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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004
Commission File Number 0-26876
OAK HILL FINANCIAL, INC.
(Exact name of Registrant as specified in its charter)
Ohio 31-1010517
(State or jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
14621 S.R. 93
Jackson, OH 45640
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 286-3283
Securities pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock without par value
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
Check whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes |X| No |_|
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such
common equity, as of June 30, 2004 was $124,271,658.00. For purposes of this
calculation, executive officers and directors of the registrant are considered
affiliates.
There were 5,577,903 shares of the registrant's common stock outstanding
on March 18, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the year
ended December 31, 2004 are incorporated by reference into Part II and IV.
Portions of the proxy statement dated March 18, 2005 for the Annual
Meeting of Stockholders to be held April 12, 2005 are incorporated by reference
into Part III.
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OAK HILL FINANCIAL, INC.
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
- ------
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 20
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 31
Item 9A. Controls and Procedures 31
Item 9B. Other Information 33
PART III
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Item 10. Directors and Executive Officers of the Registrant 34
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial owners and Management and Related 34
Stockholder Matters 34
Item 13. Certain Relationships and Related Transactions 34
Item 14. Principal Accountant Fees and Services 34
PART IV
- -------
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 34
SIGNATURES 37
2
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PART I
Item 1. Business.
Oak Hill Financial, Inc.
- ------------------------
Oak Hill Financial, Inc., an Ohio corporation (the "Company") formed in
1981, is a financial holding company registered under the Bank Holding Company
Act of 1956, as amended (the "Act"), and is subject to regulation by the Federal
Reserve Board. The Company engages indirectly in the business of commercial
banking and other permissible activities closely related to banking and consumer
finance lending through five wholly owned subsidiaries, Oak Hill Banks ("Oak
Hill"), Oak Hill Financial Insurance Agency, Inc. dba MPA Group Insurance
Specialists ("MPA") and Oak Hill Capital Trust 1, 2, and 3 (the "Trusts"). The
Company also owns forty-nine percent of Oak Hill Title Agency ("Oak Hill Title")
which provides title services for commercial and residential real estate
transactions. The Company provides management and similar services for its
subsidiaries. Since it does not conduct any operating businesses itself, the
Company must depend largely upon its subsidiaries for funds with which to pay
the expenses of its operation and, to the extent applicable, any dividends on
its outstanding shares of stock. For further information, see Note A of the
Notes to Consolidated Financial Statements appearing in the Company's Annual
Report to Stockholders, which is incorporated by reference in response to this
item.
The Company faces strong competition from both banking and non-banking
institutions. Its banking competitors include local and regional banks and bank
holding companies, as well as some of the largest banking organizations in the
United States. In addition, other types of financial institutions, such as
savings and loan associations and credit unions, offer a wide range of loan and
deposit services that are directly competitive with those offered by Oak Hill.
The consumer is also served by brokerage firms and mutual funds that provide
checking services, credit cards, and other services similar to those offered by
Oak Hill. Major stores compete for loans by offering credit cards and retail
installment contracts. It is anticipated that competition from non-bank and
non-savings and loan organizations will continue to grow.
The range of services provided by the Company's subsidiaries to their
customers includes commercial lending, real estate lending, consumer credit,
credit card, other personal loan financing, deposits, group health insurance and
other employee benefits, and title services for commercial and residential real
estate transactions. Each of the subsidiaries operates under the direction of a
Board of Directors and officers.
The Company's internet site www.oakf.com contains a hyperlink to the
Securities and Exchange Commission's ("SEC") website, where the Company's annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all amendments, if any, to these reports filed pursuant to Sections 13a
or 15d of the Securities Exchange Act of 1934 can be obtained free of charge on
EDGAR as soon as reasonably practicable after the Company has filed the report
with the SEC.
Lending Activities
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General. The Company generally makes loans in southern and central Ohio
where its branches are located. The Company's principal lending activities are
the origination of (i) conventional one-to-four family residential loans, and
(ii) commercial loans, most of which are secured by real estate located in the
Company's primary market area. These loan categories accounted for approximately
94% of the Company's net loan portfolio at December 31, 2004. The Company also
makes consumer loans, including installment loans, home equity lines of credit
and second mortgages, and offers credit cards.
Loan Portfolio Composition and Activity. The following table sets forth
the composition of the Company's loan portfolio in dollar amounts and in
percentages for each of the last five years, along with a reconciliation to
loans receivable, net of the allowance for loan losses.
3
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At December 31,
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2004 2003 2002 2001 2000
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
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Type of loan:
1-4 family residential $ 270,092 29.6% $ 235,180 29.0% $ 245,794 35.0% $ 373,323 57.8% $ 240,593 40.1%
Commercial and other 584,201 64.0 513,848 63.3 391,586 55.8 216,611 33.5 275,500 46.0
Consumer 68,072 7.5 71,100 8.8 72,012 10.3 62,829 9.7 88,585 14.8
Credit cards 2,020 0.2 1,729 0.2 1,694 0.2 1,663 0.3 1,605 0.3
====================================================================================================================================
Total loans 924,385 101.3 821,857 101.3 711,086 101.3 654,426 101.3 606,283 101.2
Less:
Allowance for
loan losses (11,847) (1.3) (10,836) (1.3) (9,142) (1.3) (8,345) (1.3) (7,197) (1.2)
====================================================================================================================================
Total loan receivable,
net $ 912,538 100.0% $ 811,021 100.0% $ 701,944 100.0% $ 646,081 100.0% $ 599,086 100.0%
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The following is maturity information with respect to commercial loans at
December 31, 2004.
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After one year After five years
Less than one year through five years through ten years After ten years
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Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Total
====================================================================================================================================
$151,917 5.71% $121,647 6.08% $ 78,619 6.00% $232,018 6.58% $584,201
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As of December 31, 2004, there were $191.3 million fixed-rate and $241.0
million variable-rate commercial loans maturing in more than one year.
Loans Secured by One- to Four-Family Real Estate. A significant portion of
the Company's lending activity is the origination of permanent conventional
loans secured by one-to four-family residences located within the Company's
primary market area. The Company typically makes adjustable rate mortgage loans
and holds the loans in portfolio. More than 49% of the Company's portfolio of
permanent conventional mortgage loans secured by one-to four-family residences
are adjustable rate. The Company also underwrites fixed-rate residential
mortgage loans, and may sell those loans on a servicing-retained basis in the
secondary market to the Federal Home Loan Mortgage Corporation ("FHLMC") or to
the Federal National Mortgage Association ("FNMA"), or on a servicing-released
basis to another financial institution.
The Company makes fixed-rate loans on one- to four-family residences up to
100% of the value of the real estate and improvements (the "loan-to-value" or
"LTV") substantially all of which are sold in the secondary market. Residential
real estate loans are offered by the Company for terms of up to 30 years. The
Company requires private mortgage insurance on secondary market loans for the
amount of such loans in excess of 80% of the value of the real estate securing
such loans.
The aggregate amount of the Company's one-to four-family residential real
estate loans totaled approximately $270.1 million at December 31, 2004, and
represented 29.6% of net loans at such date. At such date, loans secured by
residential real estate with outstanding balances of approximately $3.2 million,
or 1.2%, of its total one-to four-family residential real estate loan balance,
were more than 90 days delinquent or nonaccruing.
Commercial Loans. The Company is also active in commercial lending,
primarily to smaller businesses in the Company's primary market area. These
loans are typically secured by commercial real estate and priced in relation to
the prime rate or the one year, three year or five year U.S. Treasury Index.
Such loans generally have terms of up to 25 years and loan-to-value ratios of up
to 80%. The Company also makes commercial loans secured by collateral other than
real estate and unsecured commercial loans. Other
4
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secured and unsecured commercial loans are also typically priced at spreads to
prime or the one year, three year or five year U.S. Treasury Index and have
maturities of up to five years.
Loan officers review the borrower's financial statements, appraisals of
the collateral, and other related documents before recommending funding of a
commercial loan. The loan officer and the approving officer or committee then
determines that there is sufficient income to cover this and other loan
payments, that the collateral is of adequate liquidation value, that the
applicant has a good payment history and is capable of performing the
requirements of the loan. Other reviews and analysis are done as appropriate,
depending upon the complexity of the credit request.
Although a risk of nonpayment exists with respect to all loans, certain
specific types of risks are associated with different types of loans. The
primary risks associated with commercial loans are the quality of the borrower's
management and the impact of national and regional economic factors. The Company
mitigates these risks by maintaining a close working relationship with its
borrowers, by obtaining cross-collateralization and personal guarantees of its
loans, and by diversification within its loan portfolio.
Real estate is frequently a material component of the collateral for the
Company's loans. The expected source of repayment of these loans is generally
the operations of the borrower's business, but the real estate provides an
additional measure of security, particularly when the property is
owner-occupied. For this reason, real estate is considered additional collateral
on many of the Company's commercial loans.
Risks associated with real estate loans include fluctuating land values,
changes in tax policies, and concentration of loans within the Company's market
area. The Company mitigates these risks by generally providing loans to
experienced commercial real estate owners and developers. The risk is further
mitigated by the number of commercial real estate loans made to the user of the
property.
The aggregate amount of the Company's commercial loans without real estate
as primary or secondary collateral totaled approximately $173.8 million at
December 31, 2004, and represented 29.7% of commercial loans at that date. At
such date, commercial loans without real estate as primary or secondary
collateral that were more than 90 days delinquent or nonaccruing totaled
approximately $404,000, or 0.3% of such loans. The aggregate amount of the
Company's commercial loans with real estate as primary or secondary collateral
was approximately $410.4 million at December 31, 2004, and at such date,
approximately $2.0 million in outstanding balances, or 0.5% of such loans, were
more than 90 days delinquent or nonaccruing.
Consumer Loans. The Company offers several consumer loan products,
including installment loans, home equity lines of credit and credit cards.
The Company has developed working relationships with several car
dealerships in its market area, and is able to do some financing of new and used
cars through these relationships. The Company generally finances cars that are
seven years old or newer. These loans generally have fixed rates and maturities
of 36 to 72 months.
To a lesser degree, the Company makes small unsecured loans to
creditworthy individuals. These loans are typically between $2,000 and $5,000,
at fixed rates, with maturities of less than five years. The Company also offers
a home equity loan product and a credit card product to its customers. Both
products are underwritten to the same standards as any of the Company's other
consumer loan products.
Loan officers underwrite installment loan and other consumer loan requests
in such a manner to assure compliance with the various regulations and the
Company's underwriting standards. The payment history of applicants is very
important on these smaller loans, and is checked through in-house records as
well as credit bureaus. Normally, collateral, such as an automobile, is taken as
security and the value is checked through the N.A.D.A. book or another valuation
service. Income must be adequate to cover all monthly payments including the
proposed loan.
At December 31, 2004, the Company had approximately $70.1 million in its
consumer loan and credit card portfolio, which was 7.7% of the Company's total
net loans. Approximately $603,000 of these loans were over 90 days delinquent or
nonaccruing on that date, which represented 0.9% of the consumer loan portfolio.
Loan Solicitation and Processing. Loan originations are developed from a
number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by the Company's lending
staff, and walk-in customers.
Underwriting guidelines for all branches and loan types are set by senior
management at an administrative office. Consumer loan processing and
underwriting are decentralized; however, all other loans, including real estate
and commercial loans, are generally processed and underwritten centrally at an
administrative office. Loan applications, as well as credit bureau reports,
appraisals, financial information, verifications of income, and other
documentation concerning the credit-worthiness of the borrower, as applicable to
each loan type are reviewed.
5
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Branch managers may have the authority to approve loans up to $120,000
that meet the underwriting criteria set by management, and area managers have
authority for amounts up to $500,000. Any loan greater than $500,000 must be
approved by senior management.
Income from Lending Activities. The Company earns interest and fee income
from its lending activities. The Company earns fees for originating loans and
for making commitments to originate loans and loan participations. Certain fees,
net of origination costs, are deferred and amortized over the life of the loan.
The Company also receives fees related to existing loans, such as late charges.
Income from loan origination and commitment fees and discounts varies with the
volume and type of loans and commitments made and with competitive and economic
conditions. Note A-4 to the Consolidated Financial Statements contains a
discussion of the manner in which origination fees are recognized for financial
reporting purposes. In addition, the Company conducts mortgage banking
activities, whereby, the Company sells certain fixed-rate residential loans in
the secondary market to the FHLMC and FNMA, recognizing gains upon the sale
comprised of a cash component as well as mortgage servicing rights.
