Item 1. Business.
Oak Hill Financial, Inc.
Oak Hill Financial, Inc., an Ohio corporation (the "Company") formed in 1981, is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (the "Act"), and is subject to regulation by the Federal Reserve Board. The Company engages indirectly in the business of commercial banking and other permissible activities closely related to banking and consumer finance lending through four wholly owned subsidiaries, Oak Hill Banks ("Oak Hill"), Action Finance Company ("Action"), Oak Hill Financial Insurance Agency, Inc. dba McNelly, Patrick & Associates ("MPA") and Oak Hill Capital Trust I (the "Trust"). The Company also owns forty-nine percent of Oak Hill Title Agency ("Oak Hill Title") which provides title services for commercial and residential real estate transactions. The Company provides management and similar services for its subsidiaries. Since it does not conduct any operating businesses itself, the Company must depend largely upon its subsidiaries for funds with which to pay the expenses of its operation and, to the extent applicable, any dividends on its outstanding shares of stock. For further information, see Note A of the Notes to Consolidated Financial Statements appearing in the Company's Annual Report to Stockholders, which is incorporated by reference in response to this item.
The Company faces strong competition from both banking and non-banking institutions. Its banking competitors include local and regional banks and bank holding companies, as well as some of the largest banking organizations in the United States. In addition, other types of financial institutions, such as savings and loan associations and credit unions, offer a wide range of loan and deposit services that are directly competitive with those offered by Oak Hill. The consumer is also served by brokerage firms and mutual funds that provide checking services, credit cards, and other services similar to those offered by Oak Hill. Major stores compete for loans by offering credit cards and retail installment contracts. It is anticipated that competition from non-bank and non-savings and loan organizations will continue to grow.
The range of services provided by the Company's subsidiaries to their customers includes commercial lending, real estate lending, consumer credit, credit card, other personal loan financing, deposits, group health insurance and other employee benefits, and title services for commercial and residential real estate transactions. Each of the subsidiaries operates under the direction of a Board of Directors and officers.
The Company's internet site www.oakf.com contains a hyperlink to the Securities and Exchange Commission's ("SEC") website, where the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments, if any, to these reports filed pursuant to Sections 13a or 15d of the Securities Exchange Act of 1934 can be obtained free of charge on EDGAR as soon as reasonably practicable after the Company has filed the report with the SEC.
Lending Activities
General. The Company generally makes loans in southern and central Ohio where its branches are located. The Company's principal lending activities are the origination of (i) conventional one-to-four family residential loans, and (ii) commercial loans, most of which are secured by real estate located in the Company's primary market area. These loan categories accounted for approximately 92% of the Company's net loan portfolio at December 31, 2003. The Company also makes consumer loans, including installment loans, home equity lines of credit and second mortgages, and offers credit cards.
Loan Portfolio Composition and Activity. The following table sets forth the composition of the Company's loan portfolio in dollar amounts and in percentages for each of the last five years, along with a reconciliation to loans receivable, net of the allowance for loan losses.
The following is maturity information with respect to commercial loans at December 31, 2003.
The following table summarizes commercial loans as of December 31, 2003 which mature in more than one year ..
Fixed rate $183,242 Variable rate 222,803 -------- $406,045 ========
Loans Secured by One- to Four-Family Real Estate. A significant portion of the Company's lending activity is the origination of permanent conventional loans secured by one-to four-family residences located within the Company's primary market area. The Company typically makes adjustable rate mortgage loans and holds the loans in portfolio. More than 60% of the Company's portfolio of permanent conventional mortgage loans secured by one-to four-family residences are adjustable rate. The Company also underwrites fixed-rate residential mortgage loans, and may sell those loans on a servicing-retained basis in the secondary market to the Federal Home Loan Mortgage Corporation ("FHLMC") or to the Federal National Mortgage Association ("FNMA"), or on a servicing-released basis to another financial institution.
The Company makes fixed-rate loans on one- to four-family residences up to 100% of the value of the real estate and improvements (the "loan-to-value" or "LTV") substantially all of which are sold in the secondary market. Residential real estate loans are offered by the Company for terms of up to 30 years. The Company requires private mortgage insurance on secondary market loans for the amount of such loans in excess of 80% of the value of the real estate securing such loans.
The aggregate amount of the Company's one-to four-family residential real estate loans totaled approximately $235.2 million at December 31, 2003, and represented 29.0% of net loans at such date. At such date, loans secured by residential real estate with outstanding balances of approximately $2.3 million, or 1.0%, of its total one-to four-family residential real estate loan balance, were more than 90 days delinquent or nonaccruing.
Commercial Loans. The Company is also active in commercial lending, primarily to smaller businesses in the Company's primary market area. These loans are typically secured by commercial real estate and priced in relation to the prime rate or the one year, three year or five year U.S. Treasury Index. Such loans generally have terms of up to 25 years and loan-to-value ratios of up to 80%. The Company also makes commercial loans secured by collateral other than real estate and unsecured commercial loans. Other secured and unsecured commercial loans are also typically priced at spreads to prime or the one year, three year or five year U.S. Treasury Index and have maturities of up to one year.
Loan officers review the borrower's financial statements, appraisals of the collateral, and other related documents before recommending funding of a commercial loan. The loan officer and the approving officer or committee then determines that there is sufficient income to cover this and other loan payments, that the collateral is of adequate liquidation value, that the applicant has a good payment history and is capable of performing the requirements of the loan. Other reviews and analysis are done as appropriate, depending upon the complexity of the credit request.
Although a risk of nonpayment exists with respect to all loans, certain specific types of risks are associated with different types of loans. The primary risks associated with commercial loans are the quality of the borrower's management and the impact of national and regional economic factors. The Company mitigates these risks by maintaining a close working relationship with its borrowers, by obtaining cross-collateralization and personal guarantees of its loans, and by diversification within its loan portfolio.
Real estate is frequently a material component of the collateral for the Company's loans. The expected source of repayment of these loans is generally the operations of the borrower's business, but the real estate provides an additional measure of security, particularly when the property is owner-occupied. For this reason, real estate is considered additional collateral on many of the Company's commercial loans.
Risks associated with real estate loans include fluctuating land values, changes in tax policies, and concentration of loans within the Company's market area. The Company mitigates these risks by generally providing loans to experienced commercial real estate owners and developers. The risk is further mitigated by the number of commercial real estate loans made to the user of the property.
The aggregate amount of the Company's commercial loans without real estate as primary or secondary collateral totaled approximately $140.5 million at December 31, 2003, and represented 27.4% of commercial loans at that date. At such date, commercial loans without real estate as primary or secondary collateral that were more than 90 days delinquent or nonaccruing totaled approximately $1.6 million, or 0.3% of its commercial loan portfolio. The aggregate amount of the Company's commercial loans with real estate as primary or secondary collateral was approximately $373.3 million at December 31, 2003, and at such date, approximately $2.6 million in outstanding balances, or 0.7% of such loans, were more than 90 days delinquent or nonaccruing.
Consumer Loans. The Company offers several consumer loan products, including installment loans, home equity lines of credit and credit cards.
The Company has developed working relationships with several car dealerships in its market area, and is able to do some financing of new and used cars through these relationships. The Company generally finances cars that are seven years old or newer. These loans generally have fixed rates and maturities of 36 to 66 months.
To a lesser degree, the Company makes small unsecured loans to creditworthy individuals. These loans are typically between $2,000 and $5,000, at fixed rates, with maturities of less than five years. The Company also offers a home equity loan product and a credit card product to its customers. Both products are underwritten to the same standards as any of the Company's other consumer loan products.
Loan officers underwrite installment loan and other consumer loan requests in such a manner to assure compliance with the various regulations and the Company's underwriting standards. The payment history of applicants is very important on these smaller loans, and is checked through in-house records as well as credit bureaus. Normally, collateral, such as an automobile, is taken as security and the value is checked through the N.A.D.A. book or another valuation service. Income must be adequate to cover all monthly payments including the proposed loan.
At December 31, 2003, the Company had approximately $72.8 million in its consumer loan and credit card portfolio, which was 9.0% of the Company's total net loans. Approximately $1.6 million of these loans were over 90 days delinquent or nonaccruing on that date, which represented 2.2% of the portfolio.
