of loans for commercial, consumer and residential
purposes. Action is a consumer finance company that originates installment
and home equity loans. The Banks' and Action's profitability is
significantly dependent on net interest income, which is the difference
between interest income generated from interest-earning assets (i.e., loans
and investments) and the interest expense paid on interest-bearing
liabilities (i.e., customer deposits and borrowed funds). Net interest
income is affected by the relative amount of interest-earning assets and
interest-bearing liabilities and the interest received or paid on these
balances. The level of interest rates paid or received by the Banks' and
Action can be significantly influenced by a number of competitive factors,
such as governmental monetary policy, that are outside of management's
control.
On August 31, 2001, the Company combined with Innovative Financial
Services Agency, Inc. ("IFS") in a transaction whereby IFS became a
wholly-owned subsidiary of the Company. IFS was renamed Oak Hill Financial
Insurance Agency, Inc. and conducts business as McNelly, Patrick &
Associates ("MPA"). MPA is an insurance agency specializing in group health
insurance and other employee benefits in southern and central Ohio. The
transaction was initiated prior to July 1, 2001 and was accounted for as a
pooling-of-interests. Accordingly, the consolidated financial statements
have been restated to reflect the effects of the business combination as of
January 1, 2001. Pursuant to the merger agreement, the Company issued
172,414 shares of common stock in exchange for the shares of MPA.
On September 30, 2001, the Company formed Oak Hill Title Agency,
LLC ("Oak Hill Title") in conjunction with a law firm to provide title
services for commercial and residential real estate transactions. Oak Hill
Title commenced operations in January 2002.
In January 2002, MPA purchased McNelly Insurance Agency, a local
property and casualty insurance agency, for consideration of $100,000 in
cash and a $100,000 note payable due within one year. This purchase
resulted in an increase in goodwill of $197,000.
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore, do
not include information or footnotes necessary for a complete presentation
of financial position, results of operations and cash flows in conformity
with accounting principles generally accepted in the United States of
America. Accordingly, these financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
the Company included in the Annual Report on Form 10-K for the year ended
December 31, 2001. However, all adjustments (consisting only of normal
recurring accruals), which, in the opinion of management, are necessary for
a fair presentation of the consolidated financial statements, have been
included. The results of operations for the three months ended March 31,
2002 are not necessarily indicative of the results that may be expected for
the entire year.
2. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, the Banks, Action, Oak Hill
Capital Trust I (the "Trust"), MPA and Oak Hill Title. All intercompany
balances 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.
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Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended March 31, 2002 and 2001
3. Liquidity and Capital Resources (continued)
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 March 31, 2002, the Company had $301.4 million of certificates
of deposit maturing within one year. It has been the Company's historic
experience that such certificates of deposit will be renewed at the Banks'
market rates of interest. It is management's belief that maturing
certificates of deposit over the next year will similarly be renewed at
market rates of interest without a material adverse effect on the results
of operations.
In the event that certificates of deposit cannot be renewed at
prevalent market rates, as of March 31, 2002 the Company can obtain up to
$149.4 million in advances from the Federal Home Loan Bank of Cincinnati
("FHLB"). Also, as an operational philosophy, the Company seeks to obtain
advances to help with asset/liability management and liquidity. At March
31, 2002, the Company had $79.1 million of outstanding FHLB advances.
At March 31, 2002, loan commitments, or loans committed but not
closed, totaled $32.4 million. Additionally, the Company had unused lines
of credit and letters of credit totaling $41.5 million and $732,000,
respectively. Funding for these amounts are expected to be provided by the
sources described above. Management believes the Company has adequate
resources to meet its normal funding requirements.
4. Earnings Per Share
Basic earnings per share is computed based upon the weighted-
average shares outstanding during the period. Weighted-average common
shares outstanding totaled 5,274,240 and 5,263,175 for the three months
ended March 31, 2002 and 2001, respectively. Diluted earnings per share is
computed taking into consideration common shares outstanding and dilutive
potential common shares to be issued under the Company's stock option plan.
Weighted-average common shares deemed to be outstanding for purposes of
computing diluted earnings per share totaled 5,338,534 and 5,285,954 for
the three months ended March 31, 2002 and 2001, respectively.
There were 64,294 and 22,779 incremental shares related to the
assumed exercise of stock options included in the computation of diluted
earnings per share for three months ended March 31, 2002 and 2001,
respectively. Options to purchase 283,591 and 568,625 shares of common
stock with a respective weighted-average exercise price of $16.36 and
$16.55 were outstanding at March 31, 2002 and 2001, 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 June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Intangible Assets," which prescribes accounting for all
purchased goodwill and intangible assets. Pursuant to SFAS No. 142,
acquired goodwill is not amortized, but is tested for impairment at the
reporting unit level annually and whenever an impairment indicator arises.