Nonperforming Loans
- -------------------
General. Late charges on residential mortgages are assessed by the Company
if a payment is not received either by the 10th day following its due date or
15th day if the loan has been sold in the secondary market and is being serviced
by the Company. Late charges on installment loans and commercial loans are
assessed by the Company if a payment is not received by the 10th day following
its due date. Any borrower whose payment was not received by this time is mailed
a past due notice. If the loan is still delinquent after a second past due
notice is mailed (generally around the 20th day of delinquency), a branch
employee will attempt to contact the customer to resolve any problem that might
exist.
When an advanced stage of delinquency appears (generally around the 60th
day of delinquency) and if repayment cannot be expected within a reasonable
amount of time or a repayment agreement has not been reached, Oak Hill will
contact an attorney and request that the required 30-day prior notice of
foreclosure or repossession proceedings be prepared and delivered to the
borrower so that, if necessary, foreclosure proceedings may be initiated shortly
after the loan is 90 days delinquent. Historically, this procedure has aided in
achieving a low level of nonperforming loans and, as of December 31, 2004, only
$6.3 million or 0.7% of the Company's total loan portfolio was over 90 days
delinquent or nonaccruing. As of December 31, 2004, the Company's level of
nonperforming assets to total assets was 0.7%.
If a credit card account becomes 10 days delinquent, a notice is sent to
the account holder demanding that the payment be made to bring the account
current. Another notice is sent to the cardholder if the account becomes 20 days
delinquent. If payment is not received within 30 days, authorization requests
are denied, a message about the delinquency appears on the cardholder's account
statement, and a follow-up telephone call is made. These telephone collection
efforts and account statement messages continue until the account is deemed
uncollectible. Legal action is considered during this time. As of December 31,
2004, approximately $14,000 in outstanding balances, or 0.7% of credit card
loans were nonperforming.
At December 31, 2004, the Company had $1.6 million in real estate or other
repossessed collateral acquired as a result of foreclosure, voluntary deed, or
other means. Such real estate is classified as "other real estate owned" until
it is sold and is recorded at the lower of cost (the unpaid principal balance at
the date of acquisition plus foreclosure and other related costs) or fair value
less estimated selling expenses. Any subsequent write-down is charged to
expense. Generally, unless the property is a one-to-four family residential
dwelling and well-collateralized, interest accrual ceases in 90 days, but no
later than the date of acquisition. From that date, all costs incurred in
maintaining the property are expensed. "Other real estate owned" is appraised
during the foreclosure process, prior to the time of acquisition, and losses are
recognized for the amount by which the book value of the related mortgage loan
exceeds the estimated net realizable value of the property.
The Company had $3.8 million and $4.0 million of impaired loans, as
defined under SFAS No. 114, at December 31, 2004 and 2003, respectively. The
Company maintained an allowance for credit losses related to such impaired loans
of $1.3 million and $982,000 at December 31, 2004 and 2003, respectively.
6
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The following is a summary of the Company's loan loss experience and
selected ratios for the periods presented.
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Year Ended December 31,
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2004 2003 2002 2001 2000
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(Dollars in thousands)
Allowance for loan losses $ 10,836 $ 9,142 $ 8,345 $ 7,197 $ 6,132
(beginning of period)
Loans charged-off:
1-4 family residential 226 129 215 172 219
Multi-family and commercial real estate 1,214 226 1,064 50 37
Commercial and industrial 334 442 148 239 2
Consumer 1,771 1,355 1,136 1,365 1,155
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Total loans charged-off 3,545 2,152 2,563 1,826 1,413
Recoveries of previously charged-off loans:
1-4 family residential 35 27 14 20 20
Multi-family and commercial real estate 604 62 118 28 3
Commercial and industrial 99 14 103 8 1
Consumer 553 396 368 327 191
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Total recoveries 1,291 499 603 383 215
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Net loans charged-off 2,254 1,653 1,960 1,443 1,198
Provision for losses on loans 3,136 3,347 2,757 2,591 2,263
Allowance of acquired institution
and other 129 -- -- -- --
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Allowance for loan losses
(end of period) $ 11,847 $ 10,836 $ 9,142 $ 8,345 $ 7,197
=============================================================================================================================
Loans outstanding:
Average, net $869,849 $754,519 $690,545 $623,486 $557,038
End of period $924,385 $821,857 $711,086 $654,426 $606,283
Ratio of allowance for loan losses to
loans outstanding at end of period 1.28% 1.32% 1.29% 1.28% 1.19%
Ratio of net charge-offs to average
loans outstanding 0.26% 0.22% 0.28% 0.23% 0.22%
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At December 31, 2004, 2003 and 2002, the Company had nonperforming loans
totaling $6.3 million, $8.1 million, and $7.3 million, respectively. Interest
income that would have been recognized if such loans had performed in accordance
with contractual terms totaled approximately $406,000, $508,000, and $357,000,
for the years ended December 31, 2004, 2003 and 2002, respectively. There was no
interest income recognized on such loans during any of the periods.
Allowance for Loan Losses. The amount of the allowance for loan losses is
based on management's analysis of risks inherent in the various segments of the
loan portfolio, management's assessment of known or potential problem credits
which have come to management's attention during the ongoing analysis of credit
quality, historical loss experience, current economic conditions and other
factors. If actual circumstances and losses differ substantially from
management's assumptions and estimates, such allowance for loan losses may not
be sufficient to absorb all future losses, and net earnings could be adversely
affected. Loan loss estimates are reviewed periodically, and adjustments, if
any, are reported in earnings in the period in which they become known. In
addition, the Company maintains a portion of the allowance to cover potential
losses inherent in the portfolio that have not been specifically identified.
Although management believes that it uses the best information available
to make such determinations and that the allowance for loan losses is adequate
at December 31, 2004, future adjustments to the allowance may be necessary, and
net earnings could be affected, if circumstances and/or economic conditions
differ substantially from the assumptions used in making the initial
determinations. A downturn in the southern and central Ohio economy and
employment levels could result in the Company experiencing increased levels of
nonperforming assets and charge-offs, increased provisions for loan losses and
reductions in income. Additionally, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the recognition of additions to the
allowance based on their judgment of information available to them at the time
of their examination.
7
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The following table summarizes nonperforming assets by category.
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Year Ended December 31,
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2004 2003 2002 2001 2000
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(Dollars in thousands)
Real estate:
Nonaccrual $ 3,144 $ 2,235 $ 1,105 $ 386 $ 436
Past due 90 days or more(1) 121 98 515 40 158
Commercial and industrial:
Nonaccrual 1,858 4,153 4,345 2,813 205
Past due 90 days or more(1) 606 21 435 993 1,487
Consumer and other:
Nonaccrual 538 1,213 579 492 422
Past due 90 days or more(1) 64 399 317 492 161
===============================================================================================================================
Total nonperforming loans 6,331 8,119 7,296 5,216 2,869
Other real estate owned 1,614 585 1,587 232
===============================================================================================================================
Total nonperforming assets $ 7,945 $ 8,704 $ 7,296 $ 6,803 $ 3,101
===============================================================================================================================
Loans outstanding $ 924,385 $ 821,857 $ 711,086 $ 654,426 $ 606,283
Allowance for loan losses to
total loans 1.28% 1.32% 1.29% 1.28% 1.19%
Nonperforming loans to total loans 0.69 0.99 1.03 0.80 0.47
Nonperforming assets to total assets 0.73 0.93 0.88 0.87 0.45
Allowance for loan losses to
nonperforming loans 187.1% 133.5% 125.3% 160.0% 250.9%
===============================================================================================================================
(1) Represents accruing loans 90 days or more delinquent that are considered
by management to be well secured and in the process of collection.
As of December 31, 2004, loans where borrowers were experiencing potential
credit problems that raised doubts as to the ability of those borrowers to
comply with the present loan repayment terms were included in the nonaccrual,
past due 90 days or more or restructured categories.
Allocation of Allowance for Losses on Loans. The table below presents an
analysis of the allocation of the Company's allowance for loan losses at the
dates indicated.
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December 31,
====================================================================================================================================
2004 2003 2002 2001 2000
====================================================================================================================================
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans(1) Amount loans(1) Amount loans(1) Amount loans(1) Amount loans(1)
====================================================================================================================================
(Dollars in thousands)
Balance at end of period
applicable to:
1-4 family residential $ 492 29.2% $ 526 28.6% $ 363 34.6% $2,849 57.0% $2,506 39.7%
Commercial and other 10,368 63.2 8,793 62.5 5,990 55.1 1,715 33.1 1,508 45.4
Consumer 925 7.4 1,440 8.7 936 10.1 2,164 9.6 1,903 14.6
Credit cards 62 0.2 77 0.2 51 0.2 60 0.3 53 0.3
Unallocated -- -- -- -- 1,802 -- 1,557 -- 1,227 --
====================================================================================================================================
Total $11,847 100.0% $10,836 100.0% $9,142 100.0% $8,345 100.0% $7,197 100.0%
====================================================================================================================================
(1) Percentages are base upon loans gross of the allowance for loan losses.
8
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Classified Assets. The FDIC regulations on classification of assets
require commercial banks to classify their own assets and to establish
appropriate general and specific allowances for losses, subject to FDIC review.
These regulations are designed to encourage management to evaluate assets on a
case-by-case basis and to discourage automatic classifications. Assets
classified as substandard or doubtful must be evaluated by management to
determine a reasonable general loss reserve to be included in total capital for
purposes of the Oak Hill's risk-based capital requirement, but excluded from
core capital or tangible capital or in capital under accounting principles
generally accepted in the United States of America. Assets classified as loss
must be either written off or reserved for by a specific allowance that is not
counted toward capital for purposes of any of the regulatory capital
requirements.
Investments. Investment securities primarily satisfy the Company's
liquidity needs and provide a return on residual funds after lending activities.
Pursuant to the Company's written investment policy, investments may be in
interest-bearing deposits, U.S. Government and agency obligations, trust
preferred securities, state and local government obligations and
government-guaranteed mortgage-backed securities. The Company does not invest in
securities that are rated less than investment grade by a nationally recognized
statistical rating organization. A goal of the Company's investment policy is to
limit interest rate risk.
All securities-related activity is reported to the Board of Directors of
the Company. General changes in investment strategy must be reviewed and
approved by the Company's Board of Directors. The Company's senior management
can purchase and sell securities on behalf of the Company in accordance with the
Company's stated investment policy.
The following table sets forth the carrying value of the Company's
investment portfolio as indicated and includes both investments designated as
available for sale and those designated as held to maturity.
=================================================================================
At December 31,
=================================================================================
2004 2003 2002
=================================================================================
(Dollars in thousands)
Held-to-maturity:
Trust preferred securities $ 3,640 $ 3,659 $ 2,575
Available-for-sale:
U.S. Government and agency obligations 61,408 58,490 64,798
State and local government obligations 26,769 17,211 16,257
Other securities 206 185 159
=================================================================================
Total investment securities
available-for-sale 88,383 75,886 81,214
=================================================================================
Total investment securities $92,023 $79,545 $83,789
=================================================================================
The following table reflects the maturities of the Company's investment
securities at December 31, 2004.
====================================================================================================================================
Due in Due after one year Due after five years
one year or less through five years through ten years Due after ten years
====================================================================================================================================
Amount Rate Amount Rate Amount Rate Amount Rate Total
====================================================================================================================================
Held-to-maturity:
Trust preferred securities $ -- -- $ -- -- $ -- -- $ 3,640 8.45% $ 3,640
Available-for-sale:
U.S. Government and
agency obligations 503 7.13% 11,292 3.81% 8,477 5.12% 41,136 5.73% 61,408
Municipal obligations 314 5.13% 1,702 4.30% 5,437 4.72% 19,316 4.94% 26,769
Other securities -- -- -- -- -- -- 206 -- 206
====================================================================================================================================
Total available-for-sale
securities 817 6.36% 12,994 3.87% 13,914 4.96% 60,658 5.46% 88,383
====================================================================================================================================
Total investment securities $ 847 6.36% $12,994 3.87% $13,914 4.96% $64,298 5.63% $92,023
====================================================================================================================================
9
================================================================================
Source of Funds
- ---------------
Deposit Accounts. Deposits are a major source of the Company's funds. The
Company offers a number of alternatives for depositors designed to attract both
commercial and regular consumer checking and savings including regular and money
market savings accounts, NOW accounts, and a variety of fixed-maturity,
fixed-rate certificates with maturities ranging from 3 to 60 months. The Company
has also utilized brokered deposits as a supplement to its local deposits when
such funds are attractively priced in relation to the local market.
The distribution of the Company's deposit accounts by type and rate is set
forth in the following table.
