(cover)
Oak Hill Financial, Inc.
People driving Performance
2003 Annual Report
(inside front cover)
(map)
ABOUT OAK HILL FINANCIAL, INC.
Oak Hill Financial, Inc. is a financial holding company incorporated under the
laws of the State of Ohio and regulated by the Board of Governors of the Federal
Reserve System. We operate four subsidiaries: Oak Hill Banks, Action Finance
Company, Oak Hill Financial Insurance Agency, Inc., and Oak Hill Title Agency.
Oak Hill Banks is a state-chartered commercial bank regulated by the State of
Ohio and insured by the Federal Deposit Insurance Corporation (FDIC) that
provides depository, lending, and other financial services to individuals and
businesses in southern and central Ohio. Action Finance Company is a consumer
finance company licensed by the State of Ohio that provides installment and home
equity loans to individuals in southern Ohio. Combined, they operate 26
full-service banking offices, four bank loan production offices, and six
consumer finance offices in 15 counties across southern and central Ohio.
Oak Hill Financial Insurance Agency specializes in group health insurance and
other employee benefits and services over 350 group plans throughout the same
region. Oak Hill Title Agency is a limited liability company that provides title
services for commercial and residential real estate transactions.
With a balanced combination of "high-touch" customer service, local management,
strong operating controls, and controlled geographic expansion, Oak Hill
Financial has grown into one of Ohio's premier independent financial services
organizations.
(pages 1 through 48)
(graphs)
PERFORMANCE
(with photos of Kidd and Coffman)
To Our Fellow Shareholders:
On behalf of the employees and directors of Oak Hill Financial, Inc., we are
proud to present our Annual Report to Shareholders for the year 2003. We believe
it is entirely appropriate that the theme of this year's report is "people
driving performance" as our results for 2003 clearly reflect the commitment of
our employees to the success of Oak Hill Financial.
Performance
Entering the year, we understood the challenge of trying to follow earnings
growth that topped 20% in both 2002 and 2001. Therefore, we are especially
pleased to report that Oak Hill Financial and its subsidiaries had another
excellent year in 2003.
Driven by strong loan growth, a record year for mortgage originations, and a
substantial increase in non-interest income, net earnings from operations
increased 15% over the year 2002, operating earnings per diluted share grew 11%,
and return on equity from operations was 16.4%. Including various non-operating
gains and charges, net earnings were up 22% for the year.
The total return on Oak Hill Financial common stock was 39% in 2002. In 2003,
the market continued to reward our earnings performance with an increase in the
closing price of our stock from $21.37 on December 31, 2002 to $30.11 on
December 31, 2003. When combined with dividends, the increase in the stock price
generated a total return to our shareholders of 43% for 2003.
The Year in Review
The company's growth accelerated in 2003, with total loans increasing 16% during
the year. The key sector for loan growth was commercial real estate, with loan
balances in this category up 42% over the prior year. On the deposit side, we
continued to pursue low-cost demand deposits through aggressive sales and
marketing efforts, and the balances in these accounts increased substantially.
Our loan growth did not come at the expense of credit quality. Net charge-offs
were a low 0.22% of average loans, which is a testament to the soundness of our
underwriting standards and the diligence of our credit administration staff.
Although the net interest margin for 2003 was virtually unchanged from the prior
year, it was subject to considerable pressure due to the sustained low-rate
environment. As the year progressed, the margin began to benefit from our loan
growth and the stabilization of loan rates following a long downward trend. At
the same time, liability costs continued to decline as older, higher-cost
deposits and borrowings were replaced at lower rates. Also,
the low-rate environment created the opportunity for the company to utilize
longer-term liabilities without negatively impacting the margin.
For the year, non-interest income increased 44% and net interest income was up
7%. In addition to exceptional mortgage banking revenues, we introduced new
fee-based services during the year that contributed to the increase in
non-interest income, and we managed our expenses carefully. As a result, the
increase in revenues outpaced the change in operating expenses arising from our
overall balance sheet growth.
To sustain our growth, we continued our program of planned expansion. Oak Hill
Banks opened two de novo branches in high-growth areas within the
Cincinnati-Dayton corridor. The bank also relocated a branch in Proctorville,
Ohio to better take advantage of local market opportunities. In addition, Action
Finance opened a new consumer lending office in Athens, Ohio.
Looking Forward
We have aggressive goals for 2004, and the year will not be without its
challenges. While we are expecting another strong year for loan growth, the
large gain on sale of loans from mortgage refinancing won't be repeated in 2004.
Still, we believe that the anticipated increase in net interest income from
continued growth can offset the non-interest revenues lost due to the decline in
mortgage originations. We remain committed, however, that the pursuit of growth
must not jeopardize credit quality.
The net interest margin may continue to experience pressure if rates remain at
their current low levels. Nonetheless, we believe that the margin can be
maintained at a level sufficient for the company to achieve our earnings
objectives.
Overall, our long-term strategy remains unchanged. We will continue to pursue
growth through originating adjustable-rate commercial loans, commercial real
estate loans and residential mortgage loans; fixed-rate residential mortgage
loans and SBA loans for sale in the secondary market; and consumer loans.
Non-interest income growth and diversification of non-interest revenues are also
key elements in our strategy. Cross-selling additional services to the company's
diverse customer base and expanding the range and penetration of fee-generating
services are central to the company's pursuit of non-interest income. In this
regard, we are targeting increases in revenues from originating SBA loans,
deposit account service charges, title insurance, health insurance, and
brokerage services. Also, we now service $256 million in mortgage loans held in
the secondary market, up 37% in 2003, which creates a considerable revenue
stream going forward.
Finally, we will continue to pursue a simultaneous course of geographic
expansion and increased penetration of existing markets. Oak Hill Banks will
open a full-service banking office in the Columbus suburb of Grove City that
will complement our
successful loan production office in that market. The bank is also planning a
new branch in Chillicothe, Ohio, which will be our third location in that
community.
In Appreciation
We would like to express our heartfelt appreciation to Richard P. LeGrand, who
retired at year-end as an Executive Vice President and Director of Oak Hill
Financial. Dick served the company with distinction for over 18 years and was
the President and CEO of Oak Hill Banks from 1997 to 2001. Dick has been a major
contributor to the company's growth and success, and we wish him the very best
in his retirement.
People driving Performance
At its heart, the story of Oak Hill Financial is the story of the people who
work here - and this report is a celebration of their achievements. Now more
than 350 strong, they have made our success in 2003 possible, and we are deeply
grateful for their efforts.
Thank you for your investment in Oak Hill Financial, Inc.
(signed)
John D. Kidd
Chairman
(signed)
R. E. Coffman, Jr. President & CEO
PEOPLE DRIVING PERFORMANCE
The continued success of Oak Hill Financial is the direct result of the hard
work and dedication of our associates. We are pleased to introduce you to
several of these individuals here. Drawn from throughout our organization, they
are representative of the more than 350 women and men who combined their talents
to make 2003 another record year for Oak Hill Financial.
(with photos of employees)
Parallel Paths
Denise Brown and Lori Michael have a lot in common. Both recently celebrated
their 25th anniversaries with Oak Hill Banks, having started within a month of
each other in the late 1970s. Both started their careers as tellers. Both worked
their way up to manage (at different times) the same branch. Both ultimately
earned promotions to Vice President. And both now run banking offices that are
among the largest and most profitable in the 26-branch Oak Hill Banks system.
Denise is the manager of our branch in downtown Jackson, Ohio. Lori works 15
miles down the road overseeing our branch in the village of Oak Hill, where the
bank was founded in 1902. Their offices are the anchors of our five-branch
network in Jackson County, where we are headquartered and where we enjoy a 50%
deposit market share.
When Lori and Denise started, Oak Hill Banks had only two banking offices and
about $20 million in assets. At the time, the bank had no computers and account
records were still maintained in ledger books.
While there certainly have been many changes, Denise thinks one key aspect of
her work has stayed the same. "Everything is computerized now, which is much
more efficient," she says, "but the most important thing still is giving the
customer the best service we possibly can." Lori echoes that sentiment. "If we
don't treat our customers right, it doesn't matter how good our computer systems
are."
In today's business world, it is rare to find an employee who stays with a
company for her entire career. Oak Hill Banks is very fortunate to have many
employees who have done just that. Two of the best are Denise Brown and Lori
Michael.
Service With A Smile
Being a key customer service contact for 350 group health plans with over 10,000
participants might seem a bit overwhelming, but Renna Geitz takes it all in
stride as the Claims and Enrollment Coordinator for Oak Hill Financial Insurance
Agency.
With the agency since 1986, Renna serves as a liaison with the major insurance
carriers as she assists our group health clients and their employees in
resolving issues with insurance claims, group billing, and enrollment.
Explaining the challenges she faces daily, Renna noted, "There are a lot of
different issues that can come up. Health care is a complex area, and that makes
health insurance a complex area. Regardless of the issue, however, people
contact us because they need help, and that's what we focus on - making sure the
client is taken care of. We try to be as responsive as we can and take care of
their problems quickly."
In 2003, the retention rate on group health plans serviced by Oak Hill Financial
Insurance Agency was over 98%. We think the commitment to customer service shown
by Renna and her colleagues has a lot to do with that.
A New Town + The Right Person
In 1996, Bob Ward started his career with us running a proof machine on the
second floor of our Franklin, Ohio office. In 2003, Bob originated over $30
million in commercial and commercial real estate loans.
In between, he held a number of positions in the Franklin branch, including
branch assistant, assistant manager, and manager. At the beginning of 2003, he
moved out of branch management and into commercial lending. Shortly thereafter,
Bob moved northward from Franklin to our new loan production office in
Centerville, a suburb of Dayton.
The new loan office far exceeded our expectations. Then, in late 2003,
serendipity struck as a full-service branch location became available in
Centerville. The branch was being vacated by another institution, and we were
able to obtain the existing banking equipment, fixtures, and furniture. This
turnkey situation enabled us to open the new branch within 90 days at a very
reasonable cost.
Bob has high expectations for the new branch. "I believe this market holds
tremendous potential for us," he says. "There is a lot of development in this
area, and we should do very well in both loans and deposits."
Bob Ward's success in Centerville earned him a promotion to Vice President in
early 2004.
High Volume
The low interest rates over the past two years created an opportunity that Oak
Hill Banks was quick to take advantage of. The bank geared up a coordinated
marketing and sales campaign, backed by employee training and incentives, which
resulted in a substantial inflow of mortgage applications that continued through
most of 2003.
Once the applications were received, the next stop was Karen Adams and her team.
As a Vice President and manager of Oak Hill Banks' mortgage processing
department, Karen oversees a dedicated staff of underwriters and processors who
closed over $227 million in home loans enroute to a record year for mortgage
lending.
"I never thought we'd top 2002, but 2003 was an incredible year for us," she
said, "Looking back, it's still hard to comprehend the sheer volume of loans we
handled. Getting it all done took a lot of hard work by every person in this
department."
While she finds her job rewarding, away from the office Karen follows a higher
calling. She and her husband, both ordained ministers, recently assumed the
pastoral duties at a local church. Karen also conducts faith-based seminars for
women and recently completed a missionary trip to the island nation of Grenada.
She will be returning to Grenada in 2004 and is planning a missionary trip to
Africa in the near future.
At The Summit
Every quarter, the division of Oak Hill Banks that serves southern and central
Ohio recognizes the highest performing employees in its branches. Based on
various performance measures, the top employees are honored with Summit Awards,
signifying outstanding achievement in service to the bank.
In 2003, only one person was a four-time Summit Award winner. She is a teller in
our Gallipolis, Ohio branch. Her name is Michelle Saunders.
Tellers are considered for Summit Awards based on a scoring system that measures
customer service, teamwork, accuracy, and sales. There are over 60 tellers
competing for the Summit Awards, but only the top five or six win.