Loan Solicitation and Processing. Loan originations are developed from a number of sources, including continuing business with depositors, other borrowers and real estate developers, solicitations by the Company's lending staff, and walk-in customers.
Underwriting guidelines for all branches and loan types are set by senior management at an administrative office. Consumer loan processing and underwriting are decentralized; however, all other loans, including real estate and commercial loans, are generally processed and underwritten centrally at an administrative office. Loan applications, as well as credit bureau reports, appraisals, financial information, verifications of income, and other documentation concerning the
credit-worthiness of the borrower, as applicable to each loan type are reviewed.
Branch managers may have the authority to approve loans up to $120,000 that meet the underwriting criteria set by management, and area managers have authority for amounts up to $500,000. Any loan greater than $500,000 must be approved by senior management.
Income from Lending Activities. The Company earns interest and fee income from its lending activities. The Company earns fees for originating loans and for making commitments to originate loans and loan participations. Certain fees, net of origination costs, are deferred and amortized over the life of the loan. The Company also receives fees related to existing loans, such as late charges. Income from loan origination and commitment fees and discounts varies with the volume and type of loans and commitments made and with competitive and economic conditions. Note A-4 to the Consolidated Financial Statements contains a discussion of the manner in which origination fees are recognized for financial reporting purposes. In addition, the Company conducts mortgage banking activities, whereby, the Company sells certain fixed-rate residential loans in the secondary market to the FHLMC and FNMA, recognizing gains upon the sale comprised of a cash component as well as mortgage servicing rights.
Nonperforming Loans
General. Late charges on residential mortgages are assessed by the Company if a payment is not received either by the 10th day following its due date or 15th day if the loan has been sold in the secondary market and is being serviced by the Company. Late charges on installment loans and commercial loans are assessed by the Company if a payment is not received by the 10th day following its due date. Any borrower whose payment was not received by this time is mailed a past due notice. If the loan is still delinquent after a second past due notice is mailed (generally around the 20th day of delinquency), a branch employee will attempt to contact the customer to resolve any problem that might exist.
When an advanced stage of delinquency appears (generally around the 60th day of delinquency) and if repayment cannot be expected within a reasonable amount of time or a repayment agreement has not been reached, Oak Hill will contact an attorney and request that the required 30-day prior notice of foreclosure or repossession proceedings be prepared and delivered to the borrower so that, if necessary, foreclosure proceedings may be initiated shortly after the loan is 90 days delinquent. Historically, this procedure has aided in achieving a low level of nonperforming loans and, as of December 31, 2003, only $8.1 million or 0.99% of the Company's total loan portfolio was over 90 days delinquent or nonaccruing. As of December 31, 2003, the Company's level of nonperforming assets to total assets was 0.93%.
If a credit card account becomes 10 days delinquent, a notice is sent to the account holder demanding that the payment be made to bring the account current. Another notice is sent to the cardholder if the account becomes 20 days delinquent. If payment is not received within 30 days, authorization requests are denied, a message about the delinquency appears on the cardholder's account statement, and a follow-up telephone call is made. These telephone collection efforts and account statement messages continue until the account is deemed uncollectible. Legal action is considered during this time. As of December 31, 2003, approximately $33,000 in outstanding balances, or 1.9% of credit card loans were nonperforming.
At December 31, 2003, the Company had $585,000 in real estate or other repossessed collateral acquired as a result of foreclosure, voluntary deed, or other means. Such real estate is classified as "other real estate owned" until it is sold and is recorded at the lower of cost (the unpaid principal balance at the date of acquisition plus foreclosure and other related costs) or fair value less estimated selling expenses. Any subsequent write-down is charged to expense. Generally, unless the property is a one-to-four family residential dwelling and well-collateralized, interest accrual ceases in 90 days, but no later than the date of acquisition. From that date, all costs incurred in maintaining the property are expensed. "Other real estate owned" is appraised during the foreclosure process, prior to the time of acquisition, and losses are recognized for the amount by which the book value of the related mortgage loan exceeds the estimated net realizable value of the property.
The Company had $4.0 million of impaired loans, as defined under SFAS No. 114, at December 31, 2003. The Company maintained an allowance for credit losses related to such impaired loans of $982,000 at December 31, 2003. The Company had no impaired loans, as defined under SFAS No. 114, at December 31, 2002.
The following is a summary of the Company's loan loss experience and selected ratios for the periods presented.
At December 31, 2003, 2002 and 2001, the Company had nonperforming loans totaling $8.1 million, $7.3 million, and $5.2 million, respectively. Interest income that would have been recognized if such loans had performed in accordance with contractual terms totaled approximately $508,000, $357,000, and $416,000, for the years ended December 31, 2003, 2002 and 2001, respectively. There was no interest income recognized on such loans during any of the periods.
Allowance for Loan Losses. The amount of the allowance for loan losses is based on management's analysis of risks inherent in the various segments of the loan portfolio, management's assessment of known or potential problem credits which have come to management's attention during the ongoing analysis of credit quality, historical loss experience, current economic conditions and other factors. If actual circumstances and losses differ substantially from management's assumptions and estimates, such allowance for loan losses may not be sufficient to absorb all future losses, and net earnings could be adversely affected. Loan loss estimates are reviewed periodically, and adjustments, if any, are reported in earnings in the period in which they become known. In addition, the Company maintains a portion of the allowance to cover potential losses inherent in the portfolio that have not been specifically identified.
Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses is adequate at December 31, 2003, future adjustments to the allowance may 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. A downturn in the southern and central Ohio economy and employment levels could result in the Company experiencing increased levels of nonperforming assets and charge-offs, increased provisions for loan losses and reductions in income. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the recognition of additions to the allowance based on their judgment of information available to them at the time of their examination.
The following table summarizes nonperforming assets by category.
(1) Represents accruing loans 90 days or more delinquent that are considered by management to be well secured and in the process of collection.
As of December 31, 2003, loans where the borrowers were experiencing potential credit problems that raised doubts as to the ability of those borrowers to comply with the present loan repayment terms were included in the nonaccrual, past due 90 days or more or restructured categories.
Allocation of Allowance for Loan Losses. The following table presents an analysis of the allocation of the Company's allowance for loan losses at the dates indicated:
(1) Percentages are based upon loans gross of the allowance for loan losses.
Classified Assets. The FDIC regulations on classification of assets require commercial banks to classify their own assets and to establish appropriate general and specific allowances for losses, subject to FDIC review. These regulations are designed to encourage management to evaluate assets on a case-by-case basis and to discourage automatic classifications. Assets classified as substandard or doubtful must be evaluated by management to determine a reasonable general loss reserve to be included in total capital for purposes of the Oak Hill's risk-based capital requirement, but excluded from core capital or tangible capital or in capital under accounting principles generally accepted in the United States of America. Assets classified as loss must be either written off or reserved for by a specific allowance that is not counted toward capital for purposes of any of the regulatory capital requirements.
Investments. Investment securities primarily satisfy the Company's liquidity needs and provide a return on residual funds after lending activities. Pursuant to the Company's written investment policy, investments may be in interest-bearing deposits, U.S. Government and agency obligations, trust preferred securities, state and local government obligations and government-guaranteed mortgage-backed securities. The Company does not invest in securities that are rated less than investment grade by a nationally recognized statistical rating organization. A goal of the Company's investment policy is to limit interest rate risk.
All securities-related activity is reported to the Board of Directors of the Company. General changes in investment strategy must be reviewed and approved by the Company's Board of Directors. The Company's senior management can purchase and sell securities on behalf of the Company in accordance with the Company's stated investment policy.
The following table sets forth the carrying value of the Company's investment portfolio as indicated and includes both investments designated as available for sale and those designated as held to maturity.
The following table reflects the maturities of the Company's investment securities at December 31, 2003.
Source of Funds
Deposit Accounts. Deposits are a major source of the Company's funds. The Company offers a number of alternatives for depositors designed to attract both commercial and regular consumer checking and savings including regular and money market savings accounts, NOW accounts, and a variety of fixed-maturity, fixed-rate certificates with maturities ranging from 3 to 60 months. The Company has also utilized brokered deposits as a supplement to its local deposits when such funds are attractively priced in relation to the local market.