==================================================================================================================
At December 31,
==================================================================================================================
2004 2003 2002
==================================================================================================================
Amount Percent Amount Percent Amount Percent
==================================================================================================================
(Dollars in thousands)
Demand deposits $ 88,712 10.3% $ 66,712 9.3% $ 61,847 9.3%
Savings accounts 58,978 6.8 48,224 6.7 44,353 6.7
NOW accounts 65,395 7.6 62,033 8.6 59,359 9.0
Money market deposits 9,249 1.1 7,644 1.1 7,558 1.1
Premium investment 53,093 6.1 35,474 4.9 40,604 6.1
Select investment 27,197 3.2 33,426 4.7 27,896 4.2
==================================================================================================================
Total transaction accounts 302,624 35.1 253,513 35.3 241,617 36.4
Certificates of deposit:
1.00 - 2.99% 344,757 40.0 286,245 39.9 95,377 14.4
3.00 - 4.99% 203,406 23.6 162,541 22.6 296,053 44.6
5.00 - 6.99% 10,909 1.3 15,447 2.2 30,641 4.6
7.00 - 8.00% 400 -- 75 -- 125 --
==================================================================================================================
Total certificates of
deposit 559,472 64.9 464,308 64.7 422,196 63.6
==================================================================================================================
Total deposits $862,096 100.0% $717,821 100.0% $663,813 100.0%
==================================================================================================================
The following table presents various interest rate categories and
certain information concerning maturities of the Company's certificates of
deposit at December 31, 2004.
==================================================================================================================
One to Over
Within three three
Certificate of deposit accounts one year years years Total
==================================================================================================================
(In thousands)
3.00% and less $195,856 $204,492 $ 648 $400,996
3.01 to 4.00% 19,428 27,244 41,254 87,926
4.01 to 5.00% 21,390 24,432 15,902 61,724
5.01 to 6.00% 1,055 2,994 2,653 6,702
6.01 to 7.00% 1,156 647 -- 1,803
7.01 to 8.00% 314 7 -- 321
==================================================================================================================
Total $239,199 $259,816 $ 60,457 $559,472
==================================================================================================================
10
================================================================================
The following table sets forth the amount of the Company's certificates of
deposit that are $100,000 or greater, by time remaining until maturity, as of
December 31, 2004.
============================================================
Maturity period Amount
============================================================
(In thousands)
Three months or less $ 10,397
Over three months through six months 30,891
Over six through twelve months 43,742
Over twelve months 143,059
============================================================
Total $228,089
============================================================
Borrowings. In addition to deposits and repayment of loan principal, the
Company obtains funds necessary for its lending activities and other general
business purposes through loans (advances) from the Federal Home Loan Bank
("FHLB") of Cincinnati. Advances from the FHLB may be on a secured or unsecured
basis depending upon a number of factors, including the purpose for which the
funds are being borrowed and the total of outstanding advances. The Company
typically utilizes FHLB advances to fund loans and to meet short-term liquidity
needs. As of December 31, 2004, Oak Hill had outstanding FHLB advances totaling
$105.6 million. See Note F to the consolidated financial statements for
additional information regarding FHLB advances. The Company also has
arrangements to borrow funds from commercial banks.
In March 2000, a Delaware trust owned by the Company, Oak Hill Capital
Trust 1 ("Trust 1"), 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.
During 2004, a Delaware statutory business trust owned by the Company, Oak
Hill Capital Trust 2 ( "Trust 2"), issued $5.0 million of mandatorily redeemable
debt securities. The debt securities issued by Trust 2 are included in the
Company's regulatory capital, specifically as a component of Tier 1 capital. The
proceeds from the issuance of the subordinated debentures and common securities
were used by Trust 2 to purchase from the Company $5.0 million of subordinated
debentures maturing on October 18, 2034. The subordinated debentures are the
sole asset of Trust 2, and the Company owns all of the common securities of
Trust 2. Interest payments on the debt securities are to be made quarterly at an
annual fixed rate of interest of 6.24% through October 18, 2009 and at a
floating rate of interest, reset quarterly, equal to 3-month LIBOR plus 2.40%
thereafter. Interest payments are reported as a component of interest expense on
borrowings. The net proceeds received by the Company were contributed to the
capital of Oak Hill during 2004.
On October 1, 2004, a Delaware statutory business trust owned by the
Company, Oak Hill Capital Trust 3 ("Trust 3"), issued $8.0 million of
mandatorily redeemable debt securities. The debt securities issued by Trust 3
are included in the Company's regulatory capital, specifically as a component of
Tier 1 capital. The proceeds from the issuance of the subordinated debentures
and common securities were used by Trust 3 to purchase from the Company $8.0
million of subordinated debentures maturing on October 18, 2034. The
subordinated debentures are the sole asset of Trust 3, and the Company owns all
of the common securities of Trust 3. Interest payments on the debt securities
are to be made quarterly at a floating rate of interest, reset quarterly, equal
to 3-month LIBOR plus 2.30%. Interest payments are reported as a component of
interest expense on borrowings. The net proceeds received by the Company were
used for merger activity and general corporate activity.
11
================================================================================
The following table sets forth the maximum amount of the Company's FHLB
advances and other borrowings outstanding at any month end during the periods
shown and the average aggregate balances of FHLB advances and other borrowings
for such periods:
====================================================================================
Year Ended December 31,
====================================================================================
2004 2003 2002
====================================================================================
(Dollars in thousands)
Maximum amount outstanding:
FHLB advances $119,520 $134,030 $ 99,346
Junior subordinated debentures 18,000 5,000 5,000
Other borrowings 9,277 8,346 8,303
====================================================================================
Total $146,797 $147,376 $112,649
====================================================================================
Average amount of FHLB advances
and other borrowings outstanding $124,514 $117,328 $101,818
====================================================================================
Weighted-average interest rate of
total borrowings 4.28% 3.63% 4.85%
====================================================================================
The following table sets forth certain information as to the Company's
FHLB advances and other borrowings at the dates indicated.
====================================================================================
Year Ended December 31,
====================================================================================
2004 2003 2002
====================================================================================
(In thousands)
FHLB advances $105,601 $122,887 $ 86,055
Junior subordinated debentures 18,000 5,000 5,000
Other borrowings 8,059 7,465 8,303
====================================================================================
Total borrowings $131,660 $135,352 $ 99,358
====================================================================================
Asset and Liability Management. The Company manages its exposure to
interest rate risk through its Asset/Liability Management Committees (ALCO) at
both the Company and Oak Hill levels. Given the potential types and
characteristics of interest rate risk, the Company maintains an appropriate
process and set of measurement tools to enable it to identify and quantify its
primary sources of interest rate risk. The Company also recognizes that
effective management of interest rate risk includes understanding when and how
potential changes in interest rates will flow through the earnings statement.
Accordingly, the Company manages its position so that it monitors both its
short-term and long-term interest rate risk exposure. Tools used by management
include an interest rate sensitivity gap analysis and an interest rate
simulation model whereby changes in net interest income are measured based upon
selected hypothetical changes in market interest rates.
Net interest income, the difference between the yield on interest-earning
assets and the cost of interest-bearing liabilities, is the principal component
of the Company's net earnings. The ability to maximize net interest income is
largely dependent upon the achievement of a positive interest rate spread that
can be sustained during fluctuations in prevailing interest rate levels. Due to
the maturity, repricing and timing differences between interest-earning assets
and interest-bearing liabilities, the Company's earnings would be affected
differently under various interest rate scenarios. Interest rate sensitivity is
a measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which reprice within a given period of time. The
difference, or the interest rate repricing "gap", provides an indication of the
extent to which an interest rate spread will be affected by changes in interest
rates. A gap is considered positive when the amount of interest-rate sensitive
assets exceeds the amount of interest-rate sensitive liabilities and is
considered negative when the amount of interest-rate sensitive liabilities
exceeds the amount of interest-rate sensitive assets. Generally, during a period
of rising interest-rates, a negative gap within shorter maturities would
adversely affect net interest income, while a positive gap within shorter
maturities would result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap within shorter
maturities would result in an increase in net interest income, while a positive
gap within shorter maturities would have the opposite effect.
12
- --------------------------------------------------------------------------------
The following table contains information regarding the amounts of various
categories of assets and liabilities contractually repricing within the periods
indicated without consideration of loan prepayment assumptions or deposit decay
assumptions:
====================================================================================================================================
December 31, 2004 Year Ending December 31,
====================================================================================================================================
2005 2006 2007 2008 2009 and after Total
====================================================================================================================================
Interest-rate sensitive assets:
Federal funds sold $ 988 $ -- $ -- $ -- -- $ 988
Interest-bearing deposits 1,374 343 1,717
Investment securities 21,358 13,990 15,633 11,692 29,350 92,023
Loans receivable 420,620 127,625 139,581 95,184 129,528 912,538
Other interest-earning assets 187 -- -- -- 16,708 16,895
====================================================================================================================================
Total 444,527 141,615 155,557 106,876 175,586 1,024,161
Interest-rate sensitive liabilities:
Deposits 576,654 105,643 30,290 46,896 13,901 773,384
Borrowings 63,531 6,544 6,745 1,061 53,779 131,660
====================================================================================================================================
Total 640,185 112,187 37,035 47,957 67,680 905,044
====================================================================================================================================
Excess (deficiency) of interest-rate
sensitive assets over interest-rate
sensitive liabilities $ (195,658) $ 29,428 $ 118,522 $ 58,919 $ 107,906 $ 119,117
====================================================================================================================================
Cumulative excess (deficiency) of
interest-rate sensitive assets
over interest-rate sensitive
liabilities $ (195,658) $ (166,230) $ (47,708) $ 11,211 $ 119,117 $ 119,117
====================================================================================================================================
Cumulative interest-rate sensitivity
gap to total assets (18.07)% (15.35)% (4.41)% 1.04% 10.98% 10.98%
====================================================================================================================================
====================================================================================================================================
December 31, 2003 Year Ending December 31,
====================================================================================================================================
2004 2005 2006 2007 2008 and after Total
====================================================================================================================================
Interest-rate sensitive assets:
Federal funds sold $ 123 $ -- $ -- $ -- $ -- $ 123
Interest-bearing deposits 1,162 -- -- -- -- 1,162
Investment securities 20,904 11,222 11,813 7,467 28,139 79,545
Loans receivable 355,313 77,896 117,575 97,255 162,982 811,021
Other interest-earning assets -- -- -- -- 5,998 5,998
====================================================================================================================================
Total 377,502 89,118 129,388 104,722 197,119 897,849
Interest-rate sensitive liabilities:
Deposits 440,734 127,304 31,345 20,334 31,392 651,109
Borrowings 53,832 13,190 7,059 6,743 54,528 135,352
====================================================================================================================================
Total 494,566 140,494 38,404 27,077 85,920 786,461
====================================================================================================================================
Excess (deficiency) of interest-rate
sensitive assets over interest-rate
sensitive liabilities $ (117,064) $ (51,376) $ 90,984 $ 77,645 $ 111,199 $ 111,388
====================================================================================================================================
Cumulative excess (deficiency) of
interest-rate sensitive assets
over interest-rate sensitive
liabilities $ (117,064) $ (168,440) $ (77,456) $ 189 $ 111,388 $ 111,388
====================================================================================================================================
Cumulative interest-rate sensitivity
gap to total assets (12.48)% (17.95)% (8.26)% 0.02% 11.87% 11.87%
====================================================================================================================================
13
================================================================================
Due to the shortcomings associated with gap analysis, the Company's
primary tool in managing interest rate risk is net interest income simulations,
which measure the potential effect on earnings that instantaneous parallel and
proportional changes in interest rates could have on net interest income over
defined periods of time. The Company applies hypothetical interest rate shocks
of up and down 100, 200 and 300 basis points (100 basis points equals 1%) to its
financial instruments based upon assumed cash flows. Under the current interest
rate environment, a decline in interest rates of 200 or more basis points is
unlikely and therefore provides no meaningful information.
The parallel approach to interest rate shocks assumes that all interest
rates will simultaneously move up or down by like amounts. This approach is very
simplistic and could be viewed as a "worst case" scenario. The proportional
approach to interest rate shocks assumes that the interest rates for financial
instruments change in proportion to a single driver rate. The Company has
selected the national Prime rate as its driver rate. In the proportional
approach, the driver rate shock is multiplied by the proportional rate factors
for each financial instrument to obtain the new interest rates used to calculate
projected net interest income changes.
The following table reflects, as of December 31, 2004, projected changes
in the Company's twelve-month net interest income as a percentage of net
interest income assuming parallel and proportional interest rate shocks.
