Oak Hill Financial Inc. chairman John D. "Jack" Kidd gave a simple explanation for why the Jackson, Ohio, company is selling itself to WesBanco Inc. of Wheeling, W.Va., for $201 million.
"The entire industry for community banking is going through a real trying period," Mr. Kidd said in an interview Friday. "I think size can be a real advantage."
Though the $1.3 billion-asset Oak Hill has just about resolved the credit quality problems that had plagued it for years, Mr. Kidd said community banks like his face a slew of obstacles — margin compression, fierce competition, a sluggish Midwest economy — that have made it difficult to remain independent.
"We're almost too big to be small and almost too small to be big," said Mr. Kidd, who is to become WesBanco's vice chairman.
For the $4 billion-asset WesBanco, the deal — its largest ever — would bolster its widely scattered Ohio branch network, especially in key markets such as Cincinnati and Columbus. WesBanco would gain 36 branches and would have the No. 13 deposit share in the state, up from No. 19, according to Federal Deposit Insurance Corp. data.
"Filling in our strategic market in Ohio is an important strategy for us," said Paul M. Limbert, WesBanco's president and chief executive. "It is obviously hard to operate a group of branches that are widely geographically spread."
WesBanco has made three other acquisitions in Ohio since 2000. Its latest was in 2005, when it bought the $549 million-asset Winton Savings and Loan Co. of Cincinnati.
WesBanco is to pay 90% in stock and 10% in cash for Oak Hill. The price works out to 2.05 times Oak Hill's book value and 19.9 times its last 12 months' earnings. The deal was announced Friday and is expected to close in December.
Oak Hill's shares soared on news of the deal, closing at $33.05 Friday, up 42%. WesBanco's shares fell 8%, to close at $26.72.
Brian Martin, an analyst with Howe Barnes Hoefer & Arnett in Chicago, said that though Oak Hill has done a good job fixing its credit troubles, it simply cannot escape the broader industry challenges.
"The combination of clearing up these credit problems and the margin degradation over the last couple of years, which was permanent, caused them to sit back and say, What is best for our shareholders?" Mr. Martin said.
Oak Hill's loan troubles seemed to peak in 2005, when its ratio of net chargeoffs to loans was 0.78% and its ratio of noncurrent loans to total loans was 1.72% — both significantly above industry averages. By the first quarter of this year chargeoffs had dropped to 0.16% of loans, 13 basis points below the average for commercial banks with $1 billion to $10 billion of assets, according to FDIC data.
Mr. Kidd said that even with its asset quality problems mostly behind it — WesBanco said in a conference call that it intends to sell off $50 million of Oak Hill's troubled assets — Oak Hill lacks the resources to compete with larger banks that can offer more products and services.
He pointed to WesBanco's trust operation as an example.
WesBanco has about $3 billion of trust assets under management. Oak Hill would have to start a trust business from scratch and then it would likely take five to seven years for the unit to be profitable.
Mr. Kidd said that given the circumstances, the best long-term option for Oak Hill shareholders — many of whom are employees, he was quick to point out — was to sell to a larger bank.
He said he expects other community banks Oak Hill's size to reach a similar conclusion.
"Everybody is facing the net interest margin squeeze and more competition. I think all areas are going to be facing this same issue of economies of scale and size."