We have a lot of good people working for us, so winning a Summit Award just once
is quite an accomplishment. Winning all four quarters in one year is incredible.
What's more incredible is that Michelle just joined us in 2002 and had little
prior experience in banking.
According to Margo Swisher, Michelle's former branch manager who worked with her
throughout 2003, "Michelle is a great asset to the bank. She's always upbeat,
and she's great with customers, Michelle is a real pleasure to work with."
An Alternative View
In the banking industry, anything that customers can put their money in that
isn't a deposit account tends to be referred to as an "alternative investment."
Stuart Payne has a different perspective.
Stuart is one of three investment representatives working at the bank through
our partnership with the PrimeVest Financial Services. Through PrimeVest, Stuart
and his colleagues offer brokerage and financial planning services to our large
customer base and the general public.
"I don't refer to what we do as `alternative', says Stuart. "If we're going to
meet the full range of our customers' financial needs, brokerage and financial
planning are essential parts of the mix."
Our brokerage client base and assets under management have grown substantially
every year since Stuart joined us at the beginning of 2001. Until 2003, he was
our sole investment rep, but the geographic territory was too large, and the
opportunities too great, for one person to handle alone.
Stuart is quick to credit his co-workers for the success of the PrimeVest
program: "We get a tremendous amount of support from all levels in the bank. Our
people listen to their customers and suggest that they talk to an investment rep
if it looks like we can help them. Depending on the customer's goals and risk
preferences, sometimes our services are appropriate and sometimes it's better if
they stick with traditional bank accounts. Regardless, it's all about doing the
right thing for the customer."
PrimeVest Financial Services is an independent registered broker/dealer.
Securities and insurance products offered by PrimeVest are * not FDIC insured *
may go down in value * not financial institution guaranteed * not a deposit *
not insured by any federal government agency.
Behind the Scenes
There are a lot of people that make a bank work. The most visible, of course,
are the people in the branches, the ones who serve the customers on a daily
basis. Supporting them are many people in different functional areas who work
behind the scenes to ensure that branch operations run smoothly.
One of the key people behind the scenes at Oak Hill Financial is Melissa
Gilliland, our Branch Systems Manager. Melissa is responsible for our new
account "platform", which is the automated system through which all deposit and
loan accounts at Oak Hill Banks are set up.
Using the automated platform system, the customer service employees in our
branches can quickly open new customer accounts. They have to enter the
customer's personal information and other data specific to the new account, but
most of the account terms are already stored in the system, thus saving
considerable set-up time in the branches.
Working with senior management, branch administration, marketing, compliance,
and data processing, Melissa keeps all of our account information current.
Whenever a new type of account is set up or the rates or other terms for any of
our accounts are changed, Melissa implements the changes on the platform system
for the branches to use.
Melissa brings her considerable branch experience to bear when making decisions
about the platform. She joined Oak Hill Banks as a teller in 1988 and held
several branch positions during the next 12 years before taking over the
platform system in 2000.
Two Heads Are Better Than One
Oak Hill Banks' John Cornett and Micheal Lander share a unique responsibility in
a rather unique organization. John and Mike both hold the title of Senior
Lender, a position that is usually reserved for one person in most community
banks.
When our Towne Bank subsidiary was merged into Oak Hill Banks in late 2002, we
decided to treat our operations in the Cincinnati-Dayton region served by Towne
as an autonomous division. We wanted to keep decision-making at the local level
so that our people would retain the ability to act quickly on credit requests
and respond to local market conditions.
John has responsibility for lending in southern and central Ohio, while Mike
heads up the loan department in the Cincinnati-Dayton region. Together, they
oversee a loan portfolio that has doubled in size in five years, fueled by an
aggressive business development program focused on commercial and commercial
real estate loans. Each has a dedicated team of commercial loan officers and
credit administration specialists, and their combined efforts resulted in over
$100 million in loan growth - a 16% increase - in 2003.
"I think the structure has worked well," says Mike, "and the relative
independence of each region has been a big plus in meeting the needs of the
local markets."
"We work separately on most of our loans, but together on larger credits and
policy issues," adds John. "We also call on each other for advice when either of
us needs a fresh perspective on a loan."
A Change of Direction
Connie Hendren had a successful 23-year career with a large regional bank in
Logan, Ohio. Active and well-known in her community, her position was secure and
brought her recognition and respect among her local peers. In 1999, she quit to
accept a new position. The job? Managing a branch that hadn't been built yet for
a bank she had never heard of.
According to Connie, "Someone at Oak Hill Banks who also used to be with my
former employer called and said `Connie, you've got to talk with these guys.
It's a completely different environment than what you're used to.' To make a
long story short, I agreed to talk, and before I knew it I had a new job."
Connie opened a loan production office for Oak Hill Banks in Logan in 1999. The
rapid success of that office led to the opening of a new full-service branch in
2001 - a branch that continues to be an excellent performer under Connie's
leadership.
"After 23 years with one bank, I was more than a little apprehensive about
making a change. Since I came here, though, I've never looked back. This is a
true community bank. I can really stay close to my customers here, and I love
every minute of it."
Community Involvement
We are very proud that many of our employees are active in their local
communities. Our people devote a considerable amount of their personal time to
working with various community groups, service organizations, and charitable
causes.
Jason Leyda's involvement in the community of Blue Ash, a Cincinnati suburb that
is home to a large branch of Oak Hill Banks, is representative of the commitment
our people have to the cities and towns that they serve.
Jason's list of community activities is long and varied. He is a board member of
the Blue Ash Business Association and was Blue Ash's 2003 chairman for the
Action Auction, a fundraiser for public television. Jason was able to get local
businesses to donate over 80 items that were auctioned during the event.
Jason also serves on the "Taste of Blue Ash" committee. An annual festival,
Taste of Blue Ash is one of the top five community events in the Cincinnati
area. National musical acts and local cuisine highlight the three-day event,
which attracts an estimated 300,000 people each year.
Finally, Jason is a member of Blue Ash Revitalization, Inc., whose mission
statement reads, in part, "To improve the quality of life . . . within various
neighborhoods of the City of Blue Ash . . ." Certainly, the volunteer work that
Jason does contributes to a better quality of life in his community.
Jason joined Oak Hill Banks in 1996. He is currently the bank's Treasury
Management Officer in the Cincinnati-Dayton region and was promoted to Vice
President in early 2004.
The Night Shift
Combined, Oak Hill Financial and its subsidiaries have more than 350 employees.
At the time of day when most of them are getting ready to head for home, Pam
Mercer's workday is just getting started.
Pam is a clerk on the night shift in our data processing department, where she
and her co-workers are responsible for completing the processing of each day's
transactions and updating our financial records.
Although she is a native of our headquarters community of Jackson, Ohio, Pam
nevertheless took a roundabout path to our EDP department. After graduating from
high school, she lived in North Carolina for several years. In 1974, she opened
a campground in Wytheville, Virginia. For almost 25 years, she divided her time
between operating the campground and a part-time position as a bookkeeper for a
district office of the Presbyterian Church.
Returning to Jackson in 2000 to care for her elderly mother, Pam was looking for
a job whose schedule would allow her to take her mother to her doctor's
appointments and bridge games. The night shift in the EDP department was a
perfect fit. She's found there are other benefits as well. Pam explains, "It's
actually a very peaceful work environment. All we hear is the sound of the
equipment running."
The Coach
Jackson, Ohio has a reputation as a football town. The Jackson High School
Ironmen have a long tradition of winning, with numerous conference championships
and several trips to the state playoffs to their credit. One of the reasons for
Jackson's success in high school football is the instruction and experience that
its players get starting in the third grade.
Jackson has a popular and well-run football program for youth in grades 3
through 6 - a program that is near and dear to George Humphreys, manager of the
Action Finance Company office in Portsmouth, Ohio. George's father founded the
program in 1986 and still oversees it with help from George and his brother. For
twelve weeks every year, George devotes his evenings and weekends to the youth
football program.
"It's very rewarding working with the kids, and it's also a lot of fun," says
George. "We teach them more than plays and football skills. We also try to teach
them the importance of teamwork and the value of practice and hard work."
George started playing football in the first grade and has loved the game from
day one. In high school, his athletic accomplishments earned him all-league
recognition in both football and baseball.
Oak Hill Financial, Inc.
Selected Consolidated Financial Information
At or For the Year Ended December 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
SUMMARY OF FINANCIAL CONDITION (1)
Total assets $938,281 $833,629 $778,332 $ 694,905 $ 600,330
Interest-bearing deposits and federal funds sold 1,285 5,699 11,929 442 4,516
Investment securities 79,545 83,789 78,981 61,427 53,485
Loans receivable - net (2) 811,021 701,944 646,081 599,086 507,969
Deposits 717,821 663,813 612,204 562,414 488,743
Federal Home Loan Bank (FHLB) advances
and other borrowings 135,352 99,358 104,860 77,595 60,852
Stockholders' equity 79,928 66,881 56,349 50,224 48,025
SUMMARY OF OPERATIONS (1)
Interest income $ 55,170 $ 57,222 $ 59,704 $ 54,579 $ 45,251
Interest expense 20,468 24,724 30,777 29,505 22,416
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 34,702 32,498 28,927 25,074 22,835
Provision for losses on loans 3,347 2,757 2,591 2,263 2,432
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
losses on loans 31,355 29,741 26,336 22,811 20,403
Gain on sale of loans 4,489 2,358 1,385 174 477
Gain on sale of branch -- 122 900 -- --
Gain (loss) on sale of assets 333 331 27 (328) (2,141)
Insurance commissions 2,827 2,457 2,203 2,090 1,720
Other income 3,889 2,845 2,676 2,498 2,068
General, administrative and other expense (3)(4) 24,049 22,663 20,672 17,734 16,335
- -------------------------------------------------------------------------------------------------------------------------
Earnings before federal income tax 18,844 15,191 12,855 9,511 6,192
Federal income taxes 6,266 4,851 4,133 3,174 2,098
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 12,578 $ 10,340 $ 8,722 $ 6,337 $ 4,094
=========================================================================================================================
PER SHARE INFORMATION (5)
Basic earnings per share $ 2.29 $ 1.94 $ 1.66 $ 1.17 $ .75
Book value per share $ 14.34 $ 12.46 $ 10.70 $ 9.51 $ 8.74
Oak Hill Financial, Inc.
Selected Consolidated Financial Information
At or For the Year Ended December 31,
---------------------------------------------------------------
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
OTHER STATISTICAL AND OPERATING DATA
Return on average assets 1.45% 1.26% 1.20% 0.99% 0.72%
Return on average equity 17.08 16.76 16.45 12.98 8.51
Net interest margin (fully-taxable equivalent) 4.19 4.18 4.17 4.06 4.20
Interest rate spread during period 3.81 3.75 3.56 3.40 3.64
General, administrative and other expense
to average assets 2.77 2.77 2.85 2.76 2.85
Allowance for loan losses to nonperforming loans 133.46 125.29 160.00 250.90 192.40
Allowance for loan losses to total loans 1.32 1.29 1.28 1.19 1.19
Nonperforming loans to total loans 0.99 1.03 0.80 0.47 0.62
Nonperforming assets to total assets 0.93 0.88 0.87 0.45 0.56
Net charge-offs to average loans 0.22 0.28 0.23 0.22 0.20
Equity to assets at period end 8.52 8.02 7.24 7.23 8.00
Dividend payout ratio 23.67 25.31 26.69 33.68 43.74
- ----------
(1) Oak Hill Financial, Inc. (the "Company") completed a merger with
Innovative Financial Services, 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 financial statements as of and for the years ended
December 31, 1999 and 2000 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 917,361
shares in the Towne transaction and the issuance of 172,414 shares in the
MPA transaction.
Oak Hill Financial, Inc.
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, 1999. 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.
Oak Hill Financial, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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
Oak Hill Financial, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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.
