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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934 For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ___________ to
____________
Commission File Number 0-13507
RURBAN FINANCIAL CORP.
______________________________________________________________________
(Exact name of Registrant as specified in its charter)
Ohio 34-1395608
_______________________________ ___________________
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
401 Clinton Street, Defiance, Ohio 43512
________________________________________ __________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (419) 783-8950
Securities registered pursuant to Section 12(b) of the Act:
______________________________________________________________________
None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, Without Par Value (2,287,851 outstanding at March 1, 1997)
_______________________________________________________________________________
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [ ]
Based upon the average bid and asked prices of the Common Shares of the
Registrant on March 1, 1997, the aggregate market value of the Common Shares of
the Registrant held by non-affiliates on that date was $66,945,276.
Documents Incorporated by Reference:
Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting of Shareholders to be held on April 28, 1997 are incorporated by
reference into Part III of this Annual Report on Form 10-K.
Exhibit Index on Page 77
Page 1 of 111 Pages.
PART I
Item 1. Business.
General
Rurban Financial Corp., an Ohio corporation (the "Corporation"), is a
bank holding company under the Bank Holding Company Act of 1956, as amended, and
is subject to regulation by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). The executive offices of the Corporation are
located at 401 Clinton Street, Defiance, Ohio 43512.
Through its subsidiaries, The State Bank and Trust Company, Defiance,
Ohio ("State Bank"), The Peoples Banking Company, Findlay, Ohio ("Peoples
Bank"), The First National Bank of Ottawa ("First National Bank") and The
Citizens Savings Bank Company, Pemberville, Ohio ("Citizens Savings Bank"), the
Corporation is engaged in the business of commercial banking. The Corporation's
subsidiary, Rurbanc Data Services, Inc. ("RDSI"), is engaged in the related
business of providing data processing services, principally to banks. The
Corporation's subsidiary, Rurban Life Insurance Company ("Rurban Life"), is
engaged in the related business of accepting life and disability reinsurance
ceded in part by USLIFE Credit Life Insurance Company ("USLIFE") from the credit
life and disability insurance purchased by customers of the Corporation's
banking subsidiaries from USLIFE in connection with revolving credit loans
secured by mortgages and with certain installment loans made to such customers.
General Description of Holding Company Group
State Bank
State Bank is an Ohio state-chartered bank. State Bank presently
operates seven branch offices in Defiance County, Ohio (six in the city of
Defiance and one in Ney), one branch office in adjacent Paulding County, Ohio
and three branch offices in Fulton County, Ohio (one in each of Delta, Lyons and
Wauseon). At December 31, 1996, State Bank had 122 full-time equivalent
employees.
State Bank offers a full range of commercial banking services, including
checking and NOW accounts; passbook savings and money market accounts; automatic
teller machines; commercial, installment, agricultural and residential mortgage
loans (including "Home Value Equity" line of credit loans); personal and
corporate trust services; commercial leasing; bank credit card services; safe
deposit box rentals; and other personalized banking services. In addition, State
Bank serves as a correspondent (federal funds investing and check clearing
purposes) for three financial institutions in the region (Peoples Bank, First
National Bank and Citizens Savings Bank).
State Bank has received approval from the Office of the Comptroller of
the Currency (the "OCC") to organize Reliance Financial Services, N.A.
("Reliance") (in organization), a nationally-chartered trust and financial
services company. Reliance's charter will restrict its activities to the
performance of trust and trust-related services. It is anticipated that Reliance
will operate out of the same corporate offices used by the Corporation and State
Bank. At or near the time that Reliance receives final approval from the OCC to
commence operations, State Bank will transfer all of its trust services business
to Reliance. The management of Reliance anticipates that it will have 31
employees when it commences operations.
-2-
Peoples Bank
Peoples Bank is an Ohio state-chartered bank. The main office of Peoples
Bank is located in Findlay, Ohio. Peoples Bank provides checking and NOW
accounts; passbook savings and money market accounts; time certificates of
deposit; commercial loans and real estate mortgage loans; trust services; and
safe deposit box rental facilities. Peoples Bank operates two full-service
branches in Findlay and one in McComb, Ohio. Peoples Bank also operates a
residential mortgage loan production office located in Clearwater, Florida,
under the name "Rurban Mortgage Company". At December 31, 1996, Peoples Bank had
22 full-time equivalent employees.
First National Bank
First National Bank is a national banking association. The executive
offices of First National Bank are located at 405 East Main Street, Ottawa,
Ohio. At its present location, First National Bank operates four drive-in teller
lanes and an automatic teller machine with a traditional banking lobby on the
first floor. First National Bank presently operates no branch offices. At
December 31, 1996, First National Bank had 14 full-time equivalent employees.
First National Bank offers a full range of commercial banking services,
including checking and NOW accounts; passbook savings and money market accounts;
automatic teller machines; commercial, installment, agricultural and residential
mortgage loans; personal and corporate trust services; commercial leasing; bank
credit card services; safe deposit box rentals; and other personalized banking
services.
Citizens Savings Bank
Citizens Savings Bank is an Ohio state-chartered bank. The main office
of Citizens Savings Bank is located in Pemberville, Ohio. Citizens Savings Bank
provides checking and NOW accounts; passbook savings and money market accounts;
time certificates of deposit; commercial, installment, agricultural and
residential loans; personal and corporate trust services; commercial leasing;
bank credit card services; safe deposit box rentals; and other personalized
banking services. Citizens Savings Bank also operates a full-service branch in
Gibsonburg, Ohio. At December 31, 1996, Citizens Savings Bank had 26 full-time
equivalent employees.
RDSI
Substantially all of RDSI's business is comprised of providing data
processing services to 32 financial institutions primarily in the northwest area
of Ohio (including State Bank, Peoples Bank, First National Bank and Citizens
Savings Bank), including information processing for financial institution
customer services, deposit account information and data analysis. At December
31, 1996, RDSI had 33 full-time equivalent employees.
-3-
Rurban Life
Rurban Life commenced its business of transacting insurance as an
Arizona life and disability reinsurer in January, 1988. Rurban Life may accept
life and disability reinsurance ceded to Rurban Life by an insurance company
authorized to write life and disability insurance, provided that the amount
accepted does not exceed certain limitations imposed under Arizona law. Rurban
Life is not currently authorized to write life and disability insurance on a
direct basis. Rurban Life accepts reinsurance ceded in part by USLIFE from the
credit life and disability insurance purchased by customers of State Bank,
Peoples Bank, First National Bank and Citizens Savings Bank from USLIFE in
connection with revolving credit loans secured by mortgages and with certain
installment loans made to such customers by State Bank, Peoples Bank, First
National Bank and Citizens Savings Bank. The operations of Rurban Life do not
materially impact the consolidated results of operations of the Corporation. As
of December 31, 1996, Rurban Life has not accepted any other reinsurance. Rurban
Life does not currently intend to accept any other reinsurance in the immediate
future. At December 31, 1996, Rurban Life had no employees.
Competition
State Bank, Peoples Bank, First National Bank and Citizens Savings Bank
experience significant competition in attracting depositors and borrowers.
Competition in lending activities comes principally from other commercial banks
in the lending areas of State Bank, Peoples Bank, First National Bank and
Citizens Savings Bank, and, to a lesser extent, from savings associations,
insurance companies, governmental agencies, credit unions, securities brokerage
firms and pension funds. The primary factors in competing for loans are interest
rates charged and overall banking services.
Competition for deposits comes from other commercial banks, savings
associations, money market funds and credit unions as well as from insurance
companies and securities brokerage firms. The primary factors in competing for
deposits are interest rates paid on deposits, account liquidity and convenience
of office location.
RDSI also operates in a highly competitive field. RDSI competes
primarily on the basis of the value and quality of its data processing services,
and service and convenience to its customers.
Rurban Life operates in the highly competitive industry of credit life
and disability insurance. A large number of stock and mutual insurance companies
also operating in this industry have been in existence for longer periods of
time and have substantially greater financial resources than does Rurban Life.
The principal methods of competition in the credit life and disability insurance
industry are the availability of coverages, premium rates and quality of
service. The Corporation believes that Rurban Life has a competitive advantage
due to the fact that the business of Rurban Life is limited to the accepting of
life and disability reinsurance ceded in part by USLIFE from the credit life and
disability insurance purchased by loan customers of State Bank, Peoples Bank,
First National Bank and Citizens Savings Bank.
-4-
Supervision and Regulation
The following is a summary of certain statutes and regulations affecting
the Corporation and its subsidiaries. The summary is qualified in its entirety
by reference to such statutes and regulations.
The Corporation is a bank holding company under the Bank Holding Company
Act of 1956, as amended, which restricts the activities of the Corporation and
the acquisition by the Corporation of voting shares or assets of any bank,
savings association or other company. The Corporation is also subject to the
reporting requirements of, and examination and regulation by, the Federal
Reserve Board. Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on transactions with affiliates,
including any loans or extensions of credit to the bank holding company or any
of its subsidiaries, investments in the stock or other securities thereof and
the taking of such stock or securities as collateral for loans or extensions of
credit to any borrower; the issuance of guarantees, acceptances or letters of
credit on behalf of the bank holding company and its subsidiaries; purchases or
sales of securities or other assets; and the payment of money or furnishing of
services to the bank holding company and other subsidiaries. Bank holding
companies are prohibited from acquiring direct or indirect control of more than
5% of any class of voting stock or substantially all of the assets of any bank
holding company without the prior approval of the Federal Reserve Board. A bank
holding company and its subsidiaries are prohibited from engaging in certain
tying arrangements in connection with extensions of credit and/or the provision
of other property or services to a customer by the bank holding company or its
subsidiaries.
As a national bank, First National Bank is supervised and regulated by
the OCC. Reliance, as a nationally-chartered bank, will also be regulated by the
OCC. As Ohio state-chartered banks, State Bank, Peoples Bank and Citizens
Savings Bank are supervised and regulated by the Ohio Division of Financial
Institutions and the Federal Deposit Insurance Corporation ("FDIC"). The
deposits of State Bank, Peoples Bank, First National Bank and Citizens Savings
Bank are insured by the FDIC and those entities are subject to the applicable
provisions of the Federal Deposit Insurance Act. A subsidiary of a bank holding
company can be liable to reimburse the FDIC, if the FDIC incurs or anticipates a
loss because of a default of another FDIC-insured subsidiary of the bank holding
company or in connection with FDIC assistance provided to such subsidiary in
danger of default. In addition, the holding company of any insured financial
institution that submits a capital plan under the federal banking agencies'
regulations on prompt corrective action guarantees a portion of the
institution's capital shortfall, as discussed below.
Various requirements and restrictions under the laws of the United
States and the State of Ohio affect the operations of State Bank, Peoples Bank,
First National Bank and Citizens Savings Bank including requirements to maintain
reserves against deposits, restrictions on the nature and amount of loans which
may be made and the interest that may be charged thereon, restrictions relating
to investments and other activities, limitations on credit exposure to
correspondent banks, limitations on activities based on capital and surplus,
limitations on payment of dividends, and limitations on branching. Pursuant to
recent federal legislation, First National Bank may branch across state lines,
if permitted by the law of the other state. In addition, effective June 1997,
such interstate branching by First National Bank will be authorized, unless the
law of the other state specifically prohibits the interstate branching authority
granted by federal law.
-5-
The Federal Reserve Board has adopted risk-based capital guidelines for
bank holding companies and for state member banks, such as State Bank and
Citizens Savings Bank. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk weighted assets by
assigning assets and off-balance-sheet items to broad risk categories. The
minimum ratio of total capital to risk weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8%. At least 4.0
percentage points is to be comprised of common stockholders' equity (including
retained earnings but excluding treasury stock), noncumulative perpetual
preferred stock, a limited amount of cumulative perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and certain other intangible assets ("Tier 1 capital"). The remainder
("Tier 2 capital") may consist, among other things, of mandatory convertible
debt securities, a limited amount of subordinated debt, other preferred stock
and a limited amount of allowance for loan and lease losses. The Federal Reserve
Board also imposes a minimum leverage ratio (Tier 1 capital to total assets) of
4% for bank holding companies and state member banks that meet certain specified
conditions, including no operational, financial or supervisory deficiencies, and
including having the highest regulatory rating. The minimum leverage ratio is
1.0-2.0% higher for other bank holding companies and state member banks based on
their particular circumstances and risk profiles and those experiencing or
anticipating significant growth. National bank subsidiaries, such as First
National Bank, are subject to similar capital requirements adopted by the
Comptroller of the Currency, and state non-member bank subsidiaries, such as
Peoples Bank, are subject to similar capital requirements adopted by the FDIC.
Under an outstanding proposal of the Comptroller and the FDIC to establish an
interest rate risk component, First National Bank, State Bank, Peoples Bank and
Citizens Savings Bank may be required to have additional capital if their
interest rate risk exposure exceeds acceptable levels provided for in the
regulation when adopted.
The Corporation and its subsidiaries currently satisfy all capital
requirements. Failure to meet applicable capital guidelines could subject a
banking institution to a variety of enforcement remedies available to federal
and state regulatory authorities, including the termination of deposit insurance
by the FDIC.
The federal banking regulators have established regulations governing
prompt corrective action to resolve capital deficient banks. Under these
regulations, institutions which become undercapitalized become subject to
mandatory regulatory scrutiny and limitations, which increase as capital
continues to decrease. Such institutions are also required to file capital plans
with their primary federal regulator, and their holding companies must guarantee
the capital shortfall up to 5% of the assets of the capital deficient
institution at the time it becomes undercapitalized.
The ability of a bank holding company to obtain funds for the payment of
dividends and for other cash requirements is largely dependent on the amount of
dividends which may be declared by its subsidiary banks and other subsidiaries.
However, the Federal Reserve Board expects the Corporation to serve as a source
of strength to its subsidiary banks, which may require it to retain capital for
further investment in the subsidiaries, rather than for dividends for
shareholders of the Corporation. State Bank, Peoples Bank, First National Bank
and Citizens Savings Bank may not pay dividends to the Corporation if, after
paying such dividends, they would fail to meet the required minimum levels under
the risk-based capital guidelines and the minimum leverage ratio requirements.
State Bank, Peoples Bank, First National Bank and Citizens Savings Bank must
have the approval of their respective regulatory authorities if a dividend in
any year would cause the total dividends for that year to exceed the sum of the
-6-
current year's net profits and the retained net profits for the preceding two
years, less required transfers to surplus. Payment of dividends by the bank
subsidiaries may be restricted at any time at the discretion of the regulatory
authorities, if they deem such dividends to constitute an unsafe and/or unsound
banking practice. These provisions could have the effect of limiting the
Corporation's ability to pay dividends on its outstanding common shares.
Rurban Life is chartered by the State of Arizona and is subject to
regulation, supervision, and examination by the Arizona Department of Insurance.
The powers of regulation and supervision of the Arizona Department of Insurance
relate generally to such matters as minimum capitalization, the grant and
revocation of certificates of authority to transact business, the nature of and
limitations on investments, the maintenance of reserves, the form and content of
required financial statements, reporting requirements and other matters
pertaining to life and disability insurance companies.
Deposit Insurance Assessments and Recent Legislation
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance for members of the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF"). State Bank, Peoples Bank, First National
Bank and Citizens Savings Bank are members of BIF. The FDIC may increase
assessment rates for either fund if necessary to restore the fund's ratio of
reserves to insured deposits to its target level within a reasonable time and
may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both BIF and SAIF members. Under
this system, assessments vary based on the risk the institution poses to its
deposit insurance fund. The risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the institution.
Because BIF became fully funded, BIF assessments for healthy commercial
banks were reduced to, in effect, $2,000 per year, during 1996. Federal
legislation, which became effective September 30, 1996, provides, among other
things, for the costs of prior thrift failures to be shared by both BIF and
SAIF. As a result of such cost sharing, BIF assessments for healthy banks during
1997 will be $.013 per $100 in deposits. Based upon their respective level of
deposits at December 31, 1996, the projected BIF assessments for State Bank,
Peoples Bank, First National Bank and Citizens Savings Bank for 1997 would be
$30,000, $7,000, $5,000 and $7,000, respectively.
Monetary Policy and Economic Conditions
The commercial banking business is affected not only by general economic
conditions, but also by the policies of various governmental regulatory
authorities, including the Federal Reserve Board. The Federal Reserve Board
regulates money and credit conditions and interest rates in order to influence
general economic conditions primarily through open market operations in U.S.
Government securities, changes in the discount rate on bank borrowings and
changes in reserve requirements against bank deposits. These policies and
regulations significantly affect the overall growth and distribution of bank
loans, investments and deposits, and the interest rates charged on loans as well
as the interest rates paid on deposits and accounts.
-7-
The 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 have significant effects in the future. In view of
the changing conditions in the economy and the money market and the activities
of monetary and fiscal authorities, no definitive predictions can be made as to
future changes in interest rates, credit availability or deposit levels.
Statistical Financial Information Regarding the Corporation
The following schedules and tables analyze certain elements of the
consolidated balance sheets and statements of income of the Corporation and its
subsidiaries, as required under Exchange Act Industry Guide 3 promulgated by the
Securities and Exchange Commission, and should be read in conjunction with the
narrative analysis presented in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation and the Consolidated Financial
Statements of the Corporation and its subsidiaries included at pages 47 through
76 of this Annual Report on Form 10-K.