The distribution of the Company's deposit accounts by type and rate is set forth in the following table.
The following table presents various interest rate categories and certain information concerning maturities of the Company's certificates of deposit at December 31, 2003.
The following table sets forth the amount of the Company's certificates of deposit that are $100,000 or greater, by time remaining until maturity, as of December 31, 2003.
Maturity Period Amount --------------- ------ (In thousands)
Three months or less $ 21,895
Over three months through six months 14,369
Over six through 12 months 28,665
Over 12 months 124,421 --------
Total $189,350 ========
Borrowings. In addition to deposits and repayment of loan principal, the Company obtains funds necessary for its lending activities and other general business purposes through loans (advances) from the Federal Home Loan Bank ("FHLB") of Cincinnati. Advances from the FHLB may be on a secured or unsecured basis depending upon a number of factors, including the purpose for which the funds are being borrowed and the total of outstanding advances. The Company typically utilizes FHLB advances to fund loans and to meet short-term liquidity needs. As of December 31, 2003, Oak Hill had outstanding FHLB advances totaling $122.9 million. See Note F to the consolidated financial statements for additional information regarding FHLB advances. The Company also has arrangements to borrow funds from commercial banks.
In March 2000, a Delaware 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 subordinated debentures are the sole assets of the Trust, and the Company owns all of the common securities of the Trust. Interest payments on the debt securities are made semi-annually at an annual fixed interest rate of 10.875% and are reported as a component of interest expense on borrowings.
The following table sets forth the maximum amount of the Company's FHLB advances and other borrowings outstanding at any month end during the periods shown and the average aggregate balances of FHLB advances and other borrowings for such periods:
The following table sets forth certain information as to the Company's FHLB advances and other borrowings at the dates indicated.
December 31, ------------ 2003 2002 2001 ---- ---- ---- (In thousands)
FHLB advances $122,887 $86,055 $ 93,942
Junior subordinated debentures 5,000 5,000 5,000
Other borrowings 7,465 8,303 5,918 -------- ------- --------
Total borrowings $135,352 $99,358 $104,860 ======== ======= ========
Asset and Liability Management. The Company manages its exposure to interest rate risk through its Asset/Liability Management Committees (ALCO) at both the Company and Oak Hill levels. Given the potential types and characteristics of interest rate risk, the Company maintains an appropriate process and set of measurement tools to enable it to identify and quantify its primary sources of interest rate risk. The Company also recognizes that effective management of interest rate risk includes understanding when and how potential changes in interest rates will flow through the earnings statement. Accordingly, the Company manages its position so that it monitors both its short-term and long-term interest rate risk exposure. Tools used by management include an interest rate sensitivity gap analysis and an interest rate simulation model whereby changes in net interest income are measured based upon selected hypothetical changes in market interest rates.
Net interest income, the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities, is the principal component of the Company's net earnings. The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread that can be sustained during fluctuations in prevailing interest rate levels. Due to the maturity, repricing and timing differences between interest-earning assets and interest-bearing liabilities, the Company's earnings would be affected differently under various interest rate scenarios. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which reprice within a given period of time. The difference, or the interest rate repricing "gap", provides an indication of the extent to which an interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets. Generally, during a period of rising interest-rates, a negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income, while a positive gap within shorter maturities would have the opposite effect.
The following table contains information regarding the amounts of various categories of assets and liabilities contractually repricing within the periods indicated without consideration of loan prepayment assumptions or deposit decay assumptions:
Due to the shortcomings associated with gap analysis, the Company's primary tool in managing interest rate risk is net interest income simulations, which measure the potential effect on earnings that instantaneous parallel and proportional changes in interest rates could have on net interest income over defined periods of time. The Company applies hypothetical interest rate shocks of up and down 100, 200 and 300 basis points (100 basis points equals 1%) to its financial instruments based upon assumed cash flows. Under the current interest rate environment, a decline in interest rates of 200 or more basis points is unlikely and therefore provides no meaningful information.
The parallel approach to interest rate shocks assumes that all interest rates will simultaneously move up or down by like amounts. This approach is very simplistic and could be viewed as a "worst case" scenario. The proportional approach to interest rate shocks assumes that the interest rates for financial instruments change in proportion to a single driver rate. The Company has selected the national Prime rate as its driver rate. In the proportional approach, the driver rate shock is multiplied by the proportional rate factors for each financial instrument to obtain the new interest rates used to calculate projected net interest income changes.
The following table reflects, as of December 31, 2003, projected changes in the Company's twelve-month net interest income as a percentage of net interest income assuming parallel and proportional interest rate shocks.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the analysis. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react differently to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. In the event of a change in market interest rates, expected rates of prepayment on loans and mortgage-backed securities, and early withdrawal levels from certificates of deposit, would likely deviate from those assumed in making the interest rate risk calculations. Moreover, the analysis does not contemplate all actions the Company may take in response to changes in interest rates and should not be relied upon as being indicative of actual results.
Personnel
At December 31, 2003, the Company and its subsidiaries employed 327 persons on a full-time basis and 35 persons on a part-time basis.
Executive Offices
The Company's executive office is located at 14621 State Route 93, Jackson, Ohio 45640 and its telephone number is (740) 286-3283.
Subsidiaries
The Company owns all of the outstanding stock of Oak Hill Banks, an Ohio state-chartered bank, which was founded in 1902. The Company owns all of the outstanding stock of Action Finance Company, a consumer finance company that was formed in 1998. The Company owns all of the outstanding stock of Oak Hill Capital Trust I, a Delaware statutory trust that was formed in 2000. The Company owns all of the outstanding stock of Oak Hill Financial Insurance Agency, Inc., which conducts business as McNelly, Patrick & Associates, a group health insurance and employee benefits agency acquired in August 2001. In addition, the Company has a 49% ownership interest in Oak Hill Title Agency, LLC, a limited liability company that was formed in 2001 and commenced operations in January 2002 to provide title services for commercial and residential real estate transactions.
Regulation
Oak Hill, as an Ohio state-chartered bank, is subject to supervision and regular examination by the Superintendent of Financial Institutions of the State of Ohio. Oak Hill is insured by the Federal Deposit Insurance Corporation and is subject to the provisions of the Federal Deposit Insurance Act. To the extent that the information below consists of summaries of certain statutes or regulations, it is qualified in its entirety by reference to the statutory or regulatory provisions described.
The Company is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "Act"), which requires a bank holding company to register under the Act and to be subject to supervision and examination by the Board of Governors of the Federal Reserve System. A bank holding company is required to file with the Board of Governors an annual report and such additional information as the Board of Governors may require pursuant to the Act. The Act requires prior approval by the Board of Governors of the acquisition by a bank holding company, or any subsidiary thereof, of 5% or more of the voting stock or substantially all the assets of any bank within the United States.
A bank holding company located in the State of Ohio is not permitted to acquire a bank or other financial institution located in another state unless such acquisition is specifically authorized by the statutes of such state. The Act further provides that the Board of Governors shall not approve any such acquisition that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United States, or the effect of which may be to substantially lessen competition or to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.
The Act also prohibits a bank holding company, with certain exceptions, from acquiring 5% or more of the voting stock of any company that is not a bank and from engaging in any business other than banking or performing services for its banking subsidiary without the approval of the Board of Governors. In addition, the acquisition of a thrift institution must be approved by the Office of Thrift Supervision pursuant to the savings and loan holding company provisions of the Home Owners' Loan Act of 1933. On March 13, 2000, the Financial Services Act of 1999, also known as the Gramm-Leach-Bliley Act, became effective. This legislation repealed certain cross-industry affiliation prohibitions and made certain other changes to the Act. It authorized a new form of holding company, a financial holding company, which with certain exceptions is authorized to undertake activities which are "financial in nature" and which include banking, insurance and securities activities. Generally, the scope of activities permitted to a financial holding company are broader than those previously permitted to a bank holding company. A bank holding company may elect to become a financial holding company. The Company made this election and was notified on July 11, 2001 by the Federal Reserve Bank that its election had been approved. Under the Act, as amended by the Gramm-Leach-Bliley Act, the Company is permitted to engage in certain activities, including mortgage banking, operating small loan companies, factoring, furnishing certain data processing operations, holding or operating properties used by banking subsidiaries or acquired for such future use, providing certain
investment and financial advice, leasing (subject to certain conditions) real or personal property, providing management consulting advice to certain depository institutions, providing securities brokerage services, arranging commercial real estate equity financing, underwriting and dealing in government obligations and money market instruments, providing consumer financial counseling, operating a collection agency, owning and operating a savings association, operating a credit bureau and conducting certain real estate investment activities and acting as insurance agent for certain types of insurance. Certain other activities, including real estate brokerage and syndication, land development, and property management not related to credit transactions, are not permissible.