Oak Hill Financial, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 __ 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 below 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.
Oak Hill Financial, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RATE/VOLUME TABLE
Year Ended December 31,
-----------------------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
----------------------------------- -----------------------------------
Increase (decrease) due to Increase (decrease) due to
(In thousands) Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------------------------------
Interest income attributable to:
Loans receivable $ 4,693 $(5,352) $ (659) $ 5,563 $(7,931) $(2,368)
Investment securities (506) (796) (1,302) 1,139 (969) 170
Federal funds sold (79) (33) (112) (29) (129) (158)
Interest-earning deposits with banks 9 (1) 8 (13) (10) (23)
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income $ 4,117 $(6,182) $(2,065) $ 6,660 $(9,039) $(2,379)
============================================================================================================================
Interest expense attributable to:
Deposits:
Savings accounts $ 29 $ (219) $ (190) $ 71 $ (360) $ (289)
NOW accounts (2) (363) (365) 585 54 638
Money market deposit accounts 2 (54) (52) (25) (80) (104)
Premium & select investments 35 (472) (437) (158) (1,263) (1,421)
Certificates of deposit 503 (3,536) (3,033) 1,748 (6,634) (4,886)
Borrowings 711 (890) (179) 788 (779) 9
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 1,278 $(5,534) $(4,256) $ 3,009 $(9,062) $(6,053)
============================================================================================================================
Increase in net interest income $ 2,191 $ 3,674
============================================================================================================================
Oak Hill Financial, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
AVERAGE BALANCE AND INTEREST RATES
Year Ended December 31,
----------------------------------------------------------------------------------------
2003 2002 2001
---------------------------- ---------------------------- ----------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------
Interest earnings assets:
Loans receivable $754,519 $ 52,138 6.91% $690,544 $ 52,797 7.65% $623,486 $ 55,165 8.85%
Investment securities 84,277 3,551 4.21 92,580 4,853 5.24 72,687 4,683 6.44
Federal funds sold 699 7 1.00 7,499 119 1.59 8,472 277 3.27
Interest-earning deposits 1,508 18 1.19 230 10 4.35 476 33 6.93
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-
earnings assets 841,003 55,714 6.62 790,853 57,779 7.31 705,121 60,158 8.53
Non-interest earning assets 27,003 27,459 20,524
-------- -------- --------
Total assets $868,006 $818,312 $725,645
======== ======== ========
Interest-bearing liabilities:
Deposits:
Savings accounts $ 47,385 295 0.62 $ 43,588 485 1.11 $ 39,612 774 1.95
NOW accounts 61,200 839 1.37 62,003 1,204 1.94 32,315 566 1.75
Money market deposit accounts 7,993 56 0.70 7,951 108 1.36 9,080 212 2.33
Premium & select investments 71,848 812 1.13 69,657 1,249 1.79 74,399 2,670 3.59
Certificates of deposit 422,905 13,575 3.21 409,656 16,608 4.05 376,833 21,494 5.70
Borrowings 117,328 4,891 4.17 101,818 5,070 4.98 87,151 5,061 5.81
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 728,659 20,468 2.81 694,673 24,724 3.56 619,390 30,777 4.97
---------------- ----------------- ---------------
Non interest-bearing
liabilities 35,706 61,962 53,222
Stockholders' equity 73,641 61,677 53,033
-------- -------- --------
Total liabilities and
stockholders' equity $868,006 $818,312 $725,645
======== ======== ========
Net interest income and
interest rate spread $ 35,246 3.81% $ 33,055 3.75% $ 29,381 3.56%
================ ================= ===============
Net interest margin (1) 4.19% 4.18% 4.17%
====== ====== ======
Average interest-earning
assets to average
interest-bearing liabilities 115.42% 113.85% 113.84%
====== ====== ======
Adjustment of interest
income to a tax-equivalent
basis on tax-exempt:
Loans and investment
securities $ 544 $ 557 $ 454
======== ========= ========
(1) The net interest margin is net interest income divided by average
interest-earning assets.
Oak Hill Financial, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
2002
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. 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.
Although the Company anticipates that non-interest income overall will be
less in 2004 compared to 2003, and the gain on sale of one-to-four family
residential loans will be substantially lower, increases are expected for 2004
in gain on sales of commercial loans originated under the
Oak Hill Financial, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Small Business Administration's ("SBA") 504 loan program and the guaranteed
portion of commercial loans originated under the SBA 7(a) program, as well as
deposit account service charges, title insurance, health insurance, and
brokerage services.
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
2001
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
Oak Hill Financial, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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.
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
Oak Hill Financial, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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
(In thousands) or less three years three years Total
- ------------------------------------------------------------------------------------
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
====================================================================================
Oak Hill Financial, Inc.
Consolidated Financial Statements
TABLE OF CONTENTS
Financial Condition .................... __
Earnings ............................... __
Stockholders' Equity ................... __
Comprehensive Income ................... __
Cash Flows ............................. __
Notes .................................. __
Oak Hill Financial, Inc.
Consolidated Statements of Financial Condition
December 31,
---------------------------
(In thousands, except share data) 2003 2002
- -------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 20,390 $ 19,118
Federal funds sold 123 5,540
Investment securities designated as available for sale - at market 75,886 81,214
Investment securities held to maturity - at cost (approximate market value
of $3,583 and $2,522 at December 31, 2003 and 2002, respectively) 3,659 2,575
Loans receivable - net 810,827 700,699
Loans held for sale - at lower of cost or market 194 1,245
Office premises and equipment - net 12,192 10,266
Federal Home Loan Bank stock - at cost 5,998 5,764
Real estate acquired through foreclosure 585 --
Accrued interest receivable on loans 2,942 3,026
Accrued interest receivable on investment securities 495 600
Goodwill - net 413 413
Prepaid expenses and other assets 2,474 2,249
Prepaid federal income taxes 1,514 381
Deferred federal income taxes 589 539
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 938,281 $ 833,629
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand $ 66,712 $ 61,847
Savings and time deposits 651,109 601,966
- -------------------------------------------------------------------------------------------------------------
Total deposits 717,821 663,813
Securities sold under agreement to repurchase 4,365 5,553
Advances from the Federal Home Loan Bank 122,887 86,055
Notes payable 3,100 2,750
Guaranteed preferred beneficial interests in the Corporation's
junior subordinated debentures 5,000 5,000
Accrued interest payable and other liabilities 5,180 3,577
- -------------------------------------------------------------------------------------------------------------
Total liabilities 858,353 766,748
Stockholders' equity
Common stock - $.50 stated value; authorized 15,000,000 shares,
5,594,228 shares issued 2,797 2,797
Additional paid-in capital 5,704 5,113
Retained earnings 70,844 61,236
Treasury stock (21,542 and 225,020 shares at December 31, 2003 and
2002, respectively - at cost) (332) (3,471)
Accumulated comprehensive income:
Unrealized gain on securities designated as available for sale,
net of related tax effects 915 1,206
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 79,928 66,881
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 938,281 $ 833,629
=============================================================================================================
The accompanying notes are an integral part of these statements.
Oak Hill Financial, Inc.
Consolidated Statements of Earnings
Year Ended December 31,
----------------------------------------
(In thousands, except share data) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $52,009 $ 52,660 $ 55,015
Investments
U.S. Government and agency securities 1,862 3,095 3,026
Obligations of state and political subdivisions 771 815 590
Other securities 503 523 763
Federal funds sold 7 119 277
Interest-bearing deposits 18 10 33
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 55,170 57,222 59,704
INTEREST EXPENSE
Deposits 15,577 19,654 25,716
Borrowings 4,891 5,070 5,061
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 20,468 24,724 30,777
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 34,702 32,498 28,927
Less provision for losses on loans 3,347 2,757 2,591
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 31,355 29,741 26,336
OTHER INCOME
Service fees, charges and other operating 3,889 2,845 2,676
Insurance commissions 2,827 2,457 2,203
Gain on sale of loans 4,489 2,358 1,385
Gain on sale of securities 314 315 43
Gain on sale of branch -- 122 900
Gain (loss) on sale of real estate 19 16 (16)
- ----------------------------------------------------------------------------------------------------------------------
Total other income 11,538 8,113 7,191
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE
Employee compensation and benefits 14,201 13,123 11,744
Occupancy and equipment 2,910 2,433 2,089
Federal deposit insurance premiums 104 109 131
Franchise taxes 69 709 667
Other operating 6,765 5,922 5,782
Merger-related expenses -- 367 259
- ----------------------------------------------------------------------------------------------------------------------
Total general, administrative and other expense 24,049 22,663 20,672
- ----------------------------------------------------------------------------------------------------------------------
Earnings before federal income taxes 18,844 15,191 12,855
FEDERAL INCOME TAXES
Current 6,166 5,078 4,224
Deferred 100 (227) (91)
- ----------------------------------------------------------------------------------------------------------------------
Total federal income taxes 6,266 4,851 4,133
- ----------------------------------------------------------------------------------------------------------------------
NET EARNINGS $12,578 $ 10,340 $ 8,722
======================================================================================================================
EARNINGS PER SHARE
Basic $ 2.29 $ 1.94 $ 1.66
======================================================================================================================
Diluted $ 2.23 $ 1.90 $ 1.65
======================================================================================================================
The accompanying notes are an integral part of these statements.
Oak Hill Financial, Inc.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2003, 2002 and 2001
----------------------------------------------------------------------------------------
Unrealized
gains (losses)
on securities
Additional designated
Common paid-in Retained Treasury as available
(In thousands, except share data) stock capital earnings stock for sale Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2001 $2,793 $ 5,040 $ 47,105 $(4,680) $ (34) $ 50,224
Sale of treasury stock -- -- -- 480 -- 480
Issuance of 27,825 shares under
stock option plan 4 74 -- 223 -- 301
Dividends declared of $.443 per share -- -- (2,321) -- -- (2,321)
Repurchase of 73,050 shares -- -- -- (1,030) -- (1,030)
Unrealized losses on securities
designated as available for sale,
net of related tax effects -- -- -- -- (27) (27)
Net earnings for the year -- -- 8,722 -- -- 8,722
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 2,797 5,114 53,506 (5,007) (61) 56,349
Issuance of 98,313 shares under
stock option plan -- (1) -- 1,536 -- 1,535
Dividends declared of $.491 per share -- -- (2,610) -- -- (2,610)
Unrealized gains on securities
designated as available for sale,
net of related tax effects -- -- -- -- 1,267 1,267
Net earnings for the year -- -- 10,340 -- -- 10,340
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 2,797 5,113 61,236 (3,471) 1,206 66,881
Issuance of 203,478 shares under
stock option plan -- 591 -- 3,139 -- 3,730
Dividends declared of $.542 per share -- -- (2,970) -- -- (2,970)
Unrealized losses on securities
designated as available for sale,
net of related tax effects -- -- -- -- (291) (291)
Net earnings for the year -- -- 12,578 -- -- 12,578
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 $2,797 $ 5,704 $ 70,844 $ (332) $ 915 $ 79,928
===================================================================================================================================
The accompanying notes are an integral part of these statements.
Oak Hill Financial, Inc.
Consolidated Statements of Comprehensive Income
Year Ended December 31,
-----------------------------------------
(In thousands) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 12,578 $ 10,340 $ 8,722
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities designated as available for sale,
net of taxes (benefits) of $(47), $760 and $1 in 2003, 2002 and
2001, respectively (87) 1,475 1
Reclassification adjustment for realized gains included in
net earnings, net of taxes of $110, $107 and $15 in
2003, 2002 and 2001, respectively (204) (208) (28)
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 12,287 $ 11,607 $ 8,695
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated comprehensive income $ 915 $ 1,206 $ (61)
===============================================================================================================================
The accompanying notes are an integral part of these statements.