======================================================================================
Rate Shock Analysis
======================================================================================
ALCO Limit Parallel Proportional
Twelve-Month Twelve-Month Interest Interest
Net Interest Income Net Interest Rate Rate
Changes Income Changes Shock shock
======================================================================================
+300 basis points -30% -7.378% 17.963%
+200 basis points -20% -4.362% 12.751%
+100 basis points -15% -1.992% 6.646%
-100 basis points -15% 0.710% -6.463%
======================================================================================
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the analysis. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
differently to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types of assets and
liabilities may lag behind changes in market interest rates. In the event of a
change in market interest rates, expected rates of prepayment on loans and
mortgage-backed securities, and early withdrawal levels from certificates of
deposit, would likely deviate from those assumed in making the interest rate
risk calculations. Moreover, the analysis does not contemplate all actions the
Company may take in response to changes in interest rates and should not be
relied upon as being indicative of actual results.
14
================================================================================
Personnel
- ---------
At December 31, 2004, the Company and its subsidiaries employed 402
persons on a full-time basis and 58 persons on a part-time basis.
Executive Offices
- -----------------
The Company's executive office is located at 14621 State Route 93,
Jackson, Ohio 45640 and its telephone number is (740) 286-3283.
Subsidiaries
- ------------
The Company owns all of the outstanding stock of Oak Hill Banks, an Ohio
state-chartered bank, which was founded in 1902. The Company owns all of the
outstanding stock of Oak Hill Capital Trust 1, a Delaware statutory trust that
was formed in 2000. The Company owns all of the outstanding stock of Oak Hill
Capital Trust 2 and Oak Hill Capital Trust 3, Delaware statutory trusts that
were formed in 2004. The Company owns all of the outstanding stock of Oak Hill
Financial Insurance Agency, Inc., which conducts business as MPA Group Insurance
Specialists, a group health insurance and employee benefits agency acquired in
August 2001. In addition, the Company has a 49% ownership interest in Oak Hill
Title Agency, LLC, a limited liability company that was formed in 2001 and
commenced operations in January 2002 to provide title services for commercial
and residential real estate transactions.
Regulation
- ----------
Oak Hill, as an Ohio state-chartered bank, is subject to supervision and
regular examination by the Superintendent of Financial Institutions of the State
of Ohio. Oak Hill is insured by the Federal Deposit Insurance Corporation and is
subject to the provisions of the Federal Deposit Insurance Act. To the extent
that the information below consists of summaries of certain statutes or
regulations, it is qualified in its entirety by reference to the statutory or
regulatory provisions described.
The Company is subject to the provisions of the Bank Holding Company Act
of 1956, as amended (the "Act"), which requires a bank holding company to
register under the Act and to be subject to supervision and examination by the
Board of Governors of the Federal Reserve System. A bank holding company is
required to file with the Board of Governors an annual report and such
additional information as the Board of Governors may require pursuant to the
Act. The Act requires prior approval by the Board of Governors of the
acquisition by a bank holding company, or any subsidiary thereof, of 5% or more
of the voting stock or substantially all the assets of any bank within the
United States.
A bank holding company located in the State of Ohio is not permitted to
acquire a bank or other financial institution located in another state unless
such acquisition is specifically authorized by the statutes of such state. The
Act further provides that the Board of Governors shall not approve any such
acquisition that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any part of the United States, or the effect of which may be to
substantially lessen competition or to create a monopoly in any section of the
country, or that in any other manner would be in restraint of trade, unless the
anti-competitive effects of the proposed transaction are clearly outweighed in
the public interest by the probable effect of the transaction in meeting the
convenience and needs of the community to be served.
The Act also prohibits a bank holding company, with certain exceptions,
from acquiring 5% or more of the voting stock of any company that is not a bank
and from engaging in any business other than banking or performing services for
its banking subsidiary without the approval of the Board of Governors. In
addition, the acquisition of a thrift institution must be approved by the Office
of Thrift Supervision pursuant to the savings and loan holding company
provisions of the Home Owners' Loan Act of 1933. On March 13, 2000, the
Financial Services Act of 1999, also known as the Gramm-Leach-Bliley Act, became
effective. This legislation repealed certain cross-industry affiliation
prohibitions and made certain other changes to the Act. It authorized a new form
of holding company, a financial holding company, which with certain exceptions
is authorized to undertake activities which are "financial in nature" and which
include banking, insurance and securities activities. Generally, the scope of
activities permitted to a financial holding company are broader than those
previously permitted to a bank holding company. A bank holding company may elect
to become a financial holding company. The Company made this election and was
notified on July 11, 2001 by the Federal Reserve Bank that its election had been
approved. Under the Act, as amended by the Gramm-Leach-Bliley Act, the Company
is permitted to engage in certain activities, including mortgage banking,
operating small loan companies, factoring, furnishing certain data processing
operations, holding or operating properties used by banking subsidiaries or
acquired for such future use, providing certain investment and financial advice,
leasing (subject to certain conditions) real or personal property, providing
management consulting advice to certain depository institutions, providing
securities brokerage services, arranging commercial real estate equity
financing, underwriting and dealing in government obligations and money market
instruments, providing consumer financial counseling, operating a collection
agency, owning and operating a savings association, operating a credit bureau
and conducting certain real estate investment activities and acting as insurance
agent for certain types of insurance. Certain other activities, including real
estate brokerage and syndication,
15
================================================================================
land development, and property management not related to credit transactions,
are not permissible.
The Act and the regulations of the Board of Governors prohibit a financial
holding company and its subsidiaries from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services.
The Act also imposes certain restrictions upon dealing by affiliated banks
with the holding company and among themselves including restrictions on
interbank borrowing and upon dealings in respect to the securities or
obligations of the holding company or other affiliates.
On October 26, 2001 President Bush signed the USA Patriot Act of 2001 (the
"Patriot Act"). Enacted in response to the September 11, 2001 terrorist attacks,
the Patriot Act is intended to strengthen the ability of various agencies of the
United States to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and requires various regulations,
including:
o Due diligence requirements for financial institutions that
administer, maintain, or manage private bank accounts or
correspondent accounts for non-U.S. persons;
o Standards for verifying customer identification at account opening;
o Rules to promote cooperation among financial institutions,
regulators, and law enforcement entities in identifying parties that
may be involved in terrorism or money laundering;
o Reports by non-financial trades and businesses filed with the
Treasury Department's Financial Crimes Enforcement Network for
transactions exceeding $10,000 and;
o Filing of suspicious activities reports for securities transactions
by brokers and dealers if they believe a customer may be violating
U.S. laws and regulations.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act"). The stated goals of the Sarbanes-Oxley Act are
to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures made pursuant to the securities laws. The changes are intended to
allow shareholders to monitor the performance of companies and directors more
easily and efficiently. The Sarbanes-Oxley Act generally applies to all
companies, both U.S. and non-U.S., that file or are required to file periodic
reports with the SEC under the Exchange Act.
The Sarbanes-Oxley Act addresses, among other matters: audit committees;
auditor independence; analysts' conflicts of interest; certification of
financial statements by the chief executive officer and the chief financial
officer; the forfeiture of bonuses and profits made by directors and senior
officers in the twelve month period covered by restated financial statements; a
prohibition on insider trading during pension plan black-out periods; disclosure
of off-balance sheet transactions; a prohibition on personal loans to directors
and officers (excluding Federally insured financial institutions); expedited
filing requirements for stock transaction reports by officers and directors; the
formation of a public accounting oversight board; and various increased criminal
penalties for violations of securities laws.
In 2002 and 2003, the SEC adopted a host of new regulations implementing
the provisions of the Sarbanes-Oxley Act. These new regulations may change the
manner in which the Company is required to report its financial condition and
results of operations in the future. The Company believes that it has been at
all times in material compliance with these regulations; however, there can be
no assurance that future regulations, implementing the Sarbanes-Oxley Act, will
not have an adverse effect on the Company's reported financial condition and
results of operations as compared with prior reporting periods.
Management has instituted a series of actions to strengthen and improve
the Company's already strong corporate governance practices. Included in those
actions was the formation of a Disclosure Controls and Procedures Committee for
financial reporting (the "Disclosure Committee"), to evaluate and monitor the
continued effectiveness of the design and operation of disclosure controls for
financial reporting. The Disclosure Committee complements the Company's existing
committee structure and process and is designed to capture critical management
information and disclosures from the Company and each of its affiliates. The
Company believes that the addition of the Disclosure Committee enhances its
already effective disclosure processes.
The earnings of banks and consumer finance companies, and therefore the
earnings of the Company (and its subsidiaries), are affected by the policies of
regulatory authorities, including the Board of Governors of the Federal Reserve
System. An important function of the Federal Reserve Board is to regulate the
national supply of bank credit in an effort to prevent recession and to restrain
16
================================================================================
inflation. Among the procedures used to implement these objectives are open
market operations in U.S. Government securities, changes in the discount rate on
member bank borrowings, and changes in reserve requirements against member bank
deposits. These procedures are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, and their use
also may affect interest rates charged on loans or paid for deposits. Monetary
policies of the Federal Reserve Board have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The effect, if any, of such policies upon the future
business and earnings of the Company cannot accurately be predicted. The Company
makes no attempt to predict the effect on its revenues and earnings of changes
in general economic, industrial, and international conditions or in legislation
and governmental regulations. The Company is not able to predict the impact of
such laws or governmental regulations on its financial condition or results of
operations at this time.
Business Risks
- --------------
Except for the historical information contained herein, the matters
discussed in this Form 10-K include certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, all statements regarding the intent, belief
and expectations of the Company and its management, such as statements
concerning the Company's future profitability. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, factors detailed from time to time in the Company's filings with the
SEC. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate. Therefore, there can be no assurance that the
forward-looking statements included in this Form 10-K will prove to be accurate,
and in light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a presentation by the Company or any other person that the
objectives and plans of the Company will be achieved.
Growth Strategy. The Company has pursued and continues to pursue a
strategy of growth. The success of the Company's growth strategy will depend
largely upon its ability to manage its credit risk and control its costs while
providing competitive products and services. This growth strategy may present
special risks, such as the risk that the Company will not efficiently handle
growth with its present operations, the risk of dilution of book value and
earnings per share as a result of an acquisition, the risk that earnings will be
adversely affected by the start-up costs associated with establishing new
products and services, the risk that the Company will not be able to attract and
retain qualified personnel needed for expanded operations, and the risk that its
internal monitoring and control systems may prove inadequate.
Control by Management; Anti-Takeover Provisions. Evan E. Davis, John D.
Kidd and D. Bruce Knox (the "Principal Stockholders") beneficially own in the
aggregate approximately 21.8% of the outstanding shares of Common Stock of the
Company at December 31, 2004. In addition to Ohio and federal laws and
regulations governing changes in control of insured depository institutions, the
Company's Articles of Incorporation and Code of Regulations contain certain
provisions that may delay or make more difficult an acquisition of control of
the Company. For example, the Company's Articles of Incorporation do not exempt
the Company from the provisions of Ohio's "control share acquisition" and
"merger moratorium" statutes. Assuming that the Principal Stockholders continue
to retain the number of the outstanding voting shares of the Company that they
presently own and the law of Ohio requires, as it presently does, at least
two-thirds majority vote of the outstanding shares to approve a merger or other
consolidation, unless the articles of incorporation of the constituent companies
provide for a lower approval percentage for the transaction, which the Company's
articles do not provide, such ownership position could be expected to deter any
prospective acquirer from seeking to acquire ownership or control of the
Company, and the Principal Stockholders would be able to defeat any acquisition
proposal that requires approval of the Company's stockholders, if the Principal
Stockholders chose to do so. In addition, the Principal Stockholders may make a
private sale of shares of common stock of the Company that they own, including
to a person seeking to acquire ownership or control of the Company. The Company
has 3,000,000 shares of authorized but unissued preferred stock, par value $ .01
per share, which may be issued in the future with such rights, privileges and
preferences as are determined by the Board of Directors of the Company. In
December 1997, the Board of Directors of the Company approved and adopted a
stockholder rights plan that contemplates the issuance of rights to purchase
preferred stock of the Company to the Company's common stockholders of record as
of February 17, 1998, as set forth in the Rights Agreement entered into between
the Company and Fifth Third Bank on January 23, 1998. On December 26, 2000, the
Company amended the Rights Agreement to appoint Registrar and Transfer Company
as successor Rights Agent under the Rights Agreement due to the resignation of
Fifth Third Bank as Rights Agent. The Board of Directors of the Company approved
the appointment of Registrar and Transfer Company pursuant to a resolution dated
November 14, 2000. John D. Kidd and Evan E. Davis also have entered into a
Buy-Sell Agreement dated April 11, 2001 (the "Agreement"), whereby in the event
of either one's death, the survivor shall have the right to purchase some or all
of the shares of the Company held by the deceased's estate. In connection with
the Agreement, Mr. Kidd and Mr. Davis each have executed a Limited Power of
Attorney giving the other sole right, power and authority to vote all of the
shares of the Company that he holds in the event of his incapacity.