The Act and the regulations of the Board of Governors prohibit a financial holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services.
The Act also imposes certain restrictions upon dealing by affiliated banks with the holding company and among themselves including restrictions on interbank borrowing and upon dealings in respect to the securities or obligations of the holding company or other affiliates.
On October 26, 2001 President Bush signed the USA Patriot Act of 2001 (the "Patriot Act"). Enacted in response to the September 11, 2001 terrorist attacks, the Patriot Act is intended to strengthen the ability of various agencies of the United States to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including:
o Due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons;
o Standards for verifying customer identification at account opening;
o Rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering;
o Reports by non-financial trades and businesses filed with the Treasury Department's Financial Crimes Enforcement Network for transactions exceeding $10,000 and;
o Filing of suspicious activities reports for securities transactions by brokers and dealers if they believe a customer may be violating U.S. laws and regulations.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. The changes are intended to allow shareholders to monitor the performance of companies and directors more easily and efficiently. The Sarbanes-Oxley Act generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the SEC under the Exchange Act.
The Sarbanes-Oxley Act addresses, among other matters: audit committees; auditor independence; analysts' conflicts of interest; certification of financial statements by the chief executive officer and the chief financial officer; the forfeiture of bonuses and profits made by directors and senior officers in the twelve month period covered by restated financial statements; a prohibition on insider trading during pension plan black-out periods; disclosure of off-balance sheet transactions; a prohibition on personal loans to directors and officers (excluding Federally insured financial institutions); expedited filing requirements for stock transaction reports by officers and directors; the formation of a public accounting oversight board; and various increased criminal penalties for violations of securities laws.
In 2002 and 2003, the SEC adopted a host of new regulations implementing the provisions of the Sarbanes-Oxley Act. These new regulations may change the manner in which the Company is required to report its financial condition and results of operations in the future. The Company believes that it has been at all times in material compliance with these regulations; however, there can be no assurance that future regulations, implementing the Sarbanes-Oxley Act, will not have an adverse effect on the Company's reported financial condition and results of operations as compared with prior reporting periods.
Management has instituted a series of actions to strengthen and improve the Company's already strong corporate governance practices. Included in those actions was the formation of a Disclosure Controls and Procedures Committee for financial reporting (the "Disclosure Committee"), to evaluate and monitor the continued effectiveness of the design and operation of disclosure controls for financial reporting. The Disclosure Committee complements the Company's existing committee structure and process and is designed to capture critical management information and disclosures from the Company and each of its affiliates. The Company believes that the addition of the Disclosure Committee enhances its already effective disclosure processes.
The earnings of banks and consumer finance companies, and therefore the earnings of the Company (and its subsidiaries), are affected by the policies of regulatory authorities, including the Board of Governors of the Federal Reserve System. An important function of the Federal Reserve Board is to regulate the national supply of bank credit in an effort to prevent recession and to restrain inflation. Among the procedures used to implement these objectives are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These procedures are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use also may affect interest rates charged on loans or paid for deposits. Monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effect, if any, of such policies upon the future business and earnings of the Company cannot accurately be predicted. The Company makes no attempt to predict the effect on its revenues and earnings of changes in general economic, industrial, and international conditions or in legislation and governmental regulations. The Company is not able to predict the impact of such laws or governmental regulations on its financial condition or results of operations at this time.
Business Risks
Except for the historical information contained herein, the matters discussed in this Form 10-K include certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding the intent, belief and expectations of the Company and its management, such as statements concerning the Company's future profitability. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, factors detailed from time to time in the Company's filings with the SEC. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included in this Form 10-K will prove to be accurate, and in light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a presentation by the Company or any other person that the objectives and plans of the Company will be achieved.
Growth Strategy. The Company has pursued and continues to pursue a strategy of growth. The success of the Company's growth strategy will depend largely upon its ability to manage its credit risk and control its costs while providing competitive products and services. This growth strategy may present special risks, such as the risk that the Company will not efficiently handle growth with its present operations, the risk of dilution of book value and earnings per share as a result of an acquisition, the risk that earnings will be adversely affected by the start-up costs associated with establishing new products and services, the risk that the Company will not be able to attract and retain qualified personnel needed for expanded operations, and the risk that its internal monitoring and control systems may prove inadequate.
Control by Management; Anti-Takeover Provisions. Evan E. Davis, John D. Kidd and D. Bruce Knox (the "Principal Stockholders") beneficially own in the aggregate approximately 32.8% of the outstanding shares of Common Stock of the Company at December 31, 2003. In addition to Ohio and federal laws and regulations governing changes in control of insured depository institutions, the Company's Articles of Incorporation and Code of Regulations contain certain provisions that may delay or make more difficult an acquisition of control of the Company. For example, the Company's Articles of Incorporation do not exempt the Company from the provisions of Ohio's "control share acquisition" and "merger moratorium" statutes. Assuming that the Principal Stockholders continue to retain the number of the outstanding voting shares of the Company that they presently own and the law of Ohio requires, as it presently does, at least two-thirds majority vote of the outstanding shares to approve a merger or other consolidation, unless the articles of incorporation of the constituent companies provide for a lower approval percentage for the transaction, which the Company's articles do not provide, such ownership position could be expected to deter any prospective acquirer from seeking to acquire ownership or control of the Company, and the Principal Stockholders would be able to defeat any acquisition proposal that requires approval of the Company's stockholders, if the Principal Stockholders chose to do so. In addition, the Principal Stockholders
may make a private sale of shares of common stock of the Company that they own, including to a person seeking to acquire ownership or control of the Company. The Company has 3,000,000 shares of authorized but unissued preferred stock, par value $ .01 per share, which may be issued in the future with such rights, privileges and preferences as are determined by the Board of Directors of the Company. In December 1997, the Board of Directors of the Company approved and adopted a stockholder rights plan that contemplates the issuance of rights to purchase preferred stock of the Company to the Company's common stockholders of record as of February 17, 1998, as set forth in the Rights Agreement entered into between the Company and Fifth Third Bank on January 23, 1998. On December 26, 2000, the Company amended the Rights Agreement to appoint Registrar and Transfer Company as successor Rights Agent under the Rights Agreement due to the resignation of Fifth Third Bank as Rights Agent. The Board of Directors of the Company approved the appointment of Registrar and Transfer Company pursuant to a resolution dated November 14, 2000. John D. Kidd and Evan E. Davis also 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.
Limited Trading Market; Shares Eligible for Future Sale; Possible Volatility of Stock Price. The Common Stock is traded on the Nasdaq National Market under the symbol "OAKF." During the 12 months ending March 9, 2004, the average weekly trading volume in the Common Stock has been approximately 60,000 shares per week. There can be no assurance given as to the liquidity of the market for the Common Stock or the price at which any sales may occur, which price will depend upon, among other things, the number of holders thereof, the interest of securities dealers in maintaining a market in the Common Stock and other factors beyond the control of the Company. The market price of the Common Stock could be adversely affected by the sale of additional shares of Common Stock owned by the Company's current shareholders. The Principal Shareholders are permitted to sell certain limited amounts of Common Stock without registration, pursuant to Rule 144 under the Securities Act. The market price for the Common Stock could be subject to significant fluctuations in response to variations in quarterly and yearly operating results, general trends in the banking industry and other factors. In addition, the stock market can experience price and volume fluctuations that may be unrelated or disproportionate to the operating performance of affected companies. These broad fluctuations may adversely affect the market price of the Common Stock.