Oak Hill Financial, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
---------------------------------------------
(In thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 12,578 $ 10,340 $ 8,722
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 985 651 823
Gain on sale of securities (314) (315) (43)
Amortization of premiums and discounts on investment
securities - net 1,310 949 464
Amortization of mortgage servicing rights 1,222 602 467
Proceeds from sale of loans in secondary market 178,542 110,247 75,769
Loans disbursed for sale in secondary market (175,411) (108,764) (76,541)
Gain on sale of loans (2,080) (1,091) (682)
Gain on disposition of assets (15) (138) (884)
Amortization of deferred loan origination costs 1 195 342
Federal Home Loan Bank stock dividends (234) (270) (375)
Provision for losses on loans 3,347 2,757 2,591
Amortization of goodwill -- -- 33
Tax benefit of stock options exercised 802 266 2
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (225) (874) (630)
Accrued interest receivable 189 195 392
Accrued interest payable and other liabilities 1,603 (457) (814)
Federal income taxes
Current (1,133) (1,442) 1,651
Deferred 100 (227) (91)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 21,267 12,624 11,196
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Loan disbursements (445,612) (389,543) (301,241)
Principal repayments on loans 330,329 331,494 250,646
Principal repayments on mortgage-backed securities designated
as available for sale 31,230 16,708 12,839
Proceeds from sale of investment securities designated
as available for sale 7,573 31,711 32,533
Proceeds from sale of investment securities designated
as held to maturity -- 2,011 1,493
Proceeds from maturity of investment securities 780 5,170 7,317
Proceeds from disposition of assets 64 371 1,504
Purchase of investment securities designated as available for sale (35,678) (58,079) (72,203)
Purchase of investment securities designated as held-to-maturity (1,098) (1,050) --
(Increase) decrease in federal funds sold - net 5,417 6,111 (11,574)
Purchase of McNelly Insurance Agency -- (97) --
Purchase of Federal Home Loan Bank stock -- (138) --
Purchase of office premises and equipment (2,960) (1,756) (1,305)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (109,955) (57,087) (79,991)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating and investing activities
(balance carried forward) (88,688) (44,463) (68,795)
- --------------------------------------------------------------------------------------------------------------------------------
Oak Hill Financial, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
-----------------------------------------------
(In thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in operating and investing activities
(balance brought forward) $ (88,688) $ (44,463) $ (68,795)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds (repayments) from securities sold under agreement
to repurchase (1,188) 2,335 3,075
Net increase in deposit accounts 54,008 51,609 49,790
Proceeds from Federal Home Loan Bank advances 2,738,024 164,961 609,645
Repayment of Federal Home Loan Bank advances (2,701,192) (172,848) (585,855)
Proceeds from notes payable 3,050 -- 400
Repayment of notes payable (2,700) (50) --
Dividends on common shares (2,970) (2,610) (2,321)
Purchase of treasury stock -- -- (1,030)
Proceeds from sale of treasury stock -- -- 480
Proceeds from issuance of shares under stock option plan 2,928 1,269 299
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 89,960 44,666 74,483
- --------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,272 203 5,688
Cash and cash equivalents at beginning of year 19,118 18,915 13,227
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 20,390 $ 19,118 $ 18,915
==========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Federal income taxes $ 6,474 $ 4,874 $ 2,634
==========================================================================================================================
Interest on deposits and borrowings $ 20,463 $ 24,974 $ 31,551
==========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ (291) $ 1,267 $ (27)
==========================================================================================================================
Recognition of mortgage servicing rights in
accordance with SFAS No. 140 $ 2,409 $ 1,267 $ 703
==========================================================================================================================
Transfer from loans to real estate acquired through foreclosure $ 1,447 $ -- $ 1,654
==========================================================================================================================
Issuance of loans upon sale of real estate acquired
though foreclosure $ 862 $ 1,760 $ --
==========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Issuance of note payable in connection with the purchase of
McNelly Insurance Agency $ -- $ 100 $ --
==========================================================================================================================
Acquisition of treasury stock in exchange for stock options $ 165 $ 23 $ --
==========================================================================================================================
The accompanying notes are an integral part of these statements.
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
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 consolidated
financial statements use the term "Oak Hill" to describe the preexisting
individual banks owned by the Company.
Oak Hill conducts a general commercial banking business in southern and
central Ohio which consists of attracting deposits from the general public and
applying those funds to the origination of loans for commercial, consumer and
residential purposes. Action is a consumer finance company that originates
installment and home equity loans. Oak Hill's and Action's profitability are
significantly dependent on net interest income, which is the difference between
interest income generated from interest-earning assets (i.e., loans and
investments) and the interest expense paid on interest-bearing liabilities
(i.e., customer deposits and borrowed funds). Net interest income is affected by
the relative amount of interest-earning assets and interest-bearing liabilities
and the interest received or paid on these balances. The level of interest rates
paid or received by Oak Hill and Action can be significantly influenced by a
number of competitive factors, such as governmental monetary policy, that are
outside of management's control.
On August 31, 2001, the Company combined with Innovative Financial
Services Agency, Inc. ("IFS") in a transaction whereby IFS became a wholly-owned
subsidiary of the Company. IFS 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.
The consolidated financial information presented herein has been prepared
in accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") and general accounting practices within the financial
services industry. In preparing financial statements in accordance with U.S.
GAAP, management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from such
estimates.
The following is a summary of the Company's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Oak Hill, Action, MPA and Oak Hill Title. All
intercompany balances and transactions have been eliminated.
2. Investment Securities
The Company accounts for investment securities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires that
investments be categorized as held to maturity, trading, or available for sale.
Securities classified as held to maturity are carried at cost only if the
Company has the positive intent and ability to hold these securities to
maturity. Securities available for sale are carried at fair value with resulting
unrealized gains or losses recorded to stockholders' equity.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding, adjusted
for premiums and discounts on loans purchased and sold and the allowance for
loan losses. Premiums and discounts on loans purchased and sold are
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
amortized and accreted to operations using the interest method over the average
life of the underlying loans.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments has returned
to normal, in which case the loan is returned to accrual status.
Loans held for sale are carried at the lower of cost or market, determined
in the aggregate. Loans held for sale are identified at the point of
origination. In computing lower of cost or market, deferred loan origination
fees are deducted from the principal balance of the related loan. All loan sales
are made without further recourse to Oak Hill. At December 31, 2003 and 2002,
loans held for sale were carried at cost.
Oak Hill generally retains servicing on loans sold and agrees to remit to
the investor loan principal and interest at agreed-upon rates. 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 Oak Hill 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 Oak Hill, 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.
Oak Hill recorded amortization related to mortgage servicing rights
totaling approximately $1.2 million, $602,000 and $467,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. At December 31, 2003 and 2002,
the carrying value of Oak Hill's mortgage servicing rights, which approximated
their fair value, totaled $3.0 million and $1.8 million, respectively.
4. Loan Origination and Commitment Fees
The Company accounts for loan origination fees and costs in accordance with SFAS
No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases." Pursuant to the
provisions of SFAS No. 91, all loan origination fees received, net of certain
direct origination costs, are deferred on a loan-by-loan basis and amortized to
interest income using the interest method, giving effect to actual loan
prepayments. Additionally, SFAS No. 91 generally limits the definition of loan
origination costs to the direct costs attributable to originating a loan, i.e.,
principally actual personnel costs.
Fees received for loan commitments are deferred and amortized over the
life of the related loan using the interest method.
5. Allowance for Loan Losses
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 in certain items including, but not limited to, the level of
delinquent and specific problem loans, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral
and current economic conditions in Oak Hill's primary market areas. 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).
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
The Company maintains its allowance for loan losses 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 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 on a collective basis. 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.
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.
6. Office Premises and Equipment
Depreciation and amortization are provided on the straight-line and accelerated
methods over the estimated useful lives of the assets, estimated to be ten to
fifty years for buildings and improvements and three to twenty-five years for
furniture, fixtures and equipment.
7. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the loan's
unpaid principal balance (cost) or fair value less estimated selling expenses at
the date of acquisition. The loan loss allowance is charged for any write down
in the loan's carrying value to fair value at the date of acquisition. Real
estate loss provisions are recorded if the properties' fair value subsequently
declines below the value determined at the recording date. In determining the
lower of cost or fair value at acquisition, costs relating to development and
improvement of property are considered. Costs relating to holding real estate
acquired through foreclosure, net of rental income, are charged against earnings
as incurred.
8. Federal Income Taxes
The Company accounts for federal income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes." Pursuant to the provisions of SFAS No. 109, a
deferred tax liability or deferred tax asset is computed by applying the current
statutory tax rates to net taxable or deductible temporary differences between
the tax basis of an asset or liability and its reported amount in the
consolidated financial statements that will result in taxable or deductible
amounts in future periods. Deferred tax assets are recorded only to the extent
that the amount of net deductible temporary differences or carryforward
attributes may be utilized against current period earnings, carried back against
prior years earnings, offset against taxable temporary differences reversing in
future periods, or utilized to the extent of management's estimate of future
taxable income. A valuation allowance is provided for deferred tax assets to the
extent that the value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future taxable
income. Deferred tax liabilities are provided on the total amount of net
temporary differences taxable in the future.
The Company's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred loan origination fees and costs, Federal Home Loan Bank
stock dividends, capitalized mortgage servicing rights, certain components of
retirement expense and the allowance for loan losses. A temporary difference is
also recognized for depreciation expense computed using accelerated methods for
federal income tax purposes.
9. Goodwill
For years prior to 2002, goodwill arising from an acquisition was amortized to
operations through 2001 using the straight-line method over a fifteen-year
period. It was management's policy to periodically evaluate the carrying value
of intangible assets in relation to the continuing
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
earnings capacity of the acquired assets and assumed liabilities.
In January 2002, MPA purchased McNelly Insurance Agency, a local property
and casualty insurance agency, for consideration of $100,000 in cash and a
$100,000 note payable. This purchase resulted in an increase in goodwill of
$197,000.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Intangible Assets," which prescribes accounting for all purchased
goodwill and intangible assets. Pursuant to SFAS No. 142, acquired goodwill is
not amortized, but is tested for impairment at the reporting unit level annually
and whenever an impairment indicator arises. Goodwill has been assigned to Oak
Hill and MPA as the reporting units that are expected to benefit from the
goodwill.
The Company evaluated the unamortized goodwill balance of $413,000 during
2003 and 2002 in accordance with the provisions of SFAS No. 142 via independent
third-party appraisal. The evaluation showed no indication of impairment. The
adoption of SFAS No. 142 has resulted in the elimination of annual goodwill
amortization of approximately $33,000.
10. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value of financial instruments, both assets and liabilities
whether or not recognized in the consolidated statement of financial condition,
for which it is practicable to estimate that value. For financial instruments
where quoted market prices are not available, fair values are based on estimates
using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied,
including the discount rate and estimates of future cash flows. Therefore, the
fair values presented may not represent amounts that could be realized in an
exchange for certain financial instruments. The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial instruments at December 31, 2003 and 2002.
Cash and due from banks. The carrying amounts presented in the
consolidated statements of financial condition for cash and due from banks are
deemed to approximate fair value.
Federal funds sold. The carrying amounts presented in the consolidated
statements of financial condition for federal funds sold are deemed to
approximate fair value.
Investment securities. For investment securities, fair value is deemed to
equal the quoted market price.
Loans receivable. The loan portfolio has been segregated into categories
with similar characteristics, such as one-to-four family residential real
estate, multi-family residential real estate, commercial, installment and other.
These loan categories were further delineated into fixed-rate and
adjustable-rate loans. The fair values for the resultant loan categories were
computed via discounted cash flow analysis, using current interest rates offered
for loans with similar terms to borrowers of similar credit quality. The
historical carrying amount of accrued interest on loans is deemed to approximate
fair value.
Federal Home Loan Bank stock. The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate fair
value.