All goodwill should be assigned to reporting units that are expected to
benefit from the goodwill. When an entity reorganizes its reporting
structure, goodwill should be reallocated to reporting units based on the
relative fair values of the units. Goodwill impairment should be tested
with a two-step approach. First, the fair value of the reporting unit
should be compared to its carrying value, including goodwill. If the
reporting unit's carrying value exceeds its fair value, then any goodwill
impairment should be measured as the excess of goodwill's carrying value
over its implied fair value. The implied fair value of goodwill should be
calculated in the same manner as goodwill is calculated for a business
combination, using the reporting unit's fair value as the "purchase price."
Therefore, goodwill's implied fair value will be the excess of the
"purchase price" over the amounts allocated to assets, including
unrecognized intangible assets, and liabilities of the reporting unit.
Goodwill impairment losses should be reported in the income statement as a
separate line item within operations, except for such losses included in
the calculation of a gain or loss from discontinued operations.
9
Oak Hill Financial, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended March 31, 2002 and 2001
5. Effects of Recent Accounting Pronouncements (continued)
SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Prior to adoption of SFAS No. 142, existing goodwill
continued to be amortized and tested for impairment under previously
existing standards. As of January 1, 2002, the date SFAS No. 142 was
adopted, management established its Towne Bank subsidiary as a reporting
unit. All goodwill was assigned to the Towne Bank reporting unit.
Pursuant to SFAS No. 142, within six months of adoption the
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, the
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. Management
adopted SFAS No. 142 effective January 1, 2002, as required, without
material effect on the Company's financial position or results of
operations, as the elimination of annual goodwill amortization will
increase 2002 earnings by approximately $34,000. The Company recognized
goodwill amortization totaling $8,000 for the three month period ended
March 31, 2001.
In August 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 carries over
the recognition and measurement provisions in SFAS No. 121. Accordingly, an
entity should recognize an impairment loss if the carrying value of a
long-lived asset or asset group (a) is not recoverable and (b) exceeds its
fair value. Similar to SFAS No. 121, SFAS No. 144 requires an entity to
test an asset or asset group for impairment whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable.
SFAS No. 144 differs from SFAS No. 121 in that it provides guidance on
estimating future cash flows to test recoverability. An entity may use
either a probability-weighted approach or best-estimate approach in
developing estimates of cash flow to test recoverability. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. Management
adopted SFAS No. 144 effective January 1, 2002, as required, without
material effect on the Company's financial condition or results of
operations.
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Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three month periods ended March 31, 2002 and 2001
Discussion of Financial Condition Changes from December 31, 2001 to March 31,
2002
The Company's total assets amounted to $806.6 million at March 31,
2002, an increase of $28.2 million, or 3.6%, over December 31, 2001. The
increase was funded primarily through growth in deposits of $41.5 million and an
increase in stockholders' equity of $1.8 million, which were partially offset by
a decrease in FHLB advances of $14.9 million.
Cash and due from banks, federal funds sold, and investment securities,
including mortgage-backed securities, increased by $3.0 million, or 2.8%, to a
total of $112.6 million at March 31, 2002, compared to December 31, 2001.
Investment securities increased by $8.2 million, as purchases of $24.5 million
exceeded maturities and repayments of $8.5 million and sales of $7.2 million.
Federal funds sold decreased by $565,000 during the three-month period ended
March 31, 2002.
Loans receivable totaled $669.7 million at March 31, 2002, an increase
of $23.6 million, or 3.7%, over total loans at December 31, 2001. Loan
disbursements totaled $101.7 million during the three-month period ended March
31, 2002, which were partially offset by loan sales of $21.3 million and
principal repayments of $56.3 million. Loan origination and sales volume
increased by $27.2 million and $10.3 million, respectively, as compared to the
same period in 2001. The Company's loan growth for the period was comprised
primarily of a $28.0 million, or 8.3%, increase in commercial and other loans,
which was partially offset by a $2.0 million, or 0.9%, decrease in loans secured
by residential real estate, a $2.0 million, or 2.5%, decrease in installment
loans net of unearned interest and a $240,000, or 14.4%, decrease in credit card
loans. The Company's allowance for loan losses amounted to $8.6 million at March
31, 2002, an increase of $290,000, or 3.5%, over the total at December 31, 2001.
The allowance for loan losses represented 1.27% and 1.28% of the total loan
portfolio at March 31, 2002 and December 31, 2001, respectively. Net charge-offs
totaled approximately $169,000 and $145,000 for the three months ended March 31,
2002 and 2001, respectively. The Company's allowance represented 173.90% and
160.00% of nonperforming loans, which totaled $5.0 million and $5.2 million at
March 31, 2002 and December 31, 2001, respectively. At March 31, 2002,
nonperforming loans were comprised of $959,000 in installment loans and $4.0
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 March 31, 2002.