Limited Trading Market; Shares Eligible for Future Sale; Possible
Volatility of Stock Price. The Common Stock is traded on the Nasdaq National
Market under the symbol "OAKF." During the 12 months ending March 11, 2005, the
average weekly trading volume in the Common Stock has been approximately 59,000
shares per week. There can be no assurance given as to the
17
================================================================================
liquidity of the market for the Common Stock or the price at which any sales may
occur, which price will depend upon, among other things, the number of holders
thereof, the interest of securities dealers in maintaining a market in the
Common Stock and other factors beyond the control of the Company. The market
price of the Common Stock could be adversely affected by the sale of additional
shares of Common Stock owned by the Company's current shareholders. The
Principal Shareholders are permitted to sell certain limited amounts of Common
Stock without registration, pursuant to Rule 144 under the Securities Act. The
market price for the Common Stock could be subject to significant fluctuations
in response to variations in quarterly and yearly operating results, general
trends in the banking industry and other factors. In addition, the stock market
can experience price and volume fluctuations that may be unrelated or
disproportionate to the operating performance of affected companies. These broad
fluctuations may adversely affect the market price of the Common Stock.
Dependence on Management. The Company's success depends to a great extent
on its senior management, including its Chairman, John D. Kidd; President and
Chief Executive Officer, R. E. Coffman, Jr.; Executive Vice President and Chief
Administrative Officer, David G. Ratz; Vice President, Scott J. Hinsch, Jr.;
Executive Vice President, Chief Financial Officer, Secretary and Treasurer, Ron
J. Copher; and Executive Vice President and Chief Information Officer, D. Bruce
Knox. The loss of their individual services could have a material adverse impact
on the Company's financial stability and its operations. In addition, the
Company's future performance depends on its ability to attract and retain key
personnel and skilled employees, particularly at the senior management level.
The Company's financial stability and its operations could be adversely affected
if, for any reason, one or more key executive officers ceased to be active in
the Company's management. The Company does not own "key man" life insurance on
the lives of any of its senior management.
Competition. Banking institutions operate in a highly competitive
environment. The Company competes with other commercial banks, credit unions,
savings institutions, finance companies, mortgage companies, mutual funds, and
other financial institutions, many of which have substantially greater financial
resources than the Company. Certain of these competitors offer products and
services that are not offered by the Company and certain competitors are not
subject to the same extensive laws and regulations as the Company. Additionally,
consolidation of the financial services industry in Ohio and in the Midwest in
recent years has increased the level of competition. Recent and proposed
regulatory changes may further intensify competition in the Company's market
area.
Holding Company Structure; Government Regulations and Policies. The
Company is a financial holding company, which is substantially dependent on the
profitability of its subsidiaries and the upstream payment of dividends from Oak
Hill to the Company. Under state and federal banking law, the payment of
dividends by the Company and Oak Hill are subject to capital adequacy
requirements. The inability of Oak Hill to generate profits and pay such
dividends to the Company, or regulator restrictions on the payment of such
dividends to the Company even if earned, would have an adverse effect on the
financial condition and results of operations of the Company and the Company's
ability to pay dividends to the shareholders.
Item 2. Properties.
As of December 31, 2004 the registrant and its subsidiaries operate from
30 full-service banking offices and __ loan production offices in Ohio. In
addition, the Company operates two executive offices in Jackson, Ohio and an
operations center in Mason, Ohio. The offices are located in the following
counties:
===================================================================================
Subsidiaries
===================================================================================
Oak Hill Oak Hill Oak Hill
County Financial, Inc. Banks MPA Title Agency, LLC
===================================================================================
Athens -- 2 -- --
Brown -- 2 -- --
Butler -- 3 -- --
Franklin -- 2 -- --
Gallia -- 1 -- --
Hamilton -- 3 -- --
Hocking -- 1 -- --
Jackson(1) 1 6 1 --
Montgomery -- 1 -- --
Lawrence -- 1 -- --
Pickaway -- 1 -- --
Ross -- 4 -- --
Scioto -- 4 -- 1
Vinton -- 1 -- --
Warren(2) -- 3 -- --
===================================================================================
(1) Includes executive offices of Oak Hill Financial, Inc. and Oak
Hill Banks
(2) Includes operations center of Oak Hill Banks.
18
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The following table indicates which properties the Company leases, the
term of the lease and end of lease options. All leases are comparable to other
leases in the respective market areas and do not contain provisions detrimental
to the Company or its subsidiaries.
===========================================================================================================================
End of Lease Five Year Renewal Options
======================================================
Beginning
and Length of Term One Two Three
===========================================================================================================================
Chillicothe 02/01/93 5 years X
Chillicothe K-Mart 06/28/94 15 years No renewal options
West Portsmouth 02/18/97 8 years X
Jackson Walmart 10/28/98 5 years X
Oak Hill Banks Administrative Offices 09/15/04 4 years Three - 3-year renewal options
Columbus loan production 04/01/04 2 years No renewal options
Logan 10/1/00 5 years X
Delhi 03/01/97 10 years X
Middletown 08/19/99 5 years X
Oak Hill Title Agency, LLC 10/01/01 5 years No renewal options
Fairfield loan production 05/20/02 2 years Two - 1-year renewal options
Centerville 12/19/03 10 years X
Athens loan production 12/11/01 40 months Two - 3-year renewal options
Mason 06/01/02 5 years X
MPA 12/01/02 5 years X
===========================================================================================================================
Item 3. Legal Proceedings.
Except for routine litigation incident to their business, the registrant
and its subsidiaries are not a party to any material pending legal proceedings
and none of their property is the subject of any such proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to the shareholders during the fourth quarter of
2004.
19
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PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters.
SHAREHOLDER INFORMATION
The common stock of the Company is traded on the Nasdaq National Market
System under the symbol "OAKF."
The high and low sales prices for the Company common stock during each
quarter of 2004 and 2003 are as follows:
Quarter
Ended High Low
12/31/04 $39.25 $34.54
09/30/04 35.49 31.40
06/30/04 33.00 30.86
03/31/04 34.00 30.10
12/31/03 33.80 28.40
09/30/03 30.00 24.90
06/30/03 25.90 23.52
03/31/03 24.77 21.23
At March 18, 2005 the Company had approximately 2,400 stockholders and
5,577,903 shares of common stock outstanding.
Dividends. The ability of the Company to pay cash dividends to
stockholders is limited by its ability to receive dividends from its subsidiary.
The State of Ohio places certain limitations on the payment of dividends by Ohio
state-chartered banks.
The Company declared the following dividends per share in 2004 and 2003:
Quarter Dividend
Ended Declared
----- --------
12/31/04 $0.17
09/30/04 0.15
06/30/04 0.15
03/31/04 0.15
12/31/03 0.15
09/30/03 0.13
06/30/03 0.13
03/31/03 0.13
Future cash and stock dividends will be subject to determination and
declaration by the Board of Directors of the Company, taking into consideration,
among other factors, the Company's financial condition and results of
operations, investment opportunities, capital requirements, and regulatory
limitations.
Stock Transfer Agent. Inquiries regarding stock transfer, registration,
lost certificates, or changes in name and address should be directed in writing
to the Company's stock transfer agent:
The Registrar and Transfer Company 10 Commerce Drive Cranford, NJ
07016-3572 (800) 456-0596
Annual Meeting of Shareholders. The Annual Meeting of Shareholders of Oak
Hill Financial, Inc. will be held on April 12, 2005 at 1:00 p.m. at the Ohio
State University Extension South District Office, 17 Standpipe Road, Jackson,
Ohio.
20
================================================================================
Item 6. Selected Financial Data
At or For the Year Ended December 31,
====================================================================================================================================
2004 2003 2002 2001 2000
====================================================================================================================================
(In thousands, except share data)
SUMMARY OF FINANCIAL CONDITION (1)(2)
Total assets $ 1,083,040 $ 938,281 $ 833,629 $ 778,332 $ 694,905
Interest-bearing deposits and federal funds sold 2,705 1,285 5,699 11,929 442
Investment securities 92,023 79,545 83,789 78,981 61,427
Loans receivable - net (3) 912,538 811,021 701,944 646,081 599,086
Deposits 862,096 717,821 663,813 612,204 562,414
Federal Home Loan Bank (FHLB) advances
and other borrowings 131,660 135,352 99,358 104,860 77,595
Stockholders' equity 85,043 79,928 66,881 56,349 50,224
SUMMARY OF OPERATIONS (1)(2)
Interest income $ 59,251 $ 55,170 $ 57,222 $ 59,704 $ 54,579
Interest expense 20,838 20,468 24,724 30,777 29,505
====================================================================================================================================
Net interest income 38,413 34,702 32,498 28,927 25,074
Provision for losses on loans 3,136 3,347 2,757 2,591 2,263
====================================================================================================================================
Net interest income after provision for
losses on loans 35,277 31,355 29,741 26,336 22,811
Gain on sale of loans 1,882 4,489 2,358 1,385 174
Gain on sale of branch -- -- 122 900 --
Gain (loss) on sale of assets (47) 333 331 27 (328)
Insurance commissions 3,050 2,827 2,457 2,203 2,090
Loss on sale of consumer finance loan portfolio
and related assets (3,585) -- -- -- --
Other income 5,370 3,889 2,845 2,676 2,498
General, administrative and other expense (4) 26,944 24,049 22,663 20,672 17,734
====================================================================================================================================
Earnings before federal income tax 15,003 18,844 15,191 12,855 9,511
Federal income taxes 4,341 6,266 4,851 4,133 3,174
====================================================================================================================================
Net earnings $ 10,662 $ 12,578 $ 10,340 $ 8,722 $ 6,337
====================================================================================================================================
PER SHARE INFORMATION (5)
Basic earnings per share $ 1.92 $ 2.29 $ 1.94 $ 1.66 $ 1.17
Book value per share $ 15.30 $ 14.34 $ 12.46 $ 10.70 $ 9.51
====================================================================================================================================
====================================================================================================================================
At or For the Year Ended December 31,
====================================================================================================================================
2004 2003 2002 2001 2000
====================================================================================================================================
OTHER STATISTICAL AND OPERATING DATA
Return on average assets 1.07% 1.45% 1.26% 1.20% 0.99%
Return on average equity 12.89 17.08 16.76 16.45 12.98
Net interest margin (fully-taxable equivalent) 4.05 4.19 4.18 4.17 4.06
Interest rate spread during period 3.74 3.81 3.75 3.56 3.40
General, administrative and other expense
to average assets 2.70 2.77 2.77 2.85 2.76
Allowance for loan losses to nonperforming loans 186.83 133.46 125.29 160.00 250.90
Allowance for loan losses to total loans 1.28 1.32 1.29 1.28 1.19
Nonperforming loans to total loans 0.69 0.99 1.03 0.80 0.47
Nonperforming assets to total assets 0.73 0.93 0.88 0.87 0.45
Net charge-offs to average loans 0.26 0.22 0.28 0.23 0.22
Equity to assets at period end 7.85 8.52 8.02 7.24 7.23
Dividend payout ratio 32.19 23.67 25.31 26.69 33.68
====================================================================================================================================
See the accompanying footnotes on the next page.
================================================================================
(1) Oak Hill Financial, Inc. (the "Company") completed an acquisition of
Ripley National Bank on October 9, 2004 for $5.3 million in cash, whereby
Oak Hill Banks and Ripley National Bank merged.
(2) 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
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 year ended December 31, 2000 have previously been restated as
if the merger had occurred on January 1, 2000.
(3) Includes loans held for sale.
(4) General, administrative and other expense for 2001 includes $259,000 in
pre-tax expenses incurred pursuant to the merger with MPA. Also includes
$160,000 in pre-tax expenses incurred in 2004 pursuant to the merger with
Ripley National Bank and the pending merger with Lawrence Financial
Holdings, Inc.
(5) Per share information gives retroactive effect to the issuance 172,414
shares in the MPA transaction.
21
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
Oak Hill Financial, Inc. (the "Company") is a financial holding company,
the principal assets of which have been its ownership of Oak Hill Banks ("Oak
Hill"), Towne Bank ("Towne"), Action Finance Company ("Action") and MPA Group
Insurance Specialists ("MPA"). Accordingly, the Company's results of operations
are primarily dependent upon its financial service subsidiaries, which are
collectively viewed as a single operating segment for financial statement
purposes.
During 2002, the Board of Directors of the Company, Oak Hill and Towne
approved a plan of reorganization 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 that consists of
attracting deposits from the general public and using those funds to originate
loans for commercial, consumer, and residential purposes. Action was a consumer
finance company that originated installment and home equity loans. MPA is an
insurance agency specializing in group health insurance and other employee
benefits.