Deposits. The fair value of NOW accounts, savings accounts, demand
deposits, money market deposits and other transaction accounts is deemed to
approximate the amount payable on demand at December 31, 2003 and 2002. Fair
values for fixed-rate certificates of deposit have been estimated using a
discounted cash flow calculation using the interest rates currently offered for
deposits of similar remaining maturities.
Advances from the Federal Home Loan Bank. The fair value of advances from
the Federal Home Loan Bank has been estimated using discounted cash flow
analysis, based on the interest rates currently offered for advances of similar
remaining maturities.
Securities sold under agreement to repurchase. The carrying amounts of
securities sold under agreements to repurchase are deemed to approximate fair
value.
Notes payable. The fair value of notes payable has been estimated using
discounted cash flow analysis, based on the interest rates currently offered for
notes of similar remaining maturities.
Subordinated debentures. The fair value of the Corporation's subordinated
debentures has been estimated using discounted cash flow analysis, based on the
interest rates currently offered for instruments of similar remaining
maturities.
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
Commitments to extend credit. For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between current
levels of interest rates and committed rates. The difference between the fair
value and notional amount of outstanding loan commitments at December 31, 2003
and 2002 was not material.
Based on the foregoing methods and assumptions, the carrying value and
fair value of the Company's financial instruments are as follows:
December 31,
--------------------------------------------------------
2003 2002
------------------------ ------------------------
Carrying Fair Carrying Fair
(In thousands) value value value value
- ------------------------------------------------------------------------------------------------------------------
Financial assets
Cash and due from banks $ 20,390 $ 20,390 $ 19,118 $ 19,118
Federal funds sold 123 123 5,540 5,540
Investment securities 79,545 79,469 83,789 83,736
Loans receivable 811,021 822,684 701,944 706,445
Federal Home Loan Bank stock 5,998 5,998 5,764 5,764
- ------------------------------------------------------------------------------------------------------------------
$917,077 $928,664 $816,155 $820,603
==================================================================================================================
Financial liabilities
Deposits $717,821 $717,574 $663,813 $664,294
Advances from the Federal Home Loan Bank 122,887 129,336 86,055 86,280
Securities sold under agreement to repurchase 4,365 4,365 5,553 5,553
Notes payable 3,100 3,110 2,750 2,750
Subordinated debentures 5,000 6,138 5,000 5,192
- ------------------------------------------------------------------------------------------------------------------
$853,173 $860,523 $763,171 $764,069
==================================================================================================================
11. Earnings per Share
Basic earnings per common share is computed based upon the weighted-average
number of common shares outstanding during the year. Diluted earnings per common
share is computed including the dilutive effect of additional potential common
shares issuable under stock option. The computations were as follows for the
years ended December 31:
2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding (basic) 5,487,436 5,317,313 5,243,952
Dilutive effect of assumed exercise of stock options 139,855 121,285 42,002
- --------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding (diluted) 5,627,291 5,438,598 5,285,954
====================================================================================================================
Options to purchase 68,000, 1,000 and 420,875 shares of common stock with
a respective weighted-average exercise price of $30.46, $21.85 and $17.11 were
outstanding at December 31, 2003, 2002 and 2001, respectively, but were excluded
from the computation of common share equivalents for those respective years
because their exercise prices were greater than the average market price of the
common shares.
12. Stock Option Plan
The Company has a stock option plan that provides for grants of options of up to
1,200,000 authorized, but unissued shares of its common stock. The Company
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
accounts for its stock option plan in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually the
vesting period. Alternatively, SFAS No. 123 permits entities to continue to
account for stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net earnings and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has been
recognized for the plan. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant dates for awards under
the plan consistent with the accounting method utilized in SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
(In thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------
Net earnings
As reported $ 12,578 $ 10,340 $ 8,722
Stock-based
compensation, net
of tax (114) (128) (313)
==================================================================================
Pro forma $ 12,464 $ 10,212 $ 8,409
==================================================================================
Basic earnings per share
As reported $ 2.29 $ 1.94 $ 1.66
Stock-based
compensation, net
of tax (0.02) (0.02) (0.06)
==================================================================================
Pro forma $ 2.27 $ 1.92 $ 1.60
==================================================================================
Diluted earnings per share
As reported $ 2.23 $ 1.90 $ 1.65
Stock-based
compensation, net
of tax (0.02) (0.02) (0.06)
==================================================================================
Pro forma $ 2.21 $ 1.88 $ 1.59
==================================================================================
The fair value of each option granted is estimated on the date of grant
using the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 2003, 2002 and 2001: dividend
yield of 2.3% for 2003 and 2002 and 2.8% for 2001; expected volatility of 41.5%,
30.0% and 10.0% for 2003, 2002 and 2001, respectively; risk-free interest rates
of 3.38%, 4.00% and 4.50% for 2003, 2002 and 2001, respectively and expected
lives of 4 years for 2003 and 10 years for 2002 and 2001.
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
A summary of the status of the Company's Stock Option Plan as of December
31, 2003, 2002 and 2001 and changes during the years ended on those dates is
presented below:
2003 2002 2001
------------------------ ------------------------ ----------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 718,717 $15.35 821,401 $15.02 709,176 $14.82
Granted 68,000 $30.46 1,000 21.85 157,550 15.05
Exercised (210,820) $14.77 (101,284) 12.73 (27,825) 8.67
Forfeited (3,500) $15.05 (2,400) 14.96 (17,500) 16.98
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 572,397 $17.36 718,717 $15.35 821,401 $15.02
==============================================================================================================================
Options exercisable at year-end 503,730 640,842 653,019
==============================================================================================================================
Weighted-average fair value of
options granted during the year $ 9.31 $ 7.25 $ 2.34
==============================================================================================================================
The following information applies to options outstanding at December 31,
2003:
Range of Number
exercise prices outstanding
- -------------------------------------------------------------
$ 2.79 - $ 4.19 2,672
$ 4.20 - $ 6.30 --
$ 6.31 - $ 9.47 19,850
$ 9.48 - $14.22 15,000
$14.23 - $21.35 465,875
$21.36 - $30.46 69,000
- ------------------------------------------------------------
Total 572,397
============================================================
Weighted-average exercise price $17.36
============================================================
Weighted-average remaining contractual life 7.8 years
============================================================
13. Capitalization
The Company's authorized capital stock includes 1,500,000 shares of $.01 per
share par value voting preferred stock and 1,500,000 shares of $.01 per share
par value non-voting preferred stock. No preferred shares have been issued at
December 31, 2003 and 2002.
14. Advertising
Advertising costs are expensed when incurred. The Company's advertising expense
totaled $437,000, $423,000, and $393,000 for the years ended December 31, 2003,
2002 and 2001, respectively.
15. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents are comprised of
cash and due from banks.
16. Reclassifications
Certain prior year amounts have been reclassified to conform to the 2003
consolidated financial statement presentation.
17. Effects of Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 provides financial
accounting and reporting guidance for costs associated with exit or disposal
activities, including one-time termination benefits, contract termination costs
other than for a capital lease, and costs to consolidate facilities or relocate
employees. SFAS No. 146 is effective for exit or disposal activities initiated
after December 31, 2002. The Company adopted SFAS No. 146 effective January 1,
2003, as required, without material effect on the Company's financial condition
or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The Company adopted SFAS No. 148 effective January 1, 2003, as required,
without material effect on the Company's financial condition or results of
operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement provisions of
the interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Bank has financial letters of credit
which require the Bank to make payment if the customer's financial condition
deteriorates, as defined in the agreements. FIN 45 requires the Bank to record a
liability generally equal to fees received for these letters of credit when
guaranteeing obligations. FIN 45 applies prospectively to guarantees the Bank
issues or modifies subsequent to December 31, 2002.
The maximum potential undiscounted amount of future payments of these
letters of credit as of December 31, 2003 is $12.0 million. Such letters of
credit have terms of one through five years. Amounts due under these letters of
credit would be reduced by any proceeds that the Bank would be able to obtain in
liquidating the collateral for the loans, which varies depending on the
customer.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns, or both. FIN 46 also requires
disclosures about variable interest entities that a company is not required to
consolidate, but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company adopted FIN 46 effective July 1,
2003, as required without material effect on its financial condition or results
of operations.
In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" which clarifies certain
implementation issues raised by constituents and amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to include the
conclusions reached by the FASB on certain FASB Staff Implementation Issues
that, while inconsistent with Statement 133's conclusions, were considered by
the Board to be preferable; amends SFAS No. 133's discussion of financial
guarantee contracts and the application of the shortcut method to an
interest-rate swap agreement that includes an embedded option and amends other
pronouncements.
The guidance in Statement 149 is generally effective for new contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after that date.
Management adopted SFAS No. 149 effective July 1, 2003, as required,
without a material effect on the Company's financial position or results of
operations.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which changes the classification in the statement of financial position of
certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial statements
to recognize changes in fair value or redemption amount, as applicable, in
earnings. SFAS No. 150 requires an issuer to classify certain financial
instruments as liabilities, including mandatorily redeemable preferred and
common stocks.
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and, with one exception, is effective at the
beginning of the first interim period beginning after June 15, 2003 (July 1,
2003 as to the Company). The effect of adopting SFAS No. 150 must be recognized
as a cumulative effect of an accounting change as of the beginning of the period
of adoption. Restatement of prior periods is not permitted. Management adopted
SFAS No. 150 effective July 1, 2003, as required, without material effect on the
Company's financial position or results of operations.
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
NOTE B - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of investment securities at December 31 are shown below.
2003
------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
(In thousands) cost gains losses value
- -----------------------------------------------------------------------------------------------------------------
Held to maturity:
Trust preferred securities due after ten years $ 3,659 $ 83 $ 159 $ 3,583
================================================================================================================
Available for sale:
U.S. Government and agency obligations $57,836 $ 760 $ 106 $58,490
Obligations of state and political subdivisions 16,539 752 80 17,211
Other securities 125 81 21 185
- ----------------------------------------------------------------------------------------------------------------
Total securities available for sale $74,500 $ 1,593 $ 207 $75,886
================================================================================================================
2002
------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
(In thousands) cost gains losses value
- -----------------------------------------------------------------------------------------------------------------
Held to maturity:
Trust preferred securities due after ten years $ 2,575 $ -- $ 53 $ 2,522
================================================================================================================
Available for sale:
U.S. Government and agency obligations $63,534 $ 1,266 $ 2 $64,798
Obligations of state and political subdivisions 15,729 604 76 16,257
Other securities 123 36 $ -- 159
- ----------------------------------------------------------------------------------------------------------------
Total securities available for sale $79,386 $ 1,906 $ 78 $81,214
================================================================================================================
The amortized cost and estimated fair value of investment securities
designated as available for sale, by term to maturity at December 31 are shown
below.
2003 2002
------------------------ ------------------------
Estimated Estimated
Amortized fair Amortized fair
(In thousands) cost value cost value
- -----------------------------------------------------------------------------------------------------------------
Due in three years or less $ 5,060 $ 5,109 $ 7,783 $ 8,036
Due after three years through five years 2,793 2,836 417 417
Due after five years through ten years 11,884 12,046 14,069 14,440
Due after ten years 54,763 55,895 57,117 58,321
- ----------------------------------------------------------------------------------------------------------------
$74,500 $75,886 $79,386 $81,214
================================================================================================================
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
The table below indicates the length of time individual securities have
been in a continuous unrealized loss position at December 31, 2003.
Less than More than
twelve months twelve months
------------------------ ------------------------
Estimated Estimated
fair Unrealized fair Unrealized
(In thousands) value loss value loss
- -------------------------------------------------------------------------------------------------------------------
Held to maturity:
Trust preferred securities $ -- $ -- $1,365 $159
Available for sale:
U.S. Government and agency obligations 10,894 106
Obligations of state and political subdivisions 3,005 34 1,977 46
Other securities -- -- 32 21
- -----------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities $13,899 $140 $3,374 $226
=================================================================================================================
Management has the ability to hold these securities for the foreseeable
future. The decline in the fair value is primarily due to an increase in market
interest rates. The fair values are expected to recover as the securities
approach maturity dates.