-8-
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
A. The following are the average balance sheets for the years ending
December 31:
1996 1995 1994
---- ---- ----
ASSETS
Interest-earning assets
Securities available for sale (1)
Taxable $ 65,724,102 $ 64,643,230 $ 51,347,311
Non-taxable 8,931,157 25,869 --
Securities held to maturity
Taxable -- 1,485,961 370,644
Non-taxable -- 9,416,228 7,584,860
Federal funds sold 6,950,036 10,145,738 5,162,152
Loans, net of unearned income
and deferred loan fees (2) 305,611,881 282,864,867 249,993,210
------------- ------------- -------------
Total interest-earning assets 387,217,176 368,581,893 314,458,177
Allowance for loan losses (4,593,293) (4,606,629) (4,089,404)
------------- ------------- -------------
382,623,883 363,975,264 310,368,773
Noninterest-earning assets
Cash and due from banks 17,435,810 17,670,513 11,613,379
Premises and equipment, net 8,540,524 8,857,350 7,766,744
Accrued interest receivable and
other assets 8,142,608 8,056,940 5,368,618
------------- ------------- -------------
$ 416,742,825 $ 398,560,067 $ 335,117,514
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Savings and interest-bearing
demand deposits $ 83,395,385 $ 83,243,571 $ 70,551,648
Time deposits 243,798,539 231,640,466 191,533,849
Federal funds purchased and
securities sold under agree-
ments to repurchase 2,559,025 684,484 2,488,229
------------- ------------- -------------
Total interest-bearing liabilities 329,752,949 315,568,521 264,573,726
Noninterest-bearing liabilities
Demand deposits 42,733,313 41,427,007 37,778,969
Accrued interest payable and
other liabilities 3,507,865 3,687,999 2,150,694
------------- ------------- -------------
375,994,127 360,683,527 304,503,389
Net ESOP obligation 8,615,308 8,083,792 6,025,388
Shareholders' equity (3) 32,133,390 29,792,748 24,588,737
------------- ------------- -------------
$ 416,742,825 $ 398,560,067 $ 335,117,514
============= ============= =============
________________________________________________________________________________
(1) Securities available for sale are carried at fair value. The average
balance includes quarterly average balances of the market value adjustments
and daily average balances for the amortized cost of securities.
(2) Loan balances include principal balances of nonaccrual loans and loans held
for sale.
(3) Shown net of average net unrealized appreciation (depreciation) on
securities available for sale, net of tax.
-9-
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
B. The following tables set forth, for the years indicated, the condensed
average balances of interest-earning assets and interest-bearing
liabilities, the interest earned or paid on such amounts, and the
average interest rates earned or paid thereon.
------------------------1996---------------------
Average Average
Balance Interest Rate
----------- ------------ -----------
INTEREST-EARNING ASSETS
Securities (1)
Taxable $ 65,675,003 $ 4,066,184 6.19%
Non-taxable 8,771,930 619,411 (2) 7.06 (2)
Federal funds sold 6,950,036 355,950 5.12
Loans, net of unearned income and
deferred loan fees 305,611,881 (3) 28,680,021 (4) 9.38
------------ -------------
Total interest-earning assets $387,008,850 33,721,566 (2) 8.71%(2)
============
INTEREST-BEARING LIABILITIES
Deposits
Savings and interest-bearing
demand deposits $ 83,395,385 2,109,831 2.53%
Time deposits 243,798,539 12,401,905 5.09
Federal funds purchased and
securities sold under agree-
ments to repurchase 2,559,025 144,773 5.66
------------ -------------
Total interest-bearing liabilities $329,752,949 14,656,509 4.44%
============ -------------
Net interest income $ 19,065,057 (2)
=============
Net interest income as a percent
of average interest-earning assets 4.93%(2)
====
________________________________________________________________________________
(1) Securities balances represent daily average balances for the amortized
cost of securities. The average rate is calculated based on the amortized
cost of securities.
(2) Computed on tax equivalent basis for non-taxable securities (34% statutory
tax rate in 1996).
(3) Loan balances include principal balances of nonaccrual loans and loans held
for sale.
(4) Includes fees on loans of $1,237,771 in 1996.
-10-
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
------------------------1995---------------------
Average Average
Balance Interest Rate
----------- ------------ -----------
INTEREST-EARNING ASSETS
Securities (1)
Taxable $ 66,675,224 $ 3,756,764 5.63%
Non-taxable 9,442,097 645,724 (2) 6.84 (2)
Federal funds sold 10,145,738 707,596 6.97
Loans, net of unearned income and
deferred loan fees 282,864,867 (3) 26,539,689 (4) 9.38
------------ -------------
Total interest-earning assets $369,127,926 31,649,773 (2) 8.57%(2)
============
INTEREST-BEARING LIABILITIES
Deposits
Savings and interest-bearing
demand deposits $ 83,243,571 2,088,899 2.51%
Time deposits 231,640,466 12,109,099 5.23
Federal funds purchased and
securities sold under agree-
ments to repurchase 684,484 40,050 5.85
------------ -------------
Total interest-bearing liabilities $315,568,521 14,238,048 4.51%
============ -------------
Net interest income $ 17,411,725 (2)
=============
Net interest income as a percent
of average interest-earning assets 4.72%(2)
====
________________________________________________________________________________
(1) Securities balances represent daily average balances for the amortized cost
of securities. The average rate is calculated based on the amortized cost
of securities.
(2) Computed on tax equivalent basis for non-taxable securities (34% statutory
tax rate in 1995).
(3) Loan balances include principal balances of nonaccrual loans and loans held
for sale.
(4) Includes fees on loans of $967,504 in 1995.
-11-
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
------------------------1994---------------------
Average Average
Balance Interest Rate
----------- ------------ -----------
INTEREST-EARNING ASSETS
Securities (1)
Taxable $ 52,307,884 $ 2,485,695 4.75%
Non-taxable 7,584,860 524,977 (2) 6.92 (2)
Federal funds sold 5,162,152 220,244 4.27
Loans, net of unearned income and
deferred loan fees 249,993,210 (3) 20,421,474 (4) 8.17
------------ -------------
Total interest-earning assets $315,048,106 23,652,390 (2) 7.51%(2)
============
INTEREST-BEARING LIABILITIES
Deposits
Savings and interest-bearing
demand deposits $ 70,551,648 1,900,683 2.69%
Time deposits 191,533,849 7,586,023 3.96
Federal funds purchased and
securities sold under agree-
ments to repurchase 2,488,229 125,647 5.05
------------ -------------
Total interest-bearing liabilities $264,573,726 9,612,353 3.63%
============ -------------
Net interest income $ 14,040,037 (2)
=============
Net interest income as a percent
of average interest-earning assets 4.46%(2)
====
________________________________________________________________________________
(1) Securities balances represent daily average balances for the amortized cost
of securities. The average rate is calculated based on the amortized cost
of securities.
(2) Computed on tax equivalent basis for non-taxable securities (34% statutory
tax rate in 1994).
(3) Loan balances include principal balances of nonaccrual loans and loans held
for sale.
(4) Includes fees on loans of $797,957 in 1994.
-12-
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
C. The following tables set forth the effect of volume and rate changes
on interest income and expense for the periods indicated. For purposes
of these tables, changes in interest due to volume and rate were
determined as follows:
Volume Variance - change in volume multiplied by the previous year's
rate. Rate Variance - change in rate multiplied by the previous year's
volume. Rate/Volume Variance - change in volume multiplied by the
change in rate. This variance was allocated to volume variance and
rate variance in proportion to the relationship of the absolute dollar
amount of the change in each. Interest on non-taxable securities has
been adjusted to a fully tax equivalent basis using a statutory tax
rate of 34% in 1996, 1995 and 1994.
Total
Variance Variance Attributable To
1996/1995 Volume Rate
------------- ---------- --------
Interest income
Securities
Taxable $ 309,420 $ (57,091) $ 366,511
Non-taxable (26,313) (46,854) 20,541
Federal funds sold (351,646) (190,759) (160,887)
Loans, net of unearned income
and deferred loan fees 2,140,332 2,154,575 (14,243)
------------ ------------ -------------
2,071,793 1,859,871 211,922
Interest expense
Deposits
Savings and interest-bearing
demand deposits 20,932 3,815 17,117
Time deposits 292,806 624,266 (331,460)
Federal funds purchased and
securities sold under agreements
to repurchase 104,723 106,093 (1,370)
------------ ------------ -------------
418,461 734,174 (315,713)
------------ ------------ -------------
Net interest income $ 1,653,332 $ 1,125,697 $ 527,635
============ ============ =============
-13-
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (Continued)
Total
Variance Variance Attributable To
1995/1994 Volume Rate
------------- ---------- --------
Interest income
Securities
Taxable $ 1,271,069 $ 758,382 $ 512,687
Non-taxable 120,747 127,084 (6,337)
Federal funds sold 487,352 294,045 193,307
Loans, net of unearned income
and deferred loan fees 6,118,215 2,872,531 3,245,684
------------ ------------ -------------
7,997,383 4,052,042 3,945,341
Interest expense
Deposits
Savings and interest-bearing
demand deposits 188,216 324,954 (136,738)
Time deposits 4,523,076 1,789,516 2,733,560
Federal funds purchased and
securities sold under agreements
to repurchase (85,597) (102,943) 17,346
------------ ------------ -------------
4,625,695 2,011,527 2,614,168
------------ ------------ -------------
Net interest income $ 3,371,688 $ 2,040,515 $ 1,331,173
============ ============ =============
-14-
II. INVESTMENT PORTFOLIO
A. The book value of securities available for sale as of December 31 are
summarized as follows:
1996 1995 1994
---- ---- ----
U.S. Treasury and U.S. Government
agency securities $ 54,235,593 $ 74,251,501 $ 50,533,082
Obligations of states and
political subdivisions 6,389,434 9,543,395 -
Mortgage-backed securities 4,837,112 5,345,748 8,402,970
Marketable equity securities 1,173,750 1,189,222 875,803
------------- ------------- -------------
$ 66,635,889 $ 90,329,866 $ 59,811,855
============= ============= =============
The book value of securities held to maturity as of December 31 are
summarized as follows:
1996 1995 1994
---- ---- ----
U.S. Treasury and U.S. Government
agency securities $ - $ - $ 1,482,576
Obligations of states and
political subdivisions - - 8,888,336
------------- ------------- -------------
$ - $ - $ 10,370,912
============= ============= =============
-15-
II. INVESTMENT PORTFOLIO (Continued)
B. The maturity distribution and weighted average interest rates of
securities available for sale at December 31, 1996 are as follows:
----------------------Maturing----------------------
After One Year
Within But Within
One Year Five Years
Amount Rate Amount Rate
---------- -------- ---------- --------
U.S. Treasury and U.S. Government
agency securities $ 3,524,224 7.56% $ 50,605,280 5.87%
Obligations of state and political
subdivisions (2) 1,208,946 6.36 2,297,083 8.12
Mortgage-backed securities (1) 48,516 9.00 4,788,596 6.71
------------ ------------
$ 4,781,686 7.27% $ 57,690,959 6.03%
============ ==== ============ ====
----------------------Maturing----------------------
After Five Years
But Within After
Ten Years Ten Years
Amount Rate Amount Rate
---------- -------- ---------- --------
U.S. Treasury and U.S. Government
agency securities $ 71,789 6.43% $ 34,300 7.00%
Obligations of state and political
subdivisions (2) 2,883,405 7.68 - -
Marketable Equity Securities - 1,173,750 6.75
------------ ------------
$ 2,955,194 7.65% $ 1,208,050 6.76%
============ ==== ============ ====
(1) Maturity based upon estimated weighted-average life.
(2) Yields are presented on a tax-equivalent basis (34% statutory rate).
The weighted average interest rates are based on coupon rates for
securities purchased at par value and on effective interest rates
considering amortization or accretion if the securities were purchased at
a premium or discount.
C. Excluding those holdings of the investment portfolio in U.S.
Treasury securities and other agencies of the U.S. Government,
there were no securities of any one issuer which exceeded 10% of
the shareholders' equity of the Corporation at December 31, 1996.
-16-
III. LOAN PORTFOLIO
A. Types of Loans - Total loans on the balance sheet are comprised
of the following classifications at December 31 for the years
indicated:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Commercial,
financial and
agricultural $ 76,395,361 $ 63,444,036 $ 62,866,040 $ 51,078,815 $ 43,003,215
Real estate
mortgage 166,669,782 152,555,540 152,136,086 122,313,826 114,584,845
Installment
loans to
individuals 75,643,488 61,600,664 65,676,876 54,420,469 53,334,236
------------- ------------- -------------- -------------- -------------
$ 318,708,631 $ 277,600,240 $ 280,679,002 $ 227,813,110 $ 210,922,296
============= ============= ============== ============== =============
Real estate
mortgage
loans held
for resale $ 1,875,636 $ 2,949,293 $ 4,689,611 $ 4,669,580 $ 1,447,050
============= ============= ============== ============== ==============
Concentrations of Credit Risk: The Corporation grants commercial, real estate
and installment loans to customers mainly in northwest Ohio. Commercial loans
include loans collateralized by business assets and agricultural loans
collateralized by crops and farm equipment. Commercial loans make up
approximately 24% of the loan portfolio and the loans are expected to be repaid
from cash flow from operations of businesses. Real estate loans make up
approximately 52% of the loan portfolio and are collateralized by both
commercial and residential real estate. Installment loans make up approximately
24% of the loan portfolio and are primarily collateralized by consumer assets.
B. Maturities and Sensitivities of Loans to Changes in Interest
Rates - The following table shows the amounts of commercial,
financial and agricultural loans outstanding as of December 31,
1996 which, based on remaining scheduled repayments of principal,
are due in the periods indicated. Also, the amounts have been
classified according to sensitivity to changes in interest rates
for loans due after one year. (Variable-rate loans are those
loans with floating or adjustable interest rates.)
Commercial,
Financial and
Maturing Agricultural
Within one year $ 59,948,514
After one year but within five years 14,232,397
After five years 2,214,450
-------------
$ 76,395,361
Commercial, Financial and Agricultural
Interest Sensitivity
Fixed Variable
Rate Rate Total
Due after one year but
within five years $ 13,027,189 $ 1,205,208 $ 14,232,397
Due after five years 2,214,450 - 2,214,450
------------ ----------- -------------
$ 15,241,639 $ 1,205,208 $ 16,446,847
============ =========== =============
-17-
III. LOAN PORTFOLIO (Continued)
C. Risk Elements
1. Nonaccrual, Past Due, Restructured and Impaired Loans - The
following schedule summarizes nonaccrual, past due, restructured
and impaired loans at December 31.
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
(a) Loans accounted for on a
nonaccrual basis $ 1,055(1) $ 2,403(1) $ 3,538 $ 3,621 $ 1,239
(b) Accruing loans which
are contractually
past due 90 days or
more as to interest
or principal payments 293 711 1,198 200 105
(c) Loans not included in (a)
or (b) which are
"Troubled Debt Restruc-
turings" as defined by
Statement of Financial
Accounting Standards
No. 15
(d) Other loans defined as
"impaired" 2,490 - - - -
------- -------- ------- -------- ---------
$ 3,838 $ 3,114 $ 4,736 $ 3,821 $ 1,344
======= ======== ======= ======== =========
(1) Includes loans defined as "impaired" under SFAS No. 114.
Management believes the allowance for loan losses at December 31, 1996 is
adequate to absorb any losses on nonperforming loans, as the allowance balance
is maintained by management at a level considered adequate to cover losses that
are currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values, and other factors and estimates which
are subject to change over time.
1996
--------------
(In thousands)
Gross interest income that would have been
recorded in 1996 on nonaccrual loans
outstanding at December 31, 1996 if the
loans had been current, in accordance
with their original terms and had been
outstanding throughout the period or since
origination if held for part of the period $ 117
Interest income actually recorded on nonaccrual
loans and included in net income for the period (2)
------
Interest income not recognized during the period $ 115
=======
-18-
III. LOAN PORTFOLIO (Continued)
1. Discussion of the Nonaccrual Policy
The accrual of interest income is discontinued when the collection of
a loan or interest, in whole or in part, is doubtful. When interest
accruals are discontinued, interest income accrued in the current
period is reversed. While loans which are past due 90 days or more as
to interest or principal payments are considered for nonaccrual
status, management may elect to continue the accrual of interest when
the estimated net realizable value of collateral, in management's
judgment, is sufficient to cover the principal balance and accrued
interest. These policies apply to both commercial and consumer loans.
2. Potential Problem Loans
As of December 31, 1996, in addition to the $3,838,000 of loans
reported under Item III, C.1., there are approximately $3,138,000 in
other outstanding loans where known information about possible credit
problems of the borrowers causes management to have serious doubts as
to the ability of such borrowers to comply with the present loan
repayment terms and which may result in disclosure of such loans
pursuant to Item III. C.1 at some future date. Consideration was given
to loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed in
Section 1 above. To the extent that such loans are not included in the
$3,138,000 potential problem loans described above, management
believes that such loans will not materially impact future operating
results, liquidity, or capital resources.
3. Foreign Outstandings
None
4. Loan Concentrations
At December 31, 1996, loans outstanding related to agricultural
operations or collateralized by agricultural real estate aggregated
approximately $46,788,000. At December 31, 1996, there were $100,000
of agriculture loans which were accounted for on a nonaccrual basis;
and there are no accruing agriculture loans which are contractually
past due ninety days or more as to interest or principal payments.
D. Other Interest-Bearing Assets
Other than approximately $329,000 held as other real estate owned,
there are no other interest-bearing assets as of December 31, 1996
which would be required to be disclosed under Item III. C.1 or 2 if
such assets were loans.