Dependence on Management. The Company's success depends to a great extent on its senior management, including its Chairman, John D. Kidd; President and Chief Executive Officer, R.E. Coffman, Jr.; Executive Vice President and Chief Operating Officer, David G. Ratz; Vice President, Scott J. Hinsch, Jr.; Secretary, H. Tim Bichsel; Treasurer and Chief Financial Officer, Ron J. Copher; and Chief Information Officer, D. Bruce Knox. The loss of their individual services could have a material adverse impact on the Company's financial stability and its operations. In addition, the Company's future performance depends on its ability to attract and retain key personnel and skilled employees, particularly at the senior management level. The Company's financial stability and its operations could be adversely affected if, for any reason, one or more key executive officers ceased to be active in the Company's management. The Company does not own "key man" life insurance on the lives of any of its senior management.
Competition. Banking institutions operate in a highly competitive environment. The Company competes with other commercial banks, credit unions, savings institutions, finance companies, mortgage companies, mutual funds, and other financial institutions, many of which have substantially greater financial resources than the Company. Certain of these competitors offer products and services that are not offered by the Company and certain competitors are not subject to the same extensive laws and regulations as the Company. Additionally, consolidation of the financial services industry in Ohio and in the Midwest in recent years has increased the level of competition. Recent and proposed regulatory changes may further intensify competition in the Company's market area.
Holding Company Structure; Government Regulations and Policies. The Company is a financial holding company, which is substantially dependent on the profitability of its subsidiaries and the upstream payment of dividends from Oak Hill to the Company. Under state and federal banking law, the payment of dividends by the Company and Oak Hill are subject to capital adequacy requirements. The inability of Oak Hill to generate profits and pay such dividends to the Company, or regulator restrictions on the payment of such dividends to the Company even if earned, would have an adverse effect on the financial condition and results of operations of the Company and the Company's ability to pay dividends to the shareholders.
Item 2.
Item 2. Properties.
As of December 31, 2003 the registrant and its subsidiaries operate from 26 full-service banking offices, 6 full-service consumer finance offices, and 4 loan production offices in Ohio. In addition, the Company operates two executive offices in Jackson, Ohio and an operations center in Mason, Ohio. The offices are located in the following counties:
(1) Includes executive offices of Oak Hill Financial, Inc. and Oak Hill Banks.
(2) Includes Western Region operations center of Oak Hill Banks.
The following table indicates which properties the Company leases, the term of the lease, and end of lease options. All leases are comparable to other leases in the respective market areas and do not contain provisions detrimental to the Company or its subsidiaries.
Item 3.
Item 3. Legal Proceedings.
Except for routine litigation incident to their business, the registrant and its subsidiaries are not a party to any material pending legal proceedings and none of their property is the subject of any such proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to the shareholders during the fourth quarter of 2003.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters.
SHAREHOLDER INFORMATION
The common stock of the Company is traded on the Nasdaq National Market System under the symbol "OAKF."
The high and low sales prices for the Company common stock during each quarter of 2003 and 2002 are as follows:
Quarter Ended High Low
12/31/03 $33.80 $28.40 09/30/03 30.00 24.90 06/30/03 25.90 23.52 03/31/03 24.77 21.23 12/31/02 22.39 20.15 09/30/02 22.39 21.00 06/30/02 22.79 19.59 03/31/02 21.00 15.60
At March 9, 2004 the Company had approximately 2,300 stockholders and 5,620,011 shares of common stock outstanding.
Dividends. The ability of the Company to pay cash dividends to stockholders is limited by its ability to receive dividends from its subsidiary. The State of Ohio places certain limitations on the payment of dividends by Ohio state-chartered banks.
The Company declared the following dividends per share in 2003 and 2002:
Quarter Dividend Ended Declared ----- --------
12/31/03 $0.15 09/30/03 0.13 06/30/03 0.13 03/31/03 0.13 12/31/02 0.13 09/30/02 0.12 06/30/02 0.12 03/31/02 0.12
Future cash and stock dividends will be subject to determination and declaration by the Board of Directors of the Company, taking into consideration, among other factors, the Company's financial condition and results of operations, investment opportunities, capital requirements, and regulatory limitations.
Stock Transfer Agent. Inquiries regarding stock transfer, registration, lost certificates, or changes in name and address should be directed in writing to the Company's stock transfer agent:
The Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016-3572 (800) 456-0596
Annual Meeting of Shareholders. The Annual Meeting of Shareholders of Oak Hill Financial, Inc. will be held on April 13, 2004 at 1:00 p.m. at the Ohio State University Extension South District Office, 17 Standpipe Road, Jackson, Ohio.
Item 6.
Item 6. Selected Financial Data
See the accompanying footnotes on page 22.
- ---------- (1) The Company completed a merger with Innovative Financial Services Agency, Inc. ("IFS") on August 31, 2001. IFS was renamed Oak Hill Financial Insurance Agency, Inc. and conducts business as McNelly, Patrick and Associates ("MPA").The transaction was initiated prior to July 1, 2001 and was accounted for as a pooling-of-interests. Accordingly, the consolidated financial statements as of and for the years ended December 31, 1999 through 2000, inclusive, have previously been restated as if the merger had occurred on January 1, 1999.
(2) Includes loans held for sale.
(3) General, administrative and other expense for 1999 includes $1.1 million in pre-tax expenses incurred pursuant to the merger with Towne Financial Corporation and its subsidiary, The Blue Ash Building and Loan Company, on October 1, 1999.
(4) General, administrative and other expense for 2001 includes $259,000 in pre-tax expenses incurred pursuant to the merger with MPA.
(5) Per share information gives retroactive effect to the issuance of 172,414 shares in the MPA transaction.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
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"), Towne Bank ("Towne"), (collectively "Banks"), Action Finance Company ("Action") and McNelly, Patrick and Associates ("MPA"). Accordingly, the Company's results of operations are primarily dependent upon the results of operations of its subsidiaries.
During 2002, the Board of Directors of the Company, Oak Hill and Towne approved a business plan whereby the Banks merged on November 30, 2002 into a single bank charter under the name Oak Hill Banks. Hereinafter, the term "Oak Hill" describes the preexisting individual banks owned by the Company.
Oak Hill conducts a general commercial banking business that consists of attracting deposits from the general public and using those funds to originate loans for commercial, consumer, and residential purposes. Action is a consumer finance company that originates installment and home equity loans. MPA is an insurance agency specializing in group health insurance and other employee benefits.
Oak Hill's and Action's profitability depend primarily on their net interest income, which is the difference between interest income generated from interest-earning assets (i.e., loans and investments) less the interest expense incurred on interest-bearing liabilities (i.e., deposits and borrowed funds). Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities, and the interest rates paid on these balances. Additionally, and to a lesser extent, profitability is affected by such factors as the level of non-interest income and expenses, the provision for losses on loans, and the effective tax rate. Other income consists primarily of service charges and other fees and income from the sale of loans. General, administrative and other expenses consist of compensation and benefits, occupancy-related expenses, franchise taxes, and other operating expenses.
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 is an insurance agency specializing in group health insurance and other employee benefits in southern and central Ohio. IFS was renamed Oak Hill Financial Insurance Agency, Inc. and conducts business as McNelly, Patrick and Associates ("MPA"). The transaction was initiated prior to July 1, 2001 and was accounted for as a pooling-of-interests. Accordingly, the consolidated financial statements have previously been restated to reflect the effects of the business combination as of January 1, 2001. Pursuant to the merger agreement, the Company issued 172,414 shares of common stock in exchange for the shares of IFS.
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.
Management's discussion and analysis of earnings and related financial data are presented herein to assist investors in understanding the consolidated financial condition and results of operations of the Company as of and for the years ended December 31, 2003 and 2002. This discussion should be read in conjunction with the consolidated financial statements and related footnotes presented elsewhere in this report.
FORWARD LOOKING STATEMENTS
In the following pages, management presents an analysis of the Company's financial condition as of December 31, 2003, and the results of operations for the year ended December 31, 2003, as compared to prior periods. In addition to this historical information, the following discussion and other sections of this Annual Report contain forward-looking statements that involve risks and uncertainties. Economic circumstances, the Company's operations and the Company's actual results could differ significantly from those discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences are discussed herein but also include changes in the economy and interest rates in the nation and the Company's general market area. Without limiting the foregoing, some of the forward-looking statements include management's establishment of an allowance for loan losses, and its statements regarding the adequacy of such allowance for loan losses, and management's belief that the allowance for loan losses is adequate.