Proceeds from sales of investment securities designated as available for
sale during the year ended December 31, 2003, totaled $7.6 million, resulting in
gross realized gains of $314,000 on such sales.
Proceeds from sales of investment securities designated as available for
sale during the year ended December 31, 2002, totaled $31.7 million, resulting
in gross realized gains of $268,000 and gross realized losses of $82,000 on such
sales.
Proceeds from the sale of investment securities designated as
held-to-maturity during the year ended December 31, 2002, totaled $2.0 million,
resulting in a gross realized gain of $129,000 on such sale. The sale followed a
significant deterioration of the issuer's creditworthiness such that the
securities were deemed by management and a nationally recognized rating
organization as less than investment grade.
Proceeds from sales of investment securities designated as available for
sale during the year ended December 31, 2001, totaled $32.5 million, resulting
in gross realized gains of $148,000 and gross realized losses of $84,000 on such
sales.
Proceeds from the sale of an investment security designated as
held-to-maturity during the year ended December 31, 2001, totaled $1.5 million,
resulting in a gross realized loss of $21,000 on such sale. This isolated sale
followed a significant deterioration of the issuer's creditworthiness such that
the security was deemed by management and a nationally recognized rating
organization as less than investment grade.
At December 31, 2003 and 2002, investment securities with an aggregate
book value of $67.6 million and $64.0 million, respectively, were pledged as
collateral for public deposits.
The Company enters into purchases of mortgage-backed securities under
agreements to resell substantially identical securities on behalf of some of its
deposit customers. Securities purchased under agreements to resell totaled $4.4
million and $5.6 million at December 31, 2003 and 2002, respectively. At
December 31, 2003 and 2002, the agreements were scheduled to mature within 90
days and no material amount of agreements to resell securities was outstanding
with any individual dealer. Securities purchased under agreement to resell
averaged approximately $5.0 million during 2003 and the maximum amount
outstanding at any month-end during 2003 was $10.1 million.
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio, including loans held for sale, is as
follows at December 31:
(In thousands) 2003 2002
- --------------------------------------------------------------------------------
Real estate mortgage
(primarily residential) $235,180 $245,794
Installment, net of unearned
interest of $1.5 million
and $1.6 million at
December 31, 2003 and
2002, respectively 71,100 72,012
Commercial and other 513,848 391,586
Credit card 1,729 1,694
- --------------------------------------------------------------------------------
Gross loans 821,857 711,086
Less:
Allowance for loan losses 10,836 9,142
- --------------------------------------------------------------------------------
Loans receivable - net $811,021 $701,944
================================================================================
The Company's lending efforts have historically focused on real estate
mortgages and consumer installment loans, which comprised approximately $306.3
million, or 37%, of the total loan portfolio at December 31, 2003, and
approximately $317.8 million, or 45%, of the total loan portfolio at December
31, 2002. In recent years, lending efforts have increasingly focused on
commercial loans, generally secured by commercial real estate and equipment,
which comprise approximately $513.8 million, or 63%, of the total loan portfolio
at December 31, 2003, and approximately $391.6 million, or 55%, of the total
loan portfolio at December 31, 2002. Generally, such loans have been
underwritten with sufficient collateral or cash down payments to provide the
Company with adequate collateral coverage in the event of default. Nevertheless,
the Company, as with any lending institution, is subject to the risk that real
estate values or economic conditions could deteriorate in its primary lending
areas within Ohio, thereby impairing collateral values. However, management is
of the belief that real estate values and economic conditions in the Company's
primary lending areas are presently stable.
As stated previously, the Company has sold whole loans and participating
interests in loans in the secondary market, retaining servicing on the loans
sold. Loans sold and serviced for others totaled approximately $271.4 million,
$187.0 million and $143.4 million at December 31, 2003, 2002 and 2001,
respectively.
The activity in the allowance for loan losses is summarized as follows for
the years ended December 31:
(In thousands) 2003 2002 2001
- -------------------------------------------------------------------------------
Balance at beginning
of period $ 9,142 $ 8,345 $ 7,197
Provision charged to
operations 3,347 2,757 2,591
Charge-offs (2,152) (2,563) (1,826)
Recoveries 499 603 383
- -------------------------------------------------------------------------------
Balance at end of period $ 10,836 $ 9,142 $ 8,345
===============================================================================
At December 31, 2003, 2002 and 2001, the Company had nonaccrual and
nonperforming loans totaling approximately $8.1 million, $7.3 million and $5.2
million, respectively. Interest income that would have been recognized had
nonaccrual loans performed pursuant to contractual terms totaled approximately
$508,000, $357,000 and $416,000 for the years ended December 31, 2003, 2002 and
2001, respectively.
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
NOTE D - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are summarized at December 31 as follows:
(In thousands) 2003 2002
- -------------------------------------------------------------
Land and buildings $12,741 $11,302
Furniture and equipment 7,093 5,935
Leasehold improvements 1,067 773
- -------------------------------------------------------------
20,901 18,010
Less accumulated depreciation
And amortization (8,709) (7,744)
- -------------------------------------------------------------
$12,192 $10,266
=============================================================
NOTE E - DEPOSITS
Deposit balances at December 31 are summarized as follows:
2003 2002
--------------------------- ---------------------------
(Dollars in thousands) Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------------------------
Deposit type and interest rate range
Demand deposit accounts $ 66,712 -- $ 61,847 --
Savings accounts 48,224 0.42% 44,353 0.88%
NOW accounts 62,033 1.19% 59,359 1.66%
Money market deposit accounts 7,644 0.43% 7,558 1.00%
Premium investment accounts 35,474 0.93% 40,604 1.26%
Select investment accounts 33,426 1.12% 27,896 1.39%
- ------------------------------------------------------------------------------------------------------------------------------
Total transaction accounts 253,513 241,617
Certificates of deposit
1.00 - 2.99% 286,245 95,377
3.00 - 4.99% 162,541 296,053
5.00 - 6.99% 15,447 30,641
7.00 - 8.00% 75 125
- ------------------------------------------------------------------------------------------------------------------------------
Total certificates of deposit 464,308 2.79% 422,196 3.59%
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits $717,821 2.04% $663,813 2.64%
==============================================================================================================================
The Company had deposit accounts with balances in excess of $100,000
totaling $285.7 million and $227.3 million at December 31, 2003 and 2002,
respectively.
Interest expense on deposits is summarized as follows for the years ended
December 31:
(In thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
NOW accounts $ 839 $ 1,204 $ 566
Savings accounts 295 485 774
Money market deposit accounts 56 108 212
Premium investment accounts 411 790 2,182
Select investment accounts 401 459 488
Certificates of deposit 13,575 16,608 21,494
- ----------------------------------------------------------------------------------------------------------------------
$ 15,577 $ 19,654 $ 25,716
======================================================================================================================
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
The contractual maturities of outstanding certificates of deposit are
summarized as follows at December 31:
(In thousands) 2003 2002
- -------------------------------------------------------------
Less than one year $214,292 $253,872
One year through
three years 198,390 128,986
More than three years 51,626 39,338
- -------------------------------------------------------------
$464,308 $422,196
=============================================================
NOTE F - ADVANCES FROM
THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31, 2003
and 2002 by pledges of certain residential mortgage loans totaling $165.9
million and $116.2 million, respectively, and Oak Hill's investment in Federal
Home Loan Bank stock, are summarized as follows:
Maturing December 31,
in year ended ----------------------
Interest rate range December 31, 2003 2002
- ---------------------------------------------------------------
(Dollars in thousands)
1.46% to 6.50% 2003 $ -- $12,166
0.94% to 8.30% 2004 46,989 4,766
1.85% to 8.10% 2005 11,422 6,422
3.77% to 6.50% 2006 2,990 4,598
4.14% to 7.30% 2007 5,501 5,501
4.29% to 5.30% 2009 564 994
5.15% to 8.02% 2010 6,274 6,463
3.94% to 6.95% 2011 40,571 41,148
3.09% 2013 4,929 --
7.62% 2015 850 850
6.70% 2017 828 864
5.15% 2018 1,969 2,283
- --------------------------------------------------------------
$122,887 $86,055
==============================================================
Weighted-average
interest rate 3.39% 4.83%
==============================================================
NOTE G - OTHER BORROWINGS
At December 31, 2002, Action had a note payable to another financial institution
totaling $2.7 million. The note matured in 2003, was renewed at a rate of 5.125%
maturing in 2006 and at December 31, 2003, had an outstanding balance of
$3,050,000. The note is collateralized by a pledge of a portion of the Company's
shares of Oak Hill.
Additionally, MPA has a note payable created in connection with the
purchase of a local insurance agency during 2002. At December 31, 2003 and 2002,
the note had a balance of $50,000 bearing interest at 6.0% and is scheduled to
mature in January 2004.
NOTE H - GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN THE CORPORATION'S
JUNIOR SUBORDINATED DEBENTURES
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.
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
NOTE I - FEDERAL INCOME TAXES
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate for the years ended December 31 as follows:
(In thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Federal income taxes computed at the statutory rate $6,611 $5,223 $4,399
Increase (decrease) in taxes resulting from:
Interest income on municipal loans and obligations of state
and political subdivisions (354) (371) (299)
Amortization of goodwill -- -- 11
Nondeductible merger-related expenses -- 2 44
Other 9 (3) (22)
- ------------------------------------------------------------------------------------------------------------------------------
Federal income tax provision per consolidated financial statements $6,266 $4,851 $4,133
==============================================================================================================================
The computation of the Company's net deferred tax asset at December 31 is
as follows:
(In thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
Taxes (payable) refundable on temporary differences at statutory rate:
Deferred tax assets:
Book/tax difference of allowance for loan losses $ 3,793 $ 3,108
Deferred compensation benefits 95 97
Impairment losses -- 49
Other 4 31
- ------------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 3,892 3,285
Deferred tax liabilities:
Deferred loan origination costs (680) (415)
Federal Home Loan Bank stock dividends (959) (857)
Unrealized gains on securities designated as available for sale (471) (622)
Book/tax difference of depreciation -- (131)
Mortgage servicing rights (1,044) (611)
Mark-to-market adjustment -- (85)
Book/tax difference on bad debt reserves -- (2)
Impairment recoveries (114) --
Other (35) (23)
- ------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (3,303) (2,746)
- ------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 589 $ 539
==============================================================================================================================
The Company has not recorded a valuation allowance for any portion of the
net deferred tax asset at December 31, 2003 and 2002, based on the amount of
income taxes subject to recovery in carryback years.
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
NOTE J -- RELATED PARTY TRANSACTIONS
In the normal course of business, the Company has made loans to its directors,
officers, and their related business interests. In the opinion of management,
such loans are consistent with sound banking practices and are within applicable
regulatory lending limitations. The balance of such loans outstanding at
December 31, 2003, 2002 and 2001 totaled approximately $5.2 million, $5.0
million and $1.1 million, respectively.
The Company had also received demand and time deposits from directors,
officers and their related business interests of approximately $10.5 million,
$12.4 million and $10.1 million at December 31, 2003, 2002 and 2001,
respectively.
NOTE K -- EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing and 401(k) plan covering all employees who have
attained the age of twenty-one and completed three months of continuous service.
The profit-sharing plan is non-contributory and contributions to the plan are
made at the discretion of the Board of Directors. The Company contributed
$300,000, $250,000 and $300,000 to the plan for the years ended December 31,
2003, 2002 and 2001, respectively.