Oak Hill's profitability depends primarily on its 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 October 9, 2004, the Company acquired Ripley National Bank ("Ripley")
for $5.3 million in cash. As part of the transaction, the Company acquired
full-service offices in Ripley and Georgetown, Ohio, involving total loans of
$39.1 million, $51.6 million in deposits and $58.6 million in total assets.
On December 31, 2004, the Company sold the consumer loan portfolio of
Action. The portfolio, which was comprised of small consumer and second mortgage
loans, totaled $8.7 million. Concurrent with the sale, the Company closed its
five retail lending offices in southern Ohio.
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, 2004, 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, 2004, and the results of operations for
the year ended December 31, 2004, 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
22
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limiting the foregoing, some of the forward-looking statements include
management's establishment of an allowance for loan losses, and its statements
regarding the adequacy of such allowance for loan losses, and management's
belief that the allowance for loan losses is adequate.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to use judgments in making estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses. The
following critical accounting policies are based upon judgments 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 Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for
Contingencies," and SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan." Both Statements require the Company to evaluate the collectibility of
both contractual interest and principal loan payments. SFAS No. 5 requires the
accrual of a loss when it is probable that a loan has been impaired and the
amount of the loss can be reasonably estimated. SFAS No. 114 requires that
impaired loans be measured based upon the present value of expected future cash
flows discounted at the loan's effective interest rate or, as an alternative, at
the loans' observable market price or fair value of the collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Company considers its investment in
one-to-four family residential loans, consumer installment loans and credit card
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. These homogeneous loan groups are evaluated for
impairment in accordance with SFAS No. 5. With respect to the Company's
investment in commercial and other loans, and its evaluation of impairment
thereof, management believes such loans are adequately collateralized and as a
result impaired loans are carried as a practical expedient at the lower of cost
or fair value. It is the Company's policy to charge off unsecured credits that
are more than ninety days delinquent. Similarly, collateral dependent loans
which are more than ninety days delinquent are considered to constitute more
than a minimum delay in repayment and are evaluated for impairment under SFAS
No. 114 at that time.
Mortgage Servicing Rights: Mortgage servicing rights are accounted for
pursuant to the provisions of SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
requires that the Company recognize as separate assets, rights to service
mortgage loans for others, regardless of how those servicing rights are
acquired. An
23
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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.
Goodwill and Other Intangible Assets. The Company has recorded goodwill
and core deposit intangibles as a result of merger and acquisition activity.
Goodwill represents the excess purchase price paid over the net book
value of the assets acquired in a merger or acquisition. Pursuant to SFAS No.
142, "Goodwill and Intangible Assets," goodwill is not amortized, but is tested
for impairment at the reporting unit annually and whenever an impairment
indicator arises. The evaluation involves assigning assets and liabilities to
reporting units and comparing the fair value of each reporting unit to its
carrying value including goodwill. If the fair value of a reporting unit exceeds
its carrying amount, goodwill is not considered impaired. However, if the
carrying amount of the reporting unit exceeds the fair value, goodwill is
considered impaired. The impairment loss equals the excess of carrying value
over fair value.
Core deposit intangibles represent the value of long-term deposit
relationships and are amortized over their estimated useful lives. The Company
annually evaluates these estimated useful lives. If the Company determines that
events or circumstances warrant a change in these estimated useful lives, the
Company will adjust the amortization of the core deposit intangibles, which
could affect future amortization expense.
FINANCIAL CONDITION
The Company's total assets amounted to $1.1 billion as of December 31,
2004, an increase of $144.8 million, or 15.4%, over the $938.3 million total at
December 31, 2003. The increase was funded primarily through growth in deposits
of $144.3 million, an increase of $13.0 million in subordinated debentures and
an increase in stockholders' equity of $5.1 million, which were partially offset
by a $17.3 million decrease in Federal Home Loan Bank advances and a $400,000
decrease in notes payable.
Cash and due from banks, federal funds sold, and investment securities,
including mortgage-backed securities, increased by $24.0 million, or 23.9%, to a
total of $124.0 million at December 31, 2004, compared to December 31, 2003.
Investment securities increased by $12.5 million, as purchases of $45.7 million
and the acquisition of $5.4 million of securities acquired in the Ripley
National Bank merger exceeded maturities and repayments of $23.4 million and
sales of $13.9 million. Federal funds sold increased by $865,000 during 2004.
Loans receivable totaled $912.5 million at December 31, 2004, an increase
of $101.5 million, or 12.5%, over total loans at December 31, 2003. Loan
disbursements totaled $464.8 million during 2004, including $39.1 million
acquired in the Ripley National Bank merger, which were partially offset by loan
sales of $58.3 million and principal repayments of $338.6 million during 2004.
Loan disbursements and sales volume decreased by $156.2 million and $118.2
million, respectively, as compared to 2003 volume. Growth in the loan portfolio
during 2004 was comprised of a $70.4 million, or 13.7%, increase in commercial
and other loans and a $34.9 million, or 14.8%, increase in real estate mortgage
loans, which were partially offset by a $3.0 million, or 4.3%, decrease in
installment loans. The Company's allowance for loan losses totaled $11.8 million
at December 31, 2004, an increase of $1.0 million, or 9.3%, over the total at
December 31, 2003. The allowance for loan losses represented 1.28% and 1.32% of
the total loan portfolio at December 31, 2004 and 2003, respectively. Net
charge-offs totaled $2.3 million and $1.7 million for the years ended December
31, 2004 and 2003, respectively. The Company's allowance represented 186.8% and
133.5% of nonperforming loans, which totaled $6.3 million and $8.1 million at
December 31, 2004 and 2003, respectively. At December 31, 2004, nonperforming
loans were comprised of $603,000 in installment loans, $2.5 million of loans
secured primarily by commercial real estate and $3.2 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, 2004.
Deposits totaled $862.1 million at December 31, 2004, an increase of
$144.3 million, or 20.1%, over the $717.8 million total at December 31, 2003.
The increase resulted primarily from brokered deposits and management's
marketing efforts to attract demand
24
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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 $140.7 million with a
weighted-average cost of 2.71% at December 31, 2004, as compared to the $93.6
million in brokered deposits with a 3.04% weighted-average cost at December 31,
2003. Proceeds from deposit growth were used primarily to fund loan
originations.
Advances from the Federal Home Loan Bank totaled $105.6 million at
December 31, 2004, a decrease of $17.3 million, or 14.1%, from the December 31,
2003 total. During 2004, management reduced its reliance on advances from the
Federal Home Loan Bank in favor of procuring more demand deposit accounts and
competitively-priced certificates of deposit. Proceeds from the Federal Home
Loan Bank advances were used primarily to fund loan originations during the year
During 2004, a Delaware statutory business trust owned by the Company, Oak
Hill Capital Trust 2 ("Trust 2"), issued $5.0 million of mandatorily redeemable
debt securities. The debt securities issued by Trust 2 are included in the
Company's regulatory capital, specifically as a component of Tier 1 capital. The
proceeds from the issuance of the subordinated debentures and common securities
were used by Trust 2 to purchase from the Company $5.0 million of subordinated
debentures maturing on October 18, 2034. The subordinated debentures are the
sole asset of Trust 2, and the Company owns all of the common securities of
Trust 2. Interest payments on the debt securities are to be made quarterly at an
annual fixed rate of interest of 6.24% through October 18, 2009 and at a
floating rate of interest, reset quarterly, equal to 3-month LIBOR plus 2.40%
thereafter. Interest payments are reported as a component of interest expense on
borrowings. The net proceeds received by the Company were contributed to the
capital of Oak Hill during the current year.
On October 1, 2004, a Delaware statutory business trust owned by the
Company, Oak Hill Capital Trust 3 ("Trust 3"), issued $8.0 million of
mandatorily redeemable debt securities. The debt securities issued by Trust 3
are included in the Company's regulatory capital, specifically as a component of
Tier 1 capital. The proceeds from the issuance of the subordinated debentures
and common securities were used by Trust 3 to purchase from the Company $8.0
million of subordinated debentures maturing on October 18, 2034. The
subordinated debentures are the sole asset of Trust 3, and the Company owns all
of the common securities of Trust 3. Interest payments on the debt securities
are to be made quarterly at a floating rate of interest, reset quarterly, equal
to 3-month LIBOR plus 2.30%. Interest payments are reported as a component of
interest expense on borrowings. The net proceeds received by the Company will be
used for merger activity and general corporate purposes.
The Company's stockholders' equity amounted to $85.0 million at December
31, 2004, an increase of $5.1 million, or 6.4%, over the balance at December 31,
2003. The increase resulted primarily from net earnings of $10.7 million and
proceeds from options exercised of $2.6 million, which were partially offset by
the Company's repurchase of 134,936 outstanding shares of its common stock at a
weighted-average price of $32.38 per share totaling $4.4 million, a decrease in
the unrealized gain on securities, net of tax, totaling $310,000 and $3.4
million in dividends declared on common stock.
SUMMARY OF EARNINGS
The table on page 30 shows for each category of interest-earning assets
and interest-bearing liabilities, the average amount outstanding, the interest
earned or paid on such amount, and the average rate earned or paid for the years
ended December 31, 2004, 2003 and 2002. The table also shows the average rate
earned on all interest-earning assets, the average rate paid on all
interest-bearing liabilities, the interest rate spread, and the net interest
margin for the same periods.
Changes in net interest income are attributable to either changes in
average balances (volume change) or changes in average rates (rate change) for
interest-earning assets and interest-bearing liabilities. Volume change is
calculated as change in volume times the old rate, while rate change is
calculated as change in rate times the old volume. The table on page 31
indicates the dollar amount of the change attributable to each factor. The
rate/volume change, the change in rate times the change in volume, is allocated
between the volume change and the rate change at the ratio each component bears
to the absolute value of their total.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND
2003
General. Net earnings for the year ended December 31, 2004 totaled $10.7
million, a $1.9 million, or 15.2%, decrease from 2003 net earnings. The decrease
in earnings resulted primarily from a $4.9 million decrease in other income,
which was partially offset by a $211,000 decrease in the provision for losses on
loans, a $3.7 million increase in net interest income, and a $1.9 million
decrease in the provision for federal income taxes.
Net Interest Income. Total interest income for the year ended December 31,
2004, amounted to $59.3 million, an increase of $4.1 million, or 7.4%, from the
total recorded for 2003. Interest income on loans totaled $55.5 million, an
increase of $3.5 million, or 6.8%, from the 2003 period. This increase resulted
primarily from a $115.3 million, or 15.3%, increase in the weighted-average
("average") portfolio balance, to a total of $869.8 million in 2004, which was
partially offset by a 50 basis point decrease in the average fully-taxable
equivalent yield, to 6.41% in 2004 from 6.91% in 2003. Interest income on
investment securities and other interest-earning assets increased by $550,000,
or 17.4%. The increase resulted primarily from a 31 basis point increase in the
average fully-taxable
25
================================================================================
equivalent yield, to 4.44% in 2004, coupled with a $7.3 million, or 8.5%,
increase in the average portfolio balance, to a total of $93.8 million in 2004.
Total interest expense amounted to $20.8 million for the year ended
December 31, 2004, a decrease of $370,000, or 1.8%, from the total recorded in
2003. Interest expense on deposits increased by $346,000, or 2.2%, to a total of
$15.9 million in 2004. The increase resulted primarily from a $103.6 million, or
16.9%, increase in the average portfolio balance, to a total of $714.9 million
in 2004, which was partially offset by a 32 basis point decrease in the average
cost of deposits, to 2.23% in 2004. Interest expense on borrowings increased by
$24,000, or 0.5%, during 2004. This increase was due to a $7.2 million, or 6.1%,
increase in average borrowings outstanding, which was partially offset by a 22
basis point decrease in the average cost of borrowings, to 3.95% in 2004. 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 2004 and 2003.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $3.7 million, or 10.7%, for the year
ended December 31, 2004, as compared to 2003. The interest rate spread decreased
by 7 basis points to 3.74% in 2004, compared to 3.81% in 2003. The fully-taxable
equivalent net interest margin decreased by 14 basis point from, 4.19% in 2003
to 4.05% in 2004.
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
$3.1 million provision for losses on loans for the year ended December 31, 2004,
a decrease of $211,000, or 6.3%, compared to 2003. The provision for losses on
loans in 2004 was predicated upon a decrease of $1.8 million in nonperforming
loans from $8.1 million in 2003 to $6.3 million at December 31, 2004, the $102.5
million of growth in the gross loan portfolio and net charge-offs in 2004 of
$2.3 million.