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 judgements in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The following critical accounting policies are based upon judgements and assumptions by management that include inherent risks and uncertainties.
Allowance for Losses on Loans: The balance in this account is an accounting estimate of probable but unconfirmed asset impairment that has occurred in the Company's loan portfolio as of the date of the consolidated financial statements before losses have been confirmed resulting in a subsequent charge-off or write-down. 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. 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).
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.
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 are 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.
FINANCIAL CONDITION
The Company's total assets amounted to $938.3 million as of December 31, 2003, an increase of $104.7 million, or 12.6%, over the $833.6 million total at December 31, 2002. The increase was funded primarily through growth in deposits of $54.0 million, an increase of $36.8 million in FHLB advances and an increase in stockholders' equity of $13.0 million.
Cash and due from banks, federal funds sold, and investment securities, including mortgage-backed securities, decreased by $8.4 million, or 7.7%, to a total of $100.1 million at December 31, 2003, compared to December 31, 2002. Investment securities decreased by $4.2 million, as maturities and repayments of $32.0 million and sales of $7.3 million exceeded purchases of $36.8 million. Federal funds sold decreased by $5.4 million during 2003.
Loans receivable totaled $811.0 million at December 31, 2003, an increase of $109.1 million, or 15.5%, over total loans at December 31, 2002. Loan disbursements totaled $621.4 million during 2003, which were partially offset by loan sales of $176.5 million and principal repayments of $330.7 million during 2003. Loan disbursements and sales volume increased by $123.1 million and $67.3 million, respectively, as compared to 2002 volume. The continued low interest rate environment during 2003 contributed to the overall increases in loan origination and sales volume, as borrowers refinanced loans to lower interest rates and Oak Hill generally sold such lower interest rate loans in the secondary market. Growth in the loan portfolio during 2003 was comprised of a $122.3 million, or 31.2%, increase in commercial and other loans, which were partially offset by a $10.6 million, or 4.3%, decrease in real estate mortgage loans. The Company's allowance for loan losses totaled $10.8 million at December 31, 2003, an increase of $1.7 million, or 18.5%, over the total at December 31, 2002. The allowance for loan losses represented 1.32% and 1.29% of the total loan portfolio at December 31, 2003 and 2002, respectively. Net charge-offs totaled $1.7 million and $2.0 million for the years ended December 31, 2003 and 2002, respectively. The Company's allowance represented 133.5% and 125.3% of nonperforming loans, which totaled $8.1 million and $7.3 million at December 31, 2003 and 2002, respectively. At December 31, 2003, nonperforming loans were comprised of $1.6 million in installment loans, $4.2 million of loans secured primarily by commercial real estate and $2.3 million of loans secured by one-to-four family residential real estate. In management's opinion, all nonperforming loans were adequately collateralized or reserved for at December 31, 2003.
Deposits totaled $717.8 million at December 31, 2003, an increase of $54.0 million, or 8.1%, over the $663.8 million total at December 31, 2002. The increase resulted primarily from new brokered deposits and management's marketing efforts to attract demand deposits. 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 $93.6 million with a weighted-average cost of 3.04% at December 31, 2003, as compared to the $49.1 million in brokered deposits with a 4.35% weighted-average cost at December 31, 2002. Proceeds from deposit growth were used primarily to fund loan originations.
Advances from the Federal Home Loan Bank totaled $122.9 million at December 31, 2003, an increase of $36.8 million, or 42.8%, over the December 31, 2002 total. In recognition of the continued low interest rate environment during 2003, management obtained generally longer term and lower cost advances in 2003 compared to the maturities and cost of advances obtained from the Federal Home Loan Bank during 2002. Proceeds from the Federal Home Loan Bank advances were used primarily 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 Company's stockholders' equity amounted to $79.9 million at December 31, 2003, an increase of $13.0 million, or 19.5%, over the balance at December 31, 2002. The increase resulted primarily from net earnings of $12.6 million and proceeds from options exercised of $2.9 million, which were partially offset by a decrease in the unrealized gain on securities, net of tax, totaling $291,000 and $3.0 million in dividends declared on common stock.
SUMMARY OF EARNINGS
The table on page 30 shows for each category of interest-earning assets and interest-bearing liabilities, the average amount outstanding, the interest earned or paid on such amount, and the average rate earned or paid for the years ended December 31, 2003, 2002 and 2001. The table also shows the average rate earned on all interest-earning assets, the average rate paid on all interest-bearing liabilities, the interest rate spread, and the net interest margin for the same periods.
Changes in net interest income are attributable to either changes in average balances (volume change) or changes in average rates (rate change) for interest-earning assets and interest-bearing liabilities. Volume change is calculated as change in volume times the old rate, while rate change is calculated as change in rate times the old volume. The table on page 31 indicates the dollar amount of the change attributable to each factor. The rate/volume change, the change in rate times the change in volume, is allocated between the volume change and the rate change at the ratio each component bears to the absolute value of their total.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
GENERAL. Net earnings for the year ended December 31, 2003 totaled $12.6 million, a $2.2 million, or 21.6%, increase over 2002 net earnings. The increase in earnings resulted primarily from a $2.2 million increase in net interest income and a $3.4 million increase in other income, which were partially offset by a $590,000 increase in the provision for losses on loans, a $1.4 million increase in general, administrative and other expense, and a $1.4 million increase in the provision for federal income taxes.
NET INTEREST INCOME. Total interest income for the year ended December 31, 2003, amounted to $55.2 million, a decrease of $2.1 million, or 3.6%, from the total recorded for 2002. Interest income on loans totaled $52.0 million, a decrease of $651,000, or 1.2%, from the 2002 period. This decrease resulted primarily from a 74 basis point decrease in the average fully-taxable equivalent yield, to 6.91% in 2003 from 7.65% in 2002, which was partially offset by a $64.0 million, or 9.3%, increase in the weighted-average ("average") portfolio balance, to a total of $754.5 million in 2003. Interest income on investment securities and other interest-earning assets decreased by $1.4 million, or 30.7%. The decrease resulted primarily from an 83 basis point decrease in the average fully-taxable equivalent yield, to 4.13% in 2003, coupled with a $13.8 million, or 16.0%, decrease in the average portfolio balance, to a total of $86.5 million in 2003.
Total interest expense amounted to $20.5 million for the year ended December 31, 2003, a decrease of $4.3 million, or 17.2%, from the total recorded in 2002. Interest expense on deposits decreased by $4.1 million, or 20.7%, to a total of $15.6 million in 2003. The decrease resulted primarily from a 77 basis point decrease in the average cost of deposits, to 2.55% in 2003, which was partially offset by an $18.5 million, or 3.1%, increase in the average portfolio balance, to a total of $611.3 million in 2003. Interest expense on borrowings decreased by $179,000, or 3.5%, during 2003. This decrease was due to an 81 basis point decrease in the average cost of borrowings, to 4.17% in 2003, which was partially offset by a $15.5 million, or 15.2%, increase in average borrowings outstanding. The decrease in the level of yields on interest-earning assets and the cost of interest-bearing liabilities was primarily due to the overall decrease in interest rates in the economy throughout 2003 and 2002.
As a result of the foregoing changes in interest income and interest expense, net interest income increased by $2.2 million, or 6.8%, for the year ended December 31, 2003, as compared to 2002. The interest rate spread increased by 6 basis points to 3.81% in 2003, compared to 3.75% in 2002. The fully-taxable equivalent net interest margin increased by 1 basis point from, 4.18% in 2002 to 4.19% in 2003.
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 $3.3 million provision for losses on loans for the year ended December 31, 2003, an increase of $590,000, or 21.4%, compared to 2002. The provision for losses on loans in 2003 was predicated upon the $110.8 million of growth in the gross loan portfolio, net charge-offs in 2003 of $1.7 million and an increase of $823,000 in nonperforming loans from $7.3 million in 2002 to $8.1 million at December 31, 2003.