-19-
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following schedule presents an analysis of the allowance for loan
losses, average loan data and related ratios for the years ended
December 31:
1996 1995 1994
---- ---- ----
Loans
Loans outstanding at end of period (1) $ 320,321,476 $ 280,314,137 $ 285,106,409
============= ============= =============
Average loans outstanding during period (1) $ 305,611,881 $ 282,864,867 $ 249,993,210
============= ============= =============
Allowance for loan losses
Balance at beginning of period $ 4,270,000 $ 4,770,000 $ 3,390,000
Allowance of acquired Bank - - 1,100,000
Loans charged-off
Commercial, financial and agricultural loans (100,804) (1,267,028) (275,543)
Real estate mortgage (101,706) (509,108) (66,531)
Installment loans (675,267) (874,690) (408,879)
------------- ------------- -------------
(877,777) (2,650,826) (750,953)
Recoveries of loans previously charged-off
Commercial, financial and agricultural loans 68,478 497,437 85,052
Real estate mortgage 219,949 23,432 56,809
Installment loans 424,941 178,059 187,602
------------- ------------- -------------
713,368 698,928 329,463
------------- ------------- -------------
Net loans charged-off (164,409) (1,951,898) (421,490)
Provision charged to operating expense 961,009 1,451,898 701,490
------------- ------------- -------------
Balance at end of period $ 5,066,600 $ 4,270,000 $ 4,770,000
============= ============= =============
Ratio of net charge-offs to average
loans outstanding for period .05% .69% .17%
=== === ===
*** ABOVE TABLE IS SPLIT AT RIGHT MARGIN; IT IS CONTINUED BELOW ***
1993 1992
---- ----
Loans
Loans outstanding at end of period (1) $ 232,317,346 $ 212,173,944
============== =============
Average loans outstanding during period (1) $ 225,013,808 $ 197,052,054
============== =============
Allowance for loan losses
Balance at beginning of period $ 3,086,443 $ 2,701,835
Allowance of acquired Bank - -
Loans charged-off
Commercial, financial and agricultural loans (139,250) (185,084)
Real estate mortgage (118,054) (80,949)
Installment loans (676,436) (504,107)
-------------- -------------
(933,740) (770,140)
Recoveries of loans previously charged-off
Commercial, financial and agricultural loans 89,832 92,388
Real estate mortgage 114,156 42,195
Installment loans 237,823 251,827
-------------- -------------
441,811 386,410
-------------- -------------
Net loans charged-off (491,929) (383,730)
Provision charged to operating expense 795,486 768,338
-------------- -------------
Balance at end of period $ 3,390,000 $ 3,086,443
============== =============
Ratio of net charge-offs to average
loans outstanding for period .22% .19%
=== ===
________________________________
(1) Net of unearned income and deferred loan fees, including loans held for sale
The allowance for loan losses balance and the provision charged to expense are
judgmentally determined by management based upon periodic reviews of the loan
portfolio. In addition, management considered the level of charge-offs on loans
as well as the fluctuations of charge-offs and recoveries on loans including the
factors which caused these changes. Estimating the risk of loss and the amount
of loss is necessarily subjective. Accordingly, the allowance is maintained by
management at a level considered adequate to cover losses that are currently
anticipated based on past loss experience, general economic conditions,
information about specific borrower situations including their financial
position and collateral values and other factors and estimates which are subject
to change over time. The increase in loans charged-off in 1995 as compared to
the other periods presented is due largely to the charge-off of certain credits
which were previously reported on a nonaccrual basis.
-20-
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
B. The following schedule is a breakdown of the allowance for loan losses
allocated by type of loan and related ratios.
-----Allocation of the Allowance for Loan Losses-----
Percentage Percentage
of Loans of Loans
In Each In Each
Category to Category To
Allowance Total Allowance Total
Amount Loans Amount Loans
December 31, 1996 December 31, 1995
----------------- -----------------
Commercial, financial
and agricultural $ 1,718,000 24.0% $ 1,665,000 22.9%
Real estate mortgage 1,090,000 52.3 512,000 54.9
Installment loans 1,608,600 23.7 1,452,000 22.2
Unallocated 650,000 N/A 641,000 N/A
----------- --- ----------- ---
$ 5,066,600 100.0% $ 4,270,000 100.0%
=========== ===== =========== =====
December 31, 1994 December 31, 1993
----------------- -----------------
Commercial, financial
and agricultural $ 1,764,900 22.4% $ 1,220,400 22.4%
Real estate mortgage 572,400 54.2 372,900 53.7
Installment loans 1,621,800 23.4 1,084,800 23.9
Unallocated 810,900 N/A 711,900 N/A
----------- --- ----------- ---
$ 4,770,000 100.0% $ 3,390,000 100.0%
=========== ===== =========== =====
December 31, 1992
Commercial, financial
and agricultural $ 1,072,000 20.4%
Real estate mortgage 343,000 54.3
Installment loans 1,021,443 25.3
Unallocated 650,000 N/A
----------- ---
$ 3,086,443 100.0%
=========== =====
While management's periodic analysis of the adequacy of the allowance for loan
losses may allocate portions of the allowance for specific problem loan
situations, the entire allowance is available for any loan charge-offs that
occur.
-21-
V. DEPOSITS
The average amount of deposits and average rates paid are summarized as
follows for the years ended December 31:
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
Savings and interest-bearing
demand deposits $ 83,395,385 2.53% $ 83,243,571 2.51% $ 70,551,648 2.69%
Time deposits 243,798,539 5.09 231,640,466 5.23 191,533,849 3.96
Demand deposits (noninterest-bearing) 42,733,313 41,427,007 37,778,969
--------------- -------------- --------------
$ 369,927,237 $ 356,311,044 $ 299,864,466
=============== ============== ==============
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 1996 are summarized as
follows:
Amount
Three months or less $ 11,618,596
Over three months and through six months 9,031,929
Over six months and through twelve months 10,934,218
Over twelve months 6,720,597
-------------
$ 38,305,340
-22-
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and average total
assets and certain other ratios are as follows:
1996 1995 1994
Average total assets $ 416,742,825 $ 398,560,067 $ 335,117,514
============== ============== ===============
Average shareholders'
equity and net ESOP
obligation (1) $ 40,748,698 $ 37,876,540 $ 30,614,125
============== ============== ===============
Average shareholders'
equity (1) $ 32,133,390 $ 29,792,748 $ 24,588,737
============== ============== ===============
Net income $ 4,849,214 $ 4,094,813 $ 3,910,374
============== ============== ===============
Cash dividends declared $ 1,308,975 $ 1,310,627 $ 1,264,128
============== ============== ===============
Return on average total assets 1.16% 1.03% 1.17%
==== ==== ====
Return on average share-
holders' equity and net ESOP
obligation 11.90% 10.81% 12.77%
===== ===== =====
Return on average share-
holders' equity 15.09% 13.74% 15.90%
===== ===== =====
Dividend payout percentage (2) 26.99% 32.01% 32.33%
===== ===== =====
Average shareholders'
equity and net ESOP obligation
to average total assets 9.78% 9.50% 9.14%
==== ==== ====
Average shareholders'
equity to average total assets 7.71% 7.48% 7.34%
==== ==== ====
(1) Net of average unrealized appreciation or depreciation on securities
available for sale.
(2) Dividends declared divided by net income.
VII. SHORT-TERM BORROWINGS
The Corporation did not have any category of short-term borrowings for
which the average balance outstanding during the reported periods was 30
percent or more of shareholders' equity at the end of the reported periods.
-23-
Effect of Environmental Regulation
Compliance with federal, state and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, has not had a material effect upon the capital
expenditures, earnings or competitive position of the Corporation and its
subsidiaries. The Corporation believes that the nature of the operations of its
subsidiaries has little, if any, environmental impact. The Corporation,
therefore, anticipates no material capital expenditures for environmental
control facilities for its current fiscal year or for the foreseeable future.
The Corporation's subsidiaries may be required to make capital expenditures for
environmental control facilities related to properties which they may acquire
through foreclosure proceedings in the future; however, the amount of such
capital expenditures, if any, is not currently determinable.
Item 2. Properties.
The following is a listing and brief description of the properties owned
or leased by State Bank and used in its business:
1. Its main office is a two-story brick building
located at 401 Clinton Street, Defiance, Ohio, which was
built in 1971. Including a basement addition built in 1991,
it contains 33,400 square feet of floor space. Approximately
1,100 square feet on the second floor and 1,900 on the lower
level presently are leased to RDSI.
2. A branch office located in downtown Defiance, Ohio
containing 3,200 square feet of floor space was built in
1961. Most of the space is in the basement which is used for
storage. It contains a three-bay drive-thru, two inside
teller locations, an ATM and a night deposit unit.
3. A full service branch office located on Main Street
in Ney, Ohio containing 1,536 square feet of floor space was
opened in 1968.
4. A full service branch office located at 1796 North
Clinton Street, Defiance, Ohio containing 2,120 square feet
of floor space was opened in 1968. It is a free standing
structure located in front of a shopping center.
5. A full service branch office located at 1856 East
Second Street, Defiance, Ohio containing 2,160 square feet
of floor space was opened in 1972. It is a free standing
structure located in front of a shopping center.
6. A full service branch office located at 2010 South
Jefferson, Defiance, Ohio containing 2,160 square feet of
floor space was opened in 1979. It is located in a primarily
residential area.
7. A full service branch office located at 220 North
Main Street, Paulding, Ohio containing 6,200 square feet of
floor space was opened in 1980.
-24-
8. A full service branch office located at 312 Main
Street, Delta, Ohio containing 3,470 square feet of floor
space was acquired from Society Bank & Trust ("Society") in
1992.
9. A full service branch office located at 133 E.
Morenci Street, Lyons, Ohio containing 2,578 square feet of
floor space was acquired from Society in 1992.
10. A full service branch office located at 515
Parkview, Wauseon, Ohio containing 3,850 square feet of
floor space was acquired from Society in 1992.
11. A full service branch located in the Chief Market
Square supermarket at 705 Deatrick Street, Defiance, Ohio
and containing 425 square feet was opened in 1993. State
Bank leases the space in which this branch is located
pursuant to a 15-year lease.
The following is a listing and brief description of the properties owned
by Peoples Bank and used in its business:
1. The full service main office located at 301 South
Main Street, Findlay, Ohio was opened in 1990. It contains
approximately 30,000 square feet of floor space, of which
12,000 is used by an unrelated law firm.
2. A full service branch office located at 124 East
Main Street, McComb, Ohio was opened in 1990. It contains
approximately 3,600 square feet of floor space.
3. A full service branch office located at 1330 North
Main Street, Findlay, Ohio, was opened in 1979. It contains
approximately 1,500 square feet of floor space.
4. A 1,650 square feet office space located at 2430
Estancia Boulevard, Suite 201, Clearwater, Florida is leased
by Peoples Bank as a residential mortgage loan production
office under the name "Rurban Mortgage Company". The office
was first leased on January 22, 1997.
The only real property owned by First National Bank is the location of
the Bank at 405 East Main Street, Ottawa, Ohio. First National Bank's facility
is a two-story brick and steel building containing approximately 7,100 square
feet of space. The first floor is a traditional banking lobby which was
remodeled in 1991. The second floor contains bookkeeping, office and storage
space.
The following is a listing and brief description of the properties owned
by Citizens Savings Bank and used in its business:
-25-
1. The full service main office is located at 132 East
Front Street, Pemberville, Ohio and contains 6,389 square
feet. It was built near the turn of the century and was
completely remodeled and added on to in 1992.
2. A full service branch office located at 230 West
Madison Street, Gibsonburg, Ohio occupies 2,520 square feet
and was built in 1988.
Item 3. Legal Proceedings.
There are no pending legal proceedings to which the Corporation or any
of its subsidiaries is a party or to which any of their property is subject,
except routine legal proceedings to which the Corporation or any of its
subsidiaries is a party incidental to its banking business. None of such
proceedings are considered by the Corporation to be material.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant.
The following table lists the names and ages of the executive officers
of the Corporation as of the date of this Annual Report on Form 10-K, the
positions presently held by each such executive officer and the business
experience of each such executive officer during the past five years. Unless
otherwise indicated, each person has held his principal occupation(s) for more
than five years. All executive officers serve at the pleasure of the Board of
Directors of the Corporation.
Name Age Position(s) Held with the
Corporation and its Subsidiaries
and Principal Occupation(s)
________________________________________________________________________________
Steven D. VanDemark 44 Chairman of the Board of the Corporation since
1992; Chairman of the Board and a Director of
State Bank; General Manager of Defiance Publishing
Company, Defiance, Ohio, a newspaper publisher.
Thomas C. Williams 47 President and Chief Executive Officer of the
Corporation since June 1995; President and Chief
Executive Officer of State Bank, June 1995 to
August 1996; President of FirstMerit Bank, FSB,
Clearwater, Florida, from 1994 to June, 1995;
Senior Vice President and Managing Officer of the
Northern Region of The First National Bank of
Ohio, Cleveland, Ohio, from 1990 to 1994; Director
of the Corporation, State Bank and Chairman of
RDSI.
-26-
Robert W. Constien 44 Executive Vice President since March 12, 1997,
Vice President from 1994 to March 12, 1997 of the
Corporation; Executive Vice President since 1994,
Senior Vice President from 1991 to 1993, Vice
President from 1987 to 1991, Trust Officer since
1987 and a Director of State Bank; President,
Chief Executive Officer and Chairman of the Board
of Reliance (in organization) since March 1997.
Richard C. Warrener 52 Senior Vice President and Chief Financial Officer
of the Corporation since December 31, 1996; Senior
Vice President and Chief Financial Officer of
First Merit Bank, N.A. from March, 1994 to
December, 1996; Senior Vice President and Chief
Financial Officer of Life Savings Bank from
January, 1991 to March, 1994; Division Vice
President and Chief Financial Officer of Florida
Federal Savings Bank from 1988 to November, 1990.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The common shares of the Corporation are traded on a limited basis in
the over-the-counter market. The table below sets forth the high and low bid
quotations for, and the cash dividends declared with respect to, the common
shares of the Corporation, for the indicated periods. The bid quotations were
obtained from one of the securities dealers who makes a market in the
Corporation's common shares (the Corporation is aware of three securities
dealers who make a market in its common shares). The bid quotations reflect the
prices at which purchases and sales of the Corporation's common shares could be
made during each period and not inter-dealer prices. The bid quotations reflect
retail mark-ups, but not commissions or retail mark-downs. The bid quotations
represent actual transactions in the Corporation's common shares. The per share
amounts have been restated for the 5% stock dividend declared in December 1996.
Per Share Per Share
Bid Prices Dividends
1995 High Low Declared
---- ---- --- --------
First Quarter $ 24.29 $ 22.62 $ .1429
Second Quarter 26.43 23.93 $ .1429
Third Quarter 29.05 26.43 $ .1429
Fourth Quarter 30.84 27.98 $ .1429
1996
----
First Quarter $ 32.38 $29.88 $ .1429
Second Quarter 33.81 30.95 $ .1429
Third Quarter 33.81 31.90 $ .1429
Fourth Quarter 33.10 28.00 $ .1429
-27-
There can be no assurance as to the amount of dividends which will be
declared with respect to the common shares of the Corporation in the future,
since such dividends are subject to the discretion of the Corporation's Board of
Directors, cash needs, general business conditions, dividends from the
subsidiaries and applicable governmental regulations and policies. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - Capital Resources and Note 1 of Notes to Consolidated Financial
Statements.
The approximate number of holders of outstanding common shares of the
Corporation, based upon the number of record holders as of December 31, 1996, is
1,094.
-28-
Item 6. Selected Financial Data.
SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
Year ended December 31, 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
EARNINGS
Total interest income $ 33,511 $ 31,430 $ 23,474 $ 21,478 $ 22,716
Total interest expense 14,657 14,238 9,612 8,909 10,754
Net interest income 18,854 17,192 13,862 12,569 11,962
Provision for loan losses 961 1,452 701 795 768
Total noninterest income 6,194 5,753 5,312 5,434 5,124
Total noninterest expense 16,876 15,272 12,664 11,510 10,813
Income tax expense 2,362 2,127 1,899 1,823 1,766
Net income 4,849 4,095 3,910 3,875 3,739
_________________________________________________________________________________________________________________
PER SHARE DATA (1)
Net Income $ 2.14 $ 1.79 $ 1.80 $ 1.82 $ 1.75
Cash dividends declared 0.57 0.57 0.57 0.57 0.56
_________________________________________________________________________________________________________________
AVERAGE BALANCES
Average shareholders' equity and
net ESOP obligation $ 40,749 $ 37,877 $ 30,614 $ 29,966 $ 27,374
Average shareholders' equity 32,133 29,793 24,589 25,412 23,538
Average total assets 416,743 398,560 335,118 314,230 297,720
_________________________________________________________________________________________________________________
RATIOS
Return on average total assets 1.16% 1.03% 1.17% 1.23% 1.26%
Average shareholders' equity and
net ESOP obligation to average
total assets 9.78 9.50 9.14 9.54 9.19
Average shareholders' equity to
average total assets 7.71 7.48 7.34 8.09 7.91
Return on average shareholders'
equity and net ESOP obligation 11.90 10.81 12.77 12.93 13.66
Return on average shareholders'
equity 15.09 13.74 15.90 15.25 15.88
Cash dividend payout ratio
(cash dividends divided by net
income) 26.99 32.01 32.33 31.54 32.10
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PERIOD END TOTALS
Total assets $433,273 $411,226 $393,547 $317,845 $310,143
Total loans and leases 318,709 277,600 280,679 227,813 210,922
Total deposits 387,766 367,797 354,646 283,603 279,696
Shareholders' equity and
net ESOP obligation 41,489 40,078 35,675 31,293 28,640
Shareholders' equity 33,591 30,745 28,840 26,076 24,748
Shareholders' equity and
net ESOP obligation per
share(1) 18.13 17.47 15.55 14.69 13.44
Shareholders' equity per
share(1) 17.14 15.52 14.36 13.12 12.44
_________________________________________________________________________________________________________________
(1) Per share data restated for 5% stock dividend declared in 1996, 1994
two-for-one stock split and 1992 15% stock dividend.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Earnings Summary
Consolidated net income for Rurban Financial Corp. (the "Corporation") for 1996
was $4.8 million, up from $4.1 million in 1995 and $3.9 million in 1994. Net
income per share was $2.14 in 1996, an increase of 20% from $1.79 in 1995. The
1995 net income per share results represented a 1% decrease from $1.80 in 1994.
Cash dividends declared per share amounted to $.57 in 1996, 1995 and 1994. Per
share data has been adjusted to reflect the two-for-one stock split paid in
January 1994 and the 5% stock dividend declared in December, 1996.
Results of Operations
1996 Compared With 1995
Net interest income for 1996 was $18.9 million an increase of $1.7 million
(9.7%) over 1995. The increase was primarily due to additional net interest
income resulting from an 8.0% increase in the average balance of total loans,
net of unearned income and deferred loan fees. While the average yield on loans
remained at 9.38%, the mix of loans as a percentage of average earning assets
increased from 76.6% in 1995 to 79.0% in 1996, thereby improving the average
yield on earning assets from 8.57% to 8.71%. The improvement in earning asset
yield coupled with a decline in the average rate on interest bearing liabilities
from 4.51% in 1995 to 4.44% in 1996; resulted in an improvement in the net
interest margin from 4.72% to 4.93%.