Deposits totaled $653.7 million at March 31, 2002, an increase of $41.5
million, or 6.8%, over the $612.2 million total at December 31, 2001. The
increase resulted primarily from management's continuing marketing efforts to
attract demand deposits and low-cost core deposits as well as competitive
pricing with respect to certificate of deposit products throughout the Banks'
branch network. Proceeds from deposit growth were used primarily to fund loan
originations and purchases of investment securities, as well as to repay Federal
Home Loan Bank advances during the period.
Advances from the Federal Home Loan Bank totaled $79.1 million at March
31, 2002, a decrease of $14.9 million, or 15.8%, from the December 31, 2001
total. Securities sold under agreements to repurchase and notes payable
increased by $466,000, or 14.5%, and $100,000, or 3.7%, respectively.
The Company's stockholders' equity amounted to $58.2 million
at March 31, 2002, an increase of $1.8 million, or 3.2%, over the balance at
December 31, 2001. The increase resulted primarily from net earnings of $2.5
million, which was partially offset by an increase of $241,000 in the unrealized
loss on securities available for sale and $633,000 in dividends declared on
common stock. The Banks are required to maintain minimum regulatory capital
pursuant to federal regulations. At March 31, 2002, the Banks' regulatory
capital exceeded all regulatory capital requirements.
11
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three month periods ended March 31, 2002 and 2001
Comparison of Results of Operations for the Three-Month Periods Ended March 31,
2002 and 2001
General
Net earnings for the three months ended March 31, 2002 totaled
$2.5 million, a $789,000, or 45.3%, increase over the amount reported in the
comparable 2001 period. The increase in earnings resulted primarily from a $1.1
million increase in net interest income, a $391,000 increase in other income and
a $107,000 decrease in the provision for losses on loans, which were partially
offset by a $449,000 increase in general, administrative and other expense and a
$337,000 increase in the provision for federal income taxes.
Net Interest Income
Total interest income for the three months ended March 31, 2002,
amounted to $14.2 million, a decrease of $898,000, or 5.9%, from the $15.1
million reported in the comparable 2001 period. Interest income on loans totaled
$13.1 million, a decrease of $866,000, or 6.2%, from the comparable 2001 period.
This decrease resulted primarily from a 121 basis point decrease in the average
fully-taxable equivalent yield, to 8.04% for the three months ended March 31,
2002, which was partially offset by a $49.9 million, or 8.1%, increase in the
weighted-average ("average") portfolio balance, from $613.4 million to $663.3
million for the three months ended March 31, 2001 and 2002, respectively.
Interest income on investment securities and other interest-earning assets
decreased by $32,000, or 2.8%. The decrease resulted primarily from a 185 basis
point decrease in the average fully-taxable equivalent yield, to 5.17% for the
three months ended March 31, 2002, which was partially offset by a $27.5
million, or 39.5%, increase in the average portfolio balance, from $69.6 million
to $97.1 million for the three months ended March 31, 2001 and 2002,
respectively.
Total interest expense amounted to $6.4 million for the three
months ended March 31, 2002, a decrease of $2.0 million, or 23.5%, from the $8.4
million reported in the comparable 2001 period. Interest expense on deposits
decreased by $2.0 million, or 27.4%, to a total of $5.2 million for the three
months ended March 31, 2002. The decrease resulted primarily from a 188 basis
point decrease in the average cost of deposits, to 3.69% from 5.57% for the
three months ended March 31, 2002 and 2001, respectively, which was partially
offset by a $50.3 million, or 9.6%, increase in the average portfolio balance,
from $523.2 million to $573.5 million for the three months ended March 31, 2001
and 2002, respectively. Interest expense on borrowings decreased by $3,000, or
0.2%, for the three-month period ended March 31, 2002. This decrease was due to
an 81 basis point decrease in the average cost of borrowings, to 5.36% from
6.17% for the three months ended March 31, 2002 and 2001, respectively, which
was partially offset by a $12.0 million, or 14.8%, increase in average
borrowings outstanding, from $80.8 million to $92.8 million for the three months
ended March 31, 2001 and 2002, respectively.
As a result of the foregoing changes in interest income and
interest expense, net interest income increased by $1.1 million, or 16.0%, for
the three months ended March 31, 2002, as compared to the three months ended
March 31, 2001. The interest rate spread increased by 38 basis points, from
3.37% to 3.75% for the three months ended March 31, 2001 and 2002, respectively.
The fully-taxable equivalent net interest margin increased by 22 basis points,
from 4.02% to 4.24% for the three-months ended March 31, 2001 and 2002,
respectively.