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, 2004, 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 $6.7 million for the year ended
December 31, 2004, a decrease of $4.9 million, or 42.2%, compared to the 2003
amount. This decrease resulted primarily from a $2.6 million, or 58.1%, decrease
in gain on sale of loans and a $3.6 million loss on the sale of Action's loan
portfolio and related assets, which were partially offset by a $1.5 million, or
38.1%, increase in service fees, charges, and other operating income and a
$223,000, or 7.9%, increase in insurance commissions. The decrease in gain on
sale of loans resulted from an expected decrease in the volume of loans sold
year-to-year, which was partially offset by an increase of $312,000, or 57.4%,
in gains on sales of the guaranteed portions of commercial loans originated
under the Small Business Administration's ("SBA") 7(a) program and other
commercial loans originated under the SBA 504 loan program. The increase in
commissions was due primarily to increased premiums realized on sales of group
health insurance. The increase in service charges, fees and other income was due
primarily to an increase in overdraft fees totaling $452,000, or 17.7%, over the
total recorded in 2003, as a result of a new overdraft protection program
implemented in late March 2003, coupled with a $698,000, or 54.3%, decrease in
amortization and impairment of mortgage servicing rights.
General, Administrative and Other Expense. General, administrative and
other expense totaled $26.9 million for the year ended December 31, 2004, an
increase of $2.9 million, or 12.0%, over the 2003 total. The increase resulted
primarily from a $318,000, or 2.2%, increase in employee compensation and
benefits, a $1.1 million, or 16.9%, increase in other operating expenses, an
increase of $490,000, or 16.8%, in occupancy and equipment and a $919,000
increase in franchise taxes. 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 expenses resulted from a
$194,000 increase in ATM costs associated with switching service providers,
coupled with an overall increase in ATM locations, a $175,000 increase in
professional fees, $160,000 in merger-related expenses in connection with the
previously mentioned Ripley merger, an $80,000 increase in credit and collection
expense, a $72,000 increase in amortization of intangibles and a $71,000
increase in consulting fees, which are based upon the increase in overdraft
fees. The remaining increase of $388,000, or 5.7%, 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 $109,000, or 14.7%, increase in rent expense, a $146,000, or 18.8%,
increase in maintenance contracts and a $160,000, or 16.3%, increase in
depreciation expense year-to-year. The increases in rent and depreciation
expenses are primarily attributable to new office locations. The increase in
franchise taxes was attributable to a tax savings for 2003 resulting from the
previously mentioned Oak Hill-Towne merger in 2002.
Federal Income Taxes. The provision for federal income taxes amounted to
$4.3 million for the year ended December 31, 2004, a decrease of $1.9 million,
or 30.7%, compared to the $6.3 million recorded in 2003. The decrease resulted
primarily from a $3.8 million, or 20.4%, decrease in earnings before taxes,
coupled with $500,000 in new markets tax credits pursuant to Oak Hill's
26
================================================================================
$10.0 million qualified equity investments in Oak Hill Banks Community
Development Corp. The effective tax rates were 28.9% and 33.3% for the years
ended December 31, 2004 and 2003, respectively.
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 anticipated that non-interest income overall would be
less in 2004 compared to 2003, and the gain on sale of one-to-four family
residential loans would be substantially lower, management deployed its
origination efforts to increase sales of commercial loans originated under the
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
focusing its efforts to increase deposit account service charges, title
insurance, health insurance, and brokerage services.
27
================================================================================
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 primarily attributable to new office locations. The decrease in
franchise taxes was attributable to a tax savings for 2003 resulting from the
Oak Hill-Towne merger in 2002. The decrease in merger-related expenses was due
to the absence of $367,000 in costs 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.
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, 2004, the Company had $239.2 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 $274.2 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, 2004, the Company had $105.6 million of outstanding
FHLB advances.
The Company engages in off-balance sheet credit-related activities that
could require the Company to make cash payments in the event that specified
future events occur. The contractual amounts of these activities represent the
maximum exposure to the Company. However, certain off-balance sheet commitments
are expected to expire or be only partially used; therefore, the total amount of
commitments does not necessarily represent future cash requirements. These
off-balance sheet activities are necessary to meet the financing needs of the
Company's customers. At December 31, 2004, the Company had total off-balance
sheet contractual commitments consisting of $21.7 million in loan commitments,
or loans committed but not closed, $139.9 million in unused lines of credit and
letters of credit totaling $15.2 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, 2004, by expiration
period:
==========================================================================================
One year Two to After
(In thousands) or less three years three years Total
- ------------------------------------------------------------------------------------------
Loan commitments $ 21,732 $ -- $ -- $ 21,732
Unused lines of credit 70,447 21,435 48,032 139,914
Letters of credit 925 4,310 10,000 15,235
- ------------------------------------------------------------------------------------------
$ 93,104 $ 25,745 $ 58,032 $176,881
==========================================================================================
28
================================================================================
The table below details the amount of contractual obligations outstanding
at December 31, 2004, by expiration period:
===================================================================================================================
One year Two to After
(In thousands) or less three years three years Total
- -------------------------------------------------------------------------------------------------------------------
Advances from the Federal Home Loan Bank $ 43,426 $ 7,902 $ 54,273 $105,601
Guaranteed preferred beneficial interests in
the Corporation's junior subordinated debentures -- -- 18,000 18,000
Lease obligations 614 953 1,471 3,038
- -------------------------------------------------------------------------------------------------------------------
$ 44,040 $ 8,855 $ 73,744 $126,639
===================================================================================================================
MANAGEMENT'S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting that is designed to provide reasonable
assurance of the reliability of financial reporting and the preparation of
financial statements in accordance with U.S. generally accepted accounting
principles. Management assessed the effectiveness of its internal control over
financial reporting as of December 31, 2004, in relation to criteria for
effective internal control over financial reporting as described in "Internal
Control - Integrated Framework," issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO criteria). Management's
assessment reflects exceptions to the operating effectiveness of the system of
internal controls in the lending function, principally related to loan
approvals, none of which gave rise to adjustments to the Company's audited
financial statements.
Grant Thornton LLP, independent registered public accounting firm, has
audited management's assessment included in Management's Assessment of Internal
Control Over Financial Reporting as of December 31, 2004, based on COSO
criteria. See Item 9A of the Company's annual report on Form 10-K for
management's assessment and Grant Thornton's attestation reports on internal
controls over financial reporting.
29
================================================================================
AVERAGE BALANCE AND INTEREST RATES
Year Ended December 31,
------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------------------------------------------
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 $869,849 $ 55,734 6.41% $754,519 $ 52,138 6.91% $690,544 $ 52,797 7.65%
Investment securities 90,415 4,119 4.56 84,277 3,551 4.21 92,580 4,853 5.24
Federal funds sold 929 15 1.61 699 7 1.00 7,499 119 1.59
Interest-earning deposits 2,472 28 1.13 1,508 18 1.19 230 10 4.35
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-
earnings assets 963,665 59,896 6.22 841,003 55,714 6.62 790,853 57,779 7.31
Non-interest earning assets 33,361 27,003 27,459
-------- -------- --------
Total assets $997,026 $868,006 $818,312
======== ======== ========
Interest-bearing liabilities:
Deposits:
Savings accounts $ 52,292 195 0.37 $ 47,385 295 0.62 $ 43,588 485 1.11
NOW accounts 70,990 804 1.13 61,200 839 1.37 62,003 1,204 1.94
Money market deposit accounts 7,930 31 0.39 7,993 56 0.70 7,951 108 1.36
Premium & select investments 74,364 967 1.30 71,848 812 1.13 69,657 1,249 1.79
Certificates of deposit 509,340 13,926 2.73 422,905 13,575 3.21 409,656 16,608 4.05
Borrowings 124,514 4,915 3.95 117,328 4,891 4.17 101,818 5,070 4.98
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 839,430 20,838 2.48 728,659 20,468 2.81 694,673 24,724 3.56
----------------- ----------------- -------------------
Non interest-bearing
liabilities 74,888 35,706 61,962
Stockholders' equity 82,708 73,641 61,677
-------- -------- --------
Total liabilities and
stockholders' equity $997,026 $868,006 $818,312
======== ======== ========
Net interest income and
interest rate spread $ 39,058 3.74% $ 35,246 3.81% $ 33,055 3.75%
================= ================= ===================
Net interest margin (1) 4.05% 4.19% 4.18%
====== ====== ======
Average interest-earning
assets to average
interest-bearing liabilities 114.80% 115.42% 113.85%
====== ====== ======
Adjustment of interest
income to a tax-equivalent
basis on tax-exempt:
Loans and investment
securities $ 645 $ 544 $ 557
======== ======== ========
(1) The net interest margin is net interest income divided by average
interest-earning assets.
30
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RATE/VOLUME TABLE
Year Ended December 31,
------------------------------------------------------------------------
2004 vs. 2003 2003 vs. 2002
------------------------------------------------------------------------
Increase (decrease) due to Increase (decrease) due to
(In thousands) Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------------------------
Interest income attributable to:(1)
Loans receivable $ 7,554 $(3,958) $ 3,596 $ 4,693 $(5,352) $ (659)
Investment securities 100 468 568 (506) (796) (1,302)
Federal funds sold 3 5 8 (79) (33) (112)
Interest-earning deposits with banks 11 (1) 10 9 (1) 8
- ----------------------------------------------------------------------------------------------------------------------
Total interest income $ 7,668 $(3,486) $ 4,182 $ 4,117 $(6,182) $(2,065)
======================================================================================================================
Interest expense attributable to:
Deposits:
Savings accounts $ 10 $ (110) $ (100) $ 29 $ (219) $ (190)
NOW accounts 101 (136) (35) (2) (363) (365)
Money market deposit accounts (2) (23) (25) 2 (54) (52)
Premium & select investments 42 113 155 35 (472) (437)
Certificates of deposit 2,235 (1,884) 351 503 (3,536) (3,033)
Borrowings 289 (265) 24 711 (890) (179)
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense $ 2,675 $(2,305) $ 370 $ 1,278 $(5,534) $(4,256)
======================================================================================================================
Increase in net interest income $ 3,812 $ 2,191
======================================================================================================================
(1) Presented on a tax-equivalent basis.
================================================================================
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
This information is presented in "Asset and Liability Management" on pages
12 through 14 of this report.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements of the Company, together with the
reports thereon of Grant Thornton LLP (dated March 17, 2005) are set forth on
pages 44 through 75 hereof (see Item 15 of this Annual Report for Index).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial disclosure.
Not Applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
- ----------------------------------
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 (the "Exchange
Act"). The Company's disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed in the Company's
reports under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, and that such information is accumulated and communicated to
management, including the Company's Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
Internal control over financial reporting may not prevent or detect
misstatements due to its inherent limitations. Projections of any evaluation
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
31
================================================================================
Management's Report on Internal Control Over Financial Reporting
- ----------------------------------------------------------------
Management conducted an evaluation of the effectiveness of internal
control over financial reporting as of December 31, 2004 based on the framework
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The scope of the evaluation
encompassed all branches of its primary subsidiary Oak Hill Banks with the
exception of the two branches acquired in the Ripley National Bank merger in
October 2004. The two branches acquired accounted for approximately $38.8
million, or 4.2%, of loans receivable and approximately $99,000, or 0.9% of net
earnings of the Company at and for the twelve months ended December 31, 2004.
The following material weaknesses were identified during the evaluation:
o Incomplete documentation on loan approvals; and
o Incomplete documentation on wire transfer approvals.
Based on the evaluation, management concluded that the Company's internal
control over financial reporting was not effective at December 31, 2004. To
address the material weaknesses identified, management will monitor adherence to
existing controls and implement additional controls, as necessary, with respect
to loan and wire transfer approvals. Management's assessment of internal
controls over financial reporting has been audited by Grant Thornton LLP, an
independent registered accounting firm, as stated in their report included
herein.
Report of Independent Registered Public Accounting Firm
- -------------------------------------------------------
Board of Directors and Shareholders of Oak Hill Financial, Inc.
We have audited management's assessment, included in the accompanying Management
Report on Internal Control over Financial Reporting, that Oak Hill Financial,
Inc. (the "Company") did not maintain effective internal control over financial
reporting as of December 31, 2004, because of the effect of the material
weaknesses identified in management's assessment, based on criteria established
by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO"). Oak Hill Financial, Inc.'s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of assets of the
company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of consolidated financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures mat deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim consolidated financial statements will not
be prevented or detected. The following material weaknesses have been identified
and included in management's assessment. There were instances where the Company
had incomplete documentation on loan and wire transfer approvals. These material
weaknesses were considered in determining the nature, timing, and extent of
audit tests applied in our audit of the 2004 consolidated financial statements,
and this report does not affect our report dated March 17, 2005, on those
financial statements.