The 401(k) plan allows employees to make voluntary, tax-deferred
contributions of up to 15% of their base annual compensation. The Company
provides, at its discretion, a 50% matching of funds for each participant's
contribution, subject to a maximum of 6% of base compensation. The Company's
matching contributions under the 401(k) plan totaled $285,000, $260,000 and
$166,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
NOTE L -- COMMITMENTS
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers,
including commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the statement of financial condition. The contract or notional
amounts of the commitments reflect the extent of the Company's involvement in
such financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as those utilized for on-balance-sheet instruments.
At December 31, 2003, the Company had outstanding commitments of
approximately $35.9 million to originate residential and commercial loans. Also,
the Company had unused lines of credit and letters of credit totaling
approximately $117.6 million and $12.0 million, respectively, as of December 31,
2003. In the opinion of management, outstanding loan commitments equaled or
exceeded prevalent market interest rates as of December 31, 2003, such
commitments were underwritten in accordance with normal loan underwriting
policies, and all disbursements will be funded via normal cash flow from
operations and existing excess liquidity.
The Company has also entered into lease agreements for office premises and
equipment under operating leases which expire at various dates through 2009. The
following table summarizes minimum payments due under lease agreements by year:
Year ending
December 31, (Dollars in thousands)
- -------------------------------------------------------------
2004 $ 667
2005 540
2006 487
2007 353
2008 through 2009 294
- -------------------------------------------------------------
$2,341
=============================================================
Total rent expense under operating leases was $741,000, $588,000 and
$458,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
NOTE M -- REGULATORY CAPITAL
Oak Hill is subject to the regulatory capital requirements of the Federal
Deposit Insurance Corporation (the "FDIC"). Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on Oak Hill's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Oak Hill
must meet specific capital guidelines that involve quantitative measures of Oak
Hill's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. Oak Hill's capital accounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
The FDIC has adopted risk-based capital guidelines to which Oak Hill is
subject. The guidelines establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations. Risk-based capital ratios are determined by
allocating assets and specified off-balance-sheet commitments to four
risk-weighting categories, with higher levels of capital being required for the
categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier ("Tier
1") includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier 2") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt, and the allowance for loan losses, subject to certain
limitations, less required deductions. Banks are required to maintain a total
risk-based capital (the sum of Tier 1 and Tier 2 capital) ratio of 8%, of which
4% must be Tier 1 capital. The FDIC may, however, set higher capital
requirements when particular circumstances warrant. Banks experiencing or
anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above minimum required levels.
During the year ended December 31, 2003, Oak Hill was notified by its
primary federal regulator that it was categorized as "well-capitalized" under
the regulatory framework for prompt corrective action. To be categorized as
"well-capitalized" Oak Hill must maintain minimum Tier 1 capital, total
risk-based capital, and Tier 1 leverage ratios of 6%, 10%, and 5%, respectively.
At December 31, 2003, Oak Hill was well-capitalized.
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
As of December 31, 2003 and 2002, management believes that Oak Hill has
met all of the capital adequacy requirements to which it is subject. Oak Hill's
Tier 1 capital, total risk-based capital, and Tier 1 leverage ratios at December
31, 2003 and 2002 are set forth in the following tables:
As of December 31, 2003
----------------------------------------------------------------------------------------------
To be "well
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
Total capital $80,437 10.2% $63,387 >/= 8.0% $79,234 >/= 10.0%
(to risk-weighted assets)
Tier 1 capital $70,526 8.9% $31,693 >/= 4.0% $47,540 >/= 6.0%
(to risk-weighted assets)
Tier 1 leverage ratio $70,526 7.8% $36,112 >/= 4.0% $45,140 >/= 5.0%
As of December 31, 2002
----------------------------------------------------------------------------------------------
To be "well
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
Total capital $71,360 10.9% $52,467 >/= 8.0% $65,584 >/= 10.0%
(to risk-weighted assets)
Tier 1 capital $63,157 9.6% $26,233 >/= 4.0% $39,350 >/= 6.0%
(to risk-weighted assets)
Tier 1 leverage ratio $63,157 7.6% $33,414 >/= 4.0% $41,767 >/= 5.0%
The Company's management believes that under the current regulatory
capital regulations Oak Hill will continue to meet it's minimum capital
requirements in the foreseeable future. However, events beyond the control of
the Company, such as increased interest rates or a downturn in the economy in
Oak Hill's primary market areas, could adversely affect future earnings and
consequently, the ability to meet future minimum regulatory capital
requirements.
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
NOTE N -- OAK HILL FINANCIAL, INC. CONDENSED FINANCIAL INFORMATION
The following condensed financial statements summarize the financial position of
Oak Hill Financial, Inc. as of December 31, 2003 and 2002, and the results of
its operations and its cash flows for each of the years ended December 31, 2003,
2002 and 2001.
Oak Hill Financial, Inc.
CONDENSED STATEMENTS OF
FINANCIAL CONDITION
December 31,
-------------------------
(In thousands) 2003 2002
- --------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 666 $ 596
Interest-bearing deposits in
Oak Hill Banks 6,263 2,171
Investment in Oak Hill Banks 71,915 64,735
Investment in Action Finance Co. 2,649 2,493
Investment in Oak Hill Capital
Trust I 155 155
Investment in MPA 1,178 744
Investment in Oak Hill Title LLC 15 15
Office premises and
equipment - net 2,302 1,827
Prepaid expenses and other assets 1,673 1,531
- --------------------------------------------------------------------------------
Total assets $86,816 $74,267
================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Oak Hill Financial, Inc.
Accrued expenses and other
liabilities $ 1,725 $ 2,223
Minority interests 8 8
Guaranteed preferred beneficial
interests in the Corporation's
junior subordinated debentures 5,155 5,155
- -------------------------------------------------------------------------------
Total liabilities 6,888 7,386
Stockholders' equity
Common stock 2,797 2,797
Additional paid-in capital 5,704 5,113
Retained earnings 70,844 61,236
Less cost of treasury stock (332) (3,471)
Unrealized gains on
securities designated as
available for sale, net of
related tax effects 915 1,206
- -------------------------------------------------------------------------------
Total stockholders' equity 79,928 66,881
- -------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 86,816 $ 74,267
===============================================================================
CONDENSED STATEMENTS OF EARNINGS
Year ended December 31,
-----------------------------------------
(In thousands) 2003 2002 2001
- -------------------------------------------------------------------------------
REVENUE
Interest income $ 24 $ 32 $ 34
Other income 10 6 9
Equity in earnings of
subsidiaries 13,306 11,144 9,630
- --------------------------------------------------------------------------------
Total revenue 13,340 11,182 9,673
EXPENSES
Interest expense 578 578 566
Loss on disposal of assets -- -- 34
General and
administrative 498 644 818
- --------------------------------------------------------------------------------
Total expenses 1,076 1,222 1,418
- --------------------------------------------------------------------------------
Earnings before
federal income
tax credits 12,264 9,960 8,255
Federal income
tax credits (314) (380) (467)
- --------------------------------------------------------------------------------
NET EARNINGS $ 12,578 $ 10,340 $ 8,722
================================================================================
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
Oak Hill Financial, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------
(In thousands) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings for the year $ 12,578 $ 10,340 $ 8,722
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Undistributed earnings of consolidated subsidiaries (7,444) (8,360) (5,213)
Depreciation of office premises and equipment 228 147 94
Loss on disposal of assets -- -- 34
Tax benefit of stock options exercised 802 266 2
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (759) (844) 277
Other liabilities (498) (53) 1,483
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,907 1,496 5,399
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Oak Hill Banks -- (5) (500)
Investment in Oak Hill Title LLC -- -- (15)
Purchase of office premises and equipment (703) (513) (653)
(Increase) decrease in interest-bearing deposits (4,092) 488 (1,456)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,795) (30) (2,624)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 2,928 1,269 299
Proceeds from sale of treasury stock -- -- 480
Purchase of treasury stock -- -- (1,030)
Dividends on common shares (2,970) (2,610) (2,321)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (42) (1,341) (2,572)
- -------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 70 125 203
Cash and cash equivalents at beginning of year 596 471 268
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 666 $ 596 $ 471
===================================================================================================================
NOTE O -- SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
Obligations for securities sold under agreements to repurchase were
collateralized at December 31, 2003 and 2002 by investment securities with a
book value including accrued interest of approximately $4.7 million and $6.4
million and a market value of approximately $4.8 million and $6.5 million,
respectively. The maximum balance of repurchase agreements outstanding at any
month-end during the years ended December 31, 2003 and 2002 was $10.1 million
and $5.6 million, respectively, and the average month-end balance outstanding
for 2003 and 2002 was approximately $5.0 million and $4.2 million, respectively.
Oak Hill Financial, Inc.
Notes to Consolidated Financial Statements
For Years Ended December 31, 2003, 2002 and 2001
NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Company's quarterly results for the years
ended December 31, 2003 and 2002.
2003
Three Months Ended
--------------------------------------------------------
(In thousands, except per share data) March 31, June 30, September 30, December 31,
- --------------------------------------------------------------------------------------------------------
Total interest income $13,740 $13,776 $13,475 $14,179
Total interest expense 5,320 5,141 5,003 5,004
- -----------------------------------------------------------------------------------------------------
Net interest income 8,420 8,635 8,472 9,175
Provision for losses on loans 509 1,031 966 841
Other income 2,404 3,052 3,302 2,780
General, administrative and other expense 5,904 6,057 5,946 6,142
- -----------------------------------------------------------------------------------------------------
Earnings before income taxes 4,411 4,599 4,862 4,972
Federal income taxes 1,432 1,490 1,608 1,736
- -----------------------------------------------------------------------------------------------------
Net earnings $ 2,979 $ 3,109 $ 3,254 $ 3,236
=====================================================================================================
Basic earnings per share $ .55 $ .57 $ .59 $ .58
=====================================================================================================
Diluted earnings per share $ .54 $ .55 $ .57 $ .57
=====================================================================================================
2002
Three Months Ended
--------------------------------------------------------
(In thousands, except per share data) March 31, June 30, September 30, December 31,
- --------------------------------------------------------------------------------------------------------
Total interest income $14,237 $14,451 $14,247 $14,287
Total interest expense 6,446 6,250 6,116 5,912
- -----------------------------------------------------------------------------------------------------
Net interest income 7,791 8,201 8,131 8,375
Provision for losses on loans 460 587 605 1,105
Other income 1,795 1,781 1,971 2,566
General, administrative and other expense 5,411 5,562 5,539 6,151
- -----------------------------------------------------------------------------------------------------
Earnings before income taxes 3,715 3,833 3,958 3,685
Federal income taxes 1,184 1,217 1,267 1,183
- -----------------------------------------------------------------------------------------------------
Net earnings $ 2,531 $ 2,616 $ 2,691 $ 2,502
=====================================================================================================
Basic earnings per share $ .48 $ .49 $ .50 $ .47
=====================================================================================================
Diluted earnings per share $ .47 $ .48 $ .49 $ .46
=====================================================================================================
NOTE Q - SUBSEQUENT EVENTS
On February 26, 2004, the Board of Directors of the Company authorized the
repurchase of up to 300,000 shares, or approximately 5.4 percent, of the
Company's outstanding common stock through open market or privately negotiated
transactions. The repurchased shares will be will be used for general corporate
purposes, including mitigating the potentially dilutive effect of the Company's
stock compensation plan.
Report of Independent Certified Public Accountants
Grant Thornton [LOGO]
Accountants and Business Advisors
Board of Directors
Oak Hill Financial, Inc.