At December 31, 1996, total loans and loans held for sale, net of deferred loan
fees amounted to $320.3 million, an increase of 14.3% over net loans of $280.3
million at December 31, 1995. This increase was primarily due to a decline in
interest rates and an improved focus on loan origination during 1996.
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At December 31, 1996, approximately $1.9 million of real estate mortgage loans
were held for sale in the secondary market. During 1996, approximately $20.4
million of real estate mortgage loans were originated for sale and approximately
$21.2 million were sold in the secondary market. This represents an increase of
$9.0 million (74%) in loans sold in 1996 as compared to 1995. Mortgage loans
originated for sale increased $10.0 million in 1996, as compared to 1995,
primarily due to declines in interest rates during the first half of 1996. Net
losses on loan sales for 1996 totaled $210,000, a decrease of $294,000 as
compared to net gains on loan sales of $84,000 in 1995. The Corporation
continues to retain the servicing of these loans as a fee generating service.
Loans originated for sale are primarily fixed rate mortgage loans. Management
anticipates an increase in the volume of loans originated for sale in 1997 as
compared to 1996 as a result of the opening of a mortgage loan production office
in Clearwater, Florida in February, 1997.
Securities totaled $66.6 million at December 31, 1996 which represented a
decrease of $23.7 million (26.2%) from total securities of $90.3 million at
December 31, 1995. The decrease in securities from sales and maturities was
primarily due to the need to fund loan demand which outpaced deposit growth. As
of December 31, 1996, all securities of the Corporation were designated
available-for-sale. Available-for-sale securities represent those securities
which the Corporation may decide to sell if needed for liquidity,
asset/liability management or other reasons. Such securities are reported at
fair value with unrealized gains and losses included as a separate component of
shareholders' equity, net of tax. This resulted in a net reduction of
shareholders' equity of $5,000 at December 31, 1996.
Total deposits at December 31, 1996 amounted to $387.8 million, an increase of
$20.0 million (5.4%) over total deposits of $367.8 million at December 31, 1995.
The increase in deposits is believed to have occurred as a result of increased
deposit services and flexibility of products offered. Management believes that
customers continue to place a value on federal insurance on deposit accounts and
that, to the extent the Corporation continues to pay competitive rates on
deposits and continues to provide flexibility of deposit products, the
Corporation will be able to maintain its deposit levels.
The provision for loan losses charged to operations was based on the amount of
net losses incurred and management's estimation of future losses based on an
evaluation of portfolio risk and economic factors. The provision for loan losses
was $961,000 in 1996 compared to $1,452,000 in 1995. The decreased provision and
increase in the allowance in 1996 as compared to 1995 were due largely to the
charge-off of certain large credits in 1995. The allowance for loan losses at
December 31, 1996 was $5.1 million or 1.59% of total loans, net of deferred loan
fees, compared to $4.3 million or 1.54% at December 31, 1995.
Management adopted Statement of Financial Accounting Standards (SFAS) No. 114,
"ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN," as amended by SFAS No. 118,
effective January 1, 1995, which requires recognition of loan impairment. Loans
are considered impaired if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. Under this guidance, the carrying value of
impaired loans is periodically adjusted to reflect cash payments, revised
estimates of future cash flows and increases in the present value of expected
cash flows due to the passage of time. A portion of the allowance for loan
losses is allocated to impaired loans. The effect of adopting these standards
was not material.
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Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, and automobile, home equity and
second mortgage loans. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment. When analysis of borrower
operating results and financial condition indicates that underlying cash flows
of the borrower's business are not adequate to meet its debt service
requirements, the loan is evaluated for impairment. Often this is associated
with a delay or shortfall in payments of 30 days or more. Commercial loans are
rated on a scale of 1 to 8, with 1-3 being satisfactory, 4 watch, 5 special
mention, 6 substandard, 7 doubtful, and 8 as loss which are then charged off.
Loans graded a 6 or worse are considered for impairment. Loans are generally
moved to nonaccrual status when 90 days or more past due. Such loans are often
considered impaired. Impaired loans, or portions thereof, are charged off when
deemed uncollectible. This typically occurs when the loan is 120 days or more
past due. At December 31, 1996, the Corporation classified five loan
relationships as impaired, totaling $3.3 million. Management allocated $1.2
million of the allowance for loan losses to impaired loans at December 31, 1996.
Management allocated approximately 34% of the allowance for loan losses to
commercial, financial and agricultural loans; 32% to installment loans; and 22%
to real estate mortgage loans at December 31, 1996, leaving a balance of 12%
unallocated. Nonperforming loans increased to $3.8 million at December 31, 1996
from $3.1 million at December 31, 1995. The increase in nonperforming loans
relates primarily to the identification of additional loans as impaired during
1996. The allowance is maintained by management at a level considered adequate
to cover losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower situations
including their financial position and collateral values, and other factors and
estimates which are subject to change over time. Management believes the
allowance for loan losses balance at December 31, 1996 is adequate to absorb
losses on these and other loans.
Total noninterest income increased $440,000 (7.6%) to $6.2 million in 1996 from
$5.8 million in 1995. Trust department income increased $413,000 (21.2%) to
$2,359,000 in 1996 from $1,946,000 in 1995; $260,000 of this increase resulted
from a change from cash to accrual basis of accounting for trust fees. Data
processing fees increased $164,000 (8.0%) to $2,203,000 in 1996 compared to
$2,039,000 in 1995. These increases were partially offset by losses on sales of
loans of $210,000 in 1996 which was an unfavorable change of $294,000 from the
$84,000 of gains on sales of loans in 1995.
Total noninterest expense increased $1.6 million (10.5%) to $16.9 million in
1996, from $15.3 million in 1995, primarily due to the following factors.
Salaries and employee benefits increased $1.2 million (16.8%) to $8.1 million in
1996 compared to $6.9 million in 1995. This increase was due primarily to three
factors; 1) annual merit increases, 2) staffing increases, and 3) the extension
of performance related bonuses and incentive compensation throughout the
organization. Net occupancy expense of premises increased by $107,000 due to the
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repair of the exterior of the main office. Equipment costs increased $242,000
due primarily to the purchase of personal computers and other small equipment to
upgrade the quality of the tools available to our people. Other expenses
increased $91,000 (1.6%) primarily due to increases in professional fees of
$169,000 and in other operating expenses of $573,000 which were offset by
decreases in amortization of intangibles of $349,000 and FDIC deposit insurance
premiums of $359,000. The increase in other operating expenses was primarily a
result of increases in education and travel expenses of $191,000, and an
increase of $84,000 in temporary labor.
Income tax expense for the year ended December 31, 1996 was $2.4 million, an
increase of $235,000 (11.0%) from 1995. This increase was primarily attributable
to an increase in income before income tax expense.
A new accounting standard has been issued by the Financial Accounting Standards
Board (FASB) that will apply in 1997. SFAS No. 125, "ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES", provides
authoritative guidance as to the accounting and financial reporting for
transfers and servicing of financial assets and extinguishment of liabilities.
Example transactions covered by SFAS No. 125 include asset securitizations,
repurchase agreements, wash sales, loan participations, transfers of loans with
recourse and servicing of loans. The Standard is based on a consistent
application of a financial components approach that focuses on control. The
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. The
Statement also requires measuring instruments that have a substantial prepayment
risk at fair value, much like debt instruments classified as available for sale
or trading. While SFAS No. 125 supersedes SFAS No. 122, "ACCOUNTING FOR MORTGAGE
SERVICING RIGHTS," it only marginally modifies the accounting and disclosure
requirements of SFAS No. 122. SFAS No. 125, as amended by SFAS No. 127, is
effective on a prospective basis for some transactions in 1997 and others in
1998. The anticipated effect on the consolidated financial statements has not
yet been determined.
Results of Operations
1995 Compared With 1994
Net interest income for 1995 was $17,192,000, an increase of $3,331,000 (24%)
over 1994. The increase was primarily due to the additional net interest income
resulting from a 13% increase in the average balance of total loans, net of
unearned income and deferred loan fees. Net interest income was significantly
impacted by the acquisition of Citizens Savings Bank in October of 1994. For the
year ended December 31, 1994, approximately three months of net interest income
was recorded for Citizens Savings Bank in the Corporation's consolidated net
interest income as compared to a full year of net interest income for December
31, 1995. Net interest income was also favorably impacted by a 121 basis point
increase in the average yield on loans due to higher average rates charged on
loans resulting from an upward movement of interest rates during 1995. This
contributed to a 26 basis point increase in average tax equivalent net interest
margin from 4.46% in 1994 to 4.72% in 1995. The tax equivalent yield on average
balances of interest-earning assets increased from 7.51% for 1994 to 8.57% in
1995 due to the upward movement of interest rates during 1995.
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The average rate on interest-bearing liabilities for 1995 was 4.51%, an increase
of 88 basis points from 3.63% for 1994. This increase was primarily the result
of an increase in interest rates paid on time deposits when the interest rates
were rising during the early part of 1995.
At December 31, 1995, net loans amounted to $273,095,000, a decrease of 1% over
net loans of $275,647,000 at December 31, 1994. This decrease was primarily due
to lower demand for consumer loans in 1995 compared to 1994.
At December 31, 1995, approximately $2.9 million of real estate mortgage loans
were held for sale in the secondary market. During 1995, approximately $10.4
million of real estate mortgage loans were originated for sale and approximately
$12.2 million were sold in the secondary market. This represents a decrease of
$353,000 (3%) in loans sold in 1995 as compared to 1994. Mortgage loans
originated for sale decreased $2.1 million in 1995, as compared to 1994,
primarily due to increasing interest rates in the early part of 1995 which
slowed the demand for mortgage loan refinancings. Net gains on loan sales for
1995 totaled $84,000, a decrease of $28,000 (25%) as compared to 1994. The
Corporation continues to retain the servicing of these loans as a fee generating
service. Primarily, loans originated for sale are fixed rate mortgage loans.
Securities totaled $90,330,000 at December 31, 1995 which represented an
increase of $20,147,000 (29%) from total securities of $70,183,000 at December
31, 1994. The increase in securities was primarily due to a growing deposit
base, outpacing loan demand, as customers took advantage of the deposit services
being offered by the Corporation. In November 1995, the FASB issued its Special
Report, "A GUIDE TO IMPLEMENTATION OF SFAS NO. 115 ON ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES" (Guide). As permitted by the Guide,
on December 31, 1995, the Corporation made a one-time reassessment and
transferred securities from the held-to-maturity portfolio to the
available-for-sale portfolio. At the date of transfer, these securities had an
amortized cost of $10,854,000 and the transfer increased the unrealized gain on
securities available-for-sale by $211,000 and shareholders' equity by $139,000,
net of tax of $72,000. As of December 31, 1995, all securities of the
Corporation consisted of available-for-sale securities. The available-for-sale
securities represent those securities the Corporation may decide to sell if
needed for liquidity, asset/liability management or other reasons. These
securities are reported at fair value with unrealized gains and losses included
as a separate component of shareholders' equity, net of tax. This resulted in a
net addition to shareholders' equity of approximately $449,000 at December 31,
1995.
Total deposits at December 31, 1995 amounted to $367,797,000, an increase of
$13,151,000 (4%) over total deposits of $354,646,000 at December 31, 1994. The
increase of deposits is believed to have occurred as a result of increased
deposit services and flexibility of products offered.
The provision for loan losses which was charged to operations was based on the
amount of net losses incurred and management's estimation of future losses based
on an evaluation of portfolio risk and economic factors. The provision for loan
losses was $1,452,000 in 1995 compared to $701,000 in 1994. The increased
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provision and decrease in the allowance in 1995 as compared to 1994 is due
largely to the 1995 charge-off of certain large credits which were previously
reported on a nonaccrual basis. The amount of allowance acquired through the
acquisition of Citizens Savings Bank in 1994 was $1.1 million. The allowance at
December 31, 1995 was $4,270,000 or 1.54% of total loans, net of deferred loan
fees, compared to $4,770,000 or 1.70% of total loans, net of deferred loan fees,
at December 31, 1994. At December 31, 1995, the Corporation classified four loan
relationships as impaired, totaling $1,835,000. Management allocated $643,000 of
the allowance for loan losses to impaired loans at December 31, 1995.
Management allocated approximately 39% of the allowance for loan losses to
commercial, financial and agricultural loans; 34% to installment loans; and 12%
to real estate mortgage loans at December 31, 1995, leaving a balance of 15%
unallocated. Nonperforming loans decreased to $3,114,000 at December 31, 1995
from $4,736,000 at December 31, 1994. The decrease in nonperforming loans
related primarily to the charge-off of certain nonperforming loans in 1995.
Total noninterest income increased $440,000 (8%) to $5,753,000 in 1995 from
$5,313,000 in 1994, primarily due to increases in three areas. The Corporation's
service charges on deposits increased $163,000 (16%) to $1,185,000 in 1995
compared to $1,022,000 in 1994, trust department income increased $161,000 (9%)
to $1,946,000 in 1995 from $1,785,000 in 1994 and data processing fees increased
$107,000 (6%) to $2,039,000 in 1995 compared to $1,932,000 in 1994. A
significant factor in the increase in noninterest income was the addition of
Citizens Savings Bank in the fourth quarter of 1994, resulting in a full year of
noninterest income for Citizens Savings Bank in 1995 as compared to
approximately three months of noninterest income in 1994.
Total noninterest expense increased $2,608,000 (21%) to $15,272,000 in 1995,
from $12,664,000 in 1994, primarily due to the following factors. Salaries and
employee benefits increased $1,173,000 (20%) to $6,909,000 in 1995 compared to
$5,736,000 in 1994. This increase was due to normal annual salary increases and
the inclusion of Citizen Savings Bank's salary and employee benefits for the
entire year for 1995 compared to approximately three months in 1994. Equipment
rentals, depreciation and maintenance expenses increased $638,000 (51%) to
$1,890,000 in 1995 compared to $1,252,000 in 1994. This increase was largely due
to depreciation on the new data processing equipment at RDSI, which was placed
in service in the last quarter of 1994, resulting in a full year of depreciation
in 1995. Other expenses increased $716,000 (15%) primarily due to increases in
professional fees of $244,000, increases in the amortization of intangible
assets of $417,000 and a general increase in all operating expenses, partially
offset by a decrease in FDIC insurance expense. Another significant factor in
the increase in other expenses was the addition of Citizens Savings Bank in the
fourth quarter of 1994, resulting in a full year of other expenses for Citizens
Savings Bank in 1995 as compared to approximately three months of other expenses
in 1994.
Income tax expense for the year ended December 31, 1995 was $2,127,000, an
increase of $228,000 (12%) from 1994. This increase was primarily attributable
to an increase in income before income tax expense.
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Liquidity
Liquidity relates primarily to the Corporation's ability to fund loan demand,
meet deposit customers' withdrawal requirements and provide for operating
expenses. Assets used to satisfy these needs consist of cash, federal funds
sold, securities and loans held for sale. These assets are commonly referred to
as liquid assets. Liquid assets were $103 million at December 31, 1996 compared
to $122 million at December 31, 1995 and $100 million at December 31, 1994.
Liquidity levels declined $19 million from 1995 to 1996 primarily due to the
increase in loans. Management recognizes that securities may need to be sold in
the future to help fund loan demand and, accordingly, as of December 31, 1996,
the entire securities portfolio of $66.6 million was classified as
available-for-sale.
The corporation's residential first mortgage portfolio of $69.5 million which
can be readily used to collateralize borrowings is an additional source of
liquidity. Management believes its current liquidity level is sufficient to meet
anticipated future growth.
The cash flow statements for the periods presented provide an indication of the
Corporation's sources and uses of cash as well as an indication of the ability
of the Corporation to maintain an adequate level of liquidity. A discussion of
the cash flow statements for 1996, 1995 and 1994 follows.
For all periods presented, the Corporation experienced a net increase in cash
from operating activities. Net cash from operating activities was $8.6 million,
$8.0 million and $6.9 million for the years ended December 31, 1996, 1995 and
1994, respectively. The increase in net cash from operating activities of
$566,000 for 1996 as compared to 1995 was primarily due to an increase in
interest received on interest-earning assets which outpaced an increase in
interest paid on interest-bearing liabilities. Net cash from operating
activities increased $1,177,000 in 1995 as compared to 1994 primarily due to
changes in activity related to loans originated for sale and an increase in
interest received on interest-earning assets outpacing the increase in interest
paid on interest-bearing liabilities due to the acquisition of Citizens Savings
Bank in October of 1994 and rising interest rates.
Net cash flow from investing activities was $(20.0 million), $(16.7 million) and
$(13.1 million) for the years ended December 31, 1996, 1995 and 1994,
respectively. The changes in net cash from investing activities include loan
growth, as well as normal maturities and reinvestments of securities and
premises and equipment expenditures. In 1996 and 1995, the Corporation received
$19.4 million and $2.3 million, respectively, from sales of securities
available-for-sale. In 1994, the Corporation received $3.3 million in net cash
as a result of the acquisition of Citizens Savings Bank.
Net cash flow from financing activities was $17.0, $11.8 and $13.1 million for
the years ended December 31, 1996, 1995 and 1994, respectively. The net cash
increase was primarily attributable to growth in total deposits of $20.0, $13.2
and $15.3 million in 1996, 1995 and 1994, respectively.