32
================================================================================
In our opinion, management's assessment that Oak Hill Financial, Inc. did not
maintain effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on the control criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Also in our opinion,
because of the effect of the material weaknesses described above on the
achievement of the objectives of the control criteria, Oak Hill Financial, Inc.
has not maintained effective internal control over financial reporting as of
December 31, 2004, based on Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Oak Hill Financial, Inc.'s
consolidated statements of financial condition as of December 31, 2004 and 2003,
and the related statements of earnings, stockholders' equity comprehensive
income and cash flows for each of the three years in the period ended December
31, 2004, and our report dated March 17, 2005, expressed an unqualified opinion
on those financial statements.
GRANT THORNTON LLP
/s/ Grant Thornton LLP
Cincinnati, Ohio
March 17, 2005
Changes in Internal Control
- ---------------------------
There have not been any changes in the Company's internal control over
financial reporting during the quarter ended December 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company's control over financial reporting. As described above under
Management's Report on Internal Control Over Financial Reporting, the Company
has identified material weaknesses in its internal control over financial
reporting. The Company has made changes to its internal controls over financial
reporting during the first quarter of 2005 as part of its steps to remediate
such weaknesses.
Item 9B. Other Information
Effective December 21, 2004, the board of directors of Oak Hill Financial,
Inc. (the "Company") granted each of the non-employee directors of the Company
(Barry M. Dorsey, Candace DeClark Peace, Donald R. Seigneur, William Siders,
Neil S. Strawser, H. Grant Stephenson, and Donald P. Wood) options (the
"Director Options") to purchase 2,000 shares of the Company's common stock at a
strike price of $37.205 per share, exercisable June 15, 2005, and expiring ten
years after the date of grant.
Effective December 21, 2004, the governance and compensation committee of
the board of directors granted R. E. Coffman, Jr., Ron J. Copher, Scott J.
Hinsch, Jr., John D. Kidd, Bruce D. Knox, and David G. Ratz, options (the
"Executive Options") to purchase 3,000 shares, except in the case of Mr. Hincsh
who was granted options to purchase 4,000 shares and Mr. Coffman who was granted
options to purchase 10,000 shares, of the Company's common stock at a strike
price of $37.205 per share, exercisable June 15, 2005, and expiring ten years
after the date of grant.
The Director Options and Executive Options were granted under the
Company's 2004 Stock Incentive Plan. The form of Option Award Agreement is
attached as Exhibit 10.1 to this Annual Report on Form 10-K and is incorporated
herein by reference.
Effective December 21, 2004, the governance and compensation committee of
the board of directors granted 700 shares of restricted stock (the "Restricted
Stock") to each of Messrs. Coffman and Copher, such Restricted Stock subject to
vesting on December 21, 2007. The form of Restricted Stock Award Agreement is
attached as Exhibit 10.2 to this Annual Report on Form 10-K and is incorporated
herein by reference.
33
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PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The information is contained under "Ownership of Common Stock by
Management" and "Election of Directors" in the Company's Proxy Statement dated
March 18, 2005, is incorporated herein by reference in response to this item.
The information contained under "Report of the Audit Committee of the
Board of Directors", specifically concerning Audit Committee financial expert,
in the Company's Proxy Statement dated March 18, 2005, is incorporated herein by
reference in response to this item.
The information contained under "Compliance With Section 16(a) of the
Securities Exchange Act" in the Company's Proxy Statement dated March 18, 2005,
is incorporated herein by reference in response to this item.
The Company has adopted a Code of Ethics that applies to the Company's
directors, officers and employees including the Company's principal executive
officer, principal financial officer, principal accounting officer, controller
and other persons performing similar functions. The Code of Ethics may only be
amended or modified by the Board of Directors of the Company. Waivers of the
Code of Ethics may only be granted by the Board of Directors of the Company and
along with reasons for the waiver will be promptly disclosed as required by the
Securities Exchange Act of 1934 and the rules thereof and the applicable rules
of The Nasdaq Stock Market, Inc. In addition, amendments and modifications to
the Code of Ethics will be promptly disclosed to the Company's shareholders. A
copy of the Code of Ethics will be provided at no charge upon written request to
Oak Hill Financial, Inc., Attention: David G. Ratz, Chief Administrative
Officer, 14621 S.R. 93, Jackson, Ohio 45640.
Item 11. Executive Compensation.
The information appearing under "Executive Compensation" in the Company's
Proxy Statement dated March 18, 2005, is incorporated herein by reference in
response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholders Matters.
The information appearing under "Ownership of Common Stock by Principal
Shareholders", "Ownership of Common Stock By Management" and "Equity
Compensation Plan Information" in the Company's Proxy Statement dated March 18,
2005, is incorporated herein by reference in response to this item.
Item 13. Certain Relationships and Related Transactions.
The information appearing under "Certain Transactions" in the Company's
Proxy Statement dated March 18, 2005, is incorporated herein by reference in
response to this item.
Item 14. Principal Accountant Fees and Services
The information appearing under "Principal Independent Registered Public
Accounting Firm Fees" in the Company's Proxy Statement dated March 18, 2005, is
incorporated herein by reference in response to this item.
PART IV
Item 15. Exhibits and Reports on Form 8-K.
(a) Documents filed as a part of the Report:
(1) Report of Grant Thornton LLP, Independent Registered Public
Accounting Firm
Consolidated Statements of Financial Condition as of December 31,
2004 and 2003
Consolidated Statements of Earnings for years ended December 31,
2004, 2003 and 2002
Consolidated Statements of Comprehensive Income for years ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity for years ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for years ended December 31,
2004, 2003 and 2002
Notes to Consolidated Financial Statements for years ended December
31, 2004, 2003 and 2002
34
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(2) Financial Statement Schedules:
The information is contained in the Company's Annual Report to
Stockholders for the year ended December 31, 2004 is incorporated
herein by reference in response to this item.
(3) The following are filed as exhibits to this Annual Report on Form
10-K:
Exhibit
Number
* 2(a).....................Agreement and Plan of Merger, dated October 12,
2004, between Oak Hill Financial, Inc. and
Lawrence Financial Holdings, Inc. (reference is
made to Exhibit 2 included in Part I as
Appendix A of the Prospectus/Proxy Statement
filed by the Company on Form S-4/A with the
Securities and Exchange Commission ("SEC") on
January 6, 2005).
*2(b)......................Agreement and Plan of Merger, dated July 20,
2004, between Oak Hill Banks and Ripley
National Bank (reference is made to Exhibit
2(a) of the Current Report filed by the Company
on Form 8-K with the SEC on July 21, 2004).
*2(c)......................Supplemental Agreement, dated July 20, 2004,
between Oak Hill Financial, Inc., Oak Hill
Banks, and Ripley National Bank (reference is
made to Exhibit 2(b) of the Current Report
filed by the Company on Form 8-K with the SEC
on July 21, 2004).
* 2(d).....................Agreement and Plan of Merger, dated March 31,
1999, between Oak Hill Financial, Inc. and
Towne Financial Corporation (reference is made
to Exhibit 2.1 of the Prospectus/Proxy
Statement filed by the Company on Form S-4/A
with the SEC on August 3, 1999).
* 2(e).....................Supplemental Agreement, dated as of March 31,
1999, between Oak Hill Financial, Inc. and
Towne Financial Corporation (reference is made
to Exhibit 2.2 of the Prospectus/Proxy
Statement filed by the Company on Form S-4/A
with the SEC on August 3, 1999).
* 3(a).....................Fourth Amended and Restated Articles of
Incorporation (reference is made to Form S-4,
Exhibit 3.1, Registration No. 333-81645, filed
with the SEC on June 25, 1999 and incorporated
herein by reference).
* 3(b).....................Restated Code of Regulations (reference is made
to Form SB-2, Exhibit 3(ii), File No. 33-96216
and incorporated herein by reference).
*4(a)......................Reference is made to Articles FOURTH, FIFTH,
SEVENTH, EIGHTH, TENTH AND ELEVENTH of the
Registrant's Restated Articles of Incorporation
(contained in the Registrant's Restated
Articles of Incorporation filed as Exhibit 3(a)
hereto) and Articles II, III, IV, VI and VIII
of the Registrant's Amended and Restated Code
of Regulations (contained in the Registrant's
Amended and Restated Code of Regulations filed
as Exhibit 3(b) hereto).
*4(b)......................Rights Plan, dated January 23, 1998, between
Oak Hill Financial, Inc., and Fifth Third Bank,
(reference is made to Exhibit 4.1 to the Form
8-A, filed with the SEC on January 23, 1998 and
incorporated herein by reference).
*4(c)......................Amended Rights Plan, dated December 26, 2000,
between Oak Hill Financial, Inc., and Registrar
and Transfer Company, (reference is made to
Exhibit 2 to the Form 8-A12B/A, filed with the
SEC on February 21, 2001 and incorporated
herein by reference).
*10........................Oak Hill Financial, Inc. 2004 Stock Incentive
Plan (reference is made to Appendix 3 to the
Registrant's Definitive Proxy Statement for the
2004 Annual Meeting of Shareholders held on
April 13, 2004, filed with the SEC on March 11,
2004, and incorporated herein by reference).
10.1......................Form of Option Award Agreement under the
Company's 2004 Stock Incentive Plan.
10.2......................Form of Restricted Stock Award Agreement under
the Company's 2004 Stock Incentive Plan.
13........................2004 Annual Report (Selected portions)
*14........................Oak Hill Financial, Inc. & Subsidiaries Code of
Ethics
35
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*21........................Subsidiaries of the Registrant (reference is
made to Form SB-2, Exhibit 21, File No.
333-96216 and incorporated herein by
reference).
23........................Consent of Independent Registered Public
Accounting Firm, Grant Thornton LLP.
24........................Powers of Attorney.
31.1 .....................Certification by Chief Executive Officer, R. E.
Coffman, Jr., dated March 24, 2005, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 .....................Certification by Chief Financial Officer, Ron
J. Copher, dated March 24, 2005, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1......................Certification by Chief Executive Officer, R. E.
Coffman, Jr., dated March 24, 2005, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2......................Certification by Chief Financial Officer, Ron
J. Copher, dated March 24, 2005, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
*Incorporated by reference as indicated.
(b) Form 8-K's Filed:
1. Form 8-K, dated October 9, 2004, filed with the SEC on October 14,
2004 announcing the Company and Lawrence Financial Holdings, Inc.
had signed a Plan of Merger on October 12, 2004. Also announcing
that the Company had completed its previously announced merger with
Ripley National Bank on October 9, 2004.
2. Form 8-K, dated October 14, 2004, filed with the SEC on October 18,
2004 announcing the Company's results of operations and financial
condition for the three and nine months ended September 30, 2004.
3. Form 8-K, dated January 6, 2005, filed with the SEC on January 6,
2005 announcing the Company's sale of the consumer loan portfolio at
it subsidiary Action Finance Company on December 31, 2004.
4. Form 8-K, dated January 13, 2005, filed with the SEC on January 18,
2005 announcing the Company's results of operations and financial
condition for the three and twelve months ended December 31, 2004.
36
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
OAK HILL FINANCIAL, INC. Date
By: /s/ R. E. Coffman, Jr. March 24, 2005
-----------------------------------
R. E. Coffman, Jr., President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
*Evan E. Davis Director March 24, 2005
- ---------------------------
*John D. Kidd Chairman & Director March 24, 2005
- ---------------------------
/s/ R. E. Coffman, Jr. President, Chief Executive Officer and Director March 24, 2005
- --------------------------- (Principal Executive Officer)
*David G. Ratz Executive Vice President and Chief Administrative Officer March 24, 2005
- ---------------------------
*Ron J. Copher Chief Financial Officer, Secretary and Treasurer March 24, 2005
- --------------------------- (Principal Financial and Accounting Officer)
*D. Bruce Knox Chief Information Officer and Director March 24, 2005
- ---------------------------
*Scott J. Hinsch, Jr. Vice President March 24, 2005
- ---------------------------
*Candice R. DeClark-Peace Director March 24, 2005
- -------------------------
*Barry M. Dorsey, Ed.D. Director March 24, 2005
- ---------------------------
*Donald R. Seigneur Director March 24, 2005
- ---------------------------
*William S. Siders Director March 24, 2005
- ---------------------------
*H. Grant Stephenson Director March 24, 2005
*Neil S. Strawser Director March 24, 2005
- ---------------------------
*Donald P. Wood Director March 24, 2005
- ---------------------------
By: /s/ R. E. Coffman, Jr. March 24, 2005
-----------------------
R E. Coffman, Jr.,
Attorney-in-fact for each
Of the persons indicated
37