Although management believes that it uses the best information available in providing for possible loan losses and believes that the allowance is adequate at December 31, 2003, 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 $11.5 million for the year ended December 31, 2003, an increase of $3.4 million, or 42.2%, over the 2002 amount. This increase resulted primarily from a $2.1 million, or 90.4%, increase in gain on sale of loans, a $1.0 million, or 36.7%, increase in service fees, charges, and other operating income, and a $370,000, or 15.1%, increase in insurance commissions, which were partially offset by a $122,000 gain on sale of branches recorded in 2002. The increase in gain on sale of loans resulted from an increase in the volume of loans sold year-to-year. Management expects the gain on sale of one-to-four family residential loans to be substantially less next year given that the low interest rate environment may not continue in 2004. The Company will continue to aggressively pursue Small Business Administrative ("SBA") lending opportunities to help offset the anticipated decrease in gains on sale of one-to-four family residential loans in 2004. The increase in insurance commissions was due primarily to increased premiums realized on sales of group health insurance. The increase in service fees, charges and other income was due primarily to an increase in overdraft fees totaling $1.3 million over the total recorded in 2002, as a result of a new overdraft protection program implemented in late March 2003.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other expense totaled $24.0 million for the year ended December 31, 2003, an increase of $1.4 million, or 6.1%, over the 2002 total. The increase resulted primarily from a $1.1 million, or 8.2%, increase in employee compensation and benefits, an $843,000, or 14.2%, increase in other operating expenses and an increase of $477,000, or 19.6%, in occupancy and equipment, which were partially offset by a $640,000 decrease in franchise taxes and a $367,000 decrease in merger-related expenses. 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. The increase in other operating expense resulted primarily from a $259,000 increase in credit and collection expenses associated with increased lending volume and delinquency levels, a $188,000 increase in consulting fees, which are based upon the increase in overdraft fees, an $82,000 increase in expenses related to minority ownership interests in Oak Hill Title, a $26,000 increase in insurance commissions paid and a $43,000 increase in computer and PC software costs. The remaining increase of $245,000, or 4.1%, was due to pro-rata increases in other operating expenses attendant to the Company's overall growth year-to-year. The increase in occupancy and equipment expense was due primarily to a $153,000, or 26.1%, increase in rent expense, a $110,000, or 26.7%, increase in maintenance contracts and a $189,000, or 23.7%, increase in depreciation expense year-to-year. The increases in rent and depreciation expenses are attributable to new office locations, coupled with increased rents year-to-year. The decrease in franchise taxes was attributable to a one-time tax savings for 2003 resulting from the previously mentioned Oak Hill-Towne merger in 2002. The decrease in merger-related expenses was due to $367,000 incurred in connection with the Oak Hill-Towne merger.
FEDERAL INCOME TAXES. The provision for federal income taxes amounted to $6.3 million for the year ended December 31, 2003, an increase of $1.4 million, or 29.2%, over the $4.9 million recorded in 2002. The increase resulted primarily from a $3.7 million, or 24.0%, increase in earnings before taxes and the increase in tax rates attendant to the Company's level of pre-tax income. The effective tax rates were 33.3% and 31.9% for the years ended December 31, 2003 and 2002, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND
GENERAL. Net earnings for the year ended December 31, 2002 totaled $10.3 million, a $1.6 million, or 18.6%, increase over 2001 net earnings. The increase in earnings resulted primarily from a $3.6 million increase in net interest income and a $922,000 increase in other income, which were partially offset by a $166,000 increase in the provision for losses on loans, a $2.0 million increase in general, administrative and other expense, and a $718,000 increase in the provision for federal income taxes.
NET INTEREST INCOME. Total interest income for the year ended December 31, 2002, amounted to $57.2 million, a decrease of $2.5 million, or 4.2%, from the $59.7 million recorded for 2001. Interest income on loans totaled $52.7 million, a decrease of $2.4 million, or 4.3%, from the 2001 period. This decrease resulted primarily from a 120 basis point decrease in the average fully-taxable equivalent yield, to 7.65% in 2002 from 8.85% in 2001, which was partially offset by a $67.1 million, or 10.8%, increase in the weighted-average ("average") portfolio balance, to a total of $690.5 million in 2002. Interest income on investment securities and other interest-earning assets decreased by $127,000, or 2.7%. The decrease resulted primarily from a 115 basis point decrease in the average fully-taxable equivalent yield, to 4.97% in 2002, which was partially offset by an $18.7 million, or 22.9%, increase in the average portfolio balance, to a total of $100.3 million in 2002.
Total interest expense amounted to $24.7 million for the year ended December 31, 2002, a decrease of $6.1 million, or 19.7%, from the $30.8 million recorded in 2001. Interest expense on deposits decreased by $6.1 million, or 23.6%, to a total of $19.7 million in 2002. The decrease resulted primarily from a 151 basis point decrease in the average cost of deposits, to 3.32% in 2002, which was partially offset by a $60.6 million, or 11.4%, increase in the average portfolio balance, to a total of $592.9 million in 2002. Interest expense on borrowings increased by $9,000, or 0.2%, during 2002. This increase was due to a $14.7 million, or 16.8%, increase in average borrowings outstanding, which was partially offset by an 83 basis point decrease in the average cost of borrowings, to 4.98% in 2002. The decrease in the level of yields on interest-earning assets and the cost of interest-bearing liabilities was primarily due to the overall decrease in interest rates in the economy throughout 2002 and 2001.
As a result of the foregoing changes in interest income and interest expense, net interest income increased by $3.6 million, or 12.3%, for the year ended December 31, 2002, as compared to 2001. The interest rate spread increased by 19 basis points to 3.75% in 2002, compared to 3.56% in 2001. The fully-taxable equivalent net interest margin increased by 1 basis point from, 4.17% in 2001 to 4.18% in 2002.
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 $2.8 million provision for losses on loans for the year ended December 31, 2002, an increase of $166,000, or 6.4%, compared to 2001. The provision for losses on loans in 2002 was predicated upon the $56.7 million of growth in the gross loan portfolio and an increase of $2.1 million in nonperforming loans from $5.2 million in 2001 to $7.3 million at December 31, 2002. -27- OTHER INCOME. Other income totaled $8.1 million for the year ended December 31, 2002, an increase of $922,000, or 12.8%, over the 2001 amount. This increase resulted primarily from a $973,000, or 70.3%, increase in gain on sale of loans, a $169,000, or 6.3%, increase in service fees, charges, and other operating income and a $254,000, or 11.5%, increase in insurance commissions, which were partially offset by a $778,000 decrease in the gain on sale of branches.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other expense totaled $22.7 million for the year ended December 31, 2002, an increase of $2.0 million, or 9.6%, over the 2001 total. The increase resulted primarily from a $1.4 million, or 11.7%, increase in employee compensation and benefits, a $140,000, or 2.4%, increase in other operating expenses, an increase of $344,000, or 16.5%, in occupancy and equipment and a $108,000, or 41.7%, increase in merger-related expenses.
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. The increase in other operating expense resulted primarily from an increase in costs associated with an EDP upgrade and related training expenditures totaling $246,000, which was partially offset by a $143,000 decrease in professional fees unrelated to merger transactions. The remaining increase of $37,000, or 26.4%, was due to pro-rata increases in other operating expenses attendant to the Company's overall growth year-to-year. The increase in occupancy and equipment expense was due primarily to a $130,000, or 28.3%, increase in rent expense, a $220,000 increase in maintenance contracts associated with the previously mentioned EDP upgrade, and a $20,000, or 13.8%, increase in maintenance and repairs to buildings and equipment, which were partially offset by a $26,000, or 3.2%, decrease in depreciation expense year-to-year. The increase in merger-related expenses was due to $367,000 incurred in connection with the previously mentioned Oak Hill-Towne merger in 2002, compared to $259,000 incurred in connection with the MPA merger in 2001.
FEDERAL INCOME TAXES. The provision for federal income taxes amounted to $4.9 million for the year ended December 31, 2002, an increase of $718,000, or 17.4%, over the $4.1 million recorded in 2001. The increase resulted primarily from a $2.3 million, or 18.2%, increase in earnings before taxes. The effective tax rates were 31.9% and 32.2% for the years ended December 31, 2002 and 2001, respectively.