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Management of interest sensitivity is accomplished by matching the maturities of
interest-earning assets and interest-bearing liabilities. An institution's level
of interest rate risk is generally dependent on the relative sensitivity to
changes in interest rates of its earning assets and its interest-bearing
liabilities. The Corporation measures and monitors its interest rate risk by
forecasting changes in net interest income under a variety of interest rate
environments and through the use of Interest Sensitivity Gap analyses such as
the following analysis. The Interest Rate Sensitivity Gap table shown below was
prepared based on the contractual maturities/repricing dates of loans,
investments, and deposits; subjectively adjusted for a modest amount of loan
prepayments and first year "decay" rates of 15-25% on the core deposit
categories of checking and savings deposits. As shown in the table, the
Corporation has a modestly positive Asset/Liability Gap of 125% during the one
year time frame. A one year Gap ratio above 100% indicates that a change in
interest rates will affect more earning assets then interest-bearing liabilities
over the course of the year. Therefore, in the absence of countermanding
strategies or circumstances, net interest income could be expected to rise in a
period of rising rates and decline in a period of declining interest rates.
INTEREST SENSITIVITY GAP ANALYSIS
($ in thousands)
Repricable or Maturing Within
0-6 Months 6-12 Months Total 1 yr. Over 1 yr. Total
---------- ----------- ----------- ---------- -------
ASSETS
Interest-earning deposits
in other financial
institutions $ -- $ 150 $ 150 $ 30 $ 180
Federal funds sold 15,309 -- 15,309 15,309
Securities 4,141 641 4,782 61,854 66,636
Loans/loans held for sale 132,594 88,397 220,991 99,593 320,584
-------- ------- -------- -------- --------
Total interest-earning assets $152,044 $89,188 $241,232 $161,477 $402,709
======== ======= ======== ======== ========
LIABILITIES
Interest-bearing deposits $104,758 $88,887 $193,645 $151,797 $345,442
======== ======= ======== ======== ========
Assets (liabilities) GAP $ 47,286 $ 301 $ 47,587 $ 9,680 $ 57,267
======== ======= ======== ======== ========
GAP ratio (assets/
liabilities) 145% 100% 125% 106% 117%
The corporation manages its interest rate risk by the employment of strategies
to assure that desired levels of both interest earning assets and
interest-bearing liabilities mature or reprice within similar time frames. Such
strategies include; 1) loans which are renewed (and repriced) annually, 2)
variable rate loans, 3) certificates of deposit with terms from one month to
five years and 4) possible Federal Home Loan Bank borrowing for terms of one day
to ten years.
Capital Resources
Total shareholders' equity plus common stock subject to repurchase obligation in
ESOP, net of unearned ESOP shares was $41,489,000 as of December 31, 1996, an
increase of $1,410,000 over $40,079,000 as of December 31, 1995. The increase
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was primarily due to 1996 net income of $4,849,000, offset by cash dividends of
$1,324,000 and a net change in unrealized appreciation (depreciation) in
securities available for sale, net of tax of $(454,000). Common stock subject to
repurchase obligation in ESOP, net of unearned ESOP shares decreased by
$1,435,000 primarily due to participant withdrawals from the ESOP and an
increase on unearned ESOP shares of $1,490,000.
Total Regulatory (risk-based) capital was $44.5 million (which includes $7.9
million of common stock subject to repurchase obligation in ESOP, net of $1.5
million of unearned ESOP shares) as of December 31, 1996, an increase of $2.3
million over total regulatory (risk-based) capital of $42.2 million as of
December 31, 1995.
As of December 31, 1996, the Corporation's and State Bank's total capital to
risk-weighted assets exceeded the minimum requirements for capital adequacy
purposes of 8.0% (by 5.9% or $18.8 million for the Corporation and by 4.9% or
$9.9 million for State Bank). Tier 1 capital to risk weighted assets exceeded
the minimum of 4.0% (by 8.6% or $27.7 million for the Corporation and by 7.7% or
$15.4 million for State Bank), and Tier 1 capital to average assets exceeded the
minimum of 4.0% (by 5.4% or $23.3 million for the Corporation and by 5.0% or
$13.0 million for State Bank). Under prompt corrective actions regulations, the
Corporation's and State Bank's total capital to risk-weighted assets exceeded
the minimum requirement to be well capitalized of 10.0% (by 3.9% or $12.4
million for the Corporation and by 2.9% or $5.9 million for State Bank). Tier 1
capital to risk weighted assets exceeded the minimum of 6.0% (by 6.6% or $21.2
million for the Corporation and by 5.7% or $11.4 million for State Bank), and
Tier 1 capital to average assets exceeded the minimum of 5.0% (by 4.4% or $19.0
million for the Corporation and by 4.0% or $10.4 million for State Bank).
The components of total risk-based capital are Tier 1 capital and Tier 2
capital. Tier 1 capital is total shareholders' equity less intangible assets.
Tier 2 capital is Tier 1 capital plus a portion of the allowance for loan
losses. The allowance for loan losses is includable in Tier 2 capital up to a
maximum of 1.25% of risk weighted assets. The net unrealized
appreciation(depreciation) on securities available-for-sale, net of tax, under
SFAS No. 115 is not considered in meeting regulatory capital requirements. The
following table provides the minimum regulatory capital requirements and the
Corporation's capital ratios at December 31, 1996:
CAPITAL RATIOS
Minimum
Regulatory
Capital Corporation's
Requirements Capital
12/31/96 Ratio
Ratio of Total Capital to Risk Weighted Assets 8.0% 13.9%
Ratio of Tier 1 Capital to Risk Weighted Assets 4.0% 12.6%
Ratio of Tier 1 Capital to Average Assets 4.0% 9.4%
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The Corporation's subsidiaries exceed the applicable minimum regulatory capital
requirements at December 31, 1996.
Restrictions exist regarding the ability of the subsidiary banks to transfer
funds to the Corporation in the form of cash dividends, loans or advances. (See
Note 1 to consolidated financial statements.) These restrictions have had no
major impact on the Corporation's dividend policy or operations and it is not
anticipated that they will have a major impact in the future.
As of December 31, 1996, management is not aware of any current recommendations
by banking regulatory authorities which, if they were to be implemented, would
have, or are reasonably likely to have, a material adverse effect on the
Corporation's liquidity, capital resources or operations.
Impact of Inflation and Changing Prices
The majority of assets and liabilities of the Corporation are monetary in nature
and therefore the Corporation differs greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the growth of
total assets in the banking industry and the resulting need to increase equity
capital at higher than normal rates in order to maintain an appropriate equity
to assets ratio. Inflation significantly affects noninterest expense, which
tends to rise during periods of general inflation.
Management believes the most significant impact on financial results is the
Corporation's ability to react to changes in interest rates. Management seeks to
maintain an essentially balanced position between interest sensitive assets and
liabilities and actively manages the amount of securities available-for-sale in
order to protect against the effects of wide interest rate fluctuations on net
income and shareholders' equity.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Balance Sheets of the Corporation and its subsidiaries
as of December 31, 1996 and December 31, 1995, the related Consolidated
Statements of Income, Changes in Shareholders' Equity and Cash Flows for each of
the years in the three-year period ended December 31, 1996, the related Notes to
Consolidated Financial Statements and the Report of Independent Auditors, appear
on pages 47 through 76 of this Annual Report on Form 10-K. The Corporation is
not required to furnish the supplementary financial information specified by
Item 302 of Regulation S-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
-39-
PART III
Item 10. Directors and Executive Officers of the Registrant.
In accordance with General Instruction G(3), the information called for
in this Item 10 is incorporated herein by reference to the Corporation's
definitive Proxy Statement, filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of
Shareholders to be held on April 28, 1997, under the captions "ELECTION OF
DIRECTORS" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
In addition, certain information concerning the executive officers of the
Corporation called for in this Item 10 is set forth in the portion of Part I of
this Annual Report on Form 10-K entitled "Executive Officers of the Registrant"
in accordance with General Instruction G(3).
Item 11. Executive Compensation.
In accordance with General Instruction G(3), the information called for
in this Item 11 is incorporated herein by reference to the Corporation's
definitive Proxy Statement, filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of
Shareholders to be held on April 28, 1997, under the captions "COMPENSATION OF
EXECUTIVE OFFICERS AND DIRECTORS" and "COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION." Neither the "REPORT ON EXECUTIVE COMPENSATION" nor the
"PERFORMANCE GRAPH" included in the Corporation's definitive Proxy Statement
relating to the Corporation's Annual Meeting of Shareholders to be held on April
28, 1997, shall be deemed to be incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
In accordance with General Instruction G(3), the information called for
in this Item 12 is incorporated herein by reference to the Corporation's
definitive Proxy Statement, filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of
Shareholders to be held on April 28, 1997, under the caption "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Item 13. Certain Relationships and Related Transactions.
In accordance with General Instruction G(3), the information called for
in this Item 13 is incorporated herein by reference to the Corporation's
definitive Proxy Statement, filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934, relating to the Corporation's Annual Meeting of
Shareholders to be held on April 28, 1997, under the caption "TRANSACTIONS
INVOLVING MANAGEMENT."
-40-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements.
For a list of all financial statements included in this Annual Report
on Form 10-K, see "Index to Financial Statements" at page 47.
(a) (2) Financial Statement Schedules.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore,
have been omitted.
(a) (3) Exhibits.
Exhibits filed with this Annual Report on Form 10-K are attached
hereto. For a list of such exhibits, see "Index to Exhibits" at page
77. The following table provides certain information concerning
executive compensation plans and arrangements required to be filed as
exhibits to this Annual Report on Form 10-K.
Executive Compensation Plans and Arrangements
Exhibit No. Description Location
________________________________________________________________________________
10(a) Employees' Stock Ownership Plan of Incorporated herein by reference
Rurban Financial Corp. to the Corporation's Annual
Report on Form 10-K for the
fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit
10(a)].
10(b) First Amendment to Employees' Stock Incorporated herein by reference
Ownership Plan of Rurban Financial to the Corporation's Annual
Corp., dated June 14, 1993 and made to Report on Form 10-K for the
be effective as of January 1, 1993 fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit
10(b)].
10(c) Second Amendment to Employees' Stock Incorporated herein by reference
Ownership Plan of Rurban Financial to the Corporation's Annual
Corp., dated March 14, 1994 and made to Report on Form 10-K for the
be effective as of January 1, 1993 fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit
10(c)].
-41-
Exhibit No. Description Location
________________________________________________________________________________
10(d) Third Amendment to Employees' Stock Incorporated herein by reference
Ownership Plan of Rurban Financial to the Corporation's Annual
Corp., dated March 13, 1995 Report on Form 10-K for the
fiscal year ended December 31,
1994 (File No. 0-13507) [Exhibit
10(d)].
10(e) Fourth Amendment to Employees' Stock Incorporated herein by reference
Ownership Plan of Rurban Financial to the Corporation's Annual
Corp., dated June 10, 1995 and made to Report on Form 10-K for the
be effective as of January 1, 1995 fiscal year ended December 31,
1995 (File No. 0-13507) [Exhibit
10(e)].
10(f) The Rurban Financial Corp. Savings Plan Incorporated herein by reference
and Trust to the Corporation's Annual
Report on Form 10-K for the
fiscal year ended December 31,
1990 (File No. 0-13507) [Exhibit
10(g)].
10(g) First Amendment to The Rurban Financial Incorporated herein by reference
Corp. Savings Plan and Trust, dated to the Corporation's Annual
December 10, 1990 and effective Report on Form 10-K for the
January 1, 1990 fiscal year ended December
31, 1990 (File No. 0-13507)
[Exhibit 10(g)].
10(h) Second Amendment to The Rurban Incorporated herein by reference
Financial Corp. Savings Plan and Trust, to the Corporation's Annual
dated March 11, 1991, effective Report on Form 10-K for the
February 1, 1991 fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit
10(d)].
10(i) Third Amendment to The Rurban Financial Incorporated herein by reference
Corp. Savings Plan and Trust, dated to the Corporation's Annual
June 11, 1991 Report on Form 10-K for the
fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit
10(e)].
-42-
Exhibit No. Description Location
________________________________________________________________________________
10(j) Fourth Amendment to The Rurban Incorporated herein by reference
Financial Corp. Savings Plan and Trust, to the Corporation's Annual
dated July 14, 1992, effective May 1, Report on Form 10-K for the
1992 fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit
10(f)].
10(k) Fifth Amendment to The Rurban Financial Incorporated herein by reference
Corp. Savings Plan and Trust, dated to the Corporation's Annual
March 14, 1994 Report on Form 10-K for the
fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit
10(i)].
10(l) Sixth Amendment to The Rurban Financial Incorporated herein by reference
Corp. Savings Plan and Trust dated to the Corporation's Annual
May 1, 1995 Report on Form 10-K for the
fiscal year ended December 31,
1995 (File No. 0-13507) [Exhibit
10(l)].
10(m) Summary of Incentive Compensation Plan Incorporated herein by reference
of State Bank to the Corporation's Annual
Report on Form 10-K for the
fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit
10(j)].
10(n) Summary of Bonus Program adopted by the Incorporated herein by reference
Trust Department of State Bank for the to the Corporation's Annual
benefit of Robert W. Constien in his Report on Form 10-K for the
capacity as Manager of the Trust fiscal year ended December 31,
Department 1991 (File No. 0-13507) [Exhibit
10(e)].
10(o) Summary of Bonus Program for the Trust Incorporated herein by reference
Department of State Bank to the Corporation's Annual
Report on Form 10-K for the
fiscal year ended December 31,
1992 (File No. 0-13507) [Exhibit
10(i)].
-43-
Exhibit No. Description Location
________________________________________________________________________________
10(p) Summary of Sales Bonus Program of State Incorporated herein by reference
Bank to the Corporation's Annual
Report on Form 10-K for the
fiscal year ended December 31,
1994 (File No. 0-13507) [Exhibit
10(n)].
10(q) Summary of Rurban Financial Corp. Bonus Incorporated herein by reference
Plan to the Corporation's Annual
Report on Form 10-K for the
fiscal year ended December 31,
1993 (File No. 0-13507) [Exhibit
10(q)].
10(r) Executive Salary Continuation Incorporated herein by reference
Agreement, dated December 15, 1994, to the Corporation's Annual
between Rurban Financial Corp. and Report on Form 10-K for the
Richard C. Burrows fiscal year ended
December 31, 1994 (File No.
0-13507) [Exhibit 10(p)].
10(s) Executive Salary Continuation Incorporated herein by reference
Agreement, dated October 11, 1995, to the Corporation's Annual
between Rurban Financial Corp. and Report on Form 10-K for the
Thomas C. Williams; and Schedule A to fiscal year ended
Exhibit 10(s) identifying other December 31, 1995 (File
identical Executive Salary Continuation No. 0-13507) [Exhibit 10(s)].
Agreements between executive officers
of Rurban Financial Corp. and Rurban
Financial Corp.
10(t) Description of Split-Dollar Insurance Incorporated herein by reference
Policies Maintained for Certain to the Corporation's Annual
Executive Officers of Rurban Financial Report on Form 10-K for the
Corp. fiscal year ended December 31,
1995 (File No. 0-13507)
[Exhibit 10(t)].
10(u) Rurban Financial Corp. Stock Option Plan Pages 82 through 92 of this
Annual Report on Form 10-K.
-44-
Exhibit No. Description Location
________________________________________________________________________________
10(v) Rurban Financial Corp. Plan to Allow Pages 93 through 97 of this
Directors to Elect to Defer Compensation Annual Report on Form 10-K.
(b) Reports on Form 8-K.
There were no Current Reports on Form 8-K filed during the fiscal
quarter ended December 31, 1996.
(c) Exhibits.
Exhibits filed with this Annual Report on Form 10-K are attached hereto.
For a list of such exhibits, see "Index to Exhibits" at page 77.
(d) Financial Statement Schedules.
None.
-45-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RURBAN FINANCIAL CORP.
/s/ Richard C. Warrener
________________________________________
Date: March 31, 1997 By: Richard C. Warrener, Senior Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Date Capacity
________________________________________________________________________________
*Thomas C. Williams * President, Chief Executive Officer,
Principal Executive Officer and
Director
*Richard C. Burrows * Director
*John R. Compo * Director
*John Fahl * Director
*Robert A. Fawcett, Jr. * Director
*Richard Z. Graham * Director
*Eric C. Hench * Director
*John H. Moore * Director
*Steven D. VanDemark * Director
*J. Michael Walz, D.D.S * Director
*By: Richard C. Warrener * Senior Vice President and Chief
(Attorney-in-Fact) Financial Officer
Date: March 31, 1997
-46-
RURBAN FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
INDEX TO FINANCIAL STATEMENTS
Pages in
this Annual
Report on
Description Form 10-K
Report of Independent Auditors................................. 48
Consolidated Balance Sheets at December 31, 1996
and 1995..................................................... 49-50
Consolidated Statements of Income for the years
ended December 31, 1996, 1995 and 1994....................... 51
Consolidated Statements of Changes in Shareholders'
Equity for the three years ended December 31,
1996......................................................... 52
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and
1994......................................................... 53-54
Notes to Consolidated Financial Statements..................... 55-76
-47-
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Rurban Financial Corp.
Defiance, Ohio
We have audited the accompanying consolidated balance sheets of Rurban Financial
Corp. as of December 31, 1996 and 1995 and the related consolidated statements
of income, changes in shareholders' equity and cash flows for the years ended
December 31, 1996, 1995 and 1994. These consolidated financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rurban Financial
Corp. as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years ended December 31, 1996, 1995 and 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 1, the Corporation adopted the provisions of Statement of
Financial Accounting Standards No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES," as of January 1, 1994.