We have audited the accompanying consolidated statements of financial
condition of Oak Hill Financial, Inc. as of December 31, 2003 and 2002 and the
related consolidated statements of earnings, stockholders' equity, comprehensive
income and cash flows for each of the years in the three year period ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Oak Hill
Financial, Inc. as of December 31, 2003 and 2002, and the consolidated results
of its operations and its cash flows for each of the years in the three year
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Grant Thornton LLP
Cincinnati, Ohio
January 23, 2004 (except for Note Q, for which the date is February 26, 2004)
Suite 900
625 Eden Park Drive
Cincinnati OH 45202-4181
T 513.762-5000
F 513.241.6125
W 513.241.6125
Grant Thornton LLP
US Member of Grant Thornton International
Management Promotions and Additions
R. E. "Gene" Coffman, Jr. was named Chief Executive Officer of Oak Hill
Financial effective January 1, 2004. He retained the President's title in his
new position. A 30-year financial industry veteran, Gene joined the company in
1996. From 1999 to 2002, he served as President and CEO of our former Towne Bank
subsidiary, which was merged into Oak Hill Banks in late 2002. He has also
served as an Executive Vice President, Senior Vice President, and Area President
for Oak Hill Banks.
Richard K. Patrick rejoined the company and was named President and Chief
Executive Officer of Oak Hill Financial Insurance Agency (formerly Innovative
Financial Services). One of the co-founders of Innovative, an employee benefits
agency acquired by Oak Hill Financial in 2001, Rick brings over 25 years of
insurance and employee benefits experience to this key position.
There were several other key management promotions within the company. At Oak
Hill Banks, Connie S. Freeman and Ronald G. Hayes were promoted to Regional Vice
President, Gerald J. Cox was promoted to Area President, and Joseph R. Givens,
Pamela G. Jones, Jason W. Leyda, and Robert O. Ward were promoted to Vice
President. All of these individuals have been major contributors to our success,
and their promotions are very well deserved.
Finally, we further strengthened our management team with the addition of David
T. Brown and John P. Owens as Vice Presidents of Oak Hill Banks and Robert L.
Lawson as Director of Information Technology at Oak Hill Financial.
Directors
Oak Hill Financial, Inc.
R. E. Coffman, Jr.
President & CEO, Oak Hill Financial, Inc.
Evan E. Davis
Chairman, Oak Hill Banks
Barry M. Dorsey, Ed.D.
President, University of Rio Grande and
Rio Grande Community College
John D. Kidd
Chairman, Oak Hill Financial, Inc.
D. Bruce Knox
Chief Information Officer, Oak Hill Financial, Inc.
Candice DeClark Peace
Partner, Clark, Schaefer, Hackett & Co.
Donald R. Seigneur
Partner, Whited Seigneur Sams & Rahe, CPAs
William S. Siders
Retired Bank Executive
H. Grant Stephenson
Partner, Porter, Wright, Morris & Arthur
Neil S. Strawser
President, Parrott and Strawser Properties, Inc.
Donald P. Wood
President, Don Wood Automotive, Inc.
AFFILIATE DIRECTORS
OAK HILL BANKS
Miles R. Armentrout
Darrell D. Boggs
R. E. Coffman, Jr.
Ron J. Copher
Evan E. Davis (Chairman)
Scott J. Hinsch, Jr.
John D. Kidd
David G. Ratz
ACTION FINANCE COMPANY
R. E. Coffman, Jr. (Chairman)
Ron J. Copher
Evan E. Davis
Robert H. Huchison
John D. Kidd
David G. Ratz
OAK HILL FINANCIAL INSURANCE AGENCY, INC.
R. E. Coffman, Jr. (Chairman)
Ron J. Copher
Evan E. Davis
John D. Kidd
Richard K. Patrick
David G. Ratz
OFFICERS & MANAGERS
OAK HILL FINANCIAL, INC.
John D. Kidd
Chairman
R. E. Coffman, Jr. President & CEO
David G. Ratz
Executive Vice President & COO
Scott J. Hinsch, Jr.
Vice President
H. Tim Bichsel
Secretary
Ron J. Copher
Chief Financial Officer & Treasurer
D. Bruce Knox
Chief Information Officer
C. Dale Gahm
Senior Compliance Officer
Wayne B. Lindstedt
Senior Loan Review Officer
Joseph L. Michel
Senior Risk Management Officer
Connie L. King
Director of EDP
Gail S. Wilson
Personnel Administrator
Melissa R. Gilliland
Branch Systems Manager
Greta J. Hale
EDP Manager
Brian T. Moore
Accounting Manager
David T. Kent
Loan Review Officer
OAK HILL BANKS
Evan E. Davis
Chairman
Scott J. Hinsch, Jr.
President & CEO
Miles R. Armentrout
Regional President
Darrell D. Boggs
Regional President & Cashier
John L. Cornett
Senior Vice President
Daniel L. Dobbins
Senior Vice President
Jerry L. Gore
Senior Vice President
Micheal W. Lander
Senior Vice President
Fred K. Mavis
Senior Vice President
J. David McFarland
Senior Vice President & Secretary
Terry L. Franklin
Regional Vice President
Connie S. Freeman
Regional Vice President
Ronald G. Hayes
Regional Vice President
Timothy W. Brown
Area President
Gerald J. Cox
Area President
Jeffrey M. Doles
Area President
Daniel E. Mooney
Area President
Joseph M. Adams
Vice President
Karen S. Adams
Vice President
David T. Brown
Vice President
Denise L. Brown
Vice President
Joseph R. Givens
Vice President
Jason T. Henry
Vice President
Pamela G. Jones
Vice President
Jason W. Leyda
Vice President
Deborah M. Meyer
Vice President
Lori A. Michael
Vice President
Mikeal V. Mullins
Vice President
John P. Owens
Vice President
Robert O. Ward
Vice President
Linda F. Bachtel
Assistant Vice President
Joseph A. Barlow
Assistant Vice President
David E. Barney
Assistant Vice President
Lea Anne Brown
Assistant Vice President
Bruce A. Crabtree
Assistant Vice President
Sandra L. Crall
Assistant Vice President
Robert W. Hater
Assistant Vice President
Connie S. Hendren
Assistant Vice President
Paula L. Henderson
Assistant Vice President
D. Dean Henry
Assistant Vice President
Rebecca A. Hughes
Assistant Vice President
Melanie R. Isble
Assistant Vice President
Roger P. Mersch
Assistant Vice President
Elaine R. Prater
Assistant Vice President
Clara G. Ridgeway
Assistant Vice President
David R. Sassenger
Assistant Vice President
Pamela K. Shaw
Assistant Vice President
Roxanne R. Swann
Assistant Vice President
Mark J. Swartz
Assistant Vice President
Margo V. Swisher
Assistant Vice President
Christopher A. Vaughan
Assistant Vice President
Rhonda S. Welch
Assistant Vice President
James A. Younkin
Assistant Vice President
Ed K. Cunningham
Loan Officer
Karen S. Rapp
Operations Officer
Ann R. Dennison
Banking Officer
Callie E. Duhl
Banking Officer
Margaret L. Hartley
Banking Officer
Deborah L. Montavon
Banking Officer
Sheri L. Sturgill
Banking Officer
Alan G. Grauvogel
Security Officer
ACTION FINANCE COMPANY
Robert H. Huchison
President & CEO
Michele L. Phillips
Vice President
Ron J. Copher
Secretary
David G. Ratz
Treasurer
Charity L. Cash
Branch Manager
George V. Humphreys
Branch Manager
Charlene W. Jacobs
Branch Manager
Ruth Anne Kimberly
Branch Manager
Daniel K. Spencer
Branch Manager
Peggy L. Watson
Branch Manager
OAK HILL FINANCIAL INSURANCE AGENCY, INC.
Richard K. Patrick
President & CEO
Robin H. Fowler
Vice President
Sharon L. Gahm
Vice President & Secretary
Ron J. Copher
Chief Financial Officer
OAK HILL TITLE AGENCY, LLC
Fred K. Mavis
President & CEO
Stephen L. Oliver
Vice President
Darrell D. Boggs
Secretary
Ron J. Copher
Treasurer
LOCATIONS (all locations in Ohio)
OAK HILL FINANCIAL, INC.
14621 State Route 93, Jackson (1)
OAK HILL BANKS
505 Richland Ave., Athens
213 Columbus Rd. Athens (2)
4811 Cooper Rd., Blue Ash
1033 S. Main St, Centerville
49 E. Water St., Chillicothe
1470 North Bridge St., Chillicothe
8620 Beechmont Ave., Cincinnati
5681 Rapid Run Rd., Cincinnati
1210 N. Court St., Circleville
445 E. Main St., Columbus (2)
660 Wessel Dr., Fairfield (2)
310 S. Main St., Franklin
500 3rd Avenue, Gallipolis
120 Twin Oaks Dr., Jackson (1)
300 E. Main St., Jackson
975 E. Main St., Jackson
100 Wal-Mart Dr., Jackson
399 W. Front St., Logan
6501 Mason-Montgomery Rd., Mason
717 Reading Rd., Mason (1)
115 W. Main St., McArthur
4421 Roosevelt Blvd., Middletown
201 S. Front St., Oak Hill
410 N. Front St., Oak Hill (3)
924 Gallia St., Portsmouth
307 State St., Proctorville
206 Church St., Richmond Dale
715 W. State St., Trenton
109 N. Ohio Ave., Wellston
2331 Galena Pike, West
Portsmouth
7920 Ohio River Rd.,
Wheelersburg
ACTION FINANCE COMPANY
1005 E. State St., Athens
112 West Main St., Circleville
212 Eastern Ave., Gallipolis
14621 State Route 93, Jackson (1)
731 E. Main St., Jackson
917 Gallia St., Portsmouth
110 N. Manchester St.,
West Union
OAK HILL FINANCIAL INSURANCE AGENCY, INC.
135 E. Huron St., Jackson(1)
OAK HILL TITLE AGENCY
120 Twin Oaks Dr., Jackson (1)
(1) Administrative office
(2) Loan office only
(3) Drive-thru only
STOCKHOLDER INFORMATION
The common stock of Oak Hill Financial, Inc. (the "Company") is traded on the
Nasdaq National Market System under the symbol "OAKF".
The high and low sales price for Oak Hill Financial common stock during each
quarter of 2003 and 2002 is as follows:
Quarter
Ended High Low
- ------------------------------------------------
12/31/03 $33.800 $28.400
9/30/03 30.000 24.900
6/30/03 25.900 23.520
3/31/03 24.770 21.230
12/31/02 22.390 20.150
9/30/02 22.390 21.000
6/30/02 22.790 19.590
3/31/02 21.000 15.600
At February 26, 2004, the Company had approximately 2,300 stockholders and
5,609,086 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 subsidiaries. The State of Ohio places
certain limitations on the payment of dividends by Ohio state-chartered banks.
The Company declared the following quarterly cash dividends in 2003 and 2002:
Quarter Dividend
Ended Per Share
- ------------------------------------------
12/31/03 $0.15
9/30/03 0.13
6/30/03 0.13
3/31/03 0.13
12/31/02 0.13
9/30/02 0.12
6/30/02 0.12
3/31/02 0.12
Future cash and stock dividends will be subject to determination and declaration
by the Board of Directors and will consider, 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 STOCKHOLDERS
The Annual Meeting of Stockholders 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 (the Extension Office is
located just off State Route 93, 1.7 miles south of Jackson).
ANNUAL REPORT ON FORM 10-K
A copy of Oak Hill Financial, Inc.'s annual report on Form 10-K as filed with
the Securities and Exchange Commission is available without charge upon written
request directed to:
David G. Ratz
Chief Operating Officer
Oak Hill Financial, Inc.
14621 State Route 93
Jackson, OH 45640
dratz@oakf.com
(inside back cover)
(Photo captions - with photos of directors)
(standing) Donald R. Seigneur, D. Bruce Knox, (seated) John D. Kidd
(standing) William S. Siders, H. Grant Stephenson, (seated) Evan E. Davis, Neil
S. Strawser
R. E. Coffman, Jr., Barry M. Dorsey, Donald P. Wood
Not available for picture: Candice DeClark Peace