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 December 31, 2003, the Company had $214.3 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 the Oak Hill 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 $155.2 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 December 31, 2003, the Company had $122.9 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 December 31, 2003, the Company had total off-balance sheet contractual commitments consisting of $35.9 million in loan commitments, or loans committed but not closed, $117.6 million in unused lines of credit and letters of credit totaling $12.0 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 December 31, 2003, by expiration period:
One year Two to After or less three years three years Total ------- ----------- ----------- -----
(In thousands)
Loan commitments $35,920 $ -- $ -- $ 35,920 Unused lines of credit 45,455 12,391 59,765 117,611 Letters of credit 1,648 400 10,000 12,048 ------- ------- -------- -------- $83,023 $12,791 $ 69,765 $165,579 ======= ======= ======== ========
AVERAGE BALANCES AND INTEREST RATES
(1) The net interest margin is the net interest income divided by the average interest-earning assets.
RATE/VOLUME TABLE
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
This information is presented in "Asset and Liability Management" on pages 12 through 13 of this report.
Item 8.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements of the Company, together with the reports thereon of Grant Thornton LLP (dated January 23, 2004, except for Note Q, as to which the date is February 26, 2004) are set forth on pages 37 through 66 hereof (see Item 15 of this Annual Report for Index).
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial disclosure.
Not Applicable.
Item 9A.
Item 9A. Controls and Procedures
The Company's principal executive officer and principal financial officer, based on their evaluation as of the end of the period covered by this report, have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act.
The information is contained under "Ownership of Common Stock by Management" and "Election of Directors" in the Company's Proxy Statement dated March 11, 2004, is incorporated herein by reference in response to this item.
The information contained under "Report of the Audit Committee of the Board of Directors", specifically concerning Audit Committee financial expert, in the Company's Proxy Statement dated March 11, 2004, is incorporated herein by reference in response to this item.
The information contained under "Compliance With Section 16(a) of the Securities Exchange Act" in the Company's Proxy Statement dated March 11, 2004, is incorporated herein by reference in response to this item.
The Company has adopted a Code of Ethics that applies to the Company's directors, officers and employees including the Company's principal executive officer, principal financial officer, principal accounting officer, controller and other persons performing similar functions. The Code of Ethics may only be amended or modified by the Board of Directors of the Company. Waivers of the Code of Ethics may only be granted by the Board of Directors of the Company and along with reasons for the waiver will be promptly disclosed as required by the Securities Exchange Act of 1934 and the rules thereof and the applicable rules of The Nasdaq Stock Market, Inc. In addition, amendments and modifications to the Code of Ethics will be promptly disclosed to the Company's shareholders. The Code of Ethics is included as Exhibit 14 and is set forth on pages 67 through 70 hereof.
Item 11.
Item 11. Executive Compensation.
The information appearing under "Executive Compensation" in the Company's Proxy Statement dated March 11, 2004, is incorporated herein by reference in response to this item.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.
The information appearing under "Ownership of Common Stock by Principal Shareholders", "Ownership of Common Stock By Management" and "Equity Compensation Plan Information" in the Company's Proxy Statement dated March 11, 2004, is incorporated herein by reference in response to this item.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information appearing under "Certain Transactions" in the Company's Proxy Statement dated March 11, 2004, is incorporated herein by reference in response to this item.
Item 14.
Item 14. Principal Accountant Fees and Services
The information appearing under "Principal Accounting Firm Fees" in the Company's Proxy Statement dated March 11, 2004, is incorporated herein by reference in response to this item.
PART IV
Item 15.
Item 15. Exhibits and Reports on Form 8-K.
(a) Documents filed as a part of the Report:
(1) Report of Grant Thornton LLP, Independent Auditors
Consolidated Statements of Financial Condition as of December 31, 2003 and 2002
Consolidated Statements of Earnings for years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Comprehensive Income for years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for years ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements for years ended December 31, 2003, 2002 and 2001
(2) Financial Statement Schedules:
The information is contained in the Company's Annual Report to Stockholders for the year ended December 31, 2003, is incorporated herein by reference in response to this item.
(3) The following are filed as exhibits to this Annual Report on Form 10-K:
Exhibit Number
* 2(a)..................Agreement and Plan of Merger, dated March 31, 1999, between Oak Hill Financial, Inc. and Towne Financial Corporation (reference is made to Exhibit 2.1 of the Prospectus/Proxy Statement filed by the Company on Form S-4A with the SEC on August 3, 1999).
* 2(b)..................Supplemental Agreement, dated as of March 31, 1999, between Oak Hill Financial, Inc. and Towne Financial Corporation (reference is made to Exhibit 2.2 of the Prospectus/Proxy Statement filed by the Company on Form S-4A with the SEC on August 3, 1999).
* 3(a)..................Fourth Amended and Restated Articles of Incorporation (reference is made to Form S-4, Exhibit 3.1, Registration No. 333-81645, filed with the SEC on June 25, 1999 and incorporated herein by reference).
* 3(b)..................Restated Code of Regulations (reference is made to Form SB-2, Exhibit 3(ii), File No. 33-96216 and incorporated herein by reference).
*4(a)...................Reference is made to Articles FOURTH, FIFTH, SEVENTH, EIGHTH, TENTH AND ELEVENTH of the Registrant's Restated Articles of Incorporation (contained in the Registrant's Restated Articles of Incorporation filed as Exhibit 3(a) hereto) and Articles II, III, IV, VI and VIII of the Registrant's Amended and Restated Code of Regulations (contained in the Registrant's Amended and Restated Code of Regulations filed as Exhibit 3(b) hereto).
*4(b)...................Rights Plan, dated January 23, 1998, between Oak Hill Financial, Inc., and Fifth Third Bank, (reference is made to Exhibit 4.1 to the Form 8-A, filed with the SEC on January 23, 1998 and incorporated herein by reference).
*4(c)...................Amended Rights Plan, dated December 26, 2000, between Oak Hill Financial, Inc., and Registrar and Transfer Company, (reference is made to Exhibit 2 to the Form 8-A12B/A, filed with the SEC on February 21, 2001 and incorporated herein by reference).
*10(a)..................Oak Hill Financial, Inc. Fourth Amended and Restated 1995 Stock Option Plan (reference is made to Form S-8, Exhibit 4(a), Registration No. 333-45690, filed with the SEC on September 12, 2000 and incorporated herein by reference).
13.....................2003 Annual Report (Selected portions)
14.....................Oak Hill Financial, Inc. & Subsidiaries Code of Ethics
*21.....................Subsidiaries of the Registrant (reference is made to Form SB-2, Exhibit 21, File No. 333-96216 and incorporated herein by reference).
23.....................Consent of Grant Thornton LLP.
24.....................Powers of Attorney.
31.1 ..................Certification by Chief Executive Officer, R. E. Coffman, Jr., dated March 9, 2004, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 ..................Certification by Chief Financial Officer, Ron J. Copher, dated March 9, 2004, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1...................Certification by Chief Executive Officer, R. E. Coffman, Jr., dated March 9, 2004, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2...................Certification by Chief Financial Officer, Ron J. Copher, dated March 9, 2004, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Incorporated by reference as indicated.
(b) Form 8-K's Filed:
1. Form 8-K, dated October 9, 2003, filed with the SEC on October 14, 2003 announcing the Company's results of operations and financial condition for the three and nine months ended September 30, 2003.
2. Form 8-K, dated December 22, 2003, filed with the SEC on December 22, 2003 announcing the appointment of Ralph E. "Gene" Coffman, Jr. as Chief Executive Officer of the Company effective January 1, 2004.
3. Form 8-K, dated January 9, 2004, filed with the SEC on January 9, 2004 announcing the Company's results of operations and financial condition for the three and twelve months ended December 31, 2003.
4. Form 8-K, dated February 26, 2004, filed with the SEC on February 27, 2004 announcing that the Company's Board of Directors has authorized the repurchase of up to 300,000, or approximately 5.4%, of the Company's common stock through open market or privately negotiated transactions.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
OAK HILL FINANCIAL, INC. Date
By: /s/ R. E. Coffman, Jr. March 9, 2004 ----------------------------------- R. E. Coffman, Jr., President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.