Crowe, Chizek and Company LLP
South Bend, Indiana
January 17, 1997, except for
Note 1, stock dividends,
as to which the date is January 31, 1997
-48-
F-1
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
______________________________________________________________________________________________
1996 1995
---- ----
ASSETS
Cash and due from banks $ 18,718,263 $ 21,067,131
Federal funds sold 15,309,000 7,312,525
-------------- -------------
Total cash and cash equivalents 34,027,263 28,379,656
-------------- -------------
Interest-bearing deposits in other financial institutions 180,000 180,000
Securities available for sale 66,635,889 90,329,866
Loans held for sale, net of valuation allowance
(1996 - $31,119, 1995 - $10,000) 1,875,636 2,949,293
Loans
Commercial, financial and agricultural 76,395,361 63,444,036
Real estate mortgage 166,669,782 152,555,540
Installment 75,643,488 61,600,664
-------------- -------------
Total loans 318,708,631 277,600,240
Deferred loan fees, net (262,791) (235,396)
Allowance for loan losses (5,066,600) (4,270,000)
-------------- -------------
Net loans 313,379,240 273,094,844
-------------- -------------
Accrued interest receivable 3,298,902 3,240,154
Premises and equipment, net 8,827,838 8,383,717
Other assets 5,048,005 4,668,235
-------------- -------------
Total assets $ 433,272,773 $ 411,225,765
============== =============
-49-
(Continued)
F-2
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
______________________________________________________________________________________________
1996 1995
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 42,323,683 $ 48,721,000
Interest-bearing 345,442,390 319,075,538
-------------- -------------
Total deposits 387,766,073 367,796,538
-------------- -------------
Accrued interest payable 1,421,131 1,035,048
Other liabilities 2,596,921 2,315,688
-------------- -------------
Total liabilities 391,784,125 371,147,274
Common stock subject to repurchase obligation
in ESOP (shares outstanding: 1996 - 328,582,
1995 - 297,467) 9,387,588 9,333,027
Unearned ESOP shares (unearned shares: 1996 - 46,879,
1995 - 0) (1,490,000) -
Common stock: stated value $2.50 per share;
shares authorized: 1996 - 10,000,000, 1995 - 5,000,000;
shares issued and outstanding: 1996 - 1,959,269,
1995 - 1,886,911 4,898,173 4,717,277
Additional paid-in capital 8,672,955 5,798,813
Retained earnings 20,024,916 19,779,897
Net unrealized appreciation (depreciation) on
securities available for sale, net of tax of $(2,567) in
1996 and $231,549 in 1995 (4,984) 449,477
-------------- -------------
Total liabilities and shareholders' equity $ 433,272,773 $ 411,225,765
============== =============
______________________________
The accompanying notes are an integral part of these
consolidated financial statements.
-50-
F-3
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
- ------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Interest income
Loans, including fees $ 28,680,021 $26,539,689 $ 20,421,474
Taxable securities 4,066,184 3,756,764 2,485,695
Non-taxable securities 408,811 426,178 346,485
Other interest income 355,950 707,596 220,244
------------ ----------- ------------
Total interest income 33,510,966 31,430,227 23,473,898
Interest expense
Deposits 14,511,736 14,197,998 9,486,706
Short-term borrowings 144,773 40,050 125,647
------------ ----------- ------------
Total interest expense 14,656,509 14,238,048 9,612,353
------------ ----------- ------------
Net interest income 18,854,457 17,192,179 13,861,545
Provision for loan losses 961,009 1,451,898 701,490
------------ ----------- ------------
Net interest income after provision
for loan losses 17,893,448 15,740,281 13,160,055
Noninterest income
Service charges on deposit accounts 1,253,127 1,184,787 1,021,685
Trust fees 2,359,312 1,946,013 1,784,626
Data processing fees 2,203,213 2,038,948 1,932,045
Net gain (loss) on securities 33,884 3,113 (8,556)
Net gain (loss) on sales of loans (210,000) 83,919 112,156
Other income 554,131 496,419 470,727
------------ ----------- ------------
Total noninterest income 6,193,667 5,753,199 5,312,683
Noninterest expense
Salaries and employee benefits 8,073,051 6,909,268 5,736,434
Net occupancy expense of premises 977,165 869,678 788,377
Equipment rentals, depreciation and
maintenance 2,131,295 1,889,540 1,251,898
Other expenses 5,694,249 5,603,077 4,886,990
------------ ----------- ------------
Total noninterest expense 16,875,760 15,271,563 12,663,699
------------ ----------- ------------
Income before income tax expense 7,211,355 6,221,917 5,809,039
Income tax expense 2,362,141 2,127,104 1,898,665
------------ ----------- ------------
Net income $ 4,849,214 $ 4,094,813 $ 3,910,374
============ =========== ============
Earnings per common share $ 2.14 $ 1.79 $ 1.80
============ =========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
-51-
F-4
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three years ended December 31, 1996
Net Unrealized
Appreciation
(Depreciation)
On Securities
Additional Available
Common Paid-In Retained For Sale,
Stock Capital Earnings Net of Tax
____________________________________________________________________________________________________________________________________
Balances at January 1, 1994 $ 4,402,980 $ 7,324,046 $ 14,349,465 $ --
Adoption of SFAS No. 115, net of tax of $102,256 -- -- -- 198,496
Net income for the year -- -- 3,910,374 --
Cash dividends declared ($0.57 per share) -- -- (1,264,128) --
Transfer of 3,242 common shares to common
stock subject to repurchase obligation in ESOP (8,105) (1,610,234) -- --
Issuance of 155,000 shares of common stock 387,500 2,518,373 -- --
Net change in unrealized appreciation
(depreciation) on securities available for
sale, net of tax of $(705,107) -- -- -- (1,368,737)
----------- ----------- ------------ -----------
Balances at December 31, 1994 4,782,375 8,232,185 16,995,711 (1,170,241)
Net income for the year -- -- 4,094,813 --
Cash dividends declared ($0.57 per share) -- -- (1,310,627) --
Transfer of 26,039 common shares to common
stock subject to repurchase obligation in ESOP (65,098) (2,433,372) -- --
Net change in unrealized appreciation
(depreciation) on securities available for
sale, net of tax of $834,400 -- -- -- 1,619,718
----------- ----------- ------------ -----------
Balances at December 31, 1995 4,717,277 5,798,813 19,779,897 449,477
Net income for the year -- -- 4,849,214 --
Cash dividends declared ($0.57 per share) -- -- (1,308,975) --
Declaration of a 5% stock dividend and issuance
of 92,826 common shares and 15,647 common
shares subject to repurchase obligation in ESOP 232,066 2,574,993 (3,280,224) --
Fractional shares related to 5% stock dividend -- -- (14,996) --
Purchase and retirement of 5,000 common shares (12,500) (158,125) -- --
Transfer of 15,468 common shares to common
stock subject to repurchase obligation in ESOP (38,670) 457,274 -- --
Net change in unrealized appreciation
(depreciation) on securities available
for sale, net of tax of $(234,116) -- -- -- (454,461)
----------- ----------- ------------ -----------
Balances at December 31, 1996 $ 4,898,173 $ 8,672,955 $ 20,024,916 $ (4,984)
=========== =========== ============ ===========
The accompanying notes are an integral part of these
consolidated financial statements.
-52-
F-5
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows from operating activities
Cash received from customers - fees
and commissions $ 6,369,783 $ 5,666,167 $ 5,209,083
Cash paid to suppliers and employees (15,877,040) (14,117,567) (10,448,128)
Loans originated for sale (20,385,626) (10,418,133) (12,503,521)
Proceeds from sales of loans held for sale 21,249,283 12,242,370 12,595,646
Interest received 33,479,613 30,857,639 23,249,685
Interest paid (14,270,426) (14,111,248) (9,353,404)
Income taxes paid (1,966,477) (2,086,479) (1,893,366)
------------ ------------ ------------
Net cash from operating activities 8,599,110 8,032,749 6,855,995
Cash flows from investing activities
Net change in interest-bearing deposits
in other financial institutions -- 166,324 (166,324)
Net change in loans (41,986,168) 427,936 (17,010,807)
Proceeds from sales of securities available
for sale 19,416,875 2,263,104 --
Principal repayments, maturities, and
calls of:
Securities available for sale 46,431,465 22,190,401 22,285,066
Securities held to maturity -- 3,318,925 2,250,856
Purchase of:
Securities available for sale (42,809,056) (41,660,219) (17,500,656)
Securities held to maturity -- (3,802,079) (4,433,520)
Banking subsidiary, net of cash received -- -- 3,265,954
Net purchases of premises and equipment (1,717,922) (274,859) (2,105,869)
Recoveries on loan charge-offs 713,368 698,928 329,463
------------ ------------ ------------
Net cash from investing activities (19,951,438) (16,671,539) (13,085,837)
Cash flows from financing activities
Cash paid to purchase unearned ESOP
shares (1,490,000) -- --
Net change in deposits 19,969,535 13,150,902 15,335,409
Net change in short-term borrowings -- -- (1,000,000)
Cash dividends paid (1,308,975) (1,310,627) (1,264,128)
Cash paid to repurchase common stock (170,625) -- --
------------ ------------ ------------
Net cash from financing activities 16,999,935 11,840,275 13,071,281
------------ ------------ ------------
Net change in cash and cash equivalents 5,647,607 3,201,485 6,841,439
Cash and cash equivalents at beginning of year 28,379,656 25,178,171 18,336,732
------------ ------------ ------------
Cash and cash equivalents at end of year $ 34,027,263 $ 28,379,656 $ 25,178,171
============ ============ ============
-53-
(Continued)
F-6
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Reconciliation of net income to
net cash from operating activities
Net income $ 4,849,214 $ 4,094,813 $ 3,910,374
Adjustments to reconcile net income
to net cash from operating activities
Depreciation 1,273,801 1,155,227 961,919
Amortization of intangible assets 285,000 634,000 217,000
Provision for loan losses 961,009 1,451,898 701,490
Net (gain) loss on securities (33,884) (3,113) 8,556
Loans originated for sale (20,385,626) (10,418,133) (12,503,521)
Proceeds from sales of loan held for sale 21,249,283 12,242,370 12,595,646
Net (gain) loss on sales of loans 210,000 (83,919) (112,156)
Change in assets and liabilities, net of
effects from purchase of banking
subsidiary
Deferred loan fees, net 27,395 (26,808) 37,822
Accrued interest receivable (58,748) (545,780) (262,035)
Other assets (430,654) (591,281) 239,679
Accrued interest payable 386,083 126,800 258,949
Other liabilities 266,237 (3,325) 802,272
------------ ------------ ------------
Net cash from operating
activities $ 8,599,110 $ 8,032,749 $ 6,855,995
============ ============ ============
Supplemental disclosures of cash flow information
Transfer from securities held to maturity
to securities available for sale $ -- $ 10,856,066 $ --
Transfer from investment securities and
securities held for sale to:
Securities available for sale -- -- 52,386,249
Securities held to maturity -- -- 6,527,912
See also Note 14
The accompanying notes are an integral part of these
consolidated financial statements.
-54-
F-7
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of Rurban Financial Corp. and its wholly-owned
subsidiaries. Rurban Financial Corp. is a bank holding company, organized under
Ohio law, that owns all the outstanding stock of The State Bank and Trust
Company ("State Bank"), The Peoples Banking Company ("Peoples Bank"), The First
National Bank of Ottawa ("First National Bank"), The Citizens Savings Bank
Company ("Citizens Savings Bank"), RDSI Data Services, Inc. ("RDSI") and Rurban
Life Insurance Company ("Rurban Life") (together referred to as "the
Corporation"). On October 3, 1994, the Corporation acquired 100% of the common
stock of Citizens Savings Bank located in Pemberville, Ohio with approximately
$60 million in assets. The transaction was accounted for as a purchase. Citizens
Savings Bank's results of operations are included in the income statement of the
Corporation beginning as of the purchase date. Each share of Citizens Savings
Bank's common stock was exchanged for $73.39 in cash or 3.91 common shares of
the Corporation's common stock. The Corporation paid a total of $2,378,046 and
issued 155,000 common shares in the acquisition. All significant inter-company
balances and transactions are eliminated in consolidation.
Presented below are the consolidated proforma results of operations of the
Corporation for the year ended December 31, 1994 assuming this acquisition had
occurred as of January 1, of that year.
Net interest income $15,569,000
Net income 3,687,000
Earnings per share 1.61
Nature of Business: The Corporation operates primarily in the banking industry
which accounts for more than 90% of its revenues, operating income and assets.
The Corporation's subsidiary banks grant credit and accept deposits from their
customers in the normal course of business primarily in the northwestern Ohio
region. RDSI provides data processing services, primarily to financial
institutions located in northwestern Ohio. Rurban Life accepts reinsurance ceded
in part by USLIFE from the credit life and disability insurance purchased by
customers of the Corporation's subsidiary banks.
Use of Estimates: To prepare consolidated financial statements in conformity
with generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the consolidated financial statements and the
disclosures provided, and future results could differ. The collectibility of
loans, fair values of financial instruments, securities valuations, the carrying
value of loans held for sale, the realization of deferred tax assets, the
carrying value of intangibles and status of contingencies are particularly
subject to change.
-55-
(Continued)
F-8
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: On January 1, 1994, the Corporation adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, "ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES." The Corporation classifies
securities into held to maturity, available for sale and trading categories.
Held to maturity securities are those which the Corporation has the positive
intent and ability to hold to maturity, and are reported at amortized cost.
Available for sale securities are those the Corporation may decide to sell if
needed for liquidity, asset-liability management or other reasons. Available for
sale securities are reported at fair value, with unrealized gains and losses
included as a separate component of shareholders' equity, net of tax. Trading
securities are bought principally for sale in the near term, and are reported at
fair value with unrealized gains and losses included in earnings. Adoption of
SFAS No. 115 on January 1, 1994 increased shareholders' equity by $198,496, net
of $102,256 tax effect.
In November 1995, the Financial Accounting Standards Board ("FASB") issued its
Special Report, A GUIDE TO IMPLEMENTATION OF SFAS NO. 115 ON ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES ("Guide"). As permitted by the
Guide, on December 31, 1995, the Corporation made a one-time reassessment and
transferred securities from the held to maturity portfolio to the available for
sale portfolio. At the date of transfer, these securities had an amortized cost
of $10,854,066 and the transfer increased the unrealized gain on securities
available for sale by $210,566 and shareholders' equity by $138,974, net of tax
of $71,592.
Realized gains and losses resulting from the sale of securities are computed by
the specific identification method. Interest and dividend income, adjusted by
amortization of purchase premium or discount, is included in earnings. Premiums
and discounts on securities are recognized using the level yield method over the
estimated life of the security.
Loans Held for Sale: Mortgage loans intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
Interest Income on Loans: Interest on loans is accrued over the term of the
loans based upon the principal outstanding. Management reviews loans delinquent
90 days or more to determine if the interest accrual should be discontinued.
When serious doubt exists as to the collectibility of a loan, the accrual of
interest is discontinued. Under SFAS No. 114, "ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN," as amended by SFAS No. 118, the carrying value of
impaired loans is periodically adjusted to reflect cash payments, revised
estimates of future cash flows, and increases in the present value of expected
cash flows due to the passage of time. Cash payments representing interest
income are reported as such and other cash payments are reported as reductions
in carrying value. Increases or decreases in carrying value due to changes in
estimates of future payments or the passage of time are reported as a component
of the provision for loan losses.
-56-
(Continued)
F-9
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Fees and Costs: Loan fees, net of direct origination costs, are deferred.
The net amount deferred is reported in the consolidated balance sheets as part
of loans and is recognized in interest income over the term of the loan using
the level yield method.
Allowance For Loan Losses: An allowance for loan losses is established and
maintained because some loans may not be repaid in full. Increases to the
allowance are recorded by a provision for loan losses charged to expense.
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loan situations, the entire allowance is available for any loan
charge-offs that may occur. A loan is charged-off by management as a loss when
deemed uncollectible, although collection efforts continue and future recoveries
may occur.
Loans are considered impaired if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is deemed to be less than
the unpaid balance. If these allocations cause the allowance for loan losses to
require increase, such increase is reported as a component of the provision for
loan losses.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, and automobile, home equity and
second mortgage loans. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment. When analysis of borrower
operating results and financial condition indicates that underlying cash flows
of the borrower's business are not adequate to meet its debt service
requirements, the loan is evaluated for impairment. Often this is associated
with a delay or shortfall in payments of 30 days or more. Commercial loans are
rated on a scale of 1 to 8, with 1 to 3 being satisfactory, 4 watch, 5 special
mention, 6 substandard, 7 doubtful, and 8 as loss which are then charged-off.
Loans graded a 6 or worse are considered for impairment. Loans are generally
moved to nonaccrual status when 90 days or more past due. These loans are often
considered impaired. Impaired loans, or portions thereof, are charged-off when
deemed uncollectible. This typically occurs when the loan is 120 days or more
past due. The nature of disclosures for impaired loans is considered generally
comparable to prior nonaccrual and renegotiated loans and non-performing and
past-due asset disclosures.
-57-
(Continued)
F-10
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Land is carried at cost. Buildings and improvements are
depreciated using primarily the straight-line method with useful lives ranging
from 10 to 50 years. Furniture and equipment are depreciated using the
straight-line and declining-balance methods with useful lives ranging
predominantly from 5 to 20 years. These assets are reviewed for impairment under
SFAS No. 121 when events indicate the carrying amount may not be recoverable.
Maintenance and repairs are expensed and major improvements are capitalized.
Servicing Rights: Prior to adopting SFAS No. 122 at the start of 1996, servicing
right assets were recorded only for purchased rights to service mortgage loans.
Subsequent to adopting this standard, servicing rights represent both purchased
rights and the allocated value of servicing rights retained on loans sold.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates and then, secondarily, as to geographic and prepayment characteristics.
Any impairment of a grouping is reported as a valuation allowance. The impact on
the Corporation's consolidated financial position and results of operations for
the year ended December 31, 1996 was not material.
Excess servicing receivable is reported when a loan sale results in servicing in
excess of normal amounts, and is expensed over the life of the servicing on the
interest method.
Intangible Assets: Goodwill arising from the acquisition of subsidiary banks is
amortized over 5 to 25 years using the straight-line method. Core deposit
intangibles are amortized on an accelerated basis over 10 years, the estimated
life of the deposits acquired. Goodwill and identified intangibles are assessed
for impairment based on estimated undiscounted cash flows, and written down if
necessary. As of December 31, 1996, unamortized goodwill totaled approximately
$669,000 and unamortized core deposit intangibles totaled approximately
$351,000.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of acquisition
establishing a new cost basis. Any reduction to fair value from the carrying
value of the related loan at the time of acquisition is accounted for as a loan
loss and charged against the allowance for loan losses. After acquisition, a
valuation allowance is recorded through a charge to income for the amount of
estimated selling costs. Valuations are periodically performed by management,
and valuation allowances are adjusted through a charge to income for changes in
fair value or estimated selling costs. Other real estate owned amounted to
approximately $329,000 and $320,000 at December 31, 1996 and 1995, respectively,
and is included in other assets in the consolidated balance sheets.