Provision for Losses on Loans
The provision for losses on loans is charged to earnings to bring
the total allowance for loan losses to a level considered appropriate by
management based on historical experience, the volume and type of lending
conducted by the Company, the status of past due principal and interest
payments, general economic conditions, particularly as such conditions relate to
the Company's market area and other factors related to the collectibility of the
Company's loan portfolio. As a result of such analysis, management recorded a
$460,000 provision for losses on loans for the three months ended March 31,
2002, a decrease of $107,000, or 18.9%, compared to the same period in 2001. The
provision for losses on loans in the three-month period ended March 31, 2002,
generally reflects the $23.6 million of growth in the loan portfolio during the
period.
Although management believes that it uses the best information
available in providing for possible loan losses and believes that the allowance
is adequate at March 31, 2002, future adjustments to the allowance could be
necessary and net earnings
12
Oak Hill Financial, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three month periods ended March 31, 2002 and 2001
Comparison of Results of Operations for the Three-Month Periods Ended March 31,
2002 and 2001 (continued)
Provision for Losses on Loans (continued)
could be affected if circumstances and/or economic conditions differ
substantially from the assumptions used in making the initial determinations.
Other Income
Other income totaled $1.8 million for the three months ended March
31, 2002, an increase of $391,000, or 27.8%, over the amount reported in the
comparable 2001 period. This increase resulted primarily from a $46,000, or
7.1%, increase in service fees, charges, and other operating income, an increase
of $178,000 in gain on sale of loans, a $53,000 increase in gain on sale of
investments and a $122,000 gain on the sale of a former branch location, which
were partially offset by an $8,000 decrease in insurance commissions. The
increase in gain on sale of loans was due to the $10.3 million, or 93.5%,
increase in sales volume year-to-year.
General, Administrative and Other Expense
General, administrative and other expense totaled $5.4 million for
the three months ended March 31, 2002, an increase of $449,000, or 9.0%, over
the amount reported in the comparable 2001 period. The increase resulted
primarily from a $142,000, or 4.6%, increase in employee compensation and
benefits, an increase of $74,000, or 14.0%, in occupancy and equipment, and a
$231,000, or 20.0%, 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, 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 $57,000
increase in maintenance contract costs, a $31,000 increase in rent expense and a
$33,000 increase in real estate taxes, which were partially offset by decreases
of $35,000 and $18,000 in depreciation and utilities, respectively. The increase
in other operating expense resulted primarily from a $19,000 increase in costs
associated with ATM transaction charges and data processing, $55,000 in costs
associated with a new computer system upgrade, a $34,000 increase in charitable
contributions and a $24,000 increase in employee training, coupled with
incremental increases in other operating costs year-to-year.
Federal Income Taxes
The provision for federal income taxes amounted to $1.2 million
for the three months ended March 31, 2002, an increase of $337,000, or 39.8%,
over the $847,000 recorded for the comparable 2001 period. The increase resulted
primarily from a $1.1 million, or 43.5%, increase in earnings before taxes. The
effective tax rates were 31.9% and 32.7% for the three months ended March 31,
2002 and 2001, respectively.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
There has been no significant change from disclosures included
in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
13
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
(a) The Company held its 2002 Annual Meeting of
Stockholders on April 9, 2002. Holders of 4,609,414 common
shares of the Company were present, representing 87.4% of
the Company's 5,276,208 common shares outstanding.
(b) and (c) The following persons were elected
Class II members of the Company's Board of Directors to
serve until the 2004 Annual Meeting or until their
successors are duly elected and qualified. Each person
received the number of votes for or the number of votes with
authority withheld, indicated below.
Name Votes For Votes Withheld
Barry M. Dorsey, Ed.D. 4,607,332 2,082
Donald R. Seigneur 4,607,557 1,857
William S. Siders 4,607,557 1,857
H. Grant Stephenson 4,607,557 1,857
The continuing Class I Directors, whose terms expire at the
2003 Annual Meeting, are Evan E. Davis, C. Clayton Johnson,
John D. Kidd, D. Bruce Knox, and Richard P. LeGrand.
The proposal for the ratification of the appointment of
Grant Thornton LLP as independent auditor for the Company
for the year ending December 31, 2002, was approved with
4,591,164 votes FOR, 1,444 votes AGAINST, and 16,806 votes
ABSTAIN.
Item 5: Other Information
Not applicable
Item 6: Exhibits and Reports on Form 8-K
Exhibits: Not applicable
The Company has filed the following current reports on Form
8-K with the Securities and Exchange Commission:
Form 8-K, dated January 18, 2002, filed with the Securities
and Exchange Commission on January 18, 2002.
o Press Release of Oak Hill Financial, Inc., dated January 17,
2002, announcing the Company's earnings for the three months
("fourth quarter") and twelve months ended December 31, 2001.
14
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: May 6, 2002 By: /s/ John D. Kidd
------------------------------------
John D. Kidd
President and Chief Executive Officer
Date: May 6, 2002 By: /s/ Ron J. Copher
------------------------------------
Ron J. Copher
Chief Financial Officer
15