-58-
(Continued)
F-11
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Employee Benefits: The Corporation sponsors an employee stock ownership plan
(ESOP) and 401(k) profit sharing plan for which contributions are made and
expensed annually. The Corporation provides split-dollar life insurance plans
for certain executive officers of the Corporation. Also, the Corporation
sponsors a supplemental retirement plan for certain executive officers of the
Corporation.
Postretirement Health Care Benefits: The Corporation sponsors a postretirement
health care plan that covers both salaried and nonsalaried employees. The
Corporation accrues, during the years that employees render the necessary
service, the expected cost of providing postretirement health care benefits to
employees and their beneficiaries and covered dependents. The Corporation's
postretirement health care plan provides that retired employees may remain on
the Corporation's health care plan with each retiree's out-of-pocket
contribution to the Corporation equal to their premium expense determined
exclusively on the loss experience of the retirees in the plan.
Stock Dividends: Dividends issued in stock are reported by transferring the
market value of the stock issued from retained earnings to common stock and
additional paid-in capital. Stock splits are recorded by adjusting par value. On
December 9, 1996, the Board of Directors declared a five percent stock dividend
increasing shares outstanding by 108,473 shares. The stock dividend was payable
to shareholders of record as of December 24, 1996. As of December 31, 1996,
common stock includes $232,066 for the stock dividend distributable to
shareholders which was paid on January 31, 1997.
Earnings Per Common Share: Earnings and dividends per common share have been
computed based on the weighted average number of shares outstanding during the
periods presented, restated for all stock dividends and stock splits. A five
percent stock dividend was declared in 1996 and in 1994, a two-for-one stock
split was declared and paid. ESOP shares are considered to be outstanding as
they are committed to be released. Unearned ESOP shares are not considered to be
outstanding. The number of shares used in the computation of earnings per common
share was 2,260,757 for 1996, 2,293,597 for 1995 and 2,170,977 for 1994.
-59-
(Continued)
F-12
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Dividend Restriction: Certain restrictions exist regarding the ability of the
subsidiaries to transfer funds to Rurban Financial Corp. in the form of cash
dividends, loans or advances. As of December 31, 1996, approximately $7,500,000
of undistributed earnings of the subsidiaries, included in consolidated retained
earnings, was available for distribution to Rurban Financial Corp. as dividends
without prior regulatory approval.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in Note 12. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect such
estimates.
Concentrations of Credit Risk: The Corporation grants commercial, real estate
and installment loans to customers mainly in northwest Ohio. Commercial loans
include loans collateralized by business assets and agricultural loans
collateralized by crops and farm equipment. Commercial loans make up
approximately 24% of the loan portfolio and the loans are expected to be repaid
from cash flow from operations of businesses. Real estate loans make up
approximately 52% of the loan portfolio and are collateralized by both
commercial and residential real estate. Installment loans make up approximately
24% of the loan portfolio and are primarily collateralized by consumer assets.
Financial Instruments With Off-Balance-Sheet Risk: The Corporation, in the
normal course of business, makes commitments to extend credit which are not
reflected in the consolidated financial statements. A summary of these
commitments is disclosed in Note 10.
Statements of Cash Flows: For purposes of reporting cash flows, cash and cash
equivalents is defined to include cash on hand, due from financial institutions
and federal funds sold with original maturities under 90 days. The Corporation
reports net cash flows for customer loan transactions, deposit transactions,
short-term borrowings with maturities of 90 days or less and interest-bearing
deposits in other financial institutions.
New Accounting Pronouncement: SFAS No. 125, "ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES," was issued by
the FASB in 1996. It revises the accounting for transfers of financial assets,
such as loans and securities, and for distinguishing between sales and secured
borrowings. It is effective for some transactions in 1997 and others in 1998.
The anticipated effect on the consolidated financial statements has not yet been
determined.
Reclassifications: Some items in the prior consolidated financial statements
have been reclassified to conform with the current presentation.
-60-
(Continued)
F-13
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 2 - SECURITIES
Year end securities were as follows:
Gross Gross
Amortized Unrealized Unrealized
Available for sale - 1996 Cost Gains Losses Fair Value
- ------------------------- ---- ----- ------ ----------
U.S. Treasury and U.S.
Government agency
securities $ 54,407,062 $ 65,917 $ (237,386) $ 54,235,593
Obligations of states and
political subdivisions 6,249,299 152,997 (12,862) 6,389,434
Mortgage-backed securities 4,813,329 29,022 (5,239) 4,837,112
Marketable equity securities 1,173,750 - - 1,173,750
------------- --------- ----------- -------------
$ 66,643,440 $ 247,936 $ (255,487) $ 66,635,889
============= ========= =========== =============
Available for sale - 1995
U.S. Treasury and U.S.
Government agency
securities $ 73,799,068 $ 574,819 $ (122,386) $ 74,251,501
Obligations of states and
political subdivisions 9,365,076 191,846 (13,527) 9,543,395
Mortgage-backed securities 5,295,474 62,183 (11,909) 5,345,748
Marketable equity securities 1,189,222 - - 1,189,222
------------- --------- ----------- -------------
$ 89,648,840 $ 828,848 $ (147,822) $ 90,329,866
============= ========= =========== =============
-61-
(Continued)
F-14
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 2 - SECURITIES (Continued)
Contractual maturities of debt securities at December 31, 1996 were as follows.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
Available for Sale
Amortized
Cost Fair Value
Due in one year or less $ 4,731,009 $ 4,733,170
Due after one year through five years 52,990,548 52,902,363
Due after five years through ten years 2,895,004 2,955,194
Due after ten years 39,800 34,300
Mortgage-backed securities 4,813,329 4,837,112
------------- ------------
Total debt securities $ 65,469,690 $ 65,462,139
============= ============
Proceeds, gross gains and gross losses realized from sales of securities for the
years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994
---- ---- ----
Proceeds from sales of debt securities
available for sale $19,401,403 $ 2,263,104 $ -
Proceeds from sales of marketable equity
securities available for sale 15,472 - -
----------- ------------- ------------
Total proceeds from sales of
securities available for sale $19,416,875 $ 2,263,104 $ -
=========== ============= ============
Gross gains from sales of debt securities
available for sale $ 48,248 $ 11,975 $ -
Gross losses from sales of debt securities
available for sale (14,364) (8,672) -
Net losses on calls of securities available
for sale - (190) -
Net losses on calls of securities held to
maturity - - (8,556)
----------- ------------- ------------
Net gain (loss) on securities $ 33,884 $ 3,113 $ (8,556)
=========== ============= ============
-62-
(Continued)
F-15
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 2 - SECURITIES (Continued)
At December 31, 1996 there were no holdings of securities of any one issuer,
other than the U.S. Government and its agencies and corporations, in an amount
greater than 10% of shareholders' equity.
Securities with an amortized cost of approximately $31,941,000 and $47,893,000
as of December 31, 1996 and 1995, were pledged to secure public and trust
deposits.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
The following is a summary of the activity in the allowance for loan losses for
the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Beginning balance $ 4,270,000 $ 4,770,000 $ 3,390,000
Allowance of acquired bank - - 1,100,000
Provision for loan losses 961,009 1,451,898 701,490
Recoveries of previous charge-offs 713,368 698,928 329,463
Losses charged to the allowance (877,777) (2,650,826) (750,953)
----------- ----------- ------------
Ending balance $ 5,066,600 $ 4,270,000 $ 4,770,000
=========== =========== ============
At December 31, 1996 and 1995, loans past due more than 90 days and still
accruing interest approximated $293,000 and $711,000.
Impaired loans were as follows.
1996 1995
---- ----
Year end loans with no allowance for loan
losses allocated $ -- $ 302,000
Year end loans with allowance for loan
losses allocated 3,295,651 1,533,000
Amount of allowance allocated 1,237,000 643,000
Average of impaired loans during the year 3,081,000 2,542,000
Interest income recognized during impairment 115,000 32,000
Cash-basis interest income recognized 112,000 32,000
-63-
(Continued)
F-16
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 4 - PREMISES AND EQUIPMENT, NET
Premises and equipment, net at December 31, are summarized as follows:
1996 1995
---- ----
Land $ 966,579 $ 966,579
Buildings and improvements 7,069,653 6,927,945
Furniture and equipment 7,484,199 5,980,928
----------- ------------
Total cost 15,520,431 13,875,452
Accumulated depreciation and amortization (6,692,593) (5,491,735)
----------- ------------
$ 8,827,838 $ 8,383,717
=========== ============
NOTE 5 - INTEREST-BEARING DEPOSITS
Included in interest-bearing deposits are certificates of deposit in
denominations of $100,000 or more of approximately $38,305,000 and $33,426,000
as of December 31, 1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of certificates of deposit are as
follows for the years ended December 31:
1997 $139,101,883
1998 36,070,169
1999 4,484,973
2000 4,315,057
2001 and thereafter 84,161
-----------
$184,056,243
NOTE 6 - EMPLOYEE BENEFITS
Employee Stock Ownership Plan: The Corporation has a noncontributory employee
stock ownership plan (ESOP) covering substantially all employees of the
Corporation's subsidiaries. Voluntary contributions are made by the Company to
the plan. Each eligible employee is vested based upon years of service,
including prior years of service. Contributions and related expense attributable
to the plan included in salaries and employee benefits were approximately
$431,000, $374,000 and $274,000 in 1996, 1995 and 1994, respectively.
-64-
(Continued)
F-17
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 6 - EMPLOYEE BENEFITS (Continued)
For corporations not listed on NASDAQ, ERISA rules require employers with an
ESOP to agree to repurchase shares from participants for a certain time period
following the distribution of shares to the participants.
The Corporation's common stock subject to repurchase obligation in ESOP had an
estimated value as follows:
Unearned
ESOP ESOP Shares
Balance at December 31, 1993 $ 5,216,218 $ -
Change in estimated market value of common
stock subject to repurchase obligation in ESOP 1,618,339 -
------------ ------------
Balance at December 31, 1994 6,834,557 -
Change in estimated market value of common
stock subject to repurchase obligation in ESOP 2,498,470 -
------------ ------------
Balance at December 31, 1995 9,333,027
Purchase of unallocated ESOP shares 1,490,000 (1,490,000)
Change in estimated market value of common
stock subject to repurchase obligation in ESOP (1,435,439) -
------------ ------------
Balance at December 31, 1996 $ 9,387,588 $ (1,490,000)
============ ============
During 1996, the ESOP borrowed $1,490,000 from the Corporation to purchase
46,879 shares of common stock at a weighted average cost of $31.78 per share.
Collateral for the loan is the unearned shares of common stock purchased by the
ESOP with the loan proceeds. The loan will be repaid principally from the
Corporation's discretionary contributions to the ESOP. The interest rate for the
loan is 7.75%. Shares purchased by the ESOP will be held in suspense until
allocated among ESOP participants as the loan is repaid.
The ESOP shares as of December 31 were as follows:
1996 1995
---- ----
Allocated shares 281,703 297,467
Unearned shares 46,879 -
---------- ------------
Total ESOP shares 328,582 297,467
========== ============
Fair value of unearned ESOP shares at
December 31 $1,339,333 $ -
========== ============
-65-
(Continued)
F-18
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 6 - EMPLOYEE BENEFITS (Continued)
The Corporation accounts for its ESOP under AICPA Statement of Position (SOP)
93-6. Compensation expense is recorded based on the average market price of the
shares committed to be released for allocation to participant accounts. The
difference between the market price and the cost of shares committed to be
released is recorded as an adjustment to common stock. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings; dividends on
unearned ESOP shares are reflected as a reduction of debt and accrued interest.
401(k) Profit Sharing Plan: The Corporation has 401(k) profit sharing plans. The
annual expense of the plans is based on 50% matching of voluntary employee
contributions of up to 6% of individual compensation. Employee contributions are
vested immediately and the Corporation's matching contributions are fully vested
after six years. The plans cover substantially all employees of the Corporation.
Contributions and related expense attributable to the plans, included in
salaries and employee benefits, were approximately $140,000, $101,000 and
$88,000 in 1996, 1995 and 1994.
Life Insurance Plans: Life insurance plans are provided for certain executive
officers on a split-dollar basis and the Corporation is the owner of the
split-dollar policies. The officers are entitled to a sum equal to two times
either the employee's annual salary at death, if actively employed, or final
annual salary, if retired, less $50,000. The Corporation is entitled to the
remainder of the death proceeds less any loans on the policy and unpaid interest
or cash withdrawals previously incurred by the Corporation. The employees have
the right to designate a beneficiary(s) to receive their share of the proceeds
payable upon death. The cash surrender value of these life insurance policies
was approximately $602,000 and $596,000 at December 31, 1996 and 1995, and is
included in other assets in the consolidated balance sheets.
Supplemental Retirement Plan: The Corporation established a supplemental
retirement plan for selected officers. The Corporation has purchased insurance
contracts on the lives of the participants in the supplemental retirement plan
and has named the Corporation as beneficiary. While no direct contract exists
between the supplemental retirement plan and the life insurance contracts, it is
management's current intent that the proceeds from the insurance contracts will
be used to help offset earlier payments made under the supplemental retirement
plan. The Corporation is recording an expense equal to the projected present
value of the payment due at retirement based on the projected remaining years of
service using the projected unit credit method. The expense attributable to the
plan, included in salaries and employee benefits, was approximately $126,000,
$133,000 and $33,000 in 1996, 1995 and 1994. The cash surrender value of the
life insurance was approximately $1,491,000 and $1,439,000 at December 31, 1996
and 1995, and is included in other assets in the consolidated balance sheets.
-66-
(Continued)
F-19
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 7 - OTHER EXPENSES
The following is an analysis of other expenses for the years ended December 31,
1996, 1995 and 1994:
1996 1995 1994
------ ------ ------
Amortization of intangible assets $ 285,000 $ 634,000 $ 217,000
Advertising expense 271,407 259,938 233,548
Professional fees 1,266,327 1,097,162 853,241
Insurance expense 123,893 525,189 702,172
Data processing fees 426,771 436,983 323,942
Printing, stationery and supplies 689,489 604,340 587,995
Postage and delivery expense 337,544 304,362 241,441
State, local and other taxes 610,792 630,829 586,899
Other operating expenses 1,683,026 1,110,274 1,140,752
------------ ----------- ------------
$ 5,694,249 $ 5,603,077 $ 4,886,990
============ =========== ============
NOTE 8 - INCOME TAX EXPENSE
Income tax expense consists of the following for the years ended December 31,
1996, 1995 and 1994:
1996 1995 1994
------ ------ ------
Current expense $ 2,386,704 $ 2,915,522 $ 1,668,675
Deferred expense (benefit) (24,563) (788,418) 229,990
------------ ----------- ------------
$ 2,362,141 $ 2,127,104 $ 1,898,665
============ =========== ============
Tax expense (benefit) on net securities gains (losses) were $11,521, $1,058 and
$(2,909) in 1996, 1995 and 1994.
The difference between the financial statement income tax expense and amounts
computed by applying the statutory federal income tax rate to income before
income tax expense is as follows for the years ended December 31, 1996, 1995 and
1994:
1996 1995 1994
------ ------ ------
Statutory tax rate 34% 34% 34%
Income taxes computed at the
statutory federal income tax rate $ 2,451,861 $ 2,115,452 $ 1,975,073
Add (subtract) tax effect of
Tax-exempt income (200,737) (184,312) (149,706)
Non-deductible expenses and other 111,017 195,964 73,298
------------ ----------- ------------
$ 2,362,141 $ 2,127,104 $ 1,898,665
============ =========== ============
-67-
(Continued)
F-20
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 8 - INCOME TAX EXPENSE (Continued)
The components of the net deferred tax asset recorded in the consolidated
balance sheets as of December 31, 1996 and 1995 are as follows:
1996 1995
Deferred tax assets
Provision for loan losses $ 1,252,221 $ 1,061,264
Mark-to-market adjustment - 162,050
Net deferred loan fees 48,427 65,309
Net unrealized depreciation on
securities available for sale 2,567 -
Accrued compensation and benefits 154,880 185,003
Other 112,837 118,250
----------- ------------
$ 1,570,932 $ 1,591,876
=========== ============
Deferred tax liabilities
Net unrealized appreciation on
securities available for sale $ - $ (231,549)
Depreciation (113,232) (139,185)
Purchase accounting adjustments (196,360) (259,324)
Mark-to-market adjustment (43,883) -
Other (1,526) (4,566)
---------- ------------
(355,001) (634,624)
Valuation allowance - -
---------- ------------
$1,215,931 $ 957,252
========== ============
NOTE 9 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders of the
Corporation, including associates of such persons, were loan customers during
1996. A summary of the related party loan activity, for loans aggregating
$60,000 or more to any one related party, follows for the year ended December
31, 1996:
Balance, January 1, 1996 $ 3,512,000
New loans 18,423,000
Repayments (14,469,000)
Other changes 425,000
-----------
Balance, December 31, 1996 $ 7,891,000
===========
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
-68-
(Continued)
F-21
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 10 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet financing needs of its customers. These
financial instruments include commitments to make loans, unused lines of credit
and standby letters of credit. The Corporation's exposure to credit loss in the
event of nonperformance by the other party to the financial instruments for
commitments to make loans, unused lines of credit and standby letters of credit
is represented by the contractual amount of those instruments. The Corporation
follows the same credit policy to make such commitments as it uses for
on-balance-sheet items.
The Corporation has the following commitments outstanding at December 31:
1996 1995
---- ----
Fixed rate loan commitments and unused
lines of credit $ 12,613,000 $ 4,491,000
Variable rate loan commitments and unused
lines of credit 54,948,000 47,552,000
Standby letters of credit 2,431,000 2,945,000
------------ -------------
$ 69,992,000 $ 54,988,000
============ =============
Fixed rate loan commitments and unused lines of credit, at December 31, 1996,
are at current rates, ranging primarily from 5.45% to 12.00% and are primarily
for terms of up to two years.
Variable rate loan commitments and unused lines of credit, at December 31, 1996,
are at current rates, ranging primarily from 7.50% to 16.50% and are primarily
for terms of up to two years. The primary index used for adjustments is the
prime rate.
Since many commitments to make loans expire without being used, the amount does
not necessarily represent future cash commitments. In addition, commitments to
extend credit are arrangements to lend to customers as long as there is no
violation of any condition established in the contract. No losses are
anticipated as a result of these transactions. Collateral obtained upon exercise
of the commitment is determined using management's credit evaluation of the
borrower and may include real estate, business assets, consumer assets, deposits
and other items.
There are various contingent liabilities that are not reflected in the
consolidated financial statements, including claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on the Corporation's consolidated
financial condition or results of operations.
The Corporation was required to have approximately $4,802,000 and $3,475,000 of
cash on hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve and clearing requirements at December 31, 1996 and 1995. These balances
do not earn interest.
-69-
(Continued)
F-22
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 11 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are condensed financial statements for the parent company,
Rurban Financial Corp.:
CONDENSED BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
---- ----
ASSETS
Cash and cash equivalents $ 468,782 $ 844,790
Securities available for sale 506,614 306,097
Investment in and advances to subsidiaries
Banking subsidiaries 37,575,479 36,520,419
Non-banking subsidiaries 2,648,882 2,238,418
------------- -------------
Total investment in subsidiaries 40,224,361 38,758,837
Other assets 827,280 834,052
------------- -------------
Total assets $ 42,027,037 $ 40,743,776
============= =============
LIABILITIES
Other liabilities $ 538,389 $ 665,285
------------- -------------
Total liabilities 538,389 665,285
COMMON STOCK SUBJECT TO REPURCHASE
OBLIGATION IN ESOP 9,387,588 9,333,027
UNEARNED ESOP SHARES (1,490,000) -
SHAREHOLDERS' EQUITY 33,591,060 30,745,464
------------- -------------
Total liabilities and shareholders' equity $ 42,027,037 $ 40,743,776
============= =============
-70-
(Continued)
F-23
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 11 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Income
Interest on securities-non-taxable $ 21,070 $ 5,347 $ -
Dividends from subsidiaries
Banking subsidiaries 2,325,000 3,015,000 3,900,000
Non-banking subsidiaries 50,000 75,000 300,000
----------- ------------ ------------
Total 2,375,000 3,090,000 4,200,000
Noninterest income 17,869 11,509 -
----------- ------------ ------------
Total income 2,413,939 3,106,856 4,200,000
Noninterest expense 1,423,660 896,999 685,952
----------- ------------ ------------
Income before income tax benefit and equity
in undistributed net income of subsidiaries 990,279 2,209,857 3,514,048
Income tax benefit 448,950 302,011 233,224
----------- ------------ ------------
Income before equity in undistributed
net income of subsidiaries 1,439,229 2,511,868 3,747,272
Equity in undistributed net income of subsidiaries
Banking subsidiaries 2,999,521 1,358,754 80,153
Non-banking subsidiaries 410,464 224,191 82,949
----------- ------------ ------------
Total 3,409,985 1,582,945 163,102
----------- ------------ ------------
Net income $ 4,849,214 $ 4,094,813 $ 3,910,374
=========== ============ ============
-71-
(Continued)
F-24
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 11 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows from operating activities
Dividends received from subsidiaries
Banking subsidiaries $ 2,325,000 $ 3,015,000 $ 3,900,000
Non-banking subsidiaries 50,000 75,000 300,000
----------- ------------ ------------
Total 2,375,000 3,090,000 4,200,000
Cash paid to suppliers and employees (1,445,917) (681,050) (744,321)
Income tax refunds 375,026 253,486 269,455
----------- ------------ ------------
Net cash from operating activities 1,304,109 2,662,436 3,725,134
Cash flows from investing activities
Investment in banking subsidiary - - (2,378,046)
Purchase of securities available for sale (200,517) (306,097) -
Cash paid for life insurance premiums - (716,613) -
----------- ------------ ------------
Net cash from investing activities (200,517) (1,022,710) (2,378,046)
Cash flows from financing activities
Cash dividends paid (1,308,975) (1,310,627) (1,264,128)
Cash paid to repurchase common stock (170,625) - -
----------- ------------ ------------
Net cash from financing activities (1,479,600) (1,310,627) (1,264,128)
----------- ------------ ------------
Net change in cash and cash equivalents (376,008) 329,099 82,960
Cash and cash equivalents at beginning
of year 844,790 515,691 432,731
----------- ------------ ------------
Cash and cash equivalents at end of year $ 468,782 $ 844,790 $ 515,691
=========== ============ ============
-72-
(Continued)
F-25
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 11 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Reconciliation of net income to net cash
from operating activities
Net income $ 4,849,214 $ 4,094,813 $ 3,910,374
Adjustments to reconcile net income to
net cash from operating activities
Equity in undistributed net income
of subsidiaries
Banking subsidiaries (2,999,521) (1,358,754) (80,153)
Non-banking subsidiaries (410,464) (224,191) (82,949)
Change in other assets 6,772 (66,596) --
Change in other liabilities (141,892) 217,164 (58,369)
----------- ----------- -----------
Net cash from operating activities $ 1,304,109 $ 2,662,436 $ 3,725,134
=========== =========== ===========
Supplemental disclosures of cash
flow information
Non-cash increases related to Citizens
Bank acquisition
Common stock $ -- $ -- $ 387,500
Additional paid-in capital -- -- 2,518,373
-73-
(Continued)
F-26
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair values and the related carrying
values of the Corporation's financial instruments at December 31, 1996 and 1995.
Items which are not financial instruments are not included.
1 9 9 6 1 9 9 5
________________________________ _________________________________
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Financial assets
Cash and cash equivalents $ 34,027,263 $ 34,027,000 $ 28,379,656 $ 28,380,000
Interest-bearing deposits in
other financial institutions 180,000 180,000 180,000 180,000
Securities available for sale 66,635,889 66,636,000 90,329,866 90,330,000
Loans, net of allowance for loan
losses (including loans held
for sale) 315,254,876 312,643,000 276,044,137 274,564,000
Accrued interest receivable 3,298,902 3,299,000 3,240,154 3,240,154
Cash surrender value of
life insurance 2,093,000 2,093,000 2,035,000 2,035,000
Financial liabilities
Demand and savings deposits (203,709,830) (203,710,000) (179,133,751) (179,134,000)
Time deposits (184,056,243) (183,925,000) (188,662,787) (190,368,000)
Accrued interest payable (2,596,921) (2,597,000) (2,315,688) (2,316,000)
For purposes of the above disclosures of estimated fair values, the following
assumptions were used as of December 31, 1996 and 1995. The estimated fair value
for cash and cash equivalents, accrued interest receivable, cash surrender value
of life insurance and accrued interest payable are considered to approximate
cost. The estimated fair value for interest-bearing deposits in other financial
institutions and securities available for sale is based on quoted market values
for the individual deposits or securities or for equivalent deposits or
securities. The estimated fair value for loans is based on estimates of the
difference in interest rates the Corporation would charge the borrowers for
similar such loans with similar maturities made at December 31, 1996 and 1995,
applied for an estimated time period until the loan is assumed to reprice or be
paid. The estimated fair value for demand and savings deposits is based on their
carrying value. The estimated fair value for time deposits is based on estimates
of the rate the Corporation would pay on such deposits at December 31, 1996 and
1995, applied for the time period until maturity. The estimated fair value for
other financial instruments and off-balance-sheet loan commitments approximate
cost at December 31, 1996 and 1995 and are not considered significant to this
presentation.
-74-
(Continued)
F-27
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Corporation to
have disposed of such items at December 31, 1996 and 1995, the value received
would necessarily equal the estimated fair values at that date, since market
values may differ depending on various circumstances. The estimated fair values
at December 31, 1996 and 1995 should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Corporation that are not
defined as financial instruments are not included in the above disclosures, such
as premises and equipment. Also, non-financial instruments typically not
recognized in the financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of
loan servicing rights, the earnings potential of trust assets, the trained work
force, customer goodwill and similar items.
NOTE 13 - REGULATORY MATTERS
The Corporation and its subsidiary banks are subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings, and other factors, and the regulators can lower classifications in
certain cases. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the consolidated
financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
Capital to risk-
weighted assets Tier 1 capital
Total Tier 1 to average assets
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
-75-
(Continued)
F-28
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE 13 - REGULATORY MATTERS (Continued)
At year end, consolidated actual capital levels (in millions) and minimum
required levels were:
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
____________________________________________________________________________________________________________
1996
Total capital (to risk weighted assets)
Consolidated $44.5 13.9% $ 25.7 8.0% $32.1 10.0%
State Bank 25.9 12.9 16.0 8.0 20.0 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 40.5 12.6 12.8 4.0 19.3 6.0
State Bank 23.4 11.7 8.0 4.0 12.0 6.0
Tier 1 capital (to average assets)
Consolidated 40.5 9.4 17.2 4.0 21.5 5.0
State Bank 23.4 9.0 10.4 4.0 13.0 5.0
1995
Total capital (to risk weighted assets)
Consolidated 42.2 13.8 24.5 8.0 30.6 10.0
State Bank 24.0 12.6 15.2 8.0 18.9 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 38.3 12.5 12.3 4.0 18.4 6.0
State Bank 21.6 11.4 7.6 4.0 11.4 6.0
Tier 1 capital (to average assets)
Consolidated 38.3 9.3 16.4 4.0 20.5 5.0
State Bank 21.6 8.8 9.8 4.0 12.3 5.0
The Corporation and State Bank at year end 1996 were categorized as well
capitalized. All other subsidiary banks are not considered significant for this
presentation.
NOTE 14 - SUPPLEMENTAL CASH FLOW DISCLOSURES
On October 3, 1994, Rurban Financial Corp. purchased all of the common stock of
Citizens Savings Bank for $2,378,046 in cash and issued 155,000 common shares at
a market value of $18.75 per share. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired $ 58,707,000
Cash paid (2,378,046)
Common stock issued (2,905,873)
-------------
Liabilities assumed $ 53,423,081
=============
-76-
F-29
RURBAN FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
INDEX TO EXHIBITS
Exhibit No. Description Page No.
________________________________________________________________________________
3(a) Amended Articles of Registrant, as Incorporated herein by reference
amended to Registrant's Annual Report on
Form 10-K for the fiscal year
ended December 31, 1989 (File
No. 0-13507) [Exhibit 3(a)(i)].
3(b) Certificate of Amendment to the Incorporated herein by reference
Amended Articles of Rurban Financial to Registrant's Annual Report on
Corp. Form 10-K for the fiscal year
ended December 31, 1993
(File No. 0-13507) [Exhibit
3(b)].
3(c) Regulations of Registrant, as amended Incorporated herein by reference
to Registrant's Annual Report on
Form 10-K for the fiscal year
ended December 31, 1986 (File
No. 0-13507) [Exhibit 3(b)].
10(a) Employees' Stock Ownership Plan of Incorporated herein by reference
Rurban Financial Corp. to Registrant's Annual Report on
Form 10-K for the fiscal year
ended December 31, 1993 (File
No. 0-13507) [Exhibit 10(a)].
10(b) First Amendment to Employees' Stock Incorporated herein by reference
Ownership Plan of Rurban Financial to Registrant's Annual Report on
Corp., dated June 14, 1993 and made Form 10-K for the fiscal year
to be effective as of January 1, 1993 ended December 31, 1993
(File No. 0-13507) [Exhibit
10(b)].
-77-
Exhibit No. Description Page No.
________________________________________________________________________________
10(c) Second Amendment to Employees' Stock Incorporated herein by reference
Ownership Plan of Rurban Financial to Registrant's Annual Report on
Corp., dated March 14, 1994 and made Form 10-K for the fiscal year
to be effective as of January 1, 1993 ended December 31, 1993 (File
No. 0-13507) [Exhibit 10(c)].
10(d) Third Amendment to Employees' Stock Incorporated herein by reference
Ownership Plan of Rurban Financial to Registrant's Annual Report on
Corp., dated March 13, 1995 Form 10-K for the fiscal year
ended December 31, 1994 (File
No. 0-13507) [Exhibit 10(d)].
10(e) Fourth Amendment to Employees' Stock Incorporated herein by reference
Ownership Plan of Rurban Financial to Registrant's Annual Report on
Corp., dated June 10, 1995 and made Form 10-K for the fiscal year
to be effective as of January 1, 1995 ended December 31, 1995 (File
No. 0-13507) [Exhibit 10(e)].
10(f) The Rurban Financial Corp. Savings Incorporated herein by reference
Plan and Trust to Registrant's Annual Report on
Form 10-K for the fiscal year
ended December 31, 1990 (File
No. 0-13507) [Exhibit 10(g)].
10(g) First Amendment to The Rurban Incorporated herein by reference
Financial Corp. Savings Plan and to Registrant's Annual Report on
Trust, dated December 10, 1990 and Form 10-K for the fiscal year
effective January 1, 1990 ended December 31, 1990 (File
No. 0-13507) [Exhibit 10(g)].
10(h) Second Amendment to The Rurban Incorporated herein by reference
Financial Corp. Savings Plan and to Registrant's Annual Report on
Trust, dated March 11, 1991, Form 10-K for the fiscal year
effective February 1, 1991 ended December 31, 1992 (File
No. 0-13507) [Exhibit 10(d)].
10(i) Third Amendment to The Rurban Incorporated herein by reference
Financial Corp. Savings Plan and to Registrant's Annual Report on
Trust, dated June 11, 1991 Form 10-K for the fiscal year
ended December 31, 1992 (File
No. 0-13507) [Exhibit 10(e)].
-78-
Exhibit No. Description Page No.
________________________________________________________________________________
10(j) Fourth Amendment to The Rurban Incorporated herein by reference
Financial Corp. Savings Plan and to Registrant's Annual Report on
Trust, dated July 14, 1992, effective Form 10-K for the fiscal year
May 1, 1992 ended December 31, 1992 (File
No. 0-13507) [Exhibit 10(f)].
10(k) Fifth Amendment to The Rurban Incorporated herein by reference
Financial Corp. Savings Plan and to Registrant's Annual Report on
Trust, dated March 14, 1994 Form 10-K for the fiscal year
ended December 31, 1993
(File No. 0-13507) [Exhibit
10(i)].
10(l) Sixth Amendment to The Rurban Incorporated herein by reference
Financial Corp. Savings Plan and to Registrant's Annual Report on
Trust dated May 1, 1995 Form 10-K for the fiscal year
ended December 31, 1995 (File
No. 0-13507) [Exhibit 10(l)].
10(m) Summary of Incentive Compensation Incorporated herein by reference
Plan of State Bank to Registrant's Annual Report on
Form 10-K for the fiscal year
ended December 31, 1993
(File No. 0-13507) [Exhibit
10(j)].
10(n) Summary of Bonus Program adopted by Incorporated herein by reference
the Trust Department of State Bank to Registrant's Annual Report on
for the benefit of Robert W. Constien Form 10-K for the fiscal year
in his capacity as Manager of the ended December 31, 1991 (File
Trust Department No. 0-13507) [Exhibit 10(e)].
10(o) Summary of Bonus Program for the Incorporated herein by reference
Trust Department of State Bank to Registrant's Annual Report on
Form 10-K for the fiscal year
ended December 31, 1992 (File
No. 0-13507 [Exhibit 10(i)].
-79-
Exhibit No. Description Page No.
________________________________________________________________________________
10(p) Summary of Sales Bonus Program of Incorporated herein by reference
State Bank to Registrant's Annual Report on
Form 10-K for the fiscal year
ended December 31, 1994
(File No. 0-13507)
[Exhibit 10(n)].
10(q) Summary of Rurban Financial Corp. Incorporated herein by reference
Bonus Plan to Registrant's Annual Report on
Form 10-K for the fiscal year
ended December 31, 1993
(File No. 0-13507) [Exhibit
10(q)].
10(r) Executive Salary Continuation Incorporated herein by reference
Agreement, dated December 15, 1994, to Registrant's Annual Report on
between Rurban Financial Corp. and Form 10-K for the fiscal year
Richard C. Burrows ended December 31, 1994
(File No. 0-13507) [Exhibit
10(p)].
10(s) Executive Salary Continuation Incorporated herein by reference
Agreement, dated October 11, 1995, to Registrant's Annual Report on
between Rurban Financial Corp. and Form 10-K for the fiscal year
Thomas C. Williams; and Schedule A to ended December 31, 1995 (File
Exhibit 10(s) identifying other No. 0-13507) [Exhibit 10(s)].
identical Executive Salary
Continuation Agreements between
executive officers of Rurban
Financial Corp. and Rurban Financial
Corp.
10(t) Description of Split-Dollar Insurance Incorporated herein by reference
Policies Maintained for Certain to Registrant's Annual Report on
Executive Officers of Rurban Form 10-K for the fiscal year
Financial Corp. ended December 31, 1995 (File
No. 0-13507) [Exhibit 10(t)].
10(u) Rurban Financial Corp. Stock Option Pages 82 through 92 of this
Plan Annual Report on Form 10-K.
10(v) Rurban Financial Corp. Plan to Allow Pages 93 through 97 of the
Directors to Elect to Defer Annual Report on Form 10-K.
Compensation
-80-
Exhibit No. Description Page No.
________________________________________________________________________________
11 Statement re Computation of Per Share Page 59 [included in Note 1 of
Earnings the Notes to the Consolidated
Financial Statements of
Registrant in the financial
statements portion of this
Annual Report on Form 10-K].
21 Subsidiaries of Registrant Incorporated herein by reference
to Registrant's Annual Report on
Form 10-K for the fiscal year
ended December 31, 1994
(File No. 0-13507) [Exhibit 21].
24 Powers of Attorney Pages 98 through 108 of this
Annual Report on Form 10-K.
27 Financial Data Schedule Pages 109 through 111 of this
Annual Report on Form 10-K.